Why more investors are responding to the asset class’s proven outperformance and evolving investment structures
Even as the threat of the global Covid-19 pandemic appears to be fading away, the world is standing at the threshold of a new cycle of uncertainty brought on by record inflation and rising geopolitical risks. With public markets looking more treacherous than they have in recent memory, investors are looking at different diversification options – and the private markets are near the top of the list.
“The absolute outperformance of private equity over public has been really impressive. But I'd also focus on the consistency of the performance,” says Mike Woollatt, the Head of Canada for Hamilton Lane, an independent provider of global private markets investment solutions. “Every single year for the past two decades, both private equity and private credit have outperformed their public equivalents.”
According to Hamilton Lane’s recently published 2022 Market Overview, pooled average buyout returns in private equity have exceeded public equity returns in every single one of the past 20 vintage years by an average of more than 1,000 basis points. Over that time, private credit has also outclassed its public credit equivalent in every vintage year.
It’s not just the consistency of performance that makes private markets appealing at the moment. For one thing, Woollatt notes, in times of greater public market volatility, private assets historically have lower observed volatility than public markets, which in recent weeks have been rocked by turbulence not seen in decades. The private market is also home to tens of thousands of companies globally – 95,000, to be a little more accurate, with annual revenues in excess of $100 million on average – while only 10,000 companies that fit that criteria exist on the public side.
“In the U.S., 87% of companies with over $100 million in revenue are private; in Europe, it’s 95%. That opportunity set for investing is just enormous,” Woollatt says. “The public sector is also getting increasingly concentrated, which only adds to the mismatch.”
Beyond the larger ocean of opportunities, Woollatt says, is the active and long-term approach professional investors in the private markets are able to take. By fixing companies, equipping them with the proper tools, and helping them find the right connections, private equity investors are able to coax out the type of outperformance that more and more institutions and individual investors need to achieve their various objectives.
According to Hamilton Lane, fundraising levels for private market funds are on track to log a 25% jump from 2020 to 2021. And while data trends point to investors increasingly concentrating their assets with larger organizations, there remains an appetite and interest in emerging and diverse managers.
“Data from the Canadian Venture Capital and Private Equity Association points to record fundraising levels in the Canadian context from the institutional side,” Woollatt says. “At Hamilton Lane, we’re also experiencing increased levels of fundraising both on our institutional and our retail side, and we’re continuing to build our team locally to help support that growth.”
Hamilton Lane’s Global Private Assets Fund, which has gained global recognition among well-respected private market participants, has surpassed the $300 million AUM mark; that includes over $100 million of inflows that came just in the first quarter of 2022. The Canadian feeder fund is also up and running.
One reason there’s been such a rush into private markets recently, Woollatt says, is the fact that managers are responding to demand from smaller institutions and high-net-worth investors, who have been asking for access to private equity strategies for some time. The new structures managers are offering today have little resemblance to what was available less than 10 years ago, he says, which has enabled easier entry into the space.
“Typically, PE managers are coming up with ways to let smaller investors gain access to open-ended evergreen structures that don’t require long holds,” Woollatt says. “They're getting access to an illiquid market with liquid or semi-liquid options. And that's something that more and more managers probably are going to try and do.”
While new investors will certainly be keen to allocate some of their capital toward evergreen strategies, Woollatt says they must pick their spots carefully. He encourages investors to focus on managers and funds with access to the private market ecosystem, which he says will be important to ensure the strategy’s longevity as the private market grows and changes.
“The private market won't look the same in 20 years as it does now,” he says. “As the evergreen sector grows, the ability to shift with the market will be crucial to separate winners and losers over the long term.”
