New co-CEO Juan Delgado of Hamilton Lane, a US private markets investment management firm with over $120 billion assets under management, discusses the outlook and insights for private markets in 2024.
Despite stronger public markets, buyout in private markets
continued to perform better than public indices over the period
2021 to 2023, according to Juan Delgado of Hamilton Lane.
“Credit, infrastructure and real estate have all been
outperforming their public market comparables,” Delgado said at a
media event in London this month.
“Over the 12 months ending September 2023, infrastructure and
buyout were the standout performers across all geographies,” he
continued. “Credit performed well, particularly in Western
Europe, but relatively not as well in Asia.”
By contrast, growth equity investments and venture capital
continue to underperform both buyout and public markets. “Growth
equity has seen the most variation across geographies and venture
capital has performed poorly globally,” Delgado said.
Delgado highlighted how private equity has had greater upside and
less downside across all the cycles experienced in the last five
years. “Private markets, generally, have had far less volatility
than public markets,” he continued.
“The best five-year periods for all private asset classes except
infrastructure also outperformed their public benchmarks,” he
said. “The worst five-year returns for developed market buyout,
private credit and infrastructure are also still strong. The risk
of loss is minimal in those sub-classes, particularly compared to
public market returns.”
Such comments come at a time when, even after two years of rising
interest rates that ended over a decade of ultra-low/zero rates,
the wealth management sector has been regularly regaled about the
benefits of private market investments. Such assets are typically
less liquid than listed equities, or mainstream bond markets. For
that reason, investors have been able to command a premium for
that lower liquidity. An issue is whether that level of
compensation is sufficient, given large inflows into the private
markets space, and whether these assets are appropriate for
certain clients who differ in their time horizons and
tolerance for risk.
Beating the public
Richard Hope, head of EMEA, attending the event, also emphasised
how private equity outperformance in 2022 was largely due to
significant outperformance in revenue and earnings before
interest, taxes, depreciation and amortisation (EBITDA) on the
private side compared with the public markets.
“In 2023, private equity continued to perform better or at equal
levels to public companies in revenue and EBITDA,” he said. “The
difference in enterprise value largely reflects these differences
in private versus public company performance metrics. A driver of
private outperformance in 2022 and 2023 is portfolio
construction.”
“The buyout market is consistently overweight in information
technology relative to the S&P 500, a sector which has had
generally better growth characteristics than the overall market.
The buyout market has also had less exposure to sectors that are
struggling more or have significantly more volatility, such as
real estate or energy,” Hope continued.
Looking at how higher interest rates will impact performance,
Hope said the US and Europe have outperformed the best in high
interest rate periods, with annualised one-year forward returns.
“On a three-year forward return basis, the US and Europe private
markets have outperformed their respective public market
comparable in every interest rate environment and geography,” he
added.
“Across fund ages, the US and Europe returns were better in low
interest rate environments than in high-rate environments on a
forward, one-year basis,” Hope said.
Sustainability
Contrary to some opinions, Nina Kraus, principal on the fund
investment team, highlighted how more sustainable investments
won’t reduce future returns. “At the fund level, neither
sustainable nor non-sustainable investments always dominate,” she
continued.
“Strategy exposure may be a driving factor,” she added. “Natural
capital solutions dominated the sustainable universe in the early
days. Now venture capital and growth equity investments
permeate the sustainable universe.”
Looking at performance by vintage year, she said more recent
vintage years have been kinder to sustainable funds, probably due
to the venture tilt. “Realised deal performance from 2010
through 2018 was nearly identical,” Kraus added.
“Deals aligned with United Nations Sustainable Development Goals
(SDGs) have also exhibited a statistically similar performance
distribution. In aggregate, sustainable deals have a similar
risk/return profile despite differences in sector composition,”
Kraus said.
“Despite being one of the more discussed topics in private
equity, the number of funds using net asset value (NAV) lending
is still small,” John Stake, co-head of fund investments,
added.
Wrapping up, Delgado said all strategies have lower levels of
“worry” – aka risk – today compared with 2022 and 2023
except for credit, which has roughly the same between the start
of 2023 and today. See
here and
here more commentary about private markets.