Alt Investments

Private Markets Outperform Public Peers – Hamilton Lane

Amanda Cheesley Deputy Editor 24 April 2024

Private Markets Outperform Public Peers – Hamilton Lane

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.

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.

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