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The Future of Private Credit with Erik Hirsch · Masters in Business

0:02
Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
0:11
Speaker 1: Business with Barry Ritholts on Bloomberg Radio.
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Speaker 2: This week on the podcast, I have yet another extra
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Speaker 2: special guest. There are few people in the world of
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Speaker 2: private equity better positioned to identify and discuss the explosive
0:29
Speaker 2: growth and changes coming to the field. Eric Hirsh has
0:33
Speaker 2: been with the firm Hamilton Lane for nearly thirty years,
0:38
Speaker 2: both as CIO and Head of Strategic Initiatives. Now he's
0:42
Speaker 2: co CEO. I found this conversation to be absolutely fascinating.
0:47
Speaker 2: If you want to get a sense of why this
0:50
Speaker 2: space has been growing so dramatically and what the future
0:56
Speaker 2: of private credit, private capital, private equity, etc. Is going
1:00
Speaker 2: to look like, then you're gonna find this conversation to
1:02
Speaker 2: be absolutely fascinating. With no further ado, Hamilton Lane's co CEO,
1:08
Speaker 2: Eric Hirsh thrilled to be here. So let's start with
1:15
Speaker 2: your background. Bachelor's degree from University of Virginia in nineteen
1:20
Speaker 2: ninety five. Would just study what was the original career plan?
1:24
Speaker 3: I think I had no career plan because I originally
1:27
Speaker 3: studied philosophy, which I think is pretty much the definition
1:30
Speaker 3: of I'm not sure what I'm gonna do with my life.
1:32
Speaker 3: I think I was probably thinking lawyer back then, and
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Speaker 3: I luckily got on a different track and ended up
1:39
Speaker 3: in finance.
1:40
Speaker 2: Huh, really, that's really amusing philosophy. I have discovered that
1:44
Speaker 2: a number of people who have studied philosophy have said
1:49
Speaker 2: it's useful for developing frameworks and thinking about the way
1:53
Speaker 2: to approach management. We'll get to that in a bit.
1:57
Speaker 2: So from philosophy, what drew you to a career in
2:00
Speaker 2: finance and investment management?
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Speaker 3: I was not highly sought after when I was graduating
2:05
Speaker 3: from college. I think it was a combination of the
2:08
Speaker 3: philosophy degree and perhaps a little lack of studying. But
2:12
Speaker 3: I ended up getting lucky and found myself in a
2:15
Speaker 3: public finance firm in Philadelphia called Public Financial Management, And
2:19
Speaker 3: there we were really servicing governments and trying to help
2:22
Speaker 3: them with budgets and bond offerings and the like, and
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Speaker 3: that really taught me the fundamentals of finance. They had
2:29
Speaker 3: an incredibly strong training program Excel modeling and just learning
2:34
Speaker 3: kind of the ins and outs of finance. And it
2:36
Speaker 3: was from there that was sort of the launching point.
2:39
Speaker 2: Did I read this correctly. You specialized in sports stadium financing.
2:44
Speaker 3: Back in the mid nineties, governments were paying for stadiums.
2:47
Speaker 3: They were not being privately financed. They were The belief
2:51
Speaker 3: back then was that this was going to be a
2:53
Speaker 3: big revenue draw for cities if they had these great complexes,
2:56
Speaker 3: and so we had developed one of the expertise early
2:59
Speaker 3: on to help cities go through that process of raising
3:04
Speaker 3: bonds financing that.
3:06
Speaker 2: I'm always fascinated by that because you mentioned excel. If
3:10
Speaker 2: you have a spreadsheet, it's pretty obvious this ain't a
3:13
Speaker 2: money maker for cities. Maybe it's good for the municipal
3:19
Speaker 2: morale or town spirit, but it's a money loser, isn't it.
3:23
Speaker 3: I think what you found was it depended on the location.
3:25
Speaker 3: So Camden Yards in Baltimore, if you remember when that
3:28
Speaker 3: sort of first opened, was a money maker. It totally
3:32
Speaker 3: altered the landscape of that city. Now that didn't prove
3:36
Speaker 3: to be true everywhere that stadiums began to be created,
3:39
Speaker 3: and so today we no longer see a lot of
3:41
Speaker 3: public finance capital going into stadiums. But there was again
3:45
Speaker 3: a moment in time where in the right location it
3:48
Speaker 3: did make sense.
3:48
Speaker 2: That was a deeply depressed area and you pour a
3:51
Speaker 2: billion dollars into it. It certainly helps. But when we
3:55
Speaker 2: look around at other stadiums, it's kind of amazing. To me,
4:00
Speaker 2: looks like socialism. We're going to pay for your means
4:02
Speaker 2: of production as the government, and you get to keep
4:05
Speaker 2: the profits. But it's amazing. It took decades for the
4:10
Speaker 2: taxpayers to kind of and the elected officials to reach
4:13
Speaker 2: that conclusion. You also focused on mergers and acquisitions work
4:19
Speaker 2: in the nineteen nineties. What was that like?
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Speaker 3: Grueling?
4:23
Speaker 2: Gruel?
4:23
Speaker 3: I don't miss it. I think I am happy to
4:25
Speaker 3: have been moved on. I think the good thing about
4:28
Speaker 3: my time as an investment banker was that it really
4:30
Speaker 3: introduced me to private equity. We were mostly looking at
4:33
Speaker 3: selling businesses for privately held businesses with families most often,
4:38
Speaker 3: and selling them into private equity, and so having come
4:41
Speaker 3: from the public finance side, it was really the first
4:43
Speaker 3: time that my eyes got opened up to the fact
4:45
Speaker 3: that there was this whole other industry out there that
4:48
Speaker 3: seemed pretty interesting. And again, in sort of the mid
4:51
Speaker 3: later nineties, the private equity world was just beginning to
4:55
Speaker 3: start to grow up and start to have its first
4:58
Speaker 3: real growth movement.
5:00
Speaker 2: Brothers Harriman a storied firm. What was your experiences like there?
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Speaker 3: Great people. It is a lot of tradition, incredibly long history,
5:07
Speaker 3: particularly interestingly in Philadelphia. The firm had been there going
5:12
Speaker 3: back into the eighteen hundreds where it was more of
5:14
Speaker 3: a sort of a mercantile business, and it was just
5:18
Speaker 3: a good place again to kind of get the basics
5:21
Speaker 3: and the fundamentals of what it meant to be on
5:23
Speaker 3: the corporate side of finance again as opposed to the
5:26
Speaker 3: public side of finance.
5:27
Speaker 2: And if memory serves, they stayed a private partnership way
5:31
Speaker 2: longer than a lot of their peers. Am I am
5:33
Speaker 2: I remembering.
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Speaker 3: I think they still remain.
5:34
Speaker 2: Yeah, I think that's right ship correct, which is despite
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Speaker 2: all the other partnerships having either gone per public or
5:41
Speaker 2: getting acquired by other public firms.
5:43
Speaker 3: Correct.
5:43
Speaker 2: I've always wondered if that's the reason they never ran
5:47
Speaker 2: into trouble during the Great Financial Crisis.
5:50
Speaker 3: I suspect it's a lot of reasons. Again, there's a
5:53
Speaker 3: lot of it's a conservative place by nature. I think
5:57
Speaker 3: it's one of the reasons why clients are attracted to them.
6:00
Speaker 3: Partners have a lot of their capital invested in the
6:02
Speaker 3: business alongside of customers. Also a good business model, and
6:06
Speaker 3: so I think it's just a company that has had
6:08
Speaker 3: tremendous success, but as you said, has kind of remained
6:11
Speaker 3: true to its roots in that private partnership.
6:14
Speaker 2: Yeah. No, that's worked out really well for them. So
6:16
Speaker 2: from Brown Brothers, how'd you make your way to Hamilton Lane?
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Speaker 3: Headhunter came knocking. I was again familiar with the concept
6:22
Speaker 3: of private equity, and I had met some private equity
6:24
Speaker 3: firms in my short time as an investment banker, but
6:27
Speaker 3: the concept of Hamilton Lane and what they did is
6:30
Speaker 3: this kind of solutions provider intermediary was not something that
6:34
Speaker 3: I was familiar with. They were also you're going to
6:37
Speaker 3: continue to have the Philly theme here. They were also
6:39
Speaker 3: headquartered in Philadelphia, so I didn't move very far, but
6:43
Speaker 3: I went over and met some people. Thought it was interesting.
6:45
Speaker 3: Firm was very tiny at the time. It was probably
6:49
Speaker 3: twenty twenty five people. This would have been in nineteen
6:51
Speaker 3: ninety nine and essentially single office business. And the firm
6:56
Speaker 3: had been around for a few years and had had
6:58
Speaker 3: some early success, but at that point in time was
7:01
Speaker 3: still very tiny.
7:03
Speaker 2: And when you began at Hamilton Lane. What was your
7:06
Speaker 2: role there.
7:06
Speaker 3: I joined the investment side as an associate, so I
7:09
Speaker 3: was still a pretty young person and I joined the
7:12
Speaker 3: investment team. Back then was simply one group. There was
7:15
Speaker 3: no areas of specialization like we have today. But within
7:19
Speaker 3: a couple of quick years, I became the chief investment
7:21
Speaker 3: officer and we began to sort of think about the
7:24
Speaker 3: business in a slightly different way. It had been historically
7:27
Speaker 3: solely focused as a consulting company, and once we got
7:30
Speaker 3: into the early two thousands, we began a bit of
7:33
Speaker 3: a migration of adding more of an asset management service offering.
7:36
Speaker 2: So you stayed CIO for like thirteen years.
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Speaker 3: Yeah, fourteen, maybe fourteen or fifteen years.
7:42
Speaker 2: But so that must have been fascinating because the firm grew,
7:47
Speaker 2: the entire private space exploded over the past twenty five years.
7:52
Speaker 2: How did your role as CIO evolve? What did you
7:55
Speaker 2: begin investing in? And then we'll talk a little later
7:58
Speaker 2: about what your investment currently.
8:01
Speaker 3: Everything was changing. So, as I said, the firm itself
8:03
Speaker 3: was very tiny when I first took that role, and
8:07
Speaker 3: while we've grown a lot, I still think of us
8:08
Speaker 3: today as a relatively tiny company in the grand scheme
8:12
Speaker 3: of things. On our tour in here you were mentioning
8:14
Speaker 3: the employee count were one tenth of the Bloomberg employee count.
8:19
Speaker 2: So that's just this building right exactly globally right.
8:22
Speaker 3: So we're a total of a little under eight hundred
8:24
Speaker 3: employees today. And so despite having gone from sort of
8:27
Speaker 3: twenty so odd employees when I got there to about
8:29
Speaker 3: eight hundred today, I still think of us as a
8:32
Speaker 3: small business, but in the CIO role. Everything was evolving.
8:35
Speaker 3: When I first came in, the concept of secondaries was
8:39
Speaker 3: very new, the concept of co investing was relatively new.
8:43
Speaker 3: People were not specializing products in any great way. Fund
8:47
Speaker 3: of funds, which is something that we don't talk much
8:49
Speaker 3: about today, was sort of the norm. That was mostly
8:53
Speaker 3: how limited partners were accessing the private markets. The private
8:57
Speaker 3: markets themselves had not really developed back then. Private credit
9:01
Speaker 3: wasn't really much of a thing, whereas today it's a
9:05
Speaker 3: huge driver of the growth. So I was witnessing and
9:08
Speaker 3: got the experience change on lots of different axes. And
9:13
Speaker 3: it was also for me growing up in the business.
9:15
Speaker 3: I arrived there probably a twenty six year old. I'm
9:18
Speaker 3: fifty two today, and so I've also kind of grown
9:22
Speaker 3: up alongside of the industry.
9:24
Speaker 2: Really interesting when you were first appointed CIO. What sort
9:30
Speaker 2: of investments were you making back then? Was it strictly
9:33
Speaker 2: private equity or was it a smattering of everything.
9:36
Speaker 3: It was primarily private equity. The firm was at that
9:39
Speaker 3: point not really engaged in things like private infrastructure or
9:44
Speaker 3: real estate, and as I had mentioned, credit wasn't a
9:47
Speaker 3: huge part of the industry, so it was mostly leverage
9:50
Speaker 3: buyout's venture capital. And we were again a manager of managers,
9:55
Speaker 3: so most of our investment activity was selecting fund managers
9:59
Speaker 3: on behalf of our clients. Really, the genesis of the
10:02
Speaker 3: firm was quite simple. It was sort of late eighties
10:05
Speaker 3: early nineties. The institutional world was just beginning to make
10:10
Speaker 3: their move into the private markets. Prior to that, kind
10:13
Speaker 3: of in the seventies and into the early eighties, most
10:16
Speaker 3: of the activity, small as it was, was primarily financed
10:20
Speaker 3: by large families, high net worth families, endowments and foundations.
10:25
Speaker 3: Things like public and corporate pensions were not a big
10:28
Speaker 3: participant in the private markets. And with some regulatory changes
10:32
Speaker 3: and with greater awareness, that began to shift, and the
10:36
Speaker 3: founders of Hamilton Lane had a very simple concept, which
10:39
Speaker 3: is people are going to want and need help, and
10:42
Speaker 3: so we were really designed then as we are today
10:46
Speaker 3: to really be a solutions provider to help whichever kind
10:50
Speaker 3: of client is trying to access the private markets, to
10:54
Speaker 3: do so in a way that most and best fits
10:56
Speaker 3: their needs. Our view was that we didn't think that
10:59
Speaker 3: most limited partners, we're going to invest the time, resources
11:03
Speaker 3: and energy to build out large internal teams to cover
11:07
Speaker 3: this asset class, and that has proven to be correct.
11:09
Speaker 3: Most don't. They primarily find a partner, a solutions provider,
11:14
Speaker 3: and we've been that partner of choice now for over
11:16
Speaker 3: thirty years. But that was the business model, and so
11:20
Speaker 3: our evolution has really just kind of mirrored what the
11:23
Speaker 3: industry itself has been doing. Is as credit came online
11:26
Speaker 3: and became bigger, so did we in that space. As
11:29
Speaker 3: infrastructure and real estate developed, so too did we in
11:31
Speaker 3: that space. And so I sort of say that we've
11:34
Speaker 3: been kind of growing right alongside of the asset class.
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Speaker 2: Really really interesting. I'm also intrigued by the idea of
11:42
Speaker 2: quote unquote consultants but with some skin in the game.
11:46
Speaker 2: It's one thing to give advice, good or bad as
11:49
Speaker 2: it might be, but it seems like something else entirely
11:52
Speaker 2: to say, here's our recommendation, and by the way, we're
11:56
Speaker 2: going to co invest our dollars, our personal dollars alongside
12:00
Speaker 2: with you. Tell us a little bit about how that
12:03
Speaker 2: developed and what does that mean for the clients you
12:06
Speaker 2: work with.
12:07
Speaker 3: So, as I said, the firm really began as a
12:10
Speaker 3: consulting firm. That the idea originally was these were going
12:15
Speaker 3: to be new decisions, new asset class for these public
12:18
Speaker 3: pensions and corporate pensions primarily at that time, and that
12:22
Speaker 3: they were going to want someone to make a recommendation
12:24
Speaker 3: that they then could kind of ultimately take the decision themselves.
12:29
Speaker 3: What we found was that the clients realized that this
12:33
Speaker 3: industry was growing quite rapidly, and their need for resources
12:36
Speaker 3: was growing quite rapidly, and the decision making needed to
12:40
Speaker 3: also happen on a quicker pace, and so that consulting
12:44
Speaker 3: model began to morph to the client simply saying we
12:48
Speaker 3: want to just have you handle.
12:50
Speaker 1: This for us.
12:52
Speaker 3: I think the advantage that we've had came from that
12:55
Speaker 3: consulting DNA because it rooted the firm in an incredible
13:00
Speaker 3: client centric mindset that still is a hallmark of our
13:04
Speaker 3: service offering today. So today, while we're primarily doing asset management,
13:09
Speaker 3: we're still doing it in a very bespoke model, a
13:12
Speaker 3: very customer oriented. But to your point, as an asset manager,
13:16
Speaker 3: we're making the decisions, we have the discretion, and we're
13:19
Speaker 3: putting our own capital at risk alongside of the clients.
13:22
Speaker 3: And I think that alignment of interest rings true today
13:25
Speaker 3: as it rang true many many years ago, and so
13:28
Speaker 3: today it's still the biggest user of our balance sheet capital.
13:33
Speaker 3: The firm has invested a huge amount of money alongside
13:35
Speaker 3: of our clients over our history. But doing that sort
13:38
Speaker 3: of asset management alongside of in combination with that really
13:42
Speaker 3: strong customer focus, I think that has been one of
13:45
Speaker 3: the reasons why we've been such a winner.
13:47
Speaker 2: Really interesting, you've been at Hamilton Land for nearly thirty years.
13:51
Speaker 2: I want to talk about the growth of the firm
13:54
Speaker 2: and the parallel growth of the sector private markets. The
13:59
Speaker 2: growth has just been amazing over the past twenty five years.
14:03
Speaker 2: To what do you attribute this explosive increase in size
14:08
Speaker 2: of this sector.
14:10
Speaker 3: I think there's a variety of factors. One the most
14:13
Speaker 3: simple is just performance. If you take a look at
14:15
Speaker 3: aggregated private market performance, and you compare that over five, ten, fifteen,
14:20
Speaker 3: twenty year time periods to the public markets, you're going
14:23
Speaker 3: to see meaningful outperformance. I think the second thing, though,
14:27
Speaker 3: is becoming more recognized, which is diversification. Today our public
14:33
Speaker 3: equity markets have never been more concentrated. A very very
14:37
Speaker 3: small number of companies, all technology oriented, make up a
14:41
Speaker 3: huge portion of the overall market cap. And I think
14:45
Speaker 3: when you sort of see that occurring, in combination with
14:48
Speaker 3: the fact that more and more investors have moved to
14:50
Speaker 3: a passive public equity mindset, it means that you're ending
14:54
Speaker 3: up with these oddly concentrated portfolios and a small number
14:57
Speaker 3: of stocks. The other thing that's happen is that the
15:00
Speaker 3: public markets themselves are growing from a market cap standpoint,
15:04
Speaker 3: but they're not growing from a number of publicly listed companies.
15:08
Speaker 3: In fact, if we go back to the eighties and
15:10
Speaker 3: sort of draw a chart of number of publicly listed
15:12
Speaker 3: companies in the US, that chart is essentially moving down
15:15
Speaker 3: into the right. It's shrinking. So today about four thousand
15:19
Speaker 3: publicly traded businesses. But think about, Barry, how many businesses
15:23
Speaker 3: you interact with every day that are private.
15:25
Speaker 2: It's just of them right, the vast.
15:27
Speaker 3: Majority, and so they employ a huge amount of people
15:31
Speaker 3: in the country and all around the globe. So as
15:34
Speaker 3: an investor, if you want to get access to that
15:36
Speaker 3: part of the economy, a substantially large portion of the economy,
15:41
Speaker 3: the only way to do that is through investing in
15:43
Speaker 3: the private markets. So I think when you combine the performance,
15:47
Speaker 3: the diversification, all of that is resulted in the growth.
15:50
Speaker 3: And yet the private markets remain very, very small. If
15:54
Speaker 3: you took all of the capital raised last year across
15:57
Speaker 3: all of the sub sectors in the industry, it wouldn't
16:00
Speaker 3: be enough to buy Apple.
16:03
Speaker 2: Wow.
16:04
Speaker 3: So if you look at total fundraising again, all private
16:07
Speaker 3: markets fundraising, it accounts for about two percent of the
16:12
Speaker 3: MSCI market cap. So again there's been huge growth, but
16:16
Speaker 3: the public markets themselves have also been growing quite a bit.
16:19
Speaker 3: And so when we put it in context, just like
16:22
Speaker 3: I say Hamilton Lane in context as a relatively small company,
16:25
Speaker 3: so too are the private markets.
16:27
Speaker 2: So how much growth is possible in this space? I'm
16:30
Speaker 2: going to go off script and ask can the private
16:35
Speaker 2: markets ever expand to where they're comparable to what we
16:40
Speaker 2: see in the public markets.
16:41
Speaker 3: You'd have to see an enormous amount of growth for
16:43
Speaker 3: that to happen decades decades, But I think what you
16:46
Speaker 3: see in front of you is I think there are
16:49
Speaker 3: still decades more of growth to occur. The private markets
16:53
Speaker 3: are expanding across lots of different axes, so they've expanded geographically.
16:58
Speaker 3: So if we went back into sort of the eighties,
17:01
Speaker 3: it was basically a US only business, and then you've
17:03
Speaker 3: expanded into Europe, etc. So now it's becoming much more
17:07
Speaker 3: of a global phenomenon. It's also expanded across strategy. We've
17:11
Speaker 3: talked earlier about the fact that credit, for example, is
17:13
Speaker 3: becoming a bigger part infrastructure, real estate, so we've seen
17:17
Speaker 3: that expansion. Now you're also seeing expansion across the client
17:21
Speaker 3: tell So we've gone decades. Were essentially the only entities
17:26
Speaker 3: that were able to access this industry or institutional investors
17:30
Speaker 3: and ultra ultra high net worth investors.
17:33
Speaker 2: So family offices, foundations, endowments, etc.
17:36
Speaker 3: Exactly Today you now see more mass affluent individuals able
17:42
Speaker 3: to access this industry, people with say three to five
17:45
Speaker 3: million dollars of investable assets, of which there are a
17:49
Speaker 3: lot of those people all over the globe. They've been
17:51
Speaker 3: again historically shut out, but with some regulatory changes and
17:55
Speaker 3: new product offerings, they too are now accessing this industry.
17:59
Speaker 3: So I go back to lots of different axis, all
18:02
Speaker 3: of them kind of growing in different ways, and I
18:04
Speaker 3: think that trend still has a long long way to go.
18:08
Speaker 2: Huh, really really interesting, So let's focus on the firm's growth.
18:12
Speaker 2: Obviously the tailwind of the whole industry is helpful, but
18:16
Speaker 2: not every private equity has grown as explosively as Hamilton
18:21
Speaker 2: Lane has. What's been the most surprising thing about the
18:25
Speaker 2: firm's growth to you.
18:27
Speaker 3: Well, I think no one would have predicted that we've
18:29
Speaker 3: got that we would have gotten this large, So I
18:32
Speaker 3: think that in itself has been a surprise. But I
18:35
Speaker 3: think what's been noteworthy you hoped it was going to
18:38
Speaker 3: be true, but you weren't sure, was that could you
18:41
Speaker 3: continue to grow and could you continue to expand again
18:44
Speaker 3: in different ways across geographies, across clientele, and at the
18:48
Speaker 3: same time maintain the firm's core DNA. And I think
18:52
Speaker 3: one of the reasons why the growth has occurred and
18:54
Speaker 3: why the success has been there is that we have
18:56
Speaker 3: done that. The roots of the firm are still very
19:00
Speaker 3: present in how we interact with customers today, how we
19:04
Speaker 3: interact with our own employees, how we interact as a team,
19:07
Speaker 3: how we interact with shareholders. All of that still I
19:09
Speaker 3: think remains kind of very true to the firm's values
19:13
Speaker 3: and foundations, and so being able to achieve both of
19:16
Speaker 3: those was always the goal. Again, always a risk that
19:20
Speaker 3: you don't pull it off, but knock on wood, here
19:23
Speaker 3: we are and we're still doing it.
19:24
Speaker 2: So you described all the various sectors that you've expanded
19:28
Speaker 2: into in the growth that's been there. Let's talk geography.
19:32
Speaker 2: What are the plans for a global expansion.
19:33
Speaker 3: So today we have twenty two offices around the globe,
19:36
Speaker 3: so we already have a very large geographic footprint, and
19:40
Speaker 3: our client base is also about equally split between kind
19:44
Speaker 3: of North America and non North America. So while we're
19:47
Speaker 3: a US headquartered business located outside of Philadelphia, we have
19:51
Speaker 3: a very global feel to the firm in that you
19:54
Speaker 3: have hundreds of employees who are operating outside of the
19:58
Speaker 3: US and my partner in co CEO is a Hong
20:01
Speaker 3: Kong resident and operates out of Asia. So that footprint,
20:05
Speaker 3: combined with the client base, has already established us in
20:10
Speaker 3: a very geographically diversified way. I think as we look forward,
20:14
Speaker 3: I suspect the twenty two offices will continue to grow.
20:16
Speaker 3: We have plans to open up in other locations. And
20:19
Speaker 3: if you look at the map of where we are,
20:21
Speaker 3: there are some very big places where we are not
20:24
Speaker 3: at present. So India, for example, would be a fairly
20:27
Speaker 3: large economy, but so far has had a very small
20:31
Speaker 3: private markets industry. That will change over time, and I
20:34
Speaker 3: think you'll likely see a Hamilton Land office there at
20:36
Speaker 3: some point in the future. So there are a number
20:38
Speaker 3: of places that you can look around the globe and say, well,
20:41
Speaker 3: I can imagine that at some point in time that
20:43
Speaker 3: would make sense to have an office presence there.
20:45
Speaker 2: So in the public markets, the rest of the world
20:49
Speaker 2: has lagged the United States for I don't know the
20:51
Speaker 2: better part of fifteen years, decade and a half, certainly
20:54
Speaker 2: since the end of the financial crisis. This year to
20:58
Speaker 2: date or for the past twelve months, depending on where
21:01
Speaker 2: you're looking around the world, the United States has become
21:05
Speaker 2: a laggart, even though first half of the year we're
21:08
Speaker 2: up six percent, pretty decent. Twelve percent run rate is
21:12
Speaker 2: pretty typical. But Europe is doing really well. Asia is
21:17
Speaker 2: doing really well, how do you look at those parts
21:20
Speaker 2: of the world, especially I've been hearing Europe has structural problems,
21:25
Speaker 2: Europe has all these cultural issues, Brexit, Grexit, all these
21:29
Speaker 2: different things, and yet Europe really seems to be having
21:33
Speaker 2: a banner year. How do you look at that part
21:35
Speaker 2: of the world.
21:36
Speaker 3: I think this is the luxury of being a global
21:38
Speaker 3: firm with global deal flow, and most of our clients
21:41
Speaker 3: take a global view on portfolio construction. They want the
21:46
Speaker 3: best investment opportunities, the best managers that we can access
21:49
Speaker 3: for them, and so in building portfolios, we have the
21:53
Speaker 3: ability to move around the globe to take advantage of
21:56
Speaker 3: whatever we think is interesting at that moment in time. Now,
22:00
Speaker 3: unlike the public markets, we have to be making investment
22:03
Speaker 3: decisions with an eye towards how's this going to play
22:06
Speaker 3: out over the next sort of three, five, six years,
22:09
Speaker 3: because most of the investments that we're making have a
22:12
Speaker 3: fairly long duration, again long relative to public markets. So
22:16
Speaker 3: once you're investing in a private company, the work then starts,
22:20
Speaker 3: the value add then actually is happening, and that exit
22:24
Speaker 3: ultimately comes years in the future. So I think our
22:28
Speaker 3: investment view has to be balanced. We have to be
22:32
Speaker 3: looking both at short term and long term simultaneously to
22:36
Speaker 3: decide where you sort of see trends going, how that's
22:39
Speaker 3: going to impact the company or manager that you're about
22:42
Speaker 3: to invest in. But we don't have the ability that
22:45
Speaker 3: the public market has, which is to say, two hours
22:48
Speaker 3: after making a trade, I'm going to change my mind
22:51
Speaker 3: and unwind that. Once we do something, we're going to
22:53
Speaker 3: own it for a while.
22:55
Speaker 2: The liquidity premium is significant and real.
22:59
Speaker 3: It's real. Well, it changes the mindset. I have the
23:02
Speaker 3: benefit of interacting with lots of different investment heads who
23:05
Speaker 3: run all kinds of different investment firms, and as a
23:08
Speaker 3: public company ourselves, I'm also constantly interacting with our public
23:13
Speaker 3: equity shareholders and research analysts, and it is just a
23:16
Speaker 3: different mindset. The Hamilton Lane team is thinking about things
23:20
Speaker 3: over many, many years. They're not fixating on what's going
23:25
Speaker 3: to happen this week or this quarter with that company.
23:28
Speaker 3: They're thinking, how can I invest a dollar today and
23:31
Speaker 3: five years from now turn that dollar into three dollars
23:35
Speaker 3: or four dollars. It's just a different orientation.
23:39
Speaker 2: So, prior to becoming CIO, you were head of strategic Initiatives.
23:43
Speaker 2: Is that timeline right? Or was that after after So,
23:46
Speaker 2: after you are CIO, you become head of strategic Initiatives.
23:50
Speaker 2: It sounds like the different sectors, the different geographies, the
23:54
Speaker 2: different clientele fits nicely into that role. Tell us a
23:58
Speaker 2: little bit about what that role was like and how
24:02
Speaker 2: that eventually led to becoming co CEO.
24:05
Speaker 3: What we realized, my partners and I and our board
24:08
Speaker 3: was that as we were continuing to evolve, one of
24:12
Speaker 3: the areas that we needed to have a real rethink
24:15
Speaker 3: on was technology. Having spent fourteen or so years as
24:19
Speaker 3: CIO and building out the various investment verticals and putting
24:23
Speaker 3: senior leadership in place, really the thought was the best
24:27
Speaker 3: place for me to spend the next part of my
24:29
Speaker 3: career was doing the same thing on the technology side
24:32
Speaker 3: of the business. While Hamilton Lane had embraced technology and
24:36
Speaker 3: had various technologies that we had been using. I think
24:39
Speaker 3: the view was we sort we foresaw growth accelerating and
24:43
Speaker 3: the idea was we needed to really rethink the tech
24:46
Speaker 3: stack and we took an interesting approach. So in my
24:49
Speaker 3: job as the sort of head of strategic Initiatives, I
24:52
Speaker 3: was afforded the opportunity to have access to Hamilton Lane's
24:55
Speaker 3: balance sheet capital, and in using that balance sheet capital,
24:59
Speaker 3: we went off into establish partnerships with a variety of
25:02
Speaker 3: primarily tech startups that were focused on the private markets.
25:07
Speaker 3: So what we were doing was we were starting to
25:09
Speaker 3: meet with these firms who were trying to identify problems
25:13
Speaker 3: and areas that we're going to impede scaling in the
25:15
Speaker 3: private markets, and we took an ownership stake in a
25:18
Speaker 3: variety of these businesses. To date, we've done over fifteen
25:22
Speaker 3: transactions where we've taken anywhere from very small ownership stakes
25:26
Speaker 3: to very very large ownership stakes. And the benefit of
25:29
Speaker 3: doing it with balance sheet capital was we got to
25:31
Speaker 3: be unlimitedly patient. There was no pressure of us to
25:34
Speaker 3: have to exit. We weren't using client capital, we weren't
25:37
Speaker 3: using fund capital, and thought our thinking was, if this
25:40
Speaker 3: is going to be something that's good for us, it's
25:42
Speaker 3: going to probably be good for others in the industry,
25:45
Speaker 3: And if we're going to be helping to drive these
25:47
Speaker 3: businesses and to help give them ideas and real time
25:51
Speaker 3: feedback and become a customer, then we'd rather align with
25:54
Speaker 3: them by actually being an owner as well. So I
25:57
Speaker 3: spent several years developing and sourcing and working on these
26:01
Speaker 3: various partnerships with some other Hamilton Lane people to try
26:05
Speaker 3: to get us into a much better position to have
26:08
Speaker 3: a market leading tech stack. A variety of these strategic partnerships,
26:13
Speaker 3: and we've had a couple of these that have exited
26:15
Speaker 3: very successfully. So it was also a good use of
26:17
Speaker 3: balance sheet capital.
26:19
Speaker 2: So let's talk a little bit about one of the
26:21
Speaker 2: companies that you guys are founding members of, which is Novada,
26:26
Speaker 2: which is a tech platform providing private markets with ESG
26:30
Speaker 2: data and benchmarking analytics. Tell us a little bit about
26:34
Speaker 2: Novada and how that's working.
26:36
Speaker 3: At This is a great example of seeing a problem
26:39
Speaker 3: and not seeing an obvious solution. Our clients no different
26:43
Speaker 3: than they focus on the public equity side. If they
26:46
Speaker 3: want to understand what's sort of happening around ESG issues
26:49
Speaker 3: with companies that they're investing in, and so they're beginning
26:52
Speaker 3: to ask for various data points and various tracking. There
26:56
Speaker 3: was no system to do this, and what you all
27:00
Speaker 3: also realized very quickly was that investors did not have
27:03
Speaker 3: a one size fits all approach to this. An investor
27:07
Speaker 3: in Norway has a very different orientation around what ESG
27:12
Speaker 3: means to them than an investor in Japan or an
27:15
Speaker 3: investor in Saudi Arabia. And so trying to say to
27:18
Speaker 3: all these investors, oh, here's the one way you have
27:21
Speaker 3: to look at it, we thought was a total losing proposition.
27:25
Speaker 3: We also thought that, frankly, the ESG metrics in the
27:28
Speaker 3: way that scoring is working on the public equity side
27:31
Speaker 3: was a little bit nonsensical. And so take us, for
27:35
Speaker 3: an example, Hamilton Lane in the public equity world has
27:38
Speaker 3: a pretty lousy ESG score. Well, we have an incredibly
27:42
Speaker 3: good environmental footprint. We do all kinds of carbon offsetting,
27:46
Speaker 3: so no issue there. We have very positive societal impact.
27:50
Speaker 3: We're helping with an awful lot of retirement benefits, were
27:53
Speaker 3: consistently listed as a best place to work in providing
27:56
Speaker 3: employees with a healthy and constructive work environment. So why
28:01
Speaker 3: is there a score problem? Well, we're a controlled company
28:04
Speaker 3: in the public world.
28:05
Speaker 2: Define what a controlled company.
28:07
Speaker 3: Controlled company means that the insiders some shareholders, have super
28:12
Speaker 3: voting shares, and so we are technically controlled by those
28:17
Speaker 3: inside shareholders as opposed to our outside shareholder.
28:21
Speaker 2: Shouldn't that be a different scoring for a private company.
28:24
Speaker 2: Then it's one thing if you're a public company with
28:27
Speaker 2: tens of millions of shareholders, Like I am not a
28:30
Speaker 2: big fan of the Facebook management structure, and we saw
28:34
Speaker 2: something similar chops like Fharahos and Uber and other places
28:40
Speaker 2: that ran into we work as another example. You're less
28:44
Speaker 2: than a thousand employees, the founding partners are mostly still there.
28:49
Speaker 2: Why shouldn't the founders have Maybe I'm speaking my book here,
28:53
Speaker 2: but why shouldn't the founders have super majority?
28:56
Speaker 3: I think our investors liked it, yea. That was the
28:58
Speaker 3: irony was that they liked the alignment. They liked that
29:01
Speaker 3: we were again a lot of our capitals at risk.
29:03
Speaker 3: Alongside of there, our clients, like at shareholders liked it.
29:06
Speaker 3: But again in sort of the way the public equity
29:08
Speaker 3: ESG scoring works, it's a little bit blind to nuance.
29:12
Speaker 3: It's controlled company bad therefore bad score. So as we
29:16
Speaker 3: were looking at ESG for the private world, we didn't
29:18
Speaker 3: want to replicate what we saw the mistakes being made
29:21
Speaker 3: we thought on the public side, and there wasn't really
29:23
Speaker 3: anything out there at the time, and so we created
29:27
Speaker 3: from huole cloth. We came together, We met some of
29:29
Speaker 3: the now management team of Nevada, shared a philosophy around
29:34
Speaker 3: the problem that we were trying to solve. Gathered up
29:37
Speaker 3: a group of various shareholders now including the Ford Foundation, SMP, Microsoft,
29:43
Speaker 3: a lot of other interesting institutional investors, and we literally
29:48
Speaker 3: created Nevada from hl Cloth and now today Nevada is
29:52
Speaker 3: the world's largest collector of ESG data for private companies,
29:58
Speaker 3: client bases all over the globe. Huge database, interesting technology,
30:03
Speaker 3: interesting solution, and allowing investors and clients of Nevada to
30:08
Speaker 3: consume data how they want to consume it, rather than
30:12
Speaker 3: giving some arbitrary scorecard that says this is how you
30:16
Speaker 3: should look at it, or instead empowering people by saying,
30:19
Speaker 3: here's the data. You do with the data that you
30:22
Speaker 3: think is best for you and your organization.
30:24
Speaker 2: Huh. Really really fascinating. So let's talk a little bit
30:27
Speaker 2: about some of the most significant changes that are going
30:30
Speaker 2: on in the private markets. What's the difference between today
30:35
Speaker 2: and the nineteen nineties.
30:37
Speaker 3: I think it depends on which vertical we want to
30:39
Speaker 3: focus on. I would say probably the biggest difference is
30:42
Speaker 3: really around the client base. In the nineties, as we
30:45
Speaker 3: had mentioned, it was really just a game for institutional investors,
30:49
Speaker 3: and today that's no longer true. Today, the retail investor
30:53
Speaker 3: has finally been afforded the opportunity to take advantage of
30:57
Speaker 3: what the institutional investor has been taking advantage of for
30:59
Speaker 3: men many many years. So that's the biggest change I
31:03
Speaker 3: think on the investing side. The expansion of some of
31:07
Speaker 3: the verticals is also a big change. Private credit has
31:10
Speaker 3: really taken over from banks, particularly regional banks as well
31:15
Speaker 3: as large banks, in being the primary provider of lending
31:19
Speaker 3: capital to businesses. That's been a huge sea change. If
31:23
Speaker 3: we had gone back into the eighties or nineties, or
31:25
Speaker 3: even in the two thousands, and you were a local
31:28
Speaker 3: business owner that had a small factory and a town
31:32
Speaker 3: in the Midwest US, and you wanted to expand and
31:36
Speaker 3: add another factory, you would have probably gotten in your
31:39
Speaker 3: car and driven down to your local bank where you
31:41
Speaker 3: knew the bank manager and they knew you because you
31:44
Speaker 3: were the big employer in that town, and you said,
31:47
Speaker 3: I'm going to build another factory, and they said great,
31:50
Speaker 3: and they were going to give you a loan to
31:52
Speaker 3: do that. That's really not existing much anymore. Private credit
31:56
Speaker 3: has really taken that over in a much more programmatic way.
32:01
Speaker 3: So I think there's a couple of big examples of
32:04
Speaker 3: some of the changes that you're seeing across the asset class.
32:06
Speaker 2: You know, it's interesting because I have a recollection of
32:10
Speaker 2: the late nineties early two thousands, and as all the
32:13
Speaker 2: large money center brokers and banks just became larger and
32:18
Speaker 2: moved upscale upstream, there was a void created behind them,
32:22
Speaker 2: and private equity filled that void. On the mercantile banking
32:28
Speaker 2: and private equity side, it sounds like you're saying the
32:31
Speaker 2: exact same thing happened on the private credit side. Banks
32:34
Speaker 2: got bigger and they left their smaller, mid sized clients behind.
32:37
Speaker 3: They got bigger, and they got regulated in a way
32:40
Speaker 3: that made it harder for them to participate here. And
32:44
Speaker 3: I think the private credit firms have frankly just done
32:47
Speaker 3: a better job of making that an asset class and
32:51
Speaker 3: making that both accessible to borrower and lender. And so
32:55
Speaker 3: I think all of that has actually been a positive development.
32:58
Speaker 2: So I've a credit both expanded. How about infrastructure expansion there? Really?
33:05
Speaker 3: I mean, if you look around the globe, we can
33:07
Speaker 3: go anywhere very quickly and see that there's huge need
33:10
Speaker 3: for infrastructure overhaul our systems, roads, telcom, power sources, all
33:18
Speaker 3: of that is aging in a way that governments are
33:21
Speaker 3: just frankly not able to keep up with it, and
33:23
Speaker 3: they're not able to finance it, And so you're seeing
33:26
Speaker 3: more partnerships with private infrastructure to go and deal with again,
33:32
Speaker 3: whether it's transportation needs or energy needs, all of that
33:36
Speaker 3: becoming much more in the purview of the private markets.
33:40
Speaker 2: So we've seen a torrent of capital entering a variety
33:44
Speaker 2: of different private investment strategies. When I see that much
33:48
Speaker 2: money piling into a space, the first question that comes
33:53
Speaker 2: to mind is, Hey, are there enough good deals to
33:56
Speaker 2: go around for all this capital find a home or
34:00
Speaker 2: or are we just seeing a sea of cash just
34:03
Speaker 2: washing over too few deals.
34:05
Speaker 3: I think, like in anything, people do things better and
34:09
Speaker 3: some people do things worse. I think the interesting part
34:12
Speaker 3: with the private markets is that capital flows have really
34:16
Speaker 3: not been a good barometer of much of anything. So
34:19
Speaker 3: in years where you've seen lots of capital raised, you
34:22
Speaker 3: haven't seen any correlation to performance, good or bad. And
34:26
Speaker 3: in fact, if you look at performance over long periods
34:28
Speaker 3: of time, one thing that has been true is that
34:31
Speaker 3: the dispersion of performance has remained very wide. Pundits would
34:35
Speaker 3: have said and did say twenty years ago. Well, as
34:37
Speaker 3: the industry matures, the dispersion will shrink and the difference
34:42
Speaker 3: between top and bottom will become very small because the
34:45
Speaker 3: markets will quote become more efficient. And in fact, that
34:48
Speaker 3: hasn't happened at all, and it hasn't happened for a
34:50
Speaker 3: pretty basic reason. If you think about what is a
34:53
Speaker 3: private equity investment, you're literally partnering with management to run
34:57
Speaker 3: a company. And so one of the examples I always
34:59
Speaker 3: say when I'm talking to audiences about this topic is
35:03
Speaker 3: if I put ten people out out of the audience,
35:06
Speaker 3: and I gave each of the ten a chance to
35:08
Speaker 3: be the CEO of this particular business for a year,
35:13
Speaker 3: we would have ten wildly different outcomes because each of
35:17
Speaker 3: the ten would make very different decisions on marketing and
35:20
Speaker 3: manufacturing and hiring and culture. And so whether there's more
35:24
Speaker 3: or less capital thrown at that company, it's not going
35:28
Speaker 3: to alter the outcome. What's going to alter the outcome
35:30
Speaker 3: primarily is what decisions were being made, and were they
35:33
Speaker 3: good decisions or bad decisions. It's sort of the very
35:37
Speaker 3: definition of active management, where people are hands on with
35:41
Speaker 3: that company making choices, fundamental choices. So some people make
35:46
Speaker 3: better choices than others, and so the dispersion remains very,
35:49
Speaker 3: very high despite the fact that more and more capital
35:53
Speaker 3: continues to move into the business, and one of those
35:56
Speaker 3: choices is around deal flow. Not every manager has an
36:00
Speaker 3: equal access to the same deal flow. In fact, proprietary
36:03
Speaker 3: deal flow is very much still alive and well in
36:06
Speaker 3: the private markets because there's no screen that they can
36:10
Speaker 3: log into to simply look up, hey, what's available to
36:13
Speaker 3: buy today. In the private markets, it's really about getting
36:16
Speaker 3: out there, unearthing opportunities, networking, meeting with management teams, meeting
36:21
Speaker 3: with sellers. All of that is a skill set. All
36:24
Speaker 3: of that is frankly unequal, and all of that then
36:27
Speaker 3: leads to way better outcomes or way worse outcomes.
36:31
Speaker 2: Yeah, I'm surprised to hear that pundits would have imagined
36:35
Speaker 2: that that dispersion would narrow when we look in other areas.
36:39
Speaker 2: It doesn't matter ETF's mutual funds facs. Pick your public
36:43
Speaker 2: investment strategy almost a winner take all scenario when a
36:47
Speaker 2: group of also runs. The winners have a flywheel where
36:52
Speaker 2: all these advantages accumulate and compound and work to the
36:56
Speaker 2: benefit of those who were early and right like why
37:01
Speaker 2: would anyone really imagine that that dispersion would narrow. You
37:05
Speaker 2: certainly haven't seen it in mutual funds or anything in
37:07
Speaker 2: the private markets. It looks like, hey, if you have
37:11
Speaker 2: an advantage and you've been successful for a while, you
37:14
Speaker 2: should be able to continue to build on that advantage.
37:16
Speaker 3: I think the mistake that people made is that they
37:18
Speaker 3: just simply made the kind of bold and incorrect assumption
37:22
Speaker 3: that time or growth or scale would sort of cause
37:28
Speaker 3: a reversion of return or a reversion to the mean,
37:31
Speaker 3: or a collapsing of dispersion. And it just goes back
37:34
Speaker 3: to what we just said, No, this is about a
37:37
Speaker 3: skill set and what choices you make with the business,
37:41
Speaker 3: and what choices you make with your own business. And
37:44
Speaker 3: again you've got winners and losers. What's not happening in
37:47
Speaker 3: our industry is there's not a winner take all. There
37:50
Speaker 3: are thousands of private fund managers around the globe, operating
37:54
Speaker 3: in different geographies and across different styles and strategies, and
37:57
Speaker 3: that number has generally continued to grow year after year
38:00
Speaker 3: after year. So lots and lots of fund managers. And
38:03
Speaker 3: if we then put them on a plot chart across performance,
38:07
Speaker 3: you'd sort of see a big gapping between the top coretile,
38:10
Speaker 3: which is still a huge number of managers, could be
38:13
Speaker 3: over well over a thousand managers who are in the
38:16
Speaker 3: top quartile relative to the bottom couretile, and then you
38:20
Speaker 3: sort of see everything that's kind of in the middle.
38:22
Speaker 3: So lots of choice for investors. But it's also why
38:25
Speaker 3: frankly affirm like ours has the ability to exist. Navigating
38:29
Speaker 3: all of that is hard. It takes a lot of resources,
38:33
Speaker 3: a lot of expertise, a lot of data, a lot
38:34
Speaker 3: of technology to try to figure out from those thousands
38:38
Speaker 3: of choices, which ones do you want to put in
38:40
Speaker 3: your portfolio.
38:41
Speaker 2: So Sturgeon's law applies to private capital and private equity
38:45
Speaker 2: and private credit as well as everything else. I was
38:49
Speaker 2: kind of taken by a quote of yours earlier this spring.
38:54
Speaker 2: You said this could be a choppy summer. What does
38:58
Speaker 2: that mean and why do you expect choppy?
39:01
Speaker 3: Well, I think what's happening in the US politically has
39:04
Speaker 3: been very choppy. Tariffs, changes in the labor workforce, new regulations,
39:11
Speaker 3: changes in tax code. It's a lot of altering the landscape.
39:17
Speaker 3: And so I think one of the reasons why we
39:19
Speaker 3: have seen a fair amount of public market volatility. While
39:22
Speaker 3: it's generally been still moving up, we've seen a fair
39:24
Speaker 3: amount of volatility. And in our world, it's harder to
39:28
Speaker 3: price assets today because you're trying to look ahead to see, okay,
39:34
Speaker 3: does this company have exposure to something that might be
39:37
Speaker 3: tariff impacted? How much exposure and what will be the
39:40
Speaker 3: tariff impact and how long will the tariff impact be
39:43
Speaker 3: in place? So what you've seen in our industry is
39:47
Speaker 3: that deal volume, deal doing remains relatively healthy, deal exiting
39:53
Speaker 3: remains pretty slow.
39:55
Speaker 2: Is that driven by the lack of an IPO market
39:58
Speaker 2: or reduction in M and A or I.
40:00
Speaker 3: Think it's more back to the choppiness to use my
40:02
Speaker 3: own word of is today really the day I want
40:05
Speaker 3: to sell this company to maximize value? And by the
40:09
Speaker 3: way that potential buyer is also thinking to themselves, is
40:12
Speaker 3: today the data I actually want to buy this business?
40:15
Speaker 3: Could the price get lower tomorrow? Or might it get
40:18
Speaker 3: higher tomorrow? So I would say we haven't seen buyer
40:21
Speaker 3: and seller agree to what norm is, and they're both
40:26
Speaker 3: kind of staring off at each other, looking to see higher, lower, better, worse,
40:31
Speaker 3: And the result of that is causing sort of a
40:34
Speaker 3: lack of this volume across the industry.
40:37
Speaker 2: Huh, really really interesting. So the equity markets seem to
40:42
Speaker 2: have figured out, for lack of a better phrase, hey,
40:45
Speaker 2: most of this lack of clarity around tariffs is going
40:49
Speaker 2: to go away, that there's a little bit of the
40:52
Speaker 2: taco trade and that this is a negotiating tactic and
40:55
Speaker 2: eventually will have ten fifteen percent marginally higher than we
41:02
Speaker 2: had before, but nothing that's going to push the economy
41:06
Speaker 2: into a recession. Do you think that's a fair assessment
41:09
Speaker 2: or perhaps the public markets are being a little too optimistic.
41:14
Speaker 3: I think it's a reasonable assessment. And the end, the
41:17
Speaker 3: public markets have the advantage of momentum. If everyone can
41:22
Speaker 3: kind of collectively agree and kind of drink that kool aid,
41:26
Speaker 3: then you get the benefit of the sort of the
41:28
Speaker 3: tide is rising. It's different in the private markets. If
41:31
Speaker 3: you and I are out there to go do a deal,
41:34
Speaker 3: we're about to walk away owning a company. Well, we're
41:38
Speaker 3: going to live and die by that company's actual results,
41:41
Speaker 3: and so hoping that tariff impacts will be either non
41:45
Speaker 3: existent or hoping that they will change or that they
41:47
Speaker 3: will be short lived, that's not a strategy because if
41:51
Speaker 3: we're wrong, that company's earnings and revenue is going to
41:55
Speaker 3: be fundamentally altered, and then we're gonna have a hard
41:58
Speaker 3: time selling that company. So I think you have a
42:01
Speaker 3: difference of in the public equity world, I see much
42:04
Speaker 3: more macro overlay because you're sort of trying to figure out, yes,
42:09
Speaker 3: is this a good company, and how do I assess
42:11
Speaker 3: the company? And at the same time you're trying to
42:13
Speaker 3: figure out, well, generally what direction are the markets going in?
42:17
Speaker 3: But on the private side, a lot less macro overlay
42:21
Speaker 3: and much more fundamental focus on that single asset.
42:25
Speaker 2: You don't get the same tailwind from the sector and
42:28
Speaker 2: the market overall in private markets that perhaps you get
42:31
Speaker 2: in part.
42:31
Speaker 3: You get some of that when it comes time to sell.
42:33
Speaker 3: Are you in a good space? Is your industry growing?
42:37
Speaker 3: So you get some of that halo effect, but you're
42:40
Speaker 3: still pinned to a single asset, and on a relative basis,
42:45
Speaker 3: most private markets portfolios are pretty concentrated. So if you're
42:48
Speaker 3: a fund manager running a private market's portfolio, you might
42:52
Speaker 3: end up with a portfolio of fifteen companies. Well, you
42:56
Speaker 3: can't be wrong on a bunch of those. That's you're
42:58
Speaker 3: going to have a terrible result. The winners won't be
43:00
Speaker 3: big enough to outweigh the losers.
43:03
Speaker 2: Really interesting. So two related questions. The first is what
43:08
Speaker 2: do you think is next for the private markets? And
43:11
Speaker 2: the related question is what are your strategic priorities for
43:14
Speaker 2: Hamilton Lane.
43:15
Speaker 3: I think they're both related. Actually the answer is going
43:18
Speaker 3: to be sort of one and the same. I think
43:20
Speaker 3: what's next is there is going to be this adoption
43:23
Speaker 3: and influx of retail capital. We're seeing it, but it's
43:27
Speaker 3: still very early innings. If you look at the institutional world,
43:31
Speaker 3: most institutional investors have an allocation to the private markets
43:35
Speaker 3: that's north of ten percent. If you look at the
43:38
Speaker 3: average retail investor, their exposure to the asset class is
43:42
Speaker 3: about zero percent. And if you look at just wealth
43:45
Speaker 3: statistics around the globe, there are trillions and trillions and
43:49
Speaker 3: trillions of dollars in the hands of individual savers globally.
43:54
Speaker 3: So if you believe that they over time, we'll have
43:58
Speaker 3: portfolios that look much more more similar to an institutional portfolio.
44:03
Speaker 3: There's a huge amount of capital that's going to get migrated,
44:07
Speaker 3: but that capital is coming from a different type of investor,
44:12
Speaker 3: one who is accustomed to everything being on their phone
44:15
Speaker 3: and everything being available now, think about how we all
44:19
Speaker 3: interact with the public equity world as individual investors. I'm
44:22
Speaker 3: sitting here in front of a Bloomberg terminal. I have
44:25
Speaker 3: unlimited access to information, and I can execute on anything
44:29
Speaker 3: I want to do right here without moving more than
44:33
Speaker 3: a couple of fingers. The private markets today technologically are
44:38
Speaker 3: not built that way, and so there's a lot of
44:40
Speaker 3: change I think that's going to be coming around private
44:43
Speaker 3: market infrastructure, and I mean the infrastructure for our industry
44:47
Speaker 3: and how we interact with the customer. And that flow
44:50
Speaker 3: through is going to not only start with the retail investor,
44:53
Speaker 3: but it will then flow back to the institutional investor.
44:56
Speaker 3: So strategically, for Hamilton Lane, we're very focused on making
44:59
Speaker 3: sure sure that we're getting that market segment right, that
45:03
Speaker 3: we're purpose building, to make sure that we're properly caring
45:07
Speaker 3: and feeding of that customer base, which is again different
45:10
Speaker 3: than the customer base that we've historically dealt with, and
45:13
Speaker 3: making sure that all of that is oriented to sort
45:15
Speaker 3: of achieving success there is right now a huge strategic priority.
45:20
Speaker 2: So many of the topics we're discussing are very much
45:24
Speaker 2: front page headline sorts of news. Let me ask a
45:28
Speaker 2: little bit of an under the radar question. What are
45:31
Speaker 2: investors not talking about? What topics? Assets, geography, I don't know, policy,
45:38
Speaker 2: data points is getting overlooked, but perhaps should not be.
45:43
Speaker 3: I think one of them is back to this retail question,
45:46
Speaker 3: which is, how is the emergence of this new investor
45:50
Speaker 3: class going to impact the industry, Because I believe it's
45:53
Speaker 3: going to impact it dramatically in the technology and the
45:57
Speaker 3: flow of capital, in the style of investor. And so
46:01
Speaker 3: what are the ripple effects. I suspect they'll be positive
46:03
Speaker 3: and negative of that, And so what does that sort
46:07
Speaker 3: of shake out and impact then do to the industry.
46:10
Speaker 3: One of the things I think we're going to clearly
46:12
Speaker 3: see is that if you want to be a player
46:15
Speaker 3: in the industry, a fund manager, a service provider, the
46:18
Speaker 3: need for your own infrastructure, your own technology to be
46:22
Speaker 3: substantial is very real. And that's adding a whole other
46:27
Speaker 3: layer of expense to the management of these businesses. Some
46:31
Speaker 3: will figure that out, and we'll have the size and
46:33
Speaker 3: the scale and the growth to sort of do that,
46:36
Speaker 3: and I suspect a number of firms will simply not so. Today,
46:40
Speaker 3: while the industry has been growing from both a number
46:42
Speaker 3: of managers and asset perspective. I think if we were
46:46
Speaker 3: to fast forward and come back and have this conversation
46:48
Speaker 3: in ten years, I think the asset base will have
46:51
Speaker 3: continued to grow. I think the number of participants will
46:54
Speaker 3: actually have gone down.
46:56
Speaker 2: Really, I do. Even as you're adding more and more
47:00
Speaker 2: mom and pop mainstream investors to the client base.
47:03
Speaker 3: Of private I think the number of firms that are
47:06
Speaker 3: going to be capable of successfully servicing that investor base
47:11
Speaker 3: is relatively small.
47:12
Speaker 2: I will tell you from personal experience working with individual investors,
47:17
Speaker 2: some of whom want exposure to various alternatives. The back ends,
47:24
Speaker 2: the legal, compliance, reporting, custodian all those different things that
47:29
Speaker 2: have really become frictionless on the public markets. It's really challenging.
47:34
Speaker 2: It's really difficult on the private market. It's everything is
47:38
Speaker 2: its own unique I don't even want to say CSIP
47:41
Speaker 2: its own unique animal that is pet in a different way.
47:45
Speaker 2: It has no standardization at all.
47:47
Speaker 3: Has to change. The investor will not tolerate it. That's
47:50
Speaker 3: the reality is that you can't expect that individual investor
47:55
Speaker 3: who has been so trained and has adopted that friction
48:00
Speaker 3: in less environment for the for their entire portfolio, and
48:05
Speaker 3: now to say to them, well, for this five percent
48:07
Speaker 3: of your portfolio, it's going to be a gigantic pain
48:11
Speaker 3: in the rear. They're gonna say, I'm not dealing with that.
48:15
Speaker 3: So it can't stay this way. So one of the
48:19
Speaker 3: things that we believe will be one of the change
48:21
Speaker 3: agents is the world of tokenization. That does make things
48:26
Speaker 3: much cheaper, faster, and without friction. And so Hamilton Lane
48:30
Speaker 3: has been a very early and aggressive adopter of that technology.
48:34
Speaker 3: We've tokenized more funds, we believe than anybody else in the.
48:37
Speaker 2: World to find that. What does tokenization mean for an
48:39
Speaker 2: individual investor.
48:40
Speaker 3: It's moving from a physical world to a digital world.
48:45
Speaker 3: Tokens are simply tracking of investments using blockchain technology, and
48:50
Speaker 3: so instead of dealing with subscription docs and all of
48:54
Speaker 3: the pain points of all of the legal and regulatory structure,
48:59
Speaker 3: imagine doing that in a point and click world where
49:02
Speaker 3: you can access a fund digitally using a digital wallet
49:07
Speaker 3: and storing it in a digital wallet and tracking it
49:09
Speaker 3: in a digital wallet. And that is the world of tokenization.
49:12
Speaker 3: So today there are a number of token exchanges around
49:16
Speaker 3: the globe. Hamilton Lane is an investor and owner and
49:19
Speaker 3: a number of them. And if you go on today
49:22
Speaker 3: to firms like Republic or Securitize here in the US,
49:26
Speaker 3: you would see product offerings there. Investors can still access
49:31
Speaker 3: documents and information, but when it's time to actually purchase
49:35
Speaker 3: or invest, they can just simply click the buy button.
49:40
Speaker 3: And as that world matures over time, you will have
49:43
Speaker 3: exchanges that have buyers and sellers, and so some of
49:47
Speaker 3: that ill liquidity issue that we've always been mired with
49:50
Speaker 3: given the long duration, should start to lessen because you'll
49:53
Speaker 3: be able to trade more freely.
49:56
Speaker 2: My assumption is that if you're trading private law assets,
50:01
Speaker 2: regardless of what they are, Hey, if you want to sell,
50:04
Speaker 2: you're going to be getting a discounted price versus holding
50:08
Speaker 2: it for the duration.
50:10
Speaker 3: That certainly has been the case historically. I think what
50:13
Speaker 3: remains to be seen is that still true in a vibrant,
50:17
Speaker 3: healthy token world where you have lots of buyers and
50:20
Speaker 3: sellers on these exchanges. I think what you're going to
50:23
Speaker 3: see is that discount is going to greatly reduce because
50:27
Speaker 3: access to information and the ability to move assets is
50:30
Speaker 3: going to become much easier and quicker.
50:32
Speaker 2: So what does this mean for the illiquidity premium. The
50:35
Speaker 2: fact that investors who agree to tie up their money
50:38
Speaker 2: for five years, seven years, nine years get a theoretically
50:42
Speaker 2: higher payout than they might in a liquid public market.
50:46
Speaker 3: Well, this is going to be what the managers are
50:47
Speaker 3: going to have to deal with. They're going to have
50:49
Speaker 3: to continue to deliver some level of outperformance. Now, if
50:52
Speaker 3: the ill liquidity issue completely evaporates because tokens become so
50:55
Speaker 3: freely exchangeable, then I think what you're going to simply say,
50:59
Speaker 3: as well, it's an equid strategy, so it might be
51:02
Speaker 3: the exact same return as a public equity, as long
51:04
Speaker 3: as it's mirroring that, you still get the benefit of
51:08
Speaker 3: a diversification. You're still accessing assets that are non public
51:12
Speaker 3: and so the only way to access them is in
51:14
Speaker 3: the private world. But I think that will sort of
51:16
Speaker 3: cause a change in how people think about benchmarking and
51:19
Speaker 3: how they think about portfolio construction. We're a long ways
51:22
Speaker 3: away from that. So today the ill liquidity premium exists
51:26
Speaker 3: and the il liquidity issue is still very much front
51:28
Speaker 3: and center. But I think you can sort of see
51:31
Speaker 3: the building blocks are being put in place that could
51:35
Speaker 3: really begin to alter how that all works.
51:37
Speaker 2: Huh really very fascinating. All right, I don't have you
51:40
Speaker 2: all day long, so let me jump to my favorite questions,
51:44
Speaker 2: starting with who are your early mentors who helped shape
51:49
Speaker 2: your career.
51:50
Speaker 3: I'm a huge believer in mentors. I've had the benefit
51:52
Speaker 3: of several. My first boss when I came out of
51:56
Speaker 3: college is still a friend and mentor today. We were
51:59
Speaker 3: recently on a VACA together and he still treats me
52:03
Speaker 3: like I work for him, which is great, and I
52:05
Speaker 3: think it's healthy and it's good to have someone in
52:07
Speaker 3: your life who reminds you where you came from and
52:10
Speaker 3: is quick to give you advice and perspective, and has
52:13
Speaker 3: nothing but your best interest at heart.
52:15
Speaker 2: Let's talk about streaming. What are you watching or listening
52:19
Speaker 2: to today?
52:21
Speaker 3: I consume a lot of news, and so I also
52:25
Speaker 3: have a bit of a political junkie. So I've been
52:28
Speaker 3: enjoying a new launch of a new kind of network.
52:32
Speaker 3: I guess you'd call it called two Way, which is
52:35
Speaker 3: an interesting series of political conversations and access to different
52:39
Speaker 3: kind of political pundits and elected officials. So I've been
52:42
Speaker 3: consuming a fair amount of news via two Way.
52:44
Speaker 2: Huh. Interesting. Let's talk about books. What are some of
52:47
Speaker 2: your favorites. What are you reading right now?
52:49
Speaker 3: I am a voracious reader, so something is always open.
52:52
Speaker 3: Not all of it's good or worthy of sharing. I
52:54
Speaker 3: recently finished something that I think is worthy, which is
52:58
Speaker 3: a book called When the c Came a Lot by
53:00
Speaker 3: Garrett Graf. I think he writes in a really interesting
53:03
Speaker 3: way where he's piecing together first hand accounts and diaries,
53:07
Speaker 3: and so this book was really focused exclusively on the
53:11
Speaker 3: landing on the beaches at D Day.
53:13
Speaker 2: Huh. Interesting you said something. Not all of them are
53:16
Speaker 2: good or worthwhile. My view is, if you're reading a
53:20
Speaker 2: book and you're not enjoying it, well give it to
53:23
Speaker 2: someone else and start the next book.
53:25
Speaker 3: I should do that. I really struggle with that.
53:27
Speaker 2: I am not homework.
53:28
Speaker 3: It's not an assignment, I know, and yet I find
53:31
Speaker 3: myself grinding through things that I'm sitting there thinking this
53:35
Speaker 3: is really not worth my time, and yet I have
53:37
Speaker 3: this compulsion of I started it, I have to finish it.
53:41
Speaker 2: I I somebody turned me on to the idea of
53:45
Speaker 2: not finishing books. You started, like, I don't know, fifteen
53:49
Speaker 2: years ago, and it's changed. The average American reads four
53:53
Speaker 2: books a year. The average quote unquote reader reads ten
53:57
Speaker 2: books a year. I find if you don't like a
54:00
Speaker 2: book and you close it, you're reading you two books
54:03
Speaker 2: a month. It's a whole different.
54:05
Speaker 3: Well, we're probably reading two books a month and I'm
54:07
Speaker 3: not closing them. At least I should accelerate, and I
54:11
Speaker 3: have to learn. That's a good lesson for me to
54:13
Speaker 3: take takeaway from this.
54:14
Speaker 2: Our final two questions, what sort of advice would you
54:17
Speaker 2: give to a recent college grad interested in a career
54:21
Speaker 2: in either a private equity or private capital or investing
54:25
Speaker 2: in general.
54:26
Speaker 3: I think I would give the same advice regardless of
54:28
Speaker 3: the industry, and that goes back to your question on
54:30
Speaker 3: the mentor piece. I think we employ a whole lot
54:34
Speaker 3: of young people and I love that. In fact, we
54:38
Speaker 3: literally just last week welcomed our brand new analyst class.
54:42
Speaker 3: They seem younger and younger to me, and I am
54:44
Speaker 3: clearly getting older. So I had the privilege of welcoming
54:46
Speaker 3: them to the firm and addressing them, and I was
54:49
Speaker 3: asked this question and my answer was, get a mentor.
54:54
Speaker 3: I think right now, particularly with younger folks, there's a
54:58
Speaker 3: belief that everything that you need to know you can
55:01
Speaker 3: look up. I can just go online. I can ask
55:04
Speaker 3: chat GPT, I can Google for it, and I just
55:08
Speaker 3: don't believe that's true. I still think that whether it's
55:10
Speaker 3: an investment industry or a legal profession or a medical
55:15
Speaker 3: that while you can get a lot of knowledge via
55:19
Speaker 3: the Internet and via other electronic resources, there is something
55:23
Speaker 3: about learning from the mistakes that others who have gone
55:27
Speaker 3: before you have made that is invaluable. And I think
55:31
Speaker 3: aligning yourself in a really healthy mentor mentee relationship, I
55:37
Speaker 3: think is an enormously important part of a good career.
55:40
Speaker 2: Really interesting answer and our last question, what do you
55:43
Speaker 2: know about the world of investing, be it private or
55:46
Speaker 2: public today that would have been helpful had you learned
55:50
Speaker 2: it back in the nineteen nineties.
55:52
Speaker 3: I think just how much change is coming. It's so
55:55
Speaker 3: easy to go to work every day and kind of
55:59
Speaker 3: make the assumption I'm just thinking about what I have
56:01
Speaker 3: to do today and tomorrow will be very similar to today.
56:06
Speaker 3: I think training yourself to step back and try to
56:10
Speaker 3: see around corners and try to think outside the box
56:13
Speaker 3: of saying, what if it doesn't work like this forever?
56:16
Speaker 3: What if there's going to be a big change, What
56:18
Speaker 3: if this new technology is going to take off, continuing
56:21
Speaker 3: to sort of push yourself to do that. I'm better
56:23
Speaker 3: at doing that now. I wish I had done more
56:26
Speaker 3: of that when I was younger.
56:28
Speaker 2: Huh, really really interesting, Eric, Thank you for being so
56:31
Speaker 2: generous with your time. We have been speaking with Eric Hirsh.
56:35
Speaker 2: He's co CEO of Hamilton Lane, which manages or advises
56:39
Speaker 2: on nearly a trillion dollars in private assets. If you
56:44
Speaker 2: enjoy this conversation, well, be sure and check out any
56:47
Speaker 2: of the past five hundred we've done over the past
56:50
Speaker 2: eleven years. You can find those at Bloomberg, iTunes, Spotify, YouTube,
56:55
Speaker 2: wherever you find your favorite podcast. Be sure to check
56:58
Speaker 2: out my new book How Not to Invest The Bad ideas,
57:02
Speaker 2: numbers and behavior that destroys wealth and how to avoid
57:06
Speaker 2: them How Not to Invest at your favorite bookseller. I
57:10
Speaker 2: would be remiss if I do not thank the Cracked
57:13
Speaker 2: team that helps put these conversations together each week. Meredith
57:16
Speaker 2: Frank is my audio engineer. Anna Luke is my producer.
57:21
Speaker 2: Sean Russo is my researcher. Sage Bauman is the head
57:25
Speaker 2: of podcasts at Bloomberg. I'm Barry Ritoltz. You've been listening
57:29
Speaker 2: to Masters in Business on Bloomberg Radio