Hartley Rogers, Executive Co-Chairman of Hamilton Lane, joined Julie Cooling, Founder and CEO of RIA Channel, to discuss the risk, return, diversification, and liquidity of private market investments.
Rogers notes that advisors are just in the second inning of their adoption of private market investments. The first inning is characterized by drawdown funds, the second inning marks the inception of evergreen funds, and the third inning will witness the proliferation of evergreen funds.
Sophisticated investors, such as endowments and pension funds, have substantial exposure to private markets, which has increased their returns and asset bases in ways the public markets did not provide. While a typical endowment might allocate 40% of assets to private markets, and pensions might allocate 20%, most individual investors currently allocate between 0% and 3%. Due to this lack of allocation, individual investors have not had the opportunity to benefit from the strong performance of private market investments.
Historically, it has been challenging for individuals to access private market investments, as the industry has largely offered drawdown fund structures for institutional investors. With the recent growth in evergreen funds, private markets have become more accessible to individual investors. Evergreen funds enable investors to put their cash to work immediately, achieve instant diversification, and potentially offer greater liquidity than is typically seen with drawdown funds. Educating advisors today has moved beyond the definitions of private market assets to the mechanics of portfolio construction.
Evergreen funds typically have low minimum investment requirements. Tokenized funds, offering fractional ownership tracked on a blockchain, allow for even smaller minimum investments. Hamilton Lane has tokenized its evergreen infrastructure fund, allowing for a minimum investment as low as $500. Hamilton Lane offered tokenized access to funds in Asia over three years ago, as the regulatory structure was available earlier than in the US.
Hamilton Lane is the largest multi-manager private markets firm with almost $11 billion in assets invested in both primary and secondary fund offerings. Because private markets are inherently high-risk, high-return investments, it is important to diversify across strategies, managers, and underlying deals. Rogers states that approximately 23% of private equity investments result in a loss, including 11% that completely lose their value. However, a very small percentage of diversified private equity funds lose money over the life of the fund.
Resources: