Prospects for private assets positive but investors need to remain disciplined
Over the course of 2022 private market assets continued to outperform public markets - such as fixed income and equities - beating public strategies across the board, according to Hamilton Lane’s latest Market Overview report.
Despite the downward pressure applied by rising interest rates and inflation in 2022, the data from Hamilton Lane - a private markets investment manager - showed that as of Q3 2022, overall private markets demonstrated more resilience than public markets.
For example, buyout outperformed the S&P 500 by nearly 20.5 per cent, while infrastructure and real estate beat the FTSE All Equity REITs Index by more than 34 per cent.
And despite concerns that private markets valuations are misleading, Hamilton Lane said its data shows valuations are generally accurate across most industry sectors, with managers often exiting deals at a premium to reported value.
The report which analyses private markets’ investment activity in 2022 with predictions for 2023, said that fundraising figures for 2022, while still at historically high levels, will be down compared to 2021 numbers – and Hamilton Lane expected a more challenging fundraising market will persist in the year ahead.
The Market Overview data showed that in most sectors, private market valuations began 2022 at a significant discount to comparable traded assets.
Over the course of the year, valuation multiples for public equities and private equities converged. Operating performance was healthy and outpaced comparable listed assets.
Even with the challenging investment landscape, the report found that the private markets – particularly private credit, infrastructure and secondaries – are proving to be areas of opportunity for investors.
The rise of retail
In recent times, access to the private markets has expanded significantly, with products structured to appeal specifically to non-institutional investors.
The report by Hamilton Lane said these offerings resolved some of the friction of traditional private markets funds and provided retail investors expanded access to private markets products.
Today, NAV in the retail space is dominated by a few large players, with the report finding that more than 50 per cent of AUM is concentrated in the three largest managers in 2022.
The report added: “This presents some amount of risk, where the future of semi-liquid funds will inevitably be tied to the success of a few managers.
“However, the report also notes that a similar dynamic existed with private equity in the 1980s, with nearly 60 per cent of AUM concentrated in the three largest managers.
“As private equity gained acceptance, a flood of managers entered the space, decreasing that concentration and spurring the growth of the industry. This poses the question of whether this will play out within the semi-liquid space as well, or whether there will continue to be a few large winners.”
Should investors be worried?
While the 2023 Market Overview identifies a number of encouraging trends across the asset class, the report also acknowledged the challenging macro environment and knock-on effects for private markets.
Although 2021 was a record year for fundraising, 2022 will be down quite a bit and, over the last four years, Hamilton Lane has not seen capital raising keeping pace with deployment.
This is due to a few factors, including the denominator effect, the numerator effect, and what the report calls “the fear effect,” where lower public markets almost invariably cause some investor pullback in illiquid investments.
The Market Overview by Hamilton Lane also highlighted some worrisome indicators within buyouts and real estate sectors in particular and encouraged investors to proceed with caution.
"While this is not to say there aren’t interesting transactions to be done or high-quality general partners that are raising capital today, the report indicates that investors should be disciplined throughout 2023 and beyond," the report added.
Mario Giannini, chief executive of Hamilton Lane and author of the report, said: “The asset class is evolving in offerings and structure to meet the demands of a varied and growing set of investors.
“Those who employ discipline, stay consistent across sectors and through cycles, and view the private markets as a long-term asset class will be best positioned.”
