Hamilton Lane Co-CEO Erik Hirsch on Retail Investors, Evergreen Funds and Private Markets

Ann Berry  (00:00):
On this episode of After earnings, Hamilton Lane, a giant in the world of private markets investing. I'm delighted to be joined by Eric Hirsch, Hamilton Lane's Co, CEO, to discuss opening up private capital to retail investors, why fund manager experience matters more than thematics right now, and how he navigates the longer investing timelines of the private world when Hamilton Lane is itself publicly traded. Well, Eric, thank you very much for joining. I thought just to set the stage a little bit to frame a conversation around the strategy of Hamilton Lane, define for our audience the difference between your assets under management and your a UA. 

Erik Hirsch (00:38):
So our business is simple. We really think of ourself as providing solutions for all kinds of investors who want to access the private markets. And for most of our revenue is derived from assets under management where we have full discretion. We are essentially the fund manager for those assets and are responsible for deploying them. And then assets under advisement is where we're actually providing more of a consultative service to customers. Customers who might have a large internal team and who value our input and our data and our assistance and our access, but they themselves actually maintain the discretion over those assets, not us. 

Ann Berry  (01:17):
And so describe for us the shift over time from one to the other and where you are seeing the fastest growth opportunity for Hamilton Lane at the moment. 

Erik Hirsch (01:25):
So the firm really began as a pure consulting firm. So going back to the early 1990s, so long time ago, been around for over 30 years. The firm was a consultant and its customer base was essentially all institutional clients at that point in time. And if you think back to the early nineties, that was mostly public and corporate pension funds who were just beginning their journey into the private markets. And we were providing advice to them as they began to really navigate what at that point in time was really the beginning of the industry becoming fully institutionalized. And that consulting business and that practice and that reputation grew and strengthened. And that allowed us to move into a world where clients did not want to build out internal teams and internal resources, and they simply wanted to really outsource that. And so we began to be more of a manager. And today that is the preponderance of what the business is Today, about 90% or more of our revenue is coming from Hamilton Lane serving as a manager of assets. 

Ann Berry  (02:28):
And talk about the split on that side of the business between a fund of funds, you're investing in other GPS as an LP versus actually doing direct investment yourselves, whatever strategy it may be, infrastructure, private equity, private credit. 

Erik Hirsch (02:43):
We like to think of ourself as really a partner to gps, not as a competitor to them. None of our business practices are us directly investing without a gp. So when we talk about investing directly, we're talking about co-investing alongside of one of our gps. So whether that's in credit or leveraged buyouts or growth capital or the like, we're doing co-investing across all of the private markets and we're just doing that in conjunction with a lead general partner. They find that they are usually in need of additional capital in need of a constructive partner, and we're really becoming kind of that partner of choice. And so that's how we are sort of deploying capital directly. So our business then breaks out into us investing in other funds. And so we're helping customers access other private equity funds. And so that's really our fund investment team going and identifying leading fund managers across all strategies and geographies and putting capital directly in as an lp. And then we have a large business where we're co-investing alongside of them and then an even larger business where we're actually buying secondary interests and taking out and providing liquidity to other LPs out of a fund structure. 

Ann Berry  (03:59):
I'm going to come back to the secondary strategy, Eric, but just to hone in for a moment on this model of co-investment, and I grew up in the industry. We were chatting right before we started to film, and when I look back the sovereign wealth funds, the pension funds, many of whom I would go to as somebody who was a deal person but would go and meet with our investors in the fundraising cycle. And we saw those pockets of capital start truly as an LP, only as an investor into the private equity fund to agonize a bit, some of that for folks listening. And then over time theyre their co-investing business and in some cases made co-investing a prerequisite, a requirement for some of the funds who were to then welcome them as LPs and then in some cases decided, you know what? We're really going to scale back our investments in other funds and really focus on our direct business. How do you think about that? Is it possible to stay symbiotic as a truly balanced co-investor, but also lp or do you see a world over time where the aspiration actually is to become a full direct model at Hamilton Lane? 

Erik Hirsch (05:09):
Certainly not for us. That's not our aspiration. We absolutely believe that there is a synergistic and mutually beneficial relationship between us and gps. So Hamilton Lane is one of the, if not the largest provider of primary fund capital into other private equity funds. That is enormously valuable. We are a first call when someone is talking about raising a new private equity fund. We're deploying tens and tens of billions of dollars each year into private equity funds. And so we're often the largest LP when you aggregate our customer base into that fund. So that's hugely beneficial to the GP who's on the receiving end of that capital. And for us, they're a service provider. We're looking for them to achieve tremendous performance and to do it in the most efficient way possible. So we're providing capital, they're providing us returns. That's the beneficial relationship for both of 

Ann Berry  (06:07):
Us. I'm curious because the implied in that statement is the strategic value of Hamilton Lane is your scale. So just double down on that a little bit for us. Does that mean it's the insight that you bring because you see everything you just do from that vantage point? Is it because you've got certain industries where you've got particular industrial strategic relationships? Just talk a little bit about, yes, these funds are service providers to you, but I heard implicit in there that there is also a strategic value that Hamilton Lane perceives its bringing to the fund itself. 

Erik Hirsch (06:38):
Well, I think that aside from the big benefit, which is we're an efficient way for them to access a lot of capital. So it's a one diligence process, one access point. But beyond that, we like to think of ourselves as being value add simply beyond our capital. And I think that to your point, goes to our ability to have incredible market insights because of where we sit. We have an unparalleled database, we have an incredible ability to drill down inside of the industry to look at what's happening at a portfolio company level. We know what's happening across other fund managers for most fund managers. Their ability to know the competitive dynamics of their peers is very limited. Data continues to be hard to access since their competitors. They don't tend to get together a lot and sort of share notes on what's happening. But for Hamilton Lane, we really think of ourself as sitting at the middle of this sort of big ecosystem that is the private markets. We're constantly engaging with our clients, the limited partners, the investors, and we're simultaneously constantly engaging with the fund managers, the general partners. And so we're one of the few firms in the world that is sort of sitting at the nexus of those two groups of people. And so understanding challenges, frustrations, what's working, what's not working, what's happening on technology developments across the industry, what's happening at performance level, what's happening with portfolio companies, we're one of the best providers of that kind of information and I think that makes us a tremendous partner. 

Ann Berry  (08:10):
So let's talk about what you are seeing. Let's start with what is working, Eric, from the vantage point. Let's talk about traditional private equity. Which strategies are you finding working, whether it's the stage, it's growth versus buyout? Are you seeing differences currently in generalist versus sector focused? Does it just depend on cohort? Talk to us about some of the trends that you're seeing and which helps you pick the winners. 

Erik Hirsch (08:35):
I think we are, I'll take that sort of backwards. I think right now, given the market environment, we're much more about identifying great managers rather than identifying thematic investment traits. I think we're in a challenging investment environment. Liquidity has been relatively hard to come by. Purchase prices are relatively expensive, competition is fierce, fundraising is challenging. Private returns are lagging public returns, which is not something that's very normal. So we're not in an easy environment. And I think this goes to a time where you're better off identifying superb fund managers who are capable of navigating rather than there are times when you can make more thematic bets. This is not one of those times 

Ann Berry  (09:22):
That's fascinating because that really is a sea change from, I call it that pre COVID period when there was this movement towards greater thematic specialization. So talk a little bit Eric about why that changed. Is it just because the public market performance has been so strong, it's just you've got to find the outperformance wherever you find it? Or is there something about technology investing, for example, that suggests the public markets just better at it or certain kinds of ventures just better at it? 

Erik Hirsch (09:49):
I think what you see historically is when public markets are on fire, the private markets have a hard time keeping pace. 

(09:57)
So we tend to be a little bit more conservative in valuations. We're obviously not marketing to market daily. So you tend to see, if you look at this over decades when private markets are at their absolute best is typically when public markets are lagging or on average when the public markets are at their best, the private markets tend to lag. So that's sort of the macro that we're in. Very, very hot, expensive public markets, private struggling to keep up, but I think there's a multitude of factors. The privates also didn't do themselves a favor coming through COVID, which was incredibly rapid deployment of capital. And so now you have a lot of fund managers who are sitting with a lot of portfolio companies that they bought at very high prices are now dealing with the post COVID world, are dealing with tariffs, are dealing with some global uncertainty. And so we're just not seeing liquidity at the pace that certainly investors would like or even seeing it at normal historical averages. Things are slower, fund managers have their hands full. And so I think that's the combo. 

Ann Berry  (11:04):
And what about by asset clause? Eric? There's one narrative at the moment that private credit's in a bubble, for example. Do you agree with that? 

Erik Hirsch (11:11):
Well, I think private credit is attracting a tremendous amount of capital. I think when we say bubble, that sort of says to me, everybody is going to experience the same up or the same down. I don't see that. I think you're seeing credit managers take very different choices, and this is why I go back to now is not the time for big thematic investing, IE saying, Hey, anything in private credit's going to be great. I think there are managers in private credit who are great and I think they will navigate all of this successfully. And there are managers in private credit that are not great and they won't manage this successfully. But I think you're going to see, and you'll continue to see kind of a divergence and dispersion of return. To your point, you've been a student of this for a long time. We've been sort of told forever frankly, that as this industry grows and as it matures, returns will kind of revert to the mean, they'll revert to the average. 

(12:07)
It just simply hasn't happened, which is why I go back to manager selection is essential because despite this industry being 50 plus years old, when we look at dispersion of performance by manager, it's very wide. The top and the bottom are very far apart. And so this is not a question of, well, when things mature, that dispersion will go away. This goes back to talent and approach and philosophy and strategy and people make very different choices. We're seeing that now, and we've seen that historically, and it's why that dispersion continues to be wide and isn't narrowing. 

Ann Berry  (12:47):
Let's talk about how that relates to your secondary strategy, Eric. So you said earlier that you've got a pretty robust secondary amount of activity at the moment. Which kinds of opportunities are you looking for and are the best ones becoming available at a decent valuation? Because if everyone's trying to look for the great manager, to your point, because of the challenges at the moment in terms of private investing, are we seeing that secondaries one even becoming available for the best managers or are they overpriced? 

Erik Hirsch (13:18):
This is one of the things I like about the private markets, which is it's not fair. Life's 

Ann Berry  (13:23):
Not fair. 

Erik Hirsch (13:24):
It's definitely not fair. I mean, I think one of the in asset classes where everyone has kind of the exact same access to opportunity and the exact same access to data, you have a lot more equality and trying to figure out how to have your own edge and angle becomes harder. In this industry, we're still in a world where it's very unfair. People don't get to see the same deal flow. People don't have the same access to data, they don't have the same relationships with fund managers in order to get access to information. All of those things are whatever it is that you create for yourself, they're not being created for you. 

(13:58)
And so in the secondary world, your angle on deal flow, your angle on data, your angle on negotiating wildly different, and it's again, why you see performance being very different because everyone's taking some sort of different approaches to that. So for us, we're seeing large volume, that's not surprising. I would say volumes being sort of driven by three pieces. Piece number one is that it's a maturing asset class, and as this continues to mature, people wanting to have more liquidity, optionality to them is rising. That's not surprising. So part of why you're seeing the secondary market growing is simply because as an industry we're getting more mature and the idea of portfolio rebalancing and selling and all that's becoming much more normalized. So that's piece number one. Piece number two is the lack of liquidity. So you're seeing a lot fund managers lead their own, we call it GP led secondaries, single assets or portions of funds where they've been unable or unwilling frankly to get liquidity and they want to continue to roll that asset. They want to continue to manage it. You've seen a huge rise in that. And GPS trying to balance providing liquidity to their existing LPs while wanting to retain what they view to be a terrific asset on a go forward basis. So we've also seen a rise of that. 

(15:22)
Again, if we had an amazing liquidity market, would we be seeing as much of that? We would not still see some of it, but so that's piece number two. And piece number three is that you're seeing not equal levels of LP stability across the industry. Some LPs are experiencing some challenges of being overexposed or having made bad macro bets and needing to portfolio rebalance. So some of the rise in the secondary market also has to do with LPs dealing with the choices they made years ago, wanting to sort of remedy some of that and take a different approach going forward. So you've seen a big rise because I think you've seen all three of these factors colliding at the same time. And so it's driving volume higher and pricing is all over the place because the quality of assets that are being sold are widely divergent as well. So not surprisingly, you're seeing some distressed opportunities at very low prices. You're seeing trophy assets going off at very high prices. You're seeing it all today. 

Ann Berry  (16:29):
Let's talk about how this translates into your share price, Eric. It's that conundrum, right, where you're investing in private assets and yet here you are as a public company. 

Erik Hirsch (16:37):
It is ironic. 

Ann Berry  (16:39):
It's ironic, marking cap north of $8 billion. Let's talk about this recent issue. To your point, which has been the lack of liquidity. There's been a lack of exit opportunity, particularly for those expensive assets that private equity bought call it five years ago. How are you thinking about managing your p and l as a public company? Does this force you to think through diversification? Does this force you to think through acquisition? Talk to us about that. 

Erik Hirsch (17:05):
So we've been public for a number of years, and if you go back and look at our earnings transcripts, you will have heard us say countless number of times that as a management team we don't think about managing the business quarter to quarter. 

(17:17)
So we fully recognize the irony of being a leading private markets investor, and yet we ourselves are public. I think there's some very good reasons of why we went public that we can talk about, but we certainly operate with, we're in both worlds, but because we're in the private markets and because we view the private markets as something that should be approached appropriately on a more longer term basis, that's how we strategically think about managing our business. So we're not managing quarter to quarter, we're not providing quarterly guidance to our public shareholders. We're really trying to both deploy capital, manage customers and strategically grow the business on a multi-year long-term vision of where we see ourselves going and where we see the industry going. So in times like today where we might be generating less carried interest because again, there's a little bit less liquidity and pacing is different, that doesn't change at all how we manage the business. It might alter our financial results, but it's not altering how we think strategically about the choices that are ahead of us. 

Ann Berry  (18:26):
So I'm going to ask you a slightly cheeky question then, Eric, in light of all this, which is you, perfect. You've talked to all of the big, I've got to imagine publicly listed private equity firms. It's Blackstone, for example. It's Carla for example, in hush tones. What's the collective view on this SEC proposal to perhaps shift the requirement from quarterly reporting to six monthly reporting for public companies? 

Erik Hirsch (18:50):
And honestly, I haven't actually talked to people about it. It's as you well know, that was floated in the first Trump administration. And I actually believe if we go back to 20 18, 20 19, I think Jamie Diamond and Warren Buffett, you can fact check me on this, but I think I recall the two of them getting together and writing an op-ed piece saying that quarterly earnings was a disservice to companies. And I agree with them. I think this is a tricky balance issue as somebody who, as an investor in public companies, investors want and I think are entitled to as much insight as you can appropriately provide them so that they can make the most informed decisions possible. And at the same time, having companies trying to simply make all their decisions on such a short-term basis, I think is strategically flawed. So if you looked at Hamilton Lane's shareholder base since we went public, what you would see is a lot of very longstanding, long-term oriented public investors who have again bought into the notion that this is a story that can grow over time that we're thinking long-term and they want to be along for that ride, and they've been rewarded for that. 

(20:05)
Our stock over a long time period has done very, very well. We went public around 16 or $17 a share, and today we're about $150 a share. And so I think that long-term thinking in that long-term mindset has been the right one, and the investors who have been along for that ride have been rewarded for that. 

Ann Berry  (20:24):
I want to switch gears a little bit, Eric, and come back to something you said earlier, which is when it comes to the private markets, they're not fair as in life as in private markets. So let's talk about a recent shift in a world that is not fair where access to data, as you said is difficult when it comes to private capital. What are your thoughts on private capital opportunities investing in funds opening up to retail investors who may be particularly disadvantaged when it comes to access to data? 

Erik Hirsch (20:52):
Well, it's a great question. So let's talk about the disadvantage. I would say at the investor level, they've been most disadvantaged by not having access to this asset class for so long. So that's been quite unfair. I mean, the word democratization has been thrown around a lot of democratizing access. We believe in that strongly. If you sort of think about, we'll just take the US as an example. I think it's most pronounced here. One, I think we can all agree we have a real retirement crisis in this country. Study after study after study is showing that Americans are grossly woefully under saved for retirement. And the move to self-directed retirement through the form of 4 0 1 KI think has been a huge disservice because it's created kind of a false goal line by saying to people, as we always have, well just do your maximum matching, make sure you're putting in your 3% or your 4%. 

(21:50)
The models will show that Americans need to be saving more than that. And I think 4 0 1 Ks and the way they were rolled out and the way they were marketed and the way that, frankly, the way a lot of corporations who provide them to their employees talk about them has been a gross misservice to the saver. It's created this notion that, well, as long as I sort of check the box and I just do that 3%, I'm going to be fine. And the answer is, for most people, they're not going to be fine. Additionally, if we look at the other side of the SRS in this country, they're the folks who are getting the benefit of a pension. And if we look inside of pensions and look at where they've been invested, the biggest driver of pension return for the last several decades has been the private markets. 

(22:34)
So that one group of people, the firemen, the cops, the teachers, the union workers have been benefiting from their entity having access to the private markets, and our self-directed savers have had no access to the asset class that of over the last 20, 30 years has been the best performing asset class. So I think there we can sort of all say that's been unfair, good that it's now about to change. The next issue though is are those self-directed savers? Are they equipped to make good investment decisions? And that's the part where I think, again, more transparency, better access to data, more education, all of that we believe is needed. We at Hamilton Lane are leaning into that very much, but I think that's sort of the next phase of this of well, good access is important. We just talked about why it's necessary. Now with that, are people going to make good choices? 

Ann Berry  (23:32):
Talk to us about how Hamilton Lane is leading into this. Eric, talk about the call it financial literacy piece, something I think we're all very passionate about. And then any specifics around how you are actually leading into distribution so that you are accessing retail investors into this newer space directly. 

Erik Hirsch (23:50):
So let's take these in pieces. So on the education front, you can see that one, just doing things like this is a big start. So we certainly make ourselves available to the media and are eager to talk about the industry. And we're always happy to talk about the pros and the cons because there are both, and we should be upfront and candid about that. It's not all perfect. So part of it is letting firms like us be accessible to media so that that information can be getting out there and can be consumed. Two, we've built one of the leading data providers of private market information in a SaaS business that resides inside of Hamilton Lane called Cobalt, and that is available for sale by both individual investors and institutional investors. It's a business that is growing handsomely, double digits, and a lot of people are availing themselves of that tool. 

(24:44)
So we think that's another important piece. And then we are creating and have created a number of products that are more commonly referred to as evergreen products as opposed to draw down funds, which is what you and I sort of have grown up with for our time in the industry. Draw down funds for an individual investor are very cumbersome, capital calls and distributions. And dealing with all of that over a 10 to 15 year time horizon is really inefficient and challenging for the typical average saver. Evergreen funds fully invested, no capital calls have liquidity provisions where you can actually have monthly, quarterly redemptions and you're fully invested all the time. Structurally, I think they're just much more efficient for frankly both individual investors and for many institutional investors. And we're seeing both avail themselves of those products. And so that product for us is becoming much more widely available through distribution partners, through self selling that we're doing ourselves. We're tokenizing some of that and putting that on various token platforms around the globe. So again, trying to make this as easy as possible. Hamilton Lane's view is very simple. We need to meet the customer where they are. We can't expect the customer to come to us. So we are active across a variety of different distribution channels. Again, because that's where the customers are. 

Ann Berry  (26:13):
How big do you think that retail investor, customer base could be for your business five years from now, 10 years from now? 

Erik Hirsch (26:21):
Huge. You think about it, it's the biggest source of capital in the world and their typical exposure for most individual investors around the globe into private markets as close to zero. This is sort of to the point of they really haven't had the opportunity and it's trillions and trillions and trillions and trillions of dollars when you measure that on a global basis. And they just heretofore haven't had the opportunity or the access point to do this. So today, evergreen funds are our fastest growing business segment, but to my earlier point, they're not just being availed by individual retail investors. We find that a meaningful amount of our flows are actually coming from institutional investors because they find that product construction and the features of that product to be more attractive than a drawdown fund. And so they're availing themselves of both. 

Ann Berry  (27:17):
So is that the future then, Eric? Is everything just going to go away from being a drawdown fund towards becoming evergreen? 

Erik Hirsch (27:23):
I think you're going to see the evergreen funds become the dominant product structure over time, 

(27:29)
But that's not to say that we're going to see no drawdown funds. I think you're going to see the world begin to bifurcate where very large asset managers focused on the private markets will have a multitude of evergreen funds and they will be kind of the dominant players because of their size, scale, brand distribution, et cetera. And then I think the next tier down, the sort of the very large cap private equity firms will also begin to have some evergreen. And then we're going to see a shift to the much smaller managers are going to operate in a world that is draw down and is all institutionally oriented. But for that group of fund managers, they're going to have to have clearly differentiated investment strategies and clearly differentiated returns in order to justify their existence. 

Ann Berry  (28:24):
And a question for you, Eric, will they have to have meaningfully lower fees as a result? 

Erik Hirsch (28:31):
I don't know that I agree with that. I think this is going to come down to their performance and their value add in a portfolio. I think you're more likely to see the evergreen fees over time coming down, as you've seen it in every other asset class. So we saw it in the mutual fund world. We've seen it in ETFs, so we will see it here. And I think the industry is going to have to sort of deal with the reckoning that today you've got too many fund managers period, 

(29:01)
And you have way too many fund managers who don't really have a differentiation or a need for existing. And I think the fundraising challenge that we're seeing today is two pieces colliding. Part of it is simply the lack of liquidity. Investors are a little bit overfunded, overexposed, et cetera, et cetera, and we're now starting to deal with the reality that we've had this huge rise of fund managers over the last decade plus that investors are looking at in saying, I don't need all of this and I'm not sure I need you, and I'm not sure why you exist. 

(29:35)
Add on top of that, the fact that all of us are going to be under tremendous pressure to increase our technology spend because the customer is going to demand it. We're now heading into this world of this individual investor. Well, the individual investor for every other asset class can pull out their phone, can get price quotes, can transact, can look at their portfolio, can perform analytics on that while they're brushing their teeth, having lunch, going on a walk, all of that power is literally sitting in their hand or in their pocket. Now, for us as an industry to think that we too aren't going to have to provide that same level of access and information, I think would be tremendously naive and wrong. We are going to have to provide that. And so we've had an industry that on average has been kind of not great at investing in itself and is now about to collide with a customer that has extremely high expectations and has a long history of, well, I've always done it like this. I order pizza on my phone, I buy a stock on my phone. I'm going to want to deal with the private markets on my phone as well. And so we're going to have to deal with that reality. 

Ann Berry  (30:51):
Eric, you've just teed up a second conversation for when you come back to talk about tokenization, to talk about the retailization of the industry. So Eric Hersh, co, CEO of at Hamilton Lane. Please come back. There's a lot more to go. 

Erik Hirsch (31:03):
What a pleasure. Thank you so much. 

Ann Berry  (31:05):
I'm Anne Berry. Thanks for tuning into After earnings, the show that brings you up close and personal with the executives behind the world's most interesting publicly traded companies. If you learn something today, don't forget to like, subscribe, and share with your friends. Upcoming episodes will feature CEOs and CFOs from Robinhood Scott's Miracle Grow and many more. We'll see you back here.