My vision is this democratisation of investment in private markets; smaller investors have not been able to access them and have been confined to public markets.
Today, several factors have aligned to make this democratisation possible. Markets have undergone a radical transformation and dysfunctionalities have entered public markets. Another reason is that the legal definition of an acceptable client is broadening.
By contrast, thanks to the rise of ETFs and indexation, a third of the S&P 500’s market cap is now made up of just eight stocks. Fewer and fewer companies are going to public markets.
If you wish to access the growth opportunities available in smaller and medium-sized companies then, really, private markets are the only route. Most companies historically delivered superior returns to public markets.
Historically, access to private markets was prohibitively expensive and small investors were excluded.
Today, private markets have grown in ways that make retail participation easier. With the advent of the secondary market and the growth of the private credit market you are able to do things in different ways, and to craft risk and returns in evergreen open-ended vehicles where retail investors are able to deploy capital more easily.
Some analysts have suggested the private markets could grow to US$10 trillion. It’s hard to get to a precise number, but it is definitely a very large one. You have to consider the size of illiquid assets now in many institutional portfolios; in some, this can be as much as 50 per cent.
Private markets have changed significantly from the 1990s and early 2000s, when you might have as little as 10 per cent of a company structure in private equity. Now it is much more likely to be 40 per cent or 50 per cent.
Then there is private credit, which is important for the creation of efficient capital structures and the optimal amount for each company will not necessarily be different between a private and a public market structure. I would say there is a level playing field between private and public companies on this point.
Future of private markets
Times are tougher: private equity fund raising has slowed, and the general economic uncertainty, war, and the impending US election have all created uncertainty. We are obviously going through a difficult period of adjustment as an industry at present as we see rising interest rates and inflation.
All of this has made people a little leery of long-term investments. But I do believe that developments in the private equity market beneath the surface are a significant cause for optimism.
There has been a significant rise in co-investment opportunities which is enabling the market to mature, and there is continuing development of a broader secondaries market. There has also been significant growth in the private credit business as banks are pulling away from lending to smaller companies. In my opinion, this expansion of private credit is here to stay and offers very interesting opportunities for investors.
To us, the core of private equity is the middle market. The returns in that segment are historically better and this is a crucial part of our value proposition, capturing the alpha available in small and medium-sized businesses.
Hartley Rogers, chair, Hamilton Lane