2015/2016. Private Markets Survey. Unique insights on the private markets from the world s industry-leading investors and fund managers

Transcription

1 /2016 Private Markets Survey Unique insights on the private markets from the world s industry-leading investors and fund managers

2 1 Introduction Hamilton Lane is a significant investor and allocator of capital to some of the premier general partners across the private markets spectrum. Our position as a discretionary manager and consultant to some of the world s largest and most sophisticated limited partners gives us unique access when it comes to gathering market intel. Hamilton Lane s Private Markets Survey offers a look into the insights and opinions of the world s most prominent private markets players. We polled a diverse group of global practitioners, on both the limited partner and general partner side, to gather their thoughts on the current investment environment and where they believe the world of private markets investing is headed. We re pleased to share those perspectives in what we hope proves an informative and useful reference tool. We encourage you to contact anyone at Hamilton Lane should you have questions or feedback. The will cover: Public and private equity return expectations over the next 5 years LPs private equity allocation plans in 2016 Which investment strategies are winning the allocation race Whether industry practitioners believe that PE fee structures will evolve in the future

3 2 Representative of the Asset Class 30 GPs $1.2T Represented $2.3T Represented 34 LPs 4 41% 16% 2 15% 15% 15% 1 9% 5% Natural Venture Resources Capital Credit Buyout Mid- Market Diversified Public Pension Financial/ Insurance Corp. Pension SWF Endowment Taft- Hartley Regions of Investment Focus Investor Regions Represented Global 43% North America 4 North America 59% Europe 15% Europe Asia South America 3% Middle East Asia Australia 2%

4 3 U.S. Public Market Returns Expectations Slightly Less Bullish Overall Compared to last year, respondents were slightly less bullish on the U.S. public market outlook for the next 3-5 years. While the majority of GPs (65%) anticipate returns in the 5-1 range, this is a meaningful reduction from this group s expectations last year, which saw 9 anticipating 5-1 returns and the remainder anticipating 1+ returns. While we would expect the GP group to have a more positive outlook overall, the GP and LP responses are much more closely aligned than they were in. Over the next 3-5 years, I expect public equity returns in the U.S. to be: Negative 1.5% 65% GP LP 0-5% % 59% 76% 35% 31% 54% > 1 3% Negative 0-5% 4% 5-1 > 1 More Optimism Around European Public Equity Return Expectations Notably, there is more optimism around European public equity returns among GPs and LPs alike. Those anticipating returns in the 5-1 range jumped more than 2 year-over-year, while the 1+ return category nearly doubled from. Over the next 3-5 years, I expect public equity returns in Europe to be: Negative 2% 3% 0-5% 26% 56% % 53% > %

5 4 Mixed Bag of Return Expectations for the Emerging Markets Return expectations for emerging market public equity over the next three to five years were decidedly mixed. While the number of those anticipating returns in the 1+ range held fairly steady year-over-year at around 25%, there was a big increase in the 0-5% return camp at the expense of 5-1 return expectations. Over the next 3-5 years, I expect public equity returns in emerging markets to be: Negative 0-5% 19% 32% > 1 24% 2 More Temperate Outlook for Strength of U.S. Dollar vs. Yen and Euro While one-third of respondents believe the strength of the U.S. Dollar versus the Yen and the Euro will remain essentially the same over the next three years, we saw a significant increase in respondents that believe the dollar s strength will be lower than its Japanese and European counterparts. Just one year ago, the outlook was heavily tilted toward a stronger dollar. In three years, the U.S. Dollar, against the Yen and the Euro, will be: Higher 3 81% Lower 29% Same 11% 33%

6 5 Generally Low GDP Growth Expected in U.S.; China GDP Growth Expectations More Positive Over the next three to five years, respondents are fairly evenly split in believing that U.S. annual GDP growth will fall in either the 0-2% or 2-4% range. We believe this is consistent with generally low growth expectations worldwide. However, the vast majority of this year s respondents continue to anticipate stronger GDP growth in China, measuring in the 4- range over the next three to five years. What is your expectation for annual GDP growth in the U.S. over the next 3-5 years? What is your expectation for annual GDP growth in China over the next 3-5 years? 0-2% 2-4% > 2% 15% 0-4% 55% 45% 4-83% 10-Year U.S. Treasury Rate Expected to Rise, But Not Dramatically So In three years time, most expect interest rates to be somewhere in the 2.5%-4% range, although nearly 3 believe rates will not rise above 2.5%. Interestingly, in this year s Market Overview, we took a look at data across the last 400 years and found that 10-year rates have historically averaged 4% around the world and have frequently dipped below that level for considerable spans of time. So, the argument could be made that current interest rates are actually far closer to historically normal levels than many believe. In three years, the 10-year U.S. Treasury rate, currently around 2%, will be: < 2.5% 29% 81% 2.5-4% 66% > 4% 5% 11% 33%

7 6 Positive PE Returns Expected Over the Next 5 Years Assuming public equity returns average 5%, the vast majority of respondents anticipate private equity returns will be in the 5-15% range over the next five years. However, compared to last year s responses, there is a notable decrease in the number of people who expect returns to be greater than 15% over that time period. In addition and once again assuming that public equity returns average 5% over the next five years most respondents anticipate relatively strong performance in the distressed debt sector of between 5 and 15%. What is your expectation for private equity returns over the next five years, assuming public equity returns average 5%? Negative 0-5% 2% 5-15% 7 92% > 15% 21% What is your expectation for distressed debt returns over the next five years, assuming public equity returns average 5%? Negative 2% 0-5% 22% 5-15% 72% > 15% 5% HL Data Snapshot 10-Year TWR Evaluating our own data, we see that long-term investments in private equity have consistently outperformed the public market benchmarks. Across the more recent time horizons, PE performance, while quite strong, has fallen short as compared to at least one of the most common public market benchmarks. However, the 10-year TWR numbers for all PE are impressive, outpacing the S&P 500 by 550 basis points and the MSCI World by more than 600 basis points. 12. All PE MSCI World S&P 500 Russell 2000 Source: Hamilton Lane Fund Investment Database; MSCI World Net TR Index; S&P 500 Net TR Index; Russell 2000 Net TR Index (August ). Returns through 3/31/15.

8 7 Debate Around How Best to Access Energy Investments We asked our survey participants for their thoughts on the best way to invest in energy today, and nearly half felt that energy was best accessed through some combination of debt and equity. Taking a closer look at where GP and LP responses diverge is interesting, and reveals that more GPs than LPs believe debt investments alone are the best way to access energy. As a whole, however, the GP group is pretty evenly split in thinking that the best approach is either equity, debt or some combination of the two. The best way to invest in energy today is: Through Both Debt and Equity 4 Through Debt 2 GP LP 53% Don t Invest in it at All 2% Through Equity 29% 39% 14% 26% 31% 3% 35% Through Debt Through Equity Don t Invest in it at All Through Both Debt and Equity Most LPs Planning to Maintain or Increase PE Allocations Looking at the year ahead, a full 9 of LPs plan to either maintain or increase their allocation to private equity. Of the 35% who responded that they will be upping their allocations, we then asked what was driving the increase. While more than half agree they are doing so because they believe PE will perform better than public equity in 2016, a fair number of responses were based solely on a need to increase PE exposure to account for current under-allocation. LPs: Your allocation to private equity for 2016 will be: 3% Down LPs: If allocation is going up, it is because: I have nowhere else appealing to put my money 6% 63% 35% Same Up I need to increase to account for my current under-allocation 39% I believe PE will do better than public equity 56%

9 8 Buyout Strategies Lead the Pack for LPs Expected Allocation; Venture Remains Out of Favor Digging deeper into which specific strategies are most attractive to LPs, we find that the majority plan to allocate most of their PE capital to buyout strategies (Large and Other) over the next two years. Emerging markets and venture captured of the results, and distressed debt only 9%. Perhaps not surprisingly, when asked to which strategies LPs would be allocating the least over the next two years, venture led the pack with 51%, followed by emerging markets and distressed debt with 19% and 16%, respectively. LPs: To which private equity area will you allocate the most capital in the next two years? Other Buyout 4 Large Buyout 34% Distressed Debt 9% 3% Other Emerging Markets 6% Venture Europe 6% 3 5 LPs: To which private equity area will you allocate the least capital in the next two years? Venture 51% Emerging Markets Distressed Debt 16% 19% Large Buyout 11% Other 3% Other Buyout Europe

10 9 GPs Recommend Allocation to Buyout Strategies; More Bullish on Europe As Well Turning our attention to the GP respondents, we asked this group to tell us where they d be directing their capital over the next two years if they were LPs. Similar to our LP respondents, buyout strategies captured the majority of votes and, notably, there was a meaningful increase in the large buyout category over. From a regional perspective, and unlike the LP group, both Europe and the emerging markets received a fair number of votes, although the weighting of each category reversed this year with Europe outpacing the emerging markets. GPs: If you were investing your own money and were an LP, where would you allocate the most capital in the next two years? Other Buyout Large Buyout Europe Emerging Markets Distressed Debt Other Venture 4% 4% 19% 19% PE Fee Structures Expected to Become More Variable in the Future Shifting the focus of our questions to the future of the industry, we first asked our respondents what they thought private equity fee structures would look like in five years. About one fifth contend they will remain essentially the same as they are today, with significantly more GPs than LPs believing (or, perhaps, hoping?) that fee structures will remain the same. Nevertheless, the majority of both GPs and LPs believe PE fee structures will become more variable depending upon the investor. In five years, fees for PE structures will be: Materially Lower 4% Basically the Same as Today 21% GP LP 63% 82% 3 More Variable Depending on the Investor 11% 75% Materially Lower Basically the Same as Today More Variable Depending on the Investor

11 10 Trend of PE Firms Going Public Expected to Continue; Bears Little Influence on LPs Decision to Invest We asked for our participants thoughts on the number of PE firms that will be public in five years. More than half anticipate the number of public PE firms to double or even triple what it is today. Taking a look at the LP/GP breakdown reveals that two-thirds of the GPs believe more PE firms will be public, whereas the LP group is more mixed, with nearly half believing today s number will remain the same in five years. Only a small percentage sees this trend reversing to fewer public firms than we have today. As a follow up to this question, we polled LPs as to whether a GP being public influences their decisions to invest and the results are quite interesting. Simply put, while being public doesn t give a GP a materially positive advantage in the minds of LPs, more than 2 responded that it influences their decision whether to invest with that GP in a materially negative way. Nevertheless, those seem to be the outliers, as the majority of LPs responded that a GP s being public influences their decisions only minimally or not at all. In five years, the number of PE firms that are public will be: Double what it About the Same as it 42% % 33% 45% GP LP Triple what it Less than what it 4% 1 Double what it About the Same as it Triple what it Less than what it LPs: A GP being public influences my decision to invest: Not at All 36% 21% Materially in a Negative Way 42% Only Minimally

12 About Hamilton Lane Hamilton Lane is an independent alternative investment management firm providing innovative private markets solutions to sophisticated investors around the world. The firm has been dedicated to private markets investing for more than two decades and currently has more than 250 employees operating in offices throughout the U.S., London, Hong Kong, Rio de Janeiro, Tel Aviv and Tokyo. With over $239 billion in total assets under management and supervision 1, Hamilton Lane offers a full range of investment products and services that enable clients to participate in the private markets asset class on a global and customized basis. The firm has been named an Inc Fastest-Growing Company and a Best Place to Work in Money Management by Pensions & Investments for four consecutive years. 1 As of September 30, Philadelphia One Presidential Blvd., 4th Floor Bala Cynwyd, PA USA Fort Lauderdale 200 SW 1st Avenue, Suite 880 Ft. Lauderdale, FL USA San Diego 7777 Fay Avenue, Suite 201 La Jolla, CA USA Rio de Janeiro Av. Niemeyer 2, Sala 102 Leblon Rio de Janeiro Brasil New York 610 Fifth Avenue, Suite 401 New York, NY USA Tokyo 17F, Imperial Hotel Tower 1-1-1, Uchisaiwai-cho, Chiyoda-ku Tokyo Japan +81 (0) Las Vegas 3753 Howard Hughes Parkway Suite 200 Las Vegas, NV USA Hong Kong Room , 10th Floor St. George s Building 2 Ice House Street Central Hong Kong, China Tel Aviv 14 Shenkar Street Nolton House Herzliya Pituach, P.O. Box Israel Seoul 16/17 Fl., Posco P&S Tower Teheran-ro 134, Gangnam-Gu Seoul , Republic of Korea London 8-10 Great George Street London SW1P 3AE United Kingdom +44 (0) San Francisco 200 California Street, Suite 400 San Francisco, CA USA

13 Disclosures Please be aware that the information contained herein is based upon results of a survey conducted by Hamilton Lane Advisors, L.L.C. (the Firm ) of a number of private market participants. The results of the survey may not necessarily represent the opinions of the Firm or its employees, officers or directors. Publication of this report does not indicate an endorsement by the Firm of the results included herein and should not be relied upon when making investment decisions. This presentation may not be copied or distributed, in whole or in part, without the prior written consent of Hamilton Lane. The information contained in this presentation may include forward-looking statements regarding returns, performance, opinions, or other events. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control, which may result in material differences in actual results, performance or other expectations. Past performance of the investments described herein is not indicative of future results. In addition, nothing contained herein shall be deemed to be a prediction of future performance of any product, strategy or transaction. The information included in this presentation has not been reviewed or audited by independent public accountants. Certain information included herein has been obtained from sources that Hamilton Lane believes to be reliable but the accuracy of such information cannot be guaranteed. Any tables, graphs or charts relating to performance included in this presentation are intended only to illustrate the performance of the indices, composites, strategies or asset classes referred to for the periods shown. Such tables, graphs and charts are not intended to predict future performance and should not be used as the basis for an investment decision. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein. This presentation is not an offer to sell, or a solicitation of any offer to buy, any security or to enter into any agreement with Hamilton Lane or any of its affiliates. Any such offering will be made only at your request. Hamilton Lane (UK) Limited is a wholly-owned subsidiary of Hamilton Lane Advisors, L.L.C. Hamilton Lane (UK) Limited is authorized and regulated by the Financial Conducts Authority. In the UK this communication is directed solely at persons who would be classified as a professional client or eligible counterparty under the FCA Handbook of Rules and Guidance. Its contents are not directed at, may not be suitable for and should not be relied upon by retail clients. As of January 8, 2016