E398: Hamilton Lane ($1T AUA) on Venture Capital, AI, and Private Markets

What separates the venture investors who consistently outperform from those who simply get lucky? In this episode, I sit down with Miguel Luina, Co-Head of Global Venture Capital at Hamilton Lane, to discuss how one of the world's largest private markets investors evaluates venture managers, constructs portfolios, and thinks about the future of innovation investing. Miguel explains why venture and growth have become an essential allocation for institutional investors, how LPs distinguish skill from luck, and why conviction investing, secondaries, and portfolio construction may be the biggest drivers of long-term returns.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  Thirty-one percent of all of private markets today is venture and growth.

• 0:03Speaker 01

  Yeah.

• 0:04David Weisburd?

  What does that mean for investors?

• 0:06Speaker 01

  It's a portion of the market that you just can't ignore. It's a portion of the market that historically these institutional investors had access to through their public market investments. Amazon went public in the late 90s. It had $19 million of revenue and had a $350 million market cap. Had you invested in the Series A of Amazon, by the time it went to an IPO, you generated 10 times your money. If you had invested in the IPO, you're generating something like 2,000 times your money. The better place to invest in Amazon was as a public company.

• 0:41David Weisburd?

  My guest today is Miguel Luina, co-head of Global Venture Capital at Hamilton Lane, a firm with more than $1 trillion in assets under management and supervision. In today's conversation, Miguel shares the lessons Hamilton Lane has learned from evaluating investing to venture firms across multiple market cycles, what separates great venture investors from average ones, and where Hamilton Lane believes the next generation of outsized returns will come from. Without further ado, here's my conversation with Miguel. Before we started recording, we were talking about the three largest IPOs going on. We've had SpaceX, then Anthropic seems to be going next, and then OpenAI, probably by the end of the year. What are the second order effects of these liquidity events for venture LPs?

• 1:25Speaker 01

  First off, it's going to create a lot more cash and a lot more liquidity to reinvest into the market. We've seen this kind of dynamic within venture where the longest-term investors in venture have been over-allocated to the asset class because venture has been one of the best-performing strategies, at least within the private markets, over a longer period of time. It's also been the strategy that's returned the least capital back in terms of DPI. And so you have this effect of compounding returns with less capital coming back. And what we saw was that a lot of the longer-term investors within venture continue to be bullish in venture, but they're just capped out in terms of asset allocation and portfolio construction.

• 2:09Speaker 01

  Getting capital back is going to be able to kind of reinvigorate that and restart that flywheel and have more cash coming in to make more commitments to the new funds. The other dynamic that I think is really interesting is that

• 2:24Speaker 01

  It's also going to create a little bit of a challenge for LPs to really be able to peel back and see who's been driving consistent, repeatable performance and who, let's call it, got lucky because they happen to have one of three companies in their portfolio. And when you're investing in venture, you're investing for outliers. It's the power law dynamic. It's the outliers that drive return for the overall industry. So you're constantly seeking that. But then when you have it and you have just a couple of companies that have driven that, the question is like, how repeatable is it? Can they, can they continue to do that? I think that's going to raise a lot of questions for LPs around like, some track workers are going to look fantastic and they're going to look completely unrepeatable at the same time.

• 3:08David Weisburd?

  You've been an LP now for several decades. Probably the most difficult thing is to differentiate luck from skill when it comes to GPs. How do you do that?

• 3:17Speaker 01

  That's the secret sauce, right? I mean, that's constantly what we're evaluating.

• 3:24Speaker 01

  There's this element in venture that is based on chance. You can invest a number of companies, you don't know which one is going to perform well. And in fact, talk to some of my kind of, you know, best relationships, most trusted VCs. And what they tell me is like, within the first two or three years, a lot of times, they get it wrong. Like, three years into a fund, they tried to call which were their best performing companies. And five years later, it was a different set of companies that actually drove the returns. And so there is some randomness to it, but there are clear ways to tilt the table in your favor. And that's what we're looking for, is people who can tilt that table in their favor. And

• 4:08Speaker 01

  they're not going to get every call right. Venture by, by nature is a high risk asset. You get a lot of these things wrong, but it's being able to have a better chance of getting those things right that end up driving the better returns over, over a longer period of time. And so what does that look like? That's people who have just kind of outstanding networks, outstanding connectivity. They, you know, when I think about like the venture investment value chain. It's sourcing opportunities. Do you see the best opportunities? Are you with the best networks? Are you with the best founders that are going to create that next generational business? Two, are you good at selecting? Can you evaluate who actually has the best chance of succeeding? Based on largely the quality of that team and the quality of that founder and then to a lesser extent,

• 4:53Speaker 01

  especially at the early stages, the quality of the idea itself. And then three, can you access that opportunity? So, once you see it, once you evaluate it, do you have a right to win? Why are they going to let you into the cap table? This is a really competitive market. Great founders are not unknown for the most part. And so they have their pick on which venture manager they want to work with. And so you need to have a right to win. The great managers can do all of those things. And then over time, we also need to see them be able to generate liquidity. And I think that that's a dynamic that is changing a bit within this market as well, where there are more off-ramps. We're talking about the big IPOs today,

• 5:34Speaker 01

  and that's historically been the largest source of liquidity for the market. But increasingly, there is more secondary opportunities. There's more, even with new primary rounds, there's opportunities for early investors to sell some shares. To be able to manage that liquidity, be able to de-risk those positions, but at the same time, maintain their exposure to those compounding winners and drive overall returns for the fund. It's a balance, but we think that the best managers are doing that more effectively.

• 6:04David Weisburd?

  In Q1, 75% of capital in the entire venture capital ecosystem went to a handful of companies, less than five companies. It feels like VC is becoming a consensus asset class. One is, do you believe that to be true? And two, if that is true, how important is the selection part of the GP job?

• 6:25Speaker 01

  It does feel like it's becoming a lot more consensus. I think one of the differences within this cycle is that we're seeing revenue a lot earlier. So if you go back a couple decades, you had multiple startups. They were pre-revenue for a number of years, really difficult to tell who was going to be the winner. You had multiple people funded. Today with AI businesses, we're seeing revenue ramp earlier than ever before and at scales that we haven't seen before. So it's not uncommon to see companies go from two, three million to over a hundred million dollars of recurring revenue in 18 months.

• 7:01David Weisburd?

  We were in Ligora, the fastest growing enterprise company to a hundred million in I think 18 months.

• 7:07Speaker 01

  It's unbelievable. And the thing is, like, five years ago, that would have been completely unique and absolutely unheard of. But there's a whole group of peers for companies like that today. And there's a number of other businesses that fit that category. And so you have investors really kind of rallying behind these early winners early on. But I think what's interesting is, is we're not entirely sure that revenue momentum, it certainly helps predict a winner. But at this stage of companies, they're still really young. They're still only 18 months old, two years old. There's opportunities for other companies to come and outgrow them.

• 7:46David Weisburd?

  Philosophically, are you trying to index these hyper competitive spaces like OpenAI, Anthropic, Harvey and Ligora? Or are you trying to pick winners?

• 7:57Speaker 01

  Indexing venture has historically been a really poor strategy. On average, venture has not really been worth the

• 8:07David Weisburd?

  Median return is, would be one of the worst asset classes in the world, if not the worst.

• 8:12Speaker 01

  The liquidity lockup for that median return is longer than any other portion of the market. So buying an index of venture, we think is, is not a great idea. So what's our strategy? Our strategy is to generate top tier venture returns, and you can quantify that in whatever way that you want. But our focus is really on investing in the best possible opportunities and compounding them over time. We talk about like these consensus winners. There is definitely room to invest in those businesses. And there's the need to invest in those businesses. So a lot of our clients are large institutional investors. One of the dynamics that we've seen is that the entire tech opportunity set has moved

• 8:55Speaker 01

  from the public markets into the private markets. Companies are staying private for longer. By the time they go public, generally their valuations are very high, their growth rates have slowed, the return on capital that you can get in a private, as a private market investor is significantly higher than you can in a public, as a public market investor. These companies are also highly disruptive businesses. And so, you know, we saw the whole SaaS apocalypse phenomenon at the start of the year. People are looking at their portfolios and they're saying, hey, look, we have a hole here. AI technology is clearly the engine of economic growth. The majority of those companies, aside from seven publicly traded ones that are more

• 9:37Speaker 01

  kind of infrastructure related at this point because of the amount of capital that they're investing into, into basically like the base layer of AI. The majority of these businesses are in the private markets. And if we don't have a good venture and growth strategy, we're missing out on this entire market. And so, some of these market leaders is, I think, are really important in order for these investors to be able to drive their longer term returns, in order for them to even be able to track the indexes and the benchmarks that they're looking to achieve. Is that the best way and the only way to drive returns within venture? Absolutely not. So, when you're investing in the early stage, that's where the opportunity is to drive

• 10:19Speaker 01

  the biggest returns because you can get into these companies at the lowest valuations and ride them all the way up. That's also a different approach to investing. And so, if you're putting really big dollars to work, you want to make sure that you have a mix of some of these later stage businesses. If you're looking to just drive pure returns and you're a really long-term investor, you also want to be investing the next generation of these companies you want to invest in at the early stage.

• 10:47David Weisburd?

  Last time we chatted, you said that 31% of all of private markets today is venture and growth. What does that mean for investors?

• 10:57Speaker 01

  That means that it's a portion of the market that you can't ignore anymore. I started at Hamilton Lane in 2009. Largely, what we had been telling our large institutional investors for the last decade was that venture was not an institutional strategy. It's just too small of a market. There's only a handful of managers who are really generating strong returns. Those fund sizes are limited. It's hard for you to invest the dollars into the space. It's long duration. It's high risk. It's high volatility and such a small portion of the market that it's really difficult to be able to generate returns from it at a large scale.

• 11:40David Weisburd?

  And at that point, it was single-digit percentages of the private market, probably lower single digits.

• 11:44Speaker 01

  Exactly. And so, so then you look at it today and it's a portion of the market that you just can't ignore, right? It's a portion of the market that historically these institutional investors had access to through their public market investments. Like, one of the best examples was, was Amazon. So, Amazon went public in the late 90s. It had $19 million of revenue and had a $350 million market cap. Had you invested in the Series A of Amazon, by the time it went to an IPO, you generated 10 times your money. If you had invested in the IPO, you're generating something like 2,000 times your money on it. So, definitely the better place to invest in Amazon was as a public company.

• 12:26Speaker 01

  Today, you look at like the companies that are going public and most of those returns have now happened within the private market. If you're not putting an allocation into these venture-backed businesses, you're not capturing that whole portion of the market that is creating value for the, for the overall economy. And so, what you're doing is you're, you're risking falling behind your benchmarks. You're inadvertently taking a position against disruptive technology, which, you know, in our view is probably the wrong position to take at the very wrong moment.

• 13:01David Weisburd?

  Expert calls have always been one of the most powerful ways to build conviction. But today, investors are asked to cover more companies, move faster, and do it with leaner teams. With AlphaSense AI-led expert calls, their TGS call service team sources experts based on your research criteria and lets the AI interviewer get to work. The magic is in the AI interviewer, purpose-built and knowledgeable-based information to conduct high-quality, context-rich conversations on your behalf, acting as a trusted extension of your team. Then they take it one step further. Your call transcripts flow natively into your AlphaSense experience and become queryable, searchable, and comparable. So your primary insights plug directly into earnings prep, digital work streams, and pitch books with zero tool switching.

• 13:44David Weisburd?

  And with AlphaSense expert call services, the AI-led expert calls are just one option because we know the importance of a hybrid expert research approach. AI for coverage and efficiency, humans for complexity and conviction. It's the institutional edge that scales research without scaling headcount. For hedge funds, that means validating thesis assumptions across dozens of experts before earnings instead of a handful. For private equity, it means faster pre-IOI scans and deeper commercial diligence. For investment banks and asset managers, it means pulling real operator perspectives straight into models and sector positioning without disconnected tools or manual handoffs. All of it lives inside the AlphaSense platform, trusted by 75% of the world's top hedge funds

• 14:27David Weisburd?

  alongside filings, broker research, news, and more than 240,000 expert call transcripts, turning raw conversations into comparable, auditable insight. Take advantage of AlphaSense AI-led expert calls now. The first to see wins, the rest follow. Learn more at alpha-sense.com/HowIInvest. So another way, if 31% of the private markets is venture and growth,

• 14:52David Weisburd?

  the decision not to allocate to venture and growth, you are short 31% of the index.

• 14:57Speaker 01

  Exactly.

• 14:58David Weisburd?

  It's like the decision not to invest is itself a decision.

• 15:02Speaker 01

  Yeah, it's a decision that you don't realize that you're making at the time, or you may not realize you're making at the time. So we have

• 15:09Speaker 01

  We have a large institutional client who came to us to do a strategic review as you know, part of our engagement with them. And they came to us and they said, look, we are underperforming our benchmark. We'd like you guys to help us take a look at our portfolio and tell us why are we underperforming our benchmark. And first, we start with what is the benchmark? How does your portfolio compare to the benchmark? Is it manager selection? Is it deal selection? Is it just asset allocation? Their benchmark was 40% venture and growth. They had zero allocation to venture and growth. When venture and growth is the strongest performing asset class for the last decade, and you're comparing it on a 10-year time

• 15:51Speaker 01

  period, it's clear why they're underperforming. And so, you know, that's not something that they realized. And this particular client, and we see this across a lot of institutions, is very fee sensitive. And I think that that's particularly the type of client that struggles the most with this, which is venture and growth is a very expensive asset class. There's no way around it. And by the way, it's an asset class where you get what you pay for. So the more expensive managers, the more expensive fund structures actually on average return significantly better, like on a net basis than than the cheaper.

• 16:30David Weisburd?

  I think most of the top 10 firms are two and a half and 30 at this point.

• 16:34Speaker 01

  Pretty much, pretty much.

• 16:35David Weisburd?

  And I've been told by GPs that if they don't go out with two and a half and 30, they're signaling that they're a non-premium brand.

• 16:41Speaker 01

  I think unfortunately, that is right.

• 16:44David Weisburd?

  You mentioned this client that you did a review for, and their benchmark was 40% venture and growth, and they had zero in venture and growth. It's one thing to understand that you're off in terms of your allocation. But venture capital is also an access class. If you're not in the top funds, the Sequoias, the benchmarks, the founders fund, etc., how do you go about building a portfolio today?

• 17:05Speaker 01

  It's really important to be with the top performing managers. It's really important to be in the top performing companies. But it's not a handful of managers anymore, and you can be a lot more strategic about the way that you find access into these businesses.

• 17:19Speaker 01

  And so if we look back just at the last five years across our platform, on average, we've seen somewhere between 350 to 400 venture and growth funds per year. And so if you're investing in the top decile of them, that's 35 to 40 different funds that you can select from. If you're going just for the top 5%, it's very subjective, what is the top 5%? But that's still, you know, 15 to 20 different funds a year. Based on a lot of work that we've done in terms of historical cycles, portfolio construction, we think that ideally a venture portfolio, particularly one that's focused more on the earlier stages of venture,

• 18:02Speaker 01

  you should probably be selecting eight to 10 managers a year in order to get the diversification that you need to capture those outliers. And it's interesting because there's always this push and pull, right? Two things are true at the same time. Venture has a lot of volatility within the returns. It's driven by outliers. At the same time, there is persistence. The top managers consistently perform better, not on every single fund, but consistently over time perform better. And so you want this concentration of the top managers, but you want enough diversification in order to be able to consistently capture the outliers and you don't know exactly where they're going to come from within the venture market. So our view is eight to 10 managers.

• 18:44Speaker 01

  And so there are, there's plenty of selection out there. But you have to go maybe a layer deeper and not pick the most obvious one because those are very much access constrained. They're built up relationships over time. You can work with other groups who have access to them to be able to get access into these managers, which will help drive the portfolio. But if you are, have a team that is focused on uncovering those next generation managers, seeing those groups that maybe don't have yet the brand, but have generated the returns, have the access, have all of the ingredients in order to continue to drive better returns. That is a great way to find more opportunities. And then the other dynamic here too is

• 19:26Speaker 01

  Is that the venture market has expanded way beyond what it was before. There's a lot more tools to invest into venture today than there were before. There's $3.4 trillion of NAV within venture. And so to think that like we can only invest into a handful of managers in order to drive our returns, I think is not necessarily realistic. And so there are more managers, but there's also more entry points. So there's the other dynamic where you want to pile in and drive, put more capital behind your winners. That is something that most of the top investors will tell you. The best way to invest is one, you find those companies early. And then when you find a company that is really outperforming, that is really going to drive returns, you want to double down into them.

• 20:09Speaker 01

  You can double down into them by finding funds that are great at doubling down. You can also double down into them by co-investing alongside your fund managers directly into those deals. That takes having a team and having a view of yourself. And you know, the further removed that you get from the managers, the more you have to invest into your own thought and your own, your own opinion of these businesses. And then the other way to do it too, is through secondaries. Because there are outliers, the concentration of these funds into these outliers, outlier in businesses becomes greater over time. And so you can get access into these outliers through a secondary approach where a lot of times you can invest into these businesses at a discount. You know what assets are in there.

• 20:52Speaker 01

  The manager and the blind pool risk comes down with that. And you can find some really interesting points of arbitrage, honestly, within the market to be able to access this.

• 21:02David Weisburd?

  And just to double click on that, funds become victims of their own success. We were talking Justin Fischner-Wolson from 137 Ventures. It was reported they had a $20 billion stake in SpaceX at IPO price. And of course, that's a positive thing, but I'm sure he had some pressure from LPs to sell some of that along the way. Now, it sounds like he didn't sell, which is pretty heroic, but for most GPs, it's practical to take some of that off the table. So it's not that they're short SpaceX or that they don't think it's a great company. It's that now 90% of their fund might be in one company and now it might be extremely logical for them to sell off a portion.

• 21:40Speaker 01

  Absolutely. And this is where in the private markets, you have to align incentives and getting the structures right can be really challenging within this, but.

• 21:51Speaker 01

  You know, one of the tools that we're seeing emerge, and it's been around for a few years, but we're seeing really kind of pick up steam, are continuation vehicles. Right. And so you have early LPs who have benefited from really great returns within these businesses. They, each LP is totally different. You talk to one LP, you've talked to one LP. They, each LP will tell you something different about what they want in terms of liquidity, what they want in terms of kind of your continued management of the portfolio. And so you have a number of LPs who want liquidity. You have a GP who still believes in the business, what continues to want to invest in that business and generate kind

• 22:32Speaker 01

  of compounding returns. And then you have a whole market of secondary investors who want to get access to those businesses. And so it's about, you know, finding a market where you can bring new capital in, buy out the early investors that want liquidity, roll that into a new vehicle going forward where the new investors are happy because they're getting access, they're getting access at a significantly higher price. The early investors are happy because they're getting out at what is a really good return for them. And the GP is happy because they continue to participate in the upside.

• 23:05David Weisburd?

  And importantly, it's DPI. A continuation vehicle is officially a secondary, which means you actually sold it from the fund. So now you have DPI. You could show not only your current LPs to your point, but also future LPs. You could show that you have actually have return capital in this.

• 23:21Speaker 01

  Yeah, for sure. And it's really funny. If you weren't investing in the private markets, what you realize is that it's just completely a relationship game. And you could drive a truck through an LPA, and you can negotiate every term within an LPA. And so when you look at the term for most funds,

• 23:43Speaker 01

  At the end of the term, you either can get an extension from your LPs, or you can go into liquidation. And liquidation sounds like this scary term that's like, oh, everything is going to be sold. But the reality is that the way that most LPs are drafted is that in liquidation, managers can maximize returns and they have a lot of discretion to do that. And how do you maximize return within venture? You wait for an IPO. And so the difference between having an existing term and being in liquidation, it's really not much, right? And so the legal bounds, I think that like the legal triggers for GPs to start creating liquidity for their LPs is not very strong.

• 24:28Speaker 01

  Where we all of a sudden see this motivation from GPs is when they're going to raise their next fund and their LPs are telling them, well, we haven't gotten any cash back. And so what, how are we supposed to reinvest into your fund when you haven't given us any money back? Now all of a sudden, GPs are looking at it and they're saying, well, shoot, this person really wants cash back. I want to raise my next fund. I want them into my next fund. I need to find a way to recycle capital for them. And so now they're motivated to, hey, let's set up a continuation vehicle. Let me find an off-ramp. If you really want liquidity, here's, here's an opportunity to get liquidity.

• 25:05Speaker 01

  And that creates this flywheel that they can then reinvest into their funds.

• 25:09David Weisburd?

  On the relationship aspect and the compounding of relationships, this is something so many people say, and I found in practice, very few people actually apply. Do you find that the top GPs are constantly working in conjunction with LPs before they have to get so frustrated? In other words, are they not managing these dynamics while ahead of when LPs are really asking for them?

• 25:29Speaker 01

  I think it's all over the map, right? You have a whole spectrum of GPs out there.

• 25:37Speaker 01

  You have some groups that are just generating phenomenal returns and you know they're going to be difficult to work with as an LP.

• 25:46David Weisburd?

  You're lucky to be an LP.

• 25:48Speaker 01

  You're lucky to be an LP in that.

• 25:49David Weisburd?

  And they communicate this very effectively.

• 25:51Speaker 01

  Yes, and they're not shy about telling you how lucky you are to be in that.

• 25:55David Weisburd?

  Which may be the rational position.

• 25:57Speaker 01

  For sure, and there's some people who really are that good. You know, my view is you're putting all your eggs in one basket. Returns look very different at different points in time. And we've seen a number of managers that have gone through some periods where it looks like things aren't working quite as well for them and then things rebound for them. And having built up goodwill among their LP base really helps those managers through those times. And so it's just a way to create a little bit more resilience with your LP base. And not everybody is, you know, a proven to be the top manager yet. And so having a good relationship with your LPs is really important. I think that different managers are at different points along that time.

• 26:41Speaker 01

  I'm not saying, you know, it's a little bit of like a cynical view to say like, oh, hey, all of a sudden we found religion on DPI because we're raising the next fund. But it is definitely something that's in their minds. And, you know, it's another negotiating point for the LPs when the GP is raising their next fund of like, look, it's a reminder, hey, we haven't gotten that much cash back. DPI you look at on paper, but you know, there's some questions around can you turn this into cash? Also, you know, when we look at our overall allocation, maybe you guys have done well, but you guys are outsized in terms of our current NAV. And so we have to manage our NAV position, your fund and like our total exposure to you. And so getting cash back, being able to lower that NAV so that we can recommit it to you

• 27:27Speaker 01

  can help in a lot of ways.

• 27:28David Weisburd?

  Perhaps a more GP friendly way to phrase what you're saying is that the GPs are really focused on building their fund and maximizing the returns maybe on paper. And when they come closer to a fundraise, now they have to solve other problems in their portfolios like DPI because they were so focused on their fund management.

• 27:49Speaker 01

  I'm an LP and so I look at things, I tend to look at things pretty skeptically. But yes, look, from a GP perspective, I think that.

• 27:59Speaker 01

  Any GP that we work with is obviously, we have a long relationship with them. We trust them. We wouldn't go, we wouldn't invest into a fund if we were, thought that they were trying to pull things over on us or acting like extremely transactionally. But the focus for the manager over time changes, right? So when you're first investing in a fund, you just finished your fundraise. Now you're looking at, okay, let's make those next great investments. Let's build a great portfolio. And then when it comes time to fundraise, you're looking at, your attention is now shifting towards, okay, how do we raise this next fundraise? What feedback are we getting from LPs on this next fundraise? It becomes more top of mind and so you start thinking more about these mechanisms.

• 28:42David Weisburd?

  You mentioned continuation vehicles. It's been a big topic of interest on the podcast. I had Michael Woolhouse, who runs the largest continuation vehicle fund in the buyout space at TPG. One of the things that a lot of people in the venture space believe that will keep continuation vehicles from proliferating, one is of course, they're not venture exempt. In other words, you have to be an IRA to do them. But more importantly, some of these continuation vehicles deals could take six to nine months. How does venture capital streamline that process in order to make continuation vehicles more common?

• 29:16Speaker 01

  Well, I think that there is that inefficiency within the market, right?

• 29:21David Weisburd?

  Have you guys done any continuation vehicles?

• 29:23Speaker 01

  Yes, we do. We do quite a few continuation vehicles. We really like the dynamics around them.

• 29:27David Weisburd?

  And you could argue, the reason I love secondaries is it is a form of structural alpha. In other words, if a bunch of firms can't do it because they're venture capital exempt, there should be some premium for this difficult to do thing or for a finite amount of capital that could partake in this type of deal.

• 29:44Speaker 01

  When you look at the broader private markets, including buyout, like which buyout secondary market is a lot more established than venture secondary market? The buyout secondary market is one that is massively undercapitalized. The amount of interest and demand for selling is significantly higher than the amount of capital available for investing. It's one of the reasons why secondary as an asset class or as a strategy has performed very well within the private markets.

• 30:15Speaker 01

  If you look at the buyout space, it's 2.5% to 3% of NAV transacts in secondaries, and that's an undercapitalized market. Within venture, there's, based on our data as of December, there's 3.4 trillion of NAV within venture and less than 0.5% of it. So why is that? Well, one is there's some structural challenges around some of these RIAs and some of those pieces. But there are very few buyers who are equipped to be able to take advantage of this opportunity. So one is that within venture, managers are a lot more restrictive about who's allowed into their LP base.

• 30:58Speaker 01

  Information rights are a lot more challenging, and so a lot of times there's limited or no information available for these transactions. And so if you are a buyer and you have a portfolio and you already have information on these companies, you have a huge strategic advantage in order to be able to buy into it. Third component is that most of the secondary funds in the broader private markets don't have a lot of appetite for venture. It's not a risk-return profile that they're used to underwriting or that they've marketed to their LPs. Secondaries is a more kind of credit-oriented approach a lot of times of like downside protection first, let's get cash back quickly.

• 31:42Speaker 01

  We go for, you know, IRR as opposed to multiple. We don't want kind of longer-term hold periods in these investments. Venture is a different return profile. You can hold on to these positions for a longer period of time. You can compound on them. You can drive your returns by these outliers. And so the number of people who are, who have interest in buying these is lower. And so that means there's just very few buyers capable of doing it, which means that from a supply-demand perspective.

• 32:14Speaker 01

  It's a great buyer's market right now.

• 32:15David Weisburd?

  Such a good point. Psychologically, secondaries and venture almost take up different parts of the brain and different parts of the portfolio. Traditionally, secondary, to your point, people love in the buyout space, minimal J curve. I think the number of secondary funds that have returned less than 1X is even lower than the number of buyout funds, which is in the low single digits. Extremely safe asset class. But now you're taking this extremely safe asset class with low duration. Now you're putting this very spiky asset like venture into it. And then if you want to go further and put it into a single asset exposure into one company, then you're like levering it and you're doing it all into the schema where people think of it as this lower risk part.

• 32:56Speaker 01

  It's difficult when venture secondary managers are raising capital, it's really difficult to tie those two stories together. We're going to protect your capital. We're going to be low risk.

• 33:06David Weisburd?

  So brass tacks, and I don't want you to say you diversify across everything, but if I'm a family office, I'm building a portfolio between venture and venture secondary. How should I be thinking about those allocations?

• 33:17Speaker 01

  One of the things that we did as an organization, we are structured across fund investing, co-investing, and secondary investing broadly across the private markets. There's a lot of value that you get from specializing into one of those three approaches. What we did was we took our venture team out a few years ago and created a standalone venture team that invests across funds, co-investments, and secondaries. And the reason we did that is because we think that there is a blurring line across the industry of what is a fund investment versus a co-investment versus a secondary. There's a lot of advantages that

• 33:56Speaker 01

  you can have as an investor. You can be flexible across them. So, you know, we can look at a co-investment. This happens all the time. We're working with a manager. We're looking at a co-investment opportunity. We have visibility that of where they're going to try to price around. We know that it's a competitive process. There's other people that are trying to price the same round. And then that same week, we see a secondary opportunity where the same company is a big position within the portfolio. It's still priced at the last round and we can buy it at a discount. So. Which one are we going to choose, right? Like, it's easy to buy that secondary position if we find it at a really good price.

• 34:39Speaker 01

  And so we want to be able to have the flexibility of going into co-investments, going into secondaries. And sometimes it's the opposite, where we're seeing secondary opportunities, the train at a premium, or there's a really large pref stack, and so we prefer to be in the preferred security. Or co-investments tend to have less fees and carry associated with them as well. And so the being carry drag of being able to invest in a position, hold it for a long time, and compound is the better approach to do it. And then the same thing happens with fund investment, investing. So you can invest in funds that are ceded funds, and you're coming into the last close, and you have some visibility into the portfolio. There's opportunities to staples alongside a fund.

• 35:21Speaker 01

  So you can look at it as kind of a combined transaction between a secondary or co-investment and a fund commitment. And so we think that having flexibility across it is really important. And where the fun tool really helps is particularly at the earliest stage. So if you're investing in an early stage, it's difficult to get that exposure through either a co-investment or a secondary strategy. There's just too much volatility in those returns. There's a lot of write-offs. It's hard to underwrite them. If you're underwriting them, you're not getting very big checks into those businesses. There's a reason why early, great early-stage managers

• 36:02Speaker 01

  command premium economics and high management fee and high carry. It's a very difficult thing to do. And that diversification at the earliest stage really helps you. And so that's the place where you really want to go heavily into funds. Then you use that co-investment, that secondary tool at the later stages, once you have visibility and you leverage your relationships, you leverage your information advantage to then double down into those companies at the later stages at better valuations. And then there's also the later-stage fund managers. There are some great later-stage fund managers. There's definitely places for those in portfolios, but that's a bit of a different approach.

• 36:43David Weisburd?

  You've taken such a first-principle approach to this. You're almost ignoring the wrapper around these different investments. So if you take it, just a thought experiment, you have a portfolio of 10 companies. You could build that portfolio either literally in a fund of 10 companies. You could build it through 10 co-invest in those 10 companies. Or you could do it by secondary as those 10 companies or some kind of mix. But ultimately, if you go one layer up into Hamilton's Lane's vehicle, you're going to have the same economic exposure, although probably lower fees if you're not going to the fund.

• 37:15Speaker 01

  That's exactly right.

• 37:16David Weisburd?

  I had Roger Vincent, who worked at the Cornell Endowment, talk about this. There's almost this dogma in that every line item on your portfolio needs to be diversified when it's... There's this double level of diversification that's a logical fallacy.

• 37:29Speaker 01

  You can understand it from different perspectives, right? So if you're a fund manager and you're looking to raise your next fund, you want to have diversification in that fund because that is tied to your success. And so having one fund that's off makes it very challenging to raise that next fund. As an LP, if you have a basket of 30 different funds and they're all diversified in that same way, you risk being overly diversified, right? And so our view is we want to take the labels off as much as we can because we think that that's another friction point. The more you limit yourself in selection, the more you limit yourself of, "Look, we're only going to do fund investing. We're only going to do co-investing.

• 38:13Speaker 01

  We're only going to do secondary investing." You start passing on opportunities that look something like in-between or putting yourself in a box that's unnecessary. Ultimately, what we are trying to do is get the biggest exposure we can to the best-performing companies within venture at the most attractive prices with the lowest fee drag. So if we put all of those components together, we think that we're going to build portfolios that meaningfully outperform.

• 38:44David Weisburd?

  It reminds me of CIO Scott Wilson, who was at St. Louis University of Washington. And he would go to all of his managers and he would look at where they had hit their concentration limits on their positions. And he would say, "I want more of that." And he built a portfolio of their best ideas.

• 38:58Speaker 01

  Yeah.

• 39:00David Weisburd?

  And the assumption there was that the structure themselves were keeping them from their optimal portfolio destruction. Also, this whole almost principal agent to the upside where if my kid's college is riding on my Fund III performance, even though I love SpaceX, I'm not going to go more than 20%. I'm not going to risk my entire future, regardless of my conviction, because regardless of my conviction, there's only certain level of certainty in venture. Perhaps SpaceX gets deregulated, perhaps, you know, Falcon 4 ends up being a failure. There's so many ways that something could fail despite very high conviction. And he realized that was a bias and he built a portfolio around that. And he got the best of both worlds, which was he got the best,

• 39:41David Weisburd?

  most spikiest alpha trades while also having a structure around it that made it more risk-adjusted.

• 39:48Speaker 01

  100%. So, you know, I think if I had to say like a broader theme that we've seen in venture for the last like year, maybe a couple of years, has been this theme around conviction investing, where we've seen like the best managers really go heavily into this conviction approach of let's concentrate capital into just our best performing companies. It's impressive when managers do that. At the time, that's a really scary thing to do. And, you know, you can easily second guess yourself. And when you see managers that make

• 40:26Speaker 01

  a big bet on a business and get that right, it's, you know, it looks so obvious. Like, that's the crazy thing about this is like a few years later, like, oh yeah, it looks so obvious. They just went big into Anthropic or SpaceX or, you know, name your business. But at the time, it wasn't that obvious. And a lot of people thought that they were crazy for taking so much risk. A lot of investors around the industry are really looking for these signals of conviction. And, you know, you can get that through some really concentrated funds where these managers have these high conviction approaches. You can get it through other avenues where dynamics just like that of like an earlier stage manager, a manager that doesn't have that but is maxed out and is asking their LPs for approval to increase

• 41:10Speaker 01

  their concentration limit in order to invest into a company. As long as it's the right dynamics and they're doing it from like a forward leaning perspective, not because they're trying to protect their position because, you know, it's an underperforming business or anything like that. That historically for us has been a great signal of quality. And when we look at the investments that we've made alongside our managers where they've made outsized commitments, those have generally performed very well for us.

• 41:38David Weisburd?

  The most extreme version of this, I remember I met with Luke Nosek when he was at Founder's Fund. We had this long conversation about nanotechnology and there's a company called Antero. And then I saw six months later, he went to start a fund, Gigafund, to invest into SpaceX. I'm like, this is insane. This is a very, he's risked his entire career, or he created an entire fund just based on one, one investment. And then obviously that has performed probably even better than he ever could have dreamed, despite his conviction.

• 42:05Speaker 01

  Yeah. And those kinds of bets are really impressive, really impressive.

• 42:10David Weisburd?

  You started at Hamilton Lane 2009. If you could go back right before you started and you could give yourself one piece of timeless advice, what would that be?

• 42:18Speaker 01

  Invest in relationships and don't underestimate the power of compounding in relationships and in everything that you do. And so, you know, what I've seen is that different portions of the market get hot and cold at different times. And everybody wants to be part of that new shiny object. And everybody wants to be part of this, like the new asset class that is now like gaining traction. And I think that there's a lot of value in just finding a portion of the market that you love, staying true to it, staying focused on it, investing your time into the people that you respect the most and that you think are, have the best points of view.

• 43:02David Weisburd?

  Thanks so much for jumping on. Absolute masterclass.

• 43:06Speaker 01

  My pleasure. It's been fun.