Pod Insights Masters in Business The Future of Private Credit with Erik Hirsch About this episode Barry speaks with Erik Hirsch, Co-Chief Executive Officer at Hamilton Lane, previously serving as CIO and Head of Strategic Initiatives. As co-CEO, he is responsible for the firm’s strategic direction and operations. Erik is also Vice Chairman and a trustee of the University of Virginia’s College Foundation, and serves on the board of the Philadelphia 76ers Youth Foundation. In this episode, they discuss the future of private credit, private capital, private equity,
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Transcript 11,229 words · 9 speakers
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0:00 Speaker 00 At KKR, we've spent 50 years understanding what matters to our clients and companies. From pioneering private equity to investing across credit, real assets, insurance and sports, KKR has built the experience to navigate complexity, the judgment to recognize opportunity, and the conviction to create lasting value. Because when people and institutions are counting on us, understanding what matters isn't just important, it's everything. KKR, understanding what matters. Visit kkr.com/whatmatters.
0:31 Speaker 01 This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs, and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting
1:13 Speaker 01 and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company, and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by ChatGPT. Get started at ChatGPT.com.
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2:42 Barry Ritholtz? This week on the podcast, I have yet another extra special guest. There are few people in the world of private equity better positioned to identify and discuss the explosive growth and changes coming to the field. Erik Hirsch has been with the firm, Hamilton Lane, for nearly 30 years, both as CIO and Head of Strategic Initiatives. Now he's co-CEO. I found this conversation to be absolutely fascinating. If you want to get a sense of why this space has been growing so dramatically and what the future of private credit, private
3:24 Barry Ritholtz? capital, private equity, et cetera, is going to look like, then you're going to find this conversation to be absolutely fascinating. With no further ado, Hamilton Lane's co-CEO, Erik Hirsch. Thrilled to be here.
3:39 Barry Ritholtz? So, let's start with your background. Bachelor's degree from University of Virginia in 1995. Would you study? What was the original career plan?
3:51 Speaker 04 I think I had no career plan because I originally studied philosophy, which I think is pretty much the definition of I'm not sure what I'm going to do with my life. I think I was probably thinking lawyer back then and I luckily got on a different track and ended up in finance.
4:06 Barry Ritholtz? Huh, that's really, that's really amusing. Philosophy, I have discovered that a number of people who have studied philosophy have said it's useful for developing frameworks and thinking about the way to approach management. We'll get to that in a bit. So from philosophy, what drew you to a career in finance and investment management?
4:29 Speaker 04 I was not highly sought after when I was graduating from college. I think it was a combination of the philosophy degree and perhaps a little lack of studying. But I ended up getting lucky and found myself in a public finance firm in Philadelphia called Public Financial Management. And there we were really servicing governments and trying to help them with budgets and bond offerings and the like. And that really taught me the fundamentals of finance. They had an incredibly strong training program, Excel modeling and just learning kind of the ins and outs of finance. And it was from there that was sort of the launching point.
5:05 Barry Ritholtz? Did I read this correctly? You specialized in sports stadium financing?
5:10 Speaker 04 Back in the mid 90s, governments were paying for stadiums. They were not being privately financed. They were, the belief back then was that this was going to be a big revenue draw for cities if they had these great complexes. And so we had developed one of the expertise early on to help cities go through that process of raising bonds, financing that.
5:33 Barry Ritholtz? I'm, I'm always fascinated by that because you mentioned Excel. If you have a spreadsheet, it's pretty obvious this ain't a moneymaker for cities. Maybe it's good for, you know, the municipal morale or town spirit, but it's a money loser, isn't it?
5:50 Speaker 04 I think what you found was it depended on the location. So Camden Yards in Baltimore, if you remember when that sort of first opened. Was a moneymaker. It totally altered the landscape of that city. Now, that didn't prove to be true everywhere that stadiums began to be created. And so today, we no longer see a lot of public finance capital going into stadiums. But there was again, a moment in time where in the right location, it did make sense.
6:15 Barry Ritholtz? Yeah, that was a deeply depressed area and you pour a billion dollars into it. It certainly helps, but when we look around at other stadiums, it's kind of amazing. This, to me, it looks like socialism. We're going to pay for your means of production as the government and you get to keep the profits. But it's amazing. It took decades for, you know, the taxpayers to kind of, and the elected officials to reach that, that conclusion. You also focused on mergers and acquisitions work in the 1990s. What was that like?
6:48 Speaker 04 Grueling.
6:49 Barry Ritholtz? Grueling.
6:50 Speaker 04 I don't miss it. I think I am happy to have been moved on. I think the good thing about my time as an investment banker was that it really introduced me to private equity. We were mostly looking at selling businesses for privately held businesses with families most often and selling them into private equity. And so having come from the public finance side, it was really the first time that my eyes got opened up to the fact that there was this whole other industry out there that seemed pretty interesting. And again, in sort of the mid later 90s, the private equity world was just beginning to start to grow up and start to have its first real growth movement.
7:26 Barry Ritholtz? Brown Brothers Harriman, a storied firm. What was your experiences like there?
7:30 Speaker 04 Great people. It is a lot of tradition, incredibly long history, particularly interestingly in Philadelphia. The firm had been there going back into the 1800s where it was more of a sort of a mercantile business. And it was just a good place again, to kind of get the basics and the fundamentals of what it meant to be on the corporate side of finance, again, as opposed to the public side of finance.
7:54 Barry Ritholtz? And if memory serves, they stayed a private partnership way longer than a lot of their peers. Am I, am I remembering?
8:00 Speaker 04 I think they still remain a private partnership.
8:02 Barry Ritholtz? Correct. Which is despite all the other partnerships having either gone per public. Or getting acquired by other public firms.
8:09 Speaker 04 Correct.
8:10 Barry Ritholtz? I've always wondered if that's the reason they never ran into trouble during the great financial crisis.
8:17 Speaker 04 I suspect it's a lot of reasons. Again, there's a lot of, it's a conservative place by nature. I think it's one of the reasons why clients are attracted to them. Partners have a lot of their capital invested in the business alongside of customers, also a good business model. And so I think it's just a company that has had tremendous success, but as you said, has kind of remained true to its roots in that private partnership.
8:40 Barry Ritholtz? Yeah, no, that's worked out really well for them. So from Brown Brothers, how'd you make your way to Hamilton Lane?
8:45 Speaker 04 Headhunter came knocking. I was again familiar with the concept of private equity and I had met some private equity firms in my short time as an investment banker. But the concept of Hamilton Lane and what they did as this kind of solutions provider intermediary was not something that I was familiar with. They were also, you're going to continue to have the Philly theme here, they were also headquartered in Philadelphia. So I didn't move very far. But I went over and met some people, thought it was interesting. Firm was very tiny at the time. It was probably 20, 25 people. This would have been in 1999 and essentially single office business. And the firm had been around for a few years and had had some early success. But at that point in time was still very tiny.
9:29 Barry Ritholtz? And when you began at Hamilton Lane, what was your role there?
9:33 Speaker 04 I joined the investment side as an associate, so I was still a pretty young person. And I joined the, the investment team back then was simply one group. There was no areas of specialization like we have today. But within a couple of quick years, I became the chief investment officer. And we began to sort of think about the business in a slightly different way. It had been historically solely focused as a consulting company. And once we got into the early 2000s, we began a bit of a migration of adding more of an asset management service offering.
10:03 Barry Ritholtz? So you stayed CIO for like 13 years?
10:06 Speaker 04 Yeah, I probably 14, maybe 14 or 15 years.
10:09 Barry Ritholtz? Really? So that must have been fascinating because the firm grew, the entire private space exploded over the past 25 years. How did your role as CIO evolve? What did you begin investing in? And then we'll talk a little later about what you're investing in currently.
10:27 Speaker 04 Everything was changing. So as I said, the firm itself was very tiny when I first took that that role. And while we've grown a lot, I still think of us today as relatively tiny company in the grand scheme of things.
10:39 Barry Ritholtz? Right.
10:39 Speaker 04 On our tour in here, you were mentioning the employee count. We're one tenth of the Bloomberg employee count.
10:45 Barry Ritholtz? Oh, that's just this building.
10:46 Speaker 04 Right.
10:47 Barry Ritholtz? I'm not even talking globally.
10:48 Speaker 04 Right. So we're a total of a little under 800 employees today. And so despite having gone from sort of 20 some odd employees when I got there to about 800 today, I still think of us as a as a small business. But in the CIO role, everything was evolving. When I first came in, the concept of secondaries was very new. The concept of co-investing was relatively new. People were not specializing products in any great way. Fund of funds, which is something that we don't talk much about today, was sort of the norm. That was mostly how limited partners were accessing the private markets. The private markets themselves had not really developed. So back then, private credit wasn't really much of a thing, whereas
11:30 Speaker 04 today, it's a huge driver of the growth. So I was witnessing and got the experience change on lots of different axes. And it was also for me, growing up in the business. I arrived there, probably a 26 year old. I'm 52 today. And so I've also kind of grown up alongside of the industry.
11:50 Barry Ritholtz? Really, really interesting. When you were first appointed CIO, what sort of investments were you making back then? Was it strictly private equity? Or was it a smattering of everything?
12:02 Speaker 04 It was primarily private equity. The firm was, at that point, not really engaged in things like private infrastructure or real estate. And as I had mentioned, credit wasn't a huge part of the industry. So it was mostly leveraged buyouts, venture capital. And we were, again, a manager of managers. So most of our investment activity was selecting fund managers on behalf of our clients. Really, the genesis of the firm was was quite simple. It was sort of late 80s, early 90s. The institutional world was just beginning to make their move into the private markets. Prior to that, kind of in the 70s and into the early 80s, most of the activity, small as it was, was primarily financed by large
12:47 Speaker 04 families, high net worth families, endowments and foundations.
12:52 Speaker 04 Things like public and corporate pensions were not a big participant in the private markets. And with some regulatory changes and with greater awareness, that began to shift. And the founders of Hamilton Lane had a very simple concept, which is people are going to want and need help. And so we were really designed then, as we are today, to really be a solutions provider, to help whichever kind of client is trying to access the private markets, to do so in a way that most and best fits their needs. Our view was that we didn't think that most limited partners were going to invest the time, resources and energy to build out large internal teams to cover this asset class. And that has proven to be correct. Most don't.
13:37 Speaker 04 They primarily find a partner, a solutions provider. And we've been that partner of choice now for over 30 years. But that was the business model. And so our evolution has really just kind of mirrored what the industry itself has been doing. As credit came online and became bigger, so did we in that space. As infrastructure and real estate developed, so too did we in that space. And so I sort of say that we've been kind of growing right alongside of the asset class.
14:03 Barry Ritholtz? Really, really interesting. I'm also intrigued by the idea of quote unquote consultants, but with some skin in the game. It's one thing to give advice, good or bad as it might be, but it seems like something else entirely to say, here's our recommendation, and by the way, we're going to co-invest our dollars, our personal dollars alongside with you. Tell us a little bit about how that developed and what does that mean for the clients you work with?
14:34 Speaker 04 So, as I said, the firm really began as a consulting firm. That the idea originally was these were going to be new decisions, new asset class for these public pensions and corporate pensions primarily at that time. And that they were going to want someone to make a recommendation that they then could kind of ultimately take the decision themselves. What we found was that the clients realized that this industry was growing quite rapidly and the need for resources was growing quite rapidly. And the decision-making needed to also happen on a quicker pace. And so that consulting model began to morph to the client simply saying, we want to just have you handle this for us.
15:18 Speaker 04 I think the advantage that we've had came from that consulting DNA because it rooted the firm in an incredibly client-centric mindset that still is a hallmark of our service offering today. So today, while we're primarily doing asset management, we're still doing it in a very bespoke model, a very customer-oriented. But to your point, as an asset manager, we're making the decisions, we have the discretion, and we're putting our own capital at risk alongside of the clients. And I think that alignment of interest rings true today as it rang true many, many years ago. And so today, it's still the biggest user of our balance sheet capital. The firm has invested a huge amount of money alongside of our clients
16:02 Speaker 04 over our history. But doing that sort of asset management alongside of, in combination with that really strong customer focus, I think that has been one of the reasons why we've been such a winner.
16:13 Barry Ritholtz? Really, really interesting.
16:15 Speaker 00 At KKR, we've spent 50 years understanding what matters to our clients and companies. From pioneering private equity to investing across credit, real assets, insurance, and sports, KKR has built the experience to navigate complexity, the judgment to recognize opportunity, and the conviction to create lasting value. Because when people and institutions are counting on us, understanding what matters isn't just important, it's everything. KKR, understanding what matters. Visit kkr.com/whatmatters.
16:47 Speaker 01 This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Businessweek's Lauren Grush. She reports that the company culture is defined by Musk, and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs, and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw, innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices, but according to recruiters,
17:32 Speaker 01 advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.
18:10 Barry Ritholtz? You've been at Hamilton Lane for nearly 30 years. I want to talk about the growth of the firm and the parallel growth of the sector. Private markets, the growth has just been amazing over the past 25 years. To what do you attribute this explosive increase in size of this sector?
18:31 Speaker 04 I think there's a variety of factors. One, the most simple is just performance. If you take a look at aggregated private market performance and you compare that over five, 10, 15, 20-year time periods to the public markets, you're going to see meaningful outperformance. I think the second thing, though, is becoming more recognized, which is diversification. Today, our public equity markets have never been more concentrated. A very, very small number of companies, all technology-oriented, make up a huge portion of the overall market cap. And I think when you sort of see that occurring in combination with the fact that more and more investors have moved to a passive public equity mindset,
19:14 Speaker 04 it means that you're ending up with these oddly concentrated portfolios in a small number of stocks. The other thing that's happening is that the public markets themselves are growing from a market cap standpoint, but they're not growing from a number of publicly listed companies. In fact, if we go back to the 80s and sort of draw a chart of number of publicly listed companies in the US, that chart is essentially moving down and to the right. It's shrinking. So today, about 4,000 publicly traded businesses. But think about, Barry, how many businesses you interact with every day that are private.
19:46 Barry Ritholtz? Most of them, right?
19:47 Speaker 04 The vast majority. And so, they employ a huge amount of people in the country and all around the globe. So as an investor, if you want to get access to that part of the economy, a substantially large portion of the economy, the only way to do that is through investing in the private markets. So I think when you combine the performance, the diversification, all of that has resulted in the growth. And yet, the private markets remain very, very small. If you took all of the capital raised last year across all of the subsectors in the industry, it wouldn't be enough to buy Apple.
20:24 Barry Ritholtz? Wow.
20:25 Speaker 04 So, if you look at total fundraising, again, all private markets fundraising, it accounts for about 2% of the MSCI market cap. So again, there's been huge growth, but the public markets themselves have also been growing quite a bit. And so when we put it in context, just like I say Hamilton Lane in context is a relatively small company, so too are the private markets.
20:48 Barry Ritholtz? So how much growth is possible in this space? I'm going to go off script and ask, can the private markets ever expand to where they're comparable to what we see in the public markets?
21:02 Speaker 04 You'd have to see an enormous amount of growth for that to happen.
21:05 Barry Ritholtz? Decades.
21:06 Speaker 04 Decades. But I think what you see in front of you is, I think there are still decades more of growth to occur. The private markets are expanding across lots of different axes. So, they've expanded geographically. So if we went back into sort of the 80s, it was basically a US-only business and then you expanded into Europe, etc. So now, it's becoming much more of a global phenomenon. It's also expanded across strategy. We've talked earlier about the fact that credit, for example, is becoming a bigger part, infrastructure, real estate. So we've seen that expansion. Now you're also seeing expansion across the clientele. So we've gone decades where essentially the only entities that were able to access this industry.
21:49 Speaker 04 Or institutional investors and ultra, ultra-high net worth investors.
21:54 Barry Ritholtz? So family offices, foundations, endowments, et cetera.
21:57 Speaker 04 Exactly. Today, you now see more mass affluent individuals able to access this industry. People with, say, three to five million dollars of investable assets, of which there are a lot of those people all over the globe. They've been, again, historically shut out, but with some regulatory changes and new product offerings, they too are now accessing this industry. So I go back to lots of different axes, all of them kind of growing in different ways. And I think that trend is, still has a long, long way to go.
22:29 Barry Ritholtz? Huh, really, really interesting. So let's focus on the firm's growth. Obviously, the tailwind of the whole industry is helpful, but not every private equity has grown as explosively as, as Hamilton Lane has. What's been the most surprising thing about the firm's growth to you?
22:48 Speaker 04 Well, I think no one would have predicted that we've got, that we would have gotten this large. So I think that in itself has been a surprise. But I think what's been noteworthy, you hoped it was going to be true, but you weren't sure, was that could you continue to grow and could you continue to expand again in different ways across geographies, across clientele, and at the same time, maintain the firm's core DNA? And I think one of the reasons why the growth has occurred and why the success has been there is that we have done that. That the roots of the firm are still very present in how we interact with customers today, how we interact with our own employees, how we interact as a team, how we interact with shareholders. All of that still, I think, remains kind of very
23:32 Speaker 04 true to the firm's values and foundations. And so being able to achieve both of those was always the goal. Again, always a risk that you don't pull it off. But knock on wood, here we are and we're still doing it.
23:45 Barry Ritholtz? So you described all the various sectors that you've expanded into and the growth that's been there. Let's talk geography. What are the plans for global expansion?
23:54 Speaker 04 So today, we have 22 offices around the globe. So we already have a very large geographic footprint. And our client base is also about equally split between kind of North America and non-North America. So while we're a US headquartered business located outside of Philadelphia, we have a very global feel to the firm in that you have hundreds of employees who are operating outside of the US. And my partner and co-CEO is a Hong Kong resident and operates out of Asia. So that footprint, combined with the client base, has already established us in a very geographically diversified way. I think as we look forward, I suspect the 22 offices will continue to grow.
24:37 Speaker 04 We have plans to open up in other locations. And if you look at the map of where we are, there are some very big places where we are not at present. So India, for example, would be a fairly large economy, but so far has had a very small private markets industry. That will change over time and I think you'll likely see a Hamilton Lane office there at some point in the future. So there are a number of places that you can look around the globe and say, "Well, I can imagine that at some point in time, that would make sense to have an office presence there."
25:06 Barry Ritholtz? So in the public markets, the rest of the world has lagged the United States for, I don't know, the better part of 15 years, decade and a half. Certainly since the end of the financial crisis. This year to date, or for the past 12 months, depending on where you're looking around the world, the United States has become a laggard. Even though first half of the year, we're up 6%, pretty decent, you know, 12% run rate is pretty typical. But Europe is doing really well, Asia's doing really well. How do you look at those parts of the world? Especially, I've been hearing Europe has structural problems, Europe has all these cultural issues, Brexit, Grexit, all these different things.
25:51 Barry Ritholtz? And yet, Europe really seems to be having a banner year. How do you look at that part of the world?
25:57 Speaker 04 I think this is the luxury of being a global firm with global deal flow. And most of our clients take a global view on portfolio construction. They want... The best investment opportunities, the best managers that we can access for them. And so in building portfolios, we have the ability to move around the globe to take advantage of whatever we think is interesting at that moment in time. Now, unlike the public markets, we have to be making investment decisions with an eye towards how's this going to play out over the next sort of three, five, six years? Because most of the investments that we're making have a fairly long duration, again, long relative to public markets. So, once you're investing in a private company, the work then starts, the value add then
26:42 Speaker 04 actually is happening, and that exit ultimately comes years in the future. So, I think our investment view is, has to be balanced. We have to be looking both at short-term and long-term simultaneously to decide where you sort of see trends going, how that's going to impact the company or manager that you're about to invest in. But, we don't have the ability that the public market has, which is to say, two hours after making a trade, I'm going to change my mind and unwind that. Once we do something, we're going to own it for a while.
27:15 Barry Ritholtz? The liquidity premium is significant and real.
27:20 Speaker 04 It's real. It changes the mindset. I have the benefit of interacting with lots of different investment heads who run all kinds of different investment firms. And as a public company ourself, I'm also constantly interacting with our public equity shareholders and research analysts. And it is just a different mindset. The Hamilton Lane team is thinking about things over many, many years. They're not fixating on what's going to happen this week or this quarter with that company. They're thinking, how can I invest a dollar today and five years from now turn that dollar into three dollars or four dollars? It's just a different orientation.
27:59 Barry Ritholtz? So, prior to becoming CIO, you were Head of Strategic Initiatives. Is that timeline right? Or was that after?
28:06 Speaker 04 After.
28:07 Barry Ritholtz? So, after you were CIO, you become Head of Strategic Initiatives. It sounds like the different sectors, the different geographies, the different clientele fits nicely into that role. Tell us a little bit about what that role was like and how that eventually led to becoming co-CEO.
28:26 Speaker 04 What we realized, my partners and I and our board, was that as we were continuing to evolve, one of the areas that we needed to have a real rethink on was technology. Having spent 14 or so years as CIO and building out the various investment verticals and putting senior leadership in place, really the thought was best place for me to spend the next part of my career was doing the same thing on the technology side of the business. While Hamilton Lane had embraced technology and had various technologies that we had been using, I think the view was we foresaw growth accelerating and the idea was we needed to really rethink the tech stack. And we took an interesting approach.
29:09 Speaker 04 So in my job as the head of strategic initiatives, I was afforded the opportunity to have access to Hamilton Lane's balance sheet capital. And in using that balance sheet capital, we went off and established partnerships with a variety of primarily tech startups that were focused on the private markets. So what we were doing was we were starting to meet with these firms who were trying to identify problems and areas that were going to impede scaling in the private markets. And we took an ownership stake in a variety of these businesses. To date, we've done over 15 transactions where we've taken anywhere from very small ownership stakes to very, very large ownership stakes. And the benefit of doing it with balance sheet capital was we got to be unlimitedly patient.
29:54 Speaker 04 There was no pressure of us to have to exit. We weren't using client capital. We weren't using fund capital. And our thinking was if this is going to be something that's good for us, it's going to probably be good for others in the industry. And if we're going to be helping to drive these businesses and to help give them ideas and real-time feedback and become a customer, then we'd rather align with them by actually being an owner as well. So I spent several years developing and sourcing and working on these various partnerships with some other Hamilton Lane people to try to get us into a much better position to have a market-leading tech stack, a variety of these strategic partnerships. And we've had a couple of these that have exited very successfully, so it was also a good use of balance sheet capital.
30:40 Barry Ritholtz? So let's talk a little bit about one of the companies that you guys are founding members of, which is Novada, which is a tech platform providing private markets with ESG data and benchmarking analytics. Tell us a little bit about Novada and how that's working.
30:57 Speaker 04 This is a great example of seeing a problem and not seeing an obvious solution. Our clients, no different than they focus on the public equity side, they want to understand what's sort of happening around ESG issues with companies that they're investing in. And so they're beginning to ask for various data points and various tracking. There was no system to do this. And what you also realized very quickly was that investors did not have a one-size-fits-all approach to this. An investor in Norway has a very different orientation around what ESG means to them than an investor in Japan or an investor in Saudi Arabia. And so trying to say to all these investors, "Oh, here's the one way you have to look
31:42 Speaker 04 at it," we thought was a total losing proposition. We also thought that frankly, the ESG metrics and the way that scoring is working on the public equity side was a little bit nonsensical. And so, take us for an example. Hamilton Lane, in the public equity world, has a pretty lousy ESG score. Well, we have an incredibly good environmental footprint. We do all kinds of carbon offsetting, so no issue there. We have very positive societal impact. We're helping with an awful lot of retirement benefits. We're consistently listed as a best place to work and providing employees with a healthy and constructive work environment. So why is there a score problem? Well, we're a controlled company in the public world.
32:26 Barry Ritholtz? Define what a controlled company means.
32:28 Speaker 04 Controlled company means that the insiders, some shareholders, have super voting shares.
32:34 Speaker 04 And so we are technically controlled by those inside shareholders as opposed to our outside shareholders.
32:42 Barry Ritholtz? Shouldn't that be a different scoring for a private company than it's one thing if you're a public company with tens of millions of shareholders, like I am not a big fan of the Facebook management structure and we saw something similar at shops like Theranos and Uber and other places that ran into WeWork is another example. You're less than a thousand employees, the founding partners are mostly still there. Why shouldn't the founders have, maybe I'm speaking my book here, but why shouldn't the founders have super majority?
33:17 Speaker 04 I think our investors liked it. And that was the irony was that they liked the alignment. They liked that we were, again, a lot of our capital's at risk alongside of there. Our clients like it, shareholders liked it. But again, in sort of the way the public equity ESG scoring works, it's a little bit blind to nuance. It's controlled company, bad, therefore bad score. So as we were looking at ESG for the private world, we didn't want to replicate what we saw the mistakes being made, we thought on the public side. And there wasn't really anything out there at the time. And so we created from whole cloth. We came together, we met some of the now management team of Nevada, shared a philosophy around the problem that we were trying to solve, gathered up a group of various shareholders
33:59 Speaker 04 now, including the Ford Foundation, S and P, Microsoft, a lot of other interesting institutional investors. And we literally created Nevada from whole cloth. And now today, Nevada is the world's largest collector of ESG data for private companies. Client base is all over the globe, huge database, interesting technology, interesting solution, and allowing investors and clients of Nevada to consume data how they want to consume it rather than giving some arbitrary scorecard that says, this is how you should look at it, or instead empowering people by saying, here's the data, you do with the data that
34:42 Speaker 04 you think is best for you and your organization.
34:45 Barry Ritholtz? Huh, really, really fascinating.
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37:13 Barry Ritholtz? So let's talk a little bit about some of the most significant changes that are going on in the private markets. What's the difference between today and the 1990s?
37:23 Speaker 04 I think it depends on which vertical we want to focus on. I would say probably the biggest difference is really around the client base. In the 90s, as we had mentioned, it was really just a game for institutional investors. And today, that's no longer true. Today, the retail investor has finally been afforded the opportunity to take advantage of what the institutional investor has been taking advantage of for many, many, many years. So that's the biggest change. I think on the investing side, the expansion of some of the verticals is also a big change. Private credit has really taken over from banks, particularly regional banks, as well as large banks, in being the primary provider of lending capital to businesses.
38:07 Speaker 04 That's been a huge sea change. If we had gone back into the 80s or 90s, or even into the 2000s, and you were a local business owner that had a small factory in a town in the Midwest US, and you wanted to expand and add another factory, you would have probably gotten in your car and driven down to your local bank where you knew the bank manager, and they knew you because you were the big employer in that town. And you said, "I'm going to build another factory," and they said, "Great," and they were going to give you a loan to do that. That's really not existing much anymore. Private credit has really taken that over in a much more sort of programmatic way. So I think there's a couple of big examples of some of the changes that you're seeing
38:51 Speaker 04 across the asset class.
38:53 Barry Ritholtz? You know, it's interesting because I have a recollection of the late 90s, early 2000s, and as all the large money center brokers and banks just became larger and moved upscale, upstream, there was a void created behind them, and private equity filled that void on the mercantile banking and private equity side. It sounds like you're saying the exact same thing happened on the private credit side. Banks got bigger, and they left their small and midsize clients behind.
39:24 Speaker 04 They got bigger, and they got regulated in a way that made it harder for them to participate here. And I think the private credit firms have frankly just done a better job of making that an asset class and making that both accessible to borrower and lender. And so I think all of that has actually been a positive development.
39:45 Barry Ritholtz? So private equity, private credit, both expanded. How about infrastructure?
39:49 Speaker 04 Big expansion there.
39:51 Barry Ritholtz? Really?
39:51 Speaker 04 I mean, if you look around the globe, we can go anywhere very quickly and see that there's huge need for infrastructure overhaul. Our systems, roads, telecom, power sources, all of that is aging in a way that governments are just frankly not able to keep up with it, and they're not able to finance it. And so you're seeing more partnerships with private infrastructure to go and deal with, again, whether it's transportation needs or energy needs, all of that becoming much more in the purview of the private markets.
40:26 Barry Ritholtz? So we've seen a torrent of capital entering a variety of different private investment strategies. When I see that much money piling into a space, the first question that comes to mind is, hey, are there enough good deals to go around for all this capital to find a home? Or are we just seeing a sea of cash just washing over too few deals?
40:52 Speaker 04 I think like in anything, people do things better and some people do things worse. I think the interesting part with the private markets is that capital flows have really not been a good barometer of much of anything. So in years where you've seen lots of capital raised, you haven't seen any correlation to performance, good or bad. And in fact, if you look at performance over long periods of time, one thing that has been true is that the dispersion of performance has remained very wide. Pundits would have said, and did say 20 years ago, well, as the industry matures, the dispersion will shrink and the difference between top and bottom will become very small because the markets will, quote, "become more efficient." And in fact, that hasn't happened at all. And it hasn't happened
41:36 Speaker 04 for a pretty basic reason. If you think about what is a private equity investment, you're literally partnering with management to run a company. And so one of the examples I always say when I'm talking to audiences about this topic is if I put 10 people out of the audience and I gave each of the 10 a chance to be the CEO of this particular business for a year, we would have 10 wildly different outcomes because each of the 10 would make very different decisions on marketing and manufacturing and hiring and culture. And so whether there's more or less capital thrown at that company, it's not going to alter the outcome. What's going to alter the outcome
42:16 Speaker 04 primarily is what decisions were being made and were they good decisions or bad decisions? It's sort of the very definition of active management where people are hands-on with that company making choices, fundamental choices. So, some people make better choices than others and so the dispersion remains very, very high despite the fact that more and more capital continues to move into the business. And one of those choices is around deal flow. Not every manager has an equal access to the same deal flow. In fact, proprietary deal flow is very much still alive and well in the private markets because there's no screen that they can log into to simply look up, hey, what's available to buy today
43:00 Speaker 04 in the private markets? It's really about getting out there, unearthing opportunities, networking, meeting with management teams, meeting with sellers. All of that is a skillset. All of that is frankly unequal and all of that then leads to way better outcomes or way worse outcomes.
43:18 Barry Ritholtz? Yeah, I'm surprised to hear that pundits would have imagined that that dispersion would narrow. When we look in other areas, it doesn't matter, ETFs, mutual funds, SPACs, pick your public investment strategy, almost a winner-take-all scenario in a group of also RENs, the winners have a flywheel where all these advantages accumulate and compound and work to the benefit of those who were early and right. Like, why would anyone really imagine that that dispersion would narrow? You certainly haven't seen it in mutual funds or anything in the private markets. It looks like, hey, if you have an advantage and you've been successful for a while, you should be able to continue to build on that advantage.
44:03 Speaker 04 I think the mistake that people made is that they just simply made the kind of bold and incorrect assumption that time or growth or scale would sort of cause a reversion of return, or a reversion to the mean, or a collapsing of dispersion. And it just goes back to what we just said. No, this is about a skill set and what choices you make with the business and what choices you make with your own business. And again, you've got winners and losers. What's not happening in our industry is there's not a winner-take-all. There are thousands of private fund managers around the globe, operating in different geographies and across different styles and strategies. And that number has generally continued to grow year after year after year.
44:47 Speaker 04 So, lots and lots of fund managers. And if we then put them on a plot chart across performance, you'd sort of see a big gapping between the top quartile, which is still a huge number of managers. Could be well over a thousand managers who are in the top quartile relative to the bottom quartile. And then you sort of see everything that's kind of in the middle. So, lots of choice for investors, but it's also why, frankly, a firm like ours has the ability to exist. Navigating all of that is hard. It takes a lot of resources, a lot of expertise, a lot of data, a lot of technology, to try to figure out from those thousands of choices, which ones do you want to put in your portfolio?
45:28 Barry Ritholtz? So, Sturgeon's Law applies to private capital and private equity and private credit, as well as everything else. I was kind of taken by a quote of yours earlier this spring. You said, "This could be a choppy summer." What does that mean and why do you expect choppy?
45:47 Speaker 04 Well, I think what's happening in the US politically has been very choppy. Tariffs, changes in the labor workforce, new regulations, changes in tax code. It's a lot of altering the landscape. And so, I think one of the reasons why we have seen a fair amount of public market volatility, while it's generally been still moving up, we've seen a fair amount of volatility. And in our world... It's harder to price assets today because you're trying to look ahead to see, okay, does this company have exposure to something that might be tariff impacted? How much exposure and what will be the tariff impact? And how long will the tariff impact be in place?
46:31 Speaker 04 So what you've seen in our industry is that deal volume, deal doing remains relatively healthy. Deal exiting remains pretty slow.
46:41 Barry Ritholtz? Is that driven by the lack of an IPO market or reduction in M and A?
46:46 Speaker 04 Or? I think it's more back to the choppiness, to use my own word of, is today really the day I want to sell this company to maximize value? And by the way, that potential buyer is also thinking to themselves, is today the day that I actually want to buy this business?
47:01 Barry Ritholtz? Right.
47:02 Speaker 04 Could the price get lower tomorrow or might it get higher tomorrow? So I would say we haven't seen buyer and seller agree to what norm is. And they're both kind of staring off at each other, looking to see higher, lower, better, worse. And the result of that is causing sort of a lack of this volume across the industry.
47:24 Barry Ritholtz? Huh, really, really interesting. So the equity markets seem to have figured out, for lack of a better phrase, hey, most of this lack of clarity around tariffs is going to go away. That there's a little bit of the taco trade and that this is a negotiating tactic. And eventually we'll have 10, 15% tariffs, marginally higher than we had before, but nothing that's going to push the economy into a recession. Do you think that's a fair assessment? Or perhaps the public markets are being a little too optimistic?
48:00 Speaker 04 I think it's a reasonable assessment. And the, and the public markets have the advantage of momentum. If everyone can kind of collectively agree and kind of drink that Kool-Aid, then you get the benefit of the sort of the tide is rising. It's different in the private markets. If you and I are out there to go do a deal, we're about to walk away owning a company. Well, we're going to live and die by that company's actual results. And so hoping that tariff impacts will be either non-existent or hoping that they will change or that they will be short-lived. That's not a strategy because if we're wrong, that company's earnings and revenue is going to be fundamentally altered and then we're going to have a hard time selling that
48:45 Speaker 04 company. So I think you have a difference of in the public equity world, I see much more macro overlay because you're sort of trying to figure out, yes, is this a good company and how do I assess the company? And at the same time, you're trying to figure out, well, generally what direction are the markets going in? But on the private side, a lot less macro overlay and much more fundamental focus on that single asset.
49:11 Barry Ritholtz? You don't get the same tailwind from the sector and the market overall in private markets that perhaps you get in public markets.
49:18 Speaker 04 You get some of that when it comes time to sell of are you in a good space? Is your industry growing? So you get some of that halo effect, but you're still pinned to a single asset. And on a relative basis, most private markets portfolios are pretty concentrated. So if you're a fund manager running a private markets portfolio, you might end up with a portfolio of 15 companies. Well, you can't be wrong on a, on a bunch of those or that's you're going to have a terrible result. The winners won't be big enough to outweigh the losers.
49:48 Barry Ritholtz? Really, really interesting. So two related questions. The first is, what do you think is next for the private markets? And the related question is, what are your strategic priorities for Hamilton Lane?
50:02 Speaker 04 I think they're both related, actually. The answer is going to be sort of the one in the same. I think what's next is there is going to be this adoption and influx of retail capital. We're seeing it, but it's still very early innings. If you look at the institutional world, most institutional investors have an allocation to the private markets that's north of 10%. If you look at the average retail investor, their exposure to the asset class is about 0%. And if you look at just wealth statistics around the globe, there are trillions and trillions and trillions of dollars in the hands of individual savers globally. So if you believe that they over time will have portfolios that look much more similar
50:47 Speaker 04 to an institutional portfolio, there's a huge amount of capital that's going to get migrated. But that capital is coming from a different type of investor. One who is accustomed to everything being on their phone and everything being available now. Think about how we all interact with the public equity world as individual investors. I'm sitting here in front of a Bloomberg terminal. I have unlimited access to information and I can execute on anything I want to do right here without moving more than a couple of fingers. The private markets today technologically are not built that way. And so there's a lot of change, I think, that's going to be coming around
51:29 Speaker 04 private market infrastructure, and I mean the infrastructure for our industry and how we interact with the customer. And that flow through is going to not only start with the retail investor, but it will then flow back to the institutional investor. So strategically for Hamilton Lane, we're very focused on making sure that we're getting that market segment right, that we're purpose building to make sure that we're properly caring and feeding of that customer base, which is again, different than the customer base that we've historically dealt with. And making sure that all of that is oriented to sort of achieving success there is right now a huge strategic priority.
52:07 Barry Ritholtz? So many of the topics we're discussing are very much front page headline sorts of news. Let me ask a little bit of an under the radar question. What are investors not talking about? What topics, assets, geography, I don't know, policy, data points is getting overlooked, but perhaps should not be?
52:30 Speaker 04 I think one of them is back to this retail question, which is, how is the emergence of this new investor class going to impact the industry? Because I believe it's going to impact it dramatically in the technology, in the flow of capital, in the style of investing. And so what are the ripple effects? I suspect there'll be positive and negative of that. And so what does that sort of shake out and impact then do to the industry? One of the things I think we're going to clearly see is that if you want to be a player in the industry, a fund manager, a service provider, the need for your own infrastructure, your own technology to be substantial is very real.
53:12 Speaker 04 And that's adding a whole nother layer of expense to the management of these businesses. Some will figure that out and will have the size and the scale and the growth to sort of do that. And I suspect a number of firms will simply not. So today, while the industry has been growing from both a number of managers and asset perspective, I think if we were to fast forward and come back and have this conversation in 10 years, I think the asset base will have continued to grow. I think the number of participants will actually have gone down.
53:42 Barry Ritholtz? Really?
53:43 Speaker 04 I do.
53:44 Barry Ritholtz? Even as you're adding more and more mom and pop mainstream investors to the client base of private?
53:51 Speaker 04 I think the number of firms that are going to be capable of successfully servicing that investor base is relatively small.
53:59 Barry Ritholtz? I will tell you from personal experience, working with individual investors, some of whom want exposure to various alternatives, the back end, the legal compliance, reporting, custodian, all those different things that have really become frictionless on the public markets. It's really challenging, it's really difficult on the private markets.
54:23 Speaker 04 Correct.
54:24 Barry Ritholtz? Everything is its own unique, I don't even want to say CUSIP, its own unique animal that is pet in a different way.
54:32 Speaker 04 It has to change.
54:33 Barry Ritholtz? No standardization at all.
54:33 Speaker 04 It has to change. The investor will not tolerate it. That's the reality, is that you can't expect that individual investor, who has been so trained and has adopted that frictionless environment for their entire portfolio, and now to say to them, "Well, for this 5% of your portfolio, it's going to be a gigantic pain in the rear." They're going to say, "I'm not dealing with that." So it can't stay this way. So one of the things that we believe will be one of the change agents is the world of tokenization. That does make things much cheaper, faster, and without friction.
55:16 Speaker 04 And so, Hamilton Lane has been a very early and aggressive adopter of that technology. We've tokenized more funds, we believe, than anybody else in the world.
55:23 Barry Ritholtz? Define that. What does tokenization mean for an individual investor?
55:27 Speaker 04 It's moving from a physical world to a digital world.
55:32 Speaker 04 Tokens are simply tracking of investments using blockchain technology. And so instead of dealing with subscription docs and all of the pain points of all of the legal and regulatory structure, imagine doing this in a point and click world where you can access a fund digitally using a digital wallet and storing it in a digital wallet and tracking it in a digital wallet, and that is the world of tokenization. So today, there are a number of token exchanges around the globe. Hamilton Lane is an investor and owner in a number of them. And if you go on today to firms like Republic or Securitize here in the US, you would see product offerings there.
56:16 Speaker 04 Investors can still access documents and information, but when it's time to actually purchase or invest, they can just simply click the buy button. And as that world matures over time, you will have exchanges that have buyers and sellers. And so some of that illiquidity issue that we've always been mired with, given the long duration, should start to lessen because you'll be able to trade more freely.
56:42 Barry Ritholtz? My assumption is that if you're trading private locked up assets, regardless of what they are, hey, if you want to sell, you're going to be getting a discounted price versus holding it for the duration.
56:56 Speaker 04 That certainly has been the case historically. I think what remains to be seen is, is that still true in a vibrant, healthy token world where you have lots of buyers and sellers on these exchanges? I think what you're going to see is that discount is going to greatly reduce because access to information and the ability to move assets is going to become much easier and quicker.
57:18 Barry Ritholtz? So, so what does this mean for the illiquidity premium? The fact that investors who agree to tie up their money for five years, seven years, nine years, get a theoretically higher payout than they might in a liquid public market?
57:33 Speaker 04 Well, this is going to be what the managers are going to have to deal with. They're going to have to continue to deliver some level of outperformance. Now, if the illiquidity issue completely evaporates because tokens become so freely exchangeable, then I think what you're going to simply say is, well, it's an equity strategy. So. It might be the exact same return as a public equity, as long as it's mirroring that, you still get the benefit of a diversification. You're still accessing assets that are non-public, and so the only way to access them is in the private world. But I think that will sort of cause a change in how people think about benchmarking and how they think about portfolio construction. We're a long ways away from that. So today, the ill-liquidity premium exists, and the ill-liquidity issue is still very much front and center. But I think you
58:16 Speaker 04 can sort of see the building blocks are being put in place that could really begin to alter how that all works.
58:23 Barry Ritholtz? Huh, really, really very fascinating. All right, I don't have you all day long, so let me jump to my favorite questions, starting with, who are your early mentors? Who helped shape your career?
58:37 Speaker 04 I'm a huge believer in mentors. I've had the benefit of several. My first boss, when I came out of college, is still a friend and mentor today. We were recently on a vacation together, and he still treats me like I work for him, which is great, and I think it's healthy, and it's good to have someone in your life who reminds you where you came from, and is quick to give you advice and perspective, and has nothing but your best interests at heart.
59:02 Barry Ritholtz? Let's talk about streaming. What are you watching or listening to today?
59:07 Speaker 04 I consume a lot of news, and so I also have a bit of a political junkie. So I've been enjoying a new launch of a new kind of network, I guess you'd call it, called Two Way, which is an interesting series of political conversations and access to different kind of political pundits and elected officials. So I've been consuming a fair amount of news via Two Way.
59:31 Barry Ritholtz? Huh, interesting. Let's talk about books. What are some of your favorites? What are you reading right now?
59:35 Speaker 04 I'm a voracious reader, so something is always open. Not all of it's good or worthy of sharing. I recently finished something that I think is worthy, which is a book called When the Sea Came Alive by Garrett Graff. I think he writes in a really interesting way, where he's piecing together firsthand accounts and diaries, and so this book was really focused exclusively on the landing on the beaches at D-Day.
1:00:00 Barry Ritholtz? Huh, interesting. You said something, not all of them are good or worthwhile. My view is if you're reading a book and you're not enjoying it, well, give it to someone else and start the next book.
1:00:11 Speaker 04 I should do that. I really struggle with that.
1:00:13 Barry Ritholtz? It's not homework. It's not an assignment.
1:00:15 Speaker 04 I know, and yet I find myself grinding through things that I'm sitting there thinking, this is really not worth my time. And yet I have this compulsion of, I started it, I have to finish it.
1:00:27 Barry Ritholtz? I, um, I, somebody turned me on to the idea of not finishing books you started like, I don't know, 15 years ago.
1:00:36 Speaker 04 All right.
1:00:37 Barry Ritholtz? And it's changed. The average American reads four books a year. The average quote unquote reader reads 10 books a year. I find if you don't like a book and you close it, you're reading, you know, two books a month. It's a whole different world.
1:00:52 Speaker 04 I'm probably reading two books a month and I'm not closing them, at least I should accelerate and I have to learn. That's a good lesson for me to take, take away from this.
1:01:01 Barry Ritholtz? Our final two questions, what sort of advice would you give to a recent college grad interested in a career in either private equity or private capital or, or investing in general?
1:01:13 Speaker 04 I think I would give the same advice regardless of the industry, and that goes back to your question on the mentor piece. I think we employ a whole lot of young people and I love that. In fact, we literally just last week welcomed our brand new analyst class. They seem younger and younger to me and I am clearly getting older, so I had the privilege of welcoming them to the firm and, and addressing them. And I was asked this question and my answer was, get a mentor. I think right now, particularly with younger folks, there's a belief that everything that you need to know, you can look up. I can just go online. I can ask ChatGPT. I can Google for it.
1:01:54 Speaker 04 And I just don't believe that's true. I still think that whether it's an investment industry or a legal profession or a medical, that while you can get a lot of knowledge. Via the internet and via other electronic resources, there is something about learning from the mistakes that others who have gone before you have made that is invaluable. And I think aligning yourself in a really healthy mentor-mentee relationship, I think, is an enormously important part of a good career.
1:02:26 Barry Ritholtz? Really interesting answer. And our last question, what do you know about the world of investing, be it private or public, today that would have been helpful had you learned it back in the 1990s?
1:02:39 Speaker 04 I think just how much change is coming. It's so easy to go to work every day and kind of make the assumption of, I'm just thinking about what I have to do today, and tomorrow will be very similar to today. I think training yourself to step back and try to see around corners and try to think outside the box of saying, what if it doesn't work like this forever? What if there's going to be a big change? What if this new technology is going to take off? Continuing to sort of push yourself to do that. I'm better at doing that now. I wish I had done more of that when I was younger.
1:03:14 Barry Ritholtz? Huh, really, really interesting. Eric, thank you for being so generous with your time. We have been speaking with Erik Hirsch. He's co-CEO of Hamilton Lane, which manages or advises on nearly $1 trillion in private assets. If you enjoy this conversation, well, be sure and check out any of the past 500 we've done over the past 11 years. You can find those at Bloomberg, iTunes, Spotify, YouTube, wherever you find your favorite podcasts. Be sure to check out my new book, How Not to Invest: The Bad Ideas, Numbers, and Behavior That Destroys Wealth and How to Avoid Them, How Not to Invest, at your favorite bookseller.
1:03:57 Barry Ritholtz? I would be remiss if I did not thank the crack team that helps put these conversations together each week. Meredith Frank is my audio engineer. Anna Luke is my producer. Sean Russo is my researcher. Sage Baumann is the head of podcasts at Bloomberg. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.
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