Insights Chart of the Week

What Drives Private Infrastructure's Historical Outperformance?

When making the case for private markets, we emphasize historical outperformance, and private infrastructure has historically outperformed public market alternatives on a consistent basis. From 2012-2022, private infrastructure has outperformed public indices by a significant margin, with median returns reaching double digits in eight of those years – while the public index has remained below 10% throughout the same time period.

So, how has private infrastructure historically outperformed so consistently? The answer lies in the assets. Private infrastructure managers typically focus on hard-to-replace physical assets with revenues tied to long-term contracts, offering both consistent performance and strong downside protection potential. In contrast, public infrastructure indexes often feature more asset-light, service-oriented businesses in which value is more heavily tied to traditional business operations than revenue-generating physical assets.

Is Perception Reality? Private Markets Survey Adds Perspective

Individual investors don’t always understand the pros and cons of private markets—until advisors get them up to speed. However, one perception shared by most private wealth clients is the potential for higher rewards in private markets compared to public stocks and bonds.

The potential for high rewards drives client interest

In our Annual Global Private Wealth Survey, 76% of advisors said their clients view private markets as offering higher rewards than public stocks and bonds. Another 20% saw them as offering similar rewards, with just 1% saying they would expect a lower reward.

The survey revealed that clients don’t always associate higher rewards with increased risk: 41% believed private markets would be riskier, and 35% thought they posed a similar risk. An additional 19% see private markets as lower risk.  

While the allure of high performance may be what attracts private wealth clients to private markets, advisors equally value the added diversification. Private markets typically have a low correlation to public stocks and bonds. So, it’s not about choosing one over the other but about how both markets can complement each other when building a diversified portfolio.

Will Buyout Continue its Historical Outperformance?

Public markets have seen a recent surge in performance and, on a short-term basis, have even outperformed in some cases. How do current 10-year returns compare to historical longer-term averages? This week, we look at the distribution of rolling 10-year returns for buyout and the S&P 500 Index. While buyout is still outperforming on a 10-year basis, it’s important to note how close the returns have been, with the outperformance gap narrowing. Interestingly, though, the public market index is currently at a much greater percentile against long-term, 10-year historical averages than buyout is, shown here as the 75th percentile vs. the 61st percentile. If we believe that there will likely be mean reversion, then that would point to greater outperformance for buyout.

Survey: Advisors Plan Changes to Private Market Allocations in 2025

More than half of advisors are planning to allocate more to private markets in 2025 than in 2024. That’s according to the Annual Hamilton Lane Global Private Wealth Survey of 320 financial professionals, conducted in November 2024.

Reasons for this trend include:

• The popularity of evergreen funds. Evergreen funds are designed with individual private wealth investors in mind. They provide private markets access with semi-liquidity on a monthly or quarterly basis and low investment minimums.
• A desire for diversification. Private markets have a low correlation to public stocks and bonds, making them attractive to advisors looking to balance client portfolios.
• Advisor advantages. Advisors offering private market opportunities can deepen relationships with existing clients, attract new clients and respond to increased demand from current clients.
• The benefits of semi-liquidity. Advisors noted that semi-liquidity prevents clients from reacting to market ups and downs. This keeps them invested, which can benefit their portfolio outcomes over time.

Private Credit: 23 Vintage Years of PME Outperformance

Private credit has remained an important part of many portfolios due to its ability to add ballast and diversify portfolios, but how do private credit returns compare to relevant public benchmarks? This week, we examine pooled private credit IRRs by vintage year vs. the S&P LSTA Leveraged Loan Public Market Equivalent (PME).

While there have been a few exceptions, the vintage year pooled IRRs have typically ranged from high single-digit to low-teens returns.

What is even more consistent is that private credit IRRs have outperformed their PMEs, including every vintage over the last 23 vintage years. Regardless of age or economic cycle, the asset class has shown resilience in its own performance as well as a history of outperformance relative to its PMEs. This further strengthens the core role of private credit in building robust whole portfolios.

Private Venture Opportunities Eclipse Public Market Offerings

This week, we examine the growth of $1 for venture capital (VC) sub-strategies since 2017 compared to the Russell 3000. In North America, private venture capital offers access to over 700,000 innovative tech and tech-adjacent companies, far surpassing the ~500 publicly listed tech names as of 2023.¹ The asset class enables greater participation in niche, high-upside markets that are often inaccessible or underrepresented in public markets. 

Balanced, or multi-stage venture managers, offer the advantage of flexibility and scale, leveraging their long-standing reputations and large platforms to adapt across stages based on market attractiveness. While this reduces decision-making complexity for LPs, the tradeoff is limited control over selecting specific portions of the strategy. The relative underperformance of multi-stage managers highlights the challenge investors face in accessing the best opportunities in venture capital. While these managers have captured incremental market share, often serving as the entry point for new groups interested in VC, simply picking a few brand names in the hopes of yielding a diversified approach is rarely sufficient. 

Early-stage funds provide access to high-potential, innovative sectors at low entry values, with the possibility of achieving significant returns. However, this comes with higher idiosyncratic risks, including higher loss ratios, potentially longer hold periods and reliance on key outperformers. Late-stage opportunities, by contrast, offer shorter durations and lower risk profiles, though returns may be more sensitive to valuation risks and see less upside capture than earlier-stage assets.

Venture Capital & Growth Drive Private Equity’s Historic Outperformance

This week’s chart highlights the 10-year rolling performance of private equity strategies and the MSCI World Index, showcasing how venture capital and growth equity funds have produced stellar returns for much of the past decade. While there has been considerable focus on post-2021 venture performance, private markets are a long-term asset class. Despite recent declines, both venture capital and growth equity continue to outpace other strategies and demonstrate the potential to consistently drive outsized returns relative to public equities over the long term. Regardless of macro volatility and market cycles, venture and growth continue to generate premium historical returns that investors cannot access from listed equities.

Private equity portfolios without venture and growth strategies may experience higher tracking errors to private equity benchmarks. While venture capital’s greater dispersion of returns across market cycles offers substantial long-term return potential, we underscore the importance of prudent portfolio construction and best-in-class manager selection for LPs to secure the best potential risk-adjusted returns for the asset class.

Fund Size ≠ Average Returns

Taking the crown in our Top of the Charts series is Fund Size ≠ Average Returns. In this chart, we examine the differences in dispersion of small-cap buyout, middle-market buyout and mega/large buyout. Interestingly, the median IRRs do not differ drastically between the three fund sizes, all hovering in the mid-teens. This suggests there is not a strong correlation between fund size and median returns. 

Top-quartile, middle-market managers, however, have historically posted stronger returns than their peers in the mega/large space. While top-quartile returns are high, the dispersion of returns for middle-market buyout also remains wide, showing the upside potential and downside risk. That dynamic stands in contrast to mega/large funds, which exhibit a tighter dispersion. This relationship is even further pronounced when looking at small-cap buyout relative to the other buyout buckets. Strategic planning and prudent manager selection remain crucial to targeting outperformance, especially in small-cap and middle-market investing where the wider dispersion of outcomes can introduce more downside portfolio risk considerations.

Current Rate of Distributions vs. Pre-2021

Placing 2nd in our Top of the Charts year-in-review is The Current Rate of Distributions vs. Pre-2021. And for good reason. We focus a lot on risk and return, but liquidity is another major consideration when thoughtfully constructing private market portfolios. In this chart, we observe the rate of distribution across all private markets as the total amount of distributions as a percentage of NAV. Also shown are the annual amounts to illustrate the magnitude of distributions per year, demonstrating distribution activity in two ways. Investors experienced diminished distribution activity in 2023 compared to the record amounts in 2021 and 2022, and it is unlikely to see distributions of that magnitude based on 1H 2024.

Distribution rates, however, show some evidence of recovery from the all-time lows they saw in 2023, which was the lowest annualized rate of distribution over the past 10 years. This can be attributed to minimal exit activity during that year, but it appears to have begun picking up traction in the start of 2024. Still, the distribution pacing declines are more a function of NAV growth, rather than a massive decline in absolute distributions, as distributions continue to be on pace or exceed those of pre-2021 levels.

Sourcing Outsized Returns

This week we’re focusing on interquartile range of funds’ IRR that are bucketed into three implementation strategies across private equity.

The lowest interquartile range in returns is in secondary funds, highlighting its potential for relatively lower risk implied by lower dispersion in returns. More diversification and robust investment selection in co-investment funds are particularly important to be prudent about and are implied by the highest interquartile range vs. primaries or secondaries.

It is important to note that this is not considering the top and bottom deciles of the dispersion. Although the interquartile range for co-investment funds is higher, the top decile could also be higher, implying both higher expected return and risk. Co-investments also typically show a longer tail on the right of their return distribution, emphasizing the potential for strong, outsized returns if investors have capable sourcing, investment selection and risk management skills.

How Long Should You Stay Invested?

Understanding the duration of an investment can be helpful in assessing the illiquidity of closed-end primary funds. In this week’s analysis, we calculate “implied duration” for different private markets strategies. In other words, how much time, on average, is capital at work for a private markets fund?

Infrastructure and credit origination funds demonstrate shorter implied durations – often less than four years. This expedited recuperation period can indicate lower liquidity risk exposures for investors, as capital is returned more swiftly. In contrast, higher risk and returning strategies such as venture capital see an extended duration as their underlying assets take longer to generate and return value.

Understanding the duration of illiquid assets is vital for making proactive portfolio changes that align with an investor’s strategic goals and capital needs. This nuanced approach to portfolio construction is important for LPs seeking to balance their portfolio’s return, risk and liquidity across private market investments.