Is Cobalt the Digital DJ of Private Markets Investing?

Executive Summary:

• In this paper, we draw parallels between music streaming technology and software designed for private markets investors.
• We explain how investors can leverage our Cobalt platform to easily access data to help make informed investment decisions.
• And we share a preview of what technology trends are positioned to make sound waves this year (hint: AI).

This may come as a surprise, but music streaming platforms (or as we’ll refer to them – “digital DJs”) and Cobalt by Hamilton Lane (Cobalt) – our private markets data, diligence and analytics platform – share a lot in common. Similar to how digital DJs provide musical artists and consumers with a platform through which they can share, discover, listen to and keep up with the world's largest catalogue of music, Cobalt connects institutional investors with what we believe is the most comprehensive and timely private markets database available. As a key component of our firm’s technology ecosystem, Cobalt, like the digital DJ, is setting the tone for its industry. You can think of using Cobalt as the musical industry making the leap from compact discs (CDs) to cloud-based digital DJs… let me explain.

Throwback to an earlier era

In the 1990's, musical artists (General Partners, or GPs) primarily reached new consumers (Limited Partners, LPs) through agents and music label distributors (private markets placement agents and consultants). These distributors helped artists market and monetize their musical capital in the form of physical CDs (funds). At the time, there wasn't a readily accessible market for consumers to browse the full scope of artist catalogues (diligence) without buying every CD at the store (remember CD stores?). Furthermore, without knowing ahead of time which songs (portfolio companies) they liked, consumers took a big risk each time they parted with $20 for the fresh new CD release (yes, music used to be this expensive!). For up-and-coming musical artists (emerging managers), it was also very hard to gain an audience. This era of music distribution is clearly analogous to an earlier era of private markets investing, fraught with friction, extra expenses, risk and the lack of transparency. 

Breakthrough developments

Now, let's recall how 1,000 songs made their way into consumers' pockets – portable media players. This small, digital device moved what would ordinarily be dozens of physical CDs that could only be browsed one at a time into an intuitive, scrollable gadget that could fit into your pocket. It was revolutionary. And the software powering it let users search for and organize their favorite music however they pleased. This digital innovation also created an interconnected marketplace in which consumers could better diligence their music options pre-investment. These tools gave consumers more confidence in their music purchases and, as a fortunate side effect, also gave emerging artists more opportunities to break out. 

And then, digital DJs moved music beyond closed ecosystems and broadened the experience with which artists and consumers engage, giving them better insights into what types of music are trending, connecting similar artists thematically and offering AI-generated recommendations based on pattern matching.

Sound familiar?

A similar story has been unfolding in the private markets: GPs want their "music" to be able to reach a wider audience and investors are eager to sample the wide universe of available options. As a corollary to having so much choice, LPs are demanding a greater level of transparency before the “buy,” including having access to detailed track record data, compiled diligence and even portfolio company operating metrics alongside proof of GP value-add initiatives. 

Connecting the dots with Cobalt

Digital DJs expanded on the idea of a digital library of music in your pocket, but it’s more than that – it’s a way to discover and engage music enthusiasts and a megaphone for artists hungry to build a fanbase. Similarly, Cobalt elevates the confidence of private market investors and provides a dynamic interface for GPs to demonstrate their strengths and track record to potential investors. Cobalt does this by transforming information traditionally locked into siloed, unstructured sources into valuable, dynamic insights accessed on-demand. Just like we say, “remember CDs?” we will soon be saying, “remember PDFs and data rooms?”

The experience of diligence is turned on its head when investors have information at their fingertips on more than 61,000 private markets funds and rigorous diligence on managers conducted by Hamilton Lane’s global Investment Team (as of September 30, 2024). Cobalt users can conduct sophisticated analytics within the platform and review comprehensive reports to help inform investment decisions. To hammer home our analogy, GPs are now the empowered musical artists, LPs are the efficient consumers, and Cobalt is the groundbreaking streaming platform that enables connectivity between the two – the digital DJ of the private markets.

Hamilton Lane is a leading global investment manager. We have also devoted significant time, attention and capital to hiring teams of data engineers, data scientists, software developers and other technologists to clean and enrich our vast private markets database. We do this because we use this data and technology ourselves to be better investors. But we're not resting on our laurels. With Cobalt being a central part of our technology ecosystem, we are committed to evolving our toolkit and partnering with other leading private markets technology providers to drive our business and asset class forward.

Continuing innovation  

To be change agents, we have developed a strategy to invest in and partner with emerging technology firms through our strategic HL Innovations program. We have put balance sheet capital behind approximately 20 companies over the last decade with the goal of enhancing data transparency, broadening market access and driving operational efficiency. 

For today, let’s focus on data transparency. Data is king in the private markets, but there is still a ton of friction when it comes to collecting and sending data to key stakeholders. This time last year (Tech Trends Q&A), I mused that there isn’t yet one industry solution to do it all. We engage two select partners to reduce this friction through digitization*:

• On the pre-investment side, Cobalt integrates with Daphne, an emerging platform that facilitates the distribution of private markets assets and increases fundraising efficiency. How it works: Daphne first digitizes a GP’s funds using its Fund Master, a centralized and standardized data model that serves as a single source of truth for fund information. This data can then be transmitted via a web-based interface or API to various channel managers and databases, including Cobalt. With Cobalt, the fund data becomes available immediately to assist our Investment Team and clients with pre-investment diligence and asset selection, thus eliminating the manual effort of aggregating and normalizing data for analysis.
• On the post-investment side, we leverage Canoe, a financial technology company committed to enhancing back-to-front office capabilities. Canoe's early use of AI and machine learning as well as its ability to integrate across various front-office platforms continues to differentiate it from other solutions in the market. How it works: Canoe automatically syncs financial reporting documents from investor portals, organizes files, extracts and validates data and then sends it downstream to other systems, which, for us, means Cobalt. Our clients can then analyze their portfolio performance and strategize for the future, including forecasting cash flows, building commitment plans and stress-testing their portfolios under various economic scenarios.

Ultimately, these technology platforms funnel the industry’s disparate data sources into one place where investors can discover, review, and curate it. We may sound like a broken record (pun intended), but in this way, Cobalt acts like the digital DJ of the private markets. We’d like to imagine that just like people jam out while streaming their favorite music, investors all over the world are doing the same while using Cobalt.

Want an encore?

Our analogy wouldn't be complete without talking a little more about AI. Do you listen to some variation of a smart playlist (i.e., music curated to your taste)? Frankly, I can’t remember a time without this digital streaming feature; it flawlessly elevated the user experience without feeling like anything changed. And some services now offer an AI-powered DJ that takes customization to the next level with on-the-go recommendations. Similarly, AI has the power to improve the experience of investing in the private markets (without disrupting the parts of the industry that are working well). There are a few companies embracing this technology that will be exciting to watch in 2025... more on this another time! 

Change is constant. As the private markets continue to evolve alongside innovations in digitization, diligence, data monitoring and AI, there will inevitably be winners and losers. We believe that having the industry's most comprehensive data is an advantage and have developed and partnered with technology platforms like Cobalt, Daphne and Canoe to inform investment decisions for us and our clients. We’ve said this before and it still rings true: Our approach revolves around the notion that if companies don't innovate, they will fall behind. For example, do you remember the portable CD player? It fell behind when the industry shifted to MP3s. Now, cloud-based digital DJs have taken the crown in an increasingly interconnected digital landscape. The moral of this story is that technology is constantly evolving and it's why we strive to stay ahead of the curve.