Secondary Market: Taking Advantage of This Opportunity Set
How do you best take advantage of the current opportunity set and what are the characteristics that we think are needed to be successful in this market?
We expect an incredible amount of deal flow. In order to be successful in this market, we believe you need to be selective. How do you screen deals? How do you prosecute deals and how do you build the conviction quickly?
We think there are a few things that are critical. One, having access to information. Having access to insight and making that available immediately. We’re in an advantageous position where we have primary teams, co-investment teams, credit teams, secondary teams, teams talking to GPs every day, collecting the intelligence on exits, trends, operating performance, valuations – everything you need in order to truly understand how to price in this market. Information is critical.
However, all that raw data isn’t useful unless you have an engine that spits out an answer. You need processes and technologies in place in order to disseminate that information from one place to the other, where you can really see undervalued assets, embedded value within assets, and the trends going forward in those asset classes.
Lastly, and this is something that is often not mentioned enough, the team is incredibly important. We invest an incredible amount of time in our team. This means hiring, developing individuals, and creating and fostering a good atmosphere for them to grow and become cohesive together. We think the longer they work together, the better as a group they’re going to be. We believe it’s the recipe of these three ingredients that are critical to being successful in the secondary market.
The projections published herein are based on a regression of quarterly public market index returns against quarterly private market index returns. This regression generates an alpha and a beta by strategy which can be used as inputs into the single-index model of pricing assets (Sharpe 1964, Lintner 1965). The formula for the single-index model is:
rPrivate Markets = αPrivate Markets + βPrivate Markets (rPublic Markets –rRisk Free )+ rRisk Free
Where:
rPrivate Markets = Return of Private Markets
rPublic Markets = Return of Public Markets
αPrivate Markets = Alpha of Private Markets
βPrivate Markets = Beta of Private Markets
rRisk Free = Risk Free Rate
The regression formulas for Core and Non-Core Real Estate differ slightly from the single-index model in that the regressions are multi-index models, which include multiple betas and public market returns to better predict private market returns, such as the U.S. Regression Indicator Index.
Once all inputs are obtained, we create a 75% confidence interval for our expected returns. This should denote the inherent uncertainty in these sorts of predictions. In general, we expect to be accurate within a 400 basis point spread with 75% confidence in quarters of normal stock market volatility. During periods of outsized positive or negative returns in the public markets, we would expect to either be less accurate or for the confidence interval to expand meaningfully. We also expect individual portfolios to vary meaningfully from these projections, as individual portfolio returns vary from the industry’s returns for many reasons, including concentration of assets, different investment pacing, and different strategy/geography makeups, to name a few. Larger and more mature portfolios should be expected to have a performance more similar to the market, and therefore more reflective of these estimates, than other portfolios might be.
To estimate the next quarter’s valuation for a portfolio, you can apply the estimated quarterly growth rate associated with it. The quarterly growth rate should be applied after adjusting for all fund contributions and distributions made during the quarter, in accordance with the Simple-Dietz methodology for calculating returns. Note that all calculations shown in the document are in USD. Therefore, the formula for calculating rPrivate Markets shown above yields a return in USD. To apply the rPrivate Markets to a portfolio with valuation and cash flow information already in USD, use the formula below:
Predicted NAVEnding=(NAVBeginning)(1+rPrivate Markets)+ ((1+rPrivate Markets)/2)(Period Capital Calls–Period Distributions)
If the portfolio valuation and cash flow information is not in USD OR you wish to convert a USD return to a non-USD currency, an “FX Effect” factor must be applied. The formula should be adjusted as shown below:
Predicted NAVEnding=(NAVBeginning)(1+rPrivate Markets+FX Effect)+ (1+(rPrivate Markets+FX Effect)/2)(Period Capital Calls–Period Distributions)
Strategy Definitions:
Credit: This strategy focuses on providing debt capital.
EU Buyout: Any buyout fund primarily investing in the European Union.
Mega/Large Buyout: Any buyout fund larger than a certain fund size that depends on the vintage year.
Real Estate: Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures.
SMID Buyout: Any buyout fund smaller than a certain fund size, dependent on vintage year.
VC/Growth: Includes all funds with a strategy of venture capital or growth equity.
Index Definitions:
MSCI Europe Index: The MSCI Europe Index tracks large and mid-cap equity performance across 15 developed market countries in Europe.
MSCI World Index: The MSCI World Index tracks large and mid-cap equity performance in developed market countries.
S&P 500 Index: The S&P 500 Index tracks 500 largest companies based on market capitalization of companies listed on NYSE or NASDAQ.
This document has been prepared solely for informational purposes and contains confidential and proprietary information, the disclosure of which could be harmful to Hamilton Lane. Accordingly, the recipients of this document are requested to maintain the confidentiality of the information contained herein. This document may not be copied or distributed, in whole or in part, without the prior written consent of Hamilton Lane.
There are a number of factors that can affect the private markets which can have a substantial impact on the results included in this analysis. There is no guarantee that this analysis will accurately reflect actual results which may differ materially. These valuations do not necessarily reflect current values in light of market disruptions and volatility experienced in the fourth quarter of 2020, particularly in relation to the evolving impact of COVID-19, which is affecting markets globally.
The information contained in this presentation may include forward-looking statements. Forward-looking statements include a number of risks, uncertainties and other factors beyond our control which may result in material differences in actual results, performance or other expectations. The opinions, estimates and analyses reflect our current judgment, which may change in the future.
All opinions, estimates and forecasts contained herein are based on information available to Hamilton Lane as of the date of this presentation and are subject to change. The information included in this presentation has not been reviewed or audited by independent public accountants. Certain information included herein has been obtained from sources that Hamilton Lane believes to be reliable but the accuracy of such information cannot be guaranteed.
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As of October 5, 2022