Direct Credit Investing
Access to the private credit market, emphasizing current yield with an aim toward downside protection
- The bank loan market aggressively re-opened in 2024, putting pressure on pricing. Private credit transactions have seen +/- 100 bps of spread compression; however, all-in yields remain attractive.
- Despite the bank loan market being open, private credit continues to differentiate itself through increased flexibility relative to the BSL market, particularly as the asset class has grown and offers more liquidity. YTD (through September 11), LCD estimates $16B of syndicated loans have been refinanced with private credit transactions, compared to $6.6B at this time last year. The middle market also continues to be an area favored by borrowers where there is less competition from the BSL markets.
- Many borrowers prefer private credit over public credit markets given that 1) you're typically dealing with significantly smaller lender groups and 2) private credit continues to be able to underwrite complexity, which is highly valued by borrowers particularly during choppy periods of performance or volatility.
- Hamilton Lane Credit continues to see record deal flow. There’s been +$12.3B in YTD deal flow through September 11, 2024, representing 105% of the deal flow we saw in all of 2023.
- Deal flow continues to be dominated by a mix of incremental term loans, refinancings and a modest pick-up in LBO activity. On the opportunistic side, we see interesting opportunities in HoldCo PIK loans (junior debt structures) that can offer equity-like returns. These loans can offer managers a way to preserve free cash flow while continuing to execute on growth/buy and build initiatives. While many of these managers could raise more senior debt, they may prefer not to take on extra cash interest in this environment. We continue to emphasize conservative capital structures with greater levels of equity support by sponsors and lower LTVs.
- All-in yields remain attractive, while defaults remain below historical averages. The default rate by amount outstanding in the Morningstar LSTA U.S. Leveraged Loan Index was 0.78% in August, down slightly from July, which was 0.92%. In July, Fitch revised their default expectations for institutional leveraged loans upward to 5.0-5.5% before declining to 2.0-3.0% in 2025. S&P Global is expecting their 2025 speculative-grade corporate default rate to fall to 3.75% by June 2025 from 4.8% as of June 2024. Trends leading to this reduction include recent refinancing and repricing activity, which have provided near-term liquidity relief, strong earnings results and a resilient consumer.
Direct Equity Investing
Globally diversified platform targeting the SMID market with unique positioning
- 2024 was a year of recovery, with dealmaking up YoY (preliminary deal count and deal value were up over 10% and 20%, respectively), bringing an end to a two-year dealmaking slump that saw deal value decline by more than 40% peak to trough.
- The deal flow that our direct equity platform is seeing is even more robust – our 2024 deal flow outpaced 2023, which was a record year, by more than 29%.
- In terms of the types of deals getting done, it’s notable that platform LBOs have picked up quite a bit. These deals took a hit during the last two years amid higher debt financing costs.
- We continue to find ourselves in a favorable supply market as a co-investor, with a reduction in PE dry powder driven by a decline in PE fundraising, which has been elongated.
- What is accounting for the discrepancy between what we’ve been seeing in the market broadly, which has largely been a continued pullback in fundraising, and increased CI volume?
- GPs are still looking to get deals done with fewer traditional capital sources available to them. Hamilton Lane, as a large, institutional co-investor and capital solutions provider, is positioned favorably given these supply/demand dynamics.
- Since the peak in 2021, exit activity declined meaningfully. GPs were holding onto companies for longer, with substantial bid/ask spreads between buyers and sellers and challenged credit markets making it tough to get deals done.
- The good news is that we appear to be past the trough, with exit count and exit value up for 2024, albeit still far below the highs of 2021.
- Supporting the continued turnaround in exit activity is the Fed’s efforts to engineer a soft landing through rate cuts.
- Invest in resilient sectors and mission-critical products and services.
- High earnings and asset quality are paramount.
- Align deals alongside GPs with sector expertise to invest through cycles.
- Price equity returns at levels that are appropriate for the higher cost of debt and reduced leverage levels to drive moderating valuations.
- Remain highly selective and only invest in the highest-conviction opportunities.
Emerging Managers
Early access and introductions to best-in-class emerging and diverse-led managers across primary funds and co-investment transactions
- While fundraising markets continue to be challenging, the deal flow of emerging manager funds has been strong. The overall number of fund opportunities Hamilton Lane received slightly ticked down this year, but emerging managers screened is up 9% relative to 2023, although approved emerging manager fund numbers remain flat. This is more of a testament to the selective approach Hamilton Lane employees.
- Given elongated fundraising periods, many funds currently in market will need to hold final closes around 1Q25.
- Small cap and emerging manager co-investment activity has meaningfully increased in the last quarter. These entities are as competitive as established sponsors in bidding processes, and they have often had proprietary access or have been able to preempt broader auctions. We expect to see a continued increase in volume as the environment becomes more stable, capital remains accessible and the M&A market returns.
Primary Fund Investing
High-quality primary fund investments with often hard-to-access general partners
- After speaking with multiple GPs, groups that had final closes this year but started raising/deploying capital in 2022 have set expectations for 2026 back-to-market timing (they didn’t want to specify Q1 or Q4 given continued uncertainty, but it seems like we are getting back to a 3–4-year deployment pace).
- We continue to see a strong fundraising environment for credit managers who are capitalizing on increased demand in the space, which we expect will persist as interest rates remain elevated to historical norms. Demand for these opportunities has increased but particularly from outside North America. The beginning of 2024 was dominated by direct lending, but as we move into 2025, we expect to see more opportunistic funds raise. Larger groups tend to have an easier time fundraising (credit benefits from scale) while smaller groups struggle to raise as quickly, but those larger groups are able to raise larger funds than their prior.
- Some LPs have initiated a ratchet to their commitment, saying “We will commit $25M now with the ability to commit up to $50M if the fundraise drags on and nothing else piques our interest.” GPs have generally been willing to accept that.
- GPs have found ways to deploy capital even though it may take a little longer to find opportunities. Healthy businesses are still commanding strong multiples. While GPs need to find more unique ways to source, market activity has picked up.
- The expectation is that the new administration should bolster M&A activity. Most GPs are optimistic, but some remain skeptical as there has been an overpromised and underdelivered flow of deals for the last 2+ years, adapting expectations to a “believe it when they see it” mentality.
- We have spoken to GPs recently who are getting sale processes ready to launch, so those with quality assets will be ready to hit the ground running in 2025, which should lead to increased opportunities across the market.
Impact Investing
Seeking to deliver attractive returns while generating meaningful and measurable impact
- Direct impact deal flow continues to thrive, with 2024 setting a new record for both number of deals (173) and total opportunity size ($6.6B). Our deal flow sourcing engine is working well; we’re seeing deals from sponsors as well as directly from businesses and advisors.
- The Impact team is focused on continuing to expand deal flow sourcing in 2025 with proactive outreach to sustainability-focused GPs in the U.S. and globally.
- Impact Fund I portfolio company Retina Consultants is in the process of a sale in Q125 that will result in a 3.7x MOIC and bring Fund I's DPI to 70%.
- Renewable energy sources, in combination with nuclear power, will more than cover the increase in global electricity demand from 2022 to 2025, according to the International Energy Agency, further supporting tailwinds in key impact investment themes.
- Despite political posturing, the new U.S. administration likely won’t drastically alter the Inflation Reduction Act, given the geographic distribution of its benefits.
- Many of the trends and tailwinds regarding renewables in the infrastructure space also help to accelerate the business services required to assist with this growth.
Infrastructure & Real Assets Investing
Access to primary, secondary and direct investments across infrastructure and natural resources
- There is a robust opportunity set for investments across transportation, energy, renewables, digital, social and environmental infrastructure sectors. Unsurprisingly, investments centered around digital infrastructure and the energy transition continue to lead league tables given industry tailwinds.
- Rising power demand driven by electrification, industrial growth and the voracious demand from data centers and AI applications is reversing over a decade of effectively stagnant electricity demand growth as efficiency gains largely offset demand. Power markets are tightening as reserve margins and supply overhang are rationalized at a time of demand growth. Growth in new capacity is challenged by sizeable interconnection queues, with interconnection costs and lead times rising and transmission remaining a large constraint. The Inflation Reduction Act, easing supply chain pressures and improving PPA prices serve as tailwinds for renewables development and investment. Amidst growth in intermittent renewable capacity, renewables’ marginal contribution to reliability declines are requiring additional dispatchable capacity (e.g., BESS & NatGas).
The digital infrastructure and power markets convergence, with rapid growth in data center demand challenged by power availability (plus land and water) presents obstacles and opportunities for infrastructure investors. Base rents per kilowatt of capacity are increasing amidst rapid demand growth and scarce supply, reversing a prior trend of rate declines. Hyperscalers remain key drivers of demand growth amidst the increased adoption of cloud technologies and AI. Attractive development yields persist in the market. Despite significant opportunities for infrastructure capital, selectivity is critical to success. Obsolescence risk exists for legacy data centers as customers require increasingly efficient (lower PUEs) data centers and racks become increasingly dense (kW/rack), requiring the utilization of more advanced cooling technologies.
Continued digitization in an increasingly connected society drives demand growth for wireline and wireless connectivity. Wireline opportunities are centered around dark fiber (e.g., data center interconnect) and the buildout of FTTP serving underserved markets. There is a wave of notable dealmaking activity in the FTTP segment, with T-Mobile acquiring sizeable interests in Metronet (KKR/Oak Hill) and Lumos (EQT Infrastructure), followed by Verizon’s recently announced $20B acquisition of Frontier in early September.
Environmental: There is a large opportunity set across waste and water. Fragmentation within the waste sector has created compelling opportunities for consolidation and vertical integration across the waste value chain.
Supply chain and logistics: There is a large opportunity set and a preference for opportunities with high barriers to entry and pricing power. We take a cautious approach to leasing strategies exposed to day rates. Global port throughput shows initial indications of return to growth, despite warranted caution.
Real Estate Investing
Seeking to deliver attractive, risk-adjusted returns across primary fund commitments and transactions within real estate
- The U.S. real estate market is starting to experience signs of a recovery with the Green Street Commercial Property Price Index (CPPI) up 5% in 2024.
- Transaction volume also began to recover in 2024, with an uptick across all property types, a trend which is expected to continue in 2025.
- Negative appreciation across 2023 and 2024 led to a historic basis reset with property values declining approximately 20% on average from peaks in early 2022, creating much more attractive entry pricing for investors.
- In addition to more favorable capital market conditions, the sharp decline in new construction starts across property types the past two years supports supply side fundamentals, leading to stronger medium-term rent growth and reduced vacancy.
- We expect 2025 to be a strong year for real estate, with an acceleration of transaction volume. The historic basis reset provides an opportunity for investors to capitalize on attractive entry pricing and acquire assets at a significant discount to the prior cycle’s peak pricing.
- HL screened a record $270B+ of deal flow in 2024, surpassing the previous record of $240B seen in 2022 and 2023.
- 2024 deal flow has been weighted slightly towards GP-Led deals (53%) as GPs continue to view these transactions as a mainstream, attractive option for generating liquidity for LPs in a slower distribution environment.
- Per Evercore, 2024 saw $160B in closed transactions (56% LP-led / 44% GP-led). 2024 volume materially surpassed the previous record set in 2021 ($134B) when a backlog of transactions had built up due to the global pandemic.
- Record volume can be attributed to public markets stabilizing, pricing improvement, and LPs’ need for liquidity intensifying. Both supply and demand remain robust.
- Market growth during 2024 was supported by continued innovation and adaptation. The secondary market continues to attract a broader range of participants delivering a wide range of tailored solutions to meet growing demand for liquidity and portfolio management.
- A big supply driver has been the lack of distributions to LPs.
- LPs are taking a more proactive approach to rebalancing portfolios, revisiting commitment pacing and understanding liquidity needs. LPs are using the secondary market to increase and manage distributions.
- GPs are also using the secondary market as an exit path for portfolio companies and, thus, generating distributions for their investors.
- Average pricing across all strategies in 1H 2024 increased ~300 bps from H2 2023 levels to 88% of NAV, driven in part by LPs selling higher-quality and younger funds. Preliminary reports suggest that LP interest pricing increased slightly through year-end 2024 but are expected to stabilize moving forward.
- Hamilton Lane’s GP relationships and information advantage shine in this market environment, helping us identify funds and assets with more embedded discount than headline pricing suggests.
Venture Capital & Growth Equity Investing
Seeking to access top-tier venture and growth equity companies through funds, secondaries and direct investments
- Deal activity rose in 2024 across almost all levels, surpassing pre-pandemic averages as companies finally came back to market to raise their next rounds.
- Early-stage deals saw the largest gains while growth in later-stage deals was more muted.
- Round sizes increased, driven by AI companies and marquee tech assets.
- We expect 2025 to remain an active year as the early-stage environment has been strong and the pipeline for mid- and late-stage companies has grown.
- Traditional exits remained slow in 2024 despite strong performance of select tech IPOs and normalizing valuations, which drove increased activity in the secondary market as LPs, GPs and other direct shareholders looked for liquidity.
- Based on early signal and secular tailwinds, we anticipate elevated activity in 2025 and beyond.
- GP-led activity has grown as managers become increasingly aware of secondaries as a portfolio management solution.
- VCs approaching their next fund are using the secondary markets to generate re-up capital for LPs ahead of their next fundraises.
- LP secondaries activity increased in 2024 as well; however, underlying valuations and bid/ask spreads remain the largest barrier to closings.
- Overly diversified portfolios and NAV concentration in higher-valuation investments continue to weigh on pricing.
- The universe of buyers for LP secondaries remains limited, favoring those with information access and sector expertise.
- The first half of 2025 is anticipated to be an active fundraising period for VCs.
- Several large, established firms shored up their fundraising in 2024, so activity in H1 2025 is expected to be driven by smaller and emerging firms.
- We also expect growth equity fundraising to pick up in 2025 after most firms slowed deployment and stayed out of the market following the market pullback of 2022.
Co/Direct Investment Funds: Any PM fund that primarily invests in deals alongside another financial sponsor that is leading the deal.
Credit: This strategy focuses on providing debt capital.
Infrastructure: An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources.
Private Equity: A broad term used to describe any fund that offers equity capital to private companies.
Real Estate: Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures.
Secondary FoF: A fund that purchases existing stakes in private equity funds on the secondary market.
VC/Growth: Includes all funds with a strategy of venture capital or growth equity.
Credit: This strategy focuses on providing debt capital.
Infrastructure: An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources.
Private Equity: A broad term used to describe any fund that offers equity capital to private companies.
Real Estate: Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures.
Secondary FoF: A fund that purchases existing stakes in private equity funds on the secondary market.
VC/Growth: Includes all funds with a strategy of venture capital or growth equity.