← Dry Powder: The Private Equity Podcast
Dry Powder: The Private Equity Podcast
Warp Speed w/ Hamilton Lane’s Erik Hirsch
00:18:01
Hamilton Lane's Co-CEO takes us inside the rapid buildout of private market infrastructure.
Loading summary
Transcript36 lines
- [00:05]
Eric Hirsch
Feels like to me we've been cruising along for decades at the exact same speed and someone just pushed the warp speed button.
- [00:12]
Hemac Arthur
That's Eric Hirsch, co CEO of Hamilton Lane firm whose mission is to provide solutions for investors in private markets, from GPs to LPs to high net worth individuals. However, for the first time in his career, Eric is beginning to see these varied investors converge on the same technologies. And they might also be converging on the need for similar service levels.
- [00:34]
Eric Hirsch
Good technology tends to flow broadly, it doesn't tend to stay constrained. And if there are tools and access points and transaction methods and fund structures and things on your phone that are appealing to one set of people, they're likely going to be appealing to all sets of people.
- [00:52]
Hemac Arthur
Today on Dry Powder, I'll ask Eric to take us inside the rapid build out of private market infrastructure. We'll explore how technology is raising investor expectations from smartphone friendly interfaces to daily pricing updates. I'll also ask Eric how quickly this infrastructure could divide GPS between those who can build it and those who could get left behind.
- [01:11]
Eric Hirsch
We've never really seen an instantaneous kind of dividing in this industry of the haves and the have nots.
- [01:18]
Hemac Arthur
I'm Hemac Arthur, chairman of Bain's global private equity practice and this is Dry Powder. Eric, thanks very much for stopping by today. It's a pleasure to have you on the show, Hugh.
- [01:29]
Eric Hirsch
I'm happy to be here and I'm looking forward to the conversation.
- [01:32]
Hemac Arthur
As am I. You know, for our listeners who may not be as familiar with Hamilton Lane as I am, take a moment and just describe what Hamilton Lane is all about, what services you offer and what industry problems you're trying to solve.
- [01:45]
Eric Hirsch
So Hamilton Lane is really about providing investors, all kinds of investors, institutional, individual, with access to the private markets. So we're building out customized portfolios, we're providing our own product lines, but really about helping people access a market that continues to be difficult to do and to do well. And so we're trying to do that in big scale. The firm is very global, the client base is all over the world. And we're trying to do that with really a kind of data and technology forward mindset. The private markets to date have really been about deal selection or a fund manager selection, which is very different than when we talk about the public equity markets where we spend a lot more time talking about asset allocations. And I think for Hamilton Lane, with what we do, we're really building portfolios.
- [02:36]
Hemac Arthur
Got it. So kind of a solutions provider, if you will, in the Private space. And in that, it's fascinating to me that you have very extensive relationships and interactions with both GPs and LPs. And so you're in a very unique position and vantage point to actually talk about how the industry is evolving. Sitting astride both of those constituencies as you do, how do you see the private markets industry evolving today?
- [03:01]
Eric Hirsch
We're maturing, I would say we're kind of heading closer to adult phase. The maturation has been remarkably slow, if you think about our industry. So little has frankly changed over the last several decades. We sort of transact the same way, we interact the same way, we fundraise the same way. But I think we're really at the beginning of seeing some material changes. One, as an asset class, we're moving away from being solely focused on institutional investors, and we're now sort of welcoming mass affluent individuals into the industry, which, again, is relatively new. And you're starting to see a real embracing of technology, which is something that's been very different.
- [03:41]
Hemac Arthur
Right.
- [03:41]
Eric Hirsch
So whether that is portfolio construction tools, data tools, technology to simply service the customer and to make their access easier and to make their experience better, I think we're really just at kind of the precipice of all of this beginning to play out. I think it's really exciting. And for us, as you said, we sort of sit in the middle. We're getting paid by the customer, the investor. But obviously a big part of what we do is we put capital with those managers and we transact with those managers. And so I think it's a huge advantage for us as a business in terms of just market intel, because we're getting all these insights from both sides.
- [04:21]
Hemac Arthur
That's very intriguing. And I note your point about private wealth or retail investors. Different people call them different things, but folks like you and I personally investing in private assets versus the public markets. What sort of. I mean, that's a different thing. When you have individuals doing something versus a pension fund or a sovereign wealth fund, what sort of infrastructure are you seeing? The leading GPS build for these individual customers or retail customers.
- [04:45]
Eric Hirsch
So if you think about that customer, that customer is really used to doing everything right now on their phone or on some sort of a smart device. We can look up our portfolios of public equities on our phone. We can buy securities, sell securities. We can run portfolio rebalancing tools. All of this is totally normal in the public equity markets. And again, our industry, at least for the last several decades, has been all about, you know, faxing you or mailing you or even emailing you, you know, thousand page subscription documents and having kind of quarterly valuations that are very lagged. So all of that, if you think about just at a macro, those are two totally different worlds and that can't exist that way. So we're starting to see the private markets getting sort of pushed much closer to what the public equity market is providing. So you're seeing monthly liquidity features. You're already seeing some fund managers providing daily valuations of assets, allowing for people to kind of plug in that technology to broader portfolio so that they can report through and look at a total asset allocation. No individual investor wants to sort of look at all their portfolio except for this private markets portion that sort of sits over here in a different system. So I think all of that infrastructure is starting to be here and I think the ripple effects of that are going to be really interesting because I think it's inevitable that if the retail customer likes it and becomes accustomed to it, why isn't the institutional client going to want the exact same thing? And so now you're going to create a world that's sort of pretty bifurcated around who's providing what.
- [06:22]
Hemac Arthur
Well, that's a really interesting question, Eric, but why would an institutional investor demand a feature, say like daily pricing in the context of private equity?
- [06:31]
Eric Hirsch
I think one of the things is people are getting a lot more focused on risk management and portfolio construction and asset allocation. And so when you bring those pieces together, having better data and more up to date data can allow for better decision making. I also think institutions can be long term in nature, but some of them are going to want the ability to portfolio rebalance. And so they don't necessarily want total liquidity. But right now private markets are basically providing you either no liquidity or complete liquidity. And what I mean by that is today you're either in it. And if you don't want to be in it, the only path you have in front of you is, is to do a secondary transaction where you sell your entire stake.
- [07:15]
Hemac Arthur
Right?
- [07:16]
Eric Hirsch
That all or nothing model is not great. We don't have that in the public equity world. So we sort of can trim back our exposure to a manager or to a stock and we can do that in more real time. I think you're going to start to see more of that coming into the private markets where the notion of some liquidity, partial liquidity, monthly liquidity, allowing people to kind of portfolio rebalance is coming. It's here in very small pieces, but I think there's going to be a real embracing of that.
- [07:42]
Hemac Arthur
So you're talking about a lot of things here, Eric, that kind of fit together. I mean, there's liquidity, there's daily valuation, there's transparency and look through into the portfolio. Sounds like a lot of investment in technology and capability may be required on the part of GPS to actually meet all of those expectations. And if you agree with me that that's true, can small and medium sized GPS survive without adopting the same type of technology standards as these larger players that can afford that?
- [08:09]
Eric Hirsch
So today I can imagine you've got a huge audience of private equity managers listening to this and I would imagine a lot of them are stopping right now and saying none of this really applies to me because I'm not planning on entering the wealth channel. That's really for those big kind of asset management oriented firms with brands, et cetera. So I don't know what Hugh and Eric are sort of worried about because this isn't going to be my issue. But it goes back to what we both said earlier, which is good technology tends to flow broadly. It doesn't tend to stay constrained. And if there are tools and access points and transaction methods and fund structures and things on your phone that are appealing to one set of people, they're likely going to be appealing to all sets of people. So if that rolls across the industry, done initially by the biggest managers, now where does that leave us? I can imagine as a CIO running a pension, for example, I might want all of my managers operating and reporting to me in a common standard using some common technology. So I could envision that a lot of the technology that we're all building in house could start to become more product oriented and is available to simply buy. So maybe one solution is that you're going to have to go buy it as a small and mid sized manager.
- [09:26]
Hemac Arthur
Right.
- [09:26]
Eric Hirsch
No one's going to expect you to kind of build it in house or you're going to have to move to a world where you're looking for LPs that are willing to have more traditional relationships and they're not going to be technology driven. And I think that will exist. There'll be some LPs who are fine to kind of exist in the world as it stands today and they're not going to be focused on reporting structures, they're going to be totally focused on performance. But that then is going to sort of pressure you as a manager that you're going to have to have elite performance in order to survive.
- [10:01]
Hemac Arthur
It certainly makes a lot of sense that the bar is going up. Talk to me a little bit about you being a solutions provider in the market. How does it impact how you put together SMAs in the future with all of these technology requirements? I mean, maybe the technology will be there to be purchased by gps, but maybe that won't be available for five years. So I guess a couple of questions. One is how fast do you see this kind of a world coming as individual investors come more online for private investment? And number two, how does it impact your providing solutions to LPs and individuals in the market?
- [10:34]
Eric Hirsch
I think it's going to impact all of us, and I think the change is going to come much quicker than most of us are probably anticipating. So, one, the managers that we work with, when we're building an sma, we're sort of putting them in a standard operating model. And one of the things that we're doing today is that we're sort of providing that technology backbone, recognizing that each of our managers may not have that the common denominator is that we're the LP or, or we're providing that fund structure. And so some of it is our own technology investment, which has been significant, is helping to sort of bridge gaps so that what our customer ultimately gets is exactly catered to their needs. Recognizing that each of the managers might be a little bit different, we can kind of bring them together. We can make that the common denominator and then we can report out. But in doing that, as we are out talking to managers, we are routinely talking about the need for them to continue to increase their own infrastructure. I mean, one way to look at this is GPS have gone for a long time and really thought about budgets in terms of people, small amount of rent and travel.
- [11:43]
Hemac Arthur
Right.
- [11:43]
Eric Hirsch
And I think really the time is sort of overdue to think about a fourth major category, which is kind of technology infrastructure other than like Excel. You know, a lot of GPS have gone a long time without a whole lot of technology. And I think that's just that sort of is over at this point.
- [12:02]
Hemac Arthur
I've heard the CEO of a major publicly listed alternative asset manager say something as bold as 12 months from now, people are really not going to be able to tell much of a difference between public and private markets. Do you think that's too bold a statement?
- [12:16]
Eric Hirsch
Probably a little too bold. Although if. I don't know if you happen to see it, but Apollo announced that they are launching on a variety of blockchain backbones, a tokenized private credit fund that I think is again, another indication of how quickly the game is changing, the functionality and features around it. Daily liquidity, daily pricing, again, a chance to sort of move tokens across different providers and different wallets. I think all of that is really interesting and again, a harbinger of sort of what's to come.
- [12:49]
Hemac Arthur
Right. But we're talking about evolution At a speed that's kind of 12 to 36 months, this is really going to be happening and individual investors are going to be forcing changes in technology that are going to be coming that soon. Right. We're not talking about five. We can talk about five to 10 years. And yes, everything's beyond a penetration curve, but this is going to be relatively ubiquitous within three years, in your view?
- [13:12]
Eric Hirsch
I think so. And I think if you're a fund manager listening to this and you haven't spent time looking at or thinking about the concept of tokenization, I would and immediately go do that and then come back and finish listening to us. But I think that sort of technology, that tool, if you will, that is going to be a massive accelerant because one, we shouldn't confuse kind of the concept of tokenizations with the concept of crypto, but that blockchain backbone is the common denominator. But I think having a mechanism for purely transactional purposes of using a digital wallet. So what's an LP pain point today? And frankly a GP pain point. The KYC process and the AML process that is done over and over and over and over again. You're a huge pension fund, you've got 50 funds a year. Each of those 50 funds is taking you through a KYC AML process. It's really antiquated. So having a digital wallet, going through more of a centralized digitally oriented passporting process to get through that KYC AML to then transact with tokens back to our rebalancing point. The notion that I could sell, you know, 1 27th of my token to precisely portfolio balance, that technology allows all of that to happen and it brings with it sort of the benefit of lower minimums, which if we're talking about trying to make this industry more accessible, all of those become really positive. So I think the token piece is really going to be the main conduit of getting us closer and closer and closer to kind of more looking like the public markets.
- [14:52]
Hemac Arthur
There's been a lot of discussion obviously of the the new backbone of the decentralized transaction structure. But this seems like it's really starting to happen. And obviously there are a lot of challenges with making that happen at scale but the fact that it's now beginning to happen, I think is a harbinger of what you're saying, that the world is changing. It feels like to one of your earlier points, Eric, that we're skipping a technology step in here somewhere because the loan industry is run largely as it was 30 years ago. It's hundreds of pages of documents to fill out. It's K1s at the end of the year. It's a very cumbersome process of writing checks and capital calls and moving money back and forth. You would never, ever invent an industry like this if you thought it was going to be a multi trillion dollar industry. And yet a lot of it is still operating the way it was when it was a much, much smaller industry. And now it feels like instead of gradually getting more sophisticated over time, we may be leapfrogging right into the technological bleeding edge of the future in learning how to trade private assets, driven of course by technological innovation and efficiencies. But it's going to really appeal to a huge source of capital, half the world's wealth, which are individual investors.
- [15:56]
Eric Hirsch
It feels like to me, we've been cruising along for decades at the exact same speed and someone just pushed the warp speed button and they went into hyperdrive and you know, the white lights are flashing and sort of going by us, but someone gets left behind. And so we've never really seen instantaneous kind of dividing in this industry of kind of the haves and the have nots, but this is absolutely capable of doing that. Because if the adoption is there, if the speed of adoption is what we're sort of laying out as potential, that's going to be extremely hard to kind of catch up. If the concepts are unfamiliar and you don't have a strong technology infrastructure building. Again, hard to catch up. Not to say that a lot of this won't be able to be purchased. It will. I think this is going to become something that, you know, this person has and this person has. But eventually there'll be firms that will be created that will offer this and that will come in and simply say, hugh, don't worry about it, outsource it to me and I'll do it for you. That's going to take a little bit of time. And then the question is, those that have the head start, how much further ahead have they gotten? Does it matter? What are the ripple effects of that? I think those are kind of the unanswerable questions today, but I think it's going to be fascinating to watch.
- [17:21]
Hemac Arthur
On the next episode of Dry Powder, we'll see how Hamilton Lane is harnessing one of the world's largest private market databases and building an analytics engine that works for institutional and individual investors.
- [17:31]
Eric Hirsch
I think if you and I are right that the public equity world and the private markets will start looking more and more similar, then I expect that the tools will look very similar, the access to data will look very similar. That will be part of that whole experience.
- [17:46]
Hemac Arthur
I'm Hemac. Arthur, thank you for listening.