Stewart: Welcome to another edition of the InsuranceAUM.com podcast. I'm Stewart Foley. I'll be your host. Today's topic is best opportunities in private markets. And we're joined by Drew Schardt, vice chairman, head of investment strategy, and head of direct private equity, as well as being a member of the investment and executive committees at Hamilton Lane. Drew, thanks for coming on. Thanks for taking the time.
Drew: Really happy to be here. Thanks, Stewart. Appreciate you having us.
Stewart: My pleasure. And so we'll start this off like we start them all. What is the town you grew up in, your first job? Not the fancy one. And what makes insurance asset management so cool?
Drew: Well, clearly I'll start with the last one. The people within insurance asset management and that ecosystem are what makes it cool. No, I grew up in Upstate New York, North Syracuse, New York to be precise. Was the son of two public school teachers.
And my first job, the not fancy one, which I loved, the first real job, I mowed lawns and things like that in the neighborhood, but pizza, pizza, Little Caesars. So I was on the line at Little Caesars; I think it helped me not only develop this sort of, your operational playbook and footprint of how to be efficient. But eventually, I think I got moved up to being able to work the register up front. So taught me a lot about interpersonal and people skills, and dealing with all shapes and sizes of folks. And I'd say it was a pretty good first endeavor to the working world.
Stewart: Absolutely. That's cool. I cut my teeth at McDonald's, and it's like you start with the Quarter Pounders because they go the slowest and then you work your way up, and pretty soon you're in the drive-through window, and it's just like, holy cats. For sure. I learned some good skills there too. I can relate.
Just for the people who may not be familiar with Hamilton Lane, and to be candid with you, I wasn't as much until Ryan Jaggers went over. Can you tell us about the history of the firm and your areas of focus?
Drew: We're probably the biggest firm you've never heard of. That's the easiest way to describe us. Meaning we were founded in 1991, and so over 30 years old as a firm. And through that entire history, we focus on investing exclusively in the private market asset class, so all shapes and sizes of private markets. So the most familiar, well-known one is probably private equity. So that means the buyout deals, the venture, the growth deals. Private credit, which for the insurance world is certainly, it's always been popular, continues to gain popularity. But more illiquid forms of credit origination. There's also distressed credit. There's all shapes and sizes of that, real assets in terms of infrastructure investing, real estate investing, but all within the context of investing in privately held assets, companies, and structures. And just to take the footprint, you're talking about in the private equity side, for example, an ecosystem of investment opportunities or companies that have give or take $100 million of revenue. So real sizable companies. That's 90% of the corporate ecosystem globally compared to about 10% being listed or traded public markets that we're all familiar with.
So Hamilton Lane, our job is to help investors of all shapes and sizes, insurance oriented groups, endowments, institutions, sovereign wealth. Even now more so in the individual high net worth and family office space. Our job for 30 plus years has been helping them access, navigate all those different strategies. We do it all. That's all that we do is private markets in all of its forms. And help investors find not just great returns, but portfolio diversification by getting better access to private opportunities. And so that's what we've specialized doing for 30 years.
We have 23 offices around the globe, north of 600 employees. And our capital footprint is over $818 billion of capital under management and supervision. And so we're one of the largest. Like I said, one of the biggest you've ever heard of.
And lastly, ironically, even though all we invest in is these private companies and private opportunities, we are a publicly listed company. So if you want to learn more about us, our ticker is HLNE, and we are a publicly listed organization.
Stewart: Very cool. So given that background and my obsession with educating the insurance investment community, if you can be as neutral as possible, what are the unique skills required to be a successful investor in private markets?
Drew: Yeah, and I'll try to do it not being too much of a Hamilton Lane commercial, but I think it's true that access isn't created equal in the private markets. The private markets are just that. They're illiquid. There needs to be a risk premium for that. But part of the reason they're challenging is again, navigating that complex landscape in terms of numbers of opportunities, lots of different types of strategies. But unlike the public markets where everyone has the same access, we could all pick up our tablet or our phone and purchase any security when we want in the listed public liquid markets, you can't do that, at least not today, in the private realm.
So I think the best skillsets often involve, how are you sourcing, accessing, originating opportunities? And then the other point is comparing it to listed market, information isn't created equal. So how do you have information on the opportunity, the manager, the fund, the asset? So those two things I think are critical at any deal or any manager you're assessing, is where the unique advantages in terms of accessing strategies or markets? And how are they applying information, data, technology to that private landscape? Because that's really important to knowing what's good, what's bad, or what's otherwise.
Stewart: So with regard to information, can you talk a little bit about your technology solutions? They're so important. I mean, information on private assets is key. It's not available just every which way. So can you talk a little bit about the tech stack and how you use that?
Drew: Yeah, absolutely. And there's multiple ways you use it, but I think you're right. I'll start with what you said. The information footprint is what's hard, we think, to replicate. And we have this database of, for example, over 140,000 private portfolio companies or something like 50,000 funds in that database. And it comes by the experience of having invested in this space for so long and in the amounts that we have, we're give or take investing $40 billion a year into this asset class. So when you're investing in funds, or assets, or managers, you're then getting all the cash flows, all the reporting, all the data, all the analytics. And for us, it's great to have that, but you need to be able to use it. So that's where being forward-thinking on tech and the tech stack. As you said, Hamilton Lane has made 15 balance sheet investments. So not money from our funds or our clients that we're building or investing in. But our own balance sheet capital, we've deployed to develop and build technology platforms that usually come to a couple of areas.
One is just on using the information to make better investment decisions. So what to expect in terms of how specific strategies in the private markets perform in different macro climates. We do contributions, distributions, pacing, liquidity look like. So that's all more investment level technology platforms that link our investment teams to our investment decision-making, what assets we choose. We have other technology solutions that we put around our enterprise resource planning and the efficiency we're trying to develop, because as we and our clients grow, we need to be efficient about how we're spending our time. And there's technologies for example, that now what used to take a team of five or six people two weeks to build a memo and do all this, we can click a button, and our tech platform and footprint really spits out a lot of the data, the analytics in a very customized way, where we don't have to spend that much human capital time doing it.
And then I think the third major point is we're using technology to do what we've done for 30 years, which is increase access to the private markets for all shapes and sizes of investors. So whether it's using blockchain tokenization, we have a couple investments in those areas on the tech stack, to help expand access to make it more seamless, more user-friendly, to expedite KYC and AML, historically clunky areas, very paper-based, and process and administratively burdensome. That's another way, that area the tech can help alleviate some of that. And so I think that's part of the footprint as well.
Stewart: It's interesting, there was some work done several years ago about why insurance companies pick up the phone, and it gets down to the familiarity with the firm and the salesperson, the perception of your firm's expertise in this space, and your ability to manage insurance assets, right?
Because as my friend Jonathan pointed out in the most succinct way I've heard it put, it's the externalities that make insurance asset management so complicated, right? It's not just a capital markets discussion. It's the capital markets discussion in the specific environment of that insurance company and their particular business mix and capital position, tax position, domicile, etc., that makes it so much more involved than other forms of institutional investment. So with that as a backdrop, can you talk a little bit about the history that you've had in working with insurance companies in particular?
Drew: Yeah, absolutely. Happy to do that. And so we've been at it for 32 years. Of that, I think it's 27 years is back when we onboarded our first insurance oriented client. Today, that client list spans north of 60 unique insurance oriented organizations around the globe. It is a global industry for obvious reasons, and the footprint from our management and supervised capital is about $95 billion of capital that we oversee for those insurance oriented clients.
And so it gives us experience, it gives us scale. And as you're pointing out, you're not just talking about a capital markets area of focus when you're dealing with insurers and insurance organizations. You're talking about a higher regulatory threshold, regulatory and structural considerations, and sometimes burdens, all things we're used to helping navigate.
You're also talking, we think, a pretty compelling asset profile and liability profile, when you're talking about one of the perceived drawbacks of private markets, is they do tend to be longer duration and illiquid. Well, if you match that with the liabilities of the insurance balance sheets, it's a match made in heaven, because oftentimes, those are more long-dated liabilities. And so you can match these investment opportunities in this private ecosystems, in the right structures, in the right sort of way to pair with the durational aspects that fit pretty well between private markets and insurance.
Stewart: And you've just added Ryan Jaggers, who's one of the OGs. I mean, I feel like I've been in this business for a long time and I've known Ryan for a long time too. So when you talk about the hand-in-glove fit with insurance companies and private credit, you, I believe, based on my notes, helped develop Hamilton Lane's private credit platform. Can you talk a little bit about how that came to be, and then why that can be of service to the insurance industry?
Drew: If you look at private credit in general as an asset class, it's not your mother or father's asset class anymore. In the early 2000s, for example, private credit was, basically, riskier. They called it mezzanine oriented capital or it was distress, right?
Then you had the global financial crisis, so I call it retrenchment 1.0. So all the big bulge bracket banks that had swaths of their organizations that were lending to these private assets, private companies, private opportunities in need of debt capital, i.e. private credit. They were regulated in a lot of ways out of the market post the GFC.
And then look no further that's what's happened. It's the retrenchment 2.0 in the Silicon Valley and First Republic. And so in many cases, you're talking about a private company ecosystem, companies of scale that aren't venture or growth, they're not risky. They're really larger, sophisticated, profitable growing businesses that need debt capital, where the mid-tier banks are now pulling back.
So all of that is a continuation, an acceleration of a trend towards private credit, which now is more akin, we call it direct lending. Because the fundamentals of who you're lending to are not as risky. You're talking about more sizable companies, companies that I'd say the sweet spot, $50 million to $150 plus million of earnings.
So we're not talking about small mom-and-pop businesses. Yes, there's lower middle market lending, and that can be attractive. But you're talking about these profitable companies that are in need of debt financing. Private capital isn't dependent on deposits or depository bases, or isn't subject to quarterly, or daily, or monthly outflows like some of the more liquid credit markets. And so for those reasons, captive capital footprint, you've raised funds around it. As a private credit provider or lender, you can be there in good times and bad. You're not subject again to being a depository institution, and you can lend capital that is more duration matched in terms of the typical lender is lending to these buyout deals that the equity sponsor is planning to hold the asset for five, six, seven years or longer. That creates a unique profile when your contractual maturity and private credit is five to six years in most cases.
And so for all of those reasons, we've seen a huge explosion in the amount of demand, both from companies looking for private credit, but from the investible landscape in private credit for private market participants, including insurers. And why is that? You've had better risk adjusted returns that are at similar to lower default rates overall than what you'd get even in the public high yield or public IG market. Insurers have had huge IG oriented books for obvious reasons, the capital and RBC based calculations around that. Well now, I think our industry on the private credit side is being more thoughtful about rated note feeders and structures, insurance dedicated fund structures. All things back to the OG, as you said Ryan Jaggers. He's been really a thought leader in a lot of those structuring pieces and access pieces.
So not only is the opportunity set there to deploy capital and lend really on attractive risk adjusted rates, but also the packaging in which insurers or other private credit investors can access these opportunities has become better, more efficient, easier to access. And so that continues to sort of play out. And for us, we started our private credit business. We've been doing it for a long time. Today we have about just under $60 billion of private credit assets under our portfolio and management. We lend directly to just under 200 unique private companies today. That's our incumbent book. So that gives us a lot of synergies and information on trends, and structuring, and what to think about in new deals, as well as how to monitor and manage the existing asset pool that we have.
So long way of saying, we have a footprint in private markets, including private credit, that goes back quite some time. And I think over the last 10 or 15 years, we've really crystallized our teams to accelerate the development in terms of our own clients and insurance companies looking to find better points of access. We've developed dedicated teams around that, including Ryan Jaggers, as you said.
Stewart: That's really helpful. And so in your seat, you've got a lot of visibility across a lot of markets. I think it would be interesting if you could help us discuss where you think the top opportunities lie in private markets today.
Drew: Yeah, and I don't know if that's a loaded or biased question, given we just talked about private credit, but guess what? We think that's a pretty compelling place to be in today's macro. Because as your listeners and investors know, for the last call it year and a half, two years, fifteen years prior to that, everything was kind of up and to the right, right? Interest rates were low, lots of liquidity in the system, prices continued to expand. So whatever you were buying into, three to five years later, you could simply sell at a higher multiple in many cases. Not to mention a more... not totally benign, but the trends, for example, around globalization had been running their course and continuing on a pretty straight line path in terms of continuing globalization.
Now all those factors in the last two, to three, to four years have really reversed course pretty dramatically, not the least of which is around asset prices, volatility and valuation, with higher interest rates, higher inflation. Less liquidity generally speaking, especially in the liquid listed markets. So it has made it more of a deal pickers, strategy pickers, thematic market.
And for us, we expect there to be continued volatility in the macro. You're going to have to assume on the equity side, levels of multiple contraction. I.e., you can't rely on the purchase price, and then buying something for lower than what you ultimately sell it for to be the case. So value creation is important in the thesis and thoughts of how you're going to do that.
And so for us, that means things like private credit continue to be attractive, because they are the shorter duration. So if you think about managing risk and volatility, duration's one way to play that. You can shorten duration, even though it's still going to be not as liquid as the listed market or asset classes. In private credit, your weighted average hold period in origination strategies is typically three to four years. That's very different than an equity portfolio, where the weighted average hold is five to six years. We think things that are natural inflation hedges, interest rate hedges.
So 90% of private credit is floating rate. Things like infrastructure and private infrastructure have been attractive, because they have contracts at the asset level that are often inflation linked with escalators. And then I think more broadly, just bring this back to the highest 50,000-foot level that most of our clients are thinking about, it's the mix of your public listed assets versus your private assets. And what the data would tell you is, why you're going to pick specific themes within the private markets. Overall, private markets tend to outperform more in choppier, volatile markets in downturns, relative to having that same dollar or euro invested in a listed asset class. Less volatility, more consistency and performance given the governance model of investing in the private sphere.
Stewart: That's really cool. I hold in my hand the brand new Hamilton Lane annual Market Overview. And it is about 92 pages, and it is absolutely beautiful piece of work that is full of incredible information about a wide spectrum of asset classes. And it also carries the wonderful Wizard of Oz theme. How did this start? It's widely read. A lot of people like this piece in particular. Can you talk about its start and how the annual theme came together?
Drew: Listen, I think we did our first market overview probably 16 or 17 years ago. And over time, just like everything else, it evolved. And hopefully, as you've mentioned, it's got a pretty wide readership distribution. We do events around it. We have a nice, as you mentioned, glossy book that now every year for the past probably eight or nine years has had a specific theme. It's usually a literary, or musical, or some cultural reference. This year it was Wizard of Oz. Last year I think it was Country Mouse, City Mouse. We've had Gravity's Rainbow just to give it a few.
And I think, where does it come from? Listen, I say this with a great amount of pride. We're quanty nerdy data analytics people around the private markets. I told you about our footprint. We do think it's pretty unique, and so can run some analysis and put some things into our market pieces that others just can't. And that's part of what our job is in creating better access. It's helping people understand it, what to expect.
For too long, it's been a non-transparent black box, clunky. We're trying to change all that, but it starts we think with thought leadership, and providing this valuable data that we have to the world. And we do that freely. We could hold it close to the vest and keep it in a vault of secret sauce information. At the end of the day, we think we're going to continue to evolve ourselves internally, try to disrupt ourselves. And part of that is sharing that information that's in those market pieces, that investors have come to love and expect from us.
Our CEO is very creative. He's very hands-on, Mario Giannini, in terms of helping build and create those themes, and writing a lot of what goes in there. And so we've also been fortunate to have one of the industry pioneers of private markets, Mario, really being at the epicenter of building out those themes with other partners across our platform.
Stewart: That's terrific. And so I think everybody is talking. We just did a webcast the other day on AI and its impact on investing. And Hamilton Lane is making investments there. Can you talk about those and how you think AI will shape investing in the future?
Drew: I think just like everything, there's going to be probably tiers in first order, second order, third order, ripple effects throughout, as you apply it to investing. I think particularly as it relates to some of the newer investors in private markets... So think of high net worth or individual investors who aren't as familiar with the space. And you think of a chatbot you could layer over one of these platforms that allows you to maybe invest more seamlessly into private market assets or funds.
Asking it questions that you don't understand in terms of, what strategies should I think about if I want to maximize returns in the private markets? What is the most thoughtful way to develop liquidity in an illiquid asset class? Which strategies should I focus on? It's things like that, that are the PE 101 that I think you could put over the top of newer ways to access private market platforms in evergreen or open-ended structures, that I think could be compelling.
I also think just then the second, third order. How organizations like ours or anybody else that invests in this space, how are they set up utilizing AI in their operational footprint to be efficient? How they're spending time, where they're spending money on human capital. Versus functions that whether it's around the reporting side, whether it's around the administrative side, is there functions that... Again, today we're doing things that used to take us weeks and months to build or do on the investment side or diligence side. Now we can do it with a click of a button. That's going to continue to run its way through all organizations as AI becomes better known and understood. I think you have to be cognizant about how you're developing it in a constructive way, and making sure you're doing it in a way that is going to be productive, and not creating unknown risk, which is always the big concern when I hear people talk about AI. But I think it's crazy to think that AI won't continue to disrupt our industry, investors being able to access and invest more efficiently.
And so for us, we want to embrace that. We want to invest in technologies that not only help access private markets better, more efficiently. But then, maybe we can overlay some AI to that tech that we already have in place, that stack that you alluded to, where AI is only going to make that better both for us, as well as our clients, the investor. And so it's a win-win-win for everyone if we do it in the right way.
Stewart: That's terrific. And just the last touch point here is can we talk a little bit about your macroeconomic outlook for between now and the end of the year? And today, we're recording this on the 25th of September. I like to timestamp these, because things change rapidly sometimes, and I want to make sure to give people context. And then looking at '24, in particular, fundraising, valuations, and inflation, etc., that would be I think really helpful.
Drew: We put out a white paper a couple months ago called Predictably Unpredictable, and it was basically looking back at all of the market overview pieces we put out in the last four to five years, a lot of the other white papers we put out making predictions about the economic scenarios. Because what we think is interesting is, again, you've had a very volatile environment. Just look backwards two to three years. Forget about just the Covid pieces, forget about geopolitical, but people's expectations, and anticipation, and now capitulation around hard landing, soft landing, where things go.
And so again, that piece, sort of look back at the predictions we made, and what we got right, what we got wrong, and where the jury is still out. I think our thinking today is largely in line where it has been for the last three to four years, which again, was more contrarian. Then people kind of came around more to our view. Now they're going past our view and more of... For example in North America, this soft landing, meaning no recessionary view. Whereas we've continued to say the recession we think in North America is going to be milder. Europe is going to be more of a mixed bag across different geographies and regions. The UK through some of the Brexit noise is going to have a tougher time, slower growth. We think stagflation is a real consideration there, but Europe is probably already in a recession. We think again, North America probably milder recession, that it's probably in an industrial recession if you look at some of the leading indicators today and that segment. But later this year, you're probably going to see some of the GDP phenomenon reflect a mild downturn as the data comes out. But more akin in our view to '01, not anything systematically or structurally like '08 where there's a lot of systemic and financial system at risk. We don't think you're seeing any of those things today.
You also have a backdrop from a corporate perspective where earnings fundamentals, free cash flow, and growth, just looking backwards, LTM, all are starting at a healthy starting point. It doesn't mean those things won't face headwinds, especially on the corporate growth, the GDP growth side. But I think you're at a good spot on a historical basis as a starting point for the ability to weather that storm.
I think the Asia-Pacific region is one to keep an eye on. Everyone likes to just talk or think about China. I think China does have a bit of a challenging next six to twelve months ahead of it. It's always a challenge when the data coming out starts to slow down in terms of the economic data point from there. I think you have a lot of leverage and burden on their banks and financial systems, probably a residential market that is likely to face some headwinds as well.
So we think China is too big of an economy to ignore. There's a lot of tangential, whether it's Southeast Asia or other places that are good ways to think about or play that region that aren't necessarily just China. And so long way of saying we think you've gone through a lot, volatility's not going to stop, but we're in a better place than we were six or eight months ago.
Why is that? I think interest rate policy, while it's not totally clear, I don't know if this is the right way to say. It's less uncertain than it was eight months ago. It feels like the Fed and central bankers globally in most economies, most major economies have started to stabilize and flatten out. This was one of those predictions I mentioned. We talked about it a couple of years ago, and you can see how that worked out. But I think with that, you can start to find the new normal, when the cost of capital interest rates are a little bit less uncertain. Deals start to happen. It's been a pretty anemic M&A and deal making market. We see our pipelines across our direct investment portfolios, our direct equity book for example, really starting to build.
So to us, what that means is in a world that is less uncertain, investors while not totally overconfident or super confident, aren't as concerned as they were six, twelve months ago. And that's when deals will start to happen. And so we think the pipeline of activity that is building starts to crystallize probably in early 2024. I think rates will remain higher for longer, meaning likely elevated through '24. The short rates probably stay in the 3% to 4% range for that year. And overall, things can start to gradually begin to recover, if all of those different data points actually come to fruition, which is our best guess of how things play out from today.
Stewart: Wow, that's fantastic. We've covered so much ground. I mean, it's been a great podcast. I got one fun one, maybe two for you on the way out the door. This is a term that you're very familiar with, optionality. Ready? Now it goes, what's the best piece of advice you've ever gotten, and/or who would you most like to have lunch with, alive or dead?
Drew: I've always had an affinity, and it was crystallized by the 30 for 30. Michael Jordan. I just think he epitomizes what greatness is, and then you see those documentaries and hear him speak about, it wasn't just the results, it was the journey along the way. And it was just so compelling. And I think I'm a believer in a lot of the maybe more cultural, how you think about a team and organization, a platform building.
So I don't know if that's too easy or simple, but he's just an impressive person in multiple facets. And someone again, maybe after watching that, some misunderstood him or didn't really appreciate what he was all about and what drove that greatness. So I certainly did. And then what was the other question? I'm sorry.
Stewart: Best piece of advice you ever got?
Drew: Oh geez. All right. What I probably haven't been here in my responses. Be brief, be brilliant, and be gone. So I think especially when it comes to investors that maybe have a shorter attention span or fuse, I tend to be a little more long-winded, so I'm still working on that. Constant improvement's always important, but I think those are probably words to live by when it comes to thinking of investing or anything else that's worth assessing.
Stewart: You'll find a lot of people in this town in Chicago who'll be right with you, with MJ for sure. So that's good stuff. I've learned a lot. Thanks for being on. We've been joined by Drew Schardt who's the vice chairman, head of investment strategy, head of direct private equity, and a member of the investment and executive committees at Hamilton Lane. Drew, thanks for taking the time.
Drew: Thank you, sir. It's been a pleasure. I appreciate it.
Stewart: Thanks for listening. Please rate us, like us, and review us on Apple Podcasts, Spotify, or wherever you listen to your favorite shows. My name's Stewart Foley, and this is the InsuranceAUM.com podcast.
**figures are as of 6/30/23
The InsuranceAUM.com podcast is available on
