Private equity has long been accessible to large institutional investors, says Hamza Azeem, on the Evergreen Portfolio Management Team at Hamilton Lane, but participating in the asset class has, he says, historically been challenging for individual investors, smaller institutions, and broadly those with concerns around liquidity and longer investment time frames.
“That dynamic has shifted, and over the last few years we have seen investors of all sizes around the world adding private markets or expanding their allocations, leveraging platforms like ours to gain exposure to a broad selection of high-quality, high-growth private companies,” he says.
Since the launch of Hamilton Lane’s Evergreen Platform in 2019, the company has sought to bring in a broader set of investors to private markets than the traditional LPs who invest in private equity, real estate and infrastructure.
Hamilton Lane’s Evergreen Platform now includes five funds across multiple strategies with a net asset value of approximately $8.1 billion (as of 31 August).
Azeem says that both evergreen and closed-ended structures have a place in the market, but, he adds, “we’re certainly seeing semi-liquid growing rapidly in popularity with the wealth audience and increasingly with institutional investors, especially on the smaller end”.
The wealth market is still only scratching the surface when it comes to investing in private markets, so there is a lot of room to grow, Azeem says. A 1% increase in average High Net Worth Individual (HNWI) allocation to private markets would increase the size of the private markets by over 10%.
“Although there are gaps in education around the asset class as well as around some of the fund structures and technology platforms available, we have been working to close these gaps, and believe investors will have up to 50% of their portfolios allocated to the private markets in the next 20-25 years.”
Asked why, according to our survey, a clear majority of GPs (78%) and LPs (75%) view open-ended funds with liquidity controls or a run-off class as the most common structure for evergreen funds, Azeem says that there is increasing demand from investors for flexibility and choice in the structures available to them.
“A lot of these changes are being driven by the wealth audience, but they impact all investors,” he says.
Azeem points to the fact that private markets have continued to outperform public markets across market cycles, according to historical data.
“However, the multi-year commitment period, high minimums, and a long lock-up period made it difficult for certain investor types – particularly private wealth – to access the asset class,” he says. “The emergence of evergreen products addresses these pain points, opening up the asset class to a wider LP base.”
“Given the fully deployed nature of these products from day one, and recycling of any distributions within the fund, investors benefit from compounding of returns, without the reinvestment risk typically associated with traditional closed-ended funds.”
Azeem goes on to state that, while the semi-liquid structure is most popular with the private wealth audience, it is appealing to institutions too – “most commonly with smaller institutions who may not have had much exposure to private markets in the past and want to dip their toe in the water”.
On the survey’s findings that LP pain points are mostly to do with a lag between redemption request and cash receipt, and pain points for GPs are cash management (which is the other side of the same coin), Azeem says that liquidity management for evergreen products is critical – both in terms of liquidity on the way in (i.e. deployment of inflows/distributions) and on the way out (fulfilling redemptions, other outflows).
“This starts with a thoughtful portfolio construction approach,” says. “For example, we add credit and secondaries as lower duration buckets in our portfolio and therefore as generators of liquidity in the fund.
“This needs to be complemented with a robust monitoring process which can be achieved through specialised teams focusing on portfolio construction of these funds, and leveraging technology to assist in regular monitoring.”
This interview was first published as part of a major Evergreen Funds Industry Survey, produced as a collaboration between Funds Europe and Citco. The full report may be viewed here.
