The Future of Private Credit with Erik Hirsch

Barry speaks with Erik Hirsch, Co-Chief Executive Officer at Hamilton Lane, previously serving as CIO and Head of Strategic Initiatives. As co-CEO, he is responsible for the firm’s strategic direction and operations. Erik is also Vice Chairman and a trustee of the University of Virginia’s College Foundation, and serves on the board of the Philadelphia 76ers Youth Foundation. In this episode, they discuss the future of private credit, private capital, private equity, 

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
Business with Barry Ritholts on Bloomberg Radio.

Speaker 2 (00:16):
This week on the podcast, I have yet another extra
special guest. There are few people in the world of
private equity better positioned to identify and discuss the explosive
growth and changes coming to the field. Eric Hirsh has
been with the firm Hamilton Lane for nearly thirty years,

(00:38):
both as CIO and Head of Strategic Initiatives. Now he's
co CEO. I found this conversation to be absolutely fascinating.
If you want to get a sense of why this
space has been growing so dramatically and what the future
of private credit, private capital, private equity, etc. Is going

(01:00):
to look like, then you're gonna find this conversation to
be absolutely fascinating. With no further ado, Hamilton Lane's co CEO,
Eric Hirsh thrilled to be here. So let's start with
your background. Bachelor's degree from University of Virginia in nineteen
ninety five. Would just study what was the original career plan?

Speaker 3 (01:24):
I think I had no career plan because I originally
studied philosophy, which I think is pretty much the definition
of I'm not sure what I'm gonna do with my life.
I think I was probably thinking lawyer back then, and
I luckily got on a different track and ended up
in finance.

Speaker 2 (01:40):
Huh, really, that's really amusing philosophy. I have discovered that
a number of people who have studied philosophy have said
it's useful for developing frameworks and thinking about the way
to approach management. We'll get to that in a bit.
So from philosophy, what drew you to a career in

(02:00):
finance and investment management?

Speaker 3 (02:02):
I was not highly sought after when I was graduating
from college. I think it was a combination of the
philosophy degree and perhaps a little lack of studying. But
I ended up getting lucky and found myself in a
public finance firm in Philadelphia called Public Financial Management, And
there we were really servicing governments and trying to help
them with budgets and bond offerings and the like, and

(02:25):
that really taught me the fundamentals of finance. They had
an incredibly strong training program Excel modeling and just learning
kind of the ins and outs of finance. And it
was from there that was sort of the launching point.

Speaker 2 (02:39):
Did I read this correctly. You specialized in sports stadium financing.

Speaker 3 (02:44):
Back in the mid nineties, governments were paying for stadiums.
They were not being privately financed. They were The belief
back then was that this was going to be a
big revenue draw for cities if they had these great complexes,
and so we had developed one of the expertise early
on to help cities go through that process of raising

(03:04):
bonds financing that.

Speaker 2 (03:06):
I'm always fascinated by that because you mentioned excel. If
you have a spreadsheet, it's pretty obvious this ain't a
money maker for cities. Maybe it's good for the municipal
morale or town spirit, but it's a money loser, isn't it.

Speaker 3 (03:23):
I think what you found was it depended on the location.
So Camden Yards in Baltimore, if you remember when that
sort of first opened, was a money maker. It totally
altered the landscape of that city. Now that didn't prove
to be true everywhere that stadiums began to be created,
and so today we no longer see a lot of
public finance capital going into stadiums. But there was again

(03:45):
a moment in time where in the right location it
did make sense.

Speaker 2 (03:48):
That was a deeply depressed area and you pour a
billion dollars into it. It certainly helps. But when we
look around at other stadiums, it's kind of amazing. To me,
looks like socialism. We're going to pay for your means
of production as the government, and you get to keep
the profits. But it's amazing. It took decades for the

(04:10):
taxpayers to kind of and the elected officials to reach
that conclusion. You also focused on mergers and acquisitions work
in the nineteen nineties. What was that like?

Speaker 3 (04:22):
Grueling?

Speaker 2 (04:23):
Gruel?

Speaker 3 (04:23):
I don't miss it. I think I am happy to
have been moved on. I think the good thing about
my time as an investment banker was that it really
introduced me to private equity. We were mostly looking at
selling businesses for privately held businesses with families most often,
and selling them into private equity, and so having come
from the public finance side, it was really the first

(04:43):
time that my eyes got opened up to the fact
that there was this whole other industry out there that
seemed pretty interesting. And again, in sort of the mid
later nineties, the private equity world was just beginning to
start to grow up and start to have its first
real growth movement.

Speaker 2 (05:00):
Brothers Harriman a storied firm. What was your experiences like there?

Speaker 3 (05:03):
Great people. It is a lot of tradition, incredibly long history,
particularly interestingly in Philadelphia. The firm had been there going
back into the eighteen hundreds where it was more of
a sort of a mercantile business, and it was just
a good place again to kind of get the basics
and the fundamentals of what it meant to be on
the corporate side of finance again as opposed to the

(05:26):
public side of finance.

Speaker 2 (05:27):
And if memory serves, they stayed a private partnership way
longer than a lot of their peers. Am I am
I remembering.

Speaker 3 (05:33):
I think they still remain.

Speaker 2 (05:34):
Yeah, I think that's right ship correct, which is despite
all the other partnerships having either gone per public or
getting acquired by other public firms.

Speaker 3 (05:43):
Correct.

Speaker 2 (05:43):
I've always wondered if that's the reason they never ran
into trouble during the Great Financial Crisis.

Speaker 3 (05:50):
I suspect it's a lot of reasons. Again, there's a
lot of it's a conservative place by nature. I think
it's one of the reasons why clients are attracted to them.
Partners have a lot of their capital invested in the
business alongside of customers. Also a good business model, and
so I think it's just a company that has had
tremendous success, but as you said, has kind of remained

(06:11):
true to its roots in that private partnership.

Speaker 2 (06:14):
Yeah. No, that's worked out really well for them. So
from Brown Brothers, how'd you make your way to Hamilton Lane?

Speaker 3 (06:18):
Headhunter came knocking. I was again familiar with the concept
of private equity, and I had met some private equity
firms in my short time as an investment banker, but
the concept of Hamilton Lane and what they did is
this kind of solutions provider intermediary was not something that
I was familiar with. They were also you're going to
continue to have the Philly theme here. They were also

(06:39):
headquartered in Philadelphia, so I didn't move very far, but
I went over and met some people. Thought it was interesting.
Firm was very tiny at the time. It was probably
twenty twenty five people. This would have been in nineteen
ninety nine and essentially single office business. And the firm
had been around for a few years and had had
some early success, but at that point in time was

(07:01):
still very tiny.

Speaker 2 (07:03):
And when you began at Hamilton Lane. What was your
role there.

Speaker 3 (07:06):
I joined the investment side as an associate, so I
was still a pretty young person and I joined the
investment team. Back then was simply one group. There was
no areas of specialization like we have today. But within
a couple of quick years, I became the chief investment
officer and we began to sort of think about the
business in a slightly different way. It had been historically

(07:27):
solely focused as a consulting company, and once we got
into the early two thousands, we began a bit of
a migration of adding more of an asset management service offering.

Speaker 2 (07:36):
So you stayed CIO for like thirteen years.

Speaker 3 (07:40):
Yeah, fourteen, maybe fourteen or fifteen years.

Speaker 2 (07:42):
But so that must have been fascinating because the firm grew,
the entire private space exploded over the past twenty five years.
How did your role as CIO evolve? What did you
begin investing in? And then we'll talk a little later
about what your investment currently.

Speaker 3 (08:01):
Everything was changing. So, as I said, the firm itself
was very tiny when I first took that role, and
while we've grown a lot, I still think of us
today as a relatively tiny company in the grand scheme
of things. On our tour in here you were mentioning
the employee count were one tenth of the Bloomberg employee count.

Speaker 2 (08:19):
So that's just this building right exactly globally right.

Speaker 3 (08:22):
So we're a total of a little under eight hundred
employees today. And so despite having gone from sort of
twenty so odd employees when I got there to about
eight hundred today, I still think of us as a
small business, but in the CIO role. Everything was evolving.
When I first came in, the concept of secondaries was
very new, the concept of co investing was relatively new.

(08:43):
People were not specializing products in any great way. Fund
of funds, which is something that we don't talk much
about today, was sort of the norm. That was mostly
how limited partners were accessing the private markets. The private
markets themselves had not really developed back then. Private credit
wasn't really much of a thing, whereas today it's a

(09:05):
huge driver of the growth. So I was witnessing and
got the experience change on lots of different axes. And
it was also for me growing up in the business.
I arrived there probably a twenty six year old. I'm
fifty two today, and so I've also kind of grown
up alongside of the industry.

Speaker 2 (09:24):
Really interesting when you were first appointed CIO. What sort
of investments were you making back then? Was it strictly
private equity or was it a smattering of everything.

Speaker 3 (09:36):
It was primarily private equity. The firm was at that
point not really engaged in things like private infrastructure or
real estate, and as I had mentioned, credit wasn't a
huge part of the industry, so it was mostly leverage
buyout's venture capital. And we were again a manager of managers,
so most of our investment activity was selecting fund managers

(09:59):
on behalf of our clients. Really, the genesis of the
firm was quite simple. It was sort of late eighties
early nineties. The institutional world was just beginning to make
their move into the private markets. Prior to that, kind
of in the seventies and into the early eighties, most
of the activity, small as it was, was primarily financed

(10:20):
by large families, high net worth families, endowments and foundations.
Things like public and corporate pensions were not a big
participant in the private markets. And with some regulatory changes
and with greater awareness, that began to shift, and the
founders of Hamilton Lane had a very simple concept, which
is people are going to want and need help, and

(10:42):
so we were really designed then as we are today
to really be a solutions provider to help whichever kind
of client is trying to access the private markets, to
do so in a way that most and best fits
their needs. Our view was that we didn't think that
most limited partners, we're going to invest the time, resources

(11:03):
and energy to build out large internal teams to cover
this asset class, and that has proven to be correct.
Most don't. They primarily find a partner, a solutions provider,
and we've been that partner of choice now for over
thirty years. But that was the business model, and so
our evolution has really just kind of mirrored what the
industry itself has been doing. Is as credit came online

(11:26):
and became bigger, so did we in that space. As
infrastructure and real estate developed, so too did we in
that space. And so I sort of say that we've
been kind of growing right alongside of the asset class.

Speaker 2 (11:37):
Really really interesting. I'm also intrigued by the idea of
quote unquote consultants but with some skin in the game.
It's one thing to give advice, good or bad as
it might be, but it seems like something else entirely
to say, here's our recommendation, and by the way, we're
going to co invest our dollars, our personal dollars alongside

(12:00):
with you. Tell us a little bit about how that
developed and what does that mean for the clients you
work with.

Speaker 3 (12:07):
So, as I said, the firm really began as a
consulting firm. That the idea originally was these were going
to be new decisions, new asset class for these public
pensions and corporate pensions primarily at that time, and that
they were going to want someone to make a recommendation
that they then could kind of ultimately take the decision themselves.

(12:29):
What we found was that the clients realized that this
industry was growing quite rapidly, and their need for resources
was growing quite rapidly, and the decision making needed to
also happen on a quicker pace, and so that consulting
model began to morph to the client simply saying we
want to just have you handle.

Speaker 1 (12:50):
This for us.

Speaker 3 (12:52):
I think the advantage that we've had came from that
consulting DNA because it rooted the firm in an incredible
client centric mindset that still is a hallmark of our
service offering today. So today, while we're primarily doing asset management,
we're still doing it in a very bespoke model, a

(13:12):
very customer oriented. But to your point, as an asset manager,
we're making the decisions, we have the discretion, and we're
putting our own capital at risk alongside of the clients.
And I think that alignment of interest rings true today
as it rang true many many years ago, and so
today it's still the biggest user of our balance sheet capital.

(13:33):
The firm has invested a huge amount of money alongside
of our clients over our history. But doing that sort
of asset management alongside of in combination with that really
strong customer focus, I think that has been one of
the reasons why we've been such a winner.

Speaker 2 (13:47):
Really interesting, you've been at Hamilton Land for nearly thirty years.
I want to talk about the growth of the firm
and the parallel growth of the sector private markets. The
growth has just been amazing over the past twenty five years.
To what do you attribute this explosive increase in size

(14:08):
of this sector.

Speaker 3 (14:10):
I think there's a variety of factors. One the most
simple is just performance. If you take a look at
aggregated private market performance, and you compare that over five, ten, fifteen,
twenty year time periods to the public markets, you're going
to see meaningful outperformance. I think the second thing, though,
is becoming more recognized, which is diversification. Today our public

(14:33):
equity markets have never been more concentrated. A very very
small number of companies, all technology oriented, make up a
huge portion of the overall market cap. And I think
when you sort of see that occurring, in combination with
the fact that more and more investors have moved to
a passive public equity mindset, it means that you're ending

(14:54):
up with these oddly concentrated portfolios and a small number
of stocks. The other thing that's happen is that the
public markets themselves are growing from a market cap standpoint,
but they're not growing from a number of publicly listed companies.
In fact, if we go back to the eighties and
sort of draw a chart of number of publicly listed
companies in the US, that chart is essentially moving down

(15:15):
into the right. It's shrinking. So today about four thousand
publicly traded businesses. But think about, Barry, how many businesses
you interact with every day that are private.

Speaker 2 (15:25):
It's just of them right, the vast.

Speaker 3 (15:27):
Majority, and so they employ a huge amount of people
in the country and all around the globe. So as
an investor, if you want to get access to that
part of the economy, a substantially large portion of the economy,
the only way to do that is through investing in
the private markets. So I think when you combine the performance,
the diversification, all of that is resulted in the growth.

(15:50):
And yet the private markets remain very, very small. If
you took all of the capital raised last year across
all of the sub sectors in the industry, it wouldn't
be enough to buy Apple.

Speaker 2 (16:03):
Wow.

Speaker 3 (16:04):
So if you look at total fundraising again, all private
markets fundraising, it accounts for about two percent of the
MSCI market cap. So again there's been huge growth, but
the public markets themselves have also been growing quite a bit.
And so when we put it in context, just like
I say Hamilton Lane in context as a relatively small company,

(16:25):
so too are the private markets.

Speaker 2 (16:27):
So how much growth is possible in this space? I'm
going to go off script and ask can the private
markets ever expand to where they're comparable to what we
see in the public markets.

Speaker 3 (16:41):
You'd have to see an enormous amount of growth for
that to happen decades decades, But I think what you
see in front of you is I think there are
still decades more of growth to occur. The private markets
are expanding across lots of different axes, so they've expanded geographically.
So if we went back into sort of the eighties,
it was basically a US only business, and then you've

(17:03):
expanded into Europe, etc. So now it's becoming much more
of a global phenomenon. It's also expanded across strategy. We've
talked earlier about the fact that credit, for example, is
becoming a bigger part infrastructure, real estate, so we've seen
that expansion. Now you're also seeing expansion across the client
tell So we've gone decades. Were essentially the only entities

(17:26):
that were able to access this industry or institutional investors
and ultra ultra high net worth investors.

Speaker 2 (17:33):
So family offices, foundations, endowments, etc.

Speaker 3 (17:36):
Exactly Today you now see more mass affluent individuals able
to access this industry, people with say three to five
million dollars of investable assets, of which there are a
lot of those people all over the globe. They've been
again historically shut out, but with some regulatory changes and
new product offerings, they too are now accessing this industry.

(17:59):
So I go back to lots of different axis, all
of them kind of growing in different ways, and I
think that trend still has a long long way to go.

Speaker 2 (18:08):
Huh, really really interesting, So let's focus on the firm's growth.
Obviously the tailwind of the whole industry is helpful, but
not every private equity has grown as explosively as Hamilton
Lane has. What's been the most surprising thing about the
firm's growth to you.

Speaker 3 (18:27):
Well, I think no one would have predicted that we've
got that we would have gotten this large, So I
think that in itself has been a surprise. But I
think what's been noteworthy you hoped it was going to
be true, but you weren't sure, was that could you
continue to grow and could you continue to expand again
in different ways across geographies, across clientele, and at the

(18:48):
same time maintain the firm's core DNA. And I think
one of the reasons why the growth has occurred and
why the success has been there is that we have
done that. The roots of the firm are still very
present in how we interact with customers today, how we
interact with our own employees, how we interact as a team,
how we interact with shareholders. All of that still I

(19:09):
think remains kind of very true to the firm's values
and foundations, and so being able to achieve both of
those was always the goal. Again, always a risk that
you don't pull it off, but knock on wood, here
we are and we're still doing it.

Speaker 2 (19:24):
So you described all the various sectors that you've expanded
into in the growth that's been there. Let's talk geography.
What are the plans for a global expansion.

Speaker 3 (19:33):
So today we have twenty two offices around the globe,
so we already have a very large geographic footprint, and
our client base is also about equally split between kind
of North America and non North America. So while we're
a US headquartered business located outside of Philadelphia, we have
a very global feel to the firm in that you

(19:54):
have hundreds of employees who are operating outside of the
US and my partner in co CEO is a Hong
Kong resident and operates out of Asia. So that footprint,
combined with the client base, has already established us in
a very geographically diversified way. I think as we look forward,
I suspect the twenty two offices will continue to grow.

(20:16):
We have plans to open up in other locations. And
if you look at the map of where we are,
there are some very big places where we are not
at present. So India, for example, would be a fairly
large economy, but so far has had a very small
private markets industry. That will change over time, and I
think you'll likely see a Hamilton Land office there at
some point in the future. So there are a number

(20:38):
of places that you can look around the globe and say, well,
I can imagine that at some point in time that
would make sense to have an office presence there.

Speaker 2 (20:45):
So in the public markets, the rest of the world
has lagged the United States for I don't know the
better part of fifteen years, decade and a half, certainly
since the end of the financial crisis. This year to
date or for the past twelve months, depending on where
you're looking around the world, the United States has become
a laggart, even though first half of the year we're

(21:08):
up six percent, pretty decent. Twelve percent run rate is
pretty typical. But Europe is doing really well. Asia is
doing really well, how do you look at those parts
of the world, especially I've been hearing Europe has structural problems,
Europe has all these cultural issues, Brexit, Grexit, all these

(21:29):
different things, and yet Europe really seems to be having
a banner year. How do you look at that part
of the world.

Speaker 3 (21:36):
I think this is the luxury of being a global
firm with global deal flow, and most of our clients
take a global view on portfolio construction. They want the
best investment opportunities, the best managers that we can access
for them, and so in building portfolios, we have the
ability to move around the globe to take advantage of

(21:56):
whatever we think is interesting at that moment in time. Now,
unlike the public markets, we have to be making investment
decisions with an eye towards how's this going to play
out over the next sort of three, five, six years,
because most of the investments that we're making have a
fairly long duration, again long relative to public markets. So
once you're investing in a private company, the work then starts,

(22:20):
the value add then actually is happening, and that exit
ultimately comes years in the future. So I think our
investment view has to be balanced. We have to be
looking both at short term and long term simultaneously to
decide where you sort of see trends going, how that's
going to impact the company or manager that you're about

(22:42):
to invest in. But we don't have the ability that
the public market has, which is to say, two hours
after making a trade, I'm going to change my mind
and unwind that. Once we do something, we're going to
own it for a while.

Speaker 2 (22:55):
The liquidity premium is significant and real.

Speaker 3 (22:59):
It's real. Well, it changes the mindset. I have the
benefit of interacting with lots of different investment heads who
run all kinds of different investment firms, and as a
public company ourselves, I'm also constantly interacting with our public
equity shareholders and research analysts, and it is just a
different mindset. The Hamilton Lane team is thinking about things

(23:20):
over many, many years. They're not fixating on what's going
to happen this week or this quarter with that company.
They're thinking, how can I invest a dollar today and
five years from now turn that dollar into three dollars
or four dollars. It's just a different orientation.

Speaker 2 (23:39):
So, prior to becoming CIO, you were head of strategic Initiatives.
Is that timeline right? Or was that after after So,
after you are CIO, you become head of strategic Initiatives.
It sounds like the different sectors, the different geographies, the
different clientele fits nicely into that role. Tell us a
little bit about what that role was like and how

(24:02):
that eventually led to becoming co CEO.

Speaker 3 (24:05):
What we realized, my partners and I and our board
was that as we were continuing to evolve, one of
the areas that we needed to have a real rethink
on was technology. Having spent fourteen or so years as
CIO and building out the various investment verticals and putting
senior leadership in place, really the thought was the best

(24:27):
place for me to spend the next part of my
career was doing the same thing on the technology side
of the business. While Hamilton Lane had embraced technology and
had various technologies that we had been using. I think
the view was we sort we foresaw growth accelerating and
the idea was we needed to really rethink the tech
stack and we took an interesting approach. So in my

(24:49):
job as the sort of head of strategic Initiatives, I
was afforded the opportunity to have access to Hamilton Lane's
balance sheet capital, and in using that balance sheet capital,
we went off into establish partnerships with a variety of
primarily tech startups that were focused on the private markets.
So what we were doing was we were starting to

(25:09):
meet with these firms who were trying to identify problems
and areas that we're going to impede scaling in the
private markets, and we took an ownership stake in a
variety of these businesses. To date, we've done over fifteen
transactions where we've taken anywhere from very small ownership stakes
to very very large ownership stakes. And the benefit of
doing it with balance sheet capital was we got to

(25:31):
be unlimitedly patient. There was no pressure of us to
have to exit. We weren't using client capital, we weren't
using fund capital, and thought our thinking was, if this
is going to be something that's good for us, it's
going to probably be good for others in the industry,
And if we're going to be helping to drive these
businesses and to help give them ideas and real time

(25:51):
feedback and become a customer, then we'd rather align with
them by actually being an owner as well. So I
spent several years developing and sourcing and working on these
various partnerships with some other Hamilton Lane people to try
to get us into a much better position to have
a market leading tech stack. A variety of these strategic partnerships,

(26:13):
and we've had a couple of these that have exited
very successfully. So it was also a good use of
balance sheet capital.

Speaker 2 (26:19):
So let's talk a little bit about one of the
companies that you guys are founding members of, which is Novada,
which is a tech platform providing private markets with ESG
data and benchmarking analytics. Tell us a little bit about
Novada and how that's working.

Speaker 3 (26:36):
At This is a great example of seeing a problem
and not seeing an obvious solution. Our clients no different
than they focus on the public equity side. If they
want to understand what's sort of happening around ESG issues
with companies that they're investing in, and so they're beginning
to ask for various data points and various tracking. There

(26:56):
was no system to do this, and what you all
also realized very quickly was that investors did not have
a one size fits all approach to this. An investor
in Norway has a very different orientation around what ESG
means to them than an investor in Japan or an
investor in Saudi Arabia. And so trying to say to

(27:18):
all these investors, oh, here's the one way you have
to look at it, we thought was a total losing proposition.
We also thought that, frankly, the ESG metrics in the
way that scoring is working on the public equity side
was a little bit nonsensical. And so take us, for
an example, Hamilton Lane in the public equity world has
a pretty lousy ESG score. Well, we have an incredibly

(27:42):
good environmental footprint. We do all kinds of carbon offsetting,
so no issue there. We have very positive societal impact.
We're helping with an awful lot of retirement benefits, were
consistently listed as a best place to work in providing
employees with a healthy and constructive work environment. So why
is there a score problem? Well, we're a controlled company

(28:04):
in the public world.

Speaker 2 (28:05):
Define what a controlled company.

Speaker 3 (28:07):
Controlled company means that the insiders some shareholders, have super
voting shares, and so we are technically controlled by those
inside shareholders as opposed to our outside shareholder.

Speaker 2 (28:21):
Shouldn't that be a different scoring for a private company.
Then it's one thing if you're a public company with
tens of millions of shareholders, Like I am not a
big fan of the Facebook management structure, and we saw
something similar chops like Fharahos and Uber and other places
that ran into we work as another example. You're less

(28:44):
than a thousand employees, the founding partners are mostly still there.
Why shouldn't the founders have Maybe I'm speaking my book here,
but why shouldn't the founders have super majority?

Speaker 3 (28:56):
I think our investors liked it, yea. That was the
irony was that they liked the alignment. They liked that
we were again a lot of our capitals at risk.
Alongside of there, our clients, like at shareholders liked it.
But again in sort of the way the public equity
ESG scoring works, it's a little bit blind to nuance.
It's controlled company bad therefore bad score. So as we
were looking at ESG for the private world, we didn't

(29:18):
want to replicate what we saw the mistakes being made
we thought on the public side, and there wasn't really
anything out there at the time, and so we created
from huole cloth. We came together, We met some of
the now management team of Nevada, shared a philosophy around
the problem that we were trying to solve. Gathered up
a group of various shareholders now including the Ford Foundation, SMP, Microsoft,

(29:43):
a lot of other interesting institutional investors, and we literally
created Nevada from hl Cloth and now today Nevada is
the world's largest collector of ESG data for private companies,
client bases all over the globe. Huge database, interesting technology,
interesting solution, and allowing investors and clients of Nevada to

(30:08):
consume data how they want to consume it, rather than
giving some arbitrary scorecard that says this is how you
should look at it, or instead empowering people by saying,
here's the data. You do with the data that you
think is best for you and your organization.

Speaker 2 (30:24):
Huh. Really really fascinating. So let's talk a little bit
about some of the most significant changes that are going
on in the private markets. What's the difference between today
and the nineteen nineties.

Speaker 3 (30:37):
I think it depends on which vertical we want to
focus on. I would say probably the biggest difference is
really around the client base. In the nineties, as we
had mentioned, it was really just a game for institutional investors,
and today that's no longer true. Today, the retail investor
has finally been afforded the opportunity to take advantage of

(30:57):
what the institutional investor has been taking advantage of for
men many many years. So that's the biggest change I
think on the investing side. The expansion of some of
the verticals is also a big change. Private credit has
really taken over from banks, particularly regional banks as well
as large banks, in being the primary provider of lending

(31:19):
capital to businesses. That's been a huge sea change. If
we had gone back into the eighties or nineties, or
even in the two thousands, and you were a local
business owner that had a small factory and a town
in the Midwest US, and you wanted to expand and
add another factory, you would have probably gotten in your
car and driven down to your local bank where you

(31:41):
knew the bank manager and they knew you because you
were the big employer in that town, and you said,
I'm going to build another factory, and they said great,
and they were going to give you a loan to
do that. That's really not existing much anymore. Private credit
has really taken that over in a much more programmatic way.
So I think there's a couple of big examples of

(32:04):
some of the changes that you're seeing across the asset class.

Speaker 2 (32:06):
You know, it's interesting because I have a recollection of
the late nineties early two thousands, and as all the
large money center brokers and banks just became larger and
moved upscale upstream, there was a void created behind them,
and private equity filled that void. On the mercantile banking

(32:28):
and private equity side, it sounds like you're saying the
exact same thing happened on the private credit side. Banks
got bigger and they left their smaller, mid sized clients behind.

Speaker 3 (32:37):
They got bigger, and they got regulated in a way
that made it harder for them to participate here. And
I think the private credit firms have frankly just done
a better job of making that an asset class and
making that both accessible to borrower and lender. And so
I think all of that has actually been a positive development.

Speaker 2 (32:58):
So I've a credit both expanded. How about infrastructure expansion there? Really?

Speaker 3 (33:05):
I mean, if you look around the globe, we can
go anywhere very quickly and see that there's huge need
for infrastructure overhaul our systems, roads, telcom, power sources, all
of that is aging in a way that governments are
just frankly not able to keep up with it, and
they're not able to finance it, And so you're seeing

(33:26):
more partnerships with private infrastructure to go and deal with again,
whether it's transportation needs or energy needs, all of that
becoming much more in the purview of the private markets.

Speaker 2 (33:40):
So we've seen a torrent of capital entering a variety
of different private investment strategies. When I see that much
money piling into a space, the first question that comes
to mind is, Hey, are there enough good deals to
go around for all this capital find a home or
or are we just seeing a sea of cash just

(34:03):
washing over too few deals.

Speaker 3 (34:05):
I think, like in anything, people do things better and
some people do things worse. I think the interesting part
with the private markets is that capital flows have really
not been a good barometer of much of anything. So
in years where you've seen lots of capital raised, you
haven't seen any correlation to performance, good or bad. And

(34:26):
in fact, if you look at performance over long periods
of time, one thing that has been true is that
the dispersion of performance has remained very wide. Pundits would
have said and did say twenty years ago. Well, as
the industry matures, the dispersion will shrink and the difference
between top and bottom will become very small because the
markets will quote become more efficient. And in fact, that

(34:48):
hasn't happened at all, and it hasn't happened for a
pretty basic reason. If you think about what is a
private equity investment, you're literally partnering with management to run
a company. And so one of the examples I always
say when I'm talking to audiences about this topic is
if I put ten people out out of the audience,
and I gave each of the ten a chance to

(35:08):
be the CEO of this particular business for a year,
we would have ten wildly different outcomes because each of
the ten would make very different decisions on marketing and
manufacturing and hiring and culture. And so whether there's more
or less capital thrown at that company, it's not going
to alter the outcome. What's going to alter the outcome

(35:30):
primarily is what decisions were being made, and were they
good decisions or bad decisions. It's sort of the very
definition of active management, where people are hands on with
that company making choices, fundamental choices. So some people make
better choices than others, and so the dispersion remains very,
very high despite the fact that more and more capital

(35:53):
continues to move into the business, and one of those
choices is around deal flow. Not every manager has an
equal access to the same deal flow. In fact, proprietary
deal flow is very much still alive and well in
the private markets because there's no screen that they can
log into to simply look up, hey, what's available to

(36:13):
buy today. In the private markets, it's really about getting
out there, unearthing opportunities, networking, meeting with management teams, meeting
with sellers. All of that is a skill set. All
of that is frankly unequal, and all of that then
leads to way better outcomes or way worse outcomes.

Speaker 2 (36:31):
Yeah, I'm surprised to hear that pundits would have imagined
that that dispersion would narrow when we look in other areas.
It doesn't matter ETF's mutual funds facs. Pick your public
investment strategy almost a winner take all scenario when a
group of also runs. The winners have a flywheel where

(36:52):
all these advantages accumulate and compound and work to the
benefit of those who were early and right like why
would anyone really imagine that that dispersion would narrow. You
certainly haven't seen it in mutual funds or anything in
the private markets. It looks like, hey, if you have
an advantage and you've been successful for a while, you

(37:14):
should be able to continue to build on that advantage.

Speaker 3 (37:16):
I think the mistake that people made is that they
just simply made the kind of bold and incorrect assumption
that time or growth or scale would sort of cause
a reversion of return or a reversion to the mean,
or a collapsing of dispersion. And it just goes back
to what we just said, No, this is about a

(37:37):
skill set and what choices you make with the business,
and what choices you make with your own business. And
again you've got winners and losers. What's not happening in
our industry is there's not a winner take all. There
are thousands of private fund managers around the globe, operating
in different geographies and across different styles and strategies, and
that number has generally continued to grow year after year

(38:00):
after year. So lots and lots of fund managers. And
if we then put them on a plot chart across performance,
you'd sort of see a big gapping between the top coretile,
which is still a huge number of managers, could be
over well over a thousand managers who are in the
top quartile relative to the bottom couretile, and then you

(38:20):
sort of see everything that's kind of in the middle.
So lots of choice for investors. But it's also why
frankly affirm like ours has the ability to exist. Navigating
all of that is hard. It takes a lot of resources,
a lot of expertise, a lot of data, a lot
of technology to try to figure out from those thousands
of choices, which ones do you want to put in

(38:40):
your portfolio.

Speaker 2 (38:41):
So Sturgeon's law applies to private capital and private equity
and private credit as well as everything else. I was
kind of taken by a quote of yours earlier this spring.
You said this could be a choppy summer. What does
that mean and why do you expect choppy?

Speaker 3 (39:01):
Well, I think what's happening in the US politically has
been very choppy. Tariffs, changes in the labor workforce, new regulations,
changes in tax code. It's a lot of altering the landscape.
And so I think one of the reasons why we
have seen a fair amount of public market volatility. While

(39:22):
it's generally been still moving up, we've seen a fair
amount of volatility. And in our world, it's harder to
price assets today because you're trying to look ahead to see, okay,
does this company have exposure to something that might be
tariff impacted? How much exposure and what will be the
tariff impact and how long will the tariff impact be

(39:43):
in place? So what you've seen in our industry is
that deal volume, deal doing remains relatively healthy, deal exiting
remains pretty slow.

Speaker 2 (39:55):
Is that driven by the lack of an IPO market
or reduction in M and A or I.

Speaker 3 (40:00):
Think it's more back to the choppiness to use my
own word of is today really the day I want
to sell this company to maximize value? And by the
way that potential buyer is also thinking to themselves, is
today the data I actually want to buy this business?
Could the price get lower tomorrow? Or might it get
higher tomorrow? So I would say we haven't seen buyer

(40:21):
and seller agree to what norm is, and they're both
kind of staring off at each other, looking to see higher, lower, better, worse,
And the result of that is causing sort of a
lack of this volume across the industry.

Speaker 2 (40:37):
Huh, really really interesting. So the equity markets seem to
have figured out, for lack of a better phrase, hey,
most of this lack of clarity around tariffs is going
to go away, that there's a little bit of the
taco trade and that this is a negotiating tactic and
eventually will have ten fifteen percent marginally higher than we

(41:02):
had before, but nothing that's going to push the economy
into a recession. Do you think that's a fair assessment
or perhaps the public markets are being a little too optimistic.

Speaker 3 (41:14):
I think it's a reasonable assessment. And the end, the
public markets have the advantage of momentum. If everyone can
kind of collectively agree and kind of drink that kool aid,
then you get the benefit of the sort of the
tide is rising. It's different in the private markets. If
you and I are out there to go do a deal,
we're about to walk away owning a company. Well, we're

(41:38):
going to live and die by that company's actual results,
and so hoping that tariff impacts will be either non
existent or hoping that they will change or that they
will be short lived, that's not a strategy because if
we're wrong, that company's earnings and revenue is going to
be fundamentally altered, and then we're gonna have a hard
time selling that company. So I think you have a

(42:01):
difference of in the public equity world, I see much
more macro overlay because you're sort of trying to figure out, yes,
is this a good company, and how do I assess
the company? And at the same time you're trying to
figure out, well, generally what direction are the markets going in?
But on the private side, a lot less macro overlay

(42:21):
and much more fundamental focus on that single asset.

Speaker 2 (42:25):
You don't get the same tailwind from the sector and
the market overall in private markets that perhaps you get
in part.

Speaker 3 (42:31):
You get some of that when it comes time to sell.
Are you in a good space? Is your industry growing?
So you get some of that halo effect, but you're
still pinned to a single asset, and on a relative basis,
most private markets portfolios are pretty concentrated. So if you're
a fund manager running a private market's portfolio, you might

(42:52):
end up with a portfolio of fifteen companies. Well, you
can't be wrong on a bunch of those. That's you're
going to have a terrible result. The winners won't be
big enough to outweigh the losers.

Speaker 2 (43:03):
Really interesting. So two related questions. The first is what
do you think is next for the private markets? And
the related question is what are your strategic priorities for
Hamilton Lane.

Speaker 3 (43:15):
I think they're both related. Actually the answer is going
to be sort of one and the same. I think
what's next is there is going to be this adoption
and influx of retail capital. We're seeing it, but it's
still very early innings. If you look at the institutional world,
most institutional investors have an allocation to the private markets
that's north of ten percent. If you look at the

(43:38):
average retail investor, their exposure to the asset class is
about zero percent. And if you look at just wealth
statistics around the globe, there are trillions and trillions and
trillions of dollars in the hands of individual savers globally.
So if you believe that they over time, we'll have

(43:58):
portfolios that look much more more similar to an institutional portfolio.
There's a huge amount of capital that's going to get migrated,
but that capital is coming from a different type of investor,
one who is accustomed to everything being on their phone
and everything being available now, think about how we all

(44:19):
interact with the public equity world as individual investors. I'm
sitting here in front of a Bloomberg terminal. I have
unlimited access to information, and I can execute on anything
I want to do right here without moving more than
a couple of fingers. The private markets today technologically are
not built that way, and so there's a lot of

(44:40):
change I think that's going to be coming around private
market infrastructure, and I mean the infrastructure for our industry
and how we interact with the customer. And that flow
through is going to not only start with the retail investor,
but it will then flow back to the institutional investor.
So strategically, for Hamilton Lane, we're very focused on making
sure sure that we're getting that market segment right, that

(45:03):
we're purpose building, to make sure that we're properly caring
and feeding of that customer base, which is again different
than the customer base that we've historically dealt with, and
making sure that all of that is oriented to sort
of achieving success there is right now a huge strategic priority.

Speaker 2 (45:20):
So many of the topics we're discussing are very much
front page headline sorts of news. Let me ask a
little bit of an under the radar question. What are
investors not talking about? What topics? Assets, geography, I don't know, policy,
data points is getting overlooked, but perhaps should not be.

Speaker 3 (45:43):
I think one of them is back to this retail question,
which is, how is the emergence of this new investor
class going to impact the industry, Because I believe it's
going to impact it dramatically in the technology and the
flow of capital, in the style of investor. And so
what are the ripple effects. I suspect they'll be positive

(46:03):
and negative of that, And so what does that sort
of shake out and impact then do to the industry.
One of the things I think we're going to clearly
see is that if you want to be a player
in the industry, a fund manager, a service provider, the
need for your own infrastructure, your own technology to be
substantial is very real. And that's adding a whole other

(46:27):
layer of expense to the management of these businesses. Some
will figure that out, and we'll have the size and
the scale and the growth to sort of do that,
and I suspect a number of firms will simply not so. Today,
while the industry has been growing from both a number
of managers and asset perspective. I think if we were
to fast forward and come back and have this conversation

(46:48):
in ten years, I think the asset base will have
continued to grow. I think the number of participants will
actually have gone down.

Speaker 2 (46:56):
Really, I do. Even as you're adding more and more
mom and pop mainstream investors to the client base.

Speaker 3 (47:03):
Of private I think the number of firms that are
going to be capable of successfully servicing that investor base
is relatively small.

Speaker 2 (47:12):
I will tell you from personal experience working with individual investors,
some of whom want exposure to various alternatives. The back ends,
the legal, compliance, reporting, custodian all those different things that
have really become frictionless on the public markets. It's really challenging.

(47:34):
It's really difficult on the private market. It's everything is
its own unique I don't even want to say CSIP
its own unique animal that is pet in a different way.
It has no standardization at all.

Speaker 3 (47:47):
Has to change. The investor will not tolerate it. That's
the reality is that you can't expect that individual investor
who has been so trained and has adopted that friction
in less environment for the for their entire portfolio, and
now to say to them, well, for this five percent

(48:07):
of your portfolio, it's going to be a gigantic pain
in the rear. They're gonna say, I'm not dealing with that.
So it can't stay this way. So one of the
things that we believe will be one of the change
agents is the world of tokenization. That does make things
much cheaper, faster, and without friction. And so Hamilton Lane

(48:30):
has been a very early and aggressive adopter of that technology.
We've tokenized more funds, we believe than anybody else in the.

Speaker 2 (48:37):
World to find that. What does tokenization mean for an
individual investor.

Speaker 3 (48:40):
It's moving from a physical world to a digital world.
Tokens are simply tracking of investments using blockchain technology, and
so instead of dealing with subscription docs and all of
the pain points of all of the legal and regulatory structure,
imagine doing that in a point and click world where

(49:02):
you can access a fund digitally using a digital wallet
and storing it in a digital wallet and tracking it
in a digital wallet. And that is the world of tokenization.
So today there are a number of token exchanges around
the globe. Hamilton Lane is an investor and owner and
a number of them. And if you go on today

(49:22):
to firms like Republic or Securitize here in the US,
you would see product offerings there. Investors can still access
documents and information, but when it's time to actually purchase
or invest, they can just simply click the buy button.
And as that world matures over time, you will have

(49:43):
exchanges that have buyers and sellers, and so some of
that ill liquidity issue that we've always been mired with
given the long duration, should start to lessen because you'll
be able to trade more freely.

Speaker 2 (49:56):
My assumption is that if you're trading private law assets,
regardless of what they are, Hey, if you want to sell,
you're going to be getting a discounted price versus holding
it for the duration.

Speaker 3 (50:10):
That certainly has been the case historically. I think what
remains to be seen is that still true in a vibrant,
healthy token world where you have lots of buyers and
sellers on these exchanges. I think what you're going to
see is that discount is going to greatly reduce because
access to information and the ability to move assets is

(50:30):
going to become much easier and quicker.

Speaker 2 (50:32):
So what does this mean for the illiquidity premium. The
fact that investors who agree to tie up their money
for five years, seven years, nine years get a theoretically
higher payout than they might in a liquid public market.

Speaker 3 (50:46):
Well, this is going to be what the managers are
going to have to deal with. They're going to have
to continue to deliver some level of outperformance. Now, if
the ill liquidity issue completely evaporates because tokens become so
freely exchangeable, then I think what you're going to simply say,
as well, it's an equid strategy, so it might be
the exact same return as a public equity, as long
as it's mirroring that, you still get the benefit of

(51:08):
a diversification. You're still accessing assets that are non public
and so the only way to access them is in
the private world. But I think that will sort of
cause a change in how people think about benchmarking and
how they think about portfolio construction. We're a long ways
away from that. So today the ill liquidity premium exists
and the il liquidity issue is still very much front

(51:28):
and center. But I think you can sort of see
the building blocks are being put in place that could
really begin to alter how that all works.

Speaker 2 (51:37):
Huh really very fascinating. All right, I don't have you
all day long, so let me jump to my favorite questions,
starting with who are your early mentors who helped shape
your career.

Speaker 3 (51:50):
I'm a huge believer in mentors. I've had the benefit
of several. My first boss when I came out of
college is still a friend and mentor today. We were
recently on a VACA together and he still treats me
like I work for him, which is great, and I
think it's healthy and it's good to have someone in
your life who reminds you where you came from and
is quick to give you advice and perspective, and has

(52:13):
nothing but your best interest at heart.

Speaker 2 (52:15):
Let's talk about streaming. What are you watching or listening
to today?

Speaker 3 (52:21):
I consume a lot of news, and so I also
have a bit of a political junkie. So I've been
enjoying a new launch of a new kind of network.
I guess you'd call it called two Way, which is
an interesting series of political conversations and access to different
kind of political pundits and elected officials. So I've been

(52:42):
consuming a fair amount of news via two Way.

Speaker 2 (52:44):
Huh. Interesting. Let's talk about books. What are some of
your favorites. What are you reading right now?

Speaker 3 (52:49):
I am a voracious reader, so something is always open.
Not all of it's good or worthy of sharing. I
recently finished something that I think is worthy, which is
a book called When the c Came a Lot by
Garrett Graf. I think he writes in a really interesting
way where he's piecing together first hand accounts and diaries,
and so this book was really focused exclusively on the

(53:11):
landing on the beaches at D Day.

Speaker 2 (53:13):
Huh. Interesting you said something. Not all of them are
good or worthwhile. My view is, if you're reading a
book and you're not enjoying it, well give it to
someone else and start the next book.

Speaker 3 (53:25):
I should do that. I really struggle with that.

Speaker 2 (53:27):
I am not homework.

Speaker 3 (53:28):
It's not an assignment, I know, and yet I find
myself grinding through things that I'm sitting there thinking this
is really not worth my time, and yet I have
this compulsion of I started it, I have to finish it.

Speaker 2 (53:41):
I I somebody turned me on to the idea of
not finishing books. You started, like, I don't know, fifteen
years ago, and it's changed. The average American reads four
books a year. The average quote unquote reader reads ten
books a year. I find if you don't like a
book and you close it, you're reading you two books

(54:03):
a month. It's a whole different.

Speaker 3 (54:05):
Well, we're probably reading two books a month and I'm
not closing them. At least I should accelerate, and I
have to learn. That's a good lesson for me to
take takeaway from this.

Speaker 2 (54:14):
Our final two questions, what sort of advice would you
give to a recent college grad interested in a career
in either a private equity or private capital or investing
in general.

Speaker 3 (54:26):
I think I would give the same advice regardless of
the industry, and that goes back to your question on
the mentor piece. I think we employ a whole lot
of young people and I love that. In fact, we
literally just last week welcomed our brand new analyst class.
They seem younger and younger to me, and I am
clearly getting older. So I had the privilege of welcoming

(54:46):
them to the firm and addressing them, and I was
asked this question and my answer was, get a mentor.
I think right now, particularly with younger folks, there's a
belief that everything that you need to know you can
look up. I can just go online. I can ask
chat GPT, I can Google for it, and I just

(55:08):
don't believe that's true. I still think that whether it's
an investment industry or a legal profession or a medical
that while you can get a lot of knowledge via
the Internet and via other electronic resources, there is something
about learning from the mistakes that others who have gone
before you have made that is invaluable. And I think

(55:31):
aligning yourself in a really healthy mentor mentee relationship, I
think is an enormously important part of a good career.

Speaker 2 (55:40):
Really interesting answer and our last question, what do you
know about the world of investing, be it private or
public today that would have been helpful had you learned
it back in the nineteen nineties.

Speaker 3 (55:52):
I think just how much change is coming. It's so
easy to go to work every day and kind of
make the assumption I'm just thinking about what I have
to do today and tomorrow will be very similar to today.
I think training yourself to step back and try to
see around corners and try to think outside the box

(56:13):
of saying, what if it doesn't work like this forever?
What if there's going to be a big change, What
if this new technology is going to take off, continuing
to sort of push yourself to do that. I'm better
at doing that now. I wish I had done more
of that when I was younger.

Speaker 2 (56:28):
Huh, really really interesting, Eric, Thank you for being so
generous with your time. We have been speaking with Eric Hirsh.
He's co CEO of Hamilton Lane, which manages or advises
on nearly a trillion dollars in private assets. If you
enjoy this conversation, well, be sure and check out any
of the past five hundred we've done over the past

(56:50):
eleven years. You can find those at Bloomberg, iTunes, Spotify, YouTube,
wherever you find your favorite podcast. Be sure to check
out my new book How Not to Invest The Bad ideas,
numbers and behavior that destroys wealth and how to avoid
them How Not to Invest at your favorite bookseller. I

(57:10):
would be remiss if I do not thank the Cracked
team that helps put these conversations together each week. Meredith
Frank is my audio engineer. Anna Luke is my producer.
Sean Russo is my researcher. Sage Bauman is the head
of podcasts at Bloomberg. I'm Barry Ritoltz. You've been listening
to Masters in Business on Bloomberg Radio