How I Invest with David Weisburd
E140: Hamilton Lane Co-CEO on the $950 Billion AUA Business
Fri, 21 Feb 2025
In this episode of How I Invest, I sit down with Erik Hirsch, Co-CEO of Hamilton Lane, a global leader in private market investing. Erik discusses the evolving landscape of private markets and the integration of digital tools like tokenization in investments. He dives into how private markets are becoming more accessible to retail investors and the future of asset management, with a focus on education and technology. From the role of RIAs and wirehouses to the impact of digital wallets and tokens, Erik provides deep insights into what’s next for investors at every level. If you're curious about the future of investment opportunities and how they will change by 2030, this episode is a must-listen.
Chapter 1: Why is Hamilton Lane interested in the retail market?
It makes sense why retail investors would want to diversify and own more in private assets. What's a little bit harder to understand is why somebody like a Hamilton Lane, you have today $950 billion in AUM and AUA assets under advisement. Why do you care about the retail market? Why even spend time on the retail market?
Those who have pensions today have been significantly benefiting from private market allocation because as we just talked about, those pensions have 5, 10, 15, 20, 25, up to sort of 40% in the private markets in some cases. And the fact that sort of the average American, the average saver, hasn't had any exposure to that, I think is just an inequality.
And we're big believers that we have a real retirement crisis here in this country that needs solving. And one of the ways to solve that is to give people access to more tools. The second part is we're a business. And if you just look at the pure opportunity set, the amount of capital in the hands of individual savers globally is tens of trillions of dollars. So it's a massive market.
And again, if we look at sort of average exposure of that investor base, average mass affluent individual has an exposure of 0%.
Last time we chatted, you mentioned that the 60-40 portfolio is a fallacy. Why did you say that?
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Chapter 2: How is the 60-40 portfolio considered outdated?
The markets have evolved enormously since that sort of mindset was sort of put into sort of the common thinking. One, fixed income today in a purely public sense is just not what it was decades ago when you were often seeing double-digit interest rates. And the 60-40 portfolio completely omits one of the best performing asset classes, which has been the private markets.
And so if you look today at where investors are pivoting, they're frankly mimicking what's been happening in the institutional world. You couldn't find me an institutional investor today that's sophisticated, that has a 60-40 portfolio.
Most of them today in the institutional world have a public equity portfolio that is probably 50% at max and then has huge exposures to things like private markets, other alternatives, including hedge funds.
What is the driving force behind why more retail investors are starting to invest like institutional investors?
Chapter 3: What changes are driving retail investors to mimic institutional strategies?
I think it's really twofold. One, for the first time, mass affluent individuals now actually have access to this asset class. where five years ago, they just didn't. The structures weren't there. There's been some changes in some of the regulation, but it's mostly around products that have come to market that are actually affording them the chance to do it. So what are those products?
Those products typically are evergreen products with relatively modest minimums. Again, in traditional private markets, you would often see minimum investments at $5 million or more. So obviously that's not obtainable to an individual investor. That's really just ultra high net worth individuals.
But if we're talking about mass affluent investors, having fund vehicles today that are now starting at sort of $50,000 minimums has been a real change. So that's sort of number one. Number two is that the retail investor is now seeing what the institutional investor has been seeing for some time, which is when you look at performance,
the public equity market versus the private equity market, and look at that over a 10, 15, 20, 25, 30-year timeframe, the outperformance on the private side has been significant.
And so if you talk to an endowment, a sovereign wealth fund, a pension fund, a bank, an insurance company, and you ask them why their exposure to the private markets has been moving up and to the right over the last few decades, they're gonna really say to you two things. One, performance. And two, diversification.
Performance is intuitive. Private assets outperform public assets, at least half for the last 40, 50 years. why are private assets inherently more diversified than public assets?
So if you think about what's been happening in the public equity market, today in the US as an example, there's about 4,000 listed companies. And that number over the last several decades has actually been in decline. Sure, it might vary or move up or down year to year.
But if you look at the long-term trend, the number of public companies going from the 80s to the 90s to present time has actually been down and to the right. Why? Well, Couple of reasons. You need to be much bigger today to be viable public. Two, being public is time consuming, it's expensive. Ironic, we are a publicly traded company, HLNE on the NASDAQ.
And it often can force companies to have sort of very short-term mindsets where a lot of CEOs want to have very long-term mindsets. And on top of all of that, the private markets have grown so much that they are a huge capital provider.
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Chapter 4: How does the decline in public companies affect diversification?
So back in the 80s or 90s, if you were a certain size business, you kind of had to go public because there was no other choice for liquidity or to sort of deal with shareholder issues. None of that is true anymore because of the size and the scale of the private markets.
And the last thing I would say is, so aside from the fact that there's fewer publicly traded businesses, the concentration in the public markets has never been higher. We've all been reading, we all hear about it endlessly, but it's a point that's worth repeating. You've got a handful of businesses today that represent an enormous portion of the overall market cap of the public indices.
And when you sort of realize that for most investors, they've gone with a passive index kind of style investing, they've got duplicative exposure all over the place in a very small number of businesses.
Today, you have the Magnificent Seven accounting for anywhere from 20% to 30% of the entire market cap based on how it's trading that day. In addition to your point, it seems that companies that are going public are a certain type of business that may not be reflective of the overall economy.
So you might have entire sectors, for example, crypto up until the recent election, most crypto companies couldn't even go public. So you had this...
unintended concentration that you that investors were just trying to get the market but really they're concentrating a very specific size very specific vertical the industry breakout between what the public equity markets embrace and where the private equity markets actually deploy capital are noticeably different so while you think of venture capital as being very tech oriented and it is venture capital is actually a minority portion of the private markets
So the private market's exposure to venture is less than the public markets. The private market's exposure to energy, for example, significantly less than the public markets. So even if we just sort of pie charts of industry sector allocation side by side between the public side and the private side, you would also see a huge amount of differences.
And of course, from just an average size of company, The private markets are doing a whole lot of investing in businesses with enterprise values that are sub $100 million. Name for me the number of public companies that are sub $100 million. Name for me the number of public companies that are even sub a billion dollars today.
Again, it has become such an incredibly mega cap weighted part of the market. And this isn't to sort of say that people shouldn't have public equity exposure. Of course they should. But the idea that you're going to have an equity strategy today that doesn't have both I think that's misguided.
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Chapter 5: What are Hamilton Lane's strategies for approaching the retail market?
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A few reasons. One, I think we're a big believer in our asset class and think that everyone should have access to it. So if you just kind of think from an equality standpoint, essentially what we've gone in the U.S. society and we've gone and done is to say, Most Americans were getting retirement decades ago via pensions.
So that was the norm is that you put in your time, you got your pension, you economically could plan and budget for your retirement because you sort of knew what that payment was going to be. And then we sort of shifted dramatically where very few people today actually receive pensions. And most of us are left to kind of save on our own.
whether we're using a Roth or a 401k, essentially the burden of retirement planning has completely shifted from sort of your employer to the employee.
And from an equality standpoint, those who have pensions today have been significantly benefiting from private market allocation because as we just talked about, those pensions have five, 10, 15, 20, 25, up to sort of 40% in the private markets in some cases. And the fact that sort of the average American, the average saver hasn't had any exposure to that, I think is just an inequality.
And we're big believers that we have a real retirement crisis here in this country that needs solving. And one of the ways to solve that is to give people access to more tools. The second part is we're a business. And if you just look at the pure opportunity set, the amount of capital in the hands of individual savers globally is tens of trillions of dollars. So it's a massive market.
And again, if we look at sort of average exposure of that investor base, average mass affluent individual has an exposure of 0%. So for us as a business, this is a big, powerful wind at our back growth engine.
Let's assume that the market size for retail is tens of trillions or hundred trillions of dollars. How does Hamilton Lane attack such a fragmented market?
Through a variety of channels. So one, we have these sort of direct to buyer. And the buyer in this instance is more of a wealth advisor. We're not literally knocking on doors and sort of handing out pamphlets and looking for subscription docs. So most people who are mass affluent today are using some sort of a wealth advisor.
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Chapter 6: Why might liquidity be overvalued by retail investors?
We've been fortunate enough to be vetted in diligence and have been placed on a couple of those wire house channels where, again, we're sort of partnered with them. We're a product that they are. recommending to customers. And so that's also happening.
And then channel number three is just using a variety of different strategic partnerships, including some non-traditional, although I hope they're becoming more traditional, but things like tokenization. So you can actually find some of the Hamilton Lane products today available on a variety of different token exchanges.
So in the US, think about a company like Securitize, where you could register, build yourself an account, open up your own digital wallet, and then begin to transact in the token world. And there you would find a variety of Hamilton Lane products available today for you to purchase.
So when you attack the retail market, is this more like a push where you're advertising and you're educating? Is it more like a pull coming from wire houses or RIAs?
So I think it's both a push and a pull. So on the push side, obviously, we're focused on building our brand and getting our message out there and educating people on the benefits of the return, the diversification, et cetera. And some of it's a pull.
So in the institutional world, Hamilton Lane is one of the absolute largest managers of private market capital, helping institutional customers build out and gain access to this asset class. So we're incredibly well known within our industry.
And that results in some pull where people are saying, well, if they're doing this service and building portfolios for this pension or this government or this sovereign wealth fund, I'd love to have them do that for me. So it's a bit of a mix. And the other piece we're trying to work on is making all of this easier and more streamlined. I mentioned the tokens as one of those examples.
You know, the institutional world in this asset class is fairly antiquated. Lots of subscription docs, lots of paperwork, illiquidity, long, long duration. On the retail products, what you're seeing is things like these evergreen products actually have monthly redemption features. And in a token world, it's much more of a click and purchase, you know, again, digitally native.
And so trying to make that sort of buy experience just much easier, faster, cheaper, et cetera, for that customer base.
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