Private markets valuations have been the source of some consternation over the past 12 months.

Their resilience relative to the public markets has left many investors with allocation headaches and prompted some to question whether the asset class’s valuation mechanisms are wholly accurate.

Hartley Rogers, chairman and investment committee member at asset management giant Hamilton Lane, is not one of them. In an interview with Private Equity International, Rogers tells us that he believes private markets valuations are “broadly fair” for a number of reasons.

Why do you think private equity valuations have remained so resilient, given the decline in public markets?

If you just look at the average private equity investment in given vintage years or at given times, you’ll generally see meaningful outperformance versus public markets. And that outperformance can expand or contract depending on what the public market environment is.

Interestingly, the most challenging environment for private equity is the one where public markets are up significantly, because private equity valuations are not as volatile as public market valuations. The kind of accepted beta of private equity is about 0.4, 0.5 percent. And so when you have the public market rising rapidly, private market valuations can take a little longer to move up.

If you’re really doing your valuation work right, then you’re looking at the sectors that the companies are actually in. Private equity is still a relatively small industry in the global financial landscape and doesn’t play in every sector evenly. So, it’s easy to look at what happened with some of the indexes last year and ask: ‘Why isn’t [PE] falling as much?’

Nearly 30 percent of stocks in the S&P 500 were up in 2022, and something like 15 percent of MSCI World companies were up more than 10 percent. Many of the sectors that private equity operates in tended to be sectors that didn’t do so badly last year. Now, technology did suffer; obviously late-stage venture, software buyouts – things that were more impacted by what’s going on in the tech valuation area. But broadly speaking, the private markets industry plays in sectors that are not heavily aligned with that.

Is there a risk that private equity valuations won’t match what an asset is actually sold for?

GPs don’t like to surprise LPs to the negative. In other words, if they’re carrying investments above where they can actually sell the investments, that would be a bad experience for LPs.

I think there’s also a history of valuations in private equity being a bit conservative relative to public trading multiples. So if you have a situation where public trading multiples come down, there historically has been an element of cushion in the private market valuations because the public multiples might be up here, and they’ll come down, but still the privates are lower.

And then there’s the performance of private equity-owned businesses. In the last few years, there’s been very strong performance in many portfolios where revenues and earnings and margins have been better than what you might have seen on the public side. That’s in part because the control exercised by the private equity [firms] means they can put people on the board who will then have real impact in the underlying companies. You have alignment of management teams with shareholders in a very carefully constructed, well-thought-out way to make sure that companies are meeting their goals.

Do you think GPs are likely to hold on to assets for longer, given that potential buyers may not agree with their valuation?

We haven’t really seen that so far. What we’ve seen is that it’s not really relative to the valuations. In other words, I think values are broadly fair in the private markets.

I think that the reason they haven’t fallen as much as public market values are some of the things I talked about in terms of the sectors. I’m not saying [the system is] perfect; of course there are examples where someone has marked their company too high because they made a mistake… I’m just saying I don’t believe that there is a valuation issue in the private equity industry.

Hartley Rogers is chairman and an investment committee member at Hamilton Lane. As chairman, Rogers plays a significant role in the firm’s investing and client relationship activities, as well as its strategic and organisational development. Prior to joining Hamilton Lane in 2003, Rogers was a managing director in the PE fund management areas at Morgan Stanley and Credit Suisse.