Hamilton Lane sees more volatility ahead

The fund of funds manager expects global growth across all markets in the coming months to be lower and the pressure is on LPs to make sound fund selections, says Hamilton Lane chief investment officer Erik Hirsch.

Global growth rates will remain below those experienced in the 1990s and more volatility is expected in the coming year because of growth of the overall debt market, an ageing demographic and deflationary pressures, Hamilton Lane’s chief investment officer Erik Hirsch said on a media call.

With regard to the US raising Federal Reserve interest rates, the firm expects this increase to be relatively small – most likely a quarter point and likely before the end of the year. “From a private equity standpoint, we are looking forward to a softening of interest rates. That kind of raise in rates is not going to have a material impact on people’s ability to finance acquisitions nor is it going to have an impact on existing deals already done.”

“A lowering of the public markets would frankly just bring a slightly better buying environment for private equity. A rate hike in that context will be seen on a positive basis.”

In other markets, Hamilton Lane expects between 5 percent to 6 percent growth in China, driven by improving consumer sentiment. Europe and Japan show upside and these economies’ currency depreciation will be a good driver for faster than expected growth.

The pressure is now on all limited partners to be good selectors of assets and there is a real chance to create out or underperformance based on their selection. He added that consumer staples is the safest and most interesting area to invest capital in now.

On co-investments, Hirsch said: “If you do it well, it’s an incredibly attractive way to go about deploying capital. But buyer beware, when done poorly, it can be end up becoming one of the least attractive parts of the market.”

Juan Delgado-Moreira, managing director for Asia and head of international at the firm, reported that Asia-focused private equity funds have risen on average 24 percent per year since 2005.

“In terms of distribution, 2015 is likely to be a record year – there’s a major shift in investing considering how much liquidity has picked up and the levels it is reaching. As the trends suggest, 2015 is the first year where private equity is on pace to be self-funding.”

When asked about the strategies they are finding to be more attractive, Hirsch said: “We’re looking for managers that are adept and experienced at having multiple exit channels. Asian managers who have been solely reliant on the public markets for liquidity haven’t fared as well as those who have a more facile exit background.”

With regard to the asset class going under fee pressure, Hirsch said customers want more and want it cheaper and private equity is not unique or exempt from that pressure.

He added that historically net performance for private equity continues to outperform other asset classes on an absolute and risk-adjusted basis, and as long as that spread continues to be as large as it is, private equity will charge premium fees.

“The fees are generally coming down over the last five years and that pressure will continue to extend, but there won’t be any massive wholesale change across the asset class,” Hirsch said.

“Frankly the more money that comes into the marketplace, the more power shifts back to the GPs. You’re seeing that power shift back to them because fundraising has been comparatively easy. There’s an awful lot of money flowing in and customers are continuing to seek better and better deals. We’re more in a GP-centric world than an LP-centric world,” Hirsch said.