Just happened

Retail’s summer break
Raising capital from individual investors is all well and good… until they go on holiday. Speaking on Hamilton Lane‘s Tuesday earnings call, vice-chairman Erik Hirsch pointed to “softness” in retail inflows throughout June and July, which it expects to continue this month and rebound by the autumn. He attributed the softness to “a combination of summer doldrums across the retail sector, and significant public debt and equity decline that have caused investors to simply pause their investments”. By way of comparison, the firm posted net inflows of over $100 million for each of April and May.

“Investors are just not feeling pressured… to make decisions at this moment in time,” Hirsch said. “You add… the huge volatility and geopolitical uncertainty that’s looming out there and the market is gyrating. And I think the combo of that just has people taking a pause.”

Hamilton Lane’s evergreen platform has now amassed nearly $2.8 billion in assets under management. Its offerings in this space include the closed-end Private Assets Fund, a multi-strategy investment vehicle with about $392 million in AUM, and the open-ended Global Private Assets Fund, which launched in 2019 and has about $2.2 billion of AUM. The latter is open to retail and wholesale investors in Australia and New Zealand, Canada, parts of Europe, Asia, Latin America and the Middle East.

A summer lull does not seem to have dented fundraising efforts for the firm’s latest secondaries fund: Secondary VI received commitments of more than $145 million from retail investors, representing nearly 14 percent of total capital raised so far. The vehicle had gathered $1.1 billion at quarter-end and will continue to raise capital until April 2024.

VC secondaries: A big deal
The venture capital secondaries market is far bigger than most estimates suggest, our colleagues at Secondaries Investor report (registration required). There was around $105 billion of transaction volume in 2021, split roughly 60/40 between LP interests and direct secondaries, VC secondaries buyer Industry Ventures concluded in How Big is the Secondary Market for Venture Capital? This represents a 72 percent increase on 2020, and is 40 percent up on the previous record year of 2019. This growth derives from a rapidly expanding primary market: VC funds raised $1.7 trillion in the last 10 years, compared with $406 billion in the 10 years prior to that.

As is the case in the PE secondaries market, there is a gap in pricing expectations between buyers and sellers of VC stakes. The decline of tech stocks and the resultant impact on private valuations is likely to compel sellers to cut their losses via the secondaries market.

Essentials

Bracing for a hard landing
As the asset class braces for a potential recession, Stephen Roseman, founder of risk finance provider 1970 Group, told our colleagues at Private Funds CFO he has seen an increase in the number of PE firms enquiring about insurance collateral funding (registration required). This strategy allows PE sponsors to repatriate capital faster and extract better returns from their portfolio companies, which in turn builds a higher IRR. Using “trapped” insurance collateral, companies gain the liquidity they need to allow it to grow – or even survive – during difficult times.

Larger companies will often opt for loss-sensitive insurance policies to lower their premiums on workers’ compensation, commercial vehicle and other company insurance to try to manage costs. But loss-sensitive insurance policies require collateral, and the insured companies typically use a bank letter of credit to do that, effectively drawing down liquidity. “This is a drain on corporate liquidity, hindering the owner’s ability to redeploy capital,” Roseman said. “Our solution solves that problem: we finance corporation’s collateral for their insurance programmes.”

Capitalising on the talent tussle
With talent acquisition and retention among the biggest factors limiting the growth of portfolio companies this year, many US private equity firms have invested in companies that focus on recruiting and staffing, our colleagues at PE Hub report (registration required). Notable deals recently include TA Associates backing iCIMS, a provider of cloud-based talent acquisition solutions, in May; Infinedi Partners backing Chicago-based staffing firm LaSalle Networks in February; and the Halifax Group’s June investment in Houston-based the Liberty Group, which provides staffing and screening services to the real estate sector. As the Great Resignation continues to shake up global markets, expect to see PE increasingly gravitate toward these types of businesses.

Today’s letter was prepared by Alex Lynn with Carmela Mendoza and Madeleine Farman.