Here's how an investment firm overseeing $469 billion is using private markets to withstand stock meltdowns - and where it recommends you put your money

Business Insider | Jun 12, 2019, 03.28PM IST

  • The private-equity market is known to outperform the stock market on a long-term basis.
  • Research conducted by Hamilton Lane - an investment firm overseeing $469 billion - further shows that, unlike in stocks, returns in one corner of the private-equity market hold up even in the most volatile market environments.
  • The firm's chief client officer explained to Business Insider how investors can cushion their portfolios, and offered some of his top recommendations right now.
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Volatility is a fact of life for every investor.

But for those who dread the unique stings of the stock market, consider the cushioning that private equity can provide.

To be sure, private markets are vastly more illiquid than equities and can contractually require long-term commitment. That's very unlike the stock market, where profits can be taken in an instant so long as there's a willing buyer. Also, certain investments - like those in venture capital - all but guarantee early losses as companies get their feet off the ground.

But during times when the stock market is under intense pressure, private-market returns have stood their ground, according to research conducted by Hamilton Lane, a $469 billion alternative-investment firm. Research compiled by JPMorgan and various other firms also shows that private equity has outperformed global and US public markets over the long term.

"The data shows you're going to get that edge whether we're in high volatility or low volatility," said Jeff Meeker, the chief client officer, during a recent interview with Business Insider at the firm. "Whether that continues or not, we'll see. But at least historically, you have."

He was referring to research he conducted into how public markets and the buyouts corner of the private market have fared during various periods of volatility. As the chart below shows, returns from stocks in excess of the risk-free rate have buckled in the most volatile environments, as one would expect. However, returns from buyouts have maintained their premium over stocks across volatility regimes.

kn0419 riffs risk premiums and volatility regimes

Hamilton Lane

The best-performing investors in the private markets are consistent and willing to make tactical adjustments to what they are overweight and underweight depending on the prevailing market environment, Meeker said.

They also don't try to time the market. Doing so is essentially making short-term decisions in an asset class where success can take more than a decade to unfold.

For example, the firm was putting money to work as limited partners shortly before the 2008 financial crisis tanked the private market. That seems like the opposite of what it should have been doing if it was trying to time the next crisis. On the other hand, investors who, fearful of another crisis, have waited on the sidelines in the post-crisis era have missed out on all the good years.

Read more: A duo of stock pickers crushing 96% of their peers unpack their tactics for finding companies that customers can't live without - and reveal their top picks

One concern for private investors has centered around the hot venture-capital space, where money-losing tech companies have attracted staggering amounts of capital and are now rushing to cash out through initial public offerings.

Meeker doesn't see venture capital as a major source of concern. The venture space is a small portion of the broader private markets and of most investors' individual portfolios, he said. He added that the rush of companies going public means that liquidity is being returned to investors who got in early and had their money locked up for years.

Despite the current IPO boom that Uber, Lyft, Slack, Airbnb, and other companies are participating in, the broader picture is that more companies prefer to stay private for longer. It's a trend that happened to have preceded the financial crisis and the dotcom bubble, according to Goldman Sachs research.

Historical analogs aside, Goldman also observed that investors increasingly prefer to exit via later-stage rounds of funding instead of through IPOs. The reasons include the creation of giant funds like SoftBank's $100 billion Vision Fund, and a desire to avoid the scrutiny that comes with disclosing financials ahead of IPOs.

Meeker agrees that the private-for-longer trend helps investors. "It means even though more capital's been raised and more players have come into the space, we've got a much bigger pool to pull from," he said.

His firm is hesitant to make any major sector-specific bets because of the associated risk. But listed below are a few areas where it sees opportunities for private investors:

  • Private credit has been one of the safest corners to invest in over the past 30 years, and is expected to do well even if the broader market environment turns for the worse.
  • Small and mid-market buyouts have historically been outperformers on a risk-adjusted basis.
  • Investors should be exposed to emerging markets, and many already are through public markets. But this is an area to lean out of in the private space because of the additional regulatory and currency risks that many countries present.

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