Investing Billions - E140: Hamilton Lane Co-CEO on the $950 Billion AUA Business

Episode Date: February 21, 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.

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? And 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? I think the markets have evolved enormously since that sort of mindset was sort of put into sort of the common thinking. One fixed income today and in a purely public sense is just not what it was decades ago when you are often seeing double digit interest rates. And the 6040 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? 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 fun 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 and 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 going to really say to you two things. One, performance and two, diversification. Performance is intuitive. Private assets outperform public assets in these 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 sort of down and to the right. Why? Well, a 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, HL&E on the NASDAQ. And it often can, it 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. 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 market. 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 markets exposure to venture is less than the public markets. The private markets exposure to energy, for example, significantly less than the public markets. So even if we just sort of put 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.

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? Managing a venture capital firm is complex fundraising, reporting compliance, it all adds up, but what if there was a smarter way?

Juniper square is transforming the private markets investing experience. More than 2,100 GPs trust Juniper square's connected software and services in order to raise capital more efficiently, reduce operational risk and deliver a world class LP experience. Want the freedom to focus on delivering investor results? Visit junipersquare.com slash VC to get in touch with the Juniper Square team today. 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, in, 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've got your pension, you, you economically could plan and budget for your retirement. Cause 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 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%. So for us as a business, this is a big, powerful, 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 fragments in 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. So channel number one is a Hamilton Lane sales team directly engaging with wealth advisors around the world, educating them, showing them why our product we think could be a good fit for customers, and engaging that way. Channel number two is actually through

some of the wealth advisors themselves. So think about the wire houses, the big bank wealth platforms. 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. 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, etc. 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 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. Your philosophy is that the retail investor is overly fixated on liquidity.

Why is that? All investors have been a little overly fixated on liquidity, and I don't think it served them well. I think you've seen some real changes in that thinking in the institutional side, and I now see that migrating more on the retail side. If you are a 45 year old saver, and this capital that you're talking about investing

is really for your retirement, you're talking about a capital that's not even going to get access for probably at least 20 years or more. Why do you want all of that in fully liquid securities? I think frankly, it's a, it of is it leads to bad temptation. What do we see when we see sort of significant market corrections? We see a lot of savers do the exact wrong thing, which is. They're quick to pull out of the market. Because they get a little panicky and then inevitably they're slow to

return into the market. And so they kind of miss that correction. So if you look at studies between institutional investment performance and then inevitably they're slow to return into the market. And so they kind of miss that correction. So if you look at studies between institutional investment performance and retail investment performance, institutional side wins pretty consistently. Why? Well, I'd say it's really two reasons.

One, they're much more illiquid and they have access to the privates, but you don't see them trying to market time as much. So I'm not here to advocate that everyone should take all of their savings and put it all into the private markets and have it be relatively illiquid. I am saying the notion that taking your retirement savings, again, you might not be accessing for decades and thinking that all of that needs to be fully liquid seems a little misguided to me. Quiddity could not only be something that's not bad, it could actually be something that's good.

If you're shopping and you buy a bunch of junk food in your home, you could be very disciplined and not eat it or the better solution is just not to buy that junk food at all. We are our own worst enemies and so I think one of the great protections is often from ourselves. You recently announced that you're tokenizing Hamilton Lane funds. Why are you tokenizing? So let's talk about what tokens are and what they're not.

So tokens are not crypto. The only thing they share in common with crypto is the idea that they're both a bit of a coin, but more importantly, they both share a blockchain backbone. So if you're an investor today and you wanna trade stocks, you go to your broker of choice and you open up an account. And in doing that account, they're gonna put you through a qualification process.

They're gonna put you through an anti-money laundering process and they're gonna put you through a kind of what They're going to put you through an anti-money laundering process. And they're going to put you through a kind of what's known as a know your customer process. And once that account is open, you are free to buy and trade stocks to your heart's content. You're not asked to sort of re-verify yourself or every time you want to sell, sell a share of stock, the broker does not say, Hey, fill out a million

sheets of paperwork to verify who you are. In the private fund world, each of those fund managers is required to take you through that anti-money laundering or that know your customer process every time you're subscribing to a fund. In a token world, you can go pick, and there's now a variety of token exchanges. I mentioned Securitize as a big example here in the US,

but you can open up an account. You can fund it with whatever funding mechanism you want. You're gonna go through that KYC AML process one time. You're now gonna have your digital passport and you're gonna have a funding mechanism. And then depending on your qualification, because as we know, there's different and you're gonna have a funding mechanism. And then depending on your qualification, because as we know, there's different

between qualified purchaser or accredited investor. So depending on kind of your net worth and what sort of qualifications levels you meet, your shopping universe will be tailored to you and you'll see a variety of products there today. And if you want to purchase, you can click on them, you can see all the fund information, and then it literally is a click and buy. So it is truly better, faster, cheaper for the customer. And you have the added benefit of being able to now have your digital wallet housing all of your digital assets in one place.

So rather than you having invested in five or six private markets funds with no ability as an individual to kind of house those or analyze those or store those in one place, now with the digital wallet, you can simply pull up your phone, see your private markets portfolio, see your cost basis and your exposure and what's happening on a performance standpoint. So it's much more attuned to what we all do today in the public equity world, where if I said to you, hey, you want a screen share

and show me your public equity portfolio, you'd log on to one place and you'd pull up your portfolio. We could run some basic analytics around that. And that would be, it's empowering. I think it's comforting. And it sort of allows you to make better decisions. And I think all of those are good things. Let's imagine, let's fast forward to 2030. And retail is now in the institutional market. Does it look simply like you open up your Fidelity account or your Goldman Sachs private wealth account, and you see a tab for private and then public assets.

And how does that affect the end retail client? I think that's where this is heading. I think this is a, you know, kind of here to date for again, mass affluent investors. It really has been fixed income, public equity, and that's it. And I think we're just now heading to a world where it's going to be fixed in fixed income, public equity, and that's it. And I think we're just now heading to a world where it's gonna be fixed income, public equity, private markets.

And again, private markets means a variety of different sub-asset classes, real estate, infrastructure, private credit, venture capital, growth equity, leverage buyouts. So even within the private markets, no different than the public markets, there's still a whole wealth of different strategies there that will allow investors to build out appropriately,

risk adjusted, risk tailored diversified portfolios, no different than they're doing today in the public side. The key roadblocks that, what key roadblocks are keeping this trend from happening quicker? What are the roadblocks and how could they be accelerated? I think we're here. So if you look at Hamilton Lane, just as a one small data point, today we're already managing billions and billions and billions of dollars of this in the retail market today.

So while it's not majority of our assets today, as you noted, we're very, very big company, it's a meaningful driver. And it's certainly been one of our bigger growth engines. So we're here. So I don't think this is a roadblock issue. I think what you're talking about is we're in very early innings of this whole development. And I think the biggest impediment, if you will, to kind of well, why not, why not faster, is really an education issue.

That a lot of advisors, a lot of investors are still not totally familiar. And I think some of the questions you're asking are sort of right on point and are very akin to what they ask, well, like, why do I need this? And what are the benefits? And why is it more diversified? And why is the outperformance there?

And there's also a lot of myths about the private markets. And so a lot of people haven't seen good private market data, or they've been told things like, well, if you just lever the S&P 500, you can replicate the private markets, things that are just not factually accurate and are not data driven. And so this is a process where firms like ours and others are going out into these markets and spending a lot of time educating, answering questions, debunking myths to provide the

individual investor, frankly, some of the comfort that the institutional investor has already had now for some time. RIAs and wirehouses play a critical role in the ecosystem. How does that partnership work and what needs to happen there in order to accelerate this trend? I think it's really the same answer. I think it's time and education. The wealth advisor is really kind of the gatekeeper at the end of the day of the capital. Many of them have discretion or some level of that and they've been charged as the fiduciary. And so they all take their role appropriately seriously and want to absolutely do right for their customer

and make the right decision. And so for them, no different than the customer, it's not only a, why should I do this? But it's why should I do this with you? And so that is back to education, education, education, and building out those relationships where we become seen as that trusted partner for them, education, education, and building out those relationships where we become seen as that trusted partner for them, just as we're seen as that trusted

partner on the institutional side. RIAs incentivize to push private markets more than public markets or vice versa? Do they have incentive to do one or the other? I think they have incentive to do what's right for their customer. And as you know, in that industry, there's been all kinds of sort of changes on sort of fee levels. So you see a lot of RIAs today that are fixed. So they're not there's no economic benefit from pushing this or pushing that. I think that's much more of the trend. So today, I think their incentive is have their customer have a great experience so

that customer stays. We last chatted, you mentioned that individual investors have different expectations from their institutional counterparts. How are those expectations different? Financial services industry is evolving rapidly. Reed Smith's team of over 200 financial industry group lawyers helps clients navigate the complexities of the sector in an era marked by technological advancements and AI. Reed Smith's lawyers have a deep understanding of market dynamics, legal frameworks, and regulatory developments, and advise financial institutions and technology companies on financing, lending, investment management, restructuring, insolvency, and litigation. restructuring, insolvency, and litigation.

Well, I think this is an interesting item to sort of focus on and think about how this all plays out. Go back to our earlier discussion on tokens. Today, the typical individual investor is very smart device driven. That's not how the institutional investor sort of thinks about their portfolio. You don't see a lot of pension managers sort of walking around, you know, trading stocks on behalf of the pension via their phone. But the individual world is very much technologically oriented as we all are in all facets of our life. And so I think those expectations are going to carry through as they now enter this marketplace. And so to be a successful provider, firms like ours are going to have to meet

the customer where they are, we're going to have to adapt and add technology to make sure that the customer is having a good experience with this asset class, and that it's much more akin to what they're accustomed to on the public equity side. To step back, how did you become the co-CEO of Hamilton Lane? Well, it depends on who you ask. Some could say desperate times, desperate measures. I'd like to think that I was qualified. As a firm, we've been around for over 30 years. We've

had one CEO during that entire timeframe. He's a good friend and an amazing partner to me and to the rest of us here. He's still very active in the business, but it got to a point where it was sort of time for a bit of a change. And we opted to go with a co-structure for a couple of reasons. One, the company is just getting very, very large and has a lot of different aspects to operating it successfully. And two, we have offices truly all over the world. And so my partner, my co-CEO, Juan Delgado,

is actually based in Hong Kong where I'm based here at company headquarters outside of Philadelphia, Pennsylvania. And so a bit of a divide and conquer strategy. We don't focus on the same items. We're not in the same geographical territories. Pennsylvania. And so a bit of a divide and conquer strategy, we don't focus on the same items, we're not in the same geographical territories. And so all of that we think has been really helpful to kind of continuing to move this firm

forward successfully. What are the advantages and disadvantages of being in Philadelphia versus say, in New York City? Thank you for listening to join our community and to make sure you do not miss any future episodes, please click the follow button above to subscribe. The company was founded outside of Philadelphia, so we've never really known anything different. But I think it's played some has brought some huge

advantages. One, people always say that that Philadelphia is one of the places that can be sometimes hardest to recruit into, but also one of the hardest to recruit out of. And so a lot of our employees have a tie to this area. It's a huge metropolitan area. And so we have with one of, by the way, one of the areas that has the most concentration of colleges and universities anywhere in the country. So young talent here is plentiful. The cost of living is substantially less. So I think all that sticky with our employees, a lot of our employees are homeowners,

again, have some family ties to the area. New York is a very, very short train ride away, but I think it's helped us foster a bit of a different culture where we feel a little bit different than kind of the typical New York investment firm. We've consistently won kind of best place to work in money management, which I think is a real testament to that.

So I think what we've built here is special. And I think, you know, it's been a great sort of journey of seeing this firm go from kind of a twinkle in the founder's eyes to today, one of the largest providers and players in this marketplace. And I do think that our affiliate roots has certainly helped with that. Did you underappreciate when you started at the beginning of your career that ended up being really important and really led to your success in your career? Question 52 years old. I started at the firm when I was in my mid twenties, young, egotistical,

brash, didn't know what the hell I was doing. And I think at that point you make a lot of mistakes that hopefully if you're successful you eventually mature and you grow out of them. I think today I have just a much more nuanced appreciation for people, relationships, behavior, building culture, and why all of that matters. I think if you had interviewed, you know, 27 year old Eric Hirsch, he would have been talking much more about performance and deals and all those things are important, but if you don't get the people part right, at the end of the day, we're a people business, we make decisions, that's what we're hired and paid to do. And so getting all of those aspects right

is sort of paramount because if that's broken, it doesn't really matter what's happening with the rest of the pieces. What compounds within Hamilton Lane and what do you have to start from zero month over month? You think about the infrastructure that we've built here, it's significant over 20 offices around the globe, about 800 employees. So things like deal flow compound, brand compounds,

a lot of those pieces of being kind of a 30 plus year player in the space, being successful, being a market leader, being public, a lot of those lead to compounding aspects. But I go back to the people part, the culture and keeping the culture healthy, and adjusting the culture to the fact that society continues to adjust and evolve. We're growing, so we're always hiring a lot of new people, getting them sort of introduced into the firm and integrated into the firm in a way that's good for

their career as well. And they feel like they want to belong here and be part of this. That sort of takes work every single day. What is Hamilton Lane's plans when you guys reach a trillion dollars, AUM and AUA? There'll be a pizza party or something. I mean, at the rate we're growing, we're going to get there pretty quickly. And so that is not something that is often the distant future. I think that's something that we will be tackling in the very near future.

What would you like our audience to know about you, about Hamilton Lane or anything else you'd like to share? Look for a number of years. The stock has been tremendous. It's been one of the best performing financial services stocks, period. And so I think all that comes back to the people is that what we have built here is unique.

It's special. You can feel it when you come into our offices. There's a real camaraderie. There's a real sort of focus on doing what's right for the customer. Our employees, there's a lot of young people that work here. They like the fact that they're in a vibrant, growing industry. And all of that feels exciting. It feels challenging.

It feels innovative. And I think that leads to a great place to work and a great firm to be a part of. Well, Eric, I appreciate the friendship. Appreciate you jumping on the podcast. Look forward to sitting down in Philadelphia, New York City very soon. Enjoy the conversation. Thanks so much. Thanks for listening. If you enjoyed this episode, please share with a friend. This helps us grow and also provides the best feedback when we review the episode's analytics. Thank you for your support.