The Compound and Friends - Erik Hirsch, CEO of Hamilton Lane, on the Explosive Growth of Private Markets

Episode Date: September 28, 2026

On this episode of Live From the Compound, Michael Batnick is joined by Eric Hirsch, CEO of Hamilton Lane, to discuss the state of private markets, why private equity is more correlated with public markets than investors may think, and what separates the best private market managers from the rest. They get into the rise of private credit, concerns around defaults and investor redemptions, the growing role of individual investors, why manager selection and portfolio construction matter so much, the booming secondaries market and controversy around day-one markups, plus why Hirsch believes private markets will continue to play a bigger role in investor portfolios. Sign up for ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Compound Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and never miss out! Instagram: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://instagram.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Twitter: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://twitter.com/thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ LinkedIn: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://www.linkedin.com/company/the-compound-media/⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ TikTok: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://www.tiktok.com/@thecompoundnews⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Josh Brown are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Ritholtz Wealth Management⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/advertising-disclaimers⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://ritholtzwealth.com/podcast-youtube-disclosures/⁠⁠⁠⁠ Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Live from the Compound. My name is Michael Batnik and I am very excited. I've been looking forward to this for a long time. I'm joined today by Eric Hirsch. Eric is the CEO of Hamilton Lane. Eric, welcome. Happy to be here. All right, so I want to start with a chart of Hamilton Lane's AUM. You took over a CEO when? So about two and a half years ago. Okay, but you've been with the company for a while. Long time. Join there in the late 90s. Oh, wow. Okay. So we have this going back to 2005. We took this from you. $6 billion in assets under management, to say nothing of assets under advisory, which puts you guys over a trillion dollars.

But from 2005, you've grown from $6 billion in assets to around $146 billion dollars 20 years later. Pretty incredible run. Obviously, you guys have done something right. So for the audience who doesn't know Hamilton Lane, a gigantic, publicly traded alternative asset manager, who are you? What are you guys all about?

Who are you and why are you here? Hamilton Lane is what we think of as a private market solutions provider. So we are not a fund manager like a Blackstone or a KKR. We're really a provider of capital into firms like that and many, many, many others. And so our client base is really any investor who's looking to access the private markets. So think of that as lots of institutional investors, pension funds, endowments, sovereign wealth funds, insurance companies, banks, etc. And then lots of individual investors.

And one of the misnomer's around this asset class is that most people assume, well, I can just do it myself. Doing the private markets is really hard. Finding access, identifying managers, building portfolios is frankly not something even very large institutional investors do themselves. They mostly outsource. And so we are effectively that outsource provider. I totally agree that this area of the market, you said it's an asset class. Yeah, sure, but there's a million different sub-asset classes. I mean, even private credit has a million different layers under that hood.

That's another misunderstanding is that I meet most people and we talk about the private markets. And I say, name me as many private market fund managers as you can. And the kind of the common names come spilling out very quickly. But once we get past, you know, 10 names or 12 names, they kind of get very quiet. And I say to them, okay, well, we have thousands and thousands. thousands and thousands more to go if we're going to actually name all the players in the market. So the vast majority of our market, the players in that space, no one's ever heard of them. Because they're raising primarily institutional capital.

They are managing a billion dollars or two billion dollars. And there's lots of them. And they're all over the globe. And they're all operating in different locales and different geographies, different subsectors to your point. So it's a huge industry. And navigating that is hard. Yeah. So I want to lead with this.

I am not anti-private markets at all. I think that there are some things with the industry and some of the things that I do have issues with, which we can get into. For example, not to harp on this point, but private equity, to me, is equity. I don't think that it's going to be, that returns are going to be divorced

from public equity returns. It's not going to be the same exact thing, but we're investing in the equity of a business. That's what we're doing here. I agree. I mean, our industry, when people used to say, say, and some people still say incorrectly, that, well, it's not correlated to the public markets.

That drives me nuts. It should drive you nuts because it's not true. It's totally correlated to the public markets. The reason why it can look less correlated or it's even sometimes uncorrelated is the reporting time lag, which is also another frustration about our industry, which is if you're in a private markets fund, a private equity fund and you're a limited partner in that fund, you're getting your statements at least a quarter lag after the prior quarter end. Well, that time lag, that's what, again, on a piece of paper, creates the notion of, well, this doesn't look super correlated. Yeah, because you just time lagged it out. But when you kind of erase that,

and mathematically you can, they're correlated. So, equity markets. If we have an honest conversation about it, as an investor, I understand that maybe even, forget about an illiquity premium, I love the fact that it's not marked on a daily basis, but don't lie to me about it. Don't tell me that it's not correlated. It's just a different marking system. Now, oftentimes, public markets have a freak out that has nothing to do with the underlying fundamentals of the business. And so it's okay that this gap exists, but let's just be honest and call it what it is.

I completely agree. I mean, I think just generally our asset class has been its own worst enemy because we generally don't do a great job talking about it. We took private to sort of the extreme, and so people thought that that was a good idea to kind of not talk about stuff. We've been misleading around this idea of correlation. So I think there's been a lot of, you know,

sort of bad spokespeople for the industry that have then created some of these misunderstandings, which are just not reality. Yeah, the democratization of this is another thing, and maybe we could talk about it. the history of the industry in private's assets out of 10,000 for view, it started, not started, it really blew up after David Swenson created the Yale model, tons of alpha, Bain and others came in in the 80s, and these private companies were selling at a legitimately unbelievable discount to public markets

because there was an illiquidity discount. And the leverage factor back then. It was astronomical. Shooting fish in a barrel. Right. Agree. That era is long gone. Long gone.

Long gone. It has been gone for decades. Okay. So there can't be alpha for everyone always. And so you could say that private assets offer maybe different return streams, different. So infrastructure. Yeah, that has nothing. Nothing.

That is not really where the S&P 500 makes its bread and butter. So we could be honest about that without saying. saying, if you're in the SEP 500, you're just invested in the max 7, and we're all going to die if that falls apart. I agree. So there are lots of good reasons to be in the private markets, but I would never recommend that a good way to access the private markets, you can't anyhow, would be through an index. Because not surprisingly, if we're talking about an asset class that has thousands and thousands and thousands of managers, you're going to have some really amazing managers and you're going to have some really lousy managers. And what's been interesting is the pundits, if you will, had sort of told us over time, hey, is this asset class gets bigger and more capital gets raised and time goes by, returns are going to compress.

They have to. They haven't. So they've actually stayed really wide. The dispersion of performance from kind of top to bottom is basically as big today as it was 20 years ago, despite a lot more capital coming in. But dispersion where? Because in venture, for example, the dispersion is huge. Dispersion's massive.

it's also massive in private equity. It's also big, by the way, dispersion in private credit has really wide dispersion. That's surprising. Yeah. Because it comes down to choice. The example I always use is,

let's say that, you know, I'm speaking to an audience in a room with 100 people. I say, okay, we're all, we're going to buy the hotel that we're sort of in for this event. And for the next 100 years, right, each of us is going to get a chance to be the CEO. Cart Blanche, full control, do whatever you want to do with that,

with this hotel. try to make it as good as possible. We're going to have wildly different outcomes with that. Someone's going to choose to invest in the food. Someone's going to choose to upgrade the rooms. And the clientele will tell you sort of what happens, but the results aren't going to be the same. And so when you look at private equity,

things like purchase price tend not to be a huge determinant of the outcome. It's what you do with the asset once you own it. And that comes down to the skill of the actual management team and the private equity firm that's backing them. And it's that human component to this that causes dispersion to be very, very wide because good choices get made and bad choices get made. I've never got an email saying we're in the bottom quartile of returns. No one has ever said that. I mean, it's been, it's laughable today if someone even comes in our office and wants to talk about quartiling because you sort of go, okay, you're top quartile.

So you're what? One of the top two or three thousand best fund managers. The question is, how many funds does an LP or an investor need to do to come? kind of get appropriate diversity. The answer for the Hamilton Lane customers is that most of them are doing far fewer than 10 funds per year. I mean, I would hope so. Right, because you think about each fund is going to do 10 to 20 or 30 plus companies inside of it. And so doing eight funds gives you hundreds of companies, and that's enough diversification. So one of the reasons why we exist is if we're going to see, you know, 1,500 funds this year that are in market trying to raise capital,

and we've got a customer that says, hey, my portfolio only requires six. The Hamilton Lane team needs to do a whole lot of work to take 1,500 to 6. And that's again back to kind of why we get to exist. You mentioned the work and the fact that most investors, and it doesn't matter if you're an individual investor, an RAA, a big platform, an institutional investor. It's really hard to diligence these companies. Hard.

The funds, the underlying. So I feel like when we're talking about private assets, we talk a lot about the structure. Yep. We talk about the performance. We talk about liquidity. But I feel like the portfolio management is actually weirdly almost an afterthought. And let's say I was sitting over the shoulder of some of your analysts and some of your portfolio managers. And I'm in the industry, but I wouldn't know what I'm looking at.

I would generally, but how would I know a good deal from a bad deal? Would I be able to diligence all 30 of the portfolio companies in there? Would I be able to understand the debt and equity capital structure who are the outside invest? All of it. It requires a lot of expertise. So it's difficult to diligence individually. So when people are investing in the Hamilton Lane funds, I would imagine that they're outsourcing

their diligence to you and they're getting comfortable with your team. Correct. So we are the asset manager for them. So we have discretion over the assets and we're doing that work. I would say two things. one, the first problem, if you will, actually starts with the access issue, because there's no rule that says, hey, you're going to go raise your private equity fund. You have to show it to everybody. The answer is the good managers want to do as little fundraising as possible because that's not where they want to spend their time.

They want to spend their time on deploying successfully and then managing those assets. No fundraiser wants to say to you, no asset manager wants to say to you, hey, the time I most enjoy about my job is fundraising. They want to try to compress that as much as possible. So if you're really excellent, you can compress that time frame a lot because you don't have to go to very many sources to go get your capital, which means these 90% of the world may never see the opportunity. So the access is kind of problem number one. Problem number two is the diligence, which is there's no rule that says everybody has to see the same information. That's not a thing. And so Hamilton Lane's ability, because of our size and scale and importance in the industry,

means that we do get to see all 30 companies, and we do see the cap structure, and we are able to talk to the other investors, and we are able to look at the debt structure. This investor over here who's deploying a tiny amount of money, A, may never see it, access, and B may not get the access to the diligence material at the level that we would say we require. So this is a very asymmetrical industry. It's not fair. I don't want to sell you guys short. I mentioned that you have $146 billion of assets under management. There is a non-discretionary piece which takes you guys over a trillion dollars.

Correct. What does that mean? What are you doing with those clients? So in some cases, we're providing them advice on those assets. But what we're mostly doing is we're kind of monitoring and managing those assets. The client made the investment decision. And we're essentially kind of dealing with now what happens afterwards. We're the back office.

Okay. We're the check in. We're doing all of that. Okay. All right. let's back up, talk about the industry where we are today. The cynical view or the skeptical view would say this. Here's the story.

I mentioned the Yale model, a lot of excitement, so much alpha, and it worked really well for the industry and for the investors, frankly. Everybody did very well. And institutional investors, on average, are 30% privates, whatever the number is. It's well above zero. Well above. And there was a period of time in 2021-ish, where both public and certainly private markets

got a little bit drunk, and I'm not pointing fingers because we were all involved in the same party together. And there was a lot of sloppy behavior and a lot of bad investments. And we're now five years removed from that and some of the returns

that people had hoped to get are not showing up. And therefore, this is a flywheel and it's not spinning as fast as it was because a lot of the exits we're not saying. I think exits are down 25% of year. Whatever it is.

Everybody knows the story. But Daniel, short chart too. And credit to you guys, This is from, oh, no, it's not from you. Did I post from, I put this from pitchbook. Maybe it's from your deck from pitchbook. So global private markets fundraising, and we'll look at a closed end funding,

fundraising by broad asset classes. And it doesn't matter if you're looking at real assets or credit or equity, it's down. So in comes the wealth manager, incomes the individual investor, who is basically at zero. And there is, the story is, it's very obvious. So the cynical take would say,

all right, here's individual investors and their exit liquidity. And I think the media, not wrongly, so I'm not saying like, oh, the media, but they've harped on the story in a big way and they're running with it. And I don't think it's completely unfair. So how do you answer the cynical version of,

well, yeah, institutional investors are full. They can't deploy the money. They're not getting their money back. Mom and dad are going to hold the bag. So I don't think that's cynical. I think the first part of that's not cynical at all. It's factually accurate. So let's break it into pieces.

And the listeners weren't hearing me nodding along as you were in agreement with you as you were talking. Drunken bad behavior coming out of COVID and during COVID, high prices paid, a lot of euphoria, a lot of questionable underwriting. Money was very fluid. There was lots of it. Fundraising was happening very quickly. People were doing all of that remotely, questionable diligence. So all of that happened. All that's true. That's not to say everybody did that because, again, I go back to my dispersion comment, the dispersion that we're seeing for those vintage years, which is kind of how we as the industry think about it.

So the difference between the managers in 2021, the best to worst, in 2022, best to worse, best to worse, 2023, best to worse, really wide gaping because the behavior wasn't uniform. And so you had people who were sober and they weren't at the party and they were actually making really good choices. So really wide performance. But what is true is if we take the industry as a whole, A, for the last three, to five years. It's been lagging the public markets now. I think we can agree the public markets have been on fire. Yeah, I wouldn't fault you guys for lagging. We can debate rational or irrational. And if you look at

the industry weightings between kind of what's in the S&P 500 and what's in the private markets, the industry weightings are really different. So that's not shocking. But it is true that they've been lagging. It's also completely true, factually, not cynically, factually, the distributions are way down. And so I think about distributions as kind of total liquidity provided as a percentage of sort of the industry's net asset value. That's a way to kind of normalize for size, and it's down. It's been down. And so with the other piece is, again, not cynical, factual, holding periods are going up. So all of that is absolutely true. I think that's uncorrelated to the idea of, well, now the retail investor is entering, because the idea is not simply people are trying to sell assets out of the

institutional bucket and sell them into the individual bucket. I think the rise. The rise, of the individual investor into the asset class, I think has to do with more about some changing structures, some regulation change, the invention of some different fund structures that kind of create vehicles that work for them. But there's no question that that is helping to kind of offset some of the fundraising pressure that has occurred. But the number of fund managers in the private markets who are participating in any way, shape, or form with the individual investor, is like teeny, teeny, teeny, teeny, teeny, tiny. What do you mean by that?

20 firms. 20 firms that have viable franchises that are actually raising capital. But they're the biggest firms. They are the biggest firms. What we go back to, there's thousands and thousands and thousands of firms. None of those people are participating in this at all.

And they're probably happy they didn't. Well, they're going to live and die with how the institutional experience goes. I mean, that is their market. There's no migration for them over to the other side of the wall. Yeah, they can't do it. They're institutional funds.

only period, end of story. There's no changing that. So their track record, their ability to survive is going to be completely dictated on how their returns are, how the institutional investor sort of sees them. The fundraising chart you showed is a little misleading. So you said it correctly. That is closed end fundraising, but that's it. Like period. So it doesn't show the evergreen part of it. It doesn't show the evergreen part. What it also doesn't show is, as you know, because you've talked about it, there's a rise of our secondary world has been rising. So people trading funds, buying other LP stakes, that's sort of our secondary world. So we'll definitely get there. Can I just say one thing? Yeah. So that's not captured her either.

Right. So sorry to cut you off. But one other piece of the story that I think is critical, critical, critical, is 2022. I also want to make sure that I get to ask you how you view the investing alongside the companies that are going to retail versus just the institutions. I want to make sure that we get to that. But okay, 2022. was the perfect storm in a good way for private credit because bonds got smoked and it brought down stocks with it and you had this thing that was actually negatively correlated. You had the floating rate aspect of private credit, amazing, right? So you didn't get hit on the duration.

And miraculously, there wasn't really a credit cycle. And so investors in 2022 and private credit got 10 to 12 percent. whatever it was, okay, while bonds were down 15%. And then the fuse was lit, and the money came pouring in very, very fast. Agree. I'm going to throw on a few more ands. Go ahead.

Why does private credit exist? Because if we went back 20 years ago and you and I owned a lumber business in the Midwest. Let's all a bagel business. I'm from Long Island. Great. Let's do that. And we want to go out and make some sort of,

of we want to expand. We want to open. We got to go, we got to go get some capital to do that. We don't want to go, like, give up our equity because we like our bagel company. And so what we would have typically done is you and I would have put on our, you know, best looking suits and ties and we would have marched down to the regional bank where we, by the way, keep our checking account for our bagel business. And we would have talked to our guy there and said, hey, we need a loan. That was a big provider of where, you know, private businesses got financed. That's the classic story of that, you know, that local bank that, you know, they know all the business owners in that town, and they're kind of providing capital to them.

Well, that went away. The regional banks and their ability to lend and their desire to lend has gone away dramatically. And so the capital need from the companies didn't go away, so something needed to replace it. And so in comes private credit, effectively taking the place in a more scaled, maybe more professional in some cases, lending to private companies in lieu of what the regional banks were doing. So that's, that's sort of the first part of the equation. And that's not bad. None of that's bad. I mean, that's sort of what makes our economy flywheel work. It's like, you want people to be entrepreneurs and you want us to expand our bagel business and you want all those things to happen. So at this point, there's nothing wrong with that.

Now we go to your point, which is kind of what I'll call the middle of the story. So fuse is lit, et cetera, et cetera, et cetera, et cetera. A lot of capital comes coming in. Well, what happens is the number of private credit firms also grows exponentially because Bob and Sally, who we're working for this big, large private credit firm are like, there's a lot of money to be had out here. We're going to start our own. So they spin out and they go start their own private credit shop. And then the person that they hired, Tommy and their shop also spins out and he starts his own private credit shop.

So all of a sudden, you have a whole bunch of managers kind of getting spinouts and kind of creating lots of, lots of other private credit firms. We should put in parentheses here. Parentheses, a whole lot of these people had never been operating in a down cycle because they're pretty young. And so that's where we sit here today. So what I get asked about the whole private credit, so we had the whole, there's cockroaches everywhere. Well, we haven't really seen the data bear that out yet. That was almost two years ago. Yeah. We're waiting. I'm still looking. Now, it's not to say there aren't problems, because I will tell you, we can see it. There are absolutely private credit portfolios that have problems. Too risky, not diversified enough.

Too much software maybe. Yep, questionable lending standards. But again, this is back to our dispersion comment. I got plenty of private credit fund managers. So I'm looking through their books, including our own, where I go, 99% of the stuff is performing. I'm not seeing any cockroaches. Things are fine. So I think this is becoming a space where it's going to be really hard to paint with an overly broad brush. Because I think, fast forward five years, you and are going to going to be back sitting here, hopefully, and we're going to be talking about, wow, private credit had this really big gaping of great examples of it working and really terrible examples of it not working. When this happened, I understand why everybody from pundits to the media

last time, it's a very juicy, juicy story. Oh, sure. Right? Like, it's a great story. I was reminded of what happened with B-Reed. Okay. When they needed, not a rescue, but I think it was CalPERS. I threw in a big infusion of capital. And there was legitimately massive problems in real estate, particularly the office space. Nobody would deny it. And were four or five years removed from that, they're still around.

They didn't go to zero. And doing well. And doing fine. So with what little I understand about the private credit industry, I don't believe that this is like going to be, I don't think that in five years we're going to say, holy cow, do you guys remember private credit? That was cute or whatever. That was ridiculous.

I think it's going to be a lot bigger than this today. It absolutely will be. But this is where, again, I will join you and sort of not saying like the media. The problem is, is that data around, you know, this industry is hard to come by still. That's unfortunate. You can see, we put out a lot of information because we think it's healthy. I'd rather you have the chart than trying to sort of guess or speculate. But if you look at what's, take the last sort of year of sort of coverage about the industry,

and look at how many of those stories actually had hard data, specific examples, versus a lot of speculation. And one off the record source noted that there's probably a lot of problems coming. It's just we've, we've become very speculative around what problems might, because I agree with you. It's juicy. It's fun to click on. It's interesting headlines. But I kind of go back to, like, let's bring data to the discussion and then let's talk about this. You know that it's okay for now. And I'm not saying that there's not smoke or that there won't be problems. But if there was any inklings of a problem, it would be headline after headline after headline.

And unfortunately, that spooked a lot of individual investors because we're still seeing outflows from a lot of private credit funds. Apollo this morning, Apollo Debt Solutions BDC has about $26 billion. That's huge. Told the investors on Tuesday, this was from Bloomberg, that it would again cap withdrawals at 5% of outstanding shares after 14.7% sought to pull their cash down from 16.8% last quarter, but still, so I have a question for you.

Who's responsible for this? Is it, and it's not one person's fault? Is it the private credit companies just getting so much money and just spraying it around? Maybe I'm using that, you know, being a little aggressive with that term spraying, but sloppy on the writing standards

because the money's coming in and it's got to be deployed. is it the fault of their wholesalers, not educating the advisors? Is it the fault of the advisor? Because the easiest thing in the world in the world to sell is 10 to 12% coupons with no volatility. Who doesn't want that? Is it the investor's fault for not to point fingers at the end investor, but for not really understanding what they're getting through it because they're outsourcing their diligence to the advisor. It's the advisor ultimate.

The buck stops there. But now the investors are pulling out, which might be rational because we'll get to this, the marks. the marks aren't even down really. And so a rational investor might think, well, if there's smoke coming and if there will be problems and I can get a dollar for a dollar, why the hell would I stick around? That's rational behavior. So unpack all of that.

So I think the honest answer right now is it's too early to tell and let's break it down. Despite all the headlines, there's not enough data today to say to you that you're going to see huge performance declines across that segment. In fact, the data right now indicates that we're not seeing bankruptcies rising materially. Default rates are basically sitting around 2%. And so that sort of is showing you a pretty healthy book. Also, a lot of the managers, certainly those that are big private credit that are publicly traded, have been very vocal on earnings calls about quality of the portfolio, how much is sitting in cash pay, how much is actually flipped over to pick, not that much. And so today, they're saying, hey, the marks are fine because I'm marking and the portfolio is performing, but you're still seeing huge withdraws.

So let's start with the withdrawal part first. Who's to blame for that? I think what you have is this industry is pretty nascent. Think about how long you've had a chance for individual investors to invest in private credit funds. A couple years. Yes, no. It's very new. And so I'll use this word, you know, kindly. There is an immaturity around this whole space that is not surprising. If you've only done it for a couple of years and you don't have tons and tons of data and your

education is still in its early phases because you just started doing it. And your advisor is also in a similar spot where they just started doing it too and they've just started to kind of read about this and they've just started to study about it. it's not surprising with that as the backdrop that with a kind of avalanche of headlines that people get pretty spooked because like I don't have to stay in I'd rather be at the cocktail party when I get asked

like hey are you in private credit to be like nope not me as opposed to be like yeah is there a problem have you read that you know he's like have you read these 50 articles I don't really want to answer that sort of in that manner I'd rather be like not me I'm smart I'm not there yeah So I think there's a lot of that. It's sort of like, I'm just going to go and I'm just going to go home. I don't really want to be around this.

I'm sort of nervous. Well, also, the risk are asymmetric from the advisor's point of view. 100%. On the one hand, if you think you're giving proper advice and I think all advisors do, sure, you could really fight and push back and say, listen, I understand your concerns. I'm sticking, I'm sticking to my guns here. Okay. And then you're wrong.

And you're fired. 100%. Or if you give your client a dollar back, yeah, you might look like sort of a jet. backguests for recommending something that didn't work out, but you're fine. You're not getting fired. 100%. By the way, you give them their dollar back, and depending on what you choose to put it in, well, by bonds, it's fine. You could actually look like a hero. You could be like, well, I got out of this and I did this. Right. Okay, so I'm with you. Like, I go, yep, none of that to me is all that surprising. By the way, I think fast forward a few years, this will happen less and less. More data, more maturity,

more experience, more willingness to kind of stick through things. Think about the advisors who will lens of something happens that's panicky in the public market. You know, back in the day, they might have been like, okay, we got to get liquid. Now those advisors say to, hey, calm down. We're not pulling out right now. We're at a trough. Like, we're going to ride this back out. Like, stay with me here. And the client does. On the credit side, let's go and look at a different data point. What's the institutional investor doing? Because they don't have that dynamic. That CEO of that institutional investor needs to own that decision-making and needs to sort of hang with it. There, you're continuing to see institutional investors moving money into private credit right now.

So for Hamilton Lane, we actually launched a semi-liquid credit product right in the eye of the headline hurricane that was seated by a pension fund. Headlines going off everywhere. pension fund, very sophisticated, very smart, says, yeah, I see the headlines. I see also see the data, and I'm not seeing a problem. I'm in. Different behavior. I find it funny that we spend so much time worrying about private credit. Guess what? If the credit's bad, what does the equity look like? This was the other part that, again, I go back to. And again, I'm saying this kindly because I think it's to be expected. You were literally seeing advisors and investors

lining up to redeem out of a credit fund and then filling out the sub-docs to go into an equity fund. Backwards. It's like, guys. Yeah. So let's talk about secondaries because this is an area where you guys are super active.

And I, okay, on the one hand, there have been a, there has been a lack of exit liquidity. And so a lot of LPs say, okay, we think this is worth a dollar. I'll take 89 cents. I'll take 91 cents. Okay. Totally reasonable, rational behavior. I think where the problem is, and there's been reporting in the headlines, and you guys have been named specifically about this, are the day one markups. Yep.

Now, if you buy something because you have. scale and you have relationships and you are fortunate enough to buy something for 91 cents that you believe it's worth a dollar, I could understand you marking on that your books is a dollar. And I don't know where the line is, but if you buy something for 65 cents, it is not worth a dollar. So I disagree. So let's talk about it. So one, this is not a Hamilton Lane practice. This is an industry practice because this is actually following accounting regs. So that sounds like a very defensive statement. But it's true. But it's absolutely true. You're not the only ones. Yeah, so let's talk about how the secondary space works.

One, when we're talking about secondary trades for this purpose, because this is the day one mark issue, we're talking about buying a passive LP position in a fund. So lots of LPs in a fund, that's what we're talking about. LPX wants to come out, and LPY steps in as the buyer of that position. So in that situation, it's the GP, it's the fund manager who's setting the mark. The GP is unaware of any trades that occur between we don't need to go to the GP. There's no reason for us to disclose that LPX is out when we sort of file paperwork, so the GP knows we're now the investor of record.

But this is happening separate and apart. So the reason why the accounting regs are what they are, which is when you come in as a passive LP, however you came in, the mark is whatever the GP of that fund tells you it is. So if we buy something at 65 cents that the GP has marked at a dollar, we have to take it on our books at a dollar. But you know the GP must be a moron if they're selling a dollar for 65 cents. Well, the GP is not selling it, right? The LP is selling it. So that what the GP says is, yeah, Johnny needed liquidity and didn't want to wait the 10 years.

Or Johnny doesn't have faith in me as the fund manager. And so I say it's worth a dollar. Johnny thinks it's worth 50 cents. And so Johnny's like, well, if I can sell for 65 cents, I'm a hero. So there's lots of examples as to why you're going to have different valuations occurring at the trade time. And that's not, to me, that's just not surprising. Yeah, I get that part of it. But with so much money coming into secondaries, it's a new asset class.

Doesn't that have to squish the alpha down? You can't possibly buy something at that steep of a discount. because somebody else would say, whoa, whoa, whoa, whoa, I'll give you 66 cents. 100%. So yes. I mean, I think that this is, if you look at secondary pricing over long periods of time, so when did we do our first secondary deal? Hamilton Lane did ours in 2000.

I remember because I did it. I was like the young analyst and did the model and that all happened. So we've been doing these for over 25 years. The industry, by the way, back in 2000 was teeny, teeny, teeny tiny. And so, yes, you're absolutely right. And you could get big discounts back then because there was very few buyers. And today, one, there's a lot of buyers. And two, there's a lot of brokers that sort of help sellers run efficient processes and make it competitive.

So all that's fine. So what's like an average discount today? So today you're probably looking at average discounts running about 13%. All right. So that seems reasonable. Yeah. I mean, again, for if I needed money, that's like a reasonable discount. rewind 15 minutes when you and I were talking about how long holding periods are and how long you're

waiting for capital to get back, the idea of I can have my cash now or I can wait another 10 years, that's not surprising that there's going to be a discount around that. Here's the other piece that I think people don't understand, and it makes this whole day one issue seem more alarming. So you are the CIO of a pension fund. And by the way, you don't need liquidity. So what do you do in in the secondary space selling stuff. The answer is you might have a view on valuations that might be contrary to some of your managers, or you've decided that you don't like manager X anymore. You didn't re-up in their new fund. And so your team is like, look, if we're not re-upping with them, we should just sell the current positions that we have because it's not an ongoing relationship.

So you call us as a potential buyer. So you call Hamilton Lane, hey, I've got six funds I want to purchase. and we say, okay, we got to set a date on which we're valuing those. Well, you and I already talked about the whole quarter lag on the reporting. If we're buying an asset today in the middle of September, we're basically working off of the March valuation. Well, lots happened since March. But that's the last sort of date of record that we actually have a quarterly statement for to say, here, this is going to be what we're pricing off of.

By the way, when are we going to close? this transaction? It's going to take a couple months to close the transaction. So now we sort of priced you on a March date. So we said, hey, it's going to be 92 cents on the dollar off of the March date. By the time it comes on to Hamilton Lane's books, it comes on our books in January. That's using a September valuation. So time is also occurring here. And that's causing valuations to move up or down. This is so complicated. It's super complicated. But it's also been like, we've been doing this for 25 years, and the SEC's been looking at all this, there's kind of like, it sounds, it sounds ridiculous, particularly when you're wearing a public equity hat, which is how most of our listeners.

It sounds unfair and fake. It 100% sounds that way. And when you sort of sit here and sit shoulder to shoulder with us and watch us do this, I get it. You sort of go, oh, yeah, this is really weirdly complicated. So when I say it's super complicated, I'm saying that through the lens of, this is not for people with a million dollars. It's just not.

They don't, they can't possibly understand. Forget about whether they need it or not. It is, it's just too much. So I want to, I want to transition to a question. And the last call,

Erniex call, you guys reported that for the quarter ended at June, you generated nearly $640 million of net inflows across all strategies and ended the period with over $19 billion of AUM.

In our semi-liquids. Okay. Importantly, we did not, enact gates on any of our funds, and we saw positive net inflow across 10 out of 12 funds. That is very impressive. True. And so the question that I have for you is, because a lot of funds are experiencing as well,

particularly private credit funds, how do you think about deploying capital into companies that are facing retail investors that do have the headlines and the negative flows? Are you staying away from them? Or do you, does that not factor into your thinking? Look, so one, we're big believers in portfolio construction. You said it right before, which is it's not really a thing that gets talked about in the private markets. We all like to talk about the manager that we like or the deal, but you rarely hear anybody talk about portfolio construction. Come visit us at Hamilton Lane, and you're going to have a huge part of your day on portfolio construction because we think it's essential.

So the other piece is, how picky are you? So in our secondary business, we're a big player, deploy a lot of capital. Okay, of all the deal flow we see in a given year, how much do we invest in? less than 1%. So we're saying no to 99% of the stuff that we're seeing. And that kind of holds true sort of across our investment platform. So yes, we're really mindful about looking at what industries are going to come under pressure, what companies specifically, who are the lenders into that, who's got the equity, all of that becomes important. Let me go back to your comment of this isn't for the million dollar investor. It may not be. However, what we most believe in is we need

a lot more education. We need these discussions happening where people can listen to this and see data and then they can decide whether that's appropriate for them or not. But I think right now, we're still at an undereducated level and that needs to rise. All right. I know I don't have you forever. I want to talk about how public markets are viewing the equity of these alternative asset managers. I have been of the mindset of, listen, So paint with the broad brush. Maybe there's some great funds in here. Of course there are, obviously. But why be the LP when you could be the GP? Just buy the equity. Equity, public equity markets have not been kind to the entire asset class. And you guys are not

immune from that. So Daniel, Trot 12, you guys are killing it on the incentive fees. $175 million in incentive fees for fiscal year 2026 so far. I mean, it's up until the right. Where you guys were in 2022, it was a fraction of this. It was $50, it was $55,000. for, I mean, nothing. And yet, your stock has almost been cut in half. And again, I should say, you are definitely not alone. But what are public equity investors missing? Because they do not believe that either the story is sustainable, that the outflows

will stop, that the alpha is there, whatever it is, they're calling BS. They don't like it. I agree. So I assume that you're excited as somebody that likes to buy something at a discount. Yeah. How do you think about the public marks of your companies? It's funny, you know, as the private market person, we spend a lot of time talking about why the public markets can be very flawed, because certainly there's no shortage of talking about why we're flawed. And I think, you know, the public market is not always rational.

We always like to say, oh, the market's never wrong, the market's never this. You said it earlier. It's like you can have this sort of single day reaction where the world, like, implodes. Nothing's happened to the underlying companies. Yeah, software. It's like, oh, my God, they're all going away. Now they're all coming back. So to me, the public market kind of swings too far in extremes.

This has to piss you off, though. Sure. I mean, look, it pisses me off. And what we're doing is we've been buying back stock. I've been personally buying. So all that's publicly, you know, public available. If you took, so you chose to look at the incentive fees. You could have looked at anything.

You could have looked at margin. Everything up at the right. Management fee, earnings. It's all going up to the right. But you're right. The public market, quote unquote, the public market is saying, yeah, I know that was another good quarter, but it can't continue. It can't happen. And when we talk about sort of the sort of individual investor behavior and them sort of leaving, what I sort of, and I'm now getting a little bit more aggressive

about this, I say to people, finish the sentence. And they look at me and they go, well, what do you mean? I go, no, finish the sentence. You left off half of the sentence. And they're like, well, I go, well, here's the full sentence. They're leaving the private markets and they're going to have every dollar of savings in the public markets in a increasingly highly correlated, massively mega-cap, AI-driven, that's what they have to do because if they're not going to do the privates, then they have to go back, are they going to put it in their mattress? I mean, what are they going to do with it? And I think once you start to get people to sort of think about that, I think a little bit of a light goes on. The public markets can't be the sole answer

for investors. We're not seeing a growing number of public companies. A lot of companies don't want to be public. And by the way, today, no one has to go public. You can stay private forever. There's plenty of capital to finance you. And investors should be realizing that when you look at something like SpaceX, I got asked recently by somebody, oh, are you bothered by how the stock is performing? I go, I'm not bothered by that. Our cost basis is a teeny, teeny, teeny tiny fraction of where that stock is trading. And same thing it's going to be with Anthropic, AI, all of that. The money is not going to get made in a major way by the public holders. It's already been made by the private holders. That's who was backing these businesses when they were a couple billion dollar valuation, not when they're now a trillion dollars. And so if you want exposure to the entire set of the economy, and if you want diversity, if you want all those things, you're going to have to come to the private markets. And I think that's what the public investors are getting wrong right now, which is, We're taking some lumps in the media. And by the way, some of it's well-founded.

I'm not sitting here. We've been agreeing on a lot of the cynicism stuff. But long-term, the growth is continuing for good firms like ourselves, and that's not going to stop. And so at some point, the market will realize, like, oh, okay, this is actually real and sustainable, and we'll go back. Last question before I let you get out of here. Are people accessing your funds only through intermediaries, like only through their advisor, or are they able to get, it just through swab or fidelity or whatever. So they can 100% get it directly through those places.

They can also, we've also tokenized a bunch of our funds. Next conversation. We'll do that next time. Yeah, but so, but that's, you can also get it that way. And that's actually like a much lower minimum. Like some of these are like $500 minimums, which I think is just another interesting access point. Okay.

Eric, this is great. I'm glad that we had the you on here to set the record straight. Thank you for doing this. Thanks for the conversation.