August 17, 2018
August Chart of the Month
Investment Activity: What We've Seen
Over the last decade, we’ve witnessed LPs more attentively monitoring investment activity in the private markets than ever before. And recently, we’ve seen that watchfulness turn to concern, as industry-wide LP contributions reached a record $743 billion over the trailing twelve months. This behavior has been raising red flags for some LPs – with managers seeming to be spending large sums on expensive acquisitions.
Despite all of the LP hand-wringing, at Hamilton Lane, we’re not as quick to worry. What has allayed our would-be concern around deployment? While the absolute amount of capital being invested is at a peak, the rate at which GPs are spending money is actually at or below long-term averages, in most strategies.
The Rate of Contribution (RC) in Investment Activity
The rate of contribution (RC), which divides annual contributions by dry powder, puts contributions in the context of total capital available to be spent on new deals.
In some strategies, such as real estate and credit, RC is significantly below long-term historical averages. The dramatically slower pacing of today’s real estate funds may represent a structural shift in that strategy from the torrid pace of real estate investing in the early aughts. Credit strategies also appear to be undergoing a similar shift, despite a surge in fundraising over the past few years.
The Rate of Distribution (RD) in Investment Activity
The analog to RC is the rate of distribution (RD), which is equal to the LTM distributions divided by net asset value. Even within the context of increasing private markets NAV, distribution activity over the past 12 months has been encouraging. A record $768 billion was distributed to LPs over that period, with $253 billion of that coming in Q4 2017 alone.
Those record levels of absolute distributions translate to rates of distribution above long-term averages in most strategies. Buyout and credit strategies continued their run of above-average distributions, primarily due to realizations from the maturing 2012 – 2014 vintage year funds. Venture capital investments also breached their long-term average distribution pace. Albeit with a lower hurdle to clear than buyout investments as the mercurial IPO window appears to be sliding open. Perhaps the only strategy that has fallen far behind its usual distribution pace is infrastructure (including natural resources). This is most likely due to how it accumulated significant assets over the past five years, but has yet to distribute equally significant amounts of capital, due in part to the volatility in energy markets.
We’ve said this before and we’ll surely say so again: We believe it’s important to take a holistic, data-driven
approach to the private markets. In isolation, the amount of annual contributions may be jarring, but put into a larger context of RC and RD, a different story emerges.
We’ve often noted how one would expect a recordshattering investment pace given an environment of ample liquidity and low rates. But it just hasn’t occurred. We’ll leave you with this fun fact to mention to anyone that thinks private markets investment activity has grown too large: All of the equity focused funds’ contributions made in 2017 would only buy you 39% of Apple’s stock. [endnote symbol=’1’ text=’Hamilton Lane data via Cobalt, Bloomberg’].