Hamilton Lane chief executive officer Mario Giannini said Monday that LPs learned from the 2001 and 2009 financial crises the importance of maintaining a consistent investment pace.
“The single biggest mistake we see investors make, and it’s why so many underperform, is consistency,” Giannini told the board of California Public Employees’ Retirement System during a fireside chat with private equity director Greg Ruiz. “They fall in love with the market when it’s high and then they get scared when it goes down and so they want to get out.”
The reason some LPs do so well in private equity is simple, he said: “They just kind of keep a steady pace. They don’t go crazy one way or the other.”
Giannini, who has been with Hamilton Lane since shortly after it was formed in 1991, shared his memories of both the 2008-09 global financial crisis and the 2001 dot-com bust.
“I can remember phone calls and discussions in front of boards where people simply wanted to get out of anything illiquid,” he said, according to a rush transcript of the talk. “And it proved to be the wrong decision in both market cycles.”
But this time, even during the worst parts of the March public market downturn, LPs remained resolute. “All LPs globally have kind of figured out that consistency does matter,” Giannini said.
Giannini also talked Q1 portfolio values, which he said were probably down about 8 percent to 10 percent, depending on whether portfolios were focused on growth or buyouts. If a portfolio has more growth investments, it will go down less. If it has more buyouts investments, it will go down more, he said – but be poised to go up in the second quarter.
“It’s really too soon to know, but given the public markets were up and operating performance we hear was surprisingly okay at many portfolio companies, I’d be surprised if it wasn’t up somehow,” Giannini said.
Values in PE investing
One recurring topic was environmental, social and governance, or ESG. Giannini pointed out that while in the Scandinavian countries, Australia or New Zealand, ESG is “almost the number one criteria for investing in anything,” it has yet to take hold to the same level in the US.
Board member David Miller asked Giannini about how CalPERS can work to ensure general partners are not taking actions, such as cutting jobs, which are counter to its values.
Giannini said GPs are extremely cognizant of what their investors want from them – and that one option to change behavior in the industry is for LPs to band together through organization such as the Institutional Limited Partners Association to make their preferences clear.
“It’s always easy to focus on the general partners … I think limited partners need to coalesce a little bit around ‘What does matter to us?'” he said. “You just can’t raise capital in Nordic countries if you’re not particularly environmentally sensitive. You just can’t. So I think part of your effort needs to be around other limited partners.”
And to some extent, Giannini suggested LPs have already seen some success in doing that. The conversation also touched on private equity’s often negative public profile. Giannini said much of the current attitude stems from the industry’s persona in the 1980s and 90s, notably the popularity of the book and film Barbarians at the Gate, which depicted KKR & Co.‘s takeover of RJR Nabisco and whose title became a catch phrase for the industry.
Giannini said that while that reputation has not changed, the actual nature of the industry has. Hamilton Lane’s “value attribution models” show that private equity now profits much more from growing companies and making operational improvements than from cutting expenses. And he credited LPs with helping bring that about.
“In the 80s there were a lot of hostile takeovers that private equity was involved in,” he said. “You just don’t see that anymore because I think limited partners are saying, ‘No, we know how this should work and it should work with growth. It should work with operational improvements, and not be involved in hostile acts and doing things that the industry had done many years ago.’ So that has been a real evolution.”
Hamilton Lane has $66 billion in assets under managment, according to Buyouts data, and serves over 500 clients and investors, according to its website.
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