Jeffrey Armbrister is Hamilton Lane’s global head of direct equity investments. He spoke to Buyouts about the challenges facing his firm and co-investors in general during the coronavirus crisis.
How did you adjust to this crisis as it was happening?
Fortunately, we did a number of things before they were even necessary. That included investing in technology, improving our collaborative software capabilities, improving the platforms for video communication and really just making it easier to work from a remote environment and get access to data and information pretty seamlessly. We also did a lot of business continuity planning. A lot of this existed already, but as we started seeing things get stricter and the lockdown occurring in Asia, we began to really ramp up the planning here on what this could look like for the rest of our offices around the world.
We sent everyone home to work remotely in March, and from that point things have gone extremely well. We ramped up our own communications, speaking with our clients frequently. We organized a number of calls for all of our different products and investment activities, so that they could dial in and listen to what we were seeing in the market and understand where things were. We talked to GPs, we talked to medical professionals, we talked to so many people. Just to give you some context: from March through June or July, we talked to 250 GPs, and we’ve had 450 separate meetings and update calls on what’s going on in our portfolio and what general partners are seeing in the marketplace. This amount of transparency, and really our access to these industry participants, has really allowed us to deal with what’s going on.
There’s a connection, there’s a culture that we have at Hamilton Lane and we want to do as many things as we can to maintain that, even though we’re not seeing each other in person. So, I’ve been encouraged as a leader of the team…to make sure that we’re having as much frequent contact as we can, whether it’s organized calls or trying to get together outside work in a good setting, social distancing, of course, and being safe, all those activities we feel are necessary and allow us to maintain our culture.
What are the challenges to co-investments during the crisis?
The biggest issues that we’ve seen are related to diligence. There’s been a lot of adaptation to get over the logistical diligence issues. And part of it’s really been driven by what’s been available in the pipeline, and what’s been available in the pipeline has been companies that have performed well, companies that had some part of diligence done and completed prior to covid. The way we operate and the way other GPs operate is that they’re tracking companies for years before they become available, so they know what’s in the pipeline, what the companies are that are attracted to them, they’ve met the management teams and have done some diligence, so there’s a familiarity there that lessens the need to go out in person to kick the tires and see the company and see the management team, because by and large those things were done.
Right now, we’re closer to the end of that pipeline than the beginning, so we’re confronted now more and more with situations where, you know, this is a new process, this is a new company, something that you may not have all the touch points on. So, those are going to be interesting situations and challenges to confront, and quite frankly people have been more active in trying to get together in person even though it’s a little awkward trying to do so in a safe and limited manner. But the use of advisors, the use of regional offices, those types of things have helped progress the diligence activities.
Where do you think co-investment deal flow is right now?
It’s come back. Things have been picking up ever since June and people are busy. Everyone’s working through their pipeline and the credit markets are back. These companies that are transacting, their valuations are about the same, there’s a larger growth-mix component to that pipeline than I would say in years past.
And then there’s this large group of companies that are kind of in a logjam. They’re not distressed. They would be looking to sell and be transacting under normal environments, but for whatever reason buyers, given the uncertainty of the market … they want a valuation discount. And since these sellers are not in a forced selling situation, they’d rather wait and see how things turn out. If it looks like we’re going to be in a more restricted environment longer-term, then these sellers may have to come back and accept valuation discounts or some more buyer-friendly terms. But right now, I’m looking with keen interest on how those companies roll through the system.
And of course, we’ve seen some distressed deals, that are in the obvious sectors of aviation, travel and hospitality. But we haven’t seen widespread opportunities yet. I think beyond those sectors, folks have been able to solve liquidity issues internally without a lot of need to run a process where they need that additional help.
So you haven’t seen rescue capital opportunities quite yet?
They’re trickling in. When this first started, we said it’s going to be three to six months really to see those on a broader sector basis. We’ve dedicated some resources and some capital to go after those sorts of opportunities. Scenarios where there’s going to be some challenges to diligence, financing where you’ve got junior capital or some sort of structured equity, so you have some protected downside, are going to be unique and critical parts of the solution to those puzzles.
What do you think are the biggest lessons for LPs to learn about co-investments based on this crisis?
Periods like this present great opportunities in the private markets, where there’s uncertainty, dislocation, some volatility. This is a great time to be a co-investor. You’re going to see GPs continue to utilize and work with co-investors to invest in these type of opportunities and so one of the things we continue to preach to LPs is consistency. You want to continue to be consistent in your fund activities, and in co-investing you want to do that as well. Pulling out at this time, or getting overly happy and exuberant in good times, usually ends poorly.
What market sub-sectors are most attractive for co-investors right now?
Right now we are paying very close attention to what the shape of recovery is for certain sectors. And that’s going to be really important not just for the deals but the GPs that we co-invest with. One of the things that we always say is that you need a great asset, you need the right investment partner and you need a compelling investment thesis. The right investment partner that is sector-focused that has expertise in something like collaborative software, home health, tele-health, technology and the collaborative software applications, those are going to be really exciting opportunities. We’re keeping a laser-like focus to make sure the partners that we’re pursuing opportunities with have some type of a competitive advantage and really deep knowledge of the sector that we are investing in.
How would you recommend an LP give itself an edge in the co-investment market?
It’s an attractive space, but it’s hard, and there’s a lot of competition out there. Some LPs have found it difficult because you need to be able to react quickly, and keep up with a process that the GP is running on their own timelines. You need a team that can handle that responsibility and those requirements and you need deal flow.
One of the issues that we see and why we get a lot of interest in our vehicles is because there’s just not enough deal flow to run a broadly diversified portfolio. These portfolios can often be built heavily concentrated, with a couple of GPs in one sector or the other, and by vintage year. We look at seven to eight different criteria that we’re trying to diversify against and that’s how we manage our portfolio for commingled funds. And for many LPs, that’s just not possible. So having enough deal flow, having the team, having the capabilities to keep up, these are going to be more and more important for GPs, especially the timing issues, during this time because a lot of these opportunities when we get to rescue financing, when we get to distressed and special situations, there’s a clock…and speed and certainty are what these GPs want and that’s why they like dealing with us, because we have that experience.
We have a strategic relationship with the general partners that we invest alongside with and this has been built up for the 30 years that Hamilton Lane has been in business. That’s hard to replicate, but I would say LPs looking to get into this market need to think about that: how strong are their relationships and what do they need to do to make them stronger and more strategic?
Edited for length and clarity.