Fears that private investments are due for a price crash to match the drop in stock markets are overblown, says a prominent manager and adviser for private portfolios.
The conclusion from Hamilton Lane, with $832bn in assets under management and supervision, stands in contrast to warnings from JPMorgan and others that valuations of private companies may be too high or are coming down. While listed equities trade daily, private equity holdings are assessed less frequently and their values have not moved down as sharply since early 2022.
Hamilton Lane’s annual report on the industry, to be published on Thursday, said most private equity holdings are appraised conservatively and should hold their value. At the start of last year, most private companies were priced at a substantial discount to public companies in the same sector, the report found.
Falling public markets have narrowed the gap, but privately held communications and consumer discretionary companies were the only ones held at a higher multiple of earnings than their public peers as of late last year, the report said.
“We feel that valuations broadly in the private markets are fair,” said Hartley Rogers, Hamilton Lane’s chair. “The revenue growth in private companies, the [earnings] growth in private companies, and therefore the enterprise value of those businesses exceeded the public markets. You had better operating performance in private equity-owned businesses.”
Hamilton Lane, based in Pennsylvania, runs private funds, advises clients on third-party managers and provides data on private markets.
Rogers cautioned that the venture capital investments in early-stage companies are an exception to Hamilton Lane’s conclusions and face significant downgrades. VC holdings, which represent 21 per cent of private market commitments over the past three years, are generally held on balance sheets at the value of their last financing round.
But global VC funding dropped 35 per cent last year, according to Crunchbase, and the few companies that have been able to raise more money have had to do it at lower valuations.
Hamilton Lane said history supported its predictions. Despite some spectacular failures, private equity-owned companies as a whole held their value through the 2000s dotcom bust and after the 2008 financial crisis, the report found. Since 1995, private market buyout funds delivered a positive return even during their worst five-year period from 1998 to 2003, while equities dropped 5.7 per cent over the same stretch, Hamilton Lane calculated.
Private equity owners can often avoid taking writedowns by holding on to their investments until public markets bounce back and support higher sales prices. The private structure also makes it relatively easy to provide extra financial support to portfolio companies struggling with a cash crunch.
“Private equity owners tend to have more mechanisms to cure periods of stress than publicly traded companies,” Rogers said.
Private companies are also spread across economic sectors, while S&P Global calculated that Big Tech groups including Apple, Amazon and Tesla were the major drivers of last year’s 19.4 per cent fall in the S&P 500.
Hamilton Lane’s analysis of private markets’ past performance may be limited because private markets are much larger than in earlier crises, and significantly more money is in private credit and infrastructure funds, which have less of a historical record.
The semi-liquid funds being marketed to wealthy individuals are also dominated by a handful of providers, notably Blackstone’s Breit real estate fund, which has had to limit withdrawals. That means the sector’s success or failure is closely linked to the performance of a few managers, Hamilton Lane said.