A Power Couple Talks Private Markets, Quarterly Earnings, and More | At Barron's

Key Concepts

• Northwestern Endowment: A $15 billion endowment fund managed by Amy Falls, providing significant budget support to Northwestern University.
• Hamilton Lane: A private markets asset manager with $140 billion in Assets Under Management (AUM), co-founded by Hartley Rogers, specializing in helping investors access private markets.
• Private Markets: Investments in companies that are not publicly traded on stock exchanges, including private equity and venture capital.
• Evergreen Funds: Investment vehicles designed for high-net-worth and ordinary investors, offering limited liquidity and a shorter duration portfolio compared to traditional private equity funds.
• Secondary Market: A market where existing private equity fund interests are bought and sold, providing liquidity and price discovery.
• Co-investments: Direct investments made by investors alongside a private equity fund in a specific company.
• Liquidity: The ease with which an asset can be converted into cash.
• Price Discovery: The process of determining the fair market value of an asset.
• Mag 7: Refers to the seven largest technology companies in the US stock market, often driving index performance.
• General Partner (GP): The manager of a private equity fund.
• Limited Partner (LP): An investor in a private equity fund.
• Middle Market: Refers to companies that are larger than small businesses but smaller than large corporations, often considered a key area for alpha generation in private equity.
• Macroeconomic Environment: The overall state of the economy, including factors like inflation, interest rates, and employment.
• Philanthropy: The practice of donating money to good causes.
• Education and Equity: The chosen pillars for Amy and Hartley's philanthropic foundation, focusing on informed citizenry and opportunity.

Northwestern Endowment and Private Investments

Amy Falls, Chief Investment Officer at Northwestern University, manages an endowment of approximately $15 billion. While it provides substantial budget support (around 25% of the university's budget), it is considered undercapitalized relative to its mission compared to more highly capitalized peers like Princeton (55-60% budget support).

Role of Private Investments for the Endowment:

• Return Generation: Private investments are crucial for generating high returns, particularly within the equity portfolio. The focus is on earnings growth over time, with a preference for privately owned firms due to greater investor control and their representation of mid-cap companies, which have more growth potential than "ginormous" public companies.
• Asset Allocation: Private assets constitute about half of the endowment's total assets, encompassing traditional private equity and venture capital, with smaller allocations to real estate and private credit.

Liquidity Concerns in Private Markets:

• While private markets offer potential for higher returns, liquidity has been a significant concern. Distributions from private funds have been historically low, posing challenges for endowments.
• Amy views this as a temporary issue, influenced by public market performance.
• The emergence of the secondary market is seen as a positive development, not only for providing liquidity but also for facilitating important price discovery. Selling an asset at a reasonable price is acceptable.

Hamilton Lane and Private Markets Access

Hartley Rogers, Executive Co-Chairman at Hamilton Lane, describes the firm as a private markets asset manager that serves a diverse range of investors, from individuals to large pension funds and sovereign wealth funds.

Hamilton Lane's Business Model:

• Core Business: Managing money for clients to access private markets.
• Assets Under Management (AUM): Approximately $140 billion.
• Annual Deployment: Hamilton Lane deploys $25-30 billion annually into newly raised private markets funds, positioning them as one of the largest allocators globally in this space.

Evergreen Funds and Retail Investor Access:

• Hamilton Lane has been at the forefront of developing evergreen funds, which are designed to be accessible to high-net-worth and ordinary investors.
• These funds address the liquidity challenges faced by institutional investors by incorporating strategies like secondaries, private credit, and co-investments.
• Shorter Duration: Evergreen funds require a shorter portfolio duration than traditional private equity funds due to the limited liquidity offered to investors.
• Co-investments: These are often fee-free from the underlying deal sponsor, making them an attractive component of evergreen funds.
• Countering the "Wrong Time" Argument: Hartley argues that retail investors are currently seeing some of the best deals because institutional investors are somewhat "frozen" due to prior allocations in 2020-2021 and a lack of distributions. This allows evergreen funds to access significant deal flow.

Hamilton Lane's Competitive Advantage:

• Hamilton Lane focuses on the "middle part" of the private equity market, which tends to have a wider range of outcomes and offers greater potential for alpha generation compared to the "big end" of the market dominated by firms like KKR and Blackstone.
• They act as a conduit to this middle market, helping clients access higher return areas.
• Their offerings are often complementary to those of larger firms, allowing investors to diversify their portfolios.

Public Markets and the Disconnect

Amy notes a disconnect between the seemingly "frothy" public markets, particularly driven by the "Mag 7" companies, and the lack of IPO volume and distributions. This suggests a narrowness in market performance.

• Broadening Markets Needed: A broadening out of strong markets is likely necessary for exits to occur.
• Reluctance to Go Public: There's a sentiment that companies are increasingly reluctant to go public.
• Societal Impact of Private Companies: Amy expresses concern that as more companies remain private, individuals participate less in democracy and capital markets, which she believes is not good for society in the long run.

Quarterly Reporting Debate

The discussion touches upon President Trump's suggestion to eliminate quarterly reporting for companies.

• European Perspective: In Europe, where quarterly reporting is not standard, it's argued that it keeps people focused on the long term.
• Investor Preference for Transparency: Amy, as an investor, values transparency and prefers more data.
• Over-focus on Quarterly Reporting: She acknowledges that there's an enormous industry overly focused on quarterly reporting, which can lead to missing longer-term trends.
• Opakqueness vs. Transparency: This highlights a debate between the benefits of less frequent reporting and the need for transparency.

Hamilton Lane's Origins and Growth

Hartley shares the backstory of Hamilton Lane:

• Founding: Established in Philadelphia in 1991.
• Early Focus: Initially an investment advisor helping large state pension funds select private equity managers, with CalPERS being a key early client.
• Transition to Asset Management: Moved into asset management, becoming a discretionary manager of assets.
• Key Investors: Bill Gates was an important investor when Hartley joined 22 years ago, leading a management buyout.
• Strategic Direction: The firm's strategic course has focused on secondaries, co-investments, a global approach, and diversification across asset classes.
• Data Importance: Hamilton Lane leverages its extensive industry reach and history to gather valuable data in the private markets.
• Merchant Bank for Private Equity: The thesis of being a "merchant bank for private equity" is coming to fruition, creating market-making and deal flow, which enhances transparency.
• Discipline in the Market: A more transparent secondary market can provide discipline for weaker players and address issues like "zombie funds" (funds that are underperforming with little accountability).

Macroeconomic Outlook and Opportunities

Amy expresses caution regarding the current macroeconomic environment, despite some positive signals like stable inflation and a likely downward path for interest rates.

• Uncertainty around AI: The long-term impact of AI on employment is difficult to predict.
• Softening Labor Market: Indications of softening in the labor market could negatively impact demand.
• Opportunity in Europe: Despite Europe's shrinking share of global GDP and market cap over 20 years, Amy sees potential due to dynamic companies and the possibility of regulatory reform. Valuations are also lower.
• China Investment: Hamilton Lane remained invested in China despite uncertainty, and it has seen some recovery.
• AI Risks: AI presents both opportunity and enormous risk, with potential for disintermediation.

Investment Style and Board Service

Amy reflects on her evolving investment style across different endowments (Andover, Rockefeller University, Northwestern).

• Size Matters: The size of the endowment dictates the investment strategy and the "edge" an investor has. Larger endowments can support broader strategies with larger teams.
• Liability Alignment: Understanding the real liabilities being financed by the operating institution is critical and is becoming more differentiated across universities due to varying tax statuses and funding pressures.
• Board Service: Serving on boards (Ford, MacArthur, Harvard, Andover) is a valuable learning experience.
• Broader Perspective from Boards:
  • Ford Foundation: Highlighted the importance of social stability (housing, nutrition, addressing mass incarceration) as prerequisites for education to be an effective pathway to opportunity.
  • MacArthur and Ford: Global institutions provide a broader context for understanding issues.
  • Harvard Management Company Board: Focuses on endowment management.

Challenges for Higher Education and Philanthropy

Hartley acknowledges the tricky environment for higher education institutions, with Harvard being at the center of many issues. He notes that these institutions are generally acknowledging and addressing these challenges while remaining committed to their missions.

Philanthropic Pillars: Education and Equity:

• Catalyst: Amy and Hartley's foundation focuses on education and equity, driven by patriotism and a belief in the American promise of opportunity.
• Informed Citizenry: Education is seen as critical for an informed citizenry in a democracy.
• Removing Impediments: The foundation aims to remove barriers to opportunity and ensure every child receives the best possible education.

Mentorship and Career Advice

Both Amy and Hartley share insights on mentorship and career advice.

• Hartley's Father: Advised to find something you love to do, not just to make money, ensuring happiness regardless of financial success.
• Amy's Mentors: David Swenson (Yale) was a significant mentor. She views financial markets as a place to grapple with big questions and a puzzle-solving exercise.
• Morgan Stanley Experience: Recalls positive experiences with strong research, thinking, and collaboration.
• Lifelong Learning: The financial industry is described as a "lifelong learner" business.

Work-Life Balance and Differences

Amy and Hartley openly discuss their work and how they share ideas.

• Constant Discussion: They do not leave work at the office and talk about it "a lot all the time."
• Impact on Children: This constant discussion has led their children to pursue careers outside of finance.
• Complementary Thinking Styles:
  • Amy: Described as a "top-down thinker."
  • Hartley: Described as more of a "rifle shot" or "bottom-up" thinker, focusing on specific opportunities.
• Celebrating Differences: They have learned to celebrate these differences rather than conflict over them, which has contributed to their success.

Conclusion

Amy Falls and Hartley Rogers, a prominent couple in the finance world, shared valuable insights into the complexities of managing large endowments, navigating the private markets, and the broader economic and societal implications of investment decisions. Their discussion highlighted the strategic importance of private investments for long-term growth, the evolving landscape of investor access through vehicles like evergreen funds, and the critical role of transparency and data in the private markets. They also emphasized the interconnectedness of social stability and educational opportunity, underscoring their commitment to philanthropy. Their personal journey, marked by mentorship and a complementary approach to financial thinking, offers a compelling perspective on building successful careers and making a meaningful impact.