Hamilton Lane's Hirsch: Private markets industry has too many GPs

0:02Adam Le: Welcome to the latest episode of PEI Spotlight, a private markets podcast that delves into the very latest in private markets investing. My name is Adam Le. I am a senior editor for private equity in EMEA here in London. And today we have Erik Hirsch of Hamilton Lane, one of the largest investment firms in private markets. Erik, welcome to Spotlight. Adam, I am happy to be here. It's great to have you, Erik. and it's such an interesting time to be having you here in October 2026. It feels like private markets is at a little bit of a crossroads, so I'd love to get your thoughts on the latest big topic issues affecting the industry.

0:39Adam Le: I want to start with one topic that has been on everyone's lips for the past sort of 18 months, the exit environment. We had some PEI private equity fundraising out this morning. It shows that private equity fundraising for Q3 this year and from Q1 to Q3 is on the up. So year on year, it's a larger figure, but it's still down on historical high levels. So a little bit of good news, but at the same time, it feels like the exit environment has been very, very challenged and muted. I guess my question to you is, as someone who sits at the top of a private markets investment firm, how worrying is this for you as we sit here today?

1:20Erik Hirsch: Well, I think it's a large problem for the industry. So our industry has gotten very big, and I think it makes it hard to generalize because of that size and scale. And I think we talk about things in both absolute, but we should probably also talk about things on a relative basis as you were just doing. So fundraising is getting a little bit better, but as you noted, it's down substantially from market peaks. And I don't see it returning to market peaks anytime soon. On the exit side, I think there's a multitude of challenges. One, the notion that the IPO market is going to be the saving grace for the private markets is simply untrue.

1:58Erik Hirsch: IPO market accounts for a very tiny portion of private market exits. And that's not surprising or it shouldn't be surprising because most of the companies that are backed by private equity are simply too small to be public companies. On an absolute basis, Last year calendar was the second highest year for total liquidity in the industry's history. But on a relative basis, if we're measuring that total liquidity as a percentage of total net asset value of the industry, it was another absolutely lackluster year. So why? I think there's a few different pieces going on that are unrelated. One is that in order to achieve good returns, you're not getting a lot of multiple expansion.

2:49Erik Hirsch: You're not getting some impact of leverage. You're doing it the old fashioned way, which is you simply have to grow your way into those returns. And that takes time. So we're seeing that. So holding periods just in general as a result of that are longer. The second reason is there are a number of assets that are challenged and don't have a great home for them today. Now, some of those are challenged on a temporary basis. So if you had a shipping business that is essentially reliant on a diesel fuel fleet, today's not the day to sell that. And so you want to see diesel prices normalized before you head into the exit environment.

3:30Erik Hirsch: The third piece, though, is we have a number of managers who are not going to be ongoing considerations because they're not raising a new fund.

3:38Adam Le: You're talking about the so-called zombie managers as someone like that.

3:41Erik Hirsch: I am. And as we know, zombies can be very hard to kill. And that is exactly what we're experiencing here. And those managers, frankly, don't want to sell their assets because so goes the asset, so goes their management fee, and then they're not an ongoing concern. So I think what you have right now is a bit of a storm of a lot of forces colliding, resulting in exactly what we're seeing, which is a fairly lackluster exit environment.

4:05Adam Le: Eric, there's so much that you've just said that I want to unpack. You've sort of hinted at some of the big themes that are affecting private market participants today. The very first thing you mentioned was that you don't see private market fundraising going back to the historical high levels. Why is that?

4:21Erik Hirsch: Well, I think a few pieces. One, when we talk about the fundraising statistics that you're referencing, we're really only capturing in that data closed-end fundraising. And as you know, the markets have continued to mature and develop over the last several years, where for investors, there's a lot of different ways for them to deploy capital. They can be deploying capital in secondary transactions, not captured in those numbers. They can be deploying capital in co-investments, not captured in those numbers. And they can be deploying capital increasingly in evergreen funds, also not captured in those numbers.

4:57Erik Hirsch: And so the evergreen world was originally thought to be a world of the individual investor. And it is. And it's also the world of increasingly of the institutional investor. So we're seeing more and more capital flowing into that space that would otherwise have gone into closed end funds. So it's not that the fundraising numbers are down simply because the industry is bad or struggling in some way. There are challenges that we're talking about. But it's also because there are just more mechanisms for investors to deploy capital that we don't have a great way to capture in kind of these aggregated fundraising statistics.

5:38Adam Le: So capital is still flowing into private markets exposure in an elevated way. It's just going via different vehicles and different channels, which is not necessarily being captured in some of the traditional ways that we measured the fundraising. You also mentioned stagnant funds. Some people call these zombie funds. Some people call them tail-end funds. Essentially, these are funds that may be at the end of their lives, and the manager has not managed to raise a successor fund. KKR Arctos estimates that there could be around$600 billion in stranded NAV by 2028. That's just sort of less than two years away.

6:15Adam Le: As an investor in other GPs' funds, how big an issue is this for yourself? Do you identify so-called stranded funds in your own portfolio as well?

6:26Erik Hirsch: Well, I think part of this is the reason why you're having this issue is that the dispersion of manager continues to be very, very wide. So I think we had been told by, I'll say, pundits for years that as the industry got bigger, as the industry matured and as more capital flowed into the industry, you would see returns begin to revert to some sort of mean. And if you would listen to Hamilton Lane over that time period, we've been loudly saying that's not true, that won't happen. And the data says we've been right about that, that dispersion today remains as wide as it was 10 years ago or as wide as it was 20 years ago.

7:03Erik Hirsch: Dispersion of manager performance. So if we simply line up 1 ,000 managers and we look at the best to the worst, how wide is that? And the answer is very, very, very wide. So capital has not been a determinant of shrinking the dispersion gap, nor has maturity or time or aging of assets. This is really a talent issue, that what managers do with the asset once they purchase it, that is really causing the outcome. And that's a question of manager talent and investment selection and all the pieces that go into this. And so gapping is really big. And what's also been the reality is that most LPs have not put a real premium on fund selection.

7:50Erik Hirsch: It's not something they want to really pay for. It's not something they want to dedicate a lot of resources to. If you meet a lot of LPs who are building portfolios themselves, they're very quick to talk about the secondary deal they did or the co-investment that they worked on. And it's sort of not seen as sexy to be a fund picker. We have a very different view of that. We think fund picking is essential and it's a real skill set and it has real value. And you're seeing that today very clearly in the numbers because, again, if the dispersion is so wide, being right versus being wrong is a problem.

8:24Erik Hirsch: So I agree with the notion of there's a lot of assets that are held right now in fund managers' hands that, again, are not an ongoing concern. The manager, I think, in many cases doesn't realize that they're not an ongoing concern because I think there's a naive view among managers today that this fundraising challenge, this too shall pass, and then I'll be able to raise capital again next year or the year after. And what we're saying is, as you heard me say before, this isn't really a fundraising problem. This is an industry that's evolving and moving in different ways. And let's say it clearly, we have way too many managers.

9:05Erik Hirsch: And so the industry doesn't need that many. LPs don't need that many. And it's diluted the talent pool to some extent. And so that's more of the reality rather than some temporary fundraising challenge. Very interesting. So the industry has too many managers.

9:22Adam Le: How do you see this playing out? Are they just going to die off? Do you see more consolidation coming through?

9:28Erik Hirsch: I don't see consolidation because I don't think one plus one equals three in most of these cases. I think they will eventually die off. But as you know, because you've covered this, they're hard to kill off. And so it just takes this long runoff of time. And if they're not looking to sort of liquidate their assets, you're just prolonging this piece. So I think that's why I agree with the notion of this kind of trapped nav, because if you have a non-motivated seller and you don't have pressure from the LP, now pressure from the LP is increasing. But as you know, there's only so many mechanisms LPs have to force action.

10:07Erik Hirsch: and LPs tend to be reluctant to force action. And so I think it's one of the reasons why the secondary market volumes are up because LPs are trying to solve their problems in different ways and one of them is through the secondary market.

10:21Adam Le: The secondaries market is obviously one of the huge growth stories in recent years. If you compare fundraising for secondaries funds and for annual deal volume, Hamilton Lane is obviously a very large investor in secondaries. And tying that to the zombie fund question, is the secondaries market the sort of white knight, the savior to all these kind of stranded assets?

10:43Erik Hirsch: Probably not because buying them in a secondary market if they're still stranded doesn't really help you as a secondary buyer. Stepping back, I think a large, vibrant secondary industry is a good thing. I think having people's ability to generate liquidity, rebalance portfolios, be tactical in allocation, and using the secondary market to do those things is good. In the public equity world, we have infinite ways to sort of go address those issues. The private market world has just had fewer options there. So big fan of the secondary market. I think it growing, maturing is the sign of the industry on some levels evolving and being healthy.

11:28Erik Hirsch: That said, the secondary industry in and of itself doesn't create ultimate liquidity at the asset level. It simply allows pieces to be moved from one investor to another. It's replacement capital.

11:41Adam Le: It is.

11:42Erik Hirsch: Now, that's not so true on these GP-led or these continuation vehicles. that is providing liquidity for some set of investor who is looking to exit. So again, I think all this is good, but I don't think it's a white knight piece.

11:56Adam Le: On secondaries and GP leads in particular, you've cited some data, which is that I think last year, 15 % of buyout exit volume was via GP leads. Is this a percentage that you feel is roughly in balance or do you see that likely growing in the years ahead?

12:14Erik Hirsch: Well, I think it's been growing. I think the question today is that that's probably one of the spaces in the market that is the most capital mismatched, where if you look at capital available to finance and interested capital to finance relative to the amount of opportunity that wants to be financed, there's a pretty big imbalance. So a lot of want and a lot less desire. And so that's fine. You have a lot of disappointed people who can't get a transaction done. But I think that market in and of itself can be done in a healthy way. So what does that look like? Good asset, owned by a good GP, who sees an ability to extract additional value over time, wants to continue to work that, who provides an opportunity to the existing LPs to either get out and have liquidity and or roll some portion or all into the new transaction, where the GP also economically aligns themselves in that deal.

13:20Erik Hirsch: And then you have a transparent pricing mechanism and you have an environment where the LPs who are selling can be assured that the price is reasonable and fair. I think that's a good environment. I think that's, again, I go back to the word healthy. I think that that feels appropriate. And I think that has a real place in the industry. Now, unfortunately, not every transaction that's coming through that channel is what I would describe as healthy. So they're sort of violating some number of the things that I think need to be there in order for this to be a good thing. And it's also why A lot of the deals aren't getting financed because the market, I think, is maturing and recognizing what is healthy and what is unhealthy.

14:02Erik Hirsch: But I think there's no inherent notion of a GP wanting to continue to own an asset that they already have great familiarity with.

14:10Adam Le: And does healthy equal more sort of regulatory oversight? Bodies like the SEC, ILPA, for example, putting out more best practice guidance or even strict regulation governing this part of the industry?

14:23Erik Hirsch: I don't think it requires regulation. I think it just requires sophisticated buyers who understand and can recognize what is appropriate and what is not appropriate. I don't think that that sort of is in need of an SEC issue. I think LPs should be vocal about this. I think LP advisory boards should be discussing and debating and having those dialogues with their GPs. So I think all of that is a good thing. But I'm not sure this requires a sort of a formal set of laws to resolve any issues there.

14:54Adam Le: I want to shift to the big topic of performance in private markets. You mentioned at the beginning of our conversation that investors, LPs, are actually increasing their private markets allocations. At the same time, it feels like returns in the industry are not what they used to be. The end of cheap money is sort of over and there's a lot more competition, a lot more GPs, as you mentioned. Is this lower DPI, lower return environment the new normal or do you think it's temporary?

15:23Erik Hirsch: I think it's temporary, but I think we also need to look at performance on kind of an absolute and a relative basis. I think right now the underperformance is primarily on a relative basis relative to the public markets. So if we look at historical returns for the public markets and the private markets, Today, the public markets are performing around the 90th percentile of their historical performance averages. So basically, they're performing at the top. So if you're at the 90th, not much room to go up from there, but a lot of room to go down. Conversely, the private markets are performing around the 25th percentile of their historical norms.

16:04Erik Hirsch: A lot of room to go up from there and some room to go down, but a lot of room to go up. So I think when you look at those two worlds, what I would say is we've been in an environment where the public markets, as we all know, have been on an absolute tear. But those public markets have been driven by, and we all know this, a very, very small number of stocks that are essentially all leveraged to each other and leveraged to the same tailwind. Essentially tech stocks. It's tech and AI, right? They're all correlated and intertwined. Again, from a historical standpoint, to look at the concentration at kind of the top 10 securities at this level, you would need to go back to the late 60s, early 70s to find something approaching this.

16:46Erik Hirsch: But back then, they wouldn't have been correlated or interrelated to each other. IBM and Exxon were not exactly playing the same theme. But that's not where we are today. So I think, taking a quick sidebar, one of the reasons why allocations are sort of where they are and potentially rising, despite some of the performance headwinds, is demand and desire for diversification. That LPs and investors, both individual and institutional, are realizing that a portfolio simply comprised of public equities means that they are disproportionately mega cap-oriented in a tech sector. And the number of public companies on a historical basis has been basically doing nothing but dropping decade over decade over decade.

17:35Erik Hirsch: So today in the US, far fewer public companies than there were if we went back to the 90s or the 80s. So it's also just a smaller pond in which to be fishing. So desire for diversification, high and rising. I think a recognition that public markets are at peaky and have been, frankly, for the last couple of years at peaky performance levels, whereas the private side is simply not. So if you think about where we're going to be moving, I would expect to see, and you can start to see some of the winds shifting here, publics begin to cool off and come down and privates begin to rise.

18:13Adam Le: Okay. I mean, a rising public market also provides an attractive

18:18Erik Hirsch: IPO market for private assets. It does. But, or and, the IPO market is a tiny, tiny, tiny portion of the exit environment for privates because of the size issue, that the vast majority of what the private markets finance are sub$1 billion enterprise value businesses. And those companies are not destined to become public. So the public market today is sort of the land of giants, and the private market is the land of small things. And that isn't changing. And I think what you also have is an increasing desire to simply stay private. That for, again, for most companies, there's no reason to be a public company unless you have a strategic need to have that stamp of approval, which some companies do.

19:09Erik Hirsch: That was certainly a factor for Hamilton Lane going public. But for most companies, they don't need that. And the capital markets are such that you can stay private forever. And that historically wasn't always the case. Indeed.

19:23Adam Le: I want to ask you, we tune into a lot of public pension meetings and we speak to a lot of investors as well. And one of the big issues of late that they have is with benchmarking. So with rising public markets, how do they more accurately assess the performance of their private markets portfolios? Hamilton Lane is an LP as well with your LP hat on. How do you best assess how your private market exposure is obviously doing compared with public markets if they're so difficult to measure in today's environment?

19:57Erik Hirsch: So we take a couple of tactics here. One, I think the simplest tactic is we're big believers in a public market equivalent calculation. That at the end of the day, if we're talking about a private equity portfolio, it is an equity alternative. For most LPs, if they weren't participating in private equity, they would simply have that capital in public equities. And so whatever their public equity benchmark, that tends to be the root of a public market equivalency calculation, and you're lining up, make a capital call, buy this public security, et cetera, et cetera. So I think that's sort of pass number one.

20:33Erik Hirsch: Pass number two is then I think you have to look at performance on a relative basis, not simply relative to private market alternatives. And so if we sort of do the first relativity relative to public markets, we solve that with the PME. And then we move from that into a relative calculation against other private market options. And so were you picking the best options relative to the other things that you could have been doing? So I think performance is best looked at through both of those lenses. Okay. So it's not just one comparing to if we had put the capital in public markets. I think it has to be both because I think both were choices that you made.

21:11Erik Hirsch: The first choice you made was, should I stay in the public markets or should I put capital in the private markets? And so we need to benchmark that choice. And so you do that. But the second choice you made was you chose to do that private thing versus doing another private thing. And so was that in and of itself a good choice? And I think you need to look at both.

21:32Adam Le: It would be remiss of me to have a conversation with you and not raise the topic of AI. This could go in multiple directions, But I guess specifically, I wanted to ask you, where is Hamilton Lane's house view when it comes to software asset exposure as we sit here in 2026, considering that hundreds of billions was wiped off public markets in the so-called SaaSpocalypse at the beginning of this year? Are you steering away from software as a sector in any of your investment businesses?

22:01Erik Hirsch: So we're not. And I think, frankly, what happened with the so-called saspocalypse was a good example of the public markets aren't always right. And the public markets can often be overly emotional and irrational. And that was a good example of we have a single report comes out that paints with an overly broad brush and the market reacts and it reacts in a uniform way. Now, if we measure where those stocks are today, a whole number of them have recovered and in some cases have actually recovered and gone beyond where they were at the start of that downturn. So a good reminder for everyone that sometimes kind of the herd mentality and investing based on fear is not a good path and that maybe a better path is deep analysis and looking at things on an asset by asset basis.

22:52Erik Hirsch: So software. There will be plenty of software businesses that are going to be and are being or already have been completely disrupted and upended by AI. And there will be plenty of software businesses who have already integrated AI into their offering and who are better as a result of it. And not only will they not be disrupted, but they will grow as a result. And so for us, we don't have a thematic view of all this is good or all of this is bad. We're much more focused on looking at each of those assets and making a rational choice around where do they stand? What's the value proposition? How is the market receiving them?

23:33Erik Hirsch: What are their growth prospects? And what value is the appropriate value? The public market, again, tends to sometimes just be so sector reactive. And I think it's one of the things that the private markets, because we don't have that real-time ability to have everything move, gets a little bit more immune from. We're not immune from making dumb choices. We make plenty of those as an industry. But we do benefit from the time and the inability to necessarily have singular herd mentality.

24:03Adam Le: At the same time, I mean, the pace that AI seems to be evolving is unprecedented, the things that it can do. And some of the firms active in the software space are seeing huge write-offs, write-downs. Some of the industry's largest software investors have lost billions on some of their investments. How are you confident, I suppose, that you have the right tools to assess which ones are going to be the winners and which ones are not going to be the winners?

24:31Erik Hirsch: Well, I mean, I think this is back to an asset-by-asset look at this. I don't think there's no easy solve on this one. I think this is simply you've got to have the team, the resources, the expertise, and being willing to put in the time and the effort. Because you're right. There will be, there have been, and there will be plenty more significant losses. So that is a reality. And the other reality is that there will be plenty of gains. And so this is back to our dispersion issue of some good choices and bad choices. And it's why all the returns don't look the same. This is playing out real time right in front of our face.

25:07Hmm.

25:08Adam Le: Food for thought. Eric, time is always against us. It's been an absolutely fascinating discussion. Thank you so much for your time here on PEI Spotlight.

25:16Erik Hirsch: Pleasure being here. Thank you.

25:24Adam Le: That's all for today. As always, you can find more at pei-privateequity.com. And don't forget to subscribe to PEI's Private Equity Spotlight podcast at pei-privateequity.com forward slash podcast or wherever you get your podcasts. For PEI, I'm Adam Lay. Thanks for listening.