On Friday, the Wall Street Journal reported on an updated fee structure for Hamilton Lane’s retail-facing Private Assets Fund, which changes how the firm receives carry.
The fund typically purchases private equity stakes in competitive processes at a discount to the official net asset value. After acquiring the stake, the fund marks up the stake to the GP’s official NAV, booking near-immediate paper gains on the holding (a practice referred to as “NAV squeezing” by the WSJ).
In one September 2023 purchase of a group of new positions, nearly half of the 36 stakes at least doubled in value following this initial mark-up. One fund, an Advent International-managed Latin America vehicle, was marked up by nearly eight-fold from the price paid by Hamilton Lane.
In February, the fund asked shareholders to approve a change in the vehicle’s fee structure.
Previously, Hamilton Lane collected a 1.5 percent management fee and a 12.5 percent performance fee above a hurdle. But, the performance fee was payable only on a deal-by-deal basis when the fund exited a position.
Under the February proposal, which was approved in March by a majority of shareholders, the performance fee falls to 10 percent but becomes payable quarterly across the entire fund, including unrealized gains. The previous 8 percent hurdle was also removed.
With no need to wait until exit, the change dramatically reduces the timeline for the fund’s carry realization. With the quick paper gains from post-purchase markups to the GP’s NAV, the fund is now in a position where it can receive performance fees shortly after completing new secondary purchases.
Speaking to the WSJ, Brian Gildea, a managing director at Hamilton Lane, says the complexity of the old fee structure made it “difficult for investors to calculate on their own,” and said the new terms provide “a simpler-to-understand fee structure with a lower performance-fee rate.”
According to the fund’s prospectus, there’s no clawback provision to make investors whole should they pay fees on unrealized gains that later evaporate.
The structure does include a loss recovery account mechanism that halts payment of performance fees until cumulative profits since inception exceed the balance of the LRA. But, a subsequent draw-down in NAV merely pauses future incentive fees; it does not reverse what was already paid.