Cashing out and growing sideways

With its IPO at the beginning of March, Hamilton Lane became the latest manager to position itself for the future.

Hamilton Lane, a global alternatives manager and a formidable secondaries player, decided to tap the public markets for cash and raked in at least $176 million when it began trading on the Nasdaq Global Select Market on 1 March.

The Pennsylvania-based firm, which has raised about $1.7 billion for its fourth dedicated secondaries fund, as Secondaries Investor reported at the end of February, has said it will use about a fifth of the IPO proceeds to purchase existing units of the company held by some of its current owners. The bulk of the remaining proceeds will be used to pay down debts associated with helping early investors to cash out.

The rationale for raising capital is fairly clear then: to support liquidity events for earlier investors in the firm. But why go the public route, when other options would certainly have been on the table? From lines of credit, to consolidation, to selling minority interests to GP-interest buyers, managers are spoiled for choice.

Hamilton Lane wasn’t available to comment, citing the quiet period related to the IPO – and market sources Secondaries Investor spoke to could only speculate.

What we do know is that the public markets have not always made the most comfortable home for private equity firms. The stock prices of the large listed firms have generally reflected a lack of excitement – or perhaps comprehension – from public markets investors. To take a salient example: as of Friday morning, Blackstone was trading around 17 percent below its original 2007 listing price.

It should be noted, however, that whatever the stock price of Blackstone or its peers has done, it certainly does not seem to have hampered the firms’ ability to raise and invest capital.

And therein may lie the answer: stock price distractions aside, the brand recognition and ability to raise more capital from public investors will allow the firm to seed new strategies in adjacent asset classes, with likely candidates being private debt and real assets, according to sources.

This comes when diversification for a fund investment business is increasingly valued. As one New York-based source put it: “The problem all these guys have is that funds of funds are dead and secondaries is becoming too liquid to really make money – they’re lucky to get low-teens IRRs now. They’re all desperate to diversify and extend their business models.”

Hamilton Lane does more than just funds of funds and secondaries, but even diversified managers must adapt to ever-changing market conditions. Indeed, if Unigestion’s purchase of Akina Partners and LGT Capital Partners’ acquisition of European Capital are anything to go by, expect to read more about funds of funds doing what they can to extend their business models in the weeks and months ahead.

Do the benefits of listing outweigh the risks for secondaries firms? Let us know: adam.l@peimedia.com or marine.c@peimedia.com. Or on Twitter: @adamtuyenle