Hamilton Lane advises US pension to cut secondaries allocation

Higher fees and difficulty in agreeing on side letters with secondaries funds were among the reasons given.

Hamilton Lane has advised a California pension to reduce its secondaries allocation in favour of cheaper primary exposure.

The investment manager and consultant recommended that Fresno County Employees’ Retirement Association cut the amount of capital to be invested in secondaries via its separately managed account, which Hamilton Lane manages, to $10 million from $25 million, according to a document from the pension dated 4 March.

The primary allocation of the SMA will rise to $240 million from $225 million. The proposal was approved.

The SMA charges fees management fees of 0.25 percent for primary and 0.65 percent for secondaries investments, the memo noted. Secondaries investments also bring a possible carried interest charge of 10 percent, while there is no carry charged on primary investments.

FCERA already has exposure to secondaries via the 2015-vintage Hamilton Lane Secondary Fund IV, the memo adds. Assuming the remainder of available SMA capital is invested in primaries, secondaries would account for 26 percent of the total, which represents “appropriate exposure”, Donald Kenig, the pension’s retirement administrator, wrote in the document.

The investment in Fund IV is technically outside of the SMA but should be counted towards it, Kenig added.

“Due to market conditions, it is very difficult to include the side letters that are necessary for FCERA when investing in secondaries,” the memo adds. According to a source with knowledge of the situation, this is a reference to the level of disclosure required by Californian public pensions, particularly around fees.

The Public Retirement Alternative Investments Disclosure bill, passed in 2016, requires private equity fund managers to “make specified disclosures regarding fees and expenses in connection with limited partner agreements,” sister publication Private Equity International reported.

The Los Angeles City Employees’ Retirement System has said the bill could create “significant harm”, causing PE firms to exclude California pensions from investing in their funds, PEI reported.

FCERA has had an SMA with Hamilton Lane since November 2017. It has $4.84 billion in assets under management, 5.2 percent of which is in private equity, according to Secondaries Investor data. NewQuest Capital Partners is among the GPs it backed last year.

Hamilton Lane and FCERA declined to comment.