The amount of leverage being used on transactions is worrying, according to Hamilton Lane chief executive Mario Giannini.
“You see a lot of secondaries deals being done with a fair amount of leverage,” Giannini said. “You’re seeing leverage that you just haven’t seen before. That’s a little risky and that worries us a little bit.”
The Philadelphia-headquartered firm, which has raised just under $2 billion for its latest secondaries vehicle, Hamilton Lane Secondary Fund IV, is still buying rather than selling. But with a fund significantly smaller than those of some of its competitors, it is not under as much pressure to put dollars to work, according to Giannini.
He declined to comment on fundraising.
As growth in the secondaries market only happened during the current cycle, Giannini thinks there could be a scenario where a levered secondaries portfolio bought at a premium turns negative for a period of time.
“Secondaries could end up losing money, which I don’t think anyone sees as possible,” he said, adding that a downturn would freeze up volume and push the value of existing portfolios down. “It depends how long the downturn goes.”
A quarter of deal volume last year was funded by leverage at the SPV level, with loan-to-value ratios increasing to more than 40 percent, according to a 2016 survey by investment bank Evercore.
The goal of Hamiton Lane’s March listing on the Nasdaq Global Select Market was not to make a big splash, nor did the firm need the capital, according to Giannini. The IPO raised about $170 million in net proceeds for a $1 billion enterprise value, which it used mainly to pay down debt.
What the firm wanted to do was affirm its independence and gain an institutional structure and framework; it also viewed the IPO as an important branding exercise, according to Giannini.
Looking forward, the IPO will not prompt Hamilton Lane to make significant acquisitions or to explore new lines of business, Giannini said.
“The first thing is ‘do no harm to the existing business’,” he said. “It’s always tempting to think about expanding and acquiring but we have a very good core business today. I’d be surprised if we did anything outside of where we have expertise.”
He would, however like the firm to increase its real assets – particularly real estate – and debt strategies to meet investor demand.
Another area of potential growth is the number of offices. Hamilton Lane has 12, with plans to open another in Sydney soon. The firm is considering a second European office – in addition to London – and options could include Dublin, Frankfurt or Luxembourg, according to Giannini.
It might also consider opening an office in the Middle East or in China down the line, he added.
– This is an excerpt from the privately speaking interview that appears in the June issue of sister publication Private Equity International. Click here for the full article.