How Hamilton Lane BeatsThe Public Markets

A recent client presentation provides insights into how advisory giant Hamilton Lane outperforms the public equity markets, such as by staying flexible in the face of changing market conditions.

It also illustrates some of the challenges trying to keep data confidential in the Internet age. Fresno County Employees Retirement Association, for whom the presentation was prepared, posted a copy on its Web site—to the surprise of at least one senior executive at Bala Cynwyd, Penn.-based Hamilton Lane. He called the contents “largely trade secret” in an e-mail message, declining to comment further. I was unable to reach an executive at the retirement system for comment.

The county took the presentation down. I decided to report on the contents given their inherent interest and because the presentation had originally been made public; in my last column I discussed some of the favorable terms Hamilton Lane has managed to negotiate in recent limited partnerships. The firm is one of the largest private-equity advisers in the country, with some $23 billion in discretionary assets under management, and another $143 billion under advisement.

Many institutional investors have embraced the notion that it is impossible to predict the future performance of individual asset classes. Better, they believe, to set target allocations to asset classes—20 percent to Asian equities, say—and to steadfastly keep to them even as they outperform or underperform target returns in the short run. You sell your winners and buy your losers to re-balance.

But at least within private equity, Hamilton Lane argues that “changing markets require a dynamic approach,” according to the presentation. To illustrate, the firm de-constructs four of its most recent funds of funds—its $250 million 2000 vintage fund (Hamilton Lane Private Equity Fund IV LP), $135 million 2003 vintage Fund V, $494 million 2007 vintage Fund VI and $262 million 2010 vintage Fund VII, which as of June 1 included 24 funds but was still a work in progress. Among the changes Hamilton Lane has made to its strategy over that time:

• An expansion in Latin America, Western Europe. Investments in the 2000 and 2003 funds leaned heavily toward North America (87 percent and 88 percent, respectively). By the 2007 fund, the percentage of North American investments fell to 75 percent and for the still-under-construction 2010 fund it is 63 percent. One of the beneficiaries: South America, which has so far accounted for 10 percent of investments in the 2010 pool. The firm is also making a sizeable bet on Western Europe (19 percent) with its 2010 fund.
• A big bet on distressed debt, secondaries. Distressed debt doesn’t even register as a sliver of the pie charts illustrating the make-up of the 2000 and 2003 funds in the presentation, while it accounts for six percent of the 2007 fund. So far in the 2010 fund, it accounts for 21 percent of investments. Secondaries account for 15 percent of the 2010 fund, up from 10 percent in the 2007 fund and 7 percent in the 2003 fund.
• A push into financial services, energy. Financial as a category appears to have been ignored almost completely in Hamilton Lane’s 2000 and 2007 funds. With its 2010 fund, the firm has seen 14 percent of investments go to this category. Hamilton Lane also continues to make a sizeable bet on energy, at 19 percent so far in the 2010 fund, although that’s down from 26 percent in the 2007 fund. Health care also has recently fallen as a percentage of investments, to 6 percent in the 2010 fund from 15 percent in the 2007 fund.
• A move downmarket to smaller fund sizes. By fund size the trend has been for Hamilton Lane to go smaller. What it calls “small funds” of less than $1 billion accounted for 55 percent of the 2010 fund as of June 1, up from 33 percent of the 2007 fund and 51 percent of the 2003 fund. Large funds of roughly between $3 billion and $7 billion accounted for 5 percent of the 2010 fund, down from 10 percent in the 2007 fund and 29 percent of the 2003 fund.

Within these overarching strategic moves Hamilton Lane also evidently has picked good managers to back. (“You have to find and access the best managers,” the presentation states.)

In the presentation the firm highlights the pooled net IRR performance of its combined funds of funds—not including secondary funds or five funds of funds with “investor-specific investment guidelines”—from inception through year-end 2011. Compared to the S&P 500 index, calculated using the public market equivalent methodology, investors in Hamilton Lane funds of funds would have outperformed on average by more than 650 basis points each year from 2000 through 2011.