Hamilton Lane closes third co-investment fund at $1.5bn

Hamilton Lane sees strength in mid-sized and lower mid market co-invest opportunities

Hamilton Lane has closed its third co-investment fund, which was oversubscribed at its hard cap of $1.5 billion, according to an announcement by the Philadelphia-based alternative asset management firm.

The closing exceeds the firm's second $1.2 billion co-investment fund at a time when co-investment has become increasingly popular among limited partners seeking portfolio diversification, as well as fund managers looking to bolster their deal making capabilities.

“LPs view this fund as an interesting add to their portfolio because it averages down cost over time, where we're not paying fees to the GP and we're providing co-investment capital that, in turn, provides investors with interesting diversification across their portfolio,” Erik Hirsch, chief investment officer of Hamilton Lane, told Private Equity International.

Hirsch added that it is important to not lose sight of the appeal of co-investments for GPs in light of today's high valuation environment, where companies across all market-size segments are commanding premium valuations. GPs may need additional capital to support their capital structure of their transactions, he said.

Limited partners in the Hamilton Lane Co-Investment Fund III were not identified, though a number of existing investors in the organisation's previous fund re-invested with the new fund, Hirsch said. Financial institutions, public pension funds, sovereign wealth funds, Taft-Hartley pension plans, endowments, foundations and high-net-worth individuals comprised the investor base.

Hirsch said the new co-investment vehicle will continue investing similar amounts of capital in deals as Hamilton Lane's previous fund, or between $20 million to $100 million per transaction. The firm's co-investment portfolio is more skewed towards investments in businesses with a small and mid-sized enterprise value, rather than large-cap companies, according to Hirsch. “That market is often harder to access, both at the fund level and co-investment level. We have such unique exposure to this market that we're able to offer greater access to LPs to these market segments.”

Hirsch declined to comment on the fund's carry or fee structure. A market source said Hamilton Lane Co-Investment Fund III has a standard industry structure.

Hamilton Lane is a long time co-investor, undertaking these types of deals since 1996 and completing more than 200 during that time. The organization has a staff of more than 20 professionals dedicated to its co-investment effort, according to its statement.

LPs are continuing to recognize the importance of co-investment. For example, the Arizona Public Safety Personnel Retirement System recently allocated $20 million for co-investment as part of its overall $150 million commitment to private equity, according to PEI.

While some LPs are keen to bring co-investment in-house, it is a challenging prospect when it comes to generating enough deal flow to do so for market players without a deep bench of experience in the space, Hirsch noted. “While the talk of doing co investments is the flavor of the moment, you're going to be hard pressed to find a group with a track record that goes back to the mid-1990's like ours, and that's going to be hard for newer entrants to the market to replicate.”

The firm's previous Hamilton Lane Co-Investment Fund II generated a net IRR of 21 percent, according to data from the Public Employee Retirement System of Idaho.