Privately Speaking: Adapt or die

When Juan Delgado-Moreira moved from London to Hong Kong to spearhead Hamilton Lane’s international expansion in May 2011 he had a clear sense of where the firm’s growth sweet spot lay.

Three-and-a-half years on, that sweet spot, customised separate LP accounts, remains intact and growing, but the firm is evolving even further from its advisory and co-mingled fund of funds roots.

The group’s managing director for Asia and head of international is in ebullient form, fresh off the plane from a client trip to Tel Aviv and happy to talk up recent successes, from the June 2015 close of its third co-investment fund on the $1.5 billion hard-cap to the successful 2015 exit from Indian conglomerate Avantha Holdings.

Delgado-Moreira is determined that his group, which deployed over $11.5 billion into private equity over the past year, continues to keep abreast of the latest technological developments in the industry and reveals that it has just migrated all of its managed portfolio accounts onto a new IT platform managed by i-Level.

The whole transparency debate, and recent revelations around CalPERS’ reporting difficulties should not really be happening, he insists, if companies invested in technology in the right way in the first place.

“The shocking part is that a growing asset class of $2 trillion should not have that problem,” he says. “The industry needs to do more on transparency, data and benchmarking.”

Hamilton Lane’s early days seem a long time ago. The 1990s, when Hamilton Lane was purely a US West Coast advisory firm, now feel like “pre-history”.

But while advisory still makes up the vast bulk of its assets, it was one of the first fund of funds to make the move toward separate mandates, a shift in strategy by traditional funds of funds toward hiring client teams, offering more aggressive terms and competing for separate accounts.

When Private Equity International spoke to Delgado-Moreira in March 2012, the firm had $22 billion in assets under
management, with $18 billion of that in direct and co-investments. That has now grown to $34 billion, with the separate mandates including funds, co-invests and secondaries worth almost $27 billion, and the remainder still in more traditional, co-mingled primary and secondary investments.

Jim Strang’s appointment two months ago as managing director for its European investment committee, has taken that geography away from Delgado-Moreira’s immediate control, but it’s a sign of both Strang’s own progress at the firm, and also the group’s strong continuing growth across geographies, he says.

“We think strongly that we got it right. However you look at some of our competitors, a big percentage of their AUM is historical, and not in separate mandates. There is no debate in the market that separate mandates is where everyone is focusing.”

There is also an enhanced focus on what he calls diversifying areas, be it co-investment, strategic credit, mezzanine debt or secondaries.

To Delgado-Moreira, with the winning of separate mandates continuing to gain traction, this latter focus is the newest “battleground” for Hamilton Lane and its competitors.

“The secondaries markets are now dominated by firms like us, with one or two exceptions, and private debt will be a key area also over the next few years.”

It is global players, he says, who are moving into these areas, because the local players are generally smaller and with scalability a crucial aspect, capacity has also come out of the market.

There has been a “creative destruction”, as Delgado-Moreira calls it. The local fund of funds players are typically raising funds at around $1billion or less – not quite enough to keep them ahead of the competition.

“The problem with co-investments and secondaries, is that these are expensive models. You need real feet on the ground and big teams of professionals. All this gives the larger, global players an innate advantage.”

But it is not just in debt and seconda-ries that the firm is looking to build up its operations.

The other big trend where Hamilton Lane is focusing efforts is the growth of LP interest in a broad range of real assets, be it timberland, infra, real estate or agri. It is another sweet spot, he says, particularly in terms of demand from the firm’s mid-sized US clients, who are often looking to save costs by consolidating two or three real asset sub sectors under one manager.

“Your ability to cover a range of real assets is coming more and more into play because a lot of mid-size clients want to work with fewer external managers,” he says.

What was previously a key differentiator, local knowledge, is no longer relevant, he claims, as the biggest GPs and LPs flex their muscles and expand their geographic footprint.

“The market is putting real pressure on the niche local players to specialise. Geography is no longer supporting your business because all the global players by now, have credible global coverage.”

With tight margins and lack of scale for many, Delgado-Moreira expects many of the local firms to get rolled up into a global platform, as Flag Capital and Squadron have done recently after being acquired by Aberdeen Asset Management. Alternatively, he suspects that others may gradually run their businesses down.

“They now need a track record like everybody else. There have been a couple of run-off situations already, which means letting the team go and lowering costs, but no growth.”

Delgado-Moreira expected to see more GPs entering the space by now, but he believes further interest from the global asset management firms is just round the corner.

“The asset managers are clearly interested, as we’ve seen with Aberdeen and BlackRock’s recent acquisitions. What are they trying to do? Is it grow, or is it just trying to manage the run-off from the existing portfolios from the likes of Swiss Re, SVG, Squadron, Flag, Lloyds? It remains to be seen.”

And he expects other global asset managers – including the likes of Invesco and Fidelity – will look to strengthen their alternatives capabilities, as Aberdeen and BlackRock have done.

Whether the big guns will gear up to start slugging it out for local capital and separate accounts in the future or not, Delgado-Moreira has a clear sense of what success looks like for those present on the ground right now.

“An indication of winning today is headcount expansion, AUM growth and real global investment activity. A lot of the other firms are no longer as liquid. Show me headcount, show me your offices and your deployment rate. These are the metrics you need to look at.”

Being able to allocate $11.8 billion of client money into the primaries market in 2014 is a key differentiator too, and brings other advantages.

“Part of why we have grown so well is because being a very large allocator of capital allows us to have privileged deal flow. Everyone can invest in teams but deal flow cannot be improvised, it comes from your relationships and your real investment activity in funds.”

“We know there are a lot of people in the market with a real lack of dollars to invest in primaries,” he adds.

Another significant shift in the private equity landscape over the past decade is the rise to pre-eminence of a cabal of super LP/GPs, spearheaded by the biggest Canadian pension plans.

A decade ago, Delgado-Moreira says, this term would have merely applied to one or two names in the Middle East, but today the Canadians are established as leading that elite pack.

Alongside the likes of Ontario Teachers, which has been active in opening Hong Kong offices, he also points out ADIA, which is also opening a Hong Kong base, while KIC is opening a London office. GIC and Temasek are also increasingly active in hiring in Asia, while his own firm is on the cusp of opening a two-man investment team in Seoul to complement the four they have in Tokyo.

“In a way they are doing as we did with third-party managers; trying to get proper geographic expansion to be closer to the markets and tracking the arrival of Asia as a major business destination.”

But while he thinks it makes sense for the largest players to complete their geographic footprint, there is a caveat. He says there are some tensions as the largest investors strive to create the balance between being both a GP and an LP.

Hamilton Lane may find itself bidding against some of the big investors for an asset, alongside a peer backed by one of these super LPs.

“They recognise that they need to be careful and that they have to work with GPs as true partners. What we hear sometimes from GPs is that that balance is strained in [setting] terms, and in negotiations.

“They need to get that right because it is not a huge gap to the tipping point of becoming like a Partners Group, and saying to the market, ‘I am a GP, I don’t need you.’”

GPs have allowed the expansion of non-fund activity or what Delgado-Moreira calls shadow capital.

The Australians, Nordics and Dutch are in the second tier just behind the top investors, he says, and he sees them going in the same direction, but it takes time to build up the required level of competence.

“There is a tier one of providers, where we would put ourselves, which are truly customised. They can add value to anyone in the market, at the highest level of sophistication as well as at the entry level into the asset class.”

Despite a rush to increase direct investing by many of his peers, Delgado-Moreira says his firm will always keep the bulk of his private equity investments in funds.

“You have to continue to invest in funds if you want the luxury of that deal flow,” he says, adding: “Those that shift north of 60 percent [direct investing] will find that the quality of their deal flow goes down dramatically and the risk they take in terms of doing deals will go up.”

And the more risk being taken, the more performance could become compromised, Delgado-Moreira warns.

“There is a perception that because we have been in a bull market for so long co-investment is easy. That was probably ok until mid-June. Over the past two-and-a-half months I haven’t heard that anymore because volatility has meant assets you bought just the other day are down.

“It will remind people that there is real risk in co-investing relative to fund investing. You need good teams and processes. Many LPs have not put in place these processes, and there will be blood because investing well is very hard.”

Despite his concerns for some of his peers, Delgado-Moreira is relaxed about the future of buyout investing, even as more and more traditional GPs diversify into sub-sectors.

He points out that since Lehman’s collapse in 2007, the NAV of the private equity industry has doubled.

“No other segment of alternatives has pulled that off,” he says.

“It makes it look like buyout is losing its dominance, but that is not the case. It is simply the market broadening into more specialist areas.”

Buyout strategy still oscillates between 50 and 70 percent of Hamilton Lane’s overall funds strategy. Delgado-Moreira is keen to emphasise the fluid asset allocation that defines the group’s model.

“There are a few well-known firms who believe in a more static allocation and they have done that since the 1980s. A third in venture, a third in buyout, a third in special situations. Good luck to them, but we think it has cost them and their clients a lot of return.”



The current volatility in China has made for testing times for investors, but Delgado-Moreira insists that while the global impact could be significant, he and his fellow Asia investment committee members will not just be sitting tight.

“I can’t recall Chinese news affecting the US rate decision as sharply as recent news has been perceived to have done.

“We are not relaxed, or sitting it out. We are busy looking at lots of secondaries, co-invests and directs and our deployment pace on the primary fund side is only a little slower.”

There is also a soon to be announced tie up with a well-known local player, although Delgado-Moreira is canny enough not to divulge the name until the deal is officially sanctioned.

“That is how you invest in Asia. You do not sit in or out of the market, but you play with the mix and rotate countries [and] I think we have been one of the more active players in Asia over the past couple of years.

“We are talking to our managers closely about what they see in the earnings of their portfolio companies. It is too early to tell, but the main way private equity will be affected is a slowdown in growth rates.”

Delgado-Moreira points out that the June numbers in private equity were already showing a mark down [in terms of Chinese private equity firms] and he expects that to continue in the September and December quarterly results.

“The magnitude is not cataclysmic but it will probably be a double-digit reduction.”

He is also looking closely at Chinese sales figures earnings.

In the meantime, while high volatility means that the pace of investment and fundraising will be slower, Delgado-Moreira expects that if there is any resilience, there may be some buying opportunities, particularly in the consumer facing sectors.

“Public markets hurting tends to benefit private equity in the mid to long term,” he says.

Areas where Hamilton Lane has been making significant investments have included energy and healthcare, while the group continues to like country specific funds. It has also been very active in terms of Indian transactions, although markedly less so in Indian funds.

“Funds have taken a long time to mature and to deploy in India. That has not changed. Pricing too remains at high levels.

“Private equity prices follow the public markets as closely as anywhere in the world and pricing remains as high as it was in 2010 or 2011.

“If you had an Asia allocation, whether an LP or a GP, and all of a sudden your allocation to China goes down, there is only one significant economy in the region you can go to: India.”

With the US expensive relative to historic trends, India, certainly in the small and mid-cap space, looks a relative value play, he says.

“There is a lot of activity and attention, partly because of what is happening in China, but there is probably going to be less capital than interest.” 


Avantha Holdings

In 2013, Hamilton Lane co-invested alongside AION Capital Partners in Indian conglomerate  Avantha Holdings. This was a structured investment that included equity participation in Avantha’s publicly-listed subsidiary Crompton Greaves, also based in India.  

Earlier this year, Advent International, along with Singapore’s LP Temasek acting as an independent co-investor, acquired 34.37 percent of Compton Greaves’s consumer products business, Crompton Greaves Consumer Electricals Limited, in a transaction with an enterprise value of 66 billion rupees ($1.07 billion).  This transaction resulted in AION and Hamilton Lane successfully exiting their investment in Avantha.

Sinopec Marketing

In 2014, the world’s largest fuel retail network, Sinopec Marketing, created a new shareholder structure. Sinopec Petroleum & Chemical Corp, China’s largest petroleum refining company, sold a 29.9 percent stake in Sinopec Marketing to 25 new investors.

Hamilton Lane joined Fosun International and China Development Bank Capital in the Pingtao (Hong Kong) Ltd, which then invested 2.2 billion yuan in Marketing Co.