Hamilton Lane says 70% of secondary gains come from appreciation

Hamilton Lane pushed back against criticism of its private-equity fund valuation practices, defending the industry's long-standing method of booking gains on discounted secondary-market purchases.

Hamilton Lane's co-CEO Erik Hirsch defended the firm's practice of marking up discounted secondary-market fund stakes, saying the accounting reflects a standard that has governed private equity for decades.

"You've got a seller who wants liquidity in a no-liquidity environment, and there's a very narrow number of buyers," Hirsch said on the firm's earnings call last week. "Does that mean that the assets are worth less than the general partner is telling us? No, it just means that the seller needed liquidity."

The Bala Cynwyd, Pennsylvania-based firm reported fiscal year fee earnings grew 25%, even as its stock has fallen 36% since December — a period when the S&P 500 gained 9%. Hamilton Lane has doubled assets under management since 2020 to $142 billion, fueled by a strategy of buying limited-partnership stakes from institutions seeking to exit positions early.

The defense comes as Apollo Global Management CEO Marc Rowan and other industry figures have criticized so-called day-one markups in funds marketed to individual investors. Hirsch said roughly 70% of the firm's secondary-market returns come from long-term asset appreciation, with the remaining 30% from buying at a discount — a ratio he argued validates the approach over time.

The controversy centers on a structural feature of private markets. When Hamilton Lane acquires a fund stake on the secondary market at a discount — because the seller needs immediate liquidity — it immediately marks the position up to the net asset value reported by the fund's general partner. Critics, including Rowan, argue this creates an artificial day-one gain that inflates reported returns for retail investors who lack the ability to independently verify valuations.

Hirsch countered that the practice follows generally accepted accounting principles and has been the industry standard for decades. If regulators impose a new rule, he said, Hamilton Lane will follow it. "This is something that you solve by putting up good results — by showing investors that it's a great business and that it has great future prospects," he told Barron's.

Secondary Market Growth

The secondary market for private fund stakes has expanded rapidly as institutions seek to rebalance portfolios without waiting for fund liquidations. Hamilton Lane and StepStone have built large fund-of-funds businesses by acting as buyers of last resort for pension funds, endowments, and other limited partners needing to exit. The strategy has allowed both firms to double their AUM in roughly five years, but it has also drawn scrutiny over how those discounted purchases are reported.

The debate arrives as private equity faces a broader reckoning with transparency. The industry is sitting on a backlog of at least 13,000 companies that have been held for four years or more, according to McKinsey & Co., while financial sponsors hold more than $2.5 trillion in dry powder. The combination of aging portfolios and abundant capital has intensified competition for exits — and scrutiny of how assets are valued along the way.

Hamilton Lane's stock decline mirrors a broader selloff in private-market stocks. Wealthy individual investors have pulled money from credit funds after reports of loan problems, pressuring shares of alternative asset managers across the sector. Rival StepStone Group has faced similar headwinds, with its stock also declining this year as the valuation debate weighs on investor sentiment.

Hirsch said he expects the accounting concerns to dissipate as the firm continues delivering strong results. For now, the industry's defense rests on a simple argument: a discount for liquidity is not the same as a discount on value.

This article is for informational purposes only and does not constitute investment advice.