Five Questions with Brian Gildea, Managing Director, Hamilton Lane

1. As managing director on Hamilton Lane’s Co-Investment Team, can you tell us how the firm approaches co-investing and if it would consider a direct investment?

We don’t generally do directs. With our co-investment strategy we’re investing directly into companies alongside GPs as co-investors — not to compete, but to be good partners. We’ll live as an investor in that company for the hold period in the fund. We’ll maintain a good dialogue with the lead general partner on a deal, and we’ll get to see the value-add come through as the GP executes on their investment thesis.

2. Would you agree high deal prices make deal sourcing more important than ever for GPs?

That makes sense. Deal sourcing has become harder and harder, and firms are increasingly focused on how they’re doing it. Many firms have specialized folks in that field since that initial part of a transaction is so crucial. There have been some big institutional investors that have been making direct investments and sourcing deals on their own. Our approach is different. We have terrific relationships and a good amount of capital. We can be responsive and quick with GPs on co-investment opportunities and we can give feedback.  It’s their job to find opportunities and manage the business. We don’t want to be driving those terms. Our role is to figure out if we want to participate. We are seeing an increasing divide as a result of the fact that some LPs are becoming more GP-like.

3. What kinds of observations could you share about GPs you’re working with?

Our investing team spends a lot of time on this. We look at GPs and where every dollar of their investment gain has come from. It can come from earnings growth, leverage or something else. With best-in-class managers, 65 percent of their value creation comes from growing earnings. Sourcing by itself is a cost of entry, and while it is important to buy a company at a good valuation, no one is stealing businesses in this environment as it is too competitive. Different managers have different tools for deal sourcing and for structuring their investments. They’re both important, along with an operational tool set. The best managers marry all those elements together.

4. Any more advice to GPs on how to approach value creation?

It’s always a delicate balance of researching the changes you plan to make. GPs are good at that. They may have a tool kit to approach a portfolio company’s strategy, its operations, cost reduction, approaching a new market or product. They may have experience in Asia or moving information technology systems to the cloud. When we look at deals with GPs, we weigh whether a particular group has the skill-set to do what they want to do with this business — if it lines up with their core skill set. Some groups are better at growth businesses, others are good at bringing in new management teams. It depends on the business and the GP.

5. What about GPs that hold onto an asset for longer than the typical 10-year life of a fund? Is this a good strategy?

Even though a GP may have an incentive to hold an investment for eight or 10 years, sometimes it’s best to sell it before then. Holding on to a mediocre-performing asset in the hope it’ll appreciate more in the future is not a great philosophy. If you don’t have the skills to improve the asset, then holding it for an extra five years won’t matter. GPs have already marked down bad assets in their portfolio so, from an IRR standpoint, you’ve already taken the pain. Investors want distributions. GPs are starting to recognize that the tail end of a fund could hurt them.

Photo of Brian Gildea courtesy of Hamilton Lane