Hercules drops bid for external investment adviser

The venture debt investor’s independent board members will hire an outside help to evaluate its management structure.

Hercules Capital has withdrawn its bid to become an external manager, following a decline in its stock and an offer from the TCW Group to become the Palo Alto, California-based business development company’s external manager.

In an announcement issued before the markets opened Monday morning, Hercules retracted its proposal to be advised by a third-party entity, Hamilton Advisers, which was owned by Manuel Henriquez, Hercules chairman and chief executive officer. The company also indefinitely postponed its 29 June special shareholder meeting.

“We intend to reflect shareholder input we received during our most recent shareholder outreach in our considerations of adjustments and alternatives,” Henriquez said. “The objective of the company and our board has and continues to be creating value for all of our shareholders.”

Hercules declined to comment.

In addition to abandoning its externalisation, one of its independent board members, Allyn Woodward, Jr., said the independent directors had indicated they would consult an independent financial advisor on the optimal management structure. The directors set no time table for the review. Aside from Woodward, Hercules’ independent directors are Robert Badavas, Thomas Fallon, Joseph Hoffman, Susanne Lyons and Doreen Woo Ho.

The news caused the venture lender’s shares to rise. On Friday, the stock closed at $12.66 and on Monday traded at $13.41 at 1:37 p.m., according to data from the New York Stock Exchange, where Hercules is traded. The firm’s shares declined after it issued the proposal on 4 May, opening at $15.26 and closing at $13.49. The firm filed the preliminary proxy with the US Securities and Exchange Commission and released its announcement Wednesday evening.

Hercules had proposed handing over management of the firm to Hamilton Advisers. Both the management fee and incentive fee paid to the advisor were based on a sliding scale.

As the firm’s assets under management increased, the management fee would have declined starting from 2 percent and bottoming out at 1.25 percent. As its performance increased, so would have the incentive fee, part of which was based on pre-incentive net investment income. It would have started at 5 percent once returns cleared the 7 percent hurdle rate and topping out at 30 percent on 10 percent returns, while the firm also would receive a 20 percent capital gains fee.

Last week, TCW made a bid to become Hercules’ external manager, proposing a 1.75 percent fixed-rate management fee and a flat 17.5 percent fee on capital gains and returns on pre-incentive net investment income. The Los Angeles-based firm declined to comment.