US specialty lender Hercules Capital is seeking the approval of shareholders to transfer to an externalised management structure under an agreement with advisory firm Hamilton Advisers, a newly created entity backed by Hercules chief executive Manuel Henriquez.
The move follows increased competitive pressure within the market and the firm’s push to expand its financial products, which it says will be made easier under a new structure, Hercules said in a statement provided to the US Securities and Exchange Commission.
The firm’s board has backed the move and is encouraging shareholders to vote in favour in a special meeting due to be held 29 June.
Under the terms of the agreement, the firm’s existing personnel will continue to oversee all key investment decisions, but the management structure will be transferred to Hamilton Advisers. Such functions include administrative services, recordkeeping and compliance.
Henriquez, also Hercules' chairman, will continue his role as the controlling member of the adviser.
As explained in the statement from Hercules, an externalised management structure is typical across the majority of business development companies. Administrative costs are outsourced and compensation arrangements are not limited by the 1940 Investment Act.
Long term, the firm said it is expected to make savings from reduced fees as its scales upwards because expenses will spread across more investment vehicles, although it accepts there will be an initial cost burden.
Base management fees, for instance, will range from 2 percent to 1.25 percent depending on the company’s average gross assets under management.
For assets up to $1.65 billion, the fee will be 2 percent. Between $1.65 billion and $2 billion the management fee will fall to 1.75 percent and further drop to 1.5 percent for assets between $2 billion and $2.35 billion. Finally, for assets over $2.35 billion fees will stand at 1.25 percent.
A tiered incentive fee structure will be introduced. A hurdle rate of 7 percent is set and is correlated to pre-incentive fee net income earned by the company. Because it is not a set amount, Hercules said it would align the interests of the advisor with the shareholders.
Henriquez said: “Transforming Hercules into an externally managed fund will provide important strategic advantages to Hercules and we have structured the proposed external advisory relationship with Hamilton to align the interests of the Hercules shareholders with those of the adviser in a unique way.
“In addition to offering the opportunity for future third party expenses to be spread over a broader universe of investment vehicles, the proposed base management fee will decrease as the size of Hercules increases,” he added.
“We are seeking to pursue externalization for strategic reasons. While internal management has served our shareholders well in the past, we believe that the changing competitive environment makes externalization important. It will enable us to offer a greater variety of solutions to financial sponsors to the benefit of Hercules.”
Editor's note: Hercules Capital's new external adviser will be Hamilton Advisers, not Hamilton Lane, as an earlier version of the article stated.