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.
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.
Hercules founder and chief executive Manuel Henriquez will continue his role as the controlling member of the adviser.
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. It said there will be an initial cost burden however.
Base management fees 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.
It will also introduce a tiered incentive fee structure. 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.
“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,” Henriquez said.