Chapter 7

Drawdown Resilience

The report's central question turns on one word management uses freely: recurring. If the fee engine that has compounded through the cycle would reset sharply in a private-markets downturn, the low-teens multiple is fair; if most of it holds, the de-rating overshot. Hamilton Lane earns the majority of its management fees on committed or net-invested capital that does not move with markets — the company estimates a 10% fall in its NAV-based fee base would cost about $23.8 million, roughly 4% of management and advisory fees, and recurring fees rose 18% through the 2022 drawdown. The cyclical exposure is real, but concentrated in a thin, fast-growing top layer: evergreen NAV fees, high-water-marked performance revenue, and carried interest.

The fee base is three different things

A "private-markets manager" sounds fully geared to asset values. Hamilton Lane's fee base is not. Management fees are charged on one of three bases — capital commitments, net invested capital, or net asset value (NAV) — and only the last moves with markets [1]. Drawdown funds charge on committed capital during their multi-year investment period, then step down to net invested capital or NAV; customized separate accounts run largely on commitments or net invested capital [2]. In the company's own framing, "the vast majority of our customized separate accounts and specialized funds earn fees based on commitments or net invested capital, which are not affected by market appreciation or depreciation" [3].

Only the evergreen funds earn fees purely on NAV. Their combined NAV at the end of FY2026 was about $14.3 billion across four vehicles [4] — roughly 18% of the $81.5 billion fee-earning AUM that carries the two customer-facing segments [5]. The rest of the book — customized separate accounts at $40.9 billion and the drawdown portion of specialized funds at roughly $26 billion — is not marked to the market for fee purposes.

Source: FY2026 Annual Report (Form 10-K), fee-earning AUM roll-forward [6] and evergreen fund NAVs [7]; drawdown portion derived as specialized-fund FAUM ($40.6B) less evergreen NAV.

The same roll-forward makes the insensitivity visible: of the $81.5 billion balance, foreign exchange and market value together moved fee-earning AUM by just $2.1 billion in FY2026 — flows and fee-base transitions, not marks, do the work [8].

What a drawdown actually costs — the company's own number

Hamilton Lane quantifies the market sensitivity directly. As of March 31, 2026, a hypothetical 10% decline in the NAV-based fee base, holding all else constant, would reduce management fee revenue by approximately $23.8 million over the following twelve months [9]. Against $584.2 million of management and advisory fees for the year, that is about 4% [10]. A market shock large enough to halve the value of the entire evergreen book still leaves more than four-fifths of the recurring fee line untouched.

Source: FY2026 Annual Report (Form 10-K), market-risk disclosure [11] and results of operations [12]; percentage derived.

The number is a single-variable estimate, so it understates a real downturn — redemptions, a carried-interest drought, and high-water-mark resets would arrive together (below). But it bounds the direct exposure of the recurring line, and the bound is small.

The 2022 stress test the numbers already ran

The clearest evidence is not a model — it is the last drawdown. Fiscal 2023 (the year ended March 31, 2023) spans the 2022 bear market, when public equities fell about 20% and private valuations followed with a lag. Management and advisory fees did not fall; they rose 18% to $371.9 million, with evergreen revenue itself up $19.4 million [13]. The committed-capital base kept compounding through the shock.

Source: FY2023 Annual Report [14] and FY2026 Annual Report [15] results of operations.

Where the 2022 drawdown did land was on the market-sensitive lines that sit outside the recurring fee engine. Equity in income of investees — Hamilton Lane's own general-partner stakes, marked to fund NAVs — collapsed from $79.3 million in FY2022 to $6.5 million in FY2023, a 92% fall, and balance-sheet investments swung from a $59.6 million gain to a $10.3 million loss [16]. The cycle was plainly visible in the results — just not in the fees. That is the shape a value investor should expect to repeat: a resilient annuity, with the volatility routed into the mark-sensitive and performance-linked lines.

Where the cycle does bite — the top layer

The resilience of the base does not make the whole earnings stream cycle-proof, and the exposed part is precisely the part the bull case leans on. Three pressure points concentrate the risk.

Performance revenue under high-water marks. Fee-related performance revenue (FRPR) — incentive fees from evergreen funds that management counts as "recurring" because they are "not dependent on realization events" — grew from $2.4 million in FY2024 to $59.6 million in FY2025 to $102.5 million in FY2026, and now sits inside Fee Related Earnings of $344.5 million, close to 30% of it [17]. But FRPR is charged on evergreen NAV subject to high-water marks, and the company is explicit that "declines in NAV may delay or reduce future incentive fees by increasing the amount of subsequent NAV appreciation required to exceed the applicable high-water mark" [18]. Unlike a management fee, FRPR does not merely dip with a drawdown — it can fall to zero and stay there until NAV re-clears its prior peak, so its damage lingers across years rather than one reporting period.

Source: FY2026 Annual Report (Form 10-K), Fee Related Earnings reconciliation; FRE-ex-FRPR derived as FRE less FRPR [19].

Redemptions and gates. Evergreen funds offer periodic subscriptions and redemptions, each "subject to advance notice requirements, minimum holding periods, applicable gates, fund discretion and available liquidity" [20]. In a declining market the company warns that "the pace of redemptions or repurchases and consequent reduction in our assets under management could accelerate," and that meeting requests can force the sale of illiquid assets, whereby "the reduction in such fund's NAV resulting from the redemption or repurchase would reduce the management fees payable to us and may reduce or eliminate any incentive fees or carried interest" [21]. Gates protect the remaining fee base from a run, but the firm may "redeem or repurchase fewer interests than requested or suspend redemptions or repurchases entirely" — a defense that carries its own reputational and future-fundraising cost [22].

Carried interest and the exit cycle. The lumpy incentive line — $170.6 million of GAAP incentive fees in FY2026 — depends on realizations, which stall when exits and secondaries slow [23]. This was always understood to be cyclical; it is not where the "recurring" claim is tested.

A calibrated read

The evidence points one way on the core question and the other way on the growth. The recurring management-fee annuity is genuinely structural: about four-fifths of fee-earning AUM is charged on capital that does not move with markets, the company's own sensitivity math caps a 10% NAV shock at roughly 4% of management fees, and the base grew 18% straight through the 2022 drawdown. On that measure, the market's "cycle past its peak" fear is mislocated — it does not threaten the annuity.

The counter-fact sits in the same numbers. The market-sensitive slice — evergreen NAV fees, FRPR, carried interest — is exactly the layer that drove the recent acceleration: evergreen supplied roughly three-quarters of FY2026 fee-earning AUM growth (Growth Engine) and FRPR supplied most of the two-year Fee Related Earnings increase (Financials and Estimates). So a drawdown would leave the base intact while flattening the growth rate and denting the earnings-quality optics the bull case relies on — and FRPR's high-water marks mean that dent could persist for several years, not one.

Two things would sharpen this read, and neither is fully answerable from the corpus. First, the 2022 test predates the evergreen scale-up: the NAV-based book was a fraction of today's $14.3 billion then, so the cleanest proof of resilience covers a much smaller exposure than the one that now matters. Second, no drawdown since has yet forced the gates to be used at scale — the redemption machinery is documented but untested at current size. A genuine down-cycle in exits and secondaries, and the evergreen net-subscription and NAV prints through it, would settle whether the top layer resets modestly or severely. Until then, the durable read is that the annuity holds and the growth premium is what is at risk.