How Hamilton Lane's PAF Turned Unrealized Gains Into Real Fees
And Why You Should Read Proxy Statements
“Show me the incentive, and I’ll show you the outcome” - Charlie Munger
Today’s post is about one thing: how a small change in incentives can move tens of millions of dollars from LPs to the fund manager (without a single asset being sold).
Tim McGlinn of TheAltView will walk you through a real-life example with Hamilton lane. I (Leyla) will tell you the moral of the story.
I’m going to explain this very simply, and I want you to do me a favor and forward this explanation to everyone you know: it’s truly that important.
1️⃣ Primary Fund
Let’s start simple. Bob buys two rental properties for $1 million.
After attending a guru seminar in a hotel conference room, Bob learns he can wrap those properties into a fund. He’ll earn:
A 1% annual management fee
A 10% incentive fee
So Bob forms Fund I and sells the $1 million of equity to four investors at $250,000 each.
A year goes by, nothing has been sold. But Bob marks the properties up to $1.25 million. For simplicity, assume operating income covered expenses, so the entire $250,000 increase is unrealized gains.
That was a trick question. It depends entirely on how the incentive fee is defined in the documents.
Bob has options. His legal team can draft the fund document so that incentive fees are calculated on:
Income only
Realized gains + income
Total return, including unrealized gains
If the incentive is based on realized gains only? Bob makes $0. Nothing was sold (he does accrue “incentive fee payable”, but will only get paid when the properties sell).
If the incentive is based on total return including unrealized gains? Bob’s Fund I makes 10% × $250,000 = $25,000, which will be paid out that year.
(And yes, Bob earns his 1% management fee either way)
Another (rhetorical) question: what structure do you think Bob prefers?
👉 If you invest in private markets, read the darn footnotes, you’ll find the basis for the incentive and AUM fees in said footnotes. Here’s how I do it (I’ll even give you AI prompts to get you started):
2️⃣ Secondary Fund
We’re now going to introduce a complication into Bob’s Fund I.
One of Bob’s investors, Janet, wants out. She finds a willing buyer for her $250,000 stake, and sells it to Herbert for $200,000 - after a round of price negotiations.
This, folks, is called “the secondary market”.
“Leyla, WTF are secondary funds?” — Here you go:
Herbert runs a fund-of-funds (FOF). His FOF charges:
1.25% management fee
12.5% incentive fee
He buys Janet’s stake at $200K, - a 20% discount to the underlying $250K NAV.
⚠️ I’m about to introduce an accounting sleight of hand into this conversation, so PAY ATTENTION, pretty please.
Herbert’s accounting team will use NAV as practical expedient (under rule ASC 820) to mark the value of this investment on Herbert’s FOF books. The very next day, they mark the investment to the reported NAV of Bob’s Fund I: $250,000.
In other words:
Purchase price: $200,000
Book value on Day 2: $250,000
Unrealized gain: $50,000
Nothing changed economically in 24 hours. But on paper, Herbert’s FOF now shows a $50K gain.
Do I need to run another poll, or do you already know how much Herbert’s FOF will earn on this investment in the same quarter they bought it?
🧮 If his incentive fee includes unrealized gains: 12.5% × $50,000 = $6,250
(Plus the 1.25% AUM fee)
That $6,250 is incentive income generated the same quarter the investment was purchased. This is what people mean when they talk about “crystallized carry.”
👉 Many funds charge incentive fees on unrealized gains. Here are some examples:
Others do not:
CCLFX, for example, doesn’t have a performance fee at all. CollerCredit explicitly excludes capital gains and NAV appreciation. More case studies here.
Now that you understand the mechanics, I’ll give the wheel to Tim, so he can show you what happens when this playbook runs with real money.
Hamilton Lane PAF (by Tim McGlinn)
Hamilton Lane’s Private Assets Fund (PAF) is a $5.6 billion registered ‘40 Act fund launched in September 2020 that gives retail and wealth channel investors access to private equity primarily through:
secondary fund stakes (buying LP interests at a discount to NAV) — 46% of total assets
direct equity co-investments — 42% of total assets, as of 9/30/25.
The fund has grown rapidly, powered in large part by a strategy aptly called “NAV squeezing” (FT wrote about this HERE): buying secondary stakes at 70–90 cents on the dollar, then immediately marking them up to full NAV under fair value accounting rules, producing instant (but unrealized) gains. (Remember our discussion about Herbert’s FOF?)
The PAF’s original set up:
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