Hamilton Lane Incorporated — Q3 FY2022 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2021. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted. Hamilton Lane provides private-markets investment management and advisory services. At quarter-end, it reported $46.1 billion of fee-earning AUM and approximately $753 billion of AUA.
Financial performance and position
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Revenue | $91.7m | $84.6m | $267.0m | $238.8m |
| Net income attributable to Hamilton Lane Inc. | $51.8m | $33.2m | $132.2m | $58.3m |
| Diluted EPS | $1.40 | $0.96 | $3.59 | $1.78 |
| Fee Related Earnings (non-GAAP) | $36.9m | $37.8m | $106.3m | $93.8m |
| Adjusted EBITDA (non-GAAP) | $44.3m | $46.1m | $134.0m | $118.2m |
Q3 revenue increased 8%; management and advisory fees rose 6% and incentive fees rose 28%. Nine-month revenue increased 12%. Q3 total expenses rose 21% to $50.7m, faster than revenue, driven mainly by compensation and professional fees. For the nine months, expenses rose 12% to $143.7m.
Reported earnings benefited substantially from investment and other non-operating gains. Non-operating income was $37.0m in Q3 versus $6.2m a year earlier, including $31.7m of gains on two technology investments and a reduction in the tax receivable agreement liability. Nine-month non-operating income was $65.5m versus $6.8m, including $54.9m of gains on those investments. Equity income from investees was $12.9m in Q3 and $60.2m for nine months. These items make reported net income and margins less indicative of recurring fee operations. FRE, a company-defined non-GAAP measure, declined 2% in Q3 but increased 13% for the nine-month period.
Cash flow and liquidity: Operating cash flow was $152.5m for nine months, versus $147.8m in the prior-year period. Investing used $55.7m and financing used $104.9m. Cash, cash equivalents and restricted cash totaled $82.3m at period-end, including $78.8m of cash and cash equivalents. Management stated it had $100m of availability under its loan agreements and considered liquidity adequate.
Debt and balance sheet: Debt carrying value was $146.8m at December 31, 2021, down from $163.2m at March 31, 2021; principal outstanding was $147.2m. Borrowings included a $72.2m floating-rate term loan and $75.0m multi-draw loan at 3.50%; the $25m revolver was undrawn. The company estimated a 100-basis-point increase in rates would add $0.4m of interest expense over the next 12 months. Total assets were $1.279bn and total equity was $462.9m.
Fee-earning AUM grew $4.1bn from March 31 to $46.1bn, with $7.8bn of contributions partly offset by $4.3bn of distributions. The company declared a $0.35-per-share quarterly dividend in February 2022, payable April 6, 2022.
Material changes and unusual items
- Q3 fee growth reflected new and expanded separate accounts, reporting revenue that included the 361 Capital acquisition, and higher incentive fees. Specialized-fund fee growth was partly offset by lower retroactive fees from a secondary fund compared with the prior-year quarter.
- During the nine months, the company recorded $44.5m of unrealized gains from observable price changes in two investments measured under the measurement alternative. It also sold an investment for $12.6m, recording an $11.9m gain.
- The company paid $15.6m to terminate certain tax receivable agreement payment rights early and recognized a $4.3m gain related to the transaction.
- The April 2021 acquisition of 361 Capital involved $13.1m of aggregate cash consideration, including $3.0m payable in installments; acquired revenue and net income were described as immaterial.
- In September 2021, the company issued 877,400 Class A shares and used the $73.8m net proceeds to settle exchanges of HLA units. This transaction increased the company’s economic interest in HLA.
Outlook, risks and contingencies
- The filing provides no specific numeric earnings or revenue guidance. Management said it expected to meet current and long-term liquidity needs through operating cash flow, cash on hand and potential external financing.
- Management cited continuing uncertainty from COVID-19 and noted that investment and carried-interest reporting may lag underlying partnership activity by three months.
- Unrecognized carried interest subject to contingencies was $1.064bn at December 31, 2021. If received, up to $266.1m could potentially be payable to employees and third parties under incentive compensation arrangements; these amounts were not recorded because payment was not considered probable.
- The company had $183.8m of unfunded commitments to its partnerships. It also reported $54.0m of unrealized gains on measurement-alternative investments, with up to 15% potentially eligible for discretionary bonuses as gains are realized.
- Management did not believe pending or threatened legal matters were probable to materially affect the financial statements. The filing reported no material changes to previously disclosed risk factors. Principal risks include market and investment valuation changes, fundraising and fee pressure, employee retention, debt covenant compliance, client funding defaults, and the timing and realization of incentive fees.
Important facts for investors to verify
- How much of reported profit growth is recurring fee-related performance versus volatile investment gains and other non-operating items.
- Whether fee-earning AUM growth and new client allocations continue to translate into management-fee growth after distributions and fee-base transitions.
- The valuation basis and eventual realization of technology and other private investments, including the gains recognized in this period.
- Debt availability, covenant headroom, floating-rate exposure, and funding needs for partnership commitments, dividends, and other uses.
- The timing, collectability, and potential compensation share associated with the $1.064bn of unrecognized carried interest.
- Effects of COVID-19 and the three-month reporting lag on underlying investment performance and future incentive fees.