Hamilton Lane Incorporated — FY2020 Form 10-K
Reporting period: Fiscal year ended March 31, 2020, with quarterly information through March 31, 2020. The filing is not for a calendar 2019 fourth quarter; it discusses the COVID-19 pandemic’s potential effects after year-end as well as the fiscal-year results.
Business context
Hamilton Lane is a global private-markets investment solutions provider, offering discretionary customized accounts and specialized funds, advisory and reporting services, and distribution management. At March 31, 2020, it reported approximately $69 billion in assets under management (AUM), $434 billion in assets under advisement (AUA), and $38.7 billion in fee-earning AUM. It serves more than 500 institutions and intermediaries. No client represented more than 5% of management and advisory fee revenue; the top 10 generated about 21%.
Financial results and key metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $274.0 million | $252.2 million | +9% |
| Management and advisory fees | $244.9 million | $217.8 million | +12% |
| Incentive fees | $29.1 million | $34.4 million | −15% |
| Total expenses | $157.6 million | $148.0 million | +7% |
| Income before taxes | $140.7 million | $129.6 million | +9% |
| Consolidated net income | $126.8 million | $99.0 million | +28% |
| Net income attributable to Hamilton Lane Incorporated | $60.8 million | $33.6 million | +81% |
| Diluted Class A EPS | $2.15 | $1.40 | +54% |
| Fee Related Earnings (non-GAAP) | $101.0 million | $89.9 million | +12% |
| Adjusted EBITDA (non-GAAP) | $127.3 million | $117.7 million | +8% |
Operating cash flow was $116.4 million, versus $111.6 million in FY2019. Investing activities used $49.9 million and financing activities used $64.7 million; cash, cash equivalents and restricted cash increased $1.6 million. Cash and cash equivalents were $50.1 million at year-end. The filing does not present a single conventional operating-margin measure; results include investment gains and other non-operating items.
At March 31, 2020, total assets were $473.5 million, total liabilities $236.1 million and total equity $237.4 million. Debt was $74.5 million net of unamortized costs (principal outstanding: $75.0 million). The term loan and revolving facility had a 2.25% rate at year-end; the company estimated a 100-basis-point rate increase would add about $0.4 million in interest expense over the next 12 months. A new $75 million multi-draw facility was undrawn at year-end. The company separately reported $125 million of availability under its Loan Agreements in its COVID-19 discussion.
Fee-earning AUM rose 15% to $38.7 billion, supported by new fund and account commitments. Total AUM and AUA were approximately $503 billion. FY2020 dividends declared were $1.10 per Class A share; a $0.3125 quarterly dividend was declared in May 2020.
Material changes versus prior year
- Management and advisory fees grew, led by specialized funds, including the latest secondary fund, and new or expanded customized separate accounts. Specialized-fund fee revenue increased $18.7 million; customized-account revenue increased $5.5 million.
- Incentive fees fell $5.3 million, principally reflecting lower fees from certain funds and accounts, partly offset by new accounts entering realized-fee positions.
- General, administrative and other expenses increased $8.9 million, including higher technology and office costs, professional fees, fund-closing commissions and legal expenses. Compensation expense rose only 1% overall.
- Equity income from investees increased to $20.3 million from $7.2 million, while non-operating income declined to $6.2 million from $20.9 million. FY2019 included larger gains on technology-investment sales and a tax receivable agreement liability remeasurement.
- The effective tax rate declined to 9.9% from 23.6%; the filing attributes tax-rate movements to factors including non-controlling interests and deferred-tax valuation and apportionment changes.
- The company amended its First Republic debt facilities in March 2020, extended maturities and entered the additional multi-draw term facility. Its year-end debt principal was $75 million.
Outlook, commentary, risks and unusual items
Management said FY2020 results had not been materially affected by COVID-19 based on the timing of the outbreak, but it could not predict the pandemic’s ultimate effect and provided no quantified earnings guidance. Management expected potential adverse investment valuation adjustments in the next reporting period: underlying partnership valuations generally lagged by three months and reflected December 31, 2019 values. Lower valuations could affect investments, unrealized carried interest, AUM and AUA; fundraising, investment deployment and exits could also be delayed or reduced.
Other principal risks include competition and fee pressure; reliance on investment performance, fundraising and access to attractive opportunities; short-notice termination or non-renewal of many advisory and separate-account contracts; unpredictable carried-interest timing and possible clawbacks; subjective private-asset valuations; leverage and covenant compliance; client or fund-investor defaults; cybersecurity and privacy incidents; regulatory and tax changes; international and Brexit uncertainty; and dependence on key personnel. Class B holders controlled approximately 88% of combined voting power, and Hamilton Lane qualifies as a controlled company.
Notable obligations and accounting matters include $143.5 million of unfunded general-partner commitments to investments, a $99.0 million tax receivable agreement liability, and an estimated $92.3 million of payments over 17 years for the new headquarters lease, which was not included in the contractual-obligations table. The TRA generally requires payment of 85% of specified realized or deemed tax savings to legacy owners. Unrecognized allocated carried interest was $441.2 million, but is not recognized revenue; potential related employee and third-party compensation of $110.3 million was not accrued because it was not yet probable. The auditor issued unqualified opinions on the financial statements and internal controls; a material weakness disclosed in FY2019 was reported as remediated by March 31, 2020.
Important facts for investors to verify
- How COVID-19-era portfolio valuations, exits and fundraising affected subsequent-period fee revenue, incentive fees and investment values, given the three-month valuation lag.
- The composition, realizability and sensitivity of the $137.9 million deferred tax asset and the $99.0 million TRA liability, including the potential cash burden of future payments.
- Debt availability, covenant headroom, interest-rate exposure and the funding needs for $143.5 million of investment commitments and the headquarters lease.
- The sustainability and mix of recurring management and advisory fees versus volatile incentive fees and non-operating gains.
- Fee-earning AUM trends, contract renewal and termination risks, and dilution or governance implications of unit exchanges and concentrated voting control.