Hamilton Lane Incorporated — Form 10-Q Summary
Business context and reporting period. Hamilton Lane provides private-markets investment management and advisory services. This filing covers the quarter and nine months ended December 31, 2018, the third quarter of its fiscal 2019. Unless noted otherwise, amounts below are in millions of dollars. The company held approximately 47.4% of Hamilton Lane Advisors, L.L.C. (HLA) economically at quarter-end.
Financial and operating results
| Metric | Three months ended Dec. 31, 2018 | Prior-year quarter | Nine months ended Dec. 31, 2018 | Prior-year period |
|---|---|---|---|---|
| Management and advisory fees | $55.6 | $48.3 | $159.8 | $146.3 |
| Incentive fees | $10.4 | $16.7 | $25.3 | $20.1 |
| Total revenue | $66.0 | $65.0 | $185.2 | $166.4 |
| Total expenses | $37.8 | $30.7 | $109.9 | $87.8 |
| Income before taxes | $41.4 | $40.8 | $104.3 | $91.0 |
| Consolidated net income | $22.9 | $17.8 | $78.6 | $61.7 |
| Net income attributable to Hamilton Lane Inc. | $5.5 | $(6.3) | $25.5 | $3.8 |
| Diluted Class A EPS | $0.22 | $(0.35) | $1.08 | $0.21 |
- Quarterly revenue grew 2%; management and advisory fees rose 15%, while incentive fees declined 38%. For the nine-month period, revenue rose 11%, with management and advisory fees up 9% and incentive fees up 26%.
- Expenses increased 23% in the quarter and 25% year to date, outpacing revenue growth. Higher compensation, professional and consulting fees, and fund-reimbursement expenses contributed. The company reports no separate operating-income margin; reported income includes investment and other non-operating items.
- Quarterly non-GAAP Fee Related Earnings (FRE) were $22.6 million versus $19.4 million; Adjusted EBITDA was $30.1 million versus $36.1 million. Nine-month FRE was $65.8 million versus $62.4 million, and Adjusted EBITDA was $86.4 million versus $85.1 million. These are company-defined non-GAAP measures.
- Cash and cash equivalents were $78.9 million at December 31, 2018, compared with $47.6 million at March 31, 2018; restricted cash was $2.2 million. Nine-month operating cash flow was $106.9 million. Cash used in investing and financing was $5.6 million and $69.5 million, respectively.
- Debt principal outstanding was $72.2 million, down from $84.5 million at March 31, 2018; the balance-sheet carrying amount was $71.9 million. No revolving-facility borrowings were outstanding. The term loan matures in November 2024. Management states it expects operating cash flow, cash on hand, and potential external financing to meet liquidity needs.
- Fee-earning AUM was $32.2 billion, up $1.5 billion over nine months; assets under advisement were approximately $410 billion. The company reported approximately $48 billion of customized-account AUM and $11 billion of specialized-fund AUM.
Changes, outlook, risks and unusual items
- Quarterly management-fee growth reflected new and expanded accounts and higher specialized-fund fees, including retroactive fees. Lower quarterly incentive fees primarily reflected $6.0 million less from one co-investment fund than in the prior-year quarter. Nine-month incentive-fee growth included $6.3 million from a customized account, including a general-partner catch-up.
- Other non-operating income was $21.0 million for the nine months, compared with $4.2 million in the prior-year period. It included $11.1 million of gains on sales of two technology investments and effects from remeasurement of the tax receivable agreement (TRA) liability. These items make reported earnings less representative of recurring fee operations.
- The company adopted ASC 606 on April 1, 2018 using the modified retrospective method; management said adoption did not change the historical revenue-recognition pattern. It expects lease accounting adoption on April 1, 2019 to increase reported assets and liabilities.
- A $50 million share-repurchase authorization, capped at 6% of outstanding Class A shares, was approved in November 2018; no shares had been repurchased under it by December 31. A quarterly dividend of $0.2125 per Class A share was declared in February 2019.
- Risks include variability and timing of incentive fees, investment-market and valuation exposure, client and counterparty risks, employee retention, debt-covenant compliance, and the ability to fund commitments and distributions. A 100-basis-point rise in rates was estimated to increase loan interest expense by $0.7 million over the next 12 months.
- Unrecognized carried interest, net of non-controlling interests, was $355.5 million at quarter-end and remains subject to contingencies, including clawbacks. If received, $88.9 million could potentially be payable to employees and third parties; neither amount was recorded as a liability. General-partner unfunded commitments were $113.3 million. Management did not consider pending or threatened litigation material; the federal tax return for January–March 2017 was under IRS audit.
- The filing provides no specific financial guidance. Management cautions that interim results are not necessarily indicative of full-year results and that historical fund performance is not indicative of future fund or company-stock performance.
Important facts for investors to verify
- How much of earnings growth reflects recurring management and advisory fees versus investment-sale gains, TRA remeasurement, and variable incentive fees.
- Whether fee-earning AUM growth and fundraising can sustain fee revenue as accounts mature, distribute capital, or shift to lower fee bases.
- Debt terms, covenant headroom, planned capital commitments, and the cash impact of dividends, HLA member distributions, the TRA, and the repurchase authorization.
- The timing and collectability of contingent carried interest, potential clawbacks, and related compensation obligations.
- Potential tax consequences of the IRS audit and final regulations concerning the Tax Act transition tax.