Business context and reporting period
Hamilton Lane Incorporated filed this unaudited Form 10-Q for the three months ended June 30, 2017, its fiscal first quarter of 2018. The company provides private-markets investment management, advisory, reporting and distribution services. Its March 2017 IPO and reorganization made HLI the public holding company and managing member of Hamilton Lane Advisors (HLA); HLI held approximately 34.4% of HLA’s economic interest at quarter-end.
At June 30, fee-earning AUM was $27.6 billion, up 3% from $26.8 billion at March 31; AUA was approximately $314 billion. The company cautions that managed-fund performance is not indicative of HLI stock performance.
Financial performance and position
| Metric | Three months ended June 30, 2017 | Prior-year comparable |
|---|---|---|
| Total revenue | $52.7 million | $39.6 million |
| Management and advisory fees | $51.7 million | $37.6 million |
| Incentive fees | $1.0 million | $2.0 million |
| Total expenses | $28.4 million | $22.7 million |
| Income before taxes | $29.3 million | $16.0 million |
| Consolidated net income | $25.6 million | $16.4 million |
| Net income attributable to HLI | $5.5 million | $0; HLI had no Class A shares outstanding in the prior period |
| GAAP diluted EPS, Class A | $0.30 | Not presented |
| Fee Related Earnings (non-GAAP) | $23.8 million | $15.9 million |
| Adjusted EBITDA (non-GAAP) | $26.5 million | $18.5 million |
Operating cash flow was $29.2 million, investing cash outflow $3.5 million and financing cash outflow $11.5 million. Cash, cash equivalents and restricted cash totaled $48.3 million at quarter-end, including $46.5 million of cash and cash equivalents. The senior secured term loan had $85.5 million principal outstanding; its reported net carrying value was $83.7 million. The loan bears floating interest; the stated annual rate was 4.54% at June 30. The company declared a $0.175 per-share quarterly dividend, payable July 10.
Material changes versus the prior comparable period
- Revenue increased 33%, chiefly from specialized funds. Specialized-fund management fees rose $11.5 million, including $5.8 million of retroactive fees from late commitments to the latest secondary fund.
- Fee-earning AUM increased $0.8 billion, to $27.6 billion, primarily from new fund and account commitments.
- Expenses increased 25%, mainly due to higher base compensation and professional and consulting fees.
- Equity-method income rose to $5.9 million from $2.0 million, while interest expense fell to $1.1 million from $2.9 million, primarily following the $160 million IPO-funded loan repayment.
- Incentive-fee revenue declined 49%, reflecting carried interest received in the prior-year quarter.
- Quarter-end cash and cash equivalents increased from $32.3 million at March 31. Debt principal declined modestly during the quarter after the substantial March IPO repayment.
Outlook, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management said it expects to meet liquidity needs through operating cash flow, existing cash and potential external financing. It expects compensation and public-company costs to increase with growth and noted that incentive fees are volatile and difficult to predict.
Key risks include market and investment-performance volatility, fundraising and fee pressure, employee retention, financing and covenant compliance, client or investor defaults, regulatory and tax matters, and the ability to receive distributions from HLA. A 100-basis-point increase in interest rates was estimated to increase term-loan interest expense by $0.9 million over the next 12 months. The company reported $84.7 million of its own unfunded commitments to funds and accounts it manages.
Carried interest allocated to the company but still subject to contingencies was $266.4 million; $45.2 million received remained deferred revenue. Potential related employee and third-party payments of $56.2 million were not recorded because the liability was not yet probable. Management stated that current legal matters were not expected to materially affect the financial statements.
Management concluded disclosure controls were ineffective because of a previously reported material weakness in calculating deferred taxes and tax-receivable-agreement amounts. Remediation steps began, but were not yet fully evidenced; management expected remediation during fiscal 2018. The company reported no material proceedings pending or, to its knowledge, threatened.
Important facts for investors to verify
- Whether the $5.8 million of retroactive secondary-fund fees is nonrecurring and how fundraising affects ongoing fee revenue.
- Progress and evidence supporting remediation of the deferred-tax and tax-receivable-agreement control weakness.
- Cash availability, debt covenants and floating-rate exposure, including the timing and terms of future dividends.
- Realization, clawback and compensation implications of contingent carried interest and the company’s fund commitments.
- Comparability of HLI-attributable earnings and per-share results following the March 2017 IPO and reorganization.