Hamilton Lane Incorporated — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2017. Hamilton Lane provides private-markets investment management and advisory services. The company completed its IPO and reorganization on March 6, 2017; accordingly, the 2016 comparative periods reflect predecessor HLA results, and HLI had no Class A shares outstanding then. HLI held approximately 34.5% of HLA’s economic interest at quarter-end, with the balance reported as non-controlling interests.
Financial and operating highlights
| Metric | Three months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2017 | Comparable 2016 period |
|---|---|---|---|
| Total revenue | $65.0 million, up 54% | $166.4 million, up 25% | $42.3 million and $133.1 million |
| Management and advisory fees | $48.3 million, up 15% | $146.3 million, up 16% | $42.0 million and $126.3 million |
| Incentive fees | $16.7 million | $20.1 million | $0.3 million and $6.9 million |
| Total expenses | $30.7 million, up 20% | $87.8 million, up 15% | $25.6 million and $76.1 million |
| Consolidated net income | $17.8 million | $61.7 million | $17.1 million and $57.8 million |
| Net income attributable to HLI | Loss of $6.3 million; diluted EPS loss of $0.35 | Income of $3.8 million; diluted EPS of $0.21 | No HLI Class A shares or comparable EPS |
| Fee Related Earnings (non-GAAP) | $19.4 million | $62.4 million | $16.6 million and $53.6 million |
| Adjusted EBITDA (non-GAAP) | $36.1 million | $85.1 million | $18.4 million and $62.2 million |
Consolidated net margin was approximately 27% for the quarter and 37% year to date; these figures include income attributable to non-controlling interests. Total expenses were approximately 47% and 53% of revenue, respectively. Margin comparisons are affected by the unusual incentive-fee and tax items described below.
Assets under management and advisement: Fee-earning AUM was $29.7 billion at December 31, 2017, up 11% from March 31, 2017; it comprised $20.4 billion in customized separate accounts and $9.3 billion in specialized funds. Assets under advisement were approximately $374 billion. Management said nine-month fee-earning AUM growth reflected new commitments, allocations, and the RAPM acquisition.
Cash, debt, and liquidity
- Cash and cash equivalents were $68.7 million at December 31, 2017, versus $32.3 million at March 31, 2017; including restricted cash, period-end cash was $70.5 million.
- Debt was $84.6 million on the balance sheet; principal outstanding was approximately $85.0 million. The August 2017 refinancing replaced the prior facility with a $75 million term loan and a revolving facility with $25 million capacity, of which $10.45 million was drawn.
- The term loan matures November 2024; the revolver matures August 2020. Both bear floating rates. Management estimated a 100-basis-point rate increase would add approximately $0.9 million to interest expense over the next 12 months.
- For the nine months, operating cash flow was $95.3 million, investing cash outflow was $15.2 million, and financing cash outflow was $43.8 million. The cash increase was $36.3 million.
- Management said it expects operating cash flow, existing cash, and potential external financing to meet liquidity needs. It reported compliance with regulatory capital requirements and the debt covenants at the period end. Debt is secured by substantially all HLA assets; covenants include a minimum trailing six-month adjusted EBITDA less dividends of $12.5 million.
Material changes and unusual items
- Quarterly incentive fees rose sharply, principally because $14.6 million of carried interest was recognized from a co-investment fund. The filing states this recognition did not generate current-period cash: the fees had been received in fiscal 2016 and deferred pending resolution of contingencies.
- The Tax Cuts and Jobs Act prompted a provisional $21.2 million tax expense to remeasure deferred tax assets. Effective tax rates were 56.3% for the quarter and 32.2% year to date, versus 0.6% and (0.5)% in the 2016 periods. A provisional $0.4 million foreign transition-tax liability was recorded; the company had not yet estimated potential GILTI tax effects.
- Other non-operating income included approximately $4.2 million from reducing the tax receivable agreement liability after the tax-rate change. This is not a recurring operating revenue source.
- The company acquired substantially all assets of Real Asset Portfolio Management LLC for approximately $5.8 million, including $5.2 million cash and $0.6 million in shares. Up to approximately $3.5 million more may be payable as compensation if specified former principals remain employed through the expected October 2018 payment date.
- Management and advisory fees increased with new and expanded client accounts and specialized-fund activity. Nine-month specialized-fund fees included $5.8 million of retroactive fees, compared with $1.9 million in the prior-year period.
- The company declared $0.525 per Class A share for the first nine months. A further $0.175 quarterly dividend was declared on February 6, 2018, payable April 5, 2018.
Outlook, risks, and controls
The filing provides no quantified revenue or earnings guidance. Management generally expected the Tax Act to have a net positive effect on profitability and cash flow from the lower corporate tax rate, while noting that its GILTI analysis was incomplete. Management also cautioned that results for interim periods may not indicate full-year results.
Risks include volatile and difficult-to-predict incentive fees; investment valuation and market risks; floating-rate debt; possible clawbacks of carried interest; client or investor defaults; competition for investment opportunities; and the company’s ability to retain employees, maintain fee structures, and meet debt obligations. Deferred incentive fee revenue was $31.4 million; management said fund NAV would need to decline by more than 50% before any of that balance would be subject to clawback. General-partner unfunded investment commitments were $86.9 million.
Disclosure controls and procedures were deemed ineffective at December 31, 2017 because of a previously reported material weakness in calculating deferred taxes and tax receivable agreement amounts. Remediation and testing were ongoing and had not been fully evidenced; management believed remediation could occur during fiscal 2018. Management nevertheless stated that the financial statements fairly present the company’s financial condition and results in all material respects. No material legal proceedings were reported.
Most important facts for investors to verify
- Whether recurring management and advisory fee growth continues, and how much reported earnings depend on incentive fees, retroactive fees, or other nonrecurring items.
- The assumptions and final measurement of Tax Act impacts, including deferred taxes, the tax receivable agreement, and potential GILTI exposure; also monitor remediation of the material weakness.
- Debt covenant headroom, floating-rate exposure, scheduled payments, and capacity to fund $86.9 million of investment commitments alongside dividends and member distributions.
- Whether RAPM meets the employment condition for the potential additional compensation payment and whether the acquisition contributes meaningfully to future revenue.
- Interpret performance and AUM disclosures carefully: fund performance is not a proxy for HLI stock returns, and the filing’s historical performance data are through September 30, 2017 and include unrealized valuations.