Hamilton Lane Incorporated — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 31, 2019, compared with the corresponding 2018 periods. Financial amounts are in millions of dollars unless noted.
Business context
Hamilton Lane provides private-markets investment management and advisory services, including customized separate accounts, specialized funds, advisory services, and reporting and analytics. At December 31, 2019, it reported approximately $36.8 billion of fee-earning AUM and $422 billion of AUA. The company operates as one reportable segment.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2019 | Three months ended Dec. 31, 2018 | Nine months ended Dec. 31, 2019 | Nine months ended Dec. 31, 2018 |
|---|---|---|---|---|
| Management and advisory fees | $59.8 | $55.6 | $179.6 | $159.8 |
| Incentive fees | $8.3 | $10.4 | $17.5 | $25.3 |
| Total revenue | $68.1 | $66.0 | $197.1 | $185.2 |
| Total expenses | $39.2 | $37.8 | $114.3 | $109.9 |
| Income before taxes | $33.0 | $41.4 | $99.7 | $104.3 |
| Net income | $28.4 | $22.9 | $88.2 | $78.6 |
| Net income attributable to Hamilton Lane Inc. | $13.5 | $5.5 | $40.2 | $25.5 |
| Diluted EPS | $0.46 | $0.22 | $1.44 | $1.08 |
| Fee Related Earnings (non-GAAP) | $24.5 | $22.6 | $73.5 | $65.8 |
| Adjusted EBITDA (non-GAAP) | $31.5 | $30.1 | $90.8 | $86.4 |
Management fees grew 8% for the quarter and 12% for the nine-month period; total revenue grew 3% and 6%, respectively. Incentive fees fell 20% for the quarter and 31% for nine months. Net income attributable to Hamilton Lane increased substantially, while pretax income declined in both comparison periods. The filing reports effective tax rates of 13.8% versus 44.6% for the quarter and 11.6% versus 24.6% for nine months.
Management did not present a conventional operating-income line. Total revenue less total expenses was $28.9 million for the quarter and $82.8 million for nine months; these are arithmetic differences, not reported operating income.
Cash flow, nine months: Operating cash flow was $108.1 million, versus $106.9 million; investing cash use was $29.2 million, versus $5.6 million; financing cash use was $45.7 million, versus $69.5 million. Cash, cash equivalents, and restricted cash increased $33.1 million to $84.7 million. Cash and cash equivalents alone were $81.6 million.
Balance sheet at Dec. 31, 2019: Total assets were $469.4 million and total liabilities $253.0 million. Debt had a carrying value of $67.2 million; reported principal outstanding was $67.5 million. The term loan matures in November 2024, and the $25 million revolving facility matures in August 2020. The company reported compliance with debt covenants and regulatory net-capital requirements. The filing says a 100-basis-point increase in interest rates would add an estimated $0.7 million of interest expense over 12 months.
The quarterly dividend declared was $0.275 per Class A share, compared with $0.2125 a year earlier. The company had not repurchased shares under its authorized program.
Material changes and unusual items
- Fee-earning AUM increased $3.2 billion over nine months to $36.8 billion, including growth in specialized funds to $13.5 billion and customized separate accounts to $23.3 billion. AUM includes assets subject to different fee bases and should not be treated as revenue or total client assets.
- Management attributed fee growth primarily to its latest secondary and co-investment funds, new and expanded separate accounts, and fund reimbursements. Some current-period fund fees were retroactive catch-up fees.
- Lower incentive fees reflected reduced contributions from a specialized fund, partly offset in the quarter by new accounts reaching a realized-fee position.
- Prior-year non-operating income included favorable changes in the tax receivable agreement liability and gains from technology investment sales. These items contributed to the higher prior-year pretax result; the company also recorded a $4.973 million gain on the sale of an investment in the current nine-month period.
- The September 2019 share offering generated approximately $147.1 million of net proceeds, which were used to settle exchanges of HLA membership interests. HLI’s economic interest in HLA rose to approximately 54.9% from 50.3% at March 31, 2019.
- Adoption of lease accounting added $8.6 million of lease right-of-use assets and $9.4 million of lease liabilities at December 31, 2019; the company said adoption did not affect income.
Outlook, risks and contingencies
No quantified revenue, earnings, or AUM guidance is provided. Management expects liquidity needs to be met through operating cash flow, existing cash, and potential external financing, but notes there is no assurance capital-market transactions will be completed on favorable terms or at all. Management says it may suspend owner distributions if operating cash flow is insufficient.
- Management identified a previously reported material weakness in IT general controls for a system supporting financial reporting. Disclosure controls were therefore deemed ineffective as of December 31, 2019. Remediation and testing were underway; management expected remediation during fiscal 2020 but said effectiveness had not yet been established.
- Unrecognized carried interest, net of non-controlling interests, was $408.9 million and remains subject to contingencies. If received, up to $102.2 million could potentially be payable to employees and third parties; neither amount was recorded as a recognized liability or revenue.
- The company had $132.9 million of aggregate unfunded commitments to its Partnerships. It reported maximum exposure to loss of $117.4 million related to unconsolidated VIEs.
- Other investments of $16.4 million and a related secured-financing liability were measured using Level 3 inputs. The investments were pledged as collateral; the financing liability’s fair value was $16.4 million versus amortized cost of $14.2 million.
- 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 or off-balance-sheet arrangements.
Subsequent events included a $5.0 million cash asset purchase agreement for software from an equity-method investee and a February 2020 declaration of a $0.275 quarterly dividend.
Important facts for investors to verify
- Whether recurring management-fee growth can continue and offset lower or volatile incentive fees.
- The drivers and repeatability of the large year-over-year increase in attributable net income, including tax-rate changes and HLI’s increased economic ownership of HLA.
- Progress in remediating and validating the disclosed IT-control material weakness.
- The timing and collectability of unrecognized carried interest, related potential payouts, and the impact of fund clawback provisions.
- Liquidity and covenant capacity around the August 2020 revolving-facility maturity, investment commitments, dividends, and tax-receivable-agreement payments.
- Valuation sensitivity of Level 3 investments and the collateralized financing, and the execution and financial impact of the new headquarters lease and software purchase.