Hamilton Lane Incorporated — Q3 FY2023 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2022; comparisons are with the same periods in 2021. Amounts are in U.S. dollars. The company provides private-markets investment management and advisory services.
Financial and operating results
| Metric | Quarter | Nine months |
|---|---|---|
| Total revenue | $127.1 million, up 39% | $416.0 million, up 56% |
| Management and advisory fees | $97.4 million, up 22% | $276.2 million, up 20% |
| Incentive fees, including consolidated VIEs | $29.7 million, versus $11.9 million | $139.8 million, versus $37.4 million |
| Total expenses | $68.7 million, up 36% | $225.2 million, up 57% |
| Net income attributable to Hamilton Lane Incorporated | $9.7 million, versus $51.8 million | $78.0 million, versus $132.2 million |
| GAAP diluted EPS | $0.31, versus $1.40 | $2.19, versus $3.59 |
| Fee-related earnings (non-GAAP) | $41.5 million, versus $36.9 million | $118.1 million, versus $106.3 million |
| Adjusted EBITDA (non-GAAP) | $63.7 million, versus $44.3 million | $204.5 million, versus $134.0 million |
Management attributed fee growth to specialized funds and new or expanded customized accounts. Fee-earning AUM reached $54.9 billion, up $2.2 billion for the quarter and $5.7 billion for the nine-month period. Separately, the company reported approximately $81 billion of discretionary customized-account AUM and $724 billion of assets under advisement.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $213.4 million, compared with $152.5 million in 2021. Investing activities provided $201.6 million, versus $55.7 million used; financing activities used $338.0 million, versus $104.9 million used.
- Cash and cash equivalents were $146.1 million at December 31, 2022, versus $72.1 million at March 31, 2022. Cash, restricted cash and cash held by consolidated VIEs totaled $153.1 million.
- Debt principal outstanding was $200 million, compared with $171.8 million at March 31. The October facility amendments extended maturities and set an aggregate borrowing cap of $325 million. The $100 million term loan carried a 6.25% rate; the $100 million 2020 multi-draw loan carried a fixed 3.50% rate. No revolver balance was outstanding at quarter-end.
- Management said operating cash flow, existing cash and potential external financing are expected to support liquidity needs. The company intends to continue quarterly dividends, subject to board approval and legally available funds. A $0.40-per-share dividend was declared in February 2023.
Material changes, unusual items and risks
- Quarterly attributable net income fell substantially despite higher revenue. The quarter included a $43.3 million impairment of a measurement-alternative investment, following a significant decline in its earnings performance and market conditions. The impairment was recorded in non-operating expense.
- Prior-year results benefited from investment gains; current-year results also included a $9.8 million gain on the sale of the Private Markets Connect joint venture and a $2.8 million gain from transferring advisory arrangements. Equity-method investment results weakened year over year.
- Compensation and benefits rose 34% for the quarter and 68% for the nine months, reflecting higher base compensation, bonuses and incentive-fee compensation. General and administrative costs also increased.
- Hamilton Lane Alliance Holdings I was liquidated in December 2022 after it could not complete a business combination in the required period. Its public shares were redeemed, warrants cancelled and liabilities settled. This drove a large trust-asset sale and redemption-related cash flow during the nine months.
- At December 31, contingent carried interest not recognized as revenue was $952.2 million, net of non-controlling interests; recognition depends on contingencies being resolved. The company also reported $212.9 million of aggregate unfunded commitments to Partnerships and $140.7 million of remaining unfunded commitments from general-partner entities to nonconsolidated VIEs.
- Management identified market valuations, incentive-fee variability, fundraising and investment opportunities, competition, employee retention, client funding obligations, debt covenants and the ability to receive distributions from HLA as risks. A 100-basis-point increase in interest rates was estimated to add $1.0 million of interest expense over the next 12 months.
- No specific financial guidance was provided. Management stated interim results are not necessarily indicative of full-year results. It reported no material change in risk factors from the 2022 Form 10-K, no material off-balance-sheet changes, and effective disclosure controls as of December 31.
Important facts for investors to verify
- How recurring management-fee growth and fee-earning AUM develop, particularly against distributions and fundraising conditions.
- Whether incentive fees remain volatile and how much contingent carried interest ultimately qualifies for recognition, including related compensation obligations.
- The valuation assumptions and future performance of the impaired investment and other private-company investments valued using significant estimates.
- Debt covenant compliance, floating-rate exposure, planned investment commitments and the company’s capacity to sustain dividends.
- The comparability and definitions of non-GAAP fee-related earnings and Adjusted EBITDA with GAAP results and other asset managers’ measures.