Hamilton Lane Incorporated — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2022. This is fiscal Q2 of the year ending March 31, 2023. Comparisons are with the corresponding 2021 periods. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context
Hamilton Lane is a private-markets investment solutions provider. It earns primarily management and advisory fees, with incentive fees and investment-related income also affecting results. At September 30, 2022, it reported approximately $52.7 billion of fee-earning AUM, $82 billion of discretionary customized-account AUM, and $717 billion of AUA.
Key financial results
| Metric | Three months ended Sept. 30, 2022 | Three months ended Sept. 30, 2021 | Six months ended Sept. 30, 2022 | Six months ended Sept. 30, 2021 |
|---|---|---|---|---|
| Total revenue | $153.4m | $96.3m | $288.9m | $175.3m |
| Management and advisory fees | $92.9m | $75.9m | $178.8m | $149.8m |
| Incentive fees, including consolidated VIEs | $60.5m | $20.4m | $110.1m | $25.5m |
| Total expenses | $83.6m | $49.8m | $156.5m | $93.1m |
| Net income | $57.7m | $84.8m | $113.9m | $129.5m |
| Net income attributable to Hamilton Lane Inc. | $34.9m | $52.1m | $68.4m | $80.3m |
| Diluted GAAP EPS | $0.97 | $1.41 | $1.88 | $2.19 |
| Fee Related Earnings (non-GAAP) | $39.8m | $36.0m | $76.6m | $69.4m |
| Adjusted EBITDA (non-GAAP) | $75.1m | $49.5m | $141.7m | $89.6m |
Management and advisory fees rose 22% for the quarter and 19% year to date, supported by specialized funds and new or expanded customized accounts. Incentive fees increased substantially, chiefly from specialized funds. Compensation and benefits rose 81% for the quarter and 88% year to date, including higher bonus accruals and incentive-fee compensation. The filing does not present a standard operating-margin measure.
Net income declined despite stronger revenues: equity in investee results swung to a $7.6 million quarterly loss from $27.4 million of income in the prior-year quarter, reflecting weaker underlying investment valuations versus prior-year public-market gains. Prior-year non-operating income also included a $23.2 million unrealized technology-investment gain. Current-quarter non-operating income included a $9.8 million gain on the sale of the Private Markets Connect joint venture.
Cash flow, balance sheet and capital
- Cash and liquidity: Cash and cash equivalents were $121.8 million at September 30, 2022, up from $72.1 million at March 31, 2022. Including restricted cash and cash held at consolidated VIEs, period-end cash was $125.4 million.
- Cash flow, six months: Operating cash flow was $155.9 million, versus $83.9 million a year earlier; investing cash use was $60.7 million versus $19.6 million; financing cash use was $46.0 million versus $65.1 million.
- Debt: Debt carrying value was $194.1 million, with $194.6 million principal outstanding, versus $171.3 million carrying value at March 31. The term loan carried a 4.75% rate at quarter-end; the $100 million multi-draw loan carried a fixed 3.50% rate. Management estimated that a 100-basis-point rise in floating rates would add about $0.9 million of interest expense over 12 months.
- Commitments and distributions: Unfunded commitments to partnerships were $205.0 million. The quarterly dividend declared was $0.40 per Class A share; $0.80 per share was declared for the six-month period.
- Fee-earning AUM: Increased $3.6 billion from March 31 to $52.7 billion, driven by contributions exceeding distributions. Management noted that most fee bases rely on commitments or invested capital and are therefore less directly sensitive to market valuation changes.
Material changes, outlook and risks
- Management said it expects to meet short- and long-term liquidity needs using operating cash flows, existing cash, and potential external financing. It intends to continue quarterly dividends, subject to board discretion and legally available funds. The filing provides no quantified earnings or revenue guidance.
- On October 20, 2022, the company amended its credit arrangements, extending maturities and adding borrowing capacity subject to an overall $325 million principal cap. The facilities are secured by substantially all HLA personal property and contain covenants.
- A transaction to transfer an advisory arrangement to a third party, for a share of management fees over two calendar years after closing, was subject to customary conditions, including fund shareholder approval, and expected to close in fiscal 2023. Related management contracts were classified as held for sale and were no longer being amortized. The filing text does not clearly identify the arrangement in this passage.
- Approximately $984.5 million of carried interest remained unrecognized because contingencies prevented revenue recognition. If received, about $246.1 million could potentially be payable to employees and third parties; neither amount was recorded as a liability or revenue.
- Other risks include market-driven changes in investment valuations and equity-method earnings, incentive-fee volatility and clawbacks, funding partnership commitments, debt covenant compliance, and the ability to attract and retain employees. Management said pending or threatened legal matters were not expected to materially affect the financial statements; it reported no material changes to previously disclosed risk factors.
- Management concluded disclosure controls were effective as of September 30, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether elevated incentive fees and related compensation are sustainable, and how much carried interest is ultimately realized or subject to clawback.
- How market conditions affect investee values and results, especially after the current-period decline in equity-method earnings.
- The terms, borrowing availability, maturity extensions, and covenant headroom under the amended credit facilities.
- The closing and financial impact of the advisory-arrangement transfer, including the fee share and contract disposition.
- Cash requirements for the $205.0 million of partnership commitments, dividends, debt service, and the tax receivable agreement, which requires payment of 85% of certain realized or deemed-realized tax benefits.
- Non-GAAP FRE and Adjusted EBITDA reconciliations and assumptions; these measures supplement, and do not replace, GAAP results.