Hamilton Lane Incorporated — Form 10-Q
Reporting period: Quarter and six months ended September 30, 2019 (fiscal 2020 second quarter and first half). Dollar amounts are in millions unless otherwise noted. Comparisons are with the corresponding 2018 periods.
Business context
Hamilton Lane provides private-markets investment management and advisory services, including customized accounts, specialized funds, and advisory and reporting services. At September 30, 2019, it reported $36.0 billion of fee-earning AUM and approximately $416 billion of assets under advisement. Customized separate accounts represented approximately $52 billion of AUM and specialized funds approximately $14 billion.
Financial and operating performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Total revenue | $64.3 vs. $55.8; up 15% | $129.0 vs. $119.2; up 8% |
| Management and advisory fees | $59.2 vs. $53.2; up 11% | $119.7 vs. $104.2; up 15% |
| Incentive fees | $5.1 vs. $2.6 | $9.2 vs. $15.0 |
| Net income attributable to Hamilton Lane Inc. | $15.3 vs. $11.2 | $26.7 vs. $20.1 |
| Basic / diluted EPS | $0.56 / $0.56 vs. $0.49 / $0.49 | $0.99 / $0.98 vs. $0.89 / $0.88 |
| Fee Related Earnings (non-GAAP) | $24.2 vs. $22.4 | $49.0 vs. $43.2 |
| Adjusted EBITDA (non-GAAP) | $29.6 vs. $25.9 | $59.3 vs. $56.3 |
Consolidated net income was $32.3 million for the quarter, slightly below $32.6 million a year earlier, and $59.7 million for the half-year, up from $55.7 million. Total expenses rose 8% for the quarter and 4% for the six months. Revenue less reported expenses was $26.9 million for the quarter (about 42% of revenue) and $53.9 million for the six months (about 42%); this is a simple calculated measure, not a company-reported operating margin.
Fee-earning AUM increased $1.2 billion during the quarter and $2.4 billion during the six months, reaching $36.0 billion. Management attributed growth mainly to new allocations and commitments, including fundraising for secondary and co-investment funds. The six-month increase in management and advisory fees was partly offset by lower incentive fees, reflecting a prior-year catch-up fee in a customized account. Quarterly incentive fees increased, primarily due to one specialized fund.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $66.2 million, down from $73.1 million. Investing activities used $10.8 million, compared with $8.6 million provided in the prior-year period; financing activities used $31.9 million, compared with $53.7 million.
- Cash and cash equivalents were $71.9 million at September 30, 2019, up from $49.4 million at March 31; cash, cash equivalents and restricted cash totaled $75.1 million.
- Debt carrying value was $69.1 million; principal outstanding was $69.4 million. The term loan matures in November 2024 and had a 3.75% rate at quarter-end. The $25 million revolving facility matures in August 2020; a $15 million draw during the period was repaid. Management estimated that a 100-basis-point rate increase would add $0.7 million of interest expense over the following 12 months.
- The company said operating cash flow, existing cash and potential external financing should meet current and long-term liquidity needs. Its credit agreements contain financial and other covenants. Restricted cash included approximately $3.2 million required for regulatory capital purposes.
Material changes, outlook and items to watch
- September offering and ownership: The company issued 2.45 million Class A shares in a registered offering and received approximately $147.1 million net proceeds. All proceeds funded exchanges of HLA membership interests; the filing reports corresponding issuance and cancellation of share classes. HLI’s economic interest in HLA increased to approximately 54.9% from 50.3% at March 31, 2019.
- Tax and secured financing: The offering generated a $41.1 million deferred tax asset, subject to a $3.7 million valuation allowance, and a $31.5 million payable under the tax receivable agreement. Separately, a $15.75 million transfer of investments to a partnership was accounted for as secured financing, not a sale; the investments were pledged as collateral. Its reported fair value was $15.9 million, using Level 3 inputs.
- Dividend: A quarterly dividend of $0.275 per Class A share was declared November 5, payable January 7, 2020. The company stated that distributions could be suspended if operating cash flow were insufficient.
- Contingencies and commitments: $382.0 million of carried interest remained unrecognized because of contingencies; if received, up to $95.5 million could potentially be payable to employees and third parties. The company’s unfunded commitments to its partnerships were $128.4 million. Management did not believe pending or threatened litigation was probable to materially affect the financial statements.
- Controls: Management concluded disclosure controls were ineffective at September 30 because of a previously reported material weakness in IT general controls over a system supporting financial reporting. Remediation steps were underway, but effectiveness had not yet been demonstrated; management expected remediation during fiscal 2020. No material misstatements or restatements were identified.
- Outlook and risks: No numerical earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results. Risks include market and investment performance, variable incentive-fee timing, debt covenants and refinancing access, employee retention, and the ability to fund obligations and distributions.
Important facts for investors to verify
- Whether fee-earning AUM growth and new fund commitments translate into sustained recurring fee revenue, and how much recent fee growth reflects retroactive fees.
- Whether incentive-fee variability, investment valuation changes and Level 3 collateral valuations materially affect future earnings and cash generation.
- The terms, covenant headroom and refinancing plans for the term loan and revolving facility, including the 2020 revolver maturity.
- The eventual realization of offering-related deferred tax benefits and the timing and amount of payments under the tax receivable agreement.
- Progress in remediating the IT-control material weakness and evidence that the revised controls operate effectively.
- The distinction between the company’s own $128.4 million partnership commitments and the much larger commitments disclosed for unconsolidated VIEs, which are not presented as direct company obligations.