Hamilton Lane Incorporated (HLNE) — Form 10-Q Summary
Reporting period: Three months ended June 30, 2022, the company’s fiscal first quarter of fiscal 2023. Comparisons below are with the three months ended June 30, 2021, unless stated otherwise. Hamilton Lane provides private-markets investment management, advisory, reporting and related services.
Financial and operating performance
| Metric | Quarter ended June 30, 2022 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $135.5 million | $79.0 million | Up 72% |
| Management and advisory fees | $85.9 million | $73.9 million | Up 16% |
| Incentive fees, including consolidated VIEs | $49.6 million | $5.1 million | Up $44.5 million |
| Total expenses | $73.0 million | $43.2 million | Up 69% |
| Income before taxes | $67.6 million | $56.6 million | Up 19% |
| Net income | $56.1 million | $44.7 million | Up 26% |
| Net income attributable to Hamilton Lane Inc. | $33.5 million | $28.2 million | Up 19% |
| Diluted earnings per Class A share | $0.91 | $0.78 | Up 17% |
| Operating cash flow | $61.0 million | $32.4 million | Up $28.6 million |
Management and advisory fee growth reflected higher specialized-fund and customized-account revenue. Incentive fees rose substantially from the prior-year quarter. Expenses increased with compensation and benefits, including incentive-related compensation, as well as higher general and administrative costs. Equity in income of investees fell sharply, from $20.0 million to a $0.6 million loss, partly offset by higher non-operating income, including a $6.7 million gain on a technology investment.
Fee-earning AUM was $51.1 billion at quarter-end, up from $49.1 billion at the start of the quarter and $42.8 billion a year earlier. The company also reported approximately $83 billion of discretionary customized-account AUM and $724 billion of assets under advisement. These measures have company-specific definitions.
Cash and cash equivalents were $83.1 million at June 30, 2022, versus $72.1 million at March 31, 2022. Cash, cash equivalents and restricted cash, including cash held at consolidated VIEs, totaled $87.2 million. Investing activities used $56.5 million, primarily for investment contributions and other investments; financing activities provided $6.5 million, including new borrowings. Cash increased by $11.0 million during the quarter.
Debt had a carrying value of $220.9 million at quarter-end, compared with $171.3 million at March 31, 2022. Principal outstanding was $221.3 million: $96.3 million under the term loan, $100 million under the multi-draw facility and $25 million under the revolver. The term loan and revolver carried floating rates of 3.25% at quarter-end; the multi-draw facility rate was fixed at 3.50%. Management estimated a 100-basis-point increase in rates would add $1.2 million to interest expense over the following 12 months.
The company declared $0.40 per Class A share for the quarter, versus $0.35 a year earlier. On August 2, 2022, it declared a further $0.40 quarterly dividend, payable October 6, 2022 to holders of record September 15, 2022. The effective tax rate was 17.0%, compared with 21.1%.
Company-reported non-GAAP measures were fee-related earnings of $36.8 million, adjusted EBITDA of $66.6 million and non-GAAP EPS of $0.92, compared with $33.4 million, $40.2 million and $0.84, respectively, in the prior-year quarter. These measures are not GAAP results and use company-defined adjustments.
Material changes, outlook and risks
- Quarterly revenue growth was driven disproportionately by incentive fees; the filing notes incentive-fee timing and amounts are volatile and unpredictable. Compensation and benefits rose 95% to $52.2 million, including higher incentive-fee compensation and bonus accruals.
- Management said it expects to meet short- and long-term liquidity needs through operating cash flows, existing cash and potential external financing. The filing provides no specific earnings or revenue guidance. Management intends to continue quarterly dividends, subject to board discretion and legally available funds.
- Aggregate unfunded commitments to the company’s partnerships were $193.0 million. Unrecognized carried interest subject to contingencies was $1.10 billion, net of non-controlling interests; if received, up to $275.6 million could potentially be payable to employees and third parties under related compensation arrangements. These amounts were not recorded as revenue or liabilities.
- Management cited market, investment-valuation, liquidity, financing, interest-rate, foreign-exchange, counterparty, client-funding and talent risks. It said management-fee revenue is generally less sensitive to market valuations because fees are primarily based on commitments or invested capital, while equity in investees can fluctuate with portfolio valuations. Risk factors were reported as unchanged from the 2022 Form 10-K.
- The company reported $215.2 million of maximum exposure to loss related to unconsolidated VIEs and $116.5 million of remaining unfunded commitments from general-partner entities to those VIEs. Management did not believe pending or known threatened litigation was probable to materially affect the financial statements.
- Management concluded disclosure controls and procedures were effective as of June 30, 2022; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of the revenue and earnings increase is repeatable management-fee growth versus timing-sensitive incentive fees and investment-related gains or losses.
- The drivers and sustainability of the sharp rise in compensation expense, and the relationship between incentive-fee revenue and related compensation.
- Debt terms, floating-rate exposure, covenant compliance and the planned use of borrowings to fund investments and commitments.
- The collectability and timing of unrecognized carried interest, and possible related compensation payments and clawback obligations.
- Unfunded partnership commitments, VIE exposure, investment valuation assumptions and liquidity available after dividends and member distributions.
- Quarter-end AUM and AUA definitions and trends, and the distinctions between GAAP EPS and the company’s non-GAAP measures.