Hamilton Lane Incorporated — Form 10-Q
Reporting period: Three and nine months ended December 31, 2020 (fiscal third quarter and first nine months of fiscal 2021). Comparisons are with the corresponding 2019 periods. Amounts below are in U.S. dollars; financial statement figures are rounded to millions.
Business context
Hamilton Lane provides private-markets investment management, advisory, reporting and distribution-management services, primarily to institutional clients. At December 31, 2020, it reported $40.2 billion of fee-earning AUM, approximately $59 billion of customized separate-account AUM and approximately $581 billion of AUA. Its fiscal third-quarter results include investment-partnership information reported on a three-month lag.
Financial results and liquidity
| Metric | Quarter ended Dec. 31, 2020 | Quarter ended Dec. 31, 2019 | Nine months ended Dec. 31, 2020 | Nine months ended Dec. 31, 2019 |
|---|---|---|---|---|
| Revenue | $84.6m | $68.1m | $238.8m | $197.1m |
| Net income | $54.6m | $28.4m | $104.2m | $88.2m |
| Net income attributable to Hamilton Lane Inc. | $33.2m | $13.5m | $58.3m | $40.2m |
| Diluted EPS | $0.96 | $0.46 | $1.78 | $1.44 |
| Operating cash flow | Not presented by quarter | $147.8m | $108.1m |
Quarterly revenue grew 24%; management and advisory fees increased 26% to $75.3 million, while incentive fees rose to $9.3 million from $8.3 million. Nine-month revenue increased 21%; management and advisory fees rose 16% to $208.9 million and incentive fees increased to $29.8 million from $17.5 million. Management cited growth in specialized funds, new and expanded client accounts, and higher incentive fees. Latest-secondary-fund management fees included $7.2 million of quarterly retroactive fees ($10.8 million for the nine months), making this an item to distinguish from recurring growth.
Total expenses were $41.9 million for the quarter and $128.9 million for the nine months. Compensation and benefits rose 20% quarterly and 31% year to date; general, administrative and other costs fell 14% quarterly and 18% year to date. Calculated expenses-to-revenue margins were approximately 50.5% for the quarter versus 57.6%, and 54.0% for the nine months versus 58.0%. These ratios exclude other income and taxes and are not company-reported operating margins.
Quarterly other income included $11.9 million of equity income from investees and $6.2 million of non-operating income, including a $6.2 million unrealized gain from a technology investment. For the nine months, equity income from investees was $8.7 million, down from $14.3 million. The effective tax rate was 10.5% for the quarter and 16.5% year to date.
Operating cash flow was $147.8 million; investing used $47.4 million and financing used $57.8 million over nine months. Cash and cash equivalents were $92.9 million at December 31, 2020, versus $50.1 million at March 31, 2020; available revolving-credit capacity was $125 million. Debt was $73.6 million on the balance sheet ($74.1 million principal outstanding, per management); the term loan and revolver rates were 2.25%. Total assets were $715.8 million and total liabilities $416.0 million. The quarterly Class A dividend declared was $0.313 per share; a subsequent quarterly dividend of $0.3125 was declared February 2, 2021.
Material changes and unusual items
- Management reduced its estimate of annual discretionary compensation by $6.3 million in the quarter, including $4.0 million relating to prior quarters. This lowered reported quarterly compensation expense.
- Two 2020 registered offerings generated approximately $354.6 million in proceeds, which were used to settle exchanges of HLA units; the offerings increased Hamilton Lane’s economic interest in HLA to approximately 64.6% from 55.1% at March 31, 2020.
- Deferred tax assets increased substantially, and the payable under the tax receivable agreement rose to $176.0 million from $99.0 million at March 31, 2020. The filing attributes offering-related increases to the unit exchanges and related tax benefits.
- Lease liabilities increased to $74.0 million, principally reflecting a 17-year headquarters lease. The company expects to move into the new headquarters in the first quarter of fiscal 2022.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management said public and private markets had generally recovered through December after earlier pandemic-related declines, but cautioned that COVID-19’s future effects remain uncertain. Potential impacts include volatile investment valuations, unpredictable incentive fees, fundraising and investment delays, and operational or cybersecurity risks from remote work. Private-investment reporting lags may defer the recognition of market effects.
At December 31, 2020, $497.4 million of carried interest, net of non-controlling interests, remained unrecognized because recognition criteria were not met; $124.3 million of potential related employee and third-party payments was also contingent and unrecorded. The company’s unfunded commitments to its partnerships were $155.0 million. Management said pending or threatened legal matters were not expected to materially affect the financial statements; risk factors were reported as unchanged from the 2020 Form 10-K.
Subsequent events include the January 2021 closing of a sponsored SPAC IPO of $276 million, with Hamilton Lane receiving sponsor shares and purchasing $7.5 million of warrants, subject to merger-related vesting or exercise terms. The company also agreed to acquire assets from 361 Capital for an estimated $13 million, subject to customary closing conditions.
Important facts for investors to verify
- How much revenue growth depends on retroactive fund fees, incentive fees and other potentially variable or non-recurring items.
- The effect of the $6.3 million compensation-estimate reduction on quarter-over-quarter and year-over-year expense comparisons.
- Whether deferred tax assets are realizable and how future unit exchanges may affect the tax receivable agreement obligation.
- Liquidity, debt covenants, investment commitments and the timing of cash distributions, particularly under adverse market conditions.
- The valuation and realization assumptions behind unrecognized carried interest and private investments, including the three-month reporting lag.
- Completion and financial impact of the 361 Capital transaction, and the potential costs, dilution and contingent value of the SPAC sponsor shares and warrants.