Hamilton Lane Incorporated — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2017 (the second quarter and first half of fiscal 2018). Hamilton Lane provides private-markets investment management and advisory services. It completed its IPO and reorganization on March 6, 2017; 2016 comparisons reflect the predecessor business, before HLI had publicly traded Class A shares.
Financial and operating performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Total revenue | $48.7 million, down 5% year over year | $101.4 million, up 12% |
| Management and advisory fees | $46.3 million, down 1% | $98.0 million, up 16% |
| Incentive fees | $2.4 million, down 47% | $3.4 million, down 48% |
| Total expenses | $28.7 million, up 3% | $57.1 million, up 13% |
| Net income | $18.2 million, versus $24.4 million | $43.8 million, versus $40.7 million |
| Net income attributable to HLI | $4.7 million; Class A diluted EPS $0.26 | $10.2 million; Class A diluted EPS $0.56 |
| Fee Related Earnings (non-GAAP) | $19.2 million, versus $21.1 million | $43.0 million, versus $37.0 million |
| Adjusted EBITDA (non-GAAP) | $22.6 million, versus $25.2 million | $49.0 million, versus $43.7 million |
Six-month operating cash flow was $62.8 million, versus $44.7 million; investing cash outflow was $10.9 million and financing cash outflow was $35.3 million. Cash, cash equivalents and restricted cash totaled $50.7 million at period-end, including $48.9 million of unrestricted cash and $1.8 million of restricted cash. Cash and cash equivalents were $32.3 million at March 31, 2017.
Debt was approximately $85.5 million at September 30, compared with $86.1 million at March 31. The company refinanced its predecessor facility in August with a $75 million term loan and a revolving facility of up to $25 million; no revolver borrowing is identified in the filing. Term-loan maturity is November 2024 and revolving-facility maturity is August 2020. Rates are floating; a 100-basis-point increase was estimated to raise interest expense by $0.9 million over the next 12 months. The facilities are secured by substantially all HLA assets and include financial and operating covenants.
Fee-earning AUM rose 9% over six months to $29.2 billion: $19.7 billion in customized separate accounts and $9.4 billion in specialized funds. The company also reported approximately $357 billion of assets under advisement. These measures are company-defined and should not be treated as equivalent to fee-earning assets.
Material changes versus the prior comparable period
- First-half revenue growth was led by specialized funds, including $5.8 million of retroactive fees from the latest secondary fund, and growth in customized accounts and advisory services. In the quarter, revenue fell as prior-year specialized-fund retroactive and one-time fees and carried interest did not recur.
- Incentive fees declined in both comparison periods, primarily because the prior year included carried interest receipts from a primary fund.
- First-half expenses grew faster than revenue, reflecting higher base compensation from increased headcount and higher consulting and professional fees, including costs related to a new joint venture.
- First-half equity income from investees increased to $10.2 million from $5.8 million. Interest expense was $4.6 million, including a $1.7 million write-off of old financing costs and a $0.9 million realized loss reclassified from accumulated hedge losses during refinancing.
- Reported net income attributable to HLI and Class A EPS are not directly comparable with 2016, when HLI had no Class A shares outstanding. A larger portion of consolidated income was attributable to HLA non-controlling interests.
Outlook, risks and unusual items
The filing gives no quantified revenue, earnings or AUM guidance. Management said it expects to meet current and long-term liquidity needs through operating cash flow, existing cash and potential external financing. It identified business growth, investment commitments, compensation, taxes, debt service and distributions as principal cash requirements, and stated that owner distributions could be suspended if operating cash flow were insufficient.
HLA acquired substantially all assets of Real Asset Portfolio Management LLC in August for approximately $6.0 million, including $5.4 million cash and $0.6 million in shares. An estimated additional $3.5 million may be payable as compensation if the former principals remain employed through October 2018. The acquisition added about $0.4 billion of fee-earning AUM; its period revenue and earnings were not material.
Unrecognized carried interest subject to contingencies was $300.4 million at September 30; $45.2 million received was recorded as deferred incentive fee revenue. Carried-interest-related compensation and third-party amounts potentially payable if the carry is ultimately received were not recorded because payment was not yet probable. General-partner investment commitments were $78.7 million. Management reported no material pending or threatened legal proceedings and no material change in previously disclosed risk factors.
Control issue: Management concluded disclosure controls were ineffective because of a previously reported material weakness in calculating deferred taxes and tax receivable agreement amounts. Remediation efforts continued but had not been fully evidenced; management believed the weakness could be remediated during fiscal 2018. Management nevertheless stated that the financial statements fairly present the periods in accordance with GAAP.
The company declared a quarterly dividend of $0.175 per Class A share in November, payable January 5, 2018. Market risks include volatility in investee values, floating-rate borrowing costs, counterparty and financing risks, and possible restrictions on moving cash between regulated subsidiaries. The filing cautions that historical fund performance, which includes unrealized valuations and excludes Hamilton Lane fees and expenses, is not indicative of returns on HLI shares or future fund results.
Important facts for investors to verify
- Whether the deferred-tax and tax-receivable-agreement control weakness is remediated and controls are operating effectively.
- Debt covenant headroom, actual use of the revolving facility, floating-rate exposure and compliance with minimum management-fee, adjusted-EBITDA and tangible-net-worth requirements.
- The durability of fee growth after retroactive and other one-time fees, and the timing and volatility of incentive-fee revenue.
- Realization, clawback and related compensation exposure for the substantial unrecognized carried interest.
- Cash needs for investment commitments, dividends, HLA member distributions, taxes and the RAPM contingent compensation payment.
- Non-GAAP measures and fund performance alongside GAAP results, including their definitions, adjustments and limitations.