Hamilton Lane Incorporated — FY2019 Form 10-K
Reporting period: Fiscal year ended March 31, 2019. Although the request references “2018 Q4,” this filing reports the full fiscal year; it also provides unaudited quarterly results for FY2019. Hamilton Lane is a global private-markets investment manager and adviser. At year-end, it reported approximately $61 billion of assets under management (AUM) and $422 billion of assets under advisement (AUA).
Financial and operating metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Management and advisory fees | $217.8 million | $195.0 million |
| Incentive fees | $34.4 million | $49.0 million |
| Total revenue | $252.2 million | $244.0 million |
| Total expenses | $148.0 million | $121.1 million |
| Income before taxes | $129.6 million | $139.6 million |
| Net income | $99.0 million | $106.3 million |
| Net income attributable to Hamilton Lane Incorporated | $33.6 million | $17.3 million |
| Diluted Class A EPS | $1.40 | $0.93 |
| Fee Related Earnings (non-GAAP) | $89.9 million | $81.2 million |
| Adjusted EBITDA (non-GAAP) | $117.7 million | $132.6 million |
| Operating cash flow | $111.6 million | $96.7 million |
Cash and cash equivalents were $49.4 million, plus $2.2 million of restricted cash. Debt principal outstanding was $71.3 million, down from $84.5 million. The company had a $25 million revolving credit facility, with no amount drawn at year-end. Its term loan bears floating-rate interest and matures in 2024; the revolver matures in 2020. Total assets were $360.6 million and total liabilities were $190.9 million.
Fee-earning AUM increased 9% to $33.6 billion, comprising $22.2 billion in customized separate accounts and $11.4 billion in specialized funds. The reported $61 billion of AUM is broader than fee-earning AUM; the company notes that AUM does not translate linearly into fees. Dividends declared were $0.85 per Class A share for FY2019.
Material changes versus FY2018
- Total revenue rose 3%, as management and advisory fees increased 12%; incentive fees fell 30%, primarily because FY2018 included recognition of $40.6 million of previously deferred carried interest.
- Total expenses increased 22%, including higher compensation and benefits (up 18%) and general, administrative and other costs (up 31%). The company cited increased compensation, acquisition-related contingent compensation, professional fees and fund-reimbursement expenses recorded gross under the new revenue standard.
- Net income declined 7%, while net income attributable to the public company rose to $33.6 million from $17.3 million. These measures reflect the company’s Up-C structure and differing non-controlling interests; they are not interchangeable.
- Adjusted EBITDA declined 11%, while Fee Related Earnings increased 11%. Both are non-GAAP measures and should be considered alongside GAAP results.
- Operating cash flow improved to $111.6 million. Investing cash outflow was $19.2 million and financing cash outflow was $90.2 million, including debt repayments, dividends and distributions to HLA members.
Outlook, risks and unusual items
- Management expects to fund liquidity needs from operating cash flow, existing cash and potential external financing. It describes growth opportunities in private markets, international expansion, new products and data and analytics, but provides no quantified earnings or revenue guidance.
- FY2019 non-operating income of $20.9 million included $11.1 million of gains from selling two technology investments and a $10.1 million reduction in the tax receivable agreement liability from revised state tax-rate estimates. A technology investment impairment partly offset gains.
- Management identifies risks from market and investment performance, competition and fee pressure, client termination or non-renewal, access to attractive investments, reliance on key personnel, leverage and floating interest rates, regulation, cybersecurity, and international operations including Brexit.
- The company reported a material weakness in information-technology general controls over one financial-reporting system. Management’s compensating controls were also ineffective. The auditor issued an adverse opinion on internal control over financial reporting, but an unqualified opinion on the financial statements; no misstatement or restatement was identified. Management planned independent reconciliations and added monitoring controls.
- The tax receivable agreement requires payment to legacy owners of 85% of specified tax benefits. The recorded liability was $69.6 million at year-end; payments may be accelerated in certain circumstances and could exceed realized tax savings.
- In March 2019, the company issued 1.4 million Class A shares and used approximately $63.9 million of net proceeds to settle exchanges of HLA units. Class B holders retained approximately 89.6% of combined voting power, making the company controlled under Nasdaq standards.
- On May 29, 2019, the board declared a quarterly Class A dividend of $0.275 per share, payable July 5, 2019, subject to the stated record date. The dividend remains at the board’s discretion.
Important facts for investors to verify
- Whether the material weakness has been remediated and whether subsequent filings report effective controls.
- The durability of fee growth and the effect of lower incentive fees, compensation growth and expenses on margins and cash generation.
- Debt covenant compliance, exposure to floating rates, and the ability to meet $123.6 million of company investment commitments disclosed as due on demand.
- The assumptions behind the $69.6 million tax receivable agreement liability, potential accelerated payments, and the availability of HLA distributions to fund obligations and dividends.
- How reported AUM, fee-earning AUM and AUA translate into recurring fee revenue, given their differing definitions and fee arrangements.
- Fund performance disclosures rely partly on unrealized valuations and exclude Hamilton Lane’s own fees, carried interest and expenses; historical fund results are not returns on the company’s stock.