Hamilton Lane Incorporated — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2021, filed November 2, 2021. This is the second quarter of Hamilton Lane’s fiscal year ending March 31, 2022. Financial amounts below are in U.S. dollars; unless stated otherwise, millions.
Business context
Hamilton Lane provides private-markets investment management and advisory services to institutional and other investors. At September 30, 2021, it reported approximately $44.6 billion of fee-earning AUM and $709 billion of assets under advisement. Its fee-earning AUM comprised $27.4 billion in customized separate accounts and $17.2 billion in specialized funds.
Financial results and liquidity
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Total revenue | $96.3 million, up 14% from $84.4 million | $175.3 million, up 14% from $154.2 million |
| Management and advisory fees | $75.9 million, up 14% | $149.8 million, up 12% |
| Incentive fees, net of consolidated VIE amounts | $20.4 million, versus $18.1 million | $25.5 million, versus $20.5 million |
| Total expenses | $49.8 million, up 8% | $93.1 million, up 7% |
| Net income attributable to Hamilton Lane Incorporated | $52.1 million, versus $21.8 million | $80.3 million, versus $25.1 million |
| Diluted GAAP EPS | $1.41, versus $0.66 | $2.19, versus $0.79 |
| Fee Related Earnings (non-GAAP) | $36.0 million, versus $28.5 million | $69.4 million, versus $56.0 million |
| Adjusted EBITDA (non-GAAP) | $49.5 million, versus $40.5 million | $89.6 million, versus $72.1 million |
For the six-month period, operating cash flow was $83.9 million, compared with $89.6 million a year earlier. Investing activities used $19.6 million and financing activities used $65.1 million. Cash, cash equivalents and restricted cash totaled $89.6 million at September 30; cash and cash equivalents alone were $86.0 million. The company reported $100 million of availability under its loan agreements.
Debt had a carrying value of $147.2 million, down from $163.2 million at March 31, 2021. Principal outstanding was $147.7 million, including a $72.7 million term loan and $75.0 million multi-draw facility; no revolver balance was outstanding. Total assets were $1.234 billion and total liabilities were $553.7 million. The quarterly dividend declared was $0.35 per Class A share.
Changes versus the prior comparable period
- Revenue growth reflected higher fees from specialized funds and customized separate accounts, increased reporting and distribution management revenue, and higher incentive fees. Evergreen funds added $1.2 billion of fee-earning AUM between periods; new and expanded client accounts also contributed.
- Expenses rose more slowly than revenue overall. General, administrative and other expenses increased, including higher consulting and professional fees and rent associated in part with the new headquarters; compensation expense declined, principally due to lower base compensation and bonus accruals.
- Net income growth substantially exceeded revenue growth, in part because of higher equity-method investment income and significant non-operating investment gains. Equity in income of investees was $27.2 million for the quarter, versus $15.8 million, and $47.3 million for six months, versus a $1.2 million loss.
- Fee-earning AUM increased $2.6 billion during the six months to $44.6 billion, with contributions exceeding distributions.
Outlook, commentary and risks
- Management provided no quantified earnings or revenue guidance in the supplied filing text. It said it expects to meet current and long-term liquidity needs through operating cash flows, cash on hand and potential future external financing.
- Management intended to continue quarterly dividends, subject to board discretion and legally available funds. It also expects to evaluate strategic investments and potential capital-markets transactions. The company’s $50 million share-repurchase authorization remained unused.
- COVID-19’s future effects remained uncertain. Management cited potential impacts from the pandemic and recovery on markets, portfolio investments, clients, counterparties and business partners; it anticipated reopening many offices, including headquarters, in 2022 as conditions permitted.
- Unrecognized carried interest subject to contingencies was $989.6 million at September 30, 2021. It was not recognized as revenue because the recognition criteria were not met; potential associated compensation and third-party payments were also unrecorded.
- Market risks include investment valuation, interest rates, liquidity, counterparty and foreign-exchange exposure. Management estimated that a 100-basis-point increase in interest rates would increase interest expense by $0.4 million over the following 12 months. Loan agreements include financial and operating covenants.
- Management reported no material change in risk factors from its fiscal 2021 Form 10-K and did not believe pending or threatened legal matters were probable to materially affect the financial statements.
Unusual items and subsequent events
- A $23.2 million unrealized gain on a technology investment was a principal driver of higher non-operating income. Separately, observable price changes in two measurement-alternative investments resulted in a reported $24.7 million unrealized gain during the six-month period. These valuation-driven items make reported earnings less indicative of recurring fee operations.
- The company acquired substantially all assets of 361 Capital on April 1, 2021. It paid $10.1 million at closing, with $3.0 million payable in two installments; acquired revenue and net income were reported as immaterial for the period.
- After quarter-end, an acquisition of an entity in which Hamilton Lane held an investment closed on October 13, 2021. The company expected to record an approximately $12 million gain in the quarter ending December 31, 2021.
- The September 2021 share offering generated $73.8 million in net proceeds, which were used to settle exchanges of HLA membership interests; it was not described as general-purpose operating liquidity.
Important facts for investors to verify
- How much of earnings growth reflects recurring management and advisory fees versus incentive fees, investment income and unrealized gains.
- Whether fee-earning AUM and new client allocations continue to grow, and how distributions and fee-base step-downs affect future fee revenue.
- The realizability and timing of contingent carried interest, as well as related clawback and compensation obligations.
- Available liquidity after funding investment commitments, dividends, tax-receivable-agreement payments, debt service and other obligations; also monitor loan covenants and borrowing capacity.
- The performance and valuation assumptions for private investments, including the effect of the three-month reporting lag and subsequent-event gains.