Hamilton Lane Incorporated — Form 10-Q Summary
Business context and reporting period. Hamilton Lane is a private-markets investment manager and adviser serving institutional clients. This unaudited filing covers the three months ended June 30, 2020, the company’s fiscal first quarter of fiscal 2021 (rather than calendar 2020 Q1). Comparisons are with the three months ended June 30, 2019 unless noted. The company reported approximately $39.0 billion in fee-earning AUM, $447 billion in AUA, and approximately $68 billion of discretionary AUM at quarter-end.
Financial performance and position
| Metric | Quarter ended June 30, 2020 | Prior-year quarter |
|---|---|---|
| Total revenue | $69.7 million | $64.7 million |
| Management and advisory fees | $67.3 million | $60.6 million |
| Incentive fees | $2.5 million | $4.1 million |
| Total expenses | $40.9 million | $37.7 million |
| Income before taxes | $6.9 million | $31.8 million |
| Net income attributable to Hamilton Lane Incorporated | $3.2 million | $11.4 million |
| Diluted GAAP EPS | $0.11 | $0.42 |
| Fee Related Earnings (non-GAAP) | $27.5 million | $24.8 million |
| Adjusted EBITDA (non-GAAP) | $31.6 million | $29.7 million |
- Revenue grew 8% year over year as management and advisory fees increased 11%; lower incentive fees partly offset that growth. Expenses rose 9%. Management did not provide formal forward financial guidance.
- Cash flow from operations was $47.5 million, compared with $33.4 million; investing activities used $6.1 million and financing activities used $20.3 million. Operating cash flow included favorable movements in operating assets and liabilities, notably accrued compensation.
- Cash and cash equivalents were $71.1 million at June 30, 2020, up from $50.1 million at March 31; restricted cash was $3.1 million. Total assets were $526.5 million and total liabilities $293.9 million.
- Debt had a $74.5 million carrying value; principal outstanding was $75.0 million. The company reported $125 million of availability under its Loan Agreements. Its term and revolving facilities had a 2.25% rate at quarter-end; management estimated a 100-basis-point rate increase would add $0.4 million to interest expense over 12 months.
- Fee-earning AUM increased to $39.0 billion from $34.8 billion a year earlier. AUM grew in specialized funds, while customized separate-account fee-earning AUM declined slightly during the quarter.
Material changes and notable items
- Equity in losses of investees was $21.2 million, versus equity income of $6.2 million a year earlier. Management attributed the swing primarily to COVID-19-related effects on public and private investment valuations as of March 31, 2020. Partnership investment results are reported on a three-month lag.
- Specialized-fund management fees benefited from growth in the latest secondary fund, including $3.8 million of retroactive fees. Incentive fees declined by $1.7 million, primarily due to lower fees from one specialized fund.
- Compensation and benefits increased 26%, mainly from higher base compensation and bonus accruals. General, administrative and other expenses declined, including lower travel and professional-services costs.
- In June, the company issued shares in a registered offering and received approximately $205 million net. It used all proceeds to fund exchanges of HLA membership interests; the proceeds therefore were not retained as additional cash. The transaction increased HLI’s economic interest in HLA to approximately 60.6% from 55.1%.
- The offering generated a $56.3 million deferred tax asset and a $44.5 million payable under the tax receivable agreement. Deferred tax assets rose to $191.4 million from $137.9 million at March 31.
- For the quarter, GAAP diluted EPS was $0.11 and non-GAAP EPS was $0.13. The company declared a $0.3125 per-share dividend; a further quarterly dividend of $0.3125 was declared August 4, 2020.
Outlook, risks and contingencies
- Management said COVID-19’s duration and financial impact could not be reliably predicted. Risks include volatile portfolio valuations, reduced or delayed realizations and incentive fees, fundraising and investment delays, and operational and cybersecurity risks associated with remote work.
- Management stated that liquidity was adequate at quarter-end, citing $71.1 million of available cash and $125 million of Loan Agreement availability. It expects operating cash flows, existing cash and potential external financing to meet liquidity needs, but notes that financing or capital-markets transactions are not assured.
- Unrecognized carried interest subject to contingencies was $310.9 million at June 30, down from $441.2 million at March 31. If ultimately received, up to $77.7 million could be payable to employees and third parties; these amounts were not accrued because payment was not considered probable.
- The company reported $143.5 million of its own unfunded commitments to Partnerships. Management did not believe pending or threatened legal matters were probable to materially affect the financial statements; it reported no material changes to previously disclosed risk factors.
- The company expects future lease payments of approximately $92 million over 17 years for its planned new headquarters, beginning upon lease commencement. It was not yet recognized as a lease asset and liability at quarter-end.
Important facts for investors to verify
- How much the $21.2 million investee loss reflects lagged March 31 valuations, and how subsequent portfolio valuations and realizations evolve.
- Whether fee-earning AUM growth and recurring management-fee gains continue to offset lower incentive fees and elevated compensation costs.
- The composition and sustainability of operating cash flow, particularly the effect of compensation accruals and other working-capital movements.
- Available borrowing capacity, debt covenant compliance, required principal payments, and the effect of floating rates on interest expense.
- The realization and valuation risks around the deferred tax asset, tax receivable agreement obligation, unrecognized carried interest, and investment commitments.
- The distinction between GAAP results and management’s non-GAAP measures, and the impact of the June offering and HLA unit exchanges on ownership and per-share results.