Business context and reporting period
Hamilton Lane Incorporated is a private-markets investment solutions provider, earning primarily management and advisory fees and, to a lesser extent, incentive fees. This 10-Q covers the three months ended June 30, 2019—Hamilton Lane’s fiscal 2020 first quarter, rather than calendar 2019 Q1 as stated in the request. Comparisons below are with the three months ended June 30, 2018. Dollar amounts are in millions unless otherwise noted.
At June 30, 2019, the company reported $34.8 billion of fee-earning AUM, $51.0 billion of discretionary customized separate account AUM, and $409.0 billion of AUA.
Financial and operating performance
| Metric | Quarter ended June 30, 2019 | Prior-year quarter | Change |
|---|---|---|---|
| Total revenue | $64.7 | $63.4 | Up 2% |
| Management and advisory fees | $60.6 | $51.0 | Up 19% |
| Incentive fees | $4.1 | $12.4 | Down $8.2 |
| Total expenses | $37.7 | $37.7 | Approximately flat |
| Income before taxes | $31.8 | $24.7 | Up 29% |
| Net income | $27.5 | $23.1 | Up 19% |
| Net income attributable to Hamilton Lane Incorporated | $11.4 | $8.8 | Up 29% |
| Diluted Class A EPS | $0.42 | $0.39 | Up $0.03 |
| Operating cash flow | $33.4 | $37.9 | Down $4.5 |
| Investing cash flow | $(10.5) | $(8.1) | Greater cash use |
| Financing cash flow | $(13.1) | $(23.7) | Lower cash use |
Management and advisory fee growth reflected higher specialized-fund fees, including retroactive fees, growth in customized accounts, and increased fund reimbursement revenue. Lower incentive fees primarily reflected prior-year general-partner catch-up fees and reduced fees from a co-investment fund. Equity-method investment income rose to $6.2 million from a $0.1 million loss, chiefly due to improved direct/co-investment fund results.
The filing does not present a standard operating-margin measure. As calculated from reported GAAP figures, income before taxes was approximately 49% of revenue and net income attributable to Hamilton Lane Incorporated was approximately 18% of revenue.
Balance sheet, liquidity and capital
- Cash and cash equivalents were $58.9 million at June 30, 2019, versus $49.4 million at March 31, 2019; cash, cash equivalents and restricted cash totaled $61.4 million.
- Debt was $70.0 million on the balance sheet; principal outstanding was reported as $70.3 million. The term loan matures in November 2024, and the $25 million revolver matures in August 2020. The term-loan rate was 4.25% at quarter-end. Management estimated a 100-basis-point rate increase would add $0.7 million of interest expense over 12 months.
- The company reported $33.4 million of operating cash flow, while funding investments and capital commitments, paying $5.7 million of dividends and $22.2 million of HLA member distributions, and receiving $15.8 million of secured-financing proceeds.
- On adoption of the lease standard on April 1, 2019, the company recorded $10.8 million of lease right-of-use assets and $11.7 million of lease liabilities. Adoption did not affect income; it increased reported assets and liabilities.
- The company stated that it expected operating cash flows, existing cash and potential external financing to meet current and long-term liquidity needs. It had not repurchased shares under its authorized program, leaving the full $50 million authorization available.
Material changes, outlook and risks
- Fee-earning AUM increased $1.2 billion during the quarter to $34.8 billion: customized separate accounts rose to $22.5 billion and specialized funds to $12.3 billion.
- Management gave no specific financial guidance in the supplied filing text. It cautioned that interim results are not necessarily indicative of full-year results. It expected compensation costs generally to rise with headcount and growth.
- Disclosure controls and procedures were deemed ineffective because of a previously reported material weakness in IT general controls over a system supporting financial reporting. Remediation steps were underway but not yet demonstrated to be effective; management believed remediation could occur during fiscal 2020. Management nevertheless stated that the interim financial statements fairly presented the company’s financial position and results in all material respects.
- Unrecognized carried interest subject to contingencies was $365.9 million, net of non-controlling interests; this was not recognized as revenue. If received, up to $91.5 million could potentially be payable to employees and third parties under compensation arrangements. The company also had $135.4 million of unfunded commitments to its Partnerships.
- The company transferred investments to a Partnership for $15.8 million but accounted for the transaction as secured financing, not a sale, due to continuing involvement. At quarter-end, the related liability’s fair value was $16.6 million, and the company recorded an $0.9 million unrealized loss on it.
- Management said ordinary-course legal matters were not expected to materially affect the financial statements and reported no material changes to previously disclosed risk factors. Risks include market and investment valuation changes, variable interest rates, financing access, regulatory and tax matters, client or investor defaults, and dependence on key employees and distributions from HLA.
- A subsequent acquisition closed July 1, 2019; the company estimated a gain of approximately $5 million in the quarter ending September 30, 2019. On August 6, it declared a $0.275-per-share quarterly dividend, payable October 4, 2019.
Important facts for investors to verify
- Whether the IT-control material weakness is remediated and tested as effective, and whether any reporting adjustments are required.
- The sustainability of management-fee growth, including retroactive fees and fund reimbursements, and the variability of incentive fees and investment income.
- The timing and collectability of unrecognized carried interest, related potential compensation obligations, and clawback exposure.
- Liquidity, debt covenants and refinancing needs, especially the revolver’s August 2020 maturity and floating-rate exposure.
- The valuation and collateral arrangements for Level 3 investments and the secured financing, as well as the expected acquisition gain and declared dividend.