Hamilton Lane Incorporated — Form 10-Q Summary
Reporting period: Three months ended June 30, 2021, the first quarter of fiscal 2022 (not calendar 2021 Q1). Comparisons are with the three months ended June 30, 2020. Financial amounts below are in millions unless noted.
Business context
Hamilton Lane provides private-markets investment management and advisory services, including customized separate accounts, specialized funds, advisory, reporting and distribution management. At quarter-end, it reported approximately $71 billion of discretionary AUM, $20 billion of specialized-fund AUM and $665 billion of AUA. Fee-earning AUM was $42.8 billion, up from $39.0 billion a year earlier.
Key financial results
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $79.0 | $69.7 | +13% |
| Management and advisory fees | $73.9 | $67.3 | +10% |
| Total incentive fees, including consolidated VIEs | $5.1 | $2.5 | More than doubled |
| Total expenses | $43.2 | $40.9 | +6% |
| Income before taxes | $56.6 | $6.9 | Increased substantially |
| Net income | $44.7 | $5.0 | Increased substantially |
| Net income attributable to Hamilton Lane Inc. | $28.2 | $3.2 | Increased substantially |
| Diluted Class A EPS | $0.78 | $0.11 | Increased |
| Fee Related Earnings (non-GAAP) | $33.4 | $27.5 | +21% |
| Adjusted EBITDA (non-GAAP) | $40.2 | $31.6 | +27% |
| Operating cash flow | $32.4 | $47.5 | Down $15.1 |
| Cash, cash equivalents and restricted cash | $76.2 | $74.2 | At quarter-end |
Total expenses were 54.7% of revenue, versus 58.7% a year earlier. This is an expense ratio, not a reported operating margin; reported pretax income included material investment-related gains. The effective tax rate was 21.1%, compared with 27.9%. The declared dividend was $0.35 per Class A share, versus $0.3125.
Quarter-end total debt was $147.6 carrying value ($148.1 principal), down from $163.2 carrying value at March 31, 2021. The company reported $73.1 of cash and cash equivalents, excluding restricted and VIE cash. It stated it had $100 million of availability under its loan agreements.
Material changes and notable items
- Revenue growth reflected higher specialized-fund and customized-account fees, new reporting revenue from the 361 Capital acquisition, increased distribution-management activity and higher incentive fees.
- Compensation and benefits fell $3.6 million, mainly because of lower base compensation and bonus accruals. General, administrative and other expense rose $6.0 million, including higher rent for the new headquarters and consulting and professional fees.
- Equity in income of investees swung to $20.0 million of income from a $17.0 million loss. Management attributed the change primarily to stronger public and private market valuations in the underlying investments; those results are recorded with a three-month lag.
- Other non-operating income included a $3.5 million unrealized gain after an investment’s IPO made it subject to fair-value accounting. The company said an observable price change in another investment in July was expected to produce an approximately $23 million unrealized gain in fiscal Q2.
- On April 1, 2021, the company acquired substantially all assets of 361 Capital for a stated aggregate cash amount of $13.1 million, including $10.1 million paid at closing and $3.0 million payable in installments. The acquisition added $7.1 million of definite-lived intangibles and $5.6 million of goodwill.
- Operating cash flow declined despite higher net income, in part reflecting changes in non-cash investment gains and working-capital movements. Investing cash flow included the acquisition and capital spending; financing cash flow included dividends, member distributions and repayment of the $15 million revolver balance.
Outlook, risks and contingencies
- Management said it believed operating cash flow, existing cash and access to financing would meet current and long-term liquidity needs. It gave no specific earnings or revenue guidance in the supplied filing text.
- COVID-19’s future effects remained uncertain, including potential impacts on markets, portfolio investments, clients and counterparties. Management said results may not yet reflect some effects because partnership investment results are reported on a lag.
- Incentive fees are volatile and subject to performance hurdles and potential clawbacks. Carried interest not recognized because contingencies remained was $808.8 million, net of non-controlling interests; if received, up to $202.2 million could be payable to employees and third parties under related compensation arrangements. Neither amount was recorded as a liability or revenue.
- The company had $194.7 million of aggregate unfunded commitments to its investments. Management reported compliance with regulatory net-capital requirements and loan covenants. Debt agreements include financial and other covenants and are secured by substantially all HLA assets.
- Management did not believe pending or known threatened legal matters were probable to materially affect the financial statements. The filing reported no material changes to previously disclosed risk factors or off-balance-sheet arrangements.
- Market risks include changes in underlying investment values, interest rates, liquidity, counterparties and foreign exchange. Management estimated a 100-basis-point interest-rate increase would add about $0.4 million to interest expense over the next 12 months.
Important facts for investors to verify
- How much of the sharp GAAP earnings increase reflects recurring fee operations versus investment valuation gains, and how FRE and Adjusted EBITDA reconcile to GAAP results.
- The sustainability of fee-earning AUM growth, incentive fees and recent distribution-management revenue, including the timing of fee-base reductions and fund distributions.
- The valuation, liquidity and subsequent price development of the investments measured using Level 3 inputs or the measurement alternative, including the expected fiscal Q2 gain.
- Debt availability and covenant headroom, future capital needs and cash requirements for unfunded investment commitments, leases, dividends and tax receivable agreement payments.
- The amount and timing of any carried interest ultimately recognized, clawback exposure and related compensation obligations.