Q2 2020 Earnings Call
Welcome everyone to the Hamilton Lane incorporated second quarter fiscal year 2020, <unk> earnings conference all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad, if you'd like.
For all your question press the pound Keith Thank you.
I'd like to hand, the call over to John <unk> Investor Relations manager you May begin your conference.
Good morning, and welcome to the Hamilton Lane Q2 fiscal 2020 earnings call today, I will be joined by Mario Genie CEO , Eric Hirsch, Vice Chairman, Jeff Meeker, Chief client Officer, and Randy Stillman CFO .
Before we discuss the quarter's results we want to remind you that we making forward looking statements based on our current expectations for the business.
These statements are subject to risks and uncertainties that may cause the actual results to differ materially.
For a discussion of these risks. Please review the risk factors included in the Hamilton mine fiscal 2019, 10-K, and subsequent reports we file with the FCC.
We will also be referring to non-GAAP measures that we view as important in assessing the performance of our business.
Reconciliation of those non-GAAP measures to GAAP can be found in the earnings presentation materials, which will be referencing throughout the call and will also be shown on the webcast. These materials are available on the public Investor Relations section of the Hamilton late website.
Our detailed financial results, we've made available when our 10-Q was filed.
Please note that nothing on the call represents an offer to sell or solicitation to purchase interest in any of Hamilton lanes products.
Beginning on slide three.
Year to date, our management and advisory fee revenue grew approximately 15% relative to the prior year period.
Over the same period, we grew our fee related earnings by 14%.
Translated into year to date non-GAAP EPS of 94 cents based on approximately $50 million of adjusted net income and GAAP EPS of 98 cents based on approximately $27 million a GAAP net income.
Yeah, again declared a dividend of 27 and a half cent per share this quarter, which keeps us on track for the 29% increase over last fiscal year end equates to one dollar in 10 cents per share for fiscal year 2020 with that I'll now turn the call over there.
Thank you John and good morning, everyone.
Turning to slide for the should be familiar it highlights our total asset footprint, which we defined as the some of our you EME assets under management and a two way assets under advisement.
Total asset footprint for the quarter stood at approximately $481 billion and represents a 6% increase to our footprint year over year.
Growth in the U.M. came across client type size of client geographic region and came from both our specialized phones and our separate accounts, we continue to focus on growing and winning across both lines of business.
Moving to anyway, we also saw growth come across our client type and geographic region as mentioned in the last earnings call you wake can fluctuate quarter to quarter due to a variety of reasons, but the revenue associated with a way does not necessarily move in lock step with the change and while this quarter saw an increase in a way dollars relative to the previous quarter.
We will continue to emphasize that no direct correlation exists between the scale of that you weigh dollars and revenue generation.
Although we expect to add to our eight you way over the long term. It remains an area, where we are focused on finding the right match between our services and the needs of the particular clients not simply growing for growth sake.
On slide five we highlight our fee, earning a U M.
The earning a U M is the combination of our customized separate accounts and our specialized funds with basis point driven management fees.
As we have stated in the past fee, earning a U N is the most significant driver of our business as it makes up over 80% of our management and advisory fees.
Year over year total fee, earning AUM grew $4.4 billion or nearly 14% with solid growth and positive fund flows across both our specialized phones and our customized separate accounts.
We have added net fee, earning a U M of $2 billion to our customized separate accounts and over the same time period, we have added nearly $2.4 billion of net fee, earning AUM across our specialized funds.
As we had mentioned on prior calls this growth continued to be driven by four key components number one re up from our existing clients to winning and adding new clients three growing our existing fun platforms and for raising new specialized funds.
Also as we have shown on this slide our fee rates continue to remain steady for those who have followed us since our IPO. This steadiness has been a consistent theme.
Moving to slide six fee, earning AUM for more customized separate accounts was $22.9 billion growing approximately 10% over the last 12 months. This came from a combination of re ups from existing accounts as well as the addition of brand new relationships.
We experienced growth across all of the geographies, we served as well as by the type and size of client. Additionally, in the past we've discussed our efforts and working to broaden our partnerships with distribution platforms, where we provide white label solutions. This area continues to experience attractive growth and we are encouraged.
By the opportunity set we see in front of us with that let me now turn the call over to Jeff to cover an update on our specialized funds.
Thanks, Eric with regard to our specialized products growth continues to be strong and demand is coming from a wide range of investors around the globe over the past 12 months, we achieved positive fee, earning a U.M. inflows of nearly $2.4 billion, resulting in a 22% increase we remain active with our fundraising efforts on a variety of fronts incur.
Putting our new semi liquid evergreen fund that marked our entrance into a market targeted at high net worth investors in geographies, where evergreen funds are already offered such as Australia Asia and Europe . Since the launch we've continued to be very encouraged with the demand for the product, but ultimately this is a marathon not a sprint other platforms that have achieved similar.
Does it have achieved success in this space have been built out over many years and we expect to follow similar course that said we are pleased with our progress to date since launching in May 2019. The fund has received more than $146 million of inflows as of November onest, which equates to approximately $24 million of net inflows on a monthly basis.
Now a quick update on the other specialized funds on September 27th we announce the final closing of our 10th multi strategy funds of funds with approximately 278 million total commitments, while we've seen a shift in investor in investor preference towards customize separate accounts or other specialize funds the multi strategy structure continues to fit.
The needs of certain investors seeking diversified exposure to the private markets and it continues to be an additive product for our farm.
On the secondary fun front, we had announced in our protocol in April we held the first close on our fifth secondary fun with $700 million of commitments. As a reminder, we have at least 18 months from the date of our first close to complete the raising of the fund in September we held our second close on an additional 400 million dollar.
Bringing the total closed to date to $1.1 billion since fees on this fund started in the prior quarter disclosing did did generate retrofits for the quarter.
We continue to remain encouraged with the growth we have achieved with our fee, earning AUM through this fiscal year to date, the interest and demand for private markets exposure continues to grow and we continue to be the beneficiary of this growth as a leader in this asset class with that let me turn the call over to Randy our CFO to go over the financials.
Yes, Jeff Slide eight of our presentation shows the financial highlights for the first half of our fiscal year. We continue to see very solid growth north business with management and advisory fees of approximately 15% versus the prior year period, driven by strong results across our core products and services revenue from our customized separate accounts into.
These $2.9 million compared to the prior period due to the addition of several new accounts and re ups from existing clients.
Our specialized funds revenue increased $10.2 billion from the prior year period, driven by $1.1 billion raised in our latest secondary funded the current fiscal year and $600 million race between periods for our latest co investment fund.
We recognize $2.8 million year to date in retro piece from the co investment on compared to 800000 than the prior year period.
As many of you are likely aware investors to come into later closes up the fund raise for many of our products a retroactive fees dating back to the funds first close therefore, you typically see a spike in management fees related to that on for the quarter in which subsequent closes occur.
Revenue from our advisory and reporting offerings was flat compared to the prior year period.
The final component of our revenue was incentive fees incentive fees for the period were $9.2 million were approximately 7% of total revenue.
Moving to slide nine we provide some additional detail or unrealized carry balance we saw strong growth this quarter with the balance up 15% from the prior year, even as we recognized $28.7 billion of incentive fees over the last 12 months.
As you can see from this slide the growth came from both adding new carry generating funds as well as appreciation in existing vehicles.
Turning to slide 10, which profiles our earnings or fee related earnings year to date were up 14% versus the prior year period as a result of the revenue growth we discussed earlier.
In regard to our expenses total expenses year to date increased $2.9 million compared with the prior year period.
DNA increased $5.3 million due to increases in commissions from fund closings in the cover your period, an increase in consulting and professional fees.
And an increase in fun reimbursement expenses.
Total compensation and benefits decreased $2.4 million compared to the prior year period due primarily to the earn out expense from a real assets acquisition in the prior year period.
Moving to our balance sheet on slide 11, our largest asset on our balance sheet is investments alongside our clients in our cost of my separate accounts and specialized bonds. The growth of this asset which increased 19% from pure compared to the prior year period reflects the growth of our business.
In regard to our liabilities our senior debt is our largest liability and we continue to be modestly lever.
And with that we thank you for joining the call and we're happy to open it up for questions.
At this time I'd like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad.
And we'll pause for just a moment compile the Q and a roster.
And our first question comes from the line of Ken Worthington with JP. Morgan Go ahead. Please your line is open.
Hi, Thank you for taking my question.
Maybe first on the fund to funds.
You just raise I think you said 278 million.
That's.
Fair, but smaller than what we've seen in prior funds and I think as you acknowledge this is not really where you see.
The biggest direct opportunity.
What I thought there were a number of ancillary benefits you you received from having a bigger presence.
And in the fund to fund area, So I guess.
Maybe one remind us what those ancillary benefits are I think theres implications for your co investment funds et cetera, and in does the shrinking of this size from the 500 million.
Plus range to the below 300 million does that actually start to weigh on some of those ancillary benefits.
Your presence here provides.
Sure Ken This is Jeff. Thanks for the question. So in the second part of your question.
You're exactly right in terms of the ancillary benefits, we get around things like co investment come from having significant primary dollars that we commit in the marketplace and so.
From that standpoint, yes, we need we need primary dollars to continue to do continue to generate things like co investment and secondary opportunities remember that our commingled fund of funds is compared to our separate account business a fairly small portion of the business overall, so while we continue to get those advantages from.
Our separate account business and from the co mingled side.
On the fund of funds, specifically I think Weve I mentioned that we've mentioned it before we have seen a bit of a shift in investor preference towards customized investing I think we're well positioned to take advantage of that.
The fund to funds is a natural extension of our business you've heard us talk in the past about things like White label products. So that is where we build specific.
Commingled funds or fund to fund like offerings for high net worth platforms Weve consent continued to see good growth in that area as well and overall the fund to funds business continues to be additive overall.
Thank you.
And then maybe on performance fees can you talk about how you see the crystallization of performance fees, especially in light co invest to.
That's already generating performance fees, but it seems like it has a lot more to come what is the final you don't know the exact timing, but but how should we think about crystallization in coming quarters.
Broadly and maybe that product more specifically.
Sure candidates Eric Thanks for the question I think what you're seeing with both us and the broader market is that liquidity is simply not occurring at the rates that perhaps that occurred at several years ago I think driven by a few factors one lot of volatility in the overall economy right now and it has potential sellers and buyers.
I think just since sitting here waiting and take a pause on is now the best day to go ahead and sell that asset I think secondly, what you're seeing is in an environment where people purchase some assets.
Relatively high prices. It certainly take some time to continue to generate those returns that day and we are expecting so from our perspective, the money continues to flow.
Our biggest focuses on what we can control, which is the overall totality of that carried interest dollar, which as Randy pointed out is growing very very nicely and I think on co investment fund too and the crystallization of all that obviously not in our control.
But we continue to like the assets that are there and we feel good about the prospects.
Great. Thank you very much.
Your next question comes from the line of Michael Cyprys with Morgan Stanley Go ahead. Please your line is open.
Hey, good morning, Thanks for taking the question I'm just curious on the broader fund raising front in the backdrop, where interest rate expectations relative to say six to 12 months ago are a lot lower here in the U.S. and around the world. So just curious what sort of impact is that having on conversations you're having with clients compared to say a year ago.
Do you see new investors coming at you guys for the for the first time, how is that pace sort of changing if you could kind of just give us a flavor of what you're hearing and seeing out there.
Sure Mike Mario.
With no surprise with interest rates lower I think it increases.
Or higher returning assets.
And the discussions we have with.
And some prospects whether around equity or credit or real assets is is probably heightened a little bit in terms of okay. If I don't expect interest rates are rising so like fixed income.
Component is not going to get the returns I have said, where do I get that returns. So we see we see new entrance.
We also see continued interest in existing investors or for that higher returning set of assets in their portfolios and.
Again as you as you note and then for the lower interest rates makes that.
A much more relevant conversations so I would say from a private markets perspective.
Interest rates are a net positive interest and then flows into the private markets.
Great and just maybe as a follow up as you guys are raising more assets, bringing in.
More client dollars more clients can you just talk about maybe how you're building out the platform to be able to deploy capital at a faster velocity or whether it's across different verticals and an asset classes.
How you guys are building that out.
Well I think as you've seen from just the growth in the number of people the growth in geographies I think it's what it's what you've said you build it out across the number of different ways. One is within the verticals. We have you have to build the resources and the team to take the volume the back office needs.
Grow in order to have the reporting in the monitoring of all the investments you've made so as you think about our growth.
You just have a lot of things that are that are needed in order to process the deal flow and get the deal flow done and then as we mentioned in a number of.
Our conversations there is a technology aspect to all of this in terms of.
Reaping the infrastructure moving keeping the information timely.
Allowing you to do things in a more efficient way and make sure that all of that information is moving around the from end to clients in the way you want it to.
Great. Thanks.
And your next question comes from the line of Alex Bluestine with Goldman Sachs. Go ahead. Please your line is open.
Hi, Good morning, this is actually down jacoby filling in for Alex. Thanks for taking my questions you guys had touched on the fund raising for.
Label strategies is a.
Hope or too.
Can you just help us think about kind of.
Seismic contribution to fee, earning AUM over let's say the last 12 months something like that and then just going forward to help us think about what that opportunity could look like.
Sure Dan It's Eric Thanks for the question I think as you've heard us.
Sort of note a few times. This is an area that we are excited about I think this reflects the asset class move into having a larger portion of capital coming from both high net worth individuals as well as mass affluent.
We think as a provider of customized solutions, which we see is a big part of what that market is looking for we're very very well positioned so just as a reminder.
These these vehicles are customize vehicles again, often white labeled where we're partnered with a wealth management platform. The platform is responsible for both the distribution and the servicing and then Hamilton Lane is responsible for what what we do which is assembling those portfolios to deliver performance for the clients.
And so we see this area as early days, we have started a handful of relationships and I think the growth is really coming from sort of two components of that one thus, adding new relationships and to those existing relationships beginning to grow as you can imagine most of these things start off pretty small people want to.
The success they want to see brand getting established on their platform and as that happens you start to see the uptick grow and that's exactly what we're starting to see we havent broken out.
Publicly sort of the magnitude of that I think as those become more and more important to our business over time, you'll start to see us provide some more color on those in the future.
Got it pick helpful color. Thank you and then just follow up.
Just maybe you guys could provide a little bit of color on the.
Expense outlook, how we should think about kind of.
Based compensation gross.
And that line and kind of where.
Well this quarter was relative to to the run rate and then same sort of thing on January .
Good growth outlook and.
Kind of where we are versus run rate expense levels. Thanks, Dan It's Eric I'll stay on that one I think what you're seeing is what we said in the past I think we're growing the business. We do continue to add resources, because we view ourself in sort of a high growth mode.
That said I think theres nothing abnormal occurring this quarter versus sort of prior and what we sort of expect to see in the future.
Got it thank you.
And again as a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad and your next question comes from the line of Robert Lee with KBW Go ahead. Please your line is open.
Great.
Good morning, Thanks for taking my questions.
Maybe talk a little bit about this.
Account business I'm, just kind of maybe update us little bit on.
How you think of the competitive environment for that type of business and if thats having any.
Kind of.
Impact on.
Fees, there I mean does.
I know, it's a moving target depending on how different accounts kind of.
Step up or down, but it does look like maybe the the average for your rates come down a little bit there maybe some mix, but can you talk about some of the dynamics, there and if you're seeing more competitors come into that marketplace.
Sure it's Mario.
I would say I don't know if there are more competitors.
Some has had drifted away others have come in it's a competitive environment.
Spending on what the particular clients are looking for so theres.
Usually a handful of people.
That are competing for any particular mandate and it really depends on the kinds of services you can offer the kinds of investment results. You can offer as you noted the fee pressure is marginal I mean, we see it in some places or in some geographies more in some.
People want more primaries versus secondaries or whatever they're looking for so I would say, it's a it's mix on the on the fee pressure and that obviously, depending on size, but it does come back to what services can you offer as we've noted a number of times roughly a third of Hamilton Lane employees are on the CLO.
Side, which is very different from from most of arc.
That from the point of view of offering a separate account and being able to provide customized services customized solutions is a very strong.
Feature so it's.
It's a competitive market, but we feel like we continue to win business, we want to win.
Do it at the prices that you see in the financial results.
Okay, Great and this maybe a quick kind of maybe more modeling questions is the 2.8 million catch up fees that was.
Year to date not in the quarter correct.
Rob It's Erik Yes, Thats correct that year to date.
Okay, just wanted to double check. Thank you. Thanks for taking my question.
Your next question comes from the line of Chris Kotowski from Oppenheimer and company go ahead. Please your line is open.
Yeah good morning.
Since your last call I guess private equity has come they become kind of a.
Political football.
Certainly in this country and I mean, I don't expect you to comment on it but as I read Senator Warren's proposed legislation that seems to want to do away with the concept of.
Limited liability company isn't that again I don't expect you to do.
To comment on her.
Proposals directly but I'm wondering is this isn't kind of an aberration or view in the.
In the United States or is this a common view that as you look all through all those geographies that you have.
Is it a common thing that.
Kind of private equity as portrayed as the axis of evil in the economy as opposed to being a source of capital for growth.
Yes.
Sorry, let me take a shot at valent I think it varies remember a few years ago I think it was in Germany. The private equity industry was called plague of locus. So.
It. It is batteries you have deals that bad, which then are very high profile and so it becomes politically easy to pick on them.
But these things seem to come and go you have some legislation that can impact. It. So I think that it is it is sort of the good and bad news of being an industry that has grown and been successful 15 20 years ago. It was a very small part of the capital markets and didn't get the attention it gets.
Ill because now it is a very.
Important part of the capital markets and so I suspect that this will continue.
I don't think it will go away whether in the United States or other countries.
And it is something we will have to deal with and have dealt with as I mentioned in other places.
I think I think that as part of the reality of the industry, having grown and mature.
Okay.
Alright. Thank you that's it for me.
And there are no further questions in queue at this time I'd like to turn the call back over to our presenters.
You want to thank everyone for joining us today. Thank you.
This concludes todays conference call you may now disconnect.