Q1 2021 Hamilton Lane Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Hamilton Lane incorporated first quarter fiscal year 2021 earnings Conference call. At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you will need.
A press star why or any further assistance. Please press star Zero I would now like the hand the conference over to your Speaker today, John Oh Investor Relations manager. Thank you. Please go ahead Sir.
Thank you Lisa.
Good morning, and welcome to the Hamilton Lane Q1 fiscal 2021 earnings call today, I will be virtually joined by Mario Deep Vice Chairman and a cool Varma CFO as we continue to work remotely from our Pennsylvania headquarters went to remind you that we will be making forward looking statements based on our current expectations, but.
Did you.
These statements are subject to risks and uncertainties that may cause the actual results could differ materially.
Hamilton Lane fiscal 2000 2010, Okay and subsequent reports we file.
We'll also be referring to non-GAAP measures that we view as important in assessing the perform.
And of those non-GAAP measures to GAAP.
Made available on the public investor really.
It's in section of the chemical main website.
Our detailed financial results.
Please note that nothing on this call but.
Represents an offer to sell or any of Hamilton main products.
Beginning on.
Our management advisory fee revenue grew related earnings also grew by over 11.
Present versus the prior year period.
This translated into non-GAAP EPS of 13 cents based on a positive adjusted net income and GAAP EPS of 11 cents based on it.
GAAP net income.
We have also.
Declared a dividend of 31 point 25 cents per share this quarter, which percent increase over last fiscal year equating to the targeted $1.25 cents per share for fiscal year 2021 with that I'll now.
Turn the call over to Mario.
Thanks, John Good morning.
Maybe.
Hey, Thank you we are grateful for the sacrifices an extraordinary efforts.
Goal frontline workers and volunteers.
The fourth during this training period.
Let me also again say thanks to our clients many of whose members and families are on those front line 19 through continuing to step up and deliver their very best for our clients, we had a very solid quarter and advocation.
A quick update.
Based on our various offices as of today, we have begun to see some positive migration back to the office and back toward while all of our offices in the U.S. remain closed or a number of our offices.
Outside the U.S to safely reopened and resumed a limited set of in first and activities. These includes sole Tokyo Hong Kong and.
Sydney and while we are in the early days and even in these locations situation remains fluid is nonetheless encouraging.
Does this real world continues for the majority of our clients. We are working hard to find new ways to engage and add value. We've ramped up production of thought pieces centered around our data we've begun posting a series of virtual events. One new series is something we call in the know where we showcased data and unique perspectives on various topics Hamilton Lane innovate.
Patient and creativity is alive, and well and we can to data.
Let me now turn to some results for the quarter.
Beginning on slide four here, we highlight our total asset footprint, which we define as the some of our AUM assets under managed under advisement.
Total app.
Asset footprint for the quarter stood at a problems us and represents a nine.
Percent increase to our footprint year over year, continuing our long term growth trend.
Assistant with prior quarters.
Jim growth.
Year over year, which was approximately 4 billion us or 6% came from both our specialized funds and customize separate accounts client type size of client and geographic region.
Our focus remains simply growing in winning across both lines of business and we're pleased with the continued success.
As for our AG way similar to what we've seen with our AUM growth year over year, which came in at 38 billion use square approximately 9% was from across client type and geographic regions.
As we mentioned on prior earnings call.
In fluctuate quarter to quarter for a variety of reasons, but the revenue associated with a way does not necessarily move in lock step with those changes 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 scalability way dollars revenue generation.
Now I'll turn it over to Eric.
Thank you Mario and good morning.
Moving on to slide five here, we highlight our fee, earning AUM as a reminder fee, earning AUM is the combination of our customized separate accounts and our specialized funds with basis point driven management fees.
We will continue to emphasize that this is the most significant driver.
Of our business as it makes up over 80% of our management and advisory fees.
Relative to the prior year period total fee, earning AUM grew $4.2 billion or 12% stemming from positive fund flows across both our specialized fund and our customized separate accounts taken separately nearly $1.8 billion of net fee, earning AUM came from our customers.
Separate accounts and over the same time period $2.4 billion came from our specialized funds.
Growth in these two segments continue to be driven by four key components that we have highlighted in the past one re ups from our existing clients to winning and adding new clients.
Three growing our existing fund platforms and for raising new specialized funds. What you also see here is that our fee rates have remained steady.
Moving to slide six fee, earning AUM from our customized separate accounts stood at $24.3 billion growing approximately 8% over the past 12 months, we continue to see the growth coming from a variety of avenues that include type.
Hi, guys and geographic location of the clients. What you also see here that over the last 12 months more than 80% of the gross inflows into customized separate accounts came from existing clients you've heard us say in the past that re ups from our existing client base remains a key component of the growth.
Both we've achieved in this segment of fee, earning AUM.
In addition to re ups, winning and adding brand new relationships, which in turn provide a growing base for future re up opportunities.
Worth noting in this quarter, we once again close separate account business from both existing as well as brand new relationships.
Moving to our specialized funds growth here continues to be strong, we're executing well across our product suite and demand remains robust coming like the rest of our business from a diversified set of investors around the globe.
Over the past 12 months, we achieved positive inflows of nearly $2.4 billion, resulting in a nearly 20% increase in fee, earning AUM.
Much of this growth over the last 12 months is attributed to our current secondary fund still end market.
We continue to be pleased with the results we've achieved thus far during this recent quarter. We held additional closes that totaled $486 million of LP commitments and now bringing the total dollars raise for this product to approximately $2.2 billion at this level, we have surpassed the size of our preview.
Secondary fund, which was approximately 1.9 billion and it is already the single largest commingled fund we've ever raised.
And as we noted before we have until October of this year to complete the fund raising of this current fund and we remain optimistic on our ability to continue to add capital we find the current environment, serving up some interesting opportunities for secondary deployment.
Last point here given that the fees on this fund started in the prior quarter. This closing did generate retro fees of $3.8 million in the quarter.
The next largest drivers of the U.M. inflows, where the continued fundraising by our credit fund along with continued success across our various white label initiatives as well as positive net inflows for our semi liquid evergreen product.
I will end here by highlighting an announcement that you may have seen reported in the press that being the closing of a brand New fund offering the Hamilton Lane impact fund.
This fund targets investments that have a pot.
Sort of social and or environmental impact and while the total amount of capital raise was modest at just over $95 million. We think more importantly, it speaks to our ability to recognize what the market wants to quickly respond to that and to use the power of our platform to deliver positive results for clients we build.
Interest in this space will grow overtime, and we think by establishing a presence early on we are well positioned.
Before I turn the call over to a tool to cover the financials I wanted to quickly highlight the impact on movement in unrealized valuations and to provide an important reminder.
First the reminder.
We report our unrealized carried interest and our investments made alongside our clients on a one quarter lag basis.
And so the results for this quarter reflect valuations as of March 30 Onest.
Further for most of the industry the valuations follow a point in time methodology.
It is the best estimate of what the asset would be worth where it to be sold that day.
Given this we view these drops in valuations and the related drops in unrealized carried interest to be temporary and not reflecting the ultimate value of the assets. Additionally, several of our large pools of capital are quite young.
We will also note that due to our significant diversity across our asset base and underlying company positions are volatility in marks was less than many of the other traditional fund managers with that I will turn that over to a tool to cover the specifics and the rest of the financial update.
Thank you, Eric and good morning, everyone.
Slide eight of the presentation shows a financial highlights for the first quarter fiscal 2021.
We continue to see solid growth in our business with management and advisory fee up 11% versus the prior year period.
Especially those funds revenue increased $5.3 million or 20% compared to the prior year period, driven by over $1.6 billion in fee, earning AUM added from their latest second refund between periods.
We recognize $3.8 million in retrofit fees from the secondary fund in the current year period.
Compared to $2.8 million from our latest co investment fund in the prior year period.
As many of you are likely aware invesco had come into later close this with the fundraise.
For many of for products paid retroactive fees flows.
Therefore, you related to that fund for the quarter.
Sure and rich subsequent closing to occur.
Revenue from our customers separate accounts increased approximately $1.6 million period due to the addition of several new.
Account and re up from a new from or advisory and reporting offerings increased $1.2 million.
Compared to the prior year period.
The final component of our revenue is incentive fees.
Incentive fees for the period.
The $2.5 million were approximately 3.6% of total revenue.
Moving to slide nine we provide some additional detail on or unrealized carry balance or unrealized carry balance reflects valuations on a one quarter lag basis.
One of the balances down from the last quarter 31 2020.
Our carry continues to be vote diverse geography, and number fast food.
Relatively early in the investment.
Life.
Profiles for earnings.
And for up 11% versus the prior year period as result of the rest.
Revenue growth, we discussed earlier.
Total expenses increased $3.2 million compared with the prior year period.
Good day.
Early to decreases in travel expense.
So fee and commission.
Total compensation benefits increased by $6.2 million.
Due to strong operating performance.
Yes, and an increase in head count.
We remain in growth mode add talent, including both among those.
Well.
Moving to our balance sheet and slide 11 sheet. This investment alongside our client and our customers separate accounts, especially fund.
And like or unrealized carry ballasts vsan and reflect valuation.
Over the long term we view these investments is an important component of for continued growth.
And we'll continue to invest or balance sheet.
We would expect or investment to generate solid returns and grow as our business growth.
In regard to liabilities are senior debt is the largest.
That we thank you for joining the call and are happy to open it up for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question James press, the pound or hash key.
Please standby well, we compile acumen.
Hey roster.
And our first question today comes from the line of Ken Worthington from JP Morgan. Your line is good morning. Thank for taking my questions, maybe maybe first on outlook for comp.
Thanks.
Cheerily from last year, our incentive compensation.
Think about compensation in these different components.
It does incentive comp continue to grow both through the year to levels we've seen.
Maybe to last years level or the.
Comp I think it's at 27 million right run rate.
From.
I still look forward and how should that grow with hiring.
Over the next call it 12 months or for sales.
Hey candidates for tool I can take that.
So what you.
So in the quarter with two things happening.
One we added people employees from a year ago for head count was up about 10%.
Year to year.
But with the strong revenue growth and because gn day with lower.
As we talked about defensive we had a really strong.
For the this year.
As a result the bonus.
Normally fee.
So what we would expect us to your goes on as TNT start just come back a little bit.
And and you'll recall, we talked about two quarters ago.
We're moving to new headquarters.
Which will likely happen later in the year, we'll see Gn day come back and would that be compensation and to bonus accrual would likely.
Decrease and so if you looked at it from us.
Our year to year perspective, or an annualized basis, I think you'll find it to be inline with where we were a year ago.
[laughter].
Okay. That's that's total copper is that just based comp.
That will be thinking in terms of total comp you'll see it will be.
For the salaries and benefits were going to be higher because of the higher headcount, but the bonus accrual as a percentage of revenue will be inline with where growth year ago.
Gotcha, Okay. Thank you.
And then I know this is a smaller line.
But advisory and reporting revenue came in at the highest level that we've seen.
It looked like growth in advisory might have been up like 10% sequentially.
So I.
How should we think about this part of the business has it for any reason inflect did.
To see better growth thing then you may have expected.
And is there any.
Flow through into the.
The cost my separate accounts or the specialized funds like any anything that we can read into that.
Really nice growth, we're seeing on the advisory side.
Ken It's Eric Thanks for the question I would say Theres really nothing to read into it other than that business continues to perform well and recall that that advisory line item has multiple components to it one is the pure play consulting nature of the business that we've talked about in the past. The other is kind of back office distribution and then the other pieces.
Technology, so part of that growth is you're beginning to see cobalt. After our acquisition of that continue to increase contributions into that area as well as just adding onto the base advisory but as we've also said in the past. This is not a welcome in advisory and then move them over into a U M.
So I think this is simply a that business is is doing well.
And the growth reflects that.
Okay, great. Thank you very much.
Okay.
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Hi, Michael Cypress from Morgan Stanley Your line is open.
Hey, good morning, Thanks for taking the question maybe just on the separate account side. It looked like distributions there are a bit elevated in the quarter about 1.1.
Current accounts.
Anything particular to call out there it looks at meaningfully higher than the 500 million or so that we saw a year ago on the separate account.
Outside.
Sure, Mike, It's Eric I'll take that.
This is what are what you happened to have is a couple have some traunches rollover.
The fortune of having the rollover occur at the exact same time that the new contracts gets inked and the new commitments begin to come online. So I think we've said in the past looking at this quarter to quarter. We think is not particularly useful I think when you look at this year over year taken away and you did.
And I think thats exactly what you're going to see here, so timing mismatch on some of the real step activity.
Got it Okay, and then maybe just bigger picture.
I think about your your business model, maybe a little bit different from others out there, but one of the key aspects of the value prop to your clients is the diligence that you're offering providing that service. They are on Diligencing managers and fund can maybe you could you remind us how many new GPS and new funds.
You diligence each year and maybe talk about how you're diligence approach in process is evolving here on this current environment given the limitations do you have to do differently today to get conviction behind in New fund any new manager.
Hey, Mike its Mario this is one of the things that we talk to clients and GPS and how they do it with portfolio companies.
No is from our perspective that provides us an advantage and sense of we have a lot.
Out of different offices, where were in places where if you have one office is very very difficult to do that.
I think the first thing is.
Over this last.
Short period of time, it's almost tumor or change or.
Whatever you're using.
Has been for us given the depth of our relationships.
A lot of the even Newman.
Seen in the past so it's not someone we don't know at all.
For example, some of US Ron on a meeting yesterday with a new fund.
With two people who years, so you're not generally talking to someone can you just have never met before.
Oh no.
The way the diligence is working is you just to kind of leverage those kinds of things you have done.
And then I think what we will evolve.
The stories of how.
People go to parks and they meet managers.
Hey, thanks.
Yes, creative but I think the core aspects of diligence for me.
In the same you know a lot of it is is things that you can do.
On a June color online and as I said, you figure out ways to either leverage the past relationships or meet them in new ways, but next few months as we look at doing deals in that fashion.
Great. Thank you.
It's from the line of Alexander Blostein from Goldman Sachs. Your line is open.
Then.
Thanks, Great. Thanks for taking the question.
Thoughts around the secondaries market. So you are in the market right now still fundraising.
That whole marketplace is going to get a lot more.
Active over the next six to 12 months.
Which is what what people doing when they're LP stake, so maybe a little bit more color around what the ultimate targets are on the funds growing the market will be funds that there could be.
As for you.
Okay.
Oh no.
Yes, but I mean in terms of that market.
I I've said it in past call. The secondary market today is there some of the most interesting things are happening in infrastructure in private correct.
I think what youre seeing our too.
Separate pads in that market that are combining one is you always have limited partners that want to sell interests and that won't stop and not because they are distressed that because the rebalancing portfolio.
And Thats a very active.
Mark It always has been the.
Thank you hire conversation.
Patients the GP led market, where general partners are looking at an asset or.
A series of assets, a small number and they're saying we want to keep the but in a different form and with different limited partners.
And there are very creative structures being discussed and both of those markets are very large and so I think what you have is a confluence of a market developing and on the other side a great deal of Investor interest.
Around both of those pads, where you can buy you can buy single assets are two assets at a time, where it's almost like a co investment so as we.
It's a market that we think we'll continue to grow down both of those separate Abbott.
With investor interest around half.
Thanks access to those kinds of transactions.
[laughter].
Our next question comes from the line, it's Chris Harris from.
Thanks, Hey, guys Benzes.
Maybe can you can we be a little bit more precise here.
With where you are expected to go from the Uh Huh.
The one level.
And then maybe what is kind of like a reasonable run rate do you think.
Once we get through kind of the coke situation whenever that maybe.
Hey, Chris So too I mean, I don't know how much precise guidance, we can give but what I the way I would look at it is.
And I think we talked about it a quarter ago.
A little less than 10% of our overall.
Maginn, what's happening in the market that's.
So that you've got that diner.
You know, it's anyone's guess when that comes back.
Yes.
Element I would mention is.
We have a a joint venture with I it yes.
And as we sort of get.
More funds, we put on we benefit from scale there.
There are some expensive we're benefiting from inefficiencies were benefiting from and that's probably.
Lower run rate going forward.
The other stuff is there was a lot of timing.
They come in.
I would.
They were little bit lower than the normal they are often choppy.
And the funded a little bit earlier.
For two quarters ago, we gave the guidance on how that might increase.
Later in the year so.
So I think Theres a.
I would say that the GM Dave.
Great.
But if you were to look at it for the full year.
You know.
Not that far off from where we were a year ago.
Okay and.
You guys have been.
Running.
I don't know flattish fr in margin for the last couple of years, you think that's kind of a right.
Reasonable assumption to be.
Thinking about here over the next.
Yeah, It's Eric I'll jump in there I think you know as weak as you've heard us say we're not.
We're in a growth nodes, we view ourselves very clearly as a growth company a tool and continue to go open up new offices and that strategic hires so.
I think for US the focus for management today is not on.
How can we get the margin tire and if you look over a long time period they have been.
Kind of moving up into the right.
But our view right now is that our clients is continuing to reinvest aggressively back in the business to open up new areas for growth going forward and to main maintain whats.
[noise] pickup.
Okay.
And our next question comes from the W. Your line is open.
Great. Thank you thanks, taking my question.
Doing well.
Just wanted to go back to maybe some pretty camps business.
My questions first.
Absent some color on the Rehabs Morse need more interested in is there any kind of rule of thumb, you're seeing that when a line does re up there theres.
The upsizing of their commitment.
10% 15 20.
How you're seeing kind of you are you seeing.
Hi, a row.
And then maybe lost so with that.
I just talked about some expectation.
With the coal did.
We all have with.
[noise] travel and whatnot the.
Fund raising the results we expect some moderation in the piece of it.
So are you sorry, the that now that we're on a.
Maybe the pipeline that their early in the year on how you're thinking about.
Most of it.
Cadence.
Couple of quarters.
Robin Derek Thanks for the question, let me start without the latter part first which is I would say this quarter sort of show.
With that results continue to be strong.
I think while we are.
Concerned about cobot impact and while our sales team would certainly tell you. If they were here today that they are worth.
Working harder than they've ever had to work before.
The fact that we are not only closing on existing products like the secondary fun, but also able to create and raise and have a final close on a brand new fund offering.
We think is impressive and Weve clearly noted that we're also not only getting good re up activity, but we have added in this quarter. So in a post kobin world brand new relationships.
Pipeline continues to be strong.
The team that is responsible for managing RFP responses, there feels very normal for them.
Well, if not slightly above normal bodes well to your first question in terms of that dynamic.
Hard to answer because it really is client specific so you have certain client.
Be consistent.
Commit.
Our get allocation amounts and so as a tranche rolls off a neutral.
You have other clients who are in growth mode, either because there is simply under allocated or because they are repositioning portfolios to be more aggressively tilted to the private markets and so you might see meaningful increases in size in subsequent traunches. Some cases, those were budgeted and expected decline.
And had sort of telegraph that was their intention and other cases, because as they've gone through it.
As they continue to think about how they allocate capital they've decided to increase allocation.
Remember that those traunches those separate account tranches.
Our deployed as quickly as sort of in single year tranches and as long as over you know three plus years, so things certainly change in the interim between re up so hard to sort of make up by nice statement across everything it does vary by customer.
Thank you and maybe.
Semi curious maybe client hi.
Maybe it's also scenarios.
Comment about some interesting things in the secondary market.
Are you starting to see.
Hi, some investors maybe endowments, maybe there's some state pension sorry say no where you are starting to see them.
You know.
Because of their own liquidity needs or concerns.
Sorry to see no.
Yes, it starts to come to market so to speak for source the more proactively thinking about rebalancing are.
Getting back to more liquidity from there.
Yes.
Patients.
Hi, Rob its Mario.
I, maybe surprisingly, we just have not seen that and.
And I think when we last talked three months ago.
No.
But as as Eric pointed out the months have rolled along.
People have been very active in the market. We here. So we hear anecdotally about endowments or foundation.
Particularly tied to university that are pulling back, but where we're not really seeing it.
And I think part of it you talked about municipality.
Government.
Pensions and their budgets are generally two different things and as they think about the need to a beneficiaries they tend to move into higher yielding or higher returning assets.
Tends to be the private markets in some shape or form.
So I would say that the combination of the need for more return the public markets, having stabilized has led to.
Okay fair amount of activity among investors looking for return they may vary whether they want it to be in the equity or the credit or infrastructure.
But it hasn't changed their desire to have illiquid portions of their portfolio and for that to be an active and growing part of those portfolios.
Great. Thank you very much thanks for taking my question.
Our next question comes from the line of Chris Shutler from William Blair. Your line is open.
Hi, guys. Good morning beyond the specialized funds. The today would you please remind us what new areas or most of interest to Hamilton away.
You might talent and capabilities in house to go after those.
Yeah, Chris it's Eric so.
I think we've described before that we view ourselves as as as infants and the specialize fund area I think while we are proud of ourselves for raising kind of the biggest thing we've ever had with the secondary product.
If you look at our product suite, while we continue to selectively add new areas. There are still a lot of various that are that are untapped for us.
And so we think that is encouraging we think that that provides.
So at a nice growth avenues going forward.
The good news aside from that is on the talent front. If you looked at our product offerings in the past we've not had to go off and bring in teams in order to successfully raising the reason for that is very simple, which is that we are doing that activity already across separate accounts.
So if you look at when we started and co investing for example.
Raised our first product in kind of that 2005 2006 timeframe.
We had a track record via the separate account that actually went back into the mid nineties.
So that to me is emblematic secondaries was the same credit was very similar so its emblematic of the fact that the flexibility in those separate accounts provides us mechanisms for building out expertise that may not have a specialized fund attached to it but when we feel like the market wants and needs a product offering around that we then have built out the key.
The abilities resources to do that without having to go and go higher or bring on.
Brand new resources in order to raise.
Okay got it thank you.
Can you maybe talk also about just the peso deployment, obviously, it's going to depend on the marketing environment, but is there a possibility in your view that what used to be a three or four year cycle becomes a shorter cycle for some of these these funds.
I think it's possible I I think this is sort of depends on what the market serves up Mario Mario hit it earlier, which is the secondary space in particular is serving up like an increasing amount of very interesting activity right now and so does that potentially lead to faster deployment. It might it certainly if that activity level continues.
On the fund side you know the question had come in earlier about the diligence that Mario answered, but on the volume there.
I wouldn't know, there's a pandemic going on the number of managers seeking capital.
Is at or near record levels. So our fund investment team is.
As busy if not busier than they've ever been before which we think is great remember part of our value proposition is deal flow you will flow in this asset classes not equal so everyone doesn't sort of benefit from the same flow of opportunity and we think particularly in an environment like this showing extreme.
Ordinarily high levels of deal flow is just a further differentiator for clients and certainly add the ability to potentially increase the pacing of investing.
Okay, and then lastly, just to go back to expenses one more time at all if it's possible, but could you could you clarify like as we sit here today are you thinking.
Total expense growth this fiscal year is more or like upper single digit growth mid single digit growth any any additional clarity you can give us.
Hey, Chris a touch all I can take that for the way I would think about that our total expense for me sort of frame. It in those terms I would say.
Should be.
Fairly similar to where revenue growth into being and and that's just a factor of.
As the topline growth.
We're continually investing in.
Whether its resources or things like that.
And the demand I mentioned, the other part being.
For Tandy, you've lowered now maybe to lower for longer.
Who knows the marketable sort of determined that but but we have some other things that are either timing related or rent, which which is going to start up later my my sense is that from a total expense standpoint, there maybe a little bit interplay between comp in junior Dave, but total will will be around the same.
For the.
Low double digit kind of growth rate in line with revenue.
Okay. Thank you.
Lisa.
But any more questions and again, we have no further questions at this time I'll turn the call back to air Kirsch for closing remarks.
Again, we always appreciate the time in the interest in the thoughtful questions. So thank you for that and wishing everyone to just stay well thanks again for joining.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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