Q3 2021 Hamilton Lane Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by and welcome to today's Hamilton Lane incorporated third quarter fiscal year 'twenty 'twenty, One earnings conference call.
At this time all participants lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session and you'll do press star one on your telephone if you require any further assistance. Please press star zero and I.
I would now like to hand, the conference over to your host John <unk> Investor Relations manager. Thank you. Please go ahead Sir.
Thank you Katrina.
Good morning, and welcome to the Hamilton Lane Q3 fiscal 'twenty and 'twenty one earnings call today, I will be joined by Erik Hirsch Vice Chairman Andrea Kramer CEO of Hamilton Lane aligns holdings, one and a tool Varma C. S. L b.
Before I continue you may notice that we have a smaller number of speakers today than normal. Unfortunately, this winter storm and the northeast has resulted in some power and phone issues with that we hope that everyone who is currently affected by the weather as safely navigating the storm.
Now before we discuss the quarter's results we want to remind you that we will be 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.
And for a discussion of these risks. Please review the risk factors included and the Hamilton Lane fiscal 'twenty and 'twenty 10-K, and subsequent reports we file with the SEC we.
We will also be referring to non-GAAP measures that we view as important and assessing the performance of our business reconciliations of those non-GAAP measures to GAAP can be found and the earnings presentation materials made available on the shareholders section of the Hamilton Lane website. Our detailed financial results will make will be made available when our 10-Q was filed and please note that nothing on this call represent.
And offer to sell or a solicitation.
And that purchase interest and any of Hamilton Lane's products.
Beginning on slide three.
Year to date, our management and advisory fee revenue grew by over 16%, while our fee related earnings grew by nearly 28% versus the prior year period. This translated into year to year to date GAAP EPS of $1.78 based on $58 million of GAAP net income and non-GAAP EPS of $1.78.
Based on $95 million of adjusted net income.
We have also declared a dividend of $31 25 per share this quarter, which keeps us on track for that 13, 6% increase over last fiscal year equating to the targeted $1 25 per share for fiscal year 'twenty 'twenty, one with that I'll now turn the call over to Eric.
Thank you John and good morning.
And many ways 'twenty and 'twenty was a year of incredible challenges as a country as communities as families and as individuals we have all seen and face adversity and ways, we simply could not have imagined a year ago all day.
You have with Hamilton Lane, and my partners I would like to offer my profound thanks to all of those helping to overcome these challenges to protect us and to make our global community stronger.
Across the organization, our employees and their families and I've also faced challenges throughout this past year and continue to face them now we.
And we're proud of how they have persevered. Despite this and how they've been unwavering and their focus on delivering their very best to our clients.
That dedication has again resulted in strong performance for the company and for our shareholders.
Over the past year, we have delivered strong growth open.
<unk> opened new offices.
Your talent across a number of strategic areas and introduced new product and services offerings.
This is the result of not only our high caliber employee base and their dedicated efforts.
But it is also the result of a strong culture of support for each other and for those around us.
And before I turn to the results for the quarter I'd like to take a moment to speak to how that culture has once again been recognized for.
For the ninth consecutive year Hamilton Lane has been selected as a best place to work and money management by pensions and investments magazine.
We have won this distinction every year since pensions and investments first began publishing the ranking in 2012.
And we are only one of five organizations across the entirety of the money management landscape to have earned that distinction.
We are extremely proud of this recognition and this current environment continues to remind us how essential good culture is to success.
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 sum of our AUM assets under management and a UA assets under advisement.
Asset footprint for the quarter stood at approximately $657 billion and represents a 35 per cent increase to our footprint year over year, continuing our long term growth trend.
Consistent with prior quarters.
AUM growth year over year, which was 10 billion or 14% came from both our specialized funds and customized separate accounts and continues to be diversified across client type and size of client and geographic region.
Our focus remains simply growing and winning across both lines of business and we are pleased with our ongoing success.
As for our EUA similar to what was seen with our AUM growth year over year, which came in at approximately 159 billion or approximately 38% was from across client type and geographic region. While the year over year change is relatively large from a dollar and percentage standpoint, the majority of.
The increase is resulting from us being engaged on the fixed fee basis to provide back office and portfolio reporting services to a number of new clients with very large existing portfolios.
As we've mentioned on prior calls <unk> can fluctuate quarter to quarter for a variety of reasons, but the revenue associated with <unk> does not necessarily move in lock step with those changes do and many cases to the fixed fee nature of the business.
Moving on to slide five 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 $3 $4 billion or 9% stemming from positive fund flows across both our specialized funds and our customized separate accounts.
And separately over $1.7 billion of net fee, earning AUM came from our customized separate accounts and over the same time period $1.6 billion came from our specialized funds.
Growth in these two segments continues to be driven by for key components.
One re ups from our existing clients.
Two winning and adding new clients three growing our existing fund platforms and for raising new specialized funds. What you also see here that our fee rates continue to remain steady.
Moving to slide six fee, earning AUM from our customized separate accounts stood at $25 billion growing over 7% the past 12 months.
We continue to see the growth coming across type.
<unk> and geographic location of the clients. What you also see here is that over the last 12 months more than 80 per cent of the gross inflows into customized separate accounts came from existing clients you for.
To say in the past that re ups from our existing client base remains a key component of the growth. We've achieved in this segment are fee, earning AUM and.
In addition to re ups, we continue to expand our client base by winning and adding brand new relationships, which in turn and provide a growing base for future re up opportunities.
Moving to our specialized funds growth here continues to be strong we are executing well across our existing product suite and our tactically introducing new product lines.
Overall demand remains robust and like the rest of our business comes from a diverse set of investors around the globe.
Over the past 12 months, we've achieved positive inflows of over $1 $6 billion, resulting in a 12% increase and fee earning AUM.
Turning to fund specific updates I'll start with our current secondary fund, which continues to be the primary driver of growth and specialized fund fee, earning a U M.
As of January 31st we have closed on over $3 $7 billion of L. P. Commitments. We are appreciative of all the investors who have entrusted capital to us and who have supported the growth of this platform.
It is now the largest specialized fund we've ever raised and.
And prior calls we had previously mentioned that we had until the end of January to complete fundraising.
And in order to facilitate additional time for a very small number of final investors. We now expect to wrap up this fund and the coming weeks.
As it relates to retro fees similar to prior closes with this product $575 million of LP commitments closed during this third fiscal quarter, which resulted in $7.2 million of retro fees sub.
Subsequent to that we closed on another $680 million of commitments on January 31st that will result in approximately $10 million of retro fees to be recognized in fiscal Q4.
Next I will turn to our annual credit focused series two.
To date. The current series has raised $584 million of commitments and similar to our secondary fund. We had previously said we had until the end of January 'twenty and 'twenty, one to complete raising capital, but again to accommodate those final investors coming into the series, we will actually hold the final close in the coming weeks.
For the benefit of those less familiar with the series. It is a relatively unique structure, whereby we are continually raising and deploying dollars simultaneously.
Therefore, it is less about targeting a set amount of dollars to raise as you would traditionally see across funds with multi year deployment period and more about ensuring that we size the product in line with the current opportunity set.
This inevitably will lead to some size variability from series to series.
Let me now shift gears and speak about a few exciting updates on our semi liquid evergreen business. That's.
And it's quick background and for the benefit of those less familiar this product targets the high net worth and mass affluent markets and invest almost exclusively and direct investments in both equity and credit as well and secondaries.
The product offers a monthly liquidity option and and open and evergreen structure with management fees on net asset value and deal by deal performance fee.
Our first product launch and the space occurred in May of 2019 and was offered exclusively to international investors. We've continued to see interest rise and flows are strong we posted our single largest monthly flow to date in January with over $60 million of monthly net flow.
As of February 1st the fund now had a net asset value of approximately $660 million.
On our prior call we spoke about our efforts and launching this type of product within the United States and I'm now pleased to report that we are up and running as you may have seen with our press release announcement on January 7th.
This marks an important milestone for this product and we are excited about the opportunity to offer U S. Based qualified investors access to Hamilton Lane's global platform.
And unique deal flow.
Strong distribution and channel relationships are a key part of success and the space and I'm also pleased to announce that we are bolstering our existing resources with an acquisition of 361 capital.
On January 28, we announced that we plan to acquire 361 capital with a closing expected this calendar quarter.
361 capital was founded in 2001 with a focus on bringing actively managed alternative products to the retail space through their strong relationships with our A's and investment platforms around the country.
There are 16 person strong team is based in Denver, Colorado and will remain there furthering the Hamilton Lane and geographic footprint.
And aside from depth and experience in the space 361 brings and award winning culture.
Like us. They were also recently recognized as a best places to work and money management, marking their fifth year and a row.
We are excited to welcome the 361 team to Hamilton Lane and are excited about the prospects for our U S retail vehicle.
And keeping with our new initiatives as most of you know have may seen we have recently launched our first back Hamilton Lane Alliance Holdings, one, which trades on the NASDAQ under the symbol H L. A H U joining me to provide some insights into what we believe is a unique angle and the world and specs is my partner and the <unk>.
Oh of Hamilton Lane Alliance Holdings, Andrea Kramer.
Thank you, Eric and Hello, everyone I'm excited to have the opportunity to share our thoughts around our stock offering and why we believe we are positioned for success.
As with all new initiatives and Hamilton Lane. The goal is to always great long standing business lines that have the ability to grow and scale you won't notice with this first back we have a signs and number one and two it and that is purposeful as our goal is to raise additional facts and the future and create a new business line for how long.
And lane for H L. A H Yale we raised a total of $276 million of gross proceeds from a high caliber group of investors and none.
And Brett him are also core HL and <unk> shareholders.
And we very much appreciate their support along with the support of new investors, we've used back as a natural extension of our existing investment activities.
Alongside our strong investment track record, we intend to bring to bear our access and deal flow via along a number of long standing and important relationships with private markets and fund managers, which we believe will be vital when searching for a business combination.
Ultimately, we are seeking to partner with a rapid of a fund manager that Oh, It's a great company with a strong management team and is ready to begin the transition from private to public ownership.
We believe our stock offers a compelling and elegant solution to assist and this transition we've proven to be a great partner for fund managers and believe our stock will be a sought after avenue as these managers seek to monetize their public ready assets.
Now as it relates to HL any revenue there are no management fees or carry associated with the back and the traditional sense.
The economics at Hamilton Lane book earn as the sponsor will generally take the form of promote shares and warrants and overtime, we will look to monetize those share subject to certain lockup restriction.
And I'm excited to be leading this new initiative for Hamilton Lane and look for to providing you with updates on our progress with that I'll now turn it over to a tool to discuss the financials.
Great. Thank you Andrea and good morning, everyone for.
Eight of the presentation shows for year to date financial highlight for fiscal year, 'twenty and 'twenty one.
We continue to see solid growth and our business with management and advisory fees up 16% versus the prior year period.
Our specialized funds revenue increased $24 million or 25 per cent compared to the prior year period, driven by one point to $7 billion and fee, earning AUM added from our latest secondary fund between periods.
We recognized $10 $8 million and retrofits from the secondary fund and the current year period compared to $2 $8 million from our co investment fund and the prior year period.
As many of you are likely aware.
Investors that come into later closer for the fund raise for many for our products pay retroactive fees dating back to the fund for clothes.
Therefore, you typically see a spike and management fees related to that fund for the quarter and rich subsequent closing to occur.
Revenue from our customized separate accounts increased approximately $3.6 million compared to the prior year period due to re ups from existing clients and the addition of several new accounts.
Revenue from other advisory and reporting offerings increased approximately $3 $4 million compared to the prior year period.
And final component of our revenue is incentive fees.
And incentive fee for the year to date period were $29 $8 million, we remain a very diversified carrier story with now somebody vehicles and and unrealized carry position that are ultimately backed by thousands of underlying companies.
Moving to slide nine we provide some additional detail on our unrealized carry balance.
Given the continued positive trend and valuations the balances up 22 per cent from the prior year.
Even though food recognized $41 million of incentive fees during that period.
And just to remind everyone. We don't control these positions and thus we don't control the timing effects of it.
Turning to slide 10, which profiles for earnings or year to date fee related earnings were up nearly 28% versus the prior year period and as a result for the revenue growth we discussed earlier.
In regard to our expenses total expenses increased $14.6 million compared with the prior year period.
Total compensation and benefits increased by $22 $3 million due to strong operating performance and an increase and head count.
G&A decreased $7 $8 million due primarily to decreases from travel expense and consulting and professional fees and commissions.
Due to the decrease in G&A, along with the large increase and retro fees from our latest secondary fund or fee related earnings margin increased meaningfully.
For the prior year period.
Given much of these positive event for more onetime in nature, we do not view this quarters margin of the new normal.
We remain committed to supporting growth initiative for the business and we remain focused on creating continued margin improvement overtime.
Let me take a moment here to remind everyone about the rent expense associated with the new headquarters move that we have spoken about during our prior calls.
During this quarter, we have started to expense the rent associated with the new headquarters and.
Stated on prior calls the expected impact of our G&A expense will be a run rate increase of $4 million to $5 million annually stemming from the new leaf.
Moving to our balance sheet on slide 11.
Our largest asset and the balance sheet as investment alongside our clients and our customized separate accounts and specialized fund.
Similar to our unrealized carry balance.
This quarter for an increase and the value relative to the previous quarter, primarily due to increased value shouldn't changes.
In regard to our liabilities, we continue to be modestly levered.
And with that we thank you for joining the call and are happy to open it up for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or husky.
First question, we have Ken Worthington from JP Morgan Your line is open.
Hi, good morning, and thanks for taking my questions exciting days here.
And I wanted to flush out your comments on the spec.
And so a couple of questions on this so how does the launch of the first spec expand into a broader spec business at Hamilton Lane and what ultimately is your vision here.
And then I guess, maybe along those same lines can you speak to competitive advantage and.
How do your relationships in private markets and investing.
Position.
Hamilton Lane to be successful.
Both in terms for the initial spec and then you know the outlook to to further grow this business.
And then or are you thinking about any seemed either by sector style or other characteristics for you know your spec business.
Thanks, Ken for other questions.
Andrea speaking.
And the first question I. It is absolutely our intention to institutionalize this space and to build out a line of business focused on providing these solutions to our partnership.
On your second question regarding differentiation and competitive nature of the key differentiation is our tremendous dataset really layered with attack, which gives us a preemptive from sourcing edge and long cultivated relationships and lastly, I would say it's also the institutionally.
And of our platform, which will lead us to be successful force back one and for all future Sparks.
On your third question.
It is a generalist approach that we're taking and our intention is to partner with a best in class general partner and to.
Work with them on a leading if not outperforming business as we take that company and.
And with these back process.
Okay. Thank you and just to follow up and competitive advantage.
If the relationship is with private market investing firms, it's not so much bankers per se. It's the private markets investing firms she's got data on deals how do you translate that into a competitive advantage in terms of finding deals.
And making sure you're investing and the right ones I guess, you know link those two together sure. It's a great question Andrea It is absolutely going to leverage our data analytics and the access to information and we're not going to have to go to the banks to source book and we're going to free up that process and work.
Directly based on the relationship we have with these partners.
Yes.
And engage with them on these opportunities that we're going to circumvent what is traditionally done by fax, which is you know just received banker book.
Got it okay. Thank you.
Next question, we have Alex <unk> from Goldman Sachs.
Hey, guys, Hey, guys. Good morning, I just.
Wanted to dig a little bit deeper into the opportunity you see for Hamilton Lane and the U S retail distribution and now that you have a fund.
Approved and launched can you talk a little bit about the channels that youre looking to distribute through.
The kind of you know opportunity set you see there and incremental investments you need to make into distribution to kind of accelerate that growth and sort of the vision for that business call. It over the next day or the next year or two.
Thanks, Alex it's Eric So I think if you take a look at what's happening on the non U S product as we said January was record.
For us month of flows with a net $60 million I think it's it makes us incredibly.
Optimistic about what is sort of out there the U S market on the retail side is enormous and you've seen that we've structured this product to be around qualified purchasers and so it opens up the market to a tremendous volume of participants from a channel perspective, we're looking across all the channels to wire houses to our I as you know.
Other wealth management platforms.
And we think the acquisition of 361 really enhances our ability to distribute we have existing resources.
Now nicely adds to it to the extent that we believe and the future that adding.
Adding more resources will further the growth, we're certainly open minded to that.
But I think the the non U S product is showing you a path to something that is very very scalable and a market that we think is really clamoring for access to the private markets.
Okay.
Great and.
Just a fee structure, and maybe Saddam and kind of specific economics related to the retail product kind of the blended fee rate and as we think about investments you guys need to make and it into distribution.
I guess, how should we think about that for Hamilton and I am as a whole from a fee structure perspective.
This looks sort of similar to slightly better than what our specialized funds look like the better part is slightly higher management fees.
And a deal by deal carry structure, so given the evergreen nature and it doesn't lend itself to anything other than a deal by deal carry structure and so we think the economics here are attractive to us, but also I think when you look at the overall fee rate to the to the Investor. We think it's a very very attractive offering to the investor relative to other products that are.
Out there and the market. So we think that's a win win.
In terms of other resources that are needed we feel like as I said, the 361 acquisition, we think sort of fulfills a lot of the need today.
But to the extent that we find that need changing and the future will address it from an investment standpoint, no resources needed. These are I think one of the other appeals to the clients here is that there they're doing deals that are the same deals that are being done across the entirety of the Hamilton Lane platform.
So we're not carving out unique transactions for this product that is very different than anything our institutional clients who are looking at.
Great perfect. Thanks very much.
Next question, we have Chris Kotowski from Oppenheimer and company.
Good morning, Thank you.
I Wonder if you can take us into the economics to Hamilton Lane from this back a bit more if this is going to become a line.
And line of business I think I saw and.
H L. A H Hughes registration that there are something like 12, and a half a million warrants.
Is is as the economics to Hamilton lane entirely from those warrants and and.
And.
And how many of those could Hamilton Lane and end up receiving.
So I think this is a question and that's gonna be best answered on future calls as we are literally in the process of going through all of this with our auditors and accountants to figure out treatment is as you know there is kind of and above the line and below the line component to this.
And so we are presently working through that we wanted to frankly get this back before we incurred any time and expense on the auditors and accounting firms. So we know what this back and hand, we've now turned our attention to that we will figure that out over the next sort of coming weeks and months and we will be very transparent and our disclosure to andrea's point given that we view this.
As a business line going forward, we think it's gonna be very important for us to clearly walk folks through the economics. So that frankly, we're getting appropriate credit for that as we envision raising a series of these so I think that's gonna be a topic that we will likely address and theyre coming call.
Okay Fair enough and then secondly, I was a little confused by the retro fees because I know when we were going through your presentation earlier in the morning are kind of looking at the year to date retro fees and that slide and then backing out what we thought was in prior quarters, we came to a number of like for 0.1.
And for the current quarter and and I think Eric you mentioned that there were $7 2 million and retrofits and so you just.
Square that circle.
Sure. So I think what you're seeing here is that in the script. We were I think credit clearly tell you that given we had a closing post the quarter and we are just showing you what the future retro fees are going to be from the from the Jan 31, but the retrofits are at the southern level and so then it's in addition to.
And that what's coming from the January 31st Retro of closing that will result in additional retro fees.
The additional and around 10, and that's going to come in the next quarter, though correct and that is around $10 million.
Okay Alright. Thank you that's it for me.
Next question, we have Rob Lee from K B W. Your line is open.
Hi, This is Jeff Drezner on for Rob.
Question around comp expense and if you can give us some color and how to think about that going forward.
Sure, Jeff, It's Eric I'll take that so I think what we've sort of said to folks is that we would really suggest that people look at kind of comp ratios and comp expenses on an annualized basis.
The way, we do some of our bonus accrual is not always linear and you saw that this year and so I think what we're sort of managing to as a as an overall comp ratio that is in line with what you have seen from us over the prior three years I think this year will be no different than that.
And how we actually accrue quarter to quarter does vary a little bit just given some of the accounting, but I think when you look at it annualized I think youre going to see a very consistent picture.
Great. Thanks, and then I was wondering if maybe you have and obtain on.
Dry powder or commitments, not yet earning fees or something.
Around that.
Yeah, not a number that we it's Erik again non number that we've disclosed I mean, we've always said that it's the nature of the business.
We have a and we have billions and billions of dollars of that but not something that we have chosen to kind of delineated the number fluctuates quarter to quarter and I think frankly, we've been a little reticent to I think be overly fixated on how quickly we're deploying capital I think our clients Trust. The fact that we're sort of doing things that are in there.
Best interest because we find the right opportunities not because we're anxious to deploy that capital in order to start accruing fees.
Great and thanks for taking my questions.
Next question, we have a deep chowdhry from William Blair. Your line is open.
Hey, Good morning, guys. This is <unk> on for Chris.
A quick one and apologize if you had already covered it but could you.
And discuss the driver for the sequential increase in non operating income in the quarter.
Sure it's Eric.
I think really what you're seeing there is an unrealized gain on one of our strategic balance sheet investments.
That's really driving the $6 $2 million.
Great.
Hum.
Got it.
And then one more just.
Going back from the stock could you to the extent you can.
And the process right now in terms of and <unk>.
Developing and initial list of targets are starting to have conversations we're meeting with G fees.
Or kind of more further along than that thanks.
Yeah, we are building that target list and and have been over the last week, we're having engaged and very in depth conversations on some of those targets.
And we're progressing very effectively.
We anticipate that we will be starting deal review and deal structuring discussions relatively soon.
Great. Thank you very much.
Last question, we have add and BD from UBS. Your line is open.
Hi, Good morning. Thank you for taking the question and I appreciate all the detail on the fees on the fund side last quarter, we talked a little bit about the separate accounts side and the tranche, Inc versus re ups just wanted to get an update on how that dynamic played out and the most recent quarter and maybe the near term outlook. Thank you for sure.
Sure Alex it's Eric So I think and the dynamic is always in flux I think what you saw this quarter that was a little bit of and and knowledge.
And an aberration was that you sort of saw that we had.
Some meaningful amount of separate account capital going into specialized funds and because we don't double dip on the fee that was actually generating special a special fund revenue not separate account revenue. So here you were sort of seeing what looked.
Odd, which was you saw the assets sort of rising on the customized separate accounts not directly in line with the revenue and that's what's causing that discrepancy other than that I would say re up dynamics continue to be strong you sort of noted that.
We've put in over 80% of those new flows are coming from existing investors. So we continue to see strong re up interest and and frankly as the public markets continue to rise think about that kind of swelling. The denominator for these clients and thus they need to continue to allocate more into the asset class and we're certainly seeing that dynamic at work right now.
Excellent. Thank you I also want to ask about the meaningful increase in the performance fee accrual and just give any color or detail around what might be driving that thanks sure.
Sure, it's Eric I'll stick with that so I think it's really twofold I think one and it continues to be really really good Hamilton Lane and investment selection. We are building strong portfolios I think that strong portfolios translates into strong fund raising particularly and the product World, where I think performance is more of a focus and the second thing is we're certainly getting the benefit of <unk>.
Rising markets. So I think those two are really what's driving it and then what you're also seeing and you heard from a tools comments were simply adding more and more accounts that have carry components I think the interest and L. PS of having access and exposure to things like secondaries and co investments is rising and so that just translates into more and more and more of your separate accounts.
Actually have transactional components and thus have a carried interest component and that's resulting in more vehicles.
That's excellent thank you very much.
I am showing no further questions at this time I will now turn it back to Erik Hirsch and thank you.
Great and we appreciate everyone's time, we appreciate your interest and we wish you well stay safe. Thank you.
Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you again for participating you may now disconnect have a great day.
Okay.
Yeah.
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And.
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And with.
Yes.
And we're giving a range.
And going forward.
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