Q1 2020 Earnings Call
Today today, the call will be hosted by Mario Ginny CEO , Eric Kirsch, Vice Chairman and ready Stillman CFO .
Before the Hamilton Lane team discusses the quarter's results, we want to remind you that they will be making forward looking statements based on their 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 Hamilton lanes fiscal 2019, 10-K, and subsequent reports the company files with the FTC.
Management will also be referring to non-GAAP measures that they view as important in assessing the performance of the business.
Reconciliation of those non-GAAP measures to GAAP can be found in the earnings presentation materials, which are available on the IR section of the Hamilton Lane website.
Please note that nothing on this call represents an offer to sell or a solicitation to purchase interest in any of Hamilton lanes products.
The company's detailed financial results will be made available when the 10-Q is filed.
Finally for the call. This morning, we will be referencing pages in the earnings release presentation available on the Hamilton Lane IR website and shown on the webcast version of this call with that let me turn the call over to Eric Kirsch.
Thank you Julien beginning on slide three it was another strong quarter for us.
Let me go through some quick highlights and then we'll provide some additional detail and color.
For the first fiscal quarter, our revenue from management and advisory fees grew 19% versus the prior year fiscal first quarter. This resulted in non-GAAP EPS of 45 cents based on approximately $24 million of adjusted net income.
Our GAAP net income was over $11 million, which translated into GAAP EPS of 42 cents.
In our previous earnings call, we announced that our board approved a 29% increase in our dividend. This increase reflects both management and the board's view that the business is growing strong and remains well positioned.
In keeping with this we have declared a dividend of 27 and a half since this quarter, which keeps us on track for the dollar 10 for fiscal year 2020.
Also on April 16th we officially announced our expanded presence in North America by opening an office in Toronto, Canada. The Toronto office represents our 16th location worldwide and positions us well to further expand into a large and growing market.
Turning to slide four you have heard us state in prior earnings calls the growth continues to come from a wide range of sources and this quarter was no different.
Our growth remains diversified by geography type of Investor and saw the investor Our total asset footprint of approximately $473 billion remains significant and as we stated before our scale as a competitive advantage in this asset class and we believe our clients continue to benefit from our growing footprint.
Hey, you wait for the quarter decreased slightly by 6 billion or 1% compared to the prior year period. However, our advisory and reporting revenue categories were up 3% compared to the prior year period. We will continue to caution that you wait and you wait related revenue are not directly linked.
On slide five we highlight our fee, earning AUM. This is a combination of our customized separate accounts and our specialized funds. Our total fee, earning AUM was up $4.3 billion or 14% versus the prior year period with solid growth across both our specialized fund and our customized separate accounts.
As we have stated in the past fee, earning AUM is the most significant driver of our business as it makes up over 80% of our management and advisory fees and as we've also stated we remain most focused on annualized growth given that managing growth around a particular quarter is challenging due to the long term nature of our business.
We're asking clients to enter into lengthy contracts when they ultimately approved and signed those contracts is outside of our control.
Our growth continues to come from for consistent channels, one re ups from existing clients to adding brand new client relationships, three raising new specialized funds and for growing existing funds.
In the past 12 months, we have added net fee, earning AUM of $2.3 billion to our customized separate accounts.
And over the same time period, we have added nearly $2 billion of net fee, earning AUM across our specialized funds.
Lastly, our fee rates across our fee, earning AUM continue to remain steady and with that let me turn it over to Mario for an update on our specialized funds.
Thanks, Eric and good morning.
Before providing an update on our existing specialized funds I wanted to take a moment and announced a new product that we're very excited about a semi liquid evergreen fund.
This fund introduces a new structure into our lineup of specialized products and represents our entrance into the evergreen fund market.
With this product we are offering an innovative alternative for investors, providing access to the private markets outside of traditional closed end fund structures. This fund represents a globally diversified pool of assets. It is primarily targeting the high net worth individual space in geographies, where evergreen funds are already offered and have an established market presence such as Australia and throughout Europe .
While an evergreen fund structures, a new foray for Hamilton Lane this type of product and structure had been in existence for some time and a select number of firms such as partners group in Switzerland manage somewhat similar offerings.
We believe there we are well positioned to successfully deliver on this strategy for clients and while very early days, we see the potential for strong demand across the target audience.
You've heard us speak in the past regarding strategically addressing and capitalizing on opportunities, where we see a path to growth and scale and this evergreen product is a great example of that.
Let me quickly touch upon some key differentiating features of our Evergreen fund for the benefit of those less familiar with open and structures.
Well look our products the generally follow a defined raise and deploy strategy our evergreen product as effectively always open taking in capital from investors on a monthly basis. Similarly. The fund also provides a monthly liquidity option for investors, we expect to see the majority of the capital coming from individuals and coming via wealth management platforms, with whom we already have or are developing relationships.
With regard to economics the structure similar to what you already know about our other products with both management and performance fees at rates similar to our other funds. However, unlike our other funds that are based on committed or net invested capital due to the evergreen nature of this vehicle management fees will be tied to net asset value, which we view as a positive both for us and our investors.
Again, we are very early in the launch in this is a product that we expect to grow and build for years to come that's set in our first few months of marketing we have already seen inflows totaling 91 million as of August five 2019.
Now a quick update on the other specialized funds.
As a reminder, on June 24th we announced the final closing on our fourth co investment fund with $1.7 billion in total commitments, putting us above the stated target for the fund raise.
As of August 5th we have invested or committed 61% of that funds capital. We also held our first closing in April on our fifth secondary fund with $700 million in commitments.
As a reminder, we have at least 18 months from the date of the first close that being April 2019 to complete fund raising and so expect several additional closings to come.
We are pleased with the initial support and interest. So far. This fund is also actively investing capital and as a result subsequent closing will result in retro management fees Lastly, the 2019 series of our credit oriented vehicle close recently on more than $760 million in commitments.
Recall that this product is essentially an annual fund raising which we raise and invest capital throughout the year based on the available opportunity set as such we are already actively raising capital for the 2020 series and we will continue to do so well into the next calendar year.
Product pipeline is strong and we are very excited with the new launch of our evergreen product and with that let me turn it back to Eric.
Thank you Mario before we move on we want to discuss a new line item that due to a change in accounting principles around revenue recognition. We've now begun to include in the management and advisory fee breakout section during the last fiscal year. The line item is titled Fund reimbursement revenue and last fiscal year that amounted to approximately $2 million and represented less than 1% of our management and advisory fees total revenue.
What this figure represents a simply a reimbursement of costs that we bear in connection with the creation of specialized funds.
Sit more specifically, we incur certain costs related to the organization and distribution of a fund and these costs generally include professional fees legal fees and other related items.
This is an industry standard concept and that you would find this in the vast majority of private market fund vehicles.
The Reimbursable amount is negotiated with the Lps and is usually based on the fund size and generally allows for full reimbursement.
We expense these costs as they are incurred which has an immediate and direct impact on our DNA expenses, but once the fund is successfully formed and has held its first closing. The fund is then able to reimburse us for these costs and we are able to recognize that as revenue.
What you can tell however is that there will be a timing mismatch before the first close we are incurring expenses early to create the fund and then ultimately getting them reimbursed later once the closings begin.
These costs caused DNA to look like it is rising and subsequently causes revenues to rise we would encourage investors to realize this is simply offsetting with a built in timing mismatch.
The key takeaway is that while these costs may have a short term impact on our operating margins. Ultimately they are a sign of continued growth of the platform as a whole sense rising fees means we are forming and raising more and larger specialized funds.
On the technology as you have heard us emphasized in the past technology plays an important role in how we implement our industry, leading best practices in the private market space.
In addition to integrating technology solutions into our daily work streams, we have strategically invested a small portion of our balance sheet capital into select leading technology firms with whom we partner to try to drive innovation across the industry.
With that I'm pleased to announce that on May 29th one of our technology partners agreed to be acquired we view. The acquisition has continued validation of our successful technology strategy and while the transaction represents a full exit for Hamilton Lane as an investor we remain a strategic client and look forward to continued partnership with the team on our customized solution.
As disclosed in our fiscal 2019 10-K and based upon the current terms of the acquisition agreement. We estimate that we will record a gain of approximately $5 million in connection with the transaction, resulting in a three X multiple of our investment.
We will recognize the gain from the sale of the investment as income in the second fiscal quarter as the transaction closed in July subsequent to the June quarter end.
This is now our third successful exit of a strategic technology investments with the first two exits representing returns of 2.66 and eight x. multiples of our money.
And while that return is not the key driver of why we are pursuing these relationships. We think it does clearly speak to the success and impact our partners are having on this industry and with that I will turn the call over to Randy for additional financial highlights from the quarter.
Thank you our slide eight of our presentation shows the financial highlights for the first quarter of fiscal 2020.
We continue to see very solid growth in our business with management advisory fees up 19% versus the prior year period, driven by strong results across each of our core products and services.
Revenue from our customized separate accounts increased over $1.6 million or 8% compared to the prior year period due to the addition of several new accounts and additional allocations from existing clients.
For our advisory revenue, we experienced 3% growth compared to the prior year period, driven by new client adds in our advisory Backhauls reporting and technology and analytics offerings.
Our specialized funds revenue increased $5.9 million or 28% compared to the prior year period, driven by $700 million raised in our latest secondary funds in the current year period and $800 million raised between periods for our latest co investment fund.
We recognized $2.8 million in retro fees from this co investment fund compared to $500000 in the prior year period.
As many of you are likely aware investors that come into leader closes of 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 long for the quarter in which subsequent closes occur.
The final component of our revenue was incentive fees incentive fees for the period were $4.1 million or approximately 6% of total revenue.
Moving to slide nine we provide some additional detail on our unrealized carry balance.
We saw strong growth this quarter with the balance of 25% from the prior year, even as we recognized 20 $426.2 million 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.
To the right we show our unrealized carry balance by vintage.
Approximately 70% of our unrealized carry balance is leaf is less than eight years old reflecting the early stage of a large for portion of our account resolves.
Overall, we think the carry story continues to be a strong one.
Significant diversification of carry dollars spread across more than 60 vehicles and thousands of underlying companies coupled with strong investment performance continues to drive solid calorie results.
Turning to slide 10, which profiles our earnings our fee related earnings were up 19% year over year as a result of the revenue growth we discussed earlier.
In regard to our expenses total expenses were flat compared with the prior year period.
Total compensation and benefits decreased $3 million compared to the prior year period, due primarily to a $2.8 million acquisition earn out expense recognized in the prior year that was a one time that was onetime in nature.
DNA increased three point million $3.0 million due to increases in commissions from fund closings in the current year period, an increase in consulting and professional fees and an increase in the fund reimbursement expenses that Eric discussed earlier.
Moving to our balance sheet on slide 11.
Our largest asset on the balance sheet is investments alongside customized separate accounts and specialized funds.
The growth of this asset, which increased 16% compared to the prior year period reflects the growth of our business.
In regard to our liabilities are senior debt is our largest liability and we continue to be modestly levered.
It was another strong quarter.
And with that we're happy to open up the call for questions. Thank you.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
We'll pause for just a moment to compile the Q and a roster.
Your first question comes from Ken Worthington from Jpmorgan. Your line is open.
Hi, Good morning, Thank you for taking my question.
Maybe just a little more on the Evergreen fund can you talk about how you're managing the inflows into liquidity.
Offered in the new product. So on the inflows are you limiting the monthly inflows space and your ability to deploy the capital or do excess inflows just sort of sitting in cash until they are deployed and then on the other side when you're giving monthly liquidity.
How are you accessing that liquidity and I guess, what I'm, hoping to here is to what extent is Hamilton lane, either lending or taking any risk there.
Hi, Ken its Mario.
Ill take each of those on the inflow side.
We are not limiting the inflow, but we are certainly very careful in terms of growing that product and managing the inflow because you're right as the inflow comes in it goes into cash cash has a lower return than private equity returns and so you you manage that very carefully in terms of the deal flow that you have compared to the amount of cash you can you can see the amount of cash coming in to some extent because you're having discussions with people that are interested in investing so it is a balance as you figure out what is the deal flow versus what is the cash coming in and its why as we said in our comments.
We are really looking at this on a long term basis in terms of managing it having a good result for investors.
And being careful not to take in too much capital, where you can invest at reasonably in a in a monthly timeframe.
On the outflow side.
The liquidity there is a certain amount of liquidity that investors can have on on a monthly basis.
And so that is also managed and there is no. There is no Hamilton Lane guarantee there is no Hamilton lane balance sheet commitment behind the liquidity and the there's liquidity as you note from the amount of money coming in on on any period of time. So you have some liquidity. There and then you are also managing the investments you make as we talked about these investments cover a wide variety of assets some of which provide liquidity on a monthly basis, so you're managing it that way and there is a credit line.
That the fund has in order to provide liquidity.
Okay, Okay, great that makes sense.
And then on the customized separate account side.
What types of investments are your clients building funds around these days are you seeing any changes in interest in private equity versus private credit versus infrastructure or any of the other idiosyncratic sort of investments you're looking at.
And then any help on pipeline both from the gross sales perspective here as well as the gross.
Outflows. Thanks.
Hey, Ken as Mario again.
I would say on the separate account I would divide it in in some ways I think on new separate accounts I would say the interest is what it's always been.
Primarily private equity, but with people increasingly one want private credit and infrastructure as part of it.
And looking to build a call it a diversified private markets portfolio of private equity generally still the largest part of it.
On existing clients since many of them have already built a more a more seasoned private equity portfolio you probably see at the margin more demand for credit and infrastructure real assets as they look to grow that and for many of them not have quite as season to portfolio as they may have had on the private equity side, but I would say in general not.
No big changes in trends over the last year. It is it is what it has been for the last few years I would not say that we are seeing something dramatically different happening in the market.
In terms of the question on pipeline and what we're seeing there I would say it's been what it has been for the last period of time in the last few years I think the pipeline you see people increasingly interested in separate accounts, whether to do their entire portfolio or branch into pieces of it. So I want to separate account for Europe , investing or Asian, investing I would say the appetite for separate accounts across all of the different categories private equity private credit real assets remains strong. It has a way people want to access the private markets in their portfolios.
Okay, great. Thank you very much.
Your next question comes from Michael Cyprys from Morgan Stanley . Your line is open.
Hey, Good morning. This is pure coalition sitting in for Michael Cyprus.
Can you just talk about any new costs associated with the evergreen strategy and how this could impact expenses going forward. Thank you.
It's Eric Thanks for the question.
I think as Mario pointed out this is about building this over.
Overtime I think some of the infrastructure in place, particularly around the distribution we've already put in place we had announced a couple of quarters ago that we have made.
A couple of significant senior hires on our business development team that we're particularly focused on targeting distribution relationships with wealth management platforms around the globe. The investment activity as Mario also noted is very much in line with what we're already doing across separate accounts and across our specialized funds.
So no change to there is no different or unique investment activity today around this product that were not already doing some place else. So we think this is a great addition to the stable of products that we have.
Without the need today to go often and build significant new infrastructure that doesn't already exist.
Thank you.
Your next question comes from Alex Blostein from Goldman Sachs. Your line is open.
Hi, Thanks, guys good morning.
Just building on the evergreen strategy.
Could you guys help us think longer term kind of how you would define success for that part of the model.
Either kind of your kind of near term goals, maybe over the next kind of 12 months and longer term.
Maybe as a percentage of total assets or something like that I'm, just trying to think I got a feel of how meaningful our business contributed you envision this type of business to be for Hamilton Lane.
Alex This Mario thanks.
No. We're clearly not going to give specific numbers in terms of we expect X or y.
But look you've seen how we've built products before and we've built them very carefully in terms of what Weve said earlier, the being able to deploy the capital.
And doing it in a way that makes sense for us and for investors. So we don't only we look at it as having specific targets I think we look at it as you see our platform you see how much capital we can invest.
And so as we look at that we think the product can continue to grow.
We think theres demand for it.
Because people want this kind of a product with some of the features so I am not going to get pinned down on giving a specific target or a specific number but we think this is a product that has some legs and that the market will react positively to and we can invest.
Yes fair enough.
Shifting gears a little bit.
Just one I guess you guys just thoughts on the current realization opportunities said, obviously accrued carry for Hamilton Lane continues to grow pretty nicely.
This has been a bit of a lighter quarter for realizations and that's something similar received from many of your.
Private equity and alternative asset management peers.
But anything on the horizon that you guys see.
That could expedite realization some of that Kerry.
Or.
Good evening kind of structural in the marketplace that you see today, that's just kind of prolonging the realization cycle. This time around.
Sure Alex it's Eric I'll take that.
I would say, we sort of think about the carry and pieces really into two sort of sections. One that that we can control and second that that we can't.
On the can't control piece, we can't control the timing of the exit Thats up to the fund manager and we can't control what's happening in the public market. It will certainly have some impact on our unrealized marks.
The pieces that we can control we feel like we're doing a very good job on one we can raise more assets and have more carry generating dollars and we're doing just that and secondly, we can control investment results by making good investment selections and finding the right partners.
And that certainly drives both realized carry as well as unrealized gains and we think we're doing a good job at that I think your point on the market is right I think we're seeing two features at play here one.
You are seeing across the asset class that hold periods for underlying private equity owned companies are simply getting longer we would say that's not surprising data in a market where you people are paying fairly folsom prices.
In order to generate the great returns that we're continuing to see they're going to need to work those assets for longer periods of time, thus driving up the whole periods.
And the second thing we see as we look back over history is that times of market volatility, which we're certainly experiencing most fund managers don't find that the most opportune time to decide to sell an asset. So I think both of those are also clearly at play as we look out I think our view is pretty simple everyday that goes by considering the quality of the assets, we have puts us closer and closer to generating realized carry and so we think that as on an annualized basis. The numbers continue to be strong and continues to be a solid contributor to revenue.
Great. Thanks very much.
Your next question comes from Chris Harris from Wells Fargo. Your line is open.
Thanks, you guys.
Announced a new office in Toronto, Canada.
So with that in mind just wondering.
Bigger picture can you guys give us an update.
On on where you stand with respect to your non us growth initiatives.
Yes, Chris it's Eric I'll happily take that I think you've seen is that the mix has been pretty steady, which is we have basically generating about 60% of our revenue coming from kind of north American based clients and about 40% from non that ratio has stayed relatively steady for several years and I think thats sort of telling you a couple of things one.
Despite just simply bigger growth outside of the us and some of these emerging markets were actually continuing to find an awful lot of growth in the north American market to kind of keep pace with that I think our geographic footprint expansion continues and that will likely continue you saw that we've opened up offices over the last couple of years in Australia in Germany now in Toronto, we mostly already have a presence.
Client relationships in these markets before we go in and open up an office, but we find once the the office itself opens deal flow accelerates additional client connections accelerate our brand and presence in that space accelerates, Paul hopefully, making it easier for us to raise raise assets and make new relationships. So we think we've got a great footprint today, we will continuing to look opportunistically about marketplaces, where it might make sense over time for us to have bigger presence and we'll follow through on that.
Okay and.
On the evergreen funds.
Are there any specific eligibility requirements for investors to be able to access that funds or is it going to be open for.
Pretty much anybody wants to participate.
It's Mario no I mean, there are it depends on the jurisdiction, but there are as you might imagine a number of regulatory requirements and.
Compliance now it's it's.
It's not one of those things, where you just walk in and put a sign up and say come invest in Hamilton lanes GP a product. So yes, there there are requirements, but they vary by jurisdiction.
Yes fairly detailed around that.
Okay. Thank you.
As a reminder, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Your next question comes from Chris Kotowski from Oppenheimer and company. Your line is open.
Yes, good morning.
I am just curious on the evergreen funds, where these kinds of products around 2007, and eight where they tested in that market.
It's it's Mario yes, they were they were around in that period and they were they were starting to form.
Where they were around off I think they were around in the real estate side more than on the private equity side, but they were small.
In that market period so.
They were around but would you call. It a test of that market period I don't know I think there were there were small relative to where we're today they are today.
So presumably thats the test do you have in mind, when you're setting the gates for.
For the liquidity right.
Well I think the gates are set for a number of reasons you're setting it for that you are setting it in order to for the benefit of all investors manage cash balances and the liquidity around the product itself. I mean, it's not just for market environments. I think the goal of the product is to provide investors notwithstanding that they can get out of when things are bad but for something that they can use to rebalance portfolios or whatever they need to do.
But I think in this case again, a key feature of that requirement.
More of the gating. If you will is to protect all of the investors, whether it's a good or bad environment.
Okay, and then you mentioned the $91 million in inflows.
Could you tell us what period of time that you would you have been marketing this.
That's probably been I would say two months three months.
Over that period of time.
Okay Thats it for me thank you.
We have no further questions at this time I turn the call back over to the presenters.
Great we want to thank everyone as always for your time and support and have a good day.
This concludes today's conference call you may now disconnect.