Hamilton Lane Inc
NASDAQ:HLNE
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Hamilton Lane Inc
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Hello, and welcome to the Hamilton Lane Q1 earnings call. On the call today from the Hamilton Lane team are Mario Giannini, CEO; Erik Hirsch, Vice Chairman; Randy Stilman, CFO; and Demetrius Sidberry, Head of Investor Relations.
Before the Hamilton Lane team discusses the quarter's results, I want to remind you that they will be making forward-looking statements based on their current expectations for the business. Those 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 Lane's fiscal 2018 10-K.
Management will also be referring to non-GAAP measures that they view as important in assessing the performance of the business. Reconciliation of these 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 Lane's funds or stock. The company's detailed financial results will be made available when the 10-Q is filed.
Finally, for the call this morning, the Hamilton Lane team will be referencing pages in the earnings release presentation available on the Hamilton Lane IR websites and shown on the webcast version of this call.
With that, I will turn the call over to Demetrius Sidberry, Head of Investor Relations.
Thank you, Cheryl, and thanks, everyone for joining us.
Slide 3 of the presentation provides a summary of our financial performance for Q1 of fiscal 2019. Compared with the first quarter of last year, our total revenue was up 20%, driven by strong growth across the platform, coupled with an uptick in incentive fees. Management advisory fee revenue came in relatively flat despite the fact that we comped against a large amount of retroactive fees in the prior year period.
Now moving down the P&L, to our earnings per share. For the quarter, our non-GAAP EPS was $0.38, and this is based on over $20 million of adjusted net income. Our GAAP EPS for Q1 was $0.39, and this is based on nearly $9 million of GAAP net income. Finally, as in the prior quarter, we announced a dividend of slightly more than $0.21 per share which keeps us on track of our full fiscal year target of $0.85.
With that, I will now turn the call over to Mario to cover additional highlights for the quarter.
Thanks, Demetrius, and thanks, everyone for joining the call. On previous calls, we have either provided a deeper look into our company, the industry or the macro environment in which we operate. While we continue to comment on important trends in the industry and update you on noteworthy developments within our firm, our industry has simply not won the changes quarter-to-quarter. Therefore, in some quarters like this one, we will go straight into the results.
For those of you who have joined our calls before, the graph to Slide 4 should be familiar. We continue to believe that this graph is a simple, yet very important illustration of our influence in the private market as it highlights our scale. For this quarter, our asset footprint of $471 billion, was up 31% versus the same period from the previous fiscal year. Growth in our asset base is coming from a diverse set of clients from different geographies.
Broadly speaking, we are seeing the growth come from the 3 types of new clients; one, those who are brand-new to the asset class; two, those who have chosen to switch service providers; and three, those who previously took an in-house approach to investing in private markets and are now seeking a partner. We're also continuing to see positive fund flows across different geographies and from different types of investors. Our growing client base is reflective of the continued expansion of Hamilton Lane offerings, as well as the variety of customized mandates we fulfill on behalf of our clients.
As you can see on Slide 5, our total fee-earning AUM was up $2.9 billion, or nearly 11% versus the prior year, with solid growth across both our specialized products and our customized separate accounts. The chart on Slide 5 also shows that our fee rates have remained steady over a long period of time.
On Slide 6, we highlight areas of focus around our AUM build, starting with our customized separate account offering. Over the last 12 months, we have added net fee-earning AUM of a little over $2 billion to our customized separate accounts. There continues to be a steady flow in new commitments from our existing clients as these clients seek to maintain or increase their allocations to the private markets. Based on this, our existing clients account for approximately 70% of the new fee-earning AUM within our separate accounts.
The balance of the fee-earning AUM growth comes from us winning new clients, which furthers the long-term organic growth potential of this part of our business. Over the last quarter, we saw a slight decrease in our separate account fee-earning AUM due primarily to larger account reaching the end of its term. We expect this decline to be offset by the start of a new tranche of capital for this client that will ramp up as commitments are made over the coming quarters.
Having said this, as we stated on prior calls, due to the exact timing of new separate account signings and client re-ups being largely beyond our control, we believe the best way to think about our separate account AUM build is in an annual or multiyear period versus quarter-over-quarter metrics. We've also experienced nice momentum for our specialized funds, which have added net fee-earning AUM of nearly $900 million over the last 12 months. The growth in our specialized funds fee-earning AUM has been driven by the continued raise of our fourth co-investment fund, which has closed on over $900 million of commitments to date, including over $200 million raised during the first quarter.
Additionally, our fund-to-funds products, which have reached over $120 million in commitments, and the raise in investment of over credit-oriented funds, continue to make good progress. We have continued to attract capital for both our co-investment and fund-to-funds products, and we will continue to have additional closes through to 2018 and into 2019. Recall, since both of these products are already actively deploying capital, subsequent closings will result in retroactive fees.
The last area shown here is our advisory offering, with AUA up $101 billion compared with the prior year period. We continued to expand both the number of advisory clients as well as entities coming to us for management around back office and analytical needs, which are also represented in this revenue. And as we noted before, there is not always a direct relationship between AUA and advisory revenue growth. Our AUA is an indicator of our presence and influence in the private markets and is a figure we are both proud of and believe is a differentiating factor.
To wrap up my portion, we continue to be in a very robust environment for the markets in general, and the private markets, more specifically. Our existing business and pipeline of new opportunities reflects this and we are finding ways to not only address those opportunities that are here and now in nature, but also those who will be part of the evolution of what is already a very dynamic market.
I will now turn this over to Randy to cover our financial performance for the quarter.
Thank you, Mario. Slide 8 of our presentation shows the financial highlights for the quarter. As shown on the slide, we continue to see very solid growth in our business, with total revenue up 20% from the prior year period. As Demetrius mentioned, management and advisory fee revenue was essentially flat over the prior year, with the prior year quarter reflecting the impact of a contribution from significant retroactive fees of $5.8 million that we did not recur this year. As many of you are likely aware, investors that come into later closes of the fund raise for many of our products pay retroactive fees dating back to the fund's first close. Therefore, you typically see a spike in management fees related to that fund for the quarter in which subsequent closes occur.
Revenue from our customized separate accounts offering increased $1.6 million compared to the prior year period due to the addition of several new accounts and additional allocations from existing accounts.
For our advisory and reporting offerings, we experienced over 20% growth compared to the prior year period, driven by new client adds in our advisory, back office reporting and technology analytics offerings.
The final component of our revenue is incentive fees. Incentive fees were up more than $11 million from the prior year period. The increase was driven by the recognition of carried interest from a customized separate account that included the GP catchup and from one of our co-investment funds that recognized carried interest in the prior 2 quarters. As we discussed in the last call, we had $2.5 million in a deferred incentive fee liability still outstanding from this fund at the end of fiscal 2018. We were able to recognize approximately $5 million from this co-investment fund during the quarter, which included a $2.5 million of deferred incentive fees, on which we had no associated expenses.
It is important to note that while incentive fees did increase at a healthy clip this quarter, our overall expectation for carry this fiscal year remains in line, but at the high end of our historical trends of 5% to 10% of overall revenue. This quarter also shows that we have the ability to generate carry dollars beyond just via our products, as more and more of our separate accounts have a transactional component, consisting of secondaries and/or co-investments, on which we generally receive carried interest. This is helping to drive the diversity of our carry dollars.
As of quarter-end, we had over $290 million in unrealized carried interest spread across over 50 investment vehicles and thousands of underlying investments.
Turning to Slide 9, which profiles our earnings. Our fee-related earnings declined modestly from the prior year period as a result of the retroactive fees we discussed earlier. In regards to our expenses, total expenses increased compared with the prior year period, driven by incentive fee compensation and acquisition earnout expense. The earnout expense is related to our Real Assets acquisition last August, and is based on the performance of that business for a 1-year period following the acquisition. Therefore, we have recognized most of the expense to date. That business continues to perform well, and as a result, the earnout amount increased again this quarter.
Total comp and benefits were up $6.7 million compared to the prior year period due to a $4.2 million increase in incentive fee-related compensation, and $2.8 million from the earnout. G&A was up $2.6 million, or 31%, driven by a $1.4 million uptick in consulting and professional fees, which included close to $900,000, in fees related to Private Market Connect, our joint venture form in the prior year period, as well as some increases in accounting and legal fees.
Wrapping up with our balance sheet, on Slide 10. Our investments alongside clients and products, which is the largest part of our balance sheet, grew and were up approximately 3% for the quarter. This balance will continue to grow as capital raise grows, and we invest alongside. We did see a modest decline in our investment valuations this quarter compared to the strong growth in the prior year period as shown in the equity in income of investees line of our income statement. As a reminder, our valuations are on a 3-month lag, so public market performance in the first calendar quarter of the year likely had an impact on private market valuations with the S&P and MSCI, both down more than 1%.
In regards to our liabilities, our senior debt is our largest liability, and we continue to be modestly levered at less than 1x LTM adjusted EBITDA.
On the prior call, we've discussed the announcement of an acquisition of one of the technology investments on our balance sheet, Ipreo. We are excited to announce that subsequent to quarter-end, we received approximately $18 million as part of the acquisition closing on August 2. We expect to achieve about 2.6x our initial investment once all proceeds are received, and expect to recognize a gain next quarter of approximately $7.6 million.
With that, we're happy to take questions.
[Operator Instructions] Our first question comes from the line of Ken Worthington of JP Morgan.
I apologize if I missed this. In terms of distributions, you've had about $3.5 billion of distributions in the separate account business over the last 2 quarters. Can you talk a little bit about some of the timing aspects of, maybe, what happened this quarter and even last quarter? And maybe help us understand what the outlook looks like for the level of distributions, if you could, for the remainder of the year.
Thanks, Ken. It's Erik. I think what you're seeing on kind of that decline on the fee-earning AUM and around the distributions, I would say, these last few quarters have been abnormally a little bit larger. A lot of that outside of out-of-control is you're seeing these tranches just age over time and then, ultimately, come to an end. What I would sort of point people to is a couple of factors. One, you see really de minimis impact to revenue because if they're in runoff mode, the fees are already coming down pretty substantially. What you don't always have perfect alignment around is when those right run off versus when the new tranche starts. So as Mario mentioned in his comments, you had, in this quarter, just a larger client, just in terms of AUM, not necessarily revenue given again the age of the assets that have rolled off, and that new contract just hasn't been inked yet, we haven't gotten active, which will happen, we think, very shortly.
So in terms of guidance, on a go-forward basis, you're just seeing kind of aging on a quarter-to-quarter. I think in some periods, you're going to see this mismatch, where one quarter, just had slightly higher distributions than you have new stuff coming online. But I think we would go back to focus on the annual. On the annual side, I think there is when your sort of seeing the net increase still continuing to come through, reflecting the strong growth characteristics of the business.
And then on expenses and base compensations, actually base competition fell sequentially. Maybe, talk about the outlook for hiring and the growth in headcount that you expect in the coming year, and maybe how that flows through -- or should flow through the compensation line.
Hi, Ken. It's Mario. I think the growth plans in terms of hiring are probably similar to what you've seen in the last year or 2. I think that we look at -- and we obviously look at headcount very carefully, we look at compensation carefully, but I would expect that you will see growth in headcount across all areas of the organization, investment side, the infrastructure side, as we continue to grow. I think we've talked about it in the past calls, we expect the margins to be around where they are, and we look at the cost side of it very carefully. You add where you think you can grow and you add where you think that you need people to run the business as it's running. So I don't see any huge changes in how we are going to be looking at adding people or resources.
Your next question comes from the line of Michael Cyprys of Morgan Stanley.
Just following up on the Ipreo exit, the $17 million in proceeds. Can you just elaborate a little bit more how you're thinking about reinvesting using those proceeds, in terms of capital management versus reinvestments back in the business.
And then just more broadly, on the technology side, if you could just talk about how you're thinking about the next wave of sort of technology, strategic investments that you might be making or thinking about, where it could be additive, what's your approach and your criteria there?
Mike, it's Erik. Thanks for the question. Let me take the latter part first, and I'll come back to the beginning. I think the Ipreo exit, for us is one thing we're very proud of. I think it's really reflective of the fact that the technology strategy is working. We said on prior calls, us using balance sheet money in a smart way, where we can both enhance the competitive positioning of the business through technology as well as then making money on that balance sheet dollar, I think both of those coming into very -- or a lot of clarity around what just happened. One, on the advisory business, over the last couple of quarters, you've seen good growth there. Part of that is driven by new advisory clients coming on. But also, part of that is driven by us continuing to win back office and analytic mandates. Again, that is largely due to technology. So -- and then you are now seeing a very successful exit on the Ipreo position.
So we would say the strategy is working. What does that mean going forward? We continue to be actively in dialogue with technology, potential technology partners. Our criteria is pretty simple. We need something that is going to enhance what we already have, to be our current offering that's going to make us more efficient, and it's going to deliver a better client experience for the end-user. We have, as you know, have found 4 of those to date. I think we would all be surprised if that doesn't continue to grow over time. I don't think that's going to necessarily be a quarter-to-quarter growth but again, we look at that is strategically and tactically, which takes us back to the first part of your question, which is where are those dollars going? I think for us, we view our balance sheet as a strength, it's very clean. Where are we spending dollars? We've been expanding those dollars on continuing to grow our GP commitments, alongside of the AUM growth. That is not stopping, as the AUM growth is not the stopping. And I think we will also, again, opportunistically look to redeploy some of those dollars back into other technology initiatives as we continue to find them.
And then, just separately, if you could just update us on the retail or high net worth platform initiatives. I think in some cases, you were maybe white labeling for some managers or thinking about that for some distribution platform. Maybe if you could just elaborate on how you're thinking about a high net worth retail distribution and the opportunity set there?
Sure, Michael. It's Mario. I think we're looking at it in 2 ways. I don't think that has changed from what we probably articulated before. I think, one, the white label remains interesting. There are a lot of groups out there that have that distribution channel, and one it is a white label product. So I think we are a natural partner with them. We've done it before, we have experience. We don't really threaten them in the context of saying we're going to go after their clients, anything like that. So I think we are a very good partner for that, and we continue to both have some of those relationships and explore new ones.
I think, the other part of it is the retail around liquid products, around products, evergreen products, all sorts of technology and types of offerings you can have. And we continue to explore those. I think for us, it's an interesting avenue. As you probably know as well as anyone, there are all sorts of different regulatory and legal requirements around them that you've got to make sure you're doing well. But we think that it's an area that will have significant growth for us going forward. So I think we're very interested in that, and continuing to work on it.
Your next question comes from the line of Alex Blostein of Goldman Sachs.
So I was hoping to touch on fee dynamics, both kind of broader, for the industry, and specifically, related to you, guys. So I guess, when you look at the separate account fees, it looks like they've declined a little bit, sequentially. I know that small for now but there's a lot of things that kind of going in and out of it. But maybe, comment on what kind of what's going underneath the surface, and if there are any increased pricing pressures you're starting to see in the business, and how we should think about the fee rates, on the separate account side going forward.
Yes, thanks, Alex. It's Erik. I would say a couple of observations. I think the notion of fee pressure exists across all the asset classes, and we're not immune from that. I think the fact that we're showing numbers that are showing real strength and stability over long periods of time is reflective of a couple of pieces. One, we are simply doing more for clients. And as a result of that, we've been able to hold the fees. The second part is, the fee pressure is more a little bit around kind of the customized side as opposed to the co-mingled product side. In the co-mingled product side, you have seen just remarkably resilient fee levels. And if you're in that game as we are, and you're a good provider, which we are, there is a kind of market rate for that, and that market rate has been very, very stable. I think what you're seeing this quarter, on the fee side is, again, more reflective of just some of the dollars moving and aging over time and distributing out, as opposed to any alteration in the fee pressure dynamic, which we're not seeing quarter-to-quarter.
Got it. And then, just a couple of quick follow-ups for Randy. On the catchup fees, as you guys continue to fund raise and some of those investments are in the process, any way to help us size kind of what kind of a catchup fee we could have on the management side over the next couple of quarters?
And then secondly, maybe, if you could just hit on the G&A expenses, obviously, being sort of elevated, you highlighted a couple of reasons why. Once again looking out over the next 12 months or so, how we should think about the level of G&A?
Alex, it's Erik. I'll take the first one, and then, Randy will have handle the G&A. On the retro fees -- so as you have heard us say, we've got a fairly lengthy time period to raise on these co-mingled products. It's generally 18 months after the first close. So we've got some real time to go. There's a couple of pieces that are sitting in there. So our co-investment product, the most recent one, which we've talked about, in terms of adding AUM is active, and so that's where -- again, as we have subsequent closings, which Mario referenced, we will go back to those. That is going to be driven by 2 factors. One, the further out we go in time, obviously, the larger the catchup; and two, the larger the AUM, also the bigger catchup. We are still, today, not at the level of what the prior fund had been. And so there is still, we think, interesting room for us to grow those products. And as we said, we've got time do that on the fund raises across the board. What you're also seeing is -- we had talked about the credit product last time, that is done, it is raised. Given that is a fee on invested, none of those dollars are flowing through on these financials because it hasn't started during this time period, and so we still have that, looking forward on ahead of us. So we think there is some meaningful growth still coming on things that are already in process, if not already raised that you'll start seeing in subsequent quarters. With that, let me go to Randy, for the G&A question.
Hi, Alex, thanks. With the G&A, we increased about $1.6 million over the prior year's quarter and more than half of that increase was due to the Private Market Connect expense actually moving from our compensation line over it to the G&A. And this is the quarter that it occurred last year -- actually, the end of the first fiscal quarter. So that explains about half of the expense. We're also seeing we still have some additional costs that we're incurring on professional fees, whether it's legal or accounting and auditing and tax, as we build out, as we increase the public company reporting, and the like. And we also had a situation this last quarter on the legal side, where the European risk initiative was just put into place. That was something that we incurred some additional professional fees that were not expected at the time.
Got it. And just on the run rate going forward, any of that drops off?
Sure. I think that, really, what we're looking at is single digit growth to low double-digit growth in terms of expenses, which will match what we've communicated as far as the revenues.
Your next question comes from the line of Chris Harris of Wells Fargo.
Your [indiscernible] all have a number of permanent capital vehicles...
Hey, Chris, we missed the first part of your question. Sorry. Could you repeat it? We can hear you better now.
Your peers in the U.S. -- your private equity peers [indiscernible] I know you guys are different, but just wondering, if that's [indiscernible]
Chris, sorry, it's really breaking up. We're only getting pieces. I think your question is some groups have raised permanent capital vehicles and while we're not like some of them, are we thinking of raising permanent capital vehicles? Is that close?
Yes, that's the question.
The short answer is, yes. Part of what I was talking about earlier, in terms of looking at some of the retail strategies, revolves around some of those types of vehicles. Clearly, as you said, some of them are raised by groups that are different from us, and so some of the structuring challenges are different for them than they would be for someone like us. But I think as the markets continue to expand, whether here or outside the United States, some of these vehicles do become interesting. And so, yes, we are looking at those very actively.
Your next question comes from the line of Robert Lee of KBW.
First one is -- well, I apologize if -- I got on a little late, so if you touched on this earlier. But if you could maybe just refresh us on some of the specialized fund, fund raisings, I know they're still doing the co-investment, I think, the fund-to-funds. But are there other products that you're also in the process of raising for right now?
Yes, Rob. It's Erik. Thanks for the question. I think what you'll see in the earnings transcript is yes, continued progress on both the co-investment fund and the fund-to-funds. What I had mentioned earlier is that, again, everyone should keep in mind that we've got a fairly long runway to raise these vehicles, usually at least 18 months after first close. And so we still have a fair amount of time in front of us. And I would say if history is a barometer, you tend to see this a little bit bookended, a little bit of more aggressive activity on the very front end, and then more aggressive activity in terms of closing capital on the very back end, and the middle tends to be a little quieter. And so we continue to make good progress there and feel good about those prospects.
In terms of other things that are showing up, in that specialized product vehicle, this really goes back to the comment that Mario made, which is that we're seeing an increase in terms of what I would think of is kind of smaller specialty products, either white label-ish, or attacking a particular market segment or a particular geography for defined set of LPs, these are not kind of large flagship products that I think are worthy of us, kind of highlighting and calling out on the call. But as you start to see the growth of just the variety of them, they are adding meaningful increase in AUM across that as they all continue to scale over time.
Okay, great. And I just have kind of maybe a broader or higher-level question. I mean, secondary marketplace broadly feels like it's been growing like the rest of the industry growing at a higher rate, I mean you and many peers have raised a lot of assets to access that market in various ways. Could you -- how is that impacting do you think kind of pricing, the pricing or opportunity within secondaries, just generally? I mean -- and maybe this is a bad analogy, I think to many years ago, the bank loan market used to trade by appointment, it was pretty illiquid, and then, over the years, more money put into it, it got more liquid, it was still a pain in the neck to trade, but more easily traded. And that on some level, I'm assuming, impacted opportunity set. So how do you kind of think of that as more capital just kind of comes into space?
Rob, it's Mario. That is one of the more interesting markets in our view right now. I think what -- you're right, it has grown and I think it's all also accurate to say that discounts have narrowed somewhat. But even there, it depends on what you're talking about. If you're talking about discounts on big brand name funds, yes, they are very narrow. If you're talking about discounts on other funds, it varies. Some of the discounts would surprise people in terms of looking at that and saying, is it as liquid a market as people think. I think, more broadly, what you're seeing in the secondary market is how large it is becoming, both in terms of what you would call your normal vanilla, you're buying a partnership at a discount that was raised 7 or 8 years ago, to big portfolios that are being sold to massive restructurings that are being done by very high quality general partners. It is a very different market from what it was 5 years ago. And so as you think about the opportunity set, it has grown far larger than what you would normally say what is the market for just plain secondary interest in general partners trading. So as we look at that market, there is a lot of capital that has been raised. There's also a lot of capital that has been spent in that market. So there is a reloading period that needs to occur. And in our view, that market continues to expand as an opportunity set. And so as we look at it, yes, the headline numbers look like, well, is something different going on. What's different going on is that market is simply becoming a much broader deeper and expanded market than what I think anyone would have thought 5 or 6, 7 years ago.
Maybe just as a follow-up, I mean, the GPs have to approve any transfer of ownership, I presume. So do you find that most of the GPs try to -- are kind of expanding their list, so to speak, of approved investors like yourselves? Or they tend to keep their approved list who they're willing to transfer interests to or allow -- to facilitate the interest, kind of keeping that pretty narrow and tight?
It varies. I think that not all of them have approval rights in that sense. But it varies. I think that you are seeing, again, to this notion of a secondary market becoming -- 15 years ago, you only had a secondary, if there was a problem. That is no longer the case. And so it is a more accepted way of, if you will, facilitating transfers among your limited partners but there are certainly general partners that have restricted lists. I think for us, that's a great thing because everybody wants a relationship with Hamilton Lane because we represent such a large segment of the market. So while I think the answer is that general partners have restricted list, they are somewhat broad, a few of them are very narrow, if you ask us, we would love it if they will all narrowed it to 1 or 2 groups because we know we'd be one of those 1 or 2 groups. But I think the realistic answer is, there are restrictions, there are some groups that are favored more than others, but again, this is a market that is becoming way more accepted than you have seen in the past.
There are no further questions at this time, I will turn the call back over to the presenters for closing remarks.
Thanks, everyone for joining. Have a great day.
This concludes today's conference call. You may now disconnect.