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spk02: Ladies and gentlemen, thank you for standing by and welcome to today's Hamilton Lane Incorporated Third Quarter Fiscal Year 2021 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 the session, you need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your host, John Oh, Investor Relations Manager. Thank you. Please go ahead, sir.
spk09: Thank you, Katrina. Good morning and welcome to the Hamilton Lane Q3 fiscal 2021 earnings call. Today, I will be joined by Eric Hirsch, Vice Chairman, Andrea Kramer, CEO of Hamilton Lane Alliance Holdings One, and Atul Varma, CFO. Before I continue, you may notice that we have a smaller number of speakers today than normal. Unfortunately, this winter storm in the Northeast has resulted in some power and phone issues. With that, we hope that everyone who is currently affected by the weather is 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 a discussion of these risks, please review the risk factors included in the Hamilton Lane Fiscal 2020 10-K, and subsequent reports we file with the SEC. We will also be referring to non-GAAP measures that we view as important in assessing the performance of our business. Reconciliation of those non-GAAP measures to GAAP can be found in the earnings presentation materials made available on the shareholder section of the Hamilton Lane website. Our detailed financial results will be made available when our 10-Q is filed. Please note that nothing on this call represents an offer to sell or a solicitation to purchase interest in 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-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 the 13.6% increase over last fiscal year, equating to the targeted $1.25 per share for fiscal year 2021. With that, I'll now turn the call over to Eric.
spk04: Thank you, John, and good morning. In many ways, 2020 was a year of incredible challenges. As a country, as communities, as families, and as individuals, we have all seen and faced adversity in ways we simply could not have imagined a year ago. On behalf of Hamilton Lane and my partners, I'd 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 have also faced challenges throughout this past year and continue to face them now. We are proud of how they have persevered despite this and how they've been unwavering in 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, opened new offices, hired 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 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 the ninth consecutive year, Hamilton Lane has been selected as a best place to work in 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 AUA, assets under advisement. Total asset footprint for the quarter stood at approximately $657 billion and represents a 35 percent 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, 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 AUA, 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 AUA change is relatively large from a dollar and percentage standpoint, the majority of the increase is resulting from us being engaged on a 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, AUA can fluctuate quarter to quarter for a variety of reasons, but the revenue associated with AUA does not necessarily move in lockstep with those changes due, in 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. Taken 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 four key components. One, re-ups from our existing clients. Two, winning and adding new clients. Three, growing our existing fund platforms. And four, raising new specialized funds. What you also see here is that our fee rates continue to remain steady. Moving to slide six. The 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, size, and geographic location of the clients. What you also see here is that over the last 12 months, more than 80% of the gross inflows into customized separate accounts came from existing clients. You've heard us say in the past that re-ups from our existing client base remains a key component of the growth we've achieved in this segment of the Earning AUM. In addition to re-ups, we continue to expand our client base by winning and adding brand new relationships, which in turn 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 are 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 percent increase in 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 in specialized fund fee-earning AUM. As of January 31st, we have closed on over $3.7 billion of LP 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. In prior calls, we had previously mentioned that we had until the end of January to complete fundraising. However, in order to facilitate additional time for a very small number of final investors, we now expect to wrap up this fund in 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. 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 focus series. To date, the current series has raised $584 million of commitments. Similar to our secondary fund, we had previously said we had until the end of January 2021 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 periods, 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. As quick background, and for the benefit of those less familiar, this product targets the high net worth and mass affluent markets and invests almost exclusively in direct investments in both equity and credit, as well as secondaries. The product offers a monthly liquidity option in an open-end Evergreen structure with management fees on net asset value and a deal-by-deal performance fee. Our first product launch in this 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 a prior call, we spoke about our efforts in 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 in the space, And I'm also pleased to announce that we are bolstering our existing resources with an acquisition of 361 Capital. On January 28th, 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 RIAs and investment platforms around the country. Their 16-person strong team is based in Denver, Colorado, and will remain there, furthering the Hamilton Lane geographic footprint. And aside from depth and experience in the space, 361 brings an award-winning culture. Like us, they were also recently recognized as a blessed places to work in money management, marking their fifth year in 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. In keeping with our new initiatives, as most of you now have may seen, we have recently launched our first SPAC, Hamilton Lane Alliance Holdings One, which trades on the NASDAQ under the symbol HLAHU. Joining me to provide some insights into what we believe is a unique angle in the world of SPACs is my partner and the CEO of Hamilton Lane Alliance Holdings, Andrea Kramer.
spk10: Thank you, Eric, and hello, everyone. I'm excited to have the opportunity to share our thoughts around our SPAC offering and why we believe we are positioned for success. As with all new initiatives at Hamilton Lane, the goal is to always create longstanding business lines that have the ability to grow and scale. You will notice that this first SPAC, we have assigned the number one to it, and that is purposeful as our goal is to raise additional SPACs in the future and create a new business line for Hamilton Lane. For HLAHU, we raised a total of $276 million of gross proceeds from a high caliber group of investors, a number of whom are also core HL&E shareholders. We very much appreciate their support, along with the support of new investors. We view SPACs 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 a number of longstanding important relationships with private markets fund managers, which we believe will be vital when searching for a business combination. Ultimately, we are seeking to partner with a reputable fund manager that owns a great company with a strong management team and is ready to begin the transition from private to public ownership. We believe our SPAC offers a compelling and elegant solution to assist in this transition. We've proven to be a great partner for fund managers and believe our SPAC will be a sought after avenue as these managers seek to monetize their public ready assets. Now, as it relates to HL&E revenue, there are no management fees or carry associated with this SPAC in the traditional sense. The economics that Hamilton Lane will earn as the sponsor will generally take the form of promote shares and warrants. And over time, we will look to monetize those shares subject to certain lockup restrictions. I'm excited to be leading this new initiative for Hamilton Lane and look forward to providing you with updates on our progress. With that, I'll now turn it over to Atul to discuss the financials.
spk07: Great. Thank you, Andrea, and good morning, everyone. Slide 8 of the presentation shows the year-to-date financial highlights for fiscal year 2021. We continue to see solid growth in our business with management and advisory fee up 16% versus the prior year period. Our specialized funds revenue increased $20.4 million, or 25%, compared to the prior year period driven by $1.7 billion in fee-earning AUM added from our relative secondary fund between periods. we recognize $10.8 million in retro fees from the secondary fund in the current year period compared to $2.8 million from a co-investment fund in the prior year period. As many of you are likely aware, investors that come into later closes of the fund raise for many of their 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 closings 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 our advisory and reporting offerings increased approximately $3.4 million compared to the prior year period. The final component of our revenue is incentive fee. Incentive fee for the year-to-date period were $29.8 million. We remain a very diversified carry story with now 70 vehicles in an 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 in valuations, the balance is up 22% from the prior year. even as we recognized $41 million of incentive fee during that period. And just to remind everyone, we don't control these positions, and thus, we don't control the timing of exit. Turning to slide 10, which profiles our earnings, our year-to-date fee-related earnings were up nearly 28 percent versus the prior year period, and as a result of 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 in headcount. G&A decreased $7.8 million due primarily to decreases in travel expense, consulting, and professional fee and commissions. Due to this decrease in G&A, along with the large increase in retro fees from our later secondary fund, our fee-related earnings margin increased meaningfully relative to the prior year period. Given much of these positive events were more one-time in nature, we do not view this quarter's margin as the new normal. We remain committed to supporting growth initiatives for the business, and we remain focused on creating continued margin improvement over time. 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. As stated on prior calls, the expected impact to our G&A expense will be a run rate increase of $4 to $5 million annually stemming from the new lease. Moving to our balance sheet on slide 11. Our largest asset on the balance sheet is investments alongside our clients in our customized separate accounts and specialized funds. Similar to our unrealized carry balance, this quarter saw an increase in the value relative to the previous quarter, primarily due to increased valuation 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.
spk02: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. First question, we have Ken Worthington from J.P. Morgan. Your line is open.
spk00: Hi. Good morning. Thanks for taking my questions. Exciting days here. I wanted to flush out your comments on the SPAC. So a couple questions on this. So how does the launch of the first SPAC expand into a broader SPAC 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? How do your relationships in private markets investing position Hamilton Lane to be successful both in terms of the initial SPAC and then the outlook to further grow this business? And then are you thinking about any themes either by sector style or other characteristics for your SPAC business?
spk10: Thanks, Ken, for the question. This is Andrea speaking. On the first question, it is absolutely our intention to institutionalize this space and to build out a line of business focused on providing these solutions to our partnerships. On your second question regarding differentiation and competitive nature, the key differentiation is our tremendous data set, really layered with the tech which, you know, gives us a preemptive sourcing edge and long cultivated relationships. And lastly, I would say it's also the institutionalization of our platform, which will lead up to be successful for SPAC 1 and for all future SPACs. On your third question, it is a generalist approach that we are 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 into a de-SPAC process.
spk00: Okay, thank you. And just to follow up on 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. So you've got data on deals. How do you translate that into a competitive advantage in terms of finding deals and making sure you're investing in the right ones? I guess, you know, link those two together.
spk10: 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 books. We're going to preempt that process and work directly based on the relationship that we have with these partners, to source and engage with them on these opportunities. So we're going to circumvent what is traditionally done by SPACs, which is, you know, just receive banker books.
spk00: Got it. Okay. Thank you.
spk02: Next question. We have Alex Plostein from Goldman Sachs.
spk03: Hey, guys. Hey, guys. Good morning. I just wanted to dig a little bit deeper into the opportunity you see for Hamilton Lane in the U.S. retail distribution now that you have a fund approved and launched. Can you talk, I guess, a little bit about the channels that you're looking to distribute through, the kind of opportunities that you see there, any incremental investments you need to make into distribution? distribution to kind of accelerate that growth and sort of, you know, the vision for that business call it over the next year or two.
spk04: Thanks, Alex. Thanks, 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 makes us incredibly optimistic about what is sort of out there. The U.S. market on the retail side is enormous. 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 RIAs, other wealth management platforms. We think the acquisition of 361 really enhances our ability to distribute. We have existing resources. This just now nicely adds to it to the extent that we believe in the future that Adding more resources will further the growth. We're certainly open-minded to that. But I think the non-U.S. product is showing you a path to something that is very, very scalable in a market that we think is really clamoring for access to the private markets.
spk03: Great. And just the fee structure, maybe some 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 into distribution, I guess, how should we think about that for Hamilton and as a whole?
spk04: Well, 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, 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 investor, we think it's a very, very attractive offering to the investor relative to other products that are out there in 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 in the future, we'll address it. From an investment standpoint, no resources needed. I think one of the other appeals to the clients here is that 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 are looking at. Great. Perfect. Thanks very much.
spk02: Next question. We have Chris Katowski from Oppenheimer and Company.
spk06: Good morning. Thank you. I wonder if you can take us into the economics to Hamilton Lane from the SPAC a bit more, if this is going to become a line of business. I think I saw in HLAHU's registration that there are something like 12.5 million warrants. Is the economics to Hamilton Lane entirely from those warrants? And how many of those did Hamilton Lane end up receiving?
spk04: So I think this is a question that's going to 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. As you know, there is kind of an above the line and below the line component to this. And so we are just 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 now with this back in 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 in our disclosure. To Andrea's point, given that we view this as a business line going forward, We think it's going to 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 going to be a topic that we will likely address in the coming call. Okay.
spk06: Fair enough. And then, effectively, I was a little confused by the retro fees because I know when we were going through your presentation, earlier in the morning, kind of, you know, looking at the year to date retro fees in the slide and then backing out what we thought was entire quarters, we came to a number of like 4.1 million for the current quarter. And I think, Eric, you mentioned that there were 7.2 million in retro fees. So you just square that circle.
spk04: Sure. So I think what you're seeing here is that in the script, we were, I think, kind of clearly tell you that given we had a closing post the quarter end, We are just showing you what the future retro fees are going to be from the Jan 31. But the retro fees are at the seven level. And so then it's in addition to that what's coming from the January 31st closing that will result in additional retro fees.
spk06: The additional is around 10.
spk04: That's going to come in the next quarter, though, correct? And that is around $10 million. Okay.
spk06: All right. Thank you. That's it for me.
spk02: Next question, we have Rob Lee from KBW. Your line is open.
spk08: Hi, this is Jeff Dresner on for Rob. A question around comp expense and maybe you can give us some color on how to think about that going forward.
spk04: 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, It's not always linear, and you saw that this year. And so I think what we're sort of managing to is 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 you're going to see a very consistent picture.
spk08: Great, thanks. And I was wondering if you have an update on dry powder or commitments not yet earning fees or a number around that.
spk04: Yeah, not a number that we, it's Eric again, not a number that we've disclosed. I mean, we've always said that it's the nature of the business. We have billions and billions of dollars of that, but not something that we have chosen to kind of delineate. The number fluctuates quarter to quarter. And I think, frankly, we've been a little resistant to, you know, 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 their best interest because we find the right opportunities, not because we're anxious to deploy that capital in order to start accruing fees.
spk08: Great. Thanks for taking my question.
spk02: Next question. We have Adeeb Chowdhury from William Blair. Your line is open.
spk01: Hey, good morning, guys. This is Devon for Chris. Just a quick one. Apologies if you had already covered it, but could you discuss the driver for the sequential increase in non-operating income in the quarter?
spk04: 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. Got it.
spk01: And then one more, just going back to the stack, could you, to the extent you can, discuss where you're at in the process right now in terms of, you know, developing an initial list of targets or starting to have conversations or meeting with GPs or kind of more further along than that? Thanks.
spk10: Yeah, we are building that target list and have been over the last week. We are having engaged in very in-depth conversations on some of those targets, and we're progressing very effectively. Anticipate that, you know, we will be starting deal review and deal structuring discussions relatively soon.
spk01: Great. Thank you very much.
spk02: Last question, we have Adam Beattie from UBS. Your line is open.
spk05: Good morning. Thank you for taking the question. Appreciate all the detail on the fees on the fund side. Last quarter we talked a little bit about the separate account side and the tranching versus re-ups. Just wanted to get an update on how that dynamic played out in the most recent quarter and maybe the near-term outlook.
spk04: Thank you. Sure, Alex. It's Eric. So I think the dynamic is always in flux. I think what you saw this quarter that was a little bit of an analogy, 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 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 put in over 80% of those new flows were coming from existing investors, so we continue to see strong re-up interest. 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.
spk05: Excellent. Thank you. I also want to ask about the meaningful increase in the performance-free accrual and just get any color or detail around what might be driving that. Thanks.
spk04: Sure, Derek. I'll stick with that. So I think it's really twofold. I think, one, it continues to be really, really good Hamilton Lane investment selection. We are building strong portfolios. I think that strong portfolios translates into strong fundraising, particularly in the product world, where I think performance is more of a focus. And the second thing is we're certainly getting the benefit of rising markets. So I think those two are really what's driving it. And then what you're also seeing, and you heard from Atul's comments, we're simply adding more and more accounts that have carry components. I think the interest in LPs 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.
spk05: That's excellent. Thank you very much.
spk02: I am showing no further questions at this time. I will now turn it back to Eric Hirsch. Thank you.
spk04: Great. We appreciate everyone's time. We appreciate your interest, and we wish you well. Stay safe. Thank you.
spk02: 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.
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