Hamilton Lane Incorporated

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.

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.

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.