Hamilton Lane Incorporated

Ladies and gentlemen, thank you for standing by and welcome to the Hamilton Lane Incorporated third quarter fiscal year 2022 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 will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I will now turn the conference over to your speaker today, John Oh, Investor Relations Manager. Thank you. Please go ahead, sir.

Thank you, Julie. Good morning and welcome to the Hamilton Lane Q3 Fiscal 2022 Earnings Call. Today, I will be joined by Mario Giannini, CEO, Eric Hirsch, Vice Chairman, Brian Gilday, Global Head of Investments, and Phil Varma, CFO. 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 discussion of these risks, please review the risk factors included in the Hamilton Lane Fiscal 2021 10-K as amended and subsequent reports to be filed 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 Starting with the financial highlights, year-to-date, our management and advisory fee revenue grew by 10%, while our fee-related earnings grew by over 13% versus the prior year period. This translated into year-to-date GAAP EPS of $3.59, based on $132 million of GAAP net income, and non-GAAP EPS of $3.50, based on $188 million of adjusted net income. We've also declared a dividend of $0.35 per share this quarter, which keeps us on track for the 12% increase over last fiscal year, equating to the targeted $1.40 per share for fiscal year 2022. With that, I'm now turning the call over to Eric.

Thank you, John, and good morning, everyone. Let me start by announcing an award won recently, and while we have won this nine times prior, it still remains a significant and meaningful accomplishment to our firm. That is, for the 10th consecutive year, Hamilton Lane was named a Best Place to Work in Money Management by Pensions and Investments. We have won this distinction every year since Pensions and Investments first began publishing the ranking in 2012. We are one of only five organizations across the entirety of the money management landscape to have earned the distinction. We are extremely proud of this recognition, and while the firm has experienced meaningful growth across our product lines, geographies, and client base during the past 10 years, what has remained consistent throughout is our commitment to fostering a culture of excellence, innovation, and inclusion, and at all times, striving to do the right thing for our clients, employees, and partners. With that, I'll turn to some results for the quarter. Our total asset footprint, which we define as the sum of our AUM, assets under management, and AUA, assets under advisement, stood at $851 billion and represents a 30% increase to our footprint year over year, continuing our long-term consistent growth trend. AUM growth year-over-year, which was $22 billion, or 29%, 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 on growing and winning across both lines of business, and we are pleased with the continued success. As for our AUA, similar to that of our AUM growth, was from across client type and geographic region and came in at $172 billion or 30% year over year. As we have mentioned on prior earnings 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. This quarter saw an increase in AUA dollars relative to the prior quarter, due primarily to the addition of a large back office mandate. Let me shift gears now and provide a brief update on our strategic technology investments. We continue to view investing in technology as critical to our growth strategy and continued leadership in the FAFSA class. Our approach has been simple. Identify unique technology solution providers that we believe can help make us and the industry better, and we put our balance sheet capital behind them. We not only become a user of the technology, but a strategic partner as well. And given how successful we've been here, companies now seek us out, knowing that a partnership with Hamilton Lane can help speed their development, accelerate their growth, and expand their brand. This strategy has served us well so far. Aside from implementing cutting-edge technology for our firm, we've also been instrumental in developing technologies that are widely used across the industry today. In addition, we've generated attractive returns across our exited investments and remain enthused about the current slate of investments that remain on our balance sheet today. Given the continued activities in this area, the firm has decided it appropriate that going forward, we will be carving off up to 15% of the realized gains to be included in our discretionary bonus pool. While this is a much reduced level from what we do in our carried interest program, we see this as a similar way to reward employees and align with shareholders while keeping our fixed compensation costs well controlled. To be clear, this would not be retroactive and would only occur on realized gains. Now, let me provide a few specific updates on two strategic investments that have contributed to the quarter's results. On the last call, we announced that FactSet had agreed to purchase Cobalt GP. As a reminder, Hamilton Lane continues to fully own and operate Cobalt LP, The transaction officially closed during this fiscal quarter, and we recognized a $12 million realized gain from the transaction. That amount is reflected in the non-operating income line on our income statement. Next, an update on iCapital. On December 23rd, iCapital announced its latest financing round led by WestCap and Apollo. The company raised $50 million at over a $6 billion valuation, and as a result of the transaction, we recognized a $20 million unrealized gain on our investment. At this new valuation, our position is valued at nearly $60 million. We originally invested $10 million. I'll move now to our Evergreen platform and provide an update on the continued success we are achieving there. As a quick reminder, and for the benefit of those on the call less familiar with these products, our Evergreen platform provides private wealth channels and individual investors with direct and immediate exposure to the private markets by way of monthly subscriptions and semi-liquidity. For us, it represents perpetual fee-earning AUM, where we earn management fees on net asset value. The average management fee across this platform is 140 basis points, and we are able to earn carried interest at a rate of 12.5% over a hurdle of either 6% or 8%, depending on the deal type and on a deal-by-deal basis. As these vehicles contain no primary fund exposure and are exclusively transaction-oriented, every invested dollar is eligible for carried interest. During the quarter, I'm proud to say that the platform surpassed the $2 billion AUM mark. We are now one of a very small number of managers who have a platform of this size and scale, and we continue to be very encouraged at our future growth prospects. For fiscal year 2022, we are averaging nearly $100 million of monthly net inflows. Also noteworthy, flows for the month of January were directly in line with these levels, despite increased public market turbulence. We believe, and our results show, that our vehicles are seen as attractive to this retail market segment, and we are well positioned to benefit from this growing demand and general tailwinds. Let me now turn to 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 $5.9 billion, or 15%, stemming from positive fund flows across both our specialized funds and our customized separate accounts. Taken separately, $3.3 billion of net fee-earning AUM came from our customized separate accounts, and over the same time period, $2.5 billion came from our specialized funds. Growth in these two areas 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. Overall, our blended current fee rate remains steady. Last fiscal year, we benefited from the large amount of retro fees coming primarily from our fifth secondary fund, and it resulted in an elevated blended fee rate for fiscal 2021. Given the limited amount of retro fees this fiscal year to date, our fee rates have trended back to more normalized levels. Let's now move to the two parts that make up our fee-earning AUM, and I'll start with our customized separate accounts. Fee-earning AUM for the period stood at $28.4 billion, growing 13% over the past 12 months. We continue to see the growth coming across institution type, size, and geography. As it relates to our existing client base over the last 12 months, more than 80% of the gross inflows into customized separate accounts came from these groups. Re-ups from our existing client base remain a key component of this growth. 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 product suite, and demand remains robust, coming, like the rest of our business, from a diversified set of investors around the globe. Over the past 12 months, we achieved positive net inflows of $2.5 billion, resulting in a 17% increase in fee-earning AUM. And with that, I'll now turn it over to Brian Gilday, our Global Head of Investments, who will provide an update on some of our current funds and market, as well as some detail on our overall AUM base.