Hamilton Lane Incorporated (NASDAQ:HLNE) Q3 2024 Earnings Call Transcript
Hamilton Lane Incorporated (NASDAQ:HLNE) Q3 2024 Earnings Call Transcript February 6, 2024
Hamilton Lane Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Hamilton Lane Fiscal Third Quarter 2024 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, February 6, 2024. I would now like to turn the conference over to John Oh, Head of Shareholder Relations. Please go ahead.
John Oh: Thank you, Joanna. Good morning, and welcome to the Hamilton Lane Q3 fiscal 2024 earnings call. Today, I will be joined by Erik Hirsch, Co-CEO; Juan Delgado, Co-CEO; and Jeff Armbrister, CFO. Earlier this morning, we issued a press release and slide presentation which are available on our website. Before we discuss the quarter's results, we want to remind you that we will be making forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance, and business. These forward-looking statements do not guarantee future events or performance and are subject to risks and uncertainties that may cause our actual results to differ materially from those projected.
For a discussion of these risks, please review the cautionary statements and risk factors included in the Hamilton Lane fiscal 2023 10-K and subsequent reports we file with the SEC. These forward-looking statements are made only as of today, and except as required, we undertake no obligation to update or revise any of them. 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 Shareholders section of the Hamilton Lane website. Our detailed financial results will be made available when our 10-Q is filed. Please note, nothing on this call represents an offer to sell or a solicitation of an offer to purchase interest in any of Hamilton Lane's products.
Beginning with the financial highlights. Year-to-date, our management and advisory fee revenue grew by 19%, while our fee-related earnings grew by 16% versus the prior-year period. This translated into GAAP EPS of $2.43 based on $92 million of GAAP net income and non-GAAP EPS of $2.54 based on $137 million of adjusted net income. We have also declared a dividend of $0.445 per share this quarter, which keeps us on track for the 11% increase over last fiscal year, equating to the targeted $1.78 per share for fiscal year 2024. With that, I'll now turn the call over to Erik.
Erik Hirsch: Hello, everyone, and thank you, John. This is officially our first earnings call post the management transition on January 1st. It now sees me and my partner, Juan Delgado, as co-CEOs of this firm. It has been a strong start to the year as you will hear shortly, but we wanted to begin by providing you an opportunity to hear directly from Juan on his background and prior roles at Hamilton Lane. With Juan living in Hong Kong, he will not be joining these calls with regularity, but as we begin, we thought it important to provide an introduction. And so, with that, I turn it over to Juan.
Juan Delgado: Thank you, Erik, and hello, everyone. I'd like to simply begin by saying that I'm extremely excited about this next chapter. Erik and I have been friends and partners for over 19 years and I really look forward to continuing our partnership and continuing the growth and the expansion of this business. As a bit of background, I joined Hamilton Lane in 2005 to help build out our presence in London. Prior to joining, I was an Investment Manager at Baring Private Equity Partners where I focused on mid-market investing throughout Europe. I have my B.A. and Ph.D. from Universidad Complutense de Madrid in Spain, and I was a lecturer and Fulbright Scholar Stanford University. In joining Hamilton Lane, I have worn many hats.
First, I was working to build out our investment and sales presence in Europe and the Middle East. I was responsible for hiring the leadership team in place today in EMEA and open our Tel Aviv office. I have also managed the opening of our first Asian offices in Hong Kong and Tokyo in 2009. As our Asia business grew, I relocated to Hong Kong with my young family of three in 2011, and since then, I have served as Head of APAC, Head of International, and overseeing the expansion and the opening of several offices, including Seoul, Singapore, Sydney, and Shanghai. In June 2019, I took on the title of Vice Chairman for Hamilton Lane. Today, I serve on several of our investment committees. And as of January 1st, I joined the Board of HLNE. As we highlighted in our initial announcement, I will be overseeing our global clients and business development teams from Hong Kong and have joined oversight with Erik of the global investment teams.
During these 19-plus years at Hamilton Lane, I've had the privilege of witnessing growth of our non-US business. Our model of having localized teams that embrace the culture and speak their native language has allowed us to deliver best-in-class client service and strong investment results. We utilize a truly global one-team approach with really close collaboration and access to all the teams and resources Hamilton Lane brings to bear. We've become a global leader in private markets with this strategy, and I look forward to working alongside Erik in furthering in our leadership. Before I conclude, I want to mention that I am currently en route traveling to see clients and prospects as I'm doing quite often, and therefore, I will excuse myself from the live Q&A.
And with that, I will now pass it back to Erik.
Erik Hirsch: Thank you, Juan, and safe travels. Coming off of a strong calendar 2023, we are excited about 2024. The business has tremendous momentum and the employee base is excited about what is to come. Part of that excitement stems from our culture, and I am very proud to announce that once again, Hamilton Lane has been named a Best Place to Work in Money Management by Pensions & Investments for the 12th consecutive year. Even more impressive is the fact that we are only one of five firms who have been bestowed this distinction every single year since the awards creation. Some firms say culture doesn't matter and that it is all about results. Those firms tend not to have healthy cultures. We think a great culture aids in creating great results.
Be good and do good. Create a strong culture of excellence and collaboration, and use that to deliver for your clients and partners. Let's move on to the results for the quarter. I'll start with our total asset footprint, which we define as the sum of our AUM and AUA. This stood at $903 billion and represents a 9% increase to our footprint year-over-year and highlights our continued and steady growth as a firm. AUM stood at $120 billion at quarter-end and grew $12 billion, or 12%. The growth came from both our specialized funds and customized separate accounts. AUA was up $59 billion, or 8% year-over-year, primarily the result of the addition of reporting and advisory mandates. As a reminder, AUA can fluctuate for a variety of reasons, but the revenue associated with AUA does not necessarily move in lockstep with those changes.
Turning now to fee-earning AUM, which continues to be the largest driver of management fees. We continue to generate strong growth in both our customized separate accounts and specialized funds. Our total fee-earning AUM stood at $63.1 billion and grew $8.2 billion, or 15% relative to the prior-year period. Taken separately, $3.8 billion of net fee-earning AUM came from our customized separate accounts, and over the same time period, $4.4 billion came from our specialized funds. Our blended fee rate across the platform also continues to increase. This stems from the continuing shift in the mix of our fee-earning AUM towards higher fee rate specialized funds, most notably, our Evergreen product, where growth remains strong. Moving now to additional detail on our customized separate accounts.
Fee-earning AUM here stood at $36.9 billion, growing 12% over the past 12 months. We continue to see the growth coming across type, mandate size, and geographic location of the clients. Over the last 12 months, more than 80% of the gross inflows into customized separate accounts came from our existing client base. While this clearly speaks to the power of the recurring relationship model, it also tells you that with the remainder of flows, despite a very large installed base, coming from new relationships, that the market continues to offer up plenty of new opportunities. Moving to our specialized funds. Momentum here also continues to be strong. Fee-earning AUM here stood at $26.2 billion at quarter-end. Over the past 12 months, we've achieved positive net inflows of $4.4 billion, representing an increase of 20% relative to the prior-year period.
This growth stemmed from additional closes from our funds currently in market, robust investment activity, and continued expansion of our Evergreen platform. Going into some detail around the drivers of Specialized Fund flows during the quarter's growth, I'll begin with our secondary fund that is currently in market. During the quarter, we closed on over $485 million of LP commitments, and that generated $6.1 million of retro fees. This brings the total now raised to over $3.5 billion. As a quick reminder, we raised $3.9 billion for our prior secondary fund and we are on target to meaningfully surpass the prior fund size with this current fund. We expect to hold the final close for these funds over the coming weeks. We continue to be encouraged with the momentum heading into the final stages, and historically, our final closes have tended to be our largest and we expect that pattern to hold true here.
Moving on to our Strategic Opportunities Fund, which is our annual direct credit fund targeting the institutional LP. As a refresher, this series of funds is effectively always in market as we raise and deploy the capital with short investment periods and charge management fees on invested capital. We are currently in market with our eight series, and since our last update, we've closed on an additional $105 million of LP commitments. This brings the total raise for this current series to nearly $675 million. Like many of our products, we've been granted an extension on the final close of the series to allow for additional time for investors to close into this fund. We expect to hold the final close in the coming weeks. Again, I'd like to highlight that our direct credit platform has continued to experience strong growth over the past few years, with this annual institutional series now being complemented with other sleeves of credit-focused capital, including various separate accounts and our Evergreen funds.
Today, credit represents 15% of our total AUM and we continue to see opportunity to scale. Let's now turn to our Evergreen funds. As of December 31st, 2023, total AUM across our three offerings stood at $5.7 billion, growing 76% since the beginning of the calendar 2023. This growth was driven by solid investment performance, which in turn drove NAV growth along with continued strong net inflows. For calendar 2023, we averaged net inflows of $160 million per month with our US private market offering making up strong progress with our two wirehouse relationships. In less than a year of being on those platforms, we've received more than $615 million of net inflows. Our Evergreen complex continues to thrive despite an increasingly competitive marketplace.
We've emerged as a real leader in this channel and we are confident that this is only the beginning of our exciting journey. We are eager to grow our footprint in this space through additional product offerings and expansion of our distribution partnerships. Let's move now to some announcements around our most recent technology partnerships. As you'll hear, we continue to seek out partners who share in our vision of driving increased access to the private markets for the non-institutional investor. We firmly believe that managers need to meet the retail investor where they are, and the most efficient way to accomplish that is through technology. With that, let's start with an update on Helix, which we announced on a prior call and is our newest joint venture with one of our strategic partners, TIFIN.
As a reminder, Helix is the first of its kind generative AI assistant technology solely focused on the private markets. It is designed for future integration within wealth platforms and digital marketplaces used by advisors and investors seeking allocation to the private markets. Helix combines TIFIN's technological expertise with Hamilton Lane's proprietary database and market analysis to provide data-centric information around private markets benchmarking, forecasting, and diligence for financial advisors. On December 7th, Helix announced that it has successfully completed its seed funding round led by FINTOP Capital. Hamilton Lane and FINTOP have developed a successful track record of partnering and investing in leading private markets-focused companies, including DealCloud, Hazeltree, and Cobalt.
We are thrilled to partner with FINTOP Capital once again, who shares our common goal of driving technological innovation and broadening access within the private markets. Next, on January 10th, we announced our newest strategic partnership alongside Brevan Howard with Libre. Libre is a platform that connects high-net-worth investors with alternative asset managers and wealth advisors, offering them access to the global alternatives market. Libre will leverage tokenization and smart contracts that will provide asset managers with seamless direct connectivity to the growing high-net-worth channel. Libre makes access for distributors simple through API connectivity. This provides integration into Libre's comprehensive suite of wealth management services, data, and infrastructure.
Libre is scheduled to go live during the first quarter of 2024, and has already partnered with several global distributors. We are excited to be a strategic partner to Libre and one of the first to go live with them and we look forward to providing you with future updates on this exciting journey. And with that, I'll now turn the call over to Jeff to cover the financials.
Jeff Armbrister: Thank you, Erik, and good morning, everyone. Fiscal year-to-date, we achieved strong growth in our business with management and advisory fees up 19% versus the prior-year period. Our specialized funds revenue increased by $41 million, or 28% compared to the prior-year period. This was driven primarily by a $2.2 billion increase to fee-earning AUM in our Evergreen platform in the last 12 months and over $3.5 billion raised since inception in our latest secondary fund. Retro fees for the fiscal year-to-date included $12.8 million from our secondary fund in market versus $2.4 million from our direct equity fund in the prior-year period. As a reminder, investors that come into later closes during a fundraise pay retroactive fees dating back to the fund's first close.
We expect to generate additional retro fees as we hold the final closes for Secondary Fund VI. Moving on to customized separate accounts. Revenue increased $9 million, or 11% compared to the prior-year period due to the addition of several new accounts, re-ups from existing clients, and continued investment activity. Revenue from our advisory, reporting, and other offerings decreased by $2 million compared to the prior-year period due primarily to the sale of the 361 Capital assets, partially offset by increases in revenue coming from our technology solutions. Lastly, the final component of our revenue is incentive fees. Year-to-date, incentive fees totaled $49 million and are down 65% relative to the prior-year period. Recall, that last fiscal year, we generated a large amount of incentive fees due to the catch-up period that several of our carry-eligible vehicles were in.
Let me now turn to some additional detail on our unrealized carry balance. The balance is up 18% from the prior-year period, while having recognized $66 million of incentive fees during the last 12 months. The unrealized carry balance now stands at approximately $1.1 billion. Moving to expenses. Year-to-date, total expenses decreased $10 million compared with the prior-year period. Total compensation and benefits decreased by $18 million, driven primarily by lower compensation associated with the decreased amount of incentive fees. G&A increased $9 million, driven primarily by revenue-related expenses, which are the third-party commissions related to our US Evergreen product being offered on wirehouses that we've discussed on prior calls. I'd like to remind you that the flows that come in through the wirehouse channel have an associated upfront fee from the dollars raised there.
That payment is made and applied to the total amount when those dollars close into the fund. However, the corresponding management fees we earn from those same dollars come in over the course of a year for as long as the client is invested in the fund. This creates a timing mismatch between the cost of bringing those dollars on and the revenue associated with those flows. This causes our G&A to increase with the eventual offsetting revenue to come in during the subsequent quarters and years. Said more simply, we bear the full cost upfront and then receive our revenue over time. Lastly, year-to-date fee-related earnings, or FRE, were up 16% relative to the prior-year period as a result of the management fee and fee-earning AUM growth discussed earlier.
As we noted on our prior call, FRE margin for the quarter was impacted due to extending the final close for Secondary Fund VI. Recall, that extending the timing of Secondary Fund VI's final close will extend out the timing of receiving the associated retro fees and could potentially cause interim movements in our quarterly FRE margins, which is what we witnessed this quarter. However, for the fiscal year 2024, we expect to maintain levels consistent with fiscal 2023 and the first two quarters of fiscal 2024. I'll wrap up here with some commentary on our balance sheet. Our largest asset continues to be our investments alongside our clients in our customized separate accounts and specialized funds. Over the long term, we view these investments as an important component of our continued growth and we'll continue to invest our balance sheet capital alongside our clients.
In regard to our liabilities, we continue to be modestly levered. With that, we will now open up the call for questions.
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