Hamilton Lane Incorporated (NASDAQ:HLNE) Q3 2023 Earnings Call Transcript

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Hamilton Lane Incorporated (NASDAQ:HLNE) Q3 2023 Earnings Call Transcript February 7, 2023

Operator: Good morning. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hamilton Lane Third Fiscal Quarter and Fiscal Year 2023 Earnings Conference Call. At this time, I would like to turn the call over to John Oh, Investor Relations Manager. Mr. Oh, you may begin.

John Oh: Thank you, Brent. Good morning, and welcome to the Hamilton Lane Q3 fiscal 2023 Earnings Call. Today, I will be joined by Mario Giannini, CEO; Erik Hirsch, Vice Chairman; and Atul 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 a discussion of these risks, please review the risk factors included in the Hamilton Lane fiscal 2022 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 Shareholders 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. A portion of our presentation will mention an offering of new share classes of our private assets fund that is subject -- that is the subject of a registration statement filed with the Securities and Exchange Commission. The registration statement is not yet effective. We may not sell these securities until the registration statement is effective. This presentation is not an offer to sell or a solicitation of an offer to buy these securities in any jurisdiction where the offer for sale is not permitted.

Beginning with the financial highlights, year-to-date, our management and advisory fee revenue grew by 20%, while our fee-related earnings grew by 11% versus the prior year. This translated into year-to-date GAAP EPS of $2.19 based on $78 million of GAAP net income and non-GAAP EPS of $2.38 based on $128 million of adjusted net income. We have also declared a dividend of $0.40 per share this quarter, which keeps us on track with a 14% increase over last fiscal year, equating to the targeted $1.60 per share for fiscal year 2023. With that, I'll now turn the call over to Mario.

Mario Giannini: Thanks, John, and good morning, everyone. Despite what continues to be a challenging market environment, we have posted another strong quarter of earnings and growth. We are executing well across the entirety of the business, and I remain proud of the effort put forth by the firm. Hamilton Lane continues to grow as evidenced by new office openings, 21 with new offices in Milan, Stockholm and with additional openings to come. Headcount expansion, nearly 600 employees and growing new product launches, our retail debt offering, HL scope as a recent example, and additional strategic investments and partnerships with leading technology platforms. Most recently, figure securitized be net to assume that 2022 was a muted year for private market activity given the macro picture that overshadowed the year.

The reality at Hamilton Lane is that we're as busy as we've ever been, particularly on the transaction side. Deal flow remained robust across the platform with secondary's direct equity and direct credit experiencing record years. We see this as a reflection of our scale, global presence and market reputation as a partner of choice. Taking a closer look at the data, the number of new primary funds coming into market in 2022 was down versus 2021. However, 2021 was a true outlier on fund volume. 2022 relative to 2020 was basically flat. Much of the decrease in 2022 was led by venturing growth equity strategies. Since 2015 and on a rolling three-year time frame, the capital collectively raised in buyout venture and growth has grown by nearly 13% on a compounded basis versus credit of less than 5% and real assets essentially down slightly.

Buyout continues to represent the deepest segment of private markets with the capital raise in that strategy at least 3x larger than any other segment in private markets. Geographically, North America management continues to grow slightly faster relative to Europe and Asia, although all are continuing to grow. For Hamilton Lane, all three transactional areas, secondaries, direct equity and direct credit with this record deal flow. Each strategy saw more than a 15% increase in deal flow in 2022. Why is that? In a year where fundraising was challenged, look to their most trusted partners for capital certainty to ensure the deals got done, particularly as prices for assets became increasingly more attractive. As we look forward to 2023, we believe continued volatility and uncertainty will create increasingly interesting investment opportunities.

The data shows that private market performance tends to be at its greatest during level -- during periods of more volatile and negative public market returns. During the technology correction in 1992, 2000 and net again during the global financial crisis, have markets outperformed markets during those downturns and then throughout the result of recovery. While we don't present that, that will transpire in 2023, given our 30-year history in this asset class, we remain optimistic. Let me end this section with something we view as very important, both internally and externally. Earlier, I touched upon all the activity that transpired for our organization throughout 2022, and none of it would be accomplished without the tireless efforts of my colleagues.

It is the people in our culture that sets us apart, and with that, I'm proud to share with you that Hamilton Lane has once again made a Best Place to Work in money management by pensions and investments. This is our 11th consecutive year winning this award, which we have won every year since the award was created. We are only one of five firms to accomplish this and the only alternative manager. To speak to the caliber of our employee base, we remain committed to fostering a strong culture of excellence and also striving to do the right thing for our clients and partners. With that, I will turn it over to Erik.

Erik Hirsch: Thank you, Mario, and good morning, everyone. I'll start with 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 approximately $832 billion and represents a 2% decrease to our footprint year-over-year. AUM growth year-over-year, which was over $9 billion or 10%, came from both our specialized funds and customized separate accounts. AUA was down $29 billion or 4% year-over-year. 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. This was true for this period, whereby despite a reduction in AUA, revenue actually increased.

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Moving on to our fee earning AUM. At quarter end, total fee earning AUM stood at $54.9 billion and grew $8.8 billion or 19% relative to the prior year, stemming from positive fund flows across both our specialized funds and our customized separate accounts. Taken separately, $4.7 billion of net earning AUM came from our customized separate accounts and over the same time period, $4.1 billion came from our specialized funds. Our blended fee rate across both customized separate account and specialized funds has recently been increasing over the past few quarters. This stems from the continuing shift in the mix of our fee-earning AUM towards higher fee rate specialized funds, most notably our Evergreen products. Moving to customized separate accounts flows.

The earning AUM from our customized separate accounts stood at $33.1 billion, growing 17% over the past 12 months. We continue to see growth coming across type, 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, which continues to be a steady source of growth for our separate account business. But again, despite a very large installed client base, we are continuing to drive 20% of new inflows from new relationships, something of which we are very proud. As for our specialized funds, growth here continues to be strong. Fee earning AUM from our specialized funds stood at $21.8 billion at quarter end. Over the past 12 months, we achieved positive net inflows of $4.1 billion, representing growth of 23% relative to the prior year period.

This growth stemmed from additional closes for funds currently in market, robust investment activity and continued growth of our Evergreen platform. Let's now move to a few updates on fund closings, and then I'll wrap this section up and touch on our Evergreen platform. I'll start with our direct equity platform. During the quarter, we held the final close for our equity opportunities Fund V and raised over $2 billion of LP commitments. This marks the largest direct equity fund we've ever raised and represents over a 20% increase in fund size relative to the prior fund. Additionally, we recently announced that we've launched a digital token thether fund in partnership with securitized that allows individual investors access to equity opportunities V.

This is part of our continued push into the retail space, affording investor's easy and efficient access with low investment minimums through the use of digital security technology. We are appreciative of all the support from our LPs, both new and existing with this fundraise and are excited about the investment opportunities we see ahead of us. Next up is our Impact Fund II. We continue to have success in building this new franchise and to date, have closed on nearly $250 million. At this size, we've now raised more than 250% of the amount of capital from our inaugural Impact Fund I, and we will continue raising capital into the second quarter of 2023. On the secondary side, fundraising for Secondary Fund VI continues to progress well. During the quarter, we held the third close for Secondary Fund VI at over $570 million, which now takes the total capital raise for the fund to over $1.6 billion.

This close generated over $2 million in retro fees for the quarter. The fundraising pipeline is strong and deal flow is increasingly interesting. Secondary Fund VI will be in market into the fourth quarter of calendar 2023. Lastly, we continue to have success raising capital and other specialized funds that include white label programs, investor specific and regionally focused funds. Our quarterly results of specialized fund inflows include capital we are raising through these channels. I will wrap up now with a quick update on our retail Evergreen platform. As we've commented in prior calls, public market volatility and macroeconomic uncertainty has had some impact to flows for these products. That said, we remain encouraged with the results we continue to see each month.

Throughout calendar '22, we witnessed 11 months of positive net flows, averaging over $70 million per month. In addition, as we discussed on our last call, we now have a senior credit offering, the Hamilton Lane Scope Fund, to add to our Evergreen suite of products. We seeded the fund initially with balance sheet capital and are now 4 months into raising external capital. We continue to seek out additional distribution channels here, and while still early days, we are pleased with the success so far. Overall, the aggregate AUM across the entire suite of Evergreen products now stands at over $3.2 billion. And with that, I'll turn the call back over to Atul to cover the financials.

Atul Varma: Thank you, Erik, and good morning, everyone. Year-to-date, we achieved strong growth in our business with management and advisory fees up 20% for the prior year period. Our specialized funds revenue increased by $36.2 million or 34% compared to the prior year. This was driven primarily by a $1.1 billion increase in fee earnings AUM in our Evergreen platform, over $1.6 billion raised through December at Secondary Fund and over $2 billion raise in total from limited partners equity fund. fees for the year were approximately $2.4 million, primarily from our direct equity fund versus minimal amount in the prior year period. As a reminder, investors that come into later closes during the fund raise, a retroactive fee of getting that funds .

We expect to generate additional revenue fees as we hold subsequent closes for Secondary Fund VI. Moving on to customized separate accounts. Revenue increased $11.9 million or 16% over the prior year period due to from existing clients, the addition of several accounts and continued investment activity. Revenue from our advisory reporting and other offerings decreased $1.5 million compared to the prior year period due primarily due to a decrease in revenue from our distribution management business, partially offset by increases in fund reimbursement and reporting revenue. The final component of our revenue is incentive fees. Incentive fees year-to-date totaled $139.8 million. As we have detailed on prior calls, the increase in total incentive fees year-to-date coming the cash-option that a number for in during the fiscal year.

We view these results as refining and not indicative of the normalized relative to our revenue. Let me now turn to some additional detail on our unrealized balance. The balance was down 11% from the prior year period, largely due to market valuations and having recognized $156.1 million of incentive fee during the last 12 months. The annualized carry balance outstanding was just under $1 billion. Moving to expenses. Total expenses increased $81.5 million compared with the prior year period. Total compensation and benefits increased by $64.2 million, driven primarily by compensation associated with the increase in incentive fees as well as continued headcount growth in the period. G&A expenses for the period increased $17.3 million, driven primarily by revenue-related expenses, such as third-party commissions and fund expenses as well as travel and contract expenses, which were very limited during COVID.

Our fee-related earnings were up 11% on a year-to-date basis relative to the prior year period as a result of the management fee and AUM growth earlier. I'll wrap up here with some commentary on our balance sheet. Our largest assets continue 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 for continued growth, and we'll continue to invest our balance sheet capital alongside our clients. Additionally, during the quarter, we made an adjustment to the carrying value of one of our strategic balance sheet investments, investments. The adjustment is reflective of current market comp -- public market comps and broader macroeconomic environment.

This, along with the market of one of our strategic technology investment, resulted in a $28 million impact on our income statement for the quarter. Lastly, in regard to liabilities, we continue to be . And with that, we thank you for joining the call and are happy to open it up for questions.

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