Hamilton Lane(US:HLNE)2020-08-04 20:19PART I - FINANCIAL INFORMATION This section provides the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the quarter ended June 30, 2020 Financial Statements This section presents the unaudited condensed consolidated financial statements for the quarterly period ended June 30, 2020, including balance sheets, income statements, and cash flows, along with detailed notes on accounting policies and financial details Condensed Consolidated Balance Sheets Total assets increased to $526.5 million from $473.5 million, driven by higher cash and deferred income taxes, while total liabilities rose to $293.9 million primarily due to an increase in payable to related parties Condensed Consolidated Balance Sheets (in thousands) | | June 30, 2020 | March 31, 2020 | | :--- | :--- | :--- | | Total assets | $ 526,507 | $ 473,529 | | Cash and cash equivalents | $ 71,091 | $ 50,124 | | Investments | $ 194,864 | $ 207,747 | | Deferred income taxes | $ 191,375 | $ 137,941 | | Total liabilities | $ 293,896 | $ 236,128 | | Payable to related parties pursuant to tax receivable agreement | $ 143,370 | $ 98,956 | | Debt | $ 74,538 | $ 74,524 | | Total equity | $ 232,611 | $ 237,401 | Condensed Consolidated Statements of Income Total revenues increased to $69.7 million, but a significant $21.2 million equity loss from investees led to a sharp decline in net income attributable to Hamilton Lane Incorporated to $3.2 million, with diluted EPS falling to $0.11 Condensed Consolidated Statements of Income (in thousands, except per share amounts) | | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Total revenues | $ 69,744 | $ 64,686 | | Management and advisory fees | $ 67,267 | $ 60,551 | | Incentive fees | $ 2,477 | $ 4,135 | | Total expenses | $ 40,911 | $ 37,693 | | Equity in (loss) income of investees | $ (21,203) | $ 6,213 | | Income before income taxes | $ 6,892 | $ 31,790 | | Net income | $ 4,968 | $ 27,453 | | Net income attributable to Hamilton Lane Incorporated | $ 3,246 | $ 11,381 | | Diluted earnings per share of Class A common stock | $ 0.11 | $ 0.42 | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities increased to $47.5 million, while net cash used in investing activities decreased to $6.1 million, and net cash used in financing activities rose to $20.3 million due to a registered offering Condensed Consolidated Statements of Cash Flows (in thousands) | | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $ 47,455 | $ 33,402 | | Net cash used in investing activities | $ (6,074) | $ (10,488) | | Net cash used in financing activities | $ (20,343) | $ (13,135) | | Increase in cash, cash equivalents, and restricted cash | $ 21,028 | $ 9,783 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, revenue breakdown, investments, and equity transactions, including a June 2020 registered offering and $143.5 million in unfunded commitments - In June 2020, the company completed a registered offering of 2,995,757 shares of Class A common stock. Net proceeds of approximately $205 million were used to settle exchanges of HLA units by certain members6293 Revenue by Product Offering (Three Months Ended June 30, 2020, in thousands) | Revenue Source | Amount (in thousands) | | :--- | :--- | | Specialized funds | $ 32,231 | | Customized separate accounts | $ 23,515 | | Advisory | $ 6,765 | | Other Management & Advisory Fees | $ 4,756 | | Total management and advisory fees | $ 67,267 | | Total incentive fees | $ 2,477 | - As of June 30, 2020, the company had unrecognized carried interest subject to contingencies amounting to $310.9 million, net of amounts attributable to non-controlling interests77 - The company's aggregate unfunded commitment to its Partnerships was $143.5 million as of June 30, 202079 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting an 8% revenue growth to $69.7 million, a significant impact from a $21.2 million equity loss in investees, and growth in fee-earning AUM to $39.0 billion Business Overview Hamilton Lane is a global private markets investment solutions provider offering Customized Separate Accounts, Specialized Funds, and Advisory Services to a diverse institutional client base - The company's primary business offerings include: - Customized Separate Accounts: Discretionary portfolios with approximately $54 billion in AUM - Specialized Funds: Primary, secondary, and direct/co-investment funds with approximately $14 billion in AUM - Advisory Services: Investment advisory for clients with approximately $447 billion in AUA90 Trends Affecting Our Business The COVID-19 pandemic is the primary trend affecting the business, causing market volatility, potential decreases in incentive fees, and fundraising challenges, despite the company maintaining adequate liquidity - The COVID-19 pandemic has impacted the business in several ways: - Investment valuations may be adversely impacted by market volatility - Incentive fee revenue may decrease due to a more limited environment for investment exits - Fundraising and new business development may be challenged by travel restrictions and market uncertainty - The company has implemented business continuity plans and is managing operational risks associated with remote work102 Consolidated Results of Operations Total revenues increased 8% to $69.7 million, driven by management and advisory fees, but a $27.4 million negative swing in equity in investees to a loss of $21.2 million significantly reduced income before taxes Revenue Comparison (in thousands) | | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Total management and advisory fees | $ 67,267 | $ 60,551 | | Specialized funds | $ 32,231 | $ 26,959 | | Customized separate accounts | $ 23,515 | $ 21,963 | | Total incentive fees | $ 2,477 | $ 4,135 | | Total revenues | $ 69,744 | $ 64,686 | - Total expenses increased by $3.2 million (9%) year-over-year, primarily due to a $6.2 million (26%) increase in compensation and benefits, partially offset by a $3.0 million decrease in general, administrative, and other expenses129130131 Equity in (Loss) Income of Investees (in thousands) | | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Primary funds | $ (3,006) | $ 700 | | Direct/co-investment funds | $ (9,527) | $ 3,654 | | Secondary funds | $ (2,162) | $ 641 | | Customized separate accounts | $ (6,027) | $ 1,369 | | Total | $ (21,203) | $ 6,213 | Fee-Earning AUM Fee-earning Assets Under Management (AUM) increased by $0.3 billion to $39.0 billion, driven by new commitments to specialized funds, partially offset by distributions exceeding contributions in customized separate accounts Fee-Earning AUM Rollforward (in millions) | | Customized Separate Accounts | Specialized Funds | Total | | :--- | :--- | :--- | :--- | | Balance, beginning of period | $ 24,545 | $ 14,118 | $ 38,663 | | Contributions | $ 1,009 | $ 791 | $ 1,800 | | Distributions | $ (1,110) | $ (195) | $ (1,305) | | Foreign exchange, market value and other | $ (158) | $ 6 | $ (152) | | Balance, end of period | $ 24,286 | $ 14,720 | $ 39,006 | Non-GAAP Financial Measures Fee Related Earnings (FRE) increased to $27.5 million and Adjusted EBITDA rose to $31.6 million, while non-GAAP earnings per share, assuming full HLA unit conversion, decreased to $0.13 Reconciliation to Fee Related Earnings and Adjusted EBITDA (in thousands) | | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net income attributable to HLI | $ 3,246 | $ 11,381 | | Fee Related Earnings | $ 27,529 | $ 24,775 | | Adjusted EBITDA | $ 31,601 | $ 29,703 | Non-GAAP Earnings Per Share | | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Adjusted net income (in thousands) | $ 6,792 | $ 23,840 | | Adjusted shares outstanding | 53,573,570 | 53,462,608 | | Non-GAAP earnings per share | $ 0.13 | $ 0.45 | Investment Performance This section details the historical performance of the company's discretionary investment accounts through March 31, 2020, presenting realized and unrealized gross and net Internal Rates of Return (IRR) and multiples for specialized funds - The report provides detailed performance tables for specialized funds, showing metrics such as Gross IRR, Net IRR, and multiples for both realized and unrealized investments, with Co-Investment Fund III (2014 vintage) showing a realized gross IRR of 47.2% and a combined realized/unrealized gross IRR of 13.1%160162 Liquidity and Capital Resources The company maintains liquidity primarily through management fees, holding $71.1 million in cash and cash equivalents, with $75.0 million in debt outstanding and $47.5 million in net cash from operations for the quarter - As of June 30, 2020, the company had $71.1 million in cash and cash equivalents, with primary cash sources being management fees, incentive fees, and fund distributions170171 - The company has several loan agreements with First Republic Bank, including a $75 million term loan and a $75 million multi-draw term loan facility, with $75.0 million in principal debt outstanding as of June 30, 2020173174175 Cash Flow Summary (in thousands) | | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $ 47,455 | $ 33,402 | | Net cash used in investing activities | $ (6,074) | $ (10,488) | | Net cash used in financing activities | $ (20,343) | $ (13,135) | Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is tied to the fair value of investments, affecting equity in income of investees, and it faces interest rate risk where a 100 basis point increase would raise annual interest expense by $0.4 million - The company's main market risk exposure is related to its general partner investments, which can adversely affect equity in income of investees, while management fees are not significantly impacted by market value changes195 - A hypothetical 100 basis point increase in interest rates would result in an estimated $0.4 million increase in interest expense over the next 12 months on its floating-rate debt199 Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - Management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company's disclosure controls and procedures were effective as of June 30, 2020203 - There were no material changes to internal control over financial reporting during the quarter ended June 30, 2020204 PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and a list of exhibits filed with the report Legal Proceedings The company states that while it may be subject to various legal proceedings, no pending or threatened claim is expected to materially affect its consolidated financial statements - In the opinion of management, it is not probable that any pending or threatened legal proceeding would individually or in the aggregate materially affect the company's condensed consolidated financial statements207 Risk Factors The company reports no material changes from the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended March 31, 2020 - There have been no material changes from the risk factors previously disclosed in the company's 2020 Form 10-K208 Unregistered Sales of Equity Securities and Use of Proceeds During the quarter ended June 30, 2020, the company did not repurchase any shares of its Class A common stock, with the full $50 million authorization under its Stock Repurchase Program remaining available Issuer Purchases of Equity Securities (in dollars) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :--- | :--- | :--- | :--- | | April 1-30, 2020 | — | $ — | $ 50,000,000 | | May 1-31, 2020 | — | $ — | $ 50,000,000 | | June 1-30, 2020 | — | $ — | $ 50,000,000 | Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial data formatted in Inline XBRL - The exhibits filed with this report include CEO and CFO certifications (Exhibits 31.1, 31.2, 32) and financial statements in Inline XBRL format (Exhibit 101)211