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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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from Michael Cyprys from Morgan Stanley. Please go ahead.

Michael Cyprys: Hi, good morning. Thanks for taking the question. I wanted to ask about the new tokenization strategic relationship that you have. I think you had called that with Libre. Maybe you could just elaborate on that. And maybe if you can update us on some of the prior tokenization partnerships that you have to Securitize and ADDX over in Asia I think it was. Just curious what lessons learned you take away from those relationships and how that informs your view on how you see the market developing for tokenized private market funds?

Erik Hirsch: Thanks, Mike. It’s Erik. I’ll take that. I think we’re clearly at the very beginning of what we think is going to be a journey. How long that journey goes, I think, is a question mark. And this really goes to what is going to be the adoption of this. In my sort of 30 years in this industry, you don’t find a lot of things that are better for both the fund manager and the investor. Tokenization is one of those things. It is truly better, faster, cheaper. And so, we are big believers in the technology. We’re believers in increasing and easing the access into these products for both retail investors and, frankly, institutional investors. And so, what you’re seeing us do is that it’s hard to know today who’s going to be a winner.

I don’t suspect it’s going to be one winner. And so we’re building a set of strategic relationships around the globe to make sure that we are covering different kinds of exchanges in different locales, because the regulatory markets for each of those is different. What we have experienced so far is flows. We have been receiving capital from the variety of these different partnerships coming through the token channel. Has it been massively significant amounts of capital? It has not. But I think our costs around it are modest, and our strategic investments, we believe, are panning out well. And so, I think it’s telling us that the customers are there and that they need to continue to be educated and awareness continues — needs to continue to rise, and we think all those things are happening.

And we see ourselves as a very, very clear leader in the space. I think we believe we’ve got more of these strategic relationships than anybody else out there and a variety of products now sitting in these various channels.

Michael Cyprys: Great. Thanks. And just a follow-up question around new customers coming to Hamilton Lane. You mentioned about 80% of the SMA contributions are from existing customers, that even as the installed base continues to grow, this is suggesting that you’re still finding meaningful opportunity to bring new customers to the firm. So maybe you could just elaborate on the opportunities that you see in the marketplace that — where you’re winning new customers coming. Maybe you can elaborate on these folks that are new the asset class or are these folks that are already invested but need a little bit more assistance? Maybe you can just help flesh that out.

Erik Hirsch: Sure, Mike. Erik. I’ll stick with that. So I think it’s a combination, as you noted. We are continuing to see both investors that are brand new to the asset class. And again, in the SMA business, we’re talking institutional investors. So, as we kind of travel around the globe, as we continue to geographically expand, we are absolutely seeing and meeting with institutional investors who have yet to embark on their private equity journey, and we are there and ready and able to assist them. The other source of that 20% is us taking clients away from competitors. So, there’s also an aspect here of us positioning ourselves as a better service provider versus their current alternative, and we are then sort of taking clients away from another service provider. So it’s really the combination of those two pieces that’s really fueling that 20%.

Michael Cyprys: Great. Thanks.

Operator: Thank you. The next question comes from Ken Worthington from JPMorgan. Please go ahead.

Ken Worthington: Hi. Good morning. So first on margin. So FRE margin declined in 3Q. You’re still guiding to 42%, 43% FRE margins for the year, which suggests that 4Q margins has to pick way up, suggests comp is going to pull way back, all else being equal from third quarter levels. Do I have all this right? Am I putting all these pieces together sort of correctly?

Erik Hirsch: Sure, Ken. Erik. So, I think as we said on the last earnings call, due to the sort of significant amount of retro fees and the fact that we have visibility, we opted to do what we’ve done historically, which is accrued compensation, and we’re talking about variable compensation, on a steady basis throughout the year. Managing to an ultimate margin, which is in line with what we have been sort of setting expectations around. That’s what we did through this quarter. And obviously, the result of less — lower retro fees, again, because we pushed some of the closings out into the subsequent quarter, resulted in what looks like today, artificially inflated compensation ratios. Once we get to the next quarter, our view is that compensation ratios are going to remain in line with what they’ve been historically and you’re going to see margins in line with what we posted for the first two quarters of the year.

Ken Worthington: Okay. Great. Thank you. And then I guess, next, I would love to dig into distributions in the SMA business. So, in 2020 and ’21, the pace of SMA distributions really jumped, I think at the time you mentioned there was some recycling of capital, which impacted that pace. And then in ’22 and ’23, that piece of distributions came way down. So as we think about from here and going forward, maybe first, what are the factors that really go into this pace of distributions? I assume it’s part contract timing, part realizations. And as we look to this calendar year, how do we see those kind of pieces fitting together? And does — I don’t know, the pace of realizations kind of stay at these levels? Does it go up because the market is better and there’s more deal activity? I don’t know. There’s a whole bunch of moving pieces. Just if you could help us think about the next four quarters.

Erik Hirsch: Sure, Ken. Erik. So what you saw a couple of years ago was really the impact of COVID. And as we had discussed then, it did a couple of things. That market environment changed dramatically and two things occurred. One, investment pacing increased significantly, and distributions increased significantly. We’re now in a market environment where hold periods are extending out, distribution activity is coming down. So what’s happening in the SMA is really no different than what’s happening in kind of the market at large. And you’ve seen it across a variety of the other fund managers. Hold periods are extending, exit activity is somewhat muted. And so whether that’s in specialized funds or SMAs, that’s what you’re seeing here.

To the extent, and we sort of continue to see that the public markets and the overall economy stabilizing, and investors believing that it’s kind of safe to go back in the water, our expectation is that you will see distribution activity increase. And so that will come across SMA specialized funds, and it will also come across the carried interest line.

Ken Worthington: Great. Okay. Thank you very much.

Operator: Thank you. The next question comes from Alex Blostein from Goldman Sachs. Please go ahead.

Alex Blostein: Hey, thanks, guys. Good morning. Just maybe zooming out a little bit on the margin question, the FRE margin question, you guys are clearly investing in the business, that all makes a lot of sense. And the retail dynamic with the wirehouse has really masked some of the kind of embedded profitability in that channel. As you look out a couple of years from now, how should we think about the trajectory of FRE margins for the business as a whole relative to kind of where you’re likely to end up for your fiscal 2024?

Erik Hirsch: Sure, Alex. Erik. I think as you know, we are clearly investing for the future. So I think the way we look at margin is that, among our peer set, we’re already posting a substantially larger margin than most, if not all. And we’ve been doing that with continued double-digit growth. We see a lot of opportunity to continue to put capital back into the firm to both expand resources around institutional and retail sales, to continue that geographic footprint expansion, and to continue to invest in a variety of these technology partnerships, all of which we think are contributing to the results you’re seeing on the fundraising side today. That said, you’re seeing the fee shift occurring because higher price and also, by the way, over time, higher-margin product lines.