Hamilton Lane Inc (HLNE) 2017 Q4 法說會逐字稿

Good morning. My name is Krista and I will be your conference operator today. At this time I would like to welcome everyone to the Hamilton Lane (technical difficulty) (Operator Instructions). Now I'd like to turn the call over to Demetrius Sidberry, Head of Investor Relations. You may begin your conference, sir.

Thank you, Krista, and hello, everyone. Welcome to the first earnings call for Hamilton Lane which will focus on our fiscal 2017 results. Today I'm joined by our Chairman, Hartley Rogers; CEO, Mario Giannini; Vice Chairman, Erik Hirsch; and our CFO, Randy Stilman.

Before we jump into the actual presentation, I want to remind you that we will be making forward-looking statements based on our current expectations for our business. These statements are subject to risk and uncertainties that may cause our actual results to differ materially. For a discussion of these risks please review the risk factors included in our amended Form S1 registration statement 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 our earnings release which is available on the IR section of the Hamilton Lane website. Please note that nothing on this call represents an offer to sell or a solicitation to purchase interest in any of Hamilton Lane's funds.

Finally, our detailed financial results will be made available when we file our 10-K later this month. With that I will turn the call over to Hartley to touch on a few highlights from our earnings release.

Thank you, Demetrius, and thank you all for joining us today. Randy will touch on the detailed financial performance later in the presentation, but we wanted to begin with the highlights of fiscal 2017.

We hit a new record level of management and advisory fee revenue of approximately $173 million. Revenue from management and advisory fees grew by approximately 10%. This was in part due to the continued growth in revenue from our separate account and advisory offerings and was also impacted by the progress made on the fundraiser of our fourth Secondary Fund where we recently announced its final close as our largest ever Secondary Fund.

GAAP net income was $612,000 for the stub period of less than one month following the IPO. Fiscal 2017 GAAP EPS was $0.03 and fiscal 2017 non-GAAP EPS was $0.91. Our non-GAAP EPS is based on approximately $48 million of non-GAAP net income and 52.8 million adjusted shares. We also announced earlier today that we would be paying a quarterly dividend of $0.175 per share.

We stated during the road show that it was our intention to share excess cash flow with our shareholders and we are committed to doing just that immediately. I think it is important to note that we intend to pay a steady dividend on a quarterly basis that will grow over time as earnings grow. Before I turn the call of Mario I thought I would set the stage a bit for today's call.

First, given that we are still a relatively new story to the market and a new story to some of you, we thought it would be valuable to spend some time on our business and our market. While we will certainly not dedicate this much time to business review going forward, we thought it was appropriate today.

The second point is that our business lends itself more to year-over-year or even multi-year metrics versus a quarterly focus. Given that the timing of separate account signings or client re-ups are often out of our control, we think, operate and budget with an annual focus. That is how we have always managed our business and how we plan to measure our performance going forward. You will see that approach reflected in how we discuss our financials today.

With that, I will turn the call over to our CEO, Mario Giannini.

Thanks, Hartley. At Hamilton Lane we always say that our job is to enrich the lives and safeguard the futures of our clients. It's that focus on our clients that's allowed us to build a world-class organization that has now been around for 25 years. That focus on clients and striving for excellence has also allowed us to become one of the largest allocators of capital to the private markets worldwide, today managing over $340 billion.

Private markets encompass numerous strategies and styles of investing and we deal with this complexity on behalf of our clients. We actively invest across all of the private markets including buyout, growth equity, infrastructure, credit, real estate, natural resources and venture capital. Those investments are done through the three main types of transactional environments that exist in our market today: primary fund investing; secondary transactions; and co-investments alongside leading fund managers.

Our firm's strengths are our people and our client base and those have led to our large global asset footprint and strong performance. Today it's essentially a 300 person team operating in 12 offices around the world, that global footprint in (technical difficulty) are also varied in their private markets, goals and objectives. We recognize this and it's the reason we are focused on delivering customized solutions, not simply those that are off-the-shelf.

So we are not a product or a one-size-fits-all shop. We sit across the table and ask clients what can we do for you, what do you need, what are your goals for your private markets allocation and how can we help. The fact that we provide assistance and solutions in a variety of matters means that our addressable market is the entire market.

In terms of revenue generation, as shown here on page 5, you'll see that nearly 85% of our revenue comes from our asset management solutions, those being customized separate accounts and our specialized funds. Customized separate accounts are Hamilton Lane building a fund of one for an individual client.

These structures are unique to each client and customized around a particular risk and return profile or a particular industry exposure or geographic focus. Each of these separate accounts is completely tailored to the individual needs of our clients. Our specialized funds include fund of funds, credit, secondary and co-investment offerings.

You are also seeing increased interest by (technical difficulty) with a strong distribution channel seeking a white label arrangement with us. Here Hamilton Lane is charged with investing in managing capital and our white label partner is responsible for distribution and client service.

As you will see in the numbers later, we are seeing strong demand and resulting strong growth across our asset management business. (technical difficulty) working with their in-house team. While these clients have resources, they don't have the nearly 300 people that we have or the global footprint. So they find that even though they have a strong private markets presence, partnering with us can make them better still.

The last two parts of our business are more back-office in nature. The first is our reporting offering. This is a combination of data analytics and investment monitoring. The second area is distribution management where to the extent there is actually stock distributed to investors versus cash, we are proactively managing the liquidity to optimize returns. These offerings are mission-critical for a well-run private markets program and we are continuing to see increasing demand for these services.

As we turn to page 6, you can see an overview of our current client base. We work with a wide variety of institutions around the globe, including several of the largest sovereign wealth funds, leading public pension funds, a wide range of endowments and foundations, various financial service firms and we are a leading service provider of the Taft-Hartley or union pension market throughout the US.

We are proud of the relationships that we have built, we are proud of the longevity of these relationships, and we are proud that hundreds of institutions around the globe have entrusted us with over $300 billion of capital.

With that as a backdrop for who we are and what we do, I will turn it over to our Vice Chairman, Erik Hirsch.

Thank you, Mario. We are proud of our diversified client base and we think it makes for a strong business model. We are working with long-term organizations operating in a long-term asset class.

So many of the stats shown here on page 7 are important, but they may not surprise you. (technical difficulty) one, the average term for our specialized funds where we are serving as a fund manager really mirrors that (inaudible) for the life of the vehicle. Our separate accounts also benefit from deep long-term relationships. The average age of these relationships is approximately 7 years.

Now, given we continue to add new separate accounts, what that stat tells you is that we have a number of separate account relationships that date back as many as 15 years or more. And not only is the relationship long-term, it is very sticky. For the past four fiscal years there has been no turnover in our separate account revenue clients, zero.

I'm not suggesting that we will never have any client churn, but it does clearly speak to the service model, the relationships and the importance of us to our clients as a solution provider. And these clients think about this relationship in a multiple capital allocation scenario, tranches in other words.

As the first tranche of capital gets deployed they then follow that with a re-up into a second tranche. The stats here are compelling. For those clients who have seen us successfully deploy that first tranche, approximately 80% of them have re-upped for a second. And not only have they re-upped once, but on average that client base has re-upped approximately six times.

If you think about the diversification in the business, you can see on the left hand side of page 7 the clients by type and you can very clearly see the lack of any client concentration. But there is also an element here of clients having a multi-pronged relationship with Hamilton Lane.

Over 40% of our clients have multiple products or services with us. They could be multiple AUM relationships or even a combination of AUA and AUM. Across our top 20 clients, 95% of them have a multi-product or multi-service relationship with the firm.

As Hartley said at the beginning of the call, our business is not one that lends itself to quarterly trends. Page 8 shows the main driver of that dynamic. It shows the macro reality our clients live with every day. Assets are growing, but a real liability gap exists and (technical difficulty) investors are struggling to hit or maintain their target rates of return.

This is simply not a quarterly trend for years to come. For us this is a strong wind at our back as this growth (technical difficulty) well into the future as the chart shows. And this is not accounting for the new sources of demand that are coming (technical difficulty) online, high net worth individuals, additional sovereign wealth funds and at some point I think inevitably the retail channel.

So you see this rise of assets and you see this return struggle and the result of that is what you see on the bottom of page 8, which is more and more money flowing into the private markets. And data shows very clearly the private markets have been a good solution provider.

The chart on the bottom of the page shows a 20-year basis private equity has significantly outperformed other asset classes. So too has our track record. This is not just from an absolute return standpoint but also on a risk-adjusted basis. Private equity continues to deliver and the research out there shows it is expected to continue to do so.

If page 8 clearly showed you the macro reality, page 9 now shows the reality inside the private market asset class. On a positive note, for investors there are more choices than ever before, more managers, more strategies, more geographies. All of this leads to more ability to customize and tailor portfolios to meet specific risk return needs of our clients. This assumes of course that you have the deal flow, the data, the access and the resources.

We do and our clients recognize this and this increased complexity is a key reason why we exist and why as a firm we are growing. Before we go into some financial highlights, let me sum up what we believe is the Hamilton Lane story. Our approach is simple: hire great people, put them in the right places around the globe, work closely with our clients to provide customized solutions and then deliver results. This has resulted in a Company with a market-leading footprint.

Now you add to that the macro tailwinds we spoke about: investors under allocated, struggling to hit their return targets, looking and expecting to continue adding more private assets to their portfolio. This, paired with an increasingly complex and growing market environment, makes us a necessary partner for our clients. The result of all of this is our continued growth in number of clients, our stable margins and our strong expected earnings growth.

Slide 12 shows are key business drivers: asset footprint expansion, a growing investable opportunity set, increasing allocation to the private markets, and a growing interest in and reliance on data.

As you see on page 13, we offer multiple solutions to the market, allowing us to serve clients of all types. Some of those services result from us as a manager of assets, AUM. And others result from us advising on those assets, AUA. From a revenue perspective the AUM portion accounts for over 80% of total revenue. But the AUA has always and will always be important to us because it denotes size, scale and real market advantages.

The chart here shows the growth of both going back to 2005 at over a 20% CAGR. You can also clearly see that our AUM has never gone down, a result of strong growth and the lack of outflows that are prevalent in other asset classes but not here.

We believe that AUA will continue to move upwards as we grow and add more clients but, given the advised nature, the numbers can fluctuate a bit year-to-year. Due to the fixed fee nature of that AUA business, movements in AUA assets often have little to no bearing on our revenue.

Page 14 shows that our fee earning AUM has grown at a 14% CAGR going back to 2013. The components are broken out here between separate accounts and specialized funds. On the top of the page we are also clearly showing a remarkably stable fee rate. Despite a world where there's certainly some fee pressure, our ability to deliver compelling investment results and world-class service has afforded us the ability to keep these rates consistent, as shown here, over the past four fiscal years.

As our capital base has expanded, so too has our investment opportunity set, as shown here on page 15. This is the result of a growing market and asset footprint, a broad geographic presence and an expanding team. Deal flow remains strong across all of the activities: primaries, secondaries and co-investments.

We are showing you each of them here on page 15 and this is simply a year in review. The number of opportunities are across the top. This is what we are sourcing, again whether a fund, a co-investment or a secondary deal, and on the bottom you can see the investment rate. To be clear, this rate reflects all of our investments made in each category.

Now given our focus on bespoke solutions, the individual client experience is an even smaller subset. This illustrates our firm's mindset when it comes to investing: be a lot, do a little.

Page 16 shows where we've deployed capital. Starting on the top left side of the page we show strategy. This reflects both the market opportunity and our investment perspective. Buyouts remain the largest portion. Credit is growing reflecting both a growing market opportunity and a rising interest among our clients.

On the top right side of the page you can see a breakout by size of funds in which we are investing. It is clear from this chart that the bulk of our activity is at the small and mid end of the market. This is a key value proposition for our clients: allow Hamilton Lane to help you find and, equally important, access a very niche and fragmented market segment.

Lastly, by geography, we are certainly heavily weighted towards North America. Today North America accounts for nearly 80% of all of our capital deployed followed by Western Europe then Asia and rest of world. This is again a combination of market opportunity and our market perspective on the relative attractiveness of these various regions.

Now let's switch gears to cover a topic rarely discussed in our industry, data. Despite the fact that the industry is responsible for about $5 trillion or $6 trillion of capital and has been around for 40 plus years, good data remains hard to find. There is not a benchmark to which all investors refer. There is simply no easy source of information on the industry that is both universally used and accepted.

One of Hamilton Lane's strengths is that we do have a tremendous amount of data. You can see those statistics here: 40 vintage years, over $3 trillion of fund commitments covering 3,300 funds and 50,000 portfolio companies. Put that in context with an MSDI or a Capital IQ and you can see the power of that kind of data in the private markets.

We use it for our clients, better benchmarks, better market intelligence, better manager selection. We see the data as making us better, smarter and more nimble investors. But you can also see across the bottom of this page that we are increasingly working with technology companies as strategic partners to develop products around that data and to monetize certain aspects of it.

With that I will turn it over to Randy Stilman, our CFO, to go over the financials.

Thank you, Erik, and good morning. One of the messages that we gave the market while on our IPO road show was that our business model is simple. We said this because our revenue was predominantly tied to management and advisory fees and we have a straightforward balance sheet.

You will see that reflected in the presentation of our financials. Management and advisory fees continued on a strong growth trajectory with approximately 10% year-over-year growth. That trend was even stronger on a quarter-over-quarter basis as we saw an 18% growth in management and advisory fees in the fourth quarter of fiscal 2017 versus the fourth quarter of fiscal 2016. This increase was driven by growth in most of our services and products including specialized funds, customized separate accounts and our advisory services.

Client appetites for the private markets remain strong, which was evidenced by our ability to add several new noteworthy separate account clients and raise our largest Secondary Fund to date with that fund coming in well above target.

The only area where fees were down year over year was distribution management, which is the smallest component of our management fee revenue at 2%. This business is directly tied to the volume of venture backed IPOs and thus can be cyclical. Our total revenue was essentially flat year over year as a result of lower incentive fee revenue, also called carried interest, in fiscal 2017 versus fiscal 2016.

It is important to note that fiscal 2016 was our record year for carried dollars received as we crossed the hurdle on one of our large secondary funds. Equally important to note, incentive fees have historically represented only a very small part of our revenue. To put a number to it, over the last five fiscal years incentive fees have averaged only 7% of our total revenue.

We also see incentive fee revenue becoming more stable over time due to the very diversified nature of our carry sources. Our current unrealized carry of $234 million is comprised of over 3,000 underlying companies across 40 unique funds and client accounts. That level of diversification should lend itself to more stability over time.

Moving to slide 20, our earnings profile has exhibited similar levels of growth to our core business with adjusted EBITDA growing in line with management and advisory fee revenue over the past several years. You can see on this page that our fee-related earnings have also grown at a similar rate with an 11% CAGR since 2013.

The more modest year-over-year fee-related earnings growth that you see was primarily attributable to incremental expenses incurred in connection with our IPO. In addition to IPO expenses that were one time in nature, we have added more resources to support our growth, service our clients and meet our obligations as a public Company. This includes adding experienced professionals in finance, accounting, tax and legal functional areas.

Turning to the balance sheet, you can see that growth in AUM is also resulting in increasing capital commitments alongside our clients. At this stage, much of our GP commitments are self-funded, meaning that the GP commitments have not been a use of cash since distributions have funded new contributions. Also worth highlighting is our modest amount of leverage. You will recall that we used the vast majority of IPO proceeds to pay down our existing term loan.

With that I will turn the call back over to Hartley to wrap things up.

Thank you, Randy. As we wrap up the prepared remarks I want to cover some important strategic updates. As many of you know, we became a publicly traded Company approximately three months ago. For us becoming public was not only an exciting and rewarding milestone, it also helped further solidify our brand as part of a subsector in the asset management sphere that we believe has a tremendous runway in front of it.

Our goal in becoming a public Company was not only to enhance our brand but also to maintain our culture and independent decision-making when it comes to our clients. That was paramount and the early results of those efforts have been positive. From our perspective, the offering was very successful.

We raised nearly $220 million in an offering that was meaningfully oversubscribed. We floated approximately 25% of the Company, welcoming a new group of shareholders that we believe any organization would be proud to call new partners. As Randy mentioned, with the proceeds we were able to reduce our debt levels from what we viewed as a modest amount of leverage to an even more modest debt to EBITDA level at around 1 time.

We are also happy to say that the experience for shareholders has been positive with the shares trading up since the offering. Switching gears to our team and developments on that front, we announced a couple of weeks ago that Leslie Varon and David Berkman have joined as independent Board members. They both bring to us a wealth of knowledge based on years of experience across multiple industries with various leadership roles.

Prior to her retirement in 2017, Leslie served as Chief Financial Officer at Xerox Corporation. During her nearly 40-year career at Xerox she served in other leadership roles, including Vice President of Investor Relations and Vice President of Finance and Corporate Controller.

Leslie's addition to the Board expands on Randy's earlier comment regarding us bolstering our resources to meet our needs as a public Company, particularly in the areas of finance and accounting. Leslie's extensive experience in finance and accounting throughout her career made her an ideal candidate for our Board and, more specifically, to chair our audit committee.

David joins us from Associated Partners where he serves as managing partner. As a private investor for over 17 years, David brings with him a deep knowledge of the private markets as well as robust public company Board experience. We are excited to have Leslie and David join our Board and believe that it further strengthens the strategic leadership of the firm.

As we wrap up, I have two exciting developments to highlight. While neither of these are going to materially impact the business today, we believe each of them is about best positioning the firm for the future. The first is a new office opening. We are furthering our already deep geographic presence with an addition of an office in Sydney, Australia. Like our other 12 offices, this is about being closer to our clients and more active in unique deal flow.

The second development is a recently announced partnership with Ipreo. Ipreo is a leading provider of services in connection to the global capital markets. We are already in partnership with them through our strategic relationship around iLevel, a leading private market software offering.

We are simply expanding a relationship, focusing on more efficiently capturing and processing data through a newly created entity called Private Market Connect or PMC. Again, both the new office and Private Market Connect developments are about continuing to position the firm for the future.

With that, thank you to each of you for taking the time and joining us and we are now happy to open up to questions.

(Operator Instructions). Ken Worthington, JPMorgan.

Hi, good morning. First, I wanted to ask on the customized separate accounts, they saw both big inflows and then what I guess are big distributions or transfers. Can you give us any color there and then maybe talk about how the positives and the negatives will flow through to the fee rate. Thank you.

Ken, thanks for the question; this is Erik. I will address the first part and then turn it over to Randy for the second part. I think when you look at the inflows in the distribution, I think both from our end would be in line with expectations. Fundraising has been good and so we've been the beneficiary of that with a number of new separate accounts.

The distribution levels have also been relatively high, again I think also reflecting a good market environment where you are seeing fund managers continuing to harvest assets at a pretty robust pace.

And so, our view is that so long as the markets stay at this level we think our fundraising pipeline looks strong and compelling and so we see a good number of new separate accounts continuing to move in our direction, though we also continue to see distributions coming from the underlying fund managers. For the impact I will turn over to Randy.

Hi, Ken, it's Randy. For the separate accounts, we expect over time that the separate account revenue will approximate what it has in the past. Historically we have increased separate account revenues by about 10% on a CAGR basis. And as we add new separate accounts usually they start at either fees based on committed or fees based on net invested, and that will flow through directly to the income statement.

Okay, great. Thank you. And then outlook for compensation, I think excluding the [1.9] of IPO charges this quarter total comp would have been around $17 million. Is that a good base off which to grow? And is there any reason for step functions up or down in the next quarter or two? Thank you.

It's Randy again, Ken. We believe that it is a good number to base growth on. We are looking at about 12% to 13% growth in our compensation. As I said, and Hartley also mentioned, we have added additional professionals related to the IPO in the areas of SEC reporting, tax director, legal and that explains some of the increase that we are going to see in the next year or so.

Okay, thank you very much.

Michael Cyprys, Morgan Stanley.

Hi, good morning, thanks for taking the question. Just on fundraising, can you talk a little bit about co-mingled funds, what we can expect you to raise in the next couple of quarters there? And just any color on the separate account side just in terms of the flows coming in, degree from new clients versus existing.

It sounded like half the re-ups are pretty strong there. Any additional color there? And as you look out over the next quarters, what is your sense in terms of separate account assets coming in from new clients versus existing and such?

Michael, it's Erik thanks for the question. Let me start on the co-mingled and then turn over to Mario for some color context around what's happening in the separate account market in general. On the co-mingled, you saw the announcement last week, we mentioned it here -- Secondary Fund IV had its closing, $1.9 billion, our largest Secondary Fund raise to date.

Not only an increase over what we had the initial target set at, but obviously a significant increase over what the prior fund was. We are close to announcing the final close of our 2017 Strategic Opportunities Fund. That will be forthcoming. That has also progressed in a similar fashion with those numbers coming in again higher than what the prior fund vehicle looked like.

The new co-mingled launches for us, one is our Fund of Funds X. That is in early stages where we are just beginning to hit the road for that and that we will be working on that over the coming several months.

The other co-mingled product that's also coming online as we are just again in the early days of raising, but if you've watched our co-investment progress, you know that we are due up for the subsequent Co-investment Fund IV. That is also hitting the market now and again fundraising will take several months as we continue to work through that.

So pipeline I think we've had good results on what we've been raising and so we will continue to do that. The Strategic Opportunities product you know is an annual raise so, as I said, that was the 2017 number which we will announce shortly and then we will again think about that product again for 2018. With that I will turn it over to Mario to give some color context around the separate accounts.

Hey, Michael, it's Mario. On the separate accounts, I'd break your question into two parts. We've talked before that a significant growth in our separate account businesses just from existing clients and we continue to see that, as Erik had discussed in his conversation.

The clients continue to want to put more money to work and, as distributions come in, they need more capital committed in order to reach their allocation targets. So we would say that continues at sort of the historical rates we've seen.

In terms of new clients, it's across the board. It is clients that have traditionally used fund of funds in order to gain access to private markets that are now converting to separate accounts; and it's new entrants across the world really that are looking at private markets and saying, I'm going to use a separate account to access that in order to tailor the specific risk/reward, tailor the geography, the currency they are interested in.

So, I would say there is no single driver on the new separate account business, but it's just a continued interest around both existing investors moving to a separate account structure and new investors using that as their entree into the private markets.

Great, thanks for the color there. And just to follow-up a separate topic on deployment given that you are one of the largest allocators of private market capital in the world. Could you share with us just broadly how you are thinking about deploying that capital at this point in the cycle? Any color in terms of geographies or particular subsets within the private markets that you are finding more attractive today?

Yes, thanks, it's Erik, Michael. So if you look back on the slide deck, on page 15 we had covered that the incoming, we think about this as a funnel type of orientation. And so, the questions for us are really twofold. One is how big is that funnel at the top?

And the answer is we continue to see increasing amounts of opportunity across primary, secondaries and co-investments. I think that's really the result of two things. One, I think the market is still in an expansion mode. We showed the picture earlier of just -- there's just simply more participants at the fund manager level covering more strategies and more geographies.

The second driver of that increase in deal flow is us. As we add new clients, as we open up new offices, as we add more resources internally, all of that results in us being able to see, generate, track down and identify more investment opportunities.

What you see across the bottom of page 15 is our hit rate and that continues to be actually very stable. So we are still investing in a very, very small portion, again, measured in many cases as single percentage items of the total. And again, on a client basis that's even smaller.

So that dynamic for us feels very good. I go back to what I said earlier: see a lot, do a little. In terms of going to your next point on what are we seeing as more or less interesting, North America for us has continued to be a bit of an overweight. It's again, the result of the market here is bigger, but it's also influenced by our view of relative attractiveness.

And so that has still been and has accounted for the material majority of our capital again as we showed on page 16. I would say pockets of interest for us, the credit area mostly around performing credit, not nonperforming credit, has certainly seen a rise of allocation. And we are starting to see a bit more of a resurgence around real assets, natural resources and infrastructure all of that, again, attracting a bit more money.

For us at the size level, again back on 16, the majority of our money has always flowed, and I suspect will continue to flow, to the small and midsize fund manager. That is a key value proposition for our clients, finding and identifying those much harder to find and access fund managers.

Great, thanks for a much.

Alex Blostein, Goldman Sachs.

Hi, good morning, this is Daniel Jacoby filling in for Alex. On the recently announced joint venture with Ipreo, can you guys help us think about the revenue opportunity there and perhaps the timing as well?

It's Erik. Let me start on that one. It's obviously early days for us there, so we just made the announcement. I think what you are seeing for us is really a two-pronged attack on this. One is we certainly see a need across the industry to better gather and process data. And the joint venture is really designed to do that, bring our personnel expertise and domain market expertise and combine that with the technology expertise from the Ipreo side.

What you see out of the gate is really a bit of a shifting of expense as we are moving some of our current employees off of Hamilton Lane and into PMC and with that also comes some additional expenses as we are in grow mode. What we believe will happen going forward, and again this is all a to be determined as we see how the market responds to this new entity, is that we believe that PMC will begin adding to its business line.

The results of that really from our end should be what we think of as initially as more of a reduction of cost as opposed to brand-new revenue opportunity. But again, early days here. I think this will certainly be a topic that we will be talking about more going forward.

Got it. That's helpful. Thank you. And then just another one -- you've touched on some of the new asset classes or other asset classes besides traditional buyout that you guys are getting into. Can you provide us with an update on expansion into real estate and infrastructure which has currently been pretty topical?

Sure, Daniel, it's Mario. It has been topical. We've certainly seen some headlines around infrastructure. And what we are seeing, I mean we already have a robust real estate business, real assets, and we will continue to build that out.

We expect that we will continue to find people to help us in that area and grow our team. Largely because, as you note, on the client base, as they look to build their private markets portfolios across all of the different areas, whether it is equity, whether it is debt, whether it is real assets, the attraction of infrastructure, particularly if it's combined with any government action around making that an even more attractive area to invest, I think it will only grow.

So, as we look at those areas, we have a more client interest and we expect with the development of some of these discussions and conversations that you see in the press around infrastructure dollars being committed and being allocated, that that will only increase.

Thank you, that's helpful.

Robert Lee, KBW.

Thanks, good morning and congratulations on your first earnings call. Maybe talk a little bit about incentives. You have a fairly substantial amount of accrued carry, and understanding that you use -- your products use I guess predominantly a European waterfall.

But can you maybe give us some insight or color as to what our expectations be for more meaningful amounts of that accrual to start flowing through to earnings? Is that kind of your expectations over the coming quarters? I know it's hard to time, but how should we think of that?

Robert, it's Erik. Thanks for the question. I think you heard Randy allude to it in his comments. I think what we are seeing is, one, it's a growing amount of unrealized carry which we think is good. Two, we think it's also attractive because it's growing in its inherent diversification.

So we gave the statistics, today there's over 40 carry generative vehicles, the larger of those obviously are the co-mingled, co-investment secondary. But there's an increasing number of separate accounts that have transactional components that are also feeding into that. The other thing that we think is attractive is the number of underlying companies that underpin that sort of $200-million-plus of unrealized carry and that is now over 3,000 individual companies.

As you know, our ability to control the timing of any of this ranges from not at all to extremely limited. So given that, I think we remain hesitant to try to provide guidance around this on a quarterly basis because the timing is not within our control.

What we do is we try to apply some of our industry models and looking at the aging of those assets and apply that to what we see as our unrealized carry number. What that tells us is that we expect to see more material flows of that, as we mentioned during the road show, to begin more in earnest in 2019, 2020.

But over time it's our hope and expectation that, again, given the diversified nature of the carry that this, while it's a small part of our overall revenue, will become much more of a recurring part of that revenue. And our belief is, again, given that diversification it becomes a little bit less episodic.

Great. And maybe going back to the customized separate accounts, I understand you don't want to, nor should you, get into the forecasting game of here's what's going to happen next quarter or whatnot.

But as we think about -- for lack of a better way of putting it, say the pipeline, is there any way to put some type of -- or quantify in some way, gee, there's X dollars of signed commitments, you don't know when they will fund or that we should be thinking about?

Or I guess when you talk about high level client engagement and demand it's also maybe if there's any kind of, I don't know, client metrics, 500 separate accounts, whatever it may be, that -- just to kind of help us get maybe a little bit more quantitative feel for how the pipeline is developing?

Because I guess overall given you based your fee paying assets or customized separate account assets, you more or less have to do about $1.5 billion to $2 billion a year to keep the 10% rate going.

Hey, Robert, it's Mario. Hard, almost impossible to quantify. The numbers you talk about in terms of even saying the amount of AUM you need to do that because, as Randy pointed out, the fee depends on commitments, NAV. I think it's just very hard to have a set of metrics that quantify it that way.

What makes the separate account business both very appealing but very hard to quantify in that way is that it is so customized and you have first prospects and existing clients coming in with very different demands and needs and objectives around their private markets. You are now seeing for example a trend where the private market separate account has a debt component.

You didn't really see that five years ago. So how does that change some of the way you think about that? So I'd love to give you an answer. I'd love to have an answer, but it's just very hard to quantify it other than to say that the pipeline is robust and you look at, as I said before, the different range of types of clients, the kinds of things that they want to do and it feels very good in terms of that pipeline.

But I think it's just -- I can't give you much guidance on saying there's 100 prospects in the pipeline therefore that translates to X. Even the timing around them. we could have a prospect come in the door today and it could get finished in three months or it could get finished in a year. It really varies in terms of the discussions you have and what they are looking for.

Fair enough. And maybe just a quick follow-up. So with the Secondary Fund IV, the $1.9 billion well above your target -- if we think ahead to the next fiscal quarter, I guess it's fiscal Q1 2018, I guess the current quarter, is there any kind of catch-up fees that we are going to be seeing in this quarter related to that?

And if I remember correctly, this pays on commitments, not draw down. If I have that wrong please correct me. So we will see most of that and maybe any catch up flow-through in this quarter?

Hi, Rob, it's Randy. Yes, due to the close that we just had, which was approximately $400 million of commitments, in the first quarter of fiscal 2018, which ends June 30, you will see a catch-up component of approximately $4 million to $4.5 million.

And yes, Rob, it's Erik, that is paid on committed capital, not invested capital.

Great. And I appreciate your patience with all my questions. One last one on the Secondary. It's really just kind of more of an industry question, meaning that you had a big capital raise this year, it feels like there has been a lot of your peers raising secondary funds. How do you think of that in terms of the impact on returns?

I mean, have your clients' return expectations for the current vintage fund -- are your expectations maybe diminished somewhat versus some older vintage funds just as where we are in the cycle and there's more competition for them? Obviously it hasn't diminished demand, so any sense of if you've seen a change in the kind of return expectations for that asset class?

Rob, it's Mario. I would say just in general return expectations have been trending down over the last few years. I don't think this year is any -- I don't think anyone has said oh, this year return expectations have to come down because of any of the factors you cited. I just think there's a general feeling that in a lower rate environment returns are likely to come down.

People still find the returns very attractive on the private markets in general and secondaries specifically. I think with respect to the secondary market, which I think is part of your question, there is a tremendous amount of capital out there.

And interestingly there's a tremendous amount of supply, if you will, because the market becomes a little more efficient as sellers realize that there is a good market to sell your assets into.

So, I would say while that market is expensive there are still areas of opportunity. I think for us the platform provides, as we talked about before, many of those opportunities. So we feel in a reasonably good position around that. I would also say, like with any other manager like us, you want dry powder as the market turns.

And so part of the attraction of raising the capital is if it you think the market is headed down in the next year or two, then it's important to have that dry powder to take advantage of. So, it's a mix. We certainly see opportunities today, but if the market went down then I think -- we talked about it before, it's kind of ghoulish -- but you'd be a little more excited and say maybe we can buy assets cheaper.

Fair enough. That's great. Thank you so much for your patience with my questions.

Chris Harris, Wells Fargo.

Thank you. What are the economics like on some of these newly closed funds versus some of the legacy funds you guys have? And I guess what I'm trying to ask here, if there is material differences between the new funds you guys are raising versus funds that maybe you raised five, six, seven years ago?

Chris, it's Mario. No, there's no material difference. In fact in one of them in the Secondary Fund the rates are a little bit higher, but marginally. So as we look at the fees on those, I would say almost across the board they are basically the same on the co-mingled and specialized funds.

Got you, okay. And then on your dividend policy, you guys are just below a 70% payout ratio in the quarter. I know the policy is that of stable dividend and hopefully a growing dividend. But if we think about the dividend in terms of payout, is 70% a fairly reasonable target to be thinking about? I know excluding incentive fees which can be lumpy -- or could the payout ratio also increase over time from here?

Chris, it's Hartley Rogers. I think what we said on our road show and I've said so far that our target payout ratio is really something north of 50%. As you've heard, we continue to make investments in our business.

We have a lot of exciting new initiatives. We have a lot of areas in which we can grow and we want to make sure that we are keeping enough cash around to be able to fund those. We do intend to have a smooth progression, that's our goal over time.

And so of course we spend a lot of time talking about the possibility for incentive fees coming in over the next several years. And that obviously is something that could cause the dividend to increase as well. But I'm not comfortable attaching a particular percentage to it other than to say that we anticipate it will be north of 50%.

Got you. Okay, thank you.

(Operator Instructions). We have no further questions at this time. I will turn the call back over to the presenters.

Thank you, Krista, and thanks, everyone, for joining us today. Please feel free to reach out to me if you have any other questions. Have a great day.

This concludes today's conference call. You may now disconnect.