Hamilton Lane Inc (HLNE) 2018 Q3 法說會逐字稿

Hello, and welcome to the Hamilton Lane Q3 Earnings Call. On the call today from the Hamilton Lane team are Hartley Rogers, Chairman; Erik Hirsch, Vice Chairman; Randy Stilman, CFO; and Demetrius Sidberry, Head of Investor Relations.

Before the Hamilton Lane team discusses the quarter results, I want to remind you that they will be making forward-looking statements based on their 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's fiscal 2017 10-K and subsequent reports the company files with the SEC. Management will also be referring to non-GAAP measures that they view as important in assessing the performance of the business. Reconciliation of those non-GAAP measures to GAAP can be found in the earnings presentation materials, which are 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 interests in any of Hamilton Lane's funds or stock. The company's detailed financial results will be made available when the Q10 -- sorry, 10-Q is filed.

Finally, for the call this morning, the Hamilton Lane team will be referencing pages in the earnings release presentation available on the Hamilton Lane IR website and shown on the webcast version of this call.

With that, I will turn the call over to Demetrius Sidberry, Head of Investor Relations.

Thank you, Jody, and thanks, everyone for joining us. Slide 3 of the presentation provides a summary of our financial performance through Q3 of fiscal 2018. Year-to-date, our revenue from management and advisory fees grew by 16% versus last year with growth in each of our offerings.

We experienced similar growth in our fee-related earnings, which increased nearly 17% year-over-year. Non-GAAP EPS year-to-date was $1.05, and this is based on nearly $56 million of adjusted net income. Year-to-date GAAP EPS of $0.21 is based on GAAP net income of approximately $4 million. For the quarter, we posted non-GAAP EPS of $0.46 and GAAP EPS of negative $0.35.

Our GAAP EPS was negatively impacted by some of the one-time items connected to U.S. tax reform. As you would expect, there are also ongoing benefits anticipated from the tax reform that we will touch on during this call.

Finally, as in the previous 3 quarters, we announced a dividend of $0.175 per share. This quarterly dividend gets us to a payout of $0.70 per share for the entire fiscal year, which is the target that we communicated on our first earnings call.

Slide 4 of the presentation highlights our asset footprint, which continues to expand. Versus the prior quarter, both our assets under management and assets under advisement grew and we reached a new high of $424 billion on our platform.

Fee-earning AUM is a key revenue driver for our business and is profiled here on Slide 5. As a reminder, our fee-earning AUM comes from our customized separate accounts and our specialized commingled funds.

For this quarter, our core growth was again driven by a combination of 3 factors: one, separate account re-ups; two, specialized fund closings during the quarter; and 3, the addition of new clients.

Finally, the fee-earning AUM growth during the quarter also reflected $300 million from the acquisition of the Portland-based Real Assets firm. While the acquisition closed in Q2, its AUM was not fully reflected in Q2.

With that summary, I will now turn the call over to our chairman, Hartley Rogers.

Thank you, Demetrius, and thanks to everyone for taking the time to join us. You may have noticed that our CEO, Mario Giannini, is not joining this call, just as I did not join last quarter's call. The reason is simple: while we are extremely focused on delivering for shareholders, we are also extremely focused on successfully running the business. To that end, you should expect that for our earnings calls, we will put forward a rotation of top management designed to best cover the topics at hand, while at the same time ensuring that we remain focused on our clients and our business.

With that said, on this, our first earnings call for calendar 2018, we want to provide a quick year-end review of 2017.

During calendar 2017, we added impressive names to our blue-chip client roster, further diversifying and expanding our client makeup. Our total asset footprint grew nearly 30% year-over-year. We closed on 2 of our commingled specialized fund strategies at record levels of commitments. Our investment performance was strong. We maintained our over 500 basis points of outperformance against the public benchmark on a 10-year basis.

Our client servicing capabilities were enhanced by growing our team by nearly 20%, improving our technology platforms and adding 3 new offices, expanding our global presence to 15 offices.

We also strengthened our Board of Directors by adding 2 very experienced and accomplished independent directors.

Finally, amidst all of the business-related developments, we became a publicly traded company in March of 2017, and the stock has been a good story for our shareholders, as shares are up over 125% since the IPO, based on yesterday's close.

While we are proud of all that we accomplished for our clients and shareholders during 2017, none of it was possible without our people. We believe that our strong culture, which makes Hamilton Lane such a great place to work for our employees, is a key factor driving our success in developing and maintaining high-quality relationships with our clients, prospects and the market.

While we live and breathe this culture on a daily basis, it is a nice validation when it is recognized as being successful. To that point, we are proud of our numerous awards highlighting our culture, some of which are displayed here on Slide 7.

Most recently, we were recognized as one of the best places to work in money management by the publication Pensions & Investments. We have received this honor each year since its inception, making this our sixth consecutive year as a winner.

This is important to our clients as they are proud to be associated with an investment firm that places a high value on its employees and their development. In addition to the Pensions & Investments award, we were once again acknowledged by the Commonwealth of Pennsylvania as one of the best places to work in the state. While awards do not directly translate into new revenue or earnings, they very clearly translate into our ability to attract and retain outstanding talent and then, in turn, leverage that talent for the benefit of our clients and shareholders.

Before I hand the call over to Erik Hirsch, I want to provide some brief commentary on the private markets.

We've previously illustrated how the proliferation of managers and strategies in the private markets has led to more choices and complexity than ever before. Managing those complexities and making good choices for our clients is the primary reason we exist. We help clients do things that they cannot easily do themselves.

We've also discussed how the private markets continue to be the beneficiary of secular tailwinds as investors seek a path in achieving long-term outperformance against the public markets, as well as a means to diversify their portfolios beyond an increasingly large-cap public world.

On the latter point, from a sheer numbers perspective, the global economy is driven by private companies. They are the base of the economic growth engine, and they are the root of innovation. Our clients believe that to optimize their investment portfolios, they need to include allocations to private markets.

Further, as the public markets continue to skew towards larger-cap companies, there is an inherent diversification benefit that arises from investing in smaller private companies.

Lastly, the growth in private companies outstrips that of public companies as shown here on Slide 8. Investors recognize this as a larger area in which to hunt for opportunities.

With that, I will now turn the call over to our vice chairman, Erik Hirsch.

Thank you, Hartley. Since going public nearly a year ago, we have been fortunate to have meaningful engagement with many of our shareholders through investor conferences, non-deal road shows, office visits and other formats.

The 3 most frequently discussed items have been: one, how our assets under management are building; two, when do we expect the carried interest to flow through the P&L in a more meaningful manner; and three, what does tax reform mean for Hamilton Lane. We thought we would begin to tackle each of them in turn here today.

Starting with AUM growth on Slide 10. As you know, our AUM is derived from customized separate accounts and specialized commingled funds. These 2 areas combined represent over 80% of our revenue. And as Demetrius stated earlier, our AUM growth comes in 3 forms: one, re-ups from existing separate account clients as they seek to maintain or in many cases grow their allocations to the private markets; two, adding new separate account clients around the globe; and 3, raising subsequent funds across our commingled fund strategies.

In the separate account area, we experienced growth from both new client wins and client re-ups in line with our historical levels. During Q3 of fiscal '18, we saw nearly $800 million of fee-earning AUM contributions from both existing and new separate account clients. Existing clients, which we continue to emphasize as an important and powerful part of our growth story, accounted for 70% of the contributions.

And as we stated on prior calls, due to the exact timing of new separate account client signings, and client re-ups being largely beyond our control, we believe the best way to think about our separate account AUM build is in an annual or multiyear period versus quarter-over-quarter metrics. Historically, we have seen an increase in contributions in the last quarter of our fiscal year, and we expect that trend to continue based on the separate accounts we closed at the very end of Q3.

Looking forward, our robust pipeline of new business opportunities and the embedded organic growth from our existing relationships paint an attractive growth outlook for our separate account business. As it relates to our commingled funds, we are currently in market with several of our specialized products, including our fourth co-investment fund, the 2018 vintage of our credit-oriented fund and our 10th private equity fund of funds.

For each of these products, we are still in relatively early stages of fundraisings, which generally take about 12 to 24 months. As such, we are limited in the details that we can provide for each fund due to regulatory restrictions. However, what we can say is that we have closed on over $1 billion in limited partner commitments across the 3 funds combined, with over $690 million of that closed in our co-investment product, approximately $290 million committed to our credit fund and nearly $70 million closed in our fund of funds product.

Less than $10 million of the $1 billion in sized -- signed commitments is reflected in Q3's fee-earning AUM. The balance will have an impact on our fee-earning AUM over the next quarter as we turn on fees in the case of our co-investment fund and start investing capital from our credit fund.

As a reminder, once we turn on management fees for our latest co-investment fund, the management fees in the prior fund will switch to basis points on invested capital versus committed capital.

Finally, and while not impactful to our assets under management, but certainly impactful to our overall revenue growth, we continue to seek out high-quality advisory clients and have a strong pipeline of potential mandates.

In addition to the fact that our advisory business represents approximately 15% of our revenue, it is our longest-standing practice with some of our longest-tenured clients. The size and scale of this business also meaningfully enhances our influence in the private markets.

In summary, the growth opportunities across our core offerings continue to be very robust and the pipeline continues to be strong.

Now onto the carry on Slide 11. During calendar 2017, our accrued carry balance grew from $213 million to over $300 million, an uptick of over 40%. And this was while recognizing over $20 million in incentive fees over the same time period. This significant growth was driven by 3 contributors: one, appreciation of our unrealized investments; two, our investment portfolios maturing and thus crossing into potential carry positions; and 3, the addition of new carry-generating vehicles.

As you can see here on the slide, in fiscal 2013, we had 16 carry-generating vehicles as compared to more than 40 today. Now while we expect carry becoming a more meaningful contributor to our earnings growth over time, we believe that it is important that we put that into perspective.

Over the past 5 fiscal years, our carry represented less than 10% of our total revenue per annum. While this percentage could grow over the next several years, our earnings profile will continue to be significantly management fee-driven.

Additionally, and as we have stated on previous calls, a unique feature of our carry is that it is derived from a very diversified base that spans over 40 unique vehicles, covering different strategies, different stages of investments, different geographies and different sectors. And it continues to diversify as younger vintages mature and as we add new carry-generating AUM.

Given this level of diversification, we expect to see more stability in incentive fees over time. As far as the near-term outlook, we continue to expect fiscal '19 and fiscal '20 to be heavier carrier years than historical levels, given that some of our largest carry-generating vehicles are in or are close to being in cash-carry positions.

Now wrapping up on a topic that we suspect many U.S.-based public companies have had to address recently, U.S. tax reform. For us, that question has come in 2 forms: first, what is the expected impact to our earnings profile and capital allocation policy? And second, given our vantage point, what are the potential implications for the private markets?

Let me tackle the market question first. As was reported recently in a Wall Street Journal article, Hamilton Lane has published our thoughts on the impact of tax reform on the private markets. The punchline, if you haven't seen the article, is that we continually generally view the U.S. tax legislation as a business-friendly doctrine. For example, many portfolio companies held by private equity investors are U.S.-domiciled C corps that will benefit from the reduction in the federal tax rate. Our conversation with the GP community and based on our own proprietary analysis, is that the prevailing view is that the uptick gain from a reduction in the federal tax rate will more than offset the impact felt from certain restrictions resulting from the bill, such as the cap on interest deductibility. You can see our illustrative views on the impact to deal returns here on the slide.

In the private market, value is primarily contributed through 3 levers: earnings growth, debt paydown and multiple expansion.

We have a history of backing managers that drive a disproportionate amount of their value creation through earnings growth. Anything that buoys such growth should positively impact value creation.

As such, it is our general view that the tax reform is largely positive for the asset class.

In regards to the impact to our earnings profile, the answer is similar to the one for the macro question. We view the changes as a positive development.

As a C corp, we expect that our overall tax rate will drop in line with the decrease in the federal corporate rate, and estimate that this will be accretive to our consolidated earnings profile by more than 20% through a full cycle.

Slide 13 highlights how we expect our tax rate to evolve over time. Now pertaining to our capital allocation policy, and as we have stated in the past, it is our intent to share the growth in our steady-state earnings with our shareholders in the form of progressive dividend increases. We believe that the tax reform will aid in accelerating that growth. However, it is important to note that we will continue to invest in the growth of our business. Therefore, we will likely have additional uses of our anticipated earnings growth beyond just dividend increases, such as continued investment in the firm's infrastructure and new business opportunities. We will target uses of capital that we believe will draw -- drive long-term value for all of our stakeholders.

With that, let me turn the call over to our CFO, Randy Stilman, to cover our financials for the quarter.

Thank you, Erik. Slide 15 of our presentation shows the financial highlights for the quarter and year-to-date.

As shown on the slide, we continue to see solid growth in our business with year-to-date revenue up 25% from the prior year period. Each of our core products and services contributed to this growth, which is a reflection of the strong appetite for private markets solutions.

As a result, our year-to-date management and advisory fee revenue grew by 16% over the prior year. The biggest driver of this growth was our specialized funds revenue, which was up 19% over the prior year period.

Not surprisingly, the growth of our specialized funds revenue line is driven by successful fundraises. The fundraise that had the largest impact was that of our latest secondary fund, which held its final close in June of 2017. That successful fundraise resulted in nearly $10 million in new specialized funds revenue, relative to the prior year period.

Included in our latest secondary funds year-to-date revenue was $5.8 million in retroactive fees, which compares to $1.9 million in retro fees in the prior year period.

Revenue from our customized separate accounts offerings year-to-date was up 10% compared to the prior year period. Our customized separate accounts fee-earning AUM grew by over $2.6 billion during the last 12 months, as we continued to add new clients and receive additional allocations from our existing clients. The receipt of additional allocations from our clients is a key feature of our separate accounts business, as it leads to sticky long-term relationships that are strategic in nature.

For our advisory and distribution management offerings, we experienced double-digit year-to-date growth compared to the prior year period as well. For the advisory business, new-client adds were the main driver of the increase.

Growth and distribution management revenue was driven by higher stock distribution activity year-to-date, which led to higher base and performance fees.

The final component of our revenue is incentive fees. Year-to-date, our incentive fees were up over $13 million from the prior year period. While we received cash carry during the quarter, the vast majority of the incentive fee revenue came from the recognition of $14.6 million in carry from one of our co-investment funds. This amount was related to the $41.5 million of cash incentive fees we received in fiscal 2016, but did not recognize as revenue at that time. Therefore, the recognition of this carry was a noncash event. This also means that the co-investment fund that this is linked to is that much closer to being in a cash-carry position, assuming the continuation of solid investment results.

In terms of our earnings per share, the recognition of this noncash carry had a positive impact on this quarter's non-GAAP EPS of approximately $0.16.

Turning to Slide 16, which profiles our earnings. Our fee-related earnings were up 17% year-over-year, which is in line with our management fee revenue growth. In regards to our expenses, total expenses year-to-date increased by 15%. Comp and benefits year-to-date were up 13% and G&A was up 20%. Much of this was driven by the organic growth of our platform, along with the implementation of various business initiatives and the build-out of our public company infrastructure. The increase in compensation and benefits is primarily due to our growing headcount, which incurred (sic) [occurred] in all areas of the business, ranging from client-facing and investment roles to legal, finance and accounting functions.

It's important to note that the reported compensation and benefits for this period excludes the compensation expense related to the $14.6 million of noncash carry recognized this quarter. The reason that this related compensation expense is excluded from this period's numbers is because it was paid and recognized in fiscal 2016, when the incentive fees were actually received.

This mismatch of revenue and expenses related to the deferred incentive-fee revenue will continue to be at play as we work through the deferred incentive fee revenue balance that remains on our balance sheet.

On the G&A front, the year-over-year increase consisted primarily of a $5 million uptick in consulting and professional fees, which included $2.5 million in fees related to our new joint venture, Private Market Connect, as well as increases in accounting, legal and recruiting fees. Private Market Connect joint venture is made up of former employees who were previously captured in our compensation and benefits line, and are now accounted for in G&A.

On that point, it is important to note that some of our G&A are variable and it can increase based on our revenue growth. This is particularly true in our reporting offering.

Wrapping up with our balance sheet on Slide 17. Our investments alongside clients and products, which is the largest part of our balance sheet, continue to grow and we're up 9% year-to-date. This balance will likely continue to grow as we commit capital to new funds.

In regards to our liabilities, our senior debt is our largest liability and we continue to be modestly levered at less than 1x LTM EBITDA.

Another sizeable item on our balance sheet that is not profiled here on the slide is our deferred income tax asset, or DTA. During the quarter and due to the passage of the Tax Cuts and Jobs Act, our DTA balance was reduced from over $60 million to approximately $40 million.

This reduction had a meaningful impact on our GAAP results, as it was reflected in our income tax expense on our income statement. This was partially offset by a $4.2 million remeasurement of our tax receivable agreement liability, which increased other non -- excuse me, which increased other nonoperating income and a $700,000 reduction in accrued comp from our IPO.

While the net effect from one-time tax reform impacts was negative for our GAAP results this period, it is our expectation that the longer-term implications of tax reform will be positive for our business and our shareholders.

With that, we are happy to take questions.

(Operator Instructions) Your first question comes from the line of Ken Worthington of JPMorgan.

It's Will Cuddy filling in for Ken. So you had mentioned a 3% to 17% boost in product -- [were you holding] value. I know this is difficult, I expect it's difficult given the layers of the funds. But do have you any idea how much of that flowed into the increasing gross accrued incentive this quarter? And how much we could expect going forward from tax reform for your underlying PE holdings?

Will, it's Erik. In terms of -- are you referring to, kind of, the -- increase in the unrealized valuations?

Correct.

Yes, I think that just given the layers, I think that is just sort of tough to look through. I think what I would say at a macro level is that you've seen our unrealized valuations increase generally in line with what's happening in kind of the overall markets, given the diversity is so significant. Also recognizing that there is a time lag that's occurring here. So we're usually coming at these at least a quarter lag, just given the reporting cycle. So they are not going to always follow in line with what you're seeing in kind of the public markets. In terms of whether that was -- was the second part of the question whether -- you think a lot of that was driven around sort of the tax reform piece?

Yes, so like the increase from the private equity holdings flowing through. So, I actually -- I think you've hit the nail on the head with, like, how we can expect it to flow through your gross accrued incentive.

Okay. Okay. Yes, follow-on question from you, Will?

Yes, so there's been discussions on government infrastructure reform. As we think about RAPM, what potential implications could that have for their business?

Sure, it's Erik again. I'll take that. So -- look, I think everyone's kind of waiting and watching to see what actually comes out from the regulatory legislation standpoint of what's happening on that. I think the macro trend though is clearly pointing to a desire to have increased infrastructure spending across not only I think this country but others as well. I think that's directly coinciding with kind of how the clients are thinking about increasing their allocation to infrastructure and real assets. So our view, as you've heard on the prior quarter is, we've been active, Hamilton Lane's been very active in that segment for many, many, many years. The acquisition for us was, I think, reflecting 2 parts: one, finding great talent that was going to further add to our already-existing strong talent; and two, that we do see increased interest from investors into that space. So I would say, we were -- as we sit here today, knowing what we know, this all seems like a very positive trend.

(Operator Instructions) Your next question comes from the line of Alex Combs of Morgan Stanley.

It's Alex on for Mike Cyprys. Just touching broadly on growth initiatives. SunTrust has been really active on new business initiatives. I'm just curious where you see gaps in your product offerings today? And where you can see incremental growth from here?

Thanks Alex, it's Hartley Rogers. I think over the medium- to longer-term, we expect our core business growth to be in line with the expected industry growth for private markets generally, which is low double digits. And as we stated earlier, we anticipate increased revenue from carried interest, and that could serve as upside to that. But the exact magnitude of that, as we've discussed, along with the timing, is very hard to predict. In terms of specific initiatives, there's really nothing beyond what we've identified before. But I would say that we believe there's plenty of white space for our longer-standing offerings such as co-investment and secondary products, separate accounts and advisory products. And we believe that private credit and real assets/infrastructure continue to represent opportunities for growth for the firm. So in summary, I think we believe we have some very interesting areas to continue pursuing for growth.

Okay, great. And then, maybe just one more on -- the consolidation of mandates with investors seems to be an important tailwind for growth. Just curious if you can put any numbers behind this phenomenon and as you're dealing with your clients, are you seeing any higher negotiated rates on contracts? And maybe just broadly, if you could touch on, just your thoughts on the advisory business growth from here?

Sure, Alex, it's Erik. Let me dive in on that one. I think your macro is right, which is I think the recurring theme among clients today, across the world, is they want to do more with fewer. They are not looking to have more relationships, they're looking to have less. But those that are fortunate enough to win their trust and win that business, then get the benefit of more dollars flowing to them as a result. So I think what we've seen is, again, they are kind of centralizing, and kind of going for more core partnerships. And we think we've been a big beneficiary of that. I would point back to the growth that's, sort of, coming from existing client re-ups. I mean, that is a great indication of getting additional capital from your existing client base, which we think is a terrific metric and reflects on both, not only their positive view on the industry and wanting to do more there, but also to do more with us. I think in the advisory space, it's really no different. I think what you see is, they're looking for trusted partners and they're looking for firms that they believe can scale and to, sort of, meet all their needs. To go into your private -- your prior question, it's why we have built out the business the way we have. We're covering all facets of the private markets so that we can be that one-stop shop, whether it's doing real assets at a world-class level, or doing private credit at a world-class level, or being a world-class data provider. Our view is that we need to be strong and are strong across all of those, because the trend line going forward is clearly that people want to consolidate their relationships and those that are emerging as the winner are going to have to be much bigger firms with much bigger scale. We think we're absolutely, kind of, leading the pack on that and are going to be continuing to benefit from that trend line. Quantifying all that, I think, gets very challenging. I think you, sort of, see it implicitly in the numbers around the growth whether it's movement in AUA or movement in AUM. To the fee question, I think we also sort of show that picture pretty clearly, which is that from a margin perspective and from a, kind of, overall fee-earning AUM question, we're just -- we are maintaining consistency. And so I think that is a positive indicator of -- the value proposition that we're delivering, I think, continues to resonate strongly with investors and everyone is, sort of, benefiting from that size and scale.

Okay, great. And if I could squeeze one more in, that'd be awesome. Just on -- big data seems to be a big theme in the private markets right now. And clearly, you guys have a vast database of portfolio companies and certain information that you can monetize, I'm just thinking about growth from here. Any thoughts on how you could better monetize this data? Or any updates on any of the JVs that you're involved in, that I think tie into this data theme pretty well?

Sure. It's Erik. I'll take that again. I think you're right. I think one of the reasons why it is a hot topic is that it's really the private market that's, kind of, like the last horizon. You think about all the other asset classes, and they've already gone through an initial sort of big data wave. Now, no question we're moving from that into thinking about how AI is going to play into that and other pieces. But the first wave on the data side I think is all about, do you have data? And do you have good transparency into data? The other asset classes have already been over that hurdle. It's the private markets that have been a real laggard, I think taking the private part to an extreme. So as we look at it, the trend to more transparency, more reliance on data, as it has been in other asset classes will absolutely come to fruition here. I think the question is, over what time period? From our end, we have been identifying this as a trend early, you've heard us talk about it, we have put real capital behind it, we have developed real partnerships behind it, whether it's the Private Market's Connect relationship with Ipreo, whether it's any of the technology SaaS businesses that we have on our balance sheet. I think we have begun to do, we think, a very good job of laying down the core pieces to make sure we benefit from that. How will that happen? I think there's -- we talk about data in terms of offensive and defensive opportunities. On the offensive, it is identifying brand-new revenue channels, monetizing that data directly or indirectly, partnering with people around that data, all of those are beginning to come -- again, while early innings, they're beginning to come into play. The defensive part is making sure that the clients feel like we are using that data for their -- to their advantage. And I think, although again hard to directly show a linkage, we can absolutely tell you anecdotally that in many, many, many of the prospect meetings that come in here and people's decisions on who they are hiring or what service provider they are going to work with, that data and access to it in our tools and analysis is a big part of the selling metric. And we think, that it's, again, sort of, serving us well among that client base in winning new business. So I think this is going to be something that we're going to continue to talk about, frankly for years to come. It takes a long time for all of this to evolve and change as it did in the other asset classes. I think we'll be no different and I think this will be a recurring theme and one that we are, sort of, keenly focused on.

There are no further questions in the queue. I turn the call back over to Demetrius Sidberry.

Thanks, everyone for joining. Have a good day.

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