Hamilton Lane Inc (HLNE) 2020 Q4 法說會逐字稿

Good morning. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hamilton Lane, Inc. Fourth Quarter Fiscal Year 2020 Earnings Conference Call. (Operator Instructions)

John Oh, Investor Relations Manager, you may begin your conference.

Thank you, Jason. Good morning, and welcome to the Hamilton Lane Fiscal Q4 2020 Earnings Call. Today, I will be virtually joined by Mario Giannini, CEO; Erik Hirsch, Vice Chairman; and Atul Varma, CFO, as we continue to work remotely from our Pennsylvania headquarters.

Before we discuss the quarter's results, we want to remind you that we will be making forward-looking statements based on our current expectations for the business. These statements are subject to risks and uncertainties that may cause the actual results to differ materially. For a discussion of these risks, please review the risk factors included in the Hamilton Lane's fiscal 2019 10-K and subsequent reports we file with the SEC.

We will also be referring to non-GAAP measures that we view as important in assessing the performance of our business. Reconciliation of those non-GAAP measures to GAAP can be found in the earnings presentation materials which we will be referencing throughout the call and will also be shown on the webcast. These materials are available on the Public Investor Relations section of the Hamilton Lane website. Our detailed financial results will be made available when our 10-K is filed. Please note that nothing on this call represents an offer to sell or a solicitation to purchase interest in any of Hamilton Lane's products.

Beginning on Slide 3. For the fiscal year, our revenue from management and advisory fees grew 12% versus the prior year. This translated into full year non-GAAP EPS of $2.01 based on approximately $107 million of adjusted net income and GAAP EPS of $2.15, based on approximately $61 million of GAAP net income. Lastly, our Board has approved a 13.6% increase to our annual fiscal dividend to $1.25 per share or $0.3125 per share per quarter.

With that, I'll now turn the call over to Mario.

Thank you, John, and good morning. Let me start as many others before me have done by simply saying, thank you. Thank you to those on the front lines. Thank you to those putting themselves in danger to protect us. Thank you to all of those making sacrifices for the good of their communities. And a special thank you to so many of our clients whose members are part of the front lines. You're all very much in our thoughts. For Hamilton Lane, we've had certain offices in a remote work situation since December. And while some of our international offices have already begun to reopen, the majority of our offices continue to work remotely, including our headquarters here in Pennsylvania.

I'm pleased to report that despite the challenges we are all facing, our ability to work and service our clients is incredibly strong. Perhaps stating the obvious, but our long-standing commitment to technology and data is serving us well in these times. We are leaning heavily on a combination of purchased and proprietary systems and solutions that continue to benefit our clients.

Lastly, I'm very proud of our teams and the effort they exert every day servicing our clients while simultaneously managing their own lives and families. To them, I also say thank you. And while this time brings uncertainty and discomfort, the Hamilton Lane spirit of creativity and innovation remains strong and is keeping us close together.

A quick glance through our slack channels, aside from all the work-related content, would find pictures of working at home with pets, barbecue tips, videos of family concerts and reading suggestions. But you'd also see our weekly town hall video updates by me, featuring updates from various teams and employees throughout the firm, ensuring that communication is frequent and transparent. Our already strong culture is getting even stronger through this trying time, and I'm proud to be a part of this firm.

Now at this point, you've heard plenty of public company CEOs tell you this environment is unprecedented, and it is. So rather than till that same ground, we are simply going to give you some of our perspective on what we know at this point and what we don't. I'll start by answering some questions that we've been fielding from investors. First, how much of our revenue is fixed versus variable? We continue to be a management fee-heavy business. Even with a strong year of carried interest, management and advisory fees accounted for approximately 90% of our total fiscal year 2020 revenue. In addition, less than 3% of our management and advisory fees are based on net asset value, which protects our revenue stream from temporary mark-to-market moves.

Second, you expect LPs, limited partners, to default on their capital commitments. We don't. These commitments are legally binding and carry financial penalties for defaulting. In 2008, we did not, nor did the industry at large, experience any meaningful level of LP defaults. During that entire recession, Hamilton Lane only experienced a single partial defaulting $1 million LP across our entire client base.

Third, will the drop in plan values, i.e., the denominator effect, cause LPs to pull back from the asset class? In general, we think the answer here is no, though this will partially depend on where the markets go from here. As of yesterday's close, we simply haven't seen a drop significant enough to cause concern. While there may be instances of some LPs finding themselves stretched for various reasons and choosing to pull back, we believe there will also be plenty of examples of LPs who are more determined to lean into what feels like an interesting buying opportunity. And as we've said before, we have a number of clients who find themselves way below their target allocation. We believe that LPs have now seen the data for vintage year performance following past market downturns, 2000 and 2001, and again with 2009 and 2010, and understand that following times of economic correction, the private markets provide a strong investment opportunity.

Fourth, what are your expectations around carried interest payments over the next 12 months? Well, no question, they will be lower until the markets normalize, but there are a few things to remember about our carry. First, as I said earlier, carry represented around 10% of our revenues last fiscal year. Second, our carry is incredibly diversified. Over 60 vehicles with thousands of underlying companies. It is spread across companies of different sizes, industries and geographies. We see some natural hedging as a result of this diversity. But as you know, we don't control these positions, and thus, we don't control the timing of the exits.

Fifth, will you be able to achieve your same levels of historical growth? Today, this is a tough question to answer as we are essentially 2 months into our fiscal year in a very unstable and unprecedented environment. We remain optimistic about our ability to grow and have continued to close new business as well as re-ups in the month of April and May. Our sales team remains active. Our pipeline remains strong, but our inability to travel to see our clients to host events are all challenges. While we did grow through the 2008-2009 timeframe, something that should provide some additional comfort on the denominator concern, [it] was a very different environment. And again, our current inability to interact with potential investors, particularly limited partners with who we don't currently maintain a relationship, will create some challenges.

Now let me turn to the results for the quarter, which were strong across the board. Beginning on Slide 4. Here, we highlight our total asset footprint, which we define as the sum of our AUM, assets under management, and AUA, assets under advisement. Total asset for the footprint for the quarter stood at approximately USD 503 billion, and represents a 4% increase to our footprint year-over-year, continuing our long-term growth trend. Consistent with prior quarters, AUM growth year-over-year, which was over USD 7 billion or 12% came from both our specialized funds and customized separate accounts and continues to be diversified across client type, size of client and geographic region. Our focus remains simply growing and winning across both lines of business, and we are pleased with the success.

Moving to AUA, as was seen with AUM, AUA growth year-over-year, which came in at approximately USD 12 billion or 3% was from across client type and geographic region. As we mentioned on prior earnings calls, AUA can fluctuate quarter-to-quarter for a variety of reasons, but the revenue associated with AUA does not necessarily move in lockstep with those changes. And while this quarter saw an increase in AUA dollars relative to the previous quarter, we will continue to emphasize that no direct correlation exists between the scale of AUA dollars and revenue generation. Continued growth and scale of our AUA remains an area of focus over the longer term given the advantages those dollars bring. However, growth and scale will not supersede our disciplined approach to ensure that we are finding the appropriate match between our services and the needs of a particular client.

Let me now turn it over to Erik.

Thank you, Mario, and good morning. Let me also begin by adding my thanks to those working hard to protect all of us as well as to our employees and clients.

Moving on to Slide 5, we highlight our fee-earning AUM. As a reminder, fee-earning AUM is the combination of our customized separate accounts and our specialized funds with basis-point-driven management fees. We will continue to emphasize that this is the most significant driver of our business as it makes up over 80% of our management and advisory fees. Relative to the prior-year period, total fee-earning AUM grew $5.1 billion or 15%, stemming from positive fund flows across both our specialized funds and our customized separate accounts. Taken separately, nearly $2.4 billion of net fee-earning AUM came from our customized separate accounts. And over the same time period, nearly $2.7 billion came from our specialized funds. Growth continues to be driven by 4 key components: one, re-ups from our existing clients; two, winning and adding new clients; three, growing our existing fund platforms; and four, raising new specialized funds. What you also see here is that our fee rates continue to remain steady.

Moving to Slide 6. Fee-earning AUM from our customized separate accounts stood at $24.5 billion, growing approximately 11% over the last 12 months. We continue to see growth coming from a variety of avenues. As you've heard us say in the past, re-ups from our existing client base remains a key component of that growth. In addition, we continue to expand our existing client base by winning and adding brand-new relationships, which, in turn, provide a growing base for future re-up opportunities. As for our specialized funds, growth was strong. Over the past 12 months, we achieved net positive inflows of nearly $2.70, resulting in a 23% increase in our fee-earning AUM for our specialized funds. The main driver of this growth continues to be our current secondary fund. We held a close on March 31 that totaled over $350 million of commitments. This now brings the total dollars closed on this product to over $1.7 billion. We have until October 2020 to complete the fundraising. Given that fees on this fund started in the prior quarter, this closing did generate retro fees.

The next-largest drivers of AUM inflows were from our continued credit fundraising as well as our semiliquid product. On the latter, the net flows for the quarter were approximately $100 million. And while we do not intend to provide this level of detail on an ongoing basis, we appreciate the likely question on people's minds, that being, how were flows from April 1 through March -- through May 25? The answer is we saw inflows of $45.2 million and redemptions of only $2.4 million. We are very encouraged by this dynamic, and we believe it speaks to both the trust we have engendered as well as the investment results we are generating. However, and we will continue to stress, the current market environment presents challenges that we and our distribution partners have simply never experienced. And while we can't help but be encouraged by the progress to date, we simply do not know what the coming months will look like. That said, we remain committed and long-term focused and believe strongly in the prospects for this product.

Rounding out the AUM growth was continued success across our various white-label initiatives.

When we initially announced our Evergreen product launch, you heard us say that the targeted audience were retail investors based outside the United States and principally in Australia, Europe and Asia. This was largely due to certain regulatory hurdles that made raising a product with this type of profile more challenging here in the U.S. However, we are currently pursuing the opportunity to launch an Evergreen offering in the U.S. To state the obvious, this is still in the early stages and the current market will undoubtedly make this process harder and slower. Nonetheless, we are long-term focused and have said before, we view this as a marathon not a sprint. But this is an important milestone, and we are excited about the prospects here.

Let me now shift to 2 strategic topics. First, our latest balance sheet investment. On March 23, iCapital Network announced the closing of the financing round. Hamilton Lane participated in this raise, and we now join a powerful group of iCapital investors that include BlackRock, Goldman Sachs, Blackstone, UBS, among others. We believe that iCapital has built the premier marketplace for private asset opportunities and their recently announced acquisition of Artivest furthers their position of strength. Using technology, they have democratized access to private investment opportunities [for high-net] worth investors, making the ability to select and subscribe to investment opportunities, simple and (inaudible). We are excited about this investment, and we are equally excited about this partnership. Hamilton Lane product is currently available on the iCapital platform.

As we have said before, and will undoubtedly say again, our approach to technology investing is simple: Identify unique technology solution providers who we believe can make us and the industry better and our balance sheet capital behind them, forming a mutually beneficial partnership. iCapital is another strong example of this positioning.

Lastly, I wanted to provide some insight and the progress update on our joint venture with IHS Markit a company called Private Market Connect, or PMC. We created this in June 2017. Private Market Connect was developed to help solve the existing data challenges faced by limited partners and to address the information inefficiencies that exist throughout the private market. PMC focuses on scaling, automating and normalizing the information flow between general partners and limited partners with the ultimate goal of providing straight through data (inaudible). PMC primarily serves as the managed data services segment of iLEVEL, a SaaS offering in which we were an early investor and remain a key client. iLEVEL streamlines data collection and drives best practice monitoring, analytics, valuation and reporting for all types of players in the private market [ecommerce].

For some background, prior to the formation of PMC, Hamilton Lane maintained a dedicated team focused solely on data entry and reporting. As employees of Hamilton Lane, the implied cost for these back-office functions was captured through compensation and benefits. When the JV was formed, Hamilton Lane contributed this team, and with that, moved the cost of data entry and reporting to PMC, a third-party service provider, now captured in our G&A line. IHS Markit contributed technology and a sales force, linking the sales of iLEVEL with the support provided by PMC. The PMC offering is exclusively available to potential customers via either IHS Markit or Hamilton Lane.

The economic relationship here is threefold: one, we jointly own the company with IHS Markit; two, as the business scales, we benefit from a declining rate card; and three, as the business generates excess cash, it pays out a dividend. Since its formation in 2017, the Board of PMC, which includes 2 executives from IHS Markit and 2 from Hamilton Lane, has approved 2 rate card adjustments and a dividend payment to its shareholders. We continue to remain encouraged with the growth we have witnessed at PMC, and we feel it speaks to the power of the combined private markets presence of IHS Markit and Hamilton Lane. We look forward to providing you with additional updates as they unfold.

And with that, I will now turn the call over to Atul to cover the financials.

Thank you, Erik, and good morning, everyone. Slide 8 of the presentation shows the financial highlights for fiscal year 2020. We continue to see very solid growth in our business with management and advisory fee up 12% versus the prior year. Our specialized funds revenue increased $18.7 million or 20% compared to the prior year, driven by over $1.7 billion raised in our latest secondary fund in the current fiscal year and over $200 million raised between periods for our latest co-investment fund. We recognized $2.8 million in retro fees from the co-investment fund for fiscal 2020 compared to $1.7 million in fiscal 2019.

As many of you are likely aware, investors that come into later closes the fundraise for many of our products pay retroactive fees dating back to the fund's first close. Therefore, you typically see a spike in management fees related to that fund for the quarter in which subsequent closings occurred.

Revenue from our customized separate accounts increased approximately $5.5 million compared to the prior year due to the addition of several new accounts and re-ups from existing clients. Revenue from our advisory and reporting offerings was relatively flat compared to the prior year. The final component for revenue is incentive fee. Incentive fee for the period were $29.1 million, or approximately 11% of total revenue. Noteworthy this year was that we signed additional 6 vehicles moving to realize incentive fee position, which continues to show a positive trend of strong performance, the increasingly diversified sources of carried interest; and lastly, the overall aging of our carry generating vehicles.

Moving to Slide 9, we provide some additional detail on our unrealized carry balance. We saw strong growth this quarter with the balance up 35% from the prior year, even as we recognized $29.1 million of incentive fee in fiscal 2020. As you can see from the slide, the growth came from both adding new carry generating funds as well as appreciation in existing vehicles. As Mario mentioned earlier, we don't control the positions, and thus, we don't control the timing of exit. And given the current market conditions, we would expect to see distributions slow down.

Turning to Slide 10, which profiles our earnings, our fee-related earnings were up over 12% year-over-year as a result of the revenue growth we discussed earlier. In regard to our expenses, total expenses increased $9.7 million compared with the prior year. G&A increased $8.9 million due primarily to increases in technology-related expenses, consulting and professional fee, and commissions from fund closings in the current year. Total compensation and benefits increased slightly by $0.8 million, due primarily to increased salary expense from additional headcount in the current-year period compared to the prior-year period. This was partially offset by the nonrecurrence of the earn-out expense from our Real Assets acquisition, including the prior year.

Moving to our balance sheet on Slide 11, our largest asset on our balance sheet is investments alongside our clients in our customized separate account and specialized funds. The growth of this asset, which increased 31% compared to the prior year reflects the growth of our business. In regards to our liabilities, our senior debt is our largest liability. In March, we announced a comprehensive amendment package to our existing credit facility. We were able to successfully secure a lower interest rate, extend out the maturity date and increase our borrowing capacity through and added $75 million fixed-rate term loans, which may be drawn at our discretion up to a year after closing.

And with that, we thank you for joining the call and are happy to open it up for questions.

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

Maybe generally, can you talk about the impact that state and municipal finances as well as the need for cash in various sovereign wealth funds might have on gross inflows over the next few quarters, if not the next few years? And it seems that there's probably a couple of places where, at least potentially, Hamilton Lane might have some vulnerability. I was thinking one might be where clients just don't have the money to fund new commitments such as governments skipping pension fund payments, so any thoughts there? And then another might be rainy day funds, which is what many sovereign wealth funds are, which would at least get drawn down or maybe just not contributing to new funding. So any guess on what exposure you might have there?

Ken, it's Mario. Let me take it in 2 parts. In terms of the pressure on pension funds, state and local governments, any of that pressure would be future contributions that may or may not be made by those states or municipalities, whatever they are. I think as you look at -- it would be similar to what we saw in '09 and '10, if you look at the pension funds, there's nothing that affects their existing book of assets, if you will. And so from their perspective, their growth is really normally predicated on that book of assets today. And when you think about the position they're in, then -- low interest rate environment, which I assume we will be in for longer than we might have anticipated just 3 or 4 months ago, the desire, the need for a higher return increases. And I think alternatives really lend into that, whether on the equity or on the debt side, infrastructure, real assets, wherever you put it.

So I think if you're saying will pension funds grow 5 or 10 years from now at the rate that we might have anticipated, hard to say. But I don't think it will have any impact in any 3- to 5-year timeframe in terms of the sorts of assets they might put into private markets. Sovereign wealth funds are a little bit different because as you said, some of them are rainy day funds, and so some of the assets may come out. But if you look at most of them, the way they are structured, certainly in our client base, they have always had a portion of their assets basically in cash, or in more liquid investments that they knew or felt they wanted to be safe and have them put into -- to be used in situations like this. So again, that doesn't really impact anything that they are looking to put into private markets today. And I think the same dynamics that impact pension funds affect them in terms of meeting a higher return.

So you've probably seen some of them have announced publicly that they are looking to do a little more in private markets and look at what they want to do. So if you look out a 3- to 5-year timeframe, I just don't think the dynamics in either the sovereign wealth or the pension fund are going to be impacted by either of those 2 kind of pressures that they're feeling.

Your next question comes from the line of Michael Cyprys from Morgan Stanley.

Just curious, given the environment, maybe following on Ken's question there with pension funds and investors that may be a little bit more cash strapped, how are you thinking about the implications for the growth in the secondary market just in terms of the potential for investors already in the asset class to look to monetize and exit certain positions and potential additional fund that may be raised? I know you're raising the secondary fund now. You have until October 2020, I think, to complete that. Just curious if there's any thoughts around the sizing of that, raising another vehicle alongside or on top. And any thoughts on the ability to extend out the time frame on raising that fund, given the environment and the work from home?

Well, I think on the first question, we had said for a while that we thought the secondary opportunity was one of the more interesting ones just in terms of the way the market was developing, even apart from a market downturn or dislocation. And again, if history is any guide, and we think it is, the market opportunity on the secondary side is going to be a very interesting one, both I think driven by limited partners that are looking to rebalance portfolios or that might have some liquidity needs, but also driven by general partners as they look to do things with their own portfolios and work with limited partners around that. So that whole market is growing. And I think, clearly, when you have this kind of time period, it will generate a fair amount of deal flow. So that remains encouraging.

In terms of fundraising, we're in the market with our fund and we -- as we have pointed out in the discussion, there are challenges around going out fundraising and doing it by Zoom. But I think investors on the other side, as I talked about with Ken's question, people understand the opportunity set. They understand it in secondaries. They understand it on the credit side, and they understand that they've seen this movie before, if you will. In periods of dislocation, they want to be investing in places where you might be able to get assets better prices than you did 3, 6 months ago. So investors are very interested in the secondary market. And that, for us, is an encouraging sign.

And then just maybe as a follow-up question just on the Evergreen strategy, look, sounds like you're looking to pursue that in the U.S. Just curious what if anything's changed? Is there any implication from the recent SAFE Act that makes it a little bit more easily able to bring this to the U.S.? And just any color you could share around what the structure may look like in the U.S., any sort of differences versus how it looks around the rest of the world.

Sure, Mike. It's Erik. I'm happy to take that. I would say there's been nothing that has been a sort of a big change. I think this is just the processes in the U.S. are complicated. And this has been just a tremendous amount of effort on the part of us and our partners to just sort of work our way through that. Again, since we're kind of in that filing process, can't give a lot of details here, but our view is that this is going to pursue from an investment standpoint, something very similar to what we're pursuing outside the U.S. So we don't really see this as being fundamentally different from that perspective.

Your next question comes from the line of Alex Blostein from Goldman Sachs.

I was hoping you guys can talk a little bit about the co-investment business. It's also a meaningful part of what you guys do. It sounds like activity on the secondary front could be pretty meaningful over the next couple of quarters and years. But any changes you guys anticipate in the appetite for the co-invest piece of the model?

Sure. Alex, it's Erik. I'll take that. I think one of the nice things about our vehicles, frankly, whether it's the credit vehicle, co-investment or secondary is that we have a tremendous amount of flexibility. I think our clients have really entrusted us to sort of work with the right partners, in the right deals at the right point in time. So today, while our kind of credit co-investing has largely been performing credit to date, to the extent we start to see nonperforming credits start to emerge, we have the ability to kind of move and pivot into that space.

Same thing on kind of the equity co-investment. Again, we've been historically investing primarily in performing buyouts and growth-oriented strategies. But to the extent that the market opportunity serves us up turnarounds, rescue financing or the like, we don't have to go create new vehicles to do that. We already have the vehicles in place to do that. And so we can simply pivot and adjust the investment strategies to deal with whatever the opportunity set is at that point in time. And to take that one step further, that also really holds true for a lot of our separate accounts. The clients, again, have not sort of penned us into something that is very rigid in its strategic allocation policies, but rather things that can be moved and adjusted based on current market conditions. So we feel good about all of that. And I think as the opportunity set continues to grow, to echo what Mario said, the clients are smart, the clients understand what the opportunity set looks like. And so we think that if the opportunity set grows, so too does the client demand.

Got it. And maybe just a tactical question near-term. Just curious to get your thoughts around expenses over the next couple of quarters, given the fact, obviously, there is no travel and there's some kind of natural savings that are going to be running through the model. So any kind of thoughts around the near-term expense guidance would be helpful.

Yes. Alex, it's Erik, again. I think that's exactly right. So I think while we view ourselves fundamentally as a growth company and continue to want to invest in that growth -- so you're still seeing us continue to make good technology spend which we would say, by the way, is offensive spend, not defensive spend -- we haven't had to spend capital to go get people to be able to work from home. We've obviously had those systems in place for a long time. So I think the spend on those kinds of things will continue, but some of the spend is being reduced, whether we want it to or not. So T&E for us is a fairly substantial part of our budget, and that has obviously come way, way, way down. And we expect that will start to rise again, as Mario said at the beginning.

We have some offices that are beginning to return to some level of normality, certainly not all the way back to normal. But in Asia, in parts of the Middle East, we have begun to see people kind of reemerging and going and doing face-to-face meetings. And so I think, certainly, in the near term, you'll see those numbers down, and that will flow through the expense as a result.

Your next question comes from the line of Chris Harris from Wells Fargo.

So another question on fundraising. You mentioned that you're still able to get some activity done through Zoom and other things virtually. So I guess I'm wondering, like, what percent would you say your fundraising activity is potentially being impacted by the lack of travel? Is it the fundraising that you're trying to do for potentially new customers? Or is it existing clients also potentially being impacted by not being able to have in-person meetings regarding new funds?

Yes, Chris, it's Erik. Thanks for that. I'll start. I think Mario said it, we have had -- we have closed business in April. We have closed business in May, and that has been both a combination of existing as well as new relationships. I think one thing that's important to recognize is that in our industry, the whole dating process takes quite some time. So clients don't sort of meet you on Monday and then sign a contract on Friday. Big amounts of capital, long-term locked up relationship. And so the process takes a while. I think that's both good and bad here. So I think the good is that you have a number of people in that pipeline that you have been frankly, nurturing and developing that relationship with for the last several months. I think the challenge is, so bringing them to the finish line, I think our view is that for all the reasons that Mario pointed out in his macro comments feels very doable.

I think the challenge is, is that part of our growth in our business is finding and meeting brand-new people. Doing that today, I think if you talk to our sales team, they would just simply say is harder. You were trying to -- our industry had been typically based on, I call you, I introduce, we agree to get together for a meeting and start a dialogue and start a relationship, ultimately kind of culminating in you likely coming to one of our offices, doing an on-site visit, kind of kicking the tires. All of that is harder.

That said, I think if you think about what's going to be better in this environment, we would say that better brands are going to be kind of who benefits. Being kind of a new, small party, single office, that is going to be really, really tough. So in a world before where things were easy and you were sometimes having much smaller competitors who were perhaps lower-cost kind of nipping at your heels, I think going forward, in times like this, we think people are going to gravitate towards household names in the industry, and we are absolutely that. So we think that that is going to be the sort of the other benefit here, which is strength is kind of creating more strength. And we think we'll be a beneficiary there. But again, none of this is normal today.

Okay. In terms of your AUM growth, the last couple of years, you guys have had much faster growth in specialized funds, at least on -- as it relates to fee AUM versus separate accounts. As you guys look at your pipeline, would you say that trend will likely persist going forward? Or might that not necessarily be the case?

Chris, it's Mario. My guess is that trend persists. If you look at -- the trend is driven by a number of things that haven't changed. I mean, we do talk about it's harder to see people in person. But what hasn't changed is the need for investors to be in either products or separate accounts. And I don't know that the nature of how they're going to invest will fundamentally change. Clearly, the separate account is tremendously advantaged in this environment because you have re-ups, you have the client relationships. And so Zoom is not at all an impediment there. But unless we believe that the world is going to fundamentally shift in the way people want to invest in private markets, I don't believe that the breakout in terms of how people look at investing in products versus separate accounts is fundamentally changing. And certainly, we're not seeing any of that out in the market today. So there's just nothing that would lead us to say that there's a fundamental shift going on there.

Your next question comes from the line of Chris Kotowski from Oppenheimer.

As a follow up to that last one, I mean, if we think about just near term during the lockdown period, if we think about your AUM growth in the low to mid-teens, how much of that was from new clients versus re-ups from existing clients? Because presumably, the new clients could go away for a quarter or 2, right?

It's Erik, Chris. I'll take that. So I mean, the bulk of our growth, as we've said in the past, is always coming from our existing installed base just because that installed base is so big. So typically, on the separate account side, that sort of new flows are generally about sort of 70% or so from the existing and then 30% from new. I don't think you're hearing us say that we think that the new completely goes away. I think Mario laid out kind of compelling reasons as to why folks are going to need this. And if you've already started or decided that you're going to make the strategic allocation to get into the asset class, and we do continue to find folks that are just starting, I don't think this is going to cause you to sort of change that. In fact, again, as the opportunity set might be better, it might cause you to accelerate. And again, in the low interest rate environment, where returns are hard to come by, your asset allocation model tends to pivot you.

So the bulk of our growth does come from the current installed base. And you could certainly see scenarios where those folks decide to do more in this environment for the reasons that we -- that have been sort of laid out. And then the new, again, that's just on -- that is on us. But presumably, we're often not convincing people to come into the asset class. We're convincing them to work with us as opposed to working with somebody else. So I go back to my earlier point. If you've made a decision tactically as an LP that you want to be in the asset class, now the question is simply, who are you going to partner with? And we would think that, again, kind of being the big brand, the big player in the market, sort of positions us better to be the recipient of that relationship.

Okay. And then kind of on a longer-term or next say, 2 year kind of timeframe, yes, I mean, it's -- I guess, it's reasonable to assume that in terms of new private equity investing, we're going to hit an air pocket here. I mean, just between the disruption of travel and all that to start, but also just kind of the world has been roiled and valuations are upside down, and the public markets are acting very differently than the private markets. I mean, if there is a, I don't know, 18- to 24-month kind of pause in major private equity investing, what does that do to the fundraising dynamic?

Well, Chris, it's Mario. If -- sure, if you say that there's no activity in the private markets for 18 to 24 months, then I think there's no urgency for anyone to be investing. But I think the premise may be questionable. If you look at -- if you -- one of the biggest differences from the '09-'10 timeframe to now, even 2 months in, is the number of deals that have been publicly disclosed and are being discussed. So I look at the environment and say, there are deals that are actively in process. There are deals that have been disclosed. So both general partners and limited partners see that and know that.

So we're not really seeing anyone looking at this environment and saying, I don't think anything is going to happen for, certainly, that kind of timeframe. People might have a disagreement on whether something is going to happen in the next 2 months, something is going to happen the next 6 months. But there -- given that volume of activity and discussions going on today, it doesn't seem to be a scenario where you can say that deal activity is going to be fundamentally different over an 18- to 24-month timeframe.

Your next question comes from the line of Robert Lee from KBW.

Maybe sticking with the fundraising theme, popular topic, a couple of questions. So if you think of the secondaries fund, specialized funds, just kind of the first part would be between now and October would you kind of expect to have kind of a closing quarter, this quarter or next quarter? Or would you anticipate one quarter? And then when you move beyond that, your, I guess, your larger co-invest fund, I guess, is still investing. You'll obviously be investing this. You have the credit funds in the marketplace. I'm just trying to get a sense as we move, say, to the end of this year and the beginning of next year, within the specialized funds, what we should be thinking, what strategies may be fundraising if we're thinking ahead a year? And then I'll have a follow-up.

Yes. Thanks, Rob. It's Erik. Let me tackle that. So your first comment on the secondary fund. So as we said, in market until October 2020, we tend -- what we tend to do with those is that we tend to just have rolling closings. So obviously, given the retro fee comment that we made, that fund is up and running, actively investing. (inaudible) transactions now has already invested capital. We'll continue to be investing capital. And so we'll [use] that pacing and the opportunity set as will the clients to really decide what kind of capital we ultimately decide to take into that for what time period.

The other piece on the credit, that just remains essentially a perpetually open vehicle because we essentially just slide from the 2020 vehicle right into the 2021 vehicle. And so depending on when you as the client, want to close or can close, just kind of depends on what sleeve you end up going into. But as you know there, we're kind of raising, spending, raising, spending. And to Mario's earlier comments, the opportunity set there, we think is getting increasingly more interesting. And again, the clients understand that. So you're seeing certainly some pockets of distress and dislocation there. And again, this market opportunity, different than it has been in the past. There's not sort of a lack of capital. So there is a lot of capital looking for opportunities. And so right now, you're just playing the matchmaking game of matching capital bases with opportunities.

In terms of what happens on an ongoing basis for the rest of the year, I think it's just going to be sort of business as usual as we continue to finish up those fundraisings. And as again, as we sort of finish deploying capital, as we have in the past, we will inevitably just restart fundraisings for the next series of whatever that particular vehicle is.

Okay. And then maybe on the separate accounts, if we kind of maybe parse some of the some of the trends there, so if I think of re-ups, I mean, is there any color you can provide when an existing client does re-up, are they intending to increase the size of their commitments as opposed to maybe just kind of keeping commitments flat? So how much -- so I'm just trying to think how much of the growth may be coming from clients upsizing what they're committing over time. And then also maybe compare that to how much of the growth is maybe coming from incremental new clients to [adding something].

Rob, it's Mario. I mean, as Erik pointed out earlier, 70% of our growth is from the existing client base. So it's a substantial number and don't really see that shifting. As we -- it's early in this process, obviously; there's been 2 months in a market downturn. But as we have discussions with clients on re-ups, we're not seeing any significant shift in terms of more of them either increasing or staying the same. It's pretty much what we have seen before.

The beauty of a separate account is you are sitting down with the client and creating a multi-year framework for how you think and they want to invest in the private markets. So it would take a really significant event to alter that a lot. And markets simply have not gone down enough to have everyone trigger that as a response to say, oh, I have to revisit it. And recall, many of them when they do their planning, assume a market downturn at some point in the process. So these are illiquid assets, and most of the clients in the separate account world know that they're illiquid. And so they structure their portfolios and their investing program around that. So there just is not any fundamental change in terms of clients saying, oh, I'm going to really alter my investing profile. They may alter in terms of saying I'd rather lean in more to credit because I think that's a better opportunity or more secondaries or -- depending on that. But even that's a lean. It's not a fundamental shift where they go from 100% here and now 100% there.

Maybe as a follow-up -- thinking about maybe the trends before we kind of hit this environment, were you seeing, obviously, over the last 2 years in separate accounts that when existing clients were making commitments that they were upsizing pre-crisis? And then maybe the second part of that, maybe this is overly simplistic, but if we just kind of do a simplistic kind of fee range AUM kind of calculation, it looks like the rate's been in that business modestly or slightly trending down. Is that due to kind of increased fund size, competition? Any color around that would be great.

Sure. Rob, it's Erik. Look, I think what we have seen over the last couple of years, and it's not just us, and you can look at any kind of industry data and it's sort of showing you that allocation models are driving the private-market allocations higher and higher. When you think about what drives their commitment size to us, it's driven by really 2 factors: how big is their pool of plan assets, which, obviously, has also been growing pretty substantially; and what does their desired allocation to this asset class look like? So both of those have been causing things to be rising.

On the fee side, certainly you have seen on the separate account side, a little bit of compression on the fee side. But again, remember, if we're getting 70% of our growth coming from existing clients, then all the client is doing is giving us more incremental dollars. And so their account and frankly, their total revenue paid to us is increasing. So it's not surprising, it shouldn't be surprising that those folks would want to see the actual fee rate coming down as the pool of assets that we're managing is growing. From our perspective, that's a fine thing to accept and, frankly, to provide for the customer because from a managing-the-relationship perspective, the team is already in place, the processes are already in place. The systems are already in place. So all we're talking about is incremental dollars flowing in as a result of that relationship. And so that is, from our perspective, a completely acceptable trade-off.

Your next question comes from the line of Chris Shutler from William Blair.

Maybe first on expenses, I know it's early days here, but are there any more permanent impacts that you're thinking about on the expense side as a result of the crisis? And maybe just remind us or give us a general sense how big the travel budget is.

Yes, Chris, it's Erik. I'll start, and then I'll turn to Atul for the specifics on the actual T&E. So I think at a macro level, no, we're not sort of seeing anything much more permanent around this. We continue to believe, as frankly we're seeing with our non-U. S. offices, that as the situation stabilizes people will want to return to a work environment. That's not to say that everyone will return, and I certainly believe that we'll have some -- an increasing part of our employee base in some sort of a work-from-home environment, certainly for a while. But ultimately, I think what we're seeing if our foreign offices are any gauge is that people want to get back into a work environment, particularly one with a culture like ours that is highly collaborative.

So we're not seeing any real change on a permanent basis around kind of the work-from-home piece. And as I mentioned earlier, the tech piece is -- I mean, we've been, as you know, a huge investor in that. And as Mario kind of kicked off by saying, it has absolutely been paying dividends, not only from the culture and the connectivity, but again, the ability to provide data to clients in a time like this is something that is enormously valuable because you continue to see a lot of misinformation around there about what is or is not happening. The fact that we actually have the granular information and the systems to provide those answers to customers who are asking them, I think goes a long way to providing comfort. So I would say, kind of business as usual.

And again, we're still in growth mode here. And so we're thinking about how to tactically spend capital, thinking about whether we should be opening up other offices, again, other strategic hires. We are still thinking about how to continue to grow and expand and to, frankly, use this market environment to our advantage.

For the specific piece on the T&E, let me turn it over to Atul to get you that answer.

Chris, it's Atul. So I think the -- so the way to think about T&E is that it's a little under 10% of our G&A. And as you would expect and as you would have seen with our peers' reporting, T&E has just come down this quarter. And so like Erik said, it all depends on where the market goes from here and how things open up. But in the overall scheme of things, it's just not a very big number.

Okay. Great. And then just one other one. And just with all the dry powder that's out there in the private equity space, maybe just what are your updated thoughts on private equity firms, particularly more kind of middle market and small firms being able to provide self-help to their portfolio of companies? Clearly, the large guys will be fine. But what about some of the smaller to middle market firms?

It's Erik. I'll start and then -- and Mario might chime in here. We would say that unlike kind of prior crises, where there's been a kind of constraint on capital, that is certainly not the issue today. So if you look at kind of dry powder across the entire asset class and across all geographies, that number kind of rounding is running at about $2 trillion of capital. Now that doesn't mean that everybody has all of the dry powder that they want. But as you know, general partners do not lack in creativity. And so we're seeing a variety of amendments being requested to kind of extend or amend investment periods or the ability to use distributions to actually create new investment opportunities.

The ability to go borrow in times like this has actually been relatively easy, and obviously, rates are very friendly. So we think that it's -- I mean, there's no question that we're going to see some companies go away, but those are going to be, we believe, not the result of an inability to access capital, but rather a tactical decision or a strategic decision that the fund manager makes because they think that that business model is not so viable. Let me stop there and see if Mario wants to add on.

Yes, Chris. The thing I would add on is yes, the skill set, the toolkit that small and mid managers use is different from the larger managers. But

(technical difficulty)

Pardon the interruption. Mr. Oh has disconnected. We will attempt to reconnect.

It's Erik. I'm still here. I'm not sure what happened, so that line must have just gone down. So we're going to miss Mario's add-on for that, my apologies. I wasn't sure if it was my line or his line. So no add on there, but if there's a follow-up question, I'm happy to take those.

Your next question comes from the line of Michael Cyprys from Morgan Stanley.

Erik, you had spoken earlier about the power of brands and some of the challenges that smaller firms may face in the industry. So just curious how you see that impacting the opportunity set for inorganic growth. And what sort of dialogue are you having on that front today versus, say, 6 or 12 months ago?

I think part of this is sort of the early-stage nature of it -- of this -- again, our industry and our sales cycle is measured in months and months and months. In some cases, it could be measured in years. I mean, we have had prospects that, again, it's taken our sales team 2 or 3 years to kind of get them across the finish line. Because again, we're talking about very large amounts of capital, and we're talking about contracts that again are so long-dated that they just don't take those questions lightly. So I think it's a little bit early.

That said, if you think about the mechanics of what a relationship looks like and how a relationship gets formed, in the pre-COVID world that was, again, months of dating, lots of in-person meetings, getting together in offices, et cetera. And I think you were doing that all to kind of form a bond and a trust pattern. In a post-COVID world, you're still going to need to do that. But I think our belief is that that time cycle is going to get shortened up a little bit. And again, people, because they don't have a choice, are going to have to make decisions around, okay, who else -- who is doing this well already for a number of institutional investors around the world, as opposed to in a pre-COVID world perhaps there were some people, again, perhaps driven by price, perhaps driven by some other strategic issue of wanting to go try something new or try that newer thing.

I think our data sort of showed in '08, we mentioned we grew through the '08-'09 timeframe, I think, partly because of that sort of trusted provider and that reputation that makes it substantially easier to kind of diligence us and to get to know us. So a little early to actually sort of point to specific trends, but history has sort of shown us that we think, again, in times of crisis, people sort of flock to big brands and stability and certainty. And we think that we're certainly providing that.

There are no further questions at this time. I turn the call back to the presenters for any closing comments.

Great. This is Erik again. I want to just thank you all for taking the time to join us. We appreciate the questions. We appreciate the engagement. We're wishing everyone stays well and stays healthy. Take care. Thank you very much.

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