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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________________ to ___________________________
Commission file number 001-38021
HAMILTON LANE INCORPORATED
(Exact name of Registrant as specified in its charter)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Delaware | | | | | | 26-2482738 | |
| (State or other jurisdiction of incorporation or organization) | | | | | | (I.R.S. Employer Identification No.) | |
| | | | | | | | |
| One Presidential Blvd., | 4th Floor | | | | | | |
| Bala Cynwyd, | PA | | | | | 19004 | |
| (Address of principal executive offices) | | | | | | (Zip Code) | |
(610) 934-2222
(Registrant’s telephone number, including area code)
| | | | | | | | | | | | | | | | | | | | |
Securities registered pursuant to Section 12(b) of the Act: | | | | | | |
Title of each class | | | Trading Symbol(s) | | Name of each exchange on which registered | |
Class A Common Stock, $0.001 par value per share | | | HLNE | | The Nasdaq Stock Market LLC | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | x | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of November 4, 2019, there were 29,824,071 shares of the registrant’s Class A common stock, par value $0.001, and 22,049,727 shares of the registrant’s Class B common stock, par value $0.001, outstanding.
Table of Contents
This Quarterly Report on Form 10-Q (“Form 10-Q”) includes certain information regarding the historical performance of our specialized funds and customized separate accounts. An investment in shares of our Class A common stock is not an investment in our specialized funds or customized separate accounts. In considering the performance information relating to our specialized funds and customized separate accounts contained herein, current and prospective Class A common stockholders should bear in mind that the performance of our specialized funds and customized separate accounts is not indicative of the possible performance of shares of our Class A common stock and is also not necessarily indicative of the future results of our specialized funds or customized separate accounts, even if fund investments were in fact liquidated on the dates indicated, and there can be no assurance that our specialized funds or customized separate accounts will continue to achieve, or that future specialized funds and customized separate accounts will achieve, comparable results.
We own or have rights to trademarks, service marks or trade names that we use in connection with the operation of our business. In addition, our names, logos and website names and addresses are owned by us or licensed by us. We also own or have the rights to copyrights that protect the content of our solutions. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to in this Form 10-Q are listed without the ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks, trade names and copyrights.
This Form 10-Q may include trademarks, service marks or trade names of other companies. Our use or display of other parties’ trademarks, service marks, trade names or products is not intended to, and does not imply a relationship with, or endorsement or sponsorship of us by, the trademark, service mark or trade name owners.
Unless otherwise indicated, information contained in this Form 10-Q concerning our industry and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources (including industry publications, surveys and forecasts), and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets that we believe to be reasonable. Although we believe the data from these third-party sources is reliable, we have not independently verified any third-party information.
Unless otherwise indicated or the context otherwise requires, all references in this Form 10-Q to “we,” “us,” “our,” the “Company,” “Hamilton Lane” and similar terms refer to Hamilton Lane Incorporated and its consolidated subsidiaries. As used in this Form 10-Q, (i) the term “HLA” refers to Hamilton Lane Advisors, L.L.C. and (ii) the terms “Hamilton Lane Incorporated” and “HLI” refer solely to Hamilton Lane Incorporated, a Delaware corporation, and not to any of its subsidiaries.
Cautionary Note Regarding Forward-Looking Information
Some of the statements in this Form 10-Q may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Words such as “will,” “expect,” “believe,” “estimate,” “continue,” “anticipate,” “intend,” “plan” and similar expressions are intended to identify these forward-looking statements. Forward-looking statements discuss management’s current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. All forward-looking statements are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different, including risks relating to our ability to manage growth, fund performance, changes in our regulatory environment and tax status; market conditions generally; our ability to access suitable investment opportunities for our clients; our ability to maintain our fee structure; our ability to attract and retain key employees; our ability to manage our obligations under our debt agreements; defaults by clients and third-party investors on their obligations to us; our ability to comply with investment guidelines set by our clients; and our ability to receive distributions from HLA to fund our payment of dividends, taxes and other expenses.
The foregoing list of factors is not exhaustive. For more information regarding these risks and uncertainties as well as additional risks that we face, you should refer to the “Risk Factors” detailed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended March 31, 2019 (our “2019 Form 10-K”) and in our subsequent reports filed from time to time with the Securities and Exchange Commission (the “SEC”). The forward-looking statements included in this Form 10-Q are made only as of the date we filed this report. We undertake no obligation to update or revise any forward-looking statement as a result of new information or future events, except as otherwise required by law.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Hamilton Lane Incorporated
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share amounts)
| | | | | | | | | | | |
| September 30, | | March 31, |
| 2019 | | 2019 |
Assets | | | |
Cash and cash equivalents | $ | 71,899 | | | $ | 49,357 | |
Restricted cash | 3,184 | | | 2,233 | |
Fees receivable | 17,628 | | | 20,320 | |
Prepaid expenses | 5,401 | | | 4,714 | |
Due from related parties | 4,198 | | | 2,628 | |
Furniture, fixtures and equipment, net | 8,026 | | | 8,108 | |
Lease right-of-use assets, net | 9,689 | | | — | |
Investments | 174,134 | | | 154,491 | |
Deferred income taxes | 140,745 | | | 107,726 | |
Other assets | 10,478 | | | 11,014 | |
Total assets | $ | 445,382 | | | $ | 360,591 | |
Liabilities and Equity | | | |
Accounts payable | $ | 1,964 | | | $ | 2,619 | |
Accrued compensation and benefits | 20,689 | | | 12,216 | |
Deferred incentive fee revenue | 3,704 | | | 3,704 | |
Debt | 69,107 | | | 70,954 | |
Accrued members’ distributions | 3,836 | | | 17,081 | |
Payable to related parties pursuant to tax receivable agreement | 101,322 | | | 69,636 | |
Dividends payable | 8,023 | | | 5,673 | |
Lease liabilities | 10,471 | | | — | |
Other liabilities (includes $15,913 and $0 at fair value) | 21,635 | | | 8,986 | |
Total liabilities | 240,751 | | | 190,869 | |
| | | |
Commitments and contingencies (Note 13) | | | |
| | | |
Preferred stock, $0.001 par value, 10,000,000 authorized, none issued | — | | | — | |
Class A common stock, $0.001 par value, 300,000,000 authorized; 29,824,686 and 27,367,477 issued and outstanding as of September 30, 2019 and March 31, 2019, respectively | 30 | | | 27 | |
Class B common stock, $0.001 par value, 50,000,000 authorized; 22,049,727 and 23,516,439 issued and outstanding as of September 30, 2019 and March 31, 2019, respectively | 22 | | | 24 | |
Additional paid-in-capital | 107,718 | | | 92,482 | |
Retained earnings | 28,998 | | | 17,686 | |
Accumulated other comprehensive (loss) income | (7) | | | 7 | |
Total Hamilton Lane Incorporated stockholders’ equity | 136,761 | | | 110,226 | |
Non-controlling interests in general partnerships | 5,592 | | | 5,716 | |
Non-controlling interests in Hamilton Lane Advisors, L.L.C. | 62,278 | | | 53,780 | |
Total equity | 204,631 | | | 169,722 | |
Total liabilities and equity | $ | 445,382 | | | $ | 360,591 | |
See accompanying notes to the condensed consolidated financial statements.
Hamilton Lane Incorporated
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Six Months Ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues | | | | | | | |
Management and advisory fees | $ | 59,196 | | | $ | 53,248 | | | $ | 119,747 | | | $ | 104,227 | |
Incentive fees | 5,096 | | | 2,585 | | | 9,231 | | | 14,968 | |
Total revenues | 64,292 | | | 55,833 | | | 128,978 | | | 119,195 | |
Expenses | | | | | | | |
Compensation and benefits | 23,353 | | | 22,771 | | | 46,999 | | | 49,393 | |
General, administrative and other | 14,014 | | | 11,695 | | | 28,061 | | | 22,743 | |
Total expenses | 37,367 | | | 34,466 | | | 75,060 | | | 72,136 | |
Other income (expense) | | | | | | | |
Equity in income of investees | 3,664 | | | 5,276 | | | 9,877 | | | 5,162 | |
Interest expense | (745) | | | (728) | | | (1,562) | | | (1,493) | |
Interest income | 148 | | | 43 | | | 428 | | | 85 | |
Non-operating income | 4,957 | | | 12,194 | | | 4,078 | | | 12,059 | |
Total other income (expense) | 8,024 | | | 16,785 | | | 12,821 | | | 15,813 | |
Income before income taxes | 34,949 | | | 38,152 | | | 66,739 | | | 62,872 | |
Income tax expense | 2,676 | | | 5,580 | | | 7,013 | | | 7,197 | |
Net income | 32,273 | | | 32,572 | | | 59,726 | | | 55,675 | |
Less: Income attributable to non-controlling interests in general partnerships | 45 | | | 514 | | | 549 | | | 394 | |
Less: Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | 16,929 | | | 20,836 | | | 32,497 | | | 35,214 | |
Net income attributable to Hamilton Lane Incorporated | $ | 15,299 | | | $ | 11,222 | | | $ | 26,680 | | | $ | 20,067 | |
| | | | | | | |
Basic earnings per share of Class A common stock | $ | 0.56 | | | $ | 0.49 | | | $ | 0.99 | | | $ | 0.89 | |
Diluted earnings per share of Class A common stock | $ | 0.56 | | | $ | 0.49 | | | $ | 0.98 | | | $ | 0.88 | |
Dividends declared per share of Class A common stock | $ | 0.275 | | | $ | 0.2125 | | | $ | 0.55 | | | $ | 0.425 | |
See accompanying notes to the condensed consolidated financial statements.
Hamilton Lane Incorporated
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended September 30, | | | | Six Months Ended September 30, | | |
| | | | | 2019 | | 2018 | | 2019 | | 2018 |
Net income | | | | | $ | 32,273 | | | $ | 32,572 | | | $ | 59,726 | | | $ | 55,675 | |
Other comprehensive loss, net of tax | | | | | | | | | | | |
Foreign currency translation | | | | | (42) | | | — | | | (29) | | | — | |
Total other comprehensive loss, net of tax | | | | | (42) | | | — | | | (29) | | | — | |
Comprehensive income | | | | | 32,231 | | | 32,572 | | | 59,697 | | | 55,675 | |
Less: | | | | | | | | | | | |
Comprehensive income attributable to non-controlling interests in general partnerships | | | | | 45 | | | 514 | | | 549 | | | 394 | |
Comprehensive income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | | | | | 16,908 | | | 20,836 | | | 32,482 | | | 35,214 | |
Total comprehensive income attributable to Hamilton Lane Incorporated | | | | | $ | 15,278 | | | $ | 11,222 | | | $ | 26,666 | | | $ | 20,067 | |
See accompanying notes to the condensed consolidated financial statements.
Hamilton Lane Incorporated
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Non-Controlling Interests in General Partnerships | | Non-Controlling Interests in Hamilton Lane Advisors, L.L.C. | | Total Equity |
| | | | | | | | | | | | | | | |
Balance at June 30, 2019 | $ | 27 | | | $ | 24 | | | $ | 93,543 | | | $ | 21,722 | | | $ | 14 | | | $ | 5,932 | | | $ | 56,573 | | | $ | 177,835 | |
Net income | — | | | — | | | — | | | 15,299 | | | — | | | 45 | | | 16,929 | | | 32,273 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (21) | | | — | | | (21) | | | (42) | |
Equity-based compensation | — | | | — | | | 902 | | | — | | | — | | | — | | | 859 | | | 1,761 | |
Repurchase of Class A shares for employee tax withholding | — | | | — | | | (14) | | | — | | | — | | | — | | | (14) | | | (28) | |
Deferred tax adjustment | — | | | — | | | 6,207 | | | — | | | — | | | — | | | — | | | 6,207 | |
Dividends declared | — | | | — | | | — | | | (8,023) | | | — | | | — | | | — | | | (8,023) | |
Capital contributions from (distributions to) non-controlling interests, net | — | | | — | | | — | | | — | | | — | | | (385) | | | — | | | (385) | |
Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | (5,281) | | | (5,281) | |
Secondary offering | 3 | | | (2) | | | 6,367 | | | — | | | — | | | — | | | (6,370) | | | (2) | |
Employee Share Purchase Plan share issuance | — | | | — | | | 162 | | | — | | | — | | | — | | | 154 | | | 316 | |
Equity reallocation between controlling and non-controlling interests | — | | | — | | | 551 | | | — | | | — | | | — | | | (551) | | | — | |
Balance at September 30, 2019 | $ | 30 | | | $ | 22 | | | $ | 107,718 | | | $ | 28,998 | | | $ | (7) | | | $ | 5,592 | | | $ | 62,278 | | | $ | 204,631 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Non-Controlling Interests in General Partnerships | | Non-Controlling Interests in Hamilton Lane Advisors, L.L.C. | | Total Equity |
| | | | | | | | | | | | | | | |
Balance at March 31, 2019 | $ | 27 | | | $ | 24 | | | $ | 92,482 | | | $ | 17,686 | | | $ | 7 | | | $ | 5,716 | | | $ | 53,780 | | | $ | 169,722 | |
Net income | — | | | — | | | — | | | 26,680 | | | — | | | 549 | | | 32,497 | | | 59,726 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (14) | | | — | | | (15) | | | (29) | |
Equity-based compensation | — | | | — | | | 1,777 | | | — | | | — | | | — | | | 1,725 | | | 3,502 | |
Issuance of shares for contingent compensation payout | — | | | — | | | 214 | | | — | | | — | | | — | | | 211 | | | 425 | |
Repurchase of Class A shares for employee tax withholding | — | | | — | | | (23) | | | — | | | — | | | — | | | (22) | | | (45) | |
Deferred tax adjustment | — | | | — | | | 6,211 | | | — | | | — | | | — | | | — | | | 6,211 | |
Dividends declared | — | | | — | | | — | | | (15,368) | | | — | | | — | | | — | | | (15,368) | |
Capital contributions from (distributions to) non-controlling interests, net | — | | | — | | | — | | | — | | | — | | | (673) | | | — | | | (673) | |
Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | (19,430) | | | (19,430) | |
Secondary Offering | 3 | | | (2) | | | 6,367 | | | — | | | — | | | — | | | (6,370) | | | (2) | |
Employee Share Purchase Plan share issuance | — | | | — | | | 301 | | | — | | | — | | | — | | | 291 | | | 592 | |
Equity reallocation between controlling and non-controlling interests | — | | | — | | | 389 | | | — | | | — | | | — | | | (389) | | | — | |
Balance at September 30, 2019 | $ | 30 | | | $ | 22 | | | $ | 107,718 | | | $ | 28,998 | | | $ | (7) | | | $ | 5,592 | | | $ | 62,278 | | | $ | 204,631 | |
See accompanying notes to the condensed consolidated financial statements.
Hamilton Lane Incorporated
Condensed Consolidated Statement of Stockholders' Equity
(Unaudited)
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Non-Controlling Interests in General Partnerships | | Non-Controlling Interests in Hamilton Lane Advisors, L.L.C. | | Total Equity |
| | | | | | | | | | | | | | | |
Balance at June 30, 2018 | $ | 22 | | | $ | 26 | | | $ | 74,802 | | | $ | 8,685 | | | $ | — | | | $ | 6,709 | | | $ | 54,681 | | | $ | 144,925 | |
Net income | — | | | — | | | — | | | 11,222 | | | — | | | 514 | | | 20,836 | | | 32,572 | |
Equity-based compensation | — | | | — | | | 691 | | | — | | | — | | | — | | | 919 | | | 1,610 | |
Repurchase of Class A shares for employee tax withholding | — | | | — | | | (10) | | | — | | | — | | | — | | | (14) | | | (24) | |
Deferred tax adjustment | — | | | — | | | 6,170 | | | — | | | — | | | — | | | — | | | 6,170 | |
Dividends declared | — | | | — | | | — | | | (4,729) | | | — | | | — | | | — | | | (4,729) | |
Capital contributions from (distributions to) non-controlling interests, net | — | | | — | | | — | | | — | | | — | | | (350) | | | — | | | (350) | |
Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | (18,025) | | | (18,025) | |
Secondary offering | 3 | | | (2) | | | 5,891 | | | — | | | — | | | — | | | (5,894) | | | (2) | |
Equity reallocation between controlling and non-controlling interests | — | | | — | | | (1,455) | | | — | | | — | | | — | | | 1,455 | | | — | |
Balance at September 30, 2018 | $ | 25 | | | $ | 24 | | | $ | 86,089 | | | $ | 15,178 | | | $ | — | | | $ | 6,873 | | | $ | 53,958 | | | $ | 162,147 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | Non-Controlling Interests in General Partnerships | | Non-Controlling Interests in Hamilton Lane Advisors, L.L.C. | | Total Equity |
| | | | | | | | | | | | | | | |
Balance at March 31, 2018 | $ | 22 | | | $ | 26 | | | $ | 73,829 | | | $ | 4,549 | | | $ | — | | | $ | 7,266 | | | $ | 50,382 | | | $ | 136,074 | |
Cumulative-effect adjustment from adoption of accounting guidance | — | | | — | | | 411 | | | 20 | | | — | | | — | | | 566 | | | 997 | |
Net income | — | | | — | | | — | | | 20,067 | | | — | | | 394 | | | 35,214 | | | 55,675 | |
Equity-based compensation | — | | | — | | | 1,369 | | | — | | | — | | | — | | | 1,851 | | | 3,220 | |
Repurchase of Class A shares for employee tax withholding | — | | | — | | | (73) | | | — | | | — | | | — | | | (101) | | | (174) | |
Deferred tax adjustment | — | | | — | | | 6,170 | | | — | | | — | | | — | | | — | | | 6,170 | |
Dividends declared | — | | | — | | | — | | | (9,458) | | | — | | | — | | | — | | | (9,458) | |
Capital contributions from (distributions to) non-controlling interests, net | — | | | — | | | — | | | — | | | — | | | (787) | | | — | | | (787) | |
Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | (29,568) | | | (29,568) | |
Secondary offering | 3 | | | (2) | | | 5,891 | | | — | | | — | | | — | | | (5,894) | | | (2) | |
Equity reallocation between controlling and non-controlling interests | — | | | — | | | (1,508) | | | — | | | — | | | — | | | 1,508 | | | — | |
Balance at September 30, 2018 | $ | 25 | | | $ | 24 | | | $ | 86,089 | | | $ | 15,178 | | | $ | — | | | $ | 6,873 | | | $ | 53,958 | | | $ | 162,147 | |
See accompanying notes to the condensed consolidated financial statements.
Hamilton Lane Incorporated
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| | | | | | | | | | | |
| Six Months Ended September 30, | | |
| 2019 | | 2018 |
Operating activities: | | | |
Net income | $ | 59,726 | | | $ | 55,675 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 1,608 | | | 1,141 | |
Change in deferred income taxes | 4,728 | | | 2,866 | |
Change in payable to related parties pursuant to tax receivable agreement | 150 | | | (839) | |
Equity-based compensation | 3,483 | | | 3,182 | |
Equity in income of investees | (9,877) | | | (5,162) | |
Gain on sale of investments valued under the measurement alternative | (4,973) | | | | (11,133) | |
Proceeds received from investments | 4,178 | | | 7,525 | |
Other | 674 | | | 93 | |
Changes in operating assets and liabilities: | | | |
Fees receivable | 2,676 | | | 1,246 | |
Prepaid expenses | (688) | | | (554) | |
Due from related parties | (1,570) | | | 1,445 | |
Other assets | 360 | | | (1,533) | |
Accounts payable | (656) | | | (1,224) | |
Accrued compensation and benefits | 8,898 | | | 22,307 | |
Deferred incentive fees | — | | | (2,541) | |
Other liabilities | (2,514) | | | 562 | |
Net cash provided by operating activities | 66,203 | | | 73,056 | |
Investing activities: | | | |
Purchase of furniture, fixtures and equipment | (1,296) | | | (3,225) | |
Purchase of other investments | (3,967) | | | — | |
Proceeds from sales of investments valued under the measurement alternative | 6,419 | | | 22,532 | |
Distributions received from investments | 4,838 | | | 4,105 | |
Contributions to investments | (16,774) | | | (14,832) | |
Net cash (used in) provided by investing activities | (10,780) | | | 8,580 | |
Financing activities: | | | |
Proceeds from offering | 147,122 | | | 129,626 | |
Purchase of membership interests | (147,122) | | | (129,626) | |
Repayments of debt | (1,874) | | | (11,387) | |
Draw-down on revolver | 15,000 | | | — | |
Repayment of revolver | (15,000) | | | — | |
Secured financing | 15,750 | | | | — | |
Contributions from non-controlling interest in general partnerships | 29 | | | 17 | |
Distributions to non-controlling interest in general partnerships | (702) | | | (804) | |
Repurchase of Class B common stock | (2) | | | (2) | |
Repurchase of Class A shares for employee tax withholding | (45) | | | (174) | |
Proceeds received from issuance of shares under Employee Share Purchase Plan | 592 | | | — | |
Dividends paid | (13,018) | | | (8,622) | |
Members’ distributions paid | (32,675) | | | (32,690) | |
Net cash used in financing activities | (31,945) | | | (53,662) | |
Effect of exchange rate changes on cash and cash equivalents | 15 | | | — | |
Increase in cash, cash equivalents, and restricted cash | 23,493 | | | 27,974 | |
Cash, cash equivalents, and restricted cash at beginning of the period | 51,590 | | | 49,383 | |
Cash, cash equivalents, and restricted cash at end of the period | $ | 75,083 | | | $ | 77,357 | |
See accompanying notes to the condensed consolidated financial statements.
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
1. Organization
Hamilton Lane Incorporated (“HLI”) was incorporated in the State of Delaware on December 31, 2007. As of March 6, 2017, following its initial public offering (“IPO”) and related transactions, HLI became a publicly-traded entity, and is a holding company whose principal asset is a controlling equity interest in Hamilton Lane Advisors, L.L.C. (“HLA”). As the sole managing member of HLA, HLI operates and controls all of the business and affairs of HLA, and through HLA, conducts its business. As a result, HLI consolidates HLA’s financial results and reports a non-controlling interest related to the portion of HLA units not owned by HLI. The assets and liabilities of HLA represent substantially all of HLI’s consolidated assets and liabilities with the exception of certain deferred tax assets and liabilities, payable to related parties pursuant to a tax receivable agreement, and dividends payable. Unless otherwise specified, “the Company” refers to the consolidated entity of HLI and HLA and subsidiaries throughout the remainder of these notes. As of September 30, 2019 and March 31, 2019, HLI held approximately 54.9% and 50.3%, respectively, of the economic interest in HLA. As future exchanges of HLA units occur pursuant to the exchange agreement in place with HLA’s members, the economic interest in HLA held by HLI will increase.
HLA is a registered investment advisor with the United States Securities and Exchange Commission (“SEC”), providing asset management and advisory services, primarily to institutional investors, to design, build and manage private markets portfolios. HLA sponsors the formation, and serves as the general partner or managing member, of various limited partnerships or limited liability companies consisting of specialized funds and certain single client separate account entities (“Partnerships”) that acquire interests in third-party managed investment funds that make private equity and equity-related investments. The Partnerships may also make direct co-investments, including investments in debt, equity, and other equity-based instruments. HLA, which includes certain subsidiaries that serve as the general partner or managing member of the Partnerships, may invest its own capital in the Partnerships and generally makes all investment and operating decisions for the Partnerships. HLA operates several wholly-owned entities through which it conducts its foreign operations.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Management believes it has made all necessary adjustments (which consisted of only normal recurring items) so that the condensed consolidated financial statements are presented fairly and that estimates made in preparing the condensed consolidated financial statements are reasonable and prudent. Results of operations for the six months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending March 31, 2020. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in HLI’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019.
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
Fair Value of Financial Instruments
The Company utilizes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). The levels of the hierarchy are described below:
•Level 1: Values are determined using quoted market prices for identical financial instruments in an active market.
•Level 2: Values are determined using quoted prices for similar financial instruments and valuation models whose inputs are observable.
•Level 3: Values are determined using pricing models that use significant inputs that are primarily unobservable, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The carrying amount of cash and cash equivalents, fees receivable, and accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments.
The carrying amount of the term loan of $69,107 as of September 30, 2019 approximated fair value based on then-current market rates for similar debt instruments and is classified as Level 2 within the fair value hierarchy.
Leases
On April 1, 2019, the Company adopted ASU 2016-02, “Leases” (ASC 842) on a prospective basis and as a result, prior period amounts were not adjusted to reflect the impacts of the new standard. In addition, as permitted under the transition guidance within the new standard, prior scoping, classification, and accounting for initial direct costs were carried forward for leases existing as of the adoption date. The new standard establishes a right of use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the Condensed Consolidated Balance Sheets for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the Condensed Consolidated Statements of Income. The adoption did not have an impact on the Condensed Consolidated Statements of Income as all of the Company’s leases are operating leases, and will continue to be recognized as expense on a straight-line basis. The adoption, however, resulted in a gross-up in total assets and total liabilities on the Condensed Consolidated Balance Sheets.
The Company determines whether an arrangement contains a lease at inception. A lease is a contract that provides the right to control an identified asset for a period of time in exchange for consideration. For identified leases, the Company determines whether it should be classified as an operating or finance lease. The Company accounts for lease components and non-lease components as a single lease component. Lease ROU assets and lease liabilities are recognized at the commencement date of the lease and measured based on the present value of lease payments over the lease term. Lease ROU assets include initial direct costs incurred by the Company and are presented net of deferred rent and lease incentives. Generally, the Company’s leases do not provide an implicit rate and as a result, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. The Company does not recognize a lease ROU asset or lease liability for short-term leases, which have lease
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
terms of 12 months or less. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”. ASU 2018-13 changes the fair value measurement disclosure requirements. The amendments remove or modify certain disclosures, while others were added. Early adoption of any removed or modified disclosure requirements is permitted upon issuance of ASU 2018-13 and adoption of the additional disclosure requirements may be delayed until the effective date. The Company elected to early adopt the removed or modified disclosure requirements of the standard on October 1, 2018 and expects to adopt the additional disclosure requirements on April 1, 2020. The adoption of the removed or modified disclosure requirements did not have a material impact on the Company’s disclosures in its condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Accounting for Financial Instruments - Credit Losses (Topic 326)”. ASU 2016-13 replaces the incurred loss methodology in current GAAP with a methodology that reflects expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This guidance is effective for the Company on April 1, 2020 and early adoption is permitted. The Company is evaluating the impact that this guidance will have on its condensed consolidated financial statements and expects to adopt this guidance on April 1, 2020.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation.
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
3. Revenue
The following table presents revenues disaggregated by product offering, which aligns with the identified performance obligations and the basis for calculating each amount:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Six Months Ended September 30, | | |
Management and advisory fees | 2019 | | 2018 | | 2019 | | 2018 |
Specialized funds | $ | 26,985 | | | $ | 22,736 | | | 53,944 | | | 43,751 | |
Customized separate accounts | 22,466 | | | 21,106 | | | 44,429 | | | 41,493 | |
Advisory | 5,961 | | | 6,152 | | | 12,213 | | | 12,361 | |
Reporting and other | 2,092 | | | 2,163 | | | 4,255 | | | 4,113 | |
Distribution management | 702 | | | 710 | | | 2,061 | | | 1,798 | |
Fund reimbursement revenue | 990 | | | 381 | | | 2,845 | | | 711 | |
Total management and advisory fees | $ | 59,196 | | | $ | 53,248 | | | $ | 119,747 | | | $ | 104,227 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Six Months Ended September 30, | | |
Incentive fees | 2019 | | 2018 | | 2019 | | 2018 |
Specialized funds | $ | 4,980 | | | 2,085 | | | $ | 7,619 | | | $ | 7,809 | |
Customized separate accounts | 116 | | | 500 | | | 1,612 | | | 7,159 | |
Total incentive fees | $ | 5,096 | | | $ | 2,585 | | | $ | 9,231 | | | $ | 14,968 | |
The Company recognized $2,541 of incentive fees during the six months ended September 30, 2018 that were previously received and deferred.
Cost to obtain contracts
The Company incurs incremental costs related to sales commissions paid to certain employees directly related to customized separate account contracts. These incremental costs are capitalized and amortized over the expected contract length proportionately to the management fee revenue expected to be recognized in each year as a percentage of the total expected revenue for the contract. The contract asset related to the cost to obtain contracts was $960 and $968 as of September 30, 2019 and March 31, 2019, respectively, and is included in other assets in the Condensed Consolidated Balance Sheets. Amortization expense related to this contract asset was $124 and $246 for the three and six months ended September 30, 2019, respectively, and $114 and $236 for the three and six months ended September 30, 2018, respectively, and is included in general, administrative and other in the Condensed Consolidated Statements of Income.
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
4. Investments
Investments consist of the following:
| | | | | | | | | | | |
| September 30, | | March 31, |
| 2019 | | 2019 |
Equity method investments in Partnerships | $ | 140,560 | | | $ | 122,505 | |
Equity method investments in Partnerships held by consolidated VIEs | 11,485 | | | 11,648 | |
Other equity method investments | 1,461 | | | 1,086 | |
Other investments | 15,913 | | | 12,488 | |
Investments valued under the measurement alternative | 4,715 | | | 6,764 | |
Total Investments | $ | 174,134 | | | $ | 154,491 | |
Equity method investments
The Company’s equity method investments in Partnerships represent its ownership in certain specialized funds and customized separate accounts. The strategies and geographic location of investments within the Partnerships vary by fund. The Company has a 1% interest in substantially all of the Partnerships. The Company’s other equity method investments represent its ownership in a technology company that provides benchmarking and analytics of private equity data and its ownership in a joint venture that automates the collection of fund and underlying portfolio company data from general partners. The Company recognized equity method income related to its investments in Partnerships and other equity method investments of $3,664 and $9,877 for the three and six months ended September 30, 2019, respectively, and $5,276 and $5,162 for the three and six months ended September 30, 2018, respectively.
Other investments
The Company’s other investments represent investments in private equity funds and direct credit and equity co-investments. The private equity fund investments can only be redeemed through distributions received from the liquidation of underlying investments of the fund, and the timing of distributions is currently indeterminable. The direct credit co-investments are debt securities classified as trading securities. The direct equity co-investments and private equity funds are measured at fair value with unrealized holding gains and losses included in earnings. The Company’s other investments are recorded at estimated fair value utilizing significant unobservable inputs and are therefore classified in Level 3 of the fair value hierarchy.
The following is a reconciliation of other investments for which significant unobservable inputs (Level 3) were used in determining value:
| | | | | | | | | | | | | | | | | | | | | | | |
| Private equity funds | | Direct credit co-investments | | Direct equity co-investments | | Total other investments |
Balance as of June 30, 2019 | $ | 5,911 | | | | $ | 4,013 | | | | $ | 6,689 | | | | $ | 16,613 | |
Purchases | — | | | | — | | | | — | | | | — | |
Sales / Maturities | — | | | (973) | | | — | | | (973) | |
Net (loss) gain | (75) | | | | 53 | | | | 295 | | | | 273 | |
Balance as of September 30, 2019 | $ | 5,836 | | | | $ | 3,093 | | | | $ | 6,984 | | | | $ | 15,913 | |
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Private equity funds | | Direct credit co-investments | | Direct equity co-investments | | Total other investments |
Balance as of March 31, 2019 | $ | 3,734 | | | | $ | 3,940 | | | | $ | 4,814 | | | | $ | 12,488 | |
Purchases | 2,092 | | | | — | | | | 1,875 | | | | 3,967 | |
Sales / Maturities | — | | | | (973) | | | | — | | | | (973) | |
Net gain | 10 | | | | 126 | | | | 295 | | | | 431 | |
Balance as of September 30, 2019 | $ | 5,836 | | | | $ | 3,093 | | | | $ | 6,984 | | | | $ | 15,913 | |
The valuation methodologies, significant unobservable inputs, range of inputs and the weighted average input determined based upon relative fair value of the investments used in recurring Level 3 fair value measurements of assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Significant | | | | | | |
| Fair | | Valuation | | Unobservable | | | | | | Weighted |
| Value | | Methodology | | Inputs | | Range | | | | Average |
Private equity funds | $ | 5,836 | | | Adjusted net asset value | | | Selected market return | | | 3.8% | | - | 5.2% | | | 4.7% | |
Direct credit co-investments | $ | 3,093 | | | Recent precedent transactions | | | | | | | | | |
| | | Discounted cash flow | | | Market yield | | | 10.2% | | - | 11.5% | | | 10.7% | |
Direct equity co-investments | $ | 6,984 | | | Recent precedent transactions | | | | | | | | | |
| | | Market approach | | | EBITDA multiple | | 10.25x | - | 12.75x | | 11.2x |
| | | Market approach | | | Equity multiple | | 1.25x | | | | 1.25x |
For the significant unobservable inputs listed in the table above, (1) a significant increase or decrease in the selected market return would result in a significantly higher or lower fair value measurement, respectively; (2) a significant increase or decrease in the market yield would result in a significantly lower or higher fair value measurement, respectively; and (3) a significant increase or decrease in the selected multiple would result in a significantly higher or lower fair value measurement, respectively.
During the six months ended September 30, 2019, the Company transferred these investments for an agreed amount of cash of $15,750 to a Partnership that is a Variable Interest Entity (“VIE”) of which the Company is the general partner but does not consolidate as the Company is not the primary beneficiary. Due to continuing involvement with these assets at the Partnership, the Company accounted for this transfer as a secured financing as it has not met the criteria in ASC 860, “Transfers and Servicing” to qualify as a sale and therefore has recorded a financial liability for the secured financing which is included in other liabilities in the Condensed Consolidated Balance Sheets. The cash received was recorded as secured financing in financing activities in the Condensed Consolidated Statements of Cash Flows. As of September 30, 2019, all other investments were pledged as collateral on the Company’s secured financing.
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
The Company accounts for this financial liability at fair value under the fair value option. The primary reason for electing the fair value option is to mitigate volatility in earnings from using different measurement attributes. The significant input to the fair value of the secured financing is the fair value of the other investments delivered as collateral. As of September 30, 2019, the secured financing had a fair value of $15,913 and an amortized cost of $14,614. The fair value of the secured financing is estimated using Level 3 inputs with the significant input being the fair value of the other investments utilized as collateral as shown above.
The Company recognized a gain of $273 and $431 on other investments during the three and six months ended September 30, 2019, respectively, and a loss of $273 and $1,136 on the secured financing during the three and six months ended September 30, 2019, respectively, that are recorded in other non-operating loss.
Investments valued under the measurement alternative
On July 1, 2019, the previously announced sale of an entity in which the Company held an investment closed. The Company received gross proceeds of $6,419 and recorded a gain of approximately $4,973 in connection with the transaction during the three and six months ended September 30, 2019.
5. Variable Interest Entities
The Company consolidates certain VIEs in which it is determined that the Company is the primary beneficiary. The consolidated VIEs are general partner entities of the Partnerships, which are not wholly owned by the Company. The total assets of the consolidated VIEs are $11,485 and $11,648 as of September 30, 2019 and March 31, 2019, respectively, and are recorded in investments in the Condensed Consolidated Balance Sheets. The consolidated VIEs had no liabilities as of September 30, 2019 and March 31, 2019 other than deferred incentive fee revenue of $3,704 as of both September 30, 2019 and March 31, 2019. The assets of the consolidated VIEs may only be used to settle obligations of the consolidated VIEs, if any. In addition, there is no recourse to the Company for the consolidated VIEs’ liabilities, except for certain entities in which there could be a clawback of previously distributed carried interest.
The Company holds variable interests in certain Partnerships that are VIEs, which are not consolidated, as it is determined that the Company is not the primary beneficiary based upon the Company’s equity interest percentage in each of the VIEs. Certain Partnerships are considered VIEs because limited partners lack the ability to remove the general partner or dissolve the entity without cause, by simple majority vote (i.e. do not have substantive “kick out” or “liquidation” rights). The Company’s involvement with such entities is in the form of direct equity interests in, and fee arrangements with, the Partnerships in which it also serves as the general partner or managing member. In the Company’s role as general partner or managing member, it generally considers itself the sponsor of the applicable Partnership and makes all investment and operating decisions. As of September 30, 2019, the total commitments and remaining unfunded commitments from the limited partners and general partners to the unconsolidated VIEs are $17,686,664 and $6,457,991, respectively. These commitments are the primary source of financing for the unconsolidated VIEs.
The maximum exposure to loss represents the potential loss of assets recognized by the Company relating to these unconsolidated entities. The Company believes that its maximum exposure to loss is limited because it establishes separate limited partnerships or limited liability companies to serve as the general partner or managing member of the Partnerships.
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
The carrying amount of assets and liabilities recognized in the Condensed Consolidated Balance Sheets related to the Company’s interests in these non-consolidated VIEs and the Company’s maximum exposure to loss relating to non-consolidated VIEs were as follows:
| | | | | | | | | | | |
| September 30, | | March 31, |
| 2019 | | 2019 |
Investments | $ | 99,828 | | | $ | 87,001 | |
Fees receivable | 6,075 | | | 5,896 | |
Due from related parties | 3,178 | | | 1,332 | |
Total VIE Assets | 109,081 | | | 94,229 | |
Deferred incentive fee revenue | 3,704 | | | 3,704 | |
Non-controlling interests | (5,592) | | | (5,716) | |
Maximum exposure to loss | $ | 107,193 | | | $ | 92,217 | |
6. Equity
The following table shows a rollforward of the Company’s common stock outstanding since March 31, 2019:
| | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock |
March 31, 2019 | 27,367,477 | | | 23,516,439 | |
Shares issued (repurchased) in connection with registered offering | 2,451,633 | | | (1,466,712) | |
Shares issued in connection with contingent compensation payment | 7,692 | | | — | |
Forfeitures | (13,812) | | | — | |
Shares repurchased for employee tax withholdings | (509) | | | — | |
Shares issued pursuant to Employee Share Purchase Plan | 12,205 | | | — | |
September 30, 2019 | 29,824,686 | | | 22,049,727 | |
September 2019 Offering
In September 2019, the Company and certain selling stockholders completed a registered offering of an aggregate of 2,680,089 shares of Class A common stock at a price of $60.01 per share (the “September 2019 Offering”). The shares sold consisted of (i) 228,456 shares held by the selling stockholders and (ii) 2,451,633 shares newly issued by the Company. The Company received approximately $147,122 in net proceeds from the sale of its shares and used all of the proceeds to settle exchanges by certain members of HLA of a total of 1,466,712 Class B units and 984,921 Class C units. In connection with the exchange of the Class B units, the Company also repurchased for par value and canceled a corresponding number of shares of Class B common stock. The Company did not receive any proceeds from the sale of shares by the selling stockholders.
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
7. Equity-Based Compensation
A summary of restricted stock activity for the six months ended September 30, 2019 is presented below:
| | | | | | | | | | | |
| Total Unvested | | Weighted- Average Grant-Date Fair Value of Award |
March 31, 2019 | 662,076 | | | $ | 26.58 | |
Granted | — | | | $ | — | |
Vested | (8,556) | | | $ | 29.70 | |
Forfeited | (13,812) | | | $ | 28.02 | |
September 30, 2019 | 639,708 | | | $ | 26.51 | |
As of September 30, 2019, total unrecognized compensation expense related to restricted stock was $13,352.
8. Compensation and Benefits
The Company has recorded the following amounts related to compensation and benefits:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Six Months Ended September 30, | | |
| 2019 | | 2018 | | 2019 | | 2018 |
Base compensation and benefits | $ | 20,338 | | | $ | 18,216 | | | $ | 41,248 | | | $ | 38,070 | |
Incentive fee compensation | 1,259 | | | 633 | | | 2,268 | | | 3,041 | |
Equity-based compensation | 1,756 | | | 1,595 | | | 3,483 | | | 3,182 | |
Contingent compensation related to acquisition | — | | | 2,327 | | | — | | | 5,100 | |
Total compensation and benefits | $ | 23,353 | | | $ | 22,771 | | | $ | 46,999 | | | $ | 49,393 | |
9. Income Taxes
The Company’s effective tax rate used for interim periods is based on an estimated annual effective tax rate including the tax effect of items required to be recorded discretely in the interim period in which those items occur. The effective tax rate is dependent on many factors, including the estimated amount of income subject to income tax; therefore, the effective tax rate can vary from period to period. The Company evaluates the realizability of its deferred tax asset on a quarterly basis and adjusts the valuation allowance when it is more likely than not that all or a portion of the deferred tax asset may not be realized.
The Company’s effective tax rate was 7.7% and 14.6% for the three months ended September 30, 2019 and 2018, respectively, and 10.5% and 11.4% for the six months ended September 30, 2019 and 2018, respectively. The effective tax rates were different from the statutory tax rate due to the portion of income allocated to non-controlling interests and discrete tax adjustments recorded in the periods.
In connection with the September 2019 Offering, the Company recorded a deferred tax asset in the amount of $41,130. It is more likely than not that a portion of these tax benefits will not be realized, so a
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
valuation allowance of $3,736 has been established as of September 30, 2019. Additionally, in connection with the September 2019 Offering and recording of the deferred tax asset, the Company recorded a payable to related parties pursuant to the tax receivable agreement of $31,481.
As of September 30, 2019, the Company had no unrecognized tax positions and believes there will be no changes to uncertain tax positions within the next 12 months.
10. Earnings per Share
Shares of the Company’s Class B common stock do not share in the earnings or losses attributable to HLI, and, therefore, are not participating securities. As a result, a separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been included. Shares of the Company’s Class B common stock are, however, considered potentially dilutive to the Class A common stock because the Class B units to which the Class B common stock corresponds are exchangeable for shares of Class A common stock on a one-for-one basis, at which time the share of Class B common stock is surrendered in exchange for a payment of its par value.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | | | | | Three Months Ended September 30, 2018 | | | | |
| | | | | | | | | | | |
| Net income attributable to HLI | | Weighted-Average Shares | | Per share amount | | Net income attributable to HLI | | Weighted-Average Shares | | Per share amount |
Basic EPS of Class A common stock | $ | 15,299 | | | 27,229,152 | | | $ | 0.56 | | | $ | 11,222 | | | 22,671,865 | | | $ | 0.49 | |
Adjustment to net income: | | | | | | | | | | | |
Assumed vesting of employee awards | 110 | | | | | | | 165 | | | | | |
Effect of dilutive securities: | | | | | | | | | | | |
Assumed vesting of employee awards | | | 403,738 | | | | | | | 585,554 | | | |
Diluted EPS of Class A common stock | $ | 15,409 | | | 27,632,890 | | | $ | 0.56 | | | $ | 11,387 | | | 23,257,419 | | | $ | 0.49 | |
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended September 30, 2019 | | | | | | Six Months Ended September 30, 2018 | | | | |
| | | | | | | | | | | |
| Net income attributable to HLI | | Weighted-Average Shares | | Per share amount | | Net income attributable to HLI | | Weighted-Average Shares | | Per share amount |
Basic EPS of Class A common stock | $ | 26,680 | | | 26,969,363 | | | $ | 0.99 | | | $ | 20,067 | | | 22,461,363 | | | $ | 0.89 | |
Adjustment to net income: | | | | | | | | | | | |
Assumed vesting of employee awards | 181 | | | | | | | 282 | | | | | |
Effect of dilutive securities: | | | | | | | | | | | |
Assumed vesting of employee awards | | | 372,231 | | | | | | | 554,082 | | | |
Diluted EPS of Class A common stock | $ | 26,861 | | | 27,341,594 | | | $ | 0.98 | | | $ | 20,349 | | | 23,015,445 | | | $ | 0.88 | |
The calculations of diluted earnings per share exclude 23,968,994 outstanding Class B and Class C units of HLA for the three and six months ended September 30, 2019 and 27,819,930 outstanding Class B and Class C units of HLA for the three and six months ended September 30, 2018, which are exchangeable into Class A common stock under the “if-converted” method, because the inclusion of such shares would be antidilutive.
11. Related-Party Transactions
The Company has investment management agreements with various specialized funds and customized separate accounts that it manages. The Company earned management and advisory fees from Partnerships of $39,170 and $78,799 for the three and six months ended September 30, 2019, respectively, and $32,851 and $63,444 for the three and six months ended September 30, 2018, respectively. The Company earned incentive fees from Partnerships of $5,032 and $9,119 for the three and six months ended September 30, 2019, respectively, and $2,434 and $14,326 for the three and six months ended September 30, 2018, respectively.
The Company entered into a service agreement on June 1, 2017 with its joint venture pursuant to which it had expenses of $1,380 and $2,745 for the three and six months ended September 30, 2019, respectively, and $1,253 and $2,448 for the three and six months ended September 30, 2018, respectively, that are included in general, administrative and other expenses in the Condensed Consolidated Statements of Income. The Company also has a payable to the joint venture of $462 and $450 as of September 30, 2019 and March 31, 2019, respectively, which is included in other liabilities in the Condensed Consolidated Balance Sheets.
The Company holds a convertible promissory note (the “Note”) issued by one of the Company’s equity method investees. The Note contains an option for the outstanding principal and any accrued interest to be converted to shares of the issuer under certain conditions. The carrying value of the Note was $704 and $678 as of September 30, 2019 and March 31, 2019, respectively, and is recorded in other assets in the Condensed Consolidated Balance Sheets.
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
Due from related parties in the Condensed Consolidated Balance Sheets consists primarily of advances made on behalf of the Partnerships for the payment of certain operating costs and expenses, for which the Company is subsequently reimbursed, and refundable tax distributions made to members.
Fees receivable from the Partnerships were $8,351 and $8,927 as of September 30, 2019 and March 31, 2019, respectively, and are included in fees receivable in the Condensed Consolidated Balance Sheets.
In connection with HLA’s acquisition of Real Asset Portfolio Management LLC (“RAPM”) in 2017, the Company paid the remaining 50% of contingent compensation due to the former principals of RAPM, who are employees of the Company, during the six months ended September 30, 2019. Such compensation was paid $3,824 in cash and $425 by issuing Class A common stock.
12. Supplemental Cash Flow Information
| | | | | | | | | | | |
| Six Months Ended September 30, | | |
| 2019 | | 2018 |
Cumulative-effect adjustment from adoption of accounting guidance | $ | — | | | $ | 997 | |
Shares issued for contingent compensation payment | $ | 425 | | | $ | — | |
Non-cash financing activities: | | | |
Dividends declared but not paid | $ | 8,023 | | | $ | 4,729 | |
Member distributions declared but not paid | $ | 3,836 | | | $ | 8,715 | |
Establishment of net deferred tax assets related to offerings | $ | 37,394 | | | $ | 37,924 | |
13. Commitments and Contingencies
Litigation
In the ordinary course of business, the Company may be subject to various legal, regulatory, and/or administrative proceedings from time to time. Although there can be no assurance of the outcome of such proceedings, in the opinion of management, the Company does not believe it is probable that any pending or, to its knowledge, threatened legal proceeding or claim would individually or in the aggregate materially affect its condensed consolidated financial statements.
Incentive Fees
The Partnerships have allocated carried interest still subject to contingencies and that did not meet the Company’s criteria for recognition in the amounts of $382,016 and $326,466, net of amounts attributable to non-controlling interests, at September 30, 2019 and March 31, 2019, respectively, of which $3,704 at both September 30, 2019 and March 31, 2019, has been received and deferred by the Company.
If the Company ultimately receives the unrecognized carried interest, a total of $95,504 and $81,616 as of September 30, 2019 and March 31, 2019, respectively, would potentially be payable to certain employees and third parties pursuant to compensation arrangements related to carried interest profit-sharing plans. Such amounts have not been recorded in the Condensed Consolidated Balance Sheets or Condensed Consolidated Statements of Income as the payment is not yet probable.
Hamilton Lane Incorporated
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(In thousands, except share and per share amounts)
Commitments
The Company serves as the investment manager of the Partnerships. The general partner or managing member of each Partnership is generally a separate subsidiary of the Company and has agreed to invest funds on the same basis as the limited partners in most instances. The Company’s aggregate unfunded commitment to the Partnerships was $128,403 and $123,637 as of September 30, 2019 and March 31, 2019, respectively.
Leases
The Company’s leases consist primarily of operating leases for office space and office equipment in various locations around the world. These leases have remaining lease terms of one to six years, some of which have the option to extend for an additional five years or have the option to terminate within one year.
Total operating lease costs were $1,205 and $2,410 for the three and six months ended September 30, 2019, respectively. Total variable lease costs were $140 and $274 for the three and six months ended September 30, 2019, respectively. Short-term lease costs were not material for the three and six months ended September 30, 2019.
The following table shows other supplemental information related to the Company’s operating leases:
| | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | Six Months Ended September 30, 2019 |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 1,293 | | | $ | 2,575 | |
| | | |
Weighted average remaining lease term (in years) | | | 2.7 |
Weighted average discount rate | | | 5.5 | % |
As of September 30, 2019, the maturities of operating lease liabilities were as follows:
| | | | | |
Remainder of FY2020 | 2,566 | |
FY2021 | 4,490 | |
FY2022 | 2,846 | |
FY2023 | 747 | |
FY2024 | 389 | |
Thereafter | 244 | |
Total lease payments | 11,282 | |
Less: imputed interest | (811) | |
Total operating lease liabilities | $ | 10,471 | |
14. Subsequent Events
On November 5, 2019, the Company declared a quarterly dividend of $0.275 per share of Class A common stock to record holders at the close of business on December 16, 2019. The payment date will be January 7, 2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this Form 10-Q, and our audited financial statements, notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Form 10-K for a more complete understanding of our financial position and results of operations.
The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Investors should review the “Cautionary Note Regarding Forward-Looking Information” above and the “Risk Factors” detailed in Part I, Item 1A of our 2019 Form 10-K for a discussion of those risks and uncertainties that have the potential to cause actual results to be materially different. Our results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period. Unless otherwise indicated, references in this Form 10-Q to fiscal 2019 and fiscal 2018 are to our fiscal years ended March 31, 2019, and 2018, respectively.
Business Overview
We are a global private markets investment solutions provider. We offer a variety of investment solutions to address our clients’ needs across a range of private markets, including private equity, private credit, real estate, infrastructure, natural resources, growth equity and venture capital. These solutions are constructed from a range of investment types, including primary investments in funds managed by third-party managers, direct/co-investments alongside such funds and acquisitions of secondary stakes in such funds, with a number of our clients utilizing multiple investment types. These solutions are offered in a variety of formats covering some or all phases of private markets investment programs:
•Customized Separate Accounts: We design and build customized portfolios of private markets funds and direct investments to meet our clients’ specific portfolio objectives with regard to return, risk tolerance, diversification and liquidity. We generally have discretionary investment authority over our customized separate accounts, which comprised approximately $52 billion of our assets under management (“AUM”) as of September 30, 2019.
•Specialized Funds: We organize, invest and manage specialized primary, secondary and direct/co-investment funds. Our specialized funds invest across a variety of private markets and include equity, equity-linked and credit funds offered on standard terms as well as shorter duration, opportunistically oriented funds. We launched our first specialized fund in 1997, and our product offerings have grown steadily, comprising approximately $14 billion of our AUM as of September 30, 2019.
•Advisory Services: We offer investment advisory services to assist clients in developing and implementing their private markets investment programs. Our investment advisory services include asset allocation, strategic plan creation, development of investment policies and guidelines, the screening and recommending of investments, legal negotiations, the monitoring of and reporting on investments and investment manager review and due diligence. Our advisory clients include some of the largest and most sophisticated private markets investors in the world. We had approximately $416 billion of assets under advisement (“AUA”) as of September 30, 2019.
•Distribution Management: We offer distribution management services through active portfolio management to enhance the realized value of publicly traded stock our clients receive as distributions from private equity funds.
•Reporting, Monitoring, Data and Analytics: We provide our clients with comprehensive reporting and investment monitoring services, usually bundled into our broader investment solutions offerings, but occasionally on a stand-alone, fee-for-service basis. Private markets investments are unusually difficult to monitor, report on and administer, and our clients are able to benefit from our sophisticated infrastructure, which provides clients with real time access to reliable and transparent investment data, and our high-touch service approach, which allows for timely and informed responses to the multiplicity of issues that can arise. We also provide comprehensive research and analytical services as part of our investment solutions, leveraging our large, global, proprietary and high-quality database of private markets investment performance and our suite of proprietary analytical investment tools.
Our client base primarily comprises institutional investors that range from those seeking to make an initial investment in alternative assets to some of the world’s largest and most sophisticated private markets investors. As a highly customized, flexible outsourcing partner, we are equipped to provide investment services to institutional clients of all sizes and with different needs, internal resources and investment objectives. Our clients include prominent institutional investors in the United States, Europe, the Middle East, Asia, Australia and Latin America. We believe we are a leading provider of private markets solutions for U.S. labor union pension plans, and we serve numerous public and corporate pension plans, sovereign wealth funds, financial institutions and insurance companies, endowments and foundations, as well as family offices and selected high-net-worth individuals.
Recent Transactions
September 2019 Offering
In September 2019, we and certain selling stockholders completed a registered offering of an aggregate of 2,680,089 shares of Class A common stock at a price of $60.01 per share (the “September 2019 Offering”). The purpose of the September 2019 Offering was to provide liquidity to significant direct and indirect owners of HLA. The shares sold consisted of (i) 228,456 shares held by the selling stockholders and (ii) 2,451,633 shares newly issued by us. We received approximately $147.1 million in net proceeds from the sale of our shares and used all of the proceeds to settle exchanges by certain members of HLA of a total of 1,466,712 Class B units and 984,921 Class C units. In connection with the exchange of the Class B units, we also repurchased for par value and canceled a corresponding number of shares of Class B common stock. We did not receive any proceeds from the sale of shares by the selling stockholders.
Operating Segments
We operate our business in a single segment, which is how our chief operating decision maker (who is our chief executive officer) reviews financial performance and allocates resources.
Key Financial and Operating Measures
Our key financial measures are discussed below.
Revenues
We generate revenues primarily from management and advisory fees, and to a lesser extent from incentive fees.
Management and advisory fees comprise specialized fund and customized separate account management fees, advisory and reporting fees and distribution management fees.
Revenues from customized separate accounts are generally based on a contractual rate applied to committed capital or net invested capital under management. These fees often decrease over the life of the contract due to built-in declines in contractual rates and/or as a result of lower net invested capital balances as capital is returned to clients. In certain cases, we also provide advisory and/or reporting services, and therefore we also receive fees for services such as monitoring and reporting on a client’s existing private markets investments. In addition, we may provide for investments in our specialized funds as part of our customized separate accounts. In these cases, we reduce the management fees on customized separate accounts to the extent that assets in the accounts are invested in our specialized funds so that our clients do not pay duplicate fees.
Revenues from specialized funds are based on a percentage of limited partners’ capital commitments to, or net invested capital in, our specialized funds. The management fee during the commitment period is generally charged on capital commitments. After the commitment period (or a defined anniversary of the fund’s initial closing), such fee is reduced by a percentage of the management fee charged for the preceding year, or the management fee is charged on net invested capital. In the case of certain funds, we charge management fees on capital commitments, with the management fee increasing during the early years of the fund’s term and declining in the later years. Management fees for certain funds are discounted based on the amount of the limited partners’ commitments or if the limited partners are investors in our other funds.
Revenues from advisory and reporting services are generally annual fixed fees, which vary depending on the services we provide. In limited cases, advisory service clients are charged basis point fees annually based on the amounts they have committed to invest pursuant to their agreements with us. In other cases where our services are limited to monitoring and reporting on investment portfolios, clients are charged a fee based on the number of investments in their portfolio.
Distribution management fees are generally earned by applying a percentage to AUM or proceeds received. Certain active management clients may elect a fee structure under which they are charged an asset-based fee plus a performance fee based on net realized and unrealized gains and income net of realized and unrealized losses.
Incentive fees comprise carried interest earned from our specialized funds and certain customized separate accounts structured as single-client funds in which we have a general partner commitment, and performance fees earned on certain other customized separate accounts.
For each of our secondary funds, direct/co-investment funds and credit funds, we earn carried interest equal to a fixed percentage of net profits, usually 10.0% to 12.5%, subject to a compounded annual preferred return that is generally 6.0% to 8.0%. To the extent that our primary funds also directly make secondary investments and direct/co-investments, they generally earn carried interest on a similar basis. Furthermore, certain of our primary funds earn carried interest on their investments in other private markets funds on a primary basis that is generally 5.0% of net profits, subject to the fund’s compounded annual preferred return.
We recognize carried interest when it is probable that a significant reversal will not occur. In the event that a payment is made before it can be recognized as revenue, this amount would be included as deferred incentive fee revenue on our consolidated balance sheet and recognized as income in accordance with our revenue recognition policy. The primary contingency regarding incentive fees is the “clawback,” or the obligation to return distributions in excess of the amount prescribed by the applicable fund or separate account documents.
Performance fees, which are a component of incentive fees, are based on the aggregate amount of realized gains earned by the applicable customized separate account, subject to the achievement of defined minimum returns to the clients. Performance fees range from 5.0% to 12.5% of net profits, subject to a compounded annual preferred return that varies by account but is generally 6.0% to 8.0%. Performance fees are recognized when the risk of clawback or reversal is not probable.
Expenses
Compensation and benefits is our largest expense and consists of (a) base compensation comprising salary, bonuses and benefits paid and payable to employees, (b) equity-based compensation associated with the grants of restricted stock awards and (c) incentive fee compensation which consists of carried interest and performance fee allocations. We expect to continue to experience a general rise in compensation and benefits expense commensurate with expected growth in headcount and with the need to maintain competitive compensation levels as we expand geographically and create new products and services.
Our compensation arrangements with our employees contain a significant bonus component driven by the results of our operations. Therefore, as our revenues, profitability and the amount of incentive fees earned by our customized separate accounts and specialized funds increase, our compensation costs rise.
Certain current and former employees participate in a carried interest program whereby approximately 25% of incentive fees from certain of our specialized funds and customized separate accounts are awarded to plan participants. We record compensation expense payable to plan participants as the incentive fees become estimable and collection is probable.
General, administrative and other includes travel, accounting, legal and other professional fees, commissions, placement fees, office expenses, depreciation and other costs associated with our operations. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations.
Other Income (Expense)
Equity in income (loss) of investees primarily represents our share of earnings from our investments in our specialized funds and certain customized separate accounts in which we have a general partner commitment. Equity income primarily comprises our share of the net realized and unrealized gains (losses) and investment income partially offset by the expenses from these investments.
We have general partner commitments in our specialized funds and certain customized separate accounts that invest solely in primary funds, secondary funds and direct/co-investments, as well as those that invest across investment types. Equity in income (loss) of investees will increase or decrease as the change in underlying fund investment valuations increases or decreases. Since our direct/co-investment funds invest in underlying portfolio companies, their quarterly and annual valuation changes are more affected by individual company movements than our primary and secondary funds that have exposures across multiple portfolio companies in underlying private markets funds. Our specialized funds and
customized separate accounts invest across industries, strategies and geographies, and therefore our general partner investments do not include any significant concentrations in a specific sector or area outside the United States.
Interest expense includes interest paid and accrued on our outstanding debt, along with the amortization of deferred financing costs, amortization of original issue discount and the write-off of deferred financing costs due to the repayment of previously outstanding debt.
Interest income is income earned on cash and cash equivalents.
Other non-operating income (loss) consists primarily of gains and losses on certain investments, changes in liability under the tax receivable agreement and other non-recurring or non-cash items.
Fee-Earning AUM
We view fee-earning AUM as a metric to measure the assets from which we earn management fees. Our fee-earning AUM comprise assets in our customized separate accounts and specialized funds from which we derive management fees. We classify customized separate account revenue as management fees if the client is charged an asset-based fee, which includes the majority of our discretionary AUM accounts but also includes certain non-discretionary AUA accounts. Our fee-earning AUM is equal to the amount of capital commitments, net invested capital and net asset value (“NAV”) of our customized separate accounts and specialized funds depending on the fee terms. Substantially all of our customized separate accounts and specialized funds earn fees based on commitments or net invested capital, which are not affected by market appreciation or depreciation. Therefore, revenues and fee-earning AUM are not significantly affected by changes in market value.
Our calculations of fee-earning AUM may differ from the calculations of other asset managers, and as a result, this measure may not be comparable to similar measures presented by other asset managers. Our definition of fee-earning AUM is not based on any definition that is set forth in the agreements governing the customized separate accounts or specialized funds that we manage.
Consolidated Results of Operations
The following is a discussion of our consolidated results of operations for the three and six months ended September 30, 2019 and 2018. This information is derived from our accompanying condensed consolidated financial statements prepared in accordance with GAAP.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended September 30, | | | | Six Months Ended September 30, | | |
($ in thousands) | | | | | 2019 | | 2018 | | 2019 | | 2018 |
Revenues | | | | | | | | | | | |
Management and advisory fees | | | | | $ | 59,196 | | | $ | 53,248 | | | $ | 119,747 | | | $ | 104,227 | |
Incentive fees | | | | | 5,096 | | | 2,585 | | | 9,231 | | | 14,968 | |
Total revenues | | | | | 64,292 | | | 55,833 | | | 128,978 | | | 119,195 | |
Expenses | | | | | | | | | | | |
Compensation and benefits | | | | | 23,353 | | | 22,771 | | | 46,999 | | | 49,393 | |
General, administrative and other | | | | | 14,014 | | | 11,695 | | | 28,061 | | | 22,743 | |
Total expenses | | | | | 37,367 | | | 34,466 | | | 75,060 | | | 72,136 | |
Other income (expense) | | | | | | | | | | | | | | | |
Equity in income of investees | | | | | 3,664 | | | 5,276 | | | 9,877 | | | 5,162 | |
Interest expense | | | | | (745) | | | (728) | | | (1,562) | | | (1,493) | |
Interest income | | | | | 148 | | | 43 | | | 428 | | | 85 | |
Non-operating income | | | | | 4,957 | | | 12,194 | | | 4,078 | | | 12,059 | |
Total other income (expense) | | | | | 8,024 | | | 16,785 | | | 12,821 | | | 15,813 | |
Income before income taxes | | | | | 34,949 | | | 38,152 | | | 66,739 | | | 62,872 | |
Income tax expense | | | | | 2,676 | | | 5,580 | | | 7,013 | | | 7,197 | |
Net income | | | | | 32,273 | | | 32,572 | | | 59,726 | | | 55,675 | |
Less: Income attributable to non-controlling interests in general partnerships | | | | | 45 | | | 514 | | | 549 | | | 394 | |
Less: Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | | | | | 16,929 | | | 20,836 | | | 32,497 | | | 35,214 | |
Net income attributable to Hamilton Lane Incorporated | | | | | $ | 15,299 | | | $ | 11,222 | | | $ | 26,680 | | | $ | 20,067 | |
Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended September 30, | | | | Six Months Ended September 30, | | |
($ in thousands) | | | | | 2019 | | 2018 | | 2019 | | 2018 |
Management and advisory fees | | | | | | | | | | | |
Specialized funds | | | | | $ | 26,985 | | | $ | 22,736 | | | | $ | 53,944 | | | $ | 43,751 | |
Customized separate accounts | | | | | 22,466 | | | 21,106 | | | 44,429 | | | 41,493 | |
Advisory | | | | | 5,961 | | | 6,152 | | | 12,213 | | | 12,361 | |
Reporting and other | | | | | 2,092 | | | 2,163 | | | 4,255 | | | 4,113 | |
Distribution management | | | | | 702 | | | 710 | | | 2,061 | | | 1,798 | |
Fund reimbursement revenue | | | | | 990 | | | 381 | | | 2,845 | | | 711 | |
Total management and advisory fees | | | | | 59,196 | | | 53,248 | | | 119,747 | | | 104,227 | |
Incentive fees | | | | | 5,096 | | | 2,585 | | | 9,231 | | | 14,968 | |
Total revenues | | | | | $ | 64,292 | | | $ | 55,833 | | | $ | 128,978 | | | $ | 119,195 | |
Three months ended September 30, 2019 compared to three months ended September 30, 2018
Total revenues increased $8.5 million, or 15%, to $64.3 million, for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, due to increases in management and advisory fees and incentive fees.
Management and advisory fees increased $5.9 million, or 11%, to $59.2 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. Specialized funds revenue increased $4.2 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, due primarily to a $3.1 million increase in revenue from our latest secondary fund, which added $1.1 billion in fee-earning AUM between periods, and a $0.8 million increase from our latest co-investment fund, which added $0.6 billion in fee-earning AUM between periods. Management fees for our latest secondary fund included $0.7 million in retroactive fees for the three months ended September 30, 2019 compared to $0.8 million for our latest co-investment fund for the three months ended September 30, 2018. Retroactive fees are management fees earned in the current period from investors that commit to a specialized fund towards the end of the fundraising period and are required to pay a catch-up management fee as if they had committed to the fund at the first closing in a prior period. Customized separate accounts revenue increased $1.4 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to the addition of several new accounts and additional allocations from existing accounts as compared to the prior year period. Fund reimbursement revenue increased $0.6 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, due primarily to the recognition of fund reimbursements from our funds raised since the prior year period.
Incentive fees increased $2.5 million to $5.1 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, due primarily to a $3.0 million increase in incentive fees from one of our specialized funds.
Six months ended September 30, 2019 compared to six months ended September 30, 2018
Total revenues increased $9.8 million, or 8%, to $129.0 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018, due to an increase in management and advisory fees, partially offset by a decrease in incentive fees.
Management and advisory fees increased $15.5 million, or 15%, to $119.7 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018. Specialized funds revenue increased $10.2 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018, due primarily to a $5.0 million increase in revenue from our latest co-investment fund, which added $0.6 billion in fee-earning AUM between periods, and a $4.2 million increase from our latest secondary fund, which added $1.1 billion in fee-earning AUM between periods. Management fees for our latest co-investment fund included $2.8 million in retroactive fees for the six months ended September 30, 2019 compared to $0.8 million for the six months ended September 30, 2018. Customized separate accounts revenue increased $2.9 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018 due to the addition of several new accounts and additional allocations from existing accounts as compared to the prior year period. Fund reimbursement revenue increased $2.1 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018, due primarily to the recognition of fund reimbursements from our latest secondary fund, which included fund reimbursement expenses in this period and prior periods.
Incentive fees decreased $5.7 million to $9.2 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018, due primarily to a $4.8 million decrease in
incentive fees from one of our customized separate accounts that included the general partner catch-up in the prior year period.
Expenses
Three months ended September 30, 2019 compared to three months ended September 30, 2018
Total expenses increased $2.9 million, or 8%, to $37.4 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to increases in general, administrative and other expenses and compensation and benefits expenses.
Compensation and benefits expenses increased $0.6 million, or 3%, to $23.4 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, due to increases in base compensation and benefits and incentive fee compensation, partially offset by a decrease in contingent compensation related to the RAPM acquisition. Base compensation and benefits increased $2.1 million, or 12%, for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, due primarily to increased salary expense from additional headcount in the current year period compared to the prior year period. Incentive fee compensation increased $0.6 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, due to the increase in incentive fee revenue. Contingent compensation related to the RAPM acquisition decreased $2.3 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, due to the earnout period ending in 2018.
General, administrative and other expenses increased $2.3 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. This change consisted primarily of a $0.6 million increase in fund reimbursement expenses, a $0.5 million increase in consulting and professional fees, a $0.6 million increase in technology and office related expenses, and a $0.3 million increase in commissions from fund closings in the current year period.
Six months ended September 30, 2019 compared to six months ended September 30, 2018
Total expenses increased $2.9 million, or 4%, to $75.1 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018 due to an increase in general, administrative and other expenses partially offset by a decrease in compensation and benefits expenses.
Compensation and benefits expenses decreased $2.4 million, or 5%, to $47.0 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018, due to a decrease in contingent compensation related to the RAPM acquisition, partially offset by an increase in base compensation and benefits. Base compensation and benefits increased $3.2 million, or 8%, for the six months ended September 30, 2019 compared to the six months ended September 30, 2018, due primarily to increased salary expense from additional headcount in the current year period compared to the prior year period. Incentive fee compensation decreased $0.8 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018, due to the decrease in incentive fee revenue. Contingent compensation related to the RAPM acquisition decreased $5.1 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018, due to the earnout period ending in 2018.
General, administrative and other expenses increased $5.3 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018. This change consisted primarily of a $1.4 million increase in commissions from fund closings in the current year period, a $1.4 million increase in consulting and professional fees, a $1.0 million increase in technology and office related expenses, and a $0.9 million increase in fund reimbursement expenses.
Other Income (Expense)
The following table shows the equity in income (loss) of investees included in other income (expense):
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| | | | | Three Months Ended September 30, | | | | Six Months Ended September 30, | | |
($ in thousands) | | | | | 2019 | | 2018 | | 2019 | | 2018 |
Equity in income (loss) of investees | | | | | | | | | | | |
Primary funds | | | | | $ | 756 | | | $ | 515 | | | $ | 1,456 | | | $ | 942 | |
Direct/co-investment funds | | | | | 911 | | | 2,922 | | | 4,565 | | | 2,104 | |
Secondary funds | | | | | 294 | | | 777 | | | 935 | | | 931 | |
Customized separate accounts | | | | | 1,758 | | | 1,037 | | | 3,127 | | | 1,265 | |
Other equity method investments | | | | | (55) | | | 25 | | | (206) | | | (80) | |
Total equity in income (loss) of investees | | | | | $ | 3,664 | | | $ | 5,276 | | | $ | 9,877 | | | $ | 5,162 | |
Three months ended September 30, 2019 compared to three months ended September 30, 2018
Other income decreased $8.8 million to $8.0 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, due primarily to a decrease in non-operating income.
Equity in income of investees decreased $1.6 million to $3.7 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018. This was due primarily to a $2.0 million decrease in gains from our direct/co-investment funds for the three months ended September 30, 2019 compared to the three months ended September 30, 2018.
Non-operating income decreased $7.2 million for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, due primarily to a $6.2 million decrease in gains from the sale of technology investments.
Six months ended September 30, 2019 compared to six months ended September 30, 2018
Other income decreased $3.0 million to $12.8 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018, due primarily to a decrease in non-operating income, partially offset by an increase in equity in income of investees.
Equity in income of investees increased $4.7 million to $9.9 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018. This was due primarily to a $2.5 million increase in gains from our direct/co-investment funds and a $1.9 million increase in gains from our customized separate accounts for the six months ended September 30, 2019 compared to the six months ended September 30, 2018.
Non-operating income decreased $8.0 million for the six months ended September 30, 2019 compared to the six months ended September 30, 2018, due primarily to a $6.2 million decrease in gains from the sale of technology investments.
Income Tax Expense
The Company’s effective tax rate was 7.7% and 14.6% for the three months ended September 30, 2019 and 2018, respectively, and 10.5% and 11.4% for the six months ended September 30, 2019 and 2018, respectively. These rates were less than the statutory rate due primarily to the portion of income
allocated to the non-controlling entities, valuation allowance recorded against deferred tax assets and discrete tax adjustments.
Fee-Earning AUM
The following table provides the period to period rollforward of our fee-earning AUM.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | | | Six Months Ended September 30, | | |
($ in millions) | 2019 | | | | 2019 | | |
| Customized Separate Accounts | | Specialized Funds | | Total | | | Customized Separate Accounts | | Specialized Funds | | Total | |
Balance, beginning of period | $ | 22,511 | | $ | 12,285 | | $ | 34,796 | | | $ | 22,160 | | $ | 11,434 | | $ | 33,594 | |
Contributions (1) | 695 | | 1,100 | | 1,795 | | | 1,524 | | 2,068 | | 3,592 | |
Distributions (2) | (343) | | (251) | | (594) | | | (842) | | (368) | | (1,210) | |
Foreign exchange, market value and other (3) | 14 | | — | | 14 | | | 35 | | — | | 35 | |
Balance, end of period | $ | 22,877 | | $ | 13,134 | | $ | 36,011 | | | $ | 22,877 | | $ | 13,134 | | $ | 36,011 | |
(1)Contributions represent (i) new commitments from customized separate accounts and specialized funds that earn fees on a committed capital fee base and (ii) capital contributions to underlying investments from customized separate accounts and specialized funds that earn fees on a net invested capital or NAV fee base.
(2)Distributions represent (i) returns of capital in customized separate accounts and specialized funds that earn fees on a net invested capital or NAV fee base, (ii) reductions in fee-earning AUM from separate accounts and specialized funds that moved from a committed capital to net invested capital fee base and (iii) reductions in fee-earning AUM from customized separate accounts and specialized funds that are no longer earning fees.
(3)Foreign exchange, market value and other consists primarily of (i) the impact of foreign exchange rate fluctuations for customized separate accounts and specialized funds that earn fees on non-U.S. dollar denominated commitments and (ii) market value appreciation (depreciation) from customized separate accounts that earn fees on a NAV fee base.
Three months ended September 30, 2019
Fee-earning AUM increased $1.2 billion to $36.0 billion during the three months ended September 30, 2019, due to contributions from customized separate accounts and specialized funds.
Customized separate accounts fee-earning AUM increased $0.4 billion, or 2%, to $22.9 billion for the three months ended September 30, 2019. Customized separate accounts contributions were $0.7 billion for the three months ended September 30, 2019, due primarily to new allocations from existing clients. Distributions were $0.3 billion for the three months ended September 30, 2019 due to $0.2 billion from returns of capital in accounts earning fees on a net invested capital or NAV fee base and $0.1 billion from accounts reaching the end of their term.
Specialized funds fee-earning AUM increased $0.8 billion, or 7%, to $13.1 billion for the three months ended September 30, 2019. Specialized fund contributions were $1.1 billion for the three months ended September 30, 2019, due primarily to $0.5 billion from new commitments to our secondary fund in market during the period. Distributions were $0.3 billion for the three months ended September 30, 2019, due to $0.2 billion from accounts moving from a committed capital to a net invested fee base as their investment period expired and $0.1 billion from returns of capital in funds earning fees on a net invested capital fee base.
Six months ended September 30, 2019
Fee-earning AUM increased $2.4 billion to $36.0 billion during the six months ended September 30, 2019, due to contributions from customized separate accounts and specialized funds.
Customized separate accounts fee-earning AUM increased $0.7 billion, or 3%, to $22.9 billion for the six months ended September 30, 2019. Customized separate accounts contributions were $1.5 billion for the six months ended September 30, 2019, due primarily to new allocations from existing clients and new clients. Distributions were $0.8 billion for the six months ended September 30, 2019 due to $0.4 billion from returns of capital in accounts earning fees on a net invested capital or NAV fee base and $0.4 billion from accounts reaching the end of their term.
Specialized funds fee-earning AUM increased $1.7 billion, or 15%, to $13.1 billion for the six months ended September 30, 2019. Specialized fund contributions were $2.1 billion for the six months ended September 30, 2019, due primarily to $1.1 billion from new commitments to our secondary fund in market during the period and $0.2 billion from new commitments to our co-investment fund in market during the period. Distributions were $0.4 billion for the six months ended September 30, 2019, due to $0.2 billion from accounts moving from a committed capital to a net invested fee base as their investment period expired and $0.2 billion from returns of capital in funds earning fees on a net invested capital fee base.
Non-GAAP Financial Measures
Below is a description of our unaudited non-GAAP financial measures. These are not measures of financial performance under GAAP and should not be considered a substitute for the most directly comparable GAAP measures, which are reconciled below. These measures have limitations as analytical tools, and when assessing our operating performance, you should not consider these measures in isolation or as a substitute for GAAP measures. Other companies may calculate these measures differently than we do, limiting their usefulness as a comparative measure.
Fee Related Earnings
Fee Related Earnings (“FRE”) is used to highlight our earnings from recurring management fees. FRE represents net income excluding (a) incentive fees and related compensation, (b) interest income and expense, (c) income tax expense, (d) equity in income of investees, (e) other non-operating income and (f) certain other significant items that we believe are not indicative of our core performance. We believe FRE is useful to investors because it provides additional insight into the operating profitability of our business. FRE is presented before income taxes.
Adjusted EBITDA
Adjusted EBITDA is used to measure our profitability including carried interest. We believe Adjusted EBITDA is useful to investors because it enables them to better evaluate the performance of our core business across reporting periods. Adjusted EBITDA represents net income excluding (a) interest expense on our outstanding debt, (b) income tax expense, (c) depreciation and amortization expense, (d) equity-based compensation expense, (e) other non-operating income and (f) certain other significant items that we believe are not indicative of our core performance.
The following table shows a reconciliation of net income attributable to Hamilton Lane Incorporated to Fee Related Earnings and Adjusted EBITDA for the three and six months ended September 30, 2019 and 2018:
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| | | | | Three Months Ended September 30, | | | | Six Months Ended September 30, | | |
($ in thousands) | | | | | 2019 | | 2018 | | 2019 | | 2018 |
Net income attributable to Hamilton Lane Incorporated | | | | | $ | 15,299 | | | $ | 11,222 | | | $ | 26,680 | | | $ | 20,067 | |
Income attributable to non-controlling interests in general partnerships | | | | | 45 | | | 514 | | | 549 | | | 394 | |
Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | | | | | 16,929 | | | 20,836 | | | 32,497 | | | 35,214 | |
Incentive fees (1) | | | | | (5,096) | | | (2,585) | | | (9,231) | | | (14,968) | |
Incentive fee related compensation (2) | | | | | 2,392 | | | 1,243 | | | 4,309 | | | 5,970 | |
Interest income | | | | | (148) | | | (43) | | | (428) | | | (85) | |
Interest expense | | | | | 745 | | | 728 | | | 1,562 | | | 1,493 | |
Income tax expense | | | | | 2,676 | | | 5,580 | | | 7,013 | | | 7,197 | |
Equity in income of investees | | | | | (3,664) | | | (5,276) | | | (9,877) | | | (5,162) | |
Contingent compensation related to acquisition | | | | | — | | | 2,327 | | | — | | | 5,100 | |
Non-operating income | | | | | (4,957) | | | (12,194) | | | (4,078) | | | (12,059) | |
Fee Related Earnings | | | | | $ | 24,221 | | | $ | 22,352 | | | $ | 48,996 | | | $ | 43,161 | |
Depreciation and amortization | | | | | 806 | | | 632 | | | 1,608 | | | 1,141 | |
Equity-based compensation | | | | | 1,756 | | | 1,597 | | | 3,483 | | | 3,184 | |
Incentive fees (1) | | | | | 5,096 | | | 2,585 | | | 9,231 | | | 14,968 | |
Incentive fees attributable to non-controlling interests (1) | | | | | (61) | | | (52) | | | (160) | | | (263) | |
Incentive fee related compensation (2) | | | | | (2,392) | | | (1,243) | | | (4,309) | | | (5,970) | |
Interest income | | | | | 148 | | | 43 | | | 428 | | | 85 | |
Adjusted EBITDA | | | | | $ | 29,574 | | | $ | 25,914 | | | $ | 59,277 | | | $ | 56,306 | |
(1) Incentive fees for the three and six months ended September 30, 2018 included $2.6 million and $2.8 million, respectively, of non-cash carried interest. Of the $2.6 million for the three-month period, $2.5 million is included in net income and $0.1 million is attributable to non-controlling interests. Of the $2.8 million for the six-month period, $2.5 million is included in net income and $0.3 million is attributable to non-controlling interests.
(2) Incentive fee related compensation includes incentive fee compensation expense, bonus and other revenue sharing related to carried interest that is classified as base compensation. Incentive fee related compensation for the three and six months ended September 30, 2018 excludes compensation expense related to the recognition of incentive fees included in net income from one of our co-investment funds of $2.5 million as the related incentive fee compensation was recognized in fiscal 2016.
Non-GAAP Earnings Per Share
Non-GAAP earnings per share measures our per-share earnings excluding certain significant items that we believe are not indicative of our core performance and assuming all Class B and Class C units in HLA were exchanged for Class A common stock in HLI. Non-GAAP earnings per share is calculated as adjusted net income divided by adjusted shares outstanding. Adjusted net income is income before taxes fully taxed at our estimated statutory tax rate. We believe non-GAAP earnings per share is useful to investors because it enables them to better evaluate per-share operating performance across reporting periods.
The following table shows a reconciliation of adjusted net income to net income attributable to Hamilton Lane Incorporated and adjusted shares outstanding to weighted-average shares of Class A common stock outstanding for the three and six months ended September 30, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Three Months Ended September 30, | | | | Six Months Ended September 30, | | |
(in thousands, except share and per-share amounts) | | | | | | | | 2019 | | 2018 | | 2019 | | 2018 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Net income attributable to Hamilton Lane Incorporated | | | | | | | | $ | 15,299 | | | $ | 11,222 | | | $ | 26,680 | | | $ | 20,067 | |
Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | | | | | | | | 16,929 | | | 20,836 | | | 32,497 | | | 35,214 | |
Income tax expense | | | | | | | | 2,676 | | | 5,580 | | | 7,013 | | | 7,197 | |
Contingent compensation related to acquisition | | | | | | | | — | | | 2,327 | | | — | | | 5,100 | |
Adjusted pre-tax net income | | | | | | | | 34,904 | | | 39,965 | | | 66,190 | | | 67,578 | |
Adjusted income taxes (1) | | | | | | | | (8,308) | | | (10,795) | | | (15,753) | | | (18,253) | |
Adjusted net income | | | | | | | | $ | 26,596 | | | $ | 29,170 | | | $ | 50,437 | | | $ | 49,325 | |
| | | | | | | | | | | | | | |
Weighted-average shares of Class A common stock outstanding - diluted | | | | | | | | 27,632,890 | | | 23,257,419 | | | 27,341,594 | | | 23,015,445 | |
Exchange of Class B and Class C units in HLA (2) | | | | | | | | 25,914,311 | | | 30,181,224 | | | 26,166,086 | | | 30,391,448 | |
Adjusted shares outstanding | | | | | | | | 53,547,201 | | | 53,438,643 | | | 53,507,680 | | | 53,406,893 | |
| | | | | | | | | | | | | | |
Non-GAAP earnings per share | | | | | | | | $ | 0.50 | | | $ | 0.55 | | | $ | 0.94 | | | $ | 0.92 | |
| | | | | | | | | | | | | | |
(1) Represents corporate income taxes at our estimated statutory tax rate of 23.8% for the six month period ended September 30, 2019 and 27.0% for the six month period ended September 30, 2018 applied to adjusted pre-tax net income. The 23.8% is based on a federal tax statutory rate of 21.0% and a combined state income tax rate net of federal benefits of 2.8%. The 27.0% is based on a federal tax statutory rate of 21.0% and a combined state income tax rate net of federal benefits of 6.0%.
(2) Assumes the full exchange of Class B and Class C units in HLA for Class A common stock of HLI pursuant to the exchange agreement.
Investment Performance
The following tables present information relating to the historical performance of our discretionary investment accounts. The data for these investments is presented from the date indicated through June 30, 2019 and have not been adjusted to reflect acquisitions or disposals of investments subsequent to that date.
When considering the data presented below, you should note that the historical results of our discretionary investments are not indicative of the future results you should expect from such investments, from any future investment funds we may raise or from an investment in our Class A common stock, in part because:
•market conditions and investment opportunities during previous periods may have been significantly more favorable for generating positive performance than those we may experience in the future;
•the performance of our funds is generally calculated on the basis of the net asset value (“NAV”) of the funds’ investments, including unrealized gains, which may never be realized;
•our historical returns derive largely from the performance of our earlier funds, whereas future fund returns will depend increasingly on the performance of our newer funds or funds not yet formed;
•our newly established funds may generate lower returns during the period that they take to deploy their capital;
•in recent years, there has been increased competition for investment opportunities resulting from the increased amount of capital invested in private markets alternatives and high liquidity in debt markets, and the increased competition for investments may reduce our returns in the future; and
•the performance of particular funds also will be affected by risks of the industries and businesses in which they invest.
The historical and potential future returns of the investment funds we manage are not directly linked to returns on our Class A common stock. Therefore, you should not conclude that continued positive performance of the investment funds we manage will necessarily result in positive returns on an investment in our Class A common stock. As used in this discussion, internal rate of return (“IRR”) is calculated on a pooled basis using daily cash flows. See “Performance Methodology” below for more information on how our returns are calculated.
Specialized Fund Performance
We organize, invest and manage primary, secondary and direct/co-investment funds. Our funds invest across a variety of private markets and include equity, equity-linked and credit funds offered on standard terms, as well as shorter duration, opportunistically oriented funds. Below is performance information across our various specialized funds. Many of these funds are globally focused, and they are grouped by the investment strategy utilized.
Gross Returns — Realized
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Fund | Vintage year | Fund size ($M) | Realized Capital invested ($M) | Realized Gross multiple | Realized Gross IRR (%) | Realized Gross Spread vs. S&P 500 PME | Realized Gross Spread vs. MSCI World PME |
Primaries (Diversified) | | | | | | | |
PEF I | 1998 | 122 | 117 | 1.3 | 5.4% | | 378 bps | 322 bps |
PEF IV | 2000 | 250 | 238 | 1.7 | 16.2% | | 1,302 bps | 1,170 bps |
PEF V | 2003 | 135 | 133 | 1.7 | 14.4% | | 856 bps | 968 bps |
PEF VI | 2007 | 494 | 478 | 1.7 | 12.5% | | 178 bps | 516 bps |
PEF VII | 2010 | 262 | 173 | 1.5 | 16.0% | | 143 bps | 568 bps |
PEF VIII | 2012 | 427 | 11 | 1.7 | 23.3% | | 1,180 bps | 1,512 bps |
PEF IX | 2015 | 517 | 30 | 1.8 | 37.3% | | 2,248 bps | 2,549 bps |
PEF X | 2018 | 278 | N/A | N/A | N/A | | N/A | N/A |
Secondaries | | | | | | | |
Pre-Fund | - | - | 362 | 1.5 | 17.1% | | 1,330 bps | 1,173 bps |
Secondary Fund I | 2005 | 360 | 353 | 1.2 | 5.2% | | 111 bps | 339 bps |
Secondary Fund II | 2008 | 591 | 558 | 1.5 | 21.8% | | 668 bps | 1,081 bps |
Secondary Fund III | 2012 | 909 | 385 | 1.6 | 23.8% | | 1,041 bps | 1,468 bps |
Secondary Fund IV | 2016 | 1,916 | 140 | 1.6 | 34.2% | | 1,918 bps | 2,187 bps |
Co-investments | | | | | | | |
Pre-Fund | - | - | 244 | 1.9 | 21.3% | | 1,652 bps | 1,600 bps |
Co-Investment Fund | 2005 | 604 | 450 | 1.2 | 3.3% | | (269) bps | (17) bps |
Co-Investment Fund II | 2008 | 1,195 | 799 | 2.7 | 22.7% | | 1,041 bps | 1,418 bps |
Co-Investment Fund III | 2014 | 1,243 | 188 | 2.7 | 60.8% | | 4,775 bps | 5,153 bps |
Co-Investment Fund IV | 2018 | 1,698 | N/A | N/A | N/A | | N/A | N/A |
| | | | | | | |
Fund | Vintage year | Fund size ($M) | Realized Capital invested ($M) | Realized Gross multiple | Realized Gross IRR (%) | | Realized Gross Spread vs. CS HY II PME | Realized Gross Spread vs. CS LL PME |
Strategic Opportunities (Tail-end secondaries and credit) | | | | | | | |
Strat Opps 2015 | 2015 | 71 | 45 | 1.3 | 19.0% | | 874 bps | 1,279 bps |
Strat Opps 2016 | 2016 | 214 | 109 | 1.2 | 23.0% | | 1,491 bps | 1,721 bps |
Strat Opps 2017 | 2017 | 435 | 89 | 1.2 | 20.7% | | 1,869 bps | 1,696 bps |
Strat Opps 2018 | 2018 | 889 | 35 | 1.1 | 17.1% | | 1,480 bps | 1,585 bps |
Gross Returns — Realized and Unrealized
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fund | Vintage year | Fund size ($M) | Capital invested ($M) | Gross multiple | Net Multiple | Gross IRR (%) | Net IRR (%) | Gross Spread vs. S&P 500 PME | Net Spread vs. S&P 500 PME | Gross Spread vs. MSCI World PME | Net Spread vs. MSCI World PME |
Primaries (Diversified) | | | | | | | | | | | |
PEF I | 1998 | 122 | 117 | 1.3 | 1.2 | 5.4% | | 2.5% | | 378 bps | 76 bps | 322 bps | 16 bps |
PEF IV | 2000 | 250 | 238 | 1.7 | 1.5 | 16.2% | | 11.2% | | 1,302 bps | 828 bps | 1,170 bps | 708 bps |
PEF V | 2003 | 135 | 133 | 1.7 | 1.6 | 14.4% | | 9.8% | | 856 bps | 381 bps | 968 bps | 488 bps |
PEF VI | 2007 | 494 | 511 | 1.7 | 1.6 | 12.1% | | 9.4% | | 120 bps | (118) bps | 460 bps | 216 bps |
PEF VII | 2010 | 262 | 282 | 1.5 | 1.5 | 13.9% | | 9.8% | | 19 bps | (383) bps | 426 bps | 15 bps |
PEF VIII | 2012 | 427 | 376 | 1.3 | 1.3 | 11.6% | | 8.3% | | (42) bps | (395) bps | 303 bps | (56) bps |
PEF IX | 2015 | 517 | 380 | 1.4 | 1.3 | 18.9% | | 16.8% | | 586 bps | 408 bps | 902 bps | 723 bps |
PEF X | 2018 | 278 | 36 | 1.1 | 1.0 | 16.2% | | (2.5)% | | 301 bps | (1,348) bps | 649 bps | (1,081) bps |
Secondaries | | | | | | | | | | | |
Pre-Fund | - | - | 362 | 1.5 | N/A | 17.1% | | N/A | | 1,330 bps | N/A | 1,173 bps | N/A |
Secondary Fund I | 2005 | 360 | 353 | 1.2 | 1.2 | 5.2% | | 3.8% | | 111 bps | (62) bps | 339 bps | 158 bps |
Secondary Fund II | 2008 | 591 | 595 | 1.5 | 1.5 | 20.4% | | 14.2% | | 520 bps | (109) bps | 938 bps | 297 bps |
Secondary Fund III | 2012 | 909 | 827 | 1.5 | 1.4 | 17.1% | | 13.7% | | 429 bps | 54 bps | 823 bps | 453 bps |
Secondary Fund IV | 2016 | 1,916 | 1,524 | 1.3 | 1.2 | 22.9% | | 24.8% | | 922 bps | 1,387 bps | 1,259 bps | 1,724 bps |
Co-investments | | | | | | | | | | | |
Pre-Fund | - | - | 244 | 1.9 | N/A | 21.3% | | N/A | | 1,652 bps | N/A | 1,600 bps | N/A |
Co-Investment Fund | 2005 | 604 | 577 | 1.0 | 0.9 | 0.6% | | (0.9)% | | (536) bps | (707) bps | (284) bps | (461) bps |
Co-Investment Fund II | 2008 | 1,195 | 1,133 | 2.2 | 1.9 | 19.4% | | 15.7% | | 718 bps | 332 bps | 1,099 bps | 710 bps |
Co-Investment Fund III | 2014 | 1,243 | 1,244 | 1.5 | 1.4 | 18.9% | | 15.0% | | 636 bps | 262 bps | 971 bps | 588 bps |
Co-Investment Fund IV | 2018 | 1,698 | 664 | 1.1 | 1.1 | 19.3% | | 14.1% | | 785 bps | 224 bps | 1,095 bps | 422 bps |
| | | | | | | | | | | |
Fund | Vintage year | Fund size ($M) | Capital invested ($M) | Gross multiple | Net Multiple | Gross IRR (%) | | Net IRR (%) | | Gross Spread vs. CS HY II PME | Net Spread vs. CS HY II PME | Gross Spread vs. CS LL PME | Net Spread vs. CS LL PME |
Strategic Opportunities (Tail-end secondaries and credit) | | | | | | | | | | | |
Strat Opps 2015 | 2015 | 71 | 67 | 1.3 | 1.2 | 14.4% | | 11.1% | | 555 bps | 230 bps | 878 bps | 549 bps |
Strat Opps 2016 | 2016 | 214 | 214 | 1.2 | 1.2 | 13.2% | | 10.7% | | 610 bps | 384 bps | 798 bps | 570 bps |
Strat Opps 2017 | 2017 | 435 | 441 | 1.2 | 1.1 | 12.9% | | 10.5% | | 819 bps | 556 bps | 877 bps | 644 bps |
Strat Opps 2018 | 2018 | 889 | 635 | 1.1 | 1.1 | 11.9% | | 11.6% | | 375 bps | 118 bps | 799 bps | 622 bps |
Performance Methodology
The indices presented for comparison are the S&P 500, MSCI World, Credit Suisse High Yield II (“CS HY II”) and Credit Suisse Leverage Loan (“CS LL”), calculated on a public market equivalent (“PME”) basis. We believe these indices are commonly used by private markets and credit investors to evaluate performance. The PME calculation methodology allows private markets investment performance to be evaluated against a public index and assumes that capital is being invested in, or withdrawn from, the index on the days the capital was called and distributed from the underlying fund managers. The S&P 500 Index is a total return capitalization-weighted index that measures the performance of 500 U.S. large cap stocks. The MSCI World Index is a free float-adjusted market capitalization-weighted index of over 1,600 world stocks that is designed to measure the equity market performance of developed markets. The CS HY II Index, formerly known as the DLJ High Yield Index, is designed to mirror the investable universe of the U.S. dollar denominated high yield debt market. Prices for the CS HY II Index are available on a weekly basis. The CS LL Index is an index designed to mirror the investable universe of the U.S. dollar denominated leveraged loan market. Loans must be rated 5B or lower and the index frequency is monthly.
Our IRR represents the pooled IRR for all discretionary investments for the period from inception to June 30, 2019. Gross IRR is presented net of management fees, carried interest and expenses charged by the general partners of the underlying investments, but does not include our management fees, carried interest or expenses. Our gross IRR would decrease with the inclusion of our management fees, carried interest and expenses. Net IRR is net of all management fees, carried interest and expenses charged by the general partners of the underlying investments as well as by us. Net IRR figures for our funds do not include cash flows attributable to the general partner. Note that secondary portfolio IRRs can be initially impacted by purchase discounts (or premiums) paid at the closing of a transaction, the impact of which will diminish over time.
The “Realized IRR” represents the pooled IRR for those discretionary investments that we consider realized for purposes of our track record, which are investments where the underlying investment fund has been fully liquidated, has generated a distributions to paid-in capital ratio (“DPI”) greater than or equal to 1.0 or is older than six years and has a residual value to paid-in capital ratio (“RVPI”) less than or equal to 0.2. Hamilton Lane Secondary Realized includes investments that have been fully liquidated, have a DPI greater than or equal to 1.0 or a RVPI less than or equal to 0.2. Hamilton Lane Realized Co-Investment and Hamilton Lane Realized Strategic Opportunities include investments that have been fully liquidated or have a DPI greater than or equal to 1.0. “Unrealized” includes all investments that do not meet the aforementioned criteria. DPI represents total distributions divided by total invested capital. RVPI represents the remaining market value divided by total invested capital. “Capital Invested” refers to the total amount of all investments made by a fund, including commitment-reducing and non-commitment-reducing capital calls. “Multiple” represents total distributions from underlying investments to the fund plus the fund’s market value divided by total contributed capital. “Gross Multiple” is presented net of management fees, carried interest and expenses charged by the fund managers of the underlying investments.
Specialized fund and pre-fund performance does not include ten funds-of-funds that have investor-specific investment guidelines.
Certain of our specialized funds utilize revolving credit facilities, which provide capital that is available to fund investments or pay partnership expenses and management fees. Borrowings may be paid down from time to time with investor capital contributions or distributions from investments. The use of a credit facility affects the fund’s return and magnifies the performance on the upside or on the downside.
Liquidity and Capital Resources
Historical Liquidity and Capital Resources
We have managed our historical liquidity and capital requirements primarily through the receipt of management and advisory fee revenues. Our primary cash flow activities involve: (1) generating cash flow from operations, which largely includes management and advisory fees; (2) realizations generated from our investment activities; (3) funding capital commitments that we have made to certain of our specialized funds and customized separate accounts; (4) making dividend payments to our stockholders and distributions to holders of HLA units; and (5) borrowings, interest payments and repayments under our outstanding debt. As of September 30, 2019 and March 31, 2019, our cash and cash equivalents, including investments in money market funds, were $71.9 million and $49.4 million, respectively.
Our material sources of cash from our operations include: (1) management and advisory fees, which are collected monthly or quarterly; (2) incentive fees, which are volatile and largely unpredictable as to amount and timing; and (3) fund distributions related to investments in our specialized funds and certain customized separate accounts that we manage. We use cash flow from operations primarily to pay
compensation and related expenses, general, administrative and other expenses, debt service, capital expenditures and distributions to our owners and to fund commitments to certain of our specialized funds and customized separate accounts. If cash flow from operations were insufficient to fund distributions to our owners, we expect that we would suspend paying such distributions.
We have also accessed the capital markets and used proceeds from sales of our Class A common stock to settle in cash exchanges of HLA membership interests by direct and indirect owners of HLA pursuant to our exchange agreement.
Term Loan and Revolving Credit Facility
In August 2017, we entered into a Term Loan and Security Agreement (the “Term Loan Agreement”) and a Revolving Loan and Security Agreement (the “Revolving Loan Agreement” and, together with the Term Loan Agreement, the “Loan Agreements”) with First Republic Bank. Proceeds from the Loan Agreements were utilized to pay off the outstanding principal amount and accrued interest of the predecessor credit facility.
The Term Loan Agreement provides for a term loan facility in an aggregate principal amount of $75.0 million and also contains an accordion feature that allows HLA to increase the commitment under the facility by up to $25.0 million under certain conditions (the “Term Loan Facility”). Borrowings under the Term Loan Facility accrue interest at a floating per annum rate equal to the greater of (i) the prime rate minus 1.25% and (ii) 2.75%. The Term Loan Facility matures on November 1, 2024.
The Revolving Loan Agreement provides for a revolving credit facility up to an aggregate principal amount of $25.0 million (the “Revolving Loan Facility”). The Revolving Loan Facility is for working capital and general corporate purposes. Borrowings under the Revolving Loan Facility accrue interest at a floating per annum rate equal to the greater of (i) the prime rate minus 1.50% and (ii) 2.50%. The Revolving Loan Facility matures on August 21, 2020 and requires compliance with conditions precedent that must be satisfied prior to any borrowing.
As of September 30, 2019 and March 31, 2019, the principal amount of debt outstanding equaled $69.4 million and $71.3 million, respectively. The Loan Agreements contain covenants that, among other things, limit HLA’s ability to incur indebtedness, transfer or dispose of assets, merge with other companies, create, incur or allow liens, make investments, pay dividends or make distributions, engage in transactions with affiliates and take certain actions with respect to management fees. The Loan Agreements also require HLA to maintain (i) a specified amount of management fees in each fiscal year during the term of each of the Loan Agreements, (ii) adjusted EBITDA less dividend distributions on a trailing six-month basis of $12.5 million or greater, tested semi-annually, and (iii) a specified tangible net worth during each fiscal year during the term of each of the Loan Agreements. The obligations under the Loan Agreements are secured by substantially all the assets of HLA.
Future Sources and Uses of Liquidity
We generate significant cash flows from operating activities. We believe that we will be able to continue to meet our current and long-term liquidity and capital requirements through our cash flows from operating activities, existing cash and cash equivalents and our ability to obtain future external financing.
We believe we will also continue to evaluate opportunities, based on market conditions, to access the capital markets and use proceeds from sales of our Class A common stock to settle in cash exchanges of HLA membership interests by direct and indirect owners of HLA pursuant to our exchange agreement. The timing or size of any potential transactions will depend on a number of factors, including market opportunities and our views regarding our capital and liquidity positions and potential future needs. There can be no assurance that any such transactions will be completed on favorable terms, or at all.
In November 2018, we authorized a program to repurchase up to 6% of the outstanding shares of our Class A common stock, not to exceed $50 million (the “Stock Repurchase Program”). The Stock Repurchase Program does not include specific price targets or timetables and may be suspended or terminated by us at any time. We intend to finance the purchases using available working capital and/or external financing. The Stock Repurchase Program expires twelve months after the date of the first acquisition under the authorization. We have not repurchased any of our Class A common stock under the Stock Repurchase Program, and therefore the full purchase authority remains available.
We expect that our primary current and long-term liquidity needs will comprise cash to (1) provide capital to facilitate the growth of our business, (2) fund commitments to our investments, (3) pay operating expenses, including cash compensation to our employees, (4) make payments under the tax receivable agreement, (5) fund capital expenditures, (6) pay interest and principal due on our outstanding debt, (7) pay income taxes, (8) make dividend payments to our stockholders and distributions to holders of HLA units in accordance with our distribution policy, (9) settle exchanges of HLA membership interests by direct and indirect owners of HLA pursuant to our exchange agreement from time to time and (10) fund purchases of our Class A common stock pursuant to the Stock Repurchase Program.
We are required to maintain minimum net capital balances for regulatory purposes for our Hong Kong, United Kingdom and broker-dealer subsidiaries. These net capital requirements are met by retaining cash. As a result, we may be restricted in our ability to transfer cash between different operating entities and jurisdictions. As of September 30, 2019 and March 31, 2019, we were required to maintain approximately $3.2 million and $2.2 million, respectively, in liquid net assets within these subsidiaries to meet regulatory net capital and capital adequacy requirements. We are in compliance with these regulatory requirements.
Cash Flows
Six Months Ended September 30, 2019 and 2018
| | | | | | | | | | | |
| Six Months Ended September 30, | | |
($ in thousands) | 2019 | | 2018 |
Net cash provided by operating activities | $ | 66,203 | | | $ | 73,056 | |
Net cash (used in) provided by investing activities | (10,780) | | | 8,580 | |
Net cash used in financing activities | (31,945) | | | (53,662) | |
Operating Activities
Our net cash flow provided by operating activities was $66.2 million and $73.1 million during the six months ended September 30, 2019 and 2018, respectively. These operating cash flows were driven primarily by:
•net income of $59.7 million and $55.7 million during the six months ended September 30, 2019 and 2018, respectively;
•proceeds received from investments of $4.2 million and $7.5 million during the six months ended September 30, 2019 and 2018, respectively, which represent a return on investment from specialized funds and certain customized separate accounts; and
•net change in operating assets and liabilities of $6.5 million and $19.7 million during the six months ended September 30, 2019 and 2018, respectively, primarily for the accruals related to our annual bonus program that is paid in March.
Investing Activities
Our net cash flow (used in) provided by investing activities was ($10.8) million and $8.6 million during the six months ended September 30, 2019 and 2018, respectively. These amounts were driven primarily by:
•net contributions to investments of $11.9 million and $10.7 million during the six months ended September 30, 2019 and 2018, respectively;
•proceeds from the sales of technology investments of $6.4 million and $22.5 million during the six months ended September 30, 2019 and 2018, respectively; and
•purchases of other investments of $4.0 million during the six months ended September 30, 2019.
Financing Activities
Our net cash flow used in financing activities was $31.9 million and $53.7 million during the six months ended September 30, 2019 and 2018, respectively. Cash used in financing activities was attributable primarily to:
•secured financing proceeds received of $15.8 million during the six months ended September 30, 2019;
•dividends paid of $13.0 million and $8.6 million during the six months ended September 30, 2019 and 2018, respectively; and
•distributions to HLA members of $32.7 million during each of the six months ended September 30, 2019 and 2018.
Off-Balance Sheet Arrangements
There have been no material changes in our off-balance sheet arrangements discussed in our 2019 Form 10-K.
Contractual Obligations, Commitments and Contingencies
There have been no material changes outside of the ordinary course of business in our contractual obligations, commitments and contingencies from those specified in our 2019 Form 10-K.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of
contingent liabilities. We base our judgments on our historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making estimates about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
For a more complete discussion of the accounting judgments and estimates that we have identified as critical in the preparation of our condensed consolidated financial statements, please refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Form 10-K.
Recent Accounting Pronouncements
Information regarding recent accounting developments and their impact on our results can be found in Note 2, “Summary of Significant Accounting Policies” in the notes to the condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, we are exposed to a broad range of risks inherent in the financial markets in which we participate, including price risk, interest-rate risk, access to and cost of financing risk, liquidity risk, counterparty risk and foreign exchange-rate risk. Potentially negative effects of these risks may be mitigated to a certain extent by those aspects of our investment approach, investment strategies, fundraising practices or other business activities that are designed to benefit, either in relative or absolute terms, from periods of economic weakness, tighter credit or financial market dislocations.
Our predominant exposure to market risk is related to our role as general partner or investment manager for our specialized funds and customized separate accounts and the sensitivities to movements in the fair value of their investments, which may adversely affect our equity in income of investees. Since our management fees are generally based on commitments or net invested capital, our management fee and advisory fee revenue is not significantly impacted by changes in investment values.
Fair value of the financial assets and liabilities of our specialized funds and customized separate accounts may fluctuate in response to changes in the value of securities, foreign currency exchange rates, commodity prices and interest rates. The impact of investment risk is as follows:
•Equity in income of investees changes along with the realized and unrealized gains of the underlying investments in our specialized funds and certain customized separate accounts in which we have a general partner commitment. Our general partner investments include thousands of unique underlying portfolio investments with no significant concentration in any industry or country outside of the United States.
•Management fees from our specialized funds and customized separate accounts are not significantly affected by changes in fair value as the management fees are not generally based on the value of the specialized funds or customized separate accounts, but rather on the amount of capital committed or net invested in the specialized funds or customized separate accounts, as applicable.
•Incentive fees from our specialized funds and customized separate accounts are not materially affected by changes in the fair value of unrealized investments because they are based on realized gains and subject to achievement of performance criteria rather than on the fair value of the specialized fund’s or customized separate account’s assets prior to realization. We had $3.7 million of deferred incentive fee revenue on our balance sheet as of September 30, 2019. Minor decreases in underlying fair value would not affect the amount of deferred incentive fee revenue subject to clawback.
Exchange Rate Risk
Several of our specialized funds and customized separate accounts hold investments denominated in non-U.S. dollar currencies that may be affected by movements in the rate of exchange between the U.S. dollar and foreign currency, which could impact investment performance. The currency exposure related to investments in foreign currency assets is limited to our general partner interest, which is typically one percent of total capital commitments. We do not possess significant assets in foreign countries in which we operate or engage in material transactions in currencies other than the U.S. dollar. Therefore, changes in exchange rates are not expected to materially impact our financial statements.
Interest Rate Risk
As of September 30, 2019, we had $69.4 million in borrowings outstanding under our Loan Agreements. The annual interest rate on the Term Loan Agreement, which is at the prime rate minus 1.25%, subject to a floor of 2.75%, was 3.75% as of September 30, 2019.
Based on the floating rate component of our Loan Agreements payable as of September 30, 2019, we estimate that a 100 basis point increase in interest rates would result in increased interest expense related to the loan of $0.7 million over the next 12 months.
Credit Risk
We are party to agreements providing for various financial services and transactions that contain an element of risk in the event that the counterparties are unable to meet the terms of such agreements. In such agreements, we depend on the respective counterparty to make payment or otherwise perform. We generally endeavor to minimize our risk of exposure by limiting the counterparties with which we enter into financial transactions to reputable financial institutions. In other circumstances, availability of financing from financial institutions may be uncertain due to market events, and we may not be able to access these financing markets.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2019. Our disclosure controls and procedures are intended to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffective at September 30, 2019 due to the existence of a previously reported material weakness in our internal control over financial reporting. This material weakness related to insufficient information technology general controls for one information technology system that supports the Company’s financial reporting process. The material weakness was identified and discussed in Part II, Item 9A of our 2019 Form 10-K. The material weakness did not result in any identified misstatements to the audited consolidated financial statements or disclosures in our 2019 Form 10-K, or any restatements of our audited and unaudited consolidated financial statements or disclosures for any previously reported periods.
Notwithstanding the identified material weakness, management, including our Chief Executive Officer and Chief Financial Officer, believes the condensed consolidated financial statements included in this Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented in accordance with GAAP.
Changes in Internal Control over Financial Reporting
We have commenced our remediation efforts in connection with the identification of the material weakness discussed above and have taken the following steps during the quarter ended September 30, 2019:
•We are implementing procedures intended to ensure that data entry is performed correctly and a compensating control of independent reconciliations and verifications is in place to verify the system’s output.
•We are establishing additional monitoring and oversight controls to ensure the accuracy and completeness of our consolidated financial statements and related disclosures.
While we have taken considerable action to remediate the material weakness, there has not yet been a sufficient passage of time to evidence that such remediation efforts have been successful. Accordingly, we continue to test our controls implemented in the first quarter of fiscal 2020 to assess whether our controls are operating effectively. While there can be no assurance, we believe our material weakness will be remediated during the course of fiscal 2020.
Other than the changes discussed above, there have been no changes to our internal control over financial reporting during the quarter ended September 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the ordinary course of business, we may be subject to various legal, regulatory and/or administrative proceedings from time to time. Although there can be no assurance of the outcome of such proceedings, in the opinion of management, we do not believe it is probable that any pending or, to our knowledge, threatened legal proceeding or claim would individually or in the aggregate materially affect our condensed consolidated financial statements.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Part I, Item 1A of our 2019 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information about our share repurchase activity for the quarter ended September 30, 2019:
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Period | | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2) |
July 1-31, 2019 | | — | | | | $ | — | | | | — | | | | $ | 50,000,000 | |
August 1-31, 2019 | | 509 | | | | $ | 56.56 | | | | — | | | | $ | 50,000,000 | |
September 1-30, 2019 | | — | | | | $ | — | | | | — | | | | $ | 50,000,000 | |
Total | | 509 | | | $ | 56.56 | | | | | |
(1) Shares of Class A common stock tendered by an employee as payment of taxes withheld on the vesting of restricted stock granted under HLI’s 2017 Equity Incentive Plan.
(2) On November 6, 2018, we announced that our board of directors authorized a program to repurchase, in the aggregate, up to 6% of the outstanding shares of our Class A common stock as of the date of the authorization, not to exceed $50 million (the “Stock Repurchase Program”). The authorization provides us the flexibility to repurchase shares in the open market or in privately negotiated transactions from time to time, based on market conditions and other factors. We have not repurchased any of our Class A common stock under the Stock Repurchase Program, so the full purchase authority remains available under this program, which expires 12 months after the date of the first acquisition under the authorization.
Item 6. Exhibits
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| | | Incorporated By Reference | | | | Filed Herewith |
Exhibit No. | | Description of Exhibit | Form | Exhibit | Filing Date | File No. | |
| | | 8-K | 3.1 | 3/10/17 | 001-38021 | |
| | | 10-K | 3.2 | 6/27/17 | 001-38021 | |
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‡ Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 7th day of November, 2019.
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HAMILTON LANE INCORPORATED | |
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By: | /s/ Randy M. Stilman |
| Name: Randy M. Stilman |
| Title: Chief Financial Officer and Treasurer |
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By: | /s/ Michael Donohue |
| Name: Michael Donohue |
| Title: Managing Director and Controller |