HAMILTON LANE INCORPORATED The following information should be read in conjunction with our selected combined financial and operating data and the accompanying consolidated financial statements and related notes. See "Index to Consolidated Financial Statements ofHamilton Lane Incorporated ." 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. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Form 10-K, particularly in "Risk Factors", the "Summary of Risk Factors" and the "Cautionary Note Regarding Forward-Looking Information." Unless otherwise indicated, references in this Annual Report on Form 10-K to fiscal 2021, fiscal 2020 and fiscal 2019 are to our fiscal years endedMarch 31, 2021 , 2020 and 2019, 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$69 billion of our AUM as ofMarch 31, 2021 . •Specialized Funds: We organize, invest and manage specialized primary, secondary, direct/co-investment funds, strategic opportunity funds and evergreen 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$19 billion of our AUM as ofMarch 31, 2021 . •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$631 billion of AUA as ofMarch 31, 2021 . •Distribution Management: We offer distribution management services to our clients through active portfolio management to enhance the realized value of publicly traded stock they 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 66 -------------------------------------------------------------------------------- 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 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 inthe United States ,Canada ,Europe , theMiddle East ,Asia ,Australia andLatin America . We believe we are a leading provider of private markets solutions forU.S. labor union pension plans, and we serve numerous smaller 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. Trends Affecting Our Business Our results of operations are affected by a variety of factors, including conditions in the global financial markets and the economic and political environments, particularly inthe United States ,Western Europe andAsia . As interest rates remain near historic lows and public equities are not able to meet expected returns, we see increasing investor demand for alternative investments to achieve higher yields. As a result, some investors have increased their allocation to private markets relative to other asset classes. In addition, the opportunities in private markets have expanded as firms have created new vehicles and products in which to access private markets across different geographies and opportunity sets. In addition to the aforementioned macroeconomic and sector-specific trends, we believe the following factors will influence our future performance: •The extent to which investors favor alternative investments. Our ability to attract new capital is partially dependent on investors' views of alternative assets relative to traditional publicly listed equity and debt securities. We believe fundraising efforts will continue to be impacted by certain fundamental asset management trends that include: (1) the increasing importance and market share of alternative investment strategies to investors in light of an increased focus on lower-correlated and absolute levels of return; (2) the increasing demands of the investing community, including the potential for fee compression and changes to other terms; (3) shifting asset allocation policies of institutional investors; and (4) increasing barriers to entry and growth. •Our ability to generate strong returns. We must continue to generate strong returns for our investors through our disciplined investment diligence process in an increasingly competitive market. The ability to attract and retain clients is partially dependent on returns we are able to deliver versus our peers. The capital we are able to attract drives the growth of our AUM and AUA and the management and advisory fees we earn. •Our ability to source investments with attractive risk-adjusted returns. An increasing part of our management fee and incentive fee revenue has been from our co-investment and secondary 67 -------------------------------------------------------------------------------- investment platforms. The continued growth of this revenue is dependent on our continued ability to source attractive investments and deploy the capital that we have raised or manage on behalf of our clients. Because we are selective in the opportunities in which we invest, the capital deployed can vary from year to year. Our ability to identify attractive investments and execute on those investments is dependent on a number of factors, including the general macroeconomic environment, valuation, transaction size, and expected duration of such investment opportunity. A significant decrease in the quality or quantity of potential opportunities could adversely affect our ability to source investments with attractive risk-adjusted returns. •Our ability to maintain our data advantage relative to competitors. We believe that the general trend towards transparency and consistency in private markets reporting will create new opportunities for us to leverage our databases and analytical capabilities. We intend to use these advantages afforded to us by our proprietary databases, analytical tools and deep industry knowledge to drive our performance, provide our clients with customized solutions across private markets asset classes and continue to differentiate our products and services from those of our competitors. Our ability to maintain our data advantage is dependent on a number of factors, including our continued access to a broad set of private market information on an on-going basis, as well as our ability to maintain our investment scale, considering the evolving competitive landscape and potential industry consolidation. •Our ability to continue to expand globally. We believe that many institutional investors outsidethe United States are currently underinvested in private markets asset classes and that capturing capital inflows into private capital investing from non-U.S. global markets represents a significant growth opportunity for us. Our ability to continue to expand globally is dependent on our ability to continue building successful relationships with investors internationally and subject to the evolving macroeconomic and regulatory environment of the various countries where we operate or in which we invest. •Increased competition to work with top private equity fund managers. There has been a trend amongst private markets investors to consolidate the number of general partners in which they invest. At the same time, an increasing flow of capital to the private markets has often times resulted in certain funds being oversubscribed. This has resulted in some investors, primarily smaller investors or less strategically important investors, not being able to gain access to certain funds. Our ability to invest and maintain our sphere of influence with these high-performing fund managers is critical to our investors' success and our ability to maintain our competitive position and grow our revenue. •Unpredictable global macroeconomic conditions. Global economic conditions, including political environments, financial market performance, interest rates, credit spreads or other conditions beyond our control, all of which affect the performance of the assets underlying private market investments, are unpredictable and could negatively affect the performance of our clients' portfolios or the ability to raise funds in the future. •Increasing regulatory requirements. The complex regulatory and tax environment could restrict our operations and subject us to increased compliance costs and administrative burdens, as well as restrictions on our business activities. 68 -------------------------------------------------------------------------------- Impact of Covid-19 InMarch 2020 , theWorld Health Organization declared the coronavirus ("COVID-19") outbreak a global pandemic, which has resulted in significant disruption and uncertainty in the global economic markets. We are closely monitoring developments related to the COVID-19 pandemic and assessing any negative impacts to our business. For a description of the impact that COVID-19 has had and may in the future have on our business, see "Risk Factors-Risks Related to Our Industry-The COVID-19 pandemic has caused severe disruptions in theU.S. and global economies and may adversely impact our financial condition and results of operations". As ofMarch 31, 2021 we have adequate liquidity with$87 million in available cash and$35 million in availability under our Loan Agreements. For more information on our Loan Agreements, see "-Liquidity and Capital Resources-Loan Agreements". Recent TransactionsSpecial Purpose Acquisition Company InJanuary 2021 , we closed an initial public offering on our first special purpose acquisition company ("SPAC"), Hamilton Lane Alliance Holdings I, Inc. ("HLAH"), of 27.6 million units for$276 million . HLAH is sponsored by a wholly-owned subsidiary of HLA that will assist in identifying and effectuating a merger between HLAH and a target company. As part of the IPO, we were issued 4.9 million Class B shares for sponsoring HLAH and purchased 5 million warrants for$7.5 million . The shares and warrants vest or become exercisable upon a successful merger and at certain share price targets. Our goal is to raise additional SPACs in the future, depending on market and other conditions.March 2021 Offering InMarch 2021 , we and certain selling stockholders completed a registered offering of an aggregate of 1,453,110 shares of Class A common stock at a price of$87.36 per share (the "March 2021 Offering"). The purpose of theMarch 2021 Offering was to provide liquidity to significant direct and indirect owners of HLA. The shares sold consisted of (i) 94,245 shares held by the selling stockholders and (ii) 1,358,865 shares newly issued by us. We received$118.7 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 1,101,365 Class B units and 257,500 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. Investment InMarch 2021 , HLA invested$90 million in exchange for a minority interest inRussell Investments Group, Ltd. ("Russell"), a leading outsourced chief investment officer provider and global investment solutions firm. HLA and Russell intend to jointly develop and implement a strategy to engage in the global investment solutions outsourcing market. HLA funded the investment using cash on hand and available borrowings under its Loan Agreements. Acquisition InApril 2021 HLA acquired substantially all the assets of361 Capital, LLC , aDenver, Colorado -based boutique alternative investment management firm for a total aggregate purchase price of$13 million , of which$10 million was paid in cash on the closing date of the acquisition. The remaining$3 million will be paid in two equal installments on the first and second anniversaries of the closing. 69 -------------------------------------------------------------------------------- Operating Segments
We operate our business in a single segment, which is how our chief operating
decision maker (
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, incentive fees. See "-Critical Accounting Policies-Revenue
Recognition of Incentive Fees" and Note 2 of the consolidated financial
statements included in Part II, Item 8 of this Form 10-K for additional
information regarding the manner in which management and advisory fees and
incentive fees are generated.
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 generally
reduce the management and/or incentive 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, net invested capital or net asset value in, our
specialized funds. The management fee during the commitment period is often
charged on capital commitments and after the commitment period (or a defined
anniversary of the fund's initial closing) is typically reduced by a percentage
of the management fee for the preceding year or 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 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.
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For each of our secondary funds, direct/co-investment funds, strategic
opportunity funds and evergreen funds, we generally 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 to senior employees 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.
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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.
Non-operating income (loss) consists primarily of gains and losses on certain
investments and other non-recurring or non-cash items.
Fee-Earning AUM
Fee-earning AUM is a metric we use 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 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.
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Annual Consolidated Results of Operations
The following is a discussion of our consolidated results of operations for each
of the years in the three-year period ended March 31, 2021 . This information is
derived from our accompanying consolidated financial statements prepared in
accordance with GAAP.
Year Ended March 31,
2021 2020 2019
(in thousands)
Revenues
Management and advisory fees $ 289,444 $ 244,920 $ 217,773
Incentive fees 31,134 21,437 17,658
Consolidated variable interest entities related:
Incentive fees 21,057 7,691 16,748
Total revenues 341,635 274,048 252,179
Expenses
Compensation and benefits 136,319 100,138 98,995
General, administrative and other 49,210 57,481 48,960
Consolidated variable interest entities related:
General, administrative and other 378 - -
Total expenses 185,907 157,619 147,955
Other income (expense)
Equity in income of investees 32,389 20,731 7,457
Interest expense (2,044) (2,816) (3,039)
Interest income 1,676 709 255
Non-operating income 5,894 6,172 20,915
Consolidated variable interest entities related:
Equity in loss of investees (2,123) (481) (255)
Unrealized gains 2,141 - -
Interest expense (459) - -
Total other income (expense) 37,474 24,315 25,333
Income before income taxes 193,202 140,744 129,557
Income tax expense 24,417 13,968 30,560
Net income 168,785 126,776 98,997
Less: (Loss) income attributable to
non-controlling interests in general
partnerships (250) 85 564
Less: Income attributable to non-controlling
interests in Hamilton Lane Advisors, L.L.C. 69,720 65,866 64,860
Less: Income attributable to non-controlling
interests in Hamilton Lane Alliance Holdings I,
Inc. 1,293 - -
Net income attributable to Hamilton Lane
Incorporated $ 98,022 $ 60,825 $ 33,573
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Revenues
Year Ended March 31,
2021 2020 2019
(in thousands)
Management and advisory fees
Specialized funds $ 148,023 $ 111,803 $ 93,056
Customized separate accounts 93,963 90,750 85,245 Advisory 26,439 24,160 24,130 Reporting and other 11,134 9,102 8,805 Distribution management 6,701 4,920 4,525 Fund reimbursement revenue 3,184 4,185 2,012 Total management and advisory fees 289,444 244,920 217,773 Incentive fees 52,191 29,128 34,406 Total revenues$ 341,635 $ 274,048 $ 252,179 Year endedMarch 31, 2021 compared to year endedMarch 31, 2020 Total revenues increased$67.6 million , or 25%, to$341.6 million , for fiscal 2021 compared to fiscal 2020, due to increases in management and advisory fees and incentive fees. Management and advisory fees increased$44.5 million , or 18%, to$289.4 million for fiscal 2021 compared to fiscal 2020. Specialized funds revenue increased by$36.2 million compared to the prior year, due primarily to a$37.7 million increase in revenue from our latest secondary fund, which added$2.2 billion in fee-earning AUM in fiscal 2021. Management fees for our latest secondary fund included$18.2 million in retroactive fees for fiscal 2021 compared to$2.8 million for our latest co-investment fund in fiscal 2020. 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$3.2 million in fiscal 2021 due to a$1.1 billion increase in fee-earning AUM from the addition of several new accounts and additional allocations from existing accounts during the fiscal year. Advisory and reporting fees increased$4.3 million in fiscal 2021 due to the addition of new accounts. Distribution management revenue increased$1.8 million in fiscal 2021, due primarily to higher performance fees. Incentive fees increased$23.1 million to$52.2 million for fiscal 2021 compared to fiscal 2020, due to a$9.7 million increase in incentive fees from one of our specialized funds and increases across our other specialized funds and customized separate accounts. Year endedMarch 31, 2020 compared to year endedMarch 31, 2019 Total revenues increased$21.9 million , or 9%, to$274.0 million , for fiscal 2020 compared to fiscal 2019, due to an increase in management and advisory fees. Management and advisory fees increased$27.1 million , or 12%, to$244.9 million for fiscal 2020 compared to fiscal 2019. Specialized funds revenue increased by$18.7 million compared to the prior year, due primarily to a$14.0 million increase in revenue from our latest secondary fund, which added$1.7 billion in fee-earning AUM in fiscal 2020, and a$3.3 million increase from our latest co-investment fund, which added$0.2 billion in fee-earning AUM in fiscal 2020. Management fees for our latest co- 74 -------------------------------------------------------------------------------- investment fund included$2.8 million in retroactive fees for fiscal 2020 compared to$1.7 million for fiscal 2019. Customized separate accounts revenue increased$5.5 million in fiscal 2020 due to a$2.4 billion increase in fee-earning AUM from the addition of several new accounts and additional allocations from existing accounts during the fiscal year. Fund reimbursement revenue increased$2.2 million for fiscal 2020 compared to fiscal 2019, due primarily to the recognition of fund reimbursements from our latest secondary fund. Distribution management revenue increased$0.4 million due to higher stock distribution activity and the related fees earned from this business. Incentive fees decreased$5.3 million to$29.1 million for fiscal 2020 compared to fiscal 2019, due primarily to a$9.1 million decrease in incentive fees from one of our specialized funds and a$4.7 million decrease from one of our customized separate accounts, which included the general partner catch-up in the prior year period. This was partially offset by a$11.6 million increase from new accounts moving into a realized incentive fee position in fiscal 2020. Expenses Year endedMarch 31, 2021 compared to year endedMarch 31, 2020 Total expenses increased$28.3 million , or 18%, for fiscal 2021 compared to fiscal 2020 due to an increase in compensation and benefits expenses, partially offset by a decrease in general, administrative and other expenses. Compensation and benefits expenses increased$36.2 million , or 36%, to$136.3 million for fiscal 2021 compared to fiscal 2020, due primarily to an increase in base compensation and benefits. Base compensation and benefits increased$30.6 million , or 36%, for fiscal 2021 compared to fiscal 2020, due primarily to an increase in our bonus plan accrual from stronger company performance compared to the prior year period. Incentive compensation increased$5.7 million for fiscal 2021 compared to fiscal 2020 due to the increase in incentive fee revenue. General, administrative and other expenses decreased$7.9 million for fiscal 2021 compared to fiscal 2020. This change consisted primarily of a$3.9 million decrease in travel expenses due to COVID-19, a$2.3 million decrease in legal related expenses, and a$1.7 million decrease in consulting expenses. Year endedMarch 31, 2020 compared to year endedMarch 31, 2019 Total expenses increased$9.7 million , or 7%, for fiscal 2020 compared to fiscal 2019 due to an increase in general, administrative and other expenses. Compensation and benefits expenses increased$1.1 million , or 1%, to$100.1 million for fiscal 2020 compared to fiscal 2019, due to an increase in base compensation partially offset by a nonrecurring contingent compensation payment in the prior year period related to the fiscal 2018 acquisition ofReal Asset Portfolio Management LLC ("RAPM"). Base compensation and benefits increased$6 million , or 8%, for fiscal 2020 compared to fiscal 2019, due primarily to increased salary expense from additional headcount in the current year period compared to the prior year period. Contingent compensation related to the RAPM acquisition decreased$5.1 million for fiscal 2020 compared to fiscal 2019 due to the earnout period ending in the prior year. Incentive compensation decreased$0.6 million for fiscal 2020 compared to fiscal 2019 due to the decrease in incentive fee revenue. Equity-based compensation increased$0.8 million for fiscal 2020 compared to fiscal 2019 as a result of the amortization of equity awards, which have increased in recent years. General, administrative and other expenses increased$8.5 million for fiscal 2020 compared to fiscal 2019. This change consisted primarily of a$2.5 million increase in technology and office related 75 -------------------------------------------------------------------------------- expenses, a$2.2 million increase in consulting and professional fees, a$1.9 million increase in commissions from fund closings in the current year period, and a$0.9 million increase in legal-related expenses. Other Income (Expense) The following shows the equity in income (loss) of investees included in other income (expense): Year Ended March 31, 2021 2020 2019 (in thousands) Equity in income of investees Primary funds$ 2,443 $ 2,550 $ 1,594 Direct/co-investment funds 8,553 8,869 2,201 Secondary funds 6,226 2,514 1,282 Customized separate accounts 9,508 5,729
2,328
Other equity method investments 3,536 588
(203)
Total equity in income of investees
Year endedMarch 31, 2021 compared to year endedMarch 31, 2020 Other income (expense) increased$13.2 million to$37.5 million for fiscal 2021 compared to fiscal 2020, due primarily to an increase in equity in income of investees. Equity in income of investees increased$10.0 million to$30.3 million for fiscal 2021 compared to fiscal 2020. This increase was due primarily to a$3.8 million increase in gains across our customized separate accounts, a$3.7 million increase in gains in our secondary fund product, and a$2.9 million increase in gains in our other funds which includes our evergreen funds. Interest income increased$1.0 million for fiscal 2021 compared to fiscal 2020, due primarily to a late closing interest on our secondary fund in market in the period. Year endedMarch 31, 2020 compared to year endedMarch 31, 2019 Other income (expense) decreased$1.0 million to$24.3 million for fiscal 2020 compared to fiscal 2019, 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$13.0 million to$20.3 million for fiscal 2020 compared to fiscal 2019. This increase was due primarily to a$6.7 million increase in gains in our direct/co-investment fund products, a$3.4 million increase in gains across our customized separate accounts, and a$1.2 million increase in gains in our secondary fund products. Non-operating income decreased$14.7 million to$6.2 million for fiscal 2020 compared to fiscal 2019, due primarily to a$4.6 million decrease in gains from the sale of technology investments and a$10.1 million decrease to our liability under the tax receivable agreement in the prior year as a result of a re-measurement related to changes in state tax rate estimates. 76 -------------------------------------------------------------------------------- Income Tax Expense Income tax expense reflectsU.S. federal and applicable state income taxes with respect to our allocable share of any taxable income of HLA subsequent to the Reorganization. Our effective income tax rate in fiscal 2021, 2020 and 2019 was 12.6%, 9.9%, and 23.6% respectively. The fiscal 2021 effective income tax rate was different from the statutory tax rate due to the portion of income allocated to the non-controlling interest and change in the valuation allowance recorded against deferred tax assets. The effective income tax rate for fiscal 2021 was higher than fiscal 2020 due primarily to discrete tax adjustments that reduced the fiscal 2020 effective income tax rate. The effective income tax rate for fiscal 2021 was less than fiscal 2019 due primarily to the revaluation of deferred tax assets related to changes in state income tax apportionment in fiscal 2019. Fee-Earning AUM The following table provides the period to period roll-forward of our fee-earning AUM. Year Ended March 31, Year Ended March 31, 2021 2020 (in millions) Customized Customized Separate Separate Accounts Specialized Funds Total Accounts Specialized Funds Total Balance, beginning of period$ 24,545 $ 14,118$ 38,663 $ 22,160 $ 11,434$ 33,594 Contributions (1) 5,761 3,436 9,197 4,885 3,424 8,309 Distributions (2) (4,904) (1,306) (6,210) (2,624) (724) (3,348) Foreign exchange, market value and other (3) 262 93 355 124 (16) 108 Balance, end of period$ 25,664 $ 16,341$ 42,005 $ 24,545 $ 14,118$ 38,663 (1)Contributions represent new commitments from customized separate accounts and specialized funds that earn fees on a committed capital fee base and 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 returns of capital in customized separate accounts and specialized funds that earn fees on a net invested capital or NAV fee base, reductions in fee-earning AUM from separate accounts and specialized funds that moved from a committed capital to net invested capital fee base and 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 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 market value appreciation (depreciation) from customized separate accounts and specialized funds that earn fees on a NAV fee base. Year endedMarch 31, 2021 compared to year endedMarch 31, 2020 Fee-earning AUM increased$3.3 billion , or 9%, to$42.0 billion for fiscal 2021, due to contributions from customized separate accounts and specialized funds. Customized separate accounts fee-earning AUM increased$1.1 billion , or 5%, to$25.7 billion for fiscal 2021. Customized separate accounts contributions were$5.8 billion for fiscal 2021 due to new allocations from existing clients and new clients. Distributions were$4.9 billion for fiscal 2021 due to$2.1 billion from accounts reaching the end of their fund term,$1.9 billion from accounts moving from a committed to net invested capital fee base, and$0.8 billion from returns of capital in accounts earning fees on a net invested capital or NAV fee base. 77 -------------------------------------------------------------------------------- Specialized funds fee-earning AUM increased$2.2 billion , or 16%, to$16.3 billion for fiscal 2021. Specialized fund contributions were$3.4 billion for fiscal 2021 due primarily to$2.2 billion in new commitments to our secondary fund in market during the period. Distributions were$1.3 billion for fiscal 2021, due to$0.7 billion from funds reaching the end of their fund term and$0.6 billion from returns of capital in funds earning fees on a net invested capital or NAV fee base. Year endedMarch 31, 2020 compared to year endedMarch 31, 2019 Fee-earning AUM increased$5.1 billion , or 15%, to$38.7 billion for fiscal 2020, due primarily to new specialized funds and customized separate accounts commitments. Customized separate accounts fee-earning AUM increased$2.4 billion , or 11%, to$24.5 billion for fiscal 2020. Customized separate accounts contributions were$4.9 billion for fiscal 2020 due to new allocations from existing clients and new clients. Distributions were$2.6 billion for fiscal 2020 due to$1.0 billion from accounts reaching the end of their account term,$0.8 billion from accounts moving from a committed capital to a net invested fee base as their investment period expired, and$0.8 billion from returns of capital in accounts earning fees on a net invested capital or NAV fee base. Specialized funds fee-earning AUM increased$2.7 billion , or 23%, to$14.1 billion for fiscal 2020. Specialized fund contributions were$3.4 billion for fiscal 2020 due primarily to$1.7 billion in new commitments to our secondary fund in market during the period,$0.2 billion from our co-investment fund in market during the period, and$0.9 billion from funds earning fees on a net invested capital or NAV fee base. Distributions were$0.7 billion for fiscal 2020 due to$0.4 billion from returns of capital in funds earning fees on a net invested capital fee base and$0.3 billion from funds moving from a committed capital to a net invested fee base as their investment period expired. 78 -------------------------------------------------------------------------------- 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. Adjusted EBITDA Adjusted EBITDA is our primary internal measure of profitability. 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. Fee Related Earnings Fee Related Earnings ("FRE") is used to highlight earnings of the Company 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. 79 --------------------------------------------------------------------------------
The following table shows a reconciliation of net income attributable to
Year Ended March 31,
2021 2020 2019 2018 2017
(in thousands)
Net income attributable to Hamilton Lane
Incorporated $ 98,022 $
60,825
(250) 85 564 2,448 1,192
Income attributable to non-controlling
interests in Hamilton Lane Advisors, L.L.C. 69,720 65,866 64,860 86,508 72,634
Income attributable to non-controlling
interests in Hamilton Lane Alliance Holdings I,
Inc. 1,293 - - - -
Incentive fees (1) (52,191) (29,128) (34,406) (49,003) (7,146)
Incentive fee related compensation (2) 24,438 13,677 14,983 3,874 3,283
SPAC related compensation 1,686 - - - -
SPAC related general, administrative and other
expenses 378 - - - -
Interest income (1,676) (709) (255) (528) (320)
Interest expense 2,503 2,816 3,039 5,989 14,565
Income tax expense 24,417 13,968 30,560 33,333 316
Equity in income of investees (30,266) (20,250) (7,202) (17,102) (12,801)
Contingent compensation related to acquisition - - 5,100 3,399 -
Non-operating (income) loss (8,035) (6,172) (20,915) (5,036) (83)
Fee Related Earnings $ 130,039 $
100,978
4,134 3,291 2,500 1,891 1,915
Equity-based compensation 7,079 7,183 6,382 5,544 4,681
Incentive fees (1) 52,191 29,128 34,406 49,003 7,146
Incentive fees attributable to non-controlling
interests (1) (756) (320) (725) (1,729) -
Incentive fee related compensation (2) (24,438) (13,677) (14,983) (3,874) (3,283)
SPAC related compensation (1,686) - - - -
Interest income 1,676 709 255 528 320
Adjusted EBITDA $ 168,239 $ 127,292 $ 117,736 $ 132,586 $ 83,031
(1) Incentive fees for the year ended March 31, 2021 included $0.8 million of
non-cash carried interest attributable to non-controlling interests. Incentive
fees for the year ended March 31, 2020 included $0.3 million of non-cash carried
interest attributable to non-controlling interests. Incentive fees for the year
ended March 31, 2019 included $3.2 million of non-cash carried interest. Of the
$3.2 million , $2.5 million is included in net income and $0.7 million is
attributable to non-controlling interests. Incentive fees for the year ended
March 31, 2018 included $40.6 million of non-cash carried interest. Of the $40.6
million , $38.9 million is included in net income and $1.7 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
years ended March 31, 2019 and 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 and $38.9 million , respectively, as the
related incentive fee compensation was recognized in fiscal 2016.
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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 adjusted net
income and non-GAAP earnings per share are useful to investors because they
enable them to better evaluate total and 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 fiscal 2021,
2020 and 2019.
Year Ended March 31,
2021 2020 2019
(in thousands, except share and per-share amounts)
Net income attributable to
$ 98,022
69,720 65,866 64,860
Income tax expense 24,417 13,968 30,560
Contingent compensation related to acquisition - - 5,100
Adjusted pre-tax net income $ 192,159 $ 140,659 $ 134,093
Adjusted income taxes (1) (45,734) (33,336) (32,048)
Adjusted net income $ 146,425 $ 107,323 $ 102,045
Weighted-average shares of Class A common stock
outstanding - diluted 33,362,365 28,438,772 24,298,795
Exchange of Class B and Class C units in HLA (2) 20,240,035 25,067,540 29,040,205
Adjusted shares outstanding 53,602,400 53,506,312 53,339,000
Non-GAAP earnings per share $ 2.73 $ 2.01 $ 1.91
(1) For the year ended March 31, 2021, represents corporate income taxes at
our estimated statutory tax rate of 23.8% 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%. For the year
ended March 31, 2020 , represents corporate income taxes at our estimated
statutory tax rate of 23.7% applied to adjusted pre-tax net income. The 23.7% is
based on a federal tax statutory rate of 21.0% and a combined state income tax
rate net of federal benefits of 2.7%. For the year ended March 31, 2019 ,
represents corporate income taxes at our estimated statutory tax rate of 23.9%
applied to adjusted pre-tax net income. The 23.9% is based on a federal tax
statutory rate of 21.0% and a combined state income tax rate net of federal
benefits of 2.9%.
(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.
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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 March 31, 2021 and March 31, 2020 , our cash and cash equivalents,
including investments in money market funds, were $87.0 million and $50.1
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.
Loan Agreements
We maintain the Term Loan Agreement, the Revolving Loan Agreement and the
Multi-Draw Term Loan Agreement with First Republic . The Term Loan Agreement has
a maturity date of July 1, 2027 and the interest rate is a floating per annum
rate equal to the prime rate minus 1.50% subject to a floor of 2.25%. As of
March 31, 2021 , we had an outstanding balance of $74 million under the Term Loan
Agreement. We are entitled to request additional uncommitted term advances not
to exceed $25 million in the aggregate, as well as additional committed term
advances not to exceed $25 million in the aggregate through March 24, 2023 .
The Revolving Loan Agreement provides that the aggregate outstanding balance
will not exceed $25 million and has a maturity date of March 24, 2023 . The
interest rate is a floating per annum rate equal to the prime rate minus 1.50%
subject to a floor of 2.25%. As of March 31, 2021 , we had an outstanding balance
of $15 million under the Revolving Loan Agreement.
The Multi-Draw Term Loan Agreement provides for a term loan in the aggregate
principal amount of $100 million with a maturity date of July 1, 2030 . Advances
may be drawn through March 31, 2022 and the interest rate is a fixed per annum
rate of 3.50%. As of March 31, 2021 , we had an outstanding balance of $75
million under the Multi-Draw Term Loan Agreement.
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, make distributions,
engage in transactions with affiliates and take certain actions with respect to
management fees. The Loan Agreements also require HLA to maintain, among other
requirements, (i) a specified amount of management fees, (ii) a specified amount
of adjusted EBITDA, as defined in the Loan Agreements, and (iii) a specified
minimum tangible net worth, during the term of
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each of the Loan Agreements. The obligations under the Loan Agreements are
secured by substantially all the assets of HLA. As of March 31, 2021 and 2020,
the principal amount of debt outstanding equaled $163.6 million and $75.0
million , respectively.
Cash Flows
Year Ended March 31,
2021 2020 2019
(in thousands)
Net cash provided by operating activities $ 188,158 $ 116,373 $ 111,622
Net cash used in investing activities (421,781) (49,900) (19,213)
Net cash provided by (used in) financing activities 270,660 (64,709) (90,210)
Effect of exchange rate changes on cash and cash
equivalents 130 (144) 8
Increase in cash, cash equivalents and restricted cash
Operating Activities Net cash provided by operating activities was$188.2 million ,$116.4 million and$111.6 million during fiscal 2021, 2020 and 2019, respectively. These operating cash flows were driven primarily by: •net income of$168.8 million ,$126.8 million and$99.0 million during fiscal 2021, 2020 and 2019, respectively; and •net change in operating assets and liabilities of$33.5 million ,$(19.9) million and$(2.0) million during fiscal 2021, 2020 and 2019, respectively. Investing Activities Our net cash flow used in investing activities was$421.8 million ,$49.9 million and$19.2 million during fiscal 2021, 2020 and 2019, respectively. These amounts were driven primarily by: •purchase of money market funds of$276.0 million during fiscal 2021 related to our consolidated SPAC entity; •purchase of other investments of$90.5 million and$4.0 million during fiscal 2021 and 2020, respectively •contributions to investments, net of distributions received from investments, of$38.7 million ,$46.0 million and$35.4 million during fiscal 2021, 2020 and 2019, respectively; •proceeds from the sales of other investments of$6.4 million and$22.5 million during fiscal 2020 and 2019, respectively; and •purchase of furniture, fixtures and equipment of$18.6 million during fiscal 2021, mainly attributable to the build out of our new corporate headquarters location. Financing Activities Our net cash flow provided by (used in) financing activities was$270.7 million ,$(64.7) million and$(90.2) million during fiscal 2021, 2020 and 2019, respectively. Cash provided by (used in) financing activities was attributable primarily to: •new debt borrowings of$90.0 million during fiscal 2021; 83 -------------------------------------------------------------------------------- •net contributions from non-controlling interest holders to our consolidated SPAC of$270.0 million during fiscal 2021; •dividends paid of$39.7 million ,$29.1 million and$18.7 million during fiscal 2021, 2020 and 2019, respectively; and •distributions to equity holders of$34.4 million ,$47.4 million and$50.6 million during fiscal 2021, 2020 and 2019, respectively. 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. We currently sponsor a SPAC and intend to sponsor additional SPACs in the future, depending on market and other conditions, which will require an initial investment of capital from us that we may be unable to recover if a suitable target company for the SPAC is not identified within the prescribed timeframe. InNovember 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 12 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, (10) fund SPACs sponsored by us and (11) 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 ourHong 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 ofMarch 31, 2021 , we were required to maintain approximately$3.0 million in liquid net assets within these subsidiaries to meet regulatory net capital and capital adequacy requirements. We are in compliance with these regulatory requirements. 84 -------------------------------------------------------------------------------- Dividend Policy The declaration and payment by us of any future dividends to holders of our Class A common stock is at the sole discretion of our board of directors. We intend to continue to pay a cash dividend on a quarterly basis. Subject to funds being legally available, we will cause HLA to make pro rata distributions to its members, including us, in an amount at least sufficient to allow us to pay all applicable taxes, to make payments under the tax receivable agreement, and to pay our corporate and other overhead expenses. Tax Receivable Agreement We expect that exchanges of membership units of HLA by members of HLA, as well as our initial purchase of membership units of HLA with the net proceeds from our IPO from certain existing direct and indirect HLA members, will result in increases in the tax basis in our share of the assets of HLA that otherwise would not have been available. These increases in tax basis are expected to increase our depreciation and amortization deductions and create other tax benefits and therefore may reduce the amount of tax that we would otherwise be required to pay in the future. The tax receivable agreement will require us to pay 85% of the amount of these and certain other tax benefits, if any, that we realize (or are deemed to realize in the case of an early termination payment, a change in control or a material breach by us of our obligations under the tax receivable agreement) to the existing direct and indirect members of HLA. Off-Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us to any liability that is not reflected in our consolidated financial statements.
Contractual Obligations, Commitments and Contingencies
The following table represents our contractual obligations as of
Contractual Obligations, Commitments and Contingencies
Less than 1 More than 5
(in thousands) Total year 1-3 years 3-5 years years
Operating leases (1) $ 101,766 $ 6,189
163,594 16,875 6,563 25,781 114,375
Interest on debt obligations
payable (3) 28,142 4,314 8,467 7,787 7,574
Capital commitments to our
investments (4) 201,442 201,442 - - -
Total $ 494,944 $ 228,820 $ 28,029 $ 44,338 $ 193,757 (1) Operating leases obligation includes lease payments for our new headquarters
that will commence when we occupy the space, which is expected to be
(2) Represents scheduled debt obligation payments under our Loan Agreements.
(3) Represents interest to be paid over the maturity of the related debt
obligations, which has been calculated assuming no pre-payments will be made and
debt will be held until its final maturity date. The future interest payments
are calculated using
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the variable interest rate of 2.25% on our Term Loan Agreement and the fixed
interest rate of 3.50% on our Multi-Draw Term Loan Agreement in effect as of
March 31, 2021 .
(4) Represents commitments by us to fund a portion of each investment made by
our specialized funds and certain customized separate account entities. These
amounts are generally due on demand and are therefore presented in the less than
one year category.
We have entered into a tax receivable agreement with our pre-IPO owners pursuant
to which we will pay them 85% of the amount of tax benefits, if any, that we
realize (or are deemed to realize in the case of an early termination payment by
us, a change in control or a material breach by us of our obligations under the
tax receivable agreement) as a result of increases in tax basis (and certain
other tax benefits) resulting from purchases or exchanges of membership units of
HLA. Because the timing of amounts to be paid under the tax receivable agreement
cannot be determined, this contractual commitment has not been presented in the
table above. The tax savings achieved may be substantial and we may not have
sufficient cash available to pay this liability, in which case, we might be
required to incur additional debt to satisfy this liability.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with GAAP. In
applying many of these accounting principles, we need to make assumptions,
estimates or judgments that affect the reported amounts of assets, liabilities,
revenues and expenses in our combined and consolidated financial statements. We
base our estimates and judgments on historical experience and other assumptions
that we believe are reasonable under the circumstances. These assumptions,
estimates or judgments, however, are both subjective and subject to change, and
actual results may differ from our assumptions and estimates. If actual amounts
are ultimately different from our estimates, the revisions are included in our
results of operations for the period in which the actual amounts become known.
We believe the following critical accounting policies could potentially produce
materially different results if we were to change underlying assumptions,
estimates or judgments. See Note 2, "Summary of Significant Accounting
Policies," to our consolidated financial statements included in Part II, Item 8
of this Form 10-K for a summary of our significant accounting policies.
Principles of Consolidation
We consolidate all entities that we control through a controlling financial
interest or as the primary beneficiary of variable interest entities ("VIEs").
Our policy is to perform an analysis to determine whether consolidation is
required by determining if we have a variable interest in each entity and
whether that entity is a VIE. We perform the variable interest analysis for all
entities in which we have a potential variable interest, which consist primarily
of our specialized funds and customized separate accounts where we serve as the
general partner or managing member, and general partner entities not wholly
owned by us. If we have a variable interest in the entity and the entity is a
VIE, we will also analyze whether we are the primary beneficiary of this entity
and whether consolidation is required.
In evaluating whether we hold a variable interest, we review the equity
ownership to determine whether we absorb risk created and distributed by the
entity, as well as whether the fees charged to the entity are customary and
commensurate with the effort required to provide the services. We consider all
economic interests, including indirect interests, to determine if a fee is
considered a variable interest. For our specialized funds and customized
separate accounts, our fee arrangements are not considered to be variable
interests. For those entities where we hold a variable interest, we determine
whether each of these entities qualifies as a VIE and, if so, whether we are the
primary beneficiary.
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The assessment of whether the entity is a VIE requires an evaluation of
qualitative factors and, where applicable, quantitative factors. These judgments
include: (a) determining whether the equity investment at risk is sufficient to
permit the entity to finance its activities without additional subordinated
financial support, (b) evaluating whether the equity holders, as a group, can
make decisions that have a significant effect on the economic performance of the
entity, (c) determining whether two or more parties' equity interests should be
aggregated, and (d) determining whether the equity investors have proportionate
voting rights to their obligations to absorb losses or rights to receive returns
from an entity. The entities that are VIEs were determined as such because the
respective limited partners do not have the ability to remove the general
partner or dissolve the respective fund or entity with a simple majority vote
(i.e., the limited partners lack "kick out rights").
For entities that are determined to be VIEs, we are required to consolidate
those entities where we have concluded that we are the primary beneficiary. The
primary beneficiary is defined as the variable interest holder with (a) the
power to direct the activities of a VIE that most significantly impact the
entity's economic performance and (b) the obligation to absorb losses of the
entity or the right to receive benefits from the entity that could potentially
be significant to the VIE. In evaluating whether we are the primary beneficiary,
we evaluate our economic interests in the entity held either directly or
indirectly by us. At each reporting date, we determine whether any
reconsideration events have occurred that require us to revisit the primary
beneficiary analysis, and we will consolidate or deconsolidate accordingly.
Revenue Recognition of Incentive Fees
Incentive fees include both carried interest earned from certain specialized
funds and performance fees received from certain customized separate accounts.
Contracts with specialized funds and certain customized separate accounts
provide incentive fees, which generally range from 5.0% to 12.5% of profits,
when investment returns exceed minimum return levels or other performance
targets on either an annual or inception to date basis and are generally payable
after all contributed capital and the preferred return on that capital has been
distributed to investors. Incentive fees are recognized when it is probable that
a significant reversal will not occur. Investment returns are highly susceptible
to market factors and judgments and actions of third parties that are outside of
our control. We estimate the amount and probability of additional future capital
contributions to specialized funds and customized separate accounts, which could
impact the probability of a significant reversal occurring. The additional
future capital contributions relate to unfunded commitments or follow-on
investment opportunities in underlying portfolio investments.
Incentive fees received by us before the revenue recognition criteria have been
met are deferred and recorded as deferred incentive fee revenue in the
Consolidated Balance Sheets.
Incentive Fee Compensation Expense
Incentive fee compensation expense includes compensation directly related to
incentive fees. Certain employees are granted allocations or profit-sharing
interests and are thereby, as a group, entitled to a 25% portion of the
incentive fees earned from certain of our specialized funds and performance fees
from certain customized separate accounts, subject to vesting. Amounts payable
pursuant to these arrangements are recorded as a compensation expense when they
have become probable and reasonably estimable. Our determination of the point at
which it becomes probable and reasonably estimable is based on our assessment of
numerous factors, particularly those related to the profitability, realization,
distribution status, investment profile and commitments or contingencies of our
specialized funds or customized separate accounts that may give rise to
incentive fees. Incentive fee compensation may be expensed before the related
incentive fee revenue is recognized.
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Income Taxes
We account for income taxes using the asset and liability method. Deferred
income taxes are recognized for the expected future tax consequences
attributable to temporary differences between the carrying amount of the
existing tax assets and liabilities and their respective tax basis. Deferred tax
assets and liabilities are measured using enacted tax rates expected to be
applied in the years in which temporary differences are expected to be recovered
or settled. The principal items giving rise to temporary differences are certain
basis differences resulting from the acquisitions of HLA units. Realization of
the deferred tax assets is primarily dependent upon (1) historic earnings, (2)
forecasted taxable income, (3) future tax deductions of tax basis step-ups
related to our IPO and subsequent unit exchanges, (4) future tax deductions
related to payments under the tax receivable agreement, and (5) our share of
HLA's temporary differences that result in future tax deductions. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount more likely than not to be realized.
HLI is the sole managing member of HLA, which is organized as a limited
liability company and treated as a "flow-through" entity for income taxes
purposes. As a "flow-through" entity, HLA is not subject to income taxes apart
from from certain U.S. state and local taxes and foreign taxes attributable to
its operations in foreign jurisdictions. Any taxable income or loss generated by
HLA is passed through to and included in the taxable income or loss of its
members, including HLI. As a result, we do not record income taxes on pre-tax
income or loss attributable to the non-controlling interests in the general
partnerships and HLA, except for foreign taxes discussed above. HLI is subject
to U.S. federal and applicable state corporate income taxes with respect to its
allocable share of any taxable income of HLA.
We analyze our tax filing positions in all of the U.S. federal, state, local and
foreign tax jurisdictions where we are required to file income tax returns, as
well for all open tax years in these jurisdictions. We evaluate tax positions
taken or expected to be taken in the course of preparing an entity's tax returns
to determine whether it is "more-likely-than-not" that each tax position will be
sustained by the applicable tax authority.
Tax Receivable Agreement
Our purchase of HLA Class A units concurrent with the IPO, and subsequent
exchanges by holders of HLA units for shares of our Class A common stock
pursuant to the exchange agreement, result in increases in our share of the tax
basis of the tangible and intangible assets of HLA, which increases the tax
depreciation and amortization deductions that otherwise would not have been
available to us. These increases in tax basis and tax depreciation and
amortization deductions are expected to reduce the amount of cash taxes that we
would otherwise be required to pay in the future. We entered into the tax
receivable agreement with the other members of HLA, which requires us to pay
exchanging HLA unitholders (the "TRA Recipients") 85% of the amount of cash
savings, if any, in U.S. federal, state, and local income tax that we actually
realize (or, under certain circumstances, are deemed to realize) as a result of
the increases in tax basis in connection with exchanges by the TRA Recipients
described above and certain other tax benefits attributable to payments under
the tax receivable agreement. Generally, if we do not generate sufficient
cumulative taxable income in the future to utilize the tax benefits, then we
will not be required to make the related tax receivable agreement payments - the
exception being that our obligation to make such payments may be accelerated if
we elect to terminate the tax receivable agreement, in whole or in part, or if a
change in control of us, or a breach of the tax receivable agreement by us,
occurs. Therefore, we will generally only recognize a liability for payments
under the tax receivable agreement for financial reporting purposes to the
extent we determine it is probable that we will generate sufficient future
taxable income to utilize the related tax benefits. Estimating and projecting
future taxable income is inherently uncertain and requires judgment. Actual
taxable income may differ from estimates, which could
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--------------------------------------------------------------------------------significantly affect the liability under the tax benefit arrangements and our consolidated results of operations.
Based on current projections, we anticipate having sufficient taxable income to utilize these tax attributes and receive corresponding tax deductions in future periods. Changes in the projected liability resulting from the tax receivable agreement may occur based on changes in anticipated future taxable income, changes in applicable tax rates or other changes in tax attributes that may occur and could affect the expected future tax benefits to be received by us. 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 consolidated financial statements included in Part II, Item 8 of this Form 10-K.
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