HAMILTON LANE INCORPORATED 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 2021 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 2021 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
2021 and fiscal 2020 are to our fiscal years ended
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 $71 billion of our
assets under management ("AUM") as of June 30, 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 $20 billion of our AUM as of June 30, 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 $665 billion of assets under
advisement ("AUA") as of June 30, 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.
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•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
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
Trends Affecting Our Business
Impact of Covid-19
In March 2020 , the World Health Organization declared the outbreak of a novel
coronavirus ("COVID-19") 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. While we expect to re-open many of our
offices, including our corporate headquarters, to employees for onsite work
later in 2021 as conditions permit, we believe COVID-19's adverse impact on our
business, financial condition and results of operations will be significantly
driven by a number of factors that we are unable to predict or control,
including, for example: the severity and duration of the pandemic? the
pandemic's impact on the U.S. and global economies? the timing, scope and
effectiveness of additional governmental responses to the pandemic? the timing
and path of economic recovery? and the negative impact on our portfolio
investments, clients, counterparties, vendors and other business partners that
may indirectly adversely affect us.
As of June 30, 2021 , we have adequate liquidity with $73.1 million in available
cash and $100 million in availability under our Loan Agreements (defined below).
For more information on our Loan Agreements, see "Liquidity and Capital
Resources-Loan Agreements".
Recent TransactionsAcquisition
In
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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.
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 and (c) incentive fee compensation, which consists of
carried interest and performance fee allocations. We expect 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, changes in liability under the tax receivable agreement and other
non-recurring or non-cash items.
Other income (expense) of consolidated Variable Interest Entities ("VIEs")
consists primarily of the share of earnings of investments of consolidated
general partner entities, which are not wholly-owned by us, in our specialized
funds and certain customized separate accounts in which it has a general partner
commitment and changes in fair value of liabilities of our sponsored special
purpose acquisition company ("SPAC").
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 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.
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Consolidated Results of Operations
The following is a discussion of our consolidated results of operations for the
three months ended
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