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Hamilton Lane Incorporated (NASDAQ:HLNE)
Q2 2020 Earnings Call
Nov 5, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is James and I will be your conference operator today. At this time, I would like to welcome everyone to the Hamilton Lane Incorporated Second Quarter Fiscal Year 2020 Earnings Conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. I'd like to hand the call over to John Oh, Investor Relations Manager. You may begin your conference.

John Oh -- Investor Relations Manager

Thank you, James. Good morning and welcome to the Hamilton Lane Q2 fiscal 2020 earnings call.

Today I will be joined by Mario Giannini, CEO; Erik Hirsch, Vice Chairman; Jeff Meeker, Chief Client Officer; and Randy Stilman, CFO. Before we discuss the quarter's results, we want to remind you that we will be making forward-looking statements based on our current expectations for the business. These statements are subject to risks and uncertainties that may cause the actual results to differ materially. For a discussion of these risks, please review the risk factors included in the Hamilton Lane fiscal 2019 10-K and subsequent reports we file with the SEC.

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

Beginning on Slide 3. Year-to-date, our management and advisory fee revenue grew approximately 15% relative to the prior-year period. Over the same period, we grew our fee-related earnings by 14%. This translated into year-to-date non-GAAP EPS of $0.94, based on approximately $50 million of adjusted net income and GAAP EPS of $0.98 based on approximately $27 million of GAAP net income. We have again declared a dividend of $0.275 per share this quarter, which keeps us on track with the 29% increase over last fiscal year and equates to $1.10 per share for fiscal year 2020.

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

Erik Hirsch -- Vice Chairman & Head of Strategic Initiatives

Thank you, John, and good morning everyone.

Turning to Slide 4, this should be familiar. It highlights our total asset footprint, which we define as the sum of our AUM, assets under management and AUA assets under advisement. Total asset footprint for the quarter stood at approximately $481 billion and represents a 6% increase to our footprint year-over-year. Growth in AUM came across client type, size of client, geographic region and came from both our specialized funds and our separate accounts. We continue to focus on growing and winning across both lines of business.

Moving to AUA. We also saw growth come across our client type and geographic region. As mentioned in the last earnings call, AUA can fluctuate quarter-to-quarter due to a variety of reasons, but the revenue associated with AUA does not necessarily move in lockstep with the change. And while this quarter saw an increase in AUA dollars relative to the previous quarter, we will continue to emphasize that no direct correlation exists between the scale of AUA dollars and revenue generation. Although we expect to add to our AUA over the long term, it remains an area where we are focused on finding the right match between our services and the needs of the particular client, not simply growing for growth sake.

On Slide 5, we highlight our fee earning AUM. Fee earning AUM is the combination of our customized separate accounts and our specialized funds with basis point driven management fees. As we have stated in the past, fee earning AUM is the most significant driver of our business as it makes up over 80% of our management and advisory fees. Year-over-year total fee earning AUM grew $4.4 billion or nearly 14% with solid growth and positive fund flows across both our specialized funds and our customized separate accounts. We have added net fee earning AUM of $2 billion to our customized separate accounts and over the same time period, we have added nearly $2.4 billion of net fee earning AUM across our specialized funds. As we had mentioned on prior calls, this growth continues to be driven by four key components: number one, reups from our existing clients; two, winning and adding new clients; three, growing our existing fund platforms; and four, raising new specialized funds. Also as we have shown on this slide, our fee rates continue to remain steady. For those who have followed us since our IPO, this steadiness has been a consistent theme.

Moving to Slide 6. Fee-earning AUM from our customized separate accounts was $22.9 billion, growing approximately 10% over the last 12 months. This came from a combination of reups from existing accounts as well as the addition of brand new relationships. We experienced growth across all of the geographies we serve as well as by the type and size of client.

Additionally, in the past we've discussed our efforts in working to broaden our partnerships with distribution platforms where we provide white label solutions. This area continues to experience attractive growth and we are encouraged by the opportunity set we see in front of us. With that, let me now turn the call over to Jeff to cover an update on our specialized funds.

Jeff Meeker -- Chief Client Officer

Thanks, Eric. With regard to our specialized products, growth continues to be strong and demand is coming from a wide range of investors around the globe. Over the past 12 months, we achieved positive fee-earning AUM inflows of nearly $2.4 billion, resulting in a 22% increase. We remain active with our fund raising efforts on a variety of fronts, including our new semi-liquid Evergreen fund that marked our entrance into a market targeted at high net worth investors and geographies where evergreen funds are already offered such as Australia, Asia and Europe.

Since the launch, we've continued to be very encouraged with the demand for the product, but ultimately this is a marathon, not a sprint. Other platforms that have achieved similar -- have achieved success in this space have been built out over many years and we expect to follow a similar course. That said, we are pleased with our progress to date. Since launching in May 2019, the fund has received more than $146 million of inflows as of November 1, which equates to approximately $24 million of net inflows on a monthly basis.

Now, a quick update on the other specialized funds. On September 27, we announced the final closing of our 10th multi-strategy fund-of-funds with approximately $278 million total commitment. While we have seen a shift in investor preference toward customized separate accounts or other specialized funds, the multi-strategy structure continues to fit the needs of certain investors seeking diversified exposure to the private markets and it continues to be an additive product for our firm.

On the secondary fund front, we had announced in our prior call in April, we held the first close on our fifth secondary fund with $700 million of commitments. As a reminder, we have at least 18 months from the date of our first close to complete the raising of the fund. In September, we held our second close on an additional $400 million, bringing the total close to date to $1.1 billion. Since fees on this fund started in the prior quarter, disclosing did generate retro fees for the quarter. We continue to remain encouraged with the growth we have achieved with our fee-earning AUM through this fiscal year to date. The interest in demand for private markets exposure continues to grow and we continue to be the beneficiary of this growth as a leader in this asset class.

With that, let me turn the call over to Randy, our CFO, to go over the financials.

Randy M. Stilman -- Chief Financial Officer and Treasurer

Thanks, Jeff.

Slide 8 of our presentation shows the financial highlights for the first half of our fiscal year. We continued to see very solid growth in our business with management and advisory fees up approximately 15% versus the prior-year period, driven by strong results across our core products and services. Revenue from our customized separate accounts increased $2.9 million compared to the prior-year period, due to the addition of several new accounts and reups from existing clients.

Our specialized funds revenue increased $10.2 million from the prior-year period, driven by $1.1 billion raised in our latest secondary fund in the current fiscal year and $600 million raised between periods for our latest co-investment fund. We recognized $2.8 million year-to-date in retro fees from the co-investment fund, compared to $800,000 in the prior year period. As many of you are likely aware, investors that come into later closes of the fund raise for many of our products, pay retroactive fees dating back to the fund's first close. Therefore, you typically see a spike in management fees related to that fund, for the quarter in which subsequent closes occur.

Revenue from our advisory and reporting offerings was flat compared to the prior year period. The final component of our revenue is incentive fees. Incentive fees for the period were $9.2 million or approximately 7% of total revenue.

Moving to Slide 9, we provide some additional detail on unrealized carry balance. We saw strong growth this quarter with the balance of [Phonetic] 15% from the prior year, even as we recognized $28.7 million of incentive fees over the last 12 months. As you can see from this slide, the growth came from both adding new carry generating funds as well as appreciation in existing vehicles.

Turning to Slide 10 which profiles our earnings. Our fee-related earnings year-to-date were up 14% versus the prior year period, as a result of the revenue growth we discussed earlier. In regard to our expenses, total expenses year-to-date increased $2.9 million compared with the prior-year period. G&A increased $5.3 million due to increases in commissions from fund closings in the current year period, an increase in consulting and professional fees and an increase in fund reimbursement expenses. Total compensation and benefits decreased $2.4 million compared to the prior year period due primarily to the earn-out expense from our Real Asset acquisition in the prior-year period.

Moving to our balance sheet on Slide 11. Our largest asset on our balance sheet is investments alongside our clients in our customized separate accounts and specialized funds. The growth of this asset, which increased 19% compared to the prior-year period reflects the growth of our business. In regard to our liabilities, our senior debt is our largest liability, and we continue to be modestly levered.

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

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from the line of Ken Worthington with JPMorgan. Go ahead please. Your line is open.

Ken Worthington -- J.P. Morgan -- Wall Street Analyst

Hi, thank you for taking my question. Maybe first on the fund-of-funds product that you just phrased, I think you said $278 million. That's a fair bit smaller than what we've seen in prior funds. And I think as you acknowledged, this is not really where you see the biggest direct opportunity, but I thought there were a number of ancillary benefits you received from having a bigger presence in the fund-of-fund area.

So, I guess -- maybe one, remind us what those ancillary benefits are. I think there is implications for your co-investment funds etc. And does the shrinking of the size from the $500 million plus range to the below $300 million, does that actually start to weigh on some of those ancillary benefits your presence here provides?

Jeff Meeker -- Chief Client Officer

Sure, Ken. This is Jeff. Thanks for the question. So in the second part of your question, you're exactly right. In terms of the ancillary benefits we get around things like co-investment come from having significant primary dollars that we commit in the marketplace. And so, from that standpoint, yeah, we need primary dollars to continue to generate things like co-investment and secondary opportunities.

Remember that our comingled fund-of-funds is compared to our separate account business, a fairly small portion of the business overall. So, while we continue to get those advantages from our separate account business and from the comingled side. On the fund-of-fund specifically, I think I mentioned and we've mentioned it before, we have seen a bit of a shift in investor preference toward customized investing. I think we're well positioned to take advantage of that. The fund-of-funds is a natural extension of our business. You've heard us talk in the past about things like white label products. So, that is where we build specific commingled funds or fund-of-fund like offerings for high net worth platforms.

We've continued to see good growth in that area as well and overall the fund-of-funds business continues to be additive overall.

Ken Worthington -- J.P. Morgan -- Wall Street Analyst

Thank you. And then maybe on performance fees, can you talk about how you see the crystallization of performance fees, especially in like Co-Invest II. That's already generating performance fees, but it seems like it has a lot more to come, but what is the -- I don't know. You don't know the exact timing, but how should we think about crystallization in coming quarters broadly and maybe that product more specifically?

Erik Hirsch -- Vice Chairman & Head of Strategic Initiatives

Sure. Ken, it's Erik. Thanks for the question. I think what you're seeing with both us and the broader market is that liquidity is simply not occurring at the rate that it perhaps that occurred out several years ago, I think, driven by a few factors. One, a lot of volatility in the overall economy right now and it has potential sellers and buyers, I think, just sitting here and waiting to take a pause on is now the best day to go ahead and sell that asset.

I think secondly what you're seeing is, in an environment where people purchase some assets at relatively high prices, it certainly takes some time to continue to generate those returns that they and we are expecting. So, from our perspective the money continues to flow. Our biggest focus is on what we can control, which is the overall totality of that carried interest dollar which, as Randy pointed out, is growing very, very nicely. And I think on Co-Investment Fund II and the crystallization of all that obviously not in our control but we continue to like the assets that are there and we feel good about the prospects.

Ken Worthington -- J.P. Morgan -- Wall Street Analyst

Great, thank you very much.

Operator

Your next question comes from the line of Michael Cyprys with Morgan Stanley. Go ahead please. Your line is open.

Michael Cyprys -- Morgan Stanley -- Analyst

Hey, good morning. Thanks for taking the question. Just curious on the broader fundraising front in the backdrop where interest rate expectations relative to say 6 to 12 months ago or a lot lower here in the US and around the world. So, I'm just curious what sort of impact is that having on conversations that you're having with clients compared to say a year ago? Do you see new investors coming out to you guys for the first time? How is that pace sort of changing if you can kind of just give us a flavor of what you're hearing and seeing out there?

Mario L. Giannini -- Chief Executive Officer

Sure, Mike. It's Mario. With no surprise -- with interest rates lower, I think, it increases the hunt for [Phonetic] higher returning assets and the discussions we have with clients and prospects whether around equity or credit or Real Asset is probably heightened a little bit in terms of, OK, if I don't expect interest rates to rise and semi-fixed income component is not going to get the returns I have, then where do I get that return? So we see new entrants, but we also see continued interest in existing investors for that higher returning set of assets in their portfolios. And again, as you know [Indecipherable] lower interest rates makes that a much more relevant conversation. So, I would say from a private markets perspective lower interest rates are a net positive to interest and inflows into the private markets.

Michael Cyprys -- Morgan Stanley -- Analyst

Great. And just maybe as a follow-up, as you guys are raising more assets, bringing in more client dollars more clients, can you just talk about maybe how you're building out the platform to be able to deploy capital at a faster velocity, whether it's across different verticals and in asset classes? How you guys are building that out?

Mario L. Giannini -- Chief Executive Officer

Well, I think as you've seen from just the growth in the number of people, the growth in geographies, I think it's what you've said. You build it out across a number of different ways. One is, within the verticals we have, you have to build the resources and the team to take the volume. The back office needs to grow in order to have the reporting in the monitoring of all the investments you've made.

So, as you think about our growth, you just have a lot of things that are needed in order to process the deal flow and get the deal flow done. And then, as we've mentioned in a number of prior conversations, there is a technology aspect to all of this in terms of keeping the infrastructure moving, keeping the information timely, and allowing you to do things in a more efficient way and make sure that all of that information is moving around the firm and to clients in the way you want it to.

Michael Cyprys -- Morgan Stanley -- Analyst

Great, thanks.

Operator

And your next question comes from the line of Alex Blostein with Goldman Sachs. Go ahead please. Your line is open.

Daniel Jacoby -- Goldman, Sachs & Co. -- Analyst

Hi, good morning. This is actually Dan Jacoby filling in for Alex. Thanks for taking our questions. You guys had touched on the fundraising for white label strategies as a helper to AUM growth. Can you just help us think about kind of size, the contribution to fee-earning AUM, over let's say, the last 12 months, something like that? And then just going forward, help us think about what that opportunity could look like.

Erik Hirsch -- Vice Chairman & Head of Strategic Initiatives

Sure, Dan. It's Erik. Thanks for the question. I think as you've heard us sort of note a few times, this is an area that we are excited about. I think this reflects the asset class move into having a larger portion of capital coming from both high net worth individuals as well as mass affluent. We think as a provider of customized solutions, which we see is a big part of what that market is looking for, we're very, very well positioned. So just as a reminder, these vehicles -- our customized vehicles, again, often white labeled, where we're partnered with a wealth management platform, and the platform is responsible for both the distribution and the servicing and then Hamilton Lane is responsible for what we do which is assembling those portfolios to deliver performance for the clients. And so, we see this area as early days. We have started a handful of relationships and I think the growth is really coming from sort of two components of that. One, us adding new relationships and two, those existing relationships beginning to grow.

As you can imagine, most of these things start off pretty small, people want to see success, they want to see brand getting established on their platform and as that happens, you start to see the uptick grow and that's exactly what we're starting to see. We haven't broken out publicly sort of the magnitude of that. I think as those become more and more important to our business over time, you'll start to see us provide some more color on those in the future.

Daniel Jacoby -- Goldman, Sachs & Co. -- Analyst

Got it. That's helpful color. Thank you. And then just as a follow up, just maybe if you guys could provide a little bit of color on the expense outlook, how we should think about kind of base compensation, the growth in that line and kind of where this quarter was relative to the run rate? And then same sort of thing on G&A, the growth outlook and kind of where we are versus run rate expense levels? Thanks.

Erik Hirsch -- Vice Chairman & Head of Strategic Initiatives

Yeah, Dan. It's Erik. I'll stay on that one. I think what you're seeing is what we said in the past. I think we're growing the business. We do continue to add resources because we view ourself in sort of a high-growth mode. That said, I think there is nothing abnormal occurring this quarter versus sort of prior and what we sort of expect to see in the future.

Daniel Jacoby -- Goldman, Sachs & Co. -- Analyst

Got it. Thank you.

Operator

[Operator Instructions] And your next question comes from the line of Robert Lee with KBW. Go ahead please. Your line is open.

Robert Lee -- Keefe, Bruyette & Woods, Inc. -- Analyst

Great. Good morning. Thanks for taking my questions. Maybe talk a little bit about this separate account business. I'm just kind of -- maybe update us a little bit on and how you think of the competitive environment for that type of business and if that's having any kind of impact on fees there. I mean it does [Phonetic] look -- I know it's a moving target depending on how different the accounts kind of step up or down, but it does look like maybe the average fee rates come down a little bit there, maybe it's just mix, but can you talk about some of the dynamics there and if you're seeing more competitors come into that marketplace.

Mario L. Giannini -- Chief Executive Officer

Hey, Rob. It's Mario. I would say -- I don't know if there are more competitors. Some have drifted away, others have come in. It's a competitive environment depending on what the particular clients are looking for. So there is usually a handful of people that are competing for any particular mandate and it really depends on the kinds of services you can offer, the kinds of investment results you can offer. As you noted, the fee pressure is marginal. I mean, we see it in some places, more in some geographies, more in some if people want more primaries versus secondaries or whatever they are looking for. So I would say, it's mixed on the fee pressure and then obviously depending on size, but it does come back to what services can you offer. As we've noted a number of times, roughly a third of Hamilton Lane employees are on the client side, which is very different from most of our competitors. And so, that from the point of view of offering a separate account and being able to provide customized services, customized solutions is a very strong feature. So it's a competitive market, but we feel like we continue to win the business we want to win and do it at the prices that you see in the financial results.

Robert Lee -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay, great. And just maybe a quick kind of maybe more modeling questions, the $2.8 million catch-up fees, that was year-to-date, not in the quarter, correct?

Erik Hirsch -- Vice Chairman & Head of Strategic Initiatives

Rob, it's Erik. Yes, that's correct. That's year-to-date.

Robert Lee -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Just wanted to double check. Thank you. Thanks for taking my questions.

Operator

Your next question comes from the line of Chris Kotowski from Oppenheimer & Company. Go ahead please. Your line is open.

Chris Kotowski -- Oppenheimer & Company -- Analyst

Yeah, good morning. Since your last call, I guess, private equity has become kind of a political football, certainly in this country. And I mean, I don't expect you to comment on it, but as I read Senator Warren's proposed legislation, it seems to want to do away with the concept of limited liability companies. And again, I don't expect you to comment on her proposals directly, but I'm wondering, is this kind of an aberrant view in the United States or is this a common view that as you look all through -- all the geographies that you have, is it a common thing that kind of private equity is portrayed as the axis of evil in the economy as opposed to being a source of capital for growth.

Randy M. Stilman -- Chief Financial Officer and Treasurer

Sorry, hello. Let me take a shot. It's Allen. I think it varies. Remember a few years ago, I think, it was in Germany the private equity industry was called the Plague of Locusts. So, it varies. You have deals that go bad, which then are very high profile and so it becomes politically easy to pick on them, but these things seem to come and go. You have some legislation that can impact it. I think that it is sort of the good and bad news of being an industry that has grown and been successful. 15 years, 20 years ago, it was a very small part of the capital markets and didn't get the attention it gets now because now it is a very important part of the capital markets.

And so, I suspect that this will continue. I don't think it will go away whether in the United States or other countries, and it is something we will have to deal with and have dealt with as I mentioned in other places and something I think that is part of the reality of the industry having grown and matured.

Robert Lee -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. All righty. Thank you. That's it from me.

Operator

And there are no further questions in queue at this time, I'd like to turn the call back over to our presenters.

John Oh -- Investor Relations Manager

We want to thank everyone for joining us today. Thank you.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

John Oh -- Investor Relations Manager

Erik Hirsch -- Vice Chairman & Head of Strategic Initiatives

Jeff Meeker -- Chief Client Officer

Randy M. Stilman -- Chief Financial Officer and Treasurer

Mario L. Giannini -- Chief Executive Officer

Ken Worthington -- J.P. Morgan -- Wall Street Analyst

Michael Cyprys -- Morgan Stanley -- Analyst

Daniel Jacoby -- Goldman, Sachs & Co. -- Analyst

Robert Lee -- Keefe, Bruyette & Woods, Inc. -- Analyst

Chris Kotowski -- Oppenheimer & Company -- Analyst

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