Earnings Call Transcript - HLNE Q4 2024

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Hamilton Lane Fourth Fiscal Quarter and Full Fiscal Year 2024 Earnings Call. This call is being recorded on Thursday, May 23, 2024. I would now like to turn the conference over to John Oh, Head of Shareholder Relations. Please go ahead.

John Oh, Head of Shareholder Relations

Thank you, Evo. Good morning and welcome to the Hamilton Lane Q4 and fiscal year end 2024 earnings call. Today, I will be joined by Erik Hirsch, Co-Chief Executive Officer; Jeff Armbrister, Chief Financial Officer. Earlier this morning we issued a press release and slide presentation, which are available on our website. Before we discuss the quarter's results, we want to remind you that we will be making forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance, and business. These forward-looking statements do not guarantee future events or performance and are subject to risks and uncertainties that may cause our actual results to differ materially from those projected. For a discussion of these risks, please review the cautionary statements and risk factors included in the Hamilton Lane fiscal 2023 10-K and subsequent reports we file with the SEC, including our upcoming Form 10-K for fiscal 2024. These forward-looking statements are made only as of today, and except as required, we undertake no obligation to update or revise any of them. 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 made available on the Shareholders section of the Hamilton Lane website. Our detailed financial results will be made available when our 10-Q is filed. Please note, nothing on this call represents an offer to sell or a solicitation of an offer to purchase interest in any of Hamilton Lane's products. Before we get to the results, I'd like to highlight our upcoming HLNE Shareholder Day that will take place on June 5th, both in person at our Contra Hawk and PA Headquarters, and simultaneously webcast live for those unable to join us in person. The event will provide detailed insight into growth drivers for our business and showcase our leadership in the private markets. For more information on the event, please visit the Shareholder section of the Hamilton Lane website. Let's move now to some financial highlights. For fiscal year 2024, our management and advisory fee revenue grew by 22%, while our fee-related earnings also grew by 22% versus the prior year. This translated into full-year GAAP EPS of $3.69 based on $141 million of GAAP net income, and non-GAAP EPS of $3.92 based on $212 million of adjusted net income. Lastly, our board has approved a 10% increase to our annual fiscal dividend to $1.96 per share, or $0.49 per share per quarter. This marks the seventh consecutive annual double-digit percentage increase to our dividends since going public in 2017. Our ability to consistently increase distributions to our shareholders every year speaks to the growth and the strength of our business. With that, I'll now turn the call over to Erik.

Erik Hirsch, Co-Chief Executive Officer

Thank you, John, and good morning. Let's get straight to the results. It was another strong quarter. I'll start with our total asset footprint. This stood at $921 billion and represents a 7% increase to our footprint year over year. AUM stood at $124 billion at quarter end and grew $13 billion or 11%. The growth came from both our specialized funds and customized separate accounts. AUA was up $51 billion or 7% year over year, primarily the result of market value growth and the addition of technology solution mandates. Turning now to fee earning AUM, which continues to be the largest driver of management fees. We continue to generate strong growth in both our customized separate accounts and specialized funds. Our total fee earning AUM stood at $65.7 billion and grew $8.4 billion or 15% relative to the prior year period. Taken separately, $2.9 billion of net fee earning AUM came from our customized separate accounts, and over the same period, $5.5 billion came from our specialized funds. Our blended fee rate across the platform also continues to increase. This stems from the continuing shift in the mix of our fee earning AUM towards higher fee rate specialized funds, most notably our evergreen products where growth remains strong. When we went public in 2017, our blended fee rate was 57 basis points. Today, it stands at 63 basis points. Moving now to additional detail on our customized separate accounts. Fee earning AUM here stood at $37.6 billion, growing 8% over the past 12 months. We continue to see the growth coming across type, mandate, size, and geographic location of the clients. Our customized separate accounts are built in close partnership with our clients who look to us to create, manage, and invest their capital to achieve long-term success. Let me give you an example of a recent win. After months of interactions with us, and I'll note here that the sales cycle can be long given the length and size of the mandate. We secured a new separate account that importantly would be these Canadian based endowments first investments in the private markets. There were several of our competitors vying for the business, and we were selected due to our track record, breadth of service offering, and a belief that we could help them grow their program over time. So while this is an institution that is brand new to the asset class, we also continue to find meaningful growth through our existing customers. Today, on a fee earning AUM basis, the average length of relationship with our separate account clients is over 10 years with several that exceed that meaningfully. For example, we've had the privilege of managing the portfolio for a nationally recognized Taft Hartley organization whose relationship started back in the early 2000s with a single private equity separate account. Fast forward to today, that partnership is now on its 14th tranche, and along the way, we added private credit for them in 2010, and that's now on its 10th tranche, and they've had multiple commitments to various secondary funds of ours. This approach of finding clients who are new to the private markets combined with expanding with our existing base has served us well as we've continued to build out our separate customized business. Let's move on now to our specialized funds where momentum also continues to be strong. Fee earning AUM here stood at $28.2 billion at quarter end. Over the past 12 months, we've achieved positive net inflows of $5.5 billion, representing an increase of 24% relative to the prior year period. This growth stemmed from additional closes for our funds currently in the market, robust investment activity, and continued expansion of our Evergreen platform. Moving to the drivers of specialized funds flow. Let's start with our current secondary fund. During the quarter, we held additional closes in February and March that totaled just over $800 million of investor commitments. This generated retro fees of $12.3 million for the quarter. Subsequent to quarter end, we held an additional close in April that totaled $618 million, which generated over $11 million of retro fees that will be recognized in the quarter ending June 30th, our first quarter of fiscal year 2025. This brings the total fund size to over $5 billion. As with prior fundraisers, we've received a small extension in order to accommodate the last remaining investors who are completing administrative work and expect to close the fund over the next few weeks. I'll note at this point that the total current fund size of over $5 billion is the largest institutional fundraise in our history and represents a 30% increase to the prior fund. The secondary platform is a key component of our specialized fund growth, and our platform continues to expand as the overall secondaries market grows. The success of this fundraise is a direct result of our market-leading position within the asset class as we continue to be a holistic solution provider to both GPs and LPs seeking liquidity. Let's now turn to our strategic opportunities fund, which is our annual direct credit fund targeting institutional LPs. As a refresher, this series of funds is effectively always in market as we raise and deploy the capital with short investment periods and charge management fees on invested capital. During the quarter, we held the final close for our eighth series of the strategy at over $690 million of LP commitments. Overall, all credit platform continues to scale and deal flow remains robust. Private credit continues to benefit and fill the void left from the continued retrenchment by traditional lending sources and those regional banks. For calendar 2023 across our entire credit complex, which includes our separate accounts, closed-end funds, and evergreen platform, we invested more than $1.3 billion into credit transactions, not funds, which is an increase of more than 45% versus the prior year. Before we move on to Evergreen, I wanted to provide a quick update on our first dedicated specialized fund in the venture space. Recall that we have been actively investing in venture since 1996 through our separate account business and are now providing investors with commingled fund access to the venture capital market with primary, secondary, and co-investment strategies. We announced the first closing in May of 2023, and to date, we've raised nearly $250 million in LP commitments for this first-time fund, and we will remain in market throughout the remainder of calendar 2024. Now onto our Evergreen funds. We ended calendar 2023 with $5.7 billion of AUM, and we're averaging $160 million of monthly net inflow onto the platform. As of March 31st, 2024, total AUM across our three offerings stood at nearly $6.5 billion. Our goal remains simple with our Evergreen platform: maintain steady, consistent growth in monthly flows over the longer term accomplished by expanding with current distribution relationships while also adding new ones. We saw our average further tick up during this first quarter of calendar 2024, where the platform averaged over $255 million of monthly net inflow. This was the result of adding additional relationships and some backlog from relationships added earlier with the latter being more one-off in nature. I would also like to highlight that we continue to make great progress within our wirehouse channel. As of the end of the first calendar quarter of ‘24, we have taken in close to $900 million of flows as we approach the one-year anniversary of getting approved and onboarded there. In addition to that, non-wirehouse flows continue to scale nicely and complement the wirehouse success. We remain enthused about what we've already accomplished and very excited about what lies ahead. Let's move on now to some announcements around our most recent technology partnerships and balance sheet investments. On February 29th, we announced the launch of a newly created distributed ledger technology or DLT share class built on the Polygon Blockchain for our global private asset evergreen fund together with Signum Bank and Apex Group. This first of its kind, digitally native and tokenized share class marks the first entry in Apex's on-chain share register. This offering represents a significant breakthrough in making the private markets more broadly accessible, efficient, and investable via tokenization. We believe this partnership can potentially serve as a catalyst for broader adoption within the banking and wealth management industry. Next, on May 1st, we announced our newest strategic balance sheet investment to join the Hamilton Lane Innovations portfolio that being Securitize. You've heard us speak in the past about partnering with Securitize and providing tokenized access to our products, spanning strategies such as evergreen, secondaries, and direct equity. We're now pleased to announce that we have further solidified this partnership by becoming an investor in Securitize. Hamilton Lane participated in the company's most recent strategic fundraise that was led by BlackRock, which recently launched their first tokenized money market fund in partnership with Securitize. The financing also included investments from Purify and Tradeweb. We continue to view Securitize as a pioneer and a leader in the tokenization and digital asset space, and we look forward to providing updates on our journey with them in the future. Lastly, on Tuesday of this week, Nevada, another strategic investment within our Hamilton Lane Innovations balance sheet portfolio announced the closing of their most recent financing. Recall that the modest technology platform and expert services allow for the private markets to collect, analyze, and report on sustainability metrics. Hamilton Lane participated in this financing alongside existing investors S&P Global. The financing also included new investors Motive Ventures, which is backed by affiliates of Apollo Global Management. Since its launch in 2021, Nevada has continued to build a sophisticated platform that enables the private markets to achieve a more sustainable and inclusive form of capitalism, and we look forward to continuing our support in their mission. And with that, I'll now turn the call over to Jeff to cover the financials.

Jeff Armbrister, Chief Financial Officer

Thank you, Erik, and good morning, everyone. For fiscal 2024, we achieved strong growth in our business with management and advisory fees up 22% versus the prior year. Our specialized funds revenue increased by $64.7 million or 33% compared to the prior year. This was driven primarily by a $2.7 billion increase to fee earning AUM in our Evergreen platform in the last 12 months and over $4.3 billion raised since inception in our latest secondary fund. Retro fees for the fiscal year included $19.6 million from our secondary fund and market versus $2.4 million from our direct equity fund in the prior year. As a reminder, investors that come into later closes during a fundraise pay retroactive fees dating back to the funds' first close. We expect to generate additional retro fees as we hold the final closes for our secondary fund in the market. Moving on to customized separate accounts, revenue increased $11.1 million or 9% compared to the prior year period due to the addition of several new accounts, re-ups from existing clients, and continued investment activity. Revenue from our advisory reporting and other offerings decreased slightly by less than $1 million compared to the prior year, due primarily to the sale of the 361 Capital assets, partially offset by increases in revenue coming from our technology solutions. Lastly, the final component of our revenue is incentive fees. Incentive fees totaled $101.9 million for fiscal 2024 and are down 35% relative to the prior year. Recall that last fiscal year, we generated a large amount of incentive fees due to the catch-up period that several of our carry eligible vehicles were in. Let's turn to our unrealized carry balance. The balance is up 19% from the prior year while having recognized $101.9 million of incentive fees during the last 12 months, the unrealized carry balance now stands at over $1.2 billion. Moving to expenses, total expenses for fiscal 2024 increased $19.3 million compared to the prior year. Total compensation and benefits increased by $5.6 million, driven by headcount growth and partially offset by incentive fee-related compensation. G&A increased $13.7 million, driven primarily by revenue-related expenses, which are the third-party commissions related to our US Evergreen product being offered on wirehouses that we've discussed on prior calls. Lastly, fee-related earnings or FRE for fiscal 2024 were up 22% relative to the prior year as a result of the management fee and fee earning AUM growth discussed earlier. As we discussed on our prior call, our FRE margin for the year came in at 42.8%, with the fiscal fourth quarter's margin coming in higher and offsetting the fiscal third quarter's timing-related FRE margin impact stemming from the extension of our secondary fund in market. I'll wrap up here with some commentary on our balance sheet. Our largest asset continues to be our investments alongside our clients and our customized separate accounts and specialized funds. Over the long term, we view these investments as an important component of our continued growth, and we'll continue to invest our balance sheet capital alongside our clients. In regard to our liabilities, we continue to be modestly levered. With that, we'll now open up the call for questions.

Operator, Operator

Your first question comes from the line of Stephanie Ma from Morgan Stanley.

Stephanie Ma, Analyst

This is Stephanie from Mike. Our first question is on the retail channel. Appreciate some of the color you gave on the flows that's coming in strong. Maybe you can elaborate on where momentum is building and then maybe looking ahead, what's the scope for incremental rollouts of the existing funds and what might be on the rollout map for new product launches?

Erik Hirsch, Co-Chief Executive Officer

I'll take that. So I think if we sort of break those two pieces on the existing side, what you're seeing is a couple of factors. One, we continue to expand our own sales resources, and those sales resources are improving. They're building deeper relationships, getting new deeper relationships, expanding the existing relationships. So all of that is working. We continue to add new partners and channels, and part of this is an education factor as you're introducing something that is fundamentally new for most people. So that process, that education is something that our team is doing a fantastic job on, is very focused on in terms of what might come in the future. We've said in prior calls, and we'll continue to say, expect to see that our current three offerings become more than that. We're looking at a variety of strategies that we think will be well received. And for us, I've used the analogy of this as a marathon, not a sprint. We want to make sure we roll those out properly to ensure that the investor experience remains excellent. Building the brand and deepening those relationships is really our main priority. We want that investor experience and the returns to be outstanding. We want to ensure we're managing flows, managing new products, but we absolutely expect three to become more than three in the future.

Stephanie Ma, Analyst

And maybe just for my follow-up, zooming out on fundraising more broadly into your fiscal 2025, can you remind us again what funds are in the market today, where those funds stand, and what might make sense to come back into the market sooner as we look out over the next 12 months?

Erik Hirsch, Co-Chief Executive Officer

In prior calls, we've talked about some infrastructure. I mentioned today this new venture product. We have discussed that the next in our direct equity series is also in the market, and credit is perpetually in market, as I noted. So we've got a pretty full slate of things that we're working on. And, of course, the Evergreen.

Operator, Operator

Your next question comes from the line of Ken Worthington from JP Morgan.

Ken Worthington, Analyst

Talk to me about expenses. What sort of expense growth are you targeting as we think about this coming fiscal year, and what are the margins that we should expect given the investment plan that you have in place?

Jeff Armbrister, Chief Financial Officer

I'll stick with this. I'll sort of pat ourselves on the back and say, I think we've actually done a great job managing the margin. If you think about sort of what's the headwinds right now? Cost inflation. Our team's traveling a lot. Travel costs are up. Conferences are back, and those are more expensive. We have a bigger team today than we had yesterday or certainly a year ago. So more people, more offices, and more activity are headwinds. I think what's also been a headwind is that as we're onboarding onto these evergreen, the flows are great and all that's terrific. You're obviously paying the wirehouses kind of an onboarding cost in that first year. So that's a headwind. I think despite that, margins are kind of coming in this year at 43%, obviously a little higher this quarter, given some of the retro fee nature that we had talked about last quarter. I think we're doing a great job of managing the business. The tailwinds are that sort of mix shift into this higher margin business. So the specialized funds across the board is helping that. When I sort of talk to our shareholders, I say that the management team arrives to work every day thinking about how to maintain strong double-digit growth. We are not arriving at work every day thinking about how we can tweak that margin a little higher. I think that will come over time as we get the benefit of scale and operating efficiencies, etc. But I think that what we're delivering in the current market with what we're dealing with has been noteworthy.

Ken Worthington, Analyst

Is it fair to say the growth of expenses that we've seen over the last 12 months continues for the next?

Jeff Armbrister, Chief Financial Officer

My answer is I hope it does, because I think that indicates that we're continuing to grow. I certainly hope that the fees and commissions can continue on the wirehouses and also on just our distribution costs, because again, all that's indicating strong fundraising. And so I hope all of that continues.

Ken Worthington, Analyst

And then just on SMAs, talk to us about the pipeline, where it stands today versus where it stood 6 or 12 months ago? And where are SMAs you seeing sort of the greatest interest from your clients?

Erik Hirsch, Co-Chief Executive Officer

I'll stay on this. The pipeline continues to be robust. Our growth rate on the SMA side has continued to be kind of high single digits. Given the breadth of the install base, I think that's a good number for us to sort of target. We gave two examples in the script today, and I think that sort of speaks to the opportunity set. You think about those organizations as diametrically different from each other. One literally entering the asset class for the very first time, no exposure, no relationships, and they're just now saying they’re going to enter the asset class. On the other end of the spectrum, someone who has been with us for over 20 years has all the endless tranches that I spoke about. The fact that we're able to be appealing and attractive to both of those in two different geographies, two different sizes of organizations, and different objectives with what they're trying to achieve in the asset class, I think indicates that the SMA business today is really set up to address whatever needs the customer has. We talk about sort of meeting the customer where they are, and that's what the SMA business is all about. So interest is varied. People are looking for venture, and other people are looking for infrastructure, and someone else wants a credit overlay. That's the beauty of the SMA business: we can do all of that for all those customers.

Operator, Operator

Your next question comes from the line of Adam Beatty of UBS.

Adam Beatty, Analyst

You mentioned distribution fees and some of what you pay into the wealth management channel for distribution and suggested that some of that was upfront. Just wanted to get your thoughts and commentary on the mix of those upfront fees versus ongoing revenue share arrangements and how that might be changing in the near term.

Erik Hirsch, Co-Chief Executive Officer

For us, if you think about the fees, I'd put them in sort of macro, kind of two buckets. One is fundraising commissions that we're paying to our internal people. That is sort of on an internal measurement for them on dollars raised and a commission structure around that. The other piece is in the US only, where we're dealing with US based wirehouses, typically one-time upfront fees as a percentage of kind of that first-year revenue. Both are increasing for the obvious reason that, as I noted, fund flows on the wirehouse channel continue to be strong. We're dealing with that upfront fee, and internal sales continue to be equally strong, and then we're managing that commission structure. You should think about the majority of that being upfront, not ongoing.

Adam Beatty, Analyst

Certainly a good problem to have, for sure. Just turning to the advent of the specialized fund in VC. As you say, you've been managing VC type assets for quite some time, and I know that you make these decisions carefully as to when and how to launch a specialized fund. So just wondering what went into that and how you're seeing investor sentiment around VC these days.

Erik Hirsch, Co-Chief Executive Officer

I think you're right on both parts. I mean, we've been doing it as I noted, going back to 1996, with a long track record, terrific relationships, and a good reputation as a partner in that venture business. What we're seeing today is that the venture business is becoming a little bit more rational. To us, that feels like a better time to enter versus doing something a couple of years ago when things were just at an absolute frenzied pitch; that did not feel like a good time to us. It's just reacting to the market environment, and what we see in our client base is that this is a better time to be getting in when prices are beginning to come down.

Operator, Operator

We do not have further questions at this time. Erik Hirsch, please continue.

Erik Hirsch, Co-Chief Executive Officer

Well, as always, we appreciate the time, the questions, and the partnership, and wish all of you a safe and healthy Memorial Day weekend for those here in the US. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.