HLNE - NASDAQ

Good morning, ladies and gentlemen, and welcome to the Hamilton Lane First Quarter Fiscal 2025 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, August 6, 2024. I would now like to turn the conference over to John Oh, Head of Shareholder Relations. Please go ahead.

Thank you Julie. Good morning, and welcome to the Hamilton Lane Q1 fiscal 2025 earnings call. Today I will be joined by Erik Hirsch, Co-Chief Executive Officer; Jeff Armbrister, Chief Financial Officer; and Griff Norville, Head of Technology Solutions. 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 2024 10-K and subsequent reports we file with the SEC. 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 that 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. First, as a reminder for those who may have missed it, we held our second HLNE Shareholder Day on June 5, where several Hamilton Lane leaders walk through business channels and growth drivers. We charted our progress since our IPO in March 2017 and discuss what we continue to see as a large and growing market in front of us. We were proud to show our strong results and our continued leadership in private markets through the depth and breadth of our offering. For those who have not had a chance to watch the presentation, a replay recording along with the accompanying slides can be found on the shareholders section of our website. Thank you to all those who joined us in person at our headquarters for the live presentation. Let's move now to some financial highlights. For this first quarter of fiscal 2025, our management and advisory fee revenue grew by 33%, while our fee-related earnings also grew by 33% versus the prior year period. This translated into GAAP EPS of $1.47 based on $59 million of GAAP net income and non-GAAP EPS of $1.51 based on $81 million of adjusted net income. We have also declared a dividend of $0.49 per share this quarter. This keeps us on track for the targeted full fiscal 2025 dividend of $1.96 per share, which represents a 10% increase from the prior fiscal year. With that, I'll now turn the call over to Erik.

Thank you John, and good morning everyone. We continue to experience strong momentum and have recorded another outstanding quarter. None of this happens by accident particularly not in this market. And Juan and I are proud of the team here and their unwavering focus on delivering excellence to our customers. That focus is what results in our ability to expand our brand and continue to grow. Let's move now to our total asset footprint. This stood at $940 billion and represents a 15% increase to our footprint year-over-year. AUM stood at $130 billion at quarter end and grew $13 billion or 11%. The growth came from both our specialized funds and our customized separate accounts. AUA was up $110 billion or 16% year-over-year, primarily the result of market value growth and the addition of technology solutions and back-office mandates. Turning now to fee-earning AUM. We continue to generate very strong growth across our specialized fund platform and more modest growth across our separate accounts. It is worth emphasizing that increasingly we are seeing separate account mandates include meaningful allocation to our specialized funds and that AUM would get captured under specialized funds not separate accounts. This is a good thing. Our total fee-earning AUM stood at $67.7 billion and grew $8 billion or 13% relative to the prior year period. Taken separately, $2.4 billion of net fee-earning AUM came from our customized separate accounts and over the same time period $5.7 billion came from our specialized funds. As we detailed in our Shareholder Day, our blended fee rate across the platform has been steadily increasing year-over-year. 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 impressive. When we went public in 2017, our blended fee rate was 57 basis points. Today, it stands at 61 basis points excluding the impact from retro fees. Moving now to additional detail on our customized separate accounts. We continue here to see growth coming from clients across type, mandate size and geographic location. As we highlighted on our last call, our separate account business continues to grow through finding new clients some of which have already invested in private markets and for others, this is their first foray. The bulk of our flows continue to be driven by our existing clients who re-up with us, as they look to maintain and grow their exposure to the asset class. This trend has remained steady since our IPO and remains the case through this first -- this fiscal quarter where the balance of customized separate account net fee-earning AUM stood at $38.2 billion and grew by $2.4 billion or 7% over the last 12 months. Let's move now to our specialized funds where momentum continues to be strong. Fee earning AUM here stood at $29.5 billion at quarter end. Over the past 12 months, we achieved positive net inflows of $5.7 billion representing an increase of 24% relative to the prior year period. This growth stemmed from additional closes for funds currently in market, robust investment activity and continued expansion of our Evergreen platform. Now moving to the drivers of specialized fund flows. Let's start with our latest secondary fund. On June 18, we announced the final close for our sixth secondary fund with $5.6 billion in total commitments. This fund marks our largest ever institutional fundraise and represents an over 40% increase in size relative to the prior fund which held its final close in 2021. The fund's diverse group of investors include corporate and public pension funds, capped Hartley plans, sovereign wealth funds, endowments foundations, private wealth platforms and other financial institutions. On our last call, we mentioned that we held a close in April that totaled $618 million of LP commitments and generated $11 million of retro fees. The final close of this fund ended up totaling nearly $569 million and generated another $9 million of retro fees. This brings the total raise in the quarter to nearly $1.2 billion and retro fees of nearly $21 million. The final close exceeded our expectations and was the direct result of the dogged determination of our team and the faith placed in us by clients who are enthused at how the portfolio was positioned and the pipeline of attractive deals in front of us. I am extremely proud of the work and dedication my colleagues put forth during this fund raise where we dealt with a crowded field, a choppy economic backdrop and an unstable global geopolitical landscape. At conclusion, we took in over 228 investors across 31 countries and we appreciate their support and trust and we will strive to exceed their expectations. Investment activity remains fulsome and attractive. And as of June 30th, the fund was 40% committed and we have a strong pipeline in front of us. Turning now to some first close announcements for two of our flagship products. First up is our equity opportunities fund, which is our closed-end fund that co-invests alongside our fund managers in equity transactions. As a quick reminder, our fifth equity opportunities fund closed in December of 2022 at approximately $2.1 billion. We are proud to announce that we held the first close for our sixth equity opportunities fund on June 30th with over $523 million of LP commitments. Similar to our prior fund this fund will have two economic arrangements for investors where management fees are based on either committed capital with a lower carried interest rate or net invested capital with a higher carried interest rate. For context, the prior funds mix resulted in 49% of the dollars raised based on committed capital and 51% based on net invested capital. While we don't know the breakout of this next fundraise until the end, the capital raised in this first close resulted in 48% on capital committed and 52% on net invested. As we hold additional closes for this fund, we'll provide the split and associated retro fees with the committed capital option. Now stepping back. We are pleased with the start of this raise so far. We have built a strong platform of investing directly alongside the world's leading fund managers and we look forward to providing you with future updates as we progress through this fundraise. Let's now turn to our strategic opportunities fund, which is our annual direct credit fund, targeting the institutional LP. As a refresher, the series of funds is effectively always in market as we raise and deploy the capital with short investment periods and charge management fees on net invested capital. For the benefit of those less familiar with the series, it is less about targeting a set amount of dollars to raise as you would traditionally see across funds with a multiyear deployment period and more about ensuring that we size the product in line with the current opportunity set. This inevitably will lead to some size variability from series to series. We are currently in market with our ninth series and on June 28th, we held the first close for this latest series with nearly $150 million of commitments. Our strategic opportunities fund remains a key component of our overall private credit platform that includes our discretionary separate accounts and our Evergreen platform. If you total our prior eight funds, we have raised nearly $5 billion for this program going back to 2015. Now on to our Evergreen funds. During our Shareholder Day, we highlighted the opportunity we believe is in front of us related to continued growth of both our existing Evergreen product offerings and new funds yet to launch. As of June 30th, total AUM across our three existing offerings stood at nearly $7.5 billion. Monthly net inflows remained strong as we averaged over $330 million for the second calendar quarter of 2024, which was up from $255 million for the first quarter. For our US offering in a little over a year of having two wirehouse relationships, we have received nearly $1.2 billion of net inflows from that channel, an impressive accomplishment and we thank them for this successful partnership. We remain optimistic around the prospects for continued expansion of this piece of our business and our success to-date gives us confidence that we are continuing to establish ourselves as a trusted partner and solution provider. Moving on to the technology side. On June 26, we announced the latest addition to our HL Innovations portfolio Daphne Technologies. Daphne was founded in 2022 through a collaboration between Apollo Global Management and Motive Partners to transform the management and transmission of data between asset managers and their investors and channel partners. Daphne will allow asset managers to digitize fund data and publish it with a click of a button. It is designed to serve multiple channels such as institutional investors, investment consultants, independent broker-dealers and RIAs. This data can be transmitted and consumed via a web-based interface or API. As part of our partnership, Daphne has integrated with Cobalt, our proprietary private markets data, analytics forecasting and diligence platform. Daphne enables straight-through data processing by which alternative asset managers can directly transmit fund information into Cobalt, thus simplifying what has traditionally been a manual and cumbersome process for both asset managers and their investors and channel partners. Daphne represents our continued efforts to make the private markets more transparent and easier to access and we are excited for what is to come with this new partnership and investment. We are proud to be the first outside investor and strategic partner invited in and we look forward to working closely with Apollo and Motive to drive Daphne's success. I'd like to now hand the call over to my partner, Griff Norville, to provide you with more detail around the Hamilton Lane Technology Solutions offerings.

Thank you, Erik, and good morning. I'm Griff Norville, Managing Director and Head of Technology Solutions. I've been with Hamilton Lane for more than 14 years, and have led the build out of several of our data and technology initiatives over that time. I want to take this opportunity to expand on our Technology Solutions business, the combination of our in-house built Cobalt technology offering and our reporting services offering, including why we believe it differentiates us. For decades, Hamilton Lane has amassed a proprietary database of private market fund and portfolio company data. Our data advantage, along with our expertise in how to use the data, is a key differentiator in attracting new clients. Cobalt is built for front office investment professionals and provides market -- private market-specific analytics, benchmarking, portfolio construction and diligence functions. Client portfolios can consist of hundreds of positions and the documentation received from these investments remains unstructured and opaque. Our clients desire a service to gather, extract and validate data, and we offer a differentiated solution through our scale, expertise and technology. As a result of growing our reporting business, Hamilton Lane's database is sourced from both our assets under advisement or AUA and our AUM. Notably this data is derived from the primary source of information, extracted directly from fund financials as opposed to public documents or unverified surveys. The client base for Technology Solutions is diverse by geography and institution type. Today we have over 200 clients subscribing to these services and over $28 million in annual contract value. Our average net revenue renewal rate on contracts over the last four years is above 100%. The nature of our contracts and our consistent sales efforts have made this business highly predictable and it has effectively scaled at a 30% revenue CAGR for over four years with a strong and growing pipeline. We also package access to our technology with our global investment solutions a key differentiator in winning competitive processes, securing larger commitments, and retaining existing clients. Over half of our Technology Solutions clients have active fee-earning AUM with the remaining set of clients representing potential for new fundraising opportunities. Technology Solutions clients are tied to over 30% of our fee earning AUM and we expect this percentage to continue to grow. Overall, the private markets continue to move in the direction of greater transparency and deeper analytics. Clients look to Hamilton Lane as their partner and achieving these goals and in turn, access to our technology solutions deepens our relationships with them. With that, I'd like to thank you for the opportunity to share what we believe is an exciting business for us. And I'll now hand the call over to Jeff to cover the financials.

Thank you, Griff and good morning everyone. For the first quarter of fiscal 2025, we achieved strong growth in our business with management and advisory fees up 33% versus the prior year period. Our specialized funds revenue increased by $32.1 million or 56% compared to the prior year period. This was driven primarily by a $3.3 billion increase to fee earning AUM in our Evergreen platform and over $3.1 billion raised in our latest secondary fund over the last 12 months. Retro fees for the quarter included $20.7 million from our secondary fund that held its final closes versus $3.9 million from our secondary fund that held closes in the prior year period. As a reminder, investors that come into later closes during the fundraise pay retroactive fees dating back to the fund's first close. For the remainder of the fiscal year, our current direct equity funded market will be the primary driver of retro fees now that our secondary fund has finished fundraising. Moving on to customized separate accounts. Revenue increased $1.7 million or 5% compared to the prior year period due to the addition of new accounts reps from existing clients and continued investment activity. Revenue from advisory, reporting, monitoring, data, and analytics offerings increased by $1.1 million compared to the prior year period, due primarily to increases in revenue coming from our technology solutions. Lastly, the final component of revenue is incentive fees. Incentive fees for the quarter totaled $56.8 million and are up 189% relative to the prior year period. Let's now turn to our unrealized carry balance. The balance is up 12% from the prior year period while having recognized $139 million of incentive fees during the last 12 months. The unrealized carry balance now stands at approximately $1.2 billion. Moving to expenses. Total expenses for the quarter increased $37 million compared with the prior year period. Total compensation and benefits increased by $34.3 million driven primarily by higher compensation associated with the increased amount of incentive and management fees relative to the prior year period. G&A increased $2.7 million driven primarily by revenue-related expenses including the third-party commissions related to our US Evergreen product being offered on wire houses that we've discussed on prior calls. Fee-related earnings or FRE were up 33% relative to the prior year period as a result of the management fee and fee earning AUM growth discussed earlier. FRE margin for the quarter came in at 43%. I'll wrap up here with some commentary on our balance sheet. Our largest asset continues to be our investments alongside our clients in 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 will now open up the call for questions.

Thank you. [Operator Instructions] One moment for your first question. Your first question comes from Kenneth Worthington from JPMorgan. Please go ahead.

Hi. This is Alex Bernstein on for Ken. Thanks so much for taking our question and congrats on the strong quarter. Just wanted to double-click on a data point I think especially what we've seen with some of the other asset managers out there notably with the recent acquisition that BlackRock completed. Can you talk a bit more about current efforts and perhaps where you can see the monetization of the data changing? What sort of data products currently just Hamilton Lane offer? And how do you think about the sales around this data vis-à-vis some of the different sales efforts and teams that you may have? Is this really setting around cobalt or other Hamilton Lane centric products and sales related to those efforts? And finally, what more can be done with regarding to this process and ensuring that there's no distracting from the growth of the core business which of course continues to perform? Thank you.

Thanks, Alex. It's Erik. I'll take that. So from a data standpoint we are I would say directly and indirectly as Griff alluded to monetizing the data. So the direct is the Cobalt business and that is really a SaaS business. So we're selling subscriptions to that Griff over the numbers there. Growth continues to be strong double-digit. Cobalt has a dedicated sales team that is separate and apart from what we see on the institutional or the private wealth side. And so we see a very large addressable market there. Today we're really only selling to LPs and that market is significant and vast. The indirect is was what Griff alluded to which is we're really tying it together as a way to win broader pieces of business. So the asset management tie in again so take secondary fund as an example crowded space a lot of formidable competitors out there with similar secondary offerings. And again, for us one of those key differentiators is selecting us gives the client preferred access to Cobalt and we use that to win a lot of ties or a lot of jump balls. And so that is -- that's what we're doing today. There are certainly other ways to monetize data. We evaluate those continually. We have a variety of strategic discussions. Part of the technology businesses that we're also investing in some number of them benefit from some of our data. And so that also helps again with us as a preferred technology partner. So we think we have a tremendously powerful database. It's one that continues to grow as the firm continues to grow in scale. It's all verified direct sourced data which is very different than a number of the other databases out there. And so we think this is a valuable asset. We're monetizing it today and we'll continue to look for ways to do that more in the future.

Thanks so much.

Your next question comes from Alex Blostein from Goldman Sachs. Please go ahead.

Hi. Good morning. This is Anthony on for Alex. I appreciate the color on the Evergreen platform. And it's nice to see momentum continuing. Where do you expect the next leg of growth to come from? And how do you plan on balancing, getting on the new wire houses versus rolling out new products? Thanks.

Thanks Anthony, Erik. I think it's just as you noted. I think it's a combination of factors. One, we're very happy with the growth that we've been achieving so far and that's really been the result of both growth in the wirehouse relationships as well as growth in our direct sales efforts. Both of those will continue. We expect to add more distribution partners in the future. And we will certainly expect to take our current three offerings in that channel, up to more. So I think as we sort of talk about this over the next coming years, again, we keep saying, this is a marathon not a sprint that will -- it's going to be a combination of all of the above more channel partners, more direct distribution efforts, more products.

Thank you.

[Operator Instructions] Your next question comes from Stephanie Ma from Morgan Stanley. Please go ahead.

Hey, Good morning. This is Stephanie on from Mike. Maybe just one on your recent announcement of the Insurance Solutions team, can you just remind us of your insurance footprint today? And what does this team allow you to do differently or accelerate? And what are your aspirations for this channel overtime?

Thanks Stephanie. It's Erik. I think this is really more of an evolution, not a revolution. We've been selling into the insurance channel for quite some time. We have a number of prominent relationships in that space. I think the announcement that you saw last week was really directly reflecting our expansion of the resources we have. As you know, the insurance channel requires oftentimes unique structures to access the private markets. And so we're just bringing on additional capability for structuring and distribution. So our aspiration there is simple. We have a good footprint today that we believe we can make better and bigger overtime.

Great. Thank you. And maybe just as a follow-up on Daphne. Just hoping to get more color on how integrated is Cobalt today. Is this a work in progress? And what are the opportunities to do more over time with, Daphne? Thanks.

So today -- this is -- by the way, thanks for the question, Stephanie. This is Griff. Today Cobalt is fully integrated with Daphne. We are receiving data from general partners that are working with Daphne. Daphne is a young company and is working to scale. And what we are helping them do is, introduce them to our GP partners, in order to tell the story of Daphne's value-add and increase the amount of data flowing directly into our systems via Daphne.

Great. Thank you.

And there are no further questions at this time. I will turn the call back over to Erik Hirsch, for closing remarks.

Again, a very strong quarter, we appreciate everyone's time. We appreciate the questions and we appreciate the partnership. Thank you very much.