HAMILTON LANE INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)
The following information should be read in conjunction with the accompanying consolidated financial statements and related notes. See "Index to Consolidated Financial Statements ofHamilton Lane Incorporated ." The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Form 10-K, particularly in "Risk Factors", the "Summary of Risk Factors" and the "Cautionary Note Regarding Forward-Looking Information." Unless otherwise indicated, references in this Annual Report on Form 10-K to fiscal 2022, fiscal 2021 and fiscal 2020 are to our fiscal years endedMarch 31, 2022 , 2021 and 2020, respectively. Business Overview We are a global private markets investment solutions provider and operate our business in a single segment. 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, venture capital and impact. These solutions are constructed from a range of investment types, including primary investments in funds managed by third-party managers, direct 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$83 billion of our AUM as ofMarch 31, 2022 . •Specialized Funds: We organize, invest and manage specialized primary, secondary and direct investment 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. Since then, our product offerings have grown steadily and now include evergreen offerings that invest primarily in secondaries and direct investments in equity and credit and are available to certain high-net-worth individuals. Specialized funds comprised approximately$24 billion of our AUM as ofMarch 31, 2022 . •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$795 billion of AUA as ofMarch 31, 2022 . •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 in-kind from private equity funds. 70
-------------------------------------------------------------------------------- •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 also on a stand-alone, fee-for-service basis. We also provide comprehensive research and analytical services as part of our investment solutions, leveraging our large, global, proprietary and high-quality database for transparency and powerful analytics. Our data, tracking over 47,000 funds and$19 trillion in commitments, as ofMarch 31, 2022 , as well as our benchmarking and forecasting models are accessible through our proprietary technology solution,Cobalt LP , on a stand-alone, subscription basis. Our client base primarily comprises institutional investors that range from those seeking to make an initial investment in alternative assets to some of the world's largest and most sophisticated private markets investors. As we offer a highly customized, flexible service, we are equipped to provide investment services to institutional clients of all sizes and with different needs, internal resources and investment objectives. Our clients include prominent institutional investors inthe United States ,Canada ,Europe , theMiddle East ,Asia ,Australia andLatin America . We provide private markets solutions and services to some of the largest global pension, sovereign wealth andU.S. state pension funds. In addition, we believe we are a leading provider of private markets solutions forU.S. labor union pension plans, and we serve numerous smaller public and corporate pension plans, sovereign wealth funds, financial institutions and insurance companies, endowments and foundations, as well as family offices and selected high-net-worth individuals. Trends Affecting Our Business Our results of operations are affected by a variety of factors, including conditions in the global financial markets and the economic and political environments, particularly inthe United States ,Western Europe andAsia . As interest rates begin to rise in response to increasing inflationary pressures, along with increased public equity volatility leading to a wider range of equity returns, we see increasing investor demand for alternative investments to achieve higher and less correlated relative yields and returns on invested capital. As a result, some investors have increased their allocation to private markets relative to other asset classes. In addition, the opportunities in private markets have expanded as firms have created new vehicles and products in which to access private markets across different geographies and opportunity sets.
In addition to the aforementioned macroeconomic and sector-specific trends, we
believe the following factors will influence our future performance:
•The extent to which investors favor alternative investments. Our ability to
attract new capital is partially dependent on investors' views of alternative
assets relative to traditional publicly listed equity and debt securities. We
believe fundraising efforts will continue to be impacted by certain fundamental
asset management trends that include: (1) the increasing importance and market
share of alternative investment strategies to investors in light of an increased
focus on lower-correlated and absolute levels of return; (2) the increasing
demands of the investing community, including the potential for fee compression
and changes to other terms; (3) shifting asset allocation policies of
institutional investors; and (4) increasing barriers to entry and growth.
•Our ability to generate strong returns. We must continue to generate strong
returns for our investors through our disciplined investment diligence process
in an increasingly competitive market. The ability to attract and retain clients
is partially dependent on returns we are able to deliver versus our peers. The
capital we are able to attract drives the growth of our AUM and AUA and the
management and advisory fees we earn.
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•Our ability to source investments with attractive risk-adjusted returns. An
increasing part of our management fee and incentive fee revenue has been from
our direct investment and secondary investment platforms. The continued growth
of this revenue is dependent on our continued ability to source attractive
investments and deploy the capital that we have raised or manage on behalf of
our clients. Because we are selective in the opportunities in which we invest,
the capital deployed can vary from year to year. Our ability to identify
attractive investments and execute on those investments is dependent on a number
of factors, including the general macroeconomic environment, valuation,
transaction size, and expected duration of such investment opportunity. A
significant decrease in the quality or quantity of potential opportunities could
adversely affect our ability to source investments with attractive risk-adjusted
returns.
•Our ability to maintain our data advantage relative to competitors. We believe
that the general trend towards transparency and consistency in private markets
reporting will create new opportunities for us to leverage our databases and
analytical capabilities. We intend to use these advantages afforded to us by our
proprietary databases, analytical tools and deep industry knowledge to drive our
performance, provide our clients with customized solutions across private
markets asset classes and continue to differentiate our products and services
from those of our competitors. Our ability to maintain our data advantage is
dependent on a number of factors, including our continued access to a broad set
of private market information on an on-going basis, as well as our ability to
maintain our investment scale, considering the evolving competitive landscape
and potential industry consolidation.
•Our ability to continue to expand globally. We believe that many institutional
investors outside the United States are currently underinvested in private
markets asset classes and that capturing capital inflows into private capital
investing from non-U.S. global markets represents a significant growth
opportunity for us. Our ability to continue to expand globally is dependent on
our ability to continue building successful relationships with investors
internationally and subject to the evolving macroeconomic and regulatory
environment of the various countries where we operate or in which we invest.
•Increased competition to work with top private equity fund managers. There has
been a trend amongst private markets investors to consolidate the number of
general partners in which they invest. At the same time, an increasing flow of
capital to the private markets has often times resulted in certain funds being
oversubscribed. This has resulted in some investors, primarily smaller investors
or less strategically important investors, not being able to gain access to
certain funds. Our ability to invest and maintain our sphere of influence with
these high-performing fund managers is critical to our investors' success and
our ability to maintain our competitive position and grow our revenue.
•Unpredictable global macroeconomic conditions. Global economic conditions,
including political environments, financial market performance, interest rates,
credit spreads or other conditions beyond our control, all of which affect the
performance of the assets underlying private market investments, are
unpredictable and could negatively affect the performance of our clients'
portfolios or the ability to raise funds in the future.
•Increasing regulatory requirements. The complex regulatory and tax environment
could restrict our operations and subject us to increased compliance costs and
administrative burdens, as well as restrictions on our business activities.
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Impact of COVID-19
In March 2020 , the World Health Organization declared the coronavirus
("COVID-19") outbreak a global pandemic, the effects of which continue to cause
significant disruption and uncertainty in the global economic markets. We are
closely monitoring developments related to the COVID-19 pandemic and assessing
any negative impacts to our business. For a description of the impact that
COVID-19 has had and may in the future have on our business, see "Risk
Factors-Risks Related to Our Industry-The COVID-19 pandemic continues to cause
disruptions in the U.S. and global economies and may adversely impact our
financial condition and results of operations". As of March 31, 2022 , we have
adequate liquidity with $72 million in available cash and $75 million in
availability under our Loan Agreements. For more information on our Loan
Agreements, see "-Liquidity and Capital Resources-Loan Agreements".
Key Financial and Operating Measures
Our key financial measures are discussed below.
Revenues
We generate revenues primarily from management and advisory fees, and to a
lesser extent, incentive fees. See “-Critical Accounting Estimates-Revenue
Recognition of Incentive Fees” and Note 2 of the consolidated financial
statements included in Part II, Item 8 of this Form 10-K for additional
information regarding the manner in which management and advisory fees and
incentive fees are generated.
Management and advisory fees comprise specialized fund and customized separate
account management fees, advisory and reporting fees and distribution management
fees.
Revenues from customized separate accounts are generally based on a contractual
rate applied to committed capital or net invested capital under management.
These fees often decrease over the life of the contract due to built-in declines
in contractual rates and/or as a result of lower net invested capital balances
as capital is returned to clients. In certain cases, we also provide advisory
and/or reporting services, and, therefore, we also receive fees for services
such as monitoring and reporting on a client's existing private markets
investments. In addition, we may provide for investments in our specialized
funds as part of our customized separate accounts. In these cases, we generally
reduce the management and/or incentive fees on customized separate accounts to
the extent that assets in the accounts are invested in our specialized funds so
that our clients do not pay duplicate fees.
Revenues from specialized funds are based on a percentage of limited partners'
capital commitments to, net invested capital or net asset value in, our
specialized funds. The management fee during the commitment period is often
charged on capital commitments and after the commitment period (or a defined
anniversary of the fund's initial closing) is typically reduced by a percentage
of the management fee for the preceding year or charged on net invested capital.
In the case of certain funds, we charge management fees on capital commitments,
with the management fee increasing during the early years of the fund's term and
declining in the later years. Management fees for certain funds are discounted
based on the amount of the limited partners' commitments, whether the limited
partner commits early in the offering period 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.
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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.
For each of our secondary funds, direct 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 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. 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. Incentive fees
are typically only required to be returned on a net of tax basis due to a
clawback. As such, the tax-related portion of incentive fees is typically not
subject to clawback and is therefore recognized as revenue immediately upon
receipt. 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.
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 continue to
experience a general rise in compensation and benefits expense commensurate with
expected growth in headcount and with the need to maintain competitive
compensation levels as we expand geographically and create new products and
services.
Our compensation arrangements with our employees contain a significant bonus
component driven by the results of our operations. Therefore, as our revenues,
profitability and the amount of incentive fees earned by our customized separate
accounts and specialized funds increase, our compensation costs rise.
Certain current and former employees participate in a carried interest program
whereby approximately 25% of incentive fees from certain of our specialized
funds and customized separate accounts are awarded to plan participants. We
record compensation expense payable to plan participants as the incentive fees
become estimable and collection is probable.
General, administrative and other includes travel, accounting, legal and other
professional fees, commissions, placement fees, office expenses, depreciation
and other costs associated with our operations.
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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.
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 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 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 outsidethe 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 they have a general
partner commitment and changes in fair value of liabilities of our sponsored
SPAC.
Income Tax Expense
We are a corporation for U.S. federal income tax purposes and therefore are
subject to U.S. federal and state income taxes on our share of taxable income
generated by HLA. Prior to our IPO, we operated as a partnership for U.S.
federal income tax purposes and therefore were not subject to U.S. federal and
state income taxes. HLA is treated as a pass-through entity for U.S. federal and
state income tax purposes. As such, income generated by HLA flows through to its
limited partners, including us, and is generally not subject to U.S. federal or
state income tax at the partnership level. Our non-U.S. subsidiaries generally
operate as corporate entities in non-U.S. jurisdictions, with certain of these
entities subject to non-U.S. income taxes. Additionally, certain of our
subsidiaries are subject to local jurisdiction income taxes at the entity level.
Accordingly, the tax liability with respect to income attributable to
non-controlling interests in HLA is borne by the holders of such non-controlling
interests.
Non-controlling interests
Non-controlling interests ("NCI") reflect the portion of income or loss and the
corresponding equity attributable to third-party equity holders and employees in
certain consolidated subsidiaries that are not 100%
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owned by us. Non-controlling interests are presented as separate components in
our consolidated statements of income to clearly distinguish between our
interests and the economic interests of third parties and employees in those
entities.
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 that are
generally derived from applying a certain percentage to the appropriate fee
base. We classify customized separate account revenue as management fees if the
client is charged an asset-based fee, which includes the majority of our
discretionary AUM accounts but also includes certain non-discretionary AUA
accounts. Our fee-earning AUM is equal to the amount of capital commitments, net
invested capital and NAV of our customized separate accounts and specialized
funds depending on the fee terms. Substantially all of our customized separate
accounts and specialized funds earn fees based on commitments or net invested
capital, which are not affected by market appreciation or depreciation.
Therefore, revenues and fee-earning AUM are not significantly affected by
changes in market value.
Our calculations of fee-earning AUM may differ from the calculations of other
asset managers, and as a result, this measure may not be comparable to similar
measures presented by other asset managers. Our definition of fee-earning AUM is
not based on any definition that is set forth in the agreements governing the
customized separate accounts or specialized funds that we manage.
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Annual Consolidated Results of Operations
The following is a discussion of our consolidated results of operations for
fiscal 2022 compared to fiscal 2021. This information is derived from our
accompanying consolidated financial statements prepared in accordance with GAAP.
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations in our 2021 Annual Report on Form 10-K for management's
discussion and analysis of financial condition and results of operations for
fiscal 2021 compared to fiscal 2020.
Year Ended March 31,
(in thousands) 2022 2021 2020
Revenues
Management and advisory fees $ 314,228 $ 289,444 $ 244,920
Incentive fees 48,133 31,134 21,437
Consolidated variable interest entities related:
Incentive fees 5,558 21,057 7,691
Total revenues 367,919 341,635 274,048
Expenses
Compensation and benefits 129,165 136,319 100,138
General, administrative and other 68,040 49,210 57,481
Consolidated variable interest entities related:
General, administrative and other 1,150 378 -
Total expenses 198,355 185,907 157,619
Other income (expense)
Equity in income of investees 78,813 32,389 20,731
Interest expense (4,634) (2,044) (2,816)
Interest income 500 1,676 709
Non-operating income 64,469 5,894 6,172
Consolidated variable interest entities related:
Equity in loss of investees 483 (2,123) (481)
Unrealized gains 4,485 2,141 -
Interest expense (4) (459) -
Total other income (expense) 144,112 37,474 24,315
Income before income taxes 313,676 193,202 140,744
Income tax expense 66,423 24,417 13,968
Net income 247,253 168,785 126,776
Less: Income (loss) attributable to non-controlling
interests in general partnerships
376 (250) 85
Less: Income attributable to non-controlling interests in
96,548 69,720 65,866
Less: Income attributable to non-controlling interests in
Hamilton Lane Alliance Holdings I, Inc.
4,343 1,293 -
Net income attributable to
$ 98,022 $ 60,825 77
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Revenues
Year Ended March 31,
(in thousands) 2022 2021 2020
Management and advisory fees
Specialized funds $ 150,079 $ 148,023 $
111,803
Customized separate accounts 103,229 93,963 90,750 Advisory 24,972 26,439 24,160 Reporting and other 23,327 11,134 9,102 Distribution management 10,466 6,701 4,920 Fund reimbursement revenue 2,155 3,184 4,185 Total management and advisory fees 314,228 289,444 244,920 Incentive fees 53,691 52,191 29,128 Total revenues$ 367,919 $ 341,635 $ 274,048
Year ended
Total revenues increased
2022 compared to fiscal 2021, due to an increase in management and advisory
fees.
Management and advisory fees increased$24.8 million , or 9%, to$314.2 million for fiscal 2022 compared to fiscal 2021. Specialized funds revenue increased by$2.1 million compared to the prior year, due primarily to a$17.5 million increase in revenue from our evergreen funds and a$8.2 million increase in revenue from our latest direct equity fund, which added$1.5 billion and$1.1 billion , respectively, in fee-earning AUM year-over-year. These increases were partially offset by a$17.8 million decrease in revenue from our latest secondary fund, which reflects$18.2 million in retroactive fees earned in fiscal 2021. Retroactive fees are management fees earned in the current period from investors that commit to a specialized fund towards the end of the fundraising period and are required to pay a catch-up management fee as if they had committed to the fund at the first closing in a prior period. Customized separate accounts revenue increased$9.3 million in fiscal 2022 due to a$5.3 billion increase in fee-earning AUM from the addition of several new accounts and additional allocations from existing accounts during the fiscal year. Reporting and other fees increased$12.2 million in fiscal 2022 due to$8.7 million in revenue added from the acquisition of361 Capital, LLC in the current year period. Distribution management revenue increased$3.8 million in fiscal 2022 due to increased distribution activity.
Incentive fees increased
to fiscal 2021.
Expenses
Year ended
Total expenses increased
fiscal 2021 due to an increase in general, administrative and other expenses,
partially offset by a decrease in compensation and benefits expenses.
Compensation and benefits expenses decreased$7.2 million , or 5%, to$129.2 million for fiscal 2022 compared to fiscal 2021, due primarily to a decrease in base compensation and benefits. Base compensation and benefits decreased$8.0 million , or 7%, for fiscal 2022 compared to fiscal 2021, due primarily to a 78 --------------------------------------------------------------------------------
decrease in our bonus plan accrual. Incentive compensation increased
million
fee revenue.
General, administrative and other expenses increased$19.6 million for fiscal 2022 compared to fiscal 2021. This change consisted primarily of a$4.5 million increase related to the361 Capital, LLC funds, a$2.9 million increase in consulting and professional fees, a$3.0 million increase in rent expense, which included expenses for our new headquarters in the current year period, a$2.2 million increase in technology related expenses driven by the growth in our reporting and analytics offering and a$1.7 million increase in third-party commissions.
Other Income (Expense)
The following shows the equity in income (loss) of investees included in other
income (expense):
Year Ended March 31,
(in thousands) 2022 2021 2020
Equity in income of investees
Primary funds $ 9,016 $ 2,443 $ 2,550
Direct investment funds 19,519 8,553 8,869
Secondary funds 15,725 6,226 2,514
Customized separate accounts 25,223 9,508
5,729
Other equity method investments 9,813 3,536
588
Total equity in income of investees
Year ended
Other income (expense) increased$106.6 million to$144.1 million for fiscal 2022 compared to fiscal 2021, due primarily to increases in equity in income of investees and other non-operating income. Equity in income of investees increased$49.0 million to$79.3 million for fiscal 2022 compared to fiscal 2021. This increase was due primarily to a$15.7 million increase in gains across our customized separate accounts, a$11.0 million increase in gains in our direct investment funds, and a$9.5 million increase in gains in our secondary fund product. Non-operating income increased$60.9 million for fiscal 2022 compared to fiscal 2021, due primarily to$55.1 million in gains on two technology investments and a$4.3 million gain on the early extinguishment of a portion of the tax receivable liability due to termination payments to certain recipients.
Other income of consolidated VIEs increased
compared to fiscal 2021, due to increases in equity in income (loss) of
investees discussed above and a change in fair value of the warrants of our
sponsored SPAC.
Income Tax Expense
Income tax expense reflectsU.S. federal and applicable state income taxes with respect to our allocable share of any taxable income of HLA subsequent to the Reorganization. Our effective income tax rate in fiscal 2022 and 2021 was 21.2% and 12.6%, respectively. The fiscal 2022 effective income tax rate was different from the statutory tax rate due to the portion of income allocated to the non-controlling interest and change in the valuation allowance. The effective income tax rate for fiscal 79
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2022 was higher than fiscal 2021 primarily due to less income allocated to the
non-controlling interest in fiscal 2022 and an increase in the valuation
allowance for deferred tax assets not expected to be realized.
Fee-Earning AUM
The following table provides the period to period roll-forward of our
fee-earning AUM:
Year Ended March 31, Year Ended March 31,
2022 2021
(in millions)
Customized Customized
Separate Separate
Accounts Specialized Funds Total Accounts Specialized Funds Total
Balance, beginning of period $ 25,664 $ 16,341 $ 42,005 $ 24,545 $ 14,118 $ 38,663
Contributions (1) 8,994 4,228 13,222 5,761 3,436 9,197
Distributions (2) (4,194) (2,584) (6,778) (4,904) (1,306) (6,210)
Foreign exchange, market value and
other (3) 474 208 682 262 93 355
Balance, end of period $ 30,938 $ 18,193 $ 49,131 $ 25,664 $ 16,341 $ 42,005
(1)Contributions represent new commitments from customized separate accounts and
specialized funds that earn fees on a committed capital fee base and capital
contributions to underlying investments from customized separate accounts and
specialized funds that earn fees on a net invested capital or NAV fee base.
(2)Distributions represent returns of capital in customized separate accounts
and specialized funds that earn fees on a net invested capital or NAV fee base,
reductions in fee-earning AUM from separate accounts and specialized funds that
moved from a committed capital to net invested capital fee base and reductions
in fee-earning AUM from customized separate accounts and specialized funds that
are no longer earning fees.
(3)Foreign exchange, market value and other consists primarily of the impact of
foreign exchange rate fluctuations for customized separate accounts and
specialized funds that earn fees on non-U.S. dollar denominated commitments and
market value appreciation (depreciation) from customized separate accounts and
specialized funds that earn fees on a NAV fee base.
Year ended
Fee-earning AUM increased
2022, due to contributions from customized separate accounts and specialized
funds.
Customized separate accounts fee-earning AUM increased$5.3 billion , or 21%, to$30.9 billion for fiscal 2022. Customized separate accounts contributions were$9.0 billion for fiscal 2022 due to new allocations from existing clients and new clients. Distributions were$4.2 billion for fiscal 2022 due to$1.6 billion from returns of capital in accounts earning fees on a net invested capital or NAV fee base,$1.5 billion from accounts moving from a committed to net invested capital fee base, and$1.1 billion from accounts reaching the end of their fund term. Specialized funds fee-earning AUM increased$1.9 billion , or 11%, to$18.2 billion for fiscal 2022. Specialized fund contributions were$4.2 billion for fiscal 2022, due primarily to$1.3 billion from our evergreen funds and$1.1 billion from our latest direct equity fund. Distributions were$2.6 billion for fiscal 2022, due to$1.4 billion from returns of capital in funds earning fees on a net invested capital or NAV fee base,$0.7 billion from funds reaching the end of their fund term, and$0.5 billion from accounts moving from a committed to net invested capital fee base. 80 -------------------------------------------------------------------------------- Non-GAAP Financial Measures Below is a description of our unaudited non-GAAP financial measures. These are not measures of financial performance under GAAP and should not be considered a substitute for the most directly comparable GAAP measures, which are reconciled below. These measures have limitations as analytical tools, and when assessing our operating performance, you should not consider these measures in isolation or as a substitute for GAAP measures. Other companies may calculate these measures differently than we do, limiting their usefulness as a comparative measure.
Adjusted EBITDA
Adjusted EBITDA is an internal measure of profitability. We believe Adjusted
EBITDA is useful to investors because it enables them to better evaluate the
performance of our core business across reporting periods. Adjusted EBITDA
represents net income excluding (a) interest expense on our outstanding debt,
(b) income tax expense, (c) depreciation and amortization expense, (d)
equity-based compensation expense, (e) other non-operating income and (f)
certain other significant items that we believe are not indicative of our core
performance.
Fee Related Earnings
Fee Related Earnings ("FRE") is used to highlight our earnings from recurring
management fees. FRE represents net income excluding (a) incentive fees and
related compensation, (b) interest income and expense, (c) income tax expense,
(d) equity in income of investees, (e) other non-operating income and (f)
certain other significant items that we believe are not indicative of our core
performance. We believe FRE is useful to investors because it provides
additional insight into the operating profitability of our business. FRE is
presented before income taxes.
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The following table shows a reconciliation of net income attributable to
fiscal 2022, 2021, and 2020:
Year Ended March 31,
2022 2021 2020
Net income attributable to
Income (loss) attributable to non-controlling interests
in general partnerships
376 (250) 85
Income attributable to non-controlling interests in
96,548 69,720 65,866
Income attributable to non-controlling interests in
Hamilton Lane Alliance Holdings I, Inc.
4,343 1,293 - Incentive fees (1) (53,691) (52,191) (29,128) Incentive fee related compensation (2) 25,395 24,438 13,677 SPAC related compensation - 1,686 -
SPAC related general, administrative and other expenses 1,176
378 - Non-operating income related compensation 1,810 - - Interest income (500) (1,676) (709) Interest expense 4,638 2,503 2,816 Income tax expense 66,423 24,417 13,968 Equity in income of investees (79,296) (30,266) (20,250) Non-operating income (68,954) (8,035) (6,172) Fee Related Earnings$ 144,254 $ 130,039 $ 100,978 Depreciation and amortization 5,495 4,134 3,291 Equity-based compensation 7,404 7,079 7,183 Incentive fees (1) 53,691 52,191 29,128
Incentive fees attributable to non-controlling interests
(1)
(228) (756) (320) Incentive fee related compensation (2) (25,395) (24,438) (13,677) SPAC related compensation - (1,686) - Non-operating income related compensation (1,810) - - Interest income 500 1,676 709 Adjusted EBITDA$ 183,911 $ 168,239 $ 127,292 (1) Incentive fees for the years endedMarch 31, 2022 , 2021, and 2020 included$0.2 million ,$0.8 million and$0.3 million , respectively, of non-cash carried interest attributable to non-controlling interests.
(2) Incentive fee related compensation includes incentive fee compensation
expense, bonus and other revenue sharing related to carried interest that is
classified as base compensation.
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Non-GAAP Earnings Per Share
Non-GAAP earnings per share measures our per-share earnings excluding certain significant items that we believe are not indicative of our core performance and assuming all Class B and Class C units in HLA were exchanged for Class A common stock in HLI. Non-GAAP earnings per share is calculated as adjusted net income divided by adjusted shares outstanding. Adjusted net income is income before taxes fully taxed at our estimated statutory tax rate and excludes any impact of changes in carrying amount of our redeemable non-controlling interest. We believe adjusted net income and non-GAAP earnings per share are useful to investors because they enable them to better evaluate total and per-share operating performance across reporting periods. The following table shows a reconciliation of adjusted net income to net income attributable toHamilton Lane Incorporated and adjusted shares outstanding to weighted-average shares of Class A common stock outstanding for fiscal 2022, 2021, and 2020: Year Ended March 31, 2022 2021 2020
(in thousands, except share and per-share amounts)
Net income attributable to
Income attributable to non-controlling interests in
96,548 69,720 65,866 Income tax expense 66,423 24,417 13,968 Adjusted pre-tax net income$ 308,957 $ 192,159 $ 140,659 Adjusted income taxes (1) (73,532) (45,734) (33,336) Adjusted net income$ 235,425 $ 146,425 $ 107,323 Weighted-average shares of Class A common stock outstanding - diluted 53,674,293 33,362,365 28,438,772 Exchange of Class B and Class C units in HLA (2) - 20,240,035 25,067,540 Adjusted shares outstanding 53,674,293 53,602,400 53,506,312 Non-GAAP earnings per share$ 4.39 $ 2.73 $ 2.01 (1) For the years ended March 31, 2022 and March 31, 2021, represents corporate income taxes at our estimated statutory tax rate of 23.8% applied to adjusted pre-tax net income. The 23.8% is based on a federal tax statutory rate of 21.0% and a combined state income tax rate net of federal benefits of 2.8%. For the year endedMarch 31, 2020 , represents corporate income taxes at our estimated statutory tax rate of 23.7% applied to adjusted pre-tax net income. The 23.7% is based on a federal tax statutory rate of 21.0% and a combined state income tax rate net of federal benefits of 2.7%. (2) Assumes the full exchange of Class B and Class C units in HLA for Class A common stock of HLI pursuant to the exchange agreement. For the year endedMarch 31, 2022 , the full exchange of Class B and Class C units is already included within the GAAP Weighted-average shares of Class A common stock outstanding - diluted. 83
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Investment Performance
The following tables present information relating to the historical performance
of our specialized funds with fund families having at least two distinct
vintages and most recent fund sizes of greater than $500 million per fund. The
data are presented from the date indicated through December 31, 2021 and have
not been adjusted to reflect acquisitions or disposals of investments subsequent
to that date.
When considering the data presented below, note that the historical results of
our specialized funds are not indicative of the future results you should expect
from such investments, from any future investment funds we may raise or from an
investment in our Class A common stock, in part because:
•market conditions and investment opportunities during previous periods may have
been significantly more favorable for generating positive performance than those
we may experience in the future;
•the performance of our funds is generally calculated on the basis of the net
asset value ("NAV") of the funds' investments, including unrealized gains, which
may never be realized;
•our historical returns derive largely from the performance of our earlier
funds, whereas future fund returns will depend increasingly on the performance
of our newer funds or funds not yet formed;
•our newly-established funds may generate lower returns during the period that
they initially deploy their capital;
•in recent years, there has been increased competition for investment
opportunities resulting from the increased amount of capital invested in private
markets alternatives and high liquidity in debt markets, and the increased
competition for investments may reduce our returns in the future; and
•the performance of particular funds also will be affected by risks of the
industries and businesses in which they invest.
The historical and potential future returns of the investment funds we manage
are not directly linked to returns on our Class A common stock. Therefore, you
should not conclude that continued positive performance of the investment funds
we manage will necessarily result in positive returns on an investment in our
Class A common stock. As used in this discussion, internal rate of return
("IRR") is calculated on a pooled basis using daily cash flows. See
"-Performance Methodology" below for more information on how our returns are
calculated.
Specialized Fund Performance
We organize, invest and manage specialized primary, secondary and direct
investment 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. Below is
performance information across our various specialized funds. Substantially all
of these funds are globally focused, and they are grouped by the investment
strategy utilized.
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Gross Returns – Realized
Realized Realized Realized Realized Gross Realized Gross
Vintage Capital Gross Gross Spread vs. Spread vs.
Fund year Fund size ($M) invested ($M) multiple IRR (%) S&P 500 PME MSCI World PME
Primaries (Diversified)
PEF I 1998 122 117 1.3 5.4% 378 bps 322 bps
PEF IV 2000 250 238 1.7 16.2% 1,302 bps 1,170 bps
PEF V 2003 135 133 1.7 14.2% 841 bps 950 bps
PEF VI 2007 494 499 1.7 12.2% 110 bps 444 bps
PEF VII 2010 262 245 1.7 15.5% 86 bps 489 bps
PEF VIII 2012 427 202 1.8 17.1% 196 bps 552 bps
PEF IX 2015 517 219 2.2 27.1% 1,017 bps 1,359 bps
PEF X 2018 278 N/A N/A N/A N/A N/A
Secondaries
Pre-Fund - - 362 1.5 17.1% 1,330 bps 1,172 bps
Secondary Fund I 2005 360 353 1.2 5.2% 113 bps 341 bps
Secondary Fund II 2008 591 596 1.5 19.9% 459 bps 875 bps
Secondary Fund III 2012 909 805 1.5 15.2% 108 bps 499 bps
Secondary Fund IV 2016 1,916 275 2.1 36.0% 1,960 bps 2,279 bps
Secondary Fund V 2019 3,929 20 2.2 134.5% 10,494 bps 10,799 bps
Direct/Co-investments
Pre-Fund - - 244 1.9 21.3% 1,655 bps 1,600 bps
Co-Investment Fund 2005 604 561 1.0 0.2% (554) bps (304) bps
Co-Investment Fund II 2008 1,195 884 2.4 21.0% 869 bps 1,248 bps
Co-Investment Fund III 2014 1,243 640 3.0 34.2% 1,846 bps 2,192 bps
Co-Investment Fund IV 2018 1,698 271 4.4 73.6% 5,306 bps 5,682 bps
Equity Opportunities Fund V 2021 1,229 N/A N/A N/A N/A N/A
Realized Realized Realized Realized Gross Realized Gross
Vintage Capital Gross Gross Spread vs. Spread vs.
Fund year Fund size ($M) invested ($M) multiple IRR (%) CS HY II PME CS LL PME
Strategic Opportunities (Tail-end secondaries and credit)
Strat Opps 2015 2015 71 62 1.3 14.5% 612 bps 911 bps
Strat Opps 2016 2016 214 155 1.3 17.7% 1,082 bps 1,276 bps
Strat Opps 2017 2017 435 322 1.3 15.6% 1,100 bps 1,163 bps
Strat Opps 2018 2018 889 434 1.2 13.8% 940 bps 1,179 bps
Strat Opps 2019 2019 762 270 1.2 19.4% 1,335 bps 1,482 bps
Strat Opps 2020 2021 898 20 1.0 11.6% 276 bps 716 bps
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Gross Returns – Realized and Unrealized
Vintage Capital invested Net Gross Spread vs. Net Spread vs. Gross Spread vs. Net Spread vs.
Fund year Fund size ($M) ($M) Gross multiple Net Multiple Gross IRR (%) IRR (%) S&P 500 PME S&P 500 PME MSCI World PME MSCI World PME
Primaries (Diversified)
PEF I 1998 122 117 1.3 1.2 5.4% 2.5% 378 bps 76 bps 322 bps 16 bps
PEF IV 2000 250 238 1.7 1.5 16.2% 11.2% 1,302 bps 828 bps 1,170 bps 708 bps
PEF V 2003 135 133 1.7 1.6 14.2% 9.6% 841 bps 363 bps 950 bps 466 bps
PEF VI 2007 494 514 1.7 1.6 11.8% 9.0% 63 bps (181) bps 397 bps 147 bps
PEF VII 2010 262 287 1.6 1.7 13.5% 9.6% (123) bps (502) bps 277 bps (106) bps
PEF VIII 2012 427 418 1.5 1.5 11.2% 8.7% (418) bps (696) bps (63) bps (335) bps
PEF IX 2015 517 487 2.0 1.9 23.4% 21.7% 565 bps 358 bps 921 bps 717 bps
PEF X 2018 278 190 1.5 1.4 29.0% 24.4% 455 bps (165) bps 901 bps 275 bps
Secondaries
Pre-Fund - - 362 1.5 N/A 17.1% N/A 1,330 bps N/A 1,172 bps N/A
Secondary Fund I 2005 360 353 1.2 1.2 5.2% 3.8% 113 bps (63) bps 341 bps 157 bps
Secondary Fund II 2008 591 596 1.5 1.4 19.9% 13.5% 459 bps (191) bps 875 bps 214 bps
Secondary Fund III 2012 909 836 1.5 1.4 14.4% 12.2% 26 bps (224) bps 415 bps 171 bps
Secondary Fund IV 2016 1,916 2,033 1.7 1.7 23.6% 25.0% 409 bps 531 bps 792 bps 910 bps
Secondary Fund V 2019 3,929 2,721 1.5 1.5 60.3% 73.7% 3,263 bps 4,364 bps 3,857 bps 5,007 bps
Direct/Co-investments
Pre-Fund - - 244 1.9 N/A 21.3% N/A 1,655 bps N/A 1,600 bps N/A
Co-Investment Fund 2005 604 577 1.0 0.9 0.2%
(1.3)% (570) bps (747) bps (319) bps (502) bps
Co-Investment Fund II
2008 1,195 1,157 2.0 1.7 17.8% 14.1% 528 bps 141 bps 909 bps 517 bps Co-Investment Fund III 2014 1,243 1,262 2.1 1.9 20.8% 17.6% 490 bps 169 bps 843 bps 518 bps Co-Investment Fund IV 2018 1,698 1,459 2.1 1.9 37.6% 36.8%
1,455 bps 1,252 bps 1,847 bps 1,649 bps
Equity Opportunities Fund V
2021 1,229 660 1.1 1.1 17.4% 23.4% (140) bps 707 bps 518 bps 1,447 bps
Vintage Capital invested Net Gross Spread vs. Net Spread vs. Gross Spread vs. Net Spread vs.
Fund year Fund size ($M) ($M) Gross multiple Net Multiple Gross IRR (%) IRR (%) CS HY II PME CS HY II PME CS LL PME CS LL PME
Strategic Opportunities (Tail-end secondaries and credit)
Strat Opps 2015 2015 71 68 1.3 1.2 14.1% 10.8% 552 bps 221 bps 863 bps 527 bps
Strat Opps 2016 2016 214 216 1.3 1.2 11.9% 9.4% 521 bps 282 bps 704 bps 465 bps
Strat Opps 2017 2017 435 448 1.3 1.2 13.0% 10.4% 783 bps 513 bps 889 bps 633 bps
Strat Opps 2018 2018 889 851 1.2 1.2 11.5% 9.4% 598 bps 348 bps 815 bps 565 bps
Strat Opps 2019 2019 762 694 1.2 1.1 15.1% 12.1% 812 bps 365 bps 956 bps 500 bps
Strat Opps 2020 2021 898 614 1.0 1.0 9.2% 7.8% 411 bps 249 bps 502 bps 352 bps
Performance Methodology
The indices presented for comparison are the S&P 500, MSCI World , Credit Suisse
High Yield II ("CS HY II ") and Credit Suisse Leverage Loan ("CS LL"), calculated
on a public market equivalent ("PME") basis. We believe these indices are
commonly used by private markets and credit investors to evaluate performance.
The PME calculation methodology allows private markets investment performance to
be evaluated against a public index and assumes that capital is being invested
in, or withdrawn from, the index on the days the capital was called and
distributed from the underlying fund managers. The S&P 500 Index is a total
return capitalization-weighted index that measures the performance of 500 U.S.
large cap stocks. The MSCI World Index is a free float-adjusted market
capitalization-weighted index of over 1,600 world stocks that is designed to
measure the equity market performance of developed markets. The CS HY II Index,
formerly known as the DLJ High Yield Index, is designed to mirror the investable
universe of the U.S. dollar denominated high yield debt market. Prices for the
CS HY II Index are available on a weekly basis. The CS LL Index is an index
designed to mirror the investable universe of the U.S. dollar denominated
leveraged loan market. Loans must be rated 5B or lower and the index frequency
is monthly.
86
-------------------------------------------------------------------------------- Our IRR represents the pooled IRR for all discretionary investments for the period from inception toDecember 31, 2021 . Gross IRR is presented net of management fees, carried interest and expenses charged by the general partners of the underlying investments, but does not include our management fees, carried interest or expenses. Our gross IRR would decrease with the inclusion of our management fees, carried interest and expenses. Net IRR is net of all management fees, carried interest and expenses charged by the general partners of the underlying investments, as well as by us. Net IRR figures for our funds do not include cash flows attributable to the general partner. Note that secondary portfolio IRRs can be initially impacted by purchase discounts (or premiums) paid at the closing of a transaction, the impact of which will diminish over time. The "Realized IRR" represents the pooled IRR for those discretionary investments that we consider realized for purposes of our track record, which are investments where the underlying investment fund has been fully liquidated, has generated a distributions to paid-in capital ratio ("DPI") greater than or equal to 1.0 or is older than six years and has a residual value to paid-in capital ratio ("RVPI") less than or equal to 0.2. Hamilton Lane Secondary Realized includes investments that have been fully liquidated, have a DPI greater than or equal to 1.0 or a RVPI less than or equal to 0.2. Hamilton Lane Realized Direct/Co-Investment and Hamilton Lane Realized Strategic Opportunities include investments that have been fully liquidated or have a DPI greater than or equal to 1.0. "Unrealized" includes all investments that do not meet the aforementioned criteria. DPI represents total distributions divided by total invested capital. RVPI represents the remaining market value divided by total invested capital. "Capital Invested" refers to the total amount of all investments made by a fund, including commitment-reducing and non-commitment-reducing capital calls. "Multiple" represents total distributions from underlying investments to the fund plus the fund's market value divided by total contributed capital. "Gross Multiple" is presented net of management fees, carried interest and expenses charged by the fund managers of the underlying investments.
Specialized fund and pre-fund performance does not include ten funds-of-funds
that have investor-specific investment guidelines.
Many of our specialized funds utilize revolving credit facilities, which provide
capital that is available to fund investments or pay partnership expenses and
management fees. Borrowings may be paid down from time to time with investor
capital contributions or distributions from investments. The use of a credit
facility affects the fund's return and magnifies the performance on the upside
or on the downside.
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Liquidity and Capital Resources
Historical Liquidity and Capital Resources
We have managed our historical liquidity and capital requirements primarily through the receipt of management and advisory fee revenues. Our primary cash flow activities involve: (1) generating cash flow from operations, which largely includes management and advisory fees; (2) realizations generated from our investment activities; (3) funding capital commitments that we have made to certain of our specialized funds and customized separate accounts; (4) making dividend payments to our stockholders and distributions to holders of HLA units; and (5) borrowings, interest payments and repayments under our outstanding debt. As ofMarch 31, 2022 andMarch 31, 2021 , our cash and cash equivalents were$72.1 million and$87.0 million , respectively. Our material sources of cash from our operations include: (1) management and advisory fees, which are collected monthly or quarterly; (2) incentive fees, which are volatile and largely unpredictable as to amount and timing; and (3) fund distributions related to investments in our specialized funds and certain customized separate accounts that we manage. We use cash flow from operations primarily to pay compensation and related expenses, general, administrative and other expenses, debt service, capital expenditures and distributions to our owners and to fund commitments to certain of our specialized funds and customized separate accounts. If cash flow from operations were insufficient to fund distributions to our owners, we expect that we would suspend paying such distributions. We have also accessed the capital markets and used proceeds from sales of our Class A common stock to settle in cash exchanges of HLA membership interests by direct and indirect owners of HLA pursuant to our exchange agreement. Finally, we have used available cash and borrowings from our Loan Agreements to make strategic investments in companies that seek to offer technology-driven private markets data and wealth management solutions.
Loan Agreements
We maintain the Term Loan Agreement, the Revolving Loan Agreement and the Multi-Draw Term Loan Agreement withFirst Republic . The Term Loan Agreement has a maturity date ofJuly 1, 2027 and the interest rate is a floating per annum rate equal to the prime rate minus 1.50% subject to a floor of 2.25%. As ofMarch 31, 2021 , we had an outstanding balance of$72 million under the Term Loan Agreement. We are entitled to request additional uncommitted term advances not to exceed$25 million in the aggregate, as well as additional committed term advances not to exceed$25 million in the aggregate throughMarch 24, 2023 . The Revolving Loan Agreement provides that the aggregate outstanding balance will not exceed$25 million and has a maturity date ofMarch 24, 2023 . The interest rate is a floating per annum rate equal to the prime rate minus 1.50% subject to a floor of 2.25%. As ofMarch 31, 2022 , we had no outstanding balance under the Revolving Loan Agreement. The Multi-Draw Term Loan Agreement provides for a term loan in the aggregate principal amount of$100 million with a maturity date ofJuly 1, 2030 . Advances could be drawn throughMarch 31, 2022 and the interest rate is a fixed per annum rate of 3.50%. As ofMarch 31, 2022 , we had an outstanding balance of$100 million under the Multi-Draw Term Loan Agreement. The Loan Agreements contain covenants that, among other things, limit HLA's ability to incur indebtedness, transfer or dispose of assets, merge with other companies, create, incur or allow liens, make investments, make distributions, engage in transactions with affiliates and take certain actions with respect to 88 -------------------------------------------------------------------------------- management fees. The Loan Agreements also require HLA to maintain, among other requirements, (i) a specified amount of management fees, (ii) a specified amount of adjusted EBITDA, as defined in the Loan Agreements, and (iii) a specified minimum tangible net worth, during the term of each of the Loan Agreements. The obligations under the Loan Agreements are secured by substantially all the assets of HLA. As ofMarch 31, 2022 and 2021, the principal amount of debt outstanding equaled$171.8 million and$163.6 million , respectively. Cash Flows Year Ended March 31, 2022 2021 2020 (in thousands) Net cash provided by operating activities$ 169,523 $ 188,158 $ 116,373 Net cash used in investing activities (70,487)
(421,781) (49,900)
Net cash (used in) provided by financing activities (113,216) 270,660 (64,709)
Operating Activities Our operating activities generally reflect our earnings in the respective periods after adjusting for significant non-cash activity, including equity in income (loss) of investees, equity-based compensation, lease expense and depreciation and amortization, all of which are included in earnings. For the years endedMarch 31, 2022 and 2021, our net cash provided by operating activities was driven primarily by receipts of management fees and incentive fees offset by payment of operating expenses, which includes compensation and benefits and general, administrative and other expenses.
Investing Activities
Our investing activities generally reflect cash used for acquisitions, fixed asset purchases and contributions to and distributions from our investments. For the years endedMarch 31, 2022 and 2021, our net cash used in investing activities was driven primarily by purchases of furniture, fixtures and equipment, purchase of other investments and net contributions to our funds. Additionally, during the year endedMarch 31, 2022 , we received a distribution from one of our investments valued under the measurement alternative and proceeds from the sale of one of our investments valued under the measurement alternative, which was partially offset by the cash paid to acquire361 Capital, LLC . Financing Activities Our financing activities generally reflect cash received from debt and equity financings, payments to owners in the form of dividends, distributions and repurchases of shares and scheduled repayments of our outstanding debt. For the years endedMarch 31, 2022 and 2021, our net cash used in financing activities was driven primarily by dividends paid to stockholders, payments under the tax receivable agreement and distributions to HLA members. Additionally, during the year endedMarch 31, 2022 , we repaid the outstanding balance on our Revolving Loan Agreement and borrowed an additional amount under our Multi-Draw Term Loan.
Future Sources and Uses of Liquidity
We generate significant cash flows from operating activities. We believe that we
will be able to continue to meet our short-term and long-term liquidity and
capital requirements through our cash flows from operating activities, existing
cash and cash equivalents and our ability to obtain future external financing.
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We believe we will also continue to evaluate opportunities, based on market
conditions, to access the capital markets and use proceeds from sales of our
Class A common stock to settle in cash exchanges of HLA membership interests by
direct and indirect owners of HLA pursuant to our exchange agreement. The timing
or size of any potential transactions will depend on a number of factors,
including market opportunities and our views regarding our capital and liquidity
positions and potential future needs. There can be no assurance that any such
transactions will be completed on favorable terms, or at all.
We will also continue to evaluate opportunities to make strategic investments in
companies that seek to offer technology-driven private markets data and wealth
management solutions.
We currently sponsor a SPAC and may sponsor additional SPACs in the future,
depending on market and other conditions, which will require an initial
investment of capital from us that we may be unable to recover if a suitable
target company for the SPAC is not identified within the prescribed timeframe.
InNovember 2018 , we authorized a program to repurchase up to 6% of the outstanding shares of our Class A common stock, not to exceed$50 million (the "Stock Repurchase Program"). The Stock Repurchase Program does not include specific price targets or timetables and may be suspended or terminated by us at any time. We intend to finance the purchases using available working capital and/or external financing. The Stock Repurchase Program expires 12 months after the date of the first acquisition under the authorization. We have not repurchased any of our Class A common stock under the Stock Repurchase Program, and therefore the full purchase authority remains available. Our board of directors periodically reviews the Stock Repurchase Program, and, onDecember 16, 2021 , re-approved it on the same terms as those approved in 2018. We expect that our primary short-term and long-term liquidity needs will comprise cash to: (1) provide capital to facilitate the growth of our business; (2) fund commitments to our investments; (3) pay operating expenses, including cash compensation to our employees; (4) make payments and/or exercise early termination buyout rights under the tax receivable agreement; (5) fund capital expenditures and make strategic investments; (6) pay interest and principal due on our outstanding debt; (7) pay income taxes; (8) make dividend payments to our stockholders and distributions to holders of HLA units in accordance with our distribution policy; (9) settle exchanges of HLA membership interests by direct and indirect owners of HLA pursuant to our exchange agreement from time to time; (10) fund SPACs sponsored by us; and (11) fund purchases of our Class A common stock pursuant to the Stock Repurchase Program. We are required to maintain minimum net capital balances for regulatory purposes for certain of our foreign subsidiaries and our broker-dealer subsidiary. These net capital requirements are met by retaining cash. As a result, we may be restricted in our ability to transfer cash between different operating entities and jurisdictions. As ofMarch 31, 2022 , we were required to maintain approximately$4.0 million in liquid net assets within these subsidiaries to meet regulatory net capital and capital adequacy requirements. We are in compliance with these regulatory requirements.
Dividend Policy
The declaration and payment by us of any future dividends to holders of our Class A common stock is at the sole discretion of our board of directors. We intend to continue to pay a cash dividend on a quarterly basis. Subject to funds being legally available, we will cause HLA to make pro rata distributions to its members, including us, in an amount at least sufficient to allow us to pay all applicable taxes, to make payments under the tax receivable agreement, and to pay our corporate and other overhead expenses.
Tax Receivable Agreement
We expect that periodic exchanges of membership units of HLA by members of HLA
will result in increases in the tax basis in our share of the assets of HLA that
otherwise would not have been available.
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These increases in tax basis are expected to increase our depreciation and
amortization deductions and create other tax benefits and therefore may reduce
the amount of tax that we would otherwise be required to pay in the future. The
tax receivable agreement will require us to pay 85% of the amount of these and
certain other tax benefits, if any, that we realize (or are deemed to realize in
the case of an early termination payment, a change in control or a material
breach by us of our obligations under the tax receivable agreement) to the
pre-IPO members of HLA.
Contractual Obligations, Commitments and Contingencies
The following table represents our contractual obligations as of
aggregated by type:
Contractual
Obligations, Commitments and Contingencies
Less than 1 More than 5
(in thousands) Total year 1-3 years 3-5 years years
Operating leases $ 106,153 $ 7,951
Debt obligations payable (1)
171,754 1,828 11,425 60,031 98,470 Interest on debt obligations payable (2) 28,142 4,314 8,467 7,787 7,574 Capital commitments to our investments (3) 186,164 186,164 - - - Total$ 492,213 $ 200,257 $ 34,568 $ 81,071 $ 176,317
(1) Represents scheduled debt obligation payments under our Loan Agreements.
(2) Represents interest to be paid over the maturity of the related debt obligations, which has been calculated assuming no pre-payments will be made and debt will be held until its final maturity date. The future interest payments are calculated using the variable interest rate of 2.25% on our Term Loan Agreement and the fixed interest rate of 3.50% on our Multi-Draw Term Loan Agreement in effect as ofMarch 31, 2022 . (3) Represents commitments by us to fund a portion of each investment made by our specialized funds and certain customized separate account entities. These amounts are generally due on demand and are therefore presented in the less than one year category. We have entered into a tax receivable agreement with our pre-IPO owners pursuant to which we will pay them 85% of the amount of tax benefits, if any, that we realize (or are deemed to realize in the case of an early termination payment by us, a change in control or a material breach by us of our obligations under the tax receivable agreement) as a result of increases in tax basis (and certain other tax benefits) resulting from purchases or exchanges of membership units of HLA. Because the timing of amounts to be paid under the tax receivable agreement cannot be determined, this contractual commitment has not been presented in the table above. The tax savings achieved may be substantial and we may not have sufficient cash available to pay this liability, in which case, we might be required to incur additional debt to satisfy this liability. 91 -------------------------------------------------------------------------------- Critical Accounting Estimates We prepare our consolidated financial statements in accordance with GAAP. In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our combined and consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe the following critical accounting estimates could potentially produce materially different results if we were to change underlying assumptions, estimates or judgments. See Note 2, "Summary of Significant Accounting Policies," to our consolidated financial statements included in Part II, Item 8 of this Form 10-K for a summary of our significant accounting policies.
Principles of Consolidation
We consolidate all entities that we control through a controlling financial
interest or as the primary beneficiary of variable interest entities (“VIEs”).
We perform an analysis to determine whether consolidation is required by
determining (1) whether we have a variable interest in each entity, (2) whether
that entity is a VIE and (3) whether we are the primary beneficiary of this
entity and consolidation is required.
In evaluating whether we hold a variable interest, we review the equity ownership to determine whether we absorb risk created and distributed by the entity, as well as whether the fees charged to the entity are customary and commensurate with the effort required to provide the services. We consider all economic interests, including indirect interests, to determine if a fee is considered a variable interest. The assessment of whether the entity is a VIE requires an evaluation of qualitative factors and, where applicable, quantitative factors. These judgments include: (a) determining whether the equity investment at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) evaluating whether the equity holders, as a group, can make decisions that have a significant effect on the economic performance of the entity, (c) determining whether two or more parties' equity interests should be aggregated, and (d) determining whether the equity investors have proportionate voting rights to their obligations to absorb losses or rights to receive returns from an entity. For entities that are determined to be VIEs, we are required to consolidate those entities where we have concluded that we are the primary beneficiary. The primary beneficiary is defined as the variable interest holder with (a) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. In evaluating whether we are the primary beneficiary, we evaluate our economic interests in the entity held either directly or indirectly by us.
Changes to our judgments could result in a change in our consolidation
conclusion for an entity.
Revenue Recognition of Incentive Fees
Incentive fees include both carried interest earned from certain specialized funds and performance fees received from certain customized separate accounts. We recognized$53.7 million of incentive fees in fiscal 2022 and have$1.2 billion of unrecognized carried interest as ofMarch 31, 2022 . 92 -------------------------------------------------------------------------------- Contracts with specialized funds and certain customized separate accounts provide incentive fees, which generally range from 5.0% to 12.5% of profits, when investment returns exceed minimum return levels or other performance targets on either an annual or inception to date basis and are generally payable after all contributed capital and the preferred return on that capital has been distributed to investors. Incentive fees are recognized when it is probable that a significant reversal will not occur. 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. Incentive fees are typically only required to be returned on a net of tax basis due to a clawback. As such, the tax-related portion of incentive fees is typically not subject to clawback and is therefore recognized as revenue immediately upon receipt. Investment returns are highly susceptible to market factors and judgments and actions of third parties that are outside of our control. We estimate the amount and probability of additional future capital contributions, both unfunded commitments or follow-on investment opportunities in underlying portfolio investments, to specialized funds and customized separate accounts, which could impact the probability of a significant reversal occurring. Incentive fee revenue can vary significantly year over year based upon the judgments, market factors, and actions of third parties as discussed above.
Income Taxes
We account for income taxes using the asset and liability method. Deferred income taxes are recognized for the expected future tax consequences attributable to temporary differences between the carrying amount of the existing tax assets and liabilities and their respective tax basis using enacted tax rates expected to be applied in the years in which temporary differences are expected to be recovered or settled. As ofMarch 31, 2022 , we had gross deferred tax assets of$312.6 million primarily due to our acquisitions of HLA units. Realization of the deferred tax assets is primarily dependent upon (1) historic earnings, (2) forecasted taxable income, (3) future tax deductions of tax basis step-ups related to our IPO and subsequent unit exchanges, (4) future tax deductions related to payments under the tax receivable agreement, and (5) our share of HLA's temporary differences that result in future tax deductions. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. As ofMarch 31, 2022 , we had a valuation allowance of$67.6 million . Changes in judgment as it relates to the realizability of these assets, as well as potential changes in corporate tax rates, would have the effect of significantly reducing the value of the deferred tax assets. We analyze our tax filing positions in all of theU.S. federal, state, local and foreign tax jurisdictions where we are required to file income tax returns, as well for all open tax years in these jurisdictions. We evaluate tax positions taken or expected to be taken in the course of preparing an entity's tax returns to determine whether it is "more-likely-than-not" that each tax position will be sustained by the applicable tax authority. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating uncertainties under GAAP. We review our tax positions quarterly and adjust our tax balances as new legislation is passed or new information becomes available.
Tax Receivable Agreement
Our purchase of HLA Class A units concurrent with the IPO, and subsequent
exchanges by holders of HLA units for shares of our Class A common stock
pursuant to the exchange agreement, result in increases in our share of the tax
basis of the tangible and intangible assets of HLA, which increases the tax
depreciation and amortization deductions that otherwise would not have been
available to us. These increases in tax basis and tax depreciation and
amortization deductions are expected to reduce the amount of cash taxes that we
would otherwise be required to pay in the future. We entered into the tax
receivable agreement with the other
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members of HLA, which requires us to pay exchanging HLA unitholders (the "TRA
Recipients") 85% of the amount of cash savings, if any, in U.S. federal, state,
and local income tax that we actually realize (or, under certain circumstances,
are deemed to realize) as a result of the increases in tax basis in connection
with exchanges by the TRA Recipients described above and certain other tax
benefits attributable to payments under the tax receivable agreement. Generally,
if we do not generate sufficient cumulative taxable income in the future to
utilize the tax benefits, then we will not be required to make the related tax
receivable agreement payments - the exception being that our obligation to make
such payments may be accelerated if we elect to terminate the tax receivable
agreement, in whole or in part, or if a change in control of us, or a breach of
the tax receivable agreement by us, occurs. Therefore, we will generally only
recognize a liability for payments under the tax receivable agreement for
financial reporting purposes to the extent we determine it is probable that we
will generate sufficient future taxable income to utilize the related tax
benefits. Estimating and projecting future taxable income is inherently
uncertain and requires judgment. Actual taxable income may differ from
estimates, which could significantly affect the liability under the tax benefit
arrangements and our consolidated results of operations.
Based on current projections, we anticipate having sufficient taxable income to
utilize these tax attributes and receive corresponding tax deductions in future
periods. As of March 31, 2022 , the tax receivable agreement resulted in a
liability of $180.5 million . Significant changes in the projected liability
resulting from the tax receivable agreement may occur based on changes in
anticipated future taxable income, changes in applicable tax rates or other
changes in tax attributes that may occur and could affect the expected future
tax benefits to be received by us.
Recent Accounting Pronouncements
Information regarding recent accounting developments and their impact on our results can be found in Note 2, "Summary of Significant Accounting Policies" in the notes to the consolidated financial statements included in Part II, Item 8 of this Form 10-K.
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