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 of
Hamilton 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 ended March 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 billionof our AUM as of March 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 billionof our AUM as of March 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 billionof AUA as of March 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 trillionin commitments, as of March 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 in the United States, Canada, Europe, the Middle East, Asia, Australiaand Latin America. We provide private markets solutions and services to some of the largest global pension, sovereign wealth and U.S.state pension funds. In addition, we believe we are a leading provider of private markets solutions for U.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 in the United States, Western Europeand Asia. 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. 71 -------------------------------------------------------------------------------- •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 Statesare 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. 72 -------------------------------------------------------------------------------- Impact of COVID-19 In March 2020, the World Health Organizationdeclared 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 millionin available cash and $75 millionin 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.
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. 73 -------------------------------------------------------------------------------- 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. 74 --------------------------------------------------------------------------------
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 outside
the United States. Interest expense includes interest paid and accrued on our outstanding debt, along with the amortization of deferred financing costs, amortization of original issue discount and the write-off of deferred financing costs due to the repayment of previously outstanding debt.
Interest income is income earned on cash and cash equivalents.
Non-operating income (loss) consists primarily of gains and losses on certain investments, changes in liability under the tax receivable agreement and other non-recurring or non-cash items. Other income (expense) of consolidated Variable Interest Entities ("VIEs") consists primarily of the share of earnings of investments of consolidated general partner entities, which are not wholly-owned by us, in our specialized funds and certain customized separate accounts in which 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% 75 -------------------------------------------------------------------------------- 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. 76 -------------------------------------------------------------------------------- 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 $ 244,920Incentive 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 $ 60,82577
Year Ended March 31, (in thousands) 2022 2021 2020 Management and advisory fees Specialized funds
$ 150,079 $ 148,023$
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
Total revenues increased
2022 compared to fiscal 2021, due to an increase in management and advisory
Management and advisory fees increased
$24.8 million, or 9%, to $314.2 millionfor fiscal 2022 compared to fiscal 2021. Specialized funds revenue increased by $2.1 millioncompared to the prior year, due primarily to a $17.5 millionincrease in revenue from our evergreen funds and a $8.2 millionincrease in revenue from our latest direct equity fund, which added $1.5 billionand $1.1 billion, respectively, in fee-earning AUM year-over-year. These increases were partially offset by a $17.8 milliondecrease in revenue from our latest secondary fund, which reflects $18.2 millionin 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 millionin fiscal 2022 due to a $5.3 billionincrease 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 millionin fiscal 2022 due to $8.7 millionin revenue added from the acquisition of 361 Capital, LLCin the current year period. Distribution management revenue increased $3.8 millionin fiscal 2022 due to increased distribution activity.
Incentive fees increased
to fiscal 2021.
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 millionfor 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
General, administrative and other expenses increased
$19.6 millionfor fiscal 2022 compared to fiscal 2021. This change consisted primarily of a $4.5 millionincrease related to the 361 Capital, LLCfunds, a $2.9 millionincrease in consulting and professional fees, a $3.0 millionincrease in rent expense, which included expenses for our new headquarters in the current year period, a $2.2 millionincrease in technology related expenses driven by the growth in our reporting and analytics offering and a $1.7 millionincrease 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 $ 2,550Direct investment funds 19,519 8,553 8,869 Secondary funds 15,725 6,226 2,514 Customized separate accounts 25,223 9,508
Other equity method investments 9,813 3,536
Total equity in income of investees
Other income (expense) increased
$106.6 millionto $144.1 millionfor 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 millionto $79.3 millionfor fiscal 2022 compared to fiscal 2021. This increase was due primarily to a $15.7 millionincrease in gains across our customized separate accounts, a $11.0 millionincrease in gains in our direct investment funds, and a $9.5 millionincrease in gains in our secondary fund product. Non-operating income increased $60.9 millionfor fiscal 2022 compared to fiscal 2021, due primarily to $55.1 millionin gains on two technology investments and a $4.3 milliongain 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
Income Tax Expense
Income tax expense reflects
U.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
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.
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 $ 38,663Contributions (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.
Fee-earning AUM increased
2022, due to contributions from customized separate accounts and specialized
Customized separate accounts fee-earning AUM increased
$5.3 billion, or 21%, to $30.9 billionfor fiscal 2022. Customized separate accounts contributions were $9.0 billionfor fiscal 2022 due to new allocations from existing clients and new clients. Distributions were $4.2 billionfor fiscal 2022 due to $1.6 billionfrom returns of capital in accounts earning fees on a net invested capital or NAV fee base, $1.5 billionfrom accounts moving from a committed to net invested capital fee base, and $1.1 billionfrom accounts reaching the end of their fund term. Specialized funds fee-earning AUM increased $1.9 billion, or 11%, to $18.2 billionfor fiscal 2022. Specialized fund contributions were $4.2 billionfor fiscal 2022, due primarily to $1.3 billionfrom our evergreen funds and $1.1 billionfrom our latest direct equity fund. Distributions were $2.6 billionfor fiscal 2022, due to $1.4 billionfrom returns of capital in funds earning fees on a net invested capital or NAV fee base, $0.7 billionfrom funds reaching the end of their fund term, and $0.5 billionfrom 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 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. 81 --------------------------------------------------------------------------------
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 $ 100,978Depreciation 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
(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 ended March 31, 2022, 2021, and 2020 included $0.2 million, $0.8 millionand $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.
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 to
Hamilton Lane Incorporatedand 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 $ 140,659Adjusted income taxes (1) (73,532) (45,734) (33,336) Adjusted net income $ 235,425 $ 146,425 $ 107,323Weighted-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 ended March 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 ended March 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
-------------------------------------------------------------------------------- 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 millionper fund. The data are presented from the date indicated through December 31, 2021and 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. 84 --------------------------------------------------------------------------------
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 ($M) multiple IRR (%) CS HY II PME CS LL PME Strategic Opportunities (Tail-end secondaries and credit) Strat Opps 2015 2015 71 62 1.3 14.5% 612 bps 911 bps Strat Opps 2016 2016 214 155 1.3 17.7% 1,082 bps 1,276 bps Strat Opps 2017 2017 435 322 1.3 15.6% 1,100 bps 1,163 bps Strat Opps 2018 2018 889 434 1.2 13.8% 940 bps 1,179 bps Strat Opps 2019 2019 762 270 1.2 19.4% 1,335 bps 1,482 bps Strat Opps 2020 2021 898 20 1.0 11.6% 276 bps 716 bps 85
Gross Returns – Realized and Unrealized
Vintage Capitalinvested Net Gross Spread vs. Net Spread vs. Gross Spread vs. Net Spread vs. Fund year Fund size ($M) ($M) Gross multiple Net Multiple Gross IRR (%) IRR (%) S&P 500 PME S&P 500 PME MSCI World PME MSCI World PME Primaries (Diversified) PEF I 1998 122 117 1.3 1.2 5.4% 2.5% 378 bps 76 bps 322 bps 16 bps PEF IV 2000 250 238 1.7 1.5 16.2% 11.2% 1,302 bps 828 bps 1,170 bps 708 bps PEF V 2003 135 133 1.7 1.6 14.2% 9.6% 841 bps 363 bps 950 bps 466 bps PEF VI 2007 494 514 1.7 1.6 11.8% 9.0% 63 bps (181) bps 397 bps 147 bps PEF VII 2010 262 287 1.6 1.7 13.5% 9.6% (123) bps (502) bps 277 bps (106) bps PEF VIII 2012 427 418 1.5 1.5 11.2% 8.7% (418) bps (696) bps (63) bps (335) bps PEF IX 2015 517 487 2.0 1.9 23.4% 21.7% 565 bps 358 bps 921 bps 717 bps PEF X 2018 278 190 1.5 1.4 29.0% 24.4% 455 bps (165) bps 901 bps 275 bps Secondaries Pre-Fund- - 362 1.5 N/A 17.1% N/A 1,330 bps N/A 1,172 bps N/A Secondary Fund I 2005 360 353 1.2 1.2 5.2% 3.8% 113 bps (63) bps 341 bps 157 bps Secondary Fund II 2008 591 596 1.5 1.4 19.9% 13.5% 459 bps (191) bps 875 bps 214 bps Secondary Fund III 2012 909 836 1.5 1.4 14.4% 12.2% 26 bps (224) bps 415 bps 171 bps Secondary Fund IV 2016 1,916 2,033 1.7 1.7 23.6% 25.0% 409 bps 531 bps 792 bps 910 bps Secondary Fund V 2019 3,929 2,721 1.5 1.5 60.3% 73.7% 3,263 bps 4,364 bps 3,857 bps 5,007 bps Direct/Co-investments Pre-Fund- - 244 1.9 N/A 21.3% N/A 1,655 bps N/A 1,600 bps N/A Co-Investment Fund 2005 604 577 1.0 0.9 0.2%
(1.3)% (570) bps (747) bps (319) bps (502) bps
Co-Investment Fund II
2008 1,195 1,157 2.0 1.7 17.8% 14.1% 528 bps 141 bps 909 bps 517 bps Co-Investment Fund III 2014 1,243 1,262 2.1 1.9 20.8% 17.6% 490 bps 169 bps 843 bps 518 bps Co-Investment Fund IV 2018 1,698 1,459 2.1 1.9 37.6% 36.8%
1,455 bps 1,252 bps 1,847 bps 1,649 bps
Equity Opportunities Fund V
2021 1,229 660 1.1 1.1 17.4% 23.4% (140) bps 707 bps 518 bps 1,447 bps
Vintage Capitalinvested Net Gross Spread vs. Net Spread vs. Gross Spread vs. Net Spread vs. Fund year Fund size ($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 Opps2015 2015 71 68 1.3 1.2 14.1% 10.8% 552 bps 221 bps 863 bps 527 bps Strat Opps2016 2016 214 216 1.3 1.2 11.9% 9.4% 521 bps 282 bps 704 bps 465 bps Strat Opps2017 2017 435 448 1.3 1.2 13.0% 10.4% 783 bps 513 bps 889 bps 633 bps Strat Opps2018 2018 889 851 1.2 1.2 11.5% 9.4% 598 bps 348 bps 815 bps 565 bps Strat Opps2019 2019 762 694 1.2 1.1 15.1% 12.1% 812 bps 365 bps 956 bps 500 bps Strat Opps2020 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 to
December 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. 87
-------------------------------------------------------------------------------- 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 of
March 31, 2022and March 31, 2021, our cash and cash equivalents were $72.1 millionand $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.
We maintain the Term Loan Agreement, the Revolving Loan Agreement and the Multi-Draw Term Loan Agreement with
First Republic. The Term Loan Agreement has a maturity date of July 1, 2027and 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 of March 31, 2021, we had an outstanding balance of $72 millionunder the Term Loan Agreement. We are entitled to request additional uncommitted term advances not to exceed $25 millionin the aggregate, as well as additional committed term advances not to exceed $25 millionin the aggregate through March 24, 2023. The Revolving Loan Agreement provides that the aggregate outstanding balance will not exceed $25 millionand has a maturity date of March 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 of March 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 millionwith a maturity date of July 1, 2030. Advances could be drawn through March 31, 2022and the interest rate is a fixed per annum rate of 3.50%. As of March 31, 2022, we had an outstanding balance of $100 millionunder 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 of March 31, 2022and 2021, the principal amount of debt outstanding equaled $171.8 millionand $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 $ 116,373Net cash used in investing activities (70,487)
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 ended
March 31, 2022and 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.
Our investing activities generally reflect cash used for acquisitions, fixed asset purchases and contributions to and distributions from our investments. For the years ended
March 31, 2022and 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 ended March 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 acquire 361 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 ended March 31, 2022and 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 ended March 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. 89 -------------------------------------------------------------------------------- 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.
November 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, on December 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 of March 31, 2022, we were required to maintain approximately $4.0 millionin liquid net assets within these subsidiaries to meet regulatory net capital and capital adequacy requirements. We are in compliance with these regulatory requirements.
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. 90 -------------------------------------------------------------------------------- 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:
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 of
March 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 millionof incentive fees in fiscal 2022 and have $1.2 billionof unrecognized carried interest as of March 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.
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 of
March 31, 2022, we had gross deferred tax assets of $312.6 millionprimarily 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 of March 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 the U.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 93 -------------------------------------------------------------------------------- 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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