We intend to expand our business and may enter into new lines of business or geographic markets, which may result in additional risks and uncertainties in our business.
We currently generate substantially all of our revenue from asset management and advisory services. However, we may grow our business by offering additional products and services, and by entering into new lines of business.business and by entering into, or expanding our presence in, new geographic markets. Introducing new types of investment structures, products and services could increase our operational costs and the complexities involved in managing such investments, including with respect to ensuring compliance with regulatory requirements and the terms of the investment. For example, we have recently undertaken business initiatives to reach an increasing number of retail investors, which exposes us to greater levels of risk, including heightened litigation and regulatory enforcement risks. To the extent we enter into new lines of business, we will face numerous risks and uncertainties, including risks associated with the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts of risk, the required investment of capital and other resources and the loss of clients due to the perception that we are no longer focusing on our core business. In addition, we may from time to time explore opportunities to grow our business via acquisitions, partnerships, investments or other strategic transactions. There can be no assurance that we will successfully identify, negotiate or complete such transactions, or that any completed transactions will produce favorable financial results.results or that we will be able to successfully integrate an acquired business with ours.
Entry into certain lines of business or geographic markets or the introduction of new types of products or services may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk. In addition, certain aspects of our cost structure, such as costs for compensation, occupancy and equipment rentals,leases, communication and information technology services, and depreciation and amortization will beare largely fixed, and we may not be able to timely adjust these costs to match fluctuations in revenue related to growing our business or entering into new lines of business. If a new business generates insufficient revenue or if we are unable to efficiently manage our expanded operations, our business, financial condition and results of operations could be materially and adversely affected.
A decline in the pace or size of fundraising or investments made by us on behalf of our specialized funds or customized separate accounts may adversely affect our revenues.
The revenues that we earn are driven in part by the amount of capital committed by our clients for investment, our fundraising efforts and the pace at which we make investments on behalf of our specialized funds and customized separate accounts. A decline in the pace or the size of fundraising efforts or investments may reduce our revenues. The private markets investing environment continues to see increased competition, which can make fundraising and the deployment of capital more difficult. In addition, many other factors could cause a decline in the pace of investment, including the inability of our investment professionals to identify attractive investment opportunities, decreased availability of capital on attractive terms and our failure to consummate identified investment opportunities because of business, regulatory or legal complexities or uncertainty and adverse developments in the U.S. or global economy or financial markets. In addition, if we are unable to deploy capital at a pace that is sufficient to offset the pace of realizations, our fee revenues could decrease.
Our indebtedness may expose us to substantial risks.
We haverecently amended our existing Term Loan and Security Agreement (as amended, the “Term Loan Agreement”) and Revolving Loan and Security Agreement (as amended, the “Revolving Loan Agreement”) and entered into a senior secured syndicated term loan facilitynew Multi-Draw Term Loan and Security Agreement (the “Term Loan”“Multi-Draw Term Loan Agreement” and, together with the Term Loan Agreement and the Revolving Loan Agreement, the “Loan Agreements”) arranged by Morgan Stanley Senior Funding, Inc. inwith First Republic Bank (“First Republic”). The Term Loan Agreement matures on July 1, 2027, the initial principal amount of $260 million, of which approximately $86 million remained outstanding as ofRevolving Loan Agreement matures on March 24, 2023 and the Multi-Draw Term Loan Agreement matures on July 1, 2030.
We expect to continue to utilize debt to finance our operations, which will expose us to the typical risks associated with the use of leverage. An increase in leverage could make it more difficult for us to withstand adverse economic conditions or business plan variances, to take advantage of new business opportunities, or to make necessary capital expenditures. Any portion of our cash flow required for debt service would not be available for our operations, distributions, dividends or other purposes. Any substantial decrease in net operating cash flows or any substantial increase in expenses could make it difficult for us to meet our debt service requirements or force us to modify our operations. Our level of indebtedness may make us more vulnerable to economic downturns and reduce our flexibility in responding to changing business, regulatory and economic conditions, which could materially and adversely affect our business, financial condition and results of operations.
We may be unable to remain in compliance with the financial or other covenants contained in the Term Loan.Loan Agreements.
The Term Loan containsAgreements contain, and any future debt instruments may contain, financial and other covenants that impose requirements on us and limit our and our subsidiaries’ ability to engage in certain transactions or activities. There can be no assurance that we will be able to maintain leverage levels in compliance with the financial covenants included in the Term Loan. Any failure to comply with these financial and other covenants, if not waived, would cause a default or event of default under the Term Loan. Ifactivities, such a failure were to occur, there can be no assurance that we would be able to obtain a waiver, refinance or obtain a replacement for such facility on favorable terms, or at all.as:
The Term Loan contains provisions relating to the continuing involvement of certain key persons in our business. The occurrence of certain events with respect to these key persons, including, among other
events, the resignation, termination or other cessation of full-time employment with or active participation in our management, or the commission of certain bad acts by these key persons, could result in an event of default under the Term Loan. A default under the Term Loan and the resulting loss of access to capital could materially and adversely affect our business, financial condition and results of operations.
Restrictive covenants in agreements and instruments governing our debt may adversely affect our ability to operate our business.
The terms of certain of our indebtedness, including pursuant to the Term Loan, contain, and any future debt instruments may contain, various provisions that limit our and our subsidiaries’ ability to, among other things:
• incur additional debt;
•provide guarantees in respect of obligations of other persons;
•make loans, advances and investments;
•make certain payments in respect of equity interests, including, among others, the payment of dividends and other distributions, redemptions and similar payments, payments in respect of warrants, options and other rights, and payments in respect of subordinated indebtedness;
•enter into transactions with investment funds and affiliates;
•create or incur liens;
• enter into negative pledges;
•sell all or any part of the business, assets or property, or otherwise dispose of assets;
• make acquisitions or consolidate or merge with other persons;
• enter into sale-leaseback transactions;
•change the nature of our business;
• change our fiscal year;
•make certain modifications to organizational documents or certain material contracts;
•make certain modifications to certain other debt documents; and
•enter into certain agreements including agreements limiting the payment of dividends or other distributions inwith respect of equity interests,to the repayment of indebtedness, the making of loans or advances, or the transfer of assets.
AlthoughThere can be no assurance that we have negotiated certain exceptionswill be able to these events, thesemaintain leverage levels in compliance with the financial covenants included in the Loan Agreements. These restrictions may limit our flexibility in operating our business. Furthermore,business, and any violation offailure to comply with these orfinancial and other covenants, in the Term Loan could result inif not waived, would cause a default or event of default. Our obligations under the Term Loan Agreements are secured by substantially all of our assets. In the case of an event of default, creditors may exercise rights and remedies, including the rights and remedies of a secured party, under such agreements and applicable law. See “—We may be unable to remain in compliance with thelaw, which could materially and adversely affect our business, financial or other covenants contained in the Term Loan.”
condition and results of operations.
Dependence on leverage by certain funds and portfolio companies subjects us to volatility and contractions in the debt financing markets and could adversely affect the ability of our specialized funds and customized separate accounts to achieve attractive rates of return on those investments.
Certain of the specialized funds we manage, the funds in which we invest and portfolio companies within our funds and customized separate accounts currently rely on leverage. Six of our specialized funds have an aggregate of $587 million of credit lines that are available for cash flow management in funding select investment opportunities for those vehicles. As of March 31, 2017, we had an aggregate outstanding balance of approximately $324 million on those credit lines. The total capital committed for the six funds to which the credit lines are linked is approximately $4 billion. If our specialized funds or the companies in which our specialized funds or customized separate accounts invest raise capital in the structured credit, leveraged loan and high yield bond markets, the results of their operations may suffer if such markets experience dislocations, contractions or volatility. Any such events could adversely impact the availability of credit to businesses generally, the cost or terms on which lenders are willing to lend, or the strength of the overall economy.
The absence of available sources of sufficient debt financing for extended periods of time or an increase in either the general levels of interest rates or in the risk spread demanded by sources of indebtedness would make it more expensive to finance those investments.investments, and, in the case of rising interest rates, decrease the value of fixed-rate debt investments made by our funds. Certain investments may also be financed through fund-level debt facilities, which may or may not be available for refinancing at the end of their respective terms. Finally, the interest paymentslimitations on the deductibility of interest expense on indebtedness used to finance our specialized funds’ investments are generally deductible expenses for income tax purposes, subject to limitations under applicable tax law and policy. Any change in such tax law or policy to eliminate or substantially limit these income tax deductions, as has been discussed from time to time in various jurisdictions, would reduce the after-tax rates of return on the affected investments whichand make it more costly to use debt financing. See “—Extensive government regulation, compliance failures and changes in law or regulation could adversely affect us.” Any of these factors may have an adverse impact on our business, results of operations and financial condition.
Similarly, private markets fund portfolio companies regularly utilize the corporate debt markets to obtain additional financing for their operations. Leverage incurred by aThe leveraged capital structure of such businesses increases the exposure of the funds’ portfolio company may cause the portfolio companycompanies to be vulnerable to increases inadverse economic factors such as rising interest rates, and may make it less able to cope with changesdownturns in the economy or deterioration in the condition of such business and economic conditions.or its industry. Any adverse impact caused by the use of leverage by portfolio companies in which we directly or indirectly invest could in turn adversely affect the returns of our specialized funds, customized separate accounts and advisory accounts.
Defaults by clients and third-party investors in certain of our specialized funds and customized separate accounts could adversely affect that fund’s operations and performance.
Our business is exposed to the risk that clients that owe us money for our services may not pay us. IfWe believe that this risk could potentially increase due to the current novel coronavirus (“COVID-19”) pandemic. Also, if investors in our specialized funds and certain customized separate accounts default on their obligations to us,fund commitments, there may be adverse consequences on the investment process, and we could incur losses and be unable to meet underlying capital calls. For example, investors in most of our specialized funds make capital commitments to those funds that we are entitled to call from those investors at any time during prescribed periods. We depend on investors fulfilling and honoring their commitments when we call capital from them for those funds to consummate investments and otherwise pay their obligations when due. In addition, certain of our funds may utilize lines of credit to fund investments. Because interest expense and other costs of borrowings under lines of credit are an expense of the fund, the fund’s net multiple of invested capital may be reduced, as well as the amount of carried interest generated by the fund. Any material reduction in the amount of carried interest generated by a fund may adversely affect our revenues.
Any investor that did not fund a capital call would be subject to several possible penalties, including having a meaningful amount of its existing investment forfeited in that fund. However, the impact of the penalty is directly correlated to the amount of capital previously invested by the investor in the fund.
If For instance, if an investor has invested little or no capital for instance early in the life of the fund, then the forfeiture penalty may not be as meaningful. A failure of investors to honor a significant amount of capital
calls for any particular fund or funds could have a material adverse effect on the operationour business, financial condition and performanceresults of those funds.operations.
Our failure to comply with investment guidelines set by our clients could result in damage awards against us or a reduction in AUM, either of which would cause our earnings to decline and adversely affect our business.
When clients retain us to manage assets on their behalf, they specify certain guidelines regarding investment allocation and strategy that we are required to observe in the management of their portfolios. Our failure to comply with these guidelines and other limitations could result in clients terminating their investment management agreement with us, as these agreements generally are terminable without cause on 30 to 90 days’ notice. Clients could also sue us for breach of contract and seek to recover damages from us. In addition, such guidelines may restrict our ability to pursue certain allocations and strategies on behalf of our clients that we believe are economically desirable, which could similarly result in losses to a client account or termination of the account and a corresponding reduction in AUM. Even if we comply with all applicable investment guidelines, a client may be dissatisfied with its investment performance or our services or fees, and may terminate their customized separate accounts or advisory accounts or be unwilling to commit new capital to our specialized funds, customized separate accounts or advisory accounts. Any of these events could cause our earnings to decline and materially and adversely affect our business, financial condition and results of operations.
Employee misconductMisconduct by our employees, advisors or third-party service providers could harm us by impairing our ability to attract and retain clients and subjecting us to significant legal liability and reputational harm.
There is a risk that our employees, advisors or third-party service providers could engage in misconduct that adversely affects our business. We are subject to a number of obligations and standards arising from our advisory and investment management businesses and our discretionary authority over the assets we manage. The violation of these obligations and standards by any of our employees, advisors or third-party service providers would adversely affect our clients and us. Our business often requires that we deal with confidential matters of great significance to companies and funds in which we may invest for our clients. If our employees, advisors or third-party service providers were to engage in fraudulent activity, violate regulatory standards or improperly use or disclose confidential information, we could be subject to legal or regulatory action and suffer serious harm to our reputation, financial position and current and future business relationships. It is not always possible to detect or deter employee misconduct, and the extensive precautions we take that seek to detect and prevent thisundesirable activity may not be effective in all cases. If one of our employees, advisors or third-party service providers were to engage in misconduct or were to be accused of such misconduct, our business and our reputation could be materially and adversely affected. See “—IncreasedExtensive government regulation, compliance failures and changes in law or regulation could adversely affect us.”
If the investments we make on behalf of our specialized funds or customized separate accounts perform poorly, we may suffer a decline in our investment management revenue and earnings, and our ability to raise capital for future specialized funds and customized separate accounts may be materially and adversely affected.
Our revenue from our investment management business is derived from fees earned for our management of our specialized funds, customized separate accounts and advisory accounts, incentive fees, or carried interest, with respect to certain of our specialized funds and customized separate accounts, and monitoring and reporting fees. In the event that our specialized funds, customized separate accounts or individual investments perform poorly, our revenues and earnings derived from incentive fees will decline, and make it will be more difficult for us to raise capital for new specialized funds or gain new customized separate account clients in the future. In addition, if carried interest that was previously distributed to us exceeds the amounts to which we are ultimately entitled, we may be required to repay that amount under
a “clawback” obligation. If we are unable to repay the amount of the clawback, we would be subject to liability for a breach of our contractual obligations. If we are unable to raise or are required to repay capital, our business, financial condition and results of operations would be materially and adversely affected.
The timing at which we receive distributions of carried interest, an element of our revenues, can be sporadic and unpredictable, which may make it difficult for us to achieve steady earnings growth on a quarterly basis and may cause the price of our Class A common stock to decline.
Our cash flow may fluctuate significantly due to the fact that we receive carried interest distributions only when investments are realized and achieve a certain preferred return based on performance. It takes a substantial period of time to identify attractive investment opportunities, raise all funds needed to make an investment and then realize the cash value (or other proceeds) of an investment. Even if an investment proves to be profitable, it may be a number of years before any profits can be realized in cash (or other proceeds). We cannot predict when, or if, any realization of investments will occur, and thus, we cannot predict the timing or amounts of carried interest distributions to us. If we were to receive a distribution of carried interest in a particular quarter, it may have a significant impact on our results for that particular quarter, which may not be replicated in subsequent quarters. As a result, achieving steady growth in net income and cash flow on a quarterly basis may be difficult, which could in turn lead to large adverse movements or general increased volatility in the price of our Class A common stock.
Valuation methodologies for certain assets in our specialized funds and customized separate accounts can be significantly subjective, and the values of assets established pursuant to such methodologies may never be realized, which could result in significant losses for our specialized funds and customized separate accounts.
There are no readily ascertainable market prices for a large number of the investments in our specialized funds, customized separate accounts, advisory accounts or the funds in which we invest. The value of the fund investments of our specialized funds and customized separate accounts is determined periodically by us based on the fair value of such investments as reported by the underlying fund managers. Our valuation of the funds in which we invest is largely dependent upon the processes employed by the managers of those funds. The fair value of investments is determined using a number of methodologies described in the particular funds’ valuation policies. These policies are based on a number of factors, including the nature of the investment, the expected cash flows from the investment, the length of time the investment has been held, restrictions on transfer and other recognizedgenerally accepted valuation methodologies. The value of the co/direct-equity and credit investments of our specialized funds and customized separate accounts is determined periodically by us using independent third-party valuation firms to aid us in determining the fair value of these investments using generally accepted valuation methodologies. These may include references to market multiples, valuations for comparable companies, public or private market transactions, subsequent developments concerning the companies to which the securities relate, results of operations, financial condition, cash flows, and projections of such companies provided to the general partner and such other factors that we may deem relevant. The methodologies we use in valuing individual investments are based on a variety of estimates and assumptions specific to the particular investments, and actual results related to the investment may vary materially as a result of the inaccuracy of such assumptions or estimates. In addition, because the illiquid investments held by our specialized funds, customized separate accounts, advisory accounts and the funds in which we invest may be in industries or sectors that are unstable, in distress, or undergoing some uncertainty, such investments are subject to rapid changes in value caused by sudden company-specific or industry-wide developments.
Because there is significant uncertainty in the valuation of, or in the stability of the value of, illiquid investments, the fair values of such investments as reflected in a fund’s NAV do not necessarily reflect the prices that would actually be obtained if such investments were sold. Realizations at values significantly lower than the values at which investments have been reflected in fund NAVs could result in losses for the applicable fund and the loss of potential incentive fees by the fund’s manager and us. Also, a situation in which asset values turn out to be materially different from values reflected in fund NAVs, whether due to misinformation or otherwise, could cause investors to lose confidence in us and may, in turn, result in difficulties in our ability to raise additional capital, retain clients or attract new clients. Further, we often engage third-party valuation agents to assist us with the valuations. It is possible that a material fact related to the target of the valuation might be inadvertently omitted from our communications with them, resulting in an inaccurate valuation.
Further, the SEC has highlighted valuation practices as one of its areas of focus in investment advisor examinations and has instituted enforcement actions against advisors for misleading investors about valuation. If the SEC were to commit new capital toinvestigate and find errors in our specialized funds, customized separate accountsmethodologies or advisory accounts as a resultprocedures, we and/or members of our decisionmanagement could be subject to become a public company,penalties and fines, which could materiallyharm our reputation and adversely affect our business, financial condition and results of operations.
Some of our clients may view negatively our status as a publicly traded company, including concerns that as a public company we will shift our focus from the interests of our clients to those of our public stockholders. Some of our clients may believe that we will strive for near-term profit instead of superior risk-adjusted returns for our clients over time or grow our AUM for the purpose of generating additional management fees without regard to whether we believe there are sufficient investment opportunities to effectively deploy the additional capital. There canoperations could be no assurance that we will be successful in our efforts to address such concerns or to convince clients that our status as a public company will not affect our longstanding priorities or the way we conduct our business. A decision by a significant number of our clients not to commit additional capital to our specialized funds, customized separate accounts or advisory accounts to cease doing business with us altogether could inhibit our ability to achieve our investment objectives and may materially and adversely affect our business, financial condition and results of operations.
affected.
Our investment management activities may involve investments in relatively high-risk, illiquid assets, and we and our clients may lose some or all of the amounts invested in these activities or fail to realize any profits from these activities for a considerable period of time.
The investments made by our specialized funds and customized separate accounts and recommended by our advisory services may include high-risk, illiquid assets. We have made and expect to continue to make principal investments alongside our investors, as the general partner, in our existing private markets funds and certain customized separate accounts and in any new private markets funds we may establish in the future. The private markets funds in which we invest capital generally invest in securities that are not publicly traded. Even if such securities are publicly traded, many of these funds may be prohibited by contract or applicable securities laws from selling such securities for a period of time. Such funds will generally not be able to sell these securities publicly unless their sale is registered under applicable securities laws, or unless an exemption from such registration requirements is available. Accordingly, the private markets funds in which we invest our clients’ capital may not be able to sell securities when they desire and therefore may not be able to realize the full value of such securities. The ability of private markets funds to dispose of investments is dependent in part on the public equity and debt markets, to the extent that the ability to dispose of an investment may depend upon the ability to complete an IPO of the portfolio company in which such investment is held or the ability of a prospective buyer of the portfolio company to raise debt financing to fund its purchase. Furthermore, large holdings of publicly traded equity securities can often be disposed of only over a substantial period of time, exposing the investment returns to risks of downward movement in market prices during the disposition period. Contributing capital to these funds is risky, and we may lose some or the entire amount of our specialized funds’ and our clients’ investments.
In addition, our specialized funds directly or indirectly invest in businesses with capital structures that have significant leverage. The leveraged capital structure of such businesses increases the exposure of the funds’ portfolio companies to adverse economic factors such as rising interest rates, downturns in the economy or deterioration in the condition of such business or its industry. If these portfolio companies default on their indebtedness, or otherwise seek or are forced to restructure their obligations or declare bankruptcy, we could lose some or all of our investment and suffer reputational harm. See “—Dependence on leverage by certain funds and portfolio companies subjects us to volatility and contractions in the debt financing markets and could adversely affect the ability of our specialized funds and customized separate accounts to achieve attractive rates of return on those investments.”
The portfolio companies in which private markets funds have invested or may invest will sometimes involve a high degree of business and financial risk. These companies may be in an early stage of development, may not have a proven operating history, may be operating at a loss or have significant variations in operating results, may be engaged in a rapidly changing business with products subject to a substantial risk of obsolescence, may be subject to extensive regulatory oversight, may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive position, may have a high level of leverage, or may otherwise have a weak financial condition. See “—Dependence on leverage by certain funds and portfolio companies subjects us to volatility and contractions in the debt financing markets and could adversely affect the ability of our specialized funds and customized separate accounts to achieve attractive rates of return on those investments.”
In addition, these portfolio companies may face intense competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing, and other capabilities, and a larger number of qualified managerial and technical personnel. Portfolio companies in non-U.S. jurisdictions may be subject to additional risks, including changes in currency exchange rates, exchange control regulations, risks associated with different types (and lower quality) of available information, expropriation or confiscatory taxation and adverse political developments. In addition, during periods of difficult market conditions or slowdowns in a particular investment category, industry or region, portfolio companies may experience decreased revenues, financial losses, difficulty in obtaining access to financing and increased costs. During these periods, these companies may also have
difficulty in expanding their businesses and operations and may be unable to pay their expenses as they become due. A general market downturn or a specific market dislocation may result in lower investment returns for the private markets funds or portfolio companies in which our specialized funds and customized separate accounts invest, which consequently would materially and adversely affect investment returns for our specialized funds and customized separate accounts. Furthermore, if the
portfolio companies default on their indebtedness, or otherwise seek or are forced to restructure their obligations or declare bankruptcy, we could lose some or all of our investment and suffer reputational harm.
We may pursue investment opportunities that involve business, regulatory, legal or other complexities.
We may pursue investment opportunities that have unusually complex business, regulatory and/or legal aspects to them. This complexity presents risks, as such transactions can be more difficult, expensive and time-consuming to finance and execute, it can be more difficult to manage or realize value from the assets acquired in such transactions and such transactions sometimes involve a higher level of regulatory scrutiny or a greater risk of contingent liabilities. Any of these risks could materially and adversely affect our business, financial condition and results of operations.
Our specialized funds and customized separate accounts may face risks relating to undiversified investments.
We cannot give assurance as to the degree of diversification that will be achieved in any of our specialized funds or customized separate accounts. Difficult market conditions or slowdowns affecting a particular asset class, geographic region or other category of investment could have a significant adverse impact on a given specialized fund or customized separate account if its investments are concentrated in that area, which would result in lower investment returns. Accordingly, a lack of diversification on the part of a specialized fund or customized separate account could adversely affect its investment performance and, as a result, our business, financial condition and results of operations.
Our specialized funds and customized separate accounts make investments in funds and companies that we do not control.
Investments by most of our specialized funds and customized separate accounts will include debt instruments and equity securities of companies that we do not control. Our specialized funds and customized separate accounts may invest through co-investment arrangements or acquire minority equity interests and may also dispose of a portion of their equity investments in portfolio companies over time in a manner that results in their retaining a minority investment. Consequently, the performance of our specialized funds and customized separate accounts will depend significantly on the investment and other decisions made by third parties, which could have a material adverse effect on the returns achieved by our specialized funds or customized separate accounts. Portfolio companies in which the investment is made may make business, financial or management decisions with which we do not agree. In addition, the majority stakeholders or our management may take risks or otherwise act in a manner that does not serve our interests. If any of the foregoing were to occur, the values of our investments and the investments we have made on behalf of clients could decrease and our financial condition, results of operations and cash flow could suffer as a result.
Investments by our specialized funds, customized separate accounts and advisory accounts may in many cases rank junior to investments made by other investors.
In many cases, the companies in which our specialized funds, or customized separate accounts or advisory accounts invest have indebtedness or equity securities, or may be permitted to incur indebtedness or to issue equity securities, that rank senior to our clients’ investments in our specialized funds, customized separate accounts or advisory accounts. By their terms, these instruments may provide that their holders are entitled to receive payments of dividends, interest or principal on or before the dates on which payments are to be made in respect of our clients’ investments. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a company in which one or more of our specialized funds, customized separate accounts or advisory accounts hold an investment, holders of securities ranking senior to our clients’ investments would typically be entitled to receive payment in full before distributions could be made in respect of our clients’ investments. After repaying senior security holders, the company may not have any remaining assets to use for repaying amounts owed in respect of
our clients’ investments. To the extent that any assets remain, holders of claims that rank equally with our clients’ investments would be entitled to share on an equal and ratable basis in distributions that are made out of those assets. Also, during periods of financial distress or following an insolvency, our ability to
influence a company’s affairs and to take actions to protect investments by our specialized funds, customized separate accounts or advisory accounts may be substantially less than that of those holding senior interests.
The substantial growth of our business in recent years may be difficult to sustain, as it may place significant demands on our resources and employees and may increase our expenses.
The substantial growth of our business has placed, and if it continues, will continue to place, significant demands on our infrastructure, our investment team and other employees, and will increase our expenses. In addition, we are required to develop continuously our infrastructure in response to the increasingly complex investment management industry and increasing sophistication of investors. Legal and regulatory developments also contribute to the level of our expenses. The future growth of our business will depend, among other things, on our ability to maintain the appropriate infrastructure and staffing levels to sufficiently address our growth and may require us to incur significant additional expenses and commit additional senior management and operational resources. We may face significant challenges in maintaining adequate financial and operational controls as well as implementing new or updated information and financial systems and procedures. Training, managing and appropriately sizing our work force and other components of our business on a timely and cost-effective basis may also pose challenges. In addition, our efforts to retain or attract qualified investment professionals may result in significant additional expenses. There can be no assurance that we will be able to manage our growing business effectively or that we will be able to continue to grow, and any failure to do so could adversely affect our ability to generate revenue and control our expenses.
We may not be able to maintain our desired fee structure as a result of industry pressure from private markets investors to reduce fees, which could have a material adverse effect on our profit margins and results of operations.
We may not be able to maintain our current fee structure as a result of industry pressure from private markets investors to reduce fees. In order to maintain our desired fee structure in a competitive environment, we must be able to continue to provide clients with investment returns and service that incentivize our investors to pay our desired fee rates. We cannot assure you that we will succeed in providing investment returns and service that will allow us to maintain our desired fee structure. Fee reductions on existing or future new business could have a material adverse effect on our profit margins and results of operations.
Our risk management strategies and procedures may leave us exposed to unidentified or unanticipated risks.
Risk management applies to our investment management operations as well as to the investments we make for our specialized funds and customized separate accounts. We have developed and continue to update strategies and procedures specific to our business for managing risks, which include market risk, liquidity risk, operational risk and reputational risk. Management of these risks can be very complex. These strategies and procedures may fail under some circumstances, particularly if we are confronted with risks that we have underestimated or not identified.identified, including those related to the COVID-19 pandemic. In addition, some of our methods for managing the risks related to our clients’ investments are based upon our analysis of historical private markets behavior. Statistical techniques are applied to these observations in order to arrive at quantifications of some of our risk exposures. Historical analysis of private markets returns requires reliance on valuations performed by fund managers, which may not be reliable measures of current valuations. These statistical methods may not accurately quantify our risk exposure if circumstances arise that were not observed in our historical data. In particular, as we enter new lines of business or offer new products, our historical data may be incomplete.
Failure of our risk
management techniques could materially and adversely affect our business, financial condition and results of operations, including our right to receive incentive fees.
The due diligence process that we undertake in connection with investments may not reveal all facts that may be relevant in connection with an investment.
Before making or recommending investments for our clients, we conduct due diligence that we deem reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, we may be required to evaluate important and complex business, financial, tax, accounting, technological, environmental, social, governance and legal and regulatory issues. Outside consultants, legal advisors and accountants may be involved in the due diligence process in varying degrees depending on the type of investment and the parties involved. Nevertheless, when conducting due diligence and making an assessment regarding an investment, we rely on the resources available to us, including information provided by the target of the investment and, in some circumstances, third-party investigations. Theinvestigations, and such an investigation will not necessarily result in the investment ultimately being successful.
Moreover, the due diligence investigation that we will carry out with respect to any investment opportunity may not reveal or highlight all relevant facts (including bribery, fraud or other illegal activities) or risks that are necessary or helpful in evaluating such investment opportunity. Moreover,Instances of bribery, fraud, accounting irregularities and other improper, illegal or corrupt practices can be difficult to detect and may be more widespread in certain jurisdictions. Our specialized funds, customized separate accounts or advisory accounts may invest in emerging market countries that may not have established laws and regulations that are as stringent as in more developed nations, or where existing laws and regulations may not be consistently enforced. Due diligence on investment opportunities in these jurisdictions is frequently more complicated because consistent and uniform commercial practices in such locations may not have developed, and bribery, fraud, accounting irregularities and corrupt practices can be especially difficult to detect in such locations. Such misconduct may undermine our due diligence efforts with respect to such companies and could negatively affect the valuations of investments in such companies. Further, we may not identify or foresee future developments that could have a material adverse effect on an investigation will not necessarily resultinvestment, such as misconduct by personnel at companies in the investment ultimately being successful. which our specialized funds, customized separate accounts or advisory accounts invest. Financial fraud or other deceptive practices, or failures by personnel at such companies to comply with anti-bribery, trade sanctions or other legal and regulatory requirements, could cause significant legal, reputational and business harm to us.
In addition, a substantial portion of our specialized funds are funds-of-funds, and therefore we are dependent on the due diligence investigation of the general partner or co-investment partner leading such investment. We have little or no control over their due diligence process, and any shortcomings in their due diligence could be reflected in the performance of the investment we make with them on behalf of our clients. Poor investment performance could lead clients to terminate their agreements with us and/or result in negative reputational effects, either of which could materially and adversely affect our business, financial condition and results of operations.
Restrictions on our ability to collect and analyze data regarding our clients’ investments could adversely affect our business.
Our database of private markets investments includes funds and direct/co-investments that we monitor and report on for our specialized funds, customized separate accounts and advisory accounts. We rely on our database to provide regular reports to our clients, to research developments and trends in private markets and to support our investment processes. We depend on the continuation of our relationships with the general partners and sponsors of the underlying funds and investments in order to maintain current data on these investments and private markets activity. The termination of such relationships or the imposition of restrictions on our ability to use the data we obtain for our reporting and monitoring services could adversely affect our business, financial condition and results of operations.
Operational risks and data security breaches may disrupt our business, damage our reputation, result in financial losses or limit our growth.
We rely heavily on our financial, accounting, compliance, monitoring, reporting and other data processing systems. Any failure or interruption of these systems, including the loss of data, whether caused by fire, other natural disaster, power or telecommunications failure, computer viruses, actmalicious actors, acts of terrorism or war or otherwise, could result in a disruption of our business, financial loss, liability to clients, regulatory intervention or reputational damage, and thus materially and adversely affect our business. Although we have back-up systems in place, including back-up data storage, our back-up procedures and capabilities in the event of a failure or interruption may not be adequate. In recent years, we have substantially upgraded and expanded the capabilities of our data processing systems and other operating technology, and we expect that we will need to continue to upgrade and expand these capabilities in the future to avoid disruption of, or constraints on, our operations. We may incur significant costs to further upgrade our data processing systems and other operating technology in the future.
In addition, we are dependent on the
effectiveness of our information security policies, procedures and capabilities designed to protect our computer, network and telecommunications systems and the data such systems contain or transmit. An externalAttacks on our information security breach, such as a “hacker attack,” a virus or worm, or an internal problem with information protection, such as failuretechnology infrastructure could enable the attackers to controlgain access to and steal our proprietary information, destroy data or disable, degrade or sabotage our systems or divert or otherwise steal funds. Attacks could range from those common to businesses generally to those that are more advanced and persistent, which may target us because, as an alternative investment management firm, we hold a significant amount of confidential and sensitive information about our clients and potential investments.
Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software and networks may be vulnerable to unauthorized access, theft, misuse, computer viruses or other malicious code, and other events that could materially interrupthave a security impact. We and our businessemployees have been and expect to continue to be the target of “phishing” attacks, and the subject of impersonations and fraudulent requests for money, and other forms of activities. The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. In addition, cybersecurity has become a top priority for regulators around the world. Many jurisdictions in which we operate have laws and regulations relating to data privacy, cybersecurity and protection of personal information, including the General Data Protection Regulation (“GDPR”) in the EU. See “—Rapidly developing and changing privacy laws and regulations could increase compliance costs and subject us to enforcement risks and reputational damage.” Some jurisdictions have also enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data. Breaches in security could potentially jeopardize our, our employees’ or our clients’ or counterparties’ confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our, our employees’, our clients’, our counterparties’ or third parties’ operations, or cause disclosure or modification of sensitive or confidential information. Such a failurewhich could result in material financial loss,losses, increased costs, disruption of our business, liability to clients and other counterparties, regulatory actions, breach of client contracts,intervention or reputational harm or legal liability,damage, which, in turn, could cause a decline in our earnings and/or stock price. Furthermore, if we experience a cybersecurity incident, it could result in regulatory investigations and material penalties, which could lead to negative publicity and may cause our clients to lose confidence in the effectiveness of our security measures. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.
Finally, we rely on third-party service providers for certain aspects of our business, including for certain information systems, technology, administration, payroll, tax, legal and technology and administrationcompliance matters. Their inability or failure to perform as expected or in accordance with the terms of their engagements with us could have a material adverse effect on the operation of our specialized funds.business. These third-party service providers could also experience any of the above cybersecurity threats, fraudulent activities or security breaches, and as a result, unauthorized individuals could improperly gain access to our confidential data. Any interruption or deterioration in the performance of these third parties, cybersecurity incidents involving
these third parties or failures of their information systems and technology could impair the quality of theour funds’ operations, and could affect our reputation and hence adversely affect our business, financial condition and results of operations.
Rapidly developing and changing privacy laws and regulations could increase compliance costs and subject us to enforcement risks and reputational damage.
We are subject to various risks and costs associated with the collection, processing, storage and transmission of personal data and other sensitive and confidential information. Personal data is information that can be used to identify a natural person, including names, photos, email addresses, or computer IP addresses. This data is wide ranging and relates to our clients, employees, counterparties and other third parties. Our compliance obligations include those relating to state laws, such as the California Consumer Privacy Act (“CCPA”), which provides for enhanced privacy protections for California residents, a private right of action for data breaches and statutory fines and damages for data breaches or other CCPA violations, as well as well as a requirement of “reasonable” cybersecurity. We are also required to comply with foreign data collection and privacy laws in various non-U.S. jurisdictions in which we have offices or conduct business, including the GDPR, which applies to all organizations processing or holding personal data of EU data subjects (regardless of the organization’s location) as well as to organizations outside the EU that offer goods or services in the EU, or that monitor the behavior of EU data subjects. Compliance with the GDPR requires us to analyze and evaluate how we handle data in the ordinary course of business, from processes to technology. EU data subjects need to be given full disclosure about how their personal data will be used and stored. In that connection, consent must be explicit and companies must be in a position to delete information from their global systems permanently if consent were withdrawn. Financial regulators and data protection authorities throughout the EU have broad audit and investigatory powers under the GDPR to probe how personal data is being used and processed. Penalties for non-compliance can be material. Serious breaches of the GDPR include fines on companies of up to the greater of €20 million or 4% of global group turnover in the preceding year, regulatory action and reputational risk. Our business is subject to many privacy laws in addition to the CCPA and GDPR. In addition, some countries and states are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services. There are currently a number of proposals pending before federal, state, and foreign legislative and regulatory bodies.
While we have taken various measures to help ensure that our policies, processes and systems are in compliance with our obligations, our potential liability remains, particularly given the continued and rapid development of privacy laws and regulations around the world, varied requirements from jurisdiction to jurisdiction, increased enforcement action and significant monetary penalties. Any inability, or perceived inability, to adequately address privacy concerns, or comply with applicable laws, regulations, policies, industry standards and guidance, contractual obligations, or other legal obligations, even if unfounded, could result in significant regulatory and third-party liability, increased costs, disruption of our business and operations, and a loss of client confidence and other reputational damage. Furthermore, as new privacy-related laws and regulations are implemented, the time and resources needed for us to seek compliance with such laws and regulations continues to increase.
We may face damage to our professional reputation and legal liability if our services are not regarded as satisfactory or for other reasons.
As a financial services firm, we depend to a large extent on our relationships with our clients and our reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with our services, such dissatisfaction may be more damaging to our business than to other types of businesses.
In recent years, the volume of claims and amount of damages claimed in litigation and regulatory proceedings against financial advisors has been increasing. Our asset management and advisory activities may subject us to the risk of significant legal liabilities to our clients and third parties, including our
clients’ stockholders or beneficiaries, under securities or other laws and regulations for materially false or misleading statements made in connection with securities and other transactions. In our investment management business, we make investment decisions on behalf of our clients that could result in substantial losses. Any such losses also may subject us to the risk of legal and regulatory liabilities or actions alleging negligent misconduct, breach of fiduciary duty or breach of contract. These risks often may be difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. We may incur significant legal expenses in defending litigation. In addition, negative publicity and press speculation about us, our investment activities or the private markets in general, whether or not based in truth, or litigation or regulatory action against us or any third-party managers recommended by us or involving us may tarnish our reputation and harm our ability to attract and retain clients. Substantial legal or regulatory liability could materially and adversely affect our business, financial condition or results of operations or cause significant reputational harm to us, which could seriously harm our business.
Our distribution management business depends on an active market for public offerings and our ability to deliver expected investment returns.
Our distribution management business depends on active capital markets. If public offering activity is limited, there will be reduced in-kind distributions and reduced volume for our distribution management services. In addition, if our clients do not realize their expected investment returns on in-kind distributions, the performance of our distribution management business could be materially and adversely affected.
Our international operations are subject to certain risks, which may affect our revenue.
We intend to grow our non-U.S. business, including growth into new regions with which we have less familiarity and experience, and this growth is important to our overall success. In addition, many of our larger clients are non-U.S. entities seeking to invest in U.S. funds and operating companies. Our international operations carry special financial and business risks, which could include the following:
•greater difficulties in managing and staffing foreign operations;
•fluctuations in foreign currency exchange rates that could adversely affect our results;
•unexpected changes in trading policies, regulatory requirements, tariffs and other barriers;
•longer transaction cycles;
•higher operating costs;
•local labor conditions and regulations;
•adverse consequences or restrictions on the repatriation of earnings;
•potentially adverse tax consequences, such as trapped foreign losses;
•less stable political and economic environments;
•terrorism, political hostilities, war, public health crises and other civil disturbances or other catastrophic events that reduce business activity;
•cultural and language barriers and the need to adopt different business practices in different geographic areas; and
•difficulty collecting fees and, if necessary, enforcing judgments.
As part of our day-to-day operations outside the United States, we are required to create compensation programs, employment policies, compliance policies and procedures and other administrative programs that comply with the laws of multiple countries. We also must communicate and monitor standards and directives across our global operations. Our failure to successfully manage and grow our geographically diverse operations could impair our ability to react quickly to changing business and market conditions and to enforce compliance with non-U.S. standards and procedures.
A significant amount of the investments of our specialized funds, customized separate accounts and advisory accounts include private markets funds that are located outside the United States or that invest in portfolio companies located outside the United States. Such non-U.S. investments involve certain factors
not typically associated with U.S. investments, including risks related to (i) currency exchange matters, includingsuch as exchange rate fluctuations between the U.S. dollar and the foreign currency in which the investments are denominated, and costs associated with conversion of investment proceeds and income from one currency to another, (ii) differences between the U.S. and foreign capital markets, including the absence of uniform accounting, auditing, financial reporting and legal standards, practices and disclosure requirements and less government supervision and regulation, (iii) certain economic, social and political risks, including exchange control regulations and restrictions on foreign investments and repatriation of capital, the risks of political, economic or social instability, and (iv) the possible imposition of foreign taxes with respect to such investments or confiscatory taxation. These risks could adversely affect the performance of our specialized funds, customized separate accounts and advisory accounts that are
invested in securities of non-U.S. companies, which would adversely affect our business, financial condition and results of operations.
Any payment of distributions, loans or advances to and from our subsidiaries could be subject to restrictions on or taxation of dividends or repatriation of earnings under applicable local law, monetary transfer restrictions, foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate or other restrictions imposed by current or future agreements, including debt instruments, to which our non-U.S. subsidiaries may be a party. Our business, financial condition and results of operations could be adversely impacted, possibly materially, if we are unable to successfully manage these and other risks of international operations in a volatile environment. If our international business increases relative to our total business, these factors could have a more pronounced effect on our operating results or growth prospects.
In addition, in January 2020, the U.K. withdrew from the European Union, with a transition period currently expected to end in December 2020. Until that deadline, the U.K. will effectively be treated as a member-state of the EU with respect to applicable rules and regulations. Our business may be adversely affected by Brexit due to, among other things, disruption of the free movement of goods, services, capital, and people between the U.K. and the EU as well as potential changes to the legal and regulatory environment in the region. Furthermore, as a result of Brexit, our subsidiaries that are authorized and regulated by the U.K. Financial Conduct Authority may no longer be able to avail themselves of passporting rights under certain EU directives (such as the AIFMD and MiFID II) to provide services and perform activities in the U.K. and other parts of Europe. This may have an adverse impact on our results including the cost of, risk to, manner of conducting, and location of, our European business and our ability to hire and retain key staff in Europe. This may also adversely impact the markets in which we operate; the funds we manage or advise; our fund investors and our ability to raise capital from them; and ultimately the returns that may be achieved. While we have taken measures designed to allow us to continue to conduct our business in both the U.K. and the EU, Brexit may increase our cost of conducting business, interfere with our ability to market our products and provide our services and generally make it more difficult for us to pursue our objectives in the region. Brexit could also lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which EU laws to replace or replicate. Compliance with any such new laws and regulations in the U.K. may be difficult and/or costly to implement and could adversely impact our ability to raise capital from investors in the U.K. and the EU, which could materially reduce our revenue, earnings and cash flow and adversely affect our financial prospects and condition.
Political parties in several other member states of the EU have similarly proposed that a referendum be held on their country’s membership in the EU. It is unclear whether any other member states of the EU will hold such referendums, but further disruption and legal uncertainty can be expected if there are.
Our inability to obtain adequate insurance could subject us to additional risk of loss or additional expenses.
We may not be able to obtain or maintain sufficient insurance on commercially reasonable terms or with adequate coverage levels against potential liabilities we may face, which could have a material
adverse affect on our business. We may face a risk of loss from a variety of claims, including those related to contracts, fraud, compliance with laws and various other issues, whether or not such claims are valid. Insurance and other safeguards might only partially reimburse us for our losses, if at all, and if a claim is successful and exceeds or is not covered by our insurance policies, we may be required to pay a substantial amount in respect of such successful claim. Certain losses of a catastrophic nature, such as wars, earthquakes, typhoons, terrorist attacks or other similar events, may be uninsurable or may only be insurable at rates that are so high that maintaining coverage would cause an adverse impact on our business, in which case we may choose not to maintain such coverage.
Risks Related to Our Industry
The investment management business is intensely competitive.
The investment management business is intensely competitive, with competition based on a variety of factors, including investment performance, the quality of service provided to clients, investor liquidity and willingness to invest, investment terms and conditions, brand recognition and business reputation. Our investment management business competes with a variety of traditional and alternative asset managers, commercial banks, investment banks and other financial institutions.institutions, and we expect that competition will continue to increase. A number of factors serve to increase our competitive risks:
•some of our competitors have more relevant experience, greater financial and other resources and more personnel than we do;
•there are relatively few barriers to entry impeding new asset management firms, including a relatively low cost of entering these lines of business, and the successful efforts of new entrants into our various lines of business have resultedis expected to continue to result in increased competition;
•if as we expect, allocation of assets to alternative investment strategies increases, there maywill be increased competition for alternative investments and access to fund general partners and managers;
• some of our competitors may have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to our specialized funds, particularly funds that directly use leverage or rely on debt financing of their portfolio companies to generate superior investment returns;
• developments in financial technology (or fintech), such as a distributed ledger technology (or blockchain), have the potential to disrupt the financial industry and change the way financial institutions, as well as investment managers, do business, and could exacerbate these competitive pressures;
•certain investors may prefer to invest with private partnerships; and
•other industry participants will from time to time seek to recruit our investment professionals and other employees away from us.
This competitive pressure could adversely affect our ability to make successful investments and restrict our ability to raise future funds, either of which would materially and adversely impact our business, financial condition and results of operations.
Difficult market and geopolitical conditions can adversely affect our business in many ways, including by reducing the market value of the assets we manage, or causing our customized separate account clients to reduce their investments in private markets.markets or adversely affecting our ability to conduct our business.
The future globalOur business can be materially affected by difficult financial market and economic climate may deteriorate because of many factors beyondconditions and events throughout the world that are outside our control, including rising interest rates, or inflation, the availability of credit, changes in laws, trade barriers, public health crises, terrorism or political
uncertainty. WeThese factors may affect the level and volatility of securities prices and the liquidity and value of investments, and we may not be able to or may choose not to manage our exposure to these market conditions. them.
Market deterioration could cause us, the specialized funds and customized separate accounts we manage or the funds in which they invest to experience tightening of liquidity, reduced earnings and
cash flow and impairment charges, as well as challenges in raising additionaland deploying capital, obtaining investment financing and making investments on attractive terms. These market conditions can also have an impact on our ability and the ability of funds in which we and our clients invest to liquidate positions in a timely and efficient manner. More costly and restrictive financing may also may adversely impact the returns of our co-investments in leveraged buyout transactions and, therefore, adversely affect the results of operations and financial condition of our co-investment funds.
Our business could generate lower revenue in a general economic downturn or a tightening of global credit markets. While our revenue continued to grow during the economic downturn beginning in 2008, we may not experience a similar outcome during future downturns.subsequent downturns, including the current one triggered by the COVID-19 pandemic. A general economic downturn or tightening of global credit markets may result in reduced opportunities to find suitable investments and make it more difficult for us, or for the funds in which we and our clients invest, to exit and realize value from existing investments, potentially resulting in a decline in the value of the investments held in our clients’ portfolios, leading to a decrease in incentive fee revenue. Any reduction in the market value of the assets we manage will not likely be reported until one or more quarters after the end of the applicable performance period due to an inherent lag in the valuation process of private markets investments. This can result in a mismatch between stated valuation and current market conditions and can lead to delayed revelations of changes in performance and, therefore, delayed effects on our clients’ portfolios. Such a decline could cause our revenue and net income to decline by causing some ofIf our clients to reduce their commitments to make investments in private markets in favor of investments they perceive as offering greater opportunity or lower risk, which wouldour revenue or net income could decline as a result inof lower fees being paid to us. Further, if, due to the lag in reporting, their decision to do so is made after the initial effects of a market downturn are felt by the rest of the economy, the adverse effect we experience as a result of that decision could likewise adversely affect our results of operations on a delayed basis.
A generalGeopolitical concerns and other global events, such as political developments, economic downturninstability, natural disasters, civil unrest, trade conflicts, war or a tighteningthreat of war, terrorist attacks, pandemics or other severe public health events are examples of other conditions and events outside of our control that can materially and adversely affect our ability to conduct our business, as well as the value of our investments. See “—The COVID-19 pandemic has caused severe disruptions in the U.S. and global credit marketseconomies and may also reduce the commitmentsadversely impact our clients are able to devote to alternative investments generallyfinancial condition and make it more difficult for the funds in which we invest to obtain funding for additional investments at attractive rates, which would further reduce our profitability.results of operations.”
Our profitability may also be adversely affected by our fixed costs and the possibility that we would be unable to scale back other costs within a time frame sufficient to match any decreases in revenue relating to changes in market and economic conditions. If our revenue declines without a commensurate reduction in our expenses, our net income will be reduced. Accordingly, difficult market conditions could materially and adversely affect our business, financial condition and results of operations.
IncreasedThe COVID-19 pandemic has caused severe disruptions in the U.S. and global economies and may adversely impact our financial condition and results of operations.
The outbreak of the COVID-19 pandemic led much of the world to institute stay-at-home orders, restrictions on travel, bans on public gatherings, the closing of non-essential businesses or limiting their hours of operation and other restrictions on businesses and their operations, which has adversely impacted global commercial activity and contributed to significant volatility and a downturn in global financial markets. While some of these restrictions are being relaxed or lifted in an effort to generate more economic activity, the risk of future COVID-19 outbreaks remains, and jurisdictions may reimpose them in an effort to mitigate risks to public health. Moreover, even where restrictions are and remain lifted, the absence of viable treatment options or a vaccine could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. As a result, we are
unable to predict the ultimate adverse impact of the pandemic, but it has affected, and may further affect, our business in various ways, including, but not limited to, the following:
•We operate our business globally, with clients and offices across North America, Europe, Asia-Pacific, Latin America and the Middle East. The ability to easily travel and meet with prospective and current clients in person helps build and strengthen our relationships with them in ways that telephone and video conferences may not always afford. In addition, the ability of our employees to conduct their daily work in our offices helps to ensure a level of productivity that may not be achieved when coming to the office every day is not an option. Further, our investment strategies target opportunities globally. Restrictions on travel and public gatherings as well as stay-at-home orders mean that most of our client and prospect meetings are not currently taking place in person, and the vast majority of our employees are working from home. As a consequence, our ability to market our funds and raise new business has been impeded (which may result in lower or delayed revenue growth), it has become more difficult to conduct due diligence on investments (which can impede the identification of investment risks) and an extended period of remote working by our employees could strain our technology resources and introduce operational risks, including heightened cybersecurity risk, as remote working environments can be less secure and more susceptible to hacking attacks.
•A slowdown in fundraising activity could result in delayed or decreased management fees compared to prior periods. In addition, in light of declines in public equity markets and other components of their investment portfolios, investors may become restricted by their asset allocation policies to invest in new or successor funds that we provide, or may be prohibited by new laws or regulations from funding existing commitments. We may also experience a slowdown in the deployment of our capital, which could also adversely affect our ability to raise capital for new or successor funds.
•While the market dislocation caused by COVID-19 may present attractive investment opportunities due to increased volatility in the financial markets, we may not be able to complete those investments, which could impact revenue, particularly for specialized funds and customized separate accounts that charge fees on invested capital.
•Our liquidity and cash flows may be adversely impacted by declines or delays in realized incentive fees and management fee revenues. As of March 31, 2020, we have $50.1 million in available cash and $125 million in availability under our Loan Agreements.
•Our specialized funds and customized separate accounts invest in industries that have been materially impacted by the COVID-19 pandemic, including healthcare, travel, entertainment, hospitality and retail. Companies in these industries are facing operational and financial hardships resulting from the pandemic, and if conditions do not improve, they could continue to suffer materially, become insolvent or cease operations altogether, any of which would decrease the value of the investments. Underlying investments within our specialized funds and customized separate accounts reflect valuations determined as of December 31, 2019, which is prior to the time when the pandemic started to adversely impact global economies and, therefore, we will likely have a negative valuation adjustment in the next quarter based on March 31, 2020 valuations. Adverse investment valuations would directly impact our unrealized carried interest, AUM and AUA.
•COVID-19 presents a threat to our employees’ well-being and morale. If our senior management or other key personnel become ill or are otherwise unable to perform their duties for an extended period of time, we may experience a loss of productivity or a delay in the implementation of certain strategic plans. In addition to any potential impact of such extended illness on our operations, we may be exposed to the risk of litigation by our employees against us for, among other things, failure to take adequate steps to protect their well-being, particularly in the event they become sick after a return to the office. Further, local COVID-19-related laws can be subject to rapid change depending on public health developments, which can lead to confusion and make compliance with laws uncertain and subject us to increased risk of litigation for non-compliance.
•We anticipate that regulatory oversight and enforcement will become more rigorous for public companies in general, and for the financial services industry in particular, as a result of the recent volatility in the financial markets.
We believe COVID-19’s adverse impact on our business, financial condition and results of operations will be significantly driven by a number of factors that we are unable to predict or control, including, for example: the severity and duration of the pandemic, including the timing of availability of a treatment or vaccine for COVID-19; the pandemic’s impact on the U.S. and global economies; the timing, scope and effectiveness of additional governmental responses to the pandemic; the timing and path of economic recovery; and the negative impact on our clients, counterparties, vendors and other business partners that may indirectly adversely affect us.
Extensive government regulation, compliance failures and changes in law or regulation could adversely affect us.
Our business activities are subject to laws, rules and regulations with which we seek to comply. Any changes or potential changes in the regulatory framework applicable to our business may impose additional expenses or capital requirements on us, limit our fundraising activities, have an adverse effect on our results of operations, financial condition, reputation or prospects, impair employee retention or recruitment and require substantial attention by senior management. It is impossible to determine the extent of the impact of any new laws, regulations, initiatives or regulatory guidance that may be proposed or may become law on our business or the markets in which we operate.
Governmental authorities around the world in recent years have called forimplemented or implementedare implementing financial system and participant regulatory reform in reaction to volatility and disruption in the global financial markets, financial institution failures and financial frauds. Such reform includes, among other things, additional regulation of investment funds, as well as their managers and activities, including compliance, risk management and anti-money laundering procedures; restrictions on specific types of investments and the provision and use of leverage; implementation of capital requirements; limitations on compensation to managers; and books and records, reporting and disclosure requirements. We cannot predict with certainty the impact on us, our specialized funds or customized separate accounts, or on private markets funds generally, of any such reforms. Any of these regulatory reform measures could have an adverse effect on our specialized funds’ and customized separate accounts’ investment strategies or our business model. We may incur significant expense in order to comply with such reform measures. Additionally, legislation, including proposed legislation regarding executive compensationmeasures and taxation of carried interest, may adversely affect our ability to attract and retain key personnel.incur significant liabilities if regulatory authorities determine that we are not in compliance.
We could also be adversely affected in the future by changes in applicable tax laws, regulations, or administrative interpretations thereof. The Trump Administration and key members of Congress have made public statements indicating that U.S. corporate tax reform is a high priority, andFor example, the U.S. Congress is expectedfederal tax legislation commonly referred to propose sweepingas the Tax Cuts and Jobs Act (the “Tax Act”), enacted in December 2017, resulted in fundamental changes to the Code, including, among many other things, a reduction to the federal corporate income tax rate, a partial limitation on the deductibility of business interest expense, a limitation on the deductibility of certain director and officer compensation expense, limitations on net operating loss carrybacks and carryovers and changes relating to the scope and timing of U.S. tax system,taxation on earnings from international business operations. Subsequent legislation, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted on March 27, 2020, relaxed certain of the limitations imposed by the Tax Act for certain
taxable years, including changes to corporate tax ratesthe limitation on the use and carryback of net operating losses and the taxationlimitation on the deductibility of income earned outsidebusiness interest expense. The exact impact of the United States (including the taxation of previously unrepatriated foreign earnings). There remains a substantial lack of clarity around the likelihood, timing
and details of any potential tax reformTax Act and the impact of such tax reform on us or an investment in our Class A common stock. AnyCARES Act for future years is difficult to quantify, but these changes to the tax laws as part of such tax reform or otherwise, with or without retroactive application, could materially and adversely affect our investors, the companies in which our funds invest, or us. In addition, other changes could be enacted in the future to increase the corporate tax rate, limit further the deductibility of interest, subject carried interests to more onerous taxation or effect other changes that could have a material adverse effect on our business, results of operations and financial condition. Such changes could also include increases in state taxes and other changes to state tax laws to replenish state and local government finances depleted by costs attributable to the COVID-19 pandemic and the reduction in tax revenues due to the accompanying economic downturn.
In addition, our effective tax rate and tax liability are based on the application of current income tax laws, regulations and treaties. These laws, regulations and treaties are complex, and the manner which they apply to us and our funds is sometimes open to interpretation. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. The tax authorities could challenge our interpretation of laws, regulations and treaties, resulting in additional tax liability or adjustment to our income tax provision that could increase our effective tax rate. Changes to tax laws may also adversely affect our ability to attract and retain key personnel.
Our advisory and investment management businesses are subject to regulation in the United States, including by the Securities and Exchange Commission (the “SEC”), the Commodity Futures Trading Commission (the “CFTC”), the Internal Revenue Service (the “IRS”), the Financial Industry Regulatory Authority and other regulatory agencies, pursuant to, among other laws, the Investment Advisers Act, of 1940 (the “Investment Advisers Act”), the Securities Act, the Internal Revenue Code, of 1986, as amended, (the “Code”), the Commodity Exchange Act, and the Exchange Act. Any change in such regulation or oversight may have a material adverse impact on our operating results. In addition, we regularly rely on exemptions from various requirements of these and other applicable laws. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If, for any reason, these exemptions were to be revoked or challenged or otherwise become unavailable to us, we could be subject to regulatory action or third-party claims, and our business could be materially and adversely affected. Our failure to comply with applicable laws or regulations could result in fines, suspensions of personnel or other sanctions, including revocation of our registration as an investment adviser.adviser or the registration of our broker-dealer subsidiary. Even if a sanction imposed against us or our personnel is small in monetary amount, the adverse publicity arising from the imposition of sanctions against us by regulators could harm our reputation and cause us to lose existing clients or fail to gain new clients.
As a resultIn the wake of recent highly publicized financial scandals, investors have exhibited concerns over the integrity of the U.S. financial markets, and the regulatory environment in which we operate is subject to further regulation in addition to those rules already promulgated. For example, there are a significant number of new and proposed regulations that may affect our business under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The SEC in particular has increasedcontinues to increase its regulation of the asset management and private equity industries, in recent years, focusing on the private equity industry’s fees, allocation of expenses to funds, valuationmarketing practices, allocation of fund investment opportunities, disclosures to fund investors, the allocation of broken-deal expenses and general conflicts of interest disclosures. The SEC has also heightened its focus on the valuation processespractices employed by investment advisers. The lack of readily ascertainable market prices for many of the investments made by our specialized funds or customized separate accounts or the funds in which we invest could subject our valuation policies and processes to increased scrutiny by the SEC. We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets. The pending exit of the United Kingdom from the European Union (“EU”)Brexit may result in our being subject us to new and increased regulations if we can no longer rely on “passporting”passporting privileges that allow U.K. financial institutions to access the EU single market without restrictions. We also may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations.
To the extent that HLA is a “fiduciary” under ERISA, with respect to benefit plan clients, it is subject to ERISA, and to regulations promulgated thereunder. ERISA and applicable provisions of the Code impose certain duties on persons who are fiduciaries under ERISA, prohibit certain transactions involving ERISA plan clients and provide monetary penalties for violations of these prohibitions. Our failure to comply with these requirements could have a material adverse effect on our business. In addition, a court could find that one of our co-investment funds has formed a partnership-in-fact conducting a trade or business and would therefore be jointly and severally liable for the portfolio company’s unfunded pension liabilities.
In addition, HLA is registered as an investment adviser with the SEC and is subject to the requirements and regulations of the Investment Advisers Act. Such requirements relate to, among other things, restrictions on entering into transactions with clients, maintaining an effective compliance program, incentive fees, solicitation arrangements, allocation of investments, recordkeeping and reporting
requirements, disclosure requirements, limitations on agency cross and principal transactions between an adviser and their advisory clients, as well as general anti-fraud prohibitions. As a registered investment adviser, HLA has fiduciary duties to its clients. A failure to comply with the obligations imposed by the Investment Advisers Act, including recordkeeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, could result in examinations, investigations, sanctions and reputational damage, and could materially and adversely affect our business, financial condition and results of operations.
The Foreign Investment Risk Review Modernization Act significantly increased the types of transactions that are subject to the jurisdiction of the Committee on Foreign Investment in the United States (“CFIUS”). Once the reform legislation is fully implemented through the rulemaking process, CFIUS will have the authority to review and potentially recommend that the President of the United States block or impose conditions on non-controlling investments in critical infrastructure and critical technology companies and in companies collecting or storing sensitive data of U.S. citizens, which may reduce the number of potential buyers and limit the ability of our funds to realize value from certain existing and future investments.
In the EU, the MiFID II requires, among other things, all MiFID investment firms to comply with prescriptive disclosure, transparency, reporting and recordkeeping obligations and obligations in relation to the receipt of investment research, best execution, product governance and marketing communications. As we operate investment firms which are subject to MiFID, we have implemented policies and procedures to comply with MiFID II where relevant, including where certain rules have an extraterritorial impact on us. Compliance with MiFID II has resulted in greater overall complexity, higher compliance, administration and operational costs, and less overall flexibility.
Federal, state and foreign anti-corruption and sanctions laws create the potential for significant liabilities and penalties and reputational harm.
We are also subject to a number of laws and regulations governing payments and contributions to political persons or other third parties, including restrictions imposed by the Foreign Corrupt Practices Act (“FCPA”) as well as trade sanctions and export control laws administered by the Office of Foreign Assets Control (“OFAC”), the U.S. Department of Commerce and the U.S. Department of State. The FCPA is intended to prohibit bribery of foreign governments and their officials and political parties, and requires public companies in the United States to keep books and records that accurately and fairly reflect those companies’ transactions. OFAC, the U.S. Department of Commerce and the U.S. Department of State administer and enforce various export control laws and regulations, including economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign states, organizations and individuals. These laws and regulations relate to a number of aspects of our business, including servicing existing fund investors, finding new fund investors, and sourcing new investments, as well as activities by the portfolio companies in our investment portfolio or other controlled investments.
Similar laws in non-U.S. jurisdictions, such as EU sanctions or the U.K. Bribery Act, as well as other
applicable anti-bribery, anti-corruption, anti-money laundering, or sanction or other export control laws in the U.S. and abroad, may also impose stricter or more onerous requirements than the FCPA, OFAC, the U.S. Department of Commerce and the U.S. Department of State, and implementing them may disrupt our business or cause us to incur significantly more costs to comply with those laws. Different laws may also contain conflicting provisions, making compliance with all laws more difficult. If we fail to comply with these laws and regulations, we could be exposed to claims for damages, civil or criminal financial penalties, reputational harm, incarceration of our employees, restrictions on our operations and other liabilities, which could negatively affect our business, operating results and financial condition. In addition, we may be subject to successor liability for FCPA violations or other acts of bribery, or violations of applicable sanctions or other export control laws committed by companies in which we or our funds invest or which we or our funds acquire. While we have developed and implemented policies and procedures designed to ensure strict compliance by us and our personnel with the FCPA and other anti-corruption, sanctions and export control laws in jurisdictions in which we operate, such policies and procedures may not be effective in all instances to prevent violations. Any determination that we have violated the FCPA or other applicable anti-corruption, sanctions or export control laws could subject us to, among other things, civil and criminal penalties, material fines, profit disgorgement, injunctions on future conduct, securities litigation and a general loss of investor confidence, any one of which could adversely affect our business prospects, financial condition, results of operations or the market value of our Class A common stock.
Regulation of investment advisors outside the United States could adversely affect our ability to operate our business.
We provide investment advisory and other services and raise funds in a number of countries and jurisdictions outside the United States. In many of these countries and jurisdictions, which include the EU, the EEA, the individual member states of each of the EU and EEA, the U.K., Hong Kong, Korea, Brazil and
Japan, we and our operations, and in some cases our personnel, are subject to regulatory oversight and requirements. In general, these requirements relate to registration, licenses for our personnel, periodic inspections, the provision and filing of periodic reports, and obtaining certifications and other approvals. Across the EU, we are subject to the AIFMD, under which we are subject to regulatory requirements regarding, among other things, registration for marketing activities, the structure of remuneration for certain of our personnel and reporting obligations. Individual member states of the EU have imposed additional requirements that may include internal arrangements with respect to risk management, liquidity risks, asset valuations, and the establishment and security of depository and custodial requirements. Because some EEA countries have not yet incorporated the AIFMD into their agreement with the EU, we may undertake marketing activities and provide services in those EEA countries only in compliance with applicable local laws. Outside the EEA, the regulations to which we are subject relate primarily to registration and reporting obligations.
It is expected that additional laws and regulations will come into force in the EEA, the EU, and other countries in which we operate over the coming years. These laws and regulations may affect our costs and manner of conducting business in one or more markets, the risks of doing business, the assets that we manage or advise, and our ability to raise capital from investors. In addition, the pending exit of the United Kingdom from the EUBrexit may have adverse economic, political and regulatory effects on the operation of our business. Any failure by us to comply with either existing or new laws or regulations could have a material adverse effect on our business, financial condition and results of operations.
Volatile market, political and economic conditions can adversely affect investments made by our specialized funds, customized separate accounts and advisory accounts.
Since 2008, there has been continuedThe global financial markets are currently experiencing volatility and disruption indue to the global financial markets.COVID-19 pandemic. Volatility and disruption in the equity and credit markets, whatever the cause, could adversely affect the portfolio companies in which the private markets funds invest, which, in turn, would adversely affect the performance of our specialized funds, customized separate accounts and advisory accounts. For example, the lack of available credit or the increased cost of credit may materially
and adversely affect the performance of funds that rely heavily on leverage such as leveraged buyout funds. Disruptions in the debt and equity markets may make it more difficult for funds to exit and realize value from their investments, because potential buyers of portfolio companies may not be able to finance acquisitions and the equity markets may become unfavorable for IPOs. In addition, the volatility will directly affect the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the valuation of the investments of our specialized funds, customized separate accounts and advisory accounts. Any or all of these factors may result in lower investment returns. Governmental authorities have undertaken, and may continue to undertake, a variety of initiatives designed to strengthen and stabilize the economy and the financial markets. However, there can be no assurance that these initiatives will be successful, and there is no way to predict the ultimate impact of the disruption or the effect that these initiatives will have on the performance of our specialized funds, customized separate accounts or advisory accounts.
Investments in many industries have experienced significant volatility over the last several years. The ability to realize investments depends not only on our investments and the investments made by the private markets funds and portfolio companies in which we invest and their respective results and prospects, but also on political and economic conditions, which are out of our control. Continued volatility in political or economic conditions, including an outbreak or escalation of major hostilities, public health crises, declarations of war, terrorist actions or other substantial national or international calamities or emergencies, could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Organizational Structure
Our management has not previously managed a public company.
PriorFailure to our IPOestablish and maintain effective internal controls in February 2017, our management team operated our business as a privately owned company. The individuals who now constitute our management have not previously managed a publicly traded company. Complianceaccordance with public company requirements will place significant additional demands on our management and will require us to continue to enhance our investor relations, legal, financial and tax reporting, internal audit, compliance withSection 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and corporate communications functions. These additional efforts may strain our resources and divert management’s attention from other business concerns, which could adversely affecthave a material adverse effect on our business and profitability.stock price.
Fulfilling our public company financial reporting and other regulatory obligations will be expensive and time consuming.
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For example, we are subject to the reporting requirements of the Exchange Act, andWe are required to comply with the applicable requirementsSEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the Dodd-Frank Act, as well as rules and regulations subsequently implemented by the SEC and the NASDAQ Stock Market, including the establishment and maintenanceeffectiveness of effective disclosure controls and internal controls over financial reporting. Additionally, we are required to have our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting. An adverse report may be issued in the event our independent registered public accounting firm is not satisfied with the level at which our controls are documented, designed or operating.
A material weakness is a deficiency, or combination of deficiencies, in internal controls, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. A significant deficiency is a deficiency, or combination of deficiencies, in internal controls that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. When evaluating our internal control over financial reporting, and implementation of public company corporate governance practices. We expectwe may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with thesethe requirements will increaseof Section 404. If we identify any material weaknesses in our legal andinternal control over financial compliance costs for our historical experience and will make some activities more time consuming and costly. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. We cannot predictreporting or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as regulatory and governing bodies provide new guidance. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We will continue to invest resourcesunable to comply with evolving laws, regulationsthe requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is ineffective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, we could fail to meet our reporting obligations or be required to restate our financial statements for prior periods. Investors may also lose confidence in the accuracy and standards,completeness of our financial reports, the market price of our Class A common stock could be negatively affected, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activitieswe could become subject to compliance activities. If our efforts to comply with new laws, regulations and standards differ frominvestigations by Nasdaq, the activities intended by regulatorySEC or governing bodies due to ambiguities related to their application and practice,other regulatory authorities, may initiate legal proceedings against us,which would require additional financial and our business, financial condition and results of operations could be materially and adversely affected.
As a result of disclosure of information as a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If the claims are successful, our business, financial condition and results of operations could be materially and adversely affected. Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business operations and financial results. These factors could
resources.
also make it more difficult for us to attract and retain qualified employees, executive officers and members of our board of directors.
We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance on desired terms. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors or our board committees or to serve as executive officers.
We are a “controlled company” within the meaning of the NASDAQNasdaq listing standards and, as a result, will qualify for, and intend to continue to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Holders of our Class B common stock, which is not publicly traded, control a majority of the voting power of our outstanding common stock. As a result, we qualify as a “controlled company” within the meaning of the corporate governance standards of the NASDAQ Stock Market.Nasdaq. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirement that (i) a majority of our board of directors consist of independent directors, (ii) director nominees be selected or recommended to the board by independent directors and (iii) we have a compensation committee that is composed entirely of independent directors.
We have elected to rely on these exemptions and expect to continue to do so. As a result, we willdo not have a majority of independent directors, our compensation committee willdoes not consist entirely of independent directors and our directors willare not be nominated or selected by independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NASDAQ Stock Market.
We have identified a material weakness in our internal control over financial reporting, and any inability to maintain effective internal control over financial reporting could have a material adverse effect on our business.
During the course of preparing our audited financial statements for this Form 10-K, we, in conjunction with our independent registered public accounting firm, concluded that a lack of adequate controls surrounding certain calculations under the tax receivable agreement entered into in connection with our IPO constituted a material weakness in our internal control over financial reporting. Specifically, our initial calculations were performed in a manner inconsistent with the terms of the agreement. The error was identified and corrected in the course of preparing our audited financial statements for the year ended March 31, 2017. As a result of the identification of this material weakness, we have implemented measures designed to improve our internal control over financial reporting, including hiring a Director of Tax, implementing procedures intended to ensure that future calculations are performed correctly, and establishing additional monitoring and oversight controls. We cannot be certain that these efforts will be sufficient to remediate or prevent future material weaknesses or significant deficiencies from occurring.
Our internal controls over financial reporting do not currently meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 could have a material adverse effect on our business and the price of our Class A common stock.
Our internal controls over financial reporting do not currently meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act (“Section 404”) that we will eventually be required to meet as a public company. We are in the process of addressing our internal controls over financial reporting and are establishing formal committees to oversee our policies and processes related to financial reporting and to the identification of key financial reporting risks, assessment of their potential impact and linkage of those risks to specific areas and activities within our organization. We are not required to provide management’s assessment of our internal control over financial reporting in this annual report due to a transition period established by the SEC for newly public companies.
We do not currently have comprehensive documentation of our system of controls, nor do we yet fully document or test our compliance with this system on a periodic basis in accordance with Section 404. Furthermore, we have not yet fully tested our internal controls in accordance with Section 404 and, due to our lack of documentation, such a test would not be possible to perform at this time. However, in the course of preparing our audited consolidated financial statements for this Form 10-K, we identified a material weakness in our internal control over financial reporting related to our calculation of deferred taxes and payables under the tax receivable agreement we entered into in connection with our IPO. We cannot conclude in accordance with Section 404 that we do not have additional material weaknesses, or significant deficiencies that could result in the conclusion that we have a material weakness in our internal controls in accordance with such rules.
We have begun the process of documenting and testing our internal control procedures to satisfy the requirements of Section 404, which requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm addressing these assessments. Matters affecting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of the NASDAQ listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if our independent registered public accounting firm reports a material weakness in our internal control over financial reporting. This could materially and adversely affect us and lead to a decline in the price of our Class A common stock. In addition, we will incur incremental costs in order to improve our internal control over financial reporting and comply with Section 404, including increased auditing and legal fees and costs associated with hiring additional experienced accounting, finance, tax, legal and administrative staff. We will need to hire additional personnel to design and apply controls to areas of significant complex transactions and technical accounting matters.
Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404 until the later of our next annual report or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.
Nasdaq.
Our only material asset is our interest in HLA, and we are accordingly dependent upon distributions from HLA to pay dividends, and taxes and other expenses.
HLI is a holding company and has no material assets and other than its ownership of membership units in HLA and certain deferred tax assets. As such, HLI does not have any independent means of generating revenue. We intend to 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 we have entered into with the direct and indirect members of HLA, and to pay our corporate and other overhead expenses. To the extent that HLI needs funds, and HLA is restricted from making such distributions under applicable laws or regulations, or is otherwise unable to provide such funds, it could materially and adversely affect our liquidity and financial condition.
The IRS might challenge the tax basis step-up we received in connection with our IPO and the related transactions and in connection with futuresubsequent acquisitions of membership units in HLA.
We have used a portion of the proceeds from our IPO and from subsequent registered offerings to purchase membership units in HLA from certain of the existinglegacy direct or indirect members of HLA, which resulted in an increase in our share of the tax basis of the assets of HLA that otherwise would not have been available. The HLA membership units held directly orand indirectly by the members of HLA other than us,HLI, including members of our senior management team, may in the future be exchanged for shares of our Class A common stock. Similar tostock or, at our initial purchase of membership units, thoseelection, for cash. These exchanges are also likely to result in increases in our share of the tax basis of the assets of HLA that otherwise would not have been available. TheseThe increases in tax basis may reduce the amount of tax that we would otherwise be required to pay in the future, although it is possible that the IRS might challenge all or part of that tax basis increase, and a court might sustain such a challenge. Our ability to achieve benefits from any tax basis increase will depend upon a number of factors, as discussed below, including the timing and amount of our future income.
We will beare required to pay over to existinglegacy direct or indirect members of HLA most of the tax benefits we receive from tax basis step-ups attributable to our acquisition of membership units of HLA, in the future and the amount of those payments could be substantial.
We haveAs part of our Reorganization, we entered into a tax receivable agreement for the benefit of the direct and indirect members of HLA other than us, pursuant to which we will pay them 85% of the amount of the tax savings, if any, that we realize (or, under certain circumstances, are deemed to realize) as a result of increases in tax basis (and certain other tax benefits) resulting from our acquisition of membership units or as a result of certain items of loss being specially allocated to us for tax purposes in connection
with dispositions by HLA of certain investment assets. HLI will retain the benefit of the remaining 15% of these tax savings.
The term of the tax receivable agreement commenced upon the completion of our IPO and will continue until all tax benefits that are subject to the tax receivable agreement have been utilized or have expired, unless we exercise our right to terminate the tax receivable agreement (or the tax receivable agreement is terminated due to a change of control or our breach of a material obligation thereunder), in which case, we will be required to make the termination payment specified in the tax receivable agreement. In addition, payments we make under the tax receivable agreement will be increased by any interest accrued from the due date (without extensions) of the corresponding tax return.
The actual increase in tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending on a number of factors, including, but not limited to, the price of our Class A common stock at the time of the purchase or exchange, the timing of any future exchanges, the extent to which exchanges are taxable, the amount and timing of our income and the tax rates then applicable. We expect that, as a result of the increases in the tax basis of the tangible and intangible assets
of HLA attributable to the exchanged HLA interests, the payments that we may make to the existinglegacy direct or indirect members of HLA could be substantial. There may be a material negative effect on our liquidity if, as described below, the payments under the tax receivable agreement exceed the actual benefits we receive in respect of the tax attributes subject to the tax receivable agreement and/or distributions to us by HLA are not sufficient to permit us to make payments under the tax receivable agreement.
In certain circumstances, payments under the tax receivable agreement may be accelerated and/or significantly exceed the actual tax benefits we realize.
The tax receivable agreement provides that if we exercise our right to early termination of the tax receivable agreement, in whole or in part, we experience a change in control, or we materially breach our obligations under the tax receivable agreement, we will be obligated to make an early termination payment to the existinglegacy direct or indirect members of HLA equal to the net present value of all payments that would be required to be paid by us under the tax receivable agreement. The amount of such payments will be determined on the basis of certain assumptions in the tax receivable agreement, including (i) the assumption (except in the case of a partial termination) that we would have enough taxable income in the future to fully utilize the tax benefit resulting from any increased tax basis that results from an exchange and (ii) the assumption that any units (other than those held by Hamilton Lane Incorporated) outstanding on the termination date are deemed to be exchanged for shares of Class A common stock on the termination date. Any early termination payment may be made significantly in advance of the actual realization, if any, of the future tax benefits to which the termination payment relates.
Moreover, as a result of an elective early termination, a change of control or our material breach of our obligations under the tax receivable agreement, we could be required to make payments under the tax receivable agreement that exceed our actual cash savings under the tax receivable agreement. Thus, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, or other forms of business combinations or changes of control. There can be no assurance that we will be able to finance any such early termination payment. It is also possible that the actual benefits ultimately realized by us may be significantly less than were projected in the computation of the early termination payment.
We will not be reimbursed for any payments previously made under the tax receivable agreement if the basis increases described above are successfully challenged by the IRS or another taxing authority. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of our ultimate cash tax savings.
In certain circumstances, HLA will beis required to make distributions to us and the direct and indirect owners of HLA, and the distributions that HLA will be required to make may be substantial.
HLA is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to U.S. federal income tax. Instead, taxable income will beis allocated to members, including us. Pursuant to the HLA Operating Agreement, HLA will makemakes pro rata cash distributions, or tax distributions, to the members, including us, calculated using an assumed tax rate, to help each of the members to pay taxes on such member’s allocable share of the cumulative taxable income, reduced by cumulative taxable losses. Under applicable tax rules, HLA is required to allocate net taxable income disproportionately to its members in certain circumstances. Because tax distributions will beare determined based on the member who is allocated the largest amount of taxable income on a per unit basis and on an assumed tax rate that is the highest possible rate applicable to any member, but will beare made pro rata based on ownership, HLA will beis required to make tax distributions that, in the aggregate, will likely exceed the amount of taxes that HLA would have paid if it were taxed on its net income at the assumed rate. The pro rata distribution amounts will also be increased if and to the extent necessary if any, to ensure that the amount distributed to HLI
is sufficient to enable HLI to pay its actual tax liabilities and its other expenses and costs (including amounts payable under the tax receivable agreement).
Funds used by HLA to satisfy its tax distribution obligations willare not be available for reinvestment in our business. Moreover, the tax distributions HLA will beis required to make may be substantial, and may exceed (as a percentage of HLA’s income) the overall effective tax rate applicable to a similarly situated corporate taxpayer. In addition, because these payments will beare calculated with reference to an assumed tax rate, and because of the disproportionate allocation of net taxable income, these payments will likely significantly exceed the actual tax liability for many of the existinglegacy owners of HLA.
As a result of (i) potential differences in the amount of net taxable income allocable to us and to the direct and indirect owners of HLA, as well as(ii) the lower tax rate applicable to corporations than individuals and (iii) the use of an assumed tax rate in calculating HLA’s distribution obligations, we may receive distributions significantly in excess of our tax liabilities and obligations to make payments under the tax receivable agreement. If we do not distribute such cash balances as dividends on our Class A common stock and instead, for example, hold such cash balances or lend them to HLA, the existing owners of HLA would benefit from any value attributable to such accumulated cash balances as a result of their ownershipright to acquire shares of Class A common stock followingor, at our election, an amount of cash equal to the fair market value thereof, in exchange offor their Class B units or Class C units.
If Hamilton Lane Incorporated were deemed an “investment company” under the Investment Company Act as a result of its ownership of HLA, applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
An issuer will generally be deemed to be an “investment company” for purposes of the Investment Company Act if:
•it is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or
•absent an applicable exemption, it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.
We believe that we are engaged primarily in the business of providing asset management services and not in the business of investing, reinvesting or trading in securities. We also believe that the primary source of income from each of our businesses is properly characterized as income earned in exchange for the provision of services. We hold ourselves out as an asset management firm and do not propose to engage primarily in the business of investing, reinvesting or trading in securities. Accordingly, we do not believe that either Hamilton Lane Incorporated or HLA is an “orthodox” investment company as defined in section 3(a)(1)(A) of the Investment Company Act and described in the first bullet point above. HLA
does not have significant assets other than its equity interests in certain wholly owned subsidiaries, which in turn will have no significant assets other than general partner interests in the specialized funds we sponsor. These wholly owned subsidiaries will beare the sole general partners of the funds and will beare vested with all management and control over the funds. We do not believe the equity interests of HLA in its wholly owned subsidiaries or the general partner interests of these wholly owned subsidiaries in the funds are investment securities. Hamilton Lane Incorporated’s unconsolidated assets will consist primarily of cash, a deferred tax asset and Class A units of HLA, which represent the managing member interest in HLA. Hamilton Lane Incorporated is the sole managing member of HLA and holds an approximately 34.4%55.1% economic interest in HLA. As managing member, Hamilton Lane Incorporated will exerciseexercises complete control over HLA. As such, we do not believe Hamilton Lane Incorporated’s managing member interest in HLA is an investment security. Therefore, we believe that less than 40% of Hamilton Lane
Incorporated’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis comprise assets that could be considered investment securities. Accordingly, we do not believe Hamilton Lane Incorporated is an inadvertent investment company by virtue of the 40% test in section 3(a)(1)(C) of the Investment Company Act as described in the second bullet point above. In addition, we believe Hamilton Lane Incorporated is not an investment company under section 3(b)(1) of the Investment Company Act because it is primarily engaged in a non-investment company business.
The Investment Company Act and the rules thereunder contain detailed parameters for the organization and operations of investment companies. Among other things, the Investment Company Act and the rules thereunder limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities, prohibit the issuance of stock options, and impose certain governance requirements. We intend to continue to conduct our operations so that Hamilton Lane Incorporated will not be deemed to be an investment company under the Investment Company Act. However, if anything were to happen that would cause Hamilton Lane Incorporated to be deemed to be an investment company under the Investment Company Act, requirements imposed by the Investment Company Act, including limitations on our capital structure, ability to transact business with affiliates (including us)HLA) and ability to compensate key employees, could make it impractical for us to continue our business as currently conducted, impair the agreements and arrangements between and among HLA, us or our senior management team, or any combination thereof and materially and adversely affect our business, financial condition and results of operations.
A change of control of our Company, including the occurrence of a “Sunset,” could result in an assignment of our investment advisory agreements.
Under the Investment Advisers Act, each of the investment advisory agreements for the funds and other accounts we manage must provide that it may not be assigned without the consent of the particular fund or other client. An assignment may occur under the Investment Advisers Act if, among other things, HLA undergoes a change of control. After a “Sunset” becomes effective (as described in “Organizational Structure—Voting Rights of Class A and Class B Common Stock”Stock—Voting Rights”), the Class B Common Stock will have one vote per share instead of ten votes per share, and the Stockholders Agreementstockholders agreement will expire, meaning that the Class B Holders party thereto will no longer control the appointment of directors or be able to direct the vote on all matters that are submitted to our stockholders for a vote. These events could be deemed a change of control of HLA, and thus an assignment. If such an assignment occurs, we cannot be certain that HLA will be able to obtain the necessary consents from our funds and other clients, which could cause us to lose the management fees and performance fees we earn from such funds and other clients.
Because members of our senior management team hold most of their economic interest in HLA through other entities, conflicts of interest may arise between them and holders of shares of our Class A common stock or us.
MembersBecause members of our senior management team beneficially own approximately 52%hold most of the outstanding units in HLA. Because they hold their economic interest in HLA directly through existing holding companies rather than through ownership of shares of our Class A common stock, the members of our senior management teamthey may have interests that do not align with, or conflict with, those of the holders of Class A common stock or with us. For example, members of our senior management team will have different tax
positions from Class A common stockholders, which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness, and whether and when we should terminate the tax receivable agreement and accelerate the obligations thereunder. In addition, the structuring of future transactions and investments may take into consideration the members’ tax considerations even where no similar benefit would accrue to us.
There may not be an active trading market for shares of our Class A common stock.
Prior to our IPO, there was no public trading market for shares of our Class A common stock. It is possible that an active trading market will not continue, which would make it difficult for you to sell your shares of Class A common stock at an attractive price or at all.
The disparity in the voting rights among the classes of our common stock and inability of the holders of our Class A common stock to influence decisions submitted to a vote of our stockholders may have an adverse effect on the price of our Class A common stock.
Holders of our Class A common stock and Class B common stock will vote together as a single class on almost all matters submitted to a vote of our stockholders. Shares of our Class A common stock and Class B common stock entitle the respective holders to identical non-economic rights, except that each share of our Class A common stock will entitleentitles its holder to one vote on all matters to be voted on by stockholders generally, while each share of our Class B common stock will entitleentitles its holder to ten votes until a Sunset becomes effective. See “Organizational Structure—Class A and Class B Common Stock.” After a Sunset becomes effective, each share of our Class B common stock will entitle its holder to one vote. Certain of the holders of our Class B common stock who are significant outside investors, members of management and significant employee owners have agreed to vote all of their shares in accordance with the instructions of HLA Investments, LLC (“HLAI”), and will therefore be able to exercise control over all matters requiring theour stockholders’ approval, of our stockholders, including the election of our directors, and the approval ofas well as any significant corporate transactions. See “Stockholders Agreement” in Part III, Item 13. The difference in voting rights could adversely affect the value of our Class A common stock to the extent that investors view, or any potential future purchaser of our Company views, the superior voting rights and implicit control of the Class B common stock to have value.
The historical financial information in this Form 10-K may not permit you to assess our future performance, including our costs of operations.
The historical financial information in this Form 10-K does not reflect the added costs we expect to incur as a public company or the resulting changes that will occur in our capital structure and operations. For more information on our historical financial information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and the historical consolidated financial statements in Part II, Item 8 of this Form 10-K.
We are an emerging growth company, and reduced reporting and disclosure requirements applicable to emerging growth companies could make our Class A common stock less attractive to investors.
We are an emerging growth company and, for as long as we continue to be an emerging growth company, we may choose to continue to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years following the completion of our IPO. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of our IPO, (ii) the first fiscal year after our annual gross revenues are $1.07 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt
securities or (iv) the end of any fiscal year in which the market value of our Class A common stock held by non-affiliates is at least $700 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will find our Class A common stock less attractive if we choose to rely on these exemptions. If some investors find our Class A common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our Class A common stock, and the price of our Class A common stock may be more volatile.
Our share price may decline due to the large number of shares eligible for future sale and for exchange.
The market price of our Class A common stock could decline as a result of sales of a large number of shares of Class A common stock in the market or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. We have outstanding 19,266,421 shares of Class A common stock, of which only a portion are presently freely tradable. Shares of Class A common stock that were issued in the Reorganization to the Directoriginal members of HLA who became HLI Stockholdersstockholders owning our Class A common stock are “restricted securities”, and their resale is subject to future registration or reliance on an exemption from registration.
We have agreed with the underwriters not to dispose of or hedge any of our common stock, subject to specified exceptions, for a 180 lock-up period beginning on February 28, 2017, the date our IPO registration statement became effective, except with the prior written consent of J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC. Subject to this agreement, we may issue and sell additional shares of Class A common stock in the future.
Our directors and executive officers, certain of their affiliates, and certain of our stockholders have agreed with the underwriters not to dispose of or hedge any of our common stock, subject to specified exceptions, for that same 180-day period, except with the prior written consent of J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC. After the expiration of the 180-day lock-up period, theThe approximately 34.424 million shares of Class A common stock issuable upon exchange of the Class B units and Class C units that are held by Class B Holders and Class C Holders respectively, will be eligible for resale from time to time, subject to certain contractual, exchange timing and volume and Securities Act restrictions.
We have entered into a registration rights agreement with certain Class B Holders who are significant outside investors, members of management and significant employee owners. Under that agreement, after the expiration of the 180-day lock-up period, subject to certain limitations, thesethose persons will have the ability to cause us to register the resale of shares of our Class A common stock that they acquire upon exchange of their Class B units and Class C units in HLA. Registration of these shares would result in them becoming freely tradable in the open market unless restrictions apply.
We mayexpect to continue to pay dividends to our stockholders, but our ability to do so is subject to the discretion of our board of directors and may be limited by our holding company structure and applicable provisions of Delaware and Pennsylvania law.
We maySince our IPO, our board of directors has declared regular quarterly dividends on our Class A common stock. Although we expect to continue to pay cash dividends to our stockholders. Ourstockholders, our board of directors may, in its discretion, increase or decrease the level of dividends or discontinue the payment of dividends entirely. In addition, as a holding company, we will beare dependent upon the ability of HLA to
generate earnings and cash flows and distribute them to us so that we may pay our obligations and expenses (including our taxes and payments under the tax receivable agreement) and pay dividends to our stockholders. We expect to cause HLA to make distributions to its members, including us. However, the ability of HLA to make such distributions will be subject to its operating results, cash requirements and financial condition, restrictive covenants in the Loan Agreements and applicable Pennsylvania law (which may limit the amount of funds available for distribution to its members). Our ability to declare and pay dividends to our stockholders is likewise subject to Delaware law (which may
limit the amount of funds available for dividends). If, as a consequence of these various limitations and restrictions, we are unable to generate sufficient distributions from our business, we may not be able to make, or may be required to reduce or eliminate, the payment of dividends on our Class A common stock.
The market price of our Class A common stock may be volatile, which could cause the value of your investment to decline.
Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our Class A common stock in spite of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors, and in response, the market price of our Class A common stock could decrease significantly. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could harm our business.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace or remove our current management and may negatively affect the market price of our Class A common stock.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our certificate of incorporation and bylaws include provisions that:
•provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum;
•establish that our board of directors is divided into three classes, with each class serving three-year staggered terms;
• require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent, except that action by written consent will be allowed for as long as we are a controlled company;
•specify that special meetings of our stockholders can be called only by our board of directors or the chairman of our board of directors;
•establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;
•authorize our board of directors to issue, without further action by the stockholders, up to 10,000,000 shares of undesignated preferred stock; and
• reflect two classes of common stock, as discussed above.
These and other provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. Also, the tax receivable agreement provides that, in the event of a change of control, we will be required to make a
payment equal to the present value of estimated future payments under the tax receivable agreement, which would result in a significant payment becoming due in the event of a change of control. In addition,
we are a Delaware corporation and governed by the Delaware General Corporation Law (the “DGCL”). Section 203 of the DGCL generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder, in particular those owning 15% or more of our outstanding voting stock, for a period of three years following the date on which the stockholder became an “interested” stockholder. While we have elected in our certificate of incorporation not to be subject to Section 203 of the DGCL, our certificate of incorporation contains provisions that have the same effect as Section 203 of the DGCL, except that they provide that HLAI, its affiliates, groups that include HLAI and certain of their direct and indirect transferees will not be deemed to be “interested stockholders,” regardless of the percentage of our voting stock owned by them, and accordingly will not be subject to such restrictions.
Securities analyst coverage or lackThe provision of coverageour certificate of incorporation requiring exclusive venue in the Court of Chancery in the State of Delaware for certain types of lawsuits may have a negativethe effect of discouraging lawsuits against our directors and officers.
Our certificate of incorporation requires, to the fullest extent permitted by law, that (1) any derivative action or proceeding brought on our Class A common stock’s market price.
The trading market forbehalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our common stock will depend, in part, on the research and reports that securitiescurrent or industry analysts publish aboutformer directors, officers or stockholders to us or our business. We do not havestockholders, (3) any control over these analysts. If securitiesaction asserting a claim arising pursuant to any provision of the DGCL or industry analysts stop their coverageour certificate of usincorporation or additional securities and industry analysts failbylaws, (4) any action to cover usinterpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws or (5) any action asserting a claim governed by the internal affairs doctrine may be brought only in the future, the trading price for our Class A common stock would be negatively impacted. If any analyst or analysts who cover us downgrade our Class A common stock, changes their opinionCourt of us or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If any analyst or analysts cease coverage of us or fail to publish reports on us regularly, demand for our Class A common stock could decrease, and we could lose visibilityChancery in the financial markets,State of Delaware. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which could causeit applies, the provision may have the effect of discouraging lawsuits against our stock pricedirectors and trading volume to decline.officers.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties
We lease our corporate headquarters and principal offices, which are located at One Presidential Boulevard, Bala Cynwyd, Pennsylvania 19004. We also lease additional office space in Bala Cynwyd, Pennsylvania, as well as Hong Kong, London, Miami, Munich, New York, Portland (Oregon), Rio de Janeiro, San Diego, San Francisco, Seoul, Sydney, Herzliya, Israel (a suburb of Tel Aviv), Tokyo and Tokyo.Toronto. We plan to move operations from both Bala Cynwyd offices to our new corporate headquarters in Conshohocken, Pennsylvania in late fiscal 2021, assuming no material delays in construction of the new space. We entered a lease agreement for the space in October 2019. We do not own any real property. We believe our current facilities are adequate for our current needs and that suitable additional space will be available as and when needed.
Item 3. Legal Proceedings
In the normalordinary course of business, we may be subject to various legal, judicial andregulatory and/or administrative proceedings. Currently,proceedings from time to time. Although there arecan be no materialassurance of the outcome of such proceedings, our management does not believe it is probable that any pending or, to our knowledge, threatened against us.legal proceeding or claim would individually or in the aggregate materially affect our consolidated financial statements.
Item 4: Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrants’Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Shares of our Class A common stock began trading on the NASDAQNasdaq Global Select Market under the symbol “HLNE” on March 1, 2017. Prior to that date, there was no public trading market for shares of our Class A common stock.
The table below shows the highest and lowest prices paid per share for our Class A common stock in the period since our IPO.
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| | | | | | | | |
| | Highest | | Lowest |
Fiscal 2017 | | | | |
Fourth quarter (from March 1) | | $ | 19.66 |
| | $ | 17.74 |
|
There is no established public trading market for our Class B common stock. Class B common stock may not be transferred independently of the corresponding Class B units, which are subject to significant restrictions on transfer as set forth in the HLA Operating Agreement. Holders of Class B common stock are entitled to receive only the par value ($0.001) of the Class B common stock upon exchange of the corresponding Class B unit pursuant to the exchange agreement.
Holders of Record
As of June 19, 2017,May 26, 2020, there were 314seven stockholders of record of our Class A common stock. The number of record holders does not include persons who held shares of our Class A common stock in nominee or “street name” accounts through brokers. As of June 19, 2017,May 26, 2020, there were 3735 stockholders of record of our Class B common stock.
Dividend Policy
We declared a quarterly dividend of $0.275 per share of Class A common stock to record holders in each quarter of fiscal 2020. On May 28, 2020, we declared a quarterly dividend of $0.3125 per share of Class A common stock to record holders at the close of business on June 15, 2020. The payment date will be July 7, 2020. We do not pay dividends on our Class B common stock.
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. Our board intends to cause us to continue to pay a comparable cash dividend on a quarterly basis. Subject to funds being legally available, we willintend to 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.expenses, including dividend payments to our stockholders.
Stock Performance Graph
The following graph and table depict the total return to stockholders from the closing price on March 1, 2017 (the date our Class A common stock began trading on the NASDAQ Stock Market)Nasdaq) through March 31, 2017,2020, relative to the performance of the S&P 500 Index and the Dow Jones U.S. Asset Managers Index. The graph and table assume $100 invested on March 1, 2017.2017, and dividends reinvested in the security or index.
The performance graph and table are not intended to be indicative of future performance. The performance graph and table shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of the Company’s filings under the Securities Act or the Exchange Act.
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| | | | | | | | |
| | 3/1/2017 | | 3/31/17 |
Hamilton Lane Incorporated | | $ | 100.00 |
| | $ | 103.61 |
|
S&P 500 | | 100.00 |
| | 98.75 |
|
Dow Jones US Asset Managers Index | | 100.00 |
| | 96.85 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 3/1/17 | | 3/31/17 | | 3/31/18 | | 3/31/19 | | 3/31/20 |
Hamilton Lane Incorporated | | $ | 100.00 | | | $ | 103.61 | | | $ | 211.93 | | | $ | 253.14 | | | $ | 327.52 | |
S&P 500 | | 100.00 | | | 98.75 | | | 112.54 | | | 123.22 | | | 114.62 | |
Dow Jones US Asset Managers Index | | 100.00 | | | 96.85 | | | 120.71 | | | 101.29 | | | 86.49 | |
Use of Proceeds
On February 28, 2017, our Registration Statement on Form S-1 (File No. 333-215846), as amended, was declared effective by the SEC for our IPO pursuant to which we registered and sold an aggregate of 13,656,250 shares of our Class A common stock (including 1,781,250 shares sold pursuant to the underwriters’ over-allotment option) at a price of $16.00 per share. J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC acted as joint book-running managers in the offering. Goldman, Sachs & Co. acted as lead co-manager and Keefe, Bruyette & Woods, Inc., Wells Fargo Securities, LLC and Freeman & Co. Securities LLC acted as co-managers in the offering. The offering commenced on February 28, 2017 and terminated after sale of all of the securities registered on the registration statement. The offering closed on March 6, 2017, resulting in net proceeds of $203.2 million after deducting underwriters’ discounts and commissions of $15.3 million.
The use of proceeds was consistent with the final prospectus filed on March 1, 2017:
We used approximately $37.2 million of the net proceeds to purchase membership units in HLA from certain of its then-existing members, at a per-unit price equal to the IPO price per share of our Class A common stock. Accordingly, we did not retain any of those proceeds. Certain of these owners are or were affiliates of our directors, officers or persons owning 10% or more of our Class A common stock.
We used approximately $166.0 million of the net proceeds from our IPO to purchase newly issued membership units in HLA at a per-unit price equal to the IPO price per share of our Class A common stock. As sole managing member of HLA, we caused HLA to use approximately $160.0 million of these proceeds to repay principal under the Term Loan and approximately $6.0 million to pay the expenses incurred in connection with our IPO and the Reorganization and for general corporate purposes.
Issuer Purchases of Equity Securities
The following table provides information about our share repurchase activity for the quarter ended March 31, 2017:2020:
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| | | | | | | | | | | |
Period | | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
January 1-31, 2017 | | — | | $ | — |
| | — | | — |
February 1-28, 2017 | | — | | $ | — |
| | — | | — |
March 1-31, 2017 | | 114,529 |
| | $ | 18.79 |
| | — | | — |
Total | | 114,529 |
| | $ | 18.79 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2) |
January 1-31, 2020 | | — | | | $ | — | | | | — | | | $ | 50,000,000 | |
February 1-29, 2020 | | — | | | $ | — | | | | — | | | $ | 50,000,000 | |
March 1-31, 2020 | | 100,174 | | | | $ | 58.26 | | | | — | | | $ | 50,000,000 | |
Total | | 100,174 | | | $ | 58.26 | | | | | |
(1) IncludesRepresents shares of Class A common stock tendered by employees as payment of taxes withheld on the vesting of restricted stock granted under the Company’sHamilton Lane Incorporated 2017 Equity Incentive Plan.Plan, as amended (the “2017 Equity Plan”).
(2) On November 6, 2018, we announced that our board of directors authorized a program to repurchase, in the aggregate, up to 6% of the outstanding shares of our Class A common stock as of the date of the authorization, not to exceed $50 million (the “Stock Repurchase Program”). The authorization provides us the flexibility to repurchase shares in the open market or in privately negotiated transactions from time to time, based on market conditions and other factors. We have not repurchased any of our Class A common stock under the Stock Repurchase Program, so the full purchase authority remains available under this program, which expires 12 months after the date of the first acquisition under the authorization.
Item 6. Selected Financial Data
The following selected consolidated income statement data for the years ended March 31, 2017, 2016,2020, 2019, and 20152018 and the selected consolidated balance sheet data as of March 31, 20172020 and 20162019 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K. The following selected consolidated income statement data for the years ended March 31, 20142017 and 2013,2016, and the selected consolidated balance sheet data as of March 31, 2015, 20142018, 2017 and 20132016 are derived from our audited consolidated financial statements not included in this Form 10-K. This information should be read in conjunction with, and is qualified by reference to, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and the consolidated financial statements and notes thereto in Part II, Item 8 of this Form 10-K. The data presented below for periods before our IPO does not reflect the added costs we incur as a public company. Our historical results are not necessarily indicative of the results to be expected in the future.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended March 31, | | | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Income Statement Data | | | (in thousands, except per share amounts) | | | | | | |
Revenues | | | | | | | | | |
Management and advisory fees | $ | 244,920 | | | $ | 217,773 | | | $ | 195,030 | | | $ | 172,674 | | | $ | 157,630 | |
Incentive fees | 29,128 | | | 34,406 | | | 49,003 | | | 7,146 | | | 23,167 | |
Total revenues | 274,048 | | | 252,179 | | | 244,033 | | | 179,820 | | | 180,797 | |
Total expenses | 157,619 | | | 147,955 | | | 121,080 | | | 103,705 | | | 118,963 | |
Total other income (expense) | 24,315 | | | 25,333 | | | 16,677 | | | (1,361) | | | (5,113) | |
Income before income taxes | 140,744 | | | 129,557 | | | 139,630 | | | 74,754 | | | 56,721 | |
Income tax expense | 13,968 | | | 30,560 | | | 33,333 | | | 316 | | | 869 | |
Net income | 126,776 | | | 98,997 | | | 106,297 | | | 74,438 | | | 55,852 | |
Less: Income attributable to non-controlling interests | 65,951 | | | 65,424 | | | 88,956 | | | 73,826 | | | 55,852 | |
Net income attributable to Hamilton Lane Incorporated | $ | 60,825 | | | $ | 33,573 | | | $ | 17,341 | | | $ | 612 | | | $ | — | |
Earnings per share of Class A common stock: | | | | | | | | | |
Basic | $ | 2.17 | | | $ | 1.41 | | | $ | 0.94 | | | $ | 0.03 | | (1) | |
Diluted | $ | 2.15 | | | $ | 1.40 | | | $ | 0.93 | | | $ | 0.03 | | (1) | |
Dividends declared per share of Class A common stock | $ | 1.10 | | | $ | 0.85 | | | $ | 0.70 | | | $ | — | | | |
Non-GAAP Financial Measures | | | | | | | | | |
Fee Related Earnings(2) | 100,978 | | | 89,901 | | | 81,223 | | | 72,252 | | | 70,381 | |
Adjusted EBITDA(2) | 127,292 | | | 117,736 | | | 132,586 | | | 83,031 | | | 67,785 | |
Other Data | | | | | | | | | |
Compensation expense on deferred incentive fee revenue(3) | — | | | — | | | — | | | — | | | 20,348 | |
Balance Sheet Data | | | | | | | | | |
Cash and cash equivalents | $ | 50,124 | | | $ | 49,357 | | | $ | 47,596 | | | $ | 32,286 | | | $ | 68,584 | |
Investments | 207,747 | | | 154,491 | | | 137,253 | | | 120,147 | | | 102,749 | |
Total assets | 473,529 | | | 360,591 | | | 293,795 | | | 240,617 | | | 196,636 | |
| | | | | | | | | |
Deferred incentive fee revenue | 3,704 | | | 3,704 | | | 6,245 | | | 45,166 | | | 45,166 | |
Debt | 74,524 | | | 70,954 | | | 84,162 | | | 84,310 | | | 243,317 | |
Total liabilities | 236,128 | | | 190,869 | | | 157,721 | | | 153,990 | | | 308,574 | |
| | | | | | | | | |
Total equity (deficit) | 237,401 | | | 169,722 | | | 136,074 | | | 86,627 | | | (111,938) | |
Total liabilities and equity | 473,529 | | | 360,591 | | | 293,795 | | | 240,617 | | | 196,636 | |
(1) Represents earnings per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the period from March 6, 2017 through March 31, 2017, the period following the Reorganization and IPO.
(2) Adjusted EBITDA and Fee Related Earnings (“FRE”) are non-GAAP measures. For a further discussion of our non-GAAP measures and a reconciliation from GAAP financial measures to non-GAAP financial measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” included in Part II, Item 7 of this Form 10-K.
(3) In accordance with our accounting policy with respect to the recognition of incentive fee income, we did not recognize $41.5 million in carried interest distributions received from specialized funds in fiscal 2016, as all contingencies had not been resolved. However, incentive fee compensation expense of $20.3 million related to the receipt of this carried interest was recognized in fiscal 2016. We reduced the deferred incentive fee revenue balance in fiscal 2018 by $38.9 million from the recognition of the deferred carried interest in that period.
The $20.3 million is separately presented above to highlight the incentive fee compensation expense for which we did not recognize the associated incentive fee revenue. The compensation expense on deferred incentive fee revenue comprises $9.9 million of bonus and other revenue sharing allocations classified as base compensation and $10.4 million of incentive fee compensation. We incurred additional incentive fee compensation expense of $11.4 million in fiscal 2016 associated with incentive fee revenue that is not reflected in this figure.
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Income Statement Data | (in thousands, except per share amounts) |
Revenues | | | | | | | | | |
Management and advisory fees | $ | 172,674 |
| | $ | 157,630 |
| | $ | 145,876 |
| | $ | 130,455 |
| | $ | 112,982 |
|
Incentive fees | 7,146 |
| | 23,167 |
| | 9,509 |
| | 9,309 |
| | 6,179 |
|
Total revenues | 179,820 |
| | 180,797 |
| | 155,385 |
| | 139,764 |
| | 119,161 |
|
Total expenses | 103,705 |
| | 118,963 |
| | 87,022 |
| | 80,710 |
| | 68,999 |
|
Total other income (expense) | (1,361 | ) | | (5,113 | ) | | 3,622 |
| | 7,845 |
| | 848 |
|
Income before income taxes | 74,754 |
| | 56,721 |
| | 71,985 |
| | 66,899 |
| | 51,010 |
|
Income tax expense (benefit) | 316 |
| | 869 |
| | 483 |
| | (128 | ) | | (827 | ) |
Net income | 74,438 |
| | 55,852 |
| | 71,502 |
| | 67,027 |
| | 51,837 |
|
Less: Income attributable to non-controlling interests | 73,826 |
| | 55,852 |
| | 71,502 |
| | 67,027 |
| | 51,837 |
|
Net income attributable to Hamilton Lane Incorporated | $ | 612 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Earnings per share of Class A common stock(1): | | | | | | | | | |
Basic | $ | 0.03 |
| | | | | | | | |
Diluted | $ | 0.03 |
| | | | | | | | |
Non-GAAP Financial Measures | | | | | | | | | |
Fee Related Earnings(2) | 72,252 |
| | 70,381 |
| | 63,396 |
| | 54,256 |
| | 46,837 |
|
Adjusted EBITDA(2) | 83,031 |
| | 67,785 |
| | 73,707 |
| | 64,119 |
| | 55,335 |
|
Other Data | | | | | | | | | |
Compensation expense on deferred incentive fee revenue(3) | — |
| | 20,348 |
| | — |
| | — |
| | — |
|
Balance Sheet Data | | | | | | | | | |
Cash and cash equivalents | $ | 32,286 |
| | $ | 68,584 |
| | $ | 67,089 |
| | $ | 75,818 |
| | $ | 57,416 |
|
Investments | 120,147 |
| | 102,749 |
| | 103,360 |
| | 92,123 |
| | 77,861 |
|
Total assets | 240,617 |
| | 196,636 |
| | 201,500 |
| | 195,231 |
| | 170,893 |
|
| | | | | | | | | |
Deferred incentive fee revenue | 45,166 |
| | 45,166 |
| | 1,960 |
| | — |
| | — |
|
Senior secured term loan payable, net | 84,310 |
| | 243,317 |
| | 107,719 |
| | 122,426 |
| | 147,514 |
|
Total liabilities | 153,990 |
| | 308,574 |
| | 127,810 |
| | 138,119 |
| | 159,952 |
|
| | | | | | | | | |
Total equity (deficit) | 86,627 |
| | (111,938 | ) | | 73,690 |
| | 57,112 |
| | 10,941 |
|
Total liabilities and equity | 240,617 |
| | 196,636 |
| | 201,500 |
| | 195,231 |
| | 170,893 |
|
| |
(1) | Represents earnings per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the period from March 6, 2017 through March 31, 2017, the period following the Reorganization and IPO. |
| |
(2) | Adjusted EBITDA and Fee Related Earnings (“FRE”) are non-GAAP measures. For a further discussion of our non-GAAP measures and a reconciliation from GAAP financial measures to non-GAAP financial measures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures” included in Part II, Item 7 of this Form 10-K. |
| |
(3) | In accordance with our accounting policy with respect to the recognition of incentive fee income, we did not recognize $41.5 million in carried interest distributions received from specialized funds in fiscal 2016, as all contingencies had not been resolved. However, incentive fee compensation expense of $20.3 million related to the receipt of this carried interest was recognized in fiscal 2016 as we believe it is probable that we will incur the expenses. The $20.3 million is separately presented above to highlight the incentive fee compensation expense for which we did not recognize the associated incentive fee revenue. The compensation expense on deferred incentive fee revenue comprises $9.9 million of bonus and other revenue sharing allocations classified as base compensation and $10.4 million of incentive fee compensation. If none of the associated incentive fee revenue is recognized in a future period and we determine that its recognition is no longer probable, we will reverse the $20.3 million of previously recognized compensation expense through a clawback and a reduction in bonus payments. We incurred additional incentive fee compensation expense of $11.4 million in fiscal 2016 associated with incentive fee revenue that is not reflected in this figure. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with our selected combined financial and operating data and the accompanying consolidated financial statements and related notes. See “Index to Consolidated Financial Statements of Hamilton Lane Incorporated.” The historical consolidated financial data discussed below reflect the historical results of operations and financial position of HLA prior to our IPO in February 2017. The consolidated financial statements of HLA, our predecessor for accounting purposes, are our historical financial statements for this Form 10-K.
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” and the “Cautionary Note Regarding Forward-Looking Information.” Unless otherwise indicated, references in this Annual Report on Form 10-K to fiscal 2017,2020, fiscal 20162019 and fiscal 20152018 are to our fiscal years ended March 31, 2017, 20162020, 2019 and 2015,2018, respectively.
Business Overview
We are a global private markets investment solutions provider. 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 and venture capital. These solutions are constructed from a range of investment types, including primary investments in funds managed by third-party managers, direct/co-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 $33$54 billion of our AUM as of March 31, 2017.
2020.•Specialized Funds: We organize, invest and manage specialized primary, secondary and direct/co-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, and our product offerings have grown steadily, comprising approximately $9$15 billion of our AUM as of March 31, 2017.
2020.•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 $300$434 billion of AUA as of March 31, 2017.
2020.•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 from private equity funds.
•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 occasionally on a stand-alone, fee-for-service basis. Private markets investments are unusually difficult to monitor, report on and administer, and our clients are able to benefit from our sophisticated infrastructure, which provides clients with real time access to reliable and transparent investment data, and our high-touch service approach, which allows for timely and informed responses to the multiplicity of issues that can arise. We also provide comprehensive research and analytical services as part of our investment solutions, leveraging our large, global, proprietary and high-quality database of private markets investment performance and our suite of proprietary analytical investment tools.
Our client base primarily comprises institutional investors that range from those seeking to make an initial investment in alternative assets to some of the largest and most sophisticated private markets investors. As a highly customized, flexible outsourcing partner, 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, Europe, the Middle East, Asia, Australia and Latin America. 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 Europe and Asia. As interest rates remain near historic lows and public equities are not able to meet expected returns, we see increasing investor demand for alternative investments to achieve higher yields. 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.
•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 co-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.
Impact of Covid-19
Recent Transactions
OnIn March 6, 2017,2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) a global pandemic, which continues to spread and 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. Our fiscal 2020 financial results have not been materially impacted by the COVID-19 pandemic based upon the timing of the outbreak, but our results could be adversely affected in the future if conditions do not improve.See “Risk Factors—Risks Related to Our Industry—The COVID-19 pandemic has caused severe disruptions in the U.S. and global economies and may adversely impact our financial condition and results of operations”. As of March 31, 2020, we completed an IPO pursuant to which we sold an aggregate of 13,656,250 shares of Class A common stock at a public offering price of $16.00 per share, receiving $203.2have adequate liquidity with $50.1 million in net proceeds. We used $37.2available cash and $125 million in availability under our Loan Agreements.
Given the amount of uncertainty currently regarding the scope and duration of the net proceeds from our IPOCOVID-19 pandemic, it is currently not possible to purchase membership units in HLA from certain of its existing owners. We used $160.0 million ofpredict the net proceeds from the IPO to repay principalprecise impact it will have on our existing senior secured Term Loan (as definedbusiness, but it could result in “—Liquidity and Capital Resources—Historical Liquidity and Capital Resources—Term Loan”) and the remaining $6.0 million for IPO transaction expenses and general corporate purposes.
In connection with the IPO, we completed a series of reorganization transactions that included the following:
•Investment valuations may be adversely impacted due to the limited liability company operating agreementdisruption in global economic markets either because of HLA was amendedvaluation methodologies that rely on public market comparables or as a result of decreases in current or future estimated performance of underlying portfolio companies. Our underlying investments reflect valuations as of December 31, 2019 and, restated to, among other things, (i) effect a reverse split of existing membership interests; (ii) exchange all oftherefore, we expect our valuation adjustments will be adversely impacted in line with public markets and credit indices in the then-existing membership interests of the members of HLA for Class Bnext quarter based on March 31, 2020 valuations. The adverse investment valuations would also directly impact our investments, unrealized carried interest, AUM and Class C units, (iii) reclassify all membership interests held by us as Class A units, and (iv) appoint usAUA.
•Incentive fee revenue may decrease as the sole managing memberability of HLA;general partners to exit existing investments may be limited due to uncertainty in the global economic markets.
•While the market dislocation caused by COVID-19 may present attractive investment opportunities due to increased volatility in the financial markets, we may not be able to complete those investments, which could impact revenue, particularly for specialized funds and customized separate accounts that charge fees on invested capital.
•Restrictions on travel and social distancing requirements implemented globally may challenge our certificateability to fundraise for new products or raise new business, which may result in lower or delayed revenue growth compared to prior periods. Investors may also limit the amount of incorporation was amendedcapital they are willing to commit given the current uncertainties in global markets and restated to, among other things, (i) provide for Class A common stock and Class B common stock, (ii) set forth the voting rights of the Class A common stock and Class B common stock, and (iii) establish a classified board of directors;economies.
certain HLA members exchanged their HLA units for 3,899,169 shares of Class A common stock of HLI;
HLI issued to the Class B unitholders of HLA one share of Class B common stock for each Class B unit that they owned, in exchange for a payment of its par value; and
HLI entered into an exchange agreement with the direct owners of HLA pursuant to which they will be entitled to exchange HLA units for shares•The vast majority of our Class A common stock onemployees are working remotely. An extended duration of remote working could lead to additional operational risks, such as greater cybersecurity threats. COVID-19 presents a one-for-one basis.threat to our employees’ well-being and morale. While we have implemented a business continuity plan to protect the health of our employees and have contingency plans in place for key employees or executive officers who may become sick or otherwise unable to perform their duties for an extended period of time, such plans cannot anticipate all scenarios, and we may experience potential loss of productivity or a delay in the implementation of certain strategic plans.
See Note 1 to the consolidated financial statements included in Part II, Item 8 and “Related-Party Transactions” included in Part III, Item 13 for more information about the above-mentioned transactions as well as the other transactions completed in connection with the IPO, which we refer to collectively as the “Reorganization.”66
Operating Segments
We operate our business in a single segment, which is how our chief operating decision maker (who is our chief executive officer) reviews financial performance and allocates resources.
Key Financial and Operating Measures
Our key financial measures are discussed below.
Revenues
On April 1, 2018, we adopted the new Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method. As a result, prior period amounts continue to be reported under legacy GAAP. The adoption did not change the historical pattern of recognizing revenue for management and advisory fees and incentive fees. See Note 2 to our consolidated financial statements for more information on our adoption of ASC 606.
We generate revenues primarily from management and advisory fees, and to a lesser extent, incentive fees. See “—Critical Accounting Policies—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.management and/or asset value. 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 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, or net invested capital or net asset value in, our specialized funds. The management fee during the commitment period is generallyoften 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 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.
Distribution management fees are generally earned by applying a percentage to AUM or proceeds received. Distribution management clients are charged basis point fees on either the net proceeds received from the sale of their securities or the aggregate amount of a client’s managed assets and vary depending on whether the account is for managed liquidation or active management services. Alternatively,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. This fee is then credited to a notional account, and we are entitled to a fixed percentage of any positive balance in the notional account on an annual basis. The remaining portion of any positive balance in the notional account is carried forward to the following year. If the incentive fee calculation results in a negative amount in a given year, that amount is applied to reduce the balance in the notional account. We are not required to repay any negative balance in the notional amount.
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/co-investment funds, credit funds and Strategic Opportunitiesevergreen 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/co-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 do not recognize carried interest untilwhen it is realized and all contingencies have been resolved.probable that a significant reversal will not occur. In the event that a payment is made to us before all contingencies are resolved,it can be recognized as revenue, this amount would be
included as deferred incentive fee revenue on our consolidated balance sheetConsolidated Balance Sheet and recognized as income when all contingencies have been resolved.in accordance with our revenue recognition policy. 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.
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 no contingencies exist or where the risk of clawback has been eliminated.or reversal is not probable.
Expenses
Compensation and benefits isour 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 interest awards to senior employees 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. 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.
We expect that we will incur additional expenses as compared to prior periods as a result of becoming a public company for director and officer insurance, director fees and additional personnel. This includes the cost of investor relations professionals, tax professionals, SEC reporting and compliance, including compliance with the Sarbanes-Oxley Act, and other similar expenses.
Other Income (Expense)
Equity in income (loss) of investees primarilyrepresents 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/co-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/co-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 existing senior secured Term Loan (as defined in “—Liquidity and Capital Resources—Historical Liquidity and Capital Resources—Term Loan”) andoutstanding debt, along with the previous senior secured term loan, amortization of deferred financing costs, amortization of original issue discount on the Term Loan and the write-downwrite-off of deferred financing costs including costs associated withdue to the previous term loan repaid during fiscal 2016.repayment of previously outstanding debt.
Interest income is income earned on cash and cash equivalents.
Other non-operatingNon-operating income (loss) consists primarily of gains and losses on certain investments and other non-recurring or non-cash items.
Fee-Earning AUM
We view fee-earningFee-earning AUM asis 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. 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.
Annual Consolidated Results of Operations
The following is a discussion of our consolidated results of operations for each of the years in the three-year period ended March 31, 2017.2020. This information is derived from our accompanying consolidated financial statements prepared in accordance with GAAP.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | |
| | 2020 | | 2019 | | 2018 |
| | | | | | |
| (in thousands) | | | | | |
Revenues | | | | | | |
Management and advisory fees | | $ | 244,920 | | | $ | 217,773 | | | $ | 195,030 | |
Incentive fees | | 29,128 | | | 34,406 | | | 49,003 | |
Total revenues | | 274,048 | | | 252,179 | | | 244,033 | |
Expenses | | | | | | |
Compensation and benefits | | 98,519 | | | 97,719 | | | 82,868 | |
General, administrative and other | | 59,100 | | | 50,236 | | | 38,212 | |
Total expenses | | 157,619 | | | 147,955 | | | 121,080 | |
Other income (expense) | | | | | | |
Equity in income of investees | | 20,250 | | | 7,202 | | | 17,102 | |
Interest expense | | (2,816) | | | (3,039) | | | (5,989) | |
Interest income | | 709 | | | 255 | | | 528 | |
Non-operating income | | 6,172 | | | 20,915 | | | 5,036 | |
Total other income (expense) | | 24,315 | | | 25,333 | | | 16,677 | |
Income before income taxes | | 140,744 | | | 129,557 | | | 139,630 | |
Income tax expense | | 13,968 | | | 30,560 | | | 33,333 | |
Net income | | 126,776 | | | 98,997 | | | 106,297 | |
Less: Income attributable to non-controlling interests in general partnerships | | 85 | | | 564 | | | 2,448 | |
Less: Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | | 65,866 | | | 64,860 | | | 86,508 | |
Net income attributable to Hamilton Lane Incorporated | | $ | 60,825 | | | $ | 33,573 | | | $ | 17,341 | |
|
| | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| (in thousands) |
Revenues | | | | | | |
Management and advisory fees | | $ | 172,674 |
| | $ | 157,630 |
| | $ | 145,876 |
|
Incentive fees | | 7,146 |
| | 23,167 |
| | 9,509 |
|
Total revenues | | 179,820 |
| | 180,797 |
| | 155,385 |
|
Expenses | |
|
| | | | |
Compensation and benefits | | 72,116 |
| | 92,065 |
| | 60,157 |
|
General, administrative and other | | 31,589 |
| | 26,898 |
| | 26,865 |
|
Total expenses | | 103,705 |
| | 118,963 |
| | 87,022 |
|
Other income (expense) | |
|
| | | | |
Equity in income of investees | | 12,801 |
| | 1,518 |
| | 10,474 |
|
Interest expense | | (14,565 | ) | | (12,641 | ) | | (5,883 | ) |
Interest income | | 320 |
| | 194 |
| | 87 |
|
Other non-operating income (loss) | | 83 |
| | 5,816 |
| | (1,056 | ) |
Total other income (expense) | | (1,361 | ) | | (5,113 | ) | | 3,622 |
|
Income before income taxes | | 74,754 |
| | 56,721 |
| | 71,985 |
|
Income tax expense | | 316 |
| | 869 |
| | 483 |
|
Net income | | 74,438 |
| | 55,852 |
| | 71,502 |
|
Less: Income (loss) attributable to non-controlling interests in general partnerships | | 1,192 |
| | (1,255 | ) | | 2,242 |
|
Less: Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | | 72,634 |
| | 57,107 |
| | 69,260 |
|
Net income attributable to Hamilton Lane Incorporated | | $ | 612 |
| | $ | — |
| | $ | — |
|
Revenues
| | | | Year Ended March 31, | | Year Ended March 31, | |
| | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 |
| | | | | | | | | | | | |
| (in thousands) | | (in thousands) | |
Management and advisory fees | | | | | | | Management and advisory fees | |
Specialized funds | | Specialized funds | | $ | 111,803 | | | $ | 93,056 | | | $ | 83,151 | |
Customized separate accounts | | $ | 71,261 |
| | $ | 67,879 |
| | $ | 63,275 |
| Customized separate accounts | | 90,750 | | | 85,245 | | | 79,275 | |
Specialized funds | | 74,675 |
| | 62,340 |
| | 51,315 |
| |
Advisory and reporting | | 23,798 |
| | 22,536 |
| | 22,388 |
| |
Advisory | | Advisory | | 24,160 | | | 24,130 | | | 20,164 | |
Reporting and other | | Reporting and other | | 9,102 | | | 8,805 | | | 8,064 | |
Distribution management | | 2,940 |
| | 4,875 |
| | 8,898 |
| Distribution management | | 4,920 | | | 4,525 | | | 4,376 | |
Fund reimbursement revenue | | Fund reimbursement revenue | | 4,185 | | | 2,012 | | | — | |
Total management and advisory fees | | 172,674 |
| | 157,630 |
| | 145,876 |
| Total management and advisory fees | | 244,920 | | | 217,773 | | | 195,030 | |
Incentive fees | | 7,146 |
| | 23,167 |
| | 9,509 |
| Incentive fees | | 29,128 | | | 34,406 | | | 49,003 | |
Total revenues | | $ | 179,820 |
| | $ | 180,797 |
| | $ | 155,385 |
| Total revenues | | $ | 274,048 | | | $ | 252,179 | | | $ | 244,033 | |
Year ended March 31, 20172020 compared to year ended March 31, 20162019
Total revenues decreased $1.0increased $21.9 million, or 1%9%, to $179.8$274.0 million, for fiscal 20172020 compared to fiscal 2016,2019, due primarily to lower incentivean increase in management and advisory fees.
Management and advisory fees increased $15.0 $27.1 million, or 10%12%, to $172.7$244.9 million for fiscal 20172020 compared to fiscal 2016. This increase was driven by specialized2019. Specialized funds revenue which increased by $12.3$18.7 million compared to the prior year, due primarily to a $14.9$14.0 million increase in revenue from our latest secondary fund, including $2.9 million in retroactive fees. This fundwhich added $1.2$1.7 billion in fee-earning AUM in fiscal 2017. The revenue2020, and a $3.3 million increase from our latest secondaryco-investment fund, was partially offset by $3.7which added $0.2 billion in fee-earning AUM in fiscal 2020. Management fees for our latest co-investment fund included $2.8 million in retroactive fees from our latest direct/co-investment fund in the prior year period.for fiscal 2020 compared to $1.7 million for fiscal 2019. 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 $3.4 $5.5 million in fiscal 20172020 due to a $2.4 billion increase in fee-earning AUM from the addition of several new accounts and additional allocations from existing accounts as compared toduring the prior fiscal year. Advisory and reporting fees Fund reimbursement revenue increased $1.3 $2.2 million for fiscal 20172020 compared to fiscal 2016 due primarily to the addition of new reporting accounts as compared to the prior fiscal year. These increases were partially offset by a decrease in distribution management revenue of $1.9 million in fiscal 2017 compared to the prior year due to lower stock distribution activity and the related fees earned from this business.
Incentive fees decreased $16.0 million to $7.1 million for fiscal 2017,2019, due primarily to the recognition of $15.7 in carried interestfund reimbursements from one of our latest secondary funds in the prior year period, which included the preferred return general partner catch-up.
Year ended March 31, 2016 compared to year ended March 31, 2015
Total revenues increased $25.4 million, or 16%, to $180.8 million, for fiscal 2016 compared to fiscal 2015, due primarily to revenues from newly formed funds, as well as the receipt of additional incentive fee payments during the year.
Management and advisory fees increased $11.8 million, or 8%, to $157.6 million for fiscal 2016 compared to fiscal 2015. This increase was driven by specialized funds revenue, which increased by $11.0 million compared to the prior year as we added $0.5 billion in fee-earning AUM from four new funds, each with a different investment focus. Additional investors that were admitted to our existing funds in fiscal 2016 led to a $0.8 billion increase in fee-earning AUM and an increase in retroactive fees of $3.6 million compared to the prior year. In addition, customized separate accountsfund. Distribution management revenue increased $4.6$0.4 million in fiscal 2016 due to the addition of several new accounts and additional allocations from existing accounts as compared to the prior fiscal year. Advisory and reporting fees increased $0.1 million to $22.5 million for fiscal 2016 compared to fiscal 2015 due primarily to the addition of new reporting accounts during the preceding 12 months. These increases were partially offset by a decrease in distribution management revenue of $4.0 million compared to the prior year due to lowerhigher stock distribution activity and the related fees earned from this business.
Incentive fees increased $13.7decreased $5.3 million to $23.2$29.1 million for fiscal 2016,2020 compared to fiscal 2019, due primarily to the initial receipt of carried interest, which includes the preferred return general partner catch-up,a $9.1 million decrease in incentive fees from one of our secondary funds of $15.7 million, offset by slightly lower incentive fees on a net basis from our specialized funds and a $4.7 million decrease from one of our customized separate accounts, that have been paying incentive fees onwhich included the general partner catch-up in the prior year period. This was partially offset by a recurring basis.
In addition, on$11.6 million increase from new accounts moving into a cash basis, we received $41.5 million ofrealized incentive fee paymentsposition in fiscal 2016 that were not recognized as revenue in accordance with our accounting policy. This amount was recorded as2020.
deferred incentive fee revenue on our consolidated balance sheet, and it will be recognized in the future in the event that all related contingencies have been resolved and the risk of clawback has been eliminated.
Expenses
Year ended March 31, 20172019 compared to year ended March 31, 20162018
Total expenses decreased $15.3revenues increased $8.1 million, or 13%3%, to $252.2 million, for fiscal 20172019 compared to fiscal 2016,2018, due to an increase in management and advisory fees.
Management and advisory fees increased $22.7 million, or 12%, to $217.8 million for fiscal 2019 compared to fiscal 2018. Specialized funds revenue increased by $9.9 million compared to the prior year, due primarily to decreased compensationa $14.2 million increase in revenue from our latest co-investment fund, which added $0.8 billion in fee-earning AUM in fiscal 2019, offset by $5.8 million in retroactive fees from our latest secondary fund in fiscal 2018. Included in our latest co-investment fund’s revenue for the year was $1.7 million in retroactive fees. 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 benefits expense.
Compensationare 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 $6.1 million in fiscal 2019 due to a $1.2 billion increase in fee-earning AUM from the addition of several new accounts and benefits expenses decreased $19.9 million, or 22%, to $72.1additional allocations from existing accounts during the fiscal year. Advisory and reporting fees increased $4.6 million for fiscal 20172019 compared to fiscal 2016, due primarily to decreased incentive plan and bonus expense. Base compensation decreased $6.2 million, or 9%, for fiscal 2017 compared to fiscal 2016,2018 due primarily to the receiptaddition of additional amountsnew accounts as compared to the prior fiscal year. Fund reimbursement revenue increased $2.0 million as a result of carried interestthe new revenue recognition standards.
Incentive fees decreased $14.6 million to $34.4 million for fiscal 2019, due primarily to a $23.9 million decrease from one of our co-investment funds that had recognized $40.6 million of deferred
incentive fees in the prior fiscal year which generated higher bonus expense of $12.4 million.period. This was partially offset by $6.4 million from one of our customized separate accounts, which included the general partner catch-up in the current year period.
Expenses
Year ended March 31, 2020 compared to year ended March 31, 2019
Total expenses increased $9.7 million, or 7%, for fiscal 2020 compared to fiscal 2019 due to an increase in general, administrative and other expenses.
Compensation and benefits expenses increased $0.8 million, or 1%, to $98.5 million for fiscal 2020 compared to fiscal 2019, due to an increase in base compensation partially offset by a nonrecurring contingent compensation payment in the prior year period related to the fiscal 2018 acquisition of Real Asset Portfolio Management LLC (“RAPM”). Base compensation and benefits increased $5.7 million, or 7%, for fiscal 2020 compared to fiscal 2019, due primarily to increased salary expense due tofrom additional headcount in fiscal 2017the current year period compared to the prior fiscal year and a $1.9 million expense incurredperiod. Contingent compensation related to induce members of HLA to exchange their HLA units for HLI common stock in the Reorganization. Incentive compensation RAPM acquisition decreased $14.7 $5.1 million for fiscal 20172020 compared to fiscal 2016,2019, due primarily to the $10.4 million of deferred incentive fee compensationearnout period ending in the prior fiscal year. Equity-basedIncentive compensation increased $1.0decreased $0.6 million or 25%, for fiscal 20172020 compared to fiscal 2016,2019 due to the decrease in incentive fee revenue. Equity-based compensation increased $0.8 million for fiscal 2020 compared to fiscal 2019 as a result of the amortization of equity awards, which have increased in recent years.
General, administrative and other expenses increased $4.7 $8.9 million for fiscal 20172020 compared to fiscal 2016.2019. This change consisted primarily of a $4.1$2.5 million increase in technology and office related expenses, a $2.2 million increase in consulting and professional fees, due to increased accountinga $1.9 million increase in commissions from fund closings in the current year period, and audit fees primarily related to the IPO.a $0.9 million increase in legal-related expenses.
Year ended March 31, 20162019 compared to year ended March 31, 20152018
Total expenses increased $31.9$26.9 million, or 37%22%, for fiscal 20162019 compared to fiscal 2015,2018 due primarily to increasedincreases in base compensation and benefits expense.general, administrative and other expenses.
Compensation and benefits expenses increased $31.9$14.9 million, or 53%18%, to $92.1$97.7 million for fiscal 20162019 compared to fiscal 2015, primarily as a result2018, due to increased base compensation and contingent compensation related to the acquisition of strong revenue and incentive fee realizationsRAPM in fiscal 2016, which resulted in increased incentive plan and bonus expenses.2018. Base compensation and benefits increased $17.7$6.3 million, or 33%9%, for fiscal 20162019 compared to fiscal 2015,2018, due primarily to improved operating performance andhigher bonus expense related to the receipt of additional amounts of carried interest, which generated higher bonuses.increase in cash incentive fee revenue. Contingent compensation related to the RAPM acquisition increased $1.7 million for fiscal 2019 compared to fiscal 2018. Incentive compensation fromincreased $6.0 million for fiscal 2019 compared to fiscal 2018 due to the increase in cash incentive fees receivedfee revenue. Equity-based compensation increased $13.8$0.8 million, or 598%15%, for fiscal 20162019 compared to fiscal 2015, due primarily to increased realizations from our specialized funds resulting in receipts of carried interest. Equity-based compensation increased $0.3 million, or 10%, for fiscal 2016 compared to fiscal 2015, which is primarily2018 as a function of bonus expense. The $92.1 million of compensation expense reported above includes $20.3 million of incremental compensation expense for the year ended March 31, 2016 that is related to the $41.5 million of incentive fee payments that were received during that period but not recognized as revenue because the incentive fee payments are subject to clawback. This revenue will be recognized over time as the clawback expires, even though the incremental compensation expense was required by GAAP to be recognized in that period. The incremental expense recognized in advanceresult of the associated revenue included $10.4 millionamortization of incentive fee compensation and $9.9 million of base compensation and benefits.equity awards, which have increased in recent years.
General, administrative and other expenses increased by less than $0.1$12.0 million for fiscal 20162019 compared to fiscal 2015.2018. This change consisted primarily of a $1.1$4.6 million increase in commissions, from stronger fundraising activity by certain of our non-U.S. commissioned business development employees and third-party providers,fund reimbursement expenses that are now recorded on a gross basis under the new revenue recognition standard and a $0.7$3.5 million increase in stateconsulting and local taxes, caused primarily by higher
incentive fee realizations compared to the prior year. This was primarily offset by a $0.5 million decrease in travel expenses and a $1.2 million decrease in professional fees, which included $1.5 million in fees related to Private Market Connect (“PMC”), our joint venture, as the prior year included higher than normal expenditures for outsourced fundwell as increases in legal negotiations, marketing and compliance procedures and costs incurred in connection with office expansions.recruiting fees.
Other Income (Expense)
The following shows the equity in income (loss) of investees included in other income (expense):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | |
| | 2020 | | 2019 | | 2018 |
| | | | | | |
| (in thousands) | | | | | |
Equity in income of investees | | | | | | |
Primary funds | | $ | 2,550 | | | $ | 1,594 | | | $ | 2,516 | |
Direct/co-investment funds | | 8,869 | | | 2,201 | | | 5,915 | |
Secondary funds | | 2,514 | | | 1,282 | | | 2,088 | |
Customized separate accounts | | 5,729 | | | 2,328 | | | 7,071 | |
Other equity method investments | | 588 | | | (203) | | | (488) | |
Total equity in income of investees | | $ | 20,250 | | | $ | 7,202 | | | $ | 17,102 | |
|
| | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| (in thousands) |
Equity in income of investees | | | | | | |
Primary funds | | $ | 1,749 |
| | $ | 609 |
| | $ | 1,379 |
|
Direct/co-investment funds | | 4,652 |
| | (1,455 | ) | | 4,621 |
|
Secondary funds | | 1,275 |
| | 222 |
| | 794 |
|
Customized separate accounts | | 5,125 |
| | 2,142 |
| | 3,680 |
|
Total equity in income of investees | | $ | 12,801 |
| | $ | 1,518 |
| | $ | 10,474 |
|
Year ended March 31, 20172020 compared to year ended March 31, 20162019
Other income (expense) increased $3.8decreased $1.0 million or 73%, to ($1.4)$24.3 million for fiscal 20172020 compared to fiscal 2016,2019, due primarily to a decrease in non-operating income, partially offset by an increase in equity in income of investees, partially offset by a gain on the sale of a technology investment in the prior year.investees.
Equity in income of investees increased $11.3 $13.0 million to $12.8$20.3 million for fiscal 20172020 compared to fiscal 2016 due to higher overall valuation gains compared to the prior year.2019. This increase was due primarily to a $3.0$6.7 million increase in gains in our direct/co-investment fund products, a $3.4 million increase in gains across our customized separate accounts, and a $1.2 million increase in gains in our secondary fund products.
Non-operating income decreased $14.7 million to $6.2 million for fiscal 2020 compared to fiscal 2019, due primarily to a $4.6 million decrease in gains from the sale of technology investments and a $10.1 million decrease to our liability under the tax receivable agreement (“TRA liability”) in the prior year as a result of a re-measurement related to changes in state tax rate estimates.
Year ended March 31, 2019 compared to year ended March 31, 2018
Other income (expense) increased $8.7 million to $25.3 million for fiscal 2019 compared to fiscal 2018 due primarily to an increase in non-operating income and a decrease in interest expense partially offset by a decrease in gains from our investments.
Equity in income of investees decreased $9.9 million to $7.2 million for fiscal 2019 compared to fiscal 2018 due to lower overall valuation gains compared to the prior year. This decrease was due primarily to a $4.7 million decrease in gains across our customized separate accounts, a $3.7 million decrease in gains in our direct/co-investment fund products compared to $1.5and a $0.9 million decrease in lossesgains in the prior year.our primary fund products.
Interest expense increased $1.9decreased $3.0 million, or 15%49%, to $14.6$3.0 million for fiscal 20172019 compared to fiscal 2016,2018, due primarily to a $3.4$1.7 million write-off of deferred financing costs and a $0.9 million reclassification of an unrealized loss on interest rate caps to a realized loss as part of our predecessor credit facility in the prior year period.
Non-operating income increased $15.9 million to $20.9 million for fiscal 2019 compared to fiscal 2018 due to $11.1 million in gains on the sales of two technology investments during the period and a $10.1 million decrease to our TRA liability as a result of a re-measurement related to the $160.0 million paydown of the Term Loan,changes in state tax
rate estimates. This was partially offset by a $2.4$5.1 million write-off of deferred financing costs in the prior year.
Other non-operating income (loss) decreased $5.7 million to $0.1 million for fiscal 2017 compared to fiscal 2016 due primarily to a gain on a technology investment in the prior year.
Year ended March 31, 2016 compared to year ended March 31, 2015
Other income (expense) decreased $8.7 million, or 241%, to ($5.1) million for fiscal 2016 compared to fiscal 2015, due primarily to an increase in interest expense and a decrease in gains from our investments, offset by a gain on the sale of a technology investment.
Equity in income of investees decreased $9.0 million, or 86%, to $1.5 million for fiscal 2016 compared to fiscal 2015, due to decreased valuation gains from our specialized funds, which was partially a function of the impact of public markets on valuation adjustments. The decrease from the prior year consisted of $6.2 million of lower valuation adjustments in our direct/co-investment products, primarily due to decreased performance of publicly traded investments and the impact from a large write-up related to the announcement of a sale of an investmentTRA liability in the prior year of $2.5 million. The remaining $2.8
million decrease was due to lower positive valuation adjustments compared to fiscal 2015 across our customized separate accounts, primary funds, secondary funds, and other co/direct investment funds.
Interest expense increased $6.7 million, or 115%, to $12.6 million for fiscal 2016 compared to fiscal 2015,period due to the increased debt outstanding as a result ofre-measurement related to the Term Loan entered intochange in July 2015, which increased interest paymentsfederal tax rates enacted by $4.4 million. In addition, we wrote off $2.4 million in deferred financing costs associated with our previous term loan.the Tax Act.
Other non-operating income (loss) increased $6.9 million to $5.8 million for fiscal 2016 compared to fiscal 2015 due primarily to a gain on a separate equity investment and the gain on disposal of a financial instrument.
Interest income increased $0.1 million, or 123%, in fiscal 2016 compared to fiscal 2015, due to higher average cash balances compared to fiscal 2015.
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 2017, 20162020, 2019 and 20152018 was 0.4%9.9%, 1.6%23.6%, and 0.7%,23.9% respectively. PriorThe effective income tax rate in fiscal 2019 was primarily impacted by the portion of income allocated to non-controlling interests and revaluation of deferred tax assets related to changes in state income tax apportionment as well as a tax rate reduction due to the Reorganization, our effective tax rate was primarily driven by foreign income taxes as HLA is treated as a “flow-through” entity and is not subject to income taxes apart from foreign taxes attributable to its operations in foreign jurisdictions.Tax Act.
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, | | | |
| 2020 | | | | 2019 | | | |
| | | | | | | | |
| (in millions) | | | | | | | |
| Customized Separate Accounts | Specialized Funds | Total | | Customized Separate Accounts | Specialized Funds | Total | |
Balance, beginning of period | $ | 22,160 | | $ | 11,434 | | $ | 33,594 | | | $ | 20,931 | | $ | 9,758 | | $ | 30,689 | | |
Contributions (1) | 4,885 | | 3,424 | | 8,309 | | | 4,992 | | 2,238 | | 7,230 | | |
Distributions (2) | (2,624) | | (724) | | (3,348) | | | (3,643) | | (553) | | (4,196) | | |
Foreign exchange, market value and other (3) | 124 | | (16) | | 108 | | | (120) | | (9) | | (129) | | |
Balance, end of period | $ | 24,545 | | $ | 14,118 | | $ | 38,663 | | | $ | 22,160 | | $ | 11,434 | | $ | 33,594 | | |
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | Year Ended March 31, | |
| 2017 | | 2016 | |
| | | | | | | | |
| (in millions) | |
| Customized Separate Accounts | Specialized Funds | Total | | Customized Separate Accounts | Specialized Funds | Total | |
Balance, beginning of period | $ | 16,976 |
| $ | 7,019 |
| $ | 23,995 |
| | $ | 16,336 |
| $ | 6,064 |
| $ | 22,400 |
| |
Contributions (1) | 3,214 |
| 1,949 |
| 5,163 |
| | 3,289 |
| 1,472 |
| 4,761 |
| |
Distributions (2) | (1,959 | ) | (184 | ) | (2,143 | ) | | (2,605 | ) | (501 | ) | (3,106 | ) | |
Foreign exchange, market value and other (3) | (203 | ) | 9 |
| (194 | ) | | (44 | ) | (16 | ) | (60 | ) | |
Balance, end of period | $ | 18,028 |
| $ | 8,793 |
| $ | 26,821 |
| | $ | 16,976 |
| $ | 7,019 |
| $ | 23,995 |
| |
| |
(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 that earn fees on a NAV fee base. |
(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.
84
(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 that earn fees on a NAV fee base.
Year ended March 31, 20172020 compared to year ended March 31, 20162019
Fee-earning AUM increased $2.8$5.1 billion, or 12%15%, to $26.8$38.7 billion for fiscal 2017,2020, due primarily to new specialized funds and customized separate accounts commitments.
Customized separate accounts fee-earning AUM increased $1.0$2.4 billion, or 6%11%, to $18.0$24.5 billion for fiscal 2017.2020. Customized separate accounts contributions were $3.2$4.9 billion for fiscal 2017,2020 due primarily to new allocations from existing clients and new clients. Distributions were $2.0$2.6 billion for fiscal 2017,2020 due to $1.0 billion from accounts reaching the end of their account term, $0.8 billion from accounts moving from a committed capital to a net invested fee base as their investment period expired, $0.5 billion from accounts reaching the end of their account term and $0.6$0.8 billion from returns of capital in accounts earning fees on a net invested capital or NAV fee base.
Specialized funds fee-earning AUM increased $1.8$2.7 billion, or 25%23%, to $8.8$14.1 billion for fiscal 2017.2020. Specialized fund contributions were $1.9$3.4 billion for fiscal 2017,2020 due primarily to $1.2$1.7 billion in new commitments to our secondary fund in market during the period.period, $0.2 billion from our co-investment fund in market during the period, and $0.9 billion from accounts earning fees on a net invested capital or NAV fee base. Distributions were $0.2$0.7 billion for fiscal 2016,2020 due primarily to $0.4 billion from returns of capital in fundsaccounts earning fees on a net invested capital fee base.base and $0.3 billion from accounts moving from a committed capital to a net invested fee base as their investment period expired.
Year ended March 31, 20162019 compared to year ended March 31, 20152018
Fee-earning AUM increased $1.6$2.9 billion, or 7%9%, to $24.0$33.6 billion for fiscal 2016,2019, due primarily to new specialized funds and customized separate accounts commitments.
Customized separate accounts fee-earning AUM increased $0.6$1.2 billion, or 4%6%, to $17.0$22.2 billion for fiscal 2016.2019. Customized separate accounts contributions were $3.3$5.0 billion for fiscal 2016,2019 due primarily to new allocations from existing clients and new clients. Distributions were $2.6$3.6 billion for fiscal 2016,2019 due to $1.1$1.3 billion from accounts moving from a committed capital to a net invested fee base as their investment period expired, $1.0$1.6 billion from accounts reaching the end of their account term and $0.5$0.7 billion from returns of capital in accounts earning fees on a net invested capital or NAV fee base.
Specialized funds fee-earning AUM increased $1.0$1.7 billion, or 16%17%, to $7.0$11.4 billion for fiscal 2016.2019. Specialized fundsfund contributions were $1.5$2.2 billion for fiscal 2016,2019 due primarily due to $0.8 billion from additional investors in new commitments to our co-investment and primary fundsfund in market during the period and $0.5 billion in commitments from four new funds. Distributions were $0.5 billion for fiscal 2016, due to $0.3$1.1 billion from returns of capital in fundsaccounts earning fees on a net invested capital fee base and $0.2base. Distributions were $0.6 billion for fiscal 2019 due primarily to $0.5 billion from a primary fund that moved from a committedreturns of capital toin accounts earning fees on a net invested capital fee base during the period.base.
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 our primary 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 Term Loan,outstanding debt, (b) income tax expense, (c) depreciation and amortization expense, (d) equity-based compensation expense, (e) other non-operating income (loss) 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 earnings of the Company 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, and (e) other non-operating income.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.
The following table shows a reconciliation of net income attributable to Hamilton Lane Incorporated to Fee Related Earnings and Adjusted EBITDA for fiscal 2020, 2019, 2018, 2017 2016, 2015, 2014 and 2013:2016:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | | | | | | | | |
| (in thousands) | | | | | | | | | |
Net income attributable to Hamilton Lane Incorporated (1) | | $ | 60,825 | | | $ | 33,573 | | | $ | 17,341 | | | $ | 612 | | | $ | — | |
Income (loss) attributable to non-controlling interests in general partnerships | | 85 | | | 564 | | | 2,448 | | | 1,192 | | | (1,255) | |
Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | | 65,866 | | | 64,860 | | | 86,508 | | | 72,634 | | | 57,107 | |
Incentive fees (2) | | (29,128) | | | (34,406) | | | (49,003) | | | (7,146) | | | (23,167) | |
Incentive fee related compensation (3) | | 13,677 | | | 14,983 | | | 3,874 | | | 3,283 | | | 31,714 | |
Interest income | | (709) | | | (255) | | | (528) | | | (320) | | | (194) | |
Interest expense | | 2,816 | | | 3,039 | | | 5,989 | | | 14,565 | | | 12,641 | |
Income tax expense | | 13,968 | | | 30,560 | | | 33,333 | | | 316 | | | 869 | |
Equity in income of investees | | (20,250) | | | (7,202) | | | (17,102) | | | (12,801) | | | (1,518) | |
Contingent compensation related to acquisition | | — | | | 5,100 | | | 3,399 | | | — | | | — | |
Non-operating (income) loss | | (6,172) | | | (20,915) | | | (5,036) | | | (83) | | | (5,816) | |
Fee Related Earnings | | $ | 100,978 | | | $ | 89,901 | | | $ | 81,223 | | | $ | 72,252 | | | $ | 70,381 | |
Depreciation and amortization | | 3,291 | | | 2,500 | | | 1,891 | | | 1,915 | | | 2,027 | |
Equity-based compensation | | 7,183 | | | 6,382 | | | 5,544 | | | 4,681 | | | 3,730 | |
Incentive fees (2) | | 29,128 | | | 34,406 | | | 49,003 | | | 7,146 | | | 23,167 | |
Incentive fees attributable to non-controlling interests (2) | | (320) | | | (725) | | | (1,729) | | | — | | | — | |
Incentive fee related compensation (3) | | (13,677) | | | (14,983) | | | (3,874) | | | (3,283) | | | (31,714) | |
Interest income | | 709 | | | 255 | | | 528 | | | 320 | | | 194 | |
Adjusted EBITDA | | $ | 127,292 | | | $ | 117,736 | | | $ | 132,586 | | | $ | 83,031 | | | $ | 67,785 | |
| | | | | | | | | | |
(1) Prior to our IPO, HLI was a wholly-owned subsidiary of HLA with no operations or assets.
(2) Incentive fees for the year ended March 31, 2020 included $0.3 million of non-cash carried interest attributable to non-controlling interests. Incentive fees for the year ended March 31, 2019 included $3.2 million of non-cash carried interest. Of the $3.2 million, $2.5 million is included in net income and $0.7 million is attributable to non-controlling interests. Incentive fees for the year ended March 31, 2018 included $40.6 million of non-cash carried interest. Of the $40.6 million, $38.9 million is included in net income and $1.7 million is attributable to non-controlling interests.
(3) Incentive fee related compensation includes incentive fee compensation expense, bonus and other revenue sharing related to carried interest that is classified as base compensation. Incentive fee related compensation for the years ended March 31, 2019 and 2018 excludes compensation expense related to the recognition of incentive fees included in net income from one of our co-investment funds of $2.5 million and $38.9 million, respectively, as the related incentive fee compensation was recognized in fiscal 2016.
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | | | | | | | | |
| (in thousands) |
Net income attributable to Hamilton Lane Incorporated (1) | | $ | 612 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Income (loss) attributable to non-controlling interests in general partnerships | | 1,192 |
| | (1,255 | ) | | 2,242 |
| | 4,565 |
| | 3,157 |
|
Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | | 72,634 |
| | 57,107 |
| | 69,260 |
| | 62,462 |
| | 48,680 |
|
Incentive fees | | (7,146 | ) | | (23,167 | ) | | (9,509 | ) | | (9,309 | ) | | (6,179 | ) |
Incentive fee related compensation (2) | | 3,283 |
| | 31,714 |
| | 4,542 |
| | 4,511 |
| | 2,854 |
|
Interest income | | (320 | ) | | (194 | ) | | (87 | ) | | (142 | ) | | (296 | ) |
Interest expense | | 14,565 |
| | 12,641 |
| | 5,883 |
| | 8,503 |
| | 11,136 |
|
Income tax expense (benefit) | | 316 |
| | 869 |
| | 483 |
| | (128 | ) | | (827 | ) |
Equity in income of investees | | (12,801 | ) | | (1,518 | ) | | (10,474 | ) | | (16,905 | ) | | (12,149 | ) |
Other non-operating (income) loss | | (83 | ) | | (5,816 | ) | | 1,056 |
| | 699 |
| | 461 |
|
Fee Related Earnings | | $ | 72,252 |
| | $ | 70,381 |
| | $ | 63,396 |
| | $ | 54,256 |
| | $ | 46,837 |
|
Depreciation and amortization | | 1,915 |
| | 2,027 |
| | 1,867 |
| | 1,853 |
| | 2,074 |
|
Equity-based compensation | | 4,681 |
| | 3,730 |
| | 3,390 |
| | 3,070 |
| | 2,803 |
|
Incentive fees | | 7,146 |
| | 23,167 |
| | 9,509 |
| | 9,309 |
| | 6,179 |
|
Incentive fee related compensation (2) | | (3,283 | ) | | (31,714 | ) | | (4,542 | ) | | (4,511 | ) | | (2,854 | ) |
Interest income | | 320 |
| | 194 |
| | 87 |
| | 142 |
| | 296 |
|
Adjusted EBITDA | | $ | 83,031 |
| | $ | 67,785 |
| | $ | 73,707 |
| | $ | 64,119 |
| | $ | 55,335 |
|
| | | | | | | | | | |
77
| |
(1) | Prior to our IPO, HLI was a wholly-owned subsidiary of HLA with no operations or assets. |
| |
(2) | Incentive fee related compensation includes incentive fee compensation expense and bonus and other revenue sharing allocated to carried interest classified as base compensation. |
Non-GAAP Earnings Per Share
Non-GAAP earnings per share measures our per-share earnings excluding expenses related tocertain significant items that we believe are not indicative of our IPOcore 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. We believe Non-GAAP earnings per share is useful to investors because it enables them to better evaluate per-share operating performance across reporting periods.
The following table shows a reconciliation of adjusted net income to net income attributable to Hamilton Lane Incorporated and adjusted shares outstanding to weighted-average shares of Class A common stock outstanding for fiscal 2017.2020, 2019 and 2018.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | | |
| | 2020 | | 2019 | | 2018 | |
| | | | | | | |
(in thousands, except share and per-share amounts) | | | | | | | |
Net income attributable to Hamilton Lane Incorporated | | $ | 60,825 | | | $ | 33,573 | | | $ | 17,341 | | |
Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | | 65,866 | | | 64,860 | | | 86,508 | | |
Income tax expense | | 13,968 | | | 30,560 | | | 33,333 | | |
Write-off of deferred financing costs (1) | | — | | | — | | | 2,544 | | |
Impact of Tax Act on TRA liability (2) | | — | | | — | | | (4,964) | | |
IPO related compensation including impact of Tax Act (3) | | — | | | — | | | (669) | | |
Contingent compensation related to acquisition | | — | | | 5,100 | | | 3,399 | | |
Adjusted pre-tax net income | | $ | 140,659 | | | $ | 134,093 | | | $ | 137,492 | | |
Adjusted income taxes (4) | | (33,336) | | | (32,048) | | | (50,432) | | |
Adjusted net income | | $ | 107,323 | | | $ | 102,045 | | | $ | 87,060 | | |
| | | | | | | |
Weighted-average shares of Class A common stock outstanding - diluted | | 28,438,772 | | | 24,298,795 | | | 18,990,369 | | |
Exchange of Class B and Class C units in HLA (5) | | 25,067,540 | | | 29,040,205 | | | 34,112,983 | | |
Adjusted shares outstanding | | 53,506,312 | | | 53,339,000 | | | 53,103,352 | | |
| | | | | | | |
Non-GAAP earnings per share | | $ | 2.01 | | | $ | 1.91 | | | $ | 1.64 | | |
(1) Represents write-off of debt issuance costs and realized loss on interest rate caps related to the payoff of our predecessor credit facility in the prior year period.
(2) Represents gain recorded as a result of re-measurement due to lower federal tax rates. The fiscal 2016gain was recorded to non-operating income in the Consolidated Statements of Income.
(3) Represents accrual of one-time payments to induce members of HLA to exchange their HLA units for HLI common stock in the Reorganization during the year ended March 31, 2017 and 2015 periods are not presented below as there was no comparable earnings per sharethe change in the expense accrual due to the impact of tax rate changes pursuant to enactment of the Tax Act during the year ended March 31, 2018.
(4) 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%. For the year ended March 31, 2019, represents corporate income taxes at our estimated statutory tax rate of 23.9% applied to adjusted pre-tax net income. The 23.9% is based on a federal tax statutory rate of 21.0% and a combined state income tax rate net of federal benefits of 2.9%. For the year ended March 31, 2018, represents corporate income taxes at an assumed effective tax rate of 36.7%. The 36.7% is based on a blended federal tax statutory rate of 35.0% for 275 days and 21.0% for 90 days and a combined state income tax rate net of federal benefits of 5.1%.
(5) Assumes the full exchange of Class B and Class C units in HLA for Class A common stock outstanding - diluted in those periods.of HLI pursuant to the exchange agreement.
|
| | | | | |
| | Year Ended March 31, |
| | 2017 | |
| | | |
(in thousands, except share and per-share amounts)
| |
Net income attributable to Hamilton Lane Incorporated | | $ | 612 |
| |
Income attributable to non-controlling interests in general partnerships | | 1,192 |
| |
Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | | 72,634 |
| |
Income tax expense
| | 316 |
| |
IPO related expenses (1) | | 1,935 |
| |
Write-off of deferred financing costs (2) | | 3,359 |
| |
Adjusted pre-tax net income | | $ | 80,048 |
| |
Adjusted income taxes (3) | | (32,211 | ) | |
Adjusted net income | | $ | 47,837 |
| |
| | | |
Weighted-average shares of Class A common stock outstanding - diluted | | 18,341,079 |
| |
Exchange of Class B and Class C units in HLA (4) | | 34,438,669 |
| |
Adjusted shares | | 52,779,748 |
| |
| | | |
Non-GAAP earnings per share | | $ | 0.91 |
| |
| |
(1) | Represents accrual of one-time payments to induce members of HLA to exchange their HLA units for HLI common stock in the Reorganization. |
| |
(2) | Represents write-down of amortized discount and debt issuance related to the $160 million paydown of outstanding indebtedness under the Term Loan with proceeds from the IPO. |
| |
(3) | Represents corporate income taxes at assumed effective tax rate of 40.24% applied to adjusted pre-tax net income. The 40.24% is based on a federal tax statutory rate of 35.00% and a combined state income tax rate net of federal benefits of 5.24%. |
| |
(4) | 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. |
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 debt financing in recent periods has been used primarily to consolidate ownership of HLA among our employees by repurchasing equity from outside non-employee affiliated owners. 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 distributions to our owners;HLA unitholders; (5) paying dividends; and (5)(6) borrowings, interest payments and repayments under our Term Loan.outstanding debt. As of March 31, 20172020 and March 31, 2016,2019, our cash and cash equivalents, including investments in money market funds, were $32.3$50.1 million and $68.6$49.4 million, respectively.
Ourmaterialsources 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 inour 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. We also use our cash flows to fund commitments to certain of ourspecialized 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.
Term Loan and Revolving Credit Facility
In July 2015,August 2017, we entered into the Term Loan a $260.0 million senior secured term loanAgreement and the Revolving Loan Agreement with Morgan Stanley Senior Funding, Inc. as administrative agent, which was subsequently amended effective as of November 7, 2016. SubjectFirst Republic. Proceeds from these agreements were utilized to certain conditions, one or more additional commitments underpay off the Term Loan may be added, up to an incremental capoutstanding principal amount and accrued interest of the greater of $50.0 million and an amount that would, on a pro forma basis, result in our secured leverage ratio being less than or equal to 3.65 to 1.00.predecessor credit facility. In March 2020, the Company amended these agreements. The Term Loan maturesAgreement was amended to include an incremental term advance of approximately $9 million on the closing date of the amendment (increasing the outstanding balance to $75 million), provide for additional uncommitted term advances not to exceed $25 million in the aggregate for a period of 3 years from the closing date of the amendment, revise the principal amortization schedule beginning July 2022, or, with respect to any additional commitments, the date specified as1, 2020 through the maturity for such additional loans when they are made. We have not requested any additional commitments underdate of July 1, 2027 and change the Term Loan. Loans underinterest rate to a floating per annum rate equal to the Term Loan bear interest at our option at either LIBORprime rate minus 1.50% subject to a floor of 0.75% plus 3.50%2.25%. The Revolving Loan Agreement’s maturity date was amended to March 24, 2023 and changed the interest rate to a floating per annum or base rate equal to the prime rate minus 1.50% subject to a floor of 1.75% plus 2.50% per annum. 2.25%.
The Term Loan is subject to scheduled amortization payments of $650,000 in each fiscal quarter, in each case subject to adjustment based on any voluntary or mandatory prepayments. In February 2016, we made a voluntary principal prepayment of $10.0 million. In March 2017, we made a voluntary principal prepayment of $160.0 million using proceeds from the IPO. As of March 31, 2017 and March 31, 2016, the principal amount outstanding on the Term Loan equaled $86.1 million and $248.7 million, respectively. The Term Loan contains certain restrictiveAgreements contain covenants that, among other things, limit ourHLA’s ability to incur indebtedness, transfer or dispose of assets, merge with other companies, create, incur indebtedness andor allow liens, make investments, make certain restricted payments including paying dividends, enter into sale leaseback transactions anddistributions, engage in transactions with affiliates. In addition,affiliates and take certain actions with respect to 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, 2020 and 2019, the principal amount of debt outstanding equaled $75.0 million and $71.3 million, respectively.
Multi-Draw Term Loan contains a financial covenant requiring us to maintain our total leverage ratio at or below certain levels. The Term Loan is guaranteed by all of our direct or indirect subsidiaries, with certain exceptions, and is secured by pledges of our and the guarantor subsidiaries’ personal property assets and material real property.
Revolving Credit Facility
We previously had a revolving credit facility with Silicon Valley Bank (the “Revolving Credit Facility”), which matured in April 2017. We had no loans outstanding under the Revolving Credit Facility for any period.
Fiscal 2016 Recapitalization
In July 2015, we undertook a leveraged recapitalization primarily to redeem membership interests of certain non-employee owners of HLA. WeMarch 2020, the Company entered into thea Multi-Draw Term Loan and usedSecurity Agreement (the “Multi-Draw Facility”) with First Republic, which provides for a term loan in the proceeds to repay certain of our existing indebtedness and used the remainder, combined with cash on hand, to redeem for cash certain HLA membership interests for an aggregate redemptionprincipal amount of $168.6 million.$75 million that may be drawn any time during a period of one year following the closing date. Borrowings accrue interest at a fixed per annum rate of 4% and the Multi-Draw Facility matures on July 1, 2030.
Cash Flows
Years ended March 31, 2017, 2016 and 2015
|
| | | | | | | | | | | | |
| | Year Ended March 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| | (in thousands) |
Net cash provided by operating activities | | $ | 81,679 |
|
| $ | 109,175 |
|
| $ | 76,903 |
|
Net cash provided by (used in) investing activities | | (16,715 | ) |
| 2,502 |
|
| (10,059 | ) |
Net cash (used in) financing activities | | (101,211 | ) |
| (110,104 | ) |
| (74,901 | ) |
Increase (decrease) in cash, cash equivalents and restricted cash | | $ | (36,247 | ) | | $ | 1,573 |
| | $ | (8,057 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended March 31, | | | | |
| | 2020 | | 2019 | | 2018 |
| | (in thousands) | | | | |
Net cash provided by operating activities | | $ | 116,373 | | | $ | 111,622 | | | $ | 96,692 | |
Net cash used in investing activities | | (49,900) | | | (19,213) | | | (21,773) | |
Net cash used in financing activities | | (64,709) | | | (90,210) | | | (59,671) | |
Effect of exchange rate changes on cash and cash equivalents | | (144) | | | 8 | | | — | |
Increase in cash, cash equivalents and restricted cash | | $ | 1,620 | | | $ | 2,207 | | | $ | 15,248 | |
Operating Activities
Net cash provided by operating activities was $81.7$116.4 million, $109.2$111.6 million and $76.9$96.7 million during fiscal 2017, 20162020, 2019 and 2015,2018, respectively. These operating cash flows were driven primarily by:
•net income of $74.4$126.8 million, $55.9$99.0 million and $71.5$106.3 million during the years ended March 31, 2017, 2016fiscal 2020, 2019 and 2015, respectively, and changes in operating assets and liabilities;
deferred incentive fee revenue of $0.0 million, $43.2 million and $2.0 million during the years ended March 31, 2017, 2016 and 2015, respectively, due to the receipt and deferral of incentive fees allocated and subject to continuing contingencies; and
proceeds received from investments of $10.8 million, $4.1 million and $8.1 million during the years ended March 31, 2017, 2016 and 2015, respectively, which represent a return on investment from specialized funds and certain customized separate accounts.2018, respectively.
Investing Activities
Our net cash flow provided by (used in)used in investing activities was ($16.7)$49.9 million, $2.5$19.2 million and ($10.1)$21.8 million during fiscal 2017, 20162020, 2019 and 2015,2018, respectively. These amounts were driven primarily by:
•contributions to andinvestments, net of distributions received from investments, that netted to ($15.4)of $46.0 million $3.4, $35.4 million and ($6.2)$14.3 million forduring fiscal 2017, 20162020, 2019 and 2015,2018, respectively; and
purchases•Proceeds from the sales of furniture, fixtures and equipment consisting primarilyother investments of computers and equipment and costs associated with the build out of office space totaling ($1.3) million, ($0.9)$6.4 million and ($3.9)$22.5 million inand during fiscal 2017, 20162020 and 2015, respectively.2019, respectively; and
•cash paid for the acquisition of a business of $5.2 million during fiscal 2018.
Financing Activities
Our net cash flow (used in)used in financing activities was ($101.2)$64.7 million, ($110.1)$90.2 million and ($74.9)$59.7 million during fiscal 2017, 20162020, 2019 and 2015,2018, respectively. Cash used in financing activities was attributable primarily to:
the payoff•dividends paid of our previous term loan of ($108.8)$29.1 million, in fiscal 2016;
debt issuance of the Term Loan of $260.0 million offset by related deferred financing costs in fiscal 2016;
debt repayments of ($162.6) million, ($12.9)$18.7 million and $(15.6)$9.5 million during fiscal 2017, 20162020, 2019 and 2015, respectively;
proceeds from our IPO, net of underwriting discount of $203.2 million, along with deferred offering costs of ($5.8) million in fiscal 2017;
the repurchase of equity due to the fiscal 2016 recapitalization of HLA and other purchases of equity interests during fiscal 2016 totaling ($173.6) million and purchases of equity interests and restricted stock of ($58.1) million and ($12.0) million in fiscal 2017 and 2015,2018, respectively; and
•distributions to equity holders of ($80.5)$47.4 million, ($67.8)$50.6 million and ($47.1)$36.9 million forduring fiscal 2017, 20162020, 2019 and 2015,2018, respectively.
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 current 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.
We expect that our primary current 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 under the tax receivable agreement, (5) fund capital expenditures, (6) pay interest and principal due on our Term Loan, (7) pay income taxes, and (8) make distributions to our stockholders and holders of HLA units in accordance with our distribution policy.
We are required to maintain minimum net capital balances for regulatory purposes for our Hong Kong, United Kingdom and broker-dealer subsidiaries. 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, 2017,2020, we were required to maintain approximately $1.8$3.1 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. Our board intendsWe intend to cause uscontinue 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 exchanges of membership units of HLA by members of HLA, as well as our initial purchase of membership units of HLA with the net proceeds from our IPO from certain existing direct and indirect HLA members, will result in increases in the tax basis in our share of the assets of HLA that otherwise would not have been available. 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 existing direct and indirect members of HLA.
Off-Balance Sheet Arrangements
We do not invest in any off-balance sheet vehicles that provide liquidity, capital resources, market or credit risk support, or engage in any activities that expose us to any liability that is not reflected in our consolidated financial statements except for those described under “—Contractual Obligations, Commitments and Contingencies” below.statements.
Contractual Obligations, Commitments and Contingencies
The following table represents our contractual obligations as of March 31, 2017,2020, aggregated by type.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contractual Obligations, Commitments and Contingencies | | | | | | | | |
(in thousands) | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Operating leases (1) | $ | 10,997 | | | $ | 4,912 | | | $ | 4,520 | | | $ | 1,565 | | | $ | — | |
Debt obligations payable (2) | 75,000 | | | 1,406 | | | 3,750 | | | 11,719 | | | 58,125 | |
Interest on debt obligations payable (3) | 9,685 | | | 1,698 | | | 3,269 | | | 2,948 | | | 1,770 | |
Capital commitments to our investments (4) | 143,489 | | | 143,489 | | | — | | | — | | | — | |
Total | $ | 239,171 | | | $ | 151,505 | | | $ | 11,539 | | | $ | 16,232 | | | $ | 59,895 | |
|
| | | | | | | | | | | | | | | | | | | |
| Contractual Obligations, Commitments and Contingencies |
(in thousands) | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Operating leases | $ | 16,582 |
| | $ | 4,103 |
| | $ | 7,088 |
| | $ | 5,391 |
| | $ | — |
|
Debt obligations payable (1) | 86,100 |
| | 2,600 |
| | 5,200 |
| | 5,200 |
| | 73,100 |
|
Interest on debt obligations payable (2) | 19,072 |
| | 3,867 |
| | 7,389 |
| | 6,907 |
| | 909 |
|
Capital commitments to our investments (3) | 76,908 |
| | 76,908 |
| | — |
| | — |
| | — |
|
Total | $ | 198,662 |
| | $ | 87,478 |
| | $ | 19,677 |
| | $ | 17,498 |
| | $ | 74,009 |
|
(1) Operating leases obligation does not include the operating lease for our new headquarters which is in process of being constructed. Total lease payments are estimated at $92.3 million over 17 years starting at lease commencement.
(2) Represents scheduled debt obligation payments. Ourpayments under our Loan Agreements.
(3) 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 includes covenants requiring mandatory prepayments if certain events occur, including asset sales, the receiptAgreement in effect as of insurance/condemnation proceeds, and certain debt issuances. In addition, the Term Loan requires thatMarch 31, 2020.
(4) Represents commitments by us to fund a portion of any excess cash flow above a negotiated formula must be prepaid annually ifeach investment made by our leverage ratio as calculated underspecialized funds and certain customized separate account entities. These amounts are generally due on demand and are therefore presented in the Term Loan is greaterless than 1.75 to 1.00. There have been no mandatory prepayments under the Term Loan. Because the amount and timing of any prepayments under the Term Loan are uncertain, they have been excluded from the table.one year category.
| |
(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 4.48% in effect as of March 31, 2017. |
| |
(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.
Critical Accounting Policies
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 policies 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”).
Our policy is to perform an analysis to determine whether consolidation is required by determining if we have a variable interest in each entity and whether that entity is a VIE. We perform the variable interest analysis for all entities in which we have a potential variable interest, which consist primarily of our specialized funds and customized separate accounts where we serve as the general partner or managing member, and general partner entities not wholly owned by us. If we have a variable interest in the entity and the entity is a VIE, we will also analyze whether we are the primary beneficiary of this entity and whether 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. For our specialized funds and customized separate accounts, our fee arrangements are not considered to be
variable interests. For those entities where we hold a variable interest, we determine whether each of these entities qualifies as a VIE and, if so, whether we are the primary beneficiary.
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. The entities that are VIEs were determined as such because the respective limited partners do not have the ability to remove the general partner or dissolve the respective fund or entity with a simple majority vote (i.e., the limited partners lack “kick out rights”).
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. At each reporting date, we determine whether any reconsideration events have occurred that require us to revisit the primary beneficiary analysis, and we will consolidate or deconsolidate accordingly.
Equity-Based Compensation
Equity-based awards issued are measured at their fair value at the date of grant. Prior to our IPO, the fair values of membership interests underlying the option and restricted unit grants were based on valuations performed that primarily utilized the market approach using comparable public companies and precedent transactions and an income approach using a discounted cash flow analysis. Following the IPO, we established a policy of using the closing sale price of our Class A common stock as quoted on the NASDAQ Stock Market on the trading day before the date of grant for purposes of determining the fair value of our restricted stock awards. Expenses related to employee equity-based compensation are recorded over the vesting period using the straight-line method.
Revenue Recognition of Incentive Fees
We have elected to adopt Method 1 of ASC 605-20-S99, “Accounting for Management Fees Based on a Formula.” Under Method 1, incentive fees are recognized as income when all contingencies, including realization of specified minimum returns to limited partners, have been resolved.
Incentive fees include both carried interest earned from certain specialized funds and performance fees received from certain customized separate accounts.
Carried interest is calculated as a percentage of the profits earned by ourContracts with specialized funds subjectand 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 achievement of certain performance criteria. Any calculated amounts above the required minimum returnspreferred return on that capital has been distributed to limited partners, as specified in the partnership agreements, are allocated by our specialized funds to us.
Performanceinvestors. Incentive fees are recognized based onwhen it is probable that a significant reversal will not occur. Investment returns are highly susceptible to market factors and judgments and actions of third parties that are outside of our control. We estimate the performance duringamount and probability of additional future capital contributions to specialized funds and customized separate accounts, which could impact the period, subjectprobability of a significant reversal occurring. The additional future capital contributions relate to the achievement of minimum return levels,unfunded commitments or follow-on investment opportunities in accordance with the respective terms set out in the client agreement. We recognize incentive fees in our Consolidated Statement of Income once all contingencies have been resolved.
underlying portfolio investments.
Incentive fee paymentsfees received by us before the aboverevenue recognition criteria have been met are deferred and recorded as deferred incentive fee revenue in ourthe Consolidated Balance Sheet. We may receive tax distributions related to taxable income allocated by our specialized funds and certain of our customized separate accounts, which are treated as an advance of incentive fees and subject to the same recognition criteria.Sheets.
Incentive Fee Compensation Expense
Incentive fee compensation expense includes compensation directly related to incentive fees. Certain employees are granted allocations or profit-sharing interests and are thereby, as a group, entitled to a 25% portion of the incentive fees earned from certain of our specialized funds and performance fees from certain customized separate accounts, subject to vesting. Amounts payable pursuant to these arrangements are recorded as a compensation expense when they have become probable and reasonably estimable. Our determination of the point at which it becomes probable and reasonably estimable is based on our assessment of numerous factors, particularly those related to the profitability, realization, distribution status, investment profile and commitments or contingencies of our specialized funds or customized separate accounts that may give rise to incentive fees. Incentive fee compensation may be expensed before the related incentive fee incomerevenue is recognized.
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. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied in the years in which temporary differences are expected to be recovered or settled. The principal items giving rise to temporary differences are the use of accelerated depreciation and certain basis differences resulting from the 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 recapitalization transactions.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 expectedmore likely than not to be realized.
As a result of the Reorganization and IPO,
HLI becameis the sole managing member of HLA, which is organized as a limited liability company and treated as a “flow-through” entity for income taxes purposes. As a “flow-through” entity, HLA is not subject to income taxes apart from from certain U.S. state and local taxes and foreign taxes attributable to its operations in foreign jurisdictions. Any taxable income or loss generated by HLA is passed through to and included in the taxable income or loss of its members, including HLI, on a pro rata basis.HLI. As a result, we do not record income taxes on pre-tax income or loss attributable to the non-controlling interests in the general partnerships and HLA, except for foreign taxes discussed above. HLI is subject to U.S. federal and applicable state corporate income taxes with respect to its allocable share of any taxable income of HLA.
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 Receivable Agreement
Our purchase of HLA Class A units concurrent with the IPO, and the subsequent and future exchanges by holders of HLA units for shares of our Class A common stock pursuant to the Exchange Agreement, is expected toexchange agreement, result in increases in our share of the tax basis of the tangible and intangible assets of HLA,
which will increaseincreases 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 athe tax receivable agreement (“TRA”) with the other members of HLA, thatwhich 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 TRA.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 TRA Paymentstax receivable agreement payments - the exception being that our obligation to make TRA Paymentssuch payments may be accelerated if we elect to terminate the TRA,tax receivable agreement, in whole or in part, or if a change in control of us, or a breach of the TRAtax receivable agreement by us, occurs. Therefore, we will generally only recognize a liability for TRA Paymentspayments 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. Accordingly, we have recorded an initial liability of $10.7 million payable to the TRA Recipients under the TRA, representing approximately 85% of the calculated tax savings based on the original basis adjustments that we anticipate being able to utilize in future years. Changes in the projected liability resulting from the TRAtax 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.
JOBS Act
We qualify as an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act, as modified by the JOBS Act. The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We have irrevocably elected to “opt out” of the extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
Subject to certain conditions set forth in the JOBS Act, we are also eligible for and intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies that are not emerging growth companies, including (i) the exemption from the auditor attestation requirements with respect to internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, (ii) no requirement to seek non-binding advisory votes on executive compensation or golden parachute arrangements and (iii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We may take advantage of these exemptions until we are no longer an emerging growth company.
We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of our IPO, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which means the market value of our capital stock that is held by non-affiliates is at least $700 million as of the
prior September 30, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
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.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
In the normal course of business, we are exposed to a broad range of risks inherent in the financial markets in which we participate, including price risk, interest-rate risk, access to and cost of financing risk, liquidity risk, counterparty risk and foreign exchange-rate risk. Potentially negative effects of these risks may be mitigated to a certain extent by those aspects of our investment approach, investment strategies, fundraising practices or other business activities that are designed to benefit, either in relative or absolute terms, from periods of economic weakness, tighter credit or financial market dislocations.
Our predominant exposure to market risk is related to our role as general partner or investment manager for our specialized funds and customized separate accounts and the sensitivities to movements in the fair value of their investments, which may adversely affect our equity in income of investees. Since our management fees are generally based on commitments or net invested capital, our management fee and advisory fee revenue is not significantly impacted by changes in investment values.
Fair value of the financial assets and liabilities of our specialized funds and customized separate accounts may fluctuate in response to changes in the value of securities, foreign currency exchange rates, commodity prices and interest rates. The impact of investment risk is as follows:
•Equity in income of investees changes along with the realized and unrealized gains of the underlying investments in our specialized funds and certain customized separate accounts in which we have a general partner commitment. Our general partner investments include over 3,000 unique underlying portfolio investments with no significant concentration in any industry or country outside of the United States.
•Management fees from our specialized funds and customized separate accounts are not significantly affected by changes in fair value as the management fees are not generally based on the value of the specialized funds or customized separate accounts, but rather on the amount of capital committed or invested in the specialized funds or customized separate accounts, as applicable.
•Incentive fees from our specialized funds and customized separate accounts are not materially affected by changes in the fair value of unrealized investments because they are based on realized gains and subject to achievement of performance criteria rather than on the fair value of the specialized fund’s or customized separate account’s assets prior to realization. We had $45.2$3.7 million of deferred incentive fee revenue on our balance sheet as of March 31, 2017.2020. Minor decreases in underlying fair value would not affect the amount of deferred incentive fee revenue subject to clawback. In order for any amount of our deferred incentive fee revenue to have been subject to clawback, the NAV across our funds as of March 31, 2017 would have needed to decline by over 50%.
Exchange Rate Risk
Several of our specialized funds and customized separate accounts hold investments denominated in non-U.S. dollar currencies that may be affected by movements in the rate of exchange between the U.S. dollar and foreign currency, which could impact investment performance. The currency exposure related to investments in foreign currency assets is limited to our general partner interest, which is typically one percent of total capital commitments. We do not possess significant assets in foreign countries in which we operate or engage in material transactions in currencies other than the U.S. dollar. Therefore, changes in exchange rates are not expected to materially impact our financial statements.
Interest Rate Risk
As of March 31, 2017,2020, we had $86.1$75.0 million in borrowings outstanding under our Term Loan.Loan Agreements. The annual interest rate on the Term Loan Agreement, which is at LIBORthe prime rate minus 1.50%, subject to a floor of 0.75% plus 3.50%2.25%, was 4.48%2.25% as of March 31, 2017. In July 2015, we purchased2020. The annual interest rate caps through June 30, 2020,on the Revolving Loan Agreement, which is at the prime rate minus 1.50%, subject to limit a portionfloor of our exposure to changes in LIBOR above 2.50%.2.25%, was 2.25% as of March 31, 2020.
Based on the floating rate component of our Term Loan Agreements payable as of March 31, 2017,2020, we estimate that a 100 basis point increase in interest rates would result in increased interest expense related to the loan of $0.9$0.4 million over the next 12 months.
Credit Risk
We are party to agreements providing for various financial services and transactions that contain an element of risk in the event that the counterparties are unable to meet the terms of such agreements. In such agreements, we depend on the respective counterparty to make payment or otherwise perform. We generally endeavor to minimize our risk of exposure by limiting the counterparties with which we enter into financial transactions to reputable financial institutions. In other circumstances, availability of financing from financial institutions may be uncertain due to market events, and we may not be able to access these financing markets.
There have been no material changes in our market risk exposures since March 31, 2019.
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders of Hamilton Lane Incorporated
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hamilton Lane Incorporated (the “Company”),Company) as of March 31, 20172020 and 2016, and2019, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended March 31, 2017. These2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements arepresent fairly, in all material respects, the responsibilityfinancial position of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.Company at March 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2020, in conformity with U.S. generally accepted accounting principles.
We conducted our auditsalso have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company's internal control over financial reporting as of March 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated May 28, 2020 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-02
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in the year ending March 31, 2020 due to the adoption of ASU No. 2016-02, Leases (Topic 842), and the related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engagedmisstatement, whether due to perform an audit of the Company’s internal control over financial reporting.error or fraud. Our audits included considerationperforming procedures to assess the risks of internal control overmaterial misstatement of the financial reporting as a basis for designing auditstatements, whether due to error or fraud, and performing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includesrespond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | | | | | | | |
| | Recognition of Incentive Fee Revenue |
Description of the Matter | | For the year ended March 31, 2020, the Company recognized $29.1 million of incentive fee revenue. As explained in Note 2 to the consolidated financial statements, the Company considers incentive fees from specialized funds and customized separate accounts to be variable consideration which is constrained and recognized when it is probable that a significant reversal in the cumulative amount of incentive fee revenue will not occur. As incentive fees are generally payable after all contributed capital and the preferred return thereon has been distributed to investors, the Company estimates the amount and probability of additional future capital contributions that it will call from investors in specialized funds and customized separate accounts related to unfunded commitments or follow on investment opportunities in investees. These estimates could impact the probability of a significant reversal in the cumulative amount of incentive fee revenue occurring.
Auditing management’s assessment of whether it is probable that a significant reversal in the cumulative amount of incentive fee revenue will not occur is subjective and requires significant judgment, as the estimates described above are affected by future economic, market and investee-specific conditions. |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risk of material misstatement relating to the recognition of incentive fee revenue. This included controls over management’s review of the estimates of the amount and probability of additional future capital contributions from investors in specialized funds and customized separate accounts.
To test the recognition of incentive fee revenue, our audit procedures included, among others, evaluating the Company’s estimates of the amount and probability of additional future capital contributions described above. For example, we compared management’s assumptions about the probability that the investees will need additional capital to historical trends and financial information available from the investees, evaluated the change in the assumptions from the prior year and assessed the historical accuracy of management’s assumptions. We performed sensitivity analyses of management’s estimate of additional future capital contributions to evaluate the changes in the amount of incentive fee revenue recognized that would result from changes in the assumptions. In addition, we searched for and evaluated information that corroborated or contradicted management’s assumptions. |
| | | | | | | | |
| | Recognition of Net Deferred Tax Asset from Equity Offering and Unit Exchange |
Description of the Matter | | As further discussed in Note 12 to the consolidated financial statements, in connection with the Company’s equity offering and unit exchange during the current year (the “Transaction”), the Company recorded a net deferred tax asset of $37.4 million. As further discussed in Note 2 to the consolidated financial statements, the resulting basis differences arising from the Transaction represent a temporary difference for which the Company records a deferred tax asset if it is more likely than not the deferred tax asset will be realized. Realization of this deferred tax asset is dependent upon, among other things, the future tax deductions of tax basis step-ups related to the Transaction.
Auditing the Company’s recognition of the net deferred tax asset related to the Transaction is especially challenging, as the Company’s determination of the tax basis step-ups and related future tax deductions requires the application of complex tax laws and regulations for partnerships and the identification of historical basis differences. |
How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s net deferred tax asset recognition process, including controls over management’s review of the determination of the tax basis step-ups and related future tax deductions and the identified historical basis differences described above.
To test the recognition of the net deferred tax asset resulting from the Transaction, we involved a specialist and performed procedures that included, among others, evaluating the technical merit of the Company’s determination of the tax basis step-ups and the related future tax deductions based on relevant tax law and regulations. We also used available tax-related information to evaluate the historical basis differences the Company used in its determination. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Philadelphia, Pennsylvania
May 28, 2020
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Hamilton Lane Incorporated
Opinion on Internal Control Over Financial Reporting
We have audited Hamilton Lane Incorporated’s internal control over financial reporting as of March 31, 2020, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)(the COSO criteria). In our opinion, the financial statements referred to above present fairly,Hamilton Lane Incorporated (the Company) maintained, in all material respects, effective internal control over financial reporting as of March 31, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial positionbalance sheets of Hamilton Lane Incorporated atthe Company as of March 31, 20172020 and 2016,2019, the related consolidated statements of income, comprehensive income, stockholders’ equity and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2017,2020, and the related notes and our report dated May 28, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in conformitythe accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
May 28, 2020
June 26, 2017
Hamilton Lane Incorporated
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
| | | | | | | | | | | |
| March 31, | | |
| 2020 | | 2019 |
Assets | | | |
Cash and cash equivalents | $ | 50,124 | | | $ | 49,357 | |
Restricted cash | 3,086 | | | 2,233 | |
Fees receivable | 30,384 | | | 20,320 | |
Prepaid expenses | 6,988 | | | 4,714 | |
Due from related parties | 2,605 | | | 2,628 | |
Furniture, fixtures and equipment, net | 7,402 | | | 8,108 | |
Lease right-of-use assets, net | 9,577 | | | — | |
Investments | 207,747 | | | 154,491 | |
Deferred income taxes | 137,941 | | | 107,726 | |
Other assets | 17,675 | | | 11,014 | |
Total assets | $ | 473,529 | | | $ | 360,591 | |
| | | |
Liabilities and Equity | | | |
Accounts payable | 1,968 | | | 2,619 | |
Accrued compensation and benefits | 10,804 | | | 12,216 | |
Deferred incentive fee revenue | 3,704 | | | 3,704 | |
Debt | 74,524 | | | 70,954 | |
Accrued members’ distributions | 5,829 | | | 17,081 | |
Payable to related parties pursuant to tax receivable agreement | 98,956 | | | 69,636 | |
Accrued dividend | 8,027 | | | 5,673 | |
Lease liabilities | 10,184 | | | — | |
Other liabilities (includes $13,394 and $0 at fair value) | 22,132 | | | 8,986 | |
Total liabilities | 236,128 | | | 190,869 | |
| | | |
Commitments and Contingencies (Note 16) | | | |
| | | |
Preferred stock, $0.001 par value, 10,000,000 authorized, NaN issued | — | | | — | |
Class A common stock, $0.001 par value, 300,000,000 authorized; 29,842,784 and 27,367,477 issued and outstanding as of March 31, 2020 and 2019, respectively | 30 | | | 27 | |
Class B common stock, $0.001 par value, 50,000,000 authorized; 22,049,727 and 23,516,439 issued and outstanding as of March 31, 2020 and 2019, respectively | 22 | | | 24 | |
Additional paid-in-capital | 107,727 | | | 92,482 | |
Accumulated other comprehensive (loss) income | (78) | | | 7 | |
Retained earnings | 47,090 | | | 17,686 | |
Total Hamilton Lane Incorporated stockholders’ equity | 154,791 | | | 110,226 | |
Non-controlling interests in general partnerships | 4,853 | | | 5,716 | |
Non-controlling interests in Hamilton Lane Advisors, L.L.C. | 77,757 | | | 53,780 | |
Total equity | 237,401 | | | 169,722 | |
| | | |
Total liabilities and equity | $ | 473,529 | | | $ | 360,591 | |
|
| | | | | | | |
| March 31, |
| 2017 | | 2016 |
Assets | | | |
Cash and cash equivalents | $ | 32,286 |
| | $ | 68,584 |
|
Restricted cash | 1,849 |
| | 1,798 |
|
Fees receivable | 12,113 |
| | 11,828 |
|
Prepaid expenses | 2,593 |
| | 1,555 |
|
Due from related parties | 3,313 |
| | 2,852 |
|
Furniture, fixtures and equipment, net | 4,063 |
| | 4,612 |
|
Investments | 120,147 |
| | 102,749 |
|
Deferred income taxes | 61,223 |
| | 7 |
|
Other assets | 3,030 |
| | 2,651 |
|
Total assets | $ | 240,617 |
| | $ | 196,636 |
|
| | | |
Liabilities and Equity | | | |
Accounts payable | $ | 1,366 |
| | $ | 641 |
|
Accrued compensation and benefits | 3,417 |
| | 4,029 |
|
Deferred incentive fee revenue | 45,166 |
| | 45,166 |
|
Senior secured term loan payable | | | |
Principal amount | 86,100 |
| | 248,700 |
|
Less: unamortized discount and debt issuance costs | 1,790 |
| | 5,383 |
|
Senior secured term loan payable, net | 84,310 |
| | 243,317 |
|
Accrued members’ distributions | 2,385 |
| | 9,386 |
|
Payable to related parties pursuant to tax receivable agreement | 10,734 |
| | — |
|
Other liabilities | 6,612 |
| | 6,035 |
|
Total liabilities | 153,990 |
| | 308,574 |
|
| | | |
Commitments and Contingencies (Note 13) | | | |
| | | |
Members’ deficit | — |
| | (122,483 | ) |
Preferred stock, $0.001 par value, 10,000,000 authorized, none issued | — |
| | — |
|
Class A common stock, $0.001 par value, 300,000,000 authorized; 19,151,033 issued and 19,036,504 outstanding as of March 31, 2017 | 19 |
| | — |
|
Class B common stock, $0.001 par value, 50,000,000 authorized; 27,935,255 issued and outstanding as of March 31, 2017 | 28 |
| | — |
|
Additional paid-in-capital | 61,845 |
| | — |
|
Accumulated other comprehensive loss | (311 | ) | | (823 | ) |
Retained earnings | 612 |
| | — |
|
Less: Treasury stock, at cost, 114,529 as of March 31, 2017 | (2,151 | ) | | — |
|
Total Hamilton Lane Incorporated stockholders’ equity / members’ deficit | 60,042 |
| | (123,306 | ) |
Non-controlling interests in general partnerships | 9,901 |
| | 11,368 |
|
Non-controlling interests in Hamilton Lane Advisors, L.L.C. | 16,684 |
| | — |
|
Total equity (deficit) | 86,627 |
| | (111,938 | ) |
| | | |
Total liabilities and equity | $ | 240,617 |
| | $ | 196,636 |
|
See accompanying notes to the consolidated financial statements.
Hamilton Lane Incorporated
Consolidated Statements of Income
(In thousands, except per share amounts)
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| 2020 | | 2019 | | 2018 |
Revenues | | | | | |
Management and advisory fees | $ | 244,920 | | | $ | 217,773 | | | $ | 195,030 | |
Incentive fees | 29,128 | | | 34,406 | | | 49,003 | |
Total revenues | 274,048 | | | 252,179 | | | 244,033 | |
Expenses | | | | | |
Compensation and benefits | 98,519 | | | 97,719 | | | 82,868 | |
General, administrative and other | 59,100 | | | 50,236 | | | 38,212 | |
Total expenses | 157,619 | | | 147,955 | | | 121,080 | |
Other income (expense) | | | | | |
Equity in income of investees | 20,250 | | | 7,202 | | | 17,102 | |
Interest expense | (2,816) | | | (3,039) | | | (5,989) | |
Interest income | 709 | | | 255 | | | 528 | |
Non-operating income | 6,172 | | | 20,915 | | | 5,036 | |
Total other income (expense) | 24,315 | | | 25,333 | | | 16,677 | |
Income before income taxes | 140,744 | | | 129,557 | | | 139,630 | |
Income tax expense | 13,968 | | | 30,560 | | | 33,333 | |
Net income | 126,776 | | | 98,997 | | | 106,297 | |
Less: Income attributable to non-controlling interests in general partnerships | 85 | | | 564 | | | 2,448 | |
Less: Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | 65,866 | | | 64,860 | | | 86,508 | |
Net income attributable to Hamilton Lane Incorporated | $ | 60,825 | | | $ | 33,573 | | | $ | 17,341 | |
| | | | | |
Basic earnings per share of Class A common stock | $ | 2.17 | | | $ | 1.41 | |
| $ | 0.94 | |
Diluted earnings per share of Class A common stock | $ | 2.15 | | | $ | 1.40 | |
| $ | 0.93 | |
Dividends declared per share of Class A common stock | $ | 1.10 | | | $ | 0.85 | | | $ | 0.70 | |
|
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Revenues | | | | | |
Management and advisory fees | $ | 172,674 |
| | $ | 157,630 |
| | $ | 145,876 |
|
Incentive fees | 7,146 |
| | 23,167 |
| | 9,509 |
|
Total revenues | 179,820 |
| | 180,797 |
| | 155,385 |
|
Expenses | | | | | |
Compensation and benefits | 72,116 |
| | 92,065 |
| | 60,157 |
|
General, administrative and other | 31,589 |
| | 26,898 |
| | 26,865 |
|
Total expenses | 103,705 |
| | 118,963 |
| | 87,022 |
|
Other income (expense) | | | | | |
Equity in income of investees | 12,801 |
| | 1,518 |
| | 10,474 |
|
Interest expense | (14,565 | ) | | (12,641 | ) | | (5,883 | ) |
Interest income | 320 |
| | 194 |
| | 87 |
|
Other non-operating income (loss) | 83 |
| | 5,816 |
| | (1,056 | ) |
Total other income (expense) | (1,361 | ) | | (5,113 | ) | | 3,622 |
|
Income before income taxes | 74,754 |
| | 56,721 |
| | 71,985 |
|
Income tax expense | 316 |
| | 869 |
| | 483 |
|
Net income | 74,438 |
| | 55,852 |
| | 71,502 |
|
Less: Income (loss) attributable to non-controlling interests in general partnerships | 1,192 |
| | (1,255 | ) | | 2,242 |
|
Less: Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | 72,634 |
| | 57,107 |
| | 69,260 |
|
Net income attributable to Hamilton Lane Incorporated | $ | 612 |
| | $ | — |
| | $ | — |
|
| | | | | |
Earnings per share of Class A common stock (1):
| | | | | |
Basic | $ | 0.03 |
| | | | |
Diluted | $ | 0.03 |
| | | | |
Weighted-average shares of Class A common stock outstanding(1):
| | | | | |
Basic | 17,788,363 |
| | | | |
Diluted | 18,341,079 |
| | | | |
| |
(1) | Represents earnings per share of Class A common stock and weighted-average shares of Class A common stock outstanding for the period from March 6, 2017 through March 31, 2017, the period following the Reorganization and IPO, as defined in Note 1 (see Note 11). |
(1)See accompanying notes to the consolidated financial statements.
Hamilton Lane Incorporated
Consolidated Statements of Comprehensive Income
(In Thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| 2020 | | 2019 | | 2018 |
Net income | $ | 126,776 | | | $ | 98,997 | | | $ | 106,297 | |
Other comprehensive income (loss), net of tax: | | | | | |
Foreign currency translation | (159) | | | 15 | | | — | |
Amounts reclassified to net income: | | | | | |
Realized loss on cash flow hedge | — | | | — | | | 922 | |
Total other comprehensive income (loss), net of tax | (159) | | | 15 | | | 922 | |
Comprehensive income | $ | 126,617 | | | $ | 99,012 | | | $ | 107,219 | |
Less: | | | | | |
Comprehensive income attributable to non-controlling interests in general partnerships | 85 | | | 564 | | | 2,448 | |
Comprehensive income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | 65,792 | | | 64,868 | | | 87,119 | |
Total comprehensive income attributable to Hamilton Lane Incorporated | $ | 60,740 | | | $ | 33,580 | | | $ | 17,652 | |
|
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Net income | $ | 74,438 |
| | $ | 55,852 |
| | $ | 71,502 |
|
Other comprehensive income (loss), net of tax: | | | | | |
Unrealized loss on cash flow hedge | (142 | ) | | (823 | ) | | — |
|
Amounts reclassified to net income: | | | | | |
Realized loss on cash flow hedge | 44 |
| | — |
| | 132 |
|
Total other comprehensive income (loss), net of tax | (98 | ) | | (823 | ) | | 132 |
|
Comprehensive income | $ | 74,340 |
| | $ | 55,029 |
| | $ | 71,634 |
|
Less: | | | | | |
Comprehensive income (loss) attributable to non-controlling interests in general partnerships | 1,192 |
| | (1,255 | ) | | 2,242 |
|
Comprehensive income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. | 72,522 |
| | 56,284 |
| | 69,392 |
|
Total comprehensive income attributable to Hamilton Lane Incorporated | $ | 626 |
| | $ | — |
| | $ | — |
|
See accompanying notes to the consolidated financial statements.
Hamilton Lane Incorporated
Consolidated Statements of Stockholders' Equity
(In Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Additional Paid in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Non-Controlling Interests in general partnerships | | Non-Controlling Interests in Hamilton Lane Advisors, L.L.C. | | Total Equity |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Balance at March 31, 2017 | $ | 19 | | | $ | 28 | | | $ | 61,845 | | | $ | 612 | | | $ | (2,151) | | | $ | (311) | | | $ | 9,901 | | | $ | 16,684 | | | $ | 86,627 | |
Net income | — | | | — | | | — | | | 17,341 | | | — | | | — | | | 2,448 | | | 86,508 | | | 106,297 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 311 | | | — | | | 611 | | | 922 | |
Equity-based compensation | — | | | — | | | 1,980 | | | — | | | — | | | — | | | — | | | 3,668 | | | 5,648 | |
Retirement of treasury stock | — | | | — | | | (2,151) | | | — | | | 2,151 | | | — | | | — | | | — | | | — | |
Proceeds received from option exercises | — | | | — | | | 108 | | | — | | | — | | | — | | | — | | | 205 | | | 313 | |
Issuance of shares for acquisition | — | | | — | | | 212 | | | — | | | — | | | — | | | — | | | 400 | | | 612 | |
Repurchase of Class A shares for employee tax withholding | (1) | | | — | | | (2,672) | | | — | | | — | | | — | | | — | | | (3,800) | | | (6,473) | |
Deferred tax adjustment | — | | | — | | | 7,012 | | | — | | | — | | | — | | | — | | | — | | | 7,012 | |
Dividends declared | — | | | — | | | — | | | (13,404) | | | — | | | — | | | — | | | — | | | (13,404) | |
Capital contributions from (distributions to) non-controlling interests, net | — | | | — | | | — | | | — | | | — | | | — | | | (5,083) | | | — | | | (5,083) | |
Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (46,395) | | | (46,395) | |
Offering adjustments | 4 | | | (2) | | | 7,681 | | | — | | | — | | | — | | | — | | | (7,685) | | | (2) | |
Equity reallocation between controlling and non-controlling interests | — | | | — | | | (186) | | | — | | | — | | | — | | | — | | | 186 | | | — | |
Balance at March 31, 2018 | $ | 22 | | | $ | 26 | | | $ | 73,829 | | | $ | 4,549 | | | $ | — | | | $ | — | | | $ | 7,266 | | | $ | 50,382 | | | $ | 136,074 | |
Net income | — | | | — | | | — | | | 33,573 | | | — | | | — | | | 564 | | | 64,860 | | | 98,997 | |
Cumulative-effect adjustment from adoption of accounting guidance | — | | | — | �� | | 411 | | | 20 | | | — | | | — | | | — | | | 566 | | | 997 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 7 | | | — | | | 8 | | | 15 | |
Equity-based compensation | — | | | — | | | 2,912 | | | — | | | — | | | — | | | — | | | 3,544 | | | 6,456 | |
Issuance of shares for contingent compensation payout | 1 | | | — | | | 200 | | | — | | | — | | | — | | | — | | | 224 | | | 425 | |
Purchase and retirement of Class A stock for tax withholding | — | | | — | | | (2,425) | | | — | | | — | | | — | | | — | | | (2,962) | | | (5,387) | |
Deferred tax adjustment | — | | | — | | | 10,346 | | | — | | | — | | | — | | | — | | | — | | | 10,346 | |
Dividends declared | — | | | — | | | — | | | (20,456) | | | — | | | — | | | — | | | — | | | (20,456) | |
Capital contributions from (distributions to) non-controlling interests, net | — | | | — | | | — | | | — | | | — | | | — | | | (2,114) | | | — | | | (2,114) | |
Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (55,893) | | | (55,893) | |
Offerings adjustment | 4 | | | (2) | | | 9,589 | | | — | | | — | | | — | | | — | | | (9,593) | | | (2) | |
Employee Share Purchase Plan share issuance | — | | | — | | | 127 | | | — | | | — | | | — | | | — | | | 137 | | | 264 | |
Vesting of restricted stock | — | | | — | | | 324 | | | — | | | — | | | — | | | — | | | (324) | | | — | |
Equity reallocation between controlling and non-controlling interests | — | | | — | | | (2,831) | | | — | | | — | | | — | | | — | | | 2,831 | | | — | |
Balance at March 31, 2019 | $ | 27 | | | $ | 24 | | | $ | 92,482 | | | $ | 17,686 | | | $ | — | | | $ | 7 | | | $ | 5,716 | | | $ | 53,780 | | | $ | 169,722 | |
Hamilton Lane Incorporated
Consolidated Statements of Stockholders' Equity
(In Thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Members’ Equity (Deficit) | | Class A Common Stock | | Class B Common Stock | | Additional Paid in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Non-Controlling Interests in general partnerships | | Non-Controlling Interests in Hamilton Lane Advisors, L.L.C. | | Total Equity (deficit) |
| | | | | | | | | |
Balance at March 31, 2014 | $ | 38,742 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (132 | ) | | $ | 18,502 |
| | $ | — |
| | $ | 57,112 |
|
Net income | 69,260 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2,242 |
| | — |
| | 71,502 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 132 |
| | — |
| | — |
| | 132 |
|
Equity-based compensation | 3,390 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,390 |
|
Purchase of membership interests | (12,014 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (12,014 | ) |
Sale of membership interests | 1,535 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,535 |
|
Proceeds received from option exercises | 1,579 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,579 |
|
Member distributions | (46,254 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| — |
| | (46,254 | ) |
Capital contributions from (distributions to) non-controlling interests, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,292 | ) | | — |
| | (3,292 | ) |
Balance at March 31, 2015 | $ | 56,238 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 17,452 |
| | $ | — |
| | $ | 73,690 |
|
Net income (loss) | 57,107 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,255 | ) | | — |
| | 55,852 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (823 | ) | | — |
| | — |
| | (823 | ) |
Equity-based compensation | 3,730 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,730 |
|
Purchase of membership interests | (173,622 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (173,622 | ) |
Sale of membership interests | 3,268 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,268 |
|
Proceeds received from option exercises | 586 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 586 |
|
Member distributions | (69,790 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (69,790 | ) |
Capital contributions from (distributions to) non-controlling interests, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,829 | ) | | — |
| | (4,829 | ) |
Balance at March 31, 2016 | $ | (122,483 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (823 | ) | | $ | 11,368 |
| | $ | — |
| | $ | (111,938 | ) |
Net income prior to Reorganization and IPO | 70,658 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,136 |
| | — |
| | 71,794 |
|
Other comprehensive loss prior to Reorganization and IPO | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (140 | ) | | — |
| | — |
| | (140 | ) |
Equity-based compensation prior to Reorganization and IPO | 4,363 |
| | — |
| | — |
| | — |
| | �� |
| | — |
| | — |
| | — |
| | — |
| | 4,363 |
|
Purchase of membership interests prior to Reorganization and IPO | (18,783 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (18,783 | ) |
Sale of membership interests prior to Reorganization and IPO | 4,669 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,669 |
|
Proceeds received from option exercises prior to Reorganization and IPO | 1,192 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,192 |
|
Member distributions prior to Reorganization and IPO | (71,083 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (71,083 | ) |
Capital contributions from (distributions to) non-controlling interests, net, prior to Reorganization and IPO | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,659 | ) | | — |
| | (2,659 | ) |
Issuance of Class A common stock sold in IPO, net of commissions | — |
| | 14 |
| | — |
| | 203,191 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 203,205 |
|
Issuance of Class B common stock to existing members | — |
| | — |
| | 28 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 28 |
|
Effect of Reorganization transaction and purchase of HLA units | 131,467 |
| | 4 |
| | — |
| | (187,681 | ) | | — |
| | — |
| | 638 |
| | — |
| | 18,372 |
| | (37,200 | ) |
Deferred tax adjustments related to TRA and Unit exchanges | — |
| | — |
| | — |
| | 50,543 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 50,543 |
|
Deferred IPO costs | — |
| | — |
| | — |
| | (5,844 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (5,844 | ) |
Issuance of restricted stock | — |
| | 1 |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Purchase of restricted stock for tax withholding subsequent to Reorganization and IPO | — |
| | — |
| | — |
| | 1,415 |
| | — |
| | (2,151 | ) | | — |
| | — |
| | (1,415 | ) | | (2,151 | ) |
Member distribution subsequent to Reorganization and IPO | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,373 | ) | | (2,373 | ) |
Other comprehensive loss subsequent to Reorganization and IPO | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| | 28 |
| | 42 |
|
Net income subsequent to Reorganization and IPO | — |
| | — |
| | — |
| | — |
| | 612 |
| | — |
| | — |
| | 56 |
| | 1,976 |
| | 2,644 |
|
Equity-based compensation subsequent to Reorganization and IPO | — |
| | — |
| | — |
| | 107 |
| | — |
| | — |
| | — |
| | — |
| | 211 |
| | 318 |
|
Vesting of restricted stock | — |
| | — |
| | — |
| | 115 |
| | — |
| | — |
| | — |
| | — |
| | (115 | ) | | — |
|
Balance at March 31, 2017 | $ | — |
| | $ | 19 |
| | $ | 28 |
| | $ | 61,845 |
| | $ | 612 |
| | $ | (2,151 | ) | | $ | (311 | ) | | $ | 9,901 |
| | $ | 16,684 |
| | $ | 86,627 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Additional Paid in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Income (Loss) | | Non-Controlling Interests in general partnerships | | Non-Controlling Interests in Hamilton Lane Advisors, L.L.C. | | Total Equity |
Balance at March 31, 2019 | $ | 27 | | | $ | 24 | | | $ | 92,482 | | | $ | 17,686 | | | $ | — | | | $ | 7 | | | $ | 5,716 | | | $ | 53,780 | | | $ | 169,722 | |
Net income | — | | | — | | | — | | | 60,825 | | | — | | | — | | | 85 | | | 65,866 | | | 126,776 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (85) | | | — | | | (74) | | | (159) | |
Equity-based compensation | — | | | — | | | 3,830 | | | — | | | — | | | — | | | — | | | 3,405 | | | 7,235 | |
Issuance of shares for contingent compensation payout | — | | | — | | | 214 | | | — | | | — | | | — | | | — | | | 211 | | | 425 | |
Purchase and retirement of Class A stock for tax withholding | — | | | — | | | (3,227) | | | — | | | — | | | — | | | — | | | (2,654) | | | (5,881) | |
Deferred tax adjustment | — | | | — | | | 6,526 | | | — | | | — | | | — | | | — | | | — | | | 6,526 | |
Dividends declared | — | | | — | | | — | | | (31,421) | | | — | | | — | | | — | | | — | | | (31,421) | |
Capital contributions from (distributions to) non-controlling interests, net | — | | | — | | | — | | | — | | | — | | | — | | | (948) | | | — | | | (948) | |
Member distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (36,116) | | | (36,116) | |
Offering adjustment | 3 | | | (2) | | | 6,367 | | | — | | | — | | | — | | | — | | | (6,370) | | | (2) | |
Employee Share Purchase Plan share issuance | — | | | — | | | 659 | | | — | | | — | | | — | | | — | | | 585 | | | 1,244 | |
Vesting of restricted stock | — | | | — | | | 333 | | | — | | | — | | | — | | | — | | | (333) | | | — | |
Equity reallocation between controlling and non-controlling interests | — | | | — | | | 543 | | | — | | | — | | | — | | | — | | | (543) | | | — | |
Balance at March 31, 2020 | $ | 30 | | | $ | 22 | | | $ | 107,727 | | | $ | 47,090 | | | $ | — | | | $ | (78) | | | $ | 4,853 | | | $ | 77,757 | | | $ | 237,401 | |
See accompanying notes to the consolidated financial statements.
Hamilton Lane Incorporated
Consolidated Statements of Cash Flows
(In Thousands)
|
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Operating activities: | | | | | |
| | | | | |
Net income | $ | 74,438 |
| | $ | 55,852 |
| | $ | 71,502 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 1,915 |
| | 2,027 |
| | 1,867 |
|
Change in deferred income taxes | 26 |
| | 730 |
| | 274 |
|
Amortization of deferred financing costs | 845 |
| | 857 |
| | 912 |
|
Write-off of deferred financing costs | 3,359 |
| | 2,408 |
| | — |
|
Equity-based compensation | 4,681 |
| | 3,730 |
| | 3,390 |
|
Gain on sale | — |
| | (5,408 | ) | | — |
|
Equity in income of investees | (12,801 | ) | | (1,518 | ) | | (10,474 | ) |
Proceeds received from investments | 10,843 |
| | 4,105 |
| | 8,129 |
|
Other | 77 |
| | 117 |
| | 1,056 |
|
Changes in operating assets and liabilities: | | | | | |
Fees receivable | (285 | ) | | 4,041 |
| | (6,643 | ) |
Prepaid expenses | (1,038 | ) | | (49 | ) | | 489 |
|
Due from related parties | (461 | ) | | 101 |
| | 1,136 |
|
Other assets | (610 | ) | | (1,009 | ) | | 30 |
|
Accounts payable | 725 |
| | (1,026 | ) | | 689 |
|
Accrued compensation and benefits | (612 | ) | | (920 | ) | | 1,848 |
|
Deferred incentive fee revenue | — |
| | 43,206 |
| | 1,960 |
|
Other liabilities | 577 |
| | 1,931 |
| | 738 |
|
Net cash provided by operating activities | $ | 81,679 |
|
| $ | 109,175 |
|
| $ | 76,903 |
|
| | | | | |
Investing activities: | | | | | |
Purchase of furniture, fixtures and equipment | $ | (1,275 | ) | | $ | (921 | ) | | $ | (3,874 | ) |
Distributions received from investments | 8,782 |
| | 21,587 |
| | 13,468 |
|
Contributions to investments | (24,222 | ) | | (18,164 | ) | | (19,653 | ) |
Net cash (used in) provided by investing activities | $ | (16,715 | ) |
| $ | 2,502 |
|
| $ | (10,059 | ) |
Hamilton Lane Incorporated
Consolidated Statements of Cash Flows
(In Thousands)
|
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Financing activities: | | | | | |
Repayments of senior secured term loan | $ | (162,600 | ) | | $ | (121,680 | ) | | $ | (15,620 | ) |
Senior secured term loan borrowing, net of deferred financing | — |
| | 253,988 |
| | — |
|
Contributions from non-controlling interest in Partnerships | 532 |
| | 629 |
| | 1,137 |
|
Distributions to non-controlling interest in Partnerships | (3,191 | ) | | (5,458 | ) | | (4,429 | ) |
Proceeds from IPO, net of underwriting discount | 203,205 |
| | — |
| | — |
|
Payment of deferred offering costs | (5,844 | ) | | — |
| | — |
|
Proceeds from issuance of Class B common stock | 28 |
| | — |
| | — |
|
Sale of membership interests | 4,669 |
| | 3,268 |
| | 1,535 |
|
Purchase of restricted stock for tax withholdings | (2,151 | ) | | — |
| | — |
|
Purchase of membership interests | (55,983 | ) | | (173,622 | ) | | (12,014 | ) |
Proceeds received from option exercises | 1,192 |
| | 586 |
| | 1,579 |
|
Members’ distributions | (80,457 | ) | | (67,815 | ) | | (47,089 | ) |
Other | (611 | ) | | — |
| | — |
|
Net cash (used in) financing activities | $ | (101,211 | ) |
| $ | (110,104 | ) |
| $ | (74,901 | ) |
Increase (decrease) in cash, cash equivalents, and restricted cash | (36,247 | ) | | 1,573 |
| | (8,057 | ) |
Cash, cash equivalents, and restricted cash at beginning of year | 70,382 |
| | 68,809 |
| | 76,866 |
|
Cash, cash equivalents, and restricted cash at end of year | $ | 34,135 |
| | $ | 70,382 |
| | $ | 68,809 |
|
| | | | | |
Supplemental disclosure of cash flow information: | | | | | |
Cash paid during the year for interest | $ | 10,234 |
| | $ | 9,237 |
| | $ | 4,799 |
|
Cash paid during the year for income taxes | $ | 280 |
| | $ | 175 |
| | $ | 72 |
|
Fair value of non-cash consideration received for Company’s interest in proprietary investment | $ | — |
| | $ | 10,798 |
| | $ | — |
|
Non-cash financing activities: | | | | | |
Exchange of HLA Class A Units to HLI Class A common stock | $ | 4 |
| | $ | — |
| | $ | — |
|
Establishment of net deferred tax assets related to tax receivable agreements and the Reorganization | $ | 61,278 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| 2020 | | 2019 | | 2018 |
Operating activities: | | | | | |
Net income | $ | 126,776 | | | $ | 98,997 | | | $ | 106,297 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 3,291 | | | 2,979 | | | 1,891 | |
Change in deferred income taxes | 7,929 | | | 21,665 | | | 22,983 | |
Change in payable to related parties pursuant to tax receivable agreement | (346) | | | (9,778) | | | (5,076) | |
Write-off of deferred financing costs | — | | | — | | | 1,657 | |
Equity-based compensation | 7,183 | | | 6,382 | | | 5,544 | |
Gain on sale of investments valued under the measurement alternative | (4,973) | | | (11,133) | | | — | |
Fair value adjustment to investment valued under the measurement alternative | (1,507) | | | — | | | — | |
Equity in income of investees | (20,250) | | | (7,202) | | | (17,102) | |
Proceeds received from investments | 12,761 | | | 14,077 | | | 14,391 | |
Other | 418 | | | 190 | | | 1,411 | |
Changes in operating assets and liabilities: | | | | | |
Fees receivable | (10,003) | | | (5,390) | | | (2,624) | |
Prepaid expenses | (2,272) | | | (2,414) | | | 299 | |
Due from related parties | 23 | | | 608 | | | 77 | |
Other assets | (1,572) | | | (1,614) | | | 16 | |
Accounts payable | (654) | | | 919 | | | 334 | |
Accrued compensation and benefits | (987) | | | 4,549 | | | 4,675 | |
Deferred incentive fee revenue | — | | | (2,541) | | | (38,921) | |
Other liabilities | 556 | | | 1,328 | | | 840 | |
Net cash provided by operating activities | $ | 116,373 | | | $ | 111,622 | | | $ | 96,692 | |
Investing activities: | | | | | |
Purchase of furniture, fixtures and equipment | $ | (1,978) | | | $ | (5,366) | | | $ | (2,254) | |
Purchase of other investments | (3,967) | | | — | | | — | |
Proceeds from sales of investments valued under the measurement alternative | 6,419 | | | 22,531 | | | — | |
Cash paid for acquisition of business | — | | | — | | | (5,228) | |
Cash paid for purchase of intangible assets | (4,172) | | | — | | | — | |
Loan to investee | (157) | | | (944) | | | — | |
Distributions received from investments | 7,687 | | | 10,614 | | | 16,055 | |
Contributions to investments | (53,732) | | | (46,048) | | | (30,346) | |
Net cash used in investing activities | $ | (49,900) | | | $ | (19,213) | | | $ | (21,773) | |
Financing activities: | | | | | |
Proceeds from offering | $ | 147,122 | | | $ | 193,504 | | | $ | 125,200 | |
Purchase of membership interests | (147,122) | | | (193,504) | | | (125,200) | |
Repayments of long term debt | (71,250) | | | (2,813) | | | (87,038) | |
Borrowings of debt, net of deferred financing costs | 74,765 | | | — | | | 74,616 | |
Drawdown of revolver | 15,000 | | | — | | | 10,450 | |
Repayment of revolver | (15,000) | | | (10,450) | | | — | |
Secured financing | 15,750 | | | — | | | — | |
Contributions from non-controlling interest in general partnerships | 45 | | | 81 | | | 276 | |
Distributions to non-controlling interest in general partnerships | (993) | | | (2,195) | | | (5,359) | |
Repurchase of Class B common stock | (2) | | | (2) | | | (2) | |
Repurchase of Class A common stock for employee tax withholding | (5,881) | | | (5,387) | | | (6,473) | |
Proceeds received from issuance of shares under employee stock plans | 1,244 | | | 264 | | | 313 | |
Payments to related parties pursuant to the tax receivable agreement | (1,952) | | | (383) | | | — | |
Dividends paid | (29,067) | | | (18,676) | | | (9,511) | |
Members’ distributions paid | (47,368) | | | (50,649) | | | (36,943) | |
Net cash used in financing activities | $ | (64,709) | | | $ | (90,210) | | | $ | (59,671) | |
Effect of exchange rate changes on cash and cash equivalents | $ | (144) | | | $ | 8 | | | $ | — | |
Increase in cash, cash equivalents, and restricted cash | 1,620 | | | 2,207 | | | 15,248 | |
Cash, cash equivalents, and restricted cash at beginning of year | 51,590 | | | 49,383 | | | 34,135 | |
Cash, cash equivalents, and restricted cash at end of year | $ | 53,210 | | | $ | 51,590 | | | $ | 49,383 | |
See accompanying notes to the consolidated financial statements.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
1. Organization
Hamilton Lane Incorporated (or “HLI”(“HLI”) was incorporated in the State of Delaware on December 31, 2007. The Company was formed for the purpose of completing an2007 and, following its 2017 initial public offering, (“IPO”) and related transactions (“Reorganization”)is a holding company whose principal asset is a controlling equity interest in order to carry on the business of Hamilton Lane Advisors, L.L.C. (“HLA”) as a publicly-traded entity.. As of March 6, 2017, in connection with the Reorganization discussed below, HLI became the sole managing member of HLA.HLA, HLI operates and controls all of the business and affairs of HLA, and through HLA, conducts its business. As a result, HLI consolidates HLA’s financial results and reports a non-controlling interest related to the portion of HLA units not owned by HLI. The assets and liabilities of HLA represent substantially all of HLI’s consolidated assets and liabilities with the exception of certain cash, certain deferred tax assets and liabilities, payable to related parties pursuant to a tax receivable agreement, and dividends payable. Unless otherwise specified, “the Company” refers to the consolidated entity of Hamilton Lane Incorporated and Hamilton Lane Advisors, L.L.C.HLI, HLA and subsidiaries throughout the remainder of these notes. As of March 31, 2020 and 2019, HLI held approximately 55.1% and 50.3%, respectively, of the economic interest in HLA. As future exchanges of HLA units occur pursuant to the exchange agreement in place with HLA’s members, the economic interest in HLA held by HLI will increase.
HLA is a registered investment advisor with the United States Securities and Exchange Commission (“SEC”), providing asset management and advisory services, primarily to institutional investors, to design, build and manage private markets portfolios. HLA generates revenues primarily from management fees, by managing assets on behalf of customized separate accounts, specialized fund products and distribution management accounts, and advisory fees, by providing asset supervisory and reporting services. HLA sponsors the formation, and serves as the general partner or managing member, of various limited liability partnerships consisting of specialized funds and certain single client separate account entities (“Partnerships”) that acquire interests in third-party managed investment funds that make private equity and equity-related investments. The Partnerships may also make direct co-investments, including investments in debt, equity, and other equity-based instruments. The Company, which includes certain subsidiaries that serve as the general partner or managing member of the Partnerships, may invest its own capital in the Partnerships and generally makes all investment and operating decisions for the Partnerships. HLA operates several wholly or majority owned entities through which it conducts its foreign operations.
Reorganization
In connection with the IPO, the Company completed a series of transactions on March 6, 2017, which are described below:
HLI amended and restated its certificate of incorporation to, among other things, provide for Class A common stock, Class B common stock, and Preferred stock.
HLA amended and restated its limited liability company agreement to, among other things, (i) appoint HLI as the sole managing member of HLA, and (ii) classify the interests that were acquired by HLI as Class A Units, the voting interests held by the continuing members of HLA as Class B Units, and the non-voting interests held by the continuing members of HLA as Class C Units.
HLA effectuated a reverse unit split of 0.68-for-1 for each unit class. All unit-based data, including the number of units and per unit amounts in these consolidated financial statements and accompanying notes have been retroactively adjusted for the reverse split.
Certain HLA members exchanged their HLA units for 3,899,169 shares of Class A common stock of HLI.
HLI issued to the Class B unitholders of HLA one share of Class B common stock for each Class B unit that they owned in exchange for a payment of its par value.
Certain Class B unitholders of HLA entered into a stockholders agreement where they agreed to vote all their shares of voting stock in accordance with the instructions of HLA Investments, LLC.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
HLI entered into an exchange agreement with the direct owners of HLA pursuant to which they will be entitled to exchange HLA units for shares of HLI’s Class A common stock on a one-for-one basis.
Initial Public Offering
On March 6, 2017, HLI issued 13,656,250 shares of Class A common stock in the IPO at a price of $16.00 per share. The net proceeds totaled $203,205 after deducting underwriting commissions of $15,295 and before offering costs of $5,844 that were incurred by HLA. The net proceeds were used to purchase 11,156,250 newly issued Class A units in HLA for $166,005, and 2,500,000 Class A units from existing HLA owners for $37,200.
Subsequent to the IPO and Reorganization transactions, HLI is a holding company whose principal asset is a controlling equity interest in HLA. As the sole managing member of HLA, HLI operates and controls all of the business and affairs of HLA, and through HLA, conducts its business. As a result, HLI consolidates HLA’s financial results and reports a non-controlling interest related to the portion of HLA units not owned by HLI. The assets and liabilities of HLA represent substantially all of HLI’s consolidated assets and liabilities with the exception of certain deferred tax assets and liabilities and payable to related parties pursuant to a tax receivable agreement. As of March 31, 2017, HLI held approximately 34.2% of the economic interest in HLA. As future exchanges of HLA units occur, the economic interest in HLA held by HLI will increase.
The Reorganization is considered a transaction between entities under common control. As a result, the consolidated financial statements for periods prior to the IPO and the Reorganization are the consolidated financial statements of HLA as the predecessor to HLI for accounting and reporting purposes.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying financial statements include the accounts of the Company, and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
COVID-19
In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) a global pandemic, which has resulted in significant disruption and uncertainty in the global economic markets. Given the amount of uncertainty currently regarding the scope and duration of the COVID-19 pandemic, it is currently not possible to predict the precise impact it will have on the Company’s financial statements. In line with public markets and credit indices, the Company expects its investments in Partnerships and unrecognized carried interest amounts to be adversely impacted, as those
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
balances are reported on a three month lag, as discussed below in Accounting for Differing Fiscal Periods.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Consolidation
In accordance with Accounting Standards Update (“ASU”) 2015-02, “Amendments to the Consolidation Analysis”, theThe Company performs an analysis to determine whether it is required to consolidate entities, by determining if the Company has a variable interest in each entity and whether that entity is a variable interest entity (“VIE”). The Company performs the variable interest analysis for all
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
entities in which it has a potential variable interest, which primarily consist of all Partnerships where the Company serves as the general partner or managing member, and general partner entities not wholly owned by the Company. If the Company has a variable interest in the entity and the entity is a VIE, it will also analyze whether the Company is the primary beneficiary of this entity and whether consolidation is required.
In evaluating whether it has a variable interest in the entity, the Company reviews the equity ownership and whether the Company absorbs risk created and distributed by the entity, as well as whether the fees charged to the entity are customary and commensurate with the level of effort required to provide services. Fees received by the Company are not variable interests if (i) the fees are compensation for services provided and are commensurate with the level of effort required to provide those services, (ii) the service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length and (iii) the Company’s other economic interests in the VIE held directly and indirectly through its related parties, as well as economic interests held by related parties under common control, where applicable, would not absorb more than an insignificant amount of the entity’s losses or receive more than an insignificant amount of the entity’s benefits. Evaluation of these criteria requires judgment.
For entities determined to be VIEs, an evaluation is required to determine whether the Company is the primary beneficiary. The Company evaluates its economic interests in the entity specifically determining if the Company has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance (“the power”) and the obligation to absorb losses or right to receive benefits that could potentially be significant to the VIE (“the benefits”). When making the determination on whether the benefits received from an entity are significant, the Company considers the total economics of the entity, and analyzes whether the Company’s share of the economics is significant. The Company utilizes qualitative factors, and, where applicable, quantitative factors, while performing the analysis and the Company has determined that it is not the primary beneficiary of each of the Partnerships, therefore consolidation is not required for those entities.
For the general partner entities that are not wholly owned by the Company that are determined to be VIEs, the Company has determined it is the primary beneficiary since it has the power and the benefits; therefore, consolidation of these entities is required. The portion of the consolidated subsidiaries owned by third parties and any related activity is eliminated through non-controlling interests in general partnerships in the Consolidated Balance Sheets and income (loss) attributable to non-controlling interests in general partnerships in the Consolidated Statements of Income.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
For entities that are not determined to be VIEs, the Company analyzes whether it has a controlling financial interest to determine whether consolidation is required.
At each reporting date, the Company determines whether any reconsideration events have occurred that require it to revisit the primary beneficiary analysis and will consolidate or deconsolidate accordingly.
See Note 45 for additional disclosure on VIEs.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Accounting for Differing Fiscal Periods
The Partnerships primarily have a fiscal year end as of December 31, and the Company accounts for its investments in the Partnerships using a three-month lag due to the timing of financial information received from the investments held by the Partnerships. The Partnerships primarily invest in private equity funds, which generally require at least 90 days following the calendar year end to present audited financial statements. The Company records its share of capital contributions to and distributions from the Partnerships in investments in the Consolidated Balance Sheets during the three month lag period.
The Company’s revenue earned from Partnerships, including both management and advisory fee revenue and incentive fee revenue, is not accounted for on a lag.
To the extent that management is aware of material events that affect the Partnerships during the intervening period, the impact of the events would be disclosed in the Notes to Consolidated Financial Statements.
Foreign Currency
Foreign currency balancesThe Company and transactionssubstantially all of the Company, including its foreign subsidiaries utilize the U.S. dollar as their functional currency. The assets and liabilities of the Company’s foreign subsidiaries with non-U.S. dollar functional currencies are translated into U.S. Dollars, which is the functional currency. Assets and liabilities relating to foreign subsidiaries are translated using theat exchange rates prevailing at the end of each reporting period. ResultsThe results of the Company’s foreign subsidiariesoperations are translated usingat the weighted-averageweighted average exchange rate for each reporting period. Translation adjustments are included in other comprehensive income (loss) within the consolidated financial statements until realized. Foreign exchangecurrency transaction gains and losses related to the Company and its foreign subsidiaries are included in general, administrative and other expenses in the Consolidated Statements of Income and were $175, $4,$(103), $368, and $700$(92) for the years ended March 31, 2017, 20162020, 2019 and 2015,2018, respectively.
Cash, Cash Equivalents and Restricted Cash
Cash deposits in interest-bearing money market accounts and highly liquid investments, with an original maturity of three months or less, are classified as cash equivalents. Interest earned on cash and cash equivalents is recorded as interest income in the Consolidated Statements of Income.
Restricted cash at March 31, 20172020 and 20162019 was primarily cash held by the Company’s foreign subsidiaries due to certainmeet applicable government regulatory capital requirements.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Fees Receivable
Fees receivable are equal to contractual amounts reduced for allowances, if applicable. The Company considers fees receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been established.established as of March 31, 2020 or 2019. If accounts become uncollectible, they will be expensed when that determination is made.
Due from Related Parties
Hamilton Lane IncorporatedDue from related parties in the Consolidated Balance Sheets consist primarily of advances made on behalf of the Partnerships for the payment of certain operating costs and expenses for which the Company is subsequently reimbursed and refundable tax distributions made to members of HLA.
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment consist primarily of leasehold improvements, office equipment, furniture electronic equipment,and fixtures, and computer hardware and software and are recorded at cost, less accumulated depreciation. Depreciation is recognized in accordance with the straight-line method over the estimated useful lives as follows:
|
| | | | |
Computer equipmenthardware and software | 33-7 years |
Furniture and fixtures | 5-75 years |
Office equipment | 3-53 years |
Leasehold improvements are capitalized and depreciated over the shorter of their useful life or the life of the lease. Expenditures for improvements that extend the useful life of an asset are capitalized. Expenditures for ordinary repairs and maintenance are expensed as incurred.
Leases
On April 1, 2019, the Company adopted ASU 2016-02, “Leases” (ASC 842) on a prospective basis and as a result, prior period amounts were not adjusted to reflect the impacts of the new standard. In addition, as permitted under the transition guidance within the new standard, prior scoping, classification, and accounting for initial direct costs were carried forward for leases existing as of the adoption date. The new standard establishes a right of use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the Consolidated Balance Sheets for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the Consolidated Statements of Income. The adoption did not have an impact on the Consolidated Statements of Income as all of the Company’s leases are operating leases, and will continue to be recognized as expense on a straight-line basis. The adoption, however, resulted in a gross-up in total assets and total liabilities on the Consolidated Balance Sheets.
The Company determines whether an arrangement contains a lease at inception. A lease is a contract that provides the right to control an identified asset for a period of time in exchange for consideration. For identified leases, the Company determines whether it should be classified as an operating or finance lease. The Company accounts for lease components and non-lease components as a single lease component. Lease ROU assets and lease liabilities are recognized at the commencement date of the lease and measured based on the present value of lease payments over the lease term. Lease ROU assets include
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
initial direct costs incurred by the Company and are presented net of deferred rent and lease incentives. Generally, the Company’s leases do not provide an implicit rate and as a result, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. The Company does not recognize a lease ROU asset or lease liability for short-term leases, which have lease terms of 12 months or less. Lease expense for lease payments on operating leases is recognized on a straight-line basis over the lease term.
Intangibles and Goodwill
The Company’s intangible assets consist of customer relationship assets identified as part of an acquisition in 2013.previous acquisitions and purchased software. Identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 7 to 10 years, reflecting the contractual lives of such assets.years. The Company does not hold any indefinite-lived intangible assets. Intangible assets are reviewed for impairment quarterly, or when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company has not0t recognized any impairment charges in any of the periods presented.
As part of the acquisition noted above, the Company acquired intangible assets of $770. The carrying value of the intangible assets was $400$8,328 and $490,$2,562, and is included in other assets in the Consolidated Balance Sheets as of March 31, 20172020 and 2016,2019, respectively. The accumulated amortization of intangibles was $370$1,762 and $280$1,155 as of March 31, 20172020 and 2016,2019, respectively. Amortization of intangible assets was $91$607, $459, and $326 for each of the years in the three-year period ended March 31, 2017,2020, respectively, and is included in general, administrative and other expenses in the Consolidated Statements of Income. The estimated amortization expense for each of the next five fiscal years is $91, $91, $87, $45,$1,324, $1,324, $1,320, $1,279, and $45,$1,279, respectively.
Goodwill of $1,069, which$3,943 as March 31, 2020 and 2019 is included in other assets in the Consolidated Balance Sheets and was recorded in conjunction with the acquisition in 2013.previous acquisitions. Goodwill is reviewed for impairment at least annually utilizing a qualitative or quantitative approach, and more frequently if circumstances indicate impairment may have occurred. The impairment testing for goodwill under the qualitative approach is based first on a qualitative assessment to determine if it is more likely than not that the fair value of the Company’s reporting unit is less than the respective carrying value. The reporting unit is the reporting level for testing the impairment of goodwill. If it is determined that it is more likely than not that an operating segment’sa reporting unit’s fair value is less than its carrying value or when the quantitative approach is used, a two-step quantitative assessment is performed to (a) calculate the fair value of the operating segmentreporting unit and compare it to its carrying value, and (b) if the carrying value exceeds its fair value, to measure an impairment loss. The Company performed the annual impairment assessment as of December 31, 20162019 noting that no0 goodwill impairment existed.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Equity Method Investments
Investments inover which the Company is deemed to exert significant influence but not control are accounted for using the equity method of accounting. For investments in the Partnerships accounted for under the equity method of accounting, the Company’s share of income (losses) is included in equity in income of investees in the Consolidated Statements of Income. The Company’s equity in income of investees is generally comprised of realized and unrealized gains from the underlying funds and portfolio companies held by the Partnerships. The carrying amounts of equity method investments are reflected in investments in the Consolidated Balance Sheets.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Fair Value of Financial Instruments
The Company considersutilizes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). The levels of the hierarchy are described below:
•Level 1: Values are determined using quoted market prices for identical financial instruments in an active market.
•Level 2: Values are determined using quoted prices for similar financial instruments and valuation models whose inputs are observable.
•Level 3: Values are determined using pricing models that use significant inputs that are primarily unobservable, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The Company uses these levels of hierarchy to measure the fair value of certain financial instruments on a recurring basis, such as for investments; on a non-recurring basis, such as for acquisitions and impairment testing; for disclosure purposes, such as for long-term debt; and for other applications, as discussed in their respective notes.
The carrying amount of cash and cash equivalents, fees receivable, prepaid expenses, other assets, investments,and accounts payable accrued compensation and benefits, senior secured term loan, and other liabilitiesapproximate fair value due to be its financial instruments. The carrying amount reported in the Consolidated Balance Sheets forimmediate or short-term maturity of these financial instruments equals or closely approximates their fair values; except for investments, which are discussed in Note 3, and senior secured term loan and interest rate cap, which are discussed in Note 6.instruments.
Revenue Recognition
Revenues consist primarilyOn April 1, 2018, the Company adopted the new Accounting Standards Codification 606, “Revenue from Contracts with Customers,” using the modified retrospective method and applied the guidance only to contracts that were not completed as of that date. As a result, prior period amounts continue to be reported under legacy GAAP. The adoption did not change the historical pattern of recognizing revenue for management and advisory feesfees. Under the new standard, the Company recognizes incentive fee revenue when it concludes that it is probable that a significant reversal in the cumulative amount of incentive fee revenue will not occur. Additionally, certain reimbursable costs that were previously recorded on a net basis are recorded on a gross basis, which impacts the components of revenues and incentive fees.expenses.
The Company recorded a cumulative-effect adjustment that increased beginning additional paid-in-capital, retained earnings and non-controlling interest in Hamilton Lane Advisors, L.L.C. by $411, $20 and $566, respectively. The adjustment was related to commission payments that are considered a cost of obtaining a contract under the new guidance and are capitalized and amortized over the expected life of the contractual relationship. These amounts were previously expensed when incurred.
Management and advisory fees are generally comprised of
The Company earns management fees from services provided to its specialized funds, customized separate accounts, specialized funds, and distribution management services,clients, and advisory fees from non-discretionaryservices provided to advisory and reportingclients where the Company does not have discretion over investment decisions. Revenue is recognized when control of the promised services is transferred to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services.
Revenue from specialized Specialized funds and customizedare structured as partnerships having multiple investors with a subsidiary of the Company serving as general partner or managing member. Customized separate accounts are determined by applying a percentagegenerally contractual arrangements
Hamilton Lane Incorporated
Notes to unaffiliated net invested capital or committed capital under management. Generally, customized separate accounts are contractual arrangements Consolidated Financial Statements
(In thousands, except share and per share amounts)
involving an investment management agreement between the Company and a single client. In some cases, a customized separate account will be structured as a limited partnership with a subsidiary of the Company as general partner or managing member. Specialized funds are primarily limited partnerships having multiple investors with a subsidiary of the Company serving as general partner or managing member. DistributionThe Company determined that the partnership is generally considered to be the customer with respect to specialized funds, while the individual investor or single limited partner is the customer with respect to customized separate accounts and advisory clients.
Management fees generally exclude the reimbursement of any partnership expenses paid by the Company on behalf of its customers pursuant to its contracts, including amounts related to professional fees and other fund administrative expenses. For the professional and administrative services performed by third parties that the Company arranges for the partnerships, the Company concluded that the nature of its promise is to arrange for the services to be provided and it does not control the services provided by third parties before they are transferred to the customer. Therefore, the Company is acting as an agent. Accordingly, the reimbursement for these professional fees paid on behalf of the partnerships is generally presented on a net basis.
The Company also incurs certain costs, primarily employee travel, organization and syndication costs, for which it receives reimbursement from its customers in connection with satisfying these performance obligations. For reimbursable travel, organization and syndication costs, the Company concluded it controls the services provided by its employees and other parties and therefore is a principal. Accordingly, the Company records the reimbursement for these costs incurred on a gross basis as revenue in management and advisory fees and as expense in general, administrative and other expenses in the Consolidated Statements of Operations.
The Company considers its performance obligations in its customer contracts to be one of the following based upon the services promised: asset management services, arrangement of administrative services, distribution management services, or reporting services.
For asset management and arrangement of administrative services, the Company satisfies these performance obligations over time as the services are earnedrendered and the customer simultaneously receives and consumes the benefits of the services as they are performed. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised services to the customer. Management fees from these performance obligations for contracts where the Company has discretion over investment decisions are generally calculated by applying a percentage to assetsunaffiliated committed capital or net invested capital under management orand are usually billed quarterly. For many partnerships, fees are based on committed capital during the investment period and then net invested capital through the remainder of the partnership term. The management fee base is subject to factors outside the Company’s control and therefore estimates of future period management fees are not included in the transaction price, as those estimates would be considered constrained. Advisory fees from these performance obligations for contracts where the Company does not have discretion over investment decisions are generally based upon fixed amounts and are usually billed quarterly.
For distribution management services, the Company satisfies these performance obligations at a point in time when shares are sold/liquidated and the proceeds received. Revenue from advisory clients isare delivered and the customer receives and consumes the benefits of the services. Distribution management fees are generally calculated by applying a percentage to the amounts sold/liquidated and are billed at the completion of each transaction.
For reporting services, the Company satisfies these performance obligations over time as the services are rendered and the customer simultaneously receives and consumes the benefits of the services as they are performed. Reporting fees are generally calculated by applying a fixed fee, and reporting and diligence services are generally charged on a per fund or transaction basis. Management and advisory fee revenues are recognized inrate multiplied by the period during which the related services are performed and the amounts have been contractually earned.
Incentive fees earned on the performancenumber of certain separate accounts (“Performance Fees”) are recognized based on the performance during the period, subject to the achievement of minimum return levels, in accordance with the respective terms set out in the client agreement. Performance Fees are recognized when the return levels are metfunds monitored and are not subject to contingencies.billed quarterly.
With respect to the Partnerships, incentive fees (“Carried Interest”) are allocated to the general partner/managing member based on cumulative fund performance to date, subject to a preferred return to limited partners/non-managing members. The Company has elected to adopt “Method 1” for revenue recognition based on a formula. Under this method, incentive fees are recognized when fixed or determinable and all related contingencies have been resolved. Carried Interest received by the Company before the above criteria have been met are deferred and recorded as deferred incentive fee revenue in the
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Incentive Fees
Contracts with certain customized separate accounts and specialized funds provide incentive fees, which generally range from 5% 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. Investment returns are highly susceptible to market factors and judgments and actions of third parties that are outside of the Company’s control. Accordingly, incentive fees are considered variable consideration in asset management services and are therefore constrained and not recognized until it is probable that a significant reversal will not occur. Incentive fees from specialized funds and customized separate accounts are generally payable after all contributed capital and the preferred return on that capital has been distributed to investors. The Company estimates the amount and probability of additional future capital contributions to specialized funds and customized separate accounts, which could impact the probability of a significant reversal occurring. The additional future capital contributions relate to unfunded commitments or follow-on investment opportunities in underlying portfolio investments. Incentive fees received before the revenue recognition criteria have been met are deferred and recorded within deferred incentive fee revenue in the Consolidated Balance Sheets.
Fund reimbursement revenue
The Company may receive tax distributionsincurs certain costs related to taxable income allocated by the Partnerships, which are treated as advanced incentiveorganization and syndication of new Partnerships. These costs generally include professional fees, legal fees, and subjectother related items. The Company expenses these costs as they are incurred. Once the Partnership is successfully formed and has held its first closing, the Company recognizes those costs as revenue in the Consolidated Statements of Income as the Partnership is then able to reimburse the same recognition criteria. Tax distributions are subject to clawback unless the taxes are non-recoverable.Company for these costs.
Compensation and Benefits
Compensation and Benefits 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 to senior employees, and (c) incentive fee compensation, which consists of Carried Interestcarried interest and Performance Feeperformance fee allocations as detailed below.
Equity-based awards issued are measured at their fair value at the date of grant. The fair value of the restricted stock grant is based on the closing stock price on the trading day before the date of grant.grant less the present value of expected future dividends. Expenses related to employee equity-based compensation are recorded evenly over the vesting period using the straight-line method. See Note 810 for more information regarding accounting for equity-based awards.
Incentive fee compensation expense includes compensation directly related to incentive fees. Certain employees of the Company are granted allocations or profit-sharing interests and are thereby, as a group, entitled to a 25% portion of the incentive fees earned by the Company from certain Partnerships and certain managed accounts subject to vesting. Amounts payable pursuant to these arrangements are recorded as compensation expense when they have become probable and reasonably estimable. The Company’s determination of the point at which it becomes probable and reasonably estimable that incentive fee compensation expense should be recorded is based on its assessment of numerous factors, particularly those related to the profitability, realizations, distribution status, investment profile and commitments or contingencies of the individual funds that may give rise to incentive fees. Incentive fee compensation may be expensed before the related incentive fee revenue is recognized.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Non-Operating Income (Loss)
Other non-operatingNon-operating income for the year ended March 31, 2016consists primarily consisted of a non-cash gaingains recorded on sales of $5,408 on the merger transaction of a prior technology investment. Theother investments, fair value ofadjustments on investments valued under the consideration received, which consisted of equity inmeasurement alternative and adjustments to the acquiring company, was $10,798. Other non-operating loss forpayable to related parties pursuant to the year ended March 31, 2015 primarily consisted of a non-cash loss on an equity method investment.tax receivable agreement.
Income Taxes
The Company accounts 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. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied in the years in which temporary differences are expected to be recovered or settled. The principal items giving rise to temporary differences are the use of accelerated depreciation and certain basis differences resulting from the 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 the IPO and subsequent unit exchanges, (4) future tax deductions related to payments under the recapitalization transactions.tax receivable agreement, and (5) the Company’s 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 expectedmore likely than not to be realized.
As a result of the Reorganization and IPO, HLI became the sole managing member of HLA which is organized as a limited liability company and treated as a “flow-through” entity for income taxes purposes. As a “flow-through” entity, HLA is not subject to income taxes apart from certain U.S. state and local taxes and foreign taxes attributable to its
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
operations in foreign jurisdictions. Any taxable income or loss generated by HLA is passed through to and included in the taxable income or loss of its members, including HLI following the Reorganization and IPO, on a pro rata basis.HLI. As a result, the Company does not record income taxes on pre-tax income or loss attributable to the non-controlling interests in the general partnerships and HLA, except for foreign taxes discussed above. HLI is subject to U.S. federal and applicable state corporate income taxes with respect to its allocable share of any taxable income of HLA following the Reorganization and IPO.HLA.
The Company analyzes its tax filing positions in all of the U.S. federal, state, local and foreign tax jurisdictions where it is required to file income tax returns, as well for all open tax years in these jurisdictions. The Company evaluates 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 Receivable Agreement
The Company’s purchase of HLA Class A units concurrent with the IPO,its initial public offering and the subsequent and futureperiodic exchanges by holders of HLA units for shares of the Company'sCompany’s Class A common stock, or cash, pursuant to the Exchange Agreement, is expected to result in increases in its share of the tax basis of the tangible and intangible assets of HLA, which will increase the tax depreciation and amortization deductions that otherwise would not have been available to HLI. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of cash taxes that HLI would otherwise be required to pay in the future. HLI has entered into a tax receivable agreement (“TRA”) with the other members of HLA (the “TRA Recipients”) that requires it to pay them 85% of the amount of cash savings, if any, in U.S. federal, state, and local income tax that HLI actually realizes (or, under certain circumstances, is 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 TRA.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Segments
The Company operates its business in a single segment, which is how ourthe chief operating decision maker (who is ourthe chief executive officer) reviews financial performance and allocates resources. Accordingly, the Company considers itself to be in a single operating and reportable segment structure.
Concentrations of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, restricted cash and fees receivable. The majority of the Company’s cash, and cash equivalents, and restricted cash are held with one major financial institution and expose the Company to a certain degree of credit risk. Substantially all cash amounts on deposit with major financial institutions exceed insured limits. The concentration of credit risk with respect to fees receivable is generally limited due to the short payment terms extended to clients by the Company.
The Company derives revenues from clients located in the United States and other foreign countries.
The below table presents revenues by geographic location:
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| 2020 | | 2019 | | 2018 |
United States | $ | 134,347 | | | $ | 132,326 | | | $ | 130,737 | |
Other foreign countries | 139,701 | | | 119,853 | | | 113,296 | |
Total revenues(1) | $ | 274,048 | | | $ | 252,179 | | | $ | 244,033 | |
(1)Revenues are attributed to countries based on location of the client or investor.
The Company recognized approximately 17% of its total revenues for the year ended March 31, 2018 from previously deferred incentive fees from one of its co-investment funds.
Dividends and Distributions
Dividends and distributions are reflected in the consolidated financial statements when declared.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Accounting for Financial Instruments - Credit Losses”. ASU 2016-13 replaces the incurred loss methodology in current GAAP with a methodology that reflects expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This guidance will be adopted by the Company on April 1, 2020. The Company has determined that adoption of the guidance will not have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” (ASU 2018-13). ASU 2018-13 changes the fair value measurement disclosure requirements. The amendments remove or modify certain disclosures, while others were added. Early adoption of any removed or modified disclosure requirements is permitted upon issuance of ASU 2018-13 and adoption of the additional disclosure requirements may be delayed until the effective date. The Company elected to early adopt the removed or modified disclosure requirements of the standard on
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
October 1, 2018 and expects to adopt the additional disclosure requirements on April 1, 2020. The below table presents revenues by geographic location:
|
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
United States | $ | 99,098 |
|
| $ | 104,337 |
|
| $ | 87,949 |
|
Israel | 16,675 |
|
| 18,642 |
|
| 14,570 |
|
Other foreign countries | 64,047 |
|
| 57,818 |
|
| 52,866 |
|
Total revenues(1) | $ | 179,820 |
|
| $ | 180,797 |
|
| $ | 155,385 |
|
(1) Revenues are attributedadoption is not expected to countries basedhave a material impact on location of the client or investor.
Distributions
Distributions are reflectedCompany’s disclosures in theits consolidated financial statements when declared.statements. Refer to Note 74 for additional details on distributions.disclosure related to investments carried at fair value.
Related PartiesReclassifications
For purposes of classifyingCertain prior period amounts have been reclassified to conform with current period presentation.
3. Revenue
The following presents revenues disaggregated by product offering, which aligns with the Company considers its employees, directors, equity method investments,identified performance obligations and the TRA Recipientsbasis for calculating each amount:
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
Management and advisory fees | 2020 | | 2019 | | 2018 |
Specialized funds | $ | 111,803 | | | $ | 93,056 | | | $ | 83,151 | |
Customized separate accounts | 90,750 | | | 85,245 | | | 79,275 | |
Advisory | 24,160 | | | 24,130 | | | 20,164 | |
Reporting and other | 9,102 | | | 8,805 | | | 8,064 | |
Distribution management | 4,920 | | | 4,525 | | | 4,376 | |
Fund reimbursement revenue | 4,185 | | | 2,012 | | | — | |
Total management and advisory fees | $ | 244,920 | | | $ | 217,773 | | | $ | 195,030 | |
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
Incentive fees | 2020 | | 2019 | | 2018 |
Specialized funds | $ | 14,371 | | | $ | 25,687 | | | $ | 43,902 | |
Customized separate accounts | 14,757 | | | 8,719 | | | 5,101 | |
Total incentive fees | $ | 29,128 | | | $ | 34,406 | | | $ | 49,003 | |
The Company recognized incentive fee revenues of $2,541, and $38,921 during the years ended March 31, 2019, and 2018, respectively, that were previously received and deferred.
Cost to obtain contracts
The Company incurs incremental costs related to sales commissions paid to certain employees directly related to customized separate account contracts. These incremental costs are capitalized and amortized over the expected contract length proportionately to the management fee revenue expected to be recognized in each year as a percentage of the total expected revenue for the contract. The contract asset related parties. Refer to Note 12the cost to obtain contracts was $994 and $968 as of March 31, 2020 and March 31, 2019, respectively, and is included in other assets in the Consolidated Balance Sheets. Amortization expense related to this contract asset was $504 and $480 for details on transactions with related parties.the year ended March 31, 2020 and March 31, 2019, respectively, and is included in general, administrative and other in the Consolidated Statements of Income.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards update (ASU) No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those goods or services. In August 2015, the FASB deferred the effective date of ASU 2014-09 by one year to annual and interim reporting periods beginning after December 15, 2017. In addition, during March, April and May 2016, the FASB issued ASU No. 2016-08 “Revenue from Contracts with Customer: Principal versus Agent Consideration (Reporting Revenue Gross versus Net)”, ASU No. 2016-10 “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing”, and ASU No. 2016-12 “Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients”, respectively. These additional amendments clarified the revenue recognition guidance on reporting revenue. The Company is currently evaluating the effect that adoption will have on its Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01), which requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those years, and entities may early adopt. The Company is currently evaluating the effect that adoption will have on its Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, “Leases” (ASU 2016-02). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the consolidated balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
the consolidated income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the effect that adoption will have on its Consolidated Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of share-based payments to employees. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period but all of ASU 2016-09 must be adopted in the same period. The Company elected to early adopt the amended guidance on April 1, 2016. The primary impact of adoption was the recognition of excess tax benefits in the provision (benefit) for foreign income taxes rather than equity. The Company elected to apply the amendment to classify excess tax benefits as an operating activity in its Consolidated Statements of Cash Flows prospectively. Adoption of the guidance had no cumulative impact on members’ deficit as of March 31, 2016.
In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Payments” (ASU 2016-15). ASU 2016-15 clarifies cash flow classification of several discrete cash flows issues including debt prepayment costs and distributions received from equity method investees. The amendments are effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that adoption will have on its Consolidated Financial Statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows - Restricted Cash” (ASU 2016-18). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments in this update are effective for years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company early adopted the standard on October 1, 2016 and retrospectively applied the amendment. Other than the change in presentation of restricted cash within the Consolidated Statements of Cash Flows, the adoption of this standard did not have a material impact on its Consolidated Financial Statements.
Reclassifications
Certain prior period amounts have been reclassified to conform with current period presentation.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
3.4. Investments
Investments consist of the following:
| | | | | | | | | | | |
| March 31, | | |
| 2020 | | 2019 |
Equity method investments in Partnerships | $ | 166,106 | | | $ | 122,505 | |
Equity method investments in Partnerships held by consolidated VIEs (See Note 5) | 9,988 | | | 11,648 | |
Other equity method investments | 1,168 | | | 1,086 | |
Other investments | 13,394 | | | 12,488 | |
Investments valued under the measurement alternative | 17,091 | | | 6,764 | |
Total Investments | $ | 207,747 | | | $ | 154,491 | |
|
| | | | | | | |
| March 31, |
| 2017 | | 2016 |
Equity method investments in Partnerships | $ | 103,141 |
| | $ | 88,951 |
|
Other equity method investments | 661 |
| | — |
|
Investments carried at cost | 16,345 |
|
| 13,798 |
|
Total Investments | $ | 120,147 |
| | $ | 102,749 |
|
Equity method investments
The Company’s equity method investments in Partnerships represent its ownership in certain specialized funds and customized separate accounts. The strategies and geographic location of investments within the Partnerships vary by fund. The Company generally has a 1% interest in eachsubstantially all of the Partnerships although the Company has interests in certain Partnerships ranging from 0-7%. The Company recognized equity method income related to its investments in Partnerships and other equity method investments of $12,801, $1,518, and $10,474 for the years ended March 31, 2017, 2016, and 2015, respectively.Partnerships. The Company’s other equity method investments represent its ownership in a technology company that provides benchmarking and analytics of private equity data.data and its ownership in a joint venture that automates the collection of fund and underlying portfolio company data from general partners. The Company recognized equity method income related to its investments in Partnerships and other equity method investments of $20,250, $7,202, and $17,102 for the years ended March 31, 2020, 2019, and 2018, respectively.
The Company’s equity method investments in Partnerships consist of the following types:
| | | | | | | | | | | |
| March 31, | | |
| 2020 | | 2019 |
Primary funds | $ | 37,317 | | | $ | 22,791 | |
Secondary funds | 19,872 | | | 15,762 | |
Direct/co-investment funds | 50,288 | | | 35,902 | |
Customized separate accounts | 58,629 | | | 48,050 | |
Total equity method investments in Partnerships | $ | 166,106 | | | $ | 122,505 | |
|
| | | | | | | |
| March 31, |
| 2017 | | 2016 |
Primary funds | $ | 18,741 |
| | $ | 16,262 |
|
Secondary funds | 7,111 |
| | 6,313 |
|
Direct/co-investment funds | 34,855 |
| | 28,589 |
|
Customized separate accounts | 42,434 |
| | 37,787 |
|
Total equity method investments in Partnerships | $ | 103,141 |
| | $ | 88,951 |
|
The Company’s equity method investments in Partnerships held by consolidated VIEs consist of direct/co-investment funds.
The Company evaluates each of its equity method investments to determine if any were significant pursuant to the requirements of Regulation S-X. As of and for the years ended March 31, 20172020 and 2016,2019, no individual equity method investment held by the Company met the significance criteria, and, as a result, the Company is not required to present separate financial statements for any of its equity method investments.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
The summarized financial information of the Company’s equity method investments in Partnerships is as follows:
| | | | | | | | | | | | | | | | | |
| March 31, | | | | |
| 2020 | | 2019 | | |
Assets | | | | | |
Investments | $ | 17,577,766 | | | $ | 13,473,255 | | | |
Other assets | 415,221 | | | 349,425 | | | |
Total assets | $ | 17,992,987 | | | $ | 13,822,680 | | | |
Liabilities and Partners’ Capital | | | | | |
Debt | $ | 61,114 | | | $ | 84,530 | | | |
Other liabilities | 107,600 | | | 57,772 | | | |
Total liabilities | 168,714 | | | 142,302 | | | |
Partners’ capital | 17,824,273 | | | 13,680,378 | | | |
Total liabilities and partners’ capital | $ | 17,992,987 | | | $ | 13,822,680 | | | |
| | | | | |
| Year Ended March 31, | | | | |
| 2020 | | 2019 | | 2018 |
Investment income | $ | 300,121 | | | $ | 211,797 | | | $ | 233,255 | |
Expenses | 185,769 | | | 149,598 | | | 130,771 | |
Net investment income (loss) | 114,352 | | | 62,199 | | | 102,484 | |
Net realized and unrealized gain | 1,830,599 | | | 618,047 | | | 1,647,977 | |
Net income | $ | 1,944,951 | | | $ | 680,246 | | | $ | 1,750,461 | |
Other investments
The Company’s other investments represent investments in private equity funds and direct credit and equity co-investments. The private equity fund investments can only be redeemed through distributions received from the liquidation of underlying investments of the fund, and the timing of distributions is currently indeterminable. The direct credit co-investments are debt securities classified as trading securities. The Company’s other investments are measured at fair value with unrealized holding gains and losses included in earnings. The Company’s other investments are recorded at estimated fair value utilizing significant unobservable inputs and are, therefore, classified in Level 3 of the fair value hierarchy.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
|
| | | | | | | | | | | |
| March 31, | | |
| 2017 | | 2016 | | |
Assets | | | | | |
Investments | $ | 8,999,677 |
| | $ | 7,362,930 |
| | |
Other assets | 282,380 |
| | 270,819 |
| | |
Total assets | $ | 9,282,057 |
| | $ | 7,633,749 |
| | |
Liabilities and Partners’ Capital |
| |
| | |
Debt | $ | 71,876 |
| | $ | 64,168 |
| | |
Other liabilities | 45,043 |
| | 56,179 |
| | |
Total liabilities | 116,919 |
| | 120,347 |
| | |
Partners’ capital | 9,165,138 |
| | 7,513,402 |
| | |
Total Liabilities and Partners’ Capital | $ | 9,282,057 |
| | $ | 7,633,749 |
| | |
| | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Investment Income | $ | 93,470 |
| | $ | 103,871 |
| | $ | 93,711 |
|
Expenses | 109,648 |
| | 96,352 |
| | 80,613 |
|
Net investment income | (16,178 | ) | | 7,519 |
| | 13,098 |
|
Net realized and unrealized gain | 1,121,595 |
| | 184,831 |
| | 786,375 |
|
Net income | $ | 1,105,417 |
| | $ | 192,350 |
| | $ | 799,473 |
|
The following is a reconciliation of other investments for which significant unobservable inputs (Level 3) were used in determining value:
| | | | | | | | | | | | | | | | | | | | | | | |
| Private equity funds | | Direct credit co-investments | | Direct equity co-investments | | Total other investments |
Balance as of March 31, 2018 | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Contributions | 3,105 | | | 3,864 | | | 4,814 | | | 11,783 | |
Distributions | — | | | — | | | — | | | — | |
Net gain | 629 | | | 76 | | | — | | | 705 | |
Balance as of March 31, 2019 | $ | 3,734 | | | $ | 3,940 | | | $ | 4,814 | | | $ | 12,488 | |
Contributions | 2,526 | | | — | | | 1,875 | | | 4,401 | |
Distributions | (777) | | | (1,970) | | | — | | | (2,747) | |
Net gain (loss) | 303 | | | (214) | | | (837) | | | (748) | |
Balance as of March 31, 2020 | $ | 5,786 | | | $ | 1,756 | | | $ | 5,852 | | | $ | 13,394 | |
The valuation methodologies, significant unobservable inputs, range of inputs and the weighted average input determined based upon relative fair value of the investments used in recurring Level 3 fair value measurements of assets were as follows, as of March 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Significant | | | | | | |
| Fair | | Valuation | | Unobservable | | | | | | Weighted |
| Value | | Methodology | | Inputs | | Range | | | | Average |
Private equity funds | $ | 5,786 | | | Adjusted net asset value | | | Selected market return | | | (7.4)% | - | (3)% | | (6.2)% |
Direct credit co-investments | $ | 1,756 | | | Discounted cash flow | | | Market yield | | | 11.5% | - | 12.6% | | 12.5% |
Direct equity co-investments | $ | 5,852 | | | Market approach | | | EBITDA multiple | | 7.25x | - | 12x | | 9.93x |
| | | Market approach | | | Equity multiple | | 1.05x | | | | 1.05x |
| | | | | | | | | | | |
As of March 31, 2019, private equity funds were recorded at estimated fair value based upon the net asset value of the Company’s ownership interest in the underlying fund utilizing the practical expedient under ASC 820, “Fair Value Measurement.” The direct credit and equity co-investments were recorded at recent precedent transactions.
For the significant unobservable inputs listed in the table above, (1) a significant increase or decrease in the selected market return would result in a significantly higher or lower fair value measurement, respectively; (2) a significant increase or decrease in the market yield would result in a significantly lower or higher fair value measurement, respectively; and (3) a significant increase or decrease in the selected multiple would result in a significantly higher or lower fair value measurement, respectively.
During the year ended March 31, 2020, the Company transferred these investments for an agreed amount of cash of $15,750 to a Partnership that is a VIE of which the Company is the general partner but does not consolidate as the Company is not the primary beneficiary. Due to continuing involvement with these assets at the Partnership, the Company accounted for this transfer as a secured financing as it has not met the criteria in ASC 860, “Transfers and Servicing”, to qualify as a sale and, therefore, has recorded a financial liability for the secured financing which is included in other liabilities in the
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Consolidated Balance Sheets. The cash received was recorded as secured financing in financing activities in the Consolidated Statements of Cash Flows. As of March 31, 2020, all other investments were pledged as collateral on the Company’s secured financing.
The Company accounts for this financial liability at fair value under the fair value option. The primary reason for electing the fair value option is to mitigate volatility in earnings from using different measurement attributes. The significant input to the fair value of the secured financing is the fair value of the other investments delivered as collateral. As of March 31, 2020, the secured financing had a fair value of $13,394 and an amortized cost of $12,894. The fair value of the secured financing is estimated using Level 3 inputs with the significant input being the fair value of the other investments utilized as collateral as shown above.
The Company recognized a loss of $748 and a gain of $705 on other investments during the years ended March 31, 2020 and 2019, respectively. The Company recognized a gain of $43 on the secured financing liability during the year ended March 31, 2020. Gains and losses related to other investments and the secured financing liability are recorded in non-operating income in the Consolidated Statements of Income.
Investments valued under the measurement alternative
The Company’s investments carried at costvalued under the measurement alternative include equity securities in other proprietary investments that are not consolidated, overfor which the Company does not exerthave significant influence and for which fair value is not readily determinable. ASU 2016-01 requires equity securities to be recorded at cost and adjusted to fair value at each reporting period. However, the guidance allows for a measurement alternative, which is to record the investments at cost, less impairment, if any, and subsequently adjust for observable price changes of identical or similar investments of the same issuer.
During the year ended March 31, 2020, the Company made equity investments in two private companies. The Company invested approximately $2,000 in a technology company that has determineddeveloped software to automate manual data entry tasks associated with alternative investment reporting. The Company invested approximately $10,000 in accordancea technology company which has developed a platform for investing in alternative assets. Due to the lack of readily determinable fair values for these investments, for which the Company does not have significant influence, the Company will hold both of these investments under the measurement alternative at cost less impairment.
On January 31, 2020, an observable price transaction occurred for one of the Company’s investments valued under the measurement alternative. The Company recorded a fair value adjustment of $1,507, which is recorded in non-operating income in the Consolidated Statements of Income for the year ended March 31, 2020.
On July 1, 2019, an acquisition of an entity in which the Company held an investment with a carrying value of $1,446 was completed. The Company received cash proceeds of $6,419 and recorded a gain of approximately $4,973 in connection with the applicable guidance that it is impracticable to estimatetransaction, which was recorded in non-operating income in the fair valueConsolidated Statements of Income for the year ended March 31, 2020.
The Company performs qualitative impairment assessments on its investments carried at cost due to limited information available.recorded under the measurement alternative. As of March 31, 2017 and 2016,2019, the Company did not identify any significant events or changes in circumstancesdetermined that have a significant adverse effect onquantitative assessment was required to be performed for one of its technology investments. The assessment indicated that the fair value was less than the carrying value at March 31, 2019. Prior to the impairment recorded, the carrying
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
value of these investments carried at cost.the investment was $2,990. The impairment amount was $701 and is included in non-operating income. The fair value was determined using both a discounted cash flow approach and a market approach based on guideline public companies, and is a Level 3 fair value measurement as financial projections were utilized.
On August 2, 2018, an acquisition of an entity in which the Company held an investment with a carrying amount of $10,798 was completed. The Company received cash proceeds of $17,724 and recorded a gain of $6,926 in connection with the transaction, which was recorded in non-operating income for the year ended March 31, 2019. 4.
On August 11, 2018, an acquisition of an entity in which the Company held an investment with a carrying amount of $600 was completed. The Company received cash proceeds of $4,807 and recorded a gain of $4,207 in connection with the transaction, which was recorded in non-operating income for the year ended March 31, 2019.
5. Variable Interest Entities
The Company consolidates certain VIEs infor which it is determined that the Company is the primary beneficiary. The consolidated VIEs are general partner entities of thecertain Partnerships, which are not wholly owned by the Company. The total assets of the consolidated VIEs are $19,653$9,988 and $21,849$11,648 as of March 31, 20172020 and 2016,2019, respectively, and are recorded in Investments in the Consolidated Balance Sheets. The consolidated VIEs had no0 liabilities other than deferred incentive fee revenue of $3,704 as of March 31, 20172020 and 2016.2019. The assets of the consolidated VIEs may only be used to settle obligations of the consolidated VIEs, if any. In addition, there is no recourse to the Company for the consolidated VIEs’ liabilities, except for certain entities in which there could be a claw back of previously distributed carried interest.
The Company holds variable interests in certain Partnerships that are VIEs, which are not consolidated, as it is determined that the Company is not the primary beneficiary. CertainSuch Partnerships are considered VIEs because limited partners lack the ability to remove the general partner or dissolve the entity without cause, by simple majority vote (i.e. have substantive “kick out” or “liquidation” rights).
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
The Company’s involvement with such entities is in the form of direct equity interests in, and fee arrangements with, the Partnerships in which it also serves as the general partner or managing member. In the Company’s role as general partner or managing member, it generally considers itself the sponsor of the applicable Partnership and makes all investment and operating decisions. As of March 31, 2017,2020, the total commitments and remaining unfunded commitments from the limited partners and general partners to the unconsolidated VIEs are $11,342,835 $19,099,081and $4,614,653,$7,400,287, respectively. These commitments are the primary source of financing for the unconsolidated VIEs.
The maximum exposure to loss represents the potential loss of assets recognized by the Company relating to these unconsolidated entities. The Company believes that its maximum exposure to loss is limited because it establishes separate limited liability or limited partnership entities to serve as the general partner or managing member of the Partnerships.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
The carrying amount of assets and liabilities recognized in the Consolidated Balance Sheets related to the Company’s interests in these non-consolidated VIEs and the Company’s maximum exposure to loss relating to non-consolidated VIEs were as follows:
| | | | | | | | | | | |
| March 31, | | |
| 2020 | | 2019 |
Investments | $ | 118,696 | | | $ | 87,001 | |
Fees receivable | 8,703 | | | 5,896 | |
Due from related parties | 1,194 | | | 1,332 | |
Total VIE assets | 128,593 | | | 94,229 | |
Deferred incentive fee revenue | 3,704 | | | 3,704 | |
Non-controlling interests | (4,853) | | | (5,716) | |
Maximum exposure to loss | $ | 127,444 | | | $ | 92,217 | |
|
| | | | | | | |
| March 31, |
| 2017 | | 2016 |
Investments | $ | 60,597 |
| | $ | 49,330 |
|
Fees receivable | 430 |
| | 2 |
|
Due from related parties | 1,742 |
| | 573 |
|
Total VIE Assets | 62,769 |
| | 49,905 |
|
Deferred incentive fee revenue | 45,166 |
| | 45,166 |
|
Non-controlling interests | (9,901 | ) | | (11,368 | ) |
Maximum Exposure to Loss | $ | 98,034 |
| | $ | 83,703 |
|
5.6. Furniture, Fixtures, and Equipment
Furniture, fixtures, and equipment consist of the following:
| | | | | | | | | | | |
| March 31, | | |
| 2020 | | 2019 |
Computer hardware and software | $ | 6,156 | | | $ | 6,100 | |
Furniture and fixtures | 2,698 | | | 3,739 | |
Leasehold improvements | 6,755 | | | 5,927 | |
Office equipment | 2,230 | | | 2,045 | |
| 17,839 | | | 17,811 | |
Less: accumulated depreciation | 10,437 | | | 9,703 | |
Furniture, fixtures, and equipment, net | $ | 7,402 | | | $ | 8,108 | |
|
| | | | | | | |
| March 31, |
| 2017 | | 2016 |
Computer equipment | $ | 5,598 |
| | $ | 5,653 |
|
Furniture and fixtures | 3,855 |
| | 3,793 |
|
Leasehold improvements | 3,812 |
| | 3,978 |
|
Office equipment | 2,072 |
| | 2,045 |
|
| 15,337 |
| | 15,469 |
|
Less: accumulated depreciation | 11,274 |
| | 10,857 |
|
Furniture, fixtures, and equipment, net | $ | 4,063 |
| | $ | 4,612 |
|
Depreciation expense was $1,824, $1,936$2,684, $2,040 and $1,777$1,565 for the years ended March 31, 2017, 20162020, 2019 and 2015,2018, respectively, and is included in general, administrative and other expenses in the Consolidated Statements of Income.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
6. Senior Secured Term Loan and Bank Line of Credit
On July 9, 2015, the Company entered into a Credit and Guaranty Agreement (the “Credit Agreement”) with various lenders for a senior secured term loan of $260,000. After expenses, including underwriting fees and other expenses, the net amount received was $253,994. The Company utilized the proceeds (along with available cash) primarily to pay off the previous term loan for $108,757 and recapitalize the Company by purchasing interests from certain equity holders for $165,238 in the aggregate. The previous unamortized deferred financing costs of $2,408 were immediately written off and included in interest expense in the Consolidated Statements of Income for the year ended March 31, 2016.
The cash proceeds were net of deferred financing costs of $5,356 and an original issue discount of $650. The original issue discount represents the difference between the stated redemption price at maturity and the issue price and is included in term loan payable net of deferred financing in the Consolidated Balance Sheets and amortized into interest expense in the Consolidated Statements of Income over the term of the loan.
Interest on the senior secured term loan is variable based on LIBOR, subject to a floor of 0.75%, plus a margin of 3.5%, implying a minimum interest rate of 4.25% per annum. The term loan requires 1% annual principal payments which began December 31, 2015, as well as prepayments from certain “asset sales” and “excess cash flow”, if applicable, beginning with the six-month period ending March 31, 2016 and continuing each fiscal year thereafter. Prepayments with respect to excess cash flow, if any, are made on an annual basis, and the first payment was made on June 30, 2016.
The remaining principal balance of the term loan is due upon maturity at July 9, 2022. The Company is permitted to make voluntary prepayments on the loan without penalty. The Company made a voluntary prepayment of $160,000 and $10,000 on the term loan in MarchAugust 11, 2017, and February 2016, respectively. In connection with the voluntary prepayments, the Company has written off $3,359 of the previously unamortized deferred financing costs which are included in interest expense in the Consolidated Statements of Income.
The Credit Agreement contains various restrictive covenants. It requires the Company to maintain a specified maximum total leverage ratio. In addition, the Credit Agreement, among other things, limits the ability of the Company to incur additional indebtedness, to make certain restricted payments, to consummate mergers, consolidations, asset sales and make certain investments, subject to certain exceptions and carve-outs. The term loan is secured byHLA acquired substantially all of the assets of HLAReal Asset Portfolio Management LLC (“RAPM”) for a total aggregate purchase price of $5,840, of which $5,228 was paid in cash with the remainder settled in 27,240 shares of Class A common stock valued at approximately $612. An additional amount of $8,499 was paid to the principals of RAPM in a combination of cash and ranks seniorshares based upon an agreed-upon multiple of earnings. As the amount was contingent upon future employment, the amount was recognized as compensation expense over the required performance period. The Company recorded approximately $2,948 of intangible assets related to all other indebtedness.
In July 2015, the Company purchased interest rate caps through June 30, 2020 to limit exposure to fluctuations in LIBOR above 2.5% on a portion of the Company’s senior secured term loan. In October
2016, the Company de-designated its remaining interest rate caps as cash flow hedges and discontinued
hedge accounting. The amount accumulated in other comprehensive income (loss)acquired investment management contracts, which assets will be amortized to
interest expense over the remaining term8 years, and $2,874 of the respective interest rate caps, or written off if the cash flows become no longer probable. The changes in the fair value of these interest rate caps after the de-designationgoodwill, which are both recorded in other non-operating income in the Consolidated Statements of Income. The fair value of the interest rate caps was $194 and $225 as of March 31, 2017 and 2016, respectively, and is included in other assets in the Consolidated Balance Sheets. The fair value ofremaining assets acquired and liabilities assumed were not material to the interest rate caps is determined utilizing quoted prices in active markets for the same or similar instrumentsconsolidated financial statements.
8. Debt
On August 23, 2017, HLA entered into a Term Loan and is classified as Level II within the fair value hierarchy.
Security Agreement (the “Term Loan
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Agreement”) and a Revolving Loan and Security Agreement (the “Revolving Loan Agreement” and, together with the Term Loan Agreement, the “Loan Agreements”) with First Republic Bank (“First Republic”) for $75,000 (the “Term Loan Facility”) and $25,000 (the “Revolving Loan Facility”), respectively. The Company drew down $10,450 at closing on the Revolving Loan Facility. After expenses, the net amount of cash received was $85,066 and was utilized to pay off the outstanding principal amount and accrued interest of the predecessor credit facility. The previous unamortized deferred financing costs of $1,657 were written off and are included in interest expense in the Consolidated Statements of Income for the year ended March 31, 2018.
On March 24, 2020, the Company amended its Loan Agreements. The Term Loan Agreement was amended to include an incremental term advance of approximately $9,339 on the closing date of the amendment (increasing the outstanding balance to $75,000), provide for additional uncommitted term advances not to exceed $25,000 in the aggregate for a period of 3 years from the closing date of the amendment, revise the principal amortization schedule beginning July 1, 2020 through the maturity date of July 1, 2027 and change the interest rate to a floating per annum rate equal to the prime rate minus 1.50% subject to a floor of 2.25%. The Revolving Loan Agreement’s maturity date was amended to March 24, 2023 and changed the interest rate to a floating per annum rate equal to the prime rate minus 1.50% subject to a floor of 2.25%.
The Company previously entered into a revolving line of credit which terminated on April 4, 2017. There were no borrowings outstanding underevaluated the revolving line of credit for anyterms of the years presented.amendment and concluded that the transaction resulted in a debt modification, which resulted in the existing debt discount, existing deferred financing costs and new debt discount paid to be amortized over the extended term of the Term Loan Facility. The Company had lettersan outstanding balance, net of credit outstandingunamortized debt discount and deferred financing costs of $145$476 and $195$296, on the Term Loan Facility of $74,524 and $70,954 as of March 31, 20172020 and 2016,2019, respectively. The Company had 0 outstanding balance on the Revolving Loan Facility as of March 31, 2020 and 2019, respectively.
On March 24, 2020, the Company also entered into a Multi-Draw Term Loan and Security Agreement (the “Multi-Draw Facility”) with First Republic, which provides for a term loan in the aggregate principal amount of $75,000 that may be drawn any time during a period of one year following the closing date. Borrowings accrue interest at a fixed per annum rate of 4% and the Multi-Draw Facility matures on July 1, 2030. The Company had 0 outstanding balance on the Multi-Draw Facility as of March 31, 2020.
The Loan Agreements and Multi-Draw Facility 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 management fees. They also require HLA to maintain, among other requirements, (i) a specified amount of management fees, (ii) a specified amount of adjusted EBITDA, as defined therein, and (iii) a specified minimum tangible net worth, during the term of each of the Loan Agreements and Multi-Draw Facility. The obligations under the Loan Agreements and Multi-Draw Facility are secured by substantially all of the assets of HLA.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
The aggregate minimum principal payments on the Company’s outstanding debt are due as follows:
| | | | | |
Fiscal year ending March 31, | |
2020 | $ | 1,406 | |
2021 | 1,875 | |
2022 | 1,875 | |
2023 | 4,688 | |
2024 | 7,031 | |
Thereafter | 58,125 | |
| $ | 75,000 | |
The fair value of the outstanding balancesbalance of the term loanCompany’s debt instrument at March 31, 20172020 and 20162019 approximated par value based on current market rates for similar debt instruments and are classified as Level II2 within the fair value hierarchy.
9. Equity
The aggregate minimum principal payments on the Term Loan are due as follows:
|
| | | | |
| Fiscal year ending March 31, | |
| 2018 | $ | 2,600 |
|
| 2019 | 2,600 |
|
| 2020 | 2,600 |
|
| 2021 | 2,600 |
|
| 2022 | 2,600 |
|
| Thereafter | 73,100 |
|
| | $ | 86,100 |
|
7. Equity
Subsequent to the Reorganization and IPO as described in Note 1, the Company has two2 classes of common stock outstanding, Class A common stock and Class B common stock.
Class A common stock
Holders of Class A common stock are entitled to one1 vote for each share held of record on all matters submitted to a vote of stockholders. Additionally, holders of shares of Class A common stock are entitled to receive dividends when and if declared by the Board of Directors, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock.
Class B common stock
Holders of Class B common stock are entitled to ten10 votes for each share held of record on all matters submitted to a vote of stockholders, but have de minimis economic rights. Shares of Class B common stock were issued in the Reorganization to the holders of Class B units of HLA at a one-to-one ratio. Shares of Class B common stock (together with the corresponding Class B units) may be exchanged for shares of Class A common stock on a one-to-one basis, or, at the Company’s election, for cash in an amount equal to the net proceeds from the sale of shares of Class A common stock equal to the number of shares of Class B common stock being exchanged, subject to certain restrictions pursuant to the exchange agreement as discussed in Note 1.restrictions.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Shares of Common Stock Outstanding
The following table shows a rollforward of our common stock outstanding since our IPO:March 31, 2017:
| | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock |
March 31, 2017 | 19,036,504 | | | 27,935,255 | |
Restricted stock granted | 235,219 | | | — | |
Shares issued due to option exercise | 233,495 | | | — | |
Shares issued in connection with RAPM acquisition | 27,240 | | | — | |
Shares issued (repurchased) in connection with offering | 3,834,686 | | | (2,235,187) | |
Shares repurchased for employee tax withholdings | (186,280) | | | — | |
Forfeitures | (41,388) | | | — | |
March 31, 2018 | 23,139,476 | | | 25,700,068 | |
Shares issued (repurchased) in connection with offerings | 4,141,921 | | | (2,084,617) | |
Shares issued in connection with contingent compensation payment | 11,380 | | | — | |
Shares issued in connection with ESPP | 7,137 | | | — | |
Shares converted from units | 41,435 | | | — | |
Shares repurchased for employee tax withholdings | (123,928) | | | — | |
Forfeitures | (27,529) | | | (99,012) | |
Restricted stock granted | 177,585 | | | — | |
March 31, 2019 | 27,367,477 | | | 23,516,439 | |
Shares issued (repurchased) in connection with offering | 2,451,633 | | | (1,466,712) | |
Shares issued in connection with contingent compensation payment | 7,692 | | | — | |
Shares issued in connection with ESPP | 25,640 | | | — | |
Shares converted from units | — | | | — | |
Shares repurchased for employee tax withholdings | (100,683) | | | — | |
Forfeitures | (27,834) | | | — | |
Restricted stock granted | 118,859 | | | — | |
March 31, 2020 | 29,842,784 | | | 22,049,727 | |
|
| | | | | |
| Class A Common Stock | | Class B Common Stock |
March 6, 2017 | — |
| | — |
|
Issued to the public in the IPO | 13,656,250 |
| | — |
|
Issued to HLA Class B unitholders in the Reorganization | — |
| | 27,935,255 |
|
HLA units exchanged in the Reorganization | 3,899,169 |
| | — |
|
Restricted interests converted to restricted stock in connection with the Reorganization | 1,080,063 |
| | — |
|
Restricted stock granted at time of IPO | 231,288 |
| | — |
|
Restricted stock granted after IPO | 284,263 |
| | — |
|
Repurchase of restricted stock for tax withholding | (114,529 | ) | | — |
|
March 31, 2017 | 19,036,504 |
| | 27,935,255 |
|
The reallocation adjustment between HLI stockholders’ equity and non-controlling interests in Hamilton Lane Advisors, L.L.C. relates to the impact of changes in economic ownership percentages during the period and adjusting previously recorded equity transactions to the economic ownership percentage as of the end of each reporting period.
HLA Operating Agreement
In accordance with the limited liability company agreement of HLA (the “HLA Operating Agreement”), profits and losses from HLA are allocated on a pro rata basis based upon each member’s economic interests. The HLA Operating Agreement provides that distributions are made on a pro rata basis in an amount sufficient to pay income taxes owed by the members on their share of HLA’s taxable income. In addition to these tax distributions, the CompanyHLA made distributions in excess of required tax distributions to members in an aggregate amount of $45,000, $25,000,$34,014, $30,698, and $19,000$27,631 for the years ended March 31, 2017, 2016,2020, 2019, and 2015, respectively, which included2018, respectively.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
September 2019 Offering
In September 2019, the Company and certain selling stockholders completed a registered offering of an excess distributionaggregate of 2,680,089 shares of Class A common stock at a price of $60.01 per share (the “September 2019 Offering”). The shares sold consisted of (i) 228,456 shares held by the selling stockholders and (ii) 2,451,633 shares newly issued by the Company. The Company received approximately $147,122 in net proceeds from the sale of its shares and used all of the proceeds to option holderssettle exchanges by certain members of $2,608, $2,124,HLA of a total of 1,466,712 Class B units and $2,502984,921 Class C units. In connection with the exchange of the Class B units, the Company also repurchased for par value and canceled a corresponding number of shares of Class B common stock. The Company did not receive any proceeds from the years ended sale of shares by the selling stockholders.
March 31, 2017, 2016,2019 Offering
In March 2019, the Company and 2015, respectively.a certain selling stockholder completed a registered offering of an aggregate of 1,449,303 shares of Class A common stock at a price of $45.65 per share. The shares sold consisted of (i) 50,000 shares held by the selling stockholder and (ii) 1,399,303 shares newly issued by the Company. The Company received approximately $63,878 in proceeds from the sale of its shares, net of underwriting discounts and commissions, and used all of the proceeds to settle in cash exchanges by certain members of HLA of a total of 711,943 Class B units and 687,360 Class C units. In connection with the exchange of the Class B units, the Company also repurchased for par value and canceled a corresponding number of shares of Class B common stock. The Company did not receive any proceeds from the sale of shares by the selling stockholder.
8.
In September 2018, the Company and certain selling stockholders completed a registered offering of an aggregate of 2,880,979 shares of Class A common stock at a price of $47.26 per share. The shares sold consisted of (i) 138,361 shares held by the selling stockholders and (ii) 2,742,618 shares newly issued by the Company. The Company received approximately $129,626 in proceeds from the sale of its shares, net of underwriting discounts and commissions, and used all of the proceeds to settle in cash exchanges by certain members of HLA of a total of 1,372,674 Class B units and 1,369,944 Class C units. In connection with the exchange of the Class B units, the Company also repurchased for par value and canceled a corresponding number of shares of Class B common stock. The Company did not receive any proceeds from the sale of shares by the selling stockholders.
March 2018 Offering
In March 2018, the Company and certain selling stockholders completed a registered offering of an aggregate of 4,531,001 shares of Class A common stock at a price of $34.25 per share. The shares sold consisted of (i) 696,315 shares held by the selling stockholders and (ii) 3,834,686 shares newly issued by the Company. The Company received approximately $125,200 in proceeds from the sale of its shares, net of underwriting discounts and commissions, and used all of the net proceeds to settle in cash exchanges by certain members of HLA of a total of 2,235,187 Class B units and 1,599,499 Class C units. In connection with the exchange of the Class B units, the Company also repurchased for par value and canceled a corresponding number of shares of Class B common stock. The Company did not receive any proceeds from the sale of shares by the selling stockholders.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
10. Equity-Based Compensation
2017 Equity Incentive Plan
The Company has adopted its 2017 Equity Incentive Plan, as amended (the “Plan”), which permits the issuance of up to 5,000,000 shares of Class A common stock, which may be granted as incentive stock options, nonqualified stock options, SARs, restricted stock, restricted stock units, or PSUs. Awards under the Plan generally vest over four years, with options expiring not more than ten years from the date of grant, three months after termination of employment or one year after the date of death or termination due to disability of the grantee. As of March 31, 2017,2020, there were 3,285,4133,261,399 shares of Class A common stock available to grant under the Plan. Pursuant to the terms of the Plan, awards may not be granted after March 6,February 28, 2027.
Conversion of Restricted Interests
On March 6, 2017, in connection with the Reorganization described in Note 1, all outstanding options and unvested restricted interests of HLA were cancelled and replaced with stock options and restricted stock awards under the Plan. The replacement awards were issued with substantially identical remaining vesting periods and other terms. There was no difference in the fair value of the cancelled awards and replacement awards and no additional compensation expense was recorded.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Summary of Option Activity
A summary of option activity under the Plan for the three years ended March 31, 20172020 is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | | | | |
| 2020 | | | 2019 | | | 2018 | |
| Number of Options | Weighted- Average Exercise Price | | Number of Options | Weighted- Average Exercise Price | | Number of Options | Weighted- Average Exercise Price |
Options outstanding at beginning of year | — | | — | | | — | | — | | | 233,495 | | $ | 1.34 | |
Options exercised | — | | — | | | — | | — | | | (233,495) | | 1.34 | |
Options outstanding at end of year | — | | — | | | — | | — | | | — | | — | |
Options exercisable at end of year | — | | — | | | — | | — | | | — | | — | |
|
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
| Number of Options | Weighted- Average Exercise Price | | Number of Options | Weighted- Average Exercise Price | | Number of Options | Weighted- Average Exercise Price |
Options outstanding at beginning of year | 3,532,340 |
| $ | 1.03 |
| | 4,486,955 |
| $ | 0.94 |
| | 7,587,388 |
| $ | 0.76 |
|
Options exercised | (3,298,845 | ) | 1.01 |
| | (954,615 | ) | 0.61 |
| | (3,100,433 | ) | 0.51 |
|
Options outstanding at end of year | 233,495 |
| 1.34 |
| | 3,532,340 |
| 1.03 |
| | 4,486,955 |
| 0.94 |
|
Options exercisable at end of year | 233,495 |
| 1.34 |
| | | | | | |
All options were vested as of June 1, 2011. The aggregate intrinsic value as of March 31, 2017 was $4,047 for options outstanding, options exercisable, and options vested. The intrinsic value of options is determined based on the closing price of Company’s Class A common stock underlying the options as of March 31, 2017, less the option exercise price. The weighted-average remaining contractual term is 0.2 years for options outstanding and exercisable as of March 31, 2017. The intrinsic value of options exercised was $46,436, $10,487, and $24,136$4,350 for the yearsyear ended March 31, 2017, 2016 and 2015, respectively.2018.
At March 31, 2017, there was no unrecognized compensation expense related to options issued under the Plan.
Restricted Stock
The Company has granted restricted Class A common stock under the Plan to certain employees as part of the annual bonus program and in connection with the Reorganization.its IPO. Holders of restricted stock have all of the rights of a shareholderstockholder with respect to such shares, including the right to vote the shares but not the right to receive dividends or other distributions. TheSubstantially all of the awards vest over four years in equal annual installments. On each vesting date, the related employee tax liabilities are either paid in cash by the employee or stock is sold back to the Company at the then currentthen-current fair value to offset the required minimum tax withholding obligations. Forfeitures are recognized as they occur. Compensation expense related to the awards is recognized ratably each month over the vesting period.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
The change in unvested restricted stock including unvested restricted interests prior tofor the IPO,year ended March 31, 2020 is as follows:
| | | | | | | | | | | |
| Total Unvested | | Weighted- Average Grant-Date Fair Value of Award |
March 31, 2019 | 662,076 | | | $ | 26.58 | |
Granted | 118,859 | | | 54.71 | |
Vested | (311,586) | | | 22.40 | |
Forfeited | (27,834) | | | 30.29 | |
March 31, 2020 | 441,515 | | | $ | 36.87 | |
|
| | | | | | |
| Total Unvested | | Weighted- Average Grant-Date Fair Value of Award |
March 31, 2016 | 1,076,389 |
| | $ | 10.86 |
|
Granted prior to IPO | 7,170 |
| | 13.95 |
|
Granted at IPO | 231,288 |
| | 16.00 |
|
Granted after IPO | 284,263 |
| | 18.79 |
|
Vested | (457,093 | ) | | 9.37 |
|
Forfeited | (3,496 | ) | | 11.31 |
|
March 31, 2017 | 1,138,521 |
| | $ | 14.49 |
|
The weighted averageweighted-average fair value per share of restricted stock awarded during the years ended March 31, 2017, 20162020, 2019 and 20152018 was $17.49, $13.95,$54.71, $40.77, and $11.24,$32.45, respectively. The total fair value of restricted stock that vested during the years ended March 31, 2017, 20162020, 2019 and 20152018 was $8,589, $6,960,$18,141, $16,601, and $6,596,$16,214, respectively. As of March 31, 2017,2020, total unrecognized compensation expense related to restricted stock was approximately $16,062$15,838 with a weighted-average amortization period of 3.22.91 years.
The total tax benefit recognized from share-based compensation for the years ended March 31, 2020, 2019 and 2018 was $1,229, $2,537 and $2,403, respectively. 9.
Employee Share Purchase Plan
On September 6, 2018, the Company’s stockholders approved the Hamilton Lane Incorporated Employee Share Purchase Plan (the “ESPP”). The ESPP provides for a purchase price equal to 85% of the closing price of the Company’s Class A common stock on the last trading day of each offering period, which begins the first day of each fiscal quarter and ends on the last day of that fiscal quarter. Our initial offering period started January 1, 2019. At inception, there were 1,000,000 shares available for purchase through the ESPP and 967,223 shares were available as of March 31, 2020. The benefit received by the employees, which is equal to a 15% discount on the shares of the Company’s Class A common stock purchased, is recognized as equity-based compensation expense on the date of each purchase. During the year ended March 31, 2020 and 2019, the Company recorded expense of $220 and $47, respectively, related to the ESPP.
11. Compensation and Benefits
The Company has recorded the following amounts related to compensation and benefits:
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| 2020 | | 2019 | | 2018 |
Base compensation and benefits | $ | 84,144 | | | $ | 78,452 | | | $ | 72,151 | |
Incentive fee compensation | 7,192 | | | 7,785 | | | 1,774 | |
Equity-based compensation | 7,183 | | | 6,382 | | | 5,544 | |
Contingent compensation related to acquisition (Note 7) | — | | | 5,100 | | | 3,399 | |
Total compensation and benefits | $ | 98,519 | | | $ | 97,719 | | | $ | 82,868 | |
|
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Base compensation and benefits | $ | 65,968 |
| | $ | 72,179 |
| | $ | 54,453 |
|
Incentive fee compensation | 1,467 |
| | 16,156 |
| | 2,314 |
|
Equity-based compensation | 4,681 |
| | 3,730 |
| | 3,390 |
|
Total compensation and benefits | $ | 72,116 |
| | $ | 92,065 |
| | $ | 60,157 |
|
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
The incentive fee compensation recorded for the year ended March 31, 2016 subject to claw-back from employees is $10,366. There was no incentive fee compensation paid for the years ended March 31, 2017(In thousands, except share and 2015 that is subject to claw-back.per share amounts)
The Company provides defined contribution plans covering U.S., United Kingdom and Hong Kong employees subject to minimum age and service guidelines. Eligible employees may contribute a percentage of their annual compensation subject to statutory guidelines.
The Company makes discretionary and/or matching contributions to the plans, which amounted to $1,122, $1,080,$1,561, $1,507, and $742$1,303 for the years ended March 31, 2017, 20162020, 2019 and 2015,2018, respectively, and is included in compensation and benefits expense in the Consolidated Statements of Income.
12. Income Taxes
The Company’s income before income taxes consisted of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| 2020 | | 2019 | | 2018 |
Domestic income before income taxes | $ | 138,537 | | | $ | 128,035 | | | $ | 138,290 | |
Foreign income before income taxes | 2,207 | | | 1,522 | | | 1,340 | |
Total income before income taxes | $ | 140,744 | | | $ | 129,557 | | | $ | 139,630 | |
Components of income tax expense consist of the following:
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| 2020 | | 2019 | | 2018 |
Current: | | | | | |
Federal | $ | 4,885 | | | $ | 7,163 | | | $ | 8,001 | |
State and local | 754 | | | 1,269 | | | 1,769 | |
Foreign | 400 | | | 463 | | | 580 | |
Total current income tax expense | $ | 6,039 | | | $ | 8,895 | | | $ | 10,350 | |
Deferred: | | | | | |
Federal | $ | 6,589 | | | $ | 3,654 | | | $ | 24,180 | |
State and local | 1,315 | | | 17,917 | | | (496) | |
Foreign | 25 | | | 94 | | | (701) | |
Total deferred income tax expense | 7,929 | | | 21,665 | | | 22,983 | |
Total income tax expense | $ | 13,968 | | | $ | 30,560 | | | $ | 33,333 | |
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
The Company also provides annual discretionary bonus awards to its employees based on company and individual performance, which are included in compensation and benefits in the Consolidated Statements of Income.
10. Income Taxes
The Company’s income (loss) before income taxes consisted of the following: |
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Domestic income before income taxes | $ | 73,565 |
| | $ | 55,252 |
| | $ | 70,519 |
|
Foreign income before income taxes | 1,189 |
| | 1,469 |
| | 1,466 |
|
Total income before income taxes | $ | 74,754 |
| | $ | 56,721 |
| | $ | 71,985 |
|
Components of income tax expense consist of the following: |
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Current: | | | | | |
Federal | $ | — |
| | $ | — |
| | $ | — |
|
State and local | — |
| | — |
| | — |
|
Foreign | 290 |
| | 139 |
| | 209 |
|
Total current income tax expense | $ | 290 |
| | $ | 139 |
| | $ | 209 |
|
Deferred: | | | | | |
Federal | $ | 356 |
| | $ | — |
| | $ | — |
|
State and local | 53 |
| | — |
| | — |
|
Foreign | (383 | ) | | 730 |
| | 274 |
|
Total deferred income tax (benefit) expense | 26 |
| | 730 |
| | 274 |
|
Total income tax expense | $ | 316 |
| | $ | 869 |
| | $ | 483 |
|
A reconciliation of the U.S. statutory income tax rate to the Company’s effective tax rate is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| 2020 | | 2019 | | 2018 |
Federal tax at statutory rate | | 21.0 | % | | 21.0 | % | | 31.6 | % |
State income taxes, net of federal benefit | 1.7 | % | | 1.4 | % | | 1.5 | % |
Non-controlling interest | | (9.8) | % | | (10.8) | % | | (19.8) | % |
Foreign income taxes | | — | % | | — | % | | (0.4) | % |
Valuation allowance | (0.9) | % | | 1.9 | % | | (1.6) | % |
Tax reform impact | — | % | | — | % | | 13.7 | % |
Deferred tax asset state apportionment changes | — | % | | 10.3 | % | | — | % |
Other | (2.1) | % | | (0.2) | % | | (1.1) | % |
Effective tax rate | | 9.9 | % | | 23.6 | % | | 23.9 | % |
|
| | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Federal tax at statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
State income taxes, net of federal benefit | 5.2 | % | | 3.1 | % | | 3.1 | % |
Non-controlling interest | (39.7 | )% | | (38.1 | )% | | (38.1 | )% |
Foreign income taxes | (0.3 | )% | | 0.6 | % | | 0.7 | % |
Valuation allowance | 0.2 | % | | 1.0 | % | | — | % |
Effective tax rate | 0.4 | % | | 1.6 | % | | 0.7 | % |
The Company’s overall effective tax rate is less than the statutory rate due primarily to the portion of income allocated to the non-controlling entities, which are generally not subject to corporate-level income tax except for operations in certain foreign jurisdictions.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
The significant components of deferred tax assets and liabilities are as follows:
| | | | | | | | | | | |
| Year Ended March 31, | | |
| 2020 | | 2019 |
Deferred tax assets: | | | |
Basis difference in HLA | | $ | 150,309 | | | $ | 126,219 | |
Tax Receivable Agreement | | 24,020 | | | 16,652 | |
Fixed assets | | 42 | | | 26 | |
Net operating loss carryforwards | | 1,569 | | | 1,843 | |
Valuation allowance | | (37,969) | | | (37,164) | |
State taxes | | (30) | | | 150 | |
Total deferred tax assets | $ | 137,941 | | | $ | 107,726 | |
|
| | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 |
Deferred tax assets: | | | |
Basis difference in HLA | $ | 98,942 |
| | $ | — |
|
Equity-based compensation | 355 |
| | 7 |
|
Net operating loss carryforwards | 680 |
| | 549 |
|
Valuation allowance | (38,180 | ) | | (549 | ) |
Total deferred tax assets | $ | 61,797 |
| | $ | 7 |
|
Deferred tax liabilities: | | | |
Undistributed foreign earnings | $ | 574 |
| | $ | — |
|
Total deferred tax liabilities | 574 |
| | — |
|
Net deferred tax assets | $ | 61,223 |
| | $ | 7 |
|
As of March 31, 20172020 and 2016,2019, the Company had net operating loss carryforwards of $680$6,902 and $549$7,999 that were generated from certain foreign subsidiaries. These net operating losses can be carried forward indefinitely. As of March 31, 20172020 and March 31, 2016,2019, it is more likely than not that the tax benefits from certain of these net operating loss carryforwards will not be realized, therefore, a valuation allowance of $768 and $947 has been established, for the full amount, respectively.
In connection with the Reorganization,September 2019 Offering and unit exchange, the Company recorded a deferred tax asset in the amount of $98,778. It$37,394, which is net of a valuation allowance of $3,736 related to the portion of tax benefits that it is more likely than not that a portion of these tax benefits will not be realized, therefore,realized. Additionally, in connection with the September 2019 Offering and unit exchange and recording of the deferred tax asset, the Company recorded a valuation allowancepayable to related parties pursuant to the tax receivable agreement of $37,500 has been established as of March 31, 2017.
$31,481.
The Company believes it is more likely than not that the deferred tax assets (except those identified above)will be realized based on the Company’s historic earnings, forecasted income, and the reversal of temporary differences. The net change in the valuation allowance was an increase of $37,631.$805, which was recorded through additional paid-in-capital and income tax expense.
As of March 31, 2017, 20162020, 2019, and 2015,2018, the Company had no0 unrecognized tax positions. The Company does not expect any material increase or decrease in its gross unrecognized tax positions during
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
the next twelve months. If and when the Company does record unrecognized tax positions in the future, any interest and penalties related to unrecognized tax positions will be recorded in the income tax expense line in the Consolidated Statements of Income.
The Company files income tax returns as required by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company may be subject to examination by federal and certain state and local tax authorities. As of March 31, 2017, HLI’s federal and state2020, the Company’s income tax returns since inception are open to examination. As of March 31, 2017, HLA’s federal income tax returns for the years 2013 throughfrom 2016 remain open and are subject to examination. HLA’s state and local tax returns are generally subject to audit from 2013 through 2016. Currently, no tax authorities are auditing any of the Company’s income tax matters.
Tax Receivable Agreement
HLI’s purchase of HLA Class A units concurrent with the IPO, and the subsequent and future exchanges by holders of HLA units for shares of HLI’s Class A common stock pursuant to the Exchange Agreement, are expected to result in increases in HLI’s share of the tax basis of the tangible and intangible assets of HLA, which will increase the tax depreciation and amortization deductions that otherwise would not have been
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
available to HLI. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of cash taxes that HLI would otherwise be required to pay in the future. HLI has entered into a tax receivable agreement (“TRA”) with the other members of HLA that requires HLI 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 HLI actually realizes (or, under certain circumstances, is 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 TRA. HLIThe Company has recorded a liability related to these paymentsthe TRA of $10,734$98,956 and $69,636 as of March 31, 2017.2020 and 2019. A payment of $1,952 was made during the year ended March 31, 2020. In the event that the valuation allowance related to tax benefits associated with the TRAtax receivable agreement is released in a future period, an additional estimated payable will be due to the TRA Recipients of $5,013.$10,589.
11.13. Earnings per Share
Basic earnings per share of Class A common stock is computed by dividing net income attributable to HLI for the period from March 6, 2017 through March 31, 2017, the period following the Reorganization and IPO, by the weighted-average number of shares of Class A common stock outstanding during the same period.outstanding. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to HLI by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities.
Shares of the Company’s Class B common stock do not share in the earnings or losses attributable to HLI and therefore are not participating securities. As a result, a separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been included. Shares of the Company’s Class B common stock are, however, considered potentially dilutive to the Class A common stock because each share of Class B common stock, together with a corresponding Class B unit, is exchangeable for a share of Class A common stock on a one-for-one basis.
There were no shares of Class A common stock outstanding prior to March 6, 2017, therefore no earnings per share information has been presented for any period prior to that date.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2020 | | | | | | Year Ended March 31, 2019 | | | | |
| Net income attributable to HLI | | Weighted-Average Shares | | Per share amount | | Net income attributable to HLI | | Weighted-Average Shares | | Per share amount |
Basic EPS of Class A common stock | $ | 60,825 | | | 28,088,578 | | | $ | 2.17 | | | $ | 33,573 | | | 23,836,401 | | $ | 1.41 | |
Adjustment to net income: | | | | | | | | | | | |
Assumed exercise and vesting of employee awards | 352 | | | | | | | 355 | | | | | |
Effect of dilutive securities: | | | | | | | | | | | |
Assumed exercise and vesting of employee awards | | | 350,194 | | | | | | | 462,394 | | | |
Diluted EPS of Class A common stock | $ | 61,177 | | | 28,438,772 | | | $ | 2.15 | | | $ | 33,928 | | | 24,298,795 | | | $ | 1.40 | |
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
|
| | | |
| March 6, 2017 through March 31, 2017 |
| |
Basic net income per share: | |
Numerator | |
Net Income | $ | 74,438 |
|
Less: Net income attributable to non-controlling interests in general partnerships | 1,192 |
|
Less: Net income attributable to non-controlling interest in Hamilton Lane Advisors, L.L.C. | 72,634 |
|
Net income attributable to Class A common stockholders - basic | $ | 612 |
|
Denominator | |
Weighted-average shares of Class A common stock outstanding - basic | 17,788,363 |
|
Basic earnings per share | $ | 0.03 |
|
| |
Diluted earnings per share: | |
Numerator | |
Net income attributable to Class A common stockholders - basic | $ | 612 |
|
Reallocation of net income assuming exercise of outstanding options and vesting of restricted stock | 9 |
|
Net income attributable to Class A common stockholders - diluted | $ | 621 |
|
Denominator | |
Weighted-average shares of Class A common stock outstanding - basic | 17,788,363 |
|
Weighted-average effect of dilutive securities: | |
Assumed exercise of outstanding options and vesting of restricted stock | 552,716 |
|
Weighted-average shares of Class A common stock outstanding - diluted | 18,341,079 |
|
Diluted earnings per share | $ | 0.03 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2018 | | | | |
| Net income attributable to HLI | | Weighted-Average Shares | | Per share amount |
Basic EPS of Class A common stock | 17,341 | | 18,414,715 | | $ | 0.94 | |
Adjustment to net income: | | | | | |
Assumed exercise and vesting of employee awards | 356 | | | | | |
Effect of dilutive securities: | | | | | |
Assumed exercise and vesting of employee awards | | | 575,654 | | | |
Diluted EPS of Class A common stock | $ | 17,697 | | | 18,990,369 | | | $ | 0.93 | |
The calculationcalculations of diluted earnings per share excludes 34,438,669exclude 23,968,994,26,420,627, and 30,603,983 outstanding Class B and C Unitsunits of HLA for the years ended March 31, 2020, 2019 and 2018, respectively, which are exchangeable into Class A common stock under the “if-converted” method, because the inclusion of such shares would be antidilutive.
12.14. Related-Party Transactions
The Company considers its employees, directors, and equity method investments to be related parties.
The Company has investment management agreements with various specialized funds and customized separate accounts that it manages. The Company earned management and incentiveadvisory fees from Partnerships of $111,582, $109,253,$161,323, $134,343, and $83,897$113,507 for the years ended March 31, 2017, 20162020, 2019 and 2015,2018, respectively. The Company earned incentive fees from Partnerships of $24,077, $31,876, and $43,522 for the years ended March 31, 2020, 2019 and 2018, respectively.
DueFees receivable from related partiesthe Partnerships were $16,970 and $8,927 as of March 31, 2020 and 2019, respectively, and are included in fees receivable in the Consolidated Balance Sheets consist primarilySheets.
The Company entered into a service agreement on June 1, 2017 with a joint venture pursuant to which it incurred expenses of advances made on behalf$5,289, $5,058 and $3,638 for the years ended March 31, 2020, 2019, and 2018 respectively, which amounts are included in general, administrative and other expenses in the Consolidated Statements of Income. The Company also has a payable to the joint venture of $428 and $450 as of March 31, 2020 and 2019, respectively, which is included in other liabilities in the Consolidated Balance Sheets.
On January 31, 2020, the convertible promissory note (the “Note”) held by the Company issued by one of its equity method investments was settled by converting the outstanding principal and accrued interest into shares of the Partnershipsinvestee per the terms of the Note. The Company received 2,278,524 shares of the investee which were recorded at the carrying value of the Note of $902 at the date of conversion. These shares are included with similar shares of that investee as investments held under the measurement alternative.
On January 31, 2020, the Company entered into an asset purchase agreement with one of its equity method investments for the code and an exclusive license to distribute the Cobalt LP software. The cost of the asset acquisition was $6,373, which consisted of an upfront cash payment of certain operating costs$4,000, contribution of equity shares of the investee valued at $2,201 and expenses. The Company is subsequently reimbursed by the Partnerships for these amounts.
$172 in direct transaction fees. Additionally, a deferred
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Amounts due from related parties were comprisedcash payment of $1,000 will be made upon completion of agreed upon activities in order to finalize the purchase. The deferred cash payment will be included in the cost of the following:
|
| | | | | | | |
| March 31, |
| 2017 | | 2016 |
Advances made on behalf of Partnerships | $ | 2,629 |
| | $ | 1,954 |
|
Refundable tax distributions | 684 |
| | 870 |
|
Notes and interest receivable - employees | — |
| | 28 |
|
| $ | 3,313 |
| | $ | 2,852 |
|
Fees receivable from the Partnershipsasset acquisition when paid. The assets purchased were $918 and $2,021 for the periods ended March 31, 2017 and 2016, respectively, and are includedrecorded as intangible assets in fees receivableother assets in the Consolidated Balance Sheets.Sheets and will be amortized over 7 years.
13.15. Supplemental Cash Flow Information
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, | | | | |
| 2020 | | 2019 | | 2018 |
Cash paid during the year for interest | $ | 2,854 | | | $ | 2,966 | | | $ | 3,075 | |
Cash paid during the year for income taxes | $ | 7,804 | | | $ | 10,176 | | | $ | 8,790 | |
Cumulative-effect adjustment from adoption of accounting guidance | $ | — | | | $ | 997 | | | $ | — | |
Shares issued for contingent compensation payment | $ | 425 | | | $ | 425 | | | $ | — | |
Non-cash investing activities: | | | | | |
Shares issued for acquisition of business | $ | — | | | $ | — | | | $ | 612 | |
Conversion of note receivable | $ | 902 | | | $ | — | | | $ | — | |
Contribution of investment for purchase of intangible assets | $ | 2,201 | | | $ | — | | | $ | — | |
Non-cash financing activities: | | | | | |
Establishment of net deferred tax assets related to tax receivable agreement | $ | 37,394 | | | $ | 56,010 | | | $ | 34,492 | |
Dividends declared but not paid | $ | 8,027 | | | $ | 5,673 | | | $ | 3,893 | |
Members’ distributions declared but not paid | $ | 5,829 | | | $ | 17,081 | | | $ | 11,837 | |
16. Commitments and Contingencies
Litigation
From time to time, the Company is named as a defendant in legal actions relating to transactions conducted inIn the ordinary course of business.business, the Company may be subject to various legal, regulatory, and/or administrative proceedings from time to time. Although there can be no assurance of the outcome of such legal actions,proceedings, in the opinion of management, the Company does not believe it is probable that any currentpending or, to its knowledge, threatened legal proceeding or claim would individually or in the aggregate materially affect its Consolidated Financial Statements.consolidated financial statements.
Incentive Fees
In connection with Carried Interest from the Partnerships, the Company only recognizes its allocable share of the Partnerships’ earnings to the extent that this income is not subject to continuing contingencies. Carried Interest allocated to the Company from the Partnerships that is subject to continuing contingencies is not recognized in the accompanying Consolidated Balance Sheets. The Partnerships have allocated Carried Interest,carried interest, which is still subject to contingencies,has not yet been received or recognized, in the amounts of $236,857$441,150 and $177,257$326,466 at March 31, 20172020 and 2016,2019, respectively, of which $45,166$3,704 and $45,166$3,704 at March 31, 20172020 and 2016,2019, respectively, has been received and deferred by the Company.
If the Company ultimately receives the unrecognized Carried Interest,carried interest, a total of $48,849$110,288 and $33,949$81,616 as of March 31, 20172020 and 2016,2019, respectively, would be potentially payable to certain employees and third parties pursuant to compensation arrangements related to the carried interest profit-sharing plans. Such amounts have not been recorded in the Consolidated Balance Sheets or Consolidated Statements of Income as this liability is not yet probable.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
Leases
The Company has entered intoCompany’s leases consist primarily of operating lease agreementsleases for office equipment, office space and related information services. The Company leases office spaceequipment in various countrieslocations around the world and maintains its headquarters in Bala Cynwyd, Pennsylvania, where itworld. These leases primary office space under a non-cancellablehave remaining lease agreement expiring December 2021 with two optionsterms of one year to five years, some of which have the option to extend the term for an additional five years each. or have the option to terminate within one year.
Total operating lease costs were $4,838 for the year ended March 31, 2020. Total variable lease costs were $557 for the year ended March 31, 2020. Short-term lease costs were not material for the year ended March 31, 2020.
| | | | | | | |
| | | Year Ended March 31, 2020 |
Cash paid for amounts included in the measurement of operating lease liabilities | | | $ 5,108 |
Noncash ROU assets obtained in exchange for new operating lease liabilities | | | $ 2,102 |
| | | |
Weighted average remaining lease term (in years) | | | 2.9 |
Weighted average discount rate | | | 5.2 | % |
Total lease expense was $4,801, $4,740,$5,851 and $4,478$5,286 for the years ended March 31, 2017, 20162019 and 2015,2018, respectively, and iswas recorded on the straight-line basis and included in general, administrative and other expenses in the Consolidated Statements of Income.
Future minimum
As of March 31, 2020, the maturities of operating lease liabilities were as follows:
| | | | | |
FY2021 | $ | 4,912 | |
FY2022 | 3,320 |
FY2023 | 1,200 |
FY2024 | 877 |
Thereafter | 688 |
Total lease payments | $ | 10,997 | |
Less: imputed interest | (813) |
Total operating lease liabilities | $ | 10,184 | |
In October 2019, the Company executed an agreement to lease office space for its new headquarters in suburban Philadelphia. The lessor is currently building the office space. The Company expects to gain access to the space to build various leasehold improvements in late fiscal 2021. At that time, the Company will establish an ROU asset and a lease liability for the new lease. Upon lease commencement, total future lease payments under noncancelable operating leases consist of the following:are expected to be $92,320 over 17 years.
|
| | | | |
| Fiscal year ending March 31: | |
| 2018 | $ | 4,103 |
|
| 2019 | 3,629 |
|
| 2020 | 3,459 |
|
| 2021 | 3,262 |
|
| 2022 | 2,129 |
|
| Thereafter | — |
|
Commitments
The Company serves as the investment manager of the Partnerships. The general partner or managing member of each Partnership is generally a separate subsidiary of the Company and has agreed to invest funds on the same basis as the limited partners in most instances. The aggregate unfunded commitment of the general partners to the Partnerships was $76,908$143,489 and $123,637 as of March 31, 2017.
14. Management2020 and Advisory Fees
The following presents management and advisory fee revenues by product offering:
|
| | | | | | | | | | | |
| Year Ended March 31, |
| 2017 | | 2016 | | 2015 |
Customized separate accounts | $ | 71,261 |
| | $ | 67,879 |
| | $ | 63,275 |
|
Specialized funds | 74,675 |
| | 62,340 |
| | 51,315 |
|
Advisory and reporting | 23,798 |
| | 22,536 |
| | 22,388 |
|
Distribution management | 2,940 |
| | 4,875 |
| | 8,898 |
|
Total management and advisory fees | $ | 172,674 |
| | $ | 157,630 |
| | $ | 145,876 |
|
2019, respectively.
Hamilton Lane Incorporated
Notes to Consolidated Financial Statements
(In thousands, except share and per share amounts)
15.
17. Quarterly Financial Information (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| For the quarter ended | | | | | | |
| June 30, 2019 | | September 30, 2019 | | December 31, 2019 | | March 31, 2020 |
Total revenues | $ | 64,686 | | | $ | 64,292 | | | $ | 68,138 | | | $ | 76,932 | |
Total expenses | 37,693 | | | 37,367 | | | 39,246 | | | 43,313 | |
Net income | 27,453 | | | 32,273 | | | 28,437 | | | 38,613 | |
Net income attributable to HLI | 11,381 | | | 15,299 | | | 13,497 | | | 20,648 | |
Earnings per share of Class A common stock: | | | | | | | |
Class A - Basic | $ | .43 | | | $ | .56 | | | $ | .46 | | | $ | .71 | |
Class A - Diluted | $ | .42 | | | $ | .56 | | | $ | .46 | | | $ | .70 | |
| | | | | | | |
| For the quarter ended | | | | | | |
| June 30, 2018 | | September 30, 2018 | | December 31, 2018 | | March 31, 2019 |
Total revenues | $ | 63,362 | | | $ | 55,833 | | | $ | 65,996 | | | $ | 66,988 | |
Total expenses | 37,670 | | | 34,466 | | | 37,759 | | | 38,060 | |
Net income | 23,103 | | | 32,572 | | | 22,915 | | | 20,407 | |
Net income attributable to HLI | 8,845 | | | 11,222 | | | 5,458 | | | 8,048 | |
Earnings per share of Class A common stock: | | | | | | | |
Class A - Basic | $ | .40 | | | $ | .49 | | | $ | .22 | | | $ | .32 | |
Class A - Diluted | $ | .39 | | | $ | .49 | | | $ | .22 | | | $ | .31 | |
|
| | | | | | | | | | | | | | | |
| For the quarter ended |
| June 30, 2016 | | September 30, 2016 | | December 31, 2016 | | March 31, 2017 |
Total revenues | $ | 39,566 |
| | $ | 51,244 |
| | $ | 42,331 |
| | $ | 46,679 |
|
Total expenses | 22,706 |
| | 27,801 |
| | 25,579 |
| | 27,619 |
|
Net income | 16,391 |
| | 24,358 |
| | 17,063 |
| | 16,626 |
|
Net income attributable to Hamilton Lane Incorporated | — |
| | — |
| | — |
| | 612 |
|
Earnings per share of Class A common stock (1): | | | | | | | |
Class A - Basic | — |
| | — |
| | — |
| | $ | 0.03 |
|
Class A - Diluted | — |
| | — |
| | — |
| | $ | 0.03 |
|
| For the quarter ended |
| June 30, 2015 | | September 30, 2015 | | December 31, 2015 | | March 31, 2016 |
Total revenues | $ | 45,573 |
| | $ | 38,784 |
| | $ | 55,097 |
| | $ | 41,343 |
|
Total expenses | 23,706 |
| | 42,468 |
| | 30,292 |
| | 22,497 |
|
Net income | 23,565 |
| | (3,717 | ) | | 20,334 |
| | 15,670 |
|
Net income attributable to Hamilton Lane Incorporated | — |
| | — |
| | — |
| | — |
|
Earnings per share of Class A common stock (1): | | | | | | | |
Class A - Basic | — |
| | — |
| | — |
| | — |
|
Class A - Diluted | — |
| | — |
| | — |
| | — |
|
| |
(1) | Represents earnings per share of Class A common stock outstanding for the period from March 6, 2017 through March 31, 2017, the period following the Reorganization and IPO (See Note 11). |
16.18. Subsequent Events
On June 12, 2017,May 28, 2020, the Company declared a quarterly dividend of $0.175$0.3125 per share of Class A common stock to record holders at the close of business on June 26, 2017.15, 2020. The payment date will be July 10, 2017.7, 2020.
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in RulesExchange Act Rule 13a-15(e) and 15d-15(e) under the Exchange Act)) as of March 31, 2017.2020. Our disclosure controls and procedures are intended to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were ineffectiveeffective at March 31, 2017 due2020.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with U.S. GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of March 31, 2020, based on the criteria described in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the results of its evaluation, management concluded that our internal control over financial reporting was effective as of March 31, 2020.
Attestation Report of the Registered Public Accounting Firm
Ernst & Young LLP, an independent registered public accounting firm, has issued an unqualified attestation report on the effectiveness of our internal control over financial reporting as of March 31, 2020, which is included in Item 8 of this Form 10-K.
Previously Disclosed Material Weakness
In our Annual Report on Form 10-K for the period ended March 31, 2019 (the “2019 Form 10-K”), management identified a material weakness in our internal control over financial reporting related to our calculation of deferred taxes and payable under the tax receivable agreement we entered into in connection with our IPO. Areporting. This material weakness is a deficiency, or a combination of deficiencies,did not result in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement ofany identified misstatements to the Company’s annual or interimaudited consolidated financial statements will not be prevented or detected on a timely basis. Specifically, the deferred tax asset and corresponding payable amounts were calculated inconsistently with the termsdisclosures in our 2019 Form 10-K, or any restatements of the tax receivable agreement. The error was identified and corrected in the course of preparing our audited and unaudited consolidated financial statements or disclosures for any previously reported periods.
Remediation of Previously Disclosed Material Weakness
We have implemented additional controls during the past year ended March 31, 2017. However, we are reporting a material weakness becauseto address the review control designed to prevent or detect errors indeficiencies identified. Based on the additional controls implemented and our tax account balances and the related disclosure was not designed appropriately to identify this error.
Management’s Report on Internal Control over Financial Reporting
Although this Form 10-K does not include a reportevaluation of management’s assessment regarding internal control over financial reporting due to a transition period established by the SEC for newly public companies, management has identified a material weakness in our internal controls over financial reporting related to the calculation of the tax receivable agreement entered into in connection with our IPO, as described above.
Because we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting for so long as we are an emerging growth company.
these controls, management
has concluded that the material weakness described above and first disclosed in our 2019 Form 10-K was remediated as of March 31, 2020.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting that occurred during the quarter ended March 31, 20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Subsequent to March 31, 2017 and in connection with the identification of the material weakness discussed above, we have taken the following steps to improve our internal control over financial reporting:
We have hired a Director of Tax to oversee financial reporting for income taxes.
We have implemented procedures intended to ensure that future calculations are performed correctly.
We are establishing additional monitoring and oversight controls to ensure the accuracy and completeness of our consolidated financial statements and related disclosures.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
MANAGEMENT
The following table sets forth the names, agesinformation required by this Item is incorporated by reference to, and positions ofwill be contained in, our current directors and executive officers. Each of our executive officers is employed by and holds the listed positions at HLA. Our board of directors has appointed our senior management team to the same positions at Hamilton Lane Incorporated.
|
| | | | |
Name | | Age | | Position |
Hartley R. Rogers | | 57 | | Chairman and Director |
Mario L. Giannini | | 64 | | Chief Executive Officer and Director |
Randy M. Stilman | | 55 | | Chief Financial Officer and Treasurer |
Erik R. Hirsch | | 44 | | Vice Chairman and Director |
Kevin J. Lucey | | 50 | | Chief Operating Officer |
Lydia A. Gavalis | | 53 | | General Counsel and Secretary |
Juan Delgado-Moreira | | 46 | | Managing Director |
Michael Donohue | | 41 | | Managing Director and Controller |
David J. Berkman | | 55 | | Director |
O. Griffith Sexton | | 73 | | Director |
Leslie F. Varon | | 60 | | Director |
Hartley R. Rogers
Mr. Rogers is the Chairman of our board of directors, a Managing Director, and a member of various investment committees. Prior to serving as Chairman, Mr. Rogers was the Vice Chairman of the board of directors of HLA. He is a Managing Director of Aries Advisors, LLC and Co-Head of CSFB Equity Partners, a private equity fund that is in liquidation and for which Aries Advisors, LLC is an investment advisor. Prior to joining Hamilton Lane in 2003, he was a Managing Director in the Private Equity Division of Credit Suisse First Boston from 1997 to 2001. Subsequently, he was a Managing Director and investment committee member of DLJ Merchant Banking Partners III, a $5.3 billion private equity fund, from 2001 to 2002. Prior to joining CSFB in 1997, Mr. Rogers was a Managing Director of Morgan Stanley & Co. Incorporated, where his responsibilities included serving as President of the general partners of the Princes Gate Investors family of private equity funds. He worked at Morgan Stanley from 1981 to 1983, 1986 to 1993 and from 1995 to 1997. He serves on the boards (or equivalent bodies) of the Green Vale School, the Peoples’ Symphony Concerts and Acadia Healthcare (NASDAQ: ACHC) and previously served on the Board of the Metropolitan Opera. He is a graduate of Harvard College and received an M.B.A. from Harvard Business School.
Mr. Rogers’ extensive experience in private markets, including his long tenure as our Chairman, brings valuable industry-specific knowledge and insights to the board of directors and provides the board of directors with an in-depth understanding of our business and operations.
Mario L. Giannini
Mr. Giannini is our Chief Executive Officer, a member of our board of directors and a Co-Chairman of various investment committees. Mr. Giannini has been a director since 1998 and has been Chief Executive Officer since 2001. Prior to becoming Chief Executive Officer, Mr. Giannini was the President of HLA from 1998 to 2001. Prior to joining Hamilton Lane in 1993, he served as Executive Vice President and General Counsel of Industrial Valley Title Insurance Company from 1989 to 1992, Deputy General Counsel of Fidelity Bank in Philadelphia from 1984 to 1989, and Senior Attorney at Continental Illinois Bank in Chicago from 1979 to 1983. Mr. Giannini received a B.A. from California State University, Northridge, a Master of Laws degree from the University of Virginia and a J.D. from Boston College. He is a former member of the state bars of California and Illinois.
Mr. Giannini’s extensive experience in private markets, including his long tenure overseeing our strategic direction as Chief Executive Officer, brings valuable industry-specific knowledge and insights to the board of directors and provides the board of directors with an in-depth understanding of our business and operations.
Randy M. Stilman
Mr. Stilman is our Chief Financial Officer and Treasurer. Mr. Stilman has been the Chief Financial Officer of HLA since joining Hamilton Lane in 1997. Prior to joining Hamilton Lane, he was the Director of Accounting for Chemical Leaman Tank Lines from 1995 to 1997, Controller of CLT Appraisal Services from 1993 to 1995, and Vice President of Finance of Industrial Valley Title Insurance Company from 1989 to 1993. He began his career as an Audit Supervisor at the accounting firm of Laventhol & Horwath. Mr. Stilman received a B.B.A. from Temple University and is a certified public accountant. He is a member of the American and Pennsylvania Institutes of Certified Public Accountants.
Erik R. Hirsch
Mr. Hirsch is our Vice Chairman, a member of our board of directors and a Co-Chairman of various investment committees. Mr. Hirsch also serves as Chairman of HLA’s Investment Committee. Mr. Hirsch has served as our Vice Chairman since October 2016, and previously served as Chief Investment Officer from April 2003 to October 2016. Prior to serving as Chief Investment Officer, Mr. Hirsch held the positions of Managing Director, Vice President and Associate. Prior to joining Hamilton Lane in 1999, Mr. Hirsch was a corporate investment banker in the merger and acquisition department of Brown Brothers Harriman & Co. from 1998 to 1999. From 1995 to 1998, he was a municipal financial consultant with Public Financial Management, specializing in asset securitization, strategic consulting and sport stadium financings. Mr. Hirsch received a B.A. from the University of Virginia.
Mr. Hirsch’s extensive experience in private markets, including his long tenure managing our investments as Chief Investment Officer, brings valuable industry-specific knowledge and insights to the board of directors and provides the board of directors with an in-depth understanding of our business and operations.
Kevin J. Lucey
Mr. Lucey is our Chief Operating Officer. He is a member of HLA’s Investment Committee and leads our Operating Committee, Business Development, Relationship Management, Human Resources and Information Technology functions. Mr. Lucey joined the firm in 2007 from Delaware Investments, where he was Executive Vice President responsible for global distribution, client services, product management and product development from 2003 to 2006. Mr. Lucey previously served as Senior Vice President of Putnam Investments from 1995 to 2003, responsible for 401(k) sales. He also has held positions at Mellon
Bank, The Boston Company and Colonial Management Associates. Mr. Lucey received a B.A. in Finance from Merrimack College.
Lydia A. Gavalis
Ms. Gavalis is our General Counsel. She is responsible for Hamilton Lane’s global legal affairs, directly and through her legal and compliance team. Prior to joining the firm in 2016, Ms. Gavalis worked for SEI Investments Company (“SEI”) for more than 18 years. She served as Division General Counsel of SEI’s Institutional Investors business segment; General Counsel for both SEI Private Trust Company, a U.S. federal savings association, and SEI Trust Company, a U.S. state-charted trust company; Head of SEI’s Corporate Legal Services team; and Director & General Counsel of the company’s London-based asset management firm, SEI Investments (Europe) Limited. Ms. Gavalis received a J.D. from Temple University School of Law in 1989 and a B.A. from Rosemont College in 1986, where she received the E.R.S. Law School award. She is a member of the state bar of Pennsylvania.
Juan Delgado-Moreira
Mr. Delgado-Moreira is a Managing Director of HLA and serves as the head of our Asia business. He is a member of HLA’s Investment Committee and leads our Asian investment activities and client relationships. Prior to joining Hamilton Lane in 2005, Mr. Delgado-Moreira was an Investment Manager at Baring Private Equity Partners Ltd. in London, where he focused on mid-market private equity in Europe. Previously, Mr. Delgado-Moreira held senior research positions at institutions in the United Kingdom, including the University of Essex, and was a lecturer and Fulbright Scholar at Stanford University. Mr. Delgado-Moreira began his career as an analyst in Madrid, Spain at the Sociedad Estatal de Participaciones Industriales (formerly known as the Instituto Nacional de Industria). Mr. Delgado-Moreira received a B.A. in Political Science and Sociology and a Ph.D. in Research Methods/Statistics from the Universidad Complutense de Madrid. He is a chartered financial analyst and a member of the CFA Institute and the Securities Institute.
Michael Donohue
Mr. Donohue is our Controller and a Managing Director in HLA’s Finance Department, where he is responsible for internal and external reporting, accounting research and the development of accounting policies and procedures for us. Prior to joining Hamilton Lane in 2008, Mr. Donohue was Assistant Controller at an international chemical manufacturer. Previously, he was an audit manager with KPMG in Philadelphia. He began his career at Crown Holdings, where he held several accounting positions. Mr. Donohue received a B.S. in Accounting from The Pennsylvania State University and an M.B.A. from Villanova University and is a certified public accountant. He is a member of the American and Pennsylvania Institutes of Certified Public Accountants.
David J. Berkman
Mr. Berkman has been a member of our board of directors since May 2017. Since January 2000, Mr. Berkman has served as the Managing Partner of Associated Partners, LP, a private equity firm primarily engaged in telecommunications infrastructure operations and investments. Mr. Berkman serves on the boards (or equivalent bodies) of Entercom Communications Corp. (NYSE: ETM), Actua Corporation (NASDAQ: ACTA), and Franklin Square Holdings, LP. He previously served on the board of Diamond Resorts International, Inc. until the sale of that company to a private investor in September 2016. He also serves on the advisory committee of First Round Capital, a venture firm. Civically, Mr. Berkman serves on the Board of Overseers of the University of Pennsylvania School of Engineering and Applied Science. Mr. Berkman received a B.S. in Economics from the Wharton School of the University of Pennsylvania.
Mr. Berkman’s extensive experience in private markets, in the start-up and operation of various platforms, as well as his long-standing service on other public company boards, enables him to bring valuable investment, operations, and governance knowledge to the board of directors. Additionally, his insight in the areas of corporate finance, financial reporting, and accounting and controls is expected to be valuable to the Company.
O. Griffith Sexton
Mr. Sexton is a member of our board of directors. Mr. Sexton has served on the board of HLA since 2003. He was an adjunct professor of finance at Columbia Business School from 1995 to 2010 and is a visiting lecturer at Princeton University, where he teaches courses in corporate finance. Mr. Sexton was an investment banking professional at Morgan Stanley from 1973 to 1995 where he served as a managing director from 1985 to 1995. His responsibilities included the development and execution of advisory assignments involving major corporate transactions such as mergers, acquisitions, divestitures, corporate defense, recapitalizations, financial restructurings, joint ventures, and spin-offs and squeeze outs. He has served as an advisory director of Morgan Stanley from 1995 to 2005 and from 2014 to the present. Mr. Sexton was a member of the board of directors of Morgan Stanley from 2005 to 2014 and of Investor AB, a publicly traded Swedish investment company, from 2003 to 2015. A former U.S. naval aviator and Vietnam veteran, Mr. Sexton holds a BSE from Princeton and an MBA from Stanford.
Mr. Sexton’s broad experience in finance and academia brings valuable insight, an in-depth understanding of the industry and a unique perspective to the board of directors.
Leslie F. Varon
Ms. Varon has been a member of our board of directors since May 2017. Ms. Varon served as Chief Financial Officer of Xerox Corporation from November 2015 through December 2016 during which time she led the restructuring of the $18 billion business process services, printing equipment, software and solutions company, including the successful spin-off of its $7 billion services business. After that transaction, she became Special Advisor to the new Xerox Chief Executive Officer until March 2017 when she retired from the company. Prior to becoming Chief Financial Officer at Xerox, she was briefly VP Investor Relations from March 2015 through October 2015. Previously she served Xerox as VP Finance & Corporate Controller from July 2006 to February 2015, where she oversaw global financial operating executives and had responsibility for corporate financial planning and analysis, accounting, internal audit, risk management, global real estate and worldwide shared services centers. Earlier in her career, Ms. Varon was Vice President Finance & Operations support for Xerox’s North American business, Vice President Xerox Investor Relations and Corporate Secretary and Director of Corporate Audit. From 2006 to 2017 she served on the board of Xerox International Partners, a joint venture between Xerox Corporation and Fuji Xerox Corporation, representing Xerox Corporation’s ownership stake. Ms. Varon received a B.A. from Binghamton University and an MBA with concentrations in finance and marketing from Virginia Tech.
Ms. Varon’s extensive financial background combined with her investor engagement and corporate governance expertise and demonstrated success in business transformation, crisis management and balance sheet optimization brings valuable knowledge and insights to the board of directors.
Composition of the Board of Directors
Our business and affairs are manageddefinitive proxy statement, under the directionheadings “Election of our boardDirectors”, “Executive Officers” and “Corporate Governance”. Accordingly, we have omitted the information from this Item pursuant to General Instruction G(3) of directors. Our certificate of incorporation provides that the size of our board of directors may be set from time to time by our then
current board of directors. Our board of directors has set the size of the board at six members: Messrs. Rogers, Giannini, Berkman, Hirsch and Sexton and Ms. Varon currently serve on our board of directors, and Mr. Rogers serves as Chairman.
Our directors are elected to serve until their successors are duly elected or until their earlier death, resignation or removal. We will hold an annual meeting of stockholders for the election of directors as required by the rules of the NASDAQ Stock Market. There will be no limit on the number of terms a director may serve.
Our board of directors is divided into three classes as nearly equal in size as is practicable. The composition of the board of directors is:
Class I, which consists of Messrs. Berkman and Sexton, whose terms will expire at our annual meeting of stockholders to be held in 2017;
Class II, which consists of Mr. Hirsch and Ms. Varon, whose terms will expire at our annual meeting of stockholders to be held in 2018; and
Class III, which consists of Messrs. Giannini and Rogers, whose terms will expire at our annual meeting of stockholders to be held in 2019.
Upon the expiration of the initial term of office for each class of directors, each director in such class will be elected for a term of three years and serve until a successor is duly elected and qualified or until his or her earlier death, resignation or removal. Vacancies occurring on the board of directors, whether due to death, resignation, removal, retirement, disqualification or for any other reason, and newly created directorships resulting from an increase in the authorized number of directors, may be filled by a majority of the remaining members of the board of directors. Directors may be removed, but only for cause, with the affirmative vote of the holders of 75% of the voting power of our common stock, except that prior to a Sunset, directors may be removed with or without cause with the affirmative vote or consent of the holders of a majority of the voting power of our common stock.
Pursuant to the stockholders agreement described under “Related-Party Transactions—Stockholders Agreement” included in Part III, Item 13 of this Form 10-K, the Company and certain significant outside investors, members of management and significant employee owners have agreed to nominate for director the individuals designated by HLAI. These stockholders will vote their shares in favor of such nominees, and otherwise as directed by HLAI on all matters submitted to our stockholders for a vote.
Because the voting group collectively controls more than 50% of our voting power, we are a “controlled company” under the rules of the NASDAQ Stock Market and therefore qualify for an exemption from the requirement that our board of directors consist of a majority of independent directors, that we establish a compensation committee consisting solely of independent directors and that our director nominees be selected or recommended by independent directors. Accordingly, although we may transition to a board with a majority of independent directors prior to the time we cease to be a “controlled company,” until we cease to be a “controlled company,” you do not have the same protections afforded to stockholders of companies that are subject to all of these corporate governance requirements. If we cease to be a “controlled company” and our shares continue to be listed on the NASDAQ Stock Market, we will be required to comply with these provisions within the applicable transition periods. See “Risk Factors—Risks Related to Our Organizational Structure—We are a ‘controlled company’ within the meaning of the NASDAQ listing standards and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements” included in Part I, Item 1A of this Form 10-K.
Our board of directors and its committees have supervisory authority over us and HLA.
Stockholder Nominations
The Stockholders Agreement provides that our board of directors will nominate individuals designated by HLAI to be elected as directors at our annual meeting of stockholders.
The Company’s Amended and Restated Bylaws (“Bylaws”) describe how other stockholders may nominate candidates for election to our board of directors. For our 2017 annual meeting of stockholders, stockholders may nominate a candidate for election to our board only by sending written notice to our corporate Secretary at our principal office at One Presidential Boulevard, 4th Floor, Bala Cynwyd, Pennsylvania 19004. This notice must be received on or before July 2, 2017, but no earlier than June 2, 2017 (except that if the date of the 2017 annual meeting of stockholders is not within 30 days of September 30, 2017, this notice must be received no earlier than the 120th day before the date of the 2017 annual meeting and not later than the later of the 90th day before the date of the 2017 annual meeting, or the close of business on the 10th day after the day on which the first public disclosure of the date of such annual meeting was made).
The notice to our corporate Secretary must set forth the information required by Section 1.12(b) of our Bylaws, including, among other things: (i) the name, age, principal occupation and business and residence address of each person nominated; (ii) the number of shares of our stock which are owned of record and beneficially by each person nominated; (iii) such other information concerning each person nominated, the stockholder making the nomination and the beneficial owner, if any, on whose behalf the nomination is being made as would be required to be disclosed in a proxy statement or other filings required to be made in connection with the solicitation of proxies for the election of directors (even if an election contest is not involved) or that is otherwise required to be disclosed, under Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder; (vi) the consent of the person being nominated to being named in the proxy statement as a nominee and to serving as a director if elected; (v) the name and record address of the stockholder making the nomination and the beneficial owner, if any, on whose behalf the nomination is made; (vi) the class and number of shares of our stock which are owned beneficially and of record by the stockholder making the nomination and the beneficial owner, if any, on whose behalf the nomination is made; (vii) a description of any agreement, arrangement or understanding with respect to such nomination between the stockholder giving notice and any of its affiliates or associates, and any others acting in concert with any of the foregoing; and (viii) a description of any agreement, arrangement or understanding (including any derivative or short positions, profit interests, options, hedging transactions and borrowed or loaned shares) that has been entered into the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or to increase or decrease the voting power of, the stockholder making the nomination or any of its affiliates or associates with respect to shares of our stock, as well as certain other information and representations. This list of required information is not exhaustive.
Section 1.12(e) of our Bylaws sets forth the procedures by which stockholders may nominate candidates for election to our Board at a special meeting of stockholders called for the purposes of electing one or more directors to the Board.
A copy of the full text of the relevant Bylaw provisions, which includes the complete list of all information that must be submitted to nominate a director, may be obtained upon written request directed to our corporate Secretary at our principal office. A copy of our Bylaws is also contained in the materials we have filed with the SEC and can be found on the SEC’s website at www.sec.gov.
For so long as the Stockholders Agreement remains in effect, HLAI is not subject to the notice procedures set forth in Section 1.12 of our Bylaws with respect to any annual or special meeting of stockholders.
Board Risk Oversight
Our board of directors is responsible for overseeing our risk management process. Our board of directors focuses on our general risk management strategy and the most significant risks facing us, and oversees the implementation of risk mitigation strategies by management. Our board of directors is also apprised of particular risk management matters in connection with its general oversight and approval of corporate matters and significant transactions.
While the full board of directors has the ultimate oversight responsibility for the risk management process, its committees oversee risk in certain specified areas. In particular, our audit committee oversees management of enterprise risks, financial risks and risks associated with corporate governance, business conduct and ethics and is responsible for overseeing the review and approval of related-party transactions. Our compensation committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements and the incentives created by the compensation awards it administers. Pursuant to the board of directors’ instruction, management regularly reports on applicable risks to the relevant committee or the full board of directors, as appropriate, with additional review or reporting on risks conducted as needed or as requested by the board of directors and its committees.
Committees of the Board of Directors
Our board of directors has an audit committee and a compensation committee, each of which has the composition and responsibilities described below. Members serve on these committees for such term or terms as our board of directors may determine or until their earlier resignation or death. Each committee is governed by a written charter, which is posted on our website at www.hamiltonlane.com. From time to time, our board of directors may also establish other, special committees when necessary to address specific issues.
Audit Committee
We have a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. Our audit committee consists of Messrs. Berkman, Sexton and Rogers and Ms. Varon, with Ms. Varon serving as the Chair. Prior to Mr. Berkman’s and Ms. Varon’s appointments in May 2017, Mr. Hirsch served on the audit committee. Rule 10A-3 of the Exchange Act and the NASDAQ rules require us to have an audit committee composed entirely of independent directors by February 28, 2018. Our board of directors has affirmatively determined that Messrs. Berkman and Sexton and Ms. Varon each meet the definition of “independent director” for purposes of serving on an audit committee under Rule 10A-3 under the Exchange Act and the NASDAQ rules, and we intend to comply with the rules’ independence requirements within the time period specified.
The audit committee is responsible for, among other things:
appointment, termination, compensation and oversight of the work of any accounting firm engaged to prepare or issue an audit report or other audit, review or attestation services;
considering and approving, in advance, all audit and non-audit services to be performed by independent accountants;
reviewing and discussing the adequacy and effectiveness of our accounting and financial reporting processes and controls and the audits of our financial statements;
establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;
investigating any matter brought to its attention within the scope of its duties and engaging independent counsel and other advisers as the audit committee deems necessary;
determining compensation of the independent auditors, compensation of advisors hired by the audit committee and ordinary administrative expenses;
reviewing quarterly financial statements prior to their release;
reviewing and assessing the adequacy of a formal written charter on an annual basis;
reviewing and approving related-party transactions for potential conflict of interest situations on an ongoing basis; and
handling such other matters that are specifically delegated to the audit committee by our board of directors from time to time.
The board of directors has determined that Mr. Sexton qualifies as an “audit committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K.
Our reliance on the exemption from the independence standards available to us as a newly public company under Rule 10A-3 of the Exchange Act and the NASDAQ rules does not materially adversely affect the ability of the audit committee to act independently and to satisfy the other requirements of Rule 10A-3 of the Exchange Act in any proxy or information statement for a meeting of stockholders at which directors are elected that is filed with the SEC pursuant to the requirements of Section 14 of the Exchange Act.
Compensation Committee
Following our IPO, our board of directors formed a compensation committee consisting of Messrs. Rogers, Giannini and Sexton, with Mr. Giannini serving as the Chair.
The compensation committee is responsible for, among other things:
reviewing and approving the compensation and benefits of all of our executive officers and key employees;
monitoring and reviewing our compensation and benefit plans, including incentive compensation arrangements;
establishing and monitoring director compensation;
annual evaluation of the performance of its duties under its charter; and
such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.
Our board of directors reviewed the relevant provisions of Section 162(m) of the Code and the Treasury Regulations issued thereunder with regard to the status of the compensation committee members as outside directors and determined that Mr. Sexton meets the requirements of Section 162(m) of the Code. In connection with the performance of its duties, the compensation committee has (i) unrestricted access to and assistance from the officers, employees and independent auditors of the Company and such resources and support from the Company as the compensation committee deems necessary or desirable, and (ii) the authority to employ, at the expense of the Company, such experts and professionals as the compensation committee deems necessary or desirable from time to time.
Compensation Committee Interlocks and Insider Participation
No member of the compensation committee is a former executive officer of the Company or any of its subsidiaries. None of our executive officers serves as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of an entity that has one or more of its executive officers serving as a member of our board of directors or compensation committee.
Code of Ethics
Our Code of Conduct and Ethics (the “Code of Ethics”) is binding on all of our directors, officers and employees, including our Chief Executive Officer, Chief Financial Officer and Controller. The Code of Ethics is available on our website at www.hamiltonlane.com. We intend to post on our website any amendments to, or waivers of, any provision of the Code of Ethics to the extent applicable to our Chief Executive Officer, Chief Financial Officer or Controller or that relates to any element of the SEC’s definition of a “code of ethics.”
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on (i) our review of reports submitted to us during and with respect to the year ended March 31, 2017, filed with the SEC pursuant to Section 16(a) of the Exchange Act, including any amendment thereto and (ii) written representations of our directors, executive officers and certain beneficial owners of more than 10% of our Class A common stock, we believe that, with the following exceptions, all reports required to be filed under Section 16(a) of the Exchange Act, with respect to transactions in our equity securities through March 31, 2017, were filed on a timely basis.
In fiscal 2017, the following individuals each filed one late Form 4/A with respect to one transaction to correct an administrative error that resulted in an underreporting in the individual’s original Form 4 filing of the number of shares of our Class A common stock delivered to the Company for payment of withholding taxes upon the vesting of restricted stock granted under the Company’s 2017 Equity Incentive Plan: Erik Hirsch, Kevin Lucey, Mario Giannini, Michael Donohue, David Helgerson, Michael Kelly, Paul Yett, Stephen Brennan, Tara Blackburn and Thomas Kerr.
Item 11. Executive Compensation
We are providing compensation disclosure that satisfiesThe information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, under the requirements applicable to emerging growth companies, as defined in the JOBS Act.
As an emerging growth company,headings “Executive Compensation” and “Director Compensation”. Accordingly, we have opted to comply withomitted the executive compensation rules applicable to “smaller reporting companies,” as such term is defined under the Securities Act. These rules require compensation disclosure for our principal executive officer and the two most highly compensated executive officers other than our principal executive officer.
Summary Compensation Table
The following table sets forth the compensation earned for the periods indicated by our principal executive officer and our next three most highly compensated executive officers who served in such capacities at March 31, 2017, who collectively comprise our named executive officers.
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Name and Principal Position | | Year | | Salary ($) | | Bonus (1) ($) | | Stock Awards (2) ($) | | All Other Compensation ($) | | Total ($) |
Mario L. Giannini Chief Executive Officer | | 2017 | | 350,000 |
| | 2,216,800 |
| | 554,211 |
| | 334,524 |
| (3) | 3,455,535 |
|
| 2016 | | 350,000 |
| | 3,300,000 |
| | 700,005 |
| | 1,245,218 |
| (4) | 5,595,223 |
|
Erik R. Hirsch Vice Chairman | | 2017 | | 300,000 |
| | 1,980,000 |
| | 495,004 |
| | 279,896 |
| (5) | 3,054,900 |
|
| 2016 | | 300,000 |
| | 3,700,000 |
| | 550,001 |
| | 1,516,530 |
| (6) | 6,066,531 |
|
Hartley R. Rogers Chairman | | 2017 | | 280,000 |
| | 750,000 |
| | 750,003 |
| | 91,379 |
| (7) | 1,871,382 |
|
| 2016 | | 280,000 |
| | 1,375,000 |
| | 875,001 |
| | 1,053,429 |
| (8) | 3,583,430 |
|
Juan Delgado-Moreira Managing Director | | 2017 | | 322,206 |
| | 1,470,896 |
| | 367,908 |
| | 382,188 |
| (9) | 2,543,198 |
|
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(1) | The amount shown represents the cash portion of the annual bonus. |
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(2) | This amount represents the grant-date fair value of stock awards granted as the equity portion of the annual bonus, computed in accordance with U.S. GAAP pertaining to equity based compensation. See “Compensation and Benefits” in Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements included ininformation from this Item 8. |
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(3) | This amount represents payments received in respect of the Company's carried interest plans of $281,574, HSR filing fee paid by the Company of $45,000 and 401(k) contributions of $7,950. |
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(4) | This amount represents payments received in respect of the Company's carried interest plans of $1,237,268 and 401(k) contributions of $7,950. |
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(5) | This amount represents payments received in respect of the Company's carried interest plans of $271,946 and 401(k) contributions of $7,950. |
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(6) | This amount represents payments received in respect of the Company's carried interest plans of $1,508,580 and 401(k) contributions of $7,950. |
| |
(7) | This amount represents payments received in respect of the Company's carried interest plans of $83,429 and 401(k) contributions of $7,950. |
| |
(8) | This amount represents payments received in respect of the Company's carried interest plans of $1,045,479 and 401(k) contributions of $7,950. |
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(9) | This amount represents payments received in respect of the Company's carried interest plans of $96,888, housing cost reimbursement of $265,968 and contributions to a defined contribution plan of $19,332. |
Outstanding Equity Awards At 2017 Fiscal Year End |
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| Option Awards | | | | Restricted Stock Awards |
Name | Number of Securities Underlying Unexercised Options Exercisable | | Number of Securities Underlying Unexercised Options Unexercisable | | Option Exercise Price ($) | | Option Expiration Date | | Grant Date | | Unvested Restricted Stock Awards | | Market Value of Unvested Restricted Stock Awards ($) (1) |
Mario L. Giannini Chief Executive Officer | | | | | | | | | 3/14/2014 | | 17,029 | | 317,931 |
| | | | | | | | | 3/14/2015 | | 28,474 | | 531,610 |
| | | | | | | | | 3/11/2016 | | 37,639 | | 702,720 |
Erik R. Hirsch Vice Chairman | | | | | | | | | 3/14/2014 | | 12,809 | | 239,144 |
| | | | | | | | | 3/14/2015 | | 22,023 | | 411,169 |
| | | | | | | | | 3/11/2016 | | 29,573 | | 552,128 |
| | | | | | | | | 3/14/2017 | | 26,344 | | 491,842 |
Hartley R. Rogers Chairman | | | | | | | | | 3/14/2014 | | 15,372 | | 286,995 |
| | | | | | | | | 3/14/2015 | | 26,694 | | 498,377 |
| | | | | | | | | 3/11/2016 | | 47,048 | | 878,386 |
| | | | | | | | | 3/14/2017 | | 39,915 | | 745,213 |
Juan Delgado-Moreira Managing Director | 233,495 | | — | | $1.34 | | 5/31/2017 | | 3/14/2014 | | 8,999 | | 168,011 |
| | | | | | | | | 3/14/2015 | | 15,038 | | 280,759 |
| | | | | | | | | 3/11/2016 | | 19,781 | | 369,311 |
| | | | | | | | | 3/14/2017 | | 19,580 | | 365,559 |
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(1) | Prior to the Reorganization, all equity awards vested into Class C interests. As part of the Reorganization, unvested awards were replaced with awards vesting in Class A common stock according to the vesting schedule in effect prior to the Reorganization. The Grant Date column reflects the original award grant date. The value included in this table is based on the closing stock price of our Class A common stock as of March 31, 2017. See “Initial Public Offering and Reorganization” in Item 1. |
Pension Benefits and Nonqualified Deferred Compensation
We do not provide pension benefits or nonqualified deferred compensation.
Executive Compensation Arrangements
Equity Compensation
2017 Equity Incentive Plan
Prior to our IPO, we adopted, and our sole stockholder approved, a new omnibus equity incentive plan (the “2017 Equity Incentive Plan”), which aims to advance the interests of Hamilton Lane by enhancing its ability to attract and retain employees, officers and non-employee directors, in each case who are selected to be participants in the plan, and by motivating them to continue working toward and contributing to the success and growth of Hamilton Lane. Persons eligible to receive awards under the 2017 Equity Incentive Plan include current and prospective employees, current and prospective officers and members of our board of directors who are not our employees.
The 2017 Equity Incentive Plan authorizes the award of incentive and nonqualified stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units, incentive bonuses and dividend equivalents, any of which may be performance-based. We believe the variety of awards that may be granted under this plan gives us the flexibility to offer competitive incentives and to tailor benefits to specific needs and circumstances.
The 2017 Equity Incentive Plan is administered by our compensation committee. The compensation committee has the authority to interpret the 2017 Equity Incentive Plan and prescribe, amend and rescind rules and make all other determinations necessary or desirable for the administration of the plan. The 2017 Equity Incentive Plan permits the compensation committee to select the participants, to determine the terms and conditions of those awards, including but not limited to the exercise price, the number of Class A shares subject to awards, the term of the awards and the performance goals, and to determine the restrictions applicable to awards and the conditions under which any restrictions will lapse. The compensation committee also has the discretion to determine the vesting schedule applicable to awards, provided that all awards (other than awards replaced as part of the Reorganization) vest in no less than one year. Notwithstanding the foregoing, the 2017 Equity Incentive Plan prohibits the taking of any action with respect to an award that would be treated, for accounting purposes, as a “repricing” of such award at a lower exercise, base or purchase price, unless such action is approved by our stockholders.
The 2017 Equity Incentive Plan reserved for issuance 5,000,000 shares of Class A common stock (representing approximately 10% of the fully-diluted number of shares of Class A common stock outstanding immediately after the closing of our IPO). The maximum number of Class A shares subject to awards (other than awards being replaced as part of the Reorganization) which may be granted to any individual during any fiscal year is 200,000 and the maximum number of Class A Shares subject to stock options and SARs (other than awards being replaced as part of the Reorganization) granted to any individual during a calendar year is 100,000.
Awards granted under the 2017 Equity Incentive Plan are evidenced by award agreements. The terms of all options granted under the 2017 Equity Incentive Plan are determined by the compensation committee, but may not extend beyond 10 years after the date of grant. Stock options and SARs granted under the 2017 Equity Incentive Plan will have an exercise price that is determined by the compensation committee, provided that, except in the case of awards being replaced as part of the Reorganization, the exercise price shall not be less than the fair market value of a share of our Class A common stock on the date of grant.
Upon the death or disability of a plan participant, or upon the occurrence of a change in control or other event, in each case, as determined by the compensation committee, the compensation committee may, but is not required to, provide that each award granted under the 2017 Equity Incentive Plan will become immediately vested and, to the extent applicable, exercisable.
Our board of directors has the authority to amend or terminate the 2017 Equity Incentive Plan at any time. Stockholder approval for an amendment will generally not be obtained unless required by applicable law or stock exchange rule or deemed necessary or advisable by our board of directors. Unless previously terminated by our board of directors, the 2017 Equity Incentive Plan will terminate on the tenth anniversary of the date it was adopted by our sole stockholder. Amendments to outstanding awards, however, will require the consent of the holder if the amendment adversely affects the rights of the holder.
Predecessor Equity Plan
Prior to our IPO, HLA maintained the 2003 Class C Interest Plan, as amended (the “2003 Plan”). As part of the Reorganization, we issued options to purchase shares of our Class A common stock in replacement of all outstanding options to purchase Class C interests , and we issued awards vesting in Class A common stock to replace outstanding unvested awards of Class C interests under the 2003 Plan. These replacement awards were made under the 2017 Equity Incentive Plan and vested according to the same vesting schedule in effect prior to the IPO. We have amended the 2003 Plan to provide that no further awards will be issued thereunder.
Carried Interest Compensation
2016 Carried Interest Plan
HLA maintains its 2016 Carried Interest Plan (the “Carried Interest Plan”) pursuant to which awardsGeneral Instruction G(3) of profits interests are made to full-time salaried employees of Hamilton Lane who are designated by the Chief Executive Officer as key contributors to the success of the business.Form 10-K.
Awards under the Carried Interest Plan consist of a portion of the profits and performance fees earned by HLA from managing or advising various specialized funds and customized separate accounts, referred to as the “Carry.” The Carried Interest Plan is administered by our Chief Executive Officer, who may delegate his rights and duties to a committee. Absent such delegation, our Chief Executive Officer is responsible for making all determinations with respect to awards under the Carried Interest Plan, including the recipients and relative amounts. Any award granted to the Chief Executive Officer must be approved by HLA’s board of directors.
Under the Carried Interest Plan, HLA’s Finance Department calculates the Carry from time to time as distributions are received. Subject to the limited exception discussed below, 25% of the Carry from each specialized fund and customized separate account that generates Carry (other than those covered by predecessor plans) is allocated to be awarded to key employees. If HLA or an affiliate receives a distribution of Carry that the Chief Executive Officer determines to be extraordinary in amount and materially greater than the amount budgeted or expected from a given specialized fund or customized separate account, the Chief Executive Officer has the discretion to award some or all of that amount to key employees, in connection with the annual bonus process or otherwise at the Chief Executive Officer’s discretion. The award of an extraordinary amount would cause the aggregate percentage of Carry to exceed 25% for that specialized fund or customized separate account.
HLA may withhold amounts in order to satisfy tax withholding obligations and reserve accounts, and has the right to require participants to return distributions in order to satisfy “clawback” or similar obligations to the relevant specialized fund or customized separate account. Upon termination of
employment, unpaid awards are forfeited, except in the case of the participant’s death, in which case unpaid awards are paid to the participant’s designated beneficiaries.
Prior to adopting the Carried Interest Plan, HLA maintained similar programs as described below. Specialized funds and such customized separate accounts that were subject to prior iterations of HLA’s carried interest programs are eligible to participate in the Carried Interest Plan to the extent the prior iteration allocated less than 25% of the Carry for that fund or account.
HLA has the right to amend or terminate the Carried Interest Plan at any time. Consent of the participant is required when such amendment or termination adversely affects the terms of an award.
Predecessor Carried Interest Programs
Although the Carried Interest Plan was formally adopted in January 2016, HLA’s carried interest arrangements have operated since 2012 on terms substantially identical to those described above. Prior to 2012, each year, profits interests tied to future Carry payments from each Carry-earning specialized fund or customized separate account established in that year (totaling up to 25% of the Carry) were awarded to participants by HLA’s Chief Executive Officer. Awards vested over three years, and once vested, the participant was entitled to receive in respect of that award a percentage interest in a portion of the Carry for such specialized fund or customized separate account for the life of the fund or account, as and when earned and received. All such awards are now vested, but HLA has not yet earned the full amount of the Carry to which it may be entitled from certain of the underlying specialized funds and customized separate accounts. Therefore, future distributions of Carry by those funds and accounts will result in payments to participants, including members of management. The amount of these future payments, if any, to our named executive officers will be disclosed as required by SEC rules. We expect future awards will be made under the Carried Interest Plan rather than according to the terms of our prior carried interest programs.
Employment Agreements
With the exception of Mr. Delgado-Moreira, we do not have any employment, severance or change in control arrangements with our named executive officers. However, upon a change in control, our equity incentive plans provide for accelerated vesting of outstanding equity awards held by participants, including our named executive officers.
Juan Delgado-Moreira
On May 23, 2016, Hamilton Lane (Hong Kong) Limited entered into an employment agreement with Mr. Delgado-Moreira providing that he would serve as Managing Director on the Fund Investment Team in Hong Kong beginning on June 1, 2016. His term of employment is terminable by either party upon 12 weeks’ written notice, except for a termination for cause, in which case no prior notice is required. Pursuant to the agreement, Mr. Delgado-Moreira is entitled to an annual base salary of 2,500,000 HKD (which was equivalent to $322,000 at the spot rate in effect on March 31, 2017), which may be increased, and, beginning in March 2017, an annual bonus in an amount to be determined based on performance. During the period of June 1, 2016 through May 31, 2017, Mr. Delgado-Moreira received relocation assistance to facilitate his move from the United Kingdom to Hong Kong, including housing reimbursement and continued pension contribution. Mr. Delgado-Moreira is entitled to health coverage and also participates in the Company’s 2017 Equity Incentive Plan and the Carried Interest Plan described above.
Director Compensation
Our policy is to not pay director compensation to directors who are also our employees. We pay each of our non-employee directors an annual retainer of $125,000 in the form of cash, time-based restricted stock awarded under the 2017 Equity Incentive Plan or a combination of both. Ms. Varon also receives an additional $15,000 annual cash retainer for her service as Chair of the Audit Committee. All members of the board of directors are reimbursed for reasonable costs and expenses incurred in attending meetings of our board of directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
PRINCIPAL STOCKHOLDERS
The following table sets forth information regardingrequired by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, under the beneficial ownershipheadings “Ownership of Hamilton Lane Incorporated Class A common stockCommon Stock” and Class B common stock by:
each person known to us to beneficially own more than 5% of our Class A common stock or our Class B common stock;
each of our directors;
each of our named executive officers; and
all directors and executive officers as a group.
As described in “Related-Party Transactions—Exchange Agreement,” each Class B Holder and Class C Holder is entitled to“Equity Compensation Plan Information”. Accordingly, we have their Class B units or Class C units, as applicable, exchanged for Class A common stock on a one-for-one basis, or, at our option, for cash. In connection with our IPO, we issued to each Class B Holder one share of Class B common stock for each Class B unit it beneficially owns. As a result,omitted the number of shares of Class B common stock listed in the table below correlates to the number of Class B units each Class B Holder beneficially owns. The number of shares of Class A common stock listed in the table below represents (i) shares of Class A common stock directly owned and (ii) the number of Class C units each Class C Holder beneficially owns, and assumes no exchange of Class B units for Class A common stock.
As discussed in “Related-Party Transactions—Stockholders Agreement,” prior to the closing of our IPO, certain Class B Holders who are significant outside investors, members of management and significant employee owners entered into a stockholders agreementinformation from this Item pursuant to which they agreed to vote all their sharesGeneral Instruction G(3) of voting stock, including Class A and Class B common stock, together and in accordance with the instructions of HLAI on any matter submitted to our common stockholders for a vote. Because they are a “group” under applicable securities laws, each party to the stockholders agreement is deemed to be a beneficial owner of all securities held by all other parties to the stockholders agreement. The below table disregards shares owned by the group and lists only common stock in which the listed stockholder has a pecuniary interest. The group files reports on Schedule 13D periodically to report its holdings.Form 10-K.
In computing the number of shares beneficially owned by an individual or entity and the percentage ownership of that person, shares of common stock subject to options, or other rights, including the exchange right described above, held by such person that are currently exercisable or will become exercisable within 60 days of the date of this Annual Report on Form 10-K, are considered outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person.
Unless otherwise noted, the address for all persons listed in the table is: c/o Hamilton Lane Incorporated, One Presidential Blvd., 4th Floor, Bala Cynwyd, PA 19004.
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| | | | | | | | | | | | | | |
| Common stock owned | % of total voting power | % total economic interest in HLA |
| Class A | Class B |
Name of Beneficial Owner | Number | % | Number | % |
Named Executive Officers and Directors: | | | | | | | | |
Mario L. Giannini | 146,854 |
| | 1 | % | 7,732,702 |
| (1) | 28 | % | 25 | % | 15 | % |
Erik R. Hirsch | 2,064,790 |
| (2) | 8 | % | 1,417,861 |
| | 5 | % | 5 | % | 6 | % |
Hartley R. Rogers | 183,115 |
| | 1 | % | 11,642,163 |
| (3) | 42 | % | 38 | % | 22 | % |
Juan Delgado-Moreira | 1,851,457 |
| | 7 | % | — |
| | — | % | 1 | % | 3 | % |
David J. Berkman | 25,000 |
| | — | % | — |
| | — | % | — | % | — | % |
O. Griffith Sexton | — |
| | — | % | 2,382,466 |
| (4) | 9 | % | 8 | % | 4 | % |
Leslie F. Varon | — |
| | — | % | — |
| | — | % | — | % | — | % |
All executive officers and directors as a group (11 persons) | 5,496,697 |
| | 21 | % | 24,179,775 |
| | 87 | % | 81 | % | 55 | % |
Other 5% Beneficial Owners: | | | | | | | | |
HLA Investments, LLC(5) | — |
| | — | % | 15,793,178 |
| | 57 | % | 52 | % | 29 | % |
HL Management Investors, LLC(6) | 6,238,784 |
| | 24 | % | 5,357,574 |
| | 19 | % | 20 | % | 22 | % |
Putnam Investments, LLC(7) | 2,064,682 |
| | 8 | % | — |
| | — | % | 1 | % | 4 | % |
TPG Group Holdings (SBS) Advisors, Inc.(8) | 1,132,241 |
| | 4 | % | — |
| | — | % | — | % | 2 | % |
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(1) | This consists of 3,228,103 shares beneficially owned directly by Mr. Giannini, 977,296 shares beneficially owned by a family trust, 2,579,104 shares beneficially owned by Hamilton Lane Advisors, Inc., which is an S-corporation that is wholly owned by Mr. Giannini, 664,567 shares beneficially owned by HL Management Investors, LLC (“HLMI”) in which Mr. Giannini has a pecuniary interest, and 283,632 shares beneficially owned by HLAI in which Mr. Giannini has a pecuniary interest. This number does not include, and Mr. Giannini disclaims beneficial ownership of, shares owned by HLMI and HLAI in which he does not have a pecuniary interest. See footnote 5. |
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(2) | This number includes shares beneficially owned by HLMI in which Mr. Hirsch has a pecuniary interest. This number does not include, and Mr. Hirsch disclaims beneficial ownership of, shares owned by HLMI in which he does not have a pecuniary interest. See footnote 5. |
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(3) | This number represents shares beneficially owned by HLAI in which Mr. Rogers has a pecuniary interest. HLAI is controlled by its managing member, which is an entity controlled by Mr. Rogers. See footnote 5. |
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(4) | This number consists of shares beneficially owned by HLAI. Mr. Sexton is the trustee of two family trusts that have a pecuniary interest in these shares, and he shares voting and dispositive power over these shares with Mrs. Barbara Sexton. This number does not include, and Mr. Sexton disclaims beneficial ownership of, shares beneficially owned by HLAI in which his affiliated trusts do not have a pecuniary interest. See footnote 5. |
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(5) | HLAI is owned by an affiliate of Mr. Rogers, family trusts of Mr. Sexton, Mr. Giannini and other parties. Mr. Rogers controls the managing member of HLAI. Pursuant to the stockholders agreement, HLAI directs the votes of the voting group comprised of significant outside investors, members of management and significant employee owners. The voting group beneficially owns 36,948,717 shares of Class A common stock as reported in its Schedule 13D filed on March 16, 2017. |
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(6) | Certain of our executive officers and other senior employees beneficially own all or a portion of their shares of our common stock through HLMI. |
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(7) | Based solely on information reported in a Schedule 13G jointly filed with the SEC on May 10, 2017 by Putnam Investments, LLC d/b/a Putnam Investments (“PI”), Putnam Investment Management, LLC (“PIM”) and The Putnam Advisory Company, LLC (“PAC”). As reported in such filing, this amount consists of 1,840,631 shares beneficially owned by PIM and 224,041 shares beneficially owned by PAC, which are registered investment advisors wholly owned by PI. Both subsidiaries have |
dispositive power over the shares as investment managers. PIM has sole voting power over 6,443 shares; otherwise, in the case of shares held by the Putnam mutual funds managed by PIM, the mutual funds have voting power through their boards of trustees. PAC has sole voting power over its 224,041 shares. PI, PIM and PAC are located at Office Square, Massachusetts, 02109. In order to present these holdings consistently with those of management, our directors and related parties, the percentage of Class A common stock owned has been recalculated to reflect the exchange of Class C units into Class A common stock in the denominator.
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(8) | Based solely on information reported in a Schedule 13G jointly filed with the SEC on March 10, 2017 by TPG Group Holdings (SBS) Advisors, Inc. (“Group Advisors”), David Bonderman and James G. Coulter. As reported in such filing, Group Advisors is the beneficial owner of 1,132,241 Class A shares, constituting approximately 6% of the Class A shares outstanding, with shared voting power and shared dispositive power with respect to all 1,132,241 shares. Messrs. Bonderman and Coulter disclaim beneficial ownership of such Class A shares except to the extent of their pecuniary interest therein. Group Advisors is located at c/o TPG Global, LLC, 301 Commerce Street, Suite 3300, Fort Worth, Texas 76102. In order to present these holdings consistently with those of management, our directors and related parties, the percentage of Class A common stock owned has been recalculated to reflect the exchange of Class C units into Class A common stock in the denominator. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Related-Party Transactions
The Reorganization
In connection with the Reorganization, we entered into the HLA Operating Agreement, the tax receivable agreement, the exchange agreement, the stockholders agreement and the registration rights agreement, and we acquired from existing members of HLA certain membership interests using a portion of the proceeds of the offering, and, in some cases, in exchange for Class A common stock, issued Class B common stock to certain continuing members of HLA. From time to time after the offering, HLA members may exchange membership interests in HLA for shares of our Class A common stock on an ongoing basis.
The following are summaries of certain provisions of our related-party agreements, which are qualified in their entiretyinformation required by this Item is incorporated by reference to, all of the provisions of such agreements. Because these descriptions are only summaries of the applicable agreements, they do not necessarily contain all of the information that you may find useful. We therefore encourage you to review the agreements in their entirety. Copies of the agreements have been filed with the SEC and are incorporated by reference as exhibits to this Form 10-K, and are available electronically on the website of the SEC at www.sec.gov.
HLA Operating Agreement
In connection with the IPO and the Reorganization, the members of HLA amended and restated the limited liability company operating agreement of HLA (as amended and restated, the “HLA Operating Agreement”). We hold all of the Class A units in HLA, and serve as its managing member, and thus control all of the business and affairs of HLA and its subsidiaries. Holders of Class B units and Class C units generally do not have voting rights under the HLA Operating Agreement.
Class A units, Class B units and Class C units have the same economic rights per unit. Accordingly, the holders of our Class A common stock (through us), the Class B Holders and the Class C Holders hold approximately 34.4%, 53.2% and 12.4%, respectively, of the economic interests in our business.
We do not intend to cause HLA to issue additional Class B units (and consequently, we do not intend to issue additional shares of Class B common stock) or Class C units in the future, other than as described below.
Net profits and net losses of HLA are allocated, and distributions by HLA will be made, to its members pro rata in accordance with the number of membership units of HLA they hold. HLA will make distributions to the holders of its membership units, which include us, for the purpose of funding tax obligations in respect of HLA that are allocated to them. However, HLA may not make tax distributions to its members if doing so would violate any agreement to which it is then a party.
At any time we issue a share of our Class A common stock for cash, the net proceeds received by us will be promptly transferred to HLA, and HLA will issue to us a Class A unit. At any time we issue a share of our Class A common stock pursuant to any of our equity plans, we will contribute to HLA all of the proceeds that we receive (if any) and HLA will issue to us an equal number of its Class A units, having the same restrictions, if any, as are attached to the shares of Class A common stock issued under the plan. At any time we issue a share of our Class A common stock upon an exchange of a Class B unit or Class C unit, described below under “—Exchange Agreement,” we will contribute the exchanged unit to HLA and HLA will issue to us a Class A unit. If we issue other classes or series of our equity securities, HLA will issue to us an equal amount of equity securities of HLA with designations, preferences and
other rights and terms that are substantially the same as our newly issued equity securities. Conversely, if we retire any shares of our Class A common stock (or our equity securities of other classes or series) for cash, HLA will, immediately prior to such retirement, redeem an equal number of Class A units (or its equity securities of the corresponding classes or series) held by us, upon the same terms and for the same price, as the shares of our Class A common stock (or our equity securities of such other classes or series) are retired. In addition, membership units of HLA, as well as our common stock, will be subject to equivalent stock splits, dividends, reclassifications and other subdivisions.
Class A units may be issued only to us, the managing member of HLA, and are non-transferable. Class B units and Class C units may be issued only to give effect to changes in our common stock as described above. The sole distinction between Class B units and Class C units is that the Class C Holders will not receive any shares of our Class B common stock in respect of their Class C units. Class B units and Class C units may not be transferred, except with our consent or to a permitted transferee, subject to such conditions as we may specify. In addition, Class B Holders may not transfer any Class B units to any person unless he, she or it transfers an equal number of shares of our Class B common stock to the same transferee.
Under the HLA Operating Agreement, we can require the holders of Class B units and Class C units to sell all of their interests in HLA into certain acquisitions of HLA and, in some circumstances, those holders may require us to include some or all of those interests in such a transaction.
We have the right to determine when distributions will be made to holders of units and the amount of any such distributions, other than with respect to tax distributions as described below. If a distribution is authorized, such distribution will be made to the holders of Class A units, Class B units and Class C units on a pro rata basis in accordance with the number of units held by such holder.
The holders of units, including us, will incur U.S. federal, state and local income taxes on their proportionate share of any taxable income of HLA. Net profits and net losses of HLA will generally be allocated to holders of units (including us) on a pro rata basis in accordance with the number of units held by such holder. The HLA Operating Agreement provides for quarterly cash distributions, which we refer to as “tax distributions,” to the holders of the units. Generally, tax distributions are computed by first determining the tax amount of each holder of units, which amount will generally equal the taxable income allocated to each holder of units (with certain adjustments) and then multiplying that income by an assumed tax rate, which is the highest combined U.S. federal and applicable state and local tax rate applicable to any natural person residing in, or corporation doing business in, New York City or San Francisco, California. HLA then determines an aggregate tax distribution amount by reference to the highest unitholder’s tax amount on a per unit basis and, subject to certain limitations, will distribute that aggregate amount to all holders of units as of the tax distribution date based on their percentage ownership interests at the time of the distribution. The pro rata distribution amounts will also be increased to the extent necessary, if any, so that the amount distributed to us is sufficient to enable us to pay our actual tax liabilities and our other expenses and costs (including amounts payable under the tax receivable agreement).
The HLA Operating Agreement provides that HLA may elect to apply an allocation method with respect to certain HLA investment assets that are held at the time of the closing of this offering that is expected to result in the future, solely for tax purposes, in certain items of loss being specially allocated to us and corresponding items of gain being specially allocated to the other members of HLA. In conjunction therewith, the tax receivable agreement provides that we will pay over to the other HLA members 85% of the net tax savings to us attributable to those tax losses.
The HLA Operating Agreement provides that it may be amended, supplemented, waived or modified by us in our sole discretion without the approval of any other holder of units, except that no amendment can adversely affect the rights of a holder of any class of units without the consent of holders of a majority of the units of such class.
Tax Receivable Agreement
We used a portion of the proceeds from our IPO to purchase membership units of HLA from certain of the existing direct and indirect members of HLA. In addition, the existing direct and indirect members of HLA may exchange their Class C or Class B units for shares of our Class A common stock on a one-for-one basis or, at our election, for cash. When a Class B unit is exchanged for a share of our Class A common stock, a corresponding share of our Class B common stock will automatically be redeemed by us at par value and canceled. As a result of this initial purchase and any subsequent exchanges, we are entitled to a proportionate share of the existing tax basis of the assets of HLA. In addition, HLA has in effect an election under Section 754 of the Code, which has resulted, and may in the future result, in increases to the tax basis of the assets of HLA. 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. These increases in tax basis may also decrease gains (or increase losses) on future dispositions of certain assets.
We have entered into a tax receivable agreement with the existing members of HLA. The agreement requires us to pay to such members (or their owners) 85% of the amount of tax savings, 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, as discussed below) as a result of any possible increases in tax basis described above and of certain other tax benefits attributable to payments under the tax receivable agreement itself. In addition, the HLA Operating Agreement provides that HLA may elect to apply an allocation method with respect to certain HLA investment assets that were held at the time of the closing of our IPO that is expected to result in the future, solely for tax purposes, in certain items of loss being specially allocated to HLI and corresponding items of gain being specially allocated to the other members of HLA. In conjunction therewith, the tax receivable agreement provides that HLI will pay over to the other HLA members 85% of the net tax savings to HLI attributable to those tax losses. These are our obligations and not obligations of HLA. For purposes of the tax receivable agreement, the benefit deemed realized by us is computed by comparing our actual income tax liability to the amount of such taxes that we would have been required to pay had there been no such increase to the tax basis of the assets of HLA, and had we not entered into the tax receivable agreement. The tax receivable agreement became effective immediately upon the consummation of our IPO and will remain in effect until all such tax benefits have been utilized or expired, unless the agreement is terminated early, as described below. We believe that all of the intangible assets, including goodwill, of HLA at the time of the offering allocable to the membership units of HLA acquired or deemed acquired in taxable transactions by us from existing direct or indirect members of HLA is amortizable for tax purposes. We and our stockholders retain the remaining 15% of the tax benefits that we realize or are deemed to realize. Estimating the amount of payments that may be made under the tax receivable agreement is by its nature imprecise, insofar as the calculation of amounts payable depends on a variety of factors. The actual increase in tax basis, as well as the amount and timing of any payments under the agreement, will vary depending upon a number of factors, including:
the timing of purchases or exchanges—for instance, the increase in any tax deductions will vary depending on the fair market value, which may fluctuate over time, of the depreciable or amortizable assets of HLA at the time of each purchase or exchange;
the price of shares of our Class A common stock at the time of the purchase or exchange—the increase in any tax deductions, as well as the tax basis increase in other assets, of HLA is directly related to the price of shares of our Class A common stock at the time of the purchase or exchange;
the extent to which such purchases or exchanges are taxable—if an exchange or purchase is not taxable for any reason, increased tax deductions will not be available;
the amount and timing of our income—we expect that the tax receivable agreement will require us to pay 85% of the deemed benefits as and when deemed realized. If we do not have taxable income, we generally will not be required (absent a change of control or other circumstances requiring an early termination payment) to make payments under the tax receivable agreement for that taxable year because no benefit will have been realized. However, any tax benefits that do not result in realized benefits in a given tax year will likely generate tax attributes that may be utilized to generate benefits in previous or future tax years. The utilization of any such tax attributes will result in payments under the tax receivable agreement; and
tax rates in effect at the time that we realize the relevant tax benefits.
The payments that we may make under the tax receivable agreement could be substantial.
We have the right to terminate the tax receivable agreement, in whole or, in certain circumstances, in part, at any time. In addition, the tax receivable agreement will terminate early upon certain mergers or consolidations or other changes of control or if we materially breach our obligations under the tax receivable agreement. If we exercise our right to terminate the tax receivable agreement, or if the tax receivable agreement is terminated early in accordance with its terms, our payment obligations under the tax receivable agreement will be accelerated and will become due and payable in a lump sum amount equal to the present value of the anticipated future tax benefits calculated based on a discount rate equal to the lesser of (x) 7.5% and (y) LIBOR plus 400 basis points and on certain assumptions, including that (i) we will have sufficient taxable income to use in full the deductions arising from any increased tax basis and (ii) except in the case of a partial termination, all Class B units and Class C units outstanding on the termination date are deemed to be exchanged on the termination date. As a result, we could be required to make payments under the tax receivable agreement that are substantial and in excess of our actual cash tax savings. See “Risk Factors—Risks Related to Our Organizational Structure—In certain circumstances, payments under the tax receivable agreement may be accelerated and/or significantly exceed the actual benefits, if any, we realize” included in Part I, Item 1A of this Form 10-K.
Decisions made in the course of running our business, such as with respect to mergers and other forms of business combinations that constitute changes in control, may influence the timing and amount of payments we make under the tax receivable agreement in a manner that does not correspond to our use of the corresponding tax benefits. In these situations, our obligations under the tax receivable agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control.
Payments are generally due under the tax receivable agreement within a specified period of time following the filing of our tax return for the taxable year with respect to which the payment obligation arises, although interest on such payments will begin to accrue at a rate of LIBOR plus 100 basis points from the due date (without extensions) of such tax return. Late payments generally accrue interest at a rate of LIBOR plus 500 basis points. Because of our structure, our ability to make payments under the tax receivable agreement is dependent on the ability of HLA to make distributions to us. The ability of HLA
to make such distributions will be subject to, among other things, restrictions in the Term Loan and Revolving Credit Facility. If we are unable to make payments under the tax receivable agreement for any reason, such payments will be deferred and will accrue interest until paid.
Payments under the tax receivable agreement will be based on the tax reporting positions that we determine. Although we are not aware of any material issue that would cause the IRS to challenge a tax basis increase, we will not, in the event of such a challenge, be reimbursed for any payments previously made under the tax receivable agreement (although we would reduce future amounts otherwise payable under the tax receivable agreement). No assurance can be given that the IRS will agree with the allocation of value among our assets or that sufficient subsequent payments under the tax receivable agreement will be available to offset prior payments for disallowed benefits. As a result, in certain circumstances, payments could be made under the tax receivable agreement in excess of the benefit that we actually realize in respect of the increases in tax basis resulting from our purchases or exchanges of membership units of HLA and certain other tax benefits related to our entering into the tax receivable agreement.
Exchange Agreement
We have entered into an exchange agreement with the other members of HLA that will entitle those members (and certain permitted transferees thereof, including the beneficial owners of the Class B units and Class C units) to exchange their Class C units, and their Class B units together with an equal number of shares of Class B common stock, for shares of Class A common stock on a one-for-one basis or, at our election, for cash.
The exchange agreement permits those members to exercise their exchange rights subject to certain timing and other conditions. In particular, exchanges by our senior management and other senior employees are subject to timing and volume limitations: no exchanges are permitted until after the first anniversary of the closing date of our IPO, and then exchanges may not exceed one-third of their original holdings prior to the second anniversary and two-thirds of their original holdings prior to the third anniversary. After the third anniversary of the closing date, these limitations expire. These limitations do not apply to exchanges by our other employees who own Class B units or Class C units or holders who may sell freely under Rule 144, subject to compliance with lock-up agreements entered into in connection with the IPO and periodic blackout periods imposed by us.
In addition, the exchange agreement provides that an owner does not have the right to exchange Class B units or Class C units if we determine that such exchange would be prohibited by law or regulation or would violate other agreements with HLA to which the owner is subject. We may impose additional restrictions on exchanges that we determine to be necessary or advisable so that HLA is not treated as a “publicly traded partnership” for U.S. federal income tax purposes.
Any beneficial holder exchanging Class B units must ensure that the applicable Class B Holder delivers a corresponding number of shares of Class B common stock to us for redemption and cancellation as a condition of exercising its right to exchange Class B units for shares of our Class A common stock. When a Class B unit or Class C unit is surrendered for exchange, it will not be available for reissuance.
Stockholders Agreement
Certain Class B Holders who are significant outside investors, members of management and significant employee owners have entered into a stockholders agreement pursuant to which they will vote all their shares of voting stock, including Class A and Class B common stock, together and in accordance with the instructions of HLAI on any matter submitted to our common stockholders for a vote.
Under the stockholders agreement, these holders agree to take all necessary action, including casting all votes such members are entitled to cast at any annual or special meeting of stockholders, so as to ensure that the composition of our board of directors and its committees complies with the provisions of the stockholders agreement related to the composition of our board of directors, which are discussed under Part III, Item 10, “Management—Composition of the Board of Directors” of this Form 10-K.
HLAI holds approximately 52% of the aggregate voting power of our Class A common stock and Class B common stock, and the parties to the stockholders agreement collectively hold over 90% of the aggregate voting power of our Class A common stock and Class B common stock. The governing documents of HLAI require generally the approval of two of Messrs. Giannini, Rogers, and Sexton for those votes to be cast in favor of certain fundamental actions, including a material acquisition, an increase in our authorized capital, and an issuance of preferred stock. Otherwise, HLAI is controlled by its managing member, an entity controlled by Mr. Rogers. As a result of these arrangements, HLAI, its current members, and their permitted transferees control the outcome of any such matters that are submitted to our stockholders for the foreseeable future.
Registration Rights Agreement
We have entered into a registration rights agreement with certain Class B Holders who are significant outside investors, members of management and significant employee owners. The registration rights agreement provides these holders with certain registration rights whereby, at any time following the first anniversary of our IPO, these holders will have the right to require us to register under the Securities Act the shares of Class A common stock issuable to them upon exchange of their Class B units or Class C units. The registration rights agreement also provides for piggyback registration rights for these holders, subject to certain conditions and exceptions.
Indemnification Agreements
Our bylaws provide that we indemnify our directors and officers to the fullest extent permitted by the DGCL, subject to certain exceptions contained in, our bylaws. In addition, our certificate of incorporation, provides that our directors will not be liable for monetary damages for breach of fiduciary duty.
We have entered into indemnification agreements with each of our executive officers and directors. The indemnification agreements provide the executive officers and directors with contractual rights to indemnification, and expense advancement and reimbursement, to the fullest extent permitteddefinitive proxy statement, under the DGCL, subject to certain exceptions contained in those agreements.
There is no pending litigation or proceeding naming any of our directors or officers to which indemnification is being sought,headings “Certain Relationships and Related-Party and Other Transactions” and “Corporate Governance”. Accordingly, we are not aware of any pending litigation that may result in claims for indemnification by any director or officer.
Directed Share Program
In connection with our IPO,have omitted the underwriters reserved a certain amount of shares of our Class A common stock for sale in the IPO to directors, officers, employees and other related individuals (the “Directed Share Program”). Mr. Berkman participated in the Directed Share Program, in his capacity as a
private investor, and purchased 25,000 shares of our Class A common stock for his personal account at the IPO price of $16.00 per share, for a total of $400,000. Mr. Berkman subsequently joined our board of directors in May 2017.
Related-Party Transaction Approval Policy
We have adopted a written policy relating to the approval of related-party transactions. We will review all relationships and transactions (in excess of a specified threshold) in which we and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. Our legal and corporate finance departments are primarily responsible for the development and implementation of processes and controls to obtain information from our directors and executive officers with respectthis Item pursuant to related-party transactions and for determining, based on the facts and circumstances, whether we or a related person have a direct or indirect material interest in the transaction.General Instruction G(3) of Form 10-K.
In addition, our audit committee will review and approve or ratify any related-party transaction in accordance with the policy. In approving or rejecting any such transaction, we expect that our audit committee will consider the relevant facts and circumstances available and deemed relevant to the audit committee.
Any member of the audit committee who is a related person with respect to a transaction under review will not be permitted to participate in the deliberations or vote on approval or ratification of the transaction.
Director Independence
Our board of directors consists of Hartley R. Rogers, Mario L. Giannini, David J. Berkman, Erik R. Hirsch, O. Griffith Sexton and Leslie F. Varon. Mr. Rogers serves as Chair.
Our board of directors has determined that Messrs. Berkman and Sexton and Ms. Varon are each “independent” as defined under the rules of the NASDAQ Stock Market. In making this determination, the board of directors considered the relationships that each individual has with our Company and all other facts and circumstances that the board of directors deemed relevant in determining his or her independence, including ownership interests in us.
We are a “controlled company” under the rules of the NASDAQ Stock Market and therefore qualify for an
exemption from the requirement that our board of directors consist of a majority of independent directors,
that we establish a compensation committee consisting solely of independent directors and that our director nominees be selected or recommended by independent directors. Our audit committee consists of Messrs. Berkman, Rogers and Sexton and Ms. Varon, who serves as Chair. As required under the rules of the NASDAQ Stock Market, we will transition to an audit committee composed entirely of independent directors within one year of the IPO.
Item 14. Principal Accountant Fees and Services
Audit Fees
Audit fees chargedThe information required by this Item is incorporated by reference to, us by Ernst & Young LLP for professional services rendered for the audits of our consolidated financial statements for the fiscal years 2017, 2016, 2015 and 2014 includedwill be contained in, our Registration Statement ondefinitive proxy statement, under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm”. Accordingly, we have omitted the information from this Item pursuant to General Instruction G(3) of Form S-1 and Form 10-K during the year ended March 31, 2017 totaled $3,587,498.10-K.
Audit-Related Fees
Audit-related fees charged to us by Ernst & Young LLP for services that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees” consisted primarily of fees for attest services of individual investment funds during the year ended March 31, 2017 and totaled $147,999.
Tax Fees
Tax fees charged to us by Ernst & Young LLP for tax services rendered, primarily related to advice on tax structuring and foreign tax compliance and transfer pricing services, during the year ended March 31, 2017 totaled $233,876.
All Other Fees
The fees billed to us by Ernst & Young LLP for all other services rendered, primarily related to a subscription to an online accounting research tool, during the year ended March 31, 2017 totaled $1,995.
Pre-Approval Policies and Procedures
In connection with our IPO, the audit committee’s Charter, which may be amended from time to time, became effective as of February 28, 2017 (the “Charter”), the effective date of our IPO registration statement. All of the fees paid to Ernst & Young LLP during the year ended March 31, 2017, were pre-approved by HLA.
Pursuant to the Charter, the audit committee has adopted a Pre-Approval Policy for Audit and Non-Audit Services (the “Policy”) governing the pre-approval, selection, retention and termination of any services provided by the Company’s independent registered public accounting firm. The Policy expressly prohibits non-audit services for which engagement is not permitted by the SEC’s rules and regulations, including internal audit outsourcing and expert services unrelated to the audit. A list of prohibited and permitted services is set forth in the Policy. Permitted services include audit, audit-related, permitted non-audit and tax-related services. Audit and audit-related services may include, among other things, services related to securities filings, accounting and financial reporting consultations, statutory audits and acquisition-related due diligence and benefit plan audits.
For audit services, the independent auditor is to provide, for audit committee approval, an engagement letter for each fiscal year outlining the proposed plan covering the audit services’ scope, terms and compensation. Additional engagement letters related to other permitted services may not require separate audit committee approval if such services have been pre-approved. The independent auditor will represent to the audit committee, in each of its engagement letters, that each proposed service to be provided does not violate the SEC’s auditor independence rules.
Management and the independent auditor must submit to the audit committee a request for pre-approval of any proposed services that have not been previously pre-approved. Responses to requests for services are required to include a statement that the services are consistent with and shall not violate the SEC rules on auditor independence. The audit committee must approve permissible non-audit services in order for the independent auditor to be retained by us for such services.
PART IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this Form 10-K:
1. All financial statements. See Index to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
2. Financial Statement Schedules. Financial statement schedules are omitted as they are either not required or the information is otherwise included in the consolidated financial statements.
3. Exhibits. See Exhibit Index.
Item 16. Form 10-K Summary
None.
Omitted at the Company’s option.
Exhibit Index
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Incorporated By Reference | | | | Filed Herewith |
Exhibit No. | | Description of Exhibit | Form | Exhibit | Filing Date | File No. | |
| | | 8-K | 3.1 | 3/10/17 | 001-38021 | |
| | | 10-K | 3.2 | 6/27/17 | 001-38021 | |
| | | 10-K | 4.1 | 5/30/19 | 001-38021 | |
| | | 8-K | 10.1 | 3/10/17 | 001-38021 | |
| | | S-1 | 10.2 | 2/26/18 | 333-223235 | |
| | | 10-K | 10.3 | 6/14/18 | 001-38021 | |
| | | 8-K | 10.2 | 3/10/17 | 001-38021 | |
| | | 8-K | 10.3 | 3/10/17 | 001-38021 | |
| | | 10-Q | 10.3 | 2/9/18 | 001-38021 | |
| | | 8-K | 10.4 | 3/10/17 | 001-38021 | |
| | | 8-K | 10.5 | 3/10/17 | 001-38021 | |
| | | S-1/A | 10.6 | 2/16/17 | 333-215846 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Incorporated By Reference | | | | Filed Herewith |
Exhibit No. | | Description of Exhibit | Form | Exhibit | Filing Date | File No. | |
| | | 10-Q | 10.2 | 2/9/18 | 001-38021 | |
| | | S-1/A | 10.7 | 2/16/17 | 333-215846 | |
| | | 10-Q | 10.1 | 2/9/18 | 001-38021 | |
| | | S-1/A | 10.8 | 2/16/17 | 333-215846 | |
| | | 10-Q | 10.2 | 8/9/18 | 001-38021 | |
| | | DEF14A | Appendix A | 7/27/18 | 001-38021 | |
| | | S-1/A | 10.9 | 2/16/17 | 333-215846 | |
| | | 8-K | 10.1 | 8/25/17 | 001-38021 | |
| | | 8-K | 10.2 | 3/25/20 | 001-38021 | |
| | | 8-K | 10.2 | 8/25/17 | 001-38021 | |
| | | 8-K | 10.3 | 3/25/20 | 001-38021 | |
| | | 8-K | 10.1 | 3/25/20 | 001-38021 | |
| | | 10-K | 10.12 | 6/27/17 | 001-38021 | |
| | | 8-K | 10.1 | 1/2/20 | 001-38021 | |
| | | | | | | X |
| | | | | | | X |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Incorporated By Reference | | | | Filed Herewith |
Exhibit No. | 157 | Description of Exhibit | Form | Exhibit | Filing Date | File No. | |
| | | | | | | X |
| | | | | | | X |
| | | | | | | |
101 | | The following financial information from our Annual Report on Form 10-K for the year ended March 31, 2020 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Stockholders’ Equity (v) the Consolidated Statements of Cash Flows, and (vi) Notes to the Consolidated Financial Statements. | | | | | X |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) | | | | | X |
† Indicates a management contract or compensatory plan or arrangement.
○ Confidential information in this exhibit has been omitted.
‡ Furnished herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 26th28th day of June, 2017.
| | | | | |
HAMILTON LANE INCORPORATED | |
| |
HAMILTON LANE INCORPORATED | |
By: | |
| |
By: | /s/ Mario L. Giannini |
| Name: Mario L. Giannini |
| Title: Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on this 26th28th day of June, 2017.May, 2020.
|
| | |
Signature | | Title |
| | |
/s/ Hartley R. Rogers | | Chairman of the Board of Directors |
Hartley R. Rogers | |
| | |
/s/ Mario L. Giannini | | Chief Executive Officer and Director (Principal Executive Officer) |
Mario L. Giannini | |
| | |
/s/ Randy M. Stilman | | Chief Financial Officer and Treasurer (Principal Financial Officer) |
Randy M. Stilman | |
| | |
/s/ Michael Donohue | | Controller (Principal Accounting Officer) |
Michael Donohue | |
| | |
/s/ David J. Berkman | | Director |
David J. Berkman | |
| | |
/s/ Erik R. Hirsch | | Director |
Erik R. Hirsch | |
| | |
/s/ O. Griffith Sexton | | Director |
O. Griffith Sexton | |
| | |
/s/ Leslie F. Varon | | Director |
Leslie F. Varon | |
Exhibit Index
|
| | | | | | |
| | | Incorporated By Reference | Filed Herewith |
Exhibit No. | | Description of Exhibit | Form | Exhibit | Filing Date |
3.1 | | Amended and Restated Certificate of Incorporation of Hamilton Lane Incorporated | 8-K | 3.1 | 3/10/16 | |
3.2 | | Amended and Restated Bylaws of Hamilton Lane Incorporated | | | | * |
10.1 | | Fourth Amended and Restated Limited Liability Company Agreement of Hamilton Lane Advisors, L.L.C., dated as of March 6, 2017, by and among Hamilton Lane Advisors, L.L.C. and its members | 8-K | 10.1 | 3/10/16 | |
10.2 | | Tax Receivable Agreement, dated as of March 6, 2017, by and among Hamilton Lane Incorporated, Hamilton Lane Advisors, L.L.C., and each of the other persons and entities party thereto | 8-K | 10.2 | 3/10/16 | |
10.3 | | Exchange Agreement, dated as of March 6, 2017, by and among Hamilton Lane Incorporated, Hamilton Lane Advisors, L.L.C., and each of the other persons and entities party thereto | 8-K | 10.3 | 3/10/16 | |
10.4 | | Registration Rights Agreement, dated as of March 6, 2017, by and among Hamilton Lane Incorporated and the other persons party thereto | 8-K | 10.4 | 3/10/16 | |
10.5 | | Stockholders Agreement, dated as of March 6, 2017, by and among Hamilton Lane Incorporated, Hamilton Lane Advisors, L.L.C. and the other persons and entities party thereto | 8-K | 10.5 | 3/10/16 | |
10.6† | | Hamilton Lane Incorporated 2017 Equity Incentive Plan | S-1/A | 10.6 | 2/16/17 | |
10.7† | | Form of Restricted Stock Award Agreement under the 2017 Equity Incentive Plan | S-1/A | 10.7 | 2/16/17 | |
10.8† | | Form of Non-Qualified Stock Option Agreement under the 2017 Equity Incentive Plan | S-1/A | 10.8 | 2/16/17 | |
10.9† | | Form of Indemnification Agreement between Hamilton Lane Incorporated and certain of its directors and officers | S-1/A | 10.9 | 2/16/17 | |
10.10† | | Hamilton Lane Advisors, L.L.C. 2016 Carried Interest Plan | S-1/A | 10.10 | 2/16/17 | |
10.11○ | | Credit and Guaranty Agreement dated as of July 9, 2015, as amended November 7, 2016, among Hamilton Lane Advisors, L.L.C., certain of its subsidiaries, Morgan Stanley Senior Funding, Inc., as Administrative Agent and Collateral Agent, and the lenders party thereto | S-1 | 10.11 | 2/1/17 | |
10.12† | | Employment Agreement, effective as of May 23, 2016, by and between Hamilton Lane (Hong Kong) Limited and Juan Delgado-Moreira | | | | * |
21 | | List of Subsidiaries | | | | * |
23 | | Consent of Independent Registered Public Accounting Firm | | | | * |
31.1 | | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley | | | | * |
|
| | | | | | |
Signature | | | Incorporated By Reference | Filed HerewithTitle |
Exhibit No. | | Description of Exhibit | Form | Exhibit | Filing Date |
31.2/s/ Hartley R. Rogers | | CertificationChairman of the Principal Financial Officer pursuant to Section 302Board of the Sarbanes-Oxley | | | | *Directors |
32‡Hartley R. Rogers | | Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | |
|
| | |
/s/ Mario L. Giannini | | Chief Executive Officer and Director (Principal Executive Officer) |
Mario L. Giannini | | |
| | |
/s/ Atul Varma | | Chief Financial Officer and Treasurer (Principal Financial Officer) |
Atul Varma | | |
| | |
/s/ Michael T. Donohue | | Controller (Principal Accounting Officer) |
Michael T. Donohue | | |
| | |
/s/ Erik R. Hirsch | | Vice Chairman and Director |
Erik R. Hirsch | | |
| | |
/s/ David J. Berkman | | Director |
David J. Berkman | | |
| | |
/s/ O. Griffith Sexton | | Director |
O. Griffith Sexton | | |
| | |
/s/ Leslie F. Varon | | Director |
Leslie F. Varon | | |
† Indicates a management contract or compensatory plan or arrangement.
○ Confidential treatment has been granted for portions of this exhibit.
‡ Furnished herewith.