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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen thank you for standing-by and welcome to today’s Hamilton Lane Incorporated Third Quarter Fiscal Year 2021 Earnings Conference Call. At this time all participants lines are in listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions]
I’d now like to hand the conference over to your host John Oh, Investor Relations Manager. Thank you. Please go ahead sir.
Thank you, Katrina. Good morning and welcome to the Hamilton Lane Q3 fiscal 2021 earnings call. Today, I will be joined virtually by Eric Hirsch, Vice Chairman; Andrea Kramer, CEO of Hamilton Lane Alliance Holdings 1; and Atul Varma, CFO.
Before I continue, you may notice that we have a smaller number of speakers today than normal. Unfortunately, this winter storm in the Northeast has resulted in some power and phone issues. With that we hope that everyone who is currently affected by the weather is safely navigating the storm.
Now before we discuss the quarter's results, we want to remind you that we will be making forward-looking statements based on our current expectations for the business. These statements are subject to risks and uncertainties that may cause the actual results to differ materially. For discussion of these risks, please review the risk factors included in the Hamilton Lane Fiscal 2020 10-K and subsequent reports we filed with the SEC.
We will also be referring to non-GAAP measures that we view as important in assessing the performance of our business. Reconciliation of those non-GAAP measures to GAAP can be found in the earnings presentation materials made available on the shareholders sections of the Hamilton Lane website. Our detailed financial results will be made available when our 10-Q is filed. Please note that nothing on this call represents an offer to sell or a solicitation to purchase interest in any of Hamilton Lane products.
Beginning on Slide 3. Year-to-date, our management and advisory fee revenue grew by over 16% while our fee related earnings grew by nearly 28% versus the prior year period. This translated year-to-date GAAP EPS of $1.78 based on $58 million of GAAP net income and non-GAAP EPS of $1.78 based on $95 million of adjusted net income. We have also declared a dividend of $31.25 per share this quarter, which keeps us on track with a 13.6% increase over the last fiscal year equating to the targeted $1.25 per share for fiscal year 2021.
With that, I'll now turn the call over to Erik.
Thank you, John and good morning. In many ways 2020 was a year of incredible challenges. As a country, as communities, as families and as individuals we have all seen and faced adversity in ways we simply could not have imagined a year ago. On behalf of Hamilton Lane and my partners, I'd like to offer my profound thanks to all of those helping to overcome these challenges to protect us and to make our global community stronger.
Across the organization, our employees and their families have also faced challenges throughout this past year and continue to face them now. We are proud of how they have persevered despite this and how they've been unwavering in their focus on delivering their very best to our clients. That dedication has again resulted in strong performance for the company and for our shareholders. Over the past year, we have delivered strong growth, open to new offices, hired talent across a number of strategic areas and introduce new product and services offerings. This is the result of not only our high caliber employee base and their dedicated efforts, but it's also the result of a strong culture of support for each other and for those around us.
And before I turn to the results for the quarter, I'd like to take a moment to speak to how that culture has once again been recognized. For the ninth consecutive year, Hamilton Lane has been selected as a best place to work in money management by Pensions & Investments magazine. We have won this distinction every year since Pensions & Investments first began publishing the ranking in 2012. And we are only one of five organizations across the entirety of the money management landscape who have earned that distinction. We are extremely proud of this recognition. And this current environment continues to remind us how essential good culture is to success.
Let me now turn to some results for the quarter. Beginning on Slide 4, here we highlight our total asset footprint which we define as the some of our AUMs assets under management and AUA assets under advisement. Total asset footprint for the quarter started approximately $657 billion and represents a 35% increase to our footprint year-over-year, continuing our long-term growth trend. Consistent with prior quarters AUM growth year-over-year, which was $10 billion or 14% came from both our specialized funds and customized separate accounts and continues to be diversified across client type, size of client and geographic region. Our focus remains simply growing and winning across both lines of business. And we are pleased with our ongoing success.
As for our AUA, similar to what we've seen with our AUM growth year-over-year, which came in at approximately $159 billion or approximately 38% was from across client type and geographic region. While the year-over-year AUA change is relatively large from $1 and percentage standpoint, the majority of the increase is resulting from us being engaged on a fixed fee basis to provide back-office and portfolio reporting services to a number of new clients with very large existing portfolios. As we've mentioned on prior calls, AUA can fluctuate quarter-to-quarter for a variety of reasons. But the revenue associated with AUA does not necessarily move in lockstep with those changes, due in many cases to the fixed fee nature of the business.
Moving on to Slide 5, we highlight our fee earning AUM. As a reminder, fee earning AUM is the combination of our customized separate accounts and our specialized funds with basis point driven management fees. We will continue to emphasize that this is the most significant driver of our business, as it makes up over 80% of our management and advisory fees. Relative to the prior year period, total fee earning AUM grew $3.4 billion or 9% stemming from positive fund flows across both our specialized funds and our customized separate accounts.
Taken separately, over $1.7 billion of net fee earning AUM came from our customized separate accounts. And over the same time period $1.6 billion came from our specialized funds. Growth in these two segments continues to be driven by four key components. One, reups from our existing clients, two winning and adding new clients, three, growing our existing fund platforms and four, raising new specialized funds. What you also see here that our fee rates continue to remain steady.
Moving to Slide 6, fee earning AUM from our customized separate accounts stood at $25 billion growing over 7% the past 12 months. We continue to see the growth coming across type, size and geographic location of the clients. What you also see here is that over the last 12 months more than 80% of the gross inflows into customized separate accounts came from existing clients. You've heard us say in the past that reups from our existing client base remains a key component of the growth we've achieved in this segment of fee earning AUM. In addition to reups, we continue to expand our client base by winning and adding brand new relationships, which in turn provide a growing base for future reup opportunities.
Moving to our specialized funds, growth here continues to be strong. We are executing well across our existing product suite and are tactically introducing new product lines. Overall demand remains robust. And like the rest of our business comes from a diverse set of investors around the globe. Over the past 12 months, we've achieved positive inflows of over $1.6 billion resulting in a 12% increase in fee earning AUM.
Turning to fund specific updates, I'll start with our current secondary fund, which continues to be the primary driver of growth in specialized fund fee earning AUM. As of January 31, we have closed on over $3.7 billion of LP commitments. We are appreciative of all the investors who have entrusted capital to us, and who have supported the growth of this platform. It is now the largest specialized fund we've ever raised. In prior calls, we had previously mentioned that we had until the end of January to complete fundraising. However, in order to facilitate additional time for a very small number of final investors, we now expect to wrap up this fund in the coming weeks.
As it relates to retro fees, similar to prior closes with this product $575 million of LP commitments closed during this third fiscal quarter, which resulted in $7.2 million of retro fees. Subsequent to that, we closed on another $680 million of commitments on January 31. That will result in approximately $10 million of retro fees to be recognized in fiscal Q4.
Next, I will turn to our annual credit focus series. To-date, the current series has raised $584 million of commitments. Similar to our secondary fund, we had previously said we had until the end of January 2021, to complete raising capital. But again to accommodate those final investors coming into the series, we will actually hold the final close in the coming weeks. For the benefit of those less familiar with the series, it is a relatively unique structure whereby we are continually raising and deploying dollars simultaneously. Therefore it is less about targeting a set amount of dollars to raise as you would traditionally see across funds with multiyear deployment periods and more about ensuring that we size the product in line with the current opportunity set. This inevitably will lead to some size variability from series-to-series.
Let me now shift gears and speak about a few exciting updates on our semi liquid Evergreen business. As quick background for the benefit of those less familiar this product targets the high net worth and mass affluent markets and invest almost exclusively in direct investments in both equity and credit as well as secondary. The product offers a monthly liquidity option and an open end Evergreen structure with management fees on net asset value and deal-by-deal performance fee.
Our first product launch in this space occurred in May of 2019 and was offered exclusively to international investors, we've continued to see interest rise and flows are strong. We posted our single largest monthly flow to-date in January with over $16 million of monthly net flow. As of February 1, the fund now had a net asset value of approximately $660 million.
On a prior call, we spoke about our efforts in launching this type of product within the United States. And I'm now pleased to report that we are up and running as you may have seen with our press release announcement on January 7. This marks an important milestone for this product. And we are excited about the opportunity to offer U.S. based qualified investors access to Hamilton Lane’s global platform and unique deal flow.
Strong distribution and channel relationships are a key part of success in the space. And I'm also pleased to announce that we are bolstering our existing resources with an acquisition of 361 Capital. On January 28 we announced that we plan to acquire 361 Capital with a closing expected this calendar quarter. 361 Capital was founded in 2001 with a focus on bringing actively managed alternative products to the retail space through their strong relationships with our RIAs and investment platforms around the country.
There are 16 person strong team is based in Denver, Colorado and will remain there furthering the Hamilton Lane geographic footprint. And aside from depth and experience in the space 361 brings an award winning culture. Like us they were also recently recognized as the best places to work in money management, marketing their fifth year in a row. We are excited to welcome the 361 team to Hamilton Lane and are excited about the prospects for our U.S. retail vehicle.
In keeping with our new initiatives, as most of you now have may have seen, we have recently launched our first SPAC Hamilton Lane Alliance Holdings 1 which trades on the NASDAQ under the symbol HLAHU. Joining me to provide some insights into what we believe is a unique angle in the world of SPAC is my partner and the CEO of Hamilton Lane Alliance Holdings, Andrea Kramer.
Thank you, Erik and hello everyone. I'm excited to have the opportunity to share our thoughts around our SPAC offering and why we believe we are positioned for success. As with all new initiatives at Hamilton Lane, the goal is to always create longstanding business lines that have the ability to grow and scale. You will notice with this first SPAC, we have assigned the number one to it and that is purposeful as our goal is to raise additional SPAC in the future and create a new business line for Hamilton Lane. For HLAHU, we’ve raised a total of $276 million of gross proceeds from a high caliber group of investors, a number of whom are also core HLA shareholders, we very much appreciate their support. Along with the support of new investors, we've used SPAC as a natural extension of our existing investment activities. Alongside our strong investment track record, we intend to bring to bear our access and deal flow via a law -- a number of longstanding important relationships with private markets fund managers, which we believe will be vital when searching for a business combination.
Ultimately, we are seeking to partner with a reputable fund manager that owns a great company with a strong management team and is ready to begin the transition from private to public ownership. We believe our SPAC offers a compelling and elegant solution to assist in this transition. We've proven to be a great partner for fund managers and believe our SPAC will be a sought after avenue as these managers seek to monetize their public ready assets.
Now, as it relates to HLA revenue, there are no management fees or carry associated with this SPAC in the traditional sense. The economics that Hamilton Lane will earn as the sponsor will generally take the form of promote shares and warrants. And over time, we will look to monetize those shares subject to certain lockup restriction. I'm excited to be leading this new initiative for Hamilton Lane and look forward to providing you with updates on our progress.
With that, I'll now turn it over to Atul to discuss the financials.
Great, thank you, Andrea and good morning, everyone. Slide 8 of the presentation shows the year-to-date financial highlights for fiscal year 2021. We continue to see solid growth in our business with management and advisory fee up 16% versus the prior year period. Our specialized funds revenue increased $20.4 million or 25%, compared to the prior year period driven by $1.7 billion in fee earning AUM added from our latest secondary fund between periods.
We’ve recognized $10.8 million in retro fees from the secondary fund in the current year period, compared to $2.8 million from a co-investment fund in the prior year period. As many of you are likely aware, investors that come into later closes for the fundraise for many of our products, the retroactive fees dating back to the fund first close. Therefore, you typically see a spike in management fees related to that fund for the quarter in which subsequent closings occur.
Revenue from our customized separate accounts increased approximately $3.6 million compared to the prior year period due to reups from existing clients and the addition of several new accounts. Revenue from our advisory and reporting offerings increased approximately $3.4 million compared to the prior year period.
The final component of our revenue is incentive fee. Incentive fee for the year-to-date period were $29.8 million. We remain a very diversified carry story with now 70 vehicles in an unrealized carry position that are ultimately backed by 1,000s of underlying companies.
Moving to Slide 9, we provide some additional detail on our unrealized carry balance. Given the continued positive trend in valuations, the balance is up 22% from the prior year, even as we recognize $41 million of incentive fee during that period. And just to remind everyone, we don't control these positions and thus we don't control the timing effects.
Turning to Slide 10, which profiles are earnings, or year-to-date fee related earnings were up nearly 28% versus the prior year period. And as a result of the revenue growth we discussed earlier. In regard to our expenses, total Expenses increased $14.6 million compared with the prior year period. Total compensation and benefits increased by $22.3 million due to strong operating performance and an increase in headcount.
G&A decreased $7.8 million due primarily to decreases in travel expense, consulting and professional fee and commissions. Due to this decrease in G&A, along with the large increase in retro fees from our latest secondary fund, our fee related earnings margin increased meaningfully relative to the prior year period. Given much of these positive events for more one-time in nature. We do not view this quarter's margin as the new normal. We remain committed to supporting growth initiative for the business. And we remain focused on creating continued margin improvement over time.
Let me take a moment here to remind everyone about the rent expense associated with the new headquarters move that we have spoken about during our prior calls. During this quarter, we have started to expense the rent associated with the new headquarters. As stated on prior calls, the expected impact to our G&A expense will be a run rate increase of $4 million to $5 million annually, stemming from the new leaf.
Moving to our balance sheet on Slide 11. Our largest asset on the balance sheet is investment alongside our clients in our customized separate account and specialized funds. Similar to our unrealized carry balance, this quarter saw an increase in the value relative to the previous quarter, primarily due to increased valuation changes. In regard to our liabilities, we continue to be modestly levered.
And with that, we thank you for joining the call and are happy to open it up for questions.
[Operator Instructions] First question, we have Ken Worthington from JP Morgan. Your line is open.
Hi, good morning. And thanks for taking my questions, exciting days here. I wanted to flush out your comments on the SPAC. So a couple of questions on this. So how does the launch of the first SPAC expanded to a broader SPAC business at Hamilton Lane? And what ultimately is your vision here? And then I guess maybe along those same lines, can you speak to competitive advantage? How would your relationships in private markets investing position Hamilton Lane to be successful both in terms of the initial SPAC and then you know the outlook to further grow this business? And then are you thinking about any themes either by sector style or other characteristics for your SAPC business?
Thanks, Ken, for the question. This is Andrea speaking. On the first question, it is absolutely our intention to institutionalize this space and to build-out a line of business focused on providing these solutions to our partnership. On your second question regarding differentiation and competitive nature, the key differentiation is our tremendous data set, really layered with the SAPC which gives us a preemptive sourcing edge and long cultivated relationships.
And lastly, I would say it's also the institutionalization of our platform, which will lead us to be successful for SPAC 1, and for all future SPAC. On your third question, it is a generalist approach that we are taking. And our intention is to partner with a best-in-class general partner and to work with them on a leading if not outperforming business as we take that company into a deep SPAC process.
Okay, thank you. And just to follow up on competitive advantage, if the relationship was with private market investing firms, it's not so much bankers per se, it's the private markets investing firms. So you've got data on deals, how do you translate that into a competitive advantage in terms of finding deals? And making sure you're investing in the right ones? I guess, link those two together?
Sure. It's a great question. This is Andrea. It is absolutely going to leverage our data analytics and the access to information. And we're not going to have to go to the bank to source books, we're going to preempt that process and work directly based on the relationship we have with these partners to source and engage with them on these opportunities. So we're going to circumvent what is traditionally done by SPAC which is just received [banker book].
Got it. Okay, thank you.
Next question, we have Alex Blostein from Goldman Sachs.
Hey, guys, good morning. I just wanted to dig a little bit deeper into the opportunity you see for Hamilton Lane in the U.S. retail distribution now that you have a fund approved and launched. Can you talk I guess a little bit about the channels that you're looking to distribute through the kind of opportunities that you see there any incremental investments you need to make into distribution to kind of accelerate that growth and sort of the vision for that business call that over the next year or two?
Thanks Alex. It’s, Erik. So I think if you take a look at what's happening on the non-U.S. product, as we said, January was record for us month of flows with a net $60 million. I think it would be it makes us incredibly optimistic about what is sort of out there the U.S. market on the retail side is enormous. You've seen that we've structured this product to be around qualified purchasers. And so it opens up the market to a tremendous volume of participants.
From a channel perspective, we're looking across all the channels to warehouses to our RIAs, other wealth management platforms. We think the acquisition of 361 really enhances our ability to distribute we have existing resources this just now nicely adds to it to the extent that we believe in the future that adding more resources will further the growth, we're certainly open minded to that. But I think the non-U.S. product is showing you a path to something that is very, very scalable in a market that we think is really clamoring for access to the private markets.
Great and of just the fee structure and may be if you sit down what kind of specific economics related to the retail product, kind of the blended fee rate, and as we think about investments, you guys need to make it into distribution. I guess how should we think about that for Hamilton Lane as a whole?
Well, from a fee structure perspective, this looks sort of similar to slightly better than what our specialized funds look like, the better part is slightly higher management fees and a deal-by-deal carry structure. So given the Evergreen nature, it doesn't lend itself to anything other than a deal-by-deal carry structure. And so we think the economics here are attractive to us. But also, I think when you look at the overall fee rates to the investor, we think it's a very, very attractive offering to the investor, relative to other products that are out there in the market. So we think that's a win-win.
In terms of other resources that are needed, we feel like as I said, the 361 acquisition, we think sort of fulfills a lot of the need today. But to the extent that we find that need changing in the future, we'll address it from an investment standpoint, no resources needed. These are they one of the other appeals to the clients here is that they are doing deals that are the same deals that are being done across the entirety of the Hamilton Lane platform. So we're not carving out unique transactions for this product that is very different than anything our institutional clients are looking at.
Great. Thanks very much.
Next question, we have Chris Kotowski from Oppenheimer & Company.
Good morning and thank you. I wonder if you can take us into the economics to Hamilton Lane from the SPAC a bit more that this is going to become a line of business. I think I saw in HLAHUs registration, that there are something like 12.5 million warrants. Is the economics to Hamilton Lane entirely from those warrants and how many of those to Hamilton Lane end up receiving?
So I think this is a question that's going to be best answered on future calls, as we are literally in the process of going through all of this with our auditors and accountants to figure out treatment. As you know, there is kind of an above the line and below the line component to this. And so we are just presently working through that. We wanted to frankl, get this back before we incurred any time and expense on the auditors and accounting firms.
So we now with this SPAC in hand, we've now turned our attention to that. We will figure that out over the next sort of coming weeks and months and we will be very transparent in our disclosure. To Andrea's point given that we view this as a business line going forward, we think it's going to be very important for us to clearly walk folks through the economics. So that, frankly, we're getting appropriate credit for that, as we envision raising a series of these. So I think that's going to be a topic that we will likely address in the coming call.
Okay, fair enough. And then secondly, I was a little confused by the retro fees because I know when we are going through your presentation earlier in the morning, kind of looking at the year-to-date retro fees in that slide and then backing out what we thought was in prior quarters, we came to a number of like $4.1 million for the current quarter. And I think Erik, you mentioned that there were $7.2 million in retro fees so you just square that circle.
Sure. So I think what you're seeing here is that in the script, we were -- I didn't kind of clearly tell you that given we had a closing post the quarter end, we are just showing you what the future retro fees are going to be from the Jan 31. But the retro fees are at the 7 level. And so then it's an addition to that what's coming from the January 31 retro -- closing that will result in additional retro fees.
The additional around 10 --
That's going to come in the next quarter, though. Correct and that is around $10 million.
Okay. All right. Thank you. That's it for me.
Next question, we have Rob Lee from KBW. Your line is open.
Hi, this is Jeff Drezner on for Rob. Question around comp expense and can give us some color how to think about that going forward?
Sure, Jeff. It's Erik. I'll take that. So I think what we've sort of said to folks is that we would really suggest that people look at kind of comp ratios and comp expenses on an annualized basis. The way we do some of our bonus accrual is not always linear. And you saw that this year. And so I think what we're sort of managing to is an overall comp ratio that is in line with what you have seen from us over the prior three years, I think this year will be no different from that. And how we actually grew quarter-to-quarter does vary a little bit, just given some of the accounting, but I think when you look at it annualized, I think you are going to see a very consistent picture.
Great, thanks. And I was wondering if we have an update on dry powder or commitments earning fees, any number on that?
Yes, it’s not a number that -- this is Erik again, not a number that we've disclosed. I mean, we've always said that it's the nature of the business. We have billions and billions of dollars of that, but not something that we have chosen to kind of delineate is a number fluctuates quarter-to-quarter. And I think, frankly, we've been a little reticent to I think be overly fixated on how quickly we're deploying capital. I think our clients trust the fact that we're sort of doing things that are in their best interest because we find the right opportunities, not because we're anxious to deploy that capital in order to start accruing fees.
Great. Thanks for taking my questions.
Next question, we have Adib Choudhury from William Blair. Your line is open.
Hey, good morning, guys. This is [indiscernible] on for Chris. Just a quick one, I apologies if you had already covered it, but could you discuss the driver for the sequential increase in non-operating income in the quarter?
Sure. It's Erik. I think really what you're seeing there is an unrealized gain on one of our strategic balance sheet investments. That's really driving the $6.2 million.
Great. Got it? And then one more just going back to the SPAC, could you -- to the extent you can discuss where you're at in the process right now in terms of developing an initial list of targets or starting to have conversations are meeting [GPs] or kind of more further along than that. Thanks.
Yes, we are building that target list and have been over the last two weeks, we are having an engaged and very in depth conversations on some of those targets. And we're progressing very effectively. Anticipate that we will be starting deal, reveal and deal structuring discussions relatively soon.
Great, thank you very much.
Last question, we have Adam Beatty from UBS. Your line is open.
Hi, morning, thank you for taking the question. Appreciate all the detail on the fees on the fund side. Last quarter, we talked a little bit about the separate account side. And tranching versus reups just wanted to get an update on how that dynamic played out in the most recent quarter and maybe the near-term outlook? Thank you.
Sure, Alex, it's Erik. So I think the dynamic is always in flux. I think what you saw in this quarter that was a little bit of an analogy. And an aberration was that you sort of saw that we had some meaningful amount of separate account capital going into specialized funds. And because we don't double dip on the fee, that was actually generating special fund revenue, not separate account revenue. So here you are sort of seeing what looked odd, which was -- you saw the assets sort of rising on the customer separate accounts, not directly in line with the revenue. And that's what's causing that discrepancy. Other than that, I would say reups dynamics continue to be strong, you sort of noted that we put in over 80% of those new flows were coming from existing investors. So we continue to see strong reup interest. And frankly, as the public markets continue to rise, think about that kind of swelling the denominator for these clients, and thus, they need to continue to allocate more into the asset class. And we're certainly seeing that dynamic at work right now.
Excellent, thank you. Also want to ask about the meaningful increase in the performance fee accrual and just get any color or detail around what might be driving that? Thanks.
Sure. It’s Erik. I will stick with that. So I think it's really twofold. I think one, it continues to be really, really good Hamilton Lane investment selection. We are building strong portfolios. I think that strong portfolios translates into strong fundraising, particularly in the product world where I think performances is more of a focus.
And the second thing is we're certainly getting the benefit of rising markets. So I think those two are really what's driving it. And then what you're also seeing and you heard from Atul’s comments, we're simply adding more and more accounts that have carry components. I think the interest in LPs, of having access and exposure to things like secondary and co-investments is rising. And so that just translates into more and more and more of your separate accounts, actually have transactional components and thus have a carried interest component. And that's resulting in more vehicles.
That's excellent. Thank you very much.
I am showing no further questions at this time. I will now turn it back to Erik Hirsch. Thank you.
Great. We appreciate everyone's time. We appreciate your interest. And we wish you well stay safe. Thank you.
Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you again for participating. You may now disconnect. Have a great day.