Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the Hamilton Lane Incorporated Second Quarter Fiscal Year 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker today, John Oh, Vice President, Investor Relations. Please go ahead.

Thank you, Julie. Good morning, and welcome to the Hamilton Lane Q2 Fiscal 2021 Earnings Call. Today, I will be joined virtually by Mario Giannini, CEO; Erik Hirsch, Vice Chairman; and Atul Varma, CFO. 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 a discussion of these risks, please review the risk factors included in the Hamilton Lane's fiscal 2020 10-K and subsequent reports we file 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 public Investor Relations section of the Hamilton Lane website. Our detailed financial results will be made available when our 10-Q is filed. Please note that nothing on this call represents an offer to sell or a solicitation to purchase interest in any of Hamilton Lane's products. Beginning on Slide 3. Year-to-date, our management and advisory fee revenue grew by nearly 12%, while our fee-related earnings grew by over 14% versus the prior year period. This translated into year-to-date GAAP EPS of $0.79 based on $25.1 million of GAAP net income and non-GAAP EPS of $0.91 based on $48.8 million of adjusted net income. We have also declared a dividend of $0.3125 per share this quarter, which keeps us on track with a 13.6% increase over 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 Mario.

Thanks, John, and good morning. We had another strong quarter of growth and are continue to be impressed by and proud of our team that have tremendous efforts in meeting and exceeding needs of our clients, all while juggling their own daily lives. While we continue to operate virtually across many of our global locations, we are starting to see some return to normal in several of our offices outside the U.S. is imported in the office and in-person meetings with clients and prospects. Across the firm, productivity and output remains strong, employee engagement is high, and we continue to remain heavily at our strong technology backbone, both to keep us connected and to service our clients. This has all resulted in continued growth and support from both new and existing clients. I'll shift gears now and turn to an update on our new headquarters build and highlight a new office was open in Asia. A quick reminder regarding our new headquarters. We assigned a 17-year lease to occupy approximately 130,000 square feet in a newly constructed building located in a Subvert Philadelphia. The square footage nearly doubles our current footprint. And while we envision growing into the space over time, in the near term, the additional footprint allows us to provide a safe and socially distant safe environment for our employees. And to the extent we find ourselves with extra space we wish to sublet [indiscernible]. Construction continues to progress well, and we anticipate to relocate in the new space in the first half of 2021. In Asia, we've opened a new office in Singapore. This further expands our Asian presence and puts us closer to investors and investment opportunities in that region. I'd also like to speak about a few recognitions the firm recently received. I highlight that…

Thank you, Mario, and good morning. 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 $3.2 billion or nearly 9%, stemming from positive fund flows from across both our specialized funds and our customized separate accounts. Taken separately, nearly $1.7 billion of net fee-earning AUM came from our customized separate accounts. And over the same time period, $1.5 billion came from our specialized funds. Growth in these 2 segments continues to be driven by 4 key components: one, re-ups 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 is that our fee rates continue to remain steady. Moving to Slide 6. Fee-earning AUM from our customized separate accounts stood at $24.6 billion, growing approximately 7% over the past 12 months. We continue to see the growth come in 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 re-ups 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 reps, we continue to expand our client base by winning and adding brand-new relationships, which, in turn, provide a growing base for future re-up opportunities.…

Thank you, Erik, and good morning, everyone. Slide 8 of the presentation shows the financial highlights for the first half fiscal 2021. We continue to see solid growth in our business with management and advisory fee up nearly 12% versus the prior year period. Our specialized funds revenue increased $10 million or 19% compared to the prior year period, driven by almost $1.4 billion in fee-earning AUM added from our latest secretary fund between periods. We recognized $6.1 million of retro fees from the secondary fund in the current year period compared to $2.8 million from our latest co-investment fund in the prior year period. As many of you are likely aware, investors that come into later closes of the fund raise for many of our products pay retroactive fees dating back to the fund's first close. Therefore, you typically see a spike in management fee-related to that fund for the quarter in which subsequent closings occur. Revenue from our customized separate accounts increased approximately $2.9 million compared to the prior year period due to re-up from existing clients and the addition of several new clients. Revenue from our advisory and reporting offerings increased approximately $2.3 million compared to the prior year period. The final component of our revenue is incentive fees. Incentive fees for the year-to-date period were $20.5 million. This fiscal year -- this fiscal quarter saw strong realization activity from the second co-investment fund that materially contributed to the quarter carry total. That is a 2008 vintage fund that has performed well with a 2.5 multi prolonged realized deals contributing over $80 million in realized carry since 2018 and over $20 million in unrealized carry remaining. We remain a very diversified carry story with now over 60 vehicles in a carry position that are ultimately backed by…

[Operator Instructions] Your first question comes from the line of Ken Worthington with JP Morgan.

If we look at net sales, commitments less distributions, September was a slower quarter. Commitments looked like they were in the range of historical levels, but distributions looked elevated. So what is the outlook for distributions? And maybe could you walk through how you're thinking about the different drivers, realizations versus step-downs versus others in the fund and separate account businesses? And then if distributions are going to remain at this level, can you talk about the opportunity to drive better contributions and maybe like an outlook or a pipeline, particularly in separate accounts on the contribution side?

Ken, thanks. It's Erik. I'll take that. As we said in prior calls, some of this is really just type related, particularly around the separate account side. So on the separate account side, as you know, we're in a tranching mode. And so we had seen some tranches that expire, and we don't always have exactly perfect matches for the new tranche to come online. But the other driver on the distributions in this time period is that we have had, and secondary would be an example. Some of those funds that are now at that kind of 12-year time period are basically rolling off to be non-fee earning. And so it is a combination, as you know, there's really 3 things: aging of the asset; two, what's happening with actual distributions; and three, the timing mismatches between re-ups and tranches expiring. So we would continue to point to growth continues to look strong from our end, and we think some of this just becomes timing noise.

Okay. Is there any outlook? So on the tranches expiring, you guys have good visibility into that. If we look at over the next couple of quarters, are there enough tranches expiring where we're likely to remain in this $1 billion-plus distribution quarters? Or is that sort of going to burn itself out and look to moderate? Or are you just unclear?

It's a little unclear, again, partly because the liquidity is obviously not under our control. So you can look at the aging of the assets, but what we're seeing in terms of what we would expect to see from a pure liquidity point is a bit outside of our control.

Okay. And then maybe a little one. The new fee structure in the co-invest fund, do you think that allows you to make that fund bigger than would otherwise be the case and attract more investors? Or was this sort of something that you needed to do to just sort of reach your kind of pre-existing targets?

I think it's too early to tell. So I think the reason for the change was, as we said, I think, really just being responsive to what investors want. I think what we're finding is that people like choice. And I think what we provided them here was a good creative solution depending on what you're more focused on. Are you more focused on kind of upfront fees or more back-ended fees. And so I think putting that choice, I think, to us, innovative, strong and forward thinking. In terms of timing, remember, we've got 18 months from the date of the first close to complete the fundraising. So we would say coming out of the gate with what felt like a very strong first close, particularly as noted, since this was all kind of done post pandemic, and we've got a long runway in front of us here from a time perspective. So I think we'll continue to provide updates, but early innings here.

And your next question comes from the line of Michael Cyprys with Morgan Stanley.

If we look at the fee-related revenues are up around 12% year-on-year just for the quarter versus a year ago, while the fuel related expenses are up around 8% or so the earnings. So it looks like you guys have about 400 basis points positive operating leverage there. I'm just curious how you guys would characterize that sort of spread there, arguably, you're getting a lift from the travel side? Just trying to think through, maybe you can provide some color on where do you see that gap normalizing between the revenue growth versus the expense growth on the fee-related side? And any sort of quantification around the benefit or uplift you guys are seeing on the expense side from the environment that we're in today?

Yes. Mike, it's Erik. So I think as we noted, I mean, all the things you pointed to on the G&A side have been true. I think it's really hard to forecast out. So while we're seeing return to normal or at least more normal in some parts outside the U.S., we have offices that are open businesses, again, returning to a little bit more of a normal state. We're also not seeing big events to take part of our G&A. Aside from the travel, conferences, hosting events, et cetera. I think it's just too early to tell whether that truly returns to what it was or whether those numbers stay lower. The rent thing we obviously covered. So we think this is -- G&A is going to be rising as that rent continues to come online. So there's no surprise there. I think we've been telegraphing that very clearly. But I think on the variability on G&A that's really COVID related, I think too early to tell what a new return to normal looks like.

Okay. And just maybe a follow-up question. You guys recently raised an impact fund, I think, maybe it was last quarter or the prior quarter. So maybe just on the commingled specialized fund side. Just curious what sort of new funds or strategies could be making sense to bring to market as you look out over the next couple of years as you think about the light space that's out there just in terms of other sectors or sub asset classes within the private markets? How are you approaching that? How do you think through prioritizing that versus other initiatives?

Yes. It certainly is a priority for us. I mean I think we said in the past that we view ourselves as a relatively young and small player in the commingled product side. And we have aspirations to get that s to be much bigger. You can see that a big chunk of the current growth is being driven by us just improving and expanding the size of the current platforms that we've had. But as you know, there's a lot of white space out there in the product market. I think we've also been careful, as you've seen us to not sort of telegraph where we're going to make sure that we're kind of maintaining competitive advantages. So I think on the new funds, just like on impact, you all are going to hear about them once we've actually had a closing under our belt and that the product is already launched as opposed to us proactively telling the market what we're about to go think about raising. But we think a lot of white space, a lot of room to grow there.

And your next question comes from the line of Alexander Blostein with Goldman Sachs.

I wanted to follow-up on the pricing structure change that you discussed a little bit earlier. So I guess the question is why now, the J-curve mitigation efforts kind of well understood, and I feel like that was always part of the picture. So curious to see sort of why is this happening now? Are you seeing more explicit pressure from LPs on making those kind of changes to help them mitigate J-curve dynamics. Do you see that more as a Hamilton Lane dynamic? Or is that more of an industry phenomenon that's starting to unfold? And I guess, lastly, do you think we could see a similar structure spillover into other vehicles outside of the [indiscernible]? So could we see kind of direct private equity or something like that or some of the other funds follow a similar pattern from here?

Alex, it's Mario. It's not -- I wouldn't call it so much a pressure question as it is a question of you have investors that have different goals in the market. And so you try to reach as many investors as you can. As Erik mentioned, you have a number of investors that, and as you mentioned, are very J-curve sensitive. And so they much prefer the lower upfront fees, but our client pays the same relatives, if you will, over the life of it is more back ended. And you have others that are indifferent to that and just want to look at what works for them. I think for us, it's like a question of feeling pressure and saying we have to do this as it is a question and saying, what is the market asking for, what does it want. And that's why we've done it. And why now, I think because as the asset class is in sure, investors have said I have choices both in how I invest, and I want to have choices in the price I'm paying for those investments. So I think it's just a question of the maturity of the asset class. As for other products or other services that may have that kind of choice. I don't know that you can say that this one is fairly clear because people look at the co-investment to [indiscernible]. So I think it was a pressure for an issue for investors around that. But I don't know that I look at it and say, oh, this means that all these other products are now going to go to that. I wouldn't draw that conclusion.

Got it. Great. And a quick modeling follow-up. It looks like the incentive comp rate in the quarter or the comp related to increased incentive fees rather that came in a little bit better than expected. So I'm just curious to get an update of how you guys are thinking about compensation and on carry related from here, if we were to see maybe a bit of a pickup on the utilization front?

Alex, it's Atul. I'll take that. So as you saw in the quarter, the carry came in pretty strong, and that drove the compensation up for the quarter. So if you think about there's -- from quarter-to-quarter, it may bounce around a little bit based on business performance. Erik mentioned earlier in the call that we continue to hire. We're filling growth mode. So I think quarter-to-quarter may now round a little bit, but when we get to the end of the year and you look back, I think it will -- you'll see the story is going to be very consistent, which is that our margins are stable and moving up into the right over a period of time.

And your next question comes from the line of Robert Lee with KBW.

Most my questions were asked, but just maybe a real quick one. And I apologize, I think you mentioned it, but what were the the rental fees in the quarter? I think I heard $2.9 million. I don't know who refer to just the secondary fund or maybe other mutual fees.

Yes. The $2.9 million, Rob, it's Erik, was result of the secondary fund, and that was really the primary driver of any retro fees.

Okay. And great. And then on the -- maybe back to the direct equities fund, I just want to make sure I got in detail. So when you had the first close and basically 18 months from the first close is fundraising. The current expectation is that's not a turn on, where I was at sometime in the first calendar quarter. The announces are going to fund raising after that. I just want to make sure I'm thinking of that correct.

Sure, Rob, it's Erik again. I'll take that. So what we said here is we had the first close on over $300 million. We don't turn it live until we actually finish investing the prior, which is the current fund. Based on pipeline opportunities, our expectation is that the new fund will go live in January of 2021 assuming that, again, the pipeline, everything else holds. The fundraising is 18 months from the date of the first close and the first close took place in October of this year.

Okay. Okay. Great. And maybe just one of the kind of bigger picture environment. I think you kind of pushed into some front. But I've seen showing earnings from some of the, I guess, primary firms and what not. Kind of got a sense on maybe the realization in that it was starting up confronted or there some more M&A or what having are you seeing that same anymore employ base cost or your ops? Or that you kind of touched on maybe it at as or kind of your general sense of on that?

Rob, it's Mario. I think probably it's action and out, but I think what you're asking is whether we're seeing M&A increase, whether we're seeing deal activity increasing? Is that what you're asking?

It was mainly on the realization side. It seems like some of the primary firms were more optimistic perhaps that they're seeing more potential for selling asset IPOs as well as kind of deploying yet.

Yes. I would say there are 2 pieces to that. I think as of last week, we expected more realization activity because of a belief that taxes in the United States would increase since like people wanted to get deals done before year-end. If the election results, unclear whether there will be as big a push for higher taxes. So depending on how that shakes out, you will see whether activity increases solely for that reason. I suspect deals that are in process will continue that they have been caused by that. I think just in general, I think what you're hearing from -- from us is markets are strong and exit activity is good. And so certainly relative to earlier in the year, we've seen deal activity increasing across all geographies and across most sectors. So I don't unless we tell me that markets are going to correct significantly, I would expect that the activity in equity.

Our next question comes from the line of Chris Shutler with William Blair.

How much of Hamilton Lane's fee-paying AUM would you classify today as direct investing or co investments? And you expect that percentage to grow over time as a percentage of the total mix? And does that have any impact on how we think about comp expense trending over time?

Sure. It's Erik. I'll take that. We actually haven't broken out the portion of that. But in the total AUM it's a relatively small amount. I mean, you sort of saw what the prior fund was for our last co-investment fund, which was sub-$2 billion. And so while we include separate accounts with that activity, again, in context to total AUM, it makes up a smaller portion. That said, it's also a very fast-growing portion of the market as more investors want access to that kind of direct equity opportunities. And so to the extent that, that will certainly bring in more carry components. And then with that, the incentive compensation will rise alongside of that.

Got it. Okay. And some of your competitors, newly publicly traded competitors have disclosed a committed, not yet fee-paying AUM number. Is that something that you can provide or plan to provide going forward?

Yes. Good question. It's Erik again. At this point, we really don't plan on providing that. I think for a few -- I think a few perspectives there. I think while we have seen those numbers put out as a notion of, hey, growth already built in, the reality is that, that's just normal in our industry. So we all have that to some extent. I think the reason for us is not wanting to sort of overly focus on that. Again, it's not new, it's not novel to the industry. It's just part of the way that a number of contracts are structured. Is because I think from the client's perspective, it sort of sounds more like, hey, we can't wait to spend this, and we'll spend this as fast as possible, we start getting paid on that. That's just never been our mindset. It's not our orientation. And so I think from our perspective, we have it. We have a lot of it, but it's not only we plan on breaking out at this point.

Got it. Okay. And then lastly, just geographically, can you remind us how much of your your assets today are U.S. versus non-U.S. clients? And any updates on compare kind of the flows are coming from or any trend that you see?

Sure. It's Erik. I'll stick with that. We said in the past that the business is essentially kind of a 60-40 business, 60% North America, 40% not. It certainly moves around. But in general, that's a pretty good kind of guesstimation of where things stand at any point in time. And that ratio has been steady since we went public. So despite, I think, a lot of talk about the emerging markets being growth areas, and they certainly are. What this also tells you is that we're still seeing an awful lot of growth coming out of the United States. As well as coming out of Europe. So our ratio has been fairly static, and we've been experiencing growth across both developed and non developed markets.

And your next question comes from the line of Michael Cyprys of Morgan Stanley.

I just wanted to circle back on the credit fund strategy that you have. I was hoping you could talk a little bit about your approach to investing that capital, how you approach building a diversified portfolio there? Maybe you can give us a flavor of the types of investments that you're making?

Sure. Mike, it's Erik. I'll stick with that. So the nice thing about that product is that it's opportunistic credit. We've raised that as an opportunistic vehicle, which allows us to be tactical and to toggle, depending on market conditions. So today, we're focusing on performing credit because the markets are very healthy. To the extent that you saw dislocation in the market, the advantage of that vehicle is that we could immediately move the strategy to focus on nonperforming credit. So investors there have really entrusted us with getting them what we think are the best credit opportunities in the market, whatever that is kind of presently serving up.

Great. And maybe just last question for me. You mentioned at the start of the call that you guys had opened an office in Singapore. I was just hoping you could talk through your thought process around why opening an office there. Why now? Any thoughts on staffing? How many folks you have over there or expect to have over time? And what other geographic regions could make sense? And how do you approach that?

Sure. Mike, it's Mario. In terms of Singapore, again, it's recognition of an expanding region presence, as you look at the offices we've opened is where we have clients. It's where there are investments, as you probably know, Singapore. Certainly, on the Asian venture capital side is one of the organizations. A lot of channel partners are there. And on the fund aging side, obviously, a robust private market environment. So that's really the core reason in terms of the number of people there. We're able to start fairly small, both investment and client-oriented people. In terms of other locations, again, it really depends on where the client and the investment activity face us and where we think it makes sense to put people there. As you can imagine, opening an office both from a people's perspective and just logistics, it is something that we can all growing. So I don't if there's anything planned today that we know or we're going to open an office and expectation and it's again, as I said no question of where the client and investment opportunities to create a critical mass to have one.

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

Thank you very much. I just want to, again, thank everyone for taking the time to join us, and I hope everyone stays well. Take care.

This concludes today's conference call. You may now disconnect.