Good morning, ladies and gentlemen, and welcome to the Hamilton Lane Fiscal Third Quarter 2025 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct the question-and-answer session. [Operator Instructions] This call is being recorded on Tuesday, February 4, 2025. I would now like to turn the conference over to John Oh, Head of Shareholder Relations. Go ahead.

Thank you, Joanna. Good morning, and welcome to the Hamilton Lane Q3 fiscal 2025 earnings call. Today, I will be joined by Erik Hirsch, Co-Chief Executive Officer; and Jeff Armbrister, Chief Financial Officer. Earlier this morning, we issued a press release and slide presentation, which are available on our website. Before we discuss the quarter's results, we want to remind you that we will be making forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. These forward-looking statements do not guarantee future events or performance and are subject to risks and uncertainties that may cause our actual results to differ materially from those projected. For a discussion of these risks, please review the cautionary statements and risk factors included in the Hamilton Lane fiscal 2024 10-K and subsequent reports we file with the SEC. These forward-looking statements are made only as of today, and, except as required, we undertake no obligation to update or revise any of them. 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 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 of an offer to purchase interest in any of Hamilton Lane's products. Let's start with the highlights. Year-to-date through the third quarter of fiscal 2025, our management and advisory fee revenue grew by 18%, while our fee-related earnings grew by 21% versus the prior year period. This translated into GAAP EPS of $4.15 based on $160 million -- excuse me, $167 million of GAAP net income, and non-GAAP EPS of $3.82 based on $208 million of adjusted net income. We have also declared a dividend of $0.49 per share this quarter, which keeps us on track for the 10% increase over last fiscal year, equating to the targeted $1.96 per share for fiscal year 2025. With that, I'll now turn the call over to Erik.

Thank you, John, and good morning, everyone. Another very strong quarter for us. But before I cover the results, I'm going to spend a moment on culture. At Hamilton Lane, we talk a lot about culture. Why? Because we believe having a culture is essential to creating a successful firm. I find firms that never talk about culture either don't have one, or have one that isn't worth talking about. To be clear, we don't believe culture to be singular, nor do we believe there is a set recipe for success. But we do believe that creating a culture and maintaining it takes real work and focus at every level of the firm. So it is affirming when that culture is honored. I am pleased to share that, once again, Hamilton Lane has been recognized as a Best Place to Work in Money Management by Pension & Investments for the 13th consecutive year. The firm has been recognized every year since the award's creation in 2012. Notably, only one of five firms to receive the special honor and the only firm in all of private markets to achieve this distinction. So you ask as a shareholder, why do I care? Two reasons. One, our clients care. They want to associate with an organization they can be proud to call their partner and to work with people who love what they do. Two, our assets are our people. Attracting and retaining talent is essential to our business. Our culture and awards like this help us attract top talent and continue to expand our geographic footprint around the globe. Juan and I are extremely proud and thankful for all the Hamilton Laners who come to work every day serving our clients and continuing to build a tremendous firm. Let's move on now…

Thank you, Erik, and good morning, everyone. Year-to-date, for fiscal 2025, we've achieved strong growth in our business with management and advisory fees up 18% versus the prior year period. Our specialized funds revenue increased by $50.9 million or 28% compared to the prior year period. This was driven primarily by a $3.8 billion increase to fee-earning AUM in our Evergreen platform and $2 billion raised in our latest secondary fund over the last 12 months. Retro fees for the fiscal year were $20.7 million, primarily stemming from the final close of our most recent secondary fund versus $12.8 million from that same fund that held closes in the prior year period. As a reminder, investors that come into later closes during a fundraise pay retroactive fees dating back to the fund's first close. For the remainder of fiscal year 2025, our current direct equity funding market will be the primary driver of quarterly retro fees now that our secondary fund has finished fundraising. Our latest secondary fund represented our largest institutional fundraise and thus generated the largest amount of retro fees in our history during fiscal year 2024 and the first quarter of fiscal 2025. This is expected to have some impact on the year-over-year specialized funds revenue growth comparison going forward. Moving on to customized separate accounts, revenue increased $5.4 million or 6% compared to the prior year period due to the addition of new accounts, re-ups from existing clients and continued investment activity. Revenue from our reporting, monitoring, data and analytics offerings increased by $2.9 million compared to the prior year period. Lastly, the final component of our revenue is incentive fees. Year-to-date, incentive fees totaled $129 million and are up 163% relative to the prior year period. During the quarter, we generated strong incentive fees related…

Thank you. Ladies and gentlemen we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Ken Worthington at JPMorgan. Please go ahead.

Hi, good morning. Thanks for taking the question. I wanted to dig further into the greater adoption of fund and Evergreen product by your SMA customers. So maybe first, what is driving this portion? Is it simple as product breadth or features? Or is there something else that's migrating from one structure to the other? And given the fees are generally higher on the funds and the Evergreen side, are clients willing to pay the higher price for these funds? Or are they getting sort of SMA pricing when they transition from one structure to the other?

Thanks, Ken. It's Erik. Let me take that in pieces. I think to the first part of what's driving SMAs wanting to have some specialized fund exposure, I think that's as simple as an increased awareness of the benefits of secondaries and co-investing done well. You can see just from the fee selection on our current co-investment fund that investors are willing to pay more fee longer term in exchange for less fee early so that they have a more positive early IRR experience. And the secondary market is showing you that it's a great J-curve mitigator, it's a great diversifier, co-investment similar. Again, a huge portion of the co-investing volume that we do is coming to us fee free because we're providing a capital solution to the lead GP who's leading that transaction. So again, also a cost benefit to the customer and the diversification benefit to the customer. That's the driver. In terms of institutional adoption on Evergreen, it's early, but I think we should fully expect that we're going to see that as a tool that institutional investors will utilize over time. Some people will value the more frequent valuation dates. Some people will value the liquidity mechanisms. Some people will value the type of investing that's occurring in those vehicles. And so today, they are paying a higher rate. But I think we're all rational here, and we understand that over time, it's not likely that we're going to see no fee compression in the Evergreen space. We will. We've seen that certainly in the public equity markets, and I think ours will be no different. How quickly that occurs and what's the impact is all sort of to be determined. But the volume and simple scale of that business that's sort of -- that's sitting out there is massive. And so I think certainly from our end, we're thinking about very large scale even if that comes over time at a slightly reduced fee rate, but I think offering more choice to both the retail customer and the institutional customer is the key here. That's what's happening. And I think we'll sort of watch as this whole sector matures.

Great. Thank you very much.

The next question comes from Alex Blostein at Goldman Sachs. Please go ahead.

Hey, good morning. Thank you for taking time again. I was hoping we can dig into the wealth dynamics and the update you guys provided on Evergreen funds were really helpful. Is it possible to break down the trends that you guys have seen over the last couple of months between gross sales and gross redemptions? And then more importantly, I guess, when you think about the gross sales dynamic in the channels and in the products where you guys competing in most aggressively, how do you envision the competitive dynamic evolving? We've seen a number of other firms coming out with secondary products and then private equity dedicated product as well. So it feels like it's getting a little more crowded. I definitely understand that the TAM is large, but curious how you see that competitive set evolve?

Sure, Alex. Erik, so happy to take that. I think there's no question that this is the area of focus for a whole multitude of firms and franchises that are all eager to launch products are launching products and so there's absolutely more choice on the shelf today. So what does that mean? I think, for us, not unexpected. I don't think it means that everyone is going to be uniformly successful. I think scale, brand, head start, technology all matter immensely. We feel good about where we are. And frankly, as we look at some of the dynamics we see going forward, we feel even better about how we're positioned for some of the inevitable changes that we see coming. I think the amount of time and effort we spent talking about tokenization and different strategic partnerships, I think, should be a sort of a foreshadowing of where we see some of the retail movement beginning to go. Our view is that retail investors are going to want sort of simple, faster, cheaper, easier, et cetera. And we think the token world blockchain really offers that. And so again, we're playing a long race here, and so there's a lot of education to be done. But we think establishing those partnerships today, locking in strategic relationships, the fact that we're already sort of nipping at a $10 billion platform puts us ahead of a whole lot of people. But it's going to be competitive. We fully expect that. We're prepared to compete. We expect to compete. But I don't think you're hearing from us or, frankly, others that are sober that this is going to be easy and that we're not -- we're all going to have to just sort of work harder. So that's what I would sort…

Great. Thank you very much.

Thank you. [Operator Instructions] The next question is from Michael Cyprys at Morgan Stanley. Please go ahead.

Hey, good morning. Thank you for taking the question. So you guys continue to put up strong growth across the Evergreen fund complex, and yet you've also been able to navigate the third-party commission expenses nicely with notable margin expansion year-on-year. So maybe you could talk a little bit about some of the steps that you're taking from an expense efficiency standpoint to be able to drive the margin expansion, absorbing the third-party commission costs there? How should we think about as well, more broadly, incremental margins on the Evergreen products? And as we think about the FRE margin profile for Hamilton Lane, how should we expect that to trend as we look out over the next year or two? Is it more continued expansion from here? Or is it should we thinking more stability?

Mike, it's Erik. Thanks for the question. I think it's more stability. I think you sort of alluded to it. I think given the growth that we're seeing, with a lot of that growth coming from the wires and the fact that, in that first year, fund flows to us are definitely not margin accretive. The fact that we're holding margin, I think, is noteworthy. Team here has done a very, very good job on that. I think we're seeing two cost benefits. One, we've invested a lot of balance sheet capital very successfully into technology partnerships, and we're really reaping the benefit of that. So whether that's data ingestion or data management or analytic systems, tasks that would have historically been done by people, we are increasingly benefiting from those tasks being done faster, more efficiently by technology. The second thing is as the business continues to scale and mature, we're also just reexamining insurance, vendor relationships, all the things that you would expect a maturing business to look at as ways to sort of gain some cost efficiency. And again, kudos to the team for doing that and showing good financial management. And so I think the combo of that is being able and has been able to kind of offset what we've been seeing on sort of the rising commission fees.

Thank you.

[Operator Instructions] Next question comes from Mike Brown at Wells Fargo. Please go ahead.

Thank you. Wanted to just clarify your comments on the equity-based comp. Can you just maybe circle back on that and back a little bit? What's the -- what should we expect maybe for the back half of this year and then into next year in terms of growth year-over-year? And also, when we think about the shares outstanding, any view on how that could traject from here on a kind of a year-over-year basis as well? Thank you.

Yeah, Mike, this is Jeff. Just on the equity-based comp expense, as we've mentioned on prior calls, we expect that to be at a run rate of about $30 million per year. This quarter is the first quarter that you had that fully impacting the expense and that's about a $7 million increase in the quarter. So 7 times 4, 28, that's where we're coming up with the about $30 million per year impact on the equity-based comp.

And just, Mike, it's Erik, as a reminder, so you've got two pieces of equity comp. You had an award to a variety of employees that was done in 2022. And then you had a more recent award done to the two co-CEOs in sort of taking over the new role. Our board set what we think is very aggressive stock targets. If you think about where the stock was for -- at the time of both of those awards, it was sort of in the sub $80 a share range. And there were three target triggers. One was at $150, one was at $190 a share, and then the last target was $230 a share. So I think significant alignment with shareholders, a big go-get for management and the team on increasing shareholder value and aligning incentives with that. So to Jeff's point, we crossed over the $150 and $190 mark this year. Again, both needed to be a kind of a 20-day volume-weighted average price. They both were and so that's there. The shares are not in employees' hands because there was also a clause that has sort of x number of years of service, which has not been met. So we continue to have a good retention tool there. And I think sort of owners of that are continuing to be very focused on that last part of the target, which was the $230 a share.

Erik, can you just maybe clarify on the incremental equity-based comp? Is that an incremental $30 million to kind of where you were running at? Or is that kind of an all-in number?

Well, I think what Jeff said was, you've seen the full amount in one quarter. And so that -- the amount that you saw in this current quarter will be similar to what you will see in future quarters for the next five years.

Okay. Thank you for that. Is there ever any discussion internally about perhaps changing the way that you show your equity base comp in your adjusted financials and a number of your peers with actually kind of exclude that now? And also investors of course, or kind of added back or kind of look at it under both lenses, but is that something you guys ever talk about internally so that you might consider?

I think we’re certainly open to it. This is again new for us having just kind of crossed over this quarter and are beginning to deal with that. So we would certainly welcome feedback on what we think analysts and shareholders find to be most beneficial and helpful.

Okay, great. Thank you.

Thank you. The next question comes from Aidan Hall at KBW. Please go ahead.

Great. Thanks for taking my question. Maybe just on the base comp, excluding the equity-based comp and kind of the incentive fee-related compensation. Did see a step down there, and nice kind of defending the margin with the ramp in the equity-based comp. And I heard your comments about just like utilizing technology to kind of change some of the historically manual tasks at the firm, but is this level of like that base comp, the right way to think about kind of run rate from here? Are there like changes that you guys have implemented more recently to kind of see those changes? Or is that not a fair extrapolation over quarter-over-quarter?

Sure. It's Erik. I think there's a couple of pieces here. I think we have been certainly focused on margin protection. We had the benefit this year of -- obviously, from an employee standpoint, there's been more incentive comp flowing through the business. Obviously, the equity incentive piece of sort of reaching those targets. So I think, as management, we're thinking about comp in a multi-lever perspective and looking at sort of pulling different levers at different times to make sure that we're achieving the end result, which is having happy and retained employees. And so it's -- we have the luxury of having multiple levers in our hands that we can adjust to sort of achieve that ultimate goal. So I wouldn't necessarily extrapolate all of this out, with the exception of the carried interest portion of the comp. That sort of flow-through of basically seeing about 48% or so of that flowing to employees. That ratio has stayed static for years and years and years. So that part, you can extrapolate. Our decision around what we do with the bonus pool can vary year-to-year. And so that one is not one that I would say, well, now I have some sort of a formula. I think what you can look at is the total comp ratio that has remained very, very steady frankly, since we've been public and if you had looked back years prior to that as well.

Appreciate the thoughts.

The next question is a follow-up from Alex Blostein at Goldman Sachs. Please go ahead.

Hi, thanks for taking the follow up. Erik, you actually kind of answered the second part of my question. But I guess what I'm trying to get to is, compensation is ultimately fungible across all of these firms you guys included and people play around with geography, however they do it. But when I think about what you're ultimately trying to manage the business to, is it fair to think about like kind of total operating income margin as opposed to FRE margin, especially given this dynamic with equity-based comp, and in quarters and years where you're going to have a lot of incentive compensation that could sort of subsidize some of the FR ecom. But at the end of the day, it's the total operating income margin that we should be thinking about? And if that's the case, should we be thinking about stability in that margin as well? Or is there room for total operating income margin to improve?

So thanks for the follow-up, Alex, it's Erik, still. I think that is the right way to think about it in terms of also sort of stability in the operating margin. But I think if I sort of think about margin from whether it's FRE or operating margin over a longer time period, I certainly see levers for us to pull to continue to have some amount of margin expansion. I mean we have had that since going public. And I don't think that big picture, longer-term macro dynamic is changing. I think today, we're kind of in the eye of a bit of a storm here where certainly meaningful for us increase in equity-based comp and expense around the commissions and so the business sort of, I'll use kind of air quotes and say kind of weathering that with a stable margin, I think, goes back to good job by management to continue to sort of push through all of that. But that dynamic will change over time. The amount of flows that are coming from the wire relative to the installed base will not be as dramatic as it is here in the earlier years of being on those platforms. So the commission impact for the totality of the business will reduce over time. We're still in kind of the very early innings of this. Now by the way, if it didn't reduce over time, that would be a great thing as well. But I think as we just get bigger, bigger, bigger, I think that's probably unrealistic. But again, that's a first-class problem. And the equity comp impact is not a forever issue. And so again, we're sort of sitting here with a moment in time of dealing with both of those simultaneously.

That’s prefect. Thank you.

There are no further questions. I will turn the call back over to Erik Hirsch for closing comments.

I'll reiterate. We thought a terrific quarter. Juan and I are extremely proud of the firm for the hard work, the effort. And I go back to where I started, culture matters. We think what we're building here is special. When I look at the number of people applying for open positions, it's never been higher than it is today. People want to be part of this team. We're thrilled with that. We think what we have in front of us is exciting, a lot of growth opportunity. We appreciate your time. We appreciate the support, and thanks for the call today.

Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines. Goodbye.