Hamilton Lane Lockup Expiration: A Solid Short Opportunity

Hamilton Lane Incorporated (Nasdaq Global Select: HLNE) Sell or Short Recommendation - Price Target of $20.00

Event Overview

August 28, 2017 concludes the 180-day lockup period on Hamilton Lane Inc. (NASDAQ Global Select: HLNE).

When the lockup period ends for HNLE, its pre-IPO shareholders, directors and executives will have the chance to sell their 39.5 million previously restricted shares.

 

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The potential for a sudden increase in stock available in the open market may cause a significant decrease in the price of Hamilton Lane shares.

Our firm’s research has shown significant price declines surrounding many IPO lockup expirations, particularly for firms like LAUR with such a large percentage of shares restricted.

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Currently HLNE trades in the $22.50 to $23.00 range, above its IPO price of $16, and higher than its first day closing price of $18.02 on March 1, 2017.

Business Overview: Global Private Market Investment Company

Hamilton Lane is an investment company that specializes in direct and fund of fund investments. The company offers the following services: separate accounts (customized to each individual client and structured as single client vehicles); specialized strategies (fund-of-funds, distribution management, co-investments, taft-hartley, secondaries); advisory relationships (including strategic portfolio planning, reporting, and monitoring, and due diligence); and analytics solutions. For direct investments, the firm invests in mid and late venture, mature companies, growth equity, distressed debt, turnarounds, bridge financing, mezzanine financing, and buyouts in middle market companies. For fund of fund investments, it invests in mezzanine, venture capital, private equity, turnaround, secondary investments, and special situation funds.

Currently, Hamilton Lane has approximately $40 billion of assets under management and approximately $292 billion of assets under advisement. The company was founded in 1991 and has over 290 employees, including more than 90 investment professionals, with offices in the United States and in London, Hong Kong, Rio de Janeiro, Seoul, Tel Aviv and Tokyo. It invests in private equity markets in North America, Latin America, United States, Western Europe, Middle East, Africa, United Kingdom, Asia, Japan, and Australia.

Financial Highlights

Hamilton Lane reported the following highlights for fiscal 2017, which ended on March 31, 2017:

• The company realized a record level of management and advisory fee revenue of approximately $173 million. This is an increase of approximately 10%.
• GAAP net income was $612,000 for the stub period of less than one month following the IPO.
• Fiscal 2017 GAAP EPS was $0.03, and fiscal 2017 non-GAAP EPS was $0.91.
• Non-GAAP EPS was based on approximately $48 million of non-GAAP net income and 52.8 million adjusted shares.
• The company announced a quarterly dividend of $0.175 per share.

For the first quarter of fiscal 2018, Hamilton Lane reported:

• First quarter earnings of $5.5 million
• Net income of a per-share basis of 30 cents. Earnings adjusted for non-recurring costs were 33 cents per share
• First quarter revenue reached $52.7 million

Management Team

CEO Mario Giannini, J.D. has served in his position since 2001. He has more than 24 years of operating, management and legal experience in the financial services industry. He was an Investment Professional at American Securities. Mr. Giannini was the President of Hamilton Lane Advisors, L.L.C. from 1998 to 2001. He served as an Executive Vice President and General Counsel at Industrial Valley Title Insurance Company from 1989 to 1992 and Deputy General Counsel at Fidelity Bank in Philadelphia from 1984 to 1989. He served as a Senior Attorney at Continental Illinois Bank from 1979 to 1983. Mr. Giannini holds a J.D. from Boston College, a Master of Law degree from the University of Virginia and a B.A. degree from California State University.

Chairman and Managing Director Hartley Rogers has significant experience in the financial services industry. His previous experience comes from positions at CSFB Equity Partners, aPriori Capital Partners, Morgan Stanley, Westbury Partners, and Metalmark Capital. Mr. Rogers holds an A.B. degree from Harvard College and an M.B.A. from Harvard Business School, where he was designated a Baker Scholar.

Competition: Goldman Sachs, Morgan Stanley, Charles Schwab

Hamilton Lane faces competition from a wide array of asset management companies, broker-dealers, commercial banks, insurance companies, and other financial institutions. Morningstar lists its top competitors as Goldman Sachs (GS), Morgan Stanley (MS), Charles Schwab (SCHW), S&P Global, and others.

Early Market Performance

Hamilton Lane’s IPO priced at $16 per share, at the midpoint of its expected price range of $15 to $17. The stock closed on the first day of trading at $18.02. Since then, the stock hit a low of $18.20 on April 4, but it has recovered and now trades in the $22 to $22.50 range. HLNE closed at $22.45 on Friday, August 11.

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Conclusion: Short HLNE Shares Now Prior to 8.28

In addition to major shareholder HL Management Investors, 9 individuals also own shares pre-IPO. If even a few of these major insiders choose to sell, they could overwhelm HLNE's share price; just 23% of shares are currently trading.

Given HLNE's strong IPO and early market performance, we believe insiders could be ready to take profits and see an enormous opportunity to short HLNE shares ahead of the event.