Expanding Into Evergreen Funds And Blockchain Solutions Will Strengthen Future Prospects

Key Takeaways

• Strategic growth in specialized funds and geographic expansion drives increased revenue and earnings potential through higher fee rates and expanded product lines.
  
• Retail growth via evergreen funds and blockchain partnerships with Republic bolster future revenue and AUM, despite rising commission costs.
  
• Increased competition and rising costs in various areas could compress margins and impact Hamilton Lane's financial performance and revenue growth.

Catalysts

A private equity and venture capital firm specializing in early venture, emerging growth, turnaround, middle market, mature, mid-venture, bridge, buyout, distressed/vulture, loan, mezzanine in growth capital companies.

• Hamilton Lane's management and advisory fee revenue grew by 18% and fee-related earnings increased by 21% year-over-year, driven by growth in specialized funds and customized separate accounts. This trend expects to positively impact future revenue and earnings as they continue to expand their product lines and geographies.
  
• The company has successfully increased its fee-earning AUM towards higher fee rate specialized funds, such as evergreen products. This shift should enhance their revenue and net margins owing to the higher fee rates associated with these funds.
  
• Hamilton Lane is expanding its footprint in retail evergreen funds, with AUM growth of nearly 66% in calendar 2024. Continued strong performance and distribution expansion positions them to sustain growth, potentially boosting future revenue streams.
  
• Ongoing strategic partnerships, like the one with Republic for blockchain solutions, aim to provide greater access to private markets for retail investors, which could lead to increased AUM and potentially higher revenue as these digital solutions are rolled out.
  
• Hamilton Lane's focus on managing costs through efficiency and technology adoption, alongside maintained healthy management fee profitability, supports stable or potentially improved net margins, even amidst rising commission expenses.

Hamilton Lane Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hamilton Lane's revenue will grow by 10.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 31.1% today to 40.2% in 3 years time.
• Analysts expect earnings to reach $376.7 million (and earnings per share of $6.24) by about March 2028, up from $215.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.2x on those 2028 earnings, up from 28.1x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 3.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.18%, as per the Simply Wall St company report.

Hamilton Lane Future Earnings Per Share Growth

Risks

• The increased competition in the evergreen products and private equity space could lead to fee compression, impacting future fee-related revenues and net margins.
  
• The reliance on continued growth from third-party wirehouses comes with revenue-cost burdens, given the upfront commission expenses to distribute evergreen products, potentially affecting margin stability and growth.
  
• Fluctuations and seasonality in investor flows into evergreen funds can cause variability in fee-earning assets, which might impact revenue growth if the consistency of investment inflows is not maintained.
  
• The significant increase in equity-based compensation affects the firm's expenses and could potentially squeeze profit margins if not managed carefully.
  
• The increasing expenses on technology partnerships and infrastructure, while beneficial for long-term growth, could impact short-term earnings and financial performance metrics.

Valuation

• The analysts have a consensus price target of $171.571 for Hamilton Lane based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $190.0, and the most bearish reporting a price target of just $139.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $938.0 million, earnings will come to $376.7 million, and it would be trading on a PE ratio of 34.2x, assuming you use a discount rate of 7.2%.
• Given the current share price of $144.74, the analyst price target of $171.57 is 15.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.