Hamilton Lane INC 10-K

Item 8. Financial Statements and Supplementary Data Index Page Reports of Independent Registered Public Accounting Firm 92 Consolidated Balance Sheets 96 Consolidated Statements of Income 97 Consolidated Statements of Comprehensive Income 98 Consolidated Statements of Stockholders' Equity 99 Consolidated Statements of Cash Flows 101 Notes to Consolidated Financial Statements 103 91 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Hamilton Lane Incorporated Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Hamilton Lane Incorporated (the Company) as of March 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended March 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at March 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated May 27, 2021 expressed an unqualified opinion thereon. Adoption of ASU No. 2016-02 As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in the year ending March 31, 2020 due to the adoption of ASU No. 2016-02, Leases (Topic 842), and the related amendments. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 92 Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Recognition of Incentive Fee Revenue Description of the Matter For the year ended March 31, 2021, the Company recognized $52.2 million of incentive fee revenue. As explained in Note 2 to the consolidated financial statements, the Company considers incentive fees from specialized funds and customized separate accounts to be variable consideration which is constrained and recognized when it is probable that a significant reversal in the cumulative amount of incentive fee revenue will not occur. As incentive fees are generally payable after all contributed capital and the preferred return thereon has been distributed to investors, the Company estimates the amount and probability of additional future capital contributions that it will call from investors in specialized funds and customized separate accounts related to unfunded commitments or follow on investment opportunities in investees. These estimates could impact the probability of a significant reversal in the cumulative amount of incentive fee revenue occurring. Auditing management’s assessment of whether it is probable that a significant reversal in the cumulative amount of incentive fee revenue will not occur is subjective and requires significant judgment, as the estimates described above are affected by future economic, market and investee-specific conditions. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls that address the risk of material misstatement relating to the recognition of incentive fee revenue. This included controls over management’s review of the estimates of the amount and probability of additional future capital contributions from investors in specialized funds and customized separate accounts. To test the recognition of incentive fee revenue, our audit procedures included, among others, evaluating the Company’s estimates of the amount and probability of additional future capital contributions described above. For example, we compared management’s assumptions about the probability that the investees will need additional capital to historical trends and financial information available from the investees, evaluated the change in the assumptions from the prior year and assessed the historical accuracy of management’s assumptions. We performed sensitivity analyses of management’s estimate of additional future capital contributions to evaluate the changes in the amount of incentive fee revenue recognized that would result from changes in the assumptions. In addition, we searched for and evaluated information that corroborated or contradicted management’s assumptions. 93 Recognition of Net Deferred Tax Asset from Equity Offering and Unit Exchange Description of the Matter As further discussed in Note 11 to the consolidated financial statements, in connection with the Company’s equity offerings and unit exchanges during the current year (the “Transactions”), the Company recorded a net deferred tax asset of $121.1 million. As further discussed in Note 2 to the consolidated financial statements, the resulting basis differences arising from the Transactions represent a temporary difference for which the Company records a deferred tax asset if it is more likely than not the deferred tax asset will be realized. Realization of this deferred tax asset is dependent upon, among other things, the future tax deductions of tax basis step-ups related to the Transactions. Auditing the Company’s recognition of the net deferred tax asset related to the Transactions is especially challenging, as the Company’s determination of the tax basis step-ups and related future tax deductions requires the application of complex tax laws and regulations for partnerships and the identification of historical basis differences. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s net deferred tax asset recognition process, including controls over management’s review of the determination of the tax basis step-ups and related future tax deductions and the identified historical basis differences described above. To test the recognition of the net deferred tax asset resulting from the Transactions, we involved a specialist and performed procedures that included, among others, evaluating the technical merit of the Company’s determination of the tax basis step-ups and the related future tax deductions based on relevant tax law and regulations. We also used available tax-related information to evaluate the historical basis differences the Company used in its determination. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2008. Philadelphia, Pennsylvania May 27, 2021 94 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Hamilton Lane Incorporated Opinion on Internal Control Over Financial Reporting We have audited Hamilton Lane Incorporated’s internal control over financial reporting as of March 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Hamilton Lane Incorporated (the Company) maintained, in all material respects, effective internal control over financial reporting as of March 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of March 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended March 31, 2021, and the related notes and our report dated May 27, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Philadelphia, Pennsylvania May 27, 2021 95 Hamilton Lane Incorporated Consolidated Balance Sheets (In thousands, except share and per share amounts) March 31, 2021 2020 Assets Cash and cash equivalents $ 87,025 $ 50,124 Restricted cash 3,041 3,086 Fees receivable 29,202 30,384 Prepaid expenses 6,143 6,988 Due from related parties 2,495 2,605 Furniture, fixtures and equipment, net 23,308 7,402 Lease right-of-use assets, net 64,384 9,577 Investments 368,836 197,759 Deferred income taxes 251,949 137,941 Other assets 17,821 17,675 Assets of consolidated variable interest entities: Cash and cash equivalents 311 — Investments held in trust 276,003 — Investments 4,787 9,988 Other assets 1,214 — Total assets $ 1,136,519 $ 473,529 Liabilities, redeemable non-controlling interests and equity Accounts payable 2,173 1,968 Accrued compensation and benefits 29,415 10,804 Accrued members’ distributions 16,877 5,829 Accrued dividend 11,201 8,027 Debt 163,175 74,524 Payable to related parties pursuant to tax receivable agreement 194,764 98,956 Lease liabilities 75,281 10,184 Other liabilities (includes $ 17,381 and $ 13,394 at fair value) 36,122 22,132 Liabilities of consolidated variable interest entities: Deferred incentive fee revenue — 3,704 Other liabilities 17,310 — Total liabilities 546,318 236,128 Commitments and Contingencies (Note 15) Redeemable non-controlling interests 276,000 — Preferred stock, $ 0.001 par value, 10,000,000 authorized, none issued — — Class A common stock, $ 0.001 par value, 300,000,000 authorized; 36,290,183 and 29,842,784 issued and outstanding as of March 31, 2021 and 2020, respectively 36 30 Class B common stock, $ 0.001 par value, 50,000,000 authorized; 16,739,846 and 22,049,727 issued and outstanding as of March 31, 2021 and 2020, respectively 17 22 Additional paid-in-capital 150,564 107,727 Accumulated other comprehensive loss — ( 78 ) Retained earnings 87,512 47,090 Total Hamilton Lane Incorporated stockholders’ equity 238,129 154,791 Non-controlling interests in general partnerships 2,211 4,853 Non-controlling interests in Hamilton Lane Advisors, L.L.C. 73,861 77,757 Total equity 314,201 237,401 Total liabilities, redeemable non-controlling interests and equity $ 1,136,519 $ 473,529 See accompanying notes to the consolidated financial statements. 96 Hamilton Lane Incorporated Consolidated Statements of Income (In thousands, except per share amounts) Year Ended March 31, 2021 2020 2019 Revenues Management and advisory fees $ 289,444 $ 244,920 $ 217,773 Incentive fees 31,134 21,437 17,658 Consolidated variable interest entities related: Incentive fees 21,057 7,691 16,748 Total revenues 341,635 274,048 252,179 Expenses Compensation and benefits 136,319 100,138 98,995 General, administrative and other 49,210 57,481 48,960 Consolidated variable interest entities related: General, administrative and other 378 — — Total expenses 185,907 157,619 147,955 Other income (expense) Equity in income of investees 32,389 20,731 7,457 Interest expense ( 2,044 ) ( 2,816 ) ( 3,039 ) Interest income 1,676 709 255 Non-operating income 5,894 6,172 20,915 Consolidated variable interest entities related: Equity in loss of investees ( 2,123 ) ( 481 ) ( 255 ) Unrealized gains 2,141 — — Interest expense ( 459 ) — — Total other income (expense) 37,474 24,315 25,333 Income before income taxes 193,202 140,744 129,557 Income tax expense 24,417 13,968 30,560 Net income 168,785 126,776 98,997 Less: (Loss) income attributable to non-controlling interests in general partnerships ( 250 ) 85 564 Less: Income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. 69,720 65,866 64,860 Less: Income attributable to redeemable non-controlling interests in Hamilton Lane Alliance Holdings I, Inc. 1,293 — — Net income attributable to Hamilton Lane Incorporated $ 98,022 $ 60,825 $ 33,573 Basic earnings per share of Class A common stock $ 2.82 $ 2.17 $ 1.41 Diluted earnings per share of Class A common stock $ 2.81 $ 2.15 $ 1.40 Dividends declared per share of Class A common stock $ 1.25 $ 1.10 $ 0.85 (1) See accompanying notes to the consolidated financial statements. 97 Hamilton Lane Incorporated Consolidated Statements of Comprehensive Income (In Thousands) Year Ended March 31, 2021 2020 2019 Net income $ 168,785 $ 126,776 $ 98,997 Other comprehensive income (loss), net of tax: Foreign currency translation 130 ( 159 ) 15 Total other comprehensive income (loss), net of tax 130 ( 159 ) 15 Comprehensive income $ 168,915 $ 126,617 $ 99,012 Less: Comprehensive (loss) income attributable to non-controlling interests in general partnerships ( 250 ) 85 564 Comprehensive income attributable to non-controlling interests in Hamilton Lane Advisors, L.L.C. 69,772 65,792 64,868 Comprehensive income attributable to redeemable non-controlling interests in Hamilton Lane Alliance Holdings I, Inc. 1,293 — — Total comprehensive income attributable to Hamilton Lane Incorporated $ 98,100 $ 60,740 $ 33,580 See accompanying notes to the consolidated financial statements. 98 Hamilton Lane Incorporated Consolidated Statements of Stockholders' Equity (In Thousands) Class A Common Stock Class B Common Stock Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Non-Controlling Interests in general partnerships Non-Controlling Interests in Hamilton Lane Advisors, L.L.C. Total Equity Balance at March 31, 2018 $ 22 $ 26 $ 73,829 $ 4,549 $ — $ 7,266 $ 50,382 $ 136,074 Net income — — — 33,573 — 564 64,860 98,997 Cumulative-effect adjustment from adoption of accounting guidance — — 411 20 — — 566 997 Other comprehensive income — — — — 7 — 8 15 Equity-based compensation — — 2,912 — — — 3,544 6,456 Issuance of shares for contingent compensation payout 1 — 200 — — — 224 425 Purchase and retirement of Class A stock for tax withholding — — ( 2,425 ) — — — ( 2,962 ) ( 5,387 ) Deferred tax adjustment — — 10,346 — — — — 10,346 Dividends declared — — — ( 20,456 ) — — — ( 20,456 ) Capital contributions from (distributions to) non-controlling interests, net — — — — — ( 2,114 ) — ( 2,114 ) Member distributions — — — — — — ( 55,893 ) ( 55,893 ) Offerings adjustment 4 ( 2 ) 9,589 — — — ( 9,593 ) ( 2 ) Employee Share Purchase Plan share issuance — — 127 — — — 137 264 Vesting of restricted stock — — 324 — — — ( 324 ) 0 Equity reallocation between controlling and non-controlling interests — — ( 2,831 ) — — — 2,831 0 Balance at March 31, 2019 $ 27 $ 24 $ 92,482 $ 17,686 $ 7 $ 5,716 $ 53,780 $ 169,722 Net income — — — 60,825 — 85 65,866 126,776 Other comprehensive loss — — — — ( 85 ) — ( 74 ) ( 159 ) Equity-based compensation — — 3,830 — — — 3,405 7,235 Issuance of shares for contingent compensation payout — — 214 — — — 211 425 Purchase and retirement of Class A stock for tax withholding — — ( 3,227 ) — — — ( 2,654 ) ( 5,881 ) Deferred tax adjustment — — 6,526 — — — — 6,526 Dividends declared — — — ( 31,421 ) — — — ( 31,421 ) Capital contributions from (distributions to) non-controlling interests, net — — — — — ( 948 ) — ( 948 ) Member distributions — — — — — — ( 36,116 ) ( 36,116 ) Offering adjustment 3 ( 2 ) 6,367 — — — ( 6,370 ) ( 2 ) Employee Share Purchase Plan share issuance — — 659 — — — 585 1,244 Vesting of restricted stock — — 333 — — — ( 333 ) — Equity reallocation between controlling and non-controlling interests — — 543 — — — ( 543 ) — Balance at March 31, 2020 $ 30 $ 22 $ 107,727 $ 47,090 $ ( 78 ) $ 4,853 $ 77,757 $ 237,401 99 Hamilton Lane Incorporated Consolidated Statements of Stockholders' Equity (In Thousands) Class A Common Stock Class B Common Stock Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Non-Controlling Interests in general partnerships Non-Controlling Interests in Hamilton Lane Advisors, L.L.C. Total Equity Balance at March 31, 2020 $ 30 $ 22 $ 107,727 $ 47,090 $ ( 78 ) $ 4,853 $ 77,757 $ 237,401 Net income — — — 98,022 — ( 250 ) 69,720 167,492 Other comprehensive income — — — — 78 — 52 130 Equity-based compensation — — 4,415 — — — 2,695 7,110 Purchase and retirement of Class A stock for tax withholding — — ( 3,935 ) — — — ( 2,084 ) ( 6,019 ) Deferred tax adjustment — — 19,252 — — — — 19,252 Dividends declared — — — ( 42,850 ) — — — ( 42,850 ) Capital contributions from (distributions to) non-controlling interests, net — — — — ( 2,392 ) — ( 2,392 ) Member distributions — — — — — — ( 45,416 ) ( 45,416 ) Offerings adjustment 6 ( 5 ) 21,684 — — — ( 21,690 ) ( 5 ) Employee Share Purchase Plan share issuance — — 900 — — — 547 1,447 Accretion of redeemable non-controlling interest — — — ( 14,750 ) — — ( 7,199 ) ( 21,949 ) Equity reallocation between controlling and non-controlling interests — — 521 — — — ( 521 ) — Balance at March 31, 2021 $ 36 $ 17 $ 150,564 $ 87,512 $ — $ 2,211 $ 73,861 $ 314,201 See accompanying notes to the consolidated financial statements. D 100 Hamilton Lane Incorporated Consolidated Statements of Cash Flows (In Thousands) Year Ended March 31, 2021 2020 2019 Operating activities: Net income $ 168,785 $ 126,776 $ 98,997 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,134 3,291 2,979 Change in deferred income taxes 7,027 7,929 21,665 Change in payable to related parties pursuant to tax receivable agreement 897 ( 346 ) ( 9,778 ) Equity-based compensation 7,079 7,183 6,382 Equity in income of investees ( 32,389 ) ( 20,731 ) ( 7,457 ) Gain on sale of investments valued under the measurement alternative — ( 4,973 ) ( 11,133 ) Fair value adjustment to investment valued under the measurement alternative ( 6,229 ) ( 1,507 ) — Proceeds received from investments 784 12,761 14,077 Non-cash lease expense 7,376 4,643 — Other 1,571 789 190 Changes in operating assets and liabilities: Fees receivable 1,182 ( 10,003 ) ( 5,390 ) Prepaid expenses 845 ( 2,272 ) ( 2,414 ) Due from related parties 110 23 608 Other assets ( 549 ) ( 1,572 ) ( 1,614 ) Accounts payable 205 ( 654 ) 919 Accrued compensation and benefits 18,611 ( 987 ) 4,549 Lease liability 3,105 ( 5,014 ) — Other liabilities 10,003 556 1,328 Consolidated variable interest entities related: Unrealized gain on warrants measured at fair value ( 2,141 ) — — Equity in income of investees 2,123 481 255 Change in deferred incentive fee revenue ( 3,704 ) — ( 2,541 ) Other assets and liabilities ( 667 ) — — Net cash provided by operating activities $ 188,158 $ 116,373 $ 111,622 Investing activities: Purchase of furniture, fixtures and equipment $ ( 18,637 ) $ ( 1,978 ) $ ( 5,366 ) Purchase of investments valued under the measurement alternative ( 90,500 ) ( 3,967 ) — Distributions received from investments valued under the measurement alternative 3,072 — — Proceeds from sales of investments valued under the measurement alternative — 6,419 22,531 Cash paid for purchase of intangible assets ( 1,000 ) ( 4,172 ) — Loan to investee — ( 157 ) ( 944 ) Distributions received from partnerships 31,195 7,687 10,614 Contributions to investments ( 69,911 ) ( 53,732 ) ( 46,048 ) Consolidated variable interest entities related: Purchase of investments held in trust ( 276,000 ) — — Net cash used in investing activities $ ( 421,781 ) $ ( 49,900 ) $ ( 19,213 ) 101 Year Ended March 31, 2021 2020 2019 Financing activities: Proceeds from offering $ 473,339 $ 147,122 $ 193,504 Purchase of membership interests ( 473,339 ) ( 147,122 ) ( 193,504 ) Repayments of long term debt ( 1,406 ) ( 71,250 ) ( 2,813 ) Borrowings of debt, net of deferred financing costs 75,000 74,765 — Drawdown of revolver 15,000 15,000 — Repayment of revolver — ( 15,000 ) ( 10,450 ) Secured financing — 15,750 — Repurchase of Class B common stock ( 5 ) ( 2 ) ( 2 ) Repurchase of Class A common stock for employee tax withholding ( 6,019 ) ( 5,881 ) ( 5,387 ) Proceeds received from issuance of shares under employee stock plans 1,447 1,244 264 Payments to related parties pursuant to the tax receivable agreement ( 6,894 ) ( 1,952 ) ( 383 ) Dividends paid ( 39,676 ) ( 29,067 ) ( 18,676 ) Members’ distributions paid ( 34,368 ) ( 47,368 ) ( 50,649 ) Consolidated variable interest entities related: Contributions from non-controlling interest in general partnerships 252 45 81 Distributions to non-controlling interest in general partnerships ( 2,644 ) ( 993 ) ( 2,195 ) Proceeds from issuance of Class A units of Hamilton Lane Alliance Holdings I, Inc. 276,000 — — Offering costs paid for issuance of Class A units of Hamilton Lane Alliance Holdings I, Inc. ( 6,027 ) — — Net cash used in financing activities $ 270,660 $ ( 64,709 ) $ ( 90,210 ) Effect of exchange rate changes on cash and cash equivalents $ 130 $ ( 144 ) $ 8 Increase in cash, cash equivalents, and restricted cash 37,167 1,620 2,207 Cash, cash equivalents and restricted cash at beginning of year 53,210 51,590 49,383 Cash, cash equivalents and restricted cash at end of year $ 90,377 $ 53,210 $ 51,590 Reconciliation of Cash and Cash Equivalents, Restricted Cash and Cash and Cash Equivalents Held at Consolidated Variable Interest Entities to the Consolidated Statements of Financial Condition: Cash and cash equivalents $ 87,025 $ 50,124 $ 49,357 Restricted cash 3,041 3,086 2,233 Cash and cash equivalents held at consolidated variable interest entities 311 — — Total cash and cash equivalents, restricted cash, and cash and cash equivalents held at consolidated variable interest entities $ 90,377 $ 53,210 $ 51,590 See accompanying notes to the consolidated financial statements. 102 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) 1. Organization Hamilton Lane Incorporated (“HLI”) was incorporated in the State of Delaware on December 31, 2007 and, following its 2017 initial public offering, is a holding company whose principal asset is a controlling equity interest in Hamilton Lane Advisors, L.L.C. (“HLA”). As the sole managing member of HLA, HLI operates and controls all of the business and affairs of HLA, and through HLA, conducts its business. As a result, HLI consolidates HLA’s financial results and reports a non-controlling interest related to the portion of HLA units not owned by HLI. The assets and liabilities of HLA represent substantially all of HLI’s consolidated assets and liabilities with the exception of certain cash, certain deferred tax assets and liabilities, payable to related parties pursuant to a tax receivable agreement, and dividends payable. Unless otherwise specified, “the Company” refers to the consolidated entity of HLI, HLA and subsidiaries throughout the remainder of these notes. As of March 31, 2021 and 2020, HLI held approximately 67.2 % and 55.1 %, respectively, of the economic interest in HLA. As future exchanges of HLA units occur pursuant to the exchange agreement in place with HLA’s members, the economic interest in HLA held by HLI will increase. HLA is a registered investment advisor with the United States Securities and Exchange Commission (“SEC”), providing asset management and advisory services, primarily to institutional investors, to design, build and manage private markets portfolios. HLA generates revenues primarily from management fees, by managing assets on behalf of customized separate accounts, specialized fund products and distribution management accounts, and advisory fees, by providing asset supervisory and reporting services. HLA sponsors the formation, and serves as the general partner or managing member, of various limited liability partnerships consisting of specialized funds and certain single client separate account entities (“Partnerships”) that acquire interests in third-party managed investment funds that make private equity and equity-related investments. The Partnerships may also make direct co-investments, including investments in debt, equity, and other equity-based instruments. The Company, which includes certain subsidiaries that serve as the general partner or managing member of the Partnerships, may invest its own capital in the Partnerships and generally makes all investment and operating decisions for the Partnerships. HLA operates several wholly owned entities through which it conducts its foreign operations. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying financial statements include the accounts of the Company, and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. COVID-19 In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) a global pandemic, which has resulted in significant disruption and uncertainty in the global economic markets. Given the amount of uncertainty currently regarding the scope and duration of the COVID-19 pandemic, it is currently not possible to predict the precise impact it will have on the Company’s financial statements. In addition, certain impacts may not be reported in the current quarter 103 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) due to the Company’s investments in partnerships and unrealized carried interest amounts, which are reported on a three month lag, as discussed below in “Accounting for Differing Fiscal Periods” . Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Consolidation The Company performs an analysis to determine whether it is required to consolidate entities, by determining if the Company has a variable interest in each entity and whether that entity is a variable interest entity (“VIE”). The Company performs the variable interest analysis for all entities in which it has a potential variable interest, which primarily consist of all entities where the Company serves as the sponsor, general partner or managing member, and general partner entities not wholly owned by the Company. If the Company has a variable interest in the entity and the entity is a VIE, it will also analyze whether the Company is the primary beneficiary of this entity and whether consolidation is required. In evaluating whether it has a variable interest in the entity, the Company reviews the equity ownership and whether the Company absorbs risk created and distributed by the entity, as well as whether the fees charged to the entity are customary and commensurate with the level of effort required to provide services. Fees received by the Company are not variable interests if (i) the fees are compensation for services provided and are commensurate with the level of effort required to provide those services, (ii) the service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length and (iii) the Company’s other economic interests in the VIE held directly and indirectly through its related parties, as well as economic interests held by related parties under common control, where applicable, would not absorb more than an insignificant amount of the entity’s losses or receive more than an insignificant amount of the entity’s benefits. Evaluation of these criteria requires judgment. For entities determined to be VIEs, an evaluation is required to determine whether the Company is the primary beneficiary. The Company evaluates its economic interests in the entity specifically determining if the Company has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance (“the power”) and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE (“the benefits”). When making the determination on whether the benefits received from an entity are significant, the Company considers the total economics of the entity, and analyzes whether the Company’s share of the economics is significant. The Company utilizes qualitative factors, and, where applicable, quantitative factors, while performing the analysis. VIEs for which the Company is the primary beneficiary have been included in the Company’s consolidated financial statements. The portion of the consolidated subsidiaries owned by third parties and any related activity is eliminated through non-controlling interests in the Consolidated Balance Sheets and income (loss) attributable to non-controlling interests in the Consolidated Statements of Income. For entities that are not determined to be VIEs, the Company analyzes whether it has control through a majority voting interest to determine if consolidation is required. 104 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) At each reporting date, the Company determines whether any reconsideration events have occurred that require it to revisit the primary beneficiary analysis and will consolidate or deconsolidate accordingly. See Note 5 for additional disclosure on VIEs. Accounting for Differing Fiscal Periods The Partnerships primarily have a fiscal year end as of December 31, and the Company accounts for its investments in the Partnerships using a three-month lag due to the timing of financial information received from the investments held by the Partnerships. The Partnerships primarily invest in private equity funds, which generally require at least 90 days following the calendar year end to present audited financial statements. The Company records its share of capital contributions to and distributions from the Partnerships in investments in the Consolidated Balance Sheets during the three month lag period. The Company’s revenue earned from Partnerships, including both management and advisory fee revenue and incentive fee revenue, is not accounted for on a lag. To the extent that management is aware of material events that affect the Partnerships during the intervening period, the impact of the events would be disclosed in the Notes to Consolidated Financial Statements. Foreign Currency The Company and substantially all of its foreign subsidiaries utilize the U.S. dollar as their functional currency. The assets and liabilities of the Company’s foreign subsidiaries with non-U.S. dollar functional currencies are translated at exchange rates prevailing at the end of each reporting period. The results of foreign operations are translated at the weighted average exchange rate for each reporting period. Translation adjustments are included in other comprehensive income (loss) within the consolidated financial statements until realized. Foreign currency transaction gains(losses) are included in general, administrative and other expenses in the Consolidated Statements of Income and were $ 78 , $( 103 ), and $ 368 for the years ended March 31, 2021, 2020 and 2019, respectively. Cash, Cash Equivalents and Restricted Cash Cash deposits in interest-bearing money market accounts and highly liquid investments, with an original maturity of three months or less, are classified as cash equivalents. Interest earned on cash and cash equivalents is recorded as interest income in the Consolidated Statements of Income. Restricted cash at March 31, 2021 and 2020 was primarily cash held by the Company’s foreign subsidiaries to meet applicable government regulatory capital requirements. 105 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) Investments Held in Trust by Consolidated Variable Interest Entities Investments held in trust represent an actively-traded money market fund of Hamilton Lane Alliance Holdings I, Inc. (“HLAH”), a consolidated special purpose acquisition company (“SPAC”), that is invested in U.S. Treasury securities purchased with funds raised through the initial public offering of the consolidated entity. Investments held in trust are classified as trading securities and are presented on the balance sheet at fair value at the end of each reporting period. Gains and losses resulting from the change in fair value of these securities are included in unrealized gains of consolidated variable interest entities on the Consolidated Statements of Income. The estimated fair values of investments held in the trust account are determined using quoted prices in an active market and therefore are classified in Level 1 of the fair value hierarchy, as described in “Fair Value of Financial Instruments” below. Fees Receivable Fees receivable are equal to contractual amounts reduced for allowances, if applicable. The Company considers fees receivable to be fully collectible; accordingly, no allowance for doubtful accounts has been established as of March 31, 2021 or 2020. Due from Related Parties Due from related parties in the Consolidated Balance Sheets consist primarily of advances made on behalf of the Partnerships for the payment of certain operating costs and expenses for which the Company is subsequently reimbursed and refundable tax distributions made to members of HLA. Furniture, Fixtures and Equipment Furniture, fixtures and equipment consist primarily of leasehold improvements, office equipment, furniture and fixtures, and computer hardware and software and are recorded at cost, less accumulated depreciation. Depreciation is recognized in accordance with the straight-line method over the estimated useful lives as follows: Computer hardware and software 3 - 7 years Furniture and fixtures 5 years Office equipment 3 years Leasehold improvements are capitalized and depreciated over the shorter of their useful life or the life of the lease. Expenditures for improvements that extend the useful life of an asset are capitalized. Expenditures for ordinary repairs and maintenance are expensed as incurred. Leases On April 1, 2019, the Company adopted ASU 2016-02, “Leases” (ASC 842) on a prospective basis and as a result, prior period amounts were not adjusted to reflect the impacts of the new standard. In addition, as permitted under the transition guidance within the new standard, prior scoping, classification, and accounting for initial direct costs were carried forward for leases existing as of the adoption date. The new standard establishes a right of use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the Consolidated Balance Sheets for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense 106 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) recognition in the Consolidated Statements of Income. The adoption did not have an impact on the Consolidated Statements of Income as all of the Company’s leases are operating leases, and will continue to be recognized as expense on a straight-line basis. The adoption, however, resulted in a gross-up in total assets and total liabilities on the Consolidated Balance Sheets. The Company determines whether an arrangement contains a lease at inception. A lease is a contract that provides the right to control an identified asset for a period of time in exchange for consideration. For identified leases, the Company determines whether it should be classified as an operating or finance lease. The Company accounts for lease components and non-lease components as a single lease component. Lease ROU assets and lease liabilities are recognized at the commencement date of the lease and measured based on the present value of lease payments over the lease term. Lease ROU assets include initial direct costs incurred by the Company and are presented net of deferred rent and lease incentives. Generally, the Company’s leases do not provide an implicit rate and as a result, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Some leases have the option to extend for an additional term or terminate early. Where it is reasonably certain that the Company will exercise the option, the option has been included in the lease term and reflected in the ROU asset and liability. The Company does not recognize a lease ROU asset or lease liability for short-term leases, which have lease terms of 12 months or less. Lease expense for lease payments on operating leases is recognized on a straight-line basis over the lease term. Intangibles and Goodwill The Company’s intangible assets consist of customer relationship assets identified as part of previous acquisitions and purchased software. Identifiable finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, ranging from 7 to 10 years. The Company does not hold any indefinite-lived intangible assets. Intangible assets are reviewed for impairment quarterly, or when events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company has no t recognized any impairment charges in any of the periods presented. The carrying value of the intangible assets was $ 7,925 and $ 8,328 , and is included in other assets in the Consolidated Balance Sheets as of March 31, 2021 and 2020, respectively. The accumulated amortization of intangibles was $ 3,165 and $ 1,762 as of March 31, 2021 and 2020, respectively. Amortization of intangible assets was $ 1,403 , $ 607 , and $ 459 for each of the years in the three-year period ended March 31, 2021, respectively, and is included in general, administrative and other expenses in the Consolidated Statements of Income. The estimated amortization expense for each of the next five fiscal years is $ 1,482 , $ 1,478 , $ 1,437 , $ 1,437 , and $ 1,201 , respectively. Goodwill of $ 3,943 as March 31, 2021 and 2020 is included in other assets in the Consolidated Balance Sheets and was recorded in conjunction with previous acquisitions. Goodwill is reviewed for impairment at least annually utilizing a qualitative or quantitative approach, and more frequently if circumstances indicate impairment may have occurred. The impairment testing for goodwill under the qualitative approach is based first on a qualitative assessment to determine if it is more likely than not that the fair value of the Company’s reporting unit is less than the respective carrying value. The reporting unit is the reporting level for testing the impairment of goodwill. If it is determined that it is more likely than not that a reporting unit’s fair value is less than its carrying value or when the quantitative approach is used, a two-step quantitative assessment is performed to (a) calculate the fair value of the reporting unit and compare it to its carrying value, and (b) if the carrying value exceeds its fair value, to measure an 107 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) impairment loss. The Company performed the annual impairment assessment as of December 31, 2020 noting that no goodwill impairment existed. Equity Method Investments Investments over which the Company is deemed to exert significant influence but not control are accounted for using the equity method of accounting. For investments accounted for under the equity method of accounting, the Company’s share of income (losses) is included in equity in income of investees in the Consolidated Statements of Income. The Company’s equity in income of investees is generally comprised of realized and unrealized gains from the underlying funds and portfolio companies held by the Partnerships. The carrying amounts of equity method investments are reflected in investments in the Consolidated Balance Sheets. Fair Value of Financial Instruments The Company utilizes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). The levels of the hierarchy are described below: • Level 1: Values are determined using quoted market prices for identical financial instruments in an active market. • Level 2: Values are determined using quoted prices for similar financial instruments and valuation models whose inputs are observable. • Level 3: V alues are determined using pricing models that use significant inputs that are primarily unobservable, discounted cash flow methodologies or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. The Company uses these levels of hierarchy to measure the fair value of certain financial instruments on a recurring basis, such as for investments; on a non-recurring basis, such as for acquisitions and impairment testing; for disclosure purposes, such as for long-term debt; and for other applications, as discussed in their respective notes. The carrying amount of cash and cash equivalents, fees receivable, and accounts payable approximate fair value due to the immediate or short-term maturity of these financial instruments. Redeemable Non-Controlling Interest Redeemable non-controlling interests represent the Class A shares issued by HLAH that are redeemable for cash by the public shareholders in the event of HLAH’s failure to complete a business combination or tender offer. The redeemable non-controlling interests are initially recorded at their original issue price, net of issuance costs and the initial fair value of separately traded warrants. The carrying amount was accreted to its full redemption value at March 31, 2021. Derivative Warrant Liabilities Held by Consolidated Variable Interest Entities The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives pursuant to ASC 480 and ASC 815-15. The classification of derivative instruments, including whether 108 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) such instrument should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Both the public warrants and private placement warrants issued in connection with the initial public offering of HLAH are recognized as derivative liabilities in accordance with ASC 815-40. Accordingly, the Company recognizes the warrant instruments as liabilities at fair value within other liabilities of consolidated variable interest entities in the Consolidated Balance Sheet. At each reporting period, the Company adjusts the instruments to fair value with any change in fair value recognized in unrealized gains of consolidated variable interest entities in Consolidated Statement of Income. The fair value of the public warrants have been measured based on the listed market price of such warrants, a Level 1 measurement, at March 31, 2021. The fair value of the private placement warrants have been estimated based on the observed price for the public warrants, a Level 2 measurement, at March 31, 2021. Revenues On April 1, 2018, the Company adopted the new Accounting Standards Codification 606, “ Revenue from Contracts with Customers ,” (“ASC 606”) using the modified retrospective method and applied the guidance only to contracts that were not completed as of that date. The Company recorded a cumulative-effect adjustment that increased beginning additional paid-in-capital, retained earnings and non-controlling interest in Hamilton Lane Advisors, L.L.C. by $ 411 , $ 20 and $ 566 , respectively. The adjustment was related to commission payments that are considered a cost of obtaining a contract under ASC 606 and are capitalized and amortized over the expected life of the contractual relationship. These amounts were previously expensed when incurred. Management and advisory fees The Company earns management fees from services provided to its specialized funds, customized separate accounts, and distribution management clients, and advisory fees from services provided to advisory clients where the Company does not have discretion over investment decisions. Revenue is recognized when control of the promised services is transferred to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services. Specialized funds are structured as partnerships having multiple investors with a subsidiary of the Company serving as general partner or managing member. Customized separate accounts are generally contractual arrangements involving an investment management agreement between the Company and a single client. In some cases, a customized separate account will be structured as a partnership with a subsidiary of the Company serving as general partner or managing member. The Company determined that the partnership is generally considered to be the customer with respect to specialized funds, while the individual investor or single limited partner is the customer with respect to customized separate accounts and advisory clients. Management fees generally exclude the reimbursement of any partnership expenses paid by the Company on behalf of its customers pursuant to its contracts, including amounts related to professional fees and other fund administrative expenses. For the professional and administrative services performed by third parties that the Company arranges for the partnerships, the Company concluded that the nature of its promise is to arrange for the services to be provided and it does not control the services provided by third parties before they are transferred to the customer. Therefore, the Company is acting as an agent. Accordingly, the reimbursement for these professional fees paid on behalf of the partnerships is generally presented on a net basis. The Company also incurs certain costs, primarily employee travel, organization and syndication costs, for which it receives reimbursement from its customers in connection with satisfying these performance obligations. For reimbursable travel, organization and syndication costs, the Company concluded it controls the services provided by its employees and other parties and therefore is a principal. Accordingly, the Company records the reimbursement for these costs incurred on a gross basis as revenue 109 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) in management and advisory fees and as expense in general, administrative and other expenses in the Consolidated Statements of Operations. The Company considers its performance obligations in its customer contracts to be one of the following based upon the services promised: asset management services, arrangement of administrative services, distribution management services, or reporting services. For asset management and arrangement of administrative services, the Company satisfies these performance obligations over time as the services are rendered and the customer simultaneously receives and consumes the benefits of the services as they are performed. The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised services to the customer. Management fees from these performance obligations for contracts where the Company has discretion over investment decisions are generally calculated by applying a percentage to unaffiliated committed capital or net invested capital under management and are usually billed quarterly. For many partnerships, fees are based on committed capital during the investment period and then net invested capital through the remainder of the partnership term. The management fee base is subject to factors outside the Company’s control and therefore estimates of future period management fees are not included in the transaction price, as those estimates would be considered constrained. Advisory fees from these performance obligations for contracts where the Company does not have discretion over investment decisions are generally based upon fixed amounts and are usually billed quarterly. For distribution management services, the Company satisfies these performance obligations at a point in time when shares are sold/liquidated and the proceeds are delivered and the customer receives and consumes the benefits of the services. Distribution management fees are generally calculated by applying a percentage to the amounts sold/liquidated and are billed at the completion of each transaction. For reporting services, the Company satisfies these performance obligations over time as the services are rendered and the customer simultaneously receives and consumes the benefits of the services as they are performed. Reporting fees are generally calculated by applying a fixed rate multiplied by the number of funds monitored and are billed quarterly. 110 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) Incentive Fees Contracts with certain customized separate accounts and specialized funds provide incentive fees, which generally range from 5 % to 12.5 % of profits, when investment returns exceed minimum return levels or other performance targets on either an annual or inception to date basis. Investment returns are highly susceptible to market factors and judgments and actions of third parties that are outside of the Company’s control. Accordingly, incentive fees are considered variable consideration in asset management services and are therefore constrained and not recognized until it is probable that a significant reversal will not occur. Incentive fees from specialized funds and customized separate accounts are generally payable after all contributed capital and the preferred return on that capital has been distributed to investors. The Company estimates the amount and probability of additional future capital contributions to specialized funds and customized separate accounts, which could impact the probability of a significant reversal occurring. The additional future capital contributions relate to unfunded commitments or follow-on investment opportunities in underlying portfolio investments. Incentive fees received before the revenue recognition criteria have been met are deferred and recorded within deferred incentive fee revenue in the Consolidated Balance Sheets. Fund reimbursement revenue The Company incurs certain costs related to the organization and syndication of new Partnerships. These costs generally include professional fees, legal fees, and other related items. The Company expenses these costs as they are incurred. Once the Partnership is successfully formed and has held its first closing, the Company recognizes those costs as revenue in the Consolidated Statements of Income as the Partnership is then able to reimburse the Company for these costs. Compensation and Benefits Compensation and Benefits consists of (a) base compensation comprising salary, bonuses and benefits paid and payable to employees, (b) equity-based compensation associated with the grants of restricted stock awards to employees and (c) incentive fee compensation, which consists of carried interest and performance fee allocations as detailed below. Equity-based awards issued are measured at fair value at the date of grant. The fair value of the restricted stock grant is based on the closing stock price on the trading day before the date of grant less the present value of expected future dividends. Expenses related to employee equity-based compensation are recorded evenly over the vesting period using the straight-line method. See Note 10 for more information regarding accounting for equity-based awards. Incentive fee compensation expense includes compensation directly related to incentive fees. Certain employees of the Company are granted allocations or profit-sharing interests and are thereby, as a group, entitled to a 25 % portion of the incentive fees earned by the Company from certain Partnerships and certain managed accounts subject to vesting. Amounts payable pursuant to these arrangements are recorded as compensation expense when they have become probable and reasonably estimable. The Company’s determination of the point at which it becomes probable and reasonably estimable that incentive fee compensation expense should be recorded is based on its assessment of numerous factors, particularly those related to the profitability, realizations, distribution status, investment profile and commitments or contingencies of the individual funds that may give rise to incentive fees. Incentive fee compensation may be expensed before the related incentive fee revenue is recognized. 111 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) Non-Operating Income Non-operating income consists primarily of gains recorded on sales of other investments, fair value adjustments on investments valued under the measurement alternative and adjustments to the payable to related parties pursuant to the tax receivable agreement. Income Taxes The Company accounts for income taxes using the asset and liability method. Deferred income taxes are recognized for the expected future tax consequences attributable to temporary differences between the carrying amount of the existing tax assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied in the years in which temporary differences are expected to be recovered or settled. The principal items giving rise to temporary differences are certain basis differences resulting from the acquisitions of HLA units. Realization of the deferred tax assets is primarily dependent upon (1) historic earnings, (2) forecasted taxable income, (3) future tax deductions of tax basis step-ups related to the IPO and subsequent unit exchanges, (4) future tax deductions related to payments under the tax receivable agreement, and (5) the Company’s share of HLA’s temporary differences that result in future tax deductions. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. HLA is organized as a limited liability company and treated as a “flow-through” entity for income taxes purposes. As a “flow-through” entity, HLA is not subject to income taxes apart from certain U.S. state and local taxes and foreign taxes attributable to its operations in foreign jurisdictions. Any taxable income or loss generated by HLA is passed through to and included in the taxable income or loss of its members, including HLI. As a result, the Company does not record income taxes on pre-tax income or loss attributable to the non-controlling interests in the general partnerships and HLA, except for foreign taxes discussed above. HLI is subject to U.S. federal and applicable state corporate income taxes with respect to its allocable share of any taxable income of HLA. The Company analyzes its tax filing positions in all of the U.S. federal, state, local and foreign tax jurisdictions where it is required to file income tax returns, as well for all open tax years in these jurisdictions. The Company evaluates tax positions taken or expected to be taken in the course of preparing an entity’s tax returns to determine whether it is “more-likely-than-not” that each tax position will be sustained by the applicable tax authority. Tax Receivable Agreement The Company’s purchase of HLA Class A units concurrent with its initial public offering and periodic exchanges by holders of HLA units for shares of the Company’s Class A common stock, or cash, pursuant to the Exchange Agreement, result in increases in its share of the tax basis of the tangible and intangible assets of HLA, which will increase the tax depreciation and amortization deductions that otherwise would not have been available to HLI. These increases in tax basis and tax depreciation and amortization deductions reduce the amount of cash taxes that HLI would otherwise be required to pay in the future. HLI has entered into a tax receivable agreement (“TRA”) with the other members of HLA (the “TRA Recipients”) that requires it to pay them 85 % of the amount of cash savings, if any, in U.S. federal, state, and local income tax that HLI actually realizes (or, under certain circumstances, is deemed to realize) as a result of the increases in tax basis in connection with exchanges by the TRA Recipients described above and certain other tax benefits attributable to payments under the TRA. 112 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) Segments The Company operates its business in a single segment, which is how the chief operating decision maker (who is the chief executive officer) reviews financial performance and allocates resources. Accordingly, the Company considers itself to be in a single operating and reportable segment structure. Concentrations of Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, restricted cash and fees receivable. The majority of the Company’s cash, cash equivalents, and restricted cash are held with one major financial institution and expose the Company to a certain degree of credit risk. Substantially all cash amounts on deposit with major financial institutions exceed insured limits. The concentration of credit risk with respect to fees receivable is generally limited due to the short payment terms extended to clients by the Company. The Company derives revenues from clients located in the United States and other foreign countries. The below table presents revenues by geographic location: Year Ended March 31, 2021 2020 2019 United States $ 164,676 $ 134,347 $ 132,326 Other foreign countries 176,959 139,701 119,853 Total revenues (1) $ 341,635 $ 274,048 $ 252,179 (1) Revenues are attributed to countries based on location of the client or investor. Dividends and Distributions Dividends and distributions are reflected in the consolidated financial statements when declared. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, “ Accounting for Financial Instruments - Credit Losses ”. ASU 2016-13 replaces the incurred loss methodology in current GAAP with a methodology that reflects expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The Company adopted ASU 2016-13 using the modified retrospective transition method on April 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-13, “ Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement ” (ASU 2018-13). ASU 2018-13 changes the fair value measurement disclosure requirements. The amendments remove or modify certain disclosures, while others were added. Early adoption of any removed or modified disclosure requirements is permitted upon issuance of ASU 2018-13 and adoption of the additional disclosure requirements may be delayed until the effective date. The Company elected to early adopt the removed or modified disclosure requirements of the standard on October 1, 2018. The Company adopted the remaining requirements on April 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements. 113 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) Reclassifications Certain prior period amounts have been reclassified to conform with current period presentation. 3. Revenue The following presents revenues disaggregated by product offering, which aligns with the identified performance obligations and the basis for calculating each amount: Year Ended March 31, Management and advisory fees 2021 2020 2019 Specialized funds $ 148,023 $ 111,803 $ 93,056 Customized separate accounts 93,963 90,750 85,245 Advisory 26,439 24,160 24,130 Reporting and other 11,134 9,102 8,805 Distribution management 6,701 4,920 4,525 Fund reimbursement revenue 3,184 4,185 2,012 Total management and advisory fees $ 289,444 $ 244,920 $ 217,773 Year Ended March 31, Incentive fees 2021 2020 2019 Specialized funds $ 13,241 $ 6,680 $ 8,939 Customized separate accounts 17,893 14,757 8,719 Consolidated variable interest related: Specialized funds 21,057 7,691 16,748 Total incentive fees $ 52,191 $ 29,128 $ 34,406 The Company recognized incentive fee revenues of $ 3,704 and $ 2,541 during the years ended March 31, 2021, and 2019, respectively, that were previously received and deferred. Cost to obtain contracts The Company incurs incremental costs related to sales commissions paid to certain employees directly related to customized separate account contracts. These incremental costs are capitalized and amortized over the expected contract length proportionately to the management fee revenue expected to be recognized in each year as a percentage of the total expected revenue for the contract. The contract asset related to the cost to obtain contracts was $ 964 and $ 994 as of March 31, 2021 and March 31, 2020, respectively, and is included in other assets in the Consolidated Balance Sheets. Amortization expense related to this contract asset was $ 526 , $ 504 and $ 480 for the years ended March 31, 2021, 2020 and 2019, respectively, and is included in general, administrative and other in the Consolidated Statements of Income. 114 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) 4. Investments Investments consist of the following: March 31, 2021 2020 Equity method investments in Partnerships $ 240,337 $ 166,106 Equity method investments in Partnerships held by consolidated VIEs (See Note 5) 4,787 9,988 Other equity method investments 1,297 1,168 Other investments 17,381 13,394 Investments valued under the measurement alternative 109,821 17,091 Investment held in trust 276,003 — Total Investments $ 649,626 $ 207,747 Equity method investments The Company’s equity method investments in Partnerships represent its ownership in certain specialized funds and customized separate accounts. The strategies and geographic location of investments within the Partnerships vary by fund. The Company has a 1 % interest in substantially all of the Partnerships. The Company’s other equity method investments represent its ownership in a technology company that provides benchmarking and analytics of private equity data and its ownership in a joint venture that automates the collection of fund and underlying portfolio company data from general partners. The Company recognized equity method income related to its investments in Partnerships and other equity method investments of $ 32,389 , $ 20,731 , and $ 7,457 for the years ended March 31, 2021, 2020, and 2019, respectively. The Company’s equity method investments in Partnerships consist of the following types: March 31, 2021 2020 Primary funds $ 74,064 $ 37,317 Secondary funds 31,054 19,872 Direct/co-investment funds 63,061 50,288 Customized separate accounts 72,158 58,629 Total equity method investments in Partnerships $ 240,337 $ 166,106 The Company’s equity method investments in Partnerships held by consolidated VIEs consist of direct/co-investment funds and customized separate accounts. The Company evaluates each of its equity method investments to determine if any were significant pursuant to the requirements of Regulation S-X. As of and for the years ended March 31, 2021 and 2020, no individual equity method investment held by the Company met the significance criteria, and, as a result, the Company is not required to present separate financial statements for any of its equity method investments. 115 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) The summarized financial information of the Company’s equity method investments in Partnerships is as follows: March 31, 2021 2020 Assets Investments $ 22,445,159 $ 17,577,766 Other assets 610,672 415,221 Total assets $ 23,055,831 $ 17,992,987 Liabilities and Partners’ Capital Debt $ 11,838 $ 61,114 Other liabilities 116,593 107,600 Total liabilities 128,431 168,714 Partners’ capital 22,927,400 17,824,273 Total liabilities and partners’ capital $ 23,055,831 $ 17,992,987 Year Ended March 31, 2021 2020 2019 Investment income $ 389,571 $ 300,121 $ 211,797 Expenses 201,791 185,769 149,598 Net investment income 187,780 114,352 62,199 Net realized and unrealized gain 3,232,126 1,830,599 618,047 Net income $ 3,419,906 $ 1,944,951 $ 680,246 Other investments The Company’s other investments represent investments in private equity funds and direct credit and equity co-investments. The private equity fund investments can only be redeemed through distributions received from the liquidation of underlying investments of the fund, and the timing of distributions is currently indeterminable. The direct credit co-investments are debt securities classified as trading securities. The direct equity co-investments and private equity funds are measured at fair value with unrealized holding gains and losses included in earnings. During the year ended March 31, 2021, one of the Company’s direct equity co-investments held through a special purpose vehicle was transferred out of Level 3 and into Level 2 as the lockup restrictions from its initial public offering expired. The special purpose vehicle now predominately attributes its fair value to a publicly traded share price and is therefore classified as Level 2 in the hierarchy. As of March 31, 2021, the fair value of the Company’s investment in the special purpose vehicle was $ 4,083 . The Company’s remaining other investments are recorded at estimated fair value utilizing significant unobservable inputs and are therefore classified in Level 3 of the fair value hierarchy. 116 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) The following is a reconciliation of other investments for which significant unobservable inputs (Level 3) were used in determining value: Private equity funds Direct credit co-investments Direct equity co-investments Total other investments Balance as of March 31, 2019 $ 3,734 $ 3,940 $ 4,814 $ 12,488 Contributions 2,526 — 1,875 4,401 Distributions ( 777 ) ( 1,970 ) — ( 2,747 ) Net gain 303 ( 214 ) ( 837 ) ( 748 ) Balance as of March 31, 2020 $ 5,786 $ 1,756 $ 5,852 $ 13,394 Contributions 246 — — 246 Distributions ( 1,566 ) ( 1,025 ) ( 949 ) ( 3,540 ) Net gain (loss) 1,788 254 5,427 7,469 Transfer out of Level 3 — — ( 4,271 ) ( 4,271 ) Balance as of March 31, 2021 $ 6,254 $ 985 $ 6,059 $ 13,298 The valuation methodologies, significant unobservable inputs, range of inputs and the weighted average input determined based upon relative fair value of the investments used in recurring Level 3 fair value measurements of assets were as follows: March 31, 2021 Significant Fair Valuation Unobservable Weighted Value Methodology Inputs Range Average Private equity funds $ 6,254 Adjusted net asset value Selected market return 2 % - 12.4 % 4.2 % Direct credit co-investments $ 985 Discounted cash flow Market yield 9.3 % - 9.3 % 9.3 % Direct equity co-investments $ 6,059 Market approach EBITDA multiple 7.75 x - 14.75 x 10.42 x Market approach Equity multiple 1.52 x 1.52 x March 31, 2020 Significant Fair Valuation Unobservable Weighted Value Methodology Inputs Range Average Private equity funds $ 5,786 Adjusted net asset value Selected market return ( 7.4 )% - ( 3 )% ( 6.2 )% Direct credit co-investments $ 1,756 Discounted cash flow Market yield 11.5 % - 12.6 % 12.5 % Direct equity co-investments $ 5,852 Market approach EBITDA multiple 7.25 x - 12 x 9.93 x Market approach Equity multiple 1.05 x 1.05 x 117 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) For the significant unobservable inputs listed in the table above, (1) a significant increase or decrease in the selected market return would result in a significantly higher or lower fair value measurement, respectively; (2) a significant increase or decrease in the market yield would result in a significantly lower or higher fair value measurement, respectively; and (3) a significant increase or decrease in the selected multiple would result in a significantly higher or lower fair value measurement, respectively. In May 2019, the Company transferred these investments for an agreed amount of cash of $ 15,750 to a Partnership that is a VIE of which the Company is the general partner but does not consolidate as the Company is not the primary beneficiary. Due to continuing involvement with these assets at the Partnership, the Company accounted for this transfer as a secured financing as it has not met the criteria in ASC 860, “Transfers and Servicing”, to qualify as a sale and, therefore, has recorded a financial liability for the secured financing which is included in other liabilities in the Consolidated Balance Sheets. The cash received was recorded as secured financing in financing activities in the Consolidated Statements of Cash Flows. As of March 31, 2021, all other investments were pledged as collateral on the Company’s secured financing. The Company accounts for this financial liability at fair value under the fair value option. The primary reason for electing the fair value option is to mitigate volatility in earnings from using different measurement attributes. The significant input to the fair value of the secured financing is the fair value of the other investments delivered as collateral. As of March 31, 2021, the secured financing had a fair value of $ 17,381 and an amortized cost of $ 9,902 . The fair value of the secured financing is estimated using Level 3 inputs with the significant input being the fair value of the other investments utilized as collateral as shown above. The Company recognized a gain (loss) of $ 7,281 , $( 748 ), and $ 705 on other investments during the years ended March 31, 2021, 2020, and 2019 respectively and recognized a (loss) gain of $( 7,281 ) and $ 43 on the secured financing liability during the years ended March 31, 2021 and 2020, respectively. Gains and losses related to other investments and the secured financing liability are recorded in non-operating income in the Consolidated Statements of Income. Investments valued under the measurement alternative The Company’s investments valued under the measurement alternative include equity securities in other proprietary investments for which the Company does not have significant influence and fair value is not readily determinable. ASU 2016-01 requires equity securities to be recorded at cost and adjusted to fair value at each reporting period. However, the guidance allows for a measurement alternative, which is to record the investments at cost, less impairment, if any, and subsequently adjust for observable price changes of identical or similar investments of the same issuer. Fiscal 2021 Transactions In March 2021, the Company invested approximately $ 90,000 in Russell Investments Group, Ltd., a leading outsourced CIO (OCIO) provider and global investment solutions firm. Due to the lack of readily determinable fair values for the investment and the Company’s lack of significant influence, the Company will value the investment under the measurement alternative. Additionally, in March 2021, the Company received a distribution of $ 3,072 from Russell Investments Group, Ltd., which was recorded as a return of capital and decreased the carrying value of the investment. 118 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) In December 2020, there was an observable price change for an investment held by the Company and valued under the measurement alternative. As a result of the transaction, the Company marked that investment to fair value based upon the transaction price, which resulted in an unrealized gain of $ 6,229 that was recorded in non-operating income in the Consolidated Statements of Income for the year ended March 31, 2021. Fiscal 2020 Transactions During the year ended March 31, 2020, the Company made equity investments in two private companies. The Company invested approximately $ 2,000 in a technology company that has developed software to automate manual data entry tasks associated with alternative investment reporting. The Company invested approximately $ 10,000 in a technology company which has developed a platform for investing in alternative assets. Due to the lack of readily determinable fair values for these investments, for which the Company does not have significant influence, the Company will value the investments under the measurement alternative. On January 31, 2020, an observable price transaction occurred for one of the Company’s investments valued under the measurement alternative. The Company recorded a fair value adjustment of $ 1,507 , which is recorded in non-operating income in the Consolidated Statements of Income for the year ended March 31, 2020. On July 1, 2019, an acquisition of an entity in which the Company held an investment with a carrying value of $ 1,446 was completed. The Company received cash proceeds of $ 6,419 and recorded a gain of approximately $ 4,973 in connection with the transaction, which was recorded in non-operating income in the Consolidated Statements of Income for the year ended March 31, 2020. Fiscal 2019 Transactions The Company performs qualitative impairment assessments on its investments recorded under the measurement alternative. As of March 31, 2019, the Company determined that a quantitative assessment was required to be performed for one of its technology investments. The assessment indicated that the fair value was less than the carrying value at March 31, 2019. Prior to the impairment recorded, the carrying value of the investment was $ 2,990 . The impairment amount was $ 701 and is included in non-operating income for the year ended March 31, 2019. The fair value was determined using both a discounted cash flow approach and a market approach based on guideline public companies, and is a Level 3 fair value measurement as financial projections were utilized. On August 2, 2018, an acquisition of an entity in which the Company held an investment with a carrying amount of $ 10,798 was completed. The Company received cash proceeds of $ 17,724 and recorded a gain of $ 6,926 in connection with the transaction, which was recorded in non-operating income for the year ended March 31, 2019. On August 11, 2018, an acquisition of an entity in which the Company held an investment with a carrying amount of $ 600 was completed. The Company received cash proceeds of $ 4,807 and recorded a gain of $ 4,207 in connection with the transaction, which was recorded in non-operating income for the year ended March 31, 2019. 119 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) 5. Variable Interest Entities The Company consolidates certain VIEs for which it is determined that the Company is the primary beneficiary as described in Note 2. Consolidated Variable Interest Entities The Company consolidates general partner entities of certain Partnerships, which are not wholly owned by the Company. The total assets of the consolidated general partner entities are $ 4,787 and $ 9,988 as of March 31, 2021 and 2020. The general partner entities had no liabilities other than deferred incentive fee revenue of $ 3,704 as of March 31, 2020. The assets of the general partner entities may only be used to settle obligations of the general partners, if any. In addition, there is no recourse to the Company for the general partners’ liabilities, except for certain entities in which there could be a claw back of previously distributed carried interest. The Company sponsored and consolidates HLAH through HL Alliance Holdings Sponsor LLC, a wholly owned subsidiary of the Company. On January 15, 2021, HLAH completed an initial public offering raising total gross proceeds of $ 276,000 which were placed in a trust and can only be utilized for funding a business combination or the redemption of Class A shares of HLAH. In a private placement concurrent with the initial public offering, HLAH sold warrants to HL Alliance Holdings Sponsor LLC for gross proceeds of $ 7,520 which were used by HLAH to pay the offering costs and also provide working capital. The total assets of HLAH are $ 277,528 and liabilities are $ 17,310 as of March 31, 2021. The assets of HLAH held outside of the trust can only be used to settle obligations of HLAH and there is no recourse to the Company for HLAH’s liabilities. All warrants and Class B common stock of HLAH held by the Company are eliminated in consolidation. Nonconsolidated Variable Interest Entities The Company holds variable interests in certain Partnerships that are VIEs, which are not consolidated, as it is determined that the Company is not the primary beneficiary. Such Partnerships are considered VIEs because limited partners lack the ability to remove the general partner or dissolve the entity without cause, by simple majority vote (i.e. have substantive “kick out” or “liquidation” rights). The Company’s involvement with such entities is in the form of direct equity interests in, and fee arrangements with, the Partnerships in which it also serves as the general partner or managing member. In the Company’s role as general partner or managing member, it generally considers itself the sponsor of the applicable Partnership and makes all investment and operating decisions. As of March 31, 2021, the total commitments and remaining unfunded commitments from the limited partners and general partners to the unconsolidated VIEs are $ 23,522,838 and $ 9,986,996 , respectively. These commitments are the primary source of financing for the unconsolidated VIEs. The maximum exposure to loss represents the potential loss of assets recognized by the Company relating to these unconsolidated entities. The Company believes that its maximum exposure to loss is limited because it establishes separate limited liability or limited partnership entities to serve as the general partner or managing member of the Partnerships. 120 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) The carrying amount of assets and liabilities recognized in the Consolidated Balance Sheets related to the Company’s interests in these non-consolidated VIEs and the Company’s maximum exposure to loss relating to non-consolidated VIEs were as follows: March 31, 2021 2020 Investments $ 138,092 $ 118,696 Fees receivable 4,133 8,703 Due from related parties 837 1,194 Total VIE assets 143,062 128,593 Deferred incentive fee revenue — 3,704 Non-controlling interests ( 2,211 ) ( 4,853 ) Maximum exposure to loss $ 140,851 $ 127,444 6. Furniture, Fixtures, and Equipment Furniture, fixtures, and equipment consist of the following: March 31, 2021 2020 Computer hardware and software $ 6,859 $ 6,156 Furniture and fixtures 2,003 2,698 Leasehold improvements 22,687 6,755 Office equipment 1,822 2,230 33,371 17,839 Less: accumulated depreciation 10,063 10,437 Furniture, fixtures, and equipment, net $ 23,308 $ 7,402 Depreciation expense was $ 2,731 , $ 2,684 and $ 2,040 for the years ended March 31, 2021, 2020 and 2019, respectively, and is included in general, administrative and other expenses in the Consolidated Statements of Income. 121 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) 7. Debt The Company’s debt consisted of the following: As of March 31, 2021 2020 Principal Outstanding Carrying Value Interest Rate Principal Outstanding Carrying Value Interest Rate Term Loan $ 73,594 $ 73,378 2.25 % $ 75,000 $ 74,749 2.25 % Multi-Draw Facility 75,000 74,797 3.50 % — — 4.00 % Revolver 15,000 15,000 2.25 % — — 2.25 % Total Debt $ 163,594 $ 163,175 $ 75,000 $ 74,749 The Company has a Term Loan Agreement, a Revolving Loan Agreement (together the “Loan Agreements”) and a Multi-Draw Term Loan Agreement with First Republic Bank. The Term Loan Agreement has a maturity date of July 1, 2027, provides for additional uncommitted term advances not to exceed $ 25,000 in the aggregate until March 24, 2023, and the interest rate is a floating per annum rate equal to the prime rate minus 1.5 % subject to a floor of 2.25 %. The Revolving Loan Agreement has a $ 25,000 borrowing capacity, a maturity date of March 24, 2023, and the interest rate is a floating per annum rate equal to the prime rate minus 1.5 % subject to a floor of 2.25 %. The Multi-Draw Term Loan Agreement (the “Multi-Draw Facility”) provides for a term loan in the aggregate principal amount of $ 75,000 that may be drawn any time during a period of one year following the closing date. Borrowings accrue interest at a fixed per annum rate of 3.5 % and matures on July 1, 2030. The Company fully drew the Multi-Draw Facility in March 2021. The Loan Agreements and Multi-Draw Facility contain covenants that, among other things, limit HLA’s ability to incur indebtedness, transfer or dispose of assets, merge with other companies, create, incur or allow liens, make investments, make distributions, engage in transactions with affiliates and take certain actions with respect to management fees. They also require HLA to maintain, among other requirements, (i) a specified amount of management fees, (ii) a specified amount of adjusted EBITDA, as defined therein, and (iii) a specified minimum tangible net worth, during the term of each of the Loan Agreements and Multi-Draw Facility. The obligations under the Loan Agreements and Multi-Draw Facility are secured by substantially all of the assets of HLA. The aggregate minimum principal payments on the Company’s outstanding debt are due as follows: Fiscal year ending March 31, 2022 $ 16,875 2023 1,875 2024 4,688 2025 7,031 2026 18,750 Thereafter 114,375 Total $ 163,594 122 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) The fair value of the outstanding balance of the Company’s debt instruments at March 31, 2021 and 2020 approximated par value based on current market rates for similar debt instruments and are classified as Level 2 within the fair value hierarchy. 8. Equity The Company has two classes of common stock outstanding, Class A common stock and Class B common stock. Class A common stock Holders of Class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Additionally, holders of shares of Class A common stock are entitled to receive dividends when and if declared by the Board of Directors, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock. Class B common stock Holders of Class B common stock are entitled to ten votes for each share held of record on all matters submitted to a vote of stockholders, but have de minimis economic rights. Shares of Class B common stock were issued in the Reorganization to the holders of Class B units of HLA at a one-to-one ratio. Shares of Class B common stock (together with the corresponding Class B units) may be exchanged for shares of Class A common stock on a one-to-one basis, or, at the Company’s election, for cash in an amount equal to the net proceeds from the sale of shares of Class A common stock equal to the number of shares of Class B common stock being exchanged, subject to certain restrictions. 123 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) Shares of Common Stock Outstanding The following table shows a rollforward of our common stock outstanding: Class A Class B March 31, 2018 23,139,476 25,700,068 Shares issued (repurchased) in connection with offerings 4,141,921 ( 2,084,617 ) Shares issued in connection with contingent compensation payment 11,380 — Shares issued in connection with ESPP 7,137 — Shares converted from units 41,435 — Shares repurchased for employee tax withholdings ( 123,928 ) — Forfeitures ( 27,529 ) ( 99,012 ) Restricted stock granted 177,585 — March 31, 2019 27,367,477 23,516,439 Shares issued (repurchased) in connection with offering 2,451,633 ( 1,466,712 ) Shares issued in connection with contingent compensation payment 7,692 — Shares issued in connection with ESPP 25,640 — Shares repurchased for employee tax withholdings ( 100,683 ) — Forfeitures ( 27,834 ) — Restricted stock granted 118,859 — March 31, 2020 29,842,784 22,049,727 Shares issued (repurchased) in connection with offering 6,415,760 ( 5,309,881 ) Shares issued in connection with ESPP 23,130 — Shares repurchased for employee tax withholdings ( 69,962 ) — Forfeitures ( 1,917 ) — Restricted stock granted 80,388 — March 31, 2021 36,290,183 16,739,846 Income and equity allocations to non-controlling interests are based upon the relative ownership percentage of the consolidated variable interest entity held by non-controlling owners. The reallocation adjustment between HLI stockholders’ equity and non-controlling interests in Hamilton Lane Advisors, L.L.C. relates to the impact of changes in economic ownership percentages during the period and adjusting previously recorded equity transactions to the economic ownership percentage as of the end of each reporting period. HLA Operating Agreement In accordance with the limited liability company agreement of HLA (the “HLA Operating Agreement”), profits and losses from HLA are allocated on a pro rata basis based upon each member’s economic interests. The HLA Operating Agreement provides that distributions are made on a pro rata basis to pay income taxes owed by the members on their share of HLA’s taxable income. In addition to these tax distributions, HLA made distributions in excess of required tax distributions to members in an aggregate amount of $ 34,167 , $ 34,014 , and $ 30,698 for the years ended March 31, 2021, 2020, and 2019, respectively. 124 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) March 2021 Offering In March 2021, the Company and certain selling stockholders completed a registered offering of an aggregate of 1,453,110 shares of Class A common stock at a price of $ 87.36 per share (the “March 2021 Offering”). The shares sold consisted of (i) 94,245 shares held by the selling stockholders and (ii) 1,358,865 shares newly issued by the Company. The Company received approximately $ 118,710 in net proceeds from the sale of its shares and used all of the proceeds to settle exchanges by certain members of HLA of a total of 1,101,365 Class B units and 257,500 Class C units. In connection with the exchange of the Class B units, the Company also repurchased for par value and canceled a corresponding number of shares of Class B common stock. The Company did not receive any proceeds from the sale of shares by the selling stockholders. September 2020 Offering In September 2020, the Company and a certain selling stockholder completed a registered offering of an aggregate of 2,207,380 shares of Class A common stock at a price of $ 70.18 per share (the “September 2020 Offering”). The shares sold consisted of (i) 75,000 shares held by the selling stockholder and (ii) 2,132,380 shares newly issued by the Company. The Company received approximately $ 149,650 in net proceeds from the sale of its shares and used all of the proceeds to settle exchanges by certain members of HLA of a total of 1,936,880 Class B units and 195,500 Class C units. In connection with the exchange of the Class B units, the Company also repurchased for par value and canceled a corresponding number of shares of Class B common stock. The Company did not receive any proceeds from the sale of shares by the selling stockholder. June 2020 Offering In June 2020, the Company and certain selling stockholders completed a registered offering of an aggregate of 2,995,757 shares of Class A common stock at a price of $ 70.09 per share (the “June 2020 Offering”). The shares sold consisted of (i) 71,242 shares held by the selling stockholders and (ii) 2,924,515 shares newly issued by the Company. The Company received approximately $ 204,979 in proceeds from the sale of its shares, net of underwriting discounts and commissions, and used all of the proceeds to settle in cash exchanges by certain members of HLA of a total of 2,271,636 Class B units and 652,879 Class C units. In connection with the exchange of the Class B units, the Company also repurchased for par value and canceled a corresponding number of shares of Class B common stock. The Company did not receive any proceeds from the sale of shares by the selling stockholders. September 2019 Offering In September 2019, the Company and certain selling stockholders completed a registered offering of an aggregate of 2,680,089 shares of Class A common stock at a price of $ 60.01 per share (the “September 2019 Offering”) . The shares sold consisted of (i) 228,456 shares held by the selling stockholders and (ii) 2,451,633 shares newly issued by the Company. The Company received approximately $ 147,122 in proceeds from the sale of its shares, net of underwriting discounts and commissions, and used all of the proceeds to settle in cash exchanges by certain members of HLA of a total of 1,466,712 Class B units and 984,921 Class C units. In connection with the exchange of the Class B units, the Company also repurchased for par value and canceled a corresponding number of shares of Class B common stock. The Company did not receive any proceeds from the sale of shares by the selling stockholders. 125 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) March 2019 Offering In March 2019, the Company and a certain selling stockholder completed a registered offering of an aggregate of 1,449,303 shares of Class A common stock at a price of $ 45.65 per share (the “March 2019 Offering”). The shares sold consisted of (i) 50,000 shares held by the selling stockholder and (ii) 1,399,303 shares newly issued by the Company. The Company received approximately $ 63,878 in proceeds from the sale of its shares, net of underwriting discounts and commissions, and used all of the net proceeds to settle in cash exchanges by certain members of HLA of a total of 711,943 Class B units and 687,360 Class C units. In connection with the exchange of the Class B units, the Company also repurchased for par value and canceled a corresponding number of shares of Class B common stock. The Company did not receive any proceeds from the sale of shares by the selling stockholder. 9. Equity-Based Compensation 2017 Equity Incentive Plan The Company has adopted its 2017 Equity Incentive Plan, as amended (the “Plan”), which permits the issuance of up to 5,000,000 shares of Class A common stock, which may be granted as incentive stock options, nonqualified stock options, SARs, restricted stock, restricted stock units, or PSUs. Awards under the Plan generally vest over four years , with options expiring not more than ten years from the date of grant, three months after termination of employment or one year after the date of death or termination due to disability of the grantee. As of March 31, 2021, there were 3,252,890 shares of Class A common stock available to grant under the Plan. Pursuant to the terms of the Plan, awards may not be granted after February 28, 2027. Restricted Stock The Company has granted restricted Class A common stock under the Plan to certain employees as part of the annual bonus program and in connection with its IPO. Holders of restricted stock have all of the rights of a stockholder with respect to such shares, including the right to vote the shares but not the right to receive dividends or other distributions. Substantially all of the awards vest over four years in equal annual installments. On each vesting date, the related employee tax liabilities are either paid in cash by the employee or stock is sold back to the Company at the then-current fair value to offset the required minimum tax withholding obligations. Forfeitures are recognized as they occur. Compensation expense related to the awards is recognized ratably each month over the vesting period. 126 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) The change in unvested restricted stock for the year ended March 31, 2021 is as follows: Total Unvested Weighted- Average Grant-Date Fair Value of Award March 31, 2020 441,515 $ 36.87 Granted 80,388 82.97 Vested ( 231,129 ) 29.65 Forfeited ( 1,917 ) 20.38 March 31, 2021 288,857 $ 55.58 The weighted-average fair value per share of restricted stock awarded during the years ended March 31, 2021, 2020 and 2019 was $ 82.97 , $ 54.71 , and $ 40.77 , respectively. The total fair value of restricted stock that vested during the years ended March 31, 2021, 2020 and 2019 was $ 19,961 , $ 18,141 , and $ 16,601 , respectively. As of March 31, 2021, total unrecognized compensation expense related to restricted stock was $ 15,653 with a weighted-average amortization period of 3.0 years. The total tax benefit recognized from share-based compensation for the years ended March 31, 2021, 2020 and 2019 was $ 1,528 , $ 1,229 and $ 2,537 , respectively. Employee Share Purchase Plan On September 6, 2018, the Company’s stockholders approved the Hamilton Lane Incorporated Employee Share Purchase Plan (as amended, the “ESPP”). The ESPP provides for a purchase price equal to 85 % of the closing price of the Company’s Class A common stock on the last trading day of each offering period, which begins the first day of each fiscal quarter and ends on the last day of that fiscal quarter. Our initial offering period started January 1, 2019. At inception, there were 1,000,000 shares available for purchase through the ESPP and 944,093 shares were available as of March 31, 2021. The benefit received by the employees, which is equal to a 15 % discount on the shares of the Company’s Class A common stock purchased, is recognized as equity-based compensation expense on the date of each purchase. During the year ended March 31, 2021, 2020 and 2019, the Company recorded expense of $ 256 , $ 220 and $ 47 respectively, related to the ESPP. 10. Compensation and Benefits The Company has recorded the following amounts related to compensation and benefits: Year Ended March 31, 2021 2020 2019 Base compensation and benefits $ 116,371 $ 85,763 $ 79,728 Incentive fee compensation 12,869 7,192 7,785 Equity-based compensation 7,079 7,183 6,382 Contingent compensation related to acquisition — — 5,100 Total compensation and benefits $ 136,319 $ 100,138 $ 98,995 127 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) The Company provides defined contribution plans covering U.S., United Kingdom and Hong Kong employees subject to minimum age and service guidelines. Eligible employees may contribute a percentage of their annual compensation subject to statutory guidelines. The Company makes discretionary and/or matching contributions to the plans, which amounted to $ 1,906 , $ 1,561 , and $ 1,507 for the years ended March 31, 2021, 2020 and 2019, respectively, and is included in compensation and benefits expense in the Consolidated Statements of Income. 11. Income Taxes The Company’s income before income taxes consisted of the following: Year Ended March 31, 2021 2020 2019 Domestic income before income taxes $ 190,459 $ 138,537 $ 128,035 Foreign income before income taxes 2,743 2,207 1,522 Total income before income taxes $ 193,202 $ 140,744 $ 129,557 Components of income tax expense consist of the following: Year Ended March 31, 2021 2020 2019 Current: Federal $ 14,121 $ 4,885 $ 7,163 State and local 2,513 754 1,269 Foreign 756 400 463 Total current income tax expense $ 17,390 $ 6,039 $ 8,895 Deferred: Federal $ 7,245 $ 6,589 $ 3,654 State and local ( 211 ) 1,315 17,917 Foreign ( 7 ) 25 94 Total deferred income tax expense 7,027 7,929 21,665 Total income tax expense $ 24,417 $ 13,968 $ 30,560 A reconciliation of the U.S. statutory income tax rate to the Company’s effective tax rate is as follows: Year Ended March 31, 2021 2020 2019 Federal tax at statutory rate 21.0 % 21.0 % 21.0 % State income taxes, net of federal benefit 0.6 % 1.7 % 1.4 % Non-controlling interest ( 7.6 ) % ( 9.8 ) % ( 10.8 ) % Valuation allowance ( 1.0 ) % ( 0.9 ) % 1.9 % Deferred tax asset state apportionment changes — % — % 10.3 % Other ( 0.4 ) % ( 2.1 ) % ( 0.2 ) % Effective tax rate 12.6 % 9.9 % 23.6 % 128 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) The significant components of deferred tax assets and liabilities are as follows: Year Ended March 31, 2021 2020 Deferred tax assets: Basis difference in HLA $ 248,586 $ 150,309 Tax Receivable Agreement 48,480 24,020 Fixed assets 42 42 Net operating loss carryforwards 983 1,569 Valuation allowance ( 46,728 ) ( 37,969 ) State taxes 586 ( 30 ) Total deferred tax assets $ 251,949 $ 137,941 As of March 31, 2021 and 2020, the Company had net operating loss carryforwards of $ 5,045 and $ 6,902 . These net operating losses can be carried forward indefinitely. As of March 31, 2021 and 2020, it is more likely than not that the tax benefits from certain of these net operating loss carryforwards will not be realized, therefore, a valuation allowance of $ 176 and $ 768 has been established, respectively. In connection with the offering activity in fiscal 2021 and related unit exchanges, the Company recorded a deferred tax asset in the amount of $ 121,065 , which is net of a valuation allowance of $ 9,591 related to the portion of tax benefits that it is more likely than not will not be realized. Additionally, in connection with recording the deferred tax asset for the fiscal 2021 offerings and related unit exchanges, the Company recorded a payable to related parties pursuant to the tax receivable agreement of $ 102,052 . The Company believes it is more likely than not that the deferred tax assets (except those identified above) will be realized based on the Company’s historic earnings, forecasted income, and the reversal of temporary differences. The net change in the valuation allowance was an increase of $ 8,759 , which was recorded through additional paid-in-capital and income tax expense. As of March 31, 2021 , 2020, and 2019, the Company had no unrecognized tax positions. The Company does not expect any material increase or decrease in its gross unrecognized tax positions during the next twelve months. If and when the Company does record unrecognized tax positions in the future, any interest and penalties related to unrecognized tax positions will be recorded in the income tax expense line in the Consolidated Statements of Income. The Company files income tax returns as required by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company may be subject to examination by federal and certain state and local tax authorities. As of March 31, 2021, the Company’s income tax returns from 2017 remain open and are subject to examination. Tax Receivable Agreement The Company has recorded a liability related to the TRA of $ 194,764 and $ 98,956 as of March 31, 2021 and 2020. A payment of $ 6,894 and $ 1,952 was made during the year ended March 31, 2021 and 2020. In the event that the valuation allowance related to tax benefits associated with the tax receivable agreement is released in a future period, an additional estimated payable will be due to the TRA Recipients of $ 13,679 . 129 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) 12. Earnings per Share Basic earnings per share of Class A common stock is computed by dividing net income attributable to HLI by the weighted-average number of shares of Class A common stock outstanding. Diluted earnings per share of Class A common stock is computed by dividing net income attributable to HLI by the weighted-average number of shares of Class A common stock outstanding adjusted to give effect to potentially dilutive securities. Shares of the Company’s Class B common stock do not share in the earnings or losses attributable to HLI and therefore are not participating securities. As a result, a separate presentation of basic and diluted earnings per share of Class B common stock under the two-class method has not been included. Shares of the Company’s Class B common stock are, however, considered potentially dilutive to the Class A common stock because each share of Class B common stock, together with a corresponding Class B unit, is exchangeable for a share of Class A common stock on a one-for-one basis. The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings per share of Class A common stock: Year Ended March 31, 2021 2020 2019 Basic net income per share: Numerator Net income attributable to HLI $ 98,022 $ 60,825 $ 33,573 Less: Deemed dividend for the accretion of redeemable non-controlling interest ( 4,637 ) — — Net income attributable to Class A common stockholders - basic $ 93,385 $ 60,825 $ 33,573 Denominator Weighted-average shares of Class A common stock outstanding - basic 33,152,318 28,088,578 23,836,401 Basic earnings per share $ 2.82 $ 2.17 $ 1.41 Diluted earnings per share: Numerator Net income attributable to Class A common stockholders - basic $ 93,385 $ 60,825 $ 33,573 Adjustment to net income: Assumed vesting of employee awards 229 352 355 Net income attributable to Class A common stockholders - diluted $ 93,614 $ 61,177 $ 33,928 Denominator Weighted-average shares of Class A common stock outstanding - basic 33,152,318 28,088,578 23,836,401 Weighted-average effect of dilutive securities: Assumed vesting of employee awards 210,047 350,194 462,394 Weighted-average shares of Class A common stock outstanding - diluted 33,362,365 28,438,772 24,298,795 Diluted earnings per share $ 2.81 $ 2.15 $ 1.40 The calculations of diluted earnings per share exclude 17,553,234 , 23,968,994 , and 26,420,627 outstanding Class B and C units of HLA for the years ended March 31, 2021, 2020 and 2019, respectively, which are exchangeable into Class A common stock under the “if-converted” method, because the inclusion of such shares would be antidilutive. 130 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) 13. Related-Party Transactions The Company considers its employees, directors, and equity method investments to be related parties. Revenue and Receivables The Company has investment management agreements with various specialized funds and customized separate accounts that it manages. The Company earned management and advisory fees from Partnerships of $ 199,422 , $ 161,323 , and $ 134,343 for the years ended March 31, 2021, 2020 and 2019, respectively. The Company earned incentive fees from Partnerships of $ 47,962 , $ 24,077 , and $ 31,876 for the years ended March 31, 2021, 2020 and 2019, respectively. Fees receivable from the Partnerships were $ 14,814 and $ 16,970 as of March 31, 2021 and 2020, respectively, and are included in fees receivable in the Consolidated Balance Sheets. Expenses and Payables The Company entered into a service agreement on June 1, 2017 with a joint venture pursuant to which it incurred expenses of $ 3,978 , $ 5,289 and $ 5,058 for the years ended March 31, 2021, 2020, and 2019 respectively, which amounts are included in general, administrative and other expenses in the Consolidated Statements of Income. The Company also has a payable to the joint venture of $ 325 and $ 428 as of March 31, 2021 and 2020, respectively, which is included in other liabilities in the Consolidated Balance Sheets. Other Transactions On January 31, 2020, the convertible promissory note (the “Note”) held by the Company issued by one of its equity method investments was settled by converting the outstanding principal and accrued interest into shares of the investee per the terms of the Note. The Company received 2,278,524 shares of the investee which were recorded at the carrying value of the Note of $ 902 at the date of conversion. These shares are included with similar shares of that investee as investments held under the measurement alternative. On January 31, 2020, the Company entered into an asset purchase agreement with one of its equity method investments for the code and an exclusive license to distribute the Cobalt LP software. The cost of the asset acquisition was $ 6,373 , which consisted of an upfront cash payment of $ 4,000 , a previously deferred cash payment of $ 1,000 made during the fiscal year ended March 31, 2021, contribution of equity shares of the investee valued at $ 2,201 and direct transaction fees of $ 172 . The assets purchased were recorded as intangible assets in other assets in the Consolidated Balance Sheets and will be amortized over 7 years. 131 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) 14. Supplemental Cash Flow Information Year Ended March 31, 2021 2020 2019 Cash paid during the year for interest $ 1,986 $ 2,854 $ 2,966 Cash paid during the year for income taxes $ 6,331 $ 7,804 $ 10,176 Cumulative-effect adjustment from adoption of accounting guidance $ — $ — $ 997 Shares issued for contingent compensation payment $ — $ 425 $ 425 Establishment of lease liability in exchange for ROU asset $ 61,725 $ 14,776 $ — Non-cash investing activities: Conversion of note receivable $ — $ 902 $ — Contribution of investment for purchase of intangible assets $ — $ 2,201 $ — Non-cash financing activities: Establishment of net deferred tax assets related to tax receivable agreement $ 121,065 $ 37,394 $ 56,010 Deferred underwriter fees related to consolidated entity $ 9,660 $ — $ — Dividends declared but not paid $ 11,201 $ 8,027 $ 5,673 Members’ distributions declared but not paid $ 16,877 $ 5,829 $ 17,081 15. Commitments and Contingencies Litigation In the ordinary course of business, the Company may be subject to various legal, regulatory, and/or administrative proceedings from time to time. Although there can be no assurance of the outcome of such proceedings, in the opinion of management, the Company does not believe it is probable that any pending or, to its knowledge, threatened legal proceeding or claim would individually or in the aggregate materially affect its consolidated financial statements. Incentive Fees The Partnerships have allocated carried interest, which has not yet been received or recognized, in the amounts of $ 648,772 and $ 441,150 at March 31, 2021 and 2020, respectively, of which $ 3,704 at March 31, 2020 was received and deferred by the Company. If the Company ultimately receives the unrecognized carried interest, a total of $ 162,193 and $ 110,288 as of March 31, 2021 and 2020, respectively, would be potentially payable to certain employees and third parties pursuant to compensation arrangements related to the carried interest profit-sharing plans. Such amounts have not been recorded in the Consolidated Balance Sheets or Consolidated Statements of Income as this liability is not yet probable. 132 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) Leases The Company’s leases consist primarily of operating leases for office space and office equipment in various locations around the world, which have remaining lease terms of one year to 17 years. Some leases have the option to extend for an additional term or terminate early. Short-term lease costs are not material. The Company entered into a 17 year lease agreement for its new headquarters in a newly constructed building. The Company was granted access to the space in October 2020 to begin building various leasehold improvements and expects to move into the property in June 2021. The following table shows lease costs and other supplemental information related to the Company’s operating leases: Year Ended March 31, 2021 2020 Operating lease costs $ 5,216 $ 4,838 Variable lease costs $ 863 $ 557 Cash paid for amounts included in the measurement of operating lease liabilities $ 7,352 $ 5,108 Weighted average remaining lease term (in years) 15.4 2.9 Weighted average discount rate 3.4 % 5.2 % Total lease expense was $ 5,851 for the year ended March 31, 2019 and was recorded on the straight-line basis and included in general, administrative and other expenses in the Consolidated Statements of Income. As of March 31, 2021, the maturities of operating lease liabilities were as follows: FY2022 $ 6,189 FY2023 6,806 FY2024 6,193 FY2025 5,691 FY2026 5,078 Thereafter 71,808 Total lease payments $ 101,765 Less: imputed interest ( 26,484 ) Total operating lease liabilities $ 75,281 Commitments The Company serves as the investment manager of the Partnerships. The general partner or managing member of each Partnership is generally a separate subsidiary of the Company and has agreed to invest funds on the same basis as the limited partners in most instances. The aggregate unfunded commitment of the general partners to the Partnerships was $ 201,442 and $ 143,489 as of March 31, 2021 and 2020, respectively. 133 Hamilton Lane Incorporated Notes to Consolidated Financial Statements (In thousands, except share and per share amounts) 16. Quarterly Financial Information (Unaudited) For the quarter ended June 30, 2020 September 30, 2020 December 31, 2020 March 31, 2021 Total revenues $ 69,744 $ 84,431 $ 84,583 $ 102,877 Total expenses 40,911 46,117 41,864 57,015 Net income 4,968 44,599 54,632 64,586 Net income attributable to HLI 3,246 21,813 33,203 39,760 Earnings per share of Class A common stock: Class A - Basic $ .11 $ .66 $ .96 $ 1.01 Class A - Diluted $ .11 $ .66 $ .96 $ 1.00 For the quarter ended June 30, 2019 September 30, 2019 December 31, 2019 March 31, 2020 Total revenues $ 64,686 $ 64,292 $ 68,138 $ 76,932 Total expenses 37,693 37,367 39,246 43,313 Net income 27,453 32,273 28,437 38,613 Net income attributable to HLI 11,381 15,299 13,497 20,648 Earnings per share of Class A common stock: Class A - Basic $ .43 $ .56 $ .46 $ .71 Class A - Diluted $ .42 $ .56 $ .46 $ .70 17. Subsequent Events On April 1, 2021, the Company acquired substantially all the assets of 361 Capital, LLC for a total aggregate cash amount of $ 13,000 , of which $ 10,000 was paid on the closing date of the acquisition. The the remaining $ 3,000 will be paid in two equal installments on the first and second anniversaries of the closing. The preliminary purchase price based upon the fair value of consideration transferred at the date of acquisition is $ 12,850 . The Company expects to record approximately $ 7,145 of intangible assets related primarily to the acquired investment management contracts, which will be amortized over seven years , and $ 5,623 of goodwill. The remaining assets acquired and liabilities assumed are not expected to be material to the consolidated financial statements. The purchase price and allocation are still preliminary and subject to change as the valuation is finalized. On April 22, 2021, the Company amended its Term Loan Agreement to provide an additional $ 25,000 of committed borrowing capacity and amended its Multi-Draw Facility to increase the maximum commitment amount from $ 75,000 to $ 100,000 as well as extend the period to request an advance under the facility until March 31, 2022. On May 27, 2021, the Company declared a quarterly dividend of $ 0.35 per share of Class A common stock to record holders at the close of business on June 15, 2021. The payment date will be July 7, 2021. 134 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.