Q2 2021 Sculptor Capital Management Inc Earnings Call

[music].

Good morning, everyone and welcome to sculptor capital second quarter 2021earnings call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require operator assistance during the conference. Please press star and.

Zero on your Touchtone telephone.

Reminder, this conference call is being recorded.

I'd now like to introduce your host for today's conference Elise King head of corporate strategy and shareholder services at sculptor capital.

Thanks, Stacy good morning, everyone and welcome to our call. Joining me are Jimmy Levin, Our Chief investment Officer, and Chief Executive Officer, Wayne Cohen, Our President and Chief operating Officer, and David Ritchie, Our Chief Financial Officer. Today's call contains forward looking statements many of which are inherently uncertain.

And outside of our control.

Before we get started I need to remind you that sculptor capital's actual result may differ possibly materially from those indicated in these forward looking statements.

Please refer to our most recent SEC filings for a description of the risk factors that could affect our financial results our business and other matters related to these statements. The company does not undertake any obligation to publicly update any forward looking statements.

During today's call, we'll be referring to economic income distributable earnings and other financial measures that are not prepared in accordance with U S. GAAP.

Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measure are available in our earnings release, which is posted on our website.

No statements made during this call should be construed as an offer to purchase shares of the company or an interest from any of our funds or any other entity.

Earlier this morning.

A booming market and that led to some terrific performance Covid recovery outsized Crystallin nation, but probably more importantly underneath those numbers is also significant progress towards the long term goal of meaningfully improves FRE meaningfully improved mark.

<unk> and hopefully.

The ability to keep compounding our long term earnings power so.

The.

Line factors were pretty healthy and of course, we'll take a performance tailwind like that when when we can get it.

Fund performance.

Across multi strategy across credit across real estate, both on a year to date basis.

As well as again more importantly on a 135 year basis really continues to be somewhere between good and terrific.

And so we're pleased with that our clients are pleased with that and we see that that continues to have a positive impact both on the net inflows, where now receiving as well as the dialogues we're having in the pipeline, we see coming from that.

A real estate credit fund wreck 1 is now fully deployed.

As we publish it's doing a 12% net return.

Then a number we're really excited about it and we think 1 that bodes well for the future of that franchise.

Sorry for which is the most recent vintage of our real estate equity fund.

Is now 40 per cent committed so we're careful net culturally we don't like to celebrate wires going out.

In the investment business, we'd like to celebrate when those wires come back in that said the fact that we're at 40 per cent committed.

Relates to the fact that it has been a great investment environment. Some of that obviously has been COVID-19 driven and we've been able to take advantage of it and feeling good about where we stand. There. In addition that you'll have seen some additional real estate AUN.

In the form of a large coinvest vehicle that was created during this quarter. There was another large 1 that had been created during the prior quarter.

That coinvest process.

Allows us to 1 go after bigger deals and speak for bigger size in the real estate market, which is helpful tool and it also allows us to satisfy demand from the applicator community to do more with us in real estate, so unhealthy trends in in a micro in a macro sense.

Cielo business.

Oh, sorry back to flow so.

Second quarter again, net inflows into the multi strategy funds.

We don't know if it's a straight line up from here or not and I know that's the question that everybody likes to talk about what we do know is we went through a multiyear period, a pretty significant net outflows, we were able to stem that in terms of both reducing those growth out gross outflows and beginning to generate grew.

<unk> inflows and now after a pretty long slog, we've had a couple of quarters in a row of achieving the at least the directionality, we want to achieve which is net inflows and so we're excited about that and it seems like it's a.

A pretty positive sign.

Within the CLO business was extremely active quarter, it's been extremely active year Ah.

A significant number of new issues, a significant number of <unk>.

Reset refi restructuring activity of.

Existing deals.

I'm sure, we'll get into more of that during Q&A.

On the balance sheet fronts.

Adjusted net assets north of $300 million up $74 million in the quarter, we prepaid another $50 million on our term loan taking that that number to less than $100 million, which is something that we are thrilled about obviously there is no magic to the number of greater or less than $100 million, but after.

Again, a pretty long slogging objective, we've had for quite some time to address something that we thought needed significant.

Focus on our part to kind of finally be at a level like that both on an <unk> basis as well as on a total total.

Total debt basis makes us feel pretty good about the business.

Another point on that.

The recapitalization transaction from a couple of years ago was specifically designed to repair the balance sheet and restore the balance sheet and allow us to rebuild that allergy. We are still in the distribution holiday of that recapitalization transaction, which means by definition. The level. We are at today will be higher when.

We're done with the distribution holiday is in order to complete the distribution holiday we have to continue to earn economic income and we will continue to build a balance sheet with that economic income. So we like where we are today and we know that.

By definition should we should we ever get out of the D. H, we will do so with an even stronger balance sheet, which.

Yeah, hopefully makes the future.

World Bright for us and allows us to attack that from a position of meaningful strength. So we.

With that we will go back to the operator and buy your way with Q&A.

Thank you if you have a question at this time. Please press star followed by the 1 on your Touchtone telephone.

Answer your question has been answered or you would like to remove yourself from Q price star too.

Your first question comes from Bill Cats, which city.

Okay. Thank you very much for taking the question good morning, everyone and yes, very appreciative of the added disclosure Super helpful.

So just maybe picking up on the CLO discussion I think in your prepared remarks in the press release, you spoke a little about navid accounted balance between so good opportunity to sort of grow the business versus maybe the back book a maturing a little bit so.

They're a risk here that the seal is just sort of move sideways just given some of the.

Would run off for lack of a better word versus what you can maybe bring in the door and they were lately could you quantify how much pressure that might be on the fee right given that mix.

Sure. So we're not going to answer the second question quantitatively, but I can describe to you what's going on and hopefully that'll be helpful.

So you've seen the absolute level of 8 ohm has been about churning recently.

And I know, you've written about that and you've observed in the numbers and with that there has been some net effective fee right compression as you called out when deals get to the end of their life and remember we started the business in 2012 I think we did our first deal in July of 12.

And so now we're well into we have been for the last couple of years and probably will be for the next year or 2 in this period of still having a pretty significant amount of outstanding cielo deals which were.

Were issued a long time ago, so as those deals come up you have.

2 choices I mean, it's really 3 choices and when I say to you in that case, it's really the equity investor in that deal who has the choice, but deals can either enter runoff, where they begin to amortize down and you see some of that of numbers. When we talk about distributions and other reduction some of that is just run off of old deals deals can be called.

Which for US shows up as liquidation of a deal that's that's how we disclose that.

Or deals can be reset refinance the restructured in some way to extend their life.

The third bucket.

Number 1 serves the investors in those deals of a deal as being reset refinance to restructure its because the underlying equity and note investors are willing participants in some sort of transaction and so we are doing a service to our investor base in that regard and it also has the added benefit of extending the revenue life of video.

That revenue extension.

Is typically not done at the same economics as a new issue transaction, so you'd certainly rather do it to both serve your investor in extending your revenue than not do it at all but as we work through that entire exiting base of issuance. That's that's legacy.

You're going to see some of that compression continue on some of those older deals that we choose to accent, which again extending them is wildly better economically than not extending them.

Then there was the COVID-19 phenomenon, where the new issue market was.

Relatively shut for a period of time, the new issue market like many other things post Covid has come Roaring back.

We've come Roaring back with it and we expect that to continue so.

There was this period of chopped where essentially new su activity was pretty muted.

Existing deals that were getting late in life, where being readdress that a lower rates.

With.

Some amount of additional churn or continuation of that concept.

At some point in the not too distant future, we should be back in a position of the amount of deals. We issue is in excess of the amount of deals that are rolling off and restructuring the accident portfolio will have already been through its extension with the associate a change in economics, and we ought to re grow hopefully.

The.

From the effective fee and thereby doubly the revenue right getting the revenue impacts from the <unk> from the fee.

I don't think that's starting tomorrow and I don't think the changes between here and there are hugely dramatic but there is some further churn that needs to happen.

Okay. Thank you that's helpful.

So the second question, maybe a broader question just as you think about clothes and sort of address a little bit in your commentary forgoing Q&A around the pipelines were wondering if maybe amplify a little bit on that but just sort of stepping back.

And look and maybe even beyond the hedge fund platform.

Just want to talk a little bit down on the on the long business long only business, where you see the greatest incremental opportunity to growth. Thank you.

So I'm not sure which specific area you mean by the long Lonely are you talking about long term AUN, where you mentioned the word long long you want to clarify that film and I apologize longterm <unk> excuse me.

Okay.

So long term.

And again, we flesh that out and hopefully more helpful detail and highlighting where it is what it is and what it isn't.

And that was probably somewhat overdue highlights for helping to understand frankly, how much better our capital is then maybe.

Had been otherwise assumed.

In terms of the duration of it but the longer term capital is in our.

Can be in a multi strategy funds that can be and are opportunistic credit funds. It certainly within the Ics business and it certainly within the real estate business and.

Each of those represents.

Both as a practical matter, where we are growing and where we hope to grow.

Within the multi strategy funds are we seeing some particular trend for the for the long lockup tranches versus short lockup conscious probably none that there.

There might be some noise, there, but it's an area of focus.

And on the credit side, both opportunistic an Ics as well as the real estate side I think as you well know that's.

That's where we're seeing broad long term trends that we're seeing broad long term institutional allocations increasing.

And that's where we are open to see some growth again in addition to the multi strap on where we are seeing that growth today.

Okay. Thank you.

Once again, if you would like to ask a question. Please call star 1 on your telephone keypad.

Your next question comes from Gerry O'hara with Jeffrey.

Great. Thanks, and good morning was hoping maybe you might be able to give us a little bit of an update on.

On the relationship of Delaware life, and and as it relates to potential new new product generation, either through that partnership or or perhaps just other new kind of new product pipeline that might be might be on the horizon. Thank you.

So the Delaware life partnership has been.

At least in our assessment.

An upside surprise and better than.

We had even hoped I would say so.

Number 1 just there.

Flexibility.

Commercial approach day take too.

The relationship we have with them and the the actual capital structure in 2 parts investment that they have with US has been just awesome.

So that's the first away.

Away from that we have already begun to partner in certain investment areas. The more the more we do with that team. The more excited I get about what we can do in the future now.

I think we address this on the last quarter just to set expectations.

We are not expecting some material investments in our existing funds tomorrow, we're not expecting.

Any sort of.

Obviously, there are there are competitors of ours, who either partially own or have.

Very comprehensive commercial arrangements for the entire balance sheet of an insurance company. This is not of that so I want to make sure. We're clear on that but there are terrific investor with permanent capital in massive size tons of flexibility and they're really interested in a lot of what we do and how.

Or we can.

Productize that and how we can use our own growing balance sheet as well as their currently ample balance sheet to go after investment areas that help to kick start businesses that we think can be terrific for our clients and great for our business.

That's the focus and that's where we are seeing.

Some really positive signs of what's to come.

Okay. That's helpful. And then this 1 might be a little bit.

Harder to to answer but.

Clearly, a very strong quarter with respect to crystal's Asian incentive generation.

Is there anything you could.

Perhaps 0.2 for the third quarter to just give us a sense around what we might be able to expect either seasonally or otherwise just just for modeling purposes.

No it doesn't.

It's not like we know it and aren't telling you it's the nature of the business.

So.

We know a lot more on the last day of the quarter than we do on the first day of the quarter, but.

Sadly there is there's not a lot I can offer you on that front.

Fair enough. Thanks for taking my questions. This morning.

I'm not showing any further questions I will now turn the call from this king.

Thank you.

And then everyone regarding us today and for your interesting sculptor capital. If you have any questions. Please don't hesitate to contact me at 212719738 line.

This concludes today's teleconference. You may disconnect. Your line at this time and thank you for your participation.

[music].