Q3 2021 Sculptor Capital Management Inc Earnings Call
Good morning, everyone and welcome to the sculptor Capitals third quarter, 20th 21 earnings call. At this time, all participants are in a listen only mode.
We will conduct a question and answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star and then zero on your Touchtone telephone as a reminder, this conference call is being recorded I would now like to introduce your host for today's conference at least King head of corporate strategy and shareholder services ask up to Capitol.
Good morning, everyone and welcome to our journey.
Our chief investment Officer.
Exactly when.
<unk> Cohen, our president and Chief operating Officer, and David Ritchie, Our Chief Financial Officer.
Today's call contains forward looking statement.
Any of which are inherently uncertain and outside of our control.
Before we get started I need to remind you that sculptor capitals actual results may differ 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 are business and other matters related to these statements the.
The company does not undertake any obligation to publicly update any forward looking statements.
During today's call will be referring to economic income distributable earnings and other financial measures that are not prepared in accordance with U S gap.
Permission about and reconciliation of these non-GAAP measures. The most directly comparable GAAP measures 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 in any of our funds or any other entities yes.
Yesterday, we reported third quarter of 2021, GAAP net loss of $4 million or 17 cents per basic undiluted cost a sure distributable earnings for $35 million or 58 cents per fully diluted share. We declared a dividend of 28 cents per class a share I'll now pass the call over to Jim.
<unk> for a few words.
Good morning, everybody welcome to the call.
Want to start with just two high level of comments.
About the business. If you think about the key pieces, we need to generate fun performance and of course, we need to have assets to manage and as far as that a U M. We care about the.
The quantity the quality and importantly, I don't know for all of you that kind of direction of travel for that overtime.
And both on the performance and on the website, we feel really good and we feel we had oh, great quarter of performance a great year to date period of performance. We think it's now been a multiyear period of somewhere between good and terrific performance across almost everything we do in the platform.
And on the a U M side I would say same concept. Obviously, there was a cute focus on that issue and particularly within the open ended funds and if we step back a little bit from kind of counting each month and counting each quarter and trying to dissect each one of our release.
Which of course is part of what we all do.
We went from.
An extended period of time, where we had very little inflow and frankly quite elevated outflow to now being in a period of time, where we're getting.
She pretty material or significant inflows measured in excess of a billion dollars on the multi stretch side year to date and outflows that represent frankly normal churn.
And so when I look at those a couple of big stats I say, we're moving in the right direction will it continue obviously, we can't predict that perfectly but everything we look at shows where in a wildly different place than we were over the last several years and it seems like that.
Trend ought to continue so that's something that we feel are really good about and if I if I almost stopped the conversation right there and said performance and flows a U M.
Generally feeling good and that's that's most of the business now moving forward into greater detail wanted to talk about continued growth in the balance sheet I got a topic. We've spent a lotta time discussing with you all we're going to keep building the balance sheet, there's no specific target for that in my.
But while we continue to observe is the alternative asset management industry has gotten much more sophisticated.
Much more complex operating across a greater range of products distribution channels structures, most of which involve the need for capital from the management company itself I kind of take the simplest example of that if we think we do a terrific job of managing.
Real estate style investing xyz, and we decided that we want to raise a fund for real estate investing style xyz that fun requires a G. P capital commitment that's kind of the simplest and I'll call. It almost old fashioned version of a usage of capital and then there's a whole great wide world out there that.
You observe across the certainly the public alts that are quite a bit more complicated than additive off quite a bit more capital than that so in order to be in that conversation mm and and have a chance to plant those seats. We Wanna play it we're gonna keep building our capital.
Another topic that we hit on in the letter is.
Slightly more mundane one but I know is important in the current context, it's just the timing of our earnings timings of our revenue and timing of are expensive. So we had.
Materially outsized earnings in the fourth quarter of 2020, because we crystallized significant of beury that we had already largely paid compensation expense for in the first three quarters of this year I'd say, a similar phenomenon in terms of revenue recognition without variable bonus expense against it do.
To the policy, which Dave I can talk about in more detail of of when we recognize.
That bonus expense, which is particularly at the end of the year in excess of whatever are fixed accrual is.
This year, we number one of created and hopefully will continue to create significant Ah Ah Berea on the credit side for which there will be compensation, but no or I should say no not no without full revenue recognition and then the intraquarter effect of having.
Crystallized revenue from incentive during a year without the associated your income for that so that'll create some timing differential which again has smoothed out if you look at it from last year into this year into next year in future years, it sort of works out over time, but we did want to <unk>.
Flag that for everybody's attention.
I think with that we can.
Jump into Q&A.
Thank you.
You have a question at this time. Please press star followed by the number one on your Touchtone telephone. If your question has been answered or you would like me to remove yourself from the queue. Please press star followed by two on your Touchtone telephone.
One moment, please while the pole.
And our first question is from the cats with Citigroup. Please.
Police will see what your question.
Okay. Thank you very much can you guys hear me okay.
Yeah.
Okay, well. Thank you can like everybody. So I'll just stay at first question give me picking up until the balance sheet commentary using that as an opportunity to grow the business.
You need to take that down a layer it too and so to speak to when you look at the evolution of the alternative asset managers face when you look at where the opportunities like <expletive> like what what are the products are areas that you feel you need to continue to build capital debates actually participating.
Participating and how quickly do you think you paid changes should actually trying to go for a related businesses against that.
Yeah, well I'll I'll give you some it may not be as much as you.
Like but we generally think of it in three buckets and I tried to put this language into the letter there is.
New products for our existing investment capabilities, there are new distribution channels for our existing products and then there is new areas altogether.
And I'd say across that spectrum, that's kind of the order of priority of the order of probability and and the order of the timing right. So maybe one and two are tied in certain ways or could swap spots in certain places but.
The example, light or sort of the mock example that I gave just now at the at the beginning of the call. If there's something we're doing already in our existing funds and this is what's given rise to a lot of what our new businesses I've been overtime.
As part of our multi strategy business or credit business or a real estate business, we find ourselves doing one type of thing and.
It seems like we do it really well over time, we create standalone products or standalone funds for that and so that's the idea of creating products out of our existing expertise and the list for that is pretty long, but from our perspective.
It has to really make sense, we have to believe it can really scale. We have to believe it can be additive to whatever investment product gave rise to it in the first place but the.
The list of that type of Productization is a long list not a shortlist and historically for us that's probably been the lowest lead time item for growth. If you will but again on the capital front takes capital.
Any new fun requires a commitment and so that takes capital that type of growth doesn't tend to add a lot of incremental costs, though cause you're you're generally doing the thing you were already doing just doing it in a different way.
The new distribution channels, Oh, sorry, and just to chat a little more color that probably most applies took to various areas across our credit in real estate business in terms of what we're focused on going for it there.
In terms of new distribution channels for our existing products. This is where.
In the last several years, particularly where our organization was focused on other things there has been a massive proliferation of product.
And if you look across certainly the public all its which are are getting quite big relative to to us as a auto market cap basis as far as the peer comparison goes but on some of those large public all it's whether it's the retail space, the nontraded wreaths or B D C space.
Miss the insurance space and insurance itself has an unlimited number of sub bullets at this point.
Oz are all areas, where it effectively represents just new distribution channels for existing products. We have are existing capabilities. We have which are very long lead time requires significant capital and also in certain cases require a significant expense now those are areas that probably have even higher long term payoffs.
But that's kind of why it's number two in our in our list as far as ease probability timing et cetera relative that first bucket and.
And the third bucket as new areas altogether and frankly this as a catch all for.
He's making sure that we're we're thinking of what comes next in the world, but does it represent some you know specific next quarter's announcements so to speak.
Okay. Thank you for that color and they want for Ah Ah down there just can you break down what the typical realisation slightly it can't be out to the credit just trying to think about like the I guess to wrap you catch up to the top.
And then more broadly as you think about variable calm to variable.
All the time.
I know you'll get guidance on this there's any reason to think that your structure is any different than what you're seeing it can be a key periods of how they said it.
E mail that computation intensive oriented income.
Sure I can take that one.
So on the first question. If you think about our opportunistic kind of thought that we really have two separate unlock one one of the cost and I'm kind of platform and that is about half a b a U M N.
And that is what creates are are I'm sorry.
Yeah if.
If you remember back in Q4 of last year Recrystallize, a significant portion of that are very balance related to the kind of hotline.
This year you are trying to see that bill and the reason is that as a multiyear on that largely crystallizes happy and does that period and it will be a multiyear period from today and we will see the bulk of that and kind of crystallization occurring at that point.
[laughter] excuse me on that question.
Question that you had.
Which relates to revenue recognition, we are slightly different in our public tears most of them have any different revenue recognition policy, which allows them to recognize bearing fantasies, along the way as opposed to our <unk>, our revenue recognition methodology, which.
He allows us to recognize.
Not that I have any once it has been only crystallize and no longer subject to call back. So our policies are a bit different than our P. As in terms of that revenue.
Yeah, I'll hop back Ache you. Thank you.
And our next question comes from the line of Gerry O'hara with Jeffries. Please proceed with your question.
Great. Thanks.
Several quarters ago, you kind of mentioned, how you've been building out or sales and distribution to a certain extent hooking it might be a be able to get an update their and perhaps any other areas you are sort of specifically investing for for future growth.
Yeah, I think the.
Sales and distribution come it might be a little some of that commentary might be a bit dated you know we had certainly made some changes and additions to that team over the last several years, but I'd say that project is.
Is largely complete and and kind of has been so for some time.
The second part of the question sorry, Jerry what was that.
Oh I was just are there other areas that perhaps you were investing either from a from a team or infrastructure standpoint.
Across across the business.
So not one specific area, but I would say, it's starting to be a little bit of everything and that's a that's a good thing I forget if it was in the the prior letter or the one before that we talked about no longer giving the fixed expense guidance on the salaries and benefits.
Because we felt like the moves were relatively immaterial, but we wanted to start investing and we frankly hope that we're able to spend more in that category. So that's not meant to certainly not meant it sounds scary or like there's some enormous change coming that we know about it but across almost everything we do.
Do we want to be back and often smoke we've been playing defense for for quite a lot of years on our balance sheet on our expenses on our on our a U M et cetera, and we feel like we're back closer to firing on all cylinders and so we want to capitalize that and find great ways to.
To spend expense in the business to facilitate future growth. So it's not one specific area, we're trying to build out but if there's a handful of things we're trying to achieve and we want to get one or two or three people in in any number of those areas. Then we're looking to invest some some capital across the business, but no.
One specific build out in on the specific point around sales and distribution I I think that might be a bit dated.
Okay Fair enough and then perhaps just one I guess the modeling side can can.
Can we get a bit of an update as it as it relates to the the CLO dynamic and how those are I think kind of resetting as they near an end of life is that something we should we should sort of expected to kind of continue for next several quarters or even years.
Or just kind of how we can better contextualize that'll yeah. So there's a there's a couple of different dynamics, there and I'll talk about each the.
The first dynamic is just when you start a platform from scratch in 2011 or 12 on structures that have about five to 10 year life. You eventually get to the point, where you're not just creating new deals you're also facing what happens at the end of old deals and that can.
Manifest itself in a call where a deal completely goes away in an amortization were ideal shrinks or in some version of a refi reset restructure which is where there's a whole bunch of moving pieces in a deal ends up carrying on in some version of its prior self and so the first is.
She was we're just we're at that level of maturation, where we've created billions of dollars of deals that are later in their life of deals.
There is a second factor in probably the more important one for for everything we all follow and certainly for our own.
Cielo management platform, which is that.
Headline fees today are lower than headline fees in 2012, and so we put out some information to tell you about what those an average management fees are but there's also an unlimited amount of publishing on this this topic in the industry and so not only are deals getting to end of life, but new deals we create our.
Or at typically a lower management fee than a decade ago and as certain end of life deals get extended or re created through these various refis resets restructurings, they're generally getting recreated at spot economics as opposed to the the decade as it goes economics and so.
The now against that we have healthy issuance again, so we are back to creating you know what I'd say is a pretty good calendar of new issue bullshit in the U S and Europe. Each year again that is that spot economics. So all of this is getting to the punch line of when do when when does the accident.
Portfolio of deals.
Have today's spot economics in terms of of.
Of average fee.
We think that happened sometime in the next 12 to 24 months probably on the earlier side on the later side, but that's an inexact science. So some time over the next year or two.
And again it could be on the front end of that you're gonna have spot economic you're gonna have excellent economic start to look like spot economics, and then growth is growth, meaning from there you're not facing this decade ago economics versus today's economics compression, you're just facing the typical are we creating capital in excess of capital.
That's rolling off which we would certainly expect to be doing.
Got it that's actually that's really helpful. Alright, that's it for me Thanks Scott.
Our next question comes from the line of Patrick Daddy Autonomies Research Police will see you with your questions.
Hey, good morning, everyone. Another follow up on the the the balance sheet capital discussion should should we take this to mean that that perhaps your pivoting away from distributing so much of your cash flow.
And maybe even take it you know closer to you know.
[noise], Yeah, 10, 15% or maybe even zero to the extent there are opportunities to invest that into a business one and two through that lens is the balance. She continues to get stronger do you foresee large larger scale M&A being a part of the pie and what would the wishlist be there if so.
Sure sure.
So on the first question and I don't mean this to sound cute I think you can take 100 per cent distribution policy off the table, but as we roll through the distribution holiday et cetera, you could take zero percent off the table as well now that may not have been hugely helpful to you to know that it's gonna be somewhere between zero and one.
Hundred, but the the way of thinking is we wanna be accumulating capital.
And so against that we feel we want to provide some baseline level of distribution for our shareholders but.
The primary goal is gonna be that accumulation of capital because we think the returns longterm. We can earn on that are going to be.
Wildly in excess of the returns of simply distributing it. So we understand that as we move through the distribution holiday, we're going to need to both in our communication and certainly in practice tighten up that 021 hundred range for Ya, but we think we're gonna be somewhere in between of course.
The second point, which is as you accumulate capital how important is M&A.
I think M&A is tough we look at it a lot and we look at it across basically all the areas in which we operate in some of the areas in which we don't.
Multiples in a lot of the businesses that that we are not as big in and think are exciting are frankly really really high today and I'm not saying they are undeserving Lee high they just happened to be very high.
And so even areas we've been excited about we've found it.
Difficult to Wanna proceed on just on that basis forgetting about you know all the all the.
Typical concerns of M&A in the asset management space, So M&A as a tool in the tool kit.
But the organic growth opportunities that are capital consumptive as I as I mentioned the letter that feels like an unlimited landscape of opportunities now of course, our job is gonna be how do we limit that how do we prioritize how do we assess how do we measure the risk and how do we decide where to spend that capital and probably as important as the capitalist.
Where to spend that time, but I would say the.
Organic opportunities Ah seem more exciting now there is a little bit of a gray area in between some of these organic opportunities have.
Have.
There was an inorganic component to it but I wouldn't call. It traditional emanate company buys company B for cash and stock.
Very helpful. Thanks, My follow up is on you know it's tough for you guys to talk about this sometimes but you know you noted in the prepared remarks, you I've got a few years of good multi strapped performance under under your belt and they updated thoughts on the sales pipeline. There you know a a visit <unk> better visibility maybe seem more consistent larger <unk>.
<unk> is coming through at this point.
Hey, I'm Gonna I'll I'll give you the answer and you may roll your eyes, because it's the same one you've heard before but it's it remains true.
You know we went from a gross inflow number that looked pretty close to the number zero I mean, not exactly but it was in that zone of pretty low for a long time for frankly good reason.
And then we said.
As we address whatever hurdles there are to institutional participation in our funds. We expect that the built and then we addressed all of those concerns and it's now been you know a reasonable amount of time since all concerns have been addressed which I think is a hugely important we don't talk about it a lot anymore, because it's old news now, but with those concerns addressed.
In parallel with what is really good.
Your opinion and we thank our clients both current and prospective opinions 1357, 10 year performance basically across the platform. We're starting to see it. So we went from a number that was really really low to a number that's in excess of a billion dollars at this stage through the year.
And what we see on the follow feels really good and that's not meant to.
Be purposely vague no one no one tells us whether or not that they're gonna join the funding a year.
But all of the early signs, which is and we put some of this in a letter I forget the exact language, whether it's R. F. P participation, whether it's consultant enthusiasm, whether it's just simply level of activity and interaction and data request all feels like.
The institutional community is evaluating our fund on the basis of its risk and return stream with that which is all we can ask for and we think on that front, we can be a winter so.
I can't put that in for you and the big and small and the timing because we don't know, but certainly all signs point to we are on our way.
Thanks.
And as a reminder, if anyone has any questions you May press star one on your telephone keypad to join D. Q&A Q.
Our next question comes from the line of Bill Cats from Citigroup people see with your question.
Okay. Thank you so much for taking the following questions just maybe tie, but a little bit more at the the hedge fund pipeline is there any way you can dimension.
That you've seen or the corner in terms of the RFP activity any new distribution Chan.
Channels or anything so upgrade how does that 1.1 billion plus in Philadelphia compared to where you are at the at the end of June.
Yeah. So if if I think what you're getting at is there like sort of a backlog concept. The answer to that question is no not not really cause there are pieces of it which we we wouldn't share in this format.
Publicly anyhow, but the answer really is that there's not that type of concept that's.
Just simply not how the institutional capital raising process works the way it works is.
Do a really great job be generally approved across the universe of of intermediaries consultants et cetera be out in front of clients and.
M as people have a need for the thing that we do we hope to win our market share of that of those dollars and again that that process feels like it's working it feels like it continues to work, but I don't think you can look at it in terms of kind of the.
You know here's what was gross inflow here is what's backlog here's backlog conversion is just not that type of of process.
Okay I just called me I appreciate all the places like as you think about the strategic wrote the business by looking at a balance sheet over time.
Can you talk a little bit how you might be able to work with Delaware life actually accelerate any of those interest.
Yeah.
So Delaware life has been a terrific partner. They also have quite a large balance sheet in that balance sheet as permanent as well they happened to have investment preferences that in many ways align with our own and so sort of all those pieces work together and it's a tool in the tool kit it's one.
That has in certain ways already borne fruit and we expect it to continue to do so I will remind you I know we've done this I'm prior calls.
You should not interpret that as.
A large L P subscription into a certain fund both both older new it's more about identifying overlapping areas of investment expertise and figuring out how that works for both of us in ways that can catalyze new business for us and and create a great returns for them and something they're looking at.
Yeah, just one last one for me to say I listen to this I look around and industry. There's been a couple of flagship transaction and not in the last couple of weeks or so with some very large premium both of those name Tasha accuse me on everything.
How do you think about independent sculptor versus potentially combining with a larger placable naked maybe more easily either scale your existing platform or accelerate thank you trying to accomplish their Soviet fears are well ahead of you when it comes to that application.
Yeah.
So we certainly seen the headlines we certainly done our best to try to impute, what the numbers were in and we agree with you that that looks.
Noteworthy.
I would say a lot of the transactions that we've seen seemed like.
[noise] affirmed that's already accomplished their objectives and then it's sort of going through this process to maybe get to an entirely new different phase.
We are in the zone of trying to accomplish our objectives and it feels like you know I don't know.
Six months into the job or or whatever it's been exactly there is.
What we think is significant low hanging fruit now.
Low hanging fruit doesn't get picked over a quarter or a month or frankly, even a year. When you look at the businesses that just got so that's where a person concentrated on building that for 10, 15, 2030 years and I'm not saying, that's what exactly what we need to do but there's a whole world of opportunity before.
For us where we are now armed with for the first time, what I'll call sort of Reputational clearance, we've got all our issues sorted out in the world seems to be behind what we're doing we've got terrific performance that we've now got some capital to deploy and hopefully more capital to accumulate and deploy.
The low hanging fruit implied by all of that feels like now isn't the time to do what you're describing.
Thank you for taking all the questions.
And our next question is from the line of Patrick Davidowitz Autonomies Research. Please proceed with your question.
Thanks for the follow up.
This is probably tough to answer, but and I know, it's changing every day, but in particular on the the potential corporate minimum tax your cash tax rate has usually been below 15%, but.
Obviously, you're GAAP earnings are much different than your cash running so not sure, which one we should be looking at but any ideas or thoughts on the exposure to that in particular or any of the other tax proposals out there.
That's for Dave or Wayne.
It's really hard to comment Patrick sorry, it's a really good question, but it's really hard to comment on tax rules that [noise].
Excuse me that are proposed and not more than that so.
Obviously T extend that there is more information that comes out over time, we'll evaluate and react to it but it's not something we can really playing around or look at it any more detail right now.
Alright, Thanks [noise].
Yeah, I'm not showing any quite as further questions I will now turn the call back over to Mrs. King.
This is mine and makes everyone forget.
And for your interest.
Now have you have any questions. Please.
Contact me he went to 199381.
Right.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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