Q4 2021 GCM Grosvenor Inc Earnings Call
Please standby.
Good day and welcome to the GCM Grosvenor fourth quarter 2021 earnings call.
Later, we will conduct a question and answer session. If you are interested in asking a question. Please ensure you're dialing using the numbers you have been provided for this call and press star one on your keypad to join the queue. If anyone should require operator assistance. Please press Star then zero on your telephone.
As a reminder, this call will be recorded.
I would now like to hand, the call over to Stacey Sellinger head of Investor Relations.
You may begin.
Thank you good morning, and welcome to the GCM Grosvenor fourth quarter and full year 2021 earnings call today I'm joined by GCM grabbed Berry's Chairman and Chief Executive Officer, Michael Saks, President, John Mccain, and Chief Financial Officer, Pam Battery.
Before we discuss this quarters results. A reminder, that all statements made on this call that do not relate to matters of historical facts should be considered forward looking statements. This includes statements regarding our current expectations for the business, our financial performance and projections.
These statements are neither promises nor guarantees.
Nolan our non risks uncertainties and other important factors that may cause our actual results or performance to be materially different from our expectations of future results.
Please refer to the factors discussed in the risk factors section of our 10-K for the fiscal year ended December 31, 2020, our other filings with the Securities and Exchange Commission and our earnings release available on the public shareholders section of our website. These factors could cause actual results to differ materially from those indicated by the forward.
We're looking statements on this call.
Well also refer to non-GAAP measures that we view as important in assessing the performance of our <unk> a reconciliation of non-GAAP metrics to the nearest GAAP metric can be found in our earnings presentation and earnings supplement both of which are available on the public shareholders section of our website.
Our goal is to continually improve how we communicate with and engage with our shareholders in that spirit. We look forward to your feedback. Thank you again for joining us and with that I'll turn the call over to Michael.
Thank you Stacey.
Our business performed really well in the fourth quarter and for the full year of 2021.
As you can see on slide three.
Met or exceeded consensus and our own guidance for fund raising revenue growth and profitability.
Importantly, we added value to client portfolios enjoying good investment results across our various verticals.
For the fourth quarter and full year 'twenty, one as compared to the fourth quarter and full year of 'twenty, we grew fee related revenue by 17% and 12% for.
The related earnings by 37% and 27% adjusted.
And EBITDA by 19% and 22% and adjusted net income by 23% and 31%.
Based on the strength of these results our board has increased our stock and warrant buyback program by an additional $20 million.
The strength of 'twenty, one has set us up well for 'twenty, two and we reiterate our 'twenty two guidance for fee related revenue growth of 12% to 15%.
Fee related earnings growth of 20% to 25%.
Last year's success was led by $9 4 billion of fundraising across the firm.
Our fund raising was highly diversified across vertical geography.
<unk> channel and account structure as you can see on slides four and thoughts.
On slide five we provided more information on specialized fundraising that we hope you find helpful.
In 'twenty, one we raised $1 5 billion for diverse managers that total was comprised of 1 billion for our private equity vertical and $500 million for our real estate vertical.
$1 billion of diverse manager capital raised for our private equity vertical includes a successful first fund raise of $770 million, where our advanced one.
We look forward to delivering good results for advanced fund investors, bringing successor advance funds to the market and growing that bond series over time.
Infrastructure capture the largest share of our overall fundraising at $3 5 billion last year.
Both are non institutional or retail fundraising.
And our ESG and impact fundraising were important contributors.
We believe both of these areas provide opportunity for significant growth going forward.
Absolute return strategies had net flows in 'twenty, one that were flat and that was and remains our base case assumption.
While 21 strong fundraising in fee paying AUM growth provides strong momentum for 'twenty two.
It's also important to look at the growth in our incentive fee opportunity that occurred last year.
On slide 10, you can see that our run rate annual performance fees increased by 15%. This past year, while the firm's share of carry at net asset value grew.
Grew by $34 million or 11% in the fourth quarter.
And $198 million or 149% for the full year.
The firm's investments also grew increasing by $25 million or 22% in the fourth quarter and $58 million or 72% for the year.
Importantly.
In the fourth quarter and for the year the firm captured a higher share of the increase in carry at net asset value, which should continue over time as our larger ownership of later carry vintages comes through.
Looking at 2022, we like what we see.
Our fundraising pipeline is larger than the one we enjoyed a year ago, we start the year with more business development resources than we have ever had before and we have four specialized funds with solid track records and market, none of which are first time funds.
The key drivers of our 2022 fr growth are pretty straightforward.
12% to 15% guidance means that we need $42 million to $52 million.
We entered the year with approximately 17 million to $20 million of that growth pretty secure as it relates to the full year impact of our 2021 fundraising and the normal operation of our C&I up less distributions.
That leaves us with 25 million to $32 million up or our growth to achieve and we get that from $3 5 billion to $4 5 billion of funds raised and to outperform our plan has us raising those funds roughly equally.
Between specialized funds and custom separate accounts.
Just as 'twenty, one success set us up well for 'twenty two repeating that success in 'twenty, two will set us up well for 'twenty three.
Looking at Slide 11, you can see the various opportunities that we think have legs and give us confidence with regard to the future.
Consequently, we believe our fr can continue to grow in 'twenty, three and beyond as it did in 'twenty, one and as we have guided to for 'twenty two.
In closing I want to say that I think our stock affords good value at these levels.
As of Friday's close we were trading at $15 six times trailing FRE and $14 four times trailing adjusted net income we had a four 4% dividend yield we have solid growth prospects and we've been around a while.
Someone once said to me that when looking at P/e ratios, it's management's job to drive the E and the Pea will sort itself out we continue to see a lot of opportunity for Grosvenor, and we're focused on driving that E and with that I'll turn it over to John .
Thank you Michael as Michael said in his remarks, it was a strong year for the firm, which we successfully drove returns for clients and harnessed the platform's flexibility to deliver solutions to clients across the full spectrum of alternatives.
Our first job is to deliver strong risk adjusted returns for our clients on an absolute and relative basis.
We were pleased to deliver on that front and what was admittedly a positive environment for risk assets.
Gross performance for absolute return strategies was seven 2% for the year and nine 3% annualized over the last three years, which means we exceeded client objectives and also generated significant alpha.
We think the environment of heightened volatility and increasing interest rates sets us up well for absolute return strategies generally.
Even though January was negative for performance. It was in line with our expectations given the broader market sell off.
Moving to our strategic investments group put simply it's just a really exciting story, we have a unique origination engine and we are leveraging a well to deliver for our clients.
As a reminder, the cig group pursues opportunistic director and co investments sourced in some way shape or form from the full breadth of the firm's open architecture multi alternatives platform.
We primarily run three strategies out of this group are more liquid strategy, we call the special opportunities fund longer duration private equity like strategy, which referred to as the Mac franchise.
And a credit only capability, which we call strategic credit.
Returns across each strategy last year and since inception are fantastic.
More broadly across private markets. We saw strong performance in every strategy, which in addition to delivering value to our clients caused total unrealized carry to double during the year.
Private equity had exceptional returns last year, returning more than 30%.
This includes our most recent vintages, where our secondaries and co investment funds setting those funds up well for strong overall performance.
Our real estate vertical typically pursues value add or opportunistic type investments through partnerships with smaller fund managers are operating partners and after a period of modest impacts from the pandemic. We have seen a strong returns recovery and are quite excited about the forecasted returns for our clients in those strategies.
In infrastructure, we generally target longer data time horizons, and lower return targets been in peak in real estate and we are pleased that even through the pandemic. We have continued to deliver on our goals generating low single digit cash yields and low double digit net returns for clients.
Michael spoke about 2022, and I wanted to dive a bit deeper on two areas that were significant drivers of our growth last year.
First the infrastructure was the largest contributor to our fund raising with $3 $5 billion of capital raised.
Infrastructure assets under management increased 34% in 2021 to $9 1 billion.
The highest AUM increase and any strategy.
Combination of cash Youll generation long dated capital appreciation.
Affiliation protection and a generally growing market opportunity has led to significant growth in infrastructure appetite globally.
Layered on top of that generally constructive backdrop as the natural opportunity to drive ESG and impact initiatives through infrastructure capital deployment. So we think this is only the beginning of this market's evolution.
Our infrastructure platform is ideally positioned to benefit from these dynamics and an asset class with a longer time horizon, having a long standing track record is paramount and we have been investing for two decades and have a cycle tested track record.
We have experience scale and deep relationships in multiple ways to implement our investment ideas investing through the full range of primaries, secondaries and co investments and direct.
And then increasingly in demand strategy. Our platform based approach provides a comprehensive solution to investors seeking diversified global exposure to infrastructure.
The second driver, which we see accelerating in importance as investors focus on co investments secondaries and direct investments.
Our platform for these complementary strategies benefits from our scale and relationships.
Intelligence and insights into thousands of fund managers, we actively track and invest with our critical to this effort.
Further successfully executing transactions requires experienced and deep teams that can move efficiently to complete transactions.
The market increasingly recognizes the strength of this value proposition, which has resulted in significantly higher flows into these areas last year. For example, 70% of our flows into private equity where entities transaction oriented investments.
We see this dynamic persisting, which has the opportunity to impact not only our flows but also of our revenues.
The economics to us for co investing secondary in direct investing are accretive to our business, while importantly, still representing a compelling economic value proposition to investors.
Of course, we can only win when our clients way.
Each quarter, we will attempt to address a couple of the key themes driving the business and there are many exciting stories to tell now I will turn the call over to Pam to address our financial performance.
Thank you Dan.
Are you pleased with our results for the fourth quarter and full year and enter 2022, and a position of strength with highly attractive tailwind.
Fee related revenue grew 17% for the quarter compared to the fourth quarter of 2020, and 12% year over year. Both in line with or ahead of our guidance and indicative of the continued momentum in capital formation and investment performance.
As Michael mentioned that growth in fee paying AUM combined with our anticipated activation of contracted not yet fee paying AUM.
And at least 6% fee related revenue growth in 2022.
We have of what we have guided before any incremental fundraising.
And as John noted, we continue to see a very strong market for capital formation across the full breadth of the platform.
A primary driver of this dynamic is our private market specialized fundraising, which we foresee being a meaningful contributor to revenue next year.
Catch up management fees associated with these bonds compound over time, so typically are higher in the back half of the year.
That point catch up fees in the fourth quarter of 2021 were $4 $3 million the highest of any quarter during the year.
In the first quarter of 2022, we do not anticipate any significant specialized on closings. So therefore, there will be limited to no catch up fees in Q1, and we expect first quarter fee related revenue to be almost $3 million lower than the fourth quarter as.
As was the case in 2021, we expect our 12% to 15% revenue growth to be non linear and weighted heavily towards the back half of 2022.
Our fee rates continue to be very stable across the business a sign of our value proposition resonating in the market. We also continue to experience a mix shift towards higher fee activity, such as co investments direct investments and secondary.
Mid last year, we noted that we expected our administration fees would level off at less than $1 million per quarter, and we expect that to occur starting in the first quarter of 2022.
As a reminder, we provide administrative services primarily to private market clients for over a quarter trillion dollars in assets. This is an ancillary service we offer to many of our clients, which has significant benefits in the form of client retention and data.
Our fee related earnings compensation of $39 $1 million was relatively flat in the fourth quarter compared to the third quarter of 2021 and less than 2% higher than the fourth quarter of 2020.
As we discussed last quarter, we have aligned a greater portion of our compensation with achievement of investment performance and resulting incentive fees given the growing incentive fee earnings power that Michael mentioned.
With the broader inflationary environment, we expect fee related earnings compensation to increase by 6% to 8% in 2022, which is already incorporated into our fee related earnings guidance and anticipated margin expansion.
non-GAAP general and administrative and other expenses were $17 $3 million in the quarter in line with the third quarter levels and again lower than normalized level due to COVID-19 impact on travel and office related expenses.
The activity in that regard has already begun to return we expect increases in general and administrative expenses in the first quarter that will continue to modestly increase through the rest of the year.
Importantly, this trend is already factored into our fee related earnings growth guidance of 20% to 25% and the implied margin expansion that goes along with that.
Our fee related earnings margin with 35% in 2021 up from 31% a year ago and given the significant operating leverage in our platform. We foresee continued margin expansion in 2022 and beyond.
Turning to incentive fees I won't repeat Michael's comments other than to emphasize the broader trend.
The growth in our incentive fee earnings power is accelerating.
As a reminder, realized carried interest is difficult to predict and historically has been most significant in the back half of each year. Similarly, the majority of the annual performance fees crystallize in the fourth quarter of each year based on annual investment performance.
Consequently, and as I mentioned earlier, we had an opportunity to better align our cash incentive fee compensation framework last quarter, which created more stability in our fee related earnings compensation, while further aligning our team with the interests of our clients and shareholders.
Importantly, the right way to look at our cash incentive fee compensation is relative to our firm share of incentive fees, which are net of contractual obligations. This is most clearly shown on slide 10.
As we've noted in the past, we expect to retain 50% to 60% of the firm's share of incentive fees in 2022.
Turning to stock compensation. The vast majority of this continues to relate to awards made in conjunction with our transaction to go public.
Second third as those awards that in March of 2022, and the last third back in March of 2023.
Outside of that original transaction Grant, we expect 2022 dilution to total shares outstanding from normal course restricted stock awards to be minimal around two tenths of a percent.
The business continues to generate strong cash flow and as Youll see on slide 12, our cash balance at quarter end with $96 million as Michael noted, we have increased our stock repurchase plan to $45 million of which we have spent more than $9 million in 2021.
We continue to view the repurchase of shares and warrants as an attractive use of cash and creating shareholder value. So I anticipate a continuation of our repurchase activity.
Finally, we are often cited strong free cash flow generation and the ability to return capital to shareholders as attractive features of our business.
Last quarter, we increased our dividend to <unk> 10 per share and this quarter, we are maintaining that dividend, which will be payable on march 15th to shareholders of record on March 1st.
We continue to be excited by the positive trend of the business and the significant earnings power we are creating.
You again for joining us and we're now happy to take your questions.
Thank you.
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And our first question will come from Ken Worthington with Jpmorgan.
Hi, good morning.
First I'd love to get an update on the insurance side of the business. If I recall correctly, you closed I think $500 million and insurance solutions in <unk> and sort of the inaugural close.
And if I'm backing into numbers correctly, it looks like there may be.
Some additional in <unk>. So can you talk about any milestones reached during the fourth quarter and how we should think about the pipeline for that business going forward.
Sure. Thanks, Ken.
Yeah.
Yeah.
We have as you know high hopes for that insurance channel.
Made a couple of additional hires there since our first.
Our first hire reps since launching that and I think that the third quarter success that you mentioned was.
In a way was early and larger than anybody should have been expecting we did have some <unk>.
Modest success in the fourth quarter, but nothing that I would signal or say as a milestone or the magnitude of the of the success that you reference.
Our pipeline there is full our activity set there is significant and robust and we are you know.
Enjoying there that the type of.
Interaction exchange an opportunity that we.
Thought we saw when we when we made the commitment to the space. So I would expect for that to grow. It's one of the things that we think will help us make our 'twenty two numbers. It's one of the reasons, we're confident putting out some thoughts on 'twenty, three and I would expect it to continue to grow.
Pretty consistently throughout 'twenty, two and 'twenty three and beyond.
Okay, great. Thank you and I forgot to thank you and I started for the additional disclosure amazing Super helpful. So thank you there.
Just for sort of a follow up question on the absolute return business.
I guess, maybe my opinion was the hedge fund industry had kind of a mediocre year in 2021 and it looks to me like Grosvenor performed pretty much in line with that.
You did nail your projections on the business all different parts of your projection.
But given the backdrop for market conditions.
I guess, maybe today and the hedge fund environment.
What are you doing to make grosvenor better than breakeven for sales for 'twenty, two and beyond I heard your guidance for breakeven, but I assume youre kind of working behind the scenes.
To hopefully do better than that so what are you doing and what are sort of the opportunities there and with the equity market.
And interest rate environment, where they are to begin 2022.
Do those help or do those hurt the outlook for net sales and interest in absolute return as we sort of move through the year.
Great. So, let's say so I just want to start with.
As John mentioned in his comments for one and three year periods and frankly, even if you go look at the at a five year period. Our results are in line with or exceed client expectations. So.
It's always important to remember what the what the investors are looking for when they made commitments what that risk reward profile is and then how are we doing relative to that risk reward profile and we're doing well in that regard. So while those returns may look a bit lackluster compared to.
The tremendous returns we've seen from the equity markets. They are.
Meaning you're actually exceeding the.
Jack gives up the client base, which is.
Obviously incredibly important and I want to make sure to point that out generally as we've said before market conditions, where there's a lot of volatility where the markets arent, one way, where there's more uncertainty those tend to be better environments for alternative strategy is a better environment for hedge.
<unk>, we tend to have less volatility in our returns.
Then traditional portfolios do Dan.
So I think that that's a decent backdrop.
For us and for the strategies that the last thing I just want to remind everybody.
Is that within absolute return we have different.
Strategies, we have different.
Offerings.
Some of our offerings in particular, our strategic investments group offering.
He has performed quite well in.
<unk>.
Markets and has really added value and so we are optimistic that we can see some growth in that offering and you've all noticed that the fees in that space have stayed.
Stable for some time now and obviously.
The Cig group the strategic investment group offering in the RF space has a higher fee offerings. So we're not moving off of our base case assumptions, we obviously to your point, Ken working all the time to drive.
<unk> flows and grow.
ROE assets there.
Through.
Additions and new hires but we.
We're we're staying with that base case assumption and we think we generate good growth with the base case assumption.
Okay, great. Thank you.
Yes.
And our next question will come from Chris Kotowski with Oppenheimer <unk> company.
Yes. Good morning, Thank you.
On this call last year you mentioned.
You spoke about raising $7 $5 billion of of assets across six funds and I'm wondering are those when you were talking about that is that.
Are those the six funds that we see on page five.
And do you know.
When I add the numbers up there you're at about $2 5 billion, so far and is that kind of on pace to that expectation.
Where you were looking at looking at it last year.
Yes, we generally.
Chris we feel really good about.
Our overall fund raising.
We feel good about our specialized fund fundraising we feel good about our separate account fundraising I mentioned are our pipeline is bigger than it was a year ago.
We have.
Significantly more boots on the ground than we did a year ago. So we feel pretty good there and we are in these are that is the funds that we just wanted to provide a little bit more detailed information after having been asked for it.
So you can kind of piece that together better but these are the funds.
From our perspective.
<unk>.
Things are going quite well.
Okay, Great and then last year, you were saying expect a fund raising to be backend loaded and if I understood your comments right.
You kind of thought this year is going to be more ratable across the quarters.
I get that correctly.
Well I think that they.
I wanted to make sure we focus on this well I think the fund raising itself is.
It is.
Highly dependent on when you have that slide farm close as we said on the call. We don't anticipate a significant closes if any in Q1. So you would expect to see more fund raising in Q2, obviously, but it's really the when we talk about the backend loaded it's more the the revenue.
Build than it is necessarily the fund raising so even if you were raising your funds ratably throughout the year the way that the math.
<unk> works on revenue Youre going to have a revenue build that favors the back half of the year in the third and fourth quarter. So even.
Even with a ratable fundraise so.
And we do there.
Therefore, we will have a <unk>.
A revenue build just like last year that is tilted towards.
The the back of the year as Pam said.
Okay.
And then I guess last thing on the fund raising.
Looking at slide five which is really interesting.
And do you know just from all of the companies. We look at generally private equity is bigger than infrastructure.
Is this what you would've guessed at the beginning of last year that infrastructure would be a significantly larger than private equity or does it strike you.
Was that surprising to you.
Okay.
John go ahead.
I was just saying Hey, Chris This is John we feel we're entering the year, we felt pretty good.
About all the fundraising picture as Michael pointed out and obviously the year bore that out infra.
Infrastructure in particular for us over the last couple of years is actually just been a very active strategy when we came into.
'twenty, one with a strong.
'twenty, one sorry, with a strong pipeline in that regard we come into 'twenty two with a strong pipeline in that regard so I wouldn't say that it was.
Surprising to us to see the.
Interest in this space.
But you've seen that for us as well as for some others I do think our platform in particular.
Is a great platform.
Given its longevity, which I mentioned in my comments.
The track record over a long period of time and the multiple ways to implement and so I suspect that will continue to see a pretty significant amount of activity in the infrastructure space.
And for you infrastructure here.
In particular, I should think U S. So I should think powered transmission pipelines that kind of thing I think from a from a sector standpoint, you should think about.
Multiple parts of the infrastructure space Subsectors standpoint, so transportation social.
Renewable et cetera from a geography standpoint, you should think about it being.
Roughly.
Really balanced between the U S and Europe .
But we've also actually seen a small pickup in Asia infrastructure activity.
In recent periods of time.
Okay, Great Alright, that's it for me thank you.
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And our next question will come from Adam Beatty with U B S.
Hello. Good morning, Thank you for taking the question.
Wanted to dig into and really appreciate all the disclosure, especially on slide five.
Turning toward the separate account kind of channel.
It looks like the cadence of our fund raising I appreciate the full year disclosure there looks.
It looks like the cadence has been pretty steady.
Just wanted to give you get your sense from what you can see in terms of the re up outlook and level of client demand and what have you.
Cadence will be maintained or or maybe accelerate through this year. Thank you.
Thanks, Adam So as we've said our pipeline.
Is big.
Bigger today than it was a year ago.
Our re up rates have been terrific and we see no we see them continuing to be.
Terrific.
And so I don't think there's any.
We have reason to see a different cadence.
At all in that space.
As we go forward.
Excellent. Thank you.
And then just on the retail distribution just wanted to get maybe a little more detail around your strategy. There what you know what channels and maybe.
Either third party facilitators or intermediaries that that might be important for your success there. Thanks.
Thank you to date, it's been predominantly.
High net worth and working with wealth management platforms. We think we've got a lot of room to drive that yes.
And.
And so we are super happy to see.
North of 10% of our <unk>.
Fundraising coming from that channel as compared to five <unk>.
Percent or so of our AUM.
With frankly in our opinion a lot of ability still in front of us to continue to drive that channel and we as we said, we think $4 22 and for 'twenty three and beyond we think Theres a lot of promise there.
Great. So it's basically gaining share within Grosvenor Thats, great I appreciate that Michael Thank you.
And that does conclude the question and answer session. The Selinger I'll now turn the conference back over to you.
Thank you.
Thank you again to everybody for joining us today. We appreciate the continued interest if you have follow up questions or feedback. Please do not hesitate to reach out. Thank you again.
Okay. Thank you and that does conclude today's conference. We do thank you for your participation have an excellent day.