Q1 2022 Sculptor Capital Management Inc Earnings Call
Good morning, everyone and won't come to Sculpsure is first quarter of 2022 earnings conference call.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should have clients has just joined the conference piece based on the CRA at any time.
Ken.
As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference in a country head of corporate strategy. That's come to capital. Please go ahead ma'am.
Thank you Doug 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 Dave <unk>, 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 actual results 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 will be referring to economic income distributable earnings and other financial that are not prepared in accordance with gap Inc.
Information about and reconciliations of these non-GAAP measures to 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 entity.
Today, we reported first quarter 2020 to GAAP net income of $16 $9 million or 63 cents per basic and a loss of 29 cents per diluted class a share.
First quarter distributable earnings were $29 million or 48 cents per fully diluted share.
Additionally, we declared a cash dividend of 11 cents per class a share all earnings metrics discussed by both Jimmy and Dave will be on a non-GAAP economic income and distributable earnings metric I will now hand, the call over to Jimmy.
Good morning, everybody. Thanks for joining the call I'm going to go over some business highlights before handing it over to David David I'll cover the financials in more detail.
We're proud of the results that we were able to deliver in the first quarter, both for our fund investors as well as for our business, especially against what has been an incredibly difficult macroeconomic backdrop.
Pretty massive disruptions.
All major markets, leading to what are historically significant declines in pretty much every equity fixed income and credit market, leaving a pretty broad swath of the investment world in a state of either stress or even distress in certain cases.
If you look historically.
Times like this have generally been good for our investment style.
Been able to weather storms like this both.
Before during and after than we've typically been able to generate outperformance so for our longer term.
Business, we welcome market challenges like this and use them as an opportunity to thrive.
Periods of market distress like this.
Also historically have been catalysts for clients to seek our investment capabilities both.
As a safe haven to a certain extent as well as an opportunity to capture outperformance from the stress and distress that environments like these tend to create.
So specifically within credit, which historically has been a core capability of ours. There has been a truly dramatic repricing of risk almost across the board and that's been driven by a material rise in rates a material widening in spreads and then maybe what is harder to detect from from looking at.
General information, a pretty significant widening in the illiquidity or complexity premium over rates and spreads switch.
Oftentimes is where we focus our investments both in our credit funds real estate funds, our multi strategy funds.
Really across the board.
And as we enter a world.
Where things like recession inflation rising rates continued to remain at the forefront the need for capital from corporates from.
Real estate owners from assets in general tends to be quite acute and that's great for capital providers like us who can be flexible and dynamic in the face of some of those difficulties.
On the business side turning to flows.
We've talked about this a lot, but 2021 was a really material turning point for the business we went.
From a pretty long stretch of some difficulties on the flow side too what we're on an absolute basis material gross inflows and importantly, net inflows into our multi strategy funds in the first quarter, we continued that momentum.
Gross inflows into multi strategy funds of almost $500 million in positive net inflows of just over $300 million.
We've said it before and we'll say it again I am sure in Q&A, we can't predict what near term flows look like but it's a pretty powerful overall trend line zooming out over years and the fact that we've been able to continue that into 2022 again against what what feels like a pretty challenging macro environment.
To us means the thing that we are doing is working and is gaining traction.
We've also been discussing what we are doing to plant seeds for the future for future growth and for new initiatives in the first quarter was.
Quite important on that front as well we had.
Three different closes in the first quarter that are all meaningfully strategic for the near intermediate and long term trajectory of the business. So we had a first close in our second real estate credit Fund, we had a first close in our.
The most recent closed end credit fund called stacks, which I believe is the 7% closed end credit funds.
In our history.
Our first real estate credit fund was $750 million I believe our most recent closed end credit fund several years ago was around $500 million.
We obviously hope to have additional closures both on the stacks fund and on that real estate credit fund.
Real estate credit fund two I should say.
The other development in the in the quarter was the closing of our structured investment solution that we mentioned in our earnings release and that is a vehicle tailored specifically to meet the needs largely of insurance clients.
And so when we looked at our capabilities on the credit side on the real estate side and on the multi strategy side and we're certainly not the first to do this but as we looked across the investment universe.
A lot of what we do is as <unk>.
Perfect for the insurance industry balance sheet and what it requires is a tailored solution that looks to optimize for that client base their capital needs their rating needs their return needs.
Well as their liquidity needs.
And so we were able to create a solution that allows for a capital efficient format with a long term time horizon that allows us to deploy capital across a pretty wide breadth of our funds over a five to eight year life.
Also of note for this type of investment product is that it's not executed through the traditional.
Institutional fundraising channel, it's executed through a more capital markets style channel, which is more akin to our CLO franchise overtime. We were also investors in this structure both to help support the solution as it develops and because we think.
It will hopefully provide a great return for our balance sheet.
The broader trend is to continue to look at who are large allo caters to the alternatives market, where do we have investment skills that we think.
It can be great for those investors and how do we create solutions to help marry those two.
Those two items.
Away from that moving onto our balance sheet.
We've talked about this many times, but having a strong balance sheet, we view as a requirement.
The players of scale in our industry have strong balance sheets, they use that to compete and we need that to compete as well and in the first quarter is when we first started to really utilize that balance sheet for that growth.
In addition to that and we did this in parallel but we've <unk>.
Said for a long time that we will also always evaluate what the optimal capital structure is and whether or not to return additional capital to shareholders and in what form.
And so we as everyone knows we authorized.
Our buyback of our stock and we started to execute on that in the first quarter.
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When we think about that.
Buyback, we start with a lot of the math that we went through on our last call, which is we look at our adjusted net asset position we.
Evaluate our brewery in excess of any future compensation against that of Berry.
And then we look at what we think our management fee related earnings power is and what we think our incentive fee related earnings power is and when we do all that math, we think buying back our own stock today represents a really attractive use of capital.
It's always a tough call because we have.
But quite long list of areas in which we want to grow that we know are going to require our capital, but when presented with the type of opportunity that we see in our own stock. We wanted to do that in parallel. So we will continue to try to build our balance sheet. We will continue to try to deploy our balance sheet for growth and we will continue to try.
And take advantage of what we think is a great opportunity to buy back our own stock.
So with that I will.
I'll hand, it over to David Thanks.
Thanks, Jamie and good morning, everyone.
To build on a few of the key topics that Jimmy just discussed focusing on our balance sheet capital management strategy and finally on shareholder campaign.
Since the start of the distribution holiday, we are focused on rebuilding our balance sheet by first materially reducing our debt position and then by increasing our net asset position adjusted net asset with 282 million as of the end of March up from a deficit of $55 8 million in 2018.
The goal of the expanded balance sheet with the first ensure that we can play defense during challenging times and to second start to play offense by investing in growth initiatives for our business.
One of the investments we made in our newly launched structured alternative investment product. We are excited to provide escalations for our insurance clients and hope to continue to launch season. Thank you Sir.
The structured alternative investment product is a long duration structure at deploy capital across the funds on our platform, including the multi strategy credit.
Yes.
We closed on this release and in the Middle of March and reported the assets under management for the third quarter and our Ics business.
Underlying capital with initially deployed into money market investments ahead of our funds.
Beginning on April 1st we started to deploy this capital across various funds on our platform. As this capital is deployed we reported inflows into the various underlying fund and corresponding distributions from the Ics business.
Going forward you will see the AUM for this solution located in our reporting based on the underlying fund investment.
Because we invested alongside our clients in that product, we have consolidated the full stacks onto our GAAP financial statements starting next quarter.
While new lineup of <unk>, and our GAAP financial statements there will be no impact to economic income from that consolidation.
Next I want to expand on our capital management strategy during the quarter. The board authorized a share repurchase program of up to $100 million of common stock.
At our current share price. This represents a significant amount of our public stock outstanding.
During the quarter, we repurchased 474000 shares at an average price of $13 19.
Which was $6 2 million for the quarter and approximately 1 million shares in the aggregate and an average price of $12 56 for a total of $12 3 million three nine first.
At these stock prices. We believe this is one of the most attractive uses of our capital.
We also announced a cash dividend of <unk> 11 per class a share for the first quarter, which represents 10% of distributable earnings.
We expect to target a dividend of 10% of distributable earnings to class a shareholders for the second and third quarter 2022, and then in the fourth quarter, we expect to true up our dividend spring full year dividend to 20% to 30% of distributable earnings.
This pacing during the year as a more sensible prudent approach to our dividend policy as it better aligns dividend payments with earnings given the timing of incentive income and bonus expenses.
Accordingly, but there's not a change to our annual dividend policy, just the timing of those payments throughout the year.
As a reminder, during the distribution holiday, we only pay dividends for class a shareholders.
Taking the dividends and share repurchases together for the first quarter, we are returning $9 $1 million to shareholders $6 $2 million of that via the share repurchase program and $2 9 million via our dividend.
We will continue to be thoughtful and maintaining the ongoing balance of a strong core balance sheet deploying capital to areas of growth and returning capital to shareholders.
With that in mind, there is no change to our guidance that we gave last quarter on our proposed dividend policy post distribution holiday, we're still expecting to pay between 50 and 75% of distributable earnings annually once the distribution holiday expires.
Lastly, I'd like to provide an update on our disclosure reporting we remain focused on providing full transparency on the business and are proud of the work we've done over the past year to transform our materials and our shareholder communication.
To that end, we introduced fee paying AUM this quarter as we believe this is an important an important metric and better aligns our disclosure to our peers.
Previously we had disclosed average fee rate that allowed you to calculate the fee paying AUM, we're now showing the metric and the related roles our tables directly in our reporting.
We are also announcing a change to our monthly AUR and multi strategy performance 8-K filings.
<unk> forward, we will not issue a monthly AK to disclose this information we will continue to disclose them on our website on a monthly basis, and we will disclose performance quarterly as part of our earnings release.
This change is appropriate for the state of our business today previously our multi strategy fund with the vast majority of our AUM and accounted for the majority of our revenues and therefore our earnings.
If we look at our business today, we have successfully grown and diversified our platform with our multi strategy funds now representing just 28% of our AUM.
We believe this filing has been more of a distraction versus meaningful disclosure in the recent past has provided an incomplete and therefore confusing window into our business on a monthly basis.
We think it's better to give the complete window as part of our quarterly earnings release as is the standard for public company.
We will continue to strive to improve shareholder transparency over time to ensure that the information we are providing Q as appropriate and meaningful to our overall business fundamentals and key earnings drivers.
With that I'll hand, the call over to the operator and open it up to any questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press star followed by one let me touch Tencent.
Thank you Christian had been answered we are extremely small from the question queue. Please press star and then two.
The first question comes from Bill Katz of Citigroup.
Okay. Thank you very much I think that's the bill Katz.
Thanks for taking the questions.
We will get with just.
Just what you're doing in the insurance channel a little bit and just maybe a couple of related questions I apologize for the packing of these questions, but can you actually unpack your balance sheet, a little bit just in terms of how much.
Of the move from cash into investments will sort of migrate back out into fee paying AUM and then more broadly Jimmy you sort of mentioned that you know this is going to be part of you see the Ics platform.
Could this business ramp to such a level or how should we think about sort of incremental mandates here. Thanks.
Sure so the.
Ics question and hopefully David clarify this in her prepared comments, but the day the vehicle close as the capital comes into money market funds and thereby is appropriately reflected in Ics.
Once the capital then gets deployed across the underlying funds and which should invest the capital than our peers in those line items.
It just so happened that the transaction closed I think in mid March.
And that capital is largely already been deployed or being deployed across the underlying platform, where youll see it reflected in multi strat credit and real estate.
Over time as far as what the future of that line of business is or what the future of insurance generally it is.
And we've talked about this.
Plenty before the insurance market is one of the biggest allo caters to not just alternatives, but to really all forms of credit and real estate assets generally.
And.
We historically have thought of the insurance industry as.
Great clients for our funds and by the way the insurance industry continues to be great clients for our funds, what we have yet to do until now in a more meaningful way is figure out how do we more specifically structure, what we do.
For that market and whether that's in the form of this type of structured alternative investment solution, whether it's in other forms of funds SMA as direct relationships et cetera.
There is an investment skill that we think we have again, particularly in credit real estate is probably what suits that market most directly.
That we ought to be able to figure out how to deliver in a more helpful way to the insurance industry.
That's a.
That is a big focus of ours.
I think you had some more specific.
Numerical questions I didn't quite follow.
But I'll kick it back to you Bill and you can.
I think I'll leave those for a follow up at this moment Asia. So maybe another big picture question for you just I appreciate the capital allocation decisions, particularly the stock is trading and that certainly makes sense to us.
So as you think about go forward from here as I look at your balance sheet, you've migrated a fair amount of your cash to investments.
As you think about buyback here is it now a function of free cash flow or how should we think about balancing what you see is pre devalue versus balanced real time balance sheet liquidity and an earnings stream. That's one more gear to year end. Thank you.
Yeah, I think we're going to we're going to take that all as it goes I mean, we're doing the math constantly of what is our economic balance sheet position versus our liquidity versus our earnings profile versus the short and long term returns of how we can deploy that capital versus what we think the return.
Turns are buying back our own stock so.
There's a whole host of moving pieces that go into it and we continuously evaluate and reevaluate.
Can I sneak just one more in and thanks for taking the questions.
Just on the hedge fund.
It seems like it's accelerating which is nice to see.
How should we think about the interplay between just a more volatile backdrop, which certainly fits well with what what new capital protection type of mandate versus the potential for negative return and how much might that stall some of the momentum.
Sure so.
Negative return in and of itself doesn't necessarily stalled momentum our objective is to.
<unk> experience a fraction of the downside of broader equity market. So in significantly down markets and you can go back to the financial crisis or the Covid crisis.
Our hedge funds can experience negative returns the key for us is <unk>.
Our returns are versus the market, how is our volatility versus the market's volatility.
As far as forecasting near term flows.
As we've said, it's always hard to do that it's especially hard to do that when you get these explosions in volatility right. So just generally speaking when you're looking at a world where VIX is 35 and broad equity markets are down.
At 15%, depending on the day, and even things like treasuries corporates high yield bonds have indices that are down 8% to 15% those extreme bouts of volatility make short term forecasting, especially difficult but.
Negative returns in and of themselves are not problematic per se in the way Youre asking.
Alright, thanks for taking all the questions.
Okay.
Okay.
Thank you. The next question comes from Jeremy O'hara of Jefferies.
Great Thanks, and good morning.
Perhaps I think you touched on this in a.
Prior quarter, but can you, perhaps just remind us on how the decision to kind of come down on that 50% to 75% range post the distribution holiday was arrived at and I suppose related to that if you could just give us a quick update as to where where you stand as it relates to working way through that distribution holiday.
Sure. So what we've said is expect 50% to 75% that it's not likely to be in excess of 75.
And if there was some incredibly compelling use of capital it could be below 50, but 50 to 75 is a pretty reasonable range to expect.
And as to what motivates that we generally want to be in the business of distributing some portion of our earnings I think it's what.
The investors have come to expect and we think it's a reasonable thing to do and that's the framework around the 50%.
Lower bound guidance as far as $71 75, and why not 100 as we continue to emphasize.
The building of the balance sheet is a never ending pursuit.
There is such a long list.
Of.
Things, we want to do that required capital that we basically always want to be in the business of accumulating some and so as.
As we think of the widest possible range of zero to 150, we want to be the lower bound because we want to be distributing some reasonable portion of our earnings and we view 75 is a reasonable upper bound guidance, because we want to be able to continue to retain earnings. So that we have the ability to play offense whether that means.
Seeding new businesses, creating new products or as we're doing now if theres great times to be repurchasing. Our stock then we want to have that capital available as well.
In terms of where we are in the distribution holiday their requirements were to earn 600 million. We earned 500 of that through and about 100.
Okay. That's that's helpful and then I guess.
In the commentary prepared well I guess in the earnings release there was some.
Commentary, suggesting increased traction around new platforms gatekeepers asset allocators I was just hoping you might be able to unpack that a little bit and give us kind of a sense of.
What's driving that and.
And where where it could potentially go here over the next 12 to 18 months sure. So I think what's driving that is.
Continued solid investment performance as well as passage of time from the difficulties of the past as well as the.
Remediation efforts, we took on what were some of those issues in the past so.
Not to belabor the point, but we went through a period of time, where it was obviously very difficult for us to attract new capital for what we're frankly, some fairly obvious reasons and there are steps we needed to take to <unk>.
Put ourselves in a position to attract flows and then time needed to pass for the world to believe that and during that period of time, we needed to do the thing that is.
As the underlying cause of people seeking our services to begin with which is that we need to do a great job managing our clients' capital and we were thankfully able to do all of those things over multiple years and that has led to increased traction.
<unk>.
It's very hard to pinpoint a specific thing or a specific timing, which is why we generally try to highlight.
And I think we did this in the prior quarter look at our.
Five or six or seven or eight year analysis of what those gross and net flows looked like then look at what they started to look like in 2021. Once we had accomplished those various items I just laid out and then look at how that continues into 2022, and we think the shape of that chart is pretty telling in gives us bigger picture confidence.
Okay, great. Thanks for taking my questions. This morning.
Okay.
Thank you I'm.
I'm not showing any further questions.
<unk> I will now turn the call over to MS. <unk>. Please go ahead.
Thank you Dana and thanks, everyone for joining us today and for your interest in sculptor capital. If you have any questions. Please don't hesitate to reach out.
Okay.
Thank you ladies and gentlemen that concludes today's conference you may now disconnect your lines.
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