Q3 2022 GCM Grosvenor Inc Earnings Call
Good day, and welcome to the D C and Grosvenor in 2022 third quarter results call.
Later, we will conduct a question and answer session. If you are interested in asking a question. Please ensure you are dialing in using the numbers you've had been provided for this call and press star one on your keypad to join the queue.
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As a reminder, desk call will be recorded.
I would now like to hand, the call over to Stacie cylinder head of Investor Relations you may begin.
Good morning, and welcome to GCM Grosvenor third quarter, 2022 earnings call.
I am joined by Juicy them grandparents, Chairman and Chief Executive Officer, Michael Saks, President, John Levin, and Chief Financial Officer, Pam that lie before we discuss this quarters results. A reminder, that all statements made on this call that do not relate to matters of historical fact should be considered forward looking statements.
Statements regarding our current expectations for the business, our financial performance and projections.
These statements are neither promises nor guarantees they involve known and unknown risks uncertainties and other important factors that may cause our actual results to differ materially from those indicated by the forward looking statements on this call.
Please refer to the factors and the risk factors section of our 10-K, our other filings with the Securities and Exchange Commission and our earnings release, all of which are on the public shareholder section of our website.
Well also refer to non-GAAP measures that we view as important in assessing the performance of our business 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 shareholder section of our website.
Our goal is to continually improve how we communicate with and engage with our shareholders and 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.
Broken or had a good third quarter in a tough environment.
During the quarter, we raised $2.9 billion, marking one of our highest ever quarterly fundraising totals and the second best fundraising quarter, we've experienced as a public company.
Importantly, after the strong fundraising quarter, our pipeline remains full.
Our private markets verticals, which now comprise 61% of our fee paying AUM continue to grow.
Private markets fee paying AUM is up 14% compared to the third quarter of 2021.
Private market management fees were up 16% year to date compared to 2021 as we continue to enjoy a favorable shift toward the higher fee higher margin secondaries co investment and direct investment strategies.
It is worth noting that separate account fee rates in our C. N Y up are higher than our current separate account fee rates.
Importantly, we performed well in Q3, both in our absolute return strategies in private markets verticals protecting client capital in a volatile time periods.
As of the end of Q3, we had approximately $10 billion of dry powder across our verticals and look forward to putting that to work.
Increasingly compelling investment landscape.
From a financial standpoint, we met or exceeded expectations in Q3 or.
Our strong private markets private markets momentum successfully offset the drag from the challenging absolute return strategies environment, resulting in fee related revenue growth of 7% year to date.
The related earnings margins of 35% drove fee related earnings growth of 14% year to date.
While the absence of the absolute return strategies performance fees will impact Q4, adjusted EBITDA and adjusted net income.
Third quarter incentive fees were $45 million driven by carried interest and contributed to adjusted EBITDA growth.
10% and adjusted net income growth of 17% year to date.
Notably the firm's share of carry revenues, which 35% in the third quarter.
Your percentage than our historic averages, reflecting the higher percentage of carry the firm has retained since 2014.
We entered into the third quarter with confidence that our second half fundraising would exceed first half fundraising and at our private markets fee related revenues, excluding catch up management fees would continue to grow at double digit rates, we remain on track in that regard.
That said, despite our strong third quarter fundraising performance and our confidence with regard to continued investor demand for alternatives. The current market is challenging to a degree that is not fully reflected in our numbers year to date.
Investors are contending with continued high levels of uncertainty and volatility and significant portfolio losses from traditional long only investment strategies.
70, 30 portfolios were down north of 20% as of the end of the quarter.
The resulting denominator effect in combination with increasingly what are the concerns related to reduced realizations from private markets portfolios are real factors facing investors.
While we remain confident that our broadly diversified platform enables us to continue to grow.
Our earnings and revenues at good compound rates over time, we anticipate the continuation of this challenging fundraising environment into 2023.
Until there is some consensus with short term interest rates have peaked the worst is behind us with regard to stock and bond markets and transaction activity picks up investors will move with less urgency.
To be clear, we are out meeting with investors regularly and we see no change to the intermediate and long term secular tailwind supporting institutional allocations to alternatives no change.
For the fourth quarter of 'twenty, two our absolute return strategies management fees should be flat to slightly lower than Q3 absolute return strategies management fees.
Q4, private markets management fees absence catch up fees should be up 10% to 12% versus the fourth quarter of 'twenty, one continuing their growth trajectory.
In light of the fundraising environment, we do not expect to achieve the same level of catch up management fees in Q4, 'twenty two that we did in Q4 'twenty one.
Our fee related earnings margin for the fourth quarter should be roughly consistent with the third quarter of 22, resulting in modest fee related earnings margin expansion for the full year.
We have said before the only one of our specialized funds, which will time out in December is our secondary respond which despite falling short of target is already 30% larger than our last secondaries fund.
We expect a pickup in specialized fundraising next year, where our existing bonds in market today and for new fund launches.
While this year has clearly been more challenging for markets asset managers and GCM than originally anticipated we feel fortunate to expect mid to high teens private markets management fee growth and mid teens overall fee related earnings growth in 2023.
Our board of directors increased our dividend by 10% to 11 cents a share and our dividend yield is now in excess of 5%.
Our dividend payout ratio remains very comfortable.
We continue to believe our low multiple relative to peers represents value and we bought back one 7 million shares in the third quarter that left us with around $26 million in our share buyback program. Our board increase that program by another $25 million and we look forward to putting that money to work as we go forward.
With that I'll turn it over to John .
Thank you Michael our ability to raise nearly $3 billion of capital this quarter as a direct product of our client centric philosophy and the strength of the firm's client value proposition.
In the past we've discussed that the majority of our capital raising has consistently come from our existing clients.
This is a fact, we are proud of is the best endorsement of our value proposition.
Environments such as this one it's also a strategic advantage as investors have a higher bar for where they place their capital and certainly on entering new relationships.
85% of our capital raising has come from our existing clients on a year to date basis.
The majority of capital we raised this year also has been in customized separate account for them.
Many of you know the history of GCM Grosvenor is largely rooted in customized separate accounts and designing flexible investment programs that meet our clients' unique needs.
As of quarter end, 74% of our AUM was in customized separate accounts and.
And that figure has been roughly.
<unk> for a number of years.
What makes our customized separate account value proposition so strong when we.
We talk about a separate accounts typically the program with a minimum of $100 million, but in many cases are multi $100 million or 1 billion plus in size.
These programs fall on the spectrum and in some cases, our program represents a significant portion of our clients our allocation to an alternative strategy.
Other cases, our program provides diversification through a niche or completion strategy.
It all places on the spectrum. However, we are mission critical to our client portfolios.
As a result, the barriers to entry once we have secured a cardium program.
Come to the bank.
Vantages are very high.
Our customized separate account relationships have long tenures and high re up rates, which typically occur every few years.
These relationships are highly programmatic and therefore more insulated to market dislocations and fund raising timing delays.
We also have a long history of successfully increasing re up commitments for subsequent programs over.
Over the past five years re ups have exceeded their predecessor programs by an average of 40% in size.
In addition to managing an investment program that is uniquely tailored to our clients' needs. We also serve as an extension of their staff by providing high levels of client service and advisory support.
As an example, we frequently provide leverage to our clients for their investment programs beyond that which we manage through discretionary investment accounts.
Examples of these types of leverage points include training.
Access to our teams due diligence and implementation and other operational support.
These services enhance our connectivity with our clients and deliver significant economic benefit to our clients.
Theres also a close relationship between the success of customized separate accounts and the growth and higher fee strategies, such as co investments secondaries, and direct investments, which I spoke about in detail last quarter.
The beauty of the customized separate account model combined with our one firm approach to servicing clients is that the strength of the client relationship creates natural strategic dialogue around opportunities to grow and evolve our existing partnerships.
Some clients expands new implementation for example, co investments in secondaries.
It will move into new verticals for example over 50% of our top clients are invested with us in multiple verticals.
We are constantly focused on what we can do to be more valuable to our existing clients and we are proud to develop such long standing relationships as a result.
With that I'll turn the call over to Pam.
Thanks, John .
I'll focus on delivering for our clients, attracting and retaining exceptional talent and creating long term shareholder value led to another successful quarter.
Fee related revenue increased by 2% over the third quarter of 'twenty, one and 7% on a year to date basis.
Hi, Mark because a key driver of growth with private markets fee paying AUN growing 14% over the last year and private markets management fees, increasing 13% from the third quarter of 'twenty one.
But the market's management fees.
Quarter included just under 600000 of catch up fees from specialty assignment closing, which was in line with our expectations.
Given the denominator and liquidity effects that we have spoken about.
Raising environment is slowing resulting in later and smaller specialized fund closings and related catch up management piece.
In the fourth quarter of 2002, excluding the impact of catch up management fees in either period, we expect organic growth in private markets management fees to be 10% to 12% over the fourth quarter of last year.
In the fourth quarter of 'twenty, one we enjoyed $4 $3 million of catch up management fees, and we estimate those fees to be $3 million lower in the fourth quarter.
Absolute return strategies management team.
$38 million in the quarter.
9% decrease from the third quarter of 21 about a 1% decrease on a year to date basis.
Depending on market performance and net flows we anticipate fourth quarter absolute return strategies managed net fees will be flat to slightly down.
Incentive fees realized in the quarter were approximately $45 million, primarily from private markets carried interests of the firm.
<unk> share of incentive fees after contractual obligations with $16 million and that incentive fees after cash compensation were $9 million.
Although the near term realization environment may be challenging we are very optimistic about our long term incentive fee opportunity.
While our earnings power is primarily centered around our highly visible management team one of the underappreciated parts of our story is there a significant long term carried interest earnings power.
As of the end of the third quarter, we had $771 million and gross unrealized carried interest across 135 programs, the firm's share of which $351 million.
The decrease in unrealized carry from last quarter is primarily from the strong realizations this quarter and includes less than a 2% decline due to changes in investment valuations.
In addition to our accrued carry our firm share of investments in our Cogs increased by 4% from the second quarter to $153 million.
Given that our accrued carry and balance sheet investments are marked on a one quarter lag in the near term these balances could pay headwinds.
Turning to expenses fee related earnings compensation in the quarter was $39 million effectively flat compared to the first and second quarters of the year.
We expect fee related earnings compensation to be relatively stable and the company in the coming quarters, and we continue to balance managing expenses with making investments necessary to sustainably grow that business over the long term.
non-GAAP general and administrative and other expenses were $18 million in the quarter. This is again relatively consistent with the first and second quarters, and we anticipate similar levels in the fourth quarter. This year.
Our embedded operating leverage drove fee related earnings margin expansion to 35% on a year to date basis up from 33% a year ago.
For the full year, we expect slightly growing FRE margins relative to 'twenty one.
Given the operational scalability embedded in our business. We anticipate continued long term fee related earnings margin expansion.
Lastly, the board authorized a <unk> increase in our dividend to <unk> 11 per share as well as an increase in our buyback authorization from $65 million to $90 million.
In addition to using the buyback to purchase shares at what we believe are highly attractive level.
With our peers and the industry, we plan to target minimal dilution to shareholders from any existing or future stock based compensation grants.
While we are not immune to the impact of the current market environment. Our track records of strong performance, the breadth and diversification of our platform combined with the strength of our team and culture provide us with great confidence, we remain focused on delivering long term value to our clients and our shareholders. Thank.
Thank you again for joining us and we're now happy to take your questions.
Thank you and if he would like to ask a question at this time. Please press star one on your telephone keypad. If you are using a speaker phone. Please ensure your mute function is turned off.
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Our first question comes from Bill Katz with credit Suisse.
Okay. Thank you very much for the update and taking my question. This morning, maybe Michael Thanks, So much for your perspective could you talk a little bit about within the conversations of things being sort of put on hold which is certainly a theme. We've heard from some of your peers, who reported quarter to date our results so far.
The conversations might be evolving within the alternative in terms of where you're seeing the incremental demand and how you might be positioned for that opportunity.
Sure I think the most important point is.
We truly see no change in the secular tailwind.
If anything we think that.
Investors are pleased with the performance of their alternatives portfolios.
And that intermediate term and long term.
Demand for alternatives across.
The strategy certainly across all of the private market strategies infrastructure.
Real estate private equity.
Strong and if anything will be stronger we will continue to grow.
What you're really just seeing is I think a very natural very sound very reasonable and appropriate slowdown.
Just because of the market conditions, and the economic conditions and even the global geopolitical conditions that we've all witnessed since since.
Since January I do want to mention that while we are being conservative in the way that we're talking about Q4.
We remain very confident with regard to 'twenty three and we did have a very good fundraising quarter. We it wasn't like we weren't able to raise what for US is a lot of money.
But it's just they're just there there is a denominator effect there are liquidity concerns.
And there was a general caution because of the environment.
It makes sense to be conservative.
Vacation in the short term because of that.
Bill maybe this is John I would just maybe add one point to what Michael said, which is.
I think that were in the maybe incremental demand might be or where there might be modest shifts is looking at places where you can.
Generate maybe attractive returns above the new risk free rate with maybe less risk. So we see certainly opportunities to take credit risk and generate equity like returns I still think there's incredible amount of interest in infrastructure strategies, given the long duration.
Inflation protected cash flows with good counterparty risk kind of ensuring those cash flows and certainly I would say would be more kind of opportunistic strategies that enable.
US too and in other managers to potentially take advantage of market dislocation that we're seeing right now.
Okay. Thank you maybe just a follow up I didn't listen to the rules of I'm asking an extra question I apologize, but in terms of just thinking through your glide path on FRE margins into 'twenty three and beyond.
What do you think the model can settle out over time, and then as you think about counterbalancing.
Between sort of things you are trying to build out would it be technology or third party distribution, just as you're pushing more broadly.
How do you balance that to the extent the revenue environment remains a little bit more protracted versus selling stabilizing perhaps thank you.
Well as Pam said, we do see a.
Margin increase this year, we see margin increase next year and frankly, we think we've got operating leverage and the ability to continue to drive.
That that FRE margin.
Yeah, and I think we've got a ways to go there before we need to.
Yeah, I'll talk to you about whether whether we're anywhere near.
Peak margin. So we think we we've always maintained that we have operating leverage from the time you came public we've delivered on that operating leverage in that margin expansion at the FRE level and I think that we will continue to do that.
Retail for us or non institutional for us.
Is an opportunity for accelerated growth.
<unk> done well there since coming public putting more product on more platform at the wire houses, we've got real opportunity in the RIAA and.
Independent broker dealer channels that were not yet happening I think that whole space has slowed down.
And the fact that we're less dependent on it is probably short term.
No not the worst thing for us, but the opportunity to really drive growth.
And the type of growth that we're talking about and to drive margin.
From those channels, we think is very real and we look forward to.
Achieving growth yeah, yeah, there in the future.
Thanks, so much.
Yes.
We will now take our next question from Samantha plant with Bank of America.
Good morning, Thanks for taking my question.
I wanted to touch on insurance. So the traction is looking pretty strong with 14% of your last 12 month flows coming from this channel.
Can you remind us of your strategy and how it's different from your peers in terms of the type of insurance companies, you're targeting and the types of solutions you are providing for them.
Sure sure. Thanks, Samantha so first.
Youre right and it is something that we're very we've been enthusiastic about.
We've invested in and we've generated results from.
Over the last 12 months and we remain.
Very enthusiastic about where that can go I think that the.
Comments that Pam made with regard to the breadth of our platform are really the core of the answer there. So we are engaged with all manner of insurers.
From a you know me.
Mid size to the very largest and because of the breadth of our platform from a strategy perspective, and the open architecture nature of our platform and.
Our sophistication with regard to insurance through the team that we've assembled and with regard to structuring.
You know from our internal capabilities, we think we have the ability to help.
Insurers with pretty much anything they want to do in the Alt space.
And we feel this was a very.
We feel that was a very smart thing for us to make the commitment to the space that we made a year ago and we really do think it's gonna be.
Something that contributes to our growth in 'twenty, three and beyond for quite some time and youre, saying youre seeing others start to talk about it now.
Great and just as a quick follow up what does the pipeline look like for insurance today versus six months or a year ago.
Our pipeline generally.
Is bigger.
Bigger than it was and it's bigger than it was a quarter ago, even though we had a terrific.
Fundraising quarter in insurance is a healthy part of that pipeline and.
There is a lot that we think that we can do in that space again.
Again across various verticals.
And utilizing the full capability of our flexible and open architecture platform.
So I would say that theres, a very healthy insurance pipeline and it's healthy for a range of.
Of engagement or relationship pipes with insurers of different sizes.
Thank you so much.
We will now take our next question from Ken Worthington with J P. Morgan.
Hi, good morning, Thanks for taking the question.
In private markets contributions not from committed but not yet fee paying I believe it was like $18 million.
You were supposed to have one fund.
You know close for three Q, but it looks like <unk> had contributions.
So why was the $18 million, so so low versus what we've seen in prior quarters and then you mentioned that customized fund fund raising should be better in 'twenty. Three 'twenty. Two you did have some of your biggest funds in market in 'twenty. Two so maybe walk through what gives you conviction that 'twenty three.
It should be a better year.
Sure. So let me just take the first question, we actually I think Ken on the last call. So we werent really expecting anything significant in Q3 in terms of specialized fund close we probably got a teeny bit more than we thought as you know some of the specialized funds are our pay.
You're on.
Our pay on committed so any close would show up in that <unk> number and then others are paid.
Pay on an as invested so you have some closes for specialized funds that don't show up in up in the quarter, but show up in C. N way up on and then come into outcome in general we had a terrific fundraising quarter. It was heavily weighted towards fundraising too.
Pay on invested or or or ramp in.
As our CLI uptime category.
That is we obviously all you know we.
We try to price so that we're indifferent frankly, so that our effective fee rates over time are the same but we certainly are not you know never we don't mind when things turn on right away that said, we have had quarters in the past I believe since coming public.
Even where you know the fund raising is tilted.
One way.
Or the other C N y up palm more directly.
And that's I think just part of the nature of the business and the nature of what's closing win.
In terms of our confidence for next year on pickup in.
In.
In the specialized fund fundraising the funds that are in market are good funds that had good competitive position and we think that you know a slowdown in 'twenty. Two is not anything is not a result of of our offering but it's just a result of market environment and those and we do think that that will.
Loosen up into next year, and then we have new funds coming into market.
Next year, our direct infrastructure fund.
Which you're aware of and which we've talked about and is scheduled to begin its fundraising next year and then we think it's likely we have additional.
Specialized fund probably something in the ESG impact space that will launch next year as well so in general it's really knowing what our pipeline is there understanding where and why there was a slowdown in 'twenty, two and under understanding from constant engagement with the market.
Where we think things will go.
Okay, Great and then just maybe turning to absolute return.
We've been in the market for basically a year.
With higher volatility lots.
Lots of uncertainty it would seem like this sort of macro environment would be the one that makes absolute return strategies more attractive to investors and yet as we look at sort of the gross sales there would seem to be very very limited interest.
So.
You know.
What do you attribute the lack of interest from investors is it is it your performance is at the performance of absolute return more broadly and if we're just focused on the macro if this is not the macro environment that gets people interested in absolute return.
What is that that that macro environment, that's sort of stimulate demand.
Well, so first I would tell you I think that it is largely macro in terms of our our flow results I don't think you're going to see very different.
Net.
Very different results any place else that you look I think that is the market I think that from the good news is from a performance perspective certainly.
Since April 1st.
You know the sort of beta and in the risk in that.
A R. S space has come down significantly and in general our returns are not you know their performance is kind of in line with.
What investor expectations would be through 930, given markets through 930, and I think that.
Clearly a R. S returns broadly broken or but for everybody are just not the source of focus for us.
Concern for clients.
At this time and I think Youre not you know you need to see the environment generally become a bit more stable before you might see.
Increases in general macro demand.
And you know in this environment.
Where people don't have a problem.
They are pleased to not have a problem, but nobody's really rushing forward with much in the way of new investment anywhere in the Alt space right now and I think we need that macro environment to settle down a little bit as I had said in my comments.
Just to see the.
Flows pick up again, whether when they do there will be a shift to E. R. S. We don't know I don't think anybody can really tell you that with.
Any certainty but to your point.
It's clearly been.
No.
There's been value added through 930 from that approach I wouldn't want to make one comment, which I think is worth making.
We talk a lot about how E. R. S is valued inside our kind of aggregate valuation and clearly we're trading at a pretty significant discount to peers that are pure private markets peers, and I think even if you sort of isolated R. R.
Private markets F. R R and put a margin on it you can conclude that the E. R. S businesses kind of <unk>.
I'm not seeing much at all in the way of valuation is extraordinarily cheap.
Cheaply values.
And I think that when you think about the valuations that are implicit on a or as you think about the performance of their eyes, and then you think about traditional asset management firms.
Where revenues are down dramatically because of markets and where there is not a positive inflow environment and hasn't been for quite some time I just think you've got a.
A real mismatch on the way people see the value of that that vertical.
Great. Thank you very much.
Again, if you have any question. Please press star and then the one key on your telephone keypad.
We will now take our next question from Chris Kotowski with Oppenheimer.
Yeah. Good morning, most of mine have been asked but I'm kind of thinking about.
Especially at the transfer.
'twenty, three and I and I guess I would.
You know I would think that.
Does the you've attracted really good.
Flows in the CSA is but I think of that.
It was kind of a longer term process, which you know probably.
Kind of benefited in this quarter from processes begun.
Six six or nine months ago and in.
And I guess to me that would probably argue kind of for us.
Softer spot.
And in <unk>.
Coming two or three quarters.
I guess counter availing that I think.
The other hand the.
The.
Raising 10 is very crowded and in 'twenty, two and and then but maybe at one and 2023, there's a whole new.
Block of capital to be allocated in and that would could argue for a stronger.
And I guess I am I right in thinking that those are kind of the two countervailing forces in and how it all settles out.
I think youre right about the stronger 23, new capital being allocated.
Frankly beyond even <unk>.
<unk> from new capital being allocated just people kind of getting back the business and starting to move forward again with a little bit more.
Purpose and in.
A little bit more purpose and so we agree with you there those are two good factors.
Factors.
For fund raising for 'twenty, three where I would actually pushed back a little bit is on the custom separate accounts being soft and I think it would be a mistake to.
That that the custom separate accounts need to slow down.
John mentioned in his comments.
That are re ups over a five year period had been 40% higher than the original or the previous contribution.
Contribution of the previous separate account size and when we re up the separate accounts they will re upping them at higher levels materially higher levels.
And our re up rates remain very high and we constantly have re ops. So we have separate accounts that will be due to re up next year.
So I I think you're absolutely right about the promising nature of increased flows in 'twenty, three but I want to push back a bit on the idea that cause some separate accounts need to slow down.
At all.
Okay fair enough.
I would just add one point to that you're right that the costume separate accounts are a longer sales cycle, but I do think to Michael's point, you have to differentiate between re up in new separate account and actually in both categories. The Michael mentioned the rehab category. The pipeline remains strong so that's true.
You have a lot of insights into your re ups and your timing around your re ups, because you're sitting there with your existing clients and understanding their programs and the programmatic nature of them, but we're also able to view into our pipeline around new separate account new customized separate account opportunities in the timeline of those and that activity still remains such that it had each period. When you look six to nine months out.
That long sales cycle, we have decent visibility into their continued production out of that type of implementation.
Okay.
So John's point that that keeps rolling forward. So nine months from now we'll have a whole block of.
Separate accounts, they'll then be due to start rolling them and so that's a.
That I, maybe were a little guilty of not talking about enough, but you know that that whole C. N y F palm.
Effectively if we keep our re up rate tied that whole C. A N y F bomb renews itself every few years, while we add new separate accounts along the way.
Okay. Thank you.
Our next question will come from Michael Cyprus with Morgan Stanley .
Hey, good morning, Thanks for taking the question.
Just wanted to circle back to some of your commentary around the challenges with the denominator effect and liquidity concerns that lp's are facing.
So I guess the question is which parts of the L. P community do you see as most impacted I know some folks have been pointing to the U S pension community, but just curious your thoughts on that and then which channels and geographic regions. Do you see is more insulated from some of these pressures and then how do you see this evolving into 2023.
In other words is anything that could get a little bit worse in some parts of the marketplace and then if you could speak to some of the opportunities that you see for growth and for the industry more broadly I'm, providing some liquidity solutions to Lps as they're navigating through these challenging times. Thank you.
Very good questions I think <unk>.
First of all I would say that the liquidity is or is becoming kind of as big an issue as the denominator effect. So the denominator effect is something that.
A an investment team our board can adjust by changing their portfolio allocations liquidity liquidity it's different.
And so as.
While deployments down our realizations are down more and so that's kind of what's leading to the liquidity impacts.
I think that it's probably easiest to answer your question at the highest level by talking about the channel that's not seeing that and not feeling that which is the sovereign wealth channel.
And some of the sovereign pension funds and sovereign wealth funds.
Where are the inflow environment. There is not you know create.
Creating a <unk>.
Quiddity issues. It may cricket, they they'll have a denominator effect and they'll choose how they want to deal with their denominator effect, but they're not necessarily seeing liquidity conversation because of the inflows that they have a.
Based on their revenue sources and so that's the healthiest channel with regard to liquidity I think globally.
I think that.
You asked a very smart question about.
The way that people are thinking about liquidity.
And we do believe that there are.
Appropriate dealing with liquidity that do not need to result in any that are smart for a smart for investors do not need to results.
In any kind of slowdown of.
New.
New commitments in any way and we do see activity are in.
In our engaged in conversation around those types of ideas some of which are structured solutions et cetera, and we think you'll see more of that in 'twenty three.
Great and just as a follow up question, maybe you could talk to how you see the demand evolving in the retail channel how that's holding up in this environment and maybe you can update us on your sort of new product roadmap and potential opportunities to grow further in that channel. Thank you.
Sure so.
Look that that channel has slowed down and that's our that's our experience and that's our.
Broader sort of anecdotal knowledge space and experience.
It makes all the sense in the world that it would slow down.
Given the.
Levels of traditional returns and given the uncertainty and volatility and frankly, given how robust it had been for the last few quarters. So nothing is really <unk>.
Surprising there we think that will continue to be a channel over time that from which we raised more money than we have in our AUM today and that are kind of relative growth. If you will will be higher.
I do think and we've said multiple times already today, we they get it takes US a couple of quarters and just a little bit more sort of certainty than you have in the environment today for that to ramp up again, and we do believe that we have while we do a re.
Reasonable job in the wire House channel, we think they are I E in the independent broker dealer.
Channels have.
The promise and opportunity for us and represent upside for us.
And you know frankly.
All of the various funds in market rolling into 'twenty.
Rolling into 'twenty, three and the new funds coming in market in the 'twenty three they all have appeal.
Across a broad range of channels, including non institutional.
Great. Thanks, so much.
We will now take a follow up from Bill Katz with credit Suisse.
Okay. Thanks, so much for the extra question. So just going back to your commentary around the implied value for the AOS platform and the increased boiler authorization to help me think about how quickly you might deploy the capital obviously is a pretty big buyback quarter this quarter, but how do we think about triangulating between.
So the money needed proceed or GP commitments versus just regular cash flow needs operational casual needs versus maybe continuing to reduce the share count relative to your views on how you think the stock is thank you.
Sure well I guess first I.
Take a giant step back and say that we've always believed and we've always.
Besides that one of the attractive features of our business is the ability to return capital to.
To shareholders and to do it through both dividend and buyback.
We raised our dividend our payout ratio remains.
Comfortable we had talked about the comfort in our payout ratio and our ability to raise.
You know dividend for some time.
We also talked about the fact that we believe that the stock represents very good value today.
5.5% dividend yield.
As of this morning or last night.
And you know as well, while we while we are cognizant of you know our float and the idea that you know, we don't want to shrink that float too much.
We feel like you know the value.
And.
Relative.
It's a very good return for us to deploy capital through buybacks now we want to continue to do that.
We certainly want a managed solution.
You know relative to stock based comp through our buybacks.
And we just.
We are cognizant that we don't want to necessarily.
Drink that floats so much that shareholders feel it's not there's not enough volume there on the other hand, it's just you know we think it's an awfully good.
Capital today.
And we wanted to increase that program.
Okay. Thank you.
Well now take a follow up from Ken Worthington with J P. Morgan.
Okay. Yeah. Thank you also for taking my follow up.
Thinking about performance fees for absolute return so this year.
Return to performance in our businesses is reasonably negative and it looks like in 2023 is sort of a normal year.
Nothing nothing happens in four Q with that.
You would be sort of breakeven.
Just remind us what happens with them resets and high watermarks or hurdle rates.
Hi is the 2023 outlook for performance fees kind of at some sort of risk given our returns. This year and then I know that you guys sort of rejigger compensation around mosaic to.
Have you no performance fees and carry would be a bigger part of your employee comp.
You know what a what a second year of limited returns or limited performance. He is an absolute return sort of change your views on on compensation more broadly. Thanks.
Great.
So we a couple of let me unpack that.
One Ah.
We do have hurdle rates are in in in many of the performance fees on the RF side.
And you know to.
To some extent the those hurdle rates have risen.
But most of them if not all of them have caps.
And there are probably you know near or at those caps now so the earnings power from any further interest rate increases any diminution in earnings power from future interest rate increases is pretty muted I think extremely muted.
Second we do have a loss carryforwards are high watermarks.
And so we have to get back to high water before we start to generate.
Performance fees again, we if we have returns in the high single digits, which is kind of how we typically budget or think about it as a base case.
You know between now and the end of the year and for next year, we will generate some performance fees next year and we'll be in very strong position with regard to performance fees on a presumably higher.
AUM base for the $4 24, and we're managing all of our compensation tools R. F. R E comp our incentive fee discretionary incentive comp our allocation of carry and our stock based comp I think intelligently in a way to be able to drive the business.
Forward without you know sort of seeing any of that.
Break apart and that's something we've talked about before and we've talked about it before when we've talked about you know kind of RF already margins in some of the FRE margins that you see out in the market place and I think I've said.
Several times that we are we want to manage.
We want to manage our comp when we won't want to manage our tools. So that we aren't so that we're going to be able to withstand that type of pressure if it occurs.
Great. Thank you very much.
And it appears there are no further telephone questions I'd like to turn the conference back over to my presenters for any additional or closing comments.
Thank you. Thank you all again for joining US today I was wonder if helps them connect with you. If there are any follow up questions. Please don't hesitate to reach out and we look forward to speaking with you again next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. We hope everyone has a great day you may all disconnect.
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