Q2 2023 GCM Grosvenor Inc Earnings Call
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Growth in our second quarter of 2023 results.
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These cylinder head of Investor Relations.
Thank you good morning, and welcome to GCM Grosvenor second quarter 2023 earnings call today, I'm joined by GCM, Grosvenor, Chairman and Chief Executive Officer, Michael Saks, President, John Mccain, and Chief Financial Officer, Pam badly 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.
This includes statements regarding our current expectations for the best that our financial performance and projections.
These statements are neither promises nor guarantee.
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 security and Exchange Commission and our earnings release, all of which are available 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.
With 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 and in that spirit. We look forward to your feedback. Thank you again for joining us today and with that I'll turn the call over to Michael.
Thank you Stacey.
GCM Grosvenor again made solid progress in the second quarter.
Our absolute return strategies vertical showed signs of stabilization.
In our private market verticals continued their solid growth trajectory.
Our financial performance met our expectations.
Our board increased our stock buyback authorization by $25 million.
The quarter saw assets under management grow 7% year over year, driven by 12% year over year growth in private markets a U M.
Our quarterly fee related earnings achieved the guidance, we provided last quarter.
Adjusted EBITDA and adjusted net income increased year over year, driven by a modest sequential and year over year increase in carried interest.
Importantly, during the second quarter, the fund raising environment began to loosen up just a bit.
Our second quarter fund raising up 1.5 billion was up about 50% from the first quarter. Our fundraising was again concentrated in private markets with infrastructure being the biggest recipient of capital as it has been for the last couple of years.
73% of the capital we raised came from outside of the U S, which is nice as we've been investing to expand our presence internationally.
Based on our pipeline, we remain confident that second half fundraising will exceed first half one region.
In Q3 of 'twenty, three we expect to see mid teens year over year fee related earnings growth and our goals for the full year remain insight.
We continue to see strong growth in fee related earnings in 2024.
Our ability to continue to grow our business in varied market environments is of course in part a function of the attractiveness of the industry, which we have consistently said remains very healthy in terms of investor attraction adoption and growth.
But we also believe that our unique platform provides a lot of value to clients and leaves us, particularly well positioned to the upside.
Our client first philosophy, the belief that we succeed when our clients succeed combined with a focus on our internal culture underpins everything we do.
These priorities that impacted how we have structured our business, how we develop and manage client relationships and how we invest capital and they have led to a stronger and more stable firm.
For decades, we've been determined to build a process and team oriented firm.
We want to enable talented professionals to excel so we <unk>.
Essentially avoid and manage against star systems, and functional or perceived reliance on key persons client first one firm process driven and team oriented are completely consistent and complementary with a solutions approach.
This approach has resulted in a sticky customized separate account effort comprising 74% of our.
Where client investment objectives and constraints or at the very center of portfolio construction.
We think that the strength of the business can be seen on slides eight and nine of our earnings presentation.
Over the last two years private market management fees, excluding catch up fees have increased by a 15% compound annual growth rate and have had double digit year over year growth every quarter for the last nine quarters.
Our separately managed account solutions capabilities have contributed significantly to that growth and you can see the strength of our separate accounts in our very substantial client longevity.
And our high re up rates of 90%, where subsequent commitments kept average an increase in account size of 40%.
We expect all of these trends to continue into the foreseeable future.
In addition to our separately managed accounts.
We have a strong and growing group of specialized funds with approximately $20 billion of AUM.
As of quarter end.
Our collaborative culture and the breadth of our firm have led us to originate innovative specialized fund products that uniquely leverage our platforms capabilities to create a differentiated offering.
Elevate our infrastructure advantage strategy.
Our strategic investments group, which manages our multi asset class funds. Those are three examples of our track record of launching and scaling new initiatives.
Gather those three strategies represent more than 7 billion of AUM as of quarter end and we believe has significant growth ahead of them.
From an investment perspective, we're pleased with the recent performance relative to peers of our absolute return strategies portfolios and our private markets portfolios continued to deliver results that are appreciated by our client base, we've put more than $1 billion $5 of capital to work so far this year.
Uzi asked you about the prospects for deploying our roughly $10 billion of dry powder.
With regard to the various asset classes, it's no surprise that office real estate is probably the most challenging asset class. We see today, John is going to go into greater detail on our real estate vertical in a minute, but we are fortunately very well positioned there.
We are enthusiastic about the opportunity set in credit, where we have $12 5 billion of capital under management as of the end of the quarter, and we're seeing investor demand and compelling opportunities to put more capital to work in that space.
For the industry broadly there's been some political turbulence with regards to ESG and impact investing.
Given our large custom separate account platform and the focus on Investor choice, we have navigated that navigated that turbulence very well and our AUM in that space continues to grow despite.
Despite the turbulence, we continue to see strong demand product opportunity and growth in that arena on a global basis.
In closing, we had a solid quarter with you tangible signs of improvement in the environment. We remain confident with regard to fundamental demand and in the quality of our business and we are optimistic with regard to our growth trajectory and with that John I'll turn it over to you.
Okay.
Thank you Michael we ended the quarter with $10 billion of dry powder across our strategies, which we look forward to deploy in attractive investment environment.
Higher concentration of dry powders, and our private equity business, followed by infrastructure and real estate.
It is noteworthy that our real estate dry powder of $1 7 billion equates to more than 30% of our total real estate AUM, which was five and a half billion dollars as of quarter end.
Fortunately our team will be deploying a significant portion of their total AUM. Following the reset in the real estate environment in response to higher rates and tighter access to capital.
This quarter, we're going to dive a little deeper into our real estate vertical.
Real estate vertical has been our fastest growing strategy over the last year and stands to continue to grow nicely in the intermediate term.
Our real estate AUM of $5 5 billion, 60% greater than in just two years ago.
$3 8 billion of <unk> already invested and we have minimal exposure to some of the more troubled areas in real estate, such as office and retail.
So the current portfolio is well positioned as noted earlier, we have a lot of capital to deploy relative to the total amount of capital we manage.
But it is our unique approach to real estate investing that Ed will dive deeper into today.
We focus on value add and opportunistic investments in real estate sub asset classes with favorable long term fundamentals.
Our implementation approach is high value add and unique.
An outgrowth of our open architecture approach across the firm our real estate platform focuses on investing in and alongside early stage real estate platforms.
We essentially providing unpack version of the typical opportunity funds.
We deliver our clients high quality value add and opportunistic real estate assets, often the same type of assets or clients access through some of the typical opportunistic real estate managers.
At an advantageous all in costs with additional upside potential.
We accomplish this by providing various forms of capital to these emerging real estate platforms.
Acting as a strategic partner by providing seed capital to the business our funds by helping to satisfy funding requirements or by entering into joint ventures to capitalize individual deals or groups of deals.
Through this approach our team has helped launched 44, new real estate platforms or new business lines for existing real estate platforms.
The approach has provided access to differentiated deal flow and due to the catalytic nature of the capital. In addition to the returns of the physical assets, we often generate additional return revenue sharing alongside our partners.
In simple terms, we find great real estate talent seeking to start their own platforms and share in their success.
We often see the platform's recapitalize investing on behalf of other opportunity funds with our investors enjoying an enhanced risk reward profile.
Our real estate business is highly scalable our team Leverages, our platform partners across all geographies and asset classes, creating a powerful and highly diversified sourcing networks.
The breadth of the network also enables our teams to be nimble and rapidly changing environments such as the one we find ourselves in today.
Our team is currently looking at investment opportunities with its platform partners across real estate credit and.
In niche asset classes, such as outdoor storage and affordable housing.
Our highly differentiated approach and our strong track record, notably an 18% IRR for our realized can partially realized real estate investments.
Creasing, the resonating with new pools of capital are real.
Will estate offering has already attracted some of the largest and most sophisticated institutional investors in the world.
And our practice is positioned for accelerating growth.
Looking forward, we expect real estate to be a meaningful contributor to our fund raising over the coming quarters.
With that I'll turn it over to Pat.
Thanks, John .
C driven balance sheet light business and embedded growth and scalability have continued to serve us well amidst challenging market.
That's under management grew to $76 billion in the quarter.
7% increase from a year ago.
Total fee paying AUM increased 5% year over year inclusive of about 12% growth in private markets fee paying AUM.
Our private markets business now represents 70% of our total AUM and 64% of our fee paying AUM.
Looking towards the third quarter, we again expect double digit private markets organic management fee growth year over year, excluding the impact of catch up management fees.
There is upside to that growth rate, depending on the timing and amount of fun quarter. Thanks.
Absolute return strategies management fees were stable in Q2 declining only slightly compared to the first quarter.
We have seen our S fee paying AUM stabilized.
And we are pleased with our investment performance relative to peers. This year.
Our multi strategy composite was up two 3% on a net basis in Q2 and is up nearly 4% year to date.
Q3, <unk> management fees are expected to decline slightly from this quarter, but as the business stabilizes, we expect to return to year over year growth during 2024.
Consequently, we believe our year over year Q3 fee related earnings will grow in the mid teens.
We realized 13.
Of incentive fees in the second quarter the majority from carried interest.
Again, as an improving trend line from the first quarter and although there is quite a ways to go for a full return to normal we are seeing signs of life in the M&A environment.
We believe our carried interest as a valuable source of future earnings power.
As of quarter end, we had $782 million and gross unrealized carry across 135 program the.
That's what I'm sure of which is $361 million.
Our unrealized carry has been growing steadily over the past two years and we also have significant growth potential from newer funds that are not yet in a carry earning position as well as from future fundraising.
We've raised more than 17 billion in new private market capital in the last two and a half years, allowing.
When transaction volumes return, we believe carry revenue will contribute meaningfully to our earnings.
Our annual performance fees are tied to Ari's investment returns and typically crystallize in the fourth quarter each year.
The impact of <unk> 22 performance on high Watermarks combined with our solid performance in the first half of the year. Our 'twenty three performance fee earnings potential is approximately $13 million were we to achieve an annualized 8% growth rate of return for multi strategy and 10% growth rate of return for opportunistic investments.
For the remainder of 'twenty three.
This compares to $28 million of annual performance fee earnings potential if all portfolios were at high watermark.
That number of course grows as a RIS fee paying AUM growth from performance or flows.
Turning to our expenses our compensation strategy is rooted in fostering alignment between our employees clients and shareholders.
Fee related earnings compensation in Q2, with approximately $38 $5 million down slightly compared to the first quarter. We continue to be disciplined around our entire cost structure and we anticipate FRE compensation will be stable to declining through the back half of the year.
As expected non-GAAP general and administrative and other expenses declined slightly on a sequential basis from the first quarter to $19 $5 million.
We are tightly managing expenses, despite inflationary pressures and expect this figure to remain stable in the third quarter.
From a capitalization standpoint, we our balance sheet light and the vast majority of our debt is hedged which gives us further cash flow certainty and stability against a rising interest rate environment.
Our dividend is based on fee related earnings less our cost of debt without relying on that incentive fees for regular dividend payments.
We are maintaining a healthy quarterly dividend of 11 cents per share or an average yield of five 5% this quarter and there is room for further dividend growth in the future.
In the case of share buybacks, we have repurchased more than 3 million shares. This year. We ended the quarter with 186 million shares outstanding which compares to 188 million shares outstanding at the beginning of 'twenty two.
Despite our modest float we are committed to prudently managing dilution from stock based compensation programs over time.
As of the second quarter, we had approximately $22 million remaining in our share buyback authorization and our board has approved an increase to the authorization of $25 million.
We look forward to the opportunities ahead to deliver value to our clients and shareholders. Thank you again for joining us and we're now happy to take your questions.
Thank you and if you would like to ask a question at this time. Please press star one on your telephone keypad.
Using a speaker phone. Please ensure your mute function is turned off again that function as star one.
Well pause for just a moment.
And we'll now take a question from Ken Worthington with JP Morgan.
Hi, good morning, Thanks for taking the questions.
First J F T reported a few days ago.
In article, indicating that private market asset managers are turning to fee concessions to win business.
Are you seeing the industry challenges in fund raising that we've seen over say the last 18 or so months lead to more pressure on fees and to what extent are you seeing.
Any such pressure from sort of new or existing investors.
At a different level than maybe you've seen in the past.
Thanks, Ken it's Michael.
We're actually not seen that we.
Rfps have been very have been stable they've been stable for a while as you know we've talked in the past about our mix shift, which is actually constructive for our fee rates and constructive over time.
I think the so we're not seeing that.
Do think that what's happened in the industry and it's not new it's not a response to the last year.
Year, or so, but what you have seen is.
Sponsors GPS private equity GPS offering.
Yeah.
On promoted or significantly reduced cost co invest.
And so the average cost of accessing private equity for investors who can operate.
Operate co invest programs has probably come down.
And it's possible that that's somehow in the mix of what's been talked about.
We've been a beneficiary of that as more and more of our clients had wanted us to adopt co investment programs for them.
Our.
Suffice private equity separate accounts, and we're getting incremental fees on that which is part of the stability and opportunity for our fee rates, but were not met today.
Thank you Donna.
Yes.
I'm not sure if it's the same article you saw but I did read an article in the ft on that topic and one of the things that that article it talked about was.
Structural creativity and structural innovation that we're seeing in the industry and things like.
Arranging secondary to get more liquidity back to investors to allow them to recommit or GP led secondaries around specific a specific asset or groups of assets. I think there was even a referenced in that article to collateralized bond obligations, which is something that we've talked about in the past, which are all different ways Theyre method.
To allow for people to get more capital returned to them in an environment when realizations are slow.
I think that trend is real and it's been some of that was honestly real even before the slowdown of the.
Private market capital raising environment. It was more about just kind of continued innovation that you see in the marketplace, but some of that certainly is related to.
Trying to drive drive drive greater liquidity.
Great. Thank you.
And then you know.
The private markets business continues to Hum along the absolute return business still feels like it's struggling here.
You know from a flows perspective, even if we look sort of sequentially in the absolute return business.
Gross sales were down a little bit the gross redemptions were up a little bit you know means the net was down a little bit, but ultimately I think the real issue here is on that gross sales side and we're not seeing money come in the door.
Any thoughts on how to better market your capabilities.
Or thoughts on product development that you can look into in the absolute return business that might generate greater client interest in sort of perk up those contributions I guess it starts with performance and you've kind of indicated that the performances has bounced back here a bit so maybe it's a matter of.
Time, but.
When push comes to shove.
It seems like there might be more.
That needs to be done just to kind of better stabilized that business and so my question is.
As the pressure increases how are you thinking about you know driving better flows.
To that area.
So thanks for the question I do think Ken that that business has largely stabilized.
And I think Youre right that we need you know we're focused on the inflows. The gross inflows if you will to the business Pam mentioned in her comments that we see that.
A R S management fees returning to growth next year.
And we that's kind of.
What we see evolving and we do have.
Vehicles inside our absolute return strategies that have very good performance and those are I.
I guess it's.
Obvious, but those are the vehicles that were out talking about a lot in the market now and trying.
Trying to drive we've had some recent success there.
And we have a pipeline there that is up pretty considerably from where that pipeline was a quarter ago and so we're you know we we use the word stabilization because we think that's where we're at and Pam did say that we do see that business starting to grow again next year and we are.
Focused very much on.
Making sure that the market sees all of our capabilities and offerings in the E. R S space and in particular.
Is looking hard at.
The offerings that have had very good performance over the last few years that we think can grow significantly.
Great. Thank you very much.
Thank you.
So again, if you have a question. Please press star and then one on your telephone keypad.
Our next question will come from Michael Cyprus with Morgan Stanley .
Hey, good morning, Thanks for taking the question wanted to circle back to your comment Michael about the international presence raising a lot of money overseas. Maybe you can just give us a little bit of flavor for which are some of the top countries or regions, where you're sourcing a lot of the flows overseas and driving a lot of the strength and then how would you sort of characterize.
The build out and piece of the overseas international business today, and what sort of steps might you take over the next 12 months or so there.
Sure. There was an article today I believe that talked about one of the large U K plans, making an infrastructure allocation to us.
And we've seen you know.
Some significant flows out of the U K recently, we have expanded our presence in.
Sort of central Europe in our in the U K in Canada in Australia.
And we have a strong presence as you know throughout Asia, and we're just pushing forward on all of those fronts and trying to you know stuffed pipeline on in on in all of those markets.
And in our pipeline in general is strong.
Globally.
Which as you know is strong globally, and we're pleased to see that pipeline filling.
As a result of some of the recent investments we've made and we're obviously pleased to have you'll see results coming.
From outside the U S outside the U S as well I think the one place that we want to.
Focus in the coming you will focus more we've been we've grown our business in the middle East some but we think we're still not doing as good a job there as we can and we think that provides opportunity for us and we are.
Pushing hard on that so I think that's kind of just a quick trip around the world, how we see the markets and the overarching theme.
Which I tried to touch on in my remarks is that despite a slow period for the last you know.
Four quarters five quarters the demand for all its is still quite good and so everybody's adjusted are adjusting to the new environment. If things are loosening up we're not.
Declaring victory, but Theres no question that the environment's loosening a bit there are green shoots boats on fund raising pipeline and on realizations frankly, and so we're optimistic about all of that.
Great and then just a broad question on the secondaries market given the challenges in fundraising in realization activity, there's been a lot of excitement around the prospects for a pickup in secondaries transaction activity. So just curious what youre seeing there what your outlook is for that what sort of pricing levels are you seeing in terms of.
Funds traded in the secondary market.
Right. So John John talks about this a lot. We think you know long term intermediate term, we think the secondaries market is a good one and a growing one John .
John has mentioned before on these calls you know the second a private equity is one of the few places where your secondaries market is smaller than your primary market and we just see continued growth over time in secondaries secondaries have been dominated for.
For the last year or so by GP led secondaries that continues to be the case there has been more L. P secondary activity, but to your question I think discounts are today are probably in that sort of the wider end of the range that they typically trade at you know throughout a cycle.
That's probably slowing the L. P led secondary.
You know evolution, a little bit just because.
It's been a it's been a slow environment rates are up.
<unk> take some time.
To adjust and and and so the discounts are bit wider now I don't think they are outside you know kind of the typical range you see in a cycle, but they are towards the low end of that range or the discounts at that towards the high end of the range and therefore L. P. Led activity is slower and people are looking at.
Of the structural alternatives are that is that a J.
John described a moment ago and.
GP secondaries have really taken off.
Where you know there's there the discounts are lower in those transactions.
Great. Thank you.
And as a final reminder, star one if you would like to ask a question.
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Well take a question from Chris Kotowski with Oppenheimer and company.
Page five.
Yes.
Okay.
Chris you're breaking up if you can hear us.
Your current products are and how you.
Hi, Donald.
Okay.
Chris We can't hear you Fortunately.
Yes.
Maybe we should if there are other questions maybe take them and then either Chris can try to maybe dial back in or we can.
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Okay, perfect and actually there are no further telephone questions at this time.
Okay, Chris if you can hear us we're sorry about that we appreciate the questions and we'll talk to you later.
Thank you everybody.
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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