Q3 2023 Grosvenor Capital Management LP Earnings Call
Good day and welcome to the GCM Grosvenor third party.
Third quarter 2023 results call later, we will conduct a question and answer session. If you're interested in asking a question. Please ensure you dial in using the numbers you have been provided for this call and press star one on your keypad to join the queue.
Anyone should require operator assistance. Please press Star then zero on your telephone as a reminder, this call will be recorded I would now like to hand, the call over to Stacy.
Head of Investor Relations you may begin.
Thank you.
Good morning, and welcome to GCM Grosvenor third quarter 2023 earnings call.
Today I am joined by GCM Grosvenor is chairman and Chief Executive Officer, Michael packs, President, John <unk>, and Chief Financial Officer, Pam Butler.
Before we discuss this quarters results. A reminder, that all statements made on this call that do not relate to matters historical fact should be considered forward. Looking statements include statements regarding our current expectations for the business, our financial performance and projections.
These statements are neither promises nor guarantees they involve known 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 available on the public shareholder section of our website.
I'll also refer to non-GAAP measures that we view as important in assessing the performance of our business.
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.
For those of you that have seen our filing you'll notice that we have a new look and feel to our earnings presentation.
He spent a lot of time on that that Stacy I want to thank you very much I think its an improvement and we look forward to hearing your feedback on it.
Our third quarter results were in line with expectations with fee related earnings increasing 16% year over year.
Private markets were the primary driver of growth with private markets management fees growing 10% year over year. This marks the 10th consecutive quarter of double digit private markets management fee growth, excluding catch up fees in the fourth quarter, excluding the impact of catch up fees, we again expect.
Double digit private markets management fee growth compared to the prior year.
Next week is our third anniversary as a public company and we are proud of what we've accomplished over this period.
<unk> seen our management fee centric business continue to grow while experiencing a material shift toward revenue coming from highly predictable long duration private market programs.
As of quarter end private markets capital comprised 65% of our fee paying AUM up from 54% at the end of 2020.
Over this same time period, we have raised approximately $21 billion across our various investment strategies and we have nearly tripled our firm's share of carried interest and net asset value to $365 million.
That number does not reflect any value for capital recently deployed or dry powder yet to be deployed.
While the release realization environment in recent quarters has been soft our incentive fee opportunities should drive significant significant cash flow growth in the future.
Turning to this most recent quarter, we raised $1 $2 billion.
We continue to be confident that total fund raising for the second half of 'twenty three will exceed first half fundraising.
On our last earnings call John spoke about the positive momentum we've seen in our real estate business and it was nice to see more than 40% of this quarter's fund raising accrue to our real estate vertical.
Our infrastructure growth and momentum continues with that vertical representing the greatest contributor to fundraising at approximately $580 million.
Our infrastructure vertical has more than doubled over the last three years from 6 billion of AUM at the end of 2020 to more than $13 billion at the end of the third quarter of 'twenty three.
<unk> seen that growth in both separate accounts and specialized funds.
This past quarter, a material portion of the infrastructure capital raised was for two of our specialized funds Cif three and IAF too.
Three had its final close with an ending fund size of $882 million, 37% larger than its predecessor <unk> two.
Our infrastructure advantage Fonder IAF two focuses on direct infrastructure investments that are enabled and optimized by a constructive collaborative approach to working with Union labor.
We have raised nearly 500 million since fundraising began earlier this year and while we are still early in the fund raising process. We're encouraged by investor interest in the fund.
While investors are still not moving as quickly as they did two years ago. The broad commitment to alternatives remains strong and we're seeing a moderate uptick in activity levels. We brought a new credit specialized fund to market last quarter and just held the small first closed last week, our strategic credit fund our scf too.
It's an opportunistic credit fund largely private credit that has the flexibility to invest across credit markets directly and through co investments. There's a lot of demand for private credit investments our pipeline has more than doubled over the past year, and we believe scf too and our credit focus separate accounts will be.
Full contributors to capital formation going forward.
We believe that as the private credit market matures institutions will develop programs in a similar fashion to private equity and infrastructure programs and our open architecture flexible implementation model will be a beneficiary.
It's worth noting that we have remained disciplined with regard to our cost structure, enabling us to grow margins or last 12 month fee related earnings margin was 37% up significantly from the end of 2020, and we believe we will continue to enjoy margin expansion into 2024.
We've continued to put clients first and that culture and approach are reflected in the high re up rates of approximately 90% that we continue to enjoy we remain confident in our ability to deliver for clients and to grow the firm for shareholders and team members in 2024 and beyond and with that I'll turn it over to John.
Thank you Michael the infrastructure advantage fund that Michael mentioned earlier is just one example of the work the GCM Grosvenor is doing around impact investing.
Impact investments catalyzed positive measurable outcomes that align with our clients' goals, while providing competitive investment returns.
Critically our definition of impact investing as non concessionary, meaning.
Meaning that everything we do starts with seeking competitive risk adjusted returns.
Our experience is that financial returns and impact our complementary rather than competing objectives.
Our impact track records, such as in Health care education, renewables and energy transition and diverse managers have delivered consistently competitive returns.
Importantly, the specific targeted outcomes and sometimes even the definition of impact can vary amongst corium programs.
The money is not ours. It is our clients and it is our job to deliver competitive outcomes that align with their goals.
As our customer count provider for the last three decades, we excel in delivering solutions that meet clients' varied objectives.
Client interest in developing impact programs within their alternative allocations is rapidly evolving.
<unk> are increasingly identifying specific themes they want to address via their investment portfolios.
These solutions require not only investment acumen, but also robust ancillary services, including in particular customize reporting on the relevant objectives.
With many institutions looking to not only generate return, but also to promote certain objectives in their investment portfolios. The industry must evolve so it can support impact investing at scale.
The opportunity for Weir, calling customized impact solutions is massive and perfectly suited to scale within our business.
We are extending the same flexibility that we have offered for decades to our custom separate account clients to impact programs.
The client can opt to invest through co investments secondaries direct investments or through funds or a combination of these implementation styles.
We create highly targeted programs that are focused not only on one theme or asset class, but sometimes a broad impact program that cuts across multiple teams in multiple asset classes.
We are leveraging our open architecture sourcing platform to broaden our funnel of impact investments our.
Our investment teams have been trained to identify impact opportunities that align with our various client programs regardless of whether they are originated from a quote unquote impact manager or one of our hundreds of generalist managers.
This enables us to both invest at scale and also have significant deal flow to successfully implement highly targeted impact oriented programs.
We have been built robust proprietary assessment framework using best in class practices to ensure that these investments to meet the necessary impact criteria that our clients that while also making sure that we are always focused on generating attractive risk adjusted returns.
Finally, we have combined the power of our existing data and analytics with the impact reporting capabilities of leading third party vendors.
Through our systems recapture detailed quantitative and qualitative kpis across our investments.
And then deliver a portfolio wide view of impact to our clients.
The quality of our customers impacts solution is resonating with current and prospective clients and we're seeing traction for our customized approach from a global investor base across numerous channels.
At its core our customers' impact solution as an illustration of what we do best as a firm leverage the breadth of our platform to achieve the unique objectives of each of our client partners.
Now I'll turn the call over to Pam.
Thanks, John our results this quarter were consistent with our expectations and once again demonstrated our earnings quality and scalability of the platform.
Assets under management were $76 billion as of quarter end, a 5% increase from a year ago.
Fee paying AUM also increased 5% year over year inclusive of 11% growth in private market people in the U N.
Our private markets business now represents 65% of our fee paying AUM in private markets management fees, excluding catch up fees have grown at a 13% compound annual growth rate over the last three years.
Private markets management fees grew 10% in the quarter compared to a year ago, excluding the impact of catch up management teeth. We once again expect double digit private markets management fee growth in the fourth quarter compared to the prior year.
As expected absolute return strategies management fees were relatively stable in Q3 as compared to last quarter, and we expect Ari's management fees to again be stable in the fourth quarter.
Most importantly, we are pleased with our <unk> investment performance.
Multi strategy composite is up 6% year to date on a growth basis with very little correlation to broad markets.
We realized $26 million of incentive fees in the third quarter. The majority of them carried interest as a reminder, the firm retains 50% to 60% of the firm's share of incentive fees and as of quarter end, we had $778 million in gross unrealized carried interest across a 136 program.
The firm's share of which is $365 million.
Powershares Carey has nearly tripled in the last three years, creating significant future cash flow potential.
Consequently, we believe that when the M&A activity returns the quality and diversification of our unrealized carried interest will have a significant positive impact on earnings.
Our annual performance fees are tied to E. R. S investment return and typically crystallize in the fourth quarter each year.
Given the impact of 22 performance on high Watermarks combined with our solid performance. This year, our 'twenty three performance fee earnings potential is approximately $13 million, where we can achieve an annualized 8% growth rate of return for multi strategy and 10% growth rate of return for opportunistic investing.
For the remainder of this year.
This compares to $24 million of annual performance fee earnings potential if all portfolios were at high watermark today.
Turning to our expenses our compensation strategy is rooted in fostering alignment between our employees clients and shareholders.
The related earnings compensation in Q3 was approximately $38 million slightly below the second quarter, and we expect a similar level in the fourth quarter.
non-GAAP general and administrative and other expenses declined in the quarter to $17 $5 million as a result of reduced conference and travel related costs as well as lower professional fees.
We expect our fourth quarter non-GAAP G&A will be in line with or slightly below our first and second quarter level.
We continued to exercise disciplined expense management across our business, while allowing for investment and strategic growth opportunities.
Pulling together these factors on a year over year basis fee related earnings grew a healthy 16% in the quarter, while adjusted EBITDA and adjusted net income grew 5% and 7% respectively.
From a capitalization standpoint, we our balance sheet light and the majority of our debt is hedged, which gets 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 net incentive fees for regular dividend payments.
We are maintaining a healthy quarterly dividend of <unk> 11 per share or a yield of five 2% as of last Friday and there is room for further dividend growth in the future.
In the case of share buybacks, we have repurchased nearly 4 million shares year to date and we ended the quarter with 187 million shares outstanding.
Our modest float we are committed to prudently managing dilution from stock based compensation programs over time.
As of the end of the third quarter, we had $40 million remaining in our share buyback authorization and we continue to believe that our current stock price is at an attractive level relative to market value.
Looking ahead to next year, we feel confident in our solid trajectory with continued double digit growth in private markets management fees stabilization of HRS management fees expanded FRE margins and significant growth potential in our incentive fee revenue.
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.
Yeah.
Thank you if you 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 make sure. Your mute function is turned off again that function is star one.
Our first question comes from Ken Worthington with J P. Morgan.
Please go ahead.
Hi, good morning, and thanks for taking the question.
It looks like expectations are in private markets last quarter was for four or so funds to have closed in this quarter, including C. I S. Three Mac three and for three and the new elevate fund did.
Did all of those funds actually have closes this quarter or did some of the fund raising and three Q get pushed to for Q.
And then.
Your comments suggested that you were.
Reiterate your comments that the second half fundraising would be better than the first half.
Which funds do you expect closes.
As we look towards the end of the year. So thanks for that.
So Ken it's Michael second half fund raising.
Bill.
We will exceed we remain confident it will exceed first half fund raising.
We John will give you in a second spin.
Specifically, which funds had closes and did not have closures, but there's no doubt that some of the capital that we had hoped to close on in Q3.
For Q4 some of Q4.
We're we're we're seeing things pick up.
And we our pipeline is full and our activity levels are clearly picked up there's no question about it but it's still it's not a it's not a return to the prior environment transaction levels really have have just picked up a little bit and we've been.
Saying for a while that where we see that flywheel start journey again is when transaction levels pick up and that that has not <unk>.
Certainly not fully happened yet, although we do feel like everything that we're seeing is encouraging.
John you want to give the specifics on which ones didn't didn't have a close.
Sure I think we had.
Small closing on a Mac three.
We had closings on our C. I S three and I F. We did not have a closing on our elevate.
When you step back and look at it more broadly I actually thing you noted this in your last report.
Obviously for us it's a significant part of what we're doing 75% of the cap.
Capital for customized separate accounts, which as you know providing a tremendous amount of ballast.
Two our fundraising picture and what gives us the confidence to talk about second half being greater than first half in terms of the visibility of that pipeline.
On the funds in particular, obviously, we put out a release more recently on our infrastructure platform and the success of that franchise more broadly and Michael noted the CAGR of the of.
Of that franchise as a whole not just on the commingled funds and in his comments on the on the script and so feel good about that and you know in terms of elevate we closed and put a note out on our first deal for that fund, which we think is.
An exciting kind of catalyst for that fund and in the efficacy of the seating business. So we feel good about stuff, that's a little bit hard to predict the exact timing of things as Michael noted, but overall it feels like a picture that is improving with the days.
Awesome. Thank you for that.
Then just maybe to follow up on the insurance channel.
Where assets in your insurance business as of the end of the quarter, maybe talk about how that business has grown this year and you highlighted I think it was a new some new credit capabilities.
Assuming I interpreted that correctly, how did the new credit capabilities maybe.
Further help you grow or or are they going to help you sort of build out your insurance business. Thanks for that.
So I think I wouldn't I wouldn't necessarily say new capabilities, Ken from a manufacturing standpoint, I think these are capabilities that we have.
In Charlie front we.
Manufacturing manufacturing capability that we have I think theres clearly.
More demand for.
Credit and and for alternative credit.
And that demand is coming you see demand in the insurance channel for sure. We raised more money from the insurance channel last quarter than it represents in our balance sheet, maybe John or Stacy, we can get the precise number but it continues to grow sort of.
Faster than than its pro rata share, but the credit demand is.
Sort of broad based demand, it's not just in the insurance channel and we do believe we.
Which is why we mentioned it that you'll hear more about credit growth from us going forward and specifically that the type of diversified approach that you've seen be so successful in infrastructure and private equity we're seeing.
A lot of interest in that type of approach.
For credit.
And we are hopeful that we'll be able to announce.
Wins and growth in good news in that regard going forward.
<unk> from just last quarter, we remain very we remain bullish on the insurance channel. There is a lot of activity there.
There is.
Ben.
Pretty effectively stuffing the pipeline there.
Continuously and we continue to believe that's going to cause.
We will grow.
And take more and more of a larger percentage of AUR.
Yes.
Maybe Ken I would just add one point to what Michael said, which is really just going deeper on the point. He said when Michael talks about it is not a new capability.
You know, it's a diversified approach to credit and we're seeing a lot of interest from clients all different types of channels kind of globally.
What we're really talking about there and the similarities that Michael also referenced between private equity and infrastructure is the ability to.
Invest in primary funds.
Co investments secondary investments direct investments and so when you think about the evolution of the private credit I'm, just kind of sub sector of the alternative industry and this has been noted on a number of the calls even this quarter a lot of that has been focused on the spot.
Sponsored direct lending kind of franchises and obviously credit is just a much bigger world sponsor non sponsor you have asset back do you have structured and so our ability as clients mature and that allocation to help them build out that allocation, but also do it on a cost effective basis by using co investments in the same way they've been used to.
The other alternative asset classes is something that we're excited about and think we will have who will be resonating nicely in the marketplace.
Great. Thank you.
Yeah.
Thank you and if you have a question please.
Please press Star and then one key on your telephone keypad.
Our next question comes from the line of Michael Cyprus with Morgan Stanley. Please go ahead.
Oh, Hi, good morning, Thanks for taking the question just wanted to ask on the absolute return business that you have if you could maybe speak a little bit to the gross sales environment. It's been a volatile year in public equity markets. Most stocks down on the year. If we look at the S&P equal weight index I guess, what's the scope for greater L. P demand within your absolute return.
Is this what strategies are resonating most today with with Lps and how do you see that evolving as you look out over the next 12 months.
So I think that.
We definitely have activity in that space I'm actually.
Calling in from from Hong Kong Michael.
And with our team here today, they think there you know.
Yeah.
So they see activity was specifically talking about about a R. S. I think our general budgeting approach hasn't changed I don't think we.
I think we're in a massive straw.
Strong net inflow environment, but we do think gross inflows.
We will pick up.
As was mentioned on the script.
Forming there and we're performing relative to expectations, we are performing relative to peers, we're performing relative to indices and so we think that's important and there are a couple of.
Funds in side.
Absolute return they have good numbers that we are actively showing to the marketplace and so you know.
No no you know.
Change in terms of our net flow base case assumptions we.
But we do see.
Growth in inflows area and it all starts with performance, which is in line with expectations.
Great. Thanks, So just a follow up question on Secondaries I was hoping you could speak to the deployment environment. There the discounts that you're seeing how that's evolving as this seems like it would be a hopeful solution for L. P facing liquidity constraints, what's the prospects for that activity in the secondary space to accelerate meaningfully from here.
Yes.
So.
I tell you that not a lot of change from where we saw that a quarter ago, which is pretty wide discounts relative to historical discounts.
Good.
You know people not necessarily LP led secondaries.
You know seeing huge volume increases and a little hesitancy to take those discounts.
And GP led secondaries kind of continuing to be where most of the activity is I think in general without.
Being.
Without.
Pretending to have any kind of a crystal ball, we do think that the pent up demand for transaction activity the pent up demand for.
Liquidity and secondary therefore secondary market activity, we do see that picking up next year and John This is something John has spoken about.
And I think they've spoken about publicly.
But recently, but we kind of see.
The spread between where the you know the.
The bid is where the ask is waiting for China to figure out where rates are we just think we're getting closer I guess it is definitional, but to that resolving itself.
See activity levels picking up next year sort of one way or another.
Great. Thank you.
Yeah.
And our next question comes from Chris Kotowski with Oppenheimer. Please go ahead.
Yeah, good morning, sorry.
I was wondering you've mentioned in the past that a good deal of your fund raising comes from high net worth individuals and wealth management clients.
But it seems like it's been it's been more on the account a customized kind of accounts and I'm wondering you know how high up on your.
List of priorities as a as a retail co mingled retail fund vehicle.
Hi.
Thank you Chris It's a good question I think in general the what you're referring to I think is the fact that our individual investor fund raising has like insurance exceeded most quarters.
Its representation in our total AUM, so it's growing as a percentage of our AUM.
We very much see that continuing and we.
I want to bring more focus to our individual investor efforts, we want to bring more products to the individual investor channel, we want more internal resources dedicated to the individual.
And just the Investor channel and we look forward to reporting on that.
Over the course of the next.
You know for eight quarters.
More than once.
Okay. Thank you.
Okay.
Again, if you have a question. Please press star and then one on your telephone keypad.
I'm not showing any further questions.
Thank you again for joining US today, please feel free to reach out with any follow ups and if not we look forward to speaking with you again next quarter.
Yeah.
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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