GCM Grosvenor Inc. (GCMG) Earnings Call Transcript & Summary

Good afternoon. I think we're live. Welcome back to the UBS Virtual Financials Conference. Thanks for joining us. We're very pleased today to have Michael Sacks, Chairman and CEO of GCM Grosvenor with us to talk about the business and the industry, looking forward to that discussion. Before we begin, I just want to make an admin note, call your attention to important disclosures about UBS Equity Research, which can be found on our website, www.ubs.com/disclosures. And with that, Michael, thank you so much for joining us today. Really appreciate your time and looking forward to our discussion.

Thanks for having us, Adam. We really appreciate it.

Excellent. If we could, I mean, the solutions provider segment of the private asset space is still somewhat new or unfamiliar to investors as is potentially GCMG. So if you could -- and GCM has been around for 50 years, so longer than many in the space, so if you could put the evolution of the firm and the evolution of alternative asset solutions providers in some context for us?

Well, I'm happy to. First, I think I have to say, I'm only 59 years old. So I haven't been around in a professional context for 50 years, but you're kind to point out that the firm has, and I think it's relevant. I've actually been at the firm for the last 30 years. And we've seen a lot of evolution in the alternative investment strategies space and arena over that period of time. Solutions providers to my mind, what that really connotes is: number one, that you work with clients not only in a commingled fund format, we have a strong set of co-mingled funds, several in market now, and we see that growing. But you also work with clients in a custom separate account format where you really sit down with the institutional investor, you understand precisely what they're looking for within a specific strategy, and you're building a program for them with them. And there is return from that and there is a clear risk/reward value proposition, but there's also a service component and a reporting component and operational lift component that frankly serves to make the relationship longer term in nature, I think, less transactional and quite sticky. And so you'll see with the large-scale solutions providers that they have good tenure of their client relationships. They -- we often see an initial sale and then a re-up and another re-up and it's a good business model. But that -- the other piece that I think is really relevant for the solutions providers is that we are what some of us call open architecture, which means we're not managing all of the capital in-house, direct position investment basis, we are allocating to other managers on a primary basis. We have secondaries operations. We have co-investment and direct operations. And that open architecture can be quite an advantage when paired with the custom separate account in terms of delivering value to clients.

Excellent. Could you talk a little bit, I appreciate that, on the evolution of the industry and the firm a little bit? How are LPs different today from 10 or 20 years ago? Are there still LPs that are underallocated, that are new to private assets investing? How much of that is there? And how much growth do you still see with increasing allocation to private assets?

So I think it's, on the one hand, very different from 10 to 20 years ago, could argue it's different from 5 to 10 years ago. And on the other hand, the general themes of the ability to continue to grow. It's been a very steady and impressive growth trajectory over that long period of time, the ability to grow and the ability for a greater and deeper penetration within portfolios and then different sort of activity or investment sets within portfolios, I think, continues to be very strong today as it has been over the last 5, 10, 20, 30 years. And the gating factor there is typically the speed of evolution of the client. And you've seen institutional investors evolve greatly in terms of their approach to private equity. You've seen it go from a primary -- largely primary approach to significant secondary, significant co-invest that's a very beneficial impact on risk return cost. And I think that's still not fully mature, that shift. And then you have other institutions, institutional channels, not to mention high net worth and retail that are under-allocated in all. So in general, there's pretty strong tailwinds in the space and for the solutions providers like GCM Grosvenor, more capital wanting to come into secondaries, more capital wanting to come into co-invest is economically advantageous for us while delivering great value to the client.

Yes. Talk a little bit -- there's a couple of themes in there that I want to pick up on. One is co-invest, which is a growing trend, as I understand it. Talk about Grosvenor's role in allocating co-investment opportunities, in sourcing co-investment opportunities and also how that can affect the fee structure from the LP perspective?

Sure. So years ago, as part of, I think, a shift in the private equity space. Private equity general partners started to be comfortable rather than maybe clubbing up a deal amongst other private equity GPs allocating co-investment capacity to their limited partners on often and largely an unpromoted basis. And so for LPs that were able to underwrite these co-investment opportunities and respond quickly enough to utilize the co-investment opportunities, this was a way for them to put more capital with a manager and kind of average down a fee structure, if you will. And it started to become pretty common that the GPs would offer this. For a large part of the institutional marketplace in the high net worth marketplace kind of globally, it's not really practical to operate a co-investment portfolio where you've got to turn a nondisclosure agreement, look at your material sets and make a firm commitment in a short period of time. Just the -- a lot of -- large portion of the institutional investment world just aren't set up to be able to do that regardless of whether that is something they're comfortable doing risk reward. So the opportunity for firms like ours to take on that role for the institutional client to be paid from our perspective, well for that role but deliver a cost reduction from a typical PE fee structure for the clients. So whatever portion of their portfolio, they're committing to co-invest their total cost on that is lower. They're reducing their costs. They're getting a diversified portfolio across GPs, across industries, across vintages. And it's been a good risk/reward investment with good returns over reasonable periods of time and it's a cost reduction, so it's high value add and more and more of the end users are comfortable engaging firms like ours, other solutions providers to implement that strategy for them. We see it as a significant growth opportunity for GCM Grosvenor.

Excellent. When you're speaking about LPs, talk a little bit about Grosvenor's customer base, the different LP segments, maybe where Grosvenor is different from some of your peer firms and where the growth opportunities might be within that?

Great. I think that we are were similar to our peers, we're similar to the industry. Just given our scale at $67 billion of AUM, we've got good diversification amongst clients from a geographic perspective. We've got good diversification amongst clients from a client type perspective, very significant institutional focus with the wealth channels kind of coming on and starting to grow -- starting to grow faster. But it's a pretty broad-based group of institutional clients diversified, as I said, by geography with 40% of our client base coming from outside of the U.S. diversified by the client type within the different geographies in terms of pension funds, public plans, sovereigns, financial institutions. There are a few pockets that we think offer significant opportunity for Grosvenor specifically. We feel like we're a bit -- we could do a better job up in Canada, and we've added some business development resources to help us do that last quarter. We think that the insurance industry offers an interesting opportunity for the solutions providers, and we've added some capabilities in the insurance space. And that's -- you need people that are good business development people, but really, they need specific expertise and understanding of insurance company, insurance company regulation, et cetera. So we're pleased to create GCM Grosvenor Insurance Solutions to target that opportunity, which we think is considerable.

Let's talk -- let's dig into that a little bit because I heard that on your earnings call yesterday. How -- where did it reach the tipping point in terms of insurance being the right opportunity for GCM Grosvenor?

I think that you have -- you've got low rates that persisted for a while. You've got pressure on the investment portfolios inside the insurance companies. When you think about an insurance company balance sheet, the ability to come with a custom separate account approach, with a solutions approach, to take a bunch of -- not only provide the risk reward, but to provide some of that operational lift -- some of the reporting and the service, perhaps some structuring around some of the portfolios. We think there's an opportunity to add a lot of value there. And in this world of quite low fixed income returns, there's more demand for alternatives generally, particularly, inside of the insurers. And as you know, a lot of the very sophisticated alts firms, private equity alts firms own insurance companies and are doing this for themselves. And in a way, I think that puts more pressure on the other insurers to have a more sophisticated alts effort, and we think we can help them get that.

Within alternative assets, how do you expect the -- or asset class mix to shake out? A lot of times folks think in terms of, "Oh, it's an insurance company, so it's going to be primarily alt credit." Do you expect a more diverse mix than that? Or what are your thoughts?

Yes. I think that alts generally is growing. And we don't see a geography or a channel -- I don't think we see a geography or channel globally where it's not growing. Kind of what grows inside of that, right? For us, we're private equity, real estate, infrastructure and absolute return strategies. Within those we're primary secondary co-invest indirect. And we see at different points in time in a cycle, different sub-strategies, different approaches growing faster. Right now, you're seeing broad-based growth. We're seeing gross flows into all of those areas. But I think infrastructure has seen a lot of capital recently and is likely to -- is at the macro level. I think that secondaries and co-invest have seen a lot of capital next at the macro level. And so while that whole pie seems to grow and all forecasts are for that to continue to grow, certain subsets will grow faster. ESG and impact is a place where we have a strong position. And we see that -- a lot of demand for that. we don't see that changing. So that will grow likely faster than the average.

You mentioned there's a couple of areas I want to follow up on, but you mentioned ESG and impact. And I got to say, GCM Grosvenor was -- ESG and impact before it was cool, right, I think that's safe to say. So tell me a little bit about the historical context of your business in those areas and really the philosophy of the firm that goes behind that?

So I think, look, as a firm, we believe, generally, that the ESG, impact, DEI, these are things that made you better and lead to improved economics and improved bottom line. I think that with regard to our ESG and impact investing, it was a little bit of both push and pull. We had certain impact investment approaches that were driven -- client-driven. And then we had others where we really saw opportunity and we saw risk reward enhancement for pursuing the ESG or impact strategy. Yes, we thought there's an overlooked opportunity with women, with asset management firms, all the asset management firms owned by women and underrepresented minorities. We thought that there is an approach to direct infrastructure investing that works closely with labor that is good for the bottom line. So a lot of this was looking for the overlooked opportunity and going to deliver capability set in that area that -- and it worked well for us.

In terms of the overlooked opportunity, how do you think about the industry of sort of alternative asset fund sponsors and the creation of new firms and kind of the cycle there. One of the themes that at least I've run into has been within alternative assets, kind of an organic consolidation. I mean, sometimes it involves M&A as well, but also LP sort of gravitating more to the scale providers. Has there been any kind of shortage of either small firms that are growing or new firms being created? Or do you still find opportunities there to deploy to uncover opportunity assets there?

So I would say a couple of things: one is there's absolutely no shortage of opportunity. There is tremendous talent in the mid-market and smaller scale, there always will be. And there are great firms coming on all the time. If you look at the consolidation that you've seen, it's kind of -- you've seen consolidation, but you haven't really seen like elimination or it's typically a large private equity firm will buy a secondaries capability. And that secondaries capability will still be there. It's a different flag, but it's still there. It's still raising money in secondaries. It's still operating. One of the solutions providers made what we think was a smart investment in a venture capability just last quarter. They're going to still have that venture capability, and that large solutions provider is still there just with this new capability set. So I think you don't see sort of two identical firms necessarily kind of coming together and eliminate on a synergy, let's cut half of the cost and it's more strategic. And at the same time, there's just -- there's tremendous talent, a lot of new firms that Fund I and then Fund II and Fund III and it's real. It's a very real and subset from a real track record and you see that all the time, and we'll continue to see that.

Different flag. No, I like that explanation. Makes sense.

Yes. Now for our business, where we think the value added is for clients and where we think we provide a real value proposition is in that kind of middle market. The large direct alts firms are phenomenal, phenomenal firms, they're phenomenal investors, but they're well known. They're big and they're well known and they are brand names. And I don't know that people need to pay us to go to them. Where now maybe we can help them manage their co-invest capacity. But I don't know they need to pay us to find them. We're in the middle market and with small, emerging and diverse managers where we have a large capability set. Those are places where we can actually add a lot of value in helping people get to on a primary basis and then in operating on a secondary co-investment direct basis alongside them.

Those are interesting comments to me because -- and that was true for GCM Grosvenor and for other firms. There is this as I learn more about solutions providers in that space, there's -- sometimes you hear the story basically that you've just told, which is identifying those smaller or emerging managers that are just overlooked for the time being. But other times, you hear about access, right? And the big marquee firms. And well, in effect, the LPs, the only way you're ever going to get into a Blackstone Fund is to work with Grosvenor to do that. It sounds like...

We've certainly never made that argument to anybody. But the big firms in the private equity, I think, raised a lot of money, and I think they are generally constructive and hospitable and welcome new investors pretty regularly. I think that made for some of the big well-known venture firms that may have been true. And I think there may have been a perception that if you couldn't be with Andreessen or Kleiner or Sequoia, you shouldn't be a venture investor. I think that's actually people are seeing that differently today, but that may have been more real thing there. The big PE firms, the big real estate firms have really grown their client bases, grown their capital under management. But in that middle market and with smaller emerging managers where the returns have been quite good and you're investing in a different sized deal and there's some real value there. That is the space where having some help, even on the primary side, is quite valuable. And then as I've said, a large chunk of the institutional universe could you -- likes to get some help on the co-invest and that's a very good opportunity set for us and the other solutions providers, and secondaries are growing fast as well.

How do you view in terms of -- two things. Competition, you have some public peers now, but also, I guess, it blends into substitution in terms of how else can an LP or prospective LP get this kind of alternative asset allocation and the services around it in their portfolio. What are the alternatives for them? What have they been historically? And where do you see the trends moving?

Well, so you have to remember that while the solutions providers are becoming better known in terms of the public equity markets because there are a few of us now with -- that are there, and we're telling our story more frequently. Here, we've obviously all been building these businesses for a long period of time and the client base and the customer base is quite familiar. There are great investment staffs and internal teams that will run the money themselves and may just want to work with a firm like us -- ours on a small area where it's something they can't do as easily for themselves. And then there are consulting firms that can help people to find opportunities if they can, in fact, and do, in fact, want to assume that, be that fiduciary and can implement. But that's kind of the range. And we've had a solid position, the solutions providers have had a solid position in the market for quite some time, and it's really driven by the value proposition. The value -- we talked about the co-invest. If an investors can't do it themselves and they have a real PE allocation at, say, 2 in 20, and we can do that co-invest at 1 in 10. They're saving half the fee if they allocate 1/3 of the portfolio to that, it's a 16.5% reduction in cost and with a very highly correlated return that's been competitive with the primary investment. So that's a lot of value add, and that's I think what drives a lot of what all of us, solutions providers, do is that value proposition.

Given those various features and kind of given the way the landscape sets up, and then if you look at kind of total addressable market versus penetration by solutions providers versus maybe the primary fund sponsors, how should we expect -- and we all see like the forecast from Preqin and other data providers in terms of the growth of the industry, should we expect solutions providers to be growing at a similar rate, faster, slower? What's your sense of that?

Well, so I think that -- the first point, the most important point is you see that macro growth that's there, and there's no real disagreement. Then you see that the historic growth of the -- historic growth of the solution providers has been faster. I think in our case, we've been public, we had an earnings call yesterday, and we talked about 12% to 15% fee-related revenue growth and 15% to 20% fee-related earnings growth. And so you're getting kind of growth in top line, it's in line or maybe even a bit ahead of the macro picture and then there's operating leverage in our businesses. And so you're getting growth in fee-related earnings that's clearly a higher growth than the top line macro AUM growth out there. So we're -- we like our position. In particular, we've talked for a while about the operating leverage we think should inherent the business and the fact that we made some investments as a private company to give our platform that operating leverage prior to coming public. But in general, I think you'll see good, solid top line with operating leverage from all the solutions providers.

Let me pick up on that because during the earnings call, there were some interesting nuances around -- particularly on the absolute side of GCM Grosvenor's business, the absolute return side and kind of the flows there, but also, you talked a little bit about the revenue mix and how the flows may not -- the basic AUM flow number may not be representative of the revenue trends. Could you explain that a little bit for me?