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

Good afternoon, everyone, and welcome to the 23rd Annual Credit Suisse Financial Services Forum. This is Gautam Sawant from Credit Suisse, and it is my pleasure to introduce Michael Sacks from GCM Grosvenor. Michael is the Chairman and CEO of Grosvenor, which is a global alternative asset manager with $70 billion of assets under management. The firm's main strategies include real estate, absolute return, private equity, alternative credit, infrastructure and ESG impact. Michael, it's great to have you here with us.

It's great to be here. Thanks for having us.

Let's start off with an overview of the Grosvenor business and how your services are differentiated from peers.

Sure. So Grosvenor is a $72 billion alternative asset manager. And as you noted, we're in a variety of different alternative investment strategies, real estate, infrastructure, private equity and hedge funds, and we're an investor in both equity and credit in those various strategies. I think what perhaps distinguishes us the most is that we will work with clients both in a co-mingled fund or specialized fund format, like a product format, if you will. And also we have a very large custom separate account or solutions business, where we create custom separate accounts and provide solutions to clients. And the other distinguishing factor is that we will invest in an open architecture format. So we'll invest primary with other GPs, secondary co-invest and direct invest. And I think that breadth of the platform and that ability to meet the client where the client wants you to be is what really distinguishes us, and the full breadth of strategies as well.

Got it. And next, can we dive deeper into how Grosvenor is positioned as both the private market solutions provider and a liquid out solutions provider. What are the key advantages to the strategy, and what are some of the incremental cross-sell opportunities?

So I think it's just generally our business and I think all of our businesses are really all about getting the client the best answers for them. And having that breadth of strategy and that breadth of expertise in-house enables us to provide value to the clients in a lot of different ways. So about 1/3 of our clients are invested both in the liquid side and in the private market side, right, 45% of the clients are in more than one vertical. So an additional 12% maybe doing more than one thing on the liquid side or more than one thing on the private side. And I think that having that ability to help the clients with regard to whatever they need inside alternatives is really valuable, and it enables you to just be a value-added partner and provider to the client.

Okay. And I guess how was the backdrop for alternative assets changed? Like where are you seeing the most opportunities now and I guess, over the next 12 months?

Well, so the opportunities are robust. The growth has been terrific across the industry. And I think that the outlook for continued growth actually is -- continues to be very strong. Throughout my career, what I've found to be kind of the determining factor of growth is really the -- where the clients are, where the clients' kind of appetites are and what they're ready to do in terms of investing in the portfolio. So you've seen, for example, a tremendous growth in co-investment activity on the private market side. That's something that 10 years ago, maybe even 5 years ago, you had a lot of clients that weren't quite ready to have co-invest portfolios. Well, now that's being adopted significantly. You see a lot of demand for infrastructure. Last year, we raised $3.5 billion for infrastructure out of the $9.4 billion that we raised firm-wide. I think that people are worried about inflation. I think infrastructure is a long-term asset with inherent inflation protection and good asset-liability match for these institutional portfolios. And so there's demand there. Generally, strong demand across the board. We saw that in growth coming from every channel that we have, every geography that we operate in and growth coming for all of the different verticals that we participate in. So I think it's -- the backdrop is good. The interest is high. The demand is high and the key is getting the client what they need and what's best for them.

And let's take it one step further. You kind of mentioned inflation there. I kind of want to understand the demand for alternative assets has really benefited from the low rate backdrop. But how will rising rates and maybe an inflationary backdrop affect fundraising and some of your other strategies?

So we actually don't see inflation having an impact on capital formation at all. When we think about inflation, we talk about inflation, we really look at 3 different aspects of that. One is it going to impact capital formation or fundraising. We don't see that at all. Our pipeline today is larger than it was a year ago. Our fundraising last year was very strong and we just don't see that. Maybe it leads to a little bit of shift in the strategies they want, but the demand for all is high. We also look at inflation in terms of how it affects our business and how it affects our margins. And are we managing well and budgeting properly given that we're in an inflationary environment. And finally, our investment teams across verticals, whether it's the hedge fund team, whether it's real estate, private equity infrastructure, they're all -- they're thinking about inflation and they're thinking about how inflation affects their investments, they've been thinking about that for a long time. They've looked for pricing power when they are deploying capital. As I mentioned, the infrastructure has been growing at a rapid rate, I think in part because people see the inflation hedge inherent in some of those assets. So in general, I think it's -- we have good growth ahead of us for our business. We're out with a 12% to 15% fee-related revenue guidance. And I think the industry has good growth, '22, '23 and beyond, and I don't see inflation slowing down that capital formation.

You mentioned your updated FRE growth targets, like where are you seeing the most growth there? And what strategies can you launch now, I guess, into the future that can kind of benefit from the backdrop?

Well, the growth has really been across verticals, and it's been across geographies, and it's been generally a good environment. We talked about infrastructure a little bit in some of the factors that might be driving that. We have our Multi-Asset Class Fund III in market now. That fund has a very good track, and it's got -- it's a neat intermediate liquidity profile, and I think there will be a lot of interest in that fund, and we see good growth for that fund. Co-investments as well, I think just an increasing percentage of private equity investors realizing if they dedicate a portion of their private equity portfolio to co-investments, they can lower their cost and a good well-run co-investment portfolio will be highly correlated with the primary private equity portfolio. So you're kind of getting that same well-diversified set of exposures at a much lower cost and that's attractive to clients. So those are 3 of the places that I see real continued interest right now. As far as kind of looking forward a little bit, there's -- we think that ESG and impact, which is a place where we're -- we have -- we've been active for a while. We think ESG and impact has just a tremendous amount of real legs and real power behind it, and I would expect to see that driving growth at our firm and a number of firms in the future.

And I just want to recap just where are your funds currently in terms of raising what's recently closed? And how does that kind of play into your growth targets for maybe AUM growth as you look outwards?

So we -- we had a good year last year. We just announced with $9.4 billion of fundraising, and we disclosed kind of where each of the separate account -- the co-mingled funds are in terms of their raise and when we'll have a next close for them. What's nice about our business and all of the businesses in this space is when you have a good year like we did in '21, you start '22 with some built-in growth in your fee-related revenues. So we said that we have -- with a 12% to 15% fee-related revenue growth target, we've got a chunk of that growth that is highly certain based on the full year impact of fees from the capital raised in '21, in addition to the normal operation of our contracted not yet fee-paying AUM converting into fee-paying AUM. So we've got a significant head start on that growth target. And then the rest of our growth, if we raise $3.5 billion to $4.5 billion direct into our fee-paying AUM throughout the year, which is a similar level to what we did last year, that gets us into that 12% to 15% range.

That's a great, great -- that's a great growth trajectory. And alternatives are seeing a tremendous amount of growth from a variety of channels and internationally as well. Can you walk us through some of the dynamics and how they're playing out of Grosvenor?

I will. I just got to put a plug in, we -- for us because we have -- that's our revenue growth, but we actually think we have really good operating leverage as well. So we've said clearly that we think on that 12% to 15% fee-related revenue growth, we get 20% to 25% of fee-related earnings growth, which is really where you see that the good growth trajectory and the value. As far as outside of the U.S., 45% of the capital we raised last year came from outside of the U.S. And really, maybe it sounds trite, but the demand really is global. It really is all channels and it's all geographies. And we -- last year, we had a good fundraising year with 45% coming from outside the U.S. We had 10% of our capital last year come from non-institutional channels, high net worth retail type channels, which is against maybe 5% of the -- of our AUM from those channels now, so growing much faster than kind of what's represented in the AUM today, and I -- and we see that continuing. We see that global demand and the ability for non-institutional demand, non-institutional capital to grow faster than the institutional capital, which is still growing nicely.

And on the retail channel, is that interest coming from the accountholders themselves or is it coming from the advisers, like how does that materialize?

That's a great question. I think it's both. I think the advisers have -- there have been a lot of growth in alternatives. And I think the advisers know that they need to be able to deliver alternatives and an alternatives portfolio to their clients. And so I think they're leading to a degree, most of the places -- if you look at most of the platforms there, the actual allocations to the clients are below the target allocations to alternatives of the policymakers at those institutions. So the advisers know that that's the way to go and then the clients want it, and it's something that the clients talk about. And I think it's a push/pull and it's a very constructive backdrop.

And I think Grosvenor is well positioned with some of the business aspects to, I guess, deliver those separate accounts to the channel?

We are. We actually have certain cases where we've created 4 specific advisers -- advisers as opposed to firms. But 4 specific advisers we've created portfolios, custom separate account portfolios for their clients, which is actually a nice -- it's not right for every adviser, and they're not all large enough where that's the right answer for them. But for some large advisers, it's actually a really nice thing where they're getting a kind of a custom program for their clients. And just in general, they need to be proficient in the alts to keep -- be able to serve the clients.

Got it. So Grosvenor has recently expanded global business development efforts. Can you provide us an update of where you are in the sales cycle with these new efforts?

Sure. We've done a couple of different things. So we've expanded to put more resources into certain geographies. I would say that's a little bit early days with some -- with hires in Europe and hires in Canada. We also created a dedicated effort to work with insurance companies globally, but predominantly or at least initially predominantly in North America, that's got off to a pretty quick start and that's going quite well. And that's a large market that sense, I think is underserved and provides real significant opportunity. So we are -- we come into the year with significantly more business development resources on the ground today than we had a year ago. We had a good year last year fundraising, but we've got a lot more resources in mark -- in the market today. We've got a very nice set of co-mingled funds that are open right now, none of which are first-time funds, meaning every one of them has an installed investor base that we would hope would re-up and then you try to grow and add from there. So we feel pretty good about the environment this year and our ability to meet our objectives.

And how has the environment for deployments changed over the last 3 years starting from during the pandemic to now?

Yes. It's interesting. I think right at the end of March, the -- there was -- everything sort of just literally and figuratively shut down. And I think there was a short period of time, quite short, actually probably surprisingly short where we didn't deploy a lot of capital. It started up quickly. There were a few opportunistic things to do on the liquid side that we did very quickly. And it -- things kind of got right back into a normal cycle and normal levels of deployment pretty quickly. And we -- it's never easy to deploy capital, right? It's I ever not give enough credit to the work that our people do investing the capital. But we've got -- we've been deploying capital at very high rates, and we're confident in our ability to deploy capital this year, and we've been enjoying good returns along with the rest of the industry, but enjoying good returns.

Are you seeing incremental opportunities to deploy secondary capital into the market?

I think that is something we will see. So I think you've seen a lot of formation of capital on the secondary side. I think there's a chance that you see -- and you've seen a rapid acceleration of GP-led secondaries. And so you're seeing definitely more ability to deploy capital with regard to GP-led secondaries. And I think that actually has legs and continues to go. I also think there is a shot that you see more sort of opportunity to make -- to make investments in kind of traditional secondaries as institutional investors sort of think about how they want to -- what they want to do with their portfolios for the next several years.

And how is Grosvenor positioned, I guess, in the war for talent right now? Are you seeing any challenges in recruiting or are you seeing a good opportunity to kind of bring in new talent?

We hired a lot of people this year. We've brought in some great talented team that we got at Grosvenor for our insurance effort is an absolute top tier -- top-tier team. I think generally for everybody, talent is tougher for every industry, including finance, including asset management. It's a tougher environment for talent, where we spend much more time on it and making sure that we are getting the answer right for our own team members, and we're keeping our own team members and they understand how valued they are. And then our search activity, we spend a lot of time on as well looking for new talent. Yes, I think one of the flip sides is of the wage inflation is, there are a lot of people out there that are curious. And so when we're out looking for positions, it's not hard to get a great interview schedule and see a lot of people as well.

Got it. And nearly 25% of the AUM at Grosvenor is an ESG and impact investments, which is a significant percentage as you compare to your peers. How do you see ESG and impact evolving broadly for the industry? And what is the opportunity for Grosvenor specifically?

I think it's going to be incredibly powerful force that's going to continue to roll through the industry over the next 5, 10 years pretty consistently. I think that there are very significant offensive opportunities to go out and raise capital that's focused on ESG or impact. And I think the amount of capital that wants to invest where there are mandates for -- that include the measurement of greenhouse gases includes science-based targets for reduction of carbon emission, I think that that's just going to grow. At the same time, I think we're all going to have to evolve how we report to our clients. So we're going to have to be able to report out to them what their investments with us are with regard to greenhouse gas emissions. And it's a huge -- it's a -- if people aren't kind of getting with that, I think they're taking a business risk that is imprudent. And I think it provides tremendous opportunity for those who are committed to that. We are and we hope to be a leader in that space. And I think it's highly likely that at some point in the future, we will have funds where the goals with regard to greenhouse gas emissions and the requirement for measurement are all part and parcel of the fund.

And would you ever see, I guess, a time where ESG could block or prevent you from investing in any like companies or transactions that maybe aren't specifically in an ESG fund?

Well, I guess, in theory it could. So if you were -- had a separate account and the client had said as part of the constraints in a separate account that every investment had to measure for greenhouse gases and had to have some type of science-based targeted -- target commitment to reduction and you were looking at an investment that either wasn't willing -- wasn't measuring, wasn't willing to measure or wasn't willing to make any commitment to reduction, you probably wouldn't be able to make that investment. I don't know that that's ever affecting the entirety of the capital that you manage, but on a custom separate account basis for a specific client or even a specialized fund basis, a commingled fund basis, where that's in the charter of the fund, those accounts wouldn't be permitted to make certain investments, and that's probably likely to happen at some point in time in the future.

And we can take a pause here. And if you have a question, just please notify the moderator and they can bring a mic over. I wanted to know like where are you currently seeing, I guess, some of the best opportunities to invest globally?

Our team is -- our team -- we're -- first of all, we're looking at so many different strategies and so many different opportunities on a daily basis across the globe that I think it's hard to -- it's hard to like say that there's a gaping hole here or that there's a particular -- one particular space that is just screaming value. I think we are -- I think our team has been deploying capital and deploying capital with an eye towards inflation protection for a while. And really, it's sort of much less of what I think of as alpha or macro -- kind of macro opportunities that we're taking advantage of, and it's much more sort of micro and situation-specific opportunities that where our capital is being deployed. We're putting out significant capital in the co-invest space alongside our private equity sponsors, and that's been a very good place for us to put capital to work that generate good return. We've deployed a fair amount of infrastructure capital in a chunk of which I would describe as kind of what new infrastructure, whether it's conversion of power generation facilities to bio or cold storage or data center type infrastructure as opposed to toll roads or airports or bridges. I think that's gotten more of the capital that we've deployed in that space.

Speaking of capital deployment, so you have a healthy dividend and you also are in a buyback program. Just hypothetically, one of the few negatives about the industry is the risk of a potential equity market downturn that might persist for a while. What would the reaction be in terms of capital deployment in the case that your exit strategies became limited and you had difficulty there on valuations?

So we think one of the great features of the business is its ability to return capital to shareholders. As an owner of the business going way back into the early 1990s, the cash generation of the business is very strong and the dividend-paying capability of the business is very strong. And in fact, it's one of the things that I think is missed when people look at the value of our absolute return strategies business just on a DCF basis, that business is a very valuable asset. We base our dividend on our -- we set a dividend that's comfortable for us on fee-related earnings. So we're not relying on the receipt of carry or performance fees from private equity or from ARS to be able to pay our dividend. So in a year where economic activity shut down, where markets were really tough, and there wasn't a lot of performance fee in ARS, and there wasn't a lot of deal activity in private equity, so you didn't see as much carry there, we -- our dividend would still be safe because we're looking at it through that fee-related earnings lens and wanting to be able to service it through FRE. We did just increase our buyback. Candidly, we were sitting there at a 4.5% dividend yield. And I don't know that people were carrying a lot, so raising the dividend didn't seem like something we needed to do last quarter. But the way to think of look at our dividend compared to our FRE and look at the margin there, and I think there's a lot of safety.

And then one other question. You mentioned about the outlook for this year is quite strong for the top line and the bottom line. I know you don't want to make any specific projections about the following year, who knows what's going to happen. But the -- assuming that you can still have pretty strong, potentially double-digit top line growth in the following year, are we going to see an uptick or an acceleration in expenses as well?

Well, so we actually addressed that on our earnings call, and we talked about the fact that we think we have -- we think we have operating leverage, and we think we have the opportunity for margin expansion. We do think we can drive FRR at the rates we've talked about for [ '22 ], we've accomplished for [ '21 in '23 ] and beyond. And we have operating leverage, and therefore, I think FRE margin expansion opportunity for a while as well.

I wanted to touch upon data, analytics and technology and how that's being increasingly used by investors, like how is Grosvenor leveraging maybe new analytics to find investments? And like are there any technology you're using for fund reporting or maybe some of the other strategies that people are demanding now?

So we'll separate it. On the investment side, I think that our team makes good use of data analytics tools, screening tools, et cetera. But I guess I think that the ultimate work that they're doing is still very much kind of what I'd call like hardcore fundamental work and has an element of a very heavy significant element of like old-fashioned due diligence associated with it. There's not much that we're doing, where we're making investment. We have some of that on the ARS side. But in our private markets business, we're not making -- these are traditional fundamental analysis is leading to your investment decision-making. As far as our clients go and our investors go, I think there's a constant evolution and a constant improvement in your -- in our tools, in our data set, in our own analytics and that we will -- that many of our clients will want to see and work with. And we're just -- there's a constant list literally of like [ I want to ] say features, but we're just constantly upgrading that and constantly improving what we can do and how we can look at things. And we have -- and we plan to continue to do that and we plan to continue to do that. And I think that's made the lives of clients easier and been helpful for clients. But there's still plenty of high touch as well.

And how sensitive is your client base to performance? I think do they look at near-term performance? Are they more focused on targets they need to hit in terms of their overall fund composition, like how do they kind of think about where they're going to deploy and the partners they're going to use?

The private market space is, by its nature, it's kind of a bit of an intermediate/long-term look. They're not really focusing on performance until there's been a significant level of capital deployment, and it's a very -- it's actually a pretty patient space, private markets in general. The ARS side, the absolute return or hedge fund side has got a bit of a shorter window for performance. I still think when people -- and it's got a shorter window for performance in the sense that you have decision-making points along the way. If you think about a group of private equity managers, you sign up for the fund, you're kind of in those funds for a decade, and there's not much you can do. So you look at performance, you care about it, you talk, you ask questions, but there's no leaving or getting out of that manager and going to a different one or anything like that for the client. On the hedge fund side, there's live decisions every quarter that you make. Generally, the clients understand the risk/reward profile that they want to -- that they're buying. One of the things, I think that is not well understood about Grosvenor in our absolute return business is the bulk of our client capital there is looking for kind of short-term rates plus [ 500 ], plus [ 600 ]. They're not -- it's not like a hedge fund return and that they're seeking -- they're seeking a low highly diversified low vol portfolio, and our performance has been terrific relative to the targets of our clients over 1-, 3- and 5-year periods of time, and we've delivered returns that are in line with their expectations. So we feel good about the way we've been delivering for clients. And we like the risk/reward profile that our clients have chosen on the hedge fund side to work with us in. We sort of chuckle when you see a month where there's some stories about rough hedge fund returns and our stock gets hit because it make -- feels to us like our people don't understand that core stability of that absolute return strategy business that we have and the level of diversification that we have in those portfolios -- that we have in those portfolios.

And as you look ahead to 2022 and onwards, like what gets you most excited about Grosvenor? What gets you most excited about the road ahead?

Well, it always -- so for us, it's always like deliver for clients, deliver for clients, keep the client front of mind, add value to the client. And I think what generally I'm most excited about is I can talk about a number of ways that I believe we can add more value to clients today or as much value to clients today as we ever could in the past. So you talk about the adoption of co-investment, what you're doing on a simple cost basis to bring down the cost to manage it for private equity investors. On the absolute return side, we have a slide that we use that's in our materials on our website, where you can see how low cost it is to actually work with us when you factor in the reductions in fee that we enjoy because of our size and scale and some that we can actually extend to clients -- we can extend to clients because of our size and scale. So being able to deliver for clients being confident in the value-add proposition for clients to me is always the most important thing. And then I just think we have a lot of growth ahead of us. I think that the opportunity set that we have is robust. And I think we've got real ability to compound our cash flow at very good rates of return for the foreseeable future. So that in -- is in and of itself is nice and exciting and good for shareholders and the client [ thesis ] is good for our clients.

Great.

You mentioned ESG being a main focus for you. I'm just wondering if you can maybe dive a bit deeper into how you're thinking about those investments? Are there any specific areas you think will outperform in the near to medium term?

Sure. So I can't tell you that I think there are areas that will outperform. I can tell you that I think that the power of this shift is pretty serious. And so if you're a business or an industry that's kind of over emitting, you're not paying attention to your footprint, you're not thinking about what you're going to do with your footprint. I think you're going to like wake up one day and say, who moved the cheese, this is not a good situation. Similarly, I think there's just a tremendous amount of opportunity for [ under emitting ] industries and for industries that are sort of part of the solution on helping broadly for us to reduce emissions over time. For us, what would be -- we're not there yet, but what would be very simple to envision is that we've looked at 50 different private equity firms that are ESG-focused in some way shape or form that we've selected some subset of those to make up a primary component of a portfolio. And then we're doing co-investment secondary in ESG-oriented investments alongside that in a primary/secondary co-fund. That would be something that we could bring to market relatively quickly, and I think would have a tremendous appetite and demand in the marketplace. Where we all have to get to and have to evolve to is figuring out what we are going to require with regard to actual measurement of greenhouse gas emissions and actual commitment to reduce emissions with science-based targets associated with that. And I think we're -- and I don't think the industry is there yet. I think that's where the industry has to go. That said, TPG Rise Climate was a very successful fund. And they raised a lot of money and it's added a lot of equity value to TPG as a firm. And I'm sure that Rise Climate 2 and Rise Climate 3 and Rise Climate 5, which will likely all happen, they'll have increasingly tighter constraints on what they're looking for when they're deploying capital. But those are -- that's a good business already for TPG and in lots of demand. We see it in our client base. My understanding is that Blackstone in the real estate business has a commitment to reducing greenhouse gas emissions when they acquire properties now. That's not something that they would have talked about a few years ago. That will just all continue to roll forward and evolve. And we're -- we think it represents great opportunity for us.

And what are investors missing from the GCM story right now?

Look, I think that we're new -- we've only been public 1.5 years or whatever the time frame is. So the idea that investors want to see us deliver, they want to see us kind of make our numbers, beat our numbers. We understand that. I think that at times our valuation, we think investors are just missing sort of some component of the valuation, whether they're too heavily discounting the value of the ARS business or they aren't seeing how effectively we're growing and competing in the private market space with the more fully valued peers of ours that are public. I don't know. One of the things sometimes I kind of think is our -- we got a -- we don't have that large of a market cap. And our ability as a group of the senior leaders to sort of drive growth on our size is pretty good. Some of the other firms out there are pretty -- pretty big these days. And so I think they may be missing a little bit like these guys can have lots of different ways that they can achieve their growth targets. And everyone else -- everyone can decide -- we put out our guidance, people can decide your -- think -- you think the risk is to the upside or the downside. But I think that just the sheer size and our ability to drive the basis is maybe missed a little bit.

Okay. Understood. And I think with that, it's a good place to stop. Thank you for -- we thank you for coming and joining us, Michael.

Thanks for having us. We really appreciate it. Thank you.

Thanks.

Thank you, everybody.