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

All right. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Good morning, everyone. I'm Mike Cyprys, equity analyst covering brokers, asset managers and exchanges from Morgan Stanley Research. And it's my pleasure to welcome the President of GCM Grosvenor, Jon Levin. Jon, thanks for joining us here. GCM Grosvenor is a global alternative asset manager with around $71 billion of assets under management. Great. Well, thanks for joining us.

Thanks for having me.

Let's start off big picture here. Grosvenor is still a relatively young public company, but you've been around for many years. So it might just be helpful for those that are less familiar with the company to maybe just provide a quick overview of what you guys do and how your offering is different from others.

Great. So GCM Grosvenor is a $71 billion asset manager. We've been around for 51 years now, which probably makes us one of the oldest or most experienced alternative asset managers in the market. I think we fit nicely within the category that I think investors now refer to as the solutions provider category. And what that means for us and for the category is we invest across the broad spectrum of alternative investments, everything from liquid to illiquid, hedge fund strategies or absolute return strategies, credit strategies, private equity, real estate infrastructure. Inside each of those investing verticals, we invest as a primary fund investor where we allocate capital to other managers' funds as a coinvestor in specific securities and transactions and assets as a secondary investor and also as a direct investor. As we face our clients in terms of how we deliver that manufacturing capability, we do so through both the offering of customized separate accounts, which represent about 75% of our assets under management and through commingled fund offerings, which is about 25% of our assets under management.

Great. And GCM Grosvenor's legacy business is in the liquid alt side of the business, but we've seen significant change over the last year more on the private side. So I guess, can you talk a little bit about the ways in which the business has evolved?

Sure. So I mentioned a few moments ago, 51 years old. So the business that we've been in continuously since inception, as Mike points out, is in the liquid side of things, so in the hedge fund strategies. Over the past decade or so, through acquisition and through growth, we've seen the private market alternatives become the more dominant contributor to our AUM today. It's about $46 billion of our $71 billion of AUM. When you step away, way back, though, the idea that we can deploy capital across all alternative strategies and can offer those capabilities to clients through a bunch of different mechanisms, we think, is one of our greatest assets. So the idea that we can help on the more liquid side of alternatives portfolio, the idea that we can help within the private markets is one of our strengths. Certainly, what we've seen -- putting the last few months aside, because I think -- I know we'll get into talking about what that means shortly. Certainly, the private markets have seen a greater amount of growth over the past number of years from an alternatives perspective, and we've seen that in our business, too. But I think that the ability to work with clients across that entire landscape is actually one of the great strengths of our firm.

And what would you say are some of the new opportunities, and maybe any sort of risks as you're building it out here?

Yes. So I think the opportunity is really to continue to position our business to evolve with our clients. And I think if you look at some of the strategies like coinvesting strategies or secondary strategies are a classic kind of example of that, meaning, we invest in those capabilities as a firm. We do that because we think those strategies are sensibly placed within a firm that also has primary fund investing capabilities, and we do so at a time when also investors are looking for ways to evolve their alternatives programs to make them more sophisticated, to make them more cost efficient. And so I think when you look at some of the data for our business, it's representative of that trend. About 60% of our AUM today as a snapshot would be considered kind of primary fund investing activities, and 40% being coinvestments in secondaries and direct investments. But when you look at capital raising or flows over the past few years, it's the inverse of that. So I think the opportunity for us to continue to drive those investing strategies, which also happened to come with a higher fee rate associated with them, is one of the opportunities that we have that's most exciting to us today, I think.

So it sounds like kind of an evolution from the primary side, the 60%, to the more transactional side, secondaries, coinvest, that's the 40% of the business today. I guess how durable is that trend? And what's driving that sort of shift?

I think it's secular, not cyclical. So I think it is durable. I think that one of the things you see, if you look at the natural evolution of institutional portfolios in terms of how they allocate to alternatives, there's a kind of a path that they all take, right? We start with, and it depends where you are on that path, meaning, when you started your alternatives program. But we start, for example, in private equity, we'll allocate capital to large managers we've all heard of, and we do that as a passive LP. Well, then maybe we start to find funds that are more smaller, in niche funds, maybe from a geographic standpoint or from a sector standpoint. Okay. Well, now we have a fully-developed and diversified primary fund portfolio. Now, let's think about how we can add more transactional or opportunistic strategies around that secondary strategies, coinvestment strategies. Well, most institutions need partners to help them with that. Because they are, while extremely sophisticated and extremely smart, have resource constraints and governance constraints that prevent them from necessarily executing on those more opportunistic strategies or transactional-oriented strategies with the speed and with the level of resource required to do so. And so I think what drives that evolution is the continued sophistication and the continued evolution of institutional alternatives programs.

Let me talk a little bit about fundraising environment. We've heard several money managers mentioned that the environment for fundraising could be getting a little bit more challenging from here. Given that the credit marketplace, you overlay the denominator effect and such, I guess, how do you see the environment taking shape? And what does that mean for your fundraising targets over the next year or so?

So I guess the first thing I would say is, to put aside the specific environment we're in now, the trend towards and the tailwinds behind alternative investments is still, in my opinion, very strong. So when you look across the world today, could you have some institutions to say, oh I'm a little bit high on asset allocation or my target, and I got to do something about that? Or I got to slow down a little bit pacing? I absolutely will come to that in a second. You can see that. But generally speaking, institutions are figuring out over time how to maintain those allocations to alternatives, which, in a generally procyclical environment where balance sheets are growing, means there's embedded growth there. Or in many cases, grow those allocations to time -- over time. And so I think the trends behind alternative investments generally are quite strong, and I don't see the current environment we're in affecting that. I think when you talk about the current environment today, there absolutely is impact when you see public market valuations move to the extent they have before you've seen the move in private market valuations, and it speaks to where you are with your asset allocation or what people refer to as the denominator effect, and that does require investors to make choices. The choices could be, okay, I'm going to be a little bit smaller in terms of my allocations over the next a couple of quarters or a few quarters ever it might be. Or it could be I'm going to pursue ways to reduce net asset value through structuring or secondary sales, or I'm going to maybe pass on a few funds. That absolutely does happen. I think that it is -- fortunately for us, I think it is less impactful to large diversified alts players, and I think it is less impactful to solutions providers. And I think the reason for that is, and I'll speak to the solutions providers is -- and I'll speak to our firm in particular, often, our assets that we're managing are a function of us playing a role managing some or all of an institution's alternatives program, some part of or all of institution's program. And as I spoke to before, those programs aren't going away. Those programs are being maintained, those programs are growing. And so do you have to make particular timing decisions or do you try to manage cash flows a little bit and pay attention to that? Absolutely. But you're not in a position where it's binary, meaning, I'm a small private equity founder, I'm a small infrastructure fund, and I'm raising money now. And it might just be that I'm in a bad period of time to raise capital. So I think that it's less impactful to the large, diversified players. I think it's less impactful to solutions providers, which doesn't mean that you won't experience some impact of that market environment. But over the long term, when I think about the quality of our business model and the business model in our space, I think it's a little bit short-term noise.

Why don't we talk about some of the growth opportunities. One in particular is insurance, that you've highlighted to your Insurance Solutions business. Can you tell us how Grosvenor is approaching the insurance channel? And how that differs from the approach that others -- that you see others are taking?

Well, I would just start by saying we're really excited about the insurance opportunity. We've made investments to make sure that we can appropriately get after the opportunity in our business over the past couple of years, and everything we're seeing early days is supportive of that decision to lean in. I think that what we have noticed is that putting aside even more recent interest rate environment and where you're seeing rising rates, in general, insurance companies are looking for ways to drive their ROA, drive their ROE, and do so in a less volatile fashion. And that means looking to alternative investment strategies generally because of some of the regulatory capital issues and because of some of the specific constraints or strategies that the different insurance companies pursue, having a partner that can customize the approach like we can is something that we were excited about. So, a, it's this opportunity where we see balance sheets needing this return opportunity; b, it's the specific capabilities we have to invest across the alts landscape and deliver that solution in a customized manner that got us excited about it. And c, I think we were excited about the idea that we were going to do so, partner with these insurance companies as an asset manager, as a solutions provider and not as a competitor, right, which we have seen some firms do, and that is an interesting strategy. It's not one that we're currently pursuing. The strategy we're pursuing now is how can we be an asset management partner with these insurance companies, not how can we own insurance and compete with those insurance companies.

Another area of opportunity that peers and investors are very focused on is retail. So can you just level set for us where Grosvenor is today with retail? How meaningful to the business is that? And how do you expect that to evolve over time?

Yes. So similar to what I talked about with respect to our secondaries and coinvestments and direct investing strategies, the data here is interesting in terms of what you see in terms of the current snapshot of AUM and then what you've seen in terms of the recent flows picture. So today, retail capital and sometimes I use the term, and I know others don't use it, noninstitutional because I think retail sometimes has the connotation of a particular type of noninstitutional investor versus I think the category is bigger within retail, right? You have high net worth, you have RAs, you have wirehouse distribution, you have two-legged retail investors that people think of when they think about mutual fund buyers. And so it's a big space, and there's a lot of differentiation within that space. But when you think about that broader noninstitutional segment, it represents about 5% of our AUM today. But when you look at recent flows, it's been somewhere between 10% and 12% of capital raising over recent periods of time, and I think it was even as high as maybe 16% in Q1 of capital raising. So clearly, it's a growing part of our business. For us, what that's meant primarily has been working with what I would broadly refer to as kind of distribution partners that can leverage the manufacturing capabilities we have and leverage some of the distribution capabilities we have in-house. What is that? That's wirehouse distribution in the U.S. and in Europe. We have some partners in Australia where they are kind of intermediaries where they work with us to design a product that is unique and purposely built for their distribution clients. And so we're looking for ways to take some of the distribution resources we have, take the manufacturing, and then work with partners that can help us reach a broader segment of investors. And obviously, we're seeing the success in that in terms of what is contributing from a capital-raising standpoint. And where that goes, I think that trend continues.

Can we just dig in a little bit more on the channels? Clearly, the wirehouses have a lot of the capital, you're built out there. What are the other channels that you think you could be -- have a larger footprint in over time?

Yes. I think the other ones are -- as you go down that curve, you start to look at markets that are more fragmented. And when you have more fragmented market, that means you have less ability to leverage somebody else's distribution, in the case of wirehouses or some of these partnerships we have in Australia, for example, and you have more need to have to have that distribution built internally. And so where do I see? You see that in the RIA and the independent broker-dealer channel. We've had some success there, and I think that as we continue to have success, we'll have to invest more and we will invest more in that distribution internally to make sure that we can reach that more fragmented market.

And how different are the requirements would you say between nonbank channels and wires and RIAs and such? How do you see that? And how well equipped is Grosvenor to respond to some of the requirements?

Yes. So I think there's probably what I would call kind of 3 buckets of requirements that are different. One is just the pure manufacturing difference, meaning, what does an institutional investor want versus maybe, in some cases, what is a non-institutional investor want? And sometimes depending on where you are in cycles and depends on which of those channels you're referring to, there could be some difference there. And I think our ability to customize product is a huge advantage in terms of being able to deliver the market what it wants. The second bucket, I would say, of differentiation is just pure regulatory, right? Certain types of investors, depending on their different qualifications, can only invest in certain types of products. And whether that be registered product, and there's different forms of registered product, as you know well, and we've had experience running [ 48 ] funds, we have experience running interval funds. And so certainly, that kind of operational and regulatory experience is helpful for the channel. And then the third is what we probably already talked about in terms of requirement is distribution, right? The type of sales and service support that is necessary to properly deliver the retail channel, the client service and sales support that is necessary to have that be a positive customer experience means investing more in certainly distribution resources at the firm.

And then maybe shifting over to the product side, but still staying with retail. I guess how do you think about innovating the product set for retail? You mentioned interval funds in terms of being out there in the marketplace, is that something that would be of interest? What other strategies you could make...

Yes. So if you step away, way back and think about it, the whole notion that's driving -- the whole idea that's driving this retail interest is how do you deliver an institutional quality portfolio to a retail investor given the constraints we just talked about? And I think the place where that is the hardest to do and where there's probably more innovation that needs to happen, both in terms of the manufacturing capabilities of -- and product delivery capability of firms like us, but also probably the regulatory environment is the private markets experience, right? So you can't make illiquid asset liquid. That's -- you can put structure around it and you can come up with product, but I still think that there is opportunity to create more efficient private market product for noninstitutional investors. I think that there's been a lot of progress made with respect to what I would call yield-oriented private market products, right? When you think about credit products in the BDC world or real estate products in the REIT world, I think there's been great evolution there. I still think that there's room for opportunity and greater product in the non-yield-oriented private market alternative space. And I think that requires both kind of ingenuity on behalf of the investment manager community, but probably also some more regulatory innovation where I think that we've had some success. We talked about the wirehouse channel, we talked about some distribution partners. We've had a lot of success because of our ability to customize. So you can customize sometimes for a single investor that might be a more high net worth investor, right? Or you can customize for your distribution partner, that could be a multi-family office that's working on with a number of clients. That could be a large advisory team that wants a product specific for their clients. That could be an RIA, right, where you're partnering. And I think that our ability to customize has been a huge part of the success of why we've seen a greater amount of our capital raising coming from that channel.

Great. Why don't we shift and talk about ESG, another topic that gets a lot of attention these days. And it's also a differentiator for you guys at Grosvenor. So can you just talk about your product lineup on the ESG side and your track record?

Yes. So I think the greatest differentiator for us is actually embedded in the question you just asked, which is, it's probably less about a product lineup. And I think the reason that we have about 25% of our assets under management properly categorized as ESG or impact is because of that history of customization that we talked about. So I think there is a couple of things. One, obviously, ESG means different things to different people. So the ability for us to take our manufacturing capabilities, take where we are kind of just culturally generally on ESG topics, and then be able to customize particular outcomes for institutional clients is a reason why we have a significant amount of assets in that area. We do have some situations where it is product, meaning, commingled product that is meant to work for a number of investors as opposed to being customized for a particular investor. I would say there's 2 areas that I would particularly call out. We are probably the largest and most experienced investor in the alternative landscape, providing capital to sponsors led by women and people of color. It's a business that we've been in for 20 years, and it's a business that we got in because, a, we thought it was a good thing to do. But b, and really, really importantly, we thought we could add value and alpha to our clients. And the fact is that our track record investing with sponsors led by women and people of color is competitive with our overall track record and, depending on which periods you look at, even outperforms our overall track record. And so that's an area where we've been able to customize solutions for clients, but also offer commingled product. And that's one of the areas, by the way, just to get to our last topic, where we had a lot of success in buying from some of the wirehouse channels. The second area I would probably point out again comes, first and foremost, from a viewpoint that we could add value and alpha to our clients from a risk-adjusted return perspective, which is in the infrastructure space where we have a direct investing capability that is predicated on investing in infrastructure assets in North America through a better approach and through a better partnership with government and labor. And if we could have a long conversation about the infrastructure market, but it is an area where the U.S. is certainly behind other parts of the world, mainly Europe and Australia. It's a market where in the U.S., it is -- the infrastructure market has largely been dominated by energy transactions, which is not true in other parts of the world from an infrastructure perspective. And our view is that one of the reasons for that is that infrastructure investors didn't properly engage government and labor to help unlock infrastructure assets and help unlock value in those assets once you own them. And so that's another area where we've been able to have positive outcomes for our investors that have been a result of positive outcomes for labor and for trades generally, too.

Great. And maybe just more broadly on the ESG topic. As you look across the industry, I guess, how do you see the ESG trend evolving across the private markets? And how meaningful to your growth at Grosvenor could this be?

Yes. So what I hope happens, and I was able to watch your previous speaker here for a minute, I think sharing some views with Ken Mehlman. What I hope happens is that the transparency continues to improve, and the description of what people are doing is laid out in layman terms for everyone just to understand because you're never going to get to an answer of what ESG means to one person is exactly what it means to another person. So rather than using terms like our ESG impact, just describe what it is you're doing. We are investing in infrastructure through a better partnership with labor and government. We are allocating capital to managers led by women and people of color. I was able to describe both of those things without using the term. And I think that if we get to a place where the investment managers are simply describing what it is they're doing and then the investors that are allocating capital can decide whether that is something that meets their investment objectives or meets their other non-return-oriented objectives they have, they can make that decision based on a tremendous amount of transparent disclosure. And I think that would -- that's what I hope happens with respect to the evolution of ESG in the private markets. And I think for us, the ability to continue to institutionalize and codify our own principles as a firm in terms of how we deploy capital and then the ability to offer that through commingled product and through customized accounts means that it will be a -- continue to be a growth area for us because I think the one thing that is happening for sure, putting aside the fact that you have different political views from people around the ESG landscape and all that, and we've certainly seen some of that over the past couple of weeks. I think the one thing we can definitely be sure of is that institutions and individuals are paying more attention to the value system of the -- their partners that deploy their capital. And that doesn't mean they all have the same system, but they are paying more attention to it. And it's not something that 20 or 30 or 40 years ago was something people would think about, and today, everyone is thinking about it. And so I think the idea that you can better describe and be transparent about your value system and be transparent about the types of product that you offer and then investors can choose to work with the partners that share a similar philosophy, I think, is a trend that is certainly here to stay.

Why don't we shift and talk a little bit about M&A. What are the inorganic growth opportunities you think that could be most impactful to the platform? And how are your views on M&As evolved?

So I think that the first thing I would say is we have a tremendous amount of organic growth in front of us. We've delivered it historically. We've talked publicly about the ability to continue to drive attractive fee-related revenue growth and fee-related earnings growth, and so that's always job #1 and priority #1. That being said, I think as we've continued to see the kind of maturation of the alternative investment landscape as an industry in terms of public companies that obviously have issued equity and companies that have issued debt, and you've seen then a more developed M&A market, which is something that we all take for granted today but did not exist 15 years ago, you certainly have to be paying attention to that and look for opportunities that will add value to our story. The frame that we use for that is actually quite simple. By engaging in this inorganic activity or this acquisition, are we more valuable to our clients tomorrow than we were today? B, do we have an aligned cultural framework with the target because if you don't have that, you won't have success? And then, of course, three has to be, does it make sense from a financial risk-reward standpoint? And so I would say we're certainly actively participate in that market to look for targets that would meet those objectives. And I think when I look at what would be more value to us tomorrow -- what would make us more valuable to our clients tomorrow, certainly looking at areas where we can continue to build out that kind of [indiscernible] experience whether that be geographies where we could have a little bit more half or in certain parts of the -- certain investment verticals, and so we spend -- certainly spent time looking at those opportunities actively.

How active would you say you guys are today versus, like, 12 or 18 months ago? And how is the sort of current volatile market backdrop impacted...

I would say that we're -- I wouldn't say that we're more active today than we were 12 or 18 months ago. I would say that we are definitely more active as a public company, which is now only a couple of years old than we were as a private company, and simply because when you're a public company, and I think one of the reasons to be a public company is it makes the ability to do transactions less. Have less friction, right? You have a currency, and that certainly enables easier execution from an inorganic standpoint. Not to say you can't do it as a private company, but it's just easier to acquire talent, frankly, and to acquire businesses as a public company. So I would say our effort today is more active. Honestly, I think what's going on right now, not really relevant in the long-term grand scheme of things in terms of inorganic. I think there's no difference in this industry versus any other industry, which is when you're going through a period of time of market volatility and market correction. You will go through a period of time where buyer and seller are further apart on the perceived value of assets, right, because sellers thinking about what they thought they could get 6 months ago, and buyers looking at what they think they can deliver now based on the current environment, and it always takes a little bit of time for that to converge. And so I suspect you will see a bit of slowdown in activity. But I think in terms of our desire to have an active effort there to find assets that meet our objectives, it doesn't -- it hasn't really changed.

Any questions in the room? No? If not, just raise your hand, and I'll call on you. Capital management. So in recent months, you've meaningfully increased your dividend, you've authorized a sizable buyback. So maybe you could just talk a little bit about your capital management priorities, how you think about the mix and the allocation?

So the good news is we're a cash-generative business, and we're a capital-light business. And so we certainly have options with respect to what we do with that excess capital. As you pointed out, we have a dividend that has grown. Dividend that, because of how it is structured, meaning, that it's still not even representative of 100% of our fee-related earnings, maybe it's around 70% or so, which means you're not giving credit for all your fee-related earnings, you're not giving credit for incentive fees, means that dividend has safe and has opportunity to continue to evolve. But today, it represents about -- I know everyone's checking their phones a bit because the market is moving today. So I don't know the exact yield today, but it's an attractive yield. It's probably above 5%. And so what do we think is the best use of capital today? It's the buyback program you talked about. We think the stock is cheap today. When you look at the fact that where we're trading as a multiple of FRE and that doesn't give you any credit for your run rate incentive fee opportunity, doesn't give you credit for the fact that you have carry value on your balance sheet, that can be -- current values would represent a significant percentage of the current share price, so we're using the excess cash we are generating today to buy back stock. And at our recent quarter, we announced an increase in that program, and that will us with runway to continue to be purchasing that asset.

And how should we think about the growth of the dividend looking out over time? Should that track the growth in FRE?

Yes. I think that, generally speaking, the idea with the dividend will be to be at some reasonably high percentage of FRE. So today, I mentioned it's about 70% so which gives us room for, a, to be stable, but b, also to grow. But I think the decision at any given time, whether to increase that or purchase stock would be a function of relative value, right, in terms of where the stock is trading today. And I think given where the stock is trading today, we like the idea of using that capital to repurchase.

Okay. Maybe just shift and talk a little bit about industry risk. There's been a lot of conversations, concerns out there in the marketplace just around the private market, leverage, potential systemic risk stemming from rising rates, potential recession. So what sort of risk do you see in private and broadly across the overall ecosystem? What areas are you watching?

Yes. So look, I think that there -- I don't personally see it as a systemic risk, meaning, I just see it as investment risk. So you're at a period of time where asset valuations today are lower than they were. You're at a period of time where you're operating in an environment that's a bit uncertain, right? You're -- we don't know how much we're going to have to raise interest rates globally to fight inflation. We don't know whether that is going to cause us to be in a recession or not. And that puts pressure on asset prices, and that puts uncertainty around asset prices. And so I don't view that as having a kind of systemic risk in terms of the knock-on impacts of that dynamic in the private markets any more than I view that as a risk that's associated with just asset prices generally. And so I think there's no question that is the biggest risk today, but I don't think it's necessarily unique to the alternative space. I don't think it's unique to private markets. I think the risk you have to be focused on today is how are you going to drive value in assets you already own in light of that operating environment or in light of that environment in, and how are you going to deploy capital in the face of that. And I think it requires, certainly, an approach to proper portfolio construction and diversification and conservative underwriting cases and proper liability structures to make sure that the quality businesses or assets you're buying are able to withstand within an uncertain environment. And so we're always putting in a tremendous amount of pressure on our investment teams to be mindful of the world around them. And I would say that intensity is up now, as I'm sure it is everywhere.

Great. We have about a minute left, so why don't we just conclude with just your overall view on the outlook for the next 3 to 5 years for Grosvenor. What are you most excited about for the business?

I'd say right now, our platform and capability is the strongest it's ever been. The fact that we are operating in each of the alternative segments, the fact that we can deploy capital in each of those segments in a highly flexible manner, the fact that we can then offer those capabilities to clients on a customized basis or on commingle form means that we have a tremendous amount of optionality in the business and that we can continue to do what we've always done, which is evolve with our clients and grow with our clients. And despite what's going on over the past few months, I still think that, that is a good place to be, meaning, the idea that you can partner with institutions to help them build or manage all or part of the alternatives program is still a seat I wouldn't trade for another seat. I still think it's the right part of the asset management market to be in. I still think that the flexible solutions provider model is a model that is the right model to have that optionality to continue to evolve with the alternative landscape and institutions allocating capital, so we're really excited about it. We're excited about the growth prospects for the business and the ability to really have that be kind of consistent and stable and then generating the cash that we just talked about makes it so that we're excited about the next 3 to 5 years.

Great. We'll have to leave it there. Jon, thanks so much.

Thank you.