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

Okay. Good morning, everyone. Welcome back. My name is Bill Katz. I cover the asset managers and the retail brokers for Credit Suisse. This is my first year at the conference and our 24th as a firm. It's our pleasure on behalf of the firm to welcome the management team from GCM Grosvenor. I've been working on that, Jon. And from management, we have Mr. Jon Levin, who's President of the firm. GCM was -- Grosvenor was founded in 1971 as a leading alternative asset manager. The company announced earnings yesterday with about $74 billion of assets under management at the end of the year. The firm specializes in developing customized portfolios for clients who want active role in the development of the alternatives program and also offers multi-client portfolios for investors who desire a turnkey solution for accessing alternative managers. Mr. Levin joined Grosvenor back in 2011 and is now responsible for the day-to-day management of the business. And prior to that, Mr. Levin was Treasurer and Head of Investor Relations at KKR. And also, we have the team from the IR so thank you, everyone, for coming today. Jon, welcome.

Thank you for having us Bill.

Nice to see you again.

Nice to see you.

Maybe first question, just sort of big picture, and then we can be the environment a little bit and then maybe filter down to what's happening for your firm. There's been a lot of focus over the last couple of days and really for the year-to-date just in terms of what's going on with the discussions with the LPs, what's happening with timing, what's happening with allocations? I was wondering a big picture what you're hearing since you saw client-centric as a franchise?

Sure. That definitely is a huge topic of conversation today. What I always like to remind people about the concept of the denominator effect, right, which is the notion that your traditional equities, your traditional fixed income is traded lower in value. Your alternatives portfolio is held value and now your alternative portfolio represents a higher percentage of the balance sheet than it's supposed to inside of the asset allocation. And what I always remind people about that is it means they've done a good job, the alternatives allocation. And the reason I remind that to people is because the denominator effect is something that has happened over time in different periods, but it is also something that historically has been temporary in nature. And I expect the same outcome this time around, meaning the LP conviction, the investor community conviction, their altprograms still remains very, very strong. In fact, there's an appetite and a discussion around how do I figure out that the next time there's a denominator effect, maybe my asset allocation to alts going into it was higher, so it's harder to have this result. And that's because the alternatives programs have added value to clients. I do think that there is a practical impact, however, to the denominator effect. And I think you've heard it talked about in the industry amongst our peers, which is that things in terms of capital formation, move a little bit slower for a period of time. And I expect that, that will happen. Now the good thing about our business, and you noted this in your opening remarks is that about 75% of our assets under management are custom by separate accounts. And that means typically that we are running a significant part of a particular institution's alternatives program. And I used the word program on purpose because when you're running a part of the program and you're embedded with the client, you're meant to be there consistently over time to help build out their program. And so you're not in the situation where, hey, I'm one firm that happens through raising my fund right now. Oh, bad luck, I raised it during a period of time a denominator effect and now I've lost out, okay, maybe your next cycle re-up is going to be a little bit smaller and maybe it's going to take a few more quarters, but you're still pretty well embedded with the client to help them build out that alternatives program over time.

Excellent. So zooming back out for GCMG. You've got -- done a very nice job of continuing to diversify the business, continue to reposition to some of the faster growth areas, private markets in both dollars and as a percentage of AUM continue to rise, continue to grow a bit faster than the absolute return side of the business. As you look out over the next several years, should that continue and then if it does, where do you see the best incremental growth -- incremental opportunity for growth?

I expect that we'll continue. I expect you'll continue to see the trend around private markets growing at a faster rate than absolute return strategies and making up a bigger percentage of our balance sheet, so to speak, or our AUM picture. I also think that inside of private market strategies, you'll continue to see the shift towards assets related to co-investing secondaries and direct investing strategies as compared to primary investment strategy, certainly on a revenue basis, if not on assets under management basis. And I suspect that will be a persistent trend. What we've seen in our business over the last few years, and frankly, I think these trends will continue is a focus on the ability to offer clients choice around their ESG and impact strategies. And I think that where choice is really, really important. This is their money. We're not imposing our views of how clients should have their money managed, but we have the ability to customize separate account and through some of the specialized funds to offer clients choice to help make sure that what we're offering from objectives and constraints and risk-adjusted return perspective and impact perspective meets their needs. And I think that's a trend that we'll see continue to persist. I think there continues to be a lot of room to grow and evolve in the infrastructure space. I think the infrastructure space, even though the infrastructure assets are as old as the world, the infrastructure asset management industry is actually probably the youngest of the different alternative asset classes. And so I still think it's in its formative years, which is a great period of time for someone as a solutions provider to help people build out those programs. I suspect that -- and I suspect there will also continue to be a lot of activity around the alternative credit, private credit opportunistic credit space where you're helping, again, institutions build that allocation out in a similar fashion to where you've seen the private equity allocations built out over time as the asset class has matured.

Great. Yesterday, we hosted a meeting with the CEO of AMG. And he had a little bit of a contrarian view of how we're supposed to see things playing out in that in a world that isn't dominated by sort of low-cost beta, which is what we've been in the last several years, maybe a decade or so. That is a great opportunity for the liquid oil platform. And now as I was thinking about that, I was thinking about our conversation today, and I know you have a big absolute return portfolio, which has very good relative performance, but had a bit of a struggle last year like many of your peers, so nothing unusual there per se. Could there be an opportunity here even though the private market business is probably the dominant asset driver for the firm that ARS could have maybe a little bit more of a better outlook than...

Yes. Look, I think we've been consistent in our view that where we think the growth in the ARS vertical comes from over time is the compounding of capital exceeding that of the inflow outflow environment, whatever it might be, but the compounding of capital being the primary driver of growth. And that remains my view. That being said, I do think there are some things that are going on in the markets, broadly that bode well for the ability for absolute return strategies to deliver on their promise for our clients. I think that the increased volatility in the markets, a higher interest rate environment is a huge factor actually. And over the last 9 months, you've actually seen a pretty significant amount of alpha generation in the absolute return strategies space broadly. I think to -- right now, there's just so much demand inside of an institution for that marginal dollar because everything is feeling a little bit more constrained than it was. So I don't think you can see a fundamental change until there's a little bit of loosening there. But if the environment persists the way it is now in the alpha generation persist the way now, I think that you'll see that those portfolios are adding value for clients.

And just one last one and we'll move on some of the bigger picture questions. Would you need to have positive absolute return or is just reasonable relative risk-adjusted return enough to sort of market more broadly?

It's -- you never feel good losing money even if you're losing less money than somebody else. I think that certainly, from a financial profile for our business, positive returns is what enables growth. That being said, I think that the relative performance matters from a client perspective, which is the most important factor, not our financial importance, and how does the client feel. And I think when you're in a market like you saw last year when 60-40 portfolios had probably their worst performance in many, many decades the capital preservation and capital protection inside absolute return strategies was pretty good. And I think clients appreciated that.

Great. On yesterday's call, you gave some guidance, both in terms of AUM and earnings power, if you will. We'll come back to the earnings maybe a little bit later on. But just sort of focusing on growth, if we could maybe break the discussion now between sort of some of the specialized funds that are going to be in the market and then sort of other opportunities maybe still specialized. I think if I read my notes correctly, sort of just guided to a pretty strong year my words not yours, but a little bit soft in the first quarter and then sort of a solid 2023. Could you talk a little bit about -- maybe before we get to the specifics of the funds themselves, just the environment, why is first quarter shaping up as a soft quarter and then what gives you the confidence that things could pick up in the sort of the back half of the year.

First of all, I want to know how you did 7 fireside chats and also read our earnings report.

I have a very good team and not much sleep, a lot of coffee.

All right. Good. Very, very efficient of you. I think that the main takeaway from our call with respect to what we saw -- what we see going forward was that we continue to see a persistence of the private markets growth opportunity that we -- and that ultimately, that combined with where absolute return strategies is in our more conservative view of what that looks like over the coming months, enables -- and the margin expansion opportunity we have enables us to feel good about the ability to deliver mid-teens fee-related earnings growth. So that's kind of the headline takeaway. I think when it comes to the capital formation, the first thing I would say, and I will get to your question more specifically because I say it all the time, and I don't think I could say it enough, is that specialized funds versus separately managed accounts are simply a legal factor, right? Are you invested with me in a fund of one or you invested with me in a co-mingled fund. We are agnostic. What we go to clients with is, here's what we're able to do. Here's what we think you're trying to solve here are solutions, now let's go figure out the best way to do it. And I think that gives us a huge competitive advantage. And when you look at the business today, about 75% of our assets under management are in separately managed accounts. I was telling the story the other day to one of our investors where we had a meeting a couple of weeks ago with the prospective clients and infrastructure who wants to make a $100 million allocation to co-investing strategies in the infrastructure space, it could absolutely do a separately managed account. They could absolutely do CIS 3, which is our co-mingled franchise in there, and we absolutely don't care. And I think that's a, we want to do its best for them. And I think that's really important in terms of understanding our business. It is the case that our specialized funds have a higher average fee rate. That is because our specialized funds tend to be geared towards our more fee-accretive strategies, meaning direct secondaries codes, we don't have a primary fund of funds, so to speak. And it's because we offer fee for scale, and it tends to be that smaller investors go into specialized funds instead of separate accounts. So I think it's just important that those outcomes may be relevant to our financial results in terms of that mix. But the way we approach the market to our clients, which is the most important thing is let's figure out what's best for you. In terms of the year, we just have very good insight into our business, largely because of the separate account business and knowing what the timing of re-ups are and about 80%, 85% of our capital each year comes from our existing clients. We know when we're going to hold within reason, specialized funds closings. And so we happen to know what the first quarter calendar looks like as we sit here in mid-February, and can say, okay, for idiosyncratic reasons, we closed a lot of business at the end of the fourth quarter. Our calendar looks like X Y and Z, so where there's not going to be a lot happening in the first quarter. But that's less about a view that, oh, the first quarter is a tough environment and the second quarter is a good environment. It's more just about -- it's generally remains a pretty constructive environment, and we know our calendar pretty well.

Got you. So it's more of a -- I think the spirit of it is that there's just better relationships strong re-ups, as you mentioned, and that ongoing opportunity, just the temporal nature of that rather than what you're seeing in some of the private equity funds were you're dealing a little bit more with the dynamic effect when you sort of saw the conversation.

Yes. I think that's fair.

Let's dig in a little bit in terms of some of the products, right? You have a lot of things going on, which is a good thing at the end of the day. Can you walk us through things like sort of maybe 4 legs to what I would consider the specialized fund opportunity. And you recently closed on a secondary fund, maybe some feedback on how that went? And then if you could just sort of maybe take off the opportunity set as you look at the rest of the year for the specialized opportunities?

Sure. So maybe I'll start with secondaries. And you're right we recently had the final closing for a fund that's about $1 billion in size, which is close to 40% larger than its predecessor fund. It's our third fund in our secondary series. What's interesting about the secondary market is there's always been a lot of talk about there being a lot of dry powder, maybe too much dry powder for the opportunity set. And is that a problem people have raised that notion. And I've always thought it was the exact opposite, which is you've actually never seen any in the history of capital markets, whether you're talking about the equity market or the term loan market, the high-yield market, you've never seen that ultimately, over time, a secondary market and volume usually dwarfs the size of the primary market and you still have in private markets, the secondary market being a percentage, a smaller percentage of what the primary market is. And I think as it becomes even more of a widely held asset class as it becomes more of a transparent asset class, it becomes more operationally efficient and valuation timing efficient, and all those things, I think you'll continue to see a secondary market that will grow faster than a primary market across all the private markets categories. And I think that creates a tremendous opportunity for firms like us because you're in the flow of all that activity, you're in the flow of the fund activity, you're in flow of the co-investment activity. So you're in the flow of the origination opportunity, you're in the flow of the investment opportunity and I think there's a real opportunity to add value to clients through the risk-adjusted returns that are available in that space. Not to mention, you've now had a kind of a new submarket evolve in the secondary market, which is this GP-led continuation fund secondary market, which has now gone from being probably 10% of secondary market activity is something closer to 50% of secondary market activity. And I see that to be a very persistent trend, too, which I actually think is a very positive thing. Ultimately, all these things only grow if they're positive for the LP community and I actually think it is a positive for the LP community to reduce some of the friction costs of owning private market assets, which is a long conversation we don't need to get into today, but I think that you'll continue to see growth in that market, and I think it will continue to be a growing business for us.

Just some of the other funds maybe it sums up to your solid 2023 outlook.

Yes. So I think -- so that fund had its final close. I think one of the exciting pieces of news that we talked about on yesterday's earnings call, which has been announced earlier in January is the launch of our Elevate strategy. And Elevate strategy is part of what we're calling kind of the sponsor solutions category, where we are going to be leveraging our expertise in identifying small emerging and diverse private equity talent and providing those -- that talent with capital for their funds, for their GPs, for their co-investment opportunities and structuring minority investment partnerships with those GPs. And we think that kind of that seating opportunity in the private equity space is a tremendous opportunity and one that leverages a lot of the core competencies of our platform, and we're excited to launch that in partnership with Calpers. We'll be raising other capital for that throughout the year, which we're excited and I think there's actually more things that we can do in what I'll call the sponsor solutions category. You obviously have a stakes market that folks like Dial and Blackstone and Goldman have done really well in. But given the size of capital we're managing, focusing on larger enterprise values, maybe there's something that could be done in the stakes market at the small end, maybe there's something that could be done in providing capital -- credit capital to GPs a small end. So the seating strategy inside of sponsor solutions is something we were excited about. We talked about infrastructure [indiscernible].

Sorry, [indiscernible] my own question, but a lot of things from what you just said there.

Any news you want.

When you think about the -- one of the themes that we've been hearing over the last couple of days is sort of this multi-vectored opportunity of growth for everybody in terms of the Alta, right, whether it's scaling funds, diversifying geographically, diversifying distribution channels, new markets, et cetera. I'm hearing a lot of that in this whole opportunity as well. So if you talk a little bit about, obviously, Calpit is a great anchor investor into something like this, and they have a lot of influence into the pension scheme in the United States for sure. How scalable is this opportunity as you think about incremental clients? And then in some of these other things you mentioned in terms of dollars at play here because when you mentioned the Dials and others, they're big competitive established players, right? But managing significantly higher quantum of AUM at the same time.

Sure, sure. I think for us, the size of the market opportunity is quite large. But we're in the early days here, right? We just got launched with this, as you said, from a great anchor commitment in December, and we're just getting going. And so we'll build this business and this capability over time. So I think to us, it's less about the size of the market, which is huge, and it's more around just being smart and thoughtful about how we grow this kind of sponsor solutions category thoughtfully over time. But if you think about the fact that we've got 10, 15, you'll know the number better than me 20 public alternative asset managers have lots and lots of combined market cap. The amount of private market cap in this space exceeds that by many, many, many multiples. And the ability to use our platform of relationships to figure out how we can help finance and partner with that ecosystem, which doesn't have to be exactly like somebody else does it, right? For us, we have to leverage our small -- our experience in small and emerging and diverse managers to have someone that's particularly tailored to seating managers in that general vein is where we've decided to start, but there's -- it's a huge amount of business value that exists in the private market cap space that we feel like we can figure out ways to partner with that talent.

Just one last one so we move on. The kind of vehicle that you might be able to structure here, would this be a permanent capital type of vehicle that...

It's a -- the way to think about it is that the investment capital, meaning the capital that we will invest into these managers' businesses either in the form of investing in their funds or investing in their GPs or investing in their co-investments that will be traditional private equities down in the sense that it will be invested and then it will be harvested. What will remain is a perpetual economic interest in the managers' businesses that you decided to see. So you effectively a cash flow stream, but with having had all your capital back.

Got you. Okay. Terrific. And then you're going to go into maybe the labor impact fund infrastructure fund as well. It seems like a very unique opportunity here. How much more incremental opportunity is there? Can you scale this business over time?

Yes. So maybe just stepping back for a minute around our labor impact infrastructure strategy. It's a direct investing infrastructure business that leverages our broader $10 billion infrastructure platform. And the theory of it was that investing in infrastructure is hard, investing in U.S. infrastructure is hard. Infrastructure is usually a highly political asset. And that if you bring all the proper constituents to the table, whether that's labor, government users of the set infrastructure in a constructive way that you have a better opportunity to originate infrastructure assets, you have a better opportunity to own those infrastructure assets effectively. And that doing so would generate attractive risk-adjusted returns for infrastructure investors. By bringing labor to the table, you would also have this impact to the point of the name of the fund, you would have this impact in terms of increased work hours for organized labor. But that at the end of the day, it was that approach, they would actually be an alpha generator as opposed to an impact factor that is a degradation of return. That's obviously not our view, and that's not a good way to build impact businesses over time. You have to think about in the same vein that we've seen that are focused on managers led by women and people of color has added alpha to our private equity returns, kind of a similar concept to what we're doing in the infrastructure space. So we're raising our second fund now. Our first fund was plus or minus $1 billion, largely fully invested or committed at this point and where the assets are doing pretty well. And so we're excited about second fund. And obviously, the infrastructure opportunity set and the need for infrastructure capital is massive. And I would suspect, just like we saw with secondary, just like I suspect we will see with CIS. I suspect we will see with MAC that the successor phone will be larger than its predecessor.

Maybe before we continue -- actually, another area within that seems to be you've been very -- one of the themes that's been very innovative for us to market with a few things and obviously, diversified and differentiated client base underneath that. So I'm intrigued by the CFO, which is an opportunity for you into the insurance opportunity. Can you talk a little bit about what you're doing there and then how you sort see the growth for that product line?

Sure. So maybe step back a little bit and focus on our decision to launch GSM Grosvenor Insurance Solutions, which we did in 2021. And our thought behind that was with our broad alternative investing platform, the ability to offer funds, custom accounts, the ability to invest in funds, codes, secondaries, directs, and have this kind of open architecture broad all platform could make us a very value-added partner to insurance company balance sheets that are trying to continue to build out and evolve their alternative programs and often need very specific things to do that, whether that's from a structuring standpoint for regulatory capital, whether that's from a reporting standpoint for what they need to do in terms of their regulatory reporting and that our history is a customized account provider and offering great manufacturing, but also high degrees of client service would serve us well. So we've made an investment to make sure that we were reaching out to that -- the broad network of insurance company balance sheet. In doing so, one of the many things that we focused on was structured products and CFO being an example of that. We believe that, that market makes sense in terms of a vehicle for investors to have their exposure to Ultas through that structure. It's because the liabilities are highly attractive in terms of how they're structured, duration, covenants, things of that nature. And so you could effectively offer up some levered diversified alternatives exposure with a very, very good liability structure, which would allow you to generate same dollar -- more dollars of return for the same dollar of capital effectively. Not to mention that the rated pieces of the CFO structure are attractive to insurance company balance sheets. Now obviously, just like CLOs or CDOs or whatever else, the cost of funding today is higher than it was in November of '21 when we did that deal. I still think it's a positive arbitrage relative to where you think the return of alternative assets are going to be. But it's something to kind of look at in terms of the cost of funding for 2 years ago, issuing liability was an asset. It's not as clear if that's the case today. It's not as obvious today as it was 2 years ago.

Okay. One of the areas, as our team and I have gotten to know the story line a little bit is that I think maybe an undepreciated view of the SMA opportunity that's been growing from our perspective, very strongly, generally surprising us to the upside over time. Can you talk a little bit about why so successful and how to think about the growth from here?

Yes. So I think I'm glad you're focused on it. I think that back to one of the earlier comments I made in this session is we like the idea that we have manufacturing capabilities, and we have a culture of client service and that we can go to clients and say, let's figure out which vehicle works best for you. That served us well over time. I think that -- and when it comes to separate accounts, you are very much embedded in long-duration partnerships with your clients. You are working collaboratively together to build the program that meets their specific needs. You're building customized reporting, you're building customized governance frameworks. You're building a customized cadence for how often you talk, you're getting to know their consultants, you're getting to know their trustees, you're getting to know their whole staff. Sometimes you're the more permanent fixture in life because they may have staff turnover and you're still there, right? So there's a lot about the separate account business where you become very much embedded with your client. If you're doing a good job, and we've been fortunate that we do a good job in that. What is that allows you to have the insights into a forward calendar of continued activity with that client that allows you to have conversations with that client about what other things you might be able to do together, whether it's an evolution inside of a specific investment vertical or whether it's an evolution into a new investment vertical, -- and I think that, that offers at the end of the day, a very strong value proposition to clients that you can provide this kind of holistic solution, this holistic delivery of an Ulta program and do it in a high touch, but cost-effective way.

Maybe shifting gears a little bit. Retail has been an area of focus. It seems like you'd have a pretty unique opportunity set to sort of come into that. Want to talk a little bit about maybe what is your current strategy to tap into the Global Wealth Management? And then specific to maybe the democratization opportunity, which might be more of the mass market opportunity versus the high net worth, the ultra-high net worth. Talk a little bit about how you see an opportunity here. There's obviously a lot of uncertainty right now with rates being higher, some of the issues going on with some of these more constrained liquidity products, if you will.

You're an early call on that.

Well, thank you for recognizing that. So how should we think about the opportunity?

I think that there are absolutely some of the near-term headwinds that you're talking about, but I think just as strongly, if not more strongly that the longer-term opportunity is a very positive one. Alternative investments have added value to institutional portfolios over time. And I see no reason why the same wouldn't be true for noninstitutional portfolios or retail portfolios. Typically, when you see that transition happen in terms of moving from institutions to your more retail mom-and-pop type investors when you've seen that happen in other parts of kind of capital markets evolution over time it's a -- it can be an up and down transition, right, a difficult transition. There has to be -- you have to get real a lot of transparency. You have to make sure that it's all honest players. You have to kind of make sure that the regulatory framework works, and it takes time to work that stuff out. And I think we're in that period of time of working all that out means. But I think that at the end of the day, risk-adjusted return outcomes win and that the risk-adjusted return outcomes will justify having alternatives play a role in the balance sheet of individual investors. And so I'm very positive and constructive on the opportunity over the long term. That doesn't mean there won't be a period of time where you'll have people demanding liquidity that can't be provided in different types of credit or real estate structures. I'm sure there'll be a little bit of that noise. But longer term, I see it as a very positive opportunity. In our business, we've seen that the capital formation we're getting from the retail investor has represented a higher percentage of our capital formation than it does of our existing AUM, and that's been a trend that we've seen for the past few years. For us, that's largely been through partnerships with the wealth management wirehouse kind of mass affluent channel, largely with QP product or a qualified purchaser product. And I think in order to reach the larger market opportunity, you need to have product that's structured a little bit differently, registered a little bit differently, and that's something that we'll continue to pursue as well.

It would seem just to maybe now we're on that just one moment that just given your solutions backdrop and what we see from some of the retail broker dealers, both public and private, that there's sort of this outsourcing of a turnkey asset management theme. And is there an opportunity here to maybe focus your distribution strategy a little bit more and focus on the RIA channel, which is one of the faster-growing areas within the retail distribution network itself?

I think there is. I think that there are opportunities to do that. I think you have to think through whether those opportunities are best met by building or buying, but when I say buying, I mean partnering a little bit too for people that have that expertise, that distribution, that set of relationships and we're constantly kind of on the lookout for those types of opportunities where maybe we can bring our manufacturing client service to the table, somebody else might be able to bring some of the distribution side of it. But in the meantime, we're continuing to see our existing distribution resources, be able to add to add to our AUM at a greater rate than what that capital represents of our AUM. So we like it, and we'll look for opportunities [indiscernible] where that growth, too.

Great. One more flow question on transition in the last few minutes and some of the financial dynamics of the story. As I listen to what you're saying today, it seems like you've scaled nicely, but it seems like there's still a lot of opportunity for successor funds to be larger. And there's maybe too vague or broad of a question, so I apologize in advance. But where do you think you are in terms of the J curve in terms of the slate of products you have? Is there still not only unit growth, but the scaling of that unit growth pretty significantly over time?

I think that each of the kind of vertical capabilities are contributing revenues that make it such that they've been good investments for us and kind of good businesses for us, right? Whether you're thinking about the secondaries fund on its third vintage or labor about to be on its second vintage or all the stuff we're doing in our strategic investments group. You've been very good about how we've added capabilities to leverage the broader platform and then build that over time so that we're managing larger and larger amounts of capital and seeing operating leverage in that evolution. And I don't think there's any magic to a calendar year. But each kind of year, we've come out with something that's an adjacency, whether it's -- or every couple of years, whether it's the labor infrastructure strategy, whether it's GSM Grosvenor Insurance Solutions or whether it's the Elevate strategy. And I think that, that innovation mindset has to be part of what you're doing if you want to continue to grow your business. And there's plenty of market opportunity for us to have successor funds be larger for us to have separate account series, be large over time and grow very nicely without implying in any way, shape or form that we've taken over the world.

Right. Okay. Let's transition a little bit into some of the financial guidance you provided yesterday as well. Again, from my notes, you had sort of -- and I think you've mentioned it in your opening comments, you still expect mid-teens FRE growth. I just want to qualify from what I read. Is that inclusive of '23 or is that a broader longer-term statement?

Yes. Both.

Okay [indiscernible].

I think we were talking about 23 specifically in those comments, but I would also tell you that we feel confident about that growth profile for FRE over the longer term.

Okay. And so within that, you had mentioned that you would expect to see a little bit of margin improvement as we look through this year. So maybe the first question is, can you unpack that? I know you've been spending a little bit, but also trying to control those -- you've been investing in the business, excuse me, inflationary pressure, but at the same time, you've been trying to manage your expenses to tamp down that trajectory of growth. So as you look at your margin improvement in '23, and I have a broader question next, what -- is it a revenue asset expenses or is there some...

Mostly about that, mostly by revenue growth exceeding expense growth in net operating leverage. I think that over the past couple of years, we've seen FRE margin improvement on the order of a few hundred basis points. We saw it from '21 to '22. We expect to see it again by virtue of the guidance we gave from '22 to '23. And we've always said that when you look at our FRE margin, kind of was low 30s, kind of mid-30s or the high end of mid-30s now that we still think that over time, it could go higher. I think there becomes a natural point at which there's probably not a huge amount of FRE margin accretion available. I think we've seen some peers in our space say that explicitly, but they're at much level, much higher levels of FRE margin than we're at today. And so I still think this kind of steady improvement in our FRE margin is something that we think is achievable and that we're managing to. And I think it's largely a function mostly is a function of the revenue growth exceeding the expense growth.

That was my second question. So as I think about what we cover and then maybe some of your natural peers would be beyond our coverage universe, there are some pretty impressive margins out there. Now some of them have some disyncratic business drivers that may be a grondstoffen.

They're too impressive I don't believe them. I don't believe them, but I think they have one way to go, which is down. I think we're coming out from the other side.

I appreciate that. But how should we benchmark when you say higher over time? Is 60% of some of the bigger players that are out there seem to be pretty full to us. That's what they seem to be signaling to some degree. But yes in...

I would say, talk to us again in a few years if we get to like the 40-ish range.

Okay. Good to know. Okay. All right. Maybe last topic for as we're running out of time. Just in terms of capital, you bought back some stock in the fourth quarter. I think around 6 million shares, I remember said it correctly. How do we think about just allocation? And maybe within that, interestingly, yesterday, Bridge a smaller company, we followed as a real estate niche player woke up and acquired a private equity secondary player, right, which was sort of interesting. How should we think about where you are in your footprint and then how you think about the waterfall of capital allocation?

Yes. I think that what we've always said is that in the absence of a very good opportunity to generate a highly attractive return on capital that we're focused on delivering excess capital back to shareholders. We've done that since we've been a public company. I think we've taken our quarterly dividend from $0.06 to $0.11 over the past couple of years. We've had a buyback program on pretty much since we went public and an ever increasing one, and we've been an active participant in the market. Now part of that is because we think that there's value in the stock today. That being said, if you ever saw an opportunity to use capital to make an acquisition that we thought would make us more valuable to our clients the next day. We would do that. Now the reality of that is I actually don't think that doing so would necessarily have to be at the expense of continuing to have an attractive and increasing dividend profile and a stock repurchase program on because there's other ways to get access to capital. But we will have -- the one thing, I guess, what I'm saying with all my comments is what we're not intending to do is just to have capital build on to the balance sheet.

When you look at your footprint, maybe wrap up on this question, when you look at your footprint today, and I appreciate the price market is growing nicely. ARS is a stable business, generating probably a pretty good free cash flow. Any sort of major areas to say, we'd like to really try and build this out? And do you get the de novo is there an acquisition...

Yes. Look, I think that acquisitions are really hard to do. We've had that experience historically, and we've done really well with it, but it's not something that is core to executing successful in our business plan, to your point, we can keep doing what we're doing and grow very nicely. But we're very active in looking. We have a very high bar. We have to make sure that it adds value to the clients. First and foremost, we have to make sure that there's the right financial framework, the right cultural framework. And there's areas we looked at, we touched on some, whether the -- whether it's a partnership or acquisition opportunities you could look at to help accelerate growth in the noninstitutional channel. I think credit is a massive total addressable market, and there's parts of the market we cover, parts we don't. So that's always an area where we spend some time. And so we'll continue to look at opportunities. But our main focus is on executing the great organic growth opportunity that we have in front of us.

Great. Right now we're out of time. Thank you very much, Jon. I appreciate the patience answering all the questions and joining me on the conference.

Thank you.

Good to see you.