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

This is Craig Siegenthaler from Bank of America, and I'm pleased to introduce Michael Sacks, Chairman and CEO of GCM Grosvenor. Michael joined GCM Grosvenor in 1990 and became the CEO in 1994. Under his leadership, GCM Grosvenor grew into one of the largest alternative asset manager solutions providers globally. The firm currently manages a little under $80 billion of AUM. Michael, thank you for joining us today.

Thank you for having us.

So Michael, I wanted to start with a little bit of history. So I heard when you joined GCM Grosvenor, the firm only had about $0.25 billion of AUM. And the firm's founder at the time Eldon used to say in meetings that he would one day manage $1 billion. But nobody believed him, and that was kind of a big deal. Did I get that story right or how they...

You are absolutely, directionally correct. So Dick Elden founded Grosvenor in 1971, May of 1971, which makes us a 52-, 53-year-old firm. I described, when I got there in November of 1990, as a 20-year-old start-up at the time because it was a $225 million, $250 million, it was 6 people. And it really wasn't -- it was a good investment firm and had good returns and a good history, but it wasn't really a fully built out business at the time. Dick was a visionary, Dick moved to the alternative investment strategies in the early 1970s, and he kind of doggedly pursued hedge funds and vaults, a variety of different types of vaults for 20 years before I joined him. And he really was a visionary. He saw their value. He saw them landing on the efficient frontier, he saw the growth. But back in 1990, 1991, this was a -- it was kind of a backwater place. Nobody understood the different strategies. Portfolio construction theory wasn't really a thing. It was literally unsettled law, whether institutions with a prudent person rule could even invest in these strategies. And so we'd go out and they would say to Dick, what do you -- how much money do you think you can manage? This was the day when a new long-short equity hedge fund would tell people we're going to hard close at $100 million, like that was the biggest hedge funds in the world were $350 million. And they would say to ditto us managing $125 million. What do you think you could manage? And Dick would say, I don't know, $1 billion, $2 billion, and I would have to pull him aside and say, Dick, they think you're crazy. Like that's too aggressive. Just say we could double and then it will be believable and we'll be able to get some capital. So for me, it's a lesson because never would I have thought the numbers would be where they are now. Again, you had hedge funds. I'm going to hard close when I get to you'll have $100 billion launches now. And just constant evolution, constant adoption of strategy, his vision proven true that you land on the efficient frontier and you have adoption across investors in all channels. And I think that while it's been an incredible ride and a lot of growth, I do think there is still a tremendous amount of growth ahead of us and a lot of adoption ahead of us for a variety of different alternative strategies and in some investor channels that are still significantly under allocated to alternatives.

Michael, let's fast forward today. We're sort of in a year of inflections with what's happening with interest rates, they're supposed to go down, hopefully, equity markets go up. How is GCM Grosvenor sort of positioned for this? And what should your view of the macro backdrop?

So macro backdrop in terms of rates, inflation, the economy, I don't think that we have anything particularly unique to offer, whether it's higher, longer, et cetera. I don't think we've ever -- forecasting that is not how we add value to our clients at all. I do think there -- you have some very significant inflationary pressures. You have some very significant or prospectively significant deflationary evolution with the productivity and tech perspective with regard to productivity. So where that shakes out, I don't think we know. What we do know are a few things. One, certain sectors of our marketplace that we look to invest are significantly more attractive to invest in today than they've been for a while, in particular the credit space. You're getting paid to make credit investments today. We went through long periods of time, where you weren't getting -- credit was a tough place to earn a return in most institutional investors had no ability to achieve their actuarial assumptions by investing in credit. That's different today. That feels good. There are -- so we've been moving up the cap stack and deploying more capital up the cap stack for a couple of years now, and that feels very good. You had a very low level of realizations last year. And in the alternative investment universe, in particular, the private market strategies, realizations kind of get fundraising, which begets deployment, et cetera. And so I think that the likelihood is that what started as a sort of slowdown in late '22 and continued throughout '23, it was a macro factor that affected the whole of the Alt space seems to be loosening and it seems to be loosening our pipelines are up. Our activity levels are up. You've seen more in the way of announced or intended deals. Now they have to close. They have to kind of get to the finish line. But in general, I think from a macro perspective, short term, it feels better in that we think that flywheel is likely loosening a little bit and starting to turn in a more constructive way. Just order of magnitude, we raised about $5 billion last year, which was down from a low of $7 billion and a high at $9.5 billion the previous 4 years. So it was a -- and it wasn't a Grosvenor thing. This was just an industry slowdown, I think, largely on liquidity, a little bit on denominator effect, both, I think, started to get better. And so we're looking for a pickup, long-term fundamentally from a macro perspective, for all of the alts firms that you all look at. I think the backdrop is pretty good. Fundamental demand remains high. investors are -- have not moved away from the various asset classes at all, certain parts of the spectrum deployment is opportunities are better. And so I think you're going to see good returns from these vintages now. And then you've got the entire individual investor world with a tremendous amount of assets and a very small allocation to alts that will keep growing for a long period of time.

So Michael, when rates started going up, we started seeing the emergence of a denominator effect and the backdrop was also very crowded, especially in private equity, especially in the pension plan channel. Has it been getting better recently? And also, were you able to pivot into different channels where you saw more strength than I'm thinking these sovereign wealth channel in the Middle East?

So a couple of different questions. One is we were -- I think we were very early to call out the denominator effect in early in '22 when markets had corrected. And so people were now long hauls because traditional bond valuations have come down and their portfolio allocations that shifted. While we called that out early I actually think that it was liquidity and concerns with regard to liquidity that maybe had a bigger impact on fundraising in '23 than the denominator effect. So throughout '23 as returns improve for traditional long-only asset classes, denominator effect somewhat self-corrects but liquidity didn't really improve. There was no transaction activity last year. And you had a number of PE firms as an example, that for many, many years, would be giving as much, if not more, money back to clients as they were calling from clients. And for the back half of '22 and for '23 that was not the case. And that's where the clients start to go slow and kind of slow down. So to our knowledge, we didn't see people reducing their target to private markets, whether it's real assets, infrastructure real estate or to private equity. You didn't see them kind of reducing their target. You didn't really see them reducing their capital allocation plans with regard to vintages, like they don't want to skip vintages, they want to keep going with their programs, but you did see them slowing down when they made commitments and kind of where in the cycle of an 18-month fund raise, they would make their commitments. And that does seem to be loosening up. And then the second thing that I think relates to that slowdown, which I think was more liquidity driven, as you see a greater commitment on the part of sponsors to generating some liquidity. And I think sponsors in general, have made peace with the idea that they're going to sell some things this year. And they may not be getting the values they thought they were going to get a couple of years ago. With regard to fundraising, we have a pretty diversified institutional client base, sovereigns, public pension plans, corporate pension plans well diversified. And you definitely had parts of that universe that we're more lean forward than others last year. But by and large, these are programmatic investors that are committed to the asset classes that are putting out money constantly and increasing their allocations even if not as a percentage of their book just as their corpus are growing constantly. And so I feel like you may have like Middle East sovereigns were kind of flushed. But basically, everybody was going a little bit slower to see what the outcome of the effects of '22 were going to be, and I think '23 was just a little bit slower. Importantly, I don't think it's a reduction in level. I just think it was like a stretch of a sales cycle. And I think you're starting to see people that loosen up a little bit now.

Michael, I think one misconception out there is that solutions providers like yourself and some of the other names mainly focused on kind of smaller investors. But a lot of the largest LPs out there are your client. Maybe could you flush that out for us?

Yes, that -- to the extent that, that is a perception, that is a misperception. It's a misconception. I'm certain it's the same for Hamilton Lane or for StepStone, it's certainly the case for us where our client base is largely institutional investors and it is largely large blue chip institutional investors. We work for some of the biggest and best-known and best-respected sovereign wealth funds, public pension plans in the world, and we do that globally. We work for them globally. And what those investors will use a solutions firm like Grosvenor or some of our peers for is really they'll use you almost like a -- think of like the base of a pyramid where you help them to deploy capital in a particular alternative strategy and you help them with part of their capital allocation. And then in addition to the pure raw risk return that they're getting on the money that you are managing for them on a discretionary basis, they're drafting off of you with regard to a lot of services, a lot of information flow that gives them a lot of internal lift. And so you tend to end up becoming kind of an important part of the foundation of their program in a particular strategy, you end up becoming, frankly, an important part of the institutional knowledge of the organization. We have clients that we've worked for, for 20, 25 years. Our average tenure of our large clients as well is over a decade. And we're the constant. The CIO will change. The head of alts will change, the Head of Private equity will change, and we're kind of there knowing what the program is and knowing what the program has been and what that institutional memory has been. That's frankly something that when we started with these large separate account relationships in the mid-90s, I didn't -- we didn't know that would be the case. You thought maybe there'd be -- they'd learn everything you know and be eventually you'd be disintermediated. And the fact is it becomes incredibly sticky Part of that is because we may be managing 10% or 15% of their allocation to a particular space. And they're helping to deploy -- they're deploying the rest of that capital on their own. And then there's also the evolution of strategy. So a lot of the solutions providers started out where all they were doing for clients was primarily investing. You're allocating capital externally on a primary basis. Certainly, there was a point in time where that was the overwhelming majority of all of Grosvenor's AUM today, that's maybe 55% of Grosvenor's AUM and shrinking in the larger and faster growing -- the faster-growing portion of our AUM today is secondaries co-invest and direct Invest, which is higher fee, higher margin. And for some of these institutions, it's incredibly high value add. So think about co-invest. For any institutional investor with a significant chunk of capital and private equity to not take advantage of co-invest today is literally just leaving money on the table. You don't have to pursue or think about co-invest as cherry-picking deals. You think about it as a way to deploy capital and private equity and cut your 2 in 20 fee in half. And yet most institutions can't really do that for themselves. So they can outsource that to a group like us or some of our peers, and we can deploy that capital for them, they can take a 2 in 20 cost on their private equity portfolio and bring it down to 1 in 10 on the portion of the portfolio that is being run in co-invest, they can do -- create a 12 deals a year and a 36 deal, 3-year vintage that's highly, highly correlated to private equity, and they're saving 1 in 10, which is real money on a compound basis over time. And it makes -- working with a firm like us very cost effective and very valuable to them. So I think that, that value add -- for me to have that value add to be as strong today as it was 2 years ago, when you were only doing primaries is a great thing. And I think the evolution of the institutional investors, their willingness to do different things creates a great place for the solution providers to be part of their life because there's just a lot they can't really do for themselves, seating, for example, things like that.

Michael, let's change it up and talk about the insurance channel. A lot of my large-cap alts coverage, very focused on this channel, 3 of them have actually gone out there and bought annuity companies. So I wanted to better understand what your strategy is with that channel today?

So our strategy has been to -- and we made a dedicated investment in this space and hired a team, insurance is its own language, and you have to speak insurance. And I would be -- thinks that to be like an effective business development person. And in insurance, you almost have to have kind of the knowledge base and the skill set where you could be a CFO or a deputy CFO for small, midsize insurer. You have to understand the risk-based capital requirements for different types of investments and how to tailor and structure investments for that marketplace. And we hired a team starting in 2021 that were dedicated insurance specialists, out of KKR, out of Macquarie, out of Goldman, who can -- who speak insurance fluently, have contacts and relationships there. And our view was in part that the phenomenon that you described where a lot of the really big alts firms were now actually insurance companies themselves. We're consuming a lot of their own origination for paper, they have great capabilities, these firms. We have nothing but respect for them. But over time, their own demands for paper from their insurance operations, maybe crowding out clients where they're competing in some of the actual insurance lines with the customers and you had the insurance industry incredibly overweight your top 10 firms in terms of where their alts were allocated. So our feeling was, if we spoke language well, and we were not competing on the underwriting side, and we offered the ability to bring origination and capacity to the insurers that there was room for us to build that channel as a -- from a distribution perspective. And so far, that has gone very well for us. We've added north of 30 insurance companies as clients of the firm over the last -- since '21. And we -- their allocations last year were a little muted as well. But I think that we believe we'll see that channel grow and grow in a significant way and that approaching it with sophisticated third-party asset management effective as opposed to, we want to manage your money third party, but we're also in the same business here -- in over here. We think that will give us some opportunity to grow.

Almost linked up with their growth in insurance is the growth in private credit, which is one of the hottest themes today. This really accelerated March of last year with the regional bank crisis Bank Retrenchment, we have Basel III implementation coming up. ABF also has merged asset-backed finance. How is GCM positioned for the secular growth of private credit and bank retrenchment?

So we manage $12.5 billion of our $77 billion is in credit now. We have capability to deploy capital there. We have manufacturing capability to deploy capital there, and we'll continue to invest in that as we go forward. We have tremendous origination capability in the private credit space. So I would argue that it's actually a very significant asset of the firm that's unvalued and underappreciated is our ability to originate private credit when you think about how much capital we have on the equity side of real estate infrastructure and private equity, when you think about how much co-invest we're doing direct into deals and infrastructure real estate in private equity, how much direct infrastructure we're doing, the ability for us to grab part of the cap stack, the debt cap stack of those deals is very significant. And right now, our origination capabilities exceed the capital that we have to deploy. The capital that we have to deploy will grow. I think our ability to partner with people on that origination asset is very real also backdrop before we get to the banking issues, which I think are real in our constructive and symbiotic for private credit for long term. It's just a better time to be investing in credit, as I said earlier, you're getting paid to do it for the first time in a long time. I think there is this symbiotic relationship between traditional lenders and some of the private capital -- some of the private credit efforts where the private credit are asset pools that want to own assets with a moderate amount of leverage taking out inside insurance companies and things like that. And the financial institutions want the want to own some of that credit, but they want the customers and they want the fees. And many have been hurt by sort of movement of deposits and things like that a year ago. And so to me, there's this kind of symbiotic relationship where I think the private credit asset managers can coexist very constructively and very peacefully with a lot of the financial institutions and that symbiotic relationship can enable both to grow and pursue their objectives. And so we think that is an asset class that is going to grow for a while. We actually think that this will -- a diversified approach to private credit is something that makes a lot of sense for clients where some of the capital that they're allocating to private credit will be allocated to funds. Some of that will be allocated to secondaries in private credit funds. And some of that will be allocated directly into private credit transactions, creating a more direct book of private credit. And I think Jon Levin, the President of our firm, talked about this a little bit on our earnings call last week, but we think that diversified approach to private credit is going to be grow pretty significantly and is appreciated by clients.

So next to the insurance channel, the other distribution channel that is largely untapped is private wealth. In the U.S., it's only about 2% allocated to alts in the ultra high net worth and high net worth channels. Everyone's focused on that. I wanted your perspective on this channel today. And how are you attacking it between both products and then also distribution?

Yes. So it is node question. It's a very real opportunity. It's not going to stay at 2%. I've seen like a low 2% to 4% range. If you'll say -- it's not going to stay -- it's a huge market. You're talking about 100 -- so it's a giant market. You're not going to see it stay at 2% or 4%. It's going to trend up. It's likely to trend up for a long period of time. And I think it represents a serious opportunity for alts firms of scale who can penetrate the marketplace. For us, it will involve. And we said -- I mentioned the other day, we look -- this is a priority for us. We look forward to talking more about this throughout the year -- this year. But we will evolve by having product that we offer in partnership with wholesale distribution. And if you look at the big alts firms, they have -- all of them, the top names have, at times, had product that they've worked with distributors on, we will also invest in our own distribution, and we'll do that while watching our FRE margins, which we were clear, we think, have room in them to grow as we move forward. And it will involve new product focused on some of the strategy sets that we have proven capability and expertise in. And it will involve product that's structured in a way that the marketplace kind of likes that structure at that point in time. And we're -- it's a priority for '24 and it's something we'll be talking about as we move through the year.

So I wanted to jump into impact investing. It's a newer vertical. It's had a nice trajectory, but still small relative to these other big asset classes. Are you seeing client demand strengthen? And is this a segment where you can really customize a product where I think that's really important because every client has different sort of objectives when you think about customer?

So we have a significant amount of impact capital. It's something that we've done for a long time. We sort of define that at the highest level as you've got an infrastructure strategy that is seeking top quartile, top decile infrastructure returns and then it has a second order impact that's part of the focus of that strategy, part of the constitution of the documents, which is to partner with organized labor on the infrastructure projects from that fund and to drive opportunity for organized labor. There's a second order impact after risk reward, which always comes first that you're then constitutionally committed to reporting out on -- measuring and reporting out on. And anything that does that, whether it's investing in trying to drive jobs in a particular jurisdiction, things like that in energy transition, lots of second order impacts after that first kind of risk reward. For us, it's always client choice. We're not -- we're -- it is a place where you're customizing 4 clients, you'll see clients that want impact and want a particular impact. You'll see other clients that don't want a particular impact. We talk about sustainable investing and impact investing. People used to talk about ESG. If you think about E&S and G, you find investors, I want E, I want S, I don't want this. And so for us, customization, giving the client what they want, and being in a position to be able to give the clients what they want is how we have built our capability set there. And there are a number of impact strategies that we're active in, and we do see growth in that space. The only thing I would put out is there's a lot of conversation around impact investing. Can you have a second order impact without impacting that risk reward? And when you think about how segmented traditional portfolios typically are, many people in the room, I'm sure, are financial services focused. When you think about how segmented traditional portfolios are, the idea that you are, in any way, sacrificing anything from a risk-return standpoint when you are focusing on a particular impact. I just take infrastructure. What percentage of giant infrastructure projects are done with organized labor to begin with? If that's something that your clients want you to drive the -- you're not giving up anything when you seek to drive that. In fact, you're quite possibly increasing the chances that you can -- get looks at deals that you can add value to deals and that you can win more deals. So we think impact investing will continue to grow, and it's been growing very steadily for us for a long period of time.

I wanted to touch on the absolute return business. So how is the liquid business been doing? And specifically, I wanted to get an update on both fee pressure? And how we should think about modeling organic growth?

So fee -- we have not had -- fees have been stable for a while. And it feels -- I shouldn't say this, but it feels like there's stability in fees. That's I don't think part of the conversation today at all. The issue is flows and are you in a kind of an environment where flows are neutral, like maybe a traditional asset manager? Are you in an inflow environment or you're in an outflow environment? And the good news on the ARS side is you get the compounding. And so my view is kind of -- I think it's a very good business. And I think it has less ball than traditional asset management. And I think that the flow picture is certainly kind of no more challenging than for traditional asset management. And so you ought to be able to grow if only by compounding over time, and you ought to be able to grow by compounding with less volatility. Performance last year was good. Pipeline is up from a year ago pretty significantly. There -- in any kind of redemption overhang is down from kind of where we've seen it in past years at this point in time in the year. So our feeling is we're sort of guiding people to flat flows and make -- we'll get some compounding in the market and see some growth through that. But certainly, we have seen periods of time where your growth there from performance plus flows compounds at a nice rate for a period of time. That revenue stream for us and that profit center for us is just going begging in the market right now. And it's a 50-year-old business that throws off a ton of cash on any kind of a DCF basis, it's incredibly valuable and it's literally getting no value in the market now. So we think that's a place where performance can surprise and then kind of appreciation or expectation can be a positive surprise in our story.

Great. Michael, at this moment, I just want to look at the audience and see if there's any questions for you. [Operator Instructions] We have one in the front row here.

Your fundraising seems to be much more diversified, both geographically by channel and by strategy than many of the other managers in the space. Why do you think that is? And do you expect that to change in any ways moving forward?

Yes. So I think that's actually a really good question. First, I think our platform is probably more diversified than most, right? So we have the hedge fund, we have infrastructure, we have real estate, we have private equity. And we have different approaches inside each of those strategies. We've got separate accounts, and we have co-mingled funds, and that's all going all the time. We actually think that the breadth of our approach is a great strength. We think that there are few conversations about investing in alts where we can't compete, where we can't satisfy people. And so fundamentally, I think that phenomenon that you described -- and we're global, and we've been global for a long time. And so I think fundamentally, that's what drives that is the breadth of the platform, which we think is a great strength, gives us a lot of chances to win all of the time. My experience has been that there are certain times where you're really trying to drive a particular opportunity set or a particular strategy, but you also have to be a really good listener and you have to deliver to clients what they want and you have to kind of provide for the client what the client is interested in. And so I think that the results -- while the breadth and diversification are the result of the breadth of our platform, the actual results during any period of time are more about what the clients want than they are necessarily about what we're trying to drive. And so you've been in an environment where co-invest has been growing aggressively. We've grown our real assets platform which is real estate and infrastructure. I think we grew from like $9 billion to $20 billion in the last 2, 3 years, maybe 3 years. And that's because clients like that long-term infrastructure asset liability match. They like the inflation protection there, et cetera. And so we've always wanted to be able to have a business where we say this is a great opportunity. Now let's go drive that, but also where we can go -- we can serve clients where they want to be served and enable a more consistent growth rate. And that applies not only the strategies, but applies to geographies. We talked earlier about some of the sovereign wealth funds in the Middle East and some in Asia, very flush and continuing to put money out, even if at lower levels than in '21 or even '22 and '23 still leaning forward, putting money out, and you want to be globally diversified in different channels and you want to have different product mix to provide people with and that's where that comes from.

Great. And I think with that, we're out of time. So Michael, on behalf of all of us at Bank of America, thank you very much. Thank you, everybody.

Thanks for having us. Thank you.