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

All right. Hello. I'm Mike Brown, the U.S. asset manager and broker analyst here at UBS. I'm pleased to introduce, Michael Sacks, the Chairman and CEO of GCM Grosvenor who served as CEO since 1994. GCMG is a global alternative asset manager solutions provider with $91 billion of AUM across private equity, infrastructure, real estate, credit and absolute return investment strategies. Michael, thank you so much for joining us.

Thank you for having us, and we're glad to be here. Thanks.

It's not so hard to switch around to get down to Florida, is it?

Not this time of the year when you live in Chicago.

So Michael, maybe we just start with an overview of GCMG.

Sure.

You kind of described yourself as a solutions provider, as I just mentioned. And so what does that mean in practice? And how does that mindset really shape how you engage with your clients?

So I think the concept of a solutions provider primarily relates to the fact that a large percentage, slightly over 70% of our client relationships are in customized separate accounts or funds of one, which are portfolios that we create with clients, meaning we settle on objectives and constraints and what will be included and won't be included broadly described with the clients and then we go ahead and we implement those portfolios. And I think that, that's a much more iterative and interactive process that has some service aspects and elements associated with it and some consultative aspects and elements associated with it than a ticket to a fund. So I think if 70-plus percent of your business is custom separate accounts and you're going through that process with your clients and you're engaging at that level of detail and helping your clients solve problems beyond the -- beyond just the return of the portfolio, I think you're a solutions provider. We do like to also point out that we're -- you specifically had said your clients. And so that's my answer there. But we also think we are providing solutions to the broader alternative investment space, and we're providing a lot of value add to the sponsors and the other participants in the space as well. So I think that custom separate account is probably where it's anchored, but it's really being a solutions provider, a capital provider, an idea provider to the breadth of the space.

Let's talk a little more about the customized separate account side of the business since that's 70% of your AUM. You talk about a lot of the stickiness and perpetual nature of those relationships. So what really differentiates your approach to the separate account model? What's driven that 90% re-up rate?

Look, ultimately, performance matters with everything. And so we have to be delivering good investment results on a return basis, on a risk-adjusted return basis with regard to targeted return inside levels of volatility that are -- have been talked about we have to deliver kind of as advertised, if you will, with quotation marks around advertising. But beyond the performance, there is a very significant element of service and consultative value where you are, to some degree, an extension of staff. What we find is that where we have these large custom separate account relationships, we almost like act as like the base of a pyramid for our clients where, say, private equity, there's a big chunk of their private equity allocation that we're managing for them in a custom separate account and we're helping them with. And then they have allocations on top of that, that are also garnering a degree of support from our efforts. And so it makes for -- they will move around that top of the pyramid, but it makes for a very, very strong stable base of the pyramid. Our separate account relationships have a tremendous tenure. They have almost all of them have re-upped multiple times. You've mentioned a high re-up rate. We have -- when we make an initial sale, you're working with the client for several years through your first investment period, they're re-upping, you're working with them again, they're re-upping. And just yesterday on our earnings call, Jon gave, I think, 2 examples of large separate account relationships that are many, many, many multiples of the initial relationship size as we've kind of gone through time and delivered for the clients and done more and more for them. So it's separate account business is a very -- a very good business in the sense of stickiness, real relationships, real value add outside of the -- just the return stream. And there's a reason it's got much higher re-up rates than, say, commingled fund investors do.

So it's got a real compounding effect. That seems to be pretty clear here. So you just mentioned earnings and you reported earnings yesterday. Certainly, very strong results. Stock reacted quite positively, up over 14%. Maybe just talk through some of the highlights from the fourth quarter.

First, we can't take too much away from the stock reaction because the stock had gotten crushed in this SaaS scare a few days before that. And so I think we -- I've got to acknowledge that. We had a very good year, and we had a very good quarter. And from an investment performance standpoint, it was very strong. So we delivered a lot of value to clients and I always like to start there. From a fundraising standpoint, it was the best year we've ever had. We raised $10.5 billion. It was the best quarter we ever had. So those were kind of records. We generated terrific performance fees in our absolute return strategies business. The absolute return flows were good. It was just a very -- we had margin improvement. We got more operating leverage, which we had said we were going to get, but it was good to see it come through. And it was just -- it was a very good year. I think for me, most importantly, we had a full pipeline at the beginning of 2025. We had this very significant fundraising success throughout 2025, and we start '26 with a pipeline that's actually larger than it was a year ago in 2025. So we not only raised all that money, but we fully restuffed the pipeline to have it be as robust as it was a year ago when we had this terrific year. So I think it bodes well for '26. As you know, we've set -- put out there some -- we put out some long-term goals with regard to our FRE growth from 2023, with regard to our adjusted net income by the end of 2028. And after last year is the second year of that 5-year period, we put out those long-term goals, we're certainly on track to achieve our goals, and we feel good about that. And we reiterated that on the call yesterday.

That's all great. Great to hear. You talked about the pipeline there. So I wanted to maybe just dive a little deeper into the fundraising environment for 2026. So when you talk about the pipeline, you talked about how it's greater than where it was this time last year. Maybe give us a little view into the timing of how that pipeline comes through and what that means for fundraising for the year?

So we had a pretty consistently good year last year, and we were kind of closing business all of the time. When you are -- when you do have a heavy custom separate account, approach, you can have -- you have large -- they're large relationships. And so you can have a little bit of lumpiness just based on does something close before quarter end or is it closing push into the next quarter. But that pipeline is very full. And what's interesting about the pipeline and what was frankly interesting about our numbers, our results last year, all the verticals grew. We were taking money into -- we're doing infrastructure, real estate, private equity, private credit and hedge funds, ARS. All of those saw -- capital commitments last year saw good top line fundraising. And that fundraising, by the way, came from a breadth of clients in terms of client type, client geography, so during -- you had a slowdown in private markets in '22. Rates spiked after the war started and you -- we had a slowdown. Our fundraising had been up around $7 billion, $8 billion. It dropped down to, I think, in '23, a little over $5 billion. It popped -- sort of recovered a bit in '24 to $7.5 billion, $7 billion, $7.2 billion, if I remember precisely, and then $10.5 billion, $10.6 billion last year. Throughout that whole period, we were very clear, like we were saying demand is not going anywhere. We're talking to clients every day. We're talking to the market every day. Sales cycle is stretched. Rates are up. People are doing their own checking to see what kind of damage they have in their portfolios, but nobody is backing away from alts and alts still have strong demand. And I think that's -- we've now seen that with '24 and '25 that none of that demand went away. It just sort of stretched the sales cycle a little bit. And it seems like that sales cycle is back, and we would envision pretty -- again, sometimes you're closing on a $700 million account on a $10 billion raise. So if that moves a quarter, it can be a little lumpy. But by and large, it's a full diversified pipeline with a lot of opportunity in it.

Okay. That's great to hear. Maybe if we change gears to the individual investor, where you are really kind of just scratching the surface there. You've made some significant process -- progress over the past year. You did launch the infrastructure interval fund and the joint venture with Grove Lane. So maybe talk about where the business stands today? How do you think about continuing to scale that channel over the next 3 years?

Yes. So we -- it's a major strategic priority for us. And I think it's arguably -- I think our core institutional business has tremendous sort of compounding built into it naturally. And so I'm going to get to individual investor in a minute, but I just -- between re-ups and between successor commingled funds and between cross-sells where a long-term client starts to work with us in a new asset class and between -- and looking at that contracted not yet fee-paying AUM that's already signed and sits on the shelf, those -- without adding any new clients, those result in real growth of our core institutional business. Our wealth channel business or individual investment business is only about 5% of our capital. And there's -- as I think everybody probably is aware, there's huge opportunity in that space. It's significantly underallocated the investors, the wealth channel investors are significantly under allocated to alts as compared to institutions, and they are significantly under diversified as compared to institutions. So we think a lot more flow and a lot of new names and new product from new sponsors finds its way in that channel, and it's a pretty tremendous amount of capital that you could see coming into alternatives over the next decade. And it's obviously been tremendous over the last 5 years. And so we're making a real push there. And as you said, we -- this was a big year for us in terms of making that push. We said it was a real strategic priority. We launched a distribution effort in a joint venture with a group called Grove Lane that we went out and found assembled structured relationship with, and they're working with us on distributing Grosvenor product, and we've got very talented people there, and we're adding to that team, and we're excited about how they're -- about the future, but we're actually excited about what they've done already. They've added a number of relationships, and we are now -- we feel like we have a presence there. We have the infrastructure interval fund where we work with a terrific firm called CION, that's a wholesaler that has distributed in the past for Ares and for Apollo, and they're working with us on this fund, and they're doing a great job, and that fund is now raising capital every day, and that is growing, and we're hopeful that it's going to get to a size soon enough to then be able to plug it into the wire house channel somewhere, which is something we've done -- we've had success with in the past. And we filed registration for a private equity product that will be in the wealth channel as well. So we're making a big push there. I mentioned we have a number of ways to win in that wealth channel. So we have product. We also have white label, private label relationships where we have -- I think what Jon said on the call yesterday, 11 of those in place in the last 2 years where we work with certain RIAs, certain adviser groups, and we create a version of a custom separate account for them to offer to their clients, and we think that can actually take some market share. And then I do think you're going to have like sub-advisers on model portfolios that will be adopted over time. And we're as good a player to pick up a piece of a model portfolio as anybody. So all of that actually just out there driving individual product, doing our private label activity and then working to get into the model portfolios and doing it across the full spectrum of the wealth channels, I think it's a tremendous opportunity for us.

Maybe just a quick follow-up on the wealth channel. I'd love your view on this, just given your perspective in the market. You talk about the decade opportunity here, and it's clearly a decade and multiple decades. But right now, in the current environment, there's certainly a bit more -- maybe a little more turmoil or a bit more kind of speed bumps in the space, particularly for the industry you're seeing in the private credit funds that we're seeing. Elevated redemptions and slowing gross inflows. So my question is, are you observing any pause or slowdown in the wealth channel? Again, you guys are really growing and ramping here. But what's your views on how that could play out over the next year?

For us, because we're starting at such a low base, it's all upside for us, and it's all growth. My sense is that while you may see different product type asset class, different asset class type investment activity be more in favor and out of favor at different points in time. And you certainly will see different structural models be in favor or out of favor, your tender fund versus interval fund, et cetera. You -- there's a tailwind and there's a tailwind for a while. So I think that when you're operating a business with a tailwind, I've been in the alts business and essentially since 1988, it's been a tailwind, and it's been -- it's great. And I think with regard to the wealth channel, you're going to have a tailwind for a while, and it may be more robust and less robust, but I don't see anything that turns that into a headwind for the foreseeable future.

Okay. Great. I can't let you off stage without talking about software. So I'd love to maybe talk a little bit about kind of your views and perspectives on the industry here. But maybe just start by kind of breaking down the software exposure broadly for GCMG. And then as you think about the industry, I'd love to hear your views on how to think about AI-related disruption, whether it's in private credit, private equity and maybe how LP allocations could react if we do see some real challenges flow through private assets.

So first, just even before I get to software, I'll say with regard to Grosvenor and the way that we operate as a solutions provider, one of our core tenets in every one of our verticals is diversification. And so the amount of diversification that we have in a typical diversified private equity portfolio or typical diversified private credit portfolio is significant. And there is no one industry, one issuer, one manager, one strategy that is ever going to be kind of an insurmountable problem for any of those. And that's a core tenet of how we operate. We've always operated that way, and it holds true for our exposure to the SaaS businesses that got crushed last week or last several weeks. The -- and I think that's just important to point out. Firm-wide total AUM, about 4% in SaaS businesses and credit business, about 6% in credit -- in SaaS businesses. I think our view is that the credit attachment points are likely to protect against -- I'm not saying there will be certain things that -- there's always things that are problems. But the credit attachment points generally will protect the credit portfolios. I actually -- I just personally think it's -- how SaaS businesses are valued from an equity perspective is maybe the more meaningful change because you had a lot of valuation that was revenue-based valuation without regard to necessarily cash flow or levels of profitability, the growth was terrific. And it's -- any per seat model is going to have to reinvent itself to some degree. And so you may see changed growth rates, and you may see changed valuation metrics there. But I think the -- I will say this, again, having been in this world since the late '80s and having been a bit of a student of the world for the times prior -- before I was in it, there's always noise around the alternative asset management space. There were -- you can go find articles in the '60s and the '70s, predicting the demise of hedge funds that AW Jones started this thing called the Hedge Fund, and it was going to -- they were going to go away and they were dead. And like you can always see this -- you have noise around private credit. You have noise around AI. And so I think it's important. It seems like over these last few weeks, the markets have reacted very, very sharply to things that, frankly, are is a new version of Claude or there's a new app, but it's not like we all haven't known AI was coming and was going to bring about it a lot of change and hopefully a lot of efficiency. And in fact, Grosvenor, we have more net -- we think we have more net -- we have direct long AI exposure, and we think that we have more net long AI and AI beneficiary exposure than we have exposure to SaaS or software. We're long the disruptors. Like if it turns out that it's the level of disruption that some of the recent activity implies, it's going to be a good thing for Grosvenor and for our portfolios and our investors. So I think it's important to just sort of do the work and stay -- keep your head on straight. And it's a lot of change and it's a lot of opportunity, and it's probably beneficial, I think, for investors over time.

Yes, that historical perspective is really interesting as we all kind of try to digest this really fast-moving evolution here. Maybe if we change gears to the origination side. You often talk about that your long origination and short capital. That contrasts with many peers. So what really enables you to scale origination? And how are you thinking about distribution to really fully leverage your manufacturing platform?

I think that the -- there are a couple of points embedded in that. And so one of them is that, that origination is here today. We don't really need to scale that origination. We have excess capacity. So long origination in its most simplest terms means we could put a lot more capital out without necessarily doing a lot more -- a lot more -- making a lot more investments, a lot more transactions. We have room to upsize in the things that we are already doing such that we could grow significantly with very, very little impact to margin. And I think that the loan origination comment is a comment that relates to maybe our attractiveness to some of the very, very large institutions that have capital that they need to invest that may have most of that capital allocated to the very, very large providers and where we're significantly in the middle market, they can come to us and get a lot of middle market capacity very easily and very quickly and we have conversations like that. But I think that loan origination really is fundamentally also essentially an operating margin point. What we're basically saying is to the marketplace, we're saying we have this capacity, come get it. We want to sell it to you. But I think what we're saying to shareholders and to analysts like you are, we can grow significantly with -- with positive margin. We don't have to -- we have a lot of capacity in our existing business. We said that when we came public. We have seen our operating margin grow significantly. Over that period of time, we added a couple of hundred basis points of margin last year, and we think our margins are going to continue to expand between now and the end of '28 when we put these longer-term goals out there.

Right. That's great to see that margin continue to go in the right direction. So a lot of optimism in 2026 about the capital markets recovery and that more exit activity will continue to happen in the sponsor space. Your unrealized carried interest balance has been growing meaningfully. So how should investors really think about the earnings potential from the carry in a more constructive realization environment?

So I think the way that I think about it, the way I'd like shareholders and prospective shareholders to think about it is that it's a very significant, very meaningful asset. It's roughly 20% of our total enterprise value sitting in carry at net asset value as of the end of 12/31. It has been depressed because of the depressed realization environment. So it's not flowing through our financial statements and cash flows the way you would expect it to in a more normalized basis. So the only number that we were disappointed with last year, we had a great year as a firm, but our fourth quarter realized carry was a low number. We were expecting that to be higher, frankly. And so the way I would hope people look at it is, it is simply a question of when, not if. And if the value of that asset is compounding at a good rate between today and when, I'm perfectly happy, and I would hope shareholders will be happy. You'd like -- you want the cash, you want the -- but it's -- are you -- is it compounding? Is it growing at a good rate? We did mention on the call yesterday that based on some things that we're already aware of it's -- we're highly likely to have a good first quarter in terms of the growth of that asset. And it's a material asset. And the thing that we did touch on is we do have a lot of -- that's carry at net asset value. That's liquidate all of those portfolios and what does the firm get from the carry. Separately, there's a ton of carry at work, which is AUM subject to carry that is in the early stages of deployment. The investments haven't seasoned yet. It should grow into carry at net asset value over time. There's a tremendous amount of that in our system, multiples of our carried NAV. So when you -- if you go back 5 years or so and you look, we had, I don't know, $135 million of carried NAV, that's about $478 million today. And on the way from $135 million to $478 million, we collected $85 million or whatever we collected. We think that, that $478 million is going to have a similar experience. I'm not saying 3.5x, not saying identical, but my view -- my belief is that, that $478 million is going to be a bigger number 5 years from now than it is today, and we will have collected a bunch of cash along the way. And so it's just a terrific asset, and it's actually an important part of our valuation. I don't know that it gets credit for a dollar good asset from the market. I think cash and after-tax investments get kind of subtracted out, but I'm not sure the carried NAV does, but it's a pretty good asset.

Well said. So 2025, you guys had a great Investor Day event. You laid out some new financial targets. It sounds like you basically affirmed them on the earnings call yesterday. Where do you think there's some upside potential to those targets?

Yes. I think we have -- so this is actually -- I'm really actually very -- it's a good question. Glad you asked it. I actually think the upside optionality of our business is, one, is something that's not appreciated at all by the market. So if you look at our business and you look at where we trade and you look at our multiples and just our growth rates and you look at everything, I think there's a pretty easy argument that our target prices much higher than where we're trading today that we're trading quite cheaply relative to the market, quite cheaply relative to peers. We have a high dividend yield compared to most of the other people in the industry, et cetera. And so I just think on a -- and we have this really good business that spits off a lot of cash and it compounds and it's got this built-in growth from all the institutional investors. And it's just a really constructive idea. None of that is incorporating any of the upside optionality that I think exists in the business. So we're still on a relative basis, small, like it's easy. We raised $10.5 billion last year. We had a great year. We're starting the year with fee-paying AUM, 12%, 13%, something like that percent higher than a year ago. I just visited somebody in Japan that is making a 3% allocation shift to alternatives on a $1 trillion balance sheet. Like it's easy for us to kind of blow through -- you've sort of seen maybe what slow period looks like over the last few years what slowed down. I think it's easier for us to blow through a lot of things. The white space in the wealth channel is monstrous. So I do think we have a lot of that carrier work that I talked about is a big thing. So I think that we have a lot of upside that is going -- completely unappreciated and the optionality, if you will, is on the upside, not the downside for Grosvenor and in particular, for Grosvenor as a business, but in particular, as a stock at these price levels.

Got it. And maybe if we talk about some areas where you have been seeing very good growth and that perhaps contributes to that upside is maybe infrastructure and private credit. That's been some of your fastest growth strategies. Really, if you could boil it down, what really differentiates GCM Grosvenor here? And how durable do you think the growth is there?

Yes. So first of all, I think the growth in infrastructure is quite durable. We've been growing at very high rates there. And I think that it's likely that infrastructure continues to grow like painting myself as an old guy. But the -- if I go back and I look at the evolution of hedge funds, I look at the evolution of private equity, and infrastructure is -- these are asset classes that were not on the efficient frontier. They weren't in model portfolios. They weren't in all the institutional portfolios, and that sort of all happened from the late '80s to where we are today, and it became an institutional asset class and infrastructure is early days in that. What's interesting about infrastructure is there's actually this true sort of fundamental need for the asset and the asset base to get bigger. We have massive need for power generation. We have -- there's -- all of the infrastructure projects have a fundamental underlying demand, which is a little different than an operating business going from being privately owned to private equity owned to being publicly owned to be privately owned. These are the real capital needs for infrastructure that come with returns. So I see infrastructure continuing to grow. Our approach is a diversified infrastructure approach where we have direct investments, we have co-investments with secondary investments and we have primary investments. And we tend to sit just below that kind of massive Global Infrastructure Partners, Macquarie, Brookfield kind of level. And there's a ton of deals, a ton of investment opportunity down where they need to deploy lots and lots of capital. So there's a lot of opportunity that we get to see and get to look at that we think is sort of super interesting. So our returns there have been quite good. And I think that business is just going to continue to grow. Our team is terrific. We're adding to the team over -- we add to the team over time, and we -- we're very enthusiastic about the infrastructure continuing to grow. Credit is a little different. And what I mean by that is of all the alternative strategies, it's hard to hear that ever like a client -- I'm not saying you don't hear it, you do hear it. But there's huge fixed income portfolios. A credit conversation is often a conversation about changing the type of fixed income exposure. So it's not about where I'm saying I think infrastructure is going to increase in model portfolios or I'm saying, I think hedge funds are going to appreciate by compounding but not see a ton of incremental flows by an increased allocation on a model portfolio. I think for credit, you don't really have those conversations. It's just what -- how is this private credit or alternative credit, which, by the way, can be sponsor-backed, it can be asset-backed, it can be consumer, but how does that relate to your other fixed income portfolio? And are you willing to move parts of your fixed income portfolio over to that less liquid alternative private credit piece. And so that is a I think you -- if we're going to see a prospect and that prospect thinks they're full on alternatives, we can always talk to that prospect about doing some more private credit because they've got a ton of fixed income and it's a better risk reward than what they have. And so I think private credit continues to grow as well. But infrastructure has been our fastest grower for a few years and likely to continue.

Great. I wanted to shift gears to the absolute return strategy side of your business, certainly a kind of a unique piece of the business versus maybe some of your peers, but one that does seem to really have some good tailwinds here as we get into 2026. Maybe talk a little bit about the outlook there?

Sure. So the absolute return strategies business for us is -- has been a slower growth business than our private markets business for the last 5 years. And it is, I believe, like it's a business that is less appreciated by the market. It is actually a great business. It is a solid fee-generating business that spits off a ton of cash that delivers terrific value to clients that we've been in for 55 years or 54 years. And we have a strong market position, and we're pretty good at it. And it's just a very, very good business. As I said earlier, I don't see that business seeing significant increased allocations from institutional portfolios anyway in terms of like a model portfolio or more on the efficient frontier. I do see that business as being able to keep and hold on to compounding, which is good growth over time. And that business, unlike a lot of the private market businesses, you're earning a fee on AUM and as AUM appreciates, your revenues are moving up like a traditional asset manager. And that business has had great performance for us. We -- our 1-year, 3-year, 5-year numbers for clients are very, very, very happy client base. We had net inflows last year, and that business is going to continue to generate a lot of cash, support a lot of activity at Grosvenor, have a high DCF and whether it ever attracts any multiple from the market, you know better than I do, but I've never understood why that business would be valued any less attractively than a traditional -- a well-run, high-quality traditional asset management firm. And I think we've been through periods of time where there's been very little value attached to that business. It's just a mistake. It's been wrong. It's been proven wrong.

Very fair point. So Michael, we've reached the end of our session, and thank you so much for joining us here down in Florida. And everyone in the room, just join me in thanking Michael.

Thank you, and thanks for having us. We appreciate it.

Thank you.