GCM Grosvenor Inc. ($GCMG)

Good morning, everyone. Thanks for joining us. I'm Mike Cyprys, equity analyst covering brokers, asset managers and exchanges for Morgan Stanley Research, and we're thrilled to kick off day 1 of our U.S. Flagship Financials Conference with Jon Levin, President of GCM Grosvenor. Thanks for joining us, Jon.

Thank you for having me.

Great. So GCM Grosvenor is a global alternative asset manager with over $90 billion of assets under management across private equity, infrastructure, real estate, credit and absolute return strategies. All right. So let's dig in. Big picture, let's start. You guys are a solution provider, which is a bit different from the Blackstones and the KKRs of the world. And for those in the room that may be a bit less familiar with GCM Grosvenor, can you just give us a quick overview of your platform, how you work with clients and what it means to be a solution provider?

Great. Thank you for having us here, and we get to kick off the early morning. So hopefully, people weren't up too late watching Knicks game last night. GCM Grosvenor, a 55-year-old business. And as you mentioned, kind of falling in this category of solutions provider, I think, means we're sitting in a privileged position in what I think is an unbelievably dynamic and unbelievably attractive ecosystem, which is the alternative asset management ecosystem. And as a solutions provider, you are able to provide capital to the alt ecosystem in a bunch of different ways across a bunch of different subgroups within the alternative ecosystem. So you've got private equity, infrastructure, real estate, private credit, absolute return strategies. And as an investor, we are able to deploy capital into funds as a primary fund investor, co-investments, individual companies and securities and assets, a secondary investor, multi-asset secondaries, GP-led secondaries and also as a direct investor. So tons of flexibility in the way that we can partner with hundreds of different other types of investors in the ecosystem to provide capital. As we face clients, what that means is we've got an amazing kind of toolkit to work with clients to understand to listen to where the gaps are in their investment portfolios and to see where the word is going from, provide the appropriate solution, whether that be a customized separate account, whether that be a commingled fund, whether that be a registered vehicle for the individual investor channel, the ability to package all of those different manufacturing capabilities in an open architecture way to provide that holistic solution to the client. And I think the reason I use the word privilege is I think it gives us a ton of optionality, a ton of ways to win, a ton of ways to be able to sit with providers of capital, understand what their goals and objectives are and then use our toolkit to help them meet their goals.

Great. And one of the differentiators, and you did touch on this, is your customized separate account business. which represents about 70% of your AUM and has seen re-up rates of about 90%, I believe, on average. Can you talk about how you've been able to scale this business, which is a key question investors often ask because it is customized and oftentimes can be bespoke. So how do you scale that business? And why the model results in such sticky client relationships?

Yes, it's a great question. So customized separate accounts or fund of ones or strategic partnerships. These are all different terms people would use to describe the nature of those relationships, have represented roughly 2/3 to 75% of our AUM for 30 years. And it's been a huge part. That delivery mechanism has been a huge part of our success. So one of the things, first off, that I like to separate is separate the manufacturing from the delivery mechanism. We talked a little bit about all the different ways we can deploy capital, how we can invest capital. And then the delivery system can be, as I mentioned before, it could be a registered fund, it could be a commingled fund or it could be as we're talking about a separate account. And those -- all those different wrappers or all those different delivery mechanisms use the same manufacturing platform. And the reason I give you that context is it's one of the ways that you can scale customization, which is leveraging the same manufacturing resources to deliver that. That being said, it is a human capital and technologically intensive delivery mechanism because you are working with clients to deliver something custom, and you're delivering something that is consistent with their objectives and constraints, which I think is kind of important. The reason that it represents such a big part of our AUM is, I think, a little bit of luck and a little bit of skill. I think the -- maybe the luck and skill part of it was that early on, what we realized was that if we could walk into a client's office and talk to them about what they're trying to accomplish and try to understand their objectives and then design a solution to meet that as opposed to walking into their office and saying, here's this product we're selling, do you want it, that we would be a more effective partner. So maybe that's the skill part. I think what the luck part was is the answer to your second part of your question. I don't think we had any idea at the time how good of a business that was. So to your point, the ability to create these very long duration, very sticky relationships that allow for a tremendous amount of kind of embedded organic growth if you continue to execute and do a good job with those clients as we have and your ability to become an extension of their staff, your ability to become a key part of their alternatives program in terms of not only the investment risk return that you're delivering, but also the services and the support that you have around that, everything from advice on how to build their program, to operation, to due diligence services, to customized reporting, to training programs, to secondees. You name it, we've done it for a client and you become not just a fund that they happen to invest in every 3, 4 years, but you become their partner. And that enables you to grow the relationship. That enables you to expand the relationship into other areas. And it's really you become kind of sitting in a very privileged position where you're sitting on the same side of the table as your client helping them build a program over the long term. And we really think about it as program. It's not just a fund that we're selling or product we're selling, we're helping them implement a key part of their alternatives program. And a lot of times, we become the institutional knowledge. Many times, there's changes at the clients, and we're still there. So these are very, very long relationships that have been very successful. And one of the things we highlighted in our Investor Day last fall was just what you can expect when you start with a relationship with a client on a customized basis in terms of that growth of that, just that relationship over long periods of time. And so it's been a great part of the business and something, frankly, that I think has some competitive advantage to it, but also not so easy a moat around it. It's not so easy to build that into your processes and build that into your culture overnight.

It's a good segue to the next question on cross-sell because I think that's one of the implications of what you're describing. I think about half of your top clients work with you across more than one strategy and about 1/4, I think, of your annual fundraising comes from cross-selling. So what is it about the platform that enables you to cross-sell so effectively? And how much runway do you still see ahead for that?

Well, 50% work with us in more than one product, that means there's 50% that don't. So that's opportunity. But also in that number would be people that work with us obviously with 2 products, but they could work with us in 3 or 4 or 5. So I see it as being a key part of our capital formation strategy going forward. And when I look at the overall pie chart of capital formation, you have about half of your capital formation that is coming from the same client doing the same thing with you each year. You have about 1/4 that comes with an existing client doing something new with you and then you have about 1/4 that will come from new clients. That's a very good formula for embedded growth, visibility into growth as well as opportunity for further expansion, and that's what's driven our numbers. I think it really comes back, Michael, to the -- what I said before, which is once you're sitting in that privileged trusted position once you've proven your ability to deliver for clients, that puts you in a really good position to be able to do something else with them. And I think the reason we're so good at expanding the relationships is because we don't think about it as cross-selling. We think about it as listening to our clients. We think about that as engaging with our clients regularly. We think about that as trying to understand what our clients are trying to accomplish and then evolving the relationship over time to meet their needs. If you go back 10, 12 years, that 50% number would have been single digit. Now that's a function of a couple of things. One, I think it's a function of having broadened our manufacturing capabilities over that period of time, so you have more things that you can do with those clients. I think it's a function of being a beneficiary of the trend of clients wanting to do more deeper stuff with fewer partners. Oftentimes, it's thought that only the really big guys that everyone's heard of are a beneficiary of that trend. I would argue the solutions providers are as big, if not bigger beneficiary of that trend. And it's a function, obviously, of us focusing on that from a business perspective, which is just make sure that as we're dealing with our clients and understanding what they're trying to accomplish that we react to that. And I always say to them, if we're working with you in private equity and you're doing something in infrastructure, whether we work with you or not in infrastructure, use us as a resource, use us to understand what you're trying to do. And I think over time, that enables you to expand your relationship with your clients.

You mentioned some interesting numbers. I just want to make sure I got them down right. I'm always up for those little nuggets. So half of the fundraising, it's half of fundraising is from the existing clients doing the same thing, quarter from existing clients doing new things. So that's the cross-sell component. And then 1/4 is new clients coming in.

Yes. And that's over -- every year is not going to look like that. But if you looked at it over broad periods of time, that would be roughly a breakdown.

Okay. All right. Fascinating. All right. Let's shift and talk about fundraising. You're coming off a record fundraising year in '25 and have continued to highlight a strong pipeline ahead. You said second quarter fundraise should exceed what you did in the first quarter and second half should exceed the first half. So can you unpack what you're seeing in the pipeline today that gives you confidence in this fundraising momentum that you expect to continue to build as we move through the year.

Yes. So maybe I'll answer that in 2 parts. Start with the macro picture and then focus on kind of GCM specifically in the numbers that we've put out or at least the guidance that we've put out around capital formation. From a macro standpoint, the market is extremely active. I think that when you travel around the world, as I'm fortunate to do and meet with all different types of clients and all different types of geographies, you would be hard-pressed to walk into a meeting and come out with that meeting with a conclusion that someone is reducing their exposure to alternatives.

So you're not seeing that.

No.

Okay.

No. You might find someone that's saying, "Oh, I'm going a little bit slower here right now or I'm leaning in here or whatever it might be, and we can talk about some of those different trends. But in general, over the last 5, 6 months or the first half of this year, I've been in more countries and cities than I can count in hundreds of meetings, and I'm yet to find a meeting that's not where someone saying, you know what, I'm really trying to reduce my alternatives program.

And that's despite the challenges that we hear about TPI and liquidity challenges.

That's despite the challenges. So now someone might be saying, I'm a little bit above target right now, and so I might slow my allocation a little bit so that I can catch up and grow from there. But there's no one that's walking into an asset allocation meeting or a strategic asset allocation process or an asset liability study or whatever the different things or a total portfolio approach or whatever someone is doing and looking at their pie chart and their goal and saying that they want that alternatives number to decrease that I'm meeting with. And then you've got people that are on different parts of that journey. You have places, maybe a U.S. public pension plan that's been doing it for decades that might be mature and at allocation, but even some that at allocation is growing because they're expecting their balance sheet to grow by 7% or 8% a year. And then you've got places that are way earlier in their journey, whether it's a certain part of the world or whether it's the individual investor, whether it's an insurance company, whatever it might be. So I just think that is a megatrend that is the secular trend that all alternative investment firms are a beneficiary of. I think to your question about us specifically, one of the nice things about our business, and we talked about it in the context, in particular, with customized separate accounts is we just have great visibility into our business. We know when we're scheduled to sign certain contracts or present at certain Board meetings or close on a certain fund or whatever it might be, which gives us the confidence to talk about our second quarter being larger than our first quarter and our second half being larger than our first half. And so we feel really good about the capital formation environment. I think part of that is the environment. I think part of that is with each passing year, we have more ways to win, more capabilities, more products, more channels that we're touching and an expanding total addressable market. And so you can find individual challenges and headlines, which obviously are more -- they must sell more articles with those headlines than they do with good news that present challenges, and there are challenges out there. I don't want to have head in the sand about that. But in general, I feel pretty good about it being a pretty productive environment.

Great. Why don't we shift and talk about absolute return strategies, or ARS, as you guys call it. You've delivered some very strong performance over the last few years and has recently started to show positive net flows after some time of flow challenges. What is your outlook there for the ARS business here in '26? And over the long term, what is the realistic growth rate would you say for that part of the platform?

So let's just start with the environment first. It all starts with generating outcomes for clients. And over the last several years, as you pointed out, the returns have been excellent on an absolute basis. They've been excellent on a relative basis. They've been excellent on a risk-adjusted return basis for the quants out there in the world, if you get into the technicals, they've been great in terms of alpha production return relative to kind of risk taken or market exposure you have. And we've seen that continue so far this year. Having a environment where in the first quarter, markets were pretty weak and hedge funds protected capital and even made a little bit of money. Markets come back in April, and we capture a lot of that upside growth. That's and you're doing that without a lot of beta, that's very attractive. I think that the factors that are driving that attractive environment are manyfold. I think an environment where rates are going to be higher for longer probably is a good thing for active hedge fund strategies. I think that geopolitical tension is not a good thing for the world, but it's probably a good thing for those strategies. I think that any time you're in a technological revolution, which I would argue we are with AI, that's a good thing for active strategies. And so you have more dispersion and more volatility. And so it's a very good environment for return production. So it has to start there. And what that means typically then is it becomes a better environment from a business standpoint. So as you pointed out, we had modest net inflows in 2025. We had net inflows in the first quarter of '26. We feel like it's hard to think about what that means over the long term, but it's certainly a better picture now than it would have been 3, 4 years ago when returns were a little bit muted in a lower interest rate environment and everyone was putting tons of marginal dollars out into their private strategies. And so what we've said is the pipeline is very good. The conversations and activity level is very good. What we model over a long-term basis is that business growing at effectively high single digits. We say that is from assuming neutral flows and then just compounding capital in the market as the fees there grow with NAV. Some people will say, well, could you have a little flow or a little more return or a little less return. There's a bunch of different ways to do the math. And for those people that follow traditional asset managers are used to doing that math. I would argue that the ARS business has many of the same attributes as the traditional asset management, but on every metric kind of better in the sense of the place they play in the portfolio, the return generation, the flows dynamic over different periods of time. And so we feel like we're in a good environment there right now and feel great about our ability to deliver value for clients, which is the most important part of that picture.

In terms of the flow strength, you made a very compelling and interesting argument around the environment for alpha generating outcomes supporting performance. supporting flows. Do you have a sense of where that incremental flow is sort of coming from?

It's good, it's good.

Because I think over the last decade and change or 1.5 decades, the private markets have benefited at the expense of, say, the absolute return industry. How do you see that pendulum swinging here?

Yes, I think it's a really hard question to answer. I mean, look, the biggest place everyone flows comes from right now is when the market goes up every day, there's more capital to invest. So that's the strongest source of capital you'll ever find. It's hard to know exactly where it comes from. We don't always have perfect insights into that part of a client's decision-making. They may not even have perfect insight. But I think that you can see a few different things. One, sometimes it can be coming out of a fixed income book where you feel like because of the minimal beta or market exposure in the portfolio, you're not taking a lot of incremental risk, but can kind of grind a higher return. Sometimes you might see it coming out of the traditional equity portfolio where you want to still take some equity market risk, but not necessarily with the same vol. Sometimes it might be coming with slightly less allocation to some of the private market strategies. So I think it can come from all different places. But in general, I think the idea of, hey, I can generate some really good absolute return. I can do that while sleeping well at night because I've got a little bit of a hedged portfolio to that. And oh, by the way, I can do it where I still have quarterly liquidity and I don't have to lock up my money for 12 years. That's a pretty nice package to be offering clients as a tool in their portfolio.

Why don't we shift and talk about private side of the business. Your unrealized carried interest balance has grown meaningfully since going public, now stands at over $1 billion. What could a more constructive realization environment mean for earnings power of the business going forward?

Yes. The first thing I would say is I would have lost a few bets already on the realization environment.

I don't think you're the only one.

Yes, just in the sense that the only one -- maybe not the only one that would lost a few bets, maybe the only one that would admit it. But I think that if you would have said, hey, you got a reasonably healthy credit markets, equity markets reflate and companies going public and raising capital at trillions of dollars and all these things, people probably would have said, oh, yes, that's probably an environment turns on a little bit. We have seen it come back a little bit in the realization environment. We're definitely off the trough, but it's not back to where it was. Now I would argue it shouldn't necessarily go back to kind of 2021 periods of time ever. I mean it will, of course, in some other buoyant market, but you're not supposed to raise private capital funds every 2 or 3 years and hold companies for 2 or 3 years. In a way, I would argue that, that completely undermines the entire philosophy of buying assets and making them better because it takes you 6 months when you own an asset or a company to find out where the bathroom is. You're not creating tons of value and selling it 2 years later. So I think the idea that you fundraise every 4 or 5 years and you hold companies 5, 6, 7 years, that actually makes more sense to me. That being said, we are in an elongated period of time. And if you ask me when it turns back on, I would tell you, I have absolutely no idea. But I do see signs of improvement there. But what I would further tell you is that we are in a unique, and I'll use the word again, privileged position with our $1.2 billion gross carry asset in the sense that it is about as diversified as it gets. You've got every type of private market strategy inside of that. You've got a bunch of different noncollateralized waterfalls because of your separate accounts, right, a bunch of separate accounts, a bunch of commingled funds. You've got vintage diversification. You've got sponsor diversification. You've got all sorts of asset diversification. So I'm not going to go out there and make the argument that our carry stream is so diversified and so the portfolio construction is so diversified that you should look at it like a multiple of a management fee stream that I think would be a little bit too far afield. But I would argue that it's virtually impossible for me to picture an environment where the realization environment improves generally, and we aren't a top participant in that in light of the diversification of that asset for us. And when you think about that number, roughly half of that being the firm share, that represents, I don't know what it is, roughly 25% or so of our market cap today, which probably puts us on the high end in the industry. And so we feel like it's an incredibly valuable asset that we have that will be providing a tremendous amount of cash flow for years to come.

Why don't we talk about private credit, which has been in the headlines over the last 9 months, although maybe not in the most positive light. You and your peers continue to see strong demand for institutional clients. What gives institutional clients continued confidence, would you say, in the asset class? And talk about the role that GCMG plays in the broader evolution and the growth of private credit.

So let me -- I'll kind of answer the question in the order you asked it, which is first on the market and then a little bit about us. I think that at this point, what we have seen is less a credit fundamental problem. I'm not saying we won't see one. I'm not saying that anyone invests without losses. I'm not saying you won't see cycles with normal frequency and default ratios and all the things we've all seen for years in public credit and it will happen in private credit, and it will happen in equity strategies. That's investing. What we've seen so far is asset liability mismatch that is then being discussed as a credit or an AI problem. And again, I'm not saying there won't be credits that lose money, companies that get disrupted by AI. I'm sure all that will happen to some companies. But what's happened really right now is you've had people that are investing in private assets that have then been wrapped in structures that are meant to provide liquidity under certain conditions. And when there is negative headlines, those conditions are not conducive to providing that liquidity. And I think the healthiest thing that could happen to the individual investor market and the wealth channel, in particular, is learning that lesson as early and as often as we can. I go to a lot of meetings with our wealth distribution team, and I'll sit with the first prospect and they'll say, "Oh, well, what's the liquidity of your infrastructure fund? And I say it's not liquid. And they say, what are you talking about? It's an interval fund. I said, no, it's not liquid. I'm thinking the sales guys might not take me out on the road anymore. And they say, what you want to know the terms of the fund. I'll tell you the terms of the fund. But I think it's incredibly important that people understand that you can't take an illiquid asset and magically turn it into a liquid asset because a document says that you might provide liquidity under certain conditions. And I think the earlier -- and again, the more often that investors and especially new investors in this asset class understand that, the healthier the growth of that market will be. And I don't see, by the way, any change to the long-term growth trends for the individual investor or the wealth market as a result of what's happening now. I view it as a 2 steps forward, 1 step back, 2 steps forward, 1 step back. And again, I view it as a very healthy education time. That being said, there will absolutely be, as I said before, cycles in investing, and there might be cycles in private credit investing and cycles in equity investing, and we'll see how all that plays out. And there will absolutely be companies that are beneficiaries of AI. There'll be absolutely companies that are getting disrupted by AI. We think in our ecosystem, in particular, we happen to be more net long companies that benefit from it than we are long companies that are meant to be disrupted by it, but we'll see how that plays out. For GCM Grosvenor in particular, what we have been preaching for years to clients and what we still believe today, and I think what is evidenced, even supported evidence has been the last few months for what we have been preaching, which is you need a diversified approach. Nobody in private equity decided after having 2 or 3 investments with large buyout firms that they were done with their allocation. They had large, middle, small and U.S., Europe and Asia and growth strategies and turnaround strategies and distress strategies, and I can name 10 other strategies. So people that have built private credit portfolios, what we've said is -- you've started to build that program if you have a few large direct lending sponsor businesses, but you're just at the very beginning. Where is your asset-backed exposure and your opportunistic exposure and your structured finance exposure? And are you doing large, medium and small? And are you doing global? Are you doing co-investments? Are you doing secondaries in private credit? And you should be thinking, I believe, about building out your private credit portfolio with a lot of the same principles that you've used to build out your private equity or your infrastructure portfolios. And I think some of the last few months are hopefully supportive of folks listening more to that advice.

Let's talk about secondaries. We've seen a surge in recent years in terms of activity in secondaries as investors seek liquidity amidst a more challenging exit environment, which you alluded to. Some of the peers have challenged some of the industry norms such as day 1 markups despite being accepted accounting practices. Others have argued that the day 1 markup makes sense as secondaries are buying funds at a liquidity discount. So as a solution provider yourself, what is your perspective on this debate? And how likely is it that we could see changes in the accounting timelines?

Yes. So the first thing I would say is that the secondary markets across all the private market asset classes are going to continue to grow. You can't find over hundreds of years of capital markets history any markets where a secondary market didn't ultimately dwarf the size of the primary market in terms of volumes. Go back to the late 1800s and IPOs, it used to be that you would have an IPO and then it wouldn't really trade and then all of a sudden, it traded a ton or high-yield markets of the '80s, leveraged loan or term loan markets. I'm not saying that will happen in all private markets because there's some operational and transparency issues why maybe you can't necessarily see that complete evolution, but we're even hearing people talk about now creating trading desks for private credit. And I would argue, once you do that, what's the difference between that and a term loan. And so I don't view that as a bad thing. I just view that as maturation and health of markets that you have secondary markets and liquidity providers evolve once you have a primary market developing at trillions of dollars, then people need ways to trade their financial assets. And so I just think you naturally are going to have a continued significant amount of growth in secondary market. As for the debate itself, I actually don't think it matters. What I think matters is do your investors understand it. And I think second, the structure matters. So if you're in a closed-end fund, for example, it doesn't matter if you take the markup on all on day 1 because you're using the practical expedient valuation approach and it's appropriate or if you amortize it over time because no one is getting any different fees based on that. No one's getting any carry until it's realized and it's all just on paper and it doesn't matter. And so does the investor understand the return profile and no one's incentives change. I think when it comes to an evergreen vehicle or a registered vehicle, again, I don't think there's necessarily a right or wrong answer, but there needs to be education and then you need to understand as an investor what it is you're buying. So if you're going into a secondary fund that is growing in size, the fact that they bought a bunch of discounts and generate a bunch of IRR 5 years ago is irrelevant to you because you're coming in today at today's NAV. And again, not bad,they're good, just understanding. And so to me, what it really comes down to is the concept is only particularly relevant for evergreen funds or for registered funds, and I'm not going to opine on what the right or wrong answer is or what the accountants will say. What I will opine on and what I will always say is it is really, really, really, really important that investors have complete transparency and understanding of what they're investing in and that there's complete education out there.

Great. Maybe to wrap up in the last 2 minutes that we have. At your Investor Day, you reiterated a goal to double 2023 FRE by '28 and introduced an ANI per share goal of $1.20 by 2028. As we sit here today, how are you tracking against these objectives? And what are some of the key building blocks toward achieving these goals?

Yes. So tracking great against it. I have every bit of confidence in those objectives as we had 9 months ago, if not more. And I think that one of the things that gives us confidence is I can construct the building blocks to get there in 5 different ways. And it could be a function of different FRR growth rates depending on different segments. It could be a function of continued margin -- operating margin. It could be a function of the realization environment coming back over that period of time. We've got a lot of different ways to win, and those are just the things we know about today. And so I think we are fortunate to be in a great industry with very constructive dynamics. We're fortunate, I think, to have a platform that has a bunch of different ways to win and capture different trends depending on where the market goes. And every day, I think we increase our earnings power and our growth power through the investments we're making in the business. And so feel very good about that. I feel very good about the sector overall and feel really good about GCM Grosvenor's positioning in it.

Great. Well, let's leave it there, Jon. Thanks so much.

Thank you for having me.