Conference Transcript - GCMG 2026-06-02

Operator

We will start the next session. Thank you. Thank you for joining us. We're lucky enough to have GCM Groszner, in case you don't know, Adam Klobber. I cover the company with Jeff Schmidt. There are disclosures on the website. Please look at that if you want to see disclosures. Just two or three words on GCM, and I'll introduce Michael Sachs, CEO. You know, we think they are one of the most differentiated franchises within the investment platform business, and this franchise has been built up not just in years, in decades, and as we look for moats, this is a very, very tough franchise to replicate. So that's part, obviously, what we like. The other part is they are compounding and continuing to compound. They've been public for a number of years, and they've really done a great job of meeting the growth expectations, and we think the company will continue to compound in the future. So with that, Michael, if you want to come up, tell us more about GCM.

Michael Sachs, Chairman

Thank you. You can all hear this. Sorry, somebody's microphone. i'm moving around here we prepared a little presentation and um and we'll take try to save some time at the end for questions so uh for those of you who don't know or aren't really familiar with uh gcm grosvenor we are a 91 billion dollar solutions alternative asset management solutions provider headquartered here in chicago we've been around for 55 years i've been at the firm for the last 36 years and led the firm for the last 30 and change years. I think one of the critical parts of understanding our business is understanding how we fit into the alternative asset management ecosystem. And we like to say that we are a solutions provider for capital and with capital. And we provide solutions for our clients, where we deploy their capital in highly diversified manner across all of the alternative asset management strategies. And we seek to give them best in class return, and also to give them a lot of operational support and a lot of operational lift. 70% of our client relationships are large custom separate account relationships funds of one where we partner with the client in building that program we also serve as a critical capital provider to participants in the industry to sponsors and to various investment managers in the industry where we are taking the capital we manage for clients and providing that providing solutions to clients taking the capital that we manage in you know accordance with the solutions we're providing clients and then providing that capital to sponsors to participants in the alternative asset management industry in creative ways and being a solutions provider to them as well and so we have this very interesting kind of dual identity in the middle of the uh in the middle of the alternative investment landscape uh that i think is unique and and and important for us we are benefiting from industry tailwinds we the industry is growing it's really been a multi-decade sort of super cycle if you will and you're seeing consistent growth and allocation to alternatives in the institutional space you it moves around a bit in terms of which verticals are growing right you know lately its infrastructure has been growing quite quickly private credit's been growing maybe we'll have some questions on that at the end and then maybe private equity has been a little bit slower growth in terms of increasing allocations but it's certainly you know maintaining its allocation overwhelming percentage of investors institutional investors are saying we are maintaining or increasing our allocation to alternatives uh looking forward uh into the future we've been consistently saying that this demand is there and it's strong even in you know 22 23 when fundraising for the industry sort of dipped as a result of the jump up in rates in 22 and the inflationary pressures and the war in ukraine we were saying nobody's leaving nobody's exiting it's just a stretch sales cycle and we saw our fundraising go from a seven eight billion dollar level down to five three back up to seven four or something and then up to ten six uh last year's a sort of a record year so that demand has been and remained consistent and the tailwinds that have grown this alt space for a long time uh still exist and they're really sort of given a some extra, you know, wind speed based on the individual investor opportunity where there's, you know, a 10% allocation in a $150 trillion market as compared to a 30 plus percent, you know, 30% allocation in the institutional market. So tremendous amount of growth and opportunity from there. We are based here in Chicago, as I said, nine offices, over 500 people. We have five core strategies. Hedge funds are absolute return. We have private equity, infrastructure, credit, and real estate. We're one of the few firms that offers solutions and product in all of those, in that full breadth of alternative strategies. Within each of these strategies, we are sort of what we call open architecture which means that we can deploy capital on a primary basis as an allocator we also invest in all of those areas on a direct basis co-invest basis direct oriented we call it secondary spaces and so uh we have a great ability to find a solution and and meet a request or meet a need of any client no matter how you know where they are in the world and what they're structured and what they're how they're structured and what they're interested in in solving for. 70% customized separate accounts I mentioned. Specialized funds or commingled funds are 30% of the business. Largely institutional clients with a significant tenure in a so large blue chip institutional clients significant tenure very sticky long-term relationships uh and we talk about you know the percentage of our largest clients that have added capital within the last seven years that's 92 percent our top relationships average 15 years inside those that we've got relationships that go way back you know uh to the to the 90s and are still with us and still growing uh we've just brought you know new clients and on top of them but it's a very sticky very loyal client base and one of the things that's worth mentioning is that you know over half of our clients invest with us in more than one strategy and over a third of our clients invest with us in both liquid strategies and private market strategies and those numbers are up and those numbers continue to grow and you know give us deepen the relationships between our firm and our client base. AUM and our earnings power has been growing and growing at a pretty significant rate. We have seen higher rates of growth in the private market space, which is consistent with where just the flows in the alt space have have been the absolute return strategies have actually performed quite well recently and we've seen some flows there we've used kind of a flat flow budgeting methodology for a while we're not changing that but we did have net inflows in that space last year we had net inflows in the first quarter the pipeline in ars is higher than it's been in many many years and the returns have been quite good at ars so you know we're still going with flat flows but that is a good business been around for a long time and we think you know it does have the ability to hold on to compounding and it could experience a net inflow period at some point it's going to take a lot for us to sort of announce that we're changing our budgeting you know we're going to want to see that on a sustained basis but certainly everything's kind of going in the in the right direction um in the institutional markets as i said the demand is high the uh pipeline is full the strategy the infrastructure strategy is still maturing so if you want to think of you know strategies that like find their way onto the efficient frontier and then they see their model portfolio allocation increase for a while and they see the investors kind of move towards that over time, you could maybe go and say, let's talk about real estate, which maybe found its way onto the efficient frontier in the 1980s and has been an institutional allocation since the 80s. Things like hedge funds and private equity in the 2000s, private credit and infrastructure kind of later. And infrastructure is still early days. It's growing significantly. There's a lot of features of making an attractive institutional strategy. And so I think we can continue to see that go. But the growth of the AUM and the ability to fundraise and grow assets remains quite – remains quite high. We had an investor day in the fall. It was a long presentation. I think ten different people – nine or ten different people from Grosvenor presented. And we kind of laid out our vision for each of the verticals. And we think that we have significant growth opportunity in each of those verticals over the next five years. And we think we have that growth opportunity in terms of ability to deploy capital, significant origination today, and the ability to deploy capital today, to originate today in a way that enables us to deploy significantly more capital and to do that with growing margins. And so we're we feel very good about that. Inside the private market strategies, we've seen a shift towards direct oriented strategies. And that's a good shift for a number of reasons. The direct oriented strategies, things like secondaries, co-invest, direct invest, you know, for control. Those strategies have higher average revenues for us. They probably have, you know, higher margin for us. And so that's a good evolution. That's a good shift. And we like that mixed shift, if you will, within the private markets. what i think is most interesting about today just having been doing this for a long time is our approach with that flexibility uh that i described earlier has we've been able to do things for a long time and solve problems and provide opportunity for a long time but you you can't you can't provide that opportunity unless the client's ready to embrace the opportunity so co-investing has been something that you you know it's always been there the certain types of investing stakes investing seed investing that those opportunities have been there forever the client base wasn't necessarily ready to wrap its arms around that until maybe the last decade i think 15 years ago 10 years ago even you look you'd see a lot of primary only private equity investors i think we may have one left in the whole firm now everybody has primary but they have co and they have secondary and the percentage of co and secondary relative to primary is growing and as i said earlier we think that's value add for the client and it's delivering better net returns to the client but it's also a better outcome for us as well because the the fees on and those activities are higher, the margins are higher. And so the evolution of the clients enables, it provides us with opportunity that we wouldn't have had in the past. And we've put two vehicles in different stages of evolution in the wealth channel, registered investment vehicles in the wealth channel. We're able to attract institutional capital to seed those vehicles, be able to provide a base of capital in the vehicle when it kind of hits the market day one and a specified portfolio in the vehicle when it hits the market day one and you wouldn't have dreamed of a large public pension plan providing 300 million dollars to be an anchor investor in a public infrastructure registered vehicle you know honestly probably five years ago you wouldn't have thought you were going to see that and so these are these the evolution of the client and sophistication the client is just more opportunity for us and it's something that frankly i you know i i actually it excites me to be able to think you can do more with your clients today than you could have you know 20 years ago 15 years ago even 10 years ago so i think that's a terrific thing um we are absolute return strategies is was the first strategy grosvenor ever engaged in back in 1971 this is a hedge fund strategies and and basically these are kind of like the rodney dangerfield of the alternative asset management industry most many people might be too young to even know who rodney dangerfield is but his tagline was i get no respect and hedge funds don't get a lot of respect uh in the pantheon of alternatives as compared to private equity private credit infrastructure real estate it's a great business it's a great business for us it's been a great return stream for our clients. We have had, you see the one year and three year returns on here. Those are kind of blowing away the target returns that we've talked to the clients about when they invest at like traditional asset management and a hedge fund space, you're paid, you get paid on committed capital, committed equals invested, you get paid sort of immediately and you get the compounding so when you know your revenues grow as your AUM grows and as I mentioned we've seen a much better flow environment in a much better pipeline than we've seen in a long time so we still budget you know net flows are flat we'll keep the compounding when you're you know and we'll we'll see what happens with those flows but it's been it's a very good business it's high cash flow margin. It's consistent. And we think it's just on a DCF, any kind of valuation basis, it's quite valuable. And as I said, it's been around for 55 years. And we've kind of, you know, I've kind of led the firm since the early 90s. And it's been around the entire time. And it makes money for us every year. It's a valuable part of our business. And in different environments it has different degrees of attractiveness to clients and this may be an environment where it's pretty attractive talked about the customized separate accounts a bit this is what's this is a very good business in the sense that you're really entering into a strategic relationship with these clients they are relying on you to put to put a program in place it's programmatic investing there's a lot of visibility into the future for this you you have an investment period and then you have a re-up period and in the way that institutions invest is programmatically so they don't they don't kind of go in the market and out of the market in the market they're running a program and they're growing and so when you make a sale here we have a 90 plus percent re-up rate to make the second sale at the end of the first investment period and a significant similarly significant re-up rate to make the third sale at the end of the second you know investment period and you have and so not only is it super sticky and you're in part you know institutional memory for these firms uh but you and you're building so you're providing something that's custom tailored for them uh uh but you it's a growing revenue stream over a long period of time and you have fantastic visibility into growth you know when your investment period ends you start to talk to your client who you're meeting with kind of quarterly uh as you're you know out in front of the end of that investment period you're talking about the re-up that's coming in a year coming in nine months and you start working towards that and you have great visibility our growth rate from re-ups and from what we call cross-sells which is the private equity client that wants to work with us in infrastructure and private credit or you know hedge fund client that wants to come over to the private side those the combination of our re-ups and our cross-sells is a significant amount of the fundraising that we need like significant percentage of the fundraising that we need to make our publicly stated objectives of having doubled fre from 23 to 28 and having a dollar 20 of after tax net income uh after tax adjusted net income in uh by 2028 and we reiterated our confidence and our comfort with those goals in our last earnings call uh and what i'm not sure is well understood is that our go get to make those numbers is is probably is not that significant in terms of the amount of new clients, pure new, that we have to go out and raise and find to hit that kind of a level of growth. So we think that customized separate account business, in addition to being a very good structure for the client and very sticky for us in terms of client relationship, gives you a level of visibility that you don't have from commingled funds where your re-up rates are typically much lower than they are in in uh in custom separate accounts and you know our daily you know daily liquidity registered product it's just a lot more visibility and a lot more ability to plan and so when we talk about our pipeline and we talk about our our goals we are doing all that on a granular bottom-up basis with a fairly, you know, significant, you know, a pretty high quality ability to see three years out at least. I mentioned earlier the individual investor opportunity is pretty massive. The individual investor, and Blair people in the room kind of know this, and I would suspect it's correct for your own kind of client accounts, the individual investor weight in alternatives is significantly below the weight of the top tier institutions globally and beyond that the level of diversification for the individual investor is dramatically less so it's not just that investors underweight but that investor is significantly under diversified with a relatively small maybe two handfuls of names of the mega firms that have product in the channel and you know you'll see it's not uncommon and have one pe firm or maybe two that will satisfy a pe allocation inside the individual investor channel where you'll never find that anywhere inside the institutional channel we have the ability to win in this channel a lot of different ways we have the ability to put product on shelf that anybody can buy and anybody can sell we have talked about the ability to provide private label solutions to ria firms to wire houses to others where they can custom design with us along our custom separate account kind of core skill set something that they a think they want for their clients and b gives them the ability and the luxury to tell their clients truthfully we went out we found a provider we sat with them we worked this out we think this is better for you And you can't buy this across the street. You can't buy this from another firm. And so I think we have done 13 of those deals in the last two years where we create a private label program for a firm, for an individual RIA team, etc. So we think we can grow there. We think we can go with grow with our product on shelf. And then finally, there are, I think, allocation opportunities where you can manage a portion of a target date fund or something like that. And you run the alts portion. So we got a lot of ways to a lot of ways to win in the individual platform. When we talk about our numbers for 28, we are not assuming any kind of heroic success in this platform. If you talk to a consultant, they would tell you, you should continue to grow your institutional business, you know, 10% top line and pick up margin or something like that. And you can get your 15% double in five years out of your core institutional business. And when you're done doing that, the individual channel should be 30% of your assets in, you know, five years time. If we were assuming anything like that, you would all probably rightly throw me out of the room. And I don't want to model that and own that, but it's a very significant opportunity. We've grown. We've got a track record of executing and growing on every level. The last thing I just want to mention is that we have significant earnings power from our incentive fee line today. We have a carry asset that has grown to a half billion dollars for the firm share from $133 million in 2020. 2020, we collected out of that $133 million, we collected the lion's share of that, and yet we've seen that net asset grow significantly, and we have on top of that $510 million of carried NAV, meaning all our portfolios liquidated at the end of the last quarter, we get a half billion dollar check. it's a two and a half bucks a share or something uh we on on top of that we got a billion dollars of dry powder carry behind that that just like you saw from that 133 in the right box collecting a lot of money and yet that 133 grew by 487 we would expect some similar type of picture five years out or six years out relative to the 510 that you see today and so because there's a lot of already inked power behind that as we deploy the capital and as it grows. We just we talk about that 510 as a question of when not if and as long as that 510 is growing while it is still in carry at NAV and not in our pocket we're comfortable with that and and we look forward obviously to realizing that after time. Five minutes left. I was asked, can I keep five minutes, take some questions. If there are any questions that anybody has, I'm happy to address. Michael,

Operator

as you mentioned, the infrastructure business is growing quite nicely. Are data centers and related infrastructure playing a big role yet? Is that more in the future? And what

Michael Sachs, Chairman

for us there i would say we have investments we were we were an early investor advantage you know data centers it was a it's been a very good investment for us we've actually taken some of our capital off the table there and then still riding with the portion of that capital and we have some other data center uh investments some other power investments uh and so but i think it's pro for for us it's probably um there's there's for sure representation and there's profit in that space that we've enjoyed and we hope to enjoy in the future but it's probably a little bit less than some of than what we've maybe seen for the industry as a whole um uh but but certainly our definition of infrastructure includes digital infrastructure uh and i'm sorry if i'm not in the mic our definition of infrastructure includes digital infrastructure and the opportunity and we do deploy capital in that space uh and we you know do think that is a little bit of a gating issue that has to work for all the power and promise of ai to work and so we're we're investing where we see good risk reward in that space

Operator

and are you seeing more more and more interesting it's already a big big pocket yeah i've seen more

Michael Sachs, Chairman

interest from clients i would yeah it's interesting it's interesting the client you know it's it's it's by and large worked and it's hot and so you that's usually a recipe for seeing interest for clients what i find interesting about the asset management business is sometimes when things work and they're kind of hot there is a significant chunk of clients that actually sort of have the opposite type of reaction and they start to sort of worry that it's an overheated it isn't too hot and they so you know you don't ever get like complete very very very rarely you get like real you know unanimity or something approaching it among the clients it's just such a large you know six seven hundred invest institutions and so i i think and maybe i shouldn't be saying this but you know like our ars business when the market goes up there are people that are worried that the market's up and it's more volatile and they want more hedges when the market goes down they lost money and they want more hedges and it's kind of like you know uh that's just i think how how it works and so uh but but clearly the idea of digital infrastructure being accepted as part of infrastructure, that I think where the industry has passed is just that's over. Initially, that was like, whoa, that's not infrastructure. I'm talking about an airport, a road, a bridge. That's over. It's digital infrastructure counts.

Operator

Okay. And then you mentioned that, again, that the hedge fund business has been a great, steady free cash generator for a while. Again, it's about not getting respect

Michael Sachs, Chairman

in, you know, people picking up doom.

Operator

But I think you mentioned that the pipeline is looking good.

Michael Sachs, Chairman

and better. What do you think is driving that? I think it's performance to a real degree. I think, you know, the volatility in the markets, fear to some extent of what's happening in the markets, dispersion is always part of, you know, something that drives, as I mentioned a minute ago, you know, hedge fund flows, but the performance has been really good. These are vehicles that are kind of sold with a sort of SOFR plus four to 500 target. And you saw earlier, we've had, you know, 12 to 14, you know, 12% returns the last three years, 14% last year, you're kind of crushing that target. And so that always helps. Right, right. Okay. Well, I think we're almost

Operator

on time. So I'd like to thank Michael and we'll have a breakout afterwards for those of you who are enjoying. Thank you.