Earnings Call Transcript - GCMG Q3 2022

Operator, Operator

Good day, and welcome to the GCM Grosvenor 2022 Third Quarter Results Call. Later, we will conduct a question-and-answer session. As a reminder, this call will be recorded. I would now like to hand the call over to Stacie Selinger, Head of Investor Relations. You may begin.

Stacie Selinger, Head of Investor Relations

Thank you. Good morning, and welcome to GCM Grosvenor's Third Quarter 2022 Earnings Call. Today, I'm joined by GCM Grosvenor's Chairman and Chief Executive Officer, Michael Sacks; President, Jon Levin; and Chief Financial Officer, Pam Bentley. Before we discuss this quarter's results, a reminder that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements. This includes statements regarding our current expectations for the business, our financial performance and projections. These statements are neither promises nor guarantees. They involve known and unknown risks, uncertainties and other important factors that may cause our actual results to differ materially from those indicated by the forward-looking statements on this call. Please refer to the factors in the Risk Factors section of our 10-K, our other filings with the Securities and Exchange Commission and our earnings release, all of which are on the Public Shareholders section of our website. We'll also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of non-GAAP metrics to the nearest GAAP metric can be found in our earnings presentation and earnings supplement, both of which are available on the Public Shareholders section of our website. Our goal is to continually improve how we communicate with and engage with our shareholders. And in that spirit, we look forward to your feedback. Thank you again for joining us. And with that, I'll turn the call over to Michael.

Michael Sacks, CEO

Thank you, Stacie. Grosvenor had a good third quarter in a tough environment. During the quarter, we raised $2.9 billion, marking one of our highest ever quarterly fundraising totals and the second-best fundraising quarter we've experienced as a public company. Importantly, after the strong fundraising quarter, our pipeline remains full. Our private markets verticals, which now comprise 61% of our fee-paying AUM, continue to grow. Private markets fee-paying AUM is up 14% compared to the third quarter of 2021. Private markets management fees were up 16% year-to-date compared to 2021 as we continue to enjoy the favorable shift toward the higher fee, higher margin secondaries, co-investment and direct investment strategies. It is worth noting that separate account fee rates in our CNYFPAUM are higher than our current separate account fee rates. Importantly, we performed well in Q3, both in our absolute return strategies and private markets verticals, protecting client capital in a volatile time period. As of the end of Q3, we had approximately $10 billion of dry powder across our verticals and look forward to putting that to work in an increasingly compelling investment landscape. From a financial standpoint, we met or exceeded expectations in Q3. Our strong private markets momentum successfully offset the drag from the challenging absolute return strategies environment, resulting in fee-related revenue growth of 7% year-to-date. Fee-related earnings margins of 35% drove fee-related earnings growth of 14% year-to-date. While the absence of absolute return strategies performance fees will impact Q4 adjusted EBITDA and adjusted net income. Third-quarter incentive fees were $45 million, driven by carried interest and contributed to adjusted EBITDA growth of 15% and adjusted net income growth of 17% year-to-date. Notably, the firm's share of carry revenues was 35% in the third quarter, a higher percentage than our historic averages, reflecting the higher percentage of carry the firm has retained since 2014. We entered into the third quarter with confidence that our second half fundraising would exceed first half fundraising, and that our private markets fee-related revenues, excluding catch-up management fees, would continue to grow at double-digit rates. We may remain on track in that regard. That said, despite our strong third quarter fundraising performance and our confidence with regard to continued investor demand for alternatives, the current market is challenging to a degree that is not fully reflected in our numbers year-to-date. Investors are contending with continued high levels of uncertainty and volatility and significant portfolio losses from traditional long-only investment strategies. 70/30 portfolios were down north of 20% as of the end of the quarter. The resulting denominator effect in combination with increasing liquidity concerns related to reduced realizations from private markets portfolios are real factors facing investors. While we remain confident that our broadly diversified platform enables us to continue to grow in our earnings and revenues at good compound rates over time, we anticipate a continuation of this challenging fundraising environment into 2023. Until there is some consensus that short-term interest rates have peaked, the worst is behind us with regard to stock and bond markets and transaction activity picks up, investors will move with less urgency. To be clear, we are out meeting with investors regularly, and we see no change to the intermediate and long-term secular tailwinds supporting institutional allocations to alternatives. No change. For the fourth quarter of 2022, our absolute return strategies management fees should be flat to slightly lower than Q3 absolute return strategies management fees. Q4 private markets management fees absent catch-up fees should be up 10% to 12% versus the fourth quarter of 2021, continuing their growth trajectory. In light of the fundraising environment, we do not expect to achieve the same level of catch-up management fees in Q4 2022 that we did in Q4 2021. Our fee-related earnings margin for the fourth quarter should be roughly consistent with the third quarter of 2022, resulting in modest fee-related earnings margin expansion for the full year. As we have said before, the only one of our specialized funds, which will time out in December is our secondaries fund, which despite falling short of target is already 30% larger than our last secondaries fund. We expect a pickup in specialized fundraising next year for our existing funds in the market today and for new fund launches. While this year has clearly been more challenging for markets, asset managers and GCM than originally anticipated, we feel fortunate to expect mid to high-teens private markets management fee growth and mid-teens overall fee-related earnings growth in 2023. Our Board of Directors increased our dividend by 10% to $0.11 a share, and our dividend yield is now in excess of 5%. Our dividend payout ratio remains very comfortable. We continue to believe our low multiple relative to peers represents value, and we bought back 1.7 million shares in the third quarter that left us with around $26 million in our share buyback program. Our Board increased that program by another $25 million, and we look forward to putting that money to work as we go forward. With that, I'll turn it over to Jon.

Jonathan Levin, President

Thank you, Michael. Our ability to raise nearly $3 billion of capital this quarter is a direct product of our client-centric philosophy and the strength of the firm's client value proposition. In the past, we've discussed that the majority of our capital raising has consistently come from our existing clients. This is a fact we are proud of, and it is the best endorsement of our value proposition. In a market environment such as this one, it's also a strategic advantage as investors have a higher bar for where they place their capital and certainly on entering new relationships. 85% of our capital raising has come from our existing clients on a year-to-date basis. The majority of capital we raised this year also has been in customized separate account form. As many of you know, the history of GCM Grosvenor is largely rooted in customized separate accounts and designing flexible investment programs that meet our clients' unique needs. As of quarter end, 74% of our AUM was in customized separate accounts, and that figure has been roughly similar for a number of years. So, what makes our customized separate account value propositions so strong? When we talk about a separate account, typically the program is a minimum of $100 million, but in many cases, a multi-hundred million dollars or $1 billion plus in size. These programs fall on the spectrum. In some cases, our program represents a significant portion of a client's allocation to an alternative strategy. In other cases, our program provides diversification through a niche or completion strategy. At all places on the spectrum, however, we are mission-critical to our client portfolios. As a result, the barriers to entry once we have secured a client program and the incumbency advantages are very high. Our customized separate account relationships have long tenures and high re-up rates, which typically occur every few years. These relationships are highly programmatic and, therefore, more insulated to market dislocations and fundraising timing delays. We also have a long history of successfully increasing re-up commitments for subsequent programs. Over the past five years, re-ups have exceeded their predecessor programs by an average of 40% in size. In addition to managing an investment program that is uniquely tailored to our clients' needs, we also serve as an extension of their staff by providing high levels of client service and advisory support. As an example, we frequently provide leverage to our clients for their investment programs beyond that, which we manage through discretionary investment accounts. Examples of these types of leverage points include training, access to our team's due diligence and implementation, and other operational support. These services enhance our connectivity with our clients and deliver significant economic benefit to our clients. There's also a close relationship between the success of customized separate accounts and the growth in higher fee strategies such as co-investment, secondaries, and direct investments, which I spoke about in detail last quarter. The beauty of the customized separate account model combined with our one-firm approach to servicing clients is that the strength of the client relationship creates natural strategic dialogue around opportunities to grow and evolve our existing partnerships. Some clients extend to new implementation styles, for example, co-investments and secondaries. Others will move into new verticals. For example, over 50% of our top clients are invested with us in multiple verticals. We are constantly focused on what we can do to be more valuable to our existing clients, and we are proud to develop such long-standing relationships as a result. With that, I'll turn the call over to Pam.

Pamela Bentley, CFO

Thanks, Jon. Our continual focus on delivering for our clients, attracting and retaining exceptional talent, and creating long-term shareholder value led to another successful quarter. Fee-related revenue increased by 2% over the third quarter of 2021 and 7% on a year-to-date basis. Private markets is our key driver of growth with private markets fee-paying AUM growing 14% over the last year and private markets management fees increasing 13% from the third quarter of 2021. Private markets management fees this quarter include just under $600,000 of catch-up fees from specialized fund closing, which was in line with our expectations. Given the denominator and liquidity effects that we've spoken about, the fundraising environment is slowing, resulting in later and smaller specialized fund closings and related catch-up management fees. In the fourth quarter of 2022, excluding the impact of catch-up management fees in either period, we expect organic growth in private markets management fees to be 10% to 12% over the fourth quarter of last year. In the fourth quarter of 2021, we enjoyed $4.3 million of catch-up management fees, and we estimate those fees to be $3 million lower in the fourth quarter. Absolute return strategies management fees were $38 million in the quarter, a 9% decrease from the third quarter of 2021, but a 1% decrease on a year-to-date basis. Depending on market performance and net flows, we anticipate fourth quarter absolute return strategies management fees will be flat to slightly down. Incentive fees realized in the quarter were approximately $45 million, primarily from private markets carried interest. The firm's share of incentive fees after contractual obligation was $16 million, and net incentive fees after cash compensation were $9 million. Although the near-term realization environment may be challenging, we are very optimistic about our long-term incentive fee opportunity, while our earnings power is primarily centered around our highly visible management fees. One of the underappreciated parts of our story is our significant long-term carried interest earnings power. As of the end of the third quarter, we have $771 million in gross unrealized carried interest across 135 programs, the firm's share of which is $351 million. The decrease in unrealized carry from last quarter is primarily from the strong realizations this quarter and includes less than a 2% decline due to changes in investment valuation. In addition to our accrued carry, our firm's share of investments in our funds increased by 4% from the second quarter to $153 million. Given that our accrued carry and balance sheet investments are marked on a one-quarter lag, in the near-term, these balances could face headwinds. Turning to expenses. Fee-related earnings compensation in the quarter was $39 million, effectively flat compared to the first and second quarters of the year. We expect fee-related earnings compensation to be relatively stable in the coming quarters, and we continue to balance managing expenses with making investments necessary to sustainably grow the business over the long term. Non-GAAP general and administrative and other expenses were $18 million in the quarter. This is again relatively consistent with the first and second quarters, and we anticipate similar levels in the fourth quarter this year. Our embedded operating leverage drove fee-related earnings margin expansion to 35% on a year-to-date basis, up from 33% a year ago. For the full year, we expect slightly growing FRE margins relative to 2021. Given the operational scalability embedded in our business, we anticipate continued long-term fee-related earnings margin expansion. Lastly, the Board authorized a $0.01 increase in our dividend to $0.11 per share as well as an increase in our buyback authorization from $65 million to $90 million. In addition to using the buyback to purchase shares at what we believe are highly attractive levels, consistent with our peers and the industry, we plan to target minimal dilution to shareholders from any existing or future stock-based compensation grants. While we are not immune to the impact of the current market environment, our track records of strong performance, the breadth and diversification of our platform, combined with the strength of our team and culture, provide us with great confidence. We remain focused on delivering long-term value to our clients and our shareholders. Thank you again for joining us, and we're now happy to take your questions.

Operator, Operator

Thank you. Our first question comes from Bill Katz with Credit Suisse.

William Katz, Analyst

Okay. Thank you very much for the update and taking the question this morning. Maybe, Michael, thanks so much for your perspective. Can you talk a little bit about within the conversations of things being sort of put on hold, which is certainly a theme we've heard from some of your peers who have reported quarter-to-date results so far. How the conversations might be evolving within the alternative in terms of where you're seeing the incremental demand and how you might be positioned for that opportunity?

Michael Sacks, CEO

Sure. The most important point is that we see no change in the secular tailwinds. In fact, we believe that investors are satisfied with the performance of their alternative portfolios, and the demand for alternatives in private markets strategies such as infrastructure, real estate, and private equity remains strong and will likely continue to grow. What we're observing is a natural, reasonable slowdown due to market conditions, economic conditions, and global geopolitical events we've experienced since January. While we are taking a conservative approach regarding Q4, we remain confident about 2023 and had a successful fundraising quarter. We were able to raise a significant amount of money; however, there are factors such as the denominator effect, liquidity concerns, and a general caution in the environment that warrant a conservative outlook in the short term.

Jonathan Levin, President

And Bill, this is Jon. I would like to add one point to what Michael mentioned. I think there may be incremental demand or modest shifts in areas where it's possible to achieve attractive returns above the new risk-free rate with less risk. We definitely see opportunities to take credit-like risks and generate equity-like returns. There is still a strong interest in infrastructure strategies due to the long-duration inflation-protected cash flows and the good counterparty risk that help secure those cash flows. Additionally, I would say there are more opportunistic strategies that allow us and other managers to take advantage of the market dislocation we are currently experiencing.

William Katz, Analyst

Okay. Thank you. Maybe just a follow-up. I didn't listen to the rule, so if I'm asking extra questions, I apologize. But in terms of just thinking through your glide path on FRE margins into 2023 and beyond, where do you think the model can settle out over time? And then, as you think about counterbalancing between sort of things you're trying to build out, whether it be technology or third-party distribution or distribution more broadly, how do you balance that to the extent the revenue environment remains a little bit more protracted versus something stabilizing perhaps? Thank you.

Michael Sacks, CEO

Well, as Pam said, we do see a margin increase this year. We see margin increase next year. And frankly, we think we've got operating leverage and the ability to continue to drive that FRE margin. And I think we've got a ways to go there before we need to talk to you about whether we're anywhere near peak margins. So, we think we've always maintained that we have operating leverage. From the time we came public, we've delivered on that operating leverage and that margin expansion at the FRE level. And I think that we will continue to do that. Retail for us or non-institutional for us is an opportunity for accelerated growth. We've done well there since coming public, putting more product on more platforms at the wire houses. We've got real opportunity in the RIA and independent broker/dealer channels that were not yet tapping. I think that whole space has slowed down some. And the fact that we're less dependent on it is probably short-term not the worst thing for us. But the opportunity to really drive growth and the type of growth that we're talking about and to drive margin from those channels we think is very real and we look forward to achieving growth there in the future.

William Katz, Analyst

Thanks so much.

Operator, Operator

We'll now take our next question from Samantha Platt with Bank of America.

Samantha Platt, Analyst

Good morning. Thanks for taking my question. So, I wanted to touch on insurance. So, the traction is looking pretty strong with 14% of your last 12-month flows coming from this channel. Can you remind us of your strategy and how it's different from your peers, in terms of the type of insurance companies you're targeting and the types of solutions you're providing for them?

Michael Sacks, CEO

Sure, thanks, Samantha. I appreciate your observation. We are very enthusiastic about this area, having invested in it and seen results over the past 12 months. We remain excited about its potential. Pam highlighted that the breadth of our platform is key to our strategy. We are working with a variety of insurers, from midsized firms to the largest players. Our platform's broad capabilities, along with our team's expertise in insurance and our internal structuring abilities, position us to support insurers in the alternative space effectively. Committing to this area was a strategic move for us last year, and we believe it will significantly contribute to our growth in 2023 and beyond. Other companies are starting to recognize this trend as well.

Samantha Platt, Analyst

Great. And just as a quick follow-up. What does the pipeline look like for insurance today versus six months or a year ago?

Michael Sacks, CEO

Our pipeline generally is bigger than it was, and it's bigger than it was a quarter ago even though we had a terrific fundraising quarter, and insurance is a healthy part of that pipeline, and there is a lot that we think that we can do in that space again, across various verticals and utilizing kind of the full capability of our flexible and open architecture platform. So, I would say that there's a very healthy insurance pipeline, and it's healthy for a range of engagements, relationship types with insurers of different sizes.

Samantha Platt, Analyst

Thank you so much.

Operator, Operator

We'll now take our next question from Ken Worthington with JPMorgan.

Kenneth Worthington, Analyst

Hi. Good morning. Thanks for taking the question. In private markets, contributions not from committed but not yet fee-paying, I believe it was like $18 million. I think you were supposed to have one fund close for Q3, but it looks like three had contributions. So, why was the $18 million so low versus what we've seen in prior quarters? And then you mentioned that customized fundraising should be better in 2023 than 2022. You did have some of your biggest funds in market in 2022. So, maybe walk through what gives you conviction that 2023 should be a better year?

Michael Sacks, CEO

Sure. Regarding the first question, we weren't expecting anything major in Q3 related to specialized fund closes, but we did see slightly more than anticipated. Some specialized funds operate on a pay-on committed basis, so any closures would reflect in the FPAUM number. Others are based on a pay-on invested model, meaning some closes for specialized funds might not appear in FPAUM during the quarter but will in CNYFPAUM before eventually reflecting in FPAUM. Overall, we had an excellent fundraising quarter, significantly focused on pay-on invested or ramp-in fundraising, which falls under our CNYFPAUM category. We aim to price in a way that maintains consistent effective fee rates over time, but we don't object if things activate immediately. Historically, we've experienced quarters with varied fundraising dynamics, either leaning towards CNYFPAUM or direct FPAUM, which is a normal aspect of the business. Regarding our outlook for next year and specialized fundraising growth, the funds currently in the market are strong and competitively positioned. We believe that the slowdown in 2022 was not directly tied to our offerings but rather the overall market conditions, and we anticipate improvement moving into next year. Additionally, we have new funds lined up for launch next year, including our direct infrastructure fund, which we have previously discussed and is set for fundraising to begin next year. We also expect to introduce a new specialized fund, likely in the ESG impact area, next year. Therefore, we are focused on our pipeline, acknowledging the reasons behind the 2022 slowdown, and consistently engaging with the market to gauge future trends.

Kenneth Worthington, Analyst

Okay. Great. And then just maybe turning to absolute return. We've been in the market for basically a year with higher volatility, lots of uncertainty. It would seem like this sort of macro environment would be the one that makes absolute return strategies more attractive to investors. And as we look at sort of the gross sales, there would seem to be very, very limited interest. So, what do you attribute the lack of interest from investors? Is it your performance? Is it the performance of absolute return more broadly? And if we are just focused on the macro, if this is not the macro environment that gets people interested in absolute return, what is that macro environment that sort of stimulates demand?

Michael Sacks, CEO

First, I believe our flow results are primarily influenced by macro factors. I don’t expect to see significantly different results elsewhere. That reflects the current market situation. On a positive note, since April 1, the beta and risk in the absolute return strategy (ARS) space have decreased considerably, and ARS returns are generally aligning with investor expectations through September 30, based on market conditions up to that date. Clearly, the ARS returns are not a major concern for clients right now. For an increase in macro demand, we need a more stable environment. People are satisfied with the current situation, but there isn’t much urgency for new investment in alternatives at the moment. We need some stabilization in the macro environment for flows to increase again. When they do, it's uncertain if there will be a shift toward ARS. However, there has been value added through September 30 from this approach. I also want to emphasize that we are significantly undervalued compared to our peers in private markets. Even if we isolate our private market performance and consider a margin, it’s clear that the ARS business is undervalued. When considering the implicit valuations on ARS and its performance, compared to traditional asset management firms that are facing declining revenues and a negative inflow environment, there's a stark contrast in how value is perceived in this sector.

Kenneth Worthington, Analyst

Great. Thank you very much.

Operator, Operator

We'll now take our next question from Christoph Kotowski with Oppenheimer.

Christoph Kotowski, Analyst

Good morning. Most of my questions have already been asked, but I'm considering the trends for 2023. It seems you've attracted strong flows in the CSAs, which I view as a longer-term process. I believe this quarter benefited from efforts made six to nine months ago, suggesting that we might see a slowdown in the next two to three quarters. However, the fundraising landscape in 2022 was quite crowded, and in 2023, there may be a new wave of capital to allocate, which could indicate a stronger position. Am I correct in seeing these as the two opposing forces at play and how this will unfold?

Michael Sacks, CEO

I agree that there is stronger new capital being allocated in 2023. Beyond just the new capital, people are also returning to business with more determination. These are two positive factors for fundraising this year. However, I want to disagree a bit regarding the notion that custom separate accounts are declining. Jon pointed out that our re-ups over the past five years have been significantly higher—40% more than the original contributions. When we re-up these accounts, we do so at much higher levels, and our re-up rates remain strong with ongoing re-ups. We have separate accounts ready for re-up next year. While I acknowledge the positive trends in increased flows for 2023, I feel it's incorrect to suggest that custom separate accounts need to decrease in momentum.

Jonathan Levin, President

Chris, this is Jon. I want to add one point. You are correct that the custom separate accounts have a longer sales cycle. However, I believe, as Michael pointed out, it’s important to distinguish between re-ups and new separate accounts. In both categories, the pipeline remains strong. You have a good understanding of your re-ups and their timing since you’re working closely with existing clients and their programs. We also have insights into our pipeline for new customized separate account opportunities and their timelines. The activity in that area remains stable, and when we look six to nine months ahead through that extended sales cycle, we can see decent visibility into their ongoing production from those implementations.

Christoph Kotowski, Analyst

Okay.

Michael Sacks, CEO

And to Jon's point, that keeps rolling forward. So, nine months from now, we'll have a whole block of separate accounts that will then be due to start rolling then. And so that's something that I maybe were a little guilty of not talking about enough. But that whole CNYFPAUM effectively, if we keep our re-up rates high, that we'll see CNYFPAUM renews itself every few years while we add new separate accounts along the way.

Christoph Kotowski, Analyst

Okay. Thank you.

Operator, Operator

Our next question will come from Michael Cyprys with Morgan Stanley.

Michael Cyprys, Analyst

Hey, good morning. Thanks for taking the question. Just wanted to circle back to some of your commentary around the challenges with the denominator effect and liquidity concerns that LPs are facing. So, I guess, the question is, which parts of the LP community do you see as most impacted? I know some folks have been pointing to the U.S. pension community, but just curious your thoughts on that. And then which channels and geographic regions do you see as more insulated from some of these pressures? And then how do you see this evolving into 2023? In other words, is there anything that could get a little bit worse in some parts of the marketplace? And then if you could speak to some of the opportunities that you see for Grosvenor and for the industry more broadly on providing some liquidity solutions to LPs as they're navigating through these challenging times?

Michael Sacks, CEO

Those are excellent questions. Firstly, I would mention that liquidity is becoming as significant an issue as the denominator effect. The denominator effect is something that an investment team or a Board can adjust by altering their portfolio allocations. Liquidity, however, is different. While deployment is decreasing, realizations are decreasing even more, which is leading to the liquidity impacts. The best way to address your question at a high level is to mention the channel that is not experiencing these issues, specifically the sovereign wealth channel and some sovereign pension funds. This group is not facing liquidity issues due to their inflow environment. They don't have a denominator effect, and they will decide how to manage it, but they are not currently in a liquidity conversation due to their revenue sources. This segment seems to be the healthiest in terms of global liquidity. You raised a thoughtful question about how people are approaching liquidity. We believe there are strategies to manage liquidity that can be beneficial for investors without necessitating a slowdown in new commitments. We are witnessing activity and engaging in discussions around these strategies, including structured solutions, and we anticipate seeing more of this in 2023.

Michael Cyprys, Analyst

Great. And just as a follow-up question. Maybe you could talk to how you see the demand evolving in the retail channel, how that's holding up in this environment? And maybe you can update us on your sort of new product roadmap and potential opportunities to grow further in that channel. Thank you.

Michael Sacks, CEO

Sure. That channel has slowed down, which aligns with our experiences and observations. It’s understandable that this would happen due to the traditional return levels and the current uncertainty and volatility, particularly after such strong performance in previous quarters. Nothing about this is surprising. We believe that over time, this channel will generate more revenue than our current assets under management, and we anticipate stronger relative growth. However, as we’ve mentioned several times today, we think it will take a couple of quarters and a bit more certainty in the environment for growth to pick up again. While we are performing reasonably well in the wire house channel, we see potential and opportunities in the RIA and broker/dealer channels that could provide us with additional growth. Furthermore, various funds available in the market rolling into 2023 and the new funds launching will appeal to a wide range of channels, including non-institutional investors.

Michael Cyprys, Analyst

Great. Thanks so much.

Operator, Operator

We will now take a follow-up from Bill Katz with Credit Suisse.

William Katz, Analyst

Okay. Thanks so much for your question. So, just going back to your commentary around the implied value for the ARS platform and the increased board authorization, can you help me think about how quickly you might deploy the capital? Obviously, a pretty big buyback quarter this quarter. But how do we think about triangulating between sort of money needed for seed or GP commitments versus just regular cash flow needs, operational cash flow needs versus maybe continuing to reduce the share count relative to your views on how cheap you think the stock is?

Michael Sacks, CEO

Sure. First, I want to emphasize that one of the appealing aspects of our business is our ability to return capital to shareholders through both dividends and buybacks. We have raised our dividend and our payout ratio remains comfortable. We've previously discussed our confidence in our payout ratio and our capability to increase dividends. Additionally, we believe our stock is currently a great value, with a 5.5% dividend yield as of recently. While we're aware of our float and the importance of not reducing it too much, we see significant value in executing buybacks now. We aim to continue this practice and manage our stock-based compensation through our buybacks. However, we also want to ensure that we don't diminish our float to the point where shareholders perceive insufficient trading volume. Nevertheless, we view this as an excellent use of capital right now, and we are looking to expand that program.

William Katz, Analyst

Thank you.

Operator, Operator

We'll now take a follow-up from Ken Worthington with JPMorgan.

Kenneth Worthington, Analyst

Okay. Yeah. Thank you also for taking my follow-up. Thinking about performance fees for absolute return. So, this year, returns of performance in that business is reasonably negative. And it looks like if 2023 is sort of a normal year, assuming nothing happens in Q4 that you would be sort of breakeven. Just remind us what happens with resets and high watermarks or hurdle rates? Is the 2023 outlook for performance fees kind of at some sort of risk given returns this year? And then I know that you guys sort of rejiggered compensation around Mosaic to have performance fees and carry be a bigger part of your employee comp. Would a second year of limited returns or limited performance fees and absolute return sort of change your views on compensation more broadly? Thanks.

Michael Sacks, CEO

Great. Let me explain that. First, we do have hurdle rates for many of the performance fees on the ARS side. While those rates have increased to some extent, most, if not all, have caps, and they're likely at those caps now. Therefore, the potential for earnings from any further interest rate increases is quite constrained. Second, we have loss carryforwards or high watermarks, so we need to reach high water levels before we can start generating performance fees. Assuming we have returns in the high single digits, which is how we typically budget for the remainder of the year, we will generate some performance fees next year. This should put us in a strong position regarding performance fees on a presumably larger AUM base for 2024. We're managing all of our compensation tools, including our FRE compensation, incentive fees, discretionary incentive fees, our allocation to carry, and our stock-based compensation, in a way that drives the business forward without causing any issues. This is something we've discussed previously, particularly regarding our FRE margins compared to others in the marketplace. I have mentioned before that we want to manage our compensation and tools to ensure we can withstand any potential pressure if it arises.

Kenneth Worthington, Analyst

Great. Thank you very much.

Operator, Operator

And it appears there are no further telephone questions. I'd like to turn the conference back over to our presenters for any additional or closing comments.

Stacie Selinger, Head of Investor Relations

Thank you. Thank you all again for joining us today. It was wonderful to connect with you. If there are any follow-up questions, please don't hesitate to reach out, and we look forward to speaking with you again next quarter.

Operator, Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. We hope everyone has a great day. You may all disconnect.