GCM Grosvenor Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited, consolidated GAAP results. The company manages alternative investment funds and customized accounts for institutional and other clients. Unless noted, dollar amounts are in millions.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenue | $121.7 | $137.2 | $328.4 | $346.7 |
| Operating income (loss) | $23.9 | $28.7 | $(25.0) | $66.5 |
| Net income (loss), consolidated | $17.6 | $14.2 | $(33.8) | $68.1 |
| Net income attributable to GCM Grosvenor Inc. | $5.9 | $3.1 | $9.5 | $15.4 |
| Adjusted EBITDA (non-GAAP) | $43.6 | $41.4 | $112.5 | $113.8 |
| Fee-related earnings (non-GAAP) | $36.4 | $31.4 | $99.6 | $95.6 |
- Q3 revenue declined 11%, as management fees rose 4% to $94.6 million but incentive fees fell 43% to $26.1 million. The incentive-fee decline primarily reflected lower carried-interest distributions and realizations.
- Nine-month revenue fell 5%; management fees increased 2% to $280.4 million, while incentive fees declined 34% to $44.9 million. Private-markets fees grew, partly offset by lower absolute-return fees and net withdrawals.
- Operating margin was approximately 19.6% in Q3 versus 20.9% a year earlier; the nine-month operating margin was approximately negative 7.6% versus positive 19.2%. The year-to-date operating loss mainly reflects higher compensation expense, including partnership-interest awards.
- Nine-month employee compensation and benefits increased 30% to $277.5 million, including $89.2 million of partnership-interest-based compensation versus $21.5 million in 2022. This included expense from Holdings Awards; reported expense was net of an $80.0 million reversal of prior target amounts.
- Basic EPS attributable to Class A holders was $0.14 for Q3 and $0.22 for the nine-month period. Diluted EPS was $0.04 and $(0.28), respectively; the filing’s exchange-unit and noncontrolling-interest calculations produce materially different diluted results.
AUM, cash flow and financial position
- Fee-paying AUM was $61.0 billion at September 30, up 4% from year-end; total AUM was $76.0 billion, up 3%. Contracted, not-yet-fee-paying AUM was $7.1 billion, down 7% from year-end. Private-markets FPAUM grew 7% year to date; absolute-return FPAUM declined 3%.
- Nine-month operating cash flow was $65.4 million, down from $159.9 million. Investing used $13.0 million and financing used $80.9 million. Cash and cash equivalents fell to $55.4 million from $85.2 million at year-end.
- Debt was $390.0 million principal, or $385.5 million net of issuance costs, versus $393.0 million principal at year-end. The senior loan matures in 2028; its weighted-average rate was 7.47% for the first nine months of 2023. A $300 million interest-rate swap fixes the paid rate at 4.37% on the hedged notional. The $50 million revolver was undrawn.
- Total liabilities were $598.4 million and total deficit was $93.7 million. The tax receivable agreement payable was $55.4 million. The company reported covenant compliance and a leverage ratio below 2.75x.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management stated that cash, expected operating cash flow and available revolver capacity should fund operations and debt service for the next 12 months and foreseeable future.
- Management declared a $0.11 per-share quarterly dividend in November, payable December 15, 2023. The board increased the repurchase authorization to $115 million; $40.2 million remained at quarter-end. Capital returns remain discretionary.
- Unfunded investment commitments were $88.8 million. The company’s maximum exposure to unconsolidated VIEs was $121.2 million. The filing says the company is general partner to funds and may face losses beyond its investment, although management views material loss as remote.
- Risks highlighted include market and interest-rate conditions, geopolitical and economic uncertainty, investment performance and realizations, fundraising and redemptions, competition, regulatory requirements, and the availability of suitable investments. Incentive fees and carried interest are variable and may be subject to clawbacks.
- A new New York office lease increased lease assets and liabilities; future payments under that lease are expected to total $65.7 million over 16.3 years. Management said current litigation is not expected to materially affect the financial statements. Disclosure controls were judged effective, with no material change in internal control reported.
Important facts for investors to verify
- How much of the nine-month GAAP loss and compensation increase reflects Holdings Awards and other partnership-interest awards, and how much expense remains to be recognized.
- Whether fundraising, deployment and contracted commitments convert into fee-paying AUM on the expected schedule, particularly the $7.1 billion of contracted, not-yet-fee-paying AUM.
- The trajectory of incentive fees and carried-interest realizations, including deferred carried interest and any potential clawback exposure.
- Debt costs, covenant headroom and liquidity under the higher floating-rate environment; also consider the concentration and effectiveness of the interest-rate hedge.
- The assumptions behind non-GAAP measures such as Adjusted EBITDA and fee-related earnings, and the distinction between company-attributable earnings and consolidated results.