GCM Grosvenor Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. GCM Grosvenor is an alternative asset manager serving primarily institutional clients across private equity, infrastructure, real estate, absolute return, alternative credit, and ESG and impact strategies. Unless otherwise noted, financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Operating revenue | $104.4 million | $119.7 million | $209.5 million | $222.9 million |
| Operating income | $19.8 million | $22.2 million | $37.8 million | $17.6 million |
| Operating margin | 19.0% | 18.6% | 18.0% | 7.9% |
| Net income | $30.7 million | $21.9 million | $53.9 million | $41.8 million |
| Net income attributable to GCM Grosvenor Inc. | $7.6 million | $0.7 million | $12.3 million | $3.2 million |
| GAAP diluted EPS | $0.13 | $(0.02) | $0.21 | $(0.04) |
| Adjusted EBITDA (non-GAAP) | $35.2 million | $30.7 million | $72.4 million | $60.9 million |
| Fee-related earnings (non-GAAP) | $32.6 million | $27.5 million | $64.3 million | $52.6 million |
- Revenue mix: Management fees rose 8% to $92.8 million in Q2 and 10% to $184.9 million in the first half. Incentive fees fell to $10.5 million in Q2 from $32.2 million, and to $22.5 million in the first half from $50.4 million.
- Profitability: Operating income declined 11% in Q2 but increased substantially for the first half. Lower employee compensation—partly reflecting lower carried-interest compensation and, year over year, reduced equity-based compensation—supported operating results.
- Non-operating items: A $19.6 million Q2 and $21.7 million first-half gain from the reduced fair value of warrant liabilities materially lifted GAAP earnings; this was a non-cash item. Investment income was $9.7 million in the first half, compared with $26.5 million in 2021.
- Cash flow: First-half operating cash flow was $87.4 million, versus $64.0 million in 2021. Investing activities used $4.8 million; financing activities used $97.9 million, including partner and noncontrolling-interest distributions, share and warrant repurchases, and dividends. Cash declined by $17.7 million to $78.5 million.
- Liquidity and debt: At June 30, cash was $78.5 million and available revolver capacity was $48.2 million; there were no revolver borrowings. Senior loan principal was $395.0 million ($389.1 million net of issuance costs), with a February 2028 maturity for the extended term loans. The company reported covenant compliance and a total leverage ratio below 2.75x, but did not state the exact ratio.
- Balance sheet: Total assets were $507.8 million and total liabilities were $552.8 million, resulting in a $45.0 million total deficit. The company adopted lease accounting in 2022 and recorded lease liabilities of $17.7 million at quarter-end.
Material changes and operating trends
- Q2 operating revenue fell 13% year over year; first-half revenue fell 6%. Higher management fees were more than offset by lower incentive fees and other operating income.
- Management attributed lower carried interest to large funds making distributions in 2021 that did not recur at the same level in 2022. Lower performance fees reflected weaker returns in absolute-return funds with March 31 and June 30 year-ends.
- Fee-paying AUM ended June at $57.5 billion, down 2% from year-end 2021. Private-markets fee-paying AUM rose 5% to $34.8 billion, while absolute-return fee-paying AUM fell 11% to $22.7 billion. Total AUM was $71.2 billion, down 1% from year-end; contracted, not-yet-fee-paying AUM was $6.7 billion.
- The board increased the repurchase authorization to $65 million. As of June 30, $40.3 million remained; first-half purchases included $12.5 million of Class A shares and $2.6 million of public warrants. The company declared a $0.10-per-share dividend in August, payable September 15, 2022.
Outlook, risks, and contingencies
- No specific revenue, earnings, or AUM guidance was provided. Management said cash, operating cash flow, and available revolver capacity were expected to fund operations, planned capital expenditures, and debt service for the next 12 months.
- Management cited market volatility, inflation and rising interest rates, geopolitical conditions including the war in Ukraine, COVID-19 uncertainty, fundraising and redemption activity, investment performance, and availability of suitable investments as factors that could affect results. Incentive fees and carried interest are particularly variable and depend on investment outcomes and realizations.
- Carried-interest arrangements may include clawbacks. Deferred revenue for constrained realized carried interest was approximately $6.1 million at June 30. The company also reported $85.6 million of unfunded investment commitments and $114.0 million of maximum exposure to loss for unconsolidated VIEs.
- Management did not believe current litigation or indemnification exposure would have a material effect; no material changes to the risk factors from the 2021 Form 10-K were reported. The filing states the company was in compliance with debt covenants and regulatory net-capital requirements.
Important facts for investors to verify
- How much of reported earnings growth reflects recurring management-fee economics versus the non-cash warrant-liability gain and other investment valuation changes.
- Whether absolute-return AUM stabilizes, and how continued market performance, withdrawals, and fundraising affect fee-paying AUM and management-fee revenue.
- The sustainability and timing of carried-interest and performance-fee income, including potential clawbacks and compensation owed to employees or other interest holders.
- Debt covenant headroom, interest-rate exposure, revolver availability, and the cash requirements for distributions, dividends, repurchases, and Tax Receivable Agreement payments.
- The distinction between GAAP results and management’s non-GAAP measures, including the adjustments and assumed exchange of GCMH units used in adjusted per-share measures.