GCM Grosvenor Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; comparisons are to the corresponding 2020 periods. GCM Grosvenor provides alternative investment management solutions through private markets and absolute return strategies, in customized accounts and commingled funds.
Financial performance and key metrics
Amounts below are in millions, except per-share data and where noted.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Operating revenue | $119.7 | $90.1 | $222.9 | $172.7 |
| Operating income | $22.2 | $18.2 | $17.6 | $20.8 |
| Net income (loss) | $21.9 | $0.9 | $41.8 | $(9.4) |
| Net income attributable to GCM Grosvenor Inc. | $0.7 | $0 | $3.2 | $0 |
| Operating margin | 18.6% | 20.2% | 7.9% | 12.0% |
| Operating cash flow | Not stated by quarter | $64.0 | $(6.3) | |
| Adjusted EBITDA (non-GAAP) | $30.7 | $26.2 | $60.9 | $45.5 |
| Fee-Related Earnings (non-GAAP) | $27.5 | $25.1 | $52.6 | $42.7 |
- Q2 management fees were $85.6 million, up 14%; incentive fees were $32.2 million, up 147%. The incentive-fee increase reflected higher carried-interest realizations and performance fees crystallizing at funds’ fiscal year-end.
- For the first six months, management fees rose 10% to $168.2 million and incentive fees increased to $50.4 million from $16.3 million. Operating expenses rose 35% in Q2 and 35% for the six-month period, including higher compensation, equity awards, incentive-related compensation and public-company costs.
- GAAP net income improved substantially, but only $0.7 million in Q2 and $3.2 million year to date was attributable to GCM Grosvenor Inc.; substantial amounts were attributable to noncontrolling and redeemable noncontrolling interests. Basic EPS was $0.01 for Q2 and $0.07 year to date; diluted EPS was $(0.02) and $(0.04), respectively.
- Assets under management were $66.9 billion at June 30, up 8% from year-end 2020. Fee-paying AUM was $55.0 billion, up 6%, and contracted, not-yet-fee-paying AUM was $7.0 billion.
- Cash and cash equivalents were $265.8 million, versus $198.1 million at year-end. Six-month cash from operations was $64.0 million; investing activities used $6.8 million and financing activities provided $11.2 million. Cash increased $67.7 million.
- Debt was $392.2 million net of issuance costs ($399.3 million principal); cash exceeded reported debt by approximately $126.4 million. The term loan’s weighted-average rate was 3.40%, with maturity extended to February 2028. The company reported no revolver borrowings and $48.2 million of available borrowing capacity; it was in compliance with debt covenants.
- Unfunded investment commitments were $79.2 million. The tax receivable agreement payable was $60.9 million; future payments are uncertain and may be substantial.
Material changes and notable items
- Revenue growth was strong, particularly incentive fees, but operating margin declined in both comparison periods as expenses grew faster than revenue. Six-month operating income fell despite higher revenue.
- In February 2021, the company extended approximately $290 million of term loans to 2028 and prepaid $50.3 million. In June, it increased the term-loan principal to $400 million, adding $110 million of borrowing.
- During the six months, warrant exercises generated $24.5 million of cash proceeds. Warrant fair-value changes also affected reported earnings: a $6.7 million expense in Q2 and a $7.3 million gain for the six months.
- After quarter-end, on July 2, GCMH exercised an amended Mosaic call right and paid a net $165.0 million to acquire the investor’s interest. This removes that interest from redeemable noncontrolling interest after the transaction date and is a significant use of liquidity. The filing reported $19.5 million of consolidated Mosaic cash excluded from the stated net purchase price.
- On August 6, the board declared a $0.09-per-share dividend and authorized repurchases of up to $25 million of Class A shares and warrants. Neither future repurchases nor dividends are assured.
Outlook, risks and controls
- Management said existing cash, operating cash flow and available revolver capacity should be sufficient for operations, planned capital expenditures and debt service for the next twelve months. No quantified earnings or revenue guidance was provided.
- Management identified risks from market and investment performance, fundraising and client retention, fee variability, redemptions, realizations and the availability of suitable investments. COVID-19 could affect fundraising, due diligence, portfolio values, fee timing and liquidity; the precise impact was not predictable.
- Incentive fees and carried interest are variable and depend on fund performance, realizations and other factors outside the company’s control. Some carried interest is subject to clawback provisions.
- Disclosure controls were not effective as of June 30 because of a material weakness in controls over accounting for SPAC warrants. The weakness had led to a restatement of 2020 financial statements. Management described remediation steps but cautioned that their effectiveness was not assured; management nevertheless stated the current interim financial statements fairly present the reported information.
- The company reported no current litigation expected to have a material effect, and considered loss exposure from indemnities and general-partner roles remote. General-partner responsibilities can, however, expose subsidiaries to losses beyond their investment amounts.
Important facts for investors to verify
- How much of recent earnings and cash generation is recurring management-fee performance versus volatile incentive fees, investment gains and warrant remeasurement.
- The cash, debt and liquidity position after the $165.0 million Mosaic purchase, including any related funding needs and the transaction’s effect on earnings attributable to the company.
- The sustainability of operating margins given rising compensation, equity-based awards and public-company expenses.
- Progress and independent validation of remediation of the warrant-accounting material weakness and effectiveness of disclosure controls.
- Debt covenant headroom, interest-rate exposure, future principal and interest obligations, unfunded commitments, and the timing and scale of tax receivable agreement payments.
- The actual use of the $25 million repurchase authorization and the board’s future dividend decisions.