GCM Grosvenor Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; unaudited. Unless stated otherwise, financial amounts below are in U.S. dollars, millions. GCM Grosvenor is an alternative asset manager serving primarily institutional clients through customized accounts and commingled funds.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenue | $118.1 | $101.7 | $341.0 | $274.5 |
| Operating income | $25.1 | $9.2 | $42.6 | $29.9 |
| Net income | $22.7 | $11.2 | $64.5 | $1.8 |
| Net income attributable to GCM Grosvenor Inc. | $4.1 | $0.0 | $7.3 | $0.0 |
| Operating margin | 21.2% | 9.0% | 12.5% | 10.9% |
| Adjusted EBITDA (non-GAAP) | $37.6 | $33.6 | $98.5 | $79.2 |
| Fee-Related Earnings (non-GAAP) | $31.0 | $25.6 | $83.6 | $68.3 |
Q3 revenue increased 16% year over year; nine-month revenue rose 24%. Management fees grew 12% and 11%, respectively, supported by higher fee-paying assets and contributions. Incentive fees rose 34% in Q3 and 109% year to date, mainly from higher carried interest as funds realized distributions; nine-month performance fees also increased as fees crystallized at funds with March and June fiscal year-ends. Q3 operating income increased despite broadly stable total operating expenses; year-to-date compensation and general and administrative expenses rose, including equity compensation and public-company and financing costs.
Fee-paying AUM was $56.6 billion at September 30, up 9% from year-end 2020; total AUM was $70.5 billion, up 14%. Contracted, not-yet-fee-paying AUM was $7.9 billion. Reported diluted EPS was $0.03 for both Q3 and the nine-month period; basic EPS was $0.09 and $0.17, respectively. Adjusted diluted EPS, a non-GAAP measure, was $0.13 and $0.33.
Cash flow, debt and liquidity
Nine-month operating cash flow was $144.8, compared with $43.1 in 2020. Investing activities used $12.0; financing activities used $210.0, including the $150.1 net cash outflow for the Mosaic call exercise, distributions and debt activity. Cash declined $78.2 from year-end to $120.0 at September 30.
Debt had a $398.0 principal balance and $391.2 carrying value, versus $340.3 and $335.2, respectively, at December 31, 2020. In June, the term loan facility was increased to $400 million; most borrowings mature February 24, 2028, at LIBOR plus 2.50%, subject to a 0.50% LIBOR floor. The company reported no revolver borrowings and $48.2 of available borrowing capacity. It was compliant with debt covenants. Management said cash, operating cash flow and available revolver capacity were expected to fund operations and debt service for the next 12 months.
At September 30, total liabilities were $623.0 and total assets were $512.9, leaving a total deficit of $110.2. The TRA payable was $60.9. The company reported $82.8 of unfunded investment commitments. These commitments are generally payable on demand, although management said historically they are likely to be funded over a longer period.
Material changes, outlook and risks
- On July 2, 2021, GCMH exercised the amended Mosaic call right for a net purchase price of $165.0, ending the third-party investor’s redeemable noncontrolling interest. The transaction was recorded as an equity transaction; financing cash outflow included $150.1.
- The senior loan was amended and extended in February, including a $50.3 voluntary principal prepayment, and increased by $110.0 in June. Interest-rate swaps were put in place to hedge portions of the 2028 term loan exposure.
- Q3 included a $9.6 non-cash expense from the increase in fair value of warrant liabilities; the nine-month warrant fair-value expense was $2.2. Investment income was $40.2 for the nine months, primarily reflecting changes in the value of investments, and is subject to market movements.
- The board authorized a $25 million repurchase plan in August. By September 30, $6.9 had been used for shares withheld for employee tax obligations and $0.4 for warrant repurchases; $17.7 remained available. A $0.10-per-share dividend was declared November 8 for payment December 15.
- No specific earnings or revenue guidance was provided. Management highlighted dependence on fundraising, client retention, investment performance and realizations, and suitable investment opportunities. COVID-19 could affect fundraising, fee receipts, liquidity, due diligence and investment values; the company said the pandemic’s precise future impact could not be predicted.
- Other notable exposures include carried-interest clawback provisions, general-partner obligations and investment commitments, related-party arrangements, and payments under the TRA. Management said current litigation was not expected to have a material effect and considered loss on indemnification arrangements remote. The TRA’s payment timing and amount are uncertain; management expects payments to be substantial.
- Management said the previously identified material weakness in internal control over financial reporting related to warrant accounting was remediated as of September 30, 2021. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether growth in FPAUM, total AUM and contracted commitments converts into durable management-fee growth, and how much incentive revenue depends on realizations and market performance.
- The sustainability and cash conversion of reported earnings, including the effects of investment valuation changes, noncontrolling interests, equity compensation and non-GAAP adjustments.
- Debt terms, covenant headroom and interest-rate exposure, as well as the capacity to meet $82.8 million of unfunded commitments and future TRA payments.
- The economic implications of the Mosaic repurchase and any continuing carried-interest clawback, general-partner or fund-related obligations.
- Repurchase and dividend activity, including the effect of capital returns on liquidity, strategic flexibility and shareholder value.