GCM Grosvenor Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. GCM Grosvenor provides alternative investment management services across private markets and absolute-return strategies, through customized accounts and commingled funds.
Financial performance and key metrics
Amounts below are in millions, except per-share data, percentages and AUM.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $137.2 | $118.1 | $346.7 | $341.0 |
| Operating income | $28.7 | $25.1 | $66.5 | $42.6 |
| Operating margin | 20.9% | 21.2% | 19.2% | 12.5% |
| Net income | $14.2 | $22.7 | $68.1 | $64.5 |
| Net income attributable to GCM Grosvenor Inc. | $3.1 | $4.1 | $15.4 | $7.3 |
| Basic / diluted GAAP EPS | $0.07 / $0.02 | $0.09 / $0.03 | $0.35 / $0.23 | $0.17 / $0.03 |
| Adjusted EBITDA (non-GAAP) | $41.4 | $37.6 | $113.8 | $98.5 |
| Fee-related earnings (non-GAAP) | $31.4 | $31.0 | $95.6 | $83.6 |
For Q3, management fees rose 3% to $90.7 million; incentive fees rose to $45.5 million, including $44.5 million of carried interest. For the nine-month period, management fees grew 8% to $275.7 million, while incentive fees fell to $68.0 million from $79.6 million. Interest expense was $16.7 million year to date, versus $14.5 million.
AUM: At September 30, fee-paying AUM was $58.1 billion, contracted but not yet fee-paying AUM was $8.0 billion, and total AUM was $72.6 billion. Fee-paying AUM was down $0.6 billion from year-end: private-markets fee-paying AUM increased 7% to $35.5 billion, while absolute-return fee-paying AUM declined 12% to $22.6 billion.
Cash flow and balance sheet: Nine-month operating cash flow was $159.9 million, investing cash outflow $10.3 million, and financing cash outflow $140.2 million; cash increased $5.4 million to $101.6 million. At September 30, total assets were $549.1 million and total liabilities $596.0 million, resulting in a $47.0 million total deficit. Debt was $388.3 million net of issuance costs ($394.0 million principal); no revolver borrowings were outstanding. The company reported $48.2 million of available revolver capacity and compliance with debt covenants. The $50 million revolver matures in 2026; term-loan maturities are primarily in 2028.
Material changes versus comparable periods
- Nine-month operating income increased to $66.5 million from $42.6 million, with operating margin rising to 19.2% from 12.5%; total revenue was nearly flat. Employee compensation declined 8%, largely reflecting lower equity-based compensation versus prior-year transaction-related awards.
- Investment results weakened: Q3 recorded a $2.3 million investment loss versus $13.7 million of income a year earlier; nine-month investment income was $7.4 million versus $40.2 million.
- Q3 net income fell to $14.2 million from $22.7 million, in part reflecting investment losses and a $3.8 million warrant-liability fair-value loss. The nine-month results included a $17.9 million noncash gain from the decrease in warrant-liability fair value.
- Operating cash flow increased from $144.8 million to $159.9 million year to date. Financing outflows included $20.5 million of Class A share repurchases and $13.8 million of dividends paid.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said cash, operating cash flow and available revolver capacity are expected to be sufficient for operations, planned capital expenditures and debt service over the next 12 months.
- Management cited uncertainty from market conditions, inflation and rising interest rates, geopolitical events including the Russia-Ukraine conflict, COVID-19, fundraising and redemption activity, investment performance, and the availability and realization of investments. Incentive-fee revenue is variable and dependent on fund results and realizations.
- After quarter-end, the company terminated its interest-rate swaps effective November 1, 2022, receiving $40.3 million, and entered a new $300 million swap at a fixed rate of 4.37%. The company expects approximately $5.1 million to be reclassified from accumulated other comprehensive income to interest expense over the next 12 months, including the termination impact.
- Unfunded investment commitments were $84.1 million. Maximum exposure to loss from unconsolidated VIEs was $117.2 million. The company also disclosed general-partner exposure to fund liabilities, while stating that material loss was considered remote; management did not expect current litigation to materially affect the financial statements.
- The board declared a $0.11-per-share quarterly dividend after quarter-end and increased the share-and-warrant repurchase authorization to $90 million. The Inflation Reduction Act was not expected to have a material financial-statement impact.
Important facts for investors to verify
- Whether private-markets fundraising and deployment can offset market pressure, withdrawals and weaker absolute-return AUM.
- How much future incentive-fee revenue is realizable, and how carried-interest clawback or deferral provisions could affect cash and earnings.
- Debt-service sensitivity to interest rates after the post-quarter swap changes, and the company’s continuing covenant compliance and liquidity.
- The sustainability of distributions, dividends and buybacks relative to operating cash generation, commitments and Tax Receivable Agreement payments.
- How non-GAAP measures, noncontrolling interests and noncash warrant-value changes reconcile to GAAP earnings attributable to Class A holders.