GCM Grosvenor Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with the three months ended March 31, 2020 unless noted. GCM Grosvenor provides alternative-asset investment management and advisory services. The company completed its business combination in November 2020, so Class A EPS is not comparable with 2020.
Key financial results
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total operating revenue | $103.2 million | $82.6 million | +25% |
| Management fees | $82.6 million | $77.7 million | +6% |
| Incentive fees | $18.2 million | $3.2 million | +$15.0 million |
| Operating income (loss) | $(4.7) million | $2.5 million | Down $7.2 million |
| Net income (loss), consolidated | $19.9 million | $(10.3) million | Improved $30.3 million |
| Net income attributable to GCM Grosvenor Inc. | $2.5 million | $0 | Not comparable |
| Operating cash flow | $15.8 million | $(33.0) million | Improved $48.8 million |
Revenue growth reflected higher carried interest and performance fees, alongside higher management fees. Incentive fees reached $18.2 million, comprising $12.1 million of carried interest and $6.1 million of performance fees. Management attributed the carried-interest increase to distributions from several large funds; performance fees included fees crystallizing at a fund’s March 31 year-end.
Operating expenses rose 35% to $107.9 million, primarily reflecting $27.0 million of equity-based compensation from RSU grants. The operating loss contrasts with consolidated net income, which included $13.0 million of investment income and a $14.1 million non-cash gain from the change in fair value of warrant liabilities. Basic Class A EPS was $0.06; diluted EPS was $(0.05), reflecting the filing’s diluted-share calculation and allocation adjustments. Adjusted EBITDA, a non-GAAP measure, was $30.2 million versus $19.4 million; fee-related earnings were $25.2 million versus $17.6 million.
Assets, debt and liquidity
- Cash and cash equivalents were $156.3 million at March 31, down from $198.1 million at December 31, 2020. Net cash decreased $41.9 million during the quarter.
- Debt was $285.0 million net of issuance costs, compared with $335.2 million at year-end. The company prepaid $50.3 million of principal and extended approximately $290 million of term loans to February 2028; the amended rate was 2.50% over LIBOR, subject to a 0.50% floor. The company reported covenant compliance.
- The $50 million revolving facility had no borrowings; reported available capacity was $48.2 million. Management said cash, operating cash flow and available borrowing capacity should fund operations and debt service for the next 12 months.
- Fee-paying AUM increased 3% to $53.4 billion; total AUM rose 5% to $64.9 billion. Contracted, not-yet-fee-paying AUM was $7.5 billion.
- Unfunded investment commitments were $81.6 million. The tax receivable agreement payable was $60.6 million; future payment timing and amounts were uncertain, and management expected payments to be substantial.
Material changes, outlook and risks
- Management cited recovery in public and private markets during Q1 compared with the early-pandemic period. It gave no specific revenue or earnings guidance and cautioned that quarterly results are not necessarily indicative of full-year results.
- COVID-19 may affect fundraising, client commitments, investment due diligence, realizations, fee revenue and portfolio values. The timing and scale of these effects remain uncertain.
- Revenue and incentive fees are exposed to market performance, fund distributions, redemptions, fundraising and investment-manager activity. Competition, regulation, economic and geopolitical conditions, and investment availability are additional risks.
- The filing reports a material weakness in internal control over financial reporting concerning accounting for SPAC warrants, following the SEC staff’s April 2021 statement. The weakness led to restatement of 2020 financial statements. Management described added review procedures, training and policy enhancements, but concluded disclosure controls were not effective as of March 31, 2021 and gave no assurance remediation would be sufficient.
- Potential Mosaic payments could total up to $15.0 million for 2021 and 2022, subject to contractual conditions and reductions. A third-party investor also has a conditional put right; exercise terms may increase the purchase price in specified default circumstances.
- Management said current litigation was not expected to have a material effect. The company also disclosed general-partner and indemnification exposures for which ultimate losses are uncertain; management considered material losses remote.
Most important facts for investors to verify
- How much of reported earnings and growth reflects recurring management fees versus variable incentive fees, investment gains and the non-cash warrant remeasurement.
- The drivers and future expense impact of RSU awards: 4.8 million granted, with $35.1 million of unrecognized compensation expense at quarter-end.
- Debt amendment terms, applicable covenants, available revolver capacity, and the cash-flow effect of future debt service and the $81.6 million investment commitments.
- The size, timing and assumptions behind tax receivable agreement payments and potential Mosaic obligations or put-right exposure.
- Whether the warrant-accounting control weakness is fully remediated and whether subsequent filings report further control issues or restatements.