GCM Grosvenor Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. GCM Grosvenor manages alternative investment funds and customized portfolios for institutional and other clients. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total operating revenue | $99.1 million | $105.1 million; down 6% |
| Management fees | $92.2 million | $92.1 million; broadly flat |
| Incentive fees | $5.8 million | $12.0 million; down 52% |
| Operating income (loss) | $(12.9) million | $18.0 million |
| Net income (loss), consolidated | $(15.1) million | $23.2 million |
| Net income (loss) attributable to GCM Grosvenor Inc. | $(1.2) million | $4.7 million |
| Basic / diluted GAAP EPS | $(0.03) / $(0.10) | $0.11 / $0.08 |
| Adjusted EBITDA (non-GAAP) | $32.9 million | $37.2 million; down 12% |
| Adjusted Net Income (non-GAAP) | $19.6 million | $23.8 million; down 17% |
| Operating cash flow | $(4.8) million | $40.4 million |
| Cash and cash equivalents | $61.9 million at March 31 | $85.2 million at December 31, 2022 |
| Debt, net of issuance costs | $386.9 million | $387.6 million at December 31, 2022 |
| Fee-paying AUM | $59.8 billion | $58.9 billion at start of quarter |
| AUM | $75.3 billion | $73.7 billion at December 31, 2022 |
The filing does not provide a single reported gross or operating margin. Based on reported revenue and operating loss, the operating margin was approximately negative 13.0%; this is a derived calculation. Adjusted EBITDA and other adjusted measures are non-GAAP and should be considered alongside GAAP results.
Material changes and drivers
- Management fees were nearly unchanged overall. Private-markets fees rose about $5.0 million, largely due to fundraising and deployment, while absolute-return fees fell about $5.6 million, reflecting lower fee-paying AUM from market performance and net withdrawals.
- Incentive fees declined primarily because of lower carried-interest distributions and investment exits. Carried interest was $5.6 million versus $11.0 million; performance fees were $0.2 million versus $1.0 million.
- Operating expenses rose 28% to $112.0 million. Compensation increased $20.3 million, driven mainly by equity-based compensation, including expense for awards granted in late 2022; general and administrative expense rose $4.5 million, mainly from professional fees and travel.
- Investment income decreased to $6.3 million from $10.9 million. Interest expense increased to $6.7 million from $5.3 million, reflecting higher loan rates. The company recorded a $2.2 million noncash loss from the increase in warrant liabilities, compared with a $2.0 million gain in Q1 2022.
- Fee-paying AUM increased $1.0 billion during the quarter: private-markets fee-paying AUM rose $1.2 billion, while absolute-return fee-paying AUM declined $0.2 billion, mainly due to $0.6 billion of withdrawals. Contracted, not-yet-fee-paying AUM fell to $6.4 billion from $7.6 billion.
Liquidity, debt and capital returns
- Cash fell by $23.3 million to $61.9 million. The company used $4.8 million in operating activities, $4.7 million in investing activities and $13.7 million in financing activities.
- The senior secured term loan had $392.0 million of principal outstanding, with a weighted-average interest rate of 7.03% for Q1 2023. It matures in February 2028 and requires quarterly principal payments. The $50 million revolving facility had no borrowings and $48.2 million of available capacity.
- The company reported compliance with debt covenants and regulatory capital requirements. It said cash, operating cash flow and revolver availability should be sufficient for operations and debt service over the next twelve months and foreseeable future. This is management’s assessment, not a guarantee.
- Cash dividends paid were $4.6 million. A quarterly dividend of $0.11 per Class A share was declared after quarter-end, payable June 15, 2023. The company also repurchased 415,909 Class A shares for $3.3 million and had $22.8 million remaining under its repurchase authorization. Separately, $19.4 million of RSU cash settlements and employee tax withholding was recorded as a liability at quarter-end and settled in April.
Outlook, risks and unusual items
- No quantified revenue, earnings or AUM guidance is provided. Management identifies fundraising and client retention, investment performance, realizations, market conditions, competition, redemptions, interest rates, inflation, geopolitical events and regulation as factors that could affect results.
- Incentive revenue is variable and depends on investment performance and realizations. Carried-interest arrangements may include clawbacks; $6.6 million of realized carried interest was deferred under the company’s constraint assessment at March 31.
- Adjusted EBITDA and Adjusted Net Income exclude, among other items, equity-based and partnership-interest compensation, severance, transaction expenses and unrealized investment results. Q1 included $4.6 million of severance and $2.4 million of contemplated corporate transaction costs, as well as elevated equity compensation expense.
- The company reported $85.2 million of unfunded investment commitments and a $55.4 million payable under the Tax Receivable Agreement. It also reported $113.3 million of maximum exposure to loss from unconsolidated variable-interest entities. Management said current litigation is not expected to have a material effect and considered loss exposure under indemnification arrangements remote.
- After quarter-end, the company disclosed amended employee participation awards whose grant-date fair value was still being evaluated. The awards do not dilute Class A holders or affect company cash flows, but may change compensation expense and include reversals of previously recorded target amounts.
Important facts for investors to verify
- Whether weaker absolute-return fee-paying AUM and incentive-fee realizations persist, and how fundraising converts contracted AUM into fee-paying AUM.
- How much of the compensation increase is recurring, and the future expense effects of RSUs and the post-quarter employee award amendments.
- Cash generation and liquidity after dividends, repurchases, debt interest, investment commitments and the RSU settlements paid in April.
- Debt-rate exposure, hedge effectiveness and covenant headroom; the reported term-loan rate was 7.03% despite a $300 million interest-rate swap.
- The assumptions and exclusions underlying non-GAAP measures, and the distinction between consolidated losses and results attributable to GCM Grosvenor Inc. shareholders.