GCM Grosvenor Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; compared primarily with FY2022. GCM Grosvenor (Nasdaq: GCMG) is an alternative asset manager serving institutional and individual clients through customized accounts and specialized funds.
Key financial and operating metrics
| Metric | FY2023 | FY2022 |
|---|---|---|
| Total operating revenue | $445.0 million | $446.5 million |
| Management fees | $375.4 million | $367.2 million |
| Incentive fees | $64.9 million | $75.2 million |
| Operating income (loss) | $(11.8) million | $80.3 million |
| Consolidated net income (loss) | $(29.2) million | $79.5 million |
| Net income attributable to GCM Grosvenor Inc. | $12.8 million | $19.8 million |
| Operating cash flow | $92.1 million | $216.5 million |
| Fee-related earnings (non-GAAP) | $139.9 million | $128.5 million |
| Adjusted net income (non-GAAP) | $103.2 million | $94.4 million |
| Adjusted EBITDA (non-GAAP) | $162.2 million | $149.3 million |
- Management fees, including fund expense reimbursements, rose 2%; net management fees were $360.9 million. Private-markets fees increased 9%, while absolute-return fees declined 8%.
- Incentive fees fell 14% overall: carried interest decreased 32% to $49.6 million, partly offset by performance fees rising to $15.3 million from $2.6 million.
- Operating expenses increased 25% to $456.8 million. Employee compensation and benefits rose 28% to $356.0 million, driven mainly by partnership-interest and equity compensation. The company recorded $103.9 million of partnership-interest-based compensation, including expense related to amended employee awards.
- The consolidated net loss differs from the $12.8 million attributable to GCM Grosvenor Inc. because of income and loss allocations to noncontrolling interests. The filing reports an effective tax rate of negative 36% for 2023, with noncontrolling-interest allocations among the main factors.
- Fee-related earnings were about 38% of fee-related revenue of $365.5 million. This is a non-GAAP measure, not the GAAP operating margin.
- Operating cash flow declined substantially from 2022, when it included $40.3 million received on termination of interest-rate swaps and benefited from working-capital movements. Cash and cash equivalents were $44.4 million at year-end, down from $85.2 million.
- AUM rose 4% to $76.9 billion; fee-paying AUM increased 5% to $61.7 billion. Contracted, not-yet-fee-paying AUM was $7.3 billion. Private-markets fee-paying AUM grew 9% to $40.3 billion; absolute-return fee-paying AUM declined 3% to $21.4 billion.
- Long-term debt principal was $389.0 million ($384.7 million net of debt issuance costs on the balance sheet). The revolving facility was undrawn, with $50.0 million available. The term loan’s 2023 weighted-average interest rate was 7.59%; a $300 million swap hedges part of the borrowing. The company reported covenant compliance and a total leverage ratio below 2.75x; the exact ratio is not stated in the supplied filing text.
Material changes versus FY2022
- Revenue was broadly flat as higher private-markets management fees were offset by lower absolute-return fees and incentive fees.
- GAAP operating results shifted from $80.3 million of operating income to an $11.8 million operating loss. Higher compensation—especially partnership-interest awards—and higher general and administrative expense drove the change.
- Despite the GAAP loss, fee-related earnings and adjusted net income increased. These non-GAAP measures exclude or adjust for specified items; review the filing’s reconciliations when assessing the improvement.
- Fee-paying AUM growth was led by private markets, while absolute-return assets experienced net withdrawals. Overall AUM also benefited from market-value increases.
- Cash from operations fell, and year-end cash declined by $40.8 million. Financing outflows included partner distributions, dividends, equity-award tax settlements, and debt payments.
Outlook, risks and notable items
- Outlook: The filing provides no specific revenue, earnings, or margin guidance. Management expects the $7.3 billion of contracted, not-yet-fee-paying AUM to convert to fee-paying AUM over roughly three years, subject to investment deployment and contractual fee ramps. Approximately $0.9 billion is scheduled to begin fee-paying in 2024 under agreed ramps.
- Management highlights client retention and cross-selling, international expansion, distribution to insurance and individual investors, new offerings, and balancing growth investment with operating leverage. More than 82% of gross capital inflows in 2023 came from existing clients; 51% of capital raised was outside the U.S.
- Key business risks include volatile incentive-fee and realization timing, fund performance and valuation uncertainty, redemptions and client termination rights, fundraising and deployment competition, elevated interest rates and inflation, and the ability to retain investment talent.
- Other material risks include conflicts of interest and allocation practices, evolving investment-adviser and private-fund regulation, cybersecurity and privacy threats, international regulatory complexity, and scrutiny of sustainable-investing disclosures.
- Carried interest is subject to clawback provisions. Deferred revenue associated with constrained realized carried interest was $5.6 million at year-end. The company had $85.6 million of unfunded investment commitments, generally presented as due within one year, though management says funding has historically occurred over a longer period.
- The Tax Receivable Agreement generally requires payment to former GCMH equityholders of 85% of specified realized or deemed tax benefits; the recorded liability was $53.8 million. Timing and ultimate payments may vary and could be substantial.
- A notable non-cash and accounting-sensitive item was the $155.5 million aggregate grant-date fair value of Holdings Awards, with $60.6 million of related 2023 compensation expense, net of reversals. The auditor identified valuation of these awards and certain Level 3 investments as critical audit matters.
- The board declared a $0.11-per-share quarterly dividend in February 2024 and increased the repurchase authorization to $140 million. Future dividends and repurchases remain discretionary and subject to liquidity, debt covenants, and other constraints.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The company reported no known cybersecurity threat or incident that had materially affected, or was reasonably likely to materially affect, it.
Important facts for investors to verify
- Reconcile the GAAP consolidated loss with parent-attributable income and the non-GAAP earnings measures; examine the treatment and future expense impact of employee awards.
- Track conversion of the $7.3 billion contracted AUM pipeline into fee-paying assets, actual fundraising, and absolute-return withdrawals.
- Assess the quality and timing of carried-interest realizations, potential clawbacks, and whether reported fund valuations are ultimately realized.
- Review debt service, interest-rate exposure and hedging, covenant headroom, cash available for distributions, and the $85.6 million of investment commitments.
- Monitor Tax Receivable Agreement payments and the effects of the company’s holding-company structure, noncontrolling interests, and concentrated voting control.
- Compare non-GAAP results with GAAP results and review the filing’s reconciliation and award-valuation assumptions before relying on adjusted profitability or margin trends.