GCM Grosvenor Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The company provides alternative investment management services through private markets and absolute return strategies.
Key financial results
| Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 |
|---|---|---|---|---|
| Total operating revenue | $107.6 million | $104.4 million | $206.7 million | $209.5 million |
| Operating income (loss) | $(36.0) million | $19.8 million | $(48.9) million | $37.8 million |
| Net income (loss), consolidated | $(36.3) million | $30.7 million | $(51.4) million | $53.9 million |
| Net income attributable to GCM Grosvenor Inc. | $4.8 million | $7.6 million | $3.6 million | $12.3 million |
| Adjusted EBITDA (non-GAAP) | $36.0 million | $35.2 million | $68.9 million | $72.4 million |
| Fee-related earnings (non-GAAP) | $32.8 million | $32.6 million | $63.2 million | $64.3 million |
- Q2 revenue increased 3.1%; H1 revenue decreased 1.3%. Management fees were broadly steady. Private markets fees grew, offset by lower absolute return fees; H1 incentive fees declined amid lower distributions and investment exits.
- Reported operating results were sharply affected by partnership interest-based compensation, including a $49.1 million Q2 charge related to Holdings Awards, net of reversal of prior target amounts. Total partnership interest-based compensation was $63.1 million for Q2 and $74.2 million for H1. The filing describes these awards as non-cash and says they do not dilute Class A shareholders; the expense is allocated to noncontrolling interests in GCMH.
- Q2 basic EPS was $0.11, while diluted EPS was $(0.23); H1 basic EPS was $0.08 and diluted EPS $(0.32). The differing diluted results reflect the assumed exchange of GCMH partnership units and related income allocation.
Cash, debt and liquidity
- Cash and cash equivalents were $50.8 million at June 30, 2023, down from $85.2 million at year-end 2022. H1 operating cash flow was $21.8 million versus $87.4 million a year earlier; investing cash use was $9.5 million and financing cash use was $46.1 million. Cash declined by $34.4 million.
- Senior loan principal was $391.0 million; carrying debt net of issuance costs was $386.2 million. The loan matures in February 2028. The company reported $48.2 million of available capacity under its $50 million revolving facility and no revolver borrowings.
- The senior loan’s weighted-average interest rate was 7.27% for H1 2023. The benchmark transitioned from LIBOR to Term SOFR on July 1, 2023. A $300 million interest-rate swap hedges part of the debt; management expects approximately $10.6 million to be reclassified from accumulated other comprehensive income to reduce interest expense over the next 12 months.
- The company said it was compliant with debt covenants; its total leverage ratio was below 2.75x. Management expects cash, operating cash flow and revolver capacity to fund operations and debt service for the next 12 months and foreseeable future.
- H1 cash uses included $19.4 million of partner/member distributions, $8.0 million of distributions to noncontrolling interests, $9.3 million of dividends and $4.5 million of Class A share repurchases.
Business measures and changes
- Fee-paying AUM rose 3% from year-end to $60.6 billion. Private markets FPAUM increased to $39.1 billion; absolute return FPAUM declined to $21.5 billion, mainly due to withdrawals. Total AUM was $76.0 billion, up from $73.7 billion at year-end.
- Contracted, not-yet-fee-paying AUM fell to $6.7 billion from $7.6 billion at year-end. H1 private markets management fees increased 8%, while absolute return management fees decreased 11%, reflecting lower FPAUM from market performance and net withdrawals.
- Q2 general, administrative and other expenses increased 24% to $28.7 million; H1 increased 23% to $54.5 million, primarily due to professional fees, IT operations and travel costs.
Outlook, risks and notable items
- The filing provides no specific revenue or earnings guidance. Management cites fundraising and retention, investment performance, realizations, client withdrawals, market conditions, competition, regulation and geopolitical and economic conditions as factors that could affect results.
- Incentive and carried interest revenue is variable and dependent on investment performance and realizations. Carried interest may be subject to clawbacks; approximately $6.1 million of realized carried interest was deferred under the company’s constraint assessment at June 30.
- Unfunded commitments to GCM Funds were $88.1 million. Maximum exposure to loss from unconsolidated VIEs was $112.4 million. The company also notes potential general-partner exposure beyond its investment, though management considers material loss remote.
- A New York office lease signed in June is expected to commence in August 2023, with approximately $65.7 million of future payments over about 16 years. Management said current litigation was not expected to have a material financial-statement effect.
- After quarter-end, the board declared a $0.11-per-share dividend and increased the share repurchase authorization by $25 million, from $90 million to $115 million. The company reported $21.6 million remaining under the plan at June 30, before the subsequent increase.
Important facts for investors to verify
- How recurring fee growth and private markets fundraising compare with continued withdrawals and lower absolute return FPAUM.
- The nature, timing and ongoing expense impact of Holdings Awards and other partnership-based compensation, and how these affect GAAP results versus non-GAAP measures.
- Current borrowing cost after the SOFR transition, covenant headroom, and the effect of the debt hedge as rates change.
- Cash conversion and liquidity, including the timing of incentive-fee receipts, distributions, dividends, repurchases and required fund commitments.
- The commencement and full economics of the New York lease, and developments in contingent, litigation or general-partner exposures.