Good day, and welcome to the GCM Grosvenor Second Quarter 2021 Results Webcast. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Stacie Selinger, Head of Investor Relations. Please go ahead, ma'am.

Thank you. Good morning, and welcome to GCM Grosvenor's Second Quarter 2021 Earnings Call. Today, I am joined by GCM Grosvenor's Chairman and Chief Executive Officer, Michael Sacks; President, Jon Levin; and Chief Financial Officer, Pam Bentley. Before we discuss this quarter's results, a reminder that all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements. This includes statements regarding our current expectations for the business and our financial performance. These statements are neither promises nor guarantees. They involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results. Factors discussed in the Risk Factors section of our 10-K/A for the fiscal year ended December 31, 2020, and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements on this call. We'll also refer to non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of non-GAAP metrics to the nearest GAAP metric can be found in our earnings presentation and earnings supplement, both of which are available on the Public Shareholders section of our website. Our goal is to continually improve how we communicate with our shareholders. In that spirit, we look forward to your feedback and we'll endeavor to continually improve in this regard. Thank you again for joining us. And with that, I'll turn the call over to Michael.

Thank you, Stacie, and thank you to all of you for participating. The second quarter marked 50 years of operations for GCM Grosvenor, a rarity in the alternative investment arena, and we are proud to celebrate that milestone. What is particularly nice is that we are as encouraged today by our ability to drive value for clients and shareholders as we have been at any time over the last 30 years that I have been at the firm. The second quarter of 2021 was another strong quarter for GCM Grosvenor with solid investment results and growth in assets, revenue, profitability and earnings power. The quarter's results left us solidly on track with regard to our 12% to 15% fee-related revenue and 15% to 20% fee-related earnings growth targets. We have often cited strong free cash flow generation and the ability to return capital to shareholders as attractive features of our business. In light of our results and future prospects, our Board has approved a dividend increase of 12.5% to $0.09 per share from $0.08 per share. That $0.09 per share dividend is payable on September 15 to shareholders of record on September 1. Our Board also authorized a $25 million stock repurchase plan, of which $6 million will be used to reduce the number of Class A shares being delivered in August that are associated with prior equity awards. Turning to Slide 4 of our earnings presentation. From the end of the second quarter of 2020, we have seen growth in assets under management, which increased 18% to $67 billion; in fee-paying assets under management, which increased 11% to $55 billion; and in contracted not yet fee-paying assets under management, which increased 26% to $7 billion. Our asset growth has been the product of solid fundraising, investment performance and the…

Thank you, Michael. I'll begin my remarks on Slide 6. Michael hit on the continued growth in the earnings power and scalability of the business, and we're excited to continue to invest behind this momentum. Importantly, while always investing for the future, we remain laser focused on delivering exceptional performance and client service to our existing clients. But we also believe there's a large world of potential clients that would benefit from our solutions. In that vein, last quarter, we mentioned our recently established office in Toronto. In recent weeks, you likely saw additional hires and initiatives we've announced in our business development area. One area in particular that I want to address is the creation of GCM Grosvenor Insurance Solutions. We believe our investment capabilities in combination with our flexibility and creativity in structuring and executing those strategies makes us an ideal partner for insurance companies. Historical under-allocation to alternatives, combined with the current interest rate environment, will drive growing interest in alternatives from insurance company balance sheets. The global insurance market is a multitrillion-dollar opportunity. Insurance capital represents less than 5% of our AUM today, and we believe this segment could become a low to mid-double digits percentage of our AUM over time, which makes it a multibillion dollar opportunity for us. You should expect to continue to see us invest in our business development function. This past quarter, we raised $1.5 billion, bringing year-to-date fundraising to $4 billion. Our fundraising continues to be notable in its high level of diversification across asset class, investment type and client type. Based on our current fundraising pipeline, we're very optimistic for the back half of the year, which consistent with our plan, is likely to see asset raising that exceeded the first half of the year. We continue to benefit…

Thanks, Jon. I'll begin on Slide 9. As our assets have continued to grow and we continue to see a mix shift towards higher fee activities such as co-investments, direct investments and secondaries, we've seen an accelerating positive trend in our earnings power. The firm's adjusted revenue increased 33% compared to the second quarter of 2020 and 29% on a year-to-date basis. Our fee-related revenue this quarter increased by 13% over the second quarter of 2020. And on a year-to-date basis, our fee-related revenue was up 10%. Both absolute return strategies and private markets saw management fee growth from the first to second quarters and on a year-over-year basis. Consistent with our expectations, private market specialized funds more significantly contributed to management fee growth this quarter, increasing 11% over the first quarter and 24% on a year-to-date basis. Part of this was driven by catch-up management fees from our private markets specialized funds, which were $2.3 million in the second quarter. We anticipate similar levels of catch-up management fees in the third and fourth quarters. Our fee rates in each of our verticals were stable. And solid fundraising for specialized funds and for secondary, co-invest and direct investment activities provide support for our current fee levels and rate expansion opportunity going forward. Administration fees declined this quarter to just under $2 million upon the expiration of a long-term contract we had to provide ARS administrative services. Broadly speaking, we provide these services to primarily private market clients for over $0.25 trillion in assets. This is an ancillary service we offer to many of our clients, which have significant benefits in the form of client retention and data. You can expect our administration fees to level off to less than $1 million per quarter starting in the third quarter. Moving to…

[Operator Instructions] Our first question will come from Ken Worthington with JPMorgan.

Can you level set us in terms of fundraising for the specialized funds that you have in market? I think you mentioned in your prepared remarks that the outlook for the firm was better for fundraising in the second half than it has been so far in the first half. And I don't remember if you mentioned this or not, but I thought it might have been driven by the specialized funds. So again, to level set us, how much has been closed so far in, I think, the 4 funds you were expected to have in market this year: infra, secondaries, advanced and multi-assets? That would be number one. Number two, how much has been raised in these 4 funds so far this year? And then help us with expectations for the second half of the year. And then lastly, you mentioned that catch-up fees, I think, were $2.3 million in 2Q, but expected to be about the same in 3Q and 4Q. And I guess my question is if the fundraising is expected to be better in the second half of the year and given that there's more time going by and you're further away from the inception date of those funds, why wouldn't catch-up fees, in fact, be bigger in the second half of the year than they were in the first?

Thanks, Ken. It's Michael, and thank you for the questions. First, I would say that we are overall very comfortable, very confident as you heard me say, and as Jon said, in our fund raising for the second half of the year. We have not released numbers on specific fund raise, the specific co-mingled fund efforts, and we've stated that we won't do that until final close. And the only fund that's in market now that has a final close before the end of the year or at the end of the year is the advanced fund. So we look forward to releasing those numbers after the end of the year. What I can tell you is that we are confident in the performance of those co-mingled funds. We are confident in our separate account re-ups and our new separate account activity. And I think Jon said and our expectation is for fundraising larger in the back half of the year than in the front half of the year. And what I would mention on the catch-up management fees is that of the 4 funds in market, the only fund that has funds that have appreciable catch-up management fees are secondaries fund and advanced multi-asset class having -- just getting started and with a lot of confidence on our part. And the infrastructure fund is structured in a way that there aren't catch-up management fees. So obviously, we have tried pretty consistently to be conservative in what we put out there for you. We have been very clear and very strong about our ability to hit our 12% to 15% fee-related revenue growth and our 15% to 20% fee-related earnings growth, and those numbers imply continued growth in the back half of the year. We've talked about the strength of the pipeline pretty directly. And Jon, I think, said pretty clearly what our expectations are for fundraising back half, and we're feeling very good about that environment in general.

Okay. So if we don't get specific numbers, can you give us maybe a sense how far of the way through infrastructure and secondaries are you? Are we in the first half of the game? Are we in the second half? I assume advanced is very much towards the end. But can you give us what inning we are? If you can't do it individually, then do it collectively?

Advanced will have its final closing towards the end of this year. And so that's kind of late innings. Both secondaries and infrastructure will raise into next year, which is, I guess, middle innings, maybe mid late. I don't know if that's sixth inning or fifth inning and -- fifth inning, sixth inning, seventh inning, I don't know. And MAC is early, very early innings, and we -- it has a lot of promise. So we're very -- we're comfortable with how our fundraising is going, and we are confident in the numbers that we've put out and feeling that we had a good couple of good strong quarters here that we've reported and are optimistic about the back half of the year.

Okay. Great. And then in terms of the absolute return business, we were -- inflows in 1Q, outflows in 2Q. I would say performance in 1Q was not maybe as good, and 2Q seemed fine but below what we are seeing in Blackstone's business and below some of the indices that I think we track. Does performance need to be better than what you're delivering for the absolute return business to get to more consistent inflows? I think, Michael, you mentioned in your comments that you think about flows in the context of the macro environment that you see as important. But how important is delivering returns to get back to more consistent inflows?

Well, I would say a few things. So one is, obviously, performance generally is important. I think it's -- I think you got to be a little careful about looking quarter-to-quarter and trying to adjust your expectations for the business. Last year, we outperformed most of our peers pretty significantly, and our trailing 12-month performance numbers are very strong. And frankly, our net flows environment this year is -- seems pretty good relative to the space. So I think you -- of course, performance is -- comes first, but looking at it over a reasonable time frame, and we've been at this for, as you know, just a long time, decades, and so it is really important. The second thing that I really hope you take away and that everyone takes away from this call is the significant or strengthening of the basic economics of the business where while there were net outflows, the actual revenue impact of flows was flat to marginally positive for the quarter, positive for the year before getting any benefit from the positive compounding in the market. And that's management fee only when we've also had a significant amount of incremental capital that now has a performance fee associated with it, and you've seen a very significant increase in the run rate performance fees over the last year, which we mentioned. So in general, while we don't want to change or predict a macro change in the flow environment, we've always maintained that that's a very valuable vertical. It is one that distinguishes us in a good way with clients. It's one that gives us more tools to provide solutions and sort of support for clients. It's generated tremendous cash flow over decades and is going to continue. And we just think that when you look at the relative valuation differences of our firm where our private markets business is growing in line with others. And you -- that vertical is not being, in our view, afforded the -- it's being underappreciated is I think what I said.

This is Jon. I would just add one comment. Michael said this, but just to reiterate it, I think that from a performance standpoint across the board, where you kind of think about we have, generally speaking, clients that would work with us in ARS vertical either in a multi-strategy way, in a maybe more credit-oriented way or in an opportunistic way, those are kind of 3 big buckets across the board. The feedback from the marketplace and from clients is that when you look at our performance over longer periods of time, as Michael pointed out, I think, is a more important metric whether you're talking about the last 12 months, over the last 18 months, kind of almost universally, feedback on our performance is that it is strong, meeting their goals and generally strong from a competitive standpoint as well.

Our next question comes from Jeff Schmitt with William Blair.

Could you discuss the creation of the Insurance Solutions division and kind of your strategy there? We've seen some insurers pull back on alternative investments, I think, in recent years just trying to reduce volatility. But are you seeing that demand really shift there, I guess, with this low interest rate environment?

Jon, why don't you take that one? And you touched on it, obviously, in your remarks, but I don't -- I know you can do it.

Sure. I think, in general, our view is that the demand for alternatives is large and growing. Certainly, you will find specific instances where people have to be wary of the overall composition of their balance sheet and regulatory capital treatment. But to the point you made, overall, as a matter, it's in a place where there's historical under-allocation to alternative strategies. And then specific to the point you made, the interest rate environment only drives the need to find return from other areas besides fixed income, which make up obviously a significant portion of insurance company balance sheets. I think specific to us, the idea that we are an open architecture firm with a lot of different ways to implement alternative investing, primary funds, co-investments, secondary investments, direct investments, covering all of the asset classes from the liquid to the illiquid and the ability to work with clients in a customized manner, which as we know represents about 75% of our assets under management, makes us a pretty ideal partner. And particularly on that last piece, we have the ability to structure alternative solutions that meet insurance company balance sheet needs with respect to volatility, with respect to liquidity, with respect to return generation. And we think there's a very large opportunity there. And from a competitive standpoint, our focus is on providing those solutions to the insurance companies and asset management business as opposed to being in the insurance business ourselves, which is obviously a trend you've seen from others in the marketplace. And so we're pretty excited about what that future holds for us.

Right. Okay. And then looking at the carried interest, and you provided some great detail there on that kind of earnings power and how that's increasing. And then your retention of that has been going up in terms of how much is going to employees or what have you, your retention in that is going up. And I think maybe slow 60% go out the door to employees now. And you had mentioned newer funds, your retention goes up. So do you see that going to kind of 50% over time to bring you more in line with peers? And how should we think about that time line? Like how long would that take?

Well, so if you -- if the time line, it's a little bit hard. So the cash that's received from carry now is related to carry that dates back anywhere from a couple of years to a very long -- to a decade. And if you look at that, it's about 65-35 now. Maybe it's a little bit more in favor than 35% in favor of the firm. But that relates to long ago allocations. For the last several years, we've been -- as we've said before, we've been allocating to the team on a basis where it vests over time about half. And so as we move forward in time and the carry plans that are generating the carry revenue start to -- the percentage that comes from the carry we've allocated in the last 5, 6 years starts to increase, that number will shift and should grow. And maybe the most important point, so I think that -- is we have acceleration looking forward a few years in that. And then Jon's point that he touched on in his remarks, that there is a lot of carry that is not yet at NAV that has been related to the assets raised and funds invested over the last several years that we certainly hope will come online and going forward as well. So we think we've got these sort of 2 strong tailwinds that will accelerate that carry, that firm share of carry line as we move forward.

Our next question comes from Peter Kaloostian with Morgan Stanley.

You mentioned strategic hires in the client group to expand to high-growth geographies and channels. I'm just kind of hoping to get a little bit more color on how you're approaching distribution today, specifically in high net worth channels where we're seeing increasing demand for alternatives.

Sure. So thanks, Peter, for joining and for asking a question. Jon touched on this in his comments. We -- and we've been clear that we think our best opportunity in high net worth in the intermediate term is to have a greater representation on the very successful powerful wealth channels. And over the last year, we've doubled the number of channels that we have product on. We look forward to further increasing the number of channels and also increasing the breadth of product with regard to the different channels. And so we think that we have some real opportunity there. And people who have been following us from the beginning know that we think that's a place where we can -- where we could have -- we could do a better job, and we're -- I think we're starting to show some fruits of the efforts there in light of the identified opportunity.

[Operator Instructions] We'll take a follow-up question from Ken Worthington with JPMorgan.

In terms of capital management, how aggressive do you plan to be in deploying the $25 million or the $25 million less the $6 million? And then how do you approach warrants versus the common? And I think you said you plan on being opportunistic. But given where the stock price is, again, how attractive do you think the shares are here?

We think that they're very attractive. I think you know our views, Ken, and we think they're attractive here. And so we've authorized that at the Board. We've got an identified use for a significant chunk of it. We are open to looking at warrants as compared to stock. And I think we will just -- we will be opportunistic. We will sort of be opportunistic. We will take our time relative to our kind of normal course volume. It's not an insignificant amount of capital. And we also think that we're a little -- we don't love shrinking the float. On the other hand, we've always talked about the quality of the business as our ability to return capital to shareholders. And there are 2 ways to do it, the dividend and buybacks, and we wanted to authorize this plan and have that ready. If the stock continued to exhibit weakness, we think it's good to have.

Okay. And then warrants versus common?

I think we'll look at accretion, dilution. It's there. We're -- it's a little bit hard for us to ascertain the degree to which the warrant overhang is having an impact on shareholders or institutional shareholders, but that would -- we would look at warrants as well.

Okay. And then on contracted but not yet fee-paying AUM declined slightly from pretty high levels in 1Q and sort of high levels now. Is the composition of net sales sort of changing again? Are we seeing more net sales being funded immediately? I think in part, the pipeline was building so much because the pipeline -- or the -- sorry, the net sales were coming in a bit differently than maybe they had in the past. So maybe more pipeline building than immediately funding. So are you seeing that composition sort of switch back again to what the net sales looked like in years past?

No, I don't think you can take away any meaningful change in the business from kind of the 1 quarter. We expect that number to grow over the back half of the year and to be higher at year-end than it is today or it was at [ 630 ]. As you know, contracting on separate account agreements doesn't always line up perfectly with calendar quarter. And if you look last year, I think we had a similar fundraising level in Q3 of last year and then -- and you've seen a big growth in CNYFPAUM in Q2 and again in Q1 of this year. So we don't see any fundamental shift there. And we -- as we always say, we like to grow our FPAUM. And we like to grow our CNYFPAUM, and we expect to do that over the back half of the year.

And it appears there are no further questions at this time. I'd like to turn the conference back to Stacie Selinger for any additional or closing remarks.

Thanks, Lauren. Thank you all for joining us today. If you have any feedback or follow-up questions, please feel free to reach out. Otherwise, we look forward to speaking with you again next quarter. Thank you again.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.