Good day, and thank you for standing by. Welcome to the GCM Grosvenor first quarter earnings webcast. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Stacie Selinger, Head of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to GCM Grosvenor's First Quarter 2021 Earnings Call. Today, I'm 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 filed with the SEC on May 10, 2021, 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. We may also reference our August 2020 merger presentation, which is again available on our website. Some brief housekeeping before we begin our call. As you know, based on SEC staff guidance issued on April 12, 2021, regarding the accounting treatment of certain warrants, on May 10, we filed our 2020 Form 10K/A. We also expect to file a post-effective amendment to our Form S-1 shelf registration statement next week and will seek effectiveness as soon as the SEC staff gives us the go ahead. As you know, this restatement was in no way unique to GCM Grosvenor. The guidance issued by the SEC staff impacted numerous companies with warrants containing certain characteristics and resulted in many similar restatements. Importantly, while the liability treatment of the warrants will result in some volatility in GAAP earnings, our cash flow and key non-GAAP metrics such as fee-related revenue, fee-related earnings, adjusted EBITDA and adjusted net income will not be impacted. Pam will discuss this in more detail later on the call. 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 who are listening to this call. The first quarter of 2021 was a strong quarter, leaving us on track to achieve the 12% to 15% full year 2021 over 2020 fee-related revenue growth and the 15% to 20% fee-related earnings growth we highlighted on our last earnings call. On Slide 4 of our earnings presentation, you can see we enjoyed continued momentum across the business in the first quarter of 2021. I am pleased to report that for the first quarter of 2021, we raised a total of $2.5 billion as the environment for alternative investment strategies remained robust. Looking forward, activity levels remain high, and our pipeline continues to be encouraging. As of March 31, 2021, our fee-paying assets under management stood at $53 billion, an increase of 12% compared to March 31, 2020, and an increase of 3% compared to December 31, 2020. Our contracted not yet fee-paying AUM stood at $7.5 billion as of March 31, 2021, an increase of 38% as compared to the same time 1 year ago and an increase of 6% as compared to December 31, 2020. Our contracted not yet fee-paying AUM now represents embedded incremental annual management fees of $36 million, an increase of 33% from the $27 million at the end of the first quarter of 2020 and a 6% increase from the prior quarter. Moving to Slide 5. In the first quarter, we experienced net inflows of $205 million in our absolute return strategies vertical, marking a continuation of the improvement in the fund flows environment for that strategy. While pleased with this result, we continue to maintain our base case of flat flows for absolute return strategies for the full year 2021. It is worth noting that our…

Thank you, Michael. Michael touched on the continued growth in the earnings power of the business. That momentum is a function of the environment generally, in combination with our platform's unique ability to offer investment solutions across the entirety of the alternative spectrum. The breadth and depth of our client value proposition enhances our ability to grow and evolve with our existing clients and begin relationships with new investors. Turning to Slide 7. We continue to benefit from a strong fundraising backdrop across private markets, in particular. We also benefit from our strength in customized separate accounts given the market's continued interest in heavily tailored programs. Of the $2.5 billion of capital raised in the first quarter of 2021, more than 80% of that capital was for customized separate accounts and 75% was for private markets strategies. More than 50 clients contributed capital, of which approximately 1/4 were new clients. Michael already mentioned the positive net flows and absolute return strategies for the first quarter, which is a function of the more positive investor sentiment toward the strategy given the strong recent risk-adjusted returns. Regarding specialized funds, we are currently raising or anticipate raising capital across 6 specialized funds. In 2021, we are in the market with 4 of those funds: first, our advance fund which is focused on investing in and alongside minority and women-owned managers; second, our secondaries fund or GSF III; third, our diversified infrastructure fund or CIS III; and finally, our multi-asset class direct investment fund or MAC III. All 4 funds will be raising capital through the end of 2021. And of these 4 funds, only the advance fund will have its final close this year, which will be at the end of the year. We also expect all 4 funds to have multiple closings…

Thanks, Jon. Before we get into our performance this quarter, I want to briefly address the SEC statement on warrant accounting and its impacts on our GAAP fourth quarter results in the amended 10-K that was filed earlier this week. As a result of the SEC statement, we determined that based on the tender features of our warrants, they should be classified as liabilities and mark-to-market each reporting period. Based on the change in our warrant fair value, from the time of the public offering through the end of December, we recorded a nonoperating expense of $13 million in the fourth quarter. The fair value of the warrant subsequently declined in the first quarter resulting in a more than offsetting $14 million of nonoperating income. These changes did not impact our non-GAAP financial measures or cash position, and they will not be impacted going forward. Turning to our performance in the quarter. I'll begin on Slide 8. As Michael noted, we are very pleased to see the investments we've made in recent years continue to come to fruition and benefit our assets under management and financial performance. On a year-over-year basis, our fee-related earnings, adjusted EBITDA and adjusted net income all increased, illustrating the continued positive momentum of our business. Fee-paying assets under management grew 12% over the prior year and grew 3% from the fourth quarter, which portends solid growth for the second quarter. Going one level deeper, fee-paying assets under management and management fees grew for both private markets and absolute return strategies. We also saw stable average fee rates across the business this quarter and expect this fee stability to continue. This quarter, our catch-up management fees related to our specialized fund fundraising included in our fee-related revenue were $1.5 million, which is approximately $1 million higher…

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

This is Samantha Trent on behalf of Ken. The first question is just on the absolute returns business. So Grosvenor funds have been beating the hedge fund return indices in recent quarters and this quarter kind of looked a little bit a touch below. So just wondering how did the events of the first quarter like the meme stocks and even the impact of Archegos impact the absolute returns business? And then looking at the bigger picture, how is January and to what extent were Grosvenor investments impacted by the meme stock phenomenon?

Thank you for that. It's Michael Sacks. So we believe that whenever you have extreme volatility, you have a lot of dispersion in the market in a way that, that benefits our business. It shows the value proposition of what we do. And the benefits of running a comprehensive, holistic portfolio that's diversified with no one strategy manager or market able to determine or unduly influence your results. So neither the meme stocks, which were certainly exciting for a little bit there in January, or Archegos in anyway, frankly, were terribly impactful to our performance. Our -- and I think that the value of the approach is actually reinforced from those activities. And as we mentioned in our comments, demand and pipeline and interest levels are quite high, and the entire absolute return space has seen a pretty significant change in sentiment from the third quarter of last year.

And then just to move to expenses. In terms of G&A, where the numbers pretty clean this quarter? And is this a good base to look at for expenses in coming quarters? And then for core compensation costs, I think you already talked about this, but we are expecting these to grow through the rest of this year and then into next year?

So I'll take a shot, and then Pam, if you want to add in, please, but we budget carefully. I'd like to think we budget conservatively, and we manage tightly with regard to our expenses and our headcount and our comp. And I think that the expenses were in line with our expectations. They were consistent with comments that we made on our last earnings call with regard to the seasonality of certain expenses and are consistent with the -- us achieving our 15% to 20% FRE goal this year, which we are standing by. Pam, I don't know if there's anything to add or not.

Samantha, yes, just to the second part of your question on is this an appropriate level. Yes, we think this is an appropriate level. We could see this tick up modestly if some of the pre-COVID-related travel expenses start to resume, but we wouldn't expect that in full. So again, as Michael said, this is embedded in our 15% to 20% FRE growth.

And I guess the last I'd just -- last thing I would just mention is our FRE margin from Q1 2020 to this quarter, the quarter we're reporting on now, Q1 2021, grew nicely, and as Pam mentioned, we're looking for continued margin expansion through the remainder of the year, and we do think and we've talked about in the past that we think we have some operating leverage in the business. And so I think that's all relevant as well.

And then just one more. Moving to private market assets. The distributions of around $900 million were a bit elevated relative to prior quarters and years. Just any color that you can share here and given the market conditions, in your analysis, if you have any color on the terms of the pace of distributions going forward, walking through to the end of the year?

I think we actually touched on that on our fourth quarter earnings call. We had a pause in activity, including deal activity last year due to COVID. And we anticipated that it would tick up and be more robust and we would see more transactions and therefore more distributions. We -- and that is what happened. I think activity levels remain robust, and we believe there will be continued high levels of activity throughout the remainder of the year. And all of that is sort of in our -- is kind of what we've modeled. And you can see that in the carry revenue to some extent as well.

And Samantha, this is Jon. I would just add that in general, over cycles, there's a strong correlation between the robust capital raising activity and being driven by elevated distributions or return of capital to clients. So when Michael talks about it being embedded, it's because the 2 are very much related. So clients are receiving capital back sooner and larger because of a healthy exit environment that would typically speed up the cycle by which they would make new commitments and potentially larger commitments. And so there's a healthy relationship between those 2 important metrics for the business.

Our next question comes from Adam Klauber with William Blair.

You're having a lot of success, obviously, with this current round of new funds. As you know, we think about the business longer term. When we look at '22, '23, is it likely we'll see more specialized, more secondary funds? Those seem to be particularly successful. Just some general thoughts about what that next round or next tranche would potentially look like?

Thank you, Adam. Thank you for the question. Of the funds that are in market now, as Jon mentioned, only the advanced fund will have a final close at the end of the year this year. So 3 of those funds will stay in market, including secondaries into next year and we'll continue raising. And then we have other specialized funds that in -- from a perspective of their cycles will come on and come into the market for the next fund. So I think Pam also touched on the fact that we see continued specialized fundraising through the end of the year, we see catch-up management fees for that. We see that continuing on into next year, and it's kind of part of the firmament of the firm that will continue and be present in '22 and in '23.

Okay.

And beyond.

Okay. Okay. And as far as this quarter, I mean, clearly, $2.5 billion raised in the quarter, very, very strong quarter. Was there any unusual, I guess, hits or -- that really made it that strong of a quarter? Or was it just amalgamation of a lot of the efforts that you've been talking about?

So Jon talked about the breakout between custom separate accounts and specialized funds. The -- we saw the flows and we see demand and we see pipeline across all of the verticals. So what was interesting and nice about the quarter was every vertical had grew and had net inflows. And the interest levels and activity levels across the entire firm are good.

Okay. So it sounds relatively diverse, not some big onetime hits.

I wouldn't say big onetime hits. Infrastructure took the most capital in, but I don't know that it's like -- these are onetime hits. I think there's -- there are high levels of demand for infrastructure, and we see growth in infrastructure persisting for a while. So it was all of the verticals with infrastructure being the largest. And I think it speaks more to levels of demand and activity levels than it does to any onetime thing that we don't think we continue to achieve.

Adam, this is Jon. I would say not only was it diverse, as Michael said, by investment vertical, but also the source of the capital was diverse. So we saw it across geographies. We saw it by different types of investors, different investor types, and so it was pretty well rounded in kind of all regards.

Okay. That's helpful. And that was actually my next question, I think. If I heard correctly, you said maybe 75% of the funds came from existing clients, 25% from newer clients. Could you, I guess, give us some idea of the mix of those newer clients? Are those new categories? Or just some flavor for who are some of the newer clients you're interacting with?

Yes. I think...

I would say that...

Go ahead, Jon.

I was just going to say it would be a similar mix to the existing clients, but just new clients in those channels. So I wouldn't drive particular conclusion around it's a certain type of client or a certain geography that's new. I think that in general, the ability to provide broad-based solutions in different implementation styles across the different alts verticals enables you to generate new client relationships. And I personally wouldn't pull, maybe Michael has a different comment, a particular theme around the types of clients. I would say it's just more of the diversified client base that we have today.

Yes. If you're looking for a change in the market or any that -- the thing that you would go to, obviously, would be the change in the environment with regard to the absolute return strategies. So the private market strategy is very broad, as Jon said, channel and geography, both existing and new. And if there is something that you said you got -- you want to -- what is the biggest evolution or change from 6 months ago, you'd say the interest levels and flows and activity around absolute return, which is obviously much significantly improved.

Okay. Okay. And more on the private market. Given the type of funds you're selling -- sorry, not selling, you're bringing in, should we expect the fee rate to be more level, go up, down? I guess, what's your expectation in the private markets?

So our fee rates were stable and have been stable across the firm. And as I mentioned in my comments, the driver of change in fees has not really been fee rate as much as is it primary, is it secondary, is it co or is it direct. Where for secondary, co and direct, fee levels generally are higher. And it's been -- you have seen -- we have seen, and I think the industry has seen flow -- higher flows towards secondary and co, which are higher levels of fee for the solutions providers. And so that's constructive for average fee rates over time.

Okay, great. And then as far as the margin, again, a really nice pop in the adjusted EBITDA margin. And you've been talking about that for a little while, so it's great to see that come through. From a seasonal aspect, are there things we should look for in the second or third quarter, in particular that could move up or down the margin?

The biggest thing, I think, seasonally to make sure that people are aware of and focused on is the fact that when you're raising for specialized funds and there are catch-up management fees and you have multiple closings in a year, there is a slope or a tilt to the revenue recognition for that, that slopes up towards the back half of the year. And we've talked about that before and want to make sure people are aware of that. Pam noted that in her remarks. And that's probably the biggest -- I don't know if it's -- don't think it's proper to say seasonality, but that's probably the biggest thing we -- everybody should be aware of.

[Operator Instructions] Our next question comes from Peter Kaloostian with Morgan Stanley.

Just hoping you can elaborate on the Mosaic purchase and walking through the mechanics of how you'll exercise that and then just the potential impact to the P&L?

Thank you, Peter. So we said in our remarks that we do intend to acquire -- exercise our call option on Mosaic by the end of the year. That is something we're comfortable saying and have been talking to you about the right time to do that for a while. We have numerous options with regard to -- it's essentially -- there's some information on Mosaic, Page 32 of the earnings presentation. It's an $88 million net purchase price. We have numerous options for funding our -- the exercise of our call option. It will be accretive. It will be accretive when we do it, and we'll -- as we move now towards the end of the -- through the year, and we -- with the commitment to call the exercise the option by year-end, we will look at the different cost of capital and minimize that for the firm. But it's very comfortable for us to commit to that based on both the size of the investment and the accretive nature of the investment.

And just a follow-up. You spoke on increased investment and business development and specifically with the new Toronto office. Just hoping what opportunities do you see in Canada.

We have -- go ahead.

I would just say it's similar to the opportunity set that we see in geographies around the world. So we've talked in the past about areas where we have very strong presence, particularly in United States and U.K. and Switzerland, parts of Europe, very strong presence in Asia, and then some other areas where we feel like, given the breadth and depth of our capabilities and the endorsement of those capabilities with institutional investors globally, that we should be able to similarly service clients in the regions or the channels where we're underrepresented. And so I would say it's not necessarily different from the capabilities that we offer to clients in other parts of the world, but it's really just establishing a stronger presence there with an office with 2 individuals to help develop some deep relationships with investors in the region.

And I'm showing that, that's all the questions we have for today. I'd like to turn the call back to management for any closing remarks.

Thank you all very much for joining the call, for listening, and we look forward to speaking with you again soon. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.