Good day and welcome to the GCM Grosvenor Second Quarter 2023 Results Webcast. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call will be recorded. I would now like to hand the call over to Stacie Selinger, Head of Investor Relations. You may begin.

Thank you. Good morning and welcome to GCM Grosvenor's second quarter 2023 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, our financial performance and projections. These statements are neither promises nor guarantees. They involve known and unknown risks, uncertainties, and other important factors that may cause our actual results to differ materially from those indicated by the forward-looking statements on this call. Please refer to the factors in the risk factors section of our 10-K, our other filings with the Security and Exchange Commission and our earnings release, all of which are available on the public shareholder section of our website. 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 shareholder section of our website. Our goal is to continually improve how we communicate with and engage with our shareholders and in that spirit, we look forward to your feedback. Thank you again for joining us today, and with that, I'll turn the call over to Michael.

Thank you, Stacie. GCM Grosvenor again made solid progress in the second quarter. Our Absolute Return Strategies vertical showed signs of stabilization and our private market verticals continued their solid growth trajectory. Our financial performance met our expectations, and our board increased our stock buyback authorization by $25 million. The quarter saw assets under management grow 7% year-over-year, driven by 12% year-over-year growth in Private Markets AUM. Our quarterly Fee-Related Earnings achieved the guidance we provided last quarter. Adjusted EBITDA and adjusted net income increased year-over-year, driven by a modest sequential and year-over-year increase in carried interest. Importantly, during the second quarter, the fundraising environment began to loosen up just a bit. Our second quarter fundraising of $1.5 billion was up about 50% from the first quarter. Our fundraising was again concentrated in private markets with infrastructure being the biggest recipient of capital as it has been for the last couple of years. 73% of the capital we raised came from outside of the U.S., which is nice as we've been investing to expand our presence internationally. Based on our pipeline, we remain confident that second half fundraising will exceed first half fundraising. In Q3 of 2023, we expect to see mid-teens year-over-year Fee-Related Earnings growth and our goals for the full year remain in sight. We continue to see strong growth in Fee-Related Earnings in 2024. Our ability to continue to grow our business in varied market environments is of course, in part a function of the attractiveness of the industry, which we have consistently said remains very healthy in terms of investor attraction, adoption and growth. But we also believe that our unique platform provides a lot of value to clients and leaves us particularly well positioned to the upside. Our client first philosophy, the belief that we…

Thank you, Michael. We ended the quarter with $10 billion of dry powder across our strategies, which we look forward to deploying in an attractive investment environment. The highest concentration of dry powder is in our private equity business, followed by infrastructure and real estate. It's noteworthy that our real estate dry powder of $1.7 billion equates to more than 30% of our total real estate AUM, which was $5.5 billion as of quarter end. Fortunately, our team will be deploying a significant portion of their total AUM following the reset in the real estate environment in response to higher rates and tighter access to capital. This quarter, we're going to dive a little deeper into our real estate vertical. Our real estate vertical has been our fastest growing strategy over the last year and stands to continue to grow nicely in the intermediate term. Our real estate AUM of $5.5 billion is 60% greater than just two years ago. $3.8 billion of that AUM is already invested and we have minimal exposure to some of the more troubled areas in real estate such as office and retail. So, the current portfolio is well positioned and as noted earlier, we have a lot of capital to deploy relative to the total amount of capital we manage. But it is our unique approach to real estate investing that I will dive deeper into today. We focus on value add and opportunistic investments in real estate sub-asset classes with favorable long-term fundamentals. Our implementation approach is high value-add and unique. An outgrowth of our open architecture approach across the firm, our real estate platform focuses on investing in and alongside early-stage real estate platforms. We essentially provide an unpacked version of the typical opportunity fund. We deliver our clients high quality value…

Thanks, Jon. Our management fee driven balance sheet light business and embedded growth and scalability have continued to serve us well amidst challenging markets. Assets under management grew to $76 billion in the quarter, a 7% increase from a year ago total fee-paying AUM increased 5% year-over-year inclusive of 12% growth in private markets fee paying AUM, our private markets business now represents 70% of our total AUM and 64% of our fee-paying AUM. Looking towards the third quarter, we again expect double-digit private markets, organic management fee growth year-over-year, excluding the impact of catch-up management fees. There is upside to that growth rate depending on the timing and amount of fund closings. Absolute Return Strategies’ management fees were stable in Q2, declining only slightly compared to the first quarter. We have seen our ARS fee paying AUM stabilize, and we are pleased with our investment performance relative to peers this year. Our multi-strategy composite was up 2.3% on a net basis in Q2 and is up nearly 4% year-to-date. Q3 ARS management fees are expected to decline slightly from this quarter, but as the business stabilizes, we expect to return to year-over-year growth during 2024. Consequently, we believe our year-over-year Q3 Fee-Related Earnings will grow in the mid-teens. We realized $13 million of incentive fees in the second quarter, the majority from carried interest. This again is an improving trend line from the first quarter, and although there is quite a ways to go for a full return to normal, we are seeing signs of life in the M&A environment. We believe our carried interest is a valuable source of future earnings power. As of quarter end, we have $782 million in gross unrealized carry across 135 programs, the firm’s share of which is $361 million. Our unrealized carry…

Thank you. [Operator Instructions] And we’ll now take a question from Ken Worthington with J.P. Morgan.

Hi, good morning. Thanks for taking the questions. First, the FT reported a few days ago in an article indicating that private market asset managers are turning to fee concessions to win business. Are you seeing the industry challenges in fundraising that we’ve seen over say the last 18 or so months lead to more pressure on fees? And to what extent are you seeing any such pressure from sort of new or existing investors at a different level than maybe you’ve seen in the past?

Thanks, Ken. It’s Michael. So we’re actually not seeing that. Our fees have been very -- they’ve been stable. They’ve been stable for a while. As you know we’ve talked in the past about our mix-shift, which is actually constructive for our fee rates and constructive over time. I think the -- so we’re not seeing that. I do think that what’s happened in the industry, and it’s not new, it’s not a response to the last year or so. But what you have seen is sponsors, GPs, private equity GPs offering unpromoted or significantly reduced cost co-invest. And so the average cost of accessing Private Equity for investors who can operate co-invest programs has probably come down, and it’s possible that that’s somehow in the mix of what’s been talked about. We’ve been a beneficiary of that as more and more of our clients have wanted us to adopt co-investment programs for them in our diversified Private Equity separate accounts, and we’re getting incremental fees on that, which is part of the stability and opportunity for our fee rates, but we’re not seeing that today.

Thank you.

And Ken, this is Jon. I’m not sure if it’s the same article you saw, but I did read an article in the FT on that topic. And one of the things that that article talked about was structural creativity and structural innovation that we’re seeing in the industry. Things like arranging Secondaries to get more liquidity back to investors to allow them to recommit or GP-led Secondaries around specific asset or groups of assets. I think there was even a reference in that article to collateralized fund obligations, which is something that we’ve talked about in the past. Which are all different ways or methods to allow for people to get more capital return to them in an environment when realizations are slow. I think that trend is real, and it’s been -- some of that was honestly real even before the slowdown of the private market capital raising environment and was more about just kind of continued innovation that you see in the marketplace, but some of that certainly is related to trying to drive greater liquidity.

Great. Thank you. And then the Private Markets business continues to hum along. The Absolute Return business still feels like it's struggling here. From a flow’s perspective, even if we look sequentially in the Absolute Return business, the gross sales were down a little bit. The gross redemptions were up a little bit, means the net was down a little bit, but ultimately, I think the real issue here is on that gross sales side, and we're not seeing money come in the door. Any thoughts on how to better market your capabilities or thoughts on product development that you can look into in the Absolute Return business that might generate greater client interest and perk up those contributions? I guess it starts with performance, and you've kind of indicated that the performance has bounced back here a bit, so maybe it's a matter of time. But when push comes to shove, it seems like there might be more that needs to be done just to kind of better stabilize that business. And so, my question is as the pressure increases, how are you thinking about driving better flows into that area?

So, thanks for the question. I do think, Ken, that business has largely stabilized. And I think you're right that we’re focused on the inflows, the gross inflows if you will to the business. Pam mentioned in her comments that we see that ARS management fees returning to growth next year, and that's kind of what we see evolving. And we do have vehicles inside our Absolute Return Strategies that have very good performance. And those are, I guess, it's obvious, but those are the vehicles that we're out talking about a lot in the market now and trying to drive. We've had some recent success there, and we have a pipeline there that is up pretty considerably from where that pipeline was a quarter ago. And so, we use the word stabilization because we think that's where we're at. And Pam did say that we do see that business is starting to grow again next year. And we are focused very much on making sure that the market sees all of our capabilities and offerings in the ARS space, and in particular is looking hard at the offerings that have had very good performance over the last few years that we think can grow significantly.

Great. Thank you very much.

Thank you.

[Operator Instructions] Our next question will come from Michael Cyprys with Morgan Stanley.

Hey, good morning. Thanks for taking the question. I wanted to circle back to your comment, Michael, about the international presence raising a lot of money overseas. Maybe you can just give us a little bit of flavor for which are some of the top countries or regions where you were sourcing a lot of the flows overseas and driving a lot of the strength? And then how would you characterize the build-out and pace of the overseas international business today? And what steps might you take over the next 12 months or so there?

Sure. There was an article today I believe that talked about one of the large UK plans making an Infrastructure allocation to us, and we've seen some significant flows out of the UK. Recently, we have expanded our presence in sort of Central Europe, in the UK, in Canada, in Australia. And we have a strong presence as you know throughout Asia, and we're just pushing forward on all of those fronts and trying to stuff pipeline in all of those markets. And our pipeline in general is strong globally, which is – is strong globally. And we're pleased to see that pipeline filling as a result of some of the recent investments we've made. And we're obviously pleased to see to have results coming from outside the U.S. as well. I think the one place that we want to focus in the coming – focus more. We've grown our business in the Middle East some, but we think we're still not doing as good a job there as we can, and we think that provides opportunity for us and we are pushing hard on that. So, I think that's kind of just a quick trip around the world, how we see the markets. And the overarching theme which I try to touch on in my remarks is that despite a slow period for the last four quarters, five quarters, the demand for Alts is still quite good. And so, everybody's adjusted or adjusting to the new environment if things are loosening up, we're not declaring victory, but there's no question that the environment's loosening a bit. There are green shoots both on fundraising pipeline and on realizations frankly, and so we're optimistic about all of that.

Great. And then just a broad question on the Secondaries market, given the challenges in fundraising and realization activity, there's been a lot of excitement around the prospects for a pickup in Secondaries transaction activity. So just curious what you're seeing there, what your outlook is for that? What pricing levels are you seeing in terms of funds trade in the secondary market?

Right, so Jon talks about this a lot. We think long-term, intermediate term; we think the Secondaries market is a good one and a growing one. Jon, as mentioned before on these calls, Private Equity is one of the few places where your Secondaries market is smaller than your primary market, and we just see continued growth over time in Secondaries. Secondaries have been dominated for the last year or so by GP-led secondaries. That continues to be the case. There has been more LP secondary activity. But to your question, I think discounts today are probably at the wider end of the range that they typically trade at throughout the cycle, and that's probably slowing the LP-led secondary evolution a little bit just because it's been a slow environment. Rates are up, marks takes some time to adjust, and so the discounts are a bit wider now. I don't think they're outside kind of the typical range you see in a cycle, but they're towards the low end of that range or that the discounts are that towards the high end of the range. And therefore, LP-led activity is slower, and people are looking at some of the structural alternatives that Jon described a moment ago, and then GP secondaries have really taken off where the discounts are lower in those transactions.

Great. Thank you.

[Operator Instructions] And it appears, there are no further telephone questions. Actually we do have a caller in queue. We'll take a question from Chris Kotowski with Oppenheimer and Company.

Page five that…

Chris, you're breaking up if you can hear us.

Your current products are and how you…

Chris, we can't hear you unfortunately. Maybe we should, if there are other questions, maybe take them and then either Chris can try to maybe dial back in or we can – we'll get Chris on a one on one.

Okay, perfect. And actually there are no further telephone questions at this time.

Okay. Chris, if you can hear us, we're sorry about that. We appreciate the question and we'll talk to you later. Thank you everybody.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. We hope everyone has a great day. You may all disconnect.