Okay. Good morning, everyone. Welcome back. My name is Bill Katz. I cover the asset managers and the retail brokers for Credit Suisse. This is my first year at the conference and our 24th as a firm. It's our pleasure on behalf of the firm to welcome the management team from GCM Grosvenor. I've been working on that, Jon. From management, we have Mr. Jon Levin, who's president of the firm. GCM was Grosvenor was founded in 1971 as a leading alternative asset manager. The company announced earnings yesterday with about $74 billion of assets under management at the end of the year.
The firm specializes in developing customized portfolios for clients who want an active role in the development of the alternatives program, and also offers multi-client portfolios for investors who desire a turnkey solution for accessing alternative managers. Mr. Jon Levin joined Grosvenor back in 2011, and is now responsible for the day-to-day management of the business. Prior to that, Mr. Jon Levin was treasurer and head of investor relations at KKR. Also, we have the team from the IR. Thank you, everyone, for coming today. Jon, welcome.
Thank you for having us, Bill.
Nice to see you again.
Nice to see you.
Hey, first question, just sort of big picture, and then we can behave to the environment a little bit and then maybe filter down to what's happening for your firm. There's been a lot of focus over the last couple days and really for the year to date, just in terms of what's going on with the discussions with the LPs, what's happening with timing, what's happening with allocations. I was wondering big picture what you're hearing since you're so client-centric as a franchise.
Sure. That definitely is a huge topic of conversation today. What I always like to remind people about the concept of the denominator effect, right? Which is the notion that your traditional equities, your traditional fixed income is traded lower in value, your alternatives portfolio is held value, and now your alternatives portfolio represents a higher % of the balance sheet than it's supposed to inside of the asset allocation. What I always remind people about that is, it means they've done a good job, the alternatives allocation. The reason I remind that to people is because the denominator effect is something that has happened over time, in different periods, but it is also something that historically has been temporary in nature.
I expect the same outcome this time around, meaning the LP conviction, the investor community conviction in their alts programs still remains very, very strong. In fact, there's a appetite and a discussion around how do I figure out that the next time there's a denominator effect, maybe my asset allocation to alts going into it was higher, so it's harder to have this result. That's because the alternatives programs have added value to clients. I do think that there is a practical impact, however, to the denominator effect, and I think you've heard it talked about in the industry amongst our peers, which is that things in terms of capital formation move a little bit slower for a period of time. I expect that that will happen.
The good thing about our business, and you noted this in your opening remarks, is that about 75% of our assets under management are customized separate accounts. That means typically that we are running a significant part of a particular institution's alternatives program. I use the word program on purpose because when you're running a part of the program and you're embedded with the client, you're meant to be there consistently over time to help build out that program. You're not in the situation where, "Hey, I'm one firm that happens to be raising my fund right now.
Oh, bad luck, I raised it during a period of time, a denominator effect, and now I've lost out. Okay, maybe your next cycle, you know, re-up is gonna be a little bit smaller, and maybe it's gonna take a few more quarters, but you're still pretty well-embedded with the client to help them build out that alternatives program over time.
Excellent. Zooming back out for GCMG, you've done a very nice job of continuing to diversify the business, continue to reposition to some of the faster growth areas. Private markets, both dollars and as a percentage of AUM, continue to rise, continue to grow a bit faster than the absolute return side of the business. As you look out over the next several years, A, should that continue? If it does, where do you see the best incremental opportunity for growth?
Yeah. I expect that will continue. I expect you'll continue to see the trend around private markets growing at a faster rate than absolute return strategies and making up a bigger percentage of our balance sheet, so to speak, or our AUM picture. I also think that inside of private market strategies, you'll continue to see this shift towards assets related to co-investing secondaries and direct investing strategies as compared to primary investing strategies, certainly on a revenue basis, if not on a assets under management basis. I suspect that'll be a persistent trend. What we've seen in our business over the last few years, frankly, I think these trends will continue, is a focus on the ability to offer clients choice around their ESG and impact strategies.
I think that word choice is really, really important. This is their money. We're not imposing our views of how clients should have their money managed. We have the ability through our customized separate account and through some of the specialized funds to offer clients choice to help make sure that what we're offering from a objectives and constraints and risk-adjusted return perspective and impact perspective meets their needs. I think that's a trend that we'll see continue to persist. I think there continues to be a lot of room to grow and evolve in the infrastructure space. I think the infrastructure space, even though the infrastructure assets are as old as the world, the infrastructure asset management industry is actually probably the youngest of the different alternative asset classes.
I still think it's in its formative years, which is a great period of time for someone, a solutions provider, to help people build out those programs. I suspect that, and I suspect there'll be also continue to be a lot of activity around the alternative credit, private credit, opportunistic credit space, where you're helping, again, institutions build that allocation out in a similar fashion to way you've seen the private equity allocations built out over time as the asset class has matured.
Great. Yesterday we hosted a meeting with the CEO of AMG, and he had a little bit of a contrarian view of how he sort of sees things playing out in that in a world that isn't dominated by sort of low-cost beta, which is what we've been in the last several years, maybe decade or so, that it's a great opportunity for the liquid alt platform. As I was thinking about that, I was thinking about our conversation today, and I know you have a big absolute return portfolio which has very good relative performance, but had a bit of a struggle last year, like many of your peers, so nothing unusual there per se.
Could there be an opportunity here even though the private market business is probably the dominant asset driver for the firm, that ARS could have maybe a little bit more of a better outlook than maybe it has been?
Look, I think we've been consistent in our view that where we think the growth in the ARS vertical comes from over time is the compounding of capital exceeding that of the inflow-outflow environment, whatever it might be, but the compounding of capital being the primary driver of growth. That remains my view. That being said, I do think there are some things that are going on in the markets broadly that bode well for the ability for absolute return strategies to deliver on their promise for clients. I think that the increased volatility in the markets, a higher interest rate environment is a huge factor actually.
Over the last nine months, you've actually seen, a pretty significant amount of alpha generation, in the absolute return strategy space broadly. I think to right now there's just so much, demand inside of an institution for that marginal dollar, because everything's feeling a little bit more constrained than it was. I don't think you can see, you know, a fundamental change until there's a little bit of loosening there. If the environment, persists the way it is now and the alpha generation persists the way it now, I think that you'll see that those portfolios are adding value for clients.
Mm-hmm. Just one last one, then we'll move on to some other bigger picture questions. Would you need to have positive absolute return, or is just reasonable relative, risk-adjusted return enough to sort of market more broadly?
You know, it's you never feel good losing money, even if you're losing less money than somebody else. I think that, certainly from a financial profile for our business, positive returns is what enables growth. That being said, I think that the relative performance matters from a client perspective, which is the most important factor, not our financial performance, but how does the client feel. I think when you're in a market like you saw last year when 60/40 portfolios, you know, had probably their worst performance in many, many decades, the capital preservation and capital protection side absolute return strategies was pretty good, and I think clients appreciated that.
Great. On yesterday's call, you gave some guidance both in terms of AUM and earnings power, if you will. We'll come back to the earnings maybe a little bit later on. Just sort of focusing on growth, if we could maybe break the discussion down between sort of some of the specialized funds that are gonna be in the market and then sort of other opportunities, maybe start with the specialized. I think if I read my notes correctly, sort of just guided to a pretty strong year, my words, not yours. A little bit soft in the first quarter and then sort of a solid 2023. Could you talk a little bit about, maybe before we get to the specifics of the funds themselves, just the environment. You know, why is first quarter shaping up as a soft quarter?
What gives you the confidence that things could pick up in the sort of back half of the year?
First of all, I wanna know how you did seven fireside chats and also read our earnings report.
I have a very good team and, not much sleep, a lot of coffee.
All right. Good. Well, very, very efficient of you. I think that the main takeaway from our call with respect to what we saw, what we see going forward, was that we continue to see a persistence of the private markets growth opportunity, that we, and that ultimately that combined with where absolute return strategies is and our more conservative view of what that looks like over the coming months and the margin expansion opportunity we have enables us to feel good about the ability to deliver mid-teens fee related earnings growth. That's kind of the headline takeaway.
I think when it comes to the capital formation, the first thing I would say, and I will get to your question more specifically because I say it all the time, and I don't think I could say it enough, is that specialized funds versus separately managed accounts are simply a legal factor, right? Are you invested with me in a fund of one or are you invested me in a commingled fund? We are agnostic. We are agnostic. What we go to clients with is, "Here's what we're able to do. Here's what we think you're trying to solve. Here are solutions. Now let's go figure out the best way to do it." I think that gives us a huge competitive advantage.
When you look at the business today, about 75% of our assets under management are in separately managed accounts. I was telling this story the other day to one of our investors, where we had a meeting a couple weeks ago with a prospective client in infrastructure who wants to make a $100 million allocation to co-investing strategies in the infrastructure space. They could absolutely do a separately managed account. They could absolutely do CIS-3, which is our commingled franchise in there, and we absolutely don't care. I think that's a, we wanna do what's best for them, and I think that's really important in terms of understanding our business. It is the case that our specialized funds have a higher average fee rate.
That is because our specialized funds tend to be geared towards our more fee accretive strategies, meaning RECs, secondaries, COs. We don't have a primary fund of funds, so to speak. It's because we offer fee for scale, and it tends to be that smaller investors go into specialized funds instead of separate accounts. I think it's just important that those outcomes may be relevant to our financial results in terms of that mix, but the way we approach the market to our clients, which is the most important thing, is let's figure out what's best for you. In terms of the year, you know, we just have very good insight into our business, largely because of the separate account business and knowing what the timing of reups are.
About 80-85% of our capital each year comes from our existing clients. We know when we're gonna hold, you know, within reason, specialized funds closings. We happen to know what the first quarter calendar looks like as we sit here in mid-February, and can say, "Okay, for idiosyncratic reasons, we closed a lot of business at the end of the fourth quarter. Our calendar looks like X, Y, and Z, so there's not gonna be a lot happening in the first quarter." That's less about a view that, oh, the first quarter is a tough environment, the second quarter is a good environment. It's more just about it's generally remains a pretty constructive environment, and we know our calendar pretty well.
Gotcha. It's more of a, I think, spirit of is that there's just better relationships, strong reups, as you mentioned, and that ongoing opportunity, just the temporal nature of that, rather than what you're seeing with some of the private equity funds where you're dealing a little bit more with the, with the denominator effect where you saw the conversation.
Yeah, I think that's fair.
Let's dig in a little bit in terms of some of the products, right? You have a lot of things going on, which is a good thing at the end of the day. Can you walk us through things like sort of maybe four legs to the... What I would consider the specialized fund opportunity? I think you recently closed on a secondary fund, maybe some feedback on how that went. Then as you could just sort of maybe tick off the opportunity set as you look at the rest of the year for the specialized opportunities.
Sure. Maybe I'll start with secondaries.
Sure.
You're right, we recently had the final closing for a fund that's about $1 billion in size, which is close to 40% larger than its predecessor fund. It's our third fund in our secondary series. What's interesting about the secondaries market is there's always been a lot of talk about there being a lot of dry powder, maybe too much dry powder for the opportunity set, and is that a problem? People have raised that notion. I've always thought it was the exact opposite, which is you've actually never seen any in the history of capital markets, whether you're talking about the equity market or the terminal market or the high yield market, you've never seen that ultimately over time, a secondary market in volume usually dwarfs the size of the primary market.
Mm-hmm.
You still have in private markets, the secondary market being a percentage, a smaller percentage of what the primary market is. I think as it becomes even more of a widely held asset class, as it becomes more of a transparent asset class, it becomes more operationally efficient and valuation timing efficient, all those things. I think you'll continue to see a secondary market that'll grow faster than a primary market across all the private markets categories. I think that creates a tremendous opportunity for firms like us because you're in the flow of all that activity. You're in the flow of the fund activity. You're in the flow of the co-investment activity, you're in the flow of the origination opportunity. You're in the flow of the investment opportunity.
I think there's a real opportunity set to add value to clients through the risk-adjusted returns that are available in that space. Not to mention you've now had a kind of a new sub-market evolve in the secondary market, which is this GP-led or continuation fund secondary market, which has now gone from being probably 10% of secondary market activity to something closer to 50% of secondary market activity. I see that to be a very persistent trend too, which I actually think is a very positive thing. Ultimately, all these things only grow if they're positive for the LP community.
I actually think it is a positive for the LP community to reduce some of the friction costs of owning private markets assets, which is a long conversation we don't need to get into today. I think that you'll continue to see growth in that market, and I think it'll continue to be a growing business for us.
Just some of the other funds that you... Maybe that sort of... that sums up to your solid 2023 outlook.
I think that fund had its final close. I think one of the exciting pieces of news that we talked about on yesterday's earnings call, which had been announced earlier in January, is the launch of our Elevate strategy. Elevate strategy is part of what we're calling kind of the Sponsor Solutions category, where we are going to be leveraging our expertise in identifying small, emerging and diverse private equity talent and providing those that talent with capital for their funds, for their GPs, for their co-investment opportunities, and structuring minority investment partnerships with those GPs.
We think that kind of that seeding opportunity in the private equity space is a tremendous opportunity and one that leverages a lot of the core competencies of our platform, and we're excited to launch that in partnership with CalPERS. We'll be raising other capital for that throughout the year, which we're excited. I think there's actually more things that we can do in what I'll call the Sponsor Solutions category. You obviously have a stakes market that folks like Dyal and Blackstone and Goldman have done really well in. Given the size of capital they're managing, focusing on larger enterprise values, maybe there's something that could be done in the stakes market at the small end. Maybe there's something that could be done in providing capital, credit capital, to GPs at the small end.
This seeding strategy inside of Sponsor Solutions is something that we're excited about. We talked about infrastructure.
Hold on. Can we please... Sorry, Nick. I'm sorry to interrupt my own question. A lot of things from what you just said there.
As many as you want.
When you think about the. One of the themes that we've been hearing over the last couple days is sort of this multi-vectored opportunity of growth for everybody in terms of y'all's, right? Whether it's scaling funds, diversifying geographically, diversifying in distribution channels, new markets, et cetera. I'm hearing a lot of that in this whole opportunity as well. Can you talk a little bit about, obviously CalPERS is a, is a great anchor investor into something like this, and they have a lot of influence into the pension scheme in the United States for sure. How scalable is this opportunity as you think about incremental clients?
Yep.
Some of these other things you mentioned in terms of dollars at play here, 'cause when you mention the Dyal and others, they're big competitive established players, right?
Yeah.
Managing significantly higher quantum of AUM at the same time.
Sure, sure. I think for us, the size of the market opportunity is quite large. We're in the early days here, right? We just got launched with this, as you said, from a great anchor commitment in December, and we're just getting going, and we'll build this business and this capability over time. I think to us, it's less about the size of the market, which is huge, and it's more around just being smart and thoughtful about how we grow this kind of Sponsor Solutions category thoughtfully over time. If you think about the fact that we've got 10, 15, you'll know the number better than me, you know, 20 public alternative asset managers that have lots and lots of combined market cap.
The amount of private market cap in this space exceeds that by many, many, many multiples.
Right.
The ability to use our platform of relationships to figure out how we can help finance and partner with that ecosystem, which doesn't have to be exactly like somebody else does it, right? For us, we have to leverage our experience in small and emerging and diverse managers to have something that's particularly tailored to seeding managers in that general vein, is where we've decided to start. It's a huge amount of business value that exists in the private market cap space that we feel like we can figure out ways to partner with that talent.
Just one last one as we move on. The kind of vehicle that you might be able to structure here, would this be a permanent capital type of vehicle that...?
It's The way to think about it is that the investment capital, meaning the capital that we will invest into these managers' businesses, either in the form of investing in their funds or investing in their GPs, or investing in their co-investments, that will be traditional private equity style in the sense that it'll be invested and then it'll be harvested. What will remain is a perpetual economic interest in the managers' businesses that you've decided to seed. Effectively a cash flow stream, but with having had all your capital back.
Gotcha. Okay, terrific. You, you were gonna go into maybe the Labor Impact Infrastructure fund, infrastructure fund as well. It seems like a very unique opportunity here.
Yeah.
How much more incremental opportunity is there? Can you scale this business over time?
Yeah. Maybe just stepping back for a minute around our Labor Impact Infrastructure strategy. It's a direct investing infrastructure business that leverages our broader $10 billion infrastructure platform. The theory of it was that investing in infrastructure is hard, investing in U.S. infrastructure is hard. Infrastructure is usually a highly political asset. If you bring all the proper constituents to the table, whether that's labor, government, users of the said infrastructure in a constructive way, that you have a better opportunity to originate infrastructure assets. You have a better opportunity to own those infrastructure assets effectively. Doing so would generate attractive risk-adjusted returns for infrastructure investors.
By bringing labor to the table, you would also have this impact to the point of the name of the fund. You would have this impact in terms of increased work hours for organized labor. At the end of the day, it was that approach that would actually be an alpha generator as opposed to an impact factor that is a degradation of return. That's obviously not our view, and that's not a good way to build impact businesses over time. You have to think about in the same vein that we've seen that our focus on managers led by women and people of color has added alpha to our private equity returns, kind of a similar concept to what we're doing in the infrastructure space. We're out, we're raising our second fund now.
Our first fund was plus or minus $1 billion, largely fully invested or committed at this point and where the assets are doing pretty well. We're excited about second fund and obviously, the infrastructure opportunity set and the need for infrastructure capital is massive. I would suspect, just like we saw with secondary, just like I suspect we will see with CIS, I suspect we will see with MAC, that the successor fund will be larger than its predecessor.
Maybe before we continue, actually, I think the other, another area within that seems to be been one of the themes has been very innovative, first to market with a few things, and obviously diversified and differentiated client base underneath that. I'm intrigued by the CFO, which is an opportunity for orient to the insurance opportunity. Can you talk a little bit about what you're doing there and then how you sort of see the growth for that product line?
Sure. Maybe step back a little bit, and focus on our decision to launch GCM Grosvenor Insurance Solutions, which we did in 2021.
Our thought behind that was, with our broad alternative investing platform, the ability to offer funds, custom accounts, the ability to invest in funds, co, secondaries, directs, and have this kind of open architecture broad alts platform could make us a very value-added partner to insurance company balance sheets that are trying to continue to build out and evolve their alternative programs, and often need very specific things to do that, whether that's from a structuring standpoint for regulatory capital, whether that's from a reporting standpoint for what they need to do in terms of their regulatory reporting, and that our history as a customized account provider and offering, you know, great manufacturing but also high degrees of client service would serve us well.
We made an investment to make sure that we were reaching out to that, the broad network of insurance company balance sheets. In doing so, one of the many things that we focused on was structured products, and CFO being an example of that. We believe that market makes sense in terms of a vehicle for investors to have their exposure to alts through that structure. It's because the liabilities are highly attractive in terms of how they're structured, duration, covenants, things of that nature. You could effectively offer up some levered diversified alternatives exposure with a very, very good liability structure, which would allow you to generate more dollars of return for the same dollar of capital effectively.
Not to mention that the rated pieces of the CFO structure are attractive to insurance company balance sheets. Now, obviously, just like CLOs or CDOs or whatever else, the cost of funding today is higher than it was in November of 2021 when we did that deal.
Mm-hmm.
I still think it's a positive arbitrage relative to where you think the return of alternative assets are going to be. It's something to kind of look at in terms of the cost of funding. You know, for two years ago, issuing liability was an asset. It's not as clear if that's the case today. It's not as obvious today as it was, you know, two years ago.
One of the areas as our team and I have gotten to know the storyline a little bit, is that the, I think, maybe an underappreciated view of the SMA opportunity that's been growing from our perspective very strongly, generally surprising us to the upside over time. Could you talk a little about why so successful and how to think about the growth from here?
Yeah. I think that, you know, I'm glad you're focused on it. I think that back to one of the earliest comments I made in this session is we like the idea that we have manufacturing capabilities, and we have a culture of client service, and that we can go to clients and say, "Let's figure out which vehicle works best for you." That's served us well over time. I think that... When it comes to separate accounts, you are very much embedded in long-duration partnerships with your clients. You are working collaboratively together to build the program that meets their specific needs. You're building customized reporting. You're building customized governance frameworks. You're building a customized cadence for how often you talk. You're getting to know their consultants. You're getting to know their trustees. You're getting to know their whole staff.
Sometimes you're the more permanent fixture in life because they may have staff turnover, and you're still there, right? There's a lot about the separate account business where you become very much embedded with your client if you're doing a good job, and we've been fortunate that we do a good job in that. What is that? That allows you to have the insights into a forward calendar of continued activity with that client. That allows you to have conversations with that client about what other things you might be able to do together, whether it's an evolution inside of a specific investment vertical or whether it's an evolution into a new investment vertical.
I think that offers, at the end of the day, a very strong value proposition to clients that you can provide this kind of holistic solution, this holistic delivery of an alt program and do it in a high-touch but cost-effective way.
That's perfect. Maybe shifting gears a little bit, retail's been an area of focus. Seems like you'd have a pretty unique opportunity set to sort of come into that. I want to talk a little about maybe what is your current strategy to tap into the global wealth management and then specific to maybe the democratization opportunity, which might be more the mass market opportunity versus the high net worth, the ultra high net worth? Talk a little about how you see an opportunity here. There's obviously a lot of uncertainty right now with rates being higher, some of the issues going on with some of these more constrained liquidity products, if you will.
You were an early call on that.
Thank you for recognizing that. How should we think about the opportunity?
I think that there are absolutely some of these near-term headwinds that you're talking about. I think just as strongly, if not more strongly, that the longer-term opportunity is a very positive one. Alternative investments have added value to institutional portfolios over time, and I see no reason why the same wouldn't be true for non-institutional portfolios or retail portfolios. Typically, when you see that transition happen in terms of moving from institutions to your more retail, mom-and-pop-type investors, when you've seen that happen in other parts of kinda capital markets evolution over time, can be a up-and-down transition, right? A difficult transition. There has to be. You have to get real, a lot of transparency. You have to make sure that it's all honest players.
You have to kind of make sure that the regulatory framework works, and it takes time to work that stuff out. I think we're in that period of time of working what that, what that out, all that out means. I think that at the end of the day, risk-adjusted return outcomes win, and that the risk-adjusted return outcomes will justify having alternatives play a role in the balance sheet of individual investors. I'm very positive and constructive on the opportunity over the long term. That doesn't mean there won't be a period of time where you'll have people demanding liquidity that can't be provided and different types of creditor real estate structures. I'm sure there'll be a little bit of that noise. Longer term, I see it as a very positive opportunity.
In our business, we've seen that the capital formation we're getting from the retail investor has represented a higher % of our capital formation than it does of our existing AUM, and that's been a trend that we've seen for the past few years. For us, that's largely been through partnerships with the wealth management wirehouse, kind of mass affluent channel, largely with QP product or qualified purchaser product. I think, you know, in order to reach the larger market opportunity, you need to have product that's structured a little bit differently, registered a little bit differently, and that's something that we'll continue to pursue as well.
It would seem just to maybe narrow in on that, just one more moment, that just given your solutions backdrop and what we see from following some of the retail broker deals, both public and private, that there's sort of this outsourcing of a turnkey asset management theme. Is there an opportunity here to maybe focus your distribution strategy a little bit more and focus on the RIA channel, which is one of the faster-growing areas within the retail distribution network itself?
I think there is. I think that there are opportunities to do that. I think you have to think through whether those opportunities are best met by building or, you know, buying. When I say buying, I mean partnering a little bit too, for people that have that expertise, that distribution, that set of relationships. We're constantly kind of on the lookout for those types of opportunities where maybe we can bring our manufacturing client service to the table. Somebody else might be able to bring some of the distribution side of it. In the meantime, we're continuing to see our existing distribution resources be able to add to our AUM at a greater rate than what that capital represents of our AUM.
We like it and we'll look for opportunities to supercharge that growth too.
Great. One more flow question. I wanna transition in the last few minutes into some of the financial dynamics of the story. As I listen to what you're saying today, it seems like you've scaled nicely, but seems like there's still a lot of opportunity for successive funds to be larger. This may be too vague or broad of a question, so I apologize in advance. Where do you think you are in terms of the J-curve, in terms of the slate of products you have? Is there still not only unit growth, but a scaling of that unit growth pretty significantly over time?
You know, I think that, each of the kind of vertical capabilities are contributing revenues that make it such that they've been good investments for us and good businesses for us, right? Whether you're thinking about the secondaries fund on its third vintage or labor about to be on its second vintage, or all the stuff we're doing in our Strategic Investments Group, we've been very good about how we've added capabilities to leverage the broader platform and then build that over time, so that we're managing larger and larger amounts of capital and seeing operating leverage in that evolution. I don't think there's any magic to a calendar year, but each kind of year, we've come out with something that's an adjacency, whether it's...
Every couple years, whether it's the Labor Impact Infrastructure strategy, or whether it's GSAM Growth and Return Solutions, or whether it's the Elevate strategy. I think that that innovation mindset has to be part of what you're doing if you wanna continue to grow your business. You know, there's plenty of market opportunity for us to have successor funds be larger, for us to have separate account series be larger over time and grow very nicely without, you know, implying in any way, shape, or form that we've taken over the world.
Right. Okay. Let's transition a little bit into some of the financial guidance you provided yesterday as well. Again, from my notes here, sort of, I think you've mentioned it in your opening comments, still expect mid-teens FRE growth. Just wanna qualify from what I read. Is that inclusive of 23, or is that a broader longer-term statement?
Yes.
Okay.
Both.
Oh, okay. I guess, yes to be more.
I think that.
Okay. Very good.
I think we were talking about 23 specifically in those comments. I would also tell you that we feel confident about that growth profile for FRE over the longer term.
Okay. Within that, you had mentioned that you would expect to see a little bit of margin improvement as we look through this year. Maybe the first question is, can you unpack that? I know you've been spending a little bit, but also trying to control those.
Yeah.
You've been investing in the business, excuse me, inflationary pressures, but at the same time, you've been trying to-.
Yeah
...manage your expenses to tamp down that, the trajectory of growth. As you look at your margin improvement in 2023, and I have a broader question next.
Yeah.
What Is it a revenue facet expenses or is there, you know, some?
No, mostly about that. mostly about revenue growth exceeding expense growth. I mean, that operating leverage. I think that over the past couple of years, we've seen FRE margin improvement, you know, on the order of, you know, a few hundred basis points. We saw it from 2021 to 2022. We expect to see it again by virtue of the guidance we gave from 2022 to 2023. We've always said that when you look at our FRE margin, you know, kind of was low 30s, kind of mid-30s or the high end of mid-30s now that, we still think that over time it could go higher. I think there becomes a natural point at which, you know, there's probablyNot a huge amount of FRE margin accretion available.
I think we've seen some peers in our space say that explicitly, but they're at much higher levels of FRE margin than we're at today. I still think this kind of steady improvement in our FRE margin is something that we think is achievable and that we're managing to. I think it's largely a function, or mostly is a function of the revenue growth exceeding the expense growth.
That was my second question. As I think about what we cover, and then maybe some of your natural peers would be beyond our coverage universe, there are some pretty impressive margins out there.
Yeah.
some of them have some idiosyncratic business drivers that maybe-
Yeah.
Grosvenor doesn't offer.
If they get too impressive, I don't believe them. No, I don't believe them. I think they have one way to go, which is down. I think we're coming in from the other, from the other side.
Well, I appreciate that, how should we benchmark when you say higher over time? Is 60% of some of the biggest players are out there seem to be pretty full to us? That's what they seem to be signaling to some degree. Yet-
I would say talk to us again in a few years if we get to, like, the 40-ish range, you know.
Okay. Good to know. Okay. All right. Maybe last topic for us. We're running out of time. Just in terms of capital, you bought back some stock in the fourth quarter, I think around 6 million shares, if I remembered it correctly. How do we think about just allocation and maybe within that, interestingly, yesterday, Bridge, a smaller company we follow that's a real estate niche player, woke up and acquired a private equity secondary player.
I love it.
Right? Which was sort of interesting. How should we think about where you are in your footprint and then how you think about the waterfall of capital allocation?
Yeah. I think that what we've always said is that in the absence of a very good opportunity to generate a highly attractive return on capital, that we're focused on delivering excess capital back to shareholders. We've done that since we've been a public company. I think we've taken our quarterly dividend from $0.06 to $0.11 over the past couple of years. We've had a buyback program on pretty much since we went public and an ever-increasing one, and we've been an active participant in the market. Part of that is 'cause we think that there's value in the stock today. That being said, if you ever saw an opportunity to use capital to make an acquisition that we thought would make us more valuable to our clients the next day, we would do that.
I The reality of that is I actually don't think that doing so would necessarily have to be at the expense of continuing to have an attractive and increasing dividend profile and a stock repurchase program on because there's other ways to get access to capital. we will have work The one thing, I guess what I'm saying with all my comments is what we're not intending to do is just to have capital build onto the balance sheet.
When you look at your footprint, let me wrap up on this question. When you look at your footprint today, and I appreciate that private market is growing nicely, ARS is a stable business generating probably pretty good free cash flow, any sort of major areas that say, "Ooh, we'd like to really sort of try and build this out," and do you get the de novo or is there acquisition?
Yeah. Look, I think that, acquisitions are really hard to do. We've had that experience, historically, and we've done really well with it, but it's not something that is core to executing successfully on our business plan. To your point, we can keep doing what we're doing and grow very nicely. We're very active in looking. We have a very high bar. We have to make sure that it adds value to the clients first and foremost. We have to make sure that, there's the right financial framework, the right cultural framework. There's areas we looked at. We touched on some, whether it's a partnership or acquisition opportunities you could look at to help accelerate growth in the non-institutional channel.
I think credit is a massive total addressable market, and there's parts of the market we cover, parts we don't. That's always an area where we spend some time. We'll continue to look at, you know, opportunities, but our main focus is on executing the great organic growth opportunity that we have in front of us.
Great. On that note, we're out of time. Thank you very much, Jon.
Thank you.
Appreciate the patience answering all the questions.
Thank you.
joining me on the conference.
Thank you.
Good to see you.