Sculptor Capital Management Inc (SCU) 2021 Q1 法說會逐字稿

Good morning, everyone, and welcome to Sculptor Capital's First Quarter 2021 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Elise King, Head of Corporate Strategy and Shareholder Services at Sculptor Capital.

Thanks, Daryl. Good morning, everyone, and welcome to our call. Joining me are Jimmy Levin, our Chief Investment Officer and Chief Executive Officer; Wayne Cohen, our President and Chief Operating Officer; and Dava Ritchea, our Chief Financial Officer.

Today's call contains forward-looking statements, many of which are inherently uncertain and outside of our control.

Before we get started, I need to remind you that Sculptor Capital's actual results may differ, possibly materially, from those indicated in these forward-looking statements. Please refer to our most recent SEC filings for a description of the risk factors that could affect our financial results, our business and other matters related to these statements. The company does not undertake any obligation to publicly update any forward-looking statement.

During today's call, we will be referring to economic income, distributable earnings and other financial measures that are not prepared in accordance with U.S. GAAP. Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measure are available in our earnings release, which is posted on our website.

No statements made during this call should be construed as an offer to purchase shares of the company or an interest in any of our funds or any other entities. Our earnings press release from yesterday also included an earnings presentation. We may refer to this report during the call. You can find the presentation on the investor relations page of sculptor.com at the first quarter earnings release link. If you joined through the webcast, you can navigate through the presentation on the webcast screen.

Earlier this morning, we reported first quarter 2021 GAAP net loss of $20 million or $0.85 per basic and $0.99 per diluted class A share. Distributable earnings were $37 million or $0.62 per fully diluted share. We declared a dividend of $0.30 per class A share.

I'll now pass the call over to Jimmy.

Good morning everybody, and thanks for joining. I'm excited to be here today with Dava Ritchea and Wayne Cohen, doing our first earnings call together.

We've put out a pretty detailed letter that sought to address a lot of what's happened recently as well as more importantly some of the bigger picture concepts that we're driving towards over the next several years. We also, in our earnings release, added some additional detail that helps to interpret the quarter we just reported.

And so with that, the idea is to jump right into Q&A, and that will be a format that we'll probably stick to in the future as well and try to make the call a more robust back and forth.

So thank you again, and I'll take it back to the operator to open the line.

(Operator Instructions) Your first question comes from the line of Bill Katz with Citigroup.

Congratulations to everybody on their new respective roles and appreciate all the expanded disclosure and shareholder letter that you have put out in concert with the earnings statement. Maybe sort of jump off from that, I was wondering if you could maybe, Jimmy or Dava, just sort of talk to maybe the triangulating between the nonlinear earnings growth statement in the shareholder letter against maybe the removal of expense guidance and then where you might be thinking about investing and how you sort of see that all playing through as you look out over the next couple of years?

Sure. I'll take the expense guidance one first and then we can talk about the nonlinear comment. We address this in some detail in the letter, but our variable revenue and variable expense as evidenced last year kind of wildly outweighs the fixed side of things. And there doesn't tend to be, in shorter periods of time, a lot of movement on the fixed side. And so that to us is just a less important area to focus. That doesn't mean there's some near-term plan to materially change what we're doing on the fixed expense side.

In fact, in a way, we wish there were more ways to spend money on the fixed expense side in the near-term because the long-term reward of building new businesses in the alternative space, as evidenced by what we've done in credit by what we've done in real estate, is tremendous relative to the upfront investment. So we are on the lookout for ways to do that, and that may sound like good news or bad news to you.

I guess on the good news side of it, probably nothing much material is going to change near-term, but we want to be in the business of investing for the long-term. And so that takes me over to the nonlinear component. And again, here I would break it into 2 timeframes for thinking about it. In the immediate term -- and I think this is math, Bill, that you know reasonably well. In the immediate term, an incremental dollar of capital into our existing funds tends to have a very high incremental margin on the fee-based earnings side.

Obviously, there's variable revenue that comes with that and variable expense that comes with that. But in the very near term that incremental dollar tends to be quite accretive. And so that's one version of nonlinear growth. I think the longer-term big picture version of that, similar to what I just described, is we're a relatively small company today with a relatively vast investment capability in major asset classes around the world. And as we exploit that over time, we see nonlinear potential for the business.

So -- again, you could think of it in those 2 ways, the short-term and the long-term. In our opinion, each of them represent a nonlinear opportunity.

Okay. That's terrific. If I can just maybe squeeze one more follow-up. Again, appreciate some of the disclosure on the hedge fund and gross sales and whatnot. As you step back a little bit in sort of your new role, where do you see the top 3 areas to sort of grow the business, maybe both over the intermediate term and maybe flesh out some of your comments on sort of this capability and some of these major asset classes as these look a bit longer term.

So the risk of sounding bland, the top 3 areas to grow the business are the 3 core areas. That's multi-strategy, credit and real estate. And I'm not sure if that was the question you're asking, so there may be a follow-up to that. Those 3 areas as laid out in the letter all represent not just important growth in each of their AUM but represent fairly material earnings growth should we be able to achieve that growth in AUM.

And so yes, we would love to come upon the next new idea, similar to, again, go back to the very old days, we had the multi-strategy hedge funding and we had the idea for real estate and then we had the idea for credit. And so we have lots of ideas that may come to fruition later. For the near- to intermediate-term, the key areas for the business are multi-strategy, credit and real estate. And in each of those, we think we have not a straight line to growth, and we were hopefully pretty clear about that in the letter, but we think we have a reasonably high likelihood intermediate path to thoughtful growth in AUM, which should bring pretty exciting growth in earnings power.

Our next questions come from the line of Gerry O'Hara with Jefferies.

Great. Jimmy, I was hoping you might be able to provide a little bit of color or context around the capacity comments that were in your letter. I think it was more than $8 billion, but perhaps less than $34 billion. I was just kind of hoping you might be able to shed a little bit of light on where you think the optimal AUM sizing of the business might be.

Yes. So -- good question. We don't have a specific number in mind. And our capacity generally grows with the market, as everyone else's does. Just think of the size of the S&P 500 10 years ago versus the size of the S&P 500 today or the size of the high yield market or the loan market or the CLO market. All these markets in which we operate generally expand over time, and so capacity kind of grows with markets or GDP.

That said, what we're trying to highlight in the letter is in a way a philosophical point, which is the number one priority is making sure that we feel we are optimally positioned to meet our investment objectives. And so as a practical matter, if we're at $11 billion of multi-strat today, $12 billion is a pretty similar number to $11 billion and $13 billion is a pretty similar number to $12 billion and $14 billion is a similar number to $13 billion, and I don't mean to embed some secret guidance in that. But it moves incrementally, and we know that we can do more than we're doing today. And we know our capacity will expand over time, but we will be absolutely laser focused on making sure that the money we manage matches our ability to meet our investment objectives.

Great. That's helpful. And then, I guess, from a -- for a follow-up, was kind of hoping you might be able to flesh out the comments around the longer-dated private credit business. Is this part of this an extension of something you're already kind of working on in-house or is this purely kind of inorganic? And any other kind of comments you might be able to make around just the strategy of longer-dated permanent capital vehicle structures?

Sure. Well, longer-dated and permanent capital are too different, but we'll address that. I want to make sure I'm clear on that because the last bit of your question blended them into one, and there's 2 pieces of it. There's the organic/existing and then there's the possible inorganic. On the organic/existing, our existing credit business is long-dated capital, largely. Our existing CLO business, long-dated capital. And our existing real estate and real estate credit businesses are long-dated capital.

Over time, we've had, I forget the number, more than 5 and I think less than 10 closed-end credit opportunities funds. Some of those were specific geographies or specific asset classes. We shifted over the years to a more generalized long-dated but open-ended style vehicle. The capability to make investments that are long dated in nature or private credit in nature continues to exist, and we continue to deploy that on a reasonably large scale across our existing credit and real estate businesses.

What we have not done recently is offer that capability in the form of a specific closed-end private equity style fund. We may or may not do that. As I said in the letter, it's a tool in the toolkit, and that's something that we will consider. The closed-end version of the private credit market is a much bigger market today than it was 10 years ago from an allocator's standpoint, meaning it represents a much larger percentage of the allocator's portfolio.

And so because we have the investment capability and because we have the track record and because we're doing it already, how to offer that more broadly is certainly something that we're contemplating. Again, I don't think you ought to hold your breath for the next conference call for the update on that, but that is a tool in the toolkit.

On the inorganic side, there's a great wide world of private credit that includes parts of that market that we do not currently do. And we observe the success others have had in some of those markets, we observe the scale of that, we observe what appears to be the permanence of those asset classes within a typical institutional allocation, and so it's something we will keep our eye on. Again, nothing immediate to report.

(Operator Instructions)

Our next questions come from the line of Craig Siegenthaler with Credit Suisse.

This is Samantha Platt on for Craig Siegenthaler. Given that you've deployed most of your first credit real estate fund, when could we see this come back to market? And do you expect it to be meaningfully larger given the strong performance?

Yes. So we don't give exact details on when we're going to launch new funds, but we are happy with that platform, and we do plan to try and expand it over time.

Great. And then one more question on real estate. Can you talk a little bit about the realization trajectory for the third real estate opportunistic fund?

Yes. And, well, I'll give some more information there as well because it was highlighted in our earnings release that some of the unexpected incentive income in the quarter were from realizations from Fund II. Fund II is getting down to a very small number. So I wouldn't expect anything material out of Fund II going forward. Fund III SRE 3 is the primary source of what you see described as real estate ABURI in the financial statements.

And as you know, we're now investing Fund IV, Fund III is in harvest mode. Based on the way waterfalls work and priority of payments work, the bulk of the realizations tend to be backend-loaded during the harvest period, and we've largely just started that process.

Our next questions come from the line of Bill Katz with Citigroup.

Just maybe a couple of follow-ups. I was wondering if you could expand a little bit on the hedge fund sales acceleration. I see year-to-date is now double where you were last year. So wondering if you could maybe talk about the different distribution channels where you're seeing that uptake, and then I'll just put my questions out there.

Second, I was wondering if you could maybe address capital deployment more broadly. The dividend was much larger than I would have anticipated based on your sort of prior payout guide. Anything about that. And then maybe any sort of advancement of the strategic relationship with Delaware Life and sort of new product opportunity or new distribution opportunities.

Yes. So on the hedge fund gross inflow side, as you mentioned, we provided an amount of detail that we have not done in the past, and we thought it was an important time to do that. First, we're not changing our overall disclosure plan on the gross flow side, but we did think it was important to highlight what was going on because it frankly represents a fairly material change of what's been a certainly hot (inaudible) for the last number of years.

As far as the texture of those inflows, and I mentioned this in the letter, it's pretty broad-based. It's from all types of allocators all around the world, consultant advised, non-consultant advised, institutional, noninstitutional. It's been a bit of everything, and that's why we described it as feeling healthy. And there's really no -- there's no greater insight to it than that, which is we obviously had an overhang over the last number of years that made it very difficult to see material new gross inflows, and we knew we had to take a series of steps to address that. We took all those steps. During that period of time, we continued to do the job our fund investors wanted us to do, and so we're beginning to see it. And you see the shape of the chart we put in the letter. Of course, that's not a promise that that exact shape will continue, but it's nice to see the shape be upward sloping. It's nice to see it come from a variety of places around the world. And that's generally a good sign that things ought to be returning to a normal gross-in, gross-out looking picture.

On the capital side, and again, we shared more detail here around this adjusted net asset concept. And maybe similar to the flow side, we know that the place that we were in years ago was not the place we wanted to be. We knew we wanted to be in a robust adjusted net asset position, and we know we want to keep going in that regard. So we do not have a preset number we're trying to achieve or a preset ratio we're trying to achieve.

And here, again, I'll unpack it into the shorter and longer term. In the shorter term, we have (inaudible) reasonably sufficient returning places to deploy the capital and we'll be satisfied with those returns. As we seek to expand that adjusted net asset position, that's about long-term offense and long-term creativity. And so we look at what some of our peers have been able to do with the benefit of a strong balance sheet, and it's frankly been brilliant and the value creation has been tremendous. And that was an avenue that was just simply not available to us.

We just didn't have a balance sheet to even attempt that type of creativity or that type of value creation. So we got to start by getting that balance sheet, which we have the beginnings of, but we want to keep going, and then we'll see where that takes us.

I think your last question, Bill, was on the Delaware Life side. We're really pleased with how the relationship is going. There's a variety of things that we have worked on and are working on together, both I'll call them at the fund level and at the company level, and we expect that to continue.

I'm not showing any further questions. I will now turn the call back over to Ms. King.

Thank you, Daryl, and thanks, everyone, for joining us today and for your interest in Sculptor Capital. If you have any questions, please don't hesitate to contact me at (212) 719-7381. Thank you, and have a great day.

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.