Q & A Highlights

Q: How should we think about the fee-eligible AUM raise in the second half of the year and also in 2025, given the ongoing fundraisings that you see among your partner firms? A: We have guided $20 billion to $25 billion for 2024, and our partner firms have already raised over $14 billion in fee-eligible assets in the first half. We remain confident in our guidance for the second half. It's too early to provide specific guidance for 2025, but we will offer more details at the end of the year.

Q: Do you see your partner firms making steps in private wealth distribution, especially in North America? A: Private wealth distribution is an attractive channel, and many of our partner firms are focusing on it for medium-term growth. While some firms have had success in this space, it is more relevant for larger cap players seeking new sources of capital. Our mid-market firms are still gaining market share in their sectors.

Q: How should we think about performance revenues and investment income in the second half of the year? A: Performance revenues were 9% of partner firm revenue in the first half, higher than last year but still muted. We expect the current market for realizations to remain soft. Investment income tends to be lumpy and difficult to predict with precision. We also reduced our balance sheet exposure by about 15%, which will likely lower our investment income expectations.

Q: Can you explain the dynamics behind the improvement in FRE margin between Q2 and Q1? A: The FRE margin is a weighted average blend of all partner firms. It tends to be higher in the first half and slightly lower in the second half due to finalizing expenses like compensation. Expenses have grown in line with revenues, contributing to the bottom line FRE margin.

Q: How should we think about the valuation of your investment portfolio given the rerating of the sector and the decline in U.S. long-term rates? A: Public comparable market caps were up about 9% in the first half, but our mark-to-market valuations increased by 1% to 2%. The discount rate on FRE came down slightly due to higher-quality earnings, while the discount rate on performance fees ticked up slightly, reflecting the muted realization market.

Q: How do you think about the trade-off between share buybacks and M&A, and why choose a special dividend rather than further share buybacks? A: We prioritize growth and capital efficiency. The special dividend was chosen to return the upfront payment from the LMR Partners sale. Last year, with a slow M&A environment, we opted for a tender offer and buybacks. Going forward, we will continue to prioritize growth while maintaining capital efficiency.

Q: Were there any significant one-offs in revenue terms like catch-up fees or late fees in Q2? A: No, there were no material one-offs in the second quarter.

Q: Are there any specific funds or managers that are big drivers for H2 performance fees, and can you provide a split between private asset class investments and absolute return funds? A: In the first half, all PRE came from private markets. Absolute return funds typically crystallize performance fees in the second half. The contributions were diversified across several firms.

Q: How much of the fundraising news for General Catalyst, Clearlake, and LLR is already in your H1 numbers? A: The fundraising information publicly offered by these firms is included in our H1 numbers and factored into our full-year guidance.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.