Sculptor Capital Management, Inc.
Q4 2021 Earnings Call Transcript

Published: 17 Feb 2022

[Operator:]

Good morning, everyone, and welcome to Sculptor Capital's Fourth Quarter and Full Year 2021 Earnings Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ellen Conti, Head of Corporate Strategy and at Sculptor Capital.

[Ellen Conti:]

Thanks, Peter. 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 statements. 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 Web site. 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. Yesterday, we reported our fourth quarter 2021 GAAP net loss of $5.8 million or $0.23 per basic and $0.75 per diluted Class A share. For full year 2021, we reported a GAAP net loss of $8.6 million or $0.34 per basic and $0.56 per diluted Class A share. Fourth quarter distributable earnings were a loss of $56 million or $0.94 per fully diluted share. For the full year 2021, distributable earnings were income of $83 million or $1.38 per fully diluted share. We did not declare a dividend this quarter. All earning metrics discussed by both Jimmy and Dava will be on our non-GAAP economic income and distributable earnings metrics. I'll now hand the call over to Jimmy for a few words.

[Jimmy Levin:]

Good morning, everyone. Thanks for joining the call. I’m going to give some high-level thoughts about 2021 and about where the business stands before handing it over to Dava to get into 2021 in more detail. So, 2021 was an inflection point for the business. After years and years of hard work against what at times felt like some pretty tough odds, we are now in a place where we have actual tangible results across almost every metric we use to measure the health of the business

[Dava Ritchea:]

Thanks, Jimmy. I first want to highlight some of the key drivers behind 2021 full year results, and in particular, the fourth quarter. I will then finish up with some topics that have an impact on our overall financials. Both our full year and fourth quarter results highlight timing issues that can impact our earnings, and in some periods like this year, the impact of those timing issues can be pretty significant. The main timing issue in our business comes from the differences in our revenue recognition of incentive income versus the recognition of related bonus expenses. First, to the 2021 results. In analyzing our 2021 -- in analyzing these results, we think it's helpful to evaluate our 2020 results alongside. Both of these years were significantly impacted by the timing differences I described, albeit in opposite directions. This makes comparison between the years, on an absolute basis, quite challenging. Let's unpack that a little. The 2021 results are best described as follows

[Operator:]

The first question is from Gerry O'Hara with Jefferies. Please go ahead.

[Gerry O'Hara:]

Great. Thanks and good morning. Clearly, some -- I think, optimism in the tone as it relates to future fund flows. But perhaps you could elaborate a little bit as it relates to conversations or dialogue with kind of the consultant community and gatekeepers, and perhaps LPs that sort of is driving some of that confidence?

[Jimmy Levin:]

Sure. So, I think the simplest way to say this, and we tried to highlight it with this kind of 12-year view, we were in the business of raising capital into multi-strat funds and other funds prior to the firm issues. And we, I will say, won our fair share of market share of those flow dollars. And for a long period of time, we were simply out of the market. It was -- the firm had issues where it was really challenging for new investors to allocate new dollars. And to go from that place of zero, effectively zero, I should say, to go to a place of activity is a significant difference that we can observe a bunch of different ways. We can observe the actual flows and we can observe the fact that we are in the dialogue now. When there is an RFP, we have a pretty good chance of being in it. When there is a new mandate out, we’ve a pretty good chance of being in it to win it. When an institution with a consultant adviser relationship is looking to meet managers, we get an introduction to that institution through the private wealth channel. The private wealth channel is now, I will say, largely open to us, the way we define that channel. And frankly, it was not necessarily largely open to us during those years that were more dormant. So, it's really -- it's pretty stark when we look at it top down in terms of being essentially out of the market versus now being in the market. Now, we still need to do a great job. We still need to win business. We still need to earn trust. We need to execute, but we have a horse in the race today.

[Gerry O'Hara:]

Okay. That’s helpful. And then I wanted to, I guess, expand a little bit on the operating leverage comments, both from your press release and prepared remarks. And if you could maybe just sort of help us frame that against, "no material change in expenses". Should we think that that rate of expenses or at least operating core expenses should remain sort of at a similar level? Or are there sort of some other kind of metrics that we should be focused on to kind of get a sense of how leverage in the business could develop going forward?

[Dava Ritchea:]

Thanks, Gerry. So, I think when you're talking about core expenses, again, we don’t anticipate there being any real material change from the guidance that we had given last year around core expenses and from our experience this year. In terms of starting to see that operating leverage, the first place you are going to see that is in management fees. And as we said this year, even with the growth that we had, those were up 12% year-over-year. Maybe I will turn it over to Jimmy to talk a little bit more about some of the future pieces.

[Jimmy Levin:]

Yes. Bigger picture, when we look at our -- at this point, pretty significantly larger public peers, and think about the focus areas there, whether it's the insurance market, the retail market, non-traded REITs, non-traded BDCs and permanent capital vehicles and the list goes on, those are all areas we understand deeply, see the opportunity and currently don’t do. Should we be pursuing any of those in a significant way? Obviously, those are going to cost money. Right now, we are focused on the core, and we are focused on capturing the operating leverage in the core, but I think we would be doing a disservice long-term if we weren't thinking about those other things. So, at some point, we are going to have to plant seeds for what the business looks like in a decade. And it probably doesn't look exactly the way it looks today in a decade, and we are only going to be in that position if at some point, we start planting those seeds. And when we do, it will cost operating expenses, but we are not at a point where we need to focus on that right this second.

[Gerry O'Hara:]

Okay. That’s helpful. And then just maybe one last one, if I could. The -- clearly, the timing issue is complicated and perhaps just sort of a function of the size and the structure of your current business. But is there anything that you could sort of take away from the past 2 years in terms of philosophy and process as it relates to the comp accruals that might help sort of streamline or simplify that? Or is it just sort of something that we kind of have to deal with for the present time?

[Jimmy Levin:]

I will let Dava try to answer it differently a few ones , but I think you nailed it with the second part of your question there. At our current scale, it's just magnified. The way we do it is the way we’ve always done it and the way that I would say the substantial number of our peers, albeit most of them at this scale are not public, also handle compensation. It's, of course, magnified in the context of our scale and our scale as a public company, but I think that’s something we’ve learned to live with. We obviously have tried to in this call, and more recently leading into this call, give a little more clarity on how we think of it and what to expect, and we tried to foreshadow that on our third quarter call, because there's quarterly issues and there's annual issues. Those are inherent to our business. And our accounting policy, which is more of a Dava question, follows the inherent nature of the business. So should we be so fortunate to get to a totally different scale someday, and at some point in the past, many years ago, we were -- where these issues were there, they were just frankly less noticeable, so that will be obviously a high-class problem should we get to that scale again. But we have a business that has certain inherent attributes, and the way we run it and our accounting for it is going to have to follow the inherent fundamentals of the business.

[Dava Ritchea:]

I think that's right, Jimmy. And I would also say on the compensation side, the way that we pay provides greater flexibility to us in terms of running the business as opposed to doing it in a different fashion, which might make the accounting line up a little bit easier, but we think from an actual running of the business perspective, doesn't give us the flexibility. And so, over the long-term perspective, we think this is the right way to do it. We will continue to provide as much guidance as we can, and we will incur -- we will continue to work with you in terms of looking at that ABURI balance and understanding where we are in different parts of the process. But as we stated before, looking at compensation ratios with ABURI in mind and over multi-year periods is really the best way to be evaluating our business.

[Gerry O'Hara:]

Okay, great. Thanks for taking my questions this morning.

[Operator:]

Thank you. I’m not showing any further questions. I will now turn the call over to Ms. Conti.

[Ellen Conti:]

Thank you, Peter, and thanks everyone for joining us today and for your interest in Sculpture Capital. If you have any questions, please don't hesitate to contact me at 212-719-7381. Thank you.

[Operator:]

This concludes today's conference. You may now disconnect your lines. Thank you for your participation.