Q & A Highlights

Q: How should investors think about the impact of the SpaceX investment on the firm's financials, particularly regarding the mark-to-market valuation and potential performance fees? A: Michael Sacks (Chairman and CEO) and Pam Bentley (CFO) provided detailed color on the SpaceX position. The firm invested approximately $150 million at an average cost of $6.37 per share, which has grown to a value of roughly $3.5 billion. Pam noted that the Q2 unrealized carried interest was marked at $84 per share, but given the one-quarter lag in private markets valuations, the firm could see a meaningful increase in unrealized carry next quarter. She estimated $35 million to $40 million of unrealized annual performance fees based on a $110 share price, with each additional $10 movement in SpaceX's share price worth about $4 million of performance fees. Michael emphasized that SpaceX is a unique situation and cautioned against extrapolating its trajectory to other potential IPOs.

Q: Can you provide more detail on the fundraising breakdown, specifically how much came from private market funds versus separate accounts, and what is driving the expected pickup in second-half fundraising? A: Jon Levin (President) noted that year-to-date, approximately $400 million of fundraising came from private market specialized funds, with the remainder coming from other channels including separate accounts and evergreen products. He explained that the firm typically has 10-15 specialized funds in market at any given time, split between closed-end private market funds and evergreen products for ARS or the individual investor channel. Regarding the second-half pickup, Jon expects it to be broad-based across asset classes, with credit and infrastructure continuing to be leading contributors, and strength across all channels and geographies.

Q: How should we think about the carry payout ratio and overall firm payout ratio as realizations improve? A: Michael Sacks explained that the firm has historically maintained roughly a 50% holdback of the firm's share of incentive fees, which has been a safe base case for the last couple of years. However, he noted that as carry asset cash flows increase and/or extraordinary performance fees from the ARS business materialize, the firm believes it can hold more of that over time. He declined to provide a specific number but emphasized that the unrealized carry is a very large asset relative to market cap, providing significant upside potential. On realizations, he noted that transaction activity in co-invest portfolios is up significantly year-over-year, though timing remains unpredictable.

Q: Was the decline in the average fee rate in ARS driven by fee pressures or the denominator effect from strong AUM growth? A: Michael Sacks clarified that there are no fee pressures and no rewriting of fees occurring. Any impact on fee growth is purely related to the mix of investor size and the size of capital coming in. He confirmed that Q2 numbers were not impacted by fund profitability or marks, and the firm is not feeling pressure in any area of fee negotiations.

Q: How scalable is the international platform, and will additional investments be needed to scale it further? A: Jon Levin responded that the business is scalable overall, and the firm has proven its ability to raise assets across all channels, including insurance, individual investor, and institutional channels in the US and internationally. He noted that these are relatively modest investments given the firm's expense controls, but they are always looking to add talent where opportunities exist to accelerate distribution efforts. He emphasized the continued opportunity for alts businesses, particularly those that can meet investors wherever they are on their alternatives journey.

Q: With all the anxiety around direct lending and credit uncertainty, have investors leaned more into real assets? Can you share what you're seeing in demand for infrastructure versus real estate? A: Jon Levin highlighted that infrastructure has been on a 10-12 year run and he doesn't see it stopping, citing its stable return profile, yield-based characteristics, inflation protection, and long-duration nature that matches liabilities well. Infrastructure represented 25% of Q2 fundraising and has been the highest contributor over the last 12 months. He noted that while infrastructure competes well with private credit for portfolio allocation, it's not a zero-sum game, and both asset classes can play important roles in well-constructed portfolios. Michael Sacks added that demand is significant across all areas, with credit experiencing growth despite the negative headlines.

Q: Can you provide an update on Grove Lane and the wealth channel distribution efforts? A: Jon Levin noted that the individual investor and insurance channels are growing quickly and are much more meaningful contributors to capital formation than their current AUM percentages suggest. The firm has infrastructure and absolute return registered products, and is planning to bring a differentiated private equity registered product to market. While Michael Sacks cautioned that it will take time for this momentum to become hugely meaningful to financial results, Jon emphasized that it's going well and will be a great growth driver for years to come.

Q: How typical is the kind of valuation lift seen in SpaceX between six months before an IPO and the ultimate outcome? Should we expect similar moves from other high-profile IPOs in the pipeline? A: Michael Sacks emphasized that nothing about SpaceX is typical and it would be a mistake to project its trajectory onto other companies. He noted that SpaceX has built tremendous revenue streams and value in a short period, and while there has been significant valuation movement from Q4 through the IPO and since, he cautioned against extrapolating that to other situations. He did note that concerns about expiring lockups appear to have been somewhat overinflated.

Q: How is ARS billed, and does the timing of fees explain the strong sequential growth expected in Q3? A: Michael Sacks explained that ARS fees are primarily charged quarterly in advance based on the beginning quarter AUM number. The strong Q2 investment performance will be reflected in the Q3 beginning AUM number, driving the approximately 10% sequential increase in ARS management fees expected in Q3, which equates to nearly 20% year-over-year growth. He confirmed there are no fee pressures and the growth is purely a function of the billing mechanics and strong performance.

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