The following information should be read in conjunction with our unaudited
condensed consolidated financial statements and the notes thereto included in
this Form 10-Q, and our audited financial statements, notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in our 2020 Form 10-K for a more complete understanding of
our financial position and results of operations.
The following discussion may contain forward-looking statements that reflect our
plans, estimates and beliefs. Our actual results could differ materially from
those discussed in these forward-looking statements. Investors should review the
"Cautionary Note Regarding Forward-Looking Information" above and the "Risk
Factors" detailed in Part I, Item 1A of our 2020 Form 10-K for a discussion of
those risks and uncertainties that have the potential to cause actual results to
be materially different. Our results of operations for interim periods are not
necessarily indicative of results to be expected for the full year or for any
other period. Unless otherwise indicated, references in this Form 10-Q to fiscal
2020 and fiscal 2019 are to our fiscal years ended
Business Overview We are a global private markets investment solutions provider. We offer a variety of investment solutions to address our clients' needs across a range of private markets, including private equity, private credit, real estate, infrastructure, natural resources, growth equity and venture capital. These solutions are constructed from a range of investment types, including primary investments in funds managed by third-party managers, direct/co-investments alongside such funds and acquisitions of secondary stakes in such funds, with a number of our clients utilizing multiple investment types. These solutions are offered in a variety of formats covering some or all phases of private markets investment programs: •Customized Separate Accounts: We design and build customized portfolios of private markets funds and direct investments to meet our clients' specific portfolio objectives with regard to return, risk tolerance, diversification and liquidity. We generally have discretionary investment authority over our customized separate accounts, which comprised approximately$59 billion of our assets under management ("AUM") as ofDecember 31, 2020 . •Specialized Funds: We organize, invest and manage specialized primary, secondary and direct/co-investment funds. Our specialized funds invest across a variety of private markets and include equity, equity-linked and credit funds offered on standard terms, as well as shorter duration, opportunistically oriented funds. We launched our first specialized fund in 1997, and our product offerings have grown steadily, comprising approximately$17 billion of our AUM as ofDecember 31, 2020 . •Advisory Services: We offer investment advisory services to assist clients in developing and implementing their private markets investment programs. Our investment advisory services include asset allocation, strategic plan creation, development of investment policies and guidelines, the screening and recommending of investments, legal negotiations, the monitoring of and reporting on investments and investment manager review and due diligence. Our advisory clients include some of the largest and most sophisticated private markets investors in the world. We had approximately$581 billion of assets under advisement ("AUA") as ofDecember 31, 2020 . 23
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•Distribution Management: We offer distribution management services through
active portfolio management to enhance the realized value of publicly traded
stock our clients receive as distributions from private equity funds.
•Reporting, Monitoring, Data and Analytics: We provide our clients with
comprehensive reporting and investment monitoring services, usually bundled into
our broader investment solutions offerings, but occasionally on a stand-alone,
fee-for-service basis. Private markets investments are unusually difficult to
monitor, report on and administer, and our clients are able to benefit from our
sophisticated infrastructure, which provides clients with real time access to
reliable and transparent investment data, and our high-touch service approach,
which allows for timely and informed responses to the multiplicity of issues
that can arise. We also provide comprehensive research and analytical services
as part of our investment solutions, leveraging our large, global, proprietary
and high-quality database of private markets investment performance and our
suite of proprietary analytical investment tools.
Our client base primarily comprises institutional investors that range from
those seeking to make an initial investment in alternative assets to some of the
world's largest and most sophisticated private markets investors. As a highly
customized, flexible outsourcing partner, we are equipped to provide investment
services to institutional clients of all sizes and with different needs,
internal resources and investment objectives. Our clients include prominent
institutional investors in
Recent Transactions
Special Purpose Acquisition Company
On
Trends Affecting Our Business Impact of Covid-19 InMarch 2020 , theWorld Health Organization declared the outbreak of a novel coronavirus ("COVID-19") a global pandemic, which continues to spread and cause significant disruption and uncertainty in the global economic markets. We are closely monitoring developments related to the COVID-19 pandemic and assessing any negative impacts to our business. During the quarter endedSeptember 30, 2020 , we began to see a recovery in both the public and private markets compared to the downward movements in the two previous quarters due to the effects of the COVID-19 pandemic. That recovery generally continued through the quarter endedDecember 31, 2020 . Given the amount of uncertainty regarding the scope and duration of the COVID-19 pandemic, it is 24
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currently not possible to predict the precise impact it will have on future quarters, but it has impacted, and may further impact, our business in various ways, including but not limited to the following: •Investment valuations may be subject to significant volatility and adversely impacted due to the disruption in global economic markets, whether because of valuation methodologies that rely on public market comparables or as a result of decreases in current or future estimated performance of underlying portfolio companies. Our underlying investments reflect valuations as ofSeptember 30, 2020 . Decreases in public markets and credit indices in quarters ending after that date may result in negative valuation adjustments that will be reported on a three-month lag in accordance with our accounting policy. Adverse investment valuations directly impact our investments, equity in income of investees, unrealized carried interest, AUM and AUA for the period. •Incentive fee revenue, which is typically volatile and largely unpredictable, has in the past and may in the future decrease as the ability of general partners to exit existing investments may be limited due to uncertainty in the global economic markets. •While the market dislocation caused by COVID-19 may present attractive investment opportunities due to increased volatility in the financial markets, we may not be able to complete those investments, which could impact revenue, particularly for specialized funds and customized separate accounts that charge fees on invested capital. •Restrictions on travel and social distancing requirements implemented globally have challenged our ability to fundraise for new products and raise new business, which may result in lower or delayed revenue growth compared to prior periods. Investors may also limit the amount of capital they are willing to commit given the current uncertainties in global markets and economies. •The vast majority of our employees are continuing to work remotely. This extended duration of remote working could lead to additional operational risks, such as greater cybersecurity threats. COVID-19 also presents a threat to our employees' well-being and morale. While we have implemented a business continuity plan to protect the health of our employees and have contingency plans in place for key employees or executive officers who may become sick or otherwise unable to perform their duties for an extended period of time, such plans cannot anticipate all scenarios, and we may experience potential loss of productivity or a delay in the implementation of certain strategic plans. As ofDecember 31, 2020 , we have adequate liquidity with$92.9 million in available cash and$125 million in availability under our Loan Agreements (defined below). For more information on our Loan Agreements, see "-Liquidity and Capital Resources-Loan Agreements". Operating Segments
We operate our business in a single segment, which is how our chief operating decision maker (who is our chief executive officer) reviews financial performance and allocates resources.
Key Financial and Operating Measures Our key financial measures are discussed below. Revenues We generate revenues primarily from management and advisory fees, and to a lesser extent from incentive fees. 25
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Management and advisory fees comprise specialized fund and customized separate account management fees, advisory and reporting fees and distribution management fees. Revenues from customized separate accounts are generally based on a contractual rate applied to committed capital or net invested capital under management. These fees often decrease over the life of the contract due to built-in declines in contractual rates and/or as a result of lower net invested capital balances as capital is returned to clients. In certain cases, we also provide advisory and/or reporting services, and we therefore also receive fees for services such as monitoring and reporting on a client's existing private markets investments. In addition, we may provide for investments in our specialized funds as part of our customized separate accounts. In these cases, we reduce the management and/or incentive fees on customized separate accounts to the extent that assets in the accounts are invested in our specialized funds so that our clients do not pay duplicate fees. Revenues from specialized funds are based on a percentage of limited partners' capital commitments to, net invested capital or net asset value in, our specialized funds. The management fee during the commitment period is often charged on capital commitments. After the commitment period (or a defined anniversary of the fund's initial closing), such fee is typically reduced by a percentage of the management fee charged for the preceding year, or the management fee is charged on net invested capital. In the case of certain funds, we charge management fees on capital commitments, with the management fee increasing during the early years of the fund's term and declining in the later years. Management fees for certain funds are discounted based on the amount of the limited partners' commitments or if the limited partners are investors in our other funds. Revenues from advisory and reporting services are generally annual fixed fees, which vary depending on the services we provide. In limited cases, advisory service clients are charged basis point fees annually based on the amounts they have committed to invest pursuant to their agreements with us. In other cases where our services are limited to monitoring and reporting on investment portfolios, clients are charged a fee based on the number of investments in their portfolio. Distribution management fees are generally earned by applying a percentage to AUM or proceeds received. Certain active management clients may elect a fee structure under which they are charged an asset-based fee plus a performance fee based on net realized and unrealized gains and income net of realized and unrealized losses. Incentive fees comprise carried interest earned from our specialized funds and certain customized separate accounts structured as single-client funds in which we have a general partner commitment, and performance fees earned on certain other customized separate accounts. For each of our secondary funds, direct/co-investment funds, credit funds and evergreen funds, we generally earn carried interest equal to a fixed percentage of net profits, usually 10.0% to 12.5%, subject to a compounded annual preferred return that is generally 6.0% to 8.0%. To the extent that our primary funds also directly make secondary investments and direct/co-investments, they generally earn carried interest on a similar basis. Furthermore, certain of our primary funds earn carried interest on their investments in other private markets funds on a primary basis that is generally 5.0% of net profits, subject to the fund's compounded annual preferred return. We recognize carried interest when it is probable that a significant reversal will not occur. In the event that a payment is made before it can be recognized as revenue, this amount would be included as deferred incentive fee revenue on our consolidated balance sheet and recognized as income in accordance with our revenue recognition policy. The primary contingency regarding incentive fees is the "clawback," 26
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or the obligation to return distributions in excess of the amount prescribed by the applicable fund or separate account documents. Performance fees, which are a component of incentive fees, are based on the aggregate amount of realized gains earned by the applicable customized separate account, subject to the achievement of defined minimum returns to the clients. Performance fees range from 5.0% to 12.5% of net profits, subject to a compounded annual preferred return that varies by account but is generally 6.0% to 8.0%. Performance fees are recognized when the risk of clawback or reversal is not probable. Expenses Compensation and benefits is our largest expense and consists of (a) base compensation comprising salary, bonuses and benefits paid and payable to employees, (b) equity-based compensation associated with the grants of restricted stock awards and (c) incentive fee compensation, which consists of carried interest and performance fee allocations. We expect to continue to experience a general rise in compensation and benefits expense commensurate with expected growth in headcount and with the need to maintain competitive compensation levels as we expand geographically and create new products and services. Our compensation arrangements with our employees contain a significant bonus component driven by the results of our operations. Therefore, as our revenues, profitability and the amount of incentive fees earned by our customized separate accounts and specialized funds increase, our compensation costs rise. Certain current and former employees participate in a carried interest plan whereby approximately 25% of incentive fees from certain of our specialized funds and customized separate accounts are awarded to plan participants. We record compensation expense payable to plan participants as the incentive fees become estimable and collection is probable. General, administrative and other includes travel, accounting, legal and other professional fees, commissions, placement fees, office expenses, depreciation and other costs associated with our operations. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations. Other Income (Expense) Equity in income (loss) of investees primarily represents our share of earnings from our investments in our specialized funds and certain customized separate accounts in which we have a general partner commitment. Equity income primarily comprises our share of the net realized and unrealized gains (losses) and investment income, partially offset by the expenses from these investments. We have general partner commitments in our specialized funds and certain customized separate accounts that invest solely in primary funds, secondary funds and direct/co-investments, as well as those that invest across investment types. Equity in income (loss) of investees will increase or decrease as the change in underlying fund investment valuations increases or decreases. Since our direct/co-investment funds invest in underlying portfolio companies, their quarterly and annual valuation changes are more affected by individual company movements than our primary and secondary funds that have exposures across multiple portfolio companies in underlying private markets funds. Our specialized funds and customized separate accounts invest across industries, strategies and geographies, and therefore our general partner investments do not include any significant concentrations in a specific sector or area outsidethe United States . 27
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Interest expense includes interest paid and accrued on our outstanding debt, along with the amortization of deferred financing costs, amortization of original issue discount and the write-off of deferred financing costs due to the repayment of previously outstanding debt. Interest income is income earned on cash and cash equivalents. Other non-operating income (loss) consists primarily of gains and losses on certain investments, changes in liability under the tax receivable agreement and other non-recurring or non-cash items. Fee-Earning AUM Fee-earning AUM is a metric we use to measure the assets from which we earn management fees. Our fee-earning AUM comprise assets in our customized separate accounts and specialized funds from which we derive management fees. We classify customized separate account revenue as management fees if the client is charged an asset-based fee, which includes the majority of our discretionary AUM accounts but also includes certain non-discretionary AUA accounts. Our fee-earning AUM is equal to the amount of capital commitments, net invested capital and net asset value ("NAV") of our customized separate accounts and specialized funds depending on the fee terms. Substantially all of our customized separate accounts and specialized funds earn fees based on commitments or net invested capital, which are not affected by market appreciation or depreciation. Therefore, revenues and fee-earning AUM are not significantly affected by changes in market value. Our calculations of fee-earning AUM may differ from the calculations of other asset managers, and as a result, this measure may not be comparable to similar measures presented by other asset managers. Our definition of fee-earning AUM is not based on any definition that is set forth in the agreements governing the customized separate accounts or specialized funds that we manage. 28
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Consolidated Results of Operations
The following is a discussion of our consolidated results of operations for the
three and nine months ended
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