Tuesday, November 5, 2013

Joel Martin Frank

Joel Martin Frank

Thanks, Dan. This morning, I'll review our 2013 third quarter results and discuss how we are thinking about expenses for the fourth quarter.

For the third quarter, we've reported GAAP net income of $25 million or $0.16 per basic and $0.14 per diluted Class A share. As always, our press release includes a detailed discussion of GAAP results.

Now let me turn to the 2013 third quarter economic income, starting with revenues. Management fees totaled $138 million, increasing slightly on a sequential basis as assets under management grew approximately $1.2 billion from April 1 to July 1. From July 1 to October 1, our assets under management grew another $1.7 billion to $37.8 billion.

Our average management fee for the quarter was approximately 1.5%. As a reminder, the management fees we earn vary based on which platforms our assets under management are invested in, and we anticipate that our average management fee will fluctuate over time based on the mix of products that drive our growth.

Incentive income was approximately $72 million for the third quarter. The majority of this amount related to crystallized incentive income earned on the expiration of approximately $800 million of 3-year multi-strategy assets with the remainder related to redemptions. The majority of these assets were  reinvested for an additional 3 years in the same multi-strategy platform and the remainder across other platforms within the firm.

Now let me turn to our third quarter expenses. Comp and benefits totaled $28 million during the third quarter of this year. Of this amount, salaries and benefits were $23 million, up 6% from the second quarter, and the remainder were primarily guaranteed bonus expense. The increase was driven by our hiring activity globally during the quarter on both the investing side as well as the infrastructure side.

Salaries and benefits were 17% of management fees in the third quarter. We anticipate that this ratio will remain approximately 16% to 18% of management fees for the fourth quarter of this year.

In addition to employee bonuses, our Partner Incentive Plan will also impact our compensation expenses in the fourth quarter. As a reminder, our eligible pre-IPO partners may receive an annual discretionary performance award, which will be a mix of partner units and cash. We can award a maximum of 2.8 million units this year and 10% of the annual incentive income we earn up to a cap of $39.6 million.

Now turning to non-compensation expenses. Non-comp expenses totaled $29 million in the third quarter, a decline of 15% sequentially, primarily due to a net increase in professional fees. Non-comp expenses totaled 21% of management fees in the third quarter, and we anticipate this ratio to be 21% to 23% for the fourth quarter.

Our third quarter effective tax rate was 16%, declining sequentially due to an increase in our estimate of annual incentive income for this year, which impacts our full year effective tax rate calculation. As I've discussed in the past, our effective tax rate is impacted by several factors, including the amount of revenue we generate and how our revenue and expenses flow through our legal entity structure. As a result, our actual quarterly and annual effective tax rates can vary materially from our estimates. We estimate that our effective tax rate for the fourth quarter of this year will be in the range of 15% to 20%.

Our third quarter distributable earnings were $130 million or $0.27 per adjusted Class A share. As we disclosed in our press release this morning, our dividend for the third quarter is $0.25 for Class A share. As we approach the end of the year and begin to look towards 2014, I'd like to again emphasize the elements of our model which position us to deliver superior earnings growth over time.

Our year-to-date investment performance has been very strong, demonstrating the repeatability that our investment and risk management processes have achieved historically. Our assets under management have increased by 18% during the same period.

As Dan mentioned, current and prospective fund investors have reacted positively to our performance,  and this remains the most important criteria in their decision to invest capital with us. We believe we are well positioned for additional asset growth and that we will see continued acceleration in organic net inflows as our business diversifies.

Complementing our investment performance and asset growth is a financial model that is simple and transparent with a clear linkage between our distributable earnings and our dividend. First, the management fees we earn more than exceed our fixed operating expenses, and our cost structure is scalable, meaning that we expect our operating expenses to grow at a lower rate than our assets under management over time. The results in operating leverage flows directly through to our distributable earnings.

Second, we earn 20% incentive income annually in cash on the majority of our assets as we generate investment returns. And the incentive income we earn as revenue is not subject to callbacks, and the majority of our assets under management are not subject to hurdle rates. Cash bonuses, which are discretionary, are the only operating expense paid out from the incentive income. The remainder flows directly through to our distributable learnings.

The assets we have in platforms and earned incentive income cumulatively over a multiyear period, such as our 3-year multi-strategy or dedicated credit assets, also create significant additional earnings potential. The sort of objective of the structure is reflected in our distributable earnings and dividends both this year and last year.

Third, as our assets grow, we earn management fees and incentive income on that growth. Year-to-date through November 1, our assets under management have increased by $5.9 billion. We are earning management fees and incentive income on that asset growth, which have been and will continue to be reflected in our earnings this year. 

The compounding effect of asset growth on our distributable earnings and dividends can be significant over time. Henceforth, our dividend policy is to distribute substantially all of our distributable earnings as dividends to our shareholders each quarter. We believe that the combination of these elements is a powerful driver of our current and future earnings potential.

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