Q4 2020 AllianceBernstein Holding LP Earnings Call
Thank you for standing by and welcome to the Alliance Bernstein fourth quarter 'twenty 'twenty earnings review at this time, all participants are in a listen only mode.
After the Speakers' remarks, there will be a question and answer session and I will give you instructions on how to ask questions at that time.
As a reminder, this conference is being recorded and will be available for replay for one week.
Now I'd like to turn the conference over to the host for this call head of Investor Relations for a b Mr. Marc Griffin. Please go ahead.
Thank you and Italia good morning, everyone and welcome to our fourth quarter 2020 earnings review this.
This conference call is being webcast and accompanied by a slide presentation. That's posted in the Investor Relations section of our website Www Dot Alliance Bernstein Dot Com Seth.
Seth Bernstein, our president and CEO and Alita badge head of finance and strategy will present our results.
Burke our C O L will join us for questions after our prepared remarks from.
Some of the information we'll present today is forward looking and subject to certain SEC rules and regulations regarding disclosure so I'd like to point out the safe Harbor language on slide two of our presentation.
You can also find our safe Harbor language in the MD&A of our 2020 10-K, which we filed earlier this morning.
On the regulation FD management may only address questions of material nature from the investment community in a public forum. So please ask all such questions. During this call.
Now I'll turn it over to Seth.
And thank you for joining us today.
2020 forced all of us to face unexpected challenges unparalleled in both scope and scale.
The impact of COVID-19, civil unrest and depressed economic activity continues to reverberate today. The initial onset in subsequent reaction shaped a year. Unlike any other I'm proud to say that alliance Bernstein. We've learned from these challenges through as an organization and emerge even stronger than when we started the year we.
First to ensure the health and safety of our employees and maybe it only needs to be fully invested with our clients and their needs through volatile dynamic market conditions. We also meaningfully stepped up our focus.
And commitment to practicing true corporate responsibility improving diversity and inclusion our board an operating committee in adopting she commitments to ESG and racial equity all while continuing to invest in the health and well being of the communities in which we are apart.
In 2020, we made progress on April strategic growth initiatives, including initiating our European commercial real estate debt and CLO private alternatives platforms. Both in partnership with equitable building, our onshore presence in China, and further broadening our Asian footprint, which we recently received six prestigious.
Awards in Asia asset management 2002.
'twenty, one best and best that's the best.
Launching six new multi asset products.
Expanding our ESG leadership and capabilities rooted in our distinct strength and fundamental research.
And executing our Nashville headquarters relocation, which remains on track with our New office building opening next quarter and was modestly accretive to earnings in 2020.
Our long term investment performance remained solid with our talented teams continuing to generate idiosyncratic returns that can't be replicated for.
For the year, we posted active organic growth of 3% net of expected Axa redemptions, while expanding our margins to meet our 2020 adjusted operating margin target of 30%.
Delivered 15% growth in both earnings and distributions to unitholders, let's get into the specifics starting with a firm wide overview on slide four.
Fourth quarter gross sales of $31 3 billion were up 4 billion or 16% from a year ago, a strong finish to the year.
Full year gross sales of 124 billion were up 20% from the prior year the strongest year on over a decade, reflecting broad based growth across all three channels.
Third quarter firm wide active net inflows were $5 2 billion, excluding extra redemptions of four 4% annualized active organic growth rate.
Full year active net inflows of 14.9 billion, excluding expected Axa redemptions represented a 3% active organic growth rate.
Year end assets under management of 686 billion increased 10% year over year, while full year average AUM of 620 billion increased 8% versus the prior year.
Slide five shows our quarterly flow trend by channel.
Fourth quarter firm wide net inflows reflected strong growth in institutional offset by net outflows from retail and private wealth.
Retail experienced active net inflows driven by active equities munis offset by passive outflows institutional gross sales strength into $9 9 billion. Excluding the Axa redemptions, we've generated net inflows of $5 7 billion with both active equities and active fixed income growing by 10 per.
<unk> annualized in private wealth gross sales increased 37% year over year and were up 6% sequentially with significant productivity gains net outflows were $1 1 billion in the quarter.
Slide six shows annual net flows trend.
But we buy our strongest sales years since 2000 and firm wide net inflows of $9 2 billion ex extra redemptions reflected strong growth in institutional offset by net outflows from retail and private wealth.
Retail posted its strongest sales year ever with active inflows of $3 1 billion driven by equities offset by passive outflows of $4 6 billion instead.
Institutional posted its strongest sales in over a decade and grew net inflows by 1 billion or 12.8 billion excluding axis redemptions.
Private wealth also had its strongest sales year in over a decade outflows of $2 billion, reflecting in part a flight to safety as investors shunned volatility weaker shorter term investment performance.
Now, let's turn to investment performance beginning on slide Seth.
Clearly 2020 was a stunning year for global financial markets. The market turmoil of March and April seems to day to be a distant memory. Following the provision of massive and coordinated monetary stimulus from central banks, an astonishing fiscal policy support which continues today.
Our teams responded well in a volatile market and we're positioned to take advantage of the ensuing recovery and risk assets.
In the fourth quarter, our fixed income performance continued to improve as multi sector credit positioning once again benefited from a risk on environment.
Credit sectors outperformed government from the quarter U S high yield up like 5% European high yield up five 6% emerging markets up four 5% in U S corporates up 3%, all posting healthy excess returns versus government, which returned minus 0.8%.
And fixed income 62% of assets outperformed over the three year period, and 79% outperformed over the five year period.
On a one year basis, the percentage of assets outperforming improved to 43%, reflecting strength in our municipal and global plus products.
Our flagship global high yield portfolio continued its strong recovery following a difficult first quarter, placing it in the eighth percentile of its Morningstar peer group in the fourth quarter and the 10th percentile for the nine months ending in December American income within the second quartile for these periods and remains top quartile over the three.
Five and 10 year periods as shown on slide 21 of the appendix.
[noise] long term equity performance remains solid at 61 per cent of assets outperformed over the three year period, and 53% outperformed over the five year period.
That's the most recent one year period, 41% of assets outperformed reflecting outsized weightings of the top five mega cap stocks certain benchmarks as we noted last quarter momentum in beta our prominent factor risks for these stocks to which we remain sensitive.
The market broaden considerably in the fourth quarter U S small caps up 31% and value leading growth.
This environment our value portfolio is deliberate by outperforming peers in the quarter as cyclical value came back into Vogue in November and December.
Our diverse equity offering is positioned to participate should markets continue to broaden across styles and capitalization ranges.
Moving on to our client channels, beginning with retail on slide eight.
2020 saw banner retail sales up 79 billion up 5% year over year U S sales were up 21% and Japan doubled while Asia ex Japan sales declined by 15% versus a robust 2019.
Despite experiencing record first quarter redemptions due to the industry wide selloff in March we generated active net inflows for the full year of $3 1 billion.
As shown on the Upper left chart 2020 was our fourth consecutive year of active equity growth, we delivered 7% organic growth in 2020 and 8% on average over the last four years in the face of unrelenting industry headwinds our retail offering is the most balance has been in years with equity contributing 46.
Percentage of sales and fixed income 45%.
By geography, Asia, ex Japan, and the U S represents 38% and 37% of sales respectively. Japan is now, 11% with EMEA and Latin Latin America rounding out our offering.
We now have 59 products with more than $1 billion, each balance across asset classes, including 15, alts and multi asset.
Several of our largest funds posted very strong flow rankings from 2020 as shown on the bottom right.
Now I'll discuss institutional on slide nine.
Full year gross sales of $30 9 billion were up 81% year over year, the highest level in over a decade.
Excluding the planned Axa redemptions, we generated $12 8 billion of net inflows.
Active equity sales accelerated in 2020 to the highest level on over a decade, we've now posted sales greater than $2 billion for seven of past eight quarters.
First fixed income sales were also robust up 260% driven by core mortgage the securitized debt.
Full year net flows were led by active equity, which grew organically by $7 2 billion or 16% year over year.
Equity flows led by global core International small cap U S concentrated growth and international strategic value when.
We also had diversifying flows from China value and low vol. Total return.
In alternatives, we launched our European commercial real estate debt platform in the quarter supported by a sizable commitment from equitable. This platform extends geographic capabilities, while leveraging our strong relationship effect accruals based on a yield enhancing investment alternatives.
We were also excited to have closed and funded our first CLO $400 million offering the first of hopefully many to come.
Our ESG focused portfolios with purpose have now grown to.
5 billion up 60% year over year, we continued to see strong interest from global investors and consultants and ESG focused products and have several more in development.
Our green manage volatility equity spun was recently awarded most innovative launch by investment weak and we had three finalists named by U K based ESG investing in their 2021 Investor Awards.
Our institutional pipeline was $12 2 billion at quarter end, reflecting several sizable fundings during the quarter, including a $4 billion agency MBS mandate.
Added $4 2 billion in pipeline additions from the quarter. Notable pipeline additions include $1 3 billion of global credit $750 million on European value and $450 million, our fourth U S commercial real estate debt fund and $400 million in global health care.
Moving to private wealth management on slide 10.
Full year gross sales a $14 billion increased by 27% year over year and were the highest in over a decade.
The top left graph shows strong improvement in our advisor productivity up 21% in the fourth quarter and up.
And for the full year productivity.
<unk> levels approach all time highs last seen before the financial crisis.
Redemptions of $16 billion, partially reflected a customer flight to safety, while a single strategy related outflows early in 2020.
Since abated with meaningfully improved performance.
Full year net outflows were $2 billion.
As we close the year, we saw evidence that an uptick in broader M&A activity is leading to thawing in business transactions, which bodes well for client fundings, we raised $850 million on alternatives through this channel in 2020 across a number of different strategies, including our story is the long short TMT strategy acquired in.
Early 2020.
Muni impact is now over $1 billion AUM went up 55% from the prior year, our ESG focused strategies in private wealth grew 65% last year to $4 5 billion in AUM with additional product launches planned for the near term and our proprietary separately managed equity tax loss harvesting prop.
<unk> recently surpassed $500 million with.
AUM up 52% sequentially.
I'll finish our business overview with the sell side on slide 11.
Elevated market volatility in 2020 drove an increase in the Bernstein Research's global client trading volumes, both for the fourth quarter and for the full year.
Revenues increased by 7% in the fourth quarter and 13% for the full year as compared with prior periods. We were particularly pleased to see strong growth in Asia, including in India, where we've made focused investments our U S business also posted strong growth.
While Bernstein research provided a valuable hedge to our core asset management business during the extreme volatility in early 2020 secular challenges in the research business remain.
We would not expect last year's market volatility stemming primarily from COVID-19 to persist over the long term.
In 2020, we embedded a proprietary bottom up fundamental approach to ESG into our global research.
We hosted a global webinar series authored nearly 200 reports exploring ESG related themes.
The global outline collaboration evaluating the impacts of climate change for each sector.
Highlights of our full year accomplishments are shown on slide 12.
61% of our equity assets as a percentage of our fixed income assets are outperforming over three years, we continue to show remarkable traction delivering differentiated return streams in active equities as retail and institutional grew organically by 7% and 16% respectively.
Our ESG offering is growing quickly.
<unk>.
And then $5 billion at year end up 60% in 2020.
We drove full year active inflows in both retail and institutional overcoming the axa redemptions, our institutional pipeline of $12 2 billion at year end has a fee base with a mix up over 80% active equity and alternatives.
And we continue to grow our suite of alternative and multi asset offerings, including the fourth quarter launch of our CLO and European commercial real estate debt businesses as well as six multi asset strategies and more expected to come in 2021.
We are committed to managing our business to deliver strong incremental operating margins our full year adjusted operating margin of 31% was up 260 basis points year over year with full year earnings and unit holder distributions up 15% versus the prior year.
Now I'll turn it over to Ali to barge to walk through the financials.
Thanks, Seth let's start with the GAAP income statement on slide 14.
Fourth quarter GAAP net revenues of $1 1 billion increased 8% from the prior year period operating income of $302 million increased 13% on operating margin of $28 four per cent increase by 200 basis points.
GAAP EPS of <unk> 97 in the quarter increased by 15% year over year.
For the full year GAAP net revenues of $3 7 billion increased 5% operating income of $907 million rose, 10% net operating margin of 24, 6% increased by 200 basis points.
Full year GAAP EPS of $2 80, 810 increased by 16% year over year.
As always I'll focus my remarks from here on our adjusted results, which remove the effect of certain items that are not considered part of our core operating business, we base our distribution to unit holders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results. Our standard GAAP reporting and reconciliation of GAAP to adjusted results are in our presentation.
Index press release and 10-K.
Our adjusted financials are included on slide 15.
Fourth quarter revenues of $880 million increased by 8% operating income of $301 million increased by 14% and operating margin of 34, 2% increased by 190 basis points, we earned and will distribute to our unit holders 97 cents per unit up 14% as compared to 85.
For the last year's fourth quarter.
Higher based on performance fees as well as higher Bernstein research revenues, coupled with lower promotion and servicing and lower G&A expenses drove the stronger results from.
For the year revenue increased 5% to $3 billion operating income increased 14% to $918 million on operating margin increased 260 basis points to 31 per cent meeting. Our previously stated 2020 adjusted operating margin target of 30%.
Adjusted EPS increased by 15% to $2 91 from the prior year's $2 52.
Higher based on performance fees and higher Bernstein Research services revenues combined with lower promotion and servicing expenses and moderated G&A increases drove the stronger results.
We delve into these items in more detail on our adjusted income statement on slide 16.
Beginning with revenues.
Net revenues increased 8% for the fourth quarter, and 5% political year versus the same prior year periods.
Base fees increased 4% for the fourth quarter and 3% per the full year as higher average AUM across all three distribution channels was offset by a lower year over year portfolio fee rate.
Fourth quarter fee rate of $38 seven basis points from 0.4 basis points sequentially and declined 1.1 basis points year over year. This is in line with what we had told you last quarter and we continue to believe that although our fee rate may be volatile from time to time, given large mandates in our pipeline that may skew averages.
Long term trends should be grinding higher.
Fourth quarter performance fees of $109 million increased by $35 million over the prior year period due to strong performance fees earned by our partners our multi manager long short equity platform returned $79 million in the quarter.
U S concentrated growth on $8 million of performance fees on the quarter on our private middle market lending business from $6 million.
Full year performance fees of $130 million compared to $97 million for the same prior year period, reflecting the fourth quarter on strength in the audio platform.
We are very proud of how are you performed in a challenging year and believe it has established itself among the leading multi manager platforms on the industry.
Fourth quarter and full year revenues per Bernstein research services increased 7% and 13% respectively from the same prior year periods, driven primarily by higher client trading activity in the U S. On Asia, given the volatility in the markets from the pandemic U S election, and geopolitical fluctuations.
Excluding the contribution from autonomous Bernstein research revenues increased 10% per the full year autonomous continues to meet its objectives.
We incurred investment losses of $1 million in the fourth quarter at $7 million for the full year, primarily seed capital related as compared to investment gains from the prior period.
Moving to adjusted expenses all in our total fourth quarter operating expense of $579 million increased 5% year over year.
Full year operating expense of $2 $1 billion increased just 1% from the prior year, reflecting the benefit of lower travel entertainment and meeting costs due to the Covid pandemic for which I'll provide more detail shortly.
Total compensation and benefits expense increased 12% in the fourth quarter, primarily due to higher incentive compensation driven by higher performance fee revenue for the.
Full year compensation and benefits increased 4% again, driven primarily by higher incentive compensation associated with higher performance fees.
Compensation was 46, 7% of adjusted net revenues from the Corp, fourth quarter versus 44, 8% in the prior year period.
Full year 2020 compensation ratio was 47, 9% flat from the prior year and in line with what we had said last quarter.
Given current market conditions, we plan to accrue compensation at a 48 and a half per cent ratio from the first quarter of 2021 with the option to adjust accordingly throughout the year if market conditions change.
For more clarity on the comp ratio. It is our best estimate right now.
It not only expect downward moves in this comp ratio given the performance fees have become a bigger piece about business and they grab it up fringe benefits may ramp up this year more than expected post COVID-19 and market conditions remain uncertain.
Promotion and servicing cost declined 22% in the fourth quarter and 18% for the full year due to lower <unk> and lower meeting costs, owing to the COVID-19 pandemic.
Although an imperfect exercise we estimate the COVID-19 related reduction in these expenses to be about $20 million for the fourth quarter and about $50 million for the full year versus the prior year periods on core while we strive to realize some portion of ongoing efficiencies, we would not expect 2021 promotion.
On servicing spend levels to be anywhere as low once the pandemic subsides and we are seeing some return on these expenses given our global footprint in regions such as Asia.
Trade execution costs rose due to higher Bernstein research client trading volumes in both comparison periods.
G&A expenses declined 2% in the fourth quarter and rose 2% per the full year versus the same prior year periods for.
For the fourth quarter low occupancy and professional services fees were partially offset by higher technology and market data related expenses.
Two per cent for your increase was driven by higher market data services and technology expenses, partially offset by lower professional fees.
Intangible expenses decline in the fourth quarter as a $5 million quarterly amortization charges associated with our acquisition of Bernstein 20 years ago ended in the third quarter of 2020.
Fourth quarter operating income of $301 million and full year 2020 operating income of $918 million, both increased 14% versus the prior year period as revenue growth outpaced expense increases.
Fourth quarter operating margin of 34, 2% was up 190 basis points year on year, reflecting the operating leverage of our business.
Incremental fourth quarter margin was 60% as compared to the prior year period.
Our full year 2020 operating margin of 31% increased 260 basis points from 2019.
While we are pleased to have met our previously communicated 2020 margin target of 30% as I mentioned, we would not expect the majority of 2020 COVID-19 related expense savings to persist once the pandemic subsides.
We do not plan on setting a new adjusted operating margin target going forward. We will however continue to manage the business to an incremental margin of 45% to 50% not necessarily every year, but on average over time.
As outlined in the appendix of our presentation fourth quarter and full year adjusted earnings exclude certain items, which are not part of our core business operations in the fourth quarter. Adjusted operating earnings was $1 million below GAAP operating earnings due to the net impact of real estate related charges and acquisition related expenses.
And contingent payments.
For the full year adjusted operating income was $11 million or <unk> <unk> per <unk> higher than GAAP due to the favorable net impact of real estate and acquisition related credits offset by contingent payments.
The full year 2020 effective tax rate for Alliance Bernstein LP was 5% about as expected.
Going forward, we expect an effective tax rate for 2021.
<unk>, 5.5% to 6% given the first quarter is anticipated to exceed this at 7% or slightly up resulting from one time items related to autonomous acquisition.
I'll finish with an update on our planned corporate headquarters relocation to Nashville.
Our relocation is going very well on our employees and the people of national should be very proud of such progress during a very challenging year for our headquarter city.
And we had 789 Nashville based employees nearly two thirds of the way to our target of 1250.
Following four months of Covid related construction delays earlier in 2020, which reduced the expense of the move for that year, we took possession of our new headquarters building in the fourth quarter.
We're planning to move employees into the new building on the pandemic subsides.
For the fourth quarter estimated expense savings related to our Nashville, corporate headquarters relocation totaled $10 million and purchase of transition costs of $6 million.
<unk> and a net $4 million increase in operating income or a net two cents accretion to EPS.
On the net $4 million approximately $6 million as compensation related offset by $2 million of increased occupancy costs.
For the full year 2020 expense expense savings of $30 million for greater than transition cost of $26 million, resulting in slightly less than $4 million contribution to operating income for a net increase of one cent per unit of the net.
At $4 million approximately $13 million.
Compensation related savings offset by $9 million of increased occupancy costs.
For 'twenty 'twenty, one do you expect similar accretion of around <unk> <unk> per unit, increasing each year thereafter.
Now estimate ongoing annual expense savings beginning in 2025 once the transition period is over to be toward the upper end of the range of $75 million to $80 million per year.
Cumulative transition costs, which began in 2018 and will last through 2024 are now estimated to be $145 million to $155 million, which is $10 million less than our prior estimate of $155 million to $165 million.
Cumulative savings over this period are now estimated to be $205 million to $215 million approximately $20 million above our prior estimate of $185 million to $195 million.
With that I'll turn it back to Seth for some closing remarks before we take your questions.
Thank you Allie turning to slide 18.
Our 2020 results reflect good progress as we continue to focus on the dimensions. We previously outlined firstly, we drove 3% active organic growth ex the ex outflows based on differentiated investment performance over the last five years, we've generated average active organic growth of 2% with equity.
Active equities accelerating in recent years.
We expanded our suite of higher fee alternatives, including entry into both the CLO market and the European commercial real estate debt market. We continue to enjoy invaluable support from Ecuador for these and future growth plans given their strong mutual interest in growing our yield enhancing longer David alternative strategies.
While spending was reduced due to COVID-19 related travel and meeting restrictions, we drove strong incremental margin growth in 2020, expanding margins year over year with G&A up less than 2%.
As a partnership we have a durably low tax rate and we're paying a distribution of $2 91 per unit for full year, a robust yield of 7% in a low rate environment.
We'll keep you updated on further progress on these initiatives throughout 2021 with that we're pleased to take your questions.
To ask a question. Please press star followed by the number one on your telephone keypad that star one.
Please limit your initial questions to two what are to provide.
There was an opportunity to ask questions. You are welcome to return to the queue to ask a follow up question.
We will pause for just a moment to compile the Q&A roster.
Okay.
Yeah.
Your first response is from Mike carrier. Please go ahead.
Good morning, and thanks for taking the questions.
I guess first on flows as institutional flows in the pipeline look great, obviously retail and private wealth well a bit weaker you curious what drove maybe the outflows in those channels. If there was any seasonality in the fourth quarter and then probably more importantly, just how you see that trending ahead, if there was anything more unusual.
Will you.
And in the recent periods.
It might get Seth Thank you for the question.
I don't I.
Thank the issues are less seasonal.
With respect to non Japan Asia, there has been less interest.
In fixed income as we have been highlighting earlier on.
Whether it was dollar weakness whether its the expectation of higher rates.
Going forward.
But also there is a competing bid for for our clients' money onshore in equities in particular, which has been a real source of interest for them.
But I would say in <unk>.
Asia more generally we've done.
Much better than we have done in historical periods of redemptions, because we have better balance, particularly on the growth of of retail equity positive flows in Japan. So it's actually been pretty balanced story for us there.
And we've had much stronger results.
In the U S. So that's help offset in retail just switching over to private client.
<unk>.
I think there were issues that were frankly more idiosyncratic to the to that channel for us specifically the services. They used underperform. They had a number of underperforming services earlier on in the year that have clawed back performance. So the outflows have abated for the most part and we're seeing a bit of a change in trend.
Favorable, but we'll see.
So I think until and when there is more confidence around.
U S <unk>.
And frankly as rates rise as you know the appeal of fixed income.
Becomes a lot higher if someone said to me yesterday it'd be great. If we got to a $1 50 tread tenure quickly.
I think we're just going to be watching as the market evolves.
Okay, Great and then Ali.
Ali just you.
On the non comp expenses. Historically, you guys grew like G&A, you know somewhere around inflation. So just wanted to see what is that kind of the same outlook or are there any kind of new investments that are needed and then in terms of the COVID-19 costs I wasn't sure. If you said it was $50 million in 2000, and if so I'm just roughly what do you think that that norm.
<unk> like post Covid, meaning do you expect some changes in behavior, you mean that can.
You know reduce maybe that run rate level, you know over the longer term debt.
Thanks, Mike.
So taking it step by step first in terms of our non comp expenses. We continue to expect that to grow in line with inflation and we'll manage it to do so but.
But there will be a ramp up in occupancy expenses because of Nashville, and that's something that we've talked about before.
So inflation plus a little bit is how I'd think about it given our current headquarters and given that where we took the took the sort of occupancy at the end of last year and will continue to build that out and hopefully occupy that over the course of this year, but no no major change from what we said before in that area at all.
He says we're going to invest for sure, but we want to handle it with him that within that guidance.
In terms of the Covid savings, yes, you're correct, so $50 million rough math isn't perfect.
But as our estimate of what we think the impact was in 2020.
We are already seeing some of that went back up. So for example, the global obviously institution, we're seeing some of that ramp back up in Asia. As an example on and a lot of that obviously was driven by teeny expenses being lower for meetings being lower those types of things and you know, we all hope that as a pet.
Identic subsides, we got to meet our clients more face to face when you get to meet each other face to face much more and that will ramp back up.
Look we don't know when it just as long as you do exactly when that's going to happen on how that's going to happen, we're certainly thinking about doing things somewhat differently.
But I wouldn't anticipate that we get to say the majority of that at all.
Got it Okay makes sense, thanks a lot.
Yeah.
Thank you. Your next response is from.
She got dollar. Please go ahead.
Thanks, Good morning, everyone.
Hey can you guys hear me okay.
Yeah, we can hear you alright.
Good morning, So I wanted to start with.
Strategic partnership with Ecuador can you remind us what the current mix of product at equitable is now and also can you help us size the potential opportunity.
A b from the future rotation into auction private credit as they look to enhance our portfolio.
Sure.
Look I've been absolutely critical as you know and before them Axa and helping us facilitate the development of our new businesses. So the CLO business that we just launched in October it was a $405 million deal.
Then and then the European commercial real estate.
Group, which we have just.
Formed last year recruited.
They are really the cornerstone investor and both of those transactions.
So they continue to be.
Critical to our growth plans and have really been.
Very easy partner to work with just.
Just to give you some background at the end of last year, we had about just shy of 130 billion with them, which is about 19% of our assets. The majority of that institutional which is really fixed income high grade fixed income for the most part I'm not entirely but as you know that's really for the general account.
They are looking to increase the yield on that portfolio and in that there is an opportunity for us.
To further penetrate and build.
You need to talk to them specifically about what their plans are but we see the opportunity in terms of AUM for US you know.
More than several billion dollars in terms of incremental AUM that will flow over time and hopefully more than that.
That would arise from that but we really look to them principally.
To help us as the cornerstone investor to get the service was launched and is continuing investing for those that makes sense for them like PCI, which are is our middle market lending business U S. Commercial real estate debt, both of which are quite significantly investing.
Yeah.
I hope that answers your question.
No that was great Seth and I just.
Had a follow up on the on the Alts business I was looking for some commentary on your bigger platforms like area real estate debt, which you kind of just hit on them and also private credit, but what does the fund raising pipeline look like across these businesses do you have any kind of key protocols youre looking to fill in on.
So can you comment on investment performance to hop in these businesses.
Sure I mean, let me be I'm going to be a little more general and we can follow up later with specifics Mark.
Yes, you have them at hand.
We have a pretty significant pipeline ahead of US we are in.
We already had to close in our fourth commercial U S commercial real estate debt offering and we're planning I think a second larger close.
We're looking for a round.
Over $2 billion in that total raise.
As my thought, but they will clarify mark will clarify for me if that's incorrect.
PCI continues to have fund raising needs, which are launching this year as is European commercial real estate debt.
So on all of them, we have what I think are significant fund raising expectations. This year.
With regard to <unk>.
What you didn't bring up but I just thought I would bring up in connection with this which is you know is our multi pad long short manager, which has had really good performance.
They too see funding opportunities this year, both for the main fund and some more.
More specific funds under that umbrella like the stories, which is the TMT funds, which has had very strong performance. So we see opportunities there as well.
Im sorry, there was a second part of your question.
So investment performance, Oh, sorry, sorry, and then the first part of his fundraising.
So I've tried to answer.
It's multi billions of dollars of fund raising for this year for our private credit products as I broadly laid out to you.
With respect to performance well all credit.
Particularly non investment grade credit got hit fairly hard in the March April timeframe.
When when the bottom fell out we've seen really good recoveries, both in PCI or middle market lending business and stability in our U S. Commercial real estate business I think the U S commercial real estate.
Credit marketplace is going to take years to to work out generally.
We feel we're in a very good competitive position.
But there are challenges certainly in that space.
But all in all I think our performance has been quite competitive.
Great. Thanks for taking my questions.
Thank you. Your next response is from John Dunn. Please go ahead. Please.
Yes.
Good morning.
Tax the tax alpha strategies should be winners over the next few years and it's small for you guys, but it's growing like a weed.
How are you selling that and what do you think maybe it could look like down the road.
Size wise.
Look we have focused debt initially.
Initially on our private client business, where the need is most acute.
<unk> said it has been growing like a weed philosophically for us it's important that our clients recognize that.
We are flexible and want to move where they are with regard to how they want to build their core portfolios and our view is that customizable.
Indexing in SMA format is a very fast growing opportunity for us and I think for others.
And so we are looking at other indices could be thinking about whether ESG oriented.
More challenging global lead, but there are still a lot of opportunities. There. It's hard for me to put a number on it but we think we have the technology. We think we have the talent to do that and do it in a thoughtful manner.
Got you and then a little more on ESG.
How do you guys differentiate it.
On that like what are some of the larger strategies that are in the $6 5 billion and particularly what products are private wealth net.
Manager in that channel what are they gravitating to.
Yeah.
Look I think there's an enormous amount of talk about ESG I think it's very important to get into the weeds of what it really means so I'm glad you asked the question that way.
Look we think that.
Evaluating companies.
On a variety of different lenses, especially understanding.
What are.
Sort of.
Cos.
Of strategies that are not properly incorporated into the discount rate.
That we're valuing those companies is a dangerous place to be and so we have long developed internally a number of tools, whether it's in credit or in fixed income.
In equities.
We are sharing data among analysts across asset classes and on.
Quarter to identify and frankly properly price the risk we see in the broader portfolios and so I would tell you nearly 80% of our AUM today, and it's 600 and something billion.
Currently is managed using ESG integration however.
However, we have $16 billion on what we call portfolios were purpose those are fun set up a specific mandate with specific ESG targets and goals and reporting.
Some would call them double bottom line kinds of investments, where we feel obliged to actually be measuring impact.
Activism through the company's owned strategy and reducing whatever.
Negative externalities, we're focused on unusually carbon.
But but not necessarily more.
More and more focused on governance related matters.
And it's been growing it's been growing incredibly rapidly. So the portfolio's purpose for example, which I just mentioned about $16 billion has increased about 60% year over year.
And so I think thats important in the context of our overall AUM growth of roughly 10.
So just to give you a sense.
When you look at what the private client group is interested in and what we're what are some of our larger strategies I'd highlight are sustainable global thematic are sustainable U S. Thematic strategies are very big are municipal our muni impact strategy.
And our newly launched managed volatility Green Alpha it's tiny, but it's gotten a lot of interesting press and I think there's there's real momentum there. So I don't know if I answered your question fully but I hope you can tell we're pretty excited debt with a focus on fundamental research. We think we have an unusual perspective to bring to the table.
That's great thanks very much.
Thank you. Your next response is from Robert Lee. Please go ahead.
Yes, hi, good morning, Thanks for taking my questions.
I guess, maybe kind of similar.
Just trying to get a sense as well.
Are you seeing any as you head into new year, any kind of shifts in the RFP activity on.
On the maybe more specifically there is are you seeing more interest in value away from growth net when you're just trying to get a sense of kind of any I need some things maybe.
With the institution.
Investor base, maybe are focused on right now.
Robert Seth.
Look let me just make a couple of comments there. Yes, we are seeing we're certainly seeing growth in ESG focused searches.
That's for sure and I should have added that in my prior answer, but you reminded me of that.
Active equities, it's like 40 odd percent of our pipeline from an earnings perspective.
Certainly seeing more interest in value and we've won some value of the business in the fourth quarter, which was very hard which I think reflects our commitment to stick setting to our knitting sticking to our knitting and being a deep value manager when a lot of people, but banded that space.
So yes, we do see some of that I should also tell you on the lower feed side, we see more first and are are customized retirement solutions as well so.
Well certainly the fee base and that the average fee rate has been much higher in our pipeline and in our underlying book, we are seeing some lower fees up as well it doesn't change.
That significantly the mix, yet, but we are seeing a lot of interest there.
Great and just a quick follow up from.
On the coupon on the comp ratio.
I just want to make sure on her right, but you just you.
How are you doing or I'm, sorry, you into guiding to 48 five over the first half of the year.
Mr.
Right. So it's 45 and give it quarterly so it's for Q1, but what we've learned is people often key off of that and thinking about the rest of the year from a comp ratio perspective, we just wanted to make sure given performance fees. For example, it becomes a much bigger piece of our business, but there may be some fluctuations up or.
On that as well as fringe benefits right. So it's something that's in our comp ratio as fringe benefits and that's impacted by somebody who's going to the doctor or or not and or until the times, maybe fewer people and if that.
Releases, a little bit maybe if you could go just go more to the doctor and the metal impact on Orange. So could we just wanted to make sure that people understand that the directionality isn't always going to be down it's really in a year like this with 48 five per cent is what we're guiding to current out correct.
Alright, great and there's not usually on the seasons when Q seasonality as it relates to.
Payroll cost of debt.
Well, so correct I mean, we we accrue it for you on him.
Okay, Alright, great. Those are my questions. Thanks, so much.
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Okay. Thank you and Italia. Thank you everybody for participating on our conference call today, Please feel free to contact Investor relations with any further questions and we wish you a great day Goodbye.
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