Q4 2021 Franklin Resources Inc Earnings Call
Okay.
Welcome to Franklin Resources earnings Conference call for the quarter and fiscal year ended September 30th 2021.
Hello, My name is April and I will be your call operator today.
As a reminder, this conference is being recorded and at this time all participants are in a listen only mode.
I would now like to turn the conference over to your host Selene, Oh head of Investor Relations for Franklin resources. Thank you you may begin.
Good morning, and thank you for joining us today to discuss our quarterly and fiscal year results. Please note that the financial results to be presented in this commentary are preliminary statements made on this conference call regarding Franklin Resources, Inc, which are not historical facts are forward looking statements within the meaning of the private Securities Litigation Reform Act.
95.
These forward looking statements involve a number of known and unknown risks uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward looking statements. These and other risks uncertainties and other important factors are described in more detail in Franklin's recent filings with the securities and.
Exchange Commission, including in the risk factors and the MD&A sections of Franklin's. Most recent Form 10-K, 10-Q filings with that ill turn the call over to Jenny Johnson, our president and Chief Executive Officer.
Thank you Celine Hello, everyone and thank you for joining us today to discuss Franklin Templeton's results for our fourth quarter and fiscal year, well. So very excited to announce the acquisition of Lexington partners and I am delighted to extend our warmest welcome to such a talented team Lexington business provides us the.
Exposure to a critical growth area in the alternative asset business and we cannot be happier with this new partnership will cover more on this transaction in a few minutes.
Nichols, our CFO and Adam Specter, our head of global distribution are on the call with me today. We're also joined by Tom Gan head of Franklin Templeton alternatives and will warn president of Lexington partners, who will be available for questions. After our prepared remarks.
I'll start by reviewing this year's milestones that Matt will go through our financial results for the quarter and the fiscal year as well as spend some time discussing today's important transaction in greater detail.
Franklin Templeton history, we have invested in our business to build a truly diversified and resilient organization that performs across market cycles with a commitment to serving our clients employees and shareholders. The.
The results that we announced today represent the first full fiscal year since we closed the Legg Mason acquisition, a transformational transaction that created a more balanced business across asset classes client mix and geographies.
We are pleased to report that the strategic and financial benefit from our acquisition of Legg Mason exceeded our goals and we have added important growth opportunities over.
Over the course of the year, we have created a management team consisting of key representation from Franklin Templeton, Legg Mason and our specialist investment managers.
We have maintained our culture, while invigorating collaboration and innovation across the firm.
Through the hard work and dedication of our employees. We've successfully brought two firms together to maximize our collective potential one that successfully combines the attributes of global strength with boutiques specialization.
We've made strong progress and yet in so many ways. We're just getting started.
Turning to investment performance, there's been an improvement in performance across a broad base of investment strategies through September, 71%, 69%, 72% and 77% of strategy composites outperformed their respective benchmarks across the four key time periods.
This quarter, we had 53% of mutual fund AUM in funds with four or five star ratings by Morningstar compared to 43% a year ago. During the year, we focused on updating our global distribution efforts by enhancing our general a specialist model reshaping client coverage and deepening relationships.
Asian ships in each sales region, particularly with the largest global financial institutions.
Fiscal year long term inflows doubled to 365 billion from the prior year, notably the U S, which is our largest sales region with over $1. One trillion in AUM was net flow positive for the year.
In terms of notable organic growth we saw positive net flows in our core growth areas, including alternatives SMA wealth management and ESG specific strategies.
We executed important acquisitions to further grow and diversify our business and the alternative assets customization and distribution of investment strategies.
In terms of other accomplishments, our alternative asset strategies and important area of focus for us generated positive net flows in each quarter during the year and grew by 19% from the prior year to 145 billion in AUM with.
<unk> from a diverse group of strategies, including real estate infrastructure private debt and hedge funds several years ago, we announced our intention to create a full suite of alternative strategies and we've been very deliberate in building our capabilities in 2018, the acquisition of benefit Street partners.
Brought us a leading alternative credit manager in 2020, we added a world class real estate manager with Clarion partners.
Focus on alternatives led us to today's announcement of the acquisition of Lexington partners, a leader and secondary private equity and co investments.
Now have top tier specialist investment managers in all of the key alternative categories with benefit Street partners.
Harry and partners Franklin venture partners key too and now Lexington partners.
Specifically with the Lexington partners transaction I'm excited that Franklin Templeton will be partnering with such an outstanding firm that is led by an experienced and talented team immediately, bringing our scale and capabilities in attractive and growing global market.
There will be no changes to the team or its independent investment management process and they will continue to operate autonomously as Lexington partners.
Upon the close of this transaction, we expect our alternative AUM to approach approximately 200 billion and over 1 billion in revenue excluding performance fees, Matt will review the additional details of the transaction shortly.
Other core growth area is our separately managed account business. We are a top three provider in SMA with 125 billion in assets under management, which is one of the fastest growing segments in retail our SMA business grew by 23% in AUM year over year and generated positive net flows in each quarter during the <unk>.
Fiscal year, our recently announced acquisition of O'shaughnessy asset management and its custom indexing platform canvas, we will take our existing strength in SMA. So next level enhancing our tax management factor based and ESG customization capabilities canvas was launched in late 2019.
And has seen strong growth since its inception and now represents one 9 billion of the firm's total AUM of $6 3 billion as of September 30th.
The transaction will bring compelling benefits to the clients that both companies serve across multiple channels.
There's no question that investors are more focused on ESG goals than ever before increasingly there are three dimensions to ESG that investors consider ESG factors as understood risks in our portfolio. How is she contributes to overall returns and the overall impact of ESG considerations to society and the.
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As an active manager approximately 95% of our E. U M represents strategies. They consider ESG factors as part of the investment process and ESG specific strategies, representing over 200 billion in AUM were net flow positive in each quarter this fiscal year.
All this being said none of our accomplishments this past year would be possible. If it weren't for employees. We're extremely fortunate to have such dedicated colleagues who are focused on achieving investment excellence fostering enduring relationships and delivering superior service to our broad range of investors around the globe.
Now I'd like to turn it over to our CFO, Matt Nicholls, who will review our financial results from the fourth quarter and fiscal year as well as take you through the specifics of the Lexington transaction Matt.
Thank you Jenny fourth quarter long term net outflows with $9.9 billion.
Which were partially offset by the acquisition of Diamond Hills high yield focused U S corporate credit mutual funds, which added $3 5 billion in AUM and closed in July.
This quarter included the previously disclosed 5.4 billion by 'twenty nine planned redemption.
Which included $4 7 billion of long term assets.
2 billion fixed income institutional redemption had minimal impact to revenue.
$800 million fixed.
Fixed income outflows from the non management fee, earning India credit loans that are in the process of liquidation.
Reinvested dividends with $2 3 billion this quarter.
1% higher average assets under management of 1.55 trillion dollars compared to the prior quarter.
$69 million.
<unk> fees generated 166 billion and adjusted revenue for the fourth quarter.
Investment management fees, excluding performance fees was 3% higher compared to the prior quarter.
Adjusted operating expenses of 1.01 billion for the quarter were 3% lower due to lower compensation and lower G&A as a result of last quarters upfront. The closed end fund expenses.
This led to an 8% increase in adjusted operating income of $647 million and an adjusted operating margin of 39%.
Fourth quarter, adjusted net income and adjusted diluted earnings per share increased 31% to $645 million or $1.26 per share.
These results include favorable discrete tax items of $155 million.
30 cents per share for the quarter.
Turning to 2021 fiscal year financial results, which benefited from favorable market conditions and a full year of Legg Mason versus two months last year.
For the full year adjusted revenues was $6 three $2 billion.
And adjusted operating expenses were $3.94 billion, an increase of 63% 65% respectively.
This led to fiscal year, adjusted operating income of $2.38 billion, which was 60% higher compared to the prior year.
Our adjusted operating margin was 37, 7%.
Compared to the prior fiscal year, adjusted net income increased 46% to $1.92 billion and adjusted diluted earnings per share increased 43%.
$3.74 per share, which included the impact of favorable discrete tax items of $175 million or 34 cents per share for the phone.
Yeah.
As planned we have achieved a run rate of 85% about targeted merger related cost synergies of 300 million this year.
We anticipate that 100% of these synergies will be achieved by the end of fiscal year 2022.
As a reminder, none of these cost efficiencies involved a specialist investment managers or investment teams.
Moving on to capital management.
We believe our strong balance sheet continues to provide us with financial and strategic flexibility to evolve our business.
For the fiscal year ended September 30th we returned 782 million to shareholders through dividends and share repurchases.
During the year, we also pre financed a large portion of legacy Legg Mason debt with lower cost of debt, reflecting our credit profile.
Specifically, we issued $850 million of one 6% senior notes due 2030 and $350 million to 95% notes due 2051.
We redeemed 250 million of 6.3% Legg Mason Junior subordinated notes due 2056 on March 15th 2021, and $500 million and $5 four 5% Legg Mason Junior subordinated notes due 2056 on September 15 2021.
We ended the quarter with $6 93 billion of cash and investments.
We will continue to prioritize our dividend and intend to repurchase enough shares to at least offset our employee equity grants.
The remainder of our capacity will focus on continued investments in our business and acquisitions to further diversify and increase our sources of cash flow while positioning of <unk>.
New growth opportunities as the industry continues to evolve.
Consistent with this we are excited to share the specifics on the acquisition of Lexington partners that we announced this morning.
As outlined in the transaction summary document Lexington partners is a global leader in secondary private equity and co investments with current fee based AUM vegetable billion doors.
Since its founding in 19 of these for Lexington has raised over $55 billion in aggregate capital commitments and currently has a team of 135 employees across a global offices.
It is expected to generate revenue of approximately $350 million and EBITDA of approximately $150 million in 2022.
With this acquisition, we now have strong and complementary capabilities in alternative credit.
Real estate hedge fund solutions and pay related activities.
Given the overall size and growth of private equity and the likelihood of the private marks expansion.
A specialist investment manager tied to this sexual tons of assets is a logical step in the diversification of our business.
Furthermore, providing access diversified versions of high returning investments, we will continue to increase in importance to meet savings and retirement goals about broad group of clients.
This could also be important in both our multi asset solutions business and the continued development of our customization capabilities.
As Jenny mentioned earlier this transaction takes us one important step further and creating a larger and more diversified alternative asset business that will result in pro forma fiscal year 2022 alternative asset AUM for approximately $200 billion <unk>.
Juicing approximately $1 billion in annual management fee revenue excluding performance fees.
At a margin of approximately 40%.
We intend to continue adding complementary business in both wealth management and asset management, including asset class and geographic expansion.
This will be both organic investments through allocating capital into our existing specialist investment matches and via acquisitions.
Given our global reach financial flexibility business model and experience and execution.
We were able to attract highly talented teams and partnerships.
Through a combination of independents support and collaboration on a global and local scale to create new growth opportunities in what is a very large and expanding segment of the asset management industry.
Turning to financial terms of the transaction, we are acquiring 100% of Lexington partners for $1 billion in cash at closing plus a further $750 million in cash over the next three years.
We are also structured this transaction to ensure continuity and strong alignment of interest with Lexington clients partners and employees over the long term.
Consistent with this we will be simultaneously issuing grants equal to 25% of Lexington to employees of Lexington subject to five year vesting and establishing a performance based cash retention pool of $338 million to be paid over the next five years.
The transaction is expected to close by the end about fiscal second quarter subject to customary approvals.
And now we would like to open the call up to your questions operator.
Thank you.
If he would like to ask a question. Please press Star then the number one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. If anyone should require operator assistance. During the conference. Please press Star then zero on your telephone keypad.
We request that you limit to one initial question and one follow up.
Our first question is from Glenn Schorr with Evercore. Please go ahead.
Alright, thank you.
So I like that you're using the cash to buy into good businesses, I think everything's accretive when you're earning nothing on cash so on.
I'm, a big fan of that.
If I took all the purchase price pieces and we can't see it all it looks to me in the range of high teens to 20 times EBITDA.
Just curious if that's about right and what kind of ROI.
That kind of comes out too thanks.
It was on whether you take the 1.75 billion or whether you take the 1.75 billion plus the study $338 million of additional did good.
Compensation.
And maybe the 25% of the company also right.
Yeah, So yeah of course yeah.
Well, yeah, I mean, all the the multiples we just referred to.
75% of the EBIDTA numbers Tonight.
Just announce.
And I thought you said.
So pretty simple I mean, just take 150% to 75% divided by the amount we pay.
Got it okay.
And and I'm curious.
You are piecing as you went through your piecing together a bunch of interesting pieces of the alternative pie.
So between benefit street, lecturing and Clarion K too.
What's the thought process on how you do or do not.
Great I noticed that you're forming and funding.
Specialist distribution team.
But you know the historical Legg Mason never really integrated.
They're they're boutiques, so curious on how you're approaching the integration of all your alternative pieces.
So I'll I'll.
I'll start and then have a tommy add to it.
So.
One of the differences when you acquire alternative managers is theres a lot of things that traditional asset managers can be shared across investment teams that isn't the case. For example, an alternative manager may want their own legal expertise says, they're doing deals and things and so there's a lot more that fits within the independent.
Specialty investment team in the alternatives world and in one of the changes that we've made with the acquisition of Legg Mason is having more institutional salespeople within the investment groups.
That's already part of an alternative manager and what we are working hard to build as we believe the opportunity to democratize alternative assets.
In the more retail channel is that global distribution of alternatives.
Do you want to add anything to that.
No.
Hey, Glenn I think that's I think that's exactly it I mean, I think we see opportunities.
In alternatives is broadly defined.
<unk> got to continue to grow it.
But a really strong rate.
And it's really sort of bringing the power of the platform to bear on the distributional alternatives, both institutional and retail and.
The joint venture that we've effectively created as his first focusing on retail.
Then we will look to expand it but given the 200 billion now.
AUM, we can afford to invest more in.
In these types of products and services, which things can be.
It can be good for everybody.
And Glenn just one other point.
As we have tried to fill out.
You know product breadth.
We really believe the opportunity a multi asset solution, that's where it gets knitted together.
As well and that's kind of the.
It requires the team to be communicating youre going to look at risk factors across as you're building additional products around that.
Thank you both appreciate it.
Thanks for that.
Your next question is from Alex Blaustein with Goldman Sachs.
Hey, good morning, Thanks for taking the question. So maybe just building a little bit more on Lexington, and kind of what that business looks like.
I guess first a pretty impressive growth in there in their funds over the last couple of vintages, maybe give us a sense what you're assuming in terms of growth collection can into 'twenty, two and 'twenty three and what the earn outs are going to be based on.
Well that will take that answer.
Yes.
Thanks.
Yes, we've been able to.
Raised significant capital in our areas of focus in secondaries at both our flagship funds are middle market funds and then our co investment business. So there are some structural drivers in.
In each of those businesses that we think.
Expand the market opportunity as we look forward. So we're excited to go after it with our new partners.
That's really it.
Yes, I think Alex.
In terms of the.
You know what needs to be achieved to get to the hurdles on the various.
Contingent consideration.
We cannot talk about our future from raising on this call, but if you look at the past history.
Of the company and the timing around some of these things we do have we do have some growth built in but I wouldn't say it particularly.
Aggressive growth for the future given the potential that we think we have together one.
One of the very.
Very attractive things about Lexington partners is frankly that are very successful on their own.
So the the forward looking growth of Lexington, Standalone was very attractive to us and then when you apply the additional growth potential through adding our resources with broader client base across high net worth another distribution globally.
It could actually add more.
More to the to the.
The numbers that we've highlighted today.
Great. Thanks, and my follow up just around the balance sheet dynamics are pro forma for the deal.
The deck says you guys have about $6 billion of cash and investments on a pro forma basis after the deal.
Can you give us a sense how much of the six is ultimately kind of unrestricted cash if you wanted to do something with it or pay it out tomorrow, what would that look like and then how much of future funds do you expect Ben's balance sheet to participate in so in other words like the co investment or sheet capital or whatnot.
Is it going to be 100% based on Franklin <unk> balance sheet and how much of sort of resources do you think that's going to take on future fundraisers. Thank you yep. Okay. Thanks, Alex So a couple of things there in terms of the sort of.
Unrestricted cash available to do other things at the time that we close this transaction and were assuming that we can close this transaction at the end of March.
That number would probably be something like $1 billion.
That's question one question two on the GP commitment.
There is very strong demand for the GP commitment from partners and employees.
At Lexington and.
And I know that the.
Okay.
Senior executives and other folks who are looking forward to to be part of that also.
But you're right to highlight the fact that frankly telecom also from a balance sheet perspective be committing capital to support.
The GP level.
Uh huh.
We have a commitment to that we obviously can't say what the amount is because it depends on future fundraising.
Great. Thank you very much for the questions.
Okay.
Our next question is from Michael Cyprus with Morgan Stanley.
Oh, Hey, good morning, Thanks for taking my question and congratulations on the deal announcement.
Matt just a question for you just around the carry economics I was hoping maybe you could just elaborate on that I didn't I don't think I heard that I apologize I missed it and then just on the equity that's granted to employees and like.
And just curious the thought process around why not grant equity insurance at the parent and Franklin Templeton.
Yes so.
What was the first question again.
Kerry just trying to get here, but yes, it's so carey.
We're going to share is something like 20% of carry going forward the focus.
For US and then we Havent acquired any pulse carry either from previous funds the focus on us in this transaction with the very attractive.
Management fee stream.
At a much higher fee rate than our average rate and the growth potential of that.
We think and I think investors believe.
And certainly collection partners the alignment of interest through allocating the majority of carry to the producers and the company is very important.
So that's what we focused on in terms of structuring.
The transaction closed.
Do you say.
What was the second question.
The second part was just around the equity ownership.
Why not at engineered good good question so firstly.
It may not surprise you to hear us say that we believe that benches.
Undervalued.
So we don't really like to.
Diluted shares we don't need to but the more important parts of the question is that we think that the alignment of interest through.
Yeah.
Providing equity in the actual business that the folks who are operating in.
You can't get a whole lot better and that we've got plenty of incentives across the firm.
To make sure people collaborate coordinate.
To create more value the more that.
That happens.
And that would create more revenue and EBITDA of the mall.
Lexington will be worth in this case and the more frankly movie with so we think that the two things aligned very well.
In this regard and frankly is probably better shareholder value for Franklin investors.
Got it and a follow up question, if I could just more bigger picture I think it was referenced in the deck about opportunities to extend the Lexington business into private credit and to real estate I was just hoping you could elaborate a bit more on the opportunity set there how that might be accomplish what sort of hurdles there might be with us putting through that sort of extension.
Growth and Theres more broadly on the retail opportunity set if you could talk a little bit about that that's clearly Franklin has strong retail distribution.
Tell me, what you will take that.
That question.
Well it didn't work.
Well look.
I think that we have.
Tremendous growth opportunities in each of the each of the verticals and.
We'll continue to look for.
<unk> needs to expand products.
Organically as well as inorganically with respect to potential.
Fund raising activity targeted at secondary real estate or or private credit.
Push that back to will.
Yeah. So as I said earlier, we see structural growth in our core products that exist today, but there are also secondary markets developing and in the areas you mentioned in private credit and certainly in real estate. So as the alternatives universe grows one of the interesting things about this transaction is the ability to.
Consider raising dedicated capital in those areas. So that'll that'll be something that we'll look at over the.
Medium term I would say.
Great. Thank you.
Your next question is from the line of Ken Worthington with J P. Morgan.
Yes. Good evening. Thank you for taking the question.
So Franklin operates increasingly as a multi brand and arguably the multi boutique asset manager model and you highlighted your intent to continue to acquire more.
Other publicly traded multi brand asset manager models commanded discount so some questions on this so how does franklin not get perpetually trapped into trading at a conglomerate or multi brand discount, particularly as you acquire more brands and then to Glenn's question and your response about solution.
As being the point of differentiation and knitting together the various products can you flush out more how you're thinking about solution based products and services on the Alt side. It looks like for example, the bigger alternatives are buying insurance companies to leverage their diverse product offerings and creative solutions.
Yes.
Offering shut so more more color if you could on the solutions roadmap.
Yes, so first of all.
We'd look at it and say.
That frankly large.
Asset managers with the broad capability that we have we think should be selling at a premium not a discount because of some of the park. If the sum of the parts isn't greater than the discrete parts than we felt so why is that you look at starting with with just our large partners clients.
They are consolidating the number of firms they do business with and you have to have a broad breadth of capability to be able to make those lists number two if you think about just what's happening today with technology and technology disruption and I'll just start out with we talk.
About you know as an active manager if you're not really good at leveraging data science and data analytics.
Ultimately you're going to have a hard time competing enacted management and data is expensive.
Our approach is at the center. We've created for example, that's the data Lake and our individual teams of data scientists in there. So they can leverage that at their at their opt in choice.
But we can negotiate large vendor contracts and gain.
Independent access to unique Ross versus the data those types of advantages if executed well at the core become a massive opportunity.
And then there are things back to that kind of partner point. When you have a broad depth breadth of the assets you can do things like we have to Franklin Templeton Academy, which we built for emerging market and find that partners in the developed markets want access to that kind of capability to do training of their teams.
Leadership with the institution.
Institute The Franklin Templeton Institute is something that sought after by our large partners and then of course, just a massive global distribution footprint that no individual manager could ever support that kind of capability and so we think that that brings a strong premium.
On your point on on solutions, Yes, I mean, do you see what's happening in the insurance business at it.
Yeah.
It probably that model will continue you'll see more of those kind of deals. Although there's a limited number yes have you have a good solutions team that can bring together and customized.
That's an opportunity and we look at at where we can continue to grow that but we also see it as an opportunity with our existing partners and I know, Matt is dying to add something here.
I would just say Ken at the highest level, we don't really see ourselves as the multi affiliate asset management company from a model perspective, I wouldn't confuse the autonomy and independence of our teams with being a multi affiliate asset management company the brand strategies, because a number of our specialist investment managers are known very <unk>.
Well exactly what they do and we don't want to dilute that in any way.
And that seems to resonate in the marketplace, both institutional and through other big distribution channels.
Number one and number two.
While.
In coordination and collaboration across the firm and some of the things that Jenny mentioned do not in any way dilute the independence and autonomy of our specialized investment matter of of companies. It is it is really good the collaboration across the firm and we are definitely seeing increased opportunities by that collaboration and its opt in collaboration.
Pass it across the firm and you're seeing it in an increasingly competitive environment across the industry that it's a it's really energizing for the company and our specialist investment managers.
One thing we will have in common is we all want to grow and we want to compete and we want to win and we're finding that this is a good strategy for us at least it doesn't mean the other models that work really well also we have tremendous respect for our colleagues that have.
Slightly different versions of our model in our opinion, we think of ourselves almost like as a hybrid.
A model that you've referred to.
And in terms of the insurance piece.
We we study these things pretty carefully.
We have a pretty meaningful insurance.
And got ourselves, but it's an area that we're very interested in also so it's one thing at a time, obviously as we continue to build new opportunities for the company.
Great. Thank you.
Our next question comes from Dan Fannon with Jefferies.
Thanks, Good morning so.
There's a lot of moving parts as we think about expenses for next year, but maybe Matt if you could give us a framework to think about fiscal 'twenty two in terms of either ex the the transactions maybe on a core basis. We can think about expense growth or if you want to talk about them together that would be helpful.
Yeah, sure, so, including including Lexington, assuming that we close March 31 or around that date.
April one sei.
I would just take the numbers we provided in the margin we provided and just divide it by two well sorry, the margin might be divided by the revenue and EBITDA would be divided by to just assume that <unk> added in and so putting that aside.
On a standalone basis.
For the first quarter first obviously, we're very early to give guidance for the year, but for the first quarter excluding performance fees.
We would expect our revenue to be approximately flat.
For the quarter and expenses to be down in the low single digits, let's say because as you know.
We do have some run rate expenses rolling through from last year from the merger related.
Synergies so we've got that.
We got that happening.
So I think I would say that all else remaining equal markets remain stable, we expect <unk> adjusted operating revenue to remain at current levels and adjusted operating expenses to be down low single digits compared to the fourth quarter. This is all excluding performance fees if you.
No. We have had elevated performance fees for the last two quarters with 102 million in the third quarter and 69 in the fourth quarter they'll see that does vary I would in terms of modeling on that one I think theres been a little bit of confusion around how to think of that I would just think of half of that being.
And the other half being non comps.
The other half coming to the parent.
If that's helpful.
That is and just to clarify that.
When you say that percentage down for expenses quarter over quarter, Yes, yeah, yeah, yeah, yeah, so sorry, low single digit percentages.
Great.
Then just in terms of the core business and gross sales and momentum in the prepared remarks, you talked about onboarding a wide range of product offerings with your largest global financial partners. So could you maybe expand upon I think you've talked about Edward Jones last quarter, but maybe some other tangible examples of what products or channels are seeing.
That and then also maybe if there you've had some one off redemptions that you've called out before if there was anything to note for the fourth quarter or I'm, sorry, your fiscal first quarter that we should be aware of as well.
Adam you want to take that.
Sure.
So let's talk about the on boarding and I'll go back to what we said about the merger over a year ago and how complementary the two firms where and if you think about the U S.
Franklin so much stronger.
In the regional.
An independent channel Lake stronger and the wires outside of the U S.
Franklin is much stronger in retail banking in markets like Germany, Italy.
With Legg Mason, and having a better presence in private banking.
Each of those busy.
Business segments really operate separate platforms. So leg had its product on one set of platforms frankly on the other.
Often.
It takes a little bit of effort and work and sometimes formal agreement to be able to participate on those platforms. Since we had the platforms.
We were able over this year.
To execute a strategy, where we brought on legacy Franklin product onto Legg Mason platforms, and vice versa that means that we have far more funds in the U S outside of the U S. Now available for sale that process took several quarters to execute and we're now in a position where we.
We can sell.
Significantly more next year, because we were able to do that.
And I guess, Adam in terms of the.
The lumpy non peanuts, if you would of numbers going into the fourth quarter.
We there are a couple of potential large.
Increases.
Because one of the things, we havent talked about since the announcement publicly as the O'shaughnessy asset management acquisition, which was a very important acquisition in terms of.
Customization capabilities and that's a tremendous team and we're really excited about what that could bring for us that may close it out.
<unk> first quarter and that will add.
Almost $7 billion under management and then we also announced publicly obviously the AR.
The acquisition of a team.
Our new team within fixed income.
And the LTI space.
As expected to raise.
Fairly quickly again, it could be a first quarter second quarter, but that that could be a few billion dollars that we will call out.
Specifically about that time, and just to kind of put an exclamation mark on it.
I think in the past there are times, where we were very concentrated on a few products today are top 10 funds represent only 19% of our AUM and.
14 out of the top 20 funds.
Flows are not our largest funds I mean, we are really not only diversifying our client base, but also very much diversifying our our product base and indicates that something like Oh Sam.
We're excited about direct indexing, but we're also excited about the capabilities of that being a wrapper to deliver just our core active strategies as well down the road really enhancing he SMA portion of that.
And Jenny I would say that.
The diversification is equally true on the institutional side, where we look at our pipeline. There were no strategy I think is a perfect kind of asset classes more than 17%.
The plan at this point, so really diversified on the institutional side as well.
Okay.
Thank you.
Thanks.
Our next question is from the line of Brennan Hawken with UBS.
Hey, good morning, Thanks for taking my questions.
A couple.
Follow up on the.
The 150.
EBITDA so.
Matthew you said that just divide it by two for the six months. So I'm guessing that that means there is no carry in that $1 50.
Tim.
Okay, Great and then.
Does that mean that the 25% interest will.
Sort of move.
With the vesting schedule, so five percentage points of interest going to that team per annum.
Now that that will be immediate so that will run through where we go through the you know we don't have to go to work through the best way to account for the transaction when the process of doing that but I would look at it on a on a.
Sort of an adjusted basis, you can expect to see 75% the impact will be 75% of those numbers that we've highlighted.
Running throughout ouch.
Running through our P&L basically.
Okay.
And then I would just apply.
Our average tax rate to the EBITDA to get to a rough contribution level in terms of net income we expect it to be a.
Probably mid to a little bit better single digits accretion.
<unk>.
Okay.
On an annualized basis.
Got it and then when we think about the REIT I know Theres, a treat 38 of performance have performance metrics tied to them, but are there any other performance a retention component to the 25%.
In other words is there.
Transferable.
Are there any performance pieces connected.
All else has that.
Thanks, Dan with Franklin over the long term.
And that's a really important question something that don't see well was very focused on as well as us from the team.
We.
Yes.
That that 25% vest over a five year period.
A non solicit non compete all the things that you would expect around how you retain incentivize senior employees that are equity holders in the company. So we have all those things.
At.
It.
First rapidly over the five years and at the end of that five year period, there of say sickly options around who can acquire the equity.
<unk>, obviously is one that could acquire it but there's a lot there's going to be a lot of demand for that equity internally at Lexington.
<unk> through their own bonus pool, so that's something that.
Well maybe wants to call. It also.
Terms of the dialogue that we hadn't been okay about contingent piece in a minute.
Well.
Yeah, Thanks, Matt I mean, the opportunity to own our own a significant portion of our own business is something that we understand.
The business has grown considerably since it was formed in 1994.
And the opportunity through this partnership and structure with Franklin to broaden that ownership.
It's really exciting for our employees.
So.
I think.
This is a this is for us a chance to have a really powerful and exceptional new partner and.
And at the same time really bet on ourselves and our ability to continue to perform for our Lps.
Thank you will and then in terms of the performance based cash awards Brendon that you took that you asked about.
They didn't begin until the second year ended the second year and they run all the way through to the fifth year and Theyre tied to you know a number of.
Revenue.
And AUM.
Base metrics that we anticipate over that period of over that period of time and then and then there is time based payments on this also.
That.
Very pleased to welcome with the team. So we have a $1 billion at closing and we referenced $750 million.
Over three years and that sort of drew $50 million is split.
$250 million in the first year $400 million at the end of the second year in a $100 million at the end of the at the end of the third yet.
And then the 338 and in the 338 is pretty much even it's a little bit different numbers, but very evenly split between the second right the way through to the fifth through to the fifth year.
It's quite well balanced between threat threat three or five years.
Alright, thank you for all that detail.
Really helpful.
Verify.
Okay.
Is that.
Great.
The equity goes.
It seemed.
Okay.
Yes.
Sorry brand, New York, you're cutting in and out we can't hear you.
Yeah.
Yeah, we can't hear you.
Sorry, Amit.
Hey, Patrick.
Patrick.
Fair enough.
You talked a little bit.
The.
Is it the 25% after five years does that have a chance to actually increase in spend election employees participated in more therefore diluting client.
Chad I just wanted to make sure I understood that no no no I meant within the 25% so.
Got it within within the 25% it really the circulate within Lexington, It will never go outside of Lexington.
Other than to Frankfurt, so it'll either be within Lexington will Franklin will acquire more.
Thank you for clarifying that.
But we expect it to stay within Mexico.
For the extended period.
Sure.
And I guess just to complete the complete the picture even if in theory, even if Lexington partners decide to sell.
Cell.
Some of their equity to Frac, then there is a minimum amount of equity that needs to be held by the partners. When they are actively employed at the company and it takes a number of years to sell down the equity and that's why we're confident that the circulation point.
Thank you for the answer I appreciate that.
Q.
Your next question is from Robert Lee with <unk>.
Great. Good morning, Thanks for taking my questions first one maybe sticking with some of the payout or earn outs as is the wont make sure I understand this is the $7 50.
You start paying I guess in your ones through three is that subject to like an earn out or performance or is that just kind of delayed payments and not really.
I'll call it performance based.
They're just time based payments.
Okay.
This is time based.
Okay, Great and then.
Just stepping back a second and maybe philosophically.
<unk>.
Lexington, I mean, certainly there is huge value in having them own a piece of their business over time Clarion I believe you know our employees partners, they're still own a piece of their business and I know, it's something that will that the legacy Legg struggled with was you know how to get.
More maybe move away somewhat from a revenue share more towards having <unk>.
Employees in western another affiliates own equity I mean is this kind of create any I don't know.
And our internal pressure or whatnot, whether its benefit street or the other specialist sales to kind of re vamp reshape.
They are.
Sure.
And how much how they have equity versus revenue share.
Well so first of all.
The nature of which individual investment team structure is often is related to some historical acquisition and the beauty of the alternatives business is because there is the carry and there are often itself is a great retention tool.
And.
And so that's built into all of our alternatives businesses and then when we did the acquisition I mean, there were things that we were able to do in the acquisition of Legg Mason to ensure that incentives are aligned with the parent company that everybody is rowing the boat in the same direction.
And.
As we talked about earlier, we've created an opt in environment, where we think there are some really good upsides to the teams by.
Leveraging the core part of the business.
And what we've seen is a real desire we had recently a CIO.
Forum, where the heads of all of our different investment teams got together and I got to tell you the engagement with outstanding.
Everybody really appreciate it and the conversations were very very good and so I think people recognize the benefit of being part of a greater organization, but also wrote this threat to Genesis points. If you think of our alternative asset spec.
Specialist investment managers, they all need to have like hiring for example loans, 18% parents. That's the same sort of partnership structures, we have with Lexington and benefit Street partners. We have basically the accrued growth units, it's not equity, but it's very close to equity. So it and then in many other businesses. We have the same thing where.
Your basic as Jenny mentioned, we're aligning interests.
It always has to be with equity it could be a combination of equity.
And and cash in terms of how it relates to certain specific growth.
Uh huh.
Objectives for that particular piece of growth targets for that business. So it's really a combination of things that works well for that specific teams, what we welcome with them and what works for the parent company to make sure we get the right growth the growth going.
Great and maybe if I could squeeze in one quick follow up.
I mean, the the 30 odd billion of fee paying AUM.
And fund raising was very good I guess last cycle, but it's there.
Is there a certain amount of dry powder, that's not yet earning fees you know maybe some of those funds or drawdown structure. So.
Is there kind of as we look forward as some kind of built in fee growth you know already just from Naver, what they've already have committed.
Well why don't we why don't you take that.
Happy happy to take it the answer is no.
On an existing products. These are commitment fee pain products.
Great. Thank you for taking my questions appreciate it.
Thanks, Rob.
Our next question comes from Brian Bedell with Deutsche Bank.
Great. Thanks, Good morning, Thanks for taking my questions.
Most of have been asked and asked and answered.
Just a couple of clarifications on the deal first and then a longer term question.
Yeah.
The 200 billion pro forma includes the 55 from Washington, but on the 1 billion.
Fees on that should we be thinking of it on the fee paying AUM contributions of more like 180 billion man.
Clarifying on the 338 million I think Matt you said that start in the second year.
Would not impact fiscal year 'twenty two whatsoever, and then what is the adjusted tax rate going forward that you're using.
Yes, so couple of things.
Lee.
The could you just repeat your first question I didn't fully follow you bet yeah.
<unk> 200 billion or $1 45, right Oh, yeah, yeah, yeah, Okay yeah.
Yes, so firstly that actually that actually doesn't include $55 billion 55 billion is the amount that's being raised in terms of capital since inception at Lexington. It only includes the 34 billion with an assumption of some modest growth, but we've been growing 20% organically across.
Yes.
The other will turn.
<unk> diverse it.
Sims. So it includes some growth in those also so it doesn't add.
At just the 55 billion at the 34 billion and then the assumption of growth. That's how you get to the 200.
$200 billion, we feel good about that.
What was that question.
And that you won't get billings at the end of March basically.
Right yes.
Yep Yep.
Just had a couple on the on the second part of your question is the.
The 338 million I think that starts after fiscal year 'twenty two.
And the go forward tax rate that you're using.
So the first contingent payment it starts in 2024 actually okay.
Okay Yep.
So that's that and then the other question you all sort of hedges and so to your question right.
1 billion adult.
You ask well I'll get to taxing second you asked about the $1 billion of management fees and yes. That's that's that's tied to the two 200 and.
Frankly is quite Conservative program, that's only management fee revenue, it's not yeah.
Carry or performance fees or anything like that.
We think that's fairly conservative because already fracked in Standalone, where probably it's something like $700 million of management fees for the.
For 2021 for example, and then plus the P M.
Got us already quite close to $1 billion.
At that 40% margin that I that I mentioned to you in terms of the tax rate I would continue to use the 23% to 24%.
Effective tax rate guidance.
On all of this now we realize that this quarter was unusual in terms of the reserves were able to release.
So we do not expect any additional large reserves like that to happen, although I should point out on taxes.
We've probably been out to benefit from about $150 million of the approximately $600 million of tax benefits obtained through the acquisition of Legg Mason.
We should be able to benefit from about another 200.
In favorable tax attributes over the next two years.
And then.
And then the rest will be over probably.
Probably seven years at that 0.6 months revenues.
And that's the cash tax rate as opposed to that.
The 24th Yep Yep, that's right.
Yes.
That's great. Thank you for all that and then maybe just.
One on ESG journey.
You mentioned, obviously now you're up to about 200 billion.
Maybe just classifying that between what you would consider.
Like pure sustainable investments versus exclusionary products I think before you said you sort of modeled it after articles eight and nine in terms of classification. So just wanted to verify if that 200 billion is linked to articles eight and nine.
Europe and maybe just what your view is that maybe potentially reclassifying.
T. J perspective is if you will.
And in terms of the strategies, even raising that 200 billion.
Well.
Yes, it's article eight nine so that's the first part.
And.
If you look at the flows in Europe, I mean, we saw something that says.
Theres two two trillion in AUM in 2020, and that's going to get up to 53 trillion by 2025 I mean.
Theres some article six selling but I got to tell you. The demand is article eight nine so that's where the growth is we've got very good products there.
I think we were very disciplined.
Nobody is claiming greenwashing on our part we were very disciplined and have a rigorous compliance group reviewing any products before we declare them that way we have more in the queue that are being reviewed internally.
And.
We think that what's happening in Europe is going to happen in Asia, and the U S as well.
Yep Yep.
Okay.
Adam you want to add to that.
I was just going to add that if you look at.
Our pipeline, it's pretty incredible about 20% of our flows are coming from eight and nine products in Europe, and it's about 40% of our pipeline. So while we've got a decent business. There, it's just growing and growing more quickly than anything else.
Yeah.
Did that.
Super helpful. Thank you for that.
If you're able to.
Break it apart between sustainable and exclusionary I don't know if that's possible.
I don't have at my Fingertips, Adam I don't know if you do.
I can tell you that yes.
Why do we get back to you with those exact number yet.
Okay, alright, thank you so much super helpful.
Great. Thank you Brian.
Okay, great well I just wanted to say.
Thank you for participating in today's call today.
We are at time.
As you can hopefully tell we've made a lot of exciting progress over the past 12 months and yet.
So many ways. We're just getting started so once again, we'd like to thank our employees for their hard work and remaining focused on our clients and each other.
And we look forward to speaking to you again next quarter. So thanks, everybody and stay healthy.
This concludes today's conference call you may now disconnect.
Yeah.