Q1 2022 AllianceBernstein Holding LP Earnings Call
Thank you for standing by and welcome to the Alliance Bernstein first quarter 2022 earnings for the year.
At this time all participants are in a listen only mode.
<unk> 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 two weeks.
I would now like to turn the conference shows Rickey Gerry host for this call head of Investor Relations for me Mr.
Mr. Mike Griffin. Please go ahead.
Thank you Ryan good morning, everyone and welcome to our first quarter 2022 earnings review.
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.
With us today to discuss the company's results for the quarter are Seth Bernstein, our president and CEO .
They'll seamers interim CFO controller, and Chief accounting officer and take Burke.
L and head of private wealth.
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 10-Q, which we filed earlier this morning.
Under 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.
Good morning, and thank you for joining us today.
First quarter results highlighted the resiliency of our globally diversified and differentiated services are.
Amid turbulent financial markets, reflecting challenging inflationary pressures rising interest rates and geopolitical conflict <unk> continued to grow and invest in our future.
We gained share in both active equities, which grew organically for the ninth quarter in a row and in municipals, which grew organically for the seventh consecutive quarter, both banking industry wide outflows.
Offsetting these results was our taxable fixed income business, which saw higher outflows in the face of the worst quarterly fixed income returns in 40 years.
In mid March we announced the acquisition of carve out which provides complementary private credit capabilities specific strategy to stop by our clients.
Combined with carve out ABB will not have an approximate $50 billion private markets platform.
Importantly, we are executing on our growth strategy in partnership with equitable, which has committed $750 million to carve out strategies.
We look forward to sharing more with you after the transaction closes which is on track for the third quarter.
We grew organically for the seventh quarter in a row, realizing a 1% year over year fee rate increase and posted an adjusted operating margin of 31, 5%, we delivered 11% year over year growth in both adjusted earnings per unit and distributions to unit holders let's.
Let's get into specifics starting with a firm wide overview on slide four.
Gross sales were $40 9 billion up $8 billion or 23% from a year ago, reflecting the funding of a previously disclosed nine $6 billion custom target mandate.
Firm wide active net inflows of $12 2 billion, a 6% annualized organic growth rate.
And assets under management of 735 billion rose, 5% year over year, while declining 6% from the prior quarter and average AUM of 751 billion increased 9% year over year and declined 1% sequentially.
Slide five shows our quarterly flow trend by channel.
Firm wide first quarter net inflows of $11 4 billion, representing 6% annualized organic growth.
Retail generated 20 billion of sales for the fifth quarter in a row net inflows in active equities communities were more than offset by outflows in taxable fixed income.
Industry wide fixed income separate outflows for the first time in the last eight quarters, reflecting a heightened investor risk aversion in the face of rapidly increasing interest rate expectation.
Institutional sales of $14 3 billion contributed to net inflows of $10 2 billion led by the nine $6 billion custom target date mandate.
In private wealth gross sales increased 12% over the prior year period with net inflows of $2 2 billion or 7% annualized as growth accelerated with ultra high net worth clients.
Investment performance as shown on slide six.
Starting with fixed income in the first quarter yields move significantly higher in generally flattened as the market priced in higher than anticipated interest rate increases.
Although all fixed income sectors declined sector to results were mixed relative to government bonds overall developed market investment grade and high yield corporate bonds underperformed global treasuries.
Our long term fixed income from performance remained strong with 72% and 71% of assets outperforming over the three and five year periods respectively.
64% of our fixed income assets outperformed over the one year period as American income marginally underperformed the peer group despite beating its benchmark.
Our tax exempt performance remains stellar.
All 10 of our strategies in the top quartile across all periods, our muni bond inflation strategy within the top 1% across all periods and our tax aware vehicles, including SMA has grew by 15% organically.
Turning to equities.
Seven straight quarters of gains for global stocks abruptly ended in the first quarter with the S&P 500, and MSCI E falling by $4 six and five 8%, respectively. A dramatic style shift occurred as rising inflation and interest rate expectations, coupled with geopolitical instability led to.
The sell off in higher multiple growth related technology and consumer discretionary sectors.
The MSCI world growth and mix declined by 9% contrast, with the MSCI World value index declining just 110th of 1%.
While our equity performance against Morningstar peers remained strong performance against benchmarks was challenged as a result, our overall percentage of assets outperforming declined from 40 with 45% of AUM outperforming for one year, 38% for three years at 58% for five year periods, respectively.
Versus Morningstar peers, 68%, 61% and 81% of our equity assets outperformed over the one three and five year period.
We were not alone in this shifting environment, just 14% of U S large cap growth managers, and 32% of small and mid cap growth managers beat their benchmarks in the first quarter.
Our growth portfolios are generally tilted towards quality and away from cyclically oriented financials energy and commodity producers all sectors that did well within the quarter.
Pockets of underperformance underperformance was due principally to multiple contraction rather than earnings contraction as we continued to see strong fundamental performance across most of our holdings with a few notable exceptions like matter.
That said many of our equity strategies fared quite well during the quarter among them strategic core strategic equity emerging markets value.
Notably 75% of our value products outperformed their benchmarks in the quarter, we continued to see interest in our value strategies as evidenced by net inflows of over $200 million into each of our China value emerging markets value and international value strategies.
Now I'll review, our client channels, beginning with retail on slide seven.
Sales exceeded 20 billion for the fifth quarter in a row down $2 billion year over year and down 7 billion from the record fourth quarter.
Back with these sales at $15 billion grew by 11% year over year as the U S retail channel.
Posted a record $9 billion sales quarter.
The overall redemption rate improved sequentially and year over year to 27%.
Net outflows were $1 billion driven by our global high income suite as a turbulent macro outlook for inflation and interest rates led to investor risk aversion historically weak fixed income returns drove.
Industry wide outflows.
While the near term outlook for fixed income flows remains uncertain.
Our active yield should begin to drive <unk> back into these products over time at quarter end gross of fees, our global high yield portfolio had a yield to worst of seven 5% versus six 5% for the broader market dynamic, which has historically been a good indicator of future long term returns.
Active equity continued its stellar growth posting 13% annualized organic growth now positive for the last 20 quarters.
It was in the top 2% of managers for U S. Retail active net inflows ninth at a 464 managers led by our U S large cap and small cap growth strategies.
Municipal SKU with a 10% annualized organic rate in the top decile of U S. Retail flows led by our Muni Bond inflation fund, which ranked second out of 667 managers in the category.
Turning to institutional on slide eight.
First quarter gross sales of $14 3 billion increased substantially from prior periods due to $9 6 billion target date mandate.
<unk> moderated the $4 1 billion or four 8% annualized rate.
Record net inflows of $10 2 billion were positive for the seventh consecutive quarter and 11th but last 12.
A few words on the growth of our defined contribution business, which we met where we manage more than $70 billion in custom target date AUM for nearly two dozen of the largest and most sophisticated DC plans in the U S.
We're proud to be an early innovator in delivering in plan guaranteed income solution with our lifetime income strategy celebrating its 10th anniversary managing $10 4 billion in assets, including $4 2 billion in secured income benefits this equates to $165 million and growing up.
Currently the income for more than a 120000 participants.
The lifetime income strategy provides participants with a personalized portfolio similar to a target date fund during their working years and a guaranteed income stream in their retirement years, while continuing to deliver both liquidity and growth potential.
Our proprietary technology platform provides us with the connectivity can record keepers with plans for expansion and allows us to deliver differentiated insurer benefits marketplace, featuring five five insurers, including our partner equitable.
We are developing additional more scalable solutions to deliver lifetime income to a broader set of clients. We believe our long term focus and our investment in VC business positions us well to grow our leadership position and lifetime income solutions as they gain traction post the secure act, which provided plan sponsors with a.
Path to incorporate annuities into their plans.
Moving to our pipeline, which stood at $9 8 billion at quarter end. Following the large custom target date funding in January our pipeline now has the second highest fee rate since we began tracking in 2011, driven by alternatives, representing two thirds of the fee base additions in the quarter included a 340 <unk>.
Global core equity mandate and $315 million of commercial real estate debt.
Moving to private wealth on slide nine.
First quarter gross sales of 12%.
Grew by 12% year over year, and 15% sequentially driven by a strong advisor productivity up 15% and 19% respectively over the same period.
Net inflows accelerated to $2 2 billion, a 7% annualized organic growth rate positive for six of the last seven quarters.
As Keith Burke will discuss in a few minutes, we continued to see our mix shift toward our ultra high net worth $20 million and over clients influenced by our pre liquidity event planning efforts.
Private alternative commitments accelerated in the quarter versus the prior year, including private credit commercial real estate private debt and demand for those services.
Our proprietary direct indexing strategy previously referred to as our passive equity tax loss harvesting portfolio grew to $1 7 billion.
And the ESG portfolios continued to resonate strongly with our clients.
I'll finish our business overview with the sell side on slide 10.
First quarter Bernstein research revenues decreased 1% year over year and increased 3% sequentially relative to a year ago revenues increased in the U S and Europe with higher volatility supporting trading volume and the mix toward high touch trades.
Revenues declined reflecting continued investor caution.
Revenues from research checks grew 4%, reflecting the strength of our brand and the value brought the clients.
We hired our first analyst and expanding the breadth of our coverage in Asia and.
And we launched coverage in two sectors this past quarter U S multi industrials.
Apparel in U S specialty retail.
I'll review now progress against our strategic initiatives on slide 11.
Fixed income investment performance remained strong while equity performance weakened against benchmarks, both stayed healthy relative to Morningstar peers.
We drove organic growth, 6% positive for the eighth consecutive quarter and we grew excluding the large custom target date inflow at strong active equities municipals more than offset weak taxable fixed income flows.
<unk> grew by 7% positive for the sixth of the last seven quarters, our ESG portfolios with purpose now stand at 27 billion in AUM of 37% year over year.
Our sustainable U S thematic equities by one of the Uk's ESG investing award for best ESG investment funds U S equities.
In alternatives, we announced the cargo acquisition and continued to see growth in our commercial real estate debt and private credit businesses. We also saw growth in liquid strategies, including systematic macro and U S flat equity long short.
Financially, we posted year over year incremental margin of 30% below our long term target range of 45% to 50%, which we assess over a rolling three year period.
First quarter adjusted operating margin of 31, 5% was down 20 basis points year over year with adjusted earnings and unit holder distributions up 10% versus the prior year.
As you know in late March former CFO and head of strategy will lead to buy she announced his resignation to pursue another leadership opportunity in the industry.
That bill <unk>, our controller and Chief Accounting Officer is serving as our interim CFO .
We continued to benefit from a deep bench of experienced finance and strategy teams.
Now I'll turn it over to Keith Burke, who in addition to her chief operating officer responsibilities has been leading our private wealth business since early last year.
Yes.
Thank you Seth it's a pleasure to do this.
Discuss our private wealth business with you this morning.
Like any portfolio private law is a valuable, particularly growing recurring fee business with stable and growing client base. This business. That's over one third of the ADHD base revenue.
Our clients growing complexity and investment needs private wealth has been a critical source of capital to commercialize new traditional and alternative services for AB along with equitable.
There are a few things I would like to highlight for your private wealth has a large opportunity.
Operate in a profitable and growing market with significant growth potential across the U S. We have.
Our unique integrated model and as a retail first of all touched on we are accelerating growth through a focused four pronged strategy.
We're expanding our platform youre accelerating financial adviser hiring and select expansion into high growth market.
Enhancing our investment platform, we are making in client engagement and we are upgrading our technology infrastructure. We are excited by the robust opportunity ahead.
Let's get into some specifics starting on slide 13.
The framework, we operate U S patent law of industry is a massive 38 trillion market solar markets growing at approximately 9% per year inclusive of markets. According to rally associates.
I bet well is in a uniquely advantaged position.
Between the private bank channel and the independent Alright.
We compete with larger private banks with the richness of our investment offerings wealth planning research and personalized advice model and yet on the NDA.
Tendencies.
This unique combination allows us to compete and win in the market with our historically strong high net worth client base.
Well as to the ultra high net worth segment.
We have shown significant linzess Wow. This is a fast growing segment of the lost market with IAA is expected to grow at 10%.
At 5% and it's.
Also the most profitable segment in the market.
On Slide 14, we show recent results, while we are happy to have tested increased organic growth over the last 18 months, we acknowledged that our growth in average laying it lagged the industry in the preceding five years for a couple of reasons.
Firstly, all right not a competitive environment for time, which led to more modest advisor head count than we had targeted as you know advisers. It's key it's a key driver of slabs.
Also we faced headwinds as our outflows trended upwards based on more clients in our spend on that.
At the same time, we took the opportunity to strengthen our foundation.
Precinct strategy.
Our services segment, and the broader addressable market and 15, the client engagement model.
To a pull model.
Foundation has given us the ability to now accelerate our financial adviser hiring continues to enhance our platform.
Client engagement and in fact in technology and infrastructure we.
We have driven net inflows in six of the last seven quarters.
At an annualized growth rate of 7% here in the first quarter.
Our growth strategy as highlighted on slide 15.
We aspire to double our revenues.
Year period, and strengthening our business and accelerating growth specifically you plan to expand our footprint.
Sure accelerated new advisor hiring and exiting select new offices and attractive cities.
Our segments Express our segmentation.
Strategies will enable us to reshape offerings to compete even more effectively in the fastest growing segments, such as ultra high net worth and emerging loss.
Our enhanced investment offering allows us to compete for increasingly sophisticated and complex clients.
Our technology will allow us to drive greater scale and client service.
Slide 16 shows our current market position.
We have an integrated plus model and literally it's a managed strategies and traditional asset classes and a mix shift proprietary.
Curated third party alternative services uniquely positioning us in the industry.
At over $115 billion.
We have just 1% share of the private bank alright channels that there is plenty of room for growth.
Okay.
In 19 offices across the U S with over 240 advisors.
<unk> markets are in New York, Los Angeles, and San Francisco.
Net approach helps clients by monitoring and managing overlapping investments on minimizing the switching costs associated with the open architecture platforms lower cost with one fee avoiding costly double layers superior test tax management and better.
Okay.
We are taking a thoughtful and deliberate approach to our footprint expansion as shown on slide 17.
A key part of this strategy is accelerating advisor head count.
Courted by additional capacity and infrastructure.
Also focusing on specific institutional channels that are better served by private law, including filing case cash balanced plans and nonprofits.
Plan to selectively open new offices in key growth markets over the next five years as well as satellite offices and larger mature markets.
<unk> substantial opportunity.
Well there is a lagged impact of new hires in that place. We nevertheless, our inherent organic growth results in 2021.
Slide 18 shows the strength of our private wealth platform has driven leading assets per adviser productivity as compared with large peers.
Advisor the complement of having the resources of a larger platform that is highly customizable for their clients combined with our superior training program allows us to attract and retain top talent.
Can provide advisers with unparalleled access to portfolio managers and sophisticated planning strategies to enhance that position in service of our clients. The division of labor that characterizes our deliverables also enables advisers to scaled our practice at industry leading rates.
Amanda support team and a team of World class investment practitioners, who serve our largest clients.
Turning to slide 19, we are focused on enhancing investment advice with an evolving investment platform, reflecting clients' increasing sophistication and client complexity.
Over the last decade, we've replacement historical or classic 60 40.
Nancy this portfolio to include income and growth oriented alternatives the satellite managers used to supplement traditional offerings.
Our risk management strategies add value by shifting exposures as needed to deliver a smoother ride to our investors.
It made great progress in building out our alternative investment platform and we continue to expand an important asset classes like private debt hedge funds private equity and real estate.
These are broad category. So let me explain how we think about multiple offerings within the same state <unk>.
In real estate for example, we have a debt offering.
The debt offering that focuses on consistent cash flow and equity strategy that impact in stabilized assets for tax efficient return.
And opportunistic long dated private equity like strategy.
It's above market returns over a market cycle and a dynamic business and qualified opportunities funds real estate is just one example of how our alternative platform built out and has room to grow.
As shown on slide 20, we have accelerated our development of innovative demand driven strategies touched on private alternatives ESG and differentiated active services.
In 2021, we launched 10, new strategies across car and alternatives and most aggressive strategy rollout and private loss history.
For example, we launched the commercial real estate private debt funds and introduced the secondaries offerings through our partnership with RSV.
First quarter, we launched the climate oriented loans start ESG funds private wealth alternatives Aegon has accelerated that the.
First quarter 2022 commitments more than doubling versus the prior year period, and our ESG stands at six 5 billion up 26% year over year.
Turning to slide 21, a key element of our segmented client strategy, it's Glenn the ultra high net worth component clients, a $20 million or more in liquid assets. This segment has been the fastest growing part of that.
Private wealth market growing at an 8% compound annual growth rate over the last 10 years.
And our.
Our mix of sales to ultra high net worth has gone from 22% in 2015% to 38% in 2021. These clients now represents 34% of our Atlanta.
In 2021 Ultra high net worth clients grew at a 30% faster rate compared with our channel average.
Our strategy here is to continue to expand existing service offerings within family engagement complex and sophisticated wealth planning.
And that platform all delivered with a white glove experience for building out <unk>.
Comprehensive suite of services, including but not limited to credit crypto chesty tax preparation and other related services and we continue to provide innovative new investment ideas to consistently provide our most sophisticated clients access to differentiated returns return streams.
We are aligning and investing in technology and infrastructure to increase efficiency reduce friction and enable growth.
Upgrading technology and client servicing platform with the goal of improving both the client and the advisor experience by enhancing our digital client experience in all segments of our business.
Priority priorities are on sale and servicing digital engagement.
Well analytics and enhanced client reporting.
The strong partnership between business and technology allows us to create highly valued differentiated platforms for continued success.
Technology and infrastructure remain important and enhancing advisor productivity and great trading greater capacity, enabling them to focus on existing and new client relationships.
Slide 23 shows our unique value proposition as a holistic wraparound model designed to provide intentional outcomes as shown at the center.
When clients by advising families and individuals on planning around and living with the complexities that come from being wealthy.
This advice as delivered by our advisers with the help of a team of highly trained and experienced investment and wealth professionals by leveraging our deep proprietary research and wealth and lifestyle topics to help our clients navigate the complexities to meet their goals. For example, we are studying co authoring and counseling our clients on the best practice.
Our success in managing the emotional complexities that come with multi generational wealth.
We're halfway through a recent series on family governance.
Delivering a question Chuck beneficiaries chest, she is with Columbia University and.
In 2021, where we're able to restart Bernstein summit experience gathering.
Gathering I most complex clients together from multi day experience highlighting the partnerships, we have and allowing clients and prospective clients.
Sure there was complexity journeys with each other.
Finally, turning to slide 24, I would like to leave you with a filing path.
Private wealth business is a strategic asset to alliance Bernstein generating 34% of our fee based revenues. This recurring fee business is growing secular Lee and commands a higher multiple in the marketplace versus traditional asset management.
That is to continue to grow this business, which enjoys exceeded stable fees and sticky assets 12 years on average.
Conclusion, we have a well defined growth strategy that we're executing on.
Advanced integrated model that delivers value to our clients and we're excited about the opportunity and hospital right.
And now please to introduce you to bill Cmos to present the financials Bill.
Okay.
It's a pleasure to be here this morning.
I'll start with the GAAP income statement on slide 26 first quarter GAAP net revenues of $1 1 billion increased 10% from the prior year period operating.
Operating income of $248 million decreased 5%.
Operating margin of $24 seven decreased by 120 basis points.
GAAP EPS of <unk> 87 in the quarter increased by 7% year over year.
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.
As disclosed in this morning's earnings release, beginning in the first quarter of 2022 acquisition related expense add backs include certain compensation related expenses amortization of intangible assets for contracts acquired and accretion expense with respect to contingent payment arrangements.
We based our distributions 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 Appendix press release and 10-Q.
Our adjusted financial highlights are shown on slide 27, which I'll touch on as we've talked through the P&L as shown on slide 28.
On slide 28, beginning with revenues net revenues of $904 million increased 10% versus the prior year period and were down 12% sequentially.
Base fees increased 10% versus the prior year period, reflecting higher average AUM across all three distribution channels, driven by both higher markets and year over year net inflows.
The first quarter fee rate of $38 nine basis points was up 1% year over year and down 1% sequentially.
This embeds the nine 6 billion.
Low fee custom target date mandate added in January .
We continue to believe that although our fee rate may be volatile from time to time, given the potential for large DC mandates such as the one in January the long term trend should be grinding higher.
First quarter performance fees of $45 million increased by $29 million over the prior year period, driven primarily by realizations in real estate equity.
Given current markets, we continue to see full year 2022 performance fees below 2020 ones outside of that level somewhere between 2019 and 2020 levels.
First quarter revenues for Bernstein Research services decreased 1% from the prior year period as higher revenues in the U S and Europe driven by market volatility.
Offset by lower trading volumes in Asia.
<unk> continues to trend that began in the fourth quarter with a shift in Asian investor sentiment away from risk.
We incurred we incurred seed related investment losses of $6 million in the first quarter as compared to a gain in the prior year period of $2 million.
Moving to adjusted expenses all in our total first quarter operating expenses of $619 million increased 10% year over year and were down 2% sequentially.
Total compensation and benefits expense increased 9% in the first quarter versus the prior year period, reflecting higher AUR driven revenues and performance fees are.
Our compensation ratio was 48% of adjusted net revenues as compared to 48, 5% in the prior year period.
The increase in compensation expense includes higher based compensation, reflecting a 5% increase in average head count as well as higher incentive compensation.
Given current market conditions, we plan to accrue compensation at a 48% ratio in the second quarter of 2022, but may adjust throughout the year if market conditions change.
Should markets pull back further this ratio could go up as we plan to pay competitively given our people are our most important asset.
As a reminder, the compensation ratio is also sensitive to variability in the year and mix of performance fee eligible funds.
Promotion and servicing costs rose, 17% in the first quarter, primarily reflecting depressed TNA and meeting costs last year, owing to the COVID-19 pandemic.
While we will strive to realize some portion of ongoing efficiencies. We expect promo servicing spend levels will continue to increase as the pandemic impacts subsides.
The spend will be managed within the context of a more volatile market environment.
G&A expenses increased 15% in the first quarter versus the prior year period or 12% excluding relocation related expenses.
G&A declined by 5% sequentially.
The remaining 12% year over year increase was split relatively evenly between inflationary pressures, including market data and related as we lap last year's first quarter when inflationary pressures had not yet fully emerged return.
Return earnings growth related technology efficiency, and other projects and core G&A necessary to support the organic growth of our business.
For the full year, we continue to expect the rate of G&A growth.
Moderate from 2021 right.
Remaining above our historical average in the mid to high single digits.
Subject to market conditions, we will continue to invest in return generating growth projects.
<unk> the use of outsource consultants, where appropriate and we expect inflation to remain persistent.
First quarter operating income of $285 million increased by 10% versus the prior year period.
First quarter operating margin of 31, 5% was down 20 basis points year on year the.
The incremental first quarter margin was 30%.
Given market conditions, we continue to expect 2022 margins to be impacted year over year, reflecting higher inflation in our growth related investments combined with rebounding <unk> expenses and lower performance fees.
As outlined in our appendix of our presentation first quarter earnings exclude certain items, which are not part of our core business operations.
In the first quarter adjusted operating earnings were $12 million or <unk> <unk> per unit above GAAP operating earnings due primarily to acquisition related expenses.
First quarter effective tax rate for APLP was five 1%. We continue to expect an effective tax rate for 2022 of approximately five to five 5%.
Regarding the natural corporate headquarters relocation.
At quarter end, we had 1012 Nashville based employees of 24% from a year ago and more than 80% of the way to our target of 1250.
As indicated last quarter, we continue to expect the relocation to be accretive for the full year 2022 with.
With compensation related savings more than offsetting increased occupancy costs.
Going forward now that we are well past the transition phase we will be updating annually at year end the annual expense savings and earnings accretion figures associated with the relocation which to date have not changed since 2021 year end.
Lastly, we were pleased to announce in March the carve out acquisition, which remains on track with an expected closing in the third quarter.
As previously disclosed <unk> will purchase 100% of carve out for an upfront purchase price of $750 million.
At a low teens EBITDA multiple and a multi year contingent earn out ranging from zero to $650 million if certain performance targets are reached.
We expect the deal to be slightly accretive to EPS in 2023 and improving thereafter.
The fee rate is approximately 1% and margins consistent with our existing mature alternatives business with upside as we scale the assets.
With that we're now pleased to take your questions operator.
Thank you.
And as a reminder to ask a question. Please press star one on your telephone keypad.
Enjoy your question press the pound key.
Please limit your initial question to two.
To provide all callers an opportunity to ask questions.
Welcome to return into the queue to ask for a follow up question.
Your first question comes from Dan Fannon from Jefferies <unk> Company. Your line is open.
Thanks, everyone. This is actually Rick Hans for Dan. So just wanted a decline in institutional pipeline, so even including the January .
Right.
If you could expand upon which segment of the market as Sean base decline and where do you see the most engagement with institutional investors in terms of products.
Forthcoming demand would be helpful.
Hi, it's Seth.
Yes.
Backlog is a bit smaller.
We have not seen.
Any.
Mandates disappear.
We continue to see considerable activity.
And as I think we indicated much of the business. We are seeing in booking is and all and in equities equities continues to.
Tracked institutional interest.
And that's been an important growth area for us but all.
<unk> in particular have really been the predominant component of what we're seeing in the backlog and so that is continuing but I would say that.
Look we've had.
Activity levels in the institutional space really continued to be pretty high but you know.
Is there some sort of slowdown maybe it could be a little slower.
In terms of the total activity levels, but.
It remained pretty active.
Understood. Thanks for the response time.
Your next question comes from Alex Boston from Goldman Sachs. Your line is open.
Okay.
Hey, good morning, guys. Thanks for taking the question I appreciate the.
A presentation on the wealth management.
All lines person for sure. So maybe we could start there I was hoping to sort of dig into a little bit more in terms of why now obviously this has been a focus for the company for some time, but it feels like you've been sort of the pillars for growth you've described.
It feels like you're starting to you're hoping to see some acceleration there. So so why increase focus now and as you think about any incremental investment or the any margin drag from either adding new offices are focusing you had counted products. How should we think about the impact on profitability from for maybe this enhanced I'm sure.
Hi.
All right Kate Bert.
For the question.
Thank the timing really came from if you reflect on the slide where we talk about the investments that were made into the platform. Both in terms of enhancing the in asset allocation.
The occasion and investment solutions that we're offering, particularly as we built out the alternatives offering with an important.
Add to the platform while at the same time really enhancing the wealth strategy and planning advice that we were positioning for both our high net worth and ultra high net worth clients. We felt like we are at a point, where we had a very strong platform and had been piloting I would say.
Looking into the ultra high net worth.
Are you really starting to show some progress and wins, which gives us high confidence in our approach to really provide a very unique customized solution to our client base and given that confidence of what we're seeing in the market. We believe now is the right time to reach.
Really accelerate again, the adviser hiring to take advantage of the strength of the overall platform we're offering.
It does take time for new advisers can become profitable it can range anywhere from 12 to three to four years.
We are doing efforts to try to continue to increase that productivity in the early years by establishing partnerships and other ways to try to diminish.
Diminish the impact on margins, but there is there will be some impact a modest impact that we will be working through as we continue to invest in the business.
Got it great. Thanks, and then maybe one for you just on dynamics in fixed income markets and we've spoken about that recently and just a couple of weeks ago here, but.
Just any any thoughts around the green shoots you guys might be seeing in terms of client demand. It feels like the kind of the belly of the curve and the rates have sort of stabilized within a range and I would've thought historically once we settle in at a higher rate than we were before there might be increased up to that what fixed income more liquid fixed income.
What we've seen in prior cycles, but just curious how close do you think we are to that.
Okay, Thanks, Alex and.
Okay.
I think we're certainly closer to it I do think that the market is dealing for the first time in a long time with inflation expectations and I think we're going to need to see CPI rollover at least the the rate of growth of it rolled over.
Before we see significant money beginning to flow back and look at the compares are getting easier.
From from PPI.
PPI perspective, and so I think that is sooner rather than later I would say this I think it also is that dependent the fed really needs I think to deliver.
On a meaningful increase in May and June .
In order to stem concerns that inflation is getting out of hand, but as we indicated earlier and as you point I think is right.
We're beginning to look at.
Outright yields that are really pretty attractive 75%.
On our global high yield product yield to worst it is a pretty pretty compelling right. Assuming you don't imagine credit defaults are going to be gapping up which we don't I think we are quite diverse portfolios.
We really tried to avoid sector overweight.
Back to the apparel the performance of the fund and so we're beginning to see people sniff around but it's not there yet Alex and I don't want to give you that impression.
Also I think for US Asia is more impactful than perhaps for some others and.
Risk aversion needs to be produced there.
As they continue to see challenges in their equity portfolios, particularly in China.
I think.
Their desire for income will continue to be there and so I think they will redirect over time as they have in the past into high income.
More stable streams like like global high yield and American income so.
I'm.
More positive, but we're not there yet and I don't want to give you some notion it's right around the corner because I don't see it what is interesting to me is that people continue.
Two to look at our Muni business as Muni should become increasingly attractive and look I mean these are dealing with exactly the same issue, we see broader outflows, but we've been building share there.
And look it's not every day, but it's pretty consistent that we see real activity. So it's been pretty promising there.
Alright, Thank you very much.
Your next question comes from John Dunn from Evercore. Your line is open.
Hi, guys.
Maybe another one on private wealth.
Well a few quarters ago you had.
<unk> talked about two different segments you know.
Those enjoy down in.
Maybe younger people are putting money to work and at one point those were kind of upsetting I think we've gotten past that now but could you contextualize kind of where those two segments are relative to one another.
It's Kate again, thank you for the question, what I would say along those lines as we are seeing.
In terms of what those are coming from that that we're seeing more of the outflows.
And really in spending category, it's rather than where they are where it's people who are continuing to gathering mouth, but are also spending it on.
Are there other things in their lifestyle versus it being what we would be there is more of a drought drawdown category and then where we're finding success is is both in our traditional high net worth client segment and then in the ultra high net worth space and that is where we are seeing.
Pretty significant acceleration.
Both of our flows there it's growing almost at two times.
Average flow of the business over the last couple of quarters. So it becomes increasingly important.
Segment.
Our client base that we're continuing to attract and retain.
Got you and then maybe just on the.
Could you update us maybe on what you think the pace of equitable putting their commitments to work in your private market strategy.
Kind of like what could be the timeframe.
Hi, let me take that.
Look equitable committed.
Put up to 750 million into carve out strategy sets. In addition to what they are doing for our commercial real estate debt and middle market.
Lending activities as well.
It's a pretty active program.
And we've been deploying pretty significantly for them.
Now let me be clear some of that is a function of replacement of lower yielding corporates, which we also manage for them for higher yielding.
Stuff, so I think that pace.
Is is high and we will continue to be at an elevated rate for a while.
I can't give you a specific in terms of quarters or flows.
No that's good color thanks very much.
Again to ask a question. Please press star one on your telephone keypad.
Okay.
Your next question comes from Robert Lee from K B W.
Hi, This is Alex on for Rob just wondering if you could just expand a little bit on the costs associated with the wealth management expansion and also what the appetite is for any future acquisitions in that space.
Hi, sorry, I cant again, we are not disclosing the numbers associated with the expansion right now.
Sure.
As we continue to see how our fluids percents will will will continue to enhance our moderate the investment in terms of advisor head count on a go forward basis, but we're not disclosing additional dollar amount right now associated with the build out.
Hi, Seth I would also add that with regard to the M&A issue.
You know, we're not we have not historically.
Sought to build the private wealth business through acquiring other firms our model is quite different we have a very distinctive training.
Program and approach and so our view is that we're going to grow it organically.
And some of that is laterally from people in similar businesses.
But much of it is from developing them.
Our fresh the base, we have and we've had an awfully good track record of doing that.
So say that the mix of private wealth business has also been a big beneficiary of the move toward alternatives as well and that is helping.
Absorbs some of the costs necessary to expand the business, but we're going to be very thoughtful.
And purposeful in how we how we spend and over what time period, we spend so as to maintain balance and current profitability.
Versus our growth expectations.
Great. Thank you for taking the questions.
And there is no further question at this time, Mr. Griffin I turn the call over back to you.
Thank you Brian . Thank you everyone for participating on our conference call. This morning feel free to contact Investor Relations with any further questions. You may have and have a great day goodbye.
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