Q3 2022 Franklin Resources Inc Earnings Call
Welcome to the Franklin Resources' Conference call for quarter end June 32022.
Hello, My name is Danielle and I will be your call operator today as a reminder, this conference is being recorded and at this time all participants are in listen only mode.
I'll now like to turn the conference over to your host Selene, Oh head of Investor Relations.
For Franklin resources.
You may begin.
Good morning, and thank you for joining us today to discuss our quarterly results statements made on this conference call regarding Franklin resources, which are not historical facts are forward looking statements has there been any of the private Securities Litigation Reform Act of 1995. These forward looking statements involve a number of known.
And unknown risks uncertainties and other important factors that could cause.
Actual results could differ materially from any future results expressed or implied by such forward looking statements.
And other risks uncertainties and other important factors are described in more detail.
<unk> 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 and 10-Q filings.
Now I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer. Thank you. Please hello, everyone and thank you for joining us today to discuss Franklin Templeton's third fiscal quarter results, Matthew Nicholls, our CFO and COO and Adam sector, our head of global distribution are on the call with me.
Since January macroeconomic and geopolitical factors have contributed to global financial markets experiencing a period of volatility not witnessed in decades with substantial drawdown for both equities and fixed income markets. These declines have challenge investor sentiment and industry flows, particularly.
And fixed income.
Assets under management and flows were impacted by these industry wide pressures, we continue to benefit from a diversified mix of assets as investors look to reposition their portfolios. We've seen interest in our alternative and multi asset strategies, which both experienced strong net inflows during the quarter.
In addition, notwithstanding flow pressures in fixed income investor interest remains robust across the asset class over the past few years, we've been very deliberate in transforming our company by expanding our investment capabilities and deepening our presence in key markets and channels. This diversification.
With our financial flexibility serves us well across market cycles and is creating broader sources of revenue positioning our company for future success. This quarter. We continued to make progress building, our alternative asset business, which is less correlated to public markets and a source of it.
Increasing client demand.
We now have specialist investment managers that represent a meaningful portion of the key alternative categories.
First we closed the acquisition of Lexington partners.
Leader and secondary private equity where current markets create further interesting opportunities at the end of May we announced the acquisition about centura and we're pleased to welcome you all central team to Franklin Templeton. This acquisition was an opportunity for us to enter the European alternative credit sector at meaningful scale and.
Globalize, our current U S alternative credit business benefit Street partners as one of the largest European credit and private debt managers al centric has approximately $38 billion AUM with global expertise across a broad array of credit strategies.
Given the current challenging market conditions, we are pleased to have carefully structured the transaction to help mitigate risks of central has a strong team that will benefit from the scale stability and cultural alignment of being part of a combined alternative credit specialist investment manager led by benefits.
Fifth Street partners long tenured and experienced senior management team pro forma for all centers AUN, our alternative credit AUM doubles to approximately 77 billion and our aggregate alternative AUR increases to over 260 billion representing 19%.
<unk> of our AUM and an even higher percentage of our adjusted revenues as mentioned this quarter's market environment challenged industry flows.
While we continue to benefit from a diversified mix of assets, we had third quarter long term net outflows of $19 8 billion.
Year to date long term net outflows were seven 4 billion. This quarter as continued market dislocation rising rate environment and the need for inflation hedging.
Has heightened investor interest in alternatives are net inflows increased to $2 1 billion. This quarter and included outflows in certain liquid alternative strategies, our three largest alternative managers benefit Street partners Clarion partners and Lexington partners each had net inflows.
With a combined total of $4 billion fund.
Fund raising momentum in this area continues.
Multi asset net inflows were $1 6 billion, which represented the fourth consecutive positive quarter for the asset class in this broad market selloff environment, where investors are focused on income generating strategies, we benefited from having strong income funds manage for yield with note.
<unk> investment track records and customization strategies. The first half of 2022, so the worst fixed income net outflows for the U S. Mutual fund industry since 2000 with six consecutive months of net outflows.
While client interest in the asset class continues to be strong and our fixed income inflows increased by 6% from the prior.
Quarter net outflows were <unk> 14, 3 billion, primarily due to certain U S taxable and Muni strategies, we benefited from having a broad range of fixed income strategies with non correlated investment philosophy, including net flows into taxable U S income.
Multi sector bond corporate enhanced liquidity strategies equity net outflows were $9 2 billion this quarter the risk off environment impacted investor sentiment on certain growth strategies, which were partially offset by positive net flows into infrastructure emerging markets and sector specific.
Equity strategies consistent with what we've learned throughout our 75 year history, we have been front and center with our clients to help them navigate this period of high market volatility rising rates and inflation and fears of recession.
In this period of uncertainty the importance of thought leadership and active engagement have increased clients are looking to us to provide them with investment solutions focused on income inflation hedged alternative and customization strategies as they look to rebalance their portfolios and reallocate.
Risk across a variety of asset classes last year, we shifted to a regionally focused sales model to meet the varying demands of our global business shifting decision, making and resources closer to our clients. This quarter, we saw the benefits of geographical diversification outside the U S with improving net sale.
<unk> trends in EMEA and positive net flows in the Americas.
Net flows for non U S regions improved by 79% fiscal year to date from the year ago period touching briefly on our financial results, which reflect the acquisition of Lexington partners.
Adjusted revenues were $1 6 billion relatively flat from the prior quarter and a decrease of 3% from the prior year quarter. Our adjusted effective fee rate increased to 39 five basis points compared to $38 five basis points. The prior quarter expenses were flat quarter over.
Quarter, and a 1% improvement from the prior year quarter adjusted operating income was $567 million for the quarter, a decrease of 2% from the prior quarter and a decline of 6% from the prior year quarter.
Our balance sheet position remained strong with total cash and investments in excess of $6 billion. After upfront cash consideration of almost $1 billion was paid for the acquisition of Lexington, Let me wrap up by saying that over the past several years, we have significantly.
<unk> diversified the firm to serve more clients across a broader range of investment strategies with deep expertise and specialization in both public and private markets through more vehicles across geographies, although the current market landscape presents challenges for the investment industry and.
Our firm within it we are proud of the progress that we have made to date to help our clients in both good and challenging market conditions.
Finally, I'd like to thank our dedicated employees, whose hard work and commitment to help people all over the world achieved the most important financial milestones of their lives now lets turn it over to your questions operator.
Thank you if you would like to ask a question. Please press star one on your telephone keypad.
Information So will indicate your line is in the question queue.
If for any reason you should require operator assistance during the conference. Please press star zero on your telephone keypad.
With that you limit to one initial question and one follow up.
Our first question is from the line of <unk>.
Glenn Schorr.
From Evercore.
You May proceed thank you very much.
So Jamie.
I enjoyed the comps.
Prepared remarks on wealth management alternatives than everything that Youre doing on the education front. So.
I'm curious from a product standpoint.
How youre thinking about just making drawdown funds available or or or.
Putting putting retail specific products.
<unk> and motion, specifically semi liquid product bucket quarterly liquidity, because we've seen some pickups lately markets pulled back and seeing.
Gross sales to free up so I'm, just curious how you're thinking about the products that you're bringing into that channel.
Sure.
Yeah, no. Thanks, I mean.
And Glenn as well the opportunity obviously in the wealth channel is tremendous what it's really complicated right and we're learning that through the process of.
The first battle as to be able to get to the gatekeepers and youre finding that there is a massive amount of education that you have to do.
It's complicated to sign up clients.
And so we've made investments in companies like case.
We now have our several of our products on both the high capital in case.
And then the education piece is a big deal and so we're actually working with case through our FTE Academy to actually do education and the alternatives we have.
Things like the BSP BDC.
<unk> reef.
<unk> is actually getting interesting traction in the RIAA channel you have to get some size before the wire houses, we'll put you on their platform, even if you pass through their due diligence and so it's really important that you have the relationships and the RA channel you may recall small acquisition that we did.
In the private credit space.
Benefit Street partners.
Purchased it but it was they had experience in REIT with the <unk>.
So there's a lot of fronts, where you have to.
Get it right to actually get the traction.
But we feel like our opportunity Zone fund, which is on quite a few of the big warehouses CP reiff the bdcs.
We've been on our venture fund made us to get that on some of the private banks.
So.
Those are the types of products.
Really more of kind of the interval Fund 40 Act fund.
Adam do you have anything you want to add on.
Yes, Glen I, just might add that when we talk about.
The distribution of alternatives to the wealth platform, yes, that's abroad.
Strategic effort, but each platform is a little bit different and so I think one of the things we've been able to do well over the last few quarters is to engage with kind of the head gatekeepers of each platform does that what type of a strategy is really best for you. Some one perpetual somewhat other things.
Someone a product where there's going to be a broad consortium.
Banks participate in the deal others want something thats more of a spoke for their platform. So we've really been able to be a little more specific about what we're offering on each platform and I think that will pay significant benefits.
I appreciate all that maybe.
Maybe just one quick follow up.
That the worst fixed income flows in 2000.
As the market was was.
Good enough.
Now that we've gotten some reprieve in terms of the rate move the spread move.
They have settled in.
Could we hope and should we expect that.
Perceval U S taxable.
Settle in with those conditions.
Well.
Sure.
I'll start and then Adam you can fill it I mean interesting some of our biggest growth flows are still into fixed income.
So while I think there's been redemptions, obviously much heavier redemptions on the on the retail channel and then on the institutional channel, we still see strong flows into the asset class and that I would just say one thing that I'm.
I'm not sure is fully appreciated.
Sure.
We cover the spectrum on views on in the fixed income market. So when you look at Brandywine.
The Franklin fixed income and western we actually there.
<unk> Alpha generation only correlate one five times right. So.
There is always something performing in that category and what you see is whether it's insurance companies or others. There is a need.
For fixed income types of investments and returns and income generating and frankly that may be in the private markets as well as the public markets, but there is definitely demand there.
Adam do you have anything that I would add Jamie that.
Yes, I would add that a few things one the asset classes, just more attractive flat out with higher yields and it's less risky with lower duration. So I think there's just a better data to be had in fixed income.
Other thing we have seen that is on the pension side.
As we see folks a little better funded at this point looking to LTI type strategies, which we're now offering.
Another area, where you might see some growth in fixed income allocation.
That definitely makes sense. Thank you.
Thank you the next.
Question comes from Ken Worthington with Jpmorgan.
Please proceed.
Thanks, Scott good morning.
This is Michael Cho I'm on for Tim today.
I wanted to shift gears a little bit.
In October .
The recent launch.
The blockchain based.
Money market fund I realize it's been in the press for a little while now but.
Some time has passed so I'm just curious kind of a few things one I mean, what are kind of your objectives of launching a fund on the blockchain and then and then two I think our thoughts on the seller.
Kind of what are the considerations when you pick that one versus area versus a private chain.
And then three like again, sometimes pass or any less.
<unk> like to share so far thank you.
Sure.
So.
One we pick stellar at the time.
Because the theory with something called proof of work and seller was.
Proof of stake.
The difference is you hear on the criticism of Bitcoin is all about how energy.
What an energy drain it is and Thats. Because this concept is you have to solve algorithms to be able to.
Posted on the chain and so that's a big energy drain, whereas we knew that that was going to become more of an issue of theory is trying to shift to proof of stake.
And so we ended up stellar was designed this proof of steak and so we selected that.
We decided to build this money market fund honestly, because we think there will be a convergence over time. These types of cocainize assets will become I think that'll become securities and there'll be regulated.
Theres other countries that are further ahead, probably than the U S. In this.
And but I think that theres going to be a convergence that we wanted to make sure that we understood. It and we were able to get in front of the wave.
We think ultimately it will drive down costs.
In this environment, so we'll be able to deliver the same kind of quality investment products at a lower cost when you build these types of things on the chain.
Starting out with the money market fund just made a lot of sense.
Honestly, we looked at and we still think it will be a already now youre starting to see it.
Some of the products that were deemed quote unquote stable coins.
That were yielding 7%, 8% anybody who has an investment background knew that there was no way that could be a stable coin and.
And so we just felt like it made sense for us too.
To come out with a money market fund and we work with the SEC I mean literally.
Throughout it as we both became educated on it it took a while.
And we are an approved 40 act.
Money market fund, where it goes well the market is going to evolve as people get.
Get more comfortable with this asset class.
Kind of an asset class with the technology, where they can hold their tokens in a secure wallet, which is complicated in itself.
And right now with a lot of people kind of played around in that space, but it will become more institutionalized and we can take all of these learnings what we built on the stellar system can launch other 40 Act funds.
So again it was just really a way to make sure that we're understanding disruption as it comes to our industry.
And that we're riding the wave forward.
Okay, Great that's wonderful thanks, Jim.
Mhm.
Thank you.
Next question comes from Dan Fannon of Jefferies.
Please proceed.
Yes.
Yes, hi, good morning, everyone. This is actually Rick on for Dan. So I wanted to tack onto the fixed income discussion from earlier. So just looking at the data that we have available to us and you guys alluded to this as well.
It's clear that a sizable chunk of <unk> and you guys are seeing in outflows are coming from retail.
But just thinking about the the large institutional base and nature of the Western franchise could you maybe speak on trends and conversations youre, having with that client base and platform more specifically.
Yes, I mean.
First of all.
In the past 10 years Western has absolutely outperformed in nine of the 10 years and in the one year. They underperformed 2018, they crushed it in 2019 and made up for any underperformance. So I always like to say be careful betting against western and as matter of fact, while it's a little.
Early to tell my CFO constantly reminds me that quarter to date western is in their top decile.
So.
They are proving out that maybe they are positioning could be right. So.
But as I said from.
We are managing the business, we're happy that we have really diversified perspectives on end products in the in the fixed income space with low correlation now institutional investors.
Western has a lot of conversations with them.
They understand western.
Matter of fact, Morningstar, just maintain the gold rating and talked about how they have high conviction on the investment team and that they are an excellent investment team.
And so I think we're continue to be very optimistic I think people slow down for now, but I wouldnt be surprised and yet I believe the core core core plus was our top selling from a gross self funds. So there is obviously still a lot of money going in there.
And if you look at it I appreciate the sales were up.
Yes were up quarter over quarter.
Remember that core and core plus or about a third of westerns total AUM. They have a lot of other things that are doing exceedingly well.
And on top of that even within the core on core plus land.
We've got a very significant institutional pipeline.
Understood. Thank you that's helpful.
Thank you. The next question comes from Alex <unk> of Goldman Sachs.
Please proceed.
Hi, Jenny Hi, Matt Thanks for taking the question.
Alright.
Maybe we could start with some of the dynamics in some of the numbers around the old products for you guys, obviously, we'd like some coming in and Theres a couple of moving pieces. So I was hoping maybe just to get a reset on what the fee paying AUM is.
For the old.
Bucket I think you guys give us total AUM, but I was hoping to get the fee paying AUM.
The management fees that are being generated.
Lexington, none of that's fully in the run rate as well as the kind of the total both bucket and then on <unk>, specifically any updates you could provide us with from a fundraising perspective I think they are in the market with form 10.
How that's going what the expectations are when that fund AUM will start coming into the run rate.
Yes sure.
Okay do you want to start Jonathan Okay.
No you go ahead Patrick.
So Alex on the management fee income from all the management fee revenue from.
The alternative asset.
Managers that we have will will likely aggregate something like on an annualized basis, one two to $1 $3 billion I think we've communicated that in the cost from that.
Consistent with what we said that's about 50%.
From the previous year.
And that excludes performance phase of courses.
As we have.
So that's where we're at on that.
Fee revenues.
And I would say on the Lexington that they are on on schedule.
Despite this environment on their fundraising.
And then.
And then if youre looking for for an idea of what the overall tonnage of asset businesses relative to the size of our franchise.
If we pro forma.
<unk> for our central for instance.
We're about 19 set of assets on a national will be any alternative asset.
21% of revenue, roughly and probably up to something like a quarter of our operating income won't be from alternative assets as a whole.
Got it alright ill hop back in queue. Thanks.
Thank you.
Next question comes from Patrick Dave.
David from.
Some economists research.
Please proceed.
Okay.
Hey, good morning, guys.
There've been a lot of questions out there about.
The quality of the <unk> business, given what looks like fairly stagnant.
Over the last few years, obviously, some high profile insulate losses.
I understand it looks like you've got a very good price relative to what you are hoping to get in and obviously put a lot of protections into that price could you flush out a bit how you see the.
Profits in riding the ship, there and getting back up to the level of growth, we would expect from the private credit manager.
Yes.
The turnover that happens obviously it happened all before the deal was announced it was really at the senior level level.
And I think that the area of concern was the direct lending and the rest of the business has been growing very well and has had very good performance.
And so I think it's important to a lot of noise around that but I think that.
It's important to understand that was just at a very senior level, which is why there is an opportunity with the fact that we can roll it in with benefit Street partners that already has a good senior leadership team.
And then.
One of the things that I think we understand really well and why we've been successful in acquisitions as we understand it you are buying an investment team in their investment process and so it's important that you have retention and so we built in retention to ensure that we.
We minimize any kind of the future.
Anybody.
Leaving in the future.
I think that what's really exciting is that we are our distribution in Europe has continued to improve.
And now you take a product like this that we think that.
Our distribution is incredibly excited about having private credit could be able to sell.
And so being able to bring these two things together, we are very very optimistic.
So.
Anything else you want to.
Yes, I would just say that all central brings two things.
One is a product capability that is very European specific in addition to other products, but that really helps us out with all of our alternatives franchise and a real distribution capability as well both of those things are additive.
No I understand.
Patrick as you know, we study M&A pretty hard in the asset management arena, including both traditional and alternative assets.
Yes.
Felt that globalizing as Tony just mentioned globalizing, our alternative credit capabilities by adding Europe is very important given the growth potential in.
And across that region, frankly, both the UK and Europe , and we concluded while we'd like to grow things organically ourselves number one priority is always to grow organically, where we can.
Some things that just take too long.
I'm, a little too long to grow too long to be relevant frankly.
Our opinion it would've taken us perhaps a decade to create what al Suntrust become just like it's taken 15 years to become with benefit Street partners has become and we just concluded that this was the best way.
To become a true global leader in alternative credit. So Thats why we did what we did and then to your point on price with <unk>.
This was driven a little bit.
Round some of the uncertainty.
The overall markets.
So it's just a function of how M&A can be structured and we've done that very carefully and we will.
Got a great partnership back to New York that has a lot of upside participation.
In the growth of this business and we expect that to be growth as Jenny mentioned, there are multiple sectors multiple stress test without sentra and both of them are growing quite nicely and we expect that to continue post closing into two kinds of 2023.
And I would just add during the due diligence process as you can imagine we checked on the reputation of the firm with the consultants and institutions and we're very comfortable with it we think there's still despite some of the headline stories around turnover have an excellent reputation in the market.
Great helpful. Thanks, and just one quick follow up could you.
Would you be willing to give the total AUM in kind of those core flagship strategies at western since so much of institutional that we can't see I don't think we've got an update on that one.
But.
Our core plus strategy, our core and core plus category.
Core and core plus.
Core core core plus together is about $150 billion.
Approximately.
Okay.
Sure.
Okay.
Thanks, Patrick.
Thank you. The next question comes from Stephanie MA with Morgan Stanley .
Please proceed.
Hi, This is Stephanie on for Mike Hi, Paresh.
My first question is on expense and performance fee outlook. So hoping you can just give us an update on our mark to market on the expansion is given lower AUM levels, and then performance fees that continues to be much stronger than you had guided so any color on that outlook would be helpful as well.
Yes, so on an overall expenses.
I think the last call last quarter, we guided to 3.9% to $3 $95 billion of adjusted operating expenses for the full fiscal year ended <unk> <unk>.
The updates that I would say is that we expect to be on the lower end of that so instead of just saying $3 nine to $3 95, we expect to be close to $3 nine to three.
Three.
And remember that includes Lexington, so we.
A couple of quarters ago, I think I explained that.
We were in the $3 90 to $3 95, excluding performance fees and executing Lexington last quarter, We said $3 90 to $3 95, excluding performance fees, but including this.
This call to us.
$103 95, excluding performance fees, including vaccines and.
And would it be on the lower end we believe.
That's remaining.
Remaining equal for the for the year in terms of specifics around that I think last quarter I guided to different.
Line items, we'd expect those to be approximately the same so G&A to be approximately $114 million.
Occupancy around 57 million and <unk> to be around $125 million of all those things obviously.
<unk>.
Lexington.
Partners and then our comp ratio, we've guided to around 45% for the year and we expect that to also be at 45% for.
For the year.
In terms of performance fee.
We don't guide on performance fees frankly.
The way I've communicated this in previous calls us to say that we think for modeling purposes.
$40 million is reasonable obviously, we acknowledged the fact that we've been higher than that for.
For a few quarters now, but again, it's very hard to.
Calculate where our performance fees are going to be gone I'd say is that.
Obviously, the reason why performance fees have gone up because because we're performing well in a number of our asset classes both across.
We are in a state and credit.
Paris correctly.
With crosses about nine of our specialist investment management companies, where that's concentrated maybe in three.
Yes, because we are just getting larger in alternative assets. So the potential more performance fees is going up as we continue to increase our alternative asset business.
But I'm sticking with it that's very helpful.
Thank you if I could.
Another follow up in here.
We never start reference to the China JV is 12 billion of AUM.
So hoping you can expand on some of the initiatives there and are there any plans to raise your ownership and then what sort of growth are you seeing in that region.
So I believe that we have said that we.
We would like to expand our ownership in there now that the regulations have changed and so we're in discussions to do that we also have a wholly owned <unk>, which would give us other optionality.
It's.
Yes.
We were not able to buy 100%.
Look China is a massive important market we were early.
As far as.
Firms asset managers, who did joint venture partners.
We have unbelievably excellent performance have had really stable investment teams there.
Higher Doctor, then Meng, who is our chairman of the Asia Pacific and as well connected.
And we it has been a profitable business for us we think it can be much more meaningful as far as its contribution over the long run.
Great. Thank you.
Thank you next question comes from the line of Alex Blaustein with Goldman Sachs. Please proceed.
Hey, Thanks for the follow up couple of a couple of quick ones here. So I guess just going back to performance fee discussion for a second.
Given the fact that it's gotten a bigger portion of the overall business model.
Maybe you can frame the frame to us sort of the sources of performance fees that you saw this quarter and any kind of ideas on performance fee accruals that could be realized over time as investments kind of crystallize or just to kind of get a better sense of what that.
The bucket of potential performance fees could look like going forward.
Yes.
A good portion of the increased performance fees quarter over quarter as being from a real estate franchise.
Franchise, Clarion partners, where the performance has been outstanding so.
I would say probably 60% of it will start to add that and.
Probably a higher percentage of the increasing performance fees that we've had is frankly, just from performance thresholds being met and Corporately.
Realizations for that performance.
Has made the performance fees.
Actions so that's the.
So that's the primary.
The primary source of the increase in performance fees, but we wouldn't want to understate the.
The performance of our credit business also has led to.
<unk>.
Performance fees and performance fee increases over the last two or three quarters. In particular the company is really a combination of realization quarterly performance fee thresholds with annual performance fee thresholds, maybe it's helpful to say that we think that outperformance fees were probably peak.
At the calendar year, and so that would be the end of our first.
Quarter.
And then.
Perhaps.
Useful point is out about $127 million.
This quarter approximately 70% of it is specific to a quarterly.
<unk> fees.
So you might get a argue that something.
Between $60 million to $70 million.
Could if we have some xactly the same performance.
Next quarter or this quarter.
Again, I'm not guiding you this way for modeling purposes, I've already explained how I'd look at that but you could argue that we could.
At least get up to $60 million to $70 million, if we were to repeat that.
Yeah, Okay I got you that's helpful and then.
Can we just around the balance sheet. So.
Lots of moving pieces, obviously election debate and came out you guys have contingencies coming up as well.
How are you thinking about sort of the discretionary cash balance today. So if you were to think about maybe both cash and investments and you to say, okay. How much of that is sort of truly available for corporate purposes or whatever else.
And how much do you guys think you're going to need to use towards future.
GP co investment of GP balance sheet commitments, given the fact that your liquids are getting bigger over the next over the next couple of years here.
Yes, so firstly.
Roughly $2 6 billion of investments.
Let's say half of that is very liquid hardly that.
Well over $1 billion of it is highly liquid but it is being important to seed new funds to accelerate access to distribution opportunities because I think we've explained that we've got a very good multiple on that feeding in terms of the AUM that's been created from et cetera.
Number one so we wouldn't want to liquidate that but we can re circulate that and we've got much more disciplined not just letting seed capital sit and fondness for like five years. So every year, we're able to circulate several hundred million dollars I would say out of the $2 6 billion and a portion of that recirculation, Alex is going in.
More of the alternative asset area, we probably have $800 million or something like that now.
Invested across the alternative asset businesses that we that we have which is more longer term investments versus the rest is more short term seed capital.
Number one we're getting better at circulating even without increasing the two six but but number two.
Every year, we are earmarking.
The full amount.
Income and our cash if we need to continue to invest in GP level alternative asset.
Opportunities.
Say that we.
When we provide that.
Commitment, we also allow our senior employees at both alternative asset business and across Franklin to invest and we're getting so much interests.
Employees to invest in these areas the actual commitment the fact and ends up backing off the balance sheet is reducing.
It is increasing but again.
If.
We don't have that interest.
Because of general market conditions, something frankly is that when we could expect that too to increase meaningfully in terms of the amount of cash that we think we have some let's say excess cash or cash available to to do further investing in including.
Including M&A put that in excess of $1 billion, but obviously in this current market conditions. We are very cautious very disciplined and we think having cash on hand.
For opportunistic situations theres going to be the <unk>.
<unk> vantage.
So that's how we look at cash flow.
So we're in a good position with around $6 billion or more of cash and investments disciplined with circulating the investments adding to it carefully each year and with the cash pace.
You mentioned.
Upcoming acquisition related payments Youre right Thats why were conservative with it because we do have $1 6 billion of acquisition related payments over the next four years. We also have one point.
$4 billion of debt over the next five years coming Dew, which we can refinance but we also like to Delever.
When that is getting more expensive.
That's that's how we look at that.
Awesome. Thanks, a lot for all that detail.
Sure.
Thank you and the next question comes from Brennan Hawken of UBS.
UBS.
Please proceed.
Good morning, and thank you for taking the question. This is Adam Beatty in for Brennan. This morning.
Kind of a two parter a multi parter on arps distribution in particular, we were wondering about sort of nuances of all its distribution in the European market, particularly for European retail and what Youre seeing there and then.
And kind of a separate angle just wanted to get your thoughts on how much sort of product and distribution crossover youre expecting between <unk> and BSP. Thanks very much.
So I think.
I'm not sure.
No.
The detailed nuances other than there's a couple of just trends that are relevant everywhere for all right.
<unk> talked about before where.
You're seeing companies waiting longer to go public.
Seeing less opportunities on equity is to invest in that universe has shrunk.
I think bank Basel III capital requirements have made it such that banks are much more careful with Luca choosing to lend to which has created this proliferation of private credit I think that is a direct.
Response to some of the capital changes that have happened in the banking industry.
So you see meaningful excess returns in the private market.
And.
There is such an opportunity to naturally bring that to the wealth channel.
The problem is it's a bit like running with scissors, where you've got these.
Illiquid assets to often people who.
Who require it.
And so creating those types of vehicles.
It is important and being really aware about how you do that and so that's the type of thing our product development team is working on.
And then same as in the U S. It requires just a massive amount of education plus the complexity of things like signing up for these and sell.
Big opportunity there, but it is it has a lot of blocking and tackling that happens before you really start to see the traction I think in the U S. We have finally started already and we're only now starting to finally see that traction we think it's going to be somewhere in the EU regulations, but then they get interpreted and so it's actually even more calm.
Applicator to bring the customer.
Adam anything you want to add to that.
I would add.
Add that if you think about all of the transactions that Franklin Templeton has done one of the real hallmark hallmarks of them has been.
Lack of overlap in product as you get larger that gets harder and harder to have zero overlap, but in general we feel really really good about the transactions, we're doing and how we.
Middle overlap there is.
Across the product set.
I think there's also a real advantage of having a regional specific alternatives manager, which means that those products will be even.
More geared towards the local market to other comments I would add.
Is that within Europe .
There was really two different pieces.
Yes.
The bringing alternatives to the wealth channel one is really at the ultra high net worth level and the other is more at the mass affluent level, we want to make sure. We address both and then finally I would say sustainability continues to be big.
Big trend around the world, but especially in Europe . So in Europe to the extent that you can add sustainability two year alternative from the wealth channels across distribute that.
Okay.
Yes.
Yes.
<unk> had the opportunity to work together whether it so.
Flow with.
From a deal.
Helping raise capital.
Insurance is on a global scale.
But the two together I don't see the relationships across to <unk>.
Complementary so.
The opportunities that they work together.
That's perfect. Thank you Brad.
You can say DSP was very very U S focused right and so and al sensor had very little.
Little footprint in the U S a little bit I think on CLO and things and so.
Bye everybody loves to care for their home home team that Europeans tend to like to buy.
As opposed it's much harder.
Credit into Europe .
So they are there.
Can be global products, you can have some of the deals worked on together from a team some of the research can be shared.
It was really hard for PSP to SaaS.
All their products into Europe , and now we have excellent private credit facility here.
Thank you so much I appreciate it.
Thank you.
This concludes today's Q&A session I would now like to hand, the call back over to Jimmy Johnson.
Franklin <unk>, President and CEO for final comments.
Great well I just want to thank everybody for participating in the call today and once again want to thank our employees for their hard work and remaining focused on our clients, particularly in this type of market environment and also for supporting each other.
We look forward to speaking to you guys again next summer and stay healthy thanks, everybody.
Thank you disconnect.
Okay.
Okay.
Okay.
Sure.