Q3 2024 AllianceBernstein Holding L.P. Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Alliance Bernstein third quarter 'twenty 'twenty four earnings review.
At this time all participants are in a listen only mode.
After the 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 on our website. Shortly after the conclusion of this call.
Speaker Change: I would now like to turn the conference over to the host for this call Vice President of Investor Relations for a b Mr. Giannis drill galley. Please go ahead.
Speaker Change: Good morning, everyone and welcome to our third quarter was 2074 earnings review This conference.
Speaker Change: Conference call is being webcast and accompanied by a slide presentation. That's posted in the Investor Relations section of our website Www Dot the alliance Bernstein Dot com.
Speaker Change: With us today to discuss the company's results are Seth Bernstein, President and CEO and Jackie marks CFO.
Speaker Change: Our head of global client group and private wealth and knocked off head of private alternatives will join us for questions. After our prepared remarks.
Speaker Change: Some of the information we'll present today. It 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.
Speaker Change: You can also find our safe Harbor language in the MD&A all of our 10-Q, which we filed this morning.
Speaker Change: We base our distribution to unitholders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results.
Speaker Change: Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation Appendix press release and our thank you.
Speaker Change: 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.
Speaker Change: Now I'll turn it over to Seth.
Seth Bernstein: Good morning, and thank you for joining us today.
Seth Bernstein: Over the last several years Alliance Bernstein has been on a journey to redefine itself and emerged as the leader in asset and wealth management and I'm pleased with the progress we're making we've delivered positive net flows each quarter. This year and surpassed 800 billion in assets under management as of quarter end.
Seth Bernstein: Want to take this opportunity to express my gratitude to our colleagues clients and unit holders who supported us throughout this journey.
Seth Bernstein: Today, a b as a stronger company with a distinctive value proposition, which is highlighted on slide three.
Seth Bernstein: We have a differentiated distribution platform, which includes our proprietary private wealth business. This gives us an edge in growing markets like Asia U S high net worth and global insurance.
Seth Bernstein: We can also deliver our clients diversified investment capabilities across traditional and alternative asset classes.
Seth Bernstein: This includes our growing private markets platform, which is supported by our strategic relationship with equitable.
Seth Bernstein: In addition, as Jackie will discuss in detail later, we have a clear path for margin improvement, which will reflect on our results as we move into 2025, assuming no market deterioration.
Seth Bernstein: Finally, <unk> has a tax efficient partnership structure that prioritizes against capital returns to shareholders ensures that disciplined approach to growth investments.
Seth Bernstein: Moving to slide four I'll review, our third quarter business highlights.
Seth Bernstein: First we delivered our third consecutive quarter of organic growth active.
Seth Bernstein: Active fixed income inflows totaled $6 billion led by retail where taxable and tax exempt each grew 17% and 27% organically on an annualized rate.
Seth Bernstein: We've been among the first asset managers to benefit from Reallocations into fixed income having registered nearly 20 billion in active fixed income inflows year to date more than 50% higher than 2020 Three's full year flows.
Seth Bernstein: <unk> income continues to headline taxable demand with over 2 billion of net inflows during the third quarter.
Seth Bernstein: Our tax exempt franchises also gaining market share and had over 3 billion in net inflows led by retail Muni Sma's and demand from Bernstein private wealth.
Seth Bernstein: Also seeing preliminary signs of a turnaround in U S retail demand for tactical with over half a billion dollars in the inflows year to date into our ETF and mutual fund suite.
Seth Bernstein: Active equity outflows of $4 5 billion remained elevated in the third quarter call.
Seth Bernstein: Concentrated institutional redemptions outweighed pockets of strength in retail active equities, where we observed continued inflows into U S large cap growth and renewed interest for our value strategies.
Seth Bernstein: Second we continue to expand our private markets platform through deepening existing partnerships and forging new ones and growing retail channel our private markets a U M reached $68 billion in the third quarter up 11% year over year, driven by strong net fundings into our alternative strategies.
Seth Bernstein: At the institutional level, we deployed over $1 billion of cross Clo's real estate mortgages and renewable energy strategies.
Seth Bernstein: Last month, we announced the launch of the <unk> carve out credit opportunities fund, which is the unlisted closed end interval fund that brings carve outs expertise in specialty finance aircraft leasing and energy transition to the broader retail audience.
Seth Bernstein: Our sales teams are engaged across key channels, leveraging our established footprint in the large U S retail market.
Seth Bernstein: The interval fund is already live with one third party platform and on track for others.
Seth Bernstein: As a reminder, Bernstein wealth management has been a pioneer in bringing alternative assets to U S. High net worth segment, and we're able to leverage that distribution expertise as we forge our third party retail market strategy.
A third highlight for the quarters that our fee rate has stabilized. So we saw a base management fees grow in line with AUM.
Seth Bernstein: Finally, we're making steady progress on our margin accretion initiatives, including the completion of our New York City office relocation in September.
Seth Bernstein: Our adjusted operating margin in the quarter of 31, 3% is up 330 basis points year over year, and we have clear line of sight to further improvement in 2025 provided there is no market deterioration.
Speaker Change: Slide five reflects the summary page of our key financials metrics Jackie will follow up of more commentary on the fee rate performance fees and margin.
Speaker Change: Turning to slide six I'll review, our investment performance, starting with fixed income.
Speaker Change: September kick started the fed's monetary easing cycle in the U S. Following in the footsteps of other major central banks rates move down in the yield curve steepened pushing bond prices higher.
Speaker Change: Bloomberg U S aggregate index returned 5% in the third quarter with both duration and credit performing well in an environment of moderating growth and inflation.
Speaker Change: Our near term performance has benefited from both active duration management and credit positioning as we have successfully navigated a shift in the rate regime and continued tight spreads.
Speaker Change: 92% of our assets under management are outperforming in the past year, while 65% and 59% of our AUM outperformed over the three and five year periods.
Speaker Change: Despite elevated volatility active management of duration and credit exposure has yielded strong returns for our clients over the past year, our Mark key income strategies American income and global high yield returned more than 13% and 15% respectively over the one year period.
Speaker Change: Relative performance fee strategies was also strong in the near term with American income outperforming both its benchmark and its Morningstar category average, while global high yield outperformed this morningstar category average over the one year period.
Speaker Change: Our outlook remains constructive.
Speaker Change: Importantly, we observed a normalization in asset class return correlations as bonds regain their diversification value credit fundamentals remain healthy and monetary policy becomes more certain we expect investors to accelerate their reallocation into fixed income by tapping on the large money market holdings.
Speaker Change: While the timing of the pace of the rebalancing is debatable the case from fixed income and self evident in the capital can move swiftly as we observed with cash sorting in 2023.
Speaker Change: Turning to equities in the U S. The equal weighted S&P 500 returned 10% outperforming the market weighted S&P by 400 basis points as large cap value outperformed the large cap growth.
Speaker Change: Small caps also had solid quarter with the Russell 2000, returning 9%.
Speaker Change: Non U S equities emerging markets delivered strong gains in the third quarter led by China, which posted double digit returns following monetary and fiscal stimulus measures announced in September.
Speaker Change: Performance of our equity back where the strategies remains mixed with 55% of our AUM outperforming over the one year, while 47 per outperformed over a three year and 67% over the five year period.
Speaker Change: U S large cap growth performance has lagged in recent quarters. However year to date absolute returns remained strong and this strategy continues to outperform over the long term, beating the Morningstar peer group average of grade three five and 10 year periods.
Speaker Change: We have more than 20 strategies or funds across value smid cap, China emerging markets and international health care that outperformed their respective benchmarks for composites over the one three and five year periods.
Speaker Change: Our U S value services across the cap spectrum are performing well.
Speaker Change: Active management in U S. Large cap value was working and investors who are underexposed or passive in large cap U S value are missing out on the experience.
Speaker Change: Over the last quarter, we had nearly $400 million in inflows into U S value services, and we are ramping up efforts to increase client awareness of our distributor and <unk> capabilities.
Speaker Change: In addition, we're seeing increased client RFP activity for our new European growth service.
Speaker Change: Now turning to slide seven.
Speaker Change: Retail posted its fifth straight quarter of positive net inflows and had its highest quarterly inflows since 2021 with a 7% organic growth rate, our advantageous competitive position in APAC and our growing presence in the U S EMEA and Latin America helped us deliver positive net flows across all regions.
Speaker Change: All active asset classes, where inflows in the third quarter and total inflows of $5 4 billion led by robust gains in active fixed income and modest inflows into active equities.
Speaker Change: Taxable fixed income grew at 17% annual rate or 14% excluding money market flows offshore retail continues to drive taxable gains, reflecting inflows into American income and global high yield retail Muni Sma's continued to gain market share growing and a 27% annualized rate.
Speaker Change: Finally active equity also grew organically supported by continuing inflows into U S large cap growth U S select and value services.
Speaker Change: Base management fees grew 19% year over year, and 8% sequentially reflective of market growth. In addition to organic growth in fee based growth.
Speaker Change: Organic base fee growth was 3% over the last 12 months and <unk>, 8% as of the third quarter of 2024.
Speaker Change: Moving to slide eight.
Speaker Change: Institutions continued to shed assets in the third quarter with outflows totaling $4 4 billion at a 5% annualized loss rate.
Speaker Change: Active equity strategies continued to drive redemptions weighing on channel flows and offsetting demand for fixed income in August.
Speaker Change: Excluding money market outflows taxable fixed income grew eight 3% annualized organic rate, primarily driven by corporate investment grade.
Speaker Change: We had a $1 9 billion in pipeline fundings during the third quarter with the pipeline now standing at $10 1 billion at the end of the quarter.
Speaker Change: Note that institutional fundings accelerated in the third quarter with $2 3 billion in pass through mandates that were not captured on our pipeline.
Speaker Change: The pipeline fee rate declined as we continued to fund higher fee alternative mandates lower fee mandates such as the 500 million systematic fixed income when in the third quarter also drove down the pipeline fee rate.
Speaker Change: We continue to make inroads marketing the systematic product to institutional client channel, where we're looking to gain market share.
RFP activity and proposals are picking up the pace with a notable uptick in request for fixed income value and emerging markets equities. This is a good leading indicator for future pipeline additions.
Speaker Change: However, these mandates tend to be lower feed and will impact our pipeline fee rate.
Speaker Change: As we add that global second $10 billion commitment to the pipeline. We expect these additions to partially offset some of these pressures.
Speaker Change: While deployments and higher fee alts detract from the pipeline fee rate the benefit the channels III rate, which is up 2% sequentially.
Speaker Change: Turning now to slide nine.
Speaker Change: Private wealth posted modest inflows in the third quarter as increased sales momentum versus the prior year was offset by increased redemptions.
Speaker Change: The band dynamics within the channel favorite tax exempt posting a 10% annualized organic growth rate. In addition to alternatives growing at a similar pace more than 500 million inflows within alternatives were driven by U S real estate equity real estate debt and Secondaries fund raising and alternatives remain a key driver for <unk>.
Speaker Change: Channel activity was $700 million raised in the third quarter, including our newly established Carvel interval fund within taxable outflows were concentrated within money markets.
Speaker Change: As we approach year end, we remain constructive on the channel outlook, given strong momentum in fundraising for alternatives and risk appetite reviving advisor productivity and sales momentum is tracking at record levels in 2024.
Speaker Change: Base management fees grew 13% year over year, and 4% quarter over quarter private wealth is also a significant driver of performance fees reflective of the channels private marks to exposure and net interest margin.
Speaker Change: This is defined as dividends and interest income minus the interest expense on private wealth cash.
Speaker Change: Now I'll pass it to Jacky to cover our financial results.
Jacky: Thank you Scott and good morning, everyone.
Jacky: We continued to deliver strong financial results in the third quarter.
Jacky: <unk> solid growth in management fees and focused expense discipline.
Jacky: Third quarter adjusted earnings per unit of <unk> 77 tonnes were up 19% versus the prior year benefiting from strong markets sustained organic growth and durable fee rate and margin expansion.
Jacky: As a reminder, we distribute 100% of our adjusted earnings <unk> owners.
Jacky: Turning to slide 10.
Our adjusted results, which remove the effect of certain items not considered part of our core operating business.
Jacky: For a reconciliation of GAAP and adjusted financials. Please refer to our presentation appendix or our 10-Q.
Jacky: Net revenues of $845 million were flat versus the prior year and up 12% on a like for like basis, Excluding Bernstein research.
Jacky: Third quarter base fees increased 14% versus prior year in line with the growth in our firm wide average AUM.
Third quarter performance fees of $26 million declined by 2 million from the prior year period.
Jacky: For full year 2024, we now expect performance fees of $145 million to $155 million and I'll cover our outlook in more detail shortly.
Jacky: Dividend and interest revenue along with the broker dealer related interest expense declined which reflects lower cash and margin balances within private wealth.
Jacky: Yeah.
Jacky: Moving to our expenses.
Jacky: Our total third quarter adjusted operating expenses of 591 million declined by 5% year over year, reflecting the deconsolidation of Bernstein research and a lower compensation ratio.
Jacky: Third quarter total compensation and benefits expense was $414 million down 3% versus the prior year.
Jacky: We had a compensation ratio of 48% of adjusted net revenues in the quarter below the $49, 5% ratio in the prior year period.
Jacky: We expect our fourth quarter 2020 for compensation to revenue ratio will remain at 48% assuming fourth quarter revenues come in as expected.
Jacky: Promotion and servicing costs decreased by 32% from the prior year period, reflecting a significant reduction of trade execution and clearance expenses from Bernstein research.
Jacky: We now expect that reduction in full year promotion and servicing expenses to be at the higher end of our previously communicated guide of down 18, 20%.
Jacky: G&A expenses declined by 1% in the third quarter versus the prior year period in line with our guidance.
Jacky: Recall that this quarter's G&A included approximately $12 million in accelerated lease expense, which was embedded in our prior guidance.
Jacky: We continue to expect full year 2020 for G&A expenses to decline in the mid to high single digit range on a year over year basis.
Jacky: Third quarter interest on borrowings decreased by approximately $5 million from the prior year period.
Jacky: Selecting seasonally lower debt balances in addition to previously communicated debt repayments.
Jacky: The third quarter effective tax rate for a b L. P was approximately 4%, which was lower than expected primarily due to the favorable tax impact of the reduction in the carve out contingent consideration liability.
Jacky: Our guidance for a L. P. S effective tax rate in 2024 is now a range of 5% to 6% down from the prior range of 6% to 7%.
Jacky: Now moving on to slide 11.
Jacky: I want to focus on the trajectory of our firm right base fee rate.
Jacky: <unk> of <unk> 20 for the firm wide fee rates stood at $39 nine basis points rebounding from its 2024, Lois Unsupportive asset class and channel mix shifts.
Jacky: There are many factors that can impact the fee rate and we will not cover them all but some of the key trends in the third quarter include.
Jacky: Sure retail inflows in capital appreciation in our flagship income strategies, such as American income and global high yield enhancement fee rate contribution.
Jacky: Equity markets were also supportive, particularly given our retail exposure in active equities.
Jacky: Active equity outflows were primarily concentrated at the institutional level, while we grew organically in higher fee retail services.
Jacky: We also saw accelerating funding activity within alternatives, which had a positive impact on the institutional channel theory.
Jacky: Growing our private markets offering is a strategic priority for us supported by our partnership with equitable.
Jacky: While we expect our fee rate to remain mixed dependent in the near term we have maintained our fee conscious strategy over the last few years evolving our product capabilities and regional sales mix to mitigate some of the fee erosion witnessed across our industry.
Jacky: Slide 12 reflects the breakdown of our performance fees by private versus public strategies.
Jacky: Our total performance fees more than doubled in 2023 versus the prior year and they are on track to grow at high teens rate in 2024, assuming the midpoint of our updated guidance of $145 million to $155 million.
Jacky: Private alternative strategies have been the primary drivers of our performance over the past few years.
Jacky: These strategies include commercial real estate debt carve out and middle market lending also known as AB private credit investors or a b PCI.
Jacky: A b PCI is the largest contributor to the performance fee bucket.
Jacky: Well some strategies are more volatile than other and we expect lower interest rates to dampen the trajectory of feature that we already have line of sight to $70 million to $75 million of recurring hurdle based performance fees for 2025.
Jacky: Please note that our estimate assumes a lower interest rate environment.
Jacky: Performance related fees for private alternative strategies are more highly valued by the market over performance fees from traditional public market services and we believe this incremental disclosure I should clarify for investors the characteristics of Phoenix.
Jacky: Specifically, a b PCI performance fees are largely driven by its predictable income through contractual interest payments.
Jacky: No sale or repayment of the underlying loans are required to generate these fees.
Jacky: Hopefully this additional disclosure will lead to greater appreciation of the consistent fees, we generate from our growing private markets business.
Jacky: Turning to slide 13.
Jacky: This quarter marked another milestone on our path towards sustainably higher margins.
Jacky: As of the third quarter, our adjusted operating margin stood at 31, 3% up 310 basis points year to date, reflecting the benefit from improved market and the deconsolidation of Bernstein research.
As we noted on our last call our early exit from our previous New York Office resulted in 12 million of incremental lease expense that's corner.
Excluding the duplicate lease expense <unk> margins would have been nearly 33%.
Jacky: We completed our New York City Office move in September the last major step in our North American relocation strategy.
Jacky: As a result, we expect an incremental 100 to 150 basis points of margin expansion going forward.
Jacky: Based on current market levels, we forecast a baseline adjusted operating margin of 33% for 2025 with upside potential from favorable markets.
Jacky: We also see additional margin expansion over time as we continue to scale the business.
Speaker Change: Before opening the line for questions I want to thank my colleagues and their considerable efforts and acknowledged the significant progress. We have made as an organization, we remain committed to allocating capital efficiently, creating value for our clients our investors our employees and all our stakeholders, while we concurrently diversify and grow our business.
Speaker Change: With that we're pleased to answer your questions.
Speaker Change: Later.
Speaker Change: Thank you and we will now begin the question and answer session.
Speaker Change: If you have dialed in and would like to ask a question. Please press star one on your telephone keypad to raise your hand and join the queue.
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Speaker Change: We ask that you. Please limit your initial questions to two in order to provide all callers an opportunity to ask questions. You are welcome to return to the queue to ask any follow up questions.
Speaker Change: Again, it is star one to join the queue.
Speaker Change: And your first question comes from the line of Ben <unk> with Barclays. Your line is open.
Speaker Change: Hi, Yeah, good morning, and thanks for taking my questions.
Ben: Appreciate the updated disclosure on the performance fees I was wondering if you could talk a little bit more about a b PCI. It looks like I would presume from in 2023, you had a big pickup in performance fees as rates rose generally it looks like it's intended to be maybe flattish to up slightly in 2024. So can you talk a little bit more of that stress more about that strategy. What the kind of growth drivers are what does that look.
Ben: And how should we think about what that May look like in a declining rate environment should we see some compression of the fees with rates come down or what are the other factors to consider there.
Ben: Sure Ben This is Matt bass happy to happy to take the question first I would kind of anchor back to what we did late last year in terms of the enhanced disclosure on 80 PCI.
Ben: Good kind of background to understand the growth and the drivers of the business, but as it relates to the performance fees, but they are the most predictable out of the private markets platform. They represent the majority I would say there there are a lot of drivers that you have to appreciate behind those performance fees, obviously, it's volume and <unk>.
Ben: You can have an impact.
Ben: Base rates have an impact sales so that has been a tailwind for us that'll be more of a headwind going forward.
Ben: Spread is an impact we've seen some spread compression. This year is overall kind of public markets and private markets tightened that's had an impact as well.
Ben: There is mark to market of course and credit as well. So those are all the factors.
Ben: All that said, we do we do see that as a consistent growth. If you kind of strip out strip out mark to market. We've seen a nice trend in line with in line with revenue growth I'd say going forward, obviously, not all of our mandates.
Ben: In in PCI have had incentive fees. So that's going to vary based on channel and obviously, where we're growing is going to impact the amount of.
Ben: AUM with performance fees going forward with that business.
Speaker Change: Got it very helpful. And then maybe kind of following up on the same on the same subject what do you see as the largest you know potential future drivers, especially private market's performance fees I know you in September announced the launch of a new.
Speaker Change: Kind of democratize credit vehicle what else as we think further out what else should we see as potential added added about potential adders to us at that one.
Speaker Change: Yes, it's kind of anchor back to our growth strategy more broadly for privates, which we've articulated. So we're we're scaling existing funds existing evergreen funds. The case of <unk> private credit investors, we've got a stable of evergreen funds many of those generate performance fees.
Speaker Change: We're going to be launching we have launched products in existing and new channels.
Speaker Change: We've mentioned our focus.
On the retail side, leveraging our experience and track record in Bernstein private wealth. There is a big focus on the insurance side, obviously theres going to be a mix across those two channels, where you were able to generate performance fees less stone insurance given more of an investment grade nature lower spread kind of target both strategies and third we're going to continue.
Speaker Change: Two kind of thoughtfully look to extend our teams with.
Speaker Change: With 80 private credit investors, we talked about the addition of the <unk> lending strategy last year. So combination of those gives us comfort in the organic growth trajectory and you know it's going to be a mix on performance fees I think generally the more we grow in.
Speaker Change: In the insurance side more investment grade private credit.
Speaker Change: On your net debt is now make up less of a performance fee profile. So it's going to be a mix and channel dependent.
Speaker Change: Alright, I appreciate that thanks, so much.
Speaker Change: And your next question comes from the line of Bill Katz with TD Cowen Your line is open.
Robin: Hi, Good morning. This is robin holding on for Bill Katz. Thank you for taking the question.
Speaker Change: I was wondering if we could just touch on the broader private market strategy. If you could provide an update on the timeline to $100 billion in private markets.
Speaker Change: You get there from the current 68 billion.
Speaker Change: Any update on where you think the best opportunities are.
Speaker Change: I know you just touched on the contribution from equitable maybe if you could quantify that at all and then.
Speaker Change: Maybe some of the organic growth there as well.
Speaker Change: Sure.
Speaker Change: We've shared our longer term target as part of Equitable's Investor Day last year.
Speaker Change: We remain confident in the target I would say it won't necessarily be linear, but we've got good support if its the equitable strategic partnership that fits our business and private wealth.
Speaker Change: In terms of how we get there organically we've laid out the three pillars that we continue to execute on in terms of scaling existing capabilities across those channels launching new products to new and existing channels right as well as team extensions, which will continue to evaluate what we'll look at M&A, but opportunistically, we think the platforms.
Speaker Change: <unk> complete.
Speaker Change: In terms of the best opportunities look we think that the.
Speaker Change: The private credit market.
Speaker Change: Has a lot of room to continue to grow its matured significantly over the past 15 years from what was an opportunistic credit market to a more diversified direct lending market, we see corporate direct lending continue to grow and mature for sure and at the same time the growth in other forms.
Speaker Change: Private credit asset backed finance commercial real estate infrastructure, the latter being very diversifying to traditional corporate credit. So we see that as a very attractive longer term growth opportunity. It's also one of the reasons.
Speaker Change: Behind the acquisition of carve out two years ago, and how complementary that business is in terms of end market focus in those non corporate credit asset classes. So.
Yes.
Speaker Change: Let me add that three data points to support what Matt was highlight saying number one on equitable as you know we had a $20 billion commitments. We are only 11 out of the 20 right now so that will definitely help in terms of achieving the hundreds number two in private wealth, we raised $2 3 billion.
Speaker Change: <unk> in the first three quarters record.
Speaker Change: Levels in 24 hours, so that gives us confidence in in terms of our organic growth profile for all in private wealth and number three in terms of new channels that Matt touched on we are definitely seeing more traction on the insurance channel given we made all the investments to create more investment grade fixed income substitute products auto.
Speaker Change: Private credits and then our new retail vehicles like you highlighted like the interval fund we launched and are in telephone is already in the market. We already on boarded to add third party platform and we already have a couple of hundred million dollars in that product already so as a result, the new channels will definitely be part of the growth story.
Speaker Change: And we see the pre pipeline activity with clients and some of their platforms and money coming in on the retail side.
Speaker Change: Thank you that's really helpful. And then maybe if I could just have a quick follow up on the margin guidance for FY 'twenty five assuming flat markets could you remind us of the incremental margin that we might be able to expect on market action and NAV.
Speaker Change: Just on the margin and generally access as I said, we delivered 31, 3% in the quarter, we've guided to 33%.
Speaker Change: 2025, assuming flat market.
Speaker Change: We did not model market and we also continue to grow and scale our business for the future.
Speaker Change: In terms of the specific no question.
Speaker Change: I think I'll have to follow up afterward, I have an estimate.
Speaker Change: I want to Overcommit, So we'll take that one on the call afterwards, if that's okay.
Speaker Change: Okay.
Speaker Change: Okay. Thank you very much I appreciate it.
Speaker Change: Okay.
Speaker Change: And your next question comes from the line of Craig Siegenthaler with Bank of America. Your line is open.
Speaker Change: Yeah.
Craig Siegenthaler: Good morning, Seth Jackie hope everyone's doing well.
Craig Siegenthaler: After a long wait the reallocations are finally here so.
Craig Siegenthaler: And then actually you guys are seeing in both fixed income and the ops, but sadly not as much an active equity but my my question here is after we get through the election and some additional fed cuts do you think we could get another step up in Reallocations and duration extension activity, especially if the yield curve steepens.
Craig Siegenthaler: Appears that you guys are still very well positioned with this just given your business mix and performance.
Speaker Change: Hi, Craig this owner let me.
Speaker Change: Take a first pass at it I mean number one definitely we are seeing great strength in fixed income and alternatives. Yes, Youre right. We are one of the early beneficiaries of the rotation into fixed income.
Speaker Change: With $20 billion of.
Speaker Change: Net active inflows, but also in equities I wouldn't write them off as you know we had active.
Speaker Change: Net flows in our retail franchise in equities and this was the second quarter. So we're definitely seeing some channel strength that is in retail.
Speaker Change: Our platform continues to be quite diversified going back to your question on the Steepening of the curve absolutely. We definitely are seeing institutional interest in terms of further allocations to fixed income and that will definitely help in terms of new mandates and not to mention our again insurance franchise and we started.
Speaker Change: To see new client activity, there as well so all in all Steepening of the curve will definitely help us in terms of carrying out the momentum on <unk>.
Speaker Change: Fixed income and the broadening into other asset classes, starting with private credit, but also other adjacencies.
Seth Bernstein: It's Seth Greg and I would just note that where we are seeing particularly strong demand is in the U S and the Muni SMA category, where we've really seen.
Seth Bernstein: Even stronger net flows as we take onboard new arrays to our platform.
Seth Bernstein: And that is continuing now.
Seth Bernstein: And I do think Thats, where youll see the particular duration extension as as Thats, where it will play out.
Seth Bernstein: We also know that in Asia. Our flows are as strong today as they have been in a few years.
And that continues so I certainly think it's underway in fixed.
Seth Bernstein: And we're still seeing some parts of the active equity flows as owner had mentioned, albeit.
Seth Bernstein: Where we were seeing the issues was more on the institutional side.
Seth Bernstein: Outflows.
Seth Bernstein: Yes.
Seth: Seth Thanks for that my follow up is another follow up on expenses and the op margin.
Craig Siegenthaler: So we've seen some nice improvement already and the bird seeing deconsolidation was a big factor, but the big event. We had been waiting for is really in December when you stopped paying rent on your former headquarters at <unk> $45 six Avenue. So how much of that 15 million run rate should we expect to drop to the bottom line as it Lee.
Craig Siegenthaler: <unk> expires in two months and it sounds like from the math on the 100 and 150 basis point of margin expansion target that you gave us the paired remarks, it sounds like most of that 50 million shopping online.
Speaker Change: Thank you for the question that's absolutely correct. Our intention is to sell most of that if not all of it in terms of bottom line.
Speaker Change: Thank you Jackie.
Speaker Change: And your next question comes from the line of John Dunn with Evercore ISI. Your line is open.
Speaker Change: Hi, Thank you.
John Dunn: You guys have talked in the past about increasing your business with third party insurers you mentioned.
John Dunn: You highlighted investment grade product can you give us an update on this channel and the potential that outlook and how do you go about making that sale.
John Dunn: Yeah.
John Dunn: Sure.
John Dunn: The good news is again, we are seeing.
John Dunn: Accelerated commercial momentum whether it's through the traditional.
John Dunn: Third party channel as well as in new cap formation in the insurance industry through our engagement with different reinsurance sidecar opportunities.
John Dunn: In terms of.
Speaker Change: Uh huh.
Speaker Change: The activity. We recently for instance won a competitive process.
Speaker Change: What a large reinsurance company on the property and casualty side to add to their asset management roster in investment grades. So that's an example of the competitive strength. We are building in this channel on back of the investments we made.
Speaker Change: Made into building that channel rights whatever done we basically created influenced dedicated resources from tabak.
Speaker Change: We expanded our portfolio management capabilities dedicated to insurance companies on the multi sector side and then on top of that we created very capital efficient insurance wrappers, and Iga oriented private credit strategies, whether it's debated feeders for the middle market lending raise the mortgage kind of strategies as well as naphtha.
Speaker Change: And as they put new extensions out of our middle market lending platform.
Speaker Change: So we remain quite confident that we will see more new third party insurance money coming into these products.
Speaker Change: This quarter, our spanning into 'twenty five. Furthermore, obviously the equitable's ranked in the Islay markets registered into market helps us with the general account growth. In addition to some of the expansion in the lifetime income space, where again, we benefit directly and indirectly.
That new product channel. So all in all those are the drivers of the expected continued growth in the insurance channel for us equitable as well as third party and its not just here in the United States, either we're seeing that interest amongst insurers both in Europe and in Asia as well, 100% of like for instance in Asia.
Speaker Change: Have been the early investors in our growing systematic fixed income franchise and that is a really nice thing to see both from expansion in <unk>.
Speaker Change: Fixed income, which plays into the duration and Steepening of the yield curve story and then obviously the international franchise, we have including core markets like Japan.
Speaker Change: Got it and then maybe one on private wealth you guys expressed confidence that you know that.
Speaker Change: The outlook for flows in that channel, maybe you could just talk about stuff that you expect to.
Speaker Change: To start in flowing beyond what's already working right now.
Speaker Change: Yes sure John Thanks for the question.
Speaker Change: Like first of all.
Speaker Change: As the rates come down it helps with the flows and we have seen that playing into our numbers on a gradual basis in 'twenty four why does rates coming down help us number one.
Speaker Change: Our risk appetite goes higher in terms of moving away from cash, which we have seen and that we have seen also an increase in M&A activity and M&A activity matters for us because we have a very strong franchise with business owners and when there is more monetization liquidation kind of events it turns into net flow for <unk>.
Speaker Change: Our private wealth channel and as we have discussed our ultra high net worth channel is a faster growing segment of our business.
Speaker Change: That's basically the story that will.
Speaker Change: Play so as a result.
Speaker Change: Main optimistic about our flow trajectory moving into October and beyond and that Furthermore, I want to clarify something.
Speaker Change: At the end in terms of our flow reporting we tend to take a conservative approach, we don't take credit for dividends or interest while some of the wealth managers and their network calculations take credit for that in certain cases, it might add add to couple of percentage net.
Speaker Change: Net flows.
Speaker Change: So Hans.
Speaker Change: Our conservative net flow methodologies, sometimes makes it harder to make apples to apples comparisons.
Speaker Change: Thanks very much.
Speaker Change: Yes.
Yes.
Speaker Change: And your next question comes from the line of Dan Fannon with Jefferies. Your line is open.
Speaker Change: Good morning.
Speaker Change: Rick Roy on for Dan Shannon.
Speaker Change: And.
Rick Roy: Two sets of questions one one focus on the alts and then.
Speaker Change: One one elsewhere.
Speaker Change: On car valve now close to three years since the close.
Speaker Change: How do you view I guess, the current alternatives offering, especially considering the current market dynamic that's going on with CLO.
And separately do you have appetite to do additional M&A.
Speaker Change: Beyond carve out now given the timeline since close.
Speaker Change: Sure, It's Matt I'll take this so in terms of carve out.
Speaker Change: A little over two years post closing and I would say look we first of all we got we thought in terms of the people the investment capabilities the culture.
Speaker Change: We've got strong conviction in the business in the long term growth opportunity specifically the markets that carve out operates in if it's private asset backed finance broadly.
Speaker Change: The energy transition space, they're opportunistic investing capabilities. So all kind of growth vectors. The channels, we're looking to penetrate if its insurance and retail as well.
And again very complementary to our overall existing platform.
Speaker Change: So look we're starting to see some.
Speaker Change: Some traction here based on the products that we've been developing over the past two years, we mentioned.
Speaker Change: The credit opportunity fund the interval fund some traction on the insurance side asset backed finance more broadly so.
Speaker Change: Remain.
Speaker Change: Very very convicted in kind of a long term growth opportunities a key driver for the overall business.
Speaker Change: <unk> closed the third quarter was very strong we had $1 $3 billion in CLO reprice multiple CLO both in the U S and.
Speaker Change: Overseas, so that speaks to the global nature of our CLO platform and the good thing about the <unk> CLO don't flow through our pipelines so that flows through sales typically.
Speaker Change: So that level of an incremental bonus that you don't typically follow in the pipeline.
Speaker Change: Understood I appreciate it.
Speaker Change: Good.
Speaker Change: Switch gears, maybe talking about the APAC strategy, and then kind of separating out into two regions, obviously, Japan retail, especially has been a source of.
Speaker Change: Pretty solid organic growth for you guys. But then also on the other end of spectrum talking to obtaining a license in China earlier this year.
Speaker Change: If you could kind of expand upon the strategy is there a plan perhaps to expand.
Speaker Change: On the Japan region, perhaps expand.
Speaker Change: Into different channels and then also what is has there been any changes to the go forward strategy for China as well.
Speaker Change: Yes sure.
Speaker Change: Let me address that.
Speaker Change: In Japan.
Organic growth continues.
Speaker Change: And despite some of the.
Speaker Change: Changes with elections et cetera in Japan.
Speaker Change: Did not lose any major momentum so that's great news and it helps a lot with our retail equity picture and then we have a strong institutional presence in Japan as well as I touched on before for instance, it theres been an early adopter of our systematic fixed income strategies and institutional is an example.
Speaker Change: So I expect defensive continue to be.
Speaker Change: Growth geography for us with very healthy fees and margin.
Speaker Change: In terms of the rest of Asia as you know Asia is Japan also is hard to ignore for US given it is a very sizable region and that has been a big driver of our taxable fixed income growth and we continue to look for extensions as we have accomplished in Taiwan looking at.
Speaker Change: Etfs looking at private credit.
Speaker Change: As additional building blocks for accelerating our growth in that region, China as we.
Speaker Change: <unk> laid out in the past is a long term play for us like many of our peers.
Speaker Change: As you remember, it's a startup business. We just got the license in December 2023, and we launched our first one only in April which was probably one of the worst times when the equity markets very pleased with the performance of that IPO.
Speaker Change: I think at that time, it was a top decile asset gatherer, albeit very low capital raise levels at that point and we continue to evaluate our strategy in China to see what are the ways to accelerate the time to breakeven, it's not an outsized investment for us.
And as a long term play so no major changes in our strategy, it's not going to be accretive to our revenue or earnings in the very short term, but it does.
Speaker Change: Sizable long term potential.
Speaker Change: Got it I appreciate the color there and perhaps one one quick one on carve out the updated tax guidance related to the carve out contingent.
Speaker Change: Contingent liability is that an expression on perhaps.
Speaker Change: Housing for future carried interest.
Speaker Change: You know relative to when when when terms of certain obligations were made at the time of the deal or if you could just expand on how that impacted tax filings if I'm correct there.
Speaker Change: Sure and I'll, let cathie chime in on the tax specifics, but this is related to contingent consideration at the time of the acquisition so the earn out.
Speaker Change: So we look at this on a quarterly basis and certainly with some of the growth.
Speaker Change: Being pushed out capital raising cycles longer net deployment slower initially, although that's certainly kind of picking up.
Speaker Change: That that was that was behind the contingent liability change so all that considered we still have.
Speaker Change: A real conviction as I mentioned in the business and particularly where we're set up to grow in terms of asset classes. If it's private asset backed space energy transition and the channels. We are growing and so again, all really consistent with our thesis behind the acquisition, which was to kind of leverage the existing teams investment capabilities.
Speaker Change: Asia capabilities into lower cost of capital strategies.
Speaker Change: New channels as well.
Speaker Change: And just to add on that in the cards.
Speaker Change: Yes, the tax doesn't have anything to do with the with Carey, it's really sorry, because of the write down and therefore, it's onetime in nature this quarter.
Speaker Change: Got it. Thank you appreciate it.
Speaker Change: Okay.
Speaker Change: And your next question comes from the line of Alex <unk> with Goldman Sachs. Your line is open.
Speaker Change: Hey, everyone. Good morning. This is actually <unk> filling in for Alex. Thank you for taking our question.
Speaker Change: Just a broad question, how do you view the active ETF opportunity set from here.
Speaker Change: The type of dialogues that you are having with clients and intermediary channels to assess the appetite for this product.
Speaker Change: Sure.
Speaker Change: Let me take that.
Speaker Change: We are roughly two years into our active ETF journey, we had our second anniversary actually in September 24, very pleased with the success out of the gates at two years and five plus billion dollars of AUM across 15 products.
Speaker Change: This is all U S. At this point given active Etfs have been.
Speaker Change: More widely adopted in the U S given tax on other differences.
Our product innovation continues we continue to look at.
Speaker Change: <unk> dramatic as well as.
Speaker Change: Buffered ETF type of.
Speaker Change: Risk managed strategies and we continue to explore.
Speaker Change: The timing to take our capabilities to overseas markets, whether it's Taiwan or Korea as examples.
Speaker Change: The good news about our trajectory is for the ETF product to be added to some of the large broker dealers like warehouses think about Merrill Morgan UBS et cetera, there are typically minimum.
Speaker Change: At that time in market than AUM thresholds. So the longer you are in the market the more you'll build up in other channels, whether it's our own private wealth channel RIAA channel direct channels down your ability to grow in the large broker dealer channel goes up.
Speaker Change: Given we are.
Speaker Change: Strong partners in that channel with our other products like SMA Etfs remains as a great cross sell opportunity for us and you will see more of our Etfs, making.
Speaker Change: Shelf as the.
Speaker Change: Time passes with the.
Speaker Change: Duration of the product and AUM thresholds clearing the minimums. So overall, we remain bullish.
Speaker Change: And that will be.
Speaker Change: Net flow story for us moving forward I think it's worth just noting that 70% of that 5 billion is new money and not conversions from existing strategies that to just the owner's point it enabled us to take some of our newer ideas and apply them into new space and so it's worked and we continue.
Speaker Change: To want to push on that.
Speaker Change: Great. Thanks for the color.
Speaker Change: And there are no further questions at this time, Mr. Joe Kelly I will turn the call back over to you.
Speaker Change: Yeah.
Joe Kelly: Thank you all for joining today. Please follow up if you have any questions with IR have a great day.
Joe Kelly: [music].