AllianceBernstein Holding L.P. (AB) Earnings Call Transcript & Summary

Good morning, everyone. This is Craig Siegenthaler from Bank of America, and it's my pleasure to introduce Ali Dibadj. Ali is the CFO and Head of Strategy for AllianceBernstein. He's one of the newest CFOs in the industry as he was just appointed this year. Ali was a senior research analyst in the firm's equity research department from 2006 until 2020 covering U.S. beverages. He was also ranked #1 by institutional investor for 12 consecutive years. Prior to research, Ali spent almost a decade Consulting, including McKinsey. Good morning, Ali. Thank you for joining us today.

Thanks, Craig. Thanks for having us.

So I just wanted to start with a quick intro into AB. It was really formed in its merger in 2000 when it combined 2 businesses: Sanford Bernstein and Alliance Capital. Bernstein was founded in 1967 as an investment firm for private clients. It eventually filled out a leading equity research platform and its investment business focused on value investing. Alliance Capital was founded in 1971 through the merger of the asset management businesses of both DLJ and Moody's. And then fast forward today, the firm manages more than $740 billion of AUM and operates 3 businesses: asset management, wealth management and research. The firm has also been generating positive organic growth for the last few years despite a challenging industry backdrop for contents. Ali, before we begin, do you want to provide a quick update.

Sure. Thanks, Craig. We've come a long way in our 5 decades as a firm, as you reminded us a little bit. Hopefully, some folks have seen the slide that we use opt-in on our quarterly earnings, but also internally, it's a one pager with kind of 7 points on it. And if you see it, I'll kind of go through some of those. And effectively, this is what we measure ourselves on, this is what we measure ourselves [indiscernible] shareholders. And it starts very much and you mentioned this, Craig, with top line growth. We are comfortable with our ability to deliver sustained growth to our shareholders, hopefully, by delivering to clients what they want. The foundation of that is a differentiated long-term performance. We think about that all the time. We measure that all the time. And the results are, hopefully, that we can continue to grow our net flows. We've had about 4% active annual organic flows this year. Over the past 5 years, it's been about 2%, so the low single digits and obviously, a very difficult industry backdrop, and particularly active equities has been accelerating. So we feel pretty comfortable with our ability to drive growth, which is the first focus. A big reason we can do that isn't just the businesses that we have currently and that we have had for a lot of that history that you mentioned, Craig, it's also diversifying. We've gone into alternatives, in particular, just over the past year or so, we've brought on board a European commercial real estate debt team. Now we brought on board's liquid alternatives that have an ESG focus to them. We've partnered with a really interesting opportunistic secondaries firm, and there's more, there's more to come. So expanding our alternatives platform is a really big part of our growth trajectory. A part of that is our very close partnership with Equitable. Equitable, the large life insurance company that owns 65% of us is locked in arms with us to develop and grow our business, particularly around the alternatives businesses. It's not just based on the $121 [ something like that billion ] of permanent capital that they have with us. But it's also based on a seed capital that it gives us to grow alternative businesses, as in other business, about $10 billion is what they committed to most recently. And our track record has historically been to take the seed capital or founders capital as they and others give us and multiply that by 4, really good return on that investment, both for us and obviously for Equitable as well. We can deliver them [indiscernible] improvements for their general account as well as a higher multiple, higher value business. Now those are kind of the top line drivers of us. Of course, we want to do all of that in a manner that delivers from a margin perspective as well. Our target is to continue to have our incremental margins be 45% to 50%. And I get benefit out of our growth, get scale out of our growth, 45% to 50% incremental margins. That won't happen necessarily every quarter. That won't happen necessarily every year. We'll invest sometimes to grow the businesses. But over the long term, 45% to 50% incremental margin is what we're targeting, on top of that, our structure provides certain benefits to shareholders, we have a relatively low and stable tax rate at this point, given our grandfather PTP structure. Moreover, we have a very high distribution because we pay out 100% of our adjusted income. If you think about the past 12 months or so, we're about 350 -- $3.57 per unit, including what we plan to do in the Q3 is about a 6% yield in a relatively low-rate environment. All that comes together what we believe to be a very good brand proposition, brand proposition, certainly for our clients, most in partly, and also because of that to our shareholders. So net-net, we feel pretty comfortable with where we've been and where we're going to go. Craig, hopefully that gives folks on the phone who don't know us as well, a little bit of background and happy to answer any questions you have.

Ali, that was great. I appreciate the update. Let's start our conversation, big picture today with the AB stock. When you look at the peer group, it's outperformed a lot over the last 5 years in the range of 130%. That's a pretty big delta. What drove this in your view?

Look, I think it's a little bit of what we talked about just a moment ago. We have several engines that are driving success for us, driving growth. The first one has got to be and will continue to be driving organic growth on our core businesses, the active equity business, the active fixed income business. We've recently obviously gone into alternatives as well, and we'll talk about that in a moment, but really driving that growth. Now why can we do that? Well, we can do that because we focus on delivering for our clients outperformance relative to benchmarks, relative to what they can get elsewhere. And that's a really big focus for us. So delivering our core is kind of step one of what we've been trying to deliver. We've also been diversified, right? So I mentioned alternatives a second ago. A great partnership we have with Equitable on permanent capital and the $10 billion they've committed to us. But it's not just alternatives, it's other areas like ESG and responsible investing that we focused on. Because other areas of filling holes in the equities of fixed income and multi-asset areas that we have. We've certainly diversified the products that we offer our client base. And again, it comes down to delivering what we think clients will value. And then hopefully, they continue to value what we have been delivering. Now that's all product, right? If you're remiss in not talking about what we've been able to deliver from a client service perspective, a client perspective expanding where we sell and what we offer, whether it be a broader partnerships in institutional, whether it be driving retail growth let's not forget, 11 of the past 13 quarters, we've had very, very strong growth across asset classes within retail. So a really great distribution platform to do on top of that. So you put all that stuff together, again, delivering what we've got, expanding it, diversifying and delivering effectively is what we think the clients want. And we think we've been rewarded in the marketplace.

Great. Ali, let's move on to your private alternatives business. You have $21 billion of committed capital. You have more than $10 billion of commitments from EQH, your strategic owner. Can you walk us through the business and then also highlight what white spaces remain?

Sure. So it's a very important business to us. I mentioned it a couple of times already. We believe that in the past 10 years, we've built a very, very strong business. We want to continue to build that business. So you mentioned it's about $21 billion of AUM, call it $11 billion or $12 billion of that is in our middle market direct lending business that we have. We have a U.S. commercial real estate debt business, which is in the kind of $6 billion or $7 billion range. And then we have a European commercial estate that I mentioned. A fund of funds, a partnership and on and on and on. But $21 billion in total and growing quite rapidly. We continue to believe that, that should grow in the high single, low double-digit range and not just where we have it currently from a channel perspective but also diversifying channels as well. Important part of that, as you mentioned as well, obviously, is the capital commitment that we have from Equitable. So $10 billion number, which is a capital that partially will be reallocated, partially will be new to us, but all will be used to build new businesses for us, particularly in the alternatives world, whether it be private credit or whether it be in the private placement. And the reason for that, as I mentioned a moment ago, is really this virtuous cycle that Equitable and we have locked arms on. We can build a business that's higher fee, it's longer dated, it's higher multiple [ for Equitable ] at the same time, delivering for them as a client, better yield, and obviously, for all of our clients better risk-adjusted returns. And again, as I mentioned a moment ago, we continue to believe that we can grow that business once we see it by something like 4 or 5x. So a pretty good return on that investment on behalf of our shareholders and our clients. You mentioned white spaces. There are a few white spaces we're looking at very, very carefully right now. Broadly expanding both geographically as well as from adjacencies is what we're thinking of. So for example, infrastructure, debt and equity, we're very, very close to that landscape and looking at those businesses. Private asset-backed broadly, something that's very attractive to us. We do think we can expand geographically into Europe or Asia, just like we did with our commercial real estate debt business. So there's plenty, plenty of white space for us to go. And again, the reason we think we can get into those areas and grow those businesses is the foundation that we've built so far. And it's also the ability to deliver for clients through our client servicing channels, whether it be institutional, whether it be certainly over time, perhaps retail and very, very importantly, our private wealth channel. Our private wealth remains a key source of both seed capital and growth for alternative offerings, and we think we can continue to deliver what clients' needs are in that channel as well.

Ali, we hearing this a little bit in the last response. But have you been able to leverage your special relationship with EQH to really accelerate the growth of your private alts business?

So look, it fits both -- growing our private alts business fits both what Equitable wants to do and what we want to do. If you think about Equitable is a large life insurance company that's seeing rates, that we're all seeing, interest rates that we're all seeing and wants to improve the yield on their book of business to be competitive with the market that's out there and to deliver for their shareholders. A way to do that is private -- the private markets. Guess what, we have private market capabilities. Not a coincidence, right? It's very strategically thought through for us to develop private market capabilities that they can take advantage of by investing in and delivering for their policyholders and shareholders as well. At the same time, us building a business. That's building a business but, again, is longer dated has higher multiples over time, better margins, a longer longevity from a client perspective. And most importantly, most importantly of all, delivers on something that clients want. So it's very much of a symbiotic relationship. It's a virtuous cycle, we call it. We believe we can continue to grow that business. The $10 billion number that we mentioned a couple of times now is very, very important to that growth.

So let's pivot into profitability and expenses for a moment. In your opening comments, you talked about 45% plus incremental margins. It's actually trended much better than this over the last 3 years and beta has helped, but you also have some large expense saves in the pipeline coming. The big one is the headquarter with Nashville. So how should we think about the operating margin opportunity? And then what has allowed AB to post better expense management results than your peers over the past few years?

Yes. So our guiding principle, it's a little over, as you mentioned, 45% to 50% incremental margins. That's worth noting that, that's higher than our current margins. So over time, we do believe that our margins should improve. And I underline over time, 45% to 50% incremental margin for sure will not happen every quarter. It will not happen every year because we've seen [Indiscernible] so I'll get some of those investments in a moment. But we do believe the trend should be upward, right, 45% to 50% incremental margins getting us there, that is a guiding principle in terms of where we invest and where we prioritize investments and also where we save costs. Now you mentioned Nashville is a big driver of those savings. You're correct, expenses was one reason for that. There are many other reasons why we made the move to Nashville, but expense savings is certainly one of those. For example, this year, we're expecting about $0.04 of benefit per unit, and it should go up over time. Some of that was pulled forward from next year. But over time, that should go up to reach what we believe is $75 million to $80 million in annual savings beginning in 2025. That's one of the reasons, by the way, Craig, to the part of your question why we have been able to deliver more leverage than most of our peers, better incremental margins than most of our peers is that move to Nashville. The relocation is going quite well. Now as I mentioned, things we're investing in as well. There are things that we're investing in that are deliberate and things that we're investing in that candidly, we don't have much of a choice. And I mentioned some of this on the earnings call that we just recently had. The delivery investments are things like well to build the headquarters in Nashville, you've got to build the headquarters in Nashville, and you got to have relocation expenses. And so that's something that we're very mindful of and being very careful on how we spend, but that's an expense we have to put it into the business to get out those cost savings of the $75 million to $80 million run rate in 2025 and beyond. So those are deliberate decisions. There are others that are deliberate decisions that we invest in to drive growth. So we spent quite a bit of effort and resources on digitizing the way we serve our clients in private wealth, in our retail channels, institutional as well, really delivering the best to a client group that has been essentially spoiled by everything else that one does in one's life from an e-commerce perspective, for example. So we're really digitizing as an example of what we do with our clients. So there are many other examples of this, but we're investing in things that get us really, really good returns. Again, deliberate. I would say there's -- as I mentioned a moment ago, some undeliberate expenses that we wish we didn't have, and that's really inflationary expenses, that are market data services, professional fees, et cetera. There's real inflation, T&E, there's real inflation in the marketplace that I think all of us are going to have to be mindful of, and that's going to impact our margins, for sure, going forward like everybody else, but we think we have the cost savings to help offset some of those costs.

Ali, you partially answered this in the last one, but I want to isolate the commentary on the headquarter move to Nashville. Your target is $75 million to $80 million by 2025. It's very back-end loaded. You've already started to see small saves today. Can you update us on that progress?

Sure. Absolutely. So I mentioned it a moment ago, expenses is one of the reasons we moved to Nashville for sure, and I'll get back to it in a second, but there are really 2 other important reasons. One was to really increase the energy, the entrepreneurialism or entrepreneurialism, I guess, of the firm with new blood people, from different industries in a new environment, by the way. So increasing the energy of parts of the firm was certainly one part of the move to Nashville. And knock on wood, so far, that's gone really, really well. You can see that through some of the new launches that we have and the ideas that we're incubating as well. The second reason was employee lifestyle. Now it could be [Indiscernible] but I will say that the demand of moving out of some dense popular cities to Nashville has gone up quite significantly, not just within our own AllianceBernstein but from other competitive firms as well for very strong talent. That's part of the reason, again, not being pressured about COVID, specifically, it's part of the reason we moved to Nashville to give employees a better lifestyle, less of the commute, lower cost of living, more space, et cetera, et cetera. Now you mentioned expenses, and of course, I'd be remiss in not mentioning expenses as a reason we're moving to Nashville. Yes, $75 million to $80 million is a pretty good number to be able to spend back in the business and to deliver cost savings for us in 2025 and beyond. We're about 75% of the way there from a headcount movement perspective, so call it 930, I think, is the latest number. So I don't know of 1,250 that's our end target in terms of having people in Nashville. Some of our savings will certainly come from moving people for sure and hiring new people, again, with the new blood. Some of our savings will certainly come, and this is why it's a little bit back-end loaded from real estate expenses, real estate expenses in New York relative real estate expenses in Nashville as we're able to curtail some of our footprint in the New York area. And so that we expect to happen more kind of a step change as we get closer to 2025 and beyond. And I will say, again, we've been very pleased with the results of the movement, both from an expenses perspective and energy perspective, an employee happiness perspective. We're getting more and more investors thinking about moving down there. Our head of -- one of our heads of fixed income, Gershon Distenfeld decided moved down there. I think there's a lot more interest and exciting opportunities for folks to move to Nashville AllianceBernstein.

Great. Let's change up the subject. AB is unique in our asset management coverage, and that's one of the few names that directly touches the retail client through your private wealth business. Most of your competitors sell through third-party intermediaries. So how does your private client business differentiate AB? And does it offer any strategic elements sitting between an asset manager and the research business?

Yes. So the short answer is yes, very much. we see our private wealth business as a true jewel of our businesses, our portfolio of businesses that we have. We believe in a strategic thesis of ours is being closer to the client is the right thing to do, and it's where winning happens, if you can be close to your client and private wealth is essential for that, and with some fresh ideas from new leadership. We've looked at pre-liquidity event planning. We've looked at industry verticals. We've looked at client segmentation. We brought on board a whole new set of FAs, which we continue to grow. We have a lot of hope for that business to continue to be a crown jewel for us for many years to come. The results are starting to show fourth -- 4 out of the last 5 quarters. We've posted organic growth in that business in a very, very tough competitive environment. Part of that is the new ideas that we brought to bear, part of that is the alternatives business as well, focused especially on the ultra-high net worth piece of the business, which is our growing -- the higher growth business within the private wealth area. And so all of those kind of deliver on what we're hoping from a client perspective. Now from a business and portfolio perspective, strategically, the private wealth business is extraordinarily important. And it allows us to seed our private alternatives business that I mentioned a moment ago. It allows us to learn from our clients and actually have that inputted throughout our businesses, whether it be from a product development perspective or otherwise. It allows us to really bring kind of our foundation, which is very unique research to our clients. Our private wealth business has some of the -- put up against anybody greatest research out there that we can deliver to our clients. And so we do feel that it's a strategically a very, very important piece of the business. I'd be remiss in not mentioning as well our ability to deliver to our clients a quicker product development in that world, whether it be our portfolios with purpose, whether it be tax aware, whether it be other things like partnerships externally that we brought to bear for our clients. It's a really great kind of just-in-time process to deliver new products and new delivery mechanisms to our clients. So it's -- again, as I mentioned at the outset, a crown jewel of our portfolio.

So you just hit on the strategic elements of the business. How do you think about the forward growth trajectory of the private client business?

So look, we see a lot of opportunity to continue to grow as we are able to deliver on different categories, different asset classes that our clients want, alternatives is a big bucket of that, ESG and portfolio with a purpose is another one, very focused on tax aware [Indiscernible]. And so supporting them -- supporting our clients when they need us most, whether it be a big liquidity event. We do a lot of our company liquidity planning. We do a lot of work on understanding industry verticals whether you're an athlete, whether you're in show business, whether you're a venture capitalist or an entrepreneur, we have these verticals and specializations. We think that all will allow us to grow our private wealth business, particularly skewed to the ultra-high net worth area. So think of kind of mid-single-digit growth for that part of the business, the ultra-high net worth area of things versus private wealth growing in the kind of low single-digit realm, again, higher, we believe -- in higher value as we deliver for our clients with different products, both from an investment perspective as well as from a managing of their wealth perspective.

Thank you, Ali. And at this point, I just want to let the audience know that you're able to ask questions, you can write them in on the screen, and we can ask them here. But I just want to remind you guys that, so please feel free to ask away. I wanted to come back to the asset management business, Ali, for a moment and focus on your growth equity franchise. The firm really benefited from the value to growth rotation over the last decade on thinking about your flagship funds like U.S. Large Cap Growth, Concentrated Growth Equities. So I wanted to see if you could provide us an update on the growth equities business and then your thoughts on the potential for client migrations between growth and value now.

Sorry, between growth and value, you said?

Yes. Yes.

Sure. So yes, absolutely, we have a great growth franchise, and we have a great value franchise and also the answer into those to 2. But all of it starts from an active equities franchise and how we think about delivering for our clients. And what we want to deliver for our clients is idiosyncratic returns, right, returns that they can't get anywhere else that can't be replicated through beta or indices or factor funds or what have you. And we measure that. We measure that internally in terms of our current portfolio managers and investment strategies. We measure that as we -- from an inorganic perspective, either by or lift out teams to bring them on board. So we try to deliver this idiosyncratic return stream to our clients. And that's, I think, is something that differentiates us. Look, you mentioned the outside, I come from a consumer background, I think very simplistically about these things. If we can deliver things that clients want, right, we'll grow, we'll deliver for them and we'll deliver for our shareholders. And so that's what is kind of at the basis across value and growth for sure. I would argue that we've also taken that step from delivery to diversify. So if you think back gosh, probably 10 or 12 years ago, maybe 12 years ago, a little bit more, we really were 2 teams, right? We had a value team and a growth team, and we've diversified quite a bit from that. We have many, many more scaled products particularly concentrated scale products that have purposes. Again, purposes to deliver idiosyncratic returns to our clients. That's something that we didn't do before or across value and growth as well. And then you couple that with very, very importantly, you've heard me say this over and over and over again, coupling that with the way we deliver this to clients, our client service arms, whether that be private wealth that we talked about a second ago, whether that be institutional, whether it be in the retail world. As we deliver these products in active equities, value or growth to our clients, that becomes a differentiating factor for us, expanding our scope with our clients. Now you are right that the market has favored growth over the past several years. We benefited from that because we had a really great -- portfolio managers has been really great, returns on those asset classes and that benefited us for sure. And to your question, if things were to take a step back from a growth perspective and go to value, the great news is, well, guess what, we're diversified there, too. We have a very storied value franchise across small cap, mid-cap, large-cap that continues to perform very, very well. In fact, our key value platforms have outperformed both a year-to-date and 1-year basis, relative value, small-cap value, in particular, in both of those periods, outperformed quite handily. Especially in the small mid-cap world, we think, again, we focus on the idiosyncratic value that we deliver to our clients, we continue to deliver that. And frankly, the good news is, given what's happened over the past, take a time frame, 8 years, 10 years to value, there aren't that many real value players out there. And we expect that if things were to change, and one could imagine if rates go up, these could shift over to value and weigh a little bit from growth, we'd be ready to catch that pitch for sure, given what we've developed over the past decades and the performance that we've had very recently.

Ali, question here on fixed income, the global thirst for yield. You benefited from your fixed income offering in the last decade, I'm also thinking of funds here like American Income and Global High Yield. But AUM in this business has been now kind of more stable recently. We've been seeing a shift towards private credit. What's your thoughts on this fixed income business? Can this grow? Or do you expect to see a longer-term trend to private and which you could also benefit from that to?

Yes. So -- okay. Let's talk about the environment a little bit, right? So the environment of what our business really is in fixed income. So from an environment perspective, clearly, with the yields where they are, high yield is less high yield than it was, but we've found opportunities. Our multi-sector fixed income portfolios have found real opportunities. You remember, our general view is to be underweight duration and overweight credit. And we have a very active duration positioning at the country level that works through that process for us on a high-yield perspective. So we are -- I guess, I say that background because we are not typical when you think about fixed income. Indeed, our institutional fixed income business except for insurance is relatively small and will be volatile, and we expect it to be volatile up and down over time from a flows perspective in that business because we're mainly a retail fixed income business, retail fixed income in the U.S. certainly in our private wealth channels we mentioned a moment ago as well as in Asia. And if you think about those channels, we've been quite strong across the board there, delivering quite well. Performance has been quite strong. We're right now at 92%, 70% and 70% on a 1-, 3- and 5-year basis in our fixed income assets that are outperforming. We focus very much on delivering that to our clients. Again, not typically in institutional, that's a little bit less of where we have our strengths, except for insurance, but certainly more on retail. Now to your point, we do see continued trends towards a private replacement cycle of typical fixed income, particularly on some of the IG side of the area where the yields are actually quite low. And as actually described, that's part of the reason we're focused in on that business, it's part of the reason we've locked arms with Equitable to develop our private alternatives platform, private credit, specifically in that realm. So we think from a firm perspective, we were very well balanced. We'll continue to deliver fixed income for our clients, particularly in the retail side of things and again, weather the ups and downs of what happens with rates over the next little while.

Great. Well, Ali, with that, we are out of questions, and we're also out of time. So behalf of everyone here at Bank of America, we just want to thank you for participating in our conference, and we hope to see you next year in person when it's back at the St. Regis. Ali, thank you very much for your time today.

Thank you for your time, and have a great see in person. Take care.