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

[Audio Gap] From Seth on the business and his perspective on the asset management landscape, as always. So welcome. Thank you for being here. It's always good to see you this time of the year.

Actually change the hotel I mean, this place is [indiscernible].

We've talked about it last year. It's -- people complain, but they secretly love it. So we got the plants.

Yes, and they're fake.

Well, they look real. Well right, so we can talk about the plants, we've talked about asset location. So guys, up to you. But why don't we start with a little bit of a macro question. Look, clearly, this year, interest rates -- high interest rates and market uncertainty resulted in effectively record amount of flows cash products for obvious reasons with a little bit more clarity in terms of where rate markets are heading and maybe healthier outlook for the economy. Maybe spend a couple of minutes on how client allocations are likely to evolve into 2024.

Okay. Well, again, thank you very much for having us, and we look at 2023 as we look back upon it as a particularly challenging year in the sense that headline numbers from equity markets would make you believe it's been a great year to be -- invest in equities. I think the truth, the average investors experience has been far less sanguine just given how concentrated at least the S&P 500 has been in its outperformance. I think equally weighted you were up 5% this year, and you took quite a road to get there. So sitting in -- sitting in the treasury money market fund in [ 5.25% ], I think if you look back on it, it just reinforces that when the Fed pays you the wait you should wait and you and I talked about that last year as we were heading into it. And I think that's pretty much what we saw in that regard. We think equities even at current valuations aren't particularly compelling. I would also say that for the first time in many years, fixed income is increasingly becoming compelling. And so our own outlook is that, we will see greater interest in extending duration and taking on credit over the course of 2024. But that, I think it's going to be slower and more cautious than what we had anticipated in prior turnarounds just because I think people tend to be at the moment, quite risk-adverse. I mean I think that's where the flows of funds is reflected and equity devaluation don't cause you to bang the table that it's time to take on risk. Now when you look within fixed income, I think where we're seeing real interest is in credit, and credit really probably still has more to run, although I think you have to be more selective on where you are. I think you're getting paid pretty well on a fault -- default adjusted basis to be sitting in more traditional high yield as opposed to reaching deeply for yield into weak single Bs and triple Cs. And we're seeing people go there. In Asia, we've seen pretty strong flows in our American Income product, which is our flagship. It's been up over $4 billion in flows this year. We see continuing interest, Gershon Distenfeld, our Co-Head of fixed income and who runs our income product was in Hong Kong last week, and we're seeing real demand interest for short duration, high yield, which I think is interesting that people are willing to take the bet on credit before they're willing to take the bet on duration. And I think that's understandable because I don't -- while the Fed's predilection in election years is to ease into the election. I think it's a pretty notable trend over the last 60 years. I think the fact is, that the Fed blew its reputation for inflation fighting through the Trump and the Biden administration. And I think that Chair Powell has a lot of credibility building still to do and no one thinks that more than he does, I suspect. And so I'm skeptical that we're going to see much in the way of rate easings early in the year. In fact, I don't really think we'll see much. We see it later in the year and maybe that's too aggressive. I think the Fed's predilection will be to over emphasize its inflation pricing [indiscernible], just given how out of control inflation expectations, God. I am a believer that it's a whole lot harder to get from 4 to 2. than it was to get from 8 to 4. And I think we're going to see that. Now that being said, onerous equivalent rents are beginning to slip. There's less liquidity in the system. Both from the stimulus and otherwise, and the economy more broadly is slowing. But this may be the soft landing I predicted would never happen. Maybe I'm just been too cynical, I mean -- it's just -- I haven't seen it happen before, but I don't -- maybe this is what it looks -- so I'm pretty positive on where we see fixed income flows going.

Yes. Let's talk about that a little more. So it's interesting that you say that it's really credit and short duration credit that's seeing interest with clients today, and you guys are obviously pretty well positioned in that franchise. What do you think investors need to see to expand the breadth of fixed income flows across more kind of product categories, extend duration a little more? Do we just need to see less of an inverted yield curve on the forwards and that's kind of what gets people comfortable or you need more signaling from the Fed.

I think -- look, I think we're in a bear flattener. I think that's where we've been. I think that the demand will be outstripped by the supply of new issuance from the treasury in 2024, just given the unbelievable fiscal challenges the country really faces. And let's be blunt about it. The only buyers out there of any durability are insurers and pensions at this point. Sovereign wealth funds, for geopolitical reasons and otherwise aren't as dependable as source of supply -- I'm sorry, as source of demand as we have seen historically. So I think that is going to cause the back end to go up. So I do think you need to see the inversion flatten out, which is what I think you're going to see happen over the first quarter to the first half of next year. And I think then is when you're going to see people begin to step out in duration. Remember, it's an unnatural act for many people because they haven't done it. We haven't had this opportunity in a meaningful way in 20 years. That's not true -- in 15 years. And so I think it will be an unusual opportunity. But remember, if you wait for that first cut, statistically, you've just seen 80% of the move already occur. And so I think this is the time to begin, but I think people will be cautious in doing so. With regard to other segments of fixed income, I actually think, given how well funded the average privately sponsored defined benefit plan is, I think we're going to see a big uptake in either annuitization or immunization of those plans because this is your time, right? There's $2.3 trillion or something of stuff that's still -- while they're closed, still operating private DB plans. I think what IBM did in reopening its DB plan while -- for the industry, that would be fantastic. I just don't see that as a broad-based phenomenon that we should be looking forward to. I think that's a fluke. And so I think you're going to see a lot more demand for PRTs and annuitization. So I think that will drive incremental broad markets ag-based fixed income demand. And munis , look, I think there's a continuing muni bid, but that's principally retail not institution.

Yes. Great. That's very helpful. Let's talk a little bit about private markets. So AllianceBernstein has one of the larger private markets businesses among traditional managers you and I just talked about a little bit. $61 billion, I think, in AUM and $14 billion of that is fee-eligible upon deployment. So significant embedded growth in that business for you guys. And you talked about getting that business to $90 billion to $100 billion in AUM by 2027. So let's spend a couple of minutes here. So first, I'd like to get your perspectives on just the pace of deployment and kind of how you're thinking about that $14 billion of dry powder, how quickly you expect this capital to be put to work? And then secondly, maybe talk a little bit about fundraising efforts you have in private credit into next year.

Answering it in order, we think it's probably a 2- to 3-year deployment. It's slower than -- I would think, that doesn't mean the opportunities aren't interesting. I think in fact, structure is improving, credit -- our negotiating leverage is higher as market conditions have weakened. So that's pretty positive. In addition, that dry powder is, it's not equal, but it's pretty close to equal between our private credit investors business, which is the middle market lending business. Our commercial real estate debt businesses and carve-outs. So it's pretty broadly diversified in terms of areas within credit markets, we can deploy it. We're launching our first interval fund, which is really a constitution of a hedge -- a credit hedge fund that CarVal has, I guess, it will be a 10-year track record next year on, which is pretty good, which we planned to put through private wealth channels, including our own. We're just waiting for final approvals from the SEC to launch that. That's obviously not included in that. But we see that as another source of potential demand next year. Additionally, from a fundraising perspective, we have CarVal's Clean, CarVal's Value Fund VI. Launching where we have 18 months to go out and raise roughly $2.5 billion, which was the size -- we're being pretty cautious on just given how the headwinds we've seen in the market fundraising this year, but we're pretty comfortable we'll be able to hit that. So we see a lot of opportunities. And we announced this morning with Equitable that we're launching a NAV fund capability within our private credit investors business prudent -- I'm sorry, Equitable. I just saw pru. Equitable gave us a $500 million commitment to launch the NAV strategy, and we think that's a particularly attractive lending vehicle for a number of our insurance clients. We have over 75 insurance clients. And it's a pretty high-yielding investment grade lending segment. And so we think there could be real interest in the insurance space for it.

Is that an open-ended vehicle like kind of...

Well this is [indiscernible] this is a separately managed -- it's a separately managed account in this particular case. Okay. And we're going to focus first on other SMAs for larger insurance...

SMAs first and then the in fund form.

Then we'll do a fund form potentially.

Got it. No, that's super interesting. Let's zoom in on retail for a second. So we've seen this from effectively every significant private markets player, that retail channel remains a very big theme. It's a big opportunity. You guys have robust capabilities in both on the distribution side. And obviously, we talked about some of the product manufacturing Talk about a little more what you guys are doing on the retail side of things. And out of that $90 million to $100 million target in total AUM when it comes to alts, how big of that piece is retail?

Well, I think our private alts take-up this year in our own private wealth business were like $1.6 billion. That's just in Bernstein's Private Wealth business. We've seen demand from other big private banks and others for the products and so we're pretty optimistic that and with the launch of our interval fund that, that could become a pretty meaningful part of our business over time. It will be predominantly at least over the next 5 years an institutional business for us. I don't think we put a forecast out on what we think the size of the retail/high net worth channel list. I think it has the potential to be quite significant, but I don't want to put an estimate on it.

But I guess like is it sort of embedded in the $90 million to $100 million or become [indiscernible]...

Yes.

Okay. Got you. That makes sense.

But it's marginal to that total.

Right. That makes sense.

Principally institutional.

Let's talk a little bit about Equitable. Clearly, a unique strategic partnership you have with them. The firm originally committed, I think, to a $10 billion investment into AB's product. recently signed up for another $10 billion. How much has been funded so far? What are your expectations for future deployment? And let's talk about maybe some of the other newer strategies that you think this partnership could bring forth. Obviously, you mentioned the NAV product but...

Right, and that's not part of it. But were 80% -- approximately 80% committed on the first [indiscernible]. And it will take, call it, 2 years to deploy the NAV lending, just sort of a ballpark guess on what that timing is. But in addition to that, the resi mortgages, commercial real estate debt, both in the U.S. and in Europe, Middle market lending, all have been important components of that. I think there will be continued expansion. Clean energy, which is a service that's not really necessarily targeted to Equitable, but they do have an mandate that they want a [indiscernible] potential area for it. We look, and CarVal has a particular capability in transportation leasing kind of assets. So we think there are real opportunities for higher quality, top of the stack paper, which CarVal's been originating all along, but focused more on the lower end of the stack, lower credit quality, higher return portion of it. So we think there's considerable leverage there now to executing it.

Let's expand that a little bit outside of Equitable. Obviously, that's an anchor investor, and it's been a powerful kind of contributor to your guys' initiatives in private credit. We've seen across the industry. Insurance companies are looking to do more in private credit, particularly in investment grade part of the credit market. Can you just walk us through sort of your footprint with third-party insurance clients today? And more importantly, how does the Equitable relationship impact the ability to expand into third-party insurance market?

Okay, let's take it in two pieces. As I mentioned, we have over 75 insurance clients. Equitable operates principally in the variable annuity business. They are like 5 players in the U.S. in that space. I'm wrong, but I'm not far off in terms of the total number. Most of those are clients of ours already for different stuff, whether it's in the variable annuities that they currently manage their general account mandates that we have with them today. We see real growth in European insurers focused on the private alt space. That's been a source of opportunity for us and in Asia as well. And I would say that what Equitable may cost us in competing with other variable annuity providers because there's going to be somebody. We haven't seen that resistance among more traditional life providers nor have we seen that certainly in the property casualty space and not at all offshore. So I just don't think it's been the impediment I feared it would be when I joined. On the other hand, it's enabled us to multiply client capital in our private alt strategy. So it's been an important boost -- critical boost, frankly, to the growth of the private alts business for us broadly.

Just a follow up on that. How are insurance companies that are not partnered with a private alt manager kind of thinking about the network of GPs that are willing to work with. So the -- out of the 75 clients, the insurance clients that you mentioned, is there a willingness to say, look, I will use 3 or 4 or 5 private credit managers kind of various things or the risk is, now that they're likely going to still kind of want to attach themselves to 1 or 2 larger players in...

Look I think the smaller ones or those that are created as a function of what I would call capacity creation/regulatory arbitrage, these sidecar deals that we see developing the time, whether it's the one that pru just did, or other firms are doing all along. I think there is a pay-to-play opportunity in the life insurance space, in particular, where larger insurers are using the access to their general account to yield more competitive terms. I think it is no different in concept, although it's capital upfront to what large institutional players have been doing in the private equity space for years and co-investment, at least we are making a fee on. Albeit a lower fee, but I just think it's the early stages of that commoditization. The shift in leverage has gone to the owner of the general account from the provider of the private alternative strategy. So -- but it's been pretty lucrative so far. When you look at what Blackstone did with Corebridge, while the share price of Corebridge has an equal what the price that Blackstone wrote that check for it. I think they would do that deal again [indiscernible]. And so I think those -- we're looking at opportunities like that. We look with Equitable and opportunities like that. And if we find one that's particularly compelling, I think we would play it. So I think it's a phenomenon that we'll face. I think it is much less pronounced outside the life space. And remember, there's still many insurers who manage internally. And so they use private and public strategy providers where they don't think they have the capability or they want diversification of managers. And so I think it will become increasingly like the more normalized institutional market in that regard. But I do think there's the sort of creative destruction in the life insurance space for lack of a better expression, which has given rise to these capital markets vehicles, a theme being perhaps the most prominent which I think have changed the game.

Yes. Yes. That makes sense. Let's spend a couple of minutes on another sort of unique aspect of your guys' business, which is Private Wealth channel. I think it accounts for about 1/3 of your base management fees, which is probably bigger than I think most people would have thought. It's a unique product. It's a new distribution channel for you guys, especially as you're thinking about building out some of the private alts capabilities. So how -- and I know you mentioned a couple of stats, but how is the private alts business benefiting from this partnership? And more importantly, I guess, how are you thinking about driving growth in Private Wealth as a whole?

Yes. Look, I think unlike the research business, if you were going to start an asset management business today, having direct distribution would be central to your strategy. That is to say that I'm really happy that Private Wealth is part of AB and I think it's the jam of AB in many ways. We've been growing organically for the last several years. So I think we posted 2% growth this year. which is actually a pretty good number in what has been a tough market for Private Wealth this year as an industry. It's enabled our clients to have a richer set of choices coupled with a very, very robust wealth management advisory capability that has become the differentiating selling point. It's not the products we sell per se. It's making sure that your money is working for you in the locations that are most tax efficient to do that for you in a manner that comports up your values and your goals. And that's a hard business to scale because it's really predicated and on the trust established and the quality of the advice provided by the financial adviser, we're very good at that. And we have a very deep network of centers of influence, whether they're accountants, trust and the estate lawyers and others who are the referrals because this is a word-of-mouth business for us. Unlike almost everybody, we train virtually all our own. We don't lift teams out. It's a very different model. And we should challenge ourselves on that because the flip side of that is for principally proprietary, which is the reason I think we have an edge here because we are keeping the manufacturing margin and charging our clients unbalance less than most competitors are, whether that's in -- whether we're managing it in passive or active because we're only charging 1 level of fees not 2. We're also much more tax efficient because most of what we do is an SMA form, not in fund form. And so it's proven to be a good vehicle, but there are headwinds to it. We are principally proprietary and we're not open architecture. But frankly, I think that is a distinction that had more resonance 5 years ago when the debate was between open versus closed, I think the debate today is very much between active versus passive. And I think that's exactly the right axis for that conversation. I think in client portfolios, Private Wealth portfolios will begin to replicate what we see in institutional, which is strategic normals and big liquid asset classes are going to be expressed passively -- they just are. And if that's the case, then really high active share or very high information ratio, equity strategies are going to be satellites. They have to earn their place in that portfolio, which is exactly how we design our Private Wealth portfolios. We don't have a balance sheet. We don't have a loan book. That's what props up higher organic growth rates for our competitors, and that's okay with us. I think in a world where liquidity is pretty well and easily accessible, we don't pretend to be all things to all people. And so I think we have our niche, and we're going to play it and so we hope to accelerate that growth. We brought on, I think, 5% growth in our adviser count this year approximately. That's our goal. It's been easier to recruit and retain this year, because [ that means ] the frenzy in this business has begun to subside as interest rates have risen and returns have declined.

Yes. From the kind of some of the RIA rollout models that have been obviously pretty competitive there.

It's another example where private equity becomes this price setter in the marketplace like you know, like in, frankly, the life insurance...

Life space, that's right. So you mentioned active equities. I wanted to spend a couple of minutes there. And look, it's not new news to anybody in this room that has been a very challenging space for many years.

Well that's -- but we -- and just...

Yes. No, but hey, at least we got the trees. So, AB has distinguished itself as probably being the best organic growth story in active equities for many years. I know recently, things have been a little bit choppier. But as you look at performance and you mentioned how narrow the equity market performance has been really this year, AB's active equity performance has slipped this year, short-term issue, long-term track or is still okay. But how big of a risk is that to continue in this good track record and flows within...

Look we got it up the track record. I mean, ultimately, while short-term results, frankly, are meaningless, they have a disproportionate share of mind space. When people are or buying performance, which is still unfortunately how people select managers by and large. I think Morningstar perpetuates that. I think Lipper perpetuates that in the way that the data is presented. And it's probably the best of a bad set of options. It's hard to predict the future. When we look at ourselves on a relative basis, we do much better against our peers. But frankly, if active doesn't outperform passive, it's kind of irrelevant anyway. So I don't take undue comfort from the fact that we're beating most of our peers on a relative basis. The narrowness in growth is particularly challenging for us because those were our principal selling strategies. But we've seen a much bigger take-up in value than we've had in the past. Our performance is -- for the first time in a very long time, maybe since I became Bernstein client, 2000 -- 2001 is quite competitive again. But I don't predict there's going to be some big swift move to value. I think we have a much more balanced strategy. And frankly, results have been improving over the course of the last several months in growth. As the Magnificent 7 have stopped appreciating at such an extraordinary rate. But at the end of the day, those are a set of choices we made, we could have been market weight on those names, we weren't. And I'm okay with that decision. But ultimately, we're going to need the market breadth to expand in order to resume a position of leadership there, I think.

Yes. let's talk a little bit about active ETFs. It kind of dovetails maybe a little bit on this discussion. You guys have been one of the larger managers to really embrace the fully transparent active ETF wrapper, which has been great to see what reception are you seeing across distribution channels? What sort of resonates most when you go to market with these products? And what sort of the future looks like? Could we think about mutual fund to ETF conversions from you guys? Or this is going to be more launching kind of parallel products?

The short answer is we're not religious in our convictions on how to do it. We're going to be opportunistic to see what resonates with our clients and issue accordingly. So, we've launched 7 so far, I think, 3 of which are fixed income. We got to over $1 billion in the year, which I'm told is a pretty good pace relative to others. They're all active. More residents absolutely in the fixed income space. I think that's not a function of our performance. I think it's a function of risk aversion more broadly. And whether it's in our tax-aware fixed income strategy taffy or our short-term enhanced cash vehicles. We've seen strong resonance, we've launched a high yield, which has a very good track record. That was a conversion. So we will do conversions or launch parallels. I think we're open to doing either. My own preference would be to convert just because I think just less complexity on the platform ultimately will be lower cost, but there is a revenue impact to that. The management fees tend to be lower on ETFs than in the parallel mutual fund. But, so we continue to be more focused on -- we'll be more focused on equities next year, which hopefully our timing is right to do that. But the reception among RIAs has been pretty good, and that's not an area historically where we've really ventured aggressively. Over the last 2 or 3 years, we've had a much bigger push there, and it's been more and more successful. Particularly in the muni SMA space, which is a pretty good complement to that.

All right. Let's switch gears entirely. Let's talk about research. Now you remain on track with SocGen JV. I think the schedule closing is for the first half.

Well, it's in the -- Remember, we've extended it once. But I don't want to...

You're on track for the new timing, which is the first half of '24.

Correct.

Just talk to us a little bit about your latest expectations for potential revenue and expense synergies for the combined business. And what is the kind of ultimate ownership of this new kind of venture when and if it closes, looks like for you guys?

Well, it's moving forward at a good pace now. A lot of the hard work is now getting done. We have gotten the regulatory approvals that we needed. It's a global business, and a lot of regulators have a view -- these things should be structured. Our goal ultimately is to exit the business. So we plan on owning a minority stake in it over time, roughly 5 or more years is what we anticipate. And our rationale, I think, is pretty clear. someone with the balance sheet should be able to generate much higher revenues than we're able to generate, just given the changing nature of the cash equities business, where prime brokerage, derivatives and a primary new issue calendar are all important attributes to how you remunerate research, whether broadly adopted or not, that's just how the world works in that particular case. So, we've committed to hold it for 5 years and -- but our goal would be ultimately to exit it. With respect to synergies, there are no revenue synergies that associated with it for us. Absent -- a substantial increase in the revenues of the joint venture, which could happen, but we need to integrate it first before we start putting expectations down on where we think it ultimately. Our hope will be -- it will be higher revenues. It's certainly more of an expense savings exercise to us. And we've said publicly on a full year basis, it's worth 200 to 250 basis points to us on a margin basis.

Right. Great. So let's talk about operating [ leverage ] for a little bit as well. AllianceBernstein continues to be one of the few managers where there is a bit of a structural margin improvement story, as you just mentioned, part of it is research but there's also important kind of initiatives and scaling if that's correct sort of talked about. So I think the numbers are 300 to 400 basis points margin improvement by 2025, 100 to 150 basis points coming from Nashville move, and then there's another 50 to 100 from scaling some of the private alts opportunities by 2027, I think, is the time on that piece. Just unpack where we are with Nashville and how much of the savings are already in the run rate and then secondly, maybe speak to the pace of margin expansion from scaling of the alts business.

Okay. But let me start with Nashville. I think we booked approximately $20 million in 2022 there. And we will release I guess, in our fourth quarter numbers where we are for 2023, but it would be something in the similar ZIP code is what we're thinking in that regard. We moved out of our -- of our ancient offices on Sixth Avenue here in Manhattan toward the end of next year. And so we'll be fully in our new offices just besides Hudson Yards by January next year, so we'll have the full impact in 2025. For that and our original target was $75 million to $80 million, and we stick with that number, that range for. We've also talked about what we see as the Bernstein Research. We just had that conversation. The scaling impacts, if we could get our private alts business to 20%, 25% of our AUM. Just to give you a sense of 85% of our pipeline is alts. The alts -- the pipeline fee base is 3x our overall institutional, and that's lower than our average overall private alts revenue fee based because we have -- we have some investment-grade private placement in it, but we also have fixed income and equities, both -- all 3 of which were at lower fees, not at all the stuff. So I mean, I think you can dimension it from those stats that I've just provided to you. I think the impact is. So look, I think there is a margin improvement story there. And I'm kind of excited about it. I think the stock is cheap.

Yes. Well, I have one last question for you. I know we only have like 20 minutes on the clock -- 20 seconds on the clock. But you mentioned the stock. And when you look at all the kind of key metrics that investors care about, whether it's organic base your growth, operating leverage, you guys screen really well in all of them, but you're trading as if you were outflowing.

Well, I blame that on you.

Sure. I mean like that hotel and clearly poor stock valuation...

No, look it's [indiscernible]...

But I guess anything you guys can do to unlock value, whether it's structure. I know it's a K-1. Anything with respect to share repurchases or ownership, anything that you guys could proactively do to improve value.

Look, I think we have to look at all of those things. We've looked at the structure before. Now maybe just given our relative multiple today, it's more attractive than it was 3 years ago, we'd have to be pretty d*** sure that the multiple exit conversion to a C Corp more than compensated our clients who are taking the incremental tax drag of move because you can't reverse that, right? So once you do it, you're there. That's not a bet I'd make unless I was really confident that we'd be able to achieve it. The reasons, at least in my mind, why the private equity firms were able to do that, the ones that did is because they got fairly quick inclusion in the indices and the liquidity pop that enabled them to have was pretty significant. Unless and until Equitable sells down significantly. Our inclusion in those sorts of indexes are pretty hard to get. So that's really a decision they have to take in that regard rather than ourselves. I would say to you, the base operating business will have positive flows in November, for example. Now I wish it was more consistent than it's been. But we feel that it's a coiled spring. And if we can get stability in markets, and that's a big question. I think the outlook for fixed income is particularly attractive, and I've seen equity investment performance is improving. And there's money in motion. So with private alts, I think it's a good story. And frankly, we're pretty disciplined in expense management. And if we face a tougher market this year -- no, I'm sorry, in 2024 than we did in 2023. And that's possible, we're going to have to adjust our costs accordingly.

Got it. Great. Well, we'll leave it there. Seth, thank you so much.

My pleasure .Thank you very much.

[indiscernible] thanks for being here.

Thank you for having us.