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

So it is my pleasure to welcome Seth Bernstein, President and CEO of AllianceBernstein. With about $800 billion in assets under management, AllianceBernstein has been one of the stronger organic growth stories in the space supported by expansion into private credit, robust fixed income momentum and a really differentiated growth in active equities as well. In addition, the firm's partnership with Equitable continues to present compelling opportunities, both in the wealth management space as well as the insurance space. So with lots of momentum in the business. Seth great to have you back here despite the fact that you don't love the hotel, as you already mentioned.

No one likes this hotel.

But everyone likes the Goldman conference. One of your clients was taking a shower here last night -- this morning and the whole shower head blew off on his face. CMI and thank you for sharing that with us. Now we have to find out the who the client was, but please don't say that publicly. Okay. On to the agenda of the day. I was hoping we could start with asset allocation trends you see in the market today. Clearly, it's been a pretty robust environment macro-wise. Equity markets up a lot, Credit spreads are really tight. U.S., obviously, a lot better than non-U.S. and interest rates have started to come down. I guess this move out of money market funds into fixed income. It's taken a bit longer, but it feels like it's starting to finally kind of accelerate.

Yes. I've been saying that a while.

Right. So let's talk a little bit about that. What are you hearing on the ground? Are we -- is this acceleration sustainable? And how are you guys positioned to capture some of that money emotion?

Well, first, thanks for having me I really like the new background. And look, the trends continue. It's a great market to be invested in, enjoy it, while here. But I -- we think it actually will continue into next year and for a little while beyond that by virtue of the new administrations coming in, the economy is moving very nicely. We think that that will ease next week. And we continue to have confidence that money will continue to move off the sidelines. It has been slower for sure than at least I thought it would be. Part of it is the curve itself. But we're mildly positive, but also more importantly, as the Fed continues to cut. It's going to be increasingly difficult for you to keep that trade going in the front end. And so I think you need to see the curve steepen more. Look, I think the payroll numbers last week and the revision only reinforce the fact that the economy is slowing, albeit at a pretty nice rate. So the truth of the matter is it's a reasonably attractive market to be in fixed income. There is no value in spreads at the second, although they're not as tight as one might think on a risk-adjusted basis, just looking at the underlying quality and health of the average credit in the marketplace that we look at. So we think there is more to run there. We continue -- Asia got off the blocks much earlier for I think its own reasons than the U.S. did, although we're beginning to see that trend. But what we saw more pronounced after the election, was equities. Equities moved hard. And so we're continuing to see that. The search activity, interestingly, even in institutional, has for us anyway, seems to be much higher. That's not necessarily finding its way into our backlog yet, but we're in more equity searches than we've been in a long time. And an interesting area is not growth per se, but in value, in global -- in the markets that have been underperforming, People are looking for new managers there, but we also see that appetite elsewhere. In fixed income, we are beginning to see -- we continue to see strong flows in Muni SMA, which has really been a story for us this year. And we're continuing to see interest in Asia, although it always slows down towards the end of the year. And so this is no exception in that regard. When we look at our overall flow story, continue to be very positive in retail to see headwind in institutional. And so November, which will release, I guess, tomorrow, will be negative, but not by much. And it's really a function of the continuing story in the equity side. Now we -- I would say there, we've seen real improvement in the investment performance on the underlying strategies that were the source of the issue in institutional. And so while I don't think we're at the end, we're a whole lot closer to it, I think. So I'm feeling a bit better on that front.

Great. All right. We'll dig into all of this over the course of the next 30 minutes or so. But I wanted to start with fixed income. It's clearly been a very big contributor to organic growth at AllianceBernstein for, not just this year, but over time, I think you guys are on track to do like north of $20 billion of net flows into fixed income year-to-date. You mentioned credit spreads, and I wanted to zone in on that a little bit. Super tight environment for credit. Interest rates are starting to come down, so that's good news. But as you sort of think about the manager selection process in the world where credit spreads are so tight, how are you positioned? Are you seeing clients spending more time on individual manager as opposed to just broadly allocate into the asset class? And how are you positioned to win within fixed income when it comes to that?

We are seeing more scrutiny on underwriting decisions on individual names for sure. I think that's part and parcel of a recognition that your gain from forward is simply on rates. It's not on spreads. But they can stay tight for a long time. We've seen periods like that before. I suspect we'll see it again here. The interest in fixed income institutionally has been remarkably robust. We've seen strong demand everywhere. And so that's really been what's been driving it. And issuance is up big. So it's a pretty robust market right now. I think from an active management perspective, particularly investment grade, it's what you avoid rather than what you own. That is really the distinction between outperformers and underperformers. And so those people who have strong pretty systematic risk processes probably benefit here. And most corporate managers are not great at sector selection. That's where you see the bigger losses, whether people buy energy because energy seems cheap, and it's cheap for a reason. And so we tend to be quite broadly diversified in what we own. So when we -- when Bernstein underperforms it's because credit is really underperforming as a segment as opposed to individual idiosyncratic bets that we're making because we try to avoid industry sector bets in particular or even individual security names. So I think that diversification really matters because I think the information insight, the average credit investor has, particularly in investment grade isn't that great. The story is different in high yield where your payout pattern as a whole, less asymmetric than it is in investment grade. And we continue to see opportunities there. But I think people are wanting to see what people own because, as I said earlier, it's what you own. It's what you don't own that's going to save you when the correction comes, which I don't think it's imminent, but it is there.

Yes, I mean, we've definitely seen dispersion widen amongst the [ income managers. ] For sure, over the last couple of years, and that was granted mostly rates move, but you might...

I think this is where that security selection decision matters is now in the cycle because I just don't see how the beta move continues to benefit.

Yes. Makes sense. Makes sense. All right. Let's turn to equities for a couple of minutes. So it's really been a tale of 2 cities I feel like for you guys, you've seen good flows on the retail side actually positive flows in active equities in retail, which...

And that's continued.

And not a lot of people could say that. I mean we all know the story for equities in the intermediary channel and retail channels were pretty challenged, offset by pretty significant redemption on the institutional side. So can you maybe just kind of walk us through what differentiates AllianceBernstein's success on the retail side. And at the same time, you alluded to that a little bit, but any signs of stabilization you're seeing on the institutional...

Yes, sure. Let's go through it. Look, our contention is no one is going to buy active in a marketplace unless you have a return stream, they want that they can't replicate. So you're probably going to have pretty high active share or an extraordinary information ratio. And we're both. And I think that's hard to do. We're very much focused on those kinds of services when we were out rebuilding our investment platform over the last 15 years in equities. That's exactly what we were trying to accomplish. And for the most part, we did. Several of those strategies have gone through periods of underperformance are concentrated growth strategy or global, or global core strategy. Those were the 2 strategies that most underperformed. Those are the ones where we've seen significant pickup in relative performance over the last several months. They both got hit absolutely by a lack of holdings or market weight holdings in the mega caps. And they've made some other mistakes on their own, but the fact is that they have tightened up on their underwriting processes and they're holding disciplines, and we've seen a pretty strong recovery. It's not -- they haven't done themselves all the way out. They were principally institutional in their holdings in the clients who held them. And we have pretty good visibility where we see risk there by virtue of our conversations with the clients, what we hear from consultants. And so that's why while it has been fairly heavy, we think we're towards the end of that cycle, but we still see signs of it. Large-cap growth where we've seen both institutional and retail interest, that's really driven a lot of our retail as is our low-vol strategy or sustainable strategy. They've continued to be strong, particularly in the case of large cap growth in Japan. That has continued to flow positively for us, and that's a pretty important part of that strategy. It's not the majority, but it's an important part of it. We also are seeing more interest in the value strategies, which have quite strong performance. But...

That's new because that's really has been around there.

That hasn't been around for us for a long time. That's been, I think, for us, our Select strategy, which is more markets driven, a business that we acquired about 12 years ago has been a very strong performer this year. So we've continued to have 4 or 5 really well-performing equity strategies that have appealed in the retail space. And so I think it's a function both of the regions we've been selling in Asia for large-cap growth as well as having distinctive strategies in the U.S. market that have helped to drive that. We've also seen pretty quick pickup in our newest team that we recruited out of AGI last year, which is a global growth strategy based out of Germany, where we are seeing real appetite and pick up in Europe in particular. So it's continuing. I'd like to see the performance improve even more on the strategies that underperformed to get back to where they can begin to acquiring them, that will take several years from my vantage point to see those kick back in. But the engine continues to be performing pretty well.

Great. All right. Let's talk a little bit about some of the thematic kind of dynamics and the growth dynamics in the space. Active ETFs. That's a big -- it's been a big focus for you guys. You are sort of early to market with a couple of products there. It's grown nicely. It's not huge. It's like $5 billion...

$5.5 billion. 70% of it are new strategies. They are not...

Not a replica...

They're not replicas, not analogs. We think that's very important because our own contention, particularly in the U.S. is you're only going to launch mutual funds for specific bespoke purposes, whether it's in a 401(k) plan or something else. The market, I think, has transitioned to ETFs where the underlying securities make sense, which equities by and large, is the case. Now we will continue to look at launching analogs. If we believe the net present value of doing that is worth it. And up to now, we've had several examples, but the vast majority of the new strategies that we've been doing. And I think we have, I think, 17 strategies out there now. So we've continued to expand it. And we've gone offshore. We're in Australia. We're looking at doing it in Taiwan as well.

So importantly it didn't sound like it's cannibalizing any of the mutual fund complexes because these are all kind of newer...

Well, 70% or -- just to be clear about. And the ones we converted were pretty small strategies anyway. So I don't really think we are converting. I'm sorry, cannibalizing.

Yes. Got you. Okay. Let's spend a couple of minutes on private markets. It's been obviously a big area of focus for the firm. You guys had quite a bit of success there. I think you were at about $68 billion in AUM, and you previously talked about getting it to $100 billion by 2027, north of 20% of management fees, that's your goal for a couple of years out as well. Can you talk about the path of getting there? And with private credit in particular, being a pretty big part of that build, what are some of the key origination capabilities that differentiate AB relative to competitors and gives you kind of an edge in the marketplace.

To me, we embarked upon private credit as our focus, principally because of our insurance franchise. Our contention was equitable in particular, but the industry as a whole, and we surely weren't the first to identify this, I wish I were. But the industry needed to up the yield on those portfolios in order to be competitive. That was particularly in acute problem at low interest rates, less acute today, but the need is still ever apparent, particularly as the industry seeks to put annuities into 401(k) and 40b)(3) plans under the SECURE Act, they're going to need to continue to up the yield and be competitive relative to being outright in the fixed income market. And I think the industry understands that. I think Apollo has been the catalyst for that to happen, and we come up in their wake, which is just fine because I think we're still in the mid innings of this transition rather than in the later stages of the game. Where we think we have a competitive edge is really threefold. One is in the insurance space where we already have a preferential relationship with Equitable, who we have another $9 billion of committed capital to put to work for them in that space. We've put $11 billion to work so far. It has enabled us in this sort of holistic model we have of being a pretty compelling home for teams that want to scale very quickly, we have a proof statement to show them we can scale them very quickly. The other part is that we have relationships with 40 or 50 other insurance companies that are another $50 billion of our AUM, where we have access, whether it's through the general accounts or separate accounts to demonstrate our abilities. And we're seeing, in particular since we have unified our insurance vertical with Equitable and hired Jeff Cornell to be our CIO of Insurance. He formerly ran Core Bridge, CIO and AIG in the U.S. I think we have the credibility and the capabilities across their general account to be able to support. And we do that in a way that is very much client-oriented client first, and we have the experience to actually execute that. So we're in more searches. We're talking to more insurers. We're booking more business. that's slow, but it's beginning to accelerate, and we feel pretty good about that pace. But that will very much, I think, benefit our private alts platform generally. Getting to $100 billion was also predicated on using the private wealth space as an important part of them. First, with our own proprietary business where CarVal has been a big user as has PCI, which is our middle market lending business. It's been the area where we've launched our limited liquidity vehicles, both for AB, for PCI and for CarVal. We've now gotten on 2 or 3 other platforms, and we continue to grow that. We are bringing that to Asia, which is the third part of, I think, the puzzle why we think we have a differential capital raising advantage versus a number of peers. We have entree into the insurance space. We have a private wealth network and experience here. And we think we have a differentiated distribution capability in Greater Asia, Greater China, Asia and Japan.

Got you. Let's spend a couple of more minutes on this. So equitable, you kind of started there has kind of been the cornerstone and what enabled you to kind of get to where you are now. There's about $9 billion, I think you said left in commitment to go. How are you thinking about the pace of deployment on that $9 billion, but also more importantly, what are some of the other opportunities you see for the 2 firms to collaborate together?

Well, let's talk first about what we just did with Ruby Re, which was an investment AB made into a sidecar that RGA pretty well-regarded insurer has booked. We put $100 million into that. We are in midst of negotiating an IMA with them, but our expectation is, and it's obviously subject to closure and negotiation. Our expectation is we'll have $1 billion of private alts that we will be managing on behalf of Ruby Re once it's up and running, we think that's a 24-month kind of funding period to get that up and running. 24 months or so is roughly the same sort of horizon we're thinking about or Equitable's thinking about with respect to their $9 billion. In addition, we're looking at other side cars from an investment perspective. Part of the benefit of being part of a larger insurance complex is I'm not looking to my team to underwrite that risk. We worked hand in glove with Equitable and were introduced to RGA through Equitable as a counterparty, which had very interesting characteristics vis-a-vis Equitable, the writing different risks. Equitable has a very high regard for RGA's disciplines around it. And frankly, this is a different model for us. We're actually putting capital up, which is consistent with a number of other people in the business, but we're doing it with a high degree of confidence that we can at least equal what RGA's modeled IRR, which is low to mid-teens on these with the incremental profitability of running -- underwriting the equity. And we think that, that underlying sidecar investment may be an appealing product for either our private wealth channel or others private wealth. It's not that I have anything to announce in that regard. We're just thinking about it. And frankly, it's a very high threshold for us because we are the gatekeeper, we need to make sure of it. But I think having quality counterparties like RGA make that an easier decision for us to do, and we're looking at others. I think the issue for us is how much of this would we be willing to do. We want to remain a very capital-light business model. But Equitable is there, and it's interesting from a multiple as well as an after-tax basis for Equitable to fund that through us. So if we want to make those investments.

Look, we've seen examples with obviously others funding it with third-party capital. You look at what Apollo has done with ADIP and what KKR is doing well. There's ways to do that as an invested product with GA.

So we would like to recycle that capital. So that would be part of our goal to do it.

You mentioned the IAM. I'm assuming you guys don't have anything public to announce because it sounds like you're negotiating that. But just sizing what that general account would look like for getting the fees what's that.

Well, just for us, it would be $1 billion.

$1 billion of what you asked. Got it. And when you think about other psych opportunities like that or other opportunities with other insurance companies, what is the differentiated angle that you guys bring to the table? And does the partnership that you already have with Equitable, does that cut you out of a certain portion of the market?

Actually, I think it's a benefit to us. First of all, just because I've been asked this question a lot of times, we do business with almost all of the Equitable's key competitors already. Now we may not be in their GA, but we're in their separate accounts, for example. But they're not the big issuers of this. It's much more in term life and fixed annuities, PRT, and it's a network they're much more familiar with and have been very helpful in creating contacts for us to tap into. So I don't see it as a disadvantage, and it's also a global network. And so we're looking at stuff offshore as well that makes sense, both in Asia and elsewhere that we would continue to work with their actuarial teams, their risk teams to make sure we're not doing something foolish in terms of our underwriting capabilities to get it done. So I think there's more growth there. I just think there's a tail risk and you need to understand that risk.

Right. Let's put it back to retail for a couple of minutes. Again, it's one of the building blocks you mentioned and getting to that $100 billion in private markets. You guys recently launched AB's CarVal Credit Opportunities Fund. This product is a bit different from most retail private credit strategies that are out there. that are largely focused on direct lending, this is not one of those like there's been more flexible and...

Yes, it's a multi-sector product. It's a track record they've had for years. It was frankly, when CarVal built it, it was the first strategy. So we have a very nice track record to show for the whole thing. And we think it's a nice diversifying rather than an absolute return offering, particularly for family offices and others who are looking to manage a multi-asset portfolio.

Yes. So just how are you thinking about distribution of that product externally, maybe talk a little bit about kind of platforms you're already on? What are your hopes for scaling that product? And what's next on the wealth product side from a new creation perspective?

Sure. We're on 3 platforms already. Can't disclose those. But we are in front of our RIAs. We're in front of brokers who are looking for those kinds of diversifying products in their model portfolios. I think that's interesting. Secondly, we think there's appetite in Europe for similar strategies. And their CarVal is known there anyway. So that could be a helpful step up for them as well. We're also launching AB Land, which is a limited liquidity, also another limit liquidity, which is our direct lending middle-market product, which will be focused here in the U.S. and in Asia, where we think we have a potential to get access to the GFI, its global financial institutions with whom we distribute into those markets any way.

Yes. I got you. All right. So a few things going on there. Let's shift gears, talk about the financials for a couple of minutes. You guys, as part of your growth algorithm you talked about improvement in the fee rate mostly due to the change in the business mix, right, like with alts growing private credit.

Its really alts business and I guess distribution channel.

Right, exactly. And that's both on the retail side and the alts side that's actually quite helpful. So talk to us a little bit about how you expect it to progress the fee rate, I think, is hovering around 40 basis points now, how are you to progressive to in 2025.

We think it's a pretty durable rate. That doesn't mean it couldn't go down 1 or 2 or up 1 or 2 in a given quarter. We're very much taken by redemptions and markets in that regard and new money being put on. But we think it's particularly durable because we see that mix change in our pipeline. We see that mix change and what our clients are talking to us about today, both in retail as well as in the institutional space. But it's mix dependent, obviously. So someone who's buying private placements from us, that's a lower fee than middle market lending. That's a little bit out of our call, but in any given quarter, it's not that big an increment in terms of the margin degradation or improvement that it would actually contribute. So we feel it's pretty strong. We're also very much focused on in fixed income on the retail space, which is a higher fee channel. And to date, that's been pretty helpful for us. The Muni SMA business is growing pretty rapidly is a lower fee product, but that's all incremental to us. So while it may not be beneficial from the fee rate perspective, it absolutely is beneficial from a margin perspective to the firm. So we're pretty comfortable in the high 30s, low 40s is where this fee rate should be for a while.

I got you. I got you. That makes sense. Shifting to performance fees for a couple of minutes. It doesn't -- investors will spend a whole lot of time thinking about it, but there is a story here as well where it feels like there's a lot more durability and less volatility in that stream of income when it comes to you guys. And I think a lot of that is a function of the fact that you guys are moving into private credit and just a little more on...

If you look at the underlying driver, it's our middle market lending business that's really been the principal driver of it. And that's really, frankly, there's nothing baked in performance fees. But if you're not in default, if your client is continuing to perform, which is we have a pretty good track record over the last 10 years doing it, that we feel pretty comfortable that it's durable and we can see it next year. And we've already said we think we're going to be at the high-end of the performance fee estimates for this year. And we're feeling pretty good on where it's looking at for 2025.

Right. So I guess, how would you think about the growth algorithm in those performance fees of time? Should you just generally scale in line with your private credit business? Or is that...

I think it's more directed on PCI than others. Where CarVal's focusing there's less performance fees in some of the sort of dedicated strategies, whether it's in aircraft leasing or the asset-backed strategy. But we've doubled the size of that private -- I'm sorry, our middle market lending business since 2017, I think, 2019. No, it's 2019, so we've doubled it in 5 years, and we're continuing to see more demand, and we are deploying more money there. So I'm feeling pretty comfortable about that business as growth trajectory.

I got you. Okay. Let's shift to margins. You guys are running at around 31% margin year-to-date give or take. You gave a nice walk in your last earnings deck, just talking through the kind of some of the costs related to NYC relocation, that's 100 to 150 basis points.

I remember, there was a double rent.

Exactly. So once that falls off, you're kind of like a 32.5% call it, and your baseline for '25 is 33%. That's kind of what you put out there, sort of a goalpost. Doesn't feel like it takes a lot to get there and hence, we put it out there as a goal.

Exactly.

So help us think about the incremental margin in the business as you grow organically, markets remain relatively supportive as well? What is...

Well, markets are supportive. We should be doing better than 33%. But obviously, our incremental margin, what we target is kind of 45% to 50%. So it should be falling mostly to the bottom line to the extent we're able to generate it. Obviously, if markets reverse, we have the other side of that. But we think we're well positioned for it. In addition, we have a number -- we've been pretty aggressive in absolute terms, focusing on our underlying non-comp controllable expenses. That has been one of the reasons we've been relocating people from New York, whether it's to Nashville or now from the U.S. to India as we continue to focus on our underlying costs. We think our G&A expenses will continue to be managed efficiently and we see some improvement there. And so on balance, I think we are pretty focused on getting those expenses down just as part of our hygiene because we're price takers, we're not price setters. And so we recognize that as part of the business.

Yes. I wanted to wrap things up with the question around just the structure of the company at a higher level. It's a question that comes up a lot. But when you look at AllianceBernstein, you guys are putting up some of the best organic growth in the group, both on the fee side and just the flow side. The multiple most would argue doesn't seem to reflect it. Obviously, that's been our view for a little while as well. The structure is part of the issue, the float with Equitable. I'm not sure if there's a whole lot to do there, probably not. But the structure in terms of publicly traded partnership versus a C corp matters as well. So where are you guys in the process of thinking about converting to C corp? What are some of the puts and takes? What are the pluses and minuses? What do you need to see so I can make the decision.

So on this most basic level, the decision to convert to a C corp is a function of how much of the tax drag are you creating by virtue of doing that for your taxable shareholders of which we have a number. We believe that you'd have to have -- depending on how you structure it, anywhere from 2-plus turns multiple, you need to be very comfortable in the way you structure it that you can boost it by a couple of multiple points to get there. How do you do that? The 1 interesting change between sitting here this year versus last year, is that we're quite intrigued by what our neighbors north of the border are thinking about as they relocate their headquarters down to the United States. And to the extent they are included or can be included into a multiple -- I'm sorry, into an index. That's very interesting. That's news to us. If AB could get into an index, I think, whether it's the S&P 400 or one of the Russell indices, while we still have a controlled shareholder. That is interesting news. And so we watch what they're doing carefully, and they've been -- and then they would be the second to do what, I guess, Trade, what did it is, right.

Is that a discussion point with index providers. I feel like you guys can get that answer from.

We are talking to them about it. But remember, even if we're -- they'd be willing to include us, then they have to decide to include us. So that's sort of a separate decision on their behalf. So yes, we're not taking it for granted. We're researching. We don't have any religious conviction to stay a publicly traded partnership, even though I think we might be the last one.

Someone feels like in this space, yes.

Yes. Well, we're definitely the last one in this space. But I think we would consider it. I think the liquidity issue is a separate one. And even if we converted, you'd still have that problem because we have like 300,000 shares trading a day at $40, with $12 million. If you're a big investor buying and you're going to move the share price pretty quickly and which I think is a benefit to the existing holders because we think, there's appetite for it. I mean if you look at our holders versus our competitors, it's very little overlap. So we continue to look at it with interest. We'd have to be mindful of Equitable's, the implications from the Equitable's respect because we have the fiduciary obligation to them as well. We think there are ways of structuring around that potentially. But we're open to it. And I guess that's how I would leave it.

Does Equitable have any sort of philosophical conviction one way or another, or are they ultimately are going to maximize the value.

They don't have -- I think unless there was something adverse to them financially, I think we're open to it.

Got it. Okay. Great. All right. Well, I think we'll leave it there. Thank you so much. Always great to chat with you. Appreciate the time.

Thank you.