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

Hello, everyone, and thank you for joining us. Welcome to the AllianceBernstein Second Quarter 2026 Earnings Review. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay on our website shortly after the conclusion of this call. I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB, Mr. Ioanis Jorgali. Please go ahead.

Good morning, everyone, and welcome to our second quarter 2026 earnings review. Today's conference call is being webcast and is accompanied by a slide presentation available in the Investor Relations section of our website at www.alliancebernstein.com. Joining us today to discuss the company's quarterly results are Seth Bernstein, our Chief Executive Officer; and Tom Simeone, our Chief Financial Officer. Onur Erzan, our President, will join us for the question-and-answer session following our prepared remarks. . Some of the information we'll present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I would like to point out the safe harbor language on Slide 2 of our presentation. You can also find our safe harbor language in the MD&A of our 10-Q, which we will file on Friday. We base our distribution to unitholders in our adjusted results which we provide in addition to and not as a substitute for our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation appendix, press release and our 10-Q. Under Regulation FD, management may only address questions of material nature from the investment community in a public forum. So please ask all such questions during this call. Now I'll turn it over to Seth.

Good morning, and thank you for joining us today. Despite an uncertain geopolitical and policy backdrop, markets recovered during the second quarter, supported by resilient economic growth and strong corporate earnings. Against this backdrop, AllianceBernstein generated strongest sales quarter in 5 years, returned to positive organic growth and reached its objective of $90 billion to $100 billion in private markets AUM more than a year ahead of our 2027 commitment. . On Slide 3, I'll review the key business highlights of our second quarter. First, assets under management ended the quarter at a record level, exceeding $905 billion. This milestone reflects both market appreciation and more importantly, the returns on years of investment and strategic initiatives that are now driving organic growth across insurance, private wealth, private markets, retirement, SMAs and active ETFs. Within insurance, we now manage nearly $218 billion, including $128 billion in general account assets. We continue to see strong momentum in third-party insurance where we manage $61 billion across roughly 100 clients. This includes the $4 billion of general account assets, which were up more than 30% year-over-year. In the first half of 2026, we initiated 7 new relationships and deployed nearly $3 billion of third-party insurance capital on a gross basis, while general account assets grew organically at a 6% annualized rate. As we discussed last quarter, the proposed combination of Equitable and Corebridge represents the next step function acceleration of our flywheel. Over time, we'll add at least $100 billion of Corebridge assets, meaningfully enhancing AB's scale and providing our organic glide path towards $1 trillion in firmwide AUM. While it's too early to be specific, we see synergies from partnering with Corebridge and the new Equitable that go well beyond not just managing $100 billion of incremental assets. Bernstein Private Wealth continues to strengthen its position as a leading advice-led wealth platform, ending the quarter with $167 billion of assets and contributing nearly 40% of firm-wide revenue. By serving as our clients' trusted adviser, we build durable long-term relationships and deliver integrated solutions across traditional and alternative investments. Second, we continue to expand our investment and distribution footprint through strategic partnerships, tax-aware solutions and vehicle innovation. A core element of our strategy is making our investment capabilities available in vehicles and formats that clients want. We continue to globalize our active ETF franchise. After initially launching 3 strategies in Taiwan, we've introduced 5 new strategies in Europe, where we pioneered a dual share cloud structure, offering active UCITS ETF shares alongside mutual funds. Our platform now spans 31 strategies and over $20 billion of AUM with assets growing 73% organically over the past year. From a near standing start nearly 4 years ago, this platform now generates an annualized run rate of approximately $100 million in management fees. This growth reflects both client demand for active exposures and more efficient wrappers and our ability to globalize successful investment capabilities across channels. Our SMA platform reached $69 billion of AUM and generated 17% annualized growth over the last year. While municipals are still the foundation of our SMA business, we're encouraged by the early momentum from extending our capabilities into taxable fixed income. We see SMAs as a meaningful long-term growth opportunity as personalization, technology and adviser demand continue to converge. Our customized retirement platform has grown to $117 billion in assets. As plan sponsors keenly see customized retirement solutions, lifetime income and access to broader asset classes, AB is well positioned to help improve participant outcomes. A recent example is ABC One, our partnership with Brookfield and Carlyle, which combines private credit, private equity and private real assets in a single diversified sleeve designed to sit alongside existing target date funds and managed accounts. We believe that this solution validates AB's role as a trusted asset allocator and thought leader in the retirement solutions, broadening participant access to private markets through a scalable and efficient structure in partnership with market-leading alternative managers. Third, strong sales momentum translated into a return to organic growth. Firmwide net flows were nearly $800 million in the second quarter, ending 4 consecutive quarters of outflows. This marked our strongest quarter of gross sales in 5 years, reflecting broad-based demand across most of our strategic growth areas. Fixed income was the key driver of inflows. During the quarter, we funded a $9 billion passive fixed income mandate from Equitable, reflecting the continued expansion of our relationship beyond preannounced commitments. In addition, strong demand for tax-efficient income and continued market share gains in our municipal franchise generated approximately $3 billion of inflows. Alternatives and multi-asset solutions generated more than $4 billion of net inflows, marking this as our sixth consecutive quarter of positive organic growth. Institutional deployments into private market strategies accelerated during the quarter, supported by demand across private credit, commercial real estate debt and insurance-oriented solutions. These inflows more than offset continued pressure in active equities and taxable fixed income. Active equity outflows were nearly $11 billion, while taxable fixed income outflows exceeded $4 billion. Both were largely driven by retail redemptions concentrated in Asia Pacific, where allocation preferences are increasingly favoring local equity markets given their strong recent performance. Slide 4 provides an overview of our financial results, which Tom will discuss in greater detail shortly. Skipping to Slide 5, I'll review our investment performance starting with fixed income. Credit markets delivered healthy returns during the second quarter despite higher volatility. Following a temporary widening in spreads during April, risk assets recovered as corporate fundamentals remain resilient and investors continue to find value in attractive all-in yields despite tight spreads. Rates moved modestly higher as markets recalibrated their expectations for a higher long-term equilibrium rate. Against this backdrop, the Bloomberg U.S. ag returned 0.7% while the global high-yield index returned 3.7% during the quarter. Our 1-year relative performance improved sequentially with 68% of AUM outperforming. Longer-term performance remains competitive with 81% and 61% of AUM outperforming over the 3-year and 5-year periods, respectively. Within our flagship income strategies, American Income outperformed its benchmark and performed in line with its peer category, while Global High Yield outperformed its category and modestly lagged its benchmark during the second quarter. Turning to equities. Markets rebounded sharply in the second quarter, with very strong returns across regions. Developed markets posted exceptional returns with the S&P 500 gaining 15%, its strongest quarterly advance in 6 years. Emerging markets were standout performer globally as the MSCI Emerging Market index surged 24%. The global recovery was supported by deescalation in the Middle East, leading to lower energy prices and continued enthusiasm around AI. Technology and semiconductor stocks again led the advance extending a period of unusually narrow market leadership. Against this backdrop, our performance struggled with 23%, 28%, 31% of equity AUM outperforming over the 1-, 3- and 5-year periods, respectively. Our relative performance continues to reflect a market increasingly driven by a narrow set of beneficiaries from the AI build-out. Our largest U.S. growth strategies, which emphasize quality, diversification and valuation discipline have been at a step with this environment, weighing on our AUM weighted performance. Recent volatility among AI linked equities and the unwind of leverage positions have reinforced the importance of diversification and the risks associated with over reliance on a single market theme. More broadly, our equity platform remains diversified across styles, sectors and geographies. We have over 25 services with more than $45 billion of the assets under management that continue to outperform over both the 3- and 5-year periods. This includes our $10 billion international strategic equity service, which ranks in the top percentile across 1-, 3- and 5-year periods. We believe diversification across fixed income and quality-oriented equities can help clients generate income, stay invested and broaden their sources of return beyond a handful of market leaders over leveraged to the AI build-out. Now turning to Slide 6. Retail net flows rebounded in the second quarter, driven by record sales momentum and continued demand for fixed income. Gross sales reached $31 billion, the highest level in 5 years, driving $900 million of net inflows in the channel's first quarter of positive organic growth since the first quarter of 2025. Excluding fixed income mandate from Equitable, our gross sales were $22 billion, up 14% versus the same period in 2025. As noted, fixed income was the primary driver led by continued demand for tax-efficient income in addition to the $9 billion fixed income index mandate mentioned earlier. Active equity outflows are still elevated, driven primarily by U.S. large-cap growth redemptions across U.S. and Japan. At the same time, we continue to build diversified sources of growth across the retail platform, including active ETFs and thematic strategies. For example, our security of the future surpassed $5 billion in assets under management and generated $2 billion of inflows during the quarter. Moving to Slide 7, I'll cover our institutional channel. Institutional flows also returned to positive territory in the second quarter, generating more than $0.5 billion of net flows. Demand was driven by alternatives in multi-asset with over $4 billion of net inflows, growing at an 11% annualized organic rate. This marked the sixth consecutive quarter of positive organic growth for the category. Roughly $5 billion in deployments were roughly based across our private markets platform, including residential mortgages, commercial real estate debt, private placements and NAV lending. Active equity outflows persisted but improved sequentially declining to approximately $3 billion in the quarter. Earlier this month, we successfully onboarded $12 billion of commercial mortgage loans from Equitable ahead of schedule. Beyond the revenue contribution, the mandate roughly doubles our scale in the strategically important private asset class, expands our origination and servicing capabilities and further strengthens the flywheel between long-duration insurance capital and AB's differentiated private markets platform. We expect to begin earning management fees on the established assets in the fourth quarter at a high single-digit fee rate. The blended fee rate will increase over time as new originations and servicing revenues are layered in. Our remaining pipeline totals approximately $14 billion and is well diversified, including roughly $5 billion in private alternatives, $3 billion in customized retirement, $3 billion in fixed income and $2 billion in indexed equities. I'd note that this pipeline does not include any of the $100 billion in expected assets from Corebridge. As a result, we have good visibility into future growth. Turning to Slide 8. I will cover Bernstein Private Wealth. Private Wealth experienced a typical seasonal pressure on net flows during the second quarter, but underlying business momentum remains strong as we continue to deepen relationships with ultra-high net worth individuals and families. As expected, tax-related selling weighed on our quarterly net flows, which were negative $700 million. However, net new assets have grown at a 6% annualized rate over the last 12 months. Client engagement remains strong with demand concentrated in alternatives, tax-efficient solutions and passive equities. Our ability to deliver customized after-tax outcomes across both public and private markets continues to differentiate Bernstein with ultra-high net worth clients. Product innovation also supported organic growth, including strong capital raise for our newly launched high-yield muni strategies designed to address increasingly sophisticated tax management needs of high net worth investors. More broadly, Bernstein Private Wealth remains one of our most important strategic growth vectors. It provides direct access to ultrahigh net worth clients expands opportunities to deliver holistic investment solutions and serves as a valuable distribution channel for alternatives, tax-efficient equities, fixed income and customized portfolio strategies. I'll now turn to Slide 9, which highlights the continued growth and diversification of our private alternatives platform. I'm particularly proud to report that we've already reached $91 billion of private market assets under management achieving our $90 billion to $100 billion Investor Day target more than a year ahead of our original 2027 commitment. This milestone reflects the successful execution of our long-term strategy and the hard work of colleagues across our investment, distribution, operations and client service teams. I want to thank everyone across the firm who helped make this achievement possible. Over the past several years, we've built a diversified private markets platform spanning corporate direct lending, alternative credit, commercial real estate debt and private placements. Together, these capabilities provide differentiated sources of return and allow us to serve a broad range of client needs across institutional, insurance, retail and private wealth channels. Importantly, we continue to see a strong growth trajectory. As I mentioned earlier, we successfully onboarded nearly $12 billion of commercial mortgage loans in July that are not reflected on the slide. Including those assets, our private market AUM would already exceed the upper end of our original target range. Closing with Slide 10, I'd like to bring together the themes we've discussed today. The proposed combination of Equitable and Corebridge strengthens what we believe to be a unique competitive advantage for AB. At its core, the flywheel is straightforward. It starts up an asset-light approach that leverages long-duration insurance capital to seed and scale capabilities that can be extended across a much broader client base. The addition of Corebridge meaningfully expands that opportunity. As the $100 billion is allocated over time, it will provide greater scale across the combined general account, enhancing our ability to originate differentiated assets, establish track records, develop new investment capabilities and accelerate growth across the broader platform, particularly capabilities across private placements, residential and commercial mortgages and asset-based finance are not one-off mandates. They become scalable investment platforms that can be distributed across third-party insurance clients, institutional investors, retail wealth and over time defined contribution. We believe insurance private wealth, retirement and private market presents some of the largest and fastest-growing pools of capital globally. Increasingly, AB is differentiated at the intersection of these opportunities, complying scale, customization, investment breadth and direct client relationships in a way that are difficult to replicate. In conclusion, the second quarter reinforces the direction of travel for AB. We reached record AUM, returned to positive organic growth, generated our strongest sales quarter in 5 years and continued to scale the strategic growth platforms we've spent years building. Taken together, these results demonstrate the increasing earnings power of the franchise and the benefits of investing in areas where we see sustained client demand and long-term growth opportunities. Now I'll pass it to Tom to review our financial results. Tom?

Thank you, Seth. Good morning, everyone, and thank you for joining our call. Adjusted earnings for the second quarter 2026 were $0.82 per unit, representing an 8% increase year-over-year. Distributions grew uniformly with EPU as we distribute 100% of our adjusted earnings to unitholders. The quarter was defined by 3 key themes: solid base fee growth, disciplined expense management and continued operating leverage. At the same time, we remain focused on investing selectively in initiatives that strengthen the platform and expand its long-term earnings power. . On Slide 12, we present our adjusted results, which exclude certain items not considered part of our core operating business. For a detailed reconciliation of GAAP and adjusted financials, please refer to our presentation appendix or our 10-Q. In the second quarter, adjusted net revenues reached $888 million, a 5% increase year-over-year. Base fees grew 7% year-over-year, reflecting higher average AUM across the platform, partly offset by the impact of changes in product and channel mix on our firm-wide fee rate. Performance fees totaled approximately $24 million compared with $30 million in the prior year and strong contributions from public market strategies were offset by lower private market realizations. Dividend and interest revenue, along with broker-dealer related interest expense declined year-over-year, reflecting lower cash and margin balances within private wealth. Investment gains totaled approximately $2 million, while other revenues were unchanged from the prior year period. Turning to expenses. Second quarter total operating expenses were $595 million, up 4% year-over-year reflecting disciplined investment in strategic growth initiatives while maintaining a stable compensation ratio. Total compensation and benefits rose 5% year-over-year, with a compensation ratio of 48.5% of adjusted net revenues consistent with both the prior year period and our guidance. We expect to continue accruing at a 48.5% compensation to net revenue ratio in the third quarter while retaining flexibility to adjust as market conditions evolve. Promotion and servicing expenses declined 3% year-over-year, while G&A expenses increased 2%. Given our continued expense discipline and operating efficiency, we are lowering our full year noncompensation expense outlook to $620 million to $640 million compared with our prior range of $625 million to $650 million. Promotion and servicing expenses are still expected to represent approximately 20% to 30% of non-compensation expenses with G&A comprising the remaining 70% to 80%. Interest expense on borrowings was essentially unchanged from the prior year period. ABLP's effective tax rate was 5.8% during the quarter. Given the favorable earnings mix and updated outlook, we are lowering our expected full year ABLP tax rate to 5% to 6% from our prior range of 6% to 7%. Operating income totaled $293 million, an increase of 7% versus the prior year period. Our adjusted operating margin expanded 70 basis points year-over-year to 33% as revenue growth outpaced expense growth despite continued investment across strategic growth initiatives. Importantly, margins remain above the midpoint of our 30% to 35% target, which we originally expected to achieve by 2027. As our strategic growth initiatives continue to scale, we believe the firm is increasingly well positioned to generate operating leverage while continuing to reinvest for future growth. As demonstrated by this quarter's results, several of our newer growth initiatives have attractive economics despite carrying lower headline fee rates. In the second quarter, our firm-wide fee rate was 37.7 basis points. As we have noted previously, the fee rate is highly dependent on where clients are allocating capital and how those assets are funded over time. As Seth discussed, we see growth in strategic areas such as insurance asset management, SMAs, retirement, institutional solutions and private markets. While several of these categories carry lower headline fee rates than our firm-wide average, they represent scalable long duration sources of capital with attractive margin characteristics and strong earnings potential once fully funded and operating at scale. I would also note that this quarter's fee rate was negatively affected by the timing of onboarding the $9 billion passive fixed income mandate from Equitable, which funded on June 30. While this mandate contributed to period-end AUM, it generated little management fee revenue during the quarter, creating a temporary disconnect between asset growth and revenue realization. As Seth mentioned, approximately $11.8 billion of equitable commercial mortgage loans were successfully onboarded in July ahead of our original plan. These assets will begin generating management fees during the fourth quarter at a high single-digit fee rate. The fee rate will increase over time as we originate new loans. Importantly, we view both mandates as highly attractive opportunities that enhance the scale, durability and earnings power of the platform. While they create modest near-term pressure on the reported fee rate, they will contribute positively to revenue growth, operating leverage and long-term profitability. We reached $91 billion of private markets AUM during the quarter, surpassing the low end of our $90 billion to $100 billion target more than a year ahead of schedule and before the onboarding of the commercial mortgage lending mandate. With the addition of approximately $12 billion of CML assets in July, private markets AUM now exceeds the high end of that target range. This milestone validates our multiyear investment strategy across private markets. These capabilities required upfront investments as we build the necessary scale, infrastructure and distribution. With fundraising momentum accelerating, deployment activity increasing and asset growth continuing to compound, we believe private markets will continue to be a key driver of growth. Finally, turning to Slide 13 and our outlook. We now expect total performance fees for fiscal year 2026 of $115 million to $135 million compared with our prior outlook of $95 million to $115 million. This increase is primarily driven by our public market strategies. We now expect public market performance fees of $60 million to $70 million compared with our prior outlook of $25 million to $35 million. The increase reflects second quarter realizations from our alpha-generating U.S. select strategy in addition to improved visibility into potential fourth quarter realizations from our consistently outperforming financial services opportunities fund. For our private markets, we now expect performance fees of $55 million to $65 million compared with our prior range of $70 million to $80 million, which still represents a healthy level of performance fee contribution even as we take a proactive and conservative approach to marketing our exposures and re-underwriting portfolio loss assumptions. As mentioned earlier, we are also reducing our full year noncompensation expense outlook to $620 million to $640 million and our expected ABLP tax rate to 5% to 6%. Let me conclude by summarizing some of the key themes from this call. We were able to improve our financial outlook while continuing to build momentum across several strategic growth areas, including insurance, wealth, private markets, SMAs and active ETFs. Our success in private markets provides a good example. We achieved our target of $90 billion to $100 billion of AUM more than a year ahead of schedule and continue to see a strong pipeline for sustained growth. Looking forward, the addition of $100 billion of Corebridge general account and separate account assets will further expand our insurance platform, increase our scale and provide a meaningful new source of long-duration capital for years to come. The Corebridge assets can be onboarded onto our existing infrastructure with relatively limited incremental expense. As a result, while they may have a lower average fee rate, they have high incremental margins and will be accretive to earnings. We will continue to be disciplined in investing to build new sources of growth, recognizing that it may take time for platforms to scale and reach their full earnings potential. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Bank of America.

Our question is on the merger of EQH and Corebridge. And Corebridge's general accounts are managed by a number of third-party managers, which have various contracts. And I heard your low fee rate, high-margin comment. But can you update us on your ability to manage more of Corebridge's general accounts specifically, could they be 1 day manage the whole $200 billion, and actually, it will probably be bigger than $200 billion when we think about that day in the future.

Greg, it's Onur. Let me take that question. As you pointed out that the Equitable Corebridge merger represents a big AUM opportunity for AllianceBernstein. As it was announced at the time of the merger announcement, we expect this $100 billion of AUM post the close of the transaction over a couple of year time period. And that comes from both general account assets and separate account assets. To put things into perspective, the combined general account assets will be around $350 billion. Separate account assets will be around -- sorry, $200 billion. So the AUM base of the combined entity is very, very significant. And on top of that, the origination on the liability side is around $70 billion to $80 billion per year. So it will have a lot of money in motion. So given that large AUM base and liability origination, we believe even in the existence of other asset managers managing GA assets, we will have a significant amount of upside in terms of growing our share in that total AUM. Obviously, the merger has not closed yet. It's expected roughly by year-end. And hence, we will not be able to provide much more granularity in terms of the bottom-up but we remain very confident and optimistic about its impact both on our AUM revenue and profitability. And in terms of the profitability by category, again, it's going to be very asset class dependent. There's going to be higher fee private alternatives kind of opportunities as well as high fee equity type of opportunities depending on the channel and underlying vehicle but the core fixed income part of the portfolio, which might be easier, faster to move, that tends to be lower fee. That said, very scalable as well.

I have a follow-up on Asia. So I think we all know AB has a strong retail and institutional business across Asia. You have many U.S. and global funds like American Income, American Growth, Global High Yield, which all across the region. Now in the last 2 years, we had a trade war escalation and in this year with the Iran conflict, so through these events, I'm curious on how overall appetite and allocations for U.S. assets have trended across Asia.

Yes, sure. Great question. I'll dig into it and a little bit separate between asset class and channel. Starting with American Income and GHY, which are our taxable fixed income franchises in the region. The demand there has been less strong. To your point, with the Middle East crisis, with the lingering inflation fears and uncertainty in the rate outlook some of the clients, retail clients basically rooted into high-performing local equity markets and stayed away from some of the income-generating fixed income strategies. And some of them diversified into multi-assets to have that equity exposure in addition to some income generation. . Within that, we had outflows from American Income portfolio and GHY, as you are aware, however, we benefited from that in several other categories like our All Market Income, multi-asset product, which gathered significant assets as well as some of the more international type strategies like International Equities, Emerging Markets, et cetera. On the broader picture, we have definitely seen some broadening of appetite away from U.S.-only equity strategies to regional and global. So definitely, we have seen a little bit of that client demand for diversification across retail and institutional. And then finally, on the institutional side, the demand for fixed income actually remains strong. If I think about the pipeline and the pre pipeline, I think the demand I'm seeing from Asia, ex Japan and Japan institutional clients, including fixed income, is quite robust and it's robust across both fundamental investment grade fixed income as well as our systematic franchise. Actually, we added fixed income mandates from institutional clients to our pipeline in the quarter. And then finally, on alts, the retail alts, particularly retail private credit demand is, again, very muted. There's been a lot of news around this, the retail clients rotated out of private credit in the short term while institutional clients remain invested. There is -- we have seen some uptick on the hedge fund strategies in the region from retail clients. Again, it tends to be pretty fast moving money there. So that's a bit of the broad picture for you.

I guess, Craig, it's Seth. I just would add that we have seen what I would call cyclical rotations in and out in prior periods. And despite the trade stuff, which is disruptive for sure, and the war or the activities in the Gulf, I'd say that, at least in our view, the lack of interest in the fixed income strategy has more to do with pretty compelling local markets alternatives as Onur alluded to than anything particular to U.S. dollar fixed income. Most of the markets we really are successful in Asia are tethered either explicitly or implicitly to the dollar. So that is the alternative, and we don't see any buyer strike. I just think it's a cyclical phenomena.

Your next question comes from the line of Bill Katz with TD Securities.

Just a couple of questions, maybe start off with Onur perhaps. I wanted to zero in on the private client side. I was wondering if you could maybe comment on what you're seeing in terms of the competition for sort of third-party financial advisers. A number of your peers are sort of speaking to very elevated competition. I'm sort of curious if you're seeing it at the higher end. And then maybe a conceptual question for you as well. Could you sort of highlight how much alts are as a percentage of the private client AUM and where do you think that ratio can go over time?

Sure. Thanks, Bill. Yes, our private wealth business remains very resilient and robust. So we have not been broadly impacted by the competitive pressures, both on the adviser recruiting side or on the client retention set of things. To me, the proof points are the adviser productivity continues to go up. We are on track on our adviser recruiting. Our adviser head count is up 4% relative to end of year '25. So definitely seeing strong results there. And then in terms of the alternative side of things, we had a very strong alts fund raise in the second quarter. It was around $900 million for private wealth, significantly higher than the same period prior year as well as the first quarter despite all the headlines. And our private credit strategies continue to hold up really well with low kind of redemption. So overall, feeling very robust about the business performance across clients, advisers as well as the asset mix. In terms of alternatives, there's definitely some upside in terms of greater allocation. We have been using alternatives in our client portfolios for a long time. I think it is already approaching roughly 10%. And I can definitely see that based on our target asset allocation going up to mid-teens over time. I mean, ultimately, we are a fiduciary, we are client need and demand driven. We are not going to shoot for a precise number. But given the client demand and the robust products that we have, we will see that go up. I mean to give an example, I mean, in the second quarter alone, we launched multiple new products ranging from long/short hedge fund strategies to a muni private credit funds and then new vintages of some of the private equity and venture capital funds. So as a result, our platform continues to broaden and it attracts more assets from existing clients or brings new clients.

Great. And then maybe just a follow-up for Tom. Can you unpack maybe the decline in the private market performance fee opportunity set. I would have thought it would be more on base rates, but it sounding more like some kind of write-down. Just wondering if you could maybe click in a couple of sentences and give a little more detail on what's driving the decline versus the prior guide.

Yes, there's primarily 2 things going on there, Bill. It's an unrealized mark in the portfolio and then there were some tax events inside the fund at the investor level that flows through to our performance fee collection there. .

Your next question comes from the line of Alex Blostein with Goldman Sachs.

I wanted to get your thoughts on the interplay between the fee dynamics versus profitability over time, especially as corporate assets come on. I think initially at a pretty low basis points kind of 10-ish range or so, I believe, but obviously, you highlighted pretty high incremental margin. So as you think about the profitability in the business as a whole, relative to the margins where they are today, where do you guys see them going over time?

Yes. Alex, let me take that. As I refer earlier in the Q&A. We don't have a bottom-up view of the exact AUM split by asset class. Obviously, the fee rate will be a blended average. Starting from the other side of your question. From a profitability perspective, we expect the profitability of that incremental AUM to be robust. I mean, definitely, in line with our current margin or even better, depending on the asset class. So as a result, we remain quite optimistic and bullish about the impact of that AUM on our business economics. And an effective fee rate, although it's an important metric that we track. As you kind of imply, it's not necessarily a predictor of margin by itself. And we have a lot of persistence, lower fee asset classes that are highly profitable, like our industry-leading muni platform. So as a result, we should think about fee rates and margin as 2 separate things and not necessarily see a 1:1 link between the two. On the GA assets, even in the short term, as I mentioned earlier, there's going to be a significant amount of potential core fixed income assets we can onboard, that would tend to have a negative impact on the effective fee rate, not necessarily on the margin.

Yes, it's only I would have thought it would actually be a much better impact on the margin and the profitability would be quite a bit higher than the existing margin. So I was just kind of thinking through like once it's all onboarded where the profitability of business could kind of shake out over time.

Yes, definitely, there's more upside from an incremental margin perspective.

Yes, makes sense. All right. For my follow-up, I was hoping to get your thoughts on some of the recent focus from the Treasury Department on tax advantage investments. I think that's been a focus area of growth for you guys as well. So maybe just give us a broader view of sort of exposures across the platform to tax-advantaged strategies, obviously, maybe outside of munis, but the more kind of explicitly focused tax advantage products? And how do you think about growth in this part of the market?

Yes, absolutely. So unlike some of the other publicly listed asset managers, our exposure to some of the higher risk categories is very small. Obviously, treasury and estimated comments that led to some concern in the marketplace. But the focus areas of those comments, those transactional product types for us is very, very small as a percentage of total. So I don't see there's a material risk for our business. And they were very clear. They're not targeting the broader tax-aware investing or tax loss harvesting strategies if done properly. And a great majority of our assets fall in those categories. As you mentioned, Munis is the most significant part, and that was not referenced and direct indexing platform, which we have over $10 billion is the long only. So as a result, our exposure to those other categories is very, very small. .