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spk08: Welcome to Invesco's first quarter earnings conference call. All participants will be in a listen-only mode until the question and answer session. At that time, to ask a question, press star 1. This call will last one hour. To allow more participants to ask questions, one question and a follow-up can be submitted per participant. As a reminder, today's call is being recorded. Now I'd like to turn the call over to Greg Ketron, Invesco's head of investor relations. Thank you, sir. You may begin.
spk07: Thanks, operator, and all of you joining us on the call today. In addition to the press release, we've provided a presentation that covers the topics we plan to address today. Press release and presentation are available on our website, Invesco.com. This information can be found by going to the investor relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two of the presentation regarding these statements and measures, as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for and does not edit nor guarantee the accuracy of our earnings call transcripts provided by third parties. The only authorized webcasts are located on our website. Marty Flanagan, President and CEO. Andrew Schlossberg, Invesco's Head of Americas and who will become President and CEO upon Marty's retirement on June 30th of this year. And Allison Dukes, Chief Financial Officer, will present our results this morning. After we complete the presentation, we will open up the call for questions. Now I'll turn the call over to Marty.
spk11: Thank you, Craig. I'm going to start on page three, which is the highlights for the first quarter, if you want to follow along. The early part of 2023 provided investors and money managers reason for modest optimism as most major financial markets came to ground in that period, partially offsetting the significant declines we saw last year. Inflationary pressures showed some sign of easing and the COVID-19 pandemic at long last looks behind us. That said, heightened level of volatility persists and the financial markets reacted with caution in March as we experienced several bank failures during that period. Investors once again saw safety and risk off assets and net flows across the industry were pressured again. Although organic growth remains lower across our industry, net inflows in the first quarter, marking a return to organic growth. This progress is especially significant considering the mixed flow picture for the industry overall during the quarter. Growth this quarter is driven by areas in which we've invested for years and have been intentional in cultivating deep client relationships. Fixed income capabilities, the institutional channel, ETFs, all experienced strong net inflows during the quarter. Each of these areas has demonstrated an escrow's ability to sustain growth throughout the full market cycle. Fixed income delivered net flows for the 17th straight quarter, while the institutional channel has now been in net flows for 14 straight quarters. As we'll discuss later, our pipeline remains strong, pretending well for future growth. Our solutions business helped drive the institutional business to net long-term inflows of $6.6 billion in the quarter, Meanwhile, net long-term flows in ETF vehicles have now been a positive 10 out of 11 in the last quarters. Growth in the ETF business is broad-based with net inflows this quarter in both equity and fixed income strategies. I'm confident that when investor appetite returns to risk assets, we will see significant growth in this area. Net flows in active equities remain a headwind, but improved meaningfully compared to our experience in 2022. Net long-term outflows and global equities were $2.5 billion in the first quarter, including $1.2 billion from our developing markets fund. While still challenging environment, this was the best flow performance quarter in the asset class since 2021, with net outflows being less than half the net outflows in the fourth quarter. As we discussed on our last earnings call, the Chinese markets have continued to be unsteady for several months as the country is in the midst of transition Despite the near-term challenges, we remain extremely bullish on the opportunity in China over the long term. We rank 12th out of 160 mutual fund companies operating in China, and we remain the largest foreign-owned asset manager and the fastest-growing market owner in our industry. We expect to be in the market with new product launches during the second quarter, and we are optimistic for recovery and flows in the balance of 2023. Let me briefly touch on the private from three new COOs launched in that period. Real estate transactions slowed across the industry as markets of the turmoil in the banking sector and the higher interest rates made financing more difficult. However, our direct real estate portfolio has performed well and is diversified across geography, sectors, and investment styles. Alison will get into greater detail in just a few minutes. While we expect the growth may be more challenging, investing in, growing our business, maintaining a strong balance sheet, and providing a steady return of capital to our shareholders is a top priority. I'm pleased to know that our Throughout his more than 20-year career at Invesco, Andrew has successfully led several large businesses and earned the respect of clients, employees, the board of directors, and executive leadership team. Andrew and our highly experienced executive leadership team are well-placed to lead Invesco into the next chapter. I'm excited for the future of the firm as we build on our market-leading position to further accelerate growth under Andrew's leadership and that of the executive leadership team. This is the most talented, experienced leadership team and the team as Chairman Emeritus from June 30th through the end of 2024. Before we turn over the call to Allison, I'd like to introduce Andrew and invite him to say a few words. Andrew.
spk06: Great. Thank you, Marty, and good morning to everyone. Let me start by saying how grateful I am to Marty for his tremendous leadership as Invesco's CEO these past 18 years. Marty's truly been a visionary in the industry, and he's positioned Invesco extremely well to win in a fast-changing environment. And during my 22 years at Invesco and working closely with Marty during his tenure as CEO, I've seen it and been a part of the evolution of our firm. And during this time, we have routinely updated our strategic priorities ahead of changing client needs, evolved the leadership, and developed the talent of the firm. And I'm looking forward to the opportunity to build on this strong foundation and the legacy that Marty and our team have developed over many years of hard work and dedication for our clients, our shareholders, and everyone at Invesco. I know that we have the right capabilities. We have deep client relationships, strong talent, and an experienced executive leadership team in place to be a force in the asset management industry for years to come. I'm also looking forward to assuming the CEO role at a time when, once again, our industry is going through meaningful change with new technological developments, enhanced client delivery capabilities, and a high bar for investment quality. As an organization, we're committed to our growth strategy and the key capabilities that we've been discussing with all of you, including ETFs, greater China, private markets, active fixed income, and active global equities, and our solutions offering. Our executive leadership team is focused on further enhancing these capabilities and evolving these strategic priorities both at pace and with conviction. And as Marty noted, we're very well positioned to capture demand and develop even deeper relationships with our clients over time. I'm also committed to driving a high level of profitable growth and financial performance, continuing to further strengthen our balance sheet and return capital to shareholders. And finally, I'm excited to engage more deeply with the investment community, and I look forward to spending time and working with all of you in the quarters and years to come. And with that, I'm going to turn it over to Allison to provide a more detailed look at our results.
spk00: Thank you, Andrew, and good morning, everyone. I'll start with slide four. Overall, investment performance improved in the first quarter with 64% of actively managed funds in the top half of peers or beating benchmark on both a three-year and a five-year basis, up from 61% and 63% in the fourth quarter. We have strong performance strengths and fixed income and balance strategies where there is solid client demand. Performance lags benchmark in certain US equity strategies, but performance is trending positively in a number of global equity and alternative strategies. Turning to slide five, we ended the first quarter with $1.48 trillion in AUM, an increase of $74 billion as compared to the last quarter, as most market indices posted gains despite continued volatility. Market increases, foreign exchange movements, and reinvested dividends increased assets under management by $65 billion Total net inflows were $9 billion, inclusive of $8 billion into money market products. I'm pleased to note a return to organic growth as we generated $2.9 billion in net long-term inflows in the first quarter. The improvement in net flows, given the ongoing uncertainty in financial markets, further demonstrates the diverse nature of our business mix and should once again place Invesco among the best performing asset managers in terms of organic growth. Passive capabilities generated net inflows of $5.4 billion, while net redemptions and active strategies moderated, with net long-term outflows of $2.5 billion in the first quarter, as compared to $10.5 billion in the fourth quarter of last year. Key capability areas, including ETF, fixed income, and the institutional channel, all contributed to our growth this quarter. Invesco ETF generated $2.8 billion of net long-term inflows in the first quarter. equivalent to a 4% annualized organic growth rate. Volumes have been down across the ETF industry from the record highs experienced in the first quarter of 2021 through the first quarter of 2022. But as Marty noted, our ETF business has now been a net inflows for 10 out of the past 11 quarters. The NASDAQ 100 QQQM was one of our top selling ETFs this quarter and has now grown to over $8 billion in AUM since its launch in late 2020. We also saw strong flows into our S&P 500 equal weight and bullet shares corporate bond ETFs. Partially offsetting growth in equity and fixed income ETFs were $2.5 billion of net outflows in currency and commodity ETFs, which are included in our alternative asset class. We experienced net outflows of $3.7 billion in the retail channel during the first quarter. Net flows were roughly breakeven in EMEA, while Asia Pacific and the Americas were both in net outflows. As Marty highlighted at the top of the call, the institutional channel garnered net inflows for the 14th straight quarter to $6.6 billion. We were in net inflows in all three of our global regions and growth accelerated to 7% on an annualized basis. After several quarters of strength and institutional fixed income, equity mandates were responsible for our largest fundings in the first quarter. Advancing to slide six, net flows by geography improved as compared to last quarter and turned positive the quarter in both Americas and EMEA. This was mainly due to slower redemptions in the retail channel, as well as the funding of several institutional mandates. Net flows were breakeven in Asia Pacific and net outflows in our China joint venture were offset by growth in Japan and our Hong Kong institutional business. Looking at flows by asset class, net outflows and active equity strategies improved in the first quarter, led by moderating of redemptions and our global equity capabilities. Net outflows and global equity strategies were $2.5 billion in the first quarter, including $1.2 billion from our developing markets funds. This compares to $6 billion of net long-term outflows in the fourth quarter, which included $3.1 billion of outflows from developing markets. Fixed income capabilities garnered $2.5 billion in net long-term inflows, despite higher redemptions in Chinese fixed income products that Marty spoke of earlier. Growth in fixed incomes this quarter spanned both taxable and tax-exempt offerings, as well as the full range of vehicle types, including mutual funds, ETFs, and SMAs. This reflects the breadth and depth of our global fixed income franchise, and we see opportunity in this asset class over the remainder of this year. Alternatives experienced net outflows of $3 billion in the first quarter. Private markets net inflows were $600 million, driven by the launch of three CLOs that raised $1.5 billion in aggregate and direct real estate net inflows of $600 million. Offsetting growth in these areas of private markets were net outflows in bank loan strategies. Currency and commodity ETF net outflows, as I mentioned earlier, were the primary driver of alternative net outflows. I'd like to take a moment to highlight our direct real estate portfolio. which has $73 billion of assets under management as of March 31st. For our real estate business, we offer the full range of investment styles across the risk return spectrum, and we invest primarily in real estate equity. We also invest in real estate debt, which comprises less than 10% of our global real estate portfolio. Our direct real estate holdings are well diversified by property type. Commercial office properties comprise about one third of our assets under management. Apartments and other residential properties account for nearly one quarter, and industrial properties about one-fifth. The remaining 20% of our properties span retail and specialty sectors including mixed-use development, self-storage, and medical. Finally, we are diversified by geography within each property type. By total asset value, 40% of our office holdings are in EMEA and Asia Pacific, where the market dynamics affecting demand for office space are significantly different than those in the United States, and because the adoption of remote working models is much lower outside the U.S. Several of our direct real estate funds use leverage, but were measured in our approach, and the average loan-to-value across our direct real estate funds was approximately 30% as of December 31st. These figures may fluctuate over time, and they vary across specific funds. As Marty mentioned earlier, real estate transaction activity slowed during the first quarter, and we would expect activity to be muted over the balance of the year until markets find more stable footing. Longer term, we expect private markets and more specifically direct real estate and private credit to be a driver of growth, and we are in a strong position to capture that demand. And now moving to slide seven, our institutional pipeline was $22.1 billion at quarter end, a decrease from $30 billion last quarter. We had good pull-through from our pipeline in the first quarter, which contributed to $6.6 billion of net long-term inflow. Our pipeline has been running in the mid-20 to mid-$30 billion range, dating back to late 2019, so this is on the lower end of that range. But we view this pipeline as strong, given the market environment and the significant funding that took place in the first quarter. As we've noted previously, market volatility is causing some mandates to take longer to fund, and we would estimate the funding cycle of our pipeline is running in the three to four quarter range versus the two to three quarters prior to the market downturn. Our solutions capability enabled 14% of the global institutional pipeline as of the first quarter, as well as several of the mandates that funded recently. We embed solutions into our client interactions and we have ongoing engagement about new opportunities. The pipeline reflects a diverse business mix, but has helped Invesco sustain organic growth and institutional for more than three years now. Turning to slide eight, net revenue of $1.08 billion in the first quarter was $32 million or 3% lower than the fourth quarter and $176 million or 14% lower than the first quarter of last year. The decline from last quarter was mainly attributable to a seasonal decrease in performance fees, which were $50 million lower and two fewer days in the first quarter, which accounted for nearly $25 million in lower net revenue. This was partially offset by higher investment management fees of $25 million. The decline from the first quarter of last year was due largely to lower investment management fees driven by lower AUM levels. Total adjusted operating expenses in the first quarter were $749 million, $20 million lower than the prior quarter, and $9 million lower than the first quarter of 2022. Compensation expense increased by $12 million as compared to the fourth quarter as seasonally higher payroll taxes and benefits were largely offset by the lower incentive compensation paid on performance fees. Included in compensation expense this quarter is $13 million of costs related to executive retirements and other organizational changes. We expect to recognize approximately $20 million of additional costs related to executive retirement in the second quarter. As we've discussed, we manage variable compensation to a full year outcome in line with company performance and competitive industry practices. Historically, our compensation to net revenue ratio has been in the 38 to 42% range trending towards the upper end of that range in periods of revenue decline. At current AUM levels, we would expect the ratio to continue to trend towards the higher end of that range for 2023 when excluding the cost pertaining to executive retirement. Marketing expenses of $28 million were $6 million lower than the prior quarter, coming off the seasonal highs we typically see in fourth quarter. Marketing expenses were modestly higher than the same quarter last year by $2 million. Property office and technology expenses were $5 million lower than last quarter, primarily due to lower software costs and $2 million of property decommissioning associated with our Atlanta move that did not occur. On that note, I'm happy to share that we are speaking to you from our new global headquarters in Midtown Atlanta as we completed our move earlier this month. G&A expenses of $95 million were $21 million lower than the prior quarter. partly due to lower third-party spend on technology projects. As we've discussed previously, we continue to invest in foundational technology programs that will enable future scale. These expenses span G&A and property office and technology expenses, and spend may fluctuate from period to period. In the first quarter, we also benefited from $10 million in indirect tax credits. We do not anticipate these tax credits will recur at these levels going forward. We maintain an extremely disciplined approach to expense management and are focusing hiring and investment in the key capability areas that are driving our growth. As Marty and I have discussed previously, optimizing resource allocation to efficiently drive growth has and will continue to be a top priority for the organization. Now moving to slide nine. Adjusted operating income was $327 million in the first quarter. $12 million lower than the prior quarter due to lower net revenue partially offset by lower operating expenses. Adjusted operating margin was 30.4%, broadly in line with 30.6% in the fourth quarter, but lower than the 39.5% a year ago prior to significant market declines. Excluding $13 million of costs related to retirement and other organizational changes, first quarter operating margin would have been 31.6%, an increase of 100 basis points as compared to last quarter. Earnings per share of 38 cents was one cent lower than prior quarter and 18 cents lower than the first quarter of 22. Excluding these expenses related to executive retirement and other organizational changes in the first quarter would add two cents to earnings per share. The effective tax rate was 24.1% in the first quarter, lower than 26.9% in the prior quarter, primarily due to non-operating gains on seed money investments and lower tax jurisdictions. We estimate our non-GAAP effective tax rate to be between 23% and 25% for the second quarter of this year. The actual effective rate may vary from this estimate due to the impact of non-recurring items on pre-tax income and discrete tax items. I'll wrap up on slide 10. As you heard earlier from Marty and Andrew, building balance sheet strength remains a critical priority. We're making steady progress, and total debt of $1.5 billion is at its lowest level in more than a decade. We ended the quarter with $889 million cash and cash equivalent and zero borrowing on our credit facility. The first quarter is typically a period of seasonally higher cash needs, and we anticipate building cash in the coming quarters. Our leverage ratio, as defined under our credit facility agreement, was 0.8 times at the end of the first quarter, in line with both last quarter and the first quarter of 2022. If preferred stock is included, our fourth quarter leverage ratio was 3.4 times. As highlighted earlier, we're pleased to note that our board approved a 7% increase in our quarterly common dividend to 20 cents per share, effective this quarter. This reflects the strength of our balance sheet, position and stable cash flows despite the uncertain markets we've been facing. We also renewed our credit facility for another five years with favorable terms, as well as increasing the capacity of the facility from $1.5 billion to $2 billion. This builds additional flexibility for managing our balance sheet as we prepare to redeem the $600 million senior note maturing in January of 2024. Markets have remained volatile thus far in 23. There have also been signs that a modest recovery could be on the horizon. Overall, I'm pleased with the progress we made this quarter, returning to organic growth, tightly managing expenses, and methodically building balance sheet strength. Our firm has successfully navigated market volatility in the past. We're poised to emerge stronger in a market recovery and capitalize on future growth opportunities where they emerge. There's a lot of hard work ahead of us, and I'm excited to partner with Marty, Andrew, and the executive team as we lead Invesco into a new era. And with that, we'll ask the operator to open up the line to Q&A.
spk08: Thank you. As another quick reminder, if you'd like to ask a question, please press star then 1. Remember to unmute your phone and record your name clearly when prompted. If you'd like to withdraw your question, you may press star 2. Our first question comes from Craig Siegenthaler with Bank of America. Your line is open.
spk04: Thanks. Good morning, everyone. So my question is on China. So you're seeing bond flows improve really throughout much of the world, but not in China. And I'm guessing the comparatively low interest rate backdrop in China versus the U.S. could be one factor. But can you talk about what's driving the net redemptions in China, not just in your Great Wall JV, but across the industry, and also any perspective you have on a rebound, especially given pretty strong long-term dynamics, including aging populations and retirement.
spk11: Yeah, let me, I'll make a couple of comments and Allison and Hendrick can chime in. So, you know, as I said, our view has not changed. It's the single greatest opportunity in asset management. And we have a very, very strong position there. You're right. Andrew and I, with the leadership. We were just in China two weeks ago, and I feel they're absolutely focused on economic growth. You can actually feel it. The energy is very, very high. I anticipate the markets will start to follow that and investor behavior behind that, and for sure by the second half of the year, if not before. And we do look at this first quarter and early December of last year is really transitional period.
spk00: I would just say specifically, Craig, I mean, what you saw is the yields really increased in the fourth quarter. And that obviously drove prices lower. And that caused a bit of a spook. And it really sent investors to redeem and drive redemption higher industry-wide. So I think to your point of what are we seeing in the industry, that was really an industry phenomenon that drove that behavior. It was very pronounced coming into the first quarter. we've definitely seen it begin to moderate as the first quarter unfolded and feel better as we're starting the second quarter for sure as we see what's happening there. That also drove product launches lower. And as you know, product launches drive a lot of the flow activity in China. And so in the first quarter, we only launched four products and they were relatively low in terms of the flow capture there. And again, that was consistent with a lot of the industry dynamics We're optimistic to see more in the second quarter. We have a pretty strong pipeline of product launches, and we're optimistic that market sentiment is improving modestly, and a lot of those dynamics and that phenomenon should have played itself out.
spk04: Great. Thank you, Allison. And just as a follow-up, really appreciate those details behind the real estate business, but as you take a step back, How much of that $73 billion of AUM is in vehicles that can be redeemed versus vehicles that are more permanent or long-term and can't be redeemed? And then is there any high-level data you can give us to give us some comfort around, especially the office portfolio? I'm thinking loan-to-value, interest coverage, ratios like that.
spk00: Sure. Let me take a stab. I'm not sure if I could answer exactly what percentage could be redeemed. I think what I would say is, in general, through cycles, we see on average about 5% to 6% of our AUM in a redemption queue. You would expect it to be a little bit higher than that in times of market stress. You'd expect it to be a little bit lower in better markets. And I'd say, you know, we're probably running a little bit higher than that five to 6% at the moment, but it's not not in a disconcerting way. It usually takes a few quarters to fully fulfill some of those redemption requests. And then we also see that in times of equity market recovery. Some of those redemption requests actually get cancelled. So you manage through and we'll see where it goes. But we don't feel, you know, any sort of discomfort with where it is now, nor is it unusual relative to past cycles as we think about coming into COVID. I would note we've been managing our office exposure down since COVID began in March of 2020. So when you look at where our office exposure was coming into 2020, it made up about 45% of our total portfolio. Today, that's down to about 35%, and as we noted, that's going to be even lower in the United States, and we've been managing it down more aggressively in the U.S. It's going to trend quite a bit higher in places like APAC, where you just have not seen an impact to the office environment. In terms of loan-to-value, I would say, generally speaking, it's about a 30% loan-to-value. It's not running a whole lot higher than that. I will also say in terms of our lenders and the sources of that leverage, it's very well diversified. No concerning exposures anywhere. I feel like we have a lot of diverse good sources of funding, and those have held up really nicely.
spk04: Great. Thank you very much.
spk08: Thank you. Our next question comes from Daniel Sanin with Jefferies. Your line is open.
spk09: Thanks. Good morning. Andrew, we're hoping you could expand upon the areas of growth, you know, ETFs, active fixed income, China solutions, all the areas that have been listed in the presentation and you've talked about the, you know, Marty and Tina have talked about for some time. Curious about how you're thinking about on the margin changing those areas of increased focus or less given the market backdrop today is much different than probably when these were outlined initially, you know, a couple of years ago.
spk06: Yeah, thanks, Dan. Look, like I said at the beginning, over the whole course of my career, the last 20 plus years at Invesco, you know, we've been continuously updating our strategic priorities and adjusting and changing where client needs are going and where we anticipate them going. And I've been a part of putting together those strategic priorities that Allison and Marty have been talking to you all about over the last year or two. And I frankly don't see any of those really changing in terms of our priorities at all. But what I would say is, you know, how do we come up with them? And they're really a function of where we believe client demand will grow and where we think we have competitive strength to build on. And so the areas that I would highlight will sound similar to what you've heard before. I'd really emphasize the barbelling of client needs between all some private markets and ETFs and indexing is a huge part of the growth and where we have strong franchises We've talked about China as a growth market for us, and we believe in that regardless of geopolitics and ebbs and flows and cycles. We have strong franchises and active fixed income and solutions, and we're going to continue to scale those. And we're going to ensure we have quality and differentiation in our active equity with an emphasis on global in particular. And we're going to continue to build scale through the back and middle office transformations we've been talking about with investments in both Paul Cecala, foundational technologies and innovation for enhancements and I guess what I say is we'll continue to look at those and evolve them the team is highly focused on executing. Paul Cecala, we're going to continue to accelerate the pace with regard to that and continue to get sharper on our strategic execution to deliver so that's pretty much where where we are right now, and you know we'll continue to keep you updated.
spk09: Paul Cecala, Thanks that's helpful and then. Alex, I just wanted to clarify some of the expense numbers you gave for the quarter. I think you said there was a $10 million one-time benefit. I think that was in G&A. But maybe if you could talk about what the kind of late run rates as we think about the rest of the year based upon what we got here in the first quarter in terms of expense levels.
spk00: Sure. So yes, I noted that there was a $9 million indirect tax credit that was in GNA and that would not recur. So you shouldn't expect that. I also noted that inside of comp expense, we have an unusual $13 million of retirement expense related to our executive changes. And we expect to incur another $20 million related to the same in the second quarter of this year. And so when you think about the $9 million that won't recur plus the next $20 million of retirement expense, I would say beyond those, we would expect we can hold expenses roughly flat for the next few quarters, adjusting for variable comp, of course, and that roughly flat is all things being equal, but we would adjust variable comp in line with market changes.
spk01: Understood. Thank you.
spk08: I think our next question comes from Brennan Hawkin with UBS. Your line is open.
spk10: Thank you, and good morning. This is Adam Beattie in for Brennan. Just wanted to ask about the institutional pipeline and maybe the pipeline to the pipeline, if you will, how discussions are going there, products or areas of interest. And I think in the past you've also said that the blended fee rate on the institutional pipeline is roughly the same as the firm-wide blend. Wondering if that's still true after all the 1Q fundings. Thank you.
spk11: Let me make a couple comments. We'll chime in here. So let me talk about outside the United States. As I mentioned, Andrew and I were just out in Asia. The client interactions in China are very strong. We continue to expect growth there institutionally. Japan also And Australia, the client interactions are very strong, and that market in particular is very much along the lines of what Andrew just mentioned of being, you know, very barbell-oriented, probably the most extreme that we sort of run into, and we're positioned very strongly against that, whether it be in private credit as an area of more recent interest where historic has been heavily real estate, and you've heard of our success on the passive side in Australia. So it's all heading the right way institutionally, but Andrew, why don't you pick up?
spk06: Yeah, I mean, we're well positioned with the strategies that Marty was just alluding to where we're seeing more and more investor interest, be it private markets or indexing, fixed income, multi-asset, all sort of in demand. One thing I'd say is, Alex maybe shares a couple of details, definitely with dislocation that's going on in the market over the last several quarters, We are seeing institutions sort of rethinking their allocations. It's putting decisions in motion that we think are going to be opportunities for us to capture. At the same time, though, it is delaying some of those decisions as they're looking for more clarity. So it's a bit of a both ends of the spectrum story.
spk00: And Adam, I did that on the fee rate. And the fee rate does tend to run from, it ranges from mid-20 to mid-30 basis points. It has been actually holding up very nicely. If you think about the information that we shared on page seven, you can see a large portion of the pipeline is comprised of active equities as well as alternatives, and specifically that would be private markets primarily. So it is running on the higher side. I was pleased to see The active equity component of it, recognizing we had some meaningful active equity fundings in the first quarter, and the pipeline is replenishing nicely in a really well-balanced way. It does reflect the barbelling that Andrew noted, but it's holding up nicely in terms of fee composition.
spk10: Excellent. Thank you for all that detail. I appreciate that. And then just a quick follow-up on G&A, and you had a couple call-outs. but just in terms of the sort of third-party spend, was wondering if that was, you know, unusually low or what the trajectory might be looking like for that in the future, just in terms of cost control. Sounds like you've got that pretty well in hand, but just curious on the outlook there. Thank you.
spk00: It was on the low side this quarter, and I would expect it to fluctuate more. I don't expect that lower third-party spend would hold necessarily. But, you know, as we noted, the technology foundational enhancements we've been making, you're going to see that show up in GNA and property office and technology. So I think my comment earlier in response to Dan's question around excluding the indirect tax benefit and excluding the retirement expense, I would expect expenses to be roughly flat for the next few quarters, all things being equal.
spk10: Got it. That's great. Thank you, Allison.
spk08: Thank you. The next question comes from Bill Katz with Credit Suisse. Your line is open.
spk01: Okay. Thank you very much. And Marty, congratulations on your next phase of your career, and Andrew as well. So just coming back to the private market, private credit opportunity, Could you maybe talk a little bit, go into the next layer down in terms of where you see the opportunity on direct lending and then incrementally where else you might sort of need to spend? And then Andrew, you mentioned you're seeing some reallocations by institutions. Can you talk about where they're coming from to fund some of the new opportunities? Thanks.
spk11: Let me make a couple of comments and I'll get in here. So first of all, Bill, thanks for your comments. The fundamental strength is bank loans, CLOs, and that is the core of the franchise. We have been building out direct lending. We do see that as an opportunity. We also know it's a crowded space, but we have good capabilities, good performance, But again, those are two add-ons. Our core capability is there when we think there's opportunity.
spk00: I don't know if I'd add anything there. I'll say this and I'll let Andrew chime in because I think you actually directed that last part of the question. In terms of where we expect to, how we expect to continue to fund growth in these key capabilities, I would just say that's exactly what we've been doing for the last two years. And so as you think about the fact that, you know, we've been managing expenses lower for the last 18 months, obviously that's been, again, some very challenging market backdrops. We've been investing throughout and we have been reallocating ever since we did our strategic review a couple of years ago, consistently reallocating expenses to fund these key growth capabilities. So the growth of China, the growth of private markets, the growth of our fixed income business, our ETF franchise, we have been investing all along the way and really holding expenses very tightly managed, well maintained alongside that. I just want to make sure it's clear that's not a new strategy. That's exactly what we've been focused on as a team.
spk06: And Bill, hey, thanks for the question. What I would add to Allison's last point and then pick up on Marty's is just to emphasize what Allison said, that reallocation is going to continue and it's going to continue towards private markets, both our real estate equity and debt and our private credit, which comprises the bank loan strategies that Marty was talking about as well as direct lending. and distressed debt. We see demand over the long run continuing to grow there. In terms of your question about where are we seeing money come from, it's a little early to pinpoint it exactly, but a couple of things we're seeing. One, we're actually seeing people moving beyond their passive cap weighted benchmarks and actually moving out to other forms of indexing, but also into active strategies, both on the equity and fixed income side, which we think is a real positive thing. We're also seeing them kind of reallocate across their private markets and alternative portfolios, leaning more towards some of the things that we were emphasizing in credit. But again, that's early days as people are working through their private portfolios, taking a little bit longer. So those are some of the areas where we're seeing movements.
spk01: Okay, thank you. And this is a follow-up. You mentioned that you'll just continue to build the balance sheet as you go through this year in anticipation of sort of paying down the debt in January of next year. Looking beyond that, could you talk a little about capital management priorities and how you think about M&A, what you might need versus capital return? Thank you.
spk11: Yeah, let me make a couple of comments and turn it over. So just at a high level, done as a management team of reallocating into areas of growth and sort of squeezing costs out of areas that are less an opportunity as you go forward. We've always looked at M&A as fueling a strategic gap if we can't do it organically, and that really has not changed. But, Andrew, why don't you pick up
spk06: Yeah. I mean, just to, just to absolutely reemphasize what, what Marty said, you know, the commitment to our, um, balance sheet and improving, uh, it, uh, remains a, uh, significant focus for me and the executive leadership team moving forward. Um, you know, we'll continue the priorities that Alison and Marty have, have described with regard to M and a, um, you know, just as Marty said, you know, we feel really good about the portfolio of businesses. We have the geographies, the position to our clients. And we feel like we have scale and strength to move forward with the business we have today. We'll continue to pay attention to the M&A environment, but it's not the priority at the moment.
spk00: I think the only thing I would add to all of that is our strategy is to put our balance sheet in a position where we can be opportunistic. We feel very good about the capabilities we have, but we're very focused on improving the balance sheet. I'm very pleased. that we were able to raise the $2 million in the midst of this environment over the last six weeks. We've got a terrific, very supportive group of lenders. I think it puts us in a great position to be able to continue to manage our leverage profile down both with the upcoming 24 to be able to pay that off with a combination of cash and usage of the revolver. And beyond that, our next maturity is in 2026. It's $500 million. I think we'll be in a terrific position to continue to manage our capital structure down from there. I think, if anything, we feel like we're on our front foot and we continue to put ourselves in a position to operate on our front foot.
spk01: Thank you.
spk08: Thanks, Bill. Our next question comes from Ken Worthington with JP Morgan. Your line is open.
spk05: Hi. Good morning. Thanks for taking the question. First, Marty, it's been a pleasure working with you all these years. First Franklin, then InvestCap, so best of luck on the next step in your career. On China and Asia, you know, as mentioned a number of times, money coming out of fixed income, where is that money going to? Is it largely cash or is it some of it going into equities given the rally we've seen there? And is there a better opportunity to capture that money as it transitions from one asset class to another? And in terms of maybe what's going on in Asia outside of China, I think we sort of danced around this a couple of times, but To what extent are higher rates impacting the demand for some of Invesco's more popular yield-focused products like bank loans, real estates, and CLOs? I think, like you said, you raised three CLOs. That seems to be contrary to what we're seeing elsewhere. So you're having success there. And then bank loans seems more standard with outflows. So how does this all sort of circle around the demand for Asia for these higher-yielding products?
spk11: No, and that's just here. So let me balance this arcade on this. So what are we seeing in China and let's say in the retail market right now? I mean, you are definitely seeing the beginning of investor confidence strengthened. And so we are seeing movement more towards balanced products and equity products there, which is not the case for some period of time. And again, as I said, Andrew and I were just there, you just can sense the confidence growing in the marketplace, so we anticipate that to continue to grow. The institutional clients, all of them are very, very sophisticated. They don't move their portfolios that much. I'd say they're probably more reflective at the moment of where do they want to see the markets allow for their investments. So I don't know if there's any real great insights there. What we are seeing, In Japan, for example, there is interest in active fixed income, which has really not been the experience for us recently. It's been more passive. And also growth and some global equity capabilities, again, which is not what we've seen for a number of years. And I've talked about Australia, so I won't go there, but Andrew, what would you add?
spk06: Yeah, the one thing I'd say in the long run, Ken, to the question on China, the single biggest opportunity are the retirement market development in China. And so the notion of looking at more traditional asset allocations and more long-term asset allocations we think is going to begin to find its way into that marketplace. Also the digital sort of distribution and the way that digital is the primary way that retail investors invest, there is a higher turn. But that also means that they're able to kind of look at the trends and we're starting to see some of the equity movement even early on there. So that's all I'd ask for now. Yeah.
spk05: Great. Thank you very much.
spk08: Thank you. Our next question comes from MicroCepras with Morgan Stanley. Your line is open.
spk03: Great. Thank you. Good morning. So just a question on the Greater China business. Just curious how you think about the stickiness and duration of AUM in your Greater China business versus other regions of the world. I think if we Look, overall, your retail business has about three and a half, four-year duration or so for your retail customers. Just curious how different that is in China. How do you see that evolving over time? And then how does the cost of gathering new flows in China compare to, say, the U.S. business?
spk11: Yeah, again, I'll make a couple of comments and Andrew can chime in. So, look, we're very bullish. I mean, it is a single largest opportunity in asset management just if you look all the reasons that we know. The size of the population, the absolute focus on developing a retirement system. It's so very different than most markets. You're not fighting over existing dollars. There's new money coming in. So if you're strongly placed, you're going to grow and you are strongly placed. Also very differently that Andrew started to hit on, so much of the money, probably half the flows are coming through digital wealth platforms right now. It's actually astonishing the So the cost structure, I think, is also very important to know. It's a very, very competitive market. It's probably the most competitive market in the world. So it's not easy to be successful there, and it's not inexpensive to operate there. But Alex can speak in more details. It's very profitable, and we have scale, and it's reflected in the margins that we have.
spk00: Yeah, I would say, look, it's accretive to the firm margins. It's a well-scaled business, even though we think we've got a lot of room to continue to grow it. But it is accretive to the firm margins overall. And while it is a competitive marketplace, as Marty noted, we're the 12th largest asset manager in China. And we're the largest foreign asset manager, the 11th ahead of us. are all Chinese owned. And so we are very well positioned. We are a very competitive player. We have an opportunity to really not only grow as the market grows there, but also take market share as we've been able to do in the last few years. So in terms of the cost of gathering, you know, I think it's a very well managed, a creative business overall.
spk06: And the only thing I'd add, and it was reminded actually being on the region recently, as Marty mentioned, we're very well regarded in the market and our reputation has been built over 20 years. In fact, we're celebrating our 20th anniversary this year of IGW, of Invesco Great Wall. And being in that market for a long period of time not only builds the scale that we have today that Allison was mentioning, but also just the reputation with all parts of the ecosystem there. And so we think it's a real differentiator, just the longevity of our JV.
spk02: Great. Thank you.
spk08: Thank you. Our next question comes from Patrick Davitt with Autonomous Research. Your line is open.
spk02: Hey, good morning, everyone. I think this was the first quarter of meaningful UK inflows in many years. Could you flesh that out a bit more? Is there something unique or lumpy that happened? Or are you starting to sense a real positive shift is finally emerging there? Thank you.
spk11: Look, I'll make a comment. Andrew ran EMEA for a number of years, so he was lucky enough to be there during the Brexit. So that's a perspective. A lot of change is happening. And, you know, we anticipate, as Alison has noted, all things being equal, we anticipate it to be a net inflow year for everyone.
spk06: Yeah, I mean, we've always had a high-quality sort of active focus in the marketplace in the U.K., in particular, you know, our legacy in the equity side. And the performance has gotten stronger in those asset classes. And as some demands come back, we're capturing it. I'd say it's largely on the back of good investment performance.
spk00: Yeah, I think on the heels of that investment performance, we're seeing retail redemption improve overall. And so, obviously, the U.K. is working through their rate environment and their economic environment, much like we are. We think we're really well positioned to capture additional flows, though, as rates stabilize and as sentiment at some point improves over there as well.
spk08: Thank you. I think our last question comes from Alex Blostein with Goldman Sachs. Your line is open.
spk12: Hi, all. Thanks for taking the question. This is Luke on Alex's behalf. As part of Andrew's announcement, you guys highlighted a number of other operational realignments. Can you just help frame the operational benefits of these and any potential cost-saving opportunities that could be realized and over what period of time you think that could occur? Thanks.
spk06: Yeah, so I'll pick up on some of the benefits and I'll let Allison chime in as well here. So there's a few, and let me start at the top. We definitely believe it's going to help us accelerate the execution of the strategy and the strategic priorities we've been outlining. We think it's going to help us internally streamline some decision making, simplify ourselves, and be able to move at pace. And that's what's required by our clients right now, to move at pace and to deliver Good results and quality service. We think, though, that these changes will also help us enhance our investment quality over time. And ultimately, we think it's going to help us further leverage the global operating platform and the scale that we've built over time. Allison?
spk00: Yeah, Luke, I wouldn't point to cost savings just yet. There are a lot of ins and outs and puts and takes as we're thinking about reorganizing around these changes. But really chiming in on Andrew's comments, we're very focused on making the organization simpler and more streamlined so that as we gain scale, we can generate additional operating leverage. and really starting to get ourselves organized in a way that we do not have to grow expenses, you know, too much as markets improve, but more importantly, as we grow organically and create that organic fee rate growth. So, you know, I think at this point, we think these changes are going to be very helpful, and they organize the company in a more simple way, and we'll look forward to sharing more as we continue working away.
spk11: And let me just wrap up. So the other really important thing, and we've been talking about it here today and previously, this will absolutely facilitate being able to reallocate assets or dollars and time and expertise to areas of growth. I have a high degree of confidence in Andrew and Alice and the team. I said that before. It is going to be the most experienced and talented team that Invesco has ever had and a high degree of confidence Very exciting for clients, employees, and shareholders, very importantly. So with that, thank you very much, and we'll talk to you in July.
spk04: Thank you.
spk08: Thank you. Thank you, and that concludes today's conference. You may all disconnect at this time.
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