Invesco Ltd (IVZ) — Q1 2023 Earnings Call Transcript

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. The 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 2 of the presentation regarding these statements and measures as well as the appendix of the appropriate reconciliations to GAAP. Finally, Invesco's net response does not edit or 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 Martin's retirement on June 30 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 Martin.

Thank you, Greg. And I'm going to start on Page 3, 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 gained ground in that period, partially offsetting the significant declines we saw last year. Inflationary pressures showed some signs of easing, and the COVID-19 pandemic is all now behind us. That said, a heightened level of volatility persists in the financial markets, reacted with cash in March as we experienced several bank failures during that period. Investors were once again focused on safety and risk-off assets, and net flows across the industry were pressured again. Although organic growth remains lower across our industry, Invesco's supersite platform generated $2.9 billion net inflows in the first quarter; margin return to organic growth. This progress is especially significant considering the mix feature for the industry overall during the quarter. Growth this quarter was 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 Invesco'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, which bodes 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 positive 10 out of the last 11 quarters. Growth in the ETF business is broad-based with net inflows this quarter across both equity and fixed-income strategies. I'm confident that investor appetite for returns on risk assets will lead to 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 in global equities were $2.5 billion in the first quarter, including $1.2 billion from our developing markets fund. While it remains a challenging environment, this was the best outflow performance in this asset class since 2021, with net outflows being less than half of those 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 a transition period post COVID-19 policies and higher interest rates led to an uptick in fixed income redemptions industry-wide. Consistent with that industry direction, our Greater China business experienced $2.9 billion of net outflows in the first quarter, primarily in the fixed income sector. Despite the near-term challenges, we remain extremely bullish on the opportunity in China over the long term. We manage 12 of the 160 funds operated in China and remain the largest foreign-known asset manager in the fastest-growing market in our industry. We expect to be in the market for new product launches during the second quarter, and we are optimistic for recovery inflows for the balance of 2023. Let me briefly touch on our private market capabilities. We experienced net long-term inflows of $600 million in the first quarter. We were very active in the CLO market and raised $1.5 billion from three new CLOs launched in that period. Real estate transactions slowed across the industry as markets were in turmoil, and the banking sector and higher interest rates made financing more difficult. However, our direct real estate portfolio has performed well. It is diversified across geographies, sectors, and investment styles. Allison will get into great detail in just a few minutes. While we expect the growth may be more challenging in real estate due to market conditions, our portfolio is well managed, and we continue to source new opportunities and are having constructive conversations with our clients. Investing in, growing our business, maintaining a strong balance sheet, and providing a steady return of capital to our shareholders are top priorities. I'm pleased to note that our board approved a 7% increase in the quarterly common dividend to $0.20 per share effective this quarter, reflecting our strong cash position and stable cash flows despite the uncertain markets we've been facing. Long-term debt continues to run at the lowest levels in over a decade, and we've recently renewed and increased the size of our credit facility from $1.5 billion to $2 billion, providing us significant flexibility moving forward. Lastly, as you're aware, in February, we announced that Andrew Schlossberg will take over as President and CEO when I retire on June 30. Schlossberg has more than a 20-year career at Invesco. Andrew has successfully led several large businesses and earned the respect of clients and employees, the Board of Directors, and the 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 and experienced leadership team Invesco has ever had, from Andrew, Allison, and the rest of the ELT. I could not be more excited. I will continue to work with Andrew and the team as Chairman Emeritus from June 30 through the end of 2024. Before we turn the call over to Allison, I'd like to introduce Andrew and invite him to say a few words. Andrew?

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 has truly been a visionary in the industry, and he's positioned Invesco extremely well to win in a fast-changing environment. During my 22 years at Invesco, and working closely with Marty during his tenure as CEO, I've seen and been a part of the evolution of our firm. 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. 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 a 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. 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. 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.

Thank you, Andrew. And good morning, everyone. I'll start with Slide 4. Overall, investment performance improved in the first quarter with 64% of actively managed funds in the top half of peers or beating benchmarks on both a three-year and a five-year basis, up from 61% and 63% in the fourth quarter. We have strong performance strength in fixed income and balanced strategies, which contributed to solid client demand. Performance lagged benchmarks in certain U.S. equity strategies, but performance is trending positively in a number of global equity and alternative strategies. Turning to Slide 5. We ended the first quarter with $1.48 trillion in AUM, an increase of $74 billion 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. Asset capabilities generated net inflows of $5.4 billion, while net redemptions in active strategies moderated with net long-term outflows of $2.5 billion in the first quarter compared to $10.5 million in the fourth quarter of last year. Key capability areas, including ETFs, fixed income, and the institutional channel, all contributed to our growth this quarter. Invesco's 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 in 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 BulletShares 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 totaling $6.6 billion. We saw net inflows in all three of our global regions, and growth accelerated to 7% on an annualized basis. After several quarters of strength in institutional fixed income, equity mandates were responsible for our largest fundings in the first quarter. Advancing to Slide 6, net flows by geography improved as compared to last quarter and turned positive for 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 in active equity strategies improved in the first quarter, led by moderating redemptions in our global equity capabilities. Net outflows in global equity strategies were $2.5 billion in the first quarter, including $1.2 billion from our developing markets funds, compared 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 income 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 generated net inflows of $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 had $73 billion of assets under management as of March 31. Through 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. Apartment 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. The adoption of remote working models is much lower outside the U.S. Several of our direct real estate funds use leverage but we are measured in our approach, and the average loan-to-value across our direct real estate funds was approximately 30% as of December 31. 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. Moving to Slide 7, 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 input. 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 fundings 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 accounted for 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 regarding new opportunities. The pipeline reflects a diverse business mix but has helped Invesco sustain organic growth in institutional for more than three years now. Turning to Slide 8, 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 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 compared to the fourth quarter as seasonally higher payroll taxes and benefits were largely offset by 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 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 during periods of revenue decline. At current AUM levels, we expect the ratio to continue to trend towards the higher end of that range for 2023 when excluding costs related 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 the 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 spending on technology projects. As we 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 spending 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 been and will continue to be a top priority for the organization. Moving to Slide 9, 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. The adjusted operating margin was 30.4%, broadly in line with 30.6% in the fourth quarter, but lower than 39.5% a year ago prior to significant market declines. Excluding $13 million of costs related to retirement and other organizational changes, the first quarter operating margin would have been 31.6%, an increase of 100 basis points as compared to last quarter. Earnings per share of $0.38 was $0.01 lower than the prior quarter and $0.18 lower than the first quarter of '22. Excluding these expenses related to executive retirements and other organizational changes in the first quarter would add $0.02 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 nonoperating 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 pretax 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 of cash and cash equivalents and zero borrowing on our credit facility. The first quarter is typically a period of seasonally higher cash fees, 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 $0.20 per share effective this quarter. This reflects the strength of our balance sheet, cash position, and stable cash flows despite the uncertain markets we have 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, and 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.

Thanks, good morning everyone.

Hey, Craig.

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?

Yeah. I'll make a couple of comments, and Allison and Andrew can chime in. So 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. What's really happening is really coming out of this COVID period, and frankly, 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 as the energy is very, very high. I anticipate the markets will start to follow that in investor behavior behind that. And for sure, by the second half of the year, if not before. We look at this first quarter and early December last year as really a transitional period for the redemptions that you saw in fixed income there. But again, we're starting to see behavioral change and are frankly starting to look towards some more balanced equity products in China. So we continue to be bullish about the long term.

Yeah. 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. That caused a bit of a spook and it really set investors to redeem and drive redemptions higher industry-wide. To your point around what we're 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. As you know, product launches drive a lot of the flow activity in China. In the first quarter, we only launched four products, and they were relatively low in terms of flow capture. 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 the dynamics in that phenomenon should have played themselves out.

Great. Thank you, Allison. And just as a follow-up, I 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 and interest coverage ratios like that.

Sure. Let me take a stab. I'm not sure if I could answer exactly what percentage could be redeemed. I think what I'd 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 and a little bit lower in better markets. I'd say we're probably running a little bit higher than that 5% to 6% at the moment, but it's 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 canceled. So you manage through, and we'll see where it goes, but we don't feel any discomfort with where it is now nor is it unusual relative to past cycles as we think about coming into COVID. I'd 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. 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 on 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, and we feel like we have a lot of good diverse sources of funding, and those have held up really nicely.

Great. Thank you very much.

Thanks, good morning. Andrew, could you elaborate on the growth areas such as ETF, active fixed income, and China solutions that were mentioned in the presentation and have been discussed by Marty and the team for some time? I'm interested in how you are considering modifying your focus on these areas in light of the current market conditions, which are significantly different from when they were initially outlined a couple of years ago.

Thank you, Dan. Throughout my 20-plus years at Invesco, we have consistently updated our strategic priorities in response to client needs and trends. I have contributed to the development of the strategic priorities that Allison and Marty have discussed with you over the past couple of years, and I don't anticipate any changes to those. The priorities are shaped by where we expect client demand to grow and where we believe we have competitive strengths. Key areas of focus include the increasing demand for private markets, ETFs, and indexing, which represent significant growth opportunities for us. We view China as a growth market, regardless of geopolitical dynamics and market cycles. Our strong franchises in active fixed income and solutions will continue to scale, and we aim to maintain quality and differentiation in our active equity, especially on a global scale. We will also advance our back and middle office transformations through investments in foundational technologies and innovations. We plan to keep assessing and evolving these priorities, with a strong focus on execution, to enhance our strategic effectiveness and deliver results. That's our current status, and we will keep you informed on our progress.

That's helpful. And then, Allison, 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 right run rate is as we think about the rest of the year based upon what we got here in the first quarter in terms of expense levels?

Sure. Yes, I noted that there was a $9 million indirect tax credit that was in G&A, 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. We expect to incur another $20 million related to the same in the second quarter of this year. 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 expect we can hold expenses roughly flat for the next few quarters, adjusting for variable comp, of course, and that's roughly flat as all things being equal, but we would adjust variable comp in line with market changes.

Thank you. And good morning. This is Adam Beatty 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. 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.

Sure. I'd like to make a few comments, and Allison will add to this. Recently, Andrew and I visited Asia, and we've seen very positive client interactions in China, where we anticipate continued institutional growth. In Japan, we are focused on the fixed income market, but there is also a renewed interest in equity, especially global equity, which hasn't been the case for a while. In Australia, client interactions are robust, especially aligned with the barbell strategy that Andrew mentioned, which seems to be quite extreme. We are well-positioned in that market through private credit and real estate, and we've also seen success on the passive side there. Similarly, in the UK, the institutional market remains strong for us, particularly in fixed income.

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 Allison can maybe share a couple of details. With dislocation occurring 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 both ends of the spectrum story.

Yeah. Adam, I'd just add on the fee rate. The fee rate does tend to run from the mid-20s to mid-30s basis points and has been holding up very nicely. If you think about the information that we shared on Page 7, you can see a large portion of the pipeline is comprised of active equities as well as alternatives; 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.

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 of callouts. But just in terms of the sort of third-party spend, I was wondering if that was unusually lower what the trajectory might be looking like for that in the future, just in terms of cost control. It sounds like you've got that pretty well in hand. But just curious on the outlook there? Thank you.

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 as we noted, the technology foundational enhancements we have been making, you're going to see that show up in G&A and property office 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.

Okay, thank you very much. 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.

Let me have a couple of comments, and I'll say here. First of all, Bill, thanks for your comments. The fundamental strength is in bank loan CLOs, and that is the core of the franchise. We have been building out the same direct lending. We do see that as an opportunity. We also know it's a crowded space. But we have good capabilities for performance, so that is a focus for us in private credit, also where we are seeing institutional demand. Frankly, Australia tends to be an area that's focused on right now concerning our capabilities. So we'll see where that goes. Again, those are two add-ons to our core capabilities, and we think there's opportunity.

I don't have much to add there. However, I will say that we have been focused on how to fund growth in our key capabilities, and that's what we've been doing for the past two years. We've been managing our expenses down for the last 18 months, despite a challenging market environment. Throughout this time, we've continued to invest and have been reallocating resources since our strategic review a couple of years ago to support these growth areas. We are focusing on growth in China, private markets, our fixed income business, and our ETF franchise, while keeping a tight rein on expenses.

And Bill, thanks for the question. What I would add to Allison's last point and then to pick up on Marty's is just to emphasize that reallocation is going to continue. It's going to be 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 we're 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 and 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 what we've been emphasizing in credit. But again, that's early days as people are working through their private portfolios, so it's taking a little bit longer. Those are some of the areas where we're seeing movement.

Okay. Thank you. And then just as a follow-up, you mentioned that you 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 bit about capital management priorities and how you think about M&A, what you might need versus capital return? Thank you.

Yeah. Let me make comments and turn it over. Just at a high level, our priorities don't change. It has not changed, and Andrew and Allison can talk about it. It's really about reinvesting in the business. I think we've probably done the best job that we've ever done as a management team of reallocating into areas of growth and squeezing costs out of areas that are less opportunistic as we go forward. We've always looked at M&A as fueling a strategic gap if we can do it organically, and that really has not changed. But Andrew, why don't you pick up on your thoughts there?

Yeah. I mean just to absolutely emphasize what Marty said, the commitment to our balance sheet and improving it remains a significant focus for me and the executive leadership team moving forward. We'll continue the priorities that Allison and Marty have described. Regarding M&A, just as Marty said, 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.

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 billion 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 continue to manage our leverage profile down, both at the upcoming '24 to be able to pay that off of a combination of cash and usage of the revolver. 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. If anything, we feel like we're on our front foot, and we continue to position ourselves to operate on our front foot.

Thank you.

Thanks, Bill.

Hi, good morning. Thanks for taking the question. First, Marty, it's been a pleasure working with you all these years. First Franklin then Invesco. So best of luck on the next step in your career. On China and Asia, as mentioned a number of times, money coming out of fixed income. Where is that money going to? Is it largely cash? Or is some of it going into equities given the rally we've seen there? Is there a better opportunity to capture that money as it transitions from one asset class to another? In terms of perhaps 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 to real estate 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 seem more standard with outflows. So how does this all circle around the demand for Asia for these higher-yielding products?

Let me share a few thoughts, and I appreciate your input. Time really flies, as you all know, especially after 18 years here. Allison will elaborate on this. In China, particularly in the retail market, we are witnessing a revival in investor confidence, leading to a shift towards more balanced and equity products, which has not been seen for some time. Andrew and I recently experienced this firsthand, and it’s evident that confidence is building in the marketplace. We expect this trend to continue. Regarding institutional clients, they tend to be quite sophisticated and don’t frequently change their portfolios. I understand the concern, and it seems they are currently focused on determining where they want the market to settle for their investments. There aren’t any major insights at this moment. In Japan, for instance, there is a newfound interest in active fixed income, which is a shift from our recent experience leaning more towards passive investments, along with growth in some global equity options—again, something we haven't encountered in years. I’ll skip discussing Australia for now, but Andrew, do you have anything to add?

Yeah. The one thing I'd say in the long run to the question on China, the single biggest opportunity is the retirement market development in China. So the notion of looking at more traditional asset allocations and long-term asset allocations, we think is going to begin to find its way into that marketplace. The digital sort of distribution and the way that digital is the primary way that retail investors invest, there is a higher turnover. But that also means 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 add for now.

Great, thanks very much.

Thanks, Ken.

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 a 3.5-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?

We are very optimistic about the Greater China opportunity. It represents the largest chance in asset management. In the coming three to five years, China is expected to account for a third of global industry flows. This is due to various factors, including its large population and strong focus on developing a retirement system, which is quite different from other markets. Instead of existing money, we are seeing new capital entering the market. If you are positioned well, you will grow, and we are well-positioned. Additionally, a significant amount of the investment—about half—is currently channeled through digital wealth platforms. For instance, a company like Allianz has 800 million clients, meaning even small amounts can lead to substantial impact. We are still in the early stages of this evolution. The market's cost structure is highly competitive, likely the most competitive globally, making success challenging and operations costly. However, our profitability and scale are evident in our margins, and Allison can provide more details on this.

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, it is accretive to the firm margins overall. 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 11 ahead of us are all Chinese-owned. We're very well positioned. We are a very competitive player. We have an opportunity to grow not only as the market grows there but also take market share as we've been able to do in the last few years. In terms of the cost of gathering, I think it's a very well-managed accretive business overall.

I want to emphasize that, having been in the region recently, it’s clear that we are highly regarded in the market. Our reputation has been established over 20 years, and this year marks the 20th anniversary of IGW, Invesco Great Wall. Our long presence in the market not only contributes to our current scale but also enhances our reputation across the entire ecosystem. This longevity of our joint venture is a significant differentiator for us.

Great. Thank you.

Hi, 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.

Look, I’ll make a comment; Andrew was in EMEA for a number of years. He was lucky enough to be there during Brexit, so he brings that perspective. A lot of changes happened, and a lot of good work. I feel really good about what's happening in the UK and around the continent. I was in institutional retail, and there's been a lot of focus there. There was a significant institutional mandate that funded this quarter, but I'd say the underlying fundamentals are strong. We anticipate, all things being equal, to be a net inflow here for the year. Andrew, do you want to add?

Yeah. I mean, we've always had a high-quality sort of active focus in the marketplace in the UK, in particular, our legacy on the equity side and the performance has gotten stronger in those asset classes, and as some demand comes back, we're capturing it. It's largely on the back of good investment performance.

Yeah. On the yields of that investment performance, we're seeing retail redemption improve overall. Obviously, the UK 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.

Thank you.

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 do you think that could occur? Thanks.

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 move at pace; and that's what's required by our clients right now: to move at pace and deliver good results and quality service. We think that these changes will also help us enhance our investment quality over time. Ultimately, we think it's going to help us further leverage the global operating platform and the scale that we've built over time.

Yeah. Look, 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 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 too much as markets improve. More importantly, as we grow organically and create that organic fee rate growth. I think at this point, we think these changes are going to be very helpful, and they organize the company in a more straightforward way. We'll look forward to sharing more as we continue working away.

And let me just wrap up. 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 in time and expertise to areas of growth. I have a high degree of confidence in Andrew and Allison and the team. I said that before; it's going to be the most experienced and talented team that Invesco has ever had, and I have a high degree of confidence in the future and what they're going to execute against. It's very exciting for clients, employees, and shareholders. So with that, thank you very much, and we'll talk to you in July.

Thank you.

Thank you.