Q3 2024 Earnings Summary
- Expansion into alternative investments is expected to drive revenue growth, with the company anticipating raising close to $15 billion in alternative fundraising, reaching the top end of their expected range. They see opportunities particularly in real estate debt, secondary private equity, and private credit, which are higher-fee businesses. They expect Lexington Partners to enter the market sooner for their next fund due to faster deployment of Fund X.
- Implementation of the Aladdin platform will unify investment management technology, leading to operational efficiencies and cost savings. The company expects to realize savings of at least $25 million per annum starting in fiscal 2029, enhancing operating margins over time.
- ETF business is growing significantly, with ETF AUM standing at $27 billion and achieving 11 consecutive quarters of positive net inflows, including approximately $3.3 billion in the quarter, doubling the prior quarter's net flows. This indicates success in capturing investor demand, including in higher-fee active ETFs.
- Declining fee rates due to asset mix shifts towards lower-fee products may pressure revenue growth. Management noted that the effective fee rate decreased to 37.5 basis points, impacted by the growth in ETFs, Canvas, SMAs, and solutions, which may not fully offset the shrinkage in higher-fee areas.
- Higher expenses associated with technology investments like the Aladdin platform may impact operating income in the near term. Implementation costs are expected to be approximately $100 million over the next 3 to 5 years, with peak costs in fiscal '26 and '27, posing risks of cost overruns or delays.
- Performance challenges and increased outflows in flagship funds continue to be a concern. Some of the big flagship Western funds are struggling with performance, and outflows have picked up both gross and net, which may weigh on overall flows and asset levels.
-
Aladdin Implementation Costs and Savings
Q: What are the operational benefits and costs of the Aladdin implementation?
A: Management expects the Aladdin platform to unify their investment management technology across all public market businesses, providing benefits like a single investment book of record and consistent reporting. The implementation costs are estimated at $100 million over the next 3–5 years. They anticipate absorbing between 50% and 100% of these costs, resulting in a modest impact on operating income per quarter. Savings are expected to begin around fiscal 2028, with at least $15 million per annum, increasing to $25 million or more in 2029. -
Offsetting Aladdin Implementation Costs
Q: How will you offset the implementation costs of Aladdin?
A: Management plans to absorb the implementation expenses by consolidating from multiple vendors to one platform and through other expense initiatives. They expect no mistiming between costs and savings, with offsets occurring as they retire existing systems during the phased implementation. Capitalized costs will be spread out, and they anticipate minimal impact on operating income per quarter. -
Lexington Fund Deployment and Future Fundraising
Q: How much of Lexington Fund X has been deployed, and when will the next fundraising begin?
A: Lexington has been deploying Fund X faster than anticipated and at higher discounts than historical, which are still attractive despite narrowing. Given the rapid deployment, they may enter the market sooner than expected for the next flagship fund. -
Great West Life Relationship Upside
Q: What's the potential beyond the $25 billion allocation from Great West Life?
A: The current $25 billion allocation is considered modest relative to Great West Life's relationships with other firms. Management views this as a multi-year opportunity, collaborating on new product development for retirement platforms and insurance offerings, aiming to capture a larger share over time. -
Revenue Growth and Fee Rate Concerns
Q: How will you drive revenue growth amid potential fee rate declines?
A: Management plans to grow top-line revenue through expansion in higher-fee alternatives, with opportunities in real estate, secondary private equity, and real estate debt. Though fee rates have slightly declined due to business mix and growth in lower-fee products like ETFs and SMAs, they expect the combination of alternatives and growing sectors to offset shrinkage elsewhere. Significant growth in areas like ETFs doesn't necessarily lead to margin compression. -
ETF Strategy Expansion
Q: What's the plan for expanding the ETF franchise?
A: The firm is vehicle-agnostic and aims to meet client demand by offering capabilities in any preferred vehicle, including ETFs. Over 40% of their ETFs are active, and they have over 100 ETFs today. They see strong demand globally and view ETFs as an area for growth without necessarily compressing margins. -
Fixed Income Products Positioning
Q: Which fixed income products are best positioned if rates fall?
A: Management anticipates that as rates decrease, investors may shift from cash to other fixed income products. They highlight positive flows in fixed income, strong performance in multi-sector and customized muni strategies, and expect growth in areas like insurance-specific mandates. Their team is well-positioned to capture allocations in multi-sector and long-duration fixed income. -
Joint Venture with SBI in Japan
Q: How does the JV with SBI in Japan enhance opportunities?
A: The JV with SBI leverages SBI's significant digital financial platform in Japan, allowing them to launch ETFs and digital asset products to retail investors. This partnership aims to expand their footprint in Japan by tapping into SBI's innovation in digital client engagement.