Invesco - Q1 2023

Transcript

Operator (participant)

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 one. 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. I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations. Thank you, sir. You may begin.

Greg Ketron (Head of Investor Relations)

Thanks, operator, and to all of you joining us on the call today. In addition to the press release, we 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.

Marty Flanagan (President and CEO)

Thank you, Greg. I'm gonna start on page three, which is the highlights for the first quarter, if you wanna follow along. The early part of 2023 provided investors and money managers reason for modest optimism as most major market financial markets gained ground in that period, partially offsetting the significant declines we saw last year. Inflationary pressures showed some sign of easing, the COVID-19 pandemic at long last looks behind us. That said, heightened level of volatility persists, the financial markets reacted with caution in March as we experienced several bank failures during that period. Investors once again sought safety in risk-off assets, net flows across the industry were pressured again.

Although organic growth remains lower across our industry, Invesco's foresight platform generated $2.9 billion 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 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, portending 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 in positive 10 out of 11 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 equity remained 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 still a 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 in our last on our last earnings call, the Chinese markets have continued to be unsteady for several months as the country is in the midst of transitioning from 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 capabilities I just mentioned. Despite the near-term challenges, we remain extremely bullish on the opportunity in China over the long term.

We rank 12th out of 160 British fund companies operating in China. We remain the largest foreign-owned asset manager in the fastest-growing market in our industry. We expect to be in the market with new product launches during the second quarter. We are optimistic for recovery inflows for the balance of 2023. Let me briefly touch on our Private Market capabilities, which 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 absorbed the turmoil in the banking sector and the higher interest rates made financing more difficult.

Our direct real estate portfolio has performed well and is diversified across geographies, sectors, and investment styles. Allison will get into greater detail in just a few minutes. We expect that growth may be more challenging in direct real estate due to the 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 remains a top priority. I'm pleased to note our board approved a 7% increase in quarterly common dividend to $0.20 per share, effective this quarter, which reflects 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. We've recently renewed and increased the size of our credit facility from $1.5 billion-$2 billion, providing us significant flexibility moving forward. Lastly, as you're aware, last in February, we announced that Andrew Schlossberg will take over as President and CEO when I retire on June 30th. 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 Invesco's 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 30th through the end of 2024. Before we turn over the call to Allison, I'd like to introduce Andrew, invite him to say a few words. Andrew.

Andrew Schlossberg (Head of the Americas)

Great. Thank you, Marty. 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. During my 22 years at Invesco and working closely with Marty during his tenure as CEO, I've seen and have 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 a 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. 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.

With that, I'm gonna turn it over to Allison to provide a more detailed look at our results.

Allison Dukes (CFO)

Thank you, Andrew. 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 strength in fixed income and balance strategies where there is solid client demand. Performance lagged benchmark in certain U.S. equity strategies. 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 dollars in the first quarter as compared to $10.5 billion dollars 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. 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 ETF.

Partially offsetting growth in equity and fixed income ETFs were $2.5 billion dollars 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 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 six, 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 and active equity strategies improved in the first quarter, led by moderating of redemptions and our global equity capabilities. Net outflows in global equity strategies were $2.5 billion dollars in the first quarter, including $1.2 billion from our developing markets funds.

This compares to $6 billion in 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 dollars 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. 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. Through our real estate business, we offer the full range of investment styles across the risk-return spectrum. 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 1/3 of our assets under management. Apartments and other residential properties account for nearly 1/4, and industrial properties about 1/5. The remaining 20% of our properties span retail and specialty sectors, including mixed-use developments, 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 we're 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, 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, we are in a strong position to capture that demand. 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 inflows. Our pipeline has been running in the mid-$20 billion to mid-$30 billion range dating back to late 2019, this is on the lower end of that range.

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-four quarter range versus the two-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 e-engagements about new opportunities. The pipeline reflects a diverse business mix that has helped Invesco sustain organic growth in 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. A 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 retirements 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%-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 retirements. 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 recur.

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 $0.38 was $0.01 lower than prior quarter and $0.18 lower than the first quarter of 2022. 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 non-operating gains on seed money investments in lower tax jurisdictions. We estimate our non-GAAP effective tax rate to be between 23%-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. 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 needs, and we anticipate building cash in the coming quarters. Our leverage ratio as defined under our credit facility agreement was 0.8x 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 3.4x. 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 2023. There have also been signs that a modest recovery could be on the horizon. 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 as 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. With that, we'll ask the operator to open up the line to Q&A.

Operator (participant)

Thank you. As another quick reminder, if you'd like to ask a question, please press star then one. Remember to unmute your phone and record your name clearly when prompted. If you'd like to withdraw your question, you may press star two. Our first question comes from Craig Siegenthaler with Bank of America. Your line is open.

Craig Siegenthaler (Managing Director)

Thanks. Good morning, everyone.

Allison Dukes (CFO)

Hey, Craig.

Craig Siegenthaler (Managing Director)

My question is on China. You're seeing bond flows improve really throughout much of the world, but not in China. I'm guessing the comparatively low interest rate backdrop in China versus the U.S. could be one factor. Can you talk about what's driving the net redemptions in China, not just in your Great Wall JV, but across the industry? Also any perspective you have on a rebound, especially given pretty strong long-term dynamics, including aging populations and retirement.

Marty Flanagan (President and CEO)

I'll make a couple comments, then Allison and Andrew can chime in. 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. 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. The energy is very, very high. I anticipate, you know, the markets will start to follow that and investor behavior behind that and, you know, for sure by the second half of the year, if not before.

You know, we do look at, you know, this first quarter and, you know, really December last year as really a transitional period and the redemptions that you saw in fixed income there. Again, we're starting to see a behavioral change and frankly starting to look towards some more balanced equity products too in China. Continue to be bullish, medium to long term.

Allison Dukes (CFO)

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 redemptions higher industry-wide. I think to your point of around what are we seeing in the industry, and 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, you know, 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.

In the first quarter, we only launched four products, and they were relatively low in terms of the flow capture there. 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 dynamic and that phenomenon should have played itself out.

Craig Siegenthaler (Managing Director)

Great. Thank you, Allison. Just as a follow-up, really appreciate those details behind the real estate business. You know, 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? 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, you know, ratios like that.

Allison Dukes (CFO)

Sure. Let me take a stab. You know, 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%-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. I'd say, you know, we're probably running a little bit higher than that 5%-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. Then we also see that in times of equity market recovery, some of those redemption requests actually get canceled.

You manage through and we'll see where it goes. 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. 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 gonna be even lower in the United States. We've been managing it down more aggressively in the U.S.

It's gonna trend quite a bit higher in places like APAC, where you've 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. We, you know, 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 feel like we have a lot of diverse good sources of funding and those have held up really nicely.

Craig Siegenthaler (Managing Director)

Great. Thank you very much.

Operator (participant)

Thank you. Our next question comes from Daniel Fannon with Jefferies. Your line is open.

Daniel Fannon (Managing Director and Research Analyst)

Thanks. Good morning. Andrew, was 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, you know, Marty and team 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.

Andrew Schlossberg (Head of the Americas)

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, you know, updating our strategic priorities and adjusting and changing where client needs are going and where we anticipate them going. 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. What I would say is, you know, how do we come up with them? They're really a function of where we believe client demand will grow, and where we think we have competitive strength to build on.

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 alt and 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 gonna continue to scale those. We're gonna ensure we have quality and differentiation in our active equity with an emphasis on global in particular.

We're gonna continue to build scale through the back and middle office transformations we've been talking about with investments in both foundational technologies and innovation for enhancements. I guess what I'd say is, we'll continue to look at those and evolve them. The team is highly focused on executing. We're gonna continue to accelerate the pace with regard to that and continue to get sharper on our strategic execution to deliver. That's pretty much where we are right now, and, you know, we'll continue to keep you updated.

Daniel Fannon (Managing Director and Research Analyst)

Thanks. That's helpful. 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. Maybe if you could talk about what the kinda light 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.

Allison Dukes (CFO)

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 would expect we can hold expenses roughly flat for the next few quarters, adjusting for variable comp, of course. That's roughly flat is all things being equal, but we would adjust variable comp in line with market changes.

Daniel Fannon (Managing Director and Research Analyst)

Understood. Thank you.

Operator (participant)

Thank you. Our next question comes from Brennan Hawken with UBS. Your line is open.

Adam Beatty (Director)

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.

Marty Flanagan (President and CEO)

Yeah, let me make a couple comments. We'll chime in here. Let me talk about outside the United States. As I mentioned, you know, Andrew and I were just out in Asia. Decline interactions in China are very strong. You know, we continue to expect, you know, growth there institutionally. Japan also, we look at that as a market, fixed income market in particular. Actually, the equity. There's demand for equity in Japan, which has been a while since that's been the case, global equity in particular. Australia, the client interactions are very strong, and that market in particular is very much along the lines what Andrew just mentioned of being, you know, very barbell-oriented, probably the most extreme that we sort of run into.

We're positioned very strongly against that, whether it be in private credit is 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. The same thing, you know, the U.K., it's the institutional market, you know, continues to be an area for us, fixed income in particular. There's actually been some equity wins there. It's all, you know, heading the right way institutionally. Andrew, why don't you take over?

Andrew Schlossberg (Head of the Americas)

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 gonna 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. It's a bit of a both ends of the spectrum story.

Allison Dukes (CFO)

Adam, I'd just add on the fee rate. 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 equities, 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, in a really well-balanced way. Does reflect the barbelling that Andrew noted, but it's holding up nicely in terms of fee composition.

Adam Beatty (Director)

Excellent. Thank you for all that detail. Appreciate that. Just a quick follow-up on G&A, and you know, you had a couple call-outs. 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. It sounds like you've got that pretty well in hand, but just curious on the outlook there. Thank you.

Allison Dukes (CFO)

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 gonna see that show up in G&A and property office and technology. 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.

Adam Beatty (Director)

Got it. That's great. Thank you, Allison.

Operator (participant)

Thank you. The next question comes from Bill Katz with Credit Suisse. Your line is open.

Bill Katz (Managing Director and Equity Research Analyst)

Okay, thank you very much. Marty, congratulations on your next phase of your career, and Andrew as well. 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? 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.

Marty Flanagan (President and CEO)

Let me make a couple comments and I'll let Allison in here. First of all, Bill, thanks for your comments. As you know, the fundamental strength is, you know, bank loans, CLOs, and, you know, that is the core of the franchise. We have been building out, you know, I say direct lending. We do see that as an opportunity. We also know it's a crowded space, but we have good capabilities, good performance and that is a focus for us. In private credit also, where we are certainly see demand as more, you know, institutionally led. Frankly, Australia tends to be an area that's focused on right now in our capabilities. We'll see where that goes. But again, those are two add-ons.

you know, our core capability is there, and we think there's opportunity.

Allison Dukes (CFO)

I don't know if I'd add anything there. I'll say this. I'll let Andrew chime in because I think you actually directed that last part of the question to him. In terms of 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. 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 backdrop. We've been investing throughout. 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.

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 wanna make sure it's clear, that's not a new strategy. That's exactly what we've been focused on as a team.

Andrew Schlossberg (Head of the Americas)

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, you know, 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. Again, that's early days as people are working through their private portfolios, taking a little bit longer. Those are some of the areas where we're seeing movement.

Bill Katz (Managing Director and Equity Research Analyst)

Okay, thank you. This is a follow-up. You mentioned that sort of 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.

Marty Flanagan (President and CEO)

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

Andrew Schlossberg (Head of the Americas)

Yeah, I mean, just to absolutely reemphasize what Marty said. You know, the commitment to our balance sheet and improving it remains a significant focus for me and the executive leadership team moving forward. Yeah, we'll continue the priorities that Allison and Marty have described. With regard to M&A, 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, we feel like we have scale and strength to move forward, you know, with the business we have today. We'll continue to pay attention to the M&A environment, it's not the priority at the moment.

Allison Dukes (CFO)

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, 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 be able to continue to manage our leverage profile down, both with the upcoming 2024 to be able to pay that off with 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. You know, 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.

Bill Katz (Managing Director and Equity Research Analyst)

Thank you.

Marty Flanagan (President and CEO)

Thanks, Bill.

Operator (participant)

Your next question comes from Ken Worthington with JPMorgan. Your line is open.

Ken Worthington (Brokers Asset Manager and Exchange Analyst)

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. Best of luck on the next step in your career. On China and Asia, you know, it was 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? Is there a better opportunity to capture that money as it transitions from one asset class to another?

In terms of maybe what's going on in Asia outside of China, I think we've 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 know, you said you raised three CLOs. That seems to be contrary to what we're seeing elsewhere. You're having success there, and then bank loans seems more standard with outflows. How does this all sort of circle around the demand for Asia for these higher yielding products?

Marty Flanagan (President and CEO)

Yeah, let me make a couple comments. Thanks for your comments, too. By the way, 18 years goes very fast as you'll know, and that's just here. Let me... Allison started on this. Yeah, what are we seeing in China and let's say the retail market right now? I mean, you are definitely seeing the beginning of investor confidence strengthened. We are seeing movement more towards balanced products and equity products there, which has not been the case for some period of time. Again, as I said, Andrew and I were just there, you know, you just can sense the confidence growing in the marketplace. We anticipate that to continue to grow. When you've... The institutional clients there are like all of them are very, very sophisticated.

You know, they don't move their portfolios that much. You know, Andrew hit on the point, I'd say they're probably are more reflective at the moment of, you know, where do they wanna see the markets allow for their investments. 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. Also growth and some global equity capabilities, again, which is not what we've seen for a number of years. I've talked about Australia, I won't go there. Andrew, what could you add?

Andrew Schlossberg (Head of the Americas)

Yeah. The one thing I'd say in the, in the long run, Ken, to the question on China, you know, the single biggest opportunity are the retirement market development in China. The notion of looking at more traditional asset allocations and more long-term out asset allocations, we think is gonna 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. 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. That's all I'd ask for now. Yeah.

Ken Worthington (Brokers Asset Manager and Exchange Analyst)

Okay, great. Thank you very much.

Marty Flanagan (President and CEO)

Thanks, Ken.

Operator (participant)

Thank you. Our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Michael Cyprys (Managing Director)

Great. Thank you. Good morning. 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? Then how does the cost of gathering new flows in China compare to, say, the U.S. business?

Marty Flanagan (President and CEO)

Yeah. Again, I'll make a couple comments and Andrew can chime in. Look, you've heard we're very bullish. I mean, it is the single largest opportunity in asset management. Just if you look at global flows into the industry, you know, China is gonna make up a third of those flows over the next three to five years. That's just for all the reasons that we know. The size of the population. The absolute focus on developing, you know, a retirement system. Very different than most markets. You're not fighting over existing dollars. There's new money coming in. If you're strongly placed, you're gonna grow, and we are strongly placed. Very differently that Andrew started to hit on, so much of the money, probably half the flows are coming through institutional wealth platforms right now.

It's actually astonishing, just Ant Financial, for example, they have 800 million clients. You don't need a lot of money to make a big impact. I'd say we're just early days in what you're gonna see happening. You know, the cost structure, I think it's also very important to know it's a very, very competitive market. It's probably the most, like, the most competitive market in the world. It's not easy to be successful there, and it's not inexpensive to operate there. Allison can speak in more details. It's very profitable, and, we have scale, and it's reflected in, you know, the margins that we have.

Allison Dukes (CFO)

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. We're the largest foreign-owned asset manager. The 11 ahead of us are all Chinese-owned. 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.

In terms of the cost of gathering, you know, I think it's a very well-managed, accretive business overall.

Andrew Schlossberg (Head of the Americas)

Yeah. The only thing I'd add just. It was reminded actually being out in the region recently, as Marty mentioned. I mean, it's, we're very well-regarded in the market, and our reputation's been built over 20 years. In fact, we're celebrating our 20th anniversary this year of IGW, of Invesco Great Wall. 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. We think it's a real differentiator, just the longevity of our JV.

Michael Cyprys (Managing Director)

Great. Thank you.

Operator (participant)

Thank you. Our next question comes from Patrick Davitt with Autonomous Research. Your line is open.

Patrick Davitt (US Asset Managers and Senior Analyst)

Hey, good morning, everyone. I think this was the first quarter of meaningful U.K. 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.

Marty Flanagan (President and CEO)

Look, I'll make a comment. Andrew ran EMEA for a number of years, he was lucky enough to be there during Brexit. A lot of perspective. A lot of changes happened and a lot of good work. I feel really good about what's happened in the U.K. and on the continent, both in institution and retail, and there's been a lot of focus there. There was a big institutional mandate that funded this quarter, but I'd say the underlying fundamentals are strong. You know, we anticipate, as Allison sort of noted, all things being equal, we anticipate it to be a net inflow year for Europe. Andrew, you wanna.

Andrew Schlossberg (Head of the Americas)

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. As some demands come back, we're capturing it. I'd say it's largely on the back of good investment performance.

Allison Dukes (CFO)

Yeah. On the heels of that investment performance, we're seeing retail redemptions improve overall. 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.

Patrick Davitt (US Asset Managers and Senior Analyst)

Thank you.

Marty Flanagan (President and CEO)

Great.

Operator (participant)

Thank you. Our last question comes from Alex Blostein with Goldman Sachs. Your line is open.

Speaker 12

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, you know, over what period of time you think that could occur? Thanks.

Andrew Schlossberg (Head of the Americas)

I'll pick up on some of the benefits, and I'll let Allison chime in as well here. 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 gonna help us internally streamline some decision-making, simplify ourselves, and be able to move at pace. That's what's required by our clients right now, to move, you know, 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. Ultimately, we think it's gonna help us further leverage the global operating platform and the scale that we've built over time.

Allison.

Allison Dukes (CFO)

Yeah. Luke, I wouldn't point to cost savings just yet. There are a lot of ins and outs and buts and takes as we're thinking about reorganizing around these changes. 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. 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. You know, I think at this point, we think these changes are gonna be very helpful and they organize the company in a more simple way.

We'll look forward to sharing more as we continue working away.

Marty Flanagan (President and CEO)

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 and 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 is gonna be the most experienced and talented team that Invesco's ever had and a high degree of confidence in, you know, the future and what they're gonna be executing against. It's really very exciting for clients, employees, and shareholders, very importantly. With that, so thank you very much, and we'll talk to you in July.

Allison Dukes (CFO)

Thank you.

Andrew Schlossberg (Head of the Americas)

Thank you.

Operator (participant)

Thank you. That concludes today's conference. You may all disconnect at this time.