Franklin Resources Q3 2022 Earnings Call Transcript

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Provided by Quartr
July 27, 2022

Key Takeaways

  • Despite unprecedented market volatility and long-term net outflows of $19.8 billion in Q3, Franklin Templeton achieved $2.1 billion of net inflows into alternative strategies and $1.6 billion into multi-asset products.
  • Building on its diversification strategy, the firm closed the acquisition of Lexington Partners and announced the Alcentra deal, doubling its alternative credit AUM to $77 billion and bringing total alternative AUM to over $260 billion.
  • Financially, adjusted revenues were $1.6 billion (flat QoQ, down 3% YoY), adjusted operating income was $567 million (down 2% QoQ, 6% YoY), while the adjusted effective fee rate rose to 39.5 bps and expenses remained flat.
  • The regionally focused sales model drove a 79% improvement in non-U.S. net sales year-to-date, with positive net flows in both EMEA and the Americas.
  • Innovating ahead of the curve, Franklin launched a 40 Act money market fund on the Stellar blockchain to prepare for future asset tokenization and drive down operational costs.
AI Generated. May Contain Errors.
Earnings Conference Call
Franklin Resources Q3 2022
00:00 / 00:00

There are 10 speakers on the call.

Operator

Welcome to the Franklin Resources Conference Call for the Quarter End June 30, 2022. Hello, My name is Daniel and I will be your call operator today. As a reminder, this conference is being recorded and at this time, all participants are in a listen only mode. I would now like to turn the conference over to your host, Celine Oh, Head of Investor Relations for Franklin Resources. You may begin.

Speaker 1

Good morning and thank you for joining us today to discuss our quarterly results. Statements made on this conference call regarding Franklin Resources, Inc, which are not historical facts are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements involve a number of known and unknown risks, Uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such These and other risks, uncertainties and other important factors are just described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD and A section of Franklin's most recent Form 10 ks and 10 Q filings. Now I'd like to turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Speaker 2

Thank you, Celine. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's 3rd fiscal quarter results. Matthew Nichols, our CFO and COO and Adam Spector, our Head of Global Distribution are on the call with me. Since January, macroeconomic and geopolitical factors have contributed to global financial markets experiencing a period of volatility not witnessed In decades, with substantial drawdowns in both equities and fixed income markets, these declines have challenged investor sentiment And industry flows, particularly in fixed income. While our assets under management and flows were impacted by these industry wide pressures, We continue to benefit from a diversified mix of assets.

Speaker 2

As investors look to reposition their portfolios, we've Seeing interest in our alternative and multi asset strategies, which both experienced strong net inflows during the quarter. In addition, notwithstanding flow pressures in fixed income, investor interest remains robust across the asset class. Over the past few years, We've been very deliberate in transforming our company by expanding our investment capabilities and deepening our presence in key markets and channels. This diversification combined with our financial flexibility serves us well across market cycles And is creating broader sources of revenue, positioning our company for future success. This quarter, We continue to make progress building our alternative asset business, which is less correlated to public markets and a source of increasing client demand.

Speaker 2

We now have specialist investment managers that represent a meaningful portion of the key alternative categories. On April 1, we closed the acquisition of Lexington Partners, a leader in secondary private equity where current markets create Further interesting opportunities. At the end of May, we announced the acquisition of Alcentra, and we are pleased to welcome the Alcentra team to Franklin Templeton. This acquisition was an opportunity for us to enter the European alternative credit sector at meaningful scale and globalize our current U. S.

Speaker 2

Alternative Credit Business Benefit Street Partners. As one of the largest European credit and private debt managers, Alcentra has approximately $38,000,000,000 in AUM with global expertise across a broad array of credit strategies. Given the current challenging market conditions, we are pleased to have carefully structured the transaction to help mitigate risks. Alcentra has a strong team that will benefit from the scale, stability and cultural alignment of being part of a combined alternative Credit Specialist Investment Manager led by Benefit Street Partners' long tenured and experienced senior management team. Pro form a for Alcentra's AUM, our alternative credit AUM doubles to approximately 77,000,000,000 And our aggregate alternative AUM increases to over $260,000,000,000 representing 19% of our AUM and an even higher percentage of our adjusted revenues.

Speaker 2

As mentioned, this quarter's market environment challenged industry flows. And while we continue to benefit from a diversified mix of assets, we had 3rd quarter long term net outflows of 19,800,000,000 Fiscal year to date long term net outflows were $7,400,000,000 This quarter's continued market dislocation, rising rate environment And the need for inflation hedging has heightened investor interest in alternatives. Our net inflows increased to $2,100,000,000 this quarter and included outflows in certain liquid alternative strategies, our 3 largest alternative managers, Benefit Street Partners, Clarion Partners and Lexington Partners each had net inflows with a combined total of 4,000,000,000 Fundraising momentum in this area continues. Our multi asset net inflows were $1,600,000,000 which represented the 4th Consecutive positive quarter for the asset class. In this broad market sell off environment where investors are focused on Income generating strategies, we benefited from having strong income funds managed for yield with notable investment and customization strategies.

Speaker 2

The first half of twenty twenty two saw the worst fixed income net outflows for the U. S. Mutual fund industry since 2000 with 6 consecutive months of net outflows, while client interest in the asset class Continued to be strong and our fixed income inflows increased by 6% from the prior quarter. Net outflows were $14,300,000,000 Primarily due to certain U. S.

Speaker 2

Taxable and muni strategies, we benefited from having a broad range of fixed income strategies With non correlated investment philosophies, including net flows into taxable U. S. Income, multi sector bond, Corporate and enhanced liquidity strategies. Equity net outflows were $9,200,000,000 This quarter, the risk off environment impacted investor sentiment Uncertain growth strategies, which were partially offset by positive net flows into infrastructure, emerging markets and sector specific Equity strategies. Consistent with what we've learned throughout our 75 year history, we've been front and center with our Clients help them navigate this period of high market volatility, rising rates and inflation and fears of recession.

Speaker 2

In this period of uncertainty, the importance of thought leadership and active engagement have increased. Clients are looking to us to provide them with Investment solutions focused on income, inflation hedged, alternative and customization strategies as they look to rebalance their portfolios and reallocate risk across a variety of asset classes. Last year, we shifted to a regionally focused sales model To meet the varying demands of our global business, shifting decision making and resources closer to our clients. This quarter, we saw the benefits of geographical diversification outside the U. S.

Speaker 2

With improving net sales Trends in EMEA and positive net flows in the Americas. Net flows for non U. S. Regions improved by 79% fiscal year to date from the year ago period. Touching briefly on our financial results, which reflect the acquisition of Lexington Partners, Adjusted revenues were $1,600,000,000 relatively flat from the prior quarter and a decrease up 3% from the prior year quarter.

Speaker 2

Our adjusted effective free rate increased to 39.5 basis points compared to 38.5 basis points the prior quarter. Expenses were flat quarter over quarter and a 1% improvement from the prior year quarter. Adjusted operating income was $567,000,000 for the quarter, a decrease of 2% from the prior quarter and a decline of 6% from the prior year quarter. Our balance sheet position remains strong with Total cash investments in excess of $6,000,000,000 after upfront cash consideration of almost $1,000,000,000 was paid for the acquisition of Lexington. Let me wrap up by saying that over the past several years, we've significantly diversified the firm to serve more clients Across a broader range of investment strategies with deep expertise and specialization in both public and private markets through more vehicles across geographies.

Speaker 2

Although the current market landscape presents challenges for the investment industry And our firm within it, we are proud of the progress that we have made to date to help our clients in both good and challenging market conditions. Finally, I'd like to thank our dedicated employees whose hard work and commitment help people all over the world achieve the most important

Operator

The confirmation tool will indicate your line is in the question queue. If for any reason you should require operator assistance

Speaker 3

you may proceed. Thank you very much. So, Jenny, I enjoyed the comment that prepared remarks on wealth management alternatives And everything that you're doing on the education front. So I'm curious from a product standpoint, How you're thinking about just making drawdown funds available or Putting retail specific products in motion, specifically semi liquid products that give quarterly We've seen some hiccups lately as markets pulled back and seeing gross sales free up. So I'm just curious how you're thinking about the products that you're bringing into that channel.

Speaker 3

Thanks.

Speaker 2

Yes. No, thanks. I mean and Glenn, you know as well, like The opportunity obviously in the wealth channel is tremendous, but it's really complicated, right? And we're learning that through the process of The first battle is to be able to get to the gatekeepers and you're finding that there's a massive amount of education that you have to do. It's complicated to sign up clients.

Speaker 2

And so we've made investments in companies like Caisse. We now have our several of our products on both I Capital and CAES. And then the education piece is a big deal. And we're actually working with CASE through our Feet Academy to actually do education in the alternatives. We have things like the BSP BDC, See CP Reef is actually getting interesting traction in the RIA channel.

Speaker 2

You have to get some size before the wirehouses will put you On their platform, even if you pass their due diligence, and so it's really important that you have the relationships in the RIA channel. You may recall a small acquisition that we did in the private credit space. They'd actually Benefit Street Partners Purchased it, but it was they had experience in REIT with the RIAs. So there's a lot of fronts where you have to Get it right to actually get the traction. But we feel like our Opportunity Zone fund, which is on quite a few of the big wirehouses, CP Reefs, the BDCs, we even have on our venture fund have managed to get that on some of the private banks.

Speaker 2

So those are the types of products. So it's really more of kind of the interval fund, 40 Act fund. Adam, do you have anything you want to add on?

Speaker 4

Yes. Glenn, I just might add that when we talk about The distribution of alternatives to the wealth platform, yes, that's a broad strategic effort, but each platform is a little bit different. And so I think one of the things we've been able to do well over the last few quarters is to engage with kind of the head gatekeepers of each platform to say What type of a strategy is really best for you? Some want perpetual, some want other things, some want a product where there's going to be a broad consortium Banks participating in the deal. Others want something that's more bespoke for their platform.

Speaker 4

So we've really been able to be a little more specific about what we're On each platform and I think that'll pay significant benefit.

Speaker 3

I appreciate all that. Maybe just one quick follow-up. You know that there were fixed income flows since 2000. It's what it is. The market was a bit nuts.

Speaker 3

Now that we've gotten some reprieve in terms of the rate move, the spread move as they've settled in, Could we hope and should we expect that fixed income, particularly U. S. Taxable, settle in with those conditions?

Speaker 2

Well, interesting sorry, I'll start and then Adam, you can fill in. I mean, interesting, some of our biggest growth flows are still into fixed income. So while I think there's been redemptions and obviously much heavier redemptions On the retail channel, then on the institutional channel, we still see strong flows into the asset class. And then I would just say one thing that I'm not sure is fully appreciated, we cover the spectrum On views on in the fixed income market, so when you look at Brandywine, the Franklin Fixed income and Western, we actually their alpha generation only correlates 0.15 times, right? So there's always I think performing in that category and what you see is whether it's insurance companies or others, there is a need For fixed income types of investments and returns and income generating and frankly That may be in the private markets as well as the public markets, but there's definitely demand there.

Speaker 2

Adam, you have anything to add?

Speaker 4

I would add, Jenny, that yes, I would add that a few things. One, the asset class is just more attractive Flat out with higher yield and it's less risky with lower duration. So I think there's just a better beta to be had in fixed income. The other thing we've seen that is on the pension side, as we see folks a little bit refunded at this point looking to LDI type strategies, which we're now offering, It's another area where you might see some growth in fixed income allocation.

Speaker 3

That definitely makes sense. Thank you.

Operator

Thank you. The next question comes from Ken Worthington of JPMorgan. Please proceed.

Speaker 3

Thanks, Coddy. Good morning. This is Michael Cho. I'm in for Ken today. I wanted to shift gears a little bit and ask a little bit about the recent launch Of the blockchain based money market fund.

Speaker 3

I realize it's been in the press for a little while now, but some time has passed. So I'm just Curious kind of a few things. 1, I mean, what are kind of your objectives of launching a fund on the block Chain. And then 2, I think I saw some kind of seller chain, but kind of what were your considerations when you pick that one versus The 3 am or versus a private chain? And then 3, like, again, some time has passed, are there any lessons learned you'd like to share so far?

Speaker 3

Thank you.

Speaker 2

Sure. So let me hit 1, we picked Stellar at the time because Ethereum was Something called proof of work and Stellar was proof of stake. And the difference that you hear on the criticism of Bitcoin is all about how energy What an energy drain it is and that's because this concept is you have to solve algorithms to be able Post on the chain and so that's a big energy drain, whereas we knew that that was going to become more of an issue. Ethereum is trying to shift To proof of stake. And so we ended up Stellar was designed as proof of stake and so we selected that.

Speaker 2

We decided to build this money market fund honestly because we think there will be a convergence Over time, these types of tokenized assets will become I think they'll become securities and they'll be regulated. Now There's other countries that are further ahead probably than the U. S. In this. And but I think that there's going to be a convergence.

Speaker 2

So we wanted to make sure That we understood it and we were able to get in front of the wave. We think ultimately it will drive down costs In this environment, so we'll be able to deliver the same kind of quality investment products at a lower cost when you build these types of things on the chain. And Starting out with the money market fund just made a lot of sense. Honestly, we looked at and we still think it and you've already now you're starting to see it, that some of the That were deemed stable coins that were yielding 7% 8%. Anybody who has an investment background knew that there was no way they could be a stable coin.

Speaker 2

And so we just felt like it made sense for us to come out with a money market fund. And we worked With the SEC, I mean, literally throughout it as we both became educated on it, it took a while. And we are an approved 40 Act money market fund. Where it goes? Well, the market's going to Evolve as people get more comfortable with this asset class or it's not even asset class, with the technology where they can hold their tokens in a secure wallet, which is complicated in itself.

Speaker 2

And Right now, it's a lot of people kind of playing around in that space, but it will become more institutionalized. And we can take all of these learnings, what we built on the seller Systems can launch other 40 Act funds. So again, it was just really a way to make sure that we're understanding disruption as it comes to our industry And that we're riding the wave forward.

Speaker 3

Okay, great. That's wonderful. Thanks, Jenny.

Operator

Mhmm. Thank you. Next question comes from Dan Fannon of Jefferies. Please proceed.

Speaker 3

Yes. Hi. Good morning, everyone. This is actually Rick on for Dan. So I wanted to tack on to the fixed income discussion from earlier.

Speaker 3

So just looking at the data that we have available to us and you guys alluded to this as well, clear that a sizable chunk of the deterioration you guys are seeing in outflows are coming from retail. But just like thinking about the large institutional base and nature of the Western franchise, could you maybe speak on And conversations you're having with that client base and platform more

Speaker 5

specifically? Thanks.

Speaker 2

Yes. I mean, a couple of things. First of all, In the past 10 years, Western has absolutely outperformed in 9 of the 10 years. And in the 1 year they underperformed They crushed it in 2019 and made up for any underperformance. So I would like to say be careful betting against Western.

Speaker 2

And as a matter of fact, while it's a little early to tell, my CFO constantly reminds me that quarter to date, Western is in their top decile. So they're proving out that maybe their positioning could be right. So but as I said, from Here managing the business, we're happy that we have really diversified perspectives on and products in the fixed income space with low correlation. Now institutional investors, Western has a lot of conversations with them. They Understand Western, as a matter of fact, Morningstar just maintained their gold rating and talked about how they have high conviction Shin on the investment team and that they are an excellent investment team.

Speaker 2

And so I think we're continue to be very optimistic. I think people slow down for now, but I wouldn't be surprised. And yet, I believe the core, core plus is our top Selling from a gross sales fund. So there's obviously still a lot of money going in there.

Speaker 4

Yes. And if you look at the sales Yeah. We're up quarter over quarter. Remember that Core and Core Plus are about a third of Western's total AUM. They have a lot of other things that are doing Seatingly well.

Speaker 4

And on top of that, even within the core on core plus plan, we've got a very significant

Operator

Thank you. The next question comes from Alex Blostein of Goldman Sachs. Please proceed.

Speaker 6

Hi, Jenny. Hi, Matt. Thanks for taking the question. Maybe we could start with some of the dynamics and some of the numbers around the ALTS products for you guys. Obviously, with Lexan coming in, there's a couple of moving pieces.

Speaker 6

So I was hoping maybe just to get a reset on what the fee paying AUM is for the alts bucket. I think you guys give us total AUM, but I was hoping to The fee paying AUM, the management fees that are being generated by Lexington, not as it's Truly in the run rate as well as the kind of the total both bucket. And then on Lectin, specifically, any updates you could Provide us with from a fundraising perspective, I think they're in the market with Fund 10. How that's going, what the expectations are when that fund, EUM will start coming into the run rate? Yes.

Speaker 4

Sure. I'll take that one.

Speaker 2

Okay. Perfect.

Speaker 5

You want to start, Jenny, and I'll go.

Speaker 2

No, no, no. You go ahead.

Speaker 5

On the so, Alex, on the management fee incomes from or the management fee revenue from the alternative asset Managers that we have will likely aggregate something like on an annualized basis, dollars 1,200,000,000 to $1,300,000,000 I think communicated that in the past and that's consistent with what we said. That's about 50% Up from the previous year. And that excludes performance fees, of course, as we've explained. So that's where we're at on the management fee revenues.

Speaker 2

And I would say on the Lexington that they are on schedule despite the environment on their fundraising. So as Yes.

Speaker 5

And then if you're looking for the for an idea of what the overall incentive Asset businesses relative to the size of our franchise. If we pro form a the business for Alcentra, for instance, We're about 19% of our assets under management will be in the alternative asset space, 21% of revenue roughly and Probably up to something like a quarter of our operating income will be from alternative assets as a whole.

Speaker 6

Got it. All right. I'll hop back in the queue. Thanks.

Operator

Thank you. The next question comes from Patrick Davitt from Autonomous Research.

Speaker 3

Please proceed.

Speaker 7

Hey, good morning, guys.

Speaker 4

There have

Speaker 7

been a lot of questions out there about the quality of the Alcentra business given what looks like fairly stagnant AUM Over the last few years, obviously, some high profile employee losses. I understand it looks like you've got a very good price relative to what you're hoping to get in and obviously put a lot of It's about price. Could you flush out a bit how you see the process of running the ship there and getting back up to the level of growth we'd expect from a private credit manager?

Speaker 2

Yes. Well, first, I mean, the turnover that happened, obviously happened all before the deal was announced, It was really at the senior level. And I think that the area of concern was the direct lending and the rest of the business has been growing very well and has had very performance. And so I think it's important there's a lot of noise around that, but I think that It's important to understand that was just at a very senior level, which is why there's an opportunity with the fact that we can roll it With Benefit Street Partners, it already has a good senior leadership team. And then one of the things that I think we understand really well and why we've been successful in acquisitions is we understand that you're buying an investment team and their investment process.

Speaker 2

And so It's important that you have retention. And so we've built in retention to ensure that we minimize any kind of the future Anybody leaving in the future? I think that what's really exciting is that we are our distribution in Europe has continued to improve. And now you take a Product like this that we think that our distribution team is incredibly excited about having private credit to be able to sell. And so being able to bring these two things together, we are very, very optimistic.

Speaker 2

So Adam, anything else you want

Speaker 4

Yeah. I would just say that, Alcentra brings, you know, 2 things that And want is a product capability that's very European specific in addition to other products, but that really helps us out with our alternative franchise and a real distribution capability as well. Both of those things are additive.

Speaker 5

I'll just I'll just end by saying, Patrick, that as you know, we study M and A pretty hard in the asset management arena, including both traditional and Alternative assets. And yes, we felt that globalizing, as Jenny just mentioned, globalizing our alternative Credit Capa versus by adding Europe is very important given the growth potential in across that region, frankly, Both the U. K. And Europe. And we concluded, while we like to grow things organically ourselves, it's our number one priority is always There are some things that just take too long to become a leader, too long to grow, too long to be relevant, Frankly.

Speaker 5

And in our opinion, it would have taken us perhaps a decade to create what Alcentra has become, just like it's Taken 15 years to become what Benefit Street Partners has become, and we just concluded that this was the best way to become a true global leader in alternative credit. So that's why we did what we did. And then to your point on price, the price is driven a little bit around some of the uncertainty In the overall markets, but also it's just a function of how M and A can be structured. And we've done that very carefully and We've got a great partnership with Bank of New York that has a lot of upside participation in the growth of this business and we expect there to be growth. As Jenny mentioned, there are multiple sectors, multiple strategies at Alcentra and most of them have grown Quite nicely, and we expect that to continue post closing into calendar 2023.

Speaker 2

And I would just add, during the due diligence process, as you can imagine, we checked on the reputation of the firm with the consultants and institutions and we're very comfortable We still despite some of the headline stories around turnover have an excellent reputation in the market.

Speaker 7

Very helpful. Thanks. And just one quick follow-up.

Speaker 5

Would you be willing

Speaker 7

to give the total AUM and kind of this core flagship

Speaker 2

The The core plus strategy or core and core plus strategy?

Speaker 5

Core and core plus. Core core plus together is about 150,000,000,000 approximately at Western. Sure. Great. Thanks, Sasha.

Operator

Thank you. The next question comes from Stephanie Ma of Morgan Stanley. Please proceed.

Speaker 8

Hi. This is Stephanie on for Mike Cyprys. My first question is on expense and performance fee outlook. So hoping you can just give us an update or mark to market on expenses given Lower AUM levels and then performance fees that continues to be much stronger than you had guided. So any color on that outlook would be helpful as well.

Speaker 5

Yes. So on overall expenses, I In the last quarter, we guided to $3,900,000,000 to $3,950,000,000 of adjusted operating That's just for the full fiscal year ended ninethirty. The update to that I would say is that we expect to be on the lower end of that. So instead of just saying 3.9 to 3.95, we expect to be close to 3.9 and then to 3 point 95. And remember, that includes Lexington.

Speaker 5

So we a couple of quarters ago, I think I explained that We were in the 3.9 to 3.95 excluding performance fees and excluding Lexington. Last quarter, we said 3.9 to 3.95 Excluding performance fees but including Lexington, this quarter we're saying 3.9, 3.95 excluding performance fees including And we'll be on the lower end, we believe, all else remaining equal for the year. In terms of specifics around that, I think last quarter, I guided to the different line items and we'd expect those to be approximately the same. So G and A to be approximately $140,000,000 occupancy around 57,000,000 And IS and T to be around $125,000,000 Of all those things, obviously, inclusive of Lexington Partners. And then our comp ratio, we've guided to around 45% for the year, and we expect that to also be at 45% For the year.

Speaker 5

In terms of performance fees, we don't guide on performance fees, Frankly, I mean, the way I've communicated this in previous calls is to say that we think for modeling purposes, $30,000,000 to $40,000,000 is reasonable. Obviously, we acknowledge the fact that we've been higher than that for a few quarters Now, but again, it's very hard to calculate where our performance fees are going to be. All I'd say is that, Obviously, the reason why performance fees have gone up is because we're performing well in a number of our asset classes, both across We're in estate and credit and other areas, frankly, it crosses about 9 of our specialist investment management companies, although it concentrates ABN 3. Yes, it's because we're just getting larger in alternative assets. So the potential to earn more performance fees is going up as we continue to increase our alternative asset Business.

Speaker 5

But I'm sticking with Great.

Speaker 2

That's very helpful.

Speaker 8

Thank you. If I can discuss Please, another follow-up in here. We noticed a reference to the China JV of $12,000,000,000 of AUM. So hopefully you can expand on some of the initiatives there. And are there any plans to raise your ownership?

Speaker 8

And then what sort of growth are you seeing in that region?

Speaker 2

So I believe that we have said that we would like to expand our ownership In there now that the regulations have changed and so we're in discussions to do that. We also have a wholly owned WUFI, which would give us other optionality If it's that we were not able to buy 100%. Look, China is a massive important market. We were early as far as firms, asset managers who did joint venture partners. We have unbelievably excellent performance, have had really stable investment teams there.

Speaker 2

We hired Doctor. Ben Mang, who is our Chairman of Asia Pacific and is well connected. And we it has been a profitable Business for us, we think it can be much more meaningful as far as its contributions over the long run.

Speaker 8

Great. Thank you.

Operator

Thank you. Next question comes from the line of Alex Blostein of Goldman Sachs. Please proceed.

Speaker 6

Hey, thanks for the follow-up. Couple of quick ones here. So I guess just going back to performance fee discussion Matt, given the fact that it's gotten a bigger portion of the overall business model, maybe you can frame to us So the sources of performance fees that you saw this quarter and any kind of ideas on performance fee accruals That could be realized over time as investments kind of crystallize or just to kind of get a better sense of what that, the bucket of potential performance fees could look like going forward.

Speaker 5

Yes. I mean, a good portion of the increased performance fees quarter over quarter has been from our real estate franchise, Clari and Partners, Where the performance is being outstanding. So I'd say probably a good 60% of it or something like that and probably a higher percentage of The increasing performance fees that we've had is frankly just from performance thresholds being met and quarterly Realizations of that performance has made the performance fees action. So that's the I'd say That's the primary source of the increase in performance fees. But I wouldn't want to understate The performance of our credit business also that has led to performance fees And performance fee increases over the last 2 or 3 quarters, in particular.

Speaker 5

The combination is really a combination of Realizations, quarterly performance fee thresholds and annual performance fee thresholds, maybe it's helpful to say that we think that our performance fees would probably peak At the calendar year end, so that would be the end of our first quarter. And then perhaps another useful point is out of our $127,000,000 this quarter, approximately 70 Danavit is specifically quarterly performance fees. So you might be able to argue that something Between $60,000,000 $70,000,000 could if we have exactly the same performance Next quarter or this quarter, yes, again, I'm not guiding you this way for modeling purposes. I've already explained how I'd look at that, but you could argue that we could at least Get up to $60,000,000 $17,000,000 if we were to repeat that.

Speaker 6

Yes. Okay. I got you. That's helpful. And then another quick one for me just around the balance sheet.

Speaker 6

So Lots of moving pieces. Obviously, Lexington payment came out. You guys have contingencies coming up as well. How are you thinking about sort of the crushing the recast balance today. So if you were to think about maybe both cash and investments and you would say, okay, how much of that is So they're truly available for corporate purposes or whatever else.

Speaker 6

And how much do you guys think you're going to need to use towards future GP co investment and GP balance sheet commitments, given the fact that your liquids are getting bigger over the next couple of years here.

Speaker 5

Yes. So firstly, out of roughly $2,600,000,000 of investments, let's say half of that is very liquid, Highly liquid, like well over $1,000,000,000 of it is highly liquid. But it's been important to feed new funds in order to accelerate access Best 2 distribution opportunities. I think we've explained that we've got a very good multiple on that seeding in terms of the AUM that's been created from it. So that's sort of Number 1, so we wouldn't want to liquidate that, but we can recirculate that.

Speaker 5

We've got much more disciplined of not just letting cCapital sit in funds for like Yes. So every year, we're able to circulate several $100,000,000 I would say, out of the $2,600,000,000 And a Portion of that recirculation, Alex, is going into more of the alternative asset area. We probably have $800,000,000 or something like that now Invested across the alternative asset businesses that we have, which is more longer term in investments versus the rest is more Short term sea capital. So number 1, we're getting better at circulating it even without increasing the 2.6. But number Every year, we are earmarking a meaningful amount of our income and our cash if we need to, to continue to invest In GP level alternative asset opportunities, I should say that we when we provide that Commitment.

Speaker 5

We also allow our senior employees at both the alternative asset business and across Franklin to invest. And we're getting so much interest from employees to invest in these areas that the actual commitment that Franklin Ends up making off the balance sheet is reducing versus increasing. But again, if we don't have that interest Because of general market conditions or something, Franklin is there and we could expect that to increase meaningfully. In terms of the amount of cash that we think we have, so let's Say excess cash or cash available to do further investing and including M and A, I'd put that in excess That's of $1,000,000,000 But obviously, in this current market conditions, we are very cautious, very disciplined, and we think having cash Sean Hand, for opportunistic situations is going to be a competitive advantage of ours. So that's how we look at cash.

Speaker 5

We feel that we're in a good position with the around $6,000,000,000 or more of cash and investments, disciplined with circulating the investments, adding to it Carefully each year and with the cash piece, you mentioned upcoming acquisition related payments. You're right. That's why we're conservative with it because we do have one $6,000,000,000 of acquisition related payments over the next 4 years. We also have $1,400,000,000 of debt Over the next 5 years coming due, which we can refinance, but we also like to be at a delever where it's when debt's getting more expensive. So That's how we look at that.

Speaker 5

Awesome. Thanks a lot for

Speaker 6

all that detail.

Speaker 5

Sure. Thanks Alex.

Operator

Thank you. And the next question comes from Brennan Hawken of UBS. Please proceed.

Speaker 9

Good morning. Thank you for taking the question. This is Adam Beatty in for Brennan this morning. Kind of a 2 parter or multi parter on ALTS Distribution, in particular, we were wondering about, some of the nuances of Alts distribution in the European market, particularly For European retail and what you're seeing there. And then, in kind of a separate angle, just wanted to get your thoughts on how much sort of Product and distribution crossover you're expecting between, Alcentra and VSP?

Speaker 9

Thanks very much.

Speaker 2

So I think I'm not sure I know for the detailed nuances other than There's a couple of just trends that are relevant everywhere for Alts, right? And we've talked about it before where You're just seeing companies waiting longer to go public. You're seeing less opportunities on equities to invest in. That universe has shrunk. I think banks Basel III capital requirements have made it such that banks are much more careful with who they're choosing to lend to, which has created this proliferation of Private credit, I think that is a direct response to some of the capital changes that have happened in the banking industry.

Speaker 2

And so you see meaningful excess returns in the private markets. And there is such an opportunity To naturally bring that to the wealth channel. The problem is it's a bit like running with scissors where you've got these Illiquid assets to often people who require it. And so creating those types of vehicles is important and being really aware about How you do that? And so that's the type of thing our product development team is working on.

Speaker 2

And then same as in the U. S, it requires just a massive amount of Education, plus the complexity of things like signing up for these. And so Big opportunity there, but it is it's a lot of blocking and tackling that happens before you really start to see the traction. I think in the U. S, We are finally starting to I mean, we've been talking about this for 2 years as a core priority and we're only now starting to finally see that traction.

Speaker 2

We think it's going to be somewhere. And Again, we all say Europe, but the reality is every country is different. You might have EU regulations, but then they get interpreted. And so it's actually even more complicated to bring the customized products to those markets. Adam, anything you want to Add to that?

Speaker 4

Yes. I would add that if you think about all of the transactions that Franklin Templeton has done, one of the real hallmarks of them has Then, a lack of overlap in product. As you get larger, that gets harder and harder to have 0 overlap. But in general, we feel really, really good About the transactions we're doing and how little overlap there is across the product set. I think there's also a real advantage of having A regional specific alternatives manager, which means that those products will be even more geared towards the local market.

Speaker 4

Two other comments I would add, was that is that within Europe, there was really 2 different pieces, of Bringing alternatives to the wealth channel, one is really at the ultra high net worth level and the other is more at the mass affluent level. We want to make sure we address both. And then finally, I would say sustainability continues to be a big trend around the world, but especially in Europe. So in Europe, the extent that you can add sustainability to your alternatives in the wealth channels, that's where I think the real growth will be.

Speaker 2

And to answer your question about CSP versus Alcentra, very little overlap there.

Speaker 9

Yes. And so are you planning to sort of be able to cross Distribute that. It's similar to what you've done with Legg Mason legacy?

Speaker 5

Yes. Sorry, there's little overlap, Adam, but the opportunity to work together, whether it's on transactions, Flow with from a distribution perspective, helping raise capital together, I mean, there's really meaningful On a global scale, we have the 2 together. And obviously, the relationships across 2 are also complementary. So We think there could be some real really interesting opportunities there as they work together.

Speaker 9

That's perfect. Thank you very much. That's all Sorry, go ahead.

Speaker 2

Okay. Well, I was just going to say, DSP was very, very U. S. Focused, right? And so and Alcentra had very little footprint in the U.

Speaker 2

S, a little bit, I think, on CLOs and things. And so In the U. S, a little bit, I think, on CLOs and things. And so Europeans tend to like to buy everybody loves to cheer for their Home team. So Europeans tend to like to buy European private credit as opposed it's much harder If you can even do it to sell U.

Speaker 2

S. Private credit into Europe. And so there can be global products. You can have some of the deals Worked on together from a team, some of the research can be shared. But the good news is it was really hard for BSP to sell their products Europe and now we have excellent private credit to sell here and even Asia.

Speaker 9

Very interesting. No, no. Thank you so much, Jenny. Appreciate it.

Operator

Thank you. This concludes today's Q and A session. I would now like to hand the call back over to Jenny Johnson, Franklin's President and CEO for final comments.

Speaker 2

Great. Well, I just want to thank everybody for participating in the call today. And once again, want to thank our employees for their hard work and remaining And our clients, particularly in this type of market environment and also for supporting each other. We look forward to speaking to you guys again next quarter and I Say enjoy the rest of your summer and stay healthy. Thanks everybody.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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