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Invesco Q3 2022 Earnings Call Transcript


Listen to Conference Call View Latest SEC 10-K Filing

Participants

Corporate Executives

  • Greg Ketron
    Head of Investor Relations
  • Marty Flanagan
    President & Chief Executive Officer
  • Allison Dukes
    Chief Financial Officer

Presentation

Operator

Welcome to Invesco's Third Quarter Earnings Conference Call [Operator Instructions] As a reminder, today's call is being recorded. Now I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations. Thank you, you may begin.

Greg Ketron
Head of Investor Relations at Invesco

Thanks, operator, and to all of you joining us on Invesco's quarterly earnings call. In addition to our press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website invesco.com. This information can be found by going to the Investor Relations section of the website.

Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 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 or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our Website.

Marty Flanagan, President and Chief Executive Officer; 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 & Chief Executive Officer at Invesco

Thank you, Greg. And those so inclined to follow along, I'll start on slide three and the highlight page. So the challenging backdrop continued in the third quarter as most major equity and bond market indices moved lower. Investors continue to behave cautiously seeking risk-off trades that impact industry flows as well as the level and mix of assets under management. The dynamic environment we are in favors money managers that have a broad diversified range of capabilities that meet the client's demands in this market. Invesco continues to prove to be one of the few global investment managers that can do that, with net flows momentum in market leadership positions in areas of high client demand.

Despite historic market declines, the firm generated net long-term inflows this quarter in active fixed income, Greater China and our institutional channel. All three of these areas have also garnered net long-term inflows on a year-to-date basis, along with our global ETF business and the private markets capabilities.

I'll begin with our active fixed income capabilities which has been a steady source of growth this year and is a testament to the diversity of the investment platform. The asset class generated net inflows of $3.7 billion in the quarter with strong demand from clients of Asia Pacific. We managed nearly $380 billion back to fixed income across the full spectrum of investment offerings, vehicles serving retail clients as some of the world's largest institutions.

Our Greater China Business delivered $2.1 billion of net long term inflows this quarter, Invesco Great Wall our China joint venture has fueled our growth and we continue to successfully launch new products, most notably in fixed income. We've grown consistently in the last several quarters despite the recent difficulties faced by the Chinese economy as a result of our strong local partner and our long standing reputation as one of the top global investment managers in China. Our leading position in China is a result of many years of investment and hard work. As China and the global economy eventually recover, we expect our growth to accelerate in the fastest growing market in our industry. Our institutional channel generated net inflows for the 12th consecutive quarter with $3.9 billion led by clients in Asia Pacific. The business has proven resilient throughout COVID-19 pandemic in the market downturn we're experiencing in 2022.

Growth in institutional business as a result of investment our distribution team, the range of capabilities we bring to market and the build out of our solutions capability over the last several years which is increasingly becoming a differentiator for Invesco. Despite volatility in the risk-off sentiment impacting global markets, we continue to win new mandates and our pipeline remain solid. We look forward to continuing our partnership with many of the world's leading organizations to meet the challenges of this uncertain time. While net inflows into ETFs are relatively flat in the third quarter, demand for ETF slowed industry-wide -- despite the slowdown, we maintain the leading position in ETFs and we expect to see growth rebounds as market volatility eases. On a year-to-date basis, we have generated strong organic growth and gained market share. We have continued investing in our private markets capability and experienced net outflows in the third quarter.

Over the past year, we have generated organic growth against a very volatile market demonstrating the strength of our alternative platforms. Key to our alternative strategy is our strategic relationship with MassMutual which is meaningful and continues to strengthen. In addition to managing over $10 billion in broker dealer, variable annuity and self-advice assets prior to this decline, we have over $3 billion in other investment relationships with MassMutual. This includes nearly $2.5 billion in commitments to various Invesco alternative strategies. The commitment for MassMutual has been growing over time and work on various strategies, including $400 million committed to our innovative product.

Having a partner like MassMutual as an investor adds significant reputational impact to our third party investors. Considering the combined investment we haven't seen in co-investment vehicles which totals $900 million, along with $2.5 billion in commitment from MassMutual in various alternative strategies is compelling partnership that enables us to bring products to market more quickly and brings with it the strong reputational backing of a world class financial institution.

While growth continued in key capability areas I mentioned, the firm experience net long term outflows of $7.7 billion during the quarter, equity strategies would have been under pressure industry wide were the largest contributor to net outflows totaling $7.4 billion for the quarter. Client demand for emerging markets remain subdued and our developing markets fund had $2.8 billion in net outflows in the third quarter.

On near term headwinds persist with confidence that the lack of equity global capabilities will be a driver of growth in the future where global markets recover and client demand for this important asset class returns. As we discussed last quarter, significant progress has been made building a stronger balance sheet position to help us weather this market downturn. We ended the quarter with a zero balance on over and total debt outstanding is at the lowest level in years. Our cash balance increased over $1 billion and we maintain the flexibility we need to sustain investment in key growth areas.

Last quarter, we mentioned that we met our target of $200 million in annual cost savings from our strategic evaluation. As market volatility continues, the need to maintain a disciplined approach to expense management is paramount. We are re-examining all aspects of discretionary spending relative to the environment we are in and we will be focused on near term hiring and critical growth initiatives. We continue to thoughtfully balance managing through near term market headwinds while investing for long term growth.

As always we remain focused on helping clients meet their investment objectives invested in areas of strategic importance, scaling our operating platform and efficiently allocated resources. By executing our long term strategy, I'm confident Invesco will maintain this position as one of the leading firms in the industry while delivering compelling returns to shareholders.

With that, I'll turn it over to Allison.

Allison Dukes
Chief Financial Officer at Invesco

Thank you, Marty. And good morning, everyone. I'll start with slide four. Investment performance continued to be solid in the third quarter with 57% and 62% of actively managed funds and the top half of peers or beating benchmark a three year and a five year basis. These results reflect continued strength in fixed income and balanced strategies where we continue to see strong client demand. Performance lacks benchmark and certain equity strategies but we experienced improvement over the past quarter in several key funds.

Turning to slide five we ended third quarter with $1.32 trillion in AUM, a decrease of $67 billion from the end of the second quarter. Global market declines and foreign exchange movements reduced assets under management by $72 billion partially offset by total net inflows inclusive, inclusive of $10 billion into money market products.

As Marty noted, the firm experienced net long term outflows of $7.7 billion this quarter amid continued market volatility. Active capabilities accounted for most of the outflows totaling $7.3 billion for the quarter, while passive net outflows accounted for the remaining $400 million. We sustained organic growth in several of our key capability areas and our net flow performance remains strong relative to industry peers. A driver of our resilience and relative outperformance has been the institutional channel which delivered a 12 consecutive quarter of net inflows with $3.9 billion. We generated the strong inflows despite not renewing a $2.5 billion relationship during the quarter. While clients are carefully considering new fundings in these challenging markets, our growth in the institutional channel accelerated from the second quarter and we continue to see new mandates fund across geographies, asset classes and the risk return spectrum.

Offsetting growth and institutional were $11.6 billion of net outflows and the retail channel this quarter, primarily in the Americas and EMEA, as investors continue to seek lower risk exposure amid extreme market volatility. Net flows into ETF vehicles were relatively flat in the third quarter, with $300 million in net long term outflows. Demand for ETF slowed industry-wide. That driver, coupled with net outflows and commodities and bank loan products created net flow headwinds for Invesco. Offsetting this were net inflows into fixed income ETFs, the low volatility suite and our Q-to-Q innovation suite led by the Q-to-Q. Despite the slowdown in the third quarter, we maintain a leading position in ETF and we expect to see growth rebound as market volatility eases.

On a year-to-date basis, net long term inflows into our ETF franchise are $23 billion, equivalent to a 12% organic growth rate. We've also gained market share year-to-date. Excluding the Q-to-Q, Invesco captured 4.7% of industry net inflows, higher than our 3.1% share of total industry assets under management.

Now, turning to slide six, we experienced continued net outflows in the Americas and EMEA primarily in the retail channel. Growth picked up in Asia Pacific with over $5 billion of net long term inflows this quarter, led by China and Japan. Our China joint venture contributed $2.1 billion of net inflows, including $1.8 billion from nine new products launched during the quarter.

As Marty highlighted, our joint venture remains a key strength and we expect growth to accelerate there as markets recover. Fixed Income capabilities have been a reliable source of growth for Invesco for several years now. Despite one of the most difficult bond markets in years, the third quarter was no exception to that reliability with $6.5 billion of net long-term inflows. The firm has now experienced net inflows into fixed income strategies for 15 straight quarters, a testament to the breadth of our offering as well as our strong investment performance in the asset class.

Alternatives experienced net outflows of $5.3 billion in the third quarter. The largest drivers of net outflows were bank loans and commodity ETFs which have attracted net inflows year-to-date but saw investors pull back in the third quarter. While growth may slow in the near term as investors carefully consider asset allocations, we're confident that our alternatives business will be strategic driver of growth in the years to come. In fact, over the past volatile year, we've generated a 4% organic growth rate, excluding outflows and our GTR product, demonstrating the strength of our alternatives platform. Finally, as Marty noted, we experienced $7.4 billion of net outflows in equity capabilities. Global and developing market equities continue to account for the majority of net outflows in the asset class, with $4.3 billion in the quarter, including $2.8 billion from our developing markets fund.

Moving to slide seven, our institutional pipeline was $23 billion at quarter end modestly lower than $24 billion last quarter. Client fundings increased in the third quarter as compared to second quarter and we continue to win new mandates despite the challenging environment. Our pipeline has been running in the mid 20 to mid-$30 billion range dating back to late 2019. So while this is at the lower end of the size range, we still see the pipeline as robust given the uncertain market environment.

As we noted last quarter, that uncertainty is causing some mandates to take longer to fund and we would estimate the funding cycle of our pipeline is now in the three to four quarter range on average, as compared to two to three quarters previously.

In summary, the pipeline continues to reflect a diverse business mix across asset classes, investment styles and geographies. Our solutions capability enabled 38% of the global institutional pipeline and continues to be a differentiator with clients.

Turning to slide eight, significant decline in global markets this year have put downward pressure on our revenue base. Net revenue of $1.11 billion in the third quarter was 5% lower than the prior quarter and 17% lower than third quarter of 2021, primarily due to decline in active asset levels.

Total adjusted operating expenses were $741 million, a decrease of $21 million from last quarter and $31 million as compared to the third quarter of 2021. The drivers of the decline from last quarter with G&A expenses which were $11 million lower than last quarter and marketing expenses which declined by $7 million consistent with the seasonally lower activity we often see in third quarter as well as the decline in discretionary spending. We also saw a slight decline in employee compensation expenses.

Drivers of the decline from the third quarter of 2021 were compensation expenses and property office and technology expenses, despite the $3 million and duplicate rent for our new Atlanta headquarters that I mentioned last quarter. Embedded in our third quarter 2022 spending is continued investment in growth capabilities, as well as several transformational projects that will enhance the effectiveness of our corporate functions and enable us to reap the benefits of scale as markets recover. Current projects include a technology enabled human resources transformation, moving core finance systems to the cloud and the foundational elements of the Alpha NextGen program. The savings we achieved in our strategic evaluation and the continued discipline we have installed have enabled us to make these strategic investments without meaningfully growing technology expensive.

Compensation expenses declined $45 million, or 9% from the third quarter of 2021. Given the pace and magnitude of the market decline, it will take some time for certain elements of our expense base to adjust with lower revenue. We managed variable compensation to a full year outcome in line with company performance and competitive industry practices. This can cause quarter-to-quarter fluctuations and compensation expense.

Historically, our compensation to net revenue ratio has been in the 38% to 42% range and periods of revenue growth the ratio tends to move towards the lower end of this range, similar to 2021 when the ratio declined to 38%. During periods of revenue decline, as we are experiencing this year, the ratio tends to move towards the upper end of this range.

Year-to-date, our compensation to net revenue ratio is 40%. If assets remain at quarter end levels, the full year ratio would continue to trend towards the upper end of the range driven by the lower net revenue base. Given the uncertain market environment, we are diligently managing expenses and evaluating all aspects of discretionary spending. We continue to invest in our key growth capabilities and we're focusing near term hiring in those areas. We will differ hiring for certain other positions as we focus our efforts on critical initiatives. As always, we remain focused on meeting the diverse needs of our clients and investing where it's necessary to do so.

Finally, we are proceeding with investments and foundational technology projects that will enable growth and support future scale and our operations. Balancing these objectives will allow Invesco to provide rewarding careers for our employees, position our business for future growth and prudently manage our expense base.

Moving to slide nine, adjusted operating income was $369 million in the third quarter $43 million lower than the second quarter due to lower net revenue driven by market declines partially offset by lower operating expenses.

Adjusted operating margin was 33.3% as compared to 35.1% in the second quarter and an all-time high of 42.1% in the third quarter of last year. Earnings per share were $0.34 as compared to $0.39 last quarter, driven by the same factors that impacted adjusted operating income. The effective tax rate was 28.7% in the third quarter, due to a change in the mix of income across tax jurisdictions, including non-operating losses in lower tax entities. We estimate our non-GAAP effective tax rate to be between 26% and 28% for the fourth quarter of 2022. 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 conclude with a few points on slide 10. Maintaining balance sheet strength continues to be a top priority, particularly as we navigate this uncertain environment. Total debt was managed lower in the third quarter to $1.5 billion as of September 30 and we ended the quarter with a zero balance on a revolving credit facility. Our cash and cash equivalents balance is over $1 billion, an increase of nearly $100 million from June 30.

Our leverage ratio as defined under our credit facility agreement was 0.7 times at the end of the third quarter in line with last quarter. Our leverage ratio improved from 0.9 times in the third quarter of last year despite lower EBITDA driven by the significant market declines. If preferred stock is included, our third quarter leverage ratio was 2.8 times. In this challenging environment, Invesco is strategically aligned to areas of high client demand. And we have the financial flexibility that will allow us to navigate current volatility while continuing to invest in the future. We will be extremely thoughtful in managing expenses through the near term, so that we can rapidly scale when recovery takes place. We maintain our unwavering commitment to serving the needs of our clients in any market and delivering long term value for our shareholders.

And with that, I'll ask the operator to open up the line to Q&A.

Questions and Answers

Operator

Thank you. [Operator Instructions] And our first question comes from Brian Bedell with Deutsche Bank. Your line is open.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Great, thanks. Good morning, folks. Maybe I could just start off on the expense side, Allison, you mentioned a couple of things on the initiatives that you're working on for the transformational projects. Any sense of sort of how much that might lower the expense space going forward? And then also related to that, on the com to revenue 42% should we read, should we think of that as a potential quarterly ceiling or as you indicated, they can be lagged and therefore can go over 42% in a really bad market and then you seek to calibrate that soon, soon thereafter.

Allison Dukes
Chief Financial Officer at Invesco

Sure, good morning, Brian, let me take the first one. So on the transformational projects, I'm not ready to provide any further estimates on what that could do in terms of lower expenses. The way I would think about it and I wouldn't even say not ready, I'm not sure it's just the right way to think about why we would be doing it. A lot of this is to avoid, I would say future costs. And it's also to create scalability.

So some of the things we're doing in these enterprise systems, with our financial systems with our human capital systems, moving our data into the cloud, it will reduce tech debt over the future. It will also give us the opportunity to scale as we just moved more data into the cloud and just have a more nimble infrastructure and continue to globalize the corporate functions that support our large operation.

We've talked about Alpha NextGen in the past and we'll talk about it a whole lot more I'm sure in the future. Those are some early foundational investments that we're making in the middle and back office that will streamline and harmonize our operations and create efficiencies over time but not necessarily from a P&L perspective that you'll see just yet. And there's quite a bit of investment that's going in along the way.

On the comp-to-revenue side, our range is typically 38% to 42% on a full year and we really don't look at it quarter-to-quarter because the quarter-to-quarter fluctuations are always there just as revenue fluctuates but also as you have seasonality and things like payroll taxes and FICA. So we really look at it and manage to a full year basis, we're on an annual comp cycle and year-to-date, through the third quarter we were at about 40%.

So as we think about what the full year look like, I'd say it'll be on the higher end of that range, not the lower end. And as we noted, last year, full year 2021, we were closer to 38%.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

That makes sense.

Allison Dukes
Chief Financial Officer at Invesco

Hopefully that helps.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Yes, definitely. And then maybe if I can ask about fixed income, again, that's been a strength as you pointed out, as we now are in a much higher yield environment just coming into fourth quarter versus even just the third quarter. Maybe if you can talk about both on the retail demand side, if you're seeing that work into the channels yet, if you're seeing the sales pick up on retail funds. And then also on the institutional side, if you can comment on to what extent you think pension plans may reallocate to fixed income and how you are positioned there and could we see this really offset your equity outflows near term?

Marty Flanagan
President & Chief Executive Officer at Invesco

It's a great question, look where rates are going, you've seen what's happened, everybody's shortened, gone, very conservative. You are -- you've not seen that move yet. But the conversations are brought in very, very much looking at the full spectrum of a fixed income with a race where they are making fixed income, longer data capabilities much more attractive. That's on the institutional side. As you know, institutions tend to be much less volatile. But they will make tactical allocations accordingly.

On the retail side, again, I'd say it's too early. But all indications are -- it's I would anticipate a broader range of investments into fixed income because of where the yields are moving.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Thank you.

Operator

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

Brennan Hawken
Analyst at UBS Group

Hi, good morning. Thanks for taking my questions. I was hoping to follow up on the expense outlook. Allison, you flagged a bunch of investments that you're making, including laying the groundwork for alpha. So as we're thinking about entering into 2023, I know you're probably in the middle of the budgeting process now. So it's an early asking for an early read here. But should we continue to expect that there will be pressure to make investments and continue to like, gross out initiatives like alpha which maybe ultimately lead to some efficiencies but could result in expenses being maybe a little bit more stubborn and inflexible in the near term? Is that fair for thinking about 23? Or is it too pessimistic?

Allison Dukes
Chief Financial Officer at Invesco

It's a great question. And it's a hard one to answer exactly. And certainly not going to give firm expense guidance just yet. We are deep in the budgeting season. But I mean, let's just talk maybe, generally about how we think about the expense space and what we can manage and what we can't manage. And there is some variability in our expenses. As we've always guided to that about a third of our expenses are variable. It's it -- you see it primarily on the compensation side, you're certainly seeing that this year. I think I'd point to a couple of things.

One, despite this really challenging environment, we are managing to keep expenses kind of flat to down on most line items relative to last year. And that's because we are continuing to invest in a lot of these growth areas that we don't think it makes sense to pause on. It just simply wouldn't be good business for us to pause on key foundational transformational projects that really puts the firm in a position to grow and to scale and to be where we need to be to support our clients.

So as I think about how stubborn or not our expenses, I think a couple of things, I'd reiterate the comments I made around discretionary expenses. There are elements of discretionary expenses that we're looking at very rigorously. We're being very thoughtful about hiring. We're really focused on our key growth areas and managing our hiring against that. You've seen us, I think, do some pretty good work on facilities and some of the fixed costs that we have that we think we can continue to unlock and reallocate into areas of more transformational growth. And we'll continue to make progress against some of those areas as well. I don't feel like these investments hamstring our ability. I really don't. I think it actually puts us in a position to scale and recover faster when markets do turn and they will.

Marty Flanagan
President & Chief Executive Officer at Invesco

Yes, Brennan and I -- Allison exactly -- we are looking at everything you would imagine and hopefully would do and is responsible for us to do it. And as you say in the short term that the more discretionary things you can make some progress. It's not going to change anybody's lives but it's exactly the very responsible thing to do and we're just very focused on building scale within the organization. And that that snapback will be very, very strong. And again, I would point you to what we've done historically. And we continue to be very focused on putting the firm in a position of great success.

Brennan Hawken
Analyst at UBS Group

Sure, I recognize its balance. Just how I tried to position the question. Okay, transitioning to revenue, fee rate was under more pressure than I had actually expected. Should we expect that fee rate to continue? Maybe could you give us an idea about what the exit rate or the October rate kind of look like? Is that that showing continued pressure just given the general profile of markets through the quarter? And just as sort of a more nitty item, the other revenue has been under some pressure under this additional volume there, it -- is. Is this sort of a reasonable to think about for the other revenue? Or could this continue to come down?

Allison Dukes
Chief Financial Officer at Invesco

Sure, thanks, Brennan, those are good questions. Let me say on the fee rate one, as you know, we really don't manage the fee rate. And then the net revenue yield in particular is just an output of a whole lot of different factors. And so maybe thinking about what drove the net revenue yield declines in the quarter and then extrapolating that to what could that mean for the future. The biggest pressure on that revenue yield is the declining equity markets and in particular, the declines in emerging markets and developing markets, global equities, emerging markets, they are a meaningful part of our portfolio.

And so the market declines in those particular asset classes further exacerbate the pressure on our fee rate. You also seek to see asset mix shift and the demand that we experienced for money markets and the risk-off exposure. So while we've benefited on one side of the ledger from the growth and some of those risk-off exposures, certainly we've got real pressure and the asset mix shift at the same time. You also saw a decrease in the other revenue from those in the other revenue line item. And I'll get to that in a second that you asked about. And so those are all the sort of the downward pressures, what could that mean for the future?

I mean, I think, look, there are a few things going on. One, the ending assets under management was quite a bit lower about $95 billion lower than the average AUM for the quarter. So it's going to continue to put pressure on revenue which will put pressure on just the overall fee rate yield that comes out of that. If we expect to continue growth and passive which we do, they come at lower fees.

And at the moment, given the geopolitical tensions, I would expect continued pressure and some of those emerging markets developing markets categories as well. So this does put pressure on the overall yield there. All that is dependent upon where assets were at 930. And of course, all that subject to change as the markets do what the markets will do over the balance of this quarter.

Other revenue, as you noted, that was about $9 million lower than the prior quarter. And that was really due to lower transaction fees, in particular in global real estate and some front end mutual fund fees. So it's a function of activity levels. I don't think it's a new normal necessarily but if you think about just the activity levels and just really the pretty outstanding volatility we experienced inside of the third quarter and it did put pressure on that category and that will recover as activity levels recover.

Brennan Hawken
Analyst at UBS Group

Thanks very much.

Operator

Thank you. And our next question comes from Glenn Schorr with Evercore. Your line is open.

Glenn Schorr
Analyst at Evercore ISI

Thanks, appreciate it. I'm curious on your comments on the retail side. Obviously, in an environment like this retail is going to outflow That's unfortunate but it's going to happen every time. But as they transition towards low risk exposures as they try to capture yield, I'm curious on what you can specifically do to capture that demand, your presence obviously is huge in the channel, your product mix is great. There's rising demand on fixed income ETFs. I'm just curious on what can be done on the education front, how can you hold the channel's hand so to speak and do a better job of capturing some of those outflows?

Marty Flanagan
President & Chief Executive Officer at Invesco

Yes, you're exactly right. I think we're uniquely positioned here. Right. So with the range of capabilities that we have there's no discussion unless you start there. And but secondly, just the capabilities on the distribution side, things like investment consulting in the field, working with financial consultants, all the financial advisors in the marketplace already, the conversations are positioning for when you get back in the market, whether it be equities or fixed income. And those are real conversations. I'm sure it's happening everywhere. But we have the ability with the capabilities we have and also the coverage we have in the market but also with the marketing digital capabilities we're informed in the engagements that we have. So from my perspective, you don't want to turn into one quarter, two quarters, I don't think you're that far out, you're probably closer to the bottom than the top. And with that, you'll get reallocation into a broader range of capabilities.

Glenn Schorr
Analyst at Evercore ISI

A part of on-going processes I guess.

Marty Flanagan
President & Chief Executive Officer at Invesco

Yes, yes.

Glenn Schorr
Analyst at Evercore ISI

So I heard the comments on what outflows on the alternative side, again, product of the environment. But can we focus a little more on your private market side what it may be just refresh. What investments are being made now and where you're seeing client demand and if that could be an offset going forward as well?

Marty Flanagan
President & Chief Executive Officer at Invesco

Yes, so real estate continues to be a very dominant asset class for us and also, parts of within credit bank loans CLOs, about more challenging in the short term, where people are nervous about recession and impact on credit. But that said, there are two areas where opposition continually seek growth and it's an area of future focus very much.

The other very specific area that we've been talking about is getting some alternative capabilities into wealth management channels. We continue to be very focused on that. And from my perspective, 2023 should be the year when we start to see greater traction in leading the way and there'll be something behind that on the debt side. So that is another area of absolute focus for us as an organization.

Glenn Schorr
Analyst at Evercore ISI

Okay. Thanks, Marty.

Marty Flanagan
President & Chief Executive Officer at Invesco

Thanks Glenn.

Operator

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

Ken Worthington
Analyst at JPMorgan Chase & Co.

Hi, good morning, thanks for taking the questions. Maybe to further the discussion on expenses, looking to think about how we can think about the concept of scalability better here, maybe starting, what cost line items do you think are going to be most impacted by improved scalability and maybe which are not I would assume, as G&A and tech that are really going to see the scale benefits. And I think Invesco maybe historically thought about margins on incremental revenue of somewhere, 50%, 60%, maybe 50%, 60% plus. The investments that you're making in scalability, take margins on incremental, incremental revenues to levels that are different than what we've seen in the past. And is it like a little bit? Or is it maybe meaningfully better given what you're doing?

Allison Dukes
Chief Financial Officer at Invesco

Let me start with the first one around, where should we see the most scalability. And I think you're right, it would be the G&A and tech line items. But I'd also point to marketing; marketing is a pretty scalable line item as well. And one that, it's also a little bit, you can pull back on some of the discretionary expenses and marketing but we're not going to pull back on travel and being in front of our clients at precisely the time when they need to see us and we need to be in front of them. And we need to be actively talking to them.

And so I do think is, is I think about what that looks like on the upside. It doesn't budge quite as much on the way up and there's some benefits there as well. In terms of and maybe I'll let Marty chime in on sort of relative to the past, since mine is only a couple of years back. But I would say in terms of the expenses, where the investments we're making and some of these technology projects doesn't give us even more scalability. I think perhaps, it's really necessary to think about where the firm's been and where we've come from.

We closed the Oppenheimer acquisition just on the eve of COVID. And so you started to see, you saw a material increase in the size of the firm, just on the eve of what has now been a few rather volatile, challenging years. But what we are doing in terms of just further integrating all the various aspects of the firm and creating a unified system and platform across many different parts of the overall enterprise framework, all of this will allow us to just grow and scale from here, I think in a more seamless fashion because you just don't have the redundancy and systems that are very difficult when the data is not in the cloud.

And so it gives us flexibility to adjust our platform and to serve our clients in ways that would have just been much more difficult. Said differently, without doing this we'd be spending a whole lot more to make any nimble shifts in the environment.

Marty Flanagan
President & Chief Executive Officer at Invesco

Yes, let me add. So if you look at not too long ago when our profit margin was over 40% Is that a cap? The answer's no. So if we had the same local assets under management when we complete this work we will be north of that operating margin. So and how does that happen and this might be too much information but literally application rationalization that is happening pretty holistically because of a new set of technologies that really didn't exist in the past that can allow that to happen.

Also just going looking at, what clients are looking for in front to back the breadth of capabilities, if it's inconsistent with where client demand is, we're looking from sort of all front to back, support structures around that. That's where you get the scalability. And those are the efforts that we're on right now. And it's hard to explain in a simple line item, because they're holistic and how we look at things. So that has been scalability within our capabilities to the client demand is really the headline. And there's a lot of detail underneath it.

Ken Worthington
Analyst at JPMorgan Chase & Co.

Great. Thank you. And then maybe just following up U.K. pensions, to what extent did you see stress in the U.K. pension market. Did that flow through to impact Invesco either in 3Q or as we began 4Q? And given that Invesco has been building out fixed income and solutions globally, might there be a change to the U.K. LDI pension market? And does that make for an opportunity for Invesco?

Marty Flanagan
President & Chief Executive Officer at Invesco

Yes. So the good news is we did not have any LDI exposure. So that will be an impact. I do think post -- call this event, it will definitely open up opportunities for other managers and capabilities like we have now. Is that next quarter? Likely not. But when you look through next year, I suspect there's going to be some real opportunities.

Ken Worthington
Analyst at JPMorgan Chase & Co.

Thank you.

Allison Dukes
Chief Financial Officer at Invesco

I will say, I do think part of what we experienced there, you did see clients looking to meet some of these obligations. And so they were liquidating some of their positions and we were on the receiving end of some of that. So we didn't -- we didn't see nothing there in terms of the overall impact and that's just kind of part of the overall, I'd say market stress and volatility we've been managing through.

Marty Flanagan
President & Chief Executive Officer at Invesco

Actually, that's a good point. So it's analogous to when there's pressure on money funds or in the financial crisis, if you had a very liquid money fund portfolio, you became a source of funds. And that's a little bit what happened with some of these LDI situations.

Ken Worthington
Analyst at JPMorgan Chase & Co.

Okay. Great, thank you.

Operator

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

Dan Fannon
Analyst at Jefferies Financial Group

Thanks, good morning. Wanted to follow up on fixed income and specifically, active fixed income domestically. Can you talk about which products and capabilities you have that are either with good performance or already kind of scale that could benefit from what is the potential for kind of larger flows. And I guess if they're separate between institutional and retail in terms of the products that would be helpful also.

Marty Flanagan
President & Chief Executive Officer at Invesco

I'll make a couple of comments and Allison can chime in. So it's a broad suite of capabilities and it's really highly performing across the fixed item team. So that's really good news. And it's not all is available in retail and institutional simply because of demand within that marketplace. So -- we have the long-term record stability of team and demand coming. So we look at it as just a real opportunity for us over the next few quarters.

Dan Fannon
Analyst at Jefferies Financial Group

So I guess is that core, core plus, I guess I don't know what the funds are. Could you talk about what the actual products are.

Marty Flanagan
President & Chief Executive Officer at Invesco

Anything from short duration core, core plus bank loans, credit, it's the whole suite, Dan.

Allison Dukes
Chief Financial Officer at Invesco

Munis.

Marty Flanagan
President & Chief Executive Officer at Invesco

Munis is a very strong capability. That was outflow last quarter.

Dan Fannon
Analyst at Jefferies Financial Group

You would characterize them all at scale already.

Marty Flanagan
President & Chief Executive Officer at Invesco

Not every single asset -- fixed income asset class is not a scale which we've talked about. So direct lending is not at scale, some of the distressed credits not at scale. So -- we have a number of them at scale with performance backers and talented managers.

Dan Fannon
Analyst at Jefferies Financial Group

Okay. And then just a follow-up on the China. There are several product launches in the quarter and that seems to be kind of a continuing trend. Is there a backlog as we think about kind of launches here into the fourth quarter or into next year that you can quantify or talk to?

Allison Dukes
Chief Financial Officer at Invesco

Hard to quantify that exactly. I mean, yes, just to reiterate, we saw about $2.1 billion in inflows into our China JV. And of that about $1.8 billion came from new product launches. Those were mostly in fixed income asset classes which -- it makes sense in this environment. We do tend to see a lot of fixed income and balanced interest less so equity at the moment, though historically, we certainly benefited from some of the equity funds that have been launched in more risk-on environment.

That is -- it is just a function of a dynamic of that market. Hard to point to a backlog but I guess I would say it differently and say this is kind of the way that market functions. And I don't expect that to change in the near term. I do think the overall $2.1 billion just really, again, speaks to the resiliency of that market. And the fact that we invested quite early ahead of many of our competitors in that market and we're really well positioned to capture some of the flows there in both challenging markets and better markets. This has certainly been a more challenging year for China, though.

Dan Fannon
Analyst at Jefferies Financial Group

Thank you.

Operator

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

William Katz
Analyst at Credit Suisse Group

Okay, thank you very much for taking the questions this morning. Just three for me, just maybe just round out discussion. Can you tell me when you say you think fixed income picks up that really seems logical, where do you expect that allocation to rotate from? Is it cash, equity, private market alternative allocations -- what -- I know you obviously have a very broad client franchise. But what generally can you say in terms of where the money might come from?

Marty Flanagan
President & Chief Executive Officer at Invesco

Bill, it's a great question. And the reality is every client is different. So -- but what I would say just as a general comment, if you look in wealth management platforms, in particular, cash levels and you'll notice and everybody on the phone to this cash levels are very, very high. And I think allocations in equities and fixed income, the first quarter call is going to be cash levels.

I can't speak for how the other movements would happen, just again, as every individual and every institution is very different than their profile. But I'd start with very high cash levels as a funding source.

William Katz
Analyst at Credit Suisse Group

Okay. That's how I figure it. Second question is just going back to China. You certainly have very impressive sort of new product opportunity. Could you just sort of step back a little bit and where do you think you are in terms of the maturation of the platform itself? How many more incremental products do you think you can roll out -- and then is it -- or is it -- and/or is it a function of sort of scaling those products? And I think the average is about $200 million in what you sort of said this morning but how big can these things get? Is there a proxy? Is it U.S. as a marketplace? Is it Canada? How should we be thinking about maybe the end look for that platform?

Marty Flanagan
President & Chief Executive Officer at Invesco

Yes. It's a really good question, Bill. And it is a different market than the United States and just a couple of comments. It's extremely competitive. And performance matters. There's a lot of alpha there. So the vast majority of all the capabilities in the marketplace are active, whether it be equity or fixed income, balanced products there also.

But it has profile of fund launches which is not atypical, Korea was the same way for a good period of time. I think it will mature to on-going investments into the products in the marketplace but that that's going to come with time. And just the sheer size of the market, you're going to realize at some point, they're going to be very, very, very big portfolios. And I'd imagine starting to move away from product launches as the primary element of raising assets under management but that's probably 2, 3, 4 years before it starts to happen.

William Katz
Analyst at Credit Suisse Group

Okay. Thanks for the patience answering all the questions. Final one for me, we haven't talked about in a while. M&A just given what's going on between the sort of the rolling over of also the reduction in sort of trailing 12-month EBITDA, improvement in the leverage ratio but nonetheless, still pretty fat leverage ratios when it concludes preferred. How are you thinking about reinvestment back into the business versus any kind of acquisition and within that acquisition, where are you most focused at this point in time?

Marty Flanagan
President & Chief Executive Officer at Invesco

Yes. Good question. The story has not changed. Every next dollar is reinvestment back in the company right now. And if you look at what we've just talked about today, the key capabilities that we highlight, we see great opportunities very much in those areas and that is where our focus is. We don't see a whole lot of gaps in our capabilities back to the conversation Dan had mentioned are we at scale in all the areas that we want to be now. And if we don't have the capability and we don't think it would take too long for us to build it, that's when we would go to the market.

So our view would be consistent of -- it has to be strategic, it has to be something client demand. It has to be something that's complementary, little overlap with the organization, financials have to work and this got to be cultural alignment. So that's just not change. This is how we think about it.

That might lead you to more bolt-on acquisitions in sort of the alternative space. But right now, I don't see a whole lot moving as best we can tell public market prices versus the view of a seller are not aligned right now. So -- but it's not a focus. It's the focus on the organization.

Allison Dukes
Chief Financial Officer at Invesco

I would just chime in on that. I would say there's nothing about our balance sheet or our share price that's changing our focus. Our focus continues to be that the greatest investment we have is to continue to grow organically and invest in ourselves. We've got a really strong, well-diversified platform today. I think you see the benefits of that. You really -- you saw it in these last few quarters where our flows continue to outperform the broader peer set.

We continue to have real pockets of strength, pockets of resiliency and it's a testament to the diversified platform that we have. And so as we think about the opportunities we have from here, we see an opportunity to continue to invest in ourselves and grow these capabilities in a much more efficient, shareholder-friendly way than anything we could ever do inorganically.

And at the same time, we are making progress on the balance sheet and we are returning capital to shareholders. I think we've made really significant progress on the balance sheet over the last year. Certainly, over the last two years, you saw it even in this quarter as we grow cash and continue to manage debt levels down with every sort of opportunity we have.

And at the same time, we're returning capital to shareholders and have done so pretty thoughtfully over the course of this year despite the challenging environment. So yes, we're more constrained than we would like to be given a really challenging industry backdrop but the diversified platform and the opportunities we have to continue to invest in ourselves and grow some of these key growth capability areas. We're pretty bullish on the opportunities we have within our own portfolio.

William Katz
Analyst at Credit Suisse Group

Thank you so much for taking all the questions today.

Marty Flanagan
President & Chief Executive Officer at Invesco

Thanks, Bill.

Allison Dukes
Chief Financial Officer at Invesco

Thanks, Bill.

Operator

Thank you. And our next question comes from Michael Cyprys. Your line is open.

Michael Cyprys
Analyst at Morgan Stanley

Hey good morning. Thanks for taking the question. I wanted to circle back on the private market alternatives. I was hoping you might be able to update us on the progress of the private REIT product that you guys have, just in terms of the traction getting on platforms. And then in private credit, I hear are the comments around maybe not at the scale where you'd like it to be but maybe you could talk about some of the steps you're taking to more meaningfully scale your private credit initiatives.

Marty Flanagan
President & Chief Executive Officer at Invesco

Yes. Great. Thank you. So the in-REIT capability right now, it's about $1.1 billion. It continues to -- we continue to on-board it. Are we where we want to be with all the onboarding? No, we're not done. We'll continue to make progress. It just continues, as I said last call, it's just -- it's a slog to get through it. We will though and that's why we think it's a 2023 topic for increasing flows beyond the level that it's at right now, the performance is very, very strong. And we're behind that. There is another capability that we hope to get into market next year, more income type credit capability.

With regard to private credit starts with a very, very good team. And they're seasoned. They have a very good track record. They'll be back in the market again, raising money and its performance, track record and team and that's where we are right now. And with dislocations, we think of greater opportunities for them.

And just holistically, what we're doing around the private markets platform is just ensuring we have all the resources that we need to compete to make a difference from the investment teams all the way through operational effectiveness and everything else you would hope that we would be doing. We look at as a real opportunity for us.

Michael Cyprys
Analyst at Morgan Stanley

Great. Thanks and just a follow-up question maybe on the balance sheet and capital management. So you paid down the credit facility in the quarter. I guess just what are the opportunities here that there might be for incremental debt reduction before, I think the next maturity is in 2024. And then more broadly, how are you thinking about capital management priorities into 2023? And what do you need to see before buybacks could resume?

Allison Dukes
Chief Financial Officer at Invesco

Sure. Thanks Mike. So in terms of the debt from here, you're correct, the next maturity is at the very beginning of 2024. In terms of how are we thinking about it look, now it's a pretty attractive slug of capital just given where rates are moving. We certainly always have the opportunity to redeem something early. You saw us do that with the '22s earlier this year. Not sure what we'll do just yet but we're always thinking about what that could look like in the trade-off as we continue to grow cash.

We have made substantial progress against our debt this year. And so now we're in a position where we're rebuilding cash. You saw cash grow by $100 million with the revolver pay down at the same time this quarter. And so as I think about it, more than anything, I'd say we're thinking about it from a net leverage standpoint at the moment as we work to build cash, particularly in a volatile environment. As we think about returning capital to shareholders, first and foremost, we're committed to our common dividend and a steady increase in that common dividend and we start there. And then we think about excess capital as the form of returning capital to shareholders in terms of share repurchases.

So should we get to a point where we make the balance sheet progress we want to make and we've got excess cash, then we can think about share repurchases. And we think about that sort of year-to-year. And certainly, it's a difficult environment to be thinking about it. And at the moment, as we are looking to continue to make progress against the balance sheet and make sure we weather a rather volatile market environment but we will return to that at some point.

Michael Cyprys
Analyst at Morgan Stanley

Great. Thank you.

Operator

Thank you. And our next question comes from Craig Siegenthaler with Bank of America. Your line is open.

Craig Siegenthaler
Analyst at Bank of America

Thanks, good morning everyone. I wanted to start with a longer-term question on China. You used to highlight a McKinsey target for 40% of global industry net flows from China over the coming years. Currently, do you think China can drive about half of flows or 40% of flows? And also any perspective on the mix between domestic and then foreign players like your Great Wall JV would be helpful, too. Thank you.

Marty Flanagan
President & Chief Executive Officer at Invesco

Yes. Look, I do, right? It's -- the fundamentals are strong second large economy in the world. They continue to develop capital markets they must to support the growth that they have. They continue to develop a retirement system which they must do, again, for the population even with the geopolitical topics they are absolutely committed to continuing to open up the capital markets and for organizations such as Invesco.

And as I said a few minutes ago, everybody joining just as -- it's a very competitive market. It's going to continue to evolve. But there's no question in my mind that when the economy strengthens, you're going to see flow levels increase to for sure, back to the levels that we saw before and they're going to grow from there. So we look at over the next 3 to 5 years is a very, very important market. With regard to -- what was the question about the competitors?

Craig Siegenthaler
Analyst at Bank of America

Also the mix between domestic businesses there and then also the foreign managers and foreign JVs like your Great Wall joint venture.

Marty Flanagan
President & Chief Executive Officer at Invesco

Yes. So again, we can point to -- we have something, I believe, on our website, Andrew Low went through. There's very specific information in there.

Allison Dukes
Chief Financial Officer at Invesco

It's a presentation from last summer that had some disclosures, yes.

Marty Flanagan
President & Chief Executive Officer at Invesco

So core looking at that. But from a local joint venture, we're at the top of the pack which is great. Again, it takes us about with all the market movements, I think we're the 12th largest money -- local money manager -- excuse me, the 12th largest money manager in the wealth management channel in China. Now that could change now because of levels that's under management. So that was the last picture that I saw taken.

So it's really competitive against the local managers. And as you know there are a number of foreign money managers that I think the very important thing that we point to that has differentiated us and will allow us to have the success that we've had is we've had management control with joint ventures from the beginning in many of the other joint ventures the form money manager had an ownership stake but did not have management control.

And that has really been a big movement where when you see our competitors making a point that they've taken a majority stake in their joint venture. What that really means is a movement towards them we're managing the joint venture. So we've seen that all the last number of years. So we like the position we're in. We're not naive to the competition levels but the opportunity is a material one.

Craig Siegenthaler
Analyst at Bank of America

Thank you, Marty. And just for my follow-up, I've a more short-term question probably for Allison. But other revenues declined by $9 million sequentially on an adjusted basis. I think most of that was probably real estate transaction fees but -- can you talk about the drivers of that decline? And then just given sort of a muted backdrop, I wanted your perspective on if $48 million is roughly a floor given that 3Q was a bad backdrop and those fees probably were low? Or do you think there could be incremental downside risk from 3Q levels into 4Q or 1Q?

Allison Dukes
Chief Financial Officer at Invesco

So it was both real estate but also front-end mutual fund fees. So it was really kind of transaction volume driven is the way to think about it. No, I don't necessarily think I guess what I would say is, it's transaction volume driven. It doesn't necessarily mean that it continues to decline from here.

I don't think we're setting some new level, very volatile quarter, given the risk-off environment that we've been in, it obviously impacted market levels but also activity levels and transaction levels, as you saw, it was pretty holistically challenging. So really just a function of the quarter we're in, not necessarily a harbinger of where we will be from here.

Craig Siegenthaler
Analyst at Bank of America

Thank you very much.

Operator

Thank you. And our last question comes from Patrick Davitt with Autonomous Research. Your line is open.

Patrick Davitt
Analyst at Autonomous Research

Hey good morning guys. Most of my questions have been answered but just a quick follow-up on the tax guidance. Is it fair to assume that the 4Q guidance of 26% to 28% is kind of a good run rate for the quarters beyond?

Allison Dukes
Chief Financial Officer at Invesco

Very hard to say. It really is a function of where the market will be and the mix of jurisdictions and where our operating -- rare income will be across those jurisdictions. We do expect -- we said in the fourth quarter for it to be 26% to 28%, I can't say just yet as to whether or not that's where it will be in 2023. It's possible it could be a little bit lower but it's very much dependent on whether or not we start to see a market recovery.

In particular, you see a real impact on our non-operating losses which were our non-operating gains. Those are booked in some lower tax jurisdictions. And so when there are gains, it's quite beneficial to us at a lower tax rate. But when there are losses, we don't get the benefit of those losses. And so just hard to predict but we'll give more guidance on the first quarter when we get to January.

Patrick Davitt
Analyst at Autonomous Research

Thank you.

Marty Flanagan
President & Chief Executive Officer at Invesco

Okay. Look, thank you, everybody. I appreciate the engagement with the questions. Always very helpful and we'll be speaking with you soon. Have a good rest of the day.

Allison Dukes
Chief Financial Officer at Invesco

Thank you.

Operator

[Operator Closing Remarks]

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