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And welcome to Invesco's Third Quarter Results Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.
Now, I would like to turn the call over to your speaker for today, Marty Flanagan, President and CEO of Invesco and Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.
Thank you and thank you everybody for joining us and I appreciate you changing your schedule so quickly. Some very, very good news, we're going to talk about the transaction between ourselves Oppenheimer and MassMutual and also go over the third quarter results and if you're so inclined the presentations on our website if you want to follow along. [indiscernible] has been quite a bit of news in the market about this combination for a period of time, but before we get into the third quarter results, I really want to clarify some very important key points.
The combination will result in Invesco being the thirteenth largest global asset manager in the world and the sixth largest manager in the US retail channel, both are very important when you think of the importance of scale and client relevance as we look forward. The financial returns are extraordinarily compelling. For the partial year 2019, we're expecting 18% accretion, in the full year 2020 27% accretion and post synergies we anticipate an additional billion dollars of cash flow for the combined company, so really quite extraordinary.
We're also very excited that MassMutual can be a long time strategic shareholder of 15.5% equity stake in the $4 billion of preferred, but Loren get into details in a few minutes, but what's really important, MassMutual is not selling or taking every dollar, all the proceeds to the backing of the combined institution, showing their commitment and the excitement for the opportunity in front of us. And the other point I want to make, we're going to initiate today a $1.2 billion stock buyback which is also an important part of the discussion that we'll be having today.
So with that Loren, you can talk through the financials, yeah.
Yeah, thank you very much Marty. So on Slide 7 you'll see a summary of the results for the third quarter and continued to demonstrate strong long-term investment performance with 63% and 67% actively managed assets in the top half of peers over the three and five years.
Our year-to-date gross sales are up 16.7% versus prior year, market dynamics and some near-term performance challenges continue to impact redemption leading to total long-term net outflows of 11.2 billion for the quarter.
Adjusted net operating income was 358 million for the quarter, that was down from 377 million in the prior quarter and that was driven by a lower revenue yield resulting from a change in AUM mix, the negative impact of foreign exchange and the impact of lower transaction fees within other revenues.
Additionally, on expense side, we saw some elevated marketing and technology expenses this quarter. These items are also impacted our adjusted operating margin, which decreased to 37% from 38.7% in the prior quarter.
We returned 124 million to shareholders during the quarter two dividends and we've made good progress in paying down the balance on our credit revolver in early October and we expect to have our leverage ratios buffer in line with our previous Guggenheim acquisition levels by the end of the fourth quarter.
Moving on to slide eight, we highlight more in terms of investment performance for the quarter over the one, three and five years. As we've noted in past conversations, our investment processes and approach are focused on generating our performance over a full market cycle, so we typically see fluctuations between quarters.
The current market cycle is impacting the relative performance of a number of large value-based equity investment approaches representing more than 10% of included AUM, but some of their recent market volatility and more favourable market condition, however, the teams have seen near term improvement as you would expect. As an example, diversified dividend is now in the top debt file [ph] on a quarter-to-date basis, and also our UK equity portfolios and international growth portfolios are in the top quartile.
Let's turn to flows on slide 8. As I noted, while gross sales have been robust for the quarter up more than 17% on a year-to-date basis for 2017, we did see net negative flows during the third quarter as market dynamics weighed on redemptions and the net results.
With a pockets of strength within ETFs with nearly 1.5 billion of employees in US ETFs and that included nearly a 0.5 billion of flows into our bullet share franchise winning new flows in these products based closed to nearly 1 billion. Commodity ETFs in Europe and then commodity ETFs in U.S. were weaker in line with industry trends, which led to modestly negative path for the ETF flows for the quarter.
On the active side, the outflows were largest in the U.S., the U.K. retail equity products, which continue to face some of the challenges as noted earlier. Additionally, on the institutional side, we saw a two sovereign wealth fund up close with total nearly 2.5 billion.
We also saw varying outflows from an Asian client in our bank loan strategies and there was a $1 billion real estate outflow, which we had mentioned on the previous quarter call, all of which contributed to the negative flow this quarter.
So despite these one-time outflows in our institute outflows, I want to mention that our institutional pipeline is in fact an all-time high in terms of both AUM and revenues with AUM in the pipeline, which is one but not funded up more than 35% versus the prior quarter and up over 30% versus prior year, and that should help elevate our flows in future periods.
And also like to note, that while you see on this chart, we did see very strong flows and there are great wall JV, money market product with nearly 5 billion in inflows for this quarter and that's a trend that we would expect to continue in Q4.
With that, I'm going to turn it back to you Martin.
Thanks, Loren. And why don't we now turn to the transaction. As again, we're very excited about it, it's 100% consistent with our strategy and really it's going to rapidly advance the strategy that we've been talking about with all of you. But if you turn to page 11, I think importantly, you really want to know the fact is Oppenheimer Funds because it's clear, it's not understood really that robustness of Oppenheimer and how it's consistent with the strategy that we've been talking to you about. The first thing we're really excited about, obviously, it's the strength to the organization, it's incredible talents with group of people who are looking forward to working with them going forward and helping create something really quite special.
The organization has $250 billion dollars in assets under management, 75% of the assets are hard to replicate differentiated active and alternative strategies. They have exceptional investment talent generating very good consistent long-term performance. 59% of assets are in four and five star rated funds and the business is financially robust. Net annual revenues of $1.4 billion, the net revenue yield is 56 basis points and operating margin of 40%, all of which is accretive to Invesco.
On page 12, I want to make very, very clear, our strategy is unchanged, we continue to focus on strengthening our leadership in our core markets while executing high growth areas and we believe you must do both of these to be successful going forward. And one is not going to be satisfactory for success as you look to future. If you do both of these very well, we feel very strongly that you generate lead set of capabilities for the benefit of both clients and shareholders.
What we truly believe is unique about Invesco is a combination of our leadership in core markets and our investments into these high growth areas. The combination with Oppenheimer, now, the relationship with MassMutual will meaningfully expand our leadership in the U.S. wealth management industry, while also strengthen our ability to execute in several of these high growth areas. This transaction rapidly advances our growth strategy and it's fully aligned with our clients' needs as we look to the future and that of the industry.
One final point that I would like to make on page 14, is that from a context point of view of the $87 trillion in assets under management in the industry, the U.S. wealth management segment is the largest segment in the world with 23% of global assets under management is going to continue to grow. I think what's also very important, I think it's all clear to all of us that it will grow and be important but to be concentrated in fewer investment managers hands in the years ahead. The notion of having client relative to scale is an absolute necessity.
So turning to the combination itself, creating a $1.2 trillion global asset manager, the vision of Oppenheimer Funds provides a number of benefits to the combined organization for our tenants, our business and shareholders represents a strong strategic and cultural fit for both of our organizations and the power really comes from a combination of four different areas, scale and client relevance, differentiated investment capabilities, compelling financial returns and the strategic relationship with MassMutual.
If you take a look at client scale and relevance, as I mentioned, will be the 13th largest global investment manager in the world providing the necessary skill to compete and invest on behalf of our clients and our shareholders, but importantly the immediate impact of the combination will create a clear leader in the US retail with Invesco becoming the sixth largest U.S. investment manager with $680 billion in client assets.
Another point of client relevance is looking at the relationships with the top 10 US wealth management organizations in United States. Our relationships will be meaningfully more important, as you can see with these key platforms at the close we will have five relationships with more than $30 billion in assets under management.
When we turn to the investment capabilities of sales and the impact on the combined organization is incredibly compelling. Invesco's and Oppenheimer's strengths are very complimentary to one another. It broadens our comprehensive range of investment capabilities, which will not only benefit the U.S. retail market, which is what we're looking at here.
But opportunities in the combined firm and the institutional market both in the United States and outside of the United States and again a number of these capabilities in the retail channels outside of the United States too. Importantly, 85% of the Oppenheimer Funds are in high demand Alpha persistent, your asset classes you can take a look at international equities, emerging markets, global equities, and also very important income-focused alternative areas, high yield muni's bank loans et cetera, so again, the combined rankings post transaction are incredibly compelling.
If you take a look at the investment profiles, the investment performance profiles of the two firms, they are also highly complementary as you would imagine, from my prior comments, they are generally counter cyclical, so this is great news for our clients, it will help them through different market cycles and it is also a business benefit at the same time.
So I truly believe and the organization believes this is incredibly powerful combination that will immediately benefit our clients, our shareholders and both of the organizations and we could be more excited about it.
I'm going to turn it over to Loren have him go into more depth of the financial results of the combination.
Thanks, Marty. So, in addition to a very compelling strategic rationale for the combination that Marty just outlined. We expect the transaction to provide strong returns for our shareholders in line with our previously stated financial criteria for acquisitions.
For those following along I'm now on Slide 20. Excluding the impact of incremental intangible amortization and one-time integration charges, our pro-forma EPS accretion is approximately $0.38 or 18% in the year of closing and this is to - second quarter closed it in three quarters of accretion.
In 2020 with the full benefit of the cost synergies in place and a full year of financial accretion, we expect to achieve $0.80 or 27% EPS accretion. As a result of the combination and the inclusive - an inclusive of the expected run rate synergies of 475 million, we expect to add nearly a $1 billion in incremental EBITDA and by 2020 we project to have an operating margin well in excess of 45% and a combined annual EBITDA of more than $3 billion.
The purchase price will be satisfied with a combination of roughly 81.9 million common shares and 4 billion in non-cumulative perpetual preferred shares that has a 21 non-co-op period and a fixed rate coupon of 5.9%. Today, stock price based on where we are today that translates into a total consideration value of approximately 5.7 billion.
In addition, MassMutual will become a long-term shareholder and our largest shareholder at 15.5%, MassMutual intends to be a long-term strategic partner and a shareholder of Invesco in this regard they're entering into a two-year lock up on the common shares.
In addition, MassMutual has indicated that they do not intend to sell their common shares after the lock-up period expires, the transaction is a tax free reorganization for them and it's highly tax efficient for MassMutual. So any sale of shares in the future could trigger a sizable taxable event for them, again, incentive for them to continue to hold their shares on a long-term basis.
So reflecting the financial strength of the combined business, as well as the additional cash flow that will result from the combination, as Marty mentioned, we are announcing a $1.2 billion common share buyback program, which is to be completed within the next two years, importantly this will be funded through operating cash and as such we do not intend to take on any additional leverage to satisfy that.
Moving to the next page, as noted, we expect to add nearly 1 billion in incremental EBITDA after synergies in terms of the modelling for your purposes we included some assumption of breakage and we acquired AUM of about 4 percentage points in 2019 and a modest level of organic growth in future years.
Additionally, we've modelled modest fee reductions of approximately 45 million in future periods. We have a plan to capture by 2020 and approximately 475 million in cost synergies within the combined organization and that represents approximately 14% of our combined expense base.
We have a high degree of confidence that we can achieve our synergy target and it clearly is something we demonstrate in the past through prior acquisitions. The savings will come from the scale benefits and the platform synergies and this will be focused primarily in the middle and back office areas and activities such like such as streamlining operational technology platforms, leveraging preferred vendors and rate cards across the combined organization. And the transaction which has been approved by the Board of Directors of both companies is expected to close, as I mentioned in the second quarter of 2019.
And with that I'm going to turn it back to Marty.
Thanks, Loren, and I do want to come back to the history of our success in making these combinations work on page 22. A number of you have followed us for years and the track record is a proven track record and I have a high degree of confidence in the team, it's highly experienced, I believe we have the industry leading track record of success in delivering the benefits of clients and shareholders as we've discussed and laid out here.
And if you just look at what's happened from PowerShares with $6 billion in assets under management originally in organic growth and to follow on acquisitions, $230 billion in assets under management today and the number two position in smart beta and four - number four position in ETFs overall really quite compelling. The Morgan Stanley, Van Kampen track record by all accounts was also an incredible success for the organization for our shareholders. So when we look at our history, we have delivered each and every time and I have tremendous confidence in our abilities to that.
With this combination between the two organizations, we will create an exceptional organization. We're going to have a better client experience by the time that we're done with this. It's going to generate excellent results for our shareholders. We're going to do this on and on with our new colleagues at Oppenheimer and I couldn't be more excited. And to put this all in context, we believe this transaction is incredibly compelling bringing scale and client relevance, differentiated investment capabilities, really compelling financial returns for our shareholders and important strategic partner MassMutual. It is going to be really a special organization and we look forward to doing it with our colleagues at Oppenheimer.
So with that why don't we open it up to Q&A?
[Operator Instructions] Our first question today is from Bill Katz and please state your company name.
Okay, thank you very much, from Citi Group. So thank you very much for taking the question this morning. So I'd like just to come back to the savings opportunity for a moment, I think you the highlight 475 million and Loren just gave a little bit more detail when you post your comment here. Can we break that down a little bit more a couple of different ways, how much of its coming from standalone Invesco platform? How much of its coming from the legacy Oppenheimer foot print? And then can you break it down maybe by a line item between - in between - you mentioned mid obvious, but comp versus non-comp just to get a sense of the savings because here the question is, you're running at about 45% margin round numbers, they're running at 40%, both are pretty good, I'm just surprised by the amount of redundancy that you've identified.
Thanks Bill. So, I appreciate the question, you should be surprised. So what has been presented right here something is going to conversation amongst the industry in the benefit of scale. And if you think of the Oppenheimer organization, incredible organization largely in the mutual fund industry, but their capabilities are beyond that. So that's another topic. There is the opportunity, as I said earlier for institutional channel non-US, but when really going with this is you're looking at the organization where we have a mutual fund operation too. The scale benefits from operation are astonishing, right, it's really the systems conversion that come out of it, just all the benefits you get from scale, that's really the model that we're looking at and if you compare that to different combinations that you've seen in the marketplace, it is two organizations and two different industries or two different segments or two different continents, you can't get scale benefits. This place right down in the middle of something that will be a huge benefit to the organization. So where we are right now, this we have a high degree of confidence in these numbers, it comes from all of our experience and what we know about the operating platforms, Oppenheimer was already heading down the path to make a number of changes themselves, you do have to look at it across the combined platforms. Our next step is to use our playbook and we'll team up area by area with each of our colleagues at Oppenheimer and work through the plan and execute it over the next number of months and again we just feel very confident in knowing the path forward. So the level of detail that you're asking for now, we're not in a position to share that we have to create the plans with Oppenheimer and but do know - we know how to do this.
Okay. Thank you.
Thank you. Our next question is from Glenn Schorr and please state your company name.
Hi, thanks. Could we first talk about distribution, I get the scale and I get all the advantages you talked about at the scale and the rankings and each of the channels and wealth management's important. But is there much unique overlap on distribution where you were strong they weren't and vice versa. [indiscernible] bring specific distribution?
Yeah, so the best way to look at the complementary nature of it is on page 17, where we list the top 10 wealth managers and you'll note where we're stronger and we've been very stronger and again it's a combination that is creating much better set of outcomes, so that's at that level. So client relevance is kind of really come through with those wealth management platforms. But I think what I really want to point you to is that if you look at the investment capabilities between these two organizations they're very complementary. And if you look at really where you're going forward the impact is in high demand asset categories right, international equities emerging markets global et cetera and you can look for yourself. And although we're presenting it from a mutual fund point of view for the two organizations, these are capabilities that are in demand and different channels beyond the U.S. retail channel and again I think it's very important understand I often do want to make a point. There is no revenue synergies contemplated at all in what you're seeing today and so it's a very focused view on the existing business. Does that recon to the point?
No it definitely does. I appreciate that. It brings up the other interesting point of - you noted 85% of assets are in those categories where passes a sub 10%, and you mentioned that international EM and global. Do you have high confidence that those aren't just next on the passive hit parade because I'm pretty sure you have passive strategies that are trying to get add at assets in those categories. So I just want to make sure that we're not buying into just the next piece of secular decline?
Yeah, so it all depends on your core belief. Our core belief is that passive in a particular factor, high-conviction active and alternative is here to stay. And if you - the notion that you're going to have a passive across the different asset categories is correct, you're going to be generating alpha from active capabilities, it's just not going to go away and that is not a common belief I would say right now, but if you look at the track records they're compelling.
One last quickie on fund mergers, on Slide 18, as much as there's not lots of overlap on the high demand strategies there seem to be within each of those categories enough overlap. Have you worked through some of those decisions and within each of those asset classes?
No. Look, we were all of two hours into the go forward and again we will work with our colleagues at Oppenheimer and over the next month, create a plan and again we'll share it with you, but we don't have that level of detail right now.
Okay. Thanks Marty.
Thank you. Our next question is from Robert Lee and please state your company name.
Right, thank you. Robert Lee, KBW. Thanks guys for taking my question. Maybe we're going back to the phase of expense synergies, if I remember correctly when you did the Van Kampen deal you were able to pretty much get this - get synergies like day one after close and not that you're necessarily expecting this, but can you give us some sense of kind of how you expect that to kind of layer in. And then maybe as a follow-up with the breakage assumptions, I mean understanding mainly mutual funds or maybe little less breakage, it has institutional. But just given the importance of platforms and centralize research, can you kind of help us get to how you compliment that only $10 billion of breakage from Oppenheimer is kind of a good number or a conservative number?
So what we have assumed in terms of the modeling and we have a view or sense of confidence around is that most of the synergies we think would be sort of taken in the first year close, I think we have somewhere between 75% to 85% assumption in terms of what could be achieved with the rest being fully achieved in 2020. I think again it's something that we feel like we have a good play book in terms to have execute this, so once again it should not be very hard and complicated for us to go forward. I think in terms of the breakage, the numbers that we are actually quite similar to what we had thought of the percentage Van Kampen, again it's based on what we've done in terms of our studies of how things work, we do think $10 billion is a reasonably good estimate obviously there's some swing around that number, it doesn't make a huge difference. It is a few percentage points maybe accretion here and there, so but we don't think it's going to be anything much dramatically offer those numbers.
Great and if I can just one quick follow-up, just maybe going back you guys have obviously been talking a lot the last couple years about the investments you've making in the platform whether it's Jemstep and other things and certainly have been excited about that and thinking about 2019 as being the point in time where may we start to see some of the fruits of that start to come through. I mean are you all concerned that this - given the size of this transaction that it just becomes kind of a distraction over the next six, nine months or year as people kind of wonder about where they shake out in this and maybe that actually pushes the ability to realize some of those benefits out?
Good question, the answer is absolutely not. So again we wouldn't be doing this if we think with macro trends the business and at the same time be able to advance a number of those growth efforts that we've been on and [indiscernible] management team we've been through that have with the high degree of competence that we'll not do it.
Yeah I would say I mean year-to-date, we've had about $13 million of net flows into the areas that we have been focusing on growth we talk about a lot of already ETF through example from the factors based capabilities a lot of that's in the pipeline, institutional pipeline. We're actually seeing an enormous sort of buildup in our Jemstep pipeline where we've got I think really very close to production and ongoing support as part of this process, a very large client that will come through in short order and the area we're seeing more sort of in contracting we're winning probably the majority - we're actually winning share in this space. I think we have sort of generated four out of 11 kind of major banks and so we're feeling good about Jemstep into the digital advice and where that is going. So across the board, I'd say our growth engines are moving forward in a very positive way and again I mentioned China if you have another example. So obviously we didn't have a lot of time to highlight it in this call, but I think we're absolutely going to continue to provide the visibility in terms of how our areas of growth are going to continue to allow us to sort of turn that low trajectory to a positive number into 2019.
Great, thanks for taking my questions, guys.
Thank you. Our next question is from Ken Worthington and please state your company name.
Hi, Ken Worthington from JPMorgan. So the deal comes nine years essentially to the day after you announced Van Kampen and so I guess we're going to have to pay attention, closely to what you're doing in October 27 for the next one. So I guess congratulations. So what are your thoughts in terms of cross marketing or cross selling with MassMutual over time? Maybe is a place to start, what percentage of Oppenheimer's AUM is actually sourced from MassMutual and then what kind of incremental investment dollars might you expect from your new partner and what products investor products seem best positioned?
Yeah, so great question Ken. So we've already had half a day conversation with the respective leadership between the two organizations and there are a number of areas where we think there are opportunities by the way we're just into it right now, so let me give you - as you know they have 8,500 advisors in the United States and so that is something that's going to be an obvious focus area for us. MassMutual's also doing some very interesting things out in Asia, very complementary to what we're doing, so that's another area where we think there's some real opportunity for us, those are two to name a few. And with their knowledge and skills in insurance and risk along with what we do in investment management, I'm sure we're going to find some very interesting things. There's going to be quite a bit of focus in this area. I really can't get through to disclose the level of what they've done together historically that's just not in our permit to do right now but it is actually something that is from our perspective is going to be quite powerful as we go forward.
Thanks. Maybe a little one for Loren, you guys mentioned AUM was about $250 billion. Market conditions particularly outside the US have been poor so far this quarter. Do you have a maybe more accurate AUM figure for us to kind of start out from or even as of date of the 250 billion?
I mean it's moved around plus or minus, I mean they've actually held pretty closely to the 250, I think it probably still rounding roughly to 250 million. So it has not been a lot of turmoil into the AUM number and flow trajectory we do have seen is been on a very positive trajectory for their franchise, so some outflow, but in on the positive trajectory over the last two months. So I think again in terms of numbers I would still be thinking 250 million is the right modeling number for you.
Thank you very much.
Thank you. Our next question is from Dan Fannon and please state your company name.
Thanks. Dan Fannon, Jefferies. I guess just building on that last comment and talk about a little more detail about recent flow trends and we obviously saw your results this morning on a standalone basis where outflows are close to 11 billion, you just mentioned, I think with the data we can see is Oppenheimer has generally been in a little bit more outflow, it's improving but still been an outflow. So give us a little bit more around why you think flows on a 2020 basis will be positive given what we're seeing today from performance and kind of current industry trends?
Yeah. Back again and - again for all of us who are long-term investors that look quarter-to-quarter, which is probably not very constructive, so I'd put it in the context of - I'm very bullish on the industry, it's $87 trillion initiatives it's not going to go away. The organizations that get it right are going to be very successful we intend to be one of those organizations. So now when we bring it down here, we have seen net inflows for nine years. Some headwinds and because of where we are in this market cycle for some of our value capabilities as we told you that will change and it is changing as you know we'll again will continue to see the impact there. But what we're doing is building organization that to push through these more extreme market environments - long talk about the institutional flows Jemstep in 2019, the opportunities that we're talking about with Oppenheimer here, but stay back to even put that off to the side. What we are seeing in the factor capabilities and our solutions capabilities are multi asset capabilities where we [indiscernible] meaningful and we're expecting to be very successful as we go forward.
I think I already mentioned Dan, is there any global and international capabilities that are hard to replicate that are persistent. They've actually done very well in terms of flows and it's really some of the other areas, some of the domestic kind of equity areas that has been an industry trend when you see the biggest outflows. So we do think as we are able to leverage the capabilities on a global basis, which are in demand that we're going to be able to bring the whole franchise a positive flow and again we've talked about our own strategies around growth and how we think we can bring sort of the core Invesco capabilities also grow. So that's why we - 2019, definitely we got some outflows, nothing happened up overnight but we do think by 2020, that's the reason will remain] modest but certainly positive.
Got it and then just a couple of questions on the accretion assumptions that you're making just to be clear is that on based on consensus estimates and then also is the buyback that you announce this morning included in that accretion. And then or so just kind of like what does - and it's also kind of what market assumptions are in that?
So, yeah. So effectively it versus consensus, so that is the right assumption. In terms of the buyback, the 1.2 billion there's about 400 million of incremental buyback that we have modelled in as a result of the transaction occurring but the 800 million is pretty much consistent with consensus and so we're - that's not part of the accretion numbers. So I'd say there's about 1% accretion in 2019 due to that incremental 200 buyback and another sort of 2.5 in 2020.
Thank you.
Thank you. Our next question is from Mike Cyprys and please state your company name. Mike Cyprys, your line is open. Please check your mute feature.
Mike, we cannot hear you.
We are getting no response. We'll move to the next question. The next question is from Brennan Hawken and please state your company name.
Hey, good morning, guys. Thanks for taking the questions. From UBS. So just a quick one on the $45 million fee rate cut in your merger Mass, I think that gets me to about 2 or so basis points, which would suggest about a 59% I.A.C. for Oppenheimer. Can you - number one, is that generally right and number two, how much fee rate pressure has Oppenheimer experienced over the past year or two either through their own fee cuts or the headwinds that we've seen from remix in across the industry?
Let me hit the second part and then Martin can pick up the one. Literally their effective fee rate has gone up over the last three years by I think it's about 3 basis points, so they've been doing quite well. And again their fees are very competitive, generate very good active managers.
So again the $45 million has been estimated, really at this point we don't have a build plan in terms of how funds come together and which ones are going to sort of win in terms of fee rates but there's definitely some amount of breakage that will happen when we bring funds together. So $45 million is the number that I think it still needs to be ultimately let it out and more obviously give updates as we get closer to a real plan around how the funds come together. But we think it's really conservative number right now little bit more than we actually hope will be the case. But it does have that impact from in terms of basis points as you mentioned. There is no assumption of further because going forward per se because of their price; their products are actually reasonably priced. And again in terms of the alpha creation and the ones that are higher priced, some of the alternative capabilities are all sort of reasonable on the core products reasonably left there. There's no significant pressure on having the cut fees on the active capabilities.
Okay. Thanks for that color. And then have you spoken with the rating agencies about the potential impact of issuing this extensive amount of preferred equity? And is there any reason why the first wouldn't be viewed as the fact that given that they're non-callable in 20 year? And then finally, if you do see a downgrade for a rating agency, what kind of impact did you expect that would have?
So, again. I think the agencies will release their reports and ultimately after they go to committee on this and we hope we will hear some of the answers today, so we're not going to sort of go ahead of them doing that. I mean I think we have our own user on the preferred and what it is. Obviously, there is a perpetual coupon 226 million that is going to be part of this deal. 5.9% coupon right now as you said might feel expensive, but we think over time it might not seem like expensive to you. You find there is no commitment for us to have to repay the 4 billion perpetual, there's a whole option and it's out 21 years really is part of requirements to have qualifying equity as part of the tax free reorg that's necessary for MassMutual. So, again, we don't, I mean, personally I don't view it as debt. It has got a lot of equity like characteristics in terms of be non-cumulative and again whatever you can sort of make your own approach and or your own assessment, surely you'll hear from all our ratings partners in terms of how they perceive this and you can assimilate that.
Thanks for the color.
Thank you. Our next question is from Mike Cyprys. Please state your company name.
Great, thanks, Mike Cyprys from Morgan Stanley. Just a question more broadly on M&A, so look across the industry mix results, M&A has been put it kindly. So I guess just what do you see to look across what others get wrong with M&A? What lessons do you take away with that? What do you think you have to get right to make this a highly successful transaction on the execution side for Invesco?
Yeah that's a good question. So it's just my opinion. I think trouble happens when you look at a piece of paper and it looks good on a piece of paper and you actually lose track of what really matters and these are fiduciary organizations with talented people and the value is really the understanding what the value is and how do you maintain that and how do you have that talent and how do you have that drive and so we're very focused on being very clear and jointly working through the execution with our partners as we've done historically and it might sound pretty basic, but that is in my opinion where things break down.
And I - but let me come back to this. So Mike, you know that we've talked about this in the past. You know, there is this notion that there's going to be massive consolidation in the industry maybe may be not I do that the premises that there's with that thought is that there's excess number of money managers that might be doing a middling job and I think that is the case and that will get resolved one way or the other, but the notion that if you are going to see this massive consolidation with people that have not had experience and that is going to be done well, I think is a misnomer and there so I'd look at this experience here but the first experience I had was 1992 when Franklin bought Templeton when I was there and so I've been on both sides of these things and there is a way to do this and do this successfully. And I understand your sweeping comment but I point you to our track record and we know how to do this.
And somewhat related to that, you maybe you could talk a little about the risk around the large fund franchises that Oppenheimer has? How do you manage that? I guess particularly if you can talk about the incentive structures, retention structures you're putting in place to retain key investment professionals and to what extent are they going to be integrated or not? What the broader investment Invesco franchise?
Yeah, so important question, so MassMutual has put in retention program which is great but more importantly, people will stay at organizations for money, they stay at organizations because they want to be there because they thrive in a particular for investment managers, so they can actually express themselves through their craft and we actually run our investment teams in a very similar way that MassMutual does, they're separate, they're distinct, we want them dedicated to present process and philosophy, we reinforce that. We wanted to make sure that they have the tools they need to continue to generate alpha for their clients that's what Oppenheimer has done in the past, that's what still going to happen going forward, that's not going to change. And we had the opportunity to meet with some of the senior leaders of the great culture, they really love what they have and that's going to - it's going to continue that way. And I think that's really important and that's what matters and again this is where I come back to you, yeah, when does it fail? It fails when an organization combines and somebody thinks they're going to institutionalize on process and it's probably the worst thing you can do.
Thank you.
Thank you. Our next question is from Michael Carrier and please state your company name.
Mike Carrier, Bank of America Merrill Lynch. Thanks guys. First one, just on the core business, Martin or Loren, I think you mentioned just the institutional pipeline is strong, maybe when we saw especially heading within August just some of the elevated outflows. Just maybe what you are seeing and what gives you mainly the confidence with that pipeline that we're not kind of seeing in the same level of redemptions or maybe any color on what drove some of those redemptions in the quarter?
Again, I think I gave some color already. Obviously, I hear sort of individual accounts that we decided and terminate I think the sovereign wealth is one that we see few times, that was the largest outflow. And so it's not a performance related topic, if not something systematic not a trend and it's really just a single coin topic more than anything else. I could - you know, and not going to happen again, but it's not something that is sweeping across our institutional business which is really localized to a particular client. I think we do feel very good about the pipeline because this broad basis across equity, the alternatives, balanced fixed income and so it is actually again I think it is a function of maybe things have shifted in terms of we're going to manage go in and we are actually heading into new found areas of demand around factor for example and some areas we're on alternatives that we haven't seen in the past.
So for us revenue yield is also extremely strong and so the revenue level is also all time high. And then when we look at, we do look at the pipeline of expected losses. That is not, I mean that's funding flat quarter-over-quarter, so it is not escalating out. So I mean that's why we feel that we're just going through a rough patch here in terms of the intuitional side and it should be persistent going into 2019, certainly not anything we see with the information that we have today. Again, redemptions do happen and they can happen, we could get surprise but it just doesn't feel like a trend and it's not based on performance. Again, when we look at the products that are selling either products that are in high really performing well, we will stay in bank loans and other products that are done very well.
So, then the other side of the full story I think is the one we all know which is just domestic, equity, retail US has been an outflow some of the value oriented capabilities that we talked about have been under pressure. So that is something that I think in terms of the near term for the turn around that we've seen in October and particular just given the market is sort of a proof point to our client that what we said what's going to happen is happening. Now, again, if anybody's guess as to where the market actually go, because the fact is we've said that this would happen when markets begin to sort of turn around and you begin to see momentum become less interesting that our products are going to outperform, if we do see us we're kind of moving in that direction, it should be really helpful for us, I mean some of the redemptions going forward.
Okay, that's helpful and then maybe one more from Marty. I look at the history for you guys and even the industry, it seems like you've done M&A on for the gross side and then you've also done some scale transactions and in terms of a little bit of both, but when you think about Invesco going forward like in the areas that are very competitive like the US mutual fund industry, if you just create like an upscale that if you think over the next three, five years that you can combat any future exceed pressures, out flows. And then on the flip side, a lot of the [indiscernible] you guys have made over the past three years on the growth front and it seems like that you're still positioned in the higher growth in your differentiated areas. But just when you think about that combination, you think going forward Invesco, you know it is well positioned as you can get it to basically grow where you can and offset the headwinds through scale.
Yeah, absolutely, again, also the points I was trying to drive home, I mean if you look at the US retail industry, we become the sixth largest within that and we end up as one of the absolute leaders and I think that's but I also think what's important just not the number, it is the capabilities that we're bringing there and so historically if you think of the active management capabilities, the addition of Oppenheimer it's dramatically expanding that are in high demand there. You then add that with the early days of factor capabilities being picked up in net retail channel, early days of trying to get alternatives into that channel on a way that works for the channel, the solutions capabilities that are being taken up right now the models that are being built by organizations such as ourselves for that channel. We're uniquely placed there and there are not many competitors that can do that but the scale just puts us on another level there. So I think it's really important. And the other thing I do want to make really clear where you're going is, the information you're seeing today that we're putting forward the expresses the vast majority of Oppenheimer's investment capabilities happen to be an image of fund wrapper. They're capabilities that are beyond but there is greater demand beyond mutual fund capabilities of excess, so it's the institutional opportunity, the non-U.S. opportunity both institutional and retail, the opportunities are meaningful. And again you really have to put this in the context of everything that we've been talking about in executing against right it is a combination of this high condition active, passive factor in particular for us alternatives and I really feel really good about where we've gotten the organization over the last number of years, the last couple years actually in particular with this very rapid advancement of our strategy. And as I've said it in the past it's [0:08:25] combat back to the future, it is changing, it is changing rapidly. And our efforts to then get ahead of that curve in a meaningful way and we think we've done that.
Okay. Thanks a lot.
Thank you. Our next question is from Kenneth Lee and please state your company name.
Hi. Thanks for taking my question. Kenneth Lee, RBC capital markets. I just want to know whether you guys have any updated thoughts on long-term organic growth targets post-acquisition you know maybe post 2019 as well, proved to do sort of like a 3% to 5% range, wondering that's changing? Thanks.
I think we still believe that 3% to 5% is doable for us as a fund across market cycles, this acquisition, we think is going to help significantly improve our ability to grow not just in the U.S. in a more consistent way but also as Marty mentioned taking some of the capabilities globally is going to be a big opportunity for us. So I think there's nothing that's really changed, our belief in the market itself will have something to do with ultimately where we achieved and how we're going to keep the growth. But the growth engine that we talked about are still one that we feel strongly are sort of at a very high level, higher than the industry average physically around digital advice, China those things are at double digit kind of growth opportunities and factor based, we think we can continue to really drive more growth there, so I think long answer to 3% to 5% still feels quite achievable for us.
Okay, great. And just a follow up on an earlier question about the strategic partnership with MassMutual. Just want to clarify, is there is some sort of agreement in place for Invesco to provide asset management services going forward or MassMutual insurance and retirement products?
No. No there's no agreement. I think what's really important to understand is the MassMutual has put every dollar of the proceeds back into the combine of situation. There's a high degree that they are not getting out of the asset management business, they're staying in it and they're expressing it through their equity holding and the preferred that Loren talked about. And as I said, we have had high level of conversations, I feel very strongly that the appropriate ways to work together will emerge and it will be official to both organizations, so again just very confident in the relationship.
Got you and just one last one, just in the quarter within the EU region there were some outflows there. Just wondering whether what key factors drove some of those flows banks?
Yes. So that was the sovereign wealth outflows that I mentioned physically it was around some of our Asian equity capabilities managed out of our [indiscernible].
Thank you. Our next question is from Chris Shutler and please state your company name.
Hi, guys, good morning. Chris Shutler from William Blair. Within retail, how much of Oppenheimer's AUM is in the broker dealer channel relative to the RIA channel?
What I do know is - Loren is looking for some numbers that we have it but they have an incredible distribution capability probably one of the better in the industry is very highly regarded and the results show that. They also have some very good success in the [indiscernible] segment of the market which we do not have, and again, so we look at a combinational thing. We will be better half with the Oppenheimer real talent and I think that they have done.
Yes, so, again, I'm not sure if it's - if I have enough transparency to really start comment in detail around the various assets and channels that it looks like RIAs, bumping around 15 billion of the total numbers, so it's marching [ph] to be mostly through the wealth management platforms, yeah.
One-five, 15.
One-five, 15, Chris.
Okay. Thanks a lot. And then correct me if I'm wrong there, it looks like I think about 85% of their Oppenheimer's AUMs in mutual fund wrapper. Can you give us some kind of breakout of what the other 15%-ish of the assets look like how much of it is institutional versus sub advisory, whatever kind of flow trends in that piece of Oppenheimer?
So I think they have smaller institutional capabilities. That's been in an area that we've been trying to grow, there's probably about 10 billion - 12 billion sub advisory fee around 27 billion, 25 billion. So those are the big other pieces that you might not see through the normal sort of channels that you see. They do have smaller other business which again I think it's about 6 billion, so it's mostly in the mutual fund side and ETFs, right.
Yeah, 3 billion ETFs, but - So let me come back to that. So what I do want to make very, very clear is that the bulk of the business has been a mutual funds, that is a vehicle, the capabilities with the mutual funds are really very, very strong and we look there is going to be an opportunity for a number of those capabilities to be taken to the distribution channels we have outside of the United States, retail probably, the most immediate followed by institutional both in the U.S. and non-U.S. So again, the high quality investment seems really offer us a real opportunities as we look forward.
Last one, guys, real quick. How much - and you may have stated this already, so I apologise if that's the case, but the - how much of the AUM at Oppenheimer is in kind of an overlapping strategy with Invesco, where there's two strategies that look pretty close.
Yeah, very little overlap which is actually what is so attractive about the other combination. So again we look at the combination of the teams in the strategies as complementary an additive as we look forward.
Thank you.
Thank you. Our next question is from Alex Blostein. Please state your company name.
Hey, good morning, thanks, Goldman Sachs. I would like to go back to the cost synergy question just one more time guys and I'm sorry if I - if I missed it, but if you think about the $475 million, it looks like it's 50% to 60% of Oppenheimer's cost base that's well above what we've seen with any other transaction and management space of the size in recent history. So what makes this one different I guess to get you guys to this level of synergies that's I guess part one. And part two when you guys talk about the 450 of integration costs that also feels pretty sizable , so maybe help us maybe break that up kind of what that comprises of and how long do you think these integration cost will be in Invesco's run rate?
Yeah, so the - I want to clarify that point, so you cannot look at it as a percentage of Oppenheimer's basis, it's not factual or correct. So what we said earlier was the opportunity becomes the dominance of their platform being in mutual funds and our mutual fund capability all being in the United States. The scale benefits that come out of systems integrations and the operations supporting the mutual fund business across both platforms is material and real. And Oppenheimer already was heading down a path of simplification in the like, so this will just speed that up, so again it is - that was very different than the other combinations that you've seen in the marketplace.
Yeah and then the 450, so again there is all sorts of cost associated with completing the transaction and getting process solicitation so forth and so we have some estimates in here in terms of getting to one platform plus one platform and get one platform, so there's cost around technology and integration to get there. So it's a generous number, but it's one that we think as conservative, but you know potentially going to be all used given the degree and the 475 is a big number as you mentioned. So we would expect to see that sort of in line with the timing around the synergies, so you can think of it sort of occurring roughly in step with mostly in year one and then the rest sort of getting finished up in year two being the smaller piece.
Got it and the 450 is mostly cash I'm assuming, right, cash expenses?
Yeah, those would be cash expenses one time sort of cash expenses.
Sorry, last one on the tax rate, so I'm assuming you guys will kind of proceed with the adjusted tax rate methodology in terms of how you report earnings. This probably creates a pretty sizable amortization shield. What should be sort of the adjusted tax rate we should be thinking about post the transaction and does that feed into your accretion enough?
Yeah, there's no benefit here from a tax perspective for us, so there's no element in the accretion related to tax benefits. The accounting around the intangible amortization is going to be small, modest, probably somewhere between $50 million $70 million a year, but there is no tax benefit associated with that, so nothing. So the step up in tax rate is going to take our current rate of roughly 20.6% and probably add another two percentage points to it for the firm as a whole just because of the degree of US earnings that we're going to be generating.
Thanks very much.
Thank you. Our next question is from Jeremy Campbell and please state your company name.
Hey it's Jeremy Campbell from Barclays, most of them have been answered, just got one quick clean up question here on the OpEx thing. Loren, I think you obviously mentioned that 75%, 85% is going to come in '19, with a few months of planning, how do you guys in the books here? Are we really looking at something where you can come up pretty hot and heavy out of the shoe or is it going to kind of gradually build from 2Q through 4Q?
Yeah, I think again a little early for us to get into details. We need to work with our colleagues at Oppenheimer to really understand how to execute this. Obviously our intention is to go reasonably quickly, we don't think sort of long timeframe is helpful for anyone, but we need to be thoughtful in terms of doing this is the way we executed so. I think will be able to provide more color exactly around kind of how it gets by quarter as we get a little bit closer to close.
Got it and just one quick follow-up on Alex's question there, just want to be sure, kind of clarification that - that's sort of like the OpEx and the very kind of small extended the buyback here there's no other kind of elements to the accretion math that we might be missing there right?
Nothing else no, as I mentioned the only thing of 200 million of extra buyback in two years and so as to quantify that, that is - that's about the only thing, everything else should be straight from the numbers that you are seeing.
Great, thanks.
Thank you.
Thank you. Our next question is from Brian Bedell and please state your company name.
Brian Bedell, Deutsche Bank. Thanks very much for keeping the call going here. Two mean questions one on the cost synergies side and one on the potential for revenue synergies and maybe just starting on the cost side. You naturally took a crack at trying to estimate the synergies after this is zooming in the press, 14% cost saves on the total base is pretty high and implies some product rationalization around this and so we took a crack at that and [indiscernible] with around 150 billion of AUM on the mutual fund side to both organizations that could potentially be merged and that was almost 200 billion in costs the way we came up with it. So just wanted to see if that's way off pace and then if you can just talk about the process of timing of doing this fund mergers, for example, do you have fund board approvals yet or does that come after the deal, poses and then would you look to integrate funds in fairly quickly as - so that you're not put on gate keeper watch list.
Yeah. That would all the respect that's not how we do it. Though there are no plans for fund mergers, our focus right now is to get to a combined operating platform that will be 100% focused between now and closing. And the synergies that you're seeing are coming from what I've talked about, this is the benefit of scale within an organization and again it happens because it's operational benefits that you get through emerging operational capabilities within - largely mutual fund capabilities within the United States, that's where that's coming from and there's no contemplation, no plan for fund mergers in this work and it won't be until after - yeah we'll turn ahead to sort of what - after the closing and what makes sense there.
And so if you do you come up with fund managers later down the road would that be upside to the 475 then?
Yes.
Okay, great. And then maybe on the distribution synergy side, so I appreciate your comment on the new products structures I mean obviously mutual funds has been a challenge product structure for a long time, but if you have the investment teams in there and Oppenheimer didn't really create a big product range in that area. How quickly do you think you can come up with institutional product structures to really crank up the net flow ability of the franchise and the 10 billion that you estimate, I assume that's a gross outflow number or is that net of potential of new products offsetting some of the mutual fund have?
Yeah, so let me hit on that. So again we're all of two hours into this, so we have some work to do and being clear. But what we do know spending time with the teams that are high quality teams, they are in high demand areas. We as an organization have a very robust instructional capability to get teams what we call client ready for the institutional channel and we are very well equipped to introduce if you want to call it retail structures outside of the United States. But it's just not the structure, it is really the go to market strategy matching up against clients demand, the sales forces, the marketing capabilities, that's what is so robust about this, so again once we spend time with one another figure out what clients are looking for we'll get after pretty quickly.
And the 10 is a net - it's a net outflow number, so it's not a just a redemption number it's a net flow.
In a number, okay and then without the fund mergers, so you really don't anticipate being put on watch list from other DT specific [ph] distributor [indiscernible]?
No.
Okay. Thank you.
Thank you.
Thank you. Our next question is from Patrick Davitt and please state your company name.
Hey, good morning. It's Autonomous Research. Appreciate Slide 17, that's helpful. I imagine most of these probably want to be doing business with less managers, but is there a risk of hitting any exposure limits with big bigger with all these guys?
I wish we had that problem but no.
Okay. And then you mentioned the great wall flows, I imagine that's all money funds still if not that's great, but what kind of runway to getting more non-money fund kind of flows from that from that distribution level?
Yeah, so a couple points, so let me - we can be more excited about that actually. So if you look at our transaction partnership there it is very digitally based economy with the retail world and through we have financial. We are the first and only western joint venture partner that's in there and it starts with money funds and by the way it's 10 basis points so that's 10 basis points and tens of billions of dollars isn't so bad, but if you have a natural follow on is including further investment capabilities in that platform and we anticipate that happening in future here, I don't have the specific dates of it though, but it's a good start for us.
Thanks.
Thank you. Our next question is from Chris Harrison, please say your company name.
Good morning, Wells Fargo. Can you guys talk to us a little bit about how this transaction came about and maybe share your perspective on why MassMutual's selling?
Yeah, let's see. The transaction came about simply from conversation of where we think the world is going. We were very likeminded in where we thought it was going. All the things that we talked about today are real in the meaningful and when you have an alignment like that we turned consider your focus on what can you do together. But I do want to clarify a point, MassMutual is not selling and they're making that very, very clear and they are taking - they are holding the 81 million common equity shares and $4 billion preferred over the long term. As you know they are a mutual company, they talk about having a long-term view, it's extraordinary. And every single dollar that would be proceeds is going back into this combined intuition and I think it's really important for people to hear and understand, they're committed to combined firm and they have a high degree of confidence in what we're going to do together going forward.
Okay, understood and kind of unrelated question and some of the larger Oppenheimer Funds we looked at that have had a really extraordinary performance. They do have a large overweighting in the tech sector and so I guess I'm wondering is there a way you guys can mitigate the risks or how do you mitigate the risk of acquiring that after what's been the very good run for stocks in that particular sector?
Yeah, so you're really hitting on a question that comes up a different way. No different than Invesco the investment team's managed money consistent with investment philosophy and that's one, two, three in the list that's what we want to do in the going to continue to do that and they generate as you say very good performance over market cycle and within the portfolio sort of the full discretion of the portfolio managers that like a change in our time or has never changed at Invesco. The way that it gets if you want to call it mitigated is through having complementary strategies and that's what we're trying to point out earlier. And so when you look at the lineups side-by-side - if you want to call it that's how you're mitigating the different styles, styles are in favor and out of favor as an organization. It gives clients choice but it's also good for stable - having a more stable business.
And we do have time for one final question. Our last question today is from Greggory Warren and please state your company name.
Good morning. This is Greg Warren from Morningstar. Just a quick question want to step back to kind of the breakage forecast you guys put out there. I understand that you're basing it on what you saw with Van Kampen, but in all honesty that was 10 years ago and that was a completely different market environment. So what gives you the belief that with the disruption like this with you guys picking up Oppenheimer Funds that you're only going to see 10 billion in outflows out of the gate, I would assume you see something slightly higher than that and I guess a follow-on to that is how much of MassMutual is actually invested in Oppenheimer Funds. How much business are you guys getting from them?
I think with the Van Kampen transaction we used - we estimated 10, it was nothing close to that, it was much less, so that 10 was way conservative back then and we think it's probably still conservative, but we're using it and again when we think about it it's really - because there is no real breakage, we're not foreseeing teams to sort of come together do anything different with the process, so maybe that 10 is just not going to happen, so there are just as a - point of conservatism in the modeling. I don't think there's anything explicitly that we expect from the trigger big outflows as a result of this transaction, but we really needed it when we're thinking about just uncertainty. So that's why the10's there, it's not based on fact or data or it's more kind of conservatism. I think - what was your second question, Gregg I'm sorry?
Yeah surely how much - how does MassMutual actually have because usually in those situations where the life insurer or an insurer owns part of as a management firm, there's a plenty of cross business between them, so I was just wondering how much MassMutual actually have invested in Oppenheimer Funds at this point?
Yeah, no it is not a large number and again I am not trying to - I just don't feel liberty to - that I can have a conversation, so if not a large number of the intent going forward though is - one of the first parts that we collectively want to look at is making available more robustly the investment capabilities here in the United States at 85 - 8,500 advisors.
In terms of the General Account there is really no relationship between what Oppenheimer is doing in the management those of MassMutual has more count.
Okay. And then Loren, just a quick, I don't know if I caught it or not during the course of the call, but you've got 1.2 billion share repurchase sort of authorized now. Did you give an indication of how soon you might start buying back stock or how much of may be a quarterly run rate you're looking at?
So we can start and we have an intention of beginning after obviously this release gets its due process in terms of two days, so you think about starting next week. And so we're going to be obviously interested given the fact that the stock we feel is credibly undervalued particularly in light of the transaction. But we're also being sensitive to the fact we haven't yet completed the deal and a lot of the buyback and the extra buyback is really on the backs of this deal ultimately bringing more cash flow. So without that said, we are so intent on sort of starting in a very serious way the 1.2 - was now laid out by quarter at this point in time, but we will be in the market almost immediately.
So would it be comfortable, say you could easily finance a third of that right out of the gate?
No question.
Okay. Perfect. Thank you.
Thanks, everybody. Operator I think that's it.
I would now turn it up call back to speakers for closing remarks.
Good again just want to thank everybody for changing their schedules and really appreciate engagement the questions and we're very excited about the opportunity in the future here. So thank you very much and we will continue to communicate progress on this combination, but also as Loren pointed out, many good things are going on in our core business and I will bring up to speed on those in future calls. So have a good rest of the day. Thank you.
Thank you. This does conclude today's conference. You may disconnect at this time.