AllianceBernstein (AB) Q2 2023: Institutional Pipeline Grows 10% as Private Markets AUM Hits $61B

July 28, 2023 | By EarningsIQ Research

AllianceBernstein’s quarter was defined by a 10% sequential rise in its institutional pipeline and robust private markets momentum, even as fee compression and equity outflows weighed on near-term results. Management’s focus on higher-fee strategies, vehicle innovation, and structural cost actions sets up margin expansion potential into 2025-2027, but near-term flows remain mixed across channels. Investors should focus on the durability of fixed income gains, the pace of institutional funding, and the execution of margin levers as key drivers of forward value.

Summary

• Private Markets Scale: Private alternatives AUM reached $61B, with new capital commitments from Equitable supporting long-term growth.
• Institutional Pipeline Expansion: The $14.4B pipeline, up 10% sequentially, signals future inflows but timing remains variable.
• Margin Levers Building: Bernstein Research deconsolidation and Nashville relocation point to 350–500bps of margin upside by 2027.

Business Overview

AllianceBernstein (AB) is a global investment management firm providing active investment solutions across equities, fixed income, multi-asset, private alternatives, and research services. The firm earns revenue primarily from management and performance fees on assets under management (AUM), which are diversified across retail, institutional, and private wealth channels. Major business lines include traditional asset management, private markets, and Bernstein Research, with growing presence in ETFs and direct indexing.

Performance Analysis

AB’s Q2 2023 reflected mixed underlying trends: While total AUM climbed 7% year-over-year to $692B, average AUM was down 1% YoY, underscoring the lag in revenue catch-up from market recovery. Net outflows of $4B were skewed by $6.2B in pre-announced low-fee institutional redemptions; excluding these, net flows were positive in May and June, led by U.S. retail and global fixed income platforms, each growing at 9% annualized organically.

Fixed income performance improved materially, with 73% of assets outperforming on a one-year basis, and strong flows into American Income and global high yield strategies. In contrast, equity performance lagged near-term benchmarks, with only 23% of equity AUM outperforming over one year, although multi-year peer-relative performance remains solid. Private markets AUM rose 13% YoY (pro forma for CarVal), supported by new Equitable commitments and a tripling in CarVal’s clean energy fund size.

• Retail Channel Divergence: U.S. retail saw 9% organic growth, driven by fixed income and muni platforms, while global equity redemptions offset gains.
• Institutional Channel Transition: Pipeline grew to $14.4B, with active equity and alternatives wins, but gross sales and net flows were dampened by lumpy redemptions.
• Private Wealth Resilience: Gross sales up 35% YoY, with strong money market and alternatives demand, though net flows were flat in a seasonally slower quarter.

Fee rate dynamics remain a key watchpoint, as lower-fee fixed income inflows and risk-off mix offset gains from higher-fee strategies. Management expects sequential improvement as pipeline funding shifts toward higher-fee mandates.

Executive Commentary

Strategic Positioning

1. Private Markets and Alternatives Growth

AB’s private markets platform, including CarVal and clean energy funds, is a central growth engine. Equitable’s second $10B multi-year commitment and the tripling of CarVal’s clean energy fund underscore the firm’s ability to attract long-term, sticky assets in higher-fee verticals.

2. Fixed Income and Muni SMA Leadership

Fixed income flows and performance are outpacing industry trends, with American Income and municipal SMA (Separately Managed Accounts, customized bond portfolios) platforms gaining market share. Technology investments and vehicle expansion (SMAs, ETFs) are structural advantages supporting continued market share gains, particularly in U.S. retail and Asia.

3. Institutional Pipeline and Fee Rate Outlook

The $14.4B institutional pipeline is weighted toward higher-fee active equity and alternatives mandates, with management signaling a constructive fee rate trajectory as these fundings convert. However, the timing of pipeline realization and potential for lumpy low-fee mandates remain variables.

4. Cost Structure and Margin Expansion Levers

Strategic cost actions—Nashville relocation, Bernstein Research deconsolidation, and private markets growth—are targeted to deliver 350–500bps of margin expansion by 2027. Most Nashville savings will materialize post-2024, while Bernstein deconsolidation benefits depend on regulatory closure now expected in 1H 2024.

5. Product and Vehicle Innovation

AB is expanding its ETF lineup, direct indexing (PAT, Personalized Automated Tax management), and CIT (Collective Investment Trust) offerings, aiming to capture new flows and diversify revenue streams across channels. Early ETF traction and direct indexing AUM growth (now $3B) reflect an ability to meet evolving client needs.

Key Considerations

The quarter’s results reflect both the resilience of AB’s diversified model and the pressures of industry-wide fee compression and shifting client preferences. The firm’s strategic bets on private markets, vehicle innovation, and operational efficiency are positioning it for multi-year improvement, but near-term visibility on flows and margin is limited by macro and client allocation uncertainty.

Key Considerations:

• Pipeline Quality vs. Timing: The $14.4B institutional pipeline is fee-rich, but actual funding pace and mix will drive realized revenue and margin.
• Fixed Income Durability: Sustained retail and Asia fixed income demand, especially in high-fee American Income, is a key top-line driver.
• Margin Expansion Execution: Realization of 350–500bps margin upside hinges on timely Nashville and Bernstein Research transitions.
• Product Platform Breadth: Continued ETF, SMA, and direct indexing growth will determine AB’s ability to capture shifting client demand.
• Equity Performance Recovery: Multi-year peer outperformance is an offset, but near-term equity underperformance and outflows are headwinds.

Risks

AB faces risks from macro-driven market volatility, which could delay institutional funding, especially if equity or fixed income markets reverse. Fee compression remains a structural headwind, as mix shifts toward lower-fee products can dilute revenue even amid AUM growth. Regulatory approval delays for the Bernstein Research JV and execution risk on margin expansion initiatives could also impact forward profitability. Concentration in mega-cap tech within equity benchmarks elevates tracking error and performance risk.

Forward Outlook

For Q3 2023, AB guided to:

• Modest sequential improvement in fee rate, contingent on asset mix and pipeline funding.
• Compensation-to-revenue ratio at 49.5%, with full-year at the upper end of the 47–50% historical range.

For full-year 2023, management maintained guidance:

• Promotion and servicing spend up low single digits YoY.
• G&A growth below inflation, up low single digits.

Management flagged that margin expansion levers will phase in from late 2024 through 2027, with the Bernstein Research deal and New York office transition as key milestones. Institutional funding pace, fixed income flows, and private markets deployment are the primary swing factors for near-term results.

Takeaways

AllianceBernstein’s Q2 shows building momentum in private markets and fixed income, while margin expansion is a multi-year story tied to strategic cost actions and product mix. Investors should monitor the conversion of the institutional pipeline, the sustainability of retail fixed income flows, and the timing of margin levers as critical drivers of value creation.

• Margin Expansion Hinges on Execution: Timely completion of the Bernstein Research JV and Nashville relocation will determine the pace of operating leverage realization.
• Fee Rate and Product Mix Are Pivotal: Higher-fee mandates in the pipeline and ongoing vehicle innovation could offset industry-wide fee pressure if flows materialize as expected.
• Private Markets and Alternatives Will Shape Long-Term Growth: Equitable’s $10B commitment and CarVal’s fund scaling provide visibility, but deployment pace and performance will be key to future AUM and revenue.

Conclusion

AllianceBernstein is navigating a complex environment with clear momentum in private markets and fixed income, while near-term flows and margin remain in flux. Strategic execution on cost and product levers, along with pipeline conversion, will define the firm’s earnings power into 2025 and beyond.

Industry Read-Through

AB’s results highlight several industry themes: Private markets and alternatives are increasingly central to asset manager growth, with sticky capital and higher fees offsetting traditional channel headwinds. Vehicle innovation—SMAs, ETFs, direct indexing—is critical for capturing evolving client preferences, especially among high net worth and institutional clients. Margin expansion requires structural cost actions, not just scale, as fee compression persists across the industry. Peers with diversified product sets and operational flexibility will be best positioned to navigate macro volatility and shifting client allocations.

AB Financials Asset Management Private Markets Institutional Margin Expansion Fixed Income Alternatives