Legg Mason's Management Presents at Citigroup US Financial Services Conference (Transcript)

Mar. 5.13 | About: Legg Mason (LM)

Legg Mason Inc. (NYSE:LM)

March 05, 2013 10:30 am ET


Peter H. Nachtwey - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President


William R. Katz - Citigroup Inc, Research Division

William R. Katz - Citigroup Inc, Research Division

Appears to be stabilizing. There's still so much happening in recent months. Management's done a very good job of cutting out expenses. Significantly, in the past couple of years, have streamlined the balance sheet, it stepped up the buyback. And we all know that the CEO spot has been solidified with the permanent announcement of Mr. Joe Sullivan as the CEO. Before introducing and turning it over to management though, we have, using some survey questions, for everyone in the audience. So let's just kickoff the first one. First question is...


William R. Katz - Citigroup Inc, Research Division

Senior Executive Vice President and CFO, as well as Mr. Alan Magleby, to my left, who heads up the Investor Relations. So with that, gentlemen, thank you very much for coming and I look forward to today's presentation.

Peter H. Nachtwey

Thank you, Bill. And is rejiggered, is that the technical term for get more?

William R. Katz - Citigroup Inc, Research Division

That's high finance.

Peter H. Nachtwey

Anyway, appreciate your feedback. So let me first again thank you, Bill, for setting us up in Boston. It's kind of nice to come to New England for a change of pace as opposed to New York, and you picked a nice window where the snowstorm is going to hit our hometown in Baltimore, but not Boston. So that was a good call on your part.

William R. Katz - Citigroup Inc, Research Division

We have shovels on the way out.

Peter H. Nachtwey

But to the broader audience, both here in the room and then on the webcast, as always, we thank you for taking the time to learn more about Legg Mason. And also, this morning, provide us a little bit of feedback in terms of your thinking on things we can do strategically.

I'll jump into the deck, Page 2 here is the usual disclaimer around forward-looking statements.

Turning to Slide 3. For those of you who are not as familiar with our story, we're a diversified global asset manager. We're based in Baltimore, Maryland, and have about 3,000 employees. And as Bill said before, we ended the month of January at $654 billion in AUM. We've done quite a lot of streamlining, so of that 3,000 employees, only about 1,000 are at corporate and a big chunk of which, at that level, comprise our Global Distribution capability, which our affiliates leverage considerably in the global retail market. At the parent level, then that means we have about 500 people outselling product across the globe on a retail basis day-to-day and about 500 people doing corporate duties that go along with being a public company. The remaining 2,000 employees are spread across all of our affiliates on a multi-manager basis with the best-in-class focus on key asset sectors.

As I've mentioned, we've done quite a lot of work to take our headcount down on the corporate side, where it was roughly 1,800 people at the peak, it is now down to about 1,000. We currently feel we're in the right place at that level, with an opportunity to leverage a very streamlined set of capabilities across Legg Mason corporate and the affiliates as we focus on growing the business.

A bit more strategic this morning, given the fact where most of you probably heard several presentations on our December quarter. So as we think about things strategically, the industry has really changed in 3 key areas that are highlighted here on Slide 4: Client access, the investment arena and then the operating environment.

From a client perspective, who the clients are is evolving. We're seeing growth in global retail and the rise of developing and emerging markets. So it's also changing as to how clients want to be accessed, from very centralized for the wirehouses, to more direct with the institutional investors.

Turning to investment. Leadership peer will require a combination of relevant product, strong consistent performance and a culture of innovation. Product demand continues to shift, new growth will come from global portfolios, specialized fixed income, alternatives, passive and multi-asset class solutions.

And finally, the operating environment, where it's been challenged due to slowing organic growth, fee pressure, lower market returns and growth in passive products. And again, it emphasizes all 3 of the things that we've just talked about here are things that are impacting everybody in our industry.

Slide 5 speaks to the new normal in our industry. And I won't repeat all the items on the slide, but one of the key concerns here is overall growth is expected to slow and what growth there is will be weighted towards the developing markets.

Secondly, return on assets and operating margins will continue to be pressured. But at 30 basis points for return on assets and 30% to 35% for average operating margins, this is still a great business. On the product side, there's clearly a shift to passive alternatives and emerging market products, all of them increasingly sold as solutions. And only a few asset managers are likely to capture the majority of the flows in the market as we continue to move towards a winner-take-all kind of scenario in the marketplace.

On Slide 6, I'll highlight implications of all these to Legg Mason. Our growth opportunities in the current product portfolio are overweight in fixed income and U.S. equity. And we're underrepresented in -- underrepresented in key growth areas such as alternatives, global equity solutions and multi-asset class. But these are areas we're looking to build out, both organically and through acquisitions. Our recent Fauchier acquisition, which is both in the alternative space and non-U.S. is a good example.

Additionally, passive strategies, where we have chosen not to play, are gaining market share, while traditional active managers, like Legg Mason, are experiencing fee pressure. We do feel we are well positioned to capture institutional and global retail flows, and our global distribution infrastructure makes us uniquely qualified to capitalize on industry consolidation trends. So that's a clear-eyed assessment of where we stand today. But it's important to note that we start with $650 billion of AUM, which on a revenue basis, is well diversified across equity, fixed income, alternatives and liquidity. And clients are similarly well diversified between institutional and retail and U.S. versus international.

Finally, our new CEO, Joe Sullivan, has identified 4 key success factors for Legg Mason. First, we must continually develop new and innovative products and get them to market faster than our competitors. Second, we must deliver exceptional investment performance in the products that we choose to offer. Third, we must distribute those products better than our competitors. And finally, we must constantly review our operating model, looking for opportunities to be increasingly efficient and effective in everything that we do.

So as we think about those success factors, we have some key competitive advantages highlighted on Slide 7, including respected brands, such as Royce, Western, Permal, Brandywine, ClearBridge and here in Boston, Batterymarch. Our scale, with $654 billion in AUM as of January 31, and our diversity in terms of product and clients, these strengths are then enhanced by our significant global distribution capability where we have over $222 billion of AUM as of January 31.

So to drive growth and shareholder value, we are focused on 3 priorities. Organic growth is our top priority. We need to grow, both in institutional, retail across the firm, accelerating where we have strong product and performance or developing, and where necessary, seeding new products, including additional closed end and specialized fund launches.

Filling product gaps is also critical. And we will work with our affiliates on product development, as well as selected bolt-on and lift-out opportunities like the Fauchier acquisition, which helps to address one of our key product gaps in the alternative space.

And third, we will continue to return capital to shareholders through both share repurchases and dividends. And we've repurchased over 12 million shares this fiscal year and expect to ramp up those repurchases this quarter.

With regard to our respected brands, Slide 8 lists all of our key affiliates, and I'll give a brief update on the major ones in order of their margin contribution, leading off with Western, with nearly $462 billion in assets under management. In addition to the global sovereign mandate that we've referenced for some time, outflows last quarter were primarily driven by state pension fund that reallocated its fixed income portfolio and the successful completion of the PPIP program. One but not yet funded mandate at quarter end were $600 million.

Importantly, reflecting the continued migration of Western's business to specialized mandates and structured products, Western also raised a $500 million bank loan CLO that priced on January 23, but will get reflected in February's AUM. And Western expects additional opportunities to launch similar funds in the current market environment, much like its recent follow-on activity in the REIT space.

Finally, Western raised nearly $200 million in the quarter with a major distribution partner in a nonlisted closed-end fund that invests in middle market debt, one of the first of its kind.

Next is Royce at approximately $35 billion, where strong market performance and improved investment performance were offset by pickup and outflows for the quarter. A key priority for Royce in this environment is to increase sales by expanding into new channels with Legg Mason's retail distribution team, while leveraging their long-established wealth management and DCIO channel presence.

This month, Royce had a $100 million takeover win in a wealth management channel, which we see as a good sign that investors are beginning to come back in the active equity space generally, in small caps, in particular. Following Royce's ClearBridge investments at $57 billion in AUM, outflows increased in the quarter as a large multibillion sub-advisory client reallocated nearly $600 million from long equities into alternatives. Like many active equities managers, ClearBridge also experienced an increase in retail outflows after the election, which was likely tied to uncertainty around the potential for new federal tax policies. One but not yet funded mandate at quarter end were a very strong $1.2 billion.

Next, Permal at $16 billion is down from last quarter. While the business continues to make strong progress in the institutional channels, this quarter's net outflows were driven by continued weakness from global high net worth clients and the maturation of a large structure product. Total unfunded wins for Permal for the quarter stood at approximately $550 million. During the quarter, Permal raised approximately $100 million in a new product for which the initial lock up is 2 years. And we announced the acquisition of Fauchier Partners in December, which I'll give details on in a later slide.

Very importantly, nearly 80%, I'll repeat that, nearly 80% of performance fee eligible AUM are now at their high-water marks. And this year, Permal is set to make significant inroads into the Chinese market. It has opened an office in Shanghai, appointed a Chinese national as a country head and is now waiting for its business license before ramping up operations further.

Next is Brandywine. Now at $43 billion, and they had net inflows for the quarter. And the company's AUM was up 30% in calendar year 2012. Total unfunded wins for the quarter were $334 million, a quarter-over-quarter drop off in one but not funded mandate that is consistent with its experience in prior December quarters. In January, AUM included a new $500 million investment from an existing client.

Finally, Batterymarch at $12.5 billion. Batterymarch experienced a handful of expected but meaningful institutional redemptions during the quarter. This was due in part to the continued pressure on longly active equity managers, but also the result of choppy investment performance, reflecting an investment bias towards global cyclical growth in some of their strategies that prove to be a bit early. However, recent improvements in those stocks suggest that the cyclical bias is now poised to pay off.

Slide 9 shows the diversity and scale within our business across asset classes, client domicile and revenues. As we've shown in previous quarters, from a gross revenue standpoint, Legg Mason does have a significant balance between equity, fixed income and alternatives, as you can see from the lower pie chart. This chart highlights that 41% of our revenues come from equity, and 41% from fixed income, 12% from alternatives and 6% from liquidity. The fixed income percentage this past quarter was elevated relevant to prior quarters, thanks to the $32 million PPIP performance fee that Western earned in the December quarter. We want to continue to deepen and strengthen this balance across geographies, asset classes and channels. And we will invest strategically in our current affiliate franchises, as well as seeking new affiliates, which are a strategic fit.

On Slide 10, the map shows our significant global footprint, with investment centers and distribution locations, including 14 cities in North America and 18 additional cities around the globe. This global footprint contributes to the diversity of our investor base with 40% of AUM held by non-U.S. investors.

Moving to Slide 11. We highlight investment performance on this slide. And this shows that our strategy AUM versus their benchmarks, which is a broad representation of our assets under management, is exceeding the benchmark of over 80% of our strategies over all time periods, with the 1-year and the 3-year performance improving dramatically from a year ago.

Now Slide 12 presents an update on our Global Distribution platform. With total long-term AUM of $222 billion sourced from retail and quasi- institutional clients in the Americas, Europe, Asia and Australia. Retail assets remain very attractive from both a margin and persistency standpoint. And today, we enjoy a broad suite of retail products across equity, fixed income and alternatives and across our various affiliates. Additionally, we continue our work on improving the productivity and expanding the market share of our sales teams. New product development, sales productivity improvements and market share gains will be important drivers of our growth in the retail space going forward.

So let's look at distribution results for the quarter. Our international division had its 16th consecutive quarter of positive net flows. Globally, including both U.S. and international, we experienced outflows in the aggregate for this quarter. However, we have achieved inflows in Global Distribution in 8 of the last 12 quarters. This quarter, gross sales remained steady, driven by gains in some key channels, but were offset by a pickup in outflows from the Royce funds and the loss of the large sub-advisory mandate at ClearBridge.

Our Global Distribution capability will be a significant contributor to our organic growth, along with new product launches. As highlighted on Slide 13, fiscal year-to-date, we have launched 15 new products with total assets of just under $1.4 billion as of year end, all of these in our key focus areas of alternative solutions and income. As you can see, these product offerings are also across a number of our affiliates and includes several closed-end funds, an area where we've had continued success.

Slide 18 touches a bit on investing with and in our affiliates. As I noted earlier, one of our strategic priorities is to fill product gaps. Here, we work with our affiliates on product development, as well as selective bolt-on and lift-out opportunities.

On Slide 15, we highlight the Fauchier Partners transaction, which is our first significant bolt-on acquisition in some time. The transaction, which is anticipated to close this month, is also expected to be accretive to earnings in the first year. It is a great example of the kind of transaction that we can pursue to add growth within our affiliates and our asset portfolio more broadly. The transaction significantly expands Permal's institutional business across clients and geographies. The combined global investment team will be largely based in New York and London, with an additional presence now in Paris and Singapore. Fauchier's well-respected product set of hedged equity and event-driven strategies is also very complementary with Permal's, where Permal is known much more for fixed income, credit and macro investing.

Additionally, the combined firm will have a multi-year distribution agreement with BNP Paribas opening that channel up for the first time to Permal products.

Slide 16 highlights how we have returned -- how we have both returned capital to investors and improved our balance sheet through our new capital plan, which we executed in the first fiscal quarter. In the upper left side, you can see that we have reduced our share count by 33 million shares or 21% over the last 3 years. And we still have over $800 million remaining from our most recent board buyback authorization.

In the upper right, we've highlighted our annualized quarterly dividends over the same 3-year timeframe. As you can see, we've increased them in each of those timeframes and have nearly quadrupled the dividend payout over that time.

The bottom left provides a comparison of the new debt maturity schedule versus our prior debt structure. The benefits from our debt restructuring include delevering the balance sheet, laddering out our debt maturities, diversifying our sources of debt capital, both from new banks and bond investors and locking in rates in this historically low environment.

Additionally, we reduce our GAAP interest expense by $36 million annually. So overall, we've reduced our share count, increased dividends and delevered the balance sheet, while continuing to have over $900 million of cash on the balance sheet at the end of the quarter.

On Slide 17, a strategic priority is to utilize our significant tax benefits. Our cash taxes are now coming in at 7%. And this low cash tax rate allows for both additional investment in the business and additional return of capital to shareholders. This is a key added value to shareholders, as we currently don't expect to become a federal taxpayer until approximately 2019 to 2020. As a reminder, this lower level of cash taxes results from our net operating loss carryforward and our ability to amortize our goodwill and indefinite live intangibles for tax purposes but not for GAAP. When you translate our effective tax rate into dollars, on the right side of the schedule, you can see that over time, we will realize a positive cash tax savings of $1.5 billion.

On Slide 18, I wanted to highlight a number of the activities we've undertaken in recent years to strengthen Legg Mason and to add shareholder value. We've executed several large-scale initiatives, such as the corporate streamlining, which we completed last March. The 2 $1 billion share repurchase authorizations from the board, one which we completed last June, and the other, which we started immediately thereafter. And the debt restructuring which we announced last summer. We've also had some other incremental improvements with several happening this quarter, including the Legg Mason capital management and ClearBridge operations merger, the Fauchier Partners acquisition, the new equity plan with Permal, the Global Distribution reorganization from about a year ago, multiple new product launches and rebranding of certain affiliates, U.S. retail funds, which we kicked off with Western in the fall but have continue with both ClearBridge and Permal starting last month.

So finally, on Slide 19, we're highlighting on a go-forward basis how we will drive shareholder value for Legg Mason shareholders. First, as confirmed by the Board of Directors, we are -- we continue to believe and are committed to the multi-manager model. We remain focused on maintaining operating expense controls, and we have just kicked off a fresh effort across the organization that looks at optimizing our structure and focusing on operating efficiency. Our affiliates will continue to focus on maintaining their strong performance track records. Launching new products will continue to be a high priority and we will also continue to build out and leverage our Global Distribution platform.

Of course, existing affiliates will be a key to growing our business, both by seeding new investment ideas and partnering on strategic bolt-ons and lift-outs. Better aligning our affiliate's economic incentives with our shareholders will continue to be accomplished by selectively revising equity plans and revenue shares.

And on the product front, we'll also continue our rebranding efforts and streamlining our fund offerings.

Finally, we will continue to return capital aggressively to shareholders through buybacks and dividends. So to reiterate something I said earlier, we see 4 key success factors for Legg Mason: Products, investment performance, distribution and operating efficiency. And we plan to provide greater color and transparency on our efforts in these areas, as well as introducing Joe Sullivan to all of you at an Investor Day, hopefully, in June, assuming we can thread the needle between a number of competing meetings and industry events. So I'll close with what you've heard from Joe Sullivan on the past 2 earnings calls. The status quo is not an option, and we will be relentlessly focused on ways to add shareholder value. So with that, thanks to all of you for your attention and we'll open up for questions.

Question-and-Answer Session

William R. Katz - Citigroup Inc, Research Division

So let me kick it off and we have a couple of microphones going around if anybody wants to ask a question as well. When we think about the story here, I think it's the age old dilemma of margins and volumes, so margins versus volumes. So as you think out over the next 6 months, 12 months, and I know you have obviously more to say when Joe gives his presentation later in the year, what's the way to think about that dynamic? As I listen to you and -- it's a multipart question, but as I think about where you are and where the industry is trending toward, you're playing a little bit of catch-up by your own, I think, slides up there. So how do you think about that dynamic? Do you have to maybe give up on margins to go after the growth or can you accomplish both at the same time?

Peter H. Nachtwey

Great question. It's multi-part, but I'll answer the last first. Yes, I think we can do both. But I think at the end of the day, it does come down to products and performance. And the key thing that we've been missing in that equation, I guess, are really 2 key things is there are some key product gaps, particularly in the alternative space and Global Equities, and we need to continue to work on that and we've started a bit of that with Fauchier. And then, the second issue comes down to performance. And Western, in particular, had some challenges back in the crisis. They're primarily an institutional manager today with 80% of their AUM government institutions, and institutions have long memories. But we're getting to a stage now where all of their performance periods, including the 5-year, which was the key thing holding them back with institutions, has improved. So when you look at our performance across, again, all the time frames 1, 3, 5, 10 years, and particularly the improvement we've had in the 1 and 3 year, over the last 12 months, we think that just really bodes well for continued inflows. And then getting at a margin from there is really a scale issue from our standpoint. We think we're appropriately scaled at the corporate level. We don't need to incur any significant amount of incremental corporate cost, it will be inflationary growth and compensation and rent and so forth. But we don't think we don't need to add a lot of bodies to manage a lot more money. Ditto in distribution. Distribution, less than 20% of their costs are variable of sales. 80% of it is -- all of the infrastructure you have to have to be in the distribution business. So call centers, fund administration, basic marketing and product development, et cetera. So we think, again, distribution is also very scalable. So we plan to go after both.

William R. Katz - Citigroup Inc, Research Division

Second question I have is, as you think about -- you mentioned Fauchier, I'll come back on it a little bit later perhaps, but broadly speaking, you mentioned alternatives, asset allocation, passive is sort of 3 areas of growth for the industry in one of your opening slides, and you said you're a bit long on the U.S. and fixed income side, U.S. equity and fixed income. How do you fill the gap? Is that something you can do on a de novo basis, do a product set at the affiliates, as well as over [indiscernible] in the corporate level? Or is it of function of acquisitions are necessary to accelerate the growth?

Peter H. Nachtwey

Again, great question. And again, the answer to the latter part is both, that we do see an acquisition strategy making sense, although we're going to be very cautious about it. We're mindful of the polling results here that we need to prove ourselves here. So we're not looking to doing anything transformational, but we are looking to do small, accretive acquisitions, particularly ones that we can bolt-on to affiliates where we've had a long history of being able to do those well, including Lehman Brothers' fixed asset business, Rothschild's fixed asset business that over the years, we bolted onto Western and we kind of go affiliate by affiliate, we've done similar transactions. But also think organic growth is incredibly important. As you saw, we had 15 new products that launched fiscal year-to-date for us. We are going to absolutely continue to be aggressive in terms of new product launches. We're looking at active ETFs, we don't think we're going into passive space at this stage for new competitors, us or anyone else, makes a lot of sense. The revenues are too thin. The asset stack is huge. But the amount of revenues that are actually generated by a part of the industry are misleadingly small compared to the AUM level. On the other hand, we do think that active ETFs are going to have some lags, and that's a place that we want to be positioned. We also think that getting into other types of retail products that are different than what's been offered in the past, particularly 1099 products for alternative types of investments are things that the market's going to demand. So product development through our global distribution arm. And products, when we do it organically, come from both directions. The affiliates bring us their ideas. They’re in the marketplace every day, they're talking to their institutional clients. But our distribution folks are in the market every day as well, talking to wirehouses, the independent channels, they're talking to their research shops, they're talking to the financial advisors, so they know what people are looking for. And so, we've got a good ability to look over the horizon and at any given in point in time, we've got probably 3 dozen product ideas that are in some form of gestation. But they all take a bit of time to bring to market. Some of them need to be seeded with a track record before they can be marketable, et cetera.

William R. Katz - Citigroup Inc, Research Division

Just on your slide that you've mentioned -- products and that's -- you mentioned on the comp score as well, and I was doing the math, about $100 million of product. So it's probably at scale at this point, but what's going to drive that growth to be a more measurable or meaningful asset level, if you will? Is there one area that can they sell multiple products at one time or is it 1 or 2 products where you really could see -- could get some significant traction that could actually help the overall organic growth rate of the company?

Peter H. Nachtwey

Yes. I wish we saw a silver bullet out there, we don't. We see that it's a lot of blocking and tackling. A lot of it is we need the retail investor to come back into the market in force. Most believe that what we've seen early part of this year is just kind of the beginning of something. But we don't see a silver bullet or something we can go out and invent that's going to get $10 billion of AUM overnight. On the other hand, we think launching -- if we can launch 15 products, it can all get to $100 million in year 1, that's pretty strong performance. And then those will grow from there and we've got more coming in behind them.

William R. Katz - Citigroup Inc, Research Division

Okay. Maybe I'm reading too much into your slide, but I think you mentioned that your having a fresh effort to optimize the model a bit more. Given your opening comments that holdco had kind of about 1,000 is about right and some of the $140 million of savings you've already done, where is the opportunity from here to rationalize the business?

Peter H. Nachtwey

Yes. I mean, that's something -- I'd probably wait for a fuller explanation until Joe primarily but the rest of us in the executive committee have an opportunity to fully vet some things with the board, but we do have some ideas over nothing that -- I think is it going to be on the scale of the $140 million that we saved through the most recent streamlining. But I do think there's a series of things like what we did last quarter where we announced and we'll downsize some of our space and save $10 million on an annual basis going forward. So it's going to be more singles and doubles, but what we're trying to do with the organization in this new initiative, which we're referring to internally as compete to win, is a complete bottoms-up look at the entire organization, which we never really done. We've done a lot of doubt top-down looks that were necessitated by the crisis, but never really said, gee, if you said we were going to have this platform and pull the setback in '05, how would we have organized around that? So that's kind of one initiative. We're also looking at our fund offerings. We've got over 400 fund products out there, many of which are not at scale. And at some point, we had just to say if they're not going to get to scale, better off to give those assets back or merge them into another fund but decrease the complexity of our fund complex. And then I think organizationally, just looking beyond, do we need to be in 32 offices, do we need to have our affiliates structured quite the way they are? We want to continue to maintain the multi-manager independent model, we think that's very important to but, too, for the current affiliates and attracting new ones, but there may be ways to streamline some of the inevitable channel conflicts that you get when you operate with multiple affiliates. So again, a lot of blocking and tackling, some concrete things we think do think we can do, and there will be things we'll be prepared to talk about in a little more detail at Investor Day. We've got one here.

Unknown Analyst

Can you just explain where in the process you are with active ETF and just, generally, how you -- you mentioned it was a threat, passive, how you plan to position yourself against that?

Peter H. Nachtwey

Yes. Well, so, active ETFs, I think, we've got the exempt of relief, I think, so we've -- so we actually have the SEC exempt of relief we need go into the market with a product and then we're just trying to identify specifically which one and then who do we bring it to market with in terms of what partners, et cetera. But I'd say active ETFs will be both an offensive and defensive strategy. Some of the folks who have done it are seeing accretive flows into those products without cannibalizing their existing products. That would be our main focus. But we also want to make sure defensively that if active ETFs are going to be become a really strong competitor for traditional mutual funds that we're positioned there. But in terms of passive products, again, we've said we're an active manager, we think there's a vast difference being active manager and being a large passive manager. We just don't see the view being worth the climb in terms of the profits, go through a multiyear investment to build scale to be in passives, that the economics in passives are really worth that. And we do think that active management will continue to be valued but we got to continue to get out of this time frame we've been in the last -- really going back to the crisis. Everything went down at once and everything came back at once so everything's correlated one-to-one, why do you pay for active management. I do think that over the course of the next 12 to 18 months, with the benefit of some health to the market see the answer to that question is active managers can have differentiated performance. So good question, thank you.

William R. Katz - Citigroup Inc, Research Division

Question in the back.

Unknown Analyst

I just wanted to get a little more specific color on how you look at new products and what are the criteria that you evaluate to bring it to market, especially if it's in a crowded or competitive space?

Peter H. Nachtwey

Sure, good question. We actually -- most of the products we bring at the end of the day, need to have some seed. And so, we have a capital committee, which I chair, reporting up to Joe Sullivan, our CEO, but that capital committee consists of people from the distribution side of the house and product development, et cetera, but also, the marketing and sales side. It also includes the risk and the compliance and the finance and other folks. And basically, we will look at, first and foremost, is it a product that there's demonstrable demand in the market or if it's one that try and look over the horizon, why do we think there's going to be demanding if we seed it today, that 3 years from now, we have the track record that the demand will be there? And so, we look for a lot of gritty market intelligence, both things that where they talk to existing clients but also talk to consultants and in the space, et cetera. Once we're convinced that there's some viability to the product, then we want to know, okay, well, so how long do you need -- how much seed you need, how long you're going to need it? And what's the sales strategy and when will we know whether we're being successful or not? And so, there's a pretty high bar for people bringing seed through the process. And we look at ROI being somewhere to what our return on equity that we believe is in the 13%, 14% of the markets demanding that we're going to see that kind of ROI from all of the effort we have to put into getting a product launch, and it's not looking for a return on the seed because in actual fact, we hedge away most of that because we don't want the volatility on the P&L. What we're looking for is what's the AUM level that ultimately can be driven and what are the fees off of that kind of in the perpetuity. So we have a pretty rigorous process. We also look for co-investment, whether -- an affiliate can come to us and say, we've got this client that really believes in this product and they're willing to co-invest with us. That's one of the most powerful persuaders to me as the CFO and the guardian of the shareholder capital. Second most powerful persuader is if the affiliate team is putting some of their own money in it. Then we know that, yes, they're pretty serious about this thing having an opportunity. So pretty high bar, but we're not trying to set it so high that nothing can get over the hurdle as well. That make sense?

William R. Katz - Citigroup Inc, Research Division

Let me just follow-up on that one, Pete. If you think about your capital returns, a nice story, dividend has been picked up as long as you put share countdown of 20%, you've rationalized the balance sheet on that. So extended in -- on the duration. Can you -- it goes back to my first question as well, sort of saying, can you continue to invest in these new products, diversify the business and maintain the same level of capital return to invest it and maybe within adding the bogey of up to of 65% of the cash flowback in terms of repurchase? Can you still satisfy that constraint, as well as drive new product growth?

Peter H. Nachtwey

Sure. We've got a lot of private -- my prior life, where I came out of private equity, we call it dry powder. But we've got quite a bit of dry powder. So our minimum cash balance, as we talked about for some time, are conservatively set at $350 million. So at $900 million, although that grows all the way up till we pay bonuses probably in May, we're at $900 million, we've got $550 million of excess cash on the balance sheet to invest. As you can see, we haven't let that burn a hole in our pocket because it's been in that range now for the last several years. We're being very thoughtful about what we'll invest in it. But $550 million of excess cash in the balance sheet and a $500 million undrawn revolver, as well as our strong cash generation. When you look at our EBITDA number, I guess, we've said publicly, that being in the $500 million range, we're generating a lot of fresh cash. So we can fund the buyback at the pace that we've been doing it off of the cash from operations and still have $1 billion to invest in the business but do it very thoughtfully with a high -- kind of high ROI borrower return. And we're not looking to do -- if we find interesting deals to do from an acquisition standpoint, we are not looking to do those by diluting shareholders. We can do those with cash on the balance sheet or revolver, and we've proven with our public debt offering that we're very marketable from a credit standpoint in the market, our public bonds, which we've raise $650 million on back in May, have traded in that this spreads tightened over 100 basis points on that and aftermarket trading. And we are 3x oversubscribed when we went out. And in addition, we increased bank syndicate, probably increased by about 1/3 but we've got a dozen banks that are very anxious to lend us money. So we've got plenty of ability to get liquidity where we see opportunity but we're going to be very thoughtful about making sure those opportunities are ones that are demonstrably going to drive shareholder value.

William R. Katz - Citigroup Inc, Research Division

Okay. And with that, we actually went over a little bit. So, Pete, Al, thank you very much for the great presentation. I have a little bit of a sneak peek on what's coming up. Thanks so much.

Peter H. Nachtwey

Thanks, Bill. Thanks, everyone.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!