AllianceBernstein Holding L.P. Stock

Hello, everyone, and thank you for joining us. Welcome to the AllianceBernstein Second Quarter 2026 Earnings Review. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay on our website shortly after the conclusion of this call. I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB, Mr. Ioanis Jorgali. Please go ahead.

Good morning, everyone, and welcome to our second quarter 2026 earnings review. Today's conference call is being webcast and is accompanied by a slide presentation available in the Investor Relations section of our website at www.alliancebernstein.com. Joining us today to discuss the company's quarterly results are Seth Bernstein, our Chief Executive Officer; and Tom Simeone, our Chief Financial Officer. Onur Erzan, our President, will join us for the question-and-answer session following our prepared remarks.

Some of the information we'll present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I would like to point out the safe harbor language on Slide 2 of our presentation. You can also find our safe harbor language in the MD&A of our 10-Q, which we will file on Friday. We base our distribution to unitholders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results.

Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation appendix, press release and our 10-Q. Under Regulation FD, management may only address questions of material nature from the investment community in a public forum. So please ask all such questions during this call. Now I'll turn it over to Seth.

Good morning, and thank you for joining us today. Despite an uncertain geopolitical and policy backdrop, markets recovered during the second quarter, supported by resilient economic growth and strong corporate earnings. Against this backdrop, AllianceBernstein generated its strongest sales quarter in 5 years, returned to positive organic growth and reached its objective of $90 billion to $100 billion of private markets AUM more than a year ahead of our 2027 commitment.

On Slide 3, I'll review the key business highlights of our second quarter. First, assets under management ended the quarter at a record level, exceeding $905 billion. This milestone reflects both market appreciation and more importantly, the returns on years of investment in strategic initiatives that are now driving organic growth across insurance, private wealth, private markets, retirement, SMAs and active ETFs.

Within insurance, we now manage nearly $218 billion, including $128 billion in general account assets. We continue to see strong momentum in third-party insurance, where we manage $61 billion across roughly 100 clients -- this includes $34 billion of general account assets, which are up more than 30% year-over-year. In the first half of 2026, we initiated 7 new relationships and deployed nearly $3 billion of third-party insurance capital on a gross basis, while general account assets grew organically at a 6% annualized rate.

As we discussed last quarter, the proposed combination of Equitable and Corebridge represents the next step function acceleration of our flywheel. Over time, we'll add at least $100 billion of Corebridge assets, meaningfully enhancing AB's scale and providing an organic glide path toward $1 trillion in firm-wide AUM. While it's too early to be specific, we see synergies from partnering with Corebridge and the new Equitable that go well beyond just managing $100 billion of incremental assets.

Bernstein Private Wealth continues to strengthen its position as a leading advice-led wealth platform, ending the quarter with $167 billion of assets and contributing nearly 40% of firm-wide revenue. By serving as our clients' trusted adviser, we build durable long-term relationships and deliver integrated solutions across traditional and alternative investments.

Second, we continue to expand our investment and distribution footprint through strategic partnerships, tax-aware solutions and vehicle innovation. A core element of our strategy is making our investment capabilities available in vehicles and formats that clients want. We continue to globalize our active ETF franchise. After initially launching 3 strategies in Taiwan, we've introduced 5 new strategies in Europe, where we pioneered a dual share class structure, offering active UCITS ETF shares alongside mutual funds. Our platform now spans 31 strategies and over $20 billion of AUM with assets growing 73% organically over the past year.

From a near standing start nearly 4 years ago, this platform now generates an annualized run rate of approximately $100 million in management fees. This growth reflects both client demand for active exposures and more efficient wrappers and our ability to globalize successful investment capabilities across channels. Our SMA platform reached $69 billion of AUM and generated 17% annualized organic growth over the last year. While municipals are still the foundation of our SMA business, we're encouraged by the early momentum from extending our capabilities into taxable fixed income. We see SMAs as a meaningful long-term growth opportunity as personalization, technology and adviser demand continue to converge.

Our customized retirement platform has grown to $117 billion in assets. As plan sponsors increasingly seek customized retirement solutions, lifetime income and access to broader asset classes, AB is well positioned to help improve participant outcomes. A recent example is ABC One, our partnership with Brookfield and Carlyle, which combines private credit, private equity and private real assets in a single diversified sleeve designed to sit alongside existing target date funds and managed accounts.

We believe that this solution validates AB's role as a trusted asset allocator and thought leader in the retirement solutions, broadening participant access to private markets through a scalable and efficient structure in partnership with market-leading alternative managers. Third, strong sales momentum translated into a return to organic growth. Firm-wide net flows were nearly $800 million in the second quarter, ending 4 consecutive quarters of outflows. This marked our strongest quarter of gross sales in 5 years, reflecting broad-based demand across most of our strategic growth areas.

Fixed income was the key driver of inflows. During the quarter, we funded a $9 billion passive fixed income mandate from Equitable, reflecting the continued expansion of our relationship beyond preannounced commitments. In addition, strong demand for tax-efficient income and continued market share gains in our municipal franchise generated approximately $3 billion of inflows.

Alternatives and multi-asset solutions generated more than $4 billion of net inflows, marking this as our sixth consecutive quarter of positive organic growth. Institutional deployments into private market strategies accelerated during the quarter, supported by demand across private credit, commercial real estate debt and insurance-oriented solutions.

These inflows more than offset continued pressure in active equities and taxable fixed income. Active equity outflows were nearly $11 billion, while taxable fixed income outflows exceeded $4 billion. Both were largely driven by retail redemptions concentrated in Asia Pacific, where allocation preferences are increasingly favoring local equity markets given their strong recent performance.

Slide 4 provides an overview of our financial results, which Tom will discuss in greater detail shortly. Skipping to Slide 5, I'll review our investment performance, starting with fixed income. Credit markets delivered healthy returns during the second quarter despite higher volatility. Following a temporary widening in spreads during April, risk assets recovered as corporate fundamentals remain resilient and investors continue to find value in attractive all-in yields despite tight spreads.

Rates moved modestly higher as markets recalibrated their expectations for a higher long-term equilibrium rate. Against this backdrop, the Bloomberg U.S. Agg returned 0.7%, while the Global High Yield Index returned 3.7% during the quarter. Our 1-year relative performance improved sequentially with 68% of AUM outperforming.

Longer-term performance remains competitive with 81% and 61% of AUM outperforming over the 3-year and 5-year periods, respectively. Within our flagship income strategies, American Income outperformed its benchmark and performed in line with its peer category, while global high yield outperformed this category and modestly lagged its benchmark during the second quarter.

Turning to equities. Markets rebounded sharply in the second quarter with very strong returns across regions. Developed markets posted exceptional returns with the S&P 500 gaining 15%, its strongest quarterly advance in 6 years. Emerging markets were a standout performer globally as the MSCI Emerging Market Index surged 24%. The global recovery was supported by de-escalation in the Middle East, leading to lower energy prices and continued enthusiasm around AI.

Technology and semiconductor stocks again led the advance extending a period of unusually narrow market leadership. Against this backdrop, our performance struggled with 23%, 28% and 31% of equity AUM outperforming over the 1-, 3- and 5-year periods, respectively. Our relative performance continues to reflect a market increasingly driven by a narrow set of beneficiaries from the AI build-out.

Our largest U.S. growth strategies, which emphasize quality, diversification and valuation discipline have been out of step with this environment, weighing on our AUM weighted performance. Recent volatility among AI-linked equities and the unwind of leverage positions have reinforced the importance of diversification and the risks associated with over reliance on a single market theme.

More broadly, our equity platform remains diversified across styles, sectors and geographies. We have over 25 services with more than $45 billion of assets under management that continue to outperform over both the 3- and 5-year periods. This includes our $10 billion international strategic equity service, which ranks in the top percentile across 1-, 3- and 5-year periods. We believe diversification across fixed income and quality-oriented equities can help clients generate income, stay invested and broaden their sources of return beyond a handful of market leaders over leveraged through the AI build-out.

Now turning to Slide 6. Retail net flows rebounded in the second quarter, driven by record sales momentum and continued demand for fixed income. Gross sales reached $31 billion, the highest level in 5 years, driving $900 million of net inflows in the channel's first quarter of positive organic growth since the first quarter of 2025. Excluding fixed income mandate from Equitable, our gross sales were $22 billion, up 14% versus the same period in 2025.

As noted, fixed income was the primary driver, led by continued demand for tax-efficient income in addition to the $9 billion fixed income index mandate mentioned earlier. Active equity outflows are still elevated, driven primarily by U.S. large-cap growth redemptions across U.S. and Japan. At the same time, we continue to build diversified sources of growth across the retail platform, including active ETFs and thematic strategies. For example, our security of the future surpassed $5 billion in assets under management and generated nearly $2 billion of inflows during the quarter.

Moving to Slide 7, I'll cover our institutional channel. Institutional flows also returned to positive territory in the second quarter, generating more than $0.5 billion of net inflows. Demand was driven by alternatives and multi-asset with over $4 billion of net inflows, growing at an 11% annualized organic rate. This marked the sixth consecutive quarter of positive organic growth for the category.

Roughly $5 billion in deployments were broad-based across our private markets platform, including residential mortgages, commercial real estate debt, private placements and NAV lending. Active equity outflows persisted, but improved sequentially, declining to approximately $3 billion in the quarter.

Earlier this month, we successfully onboarded $12 billion of commercial mortgage loans from Equitable ahead of schedule. Beyond the revenue contribution, the mandate roughly doubles our scale in this strategically important private asset class, expands our origination and servicing capabilities and further strengthens the flywheel between long-duration insurance capital and AB's differentiated private markets platform.

We expect to begin earning management fees on the established assets in the fourth quarter at a high single-digit fee rate. The blended fee rate will increase over time as new originations and servicing revenues are layered in. Our remaining pipeline totals approximately $14 billion and is well diversified, including roughly $5 billion in private alternatives, $3 billion in customized retirement, $3 billion in fixed income and $2 billion in indexed equities. I'd note that this pipeline does not include any of the $100 billion in expected assets from Corebridge. As a result, we have good visibility into future growth.

Turning to Slide 8, I will cover Bernstein Private Wealth. Private Wealth experienced a typical seasonal pressure on net flows during the second quarter, but underlying business momentum remains strong as we continue to deepen relationships with ultra-high net worth individuals and families. As expected, tax-related selling weighed on our quarterly net flows, which were a negative $700 million. However, net new assets have grown at a 6% annualized rate over the last 12 months.

Client engagement remains strong with demand concentrated in alternatives, tax-efficient solutions and passive equities. Our ability to deliver customized after-tax outcomes across both public and private markets continues to differentiate Bernstein with ultra-high net worth clients.

Product innovation also supported organic growth, including strong capital raise for our newly launched high-yield Muni strategies designed to address increasingly sophisticated tax management needs of high net worth investors. More broadly, Bernstein Private Wealth remains one of our most important strategic growth vectors. It provides direct access to ultra-high net worth clients, expands opportunities to deliver holistic investment solutions and serves as a valuable distribution channel for alternatives, tax-efficient equities, fixed income and customized portfolio strategies.

I'll now turn to Slide 9, which highlights the continued growth and diversification of our private alternatives platform. I'm particularly proud to report that we've already reached $91 billion of private market assets under management, achieving our $90 billion to $100 billion Investor Day target more than a year ahead of our original 2027 commitment. This milestone reflects the successful execution of our long-term strategy and the hard work of colleagues across our investment, distribution, operations and client service teams. I want to thank everyone across the firm who helped make this achievement possible.

Over the past several years, we've built a diversified private markets platform spanning corporate direct lending, alternative credit, commercial real estate debt and private placements. Together, these capabilities provide differentiated sources of return and allow us to serve a broad range of client needs across institutional, insurance, retail and private wealth channels. Importantly, we continue to see a strong growth trajectory.

As I mentioned earlier, we successfully onboarded nearly $12 billion of commercial mortgage loans in July that are not reflected on the slide. Including those assets, our private market AUM would already exceed the upper end of our original target range. Closing with Slide 10, I'd like to bring together the themes we've discussed today. The proposed combination of Equitable and Corebridge strengthens what we believe to be a unique competitive advantage for AB. At its core, the flywheel is straightforward. It starts with an asset-light approach that leverages long-duration insurance capital to seed and scale capabilities that can be extended across a much broader client base. The addition of Corebridge meaningfully expands that opportunity.

As the $100 billion is allocated over time, it will provide greater scale across the combined general account, enhancing our ability to originate differentiated assets, establish track records, develop new investment capabilities and accelerate growth across the broader platform. Particularly capabilities across private placements, residential and commercial mortgages and asset-based finance are not one-off mandates. They become scalable investment platforms that can be distributed across third-party insurance clients, institutional investors, retail wealth and over time, defined contribution.

We believe insurance, private wealth, retirement and private markets represent some of the largest and fastest-growing pools of capital globally. Increasingly, AB is differentiated at the intersection of these opportunities, combining scale, customization, investment breadth and direct client relationships in a way that are difficult to replicate.

In conclusion, the second quarter reinforces the direction of travel for AB. We reached record AUM, returned to positive organic growth, generated our strongest sales quarter in 5 years and continued to scale the strategic growth platforms we've spent years building. Taken together, these results demonstrate the increasing earnings power of the franchise and the benefits of investing in areas where we see sustained client demand and long-term growth opportunities. Now I'll pass it to Tom to review our financial results. Tom?

Thank you, Seth. Good morning, everyone, and thank you for joining our call. Adjusted earnings for the second quarter of 2026 were $0.82 per unit, representing an 8% increase year-over-year. Distributions grew uniformly with EPU as we distribute 100% of our adjusted earnings to unitholders. The quarter was defined by 3 key themes: solid base fee growth, disciplined expense management and continued operating leverage. At the same time, we remain focused on investing selectively in initiatives that strengthen the platform and expand its long-term earnings power.

On Slide 12, we present our adjusted results, which exclude certain items not considered part of our core operating business. For a detailed reconciliation of GAAP and adjusted financials, please refer to our presentation appendix or our 10-Q.

In the second quarter, adjusted net revenues reached $888 million, a 5% increase year-over-year. Base fees grew 7% year-over-year, reflecting higher average AUM across the platform, partially offset by the impact of changes in product and channel mix on our firm-wide fee rate. Performance fees totaled approximately $24 million compared with $30 million in the prior year as strong contributions from public market strategies were offset by lower private market realizations.

Dividend and interest revenue, along with broker-dealer-related interest expense declined year-over-year, reflecting lower cash and margin balances within private wealth. Investment gains totaled approximately $2 million, while other revenues were unchanged from the prior year period. Turning to expenses. Second quarter total operating expenses were $595 million, up 4% year-over-year, reflecting disciplined investment in strategic growth initiatives while maintaining a stable compensation ratio.

Total compensation and benefits rose 5% year-over-year with a compensation ratio of 48.5% of adjusted net revenues, consistent with both the prior year period and our guidance. We expect to continue accruing at a 48.5% compensation to net revenue ratio in the third quarter while retaining flexibility to adjust as market conditions evolve. Promotion and servicing expenses declined 3% year-over-year, while G&A expenses increased 2%.

Given our continued expense discipline and operating efficiency, we are lowering our full year non-compensation expense outlook to $620 million to $640 million compared with our prior range of $625 million to $650 million. Promotion and servicing expenses are still expected to represent approximately 20% to 30% of non-compensation expenses with G&A comprising the remaining 70% to 80%. Interest expense on borrowings was essentially unchanged from the prior year period.

ABLP's effective tax rate was 5.8% during the quarter. Given the favorable earnings mix and updated outlook, we are lowering our expected full year ABLP tax rate to 5% to 6% from our prior range of 6% to 7%. Operating income totaled $293 million, an increase of 7% versus the prior year period.

Our adjusted operating margin expanded 70 basis points year-over-year to 33% as revenue growth outpaced expense growth despite continued investment across strategic growth initiatives. Importantly, margins remain above the midpoint of our 30% to 35% target, which we originally expected to achieve by 2027. As our strategic growth initiatives continue to scale, we believe the firm is increasingly well positioned to generate operating leverage while continuing to reinvest for future growth.

As demonstrated by this quarter's results, several of our newer growth initiatives have attractive economics despite carrying lower headline fee rates. In the second quarter, our firm-wide fee rate was 37.7 basis points. As we have noted previously, the fee rate is highly dependent on where clients are allocating capital and how those assets are funded over time.

As Seth discussed, we see growth in strategic areas such as insurance asset management, SMAs, retirement, institutional solutions and private markets. While several of these categories carry lower headline fee rates than our firm-wide average, they represent scalable long-duration sources of capital with attractive margin characteristics and strong earnings potential once fully funded and operating at scale.

I would also note that this quarter's fee rate was negatively affected by the timing of onboarding the $9 billion passive fixed income mandate from Equitable, which funded on June 30. While this mandate contributed to period-end AUM, it generated little management fee revenue during the quarter, creating a temporary disconnect between asset growth and revenue realization.

As Seth mentioned, approximately $11.8 billion of Equitable commercial mortgage loans were successfully onboarded in July, ahead of our original plan. These assets will begin generating management fees during the fourth quarter at a high single-digit fee rate. The fee rate will increase over time as we originate new loans. Importantly, we view both mandates as highly attractive opportunities that enhance the scale, durability and earnings power of the platform.

While they create modest near-term pressure on the reported fee rate, they will contribute positively to revenue growth, operating leverage and long-term profitability. We reached $91 billion of private markets AUM during the quarter, surpassing the low end of our $90 billion to $100 billion target more than a year ahead of schedule and before the onboarding of the commercial mortgage lending mandate.

With the addition of approximately $12 billion of CML assets in July, private markets AUM now exceeds the high end of that target range. This milestone validates our multiyear investment strategy across private markets. These capabilities required upfront investments as we built the necessary scale, infrastructure and distribution. With fundraising momentum accelerating, deployment activity increasing and asset growth continuing to compound, we believe private markets will continue to be a key driver of growth.

Finally, turning to Slide 13 and our outlook. We now expect total performance fees for fiscal year 2026 of $150 million to $135 million compared with our prior outlook of $95 million to $115 million. This increase is primarily driven by our public market strategies. We now expect public market performance fees of $60 million to $70 million compared with our prior outlook of $25 million to $35 million.

The increase reflects second quarter realizations from our alpha-generating U.S. Select strategy in addition to improved visibility into potential fourth quarter realizations from our consistently outperforming financial services opportunities fund. For our private markets, we now expect performance fees of $55 million to $65 million compared with our prior range of $70 million to $80 million, which still represents a healthy level of performance fee contribution even as we take a proactive and conservative approach to marking our exposures and re-underwriting portfolio loss assumptions.

As mentioned earlier, we are also reducing our full year non-compensation expense outlook to $620 million to $640 million and our expected ABLP tax rate to 5% to 6%.

Let me conclude by summarizing some of the key themes from this call. We were able to improve our financial outlook while continuing to build momentum across several strategic growth areas, including insurance, wealth, private markets, SMAs and active ETFs. Our success in private markets provides a good example. We achieved our target of $90 billion to $100 billion of AUM more than a year ahead of schedule and continue to see a strong pipeline for sustained growth.

Looking forward, the addition of $100 billion of Corebridge general account and separate account assets will further expand our insurance platform, increase our scale and provide a meaningful new source of long-duration capital for years to come.

The Corebridge assets can be onboarded onto our existing infrastructure with relatively limited incremental expense. As a result, while they may have a lower average fee rate, they have high incremental margins and will be accretive to earnings. We will continue to be disciplined in investing to build new sources of growth, recognizing that it may take time for platforms to scale and reach their full earnings potential. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Bank of America.

Our question is on the merger of EQH and Corebridge. And Corebridge's general accounts are managed by a number of third-party managers, which have various contracts. And I heard your low fee rate, high-margin comment. But can you update us on your ability to manage more of Corebridge's general accounts? Specifically, could AB one day manage the whole $200 billion? And actually, it will probably be bigger than $200 billion when we think about that day in the future?

Craig, it's Onur. Let me take that question. As you pointed out, the Equitable Corebridge merger represents a big AUM opportunity for AllianceBernstein. As it was announced at the time of the merger announcement, we expect at least $100 billion of AUM post the close of the transaction over a couple of year time period. And that comes from both general account assets and separate account assets.

To put things into perspective, the combined general account assets will be around $350 billion. Separate account assets will be around 100 -- sorry, $200 billion. So the AUM base of the combined entity is very, very significant. And on top of that, the origination on the liability side is around $70 billion to $80 billion per year. So it will have a lot of money in motion.

So given that large AUM base and the liability origination, we believe even in the existence of other asset managers managing GA assets, we will have significant amount of upside in terms of growing our share in that total AUM.

Obviously, the merger has not closed yet. It's expected roughly by year-end. And hence, we will not be able to provide much more granularity in terms of the bottom up. But we remain very confident and optimistic about its impact both on our AUM, revenue and profitability. And in terms of the profitability by category, again, it's going to be very asset class dependent. There's going to be higher fee private alternatives kind of opportunities as well as high fee equity type of opportunities depending on the channel and underlying vehicle. But the core fixed income part of the portfolio, which might be easier, faster to move, that tends to be lower fee. That said, very scalable as well.

I have a follow-up on Asia. So I think we all know AB has a strong retail and institutional business across Asia. you have many U.S. and global funds like American Income, American Growth, Global High Yield, which you saw across the region. Now in the last 2 years, we had a trade war escalation. And then this year, with the Iran conflict. So through these events, I'm curious on how overall appetite and allocations for U.S. assets have trended across Asia.

Yes, sure. Great question. I'll dig into it and a little bit separate between asset class and channel. Starting with American Income and GHY, which are our taxable fixed income franchises in the region. The demand there has been less strong. To your point, with the Middle East crisis, with the lingering inflation fears and uncertainty in the rate outlook, some of the clients, retail clients basically rotated into high-performing local equity markets and stayed away from some of the income-generating fixed income strategies.

And some of them diversified into multi-assets to have that equity exposure in addition to some income generation. Within that, we had outflows from American Income portfolio and GHY, as you are aware. However, we benefited from that in several other categories like our all market income multi-asset product, which gathered significant assets as well as some of the more international type strategies like international equities, emerging markets, et cetera.

On the broader picture, we have definitely seen some broadening of appetite away from U.S.-only equity strategies to regional and global. So definitely, we have seen a little bit of that client demand for diversification across retail and institutional. And then finally, on the institutional side, the demand for fixed income actually remains strong. If I think about the pipeline and the pre-pipeline, I think the demand I'm seeing from Asia ex Japan and Japan institutional clients, including fixed income is quite robust, and it's robust across both fundamental investment-grade fixed income as well as our systematic franchise.

Actually, we added fixed income mandates from institutional clients to our pipeline in the quarter. And then finally, on alts, the retail alts part of the retail private credit demand is, again, very muted. There's been a lot of news around this. A lot of the retail clients rotated out of private credit in the short term, while institutional clients remain invested. There is -- we have seen some uptick on the hedge fund strategies in the region from retail clients. Again, it tends to be pretty fast-moving money there. So that's a bit of the broad picture for you.

I guess, Craig, it's Seth. I just would add that we have seen what I would call cyclical rotations in and out in prior periods. And despite the trade stuff, which is disruptive for sure, and the war or the activities in the Gulf, I'd say that at least in our view, the lack of interest in the fixed income strategies has more to do with pretty compelling local markets alternatives, as Onur alluded to, than anything particular to U.S. dollar fixed income. Most of the markets we really are successful in, in Asia are tethered either explicitly or implicitly to the dollar. So that is the alternative, and we don't see any buyer strike. I just think it's a cyclical phenomenon.

Your next question comes from the line of Bill Katz with TD Securities.

Just a couple of questions, maybe start off with Onur perhaps. I want to zero in on the private client side. I was wondering if you could maybe comment on what you're seeing in terms of the competition for sort of third-party financial advisers. A number of your peers are sort of speaking to very elevated competition. I'm sort of curious if you're seeing at the higher end. And then maybe a conceptual question for you as well. Could you sort of highlight how much alts are as a percentage of the private client AUM and where you think that ratio can go to over time?

Sure. Thanks, Bill. Yes, our private wealth business remains very resilient and robust. So we have not been broadly impacted by the competitive pressures, both on the adviser recruiting side or on the client retention side of things. To me, the proof points are the adviser productivity continues to go up. We are on track on our adviser recruiting.

Our adviser headcount is up 4% relative to end of year '25. So definitely seeing strong results there. And then in terms of the alternative side of things, we had a very strong alts fundraise in the second quarter. It was around $900 million for private wealth, significantly higher than the same period prior year as well as the first quarter despite all the headlines. And our private credit strategies continue to hold up really well with low kind of redemptions.

So overall, feeling very robust about the business performance across clients, advisers as well as the asset mix. In terms of alternatives, there's definitely some upside in terms of greater allocation. We have been using alternatives in our client portfolios for a long time. I think it is already approaching roughly 10%. And I can definitely see that based on our target asset allocation going up to mid-teens over time.

I mean, ultimately, we are a fiduciary, we are client need and demand driven. We are not going to shoot for a precise number. But given the client demand and the robust product set we have, we will see that go up. I mean to give an example, I mean, in the second quarter alone, we launched multiple new products ranging from long-short touch fund strategies to a Muni private credit fund and then new vintages of some of the private equity and venture capital funds.

So as a result, our platform continues to broaden and it attracts more assets from existing clients and also brings new clients.

Great. And then maybe just a follow-up for Tom. Can you unpack maybe the decline in the private market performance fee opportunity set? I would have thought it would more base rates, but sounding more like some kind of write-down. Just wondering if you could maybe click in a couple of sentences and give a little more detail on what's driving the decline versus the prior guide.

Yes. There's primarily 2 things going on there, Bill. It's unrealized mark in the portfolio, and then there were some tax events inside the fund at the investor level that flows through to our performance fee collection there.

Your next question comes from the line of Alex Blostein with Goldman Sachs.

I wanted to get your thoughts on the interplay between the fee rate dynamics versus profitability over time, especially as Corebridge assets come on. I think initially at a pretty low basis points kind of 10-ish range or so, I believe, but obviously, you highlighted pretty high incremental margins. So as you think about the profitability in the business as a whole relative to the margins where they are today, where do you guys see them going over time?

Yes. Alex, let me take that. As I referred earlier in the Q&A, we don't have a bottom-up view of the exact AUM split by asset class. Obviously, the fee rate will be a blended average. Starting from the other side of your question, from a profitability perspective, we expect the profitability of that incremental AUM to be robust. I mean, definitely in line with our current margin or even better depending on the asset class.

So as a result, we remain quite optimistic and bullish about the impact of that AUM on our business economics. And the effective fee rate, although it is an important metric that we track, as you kind of imply, it's not necessarily a predictor of margin by itself, and we have a lot of persistent lower fee asset classes that are highly profitable like our industry-leading Muni platform.

So as a result, we should think about fee rates and margin as 2 separate things and not necessarily see a one-to-one link between the 2. On the GA assets, given in the short term, as I mentioned earlier, there's going to be a significant amount of potential core fixed income assets we can onboard. That would tend to have a negative impact on the effective fee rate, not necessarily on the margin.

Yes. No, totally. I would have thought it would actually be a much better impact on the margin and the profitability would be quite a bit higher than the existing margin. So I was just kind of thinking through like once it's all onboarded, where the profitability of the business could kind of shake out over time.

Yes, definitely, there's more upside from an incremental margin perspective.

Yes, makes sense. All right. For my follow-up, I was hoping to get your thoughts on some of the recent focus from the treasury department on tax advantaged investments. I think that's been a focus area of growth for you guys as well. So maybe just give us a broader view of sort of exposures across the platform to tax-advantaged strategies, obviously, maybe outside of Munis, but the more kind of explicitly focused tax-advantaged products? And how do you think about growth in this part of the market?

Yes, absolutely. So unlike some of the other publicly listed asset managers, our exposure to some of the higher risk categories is very small. Obviously, Treasury and IRS made some comments that led to some concern in the marketplace. But the focus areas of those comments, those transaction or product types for us is very, very small as a percentage of total. So I don't see this as a material risk for our business. I think they were very clear, they're not targeting the broader taxaway investing or tax loss harvesting strategies if done properly.

And great majority of our assets fall in those categories. As you mentioned, Munis is the most significant part, and that was not referenced. And direct indexing platform, which we have over $10 billion is the long only. So as a result, our exposure to those other categories is very, very small.

Your next question comes from the line of Dan Fannon with Jefferies.

So I wanted to follow up on that last set of question just around the profitability versus fee rate. I think one of the comments in the prepared remarks was once fully funding and operating at scale, that's where I think the profitability starts to increase. So curious as to how you guys define scale in some of these newer strategies? And what is a reasonable time period for which you think you can get that?

Yes. So I mean, ultimately, scale is very product specific. It's hard to generalize to an AUM number. Ultimately, historically, what we have seen is in periods where we had material AUM growth, we tended to see higher margin relative to our existing margin. So that was typically even as high as 45%, 50%. So at the end, history is supportive of the fact that typically our AUM growth translates into profitability.

That being said, it's very asset class dependent. We also want to take a long-term growth view, and there will be areas that we will continue to invest in terms of new asset classes. like private alternatives and some of those asset classes as we build the business will have lower margin.

So overall, we are focused on our overall margin and our target, as Tom would remind us, is in the 30% to 35% range. We are right in the middle of that. So we feel comfortable with it. And we, again, see upside potential from existing large categories like Munis, like institutional fixed income, systematic fixed income. So there are several categories that benefit from scale or active equities. We don't have a very explicit margin target by asset class or a specific scale number by product.

Yes. And if I could just add to that, Onur. We don't necessarily have to invest in new infrastructure or teams. We already have them here. So we're going to be able to take on those assets with very little incremental cost, and that's why there's 45% to 50% dropping down to the bottom line in incremental margin, as Onur noted. And then as far as timing of when we can begin to take on these assets, we're really focused on just getting the deal closed between Corebridge and Equitable at this point, but we do think around 20% to 30% of those assets would come online in 2027 and accelerate from there into '28 to complete the first $100 billion that we spent.

Great. That's helpful. And then just, I guess, following up on areas of investment and some of the expense guidance. So guidance coming down a bit. Curious about where some of the savings are coming from. And then in terms of -- it seems like you're spending or still investing in several growth areas. So maybe highlight kind of the areas where the spend is growing and maybe where you're seeing some of those savings come from?

Sure. I'll start with where we're spending some of our capital here. We're spending in private markets, ETFs. We continue to expand in the insurance vertical. So we're spending there as well as expanding private wealth adviser base. As far as where we're seeing the savings, we're seeing it in all noncontrollable comp expenses, both on the promo and servicing side as well as general and accounting. And this quarter, we did reduce our guidance $5 million to $10 million. That's all we have line of sight into now, but we continue to look and challenge the businesses, and they continue to challenge us. So if anything more shakes out, we'll certainly give you an update in 3Q.

Your next question comes from the line of John Dunn with Evercore.

You mentioned the future security future fund. Maybe are there any other areas in active equities on the retail side you point to that can be partial offsets? And then maybe same thing for institutional side, any areas of demand you could point to?

Yes, sure. As you pointed out, we had several equity products that had really strong investment performance, which translated into very strong commercial performance. Security of the future, which is a thematic product just exceeded $7 billion, and it's a relatively new product. So it is a great evidence of our ability to innovate and scale. Similarly, our technology-oriented disruptor strategy has done very well. That ETF is around $3 billion. So really has strong track record, but also really attracting new clients. So really excited about that.

As I mentioned earlier in the Q&A, we have also seen a broadening of the client appetite for non-U.S. strategies. So we have definitely seen positive momentum in some of the international strategies, emerging markets, as well as international equities. Finally, there are several products historically that didn't have a lot of visibility. But given the long-standing track record of some of those more maybe historic niche products, we are also seeing some success on those.

Like, for instance, we had a good institutional client coming into our REIT global REIT strategy this quarter. So definitely, that was great to see as well investing in the public REIT market in equities.

And on the institutional side, as briefly referenced earlier, we continue to see strong demand on the private alternative side. If you think about our insurance third-party general account business, -- that grew by 33% year-over-year, a really robust growth on the third-party side, and this excludes our shareholder equitable.

So really pleased with that and it's broad-based in terms of the deployment across different types of private alternatives. So really excited about that. And then we definitely see a broadening of the investor demand on the fixed income side, we have seen strong demand on the systematic fixed income in addition to our fundamental fixed income strategy.

Just staying on equities, though, international, small and mid-cap, that growth in performance fees, U.S. Select, we've had a number of strategies that have continued to perform very well. But ultimately, despite having really good performance, U.S. large-cap value being an excellent example of that, it's what -- as you know, what the clients are really interested in buying that really drives those flows.

Got it. And then just as active ETFs become more of a contributor, maybe could you talk about your kind of strategy around where to put fee rates, what the profitability is and like what client like segments are you going after? And just like a flavor of the sales process, how you're finding it?

No, absolutely. Yes. As you pointed out, our ETF franchise hits $20 billion. It's a $12 billion increase from a year ago. So it's an incredible growth rate. We are very excited about it. The platform started to globalize as well. Our also Taiwan ETF assets tripled in a very short period of time, obviously, from a small base.

The effective fee rate on that business is around 50 basis points. So now our annual run rate revenue for the ETF franchise is $100 million. For a business that is only 4 years old, we are very excited about the scaling of that platform globalization and the prospects of the ETF adoption in the world on the active side widens.

And a really small portion of that were reboots of existing strategies. Most of them were new strategies.

Absolutely.

And Bernstein captures so it's good.

And your next question comes from the line of Mason Fleming with Barclays.

This is actually Ben Budish. I wanted maybe a follow-up on the private markets piece. Just curious, maybe a 2-parter. I guess, first, could you kind of remind us of the normal composition of private markets performance fees -- and I think most of it comes from credit, but between Part 1 fees sort of recurring performance fees and realization-related revenues. What's the typical mix? And is there any more color you can share on the unrealized marks? I know we've seen some of the non-traded BDCs start to report a little bit, but curious what you're seeing in your portfolio.

So what we're seeing in private credit is we are seeing the -- a slight decrease in what we saw last year. I think what we saw last year was in the mid- to upper teens. You saw the step down in Q1 and Q2. I expect that to more normalize in Q3 and Q4, but not to necessarily the levels of last year, but certainly a step up from Q1 and Q2.

And then I think your question was on the marks. One thing I should have added on the earlier call from -- the earlier question from Bill is the marks are not related to credit events. These are just unrealized marks that we go out and get the portfolio marked by a third party every quarter, and that's what's driving the reduction in the guidance that we're providing now.

Okay. Understood. Maybe a follow-up on the retirement side. You announced the partnership with Brookfield and Carlyle earlier in the quarter. Just curious, what are your near-term expectations? How should we think about things evolving? Or how are you thinking about the next, say, 12 to 18 months where things could maybe start to rotate into more private markets and target date funds?

Yes, sure. We're very excited about our partnership with Brookfield and Carlyle on the new multi-manager, multi-out product we launched for the DC channel. We also have several other products in the pipeline in the private credit space. Ultimately, it's a slow moving part of the industry given the trustees kind of fiduciary requirements and some of the committee and other dynamics that kind of takes a pretty long time from consideration to deployment in DC.

So it's very hard to put precise numbers, particularly over a relatively short 12- to 18-month period. I would say we are very strongly positioned in the DC channel, given we have a robust credit -- sorry, custom retirement platform. So we have the ability to customize glide paths -- with those glide paths aware expertise, we can create very differentiated alternatives products by ourselves as well as in collaboration with others. So as the DC market adopts private, we're going to be a formidable competitor, combining the strength of our DC solutions business with our private alternatives experience. That said, probably this is a more medium-term opportunity versus something that we will play out in the next couple of quarters.

There are no further questions at this time. Mr. Jorgali, I will now turn the call back over to you.

Thank you, Tracy, and thank you for everyone joining our call. We look forward to catching up with you next quarter. Have a great day.

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

Thank you for standing by, and welcome to the AllianceBernstein First Quarter 2026 Earnings Review. [Operator Instructions] As a reminder, this conference is being recorded and will be available for replay on our website shortly after the conclusion of this call.

I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB, Mr. Ioanis Jorgali. Please go ahead.

Good morning, everyone, and welcome to our first quarter 2026 earnings review. Today's conference call is being webcast and is accompanied by a slide presentation available in the Investor Relations section of our website at www.alliancebernstein.com.

Joining us to discuss the company's quarterly results are Seth Bernstein, our Chief Executive Officer; and Tom Simeone, our Chief Financial Officer. Onur Erzan, our President, will join us for the question-and-answer session following our prepared remarks.

Some of the information we'll present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I would like to point out the safe harbor language on Slide 2 of our presentation. You can also find our safe harbor language in the MD&A of our 10-Q, which we will file on Friday. We base our distribution to unitholders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results.

Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation appendix, press release and our 10-Q. Under Regulation FD, management may only address questions of material nature from the investment community in a public forum, so please ask all such questions during this call.

Now I'll turn it over to Seth.

Good morning, and thank you for joining us today. While the first quarter was marked by geopolitical tensions and elevated volatility, AB's results underscore the resilience of our platform and our diversified business mix.

I want to start by highlighting the key themes that shaped this quarter listed on Slide 3. First, the proposed Equitable Corebridge merger will provide a step-function acceleration of our flywheel and meaningfully enhance AB's scale and growth outlook. The combined company will have over $350 billion of general account assets and generate $70 billion to $80 billion of new liabilities annually, positioning AB among the most strategically important players in the insurance asset management channel.

Over time, we expect to manage at least $100 billion of general and separate account assets from Corebridge. We look forward to supporting our new partner in delivering better outcomes for their policyholders while we benefit from enhanced scale, improved earnings durability and increased capacity to invest for growth. We believe this announcement will further accelerate the momentum already evident across our insurance franchise.

Today, we serve more than 90 third-party insurance clients with $58 billion of AUM, including $32 billion of general account assets. Deployments from recently announced strategic insurance partnerships are progressing ahead of schedule and are expanding beyond the initial mandates. We are well positioned to benefit as these partnerships continue to grow.

Second, while we continue to drive inflows from secular growth engines like insurance, private markets and active ETFs, we had firm-wide active net outflows of approximately $6 billion in the first quarter, concentrated within a subset of active equity strategies. Active equity outflows of roughly $11 billion spanned across channels and reflect recent performance challenges as well as client allocation decisions. We also had taxable fixed income outflows of nearly $2 billion as positive institutional engagement was offset by retail redemptions concentrated in the Asia Pacific region.

Turning to the positives. We generated over $3 billion of organic inflows in tax-exempt fixed income and alternatives multi-asset strategies, respectively. Our private market platform reached $85 billion in AUM, up 13% year-over-year, reflecting strong institutional momentum. At the same time, our SMA business stands at $63 billion, growing organically at 15% annualized rate in the first quarter. We continue to build on our technological edge and efficiency benefits for financial advisers, extending from a predominantly municipal-focused SMA offering to a broader multi-asset toolkit. We're seeing real traction in taxable fixed income SMAs highlighted by a recently funded $300 million mandate.

AB has long been a market leader in tax-optimized fixed income SMAs, an area made increasingly scalable by recent advances in data science. Our active ETF lineup now encompasses 25 strategies with more than $16 billion in AUM, up over 150% year-over-year, with 8 of our ETFs surpassing $1 billion in AUM, including our 5-star rated disruptors ETF, ticker FWD.

Our security of the future thematic portfolio has surpassed $4 billion in assets, nearly tripling from a year ago with $1.7 billion of inflows in the first quarter alone. While these offerings are currently smaller than some of our larger marquee services, they represent emerging durable growth engines that will reshape the composition of our AUM over time.

Looking forward, our institutional channel is positioned for accelerating net flows in the second half of 2026, supported by the largest pipeline on record, surpassing $27 billion in AUM.

Third, our distribution platform provides direct access to secularly growing channels, including ultra-high net worth, insurance asset management and defined contribution. Together, these account for more than 45% of firm-wide AUM and provide relative stability across market cycles.

Bernstein Private Wealth ended the quarter with $155 billion in assets under management, and it contributes more than 1/3 of firm-wide revenues. Our insurance asset management business now manages approximately $120 billion of insurance general account assets across a growing roster of global partners. Our customized retirement business exceeds $100 billion in defined contribution assets, and we continue to innovate by incorporating a broader set of asset classes, including private markets and insurance solutions that provide guaranteed lifetime income.

Overall, while this quarter's results reflect mixed dynamics and pressure from the challenging macro backdrop, we believe our broad product capabilities and differentiated distribution position AB well to generate organic growth over time.

Slide 4 provides an overview of our financial results, and Tom will walk through these in greater detail later.

Turning to Slide 5. I'll review our investment performance, starting with fixed income. Global bond markets posted modestly negative returns in the first quarter as heightened geopolitical tension, rising energy prices and shifting policy expectations pushed yields higher across most developed markets.

Credit markets were mixed. Investment-grade and high-yield corporates posted modest declines overall with U.S. corporates outperforming Eurozone peers, while securitized assets proved resilient. The Bloomberg U.S. Aggregate Index was roughly flat, outperforming the global aggregate, which returned negative 1.1% in the quarter.

Our American Income and Global High Yield products both underperformed their respective benchmarks in the first quarter. Yield curve positioning and allocation to emerging markets detracted from AIP's relative returns, while GHY was similarly affected by European high-yield exposure and EM corporates. Notwithstanding near-term headwinds, our fixed income platform continues to perform well over longer measurement periods. More than half of our assets outperformed over the 1-year period, while 80% outperformed over 3 years and 64% over 5 years.

Turning to equities. U.S. equity markets were hurt in the first quarter of 2026 with the S&P 500 returning negative 4.3%. The quarter began constructively but reversed with the emergence of credit concerns, AI-related disintermediation risks and escalating geopolitical tensions. Despite some early signs of improvement in year-to-date relative performance, our track records remain pressured and below our expectations. 23% of assets under management outperformed over the 1 year, 24% over 3 years and 44% over 5 years. This primarily reflects the outsized impact of our larger U.S.-oriented growth strategies that have underperformed this quality growth derated in recent quarters. However, our equity platform is intentionally diversified across styles and geographies, avoiding overreliance on any single market regime.

International and emerging market strategies with a smaller AUM base continue to perform well. In fact, we have more than 25 strategies with nearly $40 billion of AUM that are outperforming their respective benchmarks or composites over both the 3- and 5-year periods with 8 out of the 10 largest among them being international or global strategies. As market breadth began to improve entering 2026, a growing share of our growth, value, core and thematic strategies delivered stronger relative results.

Looking ahead, we believe a more balanced earnings environment and continued economic stability could favor international and value-oriented strategies, while lower tracking error portfolios may provide clients with more consistent participation across shifting market leadership.

Turning to Slide 6, I'll discuss our retail highlights. Retail gross sales rose sequentially and surpassed $23 billion for the first time in 4 quarters. However, the channel recorded net outflows of nearly $6 billion in the first quarter, reflecting elevated redemptions.

Active equity and taxable fixed income each exceeded $4 billion in outflows, driven primarily by redemptions from select marquee U.S. services in Asia Pacific as relative value and capital flows have shifted toward neighboring and domestic markets. Passive equities and passive fixed income also posted outflows. These headwinds were partially offset by more than $3 billion of tax-exempt inflows and nearly $1 billion of alternatives and multi-asset inflows, continuing their durable organic growth trajectories.

Our retail muni SMA platform has consecutively positive quarterly inflows for more than 3 years, a testament to the compounding strength of our market-leading capabilities. We are well positioned as the bond reallocation trend continues to unfold, particularly as we extend our success into tax-aware SMAs.

Moving to Slide 7, I'll cover our institutional channel. Institutional gross sales also increased both sequentially and year-over-year. However, the channel had roughly $2 billion of net outflows, primarily driven by more than $5 billion in active equity outflows. Despite some short-term headwinds from insurance hedging activity, the channel recorded over $2 billion of inflows in taxable fixed income, reflecting broadly improved institutional appetite.

Alternatives multi-asset also saw positive inflows for the fifth consecutive quarter, supported by deployments in private markets and fundings of defined contribution plans. Institutional engagement across private credit has persisted with nearly $1 billion of deployments on the back of improved terms and widening spreads. This includes direct lending, where ABPCI recently secured a $0.5 billion third-party institutional mandate reflected on our pipeline.

Furthermore, our pipeline has reached a record high $27.5 billion in assets under management, supported by $9 billion in new commitments. This growth reflects expansion of our recently announced insurance partnerships to include additional mandates. It also includes an increase in Equitable's commercial mortgage loan commitments to $12 billion, up from the previously announced $10 billion.

The pipeline fee rate declined slightly to 19 basis points, primarily due to the addition of sizable fixed income and passive equity mandates. Excluding roughly $5 billion in passive mandates included in the pipeline, the fee rate for active AUM stands at 23 basis points.

Next on Slide 8, I'll cover Private Wealth. Quarterly gross sales continue to set new records at Bernstein Private Wealth with the channel registering its third consecutive quarter of organic growth. Inflows grew nearly 2% annualized, while net new client assets rose 5% annualized in the first quarter. Redemption requests for private credit products that offer periodic liquidity stayed well below our 2.5% quarterly cap. This is a testament to the combined strength of our highly specialized adviser sales force, coupled with ABPCI's strong investment track record built on a decade-long partnership since Bernstein was among the pioneers that distributed direct lending as an asset class.

I'm particularly proud of the differentiated client service we offer in alternatives, reinforced by the seamless collaboration between our homegrown distribution and investment teams, a defining advantage for AllianceBernstein. Adviser headcount is tracking ahead of our 5% annual growth target. We believe our platform offers exceptional support and training that drives industry-leading adviser productivity, tracking both experienced and emerging talent.

As we continue to invest in adviser headcount growth and productivity, including integrating Generative AI capabilities into daily adviser workflows, we anticipate continuous client experience improvement along with more targeted and effective prospecting. Adviser headcount remains a key area of focused investment and a critical lever for long-term growth within the channel.

I will close with Slides 9 and 10, which highlight the momentum of our private markets platform and the opportunities from the Equitable Corebridge merger. In partnership with Equitable, we have scaled our private markets platform to $85 billion in fee-paying and fee-eligible AUM, anchored primarily in credit-oriented strategies, including direct lending, asset-based finance, commercial real estate debt and investment-grade and corporate structured private placements.

Equitable's $20 billion permanent capital commitment now fully deployed and exceeding the original commitment has been a critical catalyst, accelerating our expansion in private markets while strengthening our ability to seed and scale higher fee strategies. Our collaboration continues to deepen and evolve, progressing across residential mortgage solutions, structured private placements and most recently, commercial mortgage loans. Each initiative builds incremental scale while broadening the applicability of our capabilities across third-party insurance and other institutional client channel.

Our goal is to serve a diverse base of retail, institutional and insurance clients across a wide range of risk return objectives. The proposed Equitable Corebridge merger amplifies this flywheel. With a combined general account asset base exceeding $350 billion and a broader liability profile, the merged company will be one of the largest players in the industry, creating significant opportunities for AB.

Importantly, the strategies developed for Equitable are not bespoke or stand-alone solutions. They form the commercial foundation from which we serve a growing universe of third-party insurance and institutional clients worldwide. Amplifying the flywheel with the inclusion of Corebridge is a defining moment in AB's evolution, not simply additive to our existing asset base, but potentially transformative in its impact on scale, earnings, durability and long-term strategic positioning. With a proven operating model, a powerful strategic partner and a focused growth strategy, we're well positioned to achieve our $90 billion to $100 billion private markets AUM target by 2027 and extend our growth trajectory beyond that milestone.

With that, I will pass it on to Tom to discuss our financial results.

Thank you, Seth. Good morning, everyone, and thank you for joining our call. Adjusted earnings for the first quarter of 2026 were $0.83 per unit, representing a 4% increase year-over-year. Distributions grew uniformly with EPU as we distribute 100% of our adjusted earnings to unitholders.

On Slide 11, we present our adjusted results, which exclude certain items not considered part of our core operating business. For a detailed reconciliation of GAAP and adjusted financials, please refer to our presentation appendix or our 10-Q.

In the first quarter, net revenues reached $871 million, representing a 4% increase year-over-year. Base fees grew 5% year-over-year, reflecting 8% higher average AUM, partially offset by a lower firm-wide fee rate due to the mix shift. Performance fees totaled approximately $23 million, down $16 million year-over-year, reflecting lower realizations from private market strategies. Our full year private markets performance fee outlook remains unchanged at $70 million to $80 million.

Importantly, we are increasing our full year combined performance fee outlook to $95 million to $115 million, reflecting stronger-than-expected contributions from public market strategies. I will cover this in more detail shortly.

Dividend and interest revenue, along with broker-dealer-related interest expense declined year-over-year, reflecting lower cash and margin balances within private wealth. Investment losses totaled $5 million, largely attributable to hedging costs associated with seed-like investments.

Other revenues totaled $20 million, up $6 million versus prior year's quarter, driven primarily by higher shareholder servicing fees and mutual fund reimbursements.

Turning to expenses. First quarter total operating expenses were $580 million, up 4% year-over-year, driven by a 4% increase in compensation expense and a 5% increase in noncompensation expenses. Total compensation and benefits rose 4% year-over-year with a compensation ratio of 48.5% of adjusted net revenues, consistent with last year's accrual rate. We expect to continue accruing at 40.5% compensation to net revenue ratio in the second quarter while remaining mindful of market volatility and potential adjustments in the second half of the year as conditions evolve.

Promotion and servicing expenses increased by $1 million, while G&A expenses increased by $6 million or 5% year-over-year, reflecting normalization from relatively depressed levels in the first quarter of last year. For full year 2026, we continue to expect non-compensation expenses to range between $625 million and $650 million. This outlook reflects normalization in promotion and G&A expenses, along with discretionary investments in technology and the operational build-out for new strategies.

Promotion and servicing expenses are expected to represent 20% to 30% of non-compensation expense, while G&A comprising the remaining 70% to 80%. We are making steady progress integrating the new commercial mortgage loans platform. Importantly, Equitable has increased its long-duration general account mandate to $12 billion from $10 billion with onboarding in the second half of the year and the assets producing a high single-digit fee rate.

Interest expense on borrowings was flat compared with the prior year. ABLP's effective tax rate was 5.6% in the first quarter of 2026, which reflects a favorable mix of earnings. We continue to forecast ABLP's effective tax rate in 2026 to be between 6% and 7%.

Our operating income of $291 million is up 3% versus the prior year, slightly below the growth in revenues and operating expenses. Our adjusted operating margin was 33.4% in the first quarter, down 30 basis points year-over-year due to investments in the business. These investments include technology initiatives, the onboarding of new investment teams and increasing financial adviser headcount.

Importantly, margins remain at the high end of our Investor Day target range of 30% to 35%, which we had expected to achieve by 2027. As markets normalize, we expect improved operating leverage to support stronger flow-through from existing services, reinforcing our ability to balance reinvestment with profitability.

In the first quarter, our firm-wide fee rate was 38.1 basis points, reflecting a negative mix shift in AUM. As we've noted previously, the fee rate remains highly mix dependent and several factors weighed on the rate relative to the prior year. In retail active equities, average AUM declined to 18.7% of firm-wide AUM from 20% a year ago as market appreciation was largely offset by outflows. In fixed income, elevated rates and FX volatility pressured taxable fixed income AUM with outflows concentrated in higher fee strategies such as American Income and Global High Yield, while inflows were primarily driven by lower fee municipal SMAs.

Finally, turning to Slide 12 and our outlook. We now expect total performance fees for fiscal year 2026 of $95 million to $115 million, up from our prior range of $80 million to $100 million with additional potential upside dependent on market conditions. This reflects an increase in our public markets performance fee outlook to $25 million to $35 million, driven by first quarter realizations from our alpha-generating international small-cap strategy.

Our private markets performance fee outlook remains unchanged at $70 million to $80 million despite a light first quarter driven by prudent proactive markdowns concentrated in software and tech services exposures. Note that these markdowns were not driven by credit events. And even if realized, they would be within our assumed annual loss framework.

As a long-term buy-and-hold investor, ABPCI fully expects to realize value recovery across all creditworthy borrowers over time. It is important to note that the rate outlook and wider spread environment is supportive of forward-looking returns. All other guided items remain unchanged from last quarter.

Looking ahead, we are encouraged by our institutional outlook, supported by a record pipeline of $27.5 billion, including public market mandates expected to fund next quarter and private markets mandates expected to fund by year-end, most notably the increased $12 billion commercial mortgage loan mandate from Equitable. We expect continued inflows across secular growth areas, including private wealth, SMAs, ETFs and private alternatives. Taken together, we have meaningfully strengthened our business mix and positioned the firm for the future by leaning into areas of structural growth while addressing areas of pressure with discipline. We look ahead with optimism, confident in what we believe to be a position of strength.

With that, operator, please open the line for questions.

[Operator Instructions] We'll take our first question from Craig Siegenthaler at Bank of America.

My question is on the Equitable Corebridge merger and your expectation to manage $100 billion of incremental AUM over time. So in terms of general account assets for the NewCo, what percent of total GA assets do you assume you're going to manage? And is the current GA level at Equitable in the $70 billion range now, plus I think there's $17 billion on the side of private market initiatives still. I just want to kind of refresher on all the numbers.

Craig, Onur, let me take that question. Obviously, the Corebridge Equitable merger is a very exciting development for us. As it was announced at the March 26 call, we expect at least $100 billion over time from both GA and separate account assets. Obviously, it's very early days since that announcement, and that deal is most likely going to take another 9 months or so to close roughly by year-end or fourth quarter. And hence, it will take us time to really do the bottom-up buildup of that $100 billion between GA and separate accounts.

And in terms of funding of the assets, given the deal will likely close end of '26, it's going to be more '27 and beyond in terms of the new AUM coming to AB. So on one hand, we are super excited. On the other hand, we recognize it's going to take a few quarters to materialize those opportunities given the deal time line.

In terms of the GA buildup, we're not dependent on only Equitable or Corebridge. As you have seen in our slides, our GA assets from third-party clients grew by 28%. If you look at our pipeline, we had significant momentum in the pipeline. So for instance, we added a $3.5 billion CLO opportunity to our pipeline as an example. And we have a lot of other pipeline opportunities, which makes up 8% of our pipeline fees coming primarily from insurance clients. So overall, we are very excited about the trajectory in GA, both for proprietary as well as third-party clients.

Just as a follow-up, as you look at that $100 billion, what is the expected mix of public corporate or government debt that has CUSIPs versus private assets that are originated by your proprietary private markets businesses?

Again, we don't have an exact bottom-up buildup yet that is in works. Our estimate is, given this includes the separate account business, which tends to be more publics. And given some of the assets from the GA will be coming from the fixed income book, I think it's going to skew heavily towards the publics versus private in terms of day 1 opportunity, if you will.

But over time, if you think about this balance sheet, it's going to be one of the largest U.S. retirement companies and it will originate annuities across RILAs, fixed annuities, variable annuities, et cetera. That means your general account assets will grow materially. And a portion of that new flow, if you will, will make its way to private, and we're going to be a strong beneficiary of that growth. So you shouldn't only look at it in terms of what is mappable on day 1. You should look at it as what is the expectation on a go-forward basis given the new Equitable will be double the size of the origination and the assets at the minimum.

And congrats on the $100 billion of future wins.

Thank you.

We'll move next to Alex Blostein at Goldman Sachs.

I was hoping you guys could expand on what you're seeing in the institutional private credit market. Obviously, lots of volatility on the retail side. You guys don't have a ton of exposure there. But as you think about both opportunities and risks that are in the market today, how are you approaching that channel?

Thanks, Alex. Let me take that question as well. We continue to see strong momentum in our institutional business for private credits. To underline your comment, yes, you're right. We don't have a significant exposure on the retail side, but we're also very pleased with what we have seen on the retail and private wealth side of private credits. If you look at our BDC, our redemption rate has been less than 2%. So that's much lower than what we have seen from our competitors. That speaks to the strength of our integrated asset and wealth management franchise. Proximity to the client helps us maintain lower redemption rates in these retail vehicles, partly in our private wealth channel.

If you look at our private alts cap raise in private wealth, actually, it grew from [ '25 ]. Our first quarter fund raise in the '26 versus '25 for private wealth was more than 30% higher. So definitely, we also continue to see momentum across private equity and private credit in our private wealth business, which admittedly skews more high net worth and ultra-high net worth.

And on the institutional side, to get to your core question, as I mentioned, we continue to add significant mandates to our pipeline. As Seth also mentioned in his opening remarks, we are seeing more accelerated and expanded benefits from some of the strategic partnerships we announced around the third-party insurance, and that remains the largest driver of our new pipeline. It's broad-based. It includes both asset-backed ABF-type of mandate as well as fund financing like NAV finance and real estate debt.

And furthermore, we had several new mandates outside the insurance in core institution as well. So net-net, broad-based momentum skews heavier towards insurance, but seeing strength in noninsurance institutional as well. The implication is we're going to be comfortably hitting and exceeding our private markets AUM goal of $90 billion to $100 billion.

Great. And a follow-up for me. I was hoping to touch on the fee rate dynamics, both in the quarter, but really more importantly, looking further out. A couple of dynamics at play. Obviously, you mentioned that the active equity performance has been challenged, and we've seen that show up in retail flows, which are obviously higher fee rate, a bit mixed on the retail fixed income for now as well, but some wins on the institutional side of things, you mentioned private credit. So when you put it together, how does the evolution of the fee rate likely to look over the next couple of quarters?

Alex, it's Tom. We generally don't provide fee rate guidance, but we do prioritize sustainable organic growth and long-term profitability over focusing solely on the fee rate. Looking forward, we expect the fee rate trajectory to continue to reflect the mix of organic growth and market movements, which have been supportive in early 2Q.

Next, we'll move to Bill Katz at TD Cowen.

Just coming back to the expense outlook for a moment. It was in fact how do you interpret the slide with the initial take this morning. So you're keeping your expense non-op growth relatively stable. If I look at the first quarter, I think you're run rating well below the low end of the guide. How do we think about maybe the pacing to the spend as the year unfolds? And what kind of flexibility do you have if the markets remain volatile?

There's some seasonality in there. This happens from time to time. I would continue to stick with our guide at $625 million to $650 million. And then maybe just divide it up less what we have in there for 1Q so far. And as far as some flex, you may recall last year, we did have a lot of flex. We actually flexed down quite a bit because our business decelerated due to all the market volatility. So we do have flexibility that we can pull on this year if needed, but we did want to let the advisers get in front of some clients and attend some firm meetings that were withheld last year.

Okay. That's helpful. This is a follow-up. Maybe stepping back, talk about wealth management, very durable asset for you guys. A lot of cross currents in the industry at large. I wonder if you could talk a little bit about maybe -- and I appreciate you're also at the upper end of the market, so maybe not quite as intense as some of the key players that I think you're comped up against.

That being said, I wonder if you could talk a little bit about maybe the competition for financial advisers, what the market dynamic has been in terms of industry churn? And then sort of curious, there's a lot of sort of anxiety around Agentic AI. I was wondering if you could maybe click down a layer and sort of talk about where you're leveraging that and where some of the risks might be prospectively?

Thanks. Let me break that into 2 questions. One, talent market dynamics, how are you feeling about that? And second, come back to Agentic AI and impact on the business.

On the talent side, we feel pretty good. We are well immune from the high churn that some of our competitors are facing. Ultimately, our retention rate for our senior advisers, which drive a majority of our flows and the ones that helped us achieve the record productivity this quarter have remained loyal. Again, our attrition rate remains very low depending on the year. It tends to be low single digits. And if you look at our recruiting, as you have seen, we added -- we added roughly 14 advisers, and that means our adviser headcount is up roughly by 5% in the first quarter. So we remain on track in terms of our ability to add talent. So feeling good about that.

I mean, ultimately, we are not complacent. We'll continue to pay competitively for talent. And we'll continue to make our platform a preferred platform for existing and new talent based on our investment expertise, the tools that we provide like tax management as well as investments in technology.

In terms of the segue to Agentic AI, given we are more on the high net worth plus side of things, we tend to deal with more complex client situations. Our highest growth part of our business, our ultra-high net worth business grows at 4x as fast as the rest of the business. So that creates, in my opinion, some moats in terms of the technology disruption because we deal with a lot of complex tax issues. We deal with a lot of complex global family issues. Some of the value add is also in value-added services, not the standard asset allocation and/or basic tax mitigation strategies. So that is the bigger picture.

In terms of how we are taking advantage of AI, it's in several different areas. We are definitely using it much more for client meeting preparation, like using our CRM system to be better prepared for client engagements and hopefully using that to drive more growth from those conversations, driving share of wallet. We are definitely using it to create efficiencies in the way we manage our business, particularly the client servicing side.

Actually, if you look at our client service associates onshore, that has been relatively flat, although we have been adding advisers, new clients as well as growing organically. So some of that servicing efficiencies are driven by the usage of technology and client servicing. One example would be how we deal with RFPs. We use technology and AI heavily in that.

And then finally, in more client acquisition, we are using much more advanced lead generation technologies, and we are getting into much more AI-driven marketing to drive new growth. So all in all, it cuts across servicing and efficiencies, effectiveness in client conversations as well as new client acquisition.

That said, I cannot put a number on it yet. Probably, I'm in the same ZIP code with my colleagues in wealth management. I mean, again, there are a lot of good things happening, but still the early innings of AI. Although we see the benefits, it has not translated into very concrete financial impact yet, but that's yet to come.

We'll move next to John Dunn at Evercore ISI.

Maybe just staying on private wealth for a second. I know there's seasonality in the second quarter and then you mentioned private wealth demand. But could you remind us about maybe seasonality for the rest of the year, maybe shifting product demand and then the temperature of like the channel's appetite to put money to work?

Yes, sure. Yes, seasonality, John, definitely is something to be mindful of. Obviously, April is a tax month. So we tend to have a soft April in general in terms of flows because a lot of our clients pay taxes. And it happens every year.

In terms of the client demand, even though obviously, there are heightened risks in terms of macro, the war in the Middle East, oil prices, this and that, our high net worth and ultra-high net worth clients remain very engaged. Actually, it has been relatively robust in terms of risk taking. We have not seen them go to the sidelines. As a result, we remain excited about the fundraising and growth. Again, as you have seen in Q1, we had very high sales relative to the previous 8 quarters. So we've definitely seen a momentum in sales, and we are not seeing a major slowdown yet.

The 2 words of caution would be: number one, obviously, if the Middle East situation gets worse, if the conflict gets longer, et cetera, et cetera, I mean those all have impact on consumer sentiment and high net worth and ultra-high net worth clients will not be immune to that. So that can -- that's definitely a risk that we are monitoring.

And then secondly, given some of the volatility and some of the software headlines, et cetera, some of the M&A activity has slowed down. When M&A slows down, it also slows down exits for entrepreneurs and the liquidity events of business sales, IPOs, et cetera. And that has an impact on our business. So if that slowdown again, extends because of the macro environment, that might slow our business down. But we're not going to be alone in that. We're not going to be an outlier. It's a little bit of a market beta, if you will.

John, I would just add that the resilience in the private client group is echoed I think, more broadly in the business. And given the volatility we've seen, it's kind of amazing markets are where they are, and we continue to see people exploring committing money to longer-term opportunities. So look, there are a lot of potential drawdowns arising given the volatility in the macro market, but we're pretty pleased with progress to date.

Got it. And then maybe could you just walk through some of the factors like outside of investment performance that could get high-yield fixed income funds distributed in Asia back to being less of a headwind?

Yes. We are -- reopening our Global High Yield strategy in Taiwan. We've gotten regulatory approval, which is what stopped us. And so we're optimistic that we'll see incremental flows from there. We continue to see appetite for fixed income, but it's been more competitive and the alternative opportunities, particularly locally have been stronger. However, the dollar remains fairly strong. I'm hopeful we'll see some recovery along with performance. I don't know, Onur, if you have anything more to add.

Yes. I think those are the main points. I mean the only other minor I would add to that is our ETF platform continues to build momentum as well. If you look at the monthly run rate, domestically, we are basically getting close to $0.5 billion net flows per month. So definitely a very healthy growth rate for our ETFs, which are across asset classes, including fixed income.

And then we are expanding that momentum into international. We launched 2 ETFs, fixed income ETFs in Taiwan. We launched several UCITS ETFs in Europe this week in fixed income. So as a result, you will see us tapping into new markets outside our traditional intermediary channel using the ETFs. So it's going to take, again, a few quarters to build momentum in those new products, but we are seeding the ground for future growth in new products as well.

Next we'll go to Dan Fannon at Jefferies.

So one more just on the private wealth side and tracking above the 5% adviser growth target. And so I was curious if you could just give a little bit of a framework or profile of the adviser that's joining your platform? I know you generally aren't paying the same levels of transition assistance or other things, but curious about the profile? And then how you anticipate those to ramp as they integrate into your platform over time?

Sure. Great question. Yes, you're absolutely right. We typically have a bias towards more new to industry internal promotes as well as mid-career switches from other careers as our historical recruiting model. We have not done major recruiting in book takeovers, if you will. And as a result, our cost of talent acquisition seems to be much lower than what we see from some of the competitors.

That being said, as we look at the talent mix, we are open to adding some experienced advisers, some of which might have books. So as we think about the rest of the year and the broader pie, I mean, I would say probably 75% would fit into the more traditional profile and then roughly 1/4 would be more on the experience side, some of which might have existing transferable assets. So that's how I think about the adviser mix.

And in terms of the year-end adviser kind of numbers that we are targeting, probably given we have been intentionally fast in terms of adding new advisers early in the year, it's going to be slower in the rest of the year by our recruiting plan, but we probably would end a couple of percentage points higher than what we exited this quarter on a net basis. So that would be a rough number that we are targeting. Again, we are -- these are, I would say, directional targets. Ultimately, we flex up and down based on the talent we are seeing.

Finally, in terms of how much time does it take for a new adviser to ramp up, et cetera. We have specific initiatives to get the advisers to full productivity over a shorter period of time. We have dedicated teams that are focused on it. But typically, it takes 4 years or so for an adviser to be breakeven if it's a completely new-to-industry kind of adviser. And then you see that adviser to peak probably within 5 to 10 years. So that's sort of a typical profile for new-to-industry kind of fresh talent, if you will.

Great. And then just a follow-up on the pipeline. obviously, record levels, and I think you gave some context around the funding of that. But could you talk more broadly about momentum as you think about the institutional channel and kind of sales activity and kind of product mix in context of that outside of what is actually in the pipeline today?

Yes, sure. And if you think about our average deployment for the pipeline, we are currently running at 9 months. So the good news is the record pipeline will be deployed relatively quickly. So that's good news because that pipeline runs through fee-generating sales based on that.

In terms of new opportunities, we touched on Corebridge Equitable, the $100 billion. So that definitely is quite a sizable opportunity ahead of us in '27 and beyond.

In terms of other areas, a couple of things I would highlight. One, again, the broadening of the third-party insurance franchise. So we really have good momentum there. We continue to add new relationships, and I expect more there, both on the general account side with private credit and fixed income, but also on the separate account side with equities and multi-assets.

And then in terms of the other broader institutional markets, we are definitely seeing some momentum in Asia Pacific. Some of our more quantitatively oriented strategies have found good demand there and definitely expecting more opportunities materializing across our systematic platform globally, but also specifically in Asia, given they are pretty big buyers of systematic strategies, particularly equities.

And next, we'll move to Benjamin Budish at Barclays.

This is Mason on for Ben. I just wanted to ask more about your ETF business. Can you talk more about the current distribution footprint outside of your wealth platform? And if possible, can you share any color about the current economic arrangements with distributors? And how they may be changing at all?

Yes, for sure. In terms of our ETF franchise, you're absolutely right. It cut across our proprietary wealth channel as well as our third-party distribution. The third-party side has been growing at a faster rate, but from a smaller base. As you would expect, as we launched the ETF business starting back in 2022, we first leaned into our private wealth channel and then use that original foundation to scale into third party domestically and then overseas.

On the third-party side of things, we are definitely seeing momentum. We onboarded our ETFs to multiple new platforms, wirehouses, regional broker-dealers, independents, et cetera. In terms of the total sales mix, we tend to have a very small, immaterial almost distribution through the direct platform. So think about the Fidelity, the Schwabs of the world, the direct-to-consumer part of those businesses. So as a result, our dependence on those funds, supermarkets, et cetera, is much lower than some of the other ETF providers that has large ETF franchises, particularly in passive. So I would say our third-party distribution cost is not materially impacted by what's happening with some of those platforms.

And we'll take a follow-up question from Bill Katz at TD Cowen.

Just coming back to performance fees, thank you for the updated guidance. Can we unpack the incremental pickup in the public side? How much of that is just due to maybe market positioning versus anything going on the hedge fund side and anything related to maybe the shuttering of a relatively sizable hedge fund you announced?

And then on the operating expense side, just coming back to that for a moment, it looks like it's up about 6% on the midpoint year-on-year. As we look out into 2027, would you anticipate any kind of deceleration of the core expense growth? Or would that likely stay the same just given the myriad of different growth vectors out there?

I mean, generally, it would stay the same, speaking from the operating expense side first. We generally haven't offered any next year's information this early on. But it would generally be flat. There's nothing on the horizon that I'm aware of to offer any additional color on the expenses. As far as the performance fees, no, the changes in performance fees [ aren't ] impacted by the closure of Arya that we announced recently. And then what's driving the publics is our international SMID product in 1Q versus last year.

And there are no further questions at this time. Mr. Jorgali, I'll turn the call back over to you.

Thank you very much, Audra, and thank you, everyone, for joining our call. I hope you have a great day, and please reach out if you have any questions.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Thank you for standing by, and welcome to the AllianceBernstein Fourth Quarter 2025 Earnings Review. [Operator Instructions]. As a reminder, this conference is being recorded and will be available for replay on our website shortly after the conclusion of this call. I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB, Mr. Ioanis Jorgali. Please go ahead.

Good morning, everyone, and welcome to our fourth quarter 2025 earnings review. Today's conference call is being webcast and is accompanied by a slide presentation available in the Investor Relations section of our website at www.alliancebernstein.com. Joining us today to discuss the company's quarterly results are Seth Bernstein, our Chief Executive Officer; and Tom Simeone, our Chief Financial Officer. Onur Erzan, our President, will join us for the question-and-answer session following our prepared remarks.

Some of the information we'll present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I would like to point out the safe harbor language on Slide 2 of our presentation. You can also find our safe harbor language in the MD&A of our 10-K, which will be filed next week. We base our distribution to unitholders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results. Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation, appendix, press release and our 10-K.

Under Regulation FD, management may only address questions of material nature from the investment community in a public forum. So please ask all such questions during this call. Now I'll turn it over to Seth.

Good morning, and thank you for joining us today. 2025 was a year of disciplined execution and strategic progress for AllianceBernstein. I'm very proud of the strides we've made as a firm, and I'm deeply grateful to my colleagues for their dedication and impact. One individual who has played a pivotal role in our transformation is our newly appointed President, Onur Erzan. With a proven leadership track record spanning our client group, private wealth and more recently, our private markets businesses, Onur has consistently demonstrated strategic vision, a tireless work ethic and a deep commitment to our clients, our people and our unitholders. As CEO, I will continue to set the firm's strategic direction and guide our leadership team.

I look forward to partnering with Onur, who will lead the transformation of our business, execute our strategic priorities and drive profitable growth, working closely with Equitable to deliver innovative client-focused solutions. Now let's dive into our key business highlights in the quarter and the year on Slide 3. First, our assets under management reached a record $867 billion at year-end 2025, reflecting market appreciation, strong sales and organic growth across ultra-high net worth insurance general accounts, tax-exempt SMAs and private markets. A notable positive is our Bernstein Private Wealth business, which has $156 billion in assets under management and contributed roughly 37% of our firm-wide revenues in 2025.

In addition, our private markets platform closed the year with $82 billion in AUM, up 18% year-over-year, driven by approximately $9 billion of deployments across all channels in 2025. Finally, our SMA franchise reached $62 billion of AUM and grew 12% organically in 2025, led by our market-leading Muni capabilities. Our active ETF suite expanded to $14 billion across 24 strategies, delivering 65% organic growth in 2025, excluding conversions. While we've seen strong inflows into targeted growth areas, firm-wide active net flows were negative for both the quarter and the full year. We had $9.4 billion of total net active outflows in 2025, including $3.8 billion outflows in the fourth quarter. Firm-wide active equity redemptions persisted as performance headwinds lingered with $7.6 billion outflows in the fourth quarter and $22.5 billion throughout the year.

Roughly half of these were driven by retail redemptions. Taxable fixed income saw $2 billion in outflows in the fourth quarter and $9.1 billion for the year as overseas retail demand declined amid geopolitical uncertainty and a weaker dollar. Institutionally, we had roughly $4 billion of taxable outflows related to Equitable's reinsurance transaction with RGA. On the other hand, our tax-exempt franchise continues to deliver durable organic growth with $3.9 billion in inflows in the fourth quarter and $11.6 billion for the year. The platform has generated organic growth for 13 consecutive years on long-term alpha for our clients. Alternatives and multi-asset strategies also remained a bright spot, posting $1.9 billion active net inflows in the fourth quarter and $10.6 billion for the full year, supported by strong private markets deployments.

Third, our scalable model and disciplined expense management continued to drive profitable growth. Our adjusted operating margin expanded to 33.7% for the year at the upper end of our 30% to 35% Investor Day target range. With a streamlined expense base and robust operating leverage, we are delivering strong flow-through to earnings. Fourth, we've accelerated our collaboration with Equitable as we continue to expand our private markets capabilities and amplify the flywheel effect of this partnership. I'm pleased to share that we're making investments to enhance our commercial real estate lending capabilities and expand the scale of our platform. As a result, we'll onboard more than $10 billion of new long-duration assets from Equitable by year-end 2026.

This represents a meaningful expansion of our origination and servicing capabilities in commercial mortgages. Beyond the financially accretive nature of this commitment, it underscores the broader strategic value of our partnership with Equitable. It's a clear example of how our alignment continues to unlock incremental growth well beyond the $10 billion plus of additional committed assets. Leveraging our expertise in commercial real estate lending, the adjacent capabilities will build upon our existing footprint in core and core plus real estate credit and bring insurance tailored assets to over $20 billion. This enhances our scale and enables us to compete more effectively in the strategically important insurance channel.

As of year-end, we managed over $59 billion on behalf of more than 90 third-party insurance clients with general account assets growing 36% year-over-year. We see strong momentum in this business and expect to add $3 billion of new private asset mandates from strategic insurance partnerships in the first half of 2026. Slide 4 provides a summary page with our key financial metrics. Tom will follow up with more commentary on our results.

Turning to Slide 5. I'll review our investment performance, starting with fixed income. Fixed income markets delivered broad-based gains in the fourth quarter of 2025 despite softer labor market trends and limited macroeconomic data due to the government shutdown. Short-term rates declined following the Fed's rate cuts, while long-end yields remained elevated, steepening the yield curve. The U.S. 10-year treasury ended the year near 4.2%, reflecting persistent long-term inflation and fiscal concerns. The Bloomberg U.S. Aggregate Index returned 1.1% in the fourth quarter and 7.3% in 2025, while Bloomberg's Global High Yield Index returned 2.4% in the fourth quarter and 10% in 2025.

Overall, our 1-year relative performance improved versus the prior quarter, supported by our higher quality exposure in global high yield, our longer duration positioning in American income and continued outperformance across our municipal strategies, where nearly all our funds are rated 4 or 5 stars by Morningstar. 86% of our AUM outperformed over the 1- and 3-year periods, while 67% of our AUM outperformed over the 5-year periods. Demand for intermediate duration has strengthened and fixed income volatility has declined meaningfully, reducing 2 key headwinds to performance and enhancing the diversification value of the asset class. As the curve steepens, investors are rotating out of cash, floating rate and short duration instruments into intermediate duration products to capture higher yields.

U.S. retail taxable flows continue to show encouraging momentum with 2 consecutive years of organic growth and increasing adoption of our active ETF suite. In 2025, we ranked among the top 15 fund managers in taxable flows in the United States, a meaningful step forward in the market where we've historically been underpenetrated. Municipals remain well positioned for continued inflows, supported by attractive tax-efficient returns and continued share gains of our market-leading SMA platform.

Our systematic strategies are gaining traction in the investment-grade bond market with strong institutional demand and consultant support in 2025, underpinned by our consistent track record of outperformance. Turning to equities. The S&P 500 returned 2.7% in the fourth quarter, closing near record highs and delivering a roughly 18% total return for 2025. This marks the index's third consecutive year of double-digit gains. For the first time in several years, international equities outperformed the U.S., supported by a weaker U.S. dollar, more compelling relative valuations and a rotation away from U.S. mega cap technology leadership.

Our equity performance softened in 2025 with relative returns declining across the 1-, 3- and 5-year periods. This was primarily driven by sustained underperformance in our largest U.S. equity franchises, particularly growth, defensive and sustainable strategies amid a market environment dominated by speculative momentum-driven names and narrow leadership. 21% of our AUM outperformed over 1 year, 37% over 3 years and 51% over 5 years, with the most pronounced performance pressure in U.S. large-cap growth-oriented services where benchmark concentrations remain acute.

Outside of these areas, many value, core and thematic strategies delivered strong absolute and relative results. Portfolios with exposure to cyclical sectors such as industrials and financials benefited from improving earnings breadth, especially in non-U.S. markets. Emerging markets, China and international value and core strategies were notable standouts. The highly concentrated nature of U.S. equity market leadership and stretched valuations created a challenging backdrop for active managers. In response, we're sharpening execution against our investment philosophies, leveraging decision analytics to identify areas for improvement, implement targeted changes and measure outcomes with greater discipline.

Our equity platform is intentionally diversified across styles and regions, avoiding overexposure to any single market regime. Thematic and cyclically oriented value strategies provide balance and upside participation in risk-on environments, complementing more defensively positioned portfolios. As market breadth began to improve entering 2026, platform performance has started to rebound. A growing share of growth, value, core and thematic strategies are now delivering stronger relative results, while defensive strategies have lagged in more risk supportive conditions. Looking ahead, we believe the continued earnings breadth and stable economic growth could favor international and value strategies.

Additionally, portfolios with lower tracking error may offer clients more consistent participation in narrow leadership environments, helping to diversify performance streams and reduce reliance on a concentrated set of products. Turning to Slide 6, I'll discuss our retail highlights. Retail flows softened in 2025, ending a 2-year streak of organic gains. The channel saw $3.5 billion in net outflows in the fourth quarter and $9.1 billion for the full year, driven by active equity redemptions and softness in taxable fixed income, partially offset by continuing strength in municipals. Active equities experienced outflows throughout the quarter and the year, primarily led by U.S. growth-oriented services. Fixed income allocations favored tax-exempt strategies, while taxable flows reversed to modest outflows driven primarily by APAC as the U.S. dollar weakened.

Our retail Muni platform delivered 23% organic growth in 2025, surpassing $56 billion in third-party retail AUM across SMAs, ETFs and mutual funds. Despite overseas headwinds, U.S. retail momentum remained durable. Taxable fixed income posted a second consecutive year of organic growth, supported by expanding adoption of our ETF suite alongside continued market share gains in tax-exempt, extending a 13-year history of organic growth. In effect, we believe the bond reallocation trend has significant runway, and we're well positioned to help clients capture fixed income's enduring value, just as we've consistently demonstrated in the early waves in 2024.

Moving to Slide 7, I'll cover our institutional channel. Institutional outflows moderated year-over-year, narrowing to $1.9 billion in the fourth quarter and $4.6 billion in 2025. Private alternatives remained a key growth engine, supported by strong inflows across existing, adjacent and newly launched strategies. Channel deployments into private markets totaled approximately $2 billion in the fourth quarter and nearly $8 billion for the year. Taxable fixed income outflows were modest in the fourth quarter, while outflows for the year were largely driven by Equitable RGA's reinsurance transaction, offsetting inflows into our growing systematic platform.

Active equities experienced roughly $2 billion in outflows in the fourth quarter and $7 billion for the year, primarily from our concentrated growth in global core strategies. Our institutional pipeline expanded to nearly $20 billion, bolstered by the addition of more than the above-mentioned $10 billion in commercial mortgage loans. As previously noted, we expect to add approximately $3 billion of mandates from strategic insurance partnerships over the coming quarters. Next, on Slide 8, I will cover Private Wealth. Bernstein Private Wealth delivered its second consecutive quarter of organic growth and fifth straight year of positive net flows supported by record level advisory productivity. Net new client assets grew 7% in the fourth quarter and 6% for the full year 2025, with annual organic growth of nearly 2% for both periods.

Growth was broad-based across asset classes, driven by client reallocation to fixed income, rising adoption of alternatives and sustained demand for tax-efficient index equity solutions. As noted earlier, private wealth represents approximately 18% of firm-wide average AUM but contributes roughly 37% of total revenues, reflecting its attractive fee profile and highly engaged client base. Importantly, these revenues are sourced directly, underscoring the strength of our differentiated farm-to-table model. I'll close with Slides 9 and 10, which highlight both the momentum of our private markets platform and the strategic value of our partnership with Equitable. Over the past decade, we've scaled our private markets platform to $82 billion in fee-paying and fee-eligible AUM, delivering 18% year-over-year growth. Anchored in credit-oriented strategies, including direct lending, alternative credit, commercial real estate debt and private placements, our platform serves a broad and growing base of retail, institutional and insurance clients across a wide range of risk return objectives.

Equitable's $20 billion permanent capital commitment now largely deployed has accelerated our expansion in private markets and strengthened our ability to seed higher fee, longer duration strategies. Our collaboration continues to evolve beyond periodic commitment cycles with the expansion of the commercial mortgage capabilities representing the latest in a series of successful initiatives spanning residential mortgages, structured private placements and private credit. We view our strategic partnership with Equitable as a meaningful competitive advantage, reinforcing AB's capital-light client-aligned model and enabling efficient and disciplined scaling of new offerings. With our proven track record and focused strategy, we're well positioned to transform the business, unlock new opportunities for our clients and exceed our $90 billion to $100 billion target for private markets AUM by 2027. With that, I'll hand it over to Tom to review our financial results. Tom?

Thank you, Seth, and thank you to everyone joining us today. AB enters 2026 with clear momentum underscored by our fourth quarter and full year 2025 results and the progress we're making on our strategic priorities. Fourth quarter adjusted earnings were $0.96 per unit, down 9% from the prior year period, reflecting lower performance fees, investment gains and other revenues. Full year 2025 adjusted earnings of $3.33 increased 2% versus the prior year, while full year distributions were $3.38, up 4%. The difference between EPU and distributions reflect the mathematical impact of the lower average unit count and the higher income generated in the second half of 2025.

On Slide 11, we show our adjusted results, which remove the effect of certain items that are not considered part of our core operating business. For a reconciliation of GAAP and adjusted financials, please refer to our presentation appendix. Fourth quarter net revenues were $957 million, down 2% versus the prior year as higher base fees were offset by lower performance fees. Full year revenues were $3.5 billion, flat year-over-year and up 3% on a like-for-like basis when excluding the $96 million of Bernstein Research revenue recognized in 2024.

Fourth quarter and full year base fees increased 5% year-over-year, driven by higher markets. Fourth quarter performance fees were $82 million, below the prior year period's $133 million, which benefited from catch-up fees at CarVal on the private side and strong contributions from several public market strategies, including [ APSA and Arya ]. While full year performance fees of $172 million declined 24% year-over-year, they came in above our $130 million to $155 million guidance range, and I will provide additional details shortly.

Dividend and interest revenue, along with broker-dealer-related interest expense declined in both the fourth quarter and full year, reflecting lower client cash and margin balances in private wealth. Moving to expenses. Fourth quarter total operating expenses were $627 million, up 1% versus the prior year, driven by 2% higher compensation expenses and essentially flat non-compensation expenses. Full year operating expenses were $2.3 billion, down 2% as slightly higher compensation was more than offset by lower non-compensation expense. Fourth quarter total compensation and benefits increased 2% year-over-year with a compensation ratio of 47.7% of adjusted net revenues.

This is above last year's 46%, but better than our 48.5% guidance. Full year revenues exceeded our earlier expectations, allowing us to reduce the fourth quarter compensation ratio. As a result, our full year compensation ratio was 48.3%, slightly better than the 40.5% included in our prior guidance. We will begin accruing at a [ 48.5% ] compensation ratio in the first quarter of 2026, consistent with last year's accrual and may adjust throughout the year depending on market conditions.

Our guidance includes the cost of investments in talent and capabilities such as building out the commercial mortgage loan platform that Seth referenced. Promotion and servicing costs decreased 1% in the fourth quarter and 10% for the full year, with the full year decline driven by the separation of Bernstein Research. Fourth quarter G&A expenses were flat year-over-year. Full year G&A declined 9%, driven by the lower occupancy costs associated with our Hudson Yards relocation, which dropped to the bottom line as planned. For full year 2025, non-compensation operating expenses were $599 million, just below our prior guidance of $600 million to $610 million.

This reflects strong expense discipline amidst a volatile macro backdrop. For 2026, we expect full year non-compensation expense to be in the range of $625 million to $650 million. The increase reflects normalization in promo and G&A expenses recovering from last year's depressed levels and includes discretionary investments in technology and the operational build-out of new strategies. Promo and servicing are expected to represent 20% to 30% of non-compensation expenses with G&A comprising the remaining 70% to 80%. As a reminder, promo and servicing includes transfer fees, which move directionally with markets. Our year-over-year non-comp outlook implies 6% to 7% growth at the midpoint, slightly above our long-term objective of keeping increases below the level of inflation.

This reflects investments to integrate our new investment management platform and complete the onboarding of the commercial mortgage assets, both of which we expect to be accretive to earnings over time. After a robust selection process, we selected an investment management platform that we believe will materially enhance our foundational data model and prepare us for the future. Over the years, we have purpose-built technology that has served us well, but much of it is aligned to an individual investment teams and asset classes. This new platform will allow us to unify around a single source of data, improving analysis, decision-making and reporting. We expect it to streamline operations and drive both business and cost efficiencies. The implementation is expected to result in approximately $40 million in total cash flow impact over the next 4 years, some of which will be capitalized before generating $20 million to $25 million in annual net expense savings beginning in full year 2030 after all legacy systems are retired.

Our full year '26 non-comp guide assumes roughly $10 million of P&L impact from technology implementation expenses and the onboarding of our CML platform. As Seth mentioned, we are excited to expand our partnership with Equitable as we scale institutional and insurance tailored solutions in commercial mortgages, an area where we believe we can rapidly scale. The team and platform will be fully operational in the second half of 2026, and we expect to initially manage more than $10 billion of long-duration assets for Equitable with asset onboarding expected by year-end. Excluding discretionary investment spend, non-compensation expense would increase in the low single digits, consistent with our long-term target.

Interest on borrowings decreased by roughly $1 million in the fourth quarter and $15 million for the full year 2025 compared to the prior year period, reflecting lower interest rates and lower debt balances. ABLP's effective tax rate was 5.9% in 2025, just shy of the low end of our 6% to 7% guidance range, which reflects a favorable mix of earnings. We forecast ABLP's effective tax rate in 2026 to be 6% to 7%. In the fourth quarter, our firm-wide fee rate was 38.7 basis points and our full year fee rate was 38.9 basis points.

As we've said before, the fee rate will continue to be mix dependent and several dynamics influenced both the quarter and full year. First, on the equity side, markets finished the year higher, but volatility meant that average AUM significantly lagged end-of-period levels.

We also saw outflows from higher fee active equity services, which put modest pressures on the fee rate. In fixed income, elevated rates and FX volatility weighed on taxable fixed income flows and AUM. We experienced outflows in higher fee strategies such as American Income, while most of our active fixed income inflows came from Muni SMAs, which typically carry lower fees. Offsetting these pressures, we continue to grow our private markets capabilities, which remain a key structural support for our fee rate.

Our regional sales mix and strategic growth initiatives have helped mitigate broader industry fee rate compression and our all-in fee rate, including performance fees, has trended higher over time as private markets AUM has expanded. Slide 12 reflects a breakdown of our performance fees by private and public market strategies. Fourth quarter performance fees were $82 million, above our prior expectations. Public market strategies contributed $37 million, well ahead of our $5 million to $25 million guide, driven primarily by another strong year from our financial services opportunity strategy, which benefited from both idiosyncratic and sector-specific performance. Private market strategies contributed $45 million, slightly above our $35 million to $40 million guide with the upside largely driven by our middle market lending platform.

As a result, full year 2025 performance fees totaled $172 million, above our $130 million to $155 million outlook, well below last year's $227 million. The year-over-year decline reflects the unusually strong 2024 contributions from public market strategies, such as our securitized credit strategy, [ APSA ] and our long/short strategy [ Arya ] as well as onetime CarVal catch-up fees that we did not expect to recur in 2025, as we noted on last year's call.

Looking to 2026, we have good visibility for private market strategies to contribute $70 million to $80 million in performance fees. We also expect public market strategies to contribute at least $10 million to $20 million based on current market levels. Assuming no major market drawdown, we view this outlook as a floor, though we would caution that sector or asset class level dispersion can materially affect performance fees even in constructive broader markets. While public market alpha is inherently volatile and difficult to forecast, our public alternative franchise provides meaningful upside in favorable market environments and enhances our overall market leverage profile. This upside potential complements the more steady and predictable performance fees generated by our private markets business, resulting in an attractive and diversified performance fee opportunity for the firm.

Finally, closing with Slide 13. As previously mentioned, the adjusted operating margin increased sequentially to 34.5% in the fourth quarter. 2025 results benefited from favorable markets and improved operational efficiency, resulting in a full year adjusted margin of 33.7%, above our 33% market-neutral forecast. This margin is at the higher end of our Investor Day target of 30% to 35%, which we expected to achieve by 2027. We are pleased with the progress we've made in strengthening our margin profile. Having successfully executed our major market-neutral initiatives, including the Bernstein Research separation and our North America relocation strategy, we now see market performance and scalability as the primary drivers of future margin expansion.

We have demonstrated meaningful operating leverage from both markets and scale with incremental margins well above our long-term 45% to 50% target. We expect constructive markets to continue boosting the profitability of our existing services, reflecting improved flow-through to earnings. While we remain disciplined on expenses, we are also committed to investing in growth to create durable value for our unitholders. We expect to continue allocating resources to high conviction initiatives that support organic growth and increased long-term profitability.

Our strategic priorities include disciplined investments in targeted growth initiatives such as new investment services, product innovation and expanded marketing efforts designed to enhance earnings power over time. The expansion of our commercial mortgage lending capabilities is a clear example of an investment that we expect to be accretive and value-enhancing over the long run. Before opening the line for questions, I want to express my gratitude to our colleagues for their considerable efforts and unwavering commitment to our clients, unitholders and all stakeholders. With that, we are pleased to answer your questions. Operator?

[Operator Instructions]. Your first question comes from the line of John Dunn with Evercore ISI.

I wanted to maybe get a little more on the outlook for high-yield funds distributed in Asia, some of the -- almost beyond interest rates, some of the puts and takes of that influence demand month-to-month.

Sure. It's Onur. Let me take that question. In terms of the broader trends in Asia, obviously, there are macro factors such as the FX risk for foreign investors relative to U.S. dollar, the rate outlook, et cetera. I mean, obviously, we've been navigating those macro factors for decades. Some of our products in Asia has been in existence for 30 years. We have not seen a tremendous impact from a structural demand perspective in terms of the FX risk yet. Yes, there are some ebbs and flows. And on a relative basis, investors are a little bit more sensitive or concerned about the FX risk, but it has not dramatically impacted the structural fixed income demand. As you know, the Asia clients, the retail, particularly likes income and still the U.S. dollar-denominated strategies and global strategies deliver attractive income.

Hence, the structural demand remains strong. In terms of our business, in terms of a couple of positives, as you know, we started globalizing our ETF franchise, and we started with fixed income, given our strong brand in Asia, particularly in fixed income. And we added our second active ETF in Taiwan. If you recall, we were the first active fixed income ETF launcher in '25. This year, we added a high-yield fund, and it was a successful IPO, top in its category. So we see broadening of the vehicles that will help us. And another thing that will help us in Taiwan, we were facing some regulatory constraints in terms of percentage of assets that can come from Taiwanese investors in some of our vehicles.

Taiwan raised those minimums from 70% to 90% for us based on some of the commitments. As a result, that will help us unlock more opportunity in Taiwan. So as a result, there are a couple of unique AB specific factors that will help with the demand in 2026. And then obviously, in the broader markets, there will be definitely competition across strategies and depending on how our strategies perform on a relative basis, we will gain or lose market share. As you know, we hold very strong market share in cross-border vehicles that are used in markets like Hong Kong. We are typically a market leader. Sometimes we give up some market share or gain some market share depending on particularly the positioning of the rate curve, given we tend to be long duration and long credit structurally in most of our products.

Got it. And then private wealth did well in the fourth quarter. Could you maybe talk about the seasonality you might expect over the course of the year and then kind of frame a little more the areas where you expect to see flow demand?

Sure. Yes, as you pointed out, we are very pleased how we finished the year in private wealth. -- almost 7% annualized -- sorry, 7% net new asset organic growth rate. So feeling very good about that. In terms of seasonality, you always have the tax impact in the second quarter. So that's always the biggest thing to consider. Overall, other than that, seasonality, maybe sometimes we have a little bit of softness in August with holidays and all that in most parts of the U.S.

But broadly, I think it's a more second quarter tax-related seasonality for the most part. And beyond that, we are feeling pretty good about our pre pipeline in terms of our business. As you recall, when we mentioned in the past, one of our big drivers of growth in terms of particular new client acquisition is the exits as the M&A activity has been robust and given we have a very strong ultra net worth proposition with business owners and entrepreneurs, when we have strong exits through M&A, we tend to do quite well in terms of onboarding new ultra net worth clients. So we continue to see strength in that area as an example.

Your next question comes from the line of Benjamin Budish with Barclays.

This is Nathan on for Ben. Just a quick question with AI-related volatility impacting software valuation. Can you size AB's private credit exposure to software across the portfolio by percentage of AUM, maybe top exposures? And like any areas where you tighten underwriting or adjusted risk limits?

Sure. It's Onur. Let me take that as well. It's not a very significant exposure for us given our broadly diversified global asset management platform. To recap, our private alts platform is around [ $8 billion to $2 billion ] of assets based on fee earning and fee eligible AUM. Within that, roughly 25% is our corporate direct lending business, PCI. And in that business, typically, it is -- we are the lead underwriter in middle market loans against sponsors.

Typically, we work with 250 sponsors in the United States. Typical companies we work with are in the $10 million to $75 million EBITDA range. So within that PCI portfolio, we have exposure to technology or software kind of companies. Our exposure tends to be in line with the rest of the corporate direct lending market. So typically around 1/4 of the AUM tends to be related to software. We have a long-standing history in terms of operating in technology and software, and we have not seen any material change in terms of our loss experience. And we have been very diligent in monitoring our credit watches and staying close to those borrowers.

But so far, again, no major deterioration. And even it was to deteriorate materially, it's not going to impact our business given middle market lending is only roughly $25 billion of AUM. And within that, we only have a certain percentage exposure to software, as I mentioned. So overall, we are not that sensitive to it.

And a follow-up would be, given we understand that it's early to update on the target of getting like $90 billion to $100 billion of private markets AUM. But how are you thinking about growing that private markets piece beyond that time horizon?

Well, let me answer it -- it's Seth. Let me answer it this way. We're not including the money that we will be onboarding this year from the commercial mortgage lending team. I mean, yes, that counts as private market assets, but we continue to focus on beating the $90 billion to $100 billion that we forecasted for 2027. We will, with our second quarter earnings, revise that target for you, but we are ambitious and we see further opportunities to expand it.

[Operator Instructions]. There are no further questions at this time. Mr. Jorgali, I turn the call back over to you.

All right. Thank you all for joining this busy day. Please follow up with us if you have any additional questions. Thank you very much.

Great. Well, welcome back. Hopefully, everybody had a chance to grab something to eat, as we kind of get going for our next session. I would love to welcome Seth Bernstein, President and CEO of AllianceBernstein. AllianceBernstein is a global, diversified asset manager with over $850 billion in AUM and robust capabilities across fixed income, private markets and global equities. In addition, the firm's partnership with Equitable and its sizable wealth management franchise create unique product development opportunities further supportive of the firm's growth outlook. We look forward to getting an update from Seth on the business and his perspective on the landscape broadly as we look out here into 2026.

Seth, always great to see you. Welcome back. Thank you for being here.

Thank you. The only reason I come to this hotel is for this?

Look, we'll take what we can get. I mean, you and I have this conversation every year, and there's just...

This place is a dump.

But you do have a great time here. You got...

I do.

From what I heard, we're in the service economy and the experience economy. So this is what you're after. But we're not in the infrastructure or maybe infrastructure, not in the manufacturing economy, so here we go.

Okay. All right. With that said, let's talk about the allocation trends. So 2025 was clearly a pretty volatile year, but ultimately, equity markets delivered pretty healthy returns and credit spreads are still super tight. So given the setup and also layering in lower interest rate prospects, how are clients allocating into 2026? What are some of the themes you guys are paying attention to at a kind of macro sort of asset allocation level?

I think there are -- I think there are 2 or 3 themes that are worth really digging into. First, look, we think inflation is going to be higher going forward than it's been in the past. So getting real returns that are going to be interesting, I think it's going to be tougher than it's been in the past 5 or 6 years. And getting diversification at the same time, I think it's going to prove challenging as well, particularly given how most people are set up today.

First and foremost, the U.S. is not cheap on any measure. In fact, it's rich. On fixed income, spreads are tight. Returns have been pretty strong in fixed income as well as in equities. And as you know as well as I do when sort of cyclically adjusted returns, rates are at the level they are today, it's very hard to repeat that. So averaging 20% kind of returns for 3 years is heroic. So the notion that doing what you did in the past is going to do well for you going forward, I think it's a particular challenge, getting diversification is a challenge.

So what does that mean to us? I think it means, first and foremost, we need to readjust our expectations. Secondly, recognize that your true exposures to the U.S. are really large, larger than they've ever been, not just because the U.S. is a larger proportion of MSCI World or equity, but because your private equity allocations are primarily American. And so when you put them all together, plus your U.S. dollar fixed income exposures, you are making a very big bet on a country where, at least from my perspective, dollar weakness is not a temporary phenomenon. I think the administration wants a weaker dollar despite talking about the reserve currency status and everything else.

And if you look at returns offshore, they've been compelling versus the U.S. And not all of that is dollar devaluation. A lot of it is valuation differentials. A lot of it is better governance, stronger growth opportunities in foreign markets, particularly in Asia, where we've seen it. But even Europe, emerging markets have been quite strong this year. So we are really pounding the table of our clients to be thinking about moving more offshore. Most Americans have an allergy to doing that, but people offshore don't have that same degree of allergy. And so we're seeing much more interest -- we're seeing interest on the institutional side, even here in the U.S., much more interest in retail and institutional, outside the U.S. for those, please, still pretty comfortable with dollar fixed income assets. You can ask yourself why, but it is the best and deepest market. So it will continue to be an important source, particularly for those countries that are dollar linked.

So for example, we're seeing better flows from Asia in AIP and the weakness in the yen has actually been beneficial to us in our Japanese business. So it's been a pretty good story for us there. So moving people offshore, I think, has been the critical message that we want to give people. I would note, if you look at the returns from gold, I think that's an indicator of dollar devaluation concerns, really more foreign driven than U.S. local, but they're real. And we see that concern and resistance. And when I travel abroad with consultants and institutions, it's -- everyone wants to talk about Washington and Fed appointments and so forth. So I think we shouldn't just dismiss it and I don't think it's episodic. I think it's with us for a while.

Yes. Super interesting. Let's take these themes and maybe translate it into some of your own business, starting with fixed income. And I feel like for the last 2 to 3 years now, you and I have these conversations, and we've always had these conversations with other CEOs of other asset managers. And there's been this wall of money that's been sitting in money market funds, kind of waiting for that to eventually rotate into fixed income vehicles, especially when we get a little bit of a steeper curve. It feels like we're finally starting there...

I think we're there. I mean, look, earlier this year, it certainly had slowed down and reversed. We do still see in our private wealth business, for example, a lot of people still in cash. And money market are still near record highs. So I think it's there. I think you don't have to go far out the curve just given how steep it is. And so we're seeing a lot more interest in sort of intermediate duration kinds of assets. We continue to see -- and I think part of it is our growth relative to others in the muni market, but that SMA demand continues to be pretty robust for us. So that feels pretty good.

There continues to be a strong bid for high yield. And frankly, in the investment-grade side, very strong demand from institutions. That's robust as well. And that's interesting because you've had so much issuance. I mean, extraordinary issuance, unparalleled even just given that there hasn't been a rate move to really justify that. It's really a need to move.

Yes. And I guess, presumably, when you get the movement in lower interest rates, despite the fact that credit spreads are really tight, that maybe actually creates a little bit of a support level for like high-yield fixed duration...

Yes, because they're looking at absolute -- they're looking at absolute levels. And so they're okay by that...

That makes sense.

The back end, I think, of the curve has a risk of actually widening, right, going up, because there's a lot of issuance need for the treasury to go out and fund. So I think that's why that steepness is going to persist and why you're going to see more money move out of money market funds over time.

So how are you guys positioned to capture that? Because AB obviously has a very long track record in fixed income, really good long-term returns. The 1-year numbers, I think, has gotten little bit stronger. So how do you think about your competitive position if we do, in fact, see a much bigger wave of capital coming back into fixed income...

It hasn't been hurting us in Asia. In the U.S., look, our 3- and 5-year are still quite strong. And the last month or so have been better from a performance perspective. So we're beginning to see -- it was due to duration where we were really seeing that weakness. So I think we're pretty well positioned to capture it. But I think it's still going to be fairly so, I think people are less reactive than they used to be to this stuff. They're biding their time and waiting. And look, you're still making 365 or whatever it is in money market...

And there's less...

And you're making good returns, so -- but I think it's there. And certainly, your margin to be there as shrunk considerably.

Yes. Yes. I was really intrigued by the comments you made on the last earnings call related to your global equity franchise, and you kind of alluded to some of that in your first response as far as the themes go. But look, clearly, the active equity space for the industry has been really challenged for a long period of time. The appetite for global equities, non-U.S. equities, to your point, is starting to improve a little bit. So let's just double-click in terms of what that means for you guys? How are you positioned to capture that sort of rotation if and when that does start to occur?

So what is interesting just on the sort of non-U.S. track is that we're seeing interest in EAFE product for the first time outside of the United States. And that's more from consultants and institutions who want to reduce their U.S. exposure. But remember, that product was designed for Americans. So those were international funds. But for people who want to increase their allocations globally, but other than the United States, we see a lot of talk going on there. I mean even to the point of talking about putting them on platforms outside the United States, which typically you wouldn't have seen historically.

Europe, there's more interest. Asia, there's more interest. I wish I could tell you it's showing up in U.S. retail flows. It's not yet. Americans are going to be the last people to move offshore. China has begun to attract more interest within Asia, and we think in Europe, and we're seeing it in our own numbers. I wish I could tell you it's strong. It's beginning to become more meaningful, but it's not powerful yet. And Japan, which has already had a pretty strong track record for a couple of years, continues to show interest, even though I don't think the value there justifies it. But I think emerging markets -- look emerging market cycles kick in, in periods of dollar weakness. And I think there's an argument to really focus, particularly in Asia in emerging markets. So we're feeling pretty good about that.

Great.

Also value works better outside the U.S.

Yes. Well, especially, I guess, relative to where U.S. valuations are in the concentration, right? All right. Let's move from maybe the asset class and the kind of product strategies to more of the wrappers in some of the channels. First, I would love to spend a couple of minutes on active ETFs. It's been a big theme for the space. It's been growing rapidly. You guys have been early. I think you're running at about $10 billion in AUM across the...

And we have about 20 strategies. About 60% of that is net new flows to us. I think you've got to net out the rewrappings and the conversions in these numbers, right? Because -- and -- but we do see it as how we will continue to grow in U.S. retail for sure. But we're also seeing interesting appetite in Australia and Taiwan. We have a joint venture we've just announced in Japan with the largest -- the largest digital distributor in Japan for ETFs. So we're actually kind of excited that, that adoption is beginning to catch a bid outside the U.S. in a more meaningful way.

How are you thinking about the product road map here, either conversions or launching new strategies? What's most suitable for an active ETF wrapper where you actually feel like you've got the right to win and really just the wrapper that was the issue. So as you think about the contribution...

So, let me give you a good example. We -- we have done, I think, very well in building our reputation for being the place you go for muni SMAs. It's really resonated with our largest distributors, whether it's Morgan Stanley, Merrill Lynch, UBS and others. It's now gone to the next level down, and it's deepening, mass customization, where we're really able to design more customized benchmarks for people who want exclusions or single states or whatever. We do it on an automated platform that's worked.

And one of the things we got back from the RIAs was you don't have a vehicle, we can't use SMAs for the smaller children accounts that often are a part of this. Our National Muni SMA that we've -- I'm sorry, our National Muni ETF that we've launched this year is a natural complement to those things. So it fits a need. It's speaking to the same client, that's important, and that is resonating with our clients.

In addition, we think it's going to be in more thematic stuff like security of the future, which we've raised $2-point something billion in 1.5 years on, where people are thematically thinking about supply chains and defense and other areas that are really important are ultrashort and sort of short duration fixed income products. Those are areas where we will continue to focus in.

In the United States, in particular, the only places we're going to issue mutual funds going forward, I think, is where there's a particular restriction, which causes us not to think the asset suitable for an ETF vehicle or where like in 401(k) plans where adoption is restricted for silly reasons, but it would really be by exception that you would be using it going forward. But I think it will be a continuing area of innovation for us. And I'm really kind of interested in Asia, having a much bigger potential interest in ETFs than potentially even Europe does.

Great.

And I think part of that's because of digital engagement in Asia is so high.

Got it.

[indiscernible] is more important than it is for the [indiscernible] in Italy and stuff like that.

Yes. That makes sense. One of the -- one of the features I really like about your guys' story is during earnings calls, you guys do take the time to feature different businesses, which I feel like has been always really helpful to spotlight various attributes of the firm. One of the recent ones you talked about was your presence in the defined contribution market, which is a big business for you guys, right? It stands about $105 billion in assets. It seems like sales momentum has been also building quite nicely.

Can you expand on how the recent advisory opinion from the DOL regarding lifetime income and for those who don't know, maybe spend a minute on what that really is? And really just help us think about how you're trying to further commercialize this model because those are also tend to be maybe fee dilutive...

Yes. So let's talk about that because I think it's a complicated sector. Look, as everyone in this room knows, unless you were a municipal or federal employee, you don't have a DB plan for the most part, right? So D.C. is the preponderant non-real estate asset that most people in the United States have. They have to manage it. Most people do not have the skill set and really shouldn't be trying to build an asset allocation and build the underlying verticals of that. And so target dates make enormous sense.

You still need to do changes in them. And just on the side that you didn't raise, target dates, if they really are to serve the purpose, need to go through retirement rather than end at retirement because the last thing, frankly, someone my age 64 wants is to look at their 401(k) plan and notice that it's in cash or near cash holdings. That's a crazy construct when I hopefully have 30 years more of my life to live, right?

That takes -- that takes a fiduciary who's willing to own you as a client through your retirement. So you have a bit of an agency risk in the United States, which, frankly, the Australians and some others have been very good at adapting through building the super funds because there is an institution actually thinking about you. A part of that element that was important is that annuities for most Americans should play a very important part of their retirement because most Americans will outlive their income, right, from their assets.

People overvalue security, people overvalue certainty, annuities give them that capability. Annuities get a bad wrap, maybe fairly historically because we're laden with fees and complexity and you have counterparty risk and everything else. But if you can put them into a target date, price it institutionally rather than for a retail audience with no broker's commission and everything else embedded in it. And frankly, buy those annuities further out, i.e., when you have a much deeper pool of demand to buy those annuities. You might find that it can become a meaningful portion of somebody's retirement pool.

The opinion that the Department of Labor gave us -- gave us a safe harbor from a litigation perspective for a plan sponsor to include that. We've been working on this for 10 years. We were, if not the first amongst of those. You just saw Vanguard announced with TF, a similar kind of structure, BlackRock went into this 2 or 3 years ago in this. I think it will be slow to move because D.C.'s plan sponsors by their nature, are really risk adverse. They're really attendant to costs. And this will take time. And I think those barriers will impact the adoption of private into the 401(k) space of it. That doesn't mean it's not a reasonable home for privates, but it's going to be at a lower cost than it is being sold to retail today because that's just part of the trade-off that's going to get it into these. But frankly, as a public policy matter, it's probably a good home for it, properly sized, properly...

Great. No, it looks like a really interesting opportunity. And to your point, there's been others that try to have these kind of guaranteed decumulation, so having some safe harbor language will be helpful...

The sell process for these kinds of target date and customized target dates can be 2, 3, 5 years. Now we have 2 big ones coming on for next year. We are having more conversations than we've had maybe ever since the advisory opinion because people don't want to be the first ones at the station. And again, I think 10, 15 years from now, you're going to see this as a very significant part of people's retirement that is having an annuity built into the plan itself. It's still very early days, and this sector is slow adopter.

Do you think it's the existing target date firms and people with already big DC footprint that will ultimately be also the winners here and own this? Obviously, it will be good for insurance companies, annuity writers because that's a new sort of TAM for them to go after. But who wins in that market place?

I think it is the existing ones, but the composition is going to change. It's going to be much more passive in the traditional segments. And you're already seeing that, whether it's JPMorgan or others who have adopted to do it. And they'll leave active where they have a more symmetric payoff pattern to having active in it, and private being an example where that, I think will be manifest. So I think it will be the cost of transition is so brutal. And remember, you're not selling necessarily to the Treasurer or the CFO, you're selling it to the human resources group, right? And you're dealing with tens of thousands of retirees and current employees that has a way of sucking up management time. So their appetite to make these changes is incredibly low.

Right. Right. Okay. Well, speaking of private markets, let's talk a little bit about that. So you guys have a target obviously out there. You're aiming to be at about $90 billion to $100 billion in private markets AUM by '27. Clearly on your way there. I think, you're about $80 billion.

I think we're closing in on $90 billion. I think it's a big number.

Right. So it's certainly on your way within the range...

Look, I mentioned that we're going to make that target.

Yes. I think you've said that a couple of times. Even last year, I think you did. So I'm glad you're staying true to your story. No, look, can you talk about the path of going kind of beyond that, right? Like, to your point, you're sort of at target. What's growing quickly? Where do you guys think the next leg of growth is...

Okay. So let me -- I mean, there are a number of pillars. First, let's just go back to Equitable for a moment because they've given us $20 billion, of which I think we have $3-odd billion yet to spend approximately or deploy. But that's not the cap on it. We will have more assets from Equitable next year and the year after as they grow their general account, but also because they're going to move more of their assets to us over time in that space. So whether it's refinancing or other stuff that we will have that opportunity.

So that continues to grow, and they will continue to seed new strategies to the extent it makes sense for them and us to do that. There's things they can do and can't do. But they're there to standby to make that happen.

Secondly, third-party institutional. We've gotten a lot of support this year from consultants, particularly for PCI, which is our middle market lending, which has led us to a number of wins that have been really satisfying for us to get both in the U.S. and elsewhere. But also for CarVal as well. We see that as an important growth factor. Thirdly, third-party insurance. Our insurance vertical, we have, I think, 9 new insurance clients this year, 2 of whom we've done sidecar deals with, and we continue to look at sidecars. That's part of why the flywheel with Equitable works because we rely upon them for the underwriting, the understanding the insurance lending rider risk there.

I don't want to go and outsource that. Someone who -- I want that person align with me because that's the risk I don't understand and don't have the experience with. But that has continued to grow at a pretty good rate. We continue to talk to other parties. Most of whom are not predicated on the sidecar relationship or anything else. That arose from the fact that we merge both Equitable and AB's insurance capabilities, whether it's their general account or what we're doing under one team led by Jeff Cornell, who used to be the CIO of AIG's U.S. business, Corebridge. He's part of a much broader network of AIG people who, by the way, are everywhere. And I think it's given us credibility, whether it's in public markets or private to have a right to win around that table.

So that's been a third important pillar. Private wealth and the broader wealth channel have been growing this year. We were named Interval Fund of the year for CarVal's new -- for it's 2025 Interval Fund, which we're excited to have. The Credit Value Fund VI has launched and up and out. We've seen real demand in Latin America and in the Middle East and Asia port. So I feel that's been a pretty good launch for us. And I guess, finally, as we were just talking about in the retirement space, we absolutely see private credit, in particular, being part of a customized glide path. And we've already started doing that in a couple of -- a couple of our clients mandates, and we've done it outside the U.S. as well.

Yes. So it feels like lots of room beyond this $90 billion to $100 billion...

Yes, I don't know what the number is. I would be disappointed if it wasn't right.

So we spent -- in your answer to some of this, you talked about private credit, and I think it's worthwhile spending just a couple of minutes on that. You guys run a wide range of private credit strategies. Obviously, there's middle market lending, asset-backed finance, I would put real estate lending in the same general account...

Although there are a lot of different flavors of real estate within there.

Totally. But when we sort of zoom out, there's been relative to the actual issue, the number of headlines and like clickbates has been kind of enormous in the last few months related to private credit. Anything on the ground you're seeing that you find worrisome, anything within your portfolios that you'll say, "hey, that's worth paying attention to." And as you kind of survey the landscape and things that you do within private credit, does anything particularly stand out?

Look, I think we'd be -- we'd have our heads in the sand not to acknowledge that there is -- there are many more competitors out there with a lot of capital being thrown around, and terms are weaker than they were 3, 5 years ago. That's just undoubtedly true.

In which part, like when you kind of think of direct lending mostly or where are you...

Principally in direct lending. Lower middle market is still in pretty good shape, but -- because the banks really don't play in that space and the larger private equity firms don't really play in that space on the loan side as much. There are a couple of exceptions. In securitized, you can -- people have been stretching for yield and taking more risk, whether it's in CLOs and BBBs and below. You know that individuals without a social safety net, we're beginning to see deterioration in ABS. We're beginning to see it in non -- in subprime mortgage space and everything else. We've tried to stay away from those areas generally. It doesn't mean we don't occasionally have exposure to them, but they've been really pretty nominal and manifests typically a carve out and opportunistic strategies where we have it.

But I would say to you, when we look at the big blow-ups, they seem to us to be idiosyncratic rather than systematic, some of it because of sloppy underwriting for sure. And we're not immune to it. We have exposure to first brands, but it's an exposure that we've had for 3-plus years. We've been in the warehouse. We've counted our inventory. We didn't lend against receivables. We have the inventory, and we've counted it. We see it. We know it's there. It's going to be a long work out. People are going to attack us, but we're feeling pretty good, and that's been the 13% yielding investment for CarVal for a number of years. And we're pretty comfortable that our clients are going to see their money back from that particular piece of the investment.

But there's stuff out there that we have to be careful. We have to focus not on pushing our people to deploy the money, but to do it in a thoughtful way. And to elevate and raise issues quickly rather than hide them because nothing gets done when you sit on this sort of stuff. You just take action quickly to mitigate it.

Is that starting to impact your conversations with LPs at all in a negative way? Because it feels like LPs are asking questions, but we haven't really seen any material pullback from allocation towards private credit. So any of those concerns propping up or...

Our principal clients are insurers who tend to be more knowledgeable and sophisticated. We haven't seen it yet because we haven't really seen it emanate into those portfolios yet.

Sure.

But it's no question, it's clickbait, as you said, people are talking about it. And I would just say to you, if there are problems emanating there, there are problems emanating in credit markets everywhere, and we just need to manage them. It seems manageable at the moment, but we need to be attuned to it.

Very fair and balanced answer. Let's pivot to maybe P&L for a couple of minutes. I wanted to start with a question around institutional pipeline. You guys, I think, as of the last quarter, were at around $12 billion of wins. I think private credit is probably a decent part of that as well, that will turn off to get deployed. How are you thinking about that flowing into management fees, just the pace of deployment, pace of those mandates closing?

Well, in the RGA, for example, we've funded about 40% of that original sidecar mandate, which would have been in the backlog. We haven't funded the other sidecar, which is $1.5 billion. And there's a third sidecar that Equitable did that is beginning to fund now as well. So it's translating fairly quickly. We see it as sort of the next 12 to 18 months of a lot of that being deployed. Could it stretch out? Sure, but that's sort of where we see it.

We've had pretty good visibility on the fundings to date, particularly where the existing blocks of business rather than where it's there as people are continuing to write new risk. So I don't -- we've won some interesting equity and fixed income, traditional mandates. We have some lumpy, as I mentioned before, customized target date stuff on the pipeline. But I think it's in sort of that region. I mean there's no blockbuster I'm aware of that we haven't really disclosed to the market.

Yes. When we think about the revenue base and the fee rates of the business, you guys have been fairly stating this kind of 38, 39 basis point range. And there's a little bit of a barbell effect, right, because on the one hand, I feel like you guys have a lot of alts that are growing. The retail business seems to be growing and if global equity start to contribute, that's pretty attractive. But then at the same time, like SMAs and some of the lower fee dynamics are also contributing, right? So as you think about the evolution of that fee rate over the next couple of years, knowing what you kind of hope to accomplish from an organic perspective, how does that fee rate evolve?

Well, I think your characterization is correct. We have higher fee privates coming in. We have higher fee public equities going out, although that's tempering a bit. But we're going to have down months, down quarters. It's just how it is, and it's going to be lumpy as it goes. But I would say we think it's a pretty durable fee rate. We can continue to hold in here. But of course, that can change in any given quarter around those numbers. And so we did a little better than we -- in the third quarter than we did in the second quarter. I don't know what we're going to do in the fourth quarter, and that's that, but I think it's pretty durable.

Yes. Great.

And also remember, performance fees and derivative fees we make, I'm sure none of that fits into our base fee ratio, that's separate and apart.

Yes. Well, and the performance fee angle had a really nice story for the last couple of years...

It has. I mean we benefited last year...

That was a pretty strong fourth. But yes, great. All right. So to just maybe wrap it up, a question on profitability. I know that's been obviously a focus for you guys for the last couple of years, given some of the action steps you've made, also the divestiture of the research platform. So there's a few things that have come together to now kind of having this 33%, 34% overall operating margin. I think this year is actually tracking a little bit below what the target was in the beginning of the year marginally so...

No, I don't think so. I think it is sort of where we said.

I was looking at like 40 bps, but call it rounding. I know...

I think we're pretty close...

Basis point here and there...

Okay. So -- but I guess if you think about similar to fee rate, sort of the evolution of the business and where you're allocating your resources, how much runway do you still see in the operating leverage in the franchise and what drives that?

Ignoring markets.

Right. Because that's really the principal that's driving the market.

Look, I think the positives that we have working for us is pretty strong noncomp expense control. Two, we've made a big investment in building out India as a platform for us, and we're hopeful that frankly, we're going to move much of our new hiring offshore from the U.S. and minimize hiring here. That will take some time to show, but I think it's there. Thirdly, we will continue to be pushing private alts pretty aggressively, and we have a pretty good pipeline of visibility to new opportunities there.

So I think we feel pretty comfortable in this margin range right now. Private wealth is a lower-margin business. It's a gem of a business. And it's -- it's less than 20% of our assets. It's 1/3 of our revenue. It's an important part of the business, and we want to grow it. You're asking me where I want to spend time. We are not going to participate in auctions for RIAs. I just -- I can't make the math work. But I think there are going to be real opportunities there, and we're going to continue to accelerate the growth of organic hiring in the business, but we've been looking a lot at RIAs as an area for us.

I think if we really had a market correction and it's sustained for a while, you've got to get people off their anchor of the valuation what the buyout firms paid for these things, because I just don't understand how the math works absent markets continuing to grow. I just -- I'm boggled by it.

Yes. And I think you and many others as well. Great. Well, we're actually right at time. So with that, thanks so much...

Thank you.

Great to see you as always.

And you...

I can't promise you a different venue next year, but I hope you're still here...

Thank you.

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” TD Cowen

” Bank of America

” Goldman Sachs

” Jefferies

” Barclays

Thank you for standing by, and welcome to the AllianceBernstein Third Quarter 2025 Earnings Review. As a reminder, this conference call is being recorded and will be available for replay on our website shortly after the conclusion of this call.

I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB, Mr. Ioanis Jorgali. Please go ahead.

Good morning, everyone, and welcome to our third quarter 2025 earnings review. This conference call is being webcast and accompanied by a slide presentation that's posted in the Investor Relations section of our website, www.alliancebernstein.com.

With us today to discuss the company's results for the quarter are Seth Bernstein, President and CEO; and Tom Simeone, CFO. Onur Erzan, Head of Global Client Group and Private Wealth, will join us for questions after our prepared remarks.

Some of the information we will present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. I would like to point out the safe harbor language on Slide 2 of our presentation. You can also find our safe harbor language in the MD&A of our 10-Q, which we filed this morning. We base our distribution to unitholders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results.

Our standard GAAP reporting and a reconciliation of GAAP to adjusted results are in our presentation appendix, press release and our 10-Q. Under Regulation FD, management may only address questions of material nature from the investment community in a public forum, so please ask all such questions during this call.

Now I'll turn it over to Seth.

Good morning, and thank you for joining us today. I am delighted to update you on our progress against our goals for AllianceBernstein. Harnessing our diversified investment expertise and deep distribution capabilities, we remain steadfast in our commitment to providing better outcomes for our clients.

On Slide 3, I will review the key business highlights of the third quarter. First, firm-wide assets under management have reached a new milestone, sitting at $860 billion as of quarter end. Bernstein Private Wealth has reached a record high of $153 billion, bolstering relationships within the ultra-high net worth client segment, including wealth creators, family offices, global families and business owners.

Our institutional asset management business with $351 billion in AUM caters to long-duration capital pools encompassing private markets, insurance general account assets and customized retirement plans. Our $356 billion retail platform serves robust markets like Asia Pacific and U.S. high net worth, offering secularly growing solutions such as SMAs, active ETFs and model portfolios spanning a diverse asset allocation. Through scale, improved operating leverage and a sustainable fee structure, we are driving consistent growth in revenues, earnings and margins, capturing profitable growth aligned with market dynamics.

Second, flow dynamics improved in the third quarter. Excluding $4 billion of outflows related to the previously announced Equitable RGA reinsurance deal, our firm-wide net flows were $1.7 billion positive. Demand was led by 2 secularly growing asset classes and consistent organic growth engines for AB, tax-exempt fixed income and private alternatives.

In the third quarter, we had over $4 billion tax-exempt inflows, extending our streak of positive organic growth to 11 consecutive quarters. This quarter saw accelerated inflows from both retail and private wealth. AB is the #1 retail muni SMA manager. We grew our tax-exempt platform to more than $50 billion of AUM despite a very turbulent macro backdrop for muni bonds. Private markets generated nearly $3 billion of net inflows, reflecting an improved backdrop for commercial real estate, coupled with strong origination for investment-grade corporate and ABS private placements.

While active equities shed over $6 billion, driven by growth-oriented redemptions, we're seeing inflows in structured and defensive strategies such as our global structured equities, strategic core and U.S. Select. Additionally, thematic investments such as Security of the Future and our disruptors ETF, ticker FWD continue to attract strong inflows and deliver relative outperformance.

Net taxable outflows of approximately $4 billion were largely episodic. Excluding the impact from the reinsurance transaction, firm-wide taxable flows were flat, reflecting improved retail and private wealth dynamics where we observed modest inflows.

Thirdly, we continue to enhance our third-party insurance asset management business, drawing on our extensive 40-plus years of experience in managing insurance assets. We're excited to announce our new partnership with Fortitude and strategic investment in FCA Re. This represents another major milestone in our ongoing efforts to expand our leadership in global insurance asset management.

Leveraging our prominent competitive position in the Asia Pacific market, we're gaining further traction as a partner of choice for insurers in the region. Looking ahead, we're eager to expand our collaboration with Fortitude through this partnership. Year-to-date, we've successfully onboarded 7 new insurance GA relationships spanning across 8 strategies. These partnerships necessitate a high-touch client service approach that goes beyond traditional asset management. We've dedicated substantial operational resources and institutional expertise to provide a comprehensive client experience that is scalable, unlocking additional revenue streams beyond management fees.

Our strategic alliance with Equitable gives us a competitive advantage, reinforcing our client-centric asset-light approach. By leveraging the permanent capital commitment from Equitable, we can seed and scale our higher fee, longer-dated private alternative strategies. To date, we've deployed approximately $17 billion of the $20 billion capital commitment made by Equitable to our AB private market strategies. We see further opportunity to increase this allocation over time as Equitable continues to grow its general account assets.

Skipping to Slide 5, I'll review our investment performance, starting with fixed income. In the U.S., a weakening labor market and better than feared inflation readings raised the possibility of rate cuts, pushing yields lower. Conversely, European and Japanese sovereign yields increased due to concerns over government stability, increased fiscal spending and the conclusion of the European Central Bank's rate cutting cycle. Credit markets performed well with investment-grade corporate spreads tightening and risk on sentiment for high-yield bonds. The Bloomberg U.S. Aggregate Bond Index returned 2%, while the Hedge Global High Yield Index returned 2.7% in the third quarter.

Our 1-year performance faced challenges due to selection in emerging markets high-yield corporates and yield curve positioning, which detracted from our returns as longer yields fluctuated, ultimately ending lower. 30% of our fixed income assets outperformed over the 1-year period. Despite rates volatility, active management of duration and credit exposure has generated strong long-term returns with 86% and 70% of AUM outperforming over the 3- and 5-year periods, respectively.

Our flagship income strategies, American Income and Global High Yield delivered high single-digit and low double-digit returns over the 3-year period. Both outperforming their Morningstar categories for that period. Notably, we observed a rebound in client flows into American income, reflecting resurgent interest in duration extension and U.S. dollar-denominated assets, highlighting the enduring appeal of U.S. assets supported by attractive rate differentials and deep capital markets. Looking ahead, we maintain a positive outlook on fixed income, and we stand ready to capture the next reallocation wave as bonds regain their diversification value, credit fundamentals remain robust and monetary policy clarity increases.

Turning to equities. U.S. equity markets delivered strong returns in the third quarter of 2025, benefiting from the resilient consumer spending, benign inflation readings and strong GDP and corporate earnings growth. The S&P 500 returned 8.1% during the quarter, reaching record highs. Small-cap stocks outperformed large caps, driving a 12.4% returns for the Russell 2000 in Q3. Global developed equities posted positive returns, although they underperformed the U.S., while emerging markets outperformed.

Signs of improving market breadth are encouraging, but it's important to note that the recent rally was primarily driven by lower quality, unprofitable, high momentum and heavily shorted names. Given our limited exposure to these equity baskets, our relative performance was affected with 22% of assets outperforming over the 1 year, 41% over the 3-year and 53% of our equity AUM outperforming over the 5-year. Despite these dynamics weighing on the relative performance across the active industry, our client discussions regarding our decisions to underweight in these riskier names have been positive. Our investment philosophy centered around an active approach to quality investing continues to resonate with those seeking such strategies.

Finally, I want to highlight the growing interest in international equities, where we have a diverse selection of active equity strategies with strong breadth and high-quality product offerings, balanced across geographies. These include our international strategic equities, international Small Cap, international value, emerging market strategic Core, China and emerging markets value.

Next, I'll briefly cover channel highlights before doing a deeper dive into our retirement and private alternatives capabilities. Turning to Slide 6 with our retail highlights. Despite facing channel outflows for the second consecutive quarter, we observed a notable uptick in momentum, driven primarily by active fixed income. Sentiment around taxable fixed income has improved as rates volatility stabilized. Taxable net flows rebounded slightly in the third quarter, driven by our fixed income ETF platform in the U.S. and improving demand for our American income product in Asia.

Furthermore, our tax-exempt retail inflows reaccelerated, growing organically at an impressive 26% annualized rate. We think the bond reallocation theme has more runway, and we stand ready to assist our clients in capturing the enduring value proposition of fixed income as we effectively demonstrated in 2024.

Moving on to Slide 7 to cover our institutional channel. Our private alternative services are experiencing significant inflows with a range of existing, adjacent and new strategies in illiquid credit, attracting substantial investments from equitable and third-party institutions. Our pipeline AUM currently sits at around $12 billion, showcasing notable fundings in both liquid and illiquid credit as well as active and passive equities. We anticipate an additional $1.5 billion in private markets AUM in the upcoming quarters, a figure not yet accounted for in our pipeline.

Next, I'll move to Slide 8 to cover private wealth. Through a blend of flexibility, insight and personal attention, Bernstein Private Wealth continues to gain market share in the ultra-high net worth channel. Our private wealth channel delivered strong sales and the highest inflows in 10 quarters, reflecting strong adviser productivity and cross-asset client allocations. Bernstein Private Wealth represents 18% of our firm-wide assets with average client tenures more than 10 years, generating approximately 36% of our firm-wide revenues.

Moving to Slide 9. I'd like to talk about how AB is helping clients navigate one of their most important financial objectives, retiring with confidence. The retirement landscape has evolved a lot over the years. There are fewer younger workers to care for our aging populations and with longer lifespans, the savings challenge is even greater. The shift from defined benefit to defined contribution plans is reshaping the way people prepare for their golden years. More than ever, the burden is on individuals to save on their own and choose their own investments. Getting it wrong could leave them without the reliable income stream and retirement last that EB plans once provided.

Innovation has played a pivotal role in addressing the evolving trends and challenges in retirement planning. Target date funds became very popular after the passage of the Pension Protection Act of 2006. It was a meaningful step in improving retirement outcomes, and it relieved individuals from the burden of having to make complex asset allocation decisions that they weren't trained to do. But markets have become increasingly complex, and we did continue to innovate by customizing target date funds at the plan and participant level and incorporating a broader set of asset classes, including private assets and insurance solutions that provide guaranteed lifetime income.

AB's custom target date business was launched in 2006. Today, about 2 decades later, it stands at approximately $105 billion in assets under management across 27 global clients, mostly concentrated in the U.S., but also with a meaningful business in the U.K., where we've been an industry leader for well over 10 years. We've seen more custom target date searches this year, and we're pleased to have been selected recently to design and manage a custom target date solution for a large U.S. insurance company's DC plan. It's the second mandate we've won this year. Combined, they totaled nearly $4 billion and both will be implemented in the first half of 2026. Additionally, we were selected earlier this year to run a custom and retirement solution for one of the largest DC Master Trust in the U.K., which is expected to grow to significant scale over time.

In collaboration with Equitable, we were first movers in the in-plan lifetime income market. Our industry-leading lifetime income strategy, also known as LIS, manages $13.5 billion of total assets and $5 billion of that is guaranteed by 5 insurance companies. LIS gives DC plan participants a personalized target date portfolio with a flexible guaranteed income option, addressing both their accumulation and deaccumulation needs. When we first launched LIS in 2012, we designed it to comply with QDIA regulations so that it could be a true default option for DC plans. Our team's foresight proved invaluable.

On September 23, an advisory opinion from the U.S. Department of Labor affirmed that DC plan sponsors can benefit from ERISA's fiduciary safe harbor when they select AB's LIS program. This endorsement validates our approach and offers further reassurance to plan sponsors. The guidance significantly reduces regulatory uncertainty and shields our plan sponsor clients from potential litigation risks. That empowers them to focus on what really matters, solving for the best outcome for their participants. In fact, participants in our multi-insurer secured income portfolio have both guaranteed income for life and net of fee returns that have exceeded the typical target date fund benchmark since inception.

Our design allows us to take on higher equity exposure and has delivered returns that have offset the cost of the insurance. We continue to expand our lifetime income platform to provide choice to plan sponsors. This includes the option to add lifetime income without changing their current target date provider and a new fixed annuity version of the SAB secured income portfolio. Combining the recent DOL advisory opinion with our 13-year track record, expanded lifetime income solutions platform and ongoing integrations of additional recordkeepers, we are well positioned to benefit as interest in these solutions continues to grow.

Expanding access to private assets and DC plans is another area where AB's innovation has already been addressing the need for more diversification and new return sources. We believe that incorporating private assets and target date funds can help deliver long-term results while also minimizing downside risks for participants. We've been doing this for a decade now in both the U.S. and the U.K. We've embedded private assets into glide paths for many of our clients. This includes both corporate and public plans and spans private market segments such as private equity, private credit and private real estate.

Finally, I'd like to close with Slide 10, which highlights our private market capabilities and our strong growth in this platform. Over the past decade, we've successfully expanded our private markets platform to nearly $80 billion in fee-paying and fee-eligible assets under management, representing a 17% year-over-year growth. We focused on credit-oriented strategies, offering diverse capabilities tailored to various risk, return and portfolio objectives.

AB Private Credit Investors, or APPCI, our $22 billion middle market direct lending platform has a 17-year track record investing in directly originated privately negotiated loans to core middle market companies, offering a variety of solutions to institutional, insurance and individual investor clients. AB CarVal, our $20 billion global asset-based credit platform has a 38-year track record specializing in consumer, real estate, aviation and energy transition opportunities, investing across drawdown, evergreen and interval funds and across the capital structure from investment-grade private credit through opportunistic investing.

U.S. and European commercial real estate lending, our $12 billion commercial real estate lending platform invests across property type and business plan in the U.S. and Europe, spanning multiple risk return profiles with fund, REIT and SMA offerings. Corporate and structured private placements, our $18 billion platform offers a differentiated relative value orientation to complement investment-grade portfolios.

In addition to continued organic growth in this business, the private credit markets continue to scale and diversify, we're actively exploring strategic partnerships and lift-outs to further expand our capabilities. For instance, our structured private placement team, we onboarded approximately 1 year ago and already manages more than $2 billion in AUM. More recently, we added a correspondent residential mortgage team to expand the origination capabilities of our existing residential mortgage platform.

Our relationship with Equitable provides us with significant competitive advantage as we expand our private markets business. We continue to scale existing and develop new solutions in partnership with Equitable, leveraging our existing investment teams such as residential mortgages, NAV lending and private investment-grade asset-backed finance. These solutions are also core to our offering to other insurance and institutional clients, helping drive diversified growth in our private markets franchise. Our ability to provide borrowers with a range of solutions across the cost of capital spectrum and match those investment opportunities to the various risk reward profiles of our diversified client base is a competitive advantage. With strong momentum in the business, we're confident that we'll achieve our target of $90 billion to $100 billion of assets under management by 2027.

Now I'll pass it to Tom to cover our financial results.

Thank you, Seth. We are pleased to report strong financial performance in the third quarter, reflecting growth in asset management fees driven by record AUM and focused expense discipline. Adjusted earnings for the third quarter came in at $0.86 per unit, representing a 12% increase compared to the prior year. Distributions grew uniformly with EPU as we distribute 100% of our adjusted earnings to unitholders.

On Slide 11, we present our adjusted results, which exclude certain items not considered part of our core operating business. For a detailed reconciliation of GAAP and adjusted financials, please refer to our presentation appendix or 10-Q. In the third quarter, net revenues reached $885 million, a 5% increase compared to the prior year. Base fees grew 5% year-over-year, in line with net revenues. Total performance fees of approximately $20 million decreased by $6 million. Dividend and interest revenue, along with broker-dealer-related interest expense declined compared to the prior year, reflecting lower cash and margin balances within private wealth. Investment gains totaled $8 million, while other revenues were flat versus the prior year.

Moving to expenses. Our third quarter total adjusted operating expenses were roughly flat at $582 million compared to the prior year. In the third quarter, total compensation and benefits expenses amounted to $439 million, representing a 6% increase in absolute dollar terms compared to the previous year. This was due to a 48.5% compensation ratio of adjusted net revenues, slightly higher than the 48% ratio reported last year.

We expect our fourth quarter 2025 compensation to revenue ratio will remain at 48.5%. We see potential upside if markets remain supportive for the remainder of the year. Compared to the previous year, third quarter promotion and servicing costs remained stable, while general and administrative expenses decreased by 17% year-over-year. This reduction was primarily due to lower professional fees and the onetime accelerated lease expense of around $12 million in the third quarter of 2024. Year-to-date, our non-compensation expenses are approximately $437 million, tracking better than our revised full year guidance range of $600 million to $620 million for 2025. As a result of expense discipline and enhanced operational efficiency, we are again lowering our non-compensation expense projection to fall within $600 million to $610 million for the full year, anticipating a tick up in the fourth quarter of 2025. As a reminder, promotion and servicing accounts for roughly 20% to 25% of non-comp expenses and G&A for 75% to 80%

Third quarter interest on borrowings decreased by roughly $1 million versus the prior year due to lower cost of debt and lower debt balances. We have not funded our commitment to the Ruby Re sidecar, which we now expect will be called in 2026. In the meantime, we are pleased with the progress of the partnership and look forward to further advancing our collaboration with RGA. ABLP's effective tax rate was 6% in the third quarter, in line with our full year guidance of 6% to 7%. Our operating income of $303 million is up 15% versus the prior year, reflecting strong margin expansion of 290 basis points. Over the last 3 years, operating income has grown at a 13% CAGR, reflecting 7% growth in revenues, excluding Bernstein Research. While markets have been a tailwind to equity-driven revenues, that has not necessarily been the case for fixed income markets. We have managed to grow our liquid and private credit platforms largely organically, capitalizing on our strategic relationship with Equitable.

At the same time, we have delivered on initiatives such as the Bernstein Research deconsolidation and the real estate relocation strategy to further enhance profitability and boost margins. Transitioning to Slide 12, I'll cover the trajectory of our firm-wide base fee rate, net of distribution expenses. In the third quarter of 2025, our firm-wide fee rate increased to 38.9 basis points versus 38.7 bps in the prior quarter. The sequential shift in AUM was supportive in 3Q as equity markets outpaced fixed income returns. Average active equity AUM made up 32.8% of firm-wide AUM in the third quarter versus 32.3% in the prior quarter, but this is below the prior year's 34%, reflecting a negative year-on-year mix. Partially offsetting market dynamics, quarterly flows and FX dynamics were less supportive to our firm-wide fee rate. We observed outflows from higher fee retail services alongside organic growth in lower fee categories such as SMAs, ETFs and retirement.

We continue to grow our private markets capabilities, which has also been supportive against the industry-wide fee rate pressures. Our historical track record demonstrates a relatively durable fee rate with our regional sales mix and strategic growth initiatives helping to partially mitigate industry-wide fee erosion. Over the past 5 years, our base fee rate has generally fluctuated between 39 and 40 basis points, reflecting relative stability versus the industry.

Our all-in fee rate, including performance fees, has ticked higher over time, reflecting the growth in our private markets AUM. We are making significant strides in tapping into secularly growing long-duration capital pools that we can scale rapidly, leveraging our partnership with Equitable and our unique distribution capabilities. We remain enthusiastic about the value we bring to our clients and shareholders by focusing on scalable long-duration assets that align with our commitment to sustainable organic growth and long-term profitability rather than solely concentrating on fee rates. Slide 13 offers a breakdown of our performance fees across private and public strategies. Third quarter performance-related fees totaled approximately $20 million with nearly $18 million generated through our direct lending platform within private wealth and approximately $2 million from institutional services, both public and private. In the fourth quarter, we expect an additional $35 million to $40 million in private market performance fees, reflecting modest upside from AB CarVal's strong performance, coupled with an improved real estate backdrop for our CRE debt services.

Strong year-to-date public markets have also increased the likelihood of upside from public market strategies that could potentially crystallize in the fourth quarter, assuming stable markets. Therefore, we expect an additional $5 million to $25 million from public performance fees. All in, we are raising our full year performance fee guide to $130 million to $155 million in total performance fees from our prior guide of $110 million to $130 million.

As you can see, the range of potential outcome will largely be driven by our public market strategies. Assuming flat markets, we view our guide as a floor rather than a ceiling, although we caution that the prior year's upside was largely driven by sector-specific windfalls in select public strategies. Although public beta is volatile and difficult to predict, our public alternative strategies improve our market leverage profile and provide additional upside in strong markets. This complements our more dependable private market performance fees, creating an attractive performance fee stream for our business.

Turning to Slide 14. As previously mentioned, the adjusted operating margin rose to 34.2% in the third quarter, a 209 basis point increase from the prior year. As a result of favorable market conditions and improved operational efficiency, our year-to-date adjusted margin of 33.4% stands above our market-neutral forecast of 33%. We are pleased with the progress we have made to enhance margins, currently exceeding the midpoint of our Investor Day target.

As we have successfully executed on our major market-neutral initiatives to boost margins, including the successful completion of the Bernstein Research deconsolidation and the North America relocation strategy, we see market performance and scalability as the primary drivers for future margin expansion. Our strategic focus includes allocating resources to targeted growth initiatives like adding investment teams, new product launches and marketing efforts, which are aimed at delivering enhanced earnings over time. While we continue to be disciplined on expenses, we are committed to investing in growth to create lasting value for our unitholders. We expect our ongoing allocation of resources to targeted growth initiatives such as new teams and products to drive organic growth and sustainable profitability over the long term.

Before we proceed to the Q&A session, I want to express my sincere appreciation to all my colleagues for their continued contributions and commitment. We are steadfast in our goal to efficiently allocate capital, create value for our clients, investors, employees and stakeholders by simultaneously diversifying and expanding our business.

With that, we are pleased to answer your questions. Operator?

[Operator Instructions. ] Our first question will come from Bill Katz from TD Cowen.

I apologize, my voice is dealing with a bit of a horse situation here. Maybe starting on the insurance opportunity. I was wondering if you could flesh out maybe how the economic opportunity would sit with the opportunity with Carlyle. Then I think you mentioned in your commentary that the Ruby Re might get extended out to 2026. I was wondering, is that a delay? What might be driving that?

Bill, let me take that. Yes, we are very excited about the continued momentum in our insurance asset management business. FCA Re is our second side card investment to build on that positive experience we had with Ruby Re. Everything is going as planned with Ruby Re. We are pleased with the results to-date. It's in line with our IRR expectations. The relationship with RGA is off to a phenomenal start with all of the IMAs in place, and we already started deploying capital in all of the IMAs we have across multiple private alts mandates. All-in-all, no issues with the sidecar expectations, performance as well as our RGA relationship. That is obviously independent of the sidecar given we manage assets for the IGA balance sheet.

On the FCA Re, obviously, Carlyle is one of the investors with Fortitude as well as a number of Asian insurance companies. We really like that sidecar and it's additive to Ruby Re because Ruby Re is in the asset-intensive space, primarily U.S. liabilities versus FCA Re takes us to a very attractive Asian insurance market. It's also quite synergistic with our broader Asia strategy. All-in-all, in terms of our insurance strategy with 7 new clients in GA and 25 in general account relationships with 8 new mandates and with 2 successful sidecar investments, we believe we are on track.

Bill, it's Seth, and I hope you're feeling better. Just to clarify, the timing of the funding on RGA hasn't changed. It was always going to be deferred. I mean, it was always scheduled to be over this period. I don't think there's any delay of any sort to note.

Just maybe the second question. It just seems like a lot of attention around the opportunity in private credit. I was wondering if you could speak to just a couple of different facets. Maybe what you're seeing in terms of credit quality. It seems to be quite a quick fluffle out there, which doesn't seem logical to us, but nonetheless. And I was wondering if you could also help us understand what the rate sensitivity might be to the extent that forward rates come down and how we might think about Part 1 fees into 2026?

Well, let me start and whether it makes sense or not, Tom should jump in if I missed part of the answer. As we look at our various private credit teams, we see pretty competitive environment, pretty aggressive bidding for transactions across different asset classes with maybe the exception of commercial real estate, which, as you know, has been out of favor for a while, although we do see more and more opportunities there.

I'd also say that we do believe these are one-off transactions and don't -- issues and don't suggest a broader material deterioration in credit quality. The economy continues to be fairly robust, albeit slowing. The maturities that many of our counterparties are facing are manageable and their cash flow generation is positive. On balance, we think we're in pretty good shape.

With respect to First Brands, which is one of the names you did mention, we do have exposure there, and we think we're pretty well protected, given that ours was an inventory financing vehicle rather than funding receivables. We have a perfected interest. Look, there's -- time is going to tell, but we feel at this point, given the discussions we've had with all parties, we're sitting in a pretty good place. All-in-all, we feel that they're continuing to grow. There will be deterioration in credits more broadly, and there will be individual names where fraud and other issues do arise, but we're not in any way shaken or disturbed by the course of the market.

Yes. I think the only thing I'd add there, Seth, is as rates decline, that may have an impact on our ability to generate performance fees.

Our next question comes from Craig Siegenthaler from Bank of America.

My question is on your Asia business and what you're seeing and hearing from investors in the region. Following liberation day in the trade conflict in the first half of the year, how have investors in Asia reacted to that? Have you seen any demand rotations from U.S. to Asia product or from U.S. to global product?

Craig, let me take that question. To answer specifically for AllianceBernstein, actually, in the third quarter, we definitely saw improvement in our Asia business, particularly in taxable fixed income. We continue to see strong engagement from institutional clients as well. All-in-all, despite the noise from tariffs, some of the debasement of the U.S. dollar, we have not experienced any major impact on our business. But in our travels, anecdotally, clients talk more about getting exposure to other currencies and diversifying more into global and international equities.

Also, let me emphasize that our equities platform is a global platform. Although, we are a U.S.-headquartered global asset manager, our equity strategies are global. We have international strategies. We have regional strategies. We have global strategies. We are not necessarily at a disadvantage if there is a rotation away on a tactical basis or a structural basis from U.S. equities into international or global.

In our case, I think the pressure has been primarily in our large-cap growth product, and that is isolated in Japan. Obviously, as you know, we have delivered very impressive performance in Japan through that product over many, many quarters. I think it's natural to see some slowdown at some point. I believe that is a much more product-specific trend as opposed to a broader structural or systemic risk for our business.

Craig, I would just add that we have on the ground fundamental research capabilities in China and in broader Asia. And we are seeing more and more inquiries for those strategies, principally from outside the U.S., but that interest is there and growing. I would also say just back on the institutional point in Asia, we are continuing to see demand institutionally for U.S. fixed income.

For my follow-up, I just wanted some clarifications on the strategic partnership with Fortitude Carlyle Asia REIT. How much capital do you invest in that sidecar? Where do those funds come from? Then I think you plan to manage private and liquid credit for Fortitude Carlyle Asia's general accounts. Is that right? What is the AUM potential?

Yes. Let me start with the AUM and the asset class and then Tom can add on the financing implications, etc. In terms of the relationship, this is to manage assets for the sidecar itself. It is predominantly private credit. We expect that to be around $1.5 billion across multiple private credit strategies. So that has a lot of similarities to Ruby Re, but there are 2 differences with Ruby Re. Number one, this is for the sidecar itself. Then in terms of the AUM lift, AUM lift here is going to be even greater when all the capital is called and deployed.

In terms of financing of these sidecars, I also want to highlight the funding of the equity typically takes time. Let me hand it over to Tom to talk about the timing and the capital implications.

Yes. The commitment to FCA is $100 million. We plan to fund that in '26 or '27, when called. There's a couple of levers or a few levers rather that we have available to us to fund it. We can -- we're very underlevered. We have credit lines available to us. Then we have units through 2 avenues, either public units or private units with Equitable. We'll evaluate the best course forward when we get there.

Also to remind our investors, and we talked about it when we made the original Ruby Reinvestment. When we think about the economics of these deals, the economics come from 2 different parts, right? Number one is on the equity investment, we generate earnings. Typically, these sidecars are modeled to deliver mid-single digit -- sorry, mid-teens 15% IRR. And so that is one stream of income.

Then in addition to that 15% on average IRR, you get the downstream economics on the assets you manage with relatively long-term IMAs, and those IMAs tend to be very much focused on private credit. Pretty sticky assets, relatively high fee. As a result, it should be accretive to our revenue base and earnings on multiple dimensions.

Our next question comes from Alex Blostein from Goldman Sachs.

This is Anthony on for Alex. I wanted to touch on the margin and kind of expense growth trajectory as we look out into the outer couple of years. You guys are tracking ahead of your target for this year, and I appreciate the expense guide, but as we look out for the next couple of years, how should we think about the pace of margin expansion and non-comp expense growth?

Anthony, Look, I'm going to anchor back to Investor Day in 2023. We had a long-term target of 30% to 35% operating margin. There were 2 big anchors to achieving that at that point in time. It was the BRS divestiture as well as the relocation and consolidation strategy in the U.S. We've achieved those. We're currently at the midpoint. We're going to hit our 33% margin target for 2025. From there, there's no other stories or big stories to share with you on the expense side. We don't have anything of that size that's going to impact our expenses or be able to bring them down as those 2 that I just mentioned. We continue to look for a lot of small wins, just as evidenced by our decrease -- our second decrease actually this year in our non-comp controllable expenses. We're going to continue to look at items like that, but there's nothing more I can share with you related to that at this point.

Maybe for my follow-up, just on the buyback, it was pretty light this quarter, and I'm not sure if that had to do with the Equitable conversion. How should we think about the capital allocation strategy, specifically around buybacks or maybe any potential inorganic opportunities?

Yes. The light buyback this quarter had nothing to do with Equitable. We do buy units back and retire them, as you're aware, for our deferred compensation plan. We probably have another $30 million to $35 million left to go this year to fund that. I think it's just timing. I did read your note this morning. I just think it's a matter of timing. I think your number was pretty close, but we only captured roughly $4 million of that in Q3 versus what you had.

Our next question comes from Dan Fannon from Jefferies.

Seth, I think you said the bond reallocation that's underway. I wanted you to elaborate a bit on those comments. Then as you look at your performance in the products you have, do you think you're positioned to benefit materially from that reallocation if and when that occurs?

Thanks, Dan. We continue to see, particularly in Asia, appetite remaining for taxable fixed income. While it's not at -- the gross sales are not at the levels they were prior to April, they are recovering, and we feel good about the trajectory there.

From a relative performance perspective in our flagship products, we're doing fine. That's -- we could always do better, but I feel that, that's not a hurdle to us gaining our share or better given our very strong distribution capabilities within the region. Additionally, we continue to look at new strategies to deploy in the region. When I look back in the U.S., we -- look, we've had tremendous success in the tax-exempt SMA space. We think we're the largest player now in it, and we continue to see increasing adoption for our customized -- mass customized solutions in a number of the key distributors and receptivity continues to grow as we innovate and develop more products.

Look, I think that the short-term performance in the third quarter wasn't as good just given a couple of call-outs that I mentioned earlier on in emerging markets credit and given just the volatility and duration, but we're feeling good about performance and the quality of the team and the discipline of their process. Dan, I think it's in good shape, but there's always going to be volatility from quarter-to-quarter.

Let me add a few specific points. As Seth mentioned, per Morningstar, we are the #1 retail muni SMA manager based on net flows, so we definitely continue to capture market share. In the third quarter, our annualized organic growth rate was, I think, around 26%, so very strong results there.

Second, in terms of broadening from U.S. fixed income to global fixed income, as a proof point of that, we had a $0.5 billion global credit win in the third quarter in publics. That's definitely demonstrating that we can also play on the global bond transition. Then finally, given the growth of our ETF franchise, we have additional ways to participate in the fixed income flows from different channels. I'm very pleased that as of October, our ETF platform exceeded $10 billion. And right now, the run rate flows on a monthly basis typically exceeds $250 million, and we had multiple more than 8 ETFs in the third quarter that delivered more than $50 million in net flows. So overall, I feel, given we have a relatively modest market share in many of these client segments with new vehicles, with the broad platform, we have a long way to achieve further upside.

I guess just the final point. The long-term performance is quite strong for those services. Yes, we feel good with where we are. I hope that answers your question.

Then, Tom, just a question on expenses, just given the outperformance on the non-comp year-to-date. Can you just talk about what's been the biggest variance between the initial guidance you gave to start the year and where we sit today going into the fourth quarter?

Yes. It was really driven largely by the events of April and Q2. So we took on a couple of cost containment initiatives in Q2, and then the businesses have been delivering on those savings ever since.

Our next question comes from John Dunn from Evercore.

You guys mentioned some area of equities like structured equities, strategic core thematic. Can you kind of highlight the profile of the investors who are putting money to work there?

Sure, John. Onur again. Yes, let me comment on that. In terms of the structured equity, it is large Asian institutional. In terms of thematic products, healthcare has been more Europe, large European high net worth. In terms of some of the thematic product like security of the future, we have a strong partnership with a large global private bank that has been the driver of that. So pretty global. It's well balanced between institutional and retail and geographically.

Then maybe just on the pipeline, like the outlook for getting it back to closer to where it had been last quarter and then the composition as well?

Sure. Yes, sure. Look, at the end, I mean, pipeline -- I mean, the good news is we have been deploying at very fast speed. Eventually, you want to deploy so you can start generating revenue and assets. We are very pleased that we are deploying. Although on a net basis, the pipeline came down given the deployments and the RGA dynamics, but ultimately, we added $3 billion to the pipeline. It has been a strong quarter from that perspective.

The other thing to highlight is we don't basically get full credit for leverage on different products, which are fee earning. Some of our competitors get credit on that leverage, including net flows, etc., so I wouldn't also ignore the fact that we have $15 billion dry powder, including leverage in our private credit platform. That will also continue to flow in, and that's greater than our pipeline numbers. All in all, it's hard to promise a specific pipeline number. We are focused on deploying capital, generating revenue fast, and we are on track also with the build-out of our private credit platform, given we are almost at $80 billion relative to our $90 billion to $100 billion '27 goal.

I would just add that FCA is not included in that pipeline yet. We continue to see good search activity. But I would just also remind everybody that when we win some of these larger customized retirement solutions, they tend to be quite lumpy in the way that they impact the pipeline. They're hard to predict, but there is activity in that space.

Our next question comes from Benjamin Budish from Barclays.

Maybe just first on the private markets fees, you spent some time talking about what's going on in the public side. Curious on the private side, in the slides, you always emphasize that the majority comes from AB PCI. I would think that should be somewhat more predictable. Just curious what else -- I think the guidance came up a little over $10 million for the full year. Just curious what else changed on the private side? And could you maybe touch on the sort of sensitivity to rates? I would assume a lot of that is floating rate debt. Just curious if you could frame that up?

Yes, Ben, it's Tom. I agree, PCI is very stable and dependable, consistent performer. We get to crystallize those as we go throughout the year each quarter. Some of the other products don't crystallize until year-end, so they've got a little bit more variability to it. During the year, we've also got some performance fees. I'm just trying to see if -- yes, we've got some performance fees in commercial real estate and CarVal in our forecast as well, Ben.

Maybe just following up on a separate topic, the target date discussion from earlier. Just curious if you could unpack a little bit for the partners where you are allocating to private and custom funds, what do the allocations look like? What are the fee rate implications? And are there any -- are they custom enough such that they're not good read-throughs to what we might see as this market opens up more broadly? Or do you think that perhaps those are good indicators? I appreciate any thoughts there.

Sure. Let me take that, Onur here. In terms of our experience in DC and coming up with custom solutions, that goes back more than a decade, including the lifetime income solutions, so we have deep experience structuring these solutions, including also alternatives into the glide paths. We have been doing that for a long time, both in the U.S. as well as overseas, particularly U.K. Obviously, the executive order on private alts in D.C. creates some momentum, at least in terms of the talk track. I mean, our experience is typically, D.C. market moves slowly given the litigation risk that is still high on the minds of the sponsors. Hence, although that's definitely a structural trend, and we will definitely see more alternative assets in DC plans, I expect 2 things. One, I think it will start with more custom solutions like managed accounts, et cetera, as opposed to some of the existing large target date funds, which are in commingled vehicles. That will be my prediction.

Number two, in terms of the fees, given the pending litigation risk on the minds of the sponsors, there's going to be continued fee sensitivity in addition to the usual fee sensitivity of the institutional investors and the DC investors. Hence, some of these alternatives products might not have the same fee levels as you see in some other channels. Definitely, it's going to be lower fee than the retail vehicles. Then in many cases, it might be even lower than some of the defined benefit plans. That's how I think about it.

That being said, in terms of our positioning, with $100-plus billion of custom retirement solutions, including lifetime income, we are one of the biggest providers of custom solutions in the DC market globally. We definitely have a lot of ongoing partnership conversations as well. As the market develops, we're going to be definitely in the front seat, and we're going to be benefiting from that. We are not taking any credit in our forecast in terms of any major flows coming from DC alts. Hopefully, that will be an upside if the market moves faster than I predicted.

I would just add that to Onur's point that it's going to take time for this to mature given the caution and the process, but it's not unreasonable to think that privates could be 10% of these portfolios over time in composition. Private credit will play a big part of that. Again, it's going to take -- we're still in the very early days of this evolution. I think you're going to continue to see more activity over time.

We have time for one last question. Our last question will come from Bill Katz from TD Cowen.

I was wondering if you could unpack a little bit some of the success you're having in the private wealth side of the equation and just remind us of what the rate sensitivity is on cash.

Sure. Thanks for the question, Bill. Yes, on the success of the business, we had a strong third quarter in terms of annualized net new assets. growth, 7-plus percent in terms of net flows, if I use the asset management metric, 3.5% annualized, so definitely very strong. What I like about that is it's driven by both record run rate productivity from the adviser side, uptick in sales as a result as well as reduction in outflows. It's a very healthy picture. I mean at the end of the day, there will be always quarter-to-quarter volatility, but I'm happy with the direction of our business.

In terms of the sensitivity to rates, we have very, very little sensitivity to rates in our private wealth business when it comes to cash economics. The cash economics is less than 5% of the total revenue and earnings contribution is modest. The good thing is since we are self-funding our margin with the cash balances, we have a locked-in spread between what we pay versus what we earn. As a result, our sensitivity to absolute fee levels is very low, particularly when the rates remain positive, and I think it will remain positive for the -- at least foreseeable future. All-in-all, it's a nonevent for our business. We are much more protected on that dimension relative to some other broker-dealer that is an economic or business model highly dependent on the spread income.

There are no further questions at this time. Mr. Jorgali, I turn the call back over to you.

Thank you all very much for attending our call today. We look forward to connecting with you. Please don't hesitate to reach out.

Have a great day, everyone.

Thank you very much, Julian. I appreciate the help.