Federated Hermes, Inc. Stock

Greetings. Welcome to the Federated Hermes Q2 Analyst Call and Webcast. [Operator Instructions] Please note this conference is being recorded.

I would now like to turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.

Hello, and welcome. Thank you for joining us today. Leading our call today will be Chris Donahue, CEO and President of Federated Hermes; and Tom Donahue, Chief Financial Officer. Joining us for the Q&A are Saker Nusseibeh, the CEO of Federated Hermes Limited; and Debbie Cunningham, our Chief Investment Officer for Money Markets.

During today's call, we will make forward-looking statements and want to note that our actual results may be materially different than the results implied by such statements. Please review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?

Thank you, Ray. Good morning, all. I will review Federated Hermes' business performance. Tom will comment on financial results.

We ended the second quarter with record assets under management of $912 billion, led by growth in equity and private market assets. Equity assets closed the second quarter at a record high of $110 billion. During the second quarter, equity assets increased by $8.8 billion or 9% from the first quarter, reflecting solid market value gains. Gross equity sales were $9.1 billion in the second quarter, just about even with the first quarter's record level. Equity net redemptions in the second quarter were $1.1 billion, which included the expected global equity sub-advisory redemption of $3 billion that we discussed last quarter.

Equity sales results were again led by our MDT fundamental quant strategies. MDT equity and Market Neutral strategies had a record $6 billion of gross sales and over $3.5 billion in net sales in the second quarter. Looking at fund performance rankings at the end of the second quarter, 6 of 9 MDT fund strategies were in the top performance quartile of their Morningstar categories for the trailing 3 years. We had net sales in 35 equity fund and SMA strategies during the second quarter, including a variety of MDT offerings, which contributed $2.7 billion, not including Market Neutral, which we'll discuss later; and Strategic Value, which had $470 million.

Looking at our equity fund performance at the end of the second quarter and using Morningstar data for trailing 3 years, 54% of our equity funds were beating peers and 30% were in the top quartile of their category. For Q3 through July 24, combined equity funds and SMAs had net sales of $61 million.

Now turning to fixed income. Assets ended Q2 at just over $100 billion, up $689 million. Market appreciation added $1 billion and was partially offset by net redemptions and exchanges. We had 26 fixed income funds and SMAs with net sales in Q2, led by Core Plus and Core Agg SMA, which combined for $190 million. We had 3 ultrashort funds that were up a combined $134 million and the conservative muni microshort fund was up almost $100 million.

Regarding performance at the end of Q2 and using Morningstar data for the trailing 3 years, 39% of our fixed income funds were beating peers and 19% were in the top quartile of their category. Now for Q3 through July 24, combined fixed income and SMAs had net sales of $362 million. In the alternative private markets category, assets increased $2.6 billion in Q2 to reach $21.6 billion. The completion of the acquisition of an 80% interest in FCP Fund Manager L.P. in early April added $3.2 billion of U.S. multifamily real estate managed assets. The MDT Market Neutral fund and its ETF combined for $150 million in net sales.

Now we're in the market with our global private equity co-invest fund, which is, of course, the sixth vintage of the PEC, the PEC series. To date, we've closed on $300 million. PEC I to IV raised $400 million to $600 million in each fund and PEC V raised $500 million. We're also in the market with the European Real Estate Debt Fund, which is a new pooled European debt offering.

Across our long-term investment platform, we began Q3 with about $3.4 billion in net institutional wins yet to fund into both funds and separate accounts. Equity strategies are expected to have net sales of about $1.7 billion with MDT additions of $1.6 billion and a global equity additions of about $150 million. Approximately $1.3 billion on a net basis is expected to come into private market strategies, including direct lending of about $700 million, private equity of $538 million and trade finance of $100 million. Fixed income is expected to have net sales of about $300 million, including total return bond, low duration and high yield.

Now moving on to money markets. Total money market assets decreased by $7.9 billion or about 1%. Money market funds decreased by $2.9 billion or 1% from Q1, yet were up almost $32 billion or 7% year-over-year. After ending 2025 at a record high of $508 billion, money market fund assets have decreased slightly over the first half of the year to $500 billion at the end of Q2.

Money market separate accounts decreased by about $5 billion or 3%, similar to last year's Q2 decrease of $5.8 billion. Still, these assets were up about $10 billion or 6.4% year-over-year at the end of Q2. Money market separate account assets are impacted by the liquidity levels of the large state pools that we manage and typically peak with tax collections at year-end through mid-April before decreasing in Q2 and Q3. Our estimate of money market mutual fund market share, including sub-advised funds, was about 6.7% at the end of Q2, down from 6.9% at the end of Q1.

Now looking back at the last 7.5 years or so, of quarterly money market fund market share changes, we gained share in 14 quarters. We lost share in 14 quarters with 2 quarters of no change. The average share gain was 0.20%. The average share loss was about 0.23%. Our money market fund managed assets more than doubled from $208 billion to $500 billion over that period. This is certainly entrepreneurial delight from an owner operator. And of course, it's important to note that we remain in the top 10 in every category of money market fund managed asset levels in the top 5 in prime and tax-free.

Now let's talk about digital. Our digital initiatives include the recent launch of money market management digital treasury fund, which is expected to support both traditional and on-chain distribution. The initial reserve shares class provides a non-tokenized GENIUS compliance structure geared to institutional investors and stablecoin issuers seeking investments aligned with stablecoin reserve requirements. We are also developing an on-chain share class intended to place official books and records of that share class on blockchain infrastructure as we implement a digital transfer agency model. This dual-track approach offers flexibility between traditional and on-chain record-keeping models. We have selectively engaged with regulated digital asset intermediaries focusing on tokenized funds as regulated financial instruments.

We've previously discussed our participation in the BNY-Goldman domestic initiative involving mirrored tokenization and the Archax initiative to offer tokenized assets to a UCITS money market fund in the U.K. We are engaged in the digital asset development discussion with several other intermediaries. These are early-stage efforts. Our clients are currently looking more for digital asset information than transaction ability. We expect our engagements with intermediaries to grow as regulations clarify and as our digital assets platform and product development progress.

Now let's look at the recent asset totals as of a few days ago. Managed assets were approximately $899 billion. We should have picked the day before, including $665 billion in money markets, $109 billion in equities, $100 billion in fixed income, $23 billion in alternative private markets and $3 billion in multi-asset. Money market mutual fund assets were $490 billion. Money market fund assets have ranged from $490 billion to $501 billion during July with average asset levels of $496 billion.

Tom?

Thanks, Chris. For Q2 compared to the prior quarter, total revenues increased $23.8 million or 5%. The FCP acquisition added about $14 million, $9 million of it in the IAF category and $5 million in the other service fees. Equity asset growth added $7.6 million and additional day added $5.1 million. In private markets, Rivington had a $2.9 million gain on sale of a renewable energy property recorded in other service fees. And the U.K. real estate business had a $2 million real estate development fee for a project that did not advance into construction, also recorded in other service fees.

These increases were partially offset by lower Q2 money market average assets, resulting in $8.4 million in lower revenues. Total carried interest and performance fees were $1.4 million compared to $388,000 in the prior quarter. Approximately $682,000 of the Q2 fees were offset by compensation expense.

Q2 operating expenses increased by $17.3 million or 5% from the prior quarter due mainly to an increase of approximately $9.7 million in transaction costs from the FCP acquisition, including $6.5 million of nonrecurring acquisition-related compensation and $3.2 million of higher professional service fees, including FCP lender consent fees and other professional service fees. Compensation and related expense in addition, increased $6.9 million due to FCP's quarterly compensation expense, FHI's normal merit increases and other factors. This was offset by seasonally lower stock-based compensation expense of $6 million.

Higher advertising and promotional activities added $3.2 million as we had our spring advertising campaign. Intangible asset amortization increased $3 million, primarily from the FCP acquisition. These expense increases were partially offset by lower distribution expense, which decreased $4 million due mainly to lower money market fund average assets. In the other expense line item, the Q2 increase was due mainly to FCP property management expense of $2.8 million.

The combined Q2 impact of the revenue from the Rivington gain on property sale, the U.K. real estate development revenue fee, the FCP acquisition-related comp expense and professional service fees was about $4.7 million of lower net income or about $0.06 per share. The Q2 effective tax rate was 25.8%. We estimate the tax rate to be in the 25% to 28% range for 2026. At the end of Q2, cash and investments were $481 million, Cash and investments, excluding the portion attributable to noncontrolling interest were $416 million.

Holly, we would like to open the call up for questions now.

[Operator Instructions] Your first question for today is from Bill Katz with TD Cowen.

This is Robin Holby on for Bill Katz. We wanted to ask on fixed income. Gross sales were up nicely quarter-over-quarter and year-over-year, while net flows seem to have somewhat stabilized. Has investor interest changed at all with the prospects of higher rates? And do you think the strategy can get back to positive net flows in the foreseeable future?

Well, the reason we mentioned about the flows right now is that they have gotten exactly there. If you talk about the attitude of our intermediary client base, one of the things I'd mention is that the end clients have become kind of numb to all the negative geopolitical news and issues. But with interest rates under the Warsh regime staying the same, what we're seeing is a little more interest in things like, as I mentioned, the conservative microshort and, of course, the ultrashort funds. And that bumps a little bit into the money market fund thing as well.

So there are no definitive answers. There is no macro answer to that, that is going to take us through the next quarter. We think our products, including our Payer ETF, which gives a little higher yield and the FAs and the clients like that, has had good response as well. And so we think the variety of products out the yield curve, the strength of the team and the investment management will entitle us to positive flows here in the foreseeable future in fixed income.

That's helpful. And then I wanted to follow up on strategic value. You mentioned it in the prepared remarks, the fund has solid year-to-date performance. Just maybe how are your conversations with investors tracking there?

The investors like the performance, but we don't like being in the category because we're either in the top of it or the bottom of it. And this always attracts the attention of the portfolio manager who just likes doing what he's doing, which is increasing the dividend, growth of dividend and a dividend.

On the other hand, when you look at the ETF also doing well, these are people who come in who haven't had the experience of the fund who understand exactly what the fund is doing. And so this is a very, very positive thing on both sides. And I would say that the biggest challenge we have is that when those prices of those securities go up, the portfolio managers have to make some maneuvers, change them in order to keep the dividends going. That is a good problem.

Your next question is from Kenneth Lee with RBC Capital Markets.

Just one on the money market fund assets there. Just given the rate outlook and the environment there, any updated outlook in terms of potential asset growth for this year?

Let me comment first, and then I know Debbie is chomping at the bit to get at this one. But in terms of the money market fund overall, we've been at this for 50 years, and there's all sorts of things that come together like our rivers and a big confluence month-to-month. That's why I went through all those percentages of changes in market share. But because of the seasonality, I think that says for itself that we do expect that seasonality to come back just like it has all these years we've had these pools.

Some other interesting things have happened in the marketplace. One of the big firms offered a sort of a bonus yield program that moves some assets. We had some big clients move. That always happens. As I mentioned in the previous question, we had some ultrashort and people moving out the curve a little bit. But with the Fed situation, if it is really higher for longer, i.e., they don't do anything, that's fine with us. Remember, a 3.5-or-so percent yield on a money fund is a great thing.

Debbie?

Thanks, Chris. Yes, I agree. A lot of volatility in the first half of the year. There were some very large market deals that occurred from an IPO standpoint and a long-term debt standpoint, Amazon, Alphabet, Anthropic, SpaceX, they issued large amounts in the marketplace, which then subsequently for a period of time came into the money market universe and has subsequently gone out, still some of it left in there. So a lot of volatility and noise around the first half of the year.

But ultimately, what Chris mentioned with regard to a Warsh-led Fed that at this point is showing no signs of being in the mode of lowering rates, keeping rates higher for longer, where they are now. I mean the market is actually predicting that the rate environment is increased at the September meeting, which I don't particularly think will be the likely scenario. But nonetheless, if you're -- with rates on the short end, somewhere between 3.5% and 4.5% on a yield curve basis over the first half of the year, money market funds look very attractive. Most of the industry, including ourselves, has lowered their weighted average maturities to have some fuel available to light the fire even further as rates and the yield curve steepen to some degree, floaters are a really good use of investments in these funds during a rising rate environment, and those have been plentiful in the marketplace. Sometimes we like the spread in the floaters, sometimes we don't.

But all of this really leads us to a conclusion that with rates where they are marginally higher from a steeper yield curve standpoint, the attractiveness of cash and the attractiveness of money market funds as well as the separate accounts and the pools that we manage will continue to gather assets as does the industry.

Great. Very helpful color there. And just one follow-up, if I may, just on the expense side there. I realize that there was some noise in the quarter in 2Q due to the acquisition there. But just go forward, any updated outlook in terms of expenses?

Sure, Ken. Well, there are going to be FCP comments. On the comp-related line, I expect in the next quarter, we won't have the onetime comp expense from them. We will have their ongoing. So that number could be down around $5 million. Of course, I don't know what's going to happen to our bonus accrual as things come out. The distribution line, that's going to relate to the money market assets primarily. So which way those go, that line will go.

Systems and Communications, we'd expect that to go up a couple of million for the next quarter. And the professional service fees, FCP comment, we'd expect that one to go down by about $6 million. Of course, we might have some other additions smaller come through there. And no comments on the intangible will continue with FCP. In other, there's some FCP line expense I pointed out in there. That will continue. And then what happens with FX always makes that line move around.

Your next question is from Michael Cho with JPMorgan.

I wanted to peel in just a little bit on the money market share discussion you had in your prepared comments and just now as well. I guess I appreciate all the color on the history of the share shifts over the last 7 years. But I was just wondering, as you looked at that and you analyze it, I mean, are there any particular reasons of why these share shifts occur from time to time? Is it really just from running promotion programs or anything that you're seeing from a key takeaway perspective as these share shifts occur from time to time?

Michael, that's why I tried to list a whole bunch of confluence of factors that all jump around every single quarter. Debbie talked about all these big IPOs that came out where the cash came in, then that goes out, who has more of it than the other guy, then that changes the market share. the movement of some of the clients, the ultrashort and conservative microshort, that does it. And you already commented on the one, there's some big retail programs. And then there's just the ebb and flow of cash, and it is volatile. And there's nothing that you can do about it.

So we look for the seasonality, the Steady Eddie of the program. And as I tried to hit in my remarks, we would trade every time to go from $200 billion to $500 billion and have the market share. If it goes down a little bit, it doesn't matter. Owner-operators love revenues. And if you really want to know about it, I think if we could calculate it and calculate the market share on revenues, we'd have a better stat than on the assets.

Appreciate that color. If I can just switch gears to active ETFs. It's a key priority here for you as well. I think you launched a couple more during the quarter. If you can update us on the pace of launch from here, maybe over the next 12 to 18 months, priorities in terms of products? And maybe any opportunities that you might see through maybe deeper distribution partnerships to maybe step up scale in that business? I know you also had mentioned non-U.S. in the past as well, but just kind of curious update there.

So we like putting out a couple or so ETFs every year in order to get the marketplace focused on it to enable the basket helpers to have their mind right on the whole thing. And that's about where we are. And then there are some special deals with some of our distribution firms where I'm not going to tell you the name of the firm or the nature of the deal, but where if you play ball with them, your ETF does a lot better or your family of ETFs. So we're doing some of that. But basically, it's a long-term growth strategy.

And I think Ray has some other comments on. As far as we can go on the specifics, we can't tell you the names. They call that gun jumping.

Correct. But if you look at what we've done, we've launched in the areas where we've had the most success in our traditional mutual funds. And so that provides a bit of a road map to how we're thinking about the next wave. And you mentioned offshore. We've had a lot of success porting the MDT strategy over there in a UCITS form. We're very much looking at active ETFs outside of the U.S. as well. The focus initially has been domestic, but that's certainly something that we're looking at.

I'd make one other comment on the product development side of it. And Ray mentioned we're able to do a good job when we have an existing product and it's doing well and then you come up with an ETF that's similar or whatever, then that can do well. But if the product development people would look at it and say, where are the most sales occurring in the industry. And then that's another way, a pointer finger as to where we would go, which is sort of how payer got burped out onto the field.

We've reached the end of the question-and-answer session, and I will now turn the call over to Ray Hanley for closing remarks.

Thank you, Holly. That concludes our call, and we appreciate you joining us today.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Greetings. Welcome to the Federated Hermes Q1 Analyst Call and Webcast. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.

Thank you, and welcome to all. Thank you for joining us. Leading today's call will be Chris Donahue, CEO and President of Federated Hermes; and Tom Donahue, Chief Financial Officer. Joining us for the Q&A are Saker Nusseibeh, CEO of Federated Hermes Limited; and Debbie Cunningham, our Chief Investment Officer for Money Markets.

During today's call, we may make forward-looking statements, and we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. Please review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?

Thank you, and good morning. I will review Federated Hermes business performance, Tom will comment on the financial results. We ended Q1 with record assets under management of $907 billion led by gains in equity and money market strategies. Equity assets closed Q1 at a record high of $101 billion. During Q1, equity assets increased by $2.9 billion or 3% from year-end driven by $2.2 billion in net sales. Gross equity sales reached a record high of $9.1 billion in Q1.

Equity sales results continue to be led by our MDT fundamental quant strategies, MDT equity and market-neutral strategies together had a record $5.8 billion of gross sales and over $3.5 billion in net sales in Q1. For the second quarter through April 24, these MDT strategies had net sales in combined funds and SMAs of $687 million.

Now looking at Fund performance rankings as of March 31, 7 of 9 MDT fund strategies are in the performance quartile of their Morningstar categories for trailing 3 years. We also had net sales in 32 equity fund and SMA strategies during first quarter, including, of course, a variety of MDT offerings and the ASX Japan Fund and the strategic value SMA. MDT's offerings were mid-cap growth and large cap growth plus 5 others. Importantly, for our global efforts, the MDT U.S. Equity UCITS fund launched in June of '25 has seen strong demand from clients outside of the U.S. Net sales in this strategy were $177 million in the first quarter, and the fund has grown to about $800 million in assets.

Looking at overall equity fund performance at the end of the first quarter and again using Morningstar data for trailing 3 years, 51% of our equity funds were beating peers and 30% we're in the top quartile of their category. For Q2 through April 24, combined equity funds and SMAs had net sales of $606 million.

Now turning to fixed income. Assets ended Q1 at just under $100 billion, down $329 million from year-end. Fixed income had Q1 net redemptions of $422 million. However, we had $25 million fixed income funds and SMAs with net sales in the first quarter, led by 3 Ultrashort Funds, Total Return Bond Fund, the collective and the fund combined short-term income and our core ag and core+ SMAs. Regarding performance at the end of the first quarter and using Morningstar data for trailing 3 years, 41% of our fixed income funds were beating peers, 21% were in the top quartile of their category for Q2 through April 24, combined fixed income funds and SMAs had net redemptions of $214 million.

In the alternative private markets category, assets decreased slightly in Q1 compared to year-end as the impact of FX rates offset net sales of $82 million. The M2 MDT Market Neutral Fund and recently launched ETF combined for $341 million in net sales. Positive net sales were also achieved in trade finance strategies. We held the final close of our European Direct Lending 3, the third vintage of our European direct lending fund in the first quarter. The fund raised $780 million. For reference, EDL 1 raised $330 million, EDL 2 raised $700 million. We are now in the market with global private equity co-invest fund, the sixth vintage of the PEC series. To date, we've closed on about $300 million. PC 1 to 5 raised approximately 400 to 600 each and PCV raised about $500 million. We are also in the market with the European real estate debt fund a new pooled European debt fund.

As previously announced, on April 9, we completed our acquisition of an 80% interest in FCP Fund Manager LP, a privately held U.S. real estate manager. The acquisition added $3.2 billion of managed assets at closing in April. SCP brings U.S. multifamily housing expertise complementing our long-standing U.K.-based real estate capabilities. Across our long-term platform, we began the second quarter with about $1.1 billion in net institutional mandates yet to fund into both funds and separate occurrence. Approximately $1.4 billion on a net basis is expected to come into private market strategies, including direct lending, private equity and trade finance. Fixed income is expected to have net sales of about $1.1 billion with a core plus win of about $1.8 billion partially offset by about $800 million redeeming from a government bond strategy.

Equity strategies are expected to have net redemptions of about $1.4 billion with net global equity expected redemptions of $3 billion, which offsets MDT's additions of $1.7 billion. The global equity redemptions are mainly sub-advised assets from an institutional client who notified us of their intention to internalize the management of these assets. We continue to have a strong relationship with this client in the EOS part of our business. The client has made a strategic decision to internalize, not driven by performance, which has generally been ahead of benchmark.

Moving on to money markets. We reached another record high at the end of Q1 for total money market assets, which increased by $2 billion to reach $685 billion, reflecting seasonal patterns, money market separate accounts increased by $8 billion. Money market fund assets decreased by $6 billion in Q1 compared to the year-end total. Market conditions remain favorable for cash as an asset class. In addition to the appeal of relative safety and periods of volatility, money market strategies present opportunities to earn attractive yields compared to alternatives like bank deposits and direct investments in T-bills and commercial paper. Our estimate of money market mutual fund market share, including sub-advised funds was about 6.9% at the end of Q1, down from 7.0% at the end of 2025.

Now let's have a little discussion on digital assets and what we're doing there. We are focused on this area as an infrastructure evolution, not a speculative asset class. We are working on digital initiatives designed to enhance distribution efficiency settlement speed, transparency, operational automation and global reach while maintaining regulatory fiduciary and governance standards. Importantly, digital structures must enhance access, efficiency and integration into modern treasury portfolio and collateral workflows. They must operate within regulatory frameworks preserve investor protections and provide valuation integrity. Through deep engagement with our operational partners, we are well positioned to properly evaluate governance, ownership representation transfer restrictions and risk management implications of tokenized funds as we build out our digital capabilities.

While we are initially prioritizing products aligned with our core strength in liquidity management, we, of course, expect over time to see digital products develop for ETFs or other mutual funds, private market vehicles across many or all market classes. The firm's digital initiatives include the upcoming launch of our money market management digital treasury fund which is expected to support both traditional and on chain distribution. The initial reserve shares class will provide a nontokenized genius compliant structure geared to institutional investors and stablecoin issuers seeking high-quality reserve assets. We are also developing an on chain share class intended to place official books and records on the blockchain infrastructure once a fully digital transfer agency model is available. This dual-track approach offers flexibility between traditional custody and fully on chain models.

So we have selectively engaged with regulated digital asset intermediaries focusing on tokenized funds as regulated financial instruments. Initial use cases emphasize cash on chain liquidity solutions with a longer-term view towards supporting additional asset classes as market structures evolve. As we have previously mentioned, we are participating in the launch of a collaborative initiative between BNY and Goldman Sachs that will involve mirror tokenization of money market fund shares to improve transferability collateral utility and real-time ownership tracking of money market fund shares. We are also expanding digital engagement beyond U.S. money markets towards a global strategy. In the U.K. and Europe, we are exploring digital sterling liquidity products and assessing tokenization for broader regulated fund distribution.

We are participating in tokenized offerings where Federated Hermes funds are used as the underlying assets rather than being directly tokenized. This includes our alliance with racks, the first FCA-regulated digital Securities Exchange to offer tokenized access to a UCITS money market fund. The platform enables professional investors to hold beneficial ownership tokens across multiple blockchains and excess money market liquidity directly on chain. We are exploring similar partnership opportunities.

Finally, looking at recent asset totals as of a few days ago, managed assets were approximately $902 billion including $668 billion in money markets, $107 billion in equities, $101 billion in fixed income, $22 billion in alternatives, private markets and $3 billion in multi-asset. Money market mutual fund assets were $487 million. Tom?

Thanks, Chris. For Q1 compared to the prior quarter, total revenue decreased $3.9 million or 1%. Fewer days resulted in $10.5 million of lower revenue. Q4 revenue included $8.2 million of real estate development fees. Higher Q1 money market average assets provided $8.3 million of higher revenue, while higher equity average assets added $5.6 million. Total Q1 carried interest and performance fees were $388,000 compared to $1.6 million in the prior quarter, approximately $283,000 of the Q1 fees were offset by compensation expense. Q1 operating expenses increased by $5.4 million or 2% from the prior quarter, due mainly to seasonally higher compensation and related expenses of $8.5 million higher incentive comp expense of $3.5 million and higher distribution expense of $3.4 million from higher average fund assets.

Transaction costs from the FCP acquisition were about $1.5 million in Q1 compared to $1.3 million in Q4, nearly all in the professional service fees category. Now looking ahead to Q2. Additional FCP transaction and related costs incurred in Q2 already include $4.2 million in purchase price treated as compensation and related expense and $4.6 million of primarily FCP lender consent fees recorded in professional service fees. For a total estimated transaction-related EPS impact of $0.11 for Q2. Also for Q2, we expect that FCP will add approximately $12 million in revenue and $11 million in operating expenses including a preliminary estimate of $3.8 million of intangible asset related expense for Q2.

Now back to Q1. In the other expense line item, the Q1 decrease was mainly due to [indiscernible] in Q1 compared to Q4. The effective tax rate was 26.1%. We estimate the tax rate to be in the 25% to 28% range for 2026. At the end of Q1, cash and investments were $645 million. Cash and investments, excluding the portion attributable to noncontrolling interest were $607 million. We often talk about our desire to use free cash flow of the business to drive value over time for our shareholders in 3 primary ways: acquisitions, share repurchases and dividends. All 3 of these methods have been utilized in a meaningful way so far in 2026.

During Q1, we purchased 1.2 million shares of FHI stock for $66 million. In April, we used $216 million in cash and $23.1 million in FHI Class B stock for the initial purchase price of the SCP controlling interest acquisition. For payment in May, the FDI Board of Directors declared a dividend of $0.38. The quarterly dividend increased $0.04 up nearly 12% from the previous call [indiscernible] our 113th consecutive quarterly dividend. [indiscernible], we would now like to open the call up for questions.

[Operator Instructions] Your first question for today is from Ken Worthington with JPMorgan.

Chris, you spent a lot of time thinking about digital cash. A couple of questions on this. What portion of your existing clients today do you think care about and will utilize digital money market funds versus traditional cash product structures over time. And if you think out about -- think out about a decade what portion of the entire cash market do you think cares about tokenized money market funds versus other forms of tokenized cash?

Out 10 years is pretty tough to see. Right now, it's a very low percentage of the clients that are asking for demanding or wanting these tokenized products. And so what you see with us and with others is a grand effort to get ready for tomorrow. If you want to say you're feeling us protecting our franchise, you're right. If you want to say you're feeling us with a little fomo in it, you're right. This is not the usual customer demand. We got to have a type deal. But over time, as you see the digitization of things catching on, we are going to be there. So over 10 years, I think it would be a routine deal but it's really hard for me to say how much it would be. And I would let Debbie offer her get as to 10 years.

Wow, for 10 years, that's a long time. That's visionary, which I'm generally not. And to add to what Chris was saying, I mean, if you build it, they will come, that's sort of the attitude now with that historically as sort of a premise success has followed. So I don't know, maybe probably less than 25% of retail customers. But I think from an institutional customer standpoint, you're looking at something that maybe is in the 25% to 50% utilization. Once all the comfortability is there with the fiduciary aspects of it that Chris was mentioning at the beginning.

And I suppose this one more, Ken. And that is that, remember, the basic product is nearly liquidity of [indiscernible] However, all the fancy stuff works. That's [indiscernible]. And the next thing is if they don't have fundamental trust in the whole thing, then it doesn't work. So you got to work on those 2 things. in addition to all of the toys that are being created.

Great. I think what you're doing is great, just whatever my 2 cents. On the $3 billion, Chris, you mentioned on the global equity withdrawal, I don't think you mentioned timing. This is the timing of that? And how do the fees on that mandate compared to, say, like the new MDT audit wins?

Okay. That's probably a Q2 departure and the fees on that were lower than the average bear. Is that what you're asking?

Yes. Perfect.

Your next question is from Bill Katz with TD Cowen.

This is Robin Holby on for Bill Katz. Could you remind us of the time line on SCP's next fund launch and the demand for real assets that you're currently seeing from LPs?

Yes. Robin, this is Tom. The fund launch, so they're investing in Fund V right now, and I think they're at about 30% invested. So they've got a figure out what's the right timing, what's the best timing in order to continue to invest that and they won't start Fund VII until they're well down the path to finishing Fund VI. So that will be maybe midyear in 2027. And on the STP transaction, I just wanted to correct the number. I said on the purchase price that was treated as compensation, I think I said $4.2 million, it's $6.2 million. That will come in the second quarter. So also on since we closed, we had [indiscernible] here and our team of product marketing and a bunch of other people getting geared up and studying and preparing for the launch of Fund VI and we're pretty excited about it, even though it's some time down in the future.

Great. And then as a follow-up, could you speak to the demand for MT's ETF suite? Are the ETFs attracting a new customer? Or is it much of -- or is month of the demand coming from existing customers that like the ETF wrapper?

Well, since we go through intermediaries, we're using a lot of the same intermediaries, but we're expanding that footprint through more RIAs, which are very attentive to the ETF. So it is a combination of old intermediaries, new intermediaries, the underlying clients who are actually the owners, we don't see that much. But what we are seeing is a bigger push for what we call portfolio construction or PCS, where you're seeing our intermediary clients wanting to see how these things fit, how they work and how they make solutions. And so that's another overlay in a more general answer to your question.

Your next question for today is from Patrick Davitt with Autonomous Research.

Debbie, last quarter, you suggested that money fund organic growth could be a bit lower this year. It's tough to tell what's going on in money funds the last couple of months, obviously, given the tax loss. So with more signs the Fed could be unfold all year, I'd be curious to get your updated thoughts on the potential more rotation into the asset class from either retail or institutional or both, given that change in outlook?

Sure. Thank you. It hasn't changed much. I mean we've seen double-digit growth in the high teens and then in the lower teens in both 2024 and '25, '26 I, in my opinion, is going to be more in the single-digit growth area. But I do think it's something that a safe haven standpoint and from just a general utilization with yields in the 3 government yields, $3.72 to $3.75-ish area, prime yields, $3.86 to $3.90. With tax-free, taxable equivalent, you're still looking depending upon what -- whether it's state tax free or just federally tax-free, yields in the 4%, 5% and 6% from a taxable equivalent standpoint. So those are real long-term returns in a very, very large product.

So I think the growth will continue. I think it probably -- we find new use cases as some of these digital product innovations are rolled out for the funds. And I think that the traditional as well as new clients into the asset class will grow just not as quick as it has in the '24 and '25 time frame. I mean at assets reaching -- it depends on who you're looking at, whether it's Crane, iMoney [indiscernible], but somewhere in the $7.5 to $8.2 trillion range as a peak. I think that continues to grow steadily over the $8 trillion range. But the larger it gets the more -- obviously, the percentage growth, even if it's the same dollar amount, starts to go down.

Okay. That's helpful. And then it looks like the money funds had a really strong day yesterday, the last day of the month. So curious if the AUM number you gave would include that or not?

No. The AUM number we gave would have been as of Wednesday, actually.

We have reached the end of the question-and-answer session. And I will now turn the call over to Ray Hanley for closing remarks.

That concludes our call, and we thank you for joining us today.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good afternoon, and welcome to the Federated Hermes Annual Shareholder Meeting. [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Chris Donahue, Chairman, President and Chief Executive Officer of Federated Hermes. Sir, the floor is yours.

Thank you, and good afternoon. I'm Chris Donahue, Chairman, President and Chief Executive Officer of Federated Hermes, Inc., and I would like to welcome you to our Annual Meeting of Shareholders. The program today will consist of a brief business meeting to be followed by some comments on the company, then a brief question-and-answer period for shareholders of the company.

Before we begin the business portion of the meeting, I'd like to introduce certain individuals joining me. In the room are Joe Bartolacci, Director of Federated Hermes, Inc. and President, Chief Executive Officer of Matthews International Corporation; Karen Hanlon, Director of Federated Hermes, Inc. and President and Chief Operating Officer of Highmark Health; Marie Jones, Director, Federated Hermes, Inc. and Founding Partner, JonesPassodelis, PLLC; and Thomas R. Donahue, Director, Vice President and Chief Financial Officer of Federated Hermes, Inc; John B. Fisher, Director, Federated Hermes, Inc. and President and Chief Executive Officer of the Federated Advisory Companies.

Before I continue, as has previously been announced, John Fisher will be transitioning to the role as Chairman of Federated Advisory Companies after today's meeting. On behalf of the company, its Board and its officers and employees and our shareholders, I would like to thank John for his 16 years of service as a Board member, 28 years of service as an executive officer and 47 years of service as an employee of the company. We look forward to working with John in his new role.

Also joining me in the room today, Paul Uhlman, Vice President of Federated Hermes, Inc. As previously announced, Paul has been nominated by the Board for election as a director of the company at today's meeting. And effective later today, Paul is transitioning from his role as President of Federated Securities Corp. to succeed John Fisher as President and Executive Officer of Federated Advisory Companies.

Also, Peter Germain, Executive Vice President, Secretary, Chief Legal Officer of Federated Hermes. I'm looking. Joining me on the line are Steve Auth, Chief Investment Officer for Federated Hermes Equities; and Bryan Burke, formerly National Sales Director, Strategic Solutions, and Executive Vice President of Federated Securities Corp. As previously announced, effective later today, Bryan will be replacing Paul Uhlman as President of Federated Securities Corp. I would also like to acknowledge Leah Oakes, Dan Quirk and Greg Staude, representatives from E&Y, the independent auditors of the company.

Now in accordance with the amended bylaws of Federated Hermes, Inc., I act as Chairman of the meeting and Mr. Germain acts as secretary of the meeting and inspector of elections. Mr. Secretary, is a quorum present?

Mr. Chairman, only the Voting Shares Irrevocable Trust, as the holder of Class A common stock of the company, is entitled to vote at this meeting. And the trustees of the Voting Shares Irrevocable Trust are represented and present on the line.

The secretary's report indicates that a quorum is present for the company, and the meeting is now lawfully convened and ready to transact business.

The items for business for today's meeting are the election of directors to serve until the next annual meeting of the shareholders and the election and qualification of their successors and the approval and amendment to the Federated Hermes, Inc. stock incentive plan to reserve an additional 5 million shares of Class B common stock for issuance under the stock incentive plan.

Mr. Secretary, would you please report on the nominations for director?

Mr. Chairman, the Board of Directors has nominated the following individuals for election as directors of the company to serve until the next annual meeting and the election and qualification of their successors: Joseph Bartolacci, J. Christopher Donahue, Karen L. Hanlon, Thomas R. Donahue, Marie Jones and Paul Uhlman.

Mr. Secretary, the Voting Shares Irrevocable Trust today hereby votes to elect each of the nominees for director. As inspector of election, will you please report on the votes cast for the election of the directors.

Mr. Chairman, in the matter of the election of directors, all of the shares of Class A common stock which constitute all shares entitled to vote have voted affirmatively for each of the nominees for director.

Thank you. As all the shares entitled to vote have voted in favor of the nominees standing for election as directors, the nominees are hereby elected.

Mr. Chairman, the Board of Directors has recommended the approval of an amendment to the stock incentive plan to reserve an additional 5 million shares of Class B common stock for issuance under the stock incentive plan.

Mr. Secretary, the Voting Shares Irrevocable Trust hereby votes to approve an amendment to the stock incentive plan to reserve an additional 5 million shares of Class B common stock for issuance under the stock incentive plan. So Mr. Secretary, as inspector of elections, will you please report on the votes cast with the approval of the amendment to the stock incentive plan to reserve an additional 5,000 shares -- 5 million shares of Class B common stock for issuance under the plan?

Mr. Chairman, in the matter of the approval of an amendment to the stock incentive plan to reserve an additional 5 million shares of Class B common stock for issuance under the stock incentive plan, all the shares of Class A common stock which constitute all the shares entitled to vote have voted affirmatively for the approval of the amendment to the stock incentive plan.

Thank you. As all the shares have voted their approval of the amendment to the stock incentive plan, the amendment is duly approved.

Mr. Chairman, I move that the meeting be adjourned.

There's no objection. I declare the meeting duly adjourned.

However, at this point, I'd like to comment on our business results, after which I'll be happy to entertain questions from shareholders during our brief question-and-answer session.

First, it's my pleasure to announce that the Board, at the meeting immediately prior to this meeting, declared a dividend of $0.38 a share, up from $0.34 a share last quarter. This dividend is payable on May 15 to shareholders of record on May 8, 2026. If you would like information on our financial results for the quarter ended March 31 of '26, they are being announced in a press release this afternoon and will be available on the SEC website at www.sec.gov, as well as on our website, www.federatedhermes.com/us. You are also welcome to listen to our quarterly earnings call tomorrow morning at 9 a.m. Eastern Time. Shareholders interested in listening to the conference should dial (888) 506-0062 in the U.S. or (973) 528-0011 outside of the U.S. or visit federatedhermes.com for real-time Internet access.

I'll begin with some comments about our Q1 '26 results before moving to discuss our full year '25 results, '26 highlights. So for the first quarter, Federated's total managed assets reached $907 billion. The record assets were driven by increases in money market assets, which also reached $685 billion and flows into equity offerings. Equity assets also had a record of $101 billion. Fixed income assets had $100 billion. We also reached record total separate account assets of $288 billion.

Our diversified business mix once again supports our franchise for all seasons. On April 9, 2026, we acquired a majority interest in FCP Fund Manager LP, a privately held U.S. real estate investment manager with client assets of over $3 billion. FCP will operate as Federated Hermes FCP Manager, LLC. This acquisition extends our real estate footprint in the major U.S. markets and strengthens our commitment to expanding our private markets alternatives capabilities. Our alternative private market asset class includes private equity, private credit, real estate, infrastructure and long/short offerings.

Now let's talk a little bit about 2025. During that year, Federated Hermes marked 70 years of growth and innovation by posting strong gains in earnings, solid sales, enhancing our position as a global leader in active investment management. We maintain our long-standing focus on offering high-quality investment solutions for a range of goals in a variety of market conditions, supported by exceptional customer service.

Earnings per share grew 59% to $5.13 on net income of $403 million for '25. Our performance enabled us to maintain our commitment to delivering shareholder value. In 2025, 4 quarterly dividends totaled $1.33 per share, and we reached 112 consecutive quarterly dividend payments at year-end.

Some other highlights for the company from 2025. We grew revenue by 10%. We realized positive net equity sales, which approached $5 billion. We reached over $100 billion in fixed income assets at year-end. We increased separate account assets to a record at year-end.

We acquired a majority interest in Rivington Energy Management Limited, a U.K.-based renewable energy project development business. We expanded our product offerings with the launch of 2 ETFs and 2 collective investment trusts. We began managing the Commonwealth of Pennsylvania's treasury pool for local government entities and nonprofit organizations. We had several successful fundraising ventures in private markets and ended 2025 with $19 billion in alternative and private market assets.

Looking ahead, we'll continue to embrace digital innovation in money market funds. We'll invest in areas for growth in a competitive environment, committing to a series of projects that will deliver a business built for our global customer base.

None of our accomplishments would be possible without the hard work and dedication of over 2,000 employees. I thank them for their tireless efforts. And I thank our shareholders for your trust and confidence. I am confident that we are in a strong position in 2026 with continued opportunities for growth.

Now prior to taking questions, I ask Mr. Germain to explain the guidelines.

We will conduct a brief question-and-answer period for only shareholders of the company. To allow for an orderly shareholder question-and-answer period and to allow time to ask questions within the time allotted, we have established the following guidelines. Questions will only be taken from shareholders of the company. Please indicate to the operator that you are a shareholder of Federated Hermes and let the operator know what your question is. Shareholders' questions should not ask for more information for information that has already been discussed. Questions related to the company and its business, results of operations, financial condition or business plans are appropriate. Questions regarding personnel matters, including those relating to employment, are not pertinent to the annual meeting and therefore, will not be answered. Unfortunately, not all questions may be answered.

Operator, we'll now take questions from shareholders.

[Operator Instructions] And there are no shareholders in queue to ask a question at this time. I would now like to pass the floor back to Chris Donahue.

Thank you very much, Tom. That concludes our question-and-answer period. Thank you. The teleconference will now end.

Thank you. You may disconnect at this time, and have a wonderful day. Thank you once again for your participation.

Greetings. Welcome to the FHI Q4 2025 Analyst Call and Webcast. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.

Good morning and thanks for joining us. Today, we'll have brief remarks followed by Q&A. And leading today's call will be Chris Donahue, CEO and President of Federated Hermes; and Tom Donahue, Chief Financial Officer. And joining us for the Q&A are Saker Nusseibeh, the CEO of Federated Hermes Limited; and Debbie Cunningham, the Chief Investment Officer for Money Markets.

During today's call, we will make forward-looking statements, and we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. Please review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?

Good morning. I will review Federated Hermes business performance, Tom will comment on the financial results.

We ended the year with a record assets under management of $903 billion led by gains in money market and equity strategies. During Q4, equity assets increased by $3.2 billion, or 3% from prior quarter, and about half of that increase coming from net sales. 2025 saw record gross equity sales of $31 billion, including $9 billion in the fourth quarter. Fourth quarter net equity sales were $1.5 billion. Our full year 2025 net [indiscernible] sales of $4.6 billion showed substantial improvement from net redemptions of $10.7 billion in 2004.

Equity sales results were driven by MDT fundamental quant strategies. MDT equity and market neutral strategies had a record $4 billion of gross sales and over $2 billion in net sales in the fourth quarter. For 2025, MDT grow sales of $19.1 billion, and net sales of $13 billion were both record highs. For Q1 through January 23, these strategies had net sales in combined funds and SMAs of just under $700 million.

Looking at MDT Fund performance rankings ended December 31, 6 of 9 MDT strategies are in the top performance quartile of their Morningstar categories for the trailing 3 years. Four strategies are in the top decile of their Morningstar category for the trailing 3 years. We had 24 equity and SMA strategies -- equity Fund and SMA strategies during the fourth quarter, including a variety of the MDT offerings, the Asia ex Japan fund, and the U.S. Strategic Value Dividend, ETF. The MDT U.S. Equity UCITS fund launched in June of 2025, has seen strong demand from clients outside the U.S., with over $500 million in net sales from inception through year-end.

Looking at our equity fund performance at the end of the year and using Morningstar data for the trailing 3 years, 49% of our equity funds were beating peers, 27% were in the top quartile of their category. For Q1 through January 23, combined equity funds and SMAs had net sales of $432 million.

Turning now to fixed income. Assets ended the year at $100 billion, down $1.7 billion from the prior quarter. Fixed income had Q4 net redemptions of $2.8 billion, including about $1.7 billion from two large public entities that have regular sizable inflows and outflows. These fixed income net redemptions included the $1 billion high-yield fund net redemption included in Q3's pipeline numbers. We had 28 fixed income funds and SMAs with net sales in Q4, led by the ultrashort funds of $624 million, total return bond of about $200 million, short-term income of over $100 million, and core plus SMA of almost $100 million. Regarding performance at the end of 2025, and using Morningstar data for trailing 3 years, 42% of our fixed income funds were beating peers and 18% we're in the top quartile of their category. For Q1, through January 23, combined fixed income and SMAs had net sales of $139 million.

Turning to the alternative and private markets category. Assets increased slightly and net sales were positive. The MDT Market Neutral Fund and recently launched ETF combined for $149 million of net sales. Positive net sales were also achieved in our European Direct Lending [ Fund III ], private equity funds, and the Project and Trade Finance tender fund, partially offset by net redemptions in real estate strategies. We held the final close of our European Direct [ Lending 3 ], the third [ vintage ] of our European direct lending fund this month. We raised $780 million. EDL 1 raised $330 million and EDL 2 raised about $700 million.

We are currently in the market with global private equity co-invest fund, the sixth vintage of the PEC series. To date, we've closed on approximately $300 million. The PEC Seres, PEC 1 to 5, raised approximately $400 million to $600 million in each fund, and PEC 5 raised about $500 million. We're also in the market with the European real estate debt fund, a new pooled European debt fund.

We are progressing towards the [ FCP ] acquisition -- to closing the [ FCP ] acquisition during the first half of '26. The acquisition will add U.S. multifamily housing expertise to our long-standing U.K.-based real estate capabilities. The U.K. real estate team was recently selected as the exclusive developer on a significant mixed-use development opportunity in Manchester in the U.K.

This week, at the Asian Financial Forum, we announced plans to open a Hong Kong office to capitalize on the region's rapidly growing wealth market. Subject to regulatory and other necessary approvals, the planned Hong Kong office represents a strategic expansion as we deepen relationships across the Asia Pacific region. The planned office will complement our existing regional offices in Singapore, Tokyo and Sydney.

Across our long-term investment platform, we began 2026 with about $2.7 billion in net institutional mandates yet to fund into both funds and separate accounts. Approximately $1.2 billion on a net basis is expected to come into private market strategies, including direct lending, private equity and trade finance. Equities expected additions totaled $1.4 billion, with about $1.3 billion into MDT strategies, and $100 million into international and global equity strategies. Fixed income is expected to have net sales of about $100 million into a low-duration strategy.

Moving on to money markets. We reached another record high at the end of 2025 for total money market assets, which increased by $30 billion, to reach $683 billion. Money market fund assets increased by $16 billion, or 3%, in Q4 to reach a record high of $508 billion. Money market separate accounts increased by $14 billion in the fourth quarter, reflecting seasonal patterns.

Market conditions remain favorable for cash as an asset class. In addition to the appeal of relative safety and periods of volatility, money market strategies present opportunities to earn attractive yields compared to alternatives, such as bank deposits and direct investments in T-bills in commercial paper. Our estimate of money market fund market share, including sub-advised funds was about 7% at the end of '25, down from 7.1% at the end of Q3.

Regarding digital asset efforts, we are advancing a series of strategic initiatives that bring together the strength of money market investment and operational expertise with efficiency and transparency of blockchain technology. Our partnership with [indiscernible], the first FCA regulated digital securities exchange to offer tokenized usage money market funds marks its first major non-U.S. digital asset initiatives. The platform enables professional investors to hold beneficial ownership tokens across multiple blockchains and access money market liquidity directly on chain. The [indiscernible] relationship complements our U.S. digital efforts where we have the sub-adviser for the super state short-duration U.S. government securities fund, a private tokenized fund.

We are also participating in the launch of a collaborative initiative between [ BNY ] and Goldman Sachs, that will utilize mirrored tokenization of money market fund shares to improve transferability, collateral utility and real-time ownership tracking of money market fund shares. We have a robust pipeline of tokenization projects in the U.S. and abroad, including the development of efforts for a GENIUS compliant money market fund, and ongoing integration discussions with several leading firms developing digital technology for fully on chain trading and settlement of tokenized share classes. We believe these efforts position the firm well for the digital transition as we work collaboratively with service providers and stakeholders on developing new standards for combining liquidity, investor protections and blockchain-enabled capabilities for modern financial markets.

Looking now at recent asset totals as of a few days ago. Managed assets were approximately $909 billion, including $684 billion in money markets, $101 billion in equities, $101 billion in fixed income, $19.5 billion in alternative private markets, $3 billion in money market assets -- in multi-asset. Money market mutual fund assets were at $500 billion. Tom?

Thanks, Chris. For Q4 compared to the prior quarter, total revenue increased $13.4 million, or 3%. Revenue from higher money market assets provided $8 million of this increase, while higher equity assets added $5.5 million. Q4 revenue included $8.2 million of real estate development fees for projects that did not advance into construction and is recorded in the other service line item.

Total Q4 carried interest and performance fees were $1.6 million, compared to $3.6 million in the prior quarter. Approximately $570,000 of the Q4 fees were offset by nearly the same amount of compensation expense. Q4 operating expenses increased by $7.3 million, or 2%, from the prior quarter due mainly to higher distribution expense of $8.8 million from higher fund assets. Transaction costs from the [ FCP ] acquisition were about $1.3 million in Q4, nearly all in professional service fees. Additional transaction costs in 2026 are estimated to be approximately $9.2 million. The timing of most of these costs is based on a transaction closing date, which is expected to be in Q2 of this year. Most of these costs will be lending consent fees in the professional service fee line item.

In the other expense line item, FX and related expense decreased by $3.1 million in Q4 compared to the prior quarter. The effective tax rate was 24.4%. We estimate the tax rate to be in the 25% to 28% range for '26. At the end of 2025, cash and investments were $724 million. Cash and investments, excluding the portion attributable to noncontrolling interests were $680 million. We expect to use $215.8 million in cash and $23.2 million in FHI Class B stock for the initial purchase price of the [ FCP ] controlling interest acquisition.

Looking ahead to Q1, certain seasonal factors will impact results based on Q4 average asset levels, the impact of fewer days is expected to result in about $10.2 million in lower revenues and about $2.6 million in lower distribution expenses. In addition, based on an early assessment compensation and related expense is expected to be higher than Q4, primarily due to about $8 million of seasonally higher expenses for stock compensation and payroll taxes. Of course, these line items and others, including incentive comp will vary on -- based on multiple factors.

Holly, we would like to open up the call for questions now.

[Operator Instructions] Your first question for today is from Ken Worthington with JPMorgan.

First on distribution costs. If we look at distribution costs, in the fourth quarter of this year, compared to the fourth quarter of last year, they've jumped almost 25% and essentially all of that is coming from money market funds. But if you look at money market funds, the assets grew just 10%. So what's going on? And to what extent is there any sort of offset to these higher costs on the revenue side?

Ken, it's Ray. We had last quarter, a significant amount of assets came into share class where there are higher than average distribution expenses. And so that jumped by about $10 million last quarter in terms of both the distribution revenue and the related distribution expense. I think that's the majority of the attribution for the delta that you're speaking about. As you know, we have a lot of different share classes with different distribution fee arrangements. And so those kind of changes in mix can impact that.

As far as offsets, we don't really think of it that way. We -- that's essentially -- the distribution expense comes with distributing through the intermediaries. And we manage that the best we can, but there's no real direct way to offset that.

Got it. And then this year, I believe there's 5 higher-profile [ PMs ] that are scheduled to retire. Can you talk about the transition of those PMs to the new leadership of those funds? And any impact you think it will have with your clients?

Yes, Ken. This is Chris. The succession planning that's going on here, has gone on for many, many years. And in every one of those cases, its -- on average, it's like you take someone who's been here 35 to 40 years and replacing them with someone who's been here from 25 to 30 years. And so we don't look for any disruption in the investment management techniques performance. And we look for some great enthusiasm and opportunities by the new people coming in who get to call the shots now, whereas for a quarter of a century, they've been learning and how it's done.

And this is part of the methodology that we have [ usually ] bring in people at the lower levels, train them, and it's part of the guts of our franchise for all seasons for keeping this ship [indiscernible] moving along in choppy waters.

Your next question is from Bill Katz with TD Cowen.

Just want to, sort of, refocus on the tokenization opportunity. Just, sort of, wondering if you could talk a little bit about what you're hearing from end demand from clients, if you can maybe break down your commentary between more of the institutional kind of investor versus the retail? And what milestones would you anticipate either regulatory or legislative that we need to see to, sort of, see a faster uptake in the opportunity set?

So I will comment a little bit, Bill, and then Debbie will comment. So on the end demand from clients, it's not as robust as what you might expect from all the press, media and, in fact, all the work we're doing on it. It's getting ready for tomorrow. And we expect this will be the way things go down the road. But the end clients are perfectly sanguine about using the current products in the current way.

And when you ask about milestones, you've got to get lots of money moving into these things in addition to lots of work being done on how they're structured. Almost every week, there's another new structure and a new idea that is very intriguing. And this is what we're keeping our eyes on. And basically, we're working on all of them. And a milestone would be when you start to see real money moving into them.

There could also be some regulatory things, and that's really hard to predict because you don't know what structures you're going to obtain. And this is true both in the U.S. and globally. Maybe Debbie can talk to this, but when I was in Singapore and Hong Kong last year for the same event Debbie was, both of those and government entities, Singapore and Hong Kong, we're most anxious to be the tokenized headquarters for trading money funds, and they were well down the road of organizing their government entities. But how much is in it and how much money is actually flowing there is another question. Debbie?

Thanks, Chris. So what we've identified in the U.S. so far from a use case perspective is generally on a distribution basis, diversification, and on a use case basis for collateral purposes and for margining purposes, both of which like the instantaneous settlement that is provided from a tokenized product. And ultimately, the ability to, sort of, impact flows pretty quickly on a real-time settlement basis.

In the context of the geographic diversification that Chris was talking about. Certainly, when we look at what is more an institutional use case that we've seen so far in the U.S. when we are in other parts of the world from our checks partnership to the work that we've been doing from an Asian perspective, so much, much more interest from what I'd call sort of the family, the multifamily offices. And so that's where the retail side of it comes in.

Our product outlook has many additional use cases, many additional benefits that accrue to the end user. So we feel like this is just the tip of the iceberg, and that it will serve more purposes and more ultimate end user clients. It's just, as Chris said, a lot of, sort of, work and dissection of markets and underlying, sort of, strengths and everything that needs to be put into place to keep these, sort of, high-quality products that we have in money market funds, liquid and serving the purpose of all the end users.

Just as a follow-up. MDT has done very well for you for quite a while now and it seems like it's off to a good start into the new year as well. So maybe just a 2-part question. What is the underlying driver of the demand? And then secondly, are there any capacity constraints as you look across that portfolio?

Well, let's deal with the second one first. Capacity implies a number, and we don't look at it exactly like that. It's a very complex question as to how to look at what you've raised. And as we've done in other cases, this is rigorously analyzed by [ PM ], CIOs and everybody on the basis that how can we continue to offer the product with the kind of alpha that it's being offered in the environment. We do not see any so-called capacity constraints at this time or in the foreseeable future.

Now on the other question about the demand, the demand is across the board. So far, our -- and live and sales force has been able to consult with a lot of people showing how the MDT various offerings and their pure style box discipline has caught on very well in the intermediary space. And as you've heard in my comments about big institutions also coming into this, it's also on the big separate accounts as well. And so the demand, in short terms, is both retail and institutional.

Yes, Bill, if you look at the Q4 net sales into MDT strategies, about 2/3 of it would be into the mutual funds and the newer ETFs. And the rest of it is institutional and separately -- smaller SMAs, separately managed accounts. So weighted toward retail, but even within that fund mix, there would be institutional applications.

Your next question for today is from Patrick Davitt with Autonomous Research.

First, maybe one for Debbie. We're much further along in the Fed cutting cycle now. So curious to get your updated thoughts on what you're seeing in terms of the potential rotation from institutions into money funds? And to what extent you think there's still a lot of room to run on that theme with the curve potentially steepening here this year?

Sure. No problem, Patrick. Our outlook from an official perspective, from a firm standpoint, for 2026 is one rate cut by 25 basis points, taking the rate of 3.25% to 3.5% from a Fed funds target range. We feel like if we're wrong, we're wrong by having maybe two cuts instead of zero, so wrong on that side of the equation. But in either case, you're looking at an end, sort of, terminal rate that is north of 3% with positively slow curve that probably allows you to generate something in the order of 20 to 30 basis points on a government product basis above where the bottom of that range is. So middle 3%-type of numbers for money market funds.

And when you look at the low-risk products, the high quality, the instantaneous liquidity and settlement that you get, especially if you're looking at the tokenized product aspect of it, you find that as still very compelling from a use case perspective by both institutions whose general other comparison outside of the fund industry is direct market security. So repo, treasury bills, commercial paper, where the positive [indiscernible] yield curve should give the fund advantage.

And then on the retail side of the equation, if you've got a Fed cutting cycle, or even a pause cycle, generally speaking, their other common type of product to use for liquidity purposes is bank deposits. And those are well below where a fund can generate a yield, especially the 3-plus percent environment. So we saw a lot of retail growth driving the 2024 double-digit gains in the market from an AUM standpoint. The institutional side kicked in, in 2025 to help generate those double-digit gains again. Maybe we only get single-digit gains from an AUM standpoint in 2026, but our expectation is it's still pretty positive from an environment standpoint.

Helpful. And then on the expense side, it looks like you're seeing a lot of positive operating leverage on the compensation ratio, in particular, which I assume is a function of the large scale of money fund inflows. Kind of frame how you think that can track in '26? Do you think that operating leverage can continue, assuming flat markets?

Yes, Patrick, it's Tom. Yes, we had the comp numbers, as I mentioned in my remarks, because of the seasonally high stuff that happens in Q1, we certainly will have increase in -- expect an increase in the comp number. And if we get the same kind of flows that we had in '25, if we get that in '26 in -- as we're trending in the MDT and in the money market world, comp will go up. But I think it won't be as fast and we will get positive leverage on it like you started out with.

Your next question is from Dan Fannon with Jefferies.

Given the success of MDT, I was hoping you could talk about the product development, or proliferation as you think about new products into this year and beyond?

As you see on the footprint of what we've done on MDT, the first thing really is to expand the buckets or the wrappers that it's used for. They began as an SMA shop overwhelmingly and had a few hundred million back in the acquisition of funds. So it grew from just SMAs, now it has a lot of funds. So then you saw us go into this the ETF, than the CIT format. And then we brought out the market neutral, which is as a fund and now as an ETF. So you will continue to see us, seeing if there's more buckets or wrappers that we can use for MDT.

And -- one, I did mention in the remarks is offering it where overseas through a usage format. And the usage is basically Irish registered for available for sale U.K., Europe and other places. And that is one where we raised $500 million over a short year last year. So it's new wrappers. It's new markets, and it's repeat the sounding joy of their investment expertise.

Understood. And then, Tom, just as a follow-up in terms of what you mentioned for the first quarter. So we've got from fewer days, [ 10.2 ] lower of management fees. And then given the real estate fees in the fourth quarter and other revenues, we should assume that's obviously also not recurring kind of going into [ the ] '26?

Yes. I call those unusual items and because they really recur -- we may get another couple of million in Q1. It's -- we're still working on that. But to that level, I don't see that happening.

Your next question is from Brian Bedell with Deutsche Bank.

Maybe two questions, both on money markets. Maybe just the first, Debbie, can you remind us just the seasonality trends that we might see for flows in money market funds in the first half? I think we started with outflows early A little bit of [indiscernible] in January, if I'm not mistaken. And then, of course, you've got like tax season coming up. So maybe if you can just remind us of what you're expecting for the cadence of money fund flows for the first half of this year, just on a seasonal basis?

Sure. On a seasonal basis, we generally -- January is usually our worst month of the year from an inflow basis and it's usually actually an outflow. First quarter [indiscernible] similarly, the corporate tax date in March and then individual tax rate flowing into the second quarter in April are generally big hits from a money fund AUM standpoint. And then the second half of the year is generally where the growth really picks up with December, generally, again, being the highest quarter from a, sort of, a year-end window dressing to some degree that is then reversed in January.

What's interesting from a fund standpoint versus an other type of product standpoint? So generally, our separate accounts are state pools are, in fact gathering money starting first quarter and going strong into the third quarter -- or the second -- the beginning of the third quarter, and then they have large outflows that occur in -- later in the third quarter and at the end of fourth quarter. So the two kind of nicely set offset each other from our own AUM standpoint, which is a good thing. But from a strictly money market fund standpoint, it gets better as the year goes on.

Yes. Perfect. And then the second one, just a follow-up on the tokenization of money market fund. Thanks for all the comments on that. A bit of a multipart question here.

But can you just describe in a little more detail the collaboration with Bank of New York and Goldman in terms of that mirroring process of tokenized money funds? How that's different from how you're talking with your other potential clients on tokenization opportunities? And then also on being a stable coin reserve manager, as opposed to a tokenized money fund manager, how do you see the opportunity for that versus tokenized funds? And I guess, over the long term, do you see the tokenization opportunity as incrementally additive to your money fund franchise? or might for the industry that cannibalize existing money market funds?

That sounded like three questions and a comment at the end. We will do our best to try and catalog them.

For the comment at the end, if you look at our charts, if you get them on Page 14, you will see that we have over decades, upon decades, upon decades had higher highs and higher lows. And we would look at this effort, along with other efforts like zero interest rates. And like all of the competition that has come in over the decades, that we will continue to have higher highs and higher lows, because the fundamental business is people have cash or have money that they want daily liquidity at par. And so that is the engine.

Now on the first of your questions, which was BNY and Goldman. I'm reluctant to get too close into the details of it, but I will say this. The way that is structured is you have a regular good old-fashioned money fund and BNY [ Mellon ] basically looks at that money fund as the TA and works with Goldman with their platform, and buys and create tokens and they treat the money fund just like a good, old-fashioned, regular money market funds. So from our point of view, it's tokenizing the process. The client sees a tokenized vehicle. But from the point of view of the fund, it's almost like business as usual.

And I'll let Debbie comment on some of the others because maybe she remembers them.

Well, what I would say in addition to what Chris just mentioned with the BNY Goldman collaboration is, BNY is not only keeping its traditional books and letters on its -- books and records on a standardized ledger, but they are dual processing on the digital ledger. So it's a way of tip toeing in the market and having both belts and suspenders attached to give underlying clients comfort that this process is, in fact, airtight and working [ what it ] should be. So that's kind of the unique aspect of the BNY/Goldman collaboration at this point. At some point, there will be -- the belt or the suspender will go away and it would just be the digital ledger where the books and records are maintained. But for this particular product, it's being doubly addressed.

The part that you asked about stable coins versus a tokenized money market fund, because of the GENIUS Act and some of the other regulatory changes that occurred, or elaborations that occurred in 2025, we have learned that stable coins have to be backed 100% by some form of what is a declined type of collateral. That's where our GENIUS Act funds come into play. And what stablecoins are not allowed to do from a competition standpoint with those funds is pay an interest rate or pay a dividend. And so we -- the stable coins for us represent an additional client base for which the tokenized money market funds that are that are managed under the rules and regs of the GENIUS Act can be the collateral that backs those stable coins to get the 100%.

Right, right.

[indiscernible]

Okay. Great. Any -- just any sense of the number of entities that you're talking with now on the tokenization effort? I don't know if you can disclose that or not?

[indiscernible] on that one.

Your next question for today is a follow-up question from Patrick Davitt.

I just wanted to clarify, the AUM numbers you gave are all as of January 23? Is that correct?

The AUM numbers are actually as of the 28. The sales numbers that we gave were as of the 23rd.

Okay. And then -- so I guess that would suggest then that the money funds have net inflows through the 28, but against the fund that is showing like [ $9 billion ] of outflows. So I guess fair to assume that there's a big amount of separate account inflow?

Yes.

Yes, that's correct. And it really is [ bucking ] the trend. It did it last year, it did it this year. And I think a lot of that has been influenced because of where the Fed has been and where we think they will be in 2026.

And then one quick one. The $10.2 million fee decline, that's just management fees, not including the real estate?

Yes. That's management fees, advisory fees and distribution fees, essentially the fees that are daily based.

And you -- go ahead.

I was going to say, Patrick, it may be worthwhile for Saker to comment further on the $8.2 million where we got the development fees. And Chris made a comment in his remarks about we won a new project over there. And it may be worthwhile for Saker to make a comment on that.

Thank you. So the fees are by a development company, [ MEPC ] in the U.K. [ MEPC ] in our view, is the leader in the things we call place development. We basically developed 4 clients who invest with us, states, manage the buildings, rent them out and when the time is right, sell them for them. And we've been -- we've got a successful long-term track record of that throughout the United Kingdom.

The two states that we are talking about in the Northern England, one is called [ Noma ] and the other one is called [ Wellington place ]. One is in Manchester. The other one is in Leeds. One is 500,000 square feet, others, [ 1.4 million ].

Now the scale of MEPC is -- comes in two sides. The first one is the preparation for the development, and that's with close cooperation with the local government and the community. That's partly why we have such strong development potential and why we managed to let it. And the second one is the way we develop them in a way that makes them attractive spaces. So far, these have been office-based spaces, and they've been great, seen great success. Particularly with the move of companies who move the offices, including some major U.S. companies from London up north and the government actually, which has done the same.

In these two developments, two of our very large clients, institutional clients wanted to pause putting more money into these same developments. So because we've incurred some costs in getting the development of particular building. So the state still exists, but buildings within them because we've expanded so much effort getting everything ready for the phase of actually building, they paid us the fees. But we still have the option to carry on.

Our clients as far as they're concerned, have an option to come back and ask for these to be participants in this, or we can find other clients who want to be participants in it because it's ready to go, which is an important phase, and that's half the difficulty of developing. At the same time, as Chris mentioned, we won a very major bid to do a development project also in the North of England. This one with much more mix, but towards living in fact. So it's not offices. It's much more mixed [indiscernible] living. And that's very exciting because that's part of the pivotal living space and developing living space. And again, there's a huge demand in that part of the world and the same skills apply, the ability of every [ PCR ] developer to work with the local government, the ability to get the permits, and then they will develop something which is actually attractive to the market, both for people to come into it and of course, for the investors to get very strong returns outfit. Thank you.

I just want to go back to the $10 million. I just want to make sure I heard what you said exactly correctly. It's based on average AUM in the fourth quarter?

Yes.

End of period is 3% higher? It's something lower than that if we use end up period?

Yes, I think that's correct.

Your next question is from John Dunn with Evercore.

I wanted to ask, just given where we are in the cycle, kind of your appetite, and also the potential outlook for money market roll-ups?

The potential for money market roll-ups is almost entirely a function of the owner operator of those other money funds. Over time, with increased regulation and increased [indiscernible] of this business, it's -- we have shaken out a lot of those money fund rollouts. Where they occur is when people are deciding to move a family of funds and they happen to have some money markets in them than those are opportunities.

But as we've said before, if you're running even a smaller-sized money fund operation and you control the right to redeem then you're not as worried about what you need to do for the future even if they aren't as economic as they may otherwise be. We have also seen it occur where in some of our bank trust clients where, over the years, maybe a family of funds, or a family of money funds in the trust world doesn't make a lot of sense even though they do control the right to redeem. And then they have new leadership. And then all of a sudden, we're back being looked at as a warm and loving home.

In many of these deals we started in the '80s and '90s and sometimes it takes them that long to mature. But there's no direct pipeline. You can't just put [indiscernible] on it, but periodically, they show up.

Got it. And then just maybe on the outlook for the strategic value dividend fund, where do you think it goes from here from a flow perspective?

Well, the flows in all -- if you add the whole thing of strategic value dividend, they are positive flows, even though the fund is down. And notice that the ETF is up. And what you want to learn from that is that people are actually understanding exactly what that fund is. It's a dividend-oriented fund, with a [ 4 and 4 ] approach. You get 4% dividend growth at 4% dividend, and they've been doing it for 25 years. And this is a good situation.

So even though its Morningstar category rating is one side or the other, it is a very good, steady, long-term product. We have -- I think we're up to $36 billion in an overall and we expect it to continue to grow.

And it's off to a very solid start so far in January through yesterday, it's up about 5.3%.

We have reached the end of the question-and-answer session, and I will now turn the call over to Ray for closing remarks.

Well, that concludes our call, and we thank you for joining us today.

This concludes today's conference, and you may disconnect your phone lines at this time. Thank you for your participation.

Greetings. Welcome to the Federated Hermes Q3 2025 Analyst Call and Webcast. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.

Good morning, and welcome. Leading today's call will be Chris Donahue, CEO and President, Federated Hermes; and Tom Donahue, Chief Financial Officer; and participating in the Q&A are Saker Nusseibeh, the CEO of Federated Hermes Limited and Debbie Cunningham, our Chief Investment Officer for Money Markets.

During today's call, we may make forward-looking statements, and we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. Please review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements. Chris?

Thank you, Ray. Good morning. I will review Federated Hermes business performance. Tom will comment on the financial results. We ended the third quarter with record assets under management of $871 billion, led by gains from our money market and equity strategies. Equity assets increased by $5.7 billion or 6% from the prior quarter due mainly to market gains. Q3 equity net sales were slightly negative $130 million, as solid net fund sales of $1.4 billion were offset by about $1.5 billion of separate account net redemptions driven by one client and all their CIT strategies moving to passive ETFs.

And another client where pension funds were merged and the surviving plan happens to use private strategies -- passive strategies. Interestingly, we are also seeing other clients interested in moving from passives into our MDT strategies, which have had several RFPs come in from investors considering this switch. The MDT fundamental quant strategies produced solid results again in the third quarter. MDT equity strategies had Q3 net sales of $2 billion. Looking at MDT fund performance rankings as of September 30, 7 of the 8 MDT equity mutual fund strategies are in the top performance quartile of their Morningstar categories for the trailing 1 and 3 years.

And all eight are top quartile for the trailing 5 and 10 years. And four of these strategies are in the top decile for the trailing 3 years. We had net sales in 20 equity fund strategies during the third quarter including, obviously, a variety of the MDT offerings and the Asia ex-Japan fund leading the pack.

We are actively developing MDT distribution opportunities outside of the U.S. and are finding considerable interest from institutions, intermediaries and others. For example, the MDT U.S. equity UCITS fund, that means it's registered for us in Dublin, launched in June, is off to a great start.

We are seeing strong demand from clients outside of the U.S. and have already had $340 million in net sales from inception through last week. Now looking at our equity fund performance at the end of Q3 and using Morningstar data for trailing 3 years, 53% of our equity funds were beating peers and 33% were in the top quartile of their category. For the fourth quarter through October '24, combined equity funds and SMAs had net sales of $580 million.

Now turning to fixed income. Assets increased by $3.1 billion from the prior quarter to reach a record high of $101.8 billion at the end of Q3. Fixed income total net sales improved by $4.1 billion, as we had $1.7 billion of net sales in the third quarter compared to net redemptions of $2.4 billion in the second quarter. Q3 net sales included about $1.4 billion from two large public entities that have regular sizable inflows and outflows. We had 24 fixed income funds with net sales in the third quarter, led by the three ultrashort funds with $579 billion combined, and the sustainable global investment-grade usage fund about $240 million.

Regarding performance at the end of the third quarter, using Morningstar data for the trailing three years, 44% of our equity fixed income funds were beating peers and 15% were in the top quartile of their category. For Q4, through October 24, combined fixed income funds and SMAs had net redemptions of about $250 million.

This was occasioned by positives in Ultrashorts and Total Return Bond Fund that were overcome by negatives in high-yield bonds. In the alternative private markets category, assets decreased by about $1.7 billion from the prior quarter, mainly due to a $1.1 billion in real estate fund transactions from -- that we have previously discussed, the restructuring of the U.K. Property Trust in the third quarter.

This fund was successfully managed by us for many years. It was specifically designed for defined benefit clients. There are very few of these left. The liquidity was an important factor. The decision was made to move it to one of the last remaining managers of this type of DB fund for which we received financial consideration that Tom will address. Real estate also had net redemptions of $446 million from separate accounts in Q3 due mainly to property sales that were driven by a client's change to their asset composition.

The MDT market-neutral alternative strategy had net sales of $173 million in Q3 and now stands with assets of about $1.7 billion. We are currently in the market with European Direct Lending III, the third vintage of our European direct lending fund. To date, we've closed on about $680 million. For your information, EDL raised $300 and EDL II raised about $640 million. We are also in the market with our global private equity co-investment fund which is the sixth vintage of the PEC series.

To date, we've closed on approximately $318 million and PECs I through V raised approximately $400 million to $600 million in each fund. We're also in the market with the European real estate debt fund, which is a new pooled debt equity fund -- a debt fund and the marketing will continue here into 2026. We're also actively working on Energy Solutions product development plans following the Q2 acquisition of a majority interest in Rivington.

Last week, we announced the agreement to purchase a controlling interest in FCP, a U.S.-based real estate investment manager with $3.8 billion of assets under management as of June 30.

The acquisition will facilitate Federated Hermes' entrance into the U.S. real estate market at a time when the U.S. multifamily sector where FCP concentrates its efforts, enjoys strong fundamentals and significant growth opportunities. FCP has a strong experienced management team who have led the firm's growth through changing market conditions for over 25 years. We believe that FCP will be an excellent complement to our U.K.-based real estate business. There, with more than 40 years of experience, our U.K.-based team has more than 55 professionals managing $5.5 billion as of the end of Q3.

Now back on FCP, we're planning to close the purchase around the end of the first quarter of 2026. Across our long-term investment platform, we began Q4 with about $2.1 billion in net institutional mandates yet to fund, in both funds and separate accounts. Let's delve into that. Approximately $1.6 billion is expected to come into private market strategies, which include direct lending over $800 million, private equity, a little over $650 million and trade finance at $100 million. Equities are expected additions of $1.2 billion, with about $875 million into MDT and about $365 million into international and global equity strategies.

Fixed income is expected to have net redemptions of about $650 million, with wins of about $380 million in high yield and short duration offset by a single $1 billion high-yield redemption. Moving on to money markets. We reached another record high at the end of Q3 for total money market assets, which increased by $18 billion to reach $653 billion. Money market fund assets increased by $24.7 billion or 5% in Q3 to reach a record high of $492.7 billion. Money market separate accounts decreased by $6.3 billion in Q3, reflecting seasonal patterns.

Market conditions remain favorable for cash as an asset class. In addition to the appeal of the relative safety and periods of volatility. Money market strategies present opportunities to earn attractive yields compared to alternatives like bank deposits, direct investments in T-bills and commercial paper.

We're also developing money market funds and share classes available in tokenized form and working with parties on digital asset infrastructure. These efforts include a planned GENIUS Act compliant money market fund designed to serve as collateral for stable coins. Last week, we announced that we have made two of our UCITS money market funds, our Sterling Prime and U.S. dollar Prime available in tokenized form through Archax. Archax is a well-known digital assets operator in the U.K., having launched in 2018 and become the first FCA-regulated digital Securities Exchange broker-dealer and custodian.

This represents a Federated Hermes initial non-U.S. digital asset initiatives. The Archax relationship complements our digital efforts, where we are the sub-adviser for the superstate short-duration U.S. government securities fund, a private tokenized fund with about $735 million in assets. We will also participate in the launch of a collaborative initiative between BNY and Goldman that will use blockchain technology to maintain a record of their customers' ownership of select money market funds.

A significant step towards enhancing the utility and transferability of existing money market fund shares. We are exploring numerous other additional digital asset opportunities. We are committed to the digital space where we expect ongoing innovation and growth. Our estimate of money market mutual fund market share, including sub-advised funds remained at about 7.11% at the end of the third quarter.

Now looking at recent asset totals as of a few days ago. Managed assets were approximately $865 billion, including $645 billion in money markets, $96 billion in equities, $102 billion in fixed income, $19 billion in alternatives, private markets, $3 billion in multi-asset. Money market mutual fund assets stood at $486 billion. Tom?

Thanks, Chris. For Q3 compared to the prior quarter, total revenue increased $44.6 million or 10%. Revenue from higher money market assets provided $17.6 million of this increase, while higher equity assets added $14.8 million. An extra day in the quarter added $4.9 million, higher performance fees added $2.4 million and the Rivington acquisition added $1.2 million. Q3 revenue also included a termination fee of $4.6 million from the restructure of the U.K. property trust, and this is about -- was about 1 year of revenue from that mandate.

Total Q3 carried interest and performance fees were $3.6 million compared to $1.4 million last quarter, approximately $733,000 of the Q3 fees were offset by nearly the same amount of compensation expense. Q3 operating expenses increased by $32.2 million or 10% from the prior quarter due mainly to higher distribution expense from higher fund assets of $14.2 million. We had about $2 million in transaction costs from the FCP acquisition in Q3 in the professional service fees line.

In other expense line items, FX and related expense increased by $9.4 million in Q3 compared to the prior quarter. These expenses were $3.7 million in Q3 compared to a credit of $5.7 million for Q2 as the pound weakened against the dollar in Q3.

The other expense line item for Q3 also included $2.8 million related to a U.S. withholding tax matter on certain non-U.S. funds. The effective tax rate was 24.4%. The tax rate was impacted by $1.6 million related to R&D tax credits. At the end of Q3, cash and investments were $647 million. Cash investments excluding the portion attributable to noncontrolling interests were $610 million. We expect to use about $216 million in cash and about $23 million in FHI Class B stock for the upfront purchase price of FCP controlling interest acquisition.

During Q3, the company paused its open market share repurchase, as we entered exclusive negotiations with FCP. We expect to be active again in Q4 and repurchase shares in the open market.

Holly, we'd like to open the call up for questions now.

[Operator Instructions] Your first question for today is from Ken Worthington with JPMorgan.

This is Michael Cho, on for Ken. So my first question, I just wanted to touch on MDT franchise. I mean there's clearly some growing momentum there. You called out some new RFPs, a pretty sizable pipeline as well as some initiatives to expand distribution more notably outside the U.S. I mean, how do we think we should kind of frame the potential sizing and maybe the pace of AUM or flows growth of the overall MDT franchise as you continue to scale and as the non-U.S. distribution starts to grow. I'm just trying to get a sense of how we should frame that opportunity set.

I think you should frame it with enthusiasm and optimism. If you look at the sales to date through this time frame, they're still running net sales of -- up through October 24 of about $660 million so the pipeline continues. But for us, the exciting thing is the fact that we were able to sell these mandates across the globe. And if you look at where they're coming from, they're coming from different countries, in different ways and in different of the mandates exactly on MDT.

I can't get into exactly who the clients are. But in those pipeline numbers is a great variety of client types and geographies.

Understood. And then if I could just ask a quick follow-up on expenses. Just broader over the year ahead. You have a number of initiatives. You called out a bunch today. Clearly, alternatives and the FCP acquisition is ahead, but you also have a number of things happening within money market and blockchain, digital assets and clearly, kind of extension of some of your key franchises.

So I just think about the expense base and over the next 12 months or so, how should we kind of think about the trajectory there as you can continue to invest organically and inorganically across the business?

Okay. Mike, well, the first thing, FCP, we closed that near the end of the first quarter, then of course, those expenses will come in. But we've kind of factored that in -- on last week's discussion about our view of after transaction costs, it would be an accretive thing, and also in 2017, much more accretive based on our estimates of what we think is going to happen there. So of course, revenue go up and the expenses will go up.

And in terms of -- you're calling out a few things. Obviously, the digital things and money market stuff and other expansions. I don't see outsized expenses coming in here. And if they do, we would fully expect them to come with revenue shortly thereafter. And if you want me to go through the -- not for the year, but for the next quarter, a few comments on the line items. I'd expect comp and related to go up, as sales are increasing and therefore, incentive comp is going up, and investment management performance is causing us to increase the incentives there.

And on the corporate side, we're also increasing the incentive. These are all positive success items. On the distribution line item, we expect that to go up as you look at average assets, distribution line item and other success item goes up. On the professional service fees are looking at it today, we already said we'd expect some more FCP closing costs in Q4, but we had a couple of million, as I mentioned, in Q3, so maybe we have $3 million more as a change. And then the other line has effects in it, and that has that tax payment that we talked about and what's going to happen in FX we will see. But those are all comments on a quarterly, not a yearly basis.

Your next question for today is from Bill Katz with TD Cowen.

This is Robin Holby on for Bill Katz. Heading into 2026, what are you hearing from your institutional investors on allocations, where are you seeing opportunities? And how are you thinking about the pace of deployment for the institutional pipeline?

The institutional pipeline, I tried to hint at this a few minutes ago, is very, very strong. As we told you, we've got over $2 billion in it. And if you look into that, the pipeline is to see performance and different countries. So I was a little more general the last time, but we have a Belgium All Cap Core, MDT big mandate that we've won. In Canada, it's an international leaders mandate that we've won; in the U.K., a global equity mandate; in South Korea, a blended MDT; another U.K. client came into the All Cap Core, MDT. We have an MDT win in the Mid East as well.

So it's across the board of performance-oriented activity. And then if you look at the style box security of the various MDT offerings, you get a sense that people are looking at it that way. And then I did hint that we are seeing some clients -- this is not an avalanche, don't go writing big hairy articles that people are looking at what they really own inside a passive or indexed situation and are thinking that maybe they need to look at some of the MDT mandates as alternatives.

And Robin, on the -- in terms of the pace of the funding of the pipeline, about 2/3 of it, we expect to fund here in the fourth quarter with the equity and fixed income equity inflows, fixed income outflows happening this quarter and about half of the alt funding happening this quarter. The alts usually have a longer tail, so they will continue to fund through the first half of next year, Q1 and Q2 pretty evenly.

Okay. Holly, we must go to the next question.

We have reached the end of the question-and-answer session. And I will now turn the call over to Ray for closing remarks.

Okay. Well, thank you for joining us. That concludes our call.

Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Greetings. Welcome to the Federated Hermes-FCP Acquisition Conference Call and Webcast. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Ray Hanley, President of Federated Investors Management Company. You may begin.

Good morning. Thank you for joining us today. We're very excited to discuss the agreement for Federated Hermes purchase a controlling interest in FCP Fund Manager. Leading today's call will be Chris Donahue, CEO and President of Federated Hermes; Esko Korhonen, Founder and Managing Partner of FCP Fund Manager; Tom Donahue, Chief Financial Officer of Federated Hermes; and joining us for the Q&A is Saker Nusseibeh, CEO of Federated Hermes Limited.

During today's call, we may make forward-looking statements. We note that Federated Hermes' actual results may be materially different than the results implied by such statements. Please review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements.

Today's call may also include certain non-GAAP financial measures. Please see the analyst presentation for the transaction, which we will refer to during today's call and which is available on our website and in the 8-K that we filed yesterday for important information about these financial measures. Chris?

Thank you, Ray. Good morning, and indeed, welcome. As announced yesterday, Federated Hermes has entered into a definitive agreement to purchase an 80% controlling interest in FCP Fund Manager, LP, or as we're going to refer to it FCP, a U.S.-based real estate investment manager. Post closing, FCP's management team will retain an ownership position of 20%.

We have been seeking the right firm to expand our private markets real estate business into the U.S. as we have said many times on these calls. In FCP, we have found a growth-oriented company with a differentiated approach, and excellent management team and workforce and solid investment performance.

Slide 3 of the presentation outlines the strategic rationale for the deal. The FCP fits well with our stated growth ambitions to anchor our private markets investment footprint in the U.S. and to increase our investment offerings for our clients. We have a strong existing vertically integrated real estate platform in the U.K. that made its first investment in 1983, expanding our real estate offerings to include an established U.S. platform, one that is a specialist in the multifamily housing asset class is a natural extension.

The acquisition will facilitate Federated Hermes entrance into the U.S. real estate market at a time when the multifamily sector in the U.S. enjoys strong fundamentals and significant growth opportunities. We were attracted by FCP's national platform, their active, disciplined investment philosophy and their extensive experience with investors in this space. FCP's culture and principles align well with Federated Hermes.

FCP is focused on U.S. multifamily real estate with approximately $3.8 billion currently invested in strategies throughout the real estate capital structure. The FCP team has a strong local knowledge and capability in high-growth areas of the company -- country. FCP brings more than 75 employees located in various U.S. offices, providing deep local coverage of 19 priority U.S. markets. We believe FCP will be an excellent complement to our U.K.-based real estate business. With more than 40 years experience, the U.K.-based team has more than 55 professionals managing $5.5 billion of AUM as of the end of the third quarter.

Our U.K.-based real estate team is responsible for some of the most successful and iconic developments in the United Kingdom across multiple sectors, such as center city office, leading urban regeneration, innovation-focused life science and technology hubs and multifamily residential assets. Importantly, while the U.S. and U.K. real estate teams will operate independently within the broader Federated Hermes private markets offering, we do anticipate benefits for our collective global clients by introducing additional expertise as we seek to develop product solutions for our client base at a time of increasing demand for the private markets asset class.

Slide 4 shows the projected pro forma impact of the FCP addition to Federated Hermes private markets alternative platform. With the FCP addition, Federated Hermes, who have a global real estate platform with over 130 professionals managing approximately $9.3 billion. FCP will continue to work to execute their growth strategy, led by its strong, experienced management team who have led the firm's growth through changing market conditions over 25 years. We will develop ways to enhance FCP's resources and capabilities, including opportunities to expand distribution through our client base. We expect to retain all FCP employees. On behalf of Federated Hermes Board of Directors, executive management team and employees, I want to welcome FCP employees. We look forward to working with you to grow to new heights.

I will now turn it over to FCP Founding Managing Partner, Esko Korhonen.

Good morning. Thank you, Chris. First of all, on behalf of the partners, managers and employees of FCP, we are very excited by our alliance with Federated Hermes organization and the opportunities for growth that we expect to develop.

As noted on Slide 5, FCP is a multifamily real estate investment manager founded in 1999. We are headquartered in Chevy Chase, Maryland with regional offices in New York, Raleigh, Miami, Dallas and Denver, each a growth area for multifamily developments. FCP has raised over $6.3 billion in equity capital and has invested in or financed more than $14.6 billion in gross asset value since its founding. We invest throughout the capital stack and have more than 130,000 multifamily units that we have owned, operated, financed or advised since 1999.

We've developed an investor base rooted in long-term relationships with institutional limited partners across pension funds, sovereign wealth funds, endowments, foundations, high net worth, funded funds and others. Looking at Slide 6, our founding partners who will remain leaders of the firm have 30-plus years working together across market cycles. We also positioned the firm for future growth with 5 next-generation partners among more than 14 years -- with more than 14 years of experience with FCP. On a brief note, just to give you a little bit of a bio on Lacy Rice, Alex Marshall and myself, the founding partners, Lacy and I met over 30 years ago while we were at the Carlyle Group and part of their real estate team there. Alex joined us very shortly thereafter, where in his previous experience had been at JPMorgan and Clarion.

Moving on, Slide 7 highlights some of FCP's key attributes. Among these are our differentiated investment approach that targets U.S. markets experiencing outsized growth, particularly in the Sun Belt. The U.S. space is a persistent structural housing shortage and market dislocation exacerbated by interest rates, repricing and over-leveraged borrowers. FCP leverages local market expertise to source off-market opportunities characterized by cyclically high yields and discount to replacement costs. Our investment focus is multifamily residential, with a particular emphasis on acquiring Class B & C moderate income housing; acquiring, developing and redeveloping Class A multifamily properties; and opportunistically participating in special situations, including mixed-use and commercial.

Slide 8 presents our AUM by investment vehicle, featuring a series of flagship value-add funds and multifamily focused credit, separately managed accounts. We have also launched a housing preservation open-end fund this year. We have a hands-on investing approach, utilizing cutting-edge technologies and proprietary data analytics to lower costs, select markets and drive income. In addition, we provide a suite of resident-focused services that are meant to enhance the living experience in our communities, improve property operations and drive performance while maintaining leadership on environmental sustainability.

So why Federated Hermes? As Chris said, we believe that the culture and principles of each firm are aligned. We were attracted to Federated Hermes position as a global leader in active investing across multiple asset classes. We appreciate its well-established private markets platform primarily operated outside of the U.S.

Our alliance provides FCP an opportunity to strengthen our institutional platform, enhance our growth trajectory and provide expanded resources for our clients and stakeholders as the anchor for Federated Hermes entry into U.S. real estate private markets. For FCP, the completion of this transaction with Federated Hermes will mean we will remain highly focused on our clients and our core strength, investing across the U.S. multifamily asset class, leveraging our deep local market knowledge and utilizing our proprietary data and analytics and technology.

Our team will continue to operate as we do today, maintaining our culture and commitment to excellence. We will explore opportunities, our capital formation capabilities through access to Federated Hermes global distribution channels. Further, we will benefit from the complementary experience and knowledge of Federated Hermes U.K. real estate business, particularly in the living asset class sector as both U.S. and U.K. teams develop and grow.

Our founding partners and next-generation leaders will continue to guide FCP, ensuring continuity and stability for our clients and employees. We believe that our alliance will give us the opportunity to enhance growth by raising the profile of FCP's brand both in the U.S. and internationally to capture new investors and recapture previous investors to boost new vintages of FCP equity and debt offerings. We expect to launch new investment offerings based on FCP's broad capabilities in multifamily debt and equity investments, beginning with the next iterations of FCP's equity and debt offerings in the living sector.

Additionally, Federated Hermes will leverage its extensive global network of distribution relationships, including U.S. institutional consultant relations teams to deepen FCP's relationships further. We also see the opportunity to develop new product capabilities to service wealth clients and retirement assets. And with that, I will turn it over to Tom.

Thanks, Esko. Looking at the transaction details on Slide 9, we will be acquiring 80% interest in FCP for up to $331 million in aggregate purchase price, subject to potential post-closing purchase price adjustments. The aggregate purchase price includes $215.8 million in cash consideration and $23.2 million in FHI Class B common stock that will be paid and issued at closing as well as opportunities to earn contingent consideration of up to an aggregate of $92 million over multiple years based on achieving certain financial thresholds.

The FHI Class B common stock will be issued in a private offering to certain of FCP selling owners, subject to a 2-year lockup period. We expect to fund the cash portion of the aggregate purchase price for the acquisition with cash from our balance sheet. The total purchase price represents a valuation of 13.7x 2025 projected EBITDA of approximately $30 million less the 20% minority interest of about $6 million. The upfront consideration represents approximately 9.9x 2025 projected EBITDA less the 25% minority interest 20 -- plus the 20% minority interest. We expect an IRR of about 13.1% on the transaction.

After the close, FCP management will hold 20% of FCP. Through put/call options, there are opportunities to acquire the remaining FCP shares beginning after the 5th anniversary of the closing. Through the deal structure, including the employees' equity stake and other incentive programs, we believe we have an excellent alignment of interest among FCP employees, their clients and Federated Hermes. Performance fees and carried interest from FCP's completed deals will go to existing carried interest holders. Federated Hermes will receive a portion of any of these funds for any of these fees for future funds.

We estimate on a preliminary basis that the transaction will result in about $0.04 of EPS accretion in 2026, excluding transaction expenses, assuming a closing at the end of Q1, and $0.13 in 2027. We have recognized about $2 million in transaction costs through September 30, 2025, and expect to incur an additional approximately $5 million in Q4 and approximately $4 million in Q1 of next year.

We entered into exclusive negotiations with FCP in August. As a result, we suspended our share repurchase program for the full third quarter with no shares purchased in the open market. In closing, we've spent considerable time working with Esko, Lacy, Alex and the entire management team at FCP, and we have found a great cultural fit, as you've heard Chris and Esko say. And also, we are very excited about our future together. So Holly, we would like to open up the call for questions now.

[Operator Instructions] Your first question for today is from Ken Worthington with JPMorgan.

This is Michael Cho in for Ken this morning. Congrats on the deal. Chris and Esko, you touched on a few different areas of overlap between Federated and FCP. I was hoping you could flesh out some of those comments around where you think Federated can really deliver the most incremental value relative to a stand-alone FCP? And how do you envision the progression or the pace of progression when we think about new products and distribution within U.S. real estate?

Okay. Thank you, Michael. Say hello to Ken. We're one week early for him. So I would sort of question the word overlap. Yes, we both are in the real estate business. We've given you the numbers. But the beauty of this organization that Esko has created is that it is independent, will function as what we have called historically an area of excellence in the U.S.

And so the kinds of working together that we see are expertise where we can bring things like our experience in doing Kings Cross or Paradise Circus in Birmingham through various people showing how these things work and what success can look like there. I mean we have created things that have thousands of homes in England, in Kings Cross, and we've managed 1,700 apartments over in London. So that is one area of similarity.

The way that we can enhance value is by supporting FCP and what it does in putting out new products. We can also support them by introducing them to our distribution force, which is very, very good. Now we don't sell real estate here in the U.S. So that's not something that's going to happen tomorrow. But over time, as we enhance our private markets distribution efforts, this will go with it and is an essential key to making that happen. And I think Esko has some comments on this as well. And I think he can illuminate it by talking about some of the geographies that they are most enthusiastic about in the U.S. with their investments.

Thanks, Chris. So with regard to your last point, as mentioned, we are active in 19 to 20 markets. They're primarily focused on the high-growth markets in this country. We have owned operated assets in all of those markets. However, I will suggest there may be times where we don't actively own assets in a particular market, but we continue to focus. We have people and resources that are focused on investments because none of our markets move directly in a correlated manner. So we're always looking for those kinds of opportunities.

I would also echo what Chris talked about with regard to combining our sort of distribution channels and access to global capital, which I think is increasingly important, and something that I think that together, we will be stronger than apart. And with regard to new products, as mentioned, one, our focus really has been in the living sector. That includes multifamily, but it may include other sectors.

By way of example, it could be student housing, it could be seniors housing, both of which we've done in the past, not in a big way, but are sectors that could be attractive that we could open up. And then I think the other piece would be investment vehicles, i.e., whether it's obviously our closed-end funds, we've got separately managed accounts, our open-end funds and other vehicles of that type that would be attractive to different types of capital and different costs of capital as well.

As mentioned, we invest up and down the capital stack, meaning equity and debt. And those obviously require capital with different expectations as far as returns. And I think that, again, this enhanced distribution channel will really impact that in a good way.

So one other thing I'd add is that when we talk about adding it to the distribution of FHI, we think it can operate as a gateway or access to the wealth and high net worth channels that have been very, very successful at FHI. And this, of course, is in the U.S. And that's why we keep talking about, "Oh, this will be attractive to our clients and our investors as well."

Mike, this is Tom. One more thing. In our discussions with Esko, Lacy and Alex, we have talked about the capital that Federated Hermes generates. And while we've talked on this call many times that our order of interest is acquisitions and of course, then dividends and the regular capital things, we spent some decent amount of time talking to them about using the capital at Federated Hermes for new products, new ideas there. And so we have excitement there, and I think they have even more excitement about that.

That's great. I appreciate all the color there. If I could just quickly follow up just on fundraising. It looks like FCP's flagship product, is out in the market maybe every 2 to 3 years. I recognize that the 2023 vintage is investing now. But any thoughts around fundraising around the flagship product expectations maybe going into '26? And any way to kind of size or frame the relative size or growth and as we think about fundraising ahead.

Esko, they want to talk to you.

Okay. Well, we just had the final close on our last flagship fund in December of last year, we're actively investing that. Per our agreement with our limited partners, we can start marketing and talking about the next fund once we are 70% invested or committed. Our expectation is that, that will happen sometime during the end of next year, the beginning of '27, and so that would be when we would start looking to raise our next flagship value-add fund. That fund -- the last fund was about $1.1 billion. And frankly, it has the opportunity to even grow with co-invest, which is another element that we're using here. So over time, that would be something that we think could even be larger.

I think that when we look out at the market and sort of what we're seeing both generally in fundraising as well as just the interest in the living sector our expectation is that we'll be able to hopefully grow the next fund, Fund VII in a meaningful way. Does that answer your question?

Yes. No, that makes sense.

Your next question is from Patrick Davitt with Autonomous Research.

I guess first, I think the performance data you gave is since 2008, but you've been operating since '99. Any color you could give on how the portfolio performed through the GFC would be helpful.

Esko?

It's interesting. So we had what we call our legacy portfolio, and that was really started in '99 and went until about 2006, 2007. And those were one-off transactions. And the reason for that was that we realized we needed to have our own track record under the FCP banner as well as we wanted to take that time to build our operating platform because we knew that would be important to both those factors being important to institutional investors. So we started contemplating raising a discretionary closed-end fund in '06, '07.

Well, we all know sort of what happened as we went into the GFC. So we had closed that fund in February of 2008. And in many ways, you look back at that, it was a tough time, but it was a great time to have dry powder. And we were buying into distress at that period of time because of the impact of the GFC. Interestingly, we had raised the fund in February 2008, and I remember standing in front of our first ever Annual General Partner meeting with our investors and had to say, the bad news is we haven't actually committed any of your capital. The good news is we haven't committed any of your capital. We were patient as there was still a falling knife in that environment. We incubated a number of deals, and then we sort of struck as we went into '09 and '10. And that fund performed exceptionally well as a result.

Got it. Okay. My follow-up is on the fund structures, the traditional kind of close-end 10-year life fee structure? Anything unusual about the structure of the funds?

No, it's exactly as you say, it's a closed-end fund. We have a 3 years in which to commit the capital, i.e., invest it, then we have 7 years in which to operate and harvest. Typically, we have two 1-year extensions at the end that we could exercise if needed. And other than that, it's structured like most other closed-end funds.

Your next question for today is from Kenneth Lee with RBC Capital Markets.

Congrats again on the deal. Wondering if you could talk a little bit more about the earn-out provisions, specific targets or goals? And whether the payout is in cash or equity?

Tom?

Yes, Ken, the payout is in cash. And there's two different structures. One is based on revenue growth. And the other one -- and it's a 3-year type payments. And then the other one is based on how much money gets raised in Fund VII and payments based on pro rata type payments. Importantly, we want to pay it.

Yes. Yes. Every time that there is a payment, we are happier and we would be thrilled. Esko and team would be thrilled, and we will be thrilled and our shareholders will be thrilled if we pay the whole thing, i.e., we're all on.

Great. That's great. And then one brief follow-up here. And then in terms of the key employee 5-year agreements, any particular details around that, any sort of lockup details and that sort of thing?

Well, that's really easy because Esko, Lacy and Alex are the main players on that. And they still own a good share of the 20% and also we'll share in carry. So it's all aligned properly. And then the second wave of next generation of managers are all tied in with carry, and we also have a restricted stock plan that will come about over a 3- to 5-year period to keep everybody interested and aligned.

Your next question is from Bill Katz with TD Cowen.

Okay. Apologize for my horse voice, and congrats on the deal. Maybe the first question is, you mentioned some baseline accretion for '26 and '27. Can you unpack some of the assumptions underneath that in terms of what kind of growth you're anticipating and/or how you're thinking about capital return? And is there any impact on your existing buyback? That's my first question.

Yes. So on our buybacks, we expect to still continue on doing share buyback. I said -- I mentioned -- I wanted to mention in there that we took a pause on that because we were -- had material inside information. So we didn't think it was appropriate to buy shares, but we would expect to restart that up. And in terms of the accretion, we do -- we did our models, and we took Esko and team's forecast, and we analyzed that and we had an adviser scrutinize all their assumptions and then we put together what we think was our base case, and that's what we've used to develop those models. We think we're going to hit them, Bill.

Okay. Just as a follow-up, maybe a 2-part is somewhat unrelated. As part of your press release, you announced that your 9/30 alternative AUM or $19 billion that does down somewhat meaningfully from the June update. Can you maybe unpack me what's happening there? And then as part of this transaction, was this a -- just a bilateral negotiation? Or is this more of an open bid opportunity?

So on the first question on the AUM, I'll let Saker talk about the H Put transaction. Saker?

I apologize if the voice keeps cutting off. I don't know what's wrong with this connection today. However, so we had a fund that was here from a way back called FH Put, which was a closed-end fund, specifically designed for DB, that's -- sorry, DC, defined contribution clients. And as the market for defined contribution in the U.K. essentially is winding down so that there are very few of these funds left, we -- and the fund made the decision that this is better looked after by one of the last remaining people who look after DC funds.

And so we entered into an agreement with shareholder support to move that fund to them, which was all published in the newspapers. And of course, we also were paid the fee as a result of that, which is the fee is due to us. So this was part of our pivot, if you like, away from a market that we see no growth in to concentrate our resources on markets where we do see growth in which is -- the flagship of which is a business called MEPC, which is a developer that Chris mentioned a lot and which continues to achieve developments that hit the price and performance targets and we want to continue to expand that. And with more specialists, if you like, property management here in the U.K., including the learnings that we can get by talking to our new colleagues about multi-tenanted properties. I hope that answered the question.

What was the AUM on H Put?

Sorry, Chris, you dropped off.

What was the asset value, the AUM of H Put.

So $1.2 billion.

And just -- there was additional distributions that were made to a client that was looking to manage their real estate exposure. And so we had some property sales and refinancing that resulted in additional distributions that would be more in the normal course of that type of business.

Did you have a second question, Bill wrapped in there that we're not getting that?

Yes, I apologize. Just was this transaction just bilateral? Or was this more of an open opportunity, just more of a good process?

You mean FCP? Yes, FCP, they use Berkshire and had a process. And we were the winners of the process. Esko, you can talk about that if you want to.

Yes. We hired Berkshire, and we knew that this was the direction that we wanted to go as a firm for all the aforementioned reasons that we've talked about. And they took us out. We had a number of preliminary costs than we had what I would call intermediate calls that where people really started to dig in. Ultimately, it was winnowed down to roughly a group of four that were a fit for us. And then fund that, Federated Hermes was victorious. And we were very happy about that because, again, all the alignment that we see with the firm. So we did have multiple offers, but this really was the one that stood out.

And Bill, I will mention that from my perch on the tree this was always the right deal and a similar kind of thing we had with Hermes, where we talked to them in 2012, and it took 6 years of due dili to do that, this was done much faster. But it was the same kind of approach. Once you see the cultural alignment that now you get to live with this into the future, the beauty of it certainly comes to the fore.

Your next question for today is from John Dunn with Evercore ISI.

I just wondering maybe get your take perspective as far as where you think we are in the demand cycle for private real estate?

Esko?

Well, I think that it continues to be strong. There was an increase in capital raised although, obviously, with the dislocation sort of macro and in the capital markets, it was less growth than maybe experienced in previous years, but still positive. So I think that institutions are still looking for this globally. People are very interested in U.S. real estate. Also, I think that, as mentioned -- Chris mentioned, One of the things that I think will be extremely important is accessing that $12 trillion of retail capital.

And as that is becoming more and more focused, frankly, in our industry, I think that offers us a huge opportunity to access that capital, which I think will grow over time into these kinds of real estate vehicles. So we're extremely excited about it. Clearly, there is somewhat of a consolidation going on in our business. And this transaction, I think, represents some of that, and these kinds of alignment, but I think all that does is strengthen our ability together to continue to raise capital.

Got you. And then you mentioned that, obviously, you weren't selling private real estate in the U.S. But as far as building out that effort, are there resources you already have that you can transition to that? What new stuff would you add -- have to add? And then like how long do you think it's going to take to get ramped up?

Well, so you heard Esko talk about the timing of the next fund. So we have a little bit of time here, but that's not how we feel about it. We feel that we need to be on it right away. And so actually, in Esko's shop, they're already in the process of looking to add some distribution resources and our internal teams here are coming to us by the end of October was the request for their plan and strategy for how we really develop this into a much bigger business.

[indiscernible] is to give you a little add. This week, we're celebrating the 70th anniversary of FHI, started in 1955, by three salesmen who were selling mutual funds and no we knew what they were. Over the time frame, all new stuff came up all the time. And one of the founding fathers, my dad's comments was when someone would ask him, how do you motivate people. And he would say, "You have new things, new things to do, new opportunities. And if you're in the financial services business, they're always there." And that's how we look at this opportunity. Yes, sorry. So anyway, we love new stuff, and we'll figure it out.

Your next question is from Patrick Davitt with Autonomous Research.

A couple of housekeeping items. You mentioned in the deck that $2 million of the costs from the deal have already been incurred. Is that going to be in your 3Q reported earnings?

Yes.

Yes. And then Saker mentioned a fee from the H Put transaction. Is that -- could you frame the scale of that in earnings?

I think it's $4.6 million.

You cut out.

It's $4.6 million.

Okay. And the comp ratio on that?

There is no comp. That's just the seed to us.

We have reached the end of the question-and-answer session. And I will now turn the call over to Ray for closing remarks.

Thank you, Holly. That concludes our call, and we thank you for joining us today.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.