CEO Explains AllianceBernstein’s JV with Societe Generale
Seth Bernstein, president and chief executive of AllianceBernstein said the equities and research joint venture with Societe Generale will give the asset manager and research firm a simpler business model and significantly reduce its capital deployment.
In November AllianceBernstein and French bank Societe Generale announced plans to form a joint venture combining their cash equities and equity research businesses. Societe Generale intends to take a majority, 51%, interest in the joint venture, with an option to reach 100% ownership after five years.
Bernstein spoke at the Goldman Sachs 2022 US Financial Services Conference on 6 December in New York.
“If you are going to build an asset management business from scratch, you would not have a sell-side research business,” he said.
He described Bernstein Research as having an unusually strong reputation but that the research industry faces a secular challenge. Principal competitors, the bulge bracket banks, use research as a cost centre to support a range of other businesses that are critical to their P&L and corporate relationships, so Bernstein said it is a tough market to compete in and to see growth
“I concluded a long time ago that we may not be the ideal long-term owner of the business,” he added. “They are profitable, but not as profitable as the rest of our business, so we have been thinking about how to maximise the value in a way that ensures that there is a really attractive career path for the analysts.”
AllianceBernstein does not act as a principal in trading while Societe Generale has prime brokerage, equity derivatives and equity capital markets. Bernstein said the firm had wanted to find a partner who had those capabilities as the adjacencies would be attractive and enhance the growth potential of the research business – so the French bank was ideal.
“The cultural risks of the transaction are reduced by the lack of overlap, both in the United States and Asia and the overlap in Europe is not critical for the economics,” he added. “They are a pre-eminent equity derivatives player, which is a critical capability for a lot of our sell-side clients, particular hedge funds.”
In addition, he argued that the joint venue will give AllianceBernstein a much simpler business model and significantly reduce its capital deployment.
“We think there is upside to the valuation which we have not disclosed, but we think is pretty compelling,” said Bernstein.
The proceeds from the sale could be used to pay down debt, for a special dividend or to buy back stock. Bernstein believes the joint venture positions the firm effectively in asset management and protects the culture.
“The expense savings really come from Europe and it’s really a revenue play in the rest of the world,” he added.
This year markets have been challenging with high volatility and a rise in interest rates that is unprecedented in recent history.
“For the first time in close to 13 years we are getting nominal rates that are pretty attractive, where fixed income in a multi-asset portfolio actually plays a role other than a diversifier and can provide income,” said Bernstein.
As a result AllianceBernstein’s flagship American income or global high-yield products are attracting positive inflows for the first time in a couple of years. Bernstein expects the US Federal Reserve to stop raising rates in the second half of 2023, as well as a recession next year.
“I think private capital, particularly private credit, has a secular wind to its back,” he said. “Retail and high worth clients are under- invested in the space and are going to need that income.”
In July this year AllianceBernstein completed the acquisition of CarVal Investors, a global private alternatives investment manager with $15bn in assets under management, primarily focused on opportunistic and distressed credit, renewable energy infrastructure, specialty finance and transportation investments. The acquisition expanded AllianceBernstein’s private markets platform to $50bn in assets under management.
Bernstein said that in the third quarter the firm had approximately $2.5bn in incremental commitments and is in the market for its second clean energy fund. Although the fundraising market has become more challenging, Bernstein said the firm continues to see very strong interest.
“CarVal started as a distressed player, so we think that is a really interesting potential play,” he added. “This recession is fundamentally different than what we have seen post-global financial crisis and could be longer term and deeper.”
As a result credit underwriting becomes more important and the CarVal team has been together for more than 30 years and experienced many cycles. In contrast, most people putting money to work today have not been through a sustained downturn.
Although inflows have increased in fixed income, Bernstein warned that much of the inflows in liquid markets will go into passive products, especially as many active managers have struggled to deliver against fixed income benchmarks.
In addition, in equities AllianceBernstein assumes that the core of client portfolios are passive in liquid markets, particularly when there are tax advantages related to direct indexing.
In September this year AllianceBernstein launched its first set of active fixed income exchange-traded funds – the AB Ultra Short Income ETF and the AB Tax-Aware Short Duration Municipal ETF. Their short duration is appropriate for the market today according to Bernstein.
“To really grow and break even in the ETF space, you are talking about a three year investment cycle so we are in the very early days,” he added. “We have filed for a number of equity and multi-asset strategies as we think ETFs are an interesting wrapper for our more systematic investment styles.”
Bernstein expects to more heavy calendar of ETF launches next year, particularly in equity and multi-asset.
“If the core is passive, you better have active equities that are very idiosyncratic and that you can’t replicate through a factor,” he added. “We are very comfortable that we are able to do that and that is how we measure our investment teams.”
Bernstein believes there will be opportunities for active managers in small-cap and emerging markets.
“There will continue to be lots of opportunities to find interesting managers to buy or acquire to achieve scale and we are looking to do that,” he said.