Q3 2025 Earnings Call Transcript

Thank you for standing by, and welcome to Invesco's third quarter earnings conference call. [Operator Instructions] As a reminder, today's call is being recorded. Over to Greg Ketron, Invesco's Head of Investor Relations. Sir, you may begin.

All right. Thanks, Cedric, and to all of you joining us today. In addition to the press release, we have provided a presentation that covers the topics we plan to address. The press release and presentation are available on our website, invesco.com.

This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slide 2 as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for the accuracy of our earnings transcripts provided by third parties.

The only authorized webcast are located on our website. Andrew Schlossberg, President and CEO; and Allison Duke, Chief Financial Officer, will present our results this morning, and then we'll open up the call for questions. I'll now turn the call over to Andrew.

Okay. Thank you, Greg, and good morning to everybody. I'm pleased to be speaking with you today. We continue to perform remarkably well against our strategic priorities, which are centered on emphasizing the intersection of market size and secular change while leveraging our unique position to drive growth in the highest opportunities, regions, channels and asset classes.

We delivered another strong quarter of broad-based progress, and we continue to generate significant operating leverage while executing on initiatives to unlock value across the organization to deliver for both clients and shareholders. If you turn to Slide 3 of the presentation, which highlights some of our most recent high-impact initiatives over the past several months. In aggregate, these initiatives will help to streamline our business, drive profitability and margin expansion, build a stronger balance sheet and continue to enhance shareholder returns. Significant among these efforts is the strengthening of our capital management through the recapitalization of our balance sheet.

Here, we have improved flexibility, enabling us to continue to further deleverage. We have already repaid approximately 25% of the term loans used for the $1 billion preferred stock repurchase announced earlier this year, accelerating the expected earnings accretion from that transaction and paving a path for future redemptions. We have also made substantial progress in our efforts to simplify and hone our organizational focus. Of note is the implementation of our hybrid investment platform which we announced in May, would be shifting to a combined Alpha and Aladdin program.

Progress continues in our conversion. During the third quarter, we launched the second wave of significant equity AUM onto the Alpha platform. This entire hybrid implementation, which is on track to be complete by the end of 2026 will drive simplification, improved investment system consolidation and future cost avoidance. Also under the banner of simplifying our business and focusing on improving performance, earlier in the quarter, we realigned our fundamental equities, global international and regional investment teams.

We have consolidated capabilities under a single CIO for these particular asset classes and made portfolio management changes to our U.S. developing markets and aspects of our international and regional equity strategies. This consolidated global related equity platform mirrors our already established global fixed income structure and as part of our ongoing efforts to strengthen our investment returns in this important area for the firm. The single platform also allowed us to elevate our top investment talent and use our scale advantages to gain efficiencies. Investment performance does take time to turn around, but we are beginning to see progress on this front.

Further advancing our efforts to simplify and streamline our focus, we announced in late summer, our decision to sell Intelliflo, which is our cloud-based practice management software subsidiary. This sale will generate net cash of approximately $100 million at closing, which is expected in the fourth quarter, and it could also generate up to $65 million in additional future potential earn-outs. Finally, we are accelerating growth through a number of recently announced business development initiatives noted on the bottom of Page 3. I'm pleased to report that we have made significant progress with our Barings private markets partnership, launching our first joint product together earlier this month.

The speed at which we have been able to execute is notable. Together, we have come to market with the jointly managed Invesco Dynamic Credit Opportunity Fund within just a few months of our announced partnership. This product strategy is an interval fund targeting the U.S. wealth management market that dynamically allocates across the full spectrum of private corporate credit. By combining our 2 firms complementary strengths, we're accelerating our ability to meet client demand for income-oriented solutions in this rapidly evolving market.

This represents the first milestone of the broader private market strategic product and distribution partnership with Barings, which MassMutual intends to support with a total of $650 million of capital. A second co-managed fund is currently in development and is expected to be in market at the beginning of next year. These new strategies will complement our existing private real estate offerings that are targeting U.S. wealth management clients and have seen significant organic traction over the past several quarters. Also in the category of accelerating our growth, we are in the final stages of selling a majority interest in our Indian business to the Hinduja Group and jointly establishing a local joint venture.

We believe that the combined benefits of our existing Indian asset management business with Hinduja's domestic financial institution and local expertise will enhance the growth of that business. Our ongoing minority ownership structure will allow us to participate in the Indian market development, while also refocusing our resources accordingly. We expect this transaction to close in the fourth quarter and Allison will detail the financial implications and anticipated timing of these transactions later in the call. Finally, as you are all well aware, a significant transformative growth initiative is underway as we seek to modernize the structure of our sizable QQQ ETF.

We are in the process of soliciting shareholder approval, and we are pleased to report that we have seen strong participation and momentum in the proposals outlined in the proxy, and votes cast are overwhelmingly in favor of the proposals. We are getting close to the vote totals needed and to allow for additional time to solicit the votes needed to pass the proposals. Last week, we announced that the special meeting of the QQQ shareholders has been adjourned until December 5. Our scheduled time to complete the solicitation process is not an all uncommon. And given the sheer size of this fund and its large retail shareholder base, it is not unexpected.

We are proud of the progress on these significant initiatives highlighted on Page 3. We believe they are indicative of the exceptionally hard work of our Invesco colleagues to drive these and other efforts to completion, while continuing to seek incremental opportunities to unlock value. I am grateful for all that has been done and the ongoing disciplined focus on delivering to our clients and our shareholders. So let's pivot now to Slide 4 for our third quarter business highlights. We had strong momentum coming into the quarter, which continued as key market indices reached new highs and increasing investor confidence was bolstered with the Fed rate cut in September.

These dynamics are leading to some broadening out of investor demand, which is a welcome shift in the asset management landscape and one that we are beginning to see reflected in our results. We reached a record AUM of $2.1 trillion with exceptionally strong net long-term inflows of nearly $29 billion, or an 8% annualized organic growth which is our best flow quarter since 2021. Even more encouraging with the breadth of these flows, reflecting our diversified scaled global platform. We had strong growth on many dimensions, including across most of our strategically important investment capabilities.

It also included positive flows in aggregate in both our active and passive products, the retail and institutional channels and across the Americas, EMEA and Asia Pacific regions. Nearly 40% of our long-term AUM is now from clients outside of the U.S. and 2/3 of our net inflows this quarter were from EMEA and Asia Pacific regions. In the quarter, we continued to scale our ETF platform, gaining market share and launching products to meet client demand. When considering the entirety of our ETF and index offerings across all investment capabilities and including the QQQ, we recently reached an important milestone of $1 trillion in AUM.

This was among our best-performing quarters for our increasingly profitable ETF and index investment capability with an annualized organic growth of 15%. We garnered record net inflows in a diverse set of products for our U.S. range, including the QQQM,several ETFs within our S&P Factor suite, the China technology ETF. And in EMEA, we generated strong flows in our use of QQQ ETF and our synthetic product suite. We continue to innovate and evolve our ETF lineup to offer investors new ways to access our in-house, high-quality active strategies.

Notably, 65% of our ETF launches this year have been active. Our 5 new active ETFs launched during the third quarter brings our total to 36 months. The development is not only a U.S. trend. We now have 10 active UCITS ETFs, extending our smart beta range of products in the EMEA region.

Our ending active ETF AUM firm-wide stands at $16 billion. However, when including our active teams engaged in our passive and index capabilities, it elevates that total AUM to nearly $30 billion. Bringing the depth of our investment capabilities into the ETF wrapper has long been part of our overall strategy and will continue to be as we innovate to meet client demand. Shifting to fundamental fixed income where we garnered over $4 billion in net long-term inflows in the third quarter.

However, this only considers what's included in our fundamental fixed income capability. Looking more broadly at the fixed income asset class across all of our investment products, the third quarter net long-term flow number jumps to nearly $13 billion with the inclusion of our fixed income ETFs and China JV-based fixed income assets. Here again, the strength of our geographic profile is evident with more than half of our overall fixed income inflows coming from clients outside the United States. Though overall recent client demand trends remained largely intact this quarter in fixed income, we did begin to see a measured extension from ultrashort and short-term fixed income to the intermediate and longer end of the curve.

We saw institutional interest for investment-grade bonds with strong demand in Asia, driving net inflows. Further, we saw demand for our leading United States defined contribution focused, stable value capability, and we are exiting the quarter with a healthy pipeline for this product. Additionally, our U.S. Wealth Management SMA platform continued to help drive fixed income flows, particularly in municipal bond strategies.

Our entire SMA platform which also includes a portion of equity assets continued to capture market share, and it now stands at nearly $34 billion in AUM. We have one of the fastest-growing SMA offerings in the U.S. wealth management market with an annualized organic growth rate of 19%. Moving to our China JV and Indian capabilities where we produced exceptionally strong results this quarter. Our broad product suite and scale position in China is empowering us to perform as well as dynamic shift in this market.

We reached a record high AUM in our China JV of $122 billion, reflecting a 16% increase over last quarter. We delivered a robust $8.1 billion of net long-term inflows in these capabilities, marking one of our best quarters to date, $7.3 billion of that total came from our China JV which represents a 34% annualized organic growth rate. Flows during the quarter in our China JV were led by fixed income plus and our ETF funds. Institutional investors are favoring fixed income plus strategies as they provide an effective means of enhancing equity exposure.

We are also beginning to see interest in pure equity strategies, particularly in passive funds, as demand for active equity is slower to regenerate. We are exceedingly well positioned for the near and longer-term trends developing in the onshore China market. We continue to innovate to meet client demand across both active and passive capabilities. Of note, we launched 12 new products this quarter in our China JV, including our first fixed income ETF.

We believe that in time, demand for fixed income products will shift towards those offered in the ETF wrapper. We also launched equity index funds to capture increasing demand for these growth-oriented products. While we continue to launch innovative products to meet current and future client demand in our China JV, existing products have been the more significant driver of our organic growth, an indication of the strength of our platform. We expect our China JV to continue to benefit as both the secular and now cyclical tailwinds develop in the world's second biggest economy.

Shifting to private markets where we posted $600 million of net inflows driven by private credit and direct real estate. Private credit had nearly $1 billion of net inflows with strong CLO demand during the quarter in both the U.S. and EMEA as these products continue to offer meaningful value versus corporate bonds. We launched 3 new CLOs during the quarter, two in Europe and one in the United States. Direct real estate contributed nearly $100 million of net inflows.

INCREF, which is our real estate debt strategy targeting the U.S. wealth management channel continues to generate net inflows, and we continue to onboard platforms and clients. INCREF is now on 3 of the 4 major U.S. wealth management platforms. Assets in this fund with leverage now total over $4 billion after just 2 years in the market. Our real estate team also remains well-positioned in the institutional markets, with $7 billion of dry powder to capitalize on emerging opportunities.

And as I outlined earlier, our partnership with Barings should help accelerate growth for overall private market strategies in the wealth channel. In fundamental equities, we have continued to see positive flows from our clients in EMEA and Asia Pacific, specifically for global and regional equities and headlined by our Global Equity Income Fund managed out of the United Kingdom. This fund posted record net inflows of $3.8 billion during the quarter, predominantly from clients in the Japanese market, where it ranked first among retail active funds and has rapidly grown to $20 billion in AUM and has a very favorable net revenue yield to the firm.

This is a compelling representation of our ability to have the right products in the right markets at the right time. Despite these positive flow highlights, we did record overall net outflows in fundamental equities of $5 billion in the quarter. Our results partially reflect the broader secular outflow trend in actively managed equities, particularly in the United States. This was compounded by the expected acceleration of net outflows from our developing markets fund, which totaled $4.5 billion for the quarter.

Given our strategic decision to reposition the fund to a new internal portfolio management team, this wasn't wholly unexpected. We are confident that the aforementioned fundamental equity platform changes that have been recently implemented sharpen our focus on investment performance and risk management as we continue to identify areas of demand within fundamental equities and mitigate redemptions at a better rate than the market. Moving on to Slide 5, which shows our overall investment performance relative to benchmark and peers as well as our performance in key capabilities where information is readily comparable and more meaningful to driving results.

Investment performance is key to winning and maintaining market share despite overall market demand. As such, achieving first quartile investment performance remains a top priority for Invesco. Overall, more than half of our funds are performing in the top quartile of peers on a 3-year time horizon with 45% reaching that bar on a 5-year basis. Further, nearly 70% of our AUM is meeting its respective benchmarks over those measurement periods.

Of note, we saw significant improvements in some of our fundamental equity performance with more than half of our funds beating benchmark on a 3-year basis and 39% in the top quartile on a 5-year basis. Continuing to strengthen our investment performance is key to reducing redemption rates in these critically important equity strategies. Fixed Income continues to have strong performance with nearly half of our funds performing in the top quartile on a 3-year basis and nearly 2/3 beating their benchmarks. So with that, let me turn the call over now to Allison to discuss the quarter's financial results, and I look forward to your questions.

Thank you, Andrew, and good morning, everyone. I'll start with the third quarter financial results on Slide 6. Strong markets and net asset inflows drove assets under management to a record level for Invesco in the third quarter. Total AUM exceeded $2.1 trillion at quarter end. This was $123 billion or 6% higher than at the end of the second quarter and $329 million or 18% higher than the end of the third quarter of 2024. Average long-term assets under management were $1.46 trillion, an increase of 9% over last quarter and 16% over the same quarter last year.

Growth in total assets under management during the quarter was driven by market gains of $99 billion and net long-term inflows of $29 billion. Net revenues, adjusted operating income and adjusted operating margin all significantly improved from last quarter and the third quarter of 2024, while adjusted operating expenses continued to be well managed. This drove meaningful operating -- this drove meaningful positive operating leverage on both a sequential quarter and a year-over-year basis. On a sequential quarter basis, positive operating leverage was 480 basis points delivering a 300 basis point improvement in the third quarter operating margin to 34.2%.

On a year-over-year basis, positive operating leverage was 410 basis points delivering a 260 basis point improvement in operating margin. Adjusted diluted earnings per share was $0.61 for the third quarter. We continue to strengthen the balance sheet during the quarter through the repayment of $260 million of the 3-year bank term loan. We also ended the quarter with no draws on our revolving credit facility.

Given the level of operating cash generation going into the fourth quarter, we are in a position to repay the remaining $240 million of the 3-year term loan by the end of this month. When we announced the repurchase of $1 billion of preferred stock in April, funded with $1 billion in term loans, we indicated that once the loans will repay, the EPS run rate benefit would reach $0.13 annually. Given that we will have repaid $500 million, up to $1 billion in term loans earlier than projected, we will have captured approximately 60% of that EPS run rate benefit on a go-forward basis. The magnitude of the potential reduction in the remaining $500 million term loan that matures in 2030 will depend on the level of cash flow we generate going forward.

Additionally, we have a $500 million senior note that we intend to redeem when it matures this coming January of 2026. Finally, we continued common share repurchases, buying back $25 million or 1.2 million shares during the quarter. Moving to Slide 7, a slide most of you are familiar with by now is we've been including this update for a number of quarters, and hopefully, you have found this helpful in analyzing our net revenue and net revenue yield dynamics. Client demand continues to drive diversification of our portfolio. And as a result, concentration risk and higher fee fundamental equities and multi-asset products has been reduced while our portfolio reflects a higher mix of ETFs, index and fundamental fixed income capabilities.

Our more balanced AUM profile better positions the firm to navigate various market cycles, events and shifting client demand. The ranges by capability are representative of where the net revenue yield has trended over the past 5 quarters, and we know where in the range yields have trended more recently. To provide context for the net revenue yield trends during the third quarter, our overall net revenue yield was 22.9 basis points. This is similar to the sequential quarter decline that we experienced in the second quarter.

The magnitude of the last 2 quarterly declines is notably lower than prior quarters. And maybe aside, we're closer to reaching a degree of stabilization in the net revenue yield, but this will be dependent on the future direction of asset mix shift. The exit net revenue yield at the end of the third quarter was 22.8 basis points near the adjusted net revenue yield for the quarter. As Andrew noted earlier, last week, we announced a special meeting of QQQ shareholders have been adjourned until December 5 to allow for additional time to solicit votes.

We did want to note that under the new structure, the revised fee allocation would work similar to how we currently recognize fees on most of our ETFs. The 18 basis point fee will be recognized as investment management fees, approximately 12 basis points, which is principally for the licensing fee and administrative custody and transfer agency services will be recognized as third-party distribution, service and advisory expense. Under the current structure, marketing expenses associated with the QQQ are included a third-party expense. Upon finalization and filing of the definitive proxy statement, reflecting comments from the SEC and further accounting review, it would determine that the marketing expenses associated with the QQQ should be included in the marketing expense line item versus third-party expense.

This is solely a reclassification of where the marketing expenses are reported and the expected overall net impact to adjusted operating income of approximately 4 basis points of QQQ AUM and is unchanged from what we previously disclosed. Now turning to Slide 8. Net revenue of $1.2 billion in the third quarter was $82 million higher as compared to the same quarter last year. The increase in net revenue was largely from investment management fees, which were $102 million higher than last year and mainly driven by higher average AUM. Operating expenses continue to be well managed with the increase of $24 million, partially driven by variable employee compensation related to higher revenue.

On a sequential quarter basis, the increases in net revenue and operating expenses were driven by similar dynamics as the year-over-year changes. And that result is a substantial increase in positive operating leverage on both the year-over-year and sequential quarter basis. The Alpha hybrid platform implementation costs of $11 million were below our expectations for the third quarter, but near the range of prior quarters. We launched the second wave of equity AUM onto the Alpha platform during the third quarter.

We will continue to implement the hybrid approach we announced earlier this year. We expect the overall implementation to be completed by the end of 2026. Regarding implementation costs going forward, we expect onetime implementation costs to continue in the $10 million to $15 million range for the fourth quarter as we transition more AUM onto the platform. This amount in future quarters may fluctuate to a degree due to timing as we work towards completion by the end of 2026. We'll provide further updates as the implementation progresses throughout next year. As disclosed in August, we reached an agreement with Carlyle to sell Intelliflo, our cloud-based practice management software subsidiary.

We moved Intelliflo to held for sale in the third quarter and the noncash impairment charge of $36 million was recorded in other gains and losses, somewhat lower than the $40 million to $45 million that we had indicated previously. We expect to close this transaction in the fourth quarter and then the annual net operating impact of Intelliflo is insignificant to the overall Invesco operating results. Given Intelliflo is the U.K. subsidiary, the loss is not a taxable event. As such, we anticipated the effective non-GAAP tax rate for the third quarter to be closer to 29%.

The effective tax rate for the quarter was 11.2% as we were subsequently notified late in the quarter of a favorable resolution of a certain tax matter, including the reversal of a reserve for uncertain tax positions which had a significant impact on our third quarter non-GAAP effective tax rate. For the fourth quarter, we estimate our non-GAAP effective tax rate will move back to the 25% to 26% range, excluding any discrete items. The actual effective rate can vary due to the impact of nonrecurring items on pretax income and discrete tax items. Andrew also noted that the sale of a majority interest in our India asset management business is expected to occur in the fourth quarter, potentially at the end of October.

Post closing, given we will retain a minority interest India's AUM, which is near $15 billion and future asset flows will not be reported in our results. In addition, India's operating results will no longer be reported as part of Invesco's overall operating results including the associated revenues and expenses. Our 40% share of the joint venture's net income will be reported in equity and earnings of unconsolidated affiliates going forward. We currently expect $140 million to $150 million in cash proceeds from the sale.

I'll wrap up on Slide 9. As I noted earlier, we continue to make considerable progress on building balance sheet strength. During the third quarter, we repaid $260 million of the $1 billion in bank term loans used to fund the $1 billion repurchase of preferred stock held by MassMutual earlier this year. The $260 million repayment reduced the 3-year term left to $240 million. And as I noted earlier, we're in a position to repay the remaining balance by the end of this month, leaving only $500 million [ in ] the 5-year maturity term loan.

The full impact of the $14.8 million reduction in the preferred dividend was realized in the third quarter and the go-forward run rate preferred dividend is $44.4 million per quarter. The $14.8 million reduction is now earnings available to common shareholders. We also continued common share repurchases in the third quarter buying back $25 million or 1.2 million shares during the quarter. We intend to continue a regular common share repurchase program going forward and expect our total payout ratio, including common dividends and share buybacks to be near 60% this year as well as in 2026 as we continually evaluate our capital return levels.

The partial repayment of the bank term loan improved our leverage ratios for the quarter with the leverage ratio, excluding and including the preferred stock, improving to 0.63x and 2.5x, respectively. Going forward, we expect this ratio to continue to improve as we repay the term loan and redeem the $500 million senior note maturing in January. To conclude, the strength of our net flow performance and diversity of our business is evident again this quarter, driving strong revenue growth. This, combined with well-managed expenses resulted in significant operating leverage and a sizable improvement in our operating margin.

We're pleased with our progress on building a stronger balance sheet. And we are committed to driving profitable growth, a high level of financial performance and enhancing the return of capital to shareholders. With that, I'll ask the operator to open up the line for Q&A.

[Operator Instructions] And the first question comes from Bill Katz with TD Cowen.

Okay. Thank you very much. I excuse my voice this morning. Maybe it's on the QQQs.

I'm sort of curious if you could maybe put any kind of meat on the bone a little bit around where you are relative to the quorum or the approval rate and the development with the SEC in terms of re-categorizing and reclassifying where you're going to account for the marketing spend. Does that raise the probability of getting to the required vote to make the shift? Thank you.

We can't give you details on where we are relative to the quorum or the approval rate, but as we noted in our disclosures, we're very pleased with the progress, and it's an overwhelming majority that's voting in favor of the fee change. We're pleased. It's not unexpected that these things take a lot of time, especially for a fund as large and widely held as this one. It takes a little more time to get to the quorum, but we're pleased with the progress we're making.

On the second question, as it relates to the marketing expenses, no, there's nothing in that that really changes anything, to be frank. This is entirely related to the comments from the SEC on the proxy, some of the language changes, putting that back through an accounting review, and we determined this is the most accurate and appropriate place to reflect those marketing expenses. Going forward, I don't think it really has any impact whatsoever on how people are thinking about the proposal. There's no change at all to operating income.

Again, it's still approximately four basis points, and the way the marketing expense will work is as disclosed in the proxy filing, which is a discretionary amount of marketing expense within the range that we provided in the proxy.

Our next question comes from Brennan Hawken with BMO Capital Markets.

It's just a follow-up on Bill's question. I understand that you guys are using a proxy voting firm to help drive participation. I just want to confirm, is that considered a marketing expense of the fund, and is there any sort of spend threshold where over that it starts to become an operating expense for Invesco?

Yes, we are using a proxy solicitation firm, and it is considered a marketing expense of the fund. Those expenses are accrued in the fund. I don't foresee that happening with those expenses bleeding over into operating expenses for Invesco. There can be some timing differentials in terms of how we accrue within the fund, month to month, versus just timing, I would say, on fund expenses versus operating expenses for Invesco.

Right now, I do not see that as being a risk to Invesco's operating expenses, especially if we continue on the path to the meeting on December 5 as scheduled.

Got it. Okay. Thank you. This might be a little granular, but I'm going to give it a shot anyway. I understand that there's three proposals in the proxy vote. Are all three proposals progressing similarly, or is there any divergence in between one, two or three?

No, there's no divergence. They're all progressing similarly. I think that is a very granular question. There's one in particular everybody's focused on, but fair question. No, I think it's all progressing consistently.

The next question comes from Glenn Schorr with Evercore.

So your fixed income flows have been pretty good. Your performance is very good. There has obviously been some volatility around the potential of lower rates and the potential of credit issues rising. It has been a while since any of the channels had to deal with that.

I am curious what you saw in October and things like bank loans. More importantly, in general, given the global nature of your flows, what you expect on a go-forward basis just across the fixed income platform.

Sure. Let me start. We did not see any material implications from some of the events you described in October. We're continuing to see real strength in our fixed income business.

It's a $680 billion platform, it's up from $625 billion at the start of the year. That's come through mostly organic growth. We've had over $30 billion in platform-wide fixed income flows. We mentioned in the prepared comments that's really been broad-based.

Our SMA platform in the U.S. has probably been the strongest piece here in the United States. But overseas, we've seen a good movement out of some shorter duration strategies into some longer duration strategies, global bonds, investment-grade bonds. We're seeing that pick up materially in Asia and EMEA. We continue to go from strength to strength.

I'd say some of the bank loan flows were a little weaker at the back end of the quarter, but it continues. We continue to be a leader in that space and continue to do well in the bank loans and also in CLOs. Anything you want to add?

No surprise and no secret. Markets have been a little bit jittery on the credit side in the month of October. I do think we see some softening, maybe some outflows on the bank loan side in the month of October. We'll see how this plays out as we continue to try to evaluate if this is a rather specific risk or something broader-based.

I would say nothing notable. Overall, we continue, as Andrew said, to see things perform pretty well. In particular, the strength in our CLO platform and some of the launches across the third quarter and the demand coming into the fourth quarter still remains high.

And investment performance is pretty strong across the whole platform. So as demand picks up, as some of this cash starts to potentially move off the sidelines, we should be well positioned.

Our next question comes from Alex Blostein with Goldman Sachs.

I was hoping you could maybe unpack the two divestitures you made -- earlier that you mentioned, both on the Intelliflo side as well as the JV in India. Maybe one, with the use of proceeds, obviously, you guys have been deleveraging, and there's more to do there, but maybe talk a little bit about capital return priorities as you look out over the next 12 to 18 months. As we start to look out into 2026, what are the implications maybe for expense growth on the back of those divestitures?

Sure. Maybe I'll take that in a couple of different directions. Let me start with India. India, as we noted, we're expecting proceeds there of $140 million to $150 million.

Maybe just a little bit of color getting to kind of what's the impact on some of the expense, and I'll say operating income trajectory from there. India is a business that, from a revenue perspective, runs around $13 million a quarter. Expenses run around $7 million a quarter, call it, operating income of roughly $6 million a quarter. As we noted, that will come out of our operating income results, and we will reflect that 40% ownership below the line in equity and earnings going forward.

The AUM of about $15 billion in the flows will no longer be reported in those results either. Intelliflo, we're expecting, as I noted, about $100 million in proceeds. That's before any potential future earnouts. We expect that one to close later in the fourth quarter.

That one, operating income runs anywhere from breakeven to $1 million or $2 million loss a quarter. Call it very negligible to results overall. That would be removed entirely from our results. Total proceeds of around $240 to $250 million.

In terms of our capital priorities, they remain balanced. We remain focused on improving the balance sheet, returning about 60% of our capital to shareholders, and investing in our own growth capabilities. We're getting to a place where we're starting to create more and more capacity for ourselves. We're pleased with the progress we're making on the balance sheet.

I don't think we're totally where we want to be yet. We are seeking to continue to improve that leverage ratio, particularly while we have these strong operating cash flows that we have. I'm very pleased with the ability we have to pay down the remainder of the three-year term loan by the end of this month. That's all from operating cash flow and before any of these proceeds.

These proceeds give us the flexibility to continue to launch new products going into next year. We're highly focused on our capital planning for 2026 and working with our teams across the firm as we think about what's going to drive revenue most aggressively going forward. It gives us flexibility to keep doing all of those things, investing in ourselves, creating flexibility on the balance sheet, managing these debt levels lower, and returning capital to shareholders. In terms of expenses next year, I'd say expect them to continue to be really well managed, and we'll certainly be giving you more color as we get into 2026.

Our next question comes from Dan Fannon with Jefferies.

Great. So I guess another question on expenses just with regards to the Alpha platform and integration. We've got $10 million to $15 million, I guess, in the fourth quarter of ongoing implementation costs. Can you talk to next year in terms of the pace versus what we've seen this year?

Ultimately, I think it's about reducing future cost growth. Can you give us kind of the end state as you think about what this integration will do in terms of how to think about long-term expense growth?

Yes. As we noted, we are highly focused through the hybrid platform implementation on completing this by the end of 2026. There is aggressive planning underway right now. We do expect the pace of implementation and implementation costs to remain high throughout 2026 as we seek to move all of our assets onto the collective platforms by the end of the year. I would say, as we think about '26, and again, we'll give you more color as we get closer, we would expect some of the costs to modestly increase related to Alpha and the hybrid platform implementation.

That gives us the opportunity to then start to look at what we decommission, how do we streamline our operating systems. I wish we could be turning off more along the way, but we have to complete a lot of these things before we can actually decommission and stop renewing certain other aspects of our overall operating platform. That really becomes a 2027 opportunity. I'd say it's certainly early to be giving guidance around 2027. What I will say is I expect these run rate expenses that are associated with the hybrid implementation to peak in'26, and then we will begin aggressively planning for how we streamline our operating platforms going into '27. Against that backdrop, and I'll reiterate this, I think you can look back over the last few years and see our overall expense base has been extremely well managed, even while we've been putting in these systems.

It has been a heavy lift, and there has been cost associated with it. We've really been able to improve operating margin significantly against this. Revenue growth has helped, no question, but the expense base in particular has been very well managed along the way. We're not going to take our foot off the gas there.

We've got real opportunity to continue to manage that going into the next few years.

Yes. And we're really pleased with the progress of the implementation on the hybrid solution since announcing the change in the spring. We brought on a pretty significant piece of the equity business onto the platform. It's, you know, things are going well in terms of the implementation and the teams working together.

Our next question comes from Benjamin Budish with Barclays.

Maybe just another follow-up on the expense side. It looks like markets are constructive. Your flow profile has been looking increasingly healthy. If the QQQ vote goes through as it sounds like you're optimistic it does, there's going to be kind of even more flowing to the bottom line.

So I guess, maybe just kind of -- again, following up on the last couple of questions. How are you thinking about variable expenses going into '26 and '27? Obviously, there is the [ ports and ] pieces you can control. But how are you thinking about opportunities to drive more operating leverage given the -- what looks like a healthy backdrop for top line revenues?

Sure. I'll take that. I mean variable expenses, as we've noted in the past, they run about 25% for us. So that certainly is the first port of call, if you see pullback in revenue and it is where we see expenses really moving up as we see increases in revenue.

So as we think about what that means going forward, I mean our focus is really on how do we keep managing, maybe we fixed expense base because the variable in many respects is what it is, and we're pleased for that to fluctuate up and down. The fixed expense base is where we spend a tremendous amount of time really looking at how do we continue to unlock value there and taking a hard look at every aspect of it. I think a lot of the work we've been doing over the last couple of years, and you're seeing the fruits of that is the simplification work. And where we can reduce redundancies and simply our operating platform across all of our investment capabilities by unifying teams, by looking at where we can be more global as a firm and a little less regional reducing some of the duplication that came with some of that structure in the past.

Those are the opportunities we've had to continue to interrogate our fixed cost expense base, and we will continue to do that. That's really a part of our rigor now. And so as contracts mature, as opportunities arise, as people leave the firm, as markets change, we really look at how do we continue to simplify and collaborate better and collapse some of our platforms perhaps together so that we can go to market in a single fashion. And that's going to be -- that's work that -- it's in our blood now, it's in our DNA, and it's the work we're going to continue going into the next couple of years.

Yes, I think we -- clarifying our strategic priorities that we've shared with you over the past year or two has been helpful to energize the firm towards those. And while managing expenses in a very disciplined way, as Allison mentioned, also investing in the business, whether that's in the product line, our private market capabilities and distribution efforts, what we're doing in our ETF platform, we've been able to invest over the last 18 months on a net basis as well.

Really helpful. Maybe just one separate follow-up if I may. Andrew, I think you addressed one of the questions around credit more broadly. Just curious with the launch of this new fund with MassMutual, any specific feedback on that one?

I know there's a healthy component of direct lending in there. And just in terms of distribution, maybe remind us what the sort of rollout looks like, whether it's wires versus RIA, how should we see things start to flow in?

Yes, no problem. The fund -- we repurposed a legacy fund that has about $250 million in assets in it, and we'll get an infusion for MassMutual as well. So it's starting with a decent asset base, it has a good record. And it's going to be targeting all of those U.S. wealth management clients that you mentioned.

So traditional financial advisers, RIAs, et cetera. We've only been in market for a couple of weeks. So it's a little too early to say with regard to where progress is. But I will say the notion of it being dynamic, meaning it cuts across all sides of the credit spectrum, the ability for it to leverage both the strengths of Barings and Invesco.

And it's well priced and relatively liquid. I think those are all attributes that we've heard soundings from the wealth management marketplace that they're looking for a little more of a one-ticket solution. And that's how we're putting it into the marketplace and we'll report on it as we go forward, and we're already working on product too.

Our next question comes from Patrick Davitt with Autonomous Research.

Another follow-up on the expense question. Sorry if I missed this and all the discussion. But I think non-comp, in particular, was still well below expectations in 3Q. So is that a good run rate to think about how things are tracking in 4Q at least?

Yes. Thanks. I would say I think non-comp, probably a little low in the third quarter. It could be a touch higher in the fourth quarter.

I think we typically do see some seasonality when you think about marketing expenses and the professional services, some of the things that come in there at year-end. So it's not significantly higher, but I think I would expect non-comp to be modestly higher in the fourth quarter very modestly. I think comp to rev is probably -- or compensation expense as you think about compensation as a percentage of revenue, it's probably the one that's maybe a bigger driver as you think about just the fourth quarter and the overall year compensation is highly dependent on revenue. We'll see how the fourth quarter shapes up.

But it's probably -- so far this year, we're accrued to about 43.4% year-to-date. We really manage it on a full year basis. I think it's probably something in the 43% context. It could be a touch under 43%.

That's how I would think about fourth quarter expenses overall.

Great. And then as a quick broader follow-up, I guess you mentioned a bunch of active ETF launches. Any sense of AUM into those kind of products more coming from existing products or existing wrappers, cannibalizing existing wrappers or do you sense that it's actually new AUM in the system?

Yes. I mean, it's a couple of billion dollars. So it's not unmeaningful. It's hard to tell exactly where it's coming from.

I'd say the strategies we brought forward have been a combination of new strategies and some that are existing strategies in another format. So -- and most of it has been actually in new strategies. So I think it's incremental growth, quite frankly. It's similar advisers, though.

So the higher net worth advisers that we work with across private markets and ETFs in general are interested in those active ETFs, too. But our expectation is that this is very early and it will develop over time and that it's not just a U.S. phenomenon. I think this is something that the world is kind of acknowledging that. The ETF vehicle has some significant benefits.

And it's a good vehicle for both passive strategies and active strategies and things that are hybrids of the two, which I think will come in time.

The next question comes from Brian Bedell with Deutsche Bank.

Great. Maybe just right along that -- the last question from Patrick on the ETFs. As you expand those strategies and move more of that or I should say, as RIAs in particular, adopt the strategies, are you -- is that moving more into the ETF and index bucket? Or should we think about this over the long term as propelling growth in that ETF and index bucket?

Or is that factoring into fundamental equities?

Yes. I mean, look, at the moment, it's -- we're seeing a lot of growth in the past in the index side of the business. The active side is kind of just getting going. I think you'll see it across the piece.

And I don't think it's just going to be ETF wrapper. I think you're also going to see the SMA wrapper and then model portfolios, which incorporate a lot of ETFs, currently passive, but I think in the future active. You'll see all of those vehicle types grow, and the underlying investment capabilities will include all of the categories, you know, that we have outlined whether it's fundamental equity, fundamental fixed income and ultimately, maybe some of the alternative private assets, too. So I think you'll see it both in the vehicles that I mentioned being the expansive vehicles and I think across the capabilities.

Fixed income has been a place where we've seen a good amount of growth in our ETF lineup, both passive and active. So equity is probably the one that needs to -- will pick up the pace here as we go forward. But fixed income has predominantly been where the flows have come.

Great. Just a couple of housekeeping. On the India sale, is there a segmentation of where that $15 billion is coming out of in the categories? Just on the QQQ ETF, if that is approved on December 5, when would you expect that conversion to happen to the P&L, is it right, subsequent to that? Or do we have to get through more approvals and that's beginning of next year?

Sure. So on your first question on the India AUM, that shows up on the China and India -- sorry, that shows up in the China JV and India AUM category. So you expect to see that $50 million -- $15 billion come out of that category. And then the second question -- that would convert immediately following the shareholder meeting.

So assuming we have the quorum, once we have the quorum and the shareholder vote, requires both, in that meeting, then it would convert effectively the next day.

Our next question comes from Michael Cyprys with Morgan Stanley.

Want to circle back to India. I was hoping you could speak to the sale of a majority interest. Just curious if you could elaborate what led to that decision. It's a major market where many are quite bullish on the long-term prospects.

So why reduce the stake? Maybe you can elaborate a bit on your partner and just blend how you decided to partner with them, how you see them helping drive accelerated growth from here?

Yes. Thanks for the question. We've had great success with partnerships and alliances and JVs, notably the one we have in China over the last 22 years. And so we look at the Indian market and it's growth, but we also look at how local that market is.

Us having a domestic business there and seeing the market trends and development that we're bullish about, finding a partner that in both financial institution as well as a large brand and a well-known local operator in the Hinduja Group was just a good combination and marriage together. It will allow us, as Allison said, to participate in the growth from a profitability standpoint, but it will also allow us to see that business grow and for us to participate hopefully with sub-advising assets into it, especially those assets that will be beyond the local Indian managed assets. So I think as global equities or global bonds come into that market and Invesco will be hopefully, the underlying manager of those strategies, and that's the expectation of the partnership.

So it really was just a classic sort of 1 plus 1 equals 3 and an ability for us, as we mentioned, to really focus our resources and energy on a full basis in other areas and participate in the Indian market as it grows and develops.

Great. And then just a follow-up question on China, where you're seeing quite robust flows. I was hoping you could elaborate on the success that you're seeing there, the steps that you've taken to drive this improved momentum? What sort of demand are you seeing for passive versus active in China? Maybe remind us of the complexion of the business today.

Yes, sure. So, look, I think some of our success in China is a function of us being there for 22 years and staying committed and focused on developing a full-fledged retail asset management business there, which we have. And so the $122 billion in assets that we have under management there is an established platform, one of the larger ones in the market, a well-known brand, well thought of for its compliance and investment integrity. And so as markets improved and as demand has started to improve from those retail investors in the market, we're seeing the benefits of that.

The business is pretty diverse. So as a reminder, it's about 30% equities, 30% bonds, 20% balanced and 20% money markets. And to your question on ETFs, I think it's around $12 billion or $13 billion now of ETF. It's a business we only -- or the JV only started in the last few years.

The growth has been still largely in the active part of the business, but we're seeing a pickup in the ETF flows as well. And we're trying to meet that demand by launching new product, as I mentioned. So I think the ETF part will continue to develop as will their models area, as will the traditional equity business, it's really evolved over the course of those 22 years. And so as we're getting a little more favorable outputs from China in terms of the easing signals from the government or the pushing forward of consumption, less reliance on the property sector.

And importantly, for us, the development in time of a retirement market there and a more robust capital market, we think that JV should continue to go from strength to strength. And just as a reminder, it's a domestic to domestic business exclusively.

Our last question comes from Ken Worthington with JPMorgan.

Okay. Great. So M&A is back in investor dialogue, given Trian's offer for Janus as you sort of reflect on Invesco in the industry, where has consolidation been successful and where has it fallen short? And given your balance sheet is strong, your fundamentals are strong, is it a good or a bad time for Invesco to think about M&A to further strengthen your position and kind of get to your strategic priorities more quickly?

Yes, thanks. We're -- we've been very focused on all the organic opportunities that we have inside the company. And hopefully, we demonstrated throughout this call in the last few quarters, of the progress that we're making. And we still think there's quite a bit of progress we can continue to make in time organically.

The business is global. It's diverse. It's in the asset classes where there's demand and we continue to believe we can grow that organically. I think Allison mentioned the priorities that we have for our use of capital and what our focuses are at the moment.

We want to continue to invest in ourselves, and we want to continue to improve our balance sheet. We'll keep our eye on M&A. We'll continue to keep our eye in particular in places like the private markets areas where we have a strong business today with $130 billion in assets but also expectations for future growth. So I don't think it changes much our focus and our dedication as a company.

Okay. And back to you, Mr. Schlossberg.

Okay. Well, thank you. And in closing, we are unlocking value across the organization for the benefit of clients and shareholders. This includes looking at how we fundamentally operate leaving no opportunity unexamined as we strive to improve client outcomes, generate operating leverage and profitability, continue building a strong balance sheet and enhancing our ability to return capital to shareholders.

We have resilient operating performance across many key value drivers. Our global footprint with a significant and unique Asia Pacific presence and a strong performing EMEA business, coupled with our scale and breadth of products positions us well to perform through shifting market dynamics. We continue to demonstrate that we have durable performance and reason to be optimistic about the future. We want to thank everybody for joining the call today, and please reach out to our Investor Relations team for any additional questions.

And we appreciate your interest in Invesco and look forward to speaking with you all again soon.

Thank you. That concludes today's conference. You may all disconnect at this time.