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Friday, October 19, 2018

What Invesco Gets Out of OpFunds

Reported by Neil Anderson, Managing Editor

Buying OppenheimerFunds [profile] is Invesco's [profile] biggest deal yet, and Marty Flanagan says there are several key things that the publicly fund firm is getting from the combination. And he confirms that there will be "expense synergies", though he declined to share details.

"The power really comes from a combination of four different areas: scale and client relevance, differentiated investment capabilities, compelling financial returns, and the strategic relationship with MassMutual," Flanagan, president and CEO of Invesco, told analysts yesterday on the Atlanta-based firm's Q3 2018 earnings call, as transcribed by Seeking Alpha.

To the first point, Flanagan reiterated that once the deal closes Invesco will be the 13th largest asset manager in the world (with more than $1.2 trillion in AUM) and the sixth largest U.S. retail asset manager (with $680 billion in U.S. retail AUM).

"The immediate impact of the combination will create a clear leader in the U.S. retail," Flanagan said, pointing in particular to Invesco's relationships with key distribution platforms. "We will have five relationships with more than $30 billion in assets under management [each]."

On the financial side, the Invesco team expects to realize "expense synergies" (i.e. cost cuts of some kind) to the tune of $475 million.

"The scale benefits from operation are astonishing," Flanagan said in response to a question from Citi analyst Bill Katz. "Oppenheimer was already heading down the path to make a number of changes themselves."

Yet Flanagan declined to share specific details about the expense synergies or on any possible fund merges.

Also on the financial side, Flanagan revealed that OpFunds has an operating margin of 40 percent and net annual revenues of $1.4 billion. That translates the $5.7-billion price tag into a big more than four times revenue.

On the investment side, Flanagan described the two firms' strengths as "very complementary to one another" and points in particular to OpFunds' expertise in "international equities, emerging markets, global equities, income-focused alternatives" (such as bank loans, high yield, and munis).

"75 percent of the assets are hard to replicate differentiated active and alternative strategies," Flanagan said of OpFunds' offerings. "59 percent of assets are in four and five star rated funds."

As for the relationship with MassMutual, which will become Invesco's single biggest shareholder with a 15.5-percent stake, Flanagan offered some hints when asked by J.P. Morgan analyst Ken Worthington about cross-selling possibilities.

"As you know they have 8,500 advisors in the United States and so that is something that's going to be an obvious focus area for us," Flanagan said of MassMutual. 

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