AllianceBernstein Holding L.P. — 2020 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2020. AB Holding is a publicly traded limited partnership whose principal source of income and cash flow is its investment in operating partnership AllianceBernstein L.P. (AB). AB provides investment management, research, brokerage and related services through Institutional, Retail, Private Wealth Management and Bernstein Research Services.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| AB net revenues | $3.709 billion | $3.518 billion | Up 5.4% |
| AB operating income | $907.4 million | $823.4 million | Up 10.2% |
| AB net income attributable to AB Unitholders | $866.0 million | $752.0 million | Up 15.1% |
| AB diluted net income per unit | $3.19 | $2.78 | Up 14.7% |
| AB GAAP operating margin | 24.6% | 22.6% | Up 2.0 percentage points |
| AB adjusted operating margin (non-GAAP) | 30.1% | 27.5% | Up 2.6 percentage points |
| AB Holding net income | $279.4 million | $238.6 million | Up 17.1% |
| AB Holding diluted net income per unit | $2.88 | $2.49 | Up 15.7% |
| AB Holding cash distributions per unit for the year | $2.91 | $2.53 | Up 15.0% |
AB’s year-end AUM was $685.9 billion, up 10.1% from $622.9 billion. Market appreciation added $65.4 billion; net long-term outflows were $2.6 billion. Excluding $11.8 billion of AXA redemptions in low-fee fixed-income mandates, AB reported $9.2 billion of net inflows.
AB reported $1.5 billion of operating cash flow, compared with $827.5 million in 2019. Cash flow was affected by substantial movements in brokerage-related balances and consolidated investment funds. Cash and cash equivalents excluding consolidated funds were $1.0 billion at year-end; the filing notes this includes amounts held for broker-dealer customer clearing activities. AB had $675 million outstanding under its EQH credit facility and $675 million of total debt, versus $560 million of debt in 2019. The $800 million committed bank facility and $200 million revolver had no year-end borrowings; an additional $300 million uncommitted EQH facility also had no borrowings. AB Holding reported total assets of $1.606 billion and partners’ capital of $1.604 billion.
Material changes and operating drivers
- Investment advisory and services fees rose 5.0%, reflecting higher average AUM and performance-based fees, partially offset by lower fee realization.
- Retail revenue increased 11.9%; Institutional revenue rose 6.8%. Private Wealth Management revenue declined 2.4%, primarily from lower base fees and product mix.
- Bernstein Research Services revenue increased 12.7% to $459.7 million, helped by pandemic-related market volatility and higher trading activity; 2020 also included a full year of Autonomous Research revenue.
- Expenses increased 3.9%. Higher distribution payments and employee compensation were partly offset by lower travel, entertainment and marketing costs, and lower borrowing interest expense.
- Investment results were mixed: performance-based fees increased to $132.6 million from $99.6 million, while investment results shifted to a $16.4 million loss from a $38.7 million gain.
Outlook, commentary and risks
- Management expects Bernstein Research customer activity and trading volumes to decline gradually in 2021 and normalize in 2022 as pandemic-related volatility recedes. Related revenue may fall.
- AXA redemptions of low-fee fixed-income mandates are expected to reach approximately $14 billion in total, with the remaining redemptions expected in the first half of 2021. Management says the associated revenue is not significant.
- AB achieved its 2020 adjusted operating-margin target of 30%. It set no new margin target and cautioned that 2020 market tailwinds and pandemic-related cost savings are not expected to persist; future margins may be less favorable.
- The Nashville headquarters relocation is expected to generate total transition costs of $145–$155 million and savings of $205–$215 million through 2024. Management estimated $30 million of savings versus $26 million of costs in 2020, and approximately $0.02 of EPU accretion in 2021. These are estimates subject to execution and staffing risks; ongoing annual savings from 2025 are estimated at $75–$80 million.
- Principal risks include market volatility and AUM declines, investment performance and client outflows, fee pressure and the shift toward passive investing, reliance on EQH and other large relationships, pandemic effects, cybersecurity and operational disruptions, and evolving regulation. The filing also identifies LIBOR transition and post-Brexit financial-services arrangements as uncertainties.
- AB disclosed pending or threatened legal and regulatory matters for which possible losses could not be estimated; management did not expect them, individually or collectively, to materially affect results, financial condition or liquidity, while noting outcomes remain uncertain.
- PwC issued unqualified audit opinions on the financial statements and internal controls. Performance-based fee measurement was identified as a critical audit matter because it involves variable consideration and valuation judgments.
Most important facts for investors to verify
- Whether AUM growth and positive organic flows excluding AXA redemptions continue, particularly given the reported $2.6 billion net outflow overall.
- How much of 2020 earnings and margin improvement came from market appreciation, performance fees, unusually high trading activity and temporary pandemic-related cost savings.
- Whether AXA’s remaining mandate redemptions, client concentration and fee-rate trends materially affect future revenues.
- Actual relocation costs, savings, hiring and retention outcomes compared with management’s estimates.
- AB’s liquidity and debt terms, including reliance on the EQH facility, and the composition of reported operating cash flows and available cash.
- Developments in legal and regulatory matters, LIBOR transition, cyber risks and other contingencies for which the filing does not provide a clear loss estimate.