Thank you for standing by, and welcome to the AllianceBernstein conference call. At this time, all participants are in a listen-only mode. After the remarks, there will be a question-and-answer session, and I will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded and will be available for replay for two weeks. I would now like to turn the conference over to the host for this call, Head of Investor Relations for AB, Mr. Mark Griffin. Please go ahead.
Thank you, Phyllis. Good morning, everyone, and thank you for joining our conference call to discuss AllianceBernstein's acquisition of CarVal Investors announced earlier this morning. This conference call is being webcast and accompanied by a slide presentation that's posted in the investor relations section of our website, alliancebernstein.com. With us today to discuss the transaction are Seth Bernstein, our President and CEO, Ali Dibadj, CFO and Head of Strategy, and Matt Bass, Head of Private Alternatives. Additionally, Steven Joenk, Chief Investment Officer of Equitable Holdings, will join us for questions after our prepared remarks. Some of the information we'll present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. I'd like to point out the safe harbor language on slide two of our presentation. You can also find our safe harbor language in the MD&A of our 10-K filed last quarter.
Under Regulation FD, management may only address questions of material nature from the investment community in a public forum. Please ask all such questions during this call. Now, I'll turn it over to Seth.
On behalf of our team at AB, I'm excited to welcome CarVal Investors to AB. This acquisition marks an important step toward AB's goal of building a world-class Private Alternatives platform. We welcome an outstanding team with a 35-year track record of strong performance and broad capabilities in private and opportunistic credit across a global platform, which is highly complementary to AB's existing Private Alternatives offering. As shown on slide three, this acquisition represents significant progress toward realizing several of our key objectives. First, we're responding to increasing client demand for private credit solutions from our Institutional, Private Wealth management, and Retail clients. CarVal's products build upon the success of AB's existing Private Alternatives platform, expanding the range of our investment opportunities for a wide array of both current and potential clients. Second, CarVal is an excellent cultural, strategic, product, and financial fit for both clients and unit holders.
AB's acquisition of CarVal is consistent with AB's stated growth strategy of expanding our Private Alternatives capabilities, making an important step toward AB's goal of building a world-class Private Alternatives platform with pro forma private markets AUM of $49 billion. Third, importantly, the acquisition is enabled and enhanced by our mutually beneficial partnership with Equitable, reflecting the virtuous cycle associated with their $10 billion of permanent capital commitment. Equitable will commit $750 million in permanent capital to CarVal's growth, enhancing the risk-return profile for their general account. Now, I'll turn it over to Ali Dibadj.
Thanks, Seth. Turning to slide four. Last year, we highlighted AB's Private Alternatives growth strategy, which included a $10 billion permanent capital commitment to our strategic partner, Equitable, to support our growth in private markets. This is consistent with their desire to seek attractive yields and risk-adjusted returns while building a high margin, higher multiple capitalized business with AB. The acquisition of CarVal is a direct outcome of that strategy. To supplement our strong organic growth, you've heard Seth and I speak about using targeted inorganic growth to complement our business and serve our clients' needs. Diversifying and expanding alternatives has been a focus for us, as you know. We recognize that we have gaps to fill in Private Alternatives . CarVal provides specific capabilities that are additive to our existing proven private strategies.
Together with Equitable, we will enable CarVal to grow more quickly than they might have on their own, all while helping our growing client base fulfill their needs. Matt Bass, who is AB's Private Alternatives business, will now discuss the specifics. Matt?
Thanks, Ali. On behalf of AB's Private Alternatives business, I'm delighted to welcome the CarVal team to AB. The addition of CarVal represents a significant complementary expansion of AB's Private Alternatives capabilities and will accelerate our growth by enabling us to serve our clients more holistically. Let's start with the transaction summary and rationale on slide five. As Seth and Ali mentioned, the CarVal acquisition is consistent with our stated strategy to expand our alternatives business, specifically the firm's private markets capabilities in conjunction with our partner, Equitable. CarVal augments the firm's position during a time when clients are increasingly looking to private markets for yield enhancement and diversification. CarVal's capabilities fill key gaps in the following important areas, opportunistic and distressed credit, renewable energy, specialty finance, and transportation. Combined with CarVal, AB will now have a $49 billion private markets platform.
CarVal brings $14 billion in aggregate capital commitments, including $10 billion of current fee-based AUM with a team of 190 employees across 5 global offices. With a 35-year track record focused on opportunistic and credit-intensive investing, CarVal has delivered strong returns across market cycles. CarVal has demonstrated an ability to raise substantial capital from a high quality, diversified global investor base of over 300 institutional clients. These organizations include pensions, insurance, sovereign wealth, E&Fs, and high net worth platforms and family offices. CarVal's consistent fundraising success is demonstrated by their three most recent flagship Credit Value Fund V, all of which have been oversubscribed. Most recently, Credit Value Fund V, a 2021 vintage, reached its hard cap and raised $3.6 billion in investor commitments. CarVal has also received strong long-term support from global consultants.
Importantly, we believe that AB's strategic capital sources are poised to complement CarVal's existing capital base and accelerate growth by extending into lower cost of capital strategies, including insurance. A lower cost of capital will enable us to provide more solutions to our clients and help create a powerful flywheel effect, allowing us to scale more quickly and thoughtfully. CarVal's products are relevant to many of AB's clients, including global Institutional, Retail, and our Private Wealth business. Our partner, Equitable, is aligned with a commitment to invest $750 million in CarVal's strategies. CarVal's multiple origination engines, combined with AB's global distribution platform, will enable us to provide diversified return opportunities across our broader client base, including Equitable's general account. At the same time, expanding CarVal's market presence into lower cost of capital strategies creates further a competitive advantage for CarVal in the market.
Importantly, the transaction structure creates alignment while preserving investment autonomy with no changes to the CarVal team, day-to-day operations, or business locations. All employees, including the three managing principals, are joining AB, with the transaction including new long-term management incentive programs and employment commitments. Finally, the acquisition is financially attractive, with long-term locked up capital providing recurring management fee visibility. As Ali will discuss momentarily, we expect the transaction to be slightly accretive to earnings immediately and improving over the long term. Let's turn to slide six, which shows a snapshot of CarVal Investors. As mentioned, CarVal has $14 billion in assets under management, inclusive of $4 billion of committed uncalled capital. Over the course of its 35-year global track record in opportunistic and distressed credit, CarVal has invested over $130 billion in more than 5,600 transactions across 82 countries.
The team is global and deep, with 30 senior investment professionals averaging 23 years of experience and 13 years with CarVal. The firm's strong leadership team and collaborative entrepreneurial culture is a natural and strong fit with AB. CarVal's flexible investment strategy specializes in credit-intensive assets, employing a fundamental investing approach across asset segments. CarVal has a proven ability to invest opportunistically and thematically across an array of public and private asset classes across the credit spectrum, from performing through distress. Let's turn to slide seven. I'm very excited about the potential that CarVal's complementary private markets capabilities bring to AB's existing platform. CarVal fulfills multiple key capability and geographic gaps, adding origination platforms that are highly relevant to a diverse set of clients. Furthermore, CarVal enhances AB's ESG capabilities via its global clean energy business.
Geographically, in addition to its U.S. and European business, CarVal brings substantial capabilities in both Asia and Latin America, both additive to AB's current private markets footprint. Complementary to AB's plans in China, CarVal secured the first onshore management license granted to an offshore manager to invest in Chinese non-performing loans. As AB looks to grow in China, CarVal adds another unique investment capability in a large addressable market. From a distribution perspective, we expect synergies as CarVal's growth will be enhanced through AB's established institutional client relationships, including those with third-party insurers, which we plan to expand over time. Additionally, CarVal's substantial client base of over 300 institutions may benefit from AB's expanded public and private offerings. Now let's take a look at AB's pro forma private markets platform on slide eight. As mentioned, the addition of CarVal creates a nearly $50 billion private markets platform.
AB now has a full suite of product offerings, starting with our existing corporate direct lending business, AB Private Credit Investors, commercial real estate debt, both in the U.S. and Europe, private placements, energy, and our CLO business. CarVal adds opportunistic and distressed credit, renewable energy, specialty finance, and transportation. In summary, the acquisition of CarVal marks a significant step forward for our private markets business, and we're very excited about the potential of AB CarVal going forward. Now, I'll turn it back to Ali to review the transaction structure and financials. Ali?
Thanks, Matt. Let's turn to slide nine, which outlines the terms of the transaction. AB has announced a definitive agreement to purchase 100% of CarVal for an upfront purchase price of $750 million at a low-teens EBITDA multiple and a multi-year contingent earn-out ranging from $0 -$ 650 million if certain targets are reached. The earn-out incentivizes and aligns the team with CarVal's investors and AB's unitholders. Despite the consideration being mostly in units, the transaction is expected to be slightly accretive to AB Holdings' adjusted EPU in 2023, and improving thereafter. Additionally, Equitable is expected to make a significant initial commitment of $750 million to CarVal Strategies, an allocation that could be expanded over time.
The upfront payment will be funded approximately 20% in cash and 80% in AB units, subject to certain adjustments at closing. The CarVal equity owners will receive AB Holding units, and AB will fund the cash portion of the transaction, which will be used to pay down customary items such as CarVal debt, CarVal transaction expenses, and certain employee amounts through the EQH credit facility. The transaction is expected to close in late Q2 or early Q3 2022, pending regulatory approvals and closing conditions of the transaction. With respect to the upfront consideration, 25% of the AB Holding units will be issued at close, subject to transfer restrictions that lapse annually over three years, and the remainder will be issued later this year and will not be subject to transfer restrictions other than certain quarterly distribution limits. Turning to slide 10.
In summary, the CarVal acquisition is an exciting step in AB's journey to become a leading global Private Alternatives firm, and is well in line with our strategy to deliver, diversify, and expand responsibly in partnership with Equitable. Building upon our existing successful Private Alternatives teams, we are meeting global client demand across our diverse channels for additional private credit offerings. We believe CarVal is an excellent fit culturally, strategically, product-wise, and financially. Importantly, it executes on our partnership with Equitable, meeting their risk return objectives while supporting growth of AB's higher multiple, high margin, capital light Private Alternatives offerings. With that, we welcome your questions. Operator?
At this time, if you would like to ask a question, please press star then the number one on your telephone keypad. Please limit your initial questions to two in order to provide all callers an opportunity to ask questions. You are welcome to return to the queue to ask follow-up questions. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of John Dunn with Evercore.
Hi, good morning. Maybe just to kick it off, how does the fundraising cycle for CarVal look over the next few years?
Sure. This is Matt Bass. I'll take that question. A way to think about it, the firm has various evergreen funds in place which they're consistently raising capital into, as well as flagship private equity style funds. The largest being their Credit Value Fund flagship. Last vintage was in 2021. There's a dedicated clean energy fund, a dedicated aviation fund, a dedicated shipping fund, all private equity style and on various kind of multi-year fundraising patterns. You know, we would expect that path to continue over time, consistent with historical experience out in the market. Their last fundraise in CVF, as I mentioned, was in 2021.
Gotcha. Maybe we could talk a little more on how you guys can improve their distribution in the different channels.
Sure. I would start with, you know, CarVal has an excellent institutional client base, 300 investors across the spectrum, as I mentioned, and those relationships will continue to be fostered. In addition, we have, you know, a highly complementary client base at AB. I think we have about a 10% overlap with their clients, so highly relevant to our clients in global Institutional, Retail, as well as high net worth. We talked earlier about the strategy here to expand their business into lower cost of capital strategies. Insurance is an example of that.
You know, certainly the initial commitment Equitable's making, $750 million, creates some definitely in a lower cost of capital business that we would look to expand with other insurance companies, again, consistent with the focus we have on the distribution side. Highly complementary to our institutional retail and high net worth base.
I think, Hey, John, it's Ali. Just to add a little bit as well to Matt's point. We also believe very strongly after doing diligence on this that the ability to have AB CarVal in our quiver, so to speak, will be synergistic across our current Private Alternatives businesses. We become very legitimate in terms of having discussions. There will be a clear halo effect in being able to offer very broad-based Private Alternatives , holistic solutions to our clients who are demanding them. That's part of our energy and excitement about this transaction. It rounds things up, and it really brings us to the fore in terms of clients' needs.
Gotcha. That's great. Thanks very much.
Your next question comes from the line of Robert Lee with KBW.
Great, good morning. Thanks for taking my questions. Excuse me. A couple of questions. I apologize if you went through it. I got on the call a little bit late. Could you maybe walk through what some of the earn-outs are, maybe, you know, the triggers, size, you know, timing?
Sure. The earn-out can range between zero and $650 million. They're based on alignment between AB CarVal performance, us growing their business and them growing their business, and of course, the way it's structured as well, from a unitholder perspective. We're using this earn-out as a real kind of locking arms alignment tool across all those stakeholders. The targets are meaningful in terms of growth, but they're entirely achievable to the previous question in terms of growth as well. Although, you know, it's a scale from $0- $650 million, we would all be, and unitholders in particular, would be very, very pleased if we're actually able to deliver on a $650 million earn-out.
I mean, is it multiple tranches? Is it like, you know, one big cliff payment in five years? I'm just trying to get some sense of, you know.
It is not. Yeah. It's constructed as basically almost linearly with how the business grows over time.
Okay, and then also, you know, in the presentation, you talked about having $12 billion of fee-eligible AUM. So was that. I'm just curious how, you know, how much of that is from CarVal versus what you maybe already had? Is it possible to kind of, you know, if that was all to be drawn down, you know, what that would translate into in terms of, you know, revenues, you know, $120 million, $100 million? Just.
Sure. This is Matt. On the fee eligible point, I think approximately $4 billion of that is attributable to CarVal, the rest to the existing business. In terms of fee rates, I believe their fee rate is broadly consistent with what we've disclosed historically with respect to our existing Private Alternatives business, so around 1%, from a management fee perspective.
Okay, great. Are you acquiring any performance fees? Are you just buying, you know, you know, management fee streams? You know, and how should we think of any potential carry or performance fees, you know, going forward? Does your accretion assume any performance fees as part of it?
Thanks for the question. Now we have many different styles of funds. Some of them are longer term in nature, and so there is a performance carry element to it. Some of them are shorter term, in fact, annually crystallized in nature. The way to think about it is performance fees comprise, call it 20% of 2023 revenues for the firm, but they will be declining over time. We are not purchasing any historical performance fees at all. This is really an opportunity for us to again, as we mentioned before, lock arms and grow together with them.
It's a much more simple structure than perhaps sometimes you're used to, where there's kind of big, lumpy performance fees that come in on an annual basis.
Would you be participating in performance fees on assets raised, you know, post-closing, you know, in the future? It's just the legacy you don't participate in, but future you would?
We would in a proportion, obviously sharing with the management team. That's right.
Okay, great. Thank you for taking my question.
Your next question comes from the line of Ryan Bailey with Goldman Sachs.
Hi. Hi, Seth. Just maybe a quick question overall. I think as you think about your alternatives platform, are there still pockets or products that you're thinking about adding, following CarVal? Is there anything else that you're looking at?
Thanks for the question. Yeah, we continue to look beyond that, and I'll let Matt chime in. There are still pockets, albeit not significant pockets in private debt. You know, whether it's infrastructure or whether it is, you know, we've talked about other areas like growth equities, but there's nothing out there that's imminent or on the docket. We continue to be opportunistic where we think we have an edge and feel that from a value proposition we can realize that for our unitholders. Matt, if you have anything you wanna add, please do.
Yeah, no, I could say, you know, look, what's so exciting about this transaction for us is it fills four significant capability gaps that we have been actively and proactively looking to fill really over the better part of the past four years. Think about that as opportunistic and distressed credit investing, one. Two, private asset-backed lending is a complement to our existing middle-market lending business, corporate lending business, and real estate lending businesses. It's a significant market. Clean energy as well as geographic extensions notably further into Europe, Asia, and LatAm. The fit here, the complementary nature is fantastic with CarVal and, you know, really hits on four core areas that we've been looking to fill from an M&A perspective.
Just to add to that a little bit, I know everyone's asking, "So what's next? What's next?" Our focus very clearly is to grow CarVal. That is our number one focus as a firm for Private Alternatives . And again, the halo effect it brings to the rest of the Private Alternatives that we currently have that are performing very well and growing very well. We think we have enough, to Matt's point, to really bring an excellent suite to our clients, current clients and new clients as well. I would just add from an M&A perspective more broadly that there are certainly acquisitions that we could make to fill product gaps across the firm, whether it be distribution or product.
Again, just to underline the thesis and underline what we're doing here in today's transaction, complementary is our focus. We don't want overlap. We want complementary in all instances.
Sure. Maybe to tack onto that last point. You mentioned demand from the retail investors as well. Are there any opportunities for retail dedicated or retail specific products as part of the deal and sort of the growth outlook?
Oh, definitely. I think it's one of the areas we're most excited about. That will be one of the things that Matt and the CarVal team follow up with our distribution teams.
Thank you.
You have a follow-up question from the line of Robert Lee of KBW.
Hi, thanks for taking my follow-up. Maybe just going back, can you give us some sense of understanding that CarVal just went through a fundraising cycle to some extent? I mean, what their growth, you know, has been, say, the last three to five years. Going back to the earn-out question, is their targets predicated upon them having, you know, a similar growth rate over, you know, the following, you know, three- to five-year period? Then, I guess lastly, you know, it's easy to get some sense of the fee rate, but for us, we're trying to build this into a model. Should we be assuming that, you know, its margins are, you know, pretty similar to your ongoing margins post-deal, higher, lower?
Just trying to get some sense of how this will flow through the, excuse me, the P&L.
Sure. I'll tackle it to start, and Ali certainly chime in. From a growth perspective, you know, looking forward, where we see, you know, significant opportunity for growth, in particular where AB's distribution combined with CarVal's existing teams and origination engines could really combine is into lower cost of capital. The firm historically has raised, you know, meaningful capital in higher return strategies. I look at their Credit Value Fund flagship series, you know, targeting, you know, low to mid double-digit returns. Their existing presence in the market is showing them opportunities at a lower cost of capital that historically they've not been able to execute on.
We believe a lot of the growth is gonna come from extending into lower cost of capital, you know, 10%-12% return strategies, 6% return strategies, and lower for the insurance space. That's where we believe a significant synergy between the two firms exists. You know, in terms of the earn-out structure, you know, we do believe the growth targets are meaningful but achievable and ones that the management team is obviously comfortable with. You know, as Ali Dibadj mentioned, the structure importantly creates strong alignment between the teams for the CarVal team to continue to generate strong performance, which would enable that growth.
From a margin perspective, the good news is the way we structured the deal and the way CarVal operates is that it shouldn't be a meaningful impact to our margins as it stands. Obviously, over time, as this business scales and the rest of our Private Alternatives businesses scale, as we grow the whole pie for all of our Private Alternatives strategies, we believe it should be accretive to our margins over time.
Okay. Thanks for taking my questions.
Thanks.
At this time, there are no further questions. I will now turn the call back over to Mr. Griffin.
Okay, thank you everyone for joining our call this morning. If you have any follow-up questions, please feel free to reach out to investor relations. Have a great day. Goodbye.