Welcome to Invesco's third quarter earnings conference call. All participants will be in a listen-only mode until the question and answer session. At that time, to ask a question, press star one. This call will last one hour. To allow more participants to ask questions, one question and a follow-up can be submitted per participant. As a reminder, today's call is being recorded. Now I'd like to turn the call over to Greg Ketron, Invesco's Head of Investor Relations. Thank you. You may begin.
Hey, thanks, operator. To all of you joining us on Invesco's quarterly earnings call. In addition to our press release, we have provided a presentation that covers the topics we plan to address today. 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 two of the presentation regarding these statements and measures, as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Marty Flanagan, President and Chief Executive Officer, and Allison Dukes, Chief Financial Officer, will present our results this morning.
After we complete the presentation, we will open up the call for questions. Now I'll turn the call over to Marty.
Great. Thank you, Greg. Those so inclined to follow along, I'll start on slide three, on the highlight page. The challenging industry backdrop continued in the third quarter as most major equity and bond market indices moved lower. Investors continued to behave cautiously, seeking risk-off trades that impact industry flows, as well as the level and mix of assets under management. The dynamic environment we are in favors money managers that have a broad, diversified range of capabilities that meet client demands in this market. Invesco continues to prove to be one of the few global investment managers that can do that with net flows momentum and market leadership positions in areas of high client demand. Despite historic market declines, the firm generated net long-term inflows this quarter in active fixed income, Greater China, and our institutional channel.
All three of these areas also garnered net long-term inflows on a year-to-date basis, along with our global ETF business and the private markets capabilities. I'll begin with our active fixed income capabilities, which has been a steady source of growth this year and is a testament to the diversity of the investment platform. The asset class generated net inflows of $3.7 billion in the quarter, with strong demand from clients in Asia Pacific. We managed nearly $380 billion of active fixed income across the full spectrum of investment offerings, vehicles serving retail clients as some of the world's largest institutions. Our Greater China business delivered $2.1 billion of net long-term inflows this quarter. Invesco Great Wall, our China joint venture, has fueled our growth, and we continue to successfully launch new products, most notably in fixed income.
We've grown consistently in the last several quarters, despite the recent difficulties faced by the Chinese economy as a result of our strong local partner and our long-standing reputation as one of the top global investment managers in China. Our leading position in China is a result of many years of investment and hard work. As China and the global economy eventually recover, we expect our growth to accelerate in the fastest-growing market in our industry. Our institutional channel generated net inflows for the 12th consecutive quarter, with $3.9 billion led by clients in Asia Pacific. The business has proven resilient throughout COVID-19 pandemic in the market downturn we are experiencing in 2022.
Growth in the institutional business is a result of investment in our distribution team, the range of capabilities we bring to market, and the build-out of our solutions capability over the last several years, which is increasingly becoming the differentiator for Invesco. Despite volatility and the risk-off sentiment impacting global markets, we continue to win new mandates and our pipeline remains solid. We look forward to continuing our partnership with many of the world's leading organizations to meet the challenges of this uncertain time. While net inflows into ETFs were relatively flat in the third quarter, demand for ETFs slowed industry-wide. Despite the slowdown, we maintained a leading position in ETFs, and we expect to see growth rebound as market volatility eases. On a year-to-date basis, we have generated strong organic growth and gained market share.
We have continued investing in our private markets capability, and we have experienced net outflows in the third quarter. Over the past year, we have generated organic growth against a very volatile market, demonstrating the strength of our alternative platforms. Key to our alternative strategy is our strategic relationship with MassMutual, which is meaningful and continues to strengthen. In addition to managing over $10 billion in broker-dealer, variable annuity, and self-advised assets prior to this decline, we have over $3 billion in other investment relationships with MassMutual. This includes nearly $2.5 billion in commitments to various Invesco alternative strategies. The commitment from MassMutual has been growing over time, and we work on various strategies, including $400 million committed to our INREIT product. Having a partner like MassMutual as an investor adds significant reputational impact to our third-party investors.
Considering the combined investment we have in seed and co-investment vehicles, which totals $900 million, along with $2.5 billion in commitment from MassMutual in various alternative strategies, is a compelling partnership that enables us to bring products to market more quickly and brings with it the strong reputational backing of a world-class financial institution. While growth continues in key capability areas I mentioned, the firm experienced net long-term outflows of $7.7 billion during the quarter. Equity strategies have been under pressure industry-wide, with the largest contributor to net outflows totaling $7.4 billion for the quarter. Client demand for emerging markets remains subdued, and our developing markets fund had $2.8 billion in net outflows in the third quarter.
While near-term headwinds persist, we have confidence that the equity global capabilities will be a driver of growth in the future when global markets recover and client demand for this important asset class returns. As we discussed last quarter, significant progress has been made building a stronger balance sheet position to help us weather this market downturn. We ended the quarter with a zero balance on our revolver and total debt outstanding is at the lowest level in years. Our cash balance increased over $1 billion and we maintained the flexibility we need to sustain investment in key growth areas. Last quarter, we mentioned that we met our target of $200 million in annual cost savings from our strategic evaluation. As market volatility continues, the need to maintain a disciplined approach to expense management is paramount.
We are re-examining all aspects of our discretionary spend relative to the environment we are in, and we will be focused on near-term hiring on critical growth initiatives. We continue to thoughtfully balance managing through near-term market headwinds while investing for long-term growth. As always, we remain focused on helping clients meet their investment objectives, investing in areas of strategic importance, scaling our operating platform, and efficiently allocating resources. By executing our long-term strategy, I'm confident Invesco will maintain its position as one of the leading firms in our industry while delivering compelling return to shareholders. With that, I'll turn it over to Allison.
Thank you, Marty, and good morning, everyone. I'll start with slide four. Investment performance continued to be solid in the third quarter, with 57% and 62% of actively managed funds in the top half of peers or beating benchmark on a three-year and a five-year basis. These results reflect continued strength in fixed income and balanced strategies where we continue to see strong client demand. Performance lagged benchmark in certain equity strategies, but we experienced improvement over the past quarter in several key funds. Turning to slide five, we ended third quarter with $1.32 trillion in AUM, a decrease of $67 billion from the end of the second quarter. Global market declines and foreign exchange movements reduced assets under management by $72 billion, partially offset by total net inflows inclusive of $10 billion into money market products.
As Marty noted, the firm experienced net long-term outflows of $7.7 billion this quarter amid continued market volatility. Active capabilities accounted for most of the outflows, totaling $7.3 billion for the quarter, while passive net outflows accounted for the remaining $400 million. We sustained organic growth in several of our key capability areas, and our net flow performance remains strong relative to industry peers. A driver of our resilience and relative outperformance has been the institutional channel, which delivered a 12th consecutive quarter of net inflows with $3.9 billion. We generated the strong inflows despite not renewing a $2.5 billion relationship during the quarter.
While clients are carefully considering new fundings in these challenging markets, our growth in the institutional channel accelerated from the second quarter, and we continue to see new mandates fund across geographies, asset classes, and the risk-return spectrum. Offsetting growth in institutional were $11.6 billion of net outflows in the retail channel this quarter, primarily in the Americas and EMEA, as investors continue to seek lower risk exposure amid extreme market volatility. Net flows into ETF vehicles were relatively flat in the third quarter, with $300 million in net long-term outflows. Demand for ETFs slowed industry-wide. That driver, coupled with net outflows in commodities and bank loan products, created net flow headwinds for Invesco. Offsetting this were net inflows into fixed income ETFs, the low volatility suite, and our QQQ innovation suite led by the QQQM.
Despite the slowdown in the third quarter, we maintain a leading position in ETFs, and we expect to see growth rebound as market volatility eases. On a year-to-date basis, net long-term inflows into our ETF franchise are $23 billion, equivalent to a 12% organic growth rate. We've also gained market share year to date. Excluding the QQQs, Invesco captured 4.7% of industry net inflows, higher than our 3.1% share of total industry assets under management. Now turning to slide six, we experienced continued net outflows in the Americas and EMEA, primarily in the retail channel. Growth picked up in Asia Pacific with over $5 billion of net long-term inflows this quarter, led by China and Japan.
Our China joint venture contributed $2.1 billion of net inflows, including $1.8 billion from nine new products launched during the quarter. As Marty highlighted, our joint venture remains a key strength, and we expect growth to accelerate there as markets recover. Fixed income capabilities have been a reliable source of growth for Invesco for several years now. To cite one of the most difficult bond markets in years, the third quarter was no exception to that reliability, with $6.5 billion of net long-term inflows. The firm has now experienced net inflows into fixed income strategies for 15 straight quarters, a testament to the breadth of our offering, as well as our strong investment performance in the asset class. Alternatives experienced net outflows of $5.3 billion in the third quarter.
The largest drivers of net outflows were bank loans and commodity ETFs, which have attracted net inflows year to date, but saw investors pull back in the third quarter. While growth may slow in the near term as investors carefully consider asset allocations, we're confident that our alternatives business will be a strategic driver of growth in the years to come. In fact, over the past volatile year, we have generated a 4% organic growth rate, excluding outflows in our GTR product, demonstrating the strength of our alternatives platform. Finally, as Marty noted, we experienced $7.4 billion of net outflows in equity capabilities. Excuse me.
Global and developing markets equities continue to account for the majority of net outflows in the asset class, with $4.3 billion in the quarter, including $2.8 billion from our developing markets fund. Moving to slide seven, our institutional pipeline was $23 billion at quarter end, modestly lower than $24 billion last quarter. Client fundings increased in the third quarter as compared to second quarter, and we continue to win new mandates despite the challenging environment. Our pipeline has been running in the mid-$20 billion to mid-$30 billion range dating back to late 2019. While this is at the lower end of the size range, we still see the pipeline as robust given the uncertain market environment.
As we noted last quarter, that uncertainty is causing some mandates to take longer to fund, and we would estimate the funding cycle of our pipeline is now in the three-four quarter range on average as compared to two-three quarters previously. In summary, the pipeline continues to reflect a diverse business mix across asset classes, investment styles and geographies. Our solutions capability enabled 38% of the global institutional pipeline and continues to be a differentiator with clients. Turning to slide eight, significant declines in global markets this year have put downward pressure on our revenue base. Net revenue of $1.11 billion in the third quarter was 5% lower than the prior quarter and 17% lower than third quarter of 2021, primarily due to declines in active asset levels.
Total adjusted operating expenses were $741 million, a decrease of $21 million from last quarter and $31 million as compared to the third quarter of 2021. The drivers of the decline from last quarter were G&A expenses, which were $11 million lower than last quarter, and marketing expenses, which declined by $7 million, consistent with the seasonally lower activity we often see in third quarter, as well as a decline in discretionary spending. We also saw a slight decline in employee compensation expenses. Drivers of the decline from the third quarter of 2021 were compensation expenses and property office and technology expenses, despite the $3 million in duplicate rent for our new Atlanta headquarters that I mentioned last quarter.
Embedded in our third quarter 2022 spending is continued investment in growth capabilities, as well as several transformational projects that will enhance the effectiveness of our corporate functions and enable us to reap the benefits of scale as markets recover. Current projects include a technology-enabled human resources transformation, moving core finance systems to the cloud, and the foundational elements of the Alpha Next Gen program. The savings we achieved in our strategic evaluation and the continued discipline we have installed have enabled us to make these strategic investments without meaningfully growing technology expenses. Compensation expenses declined $45 million or 9% from the third quarter of 2021. Given the pace and magnitude of the market declines, it will take some time for certain elements of our expense base to adjust with lower revenue.
We manage variable compensation to a full year outcome in line with company performance and competitive industry practices. This can cause quarter-to-quarter fluctuations in compensation expense. Historically, our compensation to net revenue ratio has been in the 38%-42% range. In periods of revenue growth, the ratio tends to move towards the lower end of this range, similar to 2021 when the ratio declined to 38%. During periods of revenue decline, as we are experiencing this year, the ratio tends to move towards the upper end of this range. Year to date, our compensation to net revenue ratio is 40%. If assets remain at quarter end levels, the full year ratio would continue to trend towards the upper end of the range, driven by the lower net revenue base.
Given the uncertain market environment, we are diligently managing expenses and evaluating all aspects of discretionary spending. We continue to invest in our key growth capabilities and we're focusing near-term hiring in those areas. We will defer hiring for certain other positions as we focus our efforts on critical initiatives. As always, we remain focused on meeting the diverse needs of our clients and investing where it's necessary to do so. Finally, we are proceeding with investments in foundational technology projects that will enable growth and support future scale in our operations. Balancing these objectives will allow Invesco to provide rewarding careers for our employees, position our business for future growth, and prudently manage our expense base.
Moving to slide nine, adjusted operating income was $369 million in the third quarter, $43 million lower than the second quarter due to lower net revenue driven by market declines, partially offset by lower operating expenses. Adjusted operating margin was 33.3% as compared to 35.1% in the second quarter and an all-time high of 42.1% in the third quarter of last year. Earnings per share was $0.34 as compared to $0.39 last quarter, driven by the same factors that impacted adjusted operating income. The effective tax rate was 28.7% in the third quarter due to a change in the mix of income across tax jurisdictions, including non-operating losses in lower tax entities.
We estimate our non-GAAP effective tax rate to be between 26% and 28% for the fourth quarter of 2022. The actual effective rate may vary from this estimate due to the impact of non-recurring items on pre-tax income and discrete tax items. I'll conclude with a few points on slide 10. Maintaining balance sheet strength continues to be a top priority, particularly as we navigate this uncertain environment. Total debt was managed lower in the third quarter to $1.5 billion as of September 30, and we ended the quarter with a zero balance on our revolving credit facility. Our cash and cash equivalents balance is over $1 billion, an increase of nearly $100 million from June 30.
Our leverage ratio as defined under our credit facility agreement was 0.7 times at the end of the third quarter, in line with last quarter. Our leverage ratio improved from 0.9 times in the third quarter of last year, despite lower EBITDA, driven by the significant market declines. If preferred stock is included, our third quarter leverage ratio was 2.8 times. In this challenging environment, Invesco is strategically aligned to areas of high client demand, and we have the financial flexibility that will allow us to navigate current volatility while continuing to invest in the future. We will be extremely thoughtful in managing expenses through the near term so that we can rapidly scale when recovery takes place. We maintain our unwavering commitment to serving the needs of our clients in any market and delivering long-term value for our shareholders.
With that, I'll ask operator to open up the line to Q&A.
Thank you. As a reminder, if you'd like to ask a question, please press star then one. Remember to unmute your phone and record your name clearly when prompted. If you'd like to withdraw that question, you may press star two. Now first question comes from Brian Bedell with Deutsche Bank. Your line is open.
Great. Thanks. Good morning, folks. Maybe I could just start off on the expense side. Allison, you mentioned a couple things on the initiatives that you're working on for the transformational projects. Any sense of sort of how much that might lower the expense base going forward? Then also related to that, on the comp to revenue, 42%, should we think of that as a potential quarterly ceiling, or as you indicated, it can be lagged and therefore can go over 42% in a really bad market, and then you seek to calibrate that soon thereafter?
Sure. Good morning, Brian. Let me take the first one. On the transformational projects, not ready to provide any sort of estimates on what that could do in terms of lower expenses. The way I would think about it, and I wouldn't even say not ready. I'm not sure it's just the right way to think about why we would be doing it. A lot of this is to avoid, I would say, future costs, and it's also to create scalability. Some of the things we're doing, in these enterprise systems, with our financial systems, with our human capital systems, moving our data into the cloud, it will reduce tech debt over the future.
It will also give us the opportunity to scale as we just move more data into the cloud, and just have a more nimble infrastructure and continue to globalize the corporate functions that support our large operation. We've talked about Alpha Next Gen in the past, and we'll talk about it a whole lot more, I'm sure, in the future. Those are some early foundational investments that we're making in the middle and back office that will streamline and harmonize our operations and create efficiencies over time, but not necessarily from a P&L perspective that you'll see just yet. There's quite a bit of investment that's going in along the way. On the comp to revenue side, our range is typically 38%-42% on a full year.
We really don't look at it quarter to quarter because the quarter-to-quarter fluctuations are always there just as revenue fluctuates, but also as you have seasonality and things like payroll taxes, and FICA. We really look at it and manage to a full year basis. We're on an annual comp cycle, and year to date, through the third quarter, we were at about 40%. As we think about what could the full year look like, I'd say it'll be on the higher end of that range, not the lower end. As we noted last year, full year 2021, we were closer to 38%.
Yeah. No, that makes sense.
Hopefully that helps.
Yeah, yeah, definitely. Maybe if I can ask about fixed income. Again, that's been a strength, as you pointed out. As we now are in a much higher yield environment just coming into fourth quarter versus even the third quarter, maybe if you can talk about both on the retail demand side, if you're seeing that work into the channels yet, if you're seeing the sales pick up on the retail funds, and then also on the institutional side, if you can comment on to what extent you think pension plans may reallocate to fixed income and how you're positioned there. Could we see this really offset, you know, equity outflows near term?
It's a great question. Look, where rates are going, you've seen what's happened. Everybody's, you know, shortened, gone, you know, very conservative. You've not seen that move yet, but the conversations are broad and very much look at the full spectrum of fixed income. With the rates where they are making fixed income, longer-dated capability is much more attractive. That's on the institutional side. As you know, institutions tend to be much less volatile, but, you know, they will make tactical allocations accordingly. On the retail side, again, I'd say it's too early, but all indications are, I would anticipate, you know, a broader range of investments into fixed income because of where the yields are moving.
Thank you.
Thank you. Now next question comes from Brennan Hawken with UBS. Your line is open.
Good morning. Thanks for taking my questions. I was hoping to follow up on the expense outlook, Allison . You flagged a bunch of investments that you're making, including laying the groundwork for Alpha. As we're thinking about entering into 2023, I know you're probably in the middle of the budgeting process now, so it's an early asking for an early read here, but should we continue to expect that there will be pressure to make investments and continue to like, you know, grow some initiatives like Alpha, which maybe ultimately lead to some efficiencies, but could result in expenses being maybe a little bit more stubborn and inflexible in the near term. Is that fair for thinking about 2023, or is it too pessimistic?
It's a great question, and it's a hard one to answer exactly, and certainly not gonna give firm expense guidance just yet as we are deep into budgeting season. I mean, let's just talk maybe generally about how we think about the expense base and what we can manage and what we can't manage. There is some variability in our expenses. As you know, we've always guided to that. About a third of our expenses are variable. You know, you see it primarily on the compensation side, and you're certainly seeing that this year. I think I'd point to a couple of things. One, despite this really challenging environment, you know, we are managing to keep expenses kind of flat to down on most line items relative to last year.
That's because we are continuing to invest in a lot of these growth areas that we don't think it makes sense to pause on. It just simply wouldn't be good business for us to pause on key foundational transformational projects that really put the firm in a position to grow and to scale and to be where we need to be to support our clients. As I think about how stubborn or not our expenses, I think a couple of things. I'd reiterate the comments I made around discretionary expenses. There are elements of discretionary expenses that we're looking at very rigorously. We're being very thoughtful about hiring. We're really focused on our key growth areas and managing our hiring against that.
You've seen us, I think do some pretty good work on facilities and some of the fixed costs that we have that we think we can continue to unlock and reallocate into areas of more transformational growth, and we'll continue to make progress against some of those areas as well. I don't feel like these investments hamstring our ability. I really don't. I think it actually puts us in a position to scale and recover faster when markets do turn, and they will.
Yeah, Brennan, I, Allison's exact. We are looking at everything you would imagine and hope we would do, and it's responsible for us to do it. As you say, in the short term, the more discretionary things, you can make some progress. It's not gonna change anybody's lives, but it's exactly the very responsible thing to do. We're just very focused on building scale within the organization. That snap back will be very, very strong. Again, I would point you to what we've done historically. We continue to be very focused on putting the firm in a position of great success.
Sure. I recognize it's a balance, just how I tried to position the question. Okay. Transitioning to revenue, fee rate was under more pressure than I had actually expected. Should we expect that fee rate to continue? Maybe could you give us an idea about what the exit rate or the October rate kind of looked like? Is that showing continued pressure just given the general profile of markets through the quarter? Just as sort of a more nitty item, the other revenue has been under some pressure. I know there's some transactional volume there. Is this sort of a reasonable floor to think about for the other revenue, or could this continue to come down?
Sure. Thanks, Brennan. Those are good questions. Let me say on the fee rate one, as you know, we really don't manage the fee rate. The net revenue yield in particular is just an output of a whole lot of different factors. Maybe thinking about what drove the net revenue yield declines in the quarter and then extrapolating that to what could that mean for the future. The biggest pressure on net revenue yield is the declining equity markets and, in particular, the declines in emerging markets. Developing markets, global equities, emerging markets, they are a meaningful part of our portfolio. The market declines in those particular asset classes further exacerbate the pressure on our fee rate.
We also see just the asset mix shift and the demand that we experience for money markets and the risk-off exposure. While we benefited, on one side of the ledger from the growth and some of those risk-off exposures, certainly we've got a real pressure in the asset mix shift at the same time. You also saw a decrease in the other revenue, from those, in the other revenue line item, and I'll get to that in a second that you asked about. Those are all the sort of the downward pressures. What could that mean for the future? I mean, I think. Look, there are a few things going on. One, the ending assets under management was quite a bit lower, about $95 billion lower than the average AUM for the quarter.
That's gonna continue to put pressure on revenue, which will put pressure on just the overall fee rate yield that comes out of that. If we expect to continue growth in passive, which we do, they come at lower fees. At the moment, given the geopolitical tensions, I would expect continued pressure in some of those emerging markets, developing markets categories as well. It just does put pressure on the overall yield there. All that is dependent upon where assets were at 9/30, and of course, all that's subject to change as the markets do what the markets will do over the balance of this quarter.
Other revenue, as you noted, it was about $9 million lower than the prior quarter, and that was really due to lower transaction fees, in particular in global real estate and in some front-end mutual fund fees. It's a function of activity levels. I don't think it's a new normal necessarily, but if you think about just the activity levels and just really the pretty outstanding volatility we experienced inside of the third quarter, it did put pressure on that category, that will recover as activity levels recover.
Thanks very much.
Thank you. Our next question comes from Glenn Schorr with Evercore. Your line is open.
Thanks. I appreciate it. I'm curious on your comments on the retail side. Obviously, in an environment like this, retail is gonna outflow. That's unfortunate, but it's gonna happen every time. As they transition towards lower risk exposures, as they try to capture yield, I'm curious on what you can specifically do to capture that demand. Your presence obviously is huge in the channel. Your product mix is great. There's rising demand on fixed income ETFs. I'm just curious on what can be done on the education front, how can you hold the channel's hand, so to speak, and do a better job of capturing some of those outflows?
Yeah. You're exactly right, Glenn. We're uniquely positioned here, right? With the range of capabilities that we have, you know, there's no discussion unless you start there. Secondly, just the capabilities on the distribution side, things like Invesco Consulting in the field, working with financial consultants at all the financial advisors in the marketplace. Already the conversations are positioning for, you know, when do you get back in the market, whether it be equities or fixed income. Those are real conversations. I'm sure it's happening everywhere. We have the ability with the capabilities we have, but also the coverage we have in the market, but also with our, you know, sort of the marketing digital capabilities, we're informed in the engagements that we have.
From my perspective, you know, when is the turn? Is it one quarter, two quarters? I don't think you're that far out. You're probably closer to the bottom than the top. With that, you'll get reallocation into a broader range of capabilities.
Part of ongoing processes, I guess.
Yes. Yes.
I heard the comments on what outflows on the alternative side, again, product of the environment. Can we focus a little more on your private market side, and maybe just refresh what investments are being made now and where you're seeing client demand, and if that could be an offset going forward as well?
Yeah. Real estate continues to be a very dominant asset class for us and also, you know, parts of, you know, within credit, bank loans and CLOs a bit more challenged in the short term where people are nervous about, you know, recession and, you know, impact on credit. That said, there are two areas where opposition continue to see growth, and it's an area of, you know, future focus very much. The other very specific area that we've been talking about is getting some alternative capabilities into the wealth management channels. We'll continue to be very focused on that. You know, from my perspective, you know, 2023 should be a year when we start to see greater traction, you know, leading the way.
There'll be something behind that on the debt side. That is another area of absolute focus for us as an organization.
Okay. Thanks, Marty.
Thanks, Glenn.
Thank you. Our next question comes from Ken Worthington with JPMorgan. Your line is open.
Hi. Good morning. Thank you for taking the questions. Maybe to further the discussion on expenses, looking to think about how we can, you know, think about the concept of scalability better here. Maybe starting, what cost line items do you think are going to be most impacted by improved scalability and maybe which are not? I would assume it's G&A and tech that are really going to see the scale benefits. I think Invesco maybe historically thought about margins on incremental revenue of somewhere, you know, 50%-60%, maybe 50%-60% plus. Do the investments that you're making in scalability take margins on incremental revenues to levels that are different than what we've seen in the past? Is it like a little bit or is it, you know, maybe meaningfully better given what you're doing?
Let me start with the first one around where should we see the most scalability, and I think you're right. It would be the G&A and tech line items. I'd also point to marketing. Marketing is a pretty scalable line item as well, and one that you know, it's also a little bit you can pull back on some of the discretionary expenses in marketing, but we're not going to pull back on travel and being in front of our clients at precisely the time when they need to see us, and we need to be in front of them, and we need to be actively talking to them. You know, I do think as I think about what that looks like on the upside, it doesn't budge quite as much on the way up.
There's some benefits there as well. In terms of and maybe I'll let Marty chime in on sort of relative to the past, since mine's only a couple of years back. I would say in terms of the investments we're making in some of these technology projects, does it give us even more scalability? I think perhaps. You know, it's really necessary. You think about where the firm's been and where we've come from. We closed the Oppenheimer acquisition just on the eve of COVID. You saw a material increase in the size of the firm, just on the eve of what has now been a few rather volatile, challenging years.
What we are doing in terms of just further integrating all the various aspects of the firm and creating a unified system and platform across many different parts of the overall enterprise framework, all of this will allow us to just grow and scale from here, I think in a more seamless fashion, because you just don't have the redundancy in systems that are very difficult when the data is not in the cloud. It gives us flexibility to adjust our platform and to serve our clients in ways that would have just been much more difficult. Said differently, without doing this, we'd be spending a whole lot more to make any nimble shifts in the environment.
Yeah, let me add. If you look at not too long ago when our profit margin, you know, was over 40%, is that a cap? The answer is no. If we had, you know, the same level of assets under management when we complete this work, we will be north of that operating margin. How does that happen? This might be too much information, but literally application rationalization that is happening, you know, pretty holistically because of a new set of technologies that really didn't exist in the past that can allow that to happen.
Also just looking at, you know, what clients are looking for in front to back, you know, the breadth of capabilities, if it's inconsistent with where client demand is, you know, we're looking from, you know, sort of, you know, all the, you know, front to back, you know, support structures around that's where you get the scalability, and, you know, those are the efforts that we're on right now. It's hard to explain in a simple line item because they're holistic in how we look at things. That has been, you know, scalability within our capability to meet client demand is really the headline, and there's a lot of detail underneath it.
Great. Thank you.
Understood.
Maybe just following up, U.K. pensions. To what extent did you see stress in the U.K. pension market? Did that flow through to impact Invesco either in 3Q or as we began 4Q? Given that Invesco has been building out fixed income and solutions globally, might there be a change to the U.K. LDI pension market, and does that make for an opportunity for Invesco?
Yeah. The good news is, you know, we did not have any LDI exposure, so no immediate impact. I do think, you know, post, you know, quote-unquote, "this event," it will definitely open up opportunities for other managers with capabilities like we have now. Is that next quarter? Likely not. You know, when you look through next year, I suspect there's gonna be some real opportunities.
Thank you.
I will say, I do think part of, you know, what we experienced there, you did see clients looking to meet some of these obligations, and so they were liquidating some of their positions, and we were on the receiving end of some of that. You know, we didn't see nothing there in terms of the overall impact, and that's just kind of part of the overall, I'd say, market stress and volatility we've been managing through.
Actually, that's a good point. It's analogous, again, to when there's pressure on money funds during the financial crisis. You know, if you know, had a very liquid money fund portfolio, you became a source of funds, and that's a little bit what happened, you know, with some of these LDI situations.
Okay, great. Thank you.
Yeah.
Thank you. Our next question comes from Dan Fannon with Jefferies. Your line is open.
Thanks. Good morning. Wanted to follow up on fixed income and specifically active fixed income domestically. Can you talk about which products and capabilities you have that are either, you know, with good performance or already kind of at scale that could benefit from what is the potential for, you know, kind of larger flows? I guess if they're separate between institutional and retail in terms of the products that would be helpful also.
I'll make a couple comments, and Allison can chime in. It's a broad suite of capabilities, and it's, you know, really highly performing, you know, across the fixed income team. That's really good news. It's not all available in retail and institutional simply because of demand within that marketplace. We have the long-term record stability of team, you know, and demand coming. We look at it as just a real opportunity for us over the next, you know, few quarters.
I guess, is that core plus? I guess I don't know what the funds are. Could you talk about what the actual products are?
Anything from short duration core plus, you know, bank loans, credit, it's the whole suite, Dan.
Munis.
Unis is a very strong capability. There was outflows last quarter.
You would characterize them all at scale already.
Not every single asset, fixed income asset class is not at scale, which we've talked about. You know, direct lending's not at scale. Some of the distressed credit's not at scale. We have a number of them at scale with performance records and talented managers.
Okay, thanks. Just to follow up on the China, there were several product launches in the quarter, and that seems to be, you know, kind of a continuing trend. Is there a backlog as we think about, you know, kind of launches here into the fourth quarter or into next year that you can, you know, quantify or talk to?
Hard to quantify that exactly. I mean, yes, just to reiterate, we saw about $2.1 billion in inflows into our China JV, and of that, about $1.8 billion came from new product launches. Those were mostly in fixed income asset classes, which it makes sense in this environment. We do tend to see a lot of fixed income and balanced interest. Less so equity at the moment, though historically, we've certainly benefited from some of the equity funds that have been launched in more risk-on environments. That is just a function, a dynamic of that market. Hard to point to a backlog, but I guess I would say it differently and say this is kind of the way that market functions, and I don't expect that to change in the near term.
I do think the overall $2.1 billion just really, again, speaks to the resiliency of that market and the fact that we invested quite early ahead of many of our competitors in that market and we're really well-positioned to capture some of the flows there in both challenging markets and better markets. This has certainly been a more challenging year for China, though.
Thank you.
Thank you. Our next question comes from Bill Katz with Credit Suisse. Your line is open.
Okay. Thank you very much for taking the questions this morning. Just three for me, just to round out the discussion. Could you tell me when you say you think fixed income picks up, and that certainly seems logical, where do you expect that allocation to rotate from? Is it cash, equity, private market, alternative allocations? I know you obviously have a very broad client franchise, but what generally can you say in terms of where the money might come from?
Bill, it's a great question, and it's, you know, the reality is every client's different, so. What I would say just as a general comment, if you look in wealth management platforms, in particular cash levels, and you'll know this, and everybody on the phone will know this, cash levels are very, very high. I think allocations in equities and fixed income, their first port of call is gonna be cash levels. You know, I can't speak for how the other movements would happen. Just again, as you know, every individual and every institution is very different in their profile. I'd start with very high cash levels as a funding source.
Okay. That's what I figured. Second question is just going back to China. You certainly have very impressive sort of new product opportunity. Could you sort of step back a little bit, and where do you think you are in terms of the maturation of the platform itself? How many more incremental products do you think you can roll out? And then and/or is it a function of sort of scaling those products? And I think the average is about $200 million in what you sort of said this morning, but how big can these things get? Is there a proxy? Is it U.S. as a marketplace? Is it Canada? How should we be thinking about maybe the end look for that platform?
Yeah, it's a really good question, Bill, and it is a different market than the United States. Just a couple comments. It's extremely competitive, and you know, performance matters. There's a lot of alpha there, so the vast majority of all the capabilities in the marketplace are active, whether it be, you know, equity or fixed income, balance of products there also. But it has a profile of fund launches, which is not atypical. You know, Korea was the same way for a good period of time. I think it will mature to, you know, ongoing investments into the products in the marketplace, but that, you know, that's gonna come with time. Just the sheer size of the market, you're gonna realize, you know, at some point they're gonna be very big portfolios.
I'd imagine starting to, you know, move away from product launches as the primary, you know, element of raising assets under management. Bill, that's probably, you know, two, three, four years before it starts to happen.
Okay. Thanks for the patience answering all the questions. Final one for me, we haven't talked about in a while. M&A, just given what's going on between the rolling over of the reduction in trailing 12-month EBITDA, improvement in the leverage ratio, but nonetheless, still, you know, pretty fat leverage ratios when it includes preferred. How are you thinking about reinvestment back into the business versus any kind of acquisition? And within that acquisition, where are you most focused at this point in time?
Yeah. Good question. Story's not changed. Every next dollar is reinvestment back in the company right now. If you look at what we've just talked about today, we've the key capabilities that we highlight, we see great opportunities, you know, very much in those areas, and that is where our focus is. We don't see a whole lot of gaps in our capabilities. You know, back to the conversation Dan had mentioned, you know, are we at scale in all the areas that we want to be? No. If we don't have the capability, and we don't think we can, you know, and it would take too long for us to build it, that's when we'd go to the market.
Our view would be consistent with it has to be strategic, it has to be something clients demand, it has to be something that's complementary, little overlap with the organization. Financials have to work, and there's got to be cultural alignment. That's just not changed. That's just how we think about it. You know, that might lead you to, you know, more in, you know, bolt-on acquisitions in sort of the alternative space. Right now, I don't see a whole lot moving. As best we can tell, public market prices versus the view of a seller are not aligned right now. It's not a focus. It's the focus on the organization.
Yeah. I would just chime in on that. I would say there's nothing about our balance sheet or our share price that's changing our focus. Our focus continues to be that the greatest investment we have is to continue to grow organically and invest in ourselves. We've got a really strong, well-diversified platform today. I think you see the benefits of that. You really saw it in these last few quarters where our flows continue to outperform the broader peer set. We continue to have real pockets of strength, pockets of resiliency, and it's a testament to the diversified platform that we have.
As we think about the opportunities we have from here, we see an opportunity to continue to invest in ourselves and grow these capabilities, in a much more efficient, shareholder-friendly way than anything we could ever do, inorganically. At the same time, we are making progress on the balance sheet, and we are returning capital to shareholders. I think we've made really significant progress on the balance sheet over the last year, certainly over the last two years. You saw it even in this quarter as we grew cash and continue to manage debt levels down, with every sort of opportunity we have. At the same time, we're returning capital to shareholders and have done so pretty thoughtfully over the course of this year despite the challenging environment.
Yes, we're more constrained than we would like to be given a really challenging industry backdrop. The diversified platform, the opportunities we have to continue to invest in ourselves and grow some of these key growth capability areas, we're pretty bullish on the opportunities we have within our own portfolio.
Thank you so much for taking all the questions today.
Thanks, Bill.
Thanks, Bill.
Thank you. Our next question comes from Michael Cyprys.
Hey, good morning. Thanks for taking the question. Wanted to circle back on the private market alternatives. I was hoping you might be able to update us on the progress of the private REIT product that you guys have, just in terms of the traction getting on platforms. In private credit, you know, hear the comments around maybe not at the scale where you'd like it to be, but maybe you could talk about some of the steps you're taking to more meaningfully scale your private credit initiatives?
Yeah, great. Thank you. IN REIT capability right now it's about $1.1 billion. You know, we continue to onboard it. Are we where we want to be with all the onboarding? No, we're not done. You know, we'll continue to make progress. It just continues. As I said last call, it's just a slog to get through it. We will though, and that's why we think it's a 2023 topic for you know increasing flows beyond the level that it's at right now. The performance is very strong. You know, we're behind that. There is another capability that you know we hope to get into market next year. More income type credit capability.
With regard to private credit, it starts with a very, very good team. They're seasoned. They have a very good track record. You know, they'll be back in the market again, you know, raising money and its performance, track record, and team, and that's, you know, where we are right now. With dislocations, we think of great, you know, greater opportunities for them. Just holistically what we're doing around the private markets platform is just ensuring we have all the resources that we need to compete to make a difference from the investment teams all the way through, you know, operational effectiveness and everything else you would hope that we'd be doing. We look at it as a real opportunity for us.
Great. Thanks. Just a follow-up question maybe on the balance sheet and capital management. Saw you paid down the credit facility in the quarter. I guess just, you know, what are the opportunities from here that there might be for incremental debt reduction before, I guess the next maturity is in 2024. More broadly, how are you thinking about capital management priorities into 2023, and what do you need to see before buybacks could resume?
Sure. Thanks, Mike. In terms of the debt from here, you're correct. The next maturity is at the very beginning of 2024. In terms of you know how we are thinking about it. Look, now it's a pretty attractive slug of capital just given where rates are moving. We certainly always have the opportunity to redeem something early. You saw us do that with the 2022s earlier this year. Not sure what we'll do just yet, but we're always thinking about what that could look like and the trade-off as we continue to grow cash. We have made substantial progress against our debt this year, and so now we're in a position where we're rebuilding cash.
You saw cash grow by $100 million, with the revolver pay down at the same time this quarter. As I think about it, you know, more than anything, I'd say we're thinking about it from a net leverage standpoint at the moment as we look to build cash, particularly in a volatile environment. As we think about returning capital to shareholders, you know, first and foremost, we're committed to our common dividend and a steady increase in that common dividend, and we start there. Then we think about excess capital as the form of returning capital to shareholders in terms of share repurchases. Should we get to a point where we make the balance sheet progress we wanna make and we've got excess cash, then we can think about share repurchases.
We think about that, sort of year to year. Certainly it's a difficult environment to be thinking about it in at the moment, as we are looking to continue to make progress against the balance sheet and make sure we weather a rather volatile market environment, but we will return to that at some point.
Great. Thank you.
Thank you. Now next question comes from Craig Siegenthaler with Bank of America. Your line is open.
Thanks. Good morning, everyone. I wanted to start with a long-term question on China. You used to highlight a McKinsey target for 40% of global industry net flows from China over the coming years. Currently, do you think China can drive about half of flows or 40% of flows? Also, any perspective on the mix between domestic and then foreign players like your Great Wall JV would be helpful too? Thank you.
Yeah, look, I do, right? It's, you know, the fundamentals are strong. Second largest economy in the world. They continue to develop capital markets. They must to support the growth that they have. They, you know, continue to develop a retirement system, which they, you know, they must do, again, for the population. You know, even with the geopolitical topics, they are absolutely committed to continuing to open up the capital markets and for organizations such as Invesco. As I said a few minutes ago, you know, everybody joining just has to know it's a very competitive market. It's gonna continue to evolve.
There's no question in my mind that, you know, when the economy strengthens, you're gonna see flow levels increase to, you know, you know, for sure back to the levels that we saw before, and they're gonna grow from there. We look at over the next three to five years as a very, very important market. With regard to what was the question about the competitors?
Also the mix between domestic businesses there and then also the foreign managers and foreign JVs like your Great Wall joint venture?
Yeah. Again, we can point to you know, we have something I believe on our website Andrew Lo went through. There's very specific information in there.
There's a presentation from last summer that has some disclosures, yes.
It's worth looking at that. From a local joint venture, you know, we're you know, at the top of the pack, which is great. Again, takes us you know, about with all the market movements, I think we're the 12 largest local money manager. Excuse me, the 12 largest money manager in the wealth management channel in China. Now, that could change now because of levels of assets under management. That was the last picture that I saw taken. It's really competitive against the local managers. You know, as you know, there are a number of foreign money managers.
I think the very important thing that we point to that has differentiated us and allow us to have the success that we've had is we've had management control with joint ventures from the beginning. Many of the other joint ventures, the foreign money manager had an ownership stake but did not have management control. That has really been the big movement where when you see our competitors making the point that they've taken a majority stake in their joint venture, what that really means is a movement towards them, you know, managing the joint venture. We've seen that all the last number of years. We like the position we're in. We're not naive to the competition levels, but the opportunity is a material one.
Thank you, Marty. Just to follow up, I have a more short-term question probably for Allison. You know, other revenues declined by $9 million sequentially on an adjusted basis. I think most of that was probably real estate transaction fees, but can you talk about the drivers of that decline? Then just given sort of a muted backdrop, I wanted your perspective on if $48 million is roughly a floor, given that 3Q was a bad backdrop and those fees probably were low. Or do you think there could be incremental downside risk from 3Q levels into 4Q or 1Q?
It was both real estate but also front-end mutual fund fees. It was really kind of transaction volume driven, is the way to think about it. No, I don't necessarily think. I guess what I would say is it's transaction volume driven. It doesn't necessarily mean that it continues to decline from here. I don't think we're setting some new level. Very volatile quarter, given the risk-off environment that we have been in. It obviously impacted market levels, but also activity levels and transaction levels. As you saw, it was pretty holistically challenging. Really just a function of the quarter we're in, not necessarily a harbinger of where we will be from here.
Thank you very much.
Thank you Craig .
Thank you. Now last question comes from Patrick Davitt with Autonomous Research. Your line is open.
Hey, good morning, guys. Most of my questions have been answered, but just a quick follow-up on the tax guidance. Is it fair to assume that the 4Q guidance of 26-28 is kind of a good run rate for the quarters beyond?
Very hard to say. It really is a function of where the market will be and the mix of jurisdictions and where our income will be across those jurisdictions. We do expect, as we said in the fourth quarter, for it to be 26%-28%. I can't say just yet as to whether or not that's where it'll be in 2023. It's possible it could be a little bit lower, but it's very much dependent on whether or not we start to see a market recovery. In particular, you see a real impact on our non-operating losses, which are, or our non-operating gains. Those are booked in some lower tax jurisdictions. When there are gains, it's quite beneficial to us at a lower tax rate.
When there are losses, we don't get the benefit of those losses. Just hard to predict, but we'll give more guidance on first quarter when we get to January.
Got it. Thank you.
Okay. Look, thank you everybody. Appreciate the engagement, the questions. Always very helpful. We'll be speaking with you soon. Have a good rest of the day.
Thank you.
Thank you. That concludes today's conference. You may all disconnect at this time.