Good afternoon, everyone. I'm Patrick Davit, the U.S. Asset Manager Analyst here at Autonomous. It's my pleasure to welcome Invesco back to the conference.
Thank you.
Thanks so much for being here, Andrew.
Absolutely.
As a reminder, if you want to ask any questions, I'll try to throw them in. You can do it through Pigeonhole on your device, and I'll work them in as it makes sense. Maybe to start, Andrew, I think we've all probably had a little bit of whiplash over the last couple of months into last night with the court news. I think it'd be helpful to get a reset on what you're seeing in the marketplace. Firstly, investor behavior. How has that evolved through the worst of April and now since the earnings call, obviously, with markets opening back up?
Yeah. Thanks for the tale of two markets. If you kind of would have gone to sleep in mid-late March and woke up today, at the face of it, it does not look that different. It has been, as you said, a lot of whipsawing. I will start by saying client behavior or client reactions or client sentiment has been pretty orderly. I think for a couple of reasons. One, there is a lot of cash on the sidelines. There is something like 20%-25% of the average private wealth platform would tell you their clients are in cash. I think there was already a little bit of a buffer there. I think everything happened so fast that people were trying to react, but it was very orderly, in particular from wealth and retail.
As far as Invesco is concerned, given how diverse our business is and, frankly, given the strength of our non-U.S. businesses in EMEA and Asia, which are around $550 billion of our assets under management, we actually had a result of plus $1.5 billion of net flows in April. While we have not published our May figures yet, it is trending better in May. We may have had a different experience. The strengths that we have seen continue to be around fixed income mandates institutionally or still funding. We had a big one in Europe that funded in March and April. China, for us, has done well and continues to flow. Global equities, in particular, amongst Asian clients, have been quite strong. In May, the addition we have seen is equity ETFs in the U.S. have really picked up pace in May, where April was quite slow.
We're seeing it's not Q1 pace because Q1 was really strong for us, but I think it's weathered pretty well.
Yeah, for sure. On that, I think a lot of people were shocked by the solid inflow you reported in April, most of the coverage reported outflows. What would you point to as the key drivers of your outperforming what we saw from other players?
I think it's that non-U.S. thing. I think we've been in the European markets and the Asian markets that we're participating in for decades. We have high-quality relationships. We have depth on the field and market. That's where we saw the preponderance of our inflows while the U.S. was a little more challenged with some outflows. Back to what I was saying, it was China, onshore China. It was global equities out in Asia, and it was fixed income in Europe was really what drove that performance.
That's a good segue into China and APAC, obviously another topic you're particularly well positioned to address. Firstly, I think you probably have the best domestic Chinese business of the large U.S. managers. How has that business been tracking through all this volatility? More broadly, how do you sense any risk of your ability to keep ownership of the platform through all of this tariff volatility?
Can I say a word about Asia more broadly and then get on to China for a second?
Yeah, sure.
Out in Asia, we think it's one of the great growth opportunities for our business and a place where we have a lot of strength. I mentioned about $275 billion of client assets are out in the market. I think owing to how wealth creation is getting formed out in Asia and the transfer of wealth, demographic changes, less developed in most of the countries' retirement systems, and government reforms in a lot of those markets that are really favorable to asset management and wanting their citizens to be invested into the asset management and capital markets. All of those are good for us in Asia, where we've been for a long time. The key markets that we're focused on are Japan, China, Australia, Southeast Asia, and India. A lot of the core markets.
Before I get to China, I'll say Japan has been maybe the best example of where we bring our global capabilities into a domestic market and a place we've been for decades. Now we're seeing the benefits of some of those macro forces I mentioned. That business in Japan, we manage now $80 billion for clients, and that's two times what we managed four years ago. A lot of that growth has come in global equity and global bonds. China, in particular. China is a core market for us in Asia. It's a domestic-to-domestic JV that we have. It's about $100 billion of assets. Its margins are about 50%. Its fee rate is 35%-40% our basis points. We've reached high watermarks of those assets. To answer your question about how's it been, the last several quarters, it's been in positive flows.
The last two months, even with all of the tumult that's going on, has also been in positive flows. We think it's a place that's going to go from strength to strength. It's a domestic business. The economies, the quality and the strength of the economy in China, the quality and the strength of the capital markets in China will influence the success of that business. The stimulus that's going on in China, the focus on domestic consumption, the government reforms in general, but I think most importantly for Invesco strategically in the long run is the development of the retirement system in China, which they need for that growing middle class, a safety net, a security safety net. They've been vocal about building out their retirement market. We're really well positioned for all that.
We own 49% of the JV, so we're the minority partner, but we have day-to-day management control. We feel, despite the macro challenges going on geopolitically, the business is in really strong shape.
Yeah. No concerns that your ownership, your ability to own something like that could be caught up as kind of collateral damage in all of the.
The fact that the business there is domestic, it's walled off. All of the investors that we have there are Chinese. All the people doing the investments are Chinese. All the clients are Chinese. It's really pretty domestic. I don't focus on that.
Great. Another one on APAC, you recently announced selling a stake in your Indian business and keeping, I think, 40%. What was the thought process behind that and the opportunity from doing something like that?
One of the strategic goals for Invesco that we've been talking about the last few years is continuing to simplify and streamline our business while staying focused on the core activities, asset classes, and markets. We really like the Indian market, but our ability, we felt, to capitalize on the growth in India, that a partner would be a wise thing to do. Just think about my China comments. It's sort of similar. We've had a great partner. We were able to find a partner that has bank distribution in the financial services space. We'll be able to continue to participate in the Indian market growth as a minority owner. In time, as that asset management business grows, there'll be more opportunities for us to sub-advise investment strategies into it.
It was allowing us to take some cash off the table and use it for other sources.
Helpful. Thanks. What do you think the timeline is to getting more of that sub-advisory?
On the Indian side?
Yeah, the Indian.
We have got to close the transaction, which hopefully is soon. I think it is going to take a—it is a very domestic business at the moment. I think it is going to take a little bit of time before they start really deploying into greater Asia and then to outside. Over the next few years.
That all sounds great. Probably the most challenged part of your business is active equity. With the macro discussion in mind, it seems like active equity fund performance has gotten a little better this year, but on average, most managers are still not outperforming benchmarks. Most of the large funds we track actually got worse through April volatility. With all of that in mind, how are you thinking about the path forward for active equity? When are we going to ever see more traction there? What do you think needs to change in the industry to kind of get the stubborn trend back in your favor?
Yeah. Active equity is very important in Invesco. I mean, it's north of 35% of our revenues. It is a key part of our business. More than half of our active equity portfolios are global or international or emerging. One of the ways that we will see hopefully a catalyst in that is as people move away from just the domestic U.S. trade and even the more narrow domestic large-cap tech trade, more demand for these global international and emerging strategies, not just here in the U.S., but in Europe and Asia too. We're starting to see some of that traction. I mentioned global equity in Japan. Our EMEA-based clients and Asian-based clients are actually in positive flows the last quarter for active equity. I'd isolate it down to it's a U.S. mutual fund topic for us.
It is somewhat getting that demand to come back on the international global side. I think you also mentioned performance. Active equity managers at this stage need to be performing in the top quartile or decile to win and retain business. The bar has gotten very high. We spend all of our time ensuring that we have the right leadership on active equities, which we do, and a single leader on that, which we have put in place in the last few years, that we have the best teams against the capabilities and consolidate the product line and the teams where there are better teams that could be doing it. We have added risk talent and risk leadership to make sure that we have that in place. We keep trying to differentiate the products, be it fees or features.
You could see active ETFs as one of those ways to add features and being competitive in our pricing, which we are. I think it's a lot of investment quality and then demand change. Our ultimate goal is we want to have net flow market share that's greater than our market share of assets in the active equity piece, regardless of market performance, whether it's up, down, or indifferent. We want to outperform. In the U.S., we have a little more work to do.
On the active ETF point, what's your latest thinking on to what extent that's really incremental or just keeping more money in the system? In other words, cannibalizing what's in the mutual funds already?
Yeah. I think so much money has gotten pulled to passive from active. Some of that is structural and some of it is cyclical. I actually think that the growth that we will see in active ETFs is potentially pulling some of that back from passive. It is certainly going to be porting it from mutual fund assets into these other versions. I think the pie can grow when the vehicle that active is housed in is a more efficient tax vehicle for taxable U.S. investors.
For sure.
I think it's got a lot of potential.
Summing it up, I think you made some pretty significant realignment and changes to the portfolio management capabilities over the last year. Any anecdotes or helpful updates on how that's impacted performance positively since then?
Yeah. I mean, look, our U.S. equity range has delivered some pretty solid performance, and we need to see demand. We've seen pockets of improvement in the international global side. It's still not exactly where we want it to be. Flow performance, as I said, has picked up materially in EMEA and Asia. The performance of the strategies in the U.K. and Europe are quite strong. We're starting to see that trajectory change. The bar just keeps being really high. I just want to remind everybody of that. You should expect us to just continue to focus on quality, number one.
Are some people concerned that Europe, in particular, is starting to catch up to the U.S. in terms of the pacification shift? And you are seeing a pretty significant uptick in adoption of ETF use. How are you thinking about the potential for EMEA to start to look a lot more like the U.S., and then you have more of a headwind there? Although you could win on the ETF side, obviously.
Yeah. I mean, maybe it's worth saying for a second the profile we have in Europe and the U.K. It's about $275 billion of assets, more on the continent than the U.K. It's more active than it is passive. But we have a $110-$120 billion ETF business in EMEA. It's substantial what we're already doing on the passive side with ETFs. I'd say the market in Europe is different than the market in the U.S. for wealth. It's more institutional. The notion of talking to private banks, talking to home offices and gatekeepers that make sizable decisions is different in Europe than it is in the U.S. I don't see that becoming more like the U.S. I think in some ways it's a more institutional market already.
Got it. Okay.
We are very well positioned there. The flow picture for us: $14 billion of flows out of Europe in the first quarter. It was a mix of fixed income and ETFs. It is a good, healthy business with good investment performance. We bring into those markets strategies that are developed and managed in the U.S., Europe, and Asia.
Let's take a big step back and maybe reflect on your first two years as CEO. What do you think Invesco has gotten right? Where do you see room for improvement? How are your priorities evolving over the last few months?
Yeah. Over the last 18 months, two years, we think we've really pivoted the company, I think, from playing more some defense to playing offense and taking obstacles out of the way that would allow us to grow. I characterize those as things like having a much greater strategic clarity that we're executing against, having a more streamlined organization that's allowed us to be much more efficient with our expense base, a much better balance sheet with some of the things that we've done that we can talk about, whether it was with the preferred or debt that we've paid down. We're very focused on these growth vectors that I described and showing growth in those areas. We've seen operating leverage in the business. Each quarter last year, sequentially, we grew our margins.
Quarter over quarter, or year over year for the first quarter this year, we grew operating income 18% and expanded margins by 4 percentage points. I think it is starting to play through in some of the results. There is a lot of momentum in the business, but some things still need to pull through on the revenue side.
ETFs are obviously a big driver of your flow-out performance versus the industry. Could you update us on the trends in the space and how Invesco is growing its share amid significant competition?
We have been in the ETF space for over 20 years. The current ETF market is about $800 billion, largely ETFs with some passive franchises around the world. It started in the U.S. wealth channel with alternative-weighted indexes. We have grown it from $5–$10 billion 20 years ago to $800 billion today, mostly organically, by sticking to our strategy. We focus on areas where fees are not the primary decision factor. We have done many alternative beta factor-weighted indexes and unique access indices, exporting them to markets where we can succeed. The U.S. wealth market is now the largest and growing rapidly, and we have been able to participate.
Our net flows have been about twice our asset market share. It is working and growing. The business scales very well and is highly accretive to our firm-level operating margin. We will continue to put more volume through it.
More specifically on this topic, which relates to the active ETF discussion, there is much discussion about ETF share class approvals and the potential to retain more mutual fund AUM. What are your thoughts on Invesco pursuing that path?
Yeah. We'll follow multiple paths as the transition goes to active ETFs. I mean, we've been in the active ETF space for almost 10 years. We have 22 strategies, about $20 billion. And we've got even more assets affiliated with active teams that are passive. I think this is the first time that I can passionately say that it's going to happen this time where active ETFs are really going to take hold. I think there's no panacea. It is not going to happen in a week or in a month or in a year. It is going to take time. There are some limitations of the ETF vehicle. You can't close an ETF. If you've got a capacity-constrained strategy, it's difficult to own international in an active ETF. You have to disclose your holdings every day.
All the fund managers that have concentrated portfolios, it's difficult. It will be one of the ways that it happens. Share classes, we've filed for ours. Share classes of mutual funds will be one avenue. Generating new ETFs, which is largely what we've done, will be another avenue. There'll be new strategies that come to fold. I think the ETF space has shown a lot of innovation. We've kind of been at the lead on that. We're going to have multiple ways to grow the active ETFs. We'll see which one sticks with the clients.
Makes sense, thanks. I think Invesco probably has one of the better alternative businesses among traditional asset managers. Everyone is clearly focused on the retail democratization trend. Could you update us on the products in the market, their performance, new product development, the best opportunities to launch new products, and your progress in expanding distribution for these products?
For those less familiar, we have $130 billion in private market assets. Two-thirds is in real estate and real assets, primarily equity with some debt. The remaining third is in alternative credit, including structured loans, direct lending, and distressed assets. Most of these were institutional assets globally. Recently, we brought these capabilities into wealth. Alongside our generalist sales force, we built a specialized distribution team. We have three strategies in wealth: real estate equity, real estate debt, and a dynamic credit strategy. The real estate debt strategy has grown from $0 to $3 billion over 18-24 months.
This strategy fills a category with limited supply. It is on the two largest wealth platforms in the U.S., plus dozens of others. We hope this flywheel continues for real estate debt. We announced a partnership with Barings and MassMutual to expand into alternative credit strategies, leveraging their capabilities in direct lending, specialty finance, and asset-backed lending along with our strengths in structured loans and lower mid-market direct lending. MassMutual will contribute up to ~$700 million in capital.
We like the partnership structure that we just announced. It is a good model for us because we feel like we have the distribution. We have the institutional pedigree with high-quality capabilities. We have built this operational element that can scale. You do not need dozens of products here. You just need a few that hit the categories. We will take that same model beyond the U.S. to Europe and Asia too.
There's a question from the audience on this. Obviously, a newer trend, but you're seeing some partnerships between traditionally alternative managers and traditional managers. Sounds like what you're doing with Barings fits this theme.
Yes.
Would there be an opportunity to look for other partners, or do you think this is kind of where you're?
A couple of reasons we got together with Barings, aside from them being a very high-quality asset manager. We are connected together with MassMutual, with ownership in both companies. We know each other well. It is an opportunity, we think, to execute relatively quickly. These products that we are talking about, we want them to be in market very soon. The teams are familiar with one another. I think that is distinctive from some other partnerships where people are just getting to know each other, and it takes a while to get capabilities to market. We will not have that situation. I think the template that we outlined for that, we would like to continue to do partnerships where it makes sense.
Whether that's with Barings, hopefully, or others as well, we've been pretty vocal that we want to grow in this space, but we want to be really disciplined with our capital.
You are likely closer to the distribution side than the alternative managers I cover. What is your current view on the real demand for these hybrid liquid-to-liquid products?
Yeah. To be clear, what we're going to do in our strategies is we are going to have a diversified credit strategy that's all private.
It's all private too.
We'll consider doing public-private hybrids. I think they're interesting. I think the wealth platforms definitely have a lot of interest in them because I think they straddle two different challenges they're trying to solve for their clients. They create some more liquidity. I mean, liquidity still matters. I mean, as much as we talk about illiquidity and the capability of taking wealth clients up to 20%, I mean, they care a lot about liquidity when they need it. I think the public-private's a good avenue.
Up until now, I think the biggest driver of your alts growth and strength has been real estate. What are your thoughts around trying to build businesses in the other verticals, bigger businesses in the other verticals?
Yeah. Obviously, real estate's been a great asset class for us. We're a very well-known institutional manager around the world. Extensions on that real estate platform, whether it's infrastructure or other related real asset capabilities, is something we definitely keep our eye out for. We really want to make sure we do extensions from things we know very well. Real estate would be one of them. As I said, on the alt credit side, I think what we demonstrated with Barings is if we find partners that can be additive to what we do. We have this distinctive strength in structured loans and emerging strengths in distressed and direct lending. In terms of the other sort of sectors, I guess, and alternatives, we're going to be very thoughtful before we get into those.
We're not interested in being the distribution partner where we don't have some investment capability integrated into it. We're not going to try to be everything to everybody in the private market space.
Got it. So.
As I mentioned, Patrick, I mean, you do not need to move things forward. You do not want dozens of capabilities of products. A handful of things is fine.
Yeah. Taking it all together, I think it's probably pretty clear from everything we've talked about. What do you think the biggest contributors to organic growth will be in the near term versus medium term and long term?
Yeah. I think in the short run, it's going to be volatility right now. I think the short term is probably a little less relevant. The mid-term, middle term, I'd say the need for income and fixed income around the world has been pretty high. I think that's a part of our business that's, I think, underappreciated. We're a $600 billion fixed income player. Income's going to continue to be in demand. These private market strategies into wealth will continue to be in demand. I think in the medium term, you're going to see this shift of people redeploying some of their U.S. exposure to international and other markets outside the U.S. I think that's going to drive forward. I think from a vehicle standpoint, the ETF and the SMA are going to be choice vehicles, whether that's for passive or for active.
Those are generally some of the demand trends we see.
Okay. You mentioned cash, right? The amount of cash in accounts. Obviously, we've seen the money fund flows. There's obviously still a lot in deposits, earning zero. If rates really are going to be higher for longer, doesn't cash actually become an asset class? Is that really on the sidelines? It's a debate I have a lot with my clients.
I think before the tariff war or whatever we have got going on, I would have said, "Watch rates." Just say, "Where rates go is how to answer your question." I think now you have to factor in protection. People are thinking about cash as an asset class, I think, for some of that. Dry powder to basically pounce on situations as the world changes quickly. I think those balances for the moment are probably we thought they started to go down. We thought they would get into the teens, and they are still north of 20. That is what we hear anecdotally from our clients. I mean, we are a money market fund player and a liquidity player. This is what I hear from platforms in the wealth side.
Okay. Interesting. The other side of the organic growth story is obviously fees. Given the shift from active to passive to ETFs, you're obviously well-positioned for flows. That comes with a fee rate headwind. Could you update us on the moving parts there? To what extent you're seeing that headwind abating? You've been talking about a tipping point where maybe the mix gets to a point where it's not as severe.
Yeah. There is always a lot of focus on our net revenue yield. I'll just try to be as clear as I can be. It is not fees. It is not fee pressure. It is really mix for Invesco. Whether they are some secular and some cyclical, it has been, for the industry and us, ETFs over mutual funds, passive over active, short duration over long duration. All of those are lower fee yielding strategies. For someone like Invesco, our asset flow growth is high. We are seeing improvements in our organic revenue growth. Our net revenue yield goes down just as a function of that math. I point that out only to say some of the other competitors we have in the marketplace might have flat net revenue yields with declining asset flows. I would rather have our situation. We are not focused on net revenue yield as sort of a KPI.
I mean, we're really focused on operating income and operating leverage and what we do with those net revenue yields. I mean, the ETF business or our global liquidity business are highly profitable, highly scalable businesses. Regardless of the asset class, we're trying to optimize for operating income and operating margin expansion. Really, we do not see a lot of fee pressure. We tend to compete in places like our ETF business where, as I mentioned before, fees are not the first feature.
Right.
In terms of your tipping point, we're seeing organic revenue growth trend up. It's still not at the place we want it to be, but it's trending the right way. Whether you look at net revenue yield or you look at revenue or organic revenue, I think you'll get a different picture.
Got it. Aside from the revenue yield, expenses has probably been one of the biggest frustrations for a lot of us, particularly through the lens of the NextGen implementation. We got some interesting news this week that you're actually going to keep the platform in a hybrid platform, including both Alpha NextGen and BlackRock's Aladdin. Firstly, could you speak to what is behind that decision? Does it give you more visibility on the end date now?
Yeah. As I answer that, just on the expense side, I mean, our expenses, it's been an area we've been very focused on and I think pretty disciplined on. Expenses are, we took $60 million out of the business last year while reinvesting and growing. Expenses have more or less been flat to down over the last year or two, in spite of all the other things we've been doing to grow and some of your comments. On Alpha, just to reorient people, we had made the decision several years ago to move all of our assets onto the State Street Alpha platform from various different places that they had been before. We have been working through that implementation for quite some time.
We made the decision and announced it this week that we're going to move to what we're calling a hybrid approach, which means finishing all of the movement of our equity assets onto State Street Alpha, using State Street as the middleware, so to speak, and then remaining with fixed income on Aladdin, which is where we are today. State Street's been a great partner and will continue to be a great partner, as has Aladdin and BlackRock. We think this will reduce the time to completion. We want to be finished by the end of 2026. We think we can generate virtually the same benefits that we were going to get out of simplifying because we're getting down to just one platform, two providers from hundreds and dozens of systems and processes that will consolidate.
The run rate cost that we'll have going forward will be more or less the same as if we were on a single platform. We just wanted to get certainty to completion. We're on fixed income Aladdin today. We just don't need to convert to something else, which reduces the time.
Just to put a bow on it, you do not expect this to decrease the potential expense synergies from having just the one platform?
We really believe we can achieve virtually the same and get the other benefits that come from it as well.
Okay. Then higher level, to your point, you have been good on expenses away from this issue. How are you thinking about those kind of core expense run rates going forward? Are there other places you can look for savings?
Yeah. Look, as I was starting to mention, sorry, I didn't mean to get in front of you. But expense discipline's been important both in how we're more efficient with what we're doing, but also how we're de-emphasizing and emphasizing other things, so moving money around. Like I said, we've been able to take $60 million out last year while investing in all the things I was talking about a little while ago. We think there's always room to continue to find operating efficiencies. About 25% of our expenses are variable. That's largely compensation. We've been talking about we could flex that to 30-35% with some intervention from management decisions that we would make about choices or slowing down in different situations. We feel really good that we've invested in all of these growth areas. From here, revenue growth has a higher incremental margin.
On that, as we think through all of these issues, obviously stronger organic flow growth, revenue yield, expenses, Alpha NextGen, noise going away, how would you rank the things that need to happen to drive significantly more positive operating leverage from here?
Yeah. That's a good question. One of the things, as you said, we've really been focused on is going onto the offense, like I mentioned earlier, and getting some of these maybe obstacles to growth out of the way. Now that we think we've progressed past that, I'd probably put it in three buckets. Bucket one is, I'd say, parts of our business that scale really well and are in high demand and we have discernible strength. What falls in that is ETFs, fixed income, and SMAs could all be margin enhancing and leverage improvement. The second bucket I'd put around growth areas that maybe do not scale as well, but they have high growth potential and relatively high fees. That would be private markets into wealth management. That would be the Asian region and China, things like that, that really could accelerate the revenue and the revenue mix.
In that would be defending and growing in pockets of active equity. If we can reduce the redemption rate of active equity, that has significant impact on the margin. The third bucket would just be on the expense and efficiency side. Continuing to look to rationalize where we can and be really disciplined on the cost side. Any combination of a few of those work, not all of them. You can start to see a pretty different profit growth picture for the company.
This morning in a group meeting, I sat in and we had an interesting conversation specifically on kind of the tipping point on positive operating leverage in the ETF franchise and how that's tracked. It was kind of a headwind for a while. It has obviously shifted more positively to a tailwind as a lot of your marquee ETFs have gotten bigger. Could you kind of speak through that evolution and where you are, I guess, in terms of scaling those ETFs to a point where they're really additive to the margin?
Yeah. Most all of the ETFs we have, we do not have a lot of small ETFs. I mean, we have a little bit of a backbook that rotates into favor and out of favor. The size of our business at this point and the investments we have made around distribution and technology, which are, and the people that run the ETF business are basically your costs. The margins expand pretty rapidly from here. I would say even in our business, where we were already large three or four years ago, as we have layered on hundreds of billions of assets since then, the margins have expanded by 10-15 percentage points even in that business. We are already well accretive to our current margin. I do not know what the situation was you were talking about with the other company. It is not just at the fund level.
It's at the franchise level. Because funds scale, but then the franchise scales too.
Got it. One from the audience on China, on the option to buy in more. I think you've had an option for a while now. What's the latest thinking on potentially doing that?
Yeah. We're really not focused on it at the moment.
Not focused at all. Okay. Yeah. Maybe for obvious reasons.
I think maybe for obvious reasons. Also, what we're doing today is working, so do not mess with a good thing.
Got it. I'll finish up on capital. I think a lot of us are happy to see you finally get some movement on taking down the $4 billion preferred at MassMutual. Maybe for those that aren't as familiar with the situation, could you kind of update us on the structure of the paydown and the opportunity to bring it down further over the longer term?
Sure. Our capital priorities have not really changed at all. Invest back in the business, get our payout ratio between 40% and 60%. It is near 60% today through dividends modestly increasing and buybacks, which we got back into the market last year, routinely buying back once we had hit zero net debt, ex the preferred on our balance sheet. Coming into this year, and we have been paying down all the debt around the preferred. The preferred was a $4 billion piece of paper. As we were hearing more and more from investors that this was viewed as debt and maybe a more permanent instrument that was not going to retire for a long time, we started to talk with MassMutual, who is also an equity holder in the company.
We found the opportunity that worked for both of us to retire $1 billion of that preferred, which we did, and replaced it with short-term callable term loans so we can pay that down as we wish. We also left open, it has to be a two-way transaction with us and MassMutual. I think we also left open the notion that we can do more as those stars continue to align. We could have done more, I think, even in this iteration. All that said, it just gives us much more flexibility with our capital to determine what we want to do through that same priority stack. We have debt retiring at the beginning of January or beginning of next year. We will continue to look at these term loans.
We'll continue to look at the preferred while making sure that the payout stays and returning capital to shareholders. It just opens up the playing field, I think, for a lot more avenues for us to explore. I think it also takes the skepticism away from some investors that viewed it as this permanent thing sitting there we couldn't move. Clearly, it's not.
Yeah. I definitely hear that from a lot of people. I guess expanding on that, has there been any shift in kind of the priorities between balance sheet improvement, buybacks, dividends, and then I guess M&A? To what extent is M&A really in the mix?
I think M&A is way down. I think, as I said, that sort of balance between the payout ratio, which we'll keep between 40% and 60%, and last quarter was 58% or 59%. We want to be at the higher end of that. That will probably be more buybacks than dividend, and we'll do modest dividend increases. We want to continue, we're going to be routinely in the market buying back stock. Bought back $100 million last year. We'll keep that pace. If we see opportunities, we'll buy back more. Really looking at the balance sheet after that and all the things I talked about. Now we have a lot of flexibility to continue to de-lever, as it were. All that goes with investing back in the business first, which we've been able to do.
I think M&A is way down there. The partnership structures we were talking about, there's ways to grow inorganically that you don't have to write a check for.
Yeah. Yeah. I think on this point, the NDS stake sale should generate a fair amount of capital. I don't know if it's public how much.
I don't know if we've disclosed that.
Yeah. Okay. How should we think about the potential for that to drive any kind of accelerated repurchase or dividend? Is that in the mix?
I think we'll make that decision kind of when that closes. We're waiting for regulatory approval. All those options are on the table.
Got it. Cool. We finished a little early. I got to all my questions.
That's incredible.
I got through all the audience questions. Thanks a lot.
Yeah. Thank you.
Yeah. Good time.
Good to see you.