Welcome to Franklin Resources Earnings Conference Call for the Quarter Ended Fiscal Year Ended September 30, 2021. Hello. My name is April, and I will be your call operator today. As a reminder, this conference is being recorded. And at this time, all participants are in a listen-only mode. I would now like to turn the conference to your host, Selene Oh, Head of Investor Relations for Franklin Resources. Thank you. You may begin.

Good morning, and thank you for joining us today to discuss our quarterly and fiscal year results. Please note that the financial results to be presented in this commentary are preliminary. Statements made on this conference call regarding Franklin Resources Inc., which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve a number of known and unknown risk uncertainties and other important factors that could cause actual results to differ materially from any future results expressed or implied by such forward-looking statements. These and other risks, uncertainties and other important factors are described in more detail in Franklin's recent filings with the Securities and Exchange Commission, including in the Risk Factors and the MD&A sections of Franklin's most recent Form 10-K and 10-Q filing. With that, I'll turn the call over to Jenny Johnson, our President and Chief Executive Officer.

Thank you, Selene. Hello, everyone, and thank you for joining us today to discuss Franklin Templeton's results for our fourth quarter and fiscal year. We're also very excited to announce the acquisition of Lexington Partners, and I am delighted to extend our warmest welcome to such a talented team. Lexington’s business provides us the exposure to a critical growth area in the alternative asset business, and we cannot be happier with this new partnership. We'll cover more in this transaction in a few minutes. Matthew Nicholls, our CFO; and Adam Spector, our Head of Global Distribution, are on the call with me today. We're also joined by Tom Gahan, Head of Franklin Templeton Alternatives; and Will Warren, President of Lexington partners, who will be available for questions after our prepared remarks. I'll start by reviewing this year's milestones. Then Matt will go through our financial results for the quarter and the fiscal year as well spend some time discussing today's important transaction in greater detail. Throughout Franklin Templeton history, we have invested in our business to build a truly diversified and resilient organization that performs across market cycles with a commitment to serving our clients, employees and shareholders. The results that we announced today represent the first full fiscal year since we closed the Legg Mason acquisition, a transformational transaction that created a more balanced business across asset classes, client mix and geographies. We are pleased to report that the strategic and financial benefits from our acquisition of Legg Mason exceeded our goals, and we have added important growth opportunities. Over the course of the year, we have created a management team consisting of key representation from Franklin Templeton, Legg Mason and our specialists investment managers. We have maintained our culture while invigorating collaboration and innovation across the firm. Through…

Thank you, Jenny. Fourth quarter long-term net outflows were $9.9 billion, which were partially offset by the acquisition of Diamond Hill’s high yield focused U.S. corporate credit mutual funds, which added $3.5 billion in AUM enclosed in July. This quarter included the previously disclosed $5.4 billion 529 plan redemption, which included $4.7 billion of long-term assets, a $2 billion fixed income institutional redemption that have minimal impact to revenue and $800 million of fixed income outflows from the non-management fee earning India credit funds that are in the process of liquidation. Reinvested dividends with $2.3 billion this quarter, 1% higher average assets under management of $1.55 trillion, compared to the prior quarter, plus $69 million of performance fees generated $1.66 billion in adjusted revenue for the fourth quarter. Investment management fees excluding performance fees were 3% higher compared to the prior quarter. Adjusted operating expenses of $1.01 billion for the quarter were 3% lower due to lower compensation and lower G&A as a result of last quarters, up front closed end fund expenses. This led to an 8% increase in adjusted operating income and $647 million and an adjusted operating margin of 39%. Fourth quarter adjusted net income and adjusted diluted earnings per share increased 31% to $645 million, or $1.26 per share. These results include favorable discrete tax items of $135 million, or $0.30 per share for the quarter. Turning to 2021 fiscal year financial results, which benefited from favorable market conditions and a full year of Legg Mason versus two months last year. For the full year, adjusted revenues were $6.32 billion and adjusted operating expenses were $3.94 billion, an increase of 63% and 65% respectively. This led to fiscal year adjusted operating income of $2.38 billion, which was 60% higher compared to the prior year. Our adjusted…

Thank you. [Operator Instructions]. Our first question is from Glenn Schorr with Evercore. Please go ahead.

Hi, thank you. So I like that you’re using the cash to buy into good businesses. I think everything is accretive when you're earning nothing on cash. So I'm a big fan of that. If I took all the purchase price pieces and we can't see it all, it looks to me in the range of high teens to 22 times EBITDA. I'm just curious if that's about right, and what kind of ROI that that kind of comes out to? Thanks.

Assume whether you take the $1.75 billion or whether you take the $1.75 billion plus the $338 million of additional deferred compensation.

And maybe the 25% of the company also, right?

Yes. So, yes, of course. Yes. Well, yes, I mean all the multiples we just referred to assume 75% of the EBITDA numbers that we just announced.

Got it.

So pretty simple. I mean, just take 150 times 75% divided by the amount we’re paying.

Got it. Okay. And I'm curious on - you are piecing as you went through, you’re piecing together a bunch of interesting pieces of the alternative pie. So between beneficiary Lexington and Clarion, K2, what’s the thought process on how you do or do not integrate? I noticed that you’re forming and funding specialist distribution team. But the historical Legg Mason never really integrated their boutique, so curious on how you're approaching the integration of all your alternative pieces. Thank you.

So I’ll start and then have Tommy add to it. So, obviously, that one of the differences when you acquire alternative managers is there’s a lot of things that traditional asset managers can be shared across investment teams that isn't the case. For example, an alternatives manager may want their own legal expertise, since they're doing deals and things. And so there's a lot more that sits within the independent specialized investment team in the alternatives world. And in one of the changes that we've made with the acquisition of Legg Mason is having more institutional salespeople within the investment groups. So that's already part of an alternatives manager. And what we are working hard to build, as we believe the opportunity to democratize alternative assets in the more retail channel, is that global distribution of alternatives. I don’t know, Tommy, you want to add anything to that?

No, I mean, I think that’s - hey, Glenn, how are you? I think that's exactly it. I mean, I think we see opportunities in alternatives broadly defined, expect that to continue to grow at a really strong rate. And it’s really sort of bringing the power of the platform to bear on the distribution alternatives, both institutional and retail. And the joint venture that we’ve effectively created as is first focusing on retail, and then we’ll look to expand it. But given the $200 billion now in AUM, we can afford to invest more in these types of products and services, which I think is - I think it's going to be good for everybody.

And Glenn, just one other point. As we tried to fill out our products breadth, we really believe the opportunity of multi asset solutions, that's where it gets knitted together as well. And that's kind of a - requires the teams to be communicating. You're going to look at risk factors across as you're building additional products around that.

Thank you, both. Appreciate it.

Thanks, Glenn.

Your next question is from Alex Blostein with Goldman Sachs.

Hi, good morning. Thanks for taking the question. So maybe just building a little bit more on Lexington and kind of what that business looks like. I guess first, pretty impressive growth in their funds over the last couple of vintages. Maybe give us a sense what you are assuming in terms of growth for Lexington into 2022 and 2023 and what the earn outs are going to be based on?

We’ll let Will take that answer.

Thanks. Yes, we've been able to raise significant capital in our areas of focus in secondaries, both our flagship funds or our middle market funds, and then our co-investment business. So there's some structural drivers in each of those businesses that we think expand the market opportunities we look forward. So we're excited to go after it with our new partners and that's really it.

Yes. And I think, Alex, in terms of the - what needs to be achieved to get to the hurdles on the various contingent consideration, we cannot talk about future fundraising on this call. But if you look at the past history of the company and the timing around some of these things we do - we do have some growth built in, but I wouldn't say particularly aggressive growth for the future, given a potential that we think we had together. One of the very attractive things about Lexington Partners is, frankly, they're very successful on their own. So the forward-looking growth of Lexington standalone is very attractive to us. And then when you apply the additional growth potential through adding our resources and broader client base across high net worth and other distribution globally, we think it could actually add more to the numbers that we've highlighted today.

Great, thanks. And my follow-up just around the balance sheet dynamics performer for the deal. The deck says you guys have about $6 billion of cash and investments on a pro forma basis after the deal. Can you give us a sense how much of the six is ultimately kind of unrestricted cash? So if you wanted to do something when they are paid out tomorrow, what would that look like? And then how much of future funds do you expect Ben's balance sheet to participate in? So in other words, like the co-investment or seed capital, whatnot, is it going to be 100% based on Franklin's balance sheet? And how much of sort of resources do you think that's going to take on future fundraisers? Thank you.

Yes. Okay. Thanks, Alex. So a couple of things there. In terms of the sort of unrestricted cash that’s available to do other things at the time that we close this transaction and we're assuming that we can close this transaction at the end of March, that that number will probably be something like $1 billion. So that's question one. Question two on the GP commitment. There is very strong demand for the GP commitment from partners and employees, both at Lexington. And I know that the Franklin Templeton senior executives and other folks are looking forward to being part of that also. But you're right to highlight the fact that Franklin Templeton will also, from a balance sheet perspective, be committing capital to support the GP level. So yes, we have a commitment to that. We obviously can't say what the amount is, because it depends on future fundraising.

Great, thank you very much for the questions.

Our next question is from Michael Cyprys with Morgan Stanley.

Hey, good morning. Thanks for taking the question. And congratulations on the deal announcement. Matt, just question for you just around the carry economics. I was hoping maybe you could just elaborate on that. I didn't. I don't think I heard that. Apologies. I missed it. And then just on the equity that's granted to employees in Lexington. Just curious the thought process around why not grant equity in shares of the parent in Franklin Templeton?

Yes. So what was the first question again?

It carried.

So yes, so carry, we're going to share in something like 20% of carry going forward. The focus for us, and then we haven't acquired any past carry either from previous funds. The focus on us in this transaction was the very attractive management fee stream at a much higher fee rate than our average rate and the growth potential of that. We think, and I think investors believe, and certainly collection partners, the alignment of interest through allocating the majority of carry to the producers in the company is very important. So that's what we focused on in terms of structuring the transaction. What was the second question?

The second part was just around the the equity ownership? Why not engineers?

Good, good question. So firstly, it may not surprise you to hear us say that we believe that ventures are quite undervalued. So we don’t really like to tie loot our shares. We don’t need to but, the more important parts of the question is that we think that the alignment of interests through providing equity in the actual business that the folks are operating in, you can’t get a whole lot better than that. We’ve got plenty of incentives across the firm, to make sure people collaborate and coordinate to create more value. The more that that happens, and that we create more revenue and EBITDA, the more Lexington will be worth in this case and the more Franklin will be worth. So we think that the two things aligned very well, in this in this regard, and frankly is probably better shareholder value for Franklin investors.

Got it? And a follow up question if I could, just more a bigger picture. I think there was reference in the deck about opportunities to extend the Lexington business into private credit and into real estate. I was just hoping you could elaborate a bit more on the opportunity set there, how that might be accomplished, what sort of hurdles there might be with putting through that sort of extension and growth. And just more broadly on the retail opportunity set to do talk a little bit about that, because clearly, Franklin has strong retail distribution.

Tommy why don’t you take that that question. Well, you…?

Well, I think that we have tremendous growth opportunities in each of each of the verticals. And we'll continue to look for opportunities to expand products, organically as well as inorganically. With respect to potential fundraising activity targeted at secondary real estate, or private credit, I'd sort of push that back to Will.

Yes so, as I said earlier, we see structural growth in our core products that exist today, but they are also secondary markets developing in in the areas you mentioned in private credit, and certainly in real estate. So as the alternatives universe grows, one of the interesting things about this transaction is the ability to consider raising dedicated capital in those areas. So that will be something that we’ll look at over the medium term, I’d say.

Great, thank you.

Your next question is from the line of Ken Worthington with JPMorgan.

Good morning, thanks for taking the question. So Franklin operates increasingly as a multi brand and arguably the multi boutique asset manager model. And you highlighted your intent to continue to acquire more, I guess, other publicly traded multi brand asset manager models commanded discount. So some questions on this. So how does Franklin not get perpetually trapped into trading at a conglomerate or multi brand discount, particularly as you acquire more brands? And then to Glenn's question, in your response about solutions being the point of differentiation, and knitting together the various products? Can you flesh out more how you are thinking about solution based products and services on the alt side? It looks like for example, the bigger alternatives are buying insurance companies to leverage their diverse product offerings and creative solutions break base offerings set, so more more color, if you could on the solutions roadmap.

Yes, so first of all, we’d look at it and say that, frankly large asset managers with the broad capability that we have, we think should be selling at a premium, not a discount. Because the sum of the parts, if the sum of the parts isn’t greater than the discrete parts, then we failed. So why is that? You look at starting with just our large partners clients, they are consolidating the number of firms they do business with, and you have to have a broad breadth of capability to be able to make those lists. Number two, if you think about just what’s happening today, with technology and technology disruption, and I’ll just start out with we talked about, as an active manager, if you’re not really good at leveraging data science and data analytics, ultimately, you’re going to have a hard time competing and active management and data is expensive. Our approach is at the center, we’ve created for example, an investment data lake and our individual teams of data scientists in there. So they can leverage that at their at their opt in choice. But we can negotiate large vendor contracts and gain independent access to unique cross-sells versus a data. Those types of advantages, if executed well at the core, become a massive opportunity. And then there are things back to that kind of partner point when you have a broad depth breadth of assets. You can do things like we have the Franklin Templeton Academy, which we built for emerging markets and find that partners in the developed markets want access to that kind of capability to do training of their teams. Thought Leadership with the institution, or the institute the Franklin Templeton Institute. It’s something that’s sought after by our large partners and then of course, just a massive global distribution footprint that no individual manager could ever support that kind of capability. And so, we think that that brings a strong premium. On your point on on solutions, Yes. I mean, you see what's happening in the insurance business, it's, it probably, that model will continue, you'll see more of those kind of deals, although there's a limited number. Yes, if you have a good solutions team that can bring together and customize. That’s an opportunity, and we look at where we can continue to grow that. But we also see it as an opportunity with our existing partners. And I know Matt's dying to add something here.

I would just say kind of the highest level we don’t really see ourselves, the multi affiliate asset management company from a model perspective. I wouldn’t confuse the autonomy and independence of our teams with being a multi affiliate asset management company. The brand strategy is because a number of our specialist investment managers are known very well for exactly what they do. And we don’t want to dilute that in any way. And that seems to resonate in the marketplace, both institutional and through other big distribution channels. That’s number one. And number two, while the coordination and collaboration across the firm, is some of the things that Jenny mentioned, do not in any way dilute the independence and autonomy of our specialized investment management companies. It is it is really good. There’s collaboration across the firm. And we’re definitely seeing increased opportunities via that collaboration. And it’s opt-in collaboration, we don’t force it across the firm. And you’re seeing an in an increasingly competitive environment, across the industry, that it’s, it’s really energizing for the company and our specialist, investment managers. We -- one thing we will have in common is we all want to grow, we want to compete, and we want to win. And we’re finding that this is a good strategy for us at least. It doesn’t mean that other models don’t work really well. Also, we have tremendous respect for our colleagues that have slightly different versions of our model. In our opinion, we think of ourselves almost like as a hybrid of a model that the we’ve referred to. And in terms of the insurance piece, we study these things pretty carefully. We have a pretty meaningful insurance, angle ourselves. But it’s an area that that we’re very interested in also. So, it’s one thing at a time, obviously, as we continue to build new opportunities for the company.

Great, thank you.

Our next question comes from Dan Fannon with Jefferies.

Thanks. Good morning. So there’s a lot of moving parts as we think about expenses for next year. But maybe, Matt, if you could give us a framework to think about fiscal 2022 in terms of either x, the transactions, maybe on a core basis, or we can think about expense growth, or if you want to talk about them together, that would be helpful.

Yes, there. Sure. So including, including Lexington, assuming that we close March 31, or around that date, April 1 say, I would just take the numbers we provided in the margin we provided just divided by two, what sorry, the margin won’t be divided in two, the revenue and EBITDA would be divided by two, just assume that to add it in. So putting that aside, it on a standalone basis. For the first quarter, first quarter we were very early to give guidance for the year. But for the first quarter, excluding performance fees, we would expect our revenue to be approximately flat for the quarter and expenses to be down in the low single digits, let’s say because as you know, we do have some run rate expenses rolling through from last year from the merger related synergies. So we’ve got that we’ve got that happening. So I think, I would say that all else remain equal. Markets remain stable. We expect our adjusted operating revenue to remain at current levels and adjusted operating expenses to be down low, single digits compared to the fourth quarter. This is all excluding performance fees. As you know, we have had elevated performance fees for the last two quarters with $102 million in third quarter and $69 in the fourth quarter. Now obviously that does vary. I would in terms of modeling on that one. I think there’s been a little bit of confusion around how to think of that. I would just think of half of that being and the other half being not the other half coming to the parent. If that’s helpful.

That is just to clarify that. When you say that’s percentage down for expenses quarter-over-quarter or...

Yes, yes. Yes. So sorry, low single digit percentages.

Great. And then just in terms of the core business and gross sales and momentum in the prepared remarks, you talked about onboarding a wide range of product offerings with your largest global financial partners. So can you maybe expand upon I think you talked about Edward Jones last quarter, but maybe some other tangible examples of what products or channels are seeing that. And then also, maybe if they’re, you’ve had some one-off redemptions that you’ve called out before, if there’s anything to note for the fourth quarter, I’m sorry, your fiscal first quarter that we should be aware of as well.

Adam, you want to take that?

Sure. So let’s talk about the on-boarding. And I’ll go back to what we said about the merger, over a year ago, and how complimentary the two firms were. And if you think about the U.S., Legacy, Franklin, so much stronger, in the regional an independent channel legs stronger, and the wires outside of the U.S. Franklin much stronger in retail banking markets like Germany, Italy, with Legg Mason having a better presence in private banking. Each of those business segments really operate separate platforms. So Legg had its product on one set of platforms, Franklin on the other. Often, it takes a little bit of effort and work and sometimes formal agreements, to be able to participate on those platforms. Since we had the platforms, we were able over this year to execute a strategy where we brought on negative Franklin product on the Legg Mason platforms, and vice versa. That means that we have far more funds in the U.S. and the outside of U.S. now available for sale. That process took several quarters to execute. And we’re now in a position where we think we can sell significantly more next year because we’re able to do that.

And I guess, Adam, in terms of the lumpy lumpiness, if you will, of numbers going into the fourth quarter, we there are a couple of potential large increases. Because one of the things we haven’t talked about since the announcement publicly is the O'Shaughnessy Asset Management acquisition, which was a very important acquisition in terms of customization capabilities. And that’s a tremendous team. And we’re really excited about what that could bring for us that may close in our first quarter. And that will add almost $7 billion under management. And then we also announced publicly, obviously, the acquisition of a team, a new team within fixed income in the LDI space that is expected to race fairly quickly. Again, it could be first quarter second quarter, but that that could be a few billion dollars. We will call out specifically that time.

And just to kind of put an exclamation mark on it. I mean, I think the past there are times where we were very concentrated on a few products. Today, our top 10 funds represent only 19% of our AUM and of 14 out of the top 20 funds, by flows are not our largest funds. We are really not only diversifying our client base, but also very much diversifying our, our product base. And in the case of something like Oh, Sam, we’re excited about direct indexing. But we’re also excited about the capabilities of that being referred to deliver just our core active strategies as well, down the road, really enhancing the SMA portion of that.

And Jenny, I would say that the diversification is equally true on the institutional side, where we look at our pipeline, there were no strategy, I think, is our first kind of asset classes more than 17% of our pipeline at this point. So really diversified on the institutional side as well.

Thank you.

Thanks.

Our next question is from the line of Brennan Hawken with UBS.

Hi good morning. Thanks for taking my questions. A couple follow up on the $130 million of EBITDA. So Matthew, you said to just divide it by two for the six months, so I’m guessing that that means there’s no carry in that 160.

Correct.

Okay. Great. And then does that mean that the 25% interest will sort of move with the vesting schedule, so five percentage points of interest going to that team per annum.

No that that will be immediate. So that will run through, we’re, going through the – we’re obviously going to work through the best way to account for the transaction in the process of doing that. But I would look at it on a on a sort of an adjusted basis, you can expect to see 75 of the impact will be 75% of those numbers that we’ve highlighted running throughout our running through our P&L, basically.

Okay.

And then I would just apply, our average tax rate to the EBITDA to get to a rough contribution level in terms of net income, we expect it to be probably mid to a little bit better single digits, accretion immediately on an annualized basis.

Got it. And then when we think about this, we I know there’s the 338 of performance, bad performance metrics tied to them. But are there any other performance or retention components to the 25%? In other words, is that transferable? Are there any performance pieces connected? What else is linked in with Franklin over the long term?

Yes. And that’s, that’s a really important question, something that obviously, well was very focused on as well as us from the team. And we -- that that, that 25%, that over a five year period, and there are non-solicitation, non-compete all the things that you would expect around how you retain, incentivize senior employees that are equity holders in the company. So we have all those things. That’s it, it vests ratably, over the five years, and at the end of that five year period, there are basically options around who can acquire the equity. Franklin obviously, is one that could acquire, but there’s a lot, there’s going to be a lot of demand for that equity internally at Lexington, including through their own bonus pool. So that’s something that, well, maybe what’s the COVID on also in terms of the dialogue that we had and then I’ll go back to the contingent piece in a minute. Will?

Yes, thanks, Matt. I mean, the opportunity to own a significant portion of our own business is something that we understand. The business has grown considerably since it was formed in 1994. And the opportunity, through this partnership and structure with Franklin to broaden that ownership is really exciting for our employees. So, I think this is a this is, for us the chance to have a really powerful and exceptional new partner, and at the same time, really bet on ourselves and our ability to continue to perform for our LPs.

Thank you, Will. And then in terms of the performance base cash awards, Brennan, you talked, you asked about, they don’t begin until the second year, end of the second year, and they run all the way through to the fifth year. And they’re tied to a number of revenue and AUM base metrics that we anticipate over that period of over that period of time. And then there’s time based payments on this also, that, that we were very pleased to work on with the team. So we have a billion dollars at closing and we reference 750 million over three years. And that’s $750 million is split $250 million in the first year $400 million, the end of the second year and $100 million at the end of the third year. And then the $338 and then the $338 is pretty much even. It's a little bit different numbers but very evenly split between the second year right the way through to the fifth through to the fifth year. So it’s quite well balanced between through throughout through five years.

Thank you for all the details. That’s pretty helpful. Just one clarifying thoughts [Technical difficulty]

Yes, we can't hear you. Try it again. That’s better.

Better now. Yes, walk a little bit. The 25% after five years, does that have a chance to actually increase and then election employees participate in more therefore diluting Franklin, is that what you said? I just want to make sure I understood that.

No, no, I meant within the 25%. So within the 25%, it will either circulate within Lexington, it will never go outside of Lexington, other than to Franklin, so it'll either be within Lexington, or Franklin will acquire more.

Thank you for clarifying that.

But we expect it to stay within Lexington for the extended period.

Understood.

And then I guess just to complete the complete the picture, even if, in theory, even if Lexington Partners decide to sell some of their equity to Franklin, there is a minimum amount of equity that that needs to be held by the Partners when they're actively employed at the company. And it takes a number of years to sell down the equity. And that’s why we’re confident at the circulation point.

Thank you for the thoroughness of the answer. Appreciate that.

Thank you.

Your next question is from Robert Lee with KBW.

Great. Good morning. Thanks for taking my questions. First, and maybe sticking with some of the pay-out or earn outs? Is, is the one make sure you understand this is the 750 that you start paying I guess in year ones through three, is that subject to like an earn out or performance? Or is that just kind of delayed payments and not really, I’ll call it performance faced.

They’re just time based payments.

So, okay, this is time based. Okay, great. And then just stepping back a second, maybe philosophically, the Lexington, you mean, certainly there’s huge value in having them own a piece of their business over time. Clarion, I believe employees, partners, they’re, still own a piece of their business. And I know, something that Legacy Legg struggled with was how to get more, maybe move away, someone from a revenue share more towards having employees and Western and other affiliates own equity meaning is this kind of create any internal pressure or whatnot, whether it’s Benefit Street or the other specialist sales, to kind of revamp, reshape, their structure, and how much how they have equity versus revenue share?

Well, so first of all, the, the nature of which individual investment team structure is often is related to some historical acquisition. And the beauty of the alternatives business is because there’s the carry in there often itself is a great retention tool. And so that’s built into all of our alternatives, businesses. And then, when we did the acquisition, I mean, there were things that we were able to do in the acquisition, like Mason to ensure that incentives are aligned with a parent company, that everybody’s rowing the boat in the same direction. And as we talked about earlier, we’ve created an opt-in environment where we think there are some really good upsides to the teams by leveraging the core part of the business. And what we’ve seen is a real desire. We had recently a CIO forum where the heads of all of our different investment teams got together and I got to tell you, the engagement was outstanding. Everybody really appreciated it. And the conversations were very, very good. And so I think people recognize the benefit of being part of a great organization.

But also Rob just to add to Jenny’s point. If you think about alternative asset, specialist investment managers, they all either have like Clarins, for example, owns 80% Clarins, that’s the same sort of partnership structures we have with Lexington, and Benefit Street Partners we have basically the accretive growth units. It’s not equity, but it’s very close to equity. So in each and in many other businesses, we have the same thing where you’re basically as Jenny mentioned, we’re aligning interests. It doesn’t always have to be with equity, it can be a combination of equity, and cash in terms of how it relates to certain specific growth objectives for that particular business growth targets for that business. So it’s really a combination of things that works well for that specific teams, what we work on with them and what works for the parent company to make sure we get the right growth, growth going.

Great. And maybe if I could squeeze in one quick follow up. I mean that’s the 30 odd billion of fee paying AUM and fundraising was very good, I guess last cycle. But is there a certain amount of dry powder that’s not yet earning fees. Maybe some of those funds are drawdown structures. So, they’re kind of as we look forward is some kind of built in Seagrove, already just from what they’ve already have committed.

So Will, why don’t we why don’t we have you take that?

Happy to take it. The answer is no. On on existing products, these are commitment fee pain products.

Great, thank you for taking my questions. Appreciate it.

Thanks, Rob.

Our next question comes from Brian Bedell with Deutsche Bank

Great, thanks good morning, thanks for taking my questions. But most of them and asked and asked and answered just a couple of clarifications on the deal first, and then a longer term question. The AUM, the $200 billion pro forma includes the 55 from Lexington, but on the $1 billion of fees on that, should we be thinking of it on the fee paying AUM contribution, so more like $180 billion, then just to clarify on the $338 million I think, Matt, you said that starts in the second year. So that would not impact fiscal year 2022 whatsoever. And then what is the adjusted tax rates going forward that you're using?

Yes, so a couple things. Firstly, the -- could you just repeat your first question? I didn't fully follow what you said.

Yes. The $200 billion AUM is $145. Right?

Oh, yes. Yes. Okay. So firstly, that actually, that actually doesn’t include $55 billion. $55 billion is the amount that’s been raised in terms of capital. Since inception, Lexington, it only includes the $34 billion with an assumption of some modest growth. But we’ve been growing, 20% organically across other alternative asset systems. So it includes some growth in those also. So it doesn’t add just the $55 billion, it adds the $34 billion and then the assumption of growth, that’s how you get to the 200, the $200 billion. We feel good about that. What was the second question?

And that $200 billion at the end of March, basically.

Right. Yes.

Just a couple on the on the second part of the question is the $338 million I think that starts after fiscal year 2022. And the go-forward tax rate that you're using.

So the first contingent payment that starts in 2020, four actually…

Okay, yes.

So that’s that. And then in the other question, you asked. Sorry, I had to, so many questions you asked, well, I’ll get to the taxing second, you asked about the billion dollars of management fees. And yes, that’s that’s, that’s tied to the to 200. And frankly, is quite conservative, probably, that’s only management fee, revenue. It’s not anything to carry, or performance fees or anything like that. We think that’s fairly conservative, because already a fraction standalone, we’re probably at something like $700 million of management fees for the 2021, for example, and then plus, got it got us already quite close to a billion at that 40% margin that I said, I mentioned to you. In terms of the tax rate, I would continue to use the 23% to 24% effective tax rate guidance on all of this. Now we realized that this quarter was unusual in terms of the reserve that we’re able to release. So we do not expect any additional large reserves like that to happen. Although I should point out on taxes, that we’ve probably been able to benefit from about $150 million of the approximately $600 million of tax benefits obtained through the acquisition of Legg Mason. And we should be able to benefit from about another $200 in favorable tax attributes over the next two years. And then and then the rest will be over, probably seven years at that point six or seven years.

And that’s the cash tax rate as opposed to the 24.

Yes, that’s right. Yes.

That’s great. Thank you for that and maybe just one on ESG. Jenny, you mentioned obviously now you’re up to about $200 billion. Maybe just classifying that between what you would consider, like pure sustainable investments versus exclusionary products. I think before you said, you’ve sort of modeled it after articles eight and nine in terms of classification. So just want to verify that $200 billion is linked to Article 8 and 9 of Europe. And maybe just what your view is that maybe potentially reclassifying U.K. and changing perspectives is, if you will to, in terms of the strategies even raising that $200 billion?

Well. I, so yes, it’s Article 8, 9. So that’s the first part. And if you look at the flows in Europe, I mean, we saw something that says there’s, there’s $2.2 trillion in AUM in 2020, and that’s going to get up to $53 trillion by 2025. I mean, there’s some Article 6 selling, but I got to tell you, the demand is Article 8, 9. So that’s where the growth is. We’ve got very good products there. I think we were very disciplined. Nobody’s claiming greenwashing on our part, we were very disciplined and have a rigorous compliance group reviewing any products before we declare them that way. We have more in the queue that are being reviewed internally. And, we think that what’s happening in Europe is going to happen in Asia and the U.S. as well. Adam, you want to add to that?

I was just going to add to that. If you look at our pipeline, it’s pretty incredible. About 20% of our flows are coming from eight and nine products in Europe. And it’s about 40% of our pipeline. So while we’ve got a decent business there, it’s just growing and growing more quickly than anything else we did.

That that is super helpful. Thank you for that. It just if you’re able to break it apart between sustainable and exclusionary, I don’t know if that’s possible.

I don’t have them at my fingertips. Adam, I don't know if you do.

I can tell you that. Why don’t we get back to those exact numbers?

Yes.

Okay. Yes. All right. Thank you so much. Super helpful.

Thank you, Brian.

Great, well, I just want to say thank you for participating in today’s call today. We are at time, as you can hopefully tell, we’ve made a lot of exciting progress over the past 12 months. And yet, in so many ways, we’re just getting started. So once again, we’d like to thank our employees for their hard work and remaining focused on our clients and each other. And we look forward to speaking to you again next quarter. So thanks, everybody, and stay healthy.

This concludes today’s conference call. You may now disconnect.