Notes to Condensed Financial Statements
March 31, 2022
(unaudited)
The words “we” and “our” refer collectively to AllianceBernstein Holding L.P. (“AB Holding”) and AllianceBernstein L.P. and its subsidiaries (“AB”), or to their officers and employees. Similarly, the word “company” refers to both AB Holding and AB. Where the context requires distinguishing between AB Holding and AB, we identify which of them is being discussed. These statements should be read in conjunction with the audited consolidated financial statements included in the Form 10-K for the year ended December 31, 2021.
1. Business Description, Organization and Basis of Presentation
Business Description
AB Holding’s principal source of income and cash flow is attributable to its investment in AB limited partnership interests. The condensed financial statements and notes of AB Holding should be read in conjunction with the condensed consolidated financial statements and notes of AB included as an exhibit to this quarterly report on Form 10-Q and with AB Holding’s and AB’s audited financial statements included in AB Holding’s Form 10-K for the year ended December 31, 2021.
AB provides diversified investment management, research and related services globally to a broad range of clients. Its principal services include:
•Institutional Services – servicing its institutional clients, including private and public pension plans, foundations and endowments, insurance companies, central banks and governments worldwide, and affiliates such as Equitable Holdings, Inc. ("EQH") and its subsidiaries, by means of separately-managed accounts, sub-advisory relationships, structured products, collective investment trusts, mutual funds, hedge funds and other investment vehicles.
•Retail Services – servicing its retail clients, primarily by means of retail mutual funds sponsored by AB or an affiliated company, sub-advisory relationships with mutual funds sponsored by third parties, separately-managed account programs sponsored by financial intermediaries worldwide and other investment vehicles.
•Private Wealth Services – servicing its private clients, including high-net-worth individuals and families, trusts and estates, charitable foundations, partnerships, private and family corporations, and other entities, by means of separately-managed accounts, hedge funds, mutual funds and other investment vehicles.
•Bernstein Research Services – servicing institutional investors, such as pension fund, hedge fund and mutual fund managers, seeking high-quality fundamental research, quantitative services and brokerage-related services in equities and listed options.
AB also provides distribution, shareholder servicing, transfer agency services and administrative services to the mutual funds it sponsors.
AB’s high-quality, in-depth research is the foundation of its business. AB’s research disciplines include economic, fundamental equity, fixed income and quantitative research. In addition, AB has expertise in multi-asset strategies, wealth management, environmental, social and corporate governance ("ESG"), and alternative investments.
AB provides a broad range of investment services with expertise in:
•Actively-managed equity strategies, with global and regional portfolios across capitalization ranges, concentration ranges and investment strategies, including value, growth and core equities;
•Actively-managed traditional and unconstrained fixed income strategies, including taxable and tax-exempt strategies;
•Alternative investments, including hedge funds, fund of funds, direct lending and private equity;
•Multi-asset solutions and services, including dynamic asset allocation, customized target-date funds and target-risk funds; and
•Some passive management, including index and enhanced index strategies.
Organization
As of March 31, 2022, EQH owned approximately 4.0% of the issued and outstanding units representing assignments of beneficial ownership of limited partnership interests in AB Holding (“AB Holding Units”). AllianceBernstein Corporation (an indirect wholly-owned subsidiary of EQH, “General Partner”) is the general partner of both AB Holding and AB. AllianceBernstein Corporation owns 100,000 general partnership units in AB Holding and a 1.0% general partnership interest in AB.
As of March 31, 2022, the ownership structure of AB, expressed as a percentage of general and limited partnership interests, was as follows:
| | | | | |
EQH and its subsidiaries | 63.0 | % |
AB Holding | 36.3 | |
Unaffiliated holders | 0.7 | |
| 100.0 | % |
Including both the general partnership and limited partnership interests in AB Holding and AB, EQH and its subsidiaries had an approximate 64.5% economic interest in AB as of March 31, 2022.
Basis of Presentation
The interim condensed financial statements have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the interim results, have been made. The preparation of the condensed financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed financial statements and the reported amounts of revenues and expenses during the interim reporting periods. Actual results could differ from those estimates. The condensed statement of financial condition as of December 31, 2021 was derived from audited financial statements. Certain disclosures included in the annual financial statements have been condensed or omitted from these financial statements as they are not required for interim financial statements under principles generally accepted in the United States of America ("GAAP") and the rules of the SEC.
AB Holding records its investment in AB using the equity method of accounting. AB Holding’s investment is increased to reflect its proportionate share of income of AB and decreased to reflect its proportionate share of losses of AB and cash distributions made by AB to its Unitholders. In addition, AB Holding's investment is adjusted to reflect its proportionate share of certain capital transactions of AB.
Subsequent Events
We have evaluated subsequent events through the date that these financial statements were filed with the SEC and did not identify any subsequent events that would require disclosure in these financial statements.
2. Cash Distributions
AB Holding is required to distribute all of its Available Cash Flow, as defined in the Amended and Restated Agreement of Limited Partnership of AB Holding (“AB Holding Partnership Agreement”), to its Unitholders pro rata in accordance with their percentage interests in AB Holding. Available Cash Flow is defined as the cash distributions AB Holding receives from AB minus such amounts as the General Partner determines, in its sole discretion, should be retained by AB Holding for use in its business (such as the payment of taxes) or plus such amounts as the General Partner determines, in its sole discretion, should be released from previously retained cash flow.
On April 29, 2022, the General Partner declared a distribution of $0.90 per unit, representing a distribution of Available Cash Flow for the three months ended March 31, 2022. Each general partnership unit in AB Holding is entitled to receive distributions equal to those received by each AB Holding Unit. The distribution is payable on May 26, 2022 to holders of record at the close of business on May 9, 2022.
3. Long-term Incentive Compensation Plans
AB maintains several unfunded, non-qualified long-term incentive compensation plans, under which the company grants awards of restricted AB Holding Units to its employees and members of the Board of Directors, who are not employed by AB or by any of AB’s affiliates (“Eligible Directors”).
AB funds its restricted AB Holding Unit awards either by purchasing AB Holding Units on the open market or purchasing newly-issued AB Holding Units from AB Holding, and then keeping these AB Holding Units in a consolidated rabbi trust until delivering them or retiring them. In accordance with the AB Holding Partnership Agreement, when AB purchases newly-issued AB Holding Units from AB Holding, AB Holding is required to use the proceeds it receives from AB to purchase the equivalent number of newly-issued AB Units, thus increasing its percentage ownership interest in AB. AB Holding Units held in the consolidated rabbi trust are corporate assets in the name of the trust and are available to the general creditors of AB.
Repurchases of AB Holding Units for the three months ended March 31, 2022 and 2021 consisted of the following:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
| | | | | (in millions) |
Total amount of AB Holding Units Purchased/Retained (1) | | | | | | 0.3 | | | 1.0 | |
Total Cash Paid for AB Holding Units Purchased/Retained (1) | | | | | | $ | 14.0 | | | $ | 37.4 | |
Open Market Purchases of AB Holding Units Purchased (1) | | | | | | — | | | 0.6 | |
Total Cash Paid for Open Market Purchases of AB Holding Units (1) | | | | | | $ | — | | | $ | 24.2 | |
(1) Purchased on a trade date basis. The difference between open-market purchases and units retained reflects the retention of AB Holding Units from employees to fulfill statutory tax withholding requirements at the time of delivery of long-term incentive compensation awards.
Each quarter, AB considers whether to implement a plan to repurchase AB Holding Units pursuant to Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended (“Exchange Act”). A plan of this type allows a company to repurchase its shares at times when it otherwise might be prevented from doing so because of self-imposed trading blackout periods or because it possesses material non-public information. Each broker selected by AB has the authority under the terms and limitations specified in the plan to repurchase AB Holding Units on AB’s behalf. Repurchases are subject to regulations promulgated by the SEC as well as certain price, market volume and timing constraints specified in the plan. We did not adopt a plan during the first quarter of 2022. AB may adopt additional plans in the future to engage in open-market purchases of AB Holding Units to help fund anticipated obligations under its incentive compensation award program and for other corporate purposes.
During the first three months of 2022 and 2021, AB awarded to employees and Eligible Directors 0.7 million and 3.4 million restricted AB Holding Unit awards, respectively. AB used AB Holding Units repurchased during the applicable period and newly-issued AB Holding Units to fund these restricted AB Holding Unit awards.
During the first three months of 2022 and 2021, AB Holding had no issuances and 0.1 million issuances of AB Holding Units, respectively, upon exercise of options to buy AB Holding Units. AB Holding used the proceeds of zero and $1.9 million, respectively, received from award recipients as payment in cash for the exercise price to purchase the equivalent number of newly-issued AB Units.
4. Net Income per Unit
Basic net income per unit is derived by dividing net income by the basic weighted average number of units outstanding for each period. Diluted net income per unit is derived by adjusting net income for the assumed dilutive effect of compensatory options (“Net income – diluted”) and dividing by the diluted weighted average number of units outstanding for each period.
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2022 | | 2021 |
| | | | | (in thousands, except per unit amounts) |
| | | | | | | | |
Net income – basic | | | | | | $ | 85,928 | | | $ | 81,087 | |
Additional allocation of equity in net income attributable to AB resulting from assumed dilutive effect of compensatory options | | | | | | 2 | | | 18 | |
Net income – diluted | | | | | | $ | 85,930 | | | $ | 81,105 | |
| | | | | | | | |
Weighted average units outstanding – basic | | | | | | 99,202 | | | 100,146 | |
Dilutive effect of compensatory options | | | | | | 3 | | | 32 | |
Weighted average units outstanding – diluted | | | | | | 99,205 | | | 100,178 | |
| | | | | | | | |
Basic net income per unit | | | | | | $ | 0.87 | | | $ | 0.81 | |
Diluted net income per unit | | | | | | $ | 0.87 | | | $ | 0.81 | |
There were no anti-dilutive options excluded from diluted net income in the three months ended March 31, 2022 or 2021.
5. Investment in AB
Changes in AB Holding’s investment in AB during the three-month period ended March 31, 2022 are as follows (in thousands):
| | | | | |
Investment in AB as of December 31, 2021 | $ | 1,623,764 | |
Equity in net income attributable to AB Unitholders | 94,353 | |
Changes in accumulated other comprehensive (loss) | (4,204) | |
Cash distributions received from AB | (136,714) | |
| |
Capital contributions from AB | (529) | |
AB Holding Units retired | (11,707) | |
AB Holding Units issued to fund long-term incentive compensation plans | 27,362 | |
Change in AB Holding Units held by AB for long-term incentive compensation plans | (4,093) | |
| |
| |
Investment in AB as of March 31, 2022 | $ | 1,588,232 | |
6. Units Outstanding
Changes in AB Holding Units outstanding during the three-month period ended March 31, 2022 are as follows:
| | | | | |
Outstanding as of December 31, 2021 | 99,271,727 | |
| |
Units issued | 582,992 | |
Units retired | (260,245) | |
Outstanding as of March 31, 2022 | 99,594,474 | |
7. Income Taxes
AB Holding is a publicly-traded partnership (“PTP”) for federal tax purposes and, accordingly, is not subject to federal or state corporate income taxes. However, AB Holding is subject to the 4.0% New York City unincorporated business tax (“UBT”), net of credits for UBT paid by AB, and to a 3.5% federal tax on partnership gross income from the active conduct of a trade or business. AB Holding’s partnership gross income is derived from its interest in AB.
AB Holding’s federal income tax is computed by multiplying certain AB qualifying revenues (primarily U.S. investment advisory fees, research payments and brokerage commissions) by AB Holding’s ownership interest in AB, multiplied by
the 3.5% tax rate. AB Holding Units in AB’s consolidated rabbi trust are not considered outstanding for purposes of calculating AB Holding’s ownership interest in AB.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended March 31, | | |
| | | | | | | | 2022 | | 2021 | | % Change |
| | | | | | | | (in thousands) | | |
Net income attributable to AB Unitholders | | | | | | | | $ | 260,727 | | | $ | 244,131 | | | 6.8 | % |
Multiplied by: weighted average equity ownership interest | | | | | | | | 36.2 | % | | 36.4 | % | | |
Equity in net income attributable to AB Unitholders | | | | | | | | $ | 94,353 | | | $ | 88,907 | | | 6.1 | |
| | | | | | | | | | | | |
AB qualifying revenues | | | | | | | | $ | 744,717 | | | $ | 706,392 | | | 5.4 | |
Multiplied by: weighted average equity ownership interest for calculating tax | | | | | | | | 31.4 | % | | 30.6 | % | | |
Multiplied by: federal tax | | | | | | | | 3.5 | % | | 3.5 | % | | |
Federal income taxes | | | | | | | | 8,186 | | | 7,572 | | | |
State income taxes | | | | | | | | 239 | | | 248 | | | |
Total income taxes | | | | | | | | $ | 8,425 | | | $ | 7,820 | | | 7.7 | |
| | | | | | | | | | | | |
Effective tax rate | | | | | | | | 8.9 | % | | 8.8 | % | | |
In order to preserve AB Holding’s status as a PTP for federal income tax purposes, management ensures that AB Holding does not directly or indirectly (through AB) engage in a substantial new line of business. If AB Holding were to lose its status as a PTP, it would be subject to corporate income tax, which would reduce materially AB Holding’s net income and its quarterly distributions to AB Holding Unitholders.
8. Commitments and Contingencies
Legal and regulatory matters described below pertain to AB and are included here due to their potential significance to AB Holding's investment in AB.
With respect to all significant litigation matters, we consider the likelihood of a negative outcome. If we determine the likelihood of a negative outcome is probable and the amount of the loss can be reasonably estimated, we record an estimated loss for the expected outcome of the litigation. If the likelihood of a negative outcome is reasonably possible and we can determine an estimate of the possible loss or range of loss in excess of amounts already accrued, if any, we disclose that fact together with the estimate of the possible loss or range of loss. However, it is often difficult to predict the outcome or estimate a possible loss or range of loss because litigation is subject to inherent uncertainties, particularly when plaintiffs allege substantial or indeterminate damages. Such is also the case when the litigation is in its early stages or when the litigation is highly complex or broad in scope. In these cases, we disclose that we are unable to predict the outcome or estimate a possible loss or range of loss.
AB may be involved in various matters, including regulatory inquiries, administrative proceedings and litigation, some of which may allege significant damages. It is reasonably possible that AB could incur losses pertaining to these matters, but management cannot currently estimate any such losses.
Management, after consultation with legal counsel, currently believes that the outcome of any individual matter that is pending or threatened, or all of them combined, will not have a material adverse effect on our results of operations, financial condition or liquidity. However, any inquiry, proceeding or litigation has the element of uncertainty; management cannot determine whether further developments relating to any individual matter that is pending or threatened, or all of them combined, will have a material adverse effect on our results of operations, financial condition or liquidity in any future reporting period.
9. Acquisition
On March 17, 2022, AB Holding and AB entered into a transaction agreement to acquire 100% of the equity interests of CarVal Investors, L.P. (“CarVal”) in exchange for (i) AB Holding Units to be delivered in 2022 (“Upfront Payment”), and (ii) the issuance of additional AB Holding Units at future dates that are contingent upon achievement of performance hurdles by CarVal during the six-year period beginning January 1, 2022 and ending on December 31, 2027. The Upfront Payment will total approximately $750,000,000 and consist of the AB Holding Units discussed above as well as cash to fund certain CarVal business expenses and other obligations. Immediately following the acquisition of CarVal by AB Holding, AB Holding will contribute all of the equity interests of CarVal to AB in exchange for AB Units. The transaction is expected to close in the third quarter of 2022. The transaction agreement has been filed as Exhibit 10.1 to this Form 10-Q.