Welcome to the Franklin Resources Earnings Conference Call for the quarter ended March 31, 2020. My name is Darryl, and I will be your call operator today. Statements made in 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 risks, 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 of MD&A sections of Franklin's most recent Form 10-K and 10-Q filings. As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Franklin Resources' President and CEO, Jenny Johnson. Ms. Johnson, you may begin.

Hello, and thank you for joining us today to discuss Franklin Templeton's second quarter fiscal results. Significant events have unfolded in our world and at our company since we held our first quarter earnings conference call back in January. To start, this is my first official earnings conference call as President and CEO. With each new day, I continue to be filled with excitement and gratitude for the opportunity and promise that the future holds for our industry and for our business. Today, I'm joined by Greg Johnson, our Executive Chairman; and Matthew Nicholls, our CFO. We hope that everyone on this call and your loved ones are staying safe and healthy. As an organization, our top priority is on the health and well-being of our employees and their families. We're extremely proud of and grateful for how resilient they've been under these difficult conditions and their ongoing efforts to keep the business running efficiently while maintaining our strong focus on our clients. With respect to business priorities, amidst the recent market volatility, security selection is more critical than ever. We like to say that today's market dislocations are tomorrow's alpha. And I've had a number of encouraging conversations with our investment teams, who are finding compelling opportunities that result from the sharply increased volatility. It's also encouraging to note that over the recent volatile period, our strategies are producing strong results. For the period from February 20 through March 31, which is the time frame that reflects the sharpest market volatility during the quarter, approximately two-thirds of our U.S.-listed mutual funds and ETFs were in the top two quartiles of their respective Morningstar categories, and more than half of those were in the first quartile. Performance across many of our investment strategies has been strong in such areas as U.S. equity, municipal bonds, global macro and global equity, among others. Our funds continued to outperform through April. Our acquisition of Legg Mason remains on target to close in the third calendar quarter, and integration plans are well underway. We continue to see the long-term value of these combined franchises and that our strategy to diversify and create new opportunities is the right one. Additionally, our strong balance sheet continues to provide us with tremendous flexibility to evolve our business. I remain more confident than ever that as an organization, we have the talent, discipline and foresight to continue our long-term success while helping our clients achieve their financial goals. Now I'd like to open it up to your questions.

Our first questions come from the line of Craig Siegenthaler of Credit Suisse. Please proceed with your questions.

Thanks, good morning, everyone. Hope you're all staying healthy. In the merger agreement with Legg Mason, there's a criteria of 25% net outflows for client consent. I just wanted more color on this constraint. And can you confirm that net client outflows at Legg Mason would need to exceed this level before the transaction closes in order for Franklin to elect not to pursue the transaction?

Yes. I'm going to have Matt Nicholls answer that.

Yes. Craig, that's correct.

Got it. And is there any AUM level for Legg Mason where you would consider not to pursue the transaction just given that it's an all-cash transaction?

No.

Our next questions come from the line of Glenn Schorr of Evercore ISI.

Okay. With those answers, that's a good lead into this question then. So let's talk about what you can do prior to closing and what you have to wait for after closing. And I'm specifically interested in things like fund consolidation opportunities across fixed income and how you leverage their global distribution platform.

So our focus pre-close, as we've said, is really on integration of holding companies and integration of distribution. So - and really leaving the affiliates alone, which means that we're not focused on fund consolidation. Having said that, there's very little overlap in our products. As we said, this was really about filling in product gaps. And so there's very little overlap anyway. But that's where our area of focus is.

I think just to add to that, there are various countries that we have presence in where Legg Mason does not have presence. So we're focused on those too, in terms of potential growth. Distribution, as we talked about extensively on various calls, is a key area. And obviously, the operational side of things at the holding company is a big focus in terms of the planning efforts.

Our next questions come from the line of Ken Worthington of JPMorgan.

Outflows continue to be quite high, almost interesting that even with the coronavirus impact on the market, they didn't get too much higher from where they were in the December quarter. But with market conditions recovering now off the bottom, can you just walk through what you see as the path back to net flows for Franklin? Clearly, with the Legg Mason acquisition, there's a lot that you're doing on the sales side, but maybe give us the path through, both on distribution and product, to get back to a positive sales position.

Yes. So a couple of things on there. Just within our own firm, you look at our April numbers, we've been improving consistently until we sort of hit a bump here in March. I would say that our April numbers are back to where that improvement was. So that was the first thing. Second of all, of course, flows follow performance. As we mentioned, we've had almost 70% of our assets or our funds performing in the top tier quartiles during this period of volatility. And that's carried through. So you take, for example, the Global Bond Fund has outperformed its nontraditional bond peer category at Morningstar by 4.4% and its prior category of world bond by 3%. So it's markets like this with the volatility where active managers get to show outperformance. And as you have outperformance, the flows will follow. As we've talked about, we've invested a lot in distribution. We've seen good progress on things like SMA. Our ETFs have been in net inflows, and our U.S. equity is now just getting, honestly, the recognition that it's deserved concerning its outperformance. We've seen good positive flows there. Greg, do you want to add anything?

I would just add that I think Jenny mentioned some of the short-term numbers. Certainly, Templeton is one in that category as well that we're seeing some relative performance during the downturn. I think munis, we're seeing strength there. We've had very good performance on the muni side. Benefit Street, which is ideally situated and has put a lot of capital to work in these down markets, we're seeing strong interest in the year ahead in flows there. I mean, the big category killers for us are the Global Bond Fund, as Jenny mentioned, and we're really out there telling everyone about the defensive nature with all the uncertainty in the market, how it can lower risk in a portfolio. I think we're getting a positive reception as people's risk concerns and awareness are heightened. The Income Fund, while it's lagging performance-wise, it's not unexpected. As we've said before, it’s two times its industry in terms of its dividend payout. So it’s been under pressure more with high yield just generally relative to its counterpart. If high yield holds in there in this market, that should continue. So I think the Income Fund and Global Bond Fund are the ones that we'd like to see level off. Hopefully, we're starting to see that, but we think we've got some other areas that are seeing strong interest and strong performance.

Sorry. Let me just add a couple of other things. As Greg pointed out on munis, you heard a lot of noise about munis because of the levered munis in the market. We didn't have levered munis. We had already moved to higher quality, which, as there's been dislocations in the muni market, has enabled us to raise and really gain some opportunities there. As you hear states talking about bankruptcy, there's been no time like the present for a true solid credit team in the municipal bond area that will really differentiate. So we're excited about that. Additionally, as Greg mentioned, BSP has raised $1.3 billion in this window, including just under $1 billion for their private debt and special situations fund.

Yes. As we're quite far into - well, we're basically at month end, just today there. We can say that we expect to end the month at just over $600 billion under management. The flow picture will look quite similar to February, maybe a little bit more elevated than February, but very close to that.

Our next questions come from the line of Dan Fannon with Jefferies.

Matthew, maybe if you could talk about the expense outlook for the remainder of this year at your core - within Franklin and some of the levers that you're looking to either address kind of the lower AUM levels, given what's happened, and how we should think about flexibility from here.

Yes. Thanks, Dan. I mean, hopefully, as you've seen in the quarter, we've continued to display quite disciplined expense management. It’s really hard — as I think everybody can appreciate — to guide based on the current unique circumstances that we're all facing. But our previous guidance of 2% to 2.5% down for the year based on 2019 as a base of non-S&D expenses, I'd say that we can certainly double that, for sure. We’ll probably go a little bit deeper than that, is all we’d say for now. So it’s probably between 5% and 7% down versus 2019.

Great. That's helpful. And just back to the kind of more recent trends on flows. Just curious about gross sales versus gross redemptions in terms of where that rate of change is coming. And also within U.S. equity, you did have a good gross sales period in the March quarter. Could you talk about which funds are seeing that success?

We had a couple of large institutional wins in March, which accounted for, I think, about $2 billion of that. It was in the multi-asset, advisory, and K2's strategy. We're getting the inflows in U.S. equity have been very strong. The fixed income has been — Franklin fixed income is actually in the — Tax-Free has been picking up. They had large redemptions like others, but the performance has been very, very good.

Yes. I just - I mean, I think particular funds in the U.S. equity side, our DynaTech Fund just has a lot of momentum. It's now about $10 billion in size from a relatively small base and had $775 million in net flows for the quarter, which was up from $400 million. We're excited about our new Innovation fund, which we just kicked off and has five stars, and leveraging that style. In our SICAV base, the U.S. Opportunities Fund continues to have strong performance and strong flows as well. So that group has really done extremely well, and obviously, in a market where technology, even in this downturn, has continued to do extremely well.

That benefits the income. Yes.

Our next questions come from the line of Bill Katz with Citigroup.

I hope everyone's okay. Maybe just staying on the expense discussion for a moment, Matt. Of that 5% to 7% plus drop year-on-year, how much of that is permanent versus potentially some delay to the extent the revenue backdrop would improve that might sort of turn on some reinvestment perhaps?

Well, I hope the comp isn't permanent because we hope for improvement in comp as the firm continues to evolve and grow again. I think you could look at the IS&T part as being pretty permanent. We’re being very disciplined around ensuring that comes in at - in the high 50s, low 60s million per quarter. So that we're pretty confident. And that includes investing in certain areas of technology. So that 6% to 7% lower in IS&T for 2020 includes shifting of projects, reprioritization, being able to invest and lowering costs. I’d say parts of G&A, which we expect to be about 10% lower for the year, is also permanent. Obviously, going through this period, there's exceptionally low T&E by definition because nobody's traveling. So we could expect that to come back up. But still, for the year, we’d expect that to be down 10%. Excluding one-off items like impairments and things, of which some comes under G&A, we’d expect that to stay at that level in a disciplined way. Again, this is just Franklin in standalone. We can't comment on what this would look like with Legg Mason at this point in time. The occupancy expense, I think I've talked about this before, it's gone up a little bit as we've repositioned parts of our real estate here and built more real estate. But then, at the same time, we're offsetting that by leasing parts of our owned real estate to tenants that are still paying us. So that's how I'd sort of present that, Bill. Comp or benefits, obviously, will remain variable. But the other expenses that we've - other expense adjustments that we've made across IS&T and G&A are more permanent ones.

Excellent. And then just two follow-ups. Just in terms of the deal, can you sort of walk us through where we are now in terms of incremental milestones between now and completion?

Yes. So I'd say we have two critical work streams going on where we can't operate as one company between signing and closing. But we have work streams around planning, so that we're ready for closing. We're not closing until September 1. So we have a good amount of time to get ready. The two major work streams are, one, the holding company functions. We obviously don't need two holding companies; we only need one. So we're working on what that would look like and planning for what the result of that will be. The second one is around the Legg Mason Distribution Group, which is really retail distribution for the most part. As you know, with the affiliates, they have their own institutional distribution. Our global advisory services, which is our much larger distribution marketing product area, so there are strategic and planning streams going on in both of those. Jenny should talk more about the distribution side. But on the holding company function side, we feel quite organized. We'll probably be ready at least a month before closing in terms of how we're going to do things going forward.

I would just add that the other piece of this is there's a lot of regulatory approvals that have to go into the process. We are on path. Those are on schedule, and we've already gotten several approvals that have been required. As far as the distribution, the distribution world at Franklin Templeton is going to have to look different when you think about all the underlying brands that we will have. So not only are we ensuring that we get the best of both organizations, but that we structure it in a way that supports what will be this new organization.

Yes. We're very focused, Bill. We know the importance of stability and continuity with the client distributors in particular. So we're extremely focused on that. At the same time, we're extremely focused on the cost structure of the combined company and making sure that we deliver exactly what we said we were going to do.

I would just make a general statement, I think, just observing through this COVID period, the amount of work that's been done, leveraging technology and really getting messaging out to clients and advisers in a very efficient way. I think that behavior could change and lead to efficiencies and distribution as well, as advisers are really getting used to getting information quickly and leveraging technology from the portfolio managers directly.

That's right. I mean we've had over 20,000 clients attending webinars, virtual conferences. Just as Greg said, one, they're much more receptive to it. They're actually starting to like it because they recognize the efficiency of being able to get the information quickly.

Great. Just one final question. Just in terms of qualifying, it looks like February, can you talk a little bit about maybe, at the product level, where you're seeing it? Because as I look back to some work we had done in February, it looked like it was pretty broad-based outflow. Trying to get a sense of, is it just a slowing in redemptions? Because it sounds like the gross sales may peter off a little bit from some of the unique stuff in this particular quarter. Just trying to get my hands around the ins and outs a little bit better.

Yes. I would say that the gross sales are more like the February number and essentially March, too, if you took out the two big institutional wins. The what's happened is redemptions have reduced significantly.

And I guess it's interesting. I mean what always happens in periods of volatility too, you get spikes in sales and spikes in redemptions as people are trying to take advantage, and others are just saying, I've got to get out. You saw that kind of in March in a lot of categories. Now you're getting down to probably where it's settling. People are kind of assessing what's going on. So you're seeing a slowdown in redemptions and a slowdown in sales, I would say, generally.

Yes. But one way of looking at it, Bill, is that the net flow picture for March is going to be one-third of the - sorry, net flow picture for April is about one-third of March.

Our next questions come from the line of Brian Bedell of Deutsche Bank.

I hope everyone's safe and well also. Maybe just staying along the lines of the Legg deal. If you can talk a little bit about conversations that you're having with your institutional clients and gatekeepers and the distribution channels. Not sure if you can talk about conversations that Legg is having with its distribution partners and affiliates yet, given you haven't closed the deal, but maybe just to get a sense of what your distribution partners are thinking about the impact of the deal and whether there's any additional sort of handholding with the clients in regard to that.

So I'd say that the first conversations with institutional clients is that the institutions set up calls independently with Legg and Franklin to make sure we had the same story. The good news is the feedback was, wow. You guys are absolutely consistent in your story. The second point of feedback was that there was — it was actually anywhere from neutral to positive because there was certainty around ownership for the affiliates at Legg Mason. They saw Franklin's kind of long-term approach to things as being positive, with certainty around that. The third, the fact that Franklin has a record of acquiring and leaving the independent investment teams in place really fits with how Legg Mason has approached things and how the affiliates wanted to work. They had a lot of confidence that we wouldn't go in and muddle with the investment teams and the investment process. Overall, that status has been anywhere from neutral to positive.

Yes. In terms of the synergy part, Brian, I’d say that when we announced the transaction, we talked about a gross synergy number and a net synergy number. The net was following about $100 million investment. Of course, we don't need to make that $100 million of investment right away. We can do that over a longer period of time. In these market conditions, you can expect that we will do that, and we will be extremely focused on the gross synergy number. That was $300 million. The second point I would make is there is a portion of an asset management company's expense base that is just fixed to ensure that you retain the right people and the team, to make sure you’re investing in the business for the future and making sure you’re positioned appropriately across the board in the various parts of the company, both operations and front-office and so on. When you go through a market like this, which is exceptionally bad for the industry, it means when you look at our combined company, our ability to be able to control costs across a broader base means we have more leverage. Basically, with two single companies, you have that fixed base. There's only so much you can do together. We probably will have more levers to pull in the event of a sustained market downshift back to where we were in mid-March, for example. That’s how we think about it from a risk management perspective. We have to be prepared, obviously; we hope for good times, but we also want to be ready for very difficult times in our industry and company.

Greg, did you want to add anything to that?

I would just add from — as Jenny said, the distribution platform is something we're looking at and working on. We have engaged outside consultants that are interacting with intermediaries, advisers, gatekeepers to get their view of what the ideal servicing model is. The beauty of putting these two together is that we have that flexibility to go to what we think will be a better and more efficient distribution platform. But we want to do it through an unbiased eye; that's really what the consultants are driving through our client size.

I'd just summarize that when we announced this deal, I think that the market was pleased with the strategic nature of it in filling in the product gaps, diversifying our client base, adding scale in major markets. The concern was whether there will be outflows as other deals have seen. Again, because there was very little product overlap, we felt that, that was less of a concern here. The initial conversations with the institutions and the consultants have been positive. While it's still early days, we actually feel like that concern is unwarranted.

That's very helpful. And then if I could just confirm on the base of expenses, Matt, that you've talked about for the down 5% to 7%. Is that $2.4 billion for fiscal 2019? Is that the right number to be basing that off of?

Yes. Yes. I mean, it would be about the same on the adjusted as well. It's not too far off on that. It's maybe a little bit more on the adjusted. As you know, on the adjusted number, that's what we have more control over versus what the business needs to do in terms of paying for third-party distribution services. We're going to have separate calls with each of the analysts to make sure that we address all the questions for your models.

Our next questions come from the line of Mike Carrier of Bank of America.

First, just on the performance. You mentioned some of the areas across equities and munis that improved, which is good to see. Just in some of the areas that are more macro exposed, whether it's through credit, currencies and energy, like global macro and Income series, I'm just curious about how they've been sort of thinking about the environment or repositioning. So the global macro, they've been using some of that higher level of cash to take advantage of opportunities, and then same thing with income series, just how they're thinking about energy ahead in this environment?

Yes. I would say, just in general, global macro is still very defensively positioned for the market. You’re correct; they have a higher cash position. I think that the changes there, we continue to be underweighted towards emerging market currencies. We’ve taken off the negative duration bet over the last quarter or so. Mutual series is still a very deep value group. We didn’t talk about that much, but it continues to lag certainly the S&P in line with other deep value managers. As you know, that’s been the sector that, unlike most cycles, where you have these big downturns, and value outperforms growth, in this case — with the unusual nature of COVID and everything — stocks in the best-performing areas around technology have gotten stronger. The more traditional cyclical value, energy, all these other financials with negative rates continue to be under pressure. That’s really what has continued to be a drag on the mutual and will continue to be difficult on the flow side. In general, we were reducing our energy exposure across the entire organization as the macro view had a negative view of prices.

Okay. That's helpful. And then, Matt, just a quick one on buybacks. So moderated, as expected, in your prior comments, you've pivoted more of a focus on investing in areas of growth ahead. Given the market backdrop and impact on the stock price, has anything changed in the near term in terms of capital priorities?

No, I think you said it exactly right, Mike. As you know, we're a conservative company when it comes to capital management. While we think our — just to be very clear, we think our equity price is very, very attractive, it's just prudent for us to make sure that we face this market in a balanced way. In our view, we've obviously just earmarked a big portion of our cash to acquire a company to position ourselves for the future. We've repurchased some shares and will repurchase shares to hedge our employee grants and other grants around our stock. But aside from that, our plan is to sort of take a step back from it. Other than completely opportunistic repurchases, we don't intend to use our capital to repurchase shares until after the Legg Mason transaction closes. Regarding capital management with dividends, we want to continue to pay out dividends. Share repurchase and any other strategic inorganic purchases are not on the table for now. We've got several transactions to digest, including the wealth management deals, which are already going quite well.

Our next questions come from the line of Robert Lee of KBW.

Great. I hope everyone and their families are feeling well. Most of my questions were asked. Just two quick ones. Maybe on the sales front and the activity, maybe the improvement so far in Q2, could you give us some regional perspective on that? I mean it'd be interesting to see how you're seeing like APAC versus EMEA, versus the U.S., or kind of the differences?

Our strongest area of improved performance has been around the U.S. retail side. We do have some strength in some of the APAC regions. Australia was a big improvement. That's actually where that large institutional win happened. Malaysia, Korea — we do have some strength in those regions as well.

Great. And Matt, just to make sure I heard it correctly, were you suggesting that between now and deal closing, we are going to refrain from repurchases the next couple of quarters?

Yes, other than very modest repurchases to hedge employee grants and things. But yes, we expect that’s going to be very minimal.

Our next question comes from the line of Mike Cyprys of Morgan Stanley.

I was just hoping you could talk a little about how your sales and wholesaling teams are adapting to this current environment that we're in, work from home. The wholesaling function is arguably not quite set up for this sort of backdrop. Just what are some of the techniques and changes you guys are putting forth? How might the wholesaling function evolve and look on the other side of this crisis?

So first of all, as a firm, because we operate in 35 countries, we have over 100 offices and broad global platforms, we adopted to video conferencing at the desktop years ago. There isn't a meeting internally that happens without somebody being on video. For us, it was an easy transition to shift to working from home. That includes probably 98% of our employees in India, which is where a lot of people had trouble. This was built into our operations, so it wasn’t hard for us to make that adjustment. The positive is that now clients want to interact that way. Our CIOs are doing virtual conferences, literally doing virtual roadshows where they are scheduled for one client meeting after another. They’ll dedicate a day to a region, and the client will have a series of advisers on those client calls. What you're finding is that people are much more accepting of it. We have had over 20,000 clients attending webinars and podcasts out there that have been picked up. We have a volatility center where our distributors have found it so good that they’re highlighting it within their own virtual conferences. I think, where does this go in the future? You’re going to see it be much more effective and cost-effective, and from a time standpoint, it’s absolutely better to do these types of calls if your clients want them that way. I think the hybrid wholesaler is going to be the model of the future. It's not going to completely replace visiting people, but there will be a lot less in-person visits.

Great. Just as a follow-up question. I was hoping you could talk a little about the high net worth buildout. You’ve done some acquisitions, how is that progressing? Maybe an update on the overall strategy and buildout?

Yes. Our high net worth business has been about $20 billion. We think it's a great business for a lot of reasons. One is it’s a very sticky business but needs more scale. Fiduciary Trust is older than Franklin Templeton. This is a business that is one of those core, premier high net worth. We wanted to get more scale. When we acquired Athena and Penn Trust, it gave us capabilities to add scale to the business, specifically capabilities. Athena is renowned in the U.S. for endowments and foundations for its ESG. Penn Trust has specialties in managing trusts for people with special needs children. We not only gain capability, but we’re adding scale, increasing Fiduciary Trust’s assets under management by 50%. As the world is moving to more fee-based, advisers are getting pressured by clients to provide more in wealth management. What was historically preserved for just ultra-high net worth people is now being requested of financial advisers. Having this resource allows us to offer that to advisers. One of our heads of trust council is doing a webinar for financial advisers to talk about estate planning. These types of capabilities will build greater loyalty with that adviser network.

We’ve been very focused on the profitability of this business. That was an important prerequisite to agreeing to help build out the business through some acquisitions. The acquisitions are certainly helping solidify the profitability story around this business. Even though we don’t report it externally this way, we were pleased with the last quarter of results from Fiduciary Trust, which represented almost a record for that business.

Actually, we’ve had referrals. We have one client that was referred from Athena. We haven't closed Penn Trust yet, but we have about $825 million in the pipeline from referrals from Athena that Athena wouldn’t have been positioned to be able to take on but the broader Fiduciary Trust can.

Our next questions come from the line of Alex Blostein of Goldman Sachs.

I'm not sure who Travis is, but it's Alex Blostein.

We said the same thing. We said, who's Travis?

Who’s Travis?

I've been called lots of things. Travis is a new one. So just another one for you guys around capital management thoughts. I understand the approach here until the Legg deal closes, but I'm curious to get your thoughts on priorities for capital returns between buybacks and maybe deleveraging once we're through the closing of that deal. I think you're going to have a little bit of a net debt position. Just curious how quickly you are looking to kind of build that down. And then, Matthew, on your point around M&A and sort of saying you're kind of done with M&A for the foreseeable future, I think you guys talked about doubling the size of Fiduciary Trust through deals. Should we consider that’s part of the deal-making that’s also off the table?

A couple of things there. First of all, on the Fiduciary Trust front. We do still intend to grow Fiduciary Trust. We’ve already increased it by more than 50% through the actions we've taken this year. We could do a couple of smaller transactions, but those would not be material to anything we’re talking about around capital management. I don’t want to say we’re completely closed up. The point I was making is there won’t be anything material we’re going to do around capital management involving M&A. With Fiduciary Trust, some smaller bolt-on type transactions, particularly in states, can make a difference in how we continue to reposition and grow that business. I wouldn’t say my comment on shutting M&A down for the foreseeable future impacts our strategy on the smaller bolt-on type transactions. In terms of the pro forma capital management view, I think the market's been evolving so much. We announced a very balanced approach across M&A, share repurchase, debt servicing and internal capital allocation. If we become more leveraged than we anticipated, we will want to reduce our debt a little bit. We want to remain a high investment-grade company. Our goal would always be to be less than 2 times debt-to-EBITDA out of the gate. We would be around 1 times to 1.25 times debt to EBITDA. There are portions of Legg Mason's debt structure that have equity content tied to it that we view as gross debt. Our intention is to ensure we maintain a conservative debt capital structure. We also have some levers to pull in that debt stack where we can save $18 million to $20 million soon after closing in 2021. This positions us to reduce debt by $300 million to $400 million within three years. We must assess our pro forma free cash flow, which should be substantial, especially on a post-synergy basis. This will open up the opportunity for share repurchase and capital investing. But I stand by the M&A comment. Our focus is on executing what we have on our plate; we are at bandwidth max right now and it doesn't make sense to look at larger scale transactions. We want to be bigger in wealth and bigger in alternative assets and that stays the same; it's just timing as we must be prudent with our cash flow and capital structure. We do not want to be net debt heavy. At closing, even with the impact on capital structure through this crisis globally, we will be about net debt flat, maybe a little positive.

Got it. My second question was around some of the recent dynamics in emerging market distribution. There have been a few headlines, I think, with you guys shutting down a couple of funds in India. I think that had about $3 billion to $4 billion. Just curious what happened there and maybe speak to your thoughts on any risk that creates for your footprint in markets like India and maybe some other emerging markets.

Yes. So we entered India over 20 years ago as a fixed income manager. In India, anything below AAA is considered non-investment grade; the high-yield market is still very immature. We've had six funds invested with a lot of private debt. In October 2019, unfortunately, SEBI came out with new guidelines saying that any investments in unlisted instruments in funds could neither exceed 10% in a fund, nor could they be traded. That orphaned about one-third of our fund. In the meantime, we had worked hard to manage laddering maturities, diversifying sectors, ownership and had managed to decline AUM from about $7 billion to just under $4 billion. Unfortunately, with this 33%, including not increasing the percentage of unlisted instruments, it got to the point where the market froze up, leading to redemptions. There were defaults there in India, creating a run on the funds. We decided to halt any kind of subscriptions and redemptions and enter wind-down mode. The underlying holdings aren't a solvency issue; they’re solid credits. It was truly a timing issue of redemptions versus our ability to create liquidity to meet them. We worried about the impact on our equity business and high credit business. Initially, there were redemptions in high credit; we have about $2 billion in high credit and about $6 billion in equity. That seems to have stabilized. It's very unfortunate because, obviously, with India being locked down, there are people who need liquidity. Selling those assets at a fire sale is not a good option with regulations not permitting trading. SEBI just reversed that, allowing some trading and enabling banks to hold that, so we’ll see how well that opens up the market so we can return that capital to clients.

I mean, one of the steps we took in that fund was to ladder the maturities so it's not locked up, illiquid. A lot of this is in short-term debt, providing immediate liquidity for at least some redemptions as we move forward.

It's just that the press has been fair on this. They’ve really dug into the understanding of the issues. I’m not sure all of the press around the world would be as fair as India’s been around the issue of the underlying credit still being good. We have not seen a broader contagion in our emerging market business in other markets. It’s primarily been within India. More specifically, it hasn’t seemed to impact our equity business very much.

Understood. So it’s the $3 billion to $4 billion in AUM that will go through a wind-down over the next couple of months and quarters?

Right.

Yes.

It could be over a longer period than that. But we’re waiving fees during that period; consider it from the P&L perspective to be basically gone. We’re doing everything we can for those shareholders to return their money. This strategy maximizes proceeds for the investors in the fund, and we're not charging any fees.

Our next questions come from the line of Brennan Hawken of UBS.

I just wanted to follow up on the question there from the infamous Travis on the Indian credit fund. Is that going to stay in AUM? Or will you wind it down? Are you going to move it to discontinued? Just a housekeeping question.

You're going to stay in AUM.

You mean just on those credit funds? Are you talking about...

Yes, just the $4 billion.

Yes, that will be wound down. It doesn’t mean we don't have a credit business in India.

Yes. But the question is, how are we treating it from an AUM perspective?

It will be on there; we may have to footnote regarding it.

Great. Yes. Travis had that one covered like a blanket. I just wanted to — and then for my second question, given the plans that you guys have to consolidate distribution teams, how are you ensuring engagement during this transition period? In prior deals, we’ve seen some distraction. It’s not surprising really. Given we’re going through this extraordinary period of distraction already, how might you be adapting those communication and coordination efforts?

I would say, first, one of the good news points, as we talked about, the strategic benefit of this deal was the diversification of our client base. There isn’t necessarily direct overlap between coverage. Our goal is to have as little disruption on the distribution side with the frontline people, who are engaged with clients. That’s the area we are least looking for those synergies. Distribution leadership from both sides are engaged in designing what the best approach is going forward, so we want to get the best of both. Also, you know in any market, a great salesperson always has value, but this is a tougher market to walk out the door. We have retention mechanisms in place. We’re focused on making sure we get the message out as quickly as how we’re structuring this, and trying to minimize disruption on the client-facing people as much as we can.

I mean, there’s a fair amount that won’t change at all.

Yes.

Institutional piece won’t change and just be better coordination across the firm. From a retail distribution perspective, it's ensuring that the client has input and continuity; that's a key point of stability.

One quick one on the India. So it sounds like away from the $4 billion, there's another $8 billion. Is that correct, Jenny, in terms of the...

Yes, I think that's right. Yes.

Okay. Cool. Then on the fee rate, given all the moving parts towards the end of the quarter, could you frame the exit fee rate into 2Q versus what you reported for 1Q?

The exit fee rate...

It's very, very consistent. So it's $55.3 million.

Exactly.

Exactly, exactly.

On a non-GAAP basis, it's $50.6 million. The change versus the previous quarter was literally like 0.1 basis point. We don't expect based on the changes with India and things; it won't impact that average.

We have no further questions at this time. I will now hand the call back over to management for any closing remarks.

I want to thank everybody for taking the time to do this call, and wish everybody remain healthy and safe in their shelter-in-place and not go too crazy in your shelter in place. Take care, everybody.

Thank you.

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.