Federated Hermes Inc (FHI) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Federated Hermes, Inc. First Quarter 2021 Analyst Call and Webcast Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn this conference over to your host, Mr. Ray Hanley, President of Federated Investors Management Company. Thank you, sir. You may begin.

Thank you. Good morning, and welcome. Leading today's call will be Chris Donahue, President and CEO of Federated Hermes; and Tom Donahue, Chief Financial Officer; and joining us for the Q&A are Saker Nusseibeh and Debbie Cunningham. Saker is the CEO of our International Business; and Debbie is the Chief Investment Officer for Money Markets.

During today's call, we may make forward-looking statements, and we want to note that Federated Hermes' actual results may be materially different than the results implied by such statements. Please review the risk disclosures in our SEC filings. No assurance can be given as to future results, and Federated Hermes assumes no duty to update any of these forward-looking statements.

Chris?

Thank you, Ray. Good morning. I will review Federated Hermes business performance, and Tom will comment on our financial results. Q1 was another quarter of solid performance for Federated Hermes. With the challenging backdrop of the global pandemic and fluid markets, including rising long-term rates and short-term rates falling to extreme lows. We executed successfully against the variables that we can influence.

We produced solid sales results as we have over much of the last year during corona time. In fact, we achieved record high gross $5.6 billion and net $1.2 billion equity fund sales and total fund sales gross of $15.3 billion. A recent [Ignite] study noted Federated Hermes' long-term mutual fund organic growth rate of 15%. And that ranks seventh in the industry for net flows over the 11-month period ended February 28 of '21.

In Q1, our long-term strategies had net sales of $3.2 billion. We crossed over the $200 billion mark for long-term assets in the first quarter, finishing the quarter with the record high just under $206 billion of long-term assets. We also continue to grow our differentiated EOS at Federated Hermes engagement function. We added 3 new clients in the first quarter, and assets under advice reached $1.5 trillion, up from $1.3 trillion at the end of 2020. Our staff, level of engagers and other specialists reached 68, up from 49 in the first quarter of 2020.

Equity-managed assets reached a record high of $96 billion and had net sales of about $600 million. Equity fund net sales of $1.2 billion were partially offset by net redemptions in a separate account of $600 million. Equity gross sales increased 38% from the fourth quarter and 28% over the first quarter of last year. We saw positive net sales in 19 fund strategies in first quarter.

Sustainable strategies managed by our U.K. teams drove the strong equity fund sales led by global emerging markets over $400 million, global equity ESG over $400 million, SDG Engagement Equity over $400 million and Asia ex-Japan over $300 million. Other funds with net sales in the first quarter included impact opportunities and MDT Small Cap Core.

Our Global Emerging Markets Fund shareholders have been informed that the strategy will close to new investors effective June 15. Existing shareholders will continue to be able to invest in the fund. As announced in December, the Kaufmann Small Cap Fund had a soft close effective March 1, during the first quarter here. The 5-star $10 billion fund had net redemptions of about $30 million in the first quarter due in part, we believe, to the soft close.

Certain model portfolio applications that were unable to continue to use the closed strategy had lumpy redemptions in March and April. And while there's no guarantee as investor preference and other factors can change, resulting in further redemptions. We currently believe that these redemptions will dissipate in the near term. Early indications in April appear to support this view.

Using Morningstar data for the trailing 3 years at the end of the first quarter, 20% of our equity funds were in the top quartile and 53% were above median. For the first 3 weeks of the second quarter, equity funds and SMAs had net sales of about $30 million.

Turning to fixed income. Assets reached another record high of $86 billion at the end of the first quarter, up more than $2 billion from year-end and up $22 billion or 34% since the first quarter of last year. The Q1 growth was again driven by strong net sales of just under $3 billion. Our broad array of solid fixed income strategies was well positioned to meet market demand. We had 21 fixed income funds with net sales in the first quarter.

Q1 net fund sales leaders were Ultrashort Bond Fund with about $1.6 billion, the multi-sector Total Return Bond and Short-Intermediate Total Return bond funds combined for nearly $600 million and continued strong results in high yield with nearly $400 million.

Within high yield, net sales were led by another U.K. sustainable strategy, the SDG Engagement high-yield credit fund was $686 million. While our domestic flagship 5-star institutional high-yield bond fund Q1 gross sales were up 20% from the fourth quarter, the fund had net redemptions of about $300 million due to a $600 million redemption from 1 client who made a tactical change in their asset allocation strategy. The fund has returned to solid net sales of nearly $150 million here in April and has produced net sales in 22 of the last 25 quarters.

Corporate, high-yield, international, multi-sector, municipal bond fund categories all had net sales as did our fixed income SMA strategies. Across sectors, short-duration strategies were in demand. We saw another solid quarter of net sales for the U.K.-based unconstrained credit strategy with net fund sales of nearly $80 million and a couple of new institutional wins as well.

Fixed income separate account net sales were led by multi-sector and corporate mandates. At the end of the first quarter and using Morningstar data for the trailing 3 years, we had 26% of these funds in the top quartile and just about half of the funds above median. For the first 3 weeks of the second quarter, fixed income funds and SMAs had net sales of about $160 million.

We began the second quarter with about $1.6 billion in net institutional mandates yet to fund into both funds and separate accounts including about $700 million in unconstrained credit and $500 million from 3 new trade finance wins.

Now moving to money markets. Assets were down about $1 billion in Q1 from year-end. Our money market fund market share, including sub-advised funds at quarter end was about 7.4%, down slightly from the year-end market share of 7.8%.

While we've seen longer-term interest rates increased recently, short-term interest rates remain at historic lows with yields on money market securities dropping to the low single digits over the last couple of months. As a result, minimum yield waivers were greater than anticipated in the first quarter and certain money market separate accounts have begun to be impacted in a similar way.

Minimum yield waivers are expected to increase again in the second quarter before declining over the rest of the year, as we noted in our press release. As usual, we are experienced waivers for competitive purposes as well.

Against the challenging interest rate and yield environment, money market funds continue to show their resilience and value to investors, issuers and the overall financial system. The most recent ITI statistics show $4.5 trillion in money fund assets up from $4.3 trillion since year-end and $3.6 trillion at the end of '19. We believe that the lower interest rate challenge will pass despite the Fed's current stance. It's hard not to conclude that the pandemic recovery and the massive stimulus being unleashed will not lead to interest rate increases.

We also believe that as we enter another round of the 40-plus years of money market fund regulatory discussions, the truth that the March 2020 market disruptions in the midst of the global pandemic were in no way caused by money market funds and the essential role of money market funds play in our capital markets will be recognized by regulators.

We expect the regulatory process to follow the data. Any regulatory changes should be based on facts, not false scenarios and should preserve issuers' and investors' ability to utilize money market funds.

Now taking a look at recent asset totals. Managed assets were approximately $640 billion, including $430 billion in money markets, $99 billion in equities, $88 billion in fixed income, $19 billion in alternative and $4 billion in multi-asset. Money market mutual fund assets were $306 billion.

We announced earlier this week an agreement with Hancock Whitney Bank's Horizon Advisers that is expected to transition about $568 million in equity and fixed income assets from the Hancock Horizon funds. This follows a similar transaction with Hancock in 2017 that transitioned $435 million in assets. Subject to regulatory and fund shareholder approvals and other customary conditions, these transitions are expected to happen in September. And recall that these numbers, the $568 million, is not in the AUM today nor is it in the pipeline figures.

In closing my remarks, I'd like to thank our employees and clients for resilience and adaptability as demonstrated over the last year. It's gratifying to see progress in many places and moving past the worst of the pandemic. As we head towards midyear and with vaccines now available to all U.S. adults, we're planning for the stage return of more employees to our U.S. offices during the summer. Tom?

Thanks, Chris. Total revenue for the quarter was down from the prior quarter due to the increased negative impact of minimum yield waivers of $27 million. Fewer days costing $9.3 million and lower money market assets costing $6.4 million and lower performance fees. This is partially offset by higher revenue from long-term assets of about $21.5 million.

Q1 revenue included $9.4 million in combined carried interest and performance fees compared to $11.2 million in Q4. Now Q1 includes carried interest of about $7 million from variable interest entities associated with the HGPE acquisition that are being consolidated beginning in Q1.

This carried interest is paid solely to certain current and former employees of HGPE and therefore is also recorded as compensation expense beginning in the first quarter. This amount represents the current and former employees' carried interest since March 1, 2020 acquisition date as we finalize the acquisition accounting for the transaction.

As noted in the press release, negative impact from operating income from minimum yield waivers on money market mutual funds and certain separate accounts may range from $35 million to $45 million during the second quarter. This range is based on gross yields on government money market portfolios of 3 to 10 basis points. Historically, low yields are being driven by technical factors at the front end of the yield curve.

In March, we began taking on more of the impact of the low rates through waivers as we were not able to further reduce distribution expenses on certain funds and separate accounts. This was largely responsible for the higher-than-forecasted Q1 waivers and the higher forecast range for Q2.

We believe that minimum yield waivers are likely to peak in Q2, and we expect short-term rates to increase in Q3 and Q4. The amount of minimum yield waivers and the impact on operating income will vary based on a number of factors, including, among others, interest rates, the capacity of distributors to absorb waivers, asset levels and flows. Any changes in these factors can impact the amount of minimum yield waivers, including in a material way. As Ray indicated at the beginning, Federated Hermes is not undertaking any duty to update this information throughout the quarter.

Looking at operating expenses. The increase in comp and related from the prior quarter of about $5 million was due mainly to the consolidation of the variable interest entities that I mentioned earlier, which added $7 million of catch-up expenses, and about $4 million in seasonally higher items, partially offset by $8 million of combined lower vacation pay accruals and lower incentive comp expense.

The decrease in distribution expense compared to the prior quarter was mainly due to the impact of minimum yield waivers, fewer days and lower money market assets, partially offset by the impact of higher long-term assets.

Office and occupancy expense was higher in Q4, which included a nonrecurring lease incentive gain of about $5 million. Noncontrolling interest decreased from the prior quarter due mainly to the decrease in the value of investments held by consolidated funds and to lower income earned by Hermes resulting from less performance fees and carried interest in the quarter that I already mentioned.

During Q1, we purchased approximately 1.5 million shares for $45 million to substantially complete the 3.5 million share program approved last year. The Board authorized a new 4 million share repurchase program yesterday. It's our 13th program since we went public.

As contemplated in the put call option deed executed when we purchased the majority interest in Hermes Fund Managers Limited in July 2018, which we publicly filed at the time, a request for valuation has been made by BTPS. We're working with BTPS pursuant to the agreement to the agreed-upon procedures in the option deed and it cannot be determined at this time whether a put call option will actually be exercised or whether a transaction will occur. We do not currently anticipate providing interim updates on the put call process.

Laura, that concludes our prepared remarks, and we'd like to open up the call for questions.

(Operator Instructions) Our first question comes from the line of Dan Fannon with Jefferies.

My question is just on the outlook for fee waivers. You talked about the peak being in 2Q and then dissipating or declining thereafter. And is it just your view of future rates? Or can you talk about the inputs that you are using to calculate or come up with that view that the fee waivers will decline in the latter part of the year?

Yes, Dan, I'll talk for a second and then Debbie will talk because it's the view of future rates is what's driving that and our sharing with intermediaries.

Dan, this is Debbie. Some of the more specific factors about our outlook have to do with currently where overnight rates are trading, which is in the 1 basis point, maybe 1 to 2 basis point range. If you go back to early in the 2021 year and throughout most of 2020 since the pandemic began, overnight rates have been somewhere in the neighborhood of 5 to 8 basis points.

Our expectation would be because of various processes that the Fed has already gone through by increasing their RRP counterparty limits per counterparty from $30 billion to $80 billion. They did that a couple of months ago by announcing their expansion of the potential counterparties that they will allow from a trading perspective with them through the RRP.

We do believe that we will see some technical adjustments to that reverse repo rate, taking it from a floor of 0, which is, to a large degree, driving that overnight repo rate of 1 basis point right now up to a level that's more like what it was post the financial crisis during the 0 interest rate environment, which was 5 basis points.

Commensurate with that would be likely an IOER adjustment of 5 basis points. And what this does not only raises the floor from an overnight perspective by that amount of basis points, but it also raises the money market yield curve by upwards of probably 3 to 5 basis points depending upon what part of the curve you're looking at. So that plays directly through as we invest in those markets on a daily basis to the yields of the funds and thus, the waivers.

Okay. That's helpful. And then just a follow-up on expenses and comp. So I think in the quarter, you mentioned the carried interest and the flow-through. So we have $7 million of comp that's nonrecurring plus another $4 million for seasonal.

So anything else just in the expenses that we think about that you reported that could be one-off in nature or nonrecurring? And then also if there is more carried interest as we think about it going forward, is the payout ratio going to be as high as what we saw this quarter based on some of those legacy funds?

So the first question, Dan. The $7 million, we can't call it onetime. I call it more of a catch-up because as we get more carried interest, part of your second question, it will flow through there again, but this was since March 1 number. So that's why it was much bigger, and there was a decent amount of carried interest in there, obviously. So I'm not allowed to call it onetime but I do call it catch up.

Other things in the expenses. So with waivers, if they show up as forecasted and rates don't rise faster than we're expecting, I wouldn't see comp increasing. It might even decrease and the same thing with distribution fees and the other items, travel related, is that going to creep up higher because we're able to travel more because of the pandemic. I hope it does and expect it to. And advertising and promotional, while we kind of look at that over a whole year period, the Q1 number was probably light compared to what we're going to do the rest of the 3 quarters.

Forecasting. Your second question, forecasting carry and what's going to happen and calculating trying to figure out some percentage of that versus anything. We're just not going to be able to help you out with that at all. I don't think Saker is going to be able to add anything in there to say, hey, the HGPE carry and what's it going to be in percentage of anything. Saker. I don't know if you can add anything to that or not.

No, nothing to that. As I always say, we have a profile for both carry and performance fees. And you can see them historically because we've declared them historically, both in the numbers that we declare here and also in the numbers we filed in London. And you cannot predict them, but we do know that they consistently come through over time. That's the best that I can say.

But just to clarify, it was $9.4 million in carried interest revenue and $7 million of compensation that was associated with that, and that's the same type of ratio we should think about for carried interest on a go-forward basis?

Yes. The 9-point -- there was a couple of million basically of performance fees and $7 million of carried interest, the split up, which I guess I didn't give that.

So all carried interest goes into comp? So then...

Yes. The carried interest for this quarter was lower than it's been in other quarters without the $7 million catch-up. So the $7 million catch-up in the $7 million comp offset. But that doesn't mean that going forward, you're going to see a 1:1 offset.

Our next question comes from the line of Bill Katz with Citigroup.

Okay. Just coming back to the money markets a little bit. Maybe a bigger picture question. Is there any thoughts of repricing your platform to move away from the sensitivity to such low interest rates? Or is there anything you can do on the distribution side to reduce the reliance on the distribution to carry their weight? Just trying to understand how to sort of soften some of this acute cyclicality on the business model.

Bill, it would be a great idea. And if we had pricing power, we would use it. We have discovered that there are many, many competitors who make those kinds of structural changes quite challenging and difficult. And that's just the way we have experienced it.

We are now in our fifth decade of dealing with this conundrum. And if you may recall, we started off with, back in your childhood, 100 basis point money market fund. And we're a far cry from there. And we have looked at other kinds of models, but we really aren't able to figure out one that avoids the marketplace.

Remember what this fund is, is an actual marketplace rate not an administered rate, and so it is subject to these vagaries. We still like the business because over time, it adds a beautiful balance -- ballast to the enterprise, even though we have to suffer through these times with these big waivers.

Okay. Second question, just coming back to capacity for a moment. So you mentioned comp, you mentioned sort of the emerging market portfolio. Is there anything else on the horizon in the equity side or even the fixed income side that we should be anticipating as potential close that could further impact the net sale opportunity?

No.

Our next question comes from the line of Mike Carrier with Bank of America.

Debbie, just on the money fund side, the change in rates in waivers over the past few quarters has been fairly significant. But given the economic growth that we're seeing, it seems like the rebound could be equally, I guess, swift. So just wanted to get your view on what do you think could get rates and waivers back to levels that saw that we just saw in 3Q or 4Q?

Sure. I do think what I mentioned earlier, the technical adjustments that we hope were coming in the second quarter from the Fed with regard to the RRP and IOER rates should be extremely helpful. Then basically, the -- another kind of technical factor is the debt ceiling issues that start to impact in the beginning of the third quarter. Once that -- and that has supply issues associated with it because the treasury has to get its cash balance down under a certain number.

So once those issues are past us, we believe that the money market yield curves, which on the prime side, like the BSBY curve, which I'll note I'm using that instead of LIBOR now, it's the Bloomberg Short-Term Bank Yield Index, a new gauge that we think is helpful on the prime side.

That curve is already backed up maybe 1 to 3 basis points since the beginning of the year, really starting in the fourth quarter of last year. But the bill curve where the majority of our assets lie on -- from a government fund standpoint, has actually declined and gotten less steep by anywhere from 1 to 3 basis points. So we think we start in the third quarter to have the bill curve start to normalize a little bit more.

Also at that point, it's our expectation that because of the economic recovery, we should be seeing an improvement in where we see our current standard inflation measures. And the Fed will need to begin to address those -- that issue, the target rate. And we think that they start that process by beginning to announce cutbacks in their bond buying late in the second half of 2021, which then sets the stage for further economic recovery, further inflationary issues in 2022, at which point we think the Fed will react by increasing by 25 basis points.

So the point in that lengthier answer to your question, Mike, is that even without the Fed adjusting the target Fed funds rate, we think that there is a huge benefit with some of the technical adjustments that they can and will likely do that will improve the products from a yield -- gross yield standpoint, which obviously helps waivers. But that's the true -- but the true target adjustments don't come until sometime in 2022 later in the year, more than likely.

Okay. Great. That's helpful. And then just as a follow-up, just on the long-term side, so fixed income flows continue to be robust. Just any color on distribution channels or where you're seeing a strong demand? And then we saw some modest outflows in multi-asset and all. So anything there that you could think that could turn those to be positive going forward?

In terms of the distribution, we're seeing a lot of good things, singles and doubles occurring around the distribution. I'd just give you a few without the names of the distributors, but we had one just added a preference for high-yield bonds. That helps us. We had another one accept our Responsible Investing Institute training program. The Microshort's new products are being added. The engagement fund is now on a number of other lists.

ESG has come in to be a big theme in a lot of places. As I mentioned in my remarks, the short term remains strong. Ultrashorts are being well received. And people are looking at floating rate and around the horn.

So what you have is a whole array of products, and that's why we keep mentioning 19, 20, 21 different products, whether it's equity or fixed income that have positive flows because of the breadth of the offerings that we're able to make. Now if you have specific questions. Ray has a comment.

Well, you mentioned the multi-asset. And the largest fund we have in that category is our Muni and Stock Advantage Fund, and we see a pretty bright outlook for that strategy. Given the outlook for tax rates, it's a pretty unique strategy and combining munis and stock exposure. And in the first quarter, it was just about breakeven on net sales and is slightly positive here in the first part of April. And for the prior couple of quarters in 2020, we had some outflows in that strategy. So we think there's an improved outlook in the category.

Our next question comes from the line of Robert Lee with KBW.

Great. So maybe going back to the money from questions again. Just trying to frame this. So maybe if we move past Q2 and everything being equal, I know there's a huge number of moving parts, but if I think about the guidance you gave for heading into this current quarter and then rates obviously stayed lower or went lower.

But if we got back to kind of a rate environment, let's say, over that 5 basis points, 5 to 10 basis points, would we be looking at fee waivers, Q3, Q4 or being kind of more similar to what you originally were anticipating for Q1 or maybe the fourth quarter? Just trying to size if rates go up kind of what that gets us back to?

Yes, Rob. So it's tough. The last time we predicted 6 months ago or so, said, "Oh, we thought 2021 was going to be 9 9 9 9." And okay, so we stopped talking about the future like that. And we've run models based on Debbie's team's forecast, and we don't get to as low as we were before based on their -- the midpoint of their range. We don't get to Q1, and we don't get to 2020 numbers. That's about as far as you're going to get me to go on that.

Well, it's always worth a shot. Maybe on the -- going back to the minority interest from BT. Just kind of a couple of questions. Number one, is there an option as part of that arrangement for the existing Hermes employees to increase their stakes?

So once the price is agreed upon, it could actually be Hermes employees who take part of it? Or is it just going to be potentially Federated? And how do you kind of -- I know you probably -- any kind of way for us to think about potential financial impact from it? Or how we should be thinking about it going forward?

So on the first question, it would be a straight-up deal between the pension scheme and Federated Hermes. And the employees have their 10% and would keep their 10% and have arrangements and numbers of years and all sorts of a whole different program. So those 2 do not intersect. And just as a comment here, recall that when we did the deal, we were perfectly happy to buy all the stock or buy a portion of the stock so long as we bought control. And the reason for that was that we have a very large client who created this whole enterprise. And however, they wanted to handle it is how we wanted to handle it on that subject. So now that they have put in for a valuation, we're happy to go down that road and see what happens.

Now in terms of the valuation and what impact it would have, they own 29.5%. We are on the threshold of acquiring a valuation. Therefore, you will not get me to go sportfishing on the valuation. But you are certainly welcome to have a swing at that pitch.

And if it comes to a valuation we agree to, then there's no puts and calls, and we just do it or maybe they put or maybe we call. And maybe it gets delayed a year and maybe it doesn't. But those are the dynamics. So it's 29.5% of the former Hermes enterprise that we're talking about.

Our next question comes from the line of John Dunn with Evercore.

You guys have been active going back on tuck-in M&A. I mean, you just mentioned Horizon. Do you see more opportunities like that? And could you maybe give us a update on the M&A environment for both money market roll-ups and then for the long-term side?

So we're -- John, yes, thanks. We are always out there with our team. If you noticed in the press release, our gentleman who's out there doing this says we're open, available. This is the Horizon press release. We're open, available and continually looking to help out all the various entities who may decide that it's better for them to do what we call a roll-up, which is turn their assets over to us. And so we continue to have discussions out there.

In terms of bigger picture, and you see lots of things have happened in the last 1.5 years in terms of bigger deals and where things fall. And as Chris has mentioned, we see ourselves set up with our Hermes London business and what we have in the rest of the company as a great growth opportunity. So we haven't seen that we're playing in those big transactions. And they -- we still get the look at them. We still get the books. We still get contacted. We haven't had a big level of excitement about moving forward as it stands right now.

If I may comment, we are active in this space, too. If you recall, PNC, you mentioned Horizon. So you should not be surprised that we are still active in this space.

Got you. And then maybe just one more tiny one on the speed of change of fee waivers. It seemed like rates moved in Q1 and waivers changed pretty quickly, too. How quickly can they turn back down if we get some cooperation from rates? And does there have to be any cycling through of the portfolios, which could take some time?

Let me answer that. In the context of the RRP rate currently being at 0 and a potential 5 basis point move in that, the largest majority of our $430 billion in assets under management in the liquidity space is in the government product area, roughly 2/3 of it. As such, those portfolios generally have about 40% to 60% of their composition of their assets in overnight securities. So 50% of 5 basis points gives you 2.5 basis points on 2/3 of the assets.

The other asset classes, the prime products and the tax-free products and then the remaining portion of the government products would be more impacted by what the curve does as opposed to what overnights do. And we think that impact is more along the lines of maybe 1 basis point or 2.

Our next question comes from the line of Ken Worthington with JPMorgan.

And to follow up on Rob's, I don't think he got this and I sort of missed part of this question. But in terms of Hermes and the put call provisions, how much earnings or how much of your earnings is being generated by Hermes at this point? And it just helps us gauge what this deal may be like. And would you be willing to do a dilutive deal if it came to that? Or is accretion a key metric that you're looking at to execute that transaction?

I will answer the second part of the question, Ken. Tom will take the first. The second part, as regards whether we're willing to do accretive or dilutive, it doesn't matter if you're inside the structures of the put-call arrangement. It will be a price, it will be a valuation. And if it's put, we will buy. If it's called, they will sell.

And the dilution -- antidilution or non dilution will be a factor in some of that. But if the price comes within the range of the put, then we will buy it no matter what the effective it is. So this is really governed by the put call deed as they call it over there. And it obviously can be adjusted or trumped at any time by a negotiation. Tom?

Got it. Okay.

Yes. On sharing, I'll call it. So we have to do everything according to [Hoyle] from our arrangement with the pension scheme when we purchased the Hermes business, and that is pricing and sharing on distribution that we do here. So we've talked before about the funds that we started here, and there's a solid arrangement there for sharing. We've talked before about the funds. I don't think we updated that over $100 million of the funds that we started here.

We've seen some green shoots on institutional starting to arise, where our distribution in the U.S. is selling Hermes products. So we're excited about that. But it's nothing big in terms of dollars in the valuation yet.

And then the EOS business, that's a whole Hermes business. While Chris mentioned the number of people and the growth there, that's all contained in Hermes. So it's not a whole lot of what we're generating as it stands. We have a lot of efforts and energy and a whole business development committee expecting that to grow into the future and starting to see it work.

Okay. Great. And then the money fund business, I believe you guys have said in the past that even in the worst of the financial crisis that the money market fund business was a profitable business for you.

Given that the yield environment is sort of worse now than it had been and even if it's just temporary, is the money market fund business still a positive earning enterprise for you guys? Or are yields terrible enough at this point where it's more like breakeven or even generating losses?

It is not generating losses. It is still a profitable good thing to be doing.

Okay. Okay. I'm sorry, I'm going to be greedy and do one more. Given that your competition in money market funds is probably under huge pressure. Is there more opportunity to do these money market fund blocks or outright deals? Or is the business just sort of consolidated enough where that opportunity is not really much of an opportunity anymore?

There will be more of those come along, Ken. Each step in this process from prior to the big recession '08, '09, as I mentioned before, there were over 200 people doing money market funds. Now if you look at the list, it's 50 or so. And a lot of those are just in it because they totally control the money in and out. And as time evolves and as these things occur, people decide they're going to throw in the towel. And then we work out a deal, not unlike we worked out with PNC that works out for everybody. And as I always like to say, we are a warm and loving home for any money market fund assets.

Our last question comes from the line of Kenneth Lee with RBC.

Just one on the money market fund fee waivers. I think in the prepared remarks, you mentioned something about the not obtaining cost sharing for certain distribution partners. Just wondering if you could clarify that? And wondering if you could just talk about expectations for cost sharing going forward.

Sure, Ken. So generally, on the -- as rates go down in this period and in the last period, we have shared pro rata with our distribution partners and as rates -- and then we get part of our administrative fee basically. And so it's fees in total.

And then when we get down to where there's no more sharing, i.e., the distribution partner is at receiving 0, there's no more sharing that they can do. And we take the brunt of the hit on the decrease in waivers or increase in waivers, decrease in rates. And that's why you saw in the -- late in the first quarter, where that switched over to rates were low enough where the distribution couldn't go -- the distribution -- savings couldn't go -- expense couldn't go any lower, and it hit all to us.

Got you. Got you. That's very helpful. And just one follow-up, if I may. And this is just the HGPE carried interest. And perhaps this would just help me understand and make sure I got all the nuances. But just wanted to see, is the carried interest -- the level of carried interest, is that going to be dependent upon portfolio realizations going forward within HGPE or are there other nuances that we should be aware of?

It's in HGPE, the carried interest. That's mainly where it shows up.

Okay. But is it going to be dependent on portfolio monetization or any other -- or is it really just based on...

So the carried interest, if I may. So the carried interest specifically in GPE is realized there are several funds wherein these funds -- the assets that they hold come to maturity and they sell them off, which is the normal course of action within the carriage interest, which is purely within the private equity of GPE.

Performance fees is in our other private market assets and go on a slightly different cycle from that. But you are correct as far as the private equity funds are concerned, yes.

Ladies and gentlemen, we have finished our question-and-answer session. I would like to turn this call back over to Mr. Ray Hanley for closing remarks.

That concludes our call, and we thank you for joining us today.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.