Invesco Ltd. (IVZ) FY 2022 MD&A

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The discussion and analysis disclosed herein apply to material changes in the Consolidated Financial Statements for 2022 and 2021. For the comparison of 2021 and 2020, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the company’s 2021 Annual Report on Form 10-K, filed with the SEC on February 18, 2022. The following discussion and analysis of the results of operations and financial condition of Invesco should be read in conjunction with the “Forward-looking Statements” disclosure set forth in Part I and the “Risk Factors” set forth in Item 1A of Part I of this Annual Report on Form 10‑K, each of which describe our risks, uncertainties and other important factors in more detail.

Executive Overview

The following executive overview summarizes the significant trends affecting our results of operations and financial condition for the periods presented. This overview and the remainder of this management's discussion and analysis supplements and should be read in conjunction with the Consolidated Financial Statements of Invesco and the notes thereto contained elsewhere in this Annual Report on Form 10-K.

Global capital markets in 2022 were challenging for the asset management industry and for Invesco, as investors reacted to uncertainty associated with rising interest rates and high inflation in most major economies as well as geopolitical tensions. The table below summarizes the year ended December 31 returns based on price appreciation/(depreciation) of several major market indices for 2022 and 2021:

The company’s financial results are impacted by the fluctuations in exchange rates against the U.S. Dollar, as discussed in the “Results of Operations” section below.

Invesco benefits from our long-term efforts to ensure a diversified base of AUM. One of Invesco's core strengths, and a key differentiator for the company within the industry, is our broad diversification across client domiciles, asset classes and distribution channels. Our geographic diversification recognizes growth opportunities in different parts of the world. This broad diversification mitigates the impact on Invesco of different market cycles and enables the company to take advantage of growth opportunities in various markets and channels.

Despite the volatile markets, our diversified product lineup maintained net long-term inflows in certain key capabilities, notably ETFs, Fixed Income, Greater China, and the Institutional Channel.

We remain highly focused on our capital priorities, investing in our key capabilities, and efficiently allocating our resources. Consistent with our commitment to improve our leverage profile, we continue to manage our debt to lower levels. We redeemed $600 million of senior notes in May 2022, ended the year with no balance on our credit facility and our cash and cash equivalents balance increased to over $1.2 billion. Our debt of $1.5 billion is the lowest level in ten years. The progress we have made in our efforts to build financial flexibility has Invesco well-positioned to navigate volatile market conditions and deliver long-term growth. We remain committed to returning capital to shareholders longer term through a combination of modestly increasing dividends and share repurchases.

We are nearing completion of our strategic evaluation of the business that we began in 2020 and expect to be complete by the end of first quarter of 2023. Our strategic evaluation was primarily focusing on four key areas of our expense base: our organizational model, our real estate footprint, management of third-party spend and technology and operations efficiency.

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Through this evaluation, we invested and will continue to invest in key areas of growth aligned with our strategic plan, including ETFs, Fixed Income, China, Solutions, Alternatives and Global Equities, which has had a positive impact on the company’s results. We achieved $213 million in annualized savings in 2022, surpassing our original goal of $200 million of savings. We remain focused on identifying areas of expense improvement that will deliver positive operating leverage when markets recover and organic growth resumes.

On February 8, 2023 we announced that Martin L. Flanagan will retire as President and CEO of the company and as a member of the Board of Directors effective June 30, 2023. Andrew R. Schlossberg will succeed Mr. Flanagan as President and CEO and as a member of the Board of Directors effective June 30, 2023. Mr. Schlossberg is currently Senior Managing Director and Head of Americas and has served in multiple leadership roles across the company’s businesses and locations since joining the company in 2001. Upon his retirement, Mr. Flanagan will serve as Chairman Emeritus for the company and will provide advice, guidance and support to Mr. Schlossberg through December 31, 2024.

Presentation of Management's Discussion and Analysis of Financial Condition and Results of Operations - Impact of Consolidated Investment Products

The company provides investment management services to, and has transactions with, various retail mutual funds and similar entities, private equity, real estate, fund-of-funds, CLOs and other investment entities sponsored by the company for the investment of client assets in the normal course of business. The company serves as the investment manager, making day-to-day investment decisions concerning the assets of the products. The company is required to consolidate certain of these managed funds from time-to-time, as discussed more fully in Item 8, Financial Statements and Supplementary Data, Note 1, "Accounting Policies -- Basis of Accounting and Consolidation." Investment products that are consolidated are referred to in this Report as CIP. The company's economic risk with respect to each investment in CIP is limited to its equity ownership and any uncollected management and performance fees.

The majority of the company's CIP balances are CLO-related. The collateral assets of the CLOs are held solely to satisfy the obligations of the CLOs. The company has no right to the benefits from, nor does it bear the risks associated with, the collateral assets held by the CLOs, beyond the company's direct investments in, and management and performance fees generated from, the CLOs. If the company were to liquidate, the collateral assets would not be available to the general creditors of the company, and as a result, the company does not consider them to be company assets. Likewise, the investors in the CLOs have no recourse to the general credit of the company for the notes issued by the CLOs. The company therefore does not consider this debt to be a company liability.

Due to the significant impact that CIP has on the presentation of the company’s Consolidated Financial Statements, the company has elected to deconsolidate these products in its non-GAAP disclosures (among other adjustments). See "Schedule of Non-GAAP Information" for additional information regarding these adjustments. The following discussion therefore combines the results presented under U.S. Generally Accepted Accounting Principles (U.S. GAAP) with the company’s non-GAAP presentation.

To assess the impact of CIP on the company's Results of Operations and Balance Sheet Discussion, refer to Part II, Item 8, Financial Statements, Note 19, "Consolidated Investment Products."

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Summary Operating Information

Wherever a non-GAAP measure is referenced, a disclosure will follow in the narrative or in the note referring the reader to the Schedule of Non-GAAP Information, where additional details regarding the use of the non-GAAP measure by the company are disclosed, along with reconciliations of the most directly comparable U.S. GAAP measures to the non-GAAP measures. To further enhance the readability of the Results of Operations section, separate tables for each of the revenue, expense and other income and expenses (non-operating income/expense) sections of the income statement introduce the narrative that follows, providing a section-by-section review of the company’s income statements for the periods presented.

Summary operating information for 2022, 2021 and 2020 is presented in the table below.

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(1)Net revenues, Adjusted Operating Income (and by calculation, adjusted operating margin), and Adjusted Net Income (and by calculation, adjusted diluted EPS) are non-GAAP financial measures, based on methodologies other than U.S. GAAP. See “Schedule of Non-GAAP Information” for a reconciliation of the most directly comparable U.S. GAAP measures to the non-GAAP measures.

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Investment Capabilities Performance Overview

Invesco's first strategic objective is to achieve strong investment performance over the long-term for our clients. The table below presents the one-, three-, five-, and ten-year performance of our actively managed investment products measured by the percentage of AUM in the top half of benchmark and in the top half of peer group.(1)

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(1)    Excludes passive products, closed-end funds, private equity limited partnerships, non-discretionary funds, UITs, fund of funds with component funds managed by Invesco, stable value building block funds and CDOs. Certain funds and products were excluded from the analysis because of limited benchmark or peer group data. Had these been available, results may have been different. These results are preliminary and subject to revision.

AUM measured in the one, three, five and ten year quartile rankings represents 47%, 47%, 46% and 42% of total Invesco AUM, respectively, and AUM measured versus benchmark on a one, three, five and ten year basis represents 61%, 58%, 57% and 51% of total Invesco AUM as of December 31, 2022. Peer group rankings are sourced from a widely-used third-party ranking agency in each fund’s market (e.g., Morningstar, IA, Lipper, eVestment, Mercer, Galaxy, SITCA, Value Research) and asset-weighted in USD. Rankings are as of prior quarter-end for most institutional products and prior month-end for Australian retail funds due to their late release by third parties. Rankings are calculated against all funds in each peer group. Rankings for the primary share class of the most representative fund in each composite are applied to all products within each composite. Performance assumes the reinvestment of dividends. Past performance is not indicative of future results and may not reflect an investor’s experience.

(2)    Numbers in parenthesis reflect AUM for each investment product (see Note 1 above for exclusions) as a percentage of the total AUM for the 5 year peer group ($651.3 billion).

Assets Under Management

The following presentation and discussion of AUM includes Passive and Active AUM. Passive AUM include index-based ETFs, UITs, non-management fee earning AUM and other passive mandates. Active AUM are Total AUM less Passive AUM.

Non-management fee earning AUM includes non-management fee earning ETFs, UITs and product leverage. The net flows in non-management fee earning AUM can be relatively short-term in nature and, due to the relatively low revenue yield, these can have a significant impact on overall net revenue yield.

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The AUM tables and the discussion below refer to certain AUM as long-term. Long-term inflows and the underlying reasons for the movements in this line item include investments from new clients, existing clients adding new accounts/funds or contributions/subscriptions into existing accounts/funds. Long-term outflows reflect client redemptions from accounts/funds and include the return of invested capital on the maturity. We present net flows into money market funds separately because shareholders of those funds typically use them as short-term funding vehicles and because their flows are particularly sensitive to short-term interest rate movements.

Changes in AUM were as follows:

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(1)    U.S. GAAP gross revenue yield is not considered a meaningful effective fee rate measure. Gross revenue yield on AUM is equal to U.S. GAAP annualized total operating revenues divided by average AUM, excluding IGW AUM. It is appropriate to exclude the average AUM of IGW as the revenues resulting from these AUM are not presented in U.S. GAAP operating revenues. The average AUM for Invesco Great Wall was $93.5 billion in 2022 (2021: $84.0 billion, 2020: $50.0 billion). Additionally, the U.S. GAAP gross revenue yield is not a good measure because the numerator of the U.S. GAAP gross revenue yield excludes the management fees earned from CIP; however, the denominator of the measure includes the AUM of these investment products. Net revenue yield metrics include the net revenues and average AUM of IGW and CIP. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues to net revenues.

(2)    Performance fees are earned when certain performance metrics are achieved and QQQ ETFs do not earn net revenues. Therefore, net revenue yield is calculated excluding performance fees and QQQ AUM. Passive net revenue yield is calculated excluding QQQ AUM.

Flows

There are numerous drivers of AUM inflows and outflows, including individual investor decisions to change investment preferences, fiduciaries and other gatekeepers making broad asset allocation decisions on behalf of their clients and reallocation of investments within portfolios. We are not a party to these asset allocation decisions, as the company does not generally have access to the underlying investor's decision-making process, including their risk appetite or liquidity needs.

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Average AUM during the year ended December 31, 2022 were $1,452.5 billion, as compared to $1,499.9 billion for the year ended December 31, 2021.

Market Returns

Market gains and losses include the net change in AUM resulting from changes in market values of the underlying securities from period to period. The table in the “Executive Overview” section of this Management's Discussion and Analysis of Financial Condition and Results of Operations summarizes returns based on price appreciation/(depreciation) of several major market indices for the years ended December 31, 2022 and December 31, 2021.

Foreign Exchange Rates

During the year ended December 31, 2022, we experienced a decrease in AUM of $26.1 billion due to changes in foreign exchange rates (December 31, 2021: AUM decreased by $6.3 billion).

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Changes in our AUM by channel, asset class, and client domicile, and average AUM by asset class, are presented below:

Total AUM by Channel (1)

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See accompanying notes immediately following these AUM tables.

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Active AUM by Channel (1)

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See accompanying notes immediately following these AUM tables.

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Passive AUM by Channel (1)

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See accompanying notes immediately following these AUM tables.

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Total AUM by Asset Class (2)

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See accompanying notes immediately following these AUM tables.

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Active AUM by Asset Class (2)

____________

See accompanying notes immediately following these AUM tables.

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Passive AUM by Asset Class (2)

____________

See accompanying notes immediately following these AUM tables.

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Total AUM by Client Domicile (3)

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See accompanying notes immediately following these AUM tables.

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Active AUM by Client Domicile (3)

____________

See accompanying notes immediately following these AUM tables.

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Passive AUM by Client Domicile (3)

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(1)    Channel refers to the internal distribution channel from which the AUM originated. Retail AUM represent AUM distributed by the company's retail sales team. Institutional AUM represent AUM distributed by our institutional sales team. This aggregation is viewed as a proxy for presenting AUM in the retail and institutional markets in which the company operates.

(2)    Asset classes are descriptive groupings of AUM by common type of underlying investments.

(3)    Client domicile disclosure groups AUM by the domicile of the underlying clients.

(4)    EMEA includes U.K. net long-term outflows of $6.1 billion for the year ended December 31, 2022. Ending AUM of U.K. as of December 31, 2022 was $44.4 billion.

Results of Operations for the Year Ended December 31, 2022 compared to December 31, 2021

The discussion below includes the use of non-GAAP financial measures. See “Schedule of Non-GAAP Information” for additional details and reconciliations of the most directly comparable U.S. GAAP measures to the non-GAAP measures.

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Operating Revenues and Net Revenues

The main categories of revenues, and the dollar and percentage change between the periods, are as follows:

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(1)    Total revenue adjustments include pass through investment management, service and distribution, and other revenues and equal the same amount as the third-party distribution, service and advisory expenses.

(2)    See “Schedule of Non-GAAP Information” for additional important disclosures regarding the use of net revenues.

The impact of foreign exchange rate movements decreased operating revenues by $153.1 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021 ($87.6 million increase in 2021).

Our revenues are directly influenced by the level and composition of our AUM. Therefore, movements in global capital market levels, net business inflows (or outflows), changes in the mix of investment products between asset classes and geographies may materially affect our revenues from period to period. See the company’s disclosures regarding the changes in AUM during the year ended December 31, 2022 and December 31, 2021 in the “Assets Under Management” section above for additional information.

Passive AUM generally earn a lower effective fee rate than active asset classes, and therefore, changes in the mix of AUM have an impact on revenues and net revenue yield. In addition, as a significant proportion of our AUM are based outside of the U.S., changes in foreign exchange rates can result in a change to the mix of U.S. Dollar denominated AUM for AUM denominated in other currencies. As fee rates differ across geographic locations, changes to exchange rates have an impact on revenues and net revenue yields.

Average AUM were $1,452.5 billion in the year ended December 31, 2022, as compared to $1,499.9 billion in the year ended December 31, 2021. In addition to the impact of lower AUM, investors continued to shift AUM toward lower yield passive products, such as ETFs, during 2022. As a result, net revenue yield ex performance fees ex QQQ declined from 39.1 basis points (bps) for the year ended December 31, 2021 to 35.5 bps for the year ended December 31, 2022.

Investment Management Fees

Investment management fees were $4,358.4 million for year ended December 31, 2022 as compared to $4,995.9 million for year ended December 31, 2021. The impact of foreign exchange rate movements decreased investment management fees by $127.5 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021. After allowing for foreign exchange movements, investment management fees decreased by $510.0 million as a result of decline in average AUM and lower revenue yields when compared to the 2021 period.

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Service and Distribution Fees

For the year ended December 31, 2022, service and distribution fees were $1,405.5 million, as compared to $1,596.4 million for the year ended December 31, 2021. The impact of foreign exchange rate movements decreased service and distribution fees by $20.9 million in the year ended December 31, 2022, as compared to the year ended December 31, 2021. After allowing for foreign exchange movements, service and distribution fees decreased by $170.0 million. The total decrease is driven primarily by lower distribution fees of $92.2 million, transfer agency fees of $41.3 million and administrative fees of $37.1 million. The decrease is primarily driven by lower AUM to which these fees apply.

Performance Fees

For the year ended December 31, 2022, performance fees were $68.2 million, as compared to $56.1 million for the year ended December 31, 2021. Performance fees in 2022 were primarily generated from real estate, institutional, bank loans and private equity products. Performance fees in 2021 were primarily generated from real estate, institutional products and various institutional mandates in Japan.

Other Revenues

In the year ended December 31, 2022, other revenues were $216.8 million, as compared to $246.1 million for the year ended December 31, 2021. The impact of foreign exchange rate movements decreased other revenues by $2.1 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021. The decrease in other revenues was primarily driven by lower front end fees of $53.7 million which were partially offset by higher real estate transaction fees and other revenues of $13.1 million and $13.3 million, respectively.

Invesco Great Wall

The company’s most significant joint venture is our 49% investment in IGW. Management reflects 100% of IGW's results in its net revenues and adjusted operating expenses because it is important to evaluate the contribution that IGW is making to the business. The company’s non-GAAP operating results reflect the economics of these holdings on a basis consistent with the underlying AUM and flows. Adjusted net income is reduced by the amount of earnings attributable to the 51% noncontrolling interests. See “Schedule of Non-GAAP Information” for additional disclosures regarding the use of net revenues.

Net revenues from IGW were $432.7 million and average AUM was $93.5 billion for the year ended December 31, 2022 (net revenues were $473.5 million and average AUM was $84.0 billion, for the year ended December 31, 2021). The impact of foreign exchange rate movements decreased net revenues from IGW by $16.7 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. After allowing for foreign exchange movements, net revenues from IGW were $449.4 million. The decrease in revenue was primarily due to a change in the mix of AUM and lower performance fees.

Management, performance and other fees earned from CIP

Management believes that the consolidation of investment products may impact a reader's analysis of our underlying results of operations and could result in investor confusion or the production of information about the company by analysts or external credit rating agencies that is not reflective of the underlying results of operations and financial condition of the company. Accordingly, management believes that it is appropriate to adjust operating revenues for the impact of CIP in calculating net revenues. As management and performance fees earned by Invesco from the consolidated products are eliminated upon consolidation of the investment products, management believes that it is appropriate to add these operating revenues back in the calculation of net revenues. See “Schedule of Non-GAAP Information” for additional disclosures regarding the use of net revenues.

Management and performance fees earned from CIP were $49.6 million in the year ended December 31, 2022, as compared to $42.4 million for the year ended December 31, 2021. The increase is due to higher management fees earned from newly launched retail funds.

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Operating Expenses

The main categories of operating expenses, and the dollar and percentage changes between periods, are as follows:

The table below sets forth these expense categories as a percentage of total operating expenses and operating revenues, which we believe provides useful information as to the relative significance of each type of expense.

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(1)    In prior periods, amortization of intangible assets was included in the transaction, integration and restructuring line item. From the beginning of 2021, amortization of intangible assets was presented on a separate line item. There was no impact on operating expenses, operating income or net income.

Operating expenses decreased $375.1 million in 2022 compared to 2021. The impact of foreign exchange rate movements decreased operating expenses by $146.2 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021.

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Third-Party Distribution, Service and Advisory

Third-party distribution, service and advisory expenses include periodic “renewal” commissions paid to brokers and independent financial advisors for the continuing oversight of their clients' assets over the time they are invested and are payments for the servicing of client accounts. Renewal commissions are calculated based upon a percentage of the AUM value and apply to much of the company's non-U.S. retail operations. The revenues from the company’s U.S. retail operations include 12b-1 distribution fees, which are largely passed through to brokers who sell the funds as third-party distribution expenses along with additional marketing support distribution costs. Both the revenues and the costs are dependent on the underlying AUM of the brokers' clients. Third-party distribution expenses also include the amortization of upfront commissions paid to broker-dealers for sales of fund shares with a contingent deferred sales charge (a charge levied to the investor for client redemption of AUM within a certain contracted period of time). The upfront distribution commissions are amortized over the redemption period. Also included in third-party distribution, service and advisory expenses are sub-transfer agency fees that are paid to third parties for processing client common share purchases and redemptions, call center support and client reporting. These costs are reimbursed by the related funds.

Third-party distribution service and advisory expenses were $1,886.2 million for the year ended December 31, 2022, as compared to $2,149.3 million for the year ended December 31, 2021. The impact of foreign exchange rate movements decreased third-party costs by $44.7 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021. After allowing for foreign exchange rate changes, the decrease in costs was $218.4 million. The decrease was primarily due to decreases of $113.6 million in service fees, $59.5 million in renewal commissions, $40.8 million in transaction fees, and $16.1 million in front end commissions, partially offset by $11.6 million of higher administrative and other third-party management fees. The decrease is primarily driven by lower average AUM, partially offset by changes in AUM mix as discussed above. See "Schedule of Non-GAAP Information" for additional disclosures.

Employee Compensation

Employee compensation includes salary, cash bonuses and long-term incentive plans designed to attract and retain the highest caliber employees. Employee staff benefit plan costs and payroll taxes are also included in employee compensation.

Employee compensation was $1,725.1 million in the year ended December 31, 2022, as compared to $1,911.3 million for the year ended December 31, 2021. The impact of foreign exchange rate movements decreased employee compensation by $58.6 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021. After allowing for foreign exchange rate changes, the decrease in employee compensation was $127.6 million. This decrease was due to decreases of $79.9 million in variable compensation as a result of lower revenues in 2022 compared to 2021 and $95.7 million related to mark-to-market losses on deferred compensation liabilities. These decreases were partially offset by an increase of $41.9 million in salaries, staff costs and benefits as well as a $5.6 million increase in deferred compensation expenses.

Headcount at December 31, 2022 was 8,611 (December 31, 2021; 8,513).

Marketing

Marketing expenses include the cost of direct advertising of our products through trade publications, television and other media, and public relations costs, such as the marketing of the company's products through conferences or other sponsorships, and the cost of marketing-related employee travel.

Marketing expenses were $114.9 million in the year ended December 31, 2022, as compared to $98.6 million for the year ended December 31, 2021. The impact of foreign exchange rate movements decreased marketing expenses by $5.0 million. After allowing for foreign exchange rate movements, marketing expenses increased $21.3 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021. The increase was related to increased client events and marketing travel and entertainment costs as travel activity returned to more normalized levels with the easing of COVID-19 related travel restrictions.

Property, Office and Technology

Property, office and technology expenses include rent and utilities for our various leased facilities, depreciation of company-owned property, capitalized software and computer equipment costs, minor non-capitalized computer equipment and software purchases and related maintenance payments, and costs related to externally provided operations, technology, middle office and back office management services.

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Property, office and technology expenses were $539.8 million in the year ended December 31, 2022, as compared to $526.0 million for the year ended December 31, 2021. The impact of foreign exchange rate movements decreased property, office and technology expenses by $16.6 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021. After allowing for foreign exchange rate movements, property, office and technology expenses increased $30.4 million. The increase was primarily driven by increased technology costs including software maintenance costs of $24.7 million related to investments in foundational technology projects that will enable future scale in our operating platform. Property expense also increased by $4.2 million due to higher property and office costs as a result of overlapping rent associated with the move of our new Atlanta headquarters which we expect to complete in mid-2023 and higher outsourced administration costs of $6.6 million, which were partially offset by lower depreciation and other expense of $5.2 million.

General and Administrative

General and administrative expenses include professional services costs, such as information service subscriptions, irrecoverable indirect taxes, non-marketing related employee travel expenditures, consulting fees, audit, tax and legal fees, professional insurance costs and recruitment and training costs.

General and administrative expenses were $380.2 million in the year ended December 31, 2022, as compared to $424.1 million for the year ended December 31, 2021. The impact of foreign exchange rate movements decreased general and administrative expenses by $21.3 million during the year ended December 31, 2022, as compared to the year ended December 31, 2021. After allowing for foreign exchange rate movements, the decrease was $22.6 million. The decrease is due to $70 million of recoveries received during the year relating to losses incurred in prior periods, a $16.6 million decrease in the impact of CIP on general and administrative expenses, and $11.5 million in charitable contributions to the Invesco foundation and other charitable causes in the prior year. The decrease was partially offset by increases of $24.0 million in professional services costs relating to our investment in foundational technology projects, $29.3 million in fund-related client and administrative expenses, $11.5 million in travel and entertainment expenses, and $10.8 million in market data services costs.

Transaction, Integration and Restructuring

Transaction, integration and restructuring expenses include costs related to the acquisition and integration of a business and costs incurred by the company to restructure business operations to improve overall efficiency and longer-term profit, including legal, regulatory, advisory, valuation, professional services and consulting fees as well as costs for travel, severance, temporary staff and contract terminations.

Transaction, integration and restructuring charges were $21.2 million during the year ended December 31, 2022 (year ended December 31, 2021: $65.9 million benefit).

Transaction and integration expense (excluding restructuring) was a benefit to expense of $43.6 million in the year ended December 31, 2022, as compared to a benefit to expense of $186.5 million in the year ended December 31, 2021. The benefit in 2022 was primarily due to $55.0 million of recoveries related to the previously disclosed OppenheimerFunds acquisition-related matter. The benefit in 2021 was primarily due to a $131.1 million reduction to the OppenheimerFunds acquisition-related liability and $100.0 million of recoveries received related to the matter (See Item 8, Financial Statements and Supplementary Data, - Note 18, "Commitments and Contingencies," for additional details).

Restructuring costs were $64.8 million for the year ended December 31, 2022 (year ended December 31, 2021: $120.6 million). Restructuring costs related to the strategic evaluation were $41.0 million for the year ended December 31, 2022 (year ended December 31, 2021: $100.5 million) and are primarily composed of compensation and property, office and technology costs (see Item 8, Financial Statements and Supplementary Data, - Note 13, "Restructuring," for additional details). The remaining restructuring costs are primarily composed of professional service costs related to other initiatives.

Operating Income, Adjusted Operating Income, Operating Margin and Adjusted Operating Margin

Operating income was $1,317.7 million in the year ended December 31, 2022, as compared to $1,788.2 million for the year ended December 31, 2021. Operating margin (operating income divided by operating revenues), decreased to 21.8% for the year ended December 31, 2022 from 25.9% in the year ended December 31, 2021. Adjusted operating income decreased to $1,614.8 million for the year ended December 31, 2022 from $2,182.6 million in the year ended December 31, 2021. Adjusted operating margin decreased to 34.8% for the year ended December 31, 2022 from 41.5% in the year ended December 31, 2021. See “Schedule of Non-GAAP Information” for a reconciliation of operating revenues to net revenues, a reconciliation of operating income to adjusted operating income and additional important disclosures regarding net revenues, adjusted operating income and adjusted operating margin.

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Other Income and Expenses

The main categories of other income and expenses, and the dollar and percentage changes between periods are as follows:

Equity in earnings of unconsolidated affiliates

Equity in earnings of unconsolidated affiliates decreased to $106.1 million for the year ended December 31, 2022, as compared to the year ended December 31, 2021. The decrease is primarily driven by decreases in private equity investments and our joint venture investment in IGW due to lower revenue as discussed above, which were partially offset by an increase in the earnings of the real estate investments.

Interest expense

Interest expense was $85.2 million in the year ended December 31, 2022, as compared to $94.7 million for the year ended December 31, 2021. The decrease is primarily driven by the early redemption of $600 million of our senior notes in May 2022.

Other gains and losses, net

Other gains and losses was a net loss of $139.5 million for the year ended December 31, 2022, compared to a net gain of $120.5 million for the year ended December 31, 2021. The net loss in 2022 included $17.9 million of losses related to the mark-to-market on seed money investments and $132.5 million of losses on investments and instruments held for our deferred compensation plans which were partially offset by $9.7 million of gains on pension and other investments.

Other income/(expense) of CIP

Other income/(expense) of CIP includes interest and dividend income, interest expense, and realized and unrealized gains and losses on the underlying investments and debt owned by CIP. For the year ended December 31, 2022, interest and dividend income of CIP increased by $94.6 million to $374.3 million (year ended December 31, 2021: $279.7 million). Interest expense of CIP increased by $62.5 million to $223.2 million for the year ended December 31, 2022 (year ended December 31, 2021: $160.7 million). The increase in interest income and interest expense was primarily due to higher net interest income earned by the CLOs in 2022. For the year ended December 31, 2022, other gains and losses of CIP were a net loss of $126.9 million, as compared to a net gain of $390.0 million for the year ended December 31, 2021. The net loss during 2022 was attributable to market-driven losses on investments held by consolidated funds.

Net impact of CIP and related noncontrolling interests in consolidated entities

The consolidation of investment products did not have an impact on net income attributable to Invesco for the years ended December 31, 2022 and 2021. The adjustment to net income for the net income/(loss) attributable to noncontrolling interests in consolidated entities represent the CIP profit or loss attributable to third-party investors. The impact of any realized or unrealized gains or losses attributable to the interests of third-parties which is reflected in other income/(expense) of CIP, is offset by this adjustment to arrive at net income attributable to Invesco. Also, the net income or loss of CIP are taxed at the investor level, not at the product level; therefore, a tax provision is not reflected in the net impact of CIP.

Additionally, CIP represent less than 1% of the company's AUM. Therefore, the net gains or losses of CIP are not indicative of the performance of the company's aggregate AUM.

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Income Tax Expense

Our effective tax rate increased to 25.8% for the year ended December 31, 2022 from 21.2% for the year ended December 31, 2021 primarily due to the decline in income attributable to CIP and the change in the mix of income across tax jurisdictions. For additional income tax information, refer to Note 15, "Taxation," in Item 8. Financial Statements and Supplementary Data.

Schedule of Non-GAAP Information

We utilize the following non-GAAP performance measures: net revenue (and by calculation, net revenue yield on AUM), adjusted operating income, adjusted operating margin, adjusted net income attributable to Invesco and adjusted diluted EPS. The company believes the adjusted measures provide valuable insight into the company’s ongoing operational performance and assist in comparisons to its competitors. These measures also assist the company’s management with the establishment of operational budgets and forecasts. The most directly comparable U.S. GAAP measures are operating revenues (and by calculation, gross revenue yield on AUM), operating income, operating margin, net income attributable to Invesco and diluted EPS. Each of these measures is discussed more fully below.

The following are reconciliations of operating revenues, operating income (and by calculation, operating margin) and net income attributable to Invesco (and by calculation, diluted EPS) on a U.S. GAAP basis to a non-GAAP basis of net revenues, adjusted operating income (and by calculation, adjusted operating margin) and adjusted net income attributable to Invesco (and by calculation, adjusted diluted EPS). These non-GAAP measures should not be considered as substitutes for any U.S. GAAP measures and may not be comparable to other similarly titled measures of other companies. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate. The tax effects related to the reconciling items have been calculated based on the tax rate attributable to the jurisdiction to which the transaction relates. Notes to the reconciliations follow the tables.

Reconciliation of Operating revenues to Net revenues:

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Reconciliation of Operating income to Adjusted operating income:

Reconciliation of Net income attributable to Invesco to Adjusted net income attributable to Invesco:

____________

*    Operating margin is equal to operating income divided by operating revenues.

**    Adjusted operating margin is equal to adjusted operating income divided by net revenues.

***    Adjusted diluted EPS is equal to adjusted net income attributable to Invesco Ltd. divided by the weighted average number of common and restricted common shares outstanding.

(1)    Invesco Great Wall: The company reflects 100% of Invesco Great Wall in its net revenues and adjusted operating expenses. The company’s non-GAAP operating results reflect the economics of these holdings on a basis consistent with the underlying AUM and flows. Adjusted net income is reduced by the amount of earnings attributable to noncontrolling interests.

(2)    Revenue Adjustments: The company calculates net revenues by reducing operating revenues to exclude fees that are passed through to external parties who perform functions on behalf of, and distribute, the company’s managed funds. The net revenue presentation assists in identifying the revenue contribution generated by the company, removing distortions caused by the differing distribution channel fees and allowing for a fair comparison with U.S. peer investment managers and within Invesco’s own investment units. Additionally, management evaluates net revenue yield on AUM, which is equal to net revenues divided by average AUM during the reporting period, as an indicator of the basis point net revenues we receive for each dollar of AUM we manage.

Investment management fees are adjusted by renewal commissions and certain administrative fees. Service and distribution fees are primarily adjusted by distribution fees passed through to broker dealers for certain share classes and pass through fund-related costs. Other is primarily adjusted by transaction fees passed through to third parties.

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(3)    CIP: See Item 8, Financial Statements and Supplementary Data, Note 19, “Consolidated Investment Products,” for a detailed analysis of the impact to the company’s Consolidated Financial Statements from the consolidation of CIP. The reconciling items increase net revenues to reflect the management and performance fees earned by Invesco on the CIP, which are eliminated upon consolidation, and remove the underlying revenues and expenses of the CIP that have been included in the U.S. GAAP Consolidated Statements of Income.

The company believes that the consolidation of investment products may impact a reader’s analysis of our underlying results of operations and could result in investor confusion or the production of information about the company by analysts or external credit rating agencies that is not reflective of the underlying results of operations and financial condition of the company. Accordingly, management believes that it is appropriate to adjust operating revenues and operating income for the impact of CIP in calculating the respective net revenues and adjusted operating income.

(4)    Transaction, integration and restructuring related adjustments: The company believes it is useful to investors and other users of our Consolidated Financial Statements to adjust for the transaction, integration and restructuring charges in arriving at adjusted operating income, adjusted operating margin and adjusted diluted EPS, as this will aid comparability of our results period to period, and aid comparability with peer companies that may not have similar acquisition and restructuring related charges. See "Results of Operations for the Year Ended December 31, 2022 compared to December 31, 2021 -- Transaction, Integration and Restructuring" for additional details.

(5)    Amortization of intangible assets: The company believes it is useful to investors and other users of our financial statements to remove amortization expense related to acquired assets net of the tax benefits realized on the tax amortization of goodwill and intangible assets in arriving at adjusted operating income, adjusted operating margin and adjusted diluted EPS, as this will aid comparability of our results period to period, and aid comparability with peer companies that may not have similar acquisition-related charges.

(6) Market movement on deferred compensation plan liabilities: Certain deferred compensation plan awards involve a return to the employee linked to the appreciation (depreciation) of specified investments. Invesco hedges economically the exposure to market movements for these investments.

Since these plans are hedged economically, management believes it is useful to reflect the offset ultimately achieved from hedging the market exposure in the calculation of adjusted operating income (and by calculation, adjusted operating margin) and adjusted net income (and by calculation, adjusted diluted EPS) to produce results that will be more comparable period to period.

(7)     General and administrative: The adjustments in 2022 and 2020 related to the previously disclosed S&P 500 equal weight funds rebalancing correction. The 2022 adjustment removes insurance recoveries related to the fund-related loss. The 2020 adjustment removes the fund-related loss from adjusted operating income and adjusted net income.

(8)     Change in contingent consideration: The adjustments in 2021 and 2020 represents the change in the fair value of contingent consideration liabilities for acquired investment management contracts.

(9)     Impact of income tax rate changes: The company believes it is useful to investors and other users of our financial statements to remove non-cash income tax (benefits)/expense related to the remeasurement of deferred tax assets and liabilities due to enactment of changes in corporate income tax rates.

(10) Other reconciling items: The adjustment in 2020 primarily relates to a tax benefit related to the reversal of an accrual for an unrecognized tax benefit. This benefit has been removed from the company’s non-GAAP results to be consistent with the exclusion of the tax expense for the accrual in a prior period.

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Balance Sheet Discussion (1)

The following table represents a reconciliation of the balance sheet information presented on a U.S. GAAP basis to the balance sheet information excluding the impact of CIP and policyholder balances for the reasons outlined in footnote 1 to the table:

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(1)    These tables include non-GAAP presentations. Assets of CIP are not available for use by Invesco. Additionally, there is no recourse to Invesco for CIP debt. Policyholder assets and liabilities are equal and offsetting and have no impact on Invesco’s shareholder’s equity.

(2)    Amounts include accounts receivable, prepaid assets, property, equipment and software, right-of-use assets and other assets.

(3)    Amounts include accrued compensation and benefits, accounts payable and accrued expenses, lease liability and deferred tax liabilities.

(4)    Amounts include redeemable noncontrolling interests in consolidated entities and equity attributable to nonredeemable noncontrolling interests in consolidated entities.

Cash and cash equivalents

Cash and cash equivalents decreased by $661.7 million from $1,896.4 million at December 31, 2021 to $1,234.7 million at December 31, 2022. See “Cash Flows Discussion” in the following section within this Management's Discussion and Analysis for additional discussion regarding the movements in cash flows during the periods. See Item 8, Financial Statements and Supplementary Data - Note 1, “Accounting Policies - Cash and Cash Equivalents,” regarding capital adequacy requirements in certain jurisdictions.

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Investments

As disclosed in Note 3, Investments, balances comprise largely equity method investments in our Chinese joint venture, seed money and co-investments in affiliated funds, and investments related to the company’s deferred compensation plans.

As of December 31, 2022, the company had $909.2 million in seed capital and co-investments (December 31, 2021: $856.7 million), including direct investments in CIP. Total seed capital and co-investments is presented as a helpful measure for investors and represents our net investment including our net investment in CIP, net of deferred compensation investments, joint ventures and other investments. The following table reconciles the investment balance to the total seed capital and co-investment balance.

____________

(1)    Included in the total seed and co-investment balance as of December 31, 2022 is $305.4 million of seed capital and $603.8 million of co-investments (December 31, 2021: $304.7 million of seed capital and $552.0 million of co-investments).

Assets held for policyholders and policyholder payables

One of our subsidiaries, Invesco Pensions Limited, is an insurance company that was established to facilitate retirement savings plans in the U.K. The entity holds assets that are managed for its clients on its balance sheet with an equal and offsetting liability. The decrease in the balance of these accounts from $1,893.6 million at December 31, 2021 to $668.7 million at December 31, 2022, resulted from net business outflows of $1,038.2 million and negative foreign exchange rate movements of $64.8 million, and negative market movements of $121.9 million.

Liquidity and Capital Resources

Our capital structure, together with available cash balances, cash flows generated from operations, existing capacity under our credit facility and further capital market activities, if necessary, should provide us with sufficient resources to meet present and future cash needs, including operating, debt and other obligations as they come due and anticipated future capital requirements.

Sources of Liquidity by Type

On May 6, 2022, the company completed an early redemption of the $600 million, 3.125% Senior Notes due on November 30, 2022 and successfully managed debt down to $1.5 billion, the lowest level in 10 years. As of December 31, 2022, the balance on the $1.5 billion capacity credit facility was zero.

In the ordinary course of business, Invesco enters into contracts or purchase obligations with third parties whereby the third parties provide services to or on behalf of Invesco. Purchase obligations represent fixed-price contracts, which are either non-cancelable or cancellable with a penalty. As of December 31, 2022, the company's purchase obligations totaled $770.7 million (December 31, 2021: $619.7 million) and primarily reflect standard service contracts for portfolio, market data, office-related services and third-party marketing and promotional services. Purchase obligations are recorded as liabilities in the company's Consolidated Financial Statements when services are provided.

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Capital Management

Our capital management priorities have evolved with the growth and success of our business and include, in no particular order of priority: reinvestment in the business, maintaining a strong balance sheet and returning capital to shareholders longer term through a combination of modestly increasing dividends and share repurchases.

Our capital process is executed in a manner consistent with our desire to maintain strong, investment grade credit ratings. As of the date of our filing, Invesco held credit ratings of A3/Stable, BBB+/Stable and A/Stable from Moody's, S&P, and Fitch, respectively.

Other Items

Certain of our subsidiaries are required to maintain minimum levels of capital. Such requirements may change from time-to-time as additional guidance is released based on a variety of factors, including balance sheet composition, assessment of risk exposures and governance, and review from regulators. These and other similar provisions of applicable laws and regulations may have the effect of limiting withdrawals of capital, repayment of intercompany loans and payment of dividends by such entities. Our financial condition or liquidity could be adversely affected if certain of our subsidiaries are unable to distribute funds to us.

All of our regulated European Union (EU) and U.K. subsidiaries are subject to consolidated capital requirements under applicable EU and U.K. requirements, and we maintain capital within this European sub-group to satisfy these regulations. We meet these requirements in part by holding cash and cash equivalents. This retained cash can be used for general business purposes in the European sub-group in the countries where it is located. Due to the capital restrictions, the ability to transfer cash between certain jurisdictions may be limited. In addition, transfers of cash between international jurisdictions may have adverse tax consequences. We are in compliance with all regulatory minimum net capital requirements. As of December 31, 2022, the company's minimum regulatory capital requirement was $639.8 million (December 31, 2021: $724.9 million); the decrease was primarily driven by the impact of foreign exchange rate movements in the U.K. The total amount of non-U.S. cash and cash equivalents was $755.4 million at December 31, 2022 (December 31, 2021: $1,088.3 million).

The consolidation of $8,934.5 million and $6,590.4 million of total assets and debt of CIP as of December 31, 2022, respectively, did not impact the company’s liquidity and capital resources. See Item 8, Financial Statements and Supplementary Data - Note 19, “Consolidated Investment Products,” for additional details.

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Cash Flows Discussion

The ability to consistently generate cash flow from operations in excess of dividend payments, common share repurchases, capital expenditures and ongoing operating expenses is one of our company's fundamental financial strengths. Operations continue to be financed from current earnings and borrowings.

The following table represents a reconciliation of the cash flow information presented on a U.S. GAAP basis to the cash flow information, excluding the impact of the cash flows of CIP for the reasons outlined in footnote 1 to the table: