Affiliated Managers Group, Inc. (AMG) Q2 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the Affiliated Managers Group Second Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Alexandra Lynn, Senior Vice President of Corporate Strategy and Investor Relations. Thank you, Ms. Lynn. You may now begin.

Thank you for joining AMG to discuss our results for the second quarter and first half of 2014. In this conference call, certain matters discussed will constitute forward-looking statements. Actual results could differ materially from those projected due to a number of factors including, but not limited to, those referenced in the company's Form 10-K and other filings we make with the SEC from time to time. We assume no obligation to update any forward-looking statements made during the call. AMG will provide on its website at www.amg.com a replay of the call and a copy of our announcement of our results for the quarter, as well as a reconciliation of any non-GAAP financial measures to the most directly comparable GAAP financial measures. With us on the line to discuss the company's results for the quarter are Sean Healey, Chairman and Chief Financial Officer; Nate Dalton, President and Chief Operating Officer; and Jay Horgen, Chief Financial Officer. With that, I'll turn the call over to Sean Healey.

Thanks, Ally, and good morning, everyone. AMG reported economic earnings per share of $2.65 for the second quarter of 2014, an increase of 22% compared to the same period last year. Our results for both the quarter and the year-to-date demonstrate consistently excellent execution across our diversified global platform, including the addition of several outstanding new affiliates, the ongoing strong performance of our return-oriented product set and continued outstanding growth from net client cash flows bringing our assets under management to a record $625 billion. As you will hear in a moment, when Jay gives our earnings guidance for 2015, this successful execution of our growth strategy have substantially increased the earnings power of our business. With $7 billion in net client cash flows this past quarter, it marked our 17th consecutive quarter of strong positive net flows with a total of $120 billion in net flows over this period. As in prior quarters, our outstanding organic growth reflects our boutique Affiliates continued excellent investment performance, our strategic focus on alpha-generating products and the ongoing success of our global distribution strategy. Looking forward, we continue to see strong demand from global institutions for return-oriented products. And it is also clear that clients increasingly prefer boutique managers for the alpha portions of their portfolios. AMG has the broadest array of performance-oriented boutiques in the world, and our Affiliates have outstanding long-term investment track records across a wide range of alpha-generating strategies, especially in global and emerging market equities and alternatives. Through our global distribution strategy, we offer clients the benefits of this diverse set of independent specialist managers combined with the scale and efficiency of a global asset management firm with in-market client service and a single point of contact. As Nate will describe further, we are very pleased with the execution of this strategy and, as in prior quarters, we have very significant positive flows in every coverage region this past quarter. As we broaden and deepen our global distribution platform, we are well positioned to continue to generate outstanding organic growth over time. Our strong net flows into return-oriented products stand in sharp contrast to broader industry trends, which include continued and even accelerated fixed-income inflows especially from U.S. retail clients. We remain convinced, however, that this trend will change as Central Bank intervention begins to wane as economies recover and rates inevitably rise. And just as we've been experiencing with the largest institutional clients around the world, we believe that U.S. retail clients will increasingly seek return-oriented strategies especially in global and emerging market equities and alternatives, and will also recognize boutique firms as having a competitive advantage in generating alpha. We are positioned ahead of this title change in client flows with an increased focus on U.S. retail, including new leadership, additional senior-level hires and the rebranding to AMG Funds. There are only a few asset management firms in the world that can match the breadth of our performance-oriented product set, and we believe we have a tremendous opportunity ahead of us to build one of the leading retail franchises in the industry. The successful execution of our global institutional and retail distribution strategy is increasingly enhancing our appeal to prospective new Affiliates. With 4 new Affiliates added thus far in 2014, we are seeing evidence of this effect along with the benefit of our 20-year track record of successful partnerships and the proprietary relationships we have established with leading traditional and alternative boutique firms around the world. Going forward, the transaction environment remains highly favorable for us, and we continue to have a strong and diverse pipeline of new investment prospects. We're confident in our ability to make additional investments in outstanding firms, which will add meaningful accretion to our earnings while also enhancing the diversity and capacity of our performance-oriented product set with excellent, immediately salable products. Looking ahead, with the strength and scale of our existing business and our unparalleled opportunities to partner with leading boutique firms around the world, together with a strategic distribution capabilities we offer to enhance our growth, we look forward to continuing to create outstanding shareholder value going forward. With that, I'll turn it to Nate to discuss our Affiliates results in greater detail.

Thanks. Good morning, everyone. We had another very good quarter, again demonstrating the strength and diversity of our business and the multiple ways we can drive growth. As Sean noted, this past quarter was our 17th consecutive quarter of significant positive cash flows as we and our Affiliates once again executed well and benefited from our strategic positioning. Clients continue to separate their portfolios into passive beta exposures at one end and active alpha at the other, and for the alpha portions of their portfolios, clients worldwide are increasingly attracted to boutiques. For example, in the quarter, we saw significant flows and wins across a broad range of alternative product areas from liquid hedge fund products to illiquid private equity and infrastructure, with multi-strat and credit products also being significant contributors. We also continue to generate significant flows in active global developed and emerging markets equities. Turning to investment performance by category and starting with the global developed markets area. Overall, we had a good quarter with highlights including very strong performance from the global product at Artemis and Harding Loevner, as well as AQR defensive equity products. Tweedy, Browne's major global international products were right around their benchmarks reflecting good stock selection while they were held back by their still significant cash levels. In the emerging markets category, we had a very strong performance. All the major products managed by Genesis outperformed in the quarter and continue to build their exceptional track records. Trilogy had a very good quarter, and a major emerging markets products at Harding Loevner continue to maintain their very strong long-term track records. In our U.S. equity category, we had a mixed-performance quarter. Many Affiliates, including AQR, First Quadrant, SouthernSun, have outstanding performance record across their respective equity products. And while near-term performance at Yacktman continues to be challenged, largely due to their cash levels and defensive positioning, their funds had maintained their first percentile ranking for 10-year and longer periods. Finally, turning to our alternatives product category. Looking across our Affiliate group, AMG is among the largest alternative managers in the world, with our Affiliates managing a very broad array of liquid and illiquid strategies. Broadly speaking, our Affiliates generated good performance in the quarter. This includes best-in-class credit, control equity, currency, energy, infrastructure and private equity products. While it's still early in the year, the combined strong returns -- I'm sorry, the continued strong returns in the second quarter resulted in some performance fees being recognized. Now looking at flows for the quarter. As I said, we had another strong quarter with $6.9 billion in positive net client cash flows. As we emphasized on every call, flows, especially in the institutional and sub-advisory channels, are inherently lumpy. However, overall flow momentum continues to be good. Turning to the channel review and starting with the institutional channel. We have positive net flows of approximately $4.6 billion. These flows came primarily in global and emerging markets products and alternative strategies. Notable contributions came from AQR, BlueMountain, Harding Loevner, Pantheon and Trilogy. Similar to previous quarters, we had a number of great wins coming from leading institutional investors located around the world. Moving to the mutual fund channel. We have positive net flows of $1.9 billion. From a product category standpoint, we had strong net flows into global equities, emerging markets equities and alternative strategies, which came from a number of Affiliates including Artemis, First Quadrant, Harding Loevner and Tweedy, Browne. In our high net worth channel, flows were roughly $500 million for the quarter with contributions coming primarily from BlueMountain, SouthernSun and GW&K, including through our U.S. retail distribution platform. Now turning to an update of our global institutional distribution platforms. We continue to help our Affiliates generate strong flows among a diversified set of products and across geographies with significant flows coming in every one of our institutional coverage regions once again this quarter. In addition, we further enhanced our regional coverage with the addition of another senior sales professional dedicated to the Middle East, a reason why we have built a significant business over the last 5 years. While we continue to evaluate expansion to new regions, we also remain focused on deepening our sales teams in regions where we made good progress and see significant additional opportunities to gain market share. In our institutional coverage regions, we still believe we are in the relatively early stages of capitalizing on extraordinary opportunities. While we've built relationships with the largest pools of capital in our coverage regions, our Affiliates have so far only established client relationships with a subset of those large pools. So there are many more where we can make that first sale. Even where we've established a client relationship with 1 or 2 Affiliates, in almost every case there's a much more significant opportunity to introduce additional products over time from the same Affiliate, additional existing Affiliates and importantly new Affiliates as they partner with AMG. Now turning next to our U.S. retail platform, AMG Funds. As Sean noted, we believe we have an opportunity to build a leading U.S. retail distribution business. As you know, earlier this year, we re-branded the platform and brought on additional leadership. And Jeff Cerutti and his team are just making good progress. Our belief in the long-term opportunity is based in part on a view that demand trends are shifting on our favor as over time clients and their intermediaries must increase allocations to return-oriented products to meet their long-term objectives. We also believe there's a unique opportunity to be the point of contact through which platforms and intermediaries and other channel partners can access the world's broadest array of return-oriented boutiques. Finally, I want to spend a minute on our unique product development opportunity alongside these growing these distribution platforms. For us, creating new product happens together with our Affiliates, and in this regard a number of Affiliates are well known for their product innovation and development. In addition, as we add new Affiliates, each new firm brings an array of products with exceptional track records often with significant capacity to our Affiliate group. At the same time, we bring them the opportunity to offer these established, excellent products through our global institutional and retail distribution platforms. The year-to-date is a very good example of this, when you look at the 4 new Affiliates and their long-term track records in these very attractive product areas, including energy and energy infrastructure, which didn't have before; as well as additional global, emerging and high-conviction U.S. equities. These are outstanding products that are immediately salable through our distribution platform. The addition of these product and product areas will, over time, increase the effectiveness of our global institutional and retail platforms in the marketplace, as we have an even broader array of high-quality boutiques to discuss, which will not only continue to increase our organic growth opportunities, but also ultimately continue to enhance our value as an institutional partner to our existing Affiliates and our position with prospective new Affiliates. All component parts of the virtuous circle that you've heard Sean talk about. More immediately, as we look at the second half of 2014, we see a continuation of the momentum we've had for the last several years as our Affiliates maintain their excellent long-term performance records and as we continue to see strong global demand for performance-oriented products managed by some of the best investors in their respective disciplines. With that, I'll turn it to Jay to discuss financials.

Thank you, Nate. As Sean and Nate discussed, we are pleased with our second quarter results, which reflect our continued outstanding organic growth as well as the strength and diversity of our Affiliates. As you saw in the release, we reported economic earnings per share of $2.65 for the quarter with net performance fees contributing $0.09. On a GAAP basis, we reported earnings of $1.77 for the quarter. Turning to more specific modeling items. For the second quarter, our EBITDA was up more than 22% year-over-year to $212 million, reflecting the continued organic growth of our business and strong execution of our new investment growth strategy. The ratio of our EBITDA to end-of-period assets under management for the second quarter was 14 basis points or approximately 13.4 basis points before the second quarter performance fees I had mentioned earlier. In the third quarter, we expect this ratio to be closer to 13.2 basis points as a result of the closing of Veritas at the very end of the quarter and reflecting the more modest amount of performance fees typically expected in the third quarter. With regard to our taxes, our effective GAAP tax rate for the quarter was 36.8%, and our cash tax rate was 26.7%. For modeling purposes, we expect our GAAP tax rate to be approximately 34% and our cash tax rate to be approximately 25%. Intangible-related deferred taxes for the second quarter were $19 million, and we expect this number to be approximately $20 million for the third quarter. Our share of amortization for the quarter was $29.2 million, including $7.3 million of amortization from Affiliates accounted for under the equity method, and we expect AMG's amortization to remain at approximately this level for the third quarter. Our interest expense for the second quarter was $22.4 million, including $2.4 million of pretax noncash imputed interest expense. For the third quarter, we expect our total interest expense to remain at approximately $22 million, including $2.7 million of pretax noncash imputed interest expense. Turning to our balance sheet. The continued growth and scale of our business has allowed us to execute on 4 new investments in the first half of 2014 while also reducing our leverage. With a run rate EBITDA of more than $1 billion combined with another $1.2 billion of undrawn revolver, we continue to have the capacity and flexibility to execute on new investments, and the scale of our business will continue to create incremental opportunities for earnings growth. Now turning to guidance. We are narrowing our 2014 guidance as we expect economic earnings per share to be in the range of $11.20 to $12.10. With the meaningful run rate impact of recent new investments, we are providing preliminary 2015 guidance, which we expect to be in the range of $13 to $14.50. As always, we assume our normal convention of actual market performance through yesterday for the current quarter and 2% quarterly market growth beginning in the fourth quarter of 2014. We also assume a weighted average share count of approximately 56.5 million for 2014 and approximately 57 million for 2015. The lower end of our guidance ranges include a modest contribution from performance fees and organic growth, while the upper end of these ranges assumes a more robust contribution from both performance fees and net client cash flows. As always, these assumptions do not include earnings from future new investments and are based on our current expectation of Affiliate growth rates, performance and the mix of Affiliate contribution to our earnings. Of course, substantial changes in markets and the earnings contribution of our Affiliates would impact these expectations. Now we'll be happy to answer your questions.

[Operator Instructions] Our first question is from Daniel Fannon of Jefferies.

I guess just a focus on guidance to start. It seems like you took $0.10 off the high end for this year. If you could talk about what's changed. And also thinking about the performance fee, which I believe would be part of that. Then kind of where that stacks up, as you said, in the end of July this year versus where you were a year ago.

Sure. So let me point out several items in the quarter that affects our guidance but maybe then mentioning that we did take $0.10 off the top. We also brought in the bottom or moved the $0.10 up in the bottom, so we narrowed it $0.10 on each side. I guess the first thing I would call out is just the new investments. Dan, just to level set, we had closed 2 new investments in the quarter, EIG at the beginning and River Road at the end. And we also expect, as I mentioned in my prepared remarks, that Veritas will close at the very end of the third quarter. So the 2014 guidance that we're giving first reflects on that timing and the partial year impact of our new investments. I would also note that it's offset by slightly elevated deal expenses since we did 4 deals this year. And that's why, honestly, we're giving the full earnings impact estimate for 2015, and that's why we're introducing it this quarter, a quarter early. I'll just remind you also of just of our model convention. We assume markets up and until this day in the quarter, which will capture 100% of the performance for the quarter, and then we assume no more market performance until the fourth quarter. So since the last time we gave guidance which was set forth, we experienced about 3.5% market appreciation blended across all products. And again since the last time we gave guidance, that was up 1.5% higher than our standard 2% convention. And then the last point, which gets to your performance fee, I think at this point we assume 2014 will be kind of a typical year. So in the range of 5% to 10% of our total economic net income would be in the form of performance fees, which is roughly $0.60 to $1.20, $0.60 to $1.20 for the year. But we've already booked $0.16 year-to-date. So taken all of that together, that's the tightening of the 2014 range. So it's really affirming the midpoint of $11.65, but then we're guiding to 2015 midpoint of $13.75 which is an 18% year-over-year growth rate.

I would just add with respect to performance fees, Dan. As you know, we are very conservative in the way that we think about performance fees and embed them in our guidance, but the track record and the opportunity is very large, and so we're not -- I don't think any different than we were last year at this time. And seeing substantial alpha that's already been generated, performance fees that are -- that we expect, we believe, will be substantial. But it still only a little bit past midway through the year and there's a lot that can happen, and we think that the taking of conservative approach is the right path. But you'll hear it later in the year us talk about more performance fees.

Okay. And just to clarify, so is it safe to say that the deal costs are a bit higher than when you gave us your last guidance? Because markets are up to your point. The deals were already -- all the deal -- there's not an incremental deal from the last time you gave guidance.

Yes. I would note that there is -- it's modest. I mean, we're up 1.5% relative to -- and I'll just clarify. Since April 29 -- I think I was off by a quarter. But since April 29, we're up 1.5% relative to our guidance. That's a modest increase from investment performance. And it is offset slightly by deal expenses. That taken together were just normal, typical performance fee years. It's all in the small dollar category, Dan. It's why we tightened it.

Got it. And then, Sean, just to kind of look at the outlook for new investment activity there. It does seem as if there's just generally more activity obviously with you, guys, as well as the industry. And thinking about the market at the all-time high and trying to be thinking about the value that's out there for deals and how you guys can be disciplined in maybe a little bit more of a competitive environment. If you could kind of just talk about how you're thinking about capital deployment over the next kind of 6 to 12 months.

Clever and relatively novel way of asking me how many deals we're likely to do, Dan. But I think the answer, as always, is that we remain very optimistic. We have a tremendous competitive position. Really better than it's ever been. You're correct that the market environment is favorable. And some firms are in product categories where their assets and revenues reflect a lot of growth, but of course there are other product categories where there hasn't been as much growth. And inevitably, all of our new investments, virtually all of our new investments, arise out of the relationships that we have developed and maintained with the very best boutique firms around the world now over the past 20 years. And it's the opportunity that we see from all of these firms inevitably needing to do some kind of transaction to provide a solution to their succession, transition issues, that gives us the underlying confidence. And over time, while it's hard to gauge in any period, we are very, very confident. You're seeing, as I said, the beginnings of what we believe over the -- certainly over the medium to long term, will be a very substantial set of new investment opportunities. The industry backdrop and competition is relevant but really very much on the margin. Virtually, all of our investments arise out of these relationships and our negotiated transactions. So as I said in the prepared remarks, the pipeline continues. Even though we've had a very good year already, the pipeline continues to be very strong, and we're very busy.

The next question is from Michael Kim of Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: First, can you just give us a bit more color in terms of where you stand on sort of more fully leveraging AMG Funds in the retail channel? And then related to that, was just curious if there's an economic benefit from being able to offer sort of the breadth of your funds across Affiliates through a centralized platform when you're partnering with the distributors.

So I'll take them in reverse order. I think the -- of course, we believe that's exactly right. I think you captured it. So with the largest intermediaries, as well as with sort of regional intermediaries in big networks and independent networks, we absolutely think there's an opportunity to be the single point of contact through which they access a broad array of return-oriented products across a range of packages. And I think especially at the bigger ones, that across the range of packages, it is an important piece to add. So absolutely that opportunity is there. I should mention, just to step back for a second, the AMG Funds platform is really a reasonably large-scale platform, and we have signed agreements in place with all of the large -- well actually we've got over 2,000 signed agreements in place And so we got signed agreements in place with some of these places already and so the opportunity to bring additional products -- moving to the first part of the question, to bring additional product from existing Affiliates as well as to offer to new prospective Affiliates. As they come on line, the opportunity to access that breadth in distribution as well as the breadth in operations, looking at a firm like SouthernSun, you can bring their products right onto our platform. Both ways there's a lot of leveraged opportunity there. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Okay, and then maybe one for Jay. I know guys remained active on the deal front but -- as well as sort of the opportunity set seemingly remains pretty broad. But as cash flows just continue to build, at what point do maybe share repurchases come back into the equation particularly since if you look at -- your EPS growth hasn't really benefited from buybacks to the same extent as most of your peers?

Yes, thanks, Michael. I'll get to your -- to the punchline here in a second. I would note that our EBITDA growth rate has been much higher than our peers, and we continue to grow because of organic growth and because of the execution on new investments. So that's against the backdrop of that. As you know, we position our balance sheet as recently as last quarter and then if you kind of go back 2 or 3 quarters. What we've done here is we've simplified our balance sheet but then we've increased the capacity pretty significantly in front of the new investment opportunity. As you know, we've done 4 new investments already, and as per Sean's comments, we are still very -- we look forward to continue to execute on new investments. So we're positioning our balance sheet to do that to the extent that we are able to do both. I think that's something that we're thinking about. But for the moment, we see a big pipeline of new investments in front of us.

And so if you think of a business with more than $1 billion of EBITDA rapidly growing through a very strong organic growth, and even as we feel that the cash generated from the business over the medium to long term, we see that amount and more in prospective potential new investments. And so we will, as always, be primarily focused on executing new investment opportunities, which build and broaden and diversify our business and create, as we've discussed, this virtuous circle with our distribution capability. But inevitably, there will be periods, because of market volatility or just the accident of fortuity and circumstances, where there aren't new investments that we're interested in pursuing. And so what you will see more of in the future in periods like that is more substantial repurchase. We won't -- as you know, we don't like to just warehouse cash on the balance sheet. We'll stay flexible and advance to new investment opportunities, but you'll absolutely, as Jay said, see more repurchase activity over time.

The next question is from Robert Lee of KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: This question maybe is for Nate or, I guess, Sean as well. But how do you manage kind of the bandwidth and capacity of the global distribution? I mean, you have a lot of growing number of Affiliates, a lot of different products, some of which -- some Affiliates arguably compete against each other in the marketplace to some extent. So how do you actually manage kind of access -- because I assume as you demonstrated success of that, more Affiliates want to make more use of the platform. So how do you kind of control that?

I think there's sort of at least 2 different broad areas to go at this one on. So first, just to back up for a second. So the way we're building our distribution, it's designed to complement each Affiliates standalone distribution, right? So each Affiliate has a distribution capability as they're coming aboard or just a capability, right? And the goal of our distribution is to make appropriate matches. So if -- and I'll move here more into institutional. So what we're doing is, we're educating, right, the end users and intermediaries. We're using deep local expertise. Thus we're hiring very high quality people in the geography to know the client base very well. And on the institutional side, we've been focusing -- and this is a generalization, but they're focusing mostly on the high-end institutional market and the intermediaries who serve them. We're also building institution-to-institution relationships between AMG and those institutions and AMG and those large intermediaries. Now the reason we're able to build those institution-to-institution relationships is because of our breadth, including the fact that we in many cases had multiple high-quality products or product capabilities and things that could simply be looked at as the same area. Again, obviously everyone of them does it differently, but that breadth and that multiplicity of products within areas, this is the thing that allows us to build those institution-to-institution relationships. And so at the end of the -- the end-user and the intermediaries understand that they're hiring the Affiliate to manage the money, right? And so that's -- they're very clear on that. And then they get all the benefits of hiring a boutique which -- as you heard us say on our prepared remarks, there's an increasing acceptance of the advantages of the boutiques in producing the alpha streams. So they're getting all the benefits of hiring a boutique, with many of the benefits of working with a global financial institution, and they understand the advantages of these boutiques operating within AMG. So in the way I just described that process, the breadth is a really strong advantage, not disadvantage. Now obviously, we have to do on our end the distribution infrastructure that we build. You're exactly right, we have to do a very good job making sure that we understand our Affiliate products well and are able to appropriately represent them in the marketplace, and that's a huge area of focus for us. The other thing I'll say is sort of just the next step to it is that breadth is allowing us to build institution-to-institution relationships with many of the largest pools of capital in the world. Then, as I said in my prepared remarks, as we're building those relationships, we are beginning to make those first sales in here. And here's where the big opportunity -- the big sort of medium-term opportunity is. We're beginning to make those first sales. For many, we still have the opportunity to make the first sale. And as we build a relationship and make the initial sale, the opportunity to sort of, I'll use the word, cross-sell. It's not really cross-sell, but the opportunity to cross-sell within that Affiliate to other Affiliates and then to additional Affiliates as they come online is very, very powerful. It's also powerful that institutions are interacting with us, the end users, understand that we're going to be adding new Affiliates. But all of these pieces really do knit together.

And the backdrop, as you know, is one where across the industry broadly active equities and alternatives have not been as much in favor. Certainly, the active equities. And so if you look at 17 straight quarters of positive flows predominantly in return-oriented products, $120 billion in net flows through this period, and yet, as Nate said, we still feel that we're in the early stages of exploiting the opportunity both at the -- in terms of global institutional distribution but also importantly in U.S. retail. So as big as we are, lots, lots more opportunity ahead of us. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: And maybe the follow-up question on distribution. I mean, I know, Nate, I think you talked earlier about product development, and I think your comments are mainly focused on kind of the AMG fund channel. But to what extent, as you kind of expand and broaden your institutional relationships globally, have you been able to kind of take that feedback and help specific Affiliates to develop new products that they've launched and have had some success? Or is it still too early to...

Yes. I would say there is some of that, but it is still early. So again, for us, the -- when we talked broadly about product development, we mean both sort of new products as well as track records that are becoming really scalable and then also the new packages. So if you sort of think about those 3, in the first 2 categories it's still early days, as you say. In the third, this sort of new packages -- and this also relates to the earlier question. In the new packages category, this is a place where -- especially with some of the things we're doing were alternative products or working to do. It gets very early days still, but we're working to do with things like illiquid alternatives in the retail space. These are places where bringing established institutional quality product capability into more retail markets is a very big opportunity for us to do that there. And that's enabled by the scale of AMG and the fact that we're interacting. And that's partly U.S. retail but it's also non-U.S. retail. I mean as -- I think we talked about last quarter, we've begun going into the platform market in Australia. Again early days but there's an opportunity there to bring some very high-quality institutional products including alternatives. And this quarter, we spoke briefly about beginning to do some moves in the Middle East both some smaller institutions but also at the high net worth market, which is going to have a platform component to it as well.

And our distribution strategy informs and enhances our new investment strategy as well as we learn from clients or we see demand -- client demand and opportunities for new products, we in turn can reflect that in the prospecting effort with new Affiliates. And obviously it's a way that we add, as we described earlier, substantial capacity even in product areas where we may already have a presence. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: And maybe following up to the last one and just one more question. I appreciate the patience. Certainly there's no evidence of it given the number of transactions you announced and completed this year. But as you add -- as you got larger and add Affiliates, I mean, is it becoming part of the conversation that some prospective Affiliates look and say, "Gee, where am I going to fit within this 30-odd Affiliate structure?" The feeling that they're going to get potentially lost at all?

Well, I think if you compare it to the alternative, right, other entities which describe a distribution capability but have no evidence and no real ability to in fact effectively market and distribute independent boutique firms products around the world or indeed even in the U.S. retail space. So it's kind of a high-quality potential issue, but I would say it's an issue that we very effectively address in the way that we just described in responding to your prior question. I think, in fact, now more than ever, the distribution capability and the track record, the real track record, of actually selling not just selling the AMG brand and the benefits of the collective and the efficiency of single point of contact and the strategic relationships that we're building with the most important largest institutional clients around the world, but also simultaneously, in a complementary way, selling independent boutique Affiliate products and especially in return-oriented product categories, alternative products and, in many cases, to clients who haven't been big purchasers before. So that demonstrable track record is enormously valuable and increasingly visible. And so is, to the contrary, I would say, actually an even more significant advantage than it's ever been.

The next question is from Cynthia Mayer of Bank of America.

Maybe similar to what you were just answering but in a new way, which is -- if you look at the new investments you've made recently, which is 4 in pretty short succession, if you look at the past acquisitions, what kind of lag time is there between when they join and when you can ramp up their organic growth, either through increased distribution of the products they already have or through new products?

Yes. So, Cynthia, the first part of the question on existing products, there is of course a lag time, but the lag time is small numbers and anecdotal, right, but the lag time is much shorter than I would said it was if you went back a couple of years ago. And it's for a number of reasons, right? So one is we have more resources in more places with deeper relationships, right? So we're just more efficient into understanding hereof. We have more places to go, and our better understanding -- here's the ease with which this product set can go there. We're just -- we've been doing it now longer in more places, so I think we're better at that. I also think -- and this a little bit drives to the point that Sean was making. I think our credibility with the Affiliates, existing and new, is -- since we've now been doing it for a reasonably long period of time with good success, that process of bringing them on board is just a much better more efficient process. So I think we're better bringing the Affiliates along, and I think we're better understanding where the opportunity is in the marketplace. Again that -- those are self-reinforcing obviously. And then in terms of new product, I would say it's still pretty early for me to be able to give you a view of whether that's gotten sort of shorter or not. The conversation certainly start earlier, which again stands reason because we are in more places with better understandings of more market opportunities, and so we're better able to say, "There's a specific opportunity here if you just do this." And again it's obviously always, just to be clear, completely controlled by the Affiliates. We don't have judgment about what -- the return stream that they can and can't generate and how they wish to use their investment process. But we're just in more places and we're better at making that match.

A couple of points to add. First, as you know, Cynthia, in all of our investments, we're investing in firms that are very successful, complete firms generating strong organic growth already. So what we can offer is incremental to the strong growth. I mean, by definition we're not investing in firms where they're not seeing growth, and where they come to us and say, "I need something." We instead invest in firms which are very successful, and inevitably want us above all else, and we're good at this, to make sure we preserve and protect their culture and autonomy and do no harm. But increasingly, they do, as I said -- as you heard us both say, they do see real opportunity. And even in the earliest conversations increasingly with prospective Affiliates, increasingly Andrew Dyson, the head of our global distribution effort, is in the conversation, and we're talking to prospective Affiliates about opportunities that we see based on a very tangible awareness of specific client opportunities and specific opportunities in different regions and channels. And so the conversation about the ability for us to support and complement what the Affiliates, what the prospective Affiliates wants to do begin even before we close investment, and we're again seeing that in some of these investments even this year.

And I guess since you put together -- since you put out a '15 guidance there, should I assume that for your new Affiliates, when you layer them into '15 guidance, you're not adding incremental flows, you're taking their existing organic growth rate and saying, "Let's wait and see on incremental?" Or how do you differentiate...

The answer is, it depends. But we absolutely apply judgment to what we think the forward organic growth opportunity is from alpha generation and net flows, and we've looked at it in the case of each Affiliate.

Okay. And then can you just briefly talk a little bit the earnings dynamics of EIG, because some -- it's a little bit different from some other investments? And should we assume that it's a typical private equity model where you receive management fees on committed capital, but then you get carry at some point? When will you expect carry? And what visibility would we get into that as we go along? Also maybe, could they offer retail at some point?

So just on the sort of the economic profile. It's Jay, Cynthia. So you're right. It is typical private equity style commitments in the main. So that is a period on committed, and then after that it's on what's invested. So you're right about that. Reminding everyone, we are on Method 1 GAAP accounting, so we only experience performance fees when crystallized. So when we report our performance fees, EIG will be in them, and it will only be when we actually get the cash. So that's an important difference, I think, in some cases relative to alternative firms. So it will be in our guidance. It will also just be in that guidance we give for performance fees, which is typically 5% to 10% of our economic earnings per share. Given the recent fund raise that the EIG has done, which is very sizable one, and the dynamic of EIG coming out of TCW and so on, we would expect those performance fee to really come in small amount in 2015 and then after that.

And then maybe to speak to the retail question. So the short answer is yes. I think you've heard us talk about last quarter some of investment that we and [indiscernible] doing together to build the opportunity to build, to bring some of their product set to both the sort of retail market and maybe even also the DC market. So we're building some of that infrastructure. We believe that there's leverage in what we're building there to other Affiliates, and that would include EIG. It would include maybe BlueMountain and [indiscernible]. I do think there's absolutely an opportunity to bring additional illiquid alternative product to the retail market.

The next question is from Brian Bedell from Deutsche Bank.

I guess Jay and/or Sean, if you could just talk a little bit about what you see as your core EBITDA yield run rates excluding performance fees after Veritas is integrated, maybe embedded within your 2015 guidance. And then this is probably hard to answer, but is the variation around that depending on how flows move, are sort of structurally biased for that to improve given what you're seeing in flows across your product set?

Brian, can you repeat the last part of your question again?

Yes, sure, sure. So the core EBITDA revenue yield run rate x performance fees, and then the last part was the variation around that given how you're seeing or how you're expecting net flows to transpire across your business mix? Is it -- are you seeing -- I guess the question is are you seeing stronger potential flows in higher-yielding Affiliates?

Right. So let's -- to your first question, and I'll take you back to the prepared remarks just to clarify, Brian. So we experienced this quarter, and I did carve it out specifically to address this point, while we had 14 basis points EBITDA to end the period. As we have mentioned [ph] 13.4 before performance fees. In the third quarter, we expected that ratio to go to 13.2 and specifically 2 things are happening in that quarter. Third quarter that is 13.2. One, performance fees are very modest in the third quarter typically unless there's positive surprises, because there can only positive surprises with performance fees. So really the third quarter is a pretty close to nonperformance fees run rate. And then you have Veritas coming in at the end of the quarter, and if you look at the difference between our pro forma AUM and our current table, you'll see about $18 billion that's related to Veritas. So you can back that out yourself. So you'll see that our fee rate is pretty much flat in the kind of the 13.2 to 13.4, 13.5 range. That's all very close to the same number when you do the math. And I would just generically say we're not seeing a lot of movement in this ratio so that means that the mix and the blend, which are, I guess, 2 slightly different concepts, but they're producing about a consistent pattern of fees to -- fees and mix to EBITDA. But of course, you understand, Brian, we don't manage to this ratio because the accident of the next incremental Affiliate revenue share will change the ratio in ways that may -- well, that don't -- won't matter to us, because by definition we'll have satisfied ourselves. But it's an excellent firm with all of the requisite attributes of growth and stability in their earnings stream, and what their profit margin or revenue share of margin happens to be won't matter. So we'll give you the forward guidance on a go-forward basis by quarters but we don't do it for future years.

Yes, yes, totally understood. And then maybe just to talk about guidance just quickly. Do I understand this correctly: for the third quarter, we have the market up about 1%, so is your guidance inclusive of the 1% performance in the third quarter? For the market, that is. And then as you're talking about the new pipeline for deals, obviously it's very good. If they don't come to fruition, I think, Sean, you talked about if there's a lull in activity, you would not look for cash to build up on the balance sheet too aggressively and be in the market for buying back stocks. I'm just trying to get a sense of timing on that. For example, if we don't see any deals in the next couple of quarters, would that be soon enough to be back in the market to sort of buy back? Or are you thinking more longer term?

Unfortunately, there's no ready formula that I can give you. It will necessarily depend on the circumstances, and it maybe that we see very substantial opportunities to make new investments just ahead of us, which we won't be able to describe fully. But in that scenario, we might have more cash than from the outside one would expect. I think the commitment and in the track record over time, even in a period where the cash generation of the business was at a much lower scale, is to put cash to work on behalf of shareholders and not to just let it build on the balance sheet. And if you look over time, that's what we've done, and I think over the medium to long term, that's what we will do. And just to your specific question on guidance. So to distinguish between what I said earlier, really since 6/30, so really the last 29 days, we've had very modest appreciation for the quarter. A little bit but modest. And that's all the market assumption we would put into our model. That's our convention. So no more market for this quarter. And in the fourth quarter, we would assume 2% going forward.

Right. And then, of course, just to clarify, the 2015 guidance does not include any use of that capital for buyback either even if there are no deals?

Right. So as especially if this preliminary -- but also as part of our convention, we assume no new investments or material capital deployment.

The next question is from Greggory Warren of Morningstar.

Just a few housekeeping issues here. And pardon me, I jumped in the call a little bit late, so you may have gone over this already. On Veritas, you were looking at about $18.2 billion in AUM at the end of the second quarter, correct?

I think a number like $18 billion is close. There's a little rounding in your numbers.

Okay. Because I think you said $625 billion on a pro forma basis in the release, so I was looking about $18.2 billion, and then you were expecting that to close by the end of the third quarter, correct?

Correct.

Okay. And then just real quick on that and then related to distribution. How much excitement are you seeing around their particular product set in that. I'm looking at this from a more industry level, because when you look at flows overall on the equity side, it's all been passive the last couple of years here with all the money coming in. And the only area where active flows have been strong have been on the global international side of the business. So I'm just wondering what sort of interest there is and the products they're bringing in to bear.

So I think obviously very, very early days preliminary, but they have an outstanding reputation among a wide range of people globally, and that's been fantastic. And then for the people who don't know them, as we begin to talk about it, people are obviously very impressed. I think maybe one just modest sort of broader point, which is -- well, I think your observations are sort of spot on in terms of industry trends. I do think, we have been finding -- and Sean spoke to this earlier, but we have been finding the opportunity to introduce very high-quality performance oriented boutiques with excellent long-term track records and capacity into places, and been able to generate some flows in ways that are counter to the broad trends. But just to answer your question, again it's very, very early days. But obviously there's a fantastic group, and we're obviously very, very pleased that they chose to partner with us.

Good to hear you. And you guys do sort of buck the trend on the other side of the business. I wasn't making an insinuation there. And then, Jay, just real quick, too. I didn't quite catch it during the run-up to the Q&A. You were saying next year's estimates are based on 56.5 million shares, or this year's on 56.5 million and next year on 57 million, correct?

Correct. Those are the average for the year so...

And our final question comes from Chris Shutler of William Blair. Christopher Shutler - William Blair & Company L.L.C., Research Division: So first on the global distribution effort. Sounds like you're certainly very focused on deepening penetration in existing regions, but just curious on new geographies. You mentioned Japan in the past. Just where are you on the thought process there? And is your desire to go after any new geography dependent all on your ability to execute a new Affiliate investment?

I don't think it's dependent on our ability to execute a new affiliate investment. You're right, I think there have been 3 -- sort of focus on the institutional global bit. There's been 3 things we're focusing on. So one is, if you sort of go back in last year, we've been increasing with specialization by country. So sort of Benelux higher, German higher, Swiss higher, those kind of things, yes. And then as you say, we've been looking at deepening our penetration, and we did speak about Australia and this quarter spoke about the Middle East. And it looks like we've already built very strong businesses at scale especially at the high institutional end. And so that's leveraging that brand and much greater awareness of us, our business model and our affiliates in these geographies. And then we continue to look at additional regions. Japan is one that we talked about last quarter, and we continue to work on. We are building relationships institution to institution. Those high-level institutional relationships that we talked about, and we are also having conversations with intermediaries and thinking about both the institutional side and over time the sort of platform side of that market and others. I think we've talked about it in prior calls as both for us looking at the organic opportunities in the markets and looking our existing product set, and where the sort of more short-term specific opportunities are. And then a lot of it is finding the right people and building the right sort of relationships that we can find. The people that we really want to represent our Affiliates in these marketplaces.

Worth underscoring. Not that you're seeing this, but the implication sometimes when you talk about new regions is that somehow there is saturation of the extant regions and coverage, and as you've heard us say to the contrary, we see enormous opportunity in the existing regions. Some of which like Australia and the Middle East are large and rapidly growing. And we know looking at -- on a client by client basis, the extent to which we have ongoing incremental opportunities to build further relationships and deepen those relationships, so that's important to understand. And then secondly, in markets like Japan and U.S. retail has some of the same attributes, and maybe even broadly around the world, that tide of client demand trends, we believe, is increasingly shifting in our favor toward the alpha side of the barbell return-oriented products. And you're seeing that. Maybe are not quite yet seen in U.S. retail the extent to which we think we all will. But you're certainly seeing it in Japan where there's a huge ongoing shift of opportunity into the kinds of products that our Affiliates create. And on an overall basis the opportunity set in the existing areas as well as new coverage areas, new geographies, as Nate said, we're in a very early stages of taking advantage of that. Christopher Shutler - William Blair & Company L.L.C., Research Division: Okay, makes sense. And then just one more. You guys have made some pretty impressive hires in the last few months and just maybe a little bit under the radar. But I wanted to hone in on the hiring of Glenn Earle in particular and just better understand what his role is going to be at AMG?

Glenn is actually not a hire. He's a senior advisor to the firm in a consulting relationship, so a great friend to AMG and someone who is incredibly smart with as broad and an impressive network of relationships as anyone I can think of in the U.K. and more broadly in the industry given his role in a very senior position at Goldman Sachs before coming to join forces with us. But we are as -- you're absolutely right in saying that we've made some great hires, and we know as we continue to build our business, it's one that has an enormous scale opportunity. So we don't have to hire that many people, but our business depends on key people being excellent professionals, interacting effectively with our Affiliates, prospective Affiliates and our clients. And so on an ongoing basis, you'll see us adding more terrific people. And Nate and Jay and I are -- at least we tell ourselves we're still young so we're -- we have a long way ahead of us, but a great team.

Thank you. We have no further questions at this time. I'd like to turn the floor back over to management for any closing remarks.

Thanks again for joining us this morning. As you've heard, we're pleased with our results for the quarter and the first half of the year. We remain confident in our ability to generate meaningful earnings growth both through organic growth and accretive investments in new Affiliates going forward. We look forward to talking to you in October. Thanks.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.