Affiliated Managers Group, Inc. (AMG) Q1 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to AMG’s First Quarter 2015 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Selene Oh, Vice President, Finance and Investor Relations for AMG. Thank you. Please go ahead.

Thank you for joining AMG to discuss our results for the first quarter of 2015. 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 this 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 Executive Officer; Nate Dalton, President and Chief Operating Officer; and Jay Horgen, Chief Financial Officer. With that, I will turn the call over to Sean Healey.

Thanks, Celine, and good morning, everyone. AMG is off to an [Technical Difficulty] with reported economic earnings per share of $2.91 for the first quarter, an increase of 17% compared to the same period last year and record assets under management of $638 billion. Our results reflect consistently strong execution across all elements of our growth strategy, including the addition of five new affiliates and an incremental investment in AQR over the past year, the ongoing strong performance of our return-oriented product set, and continued outstanding growth from net client cash flows. With $5.3 billion on net client cash flows, this past quarter was our 20th consecutive quarter of strong positive net flows, with more than $130 billion in net flows over this period. As in prior quarters, our outstanding organic growth was driven by the excellent investment performance of our boutique affiliates, our strategic focus on alpha generating products, and the ongoing success of our global distribution strategy. While the strength of the U.S. dollar impacted returns in global and emerging market equities during the first quarter, our affiliates specializing in these areas have outstanding long-term performance track records and continue to see significant client demand. In addition, with alternative products contributing over 35% of our earnings, we continue to benefit from excellent investment performance and strong organic growth across a diverse array of outstanding alternative products managed by industry leading firms such as AQR, BlueMountain, EIG, First Quadrant, Pantheon and ValueAct. Through our global distribution strategy, we offer clients the expertise of diverse – of a diverse range of focus performance-oriented boutiques, 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 generated positive client cash flows in every coverage region this past quarter. We believe that the depth of the relationships that we have built with the largest global institutional clients in each of our markets will be increasingly valuable as these clients continue to consolidate and concentrate their active portfolios around a select group of managers and relationships, which offer them a wide range of the highest quality alpha-generating investment products. As we broaden and deepen these strategic client relationships in key markets around the world, AMG is well-positioned to continue to generate strong organic growth over time. With five new affiliates added in the last 12 months and a growing pipeline of potential partners, AMG’s new investment strategy continues to be a material driver of earnings growth. AMG has an unmatched competitive position as the partner of choice to leading traditional and alternative boutique firms around the world. This position has been built through our 20-year track record of successful partnerships and the excellent execution of our global distribution strategy. Going forward, the transaction environment remains highly favorable for us and our pipeline includes a strong and diverse group of traditional and alternative new investment prospects. We are confident in our ability to continue to make additional investments in outstanding firms which would add meaningful accretion to our earnings while also enhancing the diversity of our performance-oriented products set with excellent immediately salable products. Looking ahead, it is increasingly clear that successful execution across our business is creating a virtuous circle. Where outstanding investment results generated by our focus performance-oriented boutique affiliates, supported by our global distribution capability, enhances our relationships with clients around the world, which in turn makes us a more attractive partner to the best perspective affiliates. Finally, the growing strength and scale of our business and the substantial earnings and cash flow that AMG now generates gives us increasing capacity to invest in new Affiliates, while also returning capital through share repurchases, providing an addition – an important additional component to our long-term shareholder value creation. With that, I will turn it to Nate to discuss our affiliate results in greater detail.

Thanks. Good morning, everyone. As Sean said, we had a strong quarter to start the year, as we are continuing to benefit from several trends we have discussed on the prior calls; First, the growing realization, especially by sophisticated clients worldwide that boutiques have a competitive advantage in generating excess returns in many product categories. Second, the continued barbelling of client portfolios into a portion designed to gain data exposures on one side and a portion to generate excess returns on the other. These trends benefit many of our affiliates. And in the first quarter, we generated over $5 billion in net flows and what was our 20th consecutive quarter of strong growth, totaling over $130 billion in net flows during this period. While AMG includes a broadest array of return into boutiques in the world, including U.S., global and emerging markets equities, I wanted to spend a minute focusing especially on our alternatives business, which as Sean noted, makes up a significant portion of our earnings. Our alternatives business includes a diverse management fee component with many of the products uncorrelated to each other and the rest of AMG. So we pick up some good diversification away from equity market betas. In addition, as you all understand, many of these products include performance fee opportunities that are also very diverse, uncorrelated and of course positively asymmetric, so it can’t go below zero. Alternatives continue to be an area of particular strength, certainly from the standpoint of growth, but also innovation. You can think about our alternatives exposure across a couple of dimensions. First, dividing the group into categories, a portion that’s market beta plus alpha on the one hand and a portion that’s more absolute return on the other and we have significant and evolving exposure to each. Second, we often describe our alts business along liquidity spectrum. We have a number of affiliates who have build significant, stable and long duration capital, while other affiliates have really led some of the trends into liquid alternatives. From a product standpoint, as the alternatives business continues to evolve, we are very well positioned with our existing group of affiliates with outstanding products that have strong, long-term track records in areas such as private equity, infrastructure, energy, private debt, activist, multi-strat, relative value, managed features and long-term equities managed by firms such AQR, BlueMountain, EIG, First Quadrant, Pantheon and ValueAct, truly the leading firms in their respective areas. This is obviously, a very dynamic part of our business and entrepreneurial focused firms such as our affiliates are very well positioned to generate significant growth going forward. The long-term track records of many of the largest products in our alts category are very good and that continued in the first quarter, including especially at AQR, BlueMountain and ValueAct, while EIG took advantage of some of the volatility in the energy sector this past quarter putting several billion dollars in capital to work. Continuing with performance and the global developed markets category, our affiliates generally had good investment performance with highlights for the quarter including the major global equity products at AQR, Artemis and Harding Loevner. These products have outstanding performance records across the longer term periods as well. In the emerging markets category, performance was more mixed as the products managed by Genesis, Harding Loevner and AQR underperformed the benchmarks in the quarter, however long-term performance records remained very strong. Finally, with respect to our U.S. equity products, performance was also mixed with GW&K, Tweedy Browne and Yacktman underperforming while Systematic and River Road performed quite well during the quarter. Frontier also delivered very strong performance in the quarter and across longer time periods as well. Now turning to flows for the quarter. As I said, we had another good quarter with $5.3 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, as you saw in our results, flows were broadly disturbed across channels and diverse in terms of product category. Starting with the institutional channel, we had positive net flows of approximately $2.9 billion. Positive flows came primarily in alternative strategies and global equities, including notable contributions from AQR, BlueMountain, EIG, Harding Loevner and ValueAct, which were partially offset by outflows in U.S. equities. In our high net worth channel, we had positive net flows of $1 billion with meaningful contributions from GW&K, Harding Loevner and ValueAct. In addition, we closed our Wealth Partners investment in Baker Street at the beginning of the month. I’d like to welcome them onboard and we look forward to their contributions. Out Wealth Partners business now includes four outstanding firms that were $25 billion in AUM. Moving to the mutual fund channel, we had positive net flows of $1.4 billion. The bulk of these flows were in global and emerging markets equities and alternative strategies and came from a number of affiliates, including especially AQR, Artemis, Harding Loevner and Tweedy Browne. Turning to our U.S. retail platform, AMG Funds, the team there is making good progress continuing to diversify the product and distribution relationships. However, that part of our business has a very significant exposure to active U.S. equities, which as everyone knows have been out of favor with investors resulting in outflows. Looking ahead, we are optimistic about the opportunity we see to continue to build a world class U.S. retail distribution platform for our affiliates. And especially, as retail clients and the intermediaries to serve them ultimately need to reallocate to return-oriented managers in order to meet their liabilities. As I indicated earlier, this is also an area where we can help some of our more institutionally focused alternative firms’ access additional pools of capital. Finally, in terms of updating you on our global institutional distribution platforms, we continue to help our affiliates generate strong flows among a diverse set of products and across geographies. During the quarter, we added another senior Korean distribution professional to the team in Asia. We continue to make good progress opportunistically adding resources to our existing platforms and remain focused on evaluating additional channels and regions as we look to bring outstanding boutique products to new areas, leveraging the traction, brand and reputation we have built. With that, I will turn to Jay to discuss the financials.

Thank you, Nate. As Sean discussed, our financial results included another quarter of outstanding organic growth and together with a run-rate effect of our new investments, our first quarter results reflect significant year-over-year growth and the increasing scale of our business. As you saw in the release, we reported economic earnings per share of $2.91 for the first quarter, an increase of 17% year-over-year, with net performance fees contributing $0.04. On a GAAP basis, we reported earnings per share of $2.28. Our GAAP earnings for the quarter included a non-cash imputed interest gain related to the reevaluation of our contingent payment obligations. Excluding this item, our GAAP earnings for the quarter would have been $1.96 per share. This non-cash item had no impact on our economic earnings per share. Turning to more specific modeling items, for the first quarter, our EBITDA increased 15% year-over-year to $221 million, reflecting the continued organic growth of our business and the impact of our 2014 new investments. In the first quarter, the ratio of our EBITDA to end of period assets under management was approximately 14 basis points or approximately 13.7 basis points excluding performance fees. In the second quarter, we expect this ratio to stay flat at 14 basis points. With regard to our taxes, our effective GAAP tax rate for the quarter was 34.1% and our cash tax rate was 16.5%. For modeling purposes, we expect our GAAP tax rate to be approximately 34% and our cash tax rate to be approximately 22%. Intangible related deferred taxes for the first quarter were $20.4 million and we expect this number to increase to approximately $20.7 million in the second quarter. Our share of reported amortization for the quarter was $29.8 million, which includes $8.8 million of amortization from affiliates accounted for under the equity method. We expect our share of amortization to be approximately $30 million for the second quarter. Our share of interest expense for the first quarter was $22.2 million. And for the second quarter, we expect our share of interest expense to increase to approximately $23 million, reflecting the full quarter effect of our February bond offering. Our share of pre-tax non-cash imputed interest expense for the first quarter, excluding the contingent payment gain of $29.8 million, would have been $2.6 million. For the second quarter, we expect our pre-tax non-cash imputed interest to decline to approximately $2 million. Turning to our balance sheet, the excess cash flow generated from the increased scale and diversity of our business continues to provide us with significant capacity and flexibility to execute on both new investments and share repurchases. Since the beginning of 2014, we have invested over $1.3 billion in new and existing affiliates and executed approximately $390 million in share repurchases, including $150 million in the first quarter of 2015. Even with this record level of capital deployment, we were upgraded by S&P and received an A3 rating from Moody’s. In February, we increased – we further increased our balance sheet capacity by issuing a $350 million 10-year senior bond at an attractive rate. And combined with our $1.25 billion revolver and run-rate EBITDA of over $1 billion, we continue to be well-positioned to create incremental opportunities for earnings growth. Now, turning to guidance, we are raising our 2015 guidance as we expect economic earnings per share to be in the range of $13.10 to $14.35. This guidance reflects substantial year-over-year growth in earnings of 20% at the midpoint of our range. We also assume a weighted average share count of approximately $55.5 million for the year. This guidance assumes our normal model convention of actual market performance through yesterday for the current quarter and 2% quarterly market growth in the third quarter of 2015. In addition, to reflect the potential earnings impact from our substantial cash flow, we are updating our model convention to assume 50% of economic net income will be used to repurchase shares beginning in the second quarter of 2015 and thereafter. As always, the lower end of our guidance range includes a modest contribution from performance fees in organic growth, while the upper end of the range assumes a more robust contribution from both performance fees and net client cash flows. These assumptions do not include earnings from future new investments and are based on our expectations of affiliate growth rates, performance and the mix of affiliate contribution to our earnings. Of course, substantial changes in markets and earnings contribution of our affiliates would impact these expectations. Now, we will be happy to answer your questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Bill Katz with Citigroup. Please go ahead with your question.

Okay, thanks so much. So, actually, a two-part question, so I am going to cheat. Sorry to do that. So Jay, you mentioned just now that 50% of ENI is going to go to be purchased. So, I guess the first part of the question is why wouldn’t the share count then drop a bit more noticeably? And then, Sean perhaps for yourself I think one of the sticking points on the stock is the perception that a pickup of repurchase either precludes or slows down structurally the opportunity to grow through acquisitions? So, I am wondering how you can maybe answer that observation as well?

Those questions are actually linked. So, I think we will allow you to have two.

Thanks.

Okay. Hi, Bill. So, the reason for the muted impact really is that we are in May or almost in May and this convention is to – the convention would be that the ENI is applied to the – later in this quarter to repurchases. So, while it will have a modest impact on 2015 because of the weighted average impact of a full year of outstandings, the cumulative impact would have a greater impact on 2016.

Okay.

And to answer your question, the second part of your question, the convention is just that. It’s a guidance convention. It is a way for us when we are giving guidance, which I will say contextually as you all know we are the only firm in the industry that still gives guidance, but in trying to give you as meaningful a sense of the forward investment opportunity without as you also know ever including the impact of new investments in our forward guidance. There is a need now given the scale and earnings power and cash flow generation of the business to account for the $800 million plus and growing of cash that the business generates, which we will put to work. If we want to and expect to have a long track record of putting that cash to work and investing in new affiliates, but given the scale of the cash flow, given the inevitable variability and the timing of new investments, we also expect as you saw last year to be making increasing share repurchases so that the cash that the business generate doesn’t just build up and isn’t put to use to generate value for shareholders. So the clear strategy and expectation is that we will invest the cash in new affiliate investments. But as a forward-looking guidance convention, this is a way for us to incorporate at least a portion of the cash that the business generates into the forward earnings expectations. But it is a guidance convention and nothing more.

Okay, that’s very helpful. Thank you.

Our next question comes from the line of Michael Kim with Sandler O'Neill. Please proceed with your question.

Hey guys, good morning. So in terms of flows, you obviously have been able to consistently generate amongst best in class organic growth over the last several years, but and I think a chunk of that growth has been sourced from obviously, increasingly tapping new regions via the global distribution platform. So just wondering how you might sort of frame the non-U.S. growth opportunity today versus a few years ago when you were just getting started, just trying to understand the opportunity set as it stands today relative to the past?

Nate?

Great. So thank you for the question. So just everybody understands fundamentally, we think there is still a very, very significant opportunity ahead of us. And I would say a significant and evolving opportunity. So if you sort of rollback as you did, the initial opportunity was bringing and marrying excellent performance around boutiques into markets and regions, geographies and channels where they weren’t and beginning to make those sales. And I think in a lot of – in many regions we have done a good job of that. And there is still opportunity to grow there, but we have done a good job of making that initial penetration and bringing some of those products to market. Obviously, as new products are developed and also importantly as new affiliates come online, more opportunity to bring those products to market. The next stage of it is, I would say sort two things, right. So one is the opportunity to diversify by channel within regions we have already gone to. And then there is also a very large opportunity which we are just beginning to diversify within relationships we have built. And so with end users, large scale institutions and intermediaries in these markets, we have now sort of made those initial sales into – we have begun coverage of them. We have made the initial sales into a subset we have the opportunity to continue to deepen into the ones we haven’t made the sales to. But really importantly, we are now engaged in the conversation, a client service conversation with some of the largest, most sophisticated institutions around the world and the intermediary to serve them. And that opportunity set, you could serve crudely think of it as cross sell, but that opportunity set to cross sell within the existing affiliate base and then obviously as new affiliates come on, that’s an enormous opportunity. And we are just at the very early stage of that.

And it fits within a broader trend that I described in my prepared remarks, which is an increasing concentration among these very large pools of assets. You have ironically the largest pools of assets think the large sovereign wealth funds and other similar client entities. Their assets are rising and simultaneously they are trying just for efficiency purposes to shrink the number of providers especially on the alpha side of the barbell. So we think that the power and benefit of the relationships that we built and are still building in regions like while Korea, we announced a new hire and there are other important regions around the world like Japan, where we are still not – we still don’t have a major presence. So still building the platform, but the position that we have got is one that we think gives sustainable strength and opportunity going forward.

Got it, okay. Thanks for taking my question.

Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.

Thanks. In terms of kind of new activity in terms of the investment side, it seems like the backdrop and environment for activity has been good for a long period of time or at least for the last 12 months and you guys have deployed a lot of capital. But just wondering maybe if you could maybe give some nuances or details of how you would characterize any differences today versus maybe the start, kind of first quarter last year or if it’s relatively been similar in terms of either the pipeline, in terms of the size or just the macro factors that may be determining timings of when things could or couldn’t happen?

It’s a hard question to answer because if you look back a year ago, there had been some market volatility that we don’t really have today. And going forward, there will be a different macro environment that will inevitably impact to some extent the timing of transactions and that’s just very hard to gauge. There also are always idiosyncratic considerations that are very hard to predict exactly [ph] among prospective affiliates. What would I say about the market generally, I think it’s there is probably a little less activity across the industry. We are very busy, mainly with succession oriented transactions. There are a few third party sales. All of those by the way end up being a little more difficult to manage and gauge from a timing standpoint because the succession transactions can – they will take what they take and there is not a banker driven process typically that’s managing the transaction along a certain time line. So that being said, we strongly prefer these kinds of transactions because they are typically rising out of proprietary relationships and we get to know the firms better than we would or could in a process and the converse is true, of course. I would say the pipeline is – our pipeline is skewed more non-U.S. and more alternative than it would be normally. And then the other thing I would say, if you would look at the largest prospective affiliates, the 150 core prospects that we have been talking about, the thing that is striking, notwithstanding all of the transaction activity that has occurred in the industry and including substantially by us, is that so much of it is yet to come. And there is inevitability about forward transaction activity for the simple reason that the partners who have founded and built these firms have generated, created enormous wealth and value and the equity of their firms. And in some cases, they will transition that to a next generation in their own family. But in almost all cases, they are looking to have a succession solution which in part, of course involves transitioning equity to the next generation, but also involves a measure of liquidity and a state planning for these senior partners and so all of that – not all of that, a big – the biggest portion of that forward opportunity is yet to come. So we look at the next 5 years to 7 years. And at current asset levels, the investable opportunity for us, meaning not the total enterprise value of these 150 firms, just the value the transaction value to us is over $40 billion. And so I would look at that, the size of that opportunity and I think what our expected market share will be. And as you can imagine, we are very optimistic and enthusiastic about that opportunity.

Great, that’s helpful. Thank you.

Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.

Good morning. Thanks for taking my question. Jay, if could you just elaborate a little bit more about the guidance, what portion of the increase is due to the new convention of the share repurchase. And then if you can comment on the market return assumption for April that you are using?

Okay, I will, Brian. So, let’s maybe just at a high level, there is a couple of things going on in the new range of $13.10 to $14.35 reflects these items that all sum up to a net positive. The items include mark to market since our last call, the full year impact of the interest expense from our February bond offering, the impact of share repurchases in the quarter which were offset generally by elevated option exercises. And then finally, this model convention update. And I think there, as I mentioned muted impact this year, but positive and then a more significant impact in ‘16. On the beta question, what we have experienced so far since the last call, so just reminding everyone of our normal model convention, which we gave last on January 27, we assumed zero markets for the first quarter and 2% for the second quarter and then obviously, 2% thereafter. Since then, our blend was approximately 4% across all of our products. As a result, that’s 2% incremental to our normal model assumption. Approximately half of that was offset by the incremental interest expense on the bond. And then when you think about the capital deployment update on top of that, that would be a small net positive for the year, because we won’t start later this quarter and the averaging effect on our share count leads us to approximate our share count for the year at $55.5 million. The other thing I wanted to note in the guidance is just on performance fees, as Nate had mentioned, against the backdrop of continued flows and alternatives, the performance fee has increased – the performance fee opportunity has increased modestly as a percentage of our earnings. We continue to say we can’t go below zero. We still think that 5% is kind of a minimum level, but because of the opportunity set in a typical year you could see us go a little above 10%. And I think I mentioned this last quarter, at the top end of our range, we could see a little extra performance for you this year.

Great, thanks very much.

Our next question comes from the line of Chris Shutler with William Blair. Please proceed with your question.

Hey, guys. Good morning.

Good morning.

On the global distribution effort, just curious to what extent the flows that have you been seeing are coming from existing clients versus the new? I am sure it’s a mix, but just help us think about the size. Thanks.

Sure. So, there is no question it’s a mix. Probably, the best way to think about it is some of the – we talked about institutional flows being lumpy. One place that lumpiness definitely expresses itself is the high end of what’s going on in global distribution. And we have built some significant institutional relationships, where we are now able to really going to answer I guess the earlier question we are now able to really cross-sell in. That said, by number of mandates, it’s still more – it’s still much more new – much more, it’s still more new relationships. The other thing I would say and I think we have said before, it’s tough to also now, just with the overall growth, it’s tough to also think about it, global distribution versus affiliate driven, because now given the breadth of relationships we have, there are many places where even though the affiliates driving the process and it really is their process. At a senior level, we have a relationship with the institution, among the biggest institutions in the world, where we have built senior relationship with the intermediary, because again we have to not build relationships with them really all around the world. And so even where it’s really not so much driven by our global distribution team specifically, there is leverage in it across much of what’s going on. And then obviously, the opposite is true too, which is even where it’s sort of introduced through our global dissolution relationships, you can think of these institutional sales as having 15 or 20 kind of touches from inception through close. And even where our guys are playing critical roles, all of these sales really are affiliate sales. And I mean our affiliate sales – the clients are hiring, the affiliates manage them on their end.

Sure. It makes sense. And then just one more on different topic, the AMG Funds platform, just for these alternative firms, just curious what types of products you are at least in discussion to rollout and how should we think about – how much of it is kind of like more liquid alts versus less liquid types of products? Thanks.

Thanks. So, to your second question, so it’s across the range is the answer. It’s much easier to sort of think about the launch of the liquid alts funds. The background is much more well trod, but we are doing some very interesting work with affiliates. Think of a firm like Pantheon doing some very interesting work with firms like that bringing illiquid alternatives into the retail market, including bringing them down market in kind of 40 act fund format and also thinking about ways to bring that product set, whether it’s the PE products or the infrastructure products into DC as well. So, we are doing – there is lots of very interesting work going on at both ends. Again, the ground is much more sort of well trod on the liquid alts side, but I think there is – we think there is a very big opportunity to marry the scale of the retail platform you have got already with excellent alternative boutiques and allow them to access the retail marketplace.

Alright, thanks a lot, Nate.

Our next question comes from the line of Robert Lee with KBW. Please go ahead with your question.

Thanks. Good morning guys.

Good morning.

I guess my two questions. The first one I am just curious in looking at the balance sheet, can you just update us again on kind of where things been with the ability to continue to kind of refinance some of the debt of the balance sheet and the convert when that kind of comes I guess callable down the road. So, does it help us frame that opportunity?

Sure. On the balance sheet, we did do a financing in the first quarter. It was a $350 million, 10-year at 3.5%. We used the proceeds to repay our revolver, which really just basically increased our capacity. Clearly, with our revolver almost completely un-drawn at this point with our over $1 billion of EBITDA, we have a lot of capacity to execute on our new investment pipeline. And so that’s the setup of where we are today looking forward on opportunities to refinance, clearly the convertible which has a dilutive effect, because it’s in the money. We can take that out at $260. And we took two convertibles out in the last two years. So, we do have a history of doing that. I think we will look to see what the lowest cost of financing is at that time, but presumably it will be the long-term debt markets. We also have two other long-term tranches of debt that we issued before we got upgraded to A3 by Moody’s. And so those are opportunities to lower our cost of capital. So, we do actually have a real good opportunity over the next couple of years to lower our cost of capital by refinancing the securities.

Okay, thanks. And then maybe a question for Sean, just kind of curious, I mean, you mentioned the pipeline of perspective transactions skewed in part to non-U.S. entities. And just kind of if I think about markets outside the U.S., I guess they are not often thought of as being having as many entrepreneurial boutique managers maybe as you have had in the U.S. So, I am just kind of curious kind of what’s really changed when you look outside the U.S.? Is it just kind of more of those boutiques grew up and aged or is this kind of – I was just trying to get some feel for what’s really changed outside the U.S. to kind of grow that pipeline so much?

Hard to give an answer, because every geography is a little different, but it is I think, the ongoing evolution and development of the asset management industry, which has at the – on the alpha side of the barbell, in terms of the alternative firms or alpha-oriented equity managers has an entrepreneurial element that is remarkably similar across very broad geographies. Sometimes, we will meet firms with – that can be literally very different continents away from each other. And they will say the same things about the way they think about the importance of serving clients, building long-term – well, building an enduring franchise, the passion they feel about the next generation and making sure they have the same opportunity. And of course, inevitably, these firms are collections of people. So, you shouldn’t generalize too much, but excellent firms have risen up all over the world. And for us, the opportunity to partner with these firms is assuming of course that they are all at the same very high level of quality. So, you are partnering with excellent firms who are in very different markets with a different perspective perhaps in the way they invest certainly with a more diverse client set. And I guess the thing I would say cutting across geographies and true for U.S. based firms, European firms as well, but especially true for firms that are a more far-flung regions in Asia and South America and other parts of the world, the power of our global distribution platform is increasingly important. It is often the first thing that perspective affiliates are asking about. Inevitably, it is very distinguishing from other entities that would seek to invest in them. We have built uniquely, I would say purpose built a distribution capability for – that supports the distribution – the marketing and distribution of independent boutique firm products all around the world and as Nate and I have been saying with very strong relationships with some of the most important rapidly growing clients around the world. And so that capability is something that these firms appreciate and value. And of course, all of the other elements of a partnership are incredibly important and things that ultimately we would come to. But the power of the distribution capability is something that I think is contributing to the outreach that we are seeing. And of course, the last thing I would say is we are a very global business and we spend a lot of time on the road, all of our senior executives and our new investment team, building relationships with firms in places that are often hard to get to, but include some of the most excellent firms in the world.

Great. Thanks for taking my question.

Thank you. Our next question comes from the line of Michael Carrier with Bank of America. Please proceed with your question.

Hi. Thanks guys. Jay, just I guess a follow-up question, not I guess on the guidance but more on the new strategy with the cash flow. So at first, I understand what you are saying this year that you don’t see kind of the big reduction in the share count, but just curious, given where the shares are now and where your expectation is for the year, it seems like it’s pretty close, so I just wanted to understand what else is going on, on either equity grants options that might be impacting that. And then if we think about 2016, based off 50% of ENI, it looks like that would lower your share count, maybe around 3% and that’s a gross basis. So just wanted to know when we think about equity issuance, what’s kind of the net basis going forward. And then last part of this is just when we think about 50% of ENI, that’s probably a lower percentage of cash flow or EBITDA, so it seems like the focus is still on the acquisitions and growing the business. But I just wanted to make sure I understood that correctly just because the EBITDA number is obviously much greater than the ENI number?

Yes. Thanks Michael. You actually were tracking it all quite nicely, honestly. So let me see if I can – I am going to say some of the things you just said back to you, but start from the end. The 50% ENI, you are right, we do have more cash flow than that. It’s modest, but we do have more cash flow. It is just a convention, so I want to make it clear, the actual activity for capital deployment will depend on the circumstance of the quarter, the period that we are in. So this is just a convention. So against the backdrop of that convention, I guess I will answer your questions, which is going to the ‘16 number, you are more or less right when you take the economic net income. And remember that we receive our cash flow in a quarter after we book it, so it comes in the next month. So if you are just taking the first quarter, half of that and applying to the second quarter and then keep growing it forward, you are going to get to more or less that 3% number in 2016. This year, because of course, we can’t start buying until after our earnings call, you are going to get a muted effect because it’s going to be to back half of the second quarter, the back half of the third quarter and the back half of the fourth quarter and because we have already got $55.7 million booked in the first quarter to get down below $55.5 million, which we anticipate doing by the end of the year. The weighted average impact of that’s going to be $55.5 million. There is going to be some option creep if you assume an increasing share price if you just keep a constant multiple. For example, it is modest but it does provide some drag to that number. So that does explain when you run your model, you will need to include a modest amount of shares, both from the options and the convertible. So I think you accurately described all of the different elements of it. And hopefully, I answered it.

Yes. At the risk of repeating something everybody understands, I think we are quite – we think it’s quite important that no one confuse the introduction of a new guidance convention with any change to our business strategy. The business strategy is to return to – well, the most important and first priority on the cash that the business generates and obviously capital that we can readily raise is to invest in outstanding new affiliates which enhance and diversify our business, both in terms of the earnings contribution as well as the product diversity, which supports and enhances our client relationships and distribution capability as well. So that, as you all know is the first priority. And we will, in a year where we see opportunities that are in excess of the cash flows that the business generates, invest all of that cash flow and raise additional capital, debt or equity to support the new investment effort. And as I said earlier, we see that as a very, very large opportunity that is enduring, looking out given the number of excellent boutique firms around the world and the strength of our competitive position and the quantity of the relationships we built with those firms. Inevitably, there will be periods just given the variability of investing activity. There will be periods where, let’s say, we don’t make any investments in a given year. We would invest – we would put to work, repurchase substantially all of the cash that the business generates. So in no scenario where will the guidance convention likely be something that we actually followed. But as we indicated, we think that the scale of the business is such now and the magnitude of the cash generation is such that – and it’s a little bit crept up on us. We are a much larger firm now than we were even a few years ago. And so not taking account of the $800 million in cash that the business generates, which is growing hopefully, will distort or understate by a lot the value that we think we are going to create for shareholders. And so this is just an attempt to illustrate that, but no change to the underlying business strategy.

Okay, that’s helpful. Thanks a lot.

Our next question comes from the line of Patrick Davitt with Autonomous. Please proceed with your question.

Hi, good morning guys.

Good morning.

If we look 2 years or 3 years ago, you could probably say within this kind of multi-affiliate world, you guys were kind of the only game in town on the investment front. And when we look at the environment now, Legg Mason has become more active, OMAM is restructured and looking to do deals, Natixis has indicated they want to be a lot more aggressive, are you starting to see that creep into pricing or your discussions at all now that it does look like the multi-affiliate world is a little bit more competitive for new investments?

No.

No. Okay.

I think to give more context, we have been doing this for more than 20 years. Obviously, some of the entities that you identify have been around for even longer than we have. And so if you look over that 20-year period, there has been competition throughout. I suppose there was a period immediately after the financial crisis where there were far fewer buyers, but there weren’t a lot of sellers then. And so I am not sure that was an environment that you would – you could extrapolate from. But in the main, excellent firms will have opportunities to sell or partner with firms in any period. That’s the nature of excellent businesses. And so you step back and you say, well, what are the underlying dynamics then? And the underlying dynamics are driven by the choices that these firms have. And if you think about the considerations that the founding partners of a successful boutique firm have, whether it’s traditional or alternative, whether it’s in the U.S. or the UK or somewhere in Asia or Australia, all of those firms’ principles have the same set of considerations. They are first around client reaction. They have a very successful business. They care more than anything about the perception that their clients have about any transaction. The clients don’t want any change. The clients don’t want any misalignment. And the clients don’t want any uncertainty about the nature of the partner. And ideally, if the nature of the partner is enhancing to their reputation, where clients have a positive feeling and experience with the partner and the partner has a track record of successful partnerships, which as we all know in the industry over the last 20 years, there are many, many more unsuccessful acquisitions or partnerships of boutique firms than there are successful partnerships. The successful partnerships are the rare commodity. So – and clients have a lot of experience and are more perceptive and challenging than they have ever been. Then what else do you care about? You care about the quality and character of the partner in terms of how they will interact with you. You care about the – and what their track record as a partner is and longevity and successful partnerships, especially in tough times, is incredibly important. Everybody is a good partner in good times. The key test is who is a good partner and – sorry, everybody is a good partner in good times. The key test is who is a good partner in the tough times in the financial crisis, etcetera. So, a firm that has a track record of success through market cycles is incredibly advantaged as firms’ principles are thinking about their alternatives. The other consideration I mentioned earlier is the ability to meaningfully add to the distribution capability of an individual boutique firm. And it’s easy to say, we have got X number of people. I will pick on a big global bank. You might say we have got X number of marketers in all of these regions. But the reality is those marketers might not be able – and probably don’t have any experience at selling individual boutique firms products and really working in a complementary way with the marketing and distribution professionals of the boutique firm. It’s a hard thing to do. It’s a hard story to tell regarding the global clients that you have both the benefits in terms of risk management, stability and in-market client service, the benefits of a global scale asset management company, combined in a complementary way with an individual performance-oriented boutique firm and their unique product capabilities and their own marketing and distribution professionals. So, those – that relationship both with the clients and with the boutique firm is challenging to actually execute and maintain and easy to talk about, very hard to execute. And then what you had looked to is what’s the track record of success? And there is no entity in the world that has anything like our track record of successfully distributing and supporting the marketing and distribution efforts all around the world of individual boutique firms. And that is always owing to the excellence of the investment performance of the boutiques themselves, but it doesn’t happen without also very effective an excellent execution of the distribution capability. And so that too is very, very differentiating. And then the final thing I will say is we have been building relationships with these firms for over 20 years. And it doesn’t mean that they are not going to pickup the phone and talk to other people, but they don’t talk to many people. And the quality of the relationships that we build are we think very distinguishing. And at the end of the day, relatively few of these firms really want to auction themselves. And so they tend to want to pick their partner and a firm that has all of the considerations that I have described very often, most often I would say would choose us. And so we don’t feel the competition from other entities because it’s never about X, Y, Z firm will pay $1 more. The valuation comes only at the end and I would say is often the least important of the considerations.

It makes sense. Thanks.

Our next question comes from the line of Craig Siegenthaler with Credit Suisse. Please go ahead with your question.

Hi, thanks. Good morning everyone.

Hi, Craig.

So now that you introduced a consistent share repurchase target and I know it’s going to be a little premature here, but what is the…

Craig we didn’t do that.

As a third avenue to deploy capital?

I interrupted you, so I will make sure that everybody heard your question, but we did not introduce a target. We introduced a guidance convention that is different than a target. It’s not something we are managing to, so just to be crystal clear on that. And I think your question was does this mean that we are closer to a dividend. And my answer is no. I mean, at some point in the future, sure. But this is just an attempt to highlight the role that the cash generation of the business can play in shareholder value creation. Tell me if I am not addressing the – your question fully. But I think at a high level, we are not expecting a dividend.

Alright, Sean, that’s clear. And then just for those of us who look further out on earnings outside of ‘15, when you think about 2016 and 2017, is it prudent for us to continue to assume this share repurchase range in the 50% range and if it’s higher or lower, is that really deals I guess are a big factor there or also the valuation of the stock?

Right, just from a model convention, and I think Sean articulated our strategic priorities are unchanged. But from a model conversion, yes, you can roll forward that assumption as we will in our model convention. The actual amount of share repurchase and in some quarters, we might not do share repurchase, some quarters, we will do more than the 50%. We will update you and we will update the shares as part of the guidance each quarter. So every quarter, you have a chance to see how we are doing and compare it to the forward. So they will always be another opportunity each quarter to update that. But if you are just looking out, yes you can’t roll that forward.

And it’s appropriate to think that way about ’16. In any given period, we could spend all of the cash flow that the business would generate in a year, that’s the plan of course. And then of course, the guidance would be adjusted accordingly.

Thanks guys.

Thanks Craig.

Thank you. We have no further questions at this time. I would like to turn the floor back over to Sean Kelley, CEO for closing remarks.

Thank you again for joining us this morning. As you have heard, we are pleased with our results for the quarter and remain confident in our ability to generate meaningful earnings growth through both organic growth and accretive investments and new affiliates going forward. We look forward to speaking to you in July.