Affiliated Managers Group, Inc. (AMG) Q2 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the AMG’s Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Selene Oh, Vice President, Finance and Investor Relations. Thank you. You may begin.

Thank you for joining AMG to discuss our results for the second 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, Selene and good morning everyone. AMG reported economic earnings per share of $3.08 for the second quarter of 2015, which is a 16% increase over the same period last year. Our strong results for the quarter reflect ongoing momentum across all aspects of our business, including excellent execution of our new investment strategy, outstanding long-term investment performance by our industry leading boutique affiliates and continued strong organic growth from net client cash flows bringing our assets under management to a record $650 billion. Notwithstanding increased volatility in global equity markets and a somewhat muted investor risk appetite, we generated over $4 billion of net client cash flows during the quarter marking our 21st consecutive quarter of positive net client cash flows with a cumulative total of $135 billion in net flows over this period. The ongoing success of our global distribution strategy, including new or expanded fundings in every coverage region worldwide during the quarter reflects the outstanding long-term investment track records of our boutique affiliates across a diverse range of return-oriented products as well as our strategic focus on global and emerging market equities and alternatives. Moreover, given our position as one of the largest alternative managers in the world, we continue to benefit from significant organic growth across a broad array of liquid and illiquid alternative products, which collectively generate over 35% of our earnings. Looking forward, we see strong demand for our differentiated return-oriented strategies as global institutional clients continue to barbell their exposures into passive beta and active alpha components and increasingly prefer boutique managers for the alpha generating portions of their portfolios. We believe that over time demand for these products will likewise accelerate among retail clients who will inevitably require greater allocations to return-oriented strategies to meet their long-term objectives. AMG uniquely offers the breadth and diversity of an array of independent managers with distinct brands and specialized investment processes combined with the efficiency of end market client service and a single point of contact. With our affiliates’ outstanding long-term investment track records across a wide range of alpha generating strategies, especially in global and emerging market equities and alternatives, AMG is well-positioned for continued strong organic growth. Turning to new investments, we continue to make excellent progress towards partnering with outstanding new affiliates. Earlier this month, we were pleased to announce the addition of our fifth Wealth Partners affiliate, myCIO, a leading Philadelphia-based wealth management firm with approximately $7 billion in assets. Looking ahead, the transaction environment remains highly favorable to AMG and we have a growing and diverse pipeline of prospective new affiliates around the world. Given our unmatched competitive position as the permanent partner of choice to traditional and alternative boutiques globally our two decade track record of successful partnerships and our global distribution capability, we are confident in our ability to meaningfully enhance our earnings growth through accretive investments in outstanding new affiliates. Stepping back, we have built our business into one of the largest global investment managers based on the fundamental belief at outstanding boutique firms with distinct, highly focused investment processes, alignment of interest through equity ownership and unique entrepreneurial cultures have competitive advantages in generating alpha in active equities and alternatives. In June, we published a research paper which analyzed 20 years of institutional equity returns across nearly 5,000 strategies and demonstrated that active boutique investment managers have consistently outperformed both non-boutique peers and indices over virtually all relevant time periods. These results present a sharp contrast to the prevailing industry narrative that active management underperforms passive products, while also validating our belief in the distinct advantages of boutiques in delivering alpha for their clients. Going forward, we are uniquely well-positioned to continue to increase the scale, diversity and earnings power of our business both organically and through new investments. Given the strength of our existing business, our unparalleled global distribution capability and our proprietary opportunities to partner with a growing number of leading boutique firms, we are confident in our ability to continue to create outstanding shareholder value. With that, I will turn it to Nate to discuss our results in greater detail.

Thanks. Good morning, everyone. As Sean said, AMG performed well during the first half of the year. While it was a period where investor risk appetite was relatively modest, over the long-term, we believe clients will need to continue to increase allocations to return-oriented assets in order to meet their liability stream and we are very well positioned for when this occurs. In the quarter, we benefited from clients increasing their allocations to focus boutiques, especially for the return of our alpha portions of their portfolios. This trend, combined with the excellent long-term track records of our high-quality diverse group of affiliates, resulted in over $4 billion in net flows and what was our 21st consecutive quarter of strong growth totaling $135 billion in net flows during this period. Turning to investment performance and starting with the alternatives category where we offer a wide range of strategies. Standout performance in the quarter included BlueMountain and ValueAct. In addition, long-term performance track records across the majority of the largest products in our alternatives product category continue to be very strong, including especially at AQR, BlueMountain, Pantheon and ValueAct. In fact, Pantheon was just named Fund of Funds of the Year by Euromoney at their Investment Excellence Awards. Continuing with the global developed markets category, our affiliates generally had strong investment performance with highlights for the quarter, including the major global equity products at Artemis, Harding Loevner and Veritas. These products continue to have outstanding performance records across longer term periods as well. While Tweedy Browne underperformed in the quarter due to both strict value discipline and relatively the cash flows held in their portfolios, but long-term track records there remain excellent with top decile rankings across 10 and 15 years in Morningstar. In the emerging markets category, the major products managed by AQR, Genesis and Harding Loevner slightly underperformed their benchmarks in the quarter. Long-term performance records across their product suites, however, remained very strong. Finally, with respect to our U.S. equity products, performance was mixed with Yacktman underperforming, while GW&K and Systematic outperformed across most of their products during the quarter. Frontier also delivered very strong performance both in the quarter and across longer time periods. Now, turning to flows for the quarter. As I said, we had another good quarter with $4.1 billion in positive net client cash flows. As we emphasize on every call flows, especially in the institutional and sub-advisory channels are inherently lumpy. However, in the quarter, flows were very diverse in terms of product category across both alternatives and global equity products. Starting with the institutional channel, we had positive net flows of approximately $6.1 billion. Flows came primarily in alternative strategies and global equities, including notable contributions from AQR, BlueMountain, AIG, First Quadrant, Harding Loevner, Pantheon and ValueAct very diverse. In our high net worth channel, we have positive net flows of $70 million with contributions from GW&K and Harding Loevner. We also had a notable contribution from our new Wealth Partners affiliate, Baker Street. Focusing on Wealth Partners for a moment, I would also like to welcome myCIO Wealth Partners, a new affiliate which we announced a couple of weeks ago. myCIO is a highly regarded wealth advisory firm with strong future growth prospects. They provide comprehensive and integrated advises regarding asset allocation, manager selection and financial state and tax planning for the focus on corporate executives and retirement plans. With this most recent investment, our Wealth Partners business now includes five outstanding firms with over $30 billion in AUM, making us one of the leading wealth management firms in the industry. Moving to the mutual fund channel, we had outflows of $2.1 billion. While we had positive flows into many global and emerging markets equities and alternative strategies which came from a number of affiliates, including AQR, Artemis, Harding Loevner and Tweedy Browne. These were more than offset by outflows at Yacktman and other U.S. equity products that AMG funds. This was against the backdrop of a tough environment for U.S. retail flows for active return oriented managers generally and especially in U.S. equities. As we have noted on previous calls, our U.S. retail business has eschewed towards U.S. equities unlike our broader institutional and high net worth businesses. Maybe one final point about flows and distribution and the evolution of our distribution capabilities and strategy, this evolution has played an important part not only in driving our significant positive flows over the past 21 quarters, but more importantly, set us up extremely well to continue to drive significant positive flows in the years ahead. Over the last decade, we have made significant progress towards our vision to build out a unique multilevel distribution strategy. At the first level, each of our affiliates maintains their own dedicated distribution and product specialist resources in the channels and geographies where they can do an excellent job. As you know, we have invested in affiliates that are complete firms. At the same time, we have built a second highly complementary AMG level distribution designed to do three things. First, add the benefits of global scale to these boutique firms allowing them to access appropriate clients around the world in a cost effective way, clients that could not have accessed on their own. Second, to create a relationship with the marketplace that is unlike the relationship any boutique firm could have. This is a relationship where we can engage with evermore sophisticated clients around the questions of what do you the client need and what problems are you, the client trying to solve as opposed to here are the products we have to sell. Third, we are at the early stage of building client relationships that ultimately will allow us to work with our affiliates and help them with everything from more effective product development, more effective client acquisition and more effective client retention, all in the context of the multilevel relationships we already have with most of the largest institutional clients in the world. This global strategy is working well today and we continue to make good progress. Also, we are in the early stages of building out the same approach for the retail market, certainly here in the U.S. but conceptually can extend to other global regions as appropriate given the return profiles we see. And we have taken some initial steps. Putting these all together, as I said earlier, we are setting up extremely well to continue to drive significant positive flows in the year ahead – in the years ahead with our existing affiliates. Finally, we should also recognize the significant corollary benefits of the success we have been having with our AMG distribution platforms. We often speak about this in terms of a virtuous circle. Our distribution success makes us more attractive to prospective new affiliates who come with outstanding additional products, which in turn makes us a more valuable business partner to our clients and their intermediaries, which in turn will allow us to continue to generate even greater organic growth in the years ahead. And with that, I will turn it to Jay.

Thank you, Nate. As Sean discussed, despite a volatile market environment, we are pleased with our second quarter results, including another quarter of strong net client cash flows. Given the strength and diversity of our affiliates and the substantial cash generated by the size and scale of our business, we continue to produce stable and growing earnings including in periods of uneven markets. As you saw in the release, we reported economic earnings per share of $3.08 for the first quarter, an increase of 16% year-over-year with net performance fees contributing $0.11. On a GAAP basis, we reported earnings per share of $2.31. Our GAAP earnings for the quarter included a non-cash imputed interest gain related to the revaluation of our contingent payment obligations. Excluding this item, our GAAP earnings for the quarter would have been $2.14 per share. This non-cash item had no impact on our economic earnings per share. Turning to more specific modeling items, for the second quarter, our EBITDA increased 13% year-over-year to $239.2 million, reflecting the continued organic growth of our business and the impact of new investments. In the second quarter, the ratio of our EBITDA to end of period assets under management was approximately 14.9 basis points or approximately 14.2 basis points, excluding performance fees. In the third quarter, we expect this ratio to be approximately 14.1 basis points as we expect only a minimal contribution from performance fees. With regard to our taxes, our effective GAAP tax rate for the quarter was 35% and our cash tax rate was approximately 22%. For modeling purposes, we expect our GAAP tax rate to be 34% and our cash tax rate to remain at 22%. Intangible related deferred taxes for the second quarter were $20.7 million and we expect this number to stay flat at $20.7 million in the third quarter. Our share of reported amortization for the quarter was $30 million, which includes $8.7 million of amortization from affiliates accounted for under the equity method. We expect our share of amortization to remain at approximately $30 million for the third quarter. Our share of interest expense for the second quarter was $22.5 million and for the third quarter we expect our share of interest expense to remain at this level. Our share of pretax non-cash imputed interest expense for the second quarter excluding the contingent payment gain of $15 million would have been $1.8 million. For the third quarter, we expect our pretax non-cash imputed interest expense to decline to approximately $1 million. Turning to our balance sheet, the excess cash flow generated from the size, scale and diversity of our business provides us with significant capacity to execute our new investment strategy and the flexibility to return capital by repurchasing shares. In the quarter, we repurchased approximately 125 million bringing our year-to-date total to approximately 280 million. Looking forward, with run rate EBITDA of approximately $1 billion combined with over $1 billion of undrawn revolver, we continue to be well positioned to create incremental opportunities for earnings growth. Now turning to guidance, we are updating our 2015 guidance as we expect economic earnings per share to be in the range of $12.80 to $14. The revision in guidance was entirely attributable to market changes since our last earnings call. This guidance assumes a model convention of actual market performance through yesterday for the current quarter, 2% quarterly market growth beginning in the fourth quarter and repurchases of 50% of annual economic net income for 2015, resulting in a weighted average share count of approximately 55.5 million for the year. The lower end of our guidance range includes a modest contribution from performance fees and organic growth, while the upper end assumes a more robust contribution from 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 will be happy to answer your questions.

Thank you. At this we will be conducting the question-and-answer session. [Operator Instructions] Our first question is coming from the line of Craig Siegenthaler with Credit Suisse. Please proceed with your question.

Thanks. Good morning every one.

Good morning, Craig.

Just want to hit on retail first, Jeff Cerutti has been in place for over a year now and I think there has been some changes among the retail wholesaling ranks, so really when will product tweaking and the U.S. distribution efforts sort of be ready to really more aggressively attack and gain market share from the bigger broker dealers or our agents from the key distribution partners?

Sure. So this is Nate, I will take the first part of that. So you are right, the teams are in place. I think there are several members, but we had the team is now in place. And I think you also hit on the key question as you think about sort of short-term, which is the product mix. Some we have talked about the product mix of installed base. It’s reasonably scale U.S. retail platform already, right and we have talked about the product mix there being skewed towards U.S. equities and the challenges of that active U.S. equities are having. But there is a whole – there is actually a lot of work going on already in terms of product development and building out a product set or additional product if those appropriate kind of near-term, but also trying to also focus on the sort of the medium to longer term where do we think the real opportunities are. And some examples that we have talked about I think on previous calls have been in the alternative space as an example, where we have lots of manufacturing capability and we also have packaging capability and that’s both liquid and illiquid as we talked about before. So I think you hit on the right question, which is I think the teams built and in place, they are executing and continuing to evolve the focus of the people underneath them and where they are pushing. And again, I think we have also talked about we have good penetration in some places wires, RAs as examples as we bring AMG funds and asking together as we have re-branded and are now kind of leverage the AMG brand into this channel. So, there is lots of good things happening, but again, you also hit on the key determinant, I think in the short run which is making sure we continue to evolve the product mix.

In the long run, the biggest opportunity is around broader client demand trends and we are convinced that and history tells us that demand trends move in cycles. And I think with rising rates and ongoing evolution and among retail investors and the inevitable need, as I said, to find and pursue more return-oriented strategies in order for retail investors to meet their long-term planning objectives, we believe that the retail universe will – client demand universe will increasingly move toward the return-oriented product set that we emphasize the alpha portion of the barbell, if you will. And then, I know you understand this, but I think it’s worth emphasizing and we saw it again this quarter in a period of challenging U.S. equity demand in the – for us and for the industry in the U.S. retail space. The strength of our business, the preponderance of our business in the global institutional client universe is evident and you saw that in the strong flow numbers that we put up, which even as I said in a difficult period for U.S. retail resulted in flows that were strong, especially relative to overall industry results.

Great. I think she said just one question. So, I will just get back into queue.

Thank you. The next question is coming from the line of Dan Fannon with Jefferies. Please proceed with your question.

Thanks. Good morning. I guess, Jay, if you could clarify the components of the guidance in terms of the mark through the quarter. And then also on the buyback in the quarter, I guess, would you characterize 2Q in terms of the purchases in that level as kind of a base case for thinking about modeling going forward?

Okay. So, Dan, just as I mentioned in my prepared remarks, the change in guidance, the revision is entirely attributable to lower beta since our last call, which is off about 3% since the last time we gave guidance. This is reflecting the downward volatility in global markets that started late June, continues through yesterday, I guess. Stepping back though, just on the convention and then I will address your question about quarter-to-date. Our convention is since our last call April 28, we assumed zero markets for the remainder of second quarter and 2% for the third quarter. As I just mentioned though, the actual blend was off 3% from April 28, which is the last time we did the guidance through yesterday, which results in a 5% cumulative market decline versus our model. As you know, for the remainder of the year, we will assume no additional market this quarter, for the remainder of the third quarter and then 2% in the fourth quarter. So, that’s our guidance. And so when we look at the revision, it was just entirely a market-driven revision. But the detail you were looking for, a little extra detail on quarter-to-quarter changes, first, as you saw on our AUM table, we experienced almost no contribution from market change in the quarter. So, it was basically flat. And then from June 30 through yesterday, our market blend was off about 1%. So, that’s another way of looking at the same market on a quarterly basis. On repurchases, so this quarter, our share count was 55.6 million. In the third quarter, we expect the share count to come in because of the weighted average effect. In the second quarter, we will have a full effect on the third quarter. And that 125 million that we repurchased was more reflective of the fact that we didn’t have material new investments in the period. I think we – well, go back to the model convention, which is just a convention of 50% of annual economic net income for repurchases, but the substantive point is our first priority is new investments to the extent that in – because of the accident of time, timing, we don’t have a new investment or material new investments, we might do a little more. As we look forward in the second half of the year, we do have a good pipeline and we will be mindful of the new investment opportunity as it relates to the capital that we put out.

Yes. And I would just add underscoring what Jay just said that the baseline expectation for investors should be that we will return the cash the business generates either through repurchases or the first priority, as Jay noted, is always going to be new investments. So, your question around baseline is I think relevant to the guidance convention, but not really relevant to the overall business strategy, where you may see periods of even more elevated repurchase activity in a quarter. But over time, we expect that you will see substantial new investment activity, which with some repurchase activity along in the mix as well, but the overall opportunity in new investments, and I am sure I will get a question around this in a moment, remains extraordinarily strong, better than ever.

Great, thank you.

Thank you. The next question is coming from the line of Bill Katz with Citi. Please proceed with your question.

Alright, thanks so much and Sean just a pickup right there, I guess in your press release, you did add some verbiage share you are seeing progressively well, so not something it’s too much, but it sounds like a little bit more upbeat than maybe what you said last quarter, so just sort of stepping back could you talk a little bit about the pipeline sequentially, where you sort of see the best appetite? And then could you also address competition, because I have noticed a couple of deals have been announced of late, Blackstone made a majority stake into First Eagle. I think Ares merged up with Kayne. So, curious if there is any sort of pressure building on multiples? Thank you.

Sure. Thanks for the question, Bill. The overall pipeline as you heard Jay and me both say continues to be very strong. It continues to be skewed to alternative and to non-U.S. prospects with and I will talk about this further in a moment, but with a broad universe of outstanding prospects, where we built strong relationships. I would say current year pipeline, there were a couple of investment opportunities that were deferred for kind of one-off idiosyncratic reasons earlier in the year and that Jay alluded to that in the sort of slightly elevated repurchase activity. But at the moment, we are very busy with some excellent new investment prospects. So, I will leave it there in terms of the short-term. I would say, our experience and activity level is against the backdrop of actually relatively slow overall industry activity. If you look sequentially at the number of transactions, even AUM, it’s down. There have been a few notable transactions, which involve different kinds of firms doing different kinds of deals, so not really relevant to us. I would say, we continue to be highly selective in our choice of perspective affiliates. So, there are always going to be deals, which others will pursue which you will see announced, where we didn’t think the opportunity is right for us. And then finally, over the medium to long-term, our market position continues to be extremely strong. The universe and we talk about 150 core prospects where we build relationships, I would say, even over the last several months that universe expands. We have done a very good job of adding to and deepening our relationships among the best perspective boutiques around the world. Transaction timing is inevitably going to be driven entirely by the individual perspective affiliates and their idiosyncratic decisions about the right time for them. I would say, we, on an overall basis, none of our expectations about transaction activity or timing is reflected by or based on any perceived increase in competitive pressure. I would say, on an overall basis, as we think about the opportunity set again in a medium to long term. We look at this universe of outstanding boutique firms around the world and our judgment is that the decision for these firms to seek a succession planning solution is a question of when, not if. And so our relationships, which form the foundation of the opportunity and our market position, competitive position and the offerings we provide and the track record of success and our relationships and recommendations from existing affiliates give us just enormous confidence as we look forward.

Okay, thank you.

Thank you. The next question is coming from the line of Michael Carrier with Bank of America Merrill Lynch. Please proceed with your question.

Thanks, guys. Just on the M&A front, you have been a little bit more active on the wealth management side and I know each transaction is going to be different, but just wanted to get your take on the outlook for both that industry and then how you guys see it? And then on the transactions just how we should think about deploying capital in that arena versus maybe the legacy like what you traditionally have been active in on the asset management side, just how those economics differ?

Well, first, the core opportunity among asset management boutiques remains as I just said extraordinarily attractive with very large number of firms and in our judgment that we have an extremely strong competitive position. Separately, and it really is separate, with the separate team and a separate strategy and I will ask Nate to talk about the strategy and some of the potential synergies that we see with the wealth management boutiques. I am extremely pleased with the results and execution by the wealth management team. And as you heard, another new wealth management affiliate, we are now up to about $35 billion in wealth management assets, which puts us in a very short span of time, among the leading independent wealth management firms, with lots of ongoing prospects. Maybe I will ask Nate to talk in a little bit more detail about the execution and the opportunity.

Sure. So, let me start by emphasizing the point that Sean made, which is the sort of the separate effort, it really is a separate effort and customized for that space. And maybe I broadened a little and say separate and complementary and maybe I will use that to get in a little bit to, I think where Sean was headed, which is as we have made – we have five affiliates now in Wealth Partners Group and they are among the very best, so sort of how we have made investments and among the very best Wealth Partners firms, there is a continuing pipeline of firms sort of equivalent scope and scale that we are looking at. And so I think that sort of past and continued growth is there. The other thing is and this comes back to the complementary, there are two things that we are starting to do now, right, one is now add our scope and scale with the Wealth Partners firms as we did with our more traditional affiliates. Once you get to a certain scope and scale, you can start to leverage that to improve and provide additional opportunities to the businesses. So, we are beginning to that, which is one of the things we can do to help these firms and pay more effort, one of the things we have been doing to help make these firms capitalize on opportunities. And we think there are number some that look like what we have done with traditional firms, but a number that are different given the different nature of those businesses. And then there are also opportunities we believe and this is more of a medium to longer term opportunity, but we believe there are opportunities to build bridges between the more traditional affiliates and the excellent manufacturing capabilities that they have and the Wealth Partners affiliates. And so again that’s more of a medium-term opportunity set, but we do think these are highly complementary businesses on a bunch of different dimensions.

Okay, thanks a lot.

Thank you. The next question is coming from the line of Chris Shutler with William Blair. Please proceed with your question.

Hey, guys. Good morning.

Good morning.

I think last year, Sean, late last year, you started talking about potentially broadening the investment strategy. Clearly, you guys have been adding firms on the Wealth Partners side, but just curious what else you are working on behind the scenes to the extent that you can elaborate?

You are right to make the observation, Chris. And I think we have made excellent progress and there has been a great deal of time and energy devoted to identifying a universe of perspective targets and thinking through the various issues around the best way of partnering with such firms. There isn’t a lot that I can say beyond that at this point, but I think you will see some announcements. And I don’t think there will be any one investment or partnership that stands out, but the cumulative effect I think over time will contribute meaningfully to ongoing diversification and broadening of our product sets. Maybe I will ask Nate who is heading up this strategic effort to add anything that I left out given the constraints about not announcing what we can’t announce yet.

No, I think you said it just right. And I think we are very focused on alignment and where the leverage opportunities between what we know how to do and what we are good at and where the opportunity set is. And so we have looked at a lots of things and maybe on the margin, you could say being a little on the cautious side, I think we are also known by the things we don’t. So, we have looked at a bunch of things. I think we are making good progress. I agree with what Sean said.

Alright, thanks. And then just the other question I had was just on capacity and maybe just give us an update on the existing managers that you have, particularly the ones where you have been seeing really good flows over the last several quarters. Are there any that stand out as having capacity constraints at this point, I would think ValueAct is probably in that bucket, but maybe help us think about firms like Harding Loevner? Thanks.

So, you don’t get in trouble with Selene, Chris. We are going to view that as a link to your [indiscernible]. Yes, so I think let me answer it across the group. I want to be careful and not get ahead of how specific the affiliates are talking about it to their clients. But there is definitely some areas, where affiliates are looking carefully at capacity. I don’t break in the couple of buckets, right? So, one is absolutely, right, because there is a limit to how much someone can manage in a capacity. There is also a number of affiliates that are managing the pace as their firm grows, right? So, we have had affiliates building, queuing and pacing systems and all that, which is less about the capacity and less in process and just making sure that they bring in the assets in a way that they are doing a good job for their existing client base first and there are certainly affiliates doing that. And then they are certainly also ones where affiliates are managing capacity to match it with the investment opportunities they see now. And so an example that’s public would be a firm like Tweedy Browne, which has been soft closed for a while and so managing inflows from their existing user base really. And so I think when you talk about capacity, you have to sort of think about all of those. The other thing I would say is and then we have examples for all those, the other thing I would say is though those are more than offset and you are seeing this in our flow results, that’s more than offset by new products coming online at a range of different affiliates. And I think I use the words coming online sort of consciously, because some products being launched, there is also a number of products sort of coming up on 3-year records or 5-year records or $100 million in assets and places where they can really be brought to market and we have got a number of affiliates across channels and geographies, where that’s happening. And some of this also relates to packaging, right? So, we have to make sure we can help affiliates with the packaging. And a lot of this also relates back to that virtuous circle conversation that I talked about before, because we are also I think being able to be a more effective partner to our affiliates in conversations around product development, where they should be taking these products, so they can access clients faster, right, appropriate clients faster and make the cost of acquisition and the time to acquisition shorter. So, all of those things sort of happening, so we certainly have affiliates for their capacity things, but it’s certainly offset by – more than offset by sort of new products coming online at a range of affiliates. And then finally, there is the role that new affiliates play in us, which you have heard us talk about before, which is as we bring on new affiliates sort of one of the strong advantage we have, certainly as we have been building out distribution as you can bring on new affiliates with appropriate products and leverage distribution capabilities much more quickly. So, I think we feel good about the new products coming online at our existing affiliates and then obviously also the opportunity set as we look at the pipeline of potential affiliates.

Alright, thanks a lot.

Thank you. Our next question is coming from the line of Michael Kim with Sandler O'Neill. Please proceed with your question.

Hey, guys. Good morning. So, just in terms of flow trends, it seems like on the one hand, demand for alternative strategies continues to remain strong, but less favorably interested more traditional actively managed domestic equity funds remain soft across the industry and pretty evident when you look at your flows by product and channel. So just assuming those trends sort of hold steady for the time being, just wondering about sort of the relative economics for AMG in terms of EBITDA contribution, it seems like you may have some offsetting dynamics around maybe higher fee rates for deals, but maybe lower ownership stakes in some of those affiliates, so just wondering how that might play out at a high level?

Well, I think the first reaction I have is you notably left out logo on emerging market equities, which do even in the U.S. retail channel and certainly on a global basis, represent real growth opportunities where we have a number of excellent affiliates. So it’s not just an old story indeed global and emerging market equities is a bigger element of our product set even then alternatives. And so that’s the first answer. As you look at our broad product set, you look at overall industry trends and our own results, which I think relative to the industry, including of course, in return oriented products I think positioned us very well and are evidence of the ongoing strength and vitality of our business and the quality of the underlying affiliates and their products. So that’s the high level answer. The second high level answer I would give, which I am sure Jay would say, but I will say it first and then let Jay add to this is we are unique among our public peers, certainly among any large public peers, in giving earnings guidance. And sometimes the guidance methodology about what we assume about market returns in a given quarter like this one can sort of mask the underlying strength of our results and of our business and future prospects. We leave it to you to sort of through all of that, but if you look at our forward guidance and compare our earnings growth to any of our peers, we are happy to be judged on that basis and the guidance assumes and encompasses judgments around any of these changes in mix. And in many cases, the difference between or the economic impact of a “minority owned affiliate” is not that different given the incremental investments and firms like BlueMountain and AQR. It’s not that different than some of the “majority owned affiliates”. And just the guidance itself is evidence of this. We feel very good about our earnings growth prospects. I will ask Jay to add to that.

I think Sean did a nice job covering it, Michael. But just to add a bit more color to it, I think on the feedback, really the alternatives in general not only have a management fee component, but they have a performance fee component. So when you look at it in total, especially through the years and over the course of the year, most of our performance fee is expressed in the fourth quarter. You are actually seeing our fee rates go up a little bit in that context. And as Sean mentioned, the equity method affiliates, while slightly lower ownership than the consolidated, it’s not that much especially since we have made a second investment in AQR and the second investment in BlueMountain. So the mix is much closer between equity method and the consolidated. So when you take the two together and you think about we give guidance every quarter, on a quarter where there is very little performance fees like the third quarter, for example we have held pretty steady at EBITDA to end the period assets under management in the 14 – low-14s. But on a yearly basis, we are north of 15, maybe even close to 16. And if you look at that over a longer period of time, it actually has been flat to up, not flat to down.

Got it, that’s very helpful. Thanks.

Thank you. The next question is coming from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.

Hi, good morning. Maybe just to get a little bit more on the performance fee assumptions change and then a related question for Sean just in terms of the math on the $0.11 that seems to be about 3% of EBITDA, so can you verify that? And then is the upper and lower balance of the guidance range or lower and upper balance of the guidance range still 5% of EBITDA and performance fees in 10%. And then do you feel you are just based on the comments you just said Jay I think you are tracking on the better side of that. And then just longer term about the affiliates that you are interested in it is increasing that performance fee part of the mix, it’s something that’s interesting to you from a like alternative perspective?

Okay. So that’s a good question. So let’s maybe take it the performance fee at a high level, couple of quick points and then I will be more specific. Performance fees have and they continue to contribute earnings in a consistent and meaningful way given the breadth of our products and the type of performance fees that we have and the diversity of the affiliates that produce performance fees. Some of those performance fees are related to alternative products, both liquid and illiquid and some of them are related to more traditional long only products. So there is a lot of ways for us to generate performance fees, that’s first point. Second point is when you look at our flows and we have talked about good flows over a long period of time into alternatives, I would just like to add a small point before I make the bigger point that not all alternative flows go into performance fees oriented products. Notably, Pantheon and liquid alternatives AQR tend to be more management fee products. So when you see our flows, not all are going into performance fees sensitive products. Some of them are going into management fee products. But as I think you would expect, against the backdrop of continued flows, we are seeing our performance fee opportunity go up modestly as a percentage of our earnings. I think on the last call, I said given the scale, diversity and the performance to-date of our alternative products are 15 range guidance range include a slightly higher performance fee assumption. So that is the case at both the low and the high end, a slightly higher performance fee assumption. The last thing I wanted to say about performance fee is just to note, we would like to say this, we only express performance fee when realized. So we get the performance fee in cash when it’s expressed in earnings, which is distinguishing between us and other firms, which may use method two, which is mark-to-market performance fees where you can see more volatility in the performance fee stream more effectively a reversal of performance fees earnings that might have been recognized in an earlier period, but wouldn’t in the given changes in market, perhaps ever be realized as cash for us, it’s an inherently more conservative approach. The other thing I would say, which I think implicitly mentioned is the nature of performance fees for AMG is that they can’t be much higher and we have many different strategies and many opportunities to generate exceptionally strong performance fees, but they can – they can never be below for any strategy, never be below zero. We don’t – there aren’t scenarios where we are giving back money and that one way option is, again not always present in the way that other entities talk about or experience performance fees. With respect to the second part of your question around our future strategy for investing in alternative firms, there is no question that there are a large number of really excellent institutionalized alternative firms that have built and want to continue to build and doing franchises where some kind of succession solution or partnership is attractive to them. And I think I would say broadly, AMG’s proposition, value proposition is attractive to a firm that probably doesn’t need money. If all you offer is just money, that’s not something that a typical successful alternative firm really needs. And if that’s the kind of transaction that clients see, it really isn’t aligned with client interest. If by contrast it’s a competitive partnership where we offer in a way that is very attractive and amenable to the needs and desires of alternative firms in areas like global distribution, global compliance, etcetera, where perspective affiliates get the opportunity to access and benefit from economies of scale and a real strategic capability. That’s sensible and attractive to firms and by extension to their clients. And in the same way, a permanent partner with a long track record of successful partnerships where part of the ongoing opportunities to have the partner participate in ongoing succession and transition in a way that we have done several times, including with – several times with our alternative affiliates and it’s really the cornerstone of our overall business activity. That too is attractive for the right kind of alternative firm. And so, yes, you will see more investments in the future in excellent alternative firms. But I should say, the largest part of the universe of excellent boutique firms around the world are still in traditional long only strategies, including especially global and emerging market equity strategies. And so on an ongoing basis, I don’t expect the mix of our business to from a product standpoint – from a performance fee contribution to overall earnings standpoint to change that much. Obviously, we expect growth in all areas, both organically and through new investments.

Okay, that’s great color. Thanks very much.

Thank you. The next question is coming from the line of Robert Lee with KBW. Please proceed with your question.

Thanks and I appreciate your patience taking all the questions this morning. Just on the global distribution, I guess when I think of global distribution, I guess they have historically put it as predominantly institutional effort in the U.S., that the AMG Fund platform is predominantly retail effort, but could you maybe talk to us a bit about what the plan is kind of non-U.S. retail? I mean, is that kind of the next leg on your global distribution that you are either investing in or thinking about? And I mean that would seem to be a logical extension. And so maybe just talk about that a little bit where that type of initiative stands and just on the horizon and maybe how you think – what you think it would cost?

Perfect. Thanks very much for the questions. So, I think you understand exactly right sort of how we have built to here. So, fundamentally, as we said, we are marrying sort of excellent performance-oriented boutiques with the scope and scale of global distribution platforms. And you are right, the non-U.S. has been predominantly institutional, but does include some sub-advisory, but predominantly institutional. And we have started out going to regions hiring experienced marketers. And I think you have heard us talk now for a couple of quarters about deepening the coverage that we have within existing regions. So, increasing specialization by country sometimes, but also sometimes broadening the channels recovering within the regions, right? So, if we have a good high-end institutional calling effort, we are building a brand in that market, where people know us and know our affiliates and then beginning to take that down market. Some of that down market can be just smaller institutional and through intermediaries to small institutions, but some of it certainly can be into platform markets and then through that where it will be more effective direct access and some of that is through that building out more packages, which can help the institutional market as well as leverageable to more retail platforms and we are absolutely starting to work on those things. Now, it’s showing up we have done some work already in use its space, so we have launched a few uses with affiliates. Again, mostly we are focused on places where we can leverage our institutional, leverage that package to help our existing distribution team deepen their coverage, right, but we are starting to build those packages. Same thing we talked about I think in Australia where we have begun building out all the trusts, same thing which is we can leverage the brand that we have already built over the better part of the decade into platform markets and we have hired someone to begin working on that effort as well. So, I think you are understanding it exactly, right, which is it is in additional leg. I wouldn’t sort of say it’s the additional leg, but it’s an additional leg as we look at the ways that we can continue to leverage the good work that we have done so far building the AMG brand and helping our affiliates penetrate a bunch in those attractive markets in the world. I will say there are other legs and the other legs include there are geographies we haven’t really penetrated yet and there are certainly other channels besides the more retail channels and the more package product channels within geographies where we are ready that we haven’t really penetrated yet. So, there are lots of places for us to go. But one of them is certainly build appropriate packages and then bring those packages into more retail markets generally through platforms.

Great, thanks for taking my question.

Thank you. The next question is coming from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Great, thanks. Good morning. Question for you guys on retail alts, something you have talked about for a while and the industry has been talking about this product and opportunity for sometime as well. It feels like it’s taking a little bit longer to really gain much of a meaningful momentum. So just trying to get a better sense of what you guys hearing from the channels and what are the biggest hurdles for these products to become a bigger part of retail allocations?

So, I think you are right we have been talking about for a while. I think we have been seeing some good flows into sort of retail liquid alts and I think that’s both sort of a little bit touching this question and the prior one that’s both the U.S. as well as non-U.S. retail liquid alts. So, I do think we have been seeing some good penetration and we have also been doing some work as you have heard us talk about on prior calls in bringing the sort of less liquid alts products to the marketplace, which has certainly taken a while to catch hold and a lot of that is building the packages and sort of getting the mix of building what’s appropriate for the marketplace with the liquidity, with the constraints of continuing to do an excellent job relative to the investment process that underlies it. You are sort of putting those together. I think there is – I can’t speak for the industry, but sort of for us, I think there is lots and lots of good groundwork that’s been laid and I think bringing product into market. I think some of it is just figuring, helping the channels figure out how to use this product, getting it on to platforms and then through platforms, getting the first movers to adopt it. And I just think it’s, as you say, maybe taking a bit longer, but fundamentally, we have been seeing good flows in liquid alts so far.

And hard to judge exactly when or how, but our view is that there will be more and more demand, especially in the retail channel for alternatives. And if you think about it, the rest of our return-oriented product set, even though you have seen reasonable demand for global equity products, the rest of our return-oriented products that we think will be increasingly in favor in the retail channel. And you can imagine in an environment where that’s the case or increasingly the case, there will be other products, most notably, long duration fixed income, where the products and the underlying retail investors are struggling and experiencing even losses in products where they thought they were investing in a “safe” i.e., limited principal risk kind of product and they thought they were investing in a product that was highly liquid, which in some scenarios, for some products might not be. And so that will be challenges for the broader industry and certainly the firms which emphasize those products. For us, I think it will actually be an opportunity as clients rotate out of those kind of products, long duration fixed income-oriented products, and into more a broader suite of return-oriented products like liquid alts.

Got it. Thanks for the color.

Thank you. The next question is coming from the line of Greggory Warren with Morningstar. Please proceed with your question.

Yes, good morning guys. Thanks for taking my question. Hey, real, you touched on this a little bit as far as uses of cash and allocations for capitals as we move forward here. Number one priority being new investments, number two being repurchases of common stock when the stocks trading at a reasonable value, but I think one of the broader questions that I get from time-to-time from people is looking at a dividend. And I know we have talked about this a little bit in the past and it looks like with the Wealth Partners investments here, you found a good source of putting that capital to work at least in the near to medium term, but just wondering what kind of timeframe you might be thinking about longer term for a dividend and whether or not a special dividend makes sense in the near-term?

Well, thanks. I think the opportunity to invest the cash the business generates and indeed additional capital in new investments, both asset management and wealth management or Wealth Partners affiliates, is enormously attractive in the short, medium and long-term. And we, if you look over any reasonable time period, I think we have demonstrated an ability to execute investments over market cycles. And if you look forward at the 150 – and I don’t know that we have quantified the number of wealth management perspective affiliates, but it’s a very large universe worldwide. I think if anything, it’s a growing universe over the course of this year. There are more of these really excellent prospects that represent ideal investment opportunities for us and there is, as we have said a certain inevitability to transaction activity based around succession, finding a succession solution a question of when, not if. And AMG’s competitive position built over the last 20 years is really better than it’s ever been. So, an enormous opportunity set, we have quantified the asset management opportunity set as $40 billion to $50 billion in purchase price, not over – not even overall enterprise value. So, it’s that kind of a magnitude of opportunities looking forward, which makes us to sort of return to the specific timing question that you raise, makes us much more sensitive around maintaining the flexibility that share repurchases provide in terms of calibrating the return of capital to periods where we have fewer new investment opportunities. And for us, there will be those periods inevitably, but they will be short in duration, hard to predict any and the thing that we are very convinced of and very much positioning our business for is over the next five years a very substantial amount of new investment activity, which we have been able to – we have demonstrated an ability to make investments in outstanding firms, which enhance the overall value of our business franchise and obviously create even greater shareholder value. So, that’s what we are looking toward in the medium-term. There will be, at some point, a dividend, but I think it will be at a point where AMG is much bigger and where we imagine that the amount of available cash flow that’s generated every year is more than we are likely to invest in a typical period. And even at more than $1 billion in EBITDA current run-rate, we are not close to that. So, I wouldn’t count on it anytime soon. But you should count on a real commitment to return substantially all the capital the business generates in a way that is most attractive to shareholders. I don’t know if I left any meat on the bone for you, Jay.

Well said.

Okay, thank you.

Well, thanks guys. That’s it. Good color.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to Mr. Healey for any additional or concluding comments.

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

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