Greetings, and welcome to the AMG Third Quarter 2022 Earnings 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. I would now like to turn the conference over to your host, Patricia Figueroa, Head of Investor Relations for AMG. Thank you. You may begin.

Good morning, and thank you for joining us today to discuss AMG's results for the third quarter of 2022. Before we begin, I'd like to remind you that during this call, we may make a number of forward-looking statements, which could differ from our actual results materially, and AMG assumes no obligation to update these statements. A replay of today's call will be available on the Investor Relations section of our website along with a copy of our earnings release and a reconciliation of any non-GAAP financial measures, including any earnings guidance announced on this call. In addition, we posted an updated investor presentation to our website this morning and encourage investors to consult our site regularly for updated information. With us today to discuss the company's results for the quarter are Jay Horgen, President and Chief Executive Officer; and Tom Wojcik, Chief Financial Officer. With that, I'll turn the call over to Jay.

Thanks, Patricia, and good morning, everyone. This has been a remarkable last 12 months. We have seen the combination of higher inflation, rising rates and geopolitical risk drive simultaneous declines in both equities and fixed income, resulting in unprecedented disruption in client portfolios. At the same time, it has also been a remarkable period for AMG, having delivered 5% year-over-year growth in economic earnings per share in both the third quarter and the year-to-date period as the overall diversity and strong performance of our business together with capital allocated to new investments and share repurchases more than offset the impact of double-digit market declines. And given our strong year-to-date performance, we expect earnings per share to grow approximately 10% in 2022 on top of the 37% earnings growth we delivered in 2021. Notably, our results in these two years have been generated in dramatically different markets. In 2021, world markets grew significantly against the backdrop of low rates and easing monetary policies. In stark contrast to the severe drawdown in 2022 under tightening monetary policies and geopolitical risks. AMG's strong performance across disparate market environments highlights the efficacy of our model and the diversification of our business. And as we'll discuss today, we believe AMG is uniquely positioned for success and continued growth in the new environment. Our business profile is intentional and unique. We have strategically evolved AMG over the past decade by deliberately investing in a diversified group of leading independent managers across a broad array of asset classes. Our high-quality partner-owned firms have collectively provided us even greater ballast against the changing environment by strengthening AMG's overall earnings power and stability, enabling us to participate in upward trending markets and simultaneously providing us a buffer against volatility and dislocation. Our affiliates have distinguished themselves through their investment…

Thank you, Jay, and good morning, everyone. The combination of excellent investment performance and our disciplined approach to capital allocation, enabled AMG to deliver 5% year-over-year growth in earnings per share in the third quarter. As you heard Jay discuss, this year's market environment has demonstrated to investors the importance of the principles of portfolio construction, diversification, uncorrelated returns and liquidity. Clients are beginning to recalibrate portfolios, and we have intentionally built our business to capture the demand trends ahead of us. Our confidence in our business momentum is supported by outstanding affiliate investment performance this year, most notably in liquid alternative strategies, resulting in our strong outlook for full year 2022 earnings growth. That earnings growth aided by strong performance fee earnings contribute significantly to cash flow generation, and combined with the proceeds from the Baring transaction, further enhances the capital we can deploy toward long-term growth opportunities. We took the first step in that deployment in October with our investment in Peppertree Capital Management, in line with our strategy to increase our participation in private markets and real assets. In the current environment, our unique value proposition to shareholders is expressed through a number of key elements: strong investment performance, consistent performance fee earnings, significant capital generation and balance sheet strength and our ability to deploy capital towards secular growth areas and return capital to our shareholders, collectively positioning AMG to continue compounding earnings over time. Turning to our third quarter results. Economic earnings per share were $4.21, and grew 5% year-over-year as the impact of our new investment activity and share repurchases more than offset the decline in markets, foreign exchange rates and net flows. Net client cash outflows for the quarter were $8.8 billion, and excluding certain quantitative strategies, were $6.5 billion. Turning to performance across…

[Operator Instructions] Our first question comes from the line of Bill Katz with Credit Suisse. Please proceed with your question.

Okay, thank you very much for taking my questions. Good morning, everybody. Just in terms of capital deployment, so I appreciate the extra guidance. But as you step back, Jay or Tom, just what's going on in the -- it's great to see a deal get done in this kind of environment for sure. What's going on in terms of the incremental opportunity set here? Is it getting broader or contracting a little bit? And what's going on with pricing at the same time? Thank you.

Hi, Bill, good morning. Thanks for your question. Let me start maybe with the deal that we announced this morning, and then we'll talk about the backdrop of the environment. And I'll take that, and Tom, if you have anything to add, you'll still jump in. So Peppertree is in the private market space. This investment is squarely in line with our strategy, and arguably, it's investing in one of the fastest-growing areas within the infrastructure side of private markets, which is in the infrastructure for communications and the demand for data. So we think the tailwinds as far as we can see, and we're very excited about the growth opportunities of Peppertree. This business has two decades of experience investing in the space. It's an expert on the communications infrastructure, investing across towers, fiber and other areas. They've thoughtfully built their business over a long period. We believe they have a strong moat and ability to continue to drive in their specified space here. They were attracted to our model, and this is going to play back to the overall market environment. They were attracted to us, first and foremost, because they want to remain independent. This was a minority transaction for us. They're going to continue to run their business as owners. They also value the opportunity to engage with us as a strategic partner on their long-term execution of their strategy, and we look to magnify their efforts. It's very much a partnership that we see for us as our sweet spot. It's aligning with a high-quality team. They're passionate and entrepreneurial. They are independent minded. It's an area of secular growth, and it's an area where our engagement and value-added resources can be impactful over time. So maybe then taking the second part of your question…

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

Thanks, good morning. I wanted to follow up on just the outlook for performance fees. And then maybe just talk about the depth, as you guys have highlighted before, in terms of the contribution. But in that context, also would be curious about gross sales and kind of the environment for kind of future growth from these affiliates. Obviously, performance fees is a good leading indicator for overall performance. So I would be curious if you're seeing any change in demand yet or if that's still on the come and specifically, within some of the quantitative strategies that have been more out of favor.

Yeah. Well, good morning, Dan. And thanks for your question. I'm going to let Tom start and then maybe I'll circle back and talk about some of the business and the business prospects for our liquid alternatives in particular. So maybe you can start with performance fees first, Tom.

Sure. Thanks, Dan, for your question. And good morning. Maybe I'll start by talking about performance fee earnings, and then I'll give you a bit of a view to your second question around what does that lead to in terms of expectations for future flows. Look, performance fee earnings are a really important part of our business. They provide diversification. They provide significant cash generation to execute on our growth strategy. And given the diversity of our affiliates and investment strategies, they're a real differentiator for AMG and times of market dislocation in particular, and you're seeing that now. Importantly, I think our performance fee earnings stream is very different from others in the industry. All of our performance fee earnings are reported on a realized basis. So that's real cash that's coming to us, and they're also spread across more than a dozen affiliates and a multiple of that in terms of individual products. So this is a very diverse and durable earnings stream. If you look back over the course of the last decade or so, our net performance fee earnings have averaged $100 million a year annually. And as we discussed in our prepared remarks, we expect 2022 is going to be an excellent year, driven primarily by absolute return products that have really shined in this environment. And I think that's leading to some of our expectations for future flows and growth that I'll talk about in a moment. We also talk about sort of this combination of stability in the base performance fee earnings, but also asymmetry to the upside. And when you look at the pattern -- and there's a page in our investor materials that shows this, when you look at that pattern over time, you can really count on a base level…

So let me take the second part of your question, Dan, and just talk about the outlook for maybe some of the businesses and the flow profile of those businesses really the pipeline. Putting this into the -- in context that overall, we're about 41% alternatives. Of that, something like 20%-25% in the neighborhood is liquid alternatives. And as Tom said, good performance, the assets are up and in general, pipelines are growing for those firms. So I would just highlight the names for everyone, Systematica, AQR, Capula, Garda, Winton, and maybe to talk a little bit more about two of them. I think I would highlight Systematica, and that's a business that we made an incremental investment in January of last year -- this year, excuse me, at the very beginning of this year. And the performance, again, is kind of a microcosm of all of these firms. Systematica's SAM business. Systematic alternative markets is what it's called. It's up more than 50% since the beginning of 2021. Blue Trend this year is up 36%. That is consistent with a number of products that they have as well as at AQR and some of the other affiliates. So I'm just trying to give you a flavor using this one as an example. I think the other thing that I would say is, on AQR, as people know, after some choppy times, their liquid alts business has really come back, and they're having similar performance in their products. They have kind of two businesses within AQR, liquid alts business and a long-only quant business. And even the quant business, we're seeing the flows begin to ameliorate in particular because of their value consciousness and that's another theme that we've pointed out that value-sensitive investing is coming back. This year, value has outperformed growth by an enormous amount, and we think that will continue. So taking those two businesses together, when you look at pipelines and you look at forward prospects for new client flows, they are both building. And so we're constructive on flows into 2023 in these products.

Thank you. Our next question comes from the line of Mike Brown with KBW. Please proceed with your question.

Hi, thank you for taking my questions. Good morning, Jay and Tom.

Good morning.

So I guess I wanted to just hear a little bit more about just investor sentiment across all of your asset classes here. Can you touch on the equities and fixed income side as well? How is investor sentiment lately? Are you starting to see any green shoots of activity coming through?

So yeah, Tom, why don't you just broadly describe activity and flows?

Sure. Thanks, Mike. So I think importantly, putting this all in the context of our strategy, as we continue to execute, we're looking to continue to driving our business mix more and more towards secular growth areas. And as we continue to execute against that strategy, it really does give us an opportunity to capitalize on more of the client trends that are manifesting themselves in the business today and those that we expect to manifest themselves over the course of the coming years. And again, I'll point to the Peppertree announcement as another example of how we're trying to position our business for the future. In terms of the traditional equity side, right now, kind of the combination of our business's performance and what we see in the market, I think there are some pluses and minuses. On the plus side, in U.S. equities, we're really well positioned. We have two tilts there, if you will, in terms of our affiliates, one toward value strategies and then one towards ESG. And on the value side, 90% of our U.S. fundamental value managers are outperforming benchmark in the three-year period. And as Jay just mentioned in response to the last question, we think that's an area where you're going to see continued strong demand. And in terms of ESG, when we think about the long-term secular trends around energy transition and a number of kind of core elements of the ESG value proposition, we're still incredibly bullish on the long-term trends in sustainability as well. On the flip side, it continues to be a little bit challenging for global equities. Our flows improved there sequentially in the second quarter. But I think the sentiment in the market, particularly around growth strategy, is still a bit choppy. So we feel very…

Yeah. One other thing I would add, and that was a good summary, Tom. It might be challenging for you to kind of think about exactly where does AMG fit into this sort of broad spectrum of changes in the environment. And I would venture to say that we actually just look different, right? We -- you have in the main public companies that run operating models in the long-only space, some people call those traditional managers. And then on the other side, you have some of the stake buyers who are in the private equity space and then operating models within private equity, but we're sort of different than all of that, right? We have liquid alternatives, making up 20% to 25% of our business. We have a long-only business is about half, and then we have private markets as well. So I do think you're seeing that diversification in that -- almost that portfolio allocation play out really nicely in the environment that we're in, which is why we gave the guidance that we did that we think our earnings are going to be up 10% year-over-year on a '22 over '21 basis off the back of 37% last year.

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

Good morning, Jay and Tom. Hope you guys are doing well.

Good morning, Craig.

So my question is on debt and higher interest rates. So of your $2.5 billion of debt and convertibles, what is the composition of fixed versus floating? Do you guys use swaps and derivatives to hedge any of that rate exposure? And how has higher rates changed the calculus for new investments?

Yeah. So I'm going to have Tom take that question, but let's also put in the liquidity as well on our balance sheet because that's probably the most important and duration. So those would be the other things I would throw into the question. I know that you're asking here, Craig. So maybe, Tom, if you'll pick it up.

Sure. Thanks, Craig. And, good morning. So I think our balance sheet overall, first of all, we feel like is in excellent shape, not only from the perspective of where we are on duration and where we are on leverage, we continue to run with exceptionally long duration on our balance sheet. Our leverage levels are below 2 times. But also in terms of the ongoing ecosystem, if you will, around cash flow, liquidity and leverage. And I'll kind of mention a couple of elements. One, we generate significant cash flow every year. We've talked about a number of different elements of our business model in the past around the diversification of the top line. The fact that we do not really have exposure to margin either at the affiliate level or very much at the AMG level and a number of other elements that really just contribute to the strength of cash flows that are replenishing liquidity and year after year after year and allowing us to put capital to work to execute against our growth strategy. Secondly, we've got the added boost of the Baring transaction and the significant proceeds that are coming to us as a result of that. And we've talked about sort of the uses of those and where we expect to put them to work and part of that is thinking about the balance sheet. When we think about the balance sheet, it really, to Jay's point, is a combination of liquidity and also capacity over time. And if you think about the value of liquidity, right, liquidity becomes more and more valuable, the more challenging the market environment gets. So we always want to be in a position where we feel like we can squarely be on offense when opportunities present themselves, and that's exactly where we feel like we are today. We have a consistent cash flow stream. We're sitting on significant liquidity. And in addition to what we have on balance sheet, we also have the ability to draw a $1.25 billion revolver. So we have potential -- plenty of capacity to execute against potential opportunities. In terms of the nature of our balance sheet, the vast majority is fixed rate. The vast majority is long duration. We have a small floating rate term loan. And I think in terms of the calculus, I'm not sure that it's necessarily rates that have changed our view. It's really just an ongoing focus on optimizing our balance sheet and optimizing liquidity in the context of the current and our view of the forward economic environment. So you heard me mention in my prepared remarks, we did earmark some of the capital from the Baring transaction to pay down some debt. We actually bought some treasuries to offset against our 2024 bond maturities. So we're really -- we feel like we're in great shape on the balance sheet, but we continue to optimize as the market environment changes.

The other thing that's happened to us in this quarter that we're in, the fourth quarter, is we obviously got the EQT proceeds, and Tom elaborated in his prepared remarks on the uses of that. But that liquidity that's sitting on our balance sheet gives us plenty of flexibility going into an uncertain '23, which we hope to use for new investments because we see lots of opportunity, but can also go to repurchases or further debt pay down, if needed.

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

Great. Thanks. Good morning, folks. If I could just circle so back on the private market side and a little bit more detail there. So maybe if we can talk about it in 2 angles, both from the fundraising side of illiquid private markets and what you see as sort of the outlook coming into 2023 in terms of fundraising cycles. And then on the other side of monetizations, and first of all, I guess, what was the contribution in the fourth quarter from that side versus, say, the absolute return strategies? And then as you think about that going forward is just looking at today, Slide 7, do you see the private market side of that performance fee contribution increasing over time? Or just -- or rather it's coming from the absolute side like you initially said?

Yeah. So Tom, do you want to start with the outlook for illiquids?

Yeah. Brian, thanks for the questions. So I think with respect to the overall fundraising sort of opportunity, I would take the word cycle out of your question. I think as we've talked about a fair amount in the past, we have a very diverse group of private markets affiliates, and within those businesses, each of them are diversified businesses into themselves. So we generally always have a range of products out in the market at any given time in different channels in different wrappers. So we don't really have a fundraising cycle type business overall. So we continue to see strong fundraising across our businesses. And I think when we look to the future, there's nothing that changes our expectation that we're likely to continue to see strong fundraising given the quality of those businesses, given the areas that they are in across infrastructure, real assets, credit, private market solutions, we feel like we're very well positioned against the key themes that clients are focused on. And frankly, we don't have a lot of exposure to some of the themes that perhaps are facing more headwinds in terms of potential fundraising, given how much capital has been raised in some of those areas in the last couple of years like more traditional corporate buyout-style private equity. In terms of the performance fee side, I mentioned that some of the realizations this quarter did lead to some small performance fees. I would say, in terms of our guidance for the fourth quarter, the majority of that is not linked to private markets. And as we've talked about private markets performance fees, we do expect that bar to continue to grow over time, but I would think about it as more of an intermediate to long-term opportunity for us as the investments that we've made in these businesses continue to season. We continue to build that carry bank, and we look out two-three-four years. We think that's going to be a big opportunity for us: one, to just continue to generate more cash flow; but also, two, to further increase the diversification of what is already a very diverse performance fee-generative asset set.

Yeah. I'll just make one last comment. Obviously, putting it into context at only about 15% to 20% of our business is in the private markets, I know your question is probably more of a broader industry one. And I know that you have a lot of people in your coverage universe that are there. But I do think there's a denominator issue that's going on in portfolios today. And I come back to my prepared remarks, which is portfolio construction is going to take center stage at the end of this year when people go to their committees and into next year, and they're going to have to think about the liquidity in their portfolios and where they're allocated. As Tom said, though, I think we see more of the specialty areas of private markets, real assets, infrastructure, some of the specialty credit areas as being the areas that will have follow through fundraising next year, but there will be slowdowns in other areas. And I do think that portfolio construction is going to need to take center stage as clients deal with the emerging risks of the new environment, including keeping their portfolios more liquid and the ability to generate absolute return out of their portfolios.

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

Hey, good morning, everyone. Thanks for the question. On that last point, I think you guys usually talk about 4Q seasonal redemptions on the institutional side. But as you've highlighted on this call, it's a strange year. Everyone's allocation targets are off. So any early signs that maybe this year could be a little different than a normal year-end? Kind of what kind of institutional behavior are you seeing now that we're halfway through the quarter?

Yeah. Thanks, Patrick. I think, Tom, I'll tag team this one. You're right. This is a very unusual year. Actually, it's a very unusual year followed by a previously very unusual 2021. So look, I'm not sure that anyone really knows the answer to your question. I do -- I will say again that we are seeing pipelines build on the liquid alternative side. I think people are reacting to the need to have some uncorrelated return in their portfolios. That may play out in the fourth quarter for us. It may take till 2023. I think on the liquid side, obviously, there's some carryover fundraises that people are going to final close, and that kind of is bolstering the whole industry, including us on the liquid side. And then I think the last thing that I would say is, people have to be more value sensitive in their portfolios. They have to be quality sensitive in their portfolios after kind of 10 years of momentum and growth. And whether we like to admit it or not, I think we were all somewhat complicit in the run up to just buying growth in a passive way. And so more active management has to come into these portfolios. So will that play out in the fourth quarter? It might. Do I think it's going to play out in '23 and '24? Yeah. I don't know, Tom, if you have anything to add to that.

Maybe just to your specific question on seasonality, I think some of the core trends are likely still to be there, and I think this is implied in your question that Jay's answer. They may just get trumped by other things that are happening in the market. So perhaps, will not be quite as visible. And obviously, one of those trends is around retail tax loss harvesting. And we're in a very different environment than we've been in the last several years. So I think some of these things will likely still occur, but the magnitude, it's pretty early to try and understand. And there are just bigger factors at play, I think, this year.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Horgen for any final comments.

Thank you all again for joining us this morning. As you heard, we are pleased with AMG's third quarter results. And given our strong business momentum, we're confident in our ability to generate earnings growth both in 2022 as well as compounded growth over the long term. We look forward to speaking with you next quarter.

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