Greetings, and welcome to the AMG Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow this formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. 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 fourth quarter and full year 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. AMG achieved outstanding results in 2022, delivering 10% growth in economic earnings per share over the past year, and 50% growth over two years. Notably, we generated these results across dramatically different market environments. In 2021, world markets rose significantly against the backdrop of low rates and easy monetary policies, while in 2022 global tightening and geopolitical risks drove double-digit declines across both equities and fixed income. Over that period, AMG delivered record earnings per share, driven by excellent performance from our affiliates, new investments in secular growth areas, and share repurchases. Our industry-leading results in an otherwise challenging environment for asset management highlight the efficacy of our model, the quality of our affiliates and the positive impact of our capital allocation strategy. And, as we will discuss today, we believe AMG is uniquely positioned for success and continued growth going forward. Stepping back, over the last few years, we have strategically evolved AMG by aligning our capital and resources with long-term demand trends. Since 2019, we have invested $1.3 billion for growth in new and existing affiliates that contributed more than $200 million in EBITDA to AMG in 2022. Alternatives, including both liquid alternatives and private markets, accounted for approximately two-thirds of these investments with the remaining one-third primarily in sustainable strategies. The decisions we made in 2022 were representative of our growth strategies. We began the year with an incremental investment in Systematica, one of the industry's leading technology-driven liquid alternatives managers, and we ended the year with an investment in Peppertree Capital, a high-quality private markets manager in the fast-growing communications infrastructure segment. Today, more than half of our earnings are generated by affiliates in areas of secular growth, nearly doubling our exposure since 2019. And, as we continue to evolve…

Thank you, Jay, and good morning, everyone. AMG's excellent 2022 results reflect the differentiation of our business model and stand out against a challenging industry backdrop. For the full year, we delivered $1.1 billion of adjusted EBITDA and economic earnings per share of $20.14 grew 10% year-over-year, driven by outstanding affiliate investment performance and the execution of our growth and capital allocation strategies. Liquid alternative strategies delivered strong results for both clients and shareholders and generated $227 million of net performance fee earnings. And our strategy resulted in two affiliate investments and significant excess capital returned through share repurchases, driving earnings growth today and positioning us well for the future. As we enter 2023, our affiliates' value proposition is resonating with clients. Our partnership solution set is uniquely positioned to attract new affiliates. And our balance sheet and cash flow profile enable us to execute on our strategy to create significant shareholder value. Now turning to our fourth quarter results. Fourth quarter adjusted EBITDA of $371 million and economic earnings per share of $7.28 were up 4% and 19%, respectively, year-over-year, reflecting strong affiliate investment performance and the impact of new investments and share repurchases. During the quarter, the Baring transaction was completed and we received $240 million in cash and 28.7 million EQT shares. For GAAP purposes, we booked a total after-tax gain of $576 million, including a $499 million gain on the transaction that we have reported as a separate line item on our income statement and a $77 million gain on EQT shares, which is included in investment and other income. These gains are excluded from our supplemental metrics and, additionally, Baring earnings are excluded from our fourth quarter and go-forward results. Turning to performance across our business and excluding certain quantitative strategies. Net client cash outflows…

Thank you. [Operator Instructions] Our first question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Hey, good morning, guys. Thanks for the question. So, maybe we could start with a point, Jay, that you made in your prepared remarks about mixing in investments or prioritizing investments a little bit more for growth versus maybe share repurchase for the year. Maybe help us think through what areas you expect to be relatively more active in? And if the elevated pace of activity does not come through, should we expect you guys to be above the guide on the share buybacks for the year?

Yes. Well, good morning, Alex, and thank you for your question. So, to address the first part on new investments, yes, we do think we're in an environment where we are going to see more activity for us on the new investment side, in part because we have seen the market environment change in our favor, both on the buyer side, we see buyers -- sort of historical buyers being more inwardly focused as I mentioned on a prior call, and we also see after a period of elevated valuations and sort of optimistic business plans, we see more modest valuations and modest expectations. So, we think that's a good environment for us to transact. And I think the last point is that the needs of independent firms, they, in these periods, really could use a helpful support of strategic partner like in AMG. And that is something that we see in our dialogue with new affiliate prospects, something that they are really looking for. And then, when you kind of take a step back and you look at our current pipeline, we do have a pretty active pipeline. We have a growth strategy to invest in both new and existing affiliates in areas of secular growth. So, our new investment pipeline very much reflects areas of secular growth. We've articulated that over some many years now, which we believe to be in areas where long-term demand trends continue to be in our -- in the world and in the economy, and that includes areas such as private markets, liquid alternatives, ESG or sustainable investing, Asia and wealth. And we continue to see businesses in those areas and we continue to expect that we will do more investments in capital to that -- to those areas. But you're also right that to the extent that we are not able to or willing to, I guess, make those investments over the course of this year or let's just say the next many quarters ahead of us we will return capital as we have for the last four years to shareholders. And when you really take the lens back out, and I think we described it in our prepared remarks, we've put $1.3 billion out into growth investments over the last four years and $1.9 billion into share repurchases. We would like to see that mix skew more towards growth, but we are prepared to return capital just as we have, because we have a disciplined capital allocation framework that governs those new investments. I don't know, Tom, if you have -- want to add anything?

Yes. So, Alex, look, I think you asked your question in exactly the right way. And as Jay walked through, the first thing thinking about with our capital is all those opportunities for growth investment, and then we think about exactly that, which is what do we then do with our excess capital and how much should we repurchase. So, maybe I'll just spend a couple of minutes on our liquidity position and how we're thinking about repurchases, how the ASR plays in, et cetera. So, look, we entered 2023 in a very strong overall liquidity position. And that's aided not only by our strong 2022 financial results, but also the proceeds from the Baring transaction. And as Jay said, at the highest level, we're positioned to both invest for growth and return significant excess capital to shareholders via repurchases. Importantly, when you think about repurchases, we finished 2022 with about $475 million of repurchases and then we announced the $225 million accelerated share repurchase program. So, really the right way to interpret the ASR is, call it, $25 million of that gets us to our $500 million full year guidance number for 2022, and then, we really prefunded $200 million of what we plan to do in 2023. So, as you heard in my prepared remarks, for 2023, we used at least $425 million of repurchases as a good baseline number, which includes the totality of that $225 million ASR that's going to be executed in the first half of the year, and then another $200 million in the second half of the year. But we also have meaningful capacity beyond that to invest for growth in all the areas that Jay was talking about; call it, approximately $400 million of balance sheet cash that we've sort of earmarked for growth this year. And that's really even before thinking about using our revolver or taking up our leverage levels, that's just at a consistent leverage level with the liquidity that we have available to us today. Of course, if those investments don't materialize, we'll likely return more capital to shareholders per our capital allocation strategy and framework. So, you should really consider the overall earnings power that comes along with that $400 million of incremental capital that we have to put to work, whether it goes toward growth investments or whether it ends up being a return of capital via repurchases over time. Now, importantly, the goal is not to push all that capital out the door in any single quarter or calendar year, but really to ensure that we have the capital when we need it, when the highest quality opportunities become available, and that's really the way that we're managing our balance sheet and it's the focus of our overall capital allocation strategy.

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

Hey, good morning, Jay, Tom. Hope you and the team are doing well.

Yes, good morning, Craig.

So, I wanted to follow-up on Alex's question and just focus more on the investment side. Sometimes it takes the sellers time to digest lower valuations or bids. So, in the meantime, are firms generally willing to do transactions at lower valuations now? And are you seeing maybe some great businesses inside of a larger financial firm or another situation where the owner may need to sell over the near term maybe something more on the distressed side?

Yes. Thanks, Craig. That's a good question. So, one of the things that drives our partnerships over the longest period, the last three decades, is just demographics itself. So that -- there's only so much that firms can do around succession on their own. We think that AMG is the market leader in succession planning with independent firms. And so, demographically-driven transactions for us is an ongoing supply of new prospects in really any period. And then, to your specific question on valuations, look, valuations have come down. They've been down for several quarters now. And I think the prospect of them going back up is relatively low. So, I do think that there is a -- I guess, this may be more of an acknowledgment that valuations in the sort of growth era that came to an end with the tightening or kind of in the rear view mirror. One of the ways that we are able to come together with a new partnership in getting transactions done is to structure really for multiple outcomes, so that if there is substantial growth in a business that we give that credit to the potential partner, and simultaneously, we are protecting ourselves with structures that allow for a level of cash flow in down scenarios. So, we do think, again, we have a particular expertise in structuring for multiple outcomes, which allows us to bring our sort of unique model to the table and get transactions done. I guess, the last thing I would say, and I enjoy saying this, is that when you partner for businesses and you are not buying 100%, because as you know in all cases, we leave a substantial amount of equity in the hands of our partners, then really what you're saying is the vast…

Thank you. Our next question comes from the line of Bill Katz with Credit Suisse. Please proceed with your question.

Okay. Thank you very much for taking the questions. So, just maybe migrating on to maybe a flow discussion at this point. So, Jay and Tom, you both have spoken about this sort of ongoing rotation now, sort of rates normalized, what have you. Can you talk a little bit about what's been driving the alternative flows? And if you think that liquid alternatives will accelerate, where do you think that that volume will come from? Thank you.

Yes, thanks. Bill. Thanks for your question. I'm going to have Tom start here on that.

So, thanks Bill. Let me just kind of walk through flows overall. But maybe even before I go there, just to remind everyone, flows, obviously, are a very important driver of growth in our business over time. But AMG's model is unique. And really flows are just one of the important drivers in our business. And really in 2022, if you think about the performance that we delivered, it was driven by a number of the other areas that tend to drive growth in our business, excellent performance driving performance fee earnings, really strong capital allocation and new investments driving growth, and then also significant return of capital. So, flows, obviously, are going to be an important output of our strategy, but they really are only one of the components that's important. So, you heard us discuss today, our growth strategy is really driving an evolution of our business mix more towards secular growth areas. That's the way that we think about the business. And as we continue to execute against that strategy, we fully expect to enhance the long-term organic growth and earnings growth profile of the business. So, I'll touch both on the private market side as well as the liquid alternative side, and I'm sure Jay will want to add some as well. In terms of where we stand, look first of all, January was a much more constructive start to the year overall for AMG versus the environment that we faced in 2022, and we have a lot of positive setting up for 2023 and beyond. We continue to benefit from the diversity and depths of our private markets affiliates. And they're raising assets across a number of well-positioned strategies, including credit, infrastructure and real estate. And as we said, these flows are incredibly valuable given…

Yes, Bill, let me just editorialize a bit further on Tom's remarks. The second half of 2022, it was very much a risk-off environment and we think it masks some of the underlying trends in our business. It really hit our long-only equities part of our business. And as Tom said, in January and early February, we've seen that really abate, the long-term outflows have really slowed down on that part of our business. And clearly, the liquid alternatives and private markets have been driving our organic growth on the other side. Ultimately, or really for us, flows are really just an output of our strategy. We have high conviction that if we invest in areas of secular growth and new and existing affiliates that we will ultimately see the flows follow. And then as Tom said, really what we're trying to do is grow our cash flow and our economic earnings per share, which we did in 2022 and in 2021. And the drivers are multiple drivers, because AMG's model is unique. We can see those drivers come from affiliate performance, we can see it come from flows, we can see it come from new investments, or we can see the compounding effect of share repurchases. And in this period that I just described, we got three of those four drivers and they were pretty significant to our earnings profile.

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

Thanks. Good morning. Wanted to follow-up on the liquid alternative book, but focus on quants. And given the success and performance improvements you've seen over the last basically two years, do you think that we're going to be talking about this business or remove the ex-quant discussion in 2023? And maybe talk about the discussions you're having with clients and how you think about gross sales for that portion of your business in kind of this year or next? Yes, that would be helpful. Thank you.

Yes. Good morning, Dan. Thanks for your question. Good question. Yes. So, we have had outstanding performance in liquid alternative strategies. And I think you're right to point it out, we've been reporting kind of an ex-quant flow profile for some time. It's a slightly more nuanced situation because some of that quant with long-only global equities, and so, to my prior point, we are still seeing some risk-off in those strategies, albeit that pie -- part of the pie has gotten smaller. So, it very well could be that we kind of just go back to straight up flows in 2023 because the liquid alternative strategies of the quant side have just excellent performance. And we do think that they've been underrepresented in client allocations. So, we do think that's going to change. Now, look, it takes time for those allocations to change. And if just conversations and activity at those affiliates are an indicator, we're having increased level of searches, increased level of conversations around putting more of these strategies into portfolios. And we think those -- we think portfolios need these types of strategies. Clearly, if you were under allocated to liquid alts especially in absolute return trend, macro, multi-strat in 2022, your portfolio performed much worse than those that had a fair allocation to these strategies. So, we do see in '23 and in '24 increasing organic flows into liquid alts. And our performance is just really good, almost categorically, Systematica, AQR, Capula, Garda, Winton, they all had excellent performance in '22. Most of those firms had great performance in '21, and their one, three, five and 10-year numbers all look very competitive with either their benchmarks or even markets like the S&P. So, we do see increasing organic growth into these strategies. And not to lessen the discussion around private markets, which are also on our alternatives bucket, when you think about private markets, we have a number of sort of specialty areas within private markets, including Peppertree, which was a business that we made investment late last year in the communications infrastructure, as well as a private debt manager in Comvest and a number of other high-quality businesses in that segment, which really are still experiencing significant growth and significant fundraising. So, just generally our alternatives area, which comes with higher fees, as Tom said, in many cases, longer lockups, the chance for performance fees, we see that driving our growth going forward.

And I'll maybe, Dan, just add one statistic to that just to give you a sense, and this incorporates not just sort of quant, but our overall absolute return performance fee eligible book, just to give you a sense of kind of the evolution we've seen over the last couple of years. AUM today that we have in eligible absolute return strategies that are above high watermarks has increased by more than 50% since the beginning of 2020. So, when we think about not only the performance fee earnings growth opportunity, but also the organic growth opportunity, just a more and more sizable portion of our overall book is in a position to deliver those types of characteristics over time. And you really do get that network effect where excellent performance is driving performance fee earnings, excellent performance is driving new conversations with clients and flows, and we really do think that that's a real positive for us overall.

And as you know and I know you know this, Dan, is that as you get new clients, you start the new clock with performance and performance fees. And so, there is kind of a positive upward cycle that you have with the idea that above high watermark new clients, [we get] (ph) the opportunity for even more performance fee opportunity, which is what we're seeing in our business today.

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

Hey, good morning, folks. Apologies, I'm going to give you a multi-part question, if that's okay. Just linking a few things together. So, first of all, obviously, really strong 2022 relative to the asset manager peers with positive EPS growth. So, if you can talk about maybe what's your confidence level in repeating that? You're probably going to have headwinds for the asset manager industry overall. It's going to make positive EPS challenging for the industry. Maybe just talk about sort of what your confidences in having another year of positive EPS growth? And if we think about maybe the headwinds, obviously, being on the guidance on the performance fee side being a little lower, is that mostly driven by private capital monetizations being down? And then, as you think about new investments, are you more geared towards illiquid alternatives or liquid alternatives?

Yes, thanks, Brian. Actually, we might be able to wrap a lot of that into letting Tom give you some more specifics around the guidance that we gave on the call. So, I'm going to let Tom do that here in one second. Just expressing confidence, I mean, we do have a level of conservatism in the guidance that we described, even around performance fees. The way we come up with that is we look at the amount that's above high watermark, we look at the types of businesses that we have, and we took kind of the performance assumption way down. And of course, in 2022, the performance was excellent. And in 2021, it was excellent. So, candidly, the level of conservatism just in our performance fee estimate is there. In fact, over the last two years, you could argue that we've actually reduced the amount of performance that we need to generate this level that Tom has given you guidance. So, it's probably more conservative than last year or the year before. So, there's upside there. There's also upside in capital, which Tom will describe, but we can't prescribe exactly when that capital will go out and that's why we haven't sort of put it into our guidance. Those two things really are the two positive drivers. How that plays out this year as well as things like market beta will really determine our growth in 2023 over 2022, but we're still very optimistic sitting here in February that we'll be able to do that. And then, Tom, maybe you can give more specifics.

Yes. Brian, thanks for your question. So, maybe what I'll do is I'll just walk through sort of how you would bridge our first quarter guidance through to the full year conceptually. And obviously, there are a number of assumptions that you'll want to make as you do that. But before I do that, I know in our fourth quarter numbers, there were a fair amount of moving parts, in particular, around the Baring gain as well as the gain on the EQT shares that we monetized both the mark-to-market as well as the realized gains. I did state this in my prepared remarks, but just to reiterate, none of those gains are included in our EBITDA or our economic earnings per share. We've excluded all of that. So, just to be clear, those are clean numbers, excluding the sizable gains on both Baring as well as the EQT shares. So, to address your question, if you use our first quarter adjusted EBITDA guidance range of $215 million dollars to $220 million as a starting point, and then that guidance includes $20 million to $25 million of performance fee earnings for the fourth quarter -- first quarter that really gets you to a run rate number for management fee EBITDA, which is a pretty good starting point in terms of thinking about the year based on the run rate of where the business stands today. Then, you can factor in the impact of Peppertree starting in the second quarter and contributing something in the range of 2% to EBITDA on an annualized basis. And then, of course, you'll make your own assumptions about beta and flows and that will get you to a full year management fee EBITDA estimate. And then, we gave you guidance on the performance fee earnings…

Yes. And I appreciated your opening statement that we do think were differentiated relative to our peers, in part because of the discretionary cash flow nature of our business that we ultimately have a strategy to invest that cash flow into growth. But if not, we have a capital allocation framework to return that to shareholders. That's what's been driving our earnings in a positive direction relative to our peers and we expect that to continue in 2023.

Thank you. 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 for joining us this morning. As you heard, AMG achieved outstanding results in 2022. And through the execution of our growth strategy and our disciplined capital allocation framework, we are confident in our ability to create significant shareholder value going forward. 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.