Affiliated Managers Group, Inc. (NYSE:AMG) Q1 2023 Earnings Call Transcript

Affiliated Managers Group, Inc. (NYSE:AMG) Q1 2023 Earnings Call Transcript May 1, 2023

Affiliated Managers Group, Inc. beats earnings expectations. Reported EPS is $4.18, expectations were $4.16.

Operator: Greetings, and welcome to the AMG First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. 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.

Patricia Figueroa: Good morning, and thank you for joining us today to discuss AMG’s results for the first quarter of 2023. 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.

Jay Horgen: Thanks, Patricia, and good morning, everyone. AMG delivered solid results to start 2023, reporting economic earnings per share of $4.18 in the first quarter, driven by excellent Affiliate investment performance and the positive impact of our capital allocation strategy. During the quarter, we advanced several attractive new investment opportunities, we invested in our distribution resources and product development capabilities, and we enhanced our liquidity position to capitalize on the forward opportunity set. Also during the quarter, we continued to see the impact of the changing market environment as evidenced by the disruption in the banking sector and the historic volatility in treasury rates. High-quality alpha-oriented managers across both alternative and active equity strategies have distinguished themselves in this environment as elevated volatility, asset dispersion and macroeconomic uncertainty have created opportunities to generate differentiated returns.

Over the past three years, we have seen a resurgence of alpha generation in nearly every liquid alternatives category. And in 2022, active equity outperformance reached levels last seen more than a decade ago. Consistent with those trends, our Affiliates performance continues to be excellent, with approximately 90% of assets under management in both liquid alternatives and private markets delivering excess returns and more than 80% of our U.S. equity strategies above 3-year benchmarks. We expect the existing market dynamics to persist, and high-quality alpha-oriented managers are well positioned to outperform. Differentiated return streams are critical for clients to achieve their long-term objectives. We believe that independent partner-owned firms have competitive advantages in generating those differentiated returns across all stages of a market cycle.

With strong long-term investment track records, entrepreneurial cultures and alignment with their clients, our Affiliates represent the best of independent firms focused on alpha-oriented strategies. Their entrepreneurial spirit and ownership cultures enable them to protect and grow client assets in rapidly changing markets. AMG offers a unique opportunity to invest in a diversified array of independent alpha-oriented managers at scale. We have built our business one partnership at a time with a proven approach that is attractive to the highest quality firms, and we have decades of experience in identifying and partnering with them. AMG’s model enables each independent firm to preserve their entrepreneurial culture and maintain their investment focus as well as their alignment with clients.

Today, with nearly 40 partner-owned firms across asset classes, strategies and geographies, along with our ability to make investments in new and existing Affiliates, AMG offers shareholders an attractive, diversified business profile that is well positioned for long-term growth. And we see an opportunity to partner with additional alpha-oriented independent firms at a time when we expect client demand for these differentiated return streams to accelerate. Our approach continues to resonate with those firms seeking to preserve their independence, while simultaneously benefiting from collaboration with a strategic partner. Our steadfast commitment to offering solutions to independent partner-owned firms and our ability to invest across all stages of a market cycle have distinguished AMG over time.

And we formed a number of our most successful partnerships during challenging market periods. Given our 30-year track record, enhanced financial flexibility and proprietary relationships with prospective Affiliates, we are well positioned to increase our level of new investment activity. Challenging periods can present opportunities and also highlight the value of an engaged strategic partner. Choosing a partner is one of the most important decisions that principles of an independent firm make for their business. And in that process, the value of AMG’s expertise and orientation is paramount. We work with our partners to magnify their efforts and strengthen their competitive positioning, ultimately creating value for all stakeholders. As part of that strategic engagement, we continue to invest alongside our Affiliates using our capital and resources to advance our Affiliates’ long-term objectives, including through succession planning, capital formation and other business development initiatives.

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Given our confidence in AMG’s and our Affiliates’ ability to capitalize on the increasingly attractive opportunities for growth. We recently invested in key hires to further enhance AMG’s product development and distribution capabilities, including a new Head of Client Solutions. More broadly, given our focus on high-performing independent firms and our ongoing strategic evolution towards areas of secular growth, AMG’s long-term organic growth profile is improving, enhancing our cash flow and earnings growth over time. And as you know, over the last few years, we have strategically evolved AMG by aligning our capital and resources with long-term demand trends and investing in high-quality partner-owned firms that can benefit from these trends.

Since 2019, we have made $1.4 billion in growth investments in new and existing Affiliates. Alternatives across both liquid alternatives and private markets accounted for approximately two-third of these investments, with the remaining one-third primarily in sustainable strategies. 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 add new Affiliates in high-growth areas, we will further evolve our composition towards in-demand strategies, driving our long-term organic growth and further differentiating AMG. Finally, capital allocation decisions are fundamental to our strategy, and we evaluate every opportunity on a risk-adjusted basis, factoring in the impact of the investment to our business mix, cash flow and franchise.

These decisions require judgment, and our allocation discipline is embedded across all elements of our process and culture. In executing growth investments in new and existing Affiliates, we ensure proper alignment with our Affiliate partners and structure investments that benefit all stakeholders. Looking ahead, our opportunities to invest for growth have been steadily building as a result of our broadened capabilities and the changing market environment, which, as we have seen historically, can present unique opportunities to invest and create value. Given the combination of our enhanced opportunity set and our disciplined approach to capital allocation, we are confident in our growth strategy and our ability to create shareholder value going forward.

And with that, I’ll turn it over to Tom to review the details of the quarter.

Tom Wojcik: Thank you, Jay, and good morning, everyone. The quality and stability of AMG’s earnings across private markets, liquid alternatives and alpha-oriented strategies demonstrates the value of the diversity of our Affiliates and their ability to navigate volatility on behalf of clients. The combination of our business mix, our strong balance sheet and capital position and our partnership solution set position AMG well to execute on our strategy to partner with high-quality new and existing Affiliates to create significant shareholder value. This quarter, we updated our definition of EBITDA, economic net income and economic earnings per share to reflect the realized returns on the capital we invest on our balance sheet to facilitate the growth of Affiliate products and execute our overall strategy.

We will now include realized gains and losses on seed capital, GP commitments and other strategic balance sheet investments in our supplemental earnings metrics. And you’ll see in our press release that we’ve retroactively applied this definitional change to prior periods and also excluded any historical unrealized gains and losses. Now turning to our first quarter results. Adjusted EBITDA of $217 million included $25 million of net performance fee earnings, reflecting the ongoing execution of our strategy to invest in secular growth areas and strong performance at liquid alternatives Affiliates. Economic earnings per share were $4.18 and additionally benefited from the ongoing impact of share repurchases. Turning to flows. Net client cash outflows, excluding certain quantitative strategies, were $2 billion, a meaningful improvement compared to recent quarters, reflecting strong overall investment performance and continued strength across both liquid alternatives and private markets as well as improving trends in fundamental equities.

Now turning to performance across our business and excluding certain quantitative strategies. In alternatives, we again reported strong results with net inflows of $3 billion in the first quarter. These inflows reflect $2.5 billion of private markets flows at Pantheon, EIG and Comvest. Our Affiliates continue to generate outstanding investment performance, and their excellent long-term track records across credit, real estate, secondaries and infrastructure continue to drive fundraising momentum. These diversified long-duration assets are a source of stable and growing management fees as well as a performance fee opportunity that is building over the long term. We also saw strong demand for liquid alternatives, where we have outstanding performance across a wide range of products, and our Affiliates generated nearly $0.5 billion of inflows, ex quant in the quarter, as clients look for uncorrelated and differentiated return streams to add diversity to their portfolios.

In addition, we generated nearly $1 billion of inflows in certain quantitative liquid alternative strategies, which is an encouraging sign, building on strong performance over the last 2 to 3 years. Turning to global equities. Net outflows slowed considerably to $3 billion, a meaningful improvement versus prior quarters. And while overall near-term performance in global equities remains mixed. Our Affiliates’ strong long-term track records across multiple cycles position them well to recapture client demand over time. In U.S. equities, we saw net outflows of $2 billion, also moderating relative to last quarter. We continue to generate excellent investment performance in this category with approximately 80% of assets outperforming on a 3, 5 and 10 year basis, highlighted by value-oriented strategies at Yacktman, Frontier and River Road.

Finally, multi-asset and fixed income strategies saw a second consecutive quarter of improvement, with inflows of $500 million, driven by fixed income strategies at GW&K and Artemis. Now moving to second quarter guidance. We expect second quarter adjusted EBITDA to be between $210 million and $220 million based on current AUM levels, reflecting our market blend, which was up 1% quarter-to-date as of Friday and including net performance fee earnings of $15 million to $25 million as well as the impact of our newest Affiliate, Peppertree. Turning to specific modeling items. For the first quarter, our share of interest expense was $31 million, controlling interest depreciation was $2 million, amortization and impairments were $29 million, and intangible related deferred taxes were $15 million.

We expect each of these metrics to remain at similar levels for the second quarter. Our effective GAAP and cash tax rates were 24% and 16%, respectively. And we expect them to be 26% and 17% for the second quarter. Other economic items were negative $4 million in the first quarter. Other economic items included $1 million in realized gains, which are now included in economic net income under our updated definition. Going forward, we expect $1 million to $2 million of realized gains per quarter and do not expect any additional contribution from other economic items. Our adjusted weighted average share count for the first quarter was 37.9 million, reflecting the impact of the accelerated share repurchase program that we launched at the end of last year.

We expect our share count to remain at a similar level in the second quarter. Finally, turning to the balance sheet and capital allocation. Our balance sheet is in an excellent position and remains a significant source of strength as we look to generate incremental shareholder value. In the quarter, we completed the monetization of the freely tradable EQT shares we received in connection with the Baring transaction, bringing total realized gross proceeds to nearly $750 million. The lockup on the remaining 25% of the shares expired in mid-April, and we will continue to monetize the position over time. Our strong capital position ensures that we are able to invest across market cycles, including in times of dislocation, when our cash and liquidity have the potential to significantly impact our long-term earnings per share profile.

We continue to expect share repurchases of at least $425 million for the full year, inclusive of the $225 million ASR. As always, these expectations remain subject to market conditions and new investment activity. Given the combination of compelling new investment opportunities ahead and ongoing market volatility, we are holding more cash and have substantial flexibility as our opportunity set continues to evolve. To the extent compelling new investment opportunities do not materialize over time, we expect to return additional capital to shareholders via repurchases as we have demonstrated over the last 4 years, while simultaneously managing our leverage. We remain committed to making disciplined capital allocation decisions and evaluating all opportunities under a common framework.

Looking ahead, we view the current market environment as an opportunity to continue to position AMG for long-term growth. The fundamentally changing environment further reinforces our conviction in our strategy and positions us to deliver compound earnings growth and generate long-term value for our shareholders. Now we’re happy to take your questions.

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Q&A Session

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

Bill Katz: So Jay, maybe one for you. Just you mentioned in your prepared commentary, and Tom as well, that sort of the opportunity set on the Affiliate side might be expanding a little bit. Sort of wondering if you could talk a little bit about where that pipeline sits today versus where we were maybe 3 or 6 months ago. And where is the sense between the bid-ask between what sellers may be looking for versus what your pricing might be and what areas that you continue to look into?

Jay Horgen: Yes. Thanks, Bill. So you’re right. In my prepared remarks, I did mention that we’ve advanced discussions with several prospective Affiliates. And we continue to see our pipeline build on earlier stage prospecting in our efforts there. I think we’re seeing the momentum in our pipeline for several reasons, and I’ll touch on those and then maybe I’ll come back to the actual — the environment that we’re operating in. So the first thing, I think, on the momentum point, I think you’ve heard us say this in the past that we do have a growth strategy to invest in areas that are long-term secular in nature in terms of growth, which includes liquid alternatives, private markets, Asia, wealth management and sustainable strategies.

Given our high conviction there and the durability of these trends, we have been methodically targeting these areas for the last several years, which has expanded our prospect universe. I guess second, a few years back, we reorganized within new investments and increased our resources to originate and maintain relationships in this target universe. So we put more effort to it and more people. And then third, over time, we’ve broadened our partnership solution. So not just succession planning, we’ve added growth capital, strategic distribution and other resources for our Affiliates. And this expanded solution set is even more attractive to an evolving landscape that’s increasing the number of conversations that we’re having. So taking all three of those together, our partnership approach is resonating with the highest quality independent firms.

And I do think we’re significantly differentiated because of it. Why? Because we preserve independence while also engaging strategically with our partner firms. So that, I think, is helping us with the increasing sort of supply of opportunities in our pipeline. Then to your point, on the transaction environment, it is constructive today. We’re seeing reasonable expectations and reasonable valuations, at least within our ability to structure and risk-share with our Affiliates because we come to partner with them for the long term. And with that favorable environment, I think that adds an incremental tailwind as our activity and our pipeline has increased. So we are constructive about doing new investments over the sort of near and medium term, as I said in my prepared remarks.

And given the attractiveness of our model and the solution set that we offer, we do see our competitive position increasing and the demand for our partnership solutions increasing. So thanks for your question, Bill.

Operator: Our next question comes from the line of Daniel Fannon with Jefferies. Please proceed with your question.