Affiliated Managers Group, Inc. (NYSE:AMG) Q4 2023 Earnings Call Transcript

Affiliated Managers Group, Inc. (NYSE:AMG) Q4 2023 Earnings Call Transcript February 5, 2024

Affiliated Managers Group, Inc. misses on earnings expectations. Reported EPS is $5.92 EPS, expectations were $6. AMG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the AMG Fourth Quarter 2023 Earnings Call. [Operator Instructions] 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.

Patricia Figueroa: Good morning and thank you for joining us today to discuss AMG’s results for the fourth quarter and full year 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, this morning, we posted an updated investor presentation to our website 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’s full year results reflect a positive impact of our strategy and our capital allocation discipline, across both growth investments and share repurchases. In 2023, we further diversified our business by investing in secular growth areas, welcoming two new Affiliates operating in distinct fast-growing areas of private markets, Forbion and Ara Partners. We also collaborated with our existing Affiliates and expanding their reach into new geographies and channels including the development of several new and innovative products. Finally, we meaningfully enhanced our liquidity position and further strengthened our balance sheet, while also returning significant excess capital to shareholders.

AMG’s business composition is changing. And as we enter 2024, I wanted to reflect on this strategic evolution. Over the past several years, we have deliberately diversified our business by investing in high-quality independent new Affiliates operating in secular growth areas. And by investing in and alongside our existing Affiliates to capitalize on their growth opportunities. These growth investments have reshaped AMG’s business profile, from one that was characterized largely by differentiated long-only strategies to one that has the majority contribution from alternatives. Today, half of our earnings come from alternative strategies, balanced between private markets and liquid alternatives, with the other half of our earnings coming from differentiated long-only strategies.

With substantial contributions from each of the private markets, liquid alternatives, and long-only strategies, AMG’s business profile is unique in our industry. And looking ahead, we are well-positioned for long-term success across all three areas, as I’ll discuss further. In private markets, our Affiliates offer differentiated return streams in sectors aligned with durable client demand trends. Over the course of 2023, amid a challenging fundraising environment, our private markets Affiliates raised approximately $16 billion, highlighting the appeal of their specialized strategies and providing them with additional dry powder to capitalize on forward opportunities. AMG’s private markets Affiliates operate in a number of fast-growing areas with long-term structural tailwinds, including infrastructure, private credit, private market secondaries, and specialty strategies within private equity, venture capital, and real estate.

Looking ahead, we expect the contribution from private markets to accelerate through a combination of organic growth, new product launches, and new partnerships with independent firms. Turning to liquid alternatives, our Affiliates delivered outstanding performance and differentiated returns for their clients in 2023. In addition to beta-sensitive strategies, our Affiliates manage absolute return strategies, including global macro, relative value fixed-income, and trend following. All of which generate returns that have low or no correlation to broader markets. We believe liquid alternative strategies are underrepresented in client portfolios and expect this to change as these strategies have proven their value in choppy or down markets. As clients continue to focus on portfolio construction to address the changing market environment and more fully recognize the value of these strategies in their portfolios, we expect increasing allocations into liquid alternatives.

In addition to their potential for significant organic growth, these strategies can generate sizable performance fee earnings for AMG. In fact, over the last three years, across vastly different market environments, our liquid alternative strategies have delivered nearly $600 million in pre-tax performance fee earnings. Liquid alternatives are an essential feature of our unique business profile because they are complementary to both our private markets and long-only strategies. This area is often underappreciated, given that performance fee earnings have proven to be consistent and significant, especially when private markets and long-only strategies are facing headwinds. Taken together, this dynamic is a great differentiator and source of stabilization for AMG.

Turning to differentiated long-only strategies. As you know since AMG’s inception, we have partnered with a number of the highest-quality independent partner-owned firms managing differentiated long-only strategies. Our Affiliates represent the best of active investing and include a number of the most renowned brands in our industry, including Harding Loevner, Parnassus, Tweedy, Browne, and Yacktman. And our Affiliates have built enduring franchises with specialized investment expertise and long-term track records across market cycles. More broadly, the current market environment is characterized by higher volatility and more asset dispersion is generally constructive for active managers, given their entrepreneurial orientation, investment-centric cultures and alignment with clients, independent partner-owned firms have competitive advantages in managing risk and offer an – offering differentiated return streams, especially during periods of heightened uncertainty.

Overall our diversified portfolio of high-quality independent partner-owned firms operating across private markets and liquid alternatives, and differentiated long-only strategies is a competitive advantage that both enhances our earnings stability and supports our capacity to continue investing in areas of the highest growth and return to benefit our shareholders. Looking ahead, we will continue to strategically evolve AMG through growth investments in new and existing Affiliates, supported by our unmatched three-decade track record of successful partnerships, our new investment origination capabilities, and our significant financial flexibility. We will remain disciplined in our capital allocation decisions as we invest in new growth opportunities, while also returning excess capital to shareholders.

Our discipline is evidenced by our actions. In 2023, AMG invested in two new Affiliates, seeded three new products, and returned a significant amount of capital to shareholders by repurchasing 10% of our shares outstanding. Before I turn the call over to Tom, I wanted to take a moment to acknowledge, an important milestone in AMG’s history. Last year, we celebrated 30 years of successfully partnering with independent firms to magnify their advantages and actively preserve their independence. While the investment industry and AMG have evolved significantly over the past three decades, our steadfast commitment to further our Affiliates’ success, while ensuring their independence remains unchanged. Looking ahead we will continue to leverage our decades of experience in offering strategic insights and capabilities to our Affiliates to create exceptional value for their clients and our shareholders.

Our proven approach and our reputation as a collaborative engaged partner attracts the highest quality firms globally. And as we enter our next decade, we are seeing increasing opportunities to invest for growth and drive shareholder value. And with that, I’ll turn it over to Tom.

Thomas Wojcik: Thank you, Jay, and good morning everyone. Our business continue to evolve in 2023, driven by our focus on allocating our resources and capital to areas of secular growth. AMG’s strong fourth-quarter results illustrate the momentum we are seeing across our business and position us well for 2024. We had our best quarter of the year in private markets, where our Affiliates’ excellent performance continued to drive strong capital-raising and organic growth. In liquid alternatives, outstanding investment performance contributed to approximately $160 million in performance fee earnings for the year, and our differentiated long-only AUM ended 2023 at the highest levels of the year, increasing our forward earnings power.

We entered 2024 with fundraising momentum in private markets, a diverse set of Affiliates positioned for growth, a strong balance sheet, and significant liquidity to deploy capital to drive long-term durable earnings growth and shareholder value. Turning to our fourth-quarter results. Adjusted EBITDA of $296 million included $104 million of net performance fee earnings, reflecting strong Affiliate investment performance and the ongoing execution of our strategy to invest in secular growth areas. Performance fee earnings continued to be a valuable and consistent source of earnings and cash flow that further diversify our earnings profile and enhanced our earnings power. Our Affiliates’ strong investment performance generated performance fee earnings across each of our eligible asset areas, absolute return strategies, beta-sensitive, and private markets for both the quarter and the year.

Today, we have approximately $185 billion of performance fee-eligible AUM and we expect to continue to grow our alternatives footprint, further expanding our performance fee earnings opportunity through a combination of organic growth, new Affiliate partnerships, and new products. Economic earnings per share of $6.86 benefited from the impact of share repurchases and included approximately $0.60 of discrete tax benefits, primarily related to the foreign tax treatment of prior year performance fee earnings. Net client cash outflows excluding certain quantitative strategies were $4 billion for the quarter, an improvement compared to recent quarters. These results reflect continued strength in private markets fundraising, offset by fundamental equities.

Turning to performance across our business and excluding certain quantitative strategies. In alternatives, we again reported strong results, with nearly $4 billion in net inflows in the quarter driven by private markets fundraising. Private markets Affiliates raised $7 billion in the fourth quarter, contributing to a 15% organic growth rate for the full year. Our private markets Affiliates continue to generate outstanding investment performance and we expect a strong demand they are seeing from clients to support ongoing fundraising momentum in 2024. AMG has now partnered with eight private markets Affiliates. Together, these firms manage approximately $115 billion in assets and operate in areas of significant long-term client demand. Our Affiliates manage $40 billion in infrastructure strategies, $40 billion in private market solutions, $20 billion in private credit, and $15 billion in specialty areas including industrial decarbonization, life sciences, and multifamily real estate.

In liquid alternatives, while we saw outflows of $3 billion in the quarter primarily driven by seasonality and beta-sensitive strategies that generated performance fees in 4Q, we are confident that our Affiliates’ outstanding investment performance over the last three years across a range of products positions them to benefit from forward demand trends as clients look for differentiated return streams to add diversification and stability to their portfolios. As I mentioned earlier, we generated nearly $160 million of performance fee earnings for the full year 2023 and have delivered nearly $600 million over the last three years. Within differentiated long-only strategies, we saw net outflows of approximately $4 billion in global strategies and $4 billion in U.S. equities in the fourth quarter, while multi-asset and fixed-income flows were flat.

Overall, we remain confident that our Affiliates’ strong long-term track records across multiple market cycles position them to capture client demand over time. Now, moving to first-quarter guidance. We expect adjusted EBITDA to be between $235 million and $245 million, based on current AUM levels reflecting our market blend, which was flat quarter-to-date as of Friday, and including net performance fee earnings of $30 million to $40 million, and $10 million of catch-up and other fees from private markets Affiliates. We expect first-quarter economic earnings per share in the range of $5.03 to $5.24, assuming an adjusted weighted average share count of $34.5 million shares for the quarter. Consistent with last quarter, we posted a guidance reconciliation to the Investor Relations section of our website, where you can find the detailed modeling items, including interest expense, amortization and impairments, income taxes, and other economic items.

Turning to performance fee earnings expectations for the full year. Over the past five years, our net performance fee earnings have averaged roughly $150 million annually and we believe that it is a good baseline for thinking about performance fee earnings in a normalized year. Finally, turning to our balance sheet and capital allocation, our balance sheet is in an excellent position with nearly $500 million of liquidity, net of potential debt pay-down, and the full capacity of our $1.25 billion undrawn revolver. As I mentioned last quarter, we are holding short-term treasuries against our upcoming 2024 institutional bond maturity and have the option to pay down that debt in the near term, while we opportunistically look to refinance depending on market conditions.

We actively manage our liquidity and our capital allocation by running all decision-making through a common framework to ensure, we’re earning appropriate risk-adjusted returns for our shareholders over the long term, including managing net leverage, investing for growth, and returning excess capital to shareholders. In the fourth quarter, we repurchased $133 million of shares, bringing our total repurchases in 2023 to $574 million, inclusive of the $225 million ASR completed earlier in the year. We repurchased approximately 10% of our shares outstanding in 2023 and expect to continue returning excess capital to shareholders through share repurchases. For the full year of 2024, we expect to repurchase at least $400 million of shares subject to market conditions and new investment activity.

We enter 2024 in a position of strength with a strong capital position and a growing opportunity set to deploy capital, across investments in new Affiliates, innovating alongside our existing Affiliates including through seeding new products, investing in AMG’s capabilities, and then returning excess capital through share repurchases. Looking ahead, given our disciplined capital allocation framework and distinct competitive advantages, we are excited about the opportunities ahead of us and are well-positioned to create significant value for our shareholders over time. And now, we’re happy to take your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Bill Katz with TD Cowen. Please proceed with your question.

Bill Katz: Okay. Thank you very much for taking the question. Thanks for the guidance. Maybe a two-part, if I could cheat. The first part is, where you think you are in terms of the new deal pipeline and how you think some of the recent deal multiples are affecting that if at all? And then within the liquid alts discussion, how much of this discussion about things getting better is just your expectations, subject to view or versus just real-time conversations with the consultant community in terms of those allocations? Thank you.

Jay Horgen: Yes, well, thanks Bill, and nice to hear from you. Maybe I’ll start with the new deal pipeline question, address valuation, and then I’ll have Tom talk about liquid alts and our expectations there. The framework of what I’ll start here with new investments is just again remind you of our strategy with new investments and then maybe talk about the market environment and the dynamics there. Our strategy as you know is to invest in areas of secular growth within private markets, liquid alternatives, and differentiated long-only strategies. In addition to that, we are focused on certain themes that cut across, all three areas and that includes sustainable investing, wealth, and other themes. We have made several investments this year, last year, and the year before in these areas.

We expect to continue to do so. Maybe to put a finer point on, this sort of strategic investing for us is really as I said in my prepared remarks is changing our business composition, and today alternatives generate about half of our EBITDA and we see that continuing to grow. As a result, a focus has been in private markets and liquid alternatives on the new investment side. And within private markets, we’re focused on a number of areas and have been for some time that have structural tailwinds like infrastructure, like private markets solutions, private credit, and some other specialty strategies. And if you think about the new investments that we’ve made over the last five years, the benefit that we have is we can help these Affiliates grow and we are increasingly looking for opportunities where we can partner with a new Affiliate, not only one that’s growing on their own, but then to magnify their advantages as they grow.

And the way we do that is through our scaled resources, both on the wealth side and on the institutional side. We’ve been targeting firms that are kind of in that $5 billion to $20 billion in AUM range, the Enterprise value is between 250 and say 1 billion. And that range, we think is a really good range for us not to, not only help them in areas that they need help, but also easier to triple a firm of that size than it is one that’s already at 50 or 100. So private markets are very active there and our pipeline reflects it. In the case of liquid alternatives, again, very active there. As I mentioned in my prepared remarks, we also talk about the nature of liquid alternatives and how that’s complementary to both private markets and the long-only – differentiated long-only strategies.

Because, in fact they act in a dynamic way generally speaking perform well in flat, choppy, or down markets precisely when the other two are facing headwinds. So we’re excited to continue to look to partner with liquid alternatives managers. We had a lot of success over time. We’re sort of unique in the marketplace because there aren’t very many buyers for those types of businesses, so we see our competitive advantages to be high there. We are really looking for an absolute return in opportunistic strategies within liquid alternatives, and given the diverse range of liquid alternative managers that we already have, they slide in nicely in that regard. So that’s sort of what we’re looking for. Obviously, these are areas that are fast-growing that really are areas that have the opportunity for client allocations to increase over time.

Maybe taking the market backdrop and in describing that we have several competitive advantages. When we look at the market environment, we have our 30-year track record, and a proven partnership model, and we are known for our ability to magnify the success of our Affiliates, but we also actively support their independence. So for prospective Affiliates, those that are in our target universe, they do want a strategic partner and they also want to remain independent and that really is our target universe. That does set us apart both unique and uniquely positively from the more passive financially oriented buyers and it also sets us apart from those who want to consolidate or take control, because the ability to strategically benefit from AMG and remain independent is in stark contrast to a consolidator, who requires those partner-owned firms to relinquish their independence.

So, that gives us a really unique advantage in the market to be both strategic and actively support independence. We have also enhanced here our origination capabilities over the last several years and so we’re originating more new Affiliates, both from an organic perspective or proprietary perspective, but we just are canvassing the world in a much more rigorous and systematic way that is increasing our pipeline. And I guess, I would say finally the transaction environment is very attractive for AMG. You’ve seen a few transactions in the market recently that have come at high prices, but those are extremely large-scale firms. I think the opportunity for the mid-market firms and those firms where we can help, it’s moderated somewhat I would say.

Over the last 12 to 24 months, we’ve seen pricing moderate and also structures benefit both parties from a risk-sharing perspective. So we’re constructive on the environment, both for private markets and liquid alternatives, and we see the opportunity to invest in 2024. Maybe I’ll just reflect on 2023 for a moment. We had two highly attractive new investment – new partners that we added this year, Forbion and Ara Partners, both in private markets, both in sustainable investing. One being in the life sciences area and the other being industrial decarbonization. When we look back at 2023, it could have been an even more significant year from a new investment perspective. We entered the final stages with two additional firms that we ultimately did not meet our expectations and due diligence.