Q3 2019 Earnings Call

Greetings and welcome to the NMG third quarter 2019 earnings call.

At this time all participants are in listen only mode. A question and answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host well, usually our <unk> Vice President Investor Relations for AMG. Thank you you may begin.

Thank you for joining am genes to discuss our results for the third quarter 2019.

In this conference call certain matters discussed will constitute forward looking statements.

Actual results could differ materially from those projected due to a number of factors, including but not limited to those referenced in the company's Form 10-K , and other filings we make with the FCC from time to time.

We assume no obligation to update any forward looking statements made during this call.

And he will provide on the Investor Relations section of its website at <unk> Dot Dot com a replay of the call a copy of the announcement of our results for the quarter and a reconciliation of any non-GAAP financial measures that are not announced on this call. The most directly comparable GAAP financial measure.

As a reminder, we have also included updated investor presentation on the section of our website.

AG encourages investors to consult be Investor Relations section of its website regularly for updated information.

With us on the line to discuss the company as adults for the quarter, R.J. Horrigan, President and Chief Executive Officer.

<unk> Chief Financial Officer.

With that I'll turn the call over today.

Thanks on Julie and good morning, everyone.

As macro factors continue to feel uncertainty and volatility in markets AMG is diversification and unique partnership structure provides stability and enable us to continue to evolve our business to be long term client demand trends.

Boutique managers have a proven ability to outperform in more volatile markets.

Given their long term performance track record, our affiliates are well positioned to benefit as clients see differentiated risk adjusted returns that only active managers can provide.

More broadly with AMG is unique competitive advantages built over the last 25 years.

We are confident that our business will generate long term growth and shareholder value.

And your GE reported economic earnings per share of $3.16 for the third quarter.

Net client cash outflows of 19.7 billion were driven primarily by certain quantitative strategies across liquid alternatives in global equities.

And included a single low see redemption of 5 billion.

As we said last quarter and as Tom will discuss in more detail is important to note that these outflows had a disproportionate impact on a reported to you out relative to their more modest impact on our earnings.

Well, we expect outflows in these quantitative strategies to continue in the near term, we anticipate that AMG aggregate level of net outflows will moderate in the fourth quarter, given a number of large institutional and sub advisory wins, which are expected to fund by yearend.

Notwithstanding our near term flow results, we are well positioned for strong organic growth overtime.

AMC has diversified across a broad array of strategy is an active management, including a significant position and product areas currently benefiting from secular client demand trends.

I want to take a moment to discuss these growth areas within our alternatives multi asset in fixed income category.

The first is our liquid managers pantheon E G and Baring Asia, which combined to account for nearly 20% of our run rate EBITDA and are benefiting from record levels of client allocation to private markets.

Oh studies pantheon is the largest and most diversified generating two thirds of our EBITDA contribution from illiquid.

That's gone into a world class private market solutions provider offering clients a diverse array of primaries secondaries and co investment across private equity infrastructure real assets and private debt on a global basis.

This business continues to grow and its earnings stream is highly stable given that nearly all of its revenue is fee based and tied to committed capital.

In addition, E G and Baring Asia offer unique exposure to fast growing segments within private markets.

Gee is a leader in energy renewables and infrastructure investing globally.

Oh Baring Asia is one of the largest independent private equity in real estate firms focused on Asian markets.

In addition to fee related earnings E G and Baring Asia have significant upside potential from a growing performance the opportunity.

Collectively our private markets affiliates manage nearly 100 billion assets and have generated over 20 billion of net inflows over the last two years. These businesses continued to drive innovation and new structures and solutions, making private markets where accessible to clients globally.

Second within our multi asset in fixed income category.

She is benefiting from strong secular tailwinds in wealth management space through four affiliates veritable Baker Street, well should Forbes and my CIO that managed nearly 50 billion, an ultra high net worth asset.

In addition to the growing concentration of investable assets in this area wealth clients are actively transitioning from legacy manager selection model towards holistic advice and portfolio construction.

Our affiliates strong client relationships solutions orientation and focus on innovation are driving consistent inflows and earning stability.

In addition, we had a meaningful exposure to a number of attractive areas across traditional and alternative fixed income through both growth initiatives that existing affiliates such as GDP Kay and eight you are.

As well as new investments in market, leading affiliates, such as capital Encarta, both specialists and relative value fixed income.

In aggregate traditional and alternative fixed income accounts for approximately 70 billion assets and provides another growth opportunity and area of strong client demand.

These growth opportunities aggregate across private markets wealth management in fixed income account for approximately 30% of am G.'s EBITDA today, and we expect these areas to play and even more significant role in our business overtime.

Our fundamental managers across active equities and liquid alternatives, including Genesis Harding Loevner Tweedy Browne value Act Veritas and Yochum and continue to build on their strong long term track records and have further distinguish themselves that asset dispersion has increased particularly and less efficient markets such as small.

All cap emerging markets and global equities.

These strategies represent approximately 60% of our EBITDA given improving performance against the backdrop of volatile markets alongside capacity reopening in a number of strategies.

We are confident in our long term organic growth prospects across our fundamental equity and liquid alternative managers.

And finally, we continue to believe strongly the quantitative strategies across long only equity and liquid alternatives play an important role in client portfolios and we expect these strategies to be meaningful contributors to our <unk> organic growth profile overtime.

And while these products account for approximately 30% of are you on today given fee rates, an ownership levels, they contribute only 10% to our EBITDA.

Stepping back our core strategy is to generate long term value by investing in leading independent active managers through a proven partnership approach and allocating resources across AMC is unique opportunity set to the areas of highest growth and return.

This strategy has remained consistent.

And in the quarter, we made good progress in executing against our strategic plan.

Early in the quarter, we completed our investment in Garda specialist fixed income relative value manager with an exceptional performance track record.

Our building momentum in our new investment activities across a broad range of prospective affiliates offering in demand products.

Our transaction pipeline includes a diverse range of high quality growing independent firms that are attracted to our model and we are well positioned to structure partnerships that align affiliates clients and shareholders.

Unique ability to evolve and scale, our business through new investments without the risk or cost of integration is a distinctive competitive advantage.

We're dedicating significant resources to this effort and I'm confident in our ability to continue to generate earnings growth and further diversify our business through additional accretive partnerships over time.

In addition, we continue to work closely with our affiliates by supporting them and the execution of their individual growth strategies as they position there firms to capitalize on client demand trends.

We have worked with our affiliates to seed and launch new products and enter new regions and channels, we have partner together to evaluate and execute on potential lift outs and acquisition opportunities.

In other cases, we're collaborating with affiliates that are facing headwinds to help them position their businesses to achieve the best outcomes for their clients as was the case with Blue Mountain.

We're pleased to have had a good partnership with Blue mountain over the many years and that we were able to work together to find the desktop Ford for their clients and employees.

And for AMC shareholders.

More broadly consistent with the work we're doing with our affiliates. We are certainly focused on positioning AMG for future growth.

And to that end, we've engaged in a number of strategic initiatives in the quarter to align our resources and talent base with those areas, where we can deliver skill and expertise to help our affiliates grow and diversify their businesses.

For example, within our global distribution platform, we've adjusted coverage in certain regions and reallocated resources to focus on the clients that represent the largest growth opportunities for our business.

Including deploying additional resources towards building strategic relationships with leading institutions and intermediaries that are consolidating their relationships with scale players like a mg.

Leveraging our scale can also take different forms.

In certain areas delivering partnerships with industry, leading service providers to our affiliates can be more efficient and provide better outcomes, particularly where AMG scale can improve pricing access and service.

For example, we recently partner with AC compliance group to support affiliates seeking to lower their compliance costs.

An access a greater breadth of services.

Finally in the quarter, we've simplified certain elements of our business reduce operational costs and taken steps to optimize our footprint.

These initiatives will free up approximately 20 million in capital annually, which we will to redeploy towards higher growth opportunities in our business.

Finally, our entrepreneurial culture remains critical to our success and our ability to adapt to head of changing industry dynamics.

While the environment has been challenging difficult markets yield compelling opportunities and we remain confident in the quality and profile of our existing affiliate base.

Actively positioning our business for future growth.

Hey, AMG business diversification and unique partnership structure provide the resources and flexibility to execute on our growth strategy, while consistently returning capital to shareholders.

With that I'll turn it over to Tom to review the details for the core.

Thanks, Jay and good morning, everyone.

Aim GE reported stable economic earnings per share and generated strong free cash flow in the third quarter.

Despite industry volatility and near term net outflows are unique business model continues to demonstrate resiliency as we position for future growth.

Net client cash outflows of 19.7 billion.

Were concentrated in certain quantitative strategies across liquid alternatives and global equities.

As Jay said, well outflows will likely continue in these strategies until performance stabilizes we.

We see fourth quarter aggregate net outflows moderating notwithstanding your end seasonality given a number of expected institutional and sub advisory funding.

As we mentioned last quarter. It is important to understand the difference between flows and their impact on our financial results.

And the current quarter more than 75% of outflows were related to affiliates, where we have a minority interest or in low fee products that collectively make up only 10% of EBITDA and therefore have a more modest impact on current and future earnings power.

Turning to close by asset class.

In alternatives, we reported net outflows of 9 billion driven by certain liquid alternative strategies and partially offset by positive contributions from illiquid products.

As noted these outflows included a 5 billion dollar low be currency overlay redemption that was unrelated to performance.

While long term investment performance and liquid alternatives remains strong with 65% of assets under management outperforming benchmarks over a five year period.

More recent performance in this area has been mixed.

Certain of our quantitative strategies have been impacted by value factor exposures, while others. For example that went in and Systematica are generating strong near term results.

We continue to see outperformance in our fundamental liquid alternatives book, including relative value fixed income strategies Capulet Garda both of which are generating solid organic growth supported by client demand for these unique alpha streams.

Overall, we expect liquid alternatives to be a positive contributor to our growth profile over time as these strategies continue to play an important role and client portfolios.

As Jay mentioned, we also see a steadily growing opportunity and illiquid alternatives as our affiliates build on existing and new product capabilities with ongoing fund raising it pantheon Baring Asia and E G and the court.

AMG is performance in this category is very strong with 94% of our recent vintages outperforming benchmarks on an IR our basis.

In global equities, consistent with industry headwinds facing the asset class and the third quarter. We saw net outflows of 7 billion across quantitative and fundamental strategy.

Overall, our affiliates in this area continue to generate strong long term performance as evidenced by the reported increase in global equity a U M outperforming three and five year benchmarks.

Particularly in global fundamental equities were 83% of anyway is ahead of benchmark over a five year period.

Additionally, a number of our emerging market equity affiliates have recently reopened capacity or launched new strategies and we expect this category to be a meaningful contributor to future growth.

In the U.S. equity net outflows were 5 billion driven in part by institution in sourcing third party Mandy.

While we saw improvement in the quarter U.S. equities performance continues to be impacted by our overall value bias.

And multi asset and fixed income we posted nearly 1 billion in net inflows, marking the 11th consecutive quarter a positive flows in this category.

Flows were primarily driven by GW in case municipal bond products and supported by eight you are innovative systematic fixed income strategies, which continued to generate good flow momentum.

This category also includes our wealth management affiliates, which are benefiting from the positive secular trends referenced previously.

In aggregate, we remain confident that AMG is well positioned in high growth areas supported by long term client demand trends as well as our affiliate differentiated ability to generate durable alpha.

Now turning to our financials.

For the third quarter economic earnings per share declined 8% year over year to $3.16, including two cents of net performance fees.

Aggregate fees declined 12% to 1.1 billion driven primarily by lower average anyway.

Adjusted EBITDA declined 13% to 206.5 million.

Relative to adjusted EBITDA, the declining economic earnings per share of 8% reflects the lower share count as a result of continued share repurchases.

Jay discuss several initiatives, we're taking to position our business for future growth, which in combination with the Blue Mountain transaction.

I'll have an impact on our fourth quarter financial results and I'll touch on that in a moment.

Turning to specific modeling items.

For the third quarter the ratio of adjusted EBITDA to average assets under management with 10.8 basis points.

Excluding performance fees this ratio with 10.7 basis points.

In the fourth quarter, we expect adjusted EBITDA to average anyone to be between 10.5 and 12.5 basis points.

This range is pro forma for the removal of Blue Mountain and includes performance fees of 20 to 60 cents per share as well as one time costs related to the repositioning initiatives in the quarter, which we expect to have a 15 to 30 cents per share impact.

Our share of interest expense was 19.5 million for the third quarter.

In the fourth quarter, we expect our share of interest expense to be approximately 19 million.

Our share of reported amortization was 68.4 million for the third quarter and was driven by recent elevated outflow levels and included 52 million from affiliates accounted for under the equity method.

We expect a similar level of amortization in the fourth quarter.

Our effective GAAP tax rate was 24.7% and our cash tax rate was 21.6% for the third quarter.

For modeling purposes in the fourth quarter, we expect our GAAP tax rate to be approximately 25%.

We expect our cash tax rate to be impacted by a onetime benefit of approximately 50 million related to the Blue Mountain transaction.

Excluding this benefit our normalized cash tax rate is expected to be approximately 20%.

Intangible related deferred taxes were 3.5 million in the third quarter.

And we expect intangible related deferred taxes for the fourth quarter to be approximately 53 million, resulting from the onetime tax benefit I just mentioned.

Other economic items were 1.2 million for the third quarter, and we expect that to be consistent in the fourth quarter.

Our adjusted weighted average share count for the third quarter was 50.4 million.

And we expect share count to be at or below 49 million shares for the fourth quarter.

And finally, turning to our balance sheet.

During the quarter, we paid a 32 cents per share dividend and repurchased $110 million in shares reflecting our commitment to consistent capital return.

Additionally, we completed our investment in Garda and received approximately 90 million proceeds relating to the Blue Mountain transaction.

We are targeting share repurchases of 100 million or more in the fourth quarter.

Due to transaction activity and market conditions.

Our business model generates significant and stable free cash flow driven by the diversity and quality of our affiliate base together with our unique revenue share structure, which limits angies exposure to affiliate level margin fluctuation.

And we will continue to allocate capital to the areas of highest growth and return in our business.

At the same time, we continue to maintain a prudent bubble of leverage and have repositioned our balance sheet over the last several quarters, extending duration, while maintaining flexibility and capacity to capitalize on growth opportunities even in challenging markets.

Even angies combination of distinctive independent affiliates that are well aligned against future client demand trends.

Our unique ability to making new investments that deliver both earnings and organic growth accretion.

Our stable free cash flow profile, and our flexible balance sheet.

We are well positioned to create long term value for our shareholders.

With that we'd be happy to open it up for your questions.

Thank you at this time will be conducting a question and answer session.

If you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question can you.

You mean press star to if you'd like to remove your question from the Q for participants using speaker equipment, maybe necessary to pick up your handset before parsing the starkey.

In the interest of time, we request that you keep to one question each thank you.

Our first question comes in light of Chris Shutler with William Blair. Please proceed with your question.

Hi, guys good morning.

Just talk about the new investment opportunities.

Opportunities I guess in the more near term parse the pipeline I'm sorry.

Well the opportunities to do feel.

Moreover, more actionable are they how would you cannot I guess classify those small or large asset classes more proprietary versus formal process et cetera.

Great. Thanks, Thank you, Chris it's a J.

Yes, let me just talk about our pipeline broadly and then.

You know give you some attributes of it today stepping back you know our strategy of partnering with excellent firms has.

And always will be a cornerstone of our growth strategy of obviously, that's still true today and we look forward to continuing to grow our business are making new investments.

The other thing I'd, just say is the management team, including me our spending more of our time on new investments my background, obviously as an M&A.

It's something that I'm excited about and.

This extra effort and resources to the effort we think will.

We'll continue to to drive additional transactions over time.

We're building momentum in our pipeline, we see good diversity of types of businesses all high quality all attracted to our model.

I would characterize it as global in nature I would also characterize it as all sizes, what's interesting about a investing and growing firms is obviously, it's not just the capital you put out in a single transaction is the growth that you can that you can see from the from that.

Business.

Both because these are entrepreneurial businesses, but also to extend that they're in front of significant client demand trends that can add significant upside to to these to these businesses.

You know our unique business model puts us an enviable position, where we can through continued successful execution scale, our business with little or no integration risk, allowing our affiliates to name to remain autonomous that's a unique competitive advantage of AMG, we can simultaneously grow earnings.

And enhance our long term growth profile through new investments. We can also invest alongside of our affiliates both in.

And distribution capabilities, but also invest in their individual growth opportunities.

Through allocating capital to affiliates, so all of those things.

Come from a successful new investment strategy and when we look at it today, we do see momentum in both the near intermediate and longer term pipeline.

Most of what we are.

Well most of whats in our pipeline today is proprietary I'm coming through long term relationships that started how many years ago, whether that was relationships with that I started when I was in new investments or with Sean or Nate all of those relationships have been transition now and and we see that.

Terry conversations that we're having a really is important to our process. Because we are we are we're sorting through due diligence and we're also sorting through the partnership itself. As we had these long term relationships would be to see how businesses evolve and they get to understand our business man.

Model better so when it comes time.

And I think as we've said this before.

Structure and pricing is only part and part of the partnership it's really the long term autonomy and alignment of interest that that we offered through our model that really attracts these firms to us.

Thank you.

Our next question comes on line of Craig Siegenthaler with Credit Suisse. Please proceed with your question.

Thanks, Good morning, everyone.

Good morning, good morning.

Hey, So first just on flows.

We know we Mg tends to have tougher for cues just given several seasonal and cyclical factors and I heard the commentary in the prepared remarks that net outflows shirt and moderate for improved.

I wasn't sure if that's Smith total flows or assessment sort of core flows after backing out some of those seasonal and cyclical factors.

So it's a good question Craig will clarify I'll, let Tom takes out one.

Thanks, Craig So maybe I'll just kind of recap flows overall in the quarter and then try and give you a little bit of color on what we see on the horizon and address your seasonality question.

You know as you recall coming into the quarter on our July call, we talked about where we saw flows landing overall in the third quarter.

And really excluding that one large low fee currency overlay mandate that I referenced a outflows for the quarter were pretty flat against last quarter again more than 75% of the outflows that we saw came from certain kwan products, most notably in liquid alts absolute return strategies.

And these flows were on a base that today is only contributing 10% of our EBITDA. So given the combination of fee rates and ownership levels.

The ability to some products that contributed to outflows the impact on our earnings is generally going to be much less then and what the headline flows suggest.

We also continue to believe that quantitative strategies are going to be important in terms of their contribution to future growth and we're already seeing very strong performance at certain affiliates in that area, including at Winston and Systematica.

We did also see some outflows in the quarter, an active equities, primarily driven by global risk off trends, but importantly, overall outperformance in these areas continue to strengthen and we have more than 83% of our fundamental active equities products now outperforming benchmarks over the five year period, and we've also seen some incremental capacity come online recently in some of.

Our high performing young managers, so that's an area overall, where we see a lot of future upside potential.

In terms of upside Jay also talked about illiquid alternatives, where we're seeing strong fund raising at pantheon Yaggi in Baring Asia.

And the combination of their performance and current high levels of client demand continued to point to future growth in that area and we saw 11 consecutive quarter of inflows in our multi asset in fixed income area.

To give you some color on the go forward as we think about the flow picture.

Near term notwithstanding certain quanta headwinds, we do have some sizable institutional and sub advisory mandates that we expect to fund in the fourth quarter.

We think that these will more than offset the normal seasonal headwinds that we see around tax loss selling and around illiquid alternative lockup period that hit toward the end of the year.

We don't have perfect clarity on how those trends will play out but broadly speaking we feel pretty good about that so taken together, we expect to see outflows moderate in the fourth quarter versus the levels. We've seen the last couple of quarters and importantly, going forward, we see very strong performance momentum in a number of areas in our business and we continue to believe in the long term organic growth profile of our plan.

Form and the alignment that we're seeing between long term secular client demand trends and our affiliates diverse product offerings.

And then let me just add and that was good detail from Tom I'll, just summarize by saying like we said.

Even beyond this this next quarter, we see continued growth in private markets wealth management and traditional and alternative fixed income as we said in our prepared remarks.

In addition, I don't want to underscore I do want to underscore that our performance is improving across our fundamental equity affiliates equity and then liquid alternative affiliates as market volatility has increased so we view this as a positive as we look forward to 2020 in aggregate between these growth opportunities and improving.

Performance at our fundamental managers, we see that that represents about 90% of am G.'s EBITDA and then the last thing I would say is when you look at the fourth quarter, and we talked about institutional and Subadvisory wins, some of those Windsor and quantitative products and so that's an important thing to note as we.

I.

I would say more broadly. These are these products are very important declined portfolios and we're seeing that come through in the fourth quarter.

Thank you. Our next question comes from line, Alex Blostein with Goldman Sachs. Please proceed with your question.

Hey, everyone. Good morning.

A question for you guys around EBITDA yield on assets.

Both on the fourth quarter and overtime and I think Tom in the guidance you guys talked about 10.5 to 12.5, but that include a performance fees and some of the reposition expenses.

I think the low enough data will be fairly close to the kind of the base just the management fee.

He also I guess part one does that sound right and too given the kind of mix shifts in the business between affiliates in products and obviously the ownership stakes of different how do you guys have ought to think about about call. It 10, 10, and how basis point yield evolving over the next couple of years.

Sure. So why don't I start and then maybe Jay can address sort of the end of your question in terms of just the forward trajectory.

First off there are couple of things when we talked about guidance in terms of that 10.5 to 12.5 basis point range just to make sure that you have in your numbers. The first as you mentioned with the performance fee range of 20 basis point, a 20 to 60 cents per share.

But we also gave you a little bit of color on our expectations around some expenses related to some of the strategic initiatives. The J walk through that will be about 15 to 30 cents per share. So that's embedded into that guidance. So you can kind of think about I'm getting to more of a core run rate. If you. If you backed out some of those onetime expenses.

We gave you color on.

More broadly if you've actually look at kind of stability in our fee rates and sort of stability in that overall ratio you have a handful of things that are going on.

First we've talked about the fact that our flows overall.

Have really been influenced by areas, where we have either lower fee products or a minority ownership positions. So while headline flow numbers. You know have have been in rather sizable the actual impact that we've been seeing on EBITDA has been much less particularly over the course of the last couple of quarters.

And as we go forward, we talked a lot about areas of our business. You know that are very strong contributors to our EBITDA that are either growing now in terms of the illiquid area. The wealth management area and the fixed income areas. The J spoke about or that have very strong performance and we believe are well positioned against Klein trends.

For future growth.

The fundamental equity space.

The one part of that your question that that Tom picked up on and I'll just state more flatly, which is as we look look forward a growing contribution of our business is coming from the private markets the wealth management multi asset and fixed income areas.

And that that does not only put a level of stability on that number those are those businesses are growing but also if you look past or look into the kinds of assets that were raising there you see very long duration very sticky asset.

Levels and so we do see that as a positive. So it is hard to capture and just a number but you're seeing the quality of that number go up.

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

Hi, Good morning, it's been Herbert on for Bill. Thanks for taking my question.

Just was hoping we could go back to liquid alts global equities and definitely appreciate the commentary on EBITDA contribution, but can you just help us kind of ring fence. The remaining you when that risk there than maybe some sort of timeline on on yeah.

A little expectations there.

Over you know kind of the the near term horizon.

Yes, so thanks Ben.

Maybe I'll use that that question to answer it at all at a lot of you know many different levels.

So our or outflows have been localizing the quantitative liquid.

Alternatives and and long long only all in a long only equity quantitative strategies.

And you know, we did say and I just mentioned a minute ago that those those products are seeing.

Inflows in certain areas, especially with a large institutional clients. Some of those wins are going to we're going to show up in our fourth quarter and we mentioned that.

So the.

Uh huh.

The attractiveness of these products is are very much apparent and even our near term pipeline.

Our largest manager of course of of these types of strategies is eight you are and I'd like to just maybe address that.

More broadly as I as I did last quarter, and I will say it again and probably have to say it again in future quarters. Eight you are is very much.

Highly diversified business.

With 180 billion today you.

Just to remind everyone [laughter] that we made that initial investment with the business was 12 billion.

An eight yours has grown and diversified its business.

Across several different distinctive business lines, including long only quantitative equities a systematic fixed income absolute return and total return alternative strategies and within each business line. They have multiple products that address a range of client needs and risk tolerances.

Growing from 12 billion when we made the investment to where we are today was not a straight line as many of you know and a number do you have the history here, we've had a number of other periods of softness that only.

Come back stronger after that period of softness.

We continue to believe their ability to generate excellent long term investment returns given that our proven culture and process the strength of their leadership team and their multi decade track record of business success. So there's a lot to to be positive here and we are very much.

Believing that.

And I as I said, the outflows have been localized in certain products, but when you get beyond those products you see some really great performing products, including risk parity defensive equities fixed income.

They continue to run their business at scale and invest in the future.

They have a number of opportunities that are emerging.

Merging growth opportunities, including the fixed income strategies I mentioned earlier, but also SG and tax managed tax aware strategies. These all have significant growth opportunities because of the market.

Market opportunity is as very scalable and and they applying their technology and process to these markets. We we feel the opportunity is significant the option value is very high there.

Yeah, we are very much in support of what they're doing in their business Cliff John David and the rest of the senior partners are focused and fully aligned as majority holders of the firm.

It's a very entrepreneurial from we're proud to be aligned with these partners.

So yeah. The last thing I would say is we're very confident in their ability to manage their business to sustain profitability and generate long term growth as I said, we're very aligned with them. So longer term, we see growth. Returning date you are in the near term, even but but over the long term, especially.

Thank you. Our next question comes from line of Dancing with Jefferies. Please proceed with your question.

Thanks, Good morning.

On the reallocation of resources, Jay you walk through a number of things it sounds like real estate consolidation some compliance.

You know things yet, but you do services you can combine for your affiliates, but and I think you said 20 million of capital that is freed up from this I guess.

Is this going into new investments in terms of the priorities I just want to kind of walk through that again in terms of areas that you're specifically have changed and then what you where you're kind of reallocating those resources or capital too yeah. Thanks, Dan Good question.

Excuse me, let me let me just start by stepping back and tell you what we're trying to do here on the call we.

Sort of flatly state our strategy is to generate long term value by investing in leading active managers as you know to approve and partnership approach and then allocating our resources to.

Our opportunity set to the areas of highest growth and return.

They're a couple of areas that follow from this or a couple points. If all from this first we're going to focus on our strengths and competitive physician, which does include new investments. It's our primary use of capital second we're going to continue to build.

And position our business for growth, which which really means delivering our scale to our affiliates either through the service offering of.

Have a strategy distribution capital and other resources.

Or more resources, a new investments and other growth area. So really what we're doing is is pivoting.

Using our resources our talent base.

Our entrepreneurial culture, and aligning that with growth opportunities, which could include growth opportunities for existing affiliates growth opportunities in new affiliates. All of that said you know it in periods, where we have excess capital will be discipline and returning capital to shareholders.

The one other thing I would I would say is maybe just just while we're on the point of capital I might turn it to Tom and just talk a bit about our capital strategy.

Sure.

So if I think about capital management overall for AMG as you know the diversification and unique structure of our partnership agreements enabled us to generate significant and predictable unencumbered free cash flow.

We have a lot of flexibility in how we allocate that capital as a result.

Jay talked about a couple of times, we continue to believe that the highest and best use of our capital over the long term is through new investments.

Where our unique model enables us to partner with affiliates with little or no integration cost or risk.

These investments deliver immediate diversification and earnings accretion and simultaneously enhance our organic growth profile, including adding immediately saleable products in areas of future client demand.

We'll also continue to return excess capital through share repurchases in dividends as we've done in the past and since 2017, we've reduced our diluted share count by more than 12%. In addition to paying out nearly 160 million in cumulative dividends.

As I mentioned weve repurchased $110 million in shares in the third quarter slightly ahead of the pace of the guidance. We gave you in July and I also noted that we expect to repurchased 100 million or more in shares in the fourth quarter and that that amount could vary based on a variety of factors.

As you know we completed the Blue Mountain transaction earlier this month and received approximately 90 million in proceeds and we have a lot of confidence in our business in our future growth trajectory. So we feel good about buying back our stock at current levels and we'll continue to monitor deal activity market conditions and leverage levels as we execute on our capital plans going forward.

Thank you. Our next question comes from the line of my carrier with Bank of America Merrill Lynch. Please proceed with your question.

Good morning, and thanks for taking the question.

Just one more on M&A can you provide is with an update just on balance sheet capacity I'm just given some of the things that you guys have done over the past few years.

In deal activity hasn't been as you as active.

I guess more on the debts I guess, just particularly given you equity valuations in the industry being a little bit more challenge and then also just priorities on the asset management side versus the wealth management side.

In terms of the types of transactions. Thanks.

So maybe I can start on the capacity side and then Jay can answer the second part of your question.

So from a capacity perspective as I just mentioned our business generates a substantial amount of unencumbered free cash flow. So first and foremost we have that as a resource as we're looking at new investment opportunities.

And obviously looking to fund out of free cash flow in addition.

As you mentioned, we have taken actions over the course of the past several quarters and really over time to optimize the shape of our balance sheet.

You know where an a rated company we have $1.25 billion in revolver capacity.

Well as an add the market ability to issue stock.

Transactions as well so from a flexibility perspective.

We have a tremendous amount of flexibility financially.

To be able to execute against the opportunities that we see in front of us.

The other.

Part of your question and I appreciate you you're asking another new investment question, because I do want to talk a bit about pricing in the market and then you know.

More color on the types of businesses, which it.

Good could fill in from the my prior answer so just on pricing and I think everyone knows this about our model as.

We we partner with affiliates and we are only purchasing a portion of the equity at the time of initial transaction, which really take some of the weight off of pricing.

Over longer.

Because over longer periods of time the equity that is retained is.

Is expected to be worth more than the equity that we initially purchased we also try to find ways to.

Structure transaction, so that value really is a a concept overtime and therefore.

The economics day AMG is consistent with.

An opportunity cost to capital that we see across our other opportunity set including repurchasing our shares. So we really are.

Investing in businesses through our partnership model at a cost of capital consistent or or better. If you will then then or our own repurchase of shares as it relates to.

The types of transactions that were looking looking at in our pipeline today I would mention similar to the growth opportunities. We have in our business. We have a number of opportunities in the private markets a number of opportunities in fixed income alternatives.

Those are businesses that are in our pipeline today and we're moving them along we also.

You know continue to look at emerging markets as an opportunity the matic and yes, GE impact investing again another growth area for us.

And so we are seeing those types of opportunities again across the size range.

Thank you, ladies and gentlemen that concludes our question and answer session and I'll turn the floor back to Mr. Horgan for any final comment.

Thank you all again for joining us this morning, and as you heard through our unique business model, along with our ability to execute against our strategy. We are confident in our ability to generate long term sustainable growth and create shareholder value overtime.

We look forward to speaking with you next quarter.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time have a wonderful.