Q1 2020 Earnings Call
Greetings and welcome to the M. <unk> first quarter 2020 earnings conference call.
This time all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require up or your systems. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host honestly, our global Vice President Investor Relations for Am G.. Thank you you may begin.
Thank you for joining am James to discuss our results for the first quarter of 2012.
During this call certain matters discussed will constitute forward looking statement.
Our actual results could differ materially from those projected due to a number of factors, including those referenced in our form 10-K and other SEC filings.
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 a replay of this call a copy of our earnings release as well as a reconciliation of any non-GAAP financial measures, including any earnings guidance announced on this call.
As a reminder, we posted an updated investor presentation on our website. This morning, and encourage investors to consult our site regularly for updated information.
With us on the line to discuss the company's results for the quarter, R.J., Horgan, President and Chief Executive Officer, and Tom Lojack, Chief Financial Officer.
With that I'll turn the call over to Jay.
Thanks on Julie and good morning, everyone.
Before I begin our discussion on our results and for prospects I would like to say on a personal note that I sincerely hope that every one of call today as well.
You and your families are healthy and say.
Our thoughts or would those most affected by the virus and we remain focused on the health and wellbeing of the individuals and families at AMC our affiliates in the community at large.
This is an extremely challenging time for all of us to covert 19 crisis is impacting all elements of the world in which we live and work.
And it has had a profound effect on the economy in financial markets.
Given the nature of our de centralized operations and our entrepreneurial culture. We in our affiliates remain fully operational have experienced minimal disruption and continuing to serve our key stakeholders. Most importantly, our clients.
We are operating at a time tremendous uncertainty and no one knows when the economy in markets are going to recover or what changes in behavior may shake that recovery.
While this uncertainty will likely remain for some time.
I'm confident in our ability to navigate through the challenges we face.
To find unique growth opportunities in the dislocation.
And to emerge as an even stronger organization in the future.
Our business in our affiliates have been tested before as has our management team.
We're extremely volatile periods like a global financial crisis.
911, and the dotcom bubble.
Well this crisis will be different.
Due to strengthen diversity of our business together with the quality of our partner own affiliates.
AMG has an opportunity opportunity to proved once again to clients worldwide the value of independent active management in periods of dislocation in volatility.
As well as an opportunity to lever the benefits of AG is differentiated partnership approach to our shareholders.
Well volatility markets, an asset levels may have a near term impact on quarterly results. Our primary focus has been on the potential depth and duration of the economic downturn and its impact on the execution of our long term strategy.
As you would expect me the plan for all aspects of our business across a range of potential outcomes.
And we are focused on maximizing our ability to execute on our strategy three extended downturn.
Even with lower asset levels, our business and our balance sheet continue to be well position.
We enhanced our financial flexibility coming into this period through a number of strategic decisions over the last couple of years.
Including the repositioning initiatives, we implemented in 2019, and we further aligned our management team with our shareholders all of which I'll elaborate on in a moment.
Stepping back as we think about our business in the context of the current crisis. Let me first discuss unique advantages our affiliates have in leading clients through challenging times.
In addition, I'll touch on the structural advantages of our model.
And how these attributes afford us the ability to invest for growth and all environments.
AMG has built its business over the past quarter century on the principle that independent active boutiques have unique competitive advantages in delivering market, leading returns to clients, including and especially during times of volatility as.
As demonstrated in our recently published study the independent boutique advantage and volatile environments.
With excellent long term.
Performance Records outstanding reputations.
And superior client engagement, our affiliates are recognized globally as being among the leaders in their respective investment disciplines.
They have highly focused investment centric operating cultures and that equity owners in their firms our affiliate partners have ultimate accountability in Stark contrast to passive indexing.
Such entrepreneurial culture is typically attract the very best talent.
Principal to invest their own money alongside clients.
And truly experience, both the risk and reward and their investment decisions.
Therefore in times of significant volatility independent boutiques are better position to protect capital until it quickly to the areas of greatest opportunity.
And while the full impact of this crisis on the economy is still in its early days.
Our affiliates are generating strong performance across a number of strategies.
Our global managers, including Harding, Loevner, GW, NK and Veritas are generating strong relative performance in their products and our opportunistically, considering new product development.
Our value managers, most notably yacktman and Tweedy Browne significantly outperformed peers during the quarter and are well positioned to capture future inflows given top quartile performance.
And finally, our alternative managers, including Capulet Garda Systematica have delivered strong returns that are benefiting from increased quite allocations and a renewed appreciation for their uncorrelated returns strains.
This collective strength across our affiliates is a direct result of nearly three decades, the successful and deliberate execution of our strategy.
To invest in leading independent partner owned active boutiques through a proven partnership approach.
You have built a business that has scaled and broadly diversified across products investment styles and distribution channels.
Given our diversity the quality of our affiliates and our unique partnership structure AMG is able to capitalize on long term growth across cycles.
And also benefit from stability in times of market stress.
Turning to our results for the quarter.
AG reported economic earnings per share $3.16 for the first quarter 2020 down 3% year over year.
Consistent with recent quarters outflows were driven almost entirely by certain quantitative strategies that contribute only a low single digit percentage of our run rate EBITDA.
The stability of our financial results against a backdrop for the crisis reflects not only the strength of our business position.
But also the strategic actions, we took in 2019 to reposition certain affiliates and our business and to align our resources and capital with growth opportunities.
While these efforts are largely complete.
We continue to collaborate with a select few affiliates position their businesses for future success and optimize outcome for their partners and client.
Looking ahead, as we evaluate potential duration and severity of the economic downturn, we're focused on continuing to position our business to operate effectively and create value across a range of potential scenarios.
Our balance sheet as a critical component of that planning process.
And as a result in many years of focus on creating capacity and flexibility. It is also a source of significant strength.
Our capital flexibility together with a cash flow generated by our business create a distinct competitive advantage in the current environment.
While challenging markets were proud careful execution, they often present unique opportunities.
As many of you will remember in the period following the global financial crisis, we made some of our most successful new investments and we anticipate seeing similarly attractive.
Opportunities over the coming quarters and years as businesses individual partners in corporate owners reassess their strategic and financial needs.
This will take time to play out.
And it will require capital resources to execute and we will remain focused and disciplined on partnering with business is well aligned with our strategy.
As you saw early in the quarter, we established a new partnership a contest leading middle market private credit and private equity manager with a long track record of delivering returns to clients across market cycles.
We structured our partnership a contest to fund our investment over time and inline with the growth of their business, which enables AMG to put more capital to work in higher gross scenarios and provide the level of protection and lower gross scenarios.
As we continue to align pricing and structure to a range of future outcomes. This disciplined approach to capital allocation will result in higher returns across our entire opportunity set.
More broadly on new investments.
Given market volatility in recent events. This is a natural time for us to take a step back and reassess.
In particular as the environment is changing rapidly and because we anticipate seeing favorable impact on pricing structure and our opportunity reset as a result.
We will be disciplined focus and patient with our capital deployment as we explore partnership opportunities in this environment.
In addition, we continue to selectively evaluate opportunities to invest in our existing affiliates enhancing their ability to meet evolving client needs.
And in centralized capabilities to further enhance our affiliates growth potential.
We have been an active dialogue with our affiliate partners regarding distribution.
Launching new products opportunistic lift outs and ongoing succession plans.
We also continue to seek strategic partnerships that leverage the collective strength of amitiza relationships on behalf of our affiliates.
To that end during the quarter, we established a strategic relationship with <unk> capital.
Distribution technology platform building on our momentum in Fundraisings across our affiliates alternative products.
And as we've said in the past, we remain committed to efficiently returning excess capital to shareholders.
Against the backdrop of dislocation in equity markets. We've made the decision to reallocate the remaining capital that we set aside for dividends in 2020 in favor of share repurchases, which Tom will describe in a moment.
As I stated earlier, while there is tremendous uncertainty we're confident that our business will successfully whether this challenging period.
Given the environment, we believe that active management in particular when executed by independent partner own firms is more relevant and important now than ever before.
And aims use approach and track record in partnering with these businesses remains unmatched in our industry.
Our partnership approach resonates deeply with entrepreneurial management teams, who are completely aligned with their clients and we anticipate our opportunity set across new and existing affiliates to grow significantly.
And finally over the past year, our board has taken actions to further enhance the alignment of our directors and executive so shareholders building ownership through changes in our equity programs.
Further evidencing our collective confidence in the business members of our board and management team have been active buyers of the stock in the open market in recent months.
I have personally purchased AMG shares in each of the last three quarters.
And plan to continue to purchase this quarter, given my view of our for growth prospects.
Looking ahead it is with this ownership mindset.
We will execute on our strategy.
Hi, I'm as confident as ever that we will emerge from this challenging time as an even stronger organization.
With that I'll turn it over to Tom to review the details of core.
Thank you and good morning, everyone.
Before I begin I'd like to Echo Jay sentiments and recognizing that this is an extremely challenging time and our thoughts are with all of those who have been impacted by the coded 19 crisis.
As Jay discussed AMG is well positioned to navigate the current environment, given the quality and diversity of our affiliates are unique partnership structure and the strength and flexibility of our balance sheet.
Taken together these elements of our business create a distinct competitive advantage as we execute on our strategy to create long term value for our shareholders.
Turning to the quarter and beginning with flows against a historically volatile industry backdrop, AMG reported 13.8 billion of net client cash outflows more than 90% of which were driven by certain quantitative strategies across liquid alternatives and long only equity that today contribute a low single digit percentage.
Our EBITDA on a run rate basis.
Well near term flow headwinds in certain quantitative strategies may persist in aggregate our affiliates continue to improve their performance track records in this volatile period, especially relative to passive indexing.
We believe this outperformance is directly attributable to their independent ownership structures and alignment with clients and the strong performance. We are seeing across our fundamental managers from equities to relative value fixed income to liquid alternatives create significant opportunity for future growth both in the form of net inflows and.
Long term earnings growth.
Turning to flows by asset class and alternatives, we reported net outflows of 2.5 billion, which was impacted by 7 billion and net outflows in certain quantitative products.
We continue to benefit from strong client demand in illiquid alternatives with more than 3 billion in net inflows with ongoing fund raising it pantheon Baring Asia and E. G. During the quarter, along with increasing momentum at calm best the most recent addition to our private markets affiliates.
The significant dry powder from recent capital raises at each of these illiquid managers will enable them to put money to work at attractive return levels and raise additional opportunistic funds.
We also continue to see strong performance and net inflows in our relative value fixed income strategies at Capula and Garda and in light at the current opportunity set their selectively opening up capacity in new and existing strategies to capitalize on market dislocation.
And finally, we believe our recently announced strategic relationship with high capital will enhance affiliate access to technology enabled distribution of alternative products to retail and high net worth clients further adding to fund raising momentum and alternatives and again, demonstrating our commitment to delivering the benefits of scale to our AFFO.
Yes.
Moving to equities overall, our affiliates continue to generate strong long term performance, especially in fundamental strategies with more than 80% of our AG. When ahead of benchmark over a five year period.
In global equities outflows totaled 6.8 billion, primarily driven by quantitative strategies.
In fundamental strategies, we saw only modest outflows against the backdrop of significant industry de risking as our affiliates continue to deliver strong performance.
Several of our largest affiliates, including Harding Loevner Tweedy Browne and Verity costs are once again distinguishing themselves in this period and delivering excellent risk management and relative returns for clients.
In the U.S. equities, we reported net outflows of 4.3 billion nearly half of which were driven by quantitative products.
Our value managers, most notably augment and beutel Goodman significantly outperformed peers during the quarter and now have several funds in the top cortile over the three and five year period.
In aggregate as you can see in our Investor presentation, our U.S. equity performance improved significantly given the strong performance generated by our affiliates in value strategies.
Multi asset and fixed income flows were stable in the quarter despite significant industry outflows in these categories.
We continue to see positive momentum in fixed income products that GW in K Rd, Miss any QR and remain well positioned against long term client trends in specialty fixed income and wealth management.
Turning to financials.
As you saw in the press release, we updated our EBITDA and economic net income calculations to exclude the impact of noncash gains and losses on GP and seed capital investments as part of our continued focus on incorporating shareholder feedback to enhance our financial disclosure.
With respect to our results for the quarter.
Adjusted EBITDA of 200 million included 18 million of performance fees, primarily related to funds with year end performance measurement periods, and 6 million an FX gains.
Adjusted EBITDA declined 7% year over year, driven by lower market, an average 81 levels as well as lower contributions from certain quantitative strategies versus a year ago.
Partially offset by the strategic actions, we took in 2019 to reallocate resources and rationalize our footprint.
Economic net income was down 10% year over year due to higher cash taxes and interest expense.
First quarter economic earnings per share declined 3% to $3.16, reflecting the impact of share repurchases.
As we look forward to the remainder of the year, we continue to take a disciplined approach to managing discretionary expenses and expect further reductions year over year with cost naturally coming down given our virtual operating environment as well as discretion over variable compensation expense.
More broadly the vast majority of our partnerships with affiliates are structured as revenue shares for AMG is not exposed to operating expenses.
Now moving to specific modeling items.
While markets have of course spend incredibly volatile based on current anyone levels, which reflect our market blend of 3% thus far in the quarter.
We expect adjusted EBITDA in the second quarter to be approximately 160 million.
Including seasonally lower performance fees of approximately 3 million.
Excluding the seasonal impact of performance fees and the FX item I previously noted.
The expected change in second quarter EBITDA of approximately 10% primarily reflects the impact of the first quarter decline in markets on our average and you when.
The resilience in our earnings this quarter and our forward guidance reflect the diversity and strength of our affiliates and the structural stability inherent in our unique partnership models.
Our share of interest expense was 20 million for the first quarter and we expect second quarter interest expense to be approximately 22 million.
Our share of reported amortization and impairments was 196 million for the first quarter, including 179 million related to equity method affiliates.
This includes a 140 million noncash expense, reflecting the reduction in the carrying value of a non U.S. alternative affiliate.
We expect this line item to return to more normalized levels in the second quarter of approximately 55 million.
Our effective GAAP and cash tax rates were not meaningful in the first quarter, primarily given the impact of the noncash item I just mentioned.
For modeling purposes, we expect our GAAP and cash tax rates to be approximately 25% and 18% respectively going forward.
Intangible related deferred taxes were negative 31 million in the first quarter, primarily given the impact of the noncash item previously noted.
And we expect intangible related deferred taxes to return to more normalized levels in the second quarter of approximately 6 million.
Other economic items were 2 million and included 3 million of GP and seed capital investment gains.
Going forward, we anticipate that other economic items will be more volatile given the inclusion of these noncash gains or losses.
In the second quarter for modeling purposes, we expect other economic items to be 1 million.
Our adjusted weighted average share count for the first quarter was 47.8 million.
And we expect share count to be approximately 47 million for the second quarter.
Finally, turning to the balance sheet and capital allocation.
As Jay discussed our capital position remains strong and stable as a result of many years of focus on simplifying our balance sheet, extending duration, increasing capacity and lowering our cost of capital.
We have actively stress tested our business and our balance sheet and taken steps to enhance liquidity to be prepared to weather potential further market pressures associated with the cobot 19 crisis as well is to maintain financial flexibility to invest in attractive future growth opportunities.
We have access to substantial liquidity most prominently in the form of our revolver and we have the ability to draw the full 1.25 billion without impacting covenants.
Notwithstanding this capacity, we continue to manage our leverage ratio prudently and consistent with an investment grade rating and we are currently operating at approximately two times debt to EBITDA.
During the quarter, we returned $85 million of capital to shareholders, including 70 million in share repurchases.
Given the opportunities we see to invest in our business along with our desire to continue to return excess capital to shareholders as efficiently as possible.
We are resetting our quarterly dividend to one cent per share.
In lieu of dividend payments, we will reallocate the remaining 50 million of capital towards share repurchases over the balance of the year.
In the coming quarters, we would also expect to repurchase additional shares beyond that 50 million subject for prospects for new investments and market conditions.
Our core strategy is partnering with excellent independent boutique managers.
Our ability to successfully execute our strategy requires both experience and capital, especially in times like this and we will take a disciplined approach in allocating capital to the highest risk adjusted return opportunities available to us.
As past experience has taught us these opportunities do not necessarily present themselves consistently every quarter and we're focused on leveraging the strength of our business and the flexibility of our balance sheet to maximize returns to our shareholders overtime.
Now we are happy to take 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 Tom will indicate your line is in the question Q.
You mean for start to if you'd like to remove your question from the Q participants you think speaker equipment, you may be necessary to pick up your handset before pressing the star keys.
And the interest of time, we request that you keep to one question each thank you.
Our first question comes from the line.
Craig Siegenthaler with credit Suisse. Please proceed with your question.
Thanks, Good morning, everyone.
Hi, Craig warning correct.
There were saying, yes, 37% schropp in redeemable non controlling interests and the balance sheets I'm. Just wondering can you talk about what drove the decline in estimated value for affiliate equity repurchase obligations and then also on an annual basis, we think about 2020, what's really the maximum.
A level put back said AMG could experience a share.
Yes, Thanks, Craig Nice to hear your voice I'm going to let Tom take the.
The balance sheet.
Item and then I'll, maybe come back and talk about our model more generally.
Sure. Thanks for the question Craig.
So as a reminder, RNC I really reflects the fair market value of equity that affiliate partners can sell to AMG.
We came into this year as we've mentioned in the past expecting affiliate equity repurchases to be a little bit higher than in past years, just to give you. Some context that numbers generally run in the 100 150 level, we expected it to be kind of more in the 200 ish level. This year given a few historical transactions and we indicated that in some of our disclosure.
Given the market declines that we saw in the first quarter as well as some of the affiliate equity purchases. We made in the first quarter, we saw a pretty significant decline in that our anti balance of right around 300 million a little bit more. So you should think about that as our overall obligation going forward has come down quite a bit partially because we paid a fair amount of it.
And partially because given the impact of markets and the earnings on those businesses the value of those repurchases comes down as well.
Thanks, Tom and then Craig to take it up one level as you know.
Equity transition in succession planning is the very core of what we do it Mg.
We have a well design program.
Recycling that that occurs over over a generation 10 to 15 years, we do have good visibility on on these transactions and we have good protections as they adjust for market conditions as they've done this quarter, so our model of alignment.
Proven out once again the other important thing to note is as we got into this period of the crisis. We did see partners decide to not put and and that is where they had discretion, where they weren't retiring and and we think that that's a very positive.
The statement about the future.
With regards to our alignment model.
The structure works and as a as markets evolve this balance sheet reflects that.
Thank you. Our next question comes from the line of Chris Shutler with William Blair. Please proceed with your question.
Hi, guys good morning.
Foreigner could you elaborate on the the structure of a carbon steel again and a structural should we expect you to use that same structure I'm much more going forward.
Yes.
Yes, Thanks, Chris I really appreciate the question.
As I said in my prepared remarks, we have we haven't we continue to evolve our structure.
Over time.
As we as we have experienced different scenarios ourselves with new investments for over the last 25 years and I think I carefully noted that this evolved approach.
Both pricing and structure over multiple outcomes is something we do and we have applied both in the case of Congress, but also Garda.
As you look forward I think you will see.
Continued effort on structuring over a multi period multiyear period.
And allows us to not only invest more capital in these growing firms, but also protects us against in cases of lower growth.
That again was the case with with Garda and in the case of Garda in particular, given its very strong 2019, and very strong 2020. It has led to significant upside in terms of our experiencing.
You know kind of above our our original estimate on how that business is performing it's early days, but contest.
But they are actively.
Growing their business, we're helping them already.
And global distribution and the feedback has has been very favorable.
And we are we look when we look forward to putting more capital to work as it grows.
Thank you Sir our next question comes from line of Robert Lee with KBW. Please proceed with your question.
Great Good morning, guys and I hope everyone.
Families are doing well in this.
Do as well.
Thank you.
It gets a question.
And.
The revenue share certainly helps thank you guys.
I mean, it or you are there any instances where some of it. So you know just given the sharp downdrafts are running and starting to run at a place where maybe the revenue shares not functioning as you both in terms of.
Hadn't started cut into obviously cuts into their share the minority owner share, but any place where you feel like that's running it's an issue obviously you got rid of.
Part, well and some others, where maybe that would have been a problem but.
Any place for that needs to be a restructure.
Yes, thanks, Rob.
The vast majority of our affiliates have grown overtime as you know and in particular off the back of the tenure bull market, our largest affiliates well even most of our smaller affiliates have grown.
Significantly since our original revenue share agreement, which which means that they've created significant margin under the the revenue share I think you know how that works and it isn't these time to volatility and even declines in markets where.
That creates a substantial amount of cushion for us so our business during this period even at the.
Very lowest point I was handling as you would expect and I think it speaks to the stability of our business model, our ability to invest through a cycle and frankly be flexible nimble and opportunistic in periods of dislocation.
You had mentioned.
You know a number of affiliates are one affiliate I would say that we took an opportunity to work with them as partners to find the very best outcome for their clients and we mentioned this on our last call that in 2019, we took actions to reposition.
Our business and also work with certain affiliates to align their businesses with success.
I also mentioned in my prepared remarks, this is largely complete.
But we are working with a select few additional affiliates to achieve optimal outcomes.
As you know given our operating autonomy model and our partnership approach ultimately at the affiliate partners, who make their own business decisions.
And we worked with with those partners in a collaborative way to find solutions to support them to determine the best outcome for their businesses and their clients as I said were largely through that process. It started in 2019, we feel good that we started that way way ahead of the.
The current crisis. So we are in a really good position.
Strategically in our affiliates in are really good positioned strategically.
What I think is up and opportunity given our scale is that we found solutions for a number of these businesses with other affiliates and you mentioned hartwell.
Which has now partner with wealth partners capital group another business that we have an investment in.
As well as trilogy, if you remember with GW K I do think we will see.
You know other opportunities like this.
With affiliates that are facing headwinds as an opportunity for us and those partners and their clients define the very best outcome.
Thank you. Our next question comes from the line of Bill Katz with Citigroup. Please proceed with your question.
Okay. Thank you very much taking the question. This morning like others Hope there was safe and healthy in this timeframe.
Just maybe coming back to capital management, just as you think about the business on a go forward basis can you talk about the use of leverage to fund transactions and what kind of leverage ratio you think you might be willing to sustain.
Yeah. Thanks, Thanks, Bill Let me, let me have Tom start that and then I, maybe will take you back up to our history, as well and ER and talk about.
Capital allocation strategy generally, but maybe Tom start specifically with the balance sheet.
Yeah. So thanks, Jay and thanks for the question Bill I think maybe I'll start with the balance sheet and also give a little bit of color on the dividend and then and then turn it back to Jay but.
Specific to the balance sheet as we said in our prepared remarks, we've really been planning for an environment like this for years, we've been very proactive in terms of enhancing capacity.
In terms of lowering our cost of capital in terms of increasing duration and really just ensuring we have the best terms in the market on our debt.
And as a result, we feel like we have tremendous flexibility coming into this period, whether that's to make new investments or to return capital or even just to whether things if the environment gets significantly worse over the last couple of months. We've taken further steps to make sure we have even more flexibility primarily just through holding more cash.
You know with respect to constraints, we really only have a single leverage covenant, which is on our bank debt and as I said in my prepared remarks, we have substantial cushion there.
And we can effectively draw our entire $1.25 billion revolver without any issues.
You know that said to your question, we do have a solid and grade rating, which affords us.
Good access to capital and is important to our business and I think as we as we consider whether we would operate at a higher level I think for the right strategic opportunities, we feel very comfortable operating at a higher level of leverage.
For a discrete period of time, but purely for financial engineering perspective, that's not something we're going to do it's really a strategic decision.
Maybe quickly on the dividend just before I turn it back to Jay I do want to be very clear on the dividend. This was a capital deployment decision.
This is not a balance sheet decision on our balance sheet as strong as liquid and we generate a tremendous amount of cash flow in our business. So so the dividend was really a strategic decision to optimize how we deploy that cash flow to put the whole thing in perspective, we paid about 60 million and dividends last year.
That's actually not a very big number in the context of our cash flow generation and certainly it's not a very big number at all in the context of our balance sheet, but with our stock around $60 a share it isn't amount that can have a meaningful impact from a repurchase perspective. So you know given the level of our yield were really a core income holding for our shareholders and in the K.
Current environment thinking about the dividend frankly as shareholders and as owners of the business ourselves. We really believed that the repurchases are a much better use of our long term capital today. So we're allocating our reallocating that incremental 50 million of capital toward repurchases.
And as I said in my prepared remarks, we do expect to make additional repurchases beyond that over the course of the year, depending on market conditions and also the prospects for new investments going forward.
Yes, Thanks, Tom I want to Echo Toms statement. This was simply a relative choice to repurchase in lieu of of dividends and I'd like Toms phrase. There. We are taking ownership mindset and we did receive feedback from our shareholders. We think is a positive action.
For the benefit of all shareholders.
As I promise, let me, let me take a step back and talk about capital allocation kind of more broadly we do take a long term approach to our capital structure and capital allocation I also agree with Tom that the idea of.
Lightly more leverage.
Is not a problem as long as we have high conviction around that new investment opportunity, but ultimately we would bring that that leverage ratio back down.
As we benefit from the cash flows that new investment opportunity and it's not a financial engineering.
Concept, it's true it's really a strategic concept.
We have historically operated.
Between two and three times.
Leverage and the most recent.
Half DAC decade to seven years.
Weve brought that ratio down to two maybe even under two for moments in time, we'd like the two times leverage ratio again, we can go above it.
We like saying investment grade I think those are all important aspect to how we operate excess capital markets for efficiency.
In line with our strategy, which we have can continue to communicate our first priority is to invest in growth primarily through new investments as well as existing affiliates.
And then and then of course after that return excess capital to shareholders, which we've done moving into this period in last call. We commented that we we see.
Growth opportunities growing as a percentage of our capital deployment, we still see that.
Clearly.
We're in a time of dislocation and as I mentioned, we've been through times of dislocation before probably more than.
And we all had hoped we'd experience.
And that experienced though tells us that we see unique opportunities from dislocation.
They don't happen immediately you have to be ready patient prepared.
I do think that our proprietary relationship calling in our existing pipeline.
Is advantageous differentiated.
For us because.
In the world to social distancing, creating new relationships is going to be more difficult and our existing multi decade relationships will prove to be very valuable in this period.
I also think having a longer term view of capital structure and capital deployment will also help us as Tom said, we have substantial capacity both from our revolver as well as the cash flow from our business and as we see opportunities come up in the new investment.
We would like to make those.
Of course, along the discipline.
And structuring that I I described earlier and Chris is question.
As many of you remember on the heels of the global financial crisis, AMC had one of our most productive periods.
We made investments in Harding Loevner GW in K, Artemus and pantheon, a number of those are our largest affiliates today.
And so we anticipate that we will see similarly attractive opportunities over the coming quarters in years, and therefore, we positioned as Tom said for years, our balance sheet to take advantage of of this this type of environment.
Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.
Hi, good morning, Thanks for taking the question just maybe another one around the balance sheet can you guys talk a little bit about the us just background on increased that in the quarter and as we look out into the put back calm asked for you guys said earlier with respect to about $200 million this year I'm, assuming steady markets.
Is that amount sort of peak this year or just given kind of the vesting schedule. Among your affiliates does it continue to grow.
Into next year, and if you guys can give us a flavor.
On which affiliates are likely to be more active and they'll be helpful. Thanks.
Yes. So thank you Alex appreciate the question, we're going to take that as one question and I'll, let Tom Tom Walk you through it.
Thanks, Alex So just with respect to the change in debt levels in the quarter.
I mentioned previously that we put a tremendous amount of value in our model on cash.
And just in the ordinary course, and if you think about.
In times of uncertainty there is no asset more valuable than cash and in times, when you see tremendous future opportunity Theres no asset more valuable than cash. So we did draw a little bit on our revolver, which is something we've done historically just to make sure that we have more cash on hand.
In order to be opportunistic in order to be nimble as unique opportunities present themselves.
Also I note that cost to capital is kind of at an all time lows. So that carrying cost of that for us is very manageable relative to the nimbleness and opportunity and flexibility. It just gives us to operate in this environment.
Shifting to your question on affiliate repurchases. This this was an elevated year, we knew that coming in.
As we think about next year, we do expect a number to come down fairly substantially. This year is number will probably be something in the 200 range that's versus kind of one fifties issue over the last couple of years hundred ish in the years prior to that I think looking into 2021, you're certainly going to come back into that historical range. So there was a bit of.
The spike this year.
With respect to to the affiliates are I won't go into the names, but theres a.
There is a positive bias if you will in a lot of ways to our affiliate repurchases because it tends to be those businesses that have grown the most.
Since the time, we've made the investment and therefore have had the best investment performance have had the greatest inflows have been the most successful that we tend to be buying back more of so ultimately we end up owning more of some of our best businesses and we get to experience. The cash flows are those businesses you know at very attractive valuations.
Yes ill just note that we.
We did come into this period as you will remember from the last call with a significant pipeline of new investments and we still have that pipeline of course, we are.
Taking a step back and making sure that we know what the forward view looks like but the point I was trying to make in this really gets to the heart of the cash was we want to make sure that we were ready and we still want to make sure. We're ready in this environment to execute on really high quality.
Pardon her own.
New of new investments.
Thank you. Our next question comes from the line of Mike Carrier with Bank of America. Please proceed with your question.
Good morning, Thanks for taking my question on just one more just in terms of the capital.
Just run through your commitments over the next seems like 12, 24 months and how that stacks up relative to your cash flow uncapped levels more importantly, like what it means with the amount of flexibility you have for buybacks or strategic deals.
Yes so.
Thanks, Mike Let me, let me take that one I think I'm going to take it at the higher level because as Tom mentioned, we got through the kind of known.
You know recycling transactions that that we just described our forward outlook for cash outlay is going down with respect to the internal.
Resources necessary and the business. So it really comes to pivoting to new investments and if no additional growth opportunities return of capital those really our main two choices over the over the short to medium term I think given we do expect opportunity from new and.
Vestments will be disciplined and careful in terms of of that as that capital deployment, and we will and we do expect to do additional repurchases, but first and foremost we're focused on being able to execute on new investments going up kind of one more level, we've positioned ourselves to be able to.
Execute on significant new investments with the way, we handle our balance sheet.
Revolver itself.
As a longer dated revolver I think we have at least three years left on that revolver.
Before we even would consider redoing it and then when you look at the cash that generated from the business the combination of those two.
Obviously, let us execute on substantial new investment opportunities.
The the point that Tom and made earlier that for strategic reasons.
Reasons, we would consider going above kind of our long term capital structure level and we have done that in the past and frankly in the global financial crisis in the.
New investment activity after that we did bring our leverage ratio.
Just just a share touched below three times.
Those were levels.
Have a much smaller company, but I think today, we would be willing to go to say two and a half.
To be able to.
Execute on new investments, so we do have substantial capacity and substantial liquidity to do so.
Thank you. Our next question comes from the line of Brian The data with Deutsche Bank. Please proceed with your question.
Great. Thanks, Good morning, everyone safe and well also.
Thank you.
Brian you as well.
Thanks, So just maybe the ship the south are going to see organic growth, maybe if you could just talk a little bit about the.
Current run down and no yeah, maybe difficult to sort of ring fence that amount, but I would imagine that's the is Ah the risk to future outflows is that being I think you'd said few strategy is you're now low single digit percentage of EBITDA. So maybe toward the the outlook into second quarter of the 160.
Million EBIT or what is your assumption.
On the corn strategies contribution in that quarter and then if you can you just give it a flavor of the flu yeah, Oh outlook as we sort of come into the second quarter, where do we think we're improving with a little bit more of a risk on the market here at least in April.
Yes, thanks, Thanks, Brian and I'm going to let Tom or make sure that I answer here at all of your question for them to take it to the to the level of maybe I'll just talk about what we're seeing with clients generally and then I'll.
I'll answer the question around quantitative strategies and contribution.
As you probably are hearing.
Your own research when you have these moments of uncertainty in asset dislocation.
There's there's generally a number of stages that clients go through and the first stages a bit of freezing of the market.
And that is what we saw initially in say mid March.
We also had the additional complexity here.
A new environment, a new work environment, and new operational environment of work from home environment. So to some extent it wasn't just freezing of the market. It was people getting readjusted with.
There you know there their home offices and and communicating.
Virtually not physically and that happened across institutional and retail clients broadly speaking, we did see some de risking in retail as you would expect frankly it wasn't as bad as you we would have thought.
On the institutional side after we got through the work from home logistics.
We actually saw some modest.
Repositioning of assets, which was favorable to our fundamental managers.
We.
As time has moved on the environment has settled down a bit and we are seeing clients further adjust activity has picked up.
We've seen closings on the illiquid side into April we have seen some reallocation occur into our fundamental managers, especially those who have distinguish themselves. During this period I think one of the opportunities of volatility and dislocation of course is our ability.
Through our affiliates to capitalize on the volatility.
We have seen affiliates distinguish themselves in this environment I think we named some of them on our in our prepared remarks.
We also have recently come out with a are published study on how independent partner own boutiques performed during volatile periods. It's a it's a quick read it's on our website, but it does.
Prove out that you know in all periods independent partner own firms outperform, but especially during volatile periods and we're seeing that play out amongst our alternative managers capulet Garda systematic up.
Our fundamental managers Harding Loevner Tweedy Browne Veritas yachtsman, even our illiquid managers, who have gone through substantial fund raising over the last two years has a tremendous amount of dry powder and as I just mentioned on each of them are continuing to close.
In existing and new fund raising activities.
In the month of April so, we're very optimistic about the distinguishing qualities of independent active.
Partner own firms in this period.
That said the area, where we see.
Outflows in the quantitative strategies across both alternative and long only.
As Tom said that was over 90% of our outflows.
This quarter, if the trends continue we would say, 90% plus and the in the in the second quarter I think the only silver lining to that is the contribution is a very low single digit number so in that hundred 60 ish million.
Estimate the Tom gave you we would expect it to be very little.
Thank you Sir our next question comes from the line of dancing with Jefferies. Please proceed with your question.
Thank you. So my question kind of dovetails with the outlook for new investments plus kind of capital return and so.
Just curious about the makeup of the pipeline today and I would assume closing we're executing on a new investment is difficult given the environment that we're in good as we kind of go through this year.
If we do not see new investments should we be thinking about increased purchases beyond the 50 million you can you've quantified for.
For the remainder of this year and I guess, one more on just the pipeline can you talk about the scope or size of potential new investments given the last couple deals have been small in terms of a U M or can you kind of talk about the range of potential new investments you have enough pipeline currently.
Yes, Thanks, Dan So maybe I'll take you back to last quarter on the free Koby crisis call.
Our pipeline had been gaining momentum.
As we had described.
That point, we were in advance discussions with a number of high quality.
Prospects one of them, we obviously transacted, which was combat.
And then we had a number of others in the in the latest stage of of the pipeline.
The those businesses do not go away.
I will.
A mind you have a story of artemus, which they were in our pipeline going into the global financial crisis, and it took us about 18 months.
We ultimately transacted on on that so these these things don't go away and that really.
You know requires the environment to settle to make sure that as investors. We are reflecting you know.
The forward look and as as a partners get comfortable with with that environment. They also are comfortable with where the partnership because these are partnerships that are done over.
You know a generation as I as I mentioned in so they really don't go away because of market dislocation, but market stability does help us come together as partners.
We also think that new opportunities will be created in this environment as.
You know shareholders corporate sellers, even reassess their strategic needs. So we want to be mindful of our whole opportunity set it does take some time.
To developed and evolve, but that's what will be patient with our capital that said and just to clarify what Tom said is we do expect additional repurchases over the.
The capital set aside for dividends even above.
Just just the $50 million level.
The amount of course, and the extent of it and the timing of it will depend on on new investments, but we do expect additional repurchases.
Thank you, ladies and gentlemen that concludes the time, we have allowed for questions I'll turn the floor back to Mr. bargain for any final comments.
Thank you all again for joining us this morning.
While the environment has been challenging difficult markets yield compelling opportunities.
And we remain confident in our forward prospects and we'll continue to actively position our business for future growth.
I hope everyone remained safe and healthy and we look forward to speaking with you next quarter. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.