Q4 2020 Affiliated Managers Group Inc Earnings Call
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Okay.
Greetings and welcome to the AMG fourth quarter 2020 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
At this as a reminder, this conference is being recorded.
I would now like to turn the conference over to your host MS. Anjali Agarwal head of Investor Relations for AMG.
You may begin.
Good morning, and thank you for joining us today to discuss Amg's results for the fourth quarter of 2000 and fund.
Before we begin I'd like to remind you that during this call. We may make a number of forward looking statements, which.
Which could differ from our actual results materially and AMG assumes no obligation to update these statements.
A replay of today's call will be available on the Investor Relations section of our website.
Along with a copy of our earnings release, and a reconciliation of any non-GAAP financial measures, including any earnings guidance announced on this call.
In addition, we posted an updated investor presentation to our website. This morning, and encourage investors to consult our site regularly for updated information.
With us today to discuss the company's results for the quarter R. J Horrigan, President and Chief Executive Officer, and Tom <unk>, Chief Financial Officer.
With that I'll turn the call over to Jay.
Thanks, and Julia and good morning, everyone.
2020 was an extraordinary year.
And the consistent execution of Amg's long term strategy resulted in strong business performance and growth.
Complex, the operating conditions and volatile markets accelerated transition across the investment management industry with a number of our peers and competitors pursuing scale, well, others look to divest or exit businesses altogether.
Throughout this period AMG remain committed to our fundamental principles.
Net investment performance is about skill not scale.
Net investment Alpha is best generated by differentiated active managers.
And that's the entrepreneurial investment centric cultures of independent partner owned firms offer clients the greatest opportunity for Alpha.
As a result, we remain focused on executing our long term strategy with excellence and discipline.
Our affiliates built on their strong long term performance records, demonstrating their ability to distinguish themselves across market cycles, including during volatile periods like 2020.
Today, approximately three quarters of our products are outperforming their long term benchmark on an EBITDA basis.
Our affiliates also continued to evolve and enhance their product offerings.
And in collaboration with AMG.
Expanding their abilities to meet long term client needs.
And we welcomed four new affiliates and the past year.
All of which operate and areas of strong secular growth include.
Including sustainable and impact investing private markets and global equities.
Overall AMG emerged from this from the unprecedented events of 2020, and an even stronger position and we entered the year.
And we enter 2021 with significant momentum across our business and substantial capacity and flexibility to generate meaningful additional earnings growth and shareholder value.
Turning to our results.
Since the second quarter of 2020, the earnings power of our business has increased considerably.
Driven by the strong and improving performance from the large majority of our affiliates combined with the impact of strategic investments and actions, we have taken to reposition our business over the past 18 months.
These collective actions contributed to year over year growth and EBITDA of 27% and the fourth quarter drew.
Driven by growth and management fees and performance fees as well as operational efficiencies.
We also capitalized on the market environment in 2020 to strengthen our balance sheet and improved flexibility for the benefit of our shareholders.
With our enhanced capital position that substantial free cash flow, we deployed more than 800 million across a combination of growth investments and share repurchases, including new partnerships with combat Jackson square and Boston common.
Simultaneously repurchasing 10% of our shares over the course of the year.
AMG had a strong finish to 2020.
But the results do not fully capture the magnitude of the earnings power heading into 'twenty and 'twenty one.
During which significant market business performance and new investment tailwind will further contribute to our earnings growth.
And the second half of 'twenty, and 'twenty business activity and client flows and private markets wealth management, and especially fixed income were particularly strong.
These areas collectively account for more than one third of our EBITDA.
And are becoming a more significant contributor to our overall growth profile.
Our fundamental equity and liquid alternative strategies are better positioned today, given their improved track records.
Kris performance fee opportunity and enhanced potential to generate organic growth.
In addition to the building momentum of our existing affiliates the incremental earnings contribution of our 2020, new investments will.
We will be fully realized and our 2021 results given the timing of these investments over the course of the year.
And finally, given our substantial liquidity and cash flow generation, we expect to continue to deploy significant capital in 2021 across both our new investment pipeline and additional share repurchases.
For all of these reasons as we entered this year, we are confident and Amg's board prospects and our ability to generate meaningful growth and economic earnings per share.
As you know AMG is a leader and partnering with independent asset management firms.
We have continued to evolve our approach to meet the ongoing needs of our affiliates as they grow their businesses over time.
The day, we offer a uniquely broad set of partnership solutions for independent firms.
Including growth capital distribution support minority investments and long term succession planning.
Our differentiated approach continues to resonate with the highest quality independent firms as evidenced by our new investments over the course of 2020, which included Com Best partners, a premier middle market private equity and private credit firm.
Which is an area of high client demand and increasing allocations.
Jackson Square partners, a leader and global equities with an outstanding reputation and track record from managing high conviction portfolios.
And Boston common asset management, a woman owned innovator and global sustainable and impact investing which has significant organic growth prospects given their long record of success and ESG investing.
Together these new investments evidenced the power and breadth of AMG solution set.
And all three firms have joined our global distribution platform to expand their client reach across channels and geographies.
Individually each new partnership underscores amg's focus on investing and high quality growing businesses and disciplined valuations and through customized structures designed to deliver returns across a range of outcomes.
With our unique competitive position and proprietary relationships, our new investment activity remains high.
Across a broader universe of firms around the world perspective affiliates are increasingly engaging with us.
Notably Boston common is our second partnership with a specialist and sustainable investing followed following inclusive capital last year.
Client appetite for responsible and impact investing is steadily increasing and this is an important moment in time for the asset management industry to address long term sustainability through capital allocation.
We and our affiliates are increasingly focused on this imperative.
We are closely collaborating to support affiliates increased engagement and participation and responsible capitalism, particularly with respect to their product offerings.
For example, we're providing capital and resources to Artemis as they launch and dedicated sustainable global equity strategy.
And similarly, we supported GW and K and building out a suite of sustainable and fixed income strategies, which AMG is now distributing.
More broadly our global sales teams are bringing client insight to other affiliates with respect to integrating ESG into investment processes.
Ultimately, we believe that independent active managers are best positioned to generate investment alpha as clients grow their allocations to ESG investing and our affiliates are increasingly participating in this growth area.
And it's most fundamental way sustainability from the perspective of long term ism and preservation.
And of a firm's ability to build and create value over time.
It has been at the very heart of Amg's business purpose since our inception and 1993.
AMG as foundational principles support enhance the long term duration of independent firms through succession planning.
We help partner owned firms to manage their greatest asset and their greatest risk human capital.
And to preserve and enhance partner alignment with their most important stakeholder their clients.
In addition to human capital AMG also offers capabilities to assist affiliates and addressing other long term risks, including operational regulatory and Reputational support.
And helping our affiliates to manage long term risks and enhance their ability to grow over time AMG has focused on sustainability of independent partner owned firms for nearly 30 years.
And as we build upon our three decades of successful partnerships and position ourselves for the future.
The impact of the strategic and growth investments that we've made over the past two years are beginning to materialize and our results as they did and the fourth quarter and will more fully manifest in the years ahead.
Over this period.
We have invested and four new affiliates.
We've invested and the growth of our existing affiliates.
We broadened our partnership solution offering.
We enhanced our strategic capabilities.
And realigned our distribution platforms with the greatest opportunities and.
And we significantly enhanced our capital position.
We have achieved all of this while reinvigorating amg's entrepreneurial culture, and reestablishing and ownership mindset across the entire organization.
Looking ahead to 2021.
We have significant momentum and our business and heightened conviction and our strategy.
As we continue to generate increasing levels of free cash flow and we invest that capital into our growth initiatives, while returning excess capital through share repurchases.
Amg's long term opportunity to compound earnings is clear.
And positions us to deliver significant shareholder value overtime.
With that I'll turn it over to Tom to review the details of the quarter.
Thank you and good morning, everyone.
As Jay discussed strategic changes, taking place and our industry are creating significant disruption and.
And that disruption is highlighting amg's long standing belief and the value proposition of independent partner owned firms and their unique alignment with their clients.
At the same time focused execution against our strategy is producing results.
And both our quarterly earnings and our expectations for future growth.
We enter 2021 with significant momentum across our business, increasing earnings power and a stronger and more flexible balance sheet to execute on the considerable opportunities ahead of us to generate shareholder value.
Turning to the quarter.
Adjusted EBITDA of $255 million grew 27% year over year driven by.
Strength in both management and performance fees and.
And economic earnings per share of $4.22 benefited from an enhanced level of share repurchase activity.
AMG and delivered strong earnings growth. Despite net client cash outflows of $15 8 billion that were driven by certain quantitative strategies and seasonal client redemptions.
Quantitative strategies accounted for 95 per cent of outflows and the quarter, while contributing approximately 3% of run rate EBITDA.
Away from Quant and taking into account seasonality.
Our underlying organic growth trends continue to improve.
And client flows were positive and the quarter.
Strong investment performance and an increasingly attractive environment for allocating to active managers drove further stabilization and fundamental equities.
And affiliate strategies across illiquid alternatives wealth management and specialty fixed income generated significant positive net flows and continue to contribute and increasing proportion of our earnings.
Turning to our asset class breakdown and excluding challenge quantitative strategies.
And alternatives, we reported net inflows of 700 million and the fourth quarter, reflecting ongoing momentum across our illiquid alternative affiliates.
Strength in private markets was partially offset by $2 billion and seasonal redemptions and certain liquid alternative strategies with fourth quarter liquidity windows.
Fund raising remains strong at pantheon, Baring AIG and combat as clients continue to steadily increase private market allocations globally.
Performance in this category has been excellent as our affiliates have been deploying dry powder into attractive return opportunities, including across Asia, private equity global secondaries and co investments and credit funds.
Overall, our private markets book remains a significant source of earnings growth accounting for nearly 20% of management fee EBITDA and continues to build future carried interest potential.
Within liquid alternatives, our affiliates continue to post strong performance across relative value fixed income and concentrated long only strategies, which collectively generated the majority of our performance fees in 'twenty and 'twenty.
Garda and value Act among others produced very strong returns in 'twenty, and 'twenty and our liquid alternative strategies enter 2021, well positioned to deliver for clients.
Moving to fundamental equities, we reported net outflows of $2 3 billion and global equities and $1 1 billion and U S equities.
Due to the impact of retail seasonality.
We continue to generate positive organic growth and areas, where client demand for active converges with top quartile performance.
Moving it hurting loved and or Veritas, and GW and cat.
Our investment performance across our fundamental equity strategies continues to be very strong with approximately 80% of fundamental equity AUM above benchmark for the five year period significantly outpacing the 62% level of two years ago.
And with that strong performance, coupled with a more favorable macro environment for active investing we are well positioned for future organic growth.
In particular, we are seeing increasing momentum and client conversations regarding value strategies, where overall industry dynamics have improved and our affiliates continued to deliver strong relative investment performance.
Yeah.
Multi assets and fixed income strategies posted another strong quarter of organic growth generating $1 9 billion of net inflows driven by Muni bond strategies and broader wealth solutions at GW and K and Baker Street.
This area of our business continues to deliver steady long duration inflows and we anticipate ongoing client demand trends to support future growth.
In aggregate AMG is well positioned to generate positive flows over time, given our affiliates participation and areas supported by long term client demand trends and their differentiated ability to deliver superior outcomes for clients.
Now turning to financials for.
And for the fourth quarter adjusted EBITDA of $255 million grew 27% year over year, driven by strong investment performance higher markets lower corporate expenses and the impact of growth investments and both existing and new affiliates, including affiliate equity purchases.
Adjusted EBITDA included $60 million of performance fees, driven by strong investment performance across a broad array of alpha oriented strategies.
Economic earnings per share of $4.22 further benefited from an elevated level of share repurchase activity, which I'll expand on and a moment.
For the full year performance fees of 86 million represented approximately 11% of our earnings with.
With a diverse and growing performance fee opportunity. We are entering 2021, well positioned for continued strength in this area.
Now moving to specific modeling items for the first quarter.
We expect adjusted EBITDA to be and the range of $240 million to $250 million based on current AUM levels, reflecting our market blend, which was up two 5% as of Friday.
Our estimate includes a performance fee range of $35 million to $45 million, reflecting normal seasonality and strong performance at our liquid alternative managers.
Our share of interest expense was 27 million for the fourth quarter, reflecting the impact of our hybrid debt offering.
We expect interest expense to remain at a similar level for the first quarter.
Controlling interest depreciation was 2 million and the fourth quarter and we expect a consistent level for the first quarter.
Our share of reported amortization and impairments was 87 million for the fourth quarter.
And the first quarter, we expect this line item to be approximately $40 million.
Our effective GAAP and cash tax rates were 24% and 25% per the fourth quarter.
For modeling purposes, we expect our GAAP and cash tax rates to be approximately <unk> 25 per cent and 19% respectively for the first quarter.
Intangible related deferred taxes were negative $3 million and the fourth quarter, and we expect intangible related deferred taxes to be $9 million and the first quarter.
Other economic items were negative <unk> 8 million and included the Mark to market impact on GP and seed capital investments.
And the first quarter for modeling purposes, we expect other economic items, excluding any mark to market impact on GP and seed to be $1 million.
Our adjusted weighted average share count for the fourth quarter was $45 3 million and we expect share count to be approximately $43 million for the first quarter.
Turning to the balance sheet and capital allocation.
Over the course of 2020, we continued to position the company for growth taking advantage of the historically attractive financing environment to enhance our capital position by building additional liquidity and flexibility.
We doubled the duration of our debt to 15 years, while keeping our cost of debt unchanged enhanced our capital flexibility by issuing junior hybrid debt.
And significantly improved our liquidity position, including the repurposing of our dividend in favor of share repurchases.
As a result of these actions our balance sheet is in excellent position heading into 'twenty and 'twenty, one and together with the flexibility provided by our significant discretionary free cash flow, we feel confident and our ability to invest for growth and simultaneously return significant excess cash to shareholders.
In 2020, we allocated the cash flow generated by our business toward a combination of growth investments and capital returned to shareholders primarily through share repurchases.
We invested approximately $400 million of capital into growth investments across four new affiliate partnerships and elevated level of affiliate equity purchases and seed and GP capital commitments.
In addition, we repurchased $430 million of shares during the year repurchasing 10% of our shares outstanding and.
And the fourth quarter, we repurchased $226 million of shares versus our guidance of at least 100 million.
The additional $126 million of repurchases in the quarter reflects strong business performance and the second half of 2020 and significant incremental cash generated from performance fees and tax benefits.
Looking ahead through the combination of higher run rate cash generation and more normalized level of affiliate repurchases and our strong liquidity position, we have the flexibility to continue to increase discretionary capital allocation to both growth investments and capital return.
And the first quarter, we expect to repurchase approximately $200 million of shares which is elevated by $100 million as a function of our strong year end cash position and first quarter performance fee expectations.
Finally, turning to full year guidance.
While we havent given full year guidance and some time, given the sharp move and equity markets. The increased earnings power of the business on both the management fee and performance fee basis our.
Our strong liquidity position and heightened share repurchase activity, we are providing earnings guidance for 2021.
We expect economic earnings per share to be and the range of 15 and 50% to $17 <unk>.
Selecting and adjusted EBITDA range of 875 million to $940 million.
The midpoint of that range includes a market performance through last Friday, and 2% quarterly market growth starting in the second quarter.
Performance fee contribution of approximately 10% of earnings.
And a weighted average share count for the year of approximately $41 5 million.
Which reflects $500 million of excess capital returned through share repurchases.
I would note that while we are not including the impact of new investments in earnings guidance, giving timing uncertainty new investment activity is incorporated into our capital planning and would provide incremental upside to this earnings guidance.
Both our first quarter and full year guidance are subject to forward prospects for new investments and market conditions.
As Jay discussed 2020 was a year of unprecedented events and change and we've remained focused on establishing new partnerships supporting growth initiatives at our existing affiliates.
<unk>, our balance sheet for future growth.
And returning excess capital to shareholders through repurchases.
We come into 2021, with even more conviction and our strategy and.
And our ability to deploy capital to compound long term earnings growth and create value for our shareholders.
Now we're happy to take your questions.
Thank you at this time, we'll 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 tone will indicate your line is and the question Kim.
You May press star two if you'd like to remove your question from the queue from participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys and the interest of time, we request that you each keep to one question or.
Our first question comes from the line of Craig.
<unk> with credit Suisse. Please proceed with your question.
Thanks, Good morning, everyone.
Good morning, good morning.
So as we look at your pipeline of potential transactions.
Can you talk about the composition of that.
The majority of investments and also minority investments or some of these new growth capital type transactions that you guys have been pivoting and tail.
Yeah. Thanks, Craig Thanks.
Thank you for the question, let me let me start.
And I'll get to the majority and minority and growth capital and aspects of this.
First thing I'd like to say as you know our model is resonating.
It's evidenced by our four new investments we've made since the middle part of 2019.
Each of these businesses.
And our high quality businesses, obviously that is the most important aspect of our investment.
Thesis has defined the highest quality independent partner owned firms and we think we've done that for the most recent four.
Each of them offer growth.
Opportunities and they each represent slightly different.
Reasons for partnering with us.
And the case of combat and in particular that was one where growth capital was a key consideration and I'll come back to that and a moment.
The the.
As we said in the prepared remarks, we do offer.
Support throughout the whole lifecycle of and affiliates.
Uh huh.
So our solution set today includes succession planning.
Which which is a majority investment concept a minority.
Minority investments typically more for liquidity and.
Growth capital and distribution support so across that framework. When you look at the most recent four investments each of the last four investments have taken advantage of our distribution and support signing up AR and the initial.
Transaction and at the time of the transaction to a to go onto our global distribution platform.
The and in each case. These have all been minority Stakes I think that they came to us.
For various reasons and that was the opportunity for us, but majority versus minority really depends more on the needs of the affiliates.
And the prospects and we look at our current pipeline.
Have a mix of both.
And we would expect to do both over and over the medium term.
And when I look at the pipeline generally maybe I'll make some other comments here.
We do expect significant new investments over time, including in the near term, we have put more resources to this effort and.
We as I mentioned have the broader solution set which is attracting a wider universe of prospects.
Especially those in need of either strategic capital are or distribution support.
We have strong proprietary relationships and the virtual and fun environment is actually an advantage for us given that we've maintained multi year and even decade long proprietary relationships with a large number of prospects.
We're seeing increasing levels of engagement.
Under you know just using our own internal metrics, we've seen a pickup and activity since the third quarter and we you know we're seeing a great number of conversations probably isn't the greatest number and nearly a decade.
Also worth noting that our calling efforts are focused on areas of secular growth.
That includes private markets, especially fixed income ESG global equities and multi asset solutions. These are all areas that have tailwind.
Areas, where active management can add value.
And as we've mentioned and the last several calls we are being very disciplined and creating prices and creep and creative structures and pricing that aligns our interests and gives us the right combination.
Our participation through.
And incorporating a number of outcomes.
And we've designed a model that enables us to execute multiple deals at a time or many deals and a year and we can do that with out the risk or cost of integration given that we have a model that leaves independent firms independent and our goal is to enhance and preserve the alignment.
Of their partners and extend the duration of those businesses.
Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.
Thanks, Good morning, So a couple of questions just in terms of the outlook. So I guess first and the fourth quarter, where there were some impairments or write.
Write downs, there kind of from.
For some of the kind of one off items in terms of your add backs and then just trying to separate the beta of the strength, obviously, a 2020 and.
And that versus kind of the momentum in your business that you can control your affiliates control in terms of performance. So if you could kind of highlight the areas of organic growth opportunity that you see as the most incremental in terms of improvement as you think about 2021 versus this past year.
Yeah, So I'm going to let Tom take the first part of your question and then.
And maybe I'll come and I'll Circle back then thank you for your question.
Sure. Thanks, Dan.
So on the impairment question look there wasn't really anything meaningful in the quarter and kind of a couple of little things here and there and you saw our guidance for the first quarter, you know going back to the $40 million level.
So not much to speak of there in terms of kind of overall growth opportunities.
And you touch specifically on organic growth and I'll share a couple of things and I'm sure Jay will give some more color, but remember for us, it's really going to be a combination of organic growth performance and performance fees being driven by that great performance and our business the ability to make new investments and growing areas. Both from an earnings growth perspective.
And and organic growth perspective, and then allocating our capital to repurchases and the ability to drive.
Our share count and ultimately earnings compounding through that as well. So I think there are a number of areas beyond data frankly, where we were able to translate strong market performance through our capital allocation into long term growth and a variety of areas and our business.
In terms of those areas, where we are seeing significant momentum.
Both Jay and I touched on and our prepared remarks, the number of areas, where we see strong secular growth opportunities private markets and illiquid alternatives, where businesses like pantheon Baring Asia <unk> and combat have seen very strong close over the course of the past couple of years continue.
Continue to be and the market actively with new funds virtually at all times given the diversity of those businesses and we anticipate those businesses to continue to grow.
Digit rates organically collectively into the future.
Specialty fixed income and traditional fixed income we have a number of affiliates who have very unique high performing products and those areas are good.
<unk> had an excellent year, Capua, GW and Kay and the Muni side again very strong.
And then and wealth management, where again, we continue to see sticky long duration flows coming in and so those areas have been strong over the last couple of years, we anticipate them being strong into the future.
And as I mentioned in my prepared remarks, and Jay spoke to as well given the very strong and improving performance that we're seeing and our fundamental active equities book, where more than 80% of our assets are above benchmark over the five year period, we are starting to see some really nice trends in terms of core organic growth once you strip out quantum and seasonality.
That number was positive overall.
For the business this quarter and as you think about kind of the environment for active today, coupled with the strong performance that we have we do believe that we have very good tailwind behind us in terms of flow opportunities and the future with respect to our active equities book.
And that was that was a good summary.
Maybe if I had a few things to add here Dan.
First is look I recognize that are our top line flows.
Acquire you to do more work.
On the underlying growth of the business. So we recognize that and we're trying to help you get to that to that level. Tom just mentioned away from quantitative flows and and there was some seasonality, but we would expect and have seen our the rest of our business and positive territory, but really away from that.
Because what really it was really hard to see is obviously, we own different amounts of those affiliates and they have different.
Structures, so and.
And some of them often offer performance fee. So maybe if I can share.
Perspective, which is.
You know our AUM levels.
Nir.
Medium term highs here, which generate significant management fees.
Our.
Non quant flows have turned positive in the fourth quarter ex seasonality.
We had new investments in 2020 and the full effect.
Ill be seen till 'twenty 'twenty, one and that's in our guidance for for those.
Mount we're assuming kind of a 10% performance fee.
And frankly, given high watermarks, given the growth and the and some of our alternative products could be much greater than that.
If you kind of look at where Tom centered U and the mid points of 920 ish of EBITDA and kind of 16, and 25 and and economic earnings per share you know that that really does reflect.
Relatively modest performance fee assumptions.
What we're seeing and our normal convention with management fees, the carryover effect of new investments and a modest level of capital deployment. If we have new investments, we will repurchase more shares or have higher performance fees and you'd be looking at the very top of the of the range. So I do think that we have significant organic.
Our growth it's just the the benefit of it is hard to see because the immaterial the materiality of the AUM of the Quant managers as office gating the underlying growth of the business.
Thank you. Our next question comes from the line of Bill Katz with Citi. Please proceed with your question.
Okay. Thanks, very much so thanks for all the extra detail maybe just go the other way as you look at your platform and try and help investors sort of get to a sort of fundamental value of the company.
And seeing some of the other deals that happened in 2020, maybe two part question. One is what is.
And what's the concept of potentially selling some underperforming affiliates and then can you talk to our pricing a little bit just given some of the strategic deals that have happened last year as well as the sort of the and coach and buy specs and to the business as well. Thank you.
Yeah. Thanks, Thanks, Bill and good morning to you.
Look we have high conviction on our strategy, which is to be the partner of choice to independent partner owned firms.
We think that that is.
The place where active.
Is that its very best where outperformance.
Will will be experienced by clients around the world and we're seeing obviously.
Some.
And maybe even some momentum and inflows going towards active away from passive and so that's that's something that that we're seeing so we have high conviction that.
The growth of our business is still in front of us with respect to continuing to execute our strategy by investing in existing affiliates investing and new affiliates.
I think you've heard us say really now for two years about two years ago, we engaged with.
Half dozen or so of our affiliates that we're facing headwinds to address issues and to and to work through those headwind that's largely behind us now and.
It did lead to.
No different.
Ultimate resolution strategically.
But that is because we worked with our partners and it was ultimately driven by the partnerships.
AMG and and that is that is behind us I think that allowed us to free up capital and resources for our growth opportunities Youre seeing some of that come through our results now and I think youll see some some of that come through our results and 2021 as far as our our stable of affiliates, we have tremendous diversity and.
And our business.
As evidenced over the last two to three years and how we've come back with.
With the profile that we have.
We are a permanent and we take a permanent partnership approach and.
And ultimately we think that that is why affiliates have chosen us that is our uniqueness and the market there really isn't anyone else like us and we think that's what's going to drive value for shareholders.
Thank you. Our next question comes from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.
Hey, good morning.
So you have a fee.
Fair amount of new investments plugging into global distribution.
Could you maybe help us frame based on past experience of doing that and maybe what the kind of timeline is for seeing incremental flows from the new investment being made getting plugged into global distribution and and seeing.
New mandates result from that.
Yeah, Thanks, Patrick and good morning.
Select distribution and AMG, it's it's a combination of the excellent sales efforts that exist at our individual affiliates, but also augmented by the complementary offerings that we have purpose built at AMG to help those affiliates scale.
I think you know this we started our centralized distribution.
10, 15 years ago now, we've raised more than $100 and 100 billion excuse me 100 billion for our affiliates across product types and client segments.
So each of these new affiliates have come online and we've already started to raise assets for Garda and for combat and it does take a little time and COVID-19 slowed us down a bit and 2020, but we have raised assets we have mandates.
Mandates and in each case.
Both.
Jackson square.
Square.
And Boston comment have joined our retail.
Our platform and we will be supporting their retail efforts there.
So we do expect to generate flows for all four of those affiliates and.
And a relatively short period I think we would expect over the next.
Months and year to see flows navy and each and each of those from incremental flows from work that we're doing at AMG, but let me also mentioned why I think that's the case, because we made a number of adjustments.
Adjustments and the past two years.
We've talked about this as well and addition to working with certain of our affiliates that I mentioned a moment ago.
And facing headwinds, we also adjusted our own platform and evolved our strategy and approach to the market to really focus on areas that are growing.
Pulling resources away from those areas that that that arent and adding resources to two areas that are so for example, and institutional we've added resources on the private market side.
And we broadened our alternative offering.
And with Boston, Com and will be offering and ESG product.
We also.
We continue to.
To look at the new regions that we would want to go into and we do have kind of opened searches for more resources and areas that we think are going to growth. So we are putting more effort towards those growth initiatives. So that gives us confidence.
And and adding these four affiliates as well as our existing affiliate base on the U S retail and wealth side.
And we've struck a partnership with a capital again to help us on the alternatives. We've also added.
Resources and <unk>.
Technology.
And home office too to really plug into.
The wire houses, where it's really and institutional sales and then ultimately you need the sales support we believe the U S. Retail channel is actually a huge opportunity for us.
And that we're going to continue to push forward and U S retail to drive value, you'll likely hear more from us on this and as we make progress. We'll we'll give you more details but going back to your original question I do I do see flows.
Each of these affiliates over the relatively short period.
Thank you. Our next question comes from the line of Alex Blaustein with Goldman Sachs. Please proceed with your question.
Hey, everybody good morning.
And I was hoping maybe to round out the organic growth discussion a little more and given the strong momentum and the business can you guys help us understand what the organic EBITDA growth for AMG is expected to be for 'twenty, one and so again kind of like excluding impact of market performance and any purchases of either new or existing affiliates and I guess.
And investors try to evaluate sort of the longer term.
Gross profile of a company of this company.
Can you kind of I understand like kind of pinpointing it to a single year might be difficult, but what is the organic EBITDA growth that you ultimately aspiring to have over the next several years.
Thanks, Alex I'm going to let Tom answer that very nuanced and complicated question to answer, but Tom I'll, let you give it a shot.
Sure. Thanks for your question Alex So so look the organic EBITDA growth is obviously an important one there's a lot that goes into that particularly from a business like ours, where we do have a sizeable performance fee component to a lot of these businesses and also frankly, we have.
And we have different ownership and structural stakes and our underlying affiliates. So it's not a and.
Stat that we disclose but I think it's something that as you think about the overall mix of our business you can probably get some visibility into.
If you think about where we stand today, obviously, the the majority of the outflows, we're seeing continue to be on the quant side and.
And while 95% of our outflows this quarter came and quant strategies.
Again, just to restate that was only 3% of our EBITDA and a run rate basis. I'd also note that it is worth pointing out that challenge Quant and peaked in early 2018 and has basically been cut and have since then meaning that any flow activity from here is coming off of a much smaller base.
And I'd also note that we've seen some pretty strong performance. The last couple of months. There. So hopefully we can build on that going forward.
And then kind of look more broadly.
At the shape of our overall our affiliate base.
Across illiquid wealth management and specialty fixed income I think we've noted in the past that's about a third of our EBITDA today. It continues to grow as a percentage of our overall business and then similarly as you look to areas like liquid alternatives ESG global and emerging market equities, where we have very strong performance track records.
And also where active management continues to provide a very strong value proposition to clients. We look at all of those areas as being places, where we can see strong growth into the future and then similarly, I know you sort of asked to exclude this but I really don't think you can think about the AMG thesis without including the impact of new investments.
Both in terms of the earnings that they bring to our platform, but just as importantly, the fact that we're proactively investing in businesses and partnering with businesses that are delivering leading organic growth trends given the secular areas that we're prosecuting when we really think about partnerships. So when you put all those things.
And together and you look at the overall shape of our business I think we feel very strongly that.
Over the intermediate to long term kind of the footprint. If you will of where our affiliates operate the client demand trends and those areas and their investment performance should be and are positioned to drive organic AUM EBITDA growth et cetera over the long term.
Yes look I, even think we're well positioned and the short term as well.
The three quarters of our.
Of our fundamental equities and alternatives.
Are beating benchmark on a five year basis, similar kind of strong on a three year.
They distinguish themselves in 2020 and periods of volatility. So they are really well positioned to take and organic growth.
Of course, we also mentioned that our private markets, our specialty fixed income and our wealth businesses.
Have been strong for some time now and so it is just mix question of when does the.
When does the mix.
Turn and in favor and it and it looks like it turned in the fourth quarter actually.
On an EBITDA basis on a on a headline flow number it did and obviously, but on an EBITDA basis, it's pretty close and I think that's the that's the reason for the optimism here, which is you could see it could it could be the first quarter it could be this year.
Thank you. Our next question comes from the line of Robert Lee with <unk>. Please proceed with your question.
Mr. Lee Your line is live.
Oh, sorry about that had it on mute so thanks for taking my questions.
I guess, Jay maybe just curious I mean and then.
You talked about it.
And how you differentiate from some others in the marketplace and in terms of solutions some of those other contenders.
And and others have been and.
And place for a while now and then.
Multiple acquisitions, but are you starting to see and all that.
Maybe some of those managers, who so revenue shares and whatnot and some of those other.
Parking funds out there are starting to you know.
Starting to and say Hey, we need a more permanent solution now it's been a while that was fine for what it was I mean, you see that as a source and potential.
Investments going forward.
Thanks for your question, Rob Yeah, Let me, let me try to address it I'm going to I'm going to get to that question I actually realized and I'm going to throw structure and pricing and here too because I think I failed to mention that and an earlier question, but if I. If I can just take the overall universe of transactions that happened and asset management and I.
It's important because you know there is a lot of accuracy and our industry right now I think everybody knows that and there are some there are some people who are divesting. There are some people who are trying to consolidate obviously, we were very focused on independent partner owned firms and our model to invest with and and align our.
Our business with those firms and a.
A way that supports them through the entire lifecycle. So that is only a subset of transactions and the marketplace and we don't see our affiliates.
Really wanting a level of consolidation they chose us because they did not want to be consolidated.
And so I wanted to just leave that on the side because those are the types of transactions that we don't see appropriate for our business and and probably really don't affect us. So.
And and affirm that might be independent who really wants to turn the keys over to someone else. That's not a transaction that we would do so I think that that's the the starting place now we're into the segment of the of the population of independent firms.
Who don't want to sell out.
Who do who do want to remain independent and there we have a myriad of competitors, but but I will separate that group into illiquid managers and everything else. So as I say, let me focus on everything else they're competitive.
Opportunity set for US is extremely great. Because there are very few competitors to date most of our traditional competitors have either been bought consolidated decided not to continue or selling their business or assets.
And I think we all know those those names that I just described.
Cause of that in the non liquid side of the market.
We are very to say, we're very differentiated as a complete understatement. It there is very little competition structure and pricing is very attractive to us and we are seeing that when you turn to illiquid, which I recognize the very fast growing area. There are a number of state buyers and you've named one.
One of them.
They tend to take a term sheet approach to a 20% stake and theyre very passive and that can be attractive just for financial return for GPS and the illiquid space. We take a lifecycle approach we're supporting partners at all stages of their growth. So we tend to be selected.
By partnerships that want or need more than just liquidity for a small portion of the G. P.
So direct answer to your question is yes. It is a bit as possible that these state by our portfolio companies may turn to AMG for a different part of their lifecycle.
We obviously are disciplined we do not chase valuations and in this area and when we do get selected and the case of Comverse and the case of AIG and the case of Baring Asia case of Pantheon is for some other reason in addition to just price and therefore, when we think about those who.
And that situation.
We see.
Our offering is being differentiated relative to those day buyers. So and then go go way back up the opportunity for US is still a very fragmented industry and the opportunity for us is large and as I mentioned, we've committed more resources, we have and this broader solution.
And we have proprietary relationships. So we see this growth aspect of our business being and increasingly important.
And driver of our EBITDA and 21 and beyond.
Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.
Hi, great. Thanks, Good morning folks most of my questions have been asked and answered maybe just one on the core EBITDA fee rate Tom It it's Ben.
Improving and the last three quarters it looks like from from about 10 basis points to over 11, just in terms of the outlook coming into 'twenty one.
I guess, what's your confidence that that night.
Further improved from the 11 basis points I know, we do get a positive mix shift as we get.
Given the quantitative outflows there and at very low EBITDA fee rate, but you also mentioned and I think lower corporate expenses from that and <unk>. So just trying to get a sense of that and then also projects and square and how much you M D.
And in the fourth quarter and and for everything else is coming through and <unk> for that.
Yeah.
Great. Thanks, Brian Let me try and hit a few of those.
Yes, we have seen some positive trends in terms of that overall fee rate. If you will a lot of that being driven by strength in.
Some of those core secular growth areas like illiquid and relative value fixed income also frankly, the strength and markets and outperformance at some of our active equity affiliates.
Harding loved and her and the Veritas also I think continue to be quite positive for us and I think you mentioned the point around our management of expenses as we've talked about a number of times and the past I think we've taken a very hard look at the business.
And we're really running I think very lean today in terms of maker.
Making sure that all of our resources are put up against the best and highest use and.
And we're driving toward growth. So I think those trends all feel like they are moving and the right direction and I think hopefully we should continue to see that same type of impact.
Impact as the business moves forward.
In terms of Jackson square about $10 billion came through our AUM that was the only thing that was running through.
In the quarter and again that business continues to perform incredibly well and we're very excited about that partnership.
Thank you. Our next question comes from the line of Mike Carrier with Bank of America. Please proceed with your question.
Good morning, and thanks for taking the question.
The strong performance fees and <unk> and your guidance <unk> and 'twenty. One so can you provide a bit more color on the base growth and maybe some color around organic revenue growth versus the organic asset growth whether for full year 'twenty or <unk>, you're heading into 'twenty. One just given some of the fee rate nuances that you guys see.
Yes.
Yes, Tom I'll actually take that I would just also mentioned.
You know the perspective, we have and the first quarter just given some of our affiliate and timing of reporting too just when you when you incorporate all of that into the question.
Sure. So maybe just a couple of words on performance fees to start we do have a very diverse base of performance fee generative affiliates.
And they generally tend to contribute somewhere in the neighborhood of 10% of economic net income and we were a little bit ahead of that last year at 11% and we've noted sort of a midpoint of the range and our guidance is around 10% and again, we think with some upside from here you can think about performance three's performance fees really kind of in three buckets.
Johnson traded long only which will be impacted by a combination of security selection and markets absolute return strategies, which include a variety of businesses like Garda Capulet systematic.
Who'd been performing very well amidst recent volatility and then a liquids where we continue to build a carried interest bank that'll be an excellent longer term opportunity for us.
That diverse book from year to year different affiliates tend to contribute.
But over the long term rate, we believe we have a very diverse base. That's differentiated in terms of its ability to both deliver performance and and ultimately performance fees and.
And as we come into this year, we did give you guidance for a very strong first quarter, we've got pretty good visibility into.
A couple of affiliates on the liquid alternative side, who have put up very strong performance and we will see some crystallization and again similar to our strong fourth quarter performance. This year, we do have that seasonality, where the first quarter and the fourth quarter tend to be our biggest performance fee generative times of the year.
In terms of your other questions and.
And underlying growth and I think we touched on a lot of it.
Both in our prepared remarks, and and some of the Q&A today, but really you've got to think about a combination of things that are happening and our business right. One we saw obviously very strong market performance in the back half of the year, we've experienced some of that and our results today much of it will continue to come through into the first quarter and obviously into the run rate for the <unk>.
Full year on top of that we've seen very strong outperformance from a number of our active managers above and beyond what markets have provided and we're seeing the benefit of that and both AUM as well as things like performance fees.
Youre seeing the impact also of the overall allocation of our capital partially toward new investments, where Jay as noted the transactions that we entered into last year.
A couple of those happen sort of towards the back end of the year and Jackson square and the very beginning of this year with Boston common.
And so we're going to see the impact of those continue to flow through over the full year and.
And obviously the impact of our share repurchases on an economic earnings per share basis will be a continued tailwind. So you heard both Jay and I referenced sort of the power of compounding our earnings and our prepared remarks, and I think that's really exactly what youre seeing and youre seeing it from a combination of the.
The strength and our affiliates businesses, our ability to translate both of that strength as well as the benefits of strong data into capital allocation that can drive future growth and then as I referenced and one of the previous questions. We are seeing very strong organic growth across a number of areas and our business as well as the potential.
And for organic growth and a number of other areas that had been stable and are trending more and more positively. So overall I think we are very bullish in terms of our earnings run rate and momentum coming into the year and perhaps just as importantly, our significant cash flow generation momentum coming into the year as well.
Yes and look.
I don't think just.
Did it and the prepared remarks, we didn't really get many questions on this but we really improved our balance sheet last year.
We doubled the duration of our balance sheet.
We added to the equity content to it.
We actually from.
And some of the.
The repositioning that we did we ended up with significant tax savings, which came through our economic earnings, but they actually hit hit our bank accounts towards the end of the year, which led to us buying more shares and the fourth quarter, which was very fortuitous because we ultimately elevated our share repurchases right into good performance and that's why we're.
Waiting to you that we're going to do 200, something something 200, or maybe north and then if you just look at our balance sheet today, we have $1 billion of cash.
And the cash and equivalents section of our balance sheet now that's not all hours typically it's about half hours, but that is a significant number.
As we flex into this first half of the year and.
And we would like to obviously as Tom said increased both our growth investments this year, which we've allocated and our budgeting, but is not in our numbers just to be clear. It is not in our numbers and then what we do expect is something in the neighborhood of 500 with and elevated.
First quarter.
For the year could it be more than that sure it could be more than that so there is real upside to even the range that we've given given the momentum of our business.
Yeah.
Thank you. Our final question. This morning comes from the line of Chris Schott with William Blair. Please proceed with your question.
Okay.
And.
Hi, everyone. Good morning.
It's been awhile since you did a deal and the wealth management space and I know valuations there can be tricky right now given all the competition, but are you seeing any opportunities there or.
Alternatively are there ways to distinguish yourself from other buyers in that space and then.
Another quick one just on the guidance I just wanted to get the marketable and they're using for the first quarter.
And so let me take the first one Tom maybe you can follow up on that.
On the other market line so yes.
Chris. Thanks for your question, we still are very active looking at wealth businesses, we actually continue to have and investment and wealth capital partners and minority investment they are very active and acquiring and so we've actually benefited from there.
Rose as well.
We have we have had some and our pipeline we continue to have some and our pipeline.
Youre right valuations are tricky, what's interesting, though is that for some of the larger scale ones. The needs are different than kind of a high price and and part of being part of kind of a roll up strategy. So we are competing well there and.
While I would say that the sort of the concentration is maybe lower than other areas that we're focused on liquids and ESG, we do have some and our pipeline and.
And.
Would say that we do offer a differentiated solution because the permanent partnership for businesses that are already scaled and theyre looking to either extend or theyre going through succession planning that is that is where we differentiate ourselves Tom.
And just a quick answer on your other question, we're assuming two 5% in terms of our market blend as of Friday.
Yeah.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Hartman for any final comments.
Thank you all again for joining us this morning.
<unk> had a strong finish to 2020, but as discussed the earnings power of our business has increased considerably.
And we remain focused on the significant growth opportunities ahead of us.
I hope everyone remains safe and healthy and we look forward to speaking with you next quarter.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.