Q1 2021 Affiliated Managers Group Inc Earnings Call
Greetings and welcome to the AMG first quarter 2021 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 as a reminder.
This conference is being recorded I'd now like to turn the conference over to your host Anjali Aggarwal head of Investor Relations for AMG. Thank you you may begin.
Good morning, and thank you for joining us today to discuss Andas results for the first quarter of 2021.
Before we begin I'd like to remind you that during this call. We may make a number of forward looking statements, which could differ from our actual results materially and Amy 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, our JP Morgan, President and Chief Executive Officer, and Tom <unk>, Chief Financial Officer.
With that I'll turn the call over to Jay.
Thanks, Julian and good morning, everyone.
AMG entered 2021, and a position of strength and our first quarter results reflect the momentum that continues to build and our business.
Economic earnings per share of $4.28 per.
<unk> grew 35% year over year and represented the strongest first quarter and our history, primarily driven by EBITDA growth of 23% and ongoing share repurchase activity.
Building on our strong start to the year.
And looking ahead to the second quarter and full year of 2021.
We expect the growth and our business to accelerate given and excellent affiliated investment performance. The ongoing contributions of the strategic actions, we have taken and most significantly heightened activity and new investments.
With our increasing free cash flow and available capital.
And a favorable environment and to establish new partnerships.
We have a tremendous opportunity to invest and high quality firms operating in areas of secular growth such as our recent investments and Otp Asia and Boston common.
The discipline and execution of our strategy and.
Including the simultaneous return of excess capital to our shareholders.
Well further compound our earnings and free cash flow generation, and we are confident and our ability to create substantial shareholder value overtime.
Over the past year, our affiliates built on their long term performance records once again, demonstrating the ability to distinguish themselves during periods of volatility.
Excellent investment performance during this period generated meaningful first quarter performance fees increased asset levels and enhanced organic growth.
As performance driven improvements and organic growth trends continue across our business. We are also seeing investors re risking portfolios as economies reopen worldwide.
Investors are increasing allocations to high quality active managers, especially independent firms to help navigate market volatility protect capital and generate superior outcomes.
In addition to ongoing growth and flows and private market, especially fixed income and wealth management.
AMG is benefiting from growing demand for fundamental equities and liquid alternatives, particularly and our top performing value oriented affiliates and and our active ESG strategies.
As these trends continue and as and as we add new affiliates operating and secular demand areas.
We expect ongoing improvement and our organic flow profile.
Further supporting this improving profile AMG led distribution efforts are adding incremental growth and momentum to our affiliates new business activity.
Yeah.
Nearly 20 years ago, we began developing AMG led distribution resources to complement the existing sales efforts of our affiliates.
And over the past two years, we strategically evolved our platform for the benefit of our affiliate partners and their clients.
Focusing on the largest growth opportunities, while also better aligning our affiliates in demand products with the success of AMG distribution efforts.
As part of this overall evolution during the quarter, we announced a strategic decision to move to an affiliate centric model across U S wealth distribution consistent with our institutional distribution strategy.
This change provides a more competitively priced higher quality and more differentiated set of strategies exclusively manage by AMG affiliates.
With its repositioning now behind us our distribution platforms are even more strategically compelling to both existing and new affiliates as well as our clients given the increased focus and resources and alignment.
And as part of our strategy, we will continue to evolve our AMG led distribution resources to reflect the composition and needs of our affiliates and their clients over time.
Afg's enduring business model and providing a permanent solution for independent firms enabled us to be a true strategic partner to our affiliates.
Zinc from any institutional competitor and the market today.
Our partnership model is simple.
We enhanced our affiliates the ability to grow across generations, while preserving investment independence and operating autonomy.
We provide a uniquely broad set of partnership solutions and independent firms, having expanded our solution set over the years beyond succession planning to include minority investments growth capital and centralized distribution services on behalf of our affiliates.
As a result of this evolution and given our strong competitive position Amg's partnership approach today is EBIT more attractive to a broader array of independent firms around the world.
Our new investment strategy is generating both growth and return.
Not only does our partnership approach self select for growing firms.
Our discipline and structuring new investments generate meaningful returns for our shareholders across a range of business outcomes.
Over the past two years, we have meaningfully stepped up our focus and resources devoted to identifying and executing new partnerships with independent firms.
Additionally, we have concentrated our prospecting efforts on independent firms operating in areas of strong secular growth and client demand, including private markets fixed income alternatives, the Asia Pacific region, ESG and multi asset solutions.
With this enhanced focus we expect new investments to be a significant source of forward earnings growth.
As we continue to execute on a growing opportunity set over the course of 2021, each new affiliate will add immediately to our earnings.
And the full impact of Amg's earnings power and growth profile will only fully materialize starting in 2022.
And anything the momentum we are seeing and new investments last week, we announced our second partnership this year.
We are pleased to welcome Oh C P Asia and its partners to AMG.
Recognized as the leader in Asia, and private credit Otp Asia has consistently generated excellent returns for its clients.
The cultural alignment between AMG and Otp Asia is very strong and the key principles of Otp were attracted to our partnership approach and.
And the opportunity to expand and extend their client reach through our global distribution capabilities.
This new partnership enhances and Diversifies, our exposure both to private markets and to Asia, where we see increasing allocations.
We are excited to partner with Stu Teal, Dan and the broader team as they continue to provide differentiated investment returns and capitalize on their growth initiatives.
Yeah.
Finally, as I said last quarter, the contributions from the strategic and growth investments that we've made over the past two years are not only materializing and our results today.
But we'll also more fully manifest in the coming quarters.
Since the beginning of 2019, we have invested and six new affiliates.
We've invested and the growth of our existing affiliates.
We have broadened our partnership solution set.
And we've enhanced our strategic capabilities.
We have realigned our distribution platform, we have significantly enhanced our capital position and.
And.
We repurchased nearly 20% of our shares outstanding.
We have achieved all of this while reinvigorating amg's entrepreneurial culture, and reestablishing and ownership mindset across the organization.
Looking ahead, we have significant momentum across our business and we see amg's growth accelerating.
With strong affiliate investment performance and improving organic growth profile and increasing opportunities to invest and excellent partner owned firms, we are confident and our ability to execute on our substantial opportunity set and continue to create shareholder value.
And with that I'll turn it over to Tom to review the details of the quarter.
Thank you Jay and good morning, everyone.
As we discussed on our fourth quarter call focused execution against our strategy is producing significant growth as was once again evidenced by our strong first quarter.
Our earnings power and cash flow generation continue to increase and our unique ability to deploy capital across our broad opportunity set to grow EBITDA and earnings per share is a key differentiator.
Looking forward the value proposition, we offer independent partner owned firms together within and increasingly favorable environment for active managers.
<unk> and AMG well to compound earnings growth over time.
And generate meaningful shareholder value.
Our first quarter results reflect the significant momentum we're seeing across our business.
Adjusted EBITDA of $247 million grew 23% year over year driven.
Driven by strong affiliate investment performance and the impact of our growth investments.
Economic earnings per share of $4 and 28.
Grew 35% year over year further benefiting from share repurchase activity.
Net client cash flows for the quarter improved meaningfully versus prior periods.
And flows representing the vast majority of our EBITDA turned positive excluding certain quantitative strategies.
Ongoing strength and private markets specialty fixed income and wealth management strategies continue to drive strong flows.
Increased demand for fundamental equity and liquid alternatives, particularly top performing value and impact oriented strategies also contributed as clients continue to position portfolios for a post pandemic world.
Turning to performance across our business and excluding certain quantitative strategies.
And alternatives fund raising remains strong at pantheon Baring AIG and Conversely, as clients continue to steadily increase private market allocations globally.
And we reported net inflows of $2 8 billion and the first quarter.
Performance in this category is 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.
Overall, our private markets book remains a significant source of earnings growth accounting for nearly 20% of management fee EBITDA with increasing future carried interest potential.
We continue to add high quality partnerships in this sector, including our investment and OCB Asia, which I'll elaborate further on in a moment.
Within liquid alternatives, our affiliates are posting strong performance across relative value fixed income and light of ongoing volatility and bond markets as well as and concentrated long only strategies.
We are seeing increased client interest and this category as clients look for alternative sources of yield and return.
Capua, Garda and value Act continue to generate excellent investment performance translating to strong performance fees and demonstrating the attractiveness and resiliency of these strategies.
Moving to fundamental equities, we continue to see strong performance across a range of affiliates.
And U S equities, we reported net inflows of $300 million.
The outperformance of value strategies. Following decade long headwinds is leading to increased conversations with clients and are focused on the highest quality independent firms and the industry and it.
And fitting affiliates like River road and Yacktman.
And global equities net outflows of $3 9 billion were driven by redemptions and regionally focused strategies.
Affiliates continued to deliver strong investment performance across a range of strategies, including at heart and Londoner Veritas and Artemis.
Multi asset and fixed income strategies continue to produce steady long duration inflows and we anticipate ongoing client demand trends will support future growth.
These strategies generated $900 million and net client cash flows during the quarter.
Primarily driven by ongoing demand for Muni bond strategies at GW, and K and stable growth across our wealth management affiliates.
Overall affiliate investment performance and flow trends continue on a positive trajectory as clients increasingly turned to independent active managers to deliver superior investment outcomes.
And we continue to pivot our business toward areas of secular growth through investments and existing affiliates and new affiliates, which will further enhance our organic growth profile going forward.
Now turning to financials.
For the first quarter adjusted EBITDA of $247 million grew 23% year over year, driven by strong affiliate investment performance.
Adjusted EBITDA included $42 million of performance fees, reflecting outstanding performance and certain liquid alternative strategies.
Economic earnings per share of $4.28 grew.
<unk> grew by 35% year over year further benefiting from share repurchase activity.
Now moving to specific modeling items for the second quarter.
We expect adjusted EBITDA to be and the range of $210 million to $220 million based on current AUM levels, reflecting our market blend, which was up 3% as of Friday.
Our estimate includes performance fees of up to $10 million and the impact of our newest investments and Otp Asia and Boston common.
As a reminder, the second and third quarters are typically lower performance fee quarters due to the timing of performance fee crystallization.
Our share of interest expense was $27 million for the first quarter and we expect interest expense to remain at a similar level for the second quarter.
Controlling interest depreciation was $2 million and the first quarter and we expect the second quarter to be at a similar level.
Our share of reported amortization and impairments was $41 million for the first quarter and we expect it to be $35 million and the second quarter.
Our effective GAAP and cash tax rates were 24% and 20% respectively for the first quarter and we expect similar levels for the second quarter.
Intangible related deferred taxes were $9 million and the first quarter, and we expect and $11 million level and the second quarter.
Other economic items were negative $15 million and included the mark to market impact on GP and seed capital investments.
And the second quarter for modeling purposes, we expect other economic items, excluding any mark to market impact on G P and C to be $1 million.
Our adjusted weighted average share count for the first quarter was $43 2 million and we expect our share count to be approximately $42 4 million for the second quarter.
Finally, turning to the balance sheet and capital allocation.
Our balance sheet remains and an excellent position with.
With significant access to liquidity and a flexible long duration debt profile and we continue to look for ways to further enhance our capital structure.
We are generating strong and growing free cash flow and are well positioned to invest our capital through the disciplined execution of our strategy, including through new investment partnerships that create significant value over time.
First we are focused on investing and high growth businesses and areas of secular demand.
So new investments are generally growing faster than our existing business in terms of both flows and revenues enhancing our organic growth profile and our EBITDA growth.
Next new investments not only contribute immediately to our EBITDA, but we can also debt finance a portion of our purchase price and often achieve incremental tax benefits enhancing the returns we deliver to our shareholders.
And finally.
As we execute on our strategy, we continue to take a disciplined approach to pricing and structure.
<unk> and risk adjusted returns well in excess of our cost of capital across a range of potential outcomes.
Taken together, new investments generate immediate earnings and organic growth and are strategically important to the long term growth and sustainability of our business.
Our most recent investment and Otp Asia is a great example of the value of investing and new affiliates.
We took a minority interest and the business through a revenue share with a structure designed to minimize earnings volatility.
The business is growing at double digits organically and.
And its price to deliver attractive returns across a range of outcomes.
We expect that business to contribute <unk> 20 of incremental economic earnings per share and 2021 and.
And 33, and 2022, including $16 million of EBITDA and 2022.
Our renewed focus on disciplined capital allocation ensures that every dollar we invest runs through a common framework. So that we are making growth investments that clearly meet our risk and return criteria and then returning excess capital to our shareholders through repurchases.
And the first quarter, we repurchased 210 million of shares and now have repurchased nearly 20% of our shares outstanding over the past two years.
We are focused on continuing to reduce our share count through repurchases over time and.
And we remain on track to repurchase $500 million of shares this year.
As always this is subject to change based on market conditions, and the timing of new investments.
We are well positioned to compound earnings growth over time through new investments investment performance flows and share repurchases.
The momentum and our business is accelerating.
And the combination of our strategy, our capital position and a favorable environment to invest for growth underscored and many reasons to be excited about AMG going forward.
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 queue. You May press star two if you'd like to remove your question from the queue for 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 keep to one question each thank you.
Our first question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed with your question.
Good morning, everyone I wanted to come back to the last two and new investments. So C P Asia and Boston common.
And since you guys didn't disclose all the details of the deal.
Wanted to see if you could provide us the different accretion prospects between your standard new investment and buybacks given the current valuation of the AMG stock and and also if you can provide us any color on the valuation or the multiples paid for you and your investments and O C. P H and Boston common that'd be helpful too.
And good morning to you Craig and thanks for your question.
Tom and I will will each.
A portion of this.
Maybe I'll start with.
Maybe an overview of the two transactions Tom will get into the details, although we're not going to disclose individual.
Evaluations.
Obviously, that's proprietary and some ways to us, but we can give you a sense for the impact on our business and Tom did that and in his prepared remarks and O C. P Asia.
So maybe maybe taking a step back.
I'll start with Otp Asia and most recent wanted it marks the third transaction and the past six months for us and underscores the momentum that we're seeing across our business and new investments in particular.
And it represents the cash.
Current.
Profile of the depth and reach of our calling efforts.
OCC Asia is operating.
And in environment, and the private credit markets and in Asia. So we you know we've.
Got exposure further exposure, both private markets and Asia through this transaction.
And it's growing as Tom said in his prepared remarks at rates well above.
And our overall business in terms of both EBITDA growth and.
And organic growth.
The other aspect of <unk>.
C. P. Asia is that it is diversifying to our overall business.
Our distribution is looking forward to ex.
Extending the reach of their client base and we think we can do that it will be unique and our and our distribution channel and I think that means that we are excited about helping.
Helping the business grow and and diversified.
The the other transaction Boston common which was done earlier this year was and the fast growing ESG space.
Boston common is.
Ah well known.
Our long standing tenured.
Investor and ESG and impact.
And the principles, there are very well known and the industry again that business growing as fast and maybe even faster I think we see ESG being one of the fastest growing segments in active management today and.
And we were fortunate to be able to partner with.
<unk> and her team.
We see the.
The opportunity for us here to dis.
Distribute their product and our U S retail platform.
And help them grow over time.
In both cases I think there is significant growth ahead of them in the case of Boston Com and Theres, a theres an opportunity for <unk>.
Highly scaled growth given their profile and their investment process. So maybe Tom I'll, let you speak to the impact.
And the numbers are and and.
And.
And maybe just talk a little bit more about the discipline and our structuring and I think that'll be helpful.
Sure.
So in addition to what Jay walked through I'll reiterate a couple of things that I said in my prepared remarks, which are you know we're really focused on investing first in the long term growth and sustainability of our business and then returning excess capital to shareholders through repurchases and it really is in that order.
We do take and incredibly disciplined approach to putting that capital to work and every dollar that we spend is going through a common framework and we're exerting a significant amount of focus on ensuring that we find great teams and great growing macro sectors, and we put great structures around them and I referenced really you know three price.
Mary drivers of why we believe these investments are great uses of our capital and also great for our business long term and Jay referenced pieces of each of these.
First these are growing businesses generally speaking on both and EBITDA and and organic basis, particularly relative to our existing business. So we're immediately stepping into high quality businesses and some of the highest secular growth areas of the market, which benefits us and a variety of ways.
Second there are some very clear and direct financial benefits associated with our model, we're often and bringing on and almost always bringing on immediate cash flow and EBITDA that we can leverage and oftentimes. We're also finding incremental tax benefits based on the way that we structure. These transactions and each of those further enhance the return profile that we're able to do.
Deliver to our shareholders.
And then lastly on pricing and structure, we taken incredibly disciplined approach we're focused on the return on our capital we have a very good understanding of our own cost of capital and we're really pricing and structuring. These transactions over the long term to ensure that they are delivering a strong return well in excess of that cost of capital to our shareholders.
From a structural perspective, we're looking to get appropriate downside protection such that if things don't turn out exactly as we hope we get our capital out as quickly and efficiently as we possibly can and obviously, we're also ensuring that we have strong upside participation and we look to minimize earnings volatility and the process.
So when you put all those things together, we feel incredibly comfortable that those new investments that meet our criteria and sort of clear all of the different bars that we put in place as we evaluate these opportunities are very clearly the best use of our capital and the best long term investments and the business and then once we exhaust the opportunities that we have to make.
Those investments as you've seen we've been very comfortable returning capital to shareholders through repurchases and I think you should expect to continue to see us to do both of those things and we have sufficient capital to be able to do both of those things.
Yes, and let me just I'm going to take the opportunity now to go ahead, and just talk about our strong position.
And the market today and this is why we see at one of the reasons why we see elevated new investment activity and the near and intermediate term.
Yeah.
And frankly, we see it at.
And at AMG, we expect an increasing percentage of our capital to go to new investments because of the opportunities that we're seeing today.
Because the options for new for independent partner owned firms.
And has skewed and the most recent period towards consolidation and away from independence.
<unk> that are looking to be 100% owned by an acquirer just just not a good cultural fit for us and so today. This is a part of the M&A market.
Who are who are driving cost synergies we think for.
The highest quality independent partner owned firms.
The cost synergy consolidation model is just not a good fit for clients is not a good fit for success and.
And therefore, we don't think for us.
It's a real opportunity, but our opportunity set is and those those high quality firms, who want to stay independent and looking for a supportive partner looking for someone who can give them resources intellectual capital scale benefits, while maintaining complete operational autonomy and independence.
And for that we're seeing fewer competitors and I think everybody on this phone net.
Resonates were just seeing fewer competitors, who are truly hands off and the independence model and the market today and even fewer with a track record of success.
So I'll just let that sit with you for a second and then you can say so AMG has both a long standing reputation for being a partner of choice for independent firms and we have a wide array of options for those firms as they grow and evolve including growth capital succession planning liquidity planning central centralized services, we really crafted our into.
Tire business to be and the business of our affiliates.
Most of our historical competitors, especially in the traditional and liquid alternative areas they've either been bought consolidated selling their businesses.
And the partial ownership models have inherent conflicts of interest that are becoming more evident and the market. Today. So our competitive position is very strong and that does help us structure and drive economics for our shareholders. The people on this phone.
<unk> is really the only one who can truly offer a strategic and permanent solution for these firms.
Exists solely to enhance the prospects of our independent firms it creates and alignment dynamic between the shareholders are shareholders and the ultimate clients of the affiliates.
That is significantly differentiated from a fund looking for a return for and LTE for example.
We support our affiliate partners across all stages of growth. So we tend to be selected by firms who are growing who want a permanent and strategic partner and that we can extend and deliver scale benefits and also deliver independence and autonomy.
So again our strategy our disciplined are structuring it all it all of the effort to align our shareholders. Our company AMG the partners of our affiliates and the clients and which they serve and a way that we all are able to.
Deliver capital and resources for return and continue to allow the independent firms to generate excellent outcomes for their clients.
Thank you. Our next question comes from the line of Bill Katz with Citigroup. Please proceed with your question.
Okay. Thank you very much Joe you and I think you addressed some of this and your last set of answers, but just as you look to 2022 how.
How do we think about the relationship between buyback and deals it did and and is it and or.
And then you had made a point of reinvesting back in the business over the last couple of years to get more refined.
Sort of deals deal opportunity can you just talk a little about some of the structural changes you've made that's allowed you to emerge with a more.
We have a robust pipeline opportunity. Thank you.
Yes, Thanks, Bill I think that's a really good question and.
And I believe Tom did a really nice job and some ways of delivering that in his prepared remarks, but let me let me take another shot at it because I think this is a really important point, especially for the long term shareholders and I'm here.
So, let's let's talk about the shape of our growth profile and I'm going to describe it in phases of course, these phases overlap and they build on each other but I want everyone to think first about EBITDA growth and then how EBITDA growth on business franchise growth will ultimately translate into organic growth.
Over time.
And I'm going to answer your question about capital and inside of this so when we when this management team took it took through our went through our transition and May of 2019.
We were inwardly focused and candidly, but rightfully we've repositioned our resources and we reallocated those resources to the most productive areas of growth and return.
And this and began to improve our EBITDA profile and.
Generated capital that we could redeploy.
We also worked with eight to 10 affiliates facing headwinds and then we similarly increased our EBITDA that way and freed up even more capital to redeploy we.
And we took advantage of the market opportunity last year to improve our balance sheet freeing up even more capital.
We repositioned our growth engines and.
Especially in new investments with more people and focus.
We enhanced our strategy and our distribution businesses to create more alignment and more and affiliate centric focus with a goal of getting higher returns out of our investment dollars that we spent and distribution.
And finally, we repurchased 20% of our shares during this period.
And as you can see and this quarter the first quarter of 2021, our mid tier mid 20% topline growth and our mid 30% bottom line growth are reflecting these actions. This was our first phase.
We freed up capital, we improved our EBITDA profile, we remain disciplined and capital allocation now.
And now we're going to build on the strategic actions by layering in I'll call. It the second phase.
So we exited 2020, and we enter 2021 and a very strong position.
We have the ability to be more front footed more forward looking we pivoted to growth powered by our new investments and we executed on the repositioning of the strategy I just mentioned.
With the two new investments and 2021 and the six over the last two years and I'm just going to name. This ex for you. So you remember Garda, especially fixed income business converse and private markets manager inclusive capital and Boston common both and the ESG space Jackson Square.
<unk> growth manager, and then OCB Asia, and Asia private market's manager, all operating and areas of secular growth.
We are focused on enhanced.
Refocused our enhanced new investment efforts to partner with these outstanding firms that represented by this list that are poised for significant growth.
We see new investment continuing maybe accelerating probably accelerating given our competitive position as I. Just described our expanded offering and our increased resources will help us accelerate new investments.
Growth from our refocus do invest and investment effort will really and more impact 2022, and 2023 and then even this year because as you know investments bring stairstep EBITDA growth with immediate contribution and the partial year and full contribution and the following year and we see this momentum building over the next two.
Two to three years starting in 2021.
But at the same time, we are committed to returning excess capital through share repurchases. So you will see us continue to share repurchase.
During this period, but in the current phase that we're in we expect more capital to be going towards new investments and share repurchases, but still doing both this allows us to have a compounding effect on the bottom line as we grow and stair step through new investments. So first phase was repositioning our business freeing up cash.
Capital second phase is investing and top line EBITDA growth through growing new investments, while also exercising the compounding effect of delivering capital back to shareholders.
That is excess and the third phase.
As a bit of a longer tail.
And maybe I'll take a step back and say our current flow flow profile continues to improve we've got overall good performance composition changes are happening underlying our assets as illiquid ESG specialty fixed income and other areas of secular growth within our current existing affiliates are growing faster than the overall group.
And we're encouraged by the turn and performance at our plant managers, notably AQR.
This represents an asymmetric upside to us, both and our flow profile and and our EBITDA growth.
And when you layer and these new investments that we made and the new investments that we will make and outstanding firms operating in areas of secular growth areas.
This will further change our overall composition in favor of growth.
And so each of these phases builds on one another with EBITDA growth being our center, but if we drive EBITDA growth and we drive that.
And the franchise growth it should translate into a higher organic growth profile over time. So from start to finish we do see this being a long cycle you could say each one of these phases takes a couple of years.
But and we're still in the early innings, but we see very clearly our ability to execute on this opportunity for our shareholders.
Okay.
Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.
Thanks. Good morning. My question is on flows and what you just mentioned there Jade and elaborate on so first on global equities I believe Tom you mentioned, a regionally focused strategies that saw some redemptions. So maybe if you could expand upon that and then within.
And the systematic quad the buckets, where they fall into I think range across the various asset classes. So.
Just wondering.
Where we're seeing the biggest improvement.
And the Quant strategies.
And thinking based on your comments and the last question Jay It sounds like you're optimistic about the forward flow picture of that segment and so curious if you think you've seen the bottom of the redemption cycle within quanta as well. Thank you.
And maybe I'll start there Dan and then if Jay wants to add anything but.
Maybe just to give you a picture of flows overall, because I think there was a lot there and your question but.
As you noted this quarter, we saw positive flows excluding quant and you know that those quant flows do only contribute 3% of our EBITDA and a run rate basis.
Within <unk>, we did see some pretty substantial improvement relative to prior quarters and I'd note that we've also seen some strong performance there over the last several months as a result of the broader rotation into value. So we are hopeful that we can build on that going forward spin.
Specific to your question and I kind of where youre seeing it if you take the numbers that are in our release and in the numbers that I walked through in my prepared remarks, you can see the delta between the quant and non quant.
In particular on the alternative side this.
And this quarter, we did see some stabilization on the quant side and.
And most of the outflows that we're seeing continue to be on the fundamental equity side in the first quarter.
You know kind of focus on the core of our business, where we generate the vast majority of our EBITDA, we see continuing positive trajectory in terms of our flow trends overall.
We saw ongoing client demand and illiquid alternatives and traditional and specialty fixed income and the performance in these categories continues to be excellent. So we remain very well positioned there.
Our wealth management affiliates continued to deliver steady long duration inflows.
And are continuing to capitalize on broader solutions trends and the market.
In terms of U S equity strategies, we've seen improving flow patterns. Both in terms of gross flows as well as net flows and thats, particularly being driven by value strategies on the retail side, we've seen a lot of focus on value managers, particularly as clients are looking for best in class managers to navigate volatility.
Across the full economic cycle, and we're seeing the benefits there.
You asked specifically about global equities, we have seen some outflows and more regionally focused strategies. As you noted think about those as being more kind of single country oriented versus some of the broader mandate strategies.
That said, we are seeing improving gross sales overall in that category.
Particularly where we're seeing strong long term performance and increased client focus intersect.
At affiliates like Harding, <unk>, Artemis and Veritas.
And also new investments are contributing very strongly in terms of our flows across ESG private markets relative value fixed income and as Jay noted in his past answer we think thats going to continue to be a major driver of future flows and something that really AMG is uniquely positioned to access.
As we look forward, we do expect clients to increasingly take a more active approach to managing their portfolios and we strongly believe that this is a time when independent active managers can help clients to navigate market uncertainty and capitalize on asset dispersion and deliver significant alpha that should transition and translate and.
Flows over time.
And when you look at the shape of our affiliate base across illiquid wealth specialty fixed income liquid alternatives, ESG and global and emerging market equities and the strong performance track record, we have as well as our ability to add new and growing affiliates through new investments in these areas, we feel very strongly about our positioning over the intermediate and.
Along term in terms of organic growth and you're seeing good momentum today, and we expect that to continue into the future.
Yeah.
Thank you. Our next question comes from the line of Brian <unk> with Deutsche Bank. Please proceed with your question.
Hi, Greg Hi, good morning folks.
And if I could just go back to the the organic growth commentary.
Commentary Tom.
I didn't get all of the pieces of the flow picture, excluding the comp, but if you could just sort of summarize.
Our total fluids and other positive, but what were total fluids ex quant and on that organic AUM growth base.
How would you compare the organic EBITDA rate growth base.
Is that.
Coming in and a stronger clipped and the AUM base and if you don't mind, just if you have ESG dedicated fluids.
And that.
Sure.
So Brian in terms of the overall flow profile as we said flows excluding certain quant strategies were modestly positive overall.
And if you go back through the transcript you can get all the individual building blocks as to how we get there. So I won't go through that again and detail.
Let me maybe take a step back just both on your organic growth question as well as some of the others and really do two things, maybe first put organic growth and context at AMG and explain why while flows matter and they are definitely a focus for us and Jay walked you through.
A bunch of where we are there and how we're going to get to where we want to be we do have a number of differentiated growth drivers.
Primarily new investments that are likely going to be more substantial growth drivers for you will force overall.
And then secondly, I just want to walk through again and again <unk> started on some of this but some more detail on how we're executing on our strategy and that strategy is going to lead to a significantly more positive organic growth profile over time.
So first just in terms of context as you know, we generate a substantial amount of free cash flow.
That's true on an absolute basis, but it's also significantly more on a relative basis versus traditional models.
So when you think about traditional asset managers. They are generally going to be evaluated on the tradeoff between organic growth and operating margin.
Our expense base is very lean and our growth is really going to be driven by how and where we invest our capital.
If you take a look at our Investor relations deck. This quarter, we added a new page to the materials that walks through our growth drivers and Youll see that in addition to affiliate investment performance and organic growth, we have sizable opportunities to drive earnings growth through new investments and through returning capital through repurchases.
And we've demonstrated both of those over the course of the past couple of years.
And when you add those four key elements together, we have tremendous confidence that we can compound earnings growth at a high rate as we execute against our strategy.
So to kind of put it in context today on an EBITDA basis about a third of our business is in very strong secular growth areas private markets wealth management specialty fixed income and ESG and those areas have been growing fast and continue to be well positioned for future growth.
And then you have the vast majority of our remaining business that overall is stable across global and U S equities and many of our fundamental liquid alternative offerings and there we have excellent performance, we're seeing momentum and the industry. Overall, we're seeing client momentum we have a number of areas that are really starting to pick up like value.
And as the environment continues to evolve we're very bullish on flows and those businesses as well.
And then as Jay talked about our strategy is to continue to invest our capital and secular growth areas.
In terms of existing affiliates and new affiliates and as we execute against that strategy. The shape of our business is going to continue to move more towards these growth areas.
And you can certainly see a future state of the world and <unk> Phase III, we're more like two thirds of our business from an EBITDA perspective is in these strong secular growth areas, which will position us very well to deliver organic growth over time.
Yes, I'll just take another minute on ESG right now with our existing affiliate base.
It's not something we breakout separately, Brian and part because 80% of our.
AUM is managed by affiliates of consider ESG and their process. We do have 16 and affiliates that are UN PRA signatories, 20% of our business more or less is dedicated to ESG that includes Boston common inclusive capital pantheon one.
And the more significant.
Players in the private market ESG space.
Artemis is just hired a dedicated sustainable equity team, which we helped seed.
<unk> is investing in renewable energy infrastructure fund for many years and has raised assets there.
And <unk> Genesis.
MDI <unk> K, they've all integrated sustainability into their investment process. So we see ESG as one of the fastest growing segments at AMG if there so.
So to speak but it's in part because of the.
The role that active management is.
And is playing and leading.
And in ESG and we do see that this is going to continue we think it's a decade or more long.
Trend.
And that's why our focus on new investments.
Is one it is one of our areas of focus and we will continue to see new investments being done with more ESG focused managers, our ESG sensitive managers.
One other things that I think youre probably.
Seeing across all of the industry is the desire for our clients to drive outcomes and again given the <unk>.
Difficulty today, and really capturing all of the necessary data.
Two to have a passive strategy and ESG I think active for some time will lead and we expect to have a meaningful contribution.
From our affiliates, both new and existing and the ESG space.
Thank you. Our next question comes from the line of Mike Carrier with Bank of America. Please proceed with your question.
Great and good morning, Thanks for taking the question.
AMG recently terminated and sub advisory relationships.
And those were redirected some of the affiliated strategy.
If you could please let us know if that was reflected in and <unk> results or how that would.
And would kind of impact the outlook and I think there might be.
A lawsuit out there as well as challenging some of that does that impacting and the timing.
Or can you kind of go through with it.
And regardless of that and do that.
Thanks, a lot thanks.
Yeah, So I'll, let Tom address the AUM.
Let me, let me just start with.
Let me to start with.
We did and the U S wealth platform in March we announced.
And our wealth platform A&P funds to fully align and focus our resources on affiliate growth opportunities.
And clients with a number of benefits including.
Lower fees and higher quality managers.
And more differentiated funds.
It was an obvious choice for AMG. It just makes sense to focus all of our resources all of our attention on our affiliate affiliates and affiliate products I think that goes into the category of our phase one where we repositioned our business really made sure that all of our investment dollars that are going to investment to distribution and really be.
And then use for our affiliates and generating the appropriate returns for our shareholders.
And by moving too.
And affiliate only model by definition it means that that AMG has high conviction and our managers and we've added some terrific managers to.
New managers.
And that our AMG affiliates into retail that's going to lead to long term growth and focus by us.
More broadly this is consistent with our institutional plant platform, which is an affiliate only platform as well and when you take a step back.
And we're going to build on our.
Success and distribution for the benefit of our affiliates, we think it makes us even more attractive to new affiliates into our existing affiliates over the more than 15 years that we've been operating centralized services. We now have 50 client facing individuals that supplement the 500 client facing individuals at our affiliates we've raised.
Gross 110 on the institutional side, we have a $45 billion of wealth platform and we are looking to drive more growth through these channels. So maybe I'll stop there and.
Say, one other thing before I turn it over to Tom.
Did make some sub advisory changes all third party sub advisory and sub advisor changes.
All in all were third party sub advisory changes with the with one.
Affiliate change ourselves going to and a complete affiliate centric model.
The two funds that you mentioned that are in question are not material to AMG and all of these sub advisory changes are very common sub advisory mandates are awarded and terminated hundreds of times per year.
We value the relationships that we had with all of our former third party sub advisors and we wish them all well.
And I'll let.
Tom just comment on the AUM implications.
Yes, Mike so on the AUM side, Theres about $5 billion and.
AUM and the funds, where we did go through sub advisor changes.
Those will all go through a process over the course of the coming months and ultimately we will experience those flows.
And as those processes conclude there'll be some movement, plus and minuses that happens, but I would expect to see the impact of flows.
Across the second and the third quarter.
Thank you. Our next question comes from the line of Alex Blaustein with Goldman Sachs. Please proceed with your question.
Good morning. This is Brian Daley on behalf of Alex So coming back to some of the underlying EBIT trends. Firstly I was wondering and give us a sense of roughly how much of your EBITDA is from managers with positive organic growth managers with one negative trends.
And the sort of sudden quants that you've highlighted and then secondly, as it relates to six of the more recent affiliates is there any way you can give us kind of a sense of the contribution that they've been giving to EBITDA. Thank you.
Sure so.
A number of the things that you've asked for our non things that we go into a level of disclosure on but I think I can give you broad strokes and some flavor overall.
As we've talked about frequently about a third of our business on an EBITDA basis is growing very strongly.
Organically and strong secular growth areas. So again as we've mentioned private market specialty fixed income.
Wealth and multi asset solutions.
And ESG.
Broadly speaking the remainder of our business is across a number of different fundamental active equity strategies, both long only as.
And as well as long short.
Across a combination of global U S emerging markets et cetera.
Really I would say that that business overall is exhibiting relatively stable overall organic growth trends. There are some businesses in there that are growing very well within certain businesses. We have strategies that are growing very well so.
And so broadly speaking I would say the majority of our business is either in strong secular growth buckets.
Or stable with pockets of growth.
<unk>, obviously that youre aware of that seeing more headwinds is on the quant side, which frankly as I think about it from an EBITDA perspective, just makes up a very small percentage today and is not really influencing the EBITDA side of the equation very much.
In terms of the businesses.
And we made investments in recently they are all contributing and I think that that is the beauty of the model.
And as we make the investments in these businesses they are contributors to us immediately.
Obviously each of those businesses are in different phases of their growth cycles different phases of their own evolution and contribute in different ways.
And the businesses that we've invested and most recently Boston common and <unk>, we will have a partial impact this year with a full impact next year and a business like Garda, where we made an investment now a couple of years ago and it was obviously at its run rate and is contributing quite strongly. So again, we don't go into disclosure at the individual affiliate level, but you should have.
Assume that all of those businesses are strong contributors to our financials just as we.
<unk> ongoing new investments to be in the future.
Thank you. Our next question comes from the line of Robert Lee with <unk>. Please proceed with your price.
Great. Thanks, Good morning, everyone. Thanks for taking my question.
Just curious I mean, if I think back to I guess, what I'll call AMG one no.
Thank you you talked about when you deployed.
All of the $100 million and capital and some transaction that used to be kind of a rule.
And no mode kind of per share accretion quarterly and 14th and 15th.
It does seem like and.
And.
Since.
I guess I'll call it the AMG two point, though those feel like the.
The accretion you're getting per dollar invested themes.
Essentially meaningfully higher.
And my thinking about correctly and you <unk>.
And that the costs may be your reefer.
Refocused on different businesses.
Position and the way you structure and you're making.
Making them more credence for the amount of capital you're deploying just trying it.
See if I'm thinking of that correctly.
Well thanks for your question, maybe I got.
Yeah, Rob I was going to say thanks for your question, but also probably both Tom and I should give you perspectives on this.
So Tom why don't you go first I'll I'll follow up.
Yes, so one Rob I would just say that.
You've certainly heard us.
Sort of change our tone in terms of just the way we're talking about the impact of these new investments Jay spent a lot of time talking about it earlier on the call. These are strategic investments in growing businesses with very attractive financial characteristics that are going to drive the earnings growth and the organic growth of our business for many years.
To come and when we think about them right. We're thinking about the quality of the business and the individuals we're thinking about the quality of the sectors that they operate in and what the growth characteristics look like and we're focused on pricing and structuring them and inappropriate way that we can earn a long term return on our capital that's well in excess of our cost of capital.
Accretion is obviously, a part of that but accretion is sort of what happens today on day, one and these are transactions that we need to think about not just on day, one but over the course of the next 235 and 10 years as they continue to contribute to the business. So one I can assure you that from a pricing and structuring perspective, we feel very.
Comfortable with the type of return streams, we are able to deliver on day. One we're focused again on clearing our cost of capital.
Meaning flea and doing so and over the long term, we're focused on really delivering that long term shareholder return to our shareholders. The other thing I would say more tactically as the business has obviously changed versus the one point over here and you referenced we.
We do have a lower share count today.
And also the tax code has changed and.
And our cost of capital has changed so there are some inherent benefits just in terms of what's happening financially, but maybe I'll turn it back to Jay because I think it's the strategic benefits that are much more impactful.
Well, yes, and and I'm not sure I describe it as.
As one <unk> and to point out I might describe it as one two and three point O I think having been around for all three of those those those periods of time at AMG.
Look Tom.
Tom Tom gave you a lot of the underlying sort of math associated with.
And what it means for us to do new investments today, and and I agree with those comments, but but just culturally let me say a couple of things one.
When I first joined almost 15 years ago, we were very focused on.
Finding growth oriented firms that met our.
Cost of capital in excess of our cost of capital and structuring and a very disciplined way with an ownership mindset and and entrepreneurial ism to think ahead and be ahead of trends like liquid alternatives and and and.
Global equities and so on and we did a really nice job I think in that period and so you are right to compare that period and some ways to this period, where I think we haven't we borrowed a number of those those aspects I think there was a time, which I'll call to point out where we are much more focused on size.
And less focus on return I think that the refocus on return not size growth.
And.
Expectation of secular trends strategically is where we are today I think that that bodes well for the next five to 10 years for AMG and especially if we can stay disciplined and the last thing I will say is there is there is a sense that.
You get to see the extremes that sort of.
Eye-popping multiples of certain illiquid managers, but the rest of the market Theres really.
More appropriate level evaluation and one that.
And can produce reasonable financial returns and theres not a lot of competition for independent partner owned firms as I. Just described in some ways I would I would.
Would like and this period to just after the global financial crisis, where there really wasn't a lot of.
<unk>.
Competitors and the partner owned firm.
Business, because most of the competitors today want to buy 100% or they only want to go after certain parts of the market. So that leaves and entire swath of the market, where they're high quality independent firms and we have a reputation of being a good partner and we have services centralized services that can help them grow so of course, they would they would come.
To us of course, we're well positioned and I think that's where we're finding attractive returns for our shareholders.
Yes.
Thank you, ladies and gentlemen that concludes our time allowed for questions I'll turn the floor back to Mr. Horgan for any final comments.
Thank you all again for joining us. This morning, AMG had a strong start to 2021 and as discussed the earnings power of our business has increased considerably and we remain focused on the significant opportunities ahead of us.
And 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.