Q2 2021 Affiliated Managers Group Inc Earnings Call
[music].
Greetings and welcome to the AMG second quarter 2021 earnings call. At this time all participants are in a listen only mode of question and answer session will follow the formal presentation if.
Should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Anjali Aggarwal head of Investor Relations for AMG. Thank you you may begin.
Good morning, and thank you for joining us today.
And he went to Amg's results for the second 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 AMG assumes no obligation to update these statements.
A replay of today's call will be available on the Investor Relations section.
And of our website.
Along with the 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.
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, Julie and good morning, everyone.
Growth continues to be of theme for AMG as evidenced.
And by our outstanding second quarter results, which were driven by the consistent execution of our strategy and enhanced by our focus on new investments.
Yeah.
Economic earnings per share of $4 and <unk> grew 47% year over year and represented the strongest second quarter and our history, primarily driven by EBITDA growth.
Growth of 40% and ongoing share repurchase activity.
Year to date, our affiliates excellent absolute and relative investment performance has resulted in higher asset levels enhanced organic growth and meaningful performance fees.
We began the quarter.
Order by announcing our new investment and OCB Asia, increasing our exposure to the region and it's fast growing private credit markets and we ended the quarter with the announcement of our newest partnership and Parnassus, the largest independent ESG dedicated fund manager and the industry.
Together with our recent investment and Boston common.
The long term leader and impact investing.
We expect that these new affiliates will contribute over $90 million and EBITDA and 2022 and.
And contribute meaningfully to our organic growth over time.
And we're only halfway through 2021.
And the addition of Parnassus, our run rate EBITDA is now over $1 billion, increasing our opportunity to invest and new affiliates and areas of secular growth.
And and resources to enhance the growth of our existing affiliates, including strategic growth capital and distribution.
As evidenced by our 7 new partnership.
Shifts, which we've established over the last 2 years, our model is resonating with the highest quality independent investment firms in the industry.
Looking ahead, we see and even greater opportunity to execute on our new investment opportunity set given the favorable transaction environment AMG strong competitive position and the increasing.
<unk> demand for our partnership solutions.
As I highlighted in prior quarters throughout the pandemic, our number of client demand trends have remained intact.
Including the ongoing demand for illiquid alternatives.
The other trends of accelerated such.
Such as the.
Appetite for responsible and impact of investing.
All against the backdrop of an improving environment for active management.
Our strategy is focused on investing and areas of secular growth.
And our new investments and 2021 reflect this focus as we've increased our exposure to fast growing segments, such as Asia of private.
And the ESG.
With the addition of Parnassus, Boston common and inclusive of capital partners Amg's affiliates will now manage more than 80 billion of dedicated ESG strategies.
And more than 600 billion and strategies that integrate ESG into their investment process.
And they are positioned to cash.
Capitalize on future growth as investors around the world continue to turn to active managers for responsible and impact investing.
We are pleased to welcome Parnassus as Amg's newest affiliate and.
Pioneer and sustainable investing parnassus as of 37 year track record.
Of investing based on principles and performance achieving attractive risk adjusted returns by building portfolios that also have a positive societal impact.
We have known been Alan Todd Austin, and their partners for nearly a decade.
And when it came time for parnassus to choose the permanent partner and complete.
Worth generational transition and the firm's long term succession plan.
<unk> chose AMG.
We believe that Amg's partnership approach is the best solution and the market today for independent firms.
As it preserves the alignment between clients and partners across multiple generations, while maintaining the unique.
On the frontier coronary and cultures of partner owned firms.
And this will be especially important to parnassus, given its leading market position and responsible and impact investing.
Succession planning has been and.
And continues to be a core component of Amg's partnership approach.
<unk> is generational succession, and demographically driven transition is inevitable for partner owned firms.
Selecting and experience supportive partner is critical to the long term success of these independent firms.
Amg's expertise and collaborating with affiliates.
Its to develop and execute management transition plans and align incentives across generations of affiliate partners remains of significant differentiating factor as firms select the AMG as theyre institutional partner.
Today, having worked with affiliates on these matters for nearly 3 decades.
<unk> <unk> is able to provide customized solutions for new partnerships based on our foundational principles of independence and.
Linemen and support.
Over the past 2 years, we have significantly enhanced our strategic focus and our resources dedicated to originating structuring.
H shooting on new investments.
For the first time since 2016, the majority of our cash flow will be deployed and new affiliate investments already announced with additional high quality prospects and our transaction pipeline.
As I said before.
<unk> growth was certainly a theme for the second quarter.
In addition to new investments the strategic actions, we have taken to invest and our affiliates and and distribution resources on behalf of our affiliates are also key contributors to that growth.
During the quarter, we completed the evolution of our U S.
Wealth platform AMG funds to an affiliate only model consistent with our institutional distribution strategy.
We have received shareholder approval for all funds transitioning from external sub advisors, resulting in an incremental $4 billion and assets now being managed by our affiliates.
As part of these changes we are offering and more differentiated product lineup at lower fees and providing clients access to excellent affiliate strategies, including and attractive areas, such as ESG equities and fixed income Asian equities and international equities.
This is an important evolution.
And of our strategy as all of the Amg's operations and resources across our institutional wealth platforms globally are now fully aligned with our affiliates, which positions us to deliver meaningful additional organic growth over time.
And this is just 1 example of shareholder value creation.
Creation through investments and our affiliates growth.
Several years ago, we seeded the AMG Pantheon fund with $10 million.
Given the opportunity we saw to provide U S wealth investors access to private equity portfolios.
And last week the fund reached a significant milestone crossing the 5 billion.
Mark and the AUM.
The Fund's performance is outstanding and it's organic growth is accelerating as U S. Wealth investors are seeing the benefits of allocating to private equity in their portfolios.
This is a great example of how AMG central capabilities can drive new growth areas for our affiliates.
In addition, we have been actively investing and affiliates through lift outs, including global sustainable equities and fixed income teams at Artemis.
And more recently at Pantheon, where we assisted and lifting out of real estate team for its global infrastructure and real assets platform.
Finally, the strength.
<unk> and momentum that we described in our business at the start of the year.
It's only just began to manifest and our results.
As we look forward to the second half of 2021 and the full year 2022, we.
We see tremendous opportunity to further build on this momentum through the continued execution of our.
And <unk> to drive topline and EBITDA growth.
Which together with share repurchases will further compound our earnings per share and create meaningful shareholder value over time.
And with that I'll turn it over to Tom to review the details of the quarter.
Thank you Jay and good morning, everyone.
Strack and quarter results demonstrate the differentiated growth drivers inherent and Amg's business model.
And our ability to create shareholder value now and into the future.
Our affiliates delivered strong investment performance.
We generated net inflows excluding quant strategies.
And we.
Our significant capital to work, both in new partnerships and investments and affiliates.
And we repurchased stock in the quarter.
Evidenced our ability to compound growth through each of our core earnings drivers.
For the quarter adjusted EBITDA of 227 million.
<unk> grew 40% year over year.
Driven by strong affiliate investment performance and markets.
And the impact of our growth investments.
Economic earnings per share of $4 and <unk> grew 47% year over year.
Further benefiting from share repurchase activity.
Net client cash inflows, excluding certain quantitative strategies worth 3 billion and the quarter.
Driven by private markets specialty fixed income and U S equities ESG strategies and the strategic evolution of our U S wealth platform AMG funds.
Outflows from certain Quant strategies total of $11 billion and had a de minimis impact on our earnings.
Our organic growth profile continues to improve as clients seek active management solutions and the face of of more volatile market environment.
And we continue to add new affiliates.
And areas of secular growth <unk>.
Including ESG Asia and private markets.
Turning to performance by asset class and excluding certain quantitative strategies.
And alternatives are illiquid strategies posted another strong quarter with 3.
And <unk> 7 billion and net inflows led by strong fund raising at pantheon.
And bearing.
Performance in this category remained strong with more than 90% of assets outperforming benchmarks and the most recent and prior vintages.
3 pilot markets businesses like Otp Asia continued to be a focus area for us from a new investment perspective.
And represent a significant source of management fee earnings stability.
And performance fee potential over the long term.
Within liquid alternatives.
Net inflows were $1.4 billion supported.
Supported by continued client appetite for alternative sources of risk and return and the low yield environment.
Including at affiliates, such as Garda and capsular.
We continue to see significant performance fee generation and this category.
Net reflecting our excellent performance across our concentrated long only equity and specialty fixed income strategies.
Moving to global equities, we reported net outflows of $6.3 billion driven by idiosyncratic lower fee institutional reallocation.
<unk> activity.
These mandates accounted for approximately 2 thirds of the outflows and this category.
Long term global equity performance continues to be strong, particularly and strategies that are meaningful contributors to our EBITDA.
Momentum and our U.
<unk> equity strategies continues with inflows of $2.9 billion driven by strong client demand.
Particularly for our value focused strategies managed by leading firms such as River road, any aquaman and our small cap strategies.
Our performance continues to be strong.
S category.
And with our recent investments and Jackson square, Boston common and Parnassus going forward, we have a balanced mix of high performing growth and value strategies.
Our multi asset and fixed income category generated inflows of nearly $1 billion.
<unk> and primarily driven by ongoing demand for Muni bond strategies, and wealth management solutions, particularly of GW and K and Baker Street this quarter.
Turning to financials for.
For the second quarter adjusted EBITDA of $227 million grew 40.
40% year over year, driven by strong affiliate performance and markets and additional earnings power from our recent new affiliate investments.
Our adjusted EBITDA included $16 million of performance fees.
And as I mentioned previously reflects excellent affiliated investment performance.
Particularly and our liquid alternatives category.
Economic earnings per share of $4 and <unk> grew 47% year over year further benefiting from ongoing share repurchase activity.
Our recently announced partnership with Parnassus as expected.
Part of those early in the fourth quarter and will therefore have a partial year impact on our financial results and 2021.
Net of 1 time transaction costs, we expect parnassus to contribute approximately $15 million to our fourth quarter EBITDA results.
On a full year.
The 22 basis, we expect parnassus to contribute approximately 70 million of EBITDA and $1.30 of economic earnings per share.
Now moving to specific modeling items for the third quarter.
We expect adjusted EBITDA to be and the range.
And of $215 million to $220 million based on current AUM levels, which reflect a flat market blend through yesterday and seasonally lower performance fees of up to $5 million.
Our share of interest expense was $27 million for the second quarter and.
And we expect interest expense.
Our $2000.28 million and the third quarter, reflecting our recent hybrid bond offering.
Controlling interest depreciation was $2 million and the second quarter.
And we expect the third quarter to be at a similar level.
Our share of reported amortization and impairments was $36 million for the second.
<unk> quarter.
And we expect it to be similar and the third quarter.
Our effective GAAP and cash tax rates were 36, and 18% respectively for the second quarter.
And we expect GAAP and cash tax rates to be 25% and 18% respectively for the third quarter.
Intangible related deferred taxes were 31 million and this quarter and we expect this to decline to a more normalized level of $12 million and the third quarter.
Both our GAAP tax rate and intangible related deferred taxes were elevated this quarter as the result of recently enacted the UK tax.
<unk> rate changes and did not impact economic net income or economic earnings per share.
Other economic items were negative $4 million.
And the third 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 second quarter was $42.5 million and.
And we expect our share count to be approximately $42.1 million for the third quarter.
Finally, turning to the balance sheet and capital allocation.
Our balance sheet remains a source of strength as we invest for growth and consistently return capital to shareholders.
Earlier this month, we further enhanced the balance sheet by issuing a 40 year $200 million hybrid bond at and asset management industry low coupon of 4.2.
Percent.
We continue to prioritize extending duration and.
Enhancing flexibility and maintaining.
Gaining significant capacity to allocate capital to fuel our growth strategy.
We also remain committed to returning excess cash to our shareholders.
And the second quarter, we repurchased $80 million of shares.
Bringing us to $290 million year to date and.
And we remain on track for $500 million of repurchases for the full year subject to market conditions and the timing of new affiliate investments.
Over the.
The last 24 months, we've returned nearly $1 billion of excess capital to shareholders, having repurchased nearly 20% of our shares outstanding.
While simultaneously partnering with 7 new affiliates and.
And investing and our existing affiliates and centralized capabilities.
As Jay highlighted in his remarks, our strong results this quarter demonstrate amg's differentiated growth drivers and highlight the strength of our business model and the efficacy of our strategy.
The momentum and our business continues to accelerate.
And we're putting our capital and resources.
Resources to work to compound growth over time.
Our recent new investments and affiliates at significant and growing earnings power to our business and together with our strong capital position and demonstrated ability to return capital to shareholders, we are well positioned to.
And our shareholder value over time.
Now we're happy to take your questions.
Yeah.
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 1 on your telephone keypad of confirmation tone will indicate your line is and the question Kim.
And you May press star 2 if he would 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 1 question each.
Our first question comes from the line of Brian Bedell with Deutsche Bank. Please.
Proceed with your question.
Great. Thanks, good morning folks.
Is that going and maybe ask on the permanent parnassus and the ESG strategy broadly and obviously this is sort of a big change or big pivot and the ESG contribution for AMG.
A 2 part question.
First just to clarify of the 70 million of EBITDA as debt on the current and 47 billion of U M. So I guess is there upside to that.
And if it.
And it continues to grow and we're seeing about 500 million monthly of organic.
And net inflows into the fund for exam.
Simple and then secondly, just broader about around the ESG strategy quite clearly it looks like pronounce this will be the anchor.
For your firm so curious to see to what extent you think you can leverage a their products across your distribution franchise, whether you can create customer.
Customized solutions using parnassus.
And then are you would you still be and.
And the hunt for more ESG strategies or do you think you know for new investments or do you think you might be done for now with it would that the investment strategy.
Okay. Thanks, Thanks for your questions.
And I appreciate it Brian and good morning to you let me take the second part on the strategy first and then I'll, let Tom talk about the the impact of current assets on our financials and.
And I don't know.
And just maybe even.
I'll I'll, even back up 1.
1 second half second and talk about where ESG fits into our overall gross strategy. So I think you've heard us say and the last several calls that our strategy is focused on investing and areas of secular growth and that includes a number of areas private markets, especially fixed income Asia.
On multi asset solutions, and it and especially and importantly ESG.
So you can put parnassus and the and the context of our overall strategy ESG is 1 of the fastest growing areas and the industry. I think we're all aware of that and it's also 1 of the fastest growing areas at AMG.
And there's lots of data out there, but just the the 1 that recently I came across with this global sustainable investment Alliance.
Published some data that it's growing at double digit rates over the last 5 years and I think we're seeing that as well and Brian you and Deutsche Bank of <unk>.
I've done some research in this area I think youre coming up with similar.
<unk>.
Similar facts, we see this as a durable trend given the strong client appetite and we believe that active management will take a leading role and.
And the growth of sustainable investing.
The 1 consistent theme that we're hearing across all of our client conversations today is the desire.
And the increasing focus on sustainability.
So as clients have a greater desire to drive outcomes that requires and active approach. We think this focus on sustainability is revolutionizing our industry and we believe that active managers, especially and importantly.
And for dependent on firms.
Will will lead the industry through this evolution, both in the public securities as well as and the private and investing.
So maybe now turning to AMG.
And how we're enhancing our exposure to ESG, obviously parnassus is just 1 component of it it is an area.
<unk> of continued focus of our prospecting activity and new investments is clearly reflected and the new investments. We have made in addition to.
Parnassus, we've invested and Boston common as well as.
We've partnered with and cap and so we have greatly expanded our own.
On ESG exposure and the last 18 months.
We are also actively collaborated with <unk> and also invested in some of our existing affiliates to evolve and grow their ESG exposure.
Couple of ways, we do that and most importantly, we provided of sort of centralized best.
Best practice.
And consultative.
Approach, so that we've been talking to all of our affiliates about expanding their <unk>.
Involvement and the ESG space.
We began marketing.
Boston common through the strategic repositioning that we just did.
And and AMG funds and so were.
All of the selling at AMG funds, ESG strategies, and Boston common and GW K. So we have.
$2 billion of assets there so.
Our facility at the hole.
Investment that we've been making and both marketing and.
And through the strategic repositioning of getting behind those products and our wealth channel and then finally, we've seen it.
Products at other firms like Artemis and <unk> that are involved and ESG. So were pretty much across the board investing and ESG, whether that's a new investments and our own.
1 distribution or in and seed capital for.
For new products. So today, we have 3 affiliates wholly dedicated to sustainable investing so that means our dedicated assets are now at about $80 billion inclusive of those 3 and a number of other products.
<unk> that I just mentioned.
Mentioned that we've seeded or supported.
We have about $600 billion now and strategies that are integrating ESG factors because the number of our.
Affiliates, we're already integrating ESG factors into their investment process. So we do think.
ESG investing is best done by active management.
<unk> as impact and positive change is really.
Best achieved through stewardship and active engagement, so maybe just mentioning parnassus.
And.
A bit more and then I'll have Tom address the second part of your question.
Part of assets, where the larger trends.
Transaction for US obviously the investment thesis there was it was of a business operating in the the <unk>.
<unk> space and the growth there is I think obvious it.
Its investment returns are excellent and you.
See that as well.
It has been and flowing.
Significantly.
We're proud to partner with and extremely high quality group of next generation partners with the ability to grow further from here, both domestically and abroad and very scalable products.
And this transaction and I'm going to let Tom get into this just now was immediately or will be immediately accretive to.
And it is our third largest transaction and our history. So it is a very impactful.
Transactions and maybe Tom I'll turn it to you just to talk about the numbers, yes. Thanks day. So maybe just a couple of notes on the financial impact first in terms of the structure Parnassus is a majority of revenue share investment for us and it will be consolidated in our.
The financial statements.
Brian you noted the $70 million of EBITDA and $1.30 of the economic earnings per share book Your expectation that is based on the 47 billion AUM at the time of the announcement and as you noted.
We continue to see very strong performance and strong flows and the business.
So theres certainly add to.
Based on the way of the business performs over time.
Maybe also just take the opportunity to share a few thoughts on why we find this transaction and really new investments and general see such an attractive use of our capital.
First as Jay went through and.
And detailed Parnassus is clearly operating in an area of secular growth.
And it's been growing organically and the high single digits over the course of the past 5 years and at an accelerated pace of year to date, so AMG steps into both earnings and organic growth immediately average.
And it's really the hallmark of our new investment transactions.
Second we structure of the investment to deliver strong returns across a range.
<unk> of outcomes.
Third we received step up tax benefits.
And in the current environment, where we may see rising corporate tax rates those benefits actually become even more valuable to us.
And finally, when these businesses come to us they're unlevered businesses, when we make the investment and that gives us the ability to put an optimal capital.
And are on them at the AMG level, which really allows our capital to have an even greater impact on a dollar for dollar basis for our shareholders. So really a lot of excitement around this partnership and of 1 mentum overall, and we think about new instruments and the impact can have.
Of the structure. Thank you. Our next question comes from the line of Alex Paris with Barrington Research. Please proceed with your question.
Good morning, all thank you for taking my question.
I think my question dovetails a bit into the prior question, but I've been covering the AMG for many years practically since its IPO across.
Business cycles.
Lately, you've been talking about rising M&A activity and a significant amount of engagement with prospective new affiliates, both the volume and the quality of your conversations.
You've announced 3 investments already year to date 7 as you mentioned since the beginning of 2000.
Many of the <unk>, including the majority of investment and Parnassus and you've said that you expect new investments to continue to be a significant source of forward earnings growth.
My question is what is different and the current environment.
Why the recent above the trend.
After a bit of a pause.
And and 19th 2017.2018.
I know you've talked about expanding your solution set.
Maybe it would be helpful for us for me, specifically, if you dive a little deeper into whats different now what does the pipeline look like what is the competitive situation look like pricing et cetera.
Thanks, Alex and good morning, and thanks for the thanks for that question and I'll also just your own perspective that was implied in that question you certainly have been covering us for a long time.
So yeah, we are seeing elevated new investment activity and let me see if I can.
Dive.
<unk> that a bit more.
The.
I said.
In the prepared remarks, there was really 3 reasons for that.
And just maybe restating that we see of favorable transaction environment, and I'll, maybe describe that or elaborate on that.
Our strong competitive position is probably.
Better than it's ever been and.
And we'll talk about why that is.
And.
And then also.
There is there is good demand for our solutions and our solution set has expanded.
So maybe just quickly on the environment.
I think this is clear.
And there are thousands of independent partner owned firms around the world.
We have been actively monitoring them and developing relationships proprietary relationships for over 30 years.
So some of this is the cumulative benefits of having been on the market for a long time.
We are seeing more interest and.
And in discussions.
And in part because growth capital is important now and our industry, but also there's a good supply of succession, driven demographically driven transactions that we havent seen and some time.
And that.
Elevating our.
Our pipeline and I think it is adding to industry activity overall in the industry. So that's.
And that's another reason why we see the and the.
And the environment favorable, but maybe the last thing is that we're just in a relatively stable market environment and I think I've said this before on prior calls you need of backdrop.
And of relatively low volatility to establish new partnerships otherwise during the period of of discussions.
Things have to have to remain relatively stable and that hasnt been the case for some time now.
And maybe maybe elaborating further on our position and the market.
And I've said this and the last 2 calls the options for independent partner owned firms they've evolved overtime, but and this most recent period the skew has been towards consolidation and away from independence.
So.
For us and particular firms that are.
We're seeking a 100% acquirer there not a good fit for AMG.
And just my opinion and Theyre not really a good fit for clients consolidation transactions I don't think its the recipe for success.
But our opportunity set is really and the independent firms that want to stay independent and are looking for a partner the.
Indeed, the access to resources intellectual capital scale benefits that we have to offer.
And we're seeing far fewer competitors that are offering that offering of true hands off independence model and.
And even fewer with the track record of success like AMG has.
Nearly all of our historical compare.
And there's <unk>.
Especially the traditional.
The competitors and anyone who is looking at both traditional and liquid alternatives, they've been either bought or consolidated out or they are selling their businesses.
And so while we do see some.
The competition in the illiquid and space.
<unk> most of those are the stake buyers and I think they.
We've seen inherent conflicts of interest and they are becoming more evident to the underlying independent firms as well so for all of those reasons the.
Our competitive position is very very strong.
And then lastly, we've expanded.
Our offering.
Over time, and we've focused on.
Across the size spectrum. So we can offer growth capital to our fast growing firm.
Obviously, we offer succession planning to 2 firms like current assets that are going through a generational evolution and so our.
Spring has expanded and so the demand for these this expanded solution set has increased.
And we're really the only 1 who can offer both a strategic and permanent solution, while leaving you independent and I think for all of those reasons, where we are in our sweet spot today.
And we see elevated new investment activity continuing.
And the near to intermediate term and it is 1 of the best environments that at least I've seen and a decade.
Thank you. Our next question comes from the line of William Katz.
And with Citigroup. Please proceed with your question.
Thank you very much for taking the questions.
And good morning, everybody just following up Jay maybe we just left off there.
So the way to sort of ring fence, maybe the absolute size of assets that are sort of in the near to intermediate intermediate term pipeline, just trying to get a sense of incremental.
Incremental opportunity to the bottom line and then related to that just can you talk a little of our pricing last couple of deals have been more prospective price very well.
1 of them so they get a sense on just sort of sensitivity around that and I apologize, putting mystic questions, but Tom could you sort of explain why you would expect flat EBITDA sequentially.
Actually ex performance fees, just given just AUM levels flows and just momentum in the business. Thank you.
So let me take the the pipeline and maybe just how we structure of questions and then obviously, Tom you can take the forward guidance.
Question so.
So thanks, Bill and good morning.
On the on the pipeline so.
We as I stated earlier, we are very focused our strategy is very focused on investing and areas of secular growth and that includes the of liquids that includes special.
Net income multi.
The multi asset Asia, and ESG and I think you can.
You can assume we have all of those and our pipeline.
And.
Of course.
There is there is timing associated with pipeline and then there is.
Particularly the environment as I mentioned in terms of getting.
Transactions done and it takes time, so with all of those necessary caveat.
I also mentioned in my prepared remarks that we see we have seen a majority of our cash flow go to investments that have already been announced.
And we see.
Prospectively of the opportunity to invest the majority.
Of our cash flow and this pipeline.
We have.
Going forward with.
And just means another way of saying, we see and elevated.
Set of.
<unk>.
Opportunity set for us.
That are across a diverse group of.
Independent firms that are.
And areas of secular growth the thing that I would also highlight is we're seeing more demographically driven succession oriented transactions come to us so.
After the number of years, where we've seen fewer <unk>.
Succession, driven transactions, we're seeing a greater number today and that's.
Especially good for AMG because thats our.
I think Thats R.
Our most outstanding quality is able to structure.
Of success.
And and transition plans for firms that want to stay independent and are going through those those transitions.
I'm, especially excited about that I guess and I do think that as I mentioned and we kind of think about this more as capital deployed and maybe EBITDA.
Acquired.
We see that driving our result.
And plant and the near term and over the intermediate term.
Maybe on the structure and pricing.
Over the last couple of years, we really refocused our attention on new investments, adding resources to our origination, adding resources to our structuring and adding resources to.
2 our execution.
And doing that and a joined up way culturally at AMG.
With an ownership mindset and entrepreneurial as debt.
We've always had but I think we've.
Kind of dusted it off a little bit, let's say so when when you think about.
The what we say we.
<unk> for a range of outcomes. Obviously, there are lots of business cases that we see and.
And what we're trying to do is find the appropriate balance for the alignment between our shareholders of the partners and ultimately the clients and such a way that.
We're getting the returns for our shareholders debt.
Structured over long periods of time, we will generate.
Shareholder value over say just repurchases.
And.
And but also balancing that with what market is for pricing and frankly, what the rate structures are for a partnership that's going to be a permanent partnership. So when you think about that and you also think about debt the.
The idea that firms are only selling us a portion of their equity and and often cases of the lion's share of the value is and the future.
And pricing is a little less important and those transactions are still important so don't don't get me wrong, but it's a little less important the structures, what's more important and the partnerships.
What's more important so I think we get fair balanced structures and.
And Youre right.
Because we've oriented ourselves towards areas of secular growth.
And the transactions have been attractive to us, but that has a lot to do with how fast the businesses are growing and then maybe the last thing I would say is.
As we invest in these areas the secular growth of course, our mix of our entire business is changing and.
Think that leads to.
Higher levels of EBITDA growth over time.
And maybe Tom if I could ask you to talk about the.
The forward guidance sure.
So maybe I'll give you a few numbers just to provide some clarity on Q3, and then put it a bit and context.
For the full year and going forward.
So first of all in the second quarter.
We reported adjusted EBITDA of $227 million and we noted we had $16 million and performance fees. So that gets you to a base level.
Of $211 million.
And then if you look at where we are in terms of Q3 of thus far I said that our market. The blend is flat at this point when.
When you look to Q3 guidance, we see core EBITDA going from that $211 million level 2 of $215 million level. So we do see some growth and there.
And then lastly up to $5 million of the performance fees, which gets you to the $2.15 to $2.20 range.
And I do think it's worth reiterating here that Q3 is our lowest performance fee quarter of the year and we have some seasonality there and Q2, obviously this year was quite strong.
Maybe if I just kind of take a step back.
And put it in the context of the full year and going forward.
We did also and <unk> spoken about this make the investment and Parnassus, obviously, that's not in the third quarter guidance, but we will see the impact of that and the fourth quarter, and then and the full year of 2022.
And on performance fees, we reported very strong first.
The results with excellent performance in particular on the liquid alternative side and.
And looking forward based on where things stand today, we feel like we're in really good shape for the full year, there as well and then lastly on repurchases we've done $290 million through the second quarter, we reiterated our $500 million target.
First time, the full year. So I think when you take all of these things together. It gives you a good sense for just how strong 2021 is shaping up and the significant momentum that we have heading into the second half of the year and then heading into 2022.
Yes, and 1.
Last thing I think we should just comment on and we said this at the beginning of the year our guidance well.
The originally.
And considered the the need to have capital for new investments, we didn't put any of that and the.
Sort of the earnings power of the business, because it's too hard to predict the timing some of thats coming through now, but we still have more to go and I think the.
And that's always hard to sort.
Put that into your forward thinking, but we have plenty of capital and.
In fact, we enhanced our balance sheet and the quarter freeing up even more capital.
See any any real barriers to us continuing to drive growth through new investments.
Thank you. Our next question comes from the line of.
Alex Blaustein with Goldman Sachs. Please proceed with your question.
Great. Good morning, Thanks for taking the question, maybe shifting gears a little bit I was hoping to talk about amg's private market footprint and.
And really I was hoping you guys can help us frame the forward organic EBITDA growth year for AMG.
And really maybe trying to break.
It out between the fund raising outlook across the number of your liquid alternative affiliates.
Against the realization environment, which feels like of tends to be pretty attractive. We haven't shown $9 billion come out this quarter for you guys. So as you think about the gross whether it's funds or separate accounts net of realization outlook kind of help us think about how that nets.
Our EBITDA growth from this part of the market.
And so why do you take that 1 Tom and all.
Great Alex Thanks for your question maybe.
The things and there, but maybe first just to hit your question around realizations and provide some clarity.
So first I noted in my prepared remarks.
Out of the majority of the performance fees. We saw this quarter were driven primarily by the liquid alternative side of the business.
There was a little bit that came through in terms of illiquid and associated with those realizations, but really not that much.
When you think about the realization of that you saw overall first of kind of just talk about this and the last question, but obviously we're not.
The impact on our earnings power, we continue to see earnings power of increasing overall and the reason for that is.
Realizations about 2 thirds of those were in funds that were well past their investment periods, where management fees had historically already stepped down quite significantly on.
And the other third of the realizations, we saw this quarter were and co investment.
And the vehicles with low management fees.
In terms of earnings power associated with those realizations, it's really very modest.
And if any impact at all.
Stepping back a bit I think the success that we're seeing in terms of investment outcomes really does speak to the diversity and strength of our private markets businesses overall.
Raul.
With the recent addition of Comverse and Otp Asia, We now have 5 dedicated private market businesses.
Including Pantheon, Baring Asia, and AIG and each of these businesses and deliver excellent investment performance and outcomes for our clients.
The businesses are also really continuing to grow.
Into adjacent product areas and expand their growth.
Based on the historical success that they've seen.
We've experienced double digit organic growth and this category over the course of the past couple of years.
We expect to see the impact of our private market business is on organic growth overall of the AMG level continue.
To increase really in 2 ways.
Driven by our existing affiliates as they raise more and larger funds and continue to diversify their businesses and grow their businesses.
And I think distribution is also playing an important part and helping to accelerate and facilitate that growth and then secondly, as Jay talked about as.
ROE and continue to target and private markets opportunities through the new investment process. So we absolutely see private market as being.
And as large and increasing part of the overall AMG organic growth story and I think we're very bullish on that.
Yes, let me, let me add a couple of <unk>.
Other thoughts.
As we can be helpful here Alex.
The first.
And we're driving mix shift at AMG through our capital deployment in both new affiliates through new investments as well as existing affiliates through the.
Efforts that I mentioned, whether thats distribution or.
Or seed or working with our affiliates. So we're not taking of passive approach our mix is absolutely shifting.
Towards more growth and I recognize that it's harder to see that at the moment that you have to do a little more work.
But.
Tom has already said it and if.
And that might well say it again, which is the quant flows that we've been seeing and have had and will have almost no impact to our forward earnings power and that is clear from the guidance that Tom gave and the distributions that we saw have virtually no impact as well any impact they have would be more than offset.
Net by existing or expected fund Raisings and illiquid.
More importantly, though and this is the thing I really want to make sure I land.
What wasn't in our quarter and so think about our quarter, we had EBITDA growth of 40% and earnings per share growth of 47%. There was a lot that wasn't in there for.
It's not additive earnings power perspective, we closed the <unk> at the end of April It was only a portion of otp that was in the quarter.
Close on our strategic repositioning and AMG funds of $4 billion that moved over to our affiliates that happened at the end of June and Parnassus and isn't even and the numbers.
A part of this quarter, which was announced at the very end or at the beginning of the third quarter won't won't of expected to close till the fourth quarter. So if you were to pro forma for all of those events you would've seen our EBITDA closer to 50% growth and our earnings per share may be closer to 60%.
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 around flows and just wanted to clarify a few things so the ex.
Ex quanta.
Inflows.
I just wanted to clarify that includes the strategic realignment.
Alignment and so if so can we talk about the improvement ex the realignment in terms of where that's happening and then also Tom you talked about the global equity outflows and some of specific mandates that I guess were lower fee.
But could you talk about the momentum of the traction within that business.
You should think about that on a go forward basis.
And you on it if you want to take that Tom Yeah sure Dan. Thanks for your question. So a lot of different things and their let me maybe just kind of go through flows overall.
On.
Ex Quant, we have seen strengthening really over the course of the past few quarters.
And how and both by existing affiliates as well as the impact of new investments and I think we see continued momentum as we look forward.
On global equities to hit that part of your question, we saw an increase actually and gross sales.
Specifically, where a strong long term performance and increased client focus are intersecting at affiliates.
And driven the redemption side. This quarter, we did have some idiosyncratic low fee redemptions as a result of institutional rebalancing and it was really there were 3 mandates that accounted for about 2 thirds of the total ex quant global equity outflows.
Little unusual to see that kind of chunky activity and any 1 quarter. So we do think the underlying trends.
<unk> are stronger than what we experienced this quarter and we continue to like our positioning here over the long term given the excellent investment performance that we have.
We're also seeing very strong performance and U S equity strategies.
<unk> gross and net flows continued to increase particularly in small cap and value strategies on the retail.
On the.
And Jay touched on this a bit and I have as well, but when you look ahead, we really do see the mix of our business continuing to shift toward areas like private markets ESG and Asia, driven both by momentum net existing affiliates and key growth areas and our new investment focus on the segments.
Side were seeing contributions and our new private markets businesses like Humvees, and Otp, we're seeing contributions and our new ESG businesses like Boston common and and.
Parnassus as well, even with that and not yet and the numbers and we're seeing contribution from relative value fixed income affiliated like Garda all of these businesses.
And to have excellent performance strong current flows and are well positioned for the future.
And when you really look across our affiliate base at the illiquid debt wealth of specialty fixed income ESG you see the profile of our business shifting more and more toward secular growth areas and frankly, I think the point that you mentioned and around the U S.
Wealth business is really important I think strategically that's something that's going to set us up very well into the future to continue to deliver our distribution prowess on behalf of our affiliates and that is and the numbers that you saw.
And maybe just to kind of take it up 1 level of just add 1 last point here.
Organic growth and flows is.
<unk> is 1 of the many drivers that we have supporting the future earnings growth of the business.
We generate a tremendous amount of capital that we can invest for growth and both new and existing affiliates to drive our EBITDA higher and then we've demonstrated an ability to augment that earnings growth with share repurchases.
So when you see us posting.
Really jumped 40% plus annualized EBITDA and economic earnings per share growth, that's really being driven by excellent investment performance at our affiliates executing against our growth strategy and we expect to see flow is really follow that over time as the shape and growth profile of our business continue to evolve.
Hosting thank you. Our next question comes from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.
Hey, good morning, guys. Thanks for squeezing me in.
And so you just said your largest deal and a long time.
How should we think about the tradeoff between repurchase and repurchase guidance and new.
Were you to announce another big winner and.
In other words at what point of deal volume, but we have to start thinking about taking repurchases out of the model or is that not a tradeoff, we really need to worry about anymore, given how much higher your cash flow generation.
Tom do you want to take the balance sheet question, yes. So.
Patrick Thanks for the question, maybe I'll, just kind of take a step back and walk.
Through capital allocation overall, and then try and hit your specific question as well. So look as you mentioned and first and foremost we have a tremendous amount of momentum overall and our business.
That does translate into a growing free cash flow stream and combined with the flexibility and strength of our balance sheet, we have the ability to execute on the growing.
And opportunity set that we see in front of us in terms of new investments and other growth investments and.
And returned significant cash excess capital to shareholders and you've seen us execute on that strategy.
Made 6 new affiliate investments.
And new affiliates and total over the course of the past couple of years and at the same time, we've repurchased nearly 20.
The percentage of our shares outstanding.
We're going to continue to remain disciplined we're going to run all of our capital decisions through a common framework to ensure that we're earning an appropriate risk adjusted return and.
And we really do think about this over the long term.
As I mentioned earlier, we continue to believe that new investments are our best and highest use of capital.
Given the ability to create long term value the ability to step into immediate earnings and organic growth and then optimize our capital structure and take advantage of our tax structuring as well.
I think when you kind of put all of these things together and Jay mentioned. This earlier this will be the first year since 2016 and we deploy.
The majority of our capital towards new investments, we do see that trend continuing in the near to intermediate term given how robust the opportunity set looks and even with the 3 new investments, including the sizable 1 and parnassus.
We remain on track to do $500 million of repurchases and I think you can expect to continue to see a mix.
And of growth investments and repurchases and the future.
And in terms of capacity, we don't see any capacity issues right now in terms of our ability to execute on investing for growth.
We generate a tremendous amount of cash we have a sizable undrawn revolver, we have and ability to structure transactions and a way that makes sense and.
In terms of putting out capital we have full access to capital markets. There are a lot of ways that we can do that and.
And ultimately we just need to think about the appropriate tradeoffs between making those growth investments and returning capital in any given period of time, yes.
Look.
I do think that.
We are going to do both.
And it's benefited us to.
Having done both.
We do see more capital going towards new and new investments.
But the returns on those new investments are better from our perspective.
So on.
<unk> of what Youre going to see us.
Both in the near term it kind of dovetails, a little bit back to bills.
Question.
Earlier, we see a.
Good pipeline in front of us of new investments.
We'd like to think that we will allocate a lot of capital to that and obviously with all of the appropriate cautionary statements around that.
But even even after that those are all of those come to us unlevered.
And <unk>.
We're growing our underlying EBITDA, we have more capacity than we've ever had our EBITDA run rates over $1 billion. Today. So I do think that we can flex into large transactions and we can flex into multiple transactions, while also returning capital.
On leveraging our next question comes from the line of Robert Lee with Keyw. Please proceed with your question.
Great and thanks for squeezing me in guys and good morning.
Most of my questions on the loss.
The well quick ones, if I look of the balance sheet today is the 780.
Speaking of clean and so much of that.
And currently available to you versus maybe some of it.
Cash and.
Consolidated on more.
On slide 4.
The question.
Yes, Rob it's probably about half I think that's probably a good way to look at it currently and.
We're generating.
Something like $170.75 million.
As of after tax cash out of quarter.
And obviously the.
Also the hybrid bond transaction that we did was after the quarter close and you can think about that $200 million as well.
Thank you ladies and gentlemen, this concludes our question and answer session and I will turn the floor back to.
And for any final comments.
Thank you all for joining us. This morning, AMG has delivered outstanding results and the first half of 2021, and we see strong momentum as we continue to execute on our strategy.
Everyone remains safe and healthy and we look forward to speaking with you next quarter. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.