Q1 2022 Affiliated Managers Group Inc Earnings Call
Greetings and welcome to the AMG first quarter 2022 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 would now.
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 aimed these results for the first quarter of 2022.
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 of our website along with a copy of our earnings release and a reconciliation of any non-GAAP financial measures, including any earnings guidance announced on this call.
In addition, we posted an updated investor presentation to our website. This morning, and encourage investors to consult our site regularly for updated information.
With us today to discuss the company's results for the quarter R. J Horrigan, President and Chief Executive Officer, and Tom <unk>, Chief Financial Officer with that I'll turn the call over to Jay.
Thanks, Anjali good morning, everyone.
AMG achieved strong results in the first quarter of 2022 with economic earnings per share of $4.65 up 9% year over year driven by growth in management fee earnings and continued capital deployment.
During the quarter, we announced two meaningful strategic transactions involving systematically and Baring Asia.
It further demonstrates the successful execution of our strategy and our ability to create shareholder value.
The full impact of these transactions will be reflected in our results later this year and into 2023 as we generate earnings growth from systematic and.
And redeploy capital from dairy.
Amg's business is enhanced by these two transactions and the consistent and disciplined execution of our strategy over time has resulted in our strong position today.
Our business is diversified and we have structural advantages inherent in our partnership model.
Our high quality affiliates are generating strong performance across a wide array of in demand areas.
And we have a strong balance sheet enhanced by our recurring cash flow and significant incremental capital to invest.
Towards the end of last year, we saw a fundamental shift in the market environment for asset management.
And over the past four months that shift has become even more evident.
Looking forward, we expect the ongoing rotation within our industry to continue presenting new opportunities for the highest quality active managers to deliver value for our clients.
Given the combination of geopolitical tensions.
Elevated inflation rising rates.
And an increasing focus on ESG, taking an active approach to investing is critical to achieving clients goals and objectives.
Certain managers, whose strategy has resonated in recent years, we will need to adapt.
Well, others that are adhered to their long held investment beliefs like many of our affiliates managing value relative value macro and trend. Following strategies are seeing a pronounced resurgence in performance and these strategies are demonstrating their importance in client portfolios.
Well, it's still early in this transition to the new environment, we have seen several themes emerge at our affiliates.
First after a decade of underperformance.
Come back in value is benefiting numerous affiliates.
Food and Yacktman AIG River Road, AQR and Tweedy Browne.
Given their excellent long term track records and reputation as well known value investors.
Similarly affiliates with relative value alternative strategies have generated strong positive returns this year as they have over the past several years in particular at affiliates such as Caterpillar and Garda.
Yeah.
In addition, macro and trend following strategies to generate exceptional performance since the beginning of 2021, resulting in improving performance fee.
These inflows for AQR, and Winton and we continue to see inflows it systematically given industry leading performance over the past three years.
Finally, while ESG strategies are being tested in the current environment. We view this as an opportunity for the longest tenured most authentic managers to separate from the pack and gained share, including Boston common and Parnassus, where client demand remains strong.
In addition over the past three years.
We have meaningfully increased our exposure to areas of secular growth.
In 2020, one we added four new affiliates operating in real estate private credit E. S. G in Asia.
And 2022 we have further enhanced our business position with our increased ownership and systematically.
And innovative technology driven firm focused on systematic investing.
The firm is led by later Braga.
One of the best known thought leaders and quantitative investing.
And she has built a franchise that continues to deliver outstanding performance.
Also in the first quarter, we announced a significant event for AMG shareholders in the merger of bearing with EQT.
Given our alignment with our management partners are bearing.
And the strategic position of the combined entity.
We believe the merger will be a win win for all stakeholders.
AMG shareholders will benefit from the considerable capital from this transaction.
As we will redeploy approximately 1 billion for the benefit of our shareholders.
We are very pleased that AMG is alignment and engagement with bearing enhanced the team's ability to achieve their long term strategic goals.
That our partnership will culminate in an excellent outcome.
While this transaction may seem unique in the context of our history.
It is very much in line with our strategy.
When an affiliate chooses to partner with AMG.
The management principles select a partnership model that aligns with their long term strategic direction of their business and we are aligned with the future choices they make.
Through bespoke partnerships.
We are able to address a broad set of objectives for independent firms and enhance our affiliates' long term success.
In the case of bearing.
Strategic transaction was one potential outcome.
And given our strong alignment.
This transaction provided an opportunity for AMG shareholders to realize significant value.
Afg's alignment with our affiliate partners is differentiated in our industry.
Our affiliates goals are our goals.
And our purpose is to act as a catalyst for our affiliates to enhance their long term business success.
And as a magnifier of their growth ambitions.
We enter into every affiliate partnership with a permanent approach and ready to invest alongside affiliates as they execute on their opportunity sets and strategic growth objectives.
Yeah.
High quality independent businesses are attracted to amg's uniquely broad array of partnership solutions to address various stages of their development over time from growth capital to distribution to succession planning.
Amg's strategic expertise in collaborating with partner owned firms has been honed over the course of three decades of successful partnerships and our solutions are a direct reflection of the needs of independent firms.
AMG has been one of the most active investors and independent asset managers over the past three years.
Since 2019, we have made nine investments in new or existing affiliates deploying over $1 billion and those investments generate nearly 175 million in annual EBITDA today.
Moreover, these are these firms are operating in areas of secular demand, including private markets liquid alternatives ESG in Asia.
And have improved our overall growth profile.
Over time, we expect a larger proportion of our EBITDA in flows to come from these fast growing areas as we continue to invest in high quality, new affiliates and in growth opportunities at existing affiliates using a disciplined allocation framework.
Amg's business was built affiliate by affiliate throughout market cycles, and this deliberate approach over three decades has resulted in a diversified and resilient business.
Today, AMG is not only diversified by asset class strategy geography and client.
But also across roughly 40 partner owned businesses run by successful entrepreneurs.
Our affiliates are industry, leading independent active managers.
With proven track records of delivering excellent risk adjusted returns for clients through out of cycle.
These best in class specialist firms have a history of being nimble and innovative during periods of transition.
And that entrepreneurial spirit and ownership culture enable them to protect and grow client assets as.
As well as introduce new products as market conditions evolve.
The combination of our affiliates entrepreneurial vision and our commitment to support their growth initiatives has resulted in the launch of more than 50, new products over the past three years.
Which today total approximately 30 billion in assets.
Finally, we.
We see our industry as being in the midst of significant change.
For a M G given our partnership structure diversification and significant capital position.
We not only have the structural resiliency to navigate this environment.
But we also expect to outperform by capitalizing on opportunities to create substantial future growth.
Yeah.
And many of our most successful investments have come after periods of industry transition and uncertainty.
We remain confident in our ability to shape our business.
As well as scale and compound our earnings through.
Through the deployment of capital into our growth strategy.
Also returning significant excess capital to shareholders.
And with that I'll turn it over to Tom to review the details of the quarter.
Thank you Jay and good morning, everyone.
AMG delivered strong results in the first quarter.
As the market environment continues to evolve we are benefiting from the diversity of our business differ.
<unk> differentiated investment performance.
Improving flow trends and new affiliate partnerships and secular growth areas.
As Jay noted clients are adapting to the changing investment landscape by taking a more active approach to their portfolios.
And our affiliates are well positioned to meet growing demand for diversifying return streams.
Our recent incremental investment and systematically highlights that value proposition.
As macro and trend following strategies are delivering for clients amid market volatility.
And the recent announcement of bearings strategic combination with EQT will add to our significant capacity to invest in future growth.
Overall, with our strong capital position and unique ability to deploy that capital into new and existing affiliates.
AMG is well positioned to execute on our growth strategy and simultaneously return significant excess capital to shareholders through repurchases.
Turning to our first quarter results.
Adjusted EBITDA of $255 million grew 3% year over year.
And economic earnings per share of $4.65 grew 9% year over year.
Net client cash inflows, excluding certain quantitative strategies were $2 7 billion for the quarter.
The improving trajectory of our flow trends evidenced as the shift in our business mix toward high demand areas.
<unk> liquid alternatives private markets and ESG.
And the resurgence in value performance creates further forward momentum.
Turning to performance across our business and excluding certain quantitative strategies.
In alternatives, we reported strong results again with.
With net inflows of 6 billion in the first quarter.
The inflows reflect 4 billion of private markets flows at E G Pantheon <unk> and baring.
Client interest in private market strategies remains robust and our diversified long duration assets. In this category are a source of stable and growing management fees as well as a performance fee opportunity that is building over the long term.
We are also seeing strong demand for liquid alternatives, where we generated 2 billion of inflows in the quarter.
As clients seek uncorrelated and differentiated return streams to add diversity to their portfolios.
A number of our liquid alternative managers, including systematically copula and Garda are generating excellent investment performance and organic growth.
Overall, we see a growing opportunity for our affiliates to attract flows and generate performance fees across our diverse set of absolute return base.
Beta sensitive and private market strategies that builds on itself over time.
Our strong performance leads to inflows.
Which translate into higher asset levels, and a greater opportunity to generate future earnings growth.
Moving to global equities net outflows were 3 billion.
Sales activity continues to be strong and we remain confident that the changing market environment.
Heightened asset dispersion present, a favorable opportunity for the highest quality active managers, including our affiliates to.
To deliver a differentiated value proposition to clients.
In U S equities flows were relatively flat as well.
Redemptions and growth strategies, offset inflows into ESG and value strategies.
Gross sales in this category were very strong.
Our long term investment performance continues to be excellent with more than 70% of assets outperforming on a five year basis.
The significant recent outperformance of value has benefited many of our strategies, including at Yacktman and River Road and.
And we are continuing to see increased dialogue with clients looking to reposition their portfolios into more quality and value oriented strategies.
In addition, we continue to see strong demand for sustainable and impact investing.
With affiliate leaders in the space, such as Parnassus and Boston common.
Finally.
Multi asset and fixed income strategies were also roughly flat for the quarter.
Net inflows at wealth managers, including veritable and my CIO were offset by outflows in fixed income consistent with industry trends.
Turning to financials.
For the first quarter adjusted EBITDA of $255 million grew 3% year over year, driven by new investments and strong affiliate investment performance.
And partially offset by a decline in performance fees and mark to market gains on strategic investments to $25 million in the quarter.
Economic earnings per share of $4.65 grew 9% year over year.
Further benefiting from share repurchase activity.
Now moving to specific modeling items.
We expect second quarter, adjusted EBITDA to be approximately $215 million to $220 million.
Including a modest level of performance fees.
This is based on current AUM levels, reflecting our market blend, which was down 5% as of Friday.
And also reflects the full impact of the first quarter drawdown in equity markets.
As a reminder, the second and third quarters are typically seasonally lower performance fee quarters due to the timing of performance fee crystallization.
Given the diversity of our product set and the strength, we're seeing in particular across absolute return strategies are.
Our full year performance fee opportunity remains strong.
For the quarter, our share of interest expense was $29 million.
Controlling interest depreciation was $2 million.
Our share of reported amortization and impairments was <unk> $32 million.
GAAP and cash tax rates were 26% and 18% respectively.
And intangible related deferred taxes were $16 million.
We expect each of these items to be at a similar level in the second quarter.
Other economic items were 4 million in the first quarter, which included the mark to market impact on GP and seed capital investments.
In the second quarter for modeling purposes, we expect other economic items, excluding any mark to market impact on G. P N C to be $1 million.
Our adjusted weighted average share count for the first quarter was $40 9 million.
And we expect our share count to be approximately $40 million for the second quarter.
Finally, turning to the balance sheet and capital allocation.
We had an active start to 2022.
First with our incremental investment in systematic huh, followed by the announcement of the strategic combination of bearing and EQT.
Our balance sheet is in an excellent position.
And the proceeds expected from the bearing transaction will further enhance our ability to deploy capital towards strategic growth areas and deliver value to our shareholders.
At the current EQT stock price AMG would received gross proceeds of approximately $1 billion.
As we noted at the time of the announcement.
We expect approximately 40% of gross proceeds to go toward taxes transaction expenses and debt repayment.
The remaining 60% will be used first to invest for growth in both existing and new affiliates.
And the combination of the bearing proceeds and our significant cash flow generation enable us to not only fund substantial growth investments, but also to continue to return excess capital through share repurchases.
We expect the transaction to close in the fourth quarter.
And we anticipate that the full allocation of proceeds post closing.
Approximately 10% accretion on a per share basis over time.
We remain focused on long term growth and we will continue to invest our capital in a disciplined manner.
Evaluating all investment decisions under a common framework.
Whether that be assessing in new investment.
Accelerating growth at an existing affiliate.
Adding resources to enhance our strategic capabilities or repurchasing shares.
And in the first quarter, we repurchased $185 million of shares in.
And are committed to returning excess capital to shareholders.
We continue to target $400 million of full year share repurchases.
Subject to market conditions, and new investment activity.
And we plan to update that number based on the timing of the closing of the bearing transaction later in the year.
The resilience in our earnings this quarter reflects the diversity and strength of our affiliates and the structural stability inherent in our unique partnership model.
Looking ahead, we remain focused on executing our growth strategy.
And on evolving our business toward secular growth areas.
And our opportunity to drive substantial earnings growth by investing in new and existing affiliates and returning capital to shareholders through share repurchases possess.
Positions us well to compound earnings at industry, leading levels and deliver significant shareholder value.
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 in the question. Kim You May press star two if you'd like to remove your question from the queue for participants using speaker equipment, it may be necessary to pick up there.
Handset before pressing the star keys.
The interest of time.
We request that you each keep to one question. Thank you.
Our first question comes from the line of Robert Lee with <unk>. Please proceed with your question.
Great. Thanks, Good morning, everyone hope everyone's doing well.
Good morning.
So I guess my you kind of touched on this in the prepared remarks, J, but maybe dig a little deeper you know get I mean given.
What environment could you maybe put.
Got a little maybe meat on the bone if you want to think about how investor behavior is changing.
Maybe are you starting to see RFP activity really start to accelerate as a maybe more institutions starting to think to redeploy to liquid active equities.
And then maybe also.
Differentiate a little bit between what youre seeing institutionally versus maybe in the wealth management and retail channels.
Sure. Thanks, Thanks, Rob and again good morning to you.
Well I would agree with your characterization that the market environment has changed is changing we see that and and we.
Clients are already reacting to this environment.
Maybe the the different layers here that I should point out that I think the first is we think that this environment is really good for active management, we think clients will increasingly take an active approach in managing their exposures.
And we think active managers ability to protect and grow client assets in these changing conditions, it's a clear advantage and it's one that's unmatched by passive.
So when we think about our positioning which we believe to be very good in this environment, they're really three things that I would kind of point out to you. The first is the diversity of our affiliates and that includes as Tom said in his prepared remarks, the significant exposure we'd have to absolute.
Return and uncorrelated liquid alternative strategies, and we did see client activity you know as early as mid last year begin to shift to more absolute return liquid alternatives and we had been talking about that for several quarters now.
We see that to be an advantage of AMG and.
Our affiliates in terms of positioning we also see the comeback in value to be an advantage for AMG, our industry, leading value managers at AMG and that's something that we're well known for and then lastly, as you know we've invested heavily over the last couple of years and private equity.
But markets illiquid strategies, and so we have longer locked up capital private markets.
So that all supports the kind of affiliate positioning and why we feel good about this environment and delivering for clients.
I think second and I think everyone on the phone is aware of this you know our ability to make new investments during times of transition and dislocation and many of our most successful investments have come during these periods, we look to be opportunistic in this environment in part because our structural.
Ability of the business model, our partnership structures and the strength of our balance sheet enables us to be nimble and and also opportunistic in this environment.
So when we when we take a big step back I do think that the market environment, a shift to the value shift to relative value a shift too.
Liquid alternatives is occurring and we do see that client activity happening already.
And as Tom said in his remarks, all of these asset classes that I, just mentioned really account for more than half of a M. G. So when we think about that positioning you know where we're going.
We're excited about it and then in terms of of new investments pivoting to having a robust and diverse business, we can be front footed and our new investment strategy looking for opportunities in this environment, especially when others may be more inwardly focused.
And the last thing as I as I pointed out was our balance sheet and I might just have Tom pick up there and talk about the strength of our balance sheet and a and then maybe we can come back and we can talk about client activity by an institution versus wealth and and others here.
Sure. Thanks, Jay and thanks for the question, Rob So maybe just a little bit in terms of how well positioned AMG is in this environment given not only our strong balance sheet and capital position, which as you know will further be enhanced post the bearing deal closing, but also just the unique nature of our business and the way that our earnings and cash flow characteristics.
Tend to perform in this type of an environment.
Jay talked about this a bit already but that resiliency really starts with the diversity of our affiliate product set.
And it includes a number of strategies with countercyclical qualities as well and all of that translates into stability in terms of our topline revenue.
And given the performance that we're seeing in particular in some of our absolute return strategies were also really building on our opportunity to earn performance fees later in the year.
As you know the majority of our EBITDA is under a revenue share structure, we have a very lean cost base at the AMG level and moved most of that is variable in nature. So we also experience a lot less margin pressure in the face of a market draw down than you might expect to see in a traditional asset manager P&L.
And each of those attributes contributes to the consistency of our cash flow profile, we generate a lot of cash every quarter we.
We have access to even more liquidity, including the ability to draw our full 1.25 billion revolver without any impact on our covenants.
You know our balance sheet is in excellent shape, we have significant duration significant flexibility and once the bearing transaction closes we will have another $240 million of cash. In addition to the EQT shares and collectively that's a lot of firepower that really enables us to be opportunistic when we see things that we like.
And maybe then just to put sort of a finer point on it Rob in choppy markets. We see a lot of questions that tend to go to asset managers from investors in terms of how they're going to perform and if you just tick through those right from an AMG perspective, you can see how different our business model is so first you know how is this environment impacting your top.
Line, what we talked about at the diversity of our affiliates and investment strategies means our top line is much more stable than a traditional manager.
Then you know what about fee pressure what are we seeing there actually you know with all the tailwind in alternatives. The combination of great performance performance fee generation and flows we're really seeing a positive influence on our fee rate and also some significant performance fee opportunities down the road.
Expenses margin pressure as you know we're heavily weighted toward revenue shares we run lean at the center so much less margin impact for us.
And then debt and capital resources.
Long duration, we're flexible we have a lot of cash we're going to have a lot more in the near future. So when you put all those things together. It really does highlight just how different our business is I think why Jay so excited about the opportunity to be front footed in this environment.
Yeah. So the last thing just in terms of your questions.
The one major move that we have seen really is towards liquid alternatives, both institutional and wealth and I do think that we're uniquely positioned at AMG are.
Relative to say our other public peers you know.
This is something that has really this area has seen a resurgence in performance most of their relative value trend. Following our absolute return strategies are up significantly this year in terms of positive performance that bodes well for future flows and we're already seeing a pick up in client activity.
<unk> towards towards these strategies.
Yeah.
Thank you. Our next question comes from the line of Craig Siegenthaler with Bank of America. Please proceed with your question.
Good morning, Jay Tom Hope, you're both doing well.
Yeah.
I was looking at how you structured the pronounced this transaction and it looked like you paid roughly 60% of that purchase price upfront and then the rest would be deferred payments to contention payment. So.
As we model out free cash flow I want to understand how large the deferred payments and contingent payments for deals already announced could be this year and next year. If you can provide us any help with that.
Yes, sure Tom do you want to take that one.
Yeah, So Craig I think the the weighting on the pronounced this number's, probably a little bit less than what you walked through but you are right in the sense that we did structure of that transaction and similarly, we tend to structure. Many of our transactions really to ensure that our shareholders are well positioned for all outcomes and we have excellent alignment between the affiliates that were making a partnership.
With you know an AMG and our shareholders.
In the context of our overall cash flow generation.
Both the cash flow that we generate from our business on a quarterly basis. The strong performance fees, we're seeing any incremental cash that we're going to get from the bearing transaction. The piece that is out there in front of us is frankly relatively modest.
In the context of our overall ability to spend so if you think about US you know there's a page in our investment deck.
That talks about kind of 2 billion plus of liquidity. We've got another 1 billion on a gross basis coming in from Parnassus. If you start thinking about you know a couple of hundred million dollars over the course of the next couple of years in deferred payments and contingent you're you're in the range of of what we would expect.
Importantly on contingent payments contingent payments are going to be very well aligned in general with the performance of those underlying businesses. So the better those businesses do the more we may owe in terms of contingent payments again, they tend to be modest they tend to be structured, but we will have right way risk on those if you will on the deferred payment piece, it's really just a timing matter and it.
It's really a way for us to continue to manage our overall cash flow profile. So I look at it as being a really important tool for us and to enter into these transactions in a way that structurally makes sense, but as we look down the pike from here, we don't see anything impairing our ability to put significant capital to work either in new investments or repurchases in <unk>.
The quantum that is on the come if you will are in deferred payments or contingent payments.
Thank you. Our next question comes from the line of Bill Katz with Citigroup. Please proceed with your question.
Okay, I think I'm just gonna slip a two part question in one just certainly appreciate the affiliate diversification and the resiliency of the business and what seems to be shifting allocation trends I guess I'm just sort of struck by the pretty sharp sequential decline in EBITDA. It gets a 5% market dropped. So wondering if you could maybe unpack some of the delta from the two.
55, this quarter down to $2 15 for the second quarter, and then stepping back a J O. Tom just sort of curious how are.
Are you seeing a step up in conversations for new investments right now or is just the market action here just a bit more of a you know putting things on hold for now just given the uncertainty of everything thank you.
Yeah. Thanks Bill.
Tom I'll take the first one here.
Or are they the step up in conversations and then I'll turn it to you to maybe talk about the modeling items for the quarter in the next quarter. So so bill.
You again for your question.
On the new investment side.
Syed you know we have seen pretty strong activity in the M&A market now for last.
18 months.
Let's say and you know I.
I guess, there often is a a slowdown when you when you hit Choppiness like we've seen I mean, so far and interestingly I'm not exactly sure I can even explain it we haven't really seen a slowdown in our pipeline and in fact, if you just look at you know new.
<unk>.
New discussions at the front end of our pipeline, we may have even seen an uptick in this past period. So we do see the opportunity set to continue to be strong for us. We are looking for opportunities in this environment as I mentioned, we do think that a number of our competitors will be.
The.
More inwardly focused as they they focus on expenses and fees and margins all of the things that Tom said that we.
Has less sensitivity to and so we're hopeful that in this period with continued active pipeline that we're going to see opportunities for us to invest for the benefit of our shareholders. We are uniquely positioned in the marketplace.
And increasingly.
Independent firms are seeking a engaged active partner and with our resources on distribution in our strategic engagement I do think that we are especially well positioned to help independent firms continue to.
Meet their own objectives. So our you know the rationale for choosing a M G probably never been better.
And we see the pipeline being being strong. So we would expect activity to come out of this environment. So maybe Tom I'll turn it to you to do the other decision the more guidance oriented.
Sure Bill. Thanks for your question. So we guided to EBITDA in the second quarter of $215 million $220 million with modest performance fees and if I kind of walk you from where we were this quarter, where we are next quarter hopefully it'll give you the clarity that you're looking for.
So this quarter, we reported adjusted EBITDA of $255 million and we noted that that included performance fees and mark to market gains of $25 million does that kind of gets you to an ex performance fee ex gain number of about $230 million. So what we're really talking about is kind of a delta between $230 million and then that 215 to two.
$220 million range.
As a reminder performance fees in particular in the second and third quarter tend to be seasonally lower so you should assume that that $2 15 to $2 20 and has a very modest level of performance fees call it $2 million to $3 million in there.
And the vast majority of that change right from the 232 that $2 15 to 220 range is really markets and you should think about markets in two ways.
First the full impact of the Q1 market performance given the shape of the market in the first quarter.
And then secondly, the Q2, Mark where we told you that our blended is down about 5% as of Friday.
Now you know obviously last week was a very challenging week in the markets and we tend to try and mark to market write up to the day before we announced earnings so you're really seeing the latest impact of that downward market move and the impact that it's having on our EBITDA, assuming its sort of straight line from here for the rest of the quarter.
I would step back, though and make three points just at a higher level as you think about the full year and as you think about the earnings power of the business. We've talked a number of times already today in both our prepared remarks and in answers to questions about the diversity of our business. The excellent performance, we're seeing and that will continue to drive strong earnings over the course of the year.
I've also talked a little bit about the structural advantages in our model and the things that keep our topline strong. The fact that we're seeing strong fee rate trends. The fact that we're seeing very strong and resilient trends with respect to margin and expenses given the nature of the model and then lastly, again the performance fee opportunity and I think this is again very unique T. M. G. The exposure that we have to.
Absolute return strategies relative to any other business in our industry is.
He is quite high the performance in those businesses year to date has been very strong. So when you think about the full your opportunity there. It is very strong as well.
I just wanted to add and Tom said, it very nicely there, but you know when you look at any quarter to quarter.
Mark you know, we do bring it all the way current and last week was a was a lower week in the markets, but when you look more you know Paas next quarter do you look over the next couple of quarters, you know what youre seeing in our business is seeing flow story.
Really good performance, especially in the absolute return strategies, which presumably will lead to better flows in those categories and maybe even strong flows in those categories and then most importantly, our capital position and our flexibility really just doesn't express itself in any one quarter.
The capital strength that we have with the bearing transaction with where we've where we've been with our balance sheet and the continued cash flow from our business when that expresses itself. We do think it will lead to we do believe it will lead to significant earnings growth.
Thank you. Our next question comes from the line of Alex Boston Medical attacks. Please proceed with your question.
Hey, guys. Good morning, Thanks for the question.
I was hoping you can join in on your non U S strategies for a second given just a little more turbulence and volatility in the non U S markets I guess, one maybe a reminder, on the currency impact and kind of how we should think about the sort of potential mark to market risk there and the trends that you highlighted with respect.
Spec to rising appetite for maybe some of the traditional products in the U S are you seeing any of that outside the U S as well thanks.
Yeah. Thanks, Alex.
Well, we'll take it top down Holistically, Tom and just talk about flows but with a focus on the non U S piece.
Sure, maybe I'll start and maybe I'll just answer Alex one of your quick questions to begin with which is obviously with the strengthening that we've seen in the dollar you should expect some modest headwinds in terms of FX that is baked into our estimate for next quarter on a go forward basis, so that you're right to raise that it's not a massive impact for us but it but.
It does impact us given the global nature of our business.
So maybe on flows overall and then I'll come back to some.
Some of the global products.
First just maybe a quick framework right in terms of what really drives flows, particularly in an environment that is changing as much as.
Jay noted in his prepared remarks first you you really need a market, where particular strategies are well positioned to work and given all the changes we're seeing in the environment. There are obviously certain types of strategies that are well positioned for this type of a market.
Then you need those strategies to actually perform well in that environment, and we're absolutely seeing that across a number of our affiliates.
And then finally, you need clients to recognize the opportunity and you need them to understand the role that these strategies are going to play in their portfolios and that recognition is happening real time, and it's also starting to show up in our flows.
So those areas that are really well positioned for this type of changing environment, we've talked about them already liquid alternatives value private markets. Those are a big part of our business Jay referenced it earlier more than half of our EBITDA and collectively those strategies delivered very strong flows this quarter and we expect that trend to continue going forward.
As I mentioned earlier, it's also been a positive for our fee rate and we like that as well.
In addition, our ESG dedicated strategies also had strong inflows in the quarter with more than a billion five in and we saw inflows in wealth management as well.
So overall, a very sizable portion of our business is both in flowing today and also well positioned for the future.
In terms of your question around sort of global products look of course, the conflict that we're seeing overseas. The volatility we're seeing in China's market is pressuring both global and emerging markets in a variety of ways and we're not going to be immune our affiliates are not going to be immune to that completely in terms of our global equities book.
That said our long term investment performance remains very strong we feel very good about the quality of our affiliates their respective reputations with investors over decades and market cycles. In this category. These are businesses that are well known to put up strong performance over the course of time.
And in some cases to your question.
Affiliates are really seeing clients reconsidering their allocations to global and emerging market strategies and some are looking to take advantage of near term dislocation to position their portfolios into that asset class. So we're certainly seeing some of those conversations.
And one last thing I'll say here is just to remind everyone that we don't think about flows in any one particular quarter.
Really we're focused over the long term and I think you can see on page eight of our IR deck. You know the rolling 12 months really gives you a picture of the positive momentum we're seeing in Ori am.
And importantly, what you're seeing is.
Flow story, improving both on the quant side as well as on the fundamental side. So you know where we do we do see the activity of this market place changing for us to the positive.
Our flows though are really just an output of our successful execution of our strategy.
And that includes the new investment strategy and investments that we're making with our affiliates in distribution and in seed capital and we see that working we see us getting ahead of that and we're in an environment now where we're getting the benefit of being ahead of that.
So we're we're excited about the forward prospects, even though we are understanding where in a in a difficult market environment.
Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.
Great. Thanks, good morning folks.
Maybe if we can just dive into the accretion timeline and the different parts of the of the 10% accretion that you talked about Tom from the systematic Ah Ah <unk>.
That's been in in the bearing a private EQT transaction.
The other 60% of of of that in terms of what you plan I guess I guess, if you have an early read on exactly on how much you plan to invest in our internal growth initiatives with just what types of things are you planning to do with that versus share repurchase activity.
<unk> and if you could just again touch on that your overall capacity for for deals.
And Ah just in terms of the and thinking about that deal pipeline.
You know post this transaction as well as any impact on the the fund raising from the transaction in terms of you know the $4 billion that you did in fundraising this quarter.
How that could be impacted longer term from the EQT transaction.
Yes.
Great Brian well good morning, let me there's a couple of questions in there. So why don't I start and then Tom will will help me and if we've missed any we'll try to regroup. So we do we did have two significant transactions in the quarter. So let me start there. The first was systematic which was in early January .
Really with the carryover from the end of last year, and that's where we accelerated our repurchase of the remaining equity interest.
From a third party and that completed the transition to a kind of a fully as ware systematic I wanted to be in terms of its its business and.
We're very excited about that transaction.
We've seen the momentum in that business over the last.
Six years the business has almost doubled I think it has doubled now for us in that period of time and then of course, our purchase power. This year was timely it as the business continues to perform really nicely delivering very very strong performance. This year I think the business is up 15% this year alone.
So we would see the earnings from that.
You know we saw some of it this quarter and will continue to see it.
Throughout the year, obviously, one significant opportunity within systematic or would that really good performance is performance fees and typically most of those performance fees would express themselves in the fourth quarter.
As Tom mentioned, we're we're very constructive on our performance and performance fee opportunity. The other significant transaction in the quarter was the EQT bearing merger.
Let me just start by saying you know, we see that as a very good outcome for our shareholders and while it may seem somewhat unique in the context of our history. It's fully in line with our strategy and model.
As we've been.
Been aligned here with the partners of bearing over the last six years really to help that business grow and thrive. They made the decision that that partnering and and and a strategic merger was the right outcome for them and because of our alignment. It resulted in a significant proceeds to AMG shareholders now those.
<unk> will come later this year and so we are being.
Patient and thoughtful about our approach and so maybe it's a good time for me to turn it to Tom and just review, how we're thinking about that including the timing of it and and Howard capital around that.
Yep, Thanks, Jay and Brian . Thanks for your question and maybe I can just kind of go through some of the facts and some of the math to help with your question here. So.
So AMG acquired its initial a 15% interest in bearing in 2016 for $187 million and when the transaction closes, which we anticipate will be in the fourth quarter subject to customary approvals.
Are going to receive $240 million of cash and $28 7 million shares of EQT.
And that equates to about $1 billion of total proceeds on a gross basis, given where the stock is today.
75% of those shares.
We're going to be freely tradable post close 25% of the shares are going to be subject to a six month lockup agreement.
Brian as you referenced in your question. We have noted that we plan to allocate about 40% of the gross proceeds to a combination of transaction expenses debt pay down and also the taxes that will owe on the sizable realized gain when the transaction closes.
The remaining 60% I think about really as being purely incremental to our existing capital base and cash flow generation and we're going to run that through the same highly disciplined framework that all of our capital allocation decisions are subject to.
At the highest level. This is a significant enhancement to our already strong capital position, it's going to allow us to invest further in our growth initiatives, including new investments in existing affiliates and it's going to enable us to simultaneously return even more capital to shareholders via repurchases.
And when we put that to work as you noted in your question, we expect approximately 10% earnings per share accretion over time and I'll go into that in a little bit more detail.
First of all that number is bearing only that doesn't incorporate any of the upside associated with the systematic transaction. That's just associated with the capital being unlocked in the bearing transaction.
And it's also net of the earnings that will go away right. Once bearing Ah is is is no longer a part of our financial statements and that's about $35 million that we're expecting in 2022.
So that net number is based on us paying our taxes paying down our debt, making growth investments in our business and repurchasing shares. Obviously, you can make a number of different assumptions in terms of the mix and the mix is going to be a function of our opportunity set but we have a number of different ways that we can put that capital to work over time that we think will be significantly accretive to shareholder value.
Creation.
I'll also note, we're not going to rush, we're going to be very disciplined we're going to take a patient approach both to monetize eqt's stake and to allocating the capital.
We have a strategy in place we're focused on executing against that strategy with the goal being to accelerate both earnings and organic growth over time, and obviously there are a number of variables that still need to play out the timing of the transaction closing the valuation of the shares execution on the monetization and then the shape of that investment opportunity set in front of us.
And our goal is to really maximize value creation in the context of all of those variables.
Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.
Thanks, Good morning.
Wanted to follow up on performance fees and some of the firms you mentioned like Winton and AQR for the first time I think in a while with regards to having good performance maybe.
If you could remind us where we sit versus high watermarks for some of these firms that have underperformed for longer periods of time.
However, based on where things sit today, knowing that performance can change very quickly how would you characterize the 2020 to performance fee opportunity is the other years, if theres a way a good comparison or are you thinking about the magnitude of what that and where that sits today.
Yeah. Thanks for your question, Dan, Let me start Youre right that AQR Winton really all of our quantitative managers.
Have been strong really for the last 12, maybe in some cases 18 months and systematic or really for several years now.
And in the nose those businesses and in particular AQR or they've had a handful of strategies that have really performed very nicely and you would I would characterize these as being there you know higher fee liquid alternative absolute return type strategies.
And so as their performance continues to improve you know they are in many cases above high watermark in there in those products and their long term.
Our improving both at AQR, Winton and systematically they've already produced significant performance fees in the prior period and we're optimistic about what they can do this period, so maybe I'll turn to Tom too to add a bit more to the to the performance category.
Sorry for what we can do this year, but I would just say that that youre right that that for the first time in many years, we're seeing a resurgence in performance there and that's leading to them you know the potential for revenue coming from performance fees and really flow improvement because of.
The performance.
Yes, Thanks, Jay and Dan. Thanks for the question. So I guess I'd start by saying performance fees are a really important part of our business they've proven over time to be a durable component of our earnings and our cash flow.
And we think that frankly from a capitalized Abel earnings perspective, there's a core amount of performance fees.
Whether it's a great economic environment, a more challenging economic environment, you can really count on coming from AMG, you're in and year out you know that number is average somewhere in the 7% to 12% range over the course of the last five years and generally speaking the asymmetry is tended to be to the upside. So we think this is a really dura.
<unk>, an important earnings stream, an important cash flow stream to us and as we think about both our existing affiliate base and the nature of our P&L, but also making investments in new affiliates that performance fee generation opportunity is is really important to us and important to our shareholders. We've talked about this in the past, but you can really break it into three buckets concentrated long.
Only obviously, that's going to be a little bit more challenging in the current environment.
Liquids, where we continue to build a carried interest bank, that's going to be a longer term opportunity for us and then really the focus of the day the absolute return strategies.
And it's certainly the quant strategy systematic AQR Winton as you referenced but also copula Garda a relative value strategies really these are strategies that are built to perform across economic cycles and in different economic environments and we've seen very very strong performance. Thus far now you you noted this in your question Dan. It is early obviously there.
Still a lot of year left but we feel very strong about where we stand today in terms of performance fee generation and I would certainly think about you know feeling like we're in the you know the upper end of that range in terms of an opportunity for us depending on how markets develop from here.
What's really powerful is the diversification of our performance fees. There's some strategies here that are really working at all times and I think that's really important just to the overall diversification strength of our business and cash flow profile.
Yeah, I would just again reiterate.
Reiterate reminding everyone, what what performance fees mean for our business. It means that we've got really good performance.
And especially in absolute return products.
It really does feel like those are products that are meaningful for the environment that we're in and so you could say, it's a stabilizing and our business, but as Tom pointed out we've always had relatively stable performance fees. They just come from different sources at different times.
Thank you. Our final question. This morning comes from the line of Robert Lee with <unk>. Please proceed with your question.
Well thanks for my follow up guys.
Okay.
Wondering if you could maybe drill down a little bit into.
The kind of the margin protection you have built into structurally with your revenue share.
I guess I don't know if theres a way.
Formulating kind of quantifying.
How we should think about that maybe reminding us of kind of structurally.
What that looks like in <unk>.
As part of that.
Investors do question.
No.
Revenues get tough.
Margin protection is that we even though no.
Cash and cash flow at the affiliates to properly incentivized pay and bats, and whatnot. So maybe if you could kind of address that touch on that thanks.
Yeah. So let me start Rob. Thanks for your question just conceptually you know our revenue share is really just a a method for us to.
To work with our affiliates and what does that really mean it means our promise is to leave them alone let them choose there.
There.
Our own path.
Operate their business and have full control of their day to day decisions, but then just strategically engage and help them grow and get behind their growth plan and we do that through our own distribution efforts as well as just some strategic engagement initiatives that we have including seed capital and other consultative and engagement. So that's really our mall.
Model to do so we think that a revenue share is a as a tool to allow for all of those things to occur.
It's not.
You know, 100% of our business I think it really depends on the situation. So we are open to structures that that work for our affiliates, but in the main our revenue share structure for a growing firm that value and nor as to the benefit of the underlying partners and so what do I mean by that if you think about it over time a business.
Does that grow they grow scale and they develop you know growth in their EBITDA line faster than the revenue line and that builds up substantial cushion in these businesses as they grow in a 100% of that margin expansion in order to the benefit of the partners the bonus pools et cetera, and Thats really whats occurred.
At AMG. So when you look across our affiliates you know the large majority, especially coming off the environment that we've just come off of which has been a generally speaking up.
Higher asset level environment, we've had substantial cushion at our affiliates and they enjoy the benefit of that so I will say that the errors that we have are operating well.
We are mindful that if we are in environments, where there is pressure, we obviously have to adapt and adjust but we don't really see any pressure in our business today because of the built up growth in cushion underlying those those revenue shares where it really really good shape and I don't know Tom if theres anything else that you want to add to that.
No I think you've covered it okay.
Okay excellent well thanks for your question.
Rob and I do think that structurally it advantages us in this environment because.
As Tom mentioned in and really put it well.
The flexibility of our model is really around capital and so to the extent that the businesses that we partner with our operating effectively and growing.
Arriving then what we really are focused on here is a disciplined allocation of our capital for the benefit of shareholders and that flexibility that lets us be opportunistic in this environment. Both in terms of new investments as well as repurchases of our stock. So we do see that that flexibility is an opportunity for AMG.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. Hogan for any final comments.
Thank you all again for joining us this morning, AMG had a strong first quarter and as discussed our businesses and.
And resilient to navigate this environment and we expect to capitalize on opportunities that it presents.
Everyone remains safe and healthy and we look forward to speaking with you next quarter. Thank you.
Yeah.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.