Q3 2022 Affiliated Managers Group Inc Earnings Call
Greetings and welcome to the AMG third 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 like to turn the conference over to your host Patricia figure our head of Investor Relations for AMG. Thank you you may begin.
Good morning, and thank you for joining us today to discuss Afg's results for the third 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 in a N. G 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.
Yeah.
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 Corrigan, President and Chief Executive Officer, and Tom Wojcik, Chief Financial Officer with that I'll turn the call over to Jay.
Thanks, Patricia and good morning, everyone.
This has been a remarkable last 12 months.
We have seen a combination of higher inflation rising rates and geopolitical risk drive simultaneous declines in both equities and fixed income, resulting in unprecedented disruption in client portfolios.
At the same time. It has also been a remarkable period for AMG.
Having delivered 5% year over year growth in economic earnings per share in both the third quarter and the year to date period.
As the overall diversity and strong performance of our business together with capital allocated to new investments and share repurchases more than offset the impact of double digit market declines.
And given our strong year.
Year to date performance.
We expect earnings per share to grow approximately 10% in 2022 on top of the 37% earnings growth we delivered in 2021.
Yeah.
Notably.
Our results in these two years have been generated in dramatically different markets.
In 2021 World markets grew significantly against the backdrop of low rates.
An easing monetary policies.
In Stark contrast to the severe drawdown in 2022 amid tightening monetary policies and geopolitical risks.
Amg's strong performance across disparate market environments highlights the efficacy of our model.
And the diversification of our business.
And as we'll discuss today, we believe AMG is uniquely positioned for success and continued growth in the new environment.
Our business profile is intentional.
And unique.
We have strategically evolved AMG over the past decade by deliberately investing in a diversified group of leading independent managers across a broad array of asset classes.
Our high quality partner owned firms have collectively provided us even greater ballast against the changing environment by strengthening Amg's overall earnings power instability, enabling us to participate and upward trending markets and simultaneously, providing us a buffer against volatility and.
Dislocation.
Our affiliates have distinguished themselves through their investment performance and enhance their potential to generate organic growth.
We believe there are several factors that will drive client behavior going forward and at AMG and our affiliates are positioned to benefit from these trends.
First.
Portfolio construction is going to take center stage.
After a decade of highly correlated increases in risk assets.
This year investors received a reminder, in many cases, a painful one of the value of portfolio construction and diversification.
As the lessons of the global financial crisis waned over time and markets continued to rise investor focus on the risk and return considerations that are so critical in building a balanced portfolio over market cycles slowly eroded.
As a result portfolios became far too heavily weighted towards growth at inflated valuations in both the public and private markets.
Investors either chose to chase growth or unknowingly participated in that chase.
Going forward clients will need to construct portfolios to address the longer term emerging risks and trends that this new market environment will bring.
Second the diversification and capital protection provided by liquid alternatives will be critical in building more resilient portfolios.
The excellent performance generated by Amg's affiliates in the current environment provides ample evidence that investors who had previously chosen to underweight. These strategies can no longer ignore the meaningful advantages of integrated them integrating them into their portfolios.
The performance of liquid alternatives, particularly in times of market disruption.
Remind us of the foundational lessons of portfolio construction.
And we strongly believe that these strategies and our affiliates, including systematically Capua, Garda Winton and AQR.
Are all well positioned to benefit from future allocations to uncorrelated return streams.
Finally.
We believe that thoughtful portfolio construction will require even greater valuation sensitivity and risk awareness.
The outlook for risk assets has shifted given changes in long term assumptions on risk free rates and terminal value.
As investors recalibrate their portfolios, we expect a return to a more fundamental value sensitive approach to investing and our affiliates are well positioned for future allocations given their focus on quality and value strategies.
We believe that taking an active approach will be critical to achieving clients risk and return objectives across both public and private markets.
Given their entrepreneurial independent models and alignment with clients our affiliates are well positioned in volatile markets to deliver differentiated long term returns.
Critically alpha generation is driven by skill not scale.
We believe that knowledge experience and dynamic decision, making are going to be essential for navigating the new environment.
And while we're still in the early innings of this evolution. Our affiliates are positioned to benefit from the increasing need for active management and portfolios across both liquid and illiquid strategies.
As I said earlier Amg's business model is uniquely advantaged by our ability to shape, our business and scale our earnings power through investments in new and existing affiliates.
As we execute on our strategy of investing in areas of secular growth.
Our partnership approach continues to resonate with the highest quality independent firms.
In October we made a minority investment in a new affiliate Peppertree capital management, a leading 4 billion dollar communications infrastructure firm that is well positioned to benefit from the ongoing tailwind surrounding the demand for data.
This new partnership enhances our participation in real assets and as our first affiliate wholly dedicated to infrastructure.
Bringing further diversification to our business profile.
The Peppertree team was attracted to Amg's partnership approach, which preserves or operational autonomy and investment independence, while providing access to our strategic capabilities.
Yes.
As we add more affiliates in areas of secular growth, we continue to evolve our business composition towards in demand strategies, driving long term organic and earnings growth.
Going forward, we expect to see a number of high quality investment opportunities emerge in the new environment.
And with our strong capital position further enhanced with the proceeds from the sale of our minority stake in bearing we have increased flexibility to allocate capital across amg's unique opportunity set to the areas of highest growth and return.
I want to underscore again, our commitment to a disciplined capital allocation framework.
Capital decisions are fundamental to our strategy and.
And we evaluate every opportunity on a risk adjusted basis factoring in the impact of the investment to our business cash flows and franchise.
Capital decisions required judgment and our allocation discipline is embedded across all elements of our process and culture.
While we believe that growth investments in new and existing affiliates will drive long term shareholder value.
Given our disciplined allocation framework. We have also returned significant capital to shareholders by retiring more than 25% of our shares over the past three years.
Finally.
We are pleased with our results and our business momentum.
Our positive forward outlook reflects our confidence in our strategy and our affiliates positioning in this new environment.
Our results once again demonstrate that AMG and our high quality affiliates represent the best of active management and both public and private markets.
As clients reallocate portfolios, we are confident that amg's affiliates and our shareholders will benefit from the growth and value creation that will follow.
And with that I'll turn it over to Tom to review the details of the quarter.
Thank you Jay and good morning, everyone.
The combination of excellent investment performance and our disciplined approach to capital allocation enabled AMG to deliver 5% year over year growth in earnings per share in the third quarter.
As you heard Jay discussed this.
This year's market environment has demonstrated to investors the importance of the principles of portfolio construction.
Diversification uncorrelated returns and liquidity.
Clients are beginning to recalibrate portfolios and we've intentionally built our business to capture the demand trends ahead of us.
Our confidence in our business momentum is supported by outstanding affiliate investment performance this year.
Most notably and liquid alternative strategies.
The resulting in our strong outlook for full year 2022 earnings growth.
That earnings growth.
Aided by strong performance fee earnings.
Contribute significantly to cash flow generation.
And combined with the proceeds from the bearing transaction fee.
Further enhances the capital we can deploy toward long term growth opportunities.
We took the first step in that deployment in October with our investment and Pepper tree capital management.
In line with our strategy to increase our participation in private markets and real assets.
In the current environment, our unique value proposition to shareholders is expressed through a number of key elements.
Strong investment performance.
Consistent performance fee earnings.
Significant capital generation and balance sheet strength, and our ability to deploy capital towards secular growth areas and return capital to our shareholders.
Collectively positioning AMG to continue compounding earnings over time.
Turning to our third quarter results.
Economic earnings per share were $4 21.
And grew 5% year over year.
The impact of our new investment activity and share repurchases more than offset the decline in markets foreign exchange rates and net flows.
Net client cash outflows for the quarter were $8 8 billion.
And excluding certain quantitative strategies were $6 5 billion.
Turning to performance across our business and excluding certain quantitative strategies.
Within our alternatives businesses, we reported another strong quarter with 3 billion in net inflows, primarily driven by private markets fund raising at pantheon converse abacus and AIG.
Our affiliates continue to generate outstanding investment performance.
And their excellent long term track records across credit real estate secondaries and infrastructure continue to drive fundraising momentum.
And we expect our newest affiliate partnership with Pepper tree to be additive to our overall illiquid alternatives growth profile going forward.
Within our liquid alternative strategies performance remains outstanding and we are confident that our diverse set of affiliates and products. In this area will benefit from increasing client demand as investors seek differentiated sources of return and diversification within their portfolios.
Turning to equities industry dynamics remain challenging.
Within global equities net outflows of $6 5 billion were an improvement compared to the second quarter, but above longer term trend levels.
Redemptions were concentrated in growth oriented strategies consistent with the broader industry.
Despite these near term challenges, we remain confident in the quality of our global equity managers and their ability to generate strong performance and flows across a full business cycle.
In U S equities, we saw net outflows of $1 3 billion in the quarter.
Long term performance in U S equities remains excellent.
And our affiliates, including Beutel River Road and frontier.
<unk> continued to enhance their positioning amid the strong relative performance of value equity strategies.
Finally in multi asset and fixed income strategies, we saw net outflows of $1 9 billion in the quarter.
Primarily driven by a single low fee cash management redemption.
Turning to financials.
For the third quarter adjusted EBITDA of 220 million included $23 million of net performance fee earnings.
Economic earnings per share of $4 21.
Grew 5% year over year in the quarter and in the year to date period.
Benefiting from new investment activity excellent investment performance and share repurchases, which more than offset lower markets and a stronger dollar.
Yeah.
Now moving to fourth quarter guidance.
We expect fourth quarter adjusted EBITDA to be in the range of $330 million to $380 million based on current AUM levels, reflecting our market blend, which was up 3% quarter to date as of Friday.
This guidance is adjusted to reflect the removal of $10 million of Q4, EBITDA and approximately 30 billion of AUM. Following the close of the bearing transaction.
The range does not include the impact of our latest new affiliate investment.
Which will be reported on a one quarter lag beginning in the second quarter of 2023 and.
And is expected to add approximately 1% to 2% to EBITDA on a full year basis.
Additionally, the guidance range includes strong net performance fee earnings of $150 million to $200 million given the excellent performance in the large and diverse set of strategies that are expected to contribute in the quarter.
As we highlighted on our last earnings call.
Performance fee earnings at AMG are well diversified and stable component of our earnings stream with asymmetric upside potential.
Which we are experiencing this year.
Many of these performance fee generative strategies serve as ballast to our long only strategies with low and in some cases negative correlation to equity markets.
Ultimately, making amg's overall earnings power stronger and more resilient across market cycles.
Turning to specific modeling items.
For the third quarter, our share of interest expense was $28 million and we expect it to be $29 million in the fourth quarter.
Controlling interest depreciation was $2 million and we expect a similar level for the fourth quarter.
Our share of reported amortization and impairments was $42 million for the third quarter.
We expect it to be approximately $35 million in the fourth quarter.
Our effective GAAP and cash tax rates were 24% and 15% respectively for the third quarter and.
And we expect GAAP and cash tax rates to be at 25% and 20% respectively in the fourth quarter, reflecting higher income expectations.
Intangible related deferred taxes were $13 million this quarter, and we expect $16 million in the fourth quarter.
Other economic items were negative $1 million in the quarter, which included the mark to market impact on GP and seed capital investments.
In the fourth quarter, excluding any mark to market impact on GP and seed we do not expect any contribution from other economic items.
Our adjusted weighted average share count for the third quarter was $39 5 million and.
And we expect our share count to be approximately $39 million for the fourth quarter.
Yeah.
Finally, turning to the balance sheet and capital allocation.
Given the strength of our balance sheet and our significant free cash flow generation, we are well positioned to deploy capital in today's environment as we look to generate shareholder value.
The closing of the bearing transaction enhances our capital position and financial flexibility.
Further, enabling us to execute against our strategy.
As a reminder, in connection with the bearing transaction AMG received approximately $240 million of cash and $28 7 million shares of EQT.
Translating into gross proceeds of approximately $800 million based on Friday's closing price.
In line with our previous statements, we have allocated 40% of proceeds or approximately $325 million of which $150 million went to deal expenses and taxes and $175 million to future debt reduction partially through the purchase of matched duration treasuries.
Against our bonds maturing in 2024.
We expect the remaining 60% or approximately $475 million in EQT shares to be sold over the next few quarters and a disciplined and methodical manner.
Nearly half of those proceeds will be allocated by year end to fund our recent new affiliate investment and the increase in our fourth quarter share repurchase guidance.
And the remainder will fund the ongoing execution of our growth strategy and additional share repurchases in coming quarters.
In the third quarter, we repurchased $80 million of shares brings.
Bringing our total repurchases this year to $345 million.
Given the proceeds from the bearing transaction and our expectations for strong performance fee earnings in the fourth quarter.
We now intend to repurchase at least $500 million of shares for the full year 2022.
Which is nearly 10% of our shares outstanding at the beginning of the year.
As always our expectations remained subject to market conditions and new investment activity.
We remain focused on long term growth and we will continue to invest our capital in a disciplined manner evaluating.
Evaluating all investment decisions under a common framework.
The momentum in our business demonstrates the diversity and strength of our affiliates and the stability that is inherent in our model.
We have a strong balance sheet and generate significant free cash flow supported by robust and recurring management and performance fee earnings streams.
The changing environment represents a significant opportunity for both our business and our affiliates to deliver differentiated performance.
In this new market environment, we are confident in our positioning and in our ability to deploy capital to continue generating earnings growth and shareholder value.
Now we're happy to take your questions.
Okay.
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 one on your telephone keypad.
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 your handset before pressing the star keys in the interest of time, we request that you keep to one question each thank you.
Our first question comes from the line of Bill Katz with Credit Suisse. Please proceed with your question.
Okay. Thank you very much for taking the questions and good morning, everybody.
Just in terms of our capital deployment.
So I appreciate the extra guidance, but as you step back a J O. Tom just what's going on in the it's great to see a deal get done in this kind of environment for sure what's going on in terms of the incremental opportunity set here is it getting broader or contract a little bit and what's going on with pricing at the same time. Thank you.
Hi, Bill and good morning, and thanks for your question, Let me, let me start maybe with the deal that we announced this morning.
And then we'll talk about the backdrop of the environment and all.
I'll take that and Tom if you have anything to add.
Yields will jump in.
So pepper tree.
Is in the private market space. This investment is squarely in line with our strategy and arguably it's investing in one of the fastest growing areas within the infrastructure.
Side of private markets, which is in the.
Infrastructure for communications and the demand for data so we think the tailwind.
As far as we can see and we're very excited about the growth opportunities of Peppertree. This business has two decades of experience investing in this space. It's.
It's an expert on the communications infrastructure investing across towers fiber and other areas.
They have thoughtfully built their business over a long period, we believe they are a strong moat and the ability to continue to to thrive in their in their space and their.
Provide space here.
They were attracted to our model and that's going to play back too.
The overall.
Market environment, they were attracted to us first and foremost because they want to remain independent.
This was a minority transaction for us they're going to continue to run their business as owners. They also value the opportunity to engage with us as a strategic partner on their long term execution of their strategy and we look to magnify their efforts.
Much a partnership that we see.
For us as our sweet spot, it's aligning with a high quality team they are passionate and entrepreneurial.
So maybe then taking the second part of your question on the opportunity.
And the environment.
Let me start by just saying that unlike other periods, where we've seen volatility.
And activity freezes, we're not seeing that I said that last quarter end.
Yeah.
I don't know that I'm surprised but our pipeline remains full and there is plenty of opportunities out there.
We do think that our.
Our specific differentiated offering is resonating with the highest quality firms and to kind of put it bluntly. It's the combination of allowing for independence, but then also engaging strategically to help them achieve their goals.
As we continue to talk to prospect prospects and potential new affiliates, there's a increasing need for just.
Just help in the environment that could be.
Strategic advice, but it also could be distribution help seed capital.
<unk> capital and other services on the distribution side like new products. So that really is resonating for us.
We do think the environment has changed obviously the overall environment has changed as I said in my prepared remarks.
That that has played into the M&A environment. The buyer universe has has evolved a number of traditional buyers have kind of started to look inward and we don't see them as much.
And the other thing that's happened I think is that with pricing coming down overall in public markets, especially even within the private market space and you can see that in the publicly traded private markets pricing has just come down and the other thing that's happened is youre seeing better structures.
That share risk between buyer and seller.
So taken together the sort of shifting environment is good news for us in our opinion.
We are we continue as we all know that as part of our strategy to partner with the highest quality independent firms. So we continue to be very focused on this and we see good opportunities coming out of this environment. In fact, we're excited about all the capital that we have that we'll probably talk about on this call and our ability to invest.
That capital in areas of secular growth, which we expect to do and we expect to see opportunities come out of this environment and so thanks Bill for your question.
Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.
Hi, Thanks, Good morning wanted to follow up on just the outlook for performance fees.
And then maybe just talk about the depth as you guys have highlighted before in terms of the contribution but.
That context also would be curious about gross sales and kind of the environment for you.
Future growth from these affiliates, obviously performance fees is a good leading indicator for overall performance. So would be curious if you're seeing any change in demand yet or if that's still on the come and specifically within some of the quantitative strategies that have been more out of favor.
Yes.
Good morning, Dan and thanks for your question I'm going to let Tom start and then maybe I'll circle back and talk about.
Some of the business and the business prospects for our liquid alternatives in particular, so maybe if you can start with performance fees first tushar. Thanks, Dan for your question and good morning.
Maybe I'll start by talking about performance fee earnings and then I'll give you a bit of a view to your second question around what does that lead to in terms of expectations for future flows.
Look performance fee earnings are a really important part of our business. They provide diversification they provide significant cash generation to execute on our growth strategy and given the diversity of our affiliates and investment strategies. There are a real differentiator for AMG in times of market dislocation in particular and you're seeing that now.
Importantly, I think our performance fee earnings stream is very different from others in the industry. All of our performance fee earnings are reported on a realized basis. So thats real cash that's coming to us and they're also spread across more than a dozen affiliates in a multiple of that in terms of individual products. So this is a very diverse and durable earnings stream.
If you look back over the course of the last decade, or so our net performance fee earnings have averaged a $100 million a year annually and as we discussed in our prepared remarks. We expect 2022 is going to be an excellent year, driven primarily by absolute return products that have really shined in this environment and I think thats, leading to some of our expectations for our future.
Loews and growth that I'll talk about in a moment.
We also talk about sort of this combination of stability in the base performance fee earnings, but also asymmetry to the upside and when you look at the pattern and there's a page in our investor materials that shows. This when you look at that pattern over time, you can really count on a base level of performance fees being there every year and then from time to time, we really see this asymmetric upside and Youre seeing.
That this year.
Those performance fee earnings really spans three buckets.
Absolute return strategies like systematically Garda Capua AQR were exceptionally strong performance. This year is leading to our expectations for strong performance fees throughout the year and in the fourth quarter in particular.
Private markets, where we saw some realizations this quarter that translated into performance fees and we also expect to continue to build that bank over time as we continue to make more investments like the peppertree opportunity. This quarter and then beta sensitive strategies, where you know obviously this year is a bit of a challenge there but over time, our beta sensitive strategies have been very strong performance fee contributors.
<unk>.
So when you think about what that means in terms of our expectations for flows really we think this is one of the biggest changes that's happening in the market and we talked a lot in each of our prepared remarks around portfolio construction and the changes we expect clients to make and it's likely to impact us in three ways first we're seeing asset levels rise just driven by the fact that we have.
Excellent performance.
Our client conversations are accelerating a number of clients who have moved away from this space over the course of the past decade as markets have moved up into the right now have to reassess their portfolios and realize that they need this balance they need. These uncorrelated return streams and we're really starting to see conversations move a lot more quickly and think more about the role of these.
Products should should play in our portfolio and as those things happen right. It creates more of an opportunity for us to have strong management fees to have strong organic growth and ultimately to create more performance fee earnings over time. So we really feel good about our positioning in liquid alternatives overall.
And really in our book overall, when it comes to our long term growth opportunities.
So let me take the second.
Part of your question, Dan and just talk about the outlook for maybe some of the businesses and the flow profile of those businesses is really the pipeline putting this into the context that you know.
Overall, we are about 41% alternatives.
Of that something like 20.
25% in the neighborhood is liquid alternatives.
And as Tom said good performance the assets are up then.
And in general pipelines are are growing for those firms. So I would just highlight the names for everyone systematic AQR cap yellow Garda Winton and.
Then maybe to talk a little bit more about two of them I think I would highlight systematic hub.
And that's a business that we made an incremental investment in in January of last year or this year excuse me.
Very beginning of this year.
And the performance again as kind of a microcosm of all of these firms.
Somatic as Sam business. This systematic alternative markets is what it's called it's up more than 50% since the beginning of 2021.
Blue trend this year is up 36%.
That is consistent with a number of products.
They have as well as at AQR and some of the other affiliate so I'm just trying to give you a flavor using this one as an example.
I think the other thing that I would say is.
On AQR is as people know after.
Some some choppy times their liquid alts business has really come back.
And they're having similar performance in their products. They have kind of two businesses within AQR liquid alts business and our long only business and even the client business.
We're seeing the flows begin to ameliorate in particular because of their value consciousness.
And that's another theme that we've pointed out that value sensitive investing is coming back this year value has outperformed growth by an enormous amount.
And we think that will continue so taking those two business together and you look at pipelines and you look at forward prospects for new client flows. They are both building and so we were constructive on flows into 2023 and these products.
Thank you. Our next question comes from the line of Mike Brown with <unk>. Please proceed with your question.
Yeah.
Great. Thank you for taking my questions.
Good morning, Jay and Tom.
<unk>.
So.
I wanted to just hear a little bit more about just investor sentiment across.
All of your all of your asset classes here can you touch on.
The equities and fixed income side as well.
Investor sentiment lately are you starting to see any green shoots of activity coming through.
So Tom why don't you just broadly describe activity and flows.
Sure Thanks, Mike and good morning.
I think importantly, putting this all in the context of our strategy as we continue to execute we're looking to continue to driving our business mix more and more towards secular growth areas and as we continue to execute against that strategy. It really does give us an opportunity to capitalize on more of the client trends that are manifesting themselves in the business today and.
Those that we expect to manifest themselves over the course of the coming years and again I'll point to the Pepper tree announcement is another example of how we're trying to position our business for the future.
In terms of the traditional equity side right now is kind of a combination of our business performance and what we see in the market I think there are some pluses and minuses.
On the plus side in U S. Equities were really well positioned we are to tilts. There. If you will in terms of our affiliates one toward value strategies, and then one toward ESG and.
And on the value side, 90% of our U S fundamental value managers are outperforming benchmark in the three year period and as Jay just mentioned in response to the last question, we think Thats, an area, where youre going to see continued strong demand and in terms of ESG.
When we think about the long term secular trends around energy transition in a number of kind of core elements of the ESG value proposition, we're still incredibly bullish on the long term trends and sustainability as well.
On the flip side continues to be a little bit challenging for global equities. Our flows improved there sequentially in the second quarter.
But I think the sentiment in the market, particularly around growth strategies is still a bit choppy. So we feel very good about the quality of our affiliates and their long term performance track records, but I.
The market environment, there is still need some time to heal.
Then when you move over to the alternative side of the business. We really have two primary focus areas private markets and then liquid alternatives and in private markets. Our fund raising remains strong our client conversations remained strong and our performance remains strong.
We do see some things changing in that area, though.
There's been a lot of discussion about this in the industry, but it has been a bit of a last decade of sort of rising tide lifting all boats in private markets and we absolutely see that changing we see this next decade shifting much more towards a winner and loser type market and Thats an area, where we think the underwriting in our new investment process and the way that we engage with our affiliates really.
Will allow the quality of those businesses at AMG to standout over time.
Second and Jay mentioned this a bit as well in some of his remarks, we think certain subsets of private markets are going to be better positioned than others and client demand trends are likely to move more in that direction. So think about solutions businesses like pantheon that are really focused on helping clients to rightsize allocations at a time when theres been such disruption and also areas like <unk>.
Sets in like infrastructure, where we see strong secular growth trends that can kind of work through cycles.
And then lastly, we think capital formation.
<unk> is even more important starting with product strategy and product development moving all the way through being able to create the right products and then ultimately leverage distribution to get them into the market and we think that's an area that amg's strategic help as well as our sales help on the institutional side and the complete solution that we offer on the U S wealth side can really be differentiating.
And then lastly, I talked about this in the last question is the J, but liquid alternatives I think is really the big area of change and we continue to see those client conversations increasing in terms of.
Those products have done over the course of the last 12 months to 18 months in portfolios and I think the view that people are coming back to that space and saying I need this to be part of my portfolio in the future.
Yes, one other thing I would add and it was a good summary, Tom.
It might be challenging for you to kind of.
Think about exactly where does the AMG fit into this sort of broad spectrum of changes in the in the environment.
And I would I would venture to say that we actually just look different right you have in the Maine public companies that run operating models in the long only space. Some people call those traditional managers and then on the other side you have some of the state buyers who are.
In the private equity space, and then operating models within private equity, but we're sort of different than all of that right. We have liquid alternatives, making up 20%, 25% of our business. We have a long only business is about half and then we have private markets as well. So I do think youre seeing that diversification and that almost that portfolio Alex.
<unk> play out really nicely in the environment that we're in which is why we gave the guidance that we did that we think are earnings going to be up 10% year over year on a 22% for 'twenty one basis off the back of 37% last year.
Thank you. Our next question comes from the line of Craig Siegenthaler with Bank of America. Please proceed with your question.
Yes.
Good morning, Jay Tom Hope, you're both doing well good morning, Craig.
So my question is on debt and higher interest rates. So of your $2 5 billion of debt and convertibles. What is the composition of fixed versus floating do you guys use swaps had revenues to hedge any of that rate exposure.
And how has higher rates change the calculus for new investments.
Yes, so I'm going to I'm going to have Tom take that.
Question, but let's also put in the liquidity as well on our balance sheet, because thats, probably the most important and duration. So those would be the other thing I would throw into the questions I know that youre asking here, Craig So maybe Tom if you'll pick it up.
Sure Thanks, Craig and good morning.
So I think our balance sheet overall first of all we feel like is in excellent shape not only from the perspective of where we are on duration and where we are on leverage we continued run with exceptionally long duration on our balance sheet, our leverage levels are below two times.
But also in terms of the ongoing ecosystem, if you will around cash flow liquidity and leverage.
And in all kind of mentioned a couple of elements. One we generate significant cash flow every year, we've talked about a number of different elements of our business model in the past around the diversification of the topline.
The fact that we do not really have exposure to margin either at the affiliate level or very much at the AMG level and a number of other elements that really just contribute to the strength of cash flows that are replenishing liquidity year after year after year, and allowing us to put capital to work to execute against our growth strategy.
Secondly, we've got the added boost of the bearing transaction and the significant proceeds that are coming to us as a result of that and we've talked about sort of the uses of those and where we expect to put them to work and part of that is thinking about the balance sheet.
When we think about the balance sheet. It really to Jay's point is a combination of liquidity and also capacity over time.
And if you think about the value of liquidity liquidity becomes more and more valuable the more challenging the market environment gets so we always want to be in a position, where we feel like we can squarely be on offense when opportunities present themselves and thats exactly where we feel like we are today, we have a consistent cash flow stream, we're sitting on a significant liquidity and and.
In addition to what we have on balance sheet. We also have the ability to draw $1 5 billion revolver. So we have potential plenty of capacity to execute against potential opportunities in terms of the nature of our balance sheet. The vast majority is fixed rate. The vast majority of long duration, we have a small floating rate term loan and I think in terms of the calculus I am not sure.
That is necessarily rates.
That have changed our view, it's really just an ongoing focus on optimizing our balance sheet and optimizing liquidity in the context of the current and our view of the forward economic environment. So you heard me mentioned in my prepared remarks, we did earmark some of the capital from the bearing transaction to pay down some debt.
We actually bought some treasuries to to offset against.
Our 2024 bond maturities. So we're really we feel like we're in great shape on the balance sheet, but we continue to optimize as the market environment changes.
The other thing that's happened to us in this in this quarter that were in the fourth quarter as we obviously get the EQT proceeds and Tom elaborated in his prepared remarks on the uses of that but that liquidity that sitting on our balance sheet gives us plenty of flexibility going into an uncertain 'twenty three which we hope to use for new.
Because we see lots of opportunity. They can also go to repurchases or further debt pay down if needed.
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.
If I can just circle.
Circling back on the private market side, and a little bit more detail. There. So maybe if we can talk about it in two angles, both from the fund raising side of illiquid private markets.
And what you see as sort of the outlook coming into 2023 in terms of fundraising cycles and.
And then on the other side of monetization.
First of all I guess what.
What was the contribution in the fourth quarter from that side versus say the absolute return strategies and then as you think about that going forward.
Is just looking at slide seven do you see the private market side of that performance fee contribution increasing over time or just.
Rather it is coming from the absolute besides like you initially said.
Yes, So Tom do you want to start with the outlook for illiquid.
Yes, Brian Thanks for the questions.
So I think with respect to the overall fundraising serve opportunity I would take the word cycle out of your question I think as we've talked about a fair amount in the past we have a very diverse group of private markets Filiate.
And within those businesses each of them are diversified businesses into themselves. So we generally always have a range of products out in the market in any given time in different channels and different wrappers. So we don't really have a fund raising cycle type business overall.
So we continue to see strong fund raising across our businesses and I think when we look to the future. There is nothing that changes our expectation that we're likely to continue to see strong fundraising given the quality of those businesses given the areas that they are in across infrastructure real assets credit private market solutions, we feel like we're very well positioned against the key themes.
Clients are focused on.
And frankly, we don't have a lot of exposure to some of the themes that perhaps are facing more headwinds in terms of potential fundraising.
How much capital has been raised in some of those areas in the last couple of years like more traditional corporate buyout style private equity.
In terms of the performance fee side, I mentioned that some of the realizations. This quarter did lead to some small performance fees I would say in terms of our guidance for the fourth quarter. The majority of that is not linked to private markets and as we've talked about private markets performance fees. We do expect that bar to continue to grow over time, but I would think about it as more of an inner.
Medium to long term opportunity for us as the investments that we've made in these businesses continue to season, we continue to build that carry bank and we look out 234 years, we think that's going to be a big opportunity for us one to just continue to generate more cash flow, but also two to further increase the diversification of what is already a very diverse perform.
It's fee generative asset set.
Just make one last comment.
Obviously, putting it in the context that only about 15% to 20% of our business is in the private markets. I know your question is probably more of a broader industry. One I know that you had a lot of people in your coverage universe that are that are there look I do think there's a denominator issue that's going on in portfolios today and I'll come back to my prepared remarks, which is portfolio construction is.
Going to take center stage at the end of this year when people go to their committees and into next year and they're going to have to think about.
The liquidity in their portfolios and where they're allocated as Tom said, though I think we see more of the specialty areas of private market real assets infrastructure. Some of the specialty credit areas as being the areas that we will have follow through fund raising next year, but there'll be slowdowns in other areas and I do think that portfolio construction is going to need to take.
Center stage.
As as clients deal with the emerging risks of the new environment, including keeping their portfolios more liquid and the ability to generate absolute return out of their portfolios.
Thank you. Our next question comes from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.
Hey, good morning, everyone.
Thanks for the question.
On that last point.
I think you guys usually talk about <unk>.
<unk> seasonal redemptions on the institutional side, but but as you've highlighted on this call. It's a strange year everyone's allocation targets are off so any early signs that maybe this year could be a little different than a normal year end kind of what kind of institutional behavior are you seeing now that we're halfway through the quarter.
Yes, Thanks, Patrick I think Tom and I will tag team. This one you are right. This is a very unusual year actually it's a it's a very unusual year followed by a previously very unusual 2021.
So I.
Look.
Im not sure that anyone really knows the answer to your question I do I will say again that we are seeing pipelines build on the liquid alternative side I think people are reacting to the.
The need to have some uncorrelated return in their portfolios that may play out in the fourth quarter for us. It may take till 2023, I think on the illiquid side. Obviously, there is some carryover fundraisers that people are going to final close in that kind of is bolstering the whole industry, including us on the on the illiquid side.
And then I think the last thing that I would say is people have to be more value sensitive in their portfolios. They have to be quality sensitive in their portfolios. After kind of 10 years of momentum in growth and whether we like to admit it or not I think we were all somewhat complicit in the.
Run up to just to just buying growth in a passive way and so more active management has to come into these portfolio. So will that play out in the fourth quarter.
It might do I think it's going to play out in 'twenty, three and 'twenty four yes and no.
Tom If you had anything to add to that.
Just to your specific question on seasonality I think some of the core trends are likely still to be there and I think this is implied in your question and Jason answer. They may just get trumped by other things that are happening in the market. So perhaps will not be quite as as.
Is visible and obviously one of those trends is around retail tax loss harvesting and we're in a very different environment than we've been in the last several years. So I think some of these things will likely still occur, but the magnitude it's pretty early to try and understand and they're just bigger factors at play I think this year.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Hogan for any final comments.
Thank you all again for joining us this morning.
As you heard we are pleased with Amg's third quarter results and given our strong business momentum, we're confident in our ability to generate earnings growth both in 2022 as well as compounded growth over the long term.
We look forward to speaking with you next quarter.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.