Q4 2022 Affiliated Managers Group Inc Earnings Call
[music].
Greetings and welcome to the AMG fourth 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 Ms. Patricia figure our head of Investor Relations for AMG thinking you may begin.
Good morning, and thank you for joining us today to discuss Amg's results for the fourth quarter and full year 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.
Yes.
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.
AMG achieved outstanding results in 2022, delivering 10% growth in economic earnings per share over the past year.
And 50% growth over two years.
Notably we generated these results across dramatically different market environments.
In 2021.
World markets rose significantly against the backdrop of low rates and easy monetary policies well.
Well in 2022 global tightening and geopolitical risks drove double digit declines across both equities and fixed income.
Over that period AMG delivered record earnings per share.
Driven by excellent performance from our affiliates.
New investments in secular growth areas and share repurchases.
Our industry leading results.
Otherwise challenging environment for asset management.
Highlight the efficacy of our model.
The quality of our affiliates and the positive impact of our capital allocation strategy.
And.
As we will discuss today we.
We believe AMG is uniquely positioned for success and continued growth going forward.
Yeah.
Stepping back over the last few years, we have strategically evolved AMG by aligning our capital and resources with long term demand trends.
Since 2019, we've invested $1 3 billion for growth in <unk>.
New and existing affiliates.
That contributed more than 200 million in EBITDA to AMG and 2022.
Alternatives.
Including both liquid alternatives and private markets accounted for approximately two thirds of these investments with the remaining one third primarily in sustainable strategies.
The decisions we made in 2022 were representative of our growth strategy we.
We began the year with an incremental investment and systematically.
One of the industry's leading technology driven liquid alternatives managers.
And we ended the year with an investment in Peppertree capital a high quality private market's manager in the fast growing communications infrastructure segment.
Today more than half of our earnings are generated by affiliates in areas of secular growth.
Nearly doubling our exposure since 2019.
And as we continue to evolve our business next week.
We expect that contribution to increase driving future growth and further differentiating AMG from our peers.
In addition to our successful new investments, we have enhanced our strategic engagement with affiliates working with our partners to magnify their efforts and improve their competitive positioning, thereby creating value for all stakeholders.
For example in 2022, our engagement and collaboration resulted in the successful combination of first quadrant with systematic.
The combination further diversify as systematic as product offering.
Extends their client reach.
And supports the growing scale of our business that more than doubled since our initial investment.
Yeah.
In addition in 2022 strong business momentum at bearing <unk>.
Supported by our strategic engagement.
Enabled them to realize the benefits of our combination with EQT.
As a result, AMG received more than 800 million in consideration for our interest in Berry.
We have already deployed a majority of that capital for the benefit of the ANZ shareholders include.
Including through our investment in Peppertree, and an increased level of share repurchases.
More broadly we have use our capital and resources to further our affiliates' long term objectives.
Including through product development capital formation.
In other business development initiatives.
Do our engagement over time, we expect to identify additional opportunities to build on our affiliates' long term gross prospects and their strategic goals.
Looking ahead, we enter 2023 and a position of strength with a strong balance sheet, a diversified array of high quality affiliates.
And our strategy focused on areas of secular demand.
Amg's overall momentum should enable us to capitalize on opportunities that will emerge in the new market environment.
Okay.
Importantly.
We believe portfolio allocations need to change.
And taking an intentional approach to rebuilding portfolios for this new environment will be essential to achieving client outcomes in the future.
Portfolios that were designed around antiquated asset allocation models underperformed materially in 2022.
Causing a renewed focus on the fundamentals of portfolio construction, including liquidity reduce correlations and differentiated return streams.
We have always believed that partner owned firms with entrepreneurial cultures are best positioned to deliver differentiated returns across market cycles.
And we expect our affiliates to be well positioned to benefit as clients recalibrate their portfolio allocations.
This new environment also brings opportunities for attractive new investments as most buyers retrench and the appeal of Amg's partnership approach becomes even more apparent.
Having remain disciplined and selective through a period of high valuations and optimistic business plans, especially in private markets. We.
We are seeing both expectations and valuations moderate.
In addition in times of uncertainty and engaged proven partner becomes even more valuable.
Our unwavering commitment to provide partnership solutions, the independent firms and our reputation as a collaborative and supportive partner Uni.
Uniquely positions AMG during a time when other buyers are rethinking their approach.
And given our competitive advantages, we expect to execute on attractive new investment opportunities that this environment will likely produce.
Finally, I want to underscore our commitment to a disciplined capital allocation framework.
Capital decisions are fundamental to our strategy and we evaluate every opportunity on a risk adjusted basis factoring in the impact of the investment to our business mix cash flows and franchise.
These decisions required judgment and our allocation discipline is embedded across all elements of our process and culture.
In executing growth investments in new and existing affiliates, we ensure proper alignment with our affiliate partners and structures that benefit all stakeholders.
While we believe that these investments will drive long term shareholder value overtime.
We also have a track record of returning significant excess capital to shareholders.
As part of our disciplined strategy.
Since 2019 in addition to deploying more than $1 3 billion into growth investments. We have also returned $1 9 billion of excess capital primarily through share repurchases.
Looking ahead, given our opportunity set.
We expect that the mix of our investments will skew more toward growth.
But the outcome will always be governed by our capital allocation framework.
In 2023, we celebrate 30 years of successfully partnering with independent firms.
While our business and the asset management landscape has certainly evolved we remained true to our fundamental objective of providing solutions to independent partner owned firms and acting as a catalyst to support their success over time.
Today, we are well positioned to deliver consistent earnings growth given our unique competitive advantages.
And through the execution of our growth strategy and our robust capital allocation framework, we expect to create significant shareholder value going forward.
Thank you Jay and good morning, everyone.
Amg's excellent 2022 results reflect the differentiation of our business model and standout against the challenging industry backdrop.
For the full year, we delivered $1 1 billion of adjusted EBITDA and economic earnings per share of $20.14 grew 10% year over year.
Driven by outstanding affiliate investment performance and the execution of our growth and capital allocation strategies.
Liquid alternative strategies delivered strong results for both clients and shareholders and generated 227 million of net performance fee earnings.
And our strategy resulted in two affiliate investments and significant excess capital returned through share repurchases driver.
Driving earnings growth today, and positioning us well for the future.
As we enter 2023.
Our affiliates value proposition is resonating with clients.
Our partnership solution set is uniquely positioned to attract new affiliates.
And our balance sheet and cash flow profile enable us to execute on our strategy to create significant shareholder value.
Now turning to our fourth quarter results.
Fourth quarter, adjusted EBITDA of $371 million.
And economic earnings per share of $7 28 were.
We're up 4% and 19% respectively year over year.
Reflecting strong affiliate investment performance.
And the impact of new investments and share repurchases.
During the quarter the bearing transaction was completed.
And we received $240 million in cash and $28 7 million EQT shares.
For GAAP purposes, we booked a total after tax gain of $576 million.
Including a $499 million gain on the transaction that we have reported as a separate line item on our income statement.
And the $77 million gain on EQT shares, which is included in investment and other income.
These gains are excluded from our supplemental metrics and additionally bearing earnings are excluded from our fourth quarter and go forward results.
Turning to performance across our business and excluding certain quantitative strategies.
Net client cash outflows for the quarter were $5 billion, reflecting.
<unk> continued strength in alternative strategies that was offset by fundamental equities and seasonal redemptions.
Within alternatives, we reported another strong quarter with almost 6 billion in net inflows led by $5 billion of private markets fundraising at pantheon <unk> and advocacy.
Our affiliates continue to generate outstanding investment performance and their excellent long term track records across credit real estate.
<unk> and infrastructure.
<unk> to drive fundraising momentum.
Demand for liquid alternatives continued with approximately 1 billion of net inflows as the volatility in correlation in traditional equity and fixed income markets led many investors to seek alternative sources of return and diversification.
Our liquid alternative managers, including systematically AQR Capua, and Garda delivered outstanding performance in 2022.
With many strategies producing double digit returns for clients, resulting in significant performance fee earnings for AMG.
The diversification provided by liquid alternatives will be critical in building more resilient portfolios in this new market environment.
And we expect our diverse set of affiliates will benefit from increasing client demand in this area.
Turning to global equities net outflows of 7 billion continue to be primarily driven by growth oriented strategies in line with broader industry trends.
Given our affiliates' strong long term track records in this category they are well positioned to recapture client demand over time.
In U S. Equities, we saw net outflows of $4 billion in the quarter, including approximately $1 billion of retail seasonality.
Performance continues to be excellent and improved across all time periods in the quarter.
Our affiliates, including Parnassus, Yachtsmen Beutel River road and frontier continue to enhance their positioning amid the strong relative performance of value equity strategies.
Finally in multi asset and fixed income strategies flows were flat in the quarter.
Driven by inflows into wealth management and stabilizing fixed income results.
Turning to financials.
For the fourth quarter adjusted EBITDA of $371 million included 188 million of net performance fee earnings and grew 4% year over year as strong performance fee earnings and the impact of our new investment activity more than offset the decline in markets and net flows.
Economic earnings per share of $7.28.
<unk> grew 19% over the prior year quarter.
Further, reflecting the positive impact of share repurchases and a lower tax rate versus a year ago.
Performance fee earnings continued to provide a combination of earnings growth diversification stability and cash flow.
Our affiliates generate performance fee earnings in several ways.
Across absolute return beta sensitive private market strategies.
And many of those assets are growing as a function of excellent investment performance positive flows and successful execution of our strategy across secular growth areas.
In terms of performance fee earnings for full year 2023.
We are informed by the combination of our first quarter guidance range.
Our current performance fee eligible asset base and our high watermark position.
Consistent with historical experience, we expect a net performance fee earnings range of $125 million to $175 million for 2023.
And we will update you throughout the course of the year.
Okay.
Now moving to additional first quarter guidance.
We expect first quarter adjusted EBITDA to be between 215 and $220 million.
Just on current AUM levels, reflecting our market blend, which was up 6% quarter to date as of Friday.
And including net performance fee earnings up $20 million to $25 million.
As a reminder, our first quarter results will not include the impact of Peppertree, which will be reported on a one quarter lag beginning in the second quarter and is expected to contribute approximately 1% to 2% of EBITDA on a full year basis.
Turning to specific modeling items.
For the fourth quarter, our share of interest expense was $30 million and we expect it to be at a similar level in the first quarter.
Controlling interests depreciation was $2 million and we expect a similar level for the first quarter.
Our share of reported amortization and impairments was elevated at $78 million for the fourth quarter.
We expect it to normalize to approximately $30 million in the first quarter.
Our effective GAAP and cash tax rates were 23% and 21% respectively for the fourth quarter.
For the first quarter, we expect GAAP and cash tax rates to be at 26% and 17% respectively.
Intangible related deferred taxes were $4 million this quarter, and we expect a more normalized 15 million level in the first quarter.
Other economic items were $1 million in the fourth quarter, which included the mark to market impact on GP and seed capital investments.
In the first quarter, excluding any mark to market on GP and seed we do not expect any contribution from other economic items.
Our weighted average share count for the fourth quarter was $39 2 million and we expect our share count to be approximately $38 million for the first quarter, reflecting the impact of the accelerated share repurchase program, we entered into at year end.
Finally, turning to the balance sheet and capital allocation.
While market volatility in 2020 to cause many industry participants to take a step back we continue to focus on executing our strategy.
Amg's business model is uniquely advantaged by our ability to deploy capital in the areas of highest growth and return by investing in both existing and new affiliates and.
In 2022, we successfully completed two growth investments systematically in January and Pepper tree in October .
Of which further shift our business mix toward areas of client demand.
Consistent with our guidance, we also returned $475 million of excess capital through share repurchases.
In addition, given our strong liquidity position, which was further enhanced by the bearing transaction closing in the quarter.
We entered into a $225 million accelerated share repurchase program that will be executed over the first half of 2023.
With respect to the bearing transaction, we have now realized nearly 600 million in total gross proceeds in cash, including monetizing two thirds of our freely tradable EQT shares.
And many of the capital actions I, just mentioned, including Peppertree, our increased 2022 share repurchases and the ASR were funded with that capital.
Given our strong balance sheet and free cash flow profile, we entered the year with significant capacity to both execute on our growth strategy and return excess capital to shareholders through repurchases.
Value, adding all investment decisions under a disciplined common framework.
For the full year 2023.
We expect share repurchases of at least $425 million inclusive of the $225 million a S. R.
The ultimate level of repurchases will be dependent on market conditions and new investment activity.
And as Jay mentioned, we believe new investment activity can increase in the current environment given amg's unique partnership solution set.
The momentum in our business demonstrates the diversity and strength of our affiliates and the stability inherent in our model.
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 to generate earnings growth and 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 Mccann for participants using speaker equipment. It may be necessary to pick up your 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 Alex Boston with Goldman Sachs. Please proceed with your question.
Hey, good morning, guys. Thanks for the question.
So maybe we could start with a point Jay that you made in your prepared remarks about mixing.
Mixing and investments are prioritizing investments a little bit more for growth versus maybe share repurchase for the year, maybe help us think through what areas you expect to be relatively more active in and if the elevated pace of activity does not come through should we expect you guys to be above the guide on the share buybacks for the year.
Yes, well good morning, Alex and thank you for your question.
So to address the first part on new investments, Yes, we do think we're in an environment, where we are going to see more active.
Activity for us on the new investment side in part because.
We have seen.
Market environment change in our favor.
On the buyer side, we see buyers.
Sort of historical buyers be more inwardly focused as I mentioned.
On our prior call and we also see.
After a period of elevated valuations in sort of optimistic business plans, we see more modest valuations and modest expectation. So we think that's a good environment for us to transact and I think the last point is that the needs of independent firms.
They in this in these periods really could use a helpful supportive strategic partner like an AMG.
And that is something that we see in our dialogue with.
With new affiliate prospects something that they are really looking for and then when you kind of take a step back and you look at our current pipeline, we do have a pretty active pipeline.
We have a growth strategy to invest in both new and existing affiliates in areas of secular growth. So our new investment pipeline very much reflects areas of secular growth.
We articulated that over some many years now, which we believe to be in areas.
We're a long term demand trends.
<unk> to be in our in our.
In the world and and and and.
And the economy and that includes areas such as private markets liquid alternatives.
ESG or sustainable investing.
Asia and wealth and we continue to see businesses in those areas and we continue to expect that we will we will do more investments in capital to do that.
To those areas.
But youre also right that to the extent that we are not.
I'm able to or willing to I guess make those investments over the course of this year or let's just say the next many quarters ahead of us.
We'll return capital as we have for the last four years too.
To shareholders and when you really take the lens back out and I think we described it in our prepared remarks, we put $1 $3 billion out into growth investments over the last four years and $1 9 billion into share repurchases, yes, we would like to see that next skew more towards growth, but we are prepared to re.
<unk> capital just as we have because we have a.
Disciplined capital allocation framework that governs those those new investments in autonomous yes, Matt Yeah. So Alex look I think you ask your question and exactly the right way and as Jay walked through the first thing we're thinking about with our capital is all of those opportunities for growth investment and then we think about exactly that which is what do we then do with our excess capital and how much should we.
Purchase so maybe I'll just spend a couple of minutes on our liquidity position and.
And how we're thinking about repurchases how the ASR plays in et cetera. So look we enter 2023 and a very strong overall liquidity position.
And thats aided not only by our strong 2022 financial results, but also the proceeds from the bearing transaction and as Jay said at the highest level, we're positioned to both invest for growth and return significant excess capital to shareholders via repurchases.
Importantly, when you think about repurchases. We finished 2022 with about $475 million of repurchases and then we announced the $225 million accelerated share repurchase program. So really the right way to interpret the ASR is call it $25 million of that gets us to our $500 million full year guidance number for.
2022, and then we really pre funded $200 million of what we plan to do in 2023.
So as you heard in my prepared remarks for 2023, we used at least $425 million of repurchases as a good baseline number which includes the totality of that $225 million ASR, that's going to be executed in the first half of the year and then another $200 million in the second half of the year.
But we also have meaningful capacity beyond that to invest for growth in all the areas that Jay was talking about.
At approximately $400 million of balance sheet cash that we've sort of earmarked for growth this year and thats really even before thinking about using our revolver or taking up our leverage levels. That's just at a consistent leverage level with the liquidity that we have available to us today.
Of course, if those investments don't materialize, we will likely returned more capital to shareholders per our capital allocation strategy and framework. So you should really consider the overall earnings power that comes along with that $400 million of incremental capital that we have to put to work whether it goes toward growth investments or whether it ends up being a written.
<unk> capital via repurchases over time now importantly, the goal is not to push all of that capital out the door in any single quarter or calendar year, but really to ensure that we have the capital when we need it when the highest quality opportunities become available and Thats really the way that we're managing our balance sheet and it's the focus of our overall capital allocation strategy.
Okay.
Thank you. Our next question comes from the line of Craig Siegenthaler with Bank of America. Please proceed with your question.
Okay.
Hey, Good morning, Jay Tom Hope you and your team are doing well, yes, good morning, Craig.
So I wanted to follow up on Alex's question, and just focus more on the investment side.
Sometimes it takes the sellers time to digest lower valuations are beds sooner.
So in the meantime, our firms generally willing to do transactions at lower valuations now.
And are you seeing maybe some great businesses inside of a larger financial firm or another situation, where the owner may need to sell over the near term.
Maybe something more on the distress side.
Yeah, Thanks, Craig and its a good question so.
One of the things that drives our partnerships over the longest period. The last three decades is just demographics itself. So.
There is only so much.
That firms can do around succession on their own we think that AMG is the market leader in succession planning with independent firms and so demographically driven transactions for us as a as a ongoing.
Ongoing supply of.
Of new a new prospects and really any period.
And then to your specific question on valuations look valuations.
I've come down they've been down for several quarters now and I think the prospect of them going back up is relatively low so I do think that there is a.
I guess this may be more of a.
Acknowledgment that.
That valuations in the sort of growth era that came to an end with the tightening.
Or are kind of in the rearview mirror one of the ways that we.
That we are able to come together with you.
No.
Our new partnership and getting transactions done is to structure really for multiple outcomes. So that if there is substantial growth in a business that we give that credit to the potential partner.
And.
Simultaneously, we are protecting ourselves with structures that allow for.
That level of cash flow and down scenarios. So we do think again, we have a particular expertise in structuring for multiple outcomes, which allows us to bring.
R R.
Unique model to the table and get transactions done I guess, the last thing I would say and I.
I enjoy saying this is that when you partner for businesses and you are not buying 100% because as you know in all cases, we leave a substantial amount of equity in the hands of our partners than really what you are saying is that the vast majority of my growth is ahead of ahead of me.
Before the emphasis on upfront valuations are a little bit lower than our transaction. So we don't see that as an impediment and getting getting new.
New investments done in this environment I think the key question is what are the long term demand trends and where are we going to make those investments because that ultimately is going to be the indicator of success of those new investments over time and as I've mentioned in my prepared remarks, we do think that trend.
Trend is emerging where portfolio allocations are going to need a change.
As they really got wrong sided with these this changing geopolitical and fed tightening.
When we when we think about our own affiliates and their ability to deliver differentiated return streams, we do think that the.
Rotation to liquid alternatives in particular absolute return and differentiated strategies.
Bode well for our current affiliates, but it also reflects on what we have in the pipeline today, we are looking at firms that have that.
Pretty much could benefit from changing allocations in this environment.
So you know when we when.
When we zoom way out what I would say is we are looking for a secular growth trends that are affiliates and new new prospects can take advantage of we do think that.
The time is right for us because we have a committed strategy to supporting independent firms throughout their lifecycle and the needs of those firms are not have become more acute even in this environment. So we do think that transaction volume could go up from here.
Yeah.
Thank you. Our next 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.
So, but just maybe.
Migrating with maybe a flow discussion at this point.
Jay and Tony both the spoken about disorders ongoing rotation now sort of rates normalize what have you can you talk a little bit about what's been driving the alternative flows and if you think that liquid alternatives will.
Accelerate where do you think that that volume will come from thank you.
Yeah. Thanks. Thanks, Bill. Thanks for your question I'm going to have Tom start here on that.
So thanks, Bill let me just kind of walk through flows overall, but maybe even before I go there just to remind you.
Everyone flows obviously are a very important driver of growth in our business over time, but amg's model is unique and really flows are just one of the important drivers in our business and really in 2022.
If you think about the performance that we delivered it was driven by a number of the other areas that tend to drive growth in our business excellent performance driving performance fee earnings.
Strong capital allocation and new investments driving growth and then also significant return of capital. So flows obviously are going to be an important output of our strategy, but they really are only one of the components that's important.
So you heard us discuss today our growth strategy is really driving an evolution of our business mix more towards secular growth areas. That's the way that we think about the business and as we continue to execute against that strategy. We fully expect to enhance the long term organic growth and earnings growth profile of the business. So I'll touch both on the private market side as well as the liquid.
This item Im sure Jay will want to add some as well.
In terms of where we stand look first of all January was a much more constructive start to the year overall for AMG versus the environment that we faced in 2022, and we have a lot of positive setting up for 2023 and beyond.
We continue to benefit from the diversity and depth of our private markets affiliates, and they're raising assets across a number of well positioned strategies, including credit infrastructure and real estate.
And as we said these flows are incredibly valuable given their fee rate there are long duration and the potential to generate carried interest and I think importantly <unk>.
Most of our private markets AUM is also away from traditional private equity and Thats, where youre seeing the most acute impacted the denominator effect on fundraising. So we feel more insulated from that trend given the unique nature of our private markets affiliates.
And then on liquid alternative strategies as you know, we're delivering excellent performance, we're having much more active dialogue with clients around portfolio construction and the value of uncorrelated and diversifying return sources and that all positions us very well in terms of future flow opportunities. So to put alternatives together over the course of the last two years we've seen.
Approximately $40 billion of inflows into alternative strategies and collectively those now represent more than 40% of our overall EBITDA.
Maybe just to round it out and go through the rest of the business and U S. Equities were very well positioned given our general tilt toward value strategies and sustainable strategies and our performance is excellent.
97% of our U S fundamental value strategies are outperforming their benchmark on a three year period and looking ahead. We expect these categories to be even more in focus with clients.
Look obviously global equities the second half of the year was difficult in 2022, as we saw a pretty significant de risking across the industry and in a sense you could say that what happened in global equities really clouding some of the progress that we've been making overall in terms of the underlying flow profile of the business at AMG.
We remain well positioned in terms of the long term track records that are global equity affiliates and just the quality of those businesses.
And then lastly on multi asset and fixed income we saw fourth quarter inflows in our wealth businesses. Those have been a long term source of stability and growth and we're also seeing some very positive signs out of the box and fixed income early in 2023.
So overall really led by alternatives a sizeable position portion of our overall business is both in flowing today as well is well positioned for the future and we feel very confident in our ability to drive long term organic growth, Yes, Bill and let me just editorialize a bit further on Tom's remarks, you know the second half of 2022, it was very much a risk off environment.
And we think it masked some of the underlying trends in our business it really hit our long only equities.
Part of our business and as Tom said in January and early February and we've seen that really abate. The long term outflows have really slowed down on that.
Part of our business and clearly the liquid alternatives and private markets have been driving our organic growth on the other side.
Ultimately, where it really for US flows are really just an output of our strategy. We have high conviction that if we invest in areas of secular growth in new and existing affiliates that we will ultimately see the flows follow.
And then as Tom said.
Really what we're trying to do is grow our cash flow and our economic earnings per share, which we did in 2022 and in 2021 and.
And the drivers are multiple drivers because amg's model is unique we can we can see those drivers come from affiliate performance. We can see it come from flows we can see it come from new investments, where we can see the compounding effect of share repurchases and in this period that I. Just described we got three of those four drivers and they were pretty significant too.
Our earnings profile.
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 the liquid alternative book, but focus on Quants and given the success and performance improvements you've seen over the last basically two years do you think that we're going to be talking about this business.
Or remove the X quant discussion in.
In 2023, and maybe talk about the discussions we're having with clients and how you think about gross sales for that portion of your business.
Kind of this year or next.
Yes.
Would be helpful. Thank you.
Yes, good morning, Dan. Thanks. Thanks for your question good question.
Yeah. So we we have had outstanding performance in liquid alternative strategies, and I think youre right to pointed out we've been reporting kind of an ex client.
Flow profile for some time.
It's a slightly more nuanced situation because some of that quant with long only global equities and so to my prior point, we are still seeing some risk off in those strategies.
Albeit that that pie as part of the pie has gotten smaller so it very well could be that we kind of just go back to straight up flows in 2023, because the liquid alternative strategies of the quant side have just excellent performance.
And we do think that they've been underrepresented in client allocations. So we do think that's going to change now look it takes some time for those allocations to change and it's just.
Conversations and activity at those affiliates.
Or an indicator we're having.
Increased level of of searches increased level of conversations around putting more of these strategies in the portfolios and we think those four we think portfolios need these types of strategies that clearly if you were under allocated to liquid alts, especially in absolute return trend macro.
<unk> multi strat and 2022 year portfolio performed much worse than those that had a fair allocation too to the strategy. So we do see in 'twenty three and.
And in 'twenty for increasing.
Organic flows into liquid alts.
And our performance is just really good almost categorically systematic AQR <unk> Garda winter and they all had excellent performance 22, most of those firms had great performance in 'twenty, one and their 135 and 10 year numbers, all look very competitive with their benchmarks or even markets like the S&P.
<unk>.
So we do we do see increasing.
Organic growth into into these strategies and not too.
Not to lessen the discussion around private markets, which are also on our alternatives bucket. When you think about private markets. We have a number of sort of specialty areas within private markets, including Peppertree, which was a business that we have made investment late last year in the communications infrastructure as well as a private debt manager and com.
Best and in a number of other high quality businesses and that in that segment, which really are still experiencing significant growth and significant fundraising. So just generally our alternatives are.
Area, which comes with higher fees as Tom said in many cases are longer lockups the chance for performance fees.
We see that driving our growth going forward.
Maybe Dan just add one statistic to that just to give you a sense and this incorporates not just certain quant, but our overall absolute return performance fee eligible book just to give you a sense of kind of the evolution, we've seen over the last couple of years.
AUM today that we have in eligible absolute return strategies that are above high watermarks has increased by more than 50% since the beginning of 2020, so when we think about.
Not only the performance fee earnings growth opportunity, but also the organic growth opportunity just a more and more sizable portion of our overall book is in a position to deliver those types of characteristics over time, and you really do get that network effect, where excellent performance is driving performance fee earnings excellent performance as <unk>.
<unk>, new conversations with clients and flows and we really do think that that's a real positive for us overall.
And as you know and I know you know this Dan is that as you get new clients. You you started the new clock with with performance and performance fees and so there is kind of a.
A positive upward cycle that you have with the idea that above high watermark, new clients the opportunity for even more.
Our performance fee opportunity, which is what we're seeing in our business today.
Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.
Hey, good morning folks.
Apologies I'm going to give you a multipart question if that's okay.
Just linking a few things together sue.
First of all obviously, a really strong 2022 relative to the asset manager peers with positive EPS growth. So.
If you can talk about maybe what's your confidence level in repeating that.
Probably going to have headwinds for the asset manager industry overall, it's going to make a positive EPS challenging for the industry.
Maybe just talk about sort of what your confidence isn't having another year of positive EPS growth.
And if we think about maybe the headwinds obviously being on the.
On the guidance on the performance fee side being a little lower is that is that mostly driven by private capital monetization is being down and then and then as you think about new investments.
Uh huh.
Or are you more geared towards.
Illiquid alternatives or where liquid alternatives.
Yeah. Thanks, Thanks, Thanks, Brian actually we might be able to wrap a lot of that into letting Tom give you some more specifics around the guidance that we gave on the call. So I'm going to let Tom do that here in one second.
Expressing confidence I mean, we do have a level of conservatism in the guidance that we described even around performance fees.
The way, we come up with that as we look at the amount of this above high watermark, we look at the.
At the <unk>.
Types of businesses that we have.
And we took kind of the performance assumption way down.
Of course in 2022, the performance was excellent and.
And in 2021, it was excellent so candidly the the level of conservatism just in our performance fee estimate is there.
Yes.
In fact over the last two years you could argue that we've actually reduced the amount of performance that we need to generate this level that Tom's, giving you guidance. So it's probably more conservative than last year or the year before.
So there is upside there there's also upside in capital, which Tom will describe but we cant prescribe exactly when that capital will go out and Thats why we havent sort of put it into our guidance on those two things really are the two positive drivers how that plays out this year as well as things like market data will really determine.
Our growth in 2023 over 2022, but we're still very optimistic sitting here in February .
That will be able to do that and then Tom maybe you can give more specifics yeah, Brian . Thanks for your questions. So maybe what I'll do is I'll just walk through sort.
Sort of how you would bridge, our first quarter guidance through to the full year conceptually and obviously there are a number of assumptions that you would want to make as you do that but before I do that I know in our fourth quarter numbers. There were a fair amount of moving parts in particular around the.
The bearing gain as well as the gain on the EQT shares that we monetize both the mark to market as well as the realized gains I did state. This in my prepared remarks, but just to reiterate none of those gains are included in our EBITDA or our economic earnings per share. We've excluded all of that so just to be clear those are clean numbers, excluding the sizable gains.
Both bearing as well as the EQT shares.
So to address your question if you use our first quarter adjusted EBITDA guidance range of $215 million to $220 million as a starting point and then that guidance includes $20 to $25 million of performance fee earnings for the first quarter first quarter that really gets you to a run rate number for management fee EBITDA, which is a pretty good starting.
Point in terms of thinking about the year based on the run rate of where the business stands today.
Then you can factor in the impact of Peppertree, starting in the second quarter and contributing something in the range of 2% to EBITDA on an annualized basis.
And then of course, you'll make your own assumptions about beta in flows and that will get you to a full year management fee EBITDA estimate.
And then we gave you guidance on their performance fee earnings range for the full year of $125 million to $175 million and Jay talked about some of the general conservatism baked into that at this early stage of the year. So you can add that to get to sort of a full year number or a range for a full year number but importantly, as I mentioned in a previous question and as Jay mentioned.
As well that number only partially reflects the full earnings power of the business given it excludes an incremental $400 million or so of capital that we have today to deploy toward growth investments and that excludes any incremental leverage or tapping our revolver. That's really just upside to our numbers in terms of earnings power.
And if we arent able to allocate that capital toward growth overtime, you should expect us to return more of that excess capital to shareholders through repurchases, but I think regardless of how you think about that $400 million in terms of where it goes you do want to think about the run rate earnings power of the business, depending on how and when that capital is ultimately put to work and you should factor that into the.
Earnings power of the business overtime and I appreciated your opening statement that we do think we are differentiated relative to our peers in part because of the disc.
Discretionary cash flow nature of our business that we ultimately have a strategy to invest that cash flow into growth, but if not we have a capital allocation framework to return it to shareholders. That's what's been driving.
Our earnings in a pod.
Positive direction relative to our peers and we expect that to continue in 2023.
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 for joining us this morning.
As you heard AMG achieved outstanding results in 2022 and.
And through the execution of our growth strategy and our disciplined capital allocation framework, we are confident in our ability to create significant shareholder value going forward.
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.