Earnings Call Transcript - AMG Q2 2023

Operator, Operator

Greetings, and welcome to the AMG Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Patricia Figueroa, Head of Investor Relations for AMG. Thank you. You may begin.

Patricia Figueroa, Head of Investor Relations

Good morning and thank you for joining us today to discuss AMG’s results for the second quarter of 2023. Before we begin, I’d like to remind you that during this call, we may make a number of forward-looking statements, which could differ from our actual results materially, and AMG assumes no obligation to update these statements. A replay of today’s call will be available on the Investor Relations section of our website, along with a copy of our earnings release and a reconciliation of any non-GAAP financial measures, including any earnings guidance announced on this call. In addition, we posted an updated investor presentation to our website this morning, and encourage investors to consult our site regularly for updated information. With us today to discuss the company’s results for the quarter are Jay Horgen, President and Chief Executive Officer; and Tom Wojcik, Chief Financial Officer. With that, I’ll turn the call over to Jay.

Jay Horgen, President and CEO

Thanks Patricia, and good morning, everyone. AMG’s second quarter results reflect the positive impact of our capital allocation strategy across both growth investments and share repurchases. During the quarter, we announced a new partnership with Forbion, marking our seventh investment in alternatives over the last four years, further evolving the composition of our business towards in-demand strategies. We continue to see attractive new investment opportunities and advanced several of them during the quarter. Looking ahead, we expect to deploy additional capital toward private markets and liquid alternatives through investments in new and existing affiliates. Given our robust financial flexibility, which will be further enhanced by the proceeds from the Veritable transaction, along with our capital allocation discipline and differentiated partnership model, AMG is uniquely positioned to deliver significant shareholder value over time as we continue to execute on our long-term growth strategy. In June, we announced a minority investment in Forbion, a leading European life sciences venture capital and growth equity firm with more than $3 billion in assets under management. Forbion is well-positioned to benefit from strong investor demand for the development and commercialization of innovative drug therapies. The firm will be our first affiliate focused on venture capital, bringing further diversification to our business profile. And this new partnership broadens our participation in private markets, as well as life sciences, a sector with robust client demand trends and meaningful societal impact. The Forbion team chose to partner with AMG because of our unique approach, which preserves their operational autonomy and investment independence while providing access to our strategic capabilities. The Forbion partners were attracted to AMG given our firm’s deep cultural alignment, including our respective entrepreneurial cultures and long-term partnership orientations, as well as our capital formation capabilities, which we expect will expand Forbion’s client base. Building an enduring multi-generational firm is of paramount importance to the Forbion partners, as reflected in the firm’s deliberate design of an incentive structure that ensures long-term alignment, and AMG’s expertise will further advance Forbion’s ability to achieve this objective. As evidenced by some of our recent new investments, we are seeing greater demand for firms in private markets that are seeking succession planning-oriented partnerships, given the inevitable need for next-generation leadership transitions at firms that now have operated for decades. AMG’s proven approach and 30-year track record in the area are unmatched, making AMG a uniquely attractive partner to independent private markets firms seeking succession-oriented solutions. Taking a step back, over the last few years, AMG has broadened its strategic capabilities, enhancing our existing affiliates’ competitive position, and providing an even more attractive value proposition for prospective affiliates. Today, we offer the broadest array of partnership solutions available to independent firms, including strategic and business development support, succession planning, product development, capital formation capabilities, growth capital, and insights on the most significant questions that independent firms face. Our ability to engage and collaborate with our affiliates to magnify their success has yielded tangible results. Over the past several years, we have meaningfully enhanced the efforts of affiliates, including through product launches and asset-gathering support. On our U.S. wealth platform, we launched one of the first evergreen funds in the private equity space, the AMG Pantheon Fund, and have successfully scaled the strategy since. This fund has grown to more than $2 billion in assets under management and is one of the most highly regarded private markets products in the U.S. wealth channel. In the institutional channel, we have successfully supported ComVest in growing its private debt platform from approximately $2 billion at the time of our investment to more than $8 billion today through growth capital and enhanced institutional capabilities, yielding broader opportunities across both the U.S. and global client base. We have also been successful in magnifying the growth of multiple affiliates by leveraging AMG’s scale and strategic relationships globally, enabling affiliates to efficiently access hard-to-reach marketplaces. We have recently facilitated client wins in the Middle East, Korea, Australia, and Japan, extending our affiliates’ reach beyond their own historical geographic focus. AMG’s abilities to strategically engage across a range of growth initiatives can materially improve affiliates’ long-term success. In addition, our proven ability to create value together with our existing affiliates differentiates AMG to prospective new affiliates and is an increasingly important consideration as excellent independent firms seek a strategic partner. As we continue to cultivate attractive opportunities to partner with the highest quality independent firms in areas of secular growth, we are well positioned to increase our new investment activity, further evolving the composition of our business toward in-demand strategies. More broadly, the growth investments we have made over the last few years have already played a critical role in reshaping AMG’s business, accelerating the evolution of our strategic profile from predominantly traditional long-only exposures to a substantial contribution from alternatives. In the last 12 months, approximately half of our earnings were generated by alternative strategies, including private markets and liquid alternatives. And as we continue to execute on our growth strategy, we expect the composition of our earnings to reflect an even greater contribution from alternatives, both private markets and liquid alternatives. Further, given our focus on high-performing independent firms, and our ongoing strategic evolution towards areas of secular growth, we expect AMG's long-term organic growth profile to improve. And, while active equity outflows in the current macro environment obfuscate the underlying momentum in our business, specifically in alternatives, the actions we’ve taken over the last few years are producing results, as evidenced by the shift in our earnings composition, meaningful flows in alternatives, and the significant growth in our earnings per share over the past five years. Looking forward, we are well positioned to continue to evolve our business through growth investments in new and existing affiliates, given our track record, pipeline, and significant financial flexibility. And our financial flexibility will be further enhanced by the proceeds of the variable transaction announced last week. For more than a decade, AMG and Variable enjoyed a productive and prosperous partnership. That's all Variable more than double its assets under management as an independent firm. However, when the opportunity presented itself, both AMG and the Variable partners recognized the strategic benefits of a full combination with Pasto. And given our alignment and collaborative approach, AMG supported the successful outcome for all stakeholders. Consistent with our disciplined capital allocation framework, we will deploy the considerable proceeds from the transaction to benefit our shareholders, prioritizing growth investments, and returning any excess capital thereafter to shareholders. Since 2019, we’ve invested more than $1.5 billion in growth areas, with alternatives accounting for approximately two-thirds of that total, while also returning more than $2 billion in excess capital. Looking ahead, our opportunities to invest for growth have been steadily building, including as a result of broad capabilities. Given our enhanced opportunity set, our excellent capital position, and our unique competitive advantages, we are confident in our ability to generate incremental value over time. And with that, I’ll turn it over to Tom to review the details of the quarter.

Thomas Wojcik, Chief Financial Officer

Thank you, Jay. And good morning everyone. Our high level of activity in the second quarter reflects the increasingly attractive opportunity for AMG to execute our growth strategy and evolve the composition of our business. During the quarter, we simultaneously invested for growth, returned capital to shareholders, and strengthened our balance sheet to enhance future flexibility. In the past 90 days, we announced a growth investment in Forbion, completed our accelerated share repurchase program and repurchased additional shares, sold the remaining stake in EQT, and announced the Veritable transaction, which will add significant capital to our strong balance sheet. Taken together, we have and will continue to reshape the composition of AMG. We expect that our strategic activity levels will remain elevated going forward as we further evolve our business mix toward areas of secular growth and return excess capital to our shareholders to drive long-term earnings per share growth and value creation. Turning to our second quarter results, adjusted EBITDA of $214 million included $20 million of net performance fee earnings and reflected the ongoing execution of our strategy to invest in secular growth areas, as well as strong performance in liquid alternative strategies. Economic earnings per share of $4.45 grew 10% year-over-year, and benefited from incremental share repurchases as well as discrete foreign tax benefits. Net client cash outflows excluding certain quantitative strategies were $7 billion, driven primarily by global equities, which offset continued strength in alternatives. Turning to performance across our business, and excluding certain quantitative strategies. In alternatives, we again reported strong results, with nearly $2 billion in net inflows in the second quarter. These inflows reflect nearly $2 billion in private market flows at Pantheon, EIG, and Comvest. Our affiliates continue to generate outstanding investment performance, and their excellent long-term track records across credit, real estate, secondaries, and infrastructure are driving fundraising momentum. While net flows in liquid alternatives were essentially flat, our absolute return-oriented strategies continued to see strong demand with $1 billion in inflows that were offset by lockup expirations on beta-sensitive strategies that generated performance fees in the quarter. Overall, our alternatives affiliates have outstanding performance across a wide range of products and are positioned to benefit from forward demand trends as clients look for uncorrelated and differentiated return streams to add diversity to their portfolios. Industry headwinds in global equities continued, and we saw approximately $6 billion in net outflows. While overall near-term performance in global equities remains mixed, our affiliates' strong long-term track records across multiple cycles position them to recapture client demand over time. In U.S. equities, we saw net outflows of approximately $2 billion. Our collective long-term investment performance remains excellent in this category, and we are seeing pockets of client demand strength across several affiliates. Finally, in multi-asset and fixed income, flows were flat in the quarter and we saw ongoing demand for fixed income strategies at GW&K and Artemis. Now moving to third quarter guidance, we expect third quarter adjusted EBITDA to be between $190 million and $200 million based on current AUM levels reflecting our market blend, which was up 2% quarter-to-date as of Tuesday, and including net performance fee earnings of up to $10 million. This includes a partial quarter of earnings from Veritable and does not include any impact from Forbion. Turning to specific modeling items. For the second quarter, our share of interest expense was $31 million. Controlling interest depreciation was $2 million, amortization and impairments were $29 million, and intangible related deferred taxes were $15 million. We expect all of these metrics to remain at similar levels for the third quarter. Our effective GAAP and cash tax rates were approximately 20% and 11%, respectively, reflecting discrete foreign tax benefits, and we expect them to be 26% and 17% for the third quarter. Other economic items for the quarter were negative $1 million, which included $1 million of realized economic gains. As I mentioned last quarter, we expect realized economic gains to be $1 million to $2 million per quarter. Our adjusted weighted average share count for the second quarter was 37.6 million. We expect our adjusted weighted average share count to be approximately 37 million shares for the third quarter. On our year-end call in February, we guided to a performance fee earnings range of $125 million to $175 million. Given more muted investment performance in absolute return strategies in the first half of the year, we now expect full-year performance fee earnings to be closer to the lower end of that guidance range. Many of our performance fee-generative strategies continue to see strong demand and deliver excellent investment performance, and this earnings stream remains a source of strength and diversification for AMG. Finally, turning to the balance sheet and capital allocation. Our balance sheet is in an excellent position and remains a source of strength as we look to generate shareholder value. This month, we completed the sale of our EQT position, generating total gross proceeds of $890 million since the closing of the transaction. That capital has contributed significantly to growth investments, share repurchases, and reducing our net debt. As Jay discussed in the quarter, we announced a new partnership with Forbion, in line with our strategy to increase our exposure to secular growth areas, including private markets in the attractive area of life sciences. We expect the Forbion transaction to close in the second half of the year and plan to fund the purchase price with cash. In addition, the Veritable transaction announced last week will generate $294 million of pre-tax proceeds or approximately $225 million on an after-tax basis. Veritable contributed approximately $17 million of EBITDA in 2022, and we anticipate the transaction closing later in the third quarter. Taken together, we expect these two transactions to generate incremental earnings per share of approximately 2% to 3% once the proceeds from Veritable are fully deployed. We also completed the execution of the $225 million accelerated share repurchase we announced at year-end and repurchased an additional $44 million worth of shares in the quarter, bringing the total capital deployed toward share repurchases to $269 million in the first half of 2023. And, given the combination of our strong liquidity position and recurring cash flows, we now anticipate full repurchases of more than $500 million, inclusive of the ASR. As always, these expectations remain subject to market conditions and new investment activity. Given our significant liquidity and capital flexibility, we currently have approximately $500 million in capital that we can deploy toward growth investments over the second half of 2023. Incremental to the funding of Forbion and the elevated share repurchase guidance I provided for the year. Our approach to investing in the growth of our business is intentional. We generate substantial cash flow and a diverse set of growth opportunities is available to us. Across investments in new affiliates, innovating alongside our existing affiliates, and investing in AMG capabilities. Looking ahead, given our disciplined capital allocation framework and distinct competitive advantages, we remain well positioned to execute on our growth strategy and generate shareholder value over time. Now we're happy to take your questions.

Operator, Operator

Thank you. Our first question comes from Dan Fannon with Jeffries. Please go ahead with your question.

Unidentified Analyst, Analyst

Yes, good morning everyone. This is actually Rick Roy on for Dan. Earlier on, on the topic of affiliate investments, you mentioned private market and liquid alternatives as potential areas of interest. Just given the recent sale of Veritable that occurred in the quarter. Do you also see wealth management as an immediate term priority and perhaps any interest in trust or custody services and things of that nature?

Jay Horgen, President and CEO

Well, thanks for your question, Rick. Let me address the wealth question in the context of our strategy. Our strategy is to invest in areas of secular growth. We do think wealth is one of those areas. Liquid alternatives, private markets, Asia, and sustainability are the other areas. Wealth continues to be a focus area for us. We approach wealth really in two ways to capture the secular growth trend. First, by investing directly in wealth management firms that want to remain independent. While that universe of potential partners has become smaller, given consolidation trends in the industry, specifically within the RAA channel where roll-up strategies have become the dominant business model, we see these strategies are generally PE sponsored and they’re taking out costs and putting leverage on the business. That has also driven up pricing, as seen in the proceeds we got on the Veritable transaction. However, there are opportunities for partner-owned firms that see more value in remaining independent, and we currently have a number of them in our pipeline. The second primary way that we experience growth in the wealth channel is through opportunities by investing AMG Capital to expand our affiliates' access to the channel, especially in alternatives, both liquid and private markets. We see a growing demand for our private markets and liquid alternatives in that channel where AMG has been successful in bringing affiliate strategies to market and strategically supporting the infrastructure necessary to grow. Of the numerous opportunities within wealth, the introduction of private markets in the U.S. and non-U.S. markets continues to be the largest growth area for us. The democratization of alternatives— not just private markets, but other areas of alternatives— is a major secular trend. We continue to see this play out as individuals increase allocations to both private markets and liquid alternatives. We think that’s going to be further enabled by technology, regulation, and product packaging. So again, coming back to your question, wealth is going to continue to be a major focus for us. It’s multi-faceted, as I just mentioned, and we do have a long-term strategy to try to capture opportunities in the space.

Unidentified Analyst, Analyst

Thank you for the question.

Operator, Operator

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Alexander Blostein, Analyst

Thanks, guys. Good morning. I was hoping we could spend a little bit more time on the pivot you've been articulating over the last couple of quarters toward faster growth areas, particularly alternatives. Do you anticipate that also involving pruning of the traditional businesses? Any opportunities you guys see to either reduce stakes or sell as a whole part of the traditional business? Thanks.

Jay Horgen, President and CEO

Yes, thanks, Alex. It’s a really good question, and it relates to the shape of our business. Today, approximately just under half of our EBITDA is coming from alternatives, both private markets and liquid alternatives, differentiated equities comprise something like 35% to 40% and the remainder is multi-asset. It's definitely changing. Most of that’s coming from our investments in new affiliates. We did our seventh alternative investment just with Forbion, which is focused on life sciences, diversifying our portfolio. While we keep our business through investment in new growth areas, we also make investments in existing affiliates. Our flows are being offset by the underlying momentum in alternatives. To your question about the variable transaction, our strategy generally with existing affiliates is to help them remain independent and aligned with clients. So, there’s really no intention to change our strategy there. Our affiliates choose to partner with AMG because they value independence along with our capabilities. While a change in ownership is possible, it’s unlikely. We’re committed to helping independent firms remain independent, continuing to support them over the long term.

Thomas Wojcik, Chief Financial Officer

I think Jay covered it very well, and maybe I’ll follow up just with a couple of points. With respect to continuing to grow that secular growth bucket, there’s no proactive part of our strategy to move away from our existing very high-quality active equity-oriented affiliates. These are high-quality businesses with strong long-term track records. We’re focused on working with many of these affiliates as we enhance their investment capabilities and services offered to clients. Ultimately, many of these businesses have delivered strong returns and continue to be critical to our cash flow. We’re working with them to ensure they remain successful.

Operator, Operator

Thank you. Our next question comes from the line of Craig Siegenthaler with Bank of America. Please proceed with your question.

Unidentified Analyst, Analyst

Hi, good morning. Thank you for taking the question. This is actually Maggie Cal filling in for Craig. It would just be helpful to get an update on how your M&A pipeline has evolved over the last six months. Are you seeing any signs that sellers are now more motivated to execute over the near term? Thank you.

Jay Horgen, President and CEO

Yes, thanks for your question, Maggie. Unlike the general environment for M&A across all of asset management, I think we’re seeing a steady flow of opportunities and transactions. Asset management really hasn’t slowed down, and we’re continuing to see high-quality independent partner-owned firms in our pipeline. I would say I don’t have an obvious answer for why we continue to see a steady flow while other M&A environments have slowed. It’s possibly due to the dynamics within asset management and the instructive opportunities available, which have led to greater interest. Valuations have moderated, and we see structures that better share risk between buyers and sellers. Our pipeline has really grown due to taking strategic actions over the last several years. By targeting areas of secular growth such as alternatives and wealth, we've generated significant opportunities. We’ve also broadened the partnership solutions we offer independent firms to enhance collaboration. We feel optimistic about our current pipeline and believe our track record of successful partnerships enables us to capitalize on strong growth opportunities.

Operator, Operator

Thank you. Our next question comes from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.

Patrick Davitt, Analyst

Hi, good morning everyone. I would like to ask about the strong pipeline you're experiencing and the couple of smaller transactions you've announced recently. Is there a pipeline of larger, more impactful deals in that pipeline or is it more these smaller ones that we should expect to be the norm? Is there a limit on the number of affiliates you can support if you keep layering on a lot of these smaller ones? Thank you.

Jay Horgen, President and CEO

Yes, thanks for your question. We actually have a good diverse pipeline of both small, medium, and large transaction types, typically ranging from $100 million up to $500 million in capital outlay. Importantly, we’re only investing a portion of that, often around 20% to 50% of the enterprise value of these firms. This tells you why we’re disciplined in our approach while remaining intentional about strategically evolving AMG. We like this size range because it allows us to make outsized returns; many of our successful investments have been in this $100 million to $200 million range. While there’s an opportunity for larger transactions, the bar is high for those, and we generally favor investments in businesses that are in growth phases. We believe we can effectively manage a growing number of affiliates because our partnerships are aimed at promoting independence while enhancing capabilities. Over long periods, our goal is to create a diverse universe of independent partner-owned firms, allowing our shareholders to benefit from strong growth.

Operator, Operator

Thank you. Our next question comes from the line of Michael Brown with KBW. Please proceed with your question.

Michael Brown, Analyst

Great. Thank you. Good morning. I wanted to begin with a bit of clarification on the Veritable proceeds and how those will be utilized. Can you walk us through the various levers you’re considering there in your accretion guidance? Are you anticipating there will be an element of buybacks involved, as well as some deliberate capital allocation? Additionally, what are your thoughts regarding the timing behind the 2% to 3% accretion you mentioned? What variables should we consider for 2024?

Jay Horgen, President and CEO

Yes, so thanks, Mike. I’m going to have Tom take that one.

Thomas Wojcik, Chief Financial Officer

Yes, Mike, good morning and thanks for your question. When thinking about the proceeds from both the Veritable and Forbion partnerships, we view them through our overall capital allocation strategy. It’s less about where each dollar specifically will be spent and more about the total amount of capital we have and how we use it to drive shareholder value. Our strong liquidity position will improve further when the Veritable proceeds are received. We've also committed to paying down $200 million to $300 million in debt as a result of the Veritable and Bearing transactions. We expect to maintain significant flexibility in our capital and liquidity, enabling us to be in a position to capitalize on growth investments over the medium term. Overall, we have about $500 million in cash designated for growth impacting our earnings significantly. We’ve indicated an expectation of $2% to 3% incremental earnings power following the full deployment of proceeds from both transactions, which will be allocated across various growth initiatives, share buybacks, and debt repayment.

Jay Horgen, President and CEO

I just wanted to add that our business is well positioned today, reflected by our diverse range of affiliates. We continue to see excellent opportunities to invest in growth areas, and our financial flexibility is stronger than in recent history. We’re optimistic about the future positioning of AMG.

Operator, Operator

Thank you. Ladies and gentlemen, that concludes our question and answer session. I’ll turn the floor back to Mr. Horgen for any final comments.

Jay Horgen, President and CEO

Well, thank you all for joining us this morning, and we look forward to speaking with you next quarter.

Operator, Operator

Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation.