Earnings Call Transcript - AMG Q3 2020

Operator, Operator

Greetings, and welcome to the AMG Q3 2020 Earnings Conference Call. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Ms. Anjali Aggarwal, Head of Investor Relations for AMG. Ms. Aggarwal, please go ahead.

Anjali Aggarwal, Head of Investor Relations

Good morning, and thank you for joining us today to discuss AMG's results for the third quarter of 2020. 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, Anjali, and good morning, everyone. 2020 has been an extraordinary year in many ways. In addition to the significant impact it has had on our daily lives, the global health crisis has caused disruption and structural changes in the economy, including a dramatic drawdown and recovery in markets fueled by unprecedented monetary and fiscal actions that will have a lasting impact for a decade. For asset managers, these events have brought about a fundamentally different environment. We have moved from a decade-long bull market with record high asset correlations to a period of increased market volatility, lower correlations, and greater uncertainty. This new environment, characterized by significant asset dispersion, provides enhanced opportunity for the highest-quality active managers to distinguish themselves and generate superior outcomes for their clients. In addition to the changing backdrop for active management, a meaningful shift in the competitive landscape for investment management as a whole is occurring in real time. Asset managers are questioning the foundational elements of future success and, in some cases, are making dramatic changes to their forward strategy. The stark contrast and approaches evidences the strategic confusion in the marketplace, which will ultimately impact client behavior and outcomes. Our industry has struggled to successfully execute these strategies before: vertical integration, operational integration, and cultural integration. In fact, AMG was founded 27 years ago during a similar period of competing and contrasting strategies. And we have been steadfast in our approach and successful in our strategic execution across cycles, including during those periods when other industry participants may have lost sight of the key attributes necessary to meet client goals and objectives. We believe that investing is about skill, not scale. It's about alignment with clients, not cost synergy. It's about entrepreneurialism and specialization, not corporate structure and product proliferation. Consolidation in a human capital-intensive industry like ours inevitably creates cultural cost and disenfranchises entrepreneurial talent, prompting clients to reevaluate their choices. And undoubtedly, this disruption will lead to significant opportunities for those who have a successful strategy and remain focused on client outcomes. We believe the highest-quality franchises in the industry will benefit from this disruption, including especially AMG and our independent partner-owned Affiliates. We expect to see a migration of both investment talent and client assets to independent managers that have the alignment and culture necessary to generate excess returns. Active management is best delivered through independent partner-owned firms, and we believe that AMG's unique approach to investing with and alongside these firms through our proven partnership model has stood the test of time and will continue to do so. AMG's unique business model enables us to grow through new partnerships with little or no integration risk while preserving the aspects of our Affiliate businesses that are most attractive to clients: independent firms, singular cultures, and investment autonomy. Now turning to the results for the quarter. AMG reported economic earnings per share of $3.27 and adjusted EBITDA of $181 million. We are pleased with our results and that our business continues to perform well through the COVID period as we generated 12% adjusted EBITDA growth versus the prior quarter, reflecting the diversity and stability of our model, the quality of our Affiliates, and our exposure to areas of secular growth. Client outflows continue to be driven almost entirely by certain quantitative strategies, which contribute very little to our run rate EBITDA. Excluding quantitative strategies, flows were broadly stable with ongoing growth in private markets, traditional and specialty fixed income, as well as in differentiated active equities and alternatives, where we have seen outstanding performance. As the market has recovered in recent months, we have increased our focus on investing for growth and are executing on our opportunity set across both existing and prospective Affiliates. We continue to invest in our Affiliates through AMG's distribution capabilities, our seed capital program, opportunistic team lift-outs, and the ongoing development of long-term succession plans to align the next generation of partners with future growth. We also continue to build strategic partnerships that leverage the collective strength of AMG's relationships on behalf of our Affiliates. Against the backdrop of the pandemic, our global distribution platform has been even more valuable to our existing Affiliates. At a time when most boutiques have been unable to fully engage outside their home markets, our Affiliates have leveraged AMG's local sales teams to maintain close connectivity with clients and prospects. Turning to new investments. Given the strength of our existing proprietary relationships, our dialogues with prospective Affiliates have been active throughout the COVID period, and we are seeing increasing levels of engagement. Our prospecting efforts are focused on partnering with outstanding independent boutiques, scenarios of strong secular growth and client demand, including private markets, fixed income alternatives, global equities, ESG, and multi-asset solutions. AMG's differentiated approach and our three-decade-long track record of supportive partnerships strongly resonate with the highest-quality independent firms and their clients, particularly in light of a shift in the competitive landscape. Today, AMG's offering to existing and prospective Affiliates is highly flexible and enables us to meet the evolving objectives of independent firms as they grow their businesses over time. In addition to succession planning as a core element of our value proposition, AMG offers primary capital to Affiliates to invest in their growth initiatives as well as access to proven end-market distribution capabilities to extend our Affiliates' client reach and grow assets, all of which are increasingly important to new investment prospects. Looking ahead, we are highly confident in our growth strategy and anticipate opportunities arising from ongoing economic uncertainty and structural changes in our industry. We believe that in this environment, active management, particularly when executed by independent partner-owned firms, is more important than ever. And AMG's approach to investing in these firms is increasingly differentiated. Our ability to execute on the opportunities before us is enhanced by our financial flexibility and further enabled by our strong corporate culture with its hallmarks of entrepreneurialism and a partnership orientation. And with that, I'll turn it over to Tom to review the details for the quarter.

Thomas Wojcik, Chief Financial Officer

Thank you, Jay, and good morning, everyone. As we enter the fourth quarter of 2020, the resilience of our Affiliates and the strength of our partnership model is clearly visible in both the rebound in our quarterly earnings and our expectations for future growth. Over the past three quarters, we took advantage of market conditions to continue to enhance our balance sheet, extend duration, and improve liquidity. Our strong capital position and consistent cash flow generation enable AMG to create long-term shareholder value by executing on our growth strategy, both at existing Affiliates and through new investments, as well as to return significant excess capital to our shareholders. Turning to the quarter and beginning with flows. While we reported net client cash outflows of $14 billion in the third quarter, similar to prior quarters, more than 90% of those outflows were driven by certain quantitative strategies that contribute less than 5% of EBITDA on a run rate basis. I will first provide a breakdown of the impact of challenged quantitative strategies and then go through our customary flow discussion by asset class, excluding quantitative, to review the areas that continue to generate the vast majority of our earnings. Outflows in these quantitative strategies totaled $12.9 billion, including $6.3 billion within liquid alternatives, $2.3 billion in global equities, and $4.3 billion in U.S. equities as performance headwinds persist. Excluding these strategies, AMG saw modest outflows, benefiting from strong demand for private markets and specialty fixed income strategies, offset by outflows in active equities. Turning to flows by asset class and excluding certain quantitative strategies. In alternatives, we reported net inflows of $2.8 billion, driven by continued strong demand trends at our private markets Affiliates. The fundraising success we've seen at Pantheon, Baring, EIG, and Comvest has resulted in significant dry powder for deployment across numerous strategies and into attractive return opportunities in today's environment. Looking forward, our diverse group of private markets Affiliates remains well positioned to benefit from strong client demand and secular growth trends, and we anticipate continued strong fundraising in these businesses going forward. We also saw positive flows in our liquid alternatives category this quarter, driven by client demand and corresponding inflows and relative value fixed income strategies as a result of their strong near- and long-term track records and record low yields. And we are seeing client interest in thematic and sustainable investments, as well as volatility-focused strategies, and we continue to look to add new products and new Affiliates in these growing and attractive market segments. Moving to fundamental equities. We reported net outflows of $3.7 billion in global equities and $1.1 billion in U.S. equities, primarily driven by client rebalancing and current demand headwinds in value-oriented strategies. In areas where we see a convergence between client demand for active and top quartile performance, we are seeing inflows, including at Veritas, Montrusco, and GW&K in global and Asia-focused strategies. Our investment performance across our fundamental equity strategies continues to be very strong, with approximately 80% of AUM outperforming in benchmarks on a 5-year basis. We are seeing record levels of dispersion between growth and value indices today. Historically, mean reversion has followed periods of extreme dislocation. And if we see a similar pattern going forward, we are well positioned for future growth, particularly given that more than half of our AUM in value strategies across managers such as Yacktman, Tweedy Browne, and River Road are generating top quartile performance. Finally, in multi-asset and fixed income, we generated nearly $1 billion of net inflows in the quarter, driven by continued positive momentum in fixed income products at GW&K and Artemis. This area of our business continues to deliver steady recurring growth and remains well positioned for the future. Turning to financials. For the third quarter, adjusted EBITDA of $181 million, which included $4 million of performance fees, declined 12% year-over-year, primarily driven by flows and mix shift. EBITDA benefited from lower expenses and incremental income from Affiliate equity repurchases. Relative to the second quarter, adjusted EBITDA grew 12%, illustrating the disconnect between the underlying earnings power of the business and the limited earnings impact of quant flows. Economic net income of $152 million benefited from one-time tax items of approximately $16 million, primarily associated with prior strategic repositioning events, which will add to our cash position. Finally, economic earnings per share of $3.27 reflect the additional impact of share repurchase activity. Now moving to specific modeling items. We expect adjusted EBITDA in the fourth quarter to be in the range of $200 million to $230 million based on current AUM levels, reflecting our market blended, which was up 2% as of Friday, and a performance fee range of $20 million to $50 million. Our share of interest expense was $24 million for the third quarter, and we expect fourth quarter interest expense to be approximately $27 million as a result of our hybrid debt issuance in September. Controlling interest depreciation was $3 million in the third quarter, and we expect it to remain at similar levels for the fourth quarter. Our share of reported amortization and impairments was $59 million for the third quarter. In the fourth quarter, we expect this line item to be approximately $50 million. Our effective GAAP and cash tax rates were 31% and 5%, respectively, with our cash tax rate being lower in the third quarter, primarily as a result of tax benefits related to prior strategic repositioning initiatives. For modeling purposes, we expect our GAAP and cash tax rates to be approximately 25% and 21%, respectively, in the fourth quarter. Intangible-related deferred taxes were impacted by strategic repositioning and were $27 million in the third quarter, and we expect intangible-related deferred taxes to be approximately $5 million in the fourth quarter. Other economic items were negative $5 million and included the mark-to-market impact on GP and seed capital investments. In the fourth quarter, for modeling purposes, we expect other economic items, excluding any mark-to-market impact, to be $1 million. Our adjusted weighted average share count for the third quarter was $46.5 million, and we expect share count to be approximately $45.4 million for the fourth quarter. Finally, turning to the balance sheet and capital allocation. Over the past several months, we have continued to position the company for growth, taking advantage of the historically attractive financing environment to enhance our capital position by building additional liquidity and flexibility and extending the duration of our debt. Following our $350 million 10-year institutional bond offering earlier this year, during the third quarter, we issued $275 million of 40-year junior retail hybrid securities at a 4.75% coupon rate with a 5-year call option at par. Our strong capital position, significant free cash flow, and financial flexibility create a meaningful advantage as we execute on our forward opportunity set, while also returning excess cash to our shareholders. During the quarter, we repurchased approximately $85 million of shares and expect to repurchase a minimum of $100 million in the fourth quarter, subject to forward prospects for new investments and market conditions. We remain highly selective and disciplined in our approach to deploying capital, evaluating all investment decisions under a common framework, whether that be assessing a new investment prospect, accelerating growth at an existing Affiliate, adding resources to support our centralized services, or repurchasing shares. We remain focused on capitalizing on our core differentiators and competitive advantages as we execute against our strategy to drive long-term earnings growth and shareholder value creation. Now we're happy to take your questions.

Operator, Operator

Our first question today is from Alex Blostein from Goldman Sachs.

Alexander Blostein, Analyst

Great. So Tom, maybe the first question is about the buyback dynamic. We noticed that there was a slight increase in repurchases in the third quarter, and the guidance for Q4 of $100 million seems a bit higher than what we were anticipating. Could you discuss the reasons behind the increase in share repurchases and your thoughts on this going into 2021?

Thomas Wojcik, Chief Financial Officer

Sure. Thanks, Alex. And appreciate the question. Why don't I talk about kind of capital allocation overall, and I'll incorporate your question as well. So as Jay and I both noted in our prepared remarks, we view capital as an important core strategic asset for AMG. And today, as we look at the landscape and the opportunities in front of us, we're very clearly looking to be front footed in terms of allocating capital toward growth opportunities, particularly toward new investments and investing in the growth of our Affiliates. As I mentioned, we're clearly going to remain disciplined, and all of our capital decisions are running through a common framework to ensure that we're earning an appropriate risk-adjusted return for our shareholders and making great long-term decisions, and that will include returning capital through repurchases. You've seen over the last couple of quarters, we've been very active in the financing markets, which further strengthened our capital and balance sheet position, extended duration, enhanced flexibility, all at a very attractive pricing. And in terms of kind of how we've been allocating our capital this year, we have put a significant amount into growth, including our partnership with Comvest earlier in the year, forming a strategic relationship with iCapital, putting meaningful capital to work at our Affiliates, both in terms of equity purchases as well as in growth investments. And I think you're really seeing the impact of some of those investments in our results with strong fundraising momentum at Comvest, and also meaningful earnings contribution from our incremental Affiliate investments. At the same time, we've returned $220 million of capital thus far through the third quarter via both repurchases and dividends. And incorporating our guidance for the fourth quarter gets you north of $300 million in terms of capital return for the full year. I'd also point out, based on that guidance level, we should take our share count down by about 8% this year and more than 20% over the last 3 years. So the uptick in the buyback relative to where we were earlier in the year, I think you really heard this in Jay's prerecorded comments, was the fact that we spent a lot of time thinking about the strength of the business, how we want the business positioned in the context of COVID and in the context of our growth plan going forward. Things have really recovered. The business has been performing well. We feel very comfortable with our balance sheet and our cash position. And therefore, we felt comfortable returning some excess cash this quarter as well as guiding toward a slightly higher number for the fourth quarter.

Operator, Operator

Our next question today is coming from Craig Siegenthaler from Crédit Suisse.

Craig Siegenthaler, Analyst

So given the lower profit contribution from your largest AM Affiliate, which is structured in a profit share, not a revenue share. I wanted to see how they're progressing, reducing their cost base, which could help improve your EBITDA contribution to AMG going forward?

Jay Horgen, President and CEO

Yes. Thanks, Craig. I think as you know, we don't talk specifically about Affiliate-level actions, but I will note a couple of things. One, you're right, they are contributing a relatively small amount to our EBITDA today. So I think the benefit is the asymmetry for upside on earnings and flows is there for AQR. We also feel very confident about their business model and their business prospects, but most importantly, the partners at AQR: Cliff, John, David, and the rest of the senior partners are focused and fully aligned as majority holders of that business. And as you noted, we are a minority holder of that business. Given that alignment, we feel really good about the long-term prospects for the business. And as I mentioned, the asymmetry is in our favor now. The business is still highly profitable. Several segments are growing, lots of good momentum in fixed income, the tax-managed business, and the ESG capabilities at AQR. So really, in short, they've built a great, excellent, diversified business, and we continue to be optimistic about their long-term prospects.

Operator, Operator

Our next question today is coming from Bill Katz from Citigroup.

William Katz, Analyst

Question is when you look at the institutional pipeline, could you speak to how that might be changing over the last 3 or 6 months ex the quant impact?

Jay Horgen, President and CEO

Yes. Thanks, Bill. Tom, do you want to take the first shot at that? I'll follow-up.

Thomas Wojcik, Chief Financial Officer

So Bill, I hope we heard your whole question there, but your question about the institutional pipeline and where it's standing today. Maybe if I just kind of think about client trends at a high level overall, first, I'd say, in the immediate term, we're still seeing a lot of clients readjust their portfolios in the wake of COVID volatility. Existing relationships continue to pay dividends, forming new relationships is still a little bit more difficult. But the fact that we do have our global distribution folks on the ground, in market has been a big advantage for us there. You are seeing a variety of rebalancing activity take place in the markets, and we're kind of seeing both sides of that in different parts of our business. Looking forward to the fourth quarter, we are continuing to focus on rebalancing and also just to make a quick retail point, we're also closely watching how clients engage with respect to the election and the longer-term outlook for taxes. I guess, secondly, there are two big trends we're watching, just in terms of active management. The first being dispersion between growth and value. And certainly, we've seen the impact of that value drag over the last couple of years, but also the spread between the best and worst-performing managers. And I think really, when we think about our client conversations, each of these dynamics really speak to the value of active management. And as we start to see more and more dispersion in markets, investment scale, again, is really coming to the forefront. So we do believe strongly that these factors are setting up well to benefit independent boutiques that are fully aligned with client interests. And as I said in my prepared remarks, in addition to that, we have very strong near- and long-term performance track records, particularly in fundamental equities and liquid alternatives. And I'll just give you a little bit of color there because I think that's a lot of what our institutional clients are seeing today. First, on the global equity side, more than 80% of our fundamental equity strategies overall are outperforming on a 5-year basis, including really strong long-term performance at businesses like Harding Loevner, Genesis, Veritas, Yacktman, and River Road. And in the U.S., in particular, if you look at the trend over the course of the past several quarters, you've seen significant improvement on both the 3- and 5-year basis versus where we were coming into the year. So when you combine what we're seeing in terms of client conversations and the setup for active with our overall performance, in addition to the strong demand we've already been seeing in private markets, specialty fixed income, and thematic strategies, we do feel like we're very well positioned to meet the needs of our clients.

Jay Horgen, President and CEO

Yes. I believe Tom addressed this very well. We are entering a new environment characterized by asset dispersion and increased volatility, which necessitates an active approach in client portfolios. We are noticing more dialogue around this with our clients. Investors cannot afford to adopt a passive strategy when dealing with volatility in this climate. With fixed income returns close to zero, they will need to seek active management for better performance in their portfolios. Lastly, as Tom mentioned, we believe the best active management comes from independent partner-owned firms, which aligns with our positioning as a solution provider for these firms.

Operator, Operator

Our next question today is coming from Dan Fannon from Jefferies.

Daniel Fannon, Analyst

My question is regarding the outlook for new investment potential. The industry is experiencing a wave of consolidation, which ties into your comments about scale. Do you believe this will have an impact on smaller firms seeking partnerships, particularly in areas like centralized distribution? I'm interested in exploring the connections between the broader industry consolidation and your new investment outlook, as well as how we might anticipate increases in that activity.

Jay Horgen, President and CEO

Thank you, Dan. Your question covers a lot of ground, and I will try to address it from both a consolidation standpoint and its implications for AMG. I previously touched on this in my remarks, but I'll add a bit more about consolidation. First, it's important to note that AMG was the pioneer of a sustainable model for investing in independent partner-owned boutiques almost three decades ago. Throughout this time, we've experienced various M&A cycles and strategies in our industry without altering our approach. While we see many transactions framed as consolidation or vertical integration around us, we believe that any transaction should enhance investment performance and improve client outcomes. We struggle to see how cost-driven consolidation achieves that. It's also our belief that independent boutiques hold an advantage over large financial institutions in providing superior client outcomes. Our core principle has always been to avoid causing harm, as we want to preserve what is unique about these independent partner-owned firms. We structure our partnerships with them to maintain alignment, cultivate their culture, and extend their viability. Additionally, we enhance their growth potential through centralized services, which have proven increasingly valuable during the COVID period in market distribution for our boutique Affiliates. This is why our Affiliates choose AMG and why we anticipate they will continue to prefer us for new investments, as clients favor our model over consolidation. Turning to the new investment growth opportunities, we've noticed that conversations are picking back up post-pandemic. Our pipeline shows progress as long-standing proprietary relationships have resumed engagement with us, which is exciting. We believe our competitive position has strengthened for several reasons: we maintain a consistent approach, our centralized resources add value for our Affiliates, and we face less competition now since many of our competitors have exited the market or are reevaluating their strategies. This situation provides us with an opportunity to be a preferred partner for independent firms, allowing us to structure partnerships with more favorable return characteristics for our shareholders. We are enthusiastic about this period ahead. While we must execute excellently, we see significant opportunities on the horizon. History shows that after the GFC, AMG experienced one of its most fruitful periods for new investments. We believe we are entering a new market environment that, despite its differences, positions us well to implement our strategy focused on partner-owned Affiliates with less competition.

Operator, Operator

Our next question today is coming from Robert Lee from KBW.

Robert Lee, Analyst

I'm curious, Jay, you've mentioned ESG a bit and how you can collaborate with your Affiliates. You clearly have made investments in inclusive capital, but that seems to be becoming a baseline expectation. Is there a way you can assist in bringing some costly initiatives to your Affiliates to help them invest or scale those efforts? Or will they primarily need to finance this from their revenue shares as part of their ongoing expenses?

Jay Horgen, President and CEO

Yes, that's a great question. It's very relevant, and I agree with you. This is one of the fastest-growing areas in active management. We believe there is increasing client demand for new and more inclusive ways to allocate capital, both internationally and domestically. We are concentrating on this segment for our current Affiliates and pursuing new investments. We think sustainable investing will be best achieved through active management, particularly by boutique firms. I can outline three key aspects: what we're doing as a company, what our Affiliates are doing, and their investment activities. Starting with their investment activities, 80% of AMG's AUM is managed by Affiliates that incorporate ESG in their investment processes, with 16 of them being UNPRI signatories. Additionally, 20% of our Affiliates have dedicated ESG strategies, and several are renowned for responsible investing. For example, our newest inclusive capital initiative led by Jeff Ubben and his partners emerged from ValueAct. Pantheon, one of our long-standing Affiliates, was a pioneer among UNPRI signatories, has received numerous awards for its investing, and maintains a comprehensive ESG policy across all its activities, particularly in illiquid assets. Artemis has recently assembled a dedicated global sustainable equity team and plans to launch new strategies in 2021. EIG created a renewable energy infrastructure fund a few years back and is actively expanding it. Many of our other Affiliates, such as Harding Loevner, Veritas, Genesis, Montrusco, and GW&K, have integrated sustainability into their investment approaches. This clearly indicates that active management is heading in this direction, and AMG has already made a significant commitment to responsible investing. We are also supporting our Affiliates in various ways, including providing seed capital for these products and assisting with team transitions, like the recent one at Artemis. On the investment side, we are seeking ESG and responsible investing managers, and our pipeline includes several ESG-related businesses. At our corporate level, we are enhancing strategy and product development by sharing insights across our Affiliate group, including direct feedback from our global distribution team and broader industry relationships. We facilitate conversations that are led by Affiliates as a group. Lastly, at AMG corporate, we remain committed to best practices, attracting and retaining a diverse pool of talented individuals, and focusing on reducing our environmental impact. We engage in philanthropy and community service, which is documented on our website. We are deeply committed to discovering new and more inclusive capital at all levels within AMG.

Operator, Operator

Our next question today is coming from Brian Bedell from Deutsche Bank.

Brian Bedell, Analyst

I want to discuss the distribution and new sales sides. We saw lighter client cash inflows in the third quarter compared to the second quarter, but I understand that performance has improved. Could you provide some insights on how sales traction might enhance in the fourth quarter, considering the negative seasonality we typically experience? Additionally, as we look ahead to 2021, to what degree do you think new sales can be improved through your distribution initiatives and enhanced performance? Also, how do you anticipate ESG products will play a role in this? You previously highlighted the Artemis team and inclusive capital; how might those impact inflow dynamics?

Jay Horgen, President and CEO

Yes, thanks, Brian. I'll let Tom begin with that, and then I'll see if I can follow up at the end.

Thomas Wojcik, Chief Financial Officer

Great. Thanks, Jay. And thanks, Brian. Let me start just with the question you asked upfront on gross flows in terms of what we've seen in the quarter. I think you guys have to look at gross flows from a couple of angles. First, tactically, most of the delta versus what we would expect to see in terms of gross flows is really on the quant side, just not seeing a lot in the way of gross sales there at this point. Second, I think we're still in this period of time where there's a little bit of third-quarter seasonality as you get into the summer, but also still some COVID impact that's impacting activity levels. And while that's recovering certainly from an overall market perspective, things aren't totally back to normal. But I think most importantly, when we think about really all of your questions, whether it's AMG's distribution, the distribution that exists at our Affiliate partners, and the overall dialogue that we're experiencing with clients, all of our commentary about the market for active improving is really the way we're thinking about the forward opportunity set. Over the past decade, as risk asset markets have kind of moved steadily up and to the right, it's been a more difficult environment for active management. And I think we're really seeing that setup for the future change, and Jay has touched on it in detail, both in his prepared remarks and here in the Q&A. But that dramatic change, dispersion returns, and alpha generation is much more front and center on client radar, we do think is creating a great opportunity. And just briefly to touch on AMG's distribution, Jay mentioned this in the context of new investments. And I think we've talked about it in the context of investing in our Affiliates more broadly. We do view that as increasingly being a larger and larger competitive advantage for us both in terms of an environment like the COVID environment, where it's very difficult for Affiliates to get out of their home jurisdictions and actually be out in the field, the value of having these existing relationships and having people in market has certainly been incredibly important to us. And as we're having conversations with new investment prospects, whether it's our presence in the domestic wealth market or our presence in international and now domestic institutional markets as well, I do think both existing Affiliates as well as new prospects continue to view that as an extension of their resources and a real way that AMG can deliver scale in a nuanced and differentiated way.

Jay Horgen, President and CEO

I wanted to highlight a few key themes. First, both Tom and I emphasized the importance of active management for both institutional and retail portfolios during this period. Active management has been challenging to sell over the past decade, especially in recent years, but we believe this dynamic is changing. It began to shift earlier this year, and we're seeing that play out now and will continue to see it in the months and years ahead. The second theme is that our illiquid managers are continuing to grow and attract assets. We’ve been actively fundraising with bespoke funds and separate accounts, and we are moving into flagship fundraising efforts in 2021. Our illiquid managers, such as Pantheon, EIG, Baring Asia, and Comvest, are well-positioned for this. Comvest, our newest Affiliate, is benefiting from our distribution capabilities, and we are excited about their current and future funds. On the distribution side, after restructuring our global distribution in 2019, we are now proactive and adding resources, particularly for illiquid fundraising, while also focusing on retail fundraising through our capital partnerships and AMG funds. I believe that within active management, illiquid assets still hold significant fundraising potential moving forward. More generally, managers in fundamental equities and alternatives with strong performance are attracting flows, and we expect allocations to continue toward them in this low-rate, highly volatile environment.

Operator, Operator

Our next question today is coming from Mike Carrier from Bank of America.

Michael Carrier, Analyst

Just on the M&A front, given some more activity in the space, is that putting more like inflation on deal prices? Or has there been more differentiation on the types of deals? And are you not seeing as much change in, say, like the smaller book peaks that you tend to look for because there's always been demand among those types of managers?

Jay Horgen, President and CEO

Thank you, Michael. I mentioned this briefly in my previous response, but let me provide more details. For independent partner-owned firms, particularly midsized ones, we are actually observing a decrease in competition. Many multi-boutique firms have exited the market, and a number of traditional peers and public companies are sidetracked and not concentrating on new investments. While the illiquid asset class remains competitive, the majority of other categories are significantly less so. This situation creates an opportunity for us to collaborate with structures and return features that are more beneficial to our shareholders. Additionally, it allows us greater flexibility to develop solutions that yield positive results for us. We consider this to be a significant advantage, especially in segments like liquid alternatives and fundamental equity management, where conversations are becoming more exclusive than before, largely because there are very few substitutes for an AMG-proven partnership model.

Operator, Operator

Our next question today is coming from Patrick Davitt from Autonomous Research.

Patrick Davitt, Analyst

So alternatives and private credit, it seems, in particular, appear to be a big focus for regulators now. And I imagine that would only increase with the Democratic administration. So through that lens, does it change how you think about that as a target vertical? And on the other side of the coin, is that concern starting to factor into your new Affiliate conversations as something that could accelerate founders wanting to pull the trigger?

Jay Horgen, President and CEO

Thanks, Patrick. I'll ask Tom to add to this. It's a good question. We recognize that the election and potential changes may affect both transaction volume and the types of transactions we engage in. You pointed out two specific areas. We have always considered ourselves a broadly diversified investor in independent partner-owned firms, aiming to avoid excessive concentration in any single segment. Regarding private credit and alternatives, our current position in private credit is relatively small, but we don't perceive it as high risk. We anticipate regulatory changes in the market and are prepared to adapt to meet those demands. However, for the best managers with top talent, such changes often present opportunities rather than challenges. Independent firms, due to their entrepreneurial spirit and alignment, can effectively navigate these periods of evolution. We are confident in our approach, as we’ve navigated changes before, which we believe supports our business model well.

Thomas Wojcik, Chief Financial Officer

Maybe I'd just add one point, Jay, which is if you think about what sparked a lot of the growth in private credit strategies over the course of the last decade, it was a pretty dramatic regulatory shift in terms of the way regulators thought about banks and origination off of bank balance sheets. And it doesn't feel like there's a big macro change like that ahead of us. So building on what Jay said, I think incremental regulation, whether it's in private credit or any of the investment businesses that our Affiliates operate in, I think we probably have the ability to be more agile in the face of those changes than many larger, more integrated firms that are much more entrenched. So I think, obviously, as part of our new investment process, as part of our due diligence process, we're very focused on what the regulatory environment looks like today and what it can look like in the future. But I think, generally speaking, our businesses and the types of businesses that we invest in and the quality of those businesses are reasonably well positioned to evolve in the face of regulatory change.

Jay Horgen, President and CEO

Yes, I believe the election itself will be a significant event that sets us on a new path. Coming out of that, I see opportunities within our pipeline and in the current market environment that may not have been available previously. While this wasn't the main focus of your question, we are certainly considering the election and the changes it may bring in future periods as a positive influence on our new investment pipeline and growth opportunities.

Operator, Operator

Our next question today is coming from Chris Shutler from William Blair.

Christopher Shutler, Analyst

I wanted to come back to the increase in the share repurchase in Q4. I know AUM is definitely up, but it does run contrary a bit to the positive new investment pipeline commentary. So maybe if you could just flesh that out. And then on the new investment pipeline, does the prospect of higher cap gains taxes impact your discussions at all?

Jay Horgen, President and CEO

Tom, why don't you take the first part of that question? And I'll maybe take the macro part in a second.

Thomas Wojcik, Chief Financial Officer

Thank you for your question, Chris. We focus not only on individual quarters but also on the overall availability of our capital, the strength of our balance sheet, and our growth investment opportunities. Earlier this year, we started strong with the Comvest investment and healthy share repurchases in the first half of the first quarter before COVID-19 impacted us. During our second-quarter call, we emphasized the importance of being cautious and prudent amid significant volatility. We shifted our dividend to prioritize share repurchases and took advantage of favorable financing conditions to improve our balance sheet. We've seen a considerable recovery in our business, both in assets under management and in EBITDA and cash flow generation. This gives us greater confidence to return some excess capital. Additionally, we've experienced positive tax outcomes from our strategic repositioning, which has boosted our cash reserves. I don't want to suggest that we lack growth opportunities; we've already invested significantly in growth and plan to continue doing so, which Jay will elaborate on. This reflects our confidence in our current business state and our cash position.

Jay Horgen, President and CEO

Yes. And that is really the point. Maybe I'll say it flatly, Chris. Our new investment pipeline continues to be strong, and we have made good progress as these conversations have returned to us. So we're very excited about new investments being a material growth driver in the near and medium and long term for us. And I think we've done some things that will affect both the near, medium, and long term. So I would really make sure that we land that point with you that, that there is no messaging here. Where the messaging really comes is that our business has performed better than we might have expected earlier in the year, both with the recovery and the resilience of our Affiliates. We did take an opportunity to build a stronger, longer duration, more flexible balance sheet. And so we find ourselves with a business that's performing well, a balance sheet that's strong. And even though we have a very active new investment pipeline, we still can return capital, as we've said in the past.

Operator, Operator

We've reached end of our question-and-answer session. I'd like to turn the floor back over to Jay for any further or closing comments.

Jay Horgen, President and CEO

Thank you all, again, for joining us this morning. We remain focused on the significant opportunities ahead of us, and we will continue to leverage our core competitive strengths in our nearly three-decade-long track record of successful partnerships to further enhance our competitive position and create shareholder value over time. I hope everyone remains safe and healthy, and we look forward to speaking with you next quarter. Thank you.

Operator, Operator

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.