Affiliated Managers Group, Inc. (NYSE:AMG) Q3 2023 Earnings Call Transcript November 6, 2023
Affiliated Managers Group, Inc. beats earnings expectations. Reported EPS is $4.08, expectations were $3.78.
Operator: Greetings, and welcome to the AMG Third Quarter 2023 Earnings Call. [Operator Instructions] 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: Good morning, and thank you for joining us today to discuss AMG's results for the third 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 the reconciliation of any non-GAAP financial measures, including any earnings guidance announced on this call. In addition, this morning, we posted an updated investor presentation to our website 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 Moji, Chief Financial Officer. With that, I'll turn the call over to Jay.
Jay Horgen: Thanks, Patricia, and good morning, everyone. AMG's strong third quarter and year-to-date results reflect the positive impact of our capital allocation strategy across both growth investments and share repurchases. During the quarter, the changing market environment continued to challenge investors as the collective impact of higher rates, persistent inflation and increasing geopolitical risks pressured clients' ability to achieve their investment objectives. High-quality independent managers have distinguished themselves in volatile times. As uncertainty and asset dispersion create opportunities to generate differentiated returns in both liquid and private markets, and we believe this dynamic is playing out again.
Differentiated return streams are critical for clients to achieve their long-term objectives. -- independent partner-owned firms have fundamental competitive advantages in generating those differentiated returns, especially during periods of heightened uncertainty. with specialized expertise, entrepreneurial cultures and alignment with our clients, our affiliates are Among the highest quality independent firms globally. And for our shareholders, AMG offers a unique opportunity to access the long-term growth and profitability of this diverse set of high-quality independent managers through a proven partnership approach. In 2023, we have continued to add to this diverse set of affiliates having made 2 new investments in specialized private markets businesses operating in areas of secular growth.
In August, we completed our investment in Forbion, a leading European private markets investor in the fast-growing life sciences sector. And in October, we completed our investment in AR Partners, a private market manager specializing in industrial decarbonization. Given the heightened global focus on achieving a lower carbon economy, investor allocations to fund this transition are accelerating, and our partners is well positioned to continue to benefit from these secular tailwinds. As Ara entered the next phase in its evolution, aligning its business with a long-term strategic partner was critical, and the team chose AMG based on our distinctive approach of magnifying firm's long-term success while preserving their independence. With our investments in our partners and Forbion, AMG now has 8 affiliates managing more than $100 billion in private markets assets across a broad range of specialized strategies.
including private equity, private credit, secondaries, real estate, infrastructure, growth equity and venture capital And given our affiliates strong alignment with client demand trends and excellent investment performance, their fundraising momentum has remained strong this year, including approximately $7 billion raised year-to-date and approximately $10 billion pro forma for Forbion in our partners. These strong flows in an otherwise challenging fundraising environment highlight the appeal of our affiliates specialized strategies. Stepping back, we have strategically evolved AMG by deliberately investing in high-quality independent managers operating in areas of secular growth. The growth investments we have made over the last few years have played a critical role in reshaping AMG from a business profile largely characterized by traditional long-only exposures to one with a substantial contribution from alternatives.
Today, alternatives account for approximately half of our earnings. And we expect the composition of our earnings to reflect an even greater contribution from both private markets and liquid alternatives in the future as we continue to execute on our growth strategy, including investments in new and existing affiliates. Fundamentally, we partner to magnify the advantages of independent firms. And as part of our strategy, we collaborate with existing affiliates on their growth strategies, investing our capital and resources to develop new strategies and products to meet evolving client needs. As part of our capital formation capabilities, AMG offers affiliates a comprehensive, vertically integrated U.S. wealth platform that enables them to access this large and growing market that is difficult or even impossible for independent firms to enter on their own.
And our U.S. wealth platform is uniquely positioned to enable our affiliates to participate in the ongoing democratization of alternative strategies as wealth investors increase their allocations to both private markets and liquid alternatives. We have been successful in bringing affiliate strategies to market through this platform, having launched one of the first evergreen funds in the private equity space, the AMG Pantheon Fund. With approximately $2.5 billion in assets under management, the fund has nearly doubled over the past year and is one of the largest and most established private markets products in the U.S. wealth channel. And we recently filed to register a new fund, the AMG Pantheon Credit Solutions Fund, a private credit secondary strategy that will be the first of its kind in the wealth channel.
After a decade of growth in direct lending, the private credit secondaries market is gaining significant momentum as an asset class with growth in both allocations and deployment opportunities. And having built a leading position in this fast-growing segment, Pantheon is well positioned to capitalize on the significant market opportunity that's unfolding. In addition, we expect to bring a series of unique and differentiated alternative offerings to the market by combining our multi-decade experience in U.S. wealth with our affiliates investment expertise. For example, we are collaborating with Comvest partners to bring nonsponsored middle-market direct lending to wealth clients. AMG's distinctive approach continues to attract outstanding firms seeking a strategic partner that can magnify their long-term success while preserving their independence.
Given our broadened partnership solution set and our successful strategic engagement with Affiliates, prospective affiliates are increasingly attracted to AMG's model, especially in this evolving landscape. In addition, by increasing our origination resources and focusing our efforts on secular growth areas, the quality and size of our prospect universe has been enhanced. Our 2 growth investments in 2023 for Bandra Partners, which both operate in our strategic focus areas are strong evidence of the success of our enhanced new investment approach. Looking ahead, having advanced several attractive new investment opportunities during the quarter, we are well positioned to increase our new investment activity, further evolving the composition of our business towards in-demand strategies.
Finally, I want to emphasize our continued focus on disciplined capital allocation, particularly during this period of heightened volatility and uncertainty. We will continue to evolve our business through growth investments in new and existing affiliates given our unmatched 30-year track record of successful partnerships, our new investment prospects and our significant financial flexibility. That said, as we evaluate opportunities to deploy our capital, we will remain disciplined as we make growth investments and continue to return excess capital through repurchases. -- our discipline is evidenced by our track record, having invested more than $1.6 billion in growth areas over the past 5 years, while also returning more than $2 billion in excess capital to shareholders over the same period.
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Today, as a result of our ongoing evolution, AMG's profile is truly unique with independent firms operating in private markets, liquid alternatives and differentiated active equities. Our diversified portfolio of high-quality entrepreneurial businesses is a competitive advantage that both enhances our earnings stability and supports our capacity to continue investing in areas of the highest growth and return to benefit our shareholders. Looking ahead, given the combination of our competitive advantages, our excellent capital position and our disciplined approach to capital allocation, we are highly confident in our ability to create significant incremental shareholder value going forward. And with that, I'll turn it over to Tom to review the details of the quarter.
Thomas Wojcik: Thank you, Jay, and good morning, everyone. AMG's disciplined approach to capital allocation, along with the growing opportunity we see to deploy our capital has enabled us to both increase our activity level and our impact in 2023. We made 2 new investments in affiliates operating in areas of secular growth, and we continue to invest alongside our affiliates to magnify their competitive advantages. At the same time, we have strengthened our balance sheet through the completion of the sale of our remaining EQT stake as well as the closing of the veritable transaction, and we have continued to return substantial capital to shareholders through share repurchases. Our actions reflect the increasingly attractive opportunity for AMG, and we remain focused on allocating capital to further evolve our business mix toward areas of secular demand, which we expect will translate into significant long-term earnings per share growth and shareholder returns.
Turning to our third quarter results. Adjusted EBITDA of $208 million included $12 million of net performance fee earnings, $6 million of catch-up fees at one of our private markets affiliates and a partial quarter contribution from veritable -- the veritable transaction was completed in September, and AMG received $294 million in gross cash proceeds. For GAAP purposes, we recorded a pretax gain of approximately $133 million, which we have reported as a separate line item on our income statement. This gain is excluded from our supplemental financial metrics, consistent with our EBITDA and economic net income definitions. Economic earnings per share of $4.08 benefited from the impact of share repurchases. Client demand for alternative strategies remain strong, while headwinds in global equities persisted and net client cash outflows, excluding certain quantitative strategies were $7 billion for the quarter.
Turning to performance across our business and excluding certain quantitative strategies. In alternatives, we again reported strong results with nearly $3 billion in net inflows in the quarter. These inflows were primarily driven by private markets fundraising at Pantheon, Combis and EIG. Including fundraising at Forbion and Ara partners prior to our investments this year, our private markets affiliates have raised nearly $10 billion of new long-duration capital year-to-date. 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. We also generated positive flows in liquid alternative strategies where clients are benefiting from outstanding investment performance across a wide range of products.
In addition, we continue to see pockets of strength in certain quantitative liquid alternative strategies, which delivered modest net inflows in the quarter, building on strong multiyear performance track records. Industry headwinds in equities continued, and we saw approximately $7 billion in net outflows in global strategies as well as $3 billion in U.S. equities. And despite near-term performance headwinds in equities, we remain confident that our affiliates' strong long-term track records across multiple cycles position them to recapture client demand over time. Finally, in multi-asset and fixed income, we had positive flows and continue to see demand for fixed income strategies at GW&K -- now moving to fourth quarter guidance. We expect fourth quarter adjusted EBITDA to be between $260 million and $285 million based on current AUM levels, reflecting our market blend, which was down 1% quarter-to-date as of Friday.
This range reflects a partial quarter contribution from Forbion excludes earnings from veritable and does not include the impact of our latest new affiliate investment Ara partners, which will be reported on a 1 quarter lag and will begin to contribute in the first quarter of 2024. We Taken together, we expect Forbion and Ara will add 2% to 3% to economic earnings per share on an annualized basis. Additionally, this guidance range includes net performance fee earnings of $75 million to $100 million in the fourth quarter, which translates to a full year range of approximately $130 million to $155 million. AMG's performance fee earnings are generated by a well-diversified group of affiliates and products across absolute return, beta sensitive and private market strategies and are paid in cash.
Performance fee earnings continued to be a consistent contributor to our earnings, making AMG's overall earnings power stronger and more resilient across market cycles. We expect a fourth quarter economic earnings per share range of $5.43 to $5.96, assuming an adjusted weighted average share count of 35.2 million shares for the quarter. We have posted a guidance reconciliation to the Investor Relations section of our website, where you can find all of the detailed modeling items that I have historically discussed on our earnings call, including interest expense, amortization and impairments, income taxes and other economic items. 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.
In the third quarter, we completed the sale of both veritable and our remaining EQT stake, generating approximately $350 million of pretax proceeds. That capital has and will continue to contribute to growth investments, share repurchases and net debt reduction. In the third quarter, we repurchased $172 million of shares, bringing our total repurchases this year to $441 million, inclusive of the $225 million ASR completed in the second quarter. Given the combination of our strong liquidity position, recurring cash flows and building business momentum, we now anticipate full year repurchases of at least $550 million and are on pace to repurchase more than 10% of our shares outstanding this year. As always, these expectations remain subject to market conditions and new investment activity.
As we have discussed previously, we take a disciplined approach to capital allocation with all of our decision-making running through a common framework, including growth investments and the return of excess capital to shareholders as well as prudently managing our leverage levels and financial flexibility. Our strong liquidity position has enabled us to fully defease our 400 million February 2024 notes with short-term treasuries, and we expect to fully pay down these bonds in the first quarter. We continue to have significant capacity to both invest for growth and return capital to shareholders. And we head into 2024 with a strong balance sheet and the full capacity of our $1.25 billion undrawn revolver. Our approach to investing in the growth of our business is intentional.
We generate substantial cash flow, and we have a diverse set of growth opportunities to deploy capital available to us. Cross investments in new affiliates, innovating alongside our existing affiliates and launching new products 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: Thank you. [Operator Instructions] Our first question comes from the line of Dan Fannon with Jefferies.
