Affiliated Managers Group, Inc. (NYSE:AMG) Q1 2024 Earnings Call Transcript May 6, 2024
Affiliated Managers Group, Inc. misses on earnings expectations. Reported EPS is $4.96 EPS, expectations were $5.21. Affiliated Managers Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the AMG First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Patricia Figueroa, Head of Invest Relations. Thank you. Please go ahead.
Patricia Figueroa: Good morning, and thank you for joining us today to discuss AMG’s results for the first quarter of 2024. 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, 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; Tom Wojcik, Chief Operating Officer; and Dava Ritchea, Chief Financial Officer. With that, I’ll turn the call over to Jay.
Jay Horgen: Thanks, Patricia, and good morning, everyone. AMG delivered strong results in the first quarter of 2024. With $260 million in EBITDA, driven by continued momentum across both our private markets and liquid alternative strategies and together with the positive impact of our disciplined capital allocation, we generated economic earnings per share of $5.37, representing a 28% growth rate year-over-year. During the quarter, our ongoing collaboration with affiliates resulted in a number of exciting developments, including new product launches and continued strength in private markets fundraising, which position our affiliates for long-term success and accelerate AMG’s growing exposure to alternatives, both private markets and liquid alternatives.
Our value proposition for independent partner-owned firms continues to resonate with prospective affiliates, given our proven partnership model and our ability to strategically magnify their competitive advantages, while also preserving their independence. During the quarter, we advanced several attractive new investment opportunities. And with our increased financial flexibility, we have a significant opportunity to invest our capital in new and existing affiliates to accelerate AMG’s business mix evolution and our long-term growth. And in April, we evolved AMG’s leadership team, further aligning our talent with our growth prospects by expanding roles for key executives to capitalize on our momentum and capital formation and affiliate engagement, and by recruiting new leaders with experience in our focus areas of private markets and liquid alternatives.
As a strategic partner, AMG engages with our independent affiliates to enhance their long-term success, including by offering seed and growth capital, business and product development, institutional and wealth distribution, and succession planning expertise. This distinctive approach enables affiliates to build on existing strengths as illustrated by the success of two of our alternative affiliates, Pantheon and Systematica. In March, supported by our long-term engagement, Pantheon announced its management succession plan. Kathryn Leaf will become Chief Executive Officer, succeeding Paul Ward, who will become Executive Chairman. Having built Pantheon’s highly successful infrastructure business and given her extensive experience as a private markets investor, Kathryn is well positioned to lead the next generation of executives at Pantheon and the ongoing evolution of their business.
In addition, AMG has collaborated closely with Pantheon on its growth opportunities over the years, investing our capital and resources to develop and distribute new Pantheon strategies and products to meet evolving client needs. Together, we successfully launched one of the first evergreen funds in the private equity space, the AMG Pantheon Fund, which is now one of the largest and most established private markets products in the U.S. wealth channel with more than $3 billion in assets under management. Building on that success, we have further supported Pantheon’s strategic growth by seeding a new private equity fund for the non-US wealth market, and partnering to launch, seed, and distribute a first-of-its-kind private credit secondaries integral fund.
Since AMG’s investment 14 years ago, which reestablished Pantheon as an independent partner-owned firm, its asset center management have grown from approximately $25 billion to more than $65 billion. The combination of Pantheon Partners’ entrepreneurial spirit with AMG’s strategic engagement catalyzed the firm’s transformation from a private equity fund to fund business to a leading solutions provider in private markets, across private equity, infrastructure, credit, and real estate to both institutional and wealth clients globally. Also in 2024, in partnership with Systematica, one of the industry’s leading independent technology-driven investment managers. We launched and seeded and will distribute a new trend following fund expanding Systematica’s reach into the U.S. wealth market.
The firm is led by Leda Braga, whose decades of experience as an innovator in quantitative investing has enabled Systematica to deliver outstanding performance for clients. Similar to Pantheon, when we first invested in Systematica in partnership with Leda nearly a decade ago, we established it as an independent partner-owned firm. Our ongoing collaboration with Systematica’s management team on strategic initiatives has resulted in substantial growth and business diversification, enhancing the firm’s durability and its capabilities. Systematica has grown from a single product business at the time of our initial investment to a firm with $17 billion today, offering a suite of differentiated strategies and customized solutions across trend following, macro and relative value, and equity market neutral.
Given Systematica’s excellent long-term performance and the ongoing client demand for liquid alternatives, we are excited about the firm’s prospects and the ability to continue to create significant value together. Pantheons and Systematica’s success demonstrate the power of AMG’s unique partnership model to strategically engage with our affiliates to enhance their long-term prospects, while also supporting their independence. More broadly, over the past several years, we have deliberately diversified our business through capital allocation. The combination of our investments in growth opportunities at existing affiliates and our investments in high-quality new affiliates operating in secular growth areas has reshaped AMG’s business profile from one characterized largely by long-only strategies to one with a majority contribution from alternatives.
Today, with half of our earnings coming from alternative strategies balanced across private markets and liquid alternatives, AMG’s business profile is unique in our industry. Our diversified portfolio of high-quality independent partner-owned firms operating across private markets, liquid alternatives, and differentiated long-only strategies is a competitive advantage that both enhances our earning stability, given the complementary nature of these strategies, and also supports our capacity to continue investing in the areas of highest growth and return. AMG’s strategic expertise in collaborating with partner-owned firms has been honed over the course of three decades of successful partnerships and is increasingly attractive to independent firms seeking an engaged strategic partner.
We have been one of the most active investors and independent asset managers over the past five years, having made 10 investments in new affiliates since 2019. And looking ahead, given our 30-year track record, our new investment origination capabilities, and our significant financial flexibility, we are well positioned to increase our level of new investment activity, particularly in alternatives. As always, we will remain disciplined in our capital allocation decisions as we continue to strategically evolve AMG, investing in growth, while also returning excess capital to shareholders. Now, before I turn the call over to Tom, I want to take a moment to congratulate him on his new role as Chief Operating Officer in alignment with our increased focus on magnifying our affiliates’ long-term success, especially through collaboration on capital formation initiatives.
I also want to congratulate Kavita Padiyar on her new role as General Counsel, and welcome Dava Ritchea, our newly appointed Chief Financial Officer to the team. We have known Dava for many years and given her direct experience with AMG’s partnership model and her extensive experience in private markets and liquid alternatives, she is uniquely positioned to make valuable contributions to AMG. As evidenced by our ability to both develop outstanding talent within AMG and also attract excellent leaders to our team, AMG is thriving and well positioned for future growth. And with that, I’ll turn it over to Tom.
Thomas Wojcik: Thank you, Jay, and good morning, everyone. I’m proud to have served as AMG’s Chief Financial Officer for the past five years, and look forward to the contributions that Dava will make to AMG going forward. Having been a public company CFO in our industry, her experience and skill set are well suited for both the current and future state of our business. I am also excited for my new role and the opportunity to focus on driving organic growth through our product development and capital formation capabilities, as well as direct strategic engagement with many of our largest affiliates. Our first quarter results reflect the strong momentum we are experiencing across our business in each of private markets, liquid alternatives, and differentiated long-only strategies.
In private markets, our affiliates and their excellent performance continued to drive strong fundraising and organic growth. In liquid alternatives, outstanding investment performance contributed to significant net performance fee earnings and continued business momentum. In differentiated long-only strategies, we benefited from rising asset levels and strong investment performance in the quarter. We also strengthened our balance sheet by extending the average duration of our debt to more than 20 years, innovated alongside our existing affiliates on several product development initiatives, and returned excess capital through share repurchases. Our actions reflect AMG’s attractive opportunity set, and as we continue to execute our disciplined capital allocation strategy, we are confident in our ability to generate significant long-term shareholder value.
Turning to our first quarter results, adjusted EBITDA of $260 million grew 20% year-over-year and included $40 million in net performance fee earnings, as well as $20 million in catch-up and other fees from private markets affiliates. Economic earnings per share of $5.37 grew 28% year-over-year and further benefited from the impact of share repurchases. This quarter, we are returning to our historical as-reported basis for net new flow reporting and will no longer report flows excluding certain quantitative strategies. As you may recall, we moved to the ex-quant paradigm several years ago, given the significant disconnect between the outflows we were seeing in certain quant and the muted impact on our earnings, given the de minimis EBITDA contribution of those flows, and that gap has now sufficiently closed.
In the first quarter, our net client cash outflows of $4 billion reflect strength in private markets fundraising, offset by fundamental equities. Turning to performance across our business. In alternatives, we again reported strong results with nearly $5 billion in net inflows in the quarter driven by private markets fundraising and strategies including private credit, infrastructure, private equity, and solutions mandates from both institutional and wealth clients. Our private markets affiliates continue to generate outstanding investment performance, and we expect the strong demand they are seeing from clients to continue. AMG’s eight private markets affiliates manage approximately $120 billion in client assets and operate in areas of significant long-term demand, including infrastructure, private market solutions, private credit, and specialty areas, like industrial decarbonization, life sciences, and multifamily real estate.
In liquid alternatives, our affiliates continued to deliver excellent investment performance, particularly in quantitative strategies, and saw improved demand trends in the quarter. Given our affiliates’ outstanding performance over the last three years across a range of products, a significant portion of our performance fee earnings eligible AUM is currently above high watermarks and we are well positioned to capture growing demand trends and add diversification and stability to client portfolios. Within differentiated long-only strategies, we entered the second quarter with higher AUM levels and earnings power driven by market beta and investment performance despite net outflows of approximately $10 billion in equities. We generated inflows of $2 billion in multi-asset, driven by strength in wealth management and ongoing demand for fixed income strategies.
Now moving to second quarter guidance. We expect adjusted EBITDA to be between $215 million and $220 million based on current AUM levels reflecting our market blend, which was down 1% quarter-to-date as of Friday, and including seasonally lower net performance fee earnings of between $10 million and $15 million. We expect second quarter economic earnings per share in the range of $4.50 to $4.60, assuming an adjusted weighted average share count of 33.9 million shares for the quarter. We posted a guidance reconciliation slide to the investor relations section of our website where you can find detailed modeling items and given the activity in our balance sheet through a combination of debt repayment and issuance in the first quarter that I’ll touch on in a moment, I wanted to highlight the interest expense line item of approximately $34 million in the second quarter.
Finally, turning to the balance sheet and capital allocation. Our balance sheet continues to be in an excellent position. During the quarter, we issued $450 million of 40-year junior hybrid notes, which offset the repayment of $400 million in 10-year notes that came due in February, and the paydown of $50 million of our term loan. Taken together, these actions extended the average duration of our debt to more than 20 years and further enhanced our financial flexibility to execute our growth strategy. We continue to maintain significant liquidity to not only make growth investments in new and existing affiliates, but also to continue to return excess capital to our shareholders. We repurchased approximately $150 million in shares in the first quarter, and for the full year 2024, we now expect to repurchase at least $450 million in shares subject to market conditions and new investment activity.
In addition, we expect to invest up to $100 million in seed capital this year alongside our affiliates in new alternative products for the U.S. and global wealth markets, including approximately $20 million that was funded in the first quarter. We expect the balance of that capital to support the products Jay discussed at Pantheon and Systematica, as well as at Comvest Partners to bring non-sponsor-backed middle market lending to wealth clients. As part of our capital formation capabilities, including product development, operational support, and comprehensive sales coverage, AMG’s vertically integrated U.S. wealth platform enables affiliates to access the large and growing wealth market that is difficult, or in many cases impossible, for independent firms to enter on their own.
We are excited about the opportunity to engage with our affiliates to bring a series of differentiated alternative offerings to the market by combining our multi-decade experience in US wealth and our substantial balance sheet capital with our affiliates investment expertise. Today, AMG’s balance sheet has approximately $400 million in value across private market GP commitments, seed capital, and strategic investments. And we expect that balance to grow over time as we continue to partner and launch products with new and existing affiliates with a focus on private market strategies. The momentum in our business is accelerating, and with the excellent performance of our affiliates managing alternative strategies, our diverse set of affiliates positioned for growth, our strong balance sheet, and significant liquidity, we are well positioned to invest in and alongside our affiliates, in addition to making new affiliate investments in areas of secular growth to drive incremental shareholder value over time.
Now we’re happy to take your questions.
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