Affiliated Managers Group, Inc. (NYSE:AMG) Q4 2022 Earnings Call Transcript February 6, 2023

Operator: Greetings, and welcome to the AMG Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow this formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. 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 fourth quarter and full year 2022. Before we begin, I'd like to remind you that during this call, we may make a number of forward-looking statements, which could differ from our actual results materially, 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: Thanks, Patricia, and good morning, everyone. AMG achieved outstanding results in 2022, delivering 10% growth in economic earnings per share over the past year, and 50% growth over two years. Notably, we generated these results across dramatically different market environments. In 2021, world markets rose significantly against the backdrop of low rates and easy monetary policies, while in 2022 global tightening and geopolitical risks drove double-digit declines across both equities and fixed income. Over that period, AMG delivered record earnings per share, driven by excellent performance from our affiliates, new investments in secular growth areas, and share repurchases. Our industry-leading results in an otherwise challenging environment for asset management highlight the efficacy of our model, the quality of our affiliates and the positive impact of our capital allocation strategy.

And, as we will discuss today, we believe AMG is uniquely positioned for success and continued growth going forward. Stepping back, over the last few years, we have strategically evolved AMG by aligning our capital and resources with long-term demand trends. Since 2019, we have invested $1.3 billion for growth in new and existing affiliates that contributed more than $200 million in EBITDA to AMG in 2022. Alternatives, including both liquid alternatives and private markets, accounted for approximately two-thirds of these investments with the remaining one-third primarily in sustainable strategies. The decisions we made in 2022 were representative of our growth strategies. We began the year with an incremental investment in Systematica, one of the industry's leading technology-driven liquid alternatives managers, and we ended the year with an investment in Peppertree Capital, a high-quality private markets manager in the fast-growing communications infrastructure segment.

Today, more than half of our earnings are generated by affiliates in areas of secular growth, nearly doubling our exposure since 2019. And, as we continue to evolve our business mix, we expect that contribution to increase, driving future growth and further differentiating AMG from our peers. In addition to our successful new investments, we have enhanced our strategic engagement with affiliates, working with our partners to magnify their efforts and improve their competitive positioning, thereby creating value for all stakeholders. For example, in 2022, our engagement and collaboration resulted in the successful combination of First Quadrant with Systematica. The combination further diversified Systematica's product offering, extends their client reach and supports their growing scale of a business that more than doubled since our initial investment.

In addition, in 2022, strong business momentum at Baring, supported by our strategic engagement, enabled them to realize the benefits of a combination with EQT. As a result, AMG received more than $800 million in consideration for our interest in Baring. We have already deployed a majority of that capital for the benefit of AMG shareholders, including through our investment in Peppertree and an increased level of share repurchases. More broadly, we have used our capital and resources to further our affiliates' long-term objectives, including through product development, capital formation and other business development initiatives. Through our engagement over time, we expect to identify additional opportunities to build on our affiliates' long-term growth prospects and their strategic goals.

Looking ahead, we entered 2023 in a position of strength, with a strong balance sheet, a diversified array of high-quality affiliates and a strategy focused on areas of secular demand. AMG's overall momentum should enable us to capitalize on opportunities that will emerge in the new market environment. Importantly, we believe portfolio allocations need to change, and taking an intentional approach to rebuilding portfolios for this new environment will be essential to achieving client outcomes in the future. Portfolios that were designed around antiquated asset allocation models underperformed materially in 2022, causing a renewed focus on the fundamentals of portfolio construction, including liquidity, reduced correlations and differentiated return streams.

We have always believed that partner-owned firms with entrepreneurial cultures are best positioned to deliver differentiated returns across market cycles. And we expect our affiliates to be well positioned to benefit as clients recalibrate their portfolio allocations. This new environment also brings opportunities for attractive new investments, as most buyers retrench and the appeal of AMG's partnership approach becomes even more apparent. Having remained disciplined and selective through a period of high valuations and optimistic business plans, especially in private markets, we are seeing both expectations and valuations moderate. In addition, in times of uncertainty, an engaged proven partner becomes even more valuable. Our unwavering commitment to provide partnership solutions to independent firms and our reputation as a collaborative and supportive partner uniquely positions AMG during a time when other buyers are rethinking their approach.

And given our competitive advantages, we expect to execute on attractive new investment opportunities that this environment will likely produce. Finally, I want to underscore our commitment to a disciplined capital allocation framework. Capital decisions are fundamental to our strategy and we evaluate every opportunity on a risk adjusted basis, factoring in the impact of the investment to our business mix, cash flows and franchise. These decisions require judgment and our allocation discipline is embedded across all elements of our process and culture. In executing growth investments in new and existing affiliates, we ensure proper alignment with our affiliate partners and structures that benefit all stakeholders. While we believe that these investments will drive long-term shareholder value over time, we also have a track record of returning significant excess capital to shareholders as part of our disciplined strategy.

Since 2019, in addition to deploying more than $1.3 billion into growth invest, we have also returned $1.9 billion of excess capital, primarily through share repurchases. Looking ahead, given our opportunity set, we expect that the mix of our investments will skew more toward growth, but the outcome will always be governed by our capital allocation framework. In 2023, we celebrate 30 years of successfully partnering with independent firms. While our business and the asset management landscape have certainly evolved, we remain true to our fundamental objective of providing solutions to independent partner-owned firms and acting as a catalyst to support their success over time. Today, we are well positioned to deliver consistent earnings growth, given our unique competitive advantages.

And through the execution of our growth strategy and our robust capital allocation framework, we expect to create significant shareholder value going forward. And with that, I'll turn it over to Tom to review the details of the quarter.

Tom Wojcik: Thank you, Jay, and good morning, everyone. AMG's excellent 2022 results reflect the differentiation of our business model and stand out against a challenging industry backdrop. For the full year, we delivered $1.1 billion of adjusted EBITDA and economic earnings per share of $20.14 grew 10% year-over-year, driven by outstanding affiliate investment performance and the execution of our growth and capital allocation strategies. Liquid alternative strategies delivered strong results for both clients and shareholders and generated $227 million of net performance fee earnings. And our strategy resulted in two affiliate investments and significant excess capital returned through share repurchases, driving earnings growth today and positioning us well for the future.

Photo by Mathieu Stern on Unsplash

As we enter 2023, our affiliates' value proposition is resonating with clients. Our partnership solution set is uniquely positioned to attract new affiliates. And our balance sheet and cash flow profile enable us to execute on our strategy to create significant shareholder value. Now turning to our fourth quarter results. Fourth quarter adjusted EBITDA of $371 million and economic earnings per share of $7.28 were up 4% and 19%, respectively, year-over-year, reflecting strong affiliate investment performance and the impact of new investments and share repurchases. During the quarter, the Baring transaction was completed and we received $240 million in cash and 28.7 million EQT shares. For GAAP purposes, we booked a total after-tax gain of $576 million, including a $499 million gain on the transaction that we have reported as a separate line item on our income statement and a $77 million gain on EQT shares, which is included in investment and other income.

These gains are excluded from our supplemental metrics and, additionally, Baring earnings are excluded from our fourth quarter and go-forward results. Turning to performance across our business and excluding certain quantitative strategies. Net client cash outflows for the quarter were $5 billion, reflecting continued strength in alternative strategies that was offset by fundamental equities and seasonal redemptions. Within alternatives, we reported another strong quarter, with almost $6 billion in net inflows led by $5 billion of private markets fundraising at Pantheon, Comvest and Abacus. Our affiliates continue to generate outstanding investment performance, and their excellent long-term track records across credit, real estate, secondaries and infrastructure continue to drive fundraising momentum.

Demand for liquid alternatives continued, with approximately $1 billion of net inflows, as the volatility and correlation in traditional equity and fixed income markets led many investors to seek alternative sources of return and diversification. Our liquid alternative managers, including Systematica, AQR, Capula and Garda, delivered outstanding performance in 2022, with many strategies producing double-digit returns for clients, resulting in significant performance fee earnings for AMG. The diversification provided by liquid alternatives will be critical in building more resilient portfolios in this new market environment, and we expect our diverse set of affiliates will benefit from increasing client demand in this area. Turning to global equities, net outflows of $7 billion continue to be primarily driven by growth-oriented strategies, in line with broader industry trends.

Given our affiliates' strong long-term track records in this category, they are well positioned to recapture client demand over time. In U.S. equities, we saw net outflows of $4 billion in the quarter, including approximately $1 billion of retail seasonality. Performance continues to be excellent and improved across all time periods in the quarter. Our affiliates including Parnassus, Yacktman, Beutel, River Road and Frontier continue to enhance their positioning amid the strong relative performance of value equity strategies. Finally, in multi-asset and fixed income strategies, flows were flat in the quarter, driven by inflows into wealth management and stabilizing fixed income results. Turning to financials. For the fourth quarter, adjusted EBITDA of $371 million included $188 million of net performance fee earning and grew 4% year-over-year, as strong performance fee earnings and the impact of our new investment activity more than offset the decline in markets and net flows.

Economic earnings per share of $7.28 grew 19% over the prior-year quarter, further reflecting the positive impact of share repurchases and a lower tax rate versus a year ago. Performance fee earnings continued to provide a combination of earnings growth, diversification, stability and cash flow. Our affiliates generate performance fee earnings in several ways; across absolute return, beta sensitive, private market strategies, and many of those assets are growing as a function of excellent investment performance, positive flows and successful execution of our strategy across secular growth areas. In terms of performance fee earnings for full year 2023, we are informed by the combination of our first quarter guidance range, our current performance fee eligible asset base and our high watermark position.

Consistent with historical experience, we expect a net performance fee earnings range of $125 million to $175 million for 2023, and we will update you throughout the course of the year. Now, moving to additional first quarter guidance. We expect first quarter adjusted EBITDA to be between $215 million and $220 million based on current AUM levels reflecting our market blend, which was up 6% quarter-to-date as of Friday, and including net performance fee earnings of $20 million to $25 million. As a reminder, our first quarter results will not include the impact of Peppertree, which will be reported on a one-quarter lag beginning in the second quarter and is expected to contribute approximately 1% to 2% of EBITDA on a full year basis. Turning to specific modeling items.

For the fourth quarter, our share of interest expense was $30 million and we expect it to be at a similar level in the first quarter. Controlling interest depreciation was $2 million, and we expect a similar level for the first quarter. Our share of reported amortization and impairments was elevated at $78 million for the fourth quarter. We expect it to normalize to approximately $30 million in the first quarter. Our effective GAAP and cash tax rates were 23% and 21%, respectively, for the fourth quarter. For the first quarter, we expect GAAP and cash tax rates to be at 26% and 17%, respectively. Intangible-related deferred taxes were $4 million this quarter and we expect a more normalized $15 million level in the first quarter. Other economic items were $1 million in the fourth quarter, which included the mark-to-market impact on GP and seed capital investments.

In the first quarter, excluding any mark-to-market on GP and seed, we do not expect any contribution from other economic items. Our weighted average share count for the fourth quarter was 39.2 million, and we expect our share count to be approximately 38 million for the first quarter, reflecting the impact of the accelerated share repurchase program we entered into at year-end. Finally, turning to balance sheet and capital allocation. While market volatility in 2022 caused many industry participants to take a step back, we continued to focus on executing our strategy. AMG's business model is uniquely advantaged by our ability to deploy capital in the areas of highest growth and return by investing in both existing and new affiliates. In 2022, we successfully completed two growth investments, Systematica in January and Peppertree in October, both of which further shift our business mix toward areas of client demand.

Consistent with our guidance, we also returned $475 million of excess capital through share repurchases. In addition, given our strong liquidity position, which was further enhanced by the Baring transaction closing in the quarter, we entered into a $225 million accelerated share repurchase program that will be executed over the first half of 2023. With respect to the Baring transaction, we've now realized nearly $600 million in total gross proceeds in cash, including monetizing two-thirds of our freely-tradable EQT shares. And many of the capital actions I just mentioned, including Peppertree, our increased 2022 share repurchases and the ASR were funded with that capital. Given our strong balance sheet and free cash flow profile, we entered the year with significant capacity to both execute on our growth strategy and return excess capital to shareholders through repurchases, evaluating all investment decisions under a disciplined common framework.

For the full year 2023, we expect share repurchases of at least $425 million, inclusive of the $225 million ASR. The ultimate level of repurchases will be dependent on market conditions and new investment activity. And as Jay mentioned, we believe new investment activity can increase in the current environment given AMG's unique partnership solution set. The momentum in our business demonstrates the diversity and strength of our affiliates and the stability inherent in our model. The changing environment represents a significant opportunity for both our business and our affiliates to deliver differentiated performance. In this new market environment, we are confident in our positioning and in our ability to deploy capital to continue to generate earnings growth and shareholder value.

Now we're happy to take your questions.

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