Affiliated Managers Group Inc (AMG) 2007 Q1 法說會逐字稿

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Affiliated Managers Group first quarter 2007 results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions (OPERATOR INSTRUCTIONS). This conference is being recorded on Wednesday April 25th of 2007.

At this time I would like to turn the presentation over to the Vice President of Corporate Communications, Ms. Brett Perryman. Please go ahead, ma'am.

Thank you and thank you all for joining Affiliated Managers Group to discuss our results for the first quarter of 2007. By now you should have received the press release we issued. However, if anyone needs a copy, please contact us at 617-747-3300 and we'll fax you one immediately following the call. In this conference call, certain matters discussed will constitute forward-looking statements. Actual results could differ materially from those projected due to a number of factors, including but not limited to those referenced in the Company's Form 10K and other filings we make with the SEC from time to time. In this call the investment performance of certain products will be discussed and the benchmarks are teamed by AMG to be the appropriate benchmarks. AMG will provide on its website a replay of the call and a copy of our announcement of our results for this quarter, as well as a reconciliation of any non-GAAP financial projections to the most directly comparable GAAP financial measure. You can access this information at www.amg.com.

With us on the line to discuss the Company's results for the quarter are Sean Healey, President and Chief Executive Officer, Nate Dalton, Executive Vice President in charge of Affiliate Development and Chief Operating Officer, and Darrell Crate, Executive Vice President and Chief Financial Officer. And now I would like to turn the call over to Sean Healey. Sean?

Thank you, Brett. Good morning everyone and welcome to AMG's conference call discussing our financial and operating results for the first quarter of 2007. We're off to a great start for the year, with solid results across our business in the first quarter. Cash EPS for the quarter was $1.43, that's a 13% increase over the same period in 2006. New business momentum among our affiliates continues to be strong, as positive net client cash flows for the quarter totaled approximately $2 billion, contributing to overall organic growth of $7.4 billion for the quarter. Over the past 12 months assets under management have grown by 23% or $46 billion, with organic growth contributing $34 billion or 17%. Performance across our business generally was very strong, especially among our largest affiliates such as Tweedy Browne, First Quadrant, Friess, Third Avenue and AQR.

Highlights of the first quarter were the strong contributions from our alternative and international equity areas. As shareholders know, with alternative and international equity products contributing roughly 50% of our EBITDA, we have a substantial exposure to the industry's fastest growing product areas. The strong performance of our alternative products was largely driven by quantitative managers, AQR and First Quadrant, but the alternative products offered by Genesis and Third Avenue also generated good returns this quarter. Obviously, outstanding performance in our affiliates' alternative products offers the potential for additional upside to our earnings from performance fees and Darrell will discuss this in a little more detail in just a moment. The performance of our global and international equities products was another highlight of the quarter. As we all know, despite some volatility in February, international indices had a good quarter with the EAFA up over 4% and the Emerging Markets index up 2.4%.

Our affiliates which manage global and international equity products, including Tweedy, Browne, AQR and First Quadrant, as well as international firms such as Genesis, Foyston and Beutel, produced excellent results during the quarter. With a product mix that includes a number of the industries most highly regarded global, international and emerging markets products, we are optimistic that we will continue to see strong growth from this area. Stepping back, while international equities markets generally have had a great run over the past couple of years, we believe that strong secular growth trends favor continued outperformance and will drive significant additional client flows into international equities. And we look forward to maintaining and even increasing our exposure in this area.

In addition to benefiting from international exposure through -- international exposure through our affiliates global and international equity products, we've also made significant progress in increasing our exposure to non-U.S. clients. In fact, collectively our affiliates manage over $60 billion for non-U.S. clients. And while we're pleased with this level of international client assets, we see additional opportunities for growth as investors around the world increasingly seek after high quality boutique managers. To this end we are building an international distribution platform to further enhance our affiliates' ability to market and distribute to non-U.S. clients. The first step in this initiative is our recently opened office in Sydney, Australia. The team there is off to a great start. We're optimistic about our continued success in this fast growing marketplace. As Nate will discuss in a second, we're also evaluating a range of additional distribution opportunities in several other international markets.

Finally, turning to new investments, we're very pleased with the progress of our expanded new investments team, led by Jay Horgen and, as usual, while we can't comment on the pace or timing of specific new investments, as we said in our release, we have a strong pipeline. And going forward we are confident in our ability to materially add to our earnings through accretive new investments. With that I'll turn to Nate to discuss our first quarter results in greater detail.

Thanks, Sean. Good morning, everyone. As Sean noted, performance across our affiliate group was good during the first quarter, once again particularly among our largest affiliates, including Tweedy, Browne, Third Avenue, Friess, First Quadrant and AQR. Also as you saw in the release, net client cash flows were approximately $2 billion for the quarter. Now, while solid, obviously these flows were below both the $6.5 billion in flows we had last quarter and below the trend in flows we'd been seeing. So I wanted to remind everyone that, as we've been saying for a couple of years now, with significant flows coming in the institutional channel and institutional flows being inherently lumpy, there will be quarters below the trendline. This doesn't change our view on the strong position a number of our affiliates have in the institutional channel. And the pipeline of mandates, including won but not yet funded mandates, remains strong.

Now, turning to performance by distribution channels, we continue to have strong performance in the institutional channel and this quarter had positive net client cash flows totaling $2.2 billion. As I just noted institutional flow is inherently lumpy. For example, a couple of days difference in funding mandates can make quarters look very different. That said, flows in the institutional channel were once again particularly strong in quantitative products of First Quadrant and AQR. Both of these firms posted outstanding (inaudible) cash flows and strong performance for the quarter. Let me also add, that by focusing on AQR I don't want to imply that that's the whole story. In fact, a number of our affiliates are seeing significant growth in the institutional channel, including value managers such as Foyston and growth managers such as Times Square.

Now, turning to the mutual fund channel, we have positive net flows of $133 million in the quarter and generally good investment performance. Over one-third of our funds, and approximately 65% of our funds by assets, were in the top quartile of their Lipper categories for the quarter. So, bigger funds, well positioned consistent with the overall trend. That said, there are a couple of specifics in the channel to highlight. The flagship funds at each of Friess Associate and Third Avenue had excellent performance in the quarter. Third Avenue value fund outperformed its benchmark by approximately 250 basis points in the quarter and was in the 11th percentile in its Lipper category. While on the growth side, each of Brandywine and large cap growth Brandywine Blue outperformed its benchmark by over 100 basis points and those funds were in the 14th and 20th percentile in their Lipper categories, respectively. Finally, with respect it Tweedy, Browne, as you know, their mutual funds have been closed to new clients since May 2005. So, flows have been negative. That said, performance has been very good over the period, especially for the flagship Global Value Fund which again beat its benchmark by over 100 basis points in the quarter and ranked in the 12th percentile in its Lipper category. Following the end of the quarter, Tweedy's new global high dividend product, which was launched in the third quarter of last year in the institutional and high net worth channels, was just approved in the (inaudible) based fund format.

Now, one note on closed products more broadly, while we've had good growth in the mutual fund channel over the past two years, we've done that with a number of our largest and best-known products closed. In the main, these funds were not closed for reasons of capacity, but rather to give the managers an opportunity to put the cash rates to work and for them to find qualified investments. Now, we obviously can't comment on the specific timing of when any individual fund will reopen until the managers announce it themselves, but that said, managers have made good progress towards reducing the cash levels in some of the funds we're talking about.

Now, turning to our high net worth channel, we had outflows of $446 million for the quarter. The biggest contributor to the negative flow number was the same as last quarter, namely the decision by one of our affiliates to exit the retail high net worth business. Some of these assets hit last quarter, with the remainder hitting this quarter. Now, as we said, this affiliate was growing rapidly and decided to use this capacity in a higher fee and higher margin channel. As we also noted, this was not an affiliate using Affiliated Managers Group for high net worth distribution. Now with respect to manager's investment group more broadly, the platform had a good quarter and we continue to work on business mix, meaning (inaudible) funds especially, building the sales force and focusing on product development.

Finally, I want to update you on the launch of our Sidney office. As Sean mentioned, this is our first step in building out an international distribution and client service capability for those of our affiliates who wish to participate. During the quarter, we hired Gregor Rennie, who ran Business Development for GMO in Australia, to head our Sidney office. And early receptivity among our largest affiliates has been fantastic. We are already seeing significant progress in terms of participating and searches. We've begun participating in our fees and Australian consultants and even some prospects have already been in to see our participating affiliates. We would expect this office to be contributing to high cash flows in the second half of the year. As Sean also noted, with our Sidney office up and running, we are continuing to work on expanding our international distribution initiative and we're evaluating a range of locations and potential relationships. And with that, I'll turn it over to Darrell.

Thanks, Nate. Good morning, everyone. As you saw in the release, we reported cash earnings per share of $1.43 for the first quarter. GAAP earnings per share were $0.93 cents. Net client cash flows totaled $1.9 billion for the quarter and added $2 million to AMG's annualized EBITDA. Performance fees did not make a material contribution to earnings in the quarter. However, as Sean mentioned, performance among our alternative managers was very strong. As we look to later in the year and the fourth quarter, we are quite comfortable with the performance fee guidance, based upon the level of performance in these products to date. Additionally, this quarter we had some one-time gains that contributed approximately $0.02 cents to earnings per share. Now for some other financial details, the ratio of EBITDA contribution to end-of-period assets under management was 16.6 basis points in the first quarter. We expect this ratio to be 16.4 basis points in the second and third quarters. Holding company expenses were $14 million for the quarter. We expect them to remain at this level for the rest of the year.

With regard to taxes, our tax rate remained at 37%, despite our higher guidance last quarter. We expect our tax rate to remain at this lower level for the rest of the year. Our cash tax rate was 22.4% in the first quarter, and will remain at about this level for the second quarter. Intangible related deferred taxes were $7 million for the first quarter and will continue at this quarterly level for the remainder of 2007. Amortization for the quarter was $10.3 million, including $2.3 million of amortization from affiliates, accounted for using the equity method.

The earnings from equity method affiliates, including AQR and two of our Canadian affiliates, are included in the income from equity method investments line on the income statement, all net of amortization. We expect it to remain at this level for the second quarter, as well. Depreciation for the quarter was $2.4 million with $1.5 million of that amount attributable to affiliate depreciation. As you recall, affiliate depreciation is the non-cash charge we include in the cash net income, as the replenishment of these depreciated assets is repaid by the affiliates not AMG shareholders. We expect depreciation to remain at these levels for the second quarter.

Stockholders equity was a $514 million. Interest expense was $18.3 million for the first quarter. We anticipate that our interest expense will remain at this level for the second quarter. Disciplined capital management is an important component of our growth strategy and, in keeping with this objective, we repurchased approximately 890,000 shares during the quarter.

Now turning to guidance for the rest of 2007. We are increasing our guidance and expect our cash earnings per share to be in the range of $6.65 to $7.15. This assumes 2% quarterly growth in markets, and a weighted average share count of approximately 38 million. Our annual guidance also assumes an earnings pattern similar to the one you've seen from us in recent years where we earn the majority of the earnings from alternative products and performance fees in the fourth quarter. In addition to AQR and First Quadrant, eight affiliates, including Third Avenue and Genesis offer performance fee products. And while it's still early in the year, as I mentioned, we are very on optimistic about the continued growth of these products and the prospects for performance fees to be a meaningful contributor to our earnings. We would expect these asset levels to generate, as we said, at least 10% of our 2007 results, again primarily in the fourth quarter.

Our guidance does not include additional earnings from investments in new affiliates or the affects of repurchases of our stock. And it is based on current expectations about affiliate growth rates, performance and the mix of affiliate contributions to our earnings. Of course, substantial changes in the equity markets and the earnings contributions of our affiliates would impact these expectations. Now we'll be happy to answer questions.

Thank you, sir. Ladies and gentlemen, at this time, we will continue the question-and-answer session. (OPERATOR INSTRUCTIONS) One moment please for the first question. Our first question will come from the line of Laura Kaster. Please go ahead. Laura Kaster: Thank you. Darrell, a question for you on the new guidance. Was there a change in the share count outlook?

I believe guidance the last quarter was 37.5 million and we increased that to 38 million, given the appreciation of the stock.

Okay. And performance fees, that was the same level at approximately 10%?

That right.

Of that guidance? Okay. And can you talk again, just give us an update on what percentage of your assets are currently subject to performance fees?

Yes. There's about 15% of the asset base, is available for performance fee.

Is that up from last quarter a couple percent?

Yeah. It's just -- a little less than 15%. I think we had said 13% in the last quarter.

Okay. And then there has been a lot of talk about AQR going public and obviously you own a minority interest in that. How would one of your affiliates going public change your relationship with them in terms of your minority ownership and just the -- your -- you know, relative to the original agreement of the relationship?

Laura, it is Sean. I'll answer that. Of course, given the tremendous success of the Fortress offering, there's been a frenzy among investment bankers. And I can say, as a former investment banker, there is no question that bankers are calling on every major alternative firm and talking to them about the possibility of going public. I don't want to start commenting on rumors, and I won't. Your question relates to a hypothetical scenario generally. And I would say AQR, and we as its partners, would only consider them going public in a scenario, or in order to enhance what is already an outstanding business and to do something that is in the long-term best interests of their clients. And in any such hypothetical scenario, we would not expect any change to the nature or form of our investment in AQR.

As you know, AQR is unique among our affiliates in that we have a minority interest, but we have an excellent partnership with the team. We're working together with them on a number of initiatives. We expect to be partners with them for many, many years to come and will support them as they look to grow their business in whatever way we can.

Okay, thanks. And then my last question, and I'll get back in queue. Do you think with your former investment banker colleagues exploring different options of capital structure for these companies, that that will necessary bid up the prices that you might have to pay for future acquisitions?

I think there are two effects. One effect, which obviously I leave to you and our investors, but I enjoyed reading a little while ago my favorite Barrons columnist, Mike Santoli's comments, that if you like Fortress you ought to love AMG. In other words, I think focusing investors on the value of a fast-growing business, fast-growing asset management businesses generally, and alternative firms specifically, is a good thing for us. With respect to the potential impact on new investment opportunities, obviously most of the activity has been -- or discussions have been -- and recent activity -- has been concentrated in the alternative space, so that's point one. But I would say, secondly, it is certainly the case that, for large boutique managers, the IPO market is a very real competitor, one that we're facing.

That said, we believe strongly that for many, if not most, boutique managers seeking solution to success in planning needs, and thinking about how they want to run their businesses that a partnership with AMG is a superior solution. And, remember, we're only talking about the largest firms, the largest boutique asset managers within our prospect universe. Though there are, as the universe has expanded and as our own business has expanded, there are certainly a number of such firms that we talk to.

Thank you.

Thank you. Our next question comes from Bill Katz from The Buckingham Research Group. Please go ahead.

Okay, thank you. Just a follow-up on that, Sean. I'm not sure that you answered the question. Would you expect to have to pay a higher multiple or is it that you think that your stock gets revalued up, and ergo with that revaluation, you could then use that to apply a higher multiple being paid?

I think any revaluation of our stock would be independent of what we thought about as the appropriate valuation in any new investment which, of course, as always, would be driven by our view of the prospective growth and stability of the firm's revenue and cash flow base. I think our -- I think pricing is -- while the competitive environment has changed over time, and will continue to change and sometimes the major competitors are foreign banks and sometimes it's the IPO market or a subset of the firms that we would talk to. But, but we're confident that we can adhere to our pricing discipline, only make investments on an accretive basis to our cash earnings and we believe that while there is clearly a range of what we paid, that we will continue to find very attractive, very fast-growing firms that choose AMG as their partner.

Okay. That's helpful. Sort of on that same theme, it's been a while other than the Chicago Equity Partners transaction, which I think sort of came out of the blue a little bit -- it has been a while since you've had, you know, a meaningful transaction. And I'm just sort of curious, is there anything that, sort of -- bigger picture going on as a headwind given sort of the birth and growth and modernization of the alternative asset class that's a negative for AMG?

No. I think we feel very optimistic about how we're positioned from a competitive standpoint and optimistic about our prospects for, as I said in, in my prepared remarks, a continued material contribution to our earnings from accretion.

Okay. And so, just two follow-up questions. It seems like the revenue yield came down a little bit, I guess mostly due to performance fees but also perhaps incremental asset mix. But at the same time, you're increasing your guidance. Is it fair to say that you are getting better earnings contribution from some of your bigger affiliates that are more so long only in nature? Is that a reasonable assessment?

Yeah. Bill, this is Darrell. There are a couple things that are going on. One, the revenue relative to assets under management, that fee rate's going down because we're having institutional growth so -- and the institutional channel is the channel with the lowest effective fee rate. So fee rates coming down, business continues to grow. As we look out at our firms and I think you've got it just right, which is our larger firms have a very strong performance.

And as we look at our earnings guidance for 2007 and look at what is a quarter of the year completed, the performance of those firms, our expectation for future flows and we, of course, as I was speaking about performance fees, have, as we have seen the performance for one quarter and see the amount that, of course is not earned because we earn them in the fourth quarter, but the amount of performance fees that are unaccrued, we are very optimistic about the earnings for the year. We're more certain with the earnings for the year now than we were three months ago, of course. And we believe that increase in guidance, $0.15 cents on the upper end and lower end is appropriate.

And the last question, I think part of the net gain was some severance, I believe, perhaps, in the retail manager account world. Is that a function of performance? And if so, what have you done to sort of address that?

Yeah. I would say there's a set of one-time gains that are -- contribute about $0.02 cents to this quarters earnings, they are the sale of one of the Canadian affiliates that was not part of our core business and then that is offset by some severance arrangements and personnel costs in the first quarter. But I don't think that has anything to do with our revenue stream or our other financial performance metrics.

Okay. Terrific. Thank you.

Thank you. Your next question will come from Cynthia Mayer with Merrill Lynch. Please go ahead.

Hi, good morning.

Good morning, Cynthia.

Just another question on the -- quick question on the high net worth channel. You mentioned that that's sort of a second part of a shift in products that an affiliate wants to offer. And I just didn't understand. Is there more of that to go? Or is that sort of a two-quarter phenomenon?

This is Nate. No, that was a two-quarter phenomenon, as we said last quarter and in the remarks, the affiliate decided to leave the channel. A bunch of that hit last quarter and the rest of it hit this quarter but it's all through.

Okay. And were there any large redemptions of any kind in the institutional channel or is that just lumpiness in terms of sales?

Yes, it really is just lumpiness in terms of sales. As I said, quickly, it's a couple days difference one way or the other makes a difference and the mandates that have already been won this quarter, mandates that have been won and funded, as well as won and not yet funded this quarter, I mean, the pipeline looks great.

Okay. And it sounds like you're a little more positive on increasing exposure to international. Does that mean you are looking more concertedly for -- to acquire interests in affiliates overseas than before?

Well, I think there are a number of points. We have said, I think consistently over time, that we like the international equity space generally and obviously feel like we have a very good position now. As we think about focusing our prospecting efforts within the target universe, there are relatively fewer very high quality international equities managers, and we absolutely do focus more on building relationships with such firms. I guess the other element that I mentioned which I think is important to think about from a diversification and growth standpoint, is not just exposure to international equities markets, which is important, but also increasing exposure to non-U.S. clients. And that's a different related theme, but we're making good progress there as well.

Okay. I guess on that note, what percentage of your assets at this point do you think are from non-U.S. clients?

Right now the number -- the balance of assets from non-U.S. clients is a little over $60 billion, so --

Okay. And could you just go over your outlook for share buybacks from here and was the share buyback in the quarter mostly related to, an offset to a sale or was there some other reason?

Yeah. There -- as we look at buyback we -- it's all part of the broader context, which is disciplined capital management. And again, as we are of the size that we are, we stand today with the ability to execute over a billion dollars of new investments while also -- also earning substantial cash flow in any one quarter. So as -- as over $50 million of cash flow is coming in, we're going to make sure that we're doing the right thing to get that money put to work. We have bought close to a million shares a quarter in the past and will continue to do -- to buy back shares opportunistically. We're not -- what we're not doing is committing to any certain number of share buyback in any one quarter and, of course, as folks would exercise options, we are very -- we are disciplined about managing dilution and, of course, that influences our decision on when buyback is appropriate.

Okay. And last question, Darrell, if you stop the clock right here could you tell what kind of performance fees you'd have?

We -- again, it's early in the year, unfair to speculate, but I -- but what I will say, is that as we look at the performance in the first quarter, we're certainly pleased with if we were to stop the clock today, the performance fees that we would be that we would be talking to you about. There's nine months to go, I guess maybe eight moments to go now, and but that said, we are clearly more opportunistic today than we were at the beginning of the year.

Okay, thanks.

Thank you. Our next question will come from Robert Lee of KBW. Please go ahead.

Thanks. Good morning, guys.

Good morning.

Just a couple of quick questions, maybe a follow-up to the fee realization rate. Is it possible to get a sense of how much more of a decline your sort of -- baked into your earnings guidance, or are you -- should we think that's sort of -- continues to decline as sort of the rate it has been.

Yes. I would say, as we look forward we think for the year, a fee rate of around 52 to 53 basis points makes sense. That of course, includes the -- what is just about 50 basis points this quarter. I would imagine as the institutional business continues to grow, we'll see that fee rate decline by maybe a point over the next couple quarters, a point or two. But in the fourth quarter, of course, with all the performance fees that are recorded, that increases the average fee rate, and that is how you get to somewhere between 52 and 53, 53 basis points for the year.

Okay. And could you maybe update us a little bit on the most recent acquisition, Chicago Equity Partners, I mean, I guess my recollection -- I think I recall that's also a quantitative manager and you didn't seem to comment on it too much when you were talking about your various affiliates. And I know it is only one quarter since you've owned them, but could you maybe give us a little bit of an update on what their business trends pre- and post-transaction were like and, how you sort of see them fitting into your outlook?

Yeah. So a couple things, just to remind folks, this is, as you know, our most recent investment, it is also, as you know, a quantitative firm. It is sort of one of our -- sort of a smaller affiliate in the group. They continue to do a good job. Performance is good there. The other thing I'd focus folks on, just as we think about mix, is the their asset base is mostly a quantitatively managed long equity mix, so a little bit different than some of these other firms we're talking about.

Okay. Great. That was it. Thank you.

Thank you. Our next question comes from Douglas Sipkin with Wachovia Securities. Please go ahead.

Yeah, thanks. Good morning.

Hey, Doug.

Just two questions. One, Darrell, I'm just hoping and forgive me if you provided it, could you just update us on your capacity at the end of the quarter for future transactions or buybacks.

Sure. You know, one of the benefits of all the growth that we have is, of course, more cash flow. And when you look at the capacity for us to deploy capital, which is new investments, stock repurchases, and the like, we have -- our cash flow, and while we remain investment grade, would support a little bit over a billion dollars of incremental capacity. We currently have a bank facility that is $650 million that can increase to $800 million and we have approximately $400 million outstanding under that facility today. So -- and -- and then, of course, on a quarterly basis we're generating plenty of cash. And so that only increases our capacity.

And I guess the point, perhaps it's too obvious to mention, that's just extant capacity to the extent that we saw opportunities that -- that at any one point, were in excess of that billion dollar level. Obviously we have ready access to the capital markets and if we see very high quality opportunities we're going to execute them.

Okay. And then just, I guess sort of a theoretical question. Obviously tremendous growth in the institutional channel, combined with a slowdown in the mutual fund and wealth business, and obviously for reasons mentioned. Is there any concern, I mean, at some level do you guys grow concerned that the mix shift is going too far? Obviously, you know, growth is going to come when there's demand. But I mean just in terms of the mix shift, shifting too far away and being almost exclusive institutional for a period of time, or is that one of those things that you're just sort of playing the distribution channels where growth is available?

I think the way I would frame it up is I think we have had good growth in the institutional channel. I do think we focus, as Sean said in his remarks, a little bit on the product side. But if you'd spend just a second on the channel, I think good growth in the institutional channel, for some of the reasons we talked about, there's tremendous opportunity for growth for our business in the mutual fund channel as these products that were closed again, not for reasons of capacity open up, which they will, all right? So tremendous high quality brands, great track record, that is a process that is closed, as those open up, there is a tremendous opportunity there. And then, similarly, in the high net worth channels to the extent we continue growing out this distribution group at managers, the opportunity to take these products into that channel where they haven't really been distributed, there's tons of opportunity there. So, I don't know, that's how I'd frame it up.

Okay, great. Thanks for taking my questions.

Thank you. Your next question comes from Jeff Hopson with AG Edwards. Please go ahead.

Hi, good morning.

Hey, good morning, Jeff.

It sounds like you are considering more, I guess, offshore distribution. And I'm curious what type of break-even you'd be considering with those as far as when the revenues come in and offset the up-front costs. And from a geographic standpoint, what are your thoughts and process for determining, where you might expand?

Okay. Let me take those a little bit in reverse order. The process that we are going through and have been going through with respect to taking the steps we take, there's sort of a top-down element to it where we're evaluating the marketplaces and the specific opportunities in each marketplace and some of that is the go-it-alone, partner, those kinds of conversations. Some of it is also obviously very much a bottom up sort of process, which is -- which we do in partnership with our affiliates which is, sort of here are the products that we have available to us, how do those products look, against each of those marketplace opportunities? So we're sort of going through that or have been going through that sort of combined process, bottom up, top down. In terms of the sort of the second question, the break-even, maybe the only way I can do this is to speak about the specific one we've done, right, because the form that it takes in different market places may, indeed, be different. But the one we've done in Australia is -- is -- and, again, just to refresh folks, what we've built there is -- or are building but have launched is an institutional client service sales and marketing platform. The start-up costs for something like that are relatively modest. And we do that sort of, again, and the way to sort of think about it, on a roll-forward basis, is this done in partnership with participating affiliates? And as I think we mentioned, we have sort of gone out to a set of our largest affiliates, who happen to have appropriate product in the marketplace and are sort of building that out in partnership with them. So the start-up costs relative to the opportunity set are very, very modest and we're able to sort of continue building it as we grow it.

This is Darrell. And I would just say and give compliments to any of the shared services that we've put together, is that we really do build these initiatives on a -- you know, trying to minimize any marginal cost that isn't matched with marginal revenue. If you look at look at Mig, for example, Again, we invest and spend probably $4 to $5 million last years. Revenues to us cover that very, very modest expense, occurred in the following quarters, so while I think that we've proven capable of creating these shared initiatives, the quality of our firms, putting them through channels where there are very clear needs, leads us to have a very unique ability, which to continue to broaden some of these high growth areas that can really create incremental earnings, but doing it in a way where we don't have to put substantial capital into the initiatives.

Okay, great, thank you.

Thank you. Our next question comes from Mark Irizzari with Goldman Sachs. Please go ahead.

Okay, great, thanks. Couple more questions on the Australian platform. Perhaps, Sean, this is for you. Can you, number one, size the opportunity out there? Maybe give a little more color as to why Australia is kind of the best place for this platform? And then secondly, when you go out to new affiliates, potentially maybe in the alternative side of the universe, if you will, is this an incremental kind of selling point for AMG to them? Thanks.

Why don't I let Nate answer the first part and I'll answer the second?

Okay. So the -- so why Australia? Maybe I'll use the framework that I described for how we're sort of looking at all of these markets. If you look at first, that marketplace, sort of fourth largest managed money market in the world, tremendous organic growth, due in large part -- in the pension market -- due in large part to the fact they have a forced savings, sort of 9% forced savings rate. So large market, growing rapidly.

And another sort of component of that where, if you sort of think it through, is their domestic capital market can't really even absorb all of these funds. So from the sort of outside -- large fast-growing market, although there are other large ones, maybe not with quite those growth characteristics, there are others obviously larger. From a bottom-up standpoint, there's tremendous receptivity, and maybe even, maybe that's too modest, for boutique asset managers there. There really is no sort of barrier to that, and so our affiliate -- and the product that they're looking for, alternative products, global equity products, are products that our affiliates have really well-known brands for.

One of the things that also attract us to -- sort of detail on this, one of the things also attract us to that market is that we really had sort of a pull into the market, where sort of global -- we're seeing this dynamic elsewhere as well, and we're going to hopefully be able to take advantage of it elsewhere as well. Global pension firms really are pulling are, especially our largest sort of affiliates well-known brands, are pulling our affiliates into these marketplaces. And so, we -- the client service element of that is not really theoretical, as I think we mentioned on a prior call. We have over $5 billion in assets in Australia today. So there is that element of pull that has been helpful there as well. So, I hope that was is responsive.

I think the second part of your question, how that relates to our opportunities and attractiveness to prospective new affiliates, it -- it's harder to answer, obviously, really impossible to answer precisely. But there's no question that anecdotally, even if the short span of time that we've had the office up and running, it is a big help. The same reason that international distribution, assistance with international distribution is so attractive and helpful to our affiliates makes it -- makes us more attractive as a partner for prospective affiliates.

So, Sean, do you think that it will help you in any way in terms of competing in the IPO market for alternative assets?

Well, I wouldn't want to separate out alternative products separately. Because I think the -- or -- or individually. I think the opportunities are certainly, are broader than just alternative products. And I think whether it's larger boutique managers that might consider the IPO alternative, or high quality boutique firms that aren't that large, there's no question that the added level of affiliate support is helpful.

Okay. Thank you.

Thanks, Mark.

Thank you. Our next question is a follow-up question from Robert Lee with KBW. Please go ahead.

Thanks. You may have just partially answered this question, but, Sean, in your remarks about IPO's and I guess, as a source of competition for some managers, maybe not that much, I guess I've just been thinking more that it's really private equity firms that would be more of a competition, though you've seen some -- management buyouts in the U.S., supported by private equity, whether it is Mondour or, in Europe, I guess Guardmore and Jupiter now. I mean how, are you seeing more private equity shops sort of play in your neck of the woods? And how do you position the firm as an alternative to a private equity shop that may come in that may come in as a competitor for property?

No. I appreciate the question. Yeah. I think it's very important to distinguish between the IPO alternative and the private equity alternative. The private equity alternative is appropriate for a very limited and particular kind of firm, one that very rarely is appropriate and attractive to us as a potential AMG affiliate. If you think about private equity, first, the scale of the larger private equity firms and their funds is such that it is really only the very largest opportunities that we're facing, then as a potential competitor in. And then second, more importantly, whatever the size, private equity firms, almost without exception, invest in fund vehicles with finite lives. So inherently they will seek, must seek, some kind of liquidity, and that is for a boutique asset management firm, typically a firm that's seeking some kind of solution to succession planning issues, it's just a bad fit.

Because firm -- boutique equity -- boutique asset management firms don't want to have to go to their client at day one with an announced transaction, explaining why it's a great fit and great for their clients. And then three years later have to go back to their clients and explain some other kind of transaction. So we really think that the kind of firms that we're most interested in as prospective affiliates, and the firms that are most interested in us as a potential partner aren't thinking about the private equity alternative. An IPO which is a more permanent solution, although of course one that brings lots of complexity and cost, and I think is, as I said earlier, not really something that most firms, most boutique asset management firms are considering, whatever their size, that IPO is a more -- I think is a closer competitor than private equity.

Great, thank you.

Sure.

Thank you. And our next question will come from the line of [James Elman] with Eclipse. Please go ahead.

Great. Thanks for taking the time to take my question. Wanted to ask, just in terms of the private equity boom, could you comment on any outlook or why it would not make sense for AMG to actually go private?

Well, we think we're doing just fine as a public company, serving our shareholders well, serving our affiliates and their clients well. And we feel very optimistic about our prospects going forward and continuing to execute the business strategy that we've been executing for now almost a decade as a public company. And so it's not something we spend a lot of time thinking about.

But it would be fair to say that your company has attributes that a lot of buyout firms are interested in a significant amount of free cash flow, relatively good growth and potentially the ability to have a stock price that your -- I would imagine that you would say that your stock price is lower than you think it could be, in some sort of transaction like that?

Well, I think that you are right about all of those attributes. Fast growing firms that generate lots of free cash flow are appealing to private equity firms. But you know what? Over the long term, they are also very appealing to public market investors, and so you could say at any given point that that some transaction would -- whether it is a private equity transaction or some other transaction would -- would result in, at least in the short term, in a premium. We are very confident that, as I said, that we can continue to execute our business strategy as we have been and generate very attractive returns for our public shareholders.

Very good. One other quick follow-up. Have you been looking to a great extent at fund-to-fund companies, and if so, have you been increasingly receiving competition for those bids from some of the investment banks as they buy up some of the fund-to-fund companies?

We spend a fair amount of time, I don't know, Nate, what? Five years ago? Looking at fund-to-funds opportunities. And I assume you mean hedge fund-to-funds but there's also others, but the main fund-to-fund universe is, I think, focused on hedge funds. I think the growth in -- for most such firms, after enjoying a very -- a period of very strong growth, of growth in the last year or so, has slackened. And you've probably heard us say in the past that we think that the multi-strategy funds that a number of our affiliates, especially, of course, First Quadrant and AQR run, are very strong competitors to hedge fund-to-funds. So while we recognize that there's some fine firms in that space, and I would never say never, it is not something we're spending a tremendous amount of time focusing on.

Very good. Thanks a lot. And thanks for taking the call from a bystander.

Sure. Thank you.

At this time we have no additional questions in the cue and I will turn the conference back over to Sean Healey for any closing real marks.

Well, thank you all again for joining us this morning. We're very pleased with how the year has started. And we believe we're well positioned for continued growth looking forward. Thanks again.