Affiliated Managers Group Inc (AMG) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Affiliated Managers Group second-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 call is being recorded today, Wednesday, July 25th, 2007.

I would now like to turn the conference over to Ms. Brett Perryman, VP of Corporate Communications. Please go ahead ma'am.

Thank you and thank you of for joining Affiliated Managers Group to discuss our results for the second 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 will 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 10-K and other filings we make with the SEC from time to time. We assume no obligation to update any forward-looking statements made during this call.

In this call, the investment performance of certain products will be discussed and the benchmarks are deemed by AMG to be the appropriate benchmarks. AMG will provide on its Web site 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, the most directly comparable GAAP financial measures. 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 Affiliated Development; and Darrell Crate, Executive Vice President and Chief Financial Officer.

Now I would like to turn the call over to Mr. Sean Healey. Sean.

Thanks Brett. Good morning, everyone, and thank you for joining us. AMG had a strong second quarter with positive net flows and excellent investment performance which increased cash earnings per share to $1.52, up 17% from the same quarter last year.

We had solid organic growth of $18 billion or 7% for the quarter, driven primarily by the outstanding investment performance of our affiliates. Net client cash flows for the quarter were approximately $600 million.

Nate will talk more about this in a moment but suffice it to say while this number is lower than expected as a result of rebalancing at certain high performing affiliates, our strong new business pipeline combined with our affiliates' outstanding records of investment performance, makes us confident in our continued organic growth.

Highlights for the quarter were our affiliates' strong performance and two of the industry's fastest-growing product areas, alternative investment and international equities.

Starting with alternative investments. We had excellent performance across a range of investment strategies offered by affiliates such as First Quadrant, AQR, Third Avenue and Genesis. Given the continued out performance of our affiliates' alternative products, we see the potential for additional upside to our earnings from performance fees going forward.

Nate and Darryl will discuss this in more detail in a moment.

We were also pleased with a strong performance of our international equities managers, including Tweedy, Browne; Third Avenue; Genesis; and our Canadian affiliate, Foyston. The global, international and emerging market equities contributed 35% of our EBITDA and our affiliates' recent and long-term results give us confidence that we will see strong earnings growth in this area.

Looking at domestic growth equities, which contribute over 30% of our EBITDA, we were well positioned for excellent results and a favorable environment for growth equities through affiliates such as Friess, Times Square and [Essex]. Most notably our largest affiliate in this area, Friess Associates, continues to build on its outstanding performance record over all relevant time periods, as each of the firm's investment products significantly outperformed its respective peers and benchmark in the quarter.

Stepping back, our affiliates have generated outstanding organic growth over both the long term and the short term. Over the past three years organic growth has contribute $113 billion. That's an increase of 110% to our AUM; and in the last 12 months $55 billion for an increase of 27%. The strength of our affiliates' investment performance and our diverse mix of products in some of the industry's fastest-growing areas, we are very optimistic about our prospects for continuing this track record of growth.

Finally, turning to new investments we continue to make excellent progress in our discussions with a number of high-quality boutique investment firms. While we have learned over the years that investments can take longer to execute, especially in strong equity market environments, we have an excellent pipeline of new investment opportunities and we remain very excited about our prospects going forward. In particular, the success of recent public offerings in the alternative space has made a number of outstanding alternative firms which are not (technical difficulties) interest in going public, recognize the increasing importance of equity incentive as a tool to attract and incent and retain key employees.

Given the success of our investment in AQR, we are seeing a number of opportunities to invest in alternative firms with well-developed businesses and strong management teams; and we are actively engaged in discussions involving investments similar in structure to our AQR investment.

With that I will turn it to Nate to discuss our affiliates in more detail.

Thanks, Sean. Good morning, everyone. As Sean noted performance across our affiliate group was good during the second quarter with the total organic growth of $18 billion including net client cash flows of approximately $600 million for the quarter.

While we're obviously pleased with our ninth straight quarter of positive net client cash flows these overall flows are below the levels we have been seeing. So I wanted to make a couple of broad observations before moving to our customary channel by channel review.

We saw encouraging times in the mutual fund and high network segments especially on the mutual fund side. But we have good flows and feel optimistic as some additional products come online which I will come to in a moment.

Second, as Sean said, the fundamental point in terms of positioning in the institutional channel remains the same. A number of our affiliates are very well positioned in the channel both in the U.S. and internationally; and already this quarter the case of one mandate including those that funded after quarter end and those that have been won but not yet funded remains very strong.

As we have been saying every quarter for a couple of years now, a portion of our flows in the institutional channel are coming in the form of very large mandates. And as a result we expect our flows to be lumpy as the timing of those flows one week or even one day earlier or later can be significant. We certainly experienced that this quarter both with respect to the timing of mandate funding but also with respect to the timing of rebalances by one or two of these very large clients.

Now, in terms of rebalances [broadly] we had several (inaudible) from a couple of our affiliates in the institutional channel in the quarter. Notably in cases where the affiliate was in a product category that had done very well and where the affiliate had outperformed and these negatively impacted flows for the quarter.

For example emerging market manager Genesis had a number of clients we found last quarter. Now not lost clients but rebalances. Genesis is one of the best performing firms in the top (inaudible) equity asset class over the past couple of years. Up 45% for the trailing year on a compound basis (inaudible) 40% a year over three years and over 30% a year for five years.

So given that performance, these kinds of rebalances to some extent inevitable. On a related more granular point, if you look just at new clients coming in and clients leaving, meaning putting aside contributions and withdrawals with existing clients, the pace in the institutional channel is very strong running about 3 to 1. And given the outstanding performance of our affiliates, we expect that to continue.

Now during the performance by distribution channel, we had an overall good performance quarter in the institutional channel and in particular quantitative management AQR and First Quadrant, growth manager Friess Assoc. and value manager of Third Avenue had strong quarters.

One additional theme I would highlight in the institutional channel is on the performances aside. As Sean noted almost half of our affiliates including AQR, First Quadrant, Genesis and Third Avenue managed portfolios with performance fees. In addition to the overall potential upside to our earnings from performance fees, increasingly, performance fees are coming from institutional separate account clients. Including separate accounts which go into (inaudible) cycle, which is notable because it will provide a more regular pattern to performance fee realization in future periods.

Referring to the mutual fund channel we had flows of $488 million in the quarter and generally good investment performance. There are a couple of specifics to highlight. Performance was outstanding on the growth side. As Sean mentioned the brand new (inaudible) funds at Friess Associates had an excellent quarter, where each of the funds significantly outperformed the benchmark. (inaudible), which carries a five-star Morningstar rating, is benchmarked by over 190 basis points in the second quarter and over 320 basis points for the year-to-date while (inaudible) [new advisors] fund outperformed the benchmark by over 600 basis points in the second quarter and over 470 basis points for the year-to-date.

TimesSquare's growth forms funds on our manager's platform also (technical difficulties) performance each beating its benchmark by over 120 basis points.

On the value side, Third Avenue had positive flows during the quarter and continues to have solid performance. The firm's international value fund beat its benchmark by about 50 basis points and, especially given the challenges in the real estate sector, Third Avenue real estate value funds had outstanding performance, beating its benchmark by 770 basis points for the quarter and over 1000 basis points for the trailing year.

One thing we have been talking about in the mutual fund channel for a couple of quarters now is closed products. As you may recall a number of our best-known mutual fund products managed by firms such as Tweedy, Browne and Third Avenue have been closed for a couple of years. In spring of 2005 in the case of Tweedy, Browne.

Now in the main, these products were closed not for reasons of capacity, but rather to put cash raised to work. Effective May 15th, the Tweedy, Browne Value Fund reopened and also in May Tweedy, Browne filed with the SEC to launch a new fund, the Tweedy, Browne Worldwide High Dividend Fund and we expect this fund to become effective in the fall.

A separate account version of this product was launched earlier in the year. And early acceptance has been very good.

Now turning to our high net worth channel. We had outflows of $155 million for the quarter as positive flows from our managers' platform were more than offset by outflows from our investment counseling affiliates and other direct separate accounts' high net worth businesses. Now while the investment counseling business for us isn't a fast-growing segment, it is a very profitable and very consistent business for us.

Finally I want to update you on our Sydney office, which we opened just five months ago. We now have five of our largest affiliates participating in the initiative -- AQR, First Quadrant, Friess Associates, Third Avenue and Tweedy, Browne. The ramp up is well under way. There's a couple of wins directly attributable to the effort in Q2 and our first significant win coming in early July.

Now we noted last quarter, many of our affiliates are benefiting from the increasing acceptance of boutique managers in markets outside the U.S. and are seeing a significant level international institutional search activity. Now each market will be different but our early success in Australia, but we believe that we have proven the ability to help our affiliates take advantage of these opportunities and we are looking to open our second international sales office in the back half of the year.

Now with that, turn it over to Darryl to discuss our financials.

Thank you, Nate. Good morning, everyone. As you saw in the release we reported cash earnings per share of $1.52 for the second quarter. GAAP (inaudible) per share were $1.04 and net client cash flows total $578 million for the quarter and added roughly $2 million to AMG's annualized EBITDA. As Nate mentioned, our pipeline for flows in the third quarter is strong with over 1 billion of flows just threw the first three weeks of July.

Performance fees added $0.02 to our earnings this quarter. To emphasize a point Sean made earlier, we have brought exposure to performance these strategies across a number of investment styles; and with 10 of our affiliates collectively offering more than 35 performance fee products, our prospects for continued growth in this area are excellent. Performance in these products for the year to date is very strong and looking ahead to the fourth quarter we remain very comfortable with our performance fee guidance. And in fact based upon what we see now there is potential for material outperformance.

Now for some of the financial details. The ratio of our EBITDA contribution to end of period assets under management was 16.7 basis points in the second quarter. We expect this ratio to be 16 basis points in the third quarter, normalizing for performance fees and reflecting continued growth trends in the institutional channel. Holding company expenses were $14 million for the quarter and we expect them to remain at about this level for the rest of the year.

With regard to taxes our tax rate was 37% for the quarter and we expect this to remain at this level for the rest of the year. Our cash tax rate was 24.1% in the second quarter and should increase slightly in the third as a result of our strong organic growth. Intangible related deferred taxes were $6.9 million for the second quarter and will continue at this level for each quarter 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 which include 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 expected to remain at approximately this level for the third quarter.

Depreciation for the quarter was $2.4 million with $1.3 million of that amount attributable to affiliate depreciation and as you recall affiliate depreciation has been non-cash charge. We include in cash net income as the replenishment of these depreciated assets is paid by the affiliate and not AMG shareholders. We expect depreciation to remain at these levels for the third quarter as well.

Stockholders equity was $592 million and interest expense was $18.4 million for the quarter. Shares outstanding for the quarter were $39.7 million. This is modestly higher than the first quarter, reflecting both a higher average stock price during the quarter as well as lower repurchase activity.

Now turning to guidance for the rest of 2007. We are raising our guidance and expect our cash earnings per share to be in the range of $6.75 to $7.30. Our guidance assumes 2% quarterly growth in market. Our annual guidance also assumes an earnings pattern similar to the one you have seen from us in recent years where we earn the majority of earnings from alternative products and performance fees in the fourth quarter.

Our guidance does not include additional earnings from investments and new affiliates and 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 contribution of our affiliates would impact these expectations.

Now we would be happy to answer your questions.

(OPERATOR INSTRUCTIONS). Bill Katz of Buckingham Research.

Just a couple of questions for you. Just wondering if you could comment maybe a little bit more on the deal pipeline. It sounds like you may be a little bit more -- is focused on the alternative space and just sort of curious as to how you're thinking about more traditional business given given some of the underlying industry dynamics? Then the second part of that question is I guess there is a rising concern about pricing. So if you could comment a little bit about pricing as it relates to your typical valuation range? Thanks.

Sure. Well, as we've said the pipeline is very strong. I would not characterize it as more focused on alternatives. Rather what I would say is that in addition to the traditional AMG investment as a succession-oriented investment in a traditional firm, we are seeing a broader range of opportunities with an increasing number of alternative firms expressing interest in discussions with us. So that's an encouraging additional opportunity.

Pricing is really unchanged. I'd say pricing is good from our perspective. The only thing which we have mentioned in the past is the strength of the equity market gives occasional pause to firms that are thinking about a transaction but don't have to do the transaction at any particular point; and in the midst of the rising equity market discussions may take longer but that doesn't mean that they are not commencing and continuing.

The other thing that we've said is the one phenomenon in the current environment -- who knows how long it will persist -- is that for larger boutique managers, there is potential for an IPO which is probably the most direct competitor that we face. That's an alternative which, while appropriate for some boutique firms especially larger firms and more alternative focus firms, it's not a good fit for most boutique managers, I would say. So on the whole we are very encouraged about our prospects in the new investment area.

Just maybe on that line, maybe you are answering the question indirectly but based on those comments but there's also been a lot of consternation around whether or not AQR is going to go public. I know you don't necessarily control the decision making in that, but any sort of sense on where they stand in that process given everything that is going on on private equity at all?

Well, obviously, that is a different question than the new investment pipeline. I'm for obvious reasons constrained in what I can say in commenting on a potential public offering. I will say that while an AQR IPO would provide in that event a greater theoretical flexibility for our investment in the firm, we believe that AQR is an outstanding business. And it's our intention to remain partners with the firm for the very long term.

And last, what I said last quarter when this question came up, we think the AQR partners are very smart ambassadors, very good business people and any potential public offering that they would pursue would only be done because they believe it would enhance their long-term business prospects and franchise and allow them to continue serving, providing outstanding service to their client.

Then just one last question. I was writing down as quick as I could so maybe I didn't get it quite right; but it sounded like your organic growth in the business in the last 12 months was something in the ballpark of 27%. And, certainly recognizing the stock has been a good story your earnings growth has lagged that over the last year.

I'm sort of curious now. It seems like the next of affiliates is getting stronger. The free cash flow of the Company is getting stronger, more flexible. Are we, are you getting to the point now where you should start to see an upslope, if you will, in the rate of earnings growth to reflect those changes?

I think, obviously, tracking AUM to earnings growth is going to be in precise given mix, etc. I would say this. We have compounded our cash earnings per year at 22% for the last 10 years; and we are on track to do the same or better this year.

So I think continuing to execute our business model -- and all aspects of our business are performing well now continuing to execute our business model is going to be very good for shareholders.

Thanks. I appreciate the extra disclosure on the flows. I think that was very helpful. Thanks.

Laura Kaster with Sandler O'Neill Partners.

Thank you? I have been getting this question quite a bit from investors so I just have to ask. Can you quantify if any at all your subprime exposure? What percentage of EBITDA and AUM are correlated with fixed income and any exposure you have to the CLO or CDO markets with your affiliates?

Sure. Nate, why don't you answer that?

The level of exposure is essentially zero and I got the answer, actually I think every one of the segments of that question so there's no exposure there.

We do have a couple of percented fixed income. maybe (multiple speakers) maybe three.

And maybe some yes, some basis points that I am not going to say whether they are long or short on some of those names. But yes. There's nothing there.

And then secondly, Darrell, question for you. It looks like you -- you know, obviously you raised guidance. What percentage of looking at guidance I think you said -- can you give us an idea of what percentage would be from performance-based and if that percentage has changed from your prior guidance?

And you know as we are talking about our expectations going forward, we feel that there's again from where we stand today -- and there's five months left in the year -- that there could be a material contribution from performance fees, as firms that offer those products are doing quite well. That said, the increasing guidance that we are talking about today is related only to our base business.

If you look at the second quarter our base business or cash earnings per share were $1.49, $1.50 and as you'd see that move to the third quarter, fourth quarter, I think we grow in a 2% market at $0.03 to $0.04 a quarter. And I believe that is higher than current expectations and, accordingly, that is why we have raised our guidance.

I think you said last time maybe $0.60 from performance fees?

Yes. We had said about 10% which is closer to $0.70. But that said, as we look forward and on our third-quarter call I look forward to giving even more specific guidance about performance fees because they both will certainly be just a couple of months away from the end of the year and we can be more specific. But I, again, can't emphasize enough the folks who have always been the core of our performance fees are performing well and those accounts are well-positioned to generate in criminal revenues plus a set of affiliates who haven't generated performance fees in the last couple of years are demonstrating and have accounts that are positioned today at or above their high watermarks.

So that could also add materially to our earnings at the end of the year, but more on that in the third quarter.

Great; and then I couldn't really keep up with Nate. Can you just quickly go over flows are a little light relative to my expectations in the quarter. Can you touch again on high net worth and institutional? I think institutionally you said was largely a budget of timing. Should we see that rebound somewhat and in the current quarter?

I think that's right. Let me -- and I apologize maybe I did go through it quickly. So I think on the rebalancing and institutional there were really two points in there. One is sort of a fundamental point and one is really just that timing and lumpiness point. The fundamental point was that some rebalances away from firms that had great performance over an extended period. And I gave you the Genesis example.

Then the timing and lumpiness point literally it is a [day] you're there in some accounts funding at the beginning of this quarter that had they funded a week or two earlier would have made it look different. So there's both of those points are in there in the (inaudible) which I maybe run through too quickly.

So -- that's fine. Thank you. Then lastly outlook on share count. Can you give us your thoughts on - you had indicated that there was a lack of share repurchases. Can you give us an outlook for share count for the remainder of the year?

We have been consistent repurchasers of our stock in past quarters and while I can't be specific, you have seen in the past when we've had less repurchase activity in any one quarter, it really reflects the strength and robustness of our new investment pipeline. So when I look at share count, I think numbers that are consistent with share count as they were in this quarter through the end of the year make sense.

Cynthia Meyer with Merrill Lynch.

Just wondering if you can update us on when -- I think there's a couple of Third Avenue products that are still closed -- when those might reopen?

Yes and then just to refresh everybody we are talking about, is there's a couple of products that as they closed they were having tremendous inflows? And they were not closing them because they thought the price had reached necessarily capacity, but rather because they needed to put all of that cash raised to work and same dynamic at Tweedy, Browne. And they had been putting cash through related to work. They've also been having some portfolio companies bought out which is leading to high-performance but also increasing cash position. So they are working their way through the cash position.

Obviously we can't comment on precisely when they are going to reopen the product. But our view is what they are doing is exactly the right thing which is this is in the long-term best interest of the clients and products and, obviously, long-term best interest of the franchise. The specific products we are talking about, just to be clear, international product and the small cap [total].

Overall just to be clear, Third Avenue is still doing a tremendous job. It has net positive flows in their price which are opened. You just expect that to pick that as these products open.

And just a follow-up to something you mentioned which is that some of your affiliates are reaching high watermarks. Can you give us a sense, any sense of what amount of AUM is involved in that?

When we look at performance of fee products in total it's $32, $33 billion at the end of the quarter was -- were in performance fee-related products and yes I guess that (inaudible) (multiple speakers)

Yes but we -- across that group is very (multiple speakers) very good very strong.

Yes it -- we really didn't say anything about high watermarks and I think what we are telling you without trying to forecast performance fees that are five months away but, obviously, having visibility to what the performance to date is.

What we're telling you is that we see upside opportunity but that's really not related to anybody at a certain high watermark. It's sort of over the major products or above high watermarks.

I see what you're saying. You are looking at the performance so far. Okay and on the emerging markets rebalancing, is there any reason why that wouldn't continue into this quarter?

I don't think you would -- yes, again, hard to prevent exactly what it will be over the rest of the quarter, but I don't think you would see necessarily that same pace continue.

It's also correlated with continued outperformance in that product category which leads people to say, "Okay, this is out of our model in terms of the size of our interest in this segment." So to the extent that we see more rebalancing, it's likely to be accompanied by continued very strong investment performance. So the net I think could actually continue to be positive.

Craig Siegenthaler with Credit Suisse.

Just a few housekeeping items. First, what was the second-quarter holding company expense and has guidance for this changed?

The answer is $14 million and guidance has not changed. We expect $14 million for third quarter and fourth quarter, as well.

Then on I saw the decline in the minority interest relative to income. I was wondering if there's anything unusual here? Maybe you could reconcile the change?

The only thing that is unique to this quarter is looking at other income; and there were a couple of partnerships that had very strong performance and that comes into the income statement. And then it's partnerships that are owned by the affiliates so it's removed from the income statement and minority interest.

You just stated that you're thinking maybe about $0.70 of performance fees for full year '07. I'm wondering what do you think is an appropriate delta between the third and fourth quarter as most of these assets earn their fees in the fourth quarter?

Yes. A little bit of what I was speaking before is that we believe our base business is $1.49, $1.50 this quarter. Assuming the 2% mark which is consistent with our guidance that generally adds $0.02 to $0.03 per quarter to the base business.

And then the remainder in the fourth quarter?

Yes. And again reflecting upon the $.70 number, certainly, we feel very good about where performance fees are as we look at current performance. We look at the amount of performance fees, given where performance is today, we are -- we feel very comparable with the previous guidance which was at least 10% of our earnings. But accordingly as we look forward to the end of the year there could be a material increase in that number.

And is it 10% of your revenues or 10% of your earnings?

10% of our guided earnings. So again if we are at the midpoint of our range it's a little over $7, 10% of that is $0.70 and that is what we have been speaking to in the past.

(OPERATOR INSTRUCTIONS) Douglas Sipkin with Wachovia Securities.

Two questions. First off -- and you guys can correct me if I'm wrong, but looking back at my model I think this is the first quarter in maybe seven or eight that you didn't buy any shares. And I know, Darrell, Carol you mentioned you guys feel very comfortable about the acquisition environment.

Just based on your cash flow trend should I be even reading deeper into that given the lack of buyback this quarter and in light of the last 2.5 years or so -- 1.5 years, excuse me.

Part of our capital planning strategy of course is to buy back shares as well as make new investment. But if you haven't heard it enough we look at our current pipeline, we feel very good about the prospects that are there. So as we were going through this quarter it certainly made sense to conserve our cash.

Secondly, just I guess more of a thematical question just for the whole group. Obviously alternative allocations have been very strong for a couple of years. There's been some alternative flotations. I mean what is your viewpoint now?

The market seems to be taking a second look at some of the valuations for alternative managers. Do you view that as a separate phenomenon or is there something going on now with respect to alternatives? Maybe a little bit of a change in what has been a very strong growth trend?

I don't really want to get into how the stock market is valuing alternative firms. I would say that we see for larger alternative managers increasing opportunities, increasing growth. And I would say for us, making investments in alternative firms that are as I said in my earlier remarks not necessarily themselves thinking about a public offering, but recognizing a little bit in response to the alternative firms that have gone public, that having equity as a tool -- an important tool -- for their incentive structure is increasingly important.

Our discussions with those firms are at valuation levels that are consistent with what we've seen in the past. So I think to that extent we are feeling pretty good about the opportunities.

Roger Smith with Foxx-Pitt, Kelton.

I just want to go over really what do you guys think your capacity to do deals is? And how that financing would be achieved by you? Because maybe people are concerned that the marketplace is not available for you to do deals going forward. So maybe you can kind of go over that with us?

Sure there's that certainly a couple of components of that. We have committed financing that's available today for close to $0.5 billion. Given our investment grade BBB- rating and our constant conversations with the rating agencies financing $1 billion to $1.5 billion for our enterprise is not a problem. And as you know, the markets for that investment grade paper for what we do are strong.

Marc Irizarry with Goldman Sachs.

Just wondering if you could give a little more color on the types of acquisitions that you would be partial to? And then also, Sean, if you could just distinguish between some of the valuations for traditional versus alternative asset managers out there? Are we seeing maybe a little bifurcation between the two? Thanks.

We are seeing a typical traditional AMG side investments, succession-oriented investments, and traditional asset managers; and there are a large number of those firms out there. Their succession issues don't go away as time goes on and so -- and we are deeply penetrated with relationships with the best of those firms. And only at the very largest level are they -- within the boutique world -- are they considering an IPO.

So we think we are very well-positioned and absolutely confident in our ability to continue to make investments, those sorts of investments going forward. The broadening of the universe that we mentioned is one that, of course, is not entirely new for us, because we made a very successful investment in AQR a couple of years ago.

The universe or the changes in the broader capital markets and with the alternative -- within the alternative universe have led more and more firms to think about transaction structures. Obviously in the main alternative firms, while many have enjoyed very substantial growth or typically don't have demographics among their partner group that would lead them to think about succession-oriented transactions.

But nonetheless they see advantages to bringing in a strategic partner, stating a value for the equity within their firm. There are all kinds of ways in which we can help firms, traditional and alternative, as a partner. Obviously the success of our investment in AQR along with the success of our investments in other traditional affiliates is usually important for firms which are very successful, don't have to do anything in any particular time and sometimes have a number of entities that would be interested in investing in them. We feel very good about both elements of the universe of new investment prospects.

Pricing, to finish responding to your question, is as I said earlier pretty consistent with what we've seen over time. Not that affected either in the traditional -- the universe of traditional prospects or alternative firms. Not that affected except maybe at the very largest [size] by public market values which obviously in some cases have been higher. So the opportunity to make investments and the pricing from our standpoint is very good.

So, Sean, just following on to that, you know pricing is generally good and relatively good to the types of tools you want to do, I mean what is holding you back maybe from closing more deals? Thanks.

Well, we are halfway through the year. Obviously we can't describe in any kind of a specific way what we see in our pipeline, what the specific nature of our discussions are. In no event are we going to -- even if we could -- try to force an investment by overpaying or reaching in terms of the quality of the firm or the kind of structure that we use in an investment just to sort of make investments in a particular timeliness.

Again we are comforted by the experience that we all have working together for more than a decade, a decade as a public company. And in all kinds of market environments we've been successful. Somewhat paradoxically in strong equity market environments, it can actually be a little more challenging or take a longer to execute transactions. But as I said that doesn't mean that the opportunities go away and, indeed, the opportunities in the current environment as I said are even broader than they have been in the past.

Bill Katz.

Darrell, maybe I misheard or was reading too much into your comments. I don't know if it's hypothetical or not. You mentioned that giving your platform you know adding $1 billion or $1.5 billion or maybe $1.5 billion, maybe $2 billion was not inconceivable. Are you suggesting that the balance sheet capacity is now higher than the $1 billion that you formally guided to?

I think the balance -- the answer would be yes if you believe that it was $1 billion. Even recent conversations with rating agencies would indicate that at our credit rating. borrowing $1.5 billion on our balance sheet is just fine. Most of the time when we talked about capacity in the past we've talked about committed financing and we've talked about the credit facility and how that can be expanded. And that's many that's committed to us.

What I'm giving guidance to right now is, what is the capacity of this enterprise to get investment grade debt on our balance sheet. Because I think that's what the question was earlier in the call.

Then just a follow-up -- sorry to beat a dead horse here a little bit -- in terms of incremental (inaudible) opportunities though, are you still seeing a drift off in the size of potential affiliates? I guess your old sweet spot was sort of a mid-size come as a $1 billion to $10 billion. Seems like the world has sort of doubled or tripled that now and still can't see a mid-size. Just help us understand the AUM impact as well?

Well, one practical reality of our success and growth as a business is that the size of an investment and a new affiliate that moves the needle obviously changes. But I think that we are in a happy position where we've obviously grown substantially as a firm, but are not yet a point where the large group of high-quality prospects are still not real prospects and genuinely attractive as investments for us. In other words at our current EBITDA $400 million plus, the number of firms and the size of firms that represent attractive opportunities is still very large.

So of course, as firms have grown and there are larger boutique managers we're big enough to pursue discussions with those firms but there are still a large number of firms. There are very high-quality firms that can double, treble, quadruple -- that are in the kind of $5 billion to $10 billion range -- and smaller firms, we have a real capacity to acquire as add-on to our [extant] affiliates.

So and you've heard me say, when we double [our] $800 or $1 billion in EBITDA you know that will be a little different and will be a point where we say, yes, the universe of real prospects within boutique asset management world is smaller. It will still be real but it will be smaller than it is today.

That's something we will talk about when we get there, but between now and then we feel great about our ability continue to grow organically but also to make meaningful additions to our growth from new investments.

And maybe just to tie in something else and Sean alluded to it earlier. I mean, the last 10 years we compounded our cash earnings growth and about 20% and we've done that with a pretty straightforward model uniquely positioned in this industry. During that time period, we have grown faster than the industry.

So if you look at the better firms that were in our sweet spot or whatever euphemism you want to call it, it was a certain set. Well, we've grown much faster and so that is larger and what you also hear on this call is talk about new investments is, we had a transaction that was very appealing to traditional firms, that had (inaudible) succession and continuity issues.

Today we still have that but now there's this additional universable alternative firms and AQR is a fine example of one type of set of objectives those firms would have. A way that we can provide assistance and they can realize objectives over time. So I look at our set of opportunities today and have never felt more strongly about our ability to attract return for our shareholders than at really any time in our history.

This is a great time for AMG and as you look out over these next five years and you look at the capacity that we have to put capital to work and you look at the types of firms that we attract and we've built relationships with, I look at the -- our track record with regard to how we've been able to create return for shareholders and feel comfortable that we can continue to do that for that period.

Robert Lee with Keefe, Bruyette & Woods.

Just a couple of quick questions, maybe [differ] from Nate. I'm just curious. The second office you plan on opening -- I'm assuming that probably London-based -- and from an expense perspective are we going to see -- bearing in mind the expense guidance over the balance of the year. Should we be expecting that we are going to see some noticeable pickup in expenses as you sort of build out an office in Europe, I assume?

Yes. I think the answer to that is you won't see a noticeable pickup in expenses. Let me just step back and spend a moment on sort of how we are thinking about this.

So and you've picked an interesting one as your illustrative one which is London. London is definitely on the list. But we are looking at a range of markets and I think we talked about this maybe a little bit last time. We are looking at the top-down factors in the market probably the same way everybody else is. We are also looking at these bottom-up. We are a market that our affiliate products are appropriate but also very importantly, what markets are affiliates getting pulled into. Part of the dynamic you're seeing is -- and I think we mentioned this a little bit -- we are just, our affiliates and boutiques probably are being more accepted. Part of this is the rise of global [pension] consulting firms and there are affiliates that are being pulled in these markets.

And so that is one of the reasons that as we launch these markets we are launching them not just to do sales but also to really help our affiliates with client service. So that is one of the reasons that you have seen our largest sort of fastest-growing affiliates will be very attractive to the opportunity to these are markets that they're being pulled to. This will allow them to take more business than they could take otherwise.

But also related to that, you are not really going to see the big sort of cost increase thing that you talked about because we really are being pulled into these markets and sort of drafting along with them. So you will see asset growth really maybe even in front of the way you see the expense growth, which is a little different than the way the U.S. which is we pulled them along together. (inaudible) make the asset growth really almost first as affiliates get confident that we can really help them with this. So that's the long answer to that.

Maybe this is a little bit different kind of question but sort of the same theme. A lot of -- as a lot of asset managers get larger and looked more globally a lot of them also realize they've got to build more on the ground manufacturing capabilities. While these may be oriented towards marketing and servicing, how do you -- how can you help some of your affiliates expand, say, their global manufacturing capability? Whether it's doing people on the ground in London or Japan or Hong Kong or someplace, or is that clearly just within their province how they want to do it? Or is that something you can help them with?

Yes our affiliates are not looking at us for sort of helping in manufacturing. I mean I think even (inaudible) not really the right way to even think about how we are thinking about it. Our affiliates, the product suite is great and very attractive to these marketplaces right now. And so the challenge we are helping them with is really the client service and sales challenge.

The -- that said, our affiliates are talking as they are going into market, our affiliates are talking to each other and there's opportunity to do product development together and those sorts of things. Those kinds of things we're absolutely, absolutely helping them with.

And I guess one sort of put into that which is some of our affiliates are themselves as part of this growing their manufacturing capability, to keep using those terms, to make product more appropriate to these markets. And are we helping them with that feedback loop which is the informational side? Absolutely.

Maybe one question for Sean. I guess in reading the tea leaves between the share repurchase, you know it seems that you would feel pretty good about near-term prospects or transactions. I mean that said maybe this isn't fair but could you -- do you think this is at all related to some of the changes and the staff you made I guess in the past year to beef up that function or at least give a kick in the butt maybe a little bit?

No. I really don't. I think the universe -- we have been doing this a long time. We know who the great boutique prospects are. And we have a very robust pipeline. I think obviously more great people have helped us do an even better job. But if you step back and I don't want to go name by name, but let me just make a broad comment.

What you are not seeing is a number of transactions involving boutique firms which we wanted to do. They are fine firms that have engaged in transactions. I don't want to denigrate anybody, but we would be concerned if we said, "You know somehow this model that's worked so well over time and is such a great solution for succession with traditional firms and is a very appealing opportunity for increasingly for a certain kind of alternative firm that somehow -- gosh. That's not working any more because they are all doing something else." We are just not seeing that. And to the contrary and so while it is very tempting I'm sure from the outside where you don't have any visibility to pipeline to extrapolate and to infer based on relatively short time horizons, there's some issue or challenge.

In fact, our position -- our competitive position -- is better than it's ever been. Our pipeline is better than it's ever been. Pricing in this environment is as good as it's ever been. Does that mean we are going to announce a deal tomorrow? Not necessarily. The reality is that really good firms don't have to do anything at any particular time. Almost none of our investments are made as a result of a banker-driven process as you know. And so it will take time.

But again we take enormous comfort from not only from the actual knowledge that we have which of course gives us a forward view, but also just on the history. There have been periods in our in the past decade as a public company when it was harder to make new investments. Throughout that period it is not as if there's been any less receptivity to our model, any new competitor that has been especially challenging for us or any great change in the universe of investment prospects.

That is really what I would focus on. If you look at a broad universe of high-quality boutique managers including with growing markets paying the growth in the alternative space, there are more and more great prospects. And at some point, almost all of them will pursue some kind of transaction.

So looking to the long-term, not day by day or even quarter by quarter we are very confident about our prospects. And I wish I could say more, but I think that hopefully gives you a picture.

David Haas with Endeavor Capital.

Can you just -- if we think about the history of AQR in your investment not that they have needed anybody's help in growing and generating flows -- can you tell us how much you think your relationship has added to their ability to grow?

I think you I'm not sure that Cliff wants to entertain lots of calls from folks but I'd defer to the AQR partners. I think with all of our affiliates we believe that the success of our affiliates as a group, where our largest affiliates since our investment including AQR but since our investment some of which stay back over a decade they have compounded their assets in the period when markets were effectively flat at over 30% per annum.

I don't think that is entirely and accident or reflecting no contribution by AMG. But in any specific circumstance, I think we are highly reluctant to say, "Well X percent of their growth or success is attributable to something we've done." I think in many cases being a good partner, supporting them, getting out of the way is as valuable as anything else. And we've done a model and an approach which we think pretty obviously is working. So we don't spend a lot of time on a backward-looking basis, say, "Well exactly why is it working?"

That's fair. And then -- .

The last thing I would say is that the fact that we are seeing -- again I can't give you specifics but you can imagine from our comments -- an increasing number of high-quality alternative firms coming to us, I think also suggests that one way or another we are regarded as an attractive partner to these sorts of firms.

Then just a follow-up. It seems you guys are very excited about the prospect for investments and all some of these boutique alternative managers which seems like a great opportunity. One of the things that I think that investors struggle with and think about is how really to price these things. How with maybe 1/2 to 2/3 in some cases of the earnings stream coming from performance fees, if part of your core strategy is going to be investing dollars in a performance fee earnings stream, can you just tell me how you think about pricing that?

Well be the -- our investment in AQR obviously is a model of sorts although in any given circumstance, we are going to tailor the structure of our investment to the circumstances of that particular firm. In the AQR investment we made a highly structured investment which, effectively, was a share of revenues which provided initially some stability to our share of the performance fee revenue.

Now over time, there's been substantial growth and that is no longer a factor. But I think in talking to alternative firms, generally, we have I think it's fair to say more experience than any other entity in structuring investments, to allow us to pay a fair price on from the [prospectus] of the seller for the interest that we acquired, but also have the investment be attractive to our shareholders and appropriate in a public company context.

So there are ways of structuring guarantees, hearing of the performance fees, etc. And we are very experienced at designing those structures and away that allows us to pay multiples which are comparable to what we pay in other traditional succession-oriented settings.

The last thing I would say is that increasingly over time for us -- and I don't mean that we look at any investment, any individual investment differently in the way that we are pricing it or structuring it -- but if you are stepping back and looking at AMG overall, obviously, we have already -- and you can imagine over time as we talked to a variety of different firms, both traditional and alternative, we have increasing diversity among our product set and within the alternative space among alternative strategies. And that makes, we believe, our exposure to performance fees more valuable because of the stability over time that that diversity allows.

Jeff Hopson with A. G. Edwards.

I know you commented somewhat on the outflows on the institutional side. You mentioned some rebalances, but anything else you can tell us as far as are there any shifts out of particular asset classes? Or any performance-related issues? Can you add any more pieces to that puzzle I guess?

Yes. No. I would say the fundamental, yes. I would say the fundamental point remains the same which is the trend is strong and positive. We have good participation and some of the fastest-growing areas and we continue to see strong trends in institutional space in those products. And again as I said earlier, I think in this quarter you saw two rebalancing points. One is certainly a lumpiness point. We have been making that same point over the past couple of years including when flows in the institutional channel (inaudible) $6 billion or $7 billion in the quarter.

The other point which I guess you could call a fundamental point, right, is that rebalance point and I think as Sean said earlier to the an extent we continue to have very strong performance in some of these assets classes that are rapidly appreciating. Yes rebalancing away from those products, absolutely could continue and again as I said earlier to some extent that is inevitable.

Okay and amongst, say, smaller affiliates that we typically don't see a whole lot of information on, is there any I will say drifting of some of these entities where there's small amounts of outflows occurring? Anything like that?

Across the 25 (inaudible). Of course there, again, we can talk to the broad trend other (inaudible) products. Sure. But the broad trends including across a broader group of affiliates than the ones that we highlighted -- the largest and most material. Even looking across that broad group, those same trends remain which is the broad sweep institutional performance, very good and continued positive momentum. So -- .

I think if you are attempting to say looking ahead, is there anything to read into the flows in the most recent quarter, and I guess what I would say is, if you look -- and there's reasonable transparency with our largest affiliates -- but if you look across our largest affiliate group and I could say this for the group of smaller affiliates as well but focus on the larger affiliates. In almost every case and almost every product these firms are continuing to enjoy and achieve very strong performance.

And the best measure of forward asset growth, obviously, is strong investment performance. So we feel optimistic on that basis, looking ahead and where you see rebalancing at to some extent it's a byproduct of that outperformance but it is, as Nate said earlier it's a client withdrawing a little bit of money but you're not losing a client. So that's phenomenon that we see.

Laura Kaster.

Just, Darrell, to go over your modeling things that you gave us. You said the EBITDA contribution in the third quarter should be around 16 [bips]?

That's exactly right.

And then cash tax rate was 24.1. Did you say that was going up in the third quarter?

It should trend up slightly through the end of the year and that's due to the strong organic growth. Remember, the margin -- the cash marginal tax rate for organic growth is 37%.

Yes. I got that. Then, did you give any guidance for interest expense? I think you just stated what it was but no real change there?

Well, I would say that essentially flat quarter to quarter.

Mr. Healy, I will turn the call back to you for any closing comments you might have.

Thank you. We are pleased with our results for the second quarter and our business momentum headed into the second half of 2007. Thank you again for joining us this morning.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. If you would like to listen to a replay of today's conference please dial (inaudible) 230-590-3000 or 1-800-405-2236 and enter the access code of 11093489 followed by the pound sign. We thank you again for your participation, and at this time you may disconnect.