Affiliated Managers Group Inc (AMG) 2009 Q3 法說會逐字稿

Greetings, and welcome to the Affiliated Managers Group third quarter earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Alexandra Lynn, Director, Corporate Strategy, for Affiliated Managers Group. Thank you. Ms. Lynn, you may begin.

Thank you for joining Affiliated Managers Group to discuss our results for the third quarter of 2009. By now, you should have received a press release we issued this morning. However, if anyone needs a copy, please contact us at 617-747-3300, and we will send 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 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 benchmarks are deemed by AMG to be the appropriate benchmark. 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 probable 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 CEO; Nate Dalton, Chief Operating Officer; and Darrell Crate, Chief Financial Officer. Now I'd like to turn the call over to Sean Healey. Sean?

Thank you, [Ali]. Good morning, everyone, and thank you for joining. AMG reported cash earnings per share of $1.05 for the third quarter, reflecting continued recovery and global equity markets, as well as excellent investment performance across our affiliate group, and improving trends in client cash flows. We had especially strong results in our global and international equity product, our fastest growing area. For example, two of our largest affiliates, Tweedy Browne and Genesis, are having an excellent year with their flagship global and emerging markets products, continuing to build on their outstanding track records of out performance and they are substantially ahead of their peers and benchmarks over both the short and long term. Our affiliates include many of the industry leaders in global, international, and emerging markets equities, with the addition of Harding Loevner this quarter, global equity products now contribute over 40% of our EBITDA. And as we see continued strong secular growth in global equities, it's an important strategic focus for us to further increase the breadth and depth of our position in this area.

In addition to the general trends favoring the growth of international equities, our global distribution platform allows us to further leverage our international products. Global and emerging markets products have a tremendous appeal to investors in Europe, Asia, Australia, the Middle East and other markets around the world, and we are actively pursuing opportunities to further expand our global distribution capabilities. While international equities were the highlight of the quarter, we also had solid results from our domestic equity and alternative managers. Among our domestic products, Third Avenue's flagship [Valufun] was a standout with year to date performance nearly 2000 basis points ahead of the S&P, in addition to an outstanding long- term record. Our alternative managers, including First Quadrant AQR, [Value Wact] and BlueMountain have generated strong performance this year and are well positioned to generate organic growth and performance fees going forward. We see an attractive opportunities ahead for leading alternative firms, and increasing our exposure to this area is another strategic objective for us.

Along with the strong performance of our affiliates across a range of strategies, we were pleased to see continued improvement in client flow trends. As noted in our release, but or one large Australian client, which closed its external management program affecting both AQR and First Quadrant, we have positive flows in all distribution channels. Looking ahead, as Nate will discuss in a moment, we see ongoing positive trends in client flows as retail and institutional investors increasingly reallocate to risk-oriented assets, including alternatives and equities, especially global equities. Turning to new investments, we continue to have a very strong transaction pipeline, which includes an outstanding array of both traditional and alternative managers. With recovering equity markets, the transaction environment has become increasingly favorable. We see ongoing divestiture activity and heightened interest by independent managers, driven by succession issues, as well as the expectation of rising tax rates. Our competitive position has never been better, as the universe at potential buys has diminished and we continue to benefit from our reputation as the partner of choice for outstanding boutique firms. While we can't precisely predict the pace or timing of specific new investments, we're confident in our ability to add meaningfully to our earnings growth through accretive new investments going forward.

With that, I'll turn it over to Nate to discuss our affiliates results in more detail.

Thanks, Sean. Good morning, everyone. We saw significant growth in the third quarter, primarily as a result of global equity markets being up 20%, with domestic markets up 15% or so. Continuing with the historic rally off the market bottoms back in March. As Sean noted, against this backdrop, our affiliates continued their strong relative investment performance especially in key product areas like global equities and alternatives. This performance has positioned us very well because as clients and their intermediaries reassess their exposures, they will need to increase their allocations to return oriented assess classes. As this process unfolds, it will also be a significant opportunity for high quality managers with excellent long- term track records, such as our affiliates, to take market share through replacement searches. Focusing on clients flows and search activity, last quarter we saw improvement across the board with our mutual funds and high network channels turning positive, and an institutional channel that would have turned positive but for a single Australian client taking the decision to bring all their asset management in house. Unfortunately, as Sean noted, a couple affiliates had large mandates there. Our perspective on the overall flew and search activity is that while there is still a lot of volatility as client and intermediaries continue sorting out their views, trends are taking hold.

First, from an asset allocation standpoint, we saw clients across distribution channels moving up the risk spectrum. From being significantly overweight with no risk assets and increasing liquidity in their portfolios, to increasing allocations to return oriented assets initially fixed income. We believe that as this trend continues, flows will migrate up the spectrum to higher return oriented assets, especially global equities and alternatives. From our internal search data as well as conversations with consultants so far this quarter, this migration seems to be happening.

Second, the very good relative performance of a number of our affiliates, especially in key product area, is positioning us very well, not only to participate in asset allocation changes, but also replacement search activity. Third, our goal with distribution platforms is driving increased search volume of a very small basis at the beginning of the year and we have assorted products, again, in global equities and emerging markets and alternatives, it is very attractive to institutional clients worldwide. Obviously this is a potential source of incremental growth as these searches move through to final.

In terms of the details of the flows, across our three channels of distribution, and starting with institutional. We had net out flows of $1. 2 billion for the quarter, more than 100% of that was due to the one Australian client I mentioned taking the decision to move all their asset management in house. In the mutual fund channel, flows turned just positive at $4 million of in flows as successful product launches at Third Avenue, with our focus credit fund, and AQR, with their diversified [arbitras] fund, as well as positive flows in the managers platform, offset outflows and Friess and a few other affiliates. One very recent exciting development in the mutual fund channel was the launch this week of an unhedged version of Tweedy Browne flagship global value fund. Finally, in our [handle worth] channel, flows turned positive at $120 million for the quarter, the drivers here were strong inflows to move on manager [Genet, Welch, and Cutler], and Canadian affiliate [Butel], which offset out flows in the S&A space. One additional note on flows, across channeling we are seeing alternative flows stabilize, although an isolated exceptions, we so see out flows mainly relied to earlier decisions to gain liquidity. We expect these flows will turn positive as we move into 2010.

Let me spend a minute on investment performance. Starting with global equities, markets have driven absolute performance with [EFE] up 20% and [MSCI] merging markets up 21%, but we had very strong relative quarter, especially in one of our largest products. For example, Tweedy Browne's flagship global value fund out performed its hedged EFE index by 90 basis points in the quarter, remaining significantly ahead of its benchmark for the one, three, and five- year time period. While our largest global equity product by assets, AQR EFE product, out performed benchmarks by nearly 200 basis points in the quarter and 290 basis point for the year to date. With respect to merging market, the flagship products at Genesis beat its benchmark by 290 basis points in the quarter, and is up 740 basis points for the year to date, remaining ahead for the one, three and five-year time periods as well. In terms of absolute performance, the Genesis flagship product was up 24% in the quarter, bringing their year to date returns to 72%.

Now, as Sean noted, during the quarter, we also expands our already broad global equity line up, with addition of our new affiliate, Harding Loevner, which has an excellent long term record in global, international, and emerging markets. Turning to our alternative products, we had strong performance in a number of our key affiliates. The majority of AQR's alternative strategies produced outstanding results. For example, their flagship absolute return fund was up about 13% in the quarter, and 35% for the year to date. And their global risk premium and global asset allocation products also performed well. Up 25% and 20% for the quarter, and 32% and 52% for the year to date, respective. At BlueMountain, the flagship credit alternative fund was up 9% for the quarter and 29% for the year to date, while at First Quadrant, their [GPIA], global macro, and taxable currency products all have good performance in the quarter, and at value our performance is very strong, up 11% to 15% across the major products.

Now, moving to our domestic products, our affiliates in general had more mixed performance. Starting on the value side at Third Avenue, their flagship value fund continues to have a tremendous run, out performing its bench mark by 255 basis points in the quarter and over 1,900 basis points for the year to date. While at Tweedy Browne and [Systematic], all their domestic products are made ahead for the one, three and five-year periods. Although some of their products trailed their benchmark on the quarter. On the gross side, we had a more challenging performance quarter, although with the exception of Friess Associates long term track record that our growth oriented funds remain very strong, with nearly every product at [Frontier] and [Time Square] is ahead of its benchmark for the one, three and five-year trailing period.

On the operational front, as we've discussed over the past several years, we continuous work with our affiliates to determine the most efficient ways to allocate our and their resources. We've been working closely with the principles of two of our smallest affiliates, where changes in their businesses, an AMG affiliate relationship no longer appropriate and during the quarter sold their equity in these firms back to the management team. These affiliates combined contributed significantly less than 1% AMG EBITDA and sales back to management will provide the firm with the right tools to continue to run their businesses in the best interest of their clients. With respect to our distribution platforms, in the U S, we continue to make excellent progress with managers investment group as the mutual fund flows were positive for the quarter, and we continue to launch product with our affiliates. This past quarter, we launched a (inaudible), and also launched funds for First Quadrant, Frontier, and Renaissance. On the global institutional side, we are seeing a full pipeline from searches to wins in our Australian, Middle Eastern and European platforms. While we remain very focused on the profitability of each of the regions, we and our affiliates are continuing to invest in the growth of these platforms, with both additional sales and client service infrastructure for the regions we already serve, while ramping up to launch our effort in Asia next year With that, I'll turn it over to Darrell to discuss our financial.

Thanks, Nate. Good morning, everyone. During the quarter, our affiliates continued to build on their long-term track records, producing superior returns across the diverse array of investment styles, and positioning our products for strong growth. The strength and diversity of our affiliates' products, along with our revenue share approach, have provided stability in our earnings this year, and with our new investment efforts, along with recovering equity markets, we're well on our way for strong earnings growth in 2010. As you saw in the release, we reported cash earnings per share of $1.05 for the third quarter. On a GAAP basis we reported earnings of $0.40 for the quarter. Performance fees added about $0.02 to our cash earnings, which were offset by approximately the same amount in one-time restructuring charges.

Turning to some modeling items, the ratio of our EBITDA contribution to end of period assets under management was about 14.4 basis points, reflecting the strong growth in our assets under management in the third quarter. As we look to the fourth quarter, we expect this ratio to increase to about 15.7 basis points, as we realize the full effect of our increased assets under management. Holding company expenses were $11.4 million for the third quarter, and included transaction expenses associated with new investments, [anaphases 123-R] expenses. We expect holding company expenses to be $11 million in the fourth quarter. With regard to taxes, our effective GAAP tax rate for the third quarter was 18%. Which primarily relates to the disposition of two smaller affiliates that Nate mentioned earlier. This rate will return to a more normalized 42.5% for the fourth quarter. Our cash tax rate for the third quarter was less than 1%, as state and foreign tax payments were offset by federal refund opportunities. We expect our cash tax rate to be approximately 10% for the fourth quarter, and for this rate to trend up slightly in 2010 as we further grow.

Intangible related deferred taxes were $6.2 million for the quarter, again, as a result of these restructurings. We expect intangible related deferred taxes to return to a normalized $10.2 million in the fourth quarter, which, of course, includes the full impact of Harding Loevner. Amortization for the quarter was $16.1 million, including $8 million of amortization from affiliates accounted for using the equity method. The earnings from equity method affiliates are including in the income from equity method investments line on the income statement, all net of amortization. Depreciation for the quarter was $3. 2 million, with $1.9 million, of that amount attributable to affiliate depreciation. We expect amortization and appreciation to remain at these levels for the fourth quarter. We reported total interest expense of $19.5 million for the third quarter, of which $3.4 million was noncash interest expense relied to the recent accounting changes for three of our convertible securities. We expect interest expense to remain at about this level for the fourth quarter. Our capital position remains very strong, and we have substantial resources to execute upon the significant new opportunities that we are currently evaluating. In addition to the recurring free cash flow generated by our business, we now have over $375 million of cash resources, as well as $770 million available under our credit facility. I would also note that we have no net debt other than convertible securities.

Now, turning to the guidance for the remainder of 2009 and full year 2010. Beginning with 2009, we expect our earns results for 2009 to be in the range of $4.15, to $4.50. You'll notice that with this guidance, we are bringing up the bottom end to reflect the strong performance of our affiliates, while maintaining the same top end to reflect our current view of our fourth quarter performance fee opportunity. Our alternative products, which total $31 billion in assets under management, are generally uncorrelated to the equity markets and provide AMG with an important source of earnings diversification as well as incremental earnings growth. The performance of the products has been strong this year, and roughly half these assets are now at or above their high-water marks, and can provide considerable upside opportunity and deliver material performance fees in future periods. For our 2009 guidance, assumes a weighted average share count for the year of $43 million.

Now looking ahead to 2010, we expect our cash earnings per share to be in the range of $5.00 to $5.75. Given the recovery in equity markets over the past couple of quarters, this guidance returns to our prior convention and assumes 2% quarterly growth in markets in 2010. We also assume a weighted average share count of $45.5 million. Our guidance for 2010 does not include additional earnings from investments in new affiliates, but does assume an earnings pattern similar to the one you've seen from us in prior years. Where we recognize the majority of earnings from alternative products and performance fees in the fourth quarter. Our guidance for both 2009 and 2010 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 market and the earnings contributions of our affiliates would impact these expectations.

And now we'll be happy to answer your questions

Thank you. We will be now be conducting a question and answer session. (Operator Instructions). Our first questions comes from William Katz. Please state your question.

Hi, thanks very much. I was wondering. Sean, maybe it's me, I seem to say the same thing every quarter, but from your tone and comments, plus what was in the press release, it does seems like a higher level of conviction around the deal environment, and you seem to continue to point towards global alternatives. How do we think along those lines what type of product and/or distribution makes the most sense right here? And then maybe an update on the price expectations?

I think you're right to read -- in fact, I think the word that we used in our release was enthusiasm. Obviously, it's always a challenge for us to provide some gauge of the level of expected forward activity without describing transactions which have not yet been announced, but I think it is fair to say as we have been saying for a while, but clearly we are at a point where we have very strong momentum in the new investment area. As you heard me say in the prepared remarks, our pipeline includes both high quality traditional as well as alternative firms.

I would say the other kind of indicator I could give you is that we have described -- in fact, I described in my earlier remarks the ongoing focus to increase what has already a significant relative position with global and international equities, as well as to continue to invest in the alternatives area, and I would say in the alternative area, it's -- and maybe more broadly, in thinking about investing in boutique firms. The silver lining to the challenges of the past year is that there was a great sorting process, both for boutique firms as well as for perspective investors and acquirers, and so we are in a position now where we're able to see which firms, especially in the case of alternative firms, have weathered the storm, are positioned with strong franchises, and outstanding products in areas like distressed investing which are currently seeing lots of organic growth, and perspective one imagines that will continue.

That's the nature of the pipeline inasmuch detail as I can give. As I would say pricing, as we've said earlier, partly based on the changes in the competitive dynamics, pricing continues to be attractive, relative to what our historical range has been, although in a consistent pattern with our historical pricing.

Okay. And the maybe a quick question for Nate. You're going pretty quick so I was trying to take notes as fast, but you mentioned that the institutional pipeline is taking a step up for a variety of reasons, but towards the ends of your comments, you mentioned some the non- US platforms in particular were seeing some strings. Can you dimension the size of the pipeline today versus June and where you are seeing the specific interest?

Sure, the pipeline today versus June is -- call it a third or so larger. This is related to -- I'm talking about the institutional pipeline, so you're seeing good growth. If you think about our business, the fastest component of that growth is coming through non-US, and it's coming there for two reasons. One is some of the secular things you heard us talking about, and the other is we're increasing our resource allocation against that opportunity by building these global decision platforms and the added distribution we're bringing on line is very fast growth albeit off of a mall base. So that's been helpful.

Yes, and finally, Darrell, just for you, your 2010 guidance is rather wide. Particularly against really tightening the lower end of this year and leaving open the upper end, so I guess perfomance fee are not quite filled yet, but what would be the $5.00 range, type of environment, and what would be the $5.75 -- is the swing factor just performance fees here?

I think as we look to 2010, and again, there's a lot of room between now and December 2010, but the $5.00 takes a conservative approach in thinking about flows and out performance in the business. And it assumes of course 2% market growth in each quarter through 2010. The $5.75 of course allows for performance fees, and as I was sharing, we keep trying to talk about performance fees and give folks a better sense of what that portfolio looks like, but we now have as we enter 2010, a dozen affiliates who have a product that is exposed to performance fees. This is a much broader set of affiliates than we had at the beginning of 2009 where you recall we were essentially relying on two affiliates to contribute.

So $5.75 allows for that performance fee opportunity, which, again, just making reasonable assumptions about it. In addition, as Nate's talked about and Sean talked about our emphasis on global, our global distribution platform is very well positioned and so we have could look for incremental flows, and as you see the way our individual firms are positioned, with very strong track records and an environment where, potentially a substantial amount of dollars will be returning to risk product, I think we feel it doesn't take much imagination to imagine that we could see some very nice growth among our AMG holding company activities, affiliates on their own, in addition to performance fee potential. And remember all of that, that range, albeit wide, does not include the all the capacity that we have which I said was about $1 billion dollars of money to put to work in new investments in 2010. I don't know how, I just, -- I say it, and I say it again with a the lot of fact, we're very excited about 2010, just in our core business, all the seeds we've been planting through a difficult environment, and in addition the new investments opportunity is one where I think we'll all be very pleased when we look back over the prior 12 months at the end of the 2010.

Perfect, thanks so much.

Our next question comes from the line of Craig Siegenthaler with Credit Suisse. Please state your question.

Thanks, good morning. Just first on the net flow results, I was wondering if you could provide a little more granularity on the large institutionalization redemption, just in terms of size and nature of this mandate.

Okay. First to describe the type of mandate. This was a large Australian governmental entity that had effectively historically outsourced its management, so they had implemented consulting outsourced provider, and they sort of locked the details, but they took the decision to bring all that back in. So affected all the actively managed assets, affected 25 managers and all that. We had two affiliates that were managing assets with them, and those affiliates had done a good job, and none of this has anything to do with performance or client service rate or any of that stuff, and in fact, as the governmental entity sorts out what to do with the assets they have now taken back, we're in conversations with them, and it's entirely possible we get the opportunity to manage some of those assets. As I said, the size of it was larger than the outflow numbers in the institutional channel, so call it $1.5 billion or so.

Got it. And in we just add that back to your net flow run rate this quarter, we're something around $0.3 billion, $0.4 billion positive of an underlying run rate, and you talked about how activity --or at least investor interest has increased in a few areas, do you think that in the fourth quarter we can be looking at flows north of $0.3 billion?.

So what I say, activities, early in the quarter, all the -- you're thinking about it the right way. Our activity -- it will take time for the RPs to move through the cycle, but we should see that growth reflected in finals and then new assets, and feel like the future certainly looks brighter than the period we just went through. I'm probably being overly cautious. So the answer is yes.

And the products especially global equities and alternatives, and our relative performance in those products makes us optimistic. Sure, and not to keep pounding on this, but plus we are also bringing more resources in online? I wouldn't think of that RFP ramp we've seen as the extent of it, right? We're going to continue to see that ramping as we bring more resources online.

Nate, Sean, thank you very much

Sure.

Our next question comes from the line of D.J. Neiman with William Blair. Please state your question.

Hi, good morning, guys. Nate, a couple quick questions. I wanted to start with Nate. You did mention the Third Avenue distressed fund, I think they are still in fundraising mode right now. Can you give us an update on where that stands, and what might have hit in the quarter?

I did mention briefly in the prepared remarks their focus credit fund, it's been a great start, and is over a couple hundred million. At least at this point. I haven't checked in daily.

Over $250 million as of yesterday. And some of that was in the second quarter as well as in the third quarter.

Okay. Got it. Then turning to Darrell, couple of -- just thinking about holding company cash. You said $370 million total. How much of that is at the holding company level after the close of the Harding Loevner deal?

We essentially are at approximately the same cash level today as we were prior to announcing Harding Loevner. And so, as we look to the end of the year, I think we have about $100 million of additional holding company cash to get put to work, and after that, we're using money from the revolver.

Okay. $100 million additional. Can you remind me what it was prior to closing Harding Loevner?

We were roughly -- we had got our holding company cash was approximately at $100 million, and we used that cash to buy Harding Loevner.

Okay, okay. I'm with you. And then next, can you just review in detail for us the forward equity sales contract? I'm a little confused, the one with Deutsche Bank at the end of last quarter, if that was every executed. Can you go through where those stands and how you're thinking about those?

Sure. We have approximately $300 million of a forward contract with both BanK of America and Deutsche Bank. That $300 million stands available if we want to draw it down and issue equity. Again, the purpose of that is not to fund deals directly with equity, but in this environment, where equity markets have been volatile, of course, as we want to get money put to work, we will use cash off the balance sheet, then we will use our revolver, which is LIBOR plus 80, it'svery cheap money, the only way to give shareholders the benefit of those, of being well positioned from a cost of debt perspective is to actually use it, so we'll do that. But it's also not loss enough that in this environment, in this, where investor of optimism to credit concerns. By having that extra $300 million in reserve, it gives us the opportunity to delever our balance sheet instantly, if we're in a environment that is more challenging or investors are more concerned about leverage. So we look at these forward agreement as essentially buying insurance on a balance sheet so we can run in a leveled way and be in an environment where we can give investors extreme comfort on the stability of our balance sheet, should that be required. Because as Sean mentioned, our pipeline for new investments is very strong through this period. We've certainly shook out and have a much better sense of quality managers, and for us to build our business, getting that money put to work with those quality managers in this time is critical to what we do, so having a capital structure that allows us to do that is, has been the objective for this year.

Okay. That's it for me. Thank you.

Great.

Our next question comes from the line of Dan Fannon with Jeffries. Please state your question.

Thanks, guys. Sean, your commentary highlighted both alternative and traditional investments, it seems somewhat like a shift that we've heard from probably the last six months where I thought you are more focused on traditional investment firms. Can you discuss the split of your pipeline between these two types of firms and what your -- if you're looking at any certain focus or strategy that's -- to fill a gap or add to what you already have?

I would say that there has been a shift from the beginning of the year in the first quarter amidst the turmoil and the markets generally and among alternative clients, specifically I think we -- when asked about our interest in making further investments in the alternative area, we said we would be cautious. I think the pace and magnitude of the recovery in the markets generally has surprised almost everybody, and I think that's especially the case in the alternatives area where we've seen for certain firms, and by no means all, because I think, as I said earlier, it's clear that there was a windowing of the hedge fund universe over the past year, and so as always, one has to be quite careful about the people and the quality of the franchise and the firm that you invest it, but it is clear to us that there are a number of very attractive alternative firms which have emerged from this difficult period with their franchises very much intact.

In fact, some of them, some of the strongest firms are taking advantage of the difficult environment and making some great hires and additions. They are generating organic growth, and they are seeing, depending on the product category, some very attractive investing opportunities. So those kinds of firm are, as you would expect, very appealing investment prospect, and we are very well positioned as, I would say not just with traditional succession oriented firms, but with alternative firms that are looking for an institutional partner to take a minority investment, AMG is really positioned as the partner of choice. I think with respect to your question about breaking down the pipeline, it includes significant opportunities in the alternative area with some great firms, but also some large and attractive opportunities in the traditional space, both in the US and outside the US.

Great, that's helpful. And just in terms of the activity in terms of flows. You mentioned some replacement activity. I wanted to get your sense of where we are in that stage, and are we just at the beginning stage of see RPs coming out because of replacements? Just get a sense of that.

I still think we are early in that. I think people are still in the stages of finalizing where they are going to be on their allocation views, and I think as they are doing that, they are turning, I think we're seeing a increase number of what you would call (inaudible). I think we are in early stages of that and more to come.

Great. Thank you.

Our next question comes from the line of Cynthia Mayer with Bank of America Merrill Lynch. Please state your question.

Good morning. Just following up on the last question in terms of acquisitions, alternatives versus boutiques. I'm just wondering between the two, is there any difference in the pricing at this point, and does that influence you, and if you're looking forward to strong year next year in terms of performance fees, I guess would some of the alternatives firms that you're looking at, and does that mean prices there are recovering faster than they would be for the long only firm?

I would say the competitive environment for both traditional and alternative boutiques is quite favorable for us. In light of that, I'd say pricing for both kinds of firms is -- continues to be attractive. Albeit, within the range that we have historically paid in our investments. The other point that I would make with respect to the pricing for alternative firms is to recall that the structure of our investments inevitably in our alternative investments includes a synthetic revenue share, which gives us a quote, guarantee, on some level of cash flow attributable to performance products even in periods when none are earned. So that element is -- complicates the direct comparison between the two types of firms. With that said, we're seeing similarly high quality firms in each area and pricing is actually quite comparable, I would say.

Great, thanks. And just to clarify on the 2010 performance fees, maybe I missed this, did you say what the current total performance for [AUM] is at this point in.

Yes, we have $31 billion.

Great. Okay. And any thoughts on just -- holding company expenses at this point, given the way the market's been?

As we look to next year, that's $11 million run rate is a core holding company expense number and of course deal costs are incremental to that. We factored in a modest amount of deal costs but holding company expenses will increase as we execute transactions.

Great, thanks a lot.

Our next question comes from the line of Marc Irizarry with Goldman Sachs. Please state your question.

Great, thanks. Sean, just a question on acquisitions in term of what's holding up some transactions in the pipeline from coming too fruition. Is the public equity market playing a big role in sellers expectations, or stealing potential opportunities from you? And then also, are your affiliates or potential new affiliates thinking differently about when they want to partner up with someone, what the distribution relationship looks like more so than they have in the past?

I would say that the pace is -- I feel very good about the pacing actually. We just closed an investment in an outstanding international equities manager, Harding Loevner. The early part of the year, and of course, pretty much all of last year, while we had a very robust pipeline and a number of transactions that we could have closed, it was the right thing to defer those, and some, including Harding, have come back, but I feel very good about our momentum going forward. The public market is -- there's been at least one transaction done, and rumour of a couple more to come, but very than different in 2007, when we heard regularly from boutique managers that they were thinking about going public and how does our approach compare to an IPO.

We hear that very little, very little from both traditional and alternative firms, maybe especially alternative firms. I think the past year has been challenging for all companies, but it has made many, I would say most, of the boutique firms who we talk to quite reluctant to think about going public, so there will be some, but it's not something that we're encountering as any difficulty at all in the current environment. The other thing I would say with respect to distribution, we have a great story to tell on international distribution, and that's increasingly a component of what makes us appealing to outstanding boutique firms. I would say though, it's always important to remember that the firms that we're investing in are firms with great track records, strong organic growth, around prospects for ongoing growth. That's the best they are making by partnering with us and keeping such a substantial portion of the equity. Those firms care about the quality and track record of AMG as a partner, including through this past year and then after that, they certainly appreciate the additional opportunities that we offer in various areas of distribution.

Okay. Great, and just in terms of the AUM on the alternative side, how much is subject to potential redemptions as gates are lifted?

So, again, we -- our affiliates really did not -- we had a few products where people redid some restructures. I think there are still some, some outstanding redemption as people start sorting through their own things, and I think alluded that that in my prepared remarks, but there's not a lot there.

Okay. Any way to quantify that?

I'd say we look to the end of the year, and there's $3 million to $4 million that was slated to redeem - - folks in March said we would like to redeem that in December. A lot has changed since then.

And who know when, some people may just -- who knows what's going to --

I don't think there's anything about that that's material relative to the projectory that we see in the business.

Okay. Then just, Darrell, maybe you could tough on your capitol priorities to the end of the year here.

Get at much money as possible for deals is what we do. We've got -- and the way we spend it is cash first, and then the revolver, that gives us plenty of capacity in order to go ahead transactions done.

Great, thanks, guys.

Our next question comes from the line of Michael Kim with Sandler O'Neill. Please state your question.

Hi, guys. Good afternoon. First, maybe just to comment, the deal pipeline a bit differently. I understand why some of the motivated sellers may not be as motivated these days just given the market rebound. But are there any lead indicators that might suggest succession oriented transactions might start to pick up whether it's higher taxes, better markets, or what have you?

Yes. Everything you said. I think if you're talking about motivated sellers, we really, except for some isolated opportunities, most of which sort of went away, where you had high quality boutique firms embedded within larger financial services firms that felt a level of motivation, especially in the first quarter, some of that motivation on the part of corporate sellers has ebbed. But with respect to independent firms and succession oriented transactions or minority investments into alternative firms, I think the recovery in the market and the stability that has come, is one of the key elements that would make firms, for example, which face succession oriented issues, where demographics have not stood still, in fact, they've -- the demand graphic issues have become more focused and timely over the past couple of years as obviously, firms with succession oriented issues stayed out of the market. So it's been, if you will, a little bit of a buildup of those kinds of opportunities, and and with some relative stability, we are seeing, as I mentioned in my remarks, a heightened interest on the part of such firms.

I think the other point you made, which I had noted earlier as well is about taxes, it's quite important to understand the degree to which taxes are expected to rise. For both traditional and alternative firms. Is quite significant over, and I think will provide some good tail winds into next year because the level of taxes is one thing, but also, the delta between ordinary and capital rates makes capital transactions more attractive and makes a structure like the one inherent in an AMG partnership where capital incentives, equity incentives, are much more important, more prominent in a firm's incentive structure. Much more, it makes such incentives much more attractive, much more potent than incentives which rely entirely on ordinary income. Which is the norm for firms that are entirely independent. So I thinking a bunch of ways, the tax environment along with these other secular factors, I think, are going to be important, are and will continue to be important drivers of transaction activity.

As it relate to asset allocations, more broadly, given what, I guess, we're seeing in Australia, how much of a risk do you think it is for pension plans to kind of increasingly favor maybe index type products over actively managed mandates at this point?

Again, all we can sort of add to that conversation is what we see. We're seeing in the institutional marketplace across all the sectors, and certainly increasing for us, even more outside the US, we're seeing just increased search activity for active mandates in global equities, in alternatives, in merging markets, so I'm sure part of that is the fact we're just participating in more opportunities because of our growing platform, but we are not seeing that trend really impact us. And one footnote to that, what happened with the mandate we talked about, or mandates we talked about in Australia, it's not necessarily what you described which is bringing them into a past environment. They are going to have to sort out how those mandates will be managed. And I don't think they have done that yet. I understand the broad point you're making. I'm not sure that applys in that specific case.

Okay. That's helpful. Thanks, guys.

Our next question comes from the line of Robert Lee with KBW. Please state your question.

Thanks, good morning everyone.

Good morning.

I have a question on the flows, specifically the other out flows, the $4 billion. How much of that -- I'm assuming some of that was related to the two affiliates who sold back to management, and maybe some other product closures, but can you break that down a little bit, and is there any expectation for similar actions kind of over the coming quarters?

Yes, so this is Nate. Almost all of that, the vast majority, almost all of that is the two closures that we spoke about. And then with respect to looking forward, I don't see anything that's looking like -- we're going to keep working through with our affiliates as we always do, but I don't see anything like that coming up.

Great. And maybe just one quick question on the Harding Loevner. I'm curious, heading into closing the transaction, just curious what their specifically flow experience had been like. They have a variety of products from funds to separate accounts.

It's been good.

Flows have been good. And I think along side, I think they have lots of opportunity to grow into a bunch of these channels, so I think they are very strong in some potential and US retail, and they have a growing opportunity to grow outside the US, and have launched (inaudible) lots of opportunities.

They had a very big win in Australia earlier and they are continuing to get assets there. All good.

Great. And maybe just one last question on the guidance for next year, Darrell. You mentioned the $31 billion of powers of performance fee, at or above high water marks. If we think about the high end of your guidance for next year, the assumption that all the $31 billion currently of assets would be above high water marks and generating some level performances?

Actually no, it's a more conservative approach than that, and again, it is difficult given there are nearly 100 different contracts and arrangements across the complex. I'm so hesitant to create a metric around it, but I would say that -- example, in an environment, if approximately half of our products are above high watermarks, and all of those that are above high watermark were to out perform either an absolute basis, which is what some contracts are, or their index by 600 basis points, we would realize performance fees that are over a dollar. So it gives you a sense that we're -- our sensibility for again, if firms were to out perform by 300 to 400 basis points, just that half of that are above the high water marks, we would be getting to the upper end of the range. Now, as that, that is speaking broadly about it.

And I think frankly, speaking in broader terms today is more in line with reality than at the beginning of 2009. Because I said there are about a dozen firms, much more diverse set of firms and products that will contribute to performance fees in 2010, so generalizations can make sense, and hopefully that just gives you a sense that we're not -- the $5.75 remembering does not include new investments, includes some, you notice, positive assumptions about global distribution, and good efforts at firm. With regard to performance fees, it's not shooting for the moon. It would be a good year broadly for $41 billion, we've seen years like that before, and so I hope that gives you just a flavor for how we're thinking and how we incorporate that into the guidance.

That's helpful, thanks. That was it, thanks, guys.

Our next question comes from the line of Roger Smith with Fox-Pitt, Kelton. Please state your question.

Thanks a lot. I want to come back to the tax rate issue, because I think that's somewhat interesting, meaning the tax on the affiliate or tax rates the affiliates might get on some of these sales. I want to make sure I understand that. That's really a capital gains tax rate to the seller, because this is a taxable event to them. Is there then future tax payments they would make on the remaining equity that they own as well? Or is that all paid at the time of the sale?

When they sell equity to us in the future, it's a capital transaction.

Okay.

But you don't pay, you sell 50% of the equity, day one, you pay taxes on that 50% capital gains, and obviously, it's distributed broadly through the firm's partner group, but when that remaining equity comes back, typically many years into the future, it, too, is taxed at a capital gains rate.

Okay.

Again, just to run through the mechanics for others on the call, and what that means, we can all say that taxes going up would encourage folks to think about a transaction today, understand if taxes on capital gains were to double, that would mean that for a seller to have the same after- tax proceeds from a transaction that they would have to deliver materially more growth to us in the future to get to that same level as they would prior to Congress increasing the tax on capital. So if you run through the math, it's - -

It's twofold. One is what Darrell described as the people see rates going up, and they obviously want to get more proceeds, and they'll make judgment about growth, but the other more subtle aspect, which I described earlier, but maybe just to add to it a bit, is when the delta between capital and ordinary rises, as it's forecast to based on what the administration is saying, then the independent boutique firm owners, which receive their income as ordinary income, and they are making this calculus that Darrell is describing. of I know I need to want to do a succession oriented transaction sometime in the next five years, do I do it today? Or do I do it five years from now? What do you think the growth rate is going to be? Historically, the growth rate might have been 10% or 11%. That sort of made --if you say if I grow at least 10% or 11%, I'll be neutral on an after- tax basis, now given the expected delta between capital and ordinary, the expected growth rate that you would have to believe in in order to be held harmless or in the same position on an after- tax basis is much higher. So it's both elements, and believe me, the principles of these boutique firms, traditional and alternative, are increasingly sensitive to those dynamics as they think about their forward plans.

Got it. But should we then potentially worry about affiliates that you already have? Putting stock back to you at the same time?

Well, first of all, there are strict limits on how much can come back on any period, and so people's judgments are affected by what they are allowed to do, but also, and this is important, the forecast and we know as much as anybody else which is to say we don't know precisely what is going for happen to tax rates. But what has been described by the administration has been a dramatic increase in ordinary rates and the President has made statements around increasing capital gains rates to much more limited degree, and so -- and that is more in line with historical norms have been. Typically there is a big delta between ordinary and capital rates, the change in capital rates is not expected to be so great. People who are going to be taxed at a capital rate at any event are going to be more indifferent and making decisions based on their own person circumstances or judgment about forward growth.

Thanks very much for that.

Our next question comes from the line of [Sam Hoffman] with [Lincoln Square Capital]. Please state your question.

Good morning. Can you comment on what type of net flows are included in the top and bottom range of guidance, and also on performance views, does the bottom end of the range assume no performance fees?

Maybe in reverse order. Yes, the bottom end of the range assumes very modest to no performance fees. Think of it as $0.05 or so. From a float perspective, again, we are aren't going to give a particular metrics, but if you look at flows for AMG on a historical basis, getting to those historical levels is roughly in the mid- point of the range.

Second question, given that you're now in a net cash position, under what market conditions and under what amounts of net cash and gross cash would you consider starting your share repurchase again?

One component of our strategy has always been this disciplined capital management, and the degree to which we did not see material new investments on the horizon, and getting to put that money to work in a reasonable period of time for shareholders, we think about share repurchase. And again, that's consistent with our behavior over our history, but as -- how many times can we say that we look at this period and our horizon for the next year for putting money to work? I think we will not be repurchasing shares any time soon.

Okay, but you don't think that -- you made some comments earlier that some shareholders and others have had a view that doing a share repurchase in this type of environment would not make sense, I want to clarify that that doesn't mean you wouldn't just run up the cash --

No, no. That would be an ideological thing. This is just about making sure we provide strong return over time. And look, for us, I'd rather -- I would -- I think we all are focused on growing the Company through new investments, doing what we do, and share repurchases, really, the base case, but when there's a lot of value that gets added --

The bit that obviously we can't share but we see is it the strength of the new investment pipeline, and the opportunities beyond, and in the current environment, they are extremely attractive, so on an on- going basis, share repurchase is going to be an important element of our capital allocations strategy, but it's always been judged against other uses of cash, and clearly in the current environment, the environment may change, but from everything we can see, the current environment and looking out of into the medium and long- term, we see very attractive opportunities.

Do you feel there's a minimum amount of cash plus credit facility that you need to keep as kind of the floor?

I think again it falls under the umbrella of discipline management, and we always want to make sure we have capital to execute on our strategies. One which is putting money to work in new investments, and continue to do what we need to do to grow the business.

As you would expect, we always did, and continue to model sensitivity cases of the business, both up and down. We were placed with the relatively stability of our earnings through the very difficult market environment, and we are always an opportunistic but also sensitive and prudent in the way we allocate our cash.

Terrific. Thanks.

Thank you.

There are no further questions at this time. I would like to turn the floor back own to Sean Healey for closing comments.

Thank you again for joining us this morning. As we discussed on the call, we're pleased with our results for the quarter, and confident in the long-term growth prospect for AMG and its affiliates. We look forward to speaking to you next quarter. Thank you. This concludes today's teleconference. You may disconnect your line at this time. Thank you for your participation.