Affiliated Managers Group Inc (AMG) 2012 Q2 法說會逐字稿

Greetings and welcome to the Affiliated Managers Group second-quarter 2012 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, Vice President of Corporate Strategy and Investor Relations for Affiliated Managers Group. Thank you. Ms. Lynn, you may begin.

Thank you for joining Affiliated Managers Group to discuss our results for the second quarter and first half of 2012.

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.

AMG will provide on its website at www.AMG.com, a replay of the call and a copy of our announcement of the results for the quarter, as well as a reconciliation of any non-GAAP financial measures to the most directly comparable GAAP financial measures.

With us on the line to discuss the Company's results for the quarter are Sean Healey, Chairman and Chief Executive Officer; Nate Dalton, President and Chief Operating Officer; and Jay Horgen, Chief Financial Officer.

With that, I will turn the call over to Sean Healey.

Thanks, Ali, and good morning, everyone. Despite the increased market volatility in the second quarter, AMG reported strong results including economic earnings per share of $1.66 reflecting excellent execution across all aspects of our growth strategy.

With our ninth consecutive quarter of outstanding net client cash flows, two transactions closed in the quarter and our announcement this morning of our increased investment in BlueMountain Capital Management, we have substantially enhanced the growth prospects and earnings power of our business.

Even in a challenging market environment with muted investor risk appetite, our affiliates have generated $47 billion in net client cash flows over the past two years, including $7 billion in the second quarter. We continue to benefit from our strategic position and differentiated value added products in the global equities and alternative areas, which represent approximately 70% of our earnings and are seeing ongoing demand from clients globally.

Our affiliates in these product areas have outstanding long-term track records about performance including Tweedy, Browne, Harding Loevner, and Genesis, where the largest products in global international and emerging markets equities are in the top quartile across virtually all relevant periods.

Our alternative managers including Pantheon, AQR, BlueMountain, First Quadrant and ValueAct, continue to generate strong returns and we remain positioned to realize meaningful performance fees in 2012.

Our results reflect the continued strong execution of our global distribution strategy as our affiliates are winning new business and market share through affiliate level marketing efforts as well as by leveraging our centralized platform, which enhances the presence of our affiliates across channels and geographies. Given this ongoing success, we are continuing to add resources to our distribution platform in key markets worldwide including the recent addition of senior-level marketing personnel to covered Germany and Switzerland.

Our affiliates are involved in a growing number of searches and finals across Europe, the Middle East, Australia, and Asia, and we see a broad array of opportunities to win new business in these markets.

Our strong organic growth from net client cash flows has occurred in a period which industry flows -- when industry flows have been concentrated in passive and fixed income products. While much of the rise of passive has come at the expense of active, to a large extent the growth of passive products also reflects a trend where clients are separating their risk between beta and alpha portfolios and migrating away from equity products in the index-hugging middle. In our view, these barbell strategies benefit not only providers of passive beta but also value-added equity and alternative products which can generate true alpha for the other side of the strategy.

We see this trend continuing and we believe that firms such as our performance-oriented affiliates will continue to see strong organic growth even as passive beta products also grow.

With respect to fixed income, as we along with many others in the industry have observed, current outside levels of flows into fixed-income reflect extreme investor risk aversion and will inevitably reverse. No one can predict when this reallocation will occur, but when it does we believe that we will generate even stronger growth in our return-oriented products and unlike many other firms, we will not have a drag from fixed-income outflows.

Now turning to new investments, we added two outstanding new affiliates, Yacktman and Veritable during the quarter and this morning we were pleased to announce our significantly increased investment in BlueMountain Capital Management, one of the leading credit alternative managers in the world.

We have tremendous respect for Andrew Feldstein, the firm's CEO, along with the rest of the senior team and in the transaction, the firm's top eight partners have entered into new commitments to BlueMountain as well as to the AMG partnership and are reinvesting the large majority of the proceeds from the transactions into BlueMountain funds.

With over $7 billion in assets under management, BlueMountain has grown substantially since our initial investment and with its diverse range of alternative products, which lever its credit and equity expertise and excellent long-term and recent track record of absolute returns, the firm has outstanding forward prospects. The opportunity to increase our investment in BlueMountain is very attractive and was available because unlike our traditional affiliate investments, we began with a smaller minority position which allowed us to make a substantial additional investment while still providing for the largest portion of the economic interest to be retained by the management partners.

More broadly, the transaction environment continues to be highly favorable to AMG and we are pleased with the quality and diversity of our new investment pipeline which includes traditional and alternative independent firms around the world as well as divestitures from large institutions. We are confident in our prospects for additional accretive investments and new affiliates and together with the organic growth of our existing affiliates, we are uniquely positioned for continued strong earnings growth going forward.

With that, let me turn it to Nate, who will discuss our affiliates' results in greater detail.

Thanks, Sean. Good morning, everyone. Looking at the second quarter, the main themes for us were continued strong relative investment performance across our affiliate group combined with continued good flow momentum across a range of affiliates and products and especially for global equities and alternative products. As you all know, this is coming against the backdrop of an ongoing challenging period in the equity market.

Now as Sean noted, while at a macro level industry trends still favor fixed income and passive strategies, we are continuing to generate strong flows across channels with a total of $7.1 billion in net new flows for the second quarter, our ninth straight quarter of strong positive client cash flows.

There's several reasons for this. First and most important, our affiliates are continuing to generate good investment returns. Second, there are some trends that are working in our favor, increasing allocations to alternatives, increasing allocations to high conviction managers and a growing recognition of boutiques as a proven source of outperformance.

Finally, we and our affiliates are continuing to bring our products into new geographies and distribution channels.

Looking ahead, and consistent with past trends, the pipeline is good and we are constant in our ability to continue to generate strong organic growth.

Now turning to investment performance. In the global developed markets category, we had another strong quarter with nearly all of our global managers delivering outperformance. In particular, Harding Loevner and Tweedy, Browne had very strong relative performance with nearly all of their global equity products beating their respective benchmarks for all relevant time periods. Across our affiliates, we now have long-term track records of outperformance and a wide variety of global and international equity products which gives us confidence that we can continue the business momentum we have built.

In our Emerging Markets category, we had another excellent relative performance quarter with Genesis and Hardin Loevner in particular outperforming their benchmarks by a significant margin across all their products. Emerging Markets is also a category where we've built an array of products with long-term track records of significant outperformance.

Next turning to our alternatives category, as you know, we have a very diverse set of alternative products including private equity, global macro, credit alternatives, control-oriented equities, multi-strat, hedge fund beta, and several types of special situation funds. Among this group the second quarter was another good performance quarter and especially at AQR and BlueMountain, where we announced an additional investment this morning. All of BlueMountain's funds and most of AQR's products are well ahead of their benchmarks year to date and in addition, ValueAct is significantly ahead of their benchmark for the one-, three-, and 5-year periods.

While it's very difficult to benchmark Pantheon [PE] funds, the IRRs for the vast majority of their vintages remain well ahead of the applicable peer groups of funds.

Finally turning to our US equity products, against the backdrop of a challenging market environment, our affiliates delivered good performance. On the growth side, I would highlight that it was a very strong quarter for TimesSquare as the firm continued its long-term record of outperformance.

On the US value side, we were extremely pleased to welcome our newest affiliate, Yacktman, one of the truly great US value managers. Yacktman had a strong quarter in both of their five-star rated funds, continuing their track record of significant outperformance. We are very pleased to welcome Don, Stephen, and Jason, and the entire team to AMG and very much look forward to working with them.

Now turning to flows, we had another quarter of strong growth with $7.1 billion in positive net client cash flows coming principally from the global equities and alternatives areas as well as emerging markets equities. As we've been saying for a number of years now, these are areas we've been focusing on both because we think there's some long-term trends in favor of those assets classes and also because we believe these are areas where return-oriented managers will be able to add value.

Now in terms of geography, we saw positive net flows in both the US and globally. Looking at our flows for the quarter by channel and starting with the institutional channel, we had positive flows of approximately $3.5 billion. As we've seen over the past several quarters, we had significant flows in global equity products and alternative strategies as well as in emerging markets equities with notable contributions from Harding Loevner, AQR, BlueMountain, Pantheon, Beutel Goodman, Trilogy, and Systematic. We continue to be pleased with the diversity of the flows across products and firms although I'll reiterate the inherent lumpiness of this channel.

With respect to the pipeline looking forward, we continue to see positive long-term trends in terms of one business, finals, and RFPs.

Moving to the mutual funds channel, we had positive flows of $3.1 billion. Here we also continue the positive trends we have had over the past several quarters. The flows this quarter once again included strong flows in the sub advisory channel especially for alternatives products.

From a product category standpoint, we have good flows in the global and alternative strategies. In the US equities category, the migration continues towards concentrated managers moving away from benchmark-driven strategies. In the quarter we had contributions from Yacktman which were partially offset by outflows at Friess. One further note on Friess. While Jay will describe an accounting matter where we reduced an intangible asset related to the mutual funds, from a business perspective, Friess has a very stable and consistent team and process and we continue to have confidence in them.

In our high net worth channel, flows were about $600 million for the quarter. We had positive flows from Gannett Walsh & Kotler, which continues to attract flows through our US retail distribution platform and from Harding Loevner mostly in the international strategy.

Turning to our global distribution efforts, we continue to make very good progress overall. As you saw in the release, we are adding two new senior-level professionals to our global sales and marketing team. As we've said, a focus for us this year is deepening some of our regional teams, bringing on additional senior experienced sales and the client service professionals. The pipeline from these global offices is good as investments we have made over the past several years increasingly pay off.

Finally, we are very excited to announce our additional investments in BlueMountain. Andrew Feldstein and the rest of the team have been terrific partners for the past five years. Our announcement today underscores the strength of our partnership. We appreciate the team's additional long-term commitments to the business and look forward to working closely with them on a number of strategic initiatives and continuing our successful partnership for many, many years to come.

With that, I will turn it over to Jay.

Thank you, Nate. As Sean and Nate discussed, we continue to be pleased with our outstanding organic growth and the successful execution of our new investment strategy including the initial investment in one of the world's leading credit alternatives managers, BlueMountain which together greatly enhance the earnings power of our business as we look ahead to the second half of 2012 and full year 2013.

For the second quarter, we reported economic earnings per share of $1.66 with performance fees contributing $0.06. As you saw in the release, our GAAP earnings included two non-cash items related to balance sheet valuation adjustments. The first was a reduction in the non-amortizing intangible assets at Friess Associates, while the second was a gain related to our contingent payment obligations. Excluding these items, our GAAP earnings for the quarter would've been $0.82 per share. These non-cash items had no impact on our economic earnings per share or our tax benefits.

Now turning to more specific modeling items, the ratio of our EBITDA contribution to end of period assets under management excluding the effect of the end of quarter closing of Veritable and Yacktman was approximately 15.2 basis points for the quarter. For the third quarter, we expect this ratio to remain at this level including the impact of Veritable, Yacktman, and BlueMountain, and we expect it to trend upward in the fourth quarter with organic growth and performance fees.

Holding company expenses were steady at $22 million in the second quarter and we expect them to remain at approximately this level for the remainder of the year.

With regard to our taxes for the second quarter, our effective GAAP and cash tax rates and our intangible related deferred tax adjustment were distorted by the non-cash items I discussed earlier. For modeling purposes, we expect our GAAP tax rate to be 35% going forward and we expect our cash tax rate to be approximately 15% for the third quarter and then to trend upward during the fourth quarter with organic growth and performance fees.

We also expect our normalized intangible related deferred taxes to be approximately $17 million in the third quarter reflecting the additional tax benefits from the closings of our recent new investments.

Our share of amortization for the quarter would have been $17.6 million excluding the non-cash and tangible adjustment I mentioned earlier and together with the $8.2 million of amortization from affiliates accounted for under the equity method, AMG's controlling interest portion of amortization was $25.8 million. We expect our quarterly amortization to increase to approximately $30 million in the third quarter primarily as a result of our recent new investments.

Our portion of total interest expense for the second quarter would've been $24.8 million excluding the non-cash contingent payment gain I mentioned earlier. This interest expense includes $6.3 million of pretax non-cash imputed interest expense and we expect our total interest expense to increase to approximately $27.5 million for the third quarter, reflecting the financing activity for our new investments.

Turning to our balance sheet, we closed our previously announced investments in Veritable and Yacktman at the end of the second quarter. Today we closed an additional investment in BlueMountain. These transactions were funded using a combination of available cash and revolver. We continue to have ample capacity to execute on our new investment growth strategy with substantial availability under our now $1.1 billion bank facility, our strong recurring cash flow and ready access to the capital markets.

Now turning to guidance, given the successful execution of our growth strategy, we are updating 2012 and providing preliminary earnings guidance for 2013. For 2012, we expect economic earnings per share to be in the range of $7.10 to $7.70, reflecting a $0.10 increase in the bottom end of our range. And for 2013, we expect economic earnings per share to be in the range of $8.30 to $9.20.

Our guidance assumes our normal convention of actual markets through yesterday with 2% quarterly growth beginning in the fourth quarter and a weighted average share count of 53 million. The lower end of our 2012 and 2013 guidance includes a modest contribution from performance fees and organic growth while the upper end of the range assumes a more robust contribution for performance fees and flow expectation.

As always, these assumptions do not include earnings from future new investments and are based on our current expectation of affiliate growth rates, performance, and the mix of affiliate contributions to our earnings. Of course substantial changes in markets and earnings contributions of our affiliates would impact these expectations.

Now we will be happy to answer your questions.

(Operator Instructions). Bill Katz, Citigroup.

Thanks very much. I just want to sort of focus on some of the newer transactions and I know it's early days but particularly for Yacktman, you sort of highlighted a little bit into second quarter but I thought the deal closed toward the end of the quarter. Could you talk a little bit about what you are seeing early stages around acceptance and opportunity? And then the second part of the question is as you look outside of the United States and the efficacy continues to go up, where do you see the greatest rates of growth over the next six to 12 months?

Okay, starting with Yacktman, again as you say it's early days. We have already been able to -- and they've done a tremendous job and that comes first, so both their investment performance which is obviously the most important thing but also they obviously have a lot of traction and are doing a fantastic job in sort of sales, marketing, and client service already.

That said, I think you know their funds have gone on to the manager's platform, our platform, and there are a few places already where we have sort of specific strong relationships with platforms or something that have been ones that they hadn't focused on previously. And so we have been able to be helpful for them again already and so we are seeing early traction.

Some of it frankly is potentially significant, so that's very good to see. But as you say, early days still.

And then outside the US, with the second part of your question, I think there's a couple different dimensions to it. So one is the way we've been building our global distribution platforms, it's putting senior experienced people in the marketplaces where we see specific opportunities for our product set. And then again ideally strong top-down characteristics as well. So in the short run, we actually -- it's very hard to tell where do we think it's going to come from, because a lot of these are large mandates and very lumpy and all that, and we see again there's lots of things going into the pipeline and the pipelines -- and the funnel if you will is sort of growing.

Long-term I think it will be the markets with the attractive sort of macro characteristics and we are seeing good early traction in Asia and in the Middle East and Australia still and Europe and so those are growing.

I would add that apart from incremental opportunity that we can provide through our platform, Yacktman already is quite successfully distributing into Europe through a sub advisory relationship with a UK-based manager. So their product is already well accepted and I think there's lots of opportunities over time for more growth.

That's helpful. Just a quick follow-up. With the BlueMountain deal now sort of in and in any way does that sort of diminish -- I heard your comments -- sounds like you are still pretty bullish on the pipeline for new deals but does this sort of sop up some of the near-term capacity or is this just sort of something that just happened as a bit a one-off and everything else is still pretty positive?

I would say notwithstanding the market volatility over the past quarter and continuing, our pipeline remains very, very strong. It's probably a little more weighted toward alternative firms, many of which are doing very well, notwithstanding the market volatility -- I'd put BlueMountain in that category for example.

And then ongoing divestiture activity where we are spending, as you would expect, the right amount of time evaluating the various opportunities from both European and US banks. Prospectively we are seeing a little less than you would have thought in terms of traditional independent firms seeking a succession solution, but I think that is -- that will inevitably occur over time and the math of rising tax rates and for firms that are thinking even over the medium term of doing a transaction is really compelling.

So we feel great about our pipeline. The investments that we've made to date have absolutely -- involve no limit on prospective new investments and Jay can talk about capacity.

So on capacity, Bill, we have just increased our revolver to $1.1 billion. We did fund these transactions with a combination of cash which we had on hand and we had another quarter of cash in the second quarter and revolver. So just on the cash on hand point, we still have plenty of capacity to execute. But I would say more importantly, eyeing these fixed income markets generally we have the availability of going to the capital markets for additional capital at attractive rates.

Great, thanks for taking all my questions.

Daniel Fannon, Jefferies & Co.

Good morning. I guess, Jay, first on the guidance, I guess if you could maybe dissect it a bit for us and considering the amount of deals and the pretty strong acceleration between now and 2013, what you guys are assuming from the contribution from deals versus, say, organic growth, we obviously get your market assumptions that you gave us already.

So appreciate that there's a lot going on. Maybe I will take 2012 first. Our starting point was the last call, May 1, markets were down. Our blends down about 2%. Also our guidance convention would have assumed 2% for this quarter, so we are kind of off of our model about 4%. So all things being equal, negative beta would've taken our guidance range down. That was offset by the early closing of Yacktman and of course BlueMountain, which closed today and we start to participate right away on the incremental investment.

Maybe to answer potentially another question that someone might have, we really haven't changed our outlook on performance fees for the year. I would note that with global equity performance year-to-date, it has had an impact on our beta sensitive alternative products, but our absolute return products are of course continuing to produce strong results, so no real change on performance fees.

Editorializing for a moment, we did raise the bottom end of our range by $0.10. We feel really comfortable in the top half of our range just given all of the elements of positive earnings power that we have described.

Looking at 2013, again we are providing this guidance now to try to provide more clarity around the new investment activity this year. The first quarter that you will see the run rate effect of that will be the third quarter so we will not see a full year of earnings profile in calendar year 2012. It is the reason for giving 2013 guidance.

That guidance assumes standard convention for market beta and shares as we always do, so the main element reflected in the [830] to [920] is the full-year impact of our 2012 investments as well as a reasonable assumption for organic growth and performance fees.

Okay, great. That's helpful. I guess in terms of the international distribution, you guys -- it looks like you added a few more sales folks today, I mean in this quarter. Could you give us a sense of the numbers that you are kind of in that distribution region now and then kind of where you think that might go I guess this year or how much else you are looking to add kind of on a longer-term basis.

Got it. So I started to describe, just in answer to the earlier question, which is what we are doing is we are taking -- we are bringing senior market facing people in where we see opportunity for our affiliate product in the market. Not just over the long term but also in the short run, where do we see specific opportunities. And so sort of think about it, those are things that have pretty quick paybacks and pretty good return profiles because again we're able to leverage all the infrastructure we have built so far but also all the infrastructure our affiliates to really just add those marketplace-facing things -- the marketplace-facing people.

I should say we have had -- we've been very lucky in the people we've been able to attract because this is a pretty attractive proposition to represent this breadth of boutiques this way and we've also had very good pickup with our affiliates. So all of that is working.

We have a decent sized list of places that we are looking at adding people and in each geography, a place like Australia, a place like the Middle East, it will just be a couple of senior people at most. When you look at Europe, which is where we are adding these two we mentioned this quarter, one of the things we're working on this year is breaking it down a little bit and so you saw us add Nordic Specialty. You're seeing us add some more country specialty where we've done a good job already at a high-level as a team and we are seeing real opportunities to add with local expertise, truly local expertise

So it's really just a couple people per geography. We have a relatively long list of places we are still looking at but as we are putting them in, we are putting them in where we see that kind of quick payback, high return sort of opportunity.

I'd underscore the last bit of what Nate said. I think one approach would be to be, quote, strategic and say let's just cover the landscape and have sales and distribution professionals in every geography. Our approach is one and this is a general approach to the business for us is to say where is the most attractive return? And over time obviously, we are building out breadth and scale but in each case we are making investments where we see a real return over the short to medium term.

Great, thank you.

Michael Kim, Sandler O'Neill.

Good morning. First as it relates to the incremental stake in BlueMountain, can you just talk about how that transaction came about and sort of the rationale for the transaction from both perspectives? Then beyond that, would you consider looking at similar transactions as you kind of look across the other equity method affiliates?

So, the way that we think about investing in alternative firms has been to take an initial stake which represents a minority investment that is meaningful but on the smaller end and interpolating -- it's an investment in a revenue share, number one -- and interpolating to an equity position that would be, let's say, 20% to 25%.

So we have known -- and why do we do it that way? That's the -- that's what the prospective affiliate is interested in selling. It's a good fit with our approach and gives us lots of opportunity to participate in the business in a meaningful way but also to have this additional avenue for growth where we can make a substantial additional investment.

Here it's just a great advantage for us to have such a tremendous partnership and a five-year relationship and a friendship and so we feel extremely comfortable with the investment in BlueMountain, more comfortable than you could ever feel with a firm that you are just getting to know. So this is a great opportunity and as I said, it exists because we started with that smaller stake.

So as we look out going forward, I think we certainly see the opportunity to invest in additional alternative managers. As I mentioned, that's an important and very attractive part of our investment pipeline and of course we have some investments already in some fantastic alternative firms.

Going forward, I am certain that there will be over time some additional investments made similar to the one that we announced this morning but there is no way to predict exactly when and which firm, but it certainly is an opportunity that exists over time and is just inherent in the way that we are structuring these investments.

Okay, that's helpful. Maybe just focusing on revenues in the mutual fund channel, it looks like the blended fee rate continues to trend down a bit. Any color there in terms of some of the drivers behind that dynamic? Is it maybe a different set of affiliates that are driving more the growth these days? Is it a mix issue or are you seeing any incremental pressure on pricing there either looking at management fees or as it relates to payouts to the distributors?

I will let Nate talk about the drivers and answer some of the particulars. Just to look at the numbers for a moment, just make sure that you are pulling out the new investment AUM when you are looking at fee rates because I think you'll find that when you do that quarter-over-quarter, our mutual fund and really all of our fee rates are either flat or kind of up quarter-over-quarter. So I just wanted to make sure that we clarified that. I don't actually think there's anything going on between the two quarters and I will let Nate talk about it more broadly.

We're not really seeing any -- sort of any fee pressures or any need to sort of pay distributors more, what have you. I think maybe one of the trends that's in there and this does impact the mutual fund channel but one of the trends that is in there is we've been winning some large mandates that are sub advisory in the mutual fund channel, so that's one sort of component of those do have sort of lower fee profiles. But again, they are a very attractive sort of high-margin business but have lower fee profiles.

The other thing I would say is this is not particular to the mutual fund channel but the other thing I would say is the alternatives part of our business has obviously been growing as well and that has got the performance fee component to it as well which can also just if you start to think about that growing fast, there's a lag effect that could be in there, too.

Okay, I will follow-up with you off-line. Thanks for taking my questions.

Robert Lee, KBW.

Thanks, good morning, guys. A question going back to BlueMountain a bit and this is just really just kind of more of a structural deal question. But if I remember some of your initial investments and the minority investments of AQR and BlueMountain, you often structured them with some kind of collar around performance fees. I'm just kind of curious how you approach the transaction of this point and kind of the value placed on the performance fee component of the revenue stream. Is it kind of the same multiple that you also put a collar around it? Just trying to -- how should we think about that?

Sure, I wouldn't say -- it wouldn't use the term collar to describe any of these investments or the structure on these investments. Sometimes we will make an investment in the sort of blended multiple that we pay reflects that performance fees have more volatility but we don't have any structural protection or stability that's involved.

In other settings and we think this is a -- that there is an efficient arbitrage in many cases for us to structure the investment where there is an element of stability built into the performance fee revenue stream. So we will contractually arrange for the performance fees to be at a certain level, typically a lower level than the firm's expected or achieved performance and the revenues associated with that.

And so I having that contractual stability, which in a period where there are earned performance fees would be paid out of the management partners' management fees, and over time it all would work out. But having that element of extra stability allows us to pay a higher multiple for that stream. And so prospectively I think it will vary in alternative investments going forward.

BlueMountain is one of the alternative firms that in our investment with them we had and have some of that element built in and that was embedded in our purchase price.

Great, that's very helpful. I'm just curious maybe shifting gears to the global distribution platform, to what extent is the success you are seeing there and the continued strong flows also influenced by if at all by more affiliates making use of the platform? I know as it has grown and matured, you've have made it -- it's always I assume been open to everyone but maybe some affiliates didn't use it at first and now they are more willing to use it or more interested in it. Is that an element of the flows and the success there?

I think there is some element of it. Again, the way we like to talk about it is there's a very virtuous circle that you set up here as we are able to help affiliates. I'll say one thing at the outset which is these things are built in a collaborative fashion. It really isn't us going out and saying her is what we're going to do. We hope the affiliates want to do it. We are doing this in partnership with the affiliates and so we have a pretty good sense of at least what a core group wants to do in each case.

But there really is a virtuous circle that gets set up here both within our existing affiliates and then obviously with prospective affiliates as well where if we can execute in an excellent fashion on behalf of a set of affiliates and we're demonstrating success, that encourages other affiliates to participate.

As you say, the fact that other affiliates participate strengthens the platform, makes us a better partner, not to overuse that word but a better partner in the marketplace with end clients and with intermediaries.

And so at which that in turn makes us better able to serve affiliates, so there really is a very virtuous circle that gets set up here and as you say, as we have been demonstrating success, we think are able to get -- that certainly isn't lost on affiliates who then decide to participate.

Great, and one last question. Thanks for indulging me. With the Veritable transaction, can you talk little bit about now that you have closed that and are you seeing that that's had the effect you expected as it relates to that kind of new initiatives in the wealth advisory channel in terms of building pipeline there and understanding there may be generally smaller deals but are you starting to see that kind of bear some fruit?

Yes, absolutely. Veritable is one of the most highly regarded and largest of the independent ultra-high network advisory firms in the market and it's just a great calling card to be able to say that they chose us as a partner. It is hard to characterize the pipeline in a specific way, but I would say it's a good pipeline and there has been absolutely an uptick in calling activity and receptivity following the announcement of the Veritable investment and we continue to be very confident about the prospects of the wealth partners business.

Great, thanks for taking my questions.

Marc Irizarry, Goldman Sachs.

Great, thanks. Just one more on the global distribution. Can you just talk about maybe over the last six to 12 months, how much -- how many of your affiliates or what percentage of your flows maybe came from global distribution? And when you look at the platform going forward over the next sort of six to 12, how much assets do you think you can source from the [asset] platform? Thanks.

Okay, so in terms of number of affiliates, I would say the vast majority of our affiliates are working with the platforms, plural, in one or more places and an increasing number of them are working with the platform in more and more places. So we've built in a very modular fashion so they can participate where it makes the most sense for them. And then as they have success, they may choose to broaden their participation or what have you. But as you say, it's driven by them.

When you talk about which flows are coming through that platform and through our affiliates, it's actually an interesting phenomenon. It's getting in a lot of ways as more affiliates are using the platform in more ways, it's getting harder and harder to sort of say, well, this is a sale that came from mostly from us or this is a sale that came mostly from them. One big thing that we've been emphasizing this year, and Andrew, who came on to run it has really been emphasizing this year is that integration. So it's absolutely making a material contribution. You can sort of see it in the search activity, the RFP activity and then the percentage or the pace of progression through the pipeline in terms of final, then wins in geographies where affiliates really hadn't been penetrating before.

But it's getting harder and harder to sort of separate out the two things so it's absolutely making a material contribution and you can sort of see that coming across.

Okay, then just on the flows, can you just tell us how much Yacktman contributed this quarter? And then an unrelated question on flows, when you look at the dispersion of flows amongst your affiliates, how does that compare to maybe years past?

So on Yacktman contribution, I think, Mark, we don't separate out any one affiliate. I wanted to just clarify, though, that the flows that we have on Yacktman were the flows above the amount that we paid for, if you will, so we priced the transaction call it March 31 and we had an asset that just happened to be that date or close to it and we had at AUM and an earnings profile at that time. These flows are incremental to what we purchased.

So while we don't break it out, Yacktman is largely a mutual fund company. You can figure it out in the quarter.

Then on the second point, which is sort of concentration or dispersion, I'd say there are sort of two probably too broad themes that play out in any quarter. Right? One is, there is especially in the institutional channel level of lumpiness and so there is concentration but that concentration sort of rotates among firms. Then the other is sort of more secular stuff which is you have areas if you go look back over history, we've had different areas and move in and out of favor and so there is a coarse element of concentration of those firms that are performing well in areas that are in favor are getting flows.

And so as we said, in places where we are seeing concentrations this quarter was definitely global equities and alternatives and also emerging markets equities although this quarter there was on the margin more global and alternative.

Okay, great. Thank you.

Chris Shutler, William Blair.

Good morning. On the senior people that you have hired in Germany and Switzerland, can you give us just a little bit more color around how you look at the medium-term opportunity in those markets?

Sure, so we have -- since we started covering Europe, we have been covering Germany and Switzerland at a high level with the team out of London and in that process, we sort of identified some -- ore we formed some views about the increasing opportunity and it's sort of different in the two places and I think for different reasons but increasing opportunity for people, for the portions of their portfolio is looking for return. They are still very much -- sort of safe conservative element which I (inaudible) talk about there.

But increasing portions of the portfolio is people looking for returns and then sort of specifically the opportunities to bring some of the same themes we've been talking about but especially here, sort of the alternative and global emerging kind of products in the market.

So it's a little bit of a warm marketplace in the sense that we've already started covering and then again sort of see specific opportunities that are different in sort (inaudible) the two places but see specific opportunities. And then that was reinforced as we went through the process of trying to identify sort of the people that -- the kinds of people that we wanted and the people we wanted.

One thing I should say and maybe should've said before, a really important part of that process is finding the right people. For us it sort of sounds simple on one level which is find markets that are attractive for your products and where there are ideally good growth characteristics and then find strong people with good local relations.

But finding the people who will work well in our structure is the most important part. So it's also sort of the serendipity of finding those people also for those markets. So I hope that's helpful.

It is. Then just one other one. Clearly there's a secular movement right now into alternatives, which we've been seeing for a while. But it feels at least to me like we are seeing growing momentum in not only alternatives with institutional investors but also retail. So just curious what if anything you think AMG could do over time to really I guess better capture that retail opportunity in alternative?

I think we agree with your thesis and -- I think we have had that view for a while. We are participating in it now both AQR and First Quadrant have very high quality liquid alternative products that are in the retell marketplace and both are also actively -- we're working with both of them actively and having pretty good success in the subadvisory market, so we absolutely believe in that trend and see it going.

There are other things we're working on in terms of product development both with those firms and with other alternative managers. And some of it is a -- it is a complicated world with lots of rules to bring some of those products into those packages, but we've got teams of folks working on them and absolutely we think it's an area of focus. We have very high quality managers with a range of products as we've talked about and we have a scale team and platform to help bring them into the market with lots of expertise. And now again, I think we've got probably -- we have pretty good experience, I will say it that way, working with platforms and other intermediaries around liquid alternatives and so we absolutely are trying to leverage all those things and bring more product into the market.

Thanks a lot, guys.

Cynthia Mayer, Bank of America Merrill Lynch.

Good morning. Just on the pipeline for new acquisitions, I'm curious why you think you aren't seeing as much interest from boutiques as you expected. Is there maybe a wait-and-see attitude on the taxes or something else going on or optimism for beta?

Well, I would include just in terms of nomenclature all of our prospective affiliates are boutiques. So the alternative firms are and over time there's increasing convergence etc.

But in terms of traditional long-only independent boutiques, I think the main reason that we are seeing a slight decrease in activity is that markets have been volatile and so the best firms don't have to do a transaction at any particular point and they are loath to approach their clients with a deal, however good their performance on a relative basis, they are loath to approach their clients in the midst of extreme market volatility.

So I think it's nothing more than that and the point I was making is that the increase in taxes, some of it, the healthcare-related taxes are in place and whatever happens to the so-called Bush tax cuts we will see. But I think everybody is expecting higher taxes and over time that will be a catalyst for deals to happen sooner. But it doesn't mean that they're going to have to happen at any -- in any particular quarter

So long-term optimism and short-term just a mild bit of caution in terms of that category of the pipeline but we are, as I said, finding plenty to keep us busy in the interim.

Okay, and on the flows into subadvisory, especially the alternatives, is that I assume variable annuity and is there a seasonal aspect to those flows or do you see those continuing?

It's coming partly in variable annuity and also partly in just other mutual fund multiple manager kinds of products. There may be some seasonality to it although I will tell you the thing that -- the place we're seeing a lot of it is as people are moving and launching model portfolios and so right now that hasn't been a big impact for us.

Okay, I guess given the strong flows into emerging markets and alternatives, are any of the affiliates facing capacity constraints at this point in strategies which have contributed heavily to flows or is everything all clear?

There is nothing that I would sort of major in new. There's sort of also are a couple specialty products here and there that are facing capacity issues. And then the other thing I would just say to that is at the same time, they are pretty decent level, pretty good decent level of activity on product launches across a bunch of affiliates. Again a lot of alternatives but also some sort of team lift and all that kind of stuff so good level of product launches and nothing major on the capacity side that I would flat.

Cynthia, what you're hearing from us broadly -- hopefully you are hearing from us is continued confidence and ongoing momentum in our organic growth.

Right, right, okay. Then maybe just a follow-up on the BlueMountain investment. I'm sorry if you mentioned this but was that done as part of an existing put or call or was that sort of negotiated in a standalone way? How would the pricing of that compare to sort of what the puts are that are in your Qs and Ks?

So puts are an element of the what I will call original AMG structure where we are investing in a long-only manager, providing a complete solution to the succession, and typically -- not typically, always investing initially with a majority of the owners' allocation. And then over time the strategy is to recycle the equity so we don't actually want the state to go up that much.

The puts because we are involved in the -- actively involved in the recycling are set at a lower level so typically 7-ish or lower sometimes. The investments that we make in -- the initial investments that we make in both traditional affiliates and alternative firms are within our pricing discipline, which broadly obviously it's not true in every single case, but broadly is 8 to 10 times run rate EBITDA.

Those -- the follow-on investment in BlueMountain and future follow-on investments in existing or future alternative affiliates will always be separately negotiated and within the pricing discipline, so very like from a financial standpoint as Jay was saying, very much like any other new investment.

Great, thanks. Last one and thank you for all these questions, just if you can give some color on which managers contributed to performance fees this quarter. I think that came out sort of at the higher end of your guidance initially, right?

Sure, so just a number of you have heard this from us but the fourth quarter is of course where we have the bulk of our performance fees just by virtue of either the fund, the partnerships that investors -- limited partnerships invest in or the contracts and the separate account case. They tend to have year-end events but there are some performance fees through the year. We get generally speaking a few pennies in the first and third quarter and a little bit more in the second quarter because of the history of certain accounts. So that's no different this quarter. It is a typical second quarter for us.

There really wasn't a single affiliate that I would call out that is notable on the concentration of the [success]. It was really a group of affiliates with accounts that range from even along-only but beta-sensitive as well as absolute return-oriented.

Great. Thanks for answering all those questions.

Robert Lee, KBW.

Thanks, I just have one follow-up. I appreciate the patience. Just curious trying to -- is it possible to size of who your total AUM base, what piece of that, proportion of that is really not what I would call equity-sensitive, whether it's Pantheon or maybe some Veritable or BlueMountain.

How should we -- thinking about your overall AUM base, you know, what percentage would you say is probably reasonable to assume isn't really in theory directly impacted by say if we are trying to track fund performance of the S&P or the MSCI or some other index, equity index?

Well, I will answer it this way and ask Nate and Jay to and in. We don't really think about it in terms of AUM. You recall that the product breakdown that we give in the pie chart and our investor materials is by EBITDA contribution because we own different amounts, different affiliates, etc., so the beta exposure or the absolute return exposure in the case of alternative managers is more meaningfully understood as earnings contribution

So -- and I am not sure we have recalculated the precise percentage of alternative exposure but it's more than a third of our earnings and about half of that is roughly is Pantheon with absolutely no beta exposure and then there's a portion of the alternative. I'll say -- I'm looking at Nate -- I would say half of the -- a quarter of the total alternative exposure is beta-sensitive and then the rest is absolute return.

Absolute return is probably a little higher now with our investment in BlueMountain, but hopefully that gives you a rough sense and we will follow up in conversations subsequently.

That's great. Thanks for taking my question.

Thank you. Mr. Healy, I would like to turn the floor back over to you for closing comments.

Thank you again for joining us this morning. As you have heard, we are pleased with our results for the quarter and confident in our prospects for continued strong growth ahead. We look forward to speaking with you again in October.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.