Affiliated Managers Group Inc (AMG) 2014 Q2 法說會逐字稿

Greetings and welcome to the Affiliated Managers Group second-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Ms. Alexandra Lynn, Senior Vice President of Corporate Strategy and Investor Relations. Thank you, Ms. Lynn; you may now begin.

Thank you for joining AMG to discuss our results for the second quarter and first half of 2014. 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 the call.

AMG will provide on its website at www.AMG.com a replay of the call, and a copy of our announcement of our 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, Ally, and good morning, everyone. AMG reported economic earnings per share of $2.65 for the second quarter of 2014, an increase of 22% compared to the same period last year. Our results for both the quarter and the year to date demonstrate consistently excellent execution across our diversified global platform, including the addition of several outstanding new Affiliates, the ongoing strong performance of our return-oriented product set, and continued outstanding growth from net client cash flows, bringing our assets under management to a record $625 billion.

As you will hear in a moment when Jay gives our earnings guidance for 2015, this successful execution of our growth strategy has substantially increased the earnings power of our business. With $7 billion in net client cash flows this past quarter, we have marked our 17th consecutive quarter of strong positive net flows, with a total of $120 billion in net flows over this period. As in prior quarters, our outstanding organic growth reflects our boutique Affiliates' continued excellent investment performance, our strategic focus on alpha-generating products, and the ongoing success of our global distribution strategy.

Looking forward, we continue to see strong demand from global institutions for return-oriented products. And it is also clear that clients increasingly prefer boutique managers for the alpha portions of their portfolios.

AMG has the broadest array of performance-oriented boutiques in the world, and our Affiliates have outstanding long-term investment track records across a wide range of alpha-generating strategies, especially in global and emerging market equities and alternatives. Through our global distribution strategy we offer clients the benefits of this diverse set of independent specialist managers, combined with the scale and efficiency of a global asset management firm with in-market client service and a single point of contact.

As Nate will describe further, we are very pleased with the execution of this strategy and, as in prior quarters, we had very significant positive flows in every coverage region this past quarter. As we broaden and deepen our global distribution platform, we are well positioned to continue to generate outstanding organic growth over time.

Our strong net flows into return-oriented products stand in sharp contrast to broader industry trends, which include continued and even accelerated fixed-income inflows, especially from US retail clients. We remain convinced, however, that this trend will change, as central bank intervention begins to wane, as economies recover and rates inevitably rise.

Just as we have been experiencing with the largest institutional clients around the world, we believe that US retail clients will increasingly seek return-oriented strategies, especially in global and emerging market equities and alternatives, and will also recognize boutique firms as having a competitive advantage in generating alpha. We are positioned ahead of this tidal change in client flows, with an increased focus on US retail, including new leadership, additional senior level hires, and a rebranding to AMG Funds. There are only a few asset management firms in the world that can match the breadth of our performance-oriented product set, and we believe we have a tremendous opportunity ahead of us to build one of the leading retail franchises in the industry.

The successful execution of our global institutional and retail distribution strategy is increasingly enhancing our appeal to prospective new Affiliates. With four new Affiliates added thus far in 2014, we are seeing evidence of this effect, along with the benefit of our 20-year track record of successful partnerships and the proprietary relationships we have established with leading traditional and alternative boutique firms around the world.

Going forward, the transaction environment remains highly favorable for us, and we continue to have a strong and diverse pipeline of new investment prospects. We are confident in our ability to make additional investments in outstanding firms which will add meaningful accretion to our earnings while also enhancing the diversity and capacity of our performance-oriented product set with excellent, immediately salable products.

Looking ahead, with the strength and scale of our existing business and our unparalleled opportunities to partner with leading boutique firms around the world, together with the strategic distribution capabilities we offer to enhance their growth, we look forward to continuing to create outstanding shareholder value going forward. With that, I will turn it to Nate to discuss our Affiliates' results in greater detail.

Thanks. Good morning, everyone. We had another very good quarter, again demonstrating the strength and diversity of our business and the multiple ways we can drive growth. As Sean noted, this past quarter was our 17th consecutive quarter of significant positive cash flows, as we and our Affiliates once again executed well and benefited from our strategic positioning.

Clients continue to separate their portfolios into passive beta exposures at one end and active alpha at the other; and for the alpha portions of their portfolios, clients worldwide are increasingly attracted to boutiques. For example, in the quarter we saw significant flows and wins across a broad range of alternative product areas, from liquid hedge fund products to illiquid private equity and infrastructure, with multi-strat and credit products also being significant contributors. We also continue to generate significant flows in active global developed and emerging markets equities.

Turning to investment performance by category and starting with the global developed markets area, overall we had a good quarter with highlights including very strong performance from the global product at Artemis and Harding Loevner, as well as AQR's defensive equity products. Tweedy, Browne's major global and international products were right around their benchmarks, reflecting good stock selection, while they were held back by their still significant cash levels.

In the emerging markets category, we had very strong performance. All of the major products managed by Genesis outperformed in the quarter and continued to build their exceptional track records. Trilogy had a very good quarter. And the major emerging markets products at Harding Loevner continue to maintain their very strong long-term track records.

In our US equity category, we had a mixed performance quarter. Many Affiliates, including AQR, First Quadrant, and SouthernSun, had outstanding performance records across their respective equity products. And while near-term performance at Yacktman continues to be challenged, largely due to their cash levels and defensive positioning, their funds have maintained their first-percentile ranking for 10-year and longer periods.

Finally, turning to our alternatives product category. Looking across our Affiliate group, AMG is among the largest alternative managers in the world, with our Affiliates managing a very broad array of liquid and illiquid strategies. Broadly speaking, our Affiliates generated good performance in the quarter.

This includes best-in-class credit, control equity, currency, energy, infrastructure, and private equity products. While it is still early in the year, the continued strong returns in the second quarter resulted in some performance fees being recognized.

Now, looking at flows for the quarter. As I said, we had another strong quarter with $6.9 billion in positive net client cash flows. As we emphasize on every call, flows, especially in the Institutional and sub-advisory channels, are inherently lumpy. However, overall flow momentum continues to be good.

Turning to the channel review and starting with the Institutional channel, we had positive net flows of approximately $4.6 billion. These flows came primarily in global and emerging markets products and alternative strategies. Notable contributions came from AQR, BlueMountain, Harding Loevner, Pantheon, and Trilogy. Similar to previous quarters, we had a number of great wins coming from leading institutional investors located around the world.

Moving to the mutual fund channel, we had positive net flows of $1.9 billion. From a product category standpoint, we had strong net flows into global equities, emerging markets equities, and alternative strategies which came from a number of Affiliates including Artemis, First Quadrant, Harding Loevner, and Tweedy, Browne.

In our High Net Worth channel, flows were roughly $500 million for the quarter, with contributions coming primarily from BlueMountain, SouthernSun, and GW&K, including through our US retail distribution platform.

Now turning to an update of our global institutional distribution platforms, we continue to help our Affiliates generate strong flows among a diversified set of products and across geographies, with significant flows coming in every one of our Institutional coverage regions once again this quarter. In addition, we further enhanced our regional coverage with the addition of another senior sales professional dedicated to the Middle East, a region where we have built a significant business over the last 5 years.

While we continue to evaluate expansion into new regions, we also remain focused on deepening our sales teams in regions where we have made good progress and see significant additional opportunities to gain market share. In our Institutional coverage regions, we still believe we are in the relatively early stages of capitalizing on extraordinary opportunities.

While we have built relationships with the largest pools of capital in our coverage regions, our Affiliates have so far only established client relationships with a subset of those large pools, so there are many more where we can make that first sale. Even where we have established a client relationship with one or two Affiliates, in almost every case there is a much more significant opportunity to introduce additional products over time from the same Affiliate, additional existing Affiliates, and importantly new Affiliates as they partner with AMG.

Now, turning next to our US retail platform, AMG Funds. As Sean noted, we believe we have an opportunity to build a leading US retail distribution business. As you know, earlier this year we rebranded the platform and brought on additional leadership; and Jeff Cerutti and his team are making good progress. Our belief in the long-term opportunity is based in part on a view that demand trends are shifting in our favor, as over time clients and intermediaries must increase allocations to return-oriented products to meet their long-term investment objectives.

We also believe there is a unique opportunity to be the point of contact through which platforms and intermediaries and other channel partners can access the world's broadest array of return-oriented boutiques.

Finally, I want to spend a minute on our unique product development opportunity alongside these growing distribution platforms. For us, creating new products happens together with our Affiliates, and in this regard, a number of Affiliates are well known for their product innovation and development.

In addition, as we add new Affiliates, each new firm brings an array of products with exceptional track records, often with significant capacity, to our Affiliate group. At the same time, we bring them the opportunity to offer these established, excellent products through our global Institutional and retail distribution platforms.

The year-to-date is a very good example of this, when you look at the four new Affiliates and their long-term track records in very attractive product areas, including energy and energy infrastructure, which we did not have before, as well as additional global, emerging, and high-conviction US equities. These are outstanding products that are immediately salable through our distribution platform.

The addition of these products and product areas will over time increase the effectiveness of our global institutional and retail platforms in the marketplace, as we have an even broader array of high-quality boutiques to discuss, which will not only continue to increase our organic growth opportunities but also ultimately continue to enhance our value as an institutional partner to our existing Affiliates and our position with prospective new Affiliates, all component parts of the virtuous circle you have heard Sean talk about.

More immediately, as we look at the second half of 2014 we see a continuation of the momentum we have had for the last several years, as our Affiliates maintain their excellent long-term performance records and as we continue to see strong global demand for performance-oriented products managed by some of the best investors in their respective disciplines.

With that, I will turn it to Jay to discuss financials.

Thank you, Nate. As Sean and Nate discussed, we are pleased with our second-quarter results, which reflect our continued outstanding organic growth as well as the strength and diversity of our Affiliates. As you saw in the release, we reported economic earnings per share of $2.65 for the quarter, with net performance fees contributing $0.09. On a GAAP basis, we reported earnings of $1.77 for the quarter.

Turning to more specific modeling items, for the second quarter our EBITDA was up more than 22% year-over-year to $212 million, reflecting the continued organic growth of our business and strong execution of our new investment growth strategy. The ratio of our EBITDA to end-of-period assets under management for the second quarter was 14 basis points, or approximately 13.4 basis points before the second-quarter performance fees I had mentioned earlier. In the third quarter, we expect this ratio to be closer to 13.2 basis points as a result of the closing of Veritas at the very end of the quarter, and reflecting the more modest amount of performance fees typically expected the third quarter.

With regard to our taxes, our effective GAAP tax rate for the quarter was 36.8% and our cash tax rate was 26.7%. For modeling purposes we expect our GAAP tax rate to be approximately 34% and our cash tax rate to be approximately 25%. Intangible-related deferred taxes for the second quarter were $19 million, and we expect this number to be approximately $20 million for the third quarter.

Our share of amortization for the quarter was $29.2 million, including $7.3 million of amortization from Affiliates accounted for under the equity method. We expect AMG's amortization to remain at approximately this level for the third quarter.

Our interest expense for the second quarter was $22.4 million, including $2.4 million of pretax non-cash imputed interest expense. For the third quarter, we expect our total interest expense to remain at approximately $22 million, including $2.7 million of pretax non-cash imputed interest expense.

Turning to our balance sheet, the continued growth and scale of our business has allowed us to execute on four new investments in the first half of 2014 while also reducing our leverage. With run rate EBITDA of more than $1 billion, combined with another $1.2 billion of undrawn revolver, we continue to have the capacity and flexibility to execute on new investments; and the scale of our business will continue to create incremental opportunities for earnings growth.

Now turning to guidance. We are narrowing our 2014 guidance as we expect economic earnings per share to be in the range of $11.20 to $12.10. With the meaningful run rate impact of recent new investments, we are providing preliminary 2015 guidance, which we expect to be in the range of $13.00 to $14.50.

As always, we assume our normal convention of actual market performance through yesterday for the current quarter, and 2% quarterly market growth beginning in the fourth quarter of 2014. We also assume a weighted average share count of approximately 56.5 million for 2014 and approximately 57 million for 2015.

The lower end of our guidance ranges include a modest contribution from performance fees and organic growth, while the upper end of these ranges assumes a more robust contribution from both performance fees and net client cash flows. 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 contribution to our earnings. Of course, substantial changes in markets and the earnings contributions of our Affiliates would impact these expectations.

Now we will be happy to answer your questions.

(Operator Instructions) Daniel Fannon, Jefferies.

Thanks. I guess just focus on guidance to start. It seems like you took $0.10 off the high end for this year. If you could talk about what has changed.

And then also thinking about the performance fee dynamic, which I believe would be part of that, where that stacks up as you sit in the end of July this year versus where you were a year ago.

Sure. Let me point out several items in the quarter that affected our guidance, but maybe even mentioning that we did take $0.10 off the top, we also brought in the bottom -- or moved the $0.10 up on the bottom. So we narrowed it $0.10 on each side.

I guess the first thing I would call out is just the new investments, Dan, just to level-set. We did close two new investments in the quarter: EIG at the beginning and River Road at the end. And we also expect, as I mentioned in my prepared remarks, that Veritas will close at the very end of the third quarter.

So the 2014 guidance that we are giving first reflects on that timing and the partial-year impact of our new investments. I would also note it is offset by slightly elevated deal expenses, since we did four deals this year.

And that is why, honestly, we are giving the full earnings impact estimate for 2015, and that is why we are introducing it this quarter, a quarter early.

I will just remind you also of just our model convention. We assume markets up and into this day in the quarter, which will capture 100% of the performance for the quarter. And then we assume no more market performance until the fourth quarter.

So since the last time we gave guidance, which was set forth, we experienced about 3.5% market appreciation blended across all products. And again since the last time we gave guidance, that was up 1.5% higher than our standard 2% convention.

Then the last point which gets to your performance fee, I think at this point we assume 2014 will be a typical year, so in the range of 5% to 10% of our total economic net income would be in the form of performance fees, which is roughly $0.60 to $1.20 for the year; but we have already booked $0.16 year-to-date.

So taking all that together, that is the tightening of the 2014 range, so really a firming in the midpoint of $11.65, but then we are guiding to 2015 midpoint of $13.75, which is an 18% year-over-year growth rate.

I would just add with respect to performance fees, Dan, as you know, we are very conservative in the way that we think about performance fees and embed them in our guidance. But the track record and the opportunity is very large. So we are not, I don't think, any different than we were last year at this time.

And seeing substantial alpha that has already been generated, performance fees that are -- we expect, we believe will be substantial. But it is still only a little bit past midway through the year, and there is a lot that can happen. And we think that taking a conservative approach is the right path; but you will hear later in the year us talk more about performance fees.

Okay, then just to clarify, so is it safe to say that the deal costs are a bit higher than when you gave us your last guidance? Because markets are up, to your point; the deals were already -- all the deals -- there is not an incremental deal from the last time you gave guidance.

Yes, I would note that there is -- it is modest. We're up 1.5% relative to -- and I will just clarify, since April 29, I think I was off by a quarter; but since April 29 we were up 1.5% relative to our guidance. That is a modest increase from investment performance, and it is offset slightly by deal expenses.

That taken together with just normal typical performance fee years, it is all in the small dollar category, Dan, is why we tightened it.

Got it. Then, Sean, just look at the outlook for new investment activity. There does seem as if there is just generally more activity, obviously with you guys as well as the industry. So thinking about the market at all-time highs and trying to be still thinking about the value that is out there for deals, and how you guys can be disciplined in maybe a little bit more of a competitive environment, if you could just talk about how you're thinking about capital deployment over the next 6 to 12 months.

A clever and relatively novel way of asking me how many deals we are likely to do, Dan, but I think the answer as always is that we remain very optimistic. We have a tremendous competitive position, really better than it has ever been.

You are correct that the market environment is favorable. And some firms are in product categories where their assets and revenues reflect a lot of growth; but of course there are other product categories where there hasn't been as much growth.

Inevitably all of our new investments, virtually all of our new investments, arise out of the relationships that we have developed and maintained with the very best boutique firms around the world -- now over the past 20 years. And it is the opportunity that we see from all of these firms inevitably needing to do some kind of transaction to provide a solution to their succession and transition issues, that gives us the underlying confidence.

And over time, while it is hard to gauge in any period, we are very, very confident. You are seeing, as I said, the beginnings of what we believe certainly over the medium to long term will be a very substantial set of new investment opportunities.

The industry backdrop and competition is relevant, but really very much on the margin. Virtually all of our investments arise out of these relationships and are negotiated transactions.

So as I said in the prepared remarks, the pipeline continues. Even though we have had a very good year already, the pipeline continues to be very strong and we are very busy.

Great, thank you.

Michael Kim, Sandler O'Neill.

Hey, guys. Good morning. First, can you just give us a bit more color in terms of where you stand on more fully leveraging AMG Funds in the retail channel?

And then related to that, was just curious if there is an economic benefit from being able to offer the breadth of your funds across Affiliates through a centralized platform when you are partnering with the distributors.

I will take them in reverse order. I think of course, we believe that is exactly right; I think you captured it.

With the largest intermediaries as well as with regional intermediaries and big networks, independent networks, we absolutely think there is an opportunity to be the single point of contact through which they access a broad array of return-oriented products across a range of packages. I think especially at the bigger ones that, across a range of packages, is an important piece to add. So absolutely that opportunity is there.

I should mention, just to step back for a second, the AMG Funds platform is already a reasonably large-scale platform, and we have selling agreements in place with all of the large -- well, I think we've got over 2,000 selling agreements, something like that. So we have got selling agreements in place with all these places already.

So the opportunity to bring additional products, moving to the first part of your question, to bring additional product from existing Affiliates as well as to offer to new prospective Affiliates as they come online the opportunity to access that breadth in distribution, as well as the breadth in operations -- looking at a firm like SouthernSun, who can bring their products right onto our platform both ways -- there is lots of leverage opportunity there.

Okay. Then maybe one for Jay. I know you guys remained active on the deal front, but as well the opportunity set seemingly remains pretty broad. But as cash flows just continue to build, at what point do maybe share repurchases come back into the equation? Particularly since, if you look at your EPS growth, hasn't really benefited from buybacks to the same extent as most of your peers.

Yes, thanks, Michael. I will get to your -- to the punch line here in a second. I would note that our EBITDA growth rate has been much higher than our peers, and we continue to grow because of organic growth and because of the execution of new investments. So that is against the backdrop of that.

As you know, we positioned our balance sheet as recently as last quarter, and then if you go back two or three quarters what we have done here is we simplified our balance sheet; but then we have increased the capacity pretty significantly in front of the new investment opportunity. As you know, we have done four new investments already. And as per Sean's comments, we are still very -- we look forward to continuing to execute on new investments.

So we are positioning our balance sheet to do that. To the extent that we are able to do both, I think that is something that we are thinking about. But for the moment, we see a big pipeline of new investments in front of us.

So if you think of a business with more than $1 billion of EBITDA, rapidly growing through very strong organic growth, and even as we see all of the cash generated from the business, over the medium to long term we see that amount and more in prospective potential new investments. So we will, as always, be primarily focused on executing new investment opportunities which build and broaden and diversify our business and create, as we have discussed, this virtuous circle with our distribution capability.

But inevitably there will be periods, because of market volatility or just the accident of fortuity and circumstances, where there aren't new investments that we are interested in pursuing. So what you will see more of in the future in periods like that is more substantial repurchase.

We won't -- as you know, we don't like to just warehouse cash on the balance sheet. We will stay flexible in advance of new investment opportunities. But you will absolutely, as Jay said, see more repurchase activity over time.

Great. That was it for me. Thanks.

Robert Lee, KBW.

Thanks. Good morning, everyone. This question maybe it is for Nate, or I guess for Sean as well.

But how do you manage the bandwidth and capacity of the global distribution? You have a growing number of Affiliates, a lot of different products, some of which -- some Affiliates arguably compete against each other in the marketplace to some extent. So how do you actually manage access?

Because I assume as you have demonstrated success of that more Affiliates want to make more use of the platform. So how do you control that?

Well, I think there are at least two different broad areas to go at this one on. First, just to back up for a second, so the way we're building our distribution, it's designed to complement each Affiliate's standalone distribution. Right?

So each Affiliate has a distribution capability as they are coming onboard or existing capability, right? And the goal of our distribution is to make appropriate matches.

And I will move here more to Institutional. So what we are doing is we are educating the end-users and the intermediaries. We are using deep local expertise, so we are hiring very high quality people in the geographies who know the client base very well.

In the Institutional side we have been focusing -- and this is a generalization -- but they're focusing mostly on the high-end Institutional market and the intermediaries who serve them. We are also building institution-to-institution relationships between AMG and those institutions, and AMG and those large intermediaries.

Now, the reason we are able to build those institution-to-institution relationships is because of our breadth, including the fact that we in many cases have multiple high-quality products or product capabilities and things that could simply be looked at as the same area.

Again, obviously, every one of them does it differently. But that breadth and that multiplicity of products within areas is the thing that allows us to build those institution-to-institution relationships.

So at the end of it, the end-user and the intermediaries understand that they are hiring the Affiliate to manage the money. So they are very clear on that.

And then they get all the benefits of hiring the boutique, which as you heard us say in our prepared remarks, there is an increasing acceptance of the advantages of boutiques in producing the alpha streams. So they are getting all the benefits of hiring a boutique with many of the benefits of working with a global financial institution; and they understand the advantages of these boutiques operating within AMG.

So in the way I just described that process, the breadth is a really strong advantage, not disadvantage. Now obviously we have to do on our end the distribution infrastructure that we build. You are exactly right; we have to do a very good job making sure that we understand our Affiliate products well and are able to appropriately represent them in the marketplace, and that is a huge area of focus for us.

The other thing I will say, just the next step to it, is that breadth is allowing us to build institution-to-institutional relationships with many of the largest pools of capital in the world. Then as I said in my prepared remarks, as we are building those relationships, we are beginning to make those first sales in here. And here is where the big medium-term opportunity is: We are beginning to make those first sales.

For many we still have the opportunity to make the first sale. And then as we build the relationship, make the initial sale, the opportunity to -- I will use the word cross-sell; it's not really cross-sell -- but the opportunity to cross-sell within that Affiliate to other Affiliates and then to additional Affiliates as they come online is very, very powerful.

It is also powerful that institutions as they are interacting with us, the end-users, understand that we are going to be adding new Affiliates to that. All of these pieces really do knit together.

And the backdrop, as you know, is one where across the industry broadly active equities and alternatives have not been as much in favor, and certainly the active equities. So if you look at 17 straight quarters of positive flows, predominantly in return-oriented products, $120 billion in net flows through this period; and yet, as Nate said, we still feel that we are in the early stages of exploiting the opportunity both in terms of global Institutional distribution, but also importantly in US retail. So as big as we are, lots, lots more opportunity ahead of us.

Maybe as a follow-up question on distribution, I mean, I know, Nate, I think you talked earlier about product development. And I think your comments were mainly focused on the AMG Fund channel.

But to what extent, as you expand and broaden your Institutional relationships globally, have you been able to take that feedback and help specific Affiliates develop new products that they have launched and have had some success? Or is it still too early to (multiple speakers)?

Yes, I would say there is some of that, but it is still early. Again, for us, when we talk broadly about product development, we mean both new product as well as track records that are becoming really scalable, and then also new packages.

So if you think about those three, in the first two categories it is still early days, as you say. In the third, the new packages -- and this also relates to the earlier question. In the new packages category, this is a place where especially with some of the things we are doing with alternative products or are working to do -- again very early days still -- but working to do with things like illiquid alternatives in the retail space, these are places where bringing established, Institutional-quality product capability into more retail markets is a very big opportunity for us to do that there.

And that is enabled by the scale of AMG and the fact that we are interacting. And that is partly US retail, but it is also non-US retail. I mean as I think we talked about last quarter, we have begun going into the platform market in Australia; again, early days, but there is an opportunity there to bring some very high-quality Institutional product, including alternatives.

And this quarter we spoke briefly about beginning to do some moves in the Middle East, both to some smaller institutions but also at the High Net Worth market, which is going to have a platform component to it as well.

Our distribution strategy informs and enhances our new investment strategy as well, as we learn from clients or we see demand -- client demand and opportunities for new products, we in turn can reflect that in the prospecting effort with new Affiliates. And obviously, it is a way that we add, as we described earlier, substantial capacity even in product areas where we may already have a presence.

Maybe following up to that last one and just one more question; I appreciate the patience. Certainly there is no evidence of it, given the number of transactions you announced and completed this year, but as you add, as you've gotten larger and add Affiliates, is it becoming part of the conversation that some prospective Affiliates look and say: Gee, where am I going to fit within this 30-odd Affiliate structure? The feeling that they are going to get potentially lost at all?

I think if you compared to the alternative, other entities which describe a distribution capability but have no evidence and no real ability to in fact effectively market and distribute independent boutique firms' products around the world, or indeed even in the US retail space -- it is kind of a high-quality potential issue. But I would say it is an issue that we very effectively address in the way that we just described in responding to your prior question.

I think, in fact, now more than ever the distribution capability and the track record, the real track record of actually selling not just the AMG brand, and the benefits of the collective, and the efficiency of single point of contact, and the strategic relationships that we are building with the most important, largest Institutional clients around the world; but also simultaneously in a complementary way selling independent boutique Affiliate products and especially in return-oriented product categories, alternative products, and in many cases to clients who haven't been big purchasers before.

So that demonstrable track record is enormously valuable and increasingly visible and so is, to the contrary I would say, actually an even more significant advantage than it has ever been.

Great. Thank you for taking my questions.

Cynthia Mayer, Bank of America.

Hi, thanks a lot. Maybe similar to what you were just answering, but in a new way, which is: If you look at the new investments you have made recently, which is four in pretty short succession, if you look at the past acquisitions, what kind of lag time is there between when they join and when you can ramp up their organic growth, either through increased distribution of the products they already have or through new products?

Cynthia, the first part of the question on existing products, there is of course a lag time. But the lag time is -- and look, it is small numbers and anecdotal, right? But the lag time is much shorter than I would have said it was if you went back a couple years ago.

It is for a number of reasons, right? One is we have more resources in more places with deeper relationships; so we are just more efficient in understanding here is -- we have more places to go and are better at understanding, here is the ease with which this product set can go there. Right? We've been doing it now longer in more places; so I think we are better at that.

I also think -- and this is a little bit goes to the point Sean was making -- I think our credibility with the Affiliates, existing and new, is -- since we have now been doing it for a reasonably long period of time with good success, that process of bringing them onboard is just a much better, more efficient process. So I think we are better bringing the Affiliates along, and I think we are better understanding where are the opportunities in the marketplace. And again, those are self-reinforcing, obviously.

That in terms of new products, I would say it is still pretty early for me to be able to give you a view of whether that has gotten shorter or not. The conversations certainly start earlier, which again stands to reason because we are in more places with better understandings of more market opportunities. And so we are better able to say: There is a specific opportunity here if you just do this.

Then again, it is obviously always, just to be clear, completely controlled by the Affiliate. Affiliate judgment about what they -- the return on streams they can and can't generate, and how they wish to use their investment process.

But I think we are just in more places and we are better at making that match.

A couple of points to add. First, as you know, Cynthia, in all of our investments we are investing in firms that are very successful, complete firms, generating strong organic growth already. So what we can offer is incremental to the strong growth.

By definition, we are not investing in firms where they are not seeing growth and where they come to us and say: I need something. We instead invest in firms which are very successful and inevitably want us, above all else -- and we are good at this -- to make sure we preserve and protect their culture and autonomy and do no harm.

But increasingly they do, as I said -- as you heard us both say -- they do see real opportunity. Even in the earliest conversations increasingly with prospective Affiliates, increasingly Andrew Dyson, the head of our global distribution effort, is in the conversation and we are talking to prospective Affiliates about the opportunities that we see based on a very tangible awareness of specific client opportunities and specific opportunities in different regions and channels.

So the conversation about the ability for us to support and complement what the prospective Affiliate wants to do begin even before we close the investment. And we are, again, seeing that in some of these investments even this year.

I guess since you put together -- since you put out 2015 guidance there, should I assume that for your new Affiliates when you layer them into 2015 guidance, you're not adding incremental flows? You're taking their existing organic growth rate and saying: Let's wait and see on incremental. Or how do you increase the --?

The answer is it depends. But we absolutely apply judgment to what we think the forward organic growth opportunity is from alpha generation and net flows, and we look at it in the case of each Affiliate.

Okay. Then can you just briefly talk a little about the earnings dynamics of EIG? Because it is a little bit different from some of your other investments.

Should we assume that it is a typical private equity model, where you receive management fees on committed capital, but then you get carry at some point? And when would you expect carry, and what visibility would we get into that as we go along?

Also, maybe could they offer retail at some point?

So just on the economic profile -- it's Jay, Cynthia. You are right; it is typical private equity style commitments in the main. So that is a period uncommitted, and then after that it is on what is invested. So you're right about that.

Reminding everyone, we are on method one GAAP accounting, so we only experience performance fees when crystallized. So when we report our performance fees, EIG will be in them; and it will only be when we actually get the cash. So that is an important difference, I think, in some cases relative to alternative firms.

So it will be in our guidance. It will also just be in that guidance we give for performance fees, which is typically 5% to 10% of our economic earnings per share. Given the recent fund raise that EIG has done, which is the very sizable one, and the dynamic of EIG coming out of TCW and so on, we would expect those performance fees to really come in small amount in 2015 and then after that.

Then maybe to speak to the retail question, the short answer is yes. I think you have heard us talk about last quarter some of the investment that we and Pantheon are doing together to build the opportunity to bring some of their product set to both the retail market and maybe even also the DC market.

So we are building some of that infrastructure. We believe that there is leverage in what we are building there to other Affiliates. And that would include EIG; it would include maybe BlueMountain and credit and stuff. So I do think there is absolutely opportunity to bring additional illiquid alternative product to the retail market.

Great. Thanks a lot.

Brian Bedell, Deutsche Bank.

Hi, good morning. Thanks for taking my questions. I guess, Jay and/or Sean, if you could just talk a little bit about what you see as your core EBITDA yield run rate, so excluding performance fees, after Veritas is integrated, maybe embedded within your 2015 guidance.

Then this is probably hard to answer, but the variation around that, depending on how flows move; are you structurally biased for that to improve, given what you are seeing in flows across your product set?

Brian, can you repeat the last bit of your question again, please?

Yes, sorry. Sure, sure. The core EBITDA revenue yield run rate, ex-performance fees. And then the last part was the variation around that, given how you are seeing or how you are expecting net flows to transpire across your business mix. Is it -- I guess the question is: Are you seeing stronger potential flows in higher-yielding Affiliates?

Right, so let's -- to your first question, and I will take you back to the prepared remarks just to clarify, Brian. We experienced this quarter -- and I did carve it out specifically to address this point -- while we had 14 basis points EBITDA to end-of-period assets under management, it was 13.4 before performance fees.

In the third quarter, we expect that ratio to go to 13.2, and specifically two things are happening in that quarter, third quarter that is, of 13.2. One, performance fees are very modest in the third quarter, typically, unless there is positive surprises, because there can only be positive surprises with performance fees. So really the third quarter is a pretty close to nonperformance fee run rate.

And then you have Veritas coming in at the end of the quarter. And if you look at the difference between our pro forma AUM and our current table, you will see about $18 billion that is related to Veritas.

So you can back that out yourself. You will see that our fee rate is pretty much flat in the 13.2 to 13.4, 13.5 range. So that is all very close to the same number when you do the math.

I would just generically say we are not seeing a lot of movement in this ratio. So that means that the mix and the blend, which are I guess two slightly different concepts, but they are producing about a consistent pattern of fees to fees and mix to EBITDA.

But of course you understand, Brian, that we don't manage to this ratio, because the accident of the next incremental Affiliate revenue share will change the ratio in ways that may -- well, that won't matter to us. Because by definition, we will have satisfied ourselves that it is an excellent firm with all of the requisite attributes of growth and stability in their earnings stream. And what their profit margin or revenue share margin happens to be won't matter.

So we will give you the forward guidance on a go-forward basis by quarters, but we don't do it for future years.

Yes, totally understood. Then maybe just to talk about guidance just quickly, do I understand this correctly? For the third quarter, we have the market up about 1%. So is your guidance inclusive of a 1% performance in the third quarter -- for the market, that is?

Then as you were talking about the pipeline for deals obviously is very good, if they don't come to fruition -- I think, Sean, you talked about if there is a lull inactivity, you would not look for cash to build up on the balance sheet too aggressively, and be in the market for buying back stock. I was just trying to get a sense of timing on that.

For example, if we don't see any deals in the next couple of quarters, would that be soon enough to be back in the market for a buyback? Or are you thinking more longer-term?

Unfortunately, there is no ready formula that I can give you. It will necessarily depend on the circumstances. And it may be that we see very substantial opportunities to make new investments just ahead of us which we won't be able to describe fully; but in that scenario, we might have more cash than from the outside one would expect.

I think the commitment and indeed track record over time, even in a period where the cash generation of the business was at a much lower scale, is to put cash to work on behalf of shareholders and not to just let it build on the balance sheet. If you look over time, that is what we have done; and I think over the medium to long term that is what we will do.

And just your specific question on guidance, to distinguish between what I said earlier, really since 6/30 -- so really the last 29 days -- we have had very modest appreciation for the quarter. A little bit, but modest.

And that is all the market assumption we would put into our model. That is our convention. So no more market for this quarter; and then the fourth quarter we would assume 2% going forward.

Right. And then, of course, just to clarify, the 2015 guidance does not include any use of that capital for buyback either, even if there are no deals?

Right. So especially at this preliminary, but also as part of our convention, we assume no new investments or material capital deployment.

Yes, okay, great. Great. Thanks for taking my questions.

Greggory Warren, Morningstar.

Thanks for taking my call. Just a few housekeeping issues here; and pardon me, I jumped on the call a little bit late, so you may have gone over this already.

On Veritas, we're looking at about $18.2 billion in AUM at the end of the second quarter; correct?

I think a number like $18 billion is close. There is a little rounding in your numbers.

Okay, because you had -- I think you said $625 billion on a pro forma basis in the release, so I was looking at about $18.2 billion. And then you were expecting that to close by the end of the third quarter, correct?

Correct.

Okay. Then just real quick on that then, related to distribution. How much excitement are you seeing around their particular product set? I am looking at this more from an industry level. Because when you look at flows overall on the equity side, it has all been passive the last couple years here with all the money coming in; and the only area where active flows have been strong have been on the global international side of the business.

So I am just wondering what sort of interest there is in the products that they are bringing to bear.

I think, look, it's obviously very, very early days, preliminary. But look, they are -- they have an outstanding reputation among a wide range of people globally. So that has been fantastic.

And then for the people who don't know them, as we begin to talk about it people are obviously very impressed. I think maybe one just modest broader point, which is -- while I think your observations are spot on in terms of industry trends, I do think we have been finding -- and Sean spoke to this earlier -- we have been finding the opportunity to introduce very high-quality performance-oriented boutiques with excellent long-term track records and capacity into places, and have been able to generate some flows in ways that are counter to the broad trends you observe.

But that is just to the question. Again, very, very early days, but obviously they are a fantastic group and we are obviously very, very pleased that they chose to partner with us.

Good to hear. You guys do buck the trend on the other side of the business. I wasn't making an insinuation there.

Then, Jay, just real quick, too. I didn't quite catch it there during the run-up to the Q&A. You were saying next year's estimates are based on 56.5 million shares; or this year's on fixed would be 56.5 million and next year on 57 million. Correct?

Correct. Those are the average for the year.

Okay. Good, good. Thank you much.

Chris Shutler, William Blair.

Hey, guys. Good morning. First on the global distribution effort, sounds like you are certainly very focused on deepening penetration in existing regions, but just curious on new geographies. You mentioned Japan in the past.

Just where are you on the thought process there? Is your desire to go after any new geography dependent at all on your ability to execute a new Affiliate investment?

I don't think it is dependent on our ability to execute a new Affiliate investment. You're right; I think there have been three. If you focus on the institutional global bit, there have been three things we have been focusing on.

One is, if you look back at last year, we have been increasing the specialization by country, sort of Benelux hire, German hire, Swiss hire. Those kinds of things, yes.

And then as you say, we have been looking at deepening our penetration. And we did speak about Australia and then this quarter spoke about the Middle East and the other places where we have built very strong businesses at scale, especially at the high Institutional end. So that is leveraging that brand and much greater awareness of us, our business model, and our Affiliates in new geographies.

And then we continue to look at additional regions. Japan is one that we talked about last quarter, and we continue to work on. We are building relationships, institution-to-institution, those high-level Institutional relationships that we talked about.

And we are also having conversations with intermediaries and thinking about both the Institutional side and over time the platform side of that market and others.

I think we have talked about on prior calls it is both -- for us it is looking at the organic opportunities in the market, it's looking at our existing product set, and where the more short-term specific opportunities are. And then a lot of it is finding the right people and building the right sort of relationships that we can find the people that we really want to represent our Affiliates in these marketplaces.

Worth underscoring -- not that you are saying this -- but the implication sometimes when you talk about new regions is that somehow there is saturation of the extant regions and coverage. And as you have heard us say, to the contrary, we see enormous opportunity in the existing regions, some of which like Australia and the Middle East are large and rapidly growing.

And we know, looking at, on a client-by-client basis, the extent to which we have ongoing incremental opportunities to build further relationships and deepen those relationships. So that is important to understand.

Then secondly, in markets like Japan -- and US retail had some of the same attributes and maybe even broadly around the world -- the tide of client demand trends we believe is increasingly shifting in our favor, toward the alpha side of the barbell, return-oriented products. You are seeing that -- maybe you're not quite yet seeing it in US retail the extent to which we think we all will; but you are certainly seeing in Japan, where there is a huge ongoing shift of opportunity into the kinds of products that our Affiliates create.

And on an overall basis, the opportunity set in the existing areas as well as new coverage areas, new geographies, as Nate said, we are in the very early stages of taking advantage of that.

Okay. Makes sense. Then just one more. You guys have made some pretty impressive hires in the last few months and just maybe a little bit under the radar. But wanted to hone in on the hiring of Glenn

Earle in particular and just better understand what his role is going to be at AMG. Thanks.

Glenn is actually not a hire. He is a senior advisor to the Firm in a consulting relationship.

Okay, sorry about that.

A great friend to AMG and someone who is incredibly smart, with as broad and impressive a network of relationships as anyone I can think of in the UK and more broadly in the industry, given his role in a very senior position at Goldman Sachs before coming to join forces with us. But we are as -- you're absolutely right in saying that we have made some great hires.

And we know, as we continue to build our business, it is one that has enormous scale opportunities. We don't have to hire that many people, but our business depends on key people being excellent professionals, interacting effectively with our Affiliates, prospective Affiliates, and our clients. So on an ongoing basis you will see us adding more terrific people.

And Nate and Jay and I are -- at least we tell ourselves that we are still young, so we're seeing (laughter) -- we have a long way ahead of us, but a great team.

All right, thank you.

Thank you. We have no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

Thanks again for joining us this morning. As you've heard, we are pleased with our results for the quarter and the first half of the year. We remain confident in our ability to generate meaningful earnings growth, both through organic growth and accretive investments in new Affiliates going forward. We look forward to talking to you in October. Thanks.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.