Affiliated Managers Group Inc (AMG) 2015 Q1 法說會逐字稿

Greetings and welcome to AMG's first-quarter 2015 earnings call.

(Operator Instructions)

As a reminder this conference is being recorded. I would now like to turn the conference over to Selene Oh, Vice President of Finance and Investor Relations for AMG. Thank you please go ahead.

Thank you for joining AMG to discuss the results for the first-quarter of 2015.

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 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'll turn the call over to Sean Healey.

Thanks Selene good morning everyone.

AMG is off to an excellent start in 2015 with reported economic earnings per share of $2.91 for the first quarter, an increase of 17% compared to the same period last year, and record assets under management of $638 billion. Our results reflect consistently strong execution across all elements of our growth strategy, including the addition of five new Affiliates and an incremental investment in AQR over the past year, the ongoing strong performance of our return-oriented product set, and continued outstanding growth from net client cash flows.

With $5.3 billion in net client cash flows, this past quarter was our 20th consecutive quarter of strong positive net flows, with more than $130 billion in net flows over this period. As in prior quarters, our outstanding organic growth was driven by the excellent investment performance of our boutique Affiliates, our strategic focus on alpha generating products, and the ongoing success of our global distribution strategy.

While the strength of the US dollar impacted returns in global and emerging-market equities during the first quarter, our Affiliates specializing in these areas have outstanding long-term performance track records and continue to see significant client demand. In addition, with alternative products contributing over 35% of our earnings, we continue to benefit from excellent investment performance and strong organic growth across the diverse array of outstanding alternative products managed by industry leading firms such as AQR, BlueMountain, EIG, First Quadrant, Pantheon and ValueAct.

Through our global distribution strategy we offer clients the expertise of a diverse range of focused, performance-oriented boutiques, 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 generated positive client cash flows in every coverage region this past quarter.

We believe that the depth of the relationships that we've built with the largest global institutional clients in each of our markets will be increasingly valuable as these clients continue to consolidate and concentrate their active portfolios around a select group of managers and relationships which offer them a wide range of the highest quality alpha generating investment products. As we broaden and deepen these strategic client relationships in key markets around the world, AMG is well-positioned to continue to generate strong organic growth over time.

With five new Affiliates added in the last 12 months and a growing pipeline of potential partners, AMG's new investment strategy continues to be a material driver of earnings growth. AMG has an unmatched competitive position as the partner of choice to leading traditional and alternative boutique firms around the world. This position has been built through our 20-year track record of successful partnerships and the excellent execution of our global distribution strategy.

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

Looking ahead, it is increasingly clear that successful execution across our business is creating a virtuous circle, where outstanding investment results generated by our focused performance oriented boutique Affiliates, supported by our global distribution capability, enhances our relationships with clients around the world, which in turn makes us a more attractive partner to the best prospective Affiliates. Finally the growing strength and scale of our business and the substantial earnings and cash flow that AMG now generates, gives us increasing capacity to invest in new Affiliates while also returning capital through share repurchases, providing an important additional component to our long-term shareholder value creation.

With that I'll turn it to Nate to discuss our Affiliate results in greater detail.

Thanks, good morning everyone. As Sean said we had a strong quarter to start the year as we're continuing to benefit from several trends we discussed in prior calls.

First, the growing realization, especially by sophisticated clients worldwide, that boutiques have a competitive advantage in generating excess returns in many product categories. Second, the continued bar-belling of client portfolios into a portion designed to gain beta exposures on one side and a portion to generate excess returns on the other. These trends benefit many of our Affiliates, and in the first quarter we generated over $5 billion in net flows in what was our 20th consecutive quarter of strong growth, totaling over $130 billion in net flows during this period.

While AMG includes the broadest array of returns to boutiques in the world including US, global and emerging markets equities, I wanted to spend a minute focusing especially on our alternatives business which, as Sean noted, makes up a significant portion of our earnings. Our alternatives business includes a diverse management fee component with many of the products uncorrelated to each other and the rest of AMG. So we pick up some good diversification away from equity market betas. In addition, as you all understand, many of these products include performance fee opportunities that are also very diverse, uncorrelated, and of course positively asymmetric, so they can't go below zero.

Alternatives continue to be in the area of particular strength, certainly from the standpoint of growth but also innovation. You can think about our alternatives exposure across a couple of dimensions. First, dividing the group into categories, a portion that's market beta plus alpha on the one hand, and a portion that's more absolute return on the other. And we have significant and evolving exposure to each. Second, we also describe our alts business along a liquidity spectrum, where we have a number of Affiliates who have built significant, stable, and long-duration capital, while other Affiliates have led some of the trends into liquid alternatives.

From a product standpoint, as the alternatives business continues to evolve, we are very well-positioned with our existing group of Affiliates, with outstanding products that have strong, long-term track records in areas such as private equity, infrastructure, energy, private debt, activist, multi-strat, relative value, managed futures and long/short equities, managed by firms such as AQR, BlueMountain, EIG, First Quadrant, Pantheon, and ValueAct, truly the leading firms in their respective areas. This is obviously a very dynamic part of our business, and entrepreneurial focused firms such as our Affiliates are very well-positioned to generate significant growth going forward.

The long-term track records of many of the largest products in our alts category are very good and that continued in the first quarter, including especially at AQR, BlueMountain and ValueAct, while EIG took advantage of some of the volatility in the energy sector this past quarter, putting several billion dollars in capital to work. Continuing with performance in the global developed markets category, our Affiliates generally had good investment performance with highlights for the quarter including the major global equity products at AQR, Artemis and Harding Loevner. These products have outstanding performance records across longer-term periods as well.

In the emerging markets category, performance was more mixed as products managed by Genesis, Harding Loevner, and AQR under-performed their benchmarks in the quarter. However, long-term performance records remain very strong. Finally, with respect to our US equity products, performance was also mixed, with GW&K; Tweedy, Browne and Yacktman underperforming, while Systematic and River Road performed quite well during the quarter. Frontier also delivered very strong performance in the quarter, and across longer time periods as well.

Now turning to flows for the quarter. As I said, we had another good quarter with $5.3 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, as your saw in our results, flows were broadly distributed across channels and diverse in terms of product category. Starting with the institutional channel, we had positive net flows of approximately $2.9 billion. Positive flows came primarily in alternatives strategies and global equities including notable contributions from AQR, BlueMountain, EIG, Harding Loevner and ValueAct, which were partially offset by outflows in US equities.

In our high net worth channel, we had positive net flows of $1 billion, with meaningful contributions from GW&K, Harding Loevner and ValueAct. In addition, we closed our Wealth Partners investment in Baker Street at the beginning of month. I'd like to welcome them on board, and we look forward to their contributions. Our Wealth Partners business now includes four outstanding firms with over $25 billion in AUM.

Moving to the mutual fund channel we had positive net flows of $1.4 billion. The bulk of these flows were in global and emerging markets equities and alternative strategies, and came from a number of Affiliates including especially AQR, Artemis, Harding Loevner and Tweedy, Browne.

Turning to our US retail platform, AMG Funds, the team there is making good progress, continuing to diversify the product and distribution relationships. However, that part of our business has a very significant exposure to active US equities which, as everyone knows, have been out of favor with investors, resulting in outflows. Looking ahead, we are optimistic about the opportunity we see to continue to build a world-class US retail distribution platform for our Affiliates, and especially, as retail clients and the intermediaries who serve them, ultimately need to reallocate to return-oriented managers in order to meet their liabilities. As I indicated earlier, this is also an area where we can help some of our more institutionally-focused alternative firms access additional pools of capital.

Finally in terms of updating you on our global institutional distribution platforms, we continue to help our Affiliates generate strong flows among a diverse set of products and across geographies. During the quarter, we added another senior Korean distribution professional to the team in Asia. We continue to make good progress, opportunistically adding resources to our existing platforms and remain focused on evaluating additional channels and regions as we look to bring outstanding boutique products to new areas, leveraging the traction, brand, and reputation we've built.

With that I'll turn to Jay to discuss the financials.

Thank you Nate.

As Sean discussed, our financial results included another quarter of outstanding organic growth, and together with the run rate effect of our new investments, our first quarter results reflect significant year-over-year growth, and the increasing scale of our business. As you saw the release we reported economic earnings per share of $2.91 for the first quarter, an increase of 17% year-over- year, with net performance fees contributing $0.04. On a GAAP basis we reported earnings per share of $2.28. Our GAAP earnings for the quarter included a non-cash imputed interest gain related to the revaluation of our contingent payment obligations. Excluding this item our GAAP earnings for the quarter would have been a $1.96 per share. This non-cash item had no impact on our economic earnings per share.

Turning to more specific modeling items, for the first quarter our EBITDA increased 15% year-over-year to $221 million, reflecting the continued organic growth of our business and the impact of our 2014 new investments. In the first quarter the ratio of our EBITDA to end-of-period assets under management was approximately 14 basis points or approximately 13.7 basis points excluding performance fees. In the second quarter we expect this ratio to stay flat at 14 basis points. With regard to our taxes, our effective GAAP tax rate for the quarter was 34.1%, and our cash tax rate was 16.5%. For modeling purposes we expect our GAAP tax rate to be approximately 34% and our cash tax rate to be approximately 22%. Intangible-related deferred taxes for the first quarter were $20.4 million, and we expect this number to increase to approximately $20.7 million the second quarter.

Our share of reported amortization for the quarter was $29.8 million, which includes $8.8 million of amortization from Affiliates accounted for under the equity method. We expect our share of amortization to be approximately $30 million for the second quarter. Our share of interest expense for the first quarter was $22.2 million, and for the second quarter we expect our share of interest expense to increase to approximately $23 million, reflecting the full quarter effect of our February bond offering. Our share of pre-tax non-cash imputed interest expense for the first quarter, excluding the contingent payment gain of $29.8 million would have been $2.6 million. For the second quarter we expect our pretax non-cash imputed interest to decline to approximately $2 million.

Turning to our balance sheet, the excess cash flow generated from the increased scale and diversity of our business continues to provide us with significant capacity and flexibility to execute on both new investments and share repurchases. Since the beginning of 2014, we've invested over $1.3 billion in new and existing Affiliates, and executed approximately $390 million in share repurchases including $150 million in the first quarter of 2015. Even with this record level of capital deployment, we were upgraded by S&P and received an A3 rating for Moody's. In February, we further increased our balance sheet capacity by issuing a $350 million 10-year senior bond at an attractive rate. And combined with our $1.25 billion revolver and run-rate EBITDA of over $1 billion, we continue to be well-positioned to create incremental opportunities for earnings growth.

Now turning to guidance, we are raising our 2015 guidance as we expect economic earnings per share to be in the range of $13.10 to $14.35. This guidance reflects substantial year-over-year growth in earnings of 20% at the midpoint of our range. We also assume a weighted average share count of approximately 55.5 million for the year. This guidance assumes our normal model convention of actual market performance through yesterday for the current quarter and 2% quarterly market growth in the third quarter of 2015. In addition, to reflect the potential earnings impact from our substantial cash flow, we are updating our model convention to assume 50% of economic net income will be used to repurchase shares beginning in the second quarter of 2015 and thereafter.

As always the lower end of our guidance range includes a modest contribution for performance fees and organic growth while the upper end of the range assumes a more robust contribution from both performance fees and net client cash flows. These assumptions do not include earnings from future new investments and are based on expectations of Affiliate growth rates, performance, and the mix of Affiliate contribution to our earnings. Of course substantial changes in markets and earnings contribution of our Affiliates would impact these expectations.

Now we will be happy to answer your questions.

(Operator Instructions)

William Katz, Citigroup.

Thanks so much.

So actually two-part question, so I'm going to cheat. Sorry to do that.

So Jay you mentioned just now that 50% of the ENI is going to go to repurchase. So the first part of the question is: Why wouldn't the share count then drop a bit more noticeably? And then, Sean perhaps for yourself, I think one of the sticking points on the stock is the perception that a pickup of repurchase either precludes or slows down structurally the opportunity to grow through acquisitions. So I am wondering how you can answer that observation, as well.

Those questions are actually linked, so we'll allow you to have two.

Hi Bill.

The reason for the muted impact really is that we're in May, almost in May, and the convention would be that the ENI is applied later-in-this quarter to repurchases. So while it will have a modest impact on 2015, because of the weighted average impact of a full year of outstanding, the cumulative impact would have a greater impact on 2016.

And to answer the second part of your question, the convention is just that; it's a guidance convention. It is a way for us, when we are giving guidance, which I'll say contextually, as you all know, we're the only firm in the industry that still gives guidance.

But in trying to give you as meaningful a sense of the forward investment opportunity without, as you also know, ever including the impact of new investments in our forward guidance, there's a need now, given the scale and earnings power and cash flow generation of the business, to account for the $800 million plus and growing of cash that the business generates, which we will put to work. We want to, and expect to, and have a long track record of putting that cash to work and investing in new Affiliates.

But given the scale of the cash flow, given the inevitable variability in the timing of new investments, we also expect, as you saw last year, to be making increasing share repurchases so that the cash that the business generates doesn't just build up, and isn't put to use to generate value for shareholders. So the clear strategy and expectation is that we will invest the cash in new Affiliate investments, but as a forward-looking guidance convention this is a way for us to incorporate at least a portion of the cash that the business generates, into the forward earnings expectations. But it is a guidance convention and nothing more.

Okay. That's very helpful. Thank you.

Michael Kim, Sandler O'Neill.

Good morning. So in terms of flows, you obviously been able to consistently generate among best-in-class organic growth over the last several years. But I think a chunk of that growth has been sourced from, obviously, increasingly tapping new regions via the global distribution platform. So just wondering how you might sort of frame the non-US growth opportunity today versus a few years ago when you were just getting started. I'm just trying to understand the opportunity set as it stands today relative to the past.

So thank you for the question. So just so everyone understands, fundamentally, we think there's still a very significant opportunity ahead of us, and I'd say a significant and evolving opportunity. So, if you rollback as you did, the initial opportunity was bringing and marrying excellent performance-oriented boutiques into markets and regions, geographies and channels where they weren't, and beginning to make those sales.

And I think in many regions we've done a good job of that, and there's still opportunity to grow there, but we've done a good job of making that initial penetration of bringing some of those products to market. Obviously, as new products are developed and also, importantly, as new Affiliates come online, more opportunity to bring those products to market. The next stage of it is, I'd say, two things. One is the opportunity to diversify by channel within regions we've already gone to.

And then there's also a very large opportunity which we are just beginning, to diversify within relationships we've built. So with end-users, large-scale institutions and intermediaries in these markets, we've begun coverage of them, we've made the initial sales into a subset, we have the opportunity to continue to deepen into ones we haven't made the sales to. But, really importantly we're now engaged in a conversation, the client service conversation, with some of the largest, most sophisticated institutions around the world and the intermediaries to serve them. That opportunity set, you could sort of crudely think of it as cross-sell, but that opportunity set to cross-sell within the existing Affiliate base and then, obviously, as new Affiliates come on, that's an enormous opportunity, and were just at the very early stage of that.

And it fits within a broader trend that I described in my prepared remarks, which is an increasing concentration among these very large pools of assets. You have, ironically, the largest pools of assets, think the large sovereign wealth funds and other similar client entities.

Their assets are rising and simultaneously they are trying, just for efficiency purposes, to shrink the number of providers, especially on the alpha side of the barbell. We think that the power and benefit of the relationships that we've built, and are still building, in regions like Korea, we announced a new hire. And there are other important regions around the world like Japan, where we still don't have a major presence. We're still building the platform, but the position that we've got is one that we think gives sustainable strength and opportunity going forward.

Got it. Okay, thanks for taking my question.

Daniel Fannon, Jefferies LLC.

Thanks.

In terms of new activity in terms of the investment side, it seems like the backdrop and environment for activity has been good for a long period of time, or at least the last 12 months, and you have deployed a lot of capital. But just wondering if you could give some nuances or details of how you would characterize any differences today versus maybe the start of first quarter last year, or if it's relatively been similar in terms of either the pipeline in terms of the size or just the macro factors that may be determining timings of when things could or couldn't happen.

It's a hard question to answer because if you look back a year ago, there had been some market volatility that we don't really have today. And going forward, there will be a different macro environment that will inevitably impact, to some extent, the timing of transactions. That's just very hard to gauge.

There are also are always idiosyncratic considerations that are very hard to predict, ex-ante, among prospective Affiliates. What would I say about the market generally? I think there's probably a little less activity across the industry. We are very busy, mainly with succession-oriented transactions. There are a few third-party sales. All of those, by the way, end up being a little more difficult to do manage and gauge from a timing standpoint, because the succession transactions, they'll take what they take and there's not a banker-driven process, typically, that's managing the transaction along a certain time line.

That being said, we strongly prefer these kinds of transactions because they're typically arising out of proprietary relationships, and we get to know the firms better than we would or could in a process. And the converse is true, of course. I would say our pipeline is skewed more non-US and more alternative than it would be normally. And then the other thing I would say, if you look at the largest prospective Affiliates, the 150 core prospects that we have been talking about, the thing that is striking, notwithstanding all of the transaction activity, that has occurred in the industry, including substantially by us, is that so much of it is yet to come.

There is an inevitability about forward transaction activity for the simple reason that the partners who have founded and built these firms have created enormous wealth and value in the equity of their firms. In some cases they will transition that to a next-generation in their own family, but in almost all cases they are looking to have a succession solution, which in part of course involves transitioning equity to the next generation, but also involves a measure of liquidity and estate planning for these senior partners.

So the biggest portion of that forward opportunity is yet to come, so we look at the next 5 to 7 years and, at current asset levels, the invest-able opportunity for us, meaning not the total enterprise value of these 150 firms, just the transaction value to us is over $40 billion. I look at that, the size of that opportunity and I think of what our expected market share will be and, as you can imagine, we're very optimistic and enthusiastic about that opportunity.

Great. That's helpful. Thank you.

Brian Bedell, Deutsche Bank.

Good morning, thanks for taking my question. Jay could you just elaborate a little bit more about the guidance. What portion of the increase is due to the new convention of the share repurchase? And then if you can comment on the market return assumption for April that you're using.

Okay. I will, Brian. So just at a high level there's a couple of things going on in the new range of $13.10 to $14.35. It reflects these items that all sum up to a net positive. The items include mark to market. Since our last call, the full-year impact of the interest expense from our February bond offering, the impact of share repurchases in the quarter, which were offset generally by elevated option exercises, and then, finally, this model convention update, and I think as I mentioned, a muted impact this year, but positive, and then a more significant impact in 2016.

On the beta question, what we've experienced so far since the last call, so just reminding everyone of our normal model convention, which we gave last on January 27, we assumed zero markets for the first quarter and 2% for the second quarter. And then, obviously, 2% thereafter.

Since then our blend was approximately 4% across all of our products. As a result that's 2% incremental to our normal model assumption. Approximately half of that was offset by the incremental interest expense on the bond. Then, when you think about the capital deployment update on top of that, that would be a small net positive for the year, because we won't start until later this quarter and the averaging effect on our share count leads us to approximate our share count for the year at 55.5 million.

The other thing I wanted to note in the guidance is just, on performance fees, as Nate had mentioned against the backdrop of continued flows in alternatives. The performance fee opportunity has increased modestly as a percentage of our earnings. We continue to say we can't go below zero. We still think that 5% is kind of a minimum level, but because of the opportunity set, in a typical year you could this go little above 10%, and I think I mentioned this last quarter, the top end of our range, we could see a little extra performance fees this year.

Great. Thanks very much.

Chris Shutler, William Blair.

Good morning. On the global distribution effort, just curious to what extent the flows that you've been seeing are coming from existing clients versus new. I'm sure it's a mix but just help us think about the size. Thanks.

Sure. So there's no question it's a mix. Probably the best way to think about it is, we talk about institutional flows being lumpy. One place that lumpiness definitely expresses itself is the high-end of what's going in global distribution. We have built some significant institutional relationships where we're now able to, going back to the answer I gave for the earlier question, now we're really able to cross-sell in.

That said, by number of mandates? It's still more new relationships. The other thing I'd say, and I think we've said before, it's tough to also, now, just with the overall growth, it's tough to also think about global distribution versus Affiliate driven, because now, given the breadth of relationships we have, there are may places where even though the Affiliate's driving the process, and it really is their process. At a senior level we have a relationship with the institution, among the biggest institutions in the world, where we have a senior relationship with an intermediary, because we have built relationships with them really all around the world.

And so even where it's really not so much driven by our global distribution team specifically, there's leverage in it across much of what's going on. And, obviously, the opposite's true too, even where it's introduced through our global distribution relationships, you can think of these institutional sales is having 15 or 20 touches from inception through close, and even where our guys are playing critical roles, all of these sales really are Affiliate sales. The clients are hiring the Affiliates to manage the money.

Sure. Makes sense. Than just one more on a different topic, the AMG Funds platform. For these alternative firms just curious what types of products your at least in discussion to roll out, and how much of it is more liquid alts versus less liquid types of products. Thanks.

Thanks. To your second question, it's across the range, is the answer. It's much easier to think about the launch of liquid alts funds. The background is much more well trod. But we're doing some very interesting work with Affiliates. Think of a firm like Pantheon. We're doing some very interesting work with firms like that, bringing illiquid alternatives into the retail market, including bringing them down-market, in 40-Act fund format, and also thinking about ways to bring that product set, whether it's the PE products or the infrastructure products into DC, as well. So there's lots of very interesting work going on at both ends. Again the ground is much more well trod in the liquid alts side. But we think there's a very big opportunity to marry the retail platform that we've got already with excellent alternative boutiques, and allow them to access the retail marketplace.

All right. Thanks a lot, Nate.

Robert Lee, KBW.

Thanks. Good morning.

My two questions. The first one, just curious, in looking at the balance sheet, can you just update us again on where things stand with the ability to continue to refinance some of the debt on the balance sheet, and the convert when that comes callable down the road? Help us frame that opportunity.

Sure. On the balance sheet, we did do a financing in the first quarter. It was a $350 million, ten-year at 3.5%. We used the proceeds to repay our revolver, which really just basically increased our capacity. Clearly with our revolver almost completely undrawn at this point, with our over $1 billion of EBITDA, we have a lot of capacity to execute on our new investment pipeline, and so that's the setup of where we are today.

Looking forward on opportunities to refinance, clearly the convertible, which has a dilutive effect because it's in the money. We can take that out at $260, and we took two convertibles out in the last two years, so we do have a history of doing that. I think we will look to see with the lowest cost of financing is at that time. But presumably it will be the long-term debt markets.

We also have two other long-term tranches of debt, that we issued before we got upgraded to A3 by Moody's. Those are opportunities to lower our cost of capital. So we do actually have real good opportunity over the next couple of years to lower our cost of capital by refinancing securities.

Okay thanks. A question for Sean. You mentioned the pipeline of prospective transactions is skewed in part to non-US entities, and that's kind of, if I think about markets outside the US, I guess they're not often thought of having as many entrepreneurial boutique managers, maybe, as you've had in the US. So I'm curious what's really changed when you look outside the US? Is it more of those boutiques grew up and aged? Trying to get some feel for what's changed outside the US, to grow that pipeline so much.

Hard to give an answer because every geography's a little different. But it is, I think the ongoing evolution and development of the asset management industry, which has on the alpha side of the barbell, in terms of the alternative firms or alpha-oriented equity managers, has an entrepreneurial element that is remarkably similar across very broad geographies.

Sometimes we'll meet firms that can be literally continents away from each other, and they will say the same things about the way they think about the importance of serving clients, building an enduring franchise, the passion they feel about the next generation and making sure they have the same opportunity. And, of course, inevitably these firms are collections of people, so you shouldn't generalize too much.

But excellent firms have risen up all over the world, and for us the opportunity to partner with these firms is assuming of course that they are all at the same very high level of quality. So you're partnering with excellent firms who are in very different markets with a different perspective, perhaps, in the way they invest, certainly with a more diverse client set. I guess the thing I would say, cutting across geographies, and true for US-based firms, European firms as well, but especially true for firms that are in more far-flung regions, in Asia and South America and other parts of the world, the power of our global distribution platform is increasingly important. It is often the first thing that prospective Affiliates are asking about. Inevitably it is very distinguishing from other entities that would seek to invest in them.

We have built, uniquely I would say, purpose-built a distribution capability that supports the marketing and distribution of independent boutique firm products all around the world. And as Nate and I have been saying, with very strong relationships with some of the most important, rapidly growing clients around the world. And so that capability is something that these firms appreciate and value and, of course, all of the other elements of a partnership are incredibly important and things that ultimately we would come to.

But the power of the distribution capability is something that I think is contributing to the outreach that we're seeing, and of course the last thing I would say is we're a very global business, and we spend a lot of time on the road, all of our senior executives and our new investment team, building relationships with firms in places that are often hard to get to, but include some of the most excellent firms in the world.

Great. Thanks for taking my question.

Michael Kearney, Bank of America.

Thanks. Jay, just a follow-up question. Not on the guidance, but more on the new strategy with the cash flow.

So at first, I understand what you're saying this year, that you don't see the big reduction in the share count. But just curious, given where the shares are now, and where your expectation is for the year, seems like it's pretty close. So I just wanted to understand what else is going on either equity grants, options that might be impacting that. And then, if we think about 2016, based off 50% of ENI, it looks like that would lower your share count maybe around 3%, and that's on a gross basis. So just wanting to know what we think about equity issuance, what is the net basis going forward?

And then last part of this: when we think about 50% of ENI, that's probably a lower percentage of cash flow or EBITDA, so it seems like the focus is still on the acquisitions and growing the business. But I wanted to make sure I understood that correctly, just because the EBITDA number's, obviously, much greater than the ENI number.

Thanks, Michael. You actually were tracking it all quite nicely, honestly. So let me see if I can say some of the things you just said back to you. Start from the end, the 50% ENI, you're right. We do have more cash flow than that. It's modest but we do have more cash flow.

It is just a convention, so I want to make it clear, the actual activity for capital deployment will depend on the circumstance of the quarter or the period that we're in. This is just a convention. So against the backdrop of that convention, I guess I'll answer your question, which is-- going to the 2016 number, you're more or less right. When you take the economic net income, and remember that we receive our cash flow in the quarter after we book it, so it comes in the next month, so if you are just taking the first quarter, half of that, and applying to the second quarter, and then keep rolling it forward, you're going to get to more or less that 3% number in 2016.

This year, because, of course, we can't start buying until after our earnings call, you're going to get a muted effect, because it's going to be the back half of the second quarter, the back half of the third quarter and the back half of the fourth quarter. And because we've already got 55.7 million in the first quarter, to get down below 55.5 million, which we anticipate doing by the end of the year, the weighted average impact of that's going to be 55.5 million. There is going to be some option creep if you assume an increasing share price, if you just keep a constant multiple, for example. It is modest, but it does provide some drag to that number, so that does explain why, when you run your model, you'll need to include a modest amount of shares, both from the options and the convertible. So I think you accurately described all of the different elements of it. And hopefully I answered it.

At the risk of repeating something that everybody understands, we think it's quite important that no one confuse the introduction of a new guidance convention with any change to our business strategy. The business strategy is to return - - the most important and first priority on the cash that the business generates, and, obviously, capital that we can readily raise, is to invest in outstanding new Affiliates which enhance and diversify our business, both in terms of the earnings contribution, as well as the product diversity, which supports and enhances our client relationships and distribution capability, as well.

So that, as you all know, is the first priority. And we will, in a year where we see opportunities that are in excess of the cash flow the business generates, invest all of that cash flow and raise additional capital -- debt or equity -- to support the new investment effort. And, as I said earlier, we see that as a very, very large opportunity that is enduring looking out, given the number of excellent boutique firms around the world and the strength of our competitive position and the quality of the relationships we built with those firms.

Inevitably there will be periods, just given the variability of investing activity, there will be periods where, let's say we don't make any investments in a given year, we would put to work, repurchase substantially all of the cash that the business generates. So, in no scenario will the guidance convention likely be something that we actually followed. But as we indicated, we think that the scale of the business is such now, and the magnitude of the cash generation, is such that - - and it's a little bit crept up on us.

We're a much larger from now than we were even a few years ago, and so not taking account of the $800 million in cash that the business generates, which is growing, hopefully, we'll distort or understate by a lot the value that we think we're going to create for shareholders. And so, this is just an attempt to illustrate that, but no change to the underlying business strategy.

Okay. That's helpful. Thanks a lot.

Patrick Davitt, Autonomous Research.

Good morning. If we look two or three years ago, you could probably say within this multi-Affiliate world, you guys were the only game in town on the investment front. When we look at the environment now, Legg Mason has become more active, OMAM has restructured, and looking to do deals. Natixis has indicated they want to be a lot more aggressive. Are you starting to see that creep into pricing or your discussions at all, now that it does look like the multi-Affiliate world is a little bit more competitive for new investments?

No.

No. Okay.

I think to give more context, we've been doing this for more than 20 years. Obviously some of the entities that you identify have been around for even longer than we have. And so if you look over that 20-year period, there has been competition throughout. I suppose there was a period immediately after the financial crisis where there were far fewer buyers, but there weren't a lot of sellers then, and so I'm not sure that was an environment that you could extrapolate from.

But in the main, excellent firms will have opportunities to sell or partner with firms in any period. That's the nature of excellent businesses. And so you step back and you say: well what are the underlying dynamics then? And the underlying dynamics are driven by the choices that these firms have, and if you think about the considerations that the founding partners of a successful boutique firm have, whether it's traditional or alternative, whether it's in the US or the UK, or somewhere in Asia or Australia. All of those firms' principals have the same set of considerations.

Their first around client reaction. They have a very successful business. They care more than anything about the perception that their clients have about any transaction. The clients don't want any change, the clients don't want any misalignment, and the clients don't want any uncertainty about the nature of the partner, and ideally, if the nature of the partner is enhancing to their reputation, where clients have a positive feeling, and experience, with the partner, and the partner has a track record of successful partnerships--which as we all know in the industry over the last 20 years, there are many, many more unsuccessful acquisitions or partnerships of boutique firms than there are successful partnerships. Successful partnerships are the rare commodity.

And clients have a lot of experience, and are more perceptive and challenging than they have ever been. What else do you care about? Do you care about the quality and character of the partner in terms of how they'll interact with you. You care about the -- and what their track record as a partner is. And longevity and successful partnerships especially in tough times, is incredibly important.

Everybody's a good partner in good times. The key test is who's a good partner in the tough times, in the financial crisis, etc. So a firm that has a track record of success through market cycles is incredibly advantaged, as a firm's principals are thinking about their alternatives.

The other consideration I mentioned earlier is the ability to meaningfully add to the distribution capability of an individual boutique firm. It's easy to say we've got X number of people. I'll pick on-- a big global bank might say we've got X number of marketers, in all of these regions, but the reality is those marketers might not be able to -- and probably don't have any experience at -- selling individual boutique firm's products, and really working in a complementary way with the marketing and distribution professionals of the boutique firm.

It's a hard thing to do. It's a hard story to tell, regarding global clients that you have both the benefits, in terms of risk management, stability, and in-market client service. The benefits of a global scale asset management company, combined in a complementary way with an individual performance-oriented boutique firm, and their unique product capabilities, and their own marketing and distribution professionals.

That relationship, both with the client and with the boutique firm, is challenging to actually execute, and maintain. Easy to talk about, very hard to execute. And then what you would look to is, what's the track record of success?

And there's no entity in the world that has anything like our track record of successfully distributing and supporting the marketing and distribution efforts all around the world of individual boutique firms. That is always owing to the excellence of the investment performance of the boutiques themselves, but it doesn't happen without also very effective and excellent execution of the distribution capability. That, too, is very, very differentiating.

And then the final thing I'll say is, we have been building relationships with these firms for over 20 years, and it doesn't mean that they are not going to pick up the phone and talk to other people. But they don't talk to many people, and the quality of the relationships that we've built are, we think, very distinguishing.

At the end of the day, relatively few of these firms want to auction themselves. They tend to want to pick their partner, and a firm that has all of the considerations that I've described, very often, most often I would say, would choose us. So we don't feel the competition from other entities, because it's never about, XYZ firm will pay a dollar more. The valuation comes only at the end, and I would say is often the least important of the considerations.

Makes sense. Thanks.

Craig Siegenthaler, Credit Suisse.

Thank you. Morning everyone.

So now that you introduced a consistent share repurchase target, and I know I'm going to be a little premature here but --

Craig we did not do that.

As a third avenue to deploy capital.

I interrupted you, so I'll make sure that everyone heard your question, but we did not introduce a target. We introduced a guidance convention that is different than a target. It's not something were managing to. So just to be crystal clear on that. And I think your question was, does this mean that we're closer to a dividend, and my answer is no. I mean, at some point in the future, sure.

But this is just an attempt to highlight the role that the cash generation of the business can play in shareholder value creation. Tell me if I'm not addressing your question fully, but I think at high-level we're not expecting a dividend.

All right. Sean that's clear.

And for those of us who look further out in earnings outside of 2015, when we think about 2016 and 2017, is it prudent for us to continue to assume this share repurchase range in the 50% range, and if it's higher or lower, is that really-- deals I guess are a big factor there, or also the valuation of the stock.

Just from a model convention, and I think Sean articulated our strategic priorities are unchanged, but from a model convention, you can roll forward that assumption, as we will in our model convention. The actual amount of share repurchase-- in some quarters we might not do share repurchase in some quarters we'll do more than the 50%, we'll update you and we'll update the shares as part of the guidance each quarter. So every quarter you have a chance to see how we're doing and compare it to the forward, so there will always be another opportunity each quarter to update that. But if you're just looking out, yes you can roll that forward.

And it's appropriate to think that way about 2016 in any given period. We could spend all of the cash flow that the business would generate in a year. That's the plan of course - - or more. And then of course the guidance would be adjusted accordingly.

Thanks.

Thank you. We have no further questions at this time. I'd like to turn the floor back to Sean Healey CEO for closing remarks.

Thank you again for joining us this morning. As you've heard, we're pleased with our results for the quarter and remain confident in our ability to generate meaningful earnings growth through both organic growth and accretive investments in new Affiliates going forward. We look forward to speaking with you in July.