Affiliated Managers Group Inc (AMG) 2016 Q2 法說會逐字稿

Greetings and welcome to the AMG second-quarter 2016 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Selene Oh, Vice President, Investor Relations for AMG. Thank you. You may begin.

Thank you for joining AMG to discuss our results for the second quarter of 2016.

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 the Investor Relations section of 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 the reconciliation of any non-GAAP financial measures to the most directly-comparable GAAP financial measures, including a reconciliation of any estimates of the Company's economic earnings per share for future periods that are announced on this call.

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, and good morning everyone. Against the back drop of volatile markets and muted investor risk appetite, AMG generated solid results in the second quarter, including stable economic earnings per share and year-over-year growth of 8% in our pro forma assets, bringing our total assets under management to approximately $700 billion. Our Affiliates produced excellent relative investment performance and positive net client cash flows, and we added outstanding new Affiliates, including Winton Capital Management and Capula Investment Management. As Jay will describe, given the increased earnings power of our business, even in a relatively difficult environment for the asset management industry, we see continued earnings growth for the balance of the year, and through 2017.

Notwithstanding elevated market volatility, which resulted in industry-wide risk aversion, we generated positive net client cash flows during the quarter. As Nate will discuss, our strong net inflows in the retail and high net worth channels were partially offset by lower institutional sales, especially at the end of the quarter, as a number of global institutional clients decided to pause implementation of investment decisions, in response to the unexpected outcome of the UK's Brexit referendum. We believe that this was essentially a short-term response, and looking ahead as markets have stabilized and investor expectations adjusted, we are seeing a resumption in sales momentum, and expect to benefit from these delayed fundings through the balance of the year.

We also believe that rising dispersion in the markets will increasingly favor differentiated performance-oriented strategies, including focused active equities and a range of value-added alternative investment products. Our Affiliates' equity strategies performed well in the quarter, including Tweedy, Browne, Harding Loevner, and Genesis, which all posted strong absolute and relative performance in global and emerging market equities, and Yacktman and TimesSquare, which in particular, generated excellent results in US equities. Our alternative managers also generally performed well with the volatility, as several of our Affiliates, including AQR, First Quadrant and BlueMountain generated meaningful alpha during the quarter.

Looking forward, contrary to conventional wisdom around challenges in the hedge fund industry, there is significant and growing client demand for alternative strategies across distribution channels, particularly those which are additive at a total portfolio level, given their lack of correlation to traditional equity and fixed income markets. We believe this is an enduring trend. The diversification and balance of risk and return offered by well-designed alternative strategies are compelling to both sophisticated global institutions, as well as individual retail investors as they strive to meet their investment goals.

We believe that clients are increasingly focusing on the highest quality managers with long-term track records of alpha generation, and those managers which have demonstrated that they can effectively manage at scale and with institutional quality. This trend benefits the highest quality alternative firms, including our Affiliates, which are recognized as leaders in their respective disciplines, and as evidence of this, our alternative Affiliates have consistently generated positive net client cash flows over the past five years, including in the second quarter.

Across our group of Affiliates, we have strategically and deliberately assembled a very large and diverse set of alternative strategies, which taken as a whole, not only generate strong organic growth, but also have low correlation with equity markets, and low correlation with each other. There's no other firm in the industry with the range and quality of our alternative product set. We think that this point is under-valued by the market, and that the benefit of our strategic position across a very broad range of alternative strategies will become increasingly evident.

Our substantial exposure to this array of strategies, which is, in aggregate, approximately 40% of our AUM, and the highly diversified return streams they provide, is not only attractive in its own right, but it is also a strong complement to our strategic focus on differentiated active equities, through our outstanding traditional Affiliates. As clients increasingly seek the highest quality active Managers for the alpha portions of their portfolios, our industry-leading boutique Affiliates are well-positioned for continued strong organic growth going forward.

Finally, turning to new investments. We continue to have an outstanding opportunity to further enhance the diversity of our performance-oriented product set, by partnering with leading traditional and alternative firms around the world. The transaction environment remains highly favorable for us, and we have a diverse global pipeline of prospective new Affiliates, that are drawn to AMG's excellent reputation as a partner for over 23 years.

Given our unmatched competitive position and our strong and flexible capital structure, we are confident in our ability to execute additional accretive investments in new Affiliates, and together with the organic growth of our existing Affiliates, are well-positioned for continued earnings growth ahead.

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

Thanks, good morning, everyone. As Sean said, in the quarter heavily influenced by macro uncertainty, we had positive net flows and our business performed well, as the market volatility created opportunity for high-quality active managers.

Let me begin with performance in the second quarter, and start with our alternative products. Across our Affiliates, we are one of the largest managers of alternative products in the world, with a very diverse portfolio of strategies across categories and investment styles. As Sean mentioned, the addition of a diverse series of high-quality alternative return streams to our outstanding equity boutiques significantly improves the stability of our business, while also providing an enhanced long-term return profile.

Now before I describe our performance in more detail, let me further break down our alternatives exposure into categories, and we now have these categories broken out in our IR presentation on our website. We have four primary groupings: First, private equity and real assets, which includes a variety of long-locked capital products, such as Pantheon's global private equity fund-to-funds and infrastructure funds, Baring Asia's emerging markets private equity strategies, and EIG's energy and related infrastructure investment, none of which are impacted by short-term fluctuations in equity markets.

The next category is Systematic Diversified Strategies. These include our managed futures or CTA products at AQR, Systematica, and Winton, which seek to deliver returns which are uncorrelated with equity markets, and also substantially out-perform in declining markets.

The third category is Fixed Income, and Equity Relative Value strategies, including those at BlueMountain and Capula, which look to provide returns uncorrelated to traditional equity and fixed income markets, as well as strategies with varying degrees of equity market exposure, from full exposure to market-neutral. Our fourth category is multi asset and multi strategy, which includes products that utilize a variety of asset classes and exposures to deliver diversifying return streams for both institutional and retail clients.

Turning now to performance, and starting with our private equity and real asset strategies, we have a very diverse array of offerings with firms such as Baring Asia, EIG, and Pantheon. These firms have a number of current strategies where they are actively putting capital to work, and they have excellent long-term track records.

Next, turning to our Systematic Diversified Strategies, our Affiliates include three of the leading CTA Managers in the world. So we are benefiting not just from the diversity these strategies provide during periods of expanding volatility in trending markets, but also from the excess return these firms have been able to provide pretty consistently over time.

With that as backdrop, our Systematic Diversified Strategies were able to navigate the volatile markets in the quarter well. AQR Managed Futures was one strongest performing strategies in the space, with a positive return on the quarter, and a strong long-term track record. While Systematica's flagship BlueTrend fund posted losses in the quarter, it has positive returns for 2016, and a very strong long term track record. Our investment in Winton is not closed yet, and so is not reflected in the financial results for the quarter, but they also have one of the highest quality offerings in this product category, and performed well in the quarter.

Among our fixed income and equity relative value strategies, BlueMountain and Capula generated positive returns in the quarter across most of their products, while ValueAct on the other hand had a more challenging quarter, as they underperformed their benchmark, although they have started the third quarter very strong and continued an excellent long-term track record.

Finally, with regards to our multi-asset and multi-strategy offering, many our Affiliates' products performed well in the quarter, including risk parity products at both AQR and First Quadrant, as evidenced by the returns of their publicly available funds, AQR's Risk Parity Fund, and AMG FQ Global Risk Balance, which are up 6% and 7% respectively. In addition, we saw solid gains across other significant products in the category, such as AQR Style Premia and First Quadrant Tactical Currency.

Now turning to our equity products, and starting with the global developed markets category, where a number of our largest products and strategies posted strong absolute and relative returns. Tweedy, Browne's flagship global value fund out-performed its benchmark and peers in the quarter, further improving its long term track record. Through the quarter, this fund holds the top 5 and 10 year track records in Morningstar's foreign large value category.

In addition, Harding Loevner once again out-performed benchmarks and peers in both international and global equity strategies. Both strategies also feature near or above top-decile long term track records in their respective Morningstar categories. On the other hand, AQR Artemis underperformed the benchmarks, although they still maintained good long term performance records in the major non-US equity strategy.

Turning to our emerging markets category, we had very broad-based strong relative performance. Almost all of our major products at Affiliates including AQR, Genesis, Harding Loevner and Trilogy posted good absolute and relative returns. Stand-outs included Genesis Global Emerging Markets and Harding Loevner Emerging Markets, each of which outpaced the benchmark by over 250 basis points.

Finally, with respect to our US equities, many of our US growth strategies are biased towards quality growth and away from high beta stocks, and we benefited from that in the quarter, as they generally out-perform the benchmarks and peers. This includes the largest products at Frontier and TimesSquare. On the US value side, our largest US equity contributor, Yacktman, saw their Focused Fund and Diversified Fund each outperform peers for the quarter, allowing them to maintain their top decile returns year-to-date and for the trailing year, and both funds still rank in the first percentile of the Morningstar category across the last 10 to 15 year period.

Now, turning to flows for the quarter, and I'll reiterate that flows to both the institutional and sub-advisory channels are inherently lumpy. First, we were pleased to generate another quarter of positive net client cash flows of $630 million, bringing us to positive flows in 22 over the last 24 quarters. Within our flows this quarter, there are a couple themes to identify.

First, as we've discussed on previous calls, we remain very well-positioned to participate in the trend of rising allocations to alternatives across distribution channels, and we benefited from this trend again this quarter. As Sean said, investors are increasingly using alternatives to achieve their investment objectives, either to generate uncorrelated returns or for risk mitigation, and our Affiliates feature some of the best offerings in liquid and illiquid alternatives, whether for institutional, retail, or high net worth investors.

While there have been a lot of headlines about the challenges so-called hedge funds are facing, we should all be very careful to separate those from the strong underlying trend of flows to alternatives more broadly, a trend we believe will continue, and which we are very well positioned to participate in. Second, the quarter was really a tale of two parts, with a relatively good first two months giving way to June, which was impacted significantly by the Brexit vote, and the volatility around it.

Now moving to specifics for the quarter, and starting with the institutional channel, we had net outflows of $2.9 billion in the quarter. There were three broad reasons for the negative net flows in the channel. First, we saw the funding process for several significant mandates slow in the back half of the quarter. A couple of cases were explicitly linked to Brexit-related uncertainty.

Second, we did experience some outflows from petro dollar-related clients. And third, unusually, we did not have any meaningful closes in our long lock capital products, at firms such as Pantheon, EIG, and Baring Asia. That was really just an idiosyncratic dynamic related to the quarter. There is significant demand for these illiquid products, so it's a matter of incidental timing and how the fund raising cycles across Affiliates stacked up.

Turning to the high net worth channel, we had record inflows of $1.7 billion for the quarter. Key contributors to this quarter's strong flows were SMAs sold through our broker dealer channel, especially in municipal bonds, as well as our AMG Wealth Partners platform, where we continue to see good traction developing.

In the mutual fund channel, we had net inflows of $1.8 billion in the quarter. From an asset class perspective, flows this quarter were driven by strong inflows to our alternatives and emerging market equities offerings, and we continue to benefit from much better US equity redemption rates.

From an affiliate perspective, key contributors to net positive flows were AQR and Harding Loevner. We did have some elevated retail outflows at our UK affiliate, Artemis, in the second half of the quarter, particularly in their UK-oriented strategies following the Brexit vote, but as markets recover, we expect this to continue to abate.

More broadly, while there's still a lot to be determined regarding the outcome, we do not see the Brexit vote having a significant direct impact on our distribution efforts or our Affiliates' operations more broadly. In fact, in the area most likely to be impacted, the retail channel across the UK and Europe, our affiliate product offerings, even from our UK-based Affiliates, are mostly domiciled outside of the UK, and should be relatively unaffected, or domiciled in the UK, but also sold to UK clients.

Looking ahead, with our outstanding and growing array of high quality equity and alternative products, along with our unique distribution strategy, which includes both the Affiliates' own distribution teams as well as AMG's focused, complementary resources, we believe we are very well-positioned for meaningful organic growth ahead.

With that, let me turn to Jay to discuss financials.

Thank you, Nate. As Sean discussed, we generated solid results in a quarter marked by industry-wide risk aversion. AMG has a differentiated ability to produce stable earnings across a range of market environments, and with the addition of Winton and Capula, we will further diversify and increase the earnings power of our business.

As you saw in the release, we reported economic earnings per share of $3.06 for the second quarter, which included net performance fees of $0.10. On a GAAP basis, we reported earnings per share of $1.97.

Turning to more specific modeling items for the second quarter, our EBITDA was $220.3 million, and the ratio of our EBITDA to end-of-period assets under management was approximately 13.6 basis points, or approximately 13.1 basis points excluding performance fees. In the third quarter, we expect this ratio to decline to approximately 13.1 basis points, reflecting lower performance fees, which is typical in the third quarter.

As a reminder, we will report our recent new investments on a one-quarter lag. As a result, this will have the effect of lowering our earnings for the second half of 2016, but not thereafter, as we closed Capula in July, and we expect to close Winton in the fourth quarter, without reporting their respective income in the quarter in which we close. I will further describe the timing and cost of funding of these new investments in a moment.

With regard to our taxes, our effective GAAP tax rate for the quarter was 32.3%, and our cash tax rate was 18.8%. In the third quarter and for the full year 2016, we expect our GAAP tax rate to be 33%, and our cash tax rate to be 20%.

Intangible related deferred taxes for the second quarter were $21.3 million. We expect this number to remain at approximately $21 million in the third quarter, and for the full year 2016, we expect our intangible related deferred taxes to be approximately $87 million.

Our share of reported amortization for the second quarter was $37 million, which includes $14.8 million of amortization from Affiliates accounted for under the equity method. For the third quarter, we expect our share of amortization to decline to approximately $35 million, and for the full year 2016, we expect amortization to be approximately $145 million. Our share of interest expense for the second quarter was $21.9 million, and in the third quarter, we expect our share of interest expense to be approximately $24 million, reflecting the higher revolver balance from the closing of Capula.

For the full year 2016 we expect our interest expense to be approximately $90 million. Other economic items for the second quarter were $0.8 million. For modeling purposes, we expect other economic items to be approximately $1 million per quarter.

Turning to our balance sheet, in June we announced new investments for the total purchase price of $800 million and simultaneously entered into a forward equity contract for up to 2.9 million shares, a structure which we have used several times in the past. Of the available 2.9 million shares, we expect to issue 2.5 million shares for $400 million in proceeds in the fourth quarter upon closing Winton, with the remainder of the purchase price funded under our revolver.

Given the funding profile as well as the ongoing strength of our balance sheet, and the quality and diversity of our business, we were placed on positive outlook by S&P. With our flexible capital structure, we are well-positioned for growth in a range of market environments, and looking ahead, the strength and scale of our business, which generates run rate EBITDA of approximately $1 billion, along with approximately $1 billion of undrawn capacity available by year-end under our revolver, positions us to create meaningful earnings growth as we execute on our new investment strategy and return capital to shareholders over time.

Now turning to guidance. We are updating our 2016 guidance, as we now expect economic earnings per share to be in the range of $12.30 to $13.30. This guidance range assumes our normal model convention of actual market performance through Friday for the current quarter, and 2% quarterly market growth for the fourth quarter.

As per our convention, given the pacing of our 2016 new investments, our guidance does not assume incremental share repurchases for the balance of 2016. We expect our weighted average share count for 2016 to be approximately 55 million, which includes the expected equity issuance in the fourth quarter. Given the meaningful run rate impact of our recent new investments, which is not reflected in 2016, as well as the full-year impact of the fourth quarter share issuance, we are providing preliminary guidance for 2017, as we expect economic earnings per share to be in the range of $14 to $16.

This range assumes the full-year effect of our 2016 new investments, our normal model convention of 2% quarterly market growth beginning in the fourth quarter of 2016 and each quarter thereafter, and includes our normal model convention for share repurchase in 2017, equal to 50% of our annual economic net income. As a result, we expect our weighted average share count to be approximately 56 million for the full year 2017.

The lower end of our guidance ranges includes a modest contribution from performance fees and organic growth, while the upper end 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 contribution of our Affiliates could impact these expectations.

Now, we'll be happy to answer your questions.

(Operator Instructions)

Our first question comes from the line of Craig Siegenthaler with Credit Suisse.

I wanted to hit first on the $8 billion of lower institutional sales activity in Q2. So I'm just trying to think about it, but if Brexit really only impacted the last week of the quarter, and the petro dollars impacted the redemptions but not sales, I just wanted to better understand the $8 billion decline, and maybe the answer is institutional sales activity is very lumpy as you said, and also, I think you also said that you didn't have any large lock-up fund raises too.

This is Nate. So I think you understand that mostly right. So I think first, I would say that the Brexit vote, the slowed fundings really were the uncertainty around it, so we actually saw that show up more broadly through the month of June than just right after the vote, so it was actually that uncertainty running into it. We saw a few things push out, so that was the first.

And then the second is as you say, we didn't have any closes in long-lock capital products, which is the other underlying trend I'd give you. And yes, of course, as you say, it is always lumpy, and so the timing of the close on one or two fundings ends up -- can end up impacting that gross sales number, can impact the gross sales number.

And the other thing I'd say, just to follow on to your question is, look, July was a good month, and the institutional pipeline looks really strong, and partly that is probably because of some things that slipped from Q2 into the back half of the year. But the RFP levels and the finals activity levels are really fantastic. And maybe even a nuance there, which is that description I gave of June was really on funding, not really on activity level, because again activity level through the quarter was actually quite good.

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs.

I was hoping you could update us on the year-to-date trends that you're seeing out of Winton and Capula, specifically on performance and flows. And when you think about your 2017 guidance, could you remind us again what accretion you're assuming from these new deals? And then I guess the underlying assumptions for that, meaning flows and performance fees for these new Affiliates?

I'll start, and maybe Nate, if you want to add in some color, and Jay can answer the last bit. Winton and Capula of course are -- in the case of Capula, we just closed our investment, and Winton will be later this year. Their performance is actually good, and was ironically even better post-Brexit.

So across our book of alternative strategies, and you heard a broader more comprehensive discussion this quarter, and you'll hear more as we broaden and expand our disclosure around the range and quality of our alternative products, but the main answer is that looking ahead, we feel very good about the position and performance level of especially our largest affiliate products. But including the range and diversity of the products, because inevitably not every product or strategy will outperform in every period, and it's the correlation among the alternative products, as well as correlation or lack of correlation to equity markets that's important to bear in mind.

Nate? Or Jay?

Just going to answer on the 2017 piece. So on 2017, the first thing obviously Alex, is that we've incorporated Capula, which has closed, and Winton that will close in the fourth quarter. Again, we will have a full year reporting of those in 2017. The 2016 numbers will be affected by the lag that I mentioned, but that is included in the $14 to $16 of the 2017 estimate.

But specifically, when you look at the deal itself, we had announced a range of accretion of $0.50 to $0.80, given that we will be issuing the 2.5 million shares in the fourth quarter, it's going to be closer to $0.60, but it will still be in that range. And it is included in the 2017 numbers already.

Thank you. Our next question comes from the line of Michael Carrier with Bank of America.

Jay, just wanted to get an update, like when I think about the activity that you pursued this year, both in the end of 2015 beginning of 2016 and more recently in June, in deals it's been pretty active. Just wanted to get an update, when we think about either the balance sheet, the capacity, what we should be expecting maybe over the next six months, in terms of either paying down some debt versus maybe as you go into 2017, it sounds like you still have capacity, and there's a lot of activity that could potentially be done over the next few years. But just wanted to get an update, because you have been relatively active over the past six months.

Right yes I think that's a fair comment, and so far in 2016, we've closed or will close on approximately $1.3 billion in new investments, so I think you're right on that. We have positioned the balance sheet for both flexibility and capacity. As you know, we expanded or we increased the revolver to $1.45 billion and we did the equity forward, really in anticipation of continuing our new investment strategy, continuing to execute on our pipeline.

We are well positioned for that, and as it relates to overall leverage levels, we're just a hair above 2 times. I think 2 times would be a level that over a longer period of time, we would think we would be at. So we aren't really over levered at this point. In fact, we're probably right where we would want to be.

You could see a modest delevering, but nothing that would change the course of our balance sheet. And as it relates to capacity to do deals, we'll by the end of the year have over $1 billion under our revolver that we can continue to execute.

Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank.

Just wanted to circle back on the institutional side, if you could size some of that delayed funding, and what you're seeing so far in July, just to give us a sense of the flows into July. And also if you could break that out between the petro dollar redemptions, I think Jay, you had before talked about exposure to petro dollar funds, and just wanted to get the sense of where we are through that potential pipeline of redemptions. And then also the magnitude of the private equity fundraises, I realize they're lumpy, but just want a sizing of that.

So I'll try to hit all those, and I think they are -- it's not unfair to think about them as relatively equal magnitudes, is the way to think about it. So the funding is a couple billion, the petro dollar outflows, again, that's not impacting that gross sales number, but that was also significant. And the closes on long-lock capital, as you say, they are very lumpy, and they can -- some of these when you come through with flagship products, those are multi-billion products, sometimes spread across multiple closings. But as you say, it will be lumpy, but those are all very significant things.

I need to declare we did have some additional pieces in, but there was nothing that was a meaningful close on long lock, which again, if you look across the breadth and diversity of that product set across the Affiliates we talked about, it's quite unusual to not have anything. But again, it was just the accident of how things stacked up. And then I think our petro dollar exposures, still one of the lowest I think in the industry, frankly, but it's still a couple percent is how we would characterize it.

And again all of that is separate and apart from the very elevated, in fact, I think I heard Nate use the word fantastic, which is not a typical Nate word, RFP and finals activity. So we feel very good about current trends, especially given our product set and performance.

Thank you. Our next question comes from the line of William Katz with Citigroup.

Just curious, in terms of guidance for this year, and appreciate you giving us next year as well, you've narrowed down the range pretty substantially, and feel like at the midpoint it's down about $0.50. How much of that just relates to the timing of the economics of the deals, versus perhaps a little bit less performance fee dynamic going into the end of the year?

Yes, so the short answer is, it is primarily related to the timing of the financing and the quarter lag of reporting, and then there's a bit of it that's performance fee. Maybe just to give you the backdrop of the last time we gave guidance, at the time we gave that guidance in the quarter, which was May 2, we were already up about 1%. And as you can see from our AUM table, we experienced about 1.3% market change for the full quarter, and I also note that FX impacted it by about 0.5% negative.

So we really, from the last time we gave guidance, markets really haven't changed materially, so it really was not market related. And then when you look at what happened quarter to date July, we've effectively experienced about 2% up in our blend, which would be exactly consistent with what a quarter would expect. So there's really no change to our forward forecast, with respect to beta because we've got the 2% that I've just described.

So really the three items are the quarter lag closed in July, Capula, but we won't report until the fourth quarter expect to close Winton in October, but won't report until the first quarter of 2017. But we will have the revolver balance and the 2.5 million share issuance in this calendar year, and so that's the first bit.

The second bit then would be our model convention, given the pacing of new investments, the $1.3 billion I mentioned earlier, we would from a guidance and a model perspective, not assume any more share repurchases. So that has an impact. And then lastly, we've taken down our performance fee expectation just modestly, but that's the third piece here.

Thank you. Our next question comes from the line of Chris Shutler with William Blair.

This is actually Andrew Nicholas filling in for Chris. I just wanted to talk briefly, or ask a question on the fiduciary rule. If you wouldn't mind just reminding us what percentage of your EBITDA is exposed to the rule or exposed to US retirement accounts? And any thoughts generally on the shelf space at distributors potentially changing, and maybe just more broadly, how you expect AMG to be impacted?

This is Nate. I'll take that one. So I think the short answer right, is that we don't think the DoL rules will have a significant impact on our business. And maybe just at a first answer, bit of a high level but our Affiliates that are interacting with retirement investors are already fiduciaries so the retirement piece of our business is modest. It's actually frankly an area where we should be able to grow our business and there should be real opportunities for us there over time.

That said, there are definitely ways that the rules are impacting the way products are sold by intermediates we work with, and that is where most of our retirement business is. So we're probably thinking about this the same way, many others are, from that perspective, which is what are the things we can be doing to be a supportive partner or working through, as they're working through primarily through this.

So again not a particularly large piece of our business, the places that we're interacting directly already with retirement investors, we're already fiduciaries 100% of our business. So it really for us is a question of how do we really support our channel partners.

Thank you. Our next question comes from the line of Dan Fannon with Jefferies.

Sean, I guess can you talk a bit about the new investment outlook, and what's happening there? And maybe post Brexit that volatility, if that really changes the potential for deals in the short-term, and also kind of pricing, if we're seeing valuations come in, given what we're seeing in the public markets for what the traditionals, their valuations are coming in?

Sure. As you heard us say in the prepared remarks, generally speaking, the new investment pipeline continues to be strong. I guess I would say, looking back over what we've done over the last year, and trying to imagine looking forward, there's probably a little more balance in the mix, a little more traditional and perhaps a bit more US-based, but that's just the...really just the incidental element of the pipeline and our relationship set, and not anything that I would call an enduring trend. I think, because the overall opportunity is very much global and includes, of course, excellent alternative firms, as well as traditional long only.

So to your question about whether the recent volatility has done anything to impact the pipeline, I would say not really. I could maybe argue that to the extent that markets have recovered, that there might be a greater inclination to move forward, but it's not anything we've seen from the discussions that we're in the midst of. And in terms of the forward part of the pipeline, that continues to be positive with, I would say, transactions that we've been working on, as well as ones that we're just at the earlier stages of.

And finally with respect to your question about pricing, I would say for the best firms, you always have to pay fair prices. We, as you know, don't participate in auctions, don't try to quote, win auctions, and firms which choose to partner with AMG are making a much broader decision beyond just the valuation of the portion of the firm's revenues that we're acquiring in the initial transaction.

There are pockets of the industry, I would call out probably private equity firms, where there's a lot of activity, and I would say a supply demand balance among buyers and sellers, which is less favorable. But even there, we still find opportunities to invest in a sensible basis. And overall, it continues to be very much an execution of our new investment strategy, in the same way that we've been doing it for two decades. Building on relationships that we've established and over years, and then making investments as a product of all of the relationships, and the description of our investment structure and how that fits with the prospective affiliates' long-term succession plans.

Thank you. Our next question comes from the line of Robert Lee with KBW.

I guess my first question is actually on the high net worth flows. They were pretty strong this quarter, and they've been actually fairly positive for a while now. Can you maybe give us a little bit of color on that? Is that coming a lot from, I know they aren't particularly large, but is a lot of that coming from your initiatives in the RIA market, or a little bit more color around what's driving the strong flows in that channel?

Sure so as you've said, we've been -- our Affiliates have done a really nice job in the channel. The biggest driver in the quarter and over this period has been the strong flows estimated to the broker dealer channel, including through AMG funds, which has also got a distribution platform and an operational platform for those products, as well.

But as you say, AMG Wealth Partners is developing some real nice traction, was a very significant contributor this quarter, and has been over the last four or five quarters. And most of that, as always, most of that is due to the really good work that those Affiliates -- those very high quality leading independent RIAs are doing themselves, but we are also exploring and have now launched a few initiatives to help augment their new business development, and I think some of those are starting to take hold as well, so that's contributing.

Thank you. Our next question is a follow-up from the line of Brian Bedell with Deutsche Bank.

Just wanted to circle back on the last part of my prior question on just the month of July. I think, Nate, you talked about the delayed fundings of around $2 billion. Wanted to see if that actually came in in July, and if the institutional channel is substantially positive in July.

And Jay on the guidance, just the range for performance fee assumptions within your guidance? And on the net flow, on the bottom side, is that still a positive organic growth assumption on the bottom side of the net flows for guidance?

Let me start with the question about July. I don't think we're going to be able to do month by month. I think July was a good month, and I think we characterized the sort of sizing of stuff that slipped into the back half of the year. So those are both -- it was a good month and that is a positive tail wind for the next two quarters.

So I'm going to, I think you're asking about 2017, Brian, in terms of performance fees?

Yes.

So I'll address it. I would just say as we look at the estimate for 2016, we've already booked $6.01, and so really we're just looking at the second half of the year, we're making a judgment on where we are. But the year is still early and that's why we have a range, primarily for performance fees on that $12.30 to $13.30.

But when you look out into 2017 and I should have said this earlier, a lot of these items that really just affect 2016, they go away. They normalize, because we will have the full-year effect of Winton and Capula, we'll obviously have the full year effect of the share count, and we will have a new year with respect to performance fee opportunity.

When you look at the performance fee opportunity, we continue to add incremental breadth and diversity to this product set with the addition of our 2016 Affiliates, and when you take them all together, we expect a low teens contribution for performance fees at the midpoint of the 2017 guidance range. And obviously there's a range around that, that makes up a good part of that $2 range. The other thing you mentioned is organic growth, and yes we do assume positive organic growth, and a range as well, a more modest amount at the low end, and a more robust amount at the top end.

Thank you. Our next question comes from the line of William Katz with Citigroup.

Just two questions, actually. Number one, Jay could you talk more about the decision to use equity in the Winton and Capula transactions versus just funding it from operations and taking on the dilution, and what that might mean for go-forward buying power? And then on the real assets in private equity, are those three platforms you have called out, are they actually in the market right now for some mandates? Thank you.

So I'll go first. Yes, so Bill, going back to -- the back drop here was we did $1.3 billion in the first six months of announced deals. The forward equity structure, which we've used several times in past, really gives us the option to issue equity. I think the third consideration is our leverage ratio of debt to EBITDA is just above 2 times now, call it 2.1.

So those things taken together, we want to make sure that we have the ability to execute on our new investment strategy, as we obviously want to pick up the very best, highest-quality boutique Affiliates when they come to us, so we have no interruption there. We obviously also want to keep our leverage at a reasonable level so that's really the two main drivers as to why we chose or why we are choosing to issue 2.5 million shares later this year. It does preserve in both respects our ability to execute, and as we look forward we expect to continue to execute. So really it is in preparation and getting ready for the next wave of new investments.

Then on the private capital, there's not a lot we can say about it, other than I'll say, look there's good demand for a set of the products that do have plans for capital raised plans for the back half of the year. And the thing that's driving the timing, or a thing that's driving the timing is the pace of putting capital to work from prior things, and what not. So we really just have good underlying demand trends and the question of when they bring product to market.

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs.

Just hoping to get your updated thoughts on thoughts around capital management and buyback specifically. So understand the philosophy around 50% of cash flow, but given where the valuation is for the stock, and significantly I guess improved capital flexibility from just increased cash flow generation, how are you thinking about opportunistic buybacks here?

Well to just correct and maybe it's semantics, but it's not a philosophy it's a model convention, to allow or illustrate the magnitude of the impact on our earnings from the use of the cash that the business generates. So how do we spend $1 billion in EBITDA that the business generates is of course a much more important and relevant question than it was three years ago, five years ago.

We have a long track record of returning capital to shareholders, when we see periods of relatively lower new investment opportunities. And over time, inevitably, as the business grows, there will be fewer and fewer periods, where all of the cash or the largest part of the cash is used up by new investment opportunities. And so what we see going forward, in terms of the quality and pacing and magnitude of new investments is hard to gauge.

As you've heard us say, we continue to be very optimistic about our prospects for adding outstanding new Affiliates which will generate earnings accretion and broaden and diversify our product set, and enhance our business in other ways. So to the extent we have those opportunities, that will continue to be the primary focus of our capital activity.

That said, inevitably the pacing of new investment opportunities, and again over time as the business grows, the repurchase of shares will continue to be, and over time, maybe I would say even be a more important element of our capital management. That part's philosophy, and the commitment to return capital and not just to build cash on the balance sheet is also a part of our philosophy. But the amount and timing of repurchase relative to new investments is difficult to forecast, and I think if you look at our track record, we expect that we will continue to do both, and do both in a meaningful way.

Thank you. Mr. Healey, there are no further questions at this time. I'd like to turn the floor back to you for any final remarks.

Thank you again for joining us this morning. As you've heard, we're pleased with our results for the quarter, and we're confident in our ability to continue to create shareholder value through both organic growth and accretive investments in few Affiliates. We look forward to speaking with you again in October, thanks.

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