ACM Advisors Ltd. (EQB) Earnings Call Transcript & Summary

Welcome to EQB's Investor Call and Webcast on October 3, 2023. At this time, you are in a listen-only mode. Later, we will conduct a Q&A session for analysts. Instructions will be provided at that time. It is my now my pleasure to turn the call over to Sandie Douville, Vice President, Investor Relations and ESG Strategy for EQB.

Thanks, Laura. Your host today is Chadwick Westlake, Chief Financial Officer. For those on the phone lines only, we encourage you to also log on to our webcast to see our accompanying slide deck, including Slide 2 containing EQB's caution regarding forward-looking statements. One note, for this acquisition, we refer specifically to EQB Inc., or EQB, a publicly traded financial services company and the parent company of Equitable Bank. It is now my pleasure to turn the call over to Chadwick.

Good morning, everyone, and thanks for joining on short notice. Also thanks, and welcome to Sandy, our new Head of IR and ESG strategy that just recently joined from Sun Life. We're fortunate to have her on the team. Today, we're very pleased to announce an agreement to acquire a 75% ownership interest in ACM Advisors Ltd, one of Canada's most respected and best run independent alternative asset managers, which has a long-established and purpose-driven expertise of investing in commercial assets in Canada with deep bore and investor relationships. ACM is a unique position in the market and leads with exceptional and differentiated customer service. They provide the opportunity for investors to access these important asset classes that EQB understands well. As acquisitions are not an everyday occurrence for EQB, and ACM is unique in what it brings to it means for our business, we wanted to take the time to share some additional perspective with you on this call. This morning, briefly before taking your questions, I'll cover 3 topics: one, the strategic motivation for the acquisition; two, how we structured it; and three, some key benefits. Now beginning with strategic rationale. Over the past couple of years, we've been vocal about our intent to expand into wealth management. A large and attractive market and a natural fit for EQB as a financial services leader where we can serve new customers while increasing and diversifying fee-based revenue. The commercial mortgages within the ACM pooled funds are very important to the development of Canada and giving access to investors here brings a lot of value to the market. As a matter of strategy, a critical decision was to select a market we could enter with differentiated skills, improving capabilities with shared cultural risk and customer service excellence focus. Our wholly owned subsidiary, Equitable Bank has been an expert in commercial banking for decades, making the key investment classes of ACM as strong alignment. One area that is compelling and EQB does not operate in yet is pooled commercial mortgage funds. In that segment, ACM is a well-established, trusted adviser and asset manager for institutional and accredited retail investors. In an industry where relationships matter deeply. We're impressed by the number of shared borrowing partners between EQB's wholly owned subsidiary, Equitable Bank and ACM, further emphasizing the alignment in our approaches to risk and growth. The strategic fit between our businesses is evident. EQB's acquisition gating criteria that reflects our ROE and value creation discipline, reinforced our assessment. Consequently, we've chosen to start EQB's journey in this corner of wealth management from a position of immediate strength and scale with a reputational advantage in a marketplace where investors prefer to do business with advisers and asset managers that they know and trust. We couldn't be more enthusiastic about it and the capabilities of this team. In profile, ACM is a recognized leader with a 30-year track record of performance excellence. It currently manages 4 funds, approaching $5 billion in assets under management, making it one of the largest in its segment. ACM's portfolios provide access to a variety of asset classes with the highest weighting to multifamily, industrial and retail, all of which, again, are asset classes we understand deeply. As specialists in the creation, structuring and management of pooled Canadian commercial mortgage funds, it enjoys a strong investor base of more than 2,000 customers across Canada, 200 of whom are institutional investors. While ACM builds its business through direct industry relationships. It also enjoys deep and long-lasting partnerships with actuarial and investment consultants who recommend its pool funds. In the industry, ACM is known by investors and consultants for its culture of exceptional high-touch service, collaboration, responsiveness, transparency and knowledge. ACM takes a conservative investment approach and has a demonstrated methodology for assessing, mitigating and pricing risk for long-term capital preservation and value creation while delivering great performance for investors and generating strong fee-based revenue. Based in Vancouver, it's national in scope, with 4 offices across Canada and approximately 40 highly skilled employees. Key of this transaction is that ACM's proven second-generation management team will remain with the business, including Chad Mallow, President and CEO; and Chad Mercer, Chief Operating Officer. Since the founders of the business retired from active involvement a decade ago, Mallow and Mercer have led ACM to new heights. Under their stewardship, the customer base has widened significantly and assets under management have nearly doubled in just 5 years. Our team has gone to know that -- them well in this process, and we couldn't be more pleased. From our analysis, this is simply the prelude to more success. The entire ACM team has a credible long-term plan for scaling AUM, all while maintaining the performance that customers depend on, including strong and attractive cash flows. The alternative asset management industry as a whole is an attractive space for Canadian investors, drawing capital inflows not only from institutional investors, but also credited retail investors via new pool products and services. And thinking about this transaction, a few points of particular importance. One, as I've mentioned, we have a deep understanding of ACM's pooled commercial asset classes that makes EQB a value-added owner and partner that can help ACM grow and derisk our entry into the space. Two, ACM serves as a platform for EQB's growth in Wealth Management; and three, EQB knows how to work collaboratively with entrepreneurial management teams to generate great results. A case in point is Bennington Financial led by Troy Campbell, which has thrived since it was acquired by Equitable Bank in 2018. That brings me to the deal structure. This was all part of the deliberate future strategic and succession planning for ACM with its shareholders and founders. EQB is acquiring a 75% interest, the 25% will be retained by ACM's management team, providing a strong alignment of ongoing interest. As noted, the acquirer is EQB Inc. not Equitable Bank. This was intentional as the structure of ACM as an asset manager and the rules under Canadian securities regulations that government fits seamlessly under EQB. To fund this transaction, we will issue a de minimis amount of shares from EQB Treasury, with the remainder funded from existing cash and facilities available. We expect the transaction to close before calendar year-end 2023, following Securities Commission regulatory approval. ACM's financial results and assets under management will be included in EQB's consolidated financial statements starting in Q1 fiscal 2024. Moving to some more points on benefits of the deal, starting most importantly with customers. ACM has an institutional investor base that touches every province and 2 of the territories in Canada. And through ACM's business, this represents an opportunity for EQB to serve new investors and organizations under new business model. Importantly, given this is fund management, ACM's growth and scale is achieved in a low capital intensity way. With the transaction, we expect EQB's assets under management will increase in the range of 7% or nearly $5 billion to $71 billion when we based it off EQB Q2 2023 reported AUM. ACM will contribute to a meaningful increase in EQB fee-based revenue, and we expect this transaction to achieve our long-term 15% to 17% relative ROE hurdle with accretion to EQB earnings per share in the first year of our majority ownership. Since ACM manages assets on behalf of others, there is no added credit exposure or balance sheet exposure for EQB. Given that this is our first wealth management platform, one that is well run and profitable, there is no operational integration required. There are no cost or revenue synergies necessary to make the numbers work. To close my comments, the addition of ACM makes EQB a more diversified Canadian financial services company and challenger, now with expanded capabilities and dynamic positioning to serve customers. It provides us with a differentiated and proven asset management platform and serves as the starting point for broader expansion opportunities into different asset classes and fund structures in the future. It adds new relationships, deepens relationships with borrowers that EQB knows well and adds immediate scale, proven and committed management team and new opportunities that we can help ACM scale within their growth plan. It is both strategically and financially beneficial to both parties and aligns with EQB's purpose to enrich people's lives. This is a straightforward transaction we approach with clarity and confidence knowing that it has the potential to create great value for customers, shareholders and all employees. Now Laura, I'd be pleased to answer some analyst questions.

[Operator Instructions] your first questions comes from the line of Meny Grauman from Scotiabank.

I wanted to ask first off, just in terms of the accretion, if there's anything more you can provide us in terms of scaling that accretion. You highlighted that it's not tied to synergies, but just to give us more of a sense of the magnitude of the accretion that you're expecting from this transaction?

Yes. We'll share more of that many -- prefer to share more of that as we provide our 2024 guidance in December when -- after we report financial results. But I can say, again, since this is using existing facilities in that de minimis level of stock, we can expect the secretion given the great profitability of the business. So we'll have to preserve some of that too after we close and can share more than -- but like I said, it is positive on 100% of our revenue being fee-based, and that's where you can see some of that top line. And then the -- it's not public information in terms of how they perform, but they have a great operating business and very strong EBITDA margins.

From a strategic point of view, should we view this as a one-off that just fits sort of your criteria? Or is there a broader strategy that you're building here? And if you could kind of flesh that out, if that's the case, what other capabilities do you see kind of filling in on top of ACM. So I'm just curious, one-off or part of the bigger strategy that you're putting together in your view?

Well, I think one way to think about it is there's definitely not another ACM out there. This is a unique, really wonderful team capability business that they've built over the past 30 years. And in this country, this is a pretty rare asset that we're really pleased and privileged to be working with. So in terms of another one of those specifically, it's not right around the corner, but the ability to build off this and expand into different asset classes and grow this, whether it's more tuck-ins or organic launches through ACM, I think both of those are possibilities. And that's -- remember, when we think of wealth or asset management, we think of multiple businesses and verticals. And this is one particularly that fits so well under EQB Inc. But there is certainly a broader way to be thinking about wealth management when it comes to EQB Inc or Equitable Bank, respectively, whether that's digital, whether that's advice. I'd say you can see, certainly, there will be more things to come and wealth management services from EQB [ broadly ], for sure.

And that's an interesting angle in terms of the connectivity to the retail side of the business. I'm wondering is there a potential here to provide access to sort of your kind of core retail deposit customer. Is that part of the strategy here? It doesn't sound like it's kind of front and center right now, but just wondering if there's anything that you could highlight on the thinking there in terms of expanding the ACM reach to the retail side of the business?

Yes. I'd say the first priority is supporting them and continuing to run in their current strategy, which is going really well and helping where possible, broaden the distribution. And this will be completely separate from the bank. But is there a capability for them to expand into a credit or retail even more? Yes. When you think of their existing assets under management. The majority is institutional, but there is already some accredited retail, and they certainly have ambition to be broadening that creditor retail, which, as you know, is pretty common practice in the alternative asset management industry as well and providing suitable investors access to that. So the capability is there, yes, Meny, but even that is not necessary to make the deal work. But there are possibilities for sure, with the capabilities there.

Your next question comes from the line of Etienne Ricard from BMO.

So Chadwick, as you mentioned, Wealth Management is a new vertical for EQB. How do you think about the alignment of interests between EQB and ACM? I mean, in other words, how does the transaction structure to ensure retention of the management team?

Well, the first one off out of the gate -- thanks for the question, [indiscernible] -- the first question out of the gate is that why we invested 75%. This management team, the entire team is very invested in growing the business for the long term. This was a unique deal structure for us to do the 75% versus 100%. I think that 25% maintains very strong alignment of ACM to continue to grow the business and work with us to help support in that growth plan. So it's -- that's a very big part of it right out of the gate, Etienne. For other structures, obviously, its own unique subsidiary, right? So this is, again, a different part of the equation in the bank. But I think we have the talent capability within EQB to help them scale pretty effectively. And some of the other terms are not information we're disclosing publicly at this time. But I think the biggest thing to think about is that 75%, 25% support to grow.

Yes. Understood. And as part of the deal, you are acquiring a number of commercial lending relationships, what do you see as the potential to grow commercial originations as a result?

Well, I'll watch -- I'll again say the, again, separately EQB Inc. versus Equitable Bank, but there is some shared relationships. And I think there is upside potential and deepening and broadening borrowers and investors is one way to think about it Absolutely.

And for what geographies and investor profiles is ACM seeing growth opportunities, given you flagged, you have doubled AUM over the past 5 years on the fundraising side.

Well, what we've disclosed -- I don't know if you had a chance to check up the investor deck as well. We have a geographic allocation of the investors and where they're based. So you can see in terms of what's a base at a BC versus Ontario, Quebec et cetera. And I'd say it's grown fairly consistently over time. Obviously, a great concentration at West, but it is much more diversified than I think than people realize and the opportunity to grow it quite a bit from there. So again, that's right in the deck, you can see 44% BC, but 18% Ontario, et cetera. So we've laid out some of that for you, Etienne, then nothing else yet has been public information.

Your next question comes from the line of Lemar Persaud from Cormark Securities.

I apologize if this has been asked and answered or covered off in your opening remarks, Chadwick, I had to hop on a bit later here. But did you guys talk about the impacts on the CET1 ratio? How should we think about that?

Yes, I'd say that no impact, Lemar. This is -- again, is separate. This is not a part of the bank. This is with EQB Inc. specifically. And this is all within some existing facilities and you can assume no impact to capital overall for the EQB reporting [ ID ], great part of the deal.

Okay. And just another quick one here. Does it -- I get it that there's no additional credit exposure to the bank because it's an asset manager. But how did you guys get comfort around AUM and the trends there, just given some of the pressure we're seeing on commercial borrowers related to higher interest rates. I mean, I see your AUM disclosure here in the slides, and it looks positive even through the higher rate cycle. But just tell me any thoughts you have on that.

Yes. Well, the first one, so the again, while it's separate from Equitable Bank, it's for the EQB, we completed a very thorough due diligence. We did actually study a wide, wide wide base of credit files, we reviewed the underwriting, we reviewed the risk management framework. We did go in deep. This has been part of a multi-month due diligence with great transparency. So that's -- with our expertise in these spaces, and that's why there's a complementary asset classes. We were able to get a lot of comfort to be honest, and the structure of it and the fund flows in. And we have a line of sight perspective to pipeline to how the business grows in that overall growth plan, which you can see has been quite consistent. It's very diversified in a growing investor base. So that helps, Lemar, that we -- that's part of why we like this entry into alternative asset management with these types of asset classes, right? If we -- if there's many, many things we know well, this is definitely one of them. So that gives us a lot of conviction.

Got you. And just final one for me. Any time I think about purchases of asset management companies, I think about you're buying people. Obviously, the 75-25, you're maintaining alignment here. But you have contracts in place to ensure that the key employees of the CEO and COO and so on and so forth, they stick around for 5-years plus.

We do.

Your next question comes from the line of Geoffrey Kwan from RBC Capital Markets.

I know you have not -- kind of unable to talk too much on the numbers. But I'm just wondering with the -- you mentioned, I think they ran 4 funds. Are the economics of those funds identical? Or just in general, like are they kind of more like private equity funds where you have [indiscernible] earn on the commitment period and then it switches over to a percentage of invested capital? Is there a carriage interest component? Is it fees earned when the capital is committed? Or is it only when deployed that sort of thing?

No, it's like open, just it's open just like normal asset management. So there's the fees, the fee ranges do vary by each fund. The returns are varied quite a bit the -- I don't -- in some disclosures, you can find it publicly, but I'd say this is a pretty typical structure for asset management fees across them. And the duration, the risk profile is slightly different across each of the funds, including the largest one in terms of how they look at benchmark returns and how they target specific returns above those benchmarks. And you can see that in the different for funds. But it all consolidated, sets up in a pretty consistent manner. I don't think there's anything abnormal or inconsistent with the way their asset managers work that you would be surprised to find.

And you talked about the EPS and ROE accretion, I would say, it kind of sounds like incremental for year 1. Beyond year 1, do you expect that level of accretion to increase.

Yes. Yes, there's a great growth plan here. Absolutely.

Okay. And then just the last question. I know you've talked about where you structured, it is being owned outside of the bank there. And I think you've talked a little bit about it. I'm just trying to understand if there's some of these incremental other opportunities, to your point of with their borrower base, if that's potentially something that you could leverage in terms of helping to grow your commercial mortgage origination business and also to whether or not the loans that you originate might be something that could be used in some of their funds.

In general, I'd say, yes, to both possibilities are there. But again, these are separate distinct entities between EQB and Equitable Bank, but the opportunities are there in relationship. Yes, absolutely when you're thinking about it. These are not upside opportunities, like I said, that we're required to make the deal work, but that it does represent upside potential.