Affiliated Managers Group, Inc. (AMG) Earnings Call Transcript & Summary

All right. Good morning, everyone. Let's get started. This is Craig Siegenthaler from Crédit Suisse, and it's my pleasure to introduce Tom Wojcik from AMG. Tom is AMG's CFO and responsible for Finance, Accounting, Investor Relations and Capital Management. He joined AMG in 2019 from BlackRock, where he was the firm's CFO for its EMEA Division, Head of EMEA's Strategy and Global Head of Investor Relations. Prior to BlackRock, Tom also worked on the buy side at Hunter Global, and he has an MBA from The Wharton School at Penn. Tom, thank you very much for joining us.

Happy to be here. Thanks, Craig.

So let me just give a quick background on AMG. AMG is a leading partner to independent active investment firms globally. The firm holds equity investments in more than 30 independent asset and wealth managers. AMG offers centralized assistance to its Affiliates, which includes growth capital, distribution, product development and strategy. Okay. Let's begin our fireside.

So we're going to start with AMG's business momentum. The AMG stock had a very positive reaction to 4Q results. Tom, how would you characterize your business momentum today?

So thanks for the intro, Craig. And as always, thanks for hosting us today. It's great to be part of this event. Even in a virtual setting. One of the things, I think when people ask us about business momentum, often there's this question as to where we are on flows? So let me get right to that. And then I'll go through some of the momentum we're seeing in the business. First, as you know, given our partial ownership model, not all flows are created equal. And more than 95% of the outflows that we've seen recently have been associated with less than 3% of our run rate EBITDA on the quant side. More importantly, flows are a really closely followed part of the asset management business because, for a lot of traditional operating models, they're by far the biggest lever that management has to control earnings growth over time. And Craig, I think as you know, you've covered us for a long time. AMG is just different. We generate significantly more cash flow pound per pound than other asset managers. We have a greater ability to reinvest that cash flow for growth. And we really just have more ways to win. So we do believe we can drive long-term organic growth at existing Affiliates through distribution support and capital for product development and through investing in new, faster growing Affiliates. We think we can drive earnings growth through immediately accretive new investments, and then we can buy back a significant amount of stock. And when you start stacking those things up year after year, investment performance, organic growth across our Affiliates, significant discretionary free cash flow that we can reinvest into high growth, high-return investments and repurchasing our stock, you can see that's a very clear path to compounding earnings growth over the long term, and ultimately, much more so than just flows. I think that's the metric that really matters to our shareholders, and you're starting to see some of that, I think, in our stock price today. So back to your direct question, the momentum that we're seeing today, it's really a culmination of the work that we've been doing over the course of the past couple of years since this new leadership team took place to evolve our strategy and to reposition AMG's business for growth over the long term. And there are a handful of things that we've done to date, and we think we've done them pretty successfully. We've realigned our capital and our resources with the greatest growth opportunities that we see in front of us. We've broadened our partnership solution for Affiliates, and I think we'll have some time to talk more about that, and we've enhanced our new investment in prospecting efforts. We've significantly enhanced our capital position and our balance sheet further enabling us to invest for growth and then to return a significant amount of capital to shareholders. And we've also really been focused on evolving our culture, including instilling much more of an ownership mindset at all levels of the organization. And you've seen that evidenced in record levels of AMG equity purchases by our Board, our CEO, other members of the senior management team, employees and even Affiliates. And as a result of all of these actions, and also kind of against an industry backdrop where our Affiliates are delivering excellent investment performance, we have higher earnings power and higher discretionary cash flow generation and a more flexible balance sheet to execute on the considerable opportunity set ahead of us to generate long-term value. So I do think, Craig, you're starting to see all of that resonate a bit in our stock price, and we were talking just before this on where multiples are in the industry. And I think we were trading at a level that, frankly, was incredibly depressed. And I think we're starting to get back to a level now that at least begins to make more sense as we're on this long-term growth journey. And we think there's a lot more room to go from here. So maybe just to sort of summarize, we generate a tremendous amount of unencumbered free cash flow. We have multiple ways to win in terms of very attractive risk-reward investment opportunities to allocate that cash. We're buying back a lot of stock and we have an existing footprint with really strong underlying organic growth opportunities that we're going to continue to augment through new investments over time. And we have a lot of confidence in that overall flywheel really accelerating for us over the course of the next several years. And driving compounded earnings growth over time.

So Tom, historically, AMG has been very active in M&A. I even think there were years when you did 5 or 6 transactions in a single calendar year. Today, what are your capital allocation priorities?

So first of all, no reason we can't get back to that place. We think we've got everything in place to be able to do that if we're able to find new investments that, on a risk-reward basis, we think are the right use of our capital and the right opportunity for our shareholders over time. So we entered 2021 with a very strong capital position and balance sheet, with much stronger earnings power and higher discretionary free cash flow, kind of everything I just went through in the last question. So the real focus for us is how do we allocate that capital in a way that delivers the strongest long-term risk-adjusted returns to our shareholders. That is the number one thing we're focused on. How do we allocate our capital in a way that delivers the strongest long-term risk-adjusted returns to shareholders. So overall, in 2021, we do expect to deploy more capital than we did last year in aggregate. And ideally, more of that will go toward growth investments while simultaneously repurchasing a significant amount of our shares. And remember, in 2020, we made 2 new investments, plus we made third earlier this year. And in 2020, we repurchased about 10% of our shares outstanding. So I think we have a proven ability to do both. We will continue to be balanced between allocating our capital toward growth investments across new and existing Affiliates and our value-added capabilities and repurchases. But strategically, we're always focused first on investing for growth; and then second, returning excess capital to shareholders. Making investments in high-quality Affiliates operating in areas of secular growth continues to be the highest and best use of our capital over the long term. It's a model we've executed on for nearly 30 years. It's our most differentiated competitive advantage in the market. And forming these partnerships with excellent partner-owned firms is something that we firmly believe we are the best in the world at doing. It's through our new investment engine that we're able to meaningfully scale our business without the risk or cost of integration, which again is very, very different from a traditional M&A model, and reshape our growth trajectory more toward areas of high client demand. And as with many areas of our strategy, with a new team in place, we're really looking to take the best of what's been done historically at AMG and evolve it to an even better position for the future. So as an example, we're leveraging the proprietary relationships we've built over the last 3 decades to maintain a highly productive calling effort during the pandemic that's resulted in very strong momentum and dialogue with a number of outstanding firms. In addition to that, not only have we enhanced our solution set in terms of the way we can partner with Affiliates but we've also put more senior level resources on the frontlines, spending more time with prospective Affiliates. And a result of the combination of that history and reputation with the enhanced focus, alongside an industry dynamic where many more asset managers are considering partnership opportunities, given everything that's happening in the space, the volume and the quality of our conversations has increased significantly over the last couple of quarters. We focused our efforts on areas of secular growth, and you've seen that in some of our new partnerships that we announced in the last couple of years. Those include private markets where we're spending significantly more time, specialty fixed income, global equities, ESG, multi-asset solutions. All of these are areas where we believe passionately that active management can add significant value and where we're immediately able to add growing businesses to our platform. And in addition, we're also continuing to support growth and stability at our existing Affiliates. We're investing in them through our distribution. We're investing in them through product development and other strategic capabilities that reinforce the alignment between us, our Affiliates and the client demand trends that we see in the market. Now, of course, most importantly, we're going to remain balanced. We're going to remain disciplined, and we're going to remain return focused. And all of our capital allocation decisions run through a common framework to ensure that we're earning an appropriate risk-adjusted return for our shareholders and making the best long-term decisions for our business.

So Tom, we have all watched the firm broaden its partnership solution offering. And also enhance its strategic capabilities. But for those of us that are new to the AMG story, can you talk about how you've broadened your offering? And also, what are AMG's competitive advantages versus other acquirers?

Sure. That's a great question, and there's a lot there, Craig. So let me maybe start with the broadened solution offering. And you're right, there's a lot of what we do that I think people who followed us for years and years will recognize, but there's also a lot that we're emphasizing more as our industry is evolving, that can put us in an even better position going forward. And then after I go through that, I'll go to the competitive positioning question, which I think is also an important one. So today, AMG's model is really more comprehensive than it's ever been, and it's also more attractive to a broader range of high-quality partners than it's ever been. In addition, given the ongoing consolidation trends we're seeing in the industry, many of our traditional competitors are really no longer playing in the space. If you think about who we really are, right, at the highest level, AMG's model is designed to provide solutions for independent firms as they grow over time. The need for growth capital, distribution support, partial liquidity and diversification, long-term succession planning, those are all key elements of what independent partner owned firms need over their life cycles. And just as importantly, maintaining their autonomy and independence and being great partners in both good times and when things are more challenging. Again, our entire strategy revolves around helping our Affiliates. It's really the only thing we do. We leverage AMG capital and resources to create and deliver the benefits of scale to our Affiliates through building out shared services like opt-in distribution, the power of our relationships. And we're always mindful of the core promise to preserve their independence and autonomy. Remember, these are great businesses, and our first principle is do no harm. So ultimately, our goal is to be outstanding partners, and we believe in honoring our commitments to our affiliates and adhering to the spirit of our partnerships over the long term. And that's an obligation we take incredibly seriously. And we have a 3-decade track record of success in being a great partner. And in all of our conversations, those things really resonate when people are thinking about this massive decision for their business. If you go back to the beginning when we were first founded, we were mainly focused on succession planning, and that remains an important part of our solution set. But as I mentioned, we've really broadened our spectrum of solutions to meet the needs of firms across varying points in their respective life cycles in a completely bespoke and customized way, depending on the needs of the individual affiliate. We don't do sort of what are called term sheet-oriented deals. We fundamentally believe every business is different. It's all -- every business is looking for something different and to solve for something different, and we work with them to find that customized solution. So for instance, partnering with firms who see significant growth opportunities ahead really plays to our strengths, particularly with respect to providing growth capital and distribution support. And growth capital can take a number of forms. It can be primary capital to fund future growth through investments in new products or business lines. It can be GP commitments to fund the pro rata share of investment in private market vehicles. It can be acceleration capital to support the launch of new vehicles alongside our partners or it can be seed capital to help fund product innovation. And then you add in distribution, which really provides this unique scaler effect to firms who are kind of hitting an inflection point in their growth profile and looking to tap into a broader client base and tell their story more globally. So as a result of that expanded offering and rising M&A interest activity across the industry in general as well as a broader set of internal resources focused on new investments, we're seeing an incredible amount of engagement with prospective new affiliates. The virtual environment, things like this, actually has been an advantage for us for a couple of reasons. One, we have more existing relationships than just about anyone in the industry, where we have long-term connectivity and can connect with people again through this environment. But also, frankly, we found that new relationships where just jumping on a Zoom has been a really convenient way to scale our efforts to meet more and more new firms. And then when we think about making a new investment, we're really focused on 3 lenses when we think about it. The first, and this is a long-term hallmark of AMG, high-quality, independent partner-owned firms with very strong entrepreneurial spirit, investment cultures and track records. Table stakes has to be the case. Two, we're very focused on businesses that exist in secular growth areas where we believe active is likely to continue to thrive in the coming years and where we see strong client demand trends. And if we find that high-quality business with those strong client demand trends, we need to then find, thirdly, a partnership structure that appropriately aligns interests between the affiliates, their clients and AMG shareholders and gives us the right combination of upside participation and downside protection and also solves for as wide a range of outcomes as possible. So if you kind of apply that, right, to what we've done most recently, each of our newest Affiliates over the last couple of years -- Garda, Comvest, Jackson Square and Boston Common -- they're all really good examples of us executing against that framework and evidence that our model is resonating in the market. And it's worth noting that each of those firms was attracted to different elements of our partnership solution, and then all of them have joined our global distribution platform to expand their client reach. So now, Craig, maybe I'll shift gears a little bit and try and hit your competitive positioning question, which I think when you layer it into sort of our solution set, really does differentiate us in the market. So if you think about the landscape today, there are a handful of choices available to independent partner owned firms as they consider finding a partner or transacting in some way. And I kind of think about it as a spectrum. On one end of the spectrum, they could consider selling a minority position in their business to a purely passive financial investor. And on the other end, they might consider selling the totality of their business to a strategic consolidator. And frankly, landing at either end of that spectrum may make sense depending on what that individual firm is solving for. When you think about AMG, we kind of occupy the broad middle of that spectrum, and we're really 100% in the partnership business. We believe we deliver significantly more value than just writing a check, but we also never want to be all the way at the end where we're owning or controlling a business. It's just not what we do. So for those high-quality firms that are looking to remain independent and work with a partner who can help them to grow, who can de-risk their business, who can help them to thrive over time, we think AMG is the clear choice. We do get a lot of questions in terms of specifically how we compete with some of the state buyers in the illiquid space. So maybe I'll spend a couple of minutes there just to wrap up this question. First, there is a big difference between entering into a permanent partnership with AMG and selling a stream of cash flows to a private equity fund. They're fundamentally different decisions. AMG exists solely to enhance the prospects of independent partner owned firms. That creates a very different alignment dynamic that’s significantly differentiated versus a fund that's looking to earn a return for its LPs. Two, great partnerships are all about alignment. AMG has been purpose-built over 30 years to align with Affiliates and their clients. It's what we do. The resources we build, the capital and the expertise that we bring to bear are targeted toward meeting the needs of our partner firms. And that alignment and the lack of any conflicts of interest that can exist when you have competing businesses is really important. And then lastly, certainty is core to partnering with AMG. There's no second step transaction required. There's no fund liquidation to look forward to. There's no question on how the investment is ultimately resolved. And that stability really matters both to our prospective partners as well as to their clients. So over the last 30 years, AMG has been the partner of choice to the highest quality independent asset managers in the industry. Over time, we've seen competition in many forms, both successful and unsuccessful and the one thing that remains consistent throughout is that, without question, being a great partner is the long-term winning strategy.

Thank you, Tom, very comprehensive. Let's turn the page to ESG here. I wanted to get an update on how AMG's Affiliates and AMG's overall business are both positioned for the ESG migration? And how your most recent investment in Boston Common fits into your effort?

That's another great question. So look, ESG is one of the fastest-growing segments in the industry. And similarly, at AMG. And we think this is a trend that's only going to accelerate given where client appetite is and where we see it going. Our view is that sustainable investing is best done by active managers. And in a lot of ways, is a big part of the future of active management and especially by independent partner owned firms. Actually, 2 of our newest Affiliates, both Boston Common, which you mentioned as well as Inclusive Capital, are well-known investors in this space. Boston Common is a leader in sustainable and impact investing. They're known for their distinct investment process and unique engagement efforts and have been around for more than 2 decades. Amid all the firms coming to market with ESG products, it's really the authenticity of Boston Common's approach and the commitment and the passion of the firm and every team member there to pursuing both financial returns and social change that really sets them apart in the market. Now given Boston Common and Inclusive Capital's industry leadership, alongside other long-standing Affiliates such as Pantheon and Harding Loevner, who are actively engaged in ESG and had been for decades, we think AMG is very well positioned in the space with significant growth opportunities ahead. With respect to AMG overall, just to kind of paint you a picture, today, 80% of our AUM is managed by Affiliates that consider ESG in their investment processes and 16 of our Affiliates are UNPRI signatories, with many offering dedicated ESG strategies. And we're helping our Affiliates to evolve and to grow their engagement and exposure, providing them capital, resources, client feedback and insight, and a couple of examples. First, we recently assisted Artemis in the launch of a dedicated sustainable global equity strategy. And similarly, we supported GW&K in building out a suite of ESG fixed income strategies. We really do think the focus on sustainable investing is going to transform the way the industry invests and that active managers will be the group that will lead us through this transition over time. And finally, from a corporate perspective, AMG maintains leading ESG ratings and scores among the industry's most widely followed ratings providers across all aspects of corporate sustainability and responsible capitalism. And we're focused on adhering to best practices in corporate governance in managing and developing our human capital, stewardship of natural resources, and importantly, we're also building a strong culture of corporate citizenship and philanthropy.