AGF Management Limited (AGFB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Q3 2023 AGF Management Limited Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Tsang, you may begin.

Thank you, operator, and good morning, everyone. I'm Ken Tsang, Chief Financial Officer of AGF Management Limited. Today, we will be discussing the financial results for the third quarter of fiscal 2023. Slides supporting today's call and webcast can be found in the Investor Relations section of agf.com. Also speaking on the call today will be Kevin McCreadie, Chief Executive Officer and Chief Investment Officer. For the question-and-answer period following this presentation, Judith Goldring, President and Head of Global Distribution; and Jenny Quinn, Chief Accounting Officer, will also be available. Turning to Slide 4, I'll provide the agenda for today's call. We will discuss highlights of Q3 2023, provide an update on our business, review our financial results, discuss our capital and liquidity position and finally, close by summarizing the key investment highlights for AGF. After the prepared remarks, we will be happy to take questions. With that, I will now turn the call over to Kevin.

Thank you, Ken, and thank you, everyone, for joining us today. At the end of Q3, we reported AUM and fee earning assets of $42.3 billion, up 7% from Q3 of 2022. We continue to see strong momentum in our ETF and SMA AUM, which were up 43% year-over-year. Diluted EPS for the quarter was $0.34 per share, up 6% year-over-year. Our capital position remains strong. At the end of Q3, we generated $86 million of free cash flow on a trailing 12-month basis. We also have $144 million available on our credit facility. In addition, we have $30 million in cash and $273 million in short- and long-term investments on our balance sheet. We have capital available to strategically invest to generate recurring earnings and return capital to shareholders. Our European subsidiary was once again accepted as a signatory to the U.K. Stewardship Code, the best-practice benchmark in investment stewardship. This stands as a testament to the rigor of our responsible investing practices and our focus on our corporate sustainability. Starting on Slide 6, we will provide updates on our business performance. On this slide, we break down our total AUM and fee earning assets in the categories disclosed in our MD&A and show comparisons to the prior year. Mutual fund AUM increased 8% year-over-year, driven by market and organic growth. And over the same period, the S&P 500 equal weighted index rose only 6%. Starting this quarter, we are providing a breakdown of our ETF and SMA AUM, which was previously included in institutional, sub-advisory and ETF AUM. This will provide additional transparency in this category as we focus on our strategy to grow our presence in the investment dealer in SMA channels through the expansion of our vehicle agnostic model. We ended the quarter with $1.3 billion in AUM in this category, which is a $400 million increase compared to a year ago. I'll provide more color on our mutual fund businesses and ETFs and SMA AUM in a moment. Segregated accounts and sub-advisory AUM increased by 2% compared to the prior year. We are currently onboarding one of our global equity strategies onto an institutional platform in Asia, broadening our institutional distribution reach for the strategy. Finally, we continue to see interest from institutional investors across multiple strategies and jurisdictions, which bodes well for future sales. Our Private Wealth business remained steady with $7.4 billion in AUM, and our Private Capital AUM and fee earning assets were $2.1 billion at the end of the quarter. During the quarter, we continued to work through an active pipeline of Private Capital opportunities within Canada and the U.S. It is our goal to grow and diversify our private markets business to be one of Canada's emerging leaders in private market investing. Turning to Slide 7. I'll provide some details on the mutual fund business. The Canadian mutual fund industry experienced net outflows of approximately $19 billion in the quarter. This was the industry's sixth consecutive quarter of net outflows and has also been the longest quarterly streak of industry outflows in the past 20 years, demonstrating a persistent weakness in investor sentiment. On the back of dampened industry flows, our mutual fund business reported net redemptions of $151 million in the quarter. This is the first quarter of negative flows in 3 years relative to this very difficult industry backdrop. The net outflows in the quarter were driven entirely by an uptick in redemptions. Our mutual fund gross sales of $633 million in the quarter were actually up 7% from the same quarter last year. The industry continues to experience redemptions as investors are feeling the pressure of sustained higher inflation and interest rates. This is leading investors to move funds out of mutual funds into cash or to pay bills. While AGF redemptions have increased, our redemption rate of 13% is one of the lowest in the industry and better than the overall average of 15%. Given our relative success on gross sales and redemptions, our net redemptions as a percentage of our AUM in the quarter were 0.6 -- or [ 0.6% ], while the industry contracted a full 1%. We have been consistently outperforming the industry and gaining market share from our competitors. Achieving net sales of $412 million in the last 6 quarters, while the industry suffered net redemptions of $102 billion in that comparable period. AGF's outperformance to the industry is attributable to our disciplined investment process, our strong brand, the increasing diversity of our sales channels, product vehicles and client base as well as our team's continued efforts to build key relationships with our clients and partners. I want to now give a quick update on our investment performance. AGF measures mutual fund performance by comparing gross returns before fees relative to peers within the same category with the first percentile being the best possible performance. We target an average percentile ranking versus peers of 50% over any 1-year period and 40% over the 3-year period. At the end of Q3, our average percentile ranking was 64% over the past 1 year and 42% over the past 3 years. Our 1-year performance continued to be impacted by the narrowness of the market exhibited in the first half of 2023, led by a small group of U.S. mega-cap tech stocks. AGF funds have been actively managed and have generally been underweight mega-cap tech versus peer and have had a bias towards smaller, large-cap and mid-cap stocks, where we see better long-term investment opportunities. Our long-term fund performance remains solid with approximately 2/3 of our strategies outperforming our peers on a 3-and 5-year basis. We remain confident in our investment management team and our disciplined investment processes given our extensive collective experience and demonstrated ability to navigate challenging markets in the past. As I mentioned earlier, we are providing a breakdown of our ETF and SMA AUM starting this quarter. The AUM in this category has grown 49% on a compounded basis over the last 2 years. Included in this number are Canadian and U.S. ETFs and SMA platforms. We have seen consistent growth and momentum in the SMA business both in the U.S. and Canada, where a number of strategies are available on leading SMA and wealth management platforms. With that, I will turn the call over to Ken.

Thanks, Kevin. Slide 9 reflects a summary of our financial results for the third quarter with sequential quarter and year-over-year comparisons. EBITDA for the current quarter was $33.8 million, 21% lower than the prior quarter and 2% higher than the prior year. Diluted EPS was $0.34 this quarter compared to $0.45 in Q2 and $0.32 in Q3 of last year. Our results last quarter were elevated, reflecting higher revenues from the Private Capital business, which I will discuss in a moment. Net management fees for the quarter were $74 million. We saw a 3% decline over Q2, mainly due to a performance fee recorded last quarter, and we saw a 4% increase year-over-year, reflecting higher average assets offset against a lower management fee rate. AGF Private Capital contributed $7.3 million in the quarter, which is $11 million lower than Q2 and $0.7 million higher than the prior year. Revenue from our Private Capital managers this quarter included $1.8 million of carried interest earnings and performance fees, recognizing strong performance in two of our long-term Private Capital investments in our private credit vehicles. This compares to $0.9 million of carried interest earnings and performance fees recorded in Q2. Carried interest and performance fees can be variable quarter-to-quarter and is impacted by the timing of monetizations within the funds. Revenues from Private Capital LP funds, where AGF participates as an investor, were $4.8 million, which is $11.5 million and $1.1 million lower than Q2 and the prior year, respectively. Fair value adjustments in the investments can be lumpy quarter-to-quarter and Q2 saw an outsized fair value gain. On a long-term basis, we expect to earn returns of 8% to 10% from investing in Private Capital LPs. Our experience to date has exceeded or tracked to the high end of that range. SG&A for the quarter was $50.2 million. Excluding severance, SG&A for the quarter was $1.6 million lower than Q2 and $4.1 million higher than prior year. The decrease against Q2 includes the impact of lower compensation expenses. The year-over-year increase in SG&A was driven by higher incentive compensation as a result of our long-term track record of investing out-performance and the successful execution of our sales strategy, which is to increase our presence in the Canadian investment dealer channel. In addition, the increase incorporates strategic investments made in support of our growth plan, in particular, for Private Capital as well as an increase driven by the market environment. Finally, we are seeing an increase due to higher inflation and a return to pre-COVID levels of sales and marketing costs. As we head into the last quarter of fiscal 2023, we remain on track to meet our SG&A guidance of [ $206 ] million. As a reminder, our SG&A guidance does not include severance costs related to acquisitions. We also assume investment performance, fund sales and the AGF's stock price trades at a certain level. Due to the variable nature of performance bonuses and stock-based compensation, changes in any of these areas can result in a change to our SG&A expenses. We continue to monitor the environment and have been active with our approach to expenses. Turning to Slide 10, I will walk through the yield on our business in terms of basis points. This slide shows our average AUM, net management fees, operating expenses and EBITDA as basis points on our average AUM in the current quarter, previous quarter and trailing 12 months. This view excludes AUM and related results from the Private Capital business as well as DSC revenues, other income, severance and corporate development costs. The Q3 2023 net management fee yield is 74 basis points, which is 2 basis points lower than Q2. Our Q2 results were elevated due to a performance fee related to one of our institutional accounts. Adjusting for this performance fee, our net management fee yield is flat compared to Q2 and 1 basis point lower than the trailing 12 months. SG&A as a percentage of AUM was 50 basis points this quarter, 2 basis points lower than prior year and the trailing 12 months. EBITDA yield was 23 basis points in the quarter, which was 1 basis point lower than prior quarter and flat to the trailing 12 months. Turning to Slide 11. I will discuss our free cash flow and capital uses. This slide represents the last 5 quarters of consolidated free cash flow on a trailing 12-month basis as shown by the orange bars on the chart. The black line represents the percentage of free cash flows that was paid out as dividends. Our trailing 12-month free cash flows was $86 million, and our dividend paid as a percentage of free cash flows was 31%. In the same period, we returned $61 million to shareholders. That includes dividends, share repurchases under our NCIB and the $24 million substantial issuer bid completed in November 2022. Our cash balance at the end of August was $30 million, and we have $273 million in short and long-term investments. We have $144 million remaining on our credit facility, which provides credit to a maximum of $150 million. We are comfortable increasing our net debt to EBITDA should the right opportunities arise. Our Private Capital commitment to our existing Private Capital LPs is $25 million. Capital commitments may be funded from excess free cash flows. But keep in mind, there will always be further recycling of capital as monetizations occur, which will help to fund future commitments or future acquisitions. Taking all of this into account, we currently have excess capital available. Our future capital allocation will be balanced and includes returning capital to shareholders in the form of dividends and share buybacks as well as investing in areas of growth. Redeploying our excess capital to drive growth and generate recurring earnings is a key strategic priority. We will have further updates on this in the coming quarters. Before I sum up, let me take a minute on Slide 12 to look at our current market valuation. AGF's current market cap is approximately $500 million. We have no debt on the balance sheet, and we have long-term investments, which are valued at $252 million. If we remove the long-term investments from our market cap, this implies an enterprise value of about $250 million. Given we generate about $100 million in EBITDA, excluding earnings from our long-term investments, this implies that our remaining business is valued at only 2.5x multiple. We believe that this is an extremely attractive valuation, especially given the demonstrated resilience of our business over the past few years and the fact that we are in growth mode with excess capital to deploy. With that, let me turn to Slide 13 and pass it back to Kevin to wrap up today's call.

Thanks, Ken. In the third quarter, we continued to make progress against a number of our strategic objectives. Despite the market environment, our AUM and fee earning assets remain resilient. We continue to gain market share from our competitors, and we remain disciplined in our investment processes. Finally, the Board declared a quarterly dividend of $0.11 per share. As we continue to navigate through the uncertainties in the market, we remain focused on building on the momentum from the past few years, managing the risks and our results and creating value for our shareholders over the long term. As Ken alluded to, we believe we are attractively valued and have a great investment story. We have an enviable financial position with strong cash flows and significant capital to deploy. Despite the challenging market conditions, we continue to lead the industry in fund flows and gaining market share. This is in part supported by our disciplined investment approach and strong long-term investment performance. And we are executing against our 5 strategic pillars, which we believe will drive profitable long-term growth. Finally, I want to thank everyone on the AGF team for all of their hard work. We will now take your questions.

[Operator Instructions] Our first question comes from the line of Gary Ho from Desjardins Capital Markets.

Maybe for Kevin or Judy, maybe if you can elaborate kind of what you're seeing from the retail investors. Last 3 months, industry retention has been quite significant. I think you mentioned $19 billion. How are advisers' clients dealing with the higher cost of living, higher interest rates, et cetera. Maybe talk about how that might impact your flows outlook for the balance of the year?

Sure. Thanks, Gary. Obviously, we're seeing a continuing challenging market environment that I think everybody is waiting patiently for a rate cut to stimulate some more investor movement back into equities. At this point, though, we're seeing some soft redemptions for the month of September, about minus 29 month to date. And we just expect the investors, they're sitting on the sidelines [indiscernible] and money markets in GICs. And as we expect, hopefully, that the rates will get cut. I think it's been taking a little longer for that to happen. But when that does happen, we do expect our -- certainly, our equity suite will be in a position to receive those funds. Did you want to add anything, Kevin, on the market?

Yes. Gary, our gross sales are not the issue. Our gross sales are actually tracking to where we thought. It is a redemption issue for the industry. The redemption rate in the industry has ticked up and a lot of it is the factors Judy had mentioned, but also there is some hardship out there. We're seeing people leave funds going into bank deposits to actually pay bills. People leaving registered accounts to pay mortgages. So until we get to a rate cut environment where you can take the pressure off some of the end investors, I think the industry is going to have a bit of headwinds. Now the good news is we're closer to the end of the cycle with rates being hiked, so we're probably looking at not too far in the distance for rate cuts. But the challenges for the industry are really going to see an uptick in redemptions for everybody for a number of those reasons. But again, ours is not a growth issue. It's really this uptick that the industry is seeing just on that, the hardship line, as I call it.

Okay. Makes sense. And then, Kevin, while I have you portfolio positioning, we've seen the market be a bit softer the last couple of months. How are you positioning your funds looking out your call on rate and maybe cash levels within your funds versus historical?

Yes. So we're getting closer to, again, the end of the tightening cycle, which would push you towards a more neutral stance on things. Obviously, the backup in interest rates in this recent period is actually probably a place where investors will start to add back to duration. So bond funds probably still come back, I think. What you're seeing, obviously, from the investor side of it, Gary, people getting whipsawed again, negative returns in bonds for that last quarter. People are probably doing the wrong thing here. You should be probably buying into these bond funds up at these levels because you're getting pretty good coupons here. So our positioning is obviously more neutral in the portfolios. From a performance standpoint, we had a -- as we'd expect, when the market narrowed in the first quarter the way it did, basically 10 names drove the entire market. And just to remind everybody, I know you guys follow it closely, but the S&P is up maybe 11% year-to-date. The equal-weighted S&P as of this morning was actually negative. So the damage for us was really in that first quarter because we would not participate in that kind of a narrowness. Since that point, our performance has been fine, and that is positioning on a balance suite of being, again, closer to the equity weight, closer to fixed income, still keeping a hedge in that portfolio with an anti-beta product and a little bit of cash. So as you expect to get to the end of the hiking cycle, you'd expect us to try to get to square up those bets and be more neutral.

Okay. Perfect. And then maybe last question, I'm not sure if it's for Ken. The 8% to 10% return on your long-term investments, you mentioned tracking at the higher end of that. I guess, first, should we look to model at the higher end looking out? And then second, you've included that new slide, I think, on Slide 12, where you show the implied multiple, excluding these investments. How else can you look to service value here?

Yes, sure. Let me talk to the first question first, Gary. We still feel pretty good about our guidance in terms of an overall Private Capital business revenues of ranging between $5 million to $7 million, sort of the low end of the $5 million being sort of 1 from Private Capital managers and 4 from the LP funds. And then on the high end, 2 on the Private Capital managers and around 5 on the LP funds. Feeling pretty good about that given where our positioning is and where investments happen. Bear in mind, however, though, that, as I said, I mean the Private Capital LP funds do move and fluctuate, right? And so as I look at the valuation, I mean -- another way of looking at things is to look at the sum of the parts and say, hey, look, I mean, the LP funds in themselves are fair value of that $250 million already, right? And so you could take the consideration that we could remove those earnings. And apply a proper multiple to the remainder of the business and then sum it up that way. So I would just take that as another viewpoint for you as well. And then can you repeat the second question?

Yes. Just on your new slide that you had showing the investments and what the implied value is on the rest of the business. Are there other ways that you can help service value, I guess, more so in the bottom part, where it's trading at, I think, 2.5x EBITDA?

Yes. I mean I think the first point we wanted to highlight was simply the fact that if you look at the rest of the industry right now, that average trading multiple is more like 7x, right? And so -- clearly, if you look from an apples-to-apples perspective, this 2.5x is pretty discounted, especially considering the fact that we have demonstrated really strong resilience, right? I mean, again, as Judy alluded it to, we've had some pretty strong results in spite of sort of the substantial underperformance in the industry from a net redemption perspective, plus the fact that, look, I mean, we haven't talked about the third leg of our business, which is our Private Capital business. And our hope is that through time, we will be able to bolster EBITDA from that Private Capital business, which if you look at the industry as a whole, does attract a higher level of multiples. And so there's multiple ways for us to see valuation increase here, both in terms of the base business, in terms of just getting to par with respect to industry multiples there and then sort of adding on additional Private Capital EBITDA as we sort of look to potential strategic opportunities.

Okay. Great. Those are my questions.

[Operator Instructions] Our next question comes from the line of Geoffrey Kwan from RBC.

I just wanted to go back to just your discussion on the retail net sales. And just wondering Kevin, is do you have a view whether or not it's just seeing the start of rate cuts? Or do you think there needs to be a certain level of how much rate to come down to see of how the material improvement in industry net sales? I'm just wondering because to the comments of there is people struggling today, expenses, mortgage, debt payments, de-leveraging, all that other stuff. Will lower rates really help? Or are there just other investors that have lots of cash on the sidelines that would be willing to put it to work when rates are lower? Just trying to understand the size of those 2 [ camps ] or at least your sense of it of the people that low rates may not necessarily help them want to invest versus those that probably have excess cash and willing to put it to work at the right time?

Yes. Great question, Jeff. So the way I look at it is as follows. If you think about the last 6 quarters in the industry, the outflow has been $100 billion. That is the worst 6-quarter period we've looked at, I think, in 20 years, okay? And the fact that we've gotten through this with 11 straight quarters is the first time we've taken some pain has been a pretty resilient story. I think to your question, though, it's going to be a couple of things. When you cut rates, some of that $100 billion, which is parked in cash, some of it is in cash. We know it. We see it in [ leases ] out there. We see it in GICs. The equity market will start to move. And bond, as I've said, the bond market, you'll get really good returns out of fixed income potentially as you cut rates, you'll bring a bunch of that money back in. That will, may be, I think, -- not maybe, I think, is going to offset some of the pain until you get rates low enough for the hardship investor. They're going to be -- there's going to be a time a year from now, if we're in, again, a softness in the economies here in the U.S., Europe and Canada, Central banks will start to get more aggressive about cutting rates. So if you think about midyear, even maybe first quarter, they won't do one and done. They probably get on a period of cutting rates. So that will take some pressure off. But I think the offset to help is really going to be the -- bringing the investors on the sideline back into both fixed income and equities. So it is a blend of both of those, Geoff.

Okay. The other question I had was just it's been a few years since you had the Smith & Williamson sale closing and having that significant net cash. You talked about wanting to deploy that, whether or not it's making acquisitions. And obviously, the pandemic may have had, call it, an abnormal M&A market in asset management. Just wondering how it stands today in terms of what your appetite is and how active you are looking at acquisition opportunities and also just the types of things that you might be looking at?

Yes. A couple of things. Smith & Williamson was 3 years ago this month. We have given back to shareholders in the form of either SIBs, which 2 of them, which we've done, normal course issuer bid and dividends, $180 million in that 3-year period. We've given back 60 in the last 12 months, right? So we've always said there's going to be a blend about how we think about that capital, which is dividends, buybacks when the stock is attractive. We've done 1 million shares so far this year on the NCIB and as well as investing for growth. So we're at that inflection point where the growth part of that will now take precedence. We have looked at probably closing in on [ 30 things ] in our pipeline on the deal side for the Private Capital business over this last year. I'd say we're probably very close to 1, 2, maybe a third one over the next few quarters. But these things take time, as we've talked a lot on this call. The environment is losing up a little bit, believe it or not. But again, the due diligence of these does take some time. In terms of what we're looking for, I'd say, think North America and think mid-market private equity, I think maybe potentially real estate, we may be early there. We've got a great credit manager here in Canada on the best. So we're pretty happy with that. So if we can complement that with a couple of other strategies over the next few quarters, I think that's how you should think.

And just I would just add that the inorganic acquisitions that we could look to do would be accretive from an EBITDA perspective, right, just given the current levels of cost of funding related to the earnings that we pick up. Yes.

[Operator Instructions] Our next question comes from the line of Nik Priebe from CIBC Capital Markets.

Okay. Interesting discussion on retail investment behavior. And I just wanted to drill into that a little further. Kevin, you alluded to some evidence that investors are drawing down on long-term savings to repay debt or support bill payments. Is that activity more common in nonregistered accounts? And if so, do you know roughly what proportion of your retail mutual fund AUM would be owned in registered versus nonregistered accounts?

Sorry, this is Judy. On that latter question, we don't have that split available. But in terms of what we are seeing, it is within mostly in the MFDA channel, we are seeing, unfortunately, registered money being taken out presumably to pay for mortgages or other sort of hardship issues that they need to address. And so that trend is something that you do see in these types of environments. And it is unfortunate, but it is mostly among the MFDA channel.

Yes. Okay. That's interesting. And then I think you also called out the strong growth in SMA AUM. And I just -- I'd like to learn a little bit more about the SMA product structure. And I think I have a layman's understanding, but can you just expand a bit on the features of that structure, specifically that appeal to investors and maybe how the average management fee would generally compare to the same capabilities packaged in another structure, like an F Series mutual fund or an ETF. I'm just trying to understand the product structure landscape a little bit better with respect to SMA specifically?

Yes. Nick, it's Kevin. I'll take it, and then Bill can add. So think of it this way. We provide our office, so our [ rates ] and names to the platform. They typically are in strategies that could be either an ADR form. So if you think about a global strategy, if you can do it in ADRs, so you don't have foreign custody issues. You provide some these technology platforms or attempts as we call them. And there literally an adviser could sit out there and say, I want to buy this global [indiscernible] global portfolio, it gets delivered down. So all the trading, all the clearing is done on their end. We're simply providing our office. From an economic standpoint, I think F-Series has a revenue rate and SMA has probably a lower 1 by, I'd say, 20, 30-odd basis points. Don't get caught up in that, think about operating margin, right? They're roughly the same. So in a fund, we have to price that fund, create NAV, clear those trades. There's a whole back office tail to that where in the SMA business, it's a lot simpler. So the operating margins are about the same. So we are indifferent to it. And frankly, we've moved to a place where -- we think about our investors saying, hey, here's the capability, choose the wrapper you want. You want it an F, you wanted an ETF series of that fund or you want it in an SMA if we can. So again, it simplifies our life. It allows us to open up our distribution to places like the U.S., where we don't have to host a big fund the company and all that goes with that as well as Canada. And the end investor wants to see individual securities in many cases. So that's what you're getting. This is a growing part of both the U.S. and Canadian industry. One of the things we're going to talk about and you're going to see -- we're seeing it in ourselves as our SMA business is growing, it may come out of some of our funds. So the house, if you will, stay as whole, but someone is shifting vehicles. So the data is going to get a little bit murky as the SMA industry starts to grow and ramp up. And then Jud, you sit on the share of IFIC, do you have any thoughts on that?

Yes, I think, while I take that one back to IFIC, but certainly, I think it is an accurate statement to say that the IFIC numbers may end up not representing the whole picture. And as we reported, we've seen a 43% increase over all of our SMA and ETF year-over-year, and that is directly a focused effort, particularly in the U.S., where we are seeing that platform opportunity, a significant way to get in front of the RIAs in the U.S.

Yes. Okay. That's great color. Now I'll pass the line.

[Operator Instructions] Our next question comes from the line of Graham Ryding from TD Securities.

Just to follow up on that SMA conversation. Is it -- is the U.S. ahead of Canada in terms of sort of penetration of that type of product into the retail investing side of the industry? And secondly, is it more common with high net worth investors that product? Are there tax efficiencies that are sort of driving the appeal there?

Yes. So I mean, certainly, the U.S. from a technology platform perspective is way further ahead. And we've been able to get on to different platforms in the U.S. in the last months, including Envestnet, Vestmark, SMArtX, Pershing most recently. And all of those are directly connected into the RIA channel. So I'm not so sure it's necessarily focused strictly for the high net worth. It is definitely more tax efficient. But I think at end of the day, this is where the Canadian marketplace is going to go, and you're seeing a number of the big dealers converting over their systems to the Envestnet or the likes of it comparable to that. There's only a couple in Canada. And I do think it's going to be a growing trend for sure in terms of where managers need to play as well. You have to get on working with those technology platforms as well as with the dealers.

And just to follow on that, Graham, some of the more sophisticated platforms allow you to tax loss harvest. So I bought a sleeve of XYZ growth manager. I see the 30 names. I get the [ energy ]. I may have lost in this sleeve, and I can swap over in the [ XYQ ] tax loss harvesting. So the tax efficiency is a part of some of the more sophisticated platforms because we have the individual securities in that portfolio.

Ken, just -- I think you talked a little bit about you've got an appetite to add leverage for the right deal or deals. Can you give us some sort of context on how many turns on EBITDA in terms of debt you'd be comfortable adding to the business for either short term or the medium term to fund growth in private capital?

Yes, sure. I mean, look, we have an existing debt facility that allows us to lever up to $150 million and that's less than 1.5x, right? And so we certainly would be comfortable increasing to that level, if not even more. Bear in mind also, I would say that we also have this $250 million of long-term investments. The idea, as we think about inorganic growth as well is we will be harvesting some of those investments, right, and being able to sort of redeploy that into investments as well. So it's a combination of not necessarily just the debt financing, but also the liquidation of some of our longer-term investments over time.

Yes. And I'd add to that, Graham, the fact that some of those funds are now getting longer in life, so they're going to close that harvest period.

Okay. That was actually my sort of second question, but you've got $250 million there in your co-investments, and it's up, I think, roughly $75 million from a year ago. It sounds like you expect to maybe maintain at this level or it might even come down? Is that accurate in terms of sort of your visibility on capital recycling?

Yes. I mean it's -- certainly, the expectation isn't to significantly increase, right? I mean there is the opportunity as we inorganically invest in new managers that there will be a desire to see new growth opportunities, right? But the focus really is to think of it as sort of if we're going to be seeding any new funds, it is with the intention of a broader fund build for that GP to build up the overall AUM, right? But we haven't said any particular guidance yet in terms of levels, but I wouldn't expect that balance to increase significantly given the ability to sort of recycle through that long-term investment portfolio.

Yes. And I guess for me, Graham, I'd add to that, which is where we started and how we've gotten to here, we've been actually really pleased, and it's been a successful venture for us. We've hit the high end of the range of where we thought the return sets were going to be there. If we can start to recycle that capital back into our operating earnings is it's clear, we're not getting a lot of credit for even the returns being what they are for that sitting in seed capital. So if we can move away from seeding things to actually buying into operating earnings streams, I think that would be where you can place a multiple one, I think, would be something that over time will start to ship maybe how you look at that business.

[Operator Instructions] Our next question comes from the line of Shawn Kimel from K2 & Associates Investment Management, Inc.

Operator?

Yes. Shawn Kimel, yes, his line is now open from K2 Associates Investment Management, Inc. Shawn can you hear us? Again, Sean Kimel from K2 & Associates Investment Management, Inc. Your line is now open. Please proceed. [Operator Instructions] Our next question comes from the line of Graham Ryding from TD Securities.

Okay. I just wanted to follow up on the idea of servicing value, your Private Wealth business, I guess, 17% of your AUM, maybe I could ask it in a couple of ways. Would its contribution to your earnings and free cash flow be a similar ratio? And then secondly, how integrated is that part of your business into your overall investment management business? And is it an area where you can potentially look to surface the value and fund your sort of desire to maybe shift the mix of Private Capital alternatives growing in your business?

Well, let me just start. I mean certainly, we really do like these businesses generally. They are sticky assets. They do run relatively independently in our structure under 3 different brand names being in a Highstreet, London, Ontario; Dougherty in Ottawa; and Cypress in Vancouver. They are representing 17% of our AUM. I'll let Ken speak to the operating margin and contribution overall of the business. But because of the stickiness of the assets and the client relationships that we have and frankly, the good relationships we have with the key partners in those businesses, we do look to them as a good source of our total asset base. Ken, did you want to speak to the operating side?

Yes. I mean I would just say from an earnings perspective, it's broadly representative of the overall AUM levels. I've even provided details on that further, but...

Yes. I guess for me, Graham, I know a lot of the hype around these businesses and certainly in the U.S. and some other strategies. We're comfortable with the ones we have. And there, as Judy mentioned, various degrees of integration. You take Highstreet, which is pretty much fully our product set, our technology with their brand on it to Cypress, which is fully independent. So there's a mix of things in there. Each will have obviously, therefore, different costs and margins.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. AGF's next earnings call will take place on January 24, 2024. You may now disconnect.