AGF Management Limited (AGFB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Q1 2024 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 this conference call. 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 first quarter of fiscal 2024. 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 Q&A period following the presentation, Judy Goldring, President and Head of Global Distribution; and Ash Lawrence, Head of AGF Capital Partners, will also be available to address questions. Turning to Slide 4. I'll provide the agenda for today's call. We will discuss highlights of the first quarter results for 2024, 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 have questions taken. 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 the first quarter, our AUM and fee earning assets reached $45 billion, up 7% from a year ago. Adjusted diluted EPS was $0.51 in the quarter, up 89% year-over-year. In addition, we have $320 million in short- and long-term investments on our balance sheet, net debt of $17 million, with $110 million available on our credit facility. We have capital available and flexibility in our capital allocation strategy. In February, we announced a strategic investment in New Holland Capital and New York-based multi-strategy investment manager with over USD 5 billion in AUM or CAD 7.4 billion. Subsequent to the quarter on March 8, we also announced the closing of our previously announced transaction to acquire 51% of Kensington Capital Partners. I'll speak more to this later on, and Ash will be available for questions. Finally, the Board declared a $0.115 per share dividend for Q1 2024, representing a 5% dividend increase. This is the fourth consecutive year where we have increased our dividend. 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 9% year-over-year, outpacing the industry, which increased by 7%. For ETF and SMA, AUM increased 20% year-over-year. I'll provide more color on our mutual fund businesses and ETFs and SMA AUM in a moment. Segregated accounts and subadvisory AUM increased by 2% compared to the prior year. During the quarter, we received a redemption notice from one of our institutional clients for $800 million. The redemption was driven by the client shift towards passive management. Last quarter, we onboarded 2 of our global equity strategies onto an institutional platform in Asia. Getting on to this platform expands our distribution reach for the strategy. Since this relationship started in late Q4, we've had cumulative net flows of close to $72 million. Our private wealth AUM increased by 7% compared to the prior year to $7.8 billion. Our Capital Partners AUM and fee earning assets were $2.2 billion at the end of the quarter. Closing the Kensington transaction will increase the assets to $4.8 billion. Turning to Slide 7. I'll provide some details on the mutual fund business. The challenging market environment continued to weigh on industry and AGF flows, but improved from Q4 to Q1, in part due to the RSP season. The Canadian mutual fund industry experienced net redemptions of approximately $4 billion in the quarter, which is the industry's eighth consecutive quarter of net outflows. AGF reported mutual fund net redemptions of $125 million in the quarter. Since Q2 of 2022, when interest rates started increasing, the industry has had over $140 billion of net redemptions in long-term funds while AGF achieved positive retail mutual fund net sales of approximately $100 million over that same period, allowing us to grow our overall market share. Looking forward, we continue to take a long-term approach to increasing our penetration in high-growth distribution channels by diversifying our capabilities and offerings. 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. Our long-term fund performance remains solid. At the end of Q1, our 3-year performance has been in the 50th percentile and our 5-year performance has been in the 45th percentile. Furthermore, approximately 60% of our strategies are outperforming our peers on a 3- and 5-year basis. In addition, 4 of our funds, the AGF Global Select, AGF American Growth, AGF Global Convertible Bond and AGF Fixed Income Plus earned the FundGrade A+ Awards, which are given annually to investment funds and their managers who have shown consistent outstanding risk-adjusted performance throughout the year. Our 1-year performance was in the 68the percentile. As discussed in previous quarters, our 1-year performance continues to be impacted by extreme market narrowing experienced in the spring of 2023. As those months drop off, our 1-year performance is expected to improve. Slide 8 shows our ETF and SMA AUM. 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. listed ETFs and SMA platforms globally. We have seen consistent growth and momentum in the SMA business, both in the U.S., Canada as well as Asia, where a number of our strategies are available on leading SMA and wealth management platforms. In February, we broadened our ETF offerings with the launch of ETF Series on 3 of our long-standing funds. These ETF launches further advance our goal to provide investors with options to access our capabilities and their preferred investment vehicle. With that, I will turn the call over to Ken.

Thanks, Kevin. Slide 9 reflects a summary of our financial results for the first quarter with sequential quarter and year-over-year comparisons. The financial results in these periods are adjusted to exclude severance and corporate development expenses. Adjusted EBITDA for the quarter was $49.5 million, which is $22 million higher than Q4 and the prior year, mainly due to revenue from AGF Capital Partners. I will speak further about this in a minute. Net management fees for the quarter were $75 million, which is 4% higher than Q4 and 2.6% higher than the prior year. This is due to higher AUM offset by lower management fee rates. As a reminder, the net management fee rate is directly influenced by the product and series mix within our mutual fund assets. Adjusted SG&A for the quarter was $53.5 million, which is 5.5% higher than Q4 and 1.3% higher than prior year. The increase against Q4 includes a timing impact of higher government-related employee benefit expenses such as CPT and EI, which are paid annually in the first quarter. The year-over-year increase is consistent with our guidance on annual SG&A expenses, increasing by 1.5% from 2023 to 2024. AGF Capital Partners contributed revenues of $24.4 million in the quarter, which is approximately $20 million higher than Q4 and the prior year, mainly due to an outsized fair value gain on our long-term investments. Revenue from Capital Partner Managers this quarter was $1 million, which is down $400,000 from the previous quarter and flat to the prior year. Carried interest and performance fees can be variable quarter-to-quarter and are impacted by the timing of monetizations within the funds. Revenues from Capital Partners' long-term investments was $23.4 million this quarter compared to $2.5 million in Q4 and $2.9 million in the prior year. As a reminder, AGF participates as an investor in our partners' LP funds, benefiting from valuation increases and distributions from those funds. Our portfolio of long-term investments has performed very well in the current market environment. While fair value adjustments on the investments can be lumpy quarter-to-quarter, we remain conservative in our guidance and target annual returns of roughly 8% to 10%. Since inception, our investments have returned an IRR in excess of 12% on a net basis. Adjusted EPS was $0.51 this quarter, which is higher than Q4 and prior year due to the higher revenues from net management fees and capital partners. Turning to Slide 10. I'll address our SG&A guidance. In January, we provided our 2024 adjusted SG&A guidance of $209 million. After adjusting for seasonality in our Q1 results, we remain confident with this pre-acquisition core guidance. We had previously committed to providing an updated SG&A guidance upon closing of the Kensington deal. Today, we are revising our guidance to $227 million to include our recent acquisitions and additional near-term investments to support our growing AGF Capital Partners business. We continue to be thoughtful and disciplined in our approach in expense management while also investing for growth. Our updated expense guidance does not include any expenses related to performance fees and carried interest earned by our partners. It also does not include severance and corporate development costs. Finally, our adjusted SG&A guidance also assumes investment performance, fund sales and AGF stock price trades within a certain level. Turning to Slide 11, I will walk through the yield on our business in terms of basis points. This slide shows our average AUM, net management fees, adjusted SG&A 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 Capital Partners as well as these revenues, other income, severance, corporate development and acquisition-related expenses. The Q1 2024 net management fee yield was 73 basis points, which is 1 basis point lower than the previous quarter and the trailing 12 months. The net management fee yield decline is in line with what we've guided to in the past as we execute on diversifying our client base. Scaling our business across different business lines has offset the rate reduction. Adjusted SG&A as a percentage of AUM was 52 basis points this quarter, which is in line with prior quarters and the trailing 12 months. This resulted in an EBITDA yield of 21 basis points in the quarter, which was 1 basis point lower than the comparable period. Turning to Slide 12, I will discuss the free cash flows and capital uses. This slide represents the last 5 quarters of consolidated free cash flows on a trailing 12-month basis, as shown by the orange bars on the chart. The black line represents the percentage of our free cash flow that was paid out as dividends. Our trailing 12-month free cash flow was $78 million, and our dividend paid as a percentage of free cash flows was 36%. In the same period, we returned $46 million to shareholders in the form of dividends and share repurchases under our NCIB. Our cash balance at the end of February was $23 million, and we have $320 million in short-term and long-term investments. We have $110 million remaining on our credit facility, which provides credit to a maximum of $150 million. Our remaining capital commitment to our existing Capital Partners LPs is $17 million. Taking all of this into account, we have ample capital to deploy even after considering our 51% acquisition of Kensington and our strategic investments in New Holland Capital. Our future capital allocation will be balanced. It includes returning capital to shareholders in the form of dividends and share buybacks as well as investing in areas of growth. Redeploying our remaining excess capital to drive growth and generate recurring earnings remains a key strategic priority. Before I pass it back to Kevin, let me take a minute on Slide 13 to look at our market valuation. AGF's current share price is about $8.40. Our adjusted EPS as of the end of 2023 was about $1.35, which implies a P/E of about 6x for our 3 main businesses. Comparing this multiple against that of our peer group, suggests AGF is trading at a discount. For instance, using conservative industry assumptions, we've assumed a market multiple of 8x for traditional asset managers and 15x for alternative managers. This would suggest a discount of 25% and 60% for those 2 businesses. And if you valued our long-term investments at the current book value, this would suggest a discount of about 60%. Besides our earnings, AGF also has an enviable balance sheet with virtually no debt, making us one of the lowest levered companies in the industry. I will now pass it back to Kevin to close out the remainder of the presentation.

Thanks, Ken. And given the recent announcement of our 2 completed transactions, I'd like to take a minute to talk about our AGF Capital Partners business. We started our journey about 10 years ago when we partnered with different firms to build out our footprint in the alternative space. Over the years, we have seeded over $400 million into various funds and achieved over a 12% IRR on those investments. As Ken alluded to earlier, we currently have close to $300 million of long-term investments with exposure across venture capital, private credit and infrastructure. In addition to our AGF Capital Partners business, we have also been building our capabilities in liquid alternatives, including our market-neutral anti-beta strategy, ETFs, which have garnered interest from investors over the last few years. With Ash Lawrence coming on board, we made it a strategic priority to significantly scale this business through acquisitions. AGF Capital Partners objectives are to build a diversified private capital and alternatives business that is meaningful in scale, provide access to a broad range of strategies across asset classes and categories for investors and to generate material and sustainable income streams from this business. With that as a backdrop, let me discuss our recent investment in New Holland Capital on the next page. On February 12, we completed our strategic investment into New Holland Capital, a New York-based multi-strategy investment manager with more than CAD 7 billion in AUM. Founded in 2006, New Holland has more than 17 years of experience providing institutional investors with absolute return strategies across the liquidity spectrum. Their flagship Tactical Alpha multi-PM investment strategy focuses on identifying alpha-generating opportunities in both fundamental and quantitative strategies in liquid markets. They also manage strategies that invest in non-correlated niche credit opportunities, including specialty finance and real assets infrastructure. In addition, they deliver customized absolute return investment solutions for large institutional investors. We made the investment in the form of a note convertible into a 24.99% interest in New Holland with an option to subsequently increase our ownership's stake over time. The investment into New Holland, along with our completed transaction with Kensington will allow us to evolve into a true multi-boutique alternatives business, which I can speak to on the next page. With these 2 recently completed transactions, coupled with our existing alternatives capabilities, AGF now has diverse capabilities and a broad suite of solutions across private and liquid alternative strategies. Under this umbrella, clients will benefit from our partner's specialized investment expertise in private equity, venture capital, private credit, absolute return and liquid alternatives. As we continue to look for acquisitions in this space, partnering firms will also benefit from AGF scale, brand and distribution network to drive further growth. To sum up this first quarter, we continue to make great progress against a number of our strategic objectives. Our AUM and fee-earning assets continue to climb, reaching $45 billion. We are delivering against our capital partner strategy through our investments into Kensington and New Holland. And finally, we increased our quarterly dividend, now 4 years running, on the back of our strong capital position and free cash flows. I want to thank everyone on the AGF team for all of their hard work, and we will now take your questions.

[Operator Instructions] Our first question comes from Gary Ho from Desjardins Capital.

Maybe first question for Ash. Can you give a bit more color and details on the $24.4 million revenue from the AGF Capital Partners, maybe the chunkier pieces. And then historically, you've guided to that 8% to 10% return on your long-term investments. Question is why is that still relevant? I think in your slide, you show kind of 12.3% IRR and obviously, you've done better than that this quarter.

Yes. Thanks for the question. So maybe I'll start with the $24 million and a good chunk of that is the fair value increase. That fair value increase is largely, not entirely, but largely related to our infrastructure investments. And so I'll just make 3 very quick points more specific to that. So right off the bat, as we've said in prior calls, some of these fair value increases can be pretty lumpy in nature. As a result of underlying closed-ended fund business plans at the portfolio company level, and J curve impacts, we would expect, as we've seen in our historicals that, that lumpiness would continue. More specifically to our infrastructure investments, we started in this space in 2016. That's the vintage where a lot of our early dollars went in. So we're now looking 7 to 8 years ago. Generally, those investments are now on the other side of the J curve, again, from a business plan execution and value creation perspective. So it's not surprising to us that we're starting to see some of this value creation come through in the fair values. And lastly, I'd say that, again, it's not surprising for us to see business performance and metrics improving for infrastructure assets, especially those that fall into the more traditional definition of infrastructure. And by traditional, I mean businesses that have a pretty high component of real assets, inflation-linked revenue streams and pretty high barriers to entry. And in our case, when you think about the revenue streams, we would expect that in the environment we've been in with inflation, that you would start to see this push through on the revenue impact, and that is indeed what we are seeing in some of the underlying investments. And so I think we're at that stage now where it is starting to get reflected in valuations. All that being said, we remain pretty comfortable that our fair values are reflective of the underlying investments given the sectors that it's coming from and what's going on both within that sector and on a macro basis. Sorry, just on your second question around the returns. What we think of the 8% to 10% and our invested capital in the space, and what we can expect sort of averaged out even though it's going to be lumpy from that perspective, really, the 12.3 and mentioning that is for us to indicate that we are achieving the returns that we would expect on these investments. And if you think about that from a net basis and you think about the sectors we're in, in infrastructure and private credit for the most part, that is a pretty fair-to-good performance on a net basis after fees.

Okay. And then second question I have here, maybe for Ken. How should we think about the Kensington contribution and performance fee expectation now that you kind of closed that transaction? Can you provide kind of historical performance fees versus management fees mix? And then on a related question for New Holland, can I -- maybe just remind me how their contribution hits your financials? Is it just the interest from the convertible notes or any other nuance that we should be aware of?

Yes, happy to answer that, Gary. Yes, firstly, maybe with respect to Kensington, we typically would not guide to revenues overall for each of the respective businesses. And as many are aware, in particular, performance fees can be quite lumpy quarter-to-quarter. Having said that, I mean, the SG&A guidance that we didn't provide related for the most part to the consolidation of Kensington plus some additional investments that we are looking to make for the broader Capital Partners business in general. And the expectation is that even factoring in the SG&A increase that we would still be accretive from an EBITDA basis on a go-forward basis. With respect to your question on New Holland, this is very much just treated as an investment in our books. And so you're right, it is very much one where it generates some investment income on a quarter-by-quarter basis and as well as any fair value adjustments that we would have to make in light of current market environments.

Okay. And then sorry, I just wanted to clarify. So on the Kensington piece, are you able to provide maybe the historical performance fee mix versus management fees, like not on a prospective basis that may be historically how they have done?

I'll let Ash jump in as well. But I mean, I think as the results will flow through, you'll notice that the [indiscernible] typically are quite lumpy. And in fact, potentially paid out sort of even towards the end of the year, right? And so it's just quite challenging to forecast that out and then provide just a lot of guidance on it. But I'll ask Ash to provide any further color.

Yes. I think part of what we see is over the last few years, if you think about 2020, 2021 and 2022, it is highly reflective of that lumpiness. And so in 2021, generally across the private equity industry, you would have seen very, very high levels of carried interest. In 2020, you would have seen almost the exact opposite. And then it slowed down again in 2022 as rates went up and there is a little bit of a freeze in the capital markets from a transaction perspective. So it becomes difficult to think about it on a go-forward basis because it is heavily dependent on how the capital markets are behaving. So just to be clear, those performance fees are essentially like carried interest and that they are driven by underlying monetizations, which is sort of leading to both [indiscernible] comments around the lumpiness.

Okay. And Sorry, Gary, I was just going to add that. My point on the EBITDA accretion would be sort of even prior to any performance fees being paid.

Yes. Okay. That makes sense. And then if I can just sneak one more in for Judy. I think she's on the call. Maybe just update on the RSP season. Maybe talk about how you're positioned to capture the potential flows back to investment funds when rates eventually fall and GICs and cash kind of move back out of the sidelines?

Sure. Thanks, Gary. Well, just quarter-to-date, I guess that would be from March 1 to today, we're seeing, I'd call it, almost flat, of course, but minus 20 in redemptions. And so it's been an improving trend quarter-over-quarter since the last few quarters, which is encouraging to see. And then as we look to the market, you've probably seen the same data that we've been looking at, which is quite a big shift of money flowing into actual fixed income mandates, maybe GSEs are coming mature and et cetera, and they seem to be flowing more into the funds. And from that perspective, we feel quite comfortable. We've got a really good lineup of fixed income mandates. We expect we can be taking our share of that market. We have Fixed Income Plus, which is a Forestar, Morningstar, F-Series and Global convert and a couple of others. And maybe, Kevin, do you want to add anything else on the investment side?

Yes, you're starting to see anecdotally, if you look at just money market flows and [indiscernible] flows. Just the margin is starting to turn negative, which would lead me to believe that when we look at industry data in March, my guess is it should actually be the first non-RSP month in 2 years that we may see a slight positive flow for the industry, I'm not sure if it's a guess. What will happen is it will come back, as Judy said, as GIC is mature. People first go to bond funds because you're actually getting income now. And second, people are going to play for a rate cut, which means anything with duration is going to do well. And so my guess is you'll see it slowly start to seep out some of that. I think the real big impact on flows though, will happen when you start to seriously cut rates, you start to -- the banks will drop GIC rates a lot faster. That will move money back into things. But I think at the margin, you're starting to see it. But in terms of -- we have managed for, I think 7 of the 8 quarters that the industry was negative. We knew we were going to eventually flip it over [indiscernible]. And I think now you're seeing the other side, we should start to pick back up as the industry starts to get healthy. So we're pretty optimistic. We're positioned to capture either vis-a-vis that fixed income trade or if it turns back to equities later on, given the strong start to the year.

Our next question comes from Nikolaus Priebe with CIBC Capital Markets.

I just wanted to circle back on the question around the fair value adjustment in the quarter. So the adjustment was $22 million, the long-term investments at the beginning of the quarter about $250. So the magnitude is something like 9%. I don't know what the split is between infrastructure and private credit, but really simplistically, if it were split evenly, it would apply more like a 19% or something in that order of magnitude in a single quarter. So it just seems unusually large to me. Like was there any event that triggered the revaluation of a chunkier investment or anything more specific that kind of prompted the markup there?

Thanks. Maybe I'll take that. So generally, we won't and aren't really in a position to comment on the underlying investments. I will say there was no single event that created this -- the $20-odd million increase. I go back to some of the general things we're starting to see in the infrastructure space, take hold, again, largely because of the inflationary environment. And if you think about the vintage of our early fund, it invested in a market where there was still the traditional definition of infrastructure was still what we were investing in. And like I said, those are the ones that are going to see the most benefit in this kind of environment versus what you see now in the infrastructure definition where you have a little more digital infrastructure sneaking in, which sees less of that benefit. So I think this is very much a result of the sector and the vintage that we've invested in. With private credit, for the most part, our valuations there don't move around that much. We get a lot of distribution out of it, but fair values are generally smaller moves. It's mostly on the closed-ended infrastructure funds where we're seeing this.

And maybe I'll just add to it from a financial perspective. Nick, I mean, we've historically talked about an 8% to 10% sort of a return, which is useful as a high-level guidance to what the annual rate of return is for our overall Capital Partners business, right? So if you look at sort of 8% to 10% on a $300 million book that equates to about $24 million to $30 million or so per year or roughly $67 million per quarter for that business and so obviously, given where we've landed in the first quarter, that annual number that we've talked about looks quite achievable for the rest of the year.

Okay. Okay. No, fair enough. And then the results of a $16 million capital commitment that was made in the quarter to the private markets business. Now Kensington, that investment was completed subsequent to quarter end, which is when I would have expected to see any related commitment made. So what was that $16 million commitment related to in the quarter?

Yes. Sure. We still have commitments that are required in our existing long-term investments portfolio. So this relates to really those types of investments. You'll recall, I think we mentioned we still have $17 million or so of remaining commitments to these existing long-term investments portfolios. Sorry, did you have a second part to your question?

And just also like how are those commitments expected to evolve? Are you expecting to have further commitments with Kensington, I guess, subsequent to quarter end. Like I'm just kind of balancing that against the scale of proprietary capital on balance sheet and how that will all play out?

Yes. It's Ash here. So as Ken said, we have existing commitments that relate to funds we've already committed to. On a go-forward basis, any commitments we make to future partners are going to be, I'll call it, strategic in nature. So new product launches that need seeding and those kind of strategic use of our capital. So as of now, we aren't expecting any near term. And our existing commitments are slowly starting to burn off. So that should burn off over the course of the year. That's not to say we won't have future commitments but they will be specific to, again, like I said, new product launches, entering new geographies with a product, those areas where a commitment by the sponsor can be beneficial to raising third-party capital.

And Nick, if I can add, it's Kevin. The other thing to remember here, as Ash said, we -- some of these are long-tailed now. You're going to start to see monetizations come out of some of those early-stage funds, which will actually, again, start to recycle some of that capital back. So the $16 million, as you said, is prior commitments made and probably most of that [indiscernible] and you'll probably see, again, more recycling of things from those vintages.

Yes. Okay. No, that's good. And then last one for me before I pass the line. So net redemptions in the mutual fund business in the quarter were $125 million. Are you able to say what those net flows would have been if we also included the ETF and SMA offerings as well?

Yes, sure. Why don't I take that. Thanks, Nick. Yes, you're right, we were $125 million in net redemptions, which as I pointed out earlier, is an improvement over Q4 2023. That being said, we don't -- when you talk about ETF and SMA, it is a good question because it is a changing environment that we're working within. It's hard to get [indiscernible] data, particularly on the SMA side. And you can't necessarily conclude that if you have a growth of SMA, it would have otherwise gone into your mutual funds. But when we do look at it, we don't break it down, and we don't typically give that breakdown out. But that being said, if we look at the data, I think what we would roughly be able to say is our redemptions would have improved by about half. And we're seeing great growth in our SMA platform. We're up 87% year-over-year in Canada, quarter-over-quarter up 30%. So that is a great area of targeted growth for us.

And Nick, it's Kevin. Just to follow on that. It's going to get more challenging. I think we've talked about this on prior calls, our SMA business is doing so well. We know that every dealer, every platform are putting these technology layers in, which is going to allow and drive that faster. So it's going to be harder to interpret until the industry does a better job of reporting net flows across vehicles, how a company is really doing because you're going to see some of it coming out of the vehicle of a fund, not being able to tell how much of it's going back into your SMA or ETF, et cetera. But I think it's something we have to evolve as an industry on how we look at that data.

Okay. I guess I'll have to keep a closer eye on that line item in the AM schedule.

Our next question comes from Graham Ryding with TD Securities.

Just wanted to touch on -- I think you mentioned, Kevin, that there's $800 million institutional redemption coming through next quarter. Can you just give us some color on sort of what type of mandate and what kind of revenue or fee impact we should be forecasting?

Why don't I start and Kevin can add any color. The redemption is coming from a large U.S.-based institutional clients that we're not going to disclose the name. We've had that client for many years. And from the client's perspective, it really was a change of objectives where they are moving to a much more passive strategy, and we were one of many sub-advisory managers that were impacted. In terms of revenue impact, again, you can appreciate it was a large mandate at a quite a competitive rate. But our financial outlook is really not impacted as a result of this [indiscernible], although it is unfortunate.

Safe to assume that the management fee rate is lower than your weighted average management fee rate?

Yes. It won't have an impact on it, really, Graham.

Okay. Understood. And then I guess now that the Kensington deal is closed, can you give us some color, Ash, maybe on just what the -- what your initial focus is here? Are you going to try to promote and accelerate the penetration of the retail channel? Or -- and if so, how do you go about that?

Yes. We have a few, I'll call them, early initiatives that are underway with Kensington. A lot of them do relate to sort of what you described is how we can help them with broad exposure, given some of the resources that we have within our shop as a quick example, how can we help them leverage our marketing and production capabilities in that area of the AGF complex to benefit them in terms of exposure of their product. They've done a very good and admirable job, and it was actually something that attracted us to them on the distribution side. And so a lot of what we're doing is how can we help them accelerate that. Some of the other things we're talking to them about are geographic expansions around distribution and product set. That will take a little bit of time for us to [indiscernible]. Obviously, that involves regulatory vehicle structure considerations, but those discussions are ongoing now. And then the less outward focused things that are underway are around just helping them become more efficient in some of their support functions. So not the direct investing, not the direct distribution, but some of those things behind the scenes that contribute to the success of their business and how we can help them make them more efficient from a cost perspective, but also from a best practices perspective.

Okay. Perfect. That's helpful. Maybe, Ash, I'll stick with you and just sort of a bigger picture question. Should we expect some more M&A activity from you over the near term? Or are you looking to sort of consolidate given you've done a couple of deals recently, that would be the first part. And then what's your sort of overall vision here? Are you going to have investments in several private asset managers, you let them run independently as boutiques and then you look to support them on the distribution and operational side? Is that the broad vision?

Yes. Maybe I'll take those 2 in reverse order. And yes, you're correct. Our strategy is to build a multi-boutique with multiple managers sort of under the AGF umbrella. And each manager is going to have a different profile in different areas where we can help. There will be some consistency around that, I presume distribution and product development will sort of be a factor in most partners. But that is the structure we're putting in place to bring our size, scale, specific expertise, level of resources to help these managers grow, but leave them as distinct operating entities for the most part. We are also looking to build a multi-boutique structure where the individual managers we partner with underneath don't compete with each other. So we're not going to double up on strategies in geographies where we're effectively cannibalizing ourselves. The other thing this does is it puts those managers in a much easier position for us to facilitate collaboration amongst them. So not just vertically upwards with AGF in terms of efficiencies in collaboration, but also horizontally amongst our manager partners as we move forward. To get to the origination and deal pipeline. Our deal pipeline is still open and active. Obviously, we're going to make sure we put resources and time and effort with our existing partners to make sure those partnerships start off on the right foot and are productive and beneficial for both parties. But our pipeline is open. It is still relatively healthy. We are going to be a little more focused now that we've got sort of 2 of our target sectors and areas and geographies in place with Kensington and New Holland Capital. We expect most of our activity is going to be [indiscernible]. We're still looking at U.S.-based private credit. Secondaries is an area of focus. And we do think real estate, both credit and equity is at an interesting stage of that evolution for us to start thinking about. And keep in mind, as you think about the balance of our fiscal year, even with our 2 transactions, they tend to have relatively long deal cycles as we are dealing with private companies often with founding partners, complex tax situations, things like that. So while the pipeline is open, and we would hope we would start to see some origination activity fall to the bottom of our pipeline funnel, it does take time for us to get that to fruition. I think the average of our first 2 deals was almost a year to get it from initial handshake and introduction to closing.

Our next question comes from Tom MacKinnon with BMO Capital.

With respect to Kensington now that it's closed, I think you're going to be accounting for this on a 100% basis, both in terms of revenue and SG&A and then back out some non-control. Do I have that correct?

Yes, that's correct, Tom.

Okay. And so on Slide 10, what -- does this [indiscernible] increment reflect any -- does that reflect 100% of some of the SG&A associated with Kensington then?

Yes. It's 100% associated with Kensington, and we've also factored in some additional growth investments for the broader private capital business.

What percentage of that 18 reflects the stuff that isn't Kensington?

It's a small -- it's a much smaller percentage, obviously, the bulk of that would relate to Kensington.

Okay. Then -- and then how should -- so you've given some sort of guide on SG&A with respect to Kensington here, but you haven't given any guide with respect to revenue on Kensington. Do I have that correct? And then how should we be thinking of that? Is that -- what should we be thinking of just in terms of fee-related revenues?

Yes, sure. I mean, again, you're correct, Tom. We haven't historically guided to revenues for really any of our businesses. But I mean, for the purposes of your models, I think you've -- there are some sort of fee disclosures percentages with respect to Kensington that you could leverage for your modeling purposes. But as a whole, I would say, overall, this business, as I mentioned earlier, it would be accretive both from an EBITDA and earnings per share basis, factoring any cost of debt.

Great. And just to confirm, that 18 includes 100% of Kensington despite the fact that you only own 51%, correct?

That's correct.

Yes. Okay. And then if we go to Slide 13, it's an interesting slide with respect to just the earnings components. If you look at long-term investments would making up almost 1/4 of your 2023 adjusted EPS, a significant shift from years ago. How do you see this kind of evolving going forward, do you see the core continuing to shrink and as a percentage of the total adjusted EPS, how should we -- what's the strategy with respect to any kind of mix of your earnings between those 3 buckets, i.e., the managers, the long-term investments and then the [indiscernible]?

Tom, it's Kevin. Let me start and I'll hand it to Ken to follow on. We think about the [indiscernible] the client wants, right? The asset allocation preferences for our clients are changing, not just the vehicle change we talked about with in our retail business but SMAs and ETFs, but actual asset allocation choices to things that are more alternative, looking at both private alternative, liquid alternatives. You did a lot to reference U.S. studies. It's not just the institutional client base, but heavily the retail client base. So it's logical that this mix will shift over time. The shift that [indiscernible] made from the strategy from again, passively investing in funds to get us started actually now moving toward more operating businesses. So that pie will shift. In terms of what that looks like, hard to say. But you can see, again, if you link this with, again, client preferences, it's logical to see that this portion of the pie, they will both grow [indiscernible].

Yes. I'll just add -- sorry, Tom, I was just going to add to Kevin's point that the EPS number on Slide 13, of course, is last year's full year EPS number, right? This quarter's earnings, obviously, we had a pretty blowout earnings from the fair value adjustment, right? And it just gives us more assurance that we would have a considerable amount of confidence in hitting that overall annual number, as I indicated earlier.

Understood. And assuming if clients -- you say it's based on what clients want. So if clients were sort of thinking that, okay, maybe I'll be 30% in alternatives, then why would that bucket associated with capital partners be bigger than 30%?

Yes. Let me take a couple of looks at that, Tom. If you look at our asset mix today and you consolidate even our -- [indiscernible] for a second, right? It's still an asset mix. It's less than that when we think of the Capital Partners and managers, right? And as we think about the fee component. If we obviously make a shift again from what I call today is being driven by a lot of LP earnings and drive them into operating earnings as we start to make this shift, then I think the balance is more appropriate. I don't think clients will be at 30%. Not everyone is going to take the [indiscernible] model. But let's assume that if the industry in Canada just take retail between ETFs and mutual funds is $2 trillion today. And if that allocation to alternatives grows by just 5% from where we are today, which is probably a low single-digit number, that's $100 billion of assets at play. So it is a growing and attractive space for us. I also think the world is changing, right? We've had near 0 interest rates for 15 years, things that didn't work, they're going to work in the alternative space. So the New Holland acquisition for us is an attractive opportunity to think about absolute return. If we think that interest rates drop a little bit and they stop at 3.5% or 4%. And you have a vehicle that can give you that cash rate of 3 or 4 plus, 3 or 4 with low volatility, that's going to be a very interesting product to have in the market as we go through this next cycle. So I think, again, it's asset allocation preferences, but it's also about how we shift the strategy. And I don't Ash if you've had any other thoughts on Tom's question?

Yes. No, I think that's all accurate. The only thing I would add is asset mix, whether it's 30-70 or some other mix allocation in the future. From a revenue perspective, the fee rates, there's a differential in the fee rates between some of our traditional products and some of the alternative and certainly, the private capital products that are out there, which will throw off the allocation versus the impact on our business.

Okay. Great. And sorry, just squeeze in one more. I think Ken gave fair value adjustments of $6 million to $7 million per quarter as sort of a guide on the '24 to '30. Does that include -- and I assume that does not include the recent investment in New Holland Capital, correct?

Yes, that's correct. That excludes it.

So it would be slightly higher, including that then?

Yes. I mean, bear in mind, I mean, the New Holland investment was $4 million, right? So obviously, the quantum is very different.

[Operator Instructions] Our next question is the follow-up from Gary Ho.

Yes. Sorry about that. So just a quick follow-up, maybe for Kevin or Ash. So you've now hit your $5 billion alternative target. Maybe just going back to Graham's question there. So when you look out maybe 3 to 5 years, what is the next target that we should think about in terms of either AUM target or EBITDA or mix target for your alternative business?

So Gary, it's Kevin. I'll let Ash answer this one. So maybe you start Ash and I can come back on.

Yes, for sure. So as we're in the build mode on our business and adding partners, as mentioned earlier, our pipeline is still open. And so we do expect over the next few years to add some additional partners and different geographies and different sectors. AUM becomes a difficult target to set because of the volatility around it with acquisitions. And what we are very conscious of is we don't want to aim for AUM targets as we're looking at managers. What we would rather do is look at track record, compatibility with AGF and some of those other factors around the sectors and channels they operate in. So as you can see, there's a big variability even between the AUM and between Kensington [indiscernible] and that obviously, is a factor in terms of the AUM being able to generate track record, but it's not a direct drive factor in how we're going to choose partners going forward. So as we're in build mode, we're not going to focus on an AUM target per se. We're going to look at each partner and look at those other factors before we add them.

Yes. And Gary, from my perspective, I think we [indiscernible] a bunch of years ago to kind of give us [indiscernible] some guidance about how we were thinking to get this initiative off the ground. Now that we're there. I say to Ash's point, I can tell you, this part of the pie will grow faster. So it's less relevant as a number versus how we do it and how quickly we can get there.

[Operator Instructions] And I'm not showing any further questions at this time. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. AGF's next earnings call will take place on June 26, 2024. You may now disconnect.