Affiliated Managers Group - Earnings Call - Q2 2018
July 30, 2018
Transcript
Speaker 0
Greetings, and welcome to the AMG Second Quarter twenty eighteen Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms.
Celine Oh, Vice President, Investor Relations for AMG. Thank you. You may begin.
Speaker 1
Thank you for joining AMG to discuss our results for the 2018. In this conference call, certain matters discussed will constitute forward looking statements. Actual results could differ materially from those projected due to a number of factors, including, but not limited to those referenced in the company's Form 10 ks and other filings we make with the SEC from time to time. We assume no obligation to update any forward looking statements made during the call. AMG will provide on the Investor Relations section of its website at www.amg.com a replay of the call and a copy of our announcement of our results for the quarter as well as a reconciliation of any non GAAP financial measures to the most directly comparable GAAP financial measures, including a reconciliation of any estimates of the company's economic earnings per share for future periods that are announced on this call.
With us on the line to discuss the company's results for the quarter are Nate Dalton, President and Chief Executive Officer and Jay Horgan, Chief Financial Officer. With that, I'll turn the call over to Nate.
Speaker 2
Thanks, Celine. Good morning, everyone. AMG generated strong results in the second quarter with positive net client cash flow of 4,300,000,000.0 and year over year growth of 8% in economic earnings per share. Our results reflect the strength of our strategic position in attractive areas of alternatives and active global equities and ongoing significant client demand for our affiliates broad range of distinctive return streams, especially in these areas. At the highest level, we are pleased with our organic growth as we generated continued strong gross sales and returned to an overall more normal level of redemptions.
While it's still early in the third quarter, we're off to a good start so far with positive flows and the level of activity at all stages of the sales cycle remains very high across AMGs and our Affiliates business development teams. We're seeing this across one but on-site mandates, finals and RFPs. In terms of second quarter flows across our product categories, we saw continued strong demand for alternatives with $2,600,000,000 in positive net flows. We generated record sales in Global Equities during the quarter resulting in $1,900,000,000 in net flows, while U. Equities had one of its best quarters in years on a net basis with only modest outflows.
Finally, we continue to see positive flows in our multi asset and other category as some newer products are starting to gain traction. Turning to our quarterly flows by distribution channel, we saw significant strength within Institutional, producing our best quarter in the last three years with $5,300,000,000 net flows and sales well diversified across product categories. Our institutional flows were also well diversified by geography with sales in each of our coverage regions. In the retail channel, we reported net outflows of $05,000,000,000 While we saw weakness in our liquor alternatives, this was mostly offset by strong sales in global equities. In terms of subcategories within the retail channel, we had good traction in sub advisory in certain Non U.
S. Regions. Finally, in the high net worth channel, we reported modest outflows of $05,000,000,000 which we believe were driven primarily by a few SMA model changes, but otherwise the underlying demand trends remain in place. One final point relative to flows in the quarter. We were pleased to see a very diverse group of product types and affiliates contributing significantly as we saw strong sales across AQR, Capula, EIG, Pantheon and Systematica within our Alternatives segment, while Artemis, Harding Loevner, Times Square and Veritas were notable contributors within our Global Equity segment.
As I said, we're off to a strong start for the second half of the year. And now let me also spend a minute on why we are very confident about our long term organic growth prospects. First and most importantly, it begins with our Affiliates' outstanding long term track records of investment performance in areas where we continue to see secular client demand trends, including global equities and liquid and illiquid alternatives. Fundamentally, many of our affiliates largest and most significant products continue to build on excellent and distinctive track records. Second, we and our affiliates are innovating and developing new products, which is of course critically important to match evolving client needs.
Examples are many and diverse and would include AQR beginning to build a fixed income franchise or U. S. Equity managers such as Times Square launching international and now emerging markets franchise or GW and K evolving from a great mini bond manager to a successful U. S. And now an international equity manager.
Artemis in particular has a very successful model of leveraging their UK retail brand across a series of new products, homegrown and through lift outs. Third, we have a unique distribution strategy that combines the focused distribution resources at each of our affiliates with a leverageable scope and scale of AMG's global distribution platforms and our continuous evolution and improvement of those platforms. This includes coverage of geographies and channels, but also product packaging and operational expertise. As you've heard us say, this distribution strategy is increasingly effective as leading clients worldwide and the intermediaries who serve them are consolidating their relationships with external managers and looking for more effective relationships and even partnerships with a smaller universe of investment management firms. Now one product area we've highlighted recently that pulls all three of these elements together is our growing franchise in illiquid alternatives across affiliates such as Baring Asia, EIG and Pantheon.
First, each of these affiliates produces distinctive return streams in our flagship products. Second, we and May have been working to innovate and develop additional products such as the infrastructure real asset and credit strategy of the Pantheon, the Asia credit and real estate products at Baring Asia and credit direct lending and operating energy capabilities at EIG. Third, we and May have been working together to diversify their distribution opportunities and bring their expanding product sets to the most appropriate pools of capital worldwide. Now expanding on that last point about distribution capabilities, we continue to leverage AMG scale in working with our affiliates to bring their differentiated strategies to sophisticated clients and intermediaries around the world. As you know, we've been successful in strategically and deliberately building out our global distribution capabilities over the past dozen years.
First in Australia, then expanding to The Middle East, Europe and parts of Asia and offering clients an array of distinctive return streams managed by best in class boutique firms. As we mentioned on recent calls, we are extending our Asian coverage to Japan. We are opening our office in close cooperation with Pantheon, which recently opened their Tokyo office and we're in the planning stages with certain other affiliates. Given the array of relationships we and our affiliates have been establishing with some of the largest, most important clients in the New Year's in Japan, we see tremendous growth opportunities building in our early wins, and then we look forward to updating you more in the quarters to come. Putting together the three elements I highlighted earlier, first, affiliate investment performance second, continued innovation and product development, and third, our unique collaborative distribution strategy, our growth prospects look very good, and that is just speaking about our existing affiliates.
In addition, AMG's business strategy provides a unique opportunity to generate incremental earnings growth and product diversification through accretive investments in new affiliates. Given our outstanding track record spending more than two decades, AMG is the partner of choice for boutique firms around the world, both traditional and alternative, which seek a permanent strategic partner. We've an outstanding secular opportunity here. And while the pace of activity is inherently based on the dynamics of each prospective affiliate, we continue to make good progress across a range of potential new investments. As always, we remain very disciplined and highly selective.
Now given the scale of our recurring free cash flow generation, we're able to execute this element of our growth strategy while also consistently returning capital to shareholders through both our regular cash dividends as well as ongoing and increasing share repurchases as our earnings grow. As Jay will discuss further in a moment, we demonstrated this disciplined approach to capital again last quarter. Looking ahead, we are very confident in our ability to continue to enhance the quality, diversity and earnings power of our business and generate outstanding long term shareholder value. Through our unique business model, we offer the focused expertise of specialist managers along with the scale and resources of a global asset management franchise, combined with a twenty five year track record of deploying the cash flow generated by our business to create shareholder value. And with that, I'll turn to Jay to discuss the results in more detail.
Thank
Speaker 3
you, Nate, good morning. AMG generated strong organic growth for the second quarter with $4,300,000,000 in net client cash flows across a broad array of alternative and active global equity strategies. As Nate described, we feel good about our improving organic growth profile. And looking forward, we are off to a good start in the second half of the year with positive flows in July to date and a strong pipeline of won but unfunded mandates. Now turning to the details for the quarter, I'm going to describe our business trends within each product category with a focus on both flows and market performance through June.
And given that this is the first time for me to review our business trends, the flow and format may be a little different and will evolve over time. I look forward to your feedback as we continue to enhance our disclosure. Starting with alternatives which account for 39% of our AUM, we had another good quarter of organic growth and saw meaningful positive contributions from both our liquid and illiquid product set totaling $2,600,000,000 in net flows for the quarter. Focusing on illiquids for a moment, we had a solid level of fundings in the second quarter, but in July we generated more commitments in this category than all of the second quarter. Beyond illiquids, consistent with recent trends, the systematic diversified category continues to be challenged.
However, we have experienced good flows within multi strat as well as the fixed income and equity relative value categories. Now turning to our selected benchmarks by alternative category. Within systematic diversified, which accounts for 5% of our AUM, our selected industry benchmark continued to move lower with the SG trend index down 1.3% for the quarter and 5.2% year to date. However, most of our products in this category maintain good relative performance. Within fixed income and equity relative value, which accounts for 9% of our AUM, our selected industry benchmarks were modestly positive with HFRI relative value up 1.1% for the quarter and 1.5% year to date and HFRI equity hedge up 0.9% for the quarter and 1.2% year to date.
And finally, the HFRI active index was up percent for the quarter and 2.4% year to date. While our benchmarks remain modestly positive, generally we have seen mixed relative performance in this category. However, we have seen strong relative performance from our event driven strategies. Now turning to MultiStrata and Other, which accounts for 15% of our AUM, our selected industry benchmark was modestly positive with HFRI fund weighted composite up 0.8% for both the second quarter and year to date. Against this backdrop, our performance has been mixed for both the quarter and year to date.
Next turning to our private equity real asset categories accounts for 10% of our AUM and includes strategies such as global and regional private equity, co investments, credit, real assets, infrastructure and real estate. Our affiliates maintained strong long term track records and the pace of product innovation and extensions in this category has led to even greater growth in our business. Next turning to global equities which account for 34% of our AUM. We saw net inflows of $1,900,000,000 in the quarter driven by retail sales including a number of sub advisory wins as well as strong momentum in institutional sales with a significant improvement in redemption levels. Selected industry benchmarks in the category were mixed with the MSCI World up 1.9 for the quarter and 0.8% year to date.
While the MSCI e fee was down 1% for the quarter and 2.4% year to date and MSCI Emerging Market was down 7.9% for the quarter and 6.5 year to date. In U. S. Equities which account for 14% of our AUM, we reported outflows of $400,000,000 and while negative overall, we had a good institutional flow quarter with a number of wins and continue to see pockets of ongoing opportunity. While industry trends continue to be challenged in U.
S. Equities, our overall redemptions have been improving over time. Selected industry benchmarks were positive with the S and P 500 up 3.4% for the quarter and 2.6% year to date and the Russell two thousand up 7.8% for the quarter and 7.7% year to date. Finally, multi asset and other which account for 13% of our AUM encompasses multi asset and balance mandates within our wealth management business as well as a number of specialty fixed income and multi asset products. We had a slightly positive quarter producing net flows of $200,000,000 While we saw some weakness with our legacy fixed income products, our wealth management affiliates continue to generate positive flows and we are seeing good momentum in new products including systematic fixed income.
Before turning to the financials, wanted to reiterate that we are pleased with our improving organic growth profile as we and our affiliates are realizing the benefits of new products, new packaging and new geographies. Now turning to our financials. As you saw in the release, we reported economic earnings per share of $3.61 for the second quarter, which included net performance fees of $0.10 On a GAAP basis, we reported earnings per share of $2.16 For the second quarter, aggregate fees grew 5% to 1,300,000,000 from a year ago, driven by positive markets and organic growth in alternatives. The ratio of aggregate fees to average assets under management declined modestly year over year from 64 basis points to 62 basis points, which was driven in part by timing differences between AUM and revenue recognition as well as changes in composition of our AUM. Adjusted EBITDA decreased 3% to $246,200,000 from a year ago reflecting lower other income from realized and unrealized gains, modestly lower net performance fees and the impact of investments which position our business for long term growth.
Economic net income grew 4% to $195,600,000 from a year ago reflecting lower interest expense and lower tax rate, while economic earnings per share grew 8% to $3.61 given lower year over year share count due to repurchase activity. Turning to more specific modeling items for the second quarter, the ratio of adjusted EBITDA to average assets under management was 11.9 basis points or 11.5 basis points excluding performance fees. Looking ahead, we expect adjusted EBITDA to average assets under management to be approximately 11.3 basis points in the third quarter, reflecting seasonally lower performance fees and continued investment in product development and distribution capabilities. Our share of interest expense was $21,400,000 for the second quarter. In the third quarter, we expect our share of interest expense to remain at approximately $21,000,000 Our share of reported amortization impairments was $74,400,000 for the second quarter, including $56,800,000 from affiliates accounted for under the equity method, which was elevated primarily due to a non cash impairment charge of $33,000,000 related to Ivory.
While this non cash charge reduced our carrying value to zero, the economic impact was far less at roughly $1,000,000 in EBITDA per quarter. Looking ahead to the third quarter, we expect our share of reported amortization to return to a normalized level of $41,000,000 Turning to our taxes. With regard to our tax rates in the second quarter, our effective GAAP tax rate was 21.3% and our cash tax rate was 18.1%, which was lower due to adjustments related to U. S. Tax reform and we expect these rates to normalize on a full year basis.
Looking forward, we
Speaker 2
expect our GAAP tax rate
Speaker 3
to be approximately 25% and our cash tax rate to be approximately 20%. Intangible related deferred taxes were $4,700,000 which was lower in the quarter given the level of amortization and impairments. For the third quarter, we expect intangible related deferred taxes to return to approximately $12,000,000 as our amortization normalizes. Other economic items were negative $05,000,000 for the second quarter. For modeling purposes, we expect our other economic items to be approximately $1,000,000 per quarter.
Our adjusted weighted average share count for the second quarter was $54,200,000 and we expect it to be approximately $53,500,000 for the third quarter reflecting a continued level of repurchases. And we now expect our adjusted weighted average share count for the full year to be approximately $53,900,000 Turning to our balance sheet in the second quarter, we paid a $0.30 dividend per share and we repurchased 150,000,000 shares. Looking to the second half of the year, we expect to repurchase between 200,000,000 and $300,000,000 depending on the level of new investment activity. Looking ahead, we are confident in our ability to generate outstanding long term shareholder value through both the organic growth of our global asset management business as well as the deployment of capital into accretive investments and outstanding new affiliates while also consistently returning capital to shareholders. Now I'll be happy to answer your questions.
Speaker 0
Thank you. Our first question comes from the line of Bill Katz with Citigroup. Please proceed with your question.
Speaker 2
Okay. Thank you very much and thank you for taking the question. So, Janet, just coming back to flows for a moment, it's a bit of a differentiated update versus some of your peers who were out last week. How much of this might be cyclical in terms of some of the product gains that you've out there on the alternative side? And how much of it do you think is a little more structural just given that you sort of ended with new products, expanded opportunity, expanded geographies, etcetera?
How you sort of think about that beyond the third quarter just look at maybe the second half of the year and even into 2019? Great. Thanks, Bill, for question. So simply put, I think, much of it is using the same of you so that having much of it is, is structural, and and and therefore sustainable. And and on some level, there's really nothing all that different or new from the way we've been talking about overall levels of gross sales.
So if you look over the last, call it, year, year and a half, you know, our gross sales have actually been been pretty good. And then, you know, the question then is, well, okay. So why? And and, you know, we covered much of this in the prepared remarks. But as I said, it starts with, you know, the distinctive track records and that our affiliates are producing.
And and these are great institutional brands. These affiliates, I think of things in global equities like Harding Lovenir or or or Veritas and with alternatives, we're talking about brands like, you know, HUR or Capula or Winton. And in the liquids, which we highlighted in the in the prepared remarks, it's it's brands like Pantheon, Baring, and the IG. And I and I use that word brand because it is, as we talked about, these are these are franchises that are growing and expanding. And and we talk about it as approximation, but it's really doing a better and better job matching the capabilities of the firms with the evolving client needs across channels and geographies.
And so, you know, sort of a layer down, if you sort of step back, we had sales in something like I don't know, 400 products in in the quarter, and a bunch of those are products we didn't have five years ago. And and those include some of the fastest growing ones. Now that's not to say, as as as you said, some of that will have cycles to it, especially where there's something that's that's got a fundraising cycle to it or where there's a product that's exploiting a specific opportunity that one of our affiliates sees. But but in the main, that that overall kind of wave of product development and and evolution is the is the most important is the most important theme. And then, again, just to make sure everybody's tracking, for us, product development happens some at the affiliates, of course, just affiliates alone.
It it also happens us jointly with affiliates, and this is something that we're still at the early stages of because we're getting better and better at bringing the market knowledge that we have back to the affiliates. You know, again, back and talk about leveraging the scope and scope and scale. And then as we always have, we have this unique ability to add kind of proven, well performing product with distinct, you know, sort of distinctive product through our new through our new investment efforts. So we have sort of all of those, you know, kind of product development engine. And then, you know, as we said in our prepared remarks, it's not just product development that way and and innovation, but it's also the packaging distribution capabilities, you know, extensions and wrappers, and and some of it is simply bringing product to new geographies and channels.
And while we talked about, the opening of of Tokyo here, you know, it's important to note also that over the last really couple of years, we've been adding resources in the Europe in Europe and a little bit in The Middle East and a little bit in Asia as as we're doing some channel extensions in in places like that. And then we've also been making, you know, some modest investments in, impacting the capabilities. And here I would highlight things like the Pantheon for the x fund or or something which is which is public and so we can we can we can talk about it. When you put all those together, you know, the the performance, the the brands, the innovation, and this this distribution strategy. And so absolutely, we think those are the things that will that have been showing up in gross sales and will continue to drive gross sales going forward.
Speaker 0
Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.
Speaker 4
Thanks. Good morning. I guess, Jay, could you kind
Speaker 3
of update us on kind of the outlook as we think about performance fees into the back half of the year and just kind of the benchmarks versus your guidance from earlier in the year in terms of where we sit? Yes. Thanks, Dan. So maybe I'll take this in two pieces. I'll talk about the third quarter and then maybe the rest of the year.
So first, as I said in the prepared remarks, we're off to a good start. We've seen positive markets and positive flows in July so far. Our current blend across all categories is up 1.5%. That includes FX as well. That's from a base of $824,000,000,000 which you can see on the June 30 numbers.
So we're up in July. It should give us a little bit of lift here in the quarter and for the year. Let's see, you also just when we turn to the third quarter, I gave some guidance in the call around our EBITDA to average AUM of 11.3 basis points, which is slightly lower than what we came in this quarter. And I just want to remind everyone, our third quarter is a typically seasonally low point for us, both EBITDA and earnings, primarily given the population of performance fee contracts that crystallized in the third quarter, very low in that population. So as a result, we're only expecting $01 or $02 in the third quarter.
So that's in there. Obviously, we continue as you heard from Nate to make investments in the business, new products and the capabilities that's all reflected in the 11.3 basis points. And then looking beyond the third quarter to the fourth and staying on performance fees for a moment, and I'll just maybe take the perspective of a full year and then I'll narrow it to the fourth quarter. Given the benchmarks that I mentioned in my prepared remarks in the alternative category primarily, most of those benchmarks are modestly positive. And so really, it's a comment that I'm about to make is more about the overall benchmarks because our relative performance is pretty good with the exception of a continuing challenging environment for systematic diversified.
So really relative performance good, benchmarks modest. And I think when you factor all that together and you think about where we are in the year, we're now tracking closer to about a dollar 30 for the whole year in performance fee. Of course, there's a range around that. We've already booked $0.50 in the first half. I mentioned 1 or $02 in the third quarter, so that leaves about $0.80 in the fourth quarter.
This is a conservative estimate, we're just in July. So we've had, obviously, many environments where the third and fourth quarter bring about lots of performance fees. So I just wanted to point that out. Still feeling pretty good about the prospects for performance fees beyond 2018 just given the relative long term performance of our alternative products. And then finally on capital deployment and maybe I'll even touch a little bit on 2019 here.
As you think about what we've said, we continue to repurchase shares at a reasonably high level, 200 to 300 in the second half of the year. We've already done 300 in the first half. That's brought our weighted average share count down quite a bit. We expect the weighted average share count for the year to to break through 54,000,000. And when we look at the year end share count, we're we're seeing it, you know, below 53,000,000, just a touch below 53.
So that is a a pretty good setup going into next year because we started this year at 57 and we're ending at 53. So so looking looking forward to '19 together with, you know, sort of a improving organic growth profile, a lower lower share count and some good things going on our business, we're looking forward to that.
Speaker 0
Thank you. Our next question comes from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.
Speaker 5
Hi, good morning. Thank you. The last couple of quarters, you talked about some big wins in the pipeline getting delayed. Did that help 2Q? Are you still waiting for some of those to come through?
And Jay, your comments about July commitments and alts being more than all of two q, is that actual inflow or is that just adding to the pipeline? Thanks.
Speaker 2
Yes. Let me let me start and then maybe Jay can pick up on that last bit. So as I think we've talked about, we have, we have in both, sort of composition, meaning the product mix, as well as kind of the combination of challenge geography than pursuing some more complicated mandates. Some of that absolutely did start to, materialize in, in the second quarter. But in terms of the pipeline overall, the, yeah, the the overall pipeline, that's all been that's all been replenished.
And and so it's not like, hey, that this was those kind of one time, thing. That that is part of those kinds of mandates, think, are part of, two, overall trends. One is a trend in the marketplace, which is the behavior of pools of capital and and the ones in the New Year's and how they're narrowing. You've heard lots of folks talk about that. And the other is, again, on on our side, which is the evolving capabilities that we and our affiliates have to, you know, to do an increasingly good job.
And again, to be clear, there's lots more we could do and increasingly good job sort of facing off against that trend. So we are seeing some of that pull through, but but we also you know, we're also just seeing that opportunity as as a long and growing opportunity. And then, Jen, if you want to touch on the Yeah.
Speaker 3
Yeah. So so, Patrick, just maybe, starting with the second quarter, I I mentioned in my prepared remarks, we saw $2,600,000,000 in net flows for the second quarter and I also mentioned that we saw net flows in both the liquid and illiquid book. So if you imagine, you know, something in the neighborhood of an equal weighting, we had good flows in both. I would say that going into, you know, July, we're seeing, a number of, our private equity real assets and and, you know, illiquid, you know, managers starting to close on a number of funds that have been in the market without going into any more detail there because they can't. Some of those are making news, some of them haven't.
But we're seeing that number being quite a bit more than what we saw net in the second quarter.
Speaker 0
Thank you. Our next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Please proceed with your question.
Speaker 6
Hi, thanks guys. Kind of a two part question. First for Jay, just on the EBITDA, you mentioned down year over year. I think you mentioned the other income performance fees and investments. I guess just on the investments, like how much is that maybe weighing on it?
And then like in terms of the maybe the investment time horizon or where we should think about like the return on those investments? And I
Speaker 5
guess just bigger picture, like if I look at how you
Speaker 6
guys are positioned on the you mentioned the structural allocations, that makes sense. The investments you're making, it makes sense. On the other side, the alts, it seems like the performance as a whole, meaning for the industry, has been more muted, and then you had the impairment with Ivory. So I just wanted to understand, when you look across all the affiliates, if you have any stats on, like, how many are outperforming the benchmarks, even if it's a longer term, like three, five year, or out of all the affiliates, how many are having inflows versus outflows on maybe a trailing twelve months? Just something to get a little bit of color because the flows are obviously good for the quarter, but just to get a little bit more color on the sustainability of that.
Thanks.
Speaker 2
Yeah. No. So I well, I'll start with the with the back half and then then turn to Jay. So so appreciate the comment. And there's a couple of different themes that we have I mean, as as you are, there's a couple of different themes that we have to work together here.
So one is, you know, kind of short term, performance themes. And just just honestly, on a lot of levels, on the short term kinds of performance themes, I think we have to look through those. And so you've heard us talk about some specific areas where they have been good and and now we have to sort of look through those. I think there are there are questions so so I would start with where do we see and and we will think about the ways that we can get better kind of meaningful full data out. But but where are the ways in which we can where are places where we can see, and again, we're much better at this as as we go here.
Where are the ways we can see where are the places we can see significant opportunities in part for specific products, but but really for capabilities. Right? And so so I think that and and I don't think that's just, specifically in in in all, but you can use alternatives as an example and and and a place place to start that. And so we think there is a long term opportunity for the capabilities that our affiliates have. Some products absolutely underperforming.
Some products absolutely outperforming in the main. The alternative products, you know, if you start thinking about it across the whole in the main, the alternative products are performing better than peers. And that's probably the right way to think about it once you've gone from category to, to you know, that's because there is demand characteristics of the categories and then which are the better performing products and capabilities within that. So in the main, our affiliates are performing better than peers, so we'll we'll figure out ways to to get that. So then so it's, you know, demand characteristics, its capabilities.
And then within, within all specifically, there's we've talked about around these two dimensions, is liquid and illiquid. You know, we've we've sort of put down, somewhat artificial stakes around those two definitions, but put down stakes around those definitions. If you do it that way, the illiquid book and the illiquid opportunity set is is behaving. As good as the liquid is, the illiquid opportunity set is even better. And there's just an incredible amount of demand for both the existing capabilities and and also reasonably easy to see extensions of what our folks are doing.
And and to the extent that these businesses are ultimately and you heard us talk about this a little in the prepared remarks, these businesses are behaving more like platforms as you look at the way they can extend their products consistently under their brands. So I'm going Jay, if you want to add to that or also take a second part of Yes. So let me take
Speaker 3
the second part. There's a lot I could say here, so I'll try to just be brief. Just just on the the earnings, the EBITDA and and kind of where we are.
Speaker 2
If you know, if if you
Speaker 3
look at our business is seasonal, so I want to make sure that we we note that. We we have, you know, higher level performance fees in the first and the fourth quarters, seasonally low in the second and the third. And to some extent, that's affecting our EBITDA in the second to third. So if you kind of look at us as a first half, second half kind of business, I think you'll see numbers will be more, I guess, at you'll take into account sort of the spreading of those performance fees. The other point that I made in the prepared remarks is other income, clearly was down.
You can see it was down $4,500,000 on the line item, the financial statement line item. But actually, we had last year a bit more realized gains than we do this year. So it's really more down like $6,000,000 not 4,500,000.0 So that obviously impacted. And those are gains from investments that we've made, typically, seed or GP investments and that's part of our business. So we leave that in our earnings and we expect them to go up over time.
So that is something that we usually have a contribution from almost every quarter, which is down this quarter.
Speaker 5
There's a little bit of ivory
Speaker 3
in there, as I mentioned. There's a noncash element to ivory and then there's about a million a quarter, which we we would take out. If you reconcile, that's about a $10,000,000 spread that we did not see, recurring, in this quarter year over year. And then as mentioned in my remarks, the investments that we have and will make in the business that's included in the guidance of 11.3 basis points. I I would say, you know, and and just to dimensionalize it a little bit, think, you know, if you think about our history of expanding geographies in front of both the significant demand and participation by all of our affiliates.
You know, you think about Japan, as an example, and I'll and I'll make the comment that just like Australia, Middle East, etcetera, before that, we do have a bit of a start up expense initially. And in Japan, it's a it's to contextualize it, it's even a more robust statement because not only have we, moved to open up Japanese office and and work in Japan, We've helped some of our affiliates do the same. So if you think about, the Pantheon, we've worked side by side with Pantheon and in a in a in way to, to get that startup cost, through. And and so when you see that come through our numbers, sure, we've had a little bit of that. It's it's in the four projections, and we do expect the return coming through as AUM, you know, is accumulated in those regions, and that's our that's been our history.
Speaker 2
Okay. Let me let me just add a a test to that last point, which is, as Jay said, we, you know, we've we've been looking at Japan for a while and and we're now in a place where we have enough we see enough demand that we and our folks are are gonna go are gonna go after it in an on the ground kind of way. There's a little bit of startup cost as we said, and that's true everywhere as we as we invest and then start to experience the growth curve.
Speaker 3
I will say, to be clear, most of
Speaker 2
the time when we're entering market, have much less traction than we already have in, in in Japan. And we've really had, you know, quite quite a good, you know, sort of experience, some of which has already come through, but not much of which obviously hasn't, but but we're really seeing good good traction there. And then the only other just small small point I'd add is, obviously, we have had to start the process to open a Dublin office. And and we have contingency place, but we're having to, you know, having to execute on them. Not not a lot of money, but obviously and the ultimate shape of it will depend on Brexit and obviously our conversations with regulators, we are happy to stand that up.
Speaker 0
Thank you. Our next question comes from the line of Robert Lee with KBW. Please proceed with your question.
Speaker 5
Thanks. Good morning, guys. Good morning. Good morning. Maybe I guess my first question, well, I'll ask a two parter.
First one is just on M and A. I know you guys are obviously trying to stay disciplined, but you have seen a fair amount of activity in the market. Some competitors acquiring stakes and some of these kind of permanent capital vehicles, whether it's Dial or Black Stone's platform.
Speaker 2
Can you maybe talk a
Speaker 5
little bit about beyond the looking for a permanent partner, but how do you kind of perceive maybe your strategy or what you're looking to invest in compared to what you're kind of seeing happening in the marketplace as it relates at least to minority stakes in all managers? And then I guess maybe just as a second part, is it on in the alts business, you talked about a lot of commitments coming on board in July, I guess, lot of fund closing. I'm assuming that when that's not necessarily going to flow into AUM, all of that, if they haven't turned on fees. So is there any sense of getting anyway getting a sense of what your kind of dry powder pipeline may be like of commitments that your affiliates have received but we're not seeing yet in AUM or that haven't been turned on?
Speaker 2
Great. So let me start on the first part and then ask Jay to do the second. So, and I think you framed it, you know, if you understand exactly, us, I think, really well and framed it and framed it well. So to be just a sort of level set, so step stepping back, we do have a differentiated model and approach, and we've been kind of running and evolving this model for now nearly twenty five years. Our approach is very attractive to our target universe, which is, you know, prospective affiliates that are looking for a permanent institutional partner, and I would underline the word permanent there.
And look at the highest level, we're helping solve a demographically driven, you know, kind of management ownership and succession problem for these firms. And and we have a solution that preserves and protects their unique entrepreneurial cultures across successive generations of management. And that's why that that kind of permanence underlying is so is so important. And then in terms of how we pursue it, right, we have, this proprietary calling effort. We've been out building relationships with the best firms for many years, and and that activity continues a pace.
And, you know, and you you've heard us say those kind of firms that we're pursuing generally don't have to do anything at any specific point in time. So what's driving the transactions of of those firms is generally us building the relationships and the firms deciding that, you know, now, whatever the now is, is the right time to address that long term demographic issue. So that's that's a universal firms where we have a unique solution. I think we are uniquely uniquely attractive. Now in terms of your comments about the the current environment, absolutely, this has been an elevated period of of m and a activity in the industry.
And you should assume alongside our proprietary talking effort, we're looking at all of the opportunities in in the market. And then you should also assume and expect, as you sort of led your your your question with, when we're looking at investment, we're very disciplined. And that's across multiple dimensions. That's discipline around business quality. That's discipline around the long term alignment structures that we talked about.
And, of course, that's disciplined around around pricing. And then I guess the last point I'd make is that when we talk about this discipline, we're also always measuring the opportunities we have against reinvesting reinvesting in our business, you know, through through share repurchases, and we have a very high quality, diverse business in place. So so we're always looking at it against that backdrop as well. Put all that together, we have this outstanding secular opportunity to partner with the best boutique firms. And, you know, while the timing of anyone is gonna be driven by those dynamics I described, yeah, we continue to be really busy and make good progress across a range of, range of new investments.
Speaker 3
Yeah. And I was just gonna add one thing, and I'll I'll talk about the the liquid AUM in a moment. But just the the the thing I would I would add is, you know, one of the major advantages that we have in the market is our reputation for being a supportive partner over twenty five years and our permanence. And the model, the AMG model that, is what people know to be the the succession planning model to, to ensure that that permanence for both us and the affiliate and really alignment is is closer than that. That is still highly valued in the market.
It's not not for everyone. And when when you look at some of these state buyers, whether it's whether it's pricing or or other elements. In some in some cases, we have just decided that it's, not a situation where we wanna chase because pricing can be too high in those in those environments. So we have stuck to that eight to 10 times even the discipline. But where we, where we really are attractive to partners is where they value the permanent, value the the reputation and the model.
And then as it relates to the the AUM policy, you did say one thing I wanted to clarify. Our our policy is actually to take assets in under and count account for them when they come under supervisory, really when we start to manage those assets. Generally speaking, fees are tied very closely to that timing. But I would say, and I mentioned it in my prepared remarks, even this quarter, we saw, our aggregate fees to AUM ticked down a little bit mainly because of this timing issue. We have taken in some AUM, before the fees were turned on.
That's usually, you know, days or months or a quarter, but it's not usually that long. And I think you will see us, book, again in the third quarter some AUM right at the onset of fees. So we could have a little noise in the third quarter. But in general, we are taking that AUM as we start to manage it.
Speaker 0
Thank you. Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.
Speaker 3
Great. Thanks very much. Good morning, folks. Just wanted to come back to the EBITDA and the investments in the business. Obviously, a lot of good promising organic growth opportunities that we would naturally think you'd want to invest in.
But as you talked about the Japan office and that opportunity and then the Dublin office also, Should we be thinking of these investments as sort of I don't want say onetime, but sort of brief and then you guys coming back to a realization rate closer to that 12 basis points ex performance fees? Or rather do you see enough organic growth opportunities that you want to really continue that into the future?
Speaker 2
Let me start and then hand it to Jay. So I I look. The the last part of the question. Sitting here today, we think there are a lot of opportunities for us to improve how we're bringing these sustainable returns streams to market. I think our our method and approach will be pretty consistent.
I think you've seen us be quite disciplined as we've built distribution over the last twelve years. And so I think you'll see us pursue a deliberative fashion. I mean, what part of the question is what's the case and and how do we do it in our way, which is partnering with affiliates and and pursuing things that we think are the highest return opportunities at any at any point in time. And so I think you'll see us pursue it in sort of the same disciplined way we always have. I think there are definitely included things that are short term in nature.
Right? So the startup costs for a geography or the startup costs for a channel within a geography, you know, the the the Dublin office, I think is how we have the question is highly dependent on on how Brexit unfolds, but we very much hope that it is a a temporary thing. So I think there's absolutely a category that could be that way. But, you know, the most important part of of, in my mind, the most important part of the the question is is sort of where you ended, which is sitting here today, we do see opportunities each, you know, and and but we will continue to pursue them in that in that disciplined way. And, you know, and and the other thing I'd say is it it's it's working.
We are seeing returns on on those investments coming through in gross in this on the sales line.
Speaker 3
Yeah. And our our sort of AUM realization rates, you know, obviously, they have a lot to do with the level of performance fees in addition to, asset based fees. So, when you think about over the course of the year, if I go back to my first half, second half, you know, nomenclature, you know, that if you're averaging the first quarter to the second quarter and the third quarter to the fourth quarter, you'll see the realization being higher just by virtue of that normalizes our performance fee opportunity. So that you really have to think about those, I think altogether. The last thing I would say is on that ratio, we have continue we have and we continue to see, faster growth amongst our equity method affiliates primarily because those are in the alternative space, and that's where most of our liquid, managers are, though Pantheon is a consolidated affiliate.
So we are seeing more growth there, which we obviously own a bit less, and that will change that ratio just from a composition perspective over time.
Speaker 0
Thank you. Our next question comes from the line of Chris Shutler with William Blair. Please proceed with your question.
Speaker 3
Hey, guys. Good morning. Good morning. So a couple on the pipeline. I think this first one is kind of touching on the points you were just making, Jay.
But looking at the pipeline and where you're going over the next couple of years, can you give us a sense of where you think the revenue yield and the EBITDA yield on the inflows will be compared to the yield the outflows, at least in near term there? And then on, new affiliate investments, know made you've been talking about focusing more on larger, more diverse prospects. So within that context, in your conversations with prospects in the near term part of the pipeline, is distribution still as much of a selling point of the AMG model?
Speaker 2
Let me start with that last question. So I I think the way we've, the way we talk about it is we're looking for the highest quality boutiques. Right? And I do think that, the dimensions of the highest quality boutiques more require, either products that are more leverageable through distribution or otherwise or firms that themselves have investment processes and disciplines and an orientation to continue to to grow and expand their business. So I think it it can be it can be both.
The firm doesn't have to necessarily be be larger right away, but but it has to include those things as a process that can evolve and and grow as well as better indication. But but but absolutely, we are looking at larger firms and more diverse firms as well. In in terms of the attract the relative importance or attractiveness of of any distribution, let say one of the things is we are looking at firms that are themselves already complete firms. And so therefore, have distribution, proven distribution capabilities, generally in at least one or two geographies and one or two channels. Right?
So so those are the firms we're attracted to. Our distribution, the distribution we've been building over this dozen years that we talk about is designed to knit to the distribution capabilities of our affiliates, which includes some, obviously, very large, successful, diverse firms. So we are very used to working with and continuing and partnering with and enhancing and diversifying the asset bases of very successful large diverse growing firms. Right? So that's actually, you know, and that not that that's easy, but that is something that we've really done.
We put a lot of effort behind and are doing an increasingly good job at. So it's not so much that they specifically need it, but I think we have built a unique distribution flat set of platforms that, as I said, can sort of knit to the distribution of boutiques and enhance them. And that's something that we've been investing over over the past decade. So I don't know that it's you know, I'm not sure if necessary specifically important to each of them, but I think, as we go through these conversations with them, I think they all get it. And wanna pick up on a point that that Jay made before, which is a huge asset that we have is this track record of partnership with these firms.
And so all the things we described about the ability of the distribution platform to work with, you know, very successful large scale diverse and growing boutiques is highly referenceable. So they can just call and speak with any number of our affiliates about how we work with them in ways that are highly customized to those businesses. So so we do think that what we're building is additive. And, again, we're building it not just any of the virtual circle we're talking about, not just because it's helpful to these new boutiques and additive to that new investment process, but, you know, it's also absolutely today additive to even our largest most diverse affiliates and and we saw that again this quarter and and come through and falls. Yeah.
And then,
Speaker 3
Chris, just on the yield point. So look, it's a fee rate comment. It's also an ownership comment for us. But just at fee rate level, you've seen us and you've heard us say that our fee rates have been holding relatively stable at the highest level. We're at about 62 basis points with some performance fees.
So we're in that 59, 58 kind of range without performance fees. That level, when you think about it, we you could say it's been holding relatively stable. Interesting thing is we've probably seen everything underneath that. Right? We have, some places where we're seeing our mix shift, to higher fees.
We're seeing places where we see the mix shift to lower fees. We're seeing differences between affiliates. We're seeing it all. I mean, because when you have, you know, 824,000,000,000 in AUM and and as many affiliates as we we have, we're seeing we're seeing it all, but we're seeing the the composition remain relatively static at the highest level. Why is that?
Because we continue to grow in alternatives. Just sort of plain and simple. And then then within alternative, the illiquids tend to have higher fees. So when you think about and frankly, longer duration. So I think that's a a good, phenomenon, structural phenomenon that's actually happening in our business today and that's keeping our yield on the assets higher and it's attractive mix shift, if I had to say it that way.
On the ownership side, we do have the, the comments I made earlier about EBITDA to AUM. We are seeing, you know, good growth in, you know, in in those alternative business. But we're also seeing good growth in some of our global equity managers like the Harding Loevner and Pantheon who's a consolidated affiliate. So we have we are keeping up, if you will, on an ownership basis. But from quarter to quarter over time, those changes can be modest, but you have to stay focused on the EBITDA line that should be growing over time.
Speaker 0
Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.
Speaker 4
Hey, good morning, everybody. I was hoping you guys could give us a couple of specific answers around the systematic performance. I guess one topic, but a couple of questions there. I guess, a, it would be helpful if we get an update on how different strategies have done year to date kind of on absolute basis? Obviously, we could all see the public sleeves, managed futures, long short, etcetera, but it would be helpful to get a
Speaker 3
sense of where the others are. And I
Speaker 4
guess more importantly, given sort of year to date challenges in that bucket, can you give us a sense of how critical it is gonna be for flows over the next six months from an institutional perspective? And ultimately, of what do clients care about? Is it absolute or relative performance in that category?
Speaker 2
Let me let me start. There's a bunch bunch of pieces in there. So I think the clients in that category are divided into a couple different groups. I think there's clearly clients who are, who understand the product and are investing in it because of the characteristics, the diversifying characteristics of it. I'll I'll make an observation here, which is the large drawdowns in traditional portfolios tend to be more severe than the drawdown trend managers both now in this environment specific environment and historically.
So I think there are absolutely, I think the core of the investors, especially the core of the institutional investors understand the reason they're investing in these strategies and how these strategies, should behave as a diversified overall portfolio. So I think that's true. And I think that while this is a is a challenging period for the category, it's not, you know, it's not a sort of an unheard of period. So, yeah, I think that that applies. Those those comments are are really important for a significant portion.
I'd say the most significant portion of the asset base for us in in the category. Now there's there's also absolutely people who are investing in the strategy in a way that was following performance and being driven by performance, and the performance of the category has not been good. And that has been reflected in flows, you're seeing that in the retail flows that you, that you mentioned. And I think you can look at that as a base and as long as performance continues this way, some portion of it will will will will behave that way. You know, we at the at the highest level, we believe in the category.
I think we, you know, as part of our diverse business, I think it's an important part of the business. And I think for us, that's the most that's the most important point to make, right, which is we have a a large diverse business with significant participation in areas that we think have long term secular demand trends behind them. Any one piece of it will not of the of the, product set within those those sectors will not be performing well at any one given point in time. And I and that's that's okay. In fact, that actually also provides some some opportunity.
So, so I think that's kind of how I would I'd answer it, at the highest level.
Speaker 3
Yeah. And I I wanted to pick up on a thread that Nate mentioned in his prepared remarks as well. Mean, with systematic diversified being 5% of our business, today and on an AUM basis, It really speaks to the diversity of, and the and the sort of power of of the diversity of our business because, as you saw in the in the public data, I'm sure all of you saw in the public data that it looked like we were gonna have negative flows, and in fact, had demonstrably positive flows this quarter. And it just shows you that that, you know, do have tremendous diversity in this business. And even though, systematic diversified is challenged at the moment, as Nate said, it's an opportunity for the future.
And again, within the context of diversified business, it's you're always going to have those pockets and we're completely confident that over time that, that segment will provide us some growth in the future period.
Speaker 0
Thank you. At this time, this concludes our time for questions. I'll turn the floor back to Mr. Dalton for any final comments.
Speaker 2
Thank you. Thank you again for joining us this morning. We're pleased with our results for the quarter and we are confident in our ability to continue to create long term shareholder value. We look forward to speaking with you again in October. Thank you very much.
Speaker 0
Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.