Affiliated Managers Group - Earnings Call - Q2 2020

Transcript

Speaker 0

Greetings and welcome to the AMG Second Quarter twenty twenty Earnings Call. At this time, all participant lines 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.

Anjali Agarwal, Head of Investor Relations for AMG. Thank you. You may begin.

Speaker 1

Good morning, and thank you for joining us today to discuss AMG's results for the 2020. Before we begin, I'd like to remind you that during this call, we may make a number of forward looking statements, which could differ from our actual results materially, and AMG assumes no obligation to update these statements. A replay of today's call will be available on the Investor Relations section of our website, along with a copy of our earnings release and a reconciliation of any non GAAP financial measures, including any earnings guidance announced on this call. In addition, we posted an updated investor presentation to our website this morning and encourage investors to consult our site regularly for updated information. With us today to discuss the company's results for the quarter are Jay Horgan, President and Chief Executive Officer and Tom Wojcik, Chief Financial Officer.

With that, I'll turn the call over to Jay.

Speaker 2

Thanks, Angelie, and good morning, everyone. Before I discuss this quarter's results, I wanna take a moment to speak about my friend and mentor for twenty seven years, Sean Healy. Sean passed in May following the two year battle with ALS, and I know I'm not alone in feeling his loss. Many of you send your thoughts and condolences, and I wanted to again express my appreciation on behalf of everyone at AMG. Sean was a pioneer in our industry.

He transformed AMG from a nascent start up over twenty five years ago to the global business it is today. While it has been difficult time for all of us at AMG, we are proud to carry on the shared vision Sean passionately shaped through entrepreneurialism, relentlessness, and excellence in execution. While Sean will be greatly missed, AMG is fortunate to have a tremendously talented, energized, and motivated next generation leadership team that is well aligned with the long term interest of our shareholders. And in a rapidly evolving market environment, I feel strongly that across the organization, we have the right combination of history, experience, and fresh perspectives to adapt our business and create shareholder value over time. Since transitioning to a remote work environment more than four months ago, we and our affiliates have remained fully operational and highly effective in continuing to serve our clients and key stakeholders.

While COVID nineteen has necessitated changes to our approach, it has not meaningfully slowed progress against our strategic agenda. Our existing relationships have proven to be extraordinarily valuable during this period, both our proprietary relationships with new investment prospects as well as our long standing distribution relationships. We have seen a recent pickup in activity and dialogue across both these areas as clients and prospects worldwide are reengaging. And during this challenging period, the ability to leverage AMG's local sales teams around the world has become even more valuable to affiliates as they focus on remaining closely connected with their clients. We continue to believe that partner owned active managers are most successful in generating alpha over time, particularly in volatile periods.

A number of our affiliates have generated strong performance year to date having capitalized on market volatility and increased asset dispersion, in particular, those managing specialty fixed income, global macro, and fundamental equity strategies. And as market uncertainty and the recovery further play out, we anticipate additional opportunities for our affiliates to distinguish themselves. Throughout the pandemic, a number of investment themes have remained intact, including the ongoing demand for illiquids, while other trends have accelerated, such as the increasing appetite for responsible and impact investing, all against the backdrop of an improving environment for active management. While client allocation decisions will take time to play out, we are already seeing investors increasingly recognize the value and role of active management in their portfolios. Now turning to our results for the quarter.

AMG reported economic earnings per share of $2.74. Consistent with recent quarters, elevated net outflows were driven almost entirely by redemptions and quantitative strategies. As we have previously discussed, these strategies currently account for more than 25% of our AUM, but less than 5% of our EBITDA. As performance challenges persist across these strategies in part due to underperformance in value, we anticipate outflows in the category to continue in the near term. Excluding these quantitative strategies, our net flows were broadly stable as illiquid fundraisings and especially fixed income inflows continue to meaningfully contribute to our results.

Speaker 3

Stepping back, as you know, over the past year, we

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have taken strategic action across a number of areas to actively position our business for long term growth and continue to differentiate and enhance AMG's position in the market. We reshaped our resources and footprint to reallocate capital to areas of growth, collaborated with certain affiliates to reposition their businesses, invested alongside affiliates and in AMG capabilities to support growth opportunities, and enhanced our capital position. With these initiatives now largely complete, we are better positioned today to fully focus on executing and advancing our growth strategy. Turning to growth. Garda and Comvest, our two most recent new investments, are good examples of the successful execution of our strategy, which focuses on identifying high quality entrepreneurial firms positioned to benefit from secular trends and providing strategic support in the form of distribution resources and growth capital as needed.

Since our investment in 02/2019, Garda has nearly doubled its earnings as as it has benefited from secular demand for its strategies and its outstanding investment track record. In the case of Comvest, AMG provided growth capital along with global engagement by our sales team, which together have enhanced the firm's fundraising activity as evidenced by Comvest's significant inflows in the second quarter. More broadly on new affiliate investments, given the strength of our existing proprietary relationships with outstanding firms, our new investment activity has rebounded, and we continue to be focused on firms operating in areas of secular growth and client demand. Over time, in evolving to meet the needs of partner owned firms, we have expanded our partnership approach to include growth capital and resources for new affiliates such as Convest as well as existing affiliates such as Pantheon to support a wide variety of growth initiatives. For example, prior to recent favorable regulatory developments on private equity funds for retail investors, AMG's distribution team have been working with Pantheon to build out their access to wealth and retirement channels, and we invested strategic capital and resources to accelerate this initiative.

Today, Pantheon is well positioned for significant growth opportunities in these channels due to our collective efforts. And our recent strategic partnership with iCapital further enhances client access to Pantheon's products in this market. While we continue to evolve, succession planning solutions are a core component of AMG's partnership approach. Generational succession and transition is inevitable for partner owned firms, and our long term success and expertise in collaborating with affiliates to develop and execute management transition plans and align incentives across generations of affiliate partners remains a significant differentiating factor as firms select AMG as their institutional partner. And today, having worked with affiliates on these matters for twenty seven years, our expertise in succession planning is itself creating new opportunities.

For example, during the quarter, we announced a new partnership with Inclusive Capital Partners, which was enabled by the successful completion of generational transition at our longtime affiliate, ValueAct. With AMG's partnership, ValueAct's founding generation executed its plan over the course of thirteen years and has now been succeeded by a truly outstanding next generation group of partners led by Mason Morfin. Mason is an exceptional investor who has demonstrated exemplary leadership over the years, and I'm confident that he will guide the next generation of ValueAct to continued success. This transition enabled ValueAct's founder to retire and launch Inclusive Capital Partners, and AMG's partnership with NCAP represents our first investment in a business wholly dedicated to responsible capitalism. This is a particularly important moment in time for asset managers to address long term sustainability through the allocation of capital.

Client demand for new and more inclusive ways of allocating capital is intensifying, and we are focused on meeting client needs by investing AMG's capital and resources accordingly across existing affiliates and in considering new affiliate partnerships. The ongoing success of ValueAct and our continued relationship with our partners at NCAP are testaments to the strength of our affiliate relationships, the attractiveness of our model to entrepreneurial investment teams, and the flexibility and evolution of our investment approach. Looking ahead, we are highly confident in our growth strategy and are focused on executing on opportunities, including those which may arise from ongoing market and economic uncertainty. We believe that in this environment, active management, particularly when executed by independent partner owned firms, is more important than ever, and AMG's approach to investing in these firms is unparalleled. Our ability to execute on the opportunities before us is enhanced by our financial flexibility, further enabled by our strong corporate culture with its hallmarks of entrepreneurialism, a partnership orientation, and a significant focus on corporate citizenship.

With that, I'll turn it over to Tom to review the details for the quarter.

Speaker 3

Thank you, Jay, and good morning, everyone. With the combination of AMG's distinctive partner owned affiliates, our unique ability to generate both earnings and organic growth accretion through the execution of our new investment strategy, and our stable cash flow profile and flexible balance sheet, we are well positioned to generate long term earnings growth and shareholder value. As Anjali noted earlier, we have posted a new investor presentation to our website, which reflects the evolution of our strategy and more fully describes the unique elements of AMG's value proposition. Now, turning to the quarter and beginning with flows. We reported elevated net client cash outflows of $18,200,000,000 this quarter.

More than 95% of those outflows were driven by ongoing performance challenges in certain quantitative strategies that contribute less than 5% of EBITDA on a run rate basis. Before I turn to flows by asset class, I'll provide a breakdown of the impact of quantitative strategies and then go through our customary flow discussion by asset class excluding quant, so that I can provide a bit more texture on what's happening in those areas where we generate the majority of our profitability. Outflows in quantitative strategies totaled 17,300,000,000.0, including 10,000,000,000 within liquid alternatives, 5,000,000,000 in global equities, and 2,000,000,000 in US equities. As performance challenges across these strategies persist, particularly due to value factors lagging growth, we anticipate near term outflows will remain elevated. In contrast, we continue to see positive momentum in secular growth areas of the business, including private markets, wealth management, and fixed income, as well as relative stability across our fundamental active equity strategies.

Turning to flows by asset class and excluding quantitative strategies, we saw total net client cash outflows of less than $1,000,000,000 and inflows into illiquid alternatives and multi asset and fixed income were offset by outflows in certain equity strategies. In alternatives, we reported net inflows of 3,000,000,000 driven by strong continued demand at our private markets affiliates, particularly at Pantheon, where we saw significant fundraising momentum in infrastructure and regional primary strategies. EIG, which completed capital raising for its fifth private debt fund, and Comvest, a non sponsor backed direct lending where our distribution team is playing a key role in fundraising. The significant dry powder from recent capital raises across each of our illiquid managers will enable them to continue to put money to work at attractive return levels in the current environment. We also continue to see strong client demand and corresponding inflows in relative value fixed income strategies at Capula and Garda as a result of their strong near and long term track records and in light of recent opportunities to capitalize on market dislocation.

And we are seeing client interest in thematic investments as well as volatility focused strategies, including currency and global macro. Moving to global equities, we reported outflows of 3,700,000,000.0, driven primarily by global developed strategies as clients continue to grapple with market uncertainty and adjust risk levels in their portfolios. Several of our largest affiliates in this area, including Harding Lovenor, Genesis, and Veritas, continue to generate strong performance across a number of global and emerging market strategies. US equities showed stability in the quarter with net outflows of 500,000,000. Our investment performance in this category has significantly improved over time, and today, 70% of assets under management are outperforming benchmarks on a five year basis.

Several

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of

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our fundamental managers, including Yachtman and River Road, are building new business momentum given their strong and improving long term performance track records. Finally, in multi asset and fixed income, we generated $400,000,000 of net inflows in the quarter, driven by continued positive momentum in fixed income products at GW and K and Artemis. This area of our business continues to drive steady recurring growth and remains well positioned for the future. Now turning to financials. For the second quarter, adjusted EBITDA of 162,000,000 included $4,000,000 of performance fees and declined year over year as a result of the pandemic's impact on average AUM levels.

In addition, the shape of our flows and the impact of the resulting mix shift on revenue, lower performance fees, and accelerated share based compensation also contributed to the change versus a year ago. Economic net income of $130,000,000 benefited modestly from lower cash taxes and economic earnings per share of $2.74 reflect ongoing share repurchase activity. Now moving to specific modeling items. We expect adjusted EBITDA in the third quarter to be in the range of 170,000,000 to $175,000,000 based on current AUM levels reflecting our market blend, which was up 2.5% as of Friday, and seasonally lower performance fees of $1,000,000 to $5,000,000 Our share of interest expense was 22,000,000 for the second quarter, and we expect third quarter interest expense to be approximately 23,000,000 Our share of reported amortization and impairments was $86,000,000 for the second quarter. In the third quarter, we expect this line item to be approximately $50,000,000 Our effective GAAP and cash tax rates of 313% respectively were lower in the second quarter primarily as a result of one time tax benefits.

For modeling purposes, we expect our GAAP and cash tax rates to be approximately 2518% respectively going forward. Intangible related deferred taxes were negative 3,000,000 in the second quarter, primarily given the impact of amortization and impairments, and we expect intangible related deferred taxes to return to more normalized levels in the third quarter of approximately $6,000,000 Other economic items were negative $16,000,000 and included mark to market impact on GP and seed capital investments. In the third quarter for modeling purposes, we expect other economic items excluding any mark to market impact to be 1,000,000. Our adjusted weighted average share count for the second quarter was 47,300,000, and we expect share count to be approximately 46,500,000.0 for the third quarter. Finally, turning to the balance sheet and capital allocation.

Over the past several months, given market uncertainty, we've remained prudent by building liquidity, extending duration, and enhancing flexibility to position the company for future growth. During the quarter, we took advantage of the strong investment grade market to issue $350,000,000 of senior notes at a 3.3% coupon rate, the lowest financing cost in AMG's history on a leverage neutral basis. We continue to have access to substantial liquidity, including the free cash flow generated by our business, our $1,250,000,000 revolver, and proven access to capital markets to fund growth investments going forward. We repurchased 50,000,000 of shares during the quarter and expect to repurchase at similar levels in the third quarter, subject to forward prospects for new investments and market conditions. We remain highly selective and disciplined in our approach to capital allocation, evaluating all investment decisions under a common framework, whether that be assessing a new investment prospect, accelerating growth in an existing affiliate, adding resources to support our centralized services, or repurchasing shares.

We remain focused on capitalizing on our core differentiators and competitive advantages as we execute against our strategy to drive long term earnings growth and shareholder value creation. Now we are happy to take your questions.

Speaker 0

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Thank

First question comes from the line of Robert Lee with KBW. Please proceed with your question.

Speaker 5

Great. Thanks. Good morning, everyone. Maybe, Tom, can we maybe drill into that? I appreciate the color on kind of the flow mix.

If we were to think of that in terms of its cash flow contribution, should we be looking at, do you think, kind of a positive EBITDA contribution from the flow mix given that the vast, vast bulk of the outflows is only 5% of EBITDA, so it kind of suggests that on EBITDA basis, a positive organic growth.

Speaker 3

So thanks for the question, Rob. It's a little hard to hear you there, but I think I got all of it. Let me try and answer it from a couple of different angles. One, I'll just give you a little bit of color on flows and then try and kind of come right at it directly. But maybe just to start overall on flows, consistent with what we've seen in past quarters, as I said in my prepared remarks, 95% of those outflows were driven by quantitative strategies, now contributing less than 5% of our EBITDA on a run rate basis.

Obviously that EBITDA contribution numbers come down quite a bit over the course of the last couple of years. As Jay noted in his prepared remarks, given the fact that these strategies do represent, 25% of our AUM, we expect to see a continued flow pattern on the asset side that is fundamentally disconnected from the overall impact on earnings. To answer your question more directly in terms of kind of what's happening beneath the surface, I think the impact of what you've suggested with respect to quant is the right way to think about it. Certainly the asset flows that we're seeing in quant are not having nearly the impact on EBITDA that the quantum of those asset flows would suggest. With respect to the rest of the business, there are a few positives and then there are also a few, I guess what I'd call mix oriented headwinds that we're experiencing.

On the positive side, certainly the inflows we're seeing on, illiquid alternatives, private markets, relative value fixed income, are very positive in terms of their contribution to EBITDA over time. In this quarter in particular, you did see a little bit of an elevated number, around global equity outflows. And as I think you know, in the global equity space, those do tend to be some of our consolidated affiliates where we have a larger ownership percentage. So we do have a little bit of mix, working against this there just in terms of businesses we own a larger percentage of it, relatively high fee rates where we've seen some outflows. So I think overall, certainly the picture in terms of the organic base fee impact or the organic EBITDA impact is significantly better than what we're seeing on the asset side, but there are a number of moving parts that are kind of happening beneath the surface.

With respect to kind of the forward look, I would say that we continue to believe that this is a time when independent active managers can really help clients to navigate market uncertainty and deliver significant alpha that we believe should translate to flows across a number of areas of our business over time. And when you look at the overall shape of our affiliate base performance track records, as well as our ability to add new and growing affiliates through new investments over time, we're very confident that we're positioned to deliver strong organic growth in the future, both on an asset basis, as well as on an EBITDA basis, you know, obviously once we were able to work through some of these quant headwinds.

Speaker 0

Thank you. Our next question comes from the line of Chris Shutler with William Blair. Please proceed with your question.

Speaker 5

Hey guys, good morning. I wanted to follow-up on the point there about the global equity bucket. Maybe just provide a little more detail there, talk about the reasons for the elevated outflows and what the outlook, as you look at the pipeline, appears to be.

Speaker 2

Hey, Tom. Do you want

Speaker 6

to give a little bit more detail, and then I'll speak more broadly?

Speaker 3

Sure. Thanks for your question, Chris. So a a couple things happening here. First, I'd say overall, you know, the the gross flow picture in global equities has been relatively consistent. What we've seen, you know, particularly this quarter was really more on the redemption side, you know, and in particular a bit of a pickup, on the retail side where we had a couple of idiosyncratic outflows, one related to a change in a model allocation that didn't really have any performance impact and things of that nature.

At high level, we do have a number of managers who are delivering very strong performance across a number of different strategies, both in terms of global and emerging markets. We feel good about the long term prospects there. We feel good about the overall environment for active and the quality of some of the client conversations that we're having. You know, we kinda just did see on the fundamental side, as I said, a couple of idiosyncratic things there, you know, that were happening this quarter.

Speaker 6

Yeah. And and I Tom started to pick up on where I was gonna go with this, Chris, and thanks for your question. We do have very, very good three and five year numbers across a a broad array of global managers, including Harding Lovenard, Genesis, Veritas, Tweedie Brown. So performance is good. Obviously, this was a unusual quarter, you know, by by its nature, global pandemic slowdown.

We have seen a a pickup in in dialogue and activity. We we feel very good about our global products. We feel very good about the brands in the global, space for us. And as investors increasingly look to active managers to lead them through this environment. We do we do see that global is a is a key element of of our of, you know, of of our contribution to to cash flows and and our success going forward.

Speaker 0

Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.

Speaker 7

Thanks. Good morning. So just to follow-up on that, I was wondering if you could talk about shorter term performance. Slide seven gives us three and five year numbers. Can you talk about the one year performance for either Global Equity or U.

S. Equity?

Speaker 6

Yes. Thanks, Dan. I'll take that. Tom, if you have anything to add, I'll I'll I'll pause for a moment. You know, our, performance, especially on The US equity, has improved, pretty significantly, including in the short term, period, but over the three and five year as well.

Yachtman, River Road, Butel, would be three that I would highlight, for you. You know, we've had over, really the last five, seven years, we have had difficulty on the flow side with U. S. Equities, but it was off the back of mixed performance. Our performance has greatly improved on The U.

S. Equities side. I think that is, that that bodes well for our positioning going forward. Obviously, and I think, most people know this about us, we have a slightly higher concentration in value, and so that, has been the longer term story, the five year, seven year story. But in this most recent period, we have seen our affiliates distinguish themselves.

The volatility has been good for active management, especially for a number of our affiliates. And, and and we've seen that play out in the numbers. Our year to date, performance, from a distinguishing perspective, it it spans not only US equities, global equities, but also alternatives. We saw Garda and Capula put up very strong numbers year to date. We have as well, who's had very, very strong numbers in first quadrant.

So we we've seen a number, frankly, a large number of our affiliates distinguish themselves in the year to date period.

Speaker 0

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Speaker 2

Hi, good morning. Thanks for taking the question. Quick follow-up on the quant business. Appreciate all the incremental color on both flows and EBITDA contribution. I believe AQR is the only profit share affiliate you guys have at this point.

So maybe can you walk us through what profitability there looks like, EBITDA margins or anything like that? And with risks of continued outflows there, would you potentially, navigate and maybe shield the holding company from EBITDA pressure there if it does slip into negative?

Speaker 6

Alex, it's it's Jay. I'll take that. Thanks for your question. Look. We talked about HR, quite a bit in the last several quarters.

You know, I'll just start by saying, Cliff, John, David, the rest of the partners there are very focused and aligned. We do have a profit interest, as you point out. And as Tom mentioned in or I mentioned in my prepared remarks, the contribution of all of our quant strategies is less than 5% of our EBITDA. You should you should be able to do that calculation for yourself. But if you assume AQR is a large percentage of that, 4% of EBITDA translates into $3,040,000,000 dollars of profit.

And then more broadly, you know, as we look at, our affiliate diversification and as we have, you know, a structural element to our model, we are aligned directly with, with the partners there, which means that, you know, that the distributions to all partners, including us, come out before, you know, come out, after the expense base of the business, but before any other partner distribution. And then as it relates to to all of our affiliates, we have individual partnership structures at each at each entity. So, you know, the the the contribution of of of AQR to us has really the the decline has already been felt in our numbers.

Speaker 0

Thank you. Our next question comes from the line of Ryan Bedell with Deutsche Bank. Please proceed with your question.

Speaker 8

Great. Thanks very much. Good morning. Just maybe just to go

Speaker 4

back on the on

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the quant side. Appreciate the commentary on some of the steps there with 25% of AUM from QuantStrategy. Maybe if you can talk about what you believe is the remaining AUM contribution and EBITDA contribution from strategies that you think are most at risk of continued outflows that you cited near term just to get a sense of sort of that trajectory? And then maybe long bigger picture, as you look for investment strategies to invest in in the future, have you soured on quant altogether at this strategy? Or are there still appealing elements of other quant strategies in the marketplace that you might want continue to invest in down the road?

Speaker 6

Yes. Thanks, Brian. So I'm not sure there's anything more to say. I think we've covered it very well, both from the prepared remarks and the Q and A. Contribution is in that 3% to 5% range, and I think that's the key metric to stay focused on in terms of, in terms of that exposure.

The other, 95% to 97% of our EBITDA contribution, You know, there's a lot a lot of good things going on in that, that, contribution. We've got a pretty strong, orientation towards illiquids, with Pantheon, EIG, Baring Asia, as well as most recently, Convest. As you heard in the quarter, we have, been successful through our own succession planning at ValueAct to partner with a new entity, NCAP, which is focused on impact investing. I would would like to just mention that that area is an area of focus for us. This is our first investment in a business wholly dedicated to responsible capitalism.

And we do believe that this is an important time, in the asset management industry, as capital allocation to support long term environmental, social, governance considerations is is going to be a a key sustainable, theme over the next decade. So this, this is, you know, momentous for us in our in our development. More broadly, we see a number of our affiliates being leaders in sustainable investing, most notably Pantheon is a leader in responsible investing in the illiquid space. And then more broadly, you'll see that, we have a number of affiliates that have started or are continuing to develop, products, in this space, including EIG, who has a a renewable energy product, as well as a number of our other affiliates where we have actually seeded products. So we see that as a a sustainable theme.

Fixed income alternative products, as Tom mentioned, have been a highlight for us. Gorda and Capula, both significant flows. But away from, businesses, you'll see that we've had, flows in GWK, fixed income products, and more and more broadly, at AQR and their fixed income products. So, you know, when you look at the 95% of the EBITDA contribution, there's a lot of growth there. And as we transition from a mix perspective, away from quant, you'll see the the the growth driving through the numbers over time.

Speaker 0

Thank you. Our next question comes from the line of Bill Katz with Citi. Please proceed with your question.

Speaker 4

Okay. Thank you very much for taking the question this morning. Good morning. And just passing along my condolences again to the AMG family. Just a question maybe moving away from some of the flow stuff.

Just in terms of capital, maybe a little bit more around the debt raise now. And then as you think about acquisition opportunities, what are maybe the one or two areas you're focused on as you look ahead? Thank you.

Speaker 6

Tom, why don't you take the capital first, and I'll come back on the investments.

Speaker 3

Sure. So thanks for your question, Bill. Why don't I give you a little bit on the bond issuance and then maybe also just more broadly around capital. So I I put the bond offering itself sort of squarely in the camp of us having a constant focus on enhancing our balance sheet and improving our long term capital flexibility. We had a good opportunity to extend duration at a very attractive time in the market by issuing a ten year bond.

We use those proceeds to pay down our outstanding revolver balance and a portion of our term loan, while also enabling us to hold some excess cash on the balance sheet at a bit of a more challenging time in terms of overall market uncertainty and also where we see opportunity. If you kind of put that in the context of our overall capital allocation framework, we're highly focused on allocating our resources to the areas of highest growth in our business. We And continue to believe that new investments when priced and structured appropriately represent the best use of our capital. And I know Jay will talk a bit more about that. All of our capital allocation decisions are running through a common framework to ensure that we're earning an appropriate risk adjusted return for our shareholders and making the best long term decisions for our business.

And in the current period, we are operating with a bit more caution, just as we see the significant amount of uncertainty that existed in the market, as well as based on our past experience that taught us that these periods of market dislocation can create unique opportunities. And we want to ensure that we're in a position to be front footed when those opportunities present themselves. And so we are holding a little bit of extra to to ensure we're prepared for that. So Jay?

Speaker 6

Yeah. And I'm just picking up on the on the new investment side, maybe maybe three points. One on market market environment, market opportunity, and then the secular growth trends that we're pursuing, and then just discipline on pricing. So first on the market environment, you know, this this is a uncertain time. We've been through, times like this before.

We've seen a pretty sharp rebound in in market environment, in the last forty five days, really. With that has come, a rebound in our own, you know, prospecting pipeline. We're staying cautious, obviously. It's been a a unusual year. Opportunities to come out of this volatility, and that has been, based on our own experience, and we're staying close to the opportunity set as we move forward here.

So we think opportunities come out of this market environment. And then the second thing that I would say is we are very focused on those areas of secular opportunities. We talked about them as it relates to our own existing affiliates, just a moment ago. But I would say that applies also to new investments, you know, continue to prospect for illiquid managers as allocations by global clients continue, to grow in the illiquid space. Fixed income alternatives, and it's important to stress the word alternatives, given the low rate environment, finding opportunity in relative value, for example, is a is a key area.

ESG, would be another, another example. And then fundamental high quality, active managers, a a fourth bucket. So that would be secular opportunities as well as the individual characteristics, I think, that we're looking for in independent partner owned firms. And then lastly, I think over the over the past, two transactions that we've done, we've we've, enhanced our focus on on structuring. Clearly, pricing is, something that people focus on when you when you think about, you know, how much did you pay, what is that relative to your opportunity cost.

I think the thing that, or the the element of a of of new investments that that people don't talk about is structuring. You know, have you structure for, more outcomes, that that provide the right risk reward framework. And to that, the answer is yes. We've enhanced our own, discipline around structuring, and I think having that, in the last two transactions has played out well for us. As I mentioned, both Garda and Comvest, are performing sort of above our own expectations, and, and we're structured in a way that, it was designed to to to find you know, to to allow us to be in the position that we're in today.

Speaker 0

Thank you. Our next question comes from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.

Speaker 9

Good morning. Thanks for taking my question. It sounds like you've hinted a couple of times about the potential for increased interest in kind of traditional active strategies. But we aren't really seeing that in kind of the broader industry mutual fund flow data. So do you think this is a trend that's going to be more on the institutional side coming out of the recent volatility, so a net benefit to those managers with a bigger institutional mix?

Through that lens, could you maybe broadly frame the one but unfunded pipeline you're seeing relative to last quarter or last year?

Speaker 6

Yes. Thanks, Patrick. Thanks for your question. Yes, I do think it has, you know, the the statements really were more around institutional than retail. I think retail tends to react, more to market, swings as well as historical performance.

And I do think that we, are seeing, you know, our discussions pivot towards active being, more important in portfolios, institutional portfolios in in the forward environment. It is a it's a bit tough to to predict because obviously the, work from home environment did cause a a slowdown in terms of of, getting through due diligence processes, and getting through contracts when everything went virtual. So I do think, it's it's harder to predict than it would be in a normal environment. But we think that the, the orientation, of of active being, important in portfolios during a period of extreme volatility, is something that we we see as a theme. And as it relates to, you know, one, but unfunded, we you know, in in terms of our own pipeline, I'll just say more broadly, we have seen a pickup of activity in, again, the last thirty to forty five days in terms of conversations.

And in particular, where, there was a bit of a slowdown in the first part of the quarter, I'll I'll use illiquids as an example, because it's a longer tail due due diligence process. We have seen material closings in the quarter, right at the end of the quarter, and I think that bodes well for the rest of the year.

Speaker 0

Thank you. Our next question comes from the line of Mike Carrier with Bank of America. Please proceed with your question.

Speaker 10

Hi. Good morning. Thanks for taking the question. Just a cleanup on the flows. So any significant fundraising on the horizon, given some of your illiquid affiliates?

And then just on the deal front, just wanted to get an update on what you're seeing in terms of sellers' willingness to transact and maybe pricing, you know, in this,

Speaker 6

you know, uncertain backdrop. Thanks a lot. Okay. So those are those are two different questions. I'll see if I can hopefully, I'll get both of them.

Tom will help me if I if I don't. On illiquid fundraising, obviously, there's, we have to be careful. There's some regulation around talking about fundraising. We do have a number of affiliates that have opened fundraising, in the current period and through the rest of this year. Those fundraisings are ongoing.

I would say, in all cases, they've been going well or even better than expected. Although, there has been a couple months' slowdown, but we continue to see fundraising, that is strong. We do we also see at the towards the end of this year, early part of next year, a number of new, planned, campaigns. And so we will see additional fundraising start at the end of this year go into, well into 2021. So I guess the, the calendar of illiquid fundraisings continues to be strong for us, and, and in some of our most notable prod you know, products across infrastructure, for example, as well as the the private credit of of Comvest.

So so that's on the on the illiquid fundraising side. You know, pivoting to your other question, different question on, on the new investment side. The, as I mentioned in my prepared remarks there too, we have seen a pickup, a rebound, I guess, would say, in discussions. We have a number of of prospective of partner owned firms in our pipeline that we've had long standing proprietary relationships. I, you know, I might just point out that in this environment, existing proprietary relationships are key, both from a new investment perspective, but also a distribution perspective.

Leveraging those proprietary relationships, continuing the conversation, and being able to transact in a work from home environment, is something I think we can do and may be unique to us. And so that is an opportunity that I'd like to point out. As it relates to buyers and sellers coming together, clearly, this volatility, while it creates uncertainty, it also creates fresh perspectives. I think that gives us an opportunity in some cases to come together. And obviously pricing for, the right returns, returns for all of our stakeholders, including our shareholders, is is is critical.

We talked about pricing and being disciplined on pricing, and having structures that that, will allow us, to experience returns, appropriate over a series of outcomes. Those are all things that we are doing, and that is acceptable in many cases to the sellers. And I think there is, an optimism here that we will be able to continue our pace of Garda, Convest,

Speaker 2

and and

Speaker 3

And maybe I can just add actually a point to each of the things that Jay just went through. On the first around our private markets franchises, remember that each of those businesses in and themselves are pretty diverse businesses with a number of different product lines and areas. And then when you think across the totality of those businesses, it looks like a very diverse overall business. So it's not an area where we're dependent on one single fundraise in any given year that kind of drives our year. It really is a pretty consistent having products in the market, long term client relationships and the like.

Everything that Jay said around the environment, I think is relevant there. Secondly, just with respect the new investment opportunity, I'd bifurcate a little bit also that there are a lot of firms who are in the market today who see opportunity in this environment and are actually more focused on looking for growth capital today. So, Jay, I don't know if maybe you wanna spend just a a moment talking a little bit about growth capital and and the way we're pivoting there as well.

Speaker 6

Yeah. That's a very good point, Tom, and and appreciate you raising it. As Tom mentioned, importantly, our dialogues with potential new investments are expanding beyond just, you know, succession and liquidity driven transactions. That is something that is important, in in the, longer duration of any, partnership that we do, and it's present in in all partnerships, the our capabilities on succession planning and liquidity, planning. But as Tom mentioned, what we're seeing is opportunities to deploy strategic capital into new investments, as well as in existing affiliates that we we highlighted.

But but just staying focused on new investments, what does that mean? You know, making an investment in a business that is looking to accelerate their growth by putting capital directly onto their balance sheet. These would not be, liquidity transactions, but more to accelerate the growth. And AMG would would direct, would would invest for its ownership stake onto the balance sheet partners, then would use that capital to leverage it in their either new product development or an existing product to scale. That's what happened here in Comvest, is a is a good example.

And that is a reasonable portion of our current new investment pipeline. And when you think about that, our ways to help affiliates, grow, we can do that at the time of a new investment, or we can do that as affiliates bring us opportunities, in in their existing business. And using Pantheon as example, I mentioned that we invested strategic capital four years ago to launch their forty Act fund, their CIT, and to support their efforts in the the wealth and individual channel and and private equity. We put capital in. That capital has been returned to us because that those products have now scaled.

And as as you all know, the, the most recent, DOL, letter that was, recently released, while limited in scope, we believe this is a significant milestone foreshadowing a shift in attitudes, and in access of of illiquids in the individual retirement and wealth channel. That was an example, where we used our own strategic capital to accelerate an existing affiliates opportunity set. So we see that happening in new new affiliates and existing affiliates. And and so I would expect that some portion of our our new transactions will include this this type of strategic capital.

Speaker 0

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to mister Horgan for any final comments.

Speaker 6

Thank you all again for joining us this morning. As discussed, we are excited about the compelling opportunities ahead, and we will continue to leverage our core strengths to further enhance our competitive position and create shareholder value over time. I hope everyone remains safe and healthy, and we look forward to speaking with you next quarter. Thank you.

Speaker 0

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.