Affiliated Managers Group, Inc. (AMG) Q1 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Affiliated Managers Group First Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Ms. Alexandra Lynn, Vice President of Corporate Strategy and Investor Relations for Affiliated Managers Group. Thank you. Ms. Lynn, you may begin.

Thank you for joining Affiliated Managers Group to discuss our results for the first quarter of 2012. 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-K and other filings we make with the SEC from time to time. We assume no obligation to update any forward-looking statements made during this call. AMG will provide on 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 the reconciliation of any non-GAAP financial measures to the most directly comparable GAAP financial measures. With us on the line to discuss the company's results for the quarter are Sean Healey, Chairman and CEO; Nate Dalton, President and Chief Operating Officer; and Jay Horgen, Chief Financial Officer. And now I'd like to turn the call over to Sean Healey.

Thanks, Ally. Good morning, everyone. With Economic earnings per share of $1.58 for the first quarter, AMG is off to an excellent start in 2012 with strong execution across all aspects of our growth strategy, including 2 new Affiliate investments, strong performance of our products and outstanding organic growth from net client cash flows bringing our total pro forma assets under management to just under $400 billion. This was our eighth consecutive quarter of strong positive flows with over $7 billion in net inflows and $24 billion in the past 12 months. Our net inflows into a broad array of return-oriented strategies are particularly notable in a period were industry flows are being concentrated in fixed income and passive products. We continue to benefit from our strategic focus on highly attractive product areas, especially global and emerging market equities and alternatives, as well as the under -- the ongoing success of our global distribution strategy. Affiliates such as global and emerging market equity managers: Tweedy, Browne, Genesis, Harding Loevner, Trilogy and Artemis; and alternative firms: Pantheon, AQR, BlueMountain and ValueAct are all leaders in their respective disciplines, with outstanding track records of investment performance and prospects for continued organic growth. Our results reflect the strong -- the continued strong execution of our global distribution strategy as our Affiliates are winning new business and market share through both affiliate-level marketing efforts as well as by leveraging our global platform, which enhances the presence of our Affiliates across channels and geographies. Given the ongoing success of our strategy, we continue to build out our institutional and retail platforms worldwide through the opening of new offices and the addition of key personnel in existing coverage regions. As investor risk appetite inevitably returns around the world, our Affiliates are uniquely positioned to benefit, and we're seeing numerous opportunities for continued strong organic growth ahead. Turning to new investments. We're very pleased to have recently announced investments in 2 new Affiliates which are industry leaders in their respective areas. Yacktman Asset Management is an outstanding concentrated value equity manager with a tremendous long-term record of investment performance and industry accolades, having been named Morningstar Managers of the Year and nominated as Manager of the Decade. Don Yacktman, Stephen Yacktman and Jason Subotky are outstanding investors and have built a great business, and we're excited to welcome the team to our Affiliate group. In addition, with our investment in Veritable, which is one of the nation's premier independent wealth managers, we successfully launched our wealth management business, AMG Wealth Partners, which extends AMG's proven partnership approach and succession planning solutions to outstanding wealth management firms. Partnering with a firm of Veritable's caliber is a key foundational step for our wealth management strategy, which is, of course, completely incremental to our opportunity to invest in additional boutique asset management firms. Finally, we continue to make progress across a broad range of new investment opportunities. In addition to ongoing divestiture activity from corporate sellers, we also believe that demographic trends, coupled with the prospect of rising tax rates, will result in increasing transaction activity among independent firms through the balance of 2012 and beyond. We believe that AMG is positioned as the partner of choice for outstanding boutique asset management and wealth management firms worldwide, and we're confident in our ability to materially enhance our earnings growth through accretive investments and additional Affiliates. With that, let me turn it to Nate who will discuss our Affiliates results in greater detail.

Good morning, everyone. The outstanding investment performance of our Affiliate group, combined with significant flows, made for another good quarter. As Sean said, we continue to benefit from our emphasis on global and emerging markets equities and alternative products, and Affiliates specializing in these areas continue to not only perform extremely well, but also have outstanding business momentum. Notwithstanding industry trends, which continue to favor passive and fixed-income strategies, we generated strong flows across channels, especially in the product areas I just mentioned. Net client cash flows for the first quarter were $7.1 billion, with now 8 straight quarters of strong positive client cash flows. Going forward, the pipeline looks good, and we are confident in our ability to continue to generate strong organic growth. Now turning to investment performance. In a global development markets category, we had another strong quarter, with nearly all of our global managers delivering outperformance. Our leading managers with exceptional performance include Harding Loevner, Artemis, Trilogy and Third Avenue, with the majority of their global equity fund outperforming their respective benchmarks. Tweedy, Browne missed its benchmark for the quarter but remains well ahead for the 1-, 3- and 5-year periods. We had another strong quarter in the emerging markets category, with Trilogy and Harding Loevner outperforming their respective benchmarks by 100 basis points or more. The flagship strategy at Genesis underperformed for the first time in several quarters, but remained significantly ahead of its benchmark for the 1-, 3- and 5-year periods. Turning to our alternatives product category. We had good performance among many of our largest strategies. Highlights include excellent performance from firms such as First Quadrant, AQR and BlueMountain. At First Quadrant, the firm delivered outstanding performance across its suite of strategies from taxable currency products to their data-oriented products. In addition, AQR delivered strong performance among several strategies, including a global risk premium fund and diversified arbitrage funds. While BlueMountain, the firm's flagship credit alternatives fund, continued to outperform across all time periods. Turning to our U.S. equity products. Our Affiliates delivered very strong performance. On the value side, Systematic had good performance across its product set in the first quarter. While on the growth side, it was a strong quarter, with Frontier Capital and Friess Associates significantly outperforming their benchmarks across their respective products sets. TimesSquare had mixed performance, with small cap missing its benchmark, but with their mid cap and all cap products bidding for the quarter by 50 and 180 basis points, respectively. Now turning to flows. As I said, we had another quarter of good growth, with $7.1 billion in positive net client cash flows coming principally in the global equities and alternatives areas, as well as emerging markets equities. In terms of geography, we saw positive net flows in both the U.S. and globally. In terms of flows by channel, starting with the institutional channel, we had positive flows of approximately $5 billion. Looking at the flows in greater detail. It was a quarter where we had significant flows in global equity products and alternative strategies, as well as in the emerging markets equities, with notable contributions from Tweedy, Browne, Genesis, Harding Loevner, AQR, BlueMountain, ValueAct and Beutel Goodman. Now as we all would say, flows in the institutional channel are inherently lumpy, but we were very pleased with the breadth and diversity of the flows we're seeing. With respect to the pipeline, looking forward, we continue to see positive long-term trends in terms of one business, finals and RFPs. Moving to the Mutual Fund channel. We had positive flows of $1.4 billion. Here, we also continue the positive trends we've had over the past several quarters. From a product category standpoint, we had good flows into global and alternative strategies. The flows this quarter, once again, includes strong flows in the sub-advisories channel and especially for alternative products. Now as Sean mentioned, we're very excited about our new partnership with Yacktman. We have tremendous respect for the team and their investment discipline. As you may have noticed in the announcement, following the closing of the transaction, the Yacktman funds will become part of the Managers family of funds. Being the obvious, these funds are very highly regarded and have excellent long-term track records. And we look forward to working together with the team there. Now in our high net worth channel, flows were about $700 million for the quarter. We had positive flows at Gannett Welsh & Kotler, which continues to attract flows through our U.S. retail distribution platform, as well as Harding Loevner and Third Avenue. Overall, we continue to make very good progress with our global distribution strategy. We are focusing on expanding our presence in key global financial centers, as well as attracting additional world-class sales, marketing and client service talent to help expand in the regions where we already have a strong presence. For example, as we mentioned in the release, we opened our Dubai office at the beginning of the quarter allowing us to deepen our presence in the Middle East. Now fundamentally, we're very pleased with the contribution of our distribution teams to our industry-leading flows. As you've heard us say before, we remain focused on building distribution capabilities that not only can be successful in the current market environment, but that also enable us to capitalize on the even larger opportunity when some of the macro trends turn back to return-oriented assets. In addition to the Institutional business we're building in key global financial centers around the world, we also have a retail sub-advisory platform here in the U.S. through Managers Investment Group. And as we look ahead, we see significant opportunities to grow that business as well. From a product standpoint, we will continue to focus on those areas of the market where we are already seeing strong demand, including liquid alternatives, but also for good performing global and emerging markets equities. And we continue to be focused on building out the infrastructure to capitalize on the inevitable return to performance-oriented strategies. Finally, we see a lot of synergies between what we're doing in the global institutional side and the U.S. sub-advisory and retail business. And we've begun to realize these synergies with the teams working together even more closely. Looking ahead, we are uniquely well positioned for continued excellent long-term growth, with the combination of outstanding performance-oriented boutiques and increasingly, the scope and scale in the marketplace of a $400 billion diversified asset management firm where that scale is useful. And with that, I'd turn it to Jay to discuss the financials.

Thank you, Nate. We are again pleased with our industry-leading organic growth, as well as the continued successful execution of our new investment growth strategy. The newly announced partnerships in Veritable and Yacktman, which as with all of our new investments, we expect to be immediately accretive. As you saw on the release, we reported Economic earnings per share of $1.58 for the first quarter, with performance fees contributing $0.01. On a GAAP basis, we reported earnings of $0.71 per share. The ratio of our EBITDA contribution to end-of-period assets under management was about 15 basis points for the first quarter. We expect this ratio to remain at approximately this level for the second and third quarters, reflecting both our business mix and the expected closings of our 2 new investments. And in the fourth quarter, we expect this ratio to trend upward, with a reasonable assumption for performance fees. Holding company expenses were approximately $22 million in the first quarter, and we expect them to increase modestly to $23.5 million per quarter for the remainder of the year, primarily reflecting fund merger and related deal costs at Yacktman and Veritable. With regards to our taxes, our effective GAAP tax rate for the first quarter was 35.7%, and our cash tax rate was 13.7%. For modeling purposes, we expect our GAAP tax rate to be about 35% going forward, and we expect our cash tax rate to be approximately 13% for the second quarter and then to trend upward during the remainder of 2012 with organic growth and performance fees. Intangible-related deferred taxes were $9.9 million in the first quarter, and going forward, we expect intangible-related deferred taxes to remain at approximately this level. With reported amortization of intangible assets of $30.4 million, our share was $26.8 million, and together with $8.2 million of amortization from Affiliates accounted for under the equity method, AMG's controlling interest portion of amortization was $35 million. We expect our amortization to remain at this level going forward. For the first quarter, our portion of the total interest expense was $19.6 million, which included noncash imputed interest of $1 million pretax. We expect our total interest expense to remain at approximately this level for the second quarter. Turning to our balance sheet. We expect to close Veritable at the end of the second quarter and Yacktman in the middle of the third quarter. These transactions will be funded with a combination of borrowings under our revolver and available cash, leaving us with ample capacity to continue to execute on our new investment growth strategy. Now turning to guidance. We are raising our 2012 guidance as we expect Economic earnings per share to be in the range of $7 to $7.70. This range includes the partial year impact of our new investments in Veritable and Yacktman, net of fund merger and related deal costs. Our guidance also assumes our normal convention of actual market through yesterday, with 2% quarterly growth beginning in the third quarter and a weighted average share count of 53 million shares. The lower end of our 2012 guidance includes a modest contribution from performance fees and organic growth, while the upper end of the range assumes a more robust contribution for performance fees and flow expectation. As always, these assumptions do not include earnings from future new investments other than Yacktman and Veritable and are based on our current expectation of Affiliate growth rates in performance and the mix of our Affiliate contribution to our earnings. Of course, substantial changes in markets and the earnings contribution of our Affiliates would impact these expectations. Now we will be happy to answer questions.

[Operator Instructions] Our first question comes from Daniel Fannon of Jefferies & Company. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: Nate, just to talk more about the flows and kind of the context. It seems like obviously a very good quarter for flows, and then the backlog still looks good. Is there a way to kind of characterize that maybe versus a year ago or even last quarter? Just kind of give us some context.

Sure. So I think -- broadly, I think you captured it, which is we've had a series of pretty good quarters here from a flow standpoint sort of in a range. I think if you looked at the pipeline today maybe versus last quarter and obvious caveat supply right early in the quarter, all that kind of stuff. But if you look at the pipeline this quarter versus last, I'd say it's running about the same. I mean there's a lot of -- obviously, a lot of moving parts to it. But I'm sort of describing across our fees, finals and all that, as well as one business. And I'd say probably it looks about the same. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: Okay. That's helpful. And then, I guess on the performance fee outlook, Jay, if you could talk and also kind of characterize that. I guess, maybe we started out last year with the markets pretty strong or we've seen that start again this year. I guess, is it -- as you look at kind of the potential for 2012 and the contribution from performance fees, how diverse is that? And I guess, is it much different than where we were a year ago?

Sure, Dan. So our guidance of $7 to $7.70 really reflects primarily the update to market and flows as well as the partial impact -- partial year impact of deals. There is no fundamental change in the view on performance fees within the model of the guidance that's given, mainly because it's still early in the year. Having said that, we see great diversity in our performance fee opportunity, and we are experiencing flows into performance fee products. So we feel good about the prospects there.

Our next question comes from the line of Bill Katz with Citigroup.

When you look at the pipeline for new business, I'm just sort of curious. Is there any shift in the appetite in terms of what you're seeing? Or is it still heavily centered on the emerging market and the alternative platform?

Yes, I think the 3 buckets we talked about as places we've seen strong demand and continue to see strong demand are the 2 you mentioned, the alternatives and emerging markets, but also the global equities category, we are seeing strong demand. I think some of that is sort of at a macro level, and then I think some of it is just we have some very good products that we're bringing into new geography and channels. So I'd say those 3 buckets, we continue to see strong demand. And then the other things, places like U.S. equity kinds of products, it is more sort of episodic or idiosyncratic where we see demand. But those 3 buckets: global, emerging markets and alternatives the places we've been seeing strong demand and continued to.

The reason I was asking is I think last call you mentioned that 100% of volume came from outside the United States, and this quarter, in your prepared remark you said it was both U.S. and non-U.S. So apologize for running on the question.

No, no, no. Maybe let me clarify. So I think what I just described was product categories and product geography, meaning where the flows are coming from. You're right, last quarter we did say more than 100% were outside the U.S. in terms of where the clients' assets are located. This quarter, that was more balanced coming both outside the U.S. and also good -- some good flows in the U.S. But those flows in the U.S. tended to be in those product categories I mentioned, global, emerging markets and alternatives.

That's very helpful. And then just on the deal front, obviously, you had 2 behind you now. And Sean, you mentioned that there's material opportunity until '12 and '13. Where are we are in terms of the wealth succession? Is the deal patter still pretty high? Or now with these 2 deals behind you, are things a little bit cooling off but yet the long-term pipeline is still pretty healthy?

Well, I would say we don't expect to announce a deal a month, but we feel very good about the pipeline and all of the underlying trends that we've been describing are very much in place: very favorable M&A environment, where our competitive position is stronger than ever; ongoing divestiture activity, especially by European banks, but not exclusively; and then, this wave of demographically-driven succession transactions, which we are seeing now and we expect to continue for the medium term at least. And that reflects simple demographics, lots of great firms where the founding principals are nearing retirement age and where they're looking to execute a transaction which helps manage the firm's succession and transition issues and provide a solution. And I think the prospect of rising tax rates is an additional catalyst to accelerate some of those transactions. But overall it continues to be a very, very strong pipeline.

Our next question will comes from the line of Michael Kim with Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Just a follow-up on the deal pipeline. Can you just talk about the extent to which you're really starting to leverage the global distribution platform as it relates to sourcing deals? So if you think about Yacktman, obviously, it had scale, differentiated investment approach and was generating very strong flows and very strong investment performance track records. So how much of a role did that opportunity to really broaden out their distribution reach plan to the partnership because it seems like they were obviously doing very well on their own?

Sure. I would say prospectively, it's hard to measure, but I think the addition of or the enhancement to our global distribution capability, both institutionally and increasingly as Nate said, on a retail basis through retail channels is helpful. It's never going to be a reason that somebody signs up with us, but the tone and tenor of the conversations that we have with new investment prospects are quite different than they were, let's say, 5 years ago where people really -- the results of our distribution and the strength of our organic growth is obvious. I mean, we're generating industry-leading organic growth going on 2 years now. And so it's not just investors that are nosing that prospect, prospective Affiliates appreciate the opportunity. But in the event, we're always partnering with outstanding firms that are generating strong growth. They believe in themselves. They want to keep direct equity in their own firm. And so the opportunity to enhance their growth is always viewed as incremental. So helpful but not essential, I think. We're going to have a great long-term run here of new investment opportunities, which hopefully we can execute on, and the track record is incredibly important to that but our distribution is also helpful. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Got it. And then, maybe a question for Jay. I know you still have ample capacity on the revolver and continue to generate a lot of free cash, but now that you're going to put some capital work related to the new 2 recent transactions, if more deals were to materialize over the course of rest of the year, how would you be thinking about funding any incremental transactions?

So Michael, we do have ample capacity even after these transactions. We have about $150 million of holding company cash, in addition to the revolver as you mentioned. Some of it would depend on timing, but I don't think we have any constraint with respect to funding transactions, whether it's on our current revolver or it's in the capital markets transaction.

Our next question comes from Chris Shutler with William Blair. Christopher Shutler - William Blair & Company L.L.C., Research Division: Nate talked about the fact that you see a lot of untapped opportunities with Managers Investment Group. So maybe you could just expand on that a bit and give us a few examples.

Sure. So I think we talked about the opportunities with Managers Investment Group in a couple of different dimensions, right? So one is the opportunity to keep executing or to, honestly, improve execution in the current market environment. So I think there's some product categories, global and emerging, we talked about liquid alternatives is a place where we are really distinguishing ourselves. Both First Quadrant as well as AQR are doing well there, both on their own and through Managers Investment Group. There's an opportunity to continue to do more there in product development and also, to bring the expertise we're developing with liquid alternatives there to a broader set of products. As you know, we have a wide array of alternative products. So that's one sort of example of this specific alternative -- specific opportunity. There are also sort of channels where I think we could be -- we could certainly build a much stronger presence, the D.C. channel is one. Some of our Affiliates participate there. We do some work there with our Affiliates through Managers Investment Group. But honestly, there's a relatively large opportunity that we haven't yet built out there. And there's some natural leverage between the work we do elsewhere, both at Affiliates and then also our distribution in terms of firms on ITB [ph] side, in terms of what we're doing with consultant sides. There's a bunch of leverage opportunities in there, and that I think I mentioned in the prepared remarks. But broadly, there's a real opportunity to capture the synergies of and leverage between what we're doing in global institutional and the relationships we're building with consultants and others there. And what we're doing in the retail market in the U.S. So I hope that gives you some flavor both short-term and long-term.

And I would just add to that, Chris. As we all know retail flow trends in the U.S. continue to be very strongly in favor of passive and fixed-income products. Active equities continue to be in net redemption, and all of us in the industry are anticipating that there will be a re-risking by U.S.retail and I would say also institutional investors. But we really haven't seen that yet, and so the strong traction and good results that we're really already seeing in the retail space through the managers' platform and as we build out further the capabilities is all sort of against a difficult backdrop. And to the extent and the point that we see substantial re-risking and flows into return-oriented product, we think we're very, very well positioned for that. And all of that will be highly incremental to what we're seeing so far. Christopher Shutler - William Blair & Company L.L.C., Research Division: Okay, great. And then, in terms of the pipeline, maybe just zeroing in on the wealth management opportunity for second. I'm just wondering, after Veritable, has that deal generated more inbound calls from prospective Affiliates? Just what -- any kind of color you can provide on what's happened since that deal was announced?

Well, there's no question that it has generated some inbound calls and more importantly, with the really high-quality firms that are out there that -- where we've been working to build relationships. The decision by a firm, the quality of Veritable, which clearly could have chosen from anybody they wanted, would be interested insisted with partnering with Veritable. Choosing AMG Wealth Partners is such a ratification of the quality of our team and of our approach that it is incredibly valuable and a great calling card to go out and continue and deepen conversations with firms, which, in almost all cases, have the same kind of inevitable demographically-driven succession needs that independent boutique asset management firms do. So we're very well-positioned looking forward, and there's no question that the Veritable investment was a huge help, but they've got a great pipeline going. Christopher Shutler - William Blair & Company L.L.C., Research Division: Great. And I just -- one final housekeeping questions on the flows. I apologize if I missed this in the prepared remarks. But were there any noticeable client concentration issues in the flows of the quarter?

I think the only ones are the ones you would -- do you mean specific large mandate that moved it? Christopher Shutler - William Blair & Company L.L.C., Research Division: Yes, that exactly.

Nothing I think I would call out. No, nothing at all.

Our next question comes from Alex Paris with Barrington Research.

Just a couple of follow-up questions, diving a little deeper. On flows for example, we all know what the flows have been like in U.S. actively managed equities over the last year. And just trying to identify maybe a bottom at some point before investors begin to re-risk their portfolios. What do gross inflows look like? Have they been improving in your experience? Or similarly, what about growth outflows, has that flowed at all?

So let me do this in 2 parts, right? So I think the first part is, as you heard Sean say, we think there is a bottom. We actually think we are approaching the bottom. But calling a specific time, we think it's a tranche here, there or the other place. I think it's just incredibly difficult to do, and it hasn't really just -- you sort of mentioned the last year -- you called out the last year, but it's been much longer. I mean, it's been several years now of that trend. So that's the first that I'd say. The second in terms of our experience, I think the challenge for us is we end up seeing our flows -- end up being determined much more by the 2 things I talked about before, which is one, obviously the performance of the specific firm; and then two, the ability to marry that performance with distribution which is bringing it into places where it will be able to sold. I mean, look, a perfect example is you have firm like Yacktman, which is doing very well and is gathering shares -- is taking market share against that backdrop you described. So our view is it's possible for -- it's demonstrably possible for excellent performing boutiques in the U.S. equity space to still do well. But I think it's very hard to call it a turn.

Yes, and it's impossible to call it. But there's no question that when it occurs, which to us all seems inevitable, setting aside the precise timing. Because individuals and more broadly, institutions can't fund their retirement needs on the levels of returns that they're getting now. And over time, the best actively managed firms, the alpha generating firms, are going to be back in favor. So we're getting this traction and good results, the share gains that Nate is describing. But there's no question that when there is broad return to risk assets, that we'll get a disproportionate benefit prospectively so long as we're continuing to execute and generate good performance.

Great. And then one other question regarding the investment pipeline. You've made 2 larger acquisitions year-to-date putting to work $350 million or more based on the typical multiples that we've seen in the past. And I think at some point, you had said either on the conference call or at a conference appearance that you thought that you could potentially put to work $400 million to $500 million this year. The first 2 acquisitions were domestic, and you have historically said that the focus of your activity has been on international and alternatives. Qualitatively, what does the pipeline look like? Are we looking more at national acquisitions or all of the above?

Well first, I'm certain that I was careful to not give a specific target for any given year because it's not something that is knowable and not part of what our guidance is. I think there is -- if you look back to a couple of years ago, where we had a good run of new investments where we've put $1.5 billion to work in about 18 months, and I described that maybe as a period that wasn't so unusual or that wasn't impossible to think of that kind of a level of activity prospectively. But we don't guide year-to-year in terms of the magnitude of new investments that we anticipate. That said, the opportunity is tremendously attractive. As I indicated earlier, our competitive position remains extremely strong, really better than ever. And the range of new investment opportunities is broader than ever. So we've got firms around the world that need succession and transition solutions. Those include not just traditional firms in the U.S. but really on a global basis, and it includes increasingly alternative firms. Hedge fund firms which 5 years ago, 7 years ago one couldn't even imagine as enduring franchises, now they're really global scale and institutional quality firms. And the founding principals are in their 50s and anticipating retirement. So alternative firms represent an increasing opportunity set. Wealth management firms, as we've discussed. Again, a new and very large potential opportunity set completely incremental to what we've been doing. And then finally, given all of the challenges in the world that the banks and other financial services firms are facing, we're seeing still a large number of divestiture opportunities, which, for a small subset of those opportunities, represent attractive new investment candidates for us. So put all that together, we're quite optimistic about our ability to generate strong incremental growth from new investments. And that's, as I said in the prepared remarks, through the balance of 2012 and beyond, we view it as a long-term opportunity for us.

Great. And then just one last related question. With the platform of Wealth Partners and the acquisition of Veritable, is it possible that we'll see smaller acquisitions which you might have called an Affiliate development acquisition in years past?

Sure. There's no question that the universe of wealth management firms represents, in the main, firms which are relatively smaller than the asset management firms, which we would regard as the sort of prime prospects for us to make investments -- Affiliate investments in asset management firms. That said, the wealth management firms that we will look to invest in are still going to be substantial multibillion-dollar firms, and so they're not going to be -- they'll be smaller but not small transactions.

Our next question comes from the line of Marc Irizarry with Goldman Sachs.

Sean, this may be a tough one to answer. But I mean, are you sensing capitulation from some of the U.S-focused managers that are in the pipeline such that maybe the active world is under a bit more pressure that maybe they're more likely to seek an alternative or planned succession now versus waiting?

Here's what I would say to that, Mark. Those firms -- whether they're U.S. equity managers or some other product set, those firms which are headed towards capitulation, they're not the firms that were looking to invest in. So that may be true broadly for a bunch of firms, but the prospects that are most attractive to us for new investments are great firms generating strong organic growth which includes, as Nate has observed, taking market share but also position in products which are generating growth more broadly.

Right. And then what does that imply then maybe for the multiples and sort of the bid-asked on some of the businesses that you like?

The multiples are really not that changed. I mean, there's no question that relative to a decade ago when there were banks and insurance companies who, for whatever reason, were actively seeking to acquire boutique asset management firms that the environment is much more attractive for buyers. As a general matter. But for us, we have been very consistent over time in the pricing that we pay for investments in outstanding firms, and that really hasn't changed. I think to the extent that we can be opportunistic in divestiture settings where we're partnering with management and buying out their business from a larger company, then sure, we'll seek those price those as aggressively as we can, although we also want to be viewed as an attractive counterparty by those banks and I think have been. So on an overall basis, it's really a consistent discipline and one that allows for us to make investments where we think we're paying a fair price. But we're getting a very attractive return and very substantial accretion for our investors.

Okay, great. And then just, Jay, on the EBITDA contribution guidance, I guess there is some seasonality there. But it did strike me as the EBITDA contribution was maybe a bit lower this quarter. Anything to infer there? You know it's obviously a bit difficult to get some of the Affiliate level profitability, if you will. But anything behind that?

No, there isn't. If you look at our base business, we're pretty much, year-over-year, flat, $1.57, excluding performance fees. On the EBITDA contribution, the 15 basis points just reflects the math associated with the contribution. And I think as you look forward, you'll see it tick up as we get through the year as we grow and we see performance fees.

Our next question comes from the line of Cynthia Mayer with Bank of America Merrill Lynch.

A couple of questions. One is I guess it looked like you said you had flows from a broad number of Affiliates. But I'm just wondering if you could give us a sense of what percentage are from minority-owned Affiliates versus majority. any trends there?

Okay. Yes, so I'll start with that. I think there definitely was good flows through minority firms, which sort of again stands to reason because if you think about the broad set of alternative firms, a number of alternative firms -- most of our alternative forms -- many of the most of our alternative firms fall there, and that is an area where we've been seeing good growth. So whether you think about a BlueMountain or a ValueAct or an AQR those are firms we have been all seeing good growth. So I think that's the way to answer it. There's definitely good flows coming through there.

But I think what's also notable is that the very large majority, whether you take our largest 10 Affiliates including both traditional and alternative firms or our entire Affiliate mix, the large majority are seeing positive flows.

Great, okay. And then, last year's second quarter you had pretty hefty performance fees, I think. Could you talk a little about how this second quarter is shaping up versus last year?

On performance fees, Cynthia, I think, of course they're hard to predict. We do have some seasonality in the second quarter where we, oftentimes, will see a bit more performance fee contribution. Again, it's still unknown to us, but we do think that the performance fee opportunity this year is in line overall with that 5% to 10% of our earnings guidance that we give and candidly, given the flows in the alternative products that Nate just described, we think that opportunity, depending on how the year plays out, could be even better.

Okay. And then let's see, do you have -- I don't know if you mentioned this, but do you have average AUM particularly for funds? And I'm wondering if you could just talk about any trends you're seeing in terms of the average fee rates in funds and maybe how Yacktman would affect that?

So yes, you're right. In the 10-Q, we put, I guess, our billable rates, our average fee rates. We have -- in total, our average fee rates have really not changed materially. I think they're kind of in that single plus 1%, minus 1% across all of the segments. Gosh, you're testing me a little bit here. I think that Yacktman at kind of 70-ish basis points coming in is consistent with our mutual fund fee rates, and I don't think it'll change it much.

Okay. And last one is maybe just how do you feel about making more minority investments? Or you must be looking for majority or how do you feel about the mix of that overall?

We think we're in a great position. There's certainly plenty of room for additional investments in alternative firms. We've talked -- you probably heard me talk at conferences and meetings about being sensitive to some upper limit of exposure to performance fee products, but we are a long way from that. And I think to the extent that we have a large business generating strong organic growth and a very substantial new investment opportunity set, I think that there's plenty of room for investments in great alternative firms, and there are a whole bunch out there.

Our next question comes from Robert Lee with Keefe, Bruyette, & Woods. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: I had a question on Pantheon, I guess, one of the few alternative managers you haven't talked about today. And could you maybe update us at all kind of what you're seeing there in terms of there ? I know it's hard to get too specific, but I'm assuming that they're out there fundraising. I don't know to what extent they may have some existing committed capital that's not showing up in the AUM yet. But any kind of color you can provide on your progress there and kind of dry powder that they may be sitting on?

Sure. I'll try a little bit. And then I -- sort of one little caveat here which will probably answer a part of your question. They are in the market right now with their group of primary funds, which includes the other traditional primary funds, as well as some carve-out funds. They're actively marketing, which probably implies someone as for how much detail we can give right now. But I guess, I'll say a couple of things, right, which is overall, they are looking at some upcoming closes in the primary funds. This is -- I'll talk about the fundraising first, and then dry powder second. They are looking at some upcoming closes in the primary funds. One thing that I think is an evolution -- I don't think you need to ask, but if you think about sort of the shape of that business, the growth, a lot of growth is coming alongside the funds in sort of separate accounts. And so they are actively out there with that as well. And I think in this quarter, they had some couple of separate account closes sort of modest sizes but had a couple of separate account closes. So I think that's sort of one way to think about it which is they're active in the market. There are some upcoming closes. And they're pretty consistently active in the market now on the separate account side. And then in terms of dry powder, they certainly do still have some dry powder, both on the primary side but certainly on the secondary fund side, both funds and separate accounts from things they've raised not all that long ago, sort of last year. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. And then, I'm just curious. Maybe a question for Sean on the divestiture front. Obviously, we all read about and you talk about a lot of the opportunities there and lot of financial, you fee advantage and particularly looking to divest things. But it doesn't seem like at least the last year so there's been too much movement there. Is there -- just curious. Are you seeing that there's -- for all the talk of it, there's maybe sellers' expectations are out of whack with kind of people like yourselves that are willing to pay? Or is it really just dealing with these large organizations, there's just a slow grind and takes forever to get things done? Or kind of why do you think you haven't seen kind of a little more activity to date?

It's probably a mix of everything you said. I don't think we're seeing fire sales, right? So there's no great urgency on the part of most of these organizations. Many potential divestitures are discussed, and then they're not necessarily followed through with an active process. And then, finally for us, only a small subset of the firms that are being divested represent really appropriate and attractive investment prospects. But I think it's a real trend, and I would be surprised if we don't see a significant level of activity through the balance of this year. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: All right, great. And just one last question on the wealth management initiative. Can you talk a little bit about what type of infrastructure you've built or you think you need to build to kind of attract additional wealth managers? I mean, if you think of what you've done on the asset management side, whether it's taking over some compliance functions for some Affiliates or obviously the distribution initiatives, I mean, do you have -- what are the plans on the wealth management side? And what do you think you need to add there to kind of attract additional managers?

Well, I would say that there's no need to build infrastructure in order to attract excellent prospects. If you think about AMG, we're coming up on our 20th anniversary as a company. And the global distribution initiative is just 5 years old, and the centralized compliance opportunity as a capability is maybe only a few years older than that. And we continue to build out additional capabilities as scale and complexity of the world create new needs or new imperatives. But we managed to do just fine. And I would say we continue -- to reflect back to an earlier question, we continue to find the very best firms are strong believers in their own growth prospects and the continuation of an excellent performance track record and a continued generation of strong organic growth from net flows. And so their primary focus is on maintaining direct equity exposure to their business and getting, of course, a measure of liquidity and a solution to their succession and transition needs. And all the while, wanting very much to have a partner that is supportive and helpful, but most importantly doesn't at all distract from or disrupt their unique operating investment culture and the great momentum that they had. So that is true still today for asset management prospects, and it's definitely true for wealth management prospects. So I know that the team is working on an array of capabilities, that they will work to put in place -- work with their wealth Affiliates to put in place over time. They'll be different from what we've done and will do in the asset management space. But we're still very early days. And I would say that over time, we continue to be very optimistic about their prospects for -- or say, broadly our prospects for continued new investment activity independent of whatever capabilities that we build. And as we build in these capabilities, we'll talk about them, but they're not being held back at all so far.

Our next question comes from the line of Greggory Warren with MorningStar Capital.

The thing about Yacktman is it's generally a pretty solid pickup from our point of view. Could you guys walk through some of the aspects of how you came across the firm, how it came across the radar? Was this more a peer succession planning situation? Or was it a global distribution move for Yacktman? And then, could you talk a little bit more about what really made the decision for you guys because realistically this doesn't fall into 1 of the 3 buckets that you've doing deals in more recently, being alternative assets, global equities, emerging markets?

So we knew the Yacktman team. I mean, everybody in the boutique asset management space and in the retail space, generally in the U.S. would know the Yacktman firm. And we have worked to build a relationship. I think, in this setting, they called us but it was a product of a relationship, and it very much fits within mold of our other new investments. As I said earlier, I think our global distribution capabilities were interesting and on the margin attractive. But what was most essential to the Yacktman team is to find a partner that had a long track record of successful partnerships and one that would allow them to continue to do what they're doing and help them in providing a solution to succession and transition, not only get a measure of liquidity for the senior partners but build out the equity incentive structure in the firm so that they can continue to have the outstanding franchise that they built, endure and grow over time. And it's very much like that. Would you add anything to that, Jay?

No, I think that's just right, Sean. I think the one obvious thing about Yacktman is that they run a more concentrated portfolio that has outperformed over long periods of time. And they're taking share away from index-sensitive funds, and so I think that's another aspect that we liked. And so that fits into the category boutiques that can generate alpha.

Yes, and we've never said that we have an aversion to a certain product or another within the return-oriented product space. And I remember when we were on our IPO roadshow and we just made an investment in Tweedy, Browne, everybody wanted us to say that we'd never do another value manager because that wasn't fashionable back in the day. And I said then, if a clone of Tweedy, Browne walked in today, we'd happily make the investment again. And so outstanding firms that generate alpha for their clients and have great long-term organic growth track records and ongoing prospects, they're attractive to us whatever the product set.

I think it's a great pickup overall. You'd mentioned that it was probably going to close some time in the third quarter. Have you guys seen any interest yet from clients as potentially picking up investments in the fund when it comes live?

Just on the timing, we do expect middle of the third quarter. And we are merging the funds into the managers group of funds, so it's going to take a little longer than a typical deal. And that proxy is process is underway.

And then on the demand side, we have -- it's still all sort of specific rather than broad trend. But we've absolutely seen existing client relationships through global distribution where people have noticed pickup and have started to talk about it.

Our next question comes from the line of Bill Katz with Citigroup.

Just a follow-up. I think there's been some discourse back and forth during the call. But as you think about incremental growths on the Affiliates on the flow level, is it accretive or dilutive to your earnings growth for the company?

I'm not sure I'm tracking your question. The organic growth from net flows is terrific and more of it is better, and I like that we don't have to pay for it. So it's all good. I think we must be missing the thrust of your question though, Bill.

I think there's some concern from investors as you look at the equity-based earnings level of the company whereas you have great ownership, the organic growth hasn't been as robust as in some of the minority stakes. And I've gotten that question quite a bit. So just like curious, if you look about -- and I think it goes to EBITDA to AUM contribution discussion earlier. Just as you think about growth from whether AQR or Brandywine or BlueMountain I should say or from Tweedy or Third Avenue, as you think about the incremental growth, is that accretive to cash earnings -- Economic earnings leverage? Or is it more of a volume versus margin discussion at this point?

Well, there's no question that it's all accretive. So our peer companies that are getting flows into lower fee products like fixed income and passive products, I'm sure they're still happy to get them. And for us, all of our flows are into return-oriented products where we're getting higher levels of fee, including for alternative products, the opportunity for performance fees. That said, of course, as we've discussed even on this call, we own less of the -- in the main deal alternative firms. I would observed that one of the firms that continues to be extraordinarily successful and was MorningStar's International-Stock Manager of the Year is Tweedy, Browne where our ownership and their fee levels is at the higher ends, so each dollar of new money into Tweedy is extremely valuable to us. But it doesn't mean that the flows into alternative firms isn't also extremely valuable, including with the added possibility of performance fees. So we are quite pleased with the product sets that we have, including the addition of new Affiliates with new products. We think that it is -- I would step back and say our business right now is really hitting on all cylinders. We're generating industry-leading organic growth and as well we have an extraordinarily attractive new investment opportunity set where we're executing -- we have been executing over a long period of time. And we're quite confident in our prospects for continued growth and accretion. And as you know, none of that contribution from new investments is included in our guidance. And so looking ahead, we're quite cognizant of the need to continue to execute and the degree to which we are all, as asset managers, dependent on the markets being at least benign if not positive. But we feel very good about our business prospects.

There are no further questions at this time. I'd like to hand the floor back over to Mr. Healey for closing comments.

Thank you, again, for joining us this morning. As you've heard, we're pleased with our results for the quarter and confident in our prospects for continued strong growth ahead. We look forward to speaking with you again in July.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.