Affiliated Managers Group, Inc. (AMG) Q3 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Affiliated Managers Group Third Quarter 2012 Earnings Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alexandra Lynn, Vice President of Corporate Strategy and Investor Relations for Affiliated Managers Group. Thank you. Ms. Lynn, you may now begin.

Thank you for joining Affiliated Managers Group to discuss our results for the third 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 a 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 Chief Executive Officer; Nate Dalton, President and Chief Operating Officer; and Jay Horgen, Chief Financial Officer. With that, I'll turn the call over to Sean Healey.

Thanks, Ally. Good morning, everyone, and thank you for joining. We appreciate that it's been a difficult week for many of you, and we wish the very best to those affected by the storm. AMG reported economic earnings per share of $1.91 for the third quarter of 2012, which is a 23% increase over the same period of 2011. Our earnings growth was driven by continued strong business momentum with outstanding organic growth from net client cash flows and exceptional investment performance across our equity in alternative products. Our strong results reflect the excellence of our boutique Affiliates and the ongoing impact of our strategic focus on global and emerging market equities and alternatives, which collectively accounts for 70% of our earnings. We believe that specialist firms have competitive advantages in generating alpha in these areas and our boutique Affiliates, including Tweedy, Browne, Genesis, Harding Loevner, and Artemis, among global and emerging market equity managers; and Pantheon, BlueMountain, ValueAct, First Quadrant and AQR, among alternative managers, are all recognized as leaders in their respective disciplines. Over the last 10 quarters, we have generated $60 billion in net close. Concentrated in these product areas and looking ahead, we believe that both retail and institutional investors will continue to seek value-added equity and alternative strategies for the alpha portion of their portfolios. With our Affiliates industry-leading products and these attractive areas -- attractive categories, we are generating strong organic growth in the face of industry trends, which continue to overwhelmingly favor passive and fixed income products. And we are particularly well positioned to benefit when investors inevitably reallocate to return oriented products. And finally, in a rerisking rising rate environment, AMG will not be impacted by the decline of assets from fixed income outflows or the depreciation in value of fixed income…

Good morning, everyone. The overall themes of the third quarter continued those we've seen for some time. Excellent organic growth from the client cash flows, combined with continued good investment performance across most of our Affiliates. Consistent with some broader industry trend, slow momentum has been especially strong among alternative strategies in global equities products. And we're also seeing opportunities to distribute top performing U.S. equity products in institutions worldwide. Now as Sean noted, we continue to generate strong client cash flows across channels, with a total of $10.9 billion in net new flows for the third quarter, our 10th straight quarters of strong positive client cash flows. Looking ahead and consistent with past trends, the pipeline looks good through the remainder of 2012 and into 2013. Now turning to investment performance. In the global developed markets category, we had another strong quarter. Highlights include AQR, Trilogy and Third Avenue, which had very good relative performance while Tweedy, Browne's, flagship global value and international product both outperformed, continuing to build on their incredible track record. In our emerging market category, we had another excellent quarter with Genesis and Trilogy, in particular, outperforming the benchmarks by a significant margin across their products. While Harding Loevner slightly underperformed in the quarter, all of their products are ahead of their respective benchmarks for the year-to-date 1, 3 and 5-year periods. As with global equities, emerging markets is a product category with substantial opportunities for growth, in part because of the macro opportunities we see, but most importantly, because we have multiple extremely well-regarded firms in each category. Next turning to our alternatives products. All of the funds at BlueMountain and ValueAct are well ahead of their benchmarks for the quarter and our other Affiliates with significant alternative products, which is AQR and Pantheon,…

Thank you, Nate. As Sean and Nate discussed, we continue to be pleased with the successful execution of our growth strategy. With strong contributions from both organic growth and new investments, our third quarter results reflect a substantial increase in the earnings power of our business. As you saw on the release, we reported economic earnings per share of $1.91, including a $0.02 contribution from performance fees. On a GAAP basis, we reported earnings of $1.04 per share. Now turning to more specific modeling items. The ratio of our EBITDA contribution to end of period assets under management was approximately 15 basis points in the third quarter. For the fourth quarter, we expect this ratio to increase at just over 18 basis points, which includes a reasonable assumption for performance fees. And for 2013, we expect this ratio to be approximately 15 basis points. Holding company expenses remained flat at $22 million in the third quarter. And we expect them to increase to approximately $25 million for the fourth quarter, reflecting continued investment in global distribution and other anticipated year-end expenses before returning to a more normalized level of $23 million per quarter. With regard to our taxes, our effective GAAP tax rate for the quarter was approximately 26%. This rate primarily reflects changes in foreign tax rates and reserve adjustments, including a further decrease in the U.K. rate, which also impacted our third quarter cash tax rate of 12%. For modeling purposes, we expect our GAAP tax rate to be 35% going forward and our cash tax rate to return to approximately 18% in the fourth quarter. Intangible-related deferred taxes for the third quarter were $11.7 million, also reflecting the U.K. tax rate reduction I just mentioned. While this number may fluctuate across quarters, for modeling purposes, we expect…

[Operator Instructions] Our first question comes from the line of Michael Kim with Sandler O'Neill. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: First, maybe a question for Nate. Can you talk about the mix of the flows for the quarter, particularly in the institutional channel as it relates to your global distribution efforts versus the Affiliates more directly? And then more broadly, is it fair to say your newer offices are, maybe, coming online quicker, relative to the more seasoned offices as you kind of progress through the distribution expansion?

Okay. So first, in terms of mix of flows, I'll say a couple of things here. So one -- obviously every sale, and, I would say, every bit of [indiscernible], but every sale starts and ends with Affiliates, right? So there's -- I think I made this point last quarter, which is it's getting increasingly hard to separate that out completely, but everything involves Affiliates. That said, this quarter -- a significant portion of the flows had our global distribution, institutional folks -- folks in institutional channels here. A significant portion of flows had our guys involved including some of the very large mandates we talked about. So that's the first bit. And then in terms of things coming online, I would say there's really 2 parts to that. Right? So the first is, if you think about a really new region -- so Sean mentioned -- I think Sean and I both mentioned Asia. It's that couple year ramp just like we've seen elsewhere. The other thing that's happening though is we're adding resources inside regions. So for example, take Europe where we've been there for a while, but we added a Nordic specialists, for example, a little over a year ago, going to be coming on 2 years now, but we added that specialist there. And as we think about adding the German and Swiss specialists, those kinds of things. Those are not really brand new regions, right? Because we've been covering them, and we do expect the contribution from people like that to come online faster, and that has been our experience. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Got it, that's helpful. And then as it relates to performance fees, I know there are still a couple of months left in the year. But any color in terms of how things might be shaping up, particularly just given the diversification of the various strategies and Affiliates that can contribute at this point?

Yes, Michael, it's Jay. We continue to see performance fees as a significant opportunity. We have great diversity. As you mentioned, our performance fees stream ranging from absolute return products to loan-only products. We've been consistent in our guidance throughout the year in terms of what we see performance fees coming in at kind of 5% to 10%. I don't think anything's changed there. As you've heard though in our prepared -- in my prepared remarks, the -- we've upped the bottom end of that range, so we are seeing -- we're coming into focus on what we're -- what we think our opportunity is for the fourth quarter. Michael S. Kim - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then just lastly, I know you've sort of gotten away from guiding to an all-in number as it relates to deal capacity but can you just maybe walk through all of the different levers available to you in terms of sort of cash on hand, ongoing free cash flow, the credit facility, as well as the equity forward agreements?

That was great. You summarized them all, but I'll put a few numbers to that. Well first, we did see just an outstanding opportunity to finance long term, fixed rate debt in the third and fourth quarters. So that -- we took that opportunity to raise $340 million in 10-, 30-year bonds, extending our balance sheet, increasing capacity under our revolver. But we also added level of flexibility, because we have a 3- and 5-year call feature at par for both of those. So we felt very good about those financings, both from a extending and increasing capacity, but also flexibility. So we used that to pay off our revolver with virtually no revolver balance. We have $800 million available together with ready access to $150 million under the 4 -- again, we have not issued those shares, but we have ready access to that. And then, our annual cash flow in the neighborhood of $450 million of after-tax earnings, just if you added those numbers up -- and I'm doing it in my head, you're up approximately $1.5 billion.

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

I apologize the connectivity here is pretty thin. Just in terms of deals, you've seen a little pickup of other activities, Carlyle acquiring TCW, maybe a bit of an instant credit [ph] transaction. But then Schwab paying a pretty big number for Thomas partners. Just wondering if you could comment a little bit about the competitive backdrop? Any pricing change you may be seeing underneath the good pipeline?

Thanks, Bill. I would say that the competitive environment is -- continues to be highly favorable for us. There are, of course, always competitors for the very best firms and you've identified some transactions that I would agree are situation specific in the main for demographically driven succession transactions involving traditional boutique asset management firms, as well as succession-oriented [ph] transactions involving large alternative firms, and finally, divestitures of boutique firms in all of those general categories are a competitive position. It continues to be stronger than ever, and our pipeline as you've heard me say, is very strong and balanced.

Yes, that's helpful. Then just a second question. You mentioned earlier that you were able to sell some U.S. equities in some of the institutional areas. I'm just wondering just more broadly, are you seeing any more systematic change in risk appetite made from fixed income back to active equities, or is it more at the margin?

I think what is gratifying, if that's not too strong a word for us, is that the overall industry environment really hasn't changed. As we all know, passive products, passive equities and fixed income products, both in the retail and the institutional space domestically, and to some extent, internationally -- although, I would say non-U.S. clients, in general, have been put willing to rerisk sooner. Those are the clear trends they continue. I think we can all speculate about when clients will rerisk and what will happen when they rerisk. I think, as you heard me say, we're very pleased with our position, both in terms of strategic allocation of products, but also the outstanding performance and underlying excellence of our boutiques. And really what we're seeing is in driving the flows is both the outstanding -- ongoing outstanding performance of our Affiliates as well as a good execution -- very good execution in our global distribution strategy.

Our next question comes from Craig Siegenthaler with Credit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: Just like to start on the M&A pipeline, and I understand that the overall pipeline is very strong. But if you can kind of dissect your comments into 3 main groups, succession planning being one, and then divestitures in the U.S. being 2 and then Europe being 3? How have each of those kind of sources for M&A changed over the last 6 months? Are some stronger or some weaker?

I think succession-oriented transactions probably have been -- I think they will increase going forward, and we've seen fewer than one might have thought at the beginning of the year. And that I think is owing as much as anything to the timing of market volatility with a market recovery occurring in the second half of the year. If you wanted to get a transaction done by the end of the year, you really had to begin in, let's say, by June. And the ongoing driver of demand for transaction activity is, of course, demographically driven succession. That doesn't change. And I think we'll see in the medium to long-term, we'll see continued strong activity and substantial opportunities for us in that category. Divestitures tend to be more episodic. I would say there's relatively less activity among U.S. banks and insurance companies now, but still there are some transactions that we're considering, evaluating. And there are substantial opportunities, both in transactions or involving potential transactions that have been well publicized as well as that are more private. And we're evaluating all of those opportunities. We continue to be extremely disciplined and extremely selective in how we pursue transactions, and so we'll see what unfolds. Obviously, as Jay described, we've positioned the balance sheet to provide substantial flexibility in the event that we see opportunities, but we haven't taken down all of the available capital. And so if transactions don't manifest in the medium term, then we'll -- we don't have excess capacity. Craig Siegenthaler - Crédit Suisse AG, Research Division: And the demographic point on succession planning is very strong, and it's been here for a while. But at this point in time, the equity markets have recovered very strongly, so a lot of these underlying [ph] businesses have higher valuation, which I think could help some of them look to sell. But also your tax has gone up. So why isn't kind of right now like, kind of the best environment for succession acquisition? Where is that -- my thought kind of wrong there?

Well, you're not wrong. But I think if somebody wanted to get in prior to the end of the year and pending rises in tax rates, I think they would've had to have started in the first half of the year, or at least, let's say, by June. So I think we will see substantial activity going forward, and we're seeing the early stages of that. But I think looking out into next year and beyond, we're quite confident that there will be a substantial set of opportunities.

Your next question comes from Robert Lee, KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: I'm just curious. When you talk a lot and talk to perspective Affiliates, I mean if I think back 10 years ago, 5 years, 6 years ago, in fact, pretty much, except for helping with some compliance infrastructure, there weren't that many incremental resources you could -- that you really brought to bear on new Affiliates. Now, you have the global distribution that's pretty built out with the Yacktman. It seems like you're trying to -- or making some efforts maybe to beef up the managers' business. Can you maybe talk a little bit -- when you -- are you more willing to think of other types of asset managers that may have attractive investment teams and records that are intact, but you'd feel like you can bring more to the table in terms of resources, so you're thinking more broadly about some of the organizations you're willing to invest in.

The answer broadly is no. We really aren't changing the basic business strategy. We continue to focus on investing in the highest quality boutique asset managers, who really have complete businesses, and those kinds of firms anticipate continued growth. They're betting on their continued growth by choosing our structure and approach. But of course, what is the case is that in a whole set of product categories and distribution channels, we can provide meaningful additional growth to Affiliates, and I think it makes us that much more attractive to these very high quality firms, both traditional and alternative, domestic and outside the U.S. And then finally, I think one bit of our strategy, and maybe Nate can elaborate on this, is to continue to help our Affiliates grow by acquiring or expanding -- acquiring teams or expanding their product set with the addition of key personnel and in building out existing Affiliates or helping existing Affiliates build out their product set and expand their distribution. I think we're an even better partner to our Affiliates.

I would agree with that. I think one way we, I think, have talked about on previous calls. But there really are -- it's a virtual cycle we're building. And one of the things between the increased strength of the distribution platforms we're building in a collaborative way with our Affiliates, right? So we're not building it for them, we're building it with them. But one of the pieces of that circle is the ability to increase the pace of product development, increase the pace of new product launches. And so I think it opens up a number of new possibilities. And you'll hear us talking more about these as we go forward. But I think each of these pieces opened up more opportunities, including the ones Sean mentioned. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: All right, great. Could you maybe also update us a little bit on -- I guess this should be a part of the pipeline discussion, but on your wealth management, did that large transaction -- I guess it closed around the middle of the year. And are you kind of comfortable with where you are in terms of added process, in terms of seeing more? Did that really have the desired effect of kind of attracting more people to your model, or at least, willing to engage in conversations? Or has it kind of been going a little slower than you thought or kind of right in line? Any kind of color you could provide.

I think we continue to be very pleased with the launch of those business. The investment in Veritable was absolutely a huge boost to their profile and that serves as a flagship investment, which certainly helps them in their prospecting efforts, but any new initiatives requires a tremendous amounts of investment and timing going out and building relationships with all of these independent firms and teams. And so that process continues and the very best opportunities will manifest over time. But looking at what they're doing and the way in which they are executing the business plan, I'm quite happy. Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division: And maybe one last question for Jay. Is it possible to get some color on what proportion of the AUM are fees are, at this point, based on predominantly on say, committed capital, but not really market value? Obviously, this Pantheon, I'm assuming this credit opportunity's fund may be incorrectly, but with BlueMountain, may be based more on committed, not market. So just trying to get a feel for what keeps the asset base of kind of just kind of rock solid steady quarter-to-quarter, is not going to move around too much?

I think you're identifying the main kinds of pieces of it. I think it's -- and I was -- I think even on the BlueMountain one, I'd be a little bit careful on the way you just described it as well. Because it is a -- the credit opportunity's kinds of funds, I'll put it that way, and those lines of business. They're not just rock solid committed capital in one sentence, which is they all do have upside opportunities as well, right? So you can think of sort of a baseline level of fees with opportunities above that.

And we've talked about Pantheon being our most stable Affiliate, because it is committed capital. And that is, by far the largest Affiliate with this type of arrangement. And it really is the single biggest place to find long data capital.

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

Maybe a question on the EBITDA to AUM on a ratio. It sounds like 15 basis points in 3Q. You said just over 18 basis points in 4Q, 15 basis points for next year. So if next year's fourth quarter has also got performance fees, and so, it's higher than 15 basis points, doesn't that imply lower than 15 basis points for 1Q through 3Q? And if so, why would it be going down a little bit?

So as you know, Cynthia, I said they were approximate, and that was for the full year. And of course, the other quarters also have some level of performance fees, notably the second quarter usually has a noticeable amount. I really do think that you're right, the fourth quarter will have an elevated amount. But when you take 25% of the fourth quarter and you blend it with stuff that looks like 15 basis points around the 1 through 3, you'll end up with something that looks like 15 for the year.

Okay. But wouldn't that imply, let's say, a year from now that 3Q '13 would be a little bit lower than this year's?

Not necessarily. No. No, not necessarily. And remember -- again, when we give this guidance, we're really giving it to a reasonable level. So there's a range, there's a range around it. That's why we have $8.30, to $9.20 range out there next year. So if you have to imagine that we're talking to the middle of the range. More or less.

And Cynthia, I would just add that I think we're -- we may be the only one of our peer companies to give guidance of any sort. And so I think we're -- hopefully, you'll appreciate the challenge and forecasting asset management businesses generally in a business as large and diverse as ours is just inherently difficult to forecast. And predicting the changes in mix over time is specially challenging. We are very confident in the underlying drivers of our earnings growth. Obviously, incremental new investments will always change the ratio that we're discussing in a way that we're indifferent to. So it's not really a number that we used to manage the business in any way. I understand it has an element in building a model, but hopefully, you can appreciate the degree to which it's impossible to be precise.

Definitely. Yes, sure it's an output. So yes, and I appreciate it. On the -- I think on some of your presentations, you guys give emerging markets exposure by EBITDA. And I'm just wondering if you could update us on that? Sounds like 2 out of -- most of your emerging markets managers are doing really well.

Yes, it's just over 10%. It's sort of in that 11% to 12% range.

11% to 12%, okay. And last question is just on Yacktman. I guess you noted the underperformance, is that due to any particular plant in their strategy and what kind of any impact do you expect on flows going forward on that?

I think it really was just in a market that kind of ran like that. We weren't surprised, they weren't surprised. And now, the flow profile of the business remains strong. And I think one item we talked about, maybe at the last call, we're also seeing them -- we're all going to be -- helping them get on to some additional platforms and also sort of begin to cross-sell a little bit in our relationship. So I think we feel good where they are and the flow opportunity.

So given the new platforms then, would you expect the flows to accelerate ahead?

Well, I think -- remember, there's the mutual fund side of it and also the separate account side of it. So I think over the long run, we're confident in the opportunity to keep distributing the funds and -- there is a little bit of lumpiness in that business as well, so I'm not -- I'm sure it won't be a straight line.

Our next question comes from Daniel Fannon with Jefferies. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: Nate, I think you mentioned on the call in your prepared remarks about opportunities for some of the top U.S. funds to kind of continue to expand worldwide. If you could kind of elaborate on products or individual firms as kind of what you think that opportunity is?

Okay. So I think -- so this quarter, we had some good wins for U.S. equities both inside and outside the U.S. in the institutional channel. And I think the opportunities are coming from a couple of places, right? So one -- and I think Sean mentioned this, if you think about our Affiliates, we have firms that are managing really -- we talked about truly differentiated products, right? So even though there are some trends away from U.S. equities, people are looking with ways to get returns into their portfolios, and including within asset class, looking for ways to gain returns in their portfolios. So for managers, who are really willing to try to get returns in, were seeing opportunities. I think part of it is, which I do think there is that trend. I think part of it is also the sort of same macro point we're making in global emerging and elsewhere, which is we're just simply bringing more specialists' coverage online to match up with good performing U.S. equity firms. So if you can imagine a new very senior salesperson in the region, who has this other very good relationships, as if we'll look at the breadth of all of our Affiliate products. He has some -- he or she has some very good performing U.S. equity products to pick from. So we're just simply increasing the front part of the funnel, if you will, for these Affiliates in ways that just wasn't there before. So I think some of it is also that. So I think it's partly, there is -- I do think there is some trend to people looking for ways to get returns in, including for differentiated products in U.S. equity. I think that's helping us, but I also think, part of it is just -- and we saw like this quarter, part of it is just bringing product to places it just wasn't before. And making those matches. Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division: Great, that's helpful. And I guess just one more question on guidance, and I realize you don't have a crystal ball. But looking at 2013 and what you guys see today, whether it be alternative versus performance fees outlook versus high watermark or kind of pipeline for flows, I mean, would you characterize what you've laid out '13 as kind of conservative, middle of the road? Just some color around that?

I would say consistent. We have a, as hopefully comes through, an optimistic view, a confident view of our underlying business dynamics and the quality of our business and the Affiliate franchises. And I think all of those trends are continuing, in so far as we can tell. Of course, there's much about our business and about the macro environment, which is impossible to predict. And so among other considerations, we -- both in how we've positioned our balance sheet as well as in the diversity and breadth of our product exposure. We position our business to be resilient even in difficult times as well, but we feel confident about our prospects.

Our next question comes from Greggory Warren from Morningstar.

Jumping back to Yacktman a little bit and the flows overall. It looks like based on the data I'm looking at, you hit about $1 billion plus in flows for Yacktman during the quarter. That was part of what helped push your total flows up closer to $11 billion. As you look forward, do you think we should be looking at maybe a quarterly run rate in that $7 billion to $10 billion range? Is that too sort of optimistic or do you think that you sort of hit us another level here between Yacktman and between sort of the traction you're getting with the distribution platform?

Yes, so let me start. So I think I would not describe it the way you just did. I would not say things like we've just hit another level or whatnot. I'd go with -- I think the themes are really the ones we talked about in our prepared remarks, which is look, we feel good about the traction that we have. We feel good about the sort of 10-straight quarters now positive flow momentum. But the flows this quarter, I take your point about Yacktman. But the flows this quarter, the institutional channel was a very big contributor and flows in the institutional channel are very lumpy and we had some -- we experienced the benefits of that this past quarter. And so I would not characterize it as really other than that. We feel good about the prospect, we feel good about the momentum but this quarter, we really did benefit from some of that lumpiness, not to overuse it.

I would add to that, and maybe this is something that is also responsive to Dan's question, which is we're assuming that some version of the status quo is continuing. What we're not assuming is that there is a dramatic rerisking in client appetite and client demand. I think to the extent that occurs, and we can all speculate as to whether it will and when it will. But to the extent it does occur, it will be a very substantial addition to the underlying drivers of our organic growth. So the growth that we are consistently achieving, we all understand is in spite of broader industry trends. And I think we feel quite good about how our business is positioned, generally, both for difficult times, but also for good times. And I don't think we're in from an industry environment, client demand perspective we're really not in good times yet. And so that opportunity is not reflected in our underlying guidance expectations.

Okay. And I think that, that's sort of the impressive quality of what we've been seeing from you guys over the last year or so. But you sort of answered my second question which is looking at institutional. I mean, understanding that it is a bit lumpy, noticing that the sales tipped a little bit higher, the redemptions were a little bit lower and just not thinking that, that was going to be a continued factor going forward. But I guess, just back to round about to my question again. Do you think it's unreasonable to sort of assume -- a 2% is sort of quarterly organic growth rate? Do you think that, that's out of the norm? Based on what you've done with the distribution platform, based on the fact that even Yacktman with pour performance this year relative to its history and relative to the benchmarks? It's still generating decent flows.

I think we are confident in our expectations for continued strong momentum and not really comfortable giving more precise guidance than that.

Our next question comes from Xiaowei Hargrove with William Blair.

I've got a couple of questions on behalf of Chris here. First, on the institutional channel. Your redemption rate there is at a multiyear low. So maybe if you can talk about what you think has been the key drivers of that trend?

Yes, so I think -- and the last question also, question touched on the floor. But I think we are benefiting both from an uptick in gross sales, institutional but also -- and as you note, in this quarter in particular, a decline in the growth outflows. I think, look, it comes down to our -- our Affiliates in the main performing very well, right? I think that's the place that it starts and stops. And I really think that's the main driver of it.

Okay. And then my second question is kind of related to that also. So the hedge fund industry has seen a pickup in outflows this year versus last? And obviously, performance has been a big driver of that. So do you think -- is it just performance that's been a differentiator for your Affiliates? And that's how they've been seemingly able to buck that trend?

I think it's -- as Nate said, for alpha-oriented firms, all of our Affiliates, traditional and alternative, it is all about performance ultimately. And so good performance will drive. And that's not all you need, but without good performance, you're not going to see a strong organic growth. That said and stepping back a little bit and talking about what we see in the alternative industry, generally. I think there are a large number of, I'll say, a substantial subset of the alternative firm universe where you see excellent franchises performing well and generating stronger organic growth from net flows. Happily, our Affiliates are among those kinds of firms. And I think it's the firms that are, either have not built their business franchise for the long run or have had performance challenges that are seeing declines. And so it really is that bifurcation in the industry, which is underlying those broad trends that you described.

Ladies and gentlemen, there are no further questions at this time. I'd now like to turn the floor back over to Sean 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, confident in our prospects for continued strong growth ahead. We look forward to speaking with you in January.

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