Greetings and welcome to the AMG First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Anjali Aggarwal, Head of Investor Relations for AMG. Thank you. You may begin.

Good morning and thank you for joining us today to discuss AMG's results for the first quarter of 2021. 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 Horgen, President and Chief Executive Officer, and Tom Wojcik, Chief Financial Officer. With that, I'll turn the call over to Jay.

Thanks, Anjali. And good morning, everyone. AMG entered 2021 in a position of strength, and our first quarter results reflect the momentum that continues to build in our business. Economic earnings per share of $4.28 improved 35% year-over-year and represented the strongest first quarter in our history, primarily driven by EBITDA growth of 23% and ongoing share repurchase activity. Building on our strong start to the year and looking ahead to the second quarter and full year of 2021, we expect the growth in our business to accelerate, given the excellent affiliate investment performance, the ongoing contributions of the strategic actions we have taken and, most significantly, heightened activity and new investments. With our increasing free cash flow and available capital and a favorable environment to establish new partnerships, we have a tremendous opportunity to invest in high quality firms operating in areas of secular growth, such as our recent investments in OCP Asia and Boston Common. The disciplined execution of our strategy, including the simultaneous return of excess capital to our shareholders, will further compound our earnings and free cash flow generation. And we are confident in our ability to create substantial shareholder value over time. Over the past year, our affiliates built on their long-term performance records once again demonstrating their ability to distinguish themselves during periods of volatility. Excellent investment performance during this period generated meaningful first quarter performance fees, increased asset levels, and enhanced organic growth. As performance-driven improvements in organic growth trends continue across our business, we're also seeing investors rerisking portfolios as economies reopen worldwide. Investors are increasing allocations to high quality active managers, especially independent firms to help navigate market volatility, protect capital and generate superior outcomes. In addition to ongoing growth and flows in private markets, especially fixed income and wealth management,…

Thank you, Jay. And good morning, everyone. As we discussed on our fourth quarter call, focused execution against our strategy is producing significant growth, as was once again evidenced by our strong first quarter. Our earnings power and cash flow generation continued to increase and our unique ability to deploy capital across our broad opportunity set to grow EBITDA and earnings per share is a key differentiator. Looking forward, the value proposition we offer independent partner-owned firms, together within an increasingly favorable environment for active managers, position AMG well to compound earnings growth over time and generate meaningful shareholder value. Our first quarter results reflect the significant momentum we're seeing across our business. Adjusted EBITDA of $247 million grew 23% year-over-year, driven by strong affiliate investment performance and the impact of our growth investments. Economic earnings per share of $4.28 grew 35% year-over-year, further benefiting from share repurchase activity. Net client cash flows for the quarter improved meaningfully versus prior periods, and flows representing the vast majority of our EBITDA turned positive, excluding certain quantitative strategies. Ongoing strength in private markets, specialty fixed income, and wealth management strategies continue to drive strong flows. Increased demand for fundamental equity and liquid alternatives, particularly top performing value and impact oriented strategies, also contributed as clients continued to position portfolios for a post pandemic world. Turning to performance across our business and excluding certain quantitative strategies. In alternatives, fundraising remained strong at Pantheon, Baring, EIG and Comvest as clients continue to steadily increase private market allocations globally and we reported net inflows of $2.8 billion in the first quarter. Performance in this category is excellent as our affiliates have been deploying dry powder into attractive return opportunities, including across Asia private equity, global secondaries, co-investments and credit. Overall, our private markets book remains…

[Operator Instructions]. Our first question comes from the line of Craig Siegenthaler with Credit Suisse.

I wanted to come back to the last two new investments, OCP Asia and Boston Common. In the sense, you guys didn't disclose all the details of the deal. I wanted to see if you could provide us the different accretion prospects between your standard new investment and buybacks given the current valuation of the AMG stock. And also, if you can provide us any color on the valuation or the multiples paid for your new investments in OCP Asia and Boston Common, that'd be helpful too.

I think Tom and I will each take a portion of this. Maybe I'll start with maybe an overview of the two transactions. Tom will get into the details, although we're not going to disclose individual valuations. Obviously, that's proprietary in some ways to us, but we can give you a sense for the impact on our business. And Tom did that in his prepared remarks on OCP Asia. So maybe taking a step back. I'll start with OCP Asia, our most recent one. It marks the third transaction in the past six months for us. It underscores the momentum that we're seeing across our business in new investments in particular. And it represents the current profile, the depth and reach of our calling efforts. OCP Asia is operating in an environment in the private credit markets in Asia. So, we've got further exposure, both private markets and Asia through this transaction. And it's growing, as Tom said, in his prepared remarks at rates well above our overall business in terms of both EBITDA growth and organic growth. The other aspect of OCP Asia is that it is diversifying to our overall business. Our distribution is looking forward to extending the reach of their client base and we think we can do that. It will be unique in our distribution channel and I think that means that we are excited about helping the business grow and diversify it. The other transaction, Boston Common, which was done earlier this year, was in the fast growing ESG space. Boston Common is a well-known, longstanding tenured investor in ESG and impact. The principles there are very well known in the industry. Again, that business growing as fast, maybe even faster. I think we see ESG being one of the fastest growing segments in active management today. And we were fortunate to be able to partner with Geeta and her team. We see the opportunity for us here to distribute their product in our US retail platform and help them grow over time. In both cases, I think there's significant growth ahead of them. In the case of Boston Common, there's an opportunity for highly scaled growth, given their profile and their investment process. So, maybe, Tom, I'll let you speak to the impact on the numbers and maybe just talk a little bit more about the discipline in our structuring. I think that'll be helpful.

Sure. So, in addition to what Jay walked through, I'll reiterate a couple of things that I said in my prepared remarks, which are we're really focused on investing, first, in the long-term growth and sustainability of our business, and then returning excess capital to shareholders through repurchases. And it really is in that order. We do take an incredibly disciplined approach to putting that capital to work. And every dollar that we spend is going through a common framework. And we're exerting a significant amount of focus on ensuring that we find great teams in great growing macro sectors, and we put great structures around them. And I reference really three primary drivers of why we believe these investments are great uses of our capital, and also great for our business long-term. And Jay referenced pieces of each of these. First, these are growing businesses, generally speaking, on both an EBITDA and an organic basis, particularly relative to our existing business. So, we're immediately stepping into high quality businesses in some of the highest secular growth areas of the market, which benefits us in a variety of ways. Second, there are some very clear and direct financial benefits associated with our model. We're often bringing on and almost always bringing on immediate cash flows and EBITDA that we can leverage. And oftentimes, we're also finding incremental tax benefits based on the way that we structure these transactions. And each of those further enhance the return profile that we're able to deliver to our shareholders. And then lastly, on pricing and structure, we take an incredibly disciplined approach. We're focused on the return on our capital. We have a very good understanding of our own cost of capital. And we're really pricing and structuring these transactions over the long term to ensure that they're delivering a strong return, well in excess of that cost of capital to our shareholders. From a structural perspective, we're looking to get appropriate downside protection. That said, if things don't turn out exactly as we hope, we get our capital out as quickly and efficiently as we possibly can. And obviously, we're also ensuring that we have strong upside participation. And we look to minimize earnings volatility in the process. So, when you put all those things together, we feel incredibly comfortable that those new investments that meet our criteria and sort of clear all of the different bars that we put in place as we evaluate these opportunities are very clearly the best use of our capital and best long-term investments in the business. And then, once we exhaust the opportunity that we have to make those investments, as you've seen, we've been very comfortable returning capital to shareholders through repurchases. And I think you should expect to continue to see us to do both of those things. And we have sufficient capital to be able to do both of those things.

I'm going to take the opportunity now to go ahead and just talk about our strong position in the market today. And this is one of the reasons why we see elevated new investment activity in the near and intermediate term. And frankly, at AMG, we expect an increasing percentage of our capital to go to new investments because of the opportunities that we're seeing today because the options for independent partner-owned firms has skewed in the most recent period towards consolidation and away from independents. Firms that are looking to be 100% owned by an acquirer are just not a good cultural fit for us. And so, today, this is a part of the M&A market, those who are who are driving cost synergies. We think for the highest quality, independent partner-owned firms, the cost synergy consolidation model is just not a good fit for clients. It's not a good fit for success. And therefore, we don't think for us that's a real opportunity. But our opportunity set is in those high quality firms who want to stay independent, looking for a supportive partner, looking for someone who can give them resources, intellectual capital, scale benefits while maintaining complete operational autonomy and independence. And for that, we're seeing fewer competitors. And I think everybody on this phone, probably resonates. We're just seeing fewer competitors who are truly hands off in the independence model in the market today, and even fewer with a track record of success. So, I'll just let that sit with you for a second and then you can say. So, AMG has both a longstanding reputation for being a partner of choice for independent firms and we have a wide array of options for those firms as they grow and evolve, including growth capital, succession planning,…

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

Jay, I think you addressed some of this in your last set of answers. Just as you look to 2022, how do we think about the relationship between buyback and deals? Is it an and? Is it an or? And then, you had made a point of reinvesting back in the business over the last couple years to get more refined sort of deal opportunity. Can you sort of talk a little bit about some of the structural changes you've made that's allowed you to merge with a more robust pipeline opportunity?

I think that's a really good question. And I believe Tom did a really nice job in some ways of delivering that in his prepared remarks. But let me take another shot at it because I think this is a really important point, especially for the long-term shareholders here. So, let's talk about the shape of our growth profile. And I'm going to describe it in phases. Of course, these phases overlap and they build on each other. But I want everyone to think first about EBITDA growth, and then how EBITDA growth and business franchise growth will ultimately translate into organic growth over time. And I'm going to answer your question about capital inside of this. So, when this management team took through or went through our transition in May of 2018, we were inwardly focused candidly, but rightfully. We've repositioned our resources and we reallocated those resources to the most productive areas of growth and return. And this began to improve our EBITDA profile to generate capital that we could redeploy. We also worked with 8 to 10 affiliates facing headwinds, and then we similarly increased our EBITDA that way and freed up even more capital to redeploy. We took advantage of the market opportunity last year to improve our balance sheet, freeing up even more capital. We repositioned our growth engines, especially in new investments with more people in focus. We enhanced our strategy and our distribution businesses to create more alignment and more an affiliate centric focus with a goal of getting higher returns out of our investment dollars that we spent in distribution. And finally, we repurchased 20% of our shares during this period. And as you can see, in this quarter, the first quarter of 2021, our mid 20% top line growth and our…

Our next question comes from the line of Dan Fannon with Jefferies.

My question is on flows. From what you just mentioned there, Jay, to elaborate on. So, first, on global equities, I believe, Tom, you mentioned regionally focused strategy that saw some redemption. So, maybe you can expand upon that. And then, within the systematic quant, the buckets where they fall into, I think range across the various asset classes. So, just wondering where we're seeing the biggest improvement from the quant strategies. And seeing – based on your comments in the last question, Jay, it seems like you're optimistic about the forward flow picture of that segment. And so, curious if you think you've seen the bottom of the redemption cycle within quants as well.

Maybe I'll start there, Dan. And then if Jay wants to add anything. Maybe just to give you a picture of flows overall because I think there was a lot there in your question, but as you noted, this quarter we saw positive flows, excluding quant. And you know that those quant flows do only contribute 3% of our EBITDA on a run rate basis. Within quant, we did see some pretty substantial improvement relative to prior quarters. And I'd note that we've also seen some strong performance there over the last several months as a result of the broader rotation into value. So, we are hopeful that we can build on that going forward. Specific to your question on kind of where you're seeing it, if you take the numbers that are in our release and then the numbers that I walked through in my prepared remarks, you can see the delta between the quant and non-quant. In particular, on the alternative side, this quarter, we did see some stabilization on the quant side. And most of the outflows that we're seeing continue to be on the fundamental equity side in the first quarter. If you now kind of focus on the core of our business where we generate the vast majority of our EBITDA, we see continuing positive trajectory in terms of our flow trends overall. We saw ongoing client demand in illiquid alternatives and traditional and specialty fixed income. And the performance in these categories continue to be excellent. So, we remain very well positioned there. Our wealth management affiliates continue to deliver steady long duration inflows and are continuing to capitalize on broader solutions trends in the market. In terms of US equity strategies, we've seen improving flow patterns, both in terms of gross flows as…

Our next question comes from the line of Brian Bedell with Deutsche Bank.

If I could just go back to the organic growth commentary. Tom, I didn't get all of the pieces of the flow picture excluding the quant. But if you could just sort of summarize what were total flows – I know they're positive, but what were total flows ex quant. And on that organic AUM growth base, how would you compare the organic EBITDA rate growth base? Is that coming in at a stronger clip than the AUM base? And if you don't mind, just if you have ESG dedicated flows within that?

Brian, in terms of the overall flow profile, as we said, flows, excluding certain quant strategies, were modestly positive overall. I think if you go back through the transcript, you can get all the individual building blocks as to how we get there. So, I won't go through that again in detail. But let me maybe take a step back just both on your organic growth question as well as some of the others and really do two things. Maybe first, put organic growth in context at AMG and explain why, while flows matter, and they're definitely a focus for us and Jay walked you through a bunch of where we are there and how we're going to get to where we want to be, we do have a number of differentiated growth drivers, primarily new investments, that are likely going to be more substantial growth drivers for us overall. And then secondly, I just want to walk through again. And again, Jay started on some of this, but some more detail on how we're executing on our strategy and that strategy is going to lead to a significantly more positive organic growth profile over time. So, first, just in terms of context, as you know, we generate a substantial amount of free cash flow. That's true on an absolute basis. But it's also significantly more on a relative basis versus traditional models. So, when you think about traditional asset managers, they're generally going to be evaluated on the trade-off between organic growth and operating margin. Our expense base is very lean. And our growth is really going to be driven by how and where we invest our capital. If you take a look at our Investor Relations deck this quarter, we added a new page to the materials that…

I'll just take another minute on ESG right now with our existing affiliate base. It's not something that we break out separately, Brian, in part because 80% of our AUM is managed by affiliates that consider ESG in their process. We do have 16 affiliates that are UN PRI signatories. 20% of our business more or less is dedicated to ESG. That includes Boston Common, Inclusive Capital, Pantheon, one of the more significant players in the private market ESG space. Artemis has just hired a dedicated sustainable equity team, which we helped seed. EIG is investing in a renewable energy infrastructure fund for many years and has raised assets there. Harding Loevner, Veritas, Genesis, MBI, GW&K, they've all integrated sustainability into their investment process. So, we see ESG as one of the fastest growing segments at AMG, so to speak. But it's in part because of the role that active management is playing in ESG. We do see that this is going to continue. We think it's a decade or more long trend. That's why our focus on new investments is one – it is one of our areas of focus. And we will continue to see new investments being done with more ESG focused managers or ESG sensitive managers. One of the things that I think you're probably seeing across all of the industry is the desire for clients to drive outcomes. And again, given the difficulty today and really capturing all the necessary data to have a passive strategy in ESG, I think active for some time, will lead and we expect to have a meaningful contribution from our affiliates, both new and existing in the ESG. space.

Our next question comes from the line of Mike Carrier with Bank of America.

I think AMG recently terminated some sub-advisory relationships. And those are redirected into some of the affiliate strategy. If you could let us know if that was reflected in 1Q results or how that would kind of impact the outlook. I think there might be a lawsuit out there as well as challenging some of that, but is that impacting the timing or will you kind of go through with it regardless of that and do that [indiscernible]?

I'll let Tom address the AUM. Let me just start with [Technical Difficulty]. In March, we announced [Technical Difficulty] AMG Funds to fully align and focus our resources on affiliate growth opportunities, providing end clients with a number of benefits, including lower fees, higher quality managers, and more differentiated funds. It was an obvious choice for AMG. It just makes sense to focus all of our resources and all of our attention on our affiliates and affiliate products. I think that goes into the category of our phase 1 where we repositioned our business, really made sure that all of our investment dollars are going to investment – to distribution are really being used for our affiliates and generating the appropriate returns for our shareholders. By moving to an affiliate only model, by definition, it means that AMG has high conviction in our managers and we've added some terrific managers to our – new managers that are AMG affiliates into retail. That's going to lead to long-term growth and focus by us. More broadly, this is consistent with our institutional platform, which is an affiliate only platform as well. And when you take a step back, we're going to build on our success in distribution for the benefit of our affiliates. We think it makes us even more attractive to new affiliates and to our existing affiliates. Over the more than 15 years that we've been operating centralized services, we now have 50 client facing individuals that supplement the 500 client facing individuals that are affiliates. We've raised gross $110 million on the institutional side. We have a $45 billion wealth platform and we are looking to drive more growth through these channels. So, maybe I'll stop there and say one other thing before I turn it over to Tom. We did make some sub-advisory changes, all third party sub advisories – sub advisory changes – sorry, all of our third-party sub-advisory changes with one affiliate change ourselves, going to a complete affiliate centric model. The two funds that you mentioned that are in question are not material to AMG. And all these sub-advisory changes are very common. Sub-advisory mandates are awarded and terminated hundreds of times per year. We value the relationships that we had with all of our former third parties sub-advisors and we wish them all well. So, I'll let Tom just comment on the AUM implications.

On the AUM side, there is about $5 billion in AUM in the funds where we did go through sub-advisory changes. As you know, those will all go through a process over the course of the coming months. And ultimately, we'll experience those flows as those processes conclude. They'll be some movement, plus and minus as that happens. But I'd expect to see the impact of flows probably across the second and the third quarter.

Our next question comes from line of Alex Blostein with Goldman Sachs.

This is Ryan Bailey on behalf of Alex. So, coming back to some of the underlying EBITDA trends. Firstly, I was wondering if you can give us a sense of roughly how much of your EBITDA is from managers with positive organic growth versus managers with more negative trends beyond the sort of certain quant that you've highlighted? And then secondly, as it relates to six of the more recent affiliates, is there any way you can give us kind of a sense of the contribution that they've been giving to EBITDA? Thank you.

A number of the things you've asked for are not things that we go into a level of disclosure on, but I think I can give you broad strokes and some flavor overall. As we've talked about, frequently, about a third of our business on an EBITDA basis is growing very strongly organically in strong secular growth areas. So, again, as we've mentioned, private markets, specialty fixed income, wealth and multi-asset solutions and ESG. Broadly speaking, the remainder of our business is across a number of different fundamental active equity strategies, both long only, as well as long/short, across a combination of global, US, emerging markets, et cetera. Really, I would say that that business overall is exhibiting relatively stable overall organic growth trends. There's some businesses in there that are growing very well. Within certain businesses, we have strategies that are growing very well. So, broadly speaking, I would say the majority of our business is either in strong secular growth buckets or stable with pockets of growth. The piece, obviously, that you're aware of that's seeing more headwinds is on the quant side, which frankly, as I think about it from an EBITDA perspective, just makes up a very small percentage today, and is not really influencing the EBITDA side of the equation very much. In terms of the businesses that we made investments in recently, they're all contributing. And I think that that is the beauty of the model. As soon as we make the investments in these businesses, they're contributors to us immediately. Obviously, each of those businesses are in different phases of their growth cycles, different phases of their own evolution and contribute in different ways. The businesses that we've invested in most recently, Boston Common and OCP, will have a partial impact this year with a full impact next year. A business like Garda where we made an investment, now a couple of years ago, is obviously at its run rate and is contributing quite strongly. So, again, we don't go into disclosure at the individual affiliate level, but you should assume that all of those businesses are strong contributors to our financials, just as we expect ongoing new investments to be in the future.

Our next question comes from the line of Robert Lee with KBW.

Curious, if I think back to, I guess, what I'll call AMG 1.0, I think you used to talk about when you deployed, call it, $100 million of capital into transaction, there used to be kind of a rule of thumb, low teens per share accretion, call it like $0.10, $0.14, $0.15. And it does seem like since – I guess I'll call it, AMG 2.0, it does feel like the accretion you're getting per dollar invested seems to be potentially meaningfully higher. Am I thinking of that correctly? Do you find that because maybe you're refocused on different businesses with less competition and the way you're structuring it is making them more accretive for the amount of capital you're deploying, just trying to see if I'm thinking that correctly.

I was going to say thanks for your question. But also, we probably – both Tom and I should give you perspectives on this. So, Tom, why don't you go first? I'll follow up.

One, Rob, I would just say that you've certainly heard us sort of change our tone in terms of just the way we're talking about the impact of these new investments. Jay spent a lot of time talking about it earlier on the call. These are strategic investments in growing businesses with very attractive financial characteristics that are going to drive the earnings growth and the organic growth of our business for many years to come. And when we think about them, right, we're thinking about the quality of the business and the individuals, we're thinking about the quality of the sectors that they operate in and what the growth characteristics look like, and we're focused on pricing and structuring them in an appropriate way that we can earn a long-term return on our capital that's well in excess of our cost of capital. Accretion is, obviously, a part of that. But accretion is sort of what happens today on day one. And these are transactions that we need to think about not just on day one, but over the course of the next 2, 3, 5 and 10 years as they continue to contribute to the business. So, one, I can assure you that, from a pricing and structuring perspective, we feel very comfortable with the type of return streams we're able to deliver on day one. We're focused again on clearing our cost of capital, meaningfully in doing so. And over the long term, we're focused on really delivering that long-term shareholder return to our shareholders. The other thing I'd say more tactically is the business has obviously changed versus the 1.0 version you referenced. We do have a lower share count today. Also, the tax code has changed and our cost of capital has changed. So, there are some inherent benefits just in terms of what's happening financially. But maybe I'll turn it back to Jay because I think it's the strategic benefits that are much more impactful.

Yeah. I'm not sure I'd describe it as 1.0 and 2.0. I might describe it as 1.0, 2.0 and 3.0, I think having been around for all three of those, those periods of time at AMG. Look, Tom gave you a lot of the underlying sort of math associated with what it means for us to do new investments today, and I agree with those comments. But just culturally, let me say a couple things. One, when I first joined almost 15 years ago, we were very focused on finding growth-oriented firms that met our cost of capital in excess of our cost of capital and structuring in a very disciplined way with an ownership mindset and an entrepreneurialism to think ahead and be ahead of trends like liquid alternatives and global equities and so on. And we did a really nice job, I think, in that period. And so, you're right to compare that period, in some ways, to this period. I think we've borrowed a number of those aspects. I think there was a time which I'll call 2.0 where we were much more focused on size and less focused on return. I think that the refocus on return, not size, growth and expectation of secular trends strategically is where we are today. I think that that bodes well for the next 5 to 10 years for AMG and especially if we can stay disciplined. And the last thing I'll say is there is a sense that you get to see the extremes, that sort of eye popping multiples of certain illiquid managers, but the rest of the market, there's really a more appropriate level of valuation, one that can produce reasonable financial returns. And there's not a lot of competition for independent partner owned firms, as I just described. In some ways, I would liken this period to just after the Global Financial Crisis where there really wasn't a lot of competitors in the partner-owned firm business because most of the competitors today want to buy 100% or they only want to go after certain parts of the market. So, that leaves an entire swath of the market where there are high quality independent firms and we have a reputation of being a good partner. And we have centralized services that can help them grow. So, of course, they would come to us. Of course, we're well positioned. And I think that's where we're finding attractive returns for our shareholders.

Thank you, ladies and gentlemen. That concludes our time allowed for questions. I'll turn the floor back to Mr. Horgen for any final comments.

Thank you all again for joining us this morning. AMG had a strong start to 2021. And as discussed, the earnings power of our business has increased considerably and we remain focused on the significant opportunities ahead of us. I hope everyone remains safe and healthy. And we look forward to speaking with you next quarter.

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