Greetings, and welcome to the AMG Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Patricia Figueroa, 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 third quarter of 2023. 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 the reconciliation of any non-GAAP financial measures, including any earnings guidance announced on this call. In addition, this morning, we posted an updated investor presentation to our website 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 Moji, Chief Financial Officer. With that, I'll turn the call over to Jay.

Thanks, Patricia, and good morning, everyone. AMG's strong third quarter and year-to-date results reflect the positive impact of our capital allocation strategy across both growth investments and share repurchases. During the quarter, the changing market environment continued to challenge investors as the collective impact of higher rates, persistent inflation and increasing geopolitical risks pressured clients' ability to achieve their investment objectives. High-quality independent managers have distinguished themselves in volatile times. As uncertainty and asset dispersion create opportunities to generate differentiated returns in both liquid and private markets, and we believe this dynamic is playing out again. Differentiated return streams are critical for clients to achieve their long-term objectives. -- independent partner-owned firms have fundamental competitive advantages in generating those differentiated returns, especially during periods of heightened uncertainty. with specialized expertise, entrepreneurial cultures and alignment with our clients, our affiliates are Among the highest quality independent firms globally. And for our shareholders, AMG offers a unique opportunity to access the long-term growth and profitability of this diverse set of high-quality independent managers through a proven partnership approach. In 2023, we have continued to add to this diverse set of affiliates having made 2 new investments in specialized private markets businesses operating in areas of secular growth. In August, we completed our investment in Forbion, a leading European private markets investor in the fast-growing life sciences sector. And in October, we completed our investment in AR Partners, a private market manager specializing in industrial decarbonization. Given the heightened global focus on achieving a lower carbon economy, investor allocations to fund this transition are accelerating, and our partners is well positioned to continue to benefit from these secular tailwinds. As Ara entered the next phase in its evolution, aligning its business with a long-term strategic partner was critical, and the team chose AMG…

Thank you, Jay, and good morning, everyone. AMG's disciplined approach to capital allocation, along with the growing opportunity we see to deploy our capital has enabled us to both increase our activity level and our impact in 2023. We made 2 new investments in affiliates operating in areas of secular growth, and we continue to invest alongside our affiliates to magnify their competitive advantages. At the same time, we have strengthened our balance sheet through the completion of the sale of our remaining EQT stake as well as the closing of the veritable transaction, and we have continued to return substantial capital to shareholders through share repurchases. Our actions reflect the increasingly attractive opportunity for AMG, and we remain focused on allocating capital to further evolve our business mix toward areas of secular demand, which we expect will translate into significant long-term earnings per share growth and shareholder returns. Turning to our third quarter results. Adjusted EBITDA of $208 million included $12 million of net performance fee earnings, $6 million of catch-up fees at one of our private markets affiliates and a partial quarter contribution from veritable -- the veritable transaction was completed in September, and AMG received $294 million in gross cash proceeds. For GAAP purposes, we recorded a pretax gain of approximately $133 million, which we have reported as a separate line item on our income statement. This gain is excluded from our supplemental financial metrics, consistent with our EBITDA and economic net income definitions. Economic earnings per share of $4.08 benefited from the impact of share repurchases. Client demand for alternative strategies remain strong, while headwinds in global equities persisted and net client cash outflows, excluding certain quantitative strategies were $7 billion for the quarter. Turning to performance across our business and excluding certain quantitative strategies. In…

Thank you. [Operator Instructions] Our first question comes from the line of Dan Fannon with Jefferies.

Thanks, good morning. I guess a couple of clarifications on the new investments in the quarter. The new investments show up is $3 billion in the statements, but I believe you said they've raised close to $3 billion thus far this year. So maybe if you could talk about the fundraising and what the growth rate has looked like for both of those investments? And then I believe you also said 2% to 3% EPS accretive. I just wanted to add it on an annual basis. Just want to make sure accretive to what is that current estimates? Is that based on 3Q run rate? I just want to make sure what it's accretive to.

Yes. Goo morning, Dan. Thanks for your question. I'm going to have Tom start to answer those questions. There's a couple of but they're all related, and maybe we'll just talk about new investments more broadly after that. Go ahead.

Yes. Thanks, Dan. So on the first question around AUM, the $3 billion that you're seeing come through is only related to the Forbion transaction, which closed in the quarter. We'll see the AUM impact from our partners on a go-forward basis once we include that. So that's not included there. In terms of fundraising for the 2 businesses, without getting into specifics on fund by fund, each of them have been really growing quite nicely across their franchises. If you recall, Forbion has both a venture capital business in the biotech space as well as the growth equity business, and they've been raising larger vehicles in each of those over the course of time, including some very strong fundraising in 2022 and into 2023. And then Ara, on the decarbonization private equity side is in the process of closing on their flagship fundraise and really has had an exceptional 2023 in a fundraising environment that's been incredibly challenging. So really speaking to the quality of what they're doing and the demand that clients have for their offering. In terms of the accretion number, that's 2% to 3% on EBITDA, net of the impact of, obviously, the cash that we spent there. And look, that cash is obviously earning quite a bit. So I think you can look at both for being and ARA not being at all in our 2023 numbers, they'll be in our 2024 numbers and about 2% to 3% accretive to baseline EBITDA in 2024.

Yes. Dan, let me just follow that with our private markets business overall, I think you heard in my prepared remarks, year-to-date, $7 billion prior to Forbion and are in terms of new fundraisings and $10 billion with the 2 together. So that kind of gives you a sense for how much has been raised by those 2 this year. and $10 billion of dry powder just in the last 9 months. And it's an even bigger number if you look at over the last 12 months. We've had some good fundraising, lots of dry powder going into this environment. Maybe I will end with just taking it back up a level, just to remind everyone that our strategy is really to invest in secular growth. And I'll use Ara here as my example, one of the largest and most sustainable pockets of secular growth really is in the lower carbon economy. And in general, we're looking for large mega trends and that might include breakthroughs in health care, energy transition, the need for data. That really describes our partners, Forbion and Peppertree our last 3 investments. And what we think is happening here is capital has and continues to form around these trends because really, they're highly attractive in terms of their return profiles for investors. We want to be part of the increasing allocations from clients to these areas. So we're out looking for those businesses, independent firms that really have advantages because they're aligned with their clients. And we think that these strategies, these specialized strategies, you specialize sustainable strategies, have structural tailwinds, and we see a significant opportunity for growth. And specifically for our partners, the accelerating demand for capital to transition to a lower carbon economy, -- it's supported by a number of factors, including…

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

It's great to see continued momentum on the old fundraising. And I think, Tom, you mentioned a couple of sources between liquids and illiquids. It sounds like the liquid business had positive flows in the quarter, including some of the quant managers. So I was wondering if you could just kind of take a step back and talk a little bit about what you guys are seeing on the fundraising front for your liquid alt managers, what the pipeline looks like and whether you sort of think we've turned the corner on better flows on the liquids as well.

Yes. Thanks, Alex, and good morning to you, and thanks for noticing. I think the alternatives bucket generally, which today, for us, is about $230 billion in assets, about 100 in private markets and 130 and liquid alternatives is a growing segment for us. So maybe I'll let Tom give you some of the details.

Yes. So let me start with an overview and then Jay may come over the top with a little bit more color on some of the liquid alts names. But overall, importantly, our growth strategy continues to drive that evolution of our business toward the area Jay just mentioned, which is alternatives overall, in addition, broadly to overall secular growth areas. And as we continue to execute against that strategy, we do expect that to enhance both the long-term organic growth of the business as well as the earnings growth of the business over time. When you think about flows at the highest level, obviously, we continue to see this bifurcation between strength and alternatives, both private markets and liquid alternatives as well as challenges on the fundamental equity side. And I think year-to-date, our results really sort of speak to that story. We're continuing to benefit from both the diversity and the depth of our private markets affiliates, and we're seeing fundraising across a number of well-positioned strategies: credit, infrastructure, secondaries, energy transition, real estate. And these flows are very valuable to us. They're long term in nature. The fee rates are strong. We have the ability to generate potential carried interest over time. So we're really focused on that area. And Jay also mentioned that increasingly, we're really focused on businesses that are aligned with these global economic megatrends where we're going to see long-term client demand. And he spoke to pepper try with data proliferation and Forbion and biotech and health care, are partners and decarbonization. These are decade, quarter century type trends, and I think we're getting in front of them really early on, and we're going to see strong demand for a long time there. In terms of your specific question around liquid alternatives, most importantly, we're seeing excellent performance really across all time periods over the last several years. And we're having a more active dialogue with clients in terms of portfolio construction, in terms of the value of uncorrelated and diversifying return sources. And we think all of that positions us well in terms of forward flow opportunities. This quarter, we did see positive flows in liquid alternatives. We also saw modest positive flows in certain liquid alternatives, where now you've got 2, 3 years of track record after a tougher time, going back 4 or 5 years ago, and you're starting to see clients return to some of those strategies as they continue to put up very strong numbers and provide the benefits to portfolios that I just mentioned. So I think overall, we feel really good about private markets. We feel really good about where we are in liquid alternatives. And each of those offers real differentiation from independent specialized firms where clients are focused on building portfolios that can benefit from these types of exposures.

Yes. Let me -- I'm going to -- thanks, Tom, and I'm going to actually just tie this back to kind of the market environment itself. So we -- Tom talked about the mega trends. Clearly, that's where we're investing our new capital, both in existing and new affiliates, and you can see that in our new affiliate transactions. But you can also see it in some of the efforts that we are working with our affiliates in collaboration, for example, the AMG Pantheon Credit Solutions Fund, which was filed a couple of weeks ago, and that is the first of its kind in the wealth for credit secondaries. So that's going to be something that we're really going to try to get our efforts behind both people, capital and work with Pantheon. That's just an example. But when you look at the way we're positioned today, which, from an earnings perspective or an EBITDA perspective, roughly 30% is in liquid alternatives, 20% in private markets and the rest being in long-only equities I think this environment that we're in or we have been in or we're really going to be in for a while, higher rates, macro volatility return to more fundamental investing. That's generally constructive for us. And so not only I think are we leaning into the megatrends, but I also think this environment is going to be very good for AMG, in particular, in liquid alternatives. And so to kind of nail your question down, I think the good news about liquid alternatives is we've got great performance. As Tom said, after some more difficult years, we've got a lot of business momentum at places like AQR and systematic. AQR had 2 good years now. Systematica has been firing on all cylinders for some time. Those are 2 large affiliates in that space for us. And we think that not only will there be additional client allocations, but the benefit of that market segment is significant performance fees over time, which is a capital generative thing where we can reinvest in our growth strategy, but also return capital to shareholders. We generate a significant amount of performance fees last year and over the last 5 years, and we see that again this year in the guidance that Tom gave. So the combination of liquid alternatives, the combination of that with private markets locked up capital. And the combination of that with differentiated active equities just makes us unique in the market. I think we truly are unique, and we're excited about how we're going to see this business perform over the next 5 and 10 years. Operator Our next question comes from the line of Craig Siegenthaler with Bank of America.

Tom, I hope you're doing well. For our first question, we just want to dive a little deeper into the institutional channel flow dynamics. So first, what do you view as the key drivers in the $3 billion sequential increase in net flows? And do you view it as sustainable? And then secondly, historically, the industry has had some redemption challenges in 4Q and December months, partly driven by seasonality and year-end decisions. At this point, are you expecting any onetime outflows in 4Q?

Craig will follow the same pattern here. I'm going to let Tom start and then I'll add to it, I think.

Yes. So Craig, thanks for your question. I think a lot of this probably drives with the answer we gave to the previous question. Our business is changing. And if you look at the makeup of our business today versus where it was 5 or 6 years ago, in some ways, the answer to your question would be quite different. Given the concentration that we have now in private markets and liquid alternatives, I do think a lot of the institutional client dynamics in those areas are quite different from the client dynamics that AMG perhaps dealt with historically around more long-only equity strategies. So first, in terms of strength in this quarter and where we go from here, I think a lot of the strength we're seeing continues to be in those 2 areas, liquid alternatives and private markets. When you think about the way that institutional clients are buying in those areas, they're not looking for commoditized product. They're really looking for where managers have a demonstrated ability to add value in a unique and meaningful way. So maybe just to use private markets for a moment. Obviously, the 2023 fundraising environment has been incredibly challenging, very well documented in terms of denominator effect and the like. Many of our affiliates, while still experiencing the difficulty of that environment are really bucking that trend. And it goes to the comments that Jay and I have both made around both megatrends, but also around what's already in the portfolios of clients. Many have already put lots of regular-way private equity and sort of sponsor back lending into their portfolios over the course of the past 10 years, but perhaps haven't yet filled out their allocation on industrial decarbonization or data and cell towers or other areas of real estate,…

Yes. And that was a really good summary. I don't have a lot to add. I'll just remind everyone that we don't really hear think about our flows as a quarter-to-quarter event. Actually, we try to look beyond that by some amount of years. Really what we think net flows for us will really be an output of successfully executing on our strategy as we continue to shape our business towards areas of secular growth. So it will act different between private markets and liquid alternatives and then obviously differentiated equities. Those will all act differently over time. But as we're moving towards these secular growth trends, we do see long-term improvement in our flows but also really just long-term growth in the business as we pick up on these trends. Thanks for your question, Craig.

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

Maybe just to go back to some of the things you talked about in the original comments on the pipeline of new investment activity and the fact that you're stressing the -- you continue to emphasize the private capital area. Just wanted a 2-part question, if I may. One, just financially, the capital available for new investments. It sounds like you've got the $1.25 billion revolver and about, call it, $1 billion in cash flow.\ And then I know you're paying down to, I think, a $400 million tranche in February. So I just wanted to sort of get a feel for available capital. And then secondarily, what areas are, do you think in the investment pipeline in terms of private capital asset classes that you would think that you might be adding to would it be more of the same? Or are there different areas that you would want to focus on? Or would you look to potentially just invest more in your current private capital affiliates and help them develop.

Great. Thanks, Brian. Let's see. I'm going to take the new investment pipeline question and what we're looking for, and then I'll turn it over to Tom to talk about financial capacity and kind of balance sheet movements. I think those are 2 good questions, and it might take us a minute to go through both of those. So what are we looking for? I will just remind everyone, it's much broader than private markets. Although private markets were very much focused on. We're really focused, though, at the higher level on areas that we think are going to grow -- receive client allocations over time in our long-term durable trends. So when you look at where we're spending our time, won't be surprising to you. We're looking for specialized high-quality independent firms that operate in these areas. And we think that they have an edge relative to larger firms just because they're aligned with their clients and there's entrepreneurialism in those businesses, and there's an ownership mindset. So independent partner-owned firms in in areas of secular growth is generally our origination and prospecting efforts on the new investment side. So where do we see growth? Obviously, in private markets, we've talked about that. We see it in very specialized areas. Tom talked about it, but we have now 8 affiliates operating in those areas. And each affiliate has a specific orientation for their clients and the ability to kind of add adjacencies to their business. So private market is absolutely an area we're looking for. And frankly, it's more constructive to do private market deals today after a period of high valuations, we see valuations moderate in the segment. And frankly, there's better structures that share the risk of management forecast between buyer and seller. So I think it's…

Yes. Thanks, Jay. And Brian, thanks for your question. Maybe I'll start and just talk a little bit about the debt pay down and then go into capital overall. But overall, we feel really good about the way our debt has been implemented over the last several years. We've really optimized for 2 core principles. One is we've wanted to extend duration to match the long-duration affiliate partnerships that we have. And second, we really want to make sure that we enhance flexibility so that we always have the optionality to execute against our forward opportunity set, which is robust, as Jay just went through. Today, about $1.1 billion of our debt is fixed out in long-duration junior securities, where we have roughly 30 years of average duration at attractive fixed rates. So that's just excellent paper for us and really gives us a lot of flexibility. And then the remainder is well laddered senior institutional and bank debt maturing over the course of the next 7 years or so. We're currently running comfortably below our baseline 2x leverage levels. And net of cash, that long duration $1.1 billion is about 70% of our total balance sheet exposure in terms of leverage. As we think about this February maturity, as we've talked about in the past, we've been holding match duration treasuries against that, and we are planning to pay that bond off in the first quarter. And that's really a function of some of the EBITDA that's been capitalized away from us at very attractive rates and just rightsizing our overall debt level. Importantly, though I used the word earlier, optionality, and that's something that we feel very strongly about. We always have the ability to re-lever. We have the $1.25 billion revolver. We have clear access to public…

Our next question comes from the line of Thomas Wojcik Brown with KBW. So I wanted to switch over to the equity side of the business. So that's about 43% of your EBITDA today and 26% from the global equity side. So the full pressure there continues to be unrelenting really for the industry and still a challenge for you guys as well. I guess in light of some of those mega trends that you referenced, how are you really thinking about the equity side of the business, specifically the global equities piece. Is that something that can start to see a bit of an improvement here as we look out to 2024, what are you maybe seeing or hearing from the institutional investors as they think about their broader asset allocations and what that could mean for the flow picture there?

Yes. So I'm going to have Tom start with the detail, and I do have a couple of comments that I'll come back to after that.

Yes. Thanks for your question, Mike. I think it starts, as you mentioned, with the overall industry dynamic and the environment, and I spoke to this a bit in the answer to a previous question, but I think clients are really challenged in terms of how they're thinking about the global equity market environment today. So the first thing that I think really needs to happen to see some stabilization and flows for the industry to see some stabilization in the overall global economy, both from a macroeconomic perspective as well as from a geopolitical perspective. The second thing, of course, is you do have to have good performance. And we have the benefit of excellent long-term performance across many of our global equity managers but certainly some more challenging near-term performance. So seeing some near-term stabilization and performance to go alongside the quality of brands and the quality of long-term track records that many of our affiliates exhibit would also go a long way toward helping us there. The other thing is we continue to be in a market that's changing. And the way that clients, both on the institutional side as well as the wealth side, are looking to implement these strategies into portfolios and are looking to consume these alpha streams in terms of wrappers, I think, continues to evolve. And that's an area that we're also spending a tremendous amount of time on with our capital formation efforts and through our affiliate product strategy and development group, we're thinking more about the right ways to deliver some of these unique investment capabilities to end clients, exploring new wrappers, really thinking through the right way to deliver and implement these strategies into portfolios. So I think we have some tools at our disposal. We have some changes…

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