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Article Excerpt
MARC IRIZARRY, ANALYST, GOLDMAN SACHS: We can get started with our next presenter, from CME to AMG, Affiliated Managers Group. This is a very interesting story I think within asset management, given that the business model is very unique. And I think, opportunistically, this is probably the time for this model to thrive on a relative basis. And I think, over -- as sort of the deal environment comes even more into focus, AMG will be well positioned.
So, I'm very pleased to introduce Sean Healey, President and CEO of AMG. Also, Darrell Crate is up here, as well, Chief Financial Officer. So, why don't we bring up Sean, and we'll go through the slides and take some Q&A?
SEAN HEALEY, PRESIDENT AND CEO, AMG: Thanks, Marc. Thank you all for joining.
I'll begin, for those not familiar with AMG's story, with a brief overview of our business strategy.
We conduct our business through a diverse group of high-quality boutique asset management firms. Our investment approach provides for key affiliate management to retain or receive direct equity in their firm, creating a powerful incentive for continued growth.
In addition, we invest through a partnership structure that preserves the unique culture and autonomy that has made each firm successful in the first place. Our affiliates are among the leaders in their respective investment disciplines, with excellent long-term performance records, outstanding reputations, and superior client service. They have excellent track records of out-performance relative to peers and benchmarks across a wide range of investment styles, asset classes and geographic areas.
Our affiliates have strong and profitable businesses and, as partners and equity owners in their firms, they have a demonstrated commitment to their businesses, which is especially important in times like these.
Finally, our experience in working with boutique firms has enabled us to identify opportunities to leverage our scale on behalf of affiliates through growth areas -- or growth initiatives in areas such as distribution, as well as operational enhancements, such as compliance and financial controls.
All of us know how extremely difficult the markets have been this year, and obviously AMG's business has been impacted by the declines in the equity markets. However, on a relative basis, our business has held up well, and we believe as markets stabilize and recover, as at some point they will, our business is positioned to resume strong growth in earnings.
As you can see here, since our IPO in 1997, we have an excellent track record of generating strong long-term growth in earnings, both absolutely and relative to market indices, which you see on the right side of this slide.
Our earnings are primarily driven by the internal growth of our existing affiliates. For example, since the -- in the organic growth of our affiliates. For example, since the last bear market in 2002 through September 30th of this year, our organic asset growth was 100%.
Now, we've seen outflows thus far this year, principally in quantitative products, but our affiliates, our largest affiliates especially, continue to produce strong relative performance. And looking ahead, and as investors, ultimately return to equity and performance-oriented products, we are confident in our prospects for strong growth in the future.
In addition, as Darrell will discuss further, our investment structure, in which affiliates generally retain the operating leverage in their firms, it benefits the affiliate partners when markets are up and margins expand with the growth of their firms. But, in periods of declining markets, our structure protects AMG from margin compressions as revenues decline.
Our business generates strong recurring free cash flow, and we're focused on reinvesting our capital to maximize returns for our shareholders, especially through accretive investments in additional affiliates. Our capital position currently is highly liquid, with substantial flexibility.
In addition to free cash flow from operations of over 200 million a year, we have no net debt and excess cash which more than covers potential put liability. Our convertible securities consist of 30-year [troughs], 800 million of them, which are effectively equity with no put for 30 years, and senior convertibles, 460 million, which we issued in August, and they have no put-rights for five years.
There are no covenants. Darrell's going to discuss this in more detail, but, to get it right out front, no covenants at all on any of these securities.
While new investment activity is likely to be limited in the midst of the immediate extreme volatility, over the medium to long-term, we think that the opportunities for demographically driven, succession-oriented transactions are going to be tremendous within our competitive position. And the pricing environment for these transactions is better than it's ever been.
Our internal growth is obviously driven by the performance of our largest affiliates. Here you see the eight largest affiliates, which account for over 80% of our EBITDA. All of these affiliates have generated consistent, strong growth over time through investment performance and net client cash flows. As you see in this data through September 30th, the average compound annual growth in assets, since we made our investment in each firm -- which you see the dates displayed, and some of them go back over 10 years -- the average compound annual growth is 16%.
Even after declines since the quarter-end, all of these affiliates, including Blue Mountain, our most recent investment, are well above where they were when we made our investment in the first place. And again, Darrell will talk about this in more detail, but it's important to understand, when you think about operating leverage, the degree to which we have continued -- our major affiliates have continued excess margin even after all of the declines in the markets.
There's great diversity in this group by investment style, product and distribution channels. And looking across our base of more than 300 investment products, you see broad diversity, substantial exposure to some of the highest-margin segments of the industry, meaningful diversification across investment styles and geographic regions. As you see, approximately 37% of our EBITDA is from Global and International Equities, including leading products managed by affiliates such as Tweedy, Browne, Third Avenue and Genesis.
Another area where we have achieved strong growth over time is alternative investments, which contribute 15% of our EBITDA and include a wide range of investment styles and strategies. Even in the extraordinarily difficult environment this year, we've generated material performance fees from this product area.
Approximately 45% of our EBITDA is from Domestic Equities. And as you see, a split between value at 15% with firms such as Tweedy, Browne, Systematic, Third Avenue, and 30% from growth-oriented firms.
Our affiliates have developed -- or have...
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