Affiliated Managers Group's CEO Discusses Q2 2011 Results - Earnings Call Transcript

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Includes: AMG
by: SA Transcripts

Affiliated Managers Group, Inc. (NYSE:AMG)

Q2 2011 Earnings Call

July 26, 2011 11:00 AM ET

Executives

Alexandra Lynn – Head, IR

Sean Healey – Chairman and CEO

Nathaniel Dalton – President and COO

Jay Horgen – CFO and Treasurer

Analysts

Craig Siegenthaler – Credit Suisse

William Katz – Citigroup Global Markets

Daniel Fannon – Jefferies & Co.

Cynthia Mayer – Bank of America Merrill Lynch

Robert Lee – Keefe, Bruyette & Woods

Marc Irizarry – Goldman Sachs & Co.

Michael Kim – Sandler O’Neill & Partners

Operator

Greetings and welcome to the Affiliated Managers Group Second Quarter 2011 Earnings Call. A brief question-and-answer session will follow the formal presentation (Operator Instructions) It is now my pleasure to introduce your host, Allie Lynn, Vice President of Corporate Strategy and Investor Relations. Thank you. Ms. Lynn, you may begin.

Alexandra Lynn

Thank you for joining Affiliated Managers Group to discuss our results for the second quarter and first half of 2011. By now you should’ve received the press release we issued this morning. However, if anyone needs a copy, please contact us at (617) 747-3300 and we’ll send you one immediately following the call.

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 Web site at www.amg.com a replay of the call and a copy of our announcement of our results for this 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 CEO; Nate Dalton, President and COO; and Jay Horgen, CFO. And now I’d like to turn the call over to Sean Healey.

Sean Healey

Thanks, Allie. Good morning, everyone and welcome to AMG’s conference call to discuss our financial and operating results for the second quarter of 2011. Our economic earnings per share were $1.71, an increase of 27% over the prior year, driven by the strong performance of our affiliates and outstanding organic growth. With $24 billion in net client cash flows over the past 12 months and continued strong investment performance, especially in global and emerging markets equity and alternative products, our assets under management are now approximately $350 billion, an increase of 40% over the prior year. We generated net client cash flows of $7.5 billion this quarter and our flows were actually even higher than the headline number as Nate will describe in a moment.

Looking ahead, we see continued strong organic growth as investors around the world, both institutional and retail, are increasingly focused on specialized global and emerging markets equity and alternative strategies for the alpha portion of their portfolios. This strong secular trend reflects an ongoing globalization of client portfolios as well as a growing recognition that global and emerging market equities, along with alternative strategies, offer the greatest opportunity for alpha generation. Together these areas generate over 70% of our EBITDA and have produced virtually all of our net client cash flows over the past year.

We believe that boutique specialist managers have a competitive advantage in generating out-performance in these product areas and our affiliates include many of the industry leaders. Global and emerging markets equity managers like Tweedy Browne, Genesis, Artemis and Harding Loevner, and alternative affiliates including AQR, First Quadrant, BlueMountain and ValueAct have outstanding long-term track records in focused differentiated strategies.

In the midst of a weak macroeconomic environment and political gridlock, industry-wide client flow trends continue to favor asset classes such as fixed income that seem less risky. But we believe over the medium- to long-term return-oriented products, including especially global and emerging market equity and alternative strategies, will capture an increasingly large share of institutional and retail investor allocations.

We’ve achieved strong organic growth in spite of broader market and flow trends, reflecting the successful execution of our global distribution strategy as we combine the advantages of our affiliates’ capabilities with the global reach of AMG’s centralized platform. With over 55% of our EBITDA generated outside the U.S., our client base continues to diversify as we further expand in key markets, adding incremental regional coverage in our offices in Australia, Asia, Europe and the Middle East.

During the quarter we appointed Andrew Dyson as Head of Global Distribution, a newly created position based in London. Andrew was most recently head of the Global Institutional business for BlackRock and his experience and track record of leadership will provide tremendous advantages as we continue to build out AMG’s global distribution capabilities.

Finally, turning to new investments we made significant progress in advancing discussions with outstanding prospects around the world. Our new investment pipeline is strong and diverse and includes both alternative and traditional managers, and our competitive position and the transaction environment continue to be highly favorable.

Finally, during the second quarter we were pleased to formally launch our wealth management strategy through our new subsidiary, AMG Wealth Partners, which as you know, will apply AMG’s proven investment model to the wealth management industry and will meaningfully expand the set of investment opportunities before us.

With that I’ll turn it to Nate to discuss our affiliates’ results in further detail.

Nathaniel Dalton

Thanks, Sean. Good morning, everyone. AMG’s performance in the second quarter illustrates the fundamental power of our business, partnering with outstanding specialist investment firms, which generate excellent investment performance in products that are sold and serviced by a combination of dedicated affiliate teams and the increasing scale of our distribution platform.

Our $7.5 billion in net positive client cash flows marks the fifth consecutive quarter of strong flow momentum and reflects the impact of a number of our strategic decisions that are paying off in the marketplace. But we see a trend towards investment portfolios becoming global in nature with an increasing exposure to global and emerging markets equity and alternative products as well as the growing recognition that boutiques have competitive advantages in generating out-performance in these asset classes.

As we look ahead, we believe these trends will continue over the long-term, and we see strong demand, especially for our global equity, emerging markets equity and alternative products, as we and our affiliates continue to add resources to bring those products into additional attractive markets and channels. But most important of all our affiliates continue to build on their strong performance records.

Now, turning to investment performance for the quarter. In the global equity category we had another quarter of very strong performance, including especially from Harding Loevner, Tweedy Browne, AQR and Artemis. For example, all of Harding Loevner’s global equity strategies outperformed during the second quarter. Tweedy’s flagship Global Value Fund and AQR’s EC strategy each had another strong quarter and remained well ahead of benchmarks across all relevant time periods. U.K. manager, Artemis, outperformed in the quarter with its largest funds featuring strong performance records for the quarter and year-to-date. While Trilogy Global Advisors and Third Avenue had challenging quarters in their global equity products, both continue to have strong, long-term performance records.

On the emerging market side, it was a good quarter with strong relative performance. The flagship strategy at Genesis remained significantly ahead of its benchmark for the year-to-date one, three and five-year periods and outperformed its benchmark by 165 basis points in the quarter. In addition, Harding Loevner’s Emerging Markets product outperformed the index by 100 basis points or more in the quarter.

Now, turning to alternative strategies. We had a strong quarter across a broad range of products including ValueAct, which generated a substantial performance gain in the quarter. In addition, I would highlight AQR’s continuing outstanding performance across a wide range of alternative strategies from their Absolute Return Fund to some of their alternative beta strategies. In addition, both AQR and First Quadrant are having good success in the risk parity area, both from a performance as well as flow standpoint.

Finally, turning to our U.S. equity products. Systematic continued to deliver strong performance across their suite of value strategies, with the largest strategies remaining ahead of benchmarks for the quarter, one, three and five-year periods. Tweedy Browne’s U.S. value strategy outperformed its benchmark for the quarter and remained ahead for the longer-term period as well. Friess underperformed in the quarter and Frontier and Times Square missed benchmarks in their U.S. growth strategies but remained well ahead for long-term periods.

Now turning to flows. We had another quarter of strong organic growth with positive net flows of $7.5 billion; I should note that the $7.5 billion in net flows includes the loss of a low fee, sub-advisor relationship of roughly $3 billion from a prior minority owner at Trilogy, which decided to bring the accounts back in-house. Obviously, net of that, flows would have been over $10 billion in the quarter.

With $24 billion in reported net client cash flows over the past four quarters, we are benefiting from the trends I described earlier, including increasing allocations to global and emerging markets equities and alternative products. In addition, we and our affiliates are doing a good job of bringing their product into new markets, both new geographies and channels.

Looking forward, as Sean said, while some clients are reacting to the volatility and uncertainty by favoring fixed income and other asset classes that may seem less risky, in order to meet their obligations over time we believe clients will need to further increase allocations to return-oriented asset classes, especially global equities, emerging markets equities and alternatives.

Now let me unpack the flows for the quarter by channel starting with the Institutional channel. We had positive flows of approximately $7.3 billion. Looking at the flows in greater detail, it was a quarter where we had a strong contribution across a large number of strategies, especially in global and emerging markets and alternative products. Notable contributions came from AQR, First Quadrant, Genesis, Harding Loevner, Pantheon and Trilogy.

Now as we always say, flows in the Institutional channel are inherently lumpy and there were some significant large wins in the quarter, but the long-term signals remain strong in terms of search activity, pipelines and finals. We are working with a large number of our affiliates to bring their best performing product into an ever increasing range of geographies and channels, and we see continued positive momentum in the periods ahead.

Moving to the Mutual Fund channel. Excluding the Trilogy outflow I described earlier, flows would have been about $2.7 billion positive. And this would be continuing the strong momentum we’ve had over the past several quarters. Within this channel, from a product mix standpoint, the trends generally mirror the broad trends we described. Also, putting aside the one outflow, the sub-advisory channel remained a strong contributor for us, including through our sub-advisory distribution platform here in the U.S.

In our High Net Worth channel, flows are about $500 million for the quarter. We had positive flows into global equities and alternatives products in firms such as Harding Loevner and ValueAct while Gannette Welsh & Kotler continues to attract flows in the channel, especially through our U.S. distribution platform.

Finally, turning to our overall global distribution efforts. As Sean discussed, we continue to invest in the strategic expansion of our distribution platform, and in this quarter announced the hiring of Andrew Dyson as Head of Global Distribution based out of our London office. Andrew will work primarily with our Asia, Australia, Europe and Middle East institutional teams and our U.S. retail platform to capitalize on the opportunities we see helping our affiliates across some of the most attractive markets and channels around the world. He will lead the growth of these regional efforts as well as the expansion into additional regions and channels.

Now looking ahead, we believe we are still at the early stages of this opportunity to combine outstanding autonomous, investment-focused firms with the benefits of a truly global franchise.

And with that I’ll turn it to Jay to discuss our financials.

Jay Horgen

Thank you, Nate. As Sean and Nate discussed, excellent organic growth highlighted AMG’s strong second quarter with net cash flows of $7.5 billion for the quarter and $14 billion for the first half of the year. Together with market performance, AMG closed the second quarter with approximately $350 billion in assets under management. As you saw in the release, we reported economic earnings per share of $1.71 for the second quarter.

On a GAAP basis we reported earnings of $0.85 per share. Our economic earnings per share included $0.19 of performance fees generated by several affiliates with the largest contributions coming from ValueAct, Genesis, First Quadrant and AQR. Our economic earnings per share also included a $0.15 write-off of a minority investment related to the establishment of our wealth management subsidiary.

Now turning to more specific modeling items. The ratio of our EBITDA contribution to end-of-period assets under management was about 16.7 basis points for the second quarter. For the third quarter we expect this ratio to be approximately 16.5 basis points, and for the full year 2011 we expect it to be approximately 16.8 basis points, which includes a reasonable assumption for performance fees through the remainder of 2011. Holding company expenses were $22.1 million for the second quarter and are expected to increase to approximately $23 million per quarter for the remainder of 2011 as we continue to build out our global distribution platform.

With regards to our taxes, our effective GAAP tax rate for the second quarter was 34.8% as a result of one-time and flow-through items. For modeling purposes, AMG’s GAAP tax rate is expected to be 36% for the remainder of 2011. Our cash tax rate was 23.5% for the quarter, and we expect this rate to average 23% for the remainder of the year.

Intangible-related deferred taxes remained flat at $12.9 million, and is expected to remain constant through the third and fourth quarters. With reported amortization of intangible assets of $22.1 million for the quarter, our share was $18.7 million and, in addition, we had $8.2 million of amortization from affiliates accounted for under the equity method bringing AMG’s controlling interest portion to $26.9 million for the quarter. We expect our amortization to remain at approximately $27 million per quarter for the remainder of 2011. We reported total interest expense of $26.4 million for the quarter, of which our portion was $24.9 million. This included non-cash imputed interest expense of $6.8 million pre-tax. We expect our interest expense to decline over the remainder of 2011.

Now turning to guidance. We are leaving our 2011 guidance unchanged. The economic earnings per share guidance range of $6.90 to $7.70 reflects continued strength in client cash flows, our ongoing expectation for additional performance fees through year-end and is net of the one-time $0.15 charge I mentioned earlier. In addition, this guidance factors in actual markets through yesterday’s close and then assumes 2% markets growth in the fourth quarter and a weighted average share count of $53.3 million for the year.

The lower end of our 2011 guidance includes a modest contribution from performance fees, while the upper end of the range assumes more robust expectations for performance fees and organic growth. As always, these assumptions do not include earnings from future new investments and are based on our current expectation of affiliate growth rates, performance and the mix of affiliate contribution to our earnings. Of course, substantial changes in equity markets and the earnings contribution of our affiliates would impact these expectations.

Now we will be happy to answer your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Thank you. Our first question this morning is coming from the line of Craig Siegenthaler of Credit Suisse. Please state your question.

Craig Siegenthaler – Credit Suisse

Thanks. Good morning, everyone.

Sean Healey

Good morning, Craig.

Craig Siegenthaler – Credit Suisse

Just trying to think, here, on the capital management side. So, kind of two questions, here. First, how large and attractive is the M&A pipeline relative to the first quarter. And then, what level, I guess, do you have to reach in terms of capital being put to work, roughly, until you’re at the point where you actually start raising equity?

Sean Healey

Okay. So the pipeline and our level of pipeline continues to be strong. We have made progress, Craig, in the quarter and through the year. We feel very good about our pipeline. And so, relative to the first quarter I think we’ve made progress and we see good opportunities.

As it relates to your capital question, you’re probably referencing the equity forward program we put in place this morning. We do view that as normal course. It is a readiness program. We are cautious about equity, equity issuances in general. We would only do so if we saw substantial new investment activity. As you recall, we issued approximately $300 million in equity in 2010 after about $1.1 billion of deals so I think we would have to see substantial new investment activity either in the size of a single deal or in multiple deals.

Craig Siegenthaler – Credit Suisse

Got it. And then, in the existing balance sheet now, if I look at your debt which has actually come down a little bit and then your cash which has some excess in there, how much kind of excess capital versus rating agency constraints do you have embedded in the balance sheet today?

Sean Healey

As far as check writing ability we have pretty significant check writing ability just with our current cash flow, the revolver and cash that we’re building on our balance sheet. You’re right to note that we are building cash on our balance sheet. I think we always want to be in partnership with the rating agencies, making sure we’re not out of line. We will be cautious on our equity issuance.

Craig Siegenthaler – Credit Suisse

Got it. All right, great. Thanks for taking my questions.

Operator

Thank you. Our next question is from the line of Bill Katz with Citigroup. Please state your question.

William Katz – Citigroup Global Markets

Okay, thanks a lot. Good morning everyone.

Sean Healey

Good morning, Bill.

William Katz – Citigroup Global Markets

In terms of the flows, obviously you’re doing very well in terms of positioning and where the industry is headed. Just from a capacity perspective, given that some of these are more boutique in nature, are you bouncing up against anything that might otherwise squelch some of the volume trends you’re seeing?

Nathaniel Dalton

The short answer is no. I think the way we would look at that, there are a few products here and there where capacity starts to be an issue. But the other piece which maybe we should talk more about this; the other piece is at a number of sort of new products and new strategies being launched by these boutiques as well and that really runs across a lot of affiliates. Artemis added a few different products and teams this past quarter in both global and Pan Europe.

AQR added some additional products, both additions to their equity suite as well as things that are sort of more expansions of their alternative side like a reinsurance product. Trilogy added emerging wealth products.

So while there are probably a few products where the capacity thing starts to be an issue, the real trend that I’d say maybe we should talk more about is the product development trend that’s going on inside these boutiques as well. There’s some virtual circles as we add distribution and get exposure to these clients, begin to have the conversations on how do we solve – I don’t want to be talking about it as though it’s a complete solutions kind of thing, but how do we address client needs? There’s a fair bit of product development going on as well.

William Katz – Citigroup Global Markets

Okay. That’s helpful. And then just from a big picture perspective, you sort of highlighted the strength of the pipeline, you discussed it. Could you talk a little bit about where you’re seeing the greatest opportunity set and the related pricing thereof?

Sean Healey

Sure. As we’ve said earlier in the year, the opportunity set is increasingly global and increasingly alternative. Although we see a diverse group, which includes a number of traditional managers as well in the pipeline, and echo the points that we made earlier. The pipeline is very strong.

You know we don’t get in the position of quantifying the size of the pipeline at any given point or predicting the precise timing of new investments. But we feel very good about the pipeline and obviously the underlying new investment effort reflects our strategy of focusing in product areas like global and emerging market equities and alternatives, although we are very happy to invest in great firms wherever and however they’re positioned.

William Katz – Citigroup Global Markets

In terms of pricing, any major shift in the sort of 8 to 10 times run rate EBITDA?

Sean Healey

No. I would say the environment remains quite favorable for us and for sellers in general. So, no.

William Katz – Citigroup Global Markets

Okay. Just one last question; thanks for taking them all. In the retail business, if you look at the Sim Fund data from the U.S., kind of at a billion dollars I think for the quarter. But then if you strip out the $3 billion lumpy runoff that they highlighted you’ve about doubled that. Could you talk a little bit about the delta in terms of where you’re seeing that lift? Is it in the separately managed account area? And if so, what products might be driving that?

Nathaniel Dalton

So, I think if you try to draw the line between the Sim Fund data and our mutual fund channel flows, there’s probably two major components, right? One is sub-advisory where I think there are some sub-advisory wins as well. There were some sub-advisory wins as well, including some sizable ones. And so that’s one big piece. And the other piece is the non-U.S. mutual funds. So, a firm like – you know like an Artemis, which has a family of very highly regarded funds in the U.K. is also in our mutual fund segment.

William Katz – Citigroup Global Markets

Okay. Thanks. Thanks, guys.

Operator

Thank you. Our next question is from the line of Dan Fannon of Jefferies & Company. Please state your question.

Daniel Fannon – Jefferies & Co.

Hi. Good morning.

Nathaniel Dalton

Good morning, Dan.

Daniel Fannon – Jefferies & Co.

In terms of the distribution, if you could kind of – you talked about the international component. If you could break down how much of the flows are coming from the affiliates themselves and what the AMG sponsor distribution is contributing?

Nathaniel Dalton

Okay. Well let me do a couple of a different pieces here and first, let me step back a little bit which is so everyone understands on all of the flows, right, the affiliate is still playing or is still playing, the affiliate is playing a very significant, I’ll say, the most significant roles in winning the business, right, even where our sales guys in some market are making introductions a significant portion of the work to bring it from that point through the finals into win is been done by the affiliates. So, we would never talk about it as, hey this awesome versus, right. So, that’s one observation.

The other important point is we build our platform to work and integrate seamlessly with each affiliate and the affiliates have different strengths, right, so one way to express this is some affiliates are heavy users of us in some geographies than others and affiliates can map us to their own resources as well.

So, that’s another sort of important point to make it as you sort of think about the platform. So it’s – the affiliates are doing a lot of the work. (inaudible) we’re integrating and the thing that we’re adding in a lot of geographies is just the very high end local sales marketing client, senior sales marketing clients or the professional who has local market expertise, local market client relationships; those sorts of things.

So, within that framework it’s obviously going very, very well and this quarter a significant portion of the flows involved our resources. So, it was a big contributor this quarter.

Daniel Fannon – Jefferies & Co.

Okay. And then in terms of the redemption trends maybe on the institutional side if you could talk about where their, what I guess managers are seeing redemptions and does that I guess differ from where the sales are coming from.

Nathaniel Dalton

Yes. So, just isolating on the institutional channel then, so I think there really was – the redemption trend actually – the institutional channel I think came down a little bit. The places if you sort of think about the broad themes we described, some of it is product. We are seeing more redemptions in U.S. equity and more sales in global emerging and alternative, so that’s definitely a piece of it.

And then within the institutional channel, we’re also seeing more, and some of this is also a combination of mix and geography, we’re also seeing more sales outside the U.S. and a different mix in the U.S. where we’re seeing more redemption. So, but that’s also a function a little bit of the product mix and what products are being sold. We obviously have a larger installed U.S. equity base in the U.S., so it’s hard to separate those two out.

Sean Healey

I think I would add that the U.S. channel, the U.S. retail but also institutional channels represent a huge opportunity if you think about it. They’re continuing to show outflows in active equity and we’ve been saying for over a year that at some point we see a re-risking and I think that will still – it obviously hasn’t happened yet and it will depend on macroeconomic factors and political factors. But over time our view is that inevitably retail and institutional investors in the U.S., as the investors, especially institutional investors outside the U.S. have already started doing, will increasingly focus on return-oriented assets.

And so we think we’re ideally positioned for that turn, that re-risking. It will, of course, also benefit our U.S. equity affiliates and product set, but we think when that turn comes it’s a big opportunity and we’re generating very strong growth into equities, global equities and emerging market equities and alternatives, not into fixed income, not into passive. Obviously those aren’t big product areas for us and we’re generating those flows without any material contribution from U.S. investors to this point.

Daniel Fannon – Jefferies & Co.

Great. Thank you.

Operator

Thank you. Our next question is from the line of Cynthia Mayer, Bank of America. Please state your question.

Cynthia Mayer – Bank of America Merrill Lynch

Hi, good morning. Thank you.

Sean Healey

Good morning.

Cynthia Mayer – Bank of America Merrill Lynch

Let’s see, couple questions. One is just in terms of building out the distribution, can you maybe talk about what kind of further investments you expect and is that all included in the guidance you gave on holding company expense or are those expenses in other lines?

Sean Healey

I would say it is all included in the guidance obviously for this year. We haven’t guided to next year yet, but all of the investments that we have made and will continue to make are embedded in the guidance. Nate, why don’t you talk about where we’re specifically adding folks?

Nathaniel Dalton

Sure. So, given the – this actually is a good follow-on from that framework we described. What we need to do is add those, especially in the global institutional regional builds, add those very senior resources. So, we’ve been adding – you’ve seen, we’ve been adding judiciously and we’ve really been building it along where we see the flow momentum. So if you sort of look back at this year, we really only added one regional coverage, the Nordex so far as well as obviously adding Andrew, which is a significant move for us.

Looking at the rest of this year, I think you’ll see us probably add at least one more of that sort of same sort of regional coverage and as you heard us say, I think you’ve heard us say, we’re opening our office in Dubai. We’ve been running our Middle East business from London to this point, and we’ll be moving some resources, but I also think you’ll see us adding additional resources, as well.

Cynthia Mayer – Bank of America Merrill Lynch

Okay. And then in terms of the performance fees, you mentioned that ValueAct generated a big performance fee in this quarter. Could you just remind us what the timing is for the performance fees in terms of 2Q versus 4Q, or other quarters?

Sean Healey

So. Yeah. The most significant quarter, of course, for us is the fourth quarter. We do experience performance fees throughout each of the quarters. Our second quarter is generally our highest quarter outside of the fourth quarter. We did get performance fees from a large number of contributors in the quarter. ValueAct was one of the larger ones, but of course, we had AQR, First Quadrant and Genesis as well. And we continue to see the opportunity at ValueAct as well as the large number of contributors for the back half of the year.

Cynthia Mayer – Bank of America Merrill Lynch

Okay. And this last question. Maybe you could talk a little more about the wealth management strategy? What is the timing on those kinds of acquisitions, and maybe a little bit of how you see the profit and growth characteristics of those. For instance, if they are more high-touch with clients, does that lead to more succession issues? Would there be more or less – is the growth rate more or less fast? Thanks.

Sean Healey

Sure. Well, we’re obviously just launching our wealth management strategy. I would say it’s off to a great start. We hired, as you saw, John Copeland who has a tremendous track record of experience and relationships in the wealth management business, most recently from a senior position at Morgan Stanley. John and his team, I think, are going to do a fabulous job in building relationships and articulating the opportunity, which is of course different, but related to the AMG partnership approach. And I think combining the focus strategy with our track record of successful investments and our approach to being a good partner and our understanding of the structural elements in making investments of this form is all going to work very well.

We’ve already been working – or they are – working actively with a number of perspective new wealth management affiliates. There’s no sort of like our approach to new investments generally, we avoid a specific target in terms of the number of new investments or the precise timing. But obviously over the medium to long term we’ll know what success is and I think we’re quite confident that they will be successful in building a really scalable, or, I’m sorry, a scaled business.

With respect to your question about the dynamics of wealth management firms relative to institutional boutique asset management firms, it’s hard to generalize but wealth management firms typically will be more stable over time because the relationships are on a broader base of products. But they are less scalable. You’ve got to add more key people to achieve growth as opposed to institutional firms where you can achieve obviously very dramatic growth in assets without necessarily adding lots more people. So a different dynamic but one that I think is a nice complement to our broader business and we’re looking forward to seeing them grow the business and succeed over time.

Cynthia Mayer – Bank of America Merrill Lynch

Thanks a lot.

Sean Healey

Sure.

Operator

Thank you. Our next question is from Robert Lee with KBW. Please state your question.

Robert Lee – Keefe, Bruyette & Woods

Thank you. Good morning, everyone.

Sean Healey

Good morning.

Robert Lee – Keefe, Bruyette & Woods

If we can maybe shift back to the global distribution initiatives and understanding you’re still kind of building out some regional capabilities opening up the office in Dubai, but if we kind of look down the road, is there kind of a next phase that you see to this? I assume there’s only so many locations you’re going to expand to and beyond having some incremental staff here and there is it reasonable to think that somewhere down the road you start even developing some type of product capabilities that can kind of rope in various managers to manage strategies? Or is that really just kind of too far afield from how you envision the business?

Sean Healey

I’ll start and then ask Nate to fill in more of the details. I think it’s important to understand that we’ve been at this for a while now. We began prior to the financial crisis in 2007, and we’ve been building throughout the past four years and what we have put in place is obviously working. So it’s early in some respects but we are in many of the key markets and the penetration is good but we continue to see opportunity to sell additional products through the relationships that we’ve established and obviously we’re – existing affiliates are adding new products and as we bring on new affiliates there are even more opportunities.

So we feel very good about how we’re positioned and think there’s a lot of growth based on what we’ve already built. But as you know we are still building. So why don’t I let Nate turn and talk about that?

Nathaniel Dalton

Maybe to use the framework you set up, which is sort of stages, right? So, one stage of this is certainly regional coverage, right? And we’ve been adding regional coverage starting where we think. And we here is not just – is sort of often our affiliates working together, where we think we can get the most leverage. And so you saw us do sort of Australia and Middle East, Europe and Asia. And then within some of those building out focused regional coverage, the Nordex example I gave.

The first that I’d say is while we’ve been doing this for a while, as Sean described, some of these, Asia is a perfect example, you know is really not producing in the way that it will as it gets mature. So we’ve sort of got a roughly couple-year cycle as we enter a region to begin getting the benefit of the focus of the individual that we’ve got, and bringing the story and the individual (inaudible) to market. And so some regions we’ve done that and we’re sort of past that stage. Some regions we’re still doing that first stage.

Then once we do that it’s begin – we’ve built the pipeline, we start winning business. And I think we’ve talked about this a little bit before, but the next sort of sets of stages are getting the leverage, both within a region, as you move from selling – talking about the story to selling a product to then cross-selling into client relationships, right? The beauty of our model is each of these people will be able to come with a range of products, and will always be able to be helpful to a prospect or an intermediary consultant or a platform. So, that cross-sell within regions and then also the cross-sell across regions and the leverage inherent as we’re building relationships – global relationships with other global players, whether those are consulting firms or platforms, right?

So, I think we’re still in the – in the sort of execution stages of all of those, and for some, the very early execution stages. So, it’s adding coverage as well as getting leverage out of it. And then you know on the other end of that there are additional things to talk about from, as you said, sort of are there ways we can be doing some things in product development and whatnot; absolutely. But we’ve got a lot of very good things we can do before that.

Sean Healey

The last thing I would add is that we should highlight the addition of Andrew Dyson, who is a tremendously highly regarded executive in this area with a great track record of success at BlackRock. And we’re very confident that Andrew is going to make a very substantial contribution to accelerating the growth that we’re seeing.

Robert Lee – Keefe, Bruyette & Woods

And maybe one follow-up question, still on the global distribution. Is it – to what extent are you seeing in different countries, and I’m thinking maybe in particular Australia if they’re superannuation products, excuse me. Are you seeing sales coming in what I call maybe a recurring sale kind of platform where you maybe you win an initial mandate but then there could be ongoing sales for whatever reason?

Nathaniel Dalton

Absolutely. We have made sales, in Australia as an example, into platforms that have the recurring component to them as well as the kind of cross-sell opportunities I mentioned earlier. I will say one of the other places we have not yet done and Andrew I think will absolutely lead this is we need to – there isn’t a lot more we can do in the platform sales area. There’s some packaging components to that as well but there are other – it’s not just geography, it’s also channels within geography that we still have really just started to work on.

Sean Healey

And it’s not limited to superannuation funds. Obviously sovereign wealth fund clients in many cases are rapidly growing their assets as well. So if you have a strong position starting with an overall firm relationship but also a set of specific product relationships that positions you very well for ongoing growth just from that existing client.

Robert Lee – Keefe, Bruyette & Woods

All right. Great. That was it. Thank you.

Sean Healey

Thanks.

Operator

Thank you. Our next question is from the line of Marc Irizarry with Goldman Sachs. Please state your question.

Marc Irizarry – Goldman Sachs & Co.

Oh great. Thanks. Just in terms of the guidance maybe for you, Jay. The range is not going up here your second quarter. I think you had $0.15 or so and sort of consider one time, sort of one timers in there. Is this just conservatism or is it performance fees that would generate in the second quarter? And then maybe you could just talk about how much performance fees are of that guidance range.

Jay Horgen

Okay. So, on your first point we did reflect in our thinking the one-time charge. I think the most positive thing I can say in spite of sort of modest data year-to-date are flow profile has substantially offset and even exceeded the offsetting data, lackluster data and so when we look at the guidance range we imagined that we have a continuation of the current trends and flows and we also see additional opportunity for performance fees. So those taken together I think we believe that the guidance being unchanged is the right guidance in spite of the $0.15 charge.

Sean Healey

Indeed it’s effectively adding $0.15 to both ends of the guidance range.

Marc Irizarry – Goldman Sachs & Co.

Okay, great. Thanks.

Sean Healey

Sure.

Operator

Thank you. Our next question is from the line of Michael Kim with Sandler O’Neill. Please state your question.

Michael Kim – Sandler O’Neill & Partners

Hey, guys. Good morning. Just given kind of the existing capacity on the balance sheet, does the new forward equity agreement kind of suggest anything new here in terms of how you’re thinking about the deal pipeline? And then how should we be thinking about the funding mix for incremental deals in terms of utilizing, again, existing capacity versus maybe drawing down on the equity forward?

Sean Healey

Right. So Michael, I think the most important thing to say is, you know, the equity forward is a good housekeeping, normal course filing for us where we want to be ready to the extent that we see substantial deal activity in front of us. And if we do, then we will consider using this program.

As it relates to mix of capital structure, we’re always going to be cautious about issuing equity, and there is certainly a level of deal size that we can do right off our balance sheet either to through the revolver or just cash that we have on hand, and we imagine that that number is, you know, pretty significant today.

I think as I mentioned earlier to the answer of the earlier question, we did about $300 million of equity in an environment where we had $1.1 billion of deals. And we’re a bigger company today and I think that’s probably as close to the right framework. Ultimately depends on the type of deal. It depends on, you know, the spacing of transactions, and it depends on our conversations with other constituents like the rating agencies.

Michael Kim – Sandler O’Neill & Partners

Okay, great, thanks.

Sean Healey

Sure.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back to Mr. Healey for closing comments.

Sean Healey

Thank you, all, once again, for joining us this morning. As you’ve heard, we’re pleased with our results for the quarter and believe we’re well positioned to continue to generate strong organic growth as well as to enhance our growth through accretive investments and new affiliates. We look forward to speaking with you again in October, thanks.

Operator

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

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