Affiliated Managers Group's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Affiliated Managers Group, Inc. (NYSE:AMG) Q4 2011 Earnings Call January 31, 2012 11:00 AM ET

Executives

Sean Healey - Chairman & Chief Executive Officer
Nate Dalton - President & Chief Operating Officer
Jay Horgen - Chief Financial Officer
Alexandra Lynn - Vice President of Corporate Strategy & Investor Relations

Analysts

Bill Katz - Citigroup

Robert Lee - KBW

Michael Kim - Sandler O’Neill

Daniel Fannon - Jefferies & Co.

Craig Siegenthaler - Credit Suisse Group

Cynthia Mayer - Bank of America

Operator

Greetings and welcome to the Affiliated Managers Group, fourth quarter 2011 earnings call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions).

It is now my pleasure to introduce your host, Alexandra Lynn, Vice President of Corporate Strategy and Investor Relations for Affiliated Managers Group. Thank you. Ms. Lynn, you may begin.

Alexandra Lynn

Thank you for joining Affiliated Managers Group to discuss our results for the fourth quarter and full year of 2011.

In this conference call certain matters discussed will constitute forward-looking statements. Actual results could differ materially from those projected due to a number of factors, including but not limited to those referenced in the company’s Form 10-K and other filings we make with the SEC from time to time. We assume no obligation to update any forward-looking statements made during this call.

AMG will provide on its website at www.amg.com, a replay of the call and a copy of our announcement of our results for the quarter, as well as a reconciliation of any non-GAAP financial measures to the most directly comparable GAAP financial measures.

With us on the line to discuss the company’s results for the quarter are Sean Healey, Chairman and 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 and good morning everyone. AMG reported economic earnings per share of $1.76 for the fourth quarter and $6.62 for the full year. Despite the volatile markets in 2011, including 15% to 20% declines in non-U.S. equity markets, AMG generated strong results with year-over-year earnings growth and outstanding net client cash flows of $23 billion.

Against an industry backdrop of muted client demand for alpha generating products, we were very pleased with our organic growth from net client flows of $4 billion in the quarter, marking our seventh consequent quarter of strong net inflows. Our net flows which lead the industry in return oriented products reflect the quality of our specialist affiliates, our unique position in highly attracted product areas and the ongoing success of our global distribution strategy. Our strategic focus on global and emerging market equity and alternative products, which collectively account for three quarters of our EBITDA, continues to drive the growth of our business.

Our highly regarded affiliates are leaders in their respective investment disciplines, including global and emerging market equity managers such as Tweedy, Browne, Genesis and Harding Loevner and alternative firms like Pantheon, AQR, BlueMountain and ValueAct. Our affiliates continue to generate excellent relevant investment performance in these areas and we are particularly pleased and proud that Tweedy, Browne was just named Morningstar’s International Stock Manager of the Year for 2011.

Our global distribution strategy combines the resources and scale of a global asset management company, with the investment expertise of our boutique affiliates and continues to generate strong client cash flows, especially from non-U.S. clients, which accounted for all of our net flows this quarter.

We are seeing strong momentum in the East region, including Australia, the Middle East, Europe and Asia and given the ongoing success of our global strategy, we are continuing to invest in our distribution platform worldwide, with the addition of new personnel and incremental coverage regions.

Given our forward new business pipeline and the strong execution of our global distribution strategy, we continue to be confident in both our near and long-term organic growth prospects. We’ve generated strong organic growth from net client flows in a difficult period for return oriented products and we expect that we will see even greater growth as markets stabilize and institutional and retail investors, including especially the U.S. investors, increasingly return to risk oriented products. This trend will benefit our affiliates broadly and we expect continuing and even accelerating client demand for our global and emerging markets equity and alternative products.

Finally we are making significant progress in the new investments area. As we noted, our market position and opportunity set are outstanding and we’re having active discussions with traditional, alternative and wealth management prospects around the world, with prospective affiliates at all stages of the pipeline. While the timing and execution of transactions is inherently difficult to predict, we are confident that we will continue to materially enhance our earnings growth through accretive investments and new affiliates going forward.

Looking ahead, we are very well positioned across all aspects of our business. We have a fantastic group of performance-oriented affiliates, which are recognized as industry leaders in highly attractive product areas. We’re successfully executing our global distribution strategy and generating outstanding net client cash flows even in a volatile market environment. And finally our new investment opportunity is better than ever.

While there are ongoing concerns about the macro economic and political environment, we come into 2012, poised to build on our strong momentum and are feeling very optimistic of our business and forward prospects.

Let me now turn it over to Nate, who will discuss our affiliates results in greater detail.

Nate Dalton

Thanks. Good morning everyone. Against some challenging backdrop, we and our affiliates executed very well in 2011. While we’re speaking, our affiliates continue to generate strong, relative returns, particularly in the global equities, emerging markets and alternatives areas. The combination of this strong performance and our global distribution strategy, which Sean outlined, resulted in industry leading flows for 2011.

As we described in the release, net client cash flows were over $4 billion for the fourth quarter and $23 billion for the full year. With seven straight quarters of strong, positive client cash flows, we are very pleased with the execution of our organic growth strategy. This success is especially notable, given the predominant flow trends last year favored fixed income products.

We are very encouraged not only by the ongoing tactical opportunities we see to further enhance our affiliates reach on a global basis, but also by the long term macro opportunity as investors re-risk their portfolios and move back to return oriented products. As we said before, we believe institutional and retail investors both will have to do this in order to achieve the returns they need.

Now I’m turning to the most important element, investment performance. In the global equity category we had another strong quarter. The majority of Tweedy, Browne outperformed on a relative basis for the quarter and year and remained well ahead of benchmarks across all relevant time periods. As Sean mentioned, we are very proud of the team at Tweedy, Browne, which received Morningstar’s International Stock Manager of the Year award for 2011.

Harding Loevner also had a very impressive year overall, with the majority of their global equity funds outperforming for the quarter and still remaining ahead for the full year, as well as longer term periods. AQR and Trilogy, each also had a good quarter among their largest global equity products.

In the emerging markets category, we had another strong quarter and year. The flagship strategy at Genesis continued to post excellent results and is significantly ahead of it’s benchmarks for the quarter one, three and five year periods. Similarly, Harding Loevner’s emerging market products significantly outperformed their benchmarks in the fourth quarter and for the full year.

Now turning to our alternatives category, we have strong absolute performance among many of our largest products, which despite the difficult market environment delivered meaningful performance fees. Highlights include good performance from major products at AQR, BlueMountain and ValueAct.

At AQR this included especially strong performance from their global risk premium, aggressive multi strategy and diversified arbitrage funds. While at BlueMountain this included their flagship credit alternatives fund, as well as their newer long-term credit fund.

We had more of a mixed performances for First Quadrant, with strong performance from their data oriented products and a slightly negative quarter, but a strong full year from their tactical currency products. Global PA on the other hand was down slightly for the year. Finally, ValueAct had another great year, with excellent performance across all strategies.

Turning to our U.S. equity products and starting on the value side. As I noted earlier, Tweedy Browne generated outstanding performance across its global products. Their U.S. equity products missed for the quarter, but were ahead of benchmarks for the full-year as well as longer time periods.

Third Avenue’s U.S. equity products generally missed for the quarter as well, while Systematic Financial Management delivered very strong performance across its value product set in the fourth quarter.

On the growth side, fundamentally it was a challenging market environment for many managers. We saw this at Frontier where the firm’s products trailed their respective benchmarks, as well as with Friess Associates, which continue to face challenges from a performance and flow perspective. Times Square on the other hand generated outstanding performance really across a suite of growth strategies.

Now turning to flows in more detail. As I said, we had another quarter of strong growth with approximately $4.1 billion in positive net client cash flows, coming principally in the global equities, emerging markets equities and alternatives areas.

We do continue to see outflows in U.S. equities, reflecting broader industry trends. From a geographic standpoint, on a net basis, all of our flow growth is coming from clients outside the U.S.

Now, let me describe the flows for the quarter by channel. Starting with the institutional channel, we had positive flows of approximately $3.1 billion. Looking at flows in greater detail, it was a quarter where we had significant flows in global and emerging markets products and alternatives strategies, with notable contributions from Genesis, AQR, Harding Loevner, and Pantheon.

As we always say, flows in the institutional channel are inherently lumpy and this quarter was no exception as there were some sizable wins. That said, the long-term trend remains very good, in terms of pipeline of won business, finals and RFPs.

Moving to the mutual fund channel, we had positive flows of over $600 million, again, continuing the positive trend over the past several quarters. From a product category standpoint, we had strong flows into alternative and some global strategies, offset by outflows in U.S. equities.

I’ll reiterate that while we are benefiting from the trend to alternative products, we believe our affiliates outstanding and diverse product set enables us to continue to generate positive flows in this channel, despite the fact that fixed income is a very small portion of our business and we do not offer any passive products.

This quarter we again had strong flows in the sub-advisory channel and especially for alternatives and global equity products in the sub-advisory channel. As I said before, our sub-advisory distribution platform has done a good job of generating new business for our affiliates.

In our High Net Worth channel, flows were about $300 million for the quarter. We had positive flows from Gannett Welsh & Kotler, which continues to attract flows for our U.S. retail distribution platform, while Canadian affiliate Beutel also attracted positive flows.

Finally, turning to our overall global distribution efforts. In 2012 we’ll celebrate the fifth anniversary of our first international office, which we opened in Sydney, Australia. We saw the growing demand for performance-oriented boutiques among sophisticated institutional investors worldwide and we continued to build out the platform even during the financial crisis, bringing new regions online and recruiting outstanding teams to cover the Middle East, Europe and Asia and opening offices in London and Hong Kong.

As we look at this initiative today, we are obviously pleased with our execution so far. But looking ahead, with the hiring of Andrew Dyson to lead the team, we are very optimistic for continued growth within the regions and channels we are covering and we continue to work towards expanding into additional regions and channels as well.

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

Jay Horgen

Thank you Nate. As you saw in the release, we reported economic earnings per share of $1.76 for the fourth quarter with performance fees contributing $0.26. On a GAAP basis we reported earnings of $0.77 per share. The ratio of our EBITDA contribution to end of period assets under management was about 16.8 basis points for the fourth quarter, reflecting the strong contribution of performance fees. We expect this ratio to return to approximately 15 basis points for the first quarter and 16 basis points for the full year 2012, which includes a reasonable assumption for performance fees.

Holding company expenses were $21 million in the fourth quarter and we expect them to continue at this level, reflecting our ongoing focus on operational efficiency, while at the same time we continue to invest in our global distribution effort.

In the fourth quarter, there were two GAAP accounting items to point out, neither of which impacted our economic earnings per share. The first was a $9.2 million expense, resulting from a reduction in indefinite-lived ACR and the second was a $4.8 million gain, resulting from adjustments to our contingent payment liabilities. Together and after adjusting for taxes, these items reduced our GAAP earnings per share by a net $0.07, but as I mentioned, these were non-cash items, that have no effect on our economic earnings per share.

With regard to our taxes, our effective GAAP tax rate for the fourth quarter was 30.6%, reflecting flow-through items and an adjustment resulting from U.K. tax law changes. Our cash tax rate was 22.5% for the quarter, primarily due to the strong contribution of performance fees, as well as flow-through items.

For modeling purposes we expect our GAAP tax rate to be 36% going forward and we expect our cash tax rate to decline to approximately 15% in the first quarter and then trend upward in 2012 with organic growth and performance fees.

Intangible-related deferred taxes were $7 million for the fourth quarter, also reflecting the U.K. tax rate change and the ACR adjustment I mentioned earlier. Going forward, we expect intangible-related deferred taxes to return to approximately $13 million per quarter.

With reported amortization of intangible assets of $31.3 million, our share was $27.9 million and together with $8.2 million of amortization from affiliates accounted under the equity method, AMG’s controlling interest portion of amortization was $36.1 million in the quarter. We expect our amortization to return to a normalized $27 million per quarter going forward.

For the fourth quarter, our portion of total interest expense was $20.7 million, which included non-cash imputed interest of $2.5 million pre-tax. We expect our total interest expense to return to approximately $26 million for the first quarter and going forward.

Turning to our balance sheet, in November we refinanced our bank facility with a new $1 billion, five-year, unsecured revolver in term loan, together with our flexible and liquid capital position, strong recurring cash flow and low leverage, we are well positioned to execute on our growth strategy.

Now turning to guidance. We are raising the bottom end of our 2012 guidance and expect our economic earnings per share to be in the range of $6.70 to $7.40. This guidance assumes our normal convention of markets through yesterday with 2% quarterly growth beginning in the second quarter and a weighted average share count of $53 million.

The lower end of our 2012 guidance includes a relatively modest contribution for performance fees and organic growth, while the upper end of the range is simply a more robust contribution from performance fees and full expectation.

As always, these assumptions do not include earnings from future new investments and are based on our current expectations of affiliate growth rates, performance and the mix of affiliate contributions to our earnings. Of course, substantial changes in markets and the earnings contribution of affiliates would impact these expectations.

Now, we would be happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question is from the line of Bill Katz of Citigroup. Please proceed with your question.

Bill Katz - Citigroup

Okay, thanks very much. Just sort of starting with the new investment opportunity, I think Blackrock earlier in the quarter had suggested that the supply-demand is sort of asymmetric to the benefit of the other buyers. I think that’s what you’ve been talking about for a bit of time. So just sort of curious, what’s going to be the trigger to actually get a deal done and then secondarily, can you talk a little about some of the pricing dynamics as you see them on a sort of a go-forward basis?

Sean Healey

Thanks Bill. I think we have been saying for quite some time that the supply-demand balance among buyers and sellers is highly favorable to us, and I’d note that relative to other public asset management companies, as well as the mix of other buyers, which of course as a whole has contracted significantly. The opportunity set that we’re looking at is relatively differentiated and unique. Many of the opportunities that we are working on are one-on-one transactions that are the product of years of relationship building, for example.

I think going forward the only trigger that we’ll need is time. We need to execute to completion the transactions that we are working on. We need the market to avoid falling off a cliff, but as you could tell from the tone of our remarks, we are highly confident in the new investment opportunity set that we have.

Pricing continues to be favorable. Obviously, it varies according to the quality and nature of the firm, but we are seeing a great set of opportunities, both what’s in the market as well as what I’ll call more proprietary opportunities and are optimistic about this year.

Bill Katz - Citigroup

And sort of a follow-up question. I think you continue to sort of mention Friess continues to be challenged and I can appreciate the diversification of your business, but how much of a drag on flows is it and where are they in terms of assets and EBITDA contribution to the overall story?

Sean Healey

Nate, do you want to…

Nate Dalton

Sure. So I’ll spend a minute on Friess in general. So, I think as you know right, so a difficult period for U.S. equities in general, especially active U.S. equities and I don’t remember the exact number, but it’s something like 10% or 15% of active managers in the large-cap growth category, sort of beating the benchmarks, so it’s a difficult environment for them.

It’s especially difficult for firms with sort of their style, right, where they are looking for high earnings growth with reasonability. So the fact that the market, sort of moving in such a highly correlated way, sort of risk-on, risk-off ways, it’s just tough for them to get rewarded for identifying those kind of stocks they are identifying, and they are actually doing a good job identifying stocks here, but are going faster.

So you’re right; it’s a challenging environment and they have been in and out flows. The only thing I’ll say is – and again, we said this before, but I’m going to say this, it’s the same team, same process and we are very confident in that group. So we do feel good about that. But yeah, it’s a challenging space and they have been going through a challenging performance period.

Sean Healey

I think if you step back more broadly, part of what’s going on is just an industry-wide phenomenon, where active U.S. equities as a group are in massive outflows. I think our view is that that’s going to change and reverse and you’ll have equity inflows, active equity inflows, both in the U.S. as well as -- and this I think is the point that we want to emphasize, as well as in global and emerging market equities and alternatives.

So we’ve been generating very strong growth, notwithstanding the drag, which is common across U.S. equity managers of U.S. equity outflows and also notwithstanding the drag last year, which I think is easy to forget, because we think, Oh! The market ended up flat.

Global EAFE and the emerging market indices were down 15% and 20% respectively. So it was a very tough year for beta and as we look forward, we see that beta, hopefully no one knows of course in the short term, but we are confident that hopefully in the short term and absolutely in the long term, that that beta is going to be strongly positive in global and emerging market equities and we see continued strong inflows and to the extent that we have market stability and flows generally positive into active equities, we think we’ll get more than our share going forward.

Bill Katz – Citigroup

And just one last one, thanks for taking my questions. I think this one maybe for Jay. I’m sort of struggling with the low end of the guidance discussion a little bit. I can appreciate – obviously, it’s only January 31 and a dose of conservatism, as well as the averaging of asset issue.

That being said, with growing at 4% to 5% organic growth rate what appears to be a pretty good pipeline and new business, plus what seems to be in aggregate a good performance, notwithstanding Friess, I don’t understand why the low end of the guidance is as low as it is, particularly given your run rate earning is only to the new year. Maybe one or two more sentences on that would be helpful.

Jay Horgen

Sure. Thanks Bill, it’s Jay. Yes, no I think if you look at the market blend from the October call to now, it’s up just around 3%. But as you remember, our market convention is 2% per quarter, so 2% of that was expected and 1% is really the delta. So on a beta basis we have gotten a little bit of lift, but it’s modest. I think we certainly feel good about our prospects this year and we feel good about this range.

Bill Katz – Citigroup

Okay, thank you.

Operator

Thank you. Our next question is from the line of Robert Lee with KBW. Please proceed with your question.

Robert Lee – KBW

Thanks. Good morning guys.

Sean Healey

Good morning Robert.

Robert Lee – KBW

Sean, I have a question for you. I’m just curious with the transaction pipeline. I guess this really relates mainly to things you may be thinking about or in the pipeline in the U.S. To what extent does the perspective, fairly significant increases in capital gains and Medicare taxes and all that next year kind of do you think – do you think that could actually spur some activity at least in U.S. deals as the year progresses?

Sean Healey

I do, I do. I think the pipeline that we are working on includes a mix as we said of traditional, alternative and wealth management prospects and including on a global basis, and most of that pipeline consists of firms, where as you would expect given the timing of the year where we’ve been in discussions for some time and in a number of cases as I mentioned, exclusive discussions that are the product of a long-term relationship.

So I think we’ll continue to have those kinds of opportunities going forward, but I think there will be a catalytic effect, assuming markets are at least stable of the prospect of impending taxes that will encourage a number of independent firms that know that they must find a solution to their succession oriented issues and they don’t have any imperative to do it this year versus next year.

But there’s been as we’d talked about, a long build-up given the market volatility over the past few years and so inevitably we think that there will be an acceleration of transactions and I think you’re right. As we get later in the year, there could be an even bigger pick up in these transactions as people start to do their long-term planning.

Robert Lee – KBW

Okay, thanks. And maybe one follow-up. I’m just curious; this is specific to AQR and I know you’re probably going to be loathed to comment on it, but if I think back to that thing, it was maybe ‘07 or ‘06 when there was all kinds of things going around about them doing a kind of corporate strategic transaction in terms of an IPO or something.

I think to where they are now, it looks like they’ve substantially rebuilt it. They’ve done a pretty good job building a mutual fund platform along the way, which I think has been growing at a pretty rapid pace. So just curious to anything you can comment on it? Do you think they’ve kind of given up a lot of those thoughts? You think there is some possibility as they rebuilt the firms substantially and remade it, that they could be thinking along those lines since you’re still a minority holder?

Sean Healey

I think there is absolutely no news to report on that front. Their focus has been 100% on building their firm. They’ve done a fabulous job over the past two years in a whole bunch of ways and of course with any of our investments, where we have a minority interest, there’s the theoretical possibility, but that’s certainly not in the prospect.

Robert Lee – KBW

Great. That was it. Thanks for taking my question.

Operator

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

Michael Kim - Sandler O’Neill

Hi guys, good morning. Maybe just to kind of approach the deal pipeline a bit differently, can you just kind of talk about where you are in terms of the different stages of getting something done, so where you might stand as it relates to potential transactions that are maybe more sensitive to the markets or the environment versus those that just need to get through some kind of final due diligence if you will?

Sean Healey

I don’t there are any firms where we would expect that there’s an unusual exposure to or lack of exposure to market volatility. I think it’s obviously going to vary to some extent by firm, but in general, I think as long as markets are stable, we feel confident in our ability to execute a number of transactions this year.

I said, as much as you can really say, in our prepared remarks I said we have investments or prospective affiliates at all stages of the pipeline. So that means all stages, but I can’t be more specific about timing and inevitably it is quite difficult to predict, even when we are very close to a transaction, sometimes it gets pushed off or deferred, but we look at our entire set of opportunities and feel very good about it.

Michael Kim - Sandler O’Neill

Okay, fair enough. And then moving on to capital management, I don’t think you bought back a meaningful amount of stock during the quarter, so was that more a function of maybe a bit better visibility into deals like you talked about or how much of that was related to kind of price sensitivity?

Nate Dalton

We just bought a few shares, I think less than 200,000 in the quarter Michael and it was earlier in the quarter. It really is a view of the pipeline or forward pipeline and use of cash.

Michael Kim - Sandler O’Neill

Okay, and then finally just another one for Jay. In terms of the guidance range, can you just walk through what you’re expecting or how you’re thinking about performance fees at both the low and the high ends?

Jay Horgen

Sure. Maybe I’ll take a step back and just talk about performance fees. We had $0.50 for the year, $0.26 in the fourth quarter. I think I would characterize that as a good year. I think we have the potential to do better than that in performance fees.

In the main we do not have high-water mark issues. I know that’s talked about a lot. Of course you can pick a product here and there that might, but in the main we do not have high-water mark issues. It’s just a question of return, absolute and relative, depending on the type of performance fee.

So I think we look at 2012, when we say our opportunity for performance fees is at least as good as it was in 2011, in part because we are having net flows and quite a number of alternative managers and their performance fee products.

So when we look at this year, of course we are more conservative on the low side and just frankly slightly more positive on the upside. We could actually go above our own estimate, if you will, internally on performance fees, because there is quite an upside opportunity there. But in the main we have kind of stuck to this 5% to 10% range on performance fees as a percentage of our earnings. We did about 7% this year and so that’s kind of the range that we are looking at.

Michael Kim - Sandler O’Neill

Okay, that’s helpful. Thanks for taking my questions.

Operator

Thank you. Our next question is from the line of Daniel Fannon of Jefferies & Co. Please proceed with your question.

Daniel Fannon - Jefferies & Co.

Hi, good morning. I guess the first question is on distribution flows. I think the comment was that a bulk of the flows are all coming from outside the U.S. I guess is it concentrated in one region or is it pretty well split out amongst all the different sales offices? If you can kind of give us some color there it would be helpful.

Nate Dalton

Sure. I think it’s pretty diverse. Let me talk about it along another dimension, which is maybe the opportunity too, right, so good flows coming from places like Australia and the Middle East where we’ve had distribution built and operating for a while, right.

In Australia we talked about coming up on our fifth anniversary. Really increasing flows in Europe, so that’s an area where we had sort of good flows in a bunch of areas, but we see a lot of opportunity going ahead and what we’re doing in Asia, for example, I still think it’s pretty early days and there’s a lot of upside opportunity there.

So I would say it’s broad and diverse, not just by regions, but also by affiliates. But I do think there are some places where we see the opportunity to really pick it up going ahead.

Daniel Fannon - Jefferies & Co.

Okay great. And then you said pipelines, RFPs, wins, all look good. I guess can you characterize that today versus at other points in 2011 where you made similar comments?

Nate Dalton

Okay. So obviously the huge caveat of – there are two caveats, very early in the quarter and then the second is you obviously have much more visibility to the wins than you do to the things you might lose, right. But, right, let me do it this way from a sort of won by not funded perspective. This quarter we were running decently ahead of where we were in the last quarter at this time and finals continue to be probably about the same page. So, maybe overall a little bit better than where we were coming into this quarter.

And then the other thing I’ll say, is if you sort of look at – we’ve been talking about this for a couple of quarters now. It did seem like the pace of decision-making in some parts of the institutional market got slowed down and I do think we had that effect and so some of that may just be, there maybe a little bit of build up in there as well, which we’ll hopefully see come through in closed business.

Daniel Fannon - Jefferies & Co.

Great. And then I guess Sean one more question about the deal opportunity. I guess just trying to compare to ‘08 and into ‘09 when you guys deployed a lot of capital, how would you kind of characterize your backlog today and opportunity set versus then?

Sean Healey

Well, Dan as you recall, ‘08 was the year to avoid deploying capital and the back half of ‘09 in hindsight, it wasn’t obvious at that time. It was the time to be making substantial investments, which we did.

I think every year is different. We have a number divestiture opportunities, but it’s nothing like the level that you saw at the back half of ‘09. The market opportunities and the supply-demand balance I think continue to be very positive as we said earlier, very much in our favor, specifically as well as for buyers generally in the market and we feel quite optimistic.

I think the opportunity set includes the full range and I would say it includes small firms, wealth management firms, which is new from just the past year, as well as some larger opportunities, which are I think unique and potentially attractive. So we look across that range and feel very good about the opportunities.

And then the core of our investment activity over the past 18 years has been and will continue to be succession-oriented transactions with independent firms, increasingly on a global basis. And we have a tremendous asset in the firm, which is our long-term relationships that we built up with these firms over time. I mean, last year was a year where we didn’t execute any investments, but I can assure you, we were very busy working with firms, building relationships, maintaining and enhancing the ones that we built over time.

And as we look forward, I think there will be inevitably, just for demographic reasons, a substantial increase in succession-oriented transactions. Taxes may be a catalyst, but I think as long as we have a measure of stability in the markets, there’s going to be a substantial set of opportunities for us and that’s what gives us the optimism, both in the short term with the existing pipeline, as well as over the medium to long-term where we feel very, very good about our position.

Daniel Fannon - Jefferies & Co.

Great. Thank you.

Sean Healey

Sure.

Operator

Thank you. Our next question is from the line of Craig Siegenthaler of Credit Suisse Group. Please proceed with your question.

Craig Siegenthaler - Credit Suisse Group

Thanks guys. Good morning.

Sean Healey

Good morning.

Craig Siegenthaler - Credit Suisse Group

And just to kind of maybe read between the lines on the M&A commentary, so question here really for Sean. It seems like you’re actually more positive at this point on the succession planning in terms of kind of the timing of the pipeline, but maybe a little softer on the divestiture side. So maybe I’m reading too much into that; maybe you can comment on that.

And also if maybe Jay you can pipe in, in terms of what is the kind of accretion ranges for deals? And I know some these larger deals could be very creative, some of the succession deals maybe a little smaller or maybe you can comment in terms of accretion ranges for potential acquisitions.

Sean Healey

I think to the extent that you heard me emphasize succession-oriented transactions more than divestiture transactions, I intended it to be more around the contrast between the world of ’09, early ‘10 and the world of today, where we certainly – in ‘09, it was very largely divestiture opportunities.

Today we’ve got some divestiture opportunities, many of which you have read about, but there are some others that are out there that we are looking at, but you’ve also got a huge array of succession-oriented transactions, potential investments in alternative firms, as well as wealth management, which is brand new for us. So it’s more the breadth than it is one category versus another. Jay.

Jay Horgen

Yes, and on the accretion, of course it depends on where we are and where we pay and how we fund it, but in general I would say our opportunity for accretion is exactly the same as we’ve said before, which is per $100 million, somewhere between $0.10 and $0.20. Again, it depends on what kind of consideration mix.

I think, of course we’ve got build-up of cash that’s occurring on our balance sheet now, and so there’s quite a bit of time before we’d even have to consider anything other than just issuing debt or taking it off of our revolver.

Craig Siegenthaler - Credit Suisse

Got it. Thank you. And Jay, just a housekeeping item, actually two housekeeping items. Will interest expense drop again in the first quarter, because you paid back that debt I believe in the middle of the fourth quarter, so I thought there might be another step down. And I believe you said performance fees are $0.26, meaning baseline EPS of $1.50. Did I get those two numbers right?

Jay Horgen

So, on the latter, yes, you got those numbers correct. On the interest expense, our cash interest expense will stay approximately the same quarter-over-quarter. We don’t expect to repay any debt. We just expect to accumulate cash or deploy it.

Craig Siegenthaler - Credit Suisse

All right, great guys. Thanks for taking my questions.

Sean Healey

Sure.

Operator

Thank you. Our final question today is coming from the line of Robert Lee of KBW. Please proceed with your question.

Robert Lee - KBW

Thanks. I just have one follow-up. I’m just, really just more curious; I think a couple of years ago you guys had taken a small stake in a – I think it was Value Partners in Hong Kong, it was a public traded manager. I think it was only a few percent. But I’m just kind of curious on any update in terms of how maybe that relationship has helped maybe gain some access to China or any possibility or intention to kind of increase your stake there?

Sean Healey

Well, we slightly increased our stake in Value Partners last year. It’s a unique opportunity, unique situation and a great firm and we’re great friends with Cheah Cheng Hye, the Chairman and Founder of Value Partners and from a broad relationship standpoint, both with Value Partners where we have a great ongoing relationship, which could continue to evolve over time, as well as in the perspective and relationships in the region that Mr. Cheah gives us.

I think it’s been terrific and we certainly as we look forward, expect to spend more and more time in the region, both in terms of new investment opportunities, as well as distribution, which of course is a huge focus for us. Maybe I’ll ask Nate to elaborate on the distribution front?

Nate Dalton

Sure. So it took us a little bit of time to sort of maybe exactly have to work together. We’ve started working, both with our institutional sales forces in a couple of regions, working with them on the sales and marketing client service side, so I think we just actually added them to the Europe platform. I think we’re going to be really helpful to them there, and it’s also helpful to our guys, because it’s a pretty unique differentiated product set.

And then also the other way, which is they are being very helpful to us as we look at a couple of specific things in different countries. I’m thinking of a specific opportunity in Taiwan where they are being very helpful to us, because of some relationships they’ve got both on the sort of general client servicing, as well as some regulatory things. So, again, it’s a great relationship and we are finding more and more ways to work together.

Robert Lee - KBW

All right, great. Thanks for the color.

Operator

Thank you. Gentlemen, we have one further question. It is from Cynthia Mayer of Bank of America. Please proceed with your question.

Cynthia Mayer - Bank of America

Hi, good morning.

Sean Healey

Good morning.

Cynthia Mayer - Bank of America

Can you talk a little about in terms of buying the wealth management firms, are those structured similarly and would those have the same accretion as a more typical asset management deal?

Sean Healey

Broadly speaking, yes. I think there’s certainly aspects to the relationship and the degree to which we can provide in the AMG Wealth Partners business, the broader set of capabilities or maybe I’ll say a different set of capabilities to help our wealth management affiliates; I think it will look a little bit different.

But the core approach and the core philosophy is very much the same, investing in very high quality growing businesses where the management partners want a degree of liquidity, but very much believe in the ongoing growth of their business.

I think with respect to the level of accretion in those investments, it’s really going to be a function of size and by and large they are at the smaller end, but not all, but they’ll tend to be at the smaller end of the size range of our investments and therefore just less accretive given the lower scale.

Cynthia Mayer - Bank of America

Great, okay. And then really briefly, it looks like through AQR you really benefited through the trend toward 40 Act alternative funds and how do you see that trend going? Do you see those flows industry-wide continuing to take greater and greater share or do think that if equity markets improve and equity flows improve, that those would back off a little bit and equity would take some share back from them?

Sean Healey

Why don’t you start and then I’ll…

Nate Dalton

So I think in the short run, the things we can see, right, and you asked a really challenging question. In the short run the things that we can see, I do think there’s lots of opportunities for them to continue to take share, both firms like AQR and First Quadrant but this idea of sort of liquid alternatives, I think there’s lots of opportunities in lots of different places where that can be used in retail investment structures, whether it’s ‘40 Act here or you said elsewhere in the world, so I do think there’s lots of opportunity for that.

We are working with a number of affiliates that have other alternative strategies to find ways to get them into sort of forms that can be used in these distribution channels. So I do think that trend has a bunch of legs.

If there is sort of very strong equity market returns, I think over time we do think that will of course have some impact on behaviors and this should be more, as the risk trade comes back on maybe, there should be increasing allocations to equities.

Will that come at the expense of what’s happening in the alternative space? My personal view, I think it’ll be a while before it really slowed it down dramatically, but at some point, sure, maybe.

Sean Healey

I think as we look more broadly, and you’ve probably heard our peers say this, it seems inevitable that there will be a return and a shift back in the cycle toward positive equity market betas, as well as positive active equity flows and to the extent that that occurs and when it occurs, I think there’s no question that we’ll benefit across our affiliate group, but I think our point is that we are given how we are positioned.

We are already generating industry-leading flows into return-oriented products and we see going forward to the extent that there’s a broad increase in active equity flows, a continuation and even we would argue an acceleration of our growth, because we believe that increasingly investors as they return to risk assets and this is U.S. as well as global investors, as they return to risk assets.

They will look increasingly not just to U.S. equity products but also to global and emerging market equities and also on an ongoing basis to alternative products and it’s really that optimism about our ongoing organic growth capability that gives us a lot of confidence going forward about our growth potential. It’s not just deals. We’re growing faster from an organic growth standpoint than any of our peers and we see that going forward.

Cynthia Mayer - Bank of America

Great. Thank you.

Sean Healey

Sure.

Operator

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

Sean Healey

Thank you again for joining us this morning. As you’ve heard, we are pleased with our results for the quarter and the year, especially given the market environment and confident in our prospects for continued growth ahead. We look forward to speaking with you again in April. Thanks.

Operator

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