OM Asset Management PLC (NYSE:OMAM)
Q3 2015 Earnings Conference Call
November 04, 2015, 10:00 ET
Brett Perryman - Head, IR
Peter Bain - President & CEO
Steve Belgrad - EVP & CFO
Craig Siegenthaler - Credit Suisse-North America
Michael Cyprys - Morgan Stanley
Bill Katz - Citi
Michael Kim - Sandler O'Neill & Partners
Adam Beatty - Bank of America Merrill Lynch
Patrick Davitt - Autonomous
Chris Harris - Wells Fargo Securities
Steve Horton - Philadelphia Financial
Robert Lee - Keefe, Bruyette & Woods North America
Welcome to the OMAM Earnings Conference Call and Webcast For The Third Quarter 2015. [Operator Instructions]. I would now like to turn the meeting over to Brett Perryman, Head of Investor Relations. Please go ahead, Brett.
Thank you. Good morning and welcome to OMAM's conference call to discuss our results for the third quarter of 2015. Before we get started, I would like to note that certain comments made on this call may constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as expect, anticipate, may, intend, believe, estimate, project, and other similar expressions.
Such statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from these forward-looking statements. These factors include, but are not limited to, the factors described in OMAM's filings made with the Securities and Exchange Commission, including our Form S-1 as filed with the SEC on June 8, 2015, as amended, under the heading "Risk Factors."
Any forward-looking statements that we make on this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. We urge you not to place undue reliance on any forward-looking statements.
During this call, we may discuss non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release which is available in the Investor Relations section of our website, where you will also find the slides that we will use as part of our discussion this morning.
Today's call will be led by Peter Bain, our President and Chief Executive Officer and Steve Belgrad, our Chief Financial Officer. I will now turn the call over to Peter.
Thank you, Brett. Good morning, everyone. Thank you for spending some time with us this morning. We certainly appreciate it. I will make a few opening observations and then I'll turn it over to Steve to walk you through some of the financial components of the results in more detail. And then, we will look forward to Q&A with you.
I think what it would start with is it was certainly a challenging quarter that we all lived through together. This third quarter of 2015 had the greatest market decline that we've seen since 2011, as you all know and we lived through that decline with substantially greater volatility than the prior periods.
So, with that as a backdrop, we were very pleased with our results for the third quarter of 2015. Our ENI delivered was $0.31 per share which is consistent with the prior-year third quarter and our total ENI for the quarter was $37.9 million which is up just under 1% over the third quarter of 2014.
On a flow basis, we had again an interesting quarter that reflects the business model that we're trying to build which is on an AUM outflow number of a net $2.5 billion in the quarter, we actually generated organic revenue growth again. And that $2.5 billion AUM net out actually translated into $700,000 of positive net revenue growth. And on a year-to-date basis, we've generated $25.5 million of organic net revenue flow which equates through the nine months to 3.5% of our beginning run rate management fees.
Again, this is reflecting that trend that we've been able to generate of concentrating our inflows in higher-fee products, with the bulk of our outflows being experienced in our lower-fee asset categories. In addition, I would make the observation that on the AUM front the net AUM outflow was impacted by a couple of substantial events. One is a single non-U.S. institutional withdrawal of about $1.9 billion. And the second is $900 million of hard asset disposals which, as you know, we report separately. We report those as outflows, because we think that's the right way to do it, but hard asset disposals are outflows that are only realized when one of our alternative managers actually harvests an asset for the benefit of its clients. So, as a business matter, it's a value-creating event.
Where that ends up is with an AUM total at September 30 so $209 billion which is 2% down from September 30 of 2014 and reflects an 8% sequential quarter decline in AUM. Of that 8%, only 1% is the flow number; 7% is attributable to the market in the third quarter. And again, when you look at our AUM breakdown with 36% of our AUM is U.S. equity and 40% in non-U.S. equity, a 7% market decline is something that we think is pretty solid.
And in fact, taking that and looking forward, we were very pleased with the investment performance that our affiliates delivered in this quarter. This was a good -- a real good, real-world test for the quality of investments disciplined and the quality of investment rigor in an active management business model. And our affiliates delivered performance that resulted in 68%, 84% and 93% of our revenue being generated by strategies beating benchmark on a one-, three- and five-year basis at the end of the quarter. We continue as disruptive as the market environment was to have conversations with high-quality investment management boutiques in the marketplace. We continue to try and build that relationship pipeline and that will continue to be a permanent part of our business model.
And the last opening observation I'll make this morning is that on October 30, Julian Roberts retired as both the CEO of Old Mutual plc, our majority shareholder, as well as the Chairman of our Board. And Julian was a tremendous supporter of OMAM. He understood our business model. He was a terrific source of wisdom and judgment and guidance for me. I will very much miss him and I certainly appreciate everything he did for us in our time together.
But I'm likewise pleased to announce that Jim Ritchie has been named our Chairman to replace Julian. Jim is a longstanding independent Director of the Firm. He's currently chair of our audit committee and on the nomination and governance committee. Jim has a deep understanding of our business model and our strategy. And I am delighted that he agreed to be our Chairman and I will look forward to working with Jim and our Board, going forward.
Shifting to slide 4, to try and begin to work through this, we have always taken a moment to talk about strategy. And I think that in the past we've tended to focus on some of the business model specific components of our strategy that we believe that our profit sharing relationship and our affiliates owning real equity in themselves enable us to bring to the marketplace. And that's tended to revolve around collaborative organic initiatives. We've talked about global distribution. Certainly, we've talked about the role that M&A will play.
But this quarter is a good quarter to remind ourselves of that core affiliate component of the business model. We believe we own seven tremendously strong active managers generating alpha for clients on a sustainable basis. This past quarter was a great test of that and we're very pleased at the core performance, the core value demonstrated by the quality of our affiliates' investment processes over the past quarter.
When you shift to slide 5, that gives you then a little bit of an update on AUM progression and mix. The top-left graph there gives you a sense of the trail of the last 12 months. Over that period, we actually have positive organic AUM flow of roughly 1%. and so, the $7 billion of AUM decline over the last 12 months really is purely a function of the market movement over that period.
And then, the bottom-left shows you just the most recent quarter. There, you see that $2.5 billion of AUM outflow combining with about just under 7% market decline, taking us to that $209 billion AUM level at September 30. On the right side, the one thing that I'd take a moment and share with you is the bottom-right chart of AUM by asset class. Interestingly, if you look at where we're sequential quarter, our alternative AUM has actually increased as a percentage of our overall AUM, from 16% to 18%. that's really a reflection of their solid performance in terms of investment results relative to the active equity markets.
And our U.S. equity as a percentage of our AUM has gone from 38% to 36%. that's a reflection of both the market decline, as well as the outflow on an AUM basis that was really centered in the U.S. equity markets. The flip side of that is if you take our international equity, global equity and emerging markets equity quarter over quarter, while those markets declined more on a percentage basis relative to U.S. equity -- and, certainly, alternatives -- we held ground well there in terms of flows. So, quarter over quarter, our international equity, global equity and emerging markets equity held constant as a percentage of our overall AUM.
Going to slide 6, you get a feel for that breakdown of how we look at AUM flow as well as revenue flow. And there, you see in the far-right bar, in both the AUM graph on the left and the revenue impact on the right, of how that $2.5 billion of AUM flow in the quarter actually translated into $700,000 of positive revenue growth.
What that enables us to do for you is to calculate which is the bottom line item in the left graph, our derived average weighted AUM flow. And what we do each quarter is we take the organic revenue growth which was $700,000 this quarter and then we simply apply our weighted average fee which is about 34.5 basis points. That enables us to impute back $700,000 of revenue at a weighted average fee of 34.5 basis points, calculates out to the $200 million positive derived AUM flow for the quarter.
So, essentially, what that tells you is our actual revenue generation in the quarter results in essentially a derived $2.7 billion positive delta on the AUM front. The other thing that I'll note is if you look at our revenue generation as an organic proposition, we've generated positive organic revenue growth in 13 of the last 15 calendar quarters. And slide 7 gives you again a little more breakdown on this AUM versus revenue distinction. The AUM graph on the left, what that shows you is of the $3.8 billion of outflow in our U.S. equity and fixed income asset classes, translated into only $6.9 million of revenue decline. Whereas, the $1.3 billion of positive net flows into non-U.S. equity translates into $7.6 million of positive organic revenue growth. So, that's where you can see the AUM net delta turning into a revenue positive delta.
Page 8 is the last one I'll spend some time on, because again I think this is when we turn our attention, from our perspective, forward-looking indicia. And here, you can see the way we look at performance which is on a three-way basis. We look at performance in terms of revenue being generated by strategies beating benchmark which is that revenue-weighted graph on the left.
The middle one which we call equal-weighted, is really tracking how many of our at-scale strategies are beating benchmark. And we've defined "at-scale" as having more than $100 million of assets in the strategy, because our view is that at that level it should be a marketable strategy.
And then, the far-right graph is the traditional asset-weighted AUM chart. Again, we're very pleased with the performance being delivered by our affiliates in this market. And what you'll note especially -- in a way, on the revenue basis you see it very strongly -- year-over-year improvement across the board, one, three and five year. That carries through to the equal-weighted and the asset-weighted strategies and is actually slightly more pronounced on that three- and five-year basis.
So, we think our affiliates really delivered and interestingly in certain asset categories where you would really want to see a strategy be tested by the kind of market environment we had in the third quarter and in particular I would point you toward what Acadian has developed in the managed volatility space. Those managed volatility strategies were ones you would want to look at in a quarter like the third quarter and we had meaningful outperformance by those managed volatility strategies in the quarter which is exactly what you would expect and hope to see with a strategy built that way. So, we were pleased by the alpha being generated by the affiliates, even in the face of a very challenging quarter.
And I think with those as my opening comments, I'll turn it over to Steve to walk you through a little more detail on the results.
Thanks, Peter and good morning. While the third quarter was obviously a challenging one from a market perspective, I think the company performed well, particularly with 7%5 of our assets in equities. Cash flows in the higher-fee products over the last 12 months positioned us to grow revenues even on a flat average asset base and the underlying business continues to show attractive operating margins despite the additional costs of being a public company.
Our drivers of profitability including key expense and tax metrics are generally in line with the levels outlined in previous calls and I'd expect this to remain the case for the remainder of the year. While a declining market is never pleasant to manage through, our results illustrate the benefit of our profit-sharing economic model. Lower revenue growth and higher expenses impacted employee owners at the affiliates as well as OMAM economics. In period of declining margin, the OMAM shareholder impact is cushioned by lower formulaic bonuses and distributions at the affiliates.
Comparing Q3 2015 to Q3 2014, economic net income was essentially flat quarter over quarter, at $38 million. While the market declines in August and September resulted in flat average assets from the year-ago quarter, excluding equity-accounted affiliates, our continued shift in asset mix towards higher-fee products enabled us to grow revenue by 4% combined operating expenses and variable comp grew 7% year over year, driven by higher G&SA which I'll discuss further, including sales-based compensation and the additional costs of being a public company.
As a result, the E&I operating margin declined from 38.1% in Q3 2014 to 36.7% in Q3 2015 public company costs of $2.7 million including variable comp reduced our margin by approximately 1.6% in the third quarter, from what would have been 38.3% to the 36.7% we reported. Our adjusted EBITDA increased 4%, to $53 million, for the third quarter of 2015, compared to Q3 2014.
Slide 10 gives a better perspective of our financial trends over the last five quarters, as essentially flat average AUM growth of 1% from Q3 2014 to Q3 2105 including equity accounted affiliates, combined with increasing fee rates to drive quarter-on-quarter E&I revenue growth of 4% and pretax E&I growth of 3%.
The increase in fee rates from 33.1 basis points in Q3 2014 to 34.5 basis points in the latest quarter reflects the increase of flows into higher-fee asset classes and the concentration of outflows in the lowest fee portion of our U.S. equity mandates. The margin of 37% in the third quarter is generally in line with the 37% to 38% margins we've seen over the last year in typical quarters, notwithstanding the 41% margin in Q4 2014 which reflects the high seasonal performance fees in the latest quarter of the year.
Slide 11 provides the E&I P&L for the three and nine months ended September 30, 2015 and 2014. the numbered circles to the left highlight profit drivers which we'll cover in more detail in subsequent slides. In this exhibit, we have excluded the extraordinary performance fee of $11.4 million net which we recorded in the second quarter of the year. Our revenue growth of 4% quarter on quarter was positively impacted by the increasing average fee rate described earlier and strong performance in our equity-accounted affiliates which comes through the Other Income line.
The diversification provided by our alternative businesses, Heitman and Campbell, are beneficial during periods of equity volatility like we've just experienced. Our revenue mix is highly stable, with over 95% from management fees this quarter. Performance fees of $3.3 million in Q3 2015 were 14% higher than the $2.9 in fees reported in the year-ago quarter and include timber performance fees which are allocated to employees only through variable comp.
This improvement incurred despite performance-related fee reductions in certain products in a difficult market environment. Given the concentration of performance fees in the fourth quarter, it's too earlier to accurately project where our full-year performance fees will come out, but we're not expecting to earn meaningful fees on the high watermark product that last year contributed one third of our $44 million of performance fees for the full year.
Net interest expense of $500,000 in Q3 2015 which was not present in Q3 2014, reduced our pretax income growth rate to 3%. E&I was also negatively impacted by our higher effective tax rate of 26% in Q3 2015, compared to 24% in Q3 2014, resulting in flat quarter-over-quarter E&I growth.
Our 26% tax rate benefited by our UK domicile and inter-company interest is actually lower than the 27% we were expecting in a rising income environment. However, in a low growth or flat earnings environment, the fixed nature of our tax benefit acts as a cushion on earnings volatility through a reduced effective tax rate. On a nine-month basis, revenue was up 10.2% and earnings after affiliate key employee distributions are up 11%, to $156.2 million.
Slide 12 provides insight into the drivers of management fee growth. In the left box, you can see average assets for Q3 2014 and Q3 2015, split out by our four key asset classes, U.S. equity; global non-U.S. equity; fixed income; and alternatives, including real estate and timber. To the right of each bar, you can see the weighted average basis points for each asset class and in total. And then the right part of the mix, you can see the average AUM growth rate period over period by asset class.
The box on the right provides the gross management fee revenue generated by these average assets and basis points of fees, also broken out by asset class. On an overall basis, average assets were up 1% period over period and gross management fees, including equity-accounted affiliates, were up 5% period over period.
As you recall our different asset classes have very different fee rates. Global non-U.S. equities and alternatives have average management fee rates of 41 to 44 basis points, while U.S. equities and fixed income have average management fee rates of 21 to 26 basis points. The average fee on global non-U.S. assets went down by a basis point due to market declines in higher-fee emerging markets assets and U.S. equity fees increased by two basis points as outflows occurred in the lowest-fee mandates.
During this period, the mix of global non-U.S. equity and alternatives each went up approximately 1% of average assets, to 40% and 16%, respectively, while the mix of U.S. equity decreased approximately 2%, to 37% of average assets. This shift was primarily driven by flows. Alternatives were the key driver of gross management fee growth, as average AUM increase of 11% period over period drove management fee increases of 17% in this category. Management fees in U.S. equities and global non-U.S. also increased.
The average assets and gross fees in these bars represent all assets managed by our affiliates, including the equity-accounted affiliates, Heitman and ICN. To tie back to E&I revenue, you need to subtract the average assets and management fees associated with the equity-accounted affiliates which we've done below each bar. You can see the shaded revenue excluding equity-accounted affiliates of $152.3 million in Q3 2014 and $158.4 million in Q3 2015 under the revenue bars. These numbers are equivalent to the third quarter E&I management fee revenues you saw on the previous page.
Slide 13 provides perspective regarding E&I operating expenses for the three months and nine months ended September 30, 2015 and 2014 and breaks out several of our key expense items. Operating expenses include non-bonus expense at the affiliates and the center and global distribution, as well as expenses related to collaborative initiatives and sales-based compensation. For Q3 2015 and nine-month 2015, they also include expenses related to being a public company.
Since many operating expenses including fixed comp and benefits and G&A are generally linked to the overall size of the business, we've provided a ratio of operating expenses to management fee revenue. While we generally track this ratio as an indication of economies of scale at OMAM, during periods of market-driven AUM and revenue volatility like we saw in August, this measure is less meaningful since operating expenses cannot and in our view should not, change in a fundamental way in response to short-term market movements.
While overall operating expenses grew by 10.1% between Q3 2014 and Q3 2015, a closer analysis of the expense base provides additional perspective. The core level of expenses before sales-based compensation and public company costs, notated by the subtotal line, grew at a lower rate, of approximately 7%. Looking at the subtotal line, you can see that the ratio of core operating expenses to management fees increased from 32.8% to 33.6% between the comparative quarters of 2014 and 2015, as a result of lower management fee growth during the summer's market declines.
The ratio of total operating expense to management fees increased from 35.9% to 38% from Q3 2014 to Q3 2015, primarily as a result of public company operating expenses of $1.8 million or 1.1% of management fees which were not present in the prior year and should remain fairly constant on an annual basis once fully implemented.
Likewise, sales-based compensation grew 8.5% quarter over quarter, as multiyear commission schedules reflected increased levels of sales. We would expect the growth of sales-based compensation to generally track the growth of revenue associated with our gross sales.
Public company operating expenses were in line with expectations, as we continue to project full-year public company operating expenses to be approximately $6 million or slightly higher. Assuming a continuation of the market returns we have seen thus far in the fourth quarter, we'd expect the ratio of total operating expenses to management fees, including public company operating expense, to be at approximately 38-plus-percent, noting that operating expenses tend to be higher in the fourth quarter due to seasonality.
We're focused on our expenses and recognize that operating expense needs to grow more slowly than revenue. However, we believe that this summer's market volatility is temporary in nature. We will tighten our belts where we can but intend to continue the fundamental investment in our business for future growth. The next key driver of profitability is variable compensation, shown in more detail on slide 14. variable comp represents annual bonuses and long-term incentives and includes both a cash and equity amortization component. Affiliate variable compensation is typically 25% to 30% of each affiliate's profit before variable comp. So, affiliate bonuses generally move in proportion to earnings.
The table at the bottom of the slide divides total variable comp into its two components, cash variable comp and equity amortization. As you can see, cash variable comp has decreased 1% quarter over quarter.
We've also calculated the ratio of total variable comp to earnings before variable comp which we refer to as the variable compensation ratio. This ratio moved from 41.9% in Q3 2014 to 42.5% in Q3 2015, with all the increase related to public-company-related variable compensation. Public-company-related variable compensation was about $900,000 in Q3 2015 and should impact full-year 2015 by approximately $3 million overall.
The public company expenses related to full-year bonuses for new public company hires and an LTIP plan granted in early March for the period 2015 to 2017. The LTIP grant impacts the level of non-cash equity based award amortization.
For full year 2015, we continue to expect the variable compensation ratio to remain in the approximately 41% to 42% range, including public-company-related variable compensation costs. Affiliate key employee distributions for the three months and nine months ended September 30, 2015 and 2014 are shown on slide 15. distributions represent the share of affiliate profits owned by the affiliate key employees. Among our five consolidated affiliates, the employees own between 15% and 35% of profits; in some cases, following an earnings preference to OMAM.
Between Q3 2014 and Q3 2015, distributions fell 16%, from $11.1 million to $9.3 million, while earnings after variable compensation were flat quarter on quarter. The reduction in distributions resulted in the decline in the distribution ratio -- or affiliate key employee distributions as a percent of earnings after variable comp -- from 18.3% to 15.3%. the primary factors that drove the decline in this ratio were the October 2014 purchase of additional equity from one affiliate which reduced the payout rate for distributions relative to Q3 2014 and the treatment of a Q3 2015 performance fee from our timber affiliate. The entire employee share of these fees run through variable comp rather than being split between variable comp and distributions.
We currently expect affiliate ownership levels to remain stable and on a full-year basis project the ratio of distributions to earnings after variable compensation to be approximately 15% to 16% for 2015, slightly lower than we originally estimated. But the final ratio will depend on the level of performance fees and profits coming from the various affiliates.
Turning now to the balance sheet and capital, we've said previously that we believe our balance sheet provides significant financial flexibility to execute our growth strategy. In addition, the filing of our $2 billion S3 shelf today gives us the capability to finance as required.
The beginning of November was the earliest time that we could file this shelf, following the one-year anniversary of our IPO. On the left side of this slide, we've provided the period-end balance sheets as of 9/30/15 and 12/31/14. You'll notice that we've boxed the notes payables to related parties and third-party borrowings line items. During the first nine months, we used excess cash to pay down the $37 note due to Old Mutual plc and $107 million on our revolving credit facility, reducing our third-party borrowings to $70 million.
Until such time as we make an investment in a new affiliate, we would expect to use excess cash to further reduce our revolver borrowings. At September 30, we had $280 million of borrowing capacity remaining on our $350 million facility and our debt-to-EBITDA ratio was at 0.3 times. Of the $126.8 million of cash on the balance sheet at 9/30, approximately $105 million is held at the affiliates and $22 million is held at the holding company, offsetting certain current liabilities. Our borrowing capacity and cash retained during the year should provide the resources we need to successfully execute our partnership strategy.
On December 29, we will pay our quarterly dividend of $0.08 per share to shareholders of record on December 11th. This dividend rates reflects the 25% payout ratio we described in the prospectus. While quarterly dividends will be determined by the Board, assuming a normal operating environment we anticipate retaining this current dividend rate for the fourth quarter.
Now, I'd like to turn the call back to the Operator and Peter and I are happy to answer any questions you may have.
[Operator Instructions]. Your first question comes from the line of Craig Siegenthaler of Credit Suisse. Your line is open.
During the first nine months 2015, total flows are down versus where they were in 2014 and 2013. and I know 3Q was difficult and the product mix shift has been positive towards higher-fee products. But can you comment on any larger trends that have been driving the softer AUM net flows in 2015?
I think the one trend that I would point you to, Craig, is the continuing headwind issue in the combined -- and I put these two together, because one is sort of a discipline-specific issue and the other is a channel-specific issue -- but I would point you toward U.S. equity in the retail space which we participate in, as you know, in the sub-advisory world. And I think that's really just been a structural headwind. I think the general market anxiety in the third quarter accelerated that and had an impact on the third quarter, specifically.
Where that goes and how long that persists is something that I don't -- that I wouldn't pretend to tell you I had the answer to. I think our view is it's a permanent asset class. We're going to be in permanently. And what we're trying to make sure we're paying attention to and focusing on is the equality of investment performance delivered within the asset class. The performance continues to be good. So, I think it's something that we're just going to continue to watch.
But that really has been the principal piece where we've seen that flow issue impact us, is the U.S. equity, principally large-cap principally retail.
And then, just as my follow-up, as you look at your current free cash flow -- and we saw the shelf filed this morning -- and your pipeline, what is the maximum amount of capital you actually could deploy within the next 12 months? I just sort of want to know what the optimal level is there?
If you took a steady state today, we probably have about $250 million of liquidity readily available to us, $250 million to $300 million. And that's something that is easily financeable by us in a very efficient way. The issue of deploying it is a much more specific, substantive question of finding a genuinely value-creating way to deploy it. So, obviously, we're delighted to have the capacity, but we're not going to waste it.
Your next question comes from the line of Michael Cyprys of Morgan Stanley. Your line is open.
Just wanted to follow up some of the commentary around Acadian and the managed volatility strategy. As you mentioned, you had some meaningful outperformance there. Can you just remind us how much in AUM they manage? And just any color you can share around the flow picture and your outlook for flows in those strategies would be helpful. And then, also, how you are thinking about potentially wrapping those capabilities into new packages, whether it's ETFs or target-day funds?
On the flow prospect category, Michael, that's just not -- given the institutional space we inhabit, we have just decided it's not productive to try and give any forward-looking guidance on flows because it can be so different depending on the idiosyncratic nature of the institutional clients you're talking to.
In terms of the scale and level, it's a substantial asset class for Acadian. They've done a very good job. They were early in the space. They were focused on. And they've built up a very strong long-term track record. So, that's a multi-billion-dollar enterprise for Acadian in terms of assets under management. And in terms of product development, I think we're always looking at ways to deliver it. I don't think when you think about the kind of things you suggested, that's really retail product packaging. That's not something that we're going to engage in a lot of initiation on.
What we would be more than happy to do and what we do actively is through our sub-advisory group here have conversation and dialogue with important sub-advisory platforms with whom we work. And to the extent there were an identified vehicle that the platform were interested in having us sub-advise, we're more than happy to provide the alpha to it. And that's the way we would approach that.
And then, just as a follow-up, I just wanted to dig in a little bit more on the deal pipeline. You mentioned that you continue to have conversations with boutiques in the pipeline for new affiliate relationships. Can you just share any color there in terms of the extent of those conversations? Any thoughts on the time frame? It seems like the market volatility in August and September may have at the time seem to push out the Venn diagram, the time frame, for when a deal could potentially occur. But with the market rebounding so far in October and November, how has your thinking changed? And how is that Venn diagram there shifting?
Your Venn diagram analogy is a pretty good one, because I think that the circles have moved apart a little bit in the real world because of the volatility, but I'll tell you how we think about it. Our strategic thinking on the value that well-executed M&A can add to our franchise hasn't changed. It's a permanent long-term strategy associated with the way we've structured this multi-boutique model.
We think that the way we've created global distribution capabilities, collaborative organic growth capabilities, rooted in our profit sharing with our affiliates, together with their owning equity in themselves continues to lend itself to intelligent M&A and we'll continue those conversations. But here's what the impact of the kind of quarter we just went through can have on those discussions. And it really is an important component of how we think about M&A and what we're trying to accomplish.
If you think about what we're looking for and we've I think, been pretty consistent, what we're looking to do is partner with firms that are already very good and firms that have a couple of strategic components to their thinking where they can conclude the things that we've built can add value to them without compromising their cultures, their investment discipline process and their kind of success in the market.
And if that's true, then what happens when you have the kind of quarter we've had is there may be firms that are weak firms or what the old analogy of when the tide goes out you see who's got a bathing suit on -- those are the firms that get in trouble in environments like this that may be more willing to do a deal, to kind of solve a problem.
The firms we're talking with are the other side of that spectrum. The firms that we're talking with are firms that are very, very soundly run, very successful and very disciplined. So, when you have the kind of market reset that we've had, their view is, look, we don't have to do anything. We have an unsettled environment. We're not going to go forward and execute something where we're not, in our view, going to have a sound partnership that's fairly valued going forward. And so, our conversations may get extended because of volatility and that's just something we're very comfortable with, because I think what's happening is very good firms that might be interested in doing something are going to wait and see how this all settles out.
And the fact that the market rebounded a little bit in October, I don't think that's something that anyone has concluded is structurally sustainable, yet. I think we might have a better feel for it by the end of this year. So, going into next year, you might see those Venn diagrams of very good firms beginning to reach a touch point with us again. And I think that's exactly how we would have it be.
Your next question comes from the line of Bill Katz of Citi. Your line is open.
First question, just talk about the flow pipeline. You sort of called out the $1.9 billion. I was wondering if you could talk, give a little more color, what drove that? It sounds like it might be sovereign wealth fund related, from what we're seeing from some of your peers and looking at some of your disclosure. Is that the case? And maybe you could sort of what the residual risk might be for the rest of the business? And then, stepping back, maybe talk about the institutional pipeline a little bit broadly, beyond just any particular affiliate and what you might be seeing?
Sure. And I think, Bill, your -- and I think we've seen it in the industry -- your inductive reasoning on the likely nature of that withdrawal is correct and it's exactly what you would expect. I can share with you that account was the beneficiary of substantial over performance on a consistent basis throughout its relationship with us. So, it was clearly a client-specific strategic decision that they made on their own. But we had delivered alpha to them consistently.
In terms of overall sovereign exposure, we're actually, I think, very well positioned. We took a look at that; obviously, we keep an eye on it. Basically, less than or around 7% of our AUM and less than that in terms of revenue are allocated across the sovereign wealth spectrum and even that allocation it's spread across 10 different countries and it's in 18 different accounts and those accounts are managed by six of our seven affiliates.
So, I think from that perspective we're not particularly concerned about that macro issue in the industry. And just in terms of therefore broader flow expectations on the downside, we're not exercised about it. And on the broader flow front, going forward, I'd sort of echo what I said to Mike which is it's just given the institutional nature of our business not something that we think is productive for us to give any guidance on.
Okay. Just to follow up, coming back to the shelf a little uncertainty with the marketplace this morning. Could you sort of frame out the technicalities of now that you've been public for a year or so, what that might mean in terms of just the sheer size of the shelf? And any restrictions you have from an M&A perspective based on the parent's ownership? And if there's any unlocking or key milestones that we need to be thinking about on a go-forward basis?
Sure, Bill. The way the restrictions on a shelf basically say that the first time you can file a shelf is basically the beginning of the month following your one-year anniversary of being a public company which is effectively now. And so, basically, from a purely flexibility point of view, this was the time to file the shelf and that's what we did.
Obviously, the shelf covers as is typical in the market -- it covers all of the parent's secondary shares which are registered now once this shelf becomes effective, as well as our ability to issue primary debt and equity and converts. So, everything is covered by it and as we said it really is a function of just putting that flexibility, as opposed to any specific reason that it was filed right now.
The sizing of it is really -- if you think that this $2 billion is meant to cover not only the full amount, roughly $80 million of parent company shares, as well as primary debt and equity, if you just sort of do the math, you want to have something in the range of what we filed to provide the flexibility for all of that. So, while the number may look big if you were thinking about it just in terms of primary issuances that we would do, when you take into account what was registered within the S-3 it's, I think, pretty reasonable.
Your next question comes from the line of Michael Kim of Sandler O'Neill. Your line is open.
First, just to follow up on the shelf registration but maybe more as it relates to M&A, it seems like you've got a fair amount of capacity under the existing credit facility, particularly following the recent pay-downs that you mentioned. You're generating north of $200 million of EBITDA on a run-rate basis. So, just trying to understand the thinking behind the shelf, more so in relation to the opportunities you may be seeing from a deal perspective, either in terms of size or timing.
I would, Michael, genuinely separate the S-3 filing from any M&A discussion. The S-3 filing really was just a good, solid, technical time to be an appropriate balanced capital management activity. Legally, you had to get to the end of the month that represented the first anniversary of your IPO. We went public in October of 2014. November of 2015 is the first legal time you file the S-3. We just did it. So, it really isn't related to any intended or planned activity. I think it's just prudent balance sheet management and optionality management.
And on the M&A front, as I said earlier, we're delighted that we have the capacity. But likewise, when I talked through the discipline that we really bring to M&A, I think our strategy is very, very discerning, is the reality of it. We're not an M&A roll-up. We're not intending to be a 50-affiliate Firm. We're not going to buy firms that need turning around or fixing or rebuilding. We're looking to partner with very good firms.
And therefore, I think as we think about it and therefore the way we would encourage you all to think about it, our view is the pool of potential good partners for us is probably smaller than the pool of potential partners for other folks in the industry. But our view is when we execute with one of those firms in that smaller pool, we will have a higher likelihood of successful partnering with that firm and having that firm grow, going forward. And so, we're just going to be very disciplined about deploying the capital that we have. We're delighted we have it and we intend to deploy it, but it is going to be a very disciplined process that we're going to go through.
The other thing I would add to that is that just from a balance sheet management point of view, while we have the revolver in place with significant capacity, around $280 million, the way at least we think about that is, look, when you're going into discussions you want to have credibility that you have access to cash. But you wouldn't look to finance permanently a transaction with a five-year revolver.
And so, the view would be that you would clearly want to use more permanent financing like long-term debt or equity, depending on where your capital structure was, to finance a transaction. So, I wouldn't think about the shelf as necessarily being additive to what you have on the revolver; it's more having the flexibility to put an appropriate long-term financing in place when you have a transaction to finance.
And if you follow that logic through, Michael, I think where you end up is our view is -- and again, we welcome your thoughts on this -- our view is when we announce an acquisition, it's going to be financially attractive. It's going to be an accretive event. Our view is that will improve our positioning in the market and that's the appropriate time then to access the market for that kind of financing permanently, anyway, whether its debt of equity.
Okay. And then, I know it's still relatively early days, but just any color on more specific initiatives to provide strategic and/or financial support to affiliates, whether it's seeding new products, product development and/or adding talent?
We're plowing ahead on that one in a very consistent way. We've got a couple of specific initiatives underway with probably three or four of the affiliates across the franchise, one of the alternative space and a couple in the long equity space, in terms of developing new capabilities that would come to the market.
Those get announced when they're actually real and there are a couple that we think are going to be very close to being real in real time in the next few weeks that probably will get announced in this quarter. And then, there are a couple of longer ones that go to we designed it and now it really is a function of identifying the right talent to put in place. And when that talent gets put in place, then you have the ability to really start the initiative and launch it.
But those initiatives continue and I think Steve hit on something important there which is we're long-term investors in these affiliates and in these initiatives. And while there has clearly been short-term disruption in the market and therefore we're disciplined about expenses and we're , as Steve mentioned, looking to tighten our belt where appropriate, we're going to be very thoughtful about continuing to invest in long-term initiatives through this period with our affiliates. We think that that's going to be very important and ultimate create compound value.
Your next question comes from the line of Michael Carrier of Bank of America Merrill Lynch. Your line is open.
This is Adam Beatty, in for Mike. A question on the fee mix which you kind of emphasized throughout the presentation. First, a clarification. You give fee rate by asset class. Is there a noteworthy channel effect in there at all -- advisory versus sub-advisory, what-have-you? And then, at affiliates that have had outflows in low-fee products, how are they responding to that? Have they introduced higher-fee products to kind of germinate alongside? Or, is it more of a stick-to-the-knitting and try to get flows to return?
I'll do the second one first, Adam and then I'll circle back and Steve can talk a little bit about the different asset class points. You raise a good question. I think that if you look at the strategic work we've been able to do, one, the relatively lower-fee asset classes that we're in, they include U.S. equity, they include large cap. They include asset classes that are important, we think core and very substantial.
So, we're continuing to be committed to those asset classes and the affiliates are continued to delivering alpha in them. That's the case. But there is an intelligent reason why, for example, we worked very closely with Barrow Hanley over the last few years to develop with Barrow Hanley a meaningful capability in the U.S. equity markets, in the emerging equity markets in asset classes that do have higher fee characteristics, because we think that's a logical way for them, one, to diversify their overall business model by asset class which we think is just smart, but also, two, to diversify into asset classes that maybe have some preferable fee characteristics. But the goal is to be delivering alpha in whatever asset classes we're in.
I think if you were to overlay on your question around channels, I think if you were to overlay channel on the mix by asset class, what you would see is that for any specific asset class you would have lower fees typically in the sub-advisory part of that asset class and also the large jumbo accounts are also obviously just from a break point of view going to have lower fees.
So, I think it's hard to if you think about sub-advisory channel, it's hard to say across the board where that channel is. But certainly, if you're looking at sub-advisory fees in U.S. equity, it's going to tend to be a little bit lower. If you look at sub-advisory fees in global non-U.S., it's going to tend to be a little bit lower.
Where you've had your outflows on the U.S. equity side which has driven a little bit of the actually the fee increase in U.S. equities, has tended to come from the large account that we talked about which was in U.S. equities, as well as sub-advisory there. So, that's why you've effectively where you've had -- your outflows have been in low-fee outflows and that's why you saw U.S. equity go from 24 to 26 basis points year over year.
And then, just to follow up on the sub-advisory channel and what kind of opportunity you see there, how are you pursuing it and given the structure of the Firm how does the center play in sub-advisory marketing to the affiliate?
The sub-advisory segment is an area where the center specifically plays a distribution role. We've essentially created two key focuses of our global distribution effort here at the center. One is non-U.S. institutional sales. But the second core component, Adam, is sub-advisory here in the States. And we have a group that is specifically engaged in calling on those platforms, in working with them as they develop their product sets and in identifying opportunities that are well-suited to our affiliates' disciplines, to add value to the platforms.
That business continues. And actually, in this year we have brought on a new professional here at the center who is specifically working in the sub-advisory space to build that out. I think the second strategic initiative and we'll see where it goes but it's something we've been looking at for some period of time and we'll likely make a decision on in the next few quarters, is whether we create a specific initiative in the insurance segment industry of the sub-advisory space. And that's something that's actively being looked at by our folks here in real time, as well.
Your next question comes from the line of Patrick Davitt of Autonomous. Your line is open.
I'm getting some chatter from London, from guys that have met with the parent around capital ratios and concerns that their ratio will come out looking a lot worse than their comps and what you doing deals could do to that comp ratio from a negative standpoint. Could you speak to any concerns that you have around the parent preferring you not to do deals for that reason and to what extent they may or could, derail attempts for you to do them?
Patrick, we're pursuing our strategy as enumerated and articulated on its merits. I think it's really not for us to comment on any conversations or chatter that is coming out of London based on conversations with the parent. I think certainly Bruce having arrived Monday as the new CEO and Ingrid, the FD, are working very closely with the whole management team on that issue. Solvency, too, is still evolving and they're working through their relationships with the PRA.
I think that they'll come out on the other side of that conversation and we'll manage the business accordingly. We're all together in a couple of weeks going through annual business planning and we certainly talk about all of that with them. But from our perspective, our job is to execute the strategy which means identifying good collaborative initiatives, identifying opportunities for global distribution and identifying additive acquisition opportunities and work through that with the parent.
And our view is we're going to continue to engage in that work. We think it creates value for plc shareholders as well as OMAM shareholders. And we think that we and the parent are aligned on that. So, I think that's exactly how we're attacking that one.
Okay. And then, an extension on the seeding question earlier, could you talk about strategies that may be coming up on milestones that could get them on the radar more broadly and maybe accelerate flows?
There are some we work with Barrow Hanley that were recently rated by some of the consulting firms that had just gotten to the point where the consulting firms were willing to rate them. And the good news -- that's a confidential process. So, I'm not going to enumerate it with you. But those strategies which we helped seed and structure a few years ago have seasoned to the point where some of the consultants are now rating them and we're getting recommendation ratings on them. So, that's encouraging.
Your next question comes from the line of Erik Burg of RBC Capital.
This is actually Rosa Hunt [ph] filling in for Eric. We just had one question on the U.S. equities sub-advisory channel which continues to see higher . so, we're wondering what is driving that? And is that related to variable annuity sales? Or, do other factors come into play? And then, the follow-up to that is are the withdrawals concentrated within a few client account?
We're not seeing any particular disproportionate component of the VA channel, one. Two, I think that the sub-advisory for us is essentially how we access retail. And so, I think the reason, in our view, you are seeing that outflow is really a function of the retail domestic U.S. equity markets. They've had headwinds, both with respect to the asset class itself. And I think what you're seeing is a little bit of the impact of the move toward pure passive, pure beta in that retail space. Because we're engaged in the active segment, we're actively generating alpha for clients in that space. Those , I think, are the two principal components on that.
And are the withdrawals concentrated with any client account? Or, is it just more broad based?
I think it's more a question of platform relationships, rather than any single sort of underlying client.
Your next question comes from the line of Chris Harris. Your line is open.
Can you talk to us a little bit about the strength you're seeing in global equity? And so, I know flows have been positive there for quite some time, but when we see the growth this quarter -- 6% in what was a really challenging time for everybody -- I thought that was particularly strong. And that may be in answering that question you guys could talk a little bit about where the flows are coming from, whether it's more institutional or sub-advisory dominated? And then, maybe if there's any sort of products to call out there? I know you already called out the Acadian strategies, but whether there's other things that are doing particularly well there?
I think your observation about the non-U.S. equity category is right. It's been well allocated across our affiliates who are doing non-U.S. equities. So, that includes Acadian, Thompson, Siegel, Barrow Hanley, CopperRock. Our managers really are delivering good performance in those segments. So, I think our view is it really is a function of being successful alpha generators in a relatively attractive asset class in a challenging environment. And our hope and view is when you look at our performance that that has the opportunity to continue. I think that's our take on it, Chris.
Is it both institutional and sub-advisory?
Sorry. Right, that was your second piece in it. It is principally institutional. It is principally institutional, although we have some interesting sub-advisory conversations going on in that space. But it has been principally institutional to date. Thompson, Siegel has a reasonable sub-advisory relationship in that non-U.S. space which has been very productive for them as well.
All right. And then, maybe can you guys update us on the status of global distribution? I believe it's still relatively small, but maybe you can tell us the contribution of from global distribution this quarter? And then, whether or not that initiative is still ramping?
The initiative is still ramping. I think the principal things -- it's been a difficult environment for us operating outside the U.S. in these markets. So, we've raised north of $1 billion year to date which is down relative to the last couple of years. But when I look at the level of activity and essentially the competitions we're getting into, we're still accessing meaningful at-bats. We just haven't hit on a couple of this year that we had in the past. But what we have done is there are a couple of things specifically that we've done that I think are the relevant ongoing investments.
One, as I mentioned earlier, we brought on a specific professional focusing on the sub-advisory space here in the States. The second is we actually hired a specific consultant relations professional in London who is going to focus on the non-U.S. consultant channel which is an important step forward and I think that's a timely one for us.
And your next question comes from the line of [indiscernible]. Your line is open.
I'm just wondering, with the commentary about maybe the Venn diagram separating a little on deals, can you comment about any appetite for doing buyback and maybe specifically buying back plc's stake?
Well, here's my take on it. Given where we're with respect to our float, given the fact that increasing, I think ,the liquidity and increasing the public float will add value to the shareholders by adding liquidity to the stock, it certainly wouldn't be at the top of my list in terms of capital management to buy back from the public. And then, if you think about buying back from the parent -- again, that's really a function of a conversation between us and the parent, first of all. That's the first comment.
Second, again, in terms of capital deployment, buying back from the parent doesn't really in my view, it doesn't add to the public float, it doesn't add to public liquidity. And I don't think anyone re-rates a stock on the basis of a buyback. Mathematically, I get the question. If you're reducing the denominator in the E&I per-share calculation, you're doing something that's accretive. So, as a mathematical result, you're going to improve your E&I per share.
But I don't think anybody looks at that and re-rates the multiple on the basis of that. So, I think our sense is we should have better opportunities to deploy capital in genuinely accretive business-building ways other than buybacks. So, I don't think that's something we're looking at.
I think you have to think about short term versus long ter. There may be the Venn diagram and people pulling away a bit during volatile markets is something that's currently occurring, but I don't think our belief is that that is a permanent or even a medium-term state of affairs. And therefore, to use our leveraging capacity on the balance sheet which right now you effectively have an opportunity to go from 0.3 debt-to-EBITDA to some place closer to -- I think we talked last quarter about 1.5 to 1.75 as being the appropriate level of leverage for a business like this.
But to do that and to use that capacity for a stock buyback, sort of making a short-term decision that has long-term implications. And so, I think our view is to wait longer until we get the right M&A deal and then use our balance sheet capacity and debt capacity on that opportunity.
So, when you say to wait longer for a deal, is there a certain period of time though where you say, okay, we have to go in. we're not seeing an opportunity for a deal. So, we would think about doing this. Or, is it just you don't think you would get to that point? A deal might be in front of you before you would ever reach that?
I think it's more the latter, Steve. I feel pretty relaxed about the M&A world. We're going to -- kind of all in good time -- but we're going to find the right strategic transaction that's going to create real shareholder value in a compoundable way and that's going to be much more valuable.
Your next question comes from the line of Robert Lee from KBW. Your line is open.
I apologize if this was asked before. For some reason, my line got dropped earlier. But on global distribution, can you maybe update us on the progress of that initiative there? I know in the past you have talked about kind of the sales and flows that have originated from that. I'm just kind of curious how that's going? If you've seen whether it's some of the noise coming out of sovereign wealth funds or just the volatility? But just kind of if you've seen any of the momentum there kind of moderate, at least in the short term? Or just kind of where the new initiatives are there?
The two critical initiatives that we've implemented this year, Rob -- we mentioned it a little bit earlier -- but we brought an another specific sub-advisory professional focusing on that platform channel here in the States. And then, we actually hired a specific consultant relations professional in London to call on the consultants outside the U.S.. Those are the two, I think, important critical moves we've made this year in it.
And in terms of the actual deliverables, they've sourced and delivered over $1 billion of new AUM this year, year to date. That's down from the first couple of years, understandably though, because I think we're seeing in terms of willingness to actually make moves and allocate and deliver mandates a little bit of retrenchment in the non-U.S. markets.
But I think our momentum continues because in monitoring the activity we're engaged in and in the competitions we're participating in, pipeline seems fine. It's just we have had a little disruption in terms of deliverable. And there have been a couple where we were at the plate and we didn't win. And we won those in the past. We didn't win them this year. We'll win them again. But I think that’s really how I'd characterize it.
I'm just curious if we in sticking with the global distribution theme, if we think about the large redemption you had this quarter which I guess seems like it's been for a while, just curios if that pre-dated the development of the global distribution? And to the extent that you have those kinds of relationships may pre-date it, how it proved, if at all, can they become in trying to maintain or service preexisting relationships, both for the affiliate and--?
The first part of your question , that relationship did pre-date global distribution and the second part of your question is the role that our global distribution team plays in ongoing client relationship engagement and management and Linda Gibson has been very disciplined about this -- is absolutely a function of our engagement and relationship and sort of terms of engagement with each of our affiliates with whom we're working.
So, it is very much affiliate specific and distribution channel specific and relationship specific. So, there is no template that we subject any of this to; it really is a function of what's the most effective way that the affiliates and we have agreed that creates value for the clients and, therefore, for us. So, it is absolutely build to suit in each of those affiliate relationships.
I guess maybe one last question, just drawing on that. Do you feel that with that interest you've got the full, complete buy-in that you'd like from all your affiliates? Or, do you feel like there's a couple that there's more to go? You think that in terms of getting full buy-in from them?
That to me, Rob, is a yes and a yes. Yes, we have buy-in from all of them and in fact we're working with all seven of the affiliates in one way or another in distribution. But again, it's very specific to the right fit, the right model with each affiliate, the right cultural relationship with each affiliate.
So, we have buy-in from all of them. And I believe there are ways that we can continue to develop that business with each of them. But again, it's going to be a very strategic, targeted, specific, affiliate-by-affiliate process.
This concludes our question and answer session. I would like to turn the conference call back over to Peter Bain.
Thank you and thank everyone of joining us. It ran a little long, but I certainly appreciate the questions. And we will look forward to talking with you going forward and perhaps visiting with some of you and look forward to the next quarter.
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