Description

Company Background

AMG (“AMG” or the “Company”) owns a collection of majority and minority GP stakes in hedge funds, private equity firms, wealth managers, and long-only asset managers. Key affiliates include Pantheon (PE fund of funds), Harding Loevner (asset manager), GW&K Investment Management (muni bond manager), Global Energy Partners (PE), ValueAct (activist), and Veritas Asset Management (asset manager).

AMG owns stakes in 30+ firms, many of which are majority positions and fully consolidated within AMG’s financials. Importantly, AMG consolidates the entire AUM base of each affiliate in which it is invested, irrespective of AMG’s percentage ownership in the affiliate. This dynamic makes it difficult to draw strong conclusions from AUM trends regarding AMG’s underlying growth and profitability, therefore necessitating a “bottom-up” view of the business.

Most of AMG’s affiliate stakes are structured as revenue sharing agreements, which limits AMG’s exposure to margin compression at most of its weaker affiliates.

Current Investment Opportunity:

AMG is viewed as a secular decliner due to consistent net outflows in “headline” AUM over the past several years, with outflows spiking to 13% and 9% in 2019 and 2020, respectively. The majority of these outflows have been concentrated within AQR, which is AMG’s largest affiliate by AUM but only represents 2-3% of EBITDA.

Excluding quant strategies, AMG’s outflows were only -0.6% in 2020. We expect ex-quant inflows in the affiliates that drive 97%+ of AMG’s EBITDA to generate organic inflows of 1-2% for the foreseeable future.

We believe AMG’s net outflows obfuscate the organic growth and long-term value of AMG’s top 10 affiliates by fee-share economics, which represent an estimated 70% of AMG adj. EBITDA and are generating flat to positive organic flows at higher fee rates than the rest of AMG affiliates. 

While the market became partially aware of this dynamic following the Q4 2020 results, we believe AMG’s valuation continues to overly discount the impact of near-term headline net outflows and does not ascribe appropriate value to the underlying growth in AMG’s largest affiliates by economic contribution – these are the affiliates that are driving AMG’s EBITDA growth.

As an example, AMG owns an ~85% stake in Pantheon, which is comparable to Hamilton Lane (HLNE) and Stepstone Group (STEP). AMG bought this stake from Russell Investments in 2010 for $1bn (including contingent payments) when Pantheon had $22bn of AUM. Today, Pantheon has ~$60bn of AUM and continues to raise money across a variety of private strategies.

PE fund of funds are very high margin businesses – HLNE and STEP generate 40-50% EBITDA margins. We believe Pantheon is generating ~$200m+ of EBITDA to AMG, or over 20% of 2021E EBITDA. Importantly, this should be a durable source of high margin growth to AMG as Pantheon continues to raise new money and generate solid returns for its investors.

Pantheon is likely generating ~$500m of fees to AMG and if you ascribe HLNE and STEP’s ~10x sales valuation, you would value AMG's stake in Pantheon at $5bn, which is 75% of AMG’s current market cap. This is not to say that AMG is about to spin or sell its stake in Pantheon. Rather, we believe this illustration highlights the gap between the market’s perception of AMG as a typical, secularly challenged equity value manager (such as IVZ, BEN, and TROW) and the value embedded in stakes like Pantheon, Global Energy Partners ($20bn+ AUM PE manager with solid AUM growth), and Harding Loevner ($75bn AUM with inflows; AMG has a 66% stake).

Management is well aware of the valuation gap and is using the majority of AMG’s FCF to repurchase stock at discounted valuations.

Valuation:

We believe EBITDA will sustainably grow at a 5%+ rate in 2022 and beyond (EBITDA should grow close to 20% y/y in 2021 off a low base), with EPS growth in the mid-teens supported in part by share buybacks. While we are only modestly above Street estimates for 2021, our 2022 EPS projection of ~$21.00 is ~15% above Street.

As (1) headline net outflows from underperforming affiliates (e.g. AQR and Winton) abate and become a smaller percentage of consolidated AUM, (2) AMG’s largest affiliates by economic contribution continue to grow, and (3) management continues to shrink AMG’s costly internal distribution infrastructure, AMG should trade within the range of its 2016 – 2018 average P/E of 10-12x for a share price of ~$230 and upside of 45%. Note that during 2016-2018, AMG experienced average annual net flows of -1% to +1%; our affiliate-level model supports headline net flows of ~0% by FY22.

Catalyst

Earnings