Jan 28, 2009
Executives
Brett Perryman - VP of Corporate Communications Sean Healey - President and CEO Nate Dalton - EVP, Affiliate Development Darrell Crate - EVP and CFO
Analysts
William Katz - Buckingham Research Michael Kim - Sandler O'Neill Craig Siegenthaler - Credit Suisse Dan Fannon - Jeffries Robert Lee - KBW D.J. Neiman - William Blair Marc Irizarry - Goldman Sachs Cynthia Mayer - Merrill Lynch William Katz - Buckingham Research John Boland - Maple Capital Management
Operator
Welcome to the Affiliated Managers fourth quarter 2008 conference call. (Operator Instructions).
I'll turn the conference over to Ms. Brett Perryman.
Vice President, Corporate Communications. Please go ahead, ma'am.
Brett Perryman
Thank you all for joining Affiliated Managers Group to discuss our results for the fourth quarter and full year 2008. By now you should have received the press release we issued this morning, however, if anyone needs a copy, please contact us at 617-747-3300 and we'll fax you one immediately following the call.
In this conference call certain matters discussed will constitute forward-looking statements. Actual results could differ materially from those projected due to a number of factors, including, but not limited to those referenced in the company's Form 10-K and other filings we make with the SEC from time to time.
We assume no obligation to update any forward-looking statements made during this call. In this call the investment performance of certain products will be discussed and the benchmarks are deemed by AMG to be the appropriate benchmarks.
AMG will provide on its website a replay of the call and copy of our announcement of our results for this quarter, as well as the reconciliation of any non-GAAP financial projection to the most directly comparable GAAP financial measure. You can access this information at www amg.com.
With us on the line to discuss the company's results for the quarter and full year are Sean Healey, President and Chief Executive Officer, Nate Dalton, Executive Vice resident in-charge of Affiliate Development and Darrell Crate, Executive Vice President and Chief Financial Officer. Now, I would like to turn the call over to Sean Healey.
Sean?
Sean Healey
Thanks, Brett. Good morning, everyone.
Thank you for joining. In an extremely difficult market environment AMG reported cash earnings per share of $1.30 for the fourth quarter and $5.49 for the full-year, a decline of 17% year-over-year as compared to a 37%, decline in the S&P 500.
As we noted in the release, we had several one-time items in this quarter, including a gain in the repurchase of trust preferred securities, as well the non-cash charge related to the voluntary surrender of management stock options. The result of these two items, was a net increase of $0.06 to our cash EPS for the fourth quarter.
We also took $150 million non-cash, charge reflecting the acceleration of amortization expense for investments we made in two alternative managers in late 2007. This non-cash amortization expense did not affect cash earnings or our deferred tax benefits, but did result in a decrease in our reported GAAP earnings.
Darrell will discuss these items in more detail in just a moment. As we all know, these are extraordinarily challenging times for asset management firms.
Our results, obviously, reflect the difficult environment, but given that AMG has a product mix that is heavily weighted toward equities, our business model and our Affiliates are weathering the storm in the markets well and we're positioned to generate strong growth once markets stabilize. Our business model, which is based on a revenue share structure and substantial retained equity by our Affiliates, is designed to provide relative stability to our earnings in periods of declining assets, since we're not exposed to our Affiliates ' operating leverage, while also ensuring that our affiliate partners have a strong incentive to manage their businesses with the long-term focus.
Our Affiliates, especially our 10 largest Affiliates which contribute 85% of our EBITDA have obviously been impacted by market declines, but virtually all have generated considerable growth since our investment and even after the declines that we've experienced, still have substantial excess operating cushion. And of course, they continue to be significant equity owners in their businesses.
Although our business model enhances the consistency of our results over time, our long term growth is based on the outstanding quality and diversity of our Affiliates. Our boutique Affiliates are among the industry leaders in their respective investment disciplines, with long term performance records, outstanding reputations and superior client service.
The quality of our Affiliates was borne out by their results last year. For example, Tweedy, Browne our largest Affiliate in terms of EBITDA contribution generated very strong relative performance in the firm's highly regarded Value products.
And as recognition of their outstanding performance Tweedy was nominated by Morningstar for both the Domestic and International Stock Manager of the Year awards. Third Avenue also had outstanding relative performance in its international products and it too was nominated for International Stock Manager of the Year.
In addition, emerging markets equity manager Genesis had very strong relative performance in its largest products for the year, and has an outstanding long term record. Finally, growth managers Friess Associates, TimesSquare Capital Management and Frontier Capital Management all generated excellent relative performance and produced positive net client cash flows for the year.
The diversity of our Affiliates' products is itself a source of earnings growth and stability. While we do not have a material fixed income business, a number of our Affiliates' managed product strategies, which are uncorrelated with equity markets.
As Nate will describe in more detail, even with the volatility of the fourth quarter, several Affiliates, including First Quadrant and BlueMountain generated meaningful performance fees in 2008. Over the medium to long-term, our Affiliates' strong relative performance is the best indicator of forward client flows.
And we believe our Affiliates are very well positioned when investors reallocate to return-based assets as they inevitably will. In addition to benefiting from a reallocation back to equities, many of our Affiliates also have an opportunity to gain market share, as investors reallocate among equity managers and seek managers who performed well in 2008, and have superior long-term track records.
As Nate will discuss further, while we had net outflows in the fourth quarter, on a relative basis our results were encouraging and the trends are positive as we look forward this year. Now, turning to our new investments area; as you saw in an earlier press release, we restructured our investment in Harding Loevner in light of extreme volatility of the fourth quarter.
The essential elements of the investment remain consistent with our original agreement and provides for the management team to retain a substantial equity stake in the firm. The revised agreement contemplates the completion of the transaction in the second half of this year, and the purchase price, will be based on the firm's then current revenues and earnings.
Looking ahead, the transaction environment is increasingly favorable to us, as we see far fewer competitors and lower valuation levels. There continues to be a large number of very attractive boutique firms, facing demographically-driven succession issues and the range of transaction alternatives for these firms have diminished substantially.
We also believe that there will be an increasing number of transaction opportunities involving corporate sellers, of asset management firms. During our conversations with perspective Affiliates, now more than ever, these firms are seeking an experienced partner that offers an investment approach which provides incentives for long-term growth, while at the same time maintaining the firm's unique culture.
Over the past 15 years, AMG has invested in some of the industry's leading boutique firms, and we've built a strong reputation as a helpful and supportive partner to our Affiliates. Finally, in addition to the strength of our Affiliates and their prospects for continued growth, the cash flow our business generates, which is supported by a strong and stable capital base, provides an additional source of earnings growth.
We're confident in our ability over time to generate incremental returns by deploying our cash flow and stock repurchases at accretive investments in additional Affiliates. With that I'll turn to Nate for a more detailed discussion of our Affiliates' results.
Nate Dalton
Thanks Sean. Good morning, everyone.
As we all know the asset management industry is experiencing an extremely challenging period, and the fourth quarter was one of the worst on record for all risk oriented assets. The fact we're performing reasonably well is in part a testament to the structure of our business, especially due to the performance of our Affiliates and relationships they have with their clients, as well as intermediaries who serve them.
As a group our Affiliates generate good relative investment performance, with most of them outperforming both peers and benchmarks for the quarter and for the full year. While this overall out-performance is good, the key point to focus on is the significant relative out-performance of many of the largest and most financially important products of AMG.
As Sean noted a perfect case in point is Tweedy, Browne, the largest financial contributor to AMG. While everyone of their product outperformed its benchmarks last year by a significant margin, ranging from few hundred basis points to 1300 basis points.
This out-performance was recognized with Tweedy being selected as a finalist by Morningstar, for both International Manager of the Year, as well as Domestic Manager of the Year. The good relative performance of our Affiliates, and especially, our largest and most profitable Affiliates, positions us to capture significant flows and earnings growth when clients once again allocate to return-oriented asset classes.
While, as we know, there are significant disruptions today, pension plans and endowment, individuals and foundations all have liability and spending needs based on generating returns on the assets, without increasing their allocations to return-oriented asset classes and managers, they simply cannot meet these needs. Now, to provide details on the performance of our products, I am starting with global equities.
While MSCI and EAFE were both down about 40% for the year and 20% in the quarter, MSCI emerging markets were down even more. We had a very good relative year versus benchmarks and peers across the most of our global and international equity products, including those managed by Tweedy, Browne, Third Avenue and Genesis.
In fact, each of Third Avenue and as I mentioned before Tweedy, Browne was nominated for Morningstar's International Stock Manager of the Year. Tweedy's flagship Global Value Fund beat hedge benchmark by 50 basis points in the quarter, and 160 basis points for the year, and the un-hedged benchmark by 190 in the quarter and 475 for the year, placing the 12th percentile with Morningstar category for the quarter and top decile for the year.
Tweedy's Worldwide High Dividend Fund beat it's benchmarked by 750 basis points for the quarter and over 1,000 basis points for the year, and ranked in the top decile for the quarter in the earnings Morningstar category. Third Avenue's International Value Fund continued to significantly outperform, leading its benchmark by 200 basis points for the quarter and 800 for the year.
It also ranks in the top decile with Morningstar category. Now, while we generally quote Morningstar ranking, it is also worth knowing that each of Tweedy, Browne's Worldwide High Dividend Fund and Third Avenue's International Value Fund ranked first in their respective categories for the year.
In the emerging market side, the flagship emerging markets products managed by Genesis, continue to build on outstanding long-term track record, outperforming its benchmark by over 450 basis points for the year and placed a 16 percentile among emerging market managers. Moving to our domestic products, I am starting with value equity.
Tweedy, Browne's performance remains strong here as well, with the Value Fund outperforming the S&P 500 by 640 basis points in the quarter and by 1265 basis points in the year, ranking in top decile with Morningstar category. Across our other value managers, Third Avenue and Systematic had a more challenging quarter in year in some of their products, but they both had excellent long-term track record.
Within our growth category, all TimesSquare strategies outperformed their benchmarks by over 385 basis points in the fourth quarter and by 570 basis points for the year. Frontier strategies had a good quarter in general, and their mid-cap growth strategy and research strategies in particular performed well.
Also, for Friess Associates, performance rebounded strongly from the previous quarter, and the firm posted solid relative performance. For example, Brandywine Blue, their large cap fund, which got a 4-Star rating by Morningstar, outperformed its benchmark by 590 basis points during the quarter, earning a top decile spot in its Morningstar category.
Finally, with respect to our alternative products, we're in a relatively good position as we have a number of products that are not correlated to either the equity markets or the credit markets. In 2008, uncorrelated products managed by several Affiliates generated solid performance resulting in performance fees, including global macro, global TAA, and tactical currency strategies managed by First Quadrant, and many of BlueMountain alternative strategies.
It may be worth stepping back and reviewing the composition of our alternative business, as most of you know, we have a very broad and diverse set of alternative products across nearly half of our Affiliates. The vast majority of the affiliates that manage alternative products are themselves diversified asset management firms, with significant base fee only business lines.
In fact, much of our alternative assets under management are not in hedge funds, meaning pooled investment vehicles, but rather are in institutional separate accounts, with tailored performance fee benchmarks. This insulates those assets from the spillover effects across the client.
That said, we do have two Affiliates, BlueMountain and ValueAct, which are primarily hedge fund firms. The management teams of these firms have done an extraordinary job managing in an unbelievably challenging environment.
And while the traditional hedge fund client base is under significant pressure, including especially the fund-to-funds client, we strongly believe in the management teams and investment processes of these firms, and that they will successfully navigate the changes that are occurring in the hedge fund business. Now, moving from performance to flows.
We all know how bad industry flows where, basically outside of cash and cash equivalents. Notwithstanding an extreme risk aversion across client segments, we had reasonable flows with sequential improvements against the significantly deteriorating industry backdrop.
In the institutional channel, we had outflows of $739 million for the quarter. Similar to last quarter, our outflows from the channel were significantly impacted by alternative products.
The other broad theme in the fourth quarter was the decline in the awarding and funding of new institutional mandates. We are seeing signs that this may be turning, and also that some of the mandates that have been won but not yet funded seem to be moving.
But fundamentally, institutional clients and their intermediaries are sorting through their needs and their asset allocation models going forward. As I said, we expect allocations to swing back to return-oriented asset classes and ultimately contributions to pickup.
Going to the mutual fund channel, we had negative flows of $1.7 billion during the quarter. The flows stored in the mutual fund channel was first, overall risk aversion and the move from equities to cash and money market fund.
And second, disruption in the intermediary business, as an unprecedented level of organizational change, exacerbated the impact of the market volatility on the platforms and financial advisers. A positive in this environment is that our Managers Distribution business has strong relationships with each of the major platforms, so we should be well positioned if they come by and evolve.
Also in the positive side, not withstanding the environment, we are seeing some good success from our sub-advisory marketing effort. Most notably in the quarter, we helped our Affiliate, Frontier win a large mandate from Vanguard.
Now, before we leave the mutual fund flows' conversation, I want to provide a little color on the first quarter so far. We are still at very early days, sales seem to be picking up a little.
Though, we're seeing a clear improvement in net flows. Now, turning to our high net worth channel.
Flows were negative $816 million for the quarter and the drivers here were the same as in the mutual fund channel, mainly risk aversion and the ongoing changes at the broker dealer platform. I'd also like to quickly update you on progress of our global distribution effort.
During the quarter, we hired a talented senior professional to head up our sales and marketing efforts in Europe. While it is too early in the process, our meetings with consultants are going very well.
One theme we continue to hear during our conversation is the value of AMG's single point of contact model and its ability to represent multiple Affiliate brands through this structure As we have discussed in previous quarters, we continue to work with our Affiliates to efficiently allocate resources to areas that have the best long term opportunities. This means cutting costs and rationalizing product lines in some areas, while in others, we and our Affiliates seek growth opportunities in new product development and in specific distribution channels.
On an earlier call, I described the consistent long-term framework. We are planning to evaluate the returns associated with each Affiliate and specific business activities.
In a volatile environment like the one we find ourselves in, having this discipline and framework in place is a tremendous help. Now, while our work with Affiliates on the expense side is important, I want to reiterate a critical point Sean made, which is that our business model with a revenue share structure and substantial retained equity, combined with the significant growth of our largest Affiliates insulates us from the vast majority of the margin compressions that asset management firms are experiencing.
Finally, it goes without saying that this is a challenging time for AMG and our Affiliate partners. However, our ability to work together through this tough period speaks to the strength of our business model and the quality of our Affiliates.
As true owners and partners in their firms, our Affiliates are focused on their proven investment discipline, and the management team that each firm has continues to run their businesses with a long-term view. As leaders in their disciplines with strong relative performance, we are confident that our affiliates will build on their long-term performance track record, and as we've said, capture flows and also market share as investors move to return-oriented assets.
With that I'll turn it over to Darrell.
Darrell Crate
Thanks, Nate. Good morning, everyone.
As Sean mentioned, our business strategy provides stability to our earnings, particularly in challenging marketing environments, such as the one we experienced in 2008. As you saw in the release, we reported cash earnings per share of $1.30 for the fourth quarter and $5.49 for the full-year 2008.
On a GAAP basis, we reported a per share loss of $1.76 for the quarter, and earnings of $0.57 for the year. This is as a result of an accelerated amortization charge that we booked in the fourth quarter, related to recent equity method investments, which I will discuss more in a moment.
Our Affiliates have excellent long-term track records, and their strong relative performance across a diverse range of products provides consistency to our results, and positions us well for when flows reallocate to return-oriented products. In addition, as a result of our participation in non-correlated investment strategies, including quantitative global tactical asset allocation and credit alternatives, performance fees made a material contribution to our earnings, adding approximately $0.30 to the fourth quarter.
These performance fees were principally generated by First Quadrant and BlueMountain, with additional contributions from AQR and several others. Our investment structure, which provides Affiliate managers with real equity ownership and sends long-term growth while leaving the operating leverage at our Affiliates, which in turn enhances AMG's earning stability in volatile markets.
Throughout the year, our EBITDA margin stayed fairly consistent at about 30%, notwithstanding major declines in the equity markets. Our capital structure is strong and stable, as a result the recurring free cash flow from our business, and provides additional financial capacity to continue to generate meaningful long-term value for our shareholders through additional investments over time.
As I mentioned, we have three noteworthy one-time items this quarter, which I will discuss before turning to some modeling points. The first is a $43 million gain from the repurchase of approximately $70 million of junior convertible trust preferred securities.
At $0.35 on the dollar, these were an attractive use for our cash. This gain was offset by a second one-time event which was a non-cash charge of $39 million from the acceleration of expenses related to Management's voluntary forfeiture of stock options.
This forfeiture was not accompanied by any new option grants, and will have the effect of reducing our expected option-related charges by approximately $3 million per quarter going forward. Most of these items are included in cash earnings, and had the net effect of increasing earnings by $0.06 in the quarter.
Lastly, we accelerated $150 million of amortization related to our recent equity method of Affiliate Investments, principally ValueAct. As you know, this is a non-cash book expense that does not impact our tax benefits or our cash earnings.
Now turning to some modeling items; the ratio of our EBITDA contribution to end-of-period assets under management was about 20.2 basis points, reflecting the fourth quarter recognition of most of our performance fee earnings. We expect this ratio to normalize to 15.7 basis points for the first quarter of 2009.
Holding company expenses were $11.6 million for the quarter, a 22% decrease over the prior quarter. We expect holding company expenses to be approximately $11.5 million per quarter in 2009, as we continue to implement additional holding company cost reductions.
Our tax rate was 38% for the quarter, and we expect it to increase to 39% through 2009. We would expect our cash taxes to be very low in 2009, as the tax benefits related to previous Affiliate purchases offset the earnings from our affiliates.
We expect intangible-related deferred taxes to be approximately $9.3 million a quarter in 2009. Excluding accelerated amortization charges, amortization for the quarter was $14.2 million, including $5.9 million of amortization from Affiliates accounted for using the equity method.
The earnings from equity method Affiliates, which include AQR, ValueAct, BlueMountain and three of our Canadian Affiliates are included in the income from equity method investments line on the Income Statement, all net of amortization. We expect amortization to be approximately $16 million in each quarter of 2009.
Depreciation for the quarter was $4.1 million, with $2.1 million of that amount attributable to Affiliate depreciation. We expect depreciation to remain at these levels during 2009.
Interest expense was $18.4 million for the fourth quarter, and we anticipate that it will decrease to approximately $17.1 million per quarter in 2009, before any adjustment for recent accounting rule changes that I will discuss in a moment. Let me talk about how we've positioned our capital structure and our financial capacity going forward.
We've a strong balance sheet with available cash of $320 million. We also continue to be well-positioned from a liquidity perspective with all of our long-term liabilities maturing in 2012 and beyond.
We expect Affiliate put obligations to be modest, consistent with prior-years, which we expect to total approximately $50 million in 2009. As we've said before, the repurchase of these obligations is accretive to earnings.
In 2009 there are several new accounting rules that will affect the presentation of our results. As a result of these changes, we will add back two additional items to cash earnings, so that these earnings continue to represent the true economic earnings of our business.
The first, APB 14-1 will require us to report the interest expense for three of our convertible securities using a theoretical rate of interest, based on the implied debt component of the convertible, instead of the actual interest expense that we owe. These incremental non-cash interest charges have no actual effect on our cash and under no circumstances could become real cash expenditures.
For example, in 2009, we expect our actual cash interest expense related to convertible securities to be $55.2 million. Our book interest expense, however, is likely to be approximately $70 million in 2009.
Going forward, we will add back the non-cash amount of interest expense related to the calculation to our cash earnings or net of tax. The second item is related to the treatment of Affiliate equity exchanges under FAS 141R and FAS 160.
As you know, we are constantly engaged in equity transactions among our affiliate partners. Certain of these transactions give rise to non-cash expenses, with no corresponding cash expenditure.
Going forward, we will add back these non-cash affiliate equity expenses net of tax to our cash earnings. In 2008, we had approximately $0.15 of Affiliate equity expense and we expect Affiliate equity expense to remain at this level in 2009.
A third accounting change, which will not cause a change in our cash earnings definition, is also under FAS 141R and will require us to expense professional fees incurred, when we make new investments. Prior to 2009, legal, due diligence and other deal related expenses were capitalized, as part of the purchase price for new investment, because these are real cash costs.
Going forward we will expense them in the period they are incurred, and reflect them in the income statement for that period. We forecast approximately $2 million of transaction-related expenses in 2009, as we work through our existing pipeline of opportunities.
Now, turning to guidance for 2009, it is particularly challenging to give earnings guidance, when equity markets continue to be volatile. We observe, that there is a range of assumptions for market growth that are used by the analysts' community.
In order to provide the most helpful guidance, we are taking an approach that is different than our previous convention, of assuming consistent market growth of 8% throughout the year. Instead, our approach will be, to guide to a range that on the lower-end assumes flat markets from today until the end of the year, and virtually no performance fees.
From this conservative baseline, the upper-end of the range, will also assume a flat market from today through the end of the year, but includes reasonable assumptions regarding organic Affiliate growth, as well as potential performance fee contribution. Given this framework, we expect our earnings results for 2009 to be in the range of $3.75 to $4.30.
We assume a weighted average share count for the year of $40.9 million. Our guidance is based on current expectations about Affiliate growth rates, performance, and the mix of Affiliate contributions to our earnings.
Of course, the substantial changes in the equity markets and the earnings contributions of our Affiliates would impact these expectations. And now we'll be happy to answer any questions.
Operator
(Operator Instructions). Our first question is from the line of William Katz with Buckingham Research.
Please go ahead.
William Katz - Buckingham Research
Thank you. Good morning, I do have three questions.
The first one just in the order to write them down; Nate, I was sort of curious, when you mentioned the early part of January in your commentary, are you in a positive flow mode or simply less negative? And then what are some of the drivers behind that?
Nate Dalton
It's much closer to flat, just to be clear, we were talking in the comments about the mutual fund channels. Where I was focused.
Where we're seeing the flow data. It is much closer to flat, and most of the change that we're seeing is coming from a significantly better picture on the outflow side.
William Katz - Buckingham Research
So, reduction in redemptions.
Nate Dalton
Correct.
William Katz - Buckingham Research
Thank you. Second question I have is, just curious, Sean or Darrell on this one.
Your previous acquisition strategy has been a bit more tilted toward global and alternatives. I was just wondering, given the outcome of the last year or so of markets, plus some of these impairments you've taken into this quarter, is your appetite shifting here a little bit to maybe more "traditional players" or not at all?
I'm just curious on your thoughts there.
Sean Healey
I would say that our interest is still, as always, focused first above all else on partnering with outstanding boutique firms. Regardless of their investment strategy or distribution channel.
Obviously, there is significant disruption in parts of the alternative channel. And while I wouldn't say if an outstanding opportunity presented itself that we wouldn't proceed.
I would say, given that volatility, it's more likely that we will be pursuing investments in more traditional Affiliates, and I would say including international firms.
William Katz - Buckingham Research
Okay. And then the final question, just a conceptual one.
It seems like within financial services generally that many firms are reducing their leverage overall. I'm curious, should we think about the balance sheet leverage on a go-forward basis without any changes, or could we envision that you might be considering using less leverage or other means of capital to potentially fund new deals?
Sean Healey
Well, our capital structure currently has other than convertible securities, which have no covenants and no near-term maturities, has no net debt and the business generates substantial free cash flow. So we will continue to invest that free cash flow.
Obviously, as we see opportunities we will finance to the extent that those opportunities exceed the amount of available free cash flow, we'll look to finance appropriately, including potentially in this environment using equity in transactions.
William Katz - Buckingham Research
Okay. Thank you.
Operator
Michael Kim with Sandler O'Neill, please go ahead with your question.
Michael Kim - Sandler O'Neill
Hey guys, good morning. Just for clarification, does the $2 million in projected fees related to new investments that Darrell you mentioned, does that refer to Harding-Loevner?
Darrell Crate
No, it does not. We, as you can imagine have a pipeline that we continue to work on, and the $2 million is projecting new work that we would do with potential new investment.
Michael Kim - Sandler O'Neill
I know you touched on this earlier, but in terms of your forecast for performance fees this year, maybe if you could just give us some color in terms of the general assumptions you're making, both from return perspective, as well as kind of perspective redemptions going forward.
Darrell Crate
Well, as we think about performance fees broadly, as you know in 2008, we had just over $0.50 of performance fees from our portfolio of products that earned performance fees. And the guidance range that we gave, again, to repeat, had flat markets at the lower end and the upper end from today to the end of the year, and then ranging from that $3.75 to $4.30 includes what we think is a very reasonable assumption for performance fee generation, and also some opportunities that we're seeing that both Sean and Nate referred to as we look at affiliate organic growth.
Michael Kim - Sandler O'Neill
At the upper end?
Darrell Crate
At the upper end. And so, as we look at the performance fee opportunity, again all the products that were strong generators of performance fees in this fourth quarter continue to be very well positioned, so that as we look at any market environment, these non-correlated products continue to make a strong contribution.
I think given the market and given the construct, it's not useful to predict a return relative to a earnings number, but hopefully each of those observations gives you some sense on our approach. And as you know, in the beginning of every year, when we make estimates of our performance fees they tend to be very conservative relative to what we think the real bounds are for what performance fees can earn.
Sean Healey
Yes, I would add to that, that the return assumption is difficult because we have a broad array of uncorrelated products, which in many cases as Nate underscored, are not in hedge fund form, they're separate accounts, with custom-tailored benchmarks. We also have, of course, a significant opportunity that is not in any of our guidance related to performance fee products, which did not contribute last year, but where we still have substantial assets and substantial opportunities run by outstanding firms.
Michael Kim - Sandler O'Neill
Okay. That's helpful.
And then just finally from a deal flow perspective, not that this would change your model, per se, but I'm just wondering if you think we could see a step-up in the number of boutique managers that opt to sell a 100% of their firms, as opposed to retaining a significant amount of equity just given the ongoing uncertainty in the markets?
Sean Healey
I would think not. Obviously over time, there are always firms which decide for their own reasons that the best alternative for them is to sell all of their equity.
I would say parenthetically, there are far fewer buyers or alternatives generally, meaning the public market, that are available for firms such as those. Those firms have never been in our pipeline, and if you take a step back and think about even given the difficult environment we're in, there are still a very large number of outstanding boutique firms which have generated strong growth and outstanding performance over time, where the principals do not need to do anything.
These are excellent businesses with outstanding prospects, and because they want a solution which provides ongoing entrepreneurial opportunity for the founding partners and the next-generation partners, and their client's value retained autonomy in their investment and operating culture, those kinds of firms regardless of the environment are not going to prefer to sell 100% even if they could. Those are precisely the kind of firms that are attracted to us and vice versa.
And I would say the best of those firms, including our Affiliates, who distinguish themselves in this very difficult period have even better opportunities going forward.
Michael Kim - Sandler O'Neill
Okay. Thanks for taking all my questions.
Operator
Our next question is from the line of Craig Siegenthaler with Credit Suisse. Please go ahead.
Craig Siegenthaler - Credit Suisse
Thanks and good morning.
Sean Healey
Good morning.
Craig Siegenthaler - Credit Suisse
I was looking for more detail around the sequential change in flows in institutional channel, which had a pretty good improvement this quarter. I am just wondering if you could comment on which boutiques are really responsible for that drive?
And it also looks like it's definitely a function of low redemptions as sales didn't really improve. So just maybe you could provide a little more color there.
Nate Dalton
Yes, I think the good news here is, it came actually relatively broadly across the group. And the other thing I would say is that happened even with some of this alternative outflows that we talked about.
So, yes, it was probably spread. And I think, the next thing I would say is, if you look forward to the other dynamic, which is a really encouraging dynamic.
After we had those big shocks very early in the quarter, and then clients really flowed down and slowed, we saw some buildup in the pipeline which is; businesses that had been won but not yet funded, things that were close, but not yet won, and that pipeline seems to be starting to move. So that is another very encouraging sign, as we look at it now.
Craig Siegenthaler - Credit Suisse
Got it. And then just one question on the balance sheet, because there are a few moving pieces this quarter.
When I look at your cash balance, which I think now is a little under $400 million, I'm wondering what's the breakout of the holding company, unrestricted cash, restricted cash? And also is any part of the forward sale now in that number?
Darrell Crate
Well, there is about $200 million that's AMG holding company cash and an additional $120 million that is part of the forward. And that is a very similar number to the last call.
In this quarter we did repurchase true-ups and we had some tax payments and some other items, and then we have not received, of course, the fourth quarter earnings, from our Affiliates, which we will receive in the first quarter.
Craig Siegenthaler - Credit Suisse
Which true-ups did you pay down? Was it the earlier one or the later one?
Because I think there are two series.
Darrell Crate
It's the earlier true-ups.
Craig Siegenthaler - Credit Suisse
Thanks for taking my questions.
Operator
Dan Fannon with Jeffries. Please go ahead.
Dan Fannon - Jeffries
Thank you. Can you give us the AUM levels for performance fee generating assets and then what component of those are at or near their high water marks at this point?
Darrell Crate
I think as we look at the portfolio we could certainly move through those numbers. I just don't think that it's helpful to you people trying to figure it out, because we have many, many products that all have different fee arrangements.
So it would be unfair to say, hey, there is this amount, and this is what they earn and this is what translates into performance fees. That all said, as we look broadly to high watermarks, I would just give some broad color, which is compared to last quarter and the quarter before our high watermarks are roughly in the same place.
And I would say that the non-correlated assets which are in these volatile environments or in equity markets that continue to be challenged, those are the products where we are going to continue to see fees and fee generation. So, as you saw in the last year, generating about $0.50 of performance fees, I think that's a very strong showing, given how the year unfolded.
And I think, as we look to this year, we are well-positioned with all those products that generated fees, and there also continue to be other products where in any market environment where we see some growth they could be well-positioned to make also material contributions.
Dan Fannon - Jeffries
Okay. And then can you give us a sense of how much cushion there is as you look at your other Affiliates and we think about impairments going forward that there are between the purchase price and the growth of assets you've seen over time and how close we are to what the market would need to do for us to see additional charges?
Darrell Crate
Clearly this is the quarter where we looked again at all our intangibles. If you recall in the third quarter, we did a series of tests on our four types of intangibles, our goodwill, our definite-lived, our indefinite-lived and these equity method investments.
But again, it only made sense, given the events of the fourth quarter to look at all of those tests again. And I would say that there is plenty of cushion in all of our segment testing, as well as we look at our definite-lived to definite-lived intangibles.
Of course, we looked at the fourth quarter, as you know, equity method investments are judged by investment-by-investment. And when we were making judgments about impairment, the standard of course is looking at the market values and what's happened in the market, in addition to business performance.
So this is a quarter where, if a firm that we made a new investment in, continued to operate to plan. As an example, if you look at BlueMountain, where assets under management continue in fact to be higher than when we shook hands on the deal.
Although, we can all observe in the market that multiples are at lower. So that's what generated our impairment charges, I think that as we look at the market we made judgments around where multiples are, and I think that we are quite conservative about it.
And as we look at business performance, all of these teams are well-positioned going forward, so you will not hear us talking about impairment charges, in the coming call.
Sean Healey
I think it's worth underscoring, not that we like to see accounting impairment charges, and we certainly recognize the degree to which the accounting only works one way, and nobody is coming to us to write-up the value of Tweedy, for example. But from an economic standpoint, from the standpoint of running the business, and the cash generation prospects of the business going forward, the thing to underscore, and what we view as most significant, is that the underlying performance of our Affiliates and the integrity of our business model.
Even after all of the declines that we've experienced they are very strong, with stable margins, as Darrell described, and intact revenue share structures with ongoing substantial equity interest held by our management partners. And that fact, which belies I think a common misconception about exposure to operating leverage and the relative strength and stability of outstanding boutique firms relative to larger integrated firms, is one that we're anxious to clarify.
Dan Fannon - Jeffries
Thank you. That's helpful.
Operator
Your next question is from the line of Robert Lee with KBW. Please go ahead.
Robert Lee - KBW
Thanks. Good morning everyone.
Sean Healey
Good morning, Rob.
Robert Lee - KBW
Two quick questions. Darrell, just to clarify on the guidance, when you say flat from here, you're assuming down 7% month-to-date and then from there flat?
Darrell Crate
Down 8% is our assumption, but that's as of last night.
Robert Lee - KBW
Okay.
Darrell Crate
Right to the end of the year.
Robert Lee - KBW
Okay, that's helpful. Second question I had, I guess, if I look at the revenue-sharing arrangements, you kind of hinted at this, but just to confirm that you don't feel any of the larger Affiliates are getting any place to a point where the revenue-sharing kind of breaks down a little bit, where their revenues are under so much pressure that you're forced to or are started dipping into your share a little bit?
Are you closed on any of the larger Affiliates?
Sean Healey
That's correct. We feel very good about the largest group of Affiliates, and you only have to look at the asset levels today relative to where they were when we made our investment, which in virtually all cases is materially higher, as well as, the ongoing direct equity ownership, equity ownership in terms of annual distributions, as well as implied equity value over time.
For the other 15% of our business, in terms of EBITDA contribution, we have said and continue to say, that the amount of potential exposure, even where we are today, is immaterial.
Robert Lee - KBW
Okay. And I just have a question with the affiliates, I am using your resources, and my understanding is, historically it's been very much up to the affiliate to choose whether they wanted to participate or use some of the distribution resources you make available, whether it is the Sydney office, or London or the retail distribution platform.
Are you seeing any change among the Affiliates, who have chosen not to use it in this environment, and say, we need to step up our rate of asset-gathering. In particular, I'm thinking of Tweedy, Browne, I mean my impression has been that they haven't necessarily used some of your resources, particularly on the retail side.
Do you see any change in behavior there?
Nate Dalton
I think you broadly understand the approach exactly right, which is we build these platforms and we build them collaboratively with our Affiliates and allow them pick and choose how they participate and where they participate? I would say most of our Affiliates, at this point, more than half of our Affiliates are working with us in one or more platforms.
Tweedy, Browne for example is working with us on some of our global distribution platforms. I think we are seeing greater acceptance, or greater participation.
I would frame that in a couple of ways. One, I do think the environment plays some role in it, in part as some channels change themselves, right, so that the environment is forcing some changes in the channels, the environment is forcing some changes at firms, and those are maybe edging them towards us.
The other long-term trend that started well before any of this is, as we build relationships, as we broaden those relationships, as we do an excellent job doing those things, yes, the Affiliates continue to participate in more and more of these things. So as the team that managers are doing an excellent job in the retail redistribution platform, that has fed lots of success with Affiliates in global distribution.
And our best references are the Affiliates themselves, as they talk to each other. So the acceptance is definitely increasing.
Sean Healey
I would emphasize that our view has always been that successful enhancements to distribution and marketing. It's fine for us or any other entity to create these platforms, but just because you create the platform and allocate resources to distribution doesn't mean you're going to sell products.
What is ultimately and always most important is of course the performance of the underlying firms and their products. And what is terrific for us, as you heard us go through, especially in areas like international emerging markets equities, we have outstanding products with very good relative performance over the near and long-term.
And the interest and ability to sell those products, whether it's in the US, or in Australia, or somewhere else in the world is obviously highly correlated to the attractiveness of the product. And so we're seeing, and expect to continue to see Affiliates who are increasingly interested in participating, because they've got products that they know will be attractive to the end client.
Robert Lee - KBW
Great. Thank you.
Operator
D.J. Neiman with William Blair, please go ahead with your question.
D.J. Neiman - William Blair
Hi, good morning, guys.
Darrell Crate
How are you, DJ?
D.J. Neiman - William Blair
Good, thanks. Just a quick follow-up.
I don't think I caught this, on the cash at the holding company level, did you actually pull in the forward equity sale?
Darrell Crate
No. When I gave the cash resources number of $320 million that includes the $120 million of the forward.
We have not drawn down any of those proceeds, but they stand ready for us and in fact accrete at a Fed funds plus a spread.
D.J. Neiman - William Blair
Is that dilution included in your share count?
Darrell Crate
No, it is not, the 40.9 does not anticipate drawing down the forward.
D.J. Neiman - William Blair
Can you just expand on that?
Darrell Crate
Take down the $120 million of cash, we would issue 1.2 million shares of stock. And that would now be at a price that's implies a price of around $95.
D.J. Neiman - William Blair
Okay. So should we think about it as deal capacity, if deals come back, and when deals come back?
Darrell Crate
No, it's a cash resource and I think we will deploy our capital wisely. And that can be new investments that can be opportunities that we see among other capital or just could repay indebtedness.
D.J. Neiman - William Blair
Okay. So then in the quarter, there was lot going on there, but did you do any share repurchasing in the quarter?
Darrell Crate
No.
D.J. Neiman - William Blair
No. Okay.
Darrell Crate
Nothing material.
D.J. Neiman - William Blair
Okay. Last question, just quickly, on the AUM brought forward and the other section in the Footnote F.
In terms of these products that were closed, $1.8 billion, how do we think about that? Is that the products are so under water that they are not going to come back or any detail there?
Nate Dalton
Sure, the way to think about the prices sitting there is, it is across a bunch of places, in a disciplined way, we are going through and making sure we're allocating resources, as a product we think they are long-term opportunities, both new products and closing and exiting business lines. It is really places where we didn't see the opportunity to continue managing those products in a profitable manner.
So the financial impact on us should be negligible or even in some cases, positive.
D.J. Neiman - William Blair
Okay. Great.
Nate, while I've got you, real quick. I saw that AQR is launching mutual funds.
Just wondered if you had any thoughts you could share with us on that. I think it should help transparency broadly speaking, but any expectations there?
Nate Dalton
Look, I think they had some very interesting ideas that they're working on in product development and distribution channel development. I think we can paint a pretty optimistic picture for the attractiveness of some of the things they're doing to broad segments of the retail market.
So yes, I think it is an exciting development and has lots of work to be done but has potential.
D.J. Neiman - William Blair
Great. Thanks, guys.
Operator
Our next question is from the line of Marc Irizarry with Goldman Sachs. Please go ahead.
Marc Irizarry - Goldman Sachs
Sean, just in terms of the deal environment, I imagine that sellers' expectations have maybe come in a little bit, but we haven't seen much in the way of deals, particularly from banks as you cited as a potential source of deal activity. What do you think we need to see for some of these transactions to start to happen here?
Sean Healey
Well, with respect to the opportunities that are interesting to us, I think it's a measure of stability, in the underlying businesses, seeing through the volatility and making sure that whatever is happening at the parent company level that their asset management subsidiaries are still performing well with excellent prospects. And, in some cases recognition by the corporate seller of where the valuation levels are now.
In other words, just setting a clearing price. I think in general, the M&A markets are relatively frozen, partly because of issues around the firms themselves, but also because demand has completely evaporated among respective buyers.
We are actively working on a number of opportunities, I would say, in the current environment, weighted heavily toward more opportunistic situations with corporate sellers. But over time, and I don't think I'm talking years but months, there will continue to be an ongoing, and I think a large number of attractive demographically driven succession investments that we can make, as we're ideally positioned.
So we're ready to go and we're waiting for the right opportunities, to present themselves.
Marc Irizarry - Goldman Sachs
And just, I was curious how you're viewing opportunities in acquisitions in fixed income, and in passive or quantitatively oriented strategies?
Sean Healey
I think our view generally is that, if we had a magic time machine and we could have gone back a year or two ago and had exposure to those areas that that would have been great, but given where we are now, we look forward, not back in the rear-view mirror in terms of what has worked. And our view is that now is precisely the time, as difficult as it is to say it, given what's happened to equity markets, now is precisely the time that we are happy for an exposure to outstanding alpha-generating boutique equity firms, and we look forward to investing in precisely such firms going forward.
We believe that that's where opportunities lie, and that's where client flows will increasingly go, not to money market funds.
Marc Irizarry - Goldman Sachs
Hey great, thanks.
Operator
Cynthia Mayer with Merrill Lynch, please go ahead with your question.
Cynthia Mayer - Merrill Lynch
Hi, good morning.
Sean Healey
Good morning, Cynthia.
Cynthia Mayer - Merrill Lynch
Just to follow up on what you might be interested in buying. How important do you think performance in '08 will be to you in terms of what you want to buy, and more broadly just in terms of firms' abilities to sell?
Do you think investors will be able to forgive underperformance due to black swans, or do you think that firms like Tweedy that did outperform, this will really be a defining moment and you would want to buy more like that?
Sean Healey
I think more the latter, Cynthia. Obviously, you would have to look on a case-by-case basis, but in general, I don't think clients will or should ignore what happened last year.
And I think they'll look to firms and favor firms which generated strong relative performance, sticking to their of course, strong relative performance in '08, coupled with obviously outstanding long-term track records. And our view is, those are the kinds of firms, generally speaking, which clients will reallocate toward, and which will benefit most, as clients reallocate back toward equities and return assets, generally.
Cynthia Mayer - Merrill Lynch
Okay. And then just in terms of the 1Q.
Do you guys expect any continued outflows from alternatives, either because some of the cash went out January 1, or as gates came down or anything like that?
Nate Dalton
I think we would expect to see some continued outflows in the first quarter. Probably not along the same lines, industry wide as the things we've seen, but I think you would expect to see outflows continuing.
Sean Healey
And a lot of it is related to news that is already in the market about firms that have put their gates down, et cetera. I don't think we see a dramatic acceleration, by any means.
Cynthia Mayer - Merrill Lynch
So you are expecting then gates for your Affiliates to come back up?
Nate Dalton
Stepping back, we had one product with one Affiliate that put a gate down. And actually what they really did was go after the client base and ask folks to commit to longer duration and the vast majority of their clients did.
So, on our Affiliates we think it's gone up, again with the exception of one product, they didn't put gates down.
Cynthia Mayer - Merrill Lynch
Okay. Great thanks.
Operator
Thank you. William Katz.
Please go ahead with your follow-up question.
William Katz - Buckingham Research
Okay. Thank you.
Just another conceptual question. One of your competitors recently made the notion that the consolidation of distribution on the retail side at least would potentially crowd out some of the smaller players.
I was just sort of wondering if you would give us your views of how you see the shifting distribution sands and the impact on your model?
Sean Healey
I think what will always matter most, no matter how much anyone may want to argue otherwise, is performance. And outstanding firms that have generated excellent performance, both in the near-term and the long-term are going to be best positioned.
Now, obviously you need to have appropriate access, and sales and marketing resources to penetrate the channel. We are very confident that we already have that and if anything, we're going to be among the firms that would benefit from consolidation among distributors.
William Katz - Buckingham Research
Okay. Thanks so much.
Operator
[Lynn Sessman with Lupitus Asset Management. Please go ahead.
Unidentified Analyst
Sure. A quick question on the accounting for the forfeited options.
Why is that a charge? Shouldn't it have been a reversal of what had already been amortized?
Darrell Crate
I think it is a great question, and intuitively that would be the right answer. But the way it works is, and I think you have got the substance of the transaction just right, which is management gave up it's last two option grants back to the company, with no other commitment for additional option grants.
But the way the accounting works is that there were $39 million of charges related to those two grants that would have taken over that vesting period. And the way the accounting rules work is that you need to accelerate those charges into the current period.
Unidentified Analyst
What line item is that on, on the income statement?
Darrell Crate
Yes, it's right in the comp and benefits line.
Unidentified Analyst
Okay. Thanks.
Operator
John Boland with Maple Capital Management, please go ahead with your question.
John Boland - Maple Capital Management
Great. Thank you for taking the call.
So just to fully flush out the revenue model, can you give us any color on pricing trends that you might be seeing? Are you seeing any pushback in fees in the marketplace, requests for fee concessions at the Affiliate level, anything like that?
Nate Dalton
I don't think we're seeing the kinds of things you just described. I do think on the margin we are seeing, maybe more fee structures that include some performance fee components on a broader set of strategies.
So, we are seeing some of those sorts of things.
John Boland - Maple Capital Management
So, you're saying greater percentage of the fees from performance and less from a fixed?
Nate Dalton
Yes. Again very much on the margins.
Sean Healey
And that would be just to be clear among traditional firms where they're willing to accept more hybrid fee structures, but it's very anecdotal I would say. Generally speaking, we're not seeing that across our Affiliate base.
John Boland - Maple Capital Management
Okay, great. Are you able to pull up any information from the Affiliate level on market trends as far as number of new RFPs, mandates being shopped more aggressively, or are you seeing fewer mandates coming up for the bid over the past couple of months?
I mean is there a change in the tone of the market?
Nate Dalton
First, yes we do look at that data. Look, you have to vary it by segment, but the markets are in a state of plus.
I think the things that we said earlier on the call, which I sort of emphasized are, that the market went through a very extreme event and then I think clients in the institutional market in lots of product categories really were just sort of frozen, except for this move to cash, that sort of swamped everything else. Looking forward, I do think we're going to see a lot of money in motion.
And I do think we are seeing that sort of thought begin to thaw because we're seeing as I said earlier, and it is anecdotal, but as I said earlier, we are starting to see mandates moving that were sort of in final stages to contracts and things that were contracted and would seem to be moving towards funding. A lot of things that were in the pipeline sort of funding got pushed out.
Unidentified Analyst
Okay. Thank you.
Operator
Thank you. And Management, there are no further questions at this time.
Please continue with any closing comments.
Sean Healey
Thank you for your interest. We appreciate your support as we all weather this difficult environment, and we look forward to speaking to you next quarter.
Operator
Thank you ladies and gentlemen. This concludes the Affiliated Managers fourth quarter 2008 conference call.
At this time you may disconnect. Thank you very much for using AT&T Conferencing.
Have a very pleasant rest of your day.