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Affiliated Managers Group Inc (NYSE:AMG)
Q3 2019 Earnings Call
Oct 28, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the AMG Third Quarter 2019 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Anjali Aggarwal, Vice President, Investor Relations for AMG. Thank you. You may begin.

Anjali Aggarwal -- Vice President, Investor Relations

Thank you for joining AMG to discuss the results for the third quarter of 2019. In this conference call, certain matters discussed will constitute forward-looking statements. Actual results could differ materially from those projected due to a number of factors including but not limited to those referenced in the Company's Form 10-K and other filings we make with the SEC from time-to-time. We assume no obligation to update any forward-looking statements made during this call.

AMG will provide on the Investor Relations section of its website at ir.amg.com, a replay of the call, a copy of the announcement of our results for the quarter, and a reconciliation of any non-GAAP financial measures that are not announced on this call to the most directly comparable GAAP financial measures.

As a reminder, we have also included an updated investor presentation on this section of our website. AMG encourages investors to consult the Investor Relations section of its website regularly for updated information. With us on the line to discuss the Company's results for the quarter are Jay Horgen, President and Chief Executive Officer; and Tom Wojcik, Chief Financial Officer.

With that, I will turn the call over to Jay.

Jay C. Horgen -- President and Chief Executive Officer

Thanks, Anjali, and good morning everyone. As macro factors continue to fuel uncertainty and volatility in market, AMG's diversification and unique partnership structure provides stability and enable us to continue to evolve our business to be long-term client demand trend.

Boutique managers have a proven ability to outperform in more volatile market and given their long-term performance track record, our affiliates are well positioned to benefit as clients seek differentiated risk-adjusted returns that only active managers can provide. More broadly, with AMG's unique competitive advantages built over the last 25 years, we are confident that our business will generate long-term growth and shareholder value.

AMG reported economic earnings per share of $3.16 for the third quarter. Net client cash outflows of $19.7 billion were driven primarily by certain quantitative strategies across liquid alternatives and global equities and included a single, low fee redemption of $5 billion. As we said last quarter, and as Tom will discuss in more detail, it's important to note that these outflows had a disproportionate impact on our reported AUM relative to their more modest impact on our earnings.

While we expect outflows in these quantitative strategies to continue in the near term, we anticipate that AMG's aggregate level of net outflows will moderate in the fourth quarter given a number of large institutional and sub-advisory wins, which are expected to fund by year-end. Notwithstanding our near-term flow results, we are well positioned for strong organic growth over time. AMG is diversified across a broad array of strategies and active management, including a significant position in product areas currently benefiting from secular client demand trend.

I want to take a moment to discuss these growth areas within our alternatives, multi-asset and fixed income category. The first is our illiquid managers Pantheon, EIG and Baring Asia, which combined account for nearly 20% of our run rate EBITDA and are benefiting from record levels of client allocation to private market. Of these, Pantheon is the largest and most diversified generating two-thirds of our EBITDA contribution from illiquid. Pantheon is a world-class private market solutions provider offering clients a diverse array of primaries, secondaries and co-investment across private equity, infrastructure, real assets and private debt on a global basis. This business continues to grow in its earnings stream is highly stable give that nearly all of its revenue is fee based and tied to committed capital.

In addition, EIG and Baring Asia offer unique exposure to fast growing segments within private market. EIG is a leader in energy renewables and infrastructure investing globally, while Baring Asia is one of the largest independent private equity and real estate firms focused on Asian market. In addition to fee-related earnings, EIG and Baring Asia has significant upside potential from a growing performance fee opportunity. Collectively, our private market affiliates managed nearly $100 billion in assets and have generated over $20 billion of net inflows over the last two years. These businesses continue to drive innovation and new structures and solutions making private markets more accessible to clients, globally.

Second, within our multi-asset and fixed income category, AMG is benefiting from strong secular tailwinds and wealth management space through four affiliate: Veritable, Baker Street, Welch & Forbes and myCIO. They manage nearly $50 billion in ultra high net worth asset. In addition to the growing concentration of investable assets in this area, wealth clients are actively transitioning from legacy manager selection model toward holistic advice and portfolio construction.

Our affiliates, strong client relationship, solution orientation and focus on innovation are driving consistent inflows and earnings stability. In addition, we have a meaningful exposure to a number of attractive areas across traditional and alternative fixed income through both growth initiatives at existing affiliates such as GWK and AQR as well as new investments in market leading affiliates such as Capula and Garda both specialist in relative value fixed income.

In aggregate, traditional and alternative fixed income accounts for approximately $70 billion in asset and provides another growth opportunity, in area of strong client demand. These growth opportunities in aggregate across private markets, wealth management and fixed income account for approximately 30% of AMG's EBITDA today, and we expect these areas to play an even more significant role in our business over time. Our fundamental managers across active equities and liquid alternatives including Genesis, Harding Loevner, Tweedy Browne, Value Act, Veritas and Yacktman continue to build on their strong long-term track record and have further distinguished themselves as asset dispersion has increased, particularly in less-efficient markets such as small cap, emerging market and global equity.

These strategies represent approximately 50% of our EBITDA given improving performance against the backdrop of volatile market, alongside capacity reopening in a number of strategy. We are confident in our long-term organic growth prospects across our fundamental equity and liquid alternative managers. And finally, we continue to believe strongly that quantitative strategies across long only equities and liquid alternatives play an important role in client portfolio, and we expect these strategies to be meaningful contributors to our organic growth profile over time, and while these products account for approximately 30% of our AUM today, given fee rates and ownership levels they contribute only 10% to our EBITDA.

Stepping back, our core strategy is to generate long-term value by investing in leading independent active managers through a proven partnership approach and allocating resources across AMG's unique opportunity set to the areas of highest growth and return. This strategy has remained consistent, and in the quarter we made good progress in executing against our strategic plan.

Early in the quarter, we completed our investment in Garda, specialist fixed income relative value manager with an exceptional performance track record, and we are building momentum in our new investment activities across a broad range of prospective affiliates offering in demand product. Our transaction pipeline includes a diverse range of high quality growing independent firms that are attracted to our model and we are well positioned to structure partnerships that align affiliates, clients and shareholders.

Unique ability to evolve and scale our business through new investment without the risk or cost of integration is a distinctive competitive advantage. We are dedicating significant resources to this effort and I'm confident in our ability to continue to generate earnings growth and further diversify our business through additional accretive partnerships over time. In addition, we continue to work closely with our affiliates by supporting them in the execution of their individual growth strategy that they position their firm to capitalize in client demand trend.

We have worked with our affiliates to see them launch new products and enter new regions and channels. We have partnered together to evaluate and execute on potential lift-outs and acquisition opportunity. In other cases, we are collaborating with affiliates that are facing headwinds to help them position their businesses to achieve the best outcomes for their client as was the case with BlueMountain. We are pleased to have had a good partnership with BlueMountain over the many years and that we were able to work together to find the best path forward for their clients and employees and for AMG shareholders.

More broadly, consistent with the work we are doing with our affiliates, we are extremely focused on positioning AMG for future growth, and to that end, we have engaged in a number of strategic initiatives in the quarter to align our resources and talent base with those areas where we can deliver scale and expertise to help our affiliates grow and diversify their business. For example, within our global distribution platform, we've adjusted coverage in certain regions and reallocated resources to focus on the clients that represent the largest growth opportunities for our business. Including deploying additional resources toward building strategic relationships with leading institutions and intermediaries that are consolidating their relationships with scale players like AMG.

Leveraging our scale can also take different form. In certain areas delivering partnerships with industry leading service providers to our affiliates can be more efficient and provide better outcome, particularly where AMG scale can improve pricing, access, service. For example, we recently partnered with ACA compliance group to support affiliates seeking to lower their compliance costs and access a greater breadth of services.

Finally in the quarter, we have simplified certain elements of our business, reduced operational cost and taken steps to optimize our footprint. These initiatives will free up approximately $20 million in capital annually which we will redeploy toward higher growth opportunities in our business. Finally, our entrepreneurial culture remains critical to our success and our ability to adapt ahead of changing industry dynamics, while the environment has been challenging, difficult market yield compelling opportunity and we remain confident in the quality and profile of our existing affiliates and are actively positioning our business for future growth. AMGs business diversification and unique partnership structure provides the resources and flexibility to execute on our growth strategy, while consistently returning capital shareholder.

And with that, I'll turn it over to Tom to review the details for the quarter.

Thomas M. Wojcik -- Chief Financial Officer

Thanks, Jay, and good morning everyone. AMG reported stable economic earnings per share and generated strong free cash flow in the third quarter. Despite industry volatility and near term net outflows, our unique business model continues to demonstrate resiliency as we position for future growth.

Net client cash outflows of $19.7 billion were concentrated in certain quantitative strategies across liquid alternatives and global equity. As Jay said, our outflows will likely continue in these strategies and so performance stabilizes. We see fourth quarter aggregate net outflows moderated notwithstanding year-end seasonality given a number of expected institutional and sub-advisory funding. As we mentioned last quarter, it is important to understand the difference between flows and their impact on our financial results. In the current quarter, more than 75% of outflows were related to affiliates, where we have a minority interest or in low fee product that collectively make up only 10% of EBITDA and therefore have a more modest impact on current and future earnings call.

Turning to flows by asset class. In alternatives, we reported net outflows of $9 billion, driven by certain liquid alternative strategy and partially offset by positive contributions from illiquid product. As noted, these outflows included a $5 billion low fee currency overlay redemption that was unrelated to performance, while long-term investment performance and liquid alternatives remain strong with 65% of assets under management outperforming benchmarks over a five-year period, more recent performance in this area has been met. Certain of our quantitative strategies have been impacted by value factor exposures while others for example, at Winton and Systematica, are generating strong near-term results. We continue to see outperformance in our fundamental liquid alternative book including relative value fixed income strategies at Capula and Garda, both of which are generating solid organic growth supported by client demand for this unique alpha stream.

Overall, we expect liquid alternatives to be a positive contributor to our growth profile over time, as these strategies continue to play an important role in client portfolio. As Jay mentioned, we also see a steadily growing opportunity in illiquid alternative as our affiliates build an existing and new product capabilities with ongoing fundraising at Pantheon, Baring Asia and EIG in the quarter.

AMG's performance in this category is very strong with 94% of our recent vintages outperforming benchmark on an IRR base. In global equities, consistent with industry headwinds facing the asset class in the third quarter, we saw net outflows of $7 billion across quantitative and fundamental strategy. Overall, our affiliates in this area continue to generate strong long-term performance, as evidenced by the reported increase in global equity AUM outperforming three and five-year benchmark and particularly in global Fundamental Equity, where 83% of AUM is ahead of benchmark over a five-year period.

Additionally, a number of our emerging market equity affiliates have recently reopened capacity or launched new strategy and we expect this category to be a meaningful contributor to future growth. In the US equity, net outflows were $5 billion, driven in part by institution in sourcing third party mandate, while we saw an improvement in the quarter, US equity's performance continues to be impacted by our overall value buy. In multi-asset and fixed income, we posted nearly $1 billion in net inflows, marking the 11th consecutive quarter of positive flows in this category.

Flows were primarily driven by GW&K's municipal bond products and supported by AQR's innovative systematic fixed income strategies, which continue to generate good flow momentum. This category also includes our wealth management affiliates, which are benefiting from the positive secular trends referenced previously. In aggregate, we remain confident that AMG is well positioned in high-growth areas supported by long-term client demand trends, as well as our affiliates' differentiated ability to generate durable output.

Now, turning to our financial. For the third quarter, economic earnings per share declined 8% year-over-year to $3.16 including $0.02 of net performance fees. Aggregate fees declined 12% to $1.1 billion, driven primarily by lower average AUM. Adjusted EBITDA declined 13% to $206.5 million. Relative to adjusted EBITDA the decline in economic earnings per share of 8% reflects a lower share count as a result of continued share repurchases. Jay discussed several initiatives we are taking to position our business for future growth, which in combination with the BlueMountain transaction will have an impact on our fourth quarter financial results and I'll touch on that in a moment.

Turning to specific modeling items. For the third quarter the ratio of adjusted EBITDA to average assets under management with 10.8 basis point. Excluding performance fees, this ratio was 10.7 basis point. In the fourth quarter, we expect adjusted EBITDA to average AUM to be between 10.5 basis point and 12.5 basis point, this range is pro forma for the removal of BlueMountain and includes performance fees of $0.20 to $0.60 per share, as well as one-time costs related to the repositioning initiatives in the quarter, which we expect to have a $0.15 to $0.30 per share impact.

Our share of interest expense was $19.5 million for the third quarter. In the fourth quarter, we expect our share of interest expense to be approximately $19 million. Our share of reported amortization was $68.4 million for the third quarter and was driven by recent elevated outflow levels and included $52 million from affiliates accounted for under the equity method. We expect a similar level of amortization in the fourth quarter. Our effective GAAP tax rate was 24.7% and our cash tax rate was 21.6% for the third quarter.

For modeling purposes, in the fourth quarter, we expect our GAAP tax rate to be approximately 25% and we expect our cash tax rate to be impacted by a one-time benefit of approximately $50 million related to the BlueMountain transaction, excluding this benefit our normalized cash tax rate is expected to be approximately 20%. Intangible-related deferred taxes were $3.5 million in the third quarter and we expect intangible-related deferred taxes for the fourth quarter to be approximately $53 million resulting from the one-time tax benefit I just mentioned. Other economic items were $1.2 million for the third quarter and we expect that to be consistent in the fourth quarter. Our adjusted weighted average share count for the third quarter was $50.4 million and we expect share count to be at or below 49 million shares for the fourth quarter.

And finally, turning to our balance sheet. During the quarter, we paid a $0.32 per share dividend and repurchased $110 million in shares reflecting our commitment to consistent capital return. Additionally, we completed our investment in Garda and received approximately $90 million in proceeds, relating to the BlueMountain transaction. We are targeting share repurchases of $100 million or more in the fourth quarter subject to transaction activity and market condition.

Our business model generates significant and stable free cash flow, driven by the diversity and quality of our affiliate base together with our unique revenue share structure, which limits AMG's exposure to affiliate level margin fluctuation, and we will continue to allocate capital to the areas of highest growth and return in our business.

At the same time, we continue to maintain a prudent level of leverage and have repositioned our balance sheet over the last several quarters, extending duration, while maintaining flexibility and capacity to capitalize on growth opportunities even in challenging market. Given AMG's combination of distinctive independent affiliates that are well aligned against future client demand trends, our unique ability to make new investments that deliver both earnings and organic growth accretion, our stable free cash flow profile and our flexible balance sheet, we are well positioned to create long-term value for our shareholders.

And with that, we'd be happy to open it up for your question.

Questions and Answers:

Operator

Thank you. At this time, I will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Chris Shutler with William Blair. Please proceed with your question.

Chris Shutler -- William Blair -- Anlayst

Hey guys, good morning. Can you just talk about the new investment opportunities I guess in the more near-term part of the pipeline for the opportunities that they do feel more actionable are they, how would you I guess classify those smaller large asset classes, more proprietary versus formal processes, et cetera?

Jay C. Horgen -- President and Chief Executive Officer

Great. Thanks. Thank you, Chris. It's, Jay. Yes, so let me just talk about our pipeline broadly and then give you some attributes of it today. Stepping back, our strategy of partnering with excellent firm has and always will be a cornerstone of our growth strategy. Obviously, that's still true today and we look forward to continuing to grow our business to making new investments. The other thing I would just say is, the management team, including me are spending more of our time on new investments. My background obviously as an M&A, it's something that I'm excited about and this extra effort and resources to the effort we think we'll continue to drive additional transactions over time.

We're building momentum in our pipeline. We see good diversity of types of businesses all high quality all attracted to our model. I would characterize it as global in nature. I would also characterize it as all sizes. What's interesting about investing in growing firms is obviously, it's not just the capital you put out in a single transaction, it's the growth that you can -- that you can see from the -- from the business both because, these are entrepreneurial businesses but also to the extent that they're in front of a significant client demand trends that you can add significant upside to these businesses.

Our unique business model puts us in an enviable position where we can through continued successful execution, scale our business with little or no integration risk allowing our affiliates to remain autonomous that's a unique competitive advantage of AMG. We can simultaneously grow our earnings and enhance our long-term growth profile through new investments. We can also invest alongside of our affiliates, both in distribution capabilities but also invest in their individual growth opportunities through allocating capital to affiliate.

So all of those things come from a successful new investment strategy, and when we look at it today, we do see momentum in both the near intermediate and longer-term pipeline, most of what we are -- most of what's in our pipeline today is proprietary coming through long-term relationships that started many years ago, whether that was relationships with -- that I started when I was in new investments or with Sean or Nate, all of those relationships have been transitioned now and we see that the proprietary conversations that we're having are really -- is important to our process, because we are -- we are -- we are sorting through due diligence and we are also sorting through the partnership itself as we have these long-term relationships, businesses evolve and they get to understand our business model, better. So when it comes time and I think as we said this before, structure in pricing is only part -- part of the partnership. It's really the long-term autonomy and alignment of interest that we offer to our model that really attracts these firms to us.

Operator

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

Craig Siegenthaler -- Credit Suisse -- Analyst

Thanks, good morning everyone.

Jay C. Horgen -- President and Chief Executive Officer

Good morning.

Thomas M. Wojcik -- Chief Financial Officer

Good morning.

Craig Siegenthaler -- Credit Suisse -- Analyst

Hey, so, first just in flows. We know AMG tends to have tougher 4Qs just given several seasonal and cyclical factors and I heard the commentary in the prepared remarks that net outflows should moderate or improve, I wasn't sure if this meant total flows or if this meant sort of core flows after backing out some of those seasonal and cyclical factors.

Jay C. Horgen -- President and Chief Executive Officer

So a good question, Greg, and we will clarify, I'll let Tom take that one.

Thomas M. Wojcik -- Chief Financial Officer

Thanks, Craig. So maybe I'll just kind of recap flows overall in the quarter and then try and give you a little bit of color on what we see on the horizon and address your seasonality question. As you recall coming into the quarter on our July call, we talked about, where we saw flows landing overall in the third quarter and really excluding that one large low fee currency overlay mandate that I referenced, outflows for the quarter were pretty flat against last quarter, again, more than 75% of the outflows that we saw came from certain quant products, most notably in liquid alt absolute-return strategy and these flows were on a base that today is only contributing 10% of our EBITDA.

So given the combination of fee rates and ownership levels and the abilities and products that contributed to outflows, the impact on our earnings is generally going to be much less than what the headline flows suggest. We also continue to believe that quantitative strategies are going to be important in terms of their contribution to future growth and we're already seeing very strong performance at certain affiliates in that area, including at Winton and Systematica. We did also see some outflows in the quarter and active equities, primarily driven by global risk off trends, but importantly overall, performance in these areas continue to strengthen and we have more than 83% of our fundamental active equities product now outperforming benchmarks over the five-year period and we've also seen some incremental capacity come online recently in some of our high performing EM managers. So that's an area overall where we see a lot of future upside potential.

In terms of upside, Jay also talked about illiquid alternatives where we're seeing strong fundraising at Pantheon, EIG and Baring Asia and the combination of their performance, and current high levels of client demand continue to point to future growth in that area and we saw our 11th consecutive quarter of inflows in our multi-asset and fixed income area. To give you some color on the go forward, as we think about the flow picture, near-term notwithstanding certain quant headwinds, we do have some sizable institutional and sub-advisory mandates that we expect to fund in the fourth quarter. We think that these will more than offset than normal seasonal headwinds that we see around tax law selling and around illiquid alternative lock-up period that hit toward the end of the year. Obviously, we don't have perfect clarity on how those trends will play out, but broadly speaking, we feel pretty good about that.

So taken together, we expect to see outflows moderate in the fourth quarter versus the levels we've seen in the last couple of quarters and importantly going forward, we see very strong performance momentum in a number of areas in our business and we continue to believe in the long-term organic growth profile of our platform and the alignment that we're seeing between long-term secular client demand trends and our affiliates' diverse product offerings.

Jay C. Horgen -- President and Chief Executive Officer

Got it. And let me just add, and that was good detail from Tom. I'll just summarize by saying, even beyond this next quarter, we see continued growth and private markets, wealth management and traditional and alternative fixed income, as we said in our prepared remarks. In addition, I don't want to underscore -- I do want to underscore that our performance is improving across our fundamental equity affiliates -- equity and liquid alternative affiliates as market volatility has increased. So we view this as a positive as we look forward to 2020.

In aggregate between these growth opportunities and improving performance at our fundamental managers, we see that that represents about 90% of AMG's EBITDA. And then the last thing I would say is when you look at the fourth quarter and we talked about institutional and sub-advisory wins. Some of those wins are in quantitative products, and so that's an important thing to note, as we would say more broadly these -- these products are very important to client portfolio and we're seeing that come through in the fourth quarter.

Operator

Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

Alex Blostein -- Goldman Sachs -- Analyst

Hi, everyone, good morning. Question for you guys around EBITDA yield on assets, both in the fourth quarter and over time, and I think Tom in the guidance, you guys talked about 10.5 basis point to 12.5 basis point, but that included performance fees and some of the repositioning expenses. I think the low end of that will be fairly close to the kind of the base just a management fee EBITDA yield. So I guess part one, does that sound right and two, given the kind of mix shift in the business between affiliates and product and obviously the ownership stakes are different. How do you guys think about that, call it 10 basis point, 10.5 basis point yield evolving over the next couple of years.

Thomas M. Wojcik -- Chief Financial Officer

Sure. So why don't I start and then maybe Jay can address sort of the end of your question in terms of just the forward trajectory. First off, there are a couple of things when we talked about guidance in terms of that 10.5 basis point to 12.5 basis point range, just to make sure that you have in your numbers. The first, as you mentioned was a performance fee range of 20 basis point -- of $0.20 to $0.60 [Phonetic] per share, but we also gave you a little bit of color on our expectations around some expenses related to some of the strategic initiatives that Jay walked through that will be about $0.15 to $0.30 per share. So that's embedded into that guidance, so you can kind of think about getting to more of a core run rate if you backed out some of those one-time expenses that we gave you color on. More broadly, if you actually look at kind of stability in our fee rates and sort of stability in that overall ratio, you have a handful of things that are going on.

First, we've talked about the fact that our flows overall have really been influenced by areas where we have either lower fee products or a minority ownership position, so while headline flow numbers have been in rather sizable the actual impact that we've been seeing on EBITDA has been much less particularly over the course of the last couple of quarters. And as we go forward, we talked a lot about areas of our business that are very strong contributors to our EBITDA that are either growing now in terms of the illiquid area, the wealth management area and the fixed income areas that Jay spoke about, or they have very strong performance and we believe are well positioned against client trends for future growth in the fundamental equity space.

Alex Blostein -- Goldman Sachs -- Analyst

The one part of your question that -- that -- that Tom picked up on, and I'll just state more flatly which is as we look forward a growing contribution of our business is coming from the private markets, the wealth management, multi-asset and fixed income areas and that, that does not only put a level of stability on that number of those businesses are growing, but also if you look past or look into the kinds of assets that we're raising there, you see very long duration very sticky asset levels, and so we do see that as a positive. So it's hard to capture, and just a number but you're seeing the quality of that number go up. Thank you.

Operator

Thank you. Our next question comes from the line of Bill Katz with Citi. Please proceed with your question.

Ben Herbert -- Citigroup -- Analyst

Hi, good morning. It's Ben Herbert on for Bill. Thanks for taking the question. Just was hoping if you go back to liquid alts and global equities and definitely appreciate the commentary on EBITDA and provision. But can you just help us kind of ring fence the remaining AUM at risk there and maybe some sort of timeline on outflow expectations there over kind of the near-term horizon?

Thomas M. Wojcik -- Chief Financial Officer

Yeah. So, thanks, Ben. Maybe I'll use that question to answer at a lot of many different levels. So our outflows have been localized in the quantitative liquid alternatives and long only equity quantitative strategies and we did say and I just mentioned a minute ago that those products are seeing inflows in certain areas, especially with large institutional clients. Some of those wins are going to -- we're going to show up in our fourth quarter and we mentioned that. So the attractiveness of these products are very much apparent and even our near-term pipeline.

Our largest manager of course of these types of strategy is AQR and I'd like to just maybe address that more broadly as I did last quarter and I will say it again, and probably have to say it again and in future quarters, AQR is very much a highly diversified business with $180 billion in AUM. Just to remind everyone that we made that additional investment with the business was $12 billion and AQR's -- has grown and diversified it's business across several different distinctive business lines including long-only quantitative equities, systematic fixed income, absolute return and total return alternative strategies and within each business line they have multiple products that address a range of client needs and risk tolerances.

Growing from $12 billion when we made the investment to where we are today, was not a straight line. As many of you know and number of, you have the history here. We've had a number of other periods of softness that only to come back stronger after that period of softness. We continue to believe in their ability to generate excellent long-term investment returns given their proven culture and process, the strength of their leadership team and their multi-decade track record of business success. So there's a lot to be positive here and we are very much believe in that.

And as I said, the outflows have been localized in certain products, but when you get beyond those products you see some really great performing products including risk parity, defensive equities, fixed income. They continue to run their business at scale and invest in the future. They have a number of opportunities that are emerging -- emerging growth opportunities including the fixed income strategy that I mentioned earlier, but also ESG and tax managed, tax aware strategies, these all have significant growth opportunities because of the market -- market opportunity is very scalable and they applying their technology and process to these markets that we feel the opportunity is significant, the option value is very high there.

We are very much in support of what they're doing in their business. Cliff, John, David and the rest of the senior partners are focused and fully aligned as majority holders of the firm. It's a very entrepreneurial firm, we're proud to be aligned with these partners. So, as a last thing, I would say is, we're very confident in their ability to manage their business to sustain profitability and generate long-term growth. And as I said, we're very aligned with them so longer term we see growth returning to AQR, in the near term even but over the long term, especially.

Operator

Thank you. Our next question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.

Dan Fannon -- Jefferies -- Analyst

Thanks, good morning. Just on the reallocation of resources, Jay, you walk through a number of things it sounds like real estate consolidation, some compliance. I mean, I think that you could, services you can combine for your affiliates, but, and I think you said $20 million of capital that's freed up from this, I guess, is this going into new investments in terms of the priorities. I just want to kind of walk through that again in terms of areas that you're specifically have changed, and then what you -- where you're kind of reallocating those resources are capital to?

Jay C. Horgen -- President and Chief Executive Officer

Yeah, thanks, Dan. Good question. Excuse me. Let me just start by stepping back and tell you what we're trying to do here. On the call, we've sort of flatly stated, our strategy is to generate long-term value by investing in leading active managers, as you know through a proven partnership approach and then allocating our resources to our opportunity set to the areas of highest growth and return. There are couple of areas that follow from this or the couple of points follow from this. First, we're going to focus on our strengths and competitive position which does include new investments, it's our primary use of capital.

Second, we're going to continue to build and position our business for growth, which really means delivering our scale to our affiliates, either through the service offering of strategy distribution capital and other resources or more resources and new investments in other growth areas. So really what we're doing is pivoting using our resources, our talent base, our entrepreneurial culture and aligning that with growth opportunities, which could include growth opportunities for existing affiliates, growth opportunities and new affiliate. All of that said, in periods where we have excess capital will be discipline in returning capital to shareholders. The one other thing I would say is, maybe just while we're on the point of capital, I might turn it to Tom and just talk a bit about our capital strategy.

Thomas M. Wojcik -- Chief Financial Officer

Sure. So if I think about capital management overall for AMG, as you know, the diversification and unique structure of our partnership agreement enabled us to generate significant and predictable unencumbered free cash flow and we have a lot of flexibility in how we allocate that capital as a result. As Dave talked about a couple of times, we continue to believe that the highest and best use of our capital over the long term is through new investment, where our unique model enables us to partner with affiliates with little or no integration costs or risk.

These investments deliver immediate diversification and earnings accretion and simultaneously enhance our organic growth profile, including adding immediately saleable products in areas of future client demand. We'll also continue to return excess capital through share repurchases and dividends, as we've done in the past and since 2017. We've reduced our diluted share count by more than 12% in addition to paying out nearly $160 million in cumulative dividend.

As I mentioned, we've repurchased $110 million in shares in the third quarter, slightly ahead of the pace of the guidance we gave you in July. And I also noted that we expect to repurchase a $100 million or more in shares in the fourth quarter and that amount could vary based on a variety of factors. As you know, we completed the BlueMountain transaction earlier this month and received approximately $90 million in proceeds and we have a lot of confidence in our business in our future growth trajectory. So we feel good about buying back our stock at current levels and we'll continue to monitor deal activity, market conditions and leverage levels as we execute on our capital plans going forward.

Operator

Thank you. Our next question comes from the line of Mike Carrier with Bank of America Merrill Lynch. Please proceed with your question.

Mike Carrier -- Bank of America Merrill Lynch -- Analyst

Hi, good morning, and thanks for taking the question. Maybe just one more on M&A. Can you provide us with an update just on balance sheet capacity. I'm just given some of the things that you guys have done over the past few years and deal activity hasn't been as active? And I guess more on the debt, I guess, just particularly given the equity valuations in the industry being a little bit more challenged. And then also just priorities on the asset management side versus the wealth management side in terms of the types of transactions. Thanks.

Thomas M. Wojcik -- Chief Financial Officer

So maybe I can start on the capacity side and then Jay can answer the second part of your question. So from a capacity perspective, as I just mentioned, our business generates a substantial amount of unencumbered free cash flow. So, first and foremost, we have that as a resource as we're looking at new investment opportunities and obviously looking to fund out of free cash flow. In addition, as you mentioned we have taken actions over the course of the past several quarters and really over time to optimize the shape of our balance sheet. We are an A-rated company, we have $1.25 billion in revolver capacity as well as an at-the-market ability to issue stock for transactions as well. So from a flexibility perspective, we have a tremendous amount of flexibility financially to be able to execute against the opportunities that we see in front of us.

Jay C. Horgen -- President and Chief Executive Officer

Yeah. And the other part of your question, and I appreciate you asking another new investment question because I do want to talk a bit about pricing in the market and then a bit more color on the types of businesses, which I could fill-in from my prior answer. So just on pricing, and I think everyone knows this about our model is, we partner with affiliates and we are only purchasing a portion of the equity at the time of the initial transaction which really takes some of the weight off of pricing over longer because over a longer periods of time. The equity that is retained is expected to be worth more than the equity that we initially purchased.

We also try to find ways to structure transaction so that value really is a concept over time and therefore the economics to AMG is consistent with an opportunity cost of capital that we see across our other opportunity set including repurchasing our shares. So we really are investing in businesses through our partnership model at cost of capital consistent or better if you will than our own repurchase of shares.

As it relates to the types of transactions that we're looking -- looking at in our pipeline today, and I would mention, similar to the growth opportunities we have in our business, we have a number of opportunities in the private markets, the number of opportunities in fixed income alternatives, those are businesses that are in our pipeline today and we're moving them along. We also continue to look at emerging markets as an opportunity, thematic and ESG impact investing, again, another growth area from us. And so we are seeing those types of opportunity again across the size range.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Horgen for any final comments.

Jay C. Horgen -- President and Chief Executive Officer

Thank you all again for joining us this morning. And as you heard through our unique business model along with our ability to execute against our strategy, we are confident in our ability to generate long-term sustainable growth and create shareholder value over time. We look forward to speaking with you next quarter.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Anjali Aggarwal -- Vice President, Investor Relations

Jay C. Horgen -- President and Chief Executive Officer

Thomas M. Wojcik -- Chief Financial Officer

Chris Shutler -- William Blair -- Anlayst

Craig Siegenthaler -- Credit Suisse -- Analyst

Alex Blostein -- Goldman Sachs -- Analyst

Ben Herbert -- Citigroup -- Analyst

Dan Fannon -- Jefferies -- Analyst

Mike Carrier -- Bank of America Merrill Lynch -- Analyst

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