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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings, and welcome to the AMG Fourth Quarter 2017 Earnings Conference 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, Ms. Selene Oh, Vice President, Investor Relations for AMG. Thank you. You may begin.
Thank you for joining AMG to discuss the results for the fourth quarter of 2017. 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 the call.
AMG will provide, on the Investor Relations section of its website at www.amg.com, a replay of the call and a copy of our announcement of our results for the quarter, as well as a reconciliation of any non-GAAP financial measures to the most directly comparable GAAP financial measures, including a reconciliation of any estimates of the company’s economic earnings per share for future periods that are announced on this call.
With us on the line to discuss to company’s results for the quarter are Sean Healey, Chairman and Chief Executive Officer; Nate Dalton, President and Chief Operating Officer; and Jay Horgen, Chief Financial Officer.
With that, I'll turn the call over to Sean Healey.
Thanks, Selene, and good morning, everyone. AMG reported record economic earnings per share of $4.68 for the fourth quarter and $14.60 for the full-year, representing growth of 23% and 14% over the respective periods of 2016. Our assets under management also grew 21% to a record $836 billion. Our excellent results for the year reflects strong organic growth, including the long-term investment outperformance of our Alpha generating affiliates and positive net client cash flows along with the ongoing execution of our growth strategy. Given the increased scale and diversity and earnings power of our business, we are confident in our ability to continue to generate strong growth going forward.
We're pleased with the organic growth we generated in 2017 with assets under management having increased nearly $150 billion in the year. Our results demonstrate AMG’s ability to generate strong growth in a rising equity market environment, notwithstanding our substantial exposure to uncorrelated alternative strategies, which are optimally positioned for periods of market volatility and provide stability and resilience to our business across market cycles. We also were pleased to generate positive net client cash flows during both the quarter and the year, notwithstanding continued industry wide net outflows enacted in actively managed strategies.
Looking ahead, we're seeing increasing demand for Affiliates global equity and alternative strategies, as clients around the world continue to seek differentiated return streams in anticipation of an environment of increasing dispersion of asset returns. The fourth quarter was a record of gross sales quarter for us and has enabled described further we are seeing strong business momentum across our Alfa oriented product set. Given the underlying fundamentals in many non-U.S. regions both U.S. and non-U.S. investors are expanding their allocations to these markets and we're seeing ongoing opportunities for growth in global activities, which today account for 35% of our assets.
In addition, we see strong growth going forward across our alternative product range which accounts for nearly 40% of our assets. Investors are increasingly seeking uncorrelated sources of Alpha and with one of the industry's broadest and most diverse ranges of alternative strategies, including relative values, systematic diversified, private equity multi-strategy and other alternative products, AMG offers clients true diversification from traditional fixed income and equity market.
Global clients increasingly recognize the advantages of specialist boutique firms in managing the Alpha portions of their portfolios, but there are some continuously [ph] concentrating their manager relationships. Given this ongoing trend, it is clear in the future excellent investment performance won't necessarily be enough for smaller specialized managers lacking product breadth and global reach. Through AMG’s global distribution strategy which combined centralized distribution resources which complement our Affiliates marketing efforts, we offer our Affiliates and ultimately our clients, the advantages of global scale and distribution compliance while also providing the excellence in alpha generation of focused and aligned boutiques.
As large institutions and intermediaries' consolidator manager relationship, they are attracted to AMG’s single point event that to the world's broadest array of boutique alpha-oriented strategy and are building strategic relationships with across Affiliates and asset classes and we believe these kinds of relationship will be an increasingly important element of our organic growth going forward.
Turning to new investment. Given our outstanding track record as a permanent strategic partner to our Affiliates over the past two decades, AMG has a tremendously attractive secular opportunity to continue to create incremental earnings growth and shareholder value through investments in additional excellent boutique around the world.
Given the favorable market environment and the strong performance generated by many boutique firms along with recent changes in U.S. tax law, we are seeing increasing new investment opportunities and have a diverse and growing pipeline. With our unique competitive position as the partner of choice to outstanding independent firms, we will remain highly selective and disciplined in the execution of our new investments strategy.
In addition, given the increasing scale of our business, our strong recurring free cash flow is an important source of shareholder value and we are positioned to consistently return capital to shareholders through dividends and share repurchases. Reflecting our confidence in our forward prospects, our board of directors has approved a 50% increase in our dividend along with a meaningful additional share repurchase authorization.
Looking ahead, AMG is well positioned on a global basis across all elements of our growth strategy and the increased breadth and scale of our business along with our unraveled reputation as a partner to outstanding boutique firm will continue to create additional avenue to growth through expanding the marketing reach of our Affiliates, building strategic relationships with key global clients and enhancing our capabilities across client types. We look forward to continue to generate strong earnings growth and outstanding long-term shareholder value in the years to come.
With that, I'll turn it to Nate to discuss our Affiliates results in more detail.
Thanks, and good morning, everyone. As Sean said, AMG ended the year with the very good fourth quarter as we participated in rising markets, our Affiliates of the growth added to their excellent long-term track records and our Affiliates and AMG together added positive net flows. We are entering 2018 with great momentum across our diverse range of actively managed strategies, absolute and relative performance continue to be excellent and the level of execution of both AMG and our Affiliates business development team is very high moving across the channel at all stages of the pipeline.
Before turning to the details though, I wanted to review some of the highlights from our flow profile last quarter. While the net number was positive 1 billion that really understates the size of the opportunity we’re executing against.
From a sales standpoint, this is our best quarter ever with nearly 40 billion in gross sales as a result of good execution across all of our client types. While we did some lumpy winds in the quarter. We also had a couple of lumpy partial redemptions in the quarter as clients rebalanced in some accounts that significantly appreciated.
Finally, this excellent sales quarter was also impacted by some fourth quarter seasonality including tax loss harvesting and dividend and capital gains distributions within our retail business.
As I said, we feel very good about the forward pipeline and opportunities as we enter 2018. With a high level of institutional activity across one that unfunded mandates, finals and RFPs across our diversified equity, multi-assets and alternative strategies. And our fund-raising pipeline with illiquid strategy is in private equity, infrastructure, real estates, credit and co-investment product is not only beginning to convert, but is also continuing to extending grow. Overall, we see tremendous ongoing opportunities for performance-oriented strategies, providing high-conviction alpha and true diversification and we are increasingly able to leverage our scale to bring these products to sophisticated investors and intermediaries.
Now turning to the details for the quarter. As a reminder, our product categories include alternatives, global equities including both developed and emerging markets, U.S. equities and multi-asset and other strategy. In addition, we will continue to discuss our alternative product at the sub category level to dimension underlying return and flow dynamics that are hard to see at the aggregate level.
Now starting with our alternative strategies, which account for 39% of our business by assets, within private equity and real assets, our Affiliates, including Baring Asia, EIG and Pantheon, continued their strong long-term track records across their flagship offerings in categories such as global and regional private equities, primary secondaries and co-investment and infrastructure, including energy. Each of these Affiliates has broadening their product lines to diversify their growth opportunities in complementary areas such as co-investments, credit, infrastructure, real assets and real estate. The increased breath of these franchises across those legacy flagship strategies and scalable product line extensions has created a strong and organic growth opportunity.
We’re also working closely with these firms to expand their distribution reach across new geographies and product types. We believe these businesses will make a substantial contribution to what is enhanced growth profile for AMG.
In fixed income and equity-relative value most major indices were positive for the quarter. The HFRI Relative Value Index posted 1.1% return and the HFRI Equity Hedge Index returned 3.5%. On the other hand, the HFRI Venture-Driven Activist Index was an out layer the loss of 0.9%.
In terms of Affiliates, ValueAct had a very good quarter outperforming both its peer group and benchmark. Outside of ValueAct performance in the categories were mixed across key products at AQR, BlueMountain, Capula and Systematica. But all of these strategies continue to maintain very good long-term track record and after a good start in 2018.
Between our multi-strategy and other category our primary index, the HFRI Fund Weighted Composite returned 2.7% for the quarter. Against that backdrop, most of our Affiliates’ key strategies generated excellent absolute returns and relative returns in the quarter benefiting from strong market betas across multiple asset classes and these strategies also continued into 2018.
Products that performed particularly well last quarter included AQR’s multi-assets style premier, alternative beta and risk-bearing strategies and multi-strategy products as well as First Quadrant’s prosperity and commodity strategies.
In our systematic diversified category, industry returns were good in the quarter with the SocGen Trend Index rising by 7.7%. While experiencing weak absolute performance in the first three quarters of the year the group capitalized on the strong trends in the fourth quarter pushing overall 2017 returns in the positive territory. This positive performance has continued into 2018, although obviously early dated.
Amongst our Affiliates in the fourth quarter of 2017, Systematica outperformed the index and their high-quality periods while we managed these products with other affiliates all generated good absolute return, we were mixed relative to the index.
Now turning to flows in our alternatives category. We had another good quarter of organic growth supported by continued sales momentum across both institutional and retail clients. While gross sales are very good in the quarter net flows were positive 1.1 billion were bit below trend. As we experienced some portfolio rebalancing activity within our institutional business and some seasonality in our retail business.
Looking at the quarter on a sub-category basis, constituent with recent trends we continue to see good flows in the multi-strategy and other subcategory, while systematic diversified continued to be in the redemption, both improving performance in the fourth quarter and into January, we would anticipate this to reverse, there continues to be significant broad-based demand for algorithmic investing and our Affiliates among the leaders in developing products to meet this demand.
Finally, we also had another strong quarter in our private equity and more illiquid product set as we saw some significant wins and interim fund closings again.
Looking ahead, we continue to see very good momentum in both our liquid and illiquid pipelines, and expect continued outstanding growth across our product set.
Turning next to our global equities category, which accounts for approximately 35% of our business by assets, it was a great quarter for global developed markets as the MSCI World Index returned 5.6% with investors rewarding those stocks and sectors with especially high growth characteristics.
Against that backdrop, our affiliates generated mixed relative results in the quarter with the flagship global strategy in Harding Loevner outperforming, while more value-oriented strategies Tweedy, Browne and Veritas underperform the broader index. However, overall performance in 2017 was very strong with the larger strategies of AQR, Harding Loevner, Times Square, Trilogy and Veritas outpacing their indices but the group as a whole continued its excellent long-term track records.
Emerging markets also posed very strong returns with a benchmark MSCI emerging market index, up 7.5% in the quarter. Among our Affiliates, the Genesis flagship products outpaced the index, while AQR and Harding Loevner lagged for the quarter, but continued to maintain their excellent long-term track records.
Moving to global equity flows, we have meaningful improvements in the third quarter with a return to positive net flows behind a very strong sales quarter and we continue to see high level of activity within the category across both developed and emerging market products.
As Sean said we are participating in a broad-based trend in which investors are increasingly shifting away from their home country bias, but ultimately recently investors seem to be interested in rebalancing further away from US equities, given the recent relative performance in the U.S. market. We’re very well-positioned as this continues to unfold as AQR, Harding Loevner, Tweedy, Browne and Veritas while maintaining excellent long-term track records of their primary products, but also as we have a significant level of product development and there are number of new products beginning to get traction.
Turning next to U.S. equities, which accounts for 14% of our business by assets. Markets were meaningfully positive as the large caps outperformed the small caps and growth outperformed value. For the quarter, the S&P 500 returned 6.6%, while the Russell 2000 Index returned 3.3%. We have very good relative performance in a number of smaller cap strategies, an area where many of our affiliates, including Times Square, Frontier, GW&K, River Road, and SFM outperformed across their flagship products. Affiliates with US largecap strategies, including SFM and Yacktman, also outperformed their benchmarks and peers this quarter.
Now within U.S. equities, we saw $1.6 billion in net outflows, as the institutional search activity and retail demand for actively managed U.S. strategies continues to be relatively muted across the industry. That said we continue to see an improved institutional redemption profile and some sales growth in particular within our quantitative and factor activity strategies, partially offset by the seasonal impact of dividend and capital gain distribution outflows within our retail business.
Finally moving to the multi-asset and other category which accounts for 12% of the business by assets and encompasses multi-asset and balance mandates at our wealth management Affiliates, as well as a number of specialties, fixed income and multi-asset products. We had an excellent quarter producing net flows of $1.3 billion as we continue to see growing sales activity across all three of our client segments within our specialty, fixed income and multi-asset product set as well as some good new business growth within our wealth management affiliates.
Performance for most of the products in this category remain good versus our benchmarks and the customized portfolios were wealth management Affiliates, broadly speaking continue to perform well across their ultra-high net worth client basis.
The business we have developed is very well positioned to perform across the market cycle, we’ve an outstanding group of performance-oriented affiliates, this diversity across a number of important dimensions including product category, client segment and geography. Together with our Affiliates, we are one of the largest providers of alpha-oriented strategy in the world especially alternatives in global emerging markets equity. The combination of focused excellence by our Affiliates and the scope and scale of the global asset manager provides us with a number of significant opportunities to continue to improve, we together meet evolving needs of clients.
As Sean said, we are making very good progress, and we see tremendous opportunities ahead, as we continue to execute, we continue to enhance our position as the partner of choice to the best boutiques in the world, and drive significant growth across our Affiliate group.
And with that, let me turn to Jay to discuss our financials.
Thank you, Nate. As Sean discussed, we are pleased to report strong earnings growth for the fourth quarter and the full year driven by strong organic growth and assets under management and a solid contribution from performance fees in the fourth quarter. With a record AUM of $836 billion at year end and the positive contribution from changes in the U.S. tax law, the scale and earnings power of our business has meaningfully increased and we are well positioned for continued earnings growth in 2018 and beyond.
As you saw in the release, we reported economic earnings per share of $4.58 for the fourth quarter and $14.50 for 2017, which excluded the one-time benefit from changes in the U.S. tax law that I'll describe in a moment. Economic earnings per share for the fourth quarter included net performance fees of $1.09 bringing our total to $1.45 for 2017. On a GAAP basis, we reported earnings per share of $5.50 for the fourth quarter and $12.03 for 2017.
Turning to our performance metrics. During the quarter, we remained aggregate revenue to aggregate fees, but there was no change in the calculation of this operating measure. Aggregate fees grew 29% both in the fourth quarter and for the full year to $1.7 billion and $5.5 billion respectively, driven primarily by strong markets and organic growth and alternatives together with a full effect of our 2016 new investments.
For the full year 2017, the ratio of our aggregate fees to average assets under management increased year-over-year from 66 basis points to 71 basis points, reflecting an increase in performance fees. Excluding performance fees, we also saw a modest increase in this ratio, as our AUM composition shifted towards a greater contribution from higher fee alternative products.
For the fourth quarter, adjusted EBITDA grew 25% to $361.3 million from a year ago, an increase by 18% to 1.1 billion for the full year 2017. Economic net income grew in the quarter by 24% to $261.3 million from a year ago and increased by 17% to $824.4 million for the full year 2017.
Turning to more specific modeling items for the fourth quarter. The ratio of adjusted EBITDA to average assets under management was 17.6 basis points or 12.8 basis points, excluding performance fees and for the full year 2017 this ratio was 14.3 basis points or 12.6 basis points, excluding performance fees.
Looking ahead, we expect this ratio to be between 13.1 and 13.5 basis points in the first quarter of 2018, reflecting a range of performance fees between $0.20 to $0.30 per share. Our share of interest expense was $19.6 million for the fourth quarter and 85.3 million for the full year 2017. We expect interest expense to remain flat at approximately $20 million in the first quarter and $80 million for the full year 2018.
Our share of reported amortization impairments was $143.9 million for the fourth quarter including $127.6 million from Affiliates accounted for under the equity method, which was elevated primarily due to a non-cash impairment charge taken at one of our equity method Affiliates totaling 93 million.
For the full year, our share of reported amortization and impairments was 265.4 million including 199.2 million from Affiliates accounted for under the equity method. Going forward, we expect our share of reported amortization to return to approximately 47 million for the first quarter and approximately 190 million for the full year 2018.
Turning to taxes. In the fourth quarter, changes in the U.S. tax law resulted in a one-time net benefit of 194.1 million, primarily from a non-cash re-measurement of our deferred tax liabilities associated with our intangible assets and our convertible security. This amount included the effects of the repatriation tax, which was not material to our results or our cash flow. And as you saw in the release, we excluded the affects with these changes in U.S. tax loss from our economic net income.
With regard to our tax credit in the fourth quarter, our GAAP and cash tax rates were impacted by the changes in U.S. tax law. Our effective GAAP tax rate turn negative in the quarter and was only 6.8% for the full year. Going forward for modeling purposes, we expect both our GAAP and our cash tax rate to be meaningfully lower and estimated 25% GAAP tax rate and the 20% cash tax rate. As a result, we anticipate $50 million in run rate tax savings, which is expected to grow overtime. For the fourth quarter intangible related deferred taxes were negative 12.9 million and for 2017 were positive 48.8 million, which included the tax effect of the impairment charge of 35.7 million reducing intangible related deferred taxes.
We expect intangible related deferred taxes for the first quarter to be approximately 10 million or approximately 40 million for the full year 2018. Other economic items for the fourth quarter were 9 million and 14.8 million for the full year, which included non-cash expenses related to adjustments in our contingent payment obligations of 5.2 million and 6.6 million respectively. As we look forward for modeling purposes, we expect other economic items to be approximately 2 million per quarter or 8 million per year.
Our adjusted weighted average share count for the fourth quarter was 55.8 million and we expected to be approximately 55.5 million for the first quarter.
Turning to our balance sheet, in the fourth quarter, we repurchased approximately 140 million in shares bringing our total to 416 million of repurchases for the year and we pay our quarterly cash dividend. Given our strong 2017 performance and the increased cash flow of our business, our Board authorized a 50% increase in our quarterly cash dividend to $0.30 per share payable in the first quarter and also increased our share repurchase authorization to 5 million shares.
Looking ahead with run rate EBITDA of over 1.2 billion and given the significant and growing scale of our business, we are confident in our ability to continue to generate meaningful earnings growth to accrete [ph] of new investments will also consistently returning capital to shareholders.
Now turning to full year guidance. For 2018, we expect economic earnings per share to be in the range of $16.50 to $18.50. Our guidance range reflects market performance through last Friday for the current quarter and our normal model convention of 2% quarterly market growth beginning in the second quarter.
At the mid-point of our guidance range, we expect performance fees to contribute approximately 13% and the ratio of our adjusted EBITDA to average assets under management to be approximately 14.1 basis points.
We also plan to repurchase approximately $300 million in the first half of 2018, which is included in our guidance.
Lastly, we expect our weighted average share count to be approximately 54.9 million for 2018, which includes to share repurchases I mentioned.
As always, these assumptions do not include earnings from future new investments and are based on our current expectations of the Affiliate growth rates performance, the mix of the Affiliate contribution to our earnings and tax savings under the new tax law. Of course, substantial changes in markets and earnings contribution of our Affiliates would impact these expectations.
Now, we’ll be happy to answer your questions.
Thank you. [Operator Instructions]. Our first question comes from the line of Dan Fannon with Jefferies. Please proceed with your question.
Thanks, good morning. I guess, Jay, just to follow up on the last question with regards to guidance, a couple things. It sounds like the first-quarter performance fee number looks -- you said $0.20 to $0.30. I guess maybe that you give us the context for the year as well as some of the other -- your general outlook for flows or other assumptions as you think about 2018 in that $16.50 to $18 range.
Okay. Yeah, thanks. Thanks Dan. Well, let me start, I’ll address the first quarter in a moment. So, let me just start by talking about the model convention again. We start the year obviously at $836 billion which is the record for us, but as of Friday our market blind is up about 4%. Quarter-to-date which means our AUM is nearly $870 billion at this point just based on markets. And as you know we don't assume anymore markets in the quarter, for model convention put 2% in our models per quarter thereafter.
You also know that you can track our market blend over time based upon the indices that we've indicated in our innate script. If you could be able to track that and adjust throughout the year, but obviously we're starting the year at a high level and we we've gone higher.
I also mentioned that for the full year we see EBITDA at average AUM at about 14.1 basis points and we anticipate about 13% contribution from performance fees.
In 2017 we had about 10% contribution from performance fees, I think people are aware that we had a very good fourth quarter across all of our business, but in particular in the systematic diversified and that sets us well for 2018. As we did last year, we expect to give you quarterly updates on performance fees and talk about seasonality because there isn’t seasonality business with respect to performance fees.
Lastly, like we did last year we're going to indicate the forward repurchases, we have put $300 million into our model for repurchases in the first half. We’ll update you next quarter as we reflect on the pacing of new investments. And clearly with us repurchase scenario as well as our new dividend we only are putting in $400 million of capital in our model, but we have up to $1 billion of after tax cash flow expected.
So, the $600 million of cash, is just not in in our model that would be upside to the extent that we deploy it throughout the year or early in the year. So, we do think this is a very conservative estimate.
Now to your seasonality question. As you recall number of our affiliates are in a one quarter lag together with really good fourth quarter performance it bodes well for the first quarter and we did come out with the performance fee, guiding for $0.20 to $0.30 which is up from $0.18 a year ago so it is shaping up to look like we’re going to have more performance fees in the first half frankly, but certainly in the first quarter. Just reminding you that the first quarter tends to be outside of the fourth quarter, our second largest performance fee or at least by contract the most opportunity for performance fees in an average year and scaling down second and the third quarter thereafter.
But when you reflect back on the range again, 30% at the mid-point given the performance that we are coming off of doesn’t seem like too much of a stretch kind of the neutral to middle estimate could be a lot higher and of course we put the capital where it could be a lot higher as well.
Thank you. Our next question comes from the line of William Katz with Citigroup. Please proceed with your question.
Okay, thank you very much for taking the questions. I apologize for the hoarse voice. Could you maybe pick up on that last point, Jay -- or actually Sean? Now that we have the tax reform behind us, obviously markets are doing what they are doing. Could you give us a sense of how that may be changing the dialogue in terms of new opportunities on the deal side? And then maybe facilitating seeing a bit of a pickup on pricing as well. Sort of talk about maybe both the pipeline now that we know where we are on taxes as well as the pricing associated with that pipeline. Thank you.
Thanks Bill. Away from the direct impact of the tax law on our earnings which Jay commented on, there is an effect on new investments I would say first it contributes along the tax law, contributes along with a very attractive market backdrop to what we’re seeing at least so far in the year I expect it to continue and accelerate which is an increasing level of interest on the part of excellent boutique firms and pursuing succession-oriented transactions.
It’s clear that at the end of last year, there was uncertainty around what happened with the tax law and the new tax law creates the certainty is there and of course there is more value that I am sure will be shared with sellers and buyers, but that contributes to a very attractive environment and opportunity for us.
I would remind you that if you just to get a sense of the size of the opportunity set if you take the top hundred prospects that we have in our universe firms with which we built strong relationships over time, the transaction value interpolating from the size of these firms and what we know of them, the transaction value would be over $50 billion so it’s an enormous opportunity, a tremendous secular opportunity for AMG.
The last thing I would say is that this is a bit more nuance, but its real the competitive dynamics are more favorable for us relative to non-U.S. firms than they have ever been. Historically, non-U.S. firms as I am sure you realize had an advantage and their ability to earnings strip and achieve a lower rate for those firms that were in jurisdictions with our home country rates and now that advantage has been removed and in some ways even there is actually a disadvantage to those firms and inverted entities that who we inevitably compete with. So, the overall affect, as I said away from the direct effect of the tax law, I think will be quite positive for us.
Our next question comes from the line of Michael Carrier with Bank of America Merrill Lynch. Please proceed with your question.
Thanks, guys. Maybe just a question on the flows and the organic growth. When we look at your mix, both on the alternatives and international, you are fairly well positioned, just given some of the industry dynamics. But Nate, maybe for you. If you can give us some color around where you are seeing some of those rebalancings, some of the seasonal distribution impacts on the retail side. And then when you look across all the affiliates, areas where things are going well, you are seeing the demand performances there versus any pockets where you have some performance challenges that may or may not rebound in 2018 or 2019.
Perfect. So, let me start with -- I'll try to hit all these pieces, so as you heard us say in our prepared remarks, obviously growth sales were very strong this quarter kind of possibility. So that was kind of both very positive sign and I’d say they were three things that impacted us on the kind of redemption side, which, if I am going to try to dimension in my public dimension together it is about kind of 4 billion or so across the three things, I’m going to hit here. One is seasonality and the retail across products, but primarily that came through in all points in a second.
There was some seasonality in both the institutional line of work, chance as well and I’ll describe that. And then there were some of these institutional rebalances and some of that actually also came through and also if you look at all growth outflow numbers, you’ll see that showing up there as well.
So, to take those in order maybe the seasonality in retail, some of that’s kind of across much of the retail book, which is kind of distribution and that will be invested amount. But also, there is tax law selling and that came through primarily in the alts book, you can think of something like managed features, which have been kind of down for the year and we talked about that and there was a period when lots of equity products appreciated. So, people were taking those losses. We saw the same thing last year. And then we also saw those flows reverse into the first quarter. And if you look at what’s happening in January so far, you’re seeing exactly that. You’re seeing those flows kind of reverse into the year.
So that was the first piece is now in retail. There is also some seasonality in the ultra-book and institutional. And that’s really, because you have lots of products, where the lock, kind of single year or multi-year locks tend to expire right at year-end and subscription and might come in on January 1st, just the way, the product is set up or other quarters. But there is a lot to have, at year-end. So, there is that piece as well.
And then on the institutional side, we did have a couple, just rebalance at the year and an example in all three, we had one kind of very sizeable rebalance. I mean those being used to balance portfolio risk at the client level and the client reduced this diversifying mandate by a significant amount.
So, there were a few of those things you got about that. You sort of put all that together, that’s kind of in that kind of 4 billion range, kind of split equally among the three.
To the other part of the question, look we have a, as we look ahead and hopefully you heard this optimize in our prepared remarks as well. Especially in the alternatives book liquid and illiquid both the sort of existing scale of product, but also a lot of really interesting new products coming on. We feel really good about that product side. And then also in global equities and I also adding, in multi-assets, there is some interesting things being developed as well. So really those are the areas, where we see lots of opportunity.
On the U.S. equity side, there is obviously industry level dynamics we talked about which we continue to face, but there are a number of -- especially as you have heard us say in this market area, a number of very good performing and in demand products as well. But I think that’s a place where just the industry dynamic is challenging.
Thank you. Our next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.
This is actually Ryan Bailey filling in for Alex. Actually, I had a quick question on the impairment charge. I was wondering if you could give us any additional color there? And maybe if you can't speak to which affiliate it came from, could you take us through why you took the charge? Thank you.
Yes. Thanks. So just the backdrop of -- we account for our affiliates and amortize, the intangibles over time, and to the extent that any point in time and again that's based upon the original purchased assets. So, what we don't count in accounting is the growth of new clients. So, I want to first say this is an accounting charge and it’s a non-cash accounting charge and we think we've been conservative here just given that the client in one of our equity method of affiliates, but again it's based upon the original clients not on its new clients. To take it in a bigger broader perspective as you know the sum of all of our affiliates have grown dramatically over the years and so we don't marke up our affiliates as they grow.
And then just specifically on this one affiliate, yeah, I think we can describe it as a small equity method affiliate, it only contributed about $0.03 to our earnings. So, it did not have -- it does not have a contribution. This doesn't reflect any material economics to AMG. Again, it's just an account charge and frankly we're confident that that business has big prospects and will benefit from a different investment environment. Do you want to give a little more context?
Sure. And again, I want to kind of reemphasize the point Jay just mentioned, this is us I think being conservative and its just non-cash account charge that doesn’t really say much more than that to the firm and it’s a firm, we’re confident over the short, medium and long-term frankly.
The firm is Ivory which is, a of couple of billion AUM long, and short equity term. They have a very good long-term track record, but over the last couple of years, they've had this kind of -- I will describe it as sort of a bearish value-oriented bias both in how they are constructed on the loan side, but also the short side of book and they had roughly loan exposure. So, that positioning has made some challenges performance and then also some client withdrawals which obviously are not material to AMG on any level. But look at the end, begin to reemphasize the point, we’re very confident a firm and we’re working together on just the best way to take this forward, but overall, great long-term track record, really good investment process and people and we’re very confident on them.
Thank you. Our next question comes from the line of Robert Lee with KBW. Please proceed with your question.
Thanks for taking my questions. Just curious -- could we -- maybe update us a little bit on if we look at your gross sales, could you give us a sense of how much of that today do you attribute to being helped -- flowing through or being helped by your global distribution? And then maybe also update us on some of your AMG funds in retail initiatives where I believe it's probably been, given the environment, a little bit more of a challenge. But maybe update us on where that stands?
Sure. I’ll start and then ask Nate to add. I think with respect of global distribution, we don’t break out the specific contribution quarter to quarter. over the last five years more than $50 billion in net flows have been true or are involving our AMG’s global distribution effort and I think prospectively the opportunity as I described and you hard us talk about this and I think others know the trends of increasing concentration by the largest global institutional clients of their manager set and I think all that plays very much to our advantage.
We continue to invest and build our global distribution effort. I think the most recent or most material update I would give is that we are beginning very good traction in Japan and we expect to open later this year an office in Japan which will be our major step forward.
With respect to AMG funds I think there are two, scale is increasingly important and you will have seen news in the industry around the major distributors also concentrating their relationships and I think we’re well positioned across AMG’s overall business including Affiliates, but also at the AMG funds level and we feel good about it. Obviously, U.S. retail is a very difficult competitive space, but I believe I know we’ve brought the scale and I feel good about how we’re positioned and our performance this year, we’re very pleased with the flows to date.
Nate, do you want to add anything to that?
Well I think maybe one high level one point and one detail. The high level point I think everybody is tracking but especially on the institutional side but are increasingly on the retail side both in the U.S. and outside the U.S. There is really three categories of kind of wins; one is where the Affiliates all have their own sales, marketing kind of services, infrastructure and themselves, one is where our infrastructure is really leading the sale and then the third is where we’re collaborative to a greater or lesser extent and that third bucket is growing more and more, which plays into the theme that Sean just described because as buyers are centralized and intermediaries are centralizing, they are all recognizing whether the Affiliates are coming directly or not, but the relationship with us and they are also working with us more broadly it’s just the volume of those conversations and the interactions just continue to increase. And then the D-side [ph] that part was actually quite incorporate [ph] in our distribution teams where I think we're pretty impactful on some in the flows, is great to see and is coming across a number of Affiliates and many of them are -- and that’s just working very well.
Thank you. Our next question comes from the line of Chris Shutler with William Blair. Please proceed with your question.
Good morning. In private equity, it feels like a lot of the big flows are yet to come. But would you just please talk about the private equity flows in the quarter? And then I don't know if it is too specific, but I know EIG was in the news winning a big subadvisory mandate with FS Investments in December. I think the number was around $4 billion or so. Just want to better understand how or if that will flow into the net flow picture. Thanks.
So, as you heard us say, in the illiquid which again I would describe as including PE but certainly much broader than just PE and we went through some of the weather infrastructure, real assets credit, real estate those kinds of things as well. But when you think about our illiquids business in general, I’d say very good quarter, we had some sizable wins in the quarter and we had kind of a relative, what I’ll describe as kind of relatively normal level of realization, realization activity kind of on the other side. So, at the highest level, that’s what it is.
Obviously as you alluded, there is lots of rules what we can and can't say and both of those kind of on the legal side, but also a bunch of clients have confidentiality requirements and things like that. But I would say about both the quarter and the pipeline is what the people is definitely building both growing in size and extending in duration, so those, let’s say dynamic. And I would say the main components of that are, let’s talk about some of those, sort of flagship funds. We’re starting to see some interim closings, we’re seeing some additional funds beginning to market. And then also, there is a separate account pipeline that’s also really building kind of alongside that. And some of these are complicated mandates and in some cases, these are actually better to think about, it’s kind of programs, other than mandates, because they are intended to expand kind of multiple products and even multiple cycles where this place into the theme of consolidated relationships as well frankly, which is people are trying to figure out how to get all these exposures on in a predictable fashion over long period of time and again across our set, Affiliates by themselves. These and frankly in a couple of places across them, there is that opportunity. So that separate account pipeline is, again sort of complicated mandate, but also, you can think about these programs.
And then what we have been calling sort of product line extensions and we’re seeing good momentum here some funds with both interim and final closing, some separate account activity. But I think important point is, that the line between these three segments kind of blur, because as you think about these separate account programs especially in the multi-product ones, sometimes those gets expressed as investments in funds plus customized additions and once product line extensions obviously get traction, I think you thought it as clearly Affiliate. At the highest level, the overall pipeline and illiquid is growing, extending and there is some very large many, I’d say, many large opportunities in the sort of coming quarters. So, it’s part of the reason why we feel so quite good about them.
Our next question comes from the line of Brian Bedell with Deutsche Bank. Please proceed with your question.
Good morning, folks. If we could just focus back a little bit on some of the dynamics of the flows. Thanks for the comment on realizations. Maybe if you can talk a little bit about the private equity gross fund raises. I think originally you were indicating about $10 billion from that. I think that's expanded since that original outlook. If you can maybe talk about what you've raised so far on the gross side. And then what it's looking like for the 2018 trajectory. And then also comment on the -- it looks like the sales -- gross sales picked up pretty nicely in US equities. Double the pace of the quarterly run rate. Maybe the driver of that. And then, Jay, just within your 2018 guidance, what your sort of range is for flows within that.
I’ll try to capture, at least all of the, parts of the, first year products. So, on the illiquid one, I think the way I would describe it is pretty much the way I'll describe it to the earlier question, which is definitely larger and extending. And sort of hard, because the way we describe it is, kind of a 10 billion over a finite period. I do think we’re going to exceed, I think it’s a [indiscernible]. We’re going to exceed the number. But it is, again it is both growing and extending and I think if you look at it kind of year-on-year I think we think that the contribution in 2018 [indiscernible] will certainly be -- we think will be larger than the contribution in 2017 just looking at the schedule and some of these kind of mandates and programs and conversations that are happening. That’s…
And that’s an enduring rather than episodic, I think, is the way I think about it.
Yeah. Absolutely. So, I think that's on the first part. And then as you -- to the second piece on U.S. equity, I think as you know there, right, we had good kind of sales growth in U.S. equity, while our overall continues to be frankly, a bit of a challenging, right, we saw little bit better institutional redemption and we did see sales growth and probably going to describe where the sales growth is coming from, I think it is mostly described as coming from the sort of more [indiscernible] or factor kind of equity strategies.
The other note I will have it on the redemption side, while it did improve, there's still that seasonal impact kind of dividends and capital gains distribution etcetera within the retail business. So, I think we do see an improving trend, but I think the overall dynamics as we described.
Behind your question the flow trends in global equities were actually quite positive and as you heard in our prepared remarks, we see very good and improving, increasing opportunities there in that category. Jay do you want to…
Just on guidance - maybe I will just up the level, Brian, we do have some structural conservatism in our range always. Obviously, everybody is well aware of the capital. So again, just to repeat we have about $600 million of capital that is not in our guidance. I would also just point out that on the tax side, while we didn't conservative, I think estimating a $50 million run rate number that number will grow of course with incremental growth comes a higher margin on those earnings, if you will.
And I think there's some refinements in our business that will prove out that that we will actually experience a higher than a $50 million run rate. So, we have capital, we have tax and we also have flows because we don't really forecast flows. We put a very conservative number really to just show some upward momentum, but the reality is the words that Nate and Sean have commented on here with respect to our momentum in flows just really is not in our model.
Thank you. Our next question comes from the line of Patrick Davitt with Autonomous Research. Please proceed with your question.
Good morning. My question's around the global -- the US to global dynamic you were talking about. I guess the first part is does that suggest that we should expect accelerating outflows in the US equity bucket? And to what extent are you seeing those redemptions look elsewhere within the AMG affiliate group, maybe on the global side? Is it rotating within the complex, so to speak?
I’ll start and then I ask Nate to add. No, the answer is the U.S. equity flow trends have been improving and I think the way our business is works is, sure, you realize it is, it's not integrated. And so, the opportunities that we're seeing in global equities across affiliates don't relate to our U.S. equity products that that there aren't going to be fundings from redemptions in our U.S. equity book. I mean, it just doesn't work that way. So, I think we remain positive and optimistic around U.S. equities, which as you know is only 14% of our earnings. But especially positive and optimistic about global equity opportunities which is partly around the performance of individual affiliates, but also representing a view that the overall backdrop of the market environment we mentioned that is home country by us eroding relative valuations between U.S. and non-U.S. markets, relative growth rates of other economies and finally the decline in the dollar obviously benefits non-U.S. markets and us to our greater exposure to global equity. So, I think all of that contributes to a very positive backdrop certainly in the year, but these are trends that we’re seeing in place and accelerate it. Do you want to add?
Thank you. Our next question is a follow-up from the line of William Katz from Citigroup. Please proceed with your question.
So early on in your prepared comments, you had mentioned that you are seeing a pickup in some of these strategic alliances. Maybe that is embedded in some of the back and forth we've had with Nate in some of the other Q&A. Could you talk a little bit about just in terms of what you are seeing in terms of economics on these mandates? Are these just longer-lived assets that are slightly lower in terms of fee rates? Or how is this working, if you will?
Well at the highest level, the trend represents just a kind of obvious move toward greater efficiency. I think global institutional clients and intermediaries with very large pools of assets and just the increasing challenge of overseen numerous managers is itself a reason for concentrating relationship obviously also a desire to have certainty and comfort around operational and legal due diligence items as well also driving this concentration.
But I think there is an important strategic component which relates to these large global institutional clients wanting to have flexibility and choice around a range of alpha-oriented products and AMG is very, very advantaged in this respect because we have the broadest array of independent alpha-oriented products especially in global equities and alternative.
And so of course there is an effort on our part with our Affiliates to coordinate an offer the efficiency advantages that an integrated firm can provide, but if you think about over time what the competitive dynamics are yes, scale matters and large integrated firms have an advantage in that respect because they can more easily coordinate among their product. But ultimately the most important competitive dynamic is going to be around through alpha generation and the broadest set of differentiated sources of alpha and on that basis, we together with our Affiliates are enormously advantage and well positioned.
Maybe Nate you can address the more specific question around how some of these mandates, what the economics can be although the answer is quite broad.
I think the way we think about this sort of a range, right. At one end of the -- and sort of easiest to execute on one end is sort of a bit of simple coordination and making the lives of clients and intermediaries a bitter easier in accessing the down streams [ph] do that many, many places right now. At the other kind of extreme and as Sean said, we have the largest collection across our Affiliates group, maybe the largest collection, this is truly outstanding return-oriented stream, recurrent streams. And the challenge for the intermediaries or the large end clients is how do you get those streams into portfolios, right. How do I do that both efficiently, when I get that done efficiently? But ultimately, they need something that’s the fact that when they produce it to their end clients.
So that’s a couple of performance, but also can we make the servicing and the oversight of the products and et cetera and operational infrastructure, could we make that all work easily for them across their entire platforms or across the entire -- their client base in the case of intermediary. And so that’s kind of the continuum.
The point on PE is, I do think there can be PE dynamics relative to these large mandates especially these large scale multi product and we’re talking across many things. But the other related point is, the effectiveness with which we can bring products to market but also the effectiveness with which they can access those products creates margin benefits on both our side and their side, right. And so, which ultimately [indiscernible] the benefit of the end client. So, I think, you have to think about it not just on fees, but you also think about it, in terms of the benefits in both kind of efficiency and doing it in the margin benefits there as well so effectively getting along to the portfolios.
Thank you. Ladies and gentlemen, that is the end of time for question. I’ll turn the floor back to Mr. Healey for any final comment.
Thank you again for joining us this morning. We’re pleased with our results for the quarter and confident in our ability to continue to create shareholder value through the organic growth for our existing Affiliates, accretive investments and new Affiliates and consistent capital return to investors. We look forward to speaking with you again in April. Thank you.
Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.