AGF Management Limited

Welcome to the Q3 2021 AGF Management Limited Earnings Conference call. My name is Richard, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star then 1 on your touchtone phone. Please note that this conference is being recorded. I'll now turn the call over to Adrian Basaraba. Mr. Basaraba, you may begin.

Thank you, operator, and good morning, everyone. I'm Adrian Basaraba, Senior Vice President and Chief Financial Officer of AGF Management Limited. Today, we will be discussing the financial results for the third quarter of fiscal 2021. Slides supporting today's call and webcast can be found in the Investor Relations section of AGF.com. Also speaking on the call today will be Kevin McCready, Chief Executive Officer and Chief Investment Officer. For the question and answer period with analysts following the presentation, Judy Goldring. president and head of global distribution will also be available to address questions. Turning to slide four, I'll provide an agenda for today's call. We will discuss highlights of Q3 2021, provide an update on the key segments of our business, review our financial results, discuss our capital and liquidity position, and finally, close by outlining our focus for the remainder of 2021. After the prepared remarks, we'll be happy to take questions. And with that, I'll turn the call over to Kevin.

Thank you, Adrian, and thank you, everyone, for joining us today. During Q3 2021, we continued to execute against our strategy and stated goals. I'll begin with some highlights. Our strong business momentum from the previous quarter was carried into Q3. AUM and fee-earning assets reached $43.4 billion at the end of Q3, an increase of $2.6 billion compared to the second quarter. Our mutual fund business continued its sales momentum, reporting net sales of $288 million, marking the fourth consecutive quarter of mutual fund net sales. As a tenured leader in sustainable investing, we are proud to announce that AGF International Advisors Company Limited has been successfully named as a signatory to the UK Stewardship Code. The UK Stewardship Code 2020, recognized globally as a best practice benchmark in investment stewardship, sets high stewardship standards for those investing money on behalf of UK savers and pensioners and those that support them. Diversity and inclusion have been a long-standing pillar of our social responsibility commitment. In early September, we entered a multi-year partnership to create a scholarship program with INSPIRE, a national indigenous organization that invests in the education of indigenous people. This partnership is part of our multi-year plan to accelerate our diversity and inclusion initiatives. Over the past few months, we have made significant progress in diversifying and expanding our private alternatives business. In early July, we launched the AGF-SAF Private Credit Limited Partnership and Trust. The LP targets Canadian institutional investors, while the Trust offers increased liquidity that is more appealing for Canadian retail investors. Subsequent to the launch, we refined our long-term partnership with SAF. Furthermore, we strategically expanded our private alternatives business into the private equity and venture capital space by partnering with First Ascent Ventures, a firm that focuses on investing in emerging technology companies. The strong business momentum has translated into strong financial results for the quarter. We reported an adjusted diluted EPS of 21 cents, up 163 percent from the 8 cents in Q3 of 2020, excluding Smith & Williamson. We have achieved these results partly by holding core expenses flat, which we will continue to do going forward. We have been able to realize efficiencies and unlock some capacity during COVID by relying on our digital strategy and doing larger virtual meetings. When you look at our process prior to COVID, there was a lot more travel and administration necessary in our sales process. We believe that going forward, our investment management business can grow with the existing resource base. Having said that, incremental operating expense and capital will be required for corporate development as we accelerate the redeployment of our excess capital. Finally, the board confirmed a quarterly dividend of $0.09 per share for the third quarter This level was increased last quarter from $0.08 per share. Starting on slide six, we will provide updates on our business performance. On this slide, we break down our total AUM and fee-earning assets in the categories disclosed in our MD&A and show comparisons to the prior year. Mutual fund AUM increased by 24%. I'll provide more color on our mutual fund business in a moment. Institutional, sub-advisory, and ETF AUM increased by 11%. We continued to receive allocations from our existing institutional clients, including $100 million U.S. into our global sustainable growth strategy during the quarter. After successfully onboarding a large institution who selected three of our global and U.S. equity strategies on their SMA platforms in Q2, in August we onboarded another large institution who chose one of our global equity strategies on their SMA platform. While AUM growth on these SMA platforms will occur gradually over time, we are optimistic based on flows for the initial few months. Building on the success of these wins, we target entering into similar relationships with other SMA platforms in the US. During the quarter, we received a redemption notice from one of our institutional clients for $900 million. The redemption was a result of an asset allocation shift, which resulted in a large reduction of their public equity exposure overall in favor of alternatives. This highlights the importance of alternatives, and also the SMA business, which tends to be less lumpy and will create some consistency in AUM levels. Looking forward, RFP and RFI activities have remained strong. We continue to see interest from institutional investors in a number of our strategies, which bodes well for future sales. Our private client business continues to demonstrate consistent, steady growth, with AUM increasing 23% year over year. Our private alternatives AUM and fee-earning assets were $2.2 billion, and we maintain our goal of reaching $5 billion in AUM and fee-earning assets by the end of 2022. During the quarter, we refined our partnership with SAF, where we have entered into a definitive agreement along with a distribution arrangement as an alternative to AGF exercising its option to acquire management contracts of select SAF funds. We will be the exclusive provider of their investment capabilities in the Canadian retail marketplace. This arrangement allows both firms to capitalize on the expected growth in the private credit space. Our strategic partnership with First Ascent Ventures helps to broaden our alternatives platform into an area that gives investors an opportunity to invest in top-tier emerging technology companies. AGF committed $30 million to First Ascent's second fund and is a member of the Limited Partner Advisory Committee. These initiatives, along with our robust pipeline of opportunities in the alternative space, will help AGF achieve our goal of reaching $5 billion in AUM and fee-earning assets by the end of 2022. Turning to slide seven, I will provide some detail on the mutual fund business. The Canadian mutual fund industry continued its strong pace in the summer months, reporting net sales of $33 billion for the three months ending August 31st. Excluding net flows from institutional clients invested in our mutual funds, net sales were $288 million, compared to net redemptions of $4 million in Q3 of last year. AGF sales improvement outpaced that of the industry. Year-over-year, gross sales for our long-term funds improved by 61% compared to 46% for the industry. We continue to see year-over-year improvement across all channels, IROC, MFDA, and strategic partnerships, and strong flows into multiple categories, including global and U.S. equities, fixed income, and ESG or sustainable opportunities. The momentum in our retail mutual fund business has continued into September. Excluding net flows from institutional clients, we have net sales of approximately $80 million up to September 24th. Before I return the call back to Adrian, I want to give a quick update on performance. AGF measures mutual fund performance by comparing gross returns before fees relative to peers within the same category, with the first percentile being the best possible performance. We target an average percentile ranking versus peers of 50% over any one year and 40% over the three-year period. At the end of Q3, average percentile rankings were 53% over the past one year and 49% over the past three years. It's important to note that one- and three-year performance for our top-selling funds have largely remained in the top quartile. With that, I will turn the call back over to Adrian.

Thank you, Kevin. Slide 8 reflects a summary of our financial results for the third quarter with sequential quarter and year-over-year comparisons. Excluding Smith and Williamson from our prior period results, EBITDA before commissions for the current quarter was $37.5 million, which is $9.3 million higher than previous quarter and $16.2 million higher than the prior year. For ease of comparison, we've shown EBITDA before private alternative contributions separately. Excluding the private alternatives business, we reported EBITDA before commissions of $29.2 million in the quarter. This is $1 million favorable compared to Q2 2021 and $9.1 million favorable compared to prior year, driven by an increase in AUM. SG&A was $50 million, an increase of $3 million from Q2 2021 and $4 million from Q3 2020. This is driven by higher mutual fund sales and strong investment performance. SG&A in the quarter was also impacted by increased corporate development activity and associated expenses of $1.3 million. As we work to deploy capital, these costs may temporarily increase SG&A. Core SG&A, which excludes variable compensation and corporate development costs, were relatively consistent with last year. EBITDA from our private alternatives business was higher in the quarter. We recorded $8.3 million from our private alternatives business And this quarter includes 5.4 million of LP earnings, which benefited from the weakening of the Canadian dollar relative to the U.S. dollar. This is the opposite phenomenon we saw last quarter when the U.S. dollar weakened, which suppressed LP earnings. As noted at a subsequent event in our financial statements and on our previous call, one of our long-term private alternative investments managed by SAF fully monetized in June 2021. As part of the transaction, AGF recorded carried interest revenue of 2.2 million this quarter. As we continue to grow and diversify our private health platform, management fee profits and earnings from our LP investments will become more consistent and predictable. Diluted EPS was $0.21 in the quarter. That's $0.14 higher than Q2 2021 and $0.13 higher than last year. Private alternatives had a strong quarter due to the combination of increased carried interest revenue and strong earnings from LP investments. For selling commissions, we're $14.1 million this quarter compared to $17.7 million last quarter. SG&A has been influenced by business performance, which continues to exceed our forecasting. Last quarter, we guided to SG&A of $185 to $190 million for this fiscal year. We anticipate being in the upper end of that range. We're currently in the middle of our annual strategic planning and budgeting process, and as Kevin mentioned, expense control is a key objective. Turning to slide nine, I'll walk you through the yield in our business in terms of basis points. This slide shows our revenue, operating expenses, and EBITDA before commissions as a percentage of average AUM on the current quarter as well as the trailing 12-month view. Note that AUM and related results from Smith & Williamson, the private health business, one-time items, and other income are excluded. The Q3 revenue yield is 112 basis points. That's one basis point lower compared to the trailing 12 months. Q3 SG&A, that's a percentage of AUM. That's 50 basis points. That's one basis point lower compared to the trailing 12 months. That resulted in an EBITDA yield of 27 basis points, which is flat to the trailing 12 months. Let's turn to slide 10. I'll discuss free cash flow and capital uses. This slide represents the last five quarters of consolidated free cash flow on a trailing 12-month basis as shown by the orange bars on the chart. The black line represents the percentage of free cash flow that was paid out as a dividend. Our trailing 12-month free cash flow was $52 million, and our dividend payout ratio was 45%. Our cash balance at the end of August was $72 million. We have $173 million in short- and long-term investments and no debt. We also have a credit facility available to provide credit to a maximum of $150 million. So while we currently have no debt, we're comfortable increasing our net debt to EBITDA up to 1.5 times for the right opportunity to rise. Our remaining capital commitment to the private alternatives business is $77 million, which is $26 million higher compared to Q2. The increase reflects the $30 million cornerstone investment to First Ascent's second fund, which was announced in August. Not included in this quarter is our anticipated U.S. $50 million commitment to an upcoming third fund managed by Instar. Capital commitments may be funded from excess free cash flow, but keep in mind there will also be further recycling of capital as monetizations occur, which will help to fund future commitments. Taking all that into account, we currently have excess capital available. Our future capital allocation will be balanced and include returning capital to shareholders and investing in areas of growth. Those growth areas include investing in our private alternatives business as well as opportunities outside our private alternatives that are strategically in line with our priorities. Redeplying our excess capital to generate recurring earnings and a key strategic priority. Over the past few months, we've made significant progress to begin deploying our capital and have generated a robust pipeline of corporate development opportunities. Executing on this priority will be a catalyst for equity growth and value creation. Last quarter, in recognition of our strong results, robust financial position, and confidence in our business, AGS Board of Directors increased the quarterly dividend by 12.5%. This is just one example of how we are directly returning capital to our shareholders. Returning to slide 11, I'll turn it over to Kevin to wrap up today's call.

Thanks, Adrian. 2-3 was a solid quarter. Our AUM and fee-earning assets continue to climb. We recorded another quarter of positive mutual fund net flows, marking the fourth consecutive quarter of net sales. We continue to deploy our capital and invest in key growth areas such as the private alternative business. We launched the new AGF SAF private credit products in July, refined our partnership with SAF, and partnered with First Ascent Ventures. Our strong business momentum translated into strong financial results. Excluding Smith and Williamson from the prior period results, EBITDA before commissions was $37.5 million, or 76% higher than Q3 of last year. Our margin also expanded by 860 basis points year over year. Adjusted EPS for the quarter was 21 cents, 163% higher than last year, excluding Smith & Williamson. We are focused on building on the momentum from the past few quarters and creating value for our shareholders over the long term. In the past 12 months, we have returned almost $70 million to our shareholders through share buybacks and increased dividend payments, which started last quarter. We will continue to strategically invest and accelerate the deployment of our capital to key growth areas creating value for shareholders. Along those lines, I'd like to reiterate our strategic priorities, which are to deliver consistent and repeatable investment performance, drive the organization to sustainable net inflows, redeploy our excess capital to generate recurring earnings, and position the firm to reach $5 billion in alternative assets by 2022, while we continue to be diligent in controlling costs to ensure increased revenue translates to expanded profits and margins to take advantage of the operating leverage in our business. I want to thank everyone on the AGF team for all of their hard work and we will now take your questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speaker phone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touchtone phone, and we're standing by for questions. And our first question online comes from Mr. Gary Ho from Desjardins Capital. Please go ahead.

Thanks. Good morning. In your MD&A, there were several mentions of this capital deployment plan, and you also spent a couple million on the corp dev costs. I think both Kevin and Adrian, you mentioned it in your prepared remarks. But, Kevin, can you just refresh us on the key pillars of that plan? You know, it sounds like a lot of effort is bulking up your private auto platform. Is that where we should see growth come from in the next two to three years? And how much would you look to deploy in that silo in particular?

Hey, Gary, thanks. So a couple of thoughts on that. You know, capital is always something that we try to balance out between growth, doing some buybacks, as well as we'll continue to think now about the dividend as well. You know, over the last year, as we've said, I think we've put back $65 million to our shareholders in two of those buckets, right? Now, as it's with the fact that we've, you know, a year on, we've got the S&W transaction behind us, we really are going to amp up getting the capital back to work and accelerate that. So with that will come some deal costs, which are kind of one-time things. And part of that, obviously, is we look at the landscape around us. The alternative space continues to get bigger and bigger. Asset allocations. are continuing to grow across the spectrum from large institutions, family offices, even retail brokers. So we know the core public markets are going to shrink. The alternative asset areas are going to grow pretty significantly over the next decade or so. So yeah, for us, strategically, it makes sense for us to start to rapidly accelerate the deployment of that capital. Part of that is we're bringing on a new head of alternatives. In the late stages of a search process for a significant hire there, we are down to several very good candidates there. So hopefully we'll have somebody on board here into the early part of next year where we can then really ramp that up. As soon as we get that capital back to work, as you all know, as soon as we can drive those earnings through. So we're on pace to, I think, as we said a year ago at this time, we said it would take 18 to 24 months. So you're now starting to see the beginnings of that. In terms of the quantum, we have a lot of dry powder. If you think about current cash on the balance sheet, it's 70 million. If you think in a world post-DSC, our cash flow is probably going to ramp to north of 100 million. And then we think conservatively about re-levering the company up to one and a half times our EBITDA. So you can kind of think of that over a multi-year period about how you can get that to scale into earnings.

Perfect. Okay, great. And then the next question, just maybe related to some of Kevin's comments there, just on the free cash flow, Adrian, it's on the quarter, $21 million. I think there's some kind of one-time private alts carry or distribution in there. And then LTM is around $52 million. But when you look at the run rate, what's the free cash flow profile look like for the company? You know, is that $50 million sustainable? And I'm looking at it excluding the DSC benefits that's coming next year. Can you maybe walk us through how you think about that?

Yeah, thanks for the question, Gary. Yeah, I think that the $50 million is sustainable based on where our AUM is today. And I would not... call the free cash flow contribution from the alternatives platform as one time. I might categorize it as lumpy. And as we build out the platform and diversify it, as Kevin mentioned, what you're going to see is that the cash, if we want to talk about cash, the cash we're getting from management fee profits, from carry, and also from treasury investments and our LPs is going to become more consistent and sustainable.

And if you factor in the DSC, I think Kevin's comment is probably close to 100. Is that what you guys are thinking there?

Yeah, I mean, rough math there. We spend about $60 million a year in DSC now. That goes away mid-2022. There's a temporary benefit there, but for a couple of years, it's going to be in the $60 million range in terms of a tailwind on our cash flow. And then, as we've talked about, we're cognizant of the fact that you know, that financial benefit reverses over time. But, yeah, for the first two or three years, it's a significant increase in our free cash flow.

And, Gary, that's probably why you want to see us accelerate this a little bit, right, is we can take advantage of that in those beginning years.

Yeah, it makes sense. Great. And then last question for me, maybe for Judy. Can we get an update on how, you know, you plan to distribute some of these private alts products? to accounts outside of institutional? So, you know, I think it was mentioned kind of high net worth customers and whatnot. You know, do you need to significantly invest on the distribution side of things?

Thanks, Gary. You know, so we are looking at the ALTS platform across the spectrum of offerings. So, you know, starting really with the mutual fund and real assets, ETF vehicles for liquid alternative strategies have been quite strong as well, whether it be the market neutral or long-short strategies. And then with our private credit offerings, It is available to retail as well as family offices and institutional. And on the distribution side, whether it be in our Canadian institutional team, our U.S. institutional team, or across the retail channel and our team there, we have capacity. We've got the capabilities to distribute all of these products to the investors as they are demanding them. And we don't anticipate significant additional expenses or headcount there.

And Gary, one of the things, you know, that when we strategically thought about this, we do have that end-to-end distribution there and where others have to acquire pieces of it. So for us, I think it's natural to go the other way, which is to provide product to that spectrum.

Yeah, that makes sense. Okay, those are my questions. Thanks very much. Thanks, Gary.

Thank you. Our next question online comes from Jeff Kwan from RBC Capital Markets. Please go ahead.

Hi, good morning. On the SG&A, so I think the guidance is $185 to $190 million for the year. And at the high end would imply the Q4 number would have to be around $45 million or just under that, which would then be kind of like $3.5 million lower than the year-to-date corporately average. I know you mentioned the corporate development expenses, but just wondering what's going to drive the SG&A to be meaningfully lower in Q4 to hit your guidance range.

Yeah, thanks, Jeffrey. It's Adrian. I mean, basically the short answer is that we're three quarters of the way through the year now, so we have a little bit of a better read on where the performance type compensation is going to land. But again, I do want to reiterate that when you look at the SG&A increase in the quarter, again, it related to corporate development, which we're going to incur these expenses to generate future incremental profits. and also performance compensation. And so the performance compensation relates to pretty impressive sales. So 2.9 billion in gross sales of mutual funds year to date versus 2.2 in the full year last year. So that obviously drives some expenses. And we recorded $288 million worth of net sales in mutual funds in a seasonally slow quarter. So I just want to make sure everyone understands that some of the increases in the first three quarters really relate to the fact that we didn't anticipate the performance to be as strong as it has been for the year, but we have a pretty good readout now on where the full year 2021 is going to land.

I mean, that's what I'm trying to get. The other thing I'd reiterate is that we've tried to X out what I call sales-based and investment performance comp and you know, just bonus account based on the success, the core SG&A is running basically flat from where it was a year ago.

Right. It's just, I mean, obviously the net sales, and we see it in the numbers as you've reported, right, and the AUM has been reported. And I'm just trying to get a sense as, okay, if we see the momentum sustain itself into Q4, we still hit, you know, with all the factors in terms of performance-based comp and the corporate developments. are you still comfortable that you can hit it within that range or as a result of the growth you've had and the performance you've had, it's going to come in higher? Just to make sure there's a matching in terms of trying to forecast out, you know, what the margins look like for the last quarter of the year.

Yeah, Jeff, it's Kevin again. Yeah, so I would say lean it toward the high end there, right? But that can get you back to where it is. We do try to true update each quarter so we don't have this effect. So clearly if we have another blowout quarter in sales, We may have to push that a little higher, but I think you guys would look at that and say that's a pretty good short-term trade-off. Remember, some of these things will reset, right? The bonus numbers all start to reset as we go into a new year. The targets get higher, et cetera. So these are essentially the impacts of probably too great a success on some of these metrics. These would be where we had planned, right? But some of these will reset as we move into 2022. And we haven't done that work yet. We're just starting in our planning process right now. but lean Q4 toward the high end of the range right now.

Okay, so if you have, sorry, just to not belabor the point, if you have the same momentum through the first three quarters as you get into Q4, are you comfortable that you'll still be within the target range?

Yeah, I mean, I think we've said a number of times on the prepared remarks and during the answers that we're end of the range, which is 190, and we're not going to, we can't give you too much transparency into some of the you know, the minutia around how we do the forecast, but, you know, at this point, that's what we, you know, that's what we're anticipating. So we're certainly not going to change that today.

Okay. Just on your alternatives business, can you help us understand, I guess, how much have your clients invested into the various alternative strategies, and what is that kind of mix between the different, you know, in terms of institutional versus retail versus, you know, have a client that sort of segmentation.

Yeah, hey, I think, Jeff, we want to look at that between our current, which is roughly $2.2 billion of private alternative assets, right? We've got $150-ish in our money in that. Again, there's some other commitments that will follow on to that, but you can think of the rest of that as third-party client money. that stretches from institutions and family offices. And we've just started on the side on the really rolling out this retail product that will be available to high end brokers. So you'll see that come on last. So I would say of the 2.2-ish, most of that is institutional family office type money across the spectrum of products.

Okay. And one last question to your point, Kevin, in terms of if alternatives is where it's at and where our clients are going, shifting capital. Does it make sense to build kind of an in-house specialization, an in-house team, as opposed to kind of partnering with some third parties as you've kind of done so far?

Yeah, we've spent a lot of time on this, right, with our Alternatives Advisory Committee and the team here. You know, I think you guys, and I've been on, you know, I come from this as a PM and an analyst in my DNA, right? If we went out and just started ramping up OpEx to build it out, you wouldn't see the return on that for six or seven years. I think if we can partner, take majority stakes, work with folks on GP structures where we're joined together in it, that's a way to kind of rent to own it model, which I think you drive the earnings first and bring what I call that knowledge equity in-house over time. That's to us a better way to reward our shareholders to get the earnings flowing quicker, be in the space, test out some partners, and think of it as a portfolio of... products and managers that will acquire over time. But you should think of it, though. That should lead you to hopefully over time bring that expertise in-house, but not through an organic body-by-body expensive growth.

Okay, thank you.

Thank you. Our next question online comes from Mr. Tom McKinnon from BMO Capital. Please go ahead.

Yeah, thanks very much. Morning. Just on the $5 billion private old school, You know, you've been sitting at $2.2 billion now for about a year, certainly talking as if you would be putting more capital or work into this. But if you want that $5 billion goal by the end of 2022, that's more than doubling within a year or about five quarters, I guess. So can you give us any kind of path as to how we should be thinking about this? And then, you know, would that be another commitment of, you know, $100 million of your capital? Just, you know, if I kind of look at the $150 million and put in the $2.2 billion we have so far. So, you know, just two parts to that question. The path to get to $5 billion and what are some of the cash flow demands of that?

Yeah, Tom, thanks. It's Kevin. I think we're still pretty comfortable with that $5 billion number over the next horizon, for sure. In that, it implies a couple of new initiatives we may be putting on the board over the next year. to get us there. There may be a little slippage, but I think we're comfortable with what we're line of sight to that. In terms of what our capital would be, we've already disclosed that we're going to put $50 million into Support Fund 3 on Instar when that rolls out. And then, obviously, a couple of the other ventures, we'll probably have some seed capital to work with there. So not sure if we've circled the number yet. You can know that $50 is clearly committed. And so it could be in that range, it could be higher, but it's not going to be significantly in the first year. In other words, I wouldn't see us out of that band. But again, it's stuff that we're comfortable with right now.

And you mentioned over the next horizon. Is that by the end of 2022?

Yeah, I think that's what we said, and I think we're still looking at the end of 2022. And I said if there's slippage, it may be a quarter or two, but it feels like it's tracking to that at this point.

Well, if it feels like it's tracking, it's been flat over the last year. So what are you reading in terms of making it feel like it's tracking to get to that?

Yes, we've had some modifications that have been bringing things down. We haven't had a lot of new initiatives, as I said, on the early part of the call. We have just rolled out a new product with SAF, which we have high expectations for, but there will be a ramp time there. At the same time, we've made an investment in our first early-stage venture fund. That hasn't been called yet. So while we've got some things that we have started to ink, it'll take a little bit of time to get in that call. And there are things that we're working on that are in the pipeline that will also play into that. So I'm not fussed by the flash, given the fact that we've had some monetizations in carry that came through. I mean, Adrian, you may have some other thoughts on that.

Okay, thanks. I think that covers it. Anything else on that, Tom?

No, that's good. Thanks, Adrian.

Thank you. Our next question on the line comes from Nick Preby from CIBC Capital Markets. Please go ahead.

Yeah, thanks. So just to build on the conversation surrounding excess capital deployment and the recent cash build, you know, in the past few quarters you've alluded to some of the commitments that you've made to various funds on the private alt side. I was wondering if you might just be able to give us a sense of what your total unfunded commitments might amount to. I'm just trying to keep track of that to better understand how excess capital might be at least partly earmarked.

Yeah, thanks for the question. It's Adrian. So there's about $77 million of unfunded commitments that we have with the funds that are up and running now. But one of the things you have to keep in mind is that when we look back over the years, a lot of these new commitments get funded through recycled capital, number one. And that would be monetizations from investments within the funds that we've invested in, but also cash earnings that are coming out of the GPs in the form of a recurring management fee and other income, as well as carried interest. So you sort of have to look at a net number, which would be much lower than that.

Understood. Okay. And then just one high-level question on the net flows outlook. You know, demand for retail investment products at the industry level has clearly been very strong this year, you know, presumably a consequence of improving household balance sheets and higher savings rates, among other factors. Just interested to canvass your views on the, you know, the sustainability and the trajectory of that trend, you know, as we see spending patterns begin to normalize, how quickly we might see demand for, you know, retail investment products normalize at accordingly. I wouldn't expect you to have a crystal ball, but just thought I'd add for your read on some of those macro dynamics.

Kevin, I'll start and I'll pass it to you for some of the micro parts of our business on that. I think a big benefit has been the higher savings rate. We think that that savings rate probably stays up a little bit elevated with the hybrid work world. So think about the fact that if folks only work downtown two or three days a week, they're saving commuting costs, et cetera, gas, things like that. There'll be some offsets with higher inflated prices for things. But if you put that in the mix, there should be some extra disposable income in that. So we've seen that go into some of, we know it's going into some parts of the savings world in the market. How sustainable is that? I think it will wane out over time as we normalize hybrid and the downtown starts to come back. I'd say probably second most important thing and maybe even more important is the market itself. If the market stays in this range, even if it's range-bound to choppy range-bound upward trend, close will be fine. I think where you get into trouble in our industry, as you've seen, is when you have market declines of 20%, 30%. The retail investor steps back. You see redemptions. And this last recession was a little odd because it was so short driven, right? The market dropped and came back pretty quickly. So I'd say that's probably the bigger impact of the two on the macro front is what the market does over in the near term. Having said that, I think things, we're not calling, you're calling for, like many others some choppiness in here, maybe some minor pullbacks, but we're not seeing a scenario where we think things are coming off a cliff at this point. Those are the two big drivers on the macro side.

And then, Judy, thoughts on where we're seeing... Just with AGF itself, we've been outpacing the industry by about 15% year over year. And I guess what we're seeing is just the breadth and scope of our product offering out of the top 10 selling funds, six are top quartile performing funds. So we would be very optimistic that we could continue that outpacing of industry going forward.

Yeah, and I'd add to that, Nick, that there are also things that are probably the highest demanding. So it's not only strong performance, but also in key categories of people. We focus the shelf to things that advisors really can't do themselves, so things that are harder to do, more global, et cetera, and that's where we're having the outperformance. there's some linkage to that sustainability there, I would suspect, as well.

Okay. That's good color. Thanks for taking my questions. I'll pass the line.

Thank you. Once again, for any questions or follow-ups, that's star then 1 on your touch-tone phone. Our next question on line comes from Mr. Graham Riding from TD Securities.

Hi. Good morning. Can you hear me? We can, Graham. Good morning. Okay, great. The investment in the first descent, I just want to make sure I've got that correct. It's a $30 million commitment on your end. Is that incremental to the $77 million, Adrian, that you flagged as commitments otherwise to your private health platform? Okay, Graham, no, that's included because we've made that commitment, yeah. Okay. And then should we interpret that... partnership as something that you're hoping will grow into a fund and a sort of a fee-earning AUM opportunity for you?

Yeah, it's a good question. I mean, this is an investment fund. It's really a partnership and a structure where we'll have multiple points of revenue, if you think about it, right, not just as an LPC, but also through the structure itself and some carry. But it really sets us up to do more with them in the future, what we think is one of the better early-stage technologies. venture firms out there. So think of it really as the first part of a multi-pronged approach to this.

Okay. Understood.

And then my second question, not related, just the regulatory changes around client-focused reforms. We've seen recently that some of the banks have announced that they're moving to a more proprietary model within their branch channels. Any expectation that that would have an impact on your flows at all or you know, the independent asset managers largely?

This is Judy. You know, this has been a trend that has been developing over a number of years. And so for ourselves, and I do, I would argue with most of the independent asset managers, it will have minimal impact as we really have not seen a significant sales flow through the bank branch in many years. So we're not concerned about it. It's an interesting development. It'd be interesting to see what the regulator says to it. But at this point, we're not concerned.

Okay. Thanks, Judy. And then maybe just to follow on that, your mutual fund sales momentum is strong. Can you give us some indication of how that is currently split across the different channels, IROC, MFDA, and then your strategic partnerships?

Yeah. The growth sales across well, we're seeing about a 50% increase across IROC and MFDA both, just in terms of the sales, in terms of the trajectory of where they're going, and in terms of the split, we're seeing about 25%, I believe, through IROC, and a smaller, yeah, I believe it's about 25% through IROC, and the rest, is that where is it? I think that's correct, yeah. Sorry, I can get that number and firm it up for you.

If it's directionally correct, then that's fine.

Thank you.

We have no further questions at this time. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. AGF's next earnings call will take place on January 26, 2022. You may now disconnect. Hello. Thank you. Thank you. Thank you. Welcome to the Q3 2021 AGF Management Limited Earnings Conference call. My name is Richard, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press star then 1 on your touchtone phone. Please note that this conference is being recorded. I'll now turn the call over to Adrian Basaraba. Mr. Basaraba, you may begin.

Thank you, operator, and good morning, everyone. I'm Adrian Basaraba, Senior Vice President and Chief Financial Officer of AGF Management Limited. Today, we will be discussing the financial results for the third quarter of fiscal 2021. Slides supporting today's call and webcast can be found in the Investor Relations section of AGF.com. Also speaking on the call today will be Kevin McCready, Chief Executive Officer and Chief Investment Officer. For the question and answer period with analysts following the presentation, Judy Goldring. President and Head of Global Distribution will also be available to address questions. Turning to slide four, I'll provide an agenda for today's call. We will discuss highlights of Q3 2021, provide an update on the key segments of our business, review our financial results, discuss our capital and liquidity position, and finally, close by outlining our focus for the remainder of 2021. After the prepared remarks, we'll be happy to take questions. And with that, I'll turn the call over to Kevin.

Thank you, Adrian, and thank you everyone for joining us today. During Q3 2021, we continued to execute against our strategy and stated goals. I'll begin with some highlights. Our strong business momentum from the previous quarter was carried into Q3. AUM and fee earning assets reached $43.4 billion at the end of Q3, an increase of $2.6 billion compared to the second quarter. Our mutual fund business continued its sales momentum, reporting net sales of $288 million, marking the fourth consecutive quarter of mutual fund net sales. As a tenured leader in sustainable investing, we are proud to announce that AGF International Advisors Company Limited has been successfully named as a signatory to the UK Stewardship Code. UK Stewardship Code 2020, recognized globally as a best practice benchmark in investment stewardship, sets high stewardship standards for those investing money on behalf of UK savers and pensioners and those that support them. Diversity and inclusion have been a long-standing pillar of our social responsibility commitment. In early September, we entered a multi-year partnership to create a scholarship program with INSPIRE, a national indigenous organization that invests in the education of indigenous people. This partnership is part of our multi-year plan to accelerate our diversity and inclusion initiatives. Over the past few months, we have made significant progress in diversifying and expanding our private alternatives business. In early July, we launched the AGF-SAF Private Credit Limited Partnership and Trust. The LP targets Canadian institutional investors, while the Trust offers increased liquidity that is more appealing for Canadian retail investors. Subsequent to the launch, we refined our long-term partnership with SAF. Furthermore, we strategically expanded our private alternatives business into the private equity and venture capital space by partnering with First Ascent Ventures, a firm that focuses on investing in emerging technology companies. The strong business momentum has translated into strong financial results for the quarter. We reported an adjusted diluted EPS of 21 cents, up 163 percent from the 8 cents in Q3 of 2020, excluding Smith & Williamson. We have achieved these results partly by holding core expenses flat, which we will continue to do going forward. We have been able to realize efficiencies and unlock some capacity during COVID by relying on our digital strategy and doing larger virtual meetings. When you look at our process prior to COVID, there was a lot more travel and administration necessary in our sales process. We believe that going forward, our investment management business can grow with the existing resource base. Having said that, incremental operating expense and capital will be required for corporate development as we accelerate the redeployment of our excess capital. Finally, the board confirmed a quarterly dividend of $0.09 per share for the third quarter. This level was increased last quarter from $0.08 per share. Starting on slide six, we will provide updates on our business performance. On this slide, we break down our total AUM and fee-earning assets in the categories disclosed in our MD&A and show comparisons to the prior year. Mutual fund AUM increased by 24%. I'll provide more color on our mutual fund business in a moment. Institutional, sub-advisory, and ETF AUM increased by 11%. We continued to receive allocations from our existing institutional clients, including $100 million U.S. into our global sustainable growth strategy during the quarter. After successfully onboarding a large institution who selected three of our global and U.S. equity strategies on their SMA platforms in Q2, in August we onboarded another large institution who chose one of our global equity strategies on their SMA platform. While AUM growth on these SMA platforms will occur gradually over time, we are optimistic based on flows for the initial few months. Building on the success of these wins, we target entering into similar relationships with other SMA platforms in the US. During the quarter, we received a redemption notice from one of our institutional clients for $900 million. The redemption was a result of an asset allocation shift, which resulted in a large reduction of their public equity exposure overall in favor of alternatives. This highlights the importance of alternatives, and also the SMA business, which tends to be less lumpy and will create some consistency in AUM levels. Looking forward, RFP and RFI activities have remained strong. We continue to see interest from institutional investors in a number of our strategies, which bodes well for future sales. Our private client business continues to demonstrate consistent, steady growth, with AUM increasing 23% year over year. Our private alternatives AUM and fee-earning assets were $2.2 billion, and we maintain our goal of reaching $5 billion in AUM and fee-earning assets by the end of 2022. During the quarter, we refined our partnership with SAF where we have entered into a definitive agreement along with a distribution arrangement as an alternative to AGF exercising its option to acquire management contracts of select SAF funds. We will be the exclusive provider of their investment capabilities in the Canadian retail marketplace. This arrangement allows both firms to capitalize on the expected growth in the private credit space. Our strategic partnership with First Ascent Ventures helps to broaden our alternatives platform into an area that gives investors an opportunity to invest in top-tier emerging technology companies. AGF committed $30 million to First Ascent's second fund and is a member of the Limited Partner Advisory Committee. These initiatives, along with our robust pipeline of opportunities in the alternative space, will help AGF achieve our goal of reaching $5 billion in AUM and fee-earning assets by the end of 2022. Turning to slide seven, I will provide some detail on the mutual fund business. The Canadian mutual fund industry continued its strong pace in the summer months, reporting net sales of $33 billion for the three months ending August 31st. Excluding net flows from institutional clients invested in our mutual funds, net sales were $288 million, compared to net redemptions of $4 million in Q3 of last year. AGF sales improvement outpaced that of the industry. Year-over-year, gross sales for our long-term funds improved by 61% compared to 46% for the industry. We continue to see year-over-year improvement across all channels, IROC, MFDA, and strategic partnerships, and strong flows into multiple categories, including global and U.S. equities, fixed income, and ESG or sustainable opportunities. The momentum in our retail mutual fund business has continued into September, excluding net flows from institutional clients, we have net sales of approximately 80 million up to September 24th. Before I return the call back to Adrian, I want to give a quick update on performance. AGF measures mutual fund performance by comparing gross returns before fees relative to peers within the same category, with the first percentile being the best possible performance. We target an average percentile ranking versus peers of 50% over any one year and 40% over the three-year period. At the end of Q3, average percentile rankings were 53% over the past one year and 49% over the past three years. It's important to note that one- and three-year performance for our top-selling funds have largely remained in the top quartile. With that, I will turn the call back over to Adrian.

Thank you, Kevin. Slide 8 reflects a summary of our financial results for the third quarter with sequential quarter and year-over-year comparisons. Excluding Smith and Williamson from our prior period results, EBITDA before commissions for the current quarter was $37.5 million, which is $9.3 million higher than previous quarter and $16.2 million higher than the prior year. For ease of comparison, we've shown EBITDA before private alternative contributions separately. Excluding the private alternatives business, we reported EBITDA before commissions of $29.2 million in the quarter. This is $1 million favorable compared to Q2 2021 and $9.1 million favorable compared to prior year, driven by an increase in AUM. SG&A was $50 million, an increase of $3 million from Q2 2021 and $4 million from Q3 2020. This is driven by higher mutual fund sales and strong investment performance. SG&A in the quarter was also impacted by increased corporate development activity and associated expenses of $1.3 million. As we work to deploy capital, these costs may temporarily increase SG&A. Core SG&A, which excludes variable compensation and corporate development costs, were relatively consistent with last year. EBITDA from our private alternatives business was higher in the quarter. We recorded $8.3 million from our private alternatives business And this quarter includes 5.4 million of LP earnings, which benefited from the weakening of the Canadian dollar relative to the U.S. dollar. This is the opposite phenomenon we saw last quarter when the U.S. dollar weakened, which suppressed LP earnings. As noted at a subsequent event in our financial statements and on our previous call, one of our long-term private alternative investments managed by SAF fully monetized in June 2021. As part of the transaction, AGF recorded carried interest revenue of 2.2 million this quarter. As we continue to grow and diversify our private alts platform, management fee profits and earnings from our LP investments will become more consistent and predictable. Delivered EPS was $0.21 in the quarter. That's $0.14 higher than Q2 2021 and $0.13 higher than last year. Private alternatives had a strong quarter due to the combination of increased carried interest revenue and strong earnings from LP investments. Deferred selling commissions were $14.1 million this quarter compared to $17.7 million last quarter SG&A has been influenced by business performance, which continues to exceed our forecasting. Last quarter, we guided to SG&A of $185 to $190 million for this fiscal year. We anticipate being in the upper end of that range. We're currently in the middle of our annual strategic planning and budgeting process, and as Kevin mentioned, expense control is a key objective. Turning to slide nine, I'll walk you through the yield in our business in terms of basis points. This slide shows our revenue, operating expenses, and EBITDA before commissions as a percentage of average AUM on the current quarter as well as the trailing 12-month view. Note that AUM and related results from Smith & Williamson, the private health business, one-time items, and other income are excluded. The Q3 revenue yield is 112 basis points. That's one basis point lower compared to the trailing 12 months. Q3 SG&A, that's a percentage of AUM. That's 50 basis points. That's one basis point lower compared to the trailing 12 months. That resulted in an EBITDA yield of 27 basis points, which is flat to the trailing 12 months. Let's turn to slide 10. I'll discuss free cash flow and capital uses. This slide represents the last five quarters of consolidated free cash flow on a trailing 12-month basis as shown by the orange bars on the chart. The black line represents the percentage of free cash flow that was paid out as a dividend. Our trailing 12-month free cash flow was $52 million, and our dividend payout ratio was 45%. Our cash balance at the end of August was $72 million. We have $173 million in short- and long-term investments and no debt. We also have a credit facility available to provide credit to a maximum of $150 million. So while we currently have no debt, we're comfortable increasing our net debt to EBITDA up to 1.5 times for the right opportunity to rise. Our remaining capital commitment to the private alternatives business is $77 million, which is $26 million higher compared to Q2. The increase reflects the $30 million cornerstone investment to First Ascent's second fund, which was announced in August. Not included in this quarter is our anticipated U.S. $50 million commitment to an upcoming third fund managed by Instar. Capital commitments may be funded from excess free cash flow, but keep in mind there will also be further recycling of capital as monetizations occur, which will help to fund future commitments. Taking all that into account, we currently have excess capital available. Our future capital allocation will be balanced and include returning capital to shareholders and investing in areas of growth. Those growth areas include investing in our private alternatives business as well as opportunities outside our private alternatives that are strategically in line with our priorities. Reapplying our excess capital to generate recurring earnings and a key strategic priority. Over the past few months, we've made significant progress to begin deploying our capital and have generated a robust pipeline of corporate development opportunities. Executing on this priority will be a catalyst for equity growth and value creation. Last quarter, in recognition of our strong results, robust financial position, and confidence in our business, AGS Board of Directors increased the quarterly dividend by 12.5%. This is just one example of how we are directly returning capital to our shareholders. Returning to slide 11, I'll turn it over to Kevin to wrap up today's call.

Thanks, Adrian. 2-3 was a solid quarter. Our AUM and fee-earning assets continue to climb. We recorded another quarter of positive mutual fund net flows, marking the fourth consecutive quarter of net sales. We continue to deploy our capital and invest in key growth areas such as the private alternative business. We launched the new AGF SAF private credit products in July, refined our partnership with SAF, and partnered with First Ascent Ventures. Our strong business momentum translated into strong financial results. Excluding Smith and Williamson from the prior period results, EBITDA before commissions was $37.5 million, or 76% higher than Q3 of last year. Our margin also expanded by 860 basis points year over year. Adjusted EPS for the quarter was 21 cents, 163% higher than last year, excluding Smith & Williamson. We are focused on building on the momentum from the past few quarters and creating value for our shareholders over the long term. In the past 12 months, we have returned almost $70 million to our shareholders through share buybacks and increased dividend payments, which started last quarter. We will continue to strategically invest and accelerate the deployment of our capital to key growth areas creating value for shareholders. Along those lines, I'd like to reiterate our strategic priorities, which are to deliver consistent and repeatable investment performance, drive the organization to sustainable net inflows, redeploy our excess capital to generate recurring earnings, and position the firm to reach $5 billion in alternative assets by 2022, while we continue to be diligent in controlling costs to ensure increased revenue translates to expanded profits and margins to take advantage of the operating leverage in our business. I want to thank everyone on the AGF team for all of their hard work and we will now take your questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speaker phone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star then 1 on your touch-tone phone, and we're standing by for questions. And our first question online comes from Mr. Gary Ho from Desjardins Capital. Please go ahead.

Thanks. Good morning. In your MD&A, there were several mentions of this capital deployment plan, and you also spent a couple million on the corp dev costs. I think both Kevin and Adrian, you mentioned it in your prepared remarks But, Kevin, can you just refresh us on the key pillars of that plan? You know, it sounds like a lot of effort is bulking up your private alts platform. Is that where we should see growth come from in the next two to three years? And how much would you look to deploy in that silo in particular?

Hey, Gary, thanks. So a couple of thoughts on that. You know, capital is always something that we try to balance out between growth, doing some buybacks, as well as we'll continue to think now about the dividend as well. Over the last year, as we've said, I think we've put back $65 million to our shareholders in two of those buckets. Now, with the fact that a year on, we've got the S&W transaction behind us, we really are going to amp up getting the capital back to work and accelerate that. With that will come some deal costs, which are one-time things. Part of that, obviously, is we look at the landscape around us. The alternative space continues to get bigger and bigger. are continuing to grow across the spectrum from large institutions, family offices, even retail brokers. So we know the core public markets are going to shrink. The alternative asset areas are going to grow pretty significantly over the next decade or so. So yeah, for us, strategically, it makes sense for us to start to rapidly accelerate the deployment of that capital. Part of that is we're bringing on a new head of alternatives. In the late stages of a search process for a significant hire there, we are down to several very good candidates there. So hopefully we'll have somebody on board here into the early part of next year where we can then really ramp that up. As soon as we get that capital back to work, as you all know, as soon as we can drive those earnings through. So we're on pace to, I think, as we said a year ago at this time, we said it would take 18 to 24 months. So you're now starting to see the beginnings of that. In terms of the quantum, we have a lot of drive power. If you think about current cash on the balance sheet at $70 million, if you think in a world post-DSC, our cash flow is probably going to ramp to north of $100 million. And then we think conservatively about re-levering the company up to one and a half times our EBITDA. So you can kind of think of that over a multi-year period about how you can get that to scale into earnings.

Perfect. Okay, great. And then next question, just maybe related to some of Kevin's comments there, just on the free cash flow, Adrian, it's on the quarter, $21 million. I think there's some kind of one-time private alts carry or distribution in there. And then LTM is around $52 million. But when you look at the run rate, you know, what's the free cash flow profile look like for the company? You know, is that $50 million sustainable? and I'm looking at it excluding the DSC benefits coming next year. Can you maybe walk us through how you think about that?

Yeah, thanks for the question, Gary. Yeah, I think that the $50 million is sustainable based on where our AUM is today, and I would not call the free cash flow contribution sustainable. from the alternatives platform as one time. I might categorize it as lumpy. And as we build out the platform and diversify it, as Kevin mentioned, what you're going to see is that the cash, if we want to talk about cash, the cash we're getting from management fee profits, from carry, and also from treasury investments and our LPs is going to become more consistent and sustainable.

And if you factor in the TSC, I think, Kevin, Kevin's comment is probably close to $100. Is that what you guys are thinking there?

Yeah, I mean, rough math there. We spend about $60 million a year in DSC now. That goes away mid-2022. There's a temporary benefit there, but for a couple of years, it's going to be in the $60 million range in terms of a tailwind on our cash flow. And then, as we've talked about, we're cognizant of the fact that that financial benefit reverses over time. But yeah, for the first two or three years, it's a significant increase in our free cash flow.

And Gary, that's probably why you want to see us accelerate this a little bit, right, is we can take advantage of that in those beginning years.

Yeah, it makes sense. Great. And then last question for me, maybe for Judy. Can we get an update on how you plan to distribute some of these private alts products to accounts outside of institutional? So I think it was mentioned kind of high net worth customers and whatnot. Do you need to significantly invest on the distribution side of things?

Thanks, Gary. We are looking at the ALTS platform across the spectrum of offerings. So starting really with the mutual fund and real assets, ETF vehicles for liquid alternative strategies have been quite strong as well, whether it be the market neutral or long-short strategies. And then with our private credit offering, it is available to retail as well as family offices and institutional. And on the distribution side, whether it be in our Canadian institutional team, our U.S. institutional team, or across the retail channel and our team there. We have capacity. We've got the capabilities to distribute all of these products to the investors as they are demanding them, and we don't anticipate significant additional expenses or headcount there.

Gary, one of the things that when we strategically thought about this, we do have that end-to-end distribution there. and where others have to acquire pieces of it. So for us, I think it's natural to go the other way, which is to provide product to that spectrum.

Yeah, that makes sense. Okay, those are my questions. Thanks very much. Thanks, Kevin.

Thank you. Our next question online comes from Jeff Kwan from RBC Capital Markets. Please go ahead.

Hi, good morning. I want to ask on the SG&A. So I think the guidance is 185 to 195. million for the year, and at the high end would imply the Q4 number would have to be around 45 million or just under that, which would then be kind of like 3.5 million lower than the year-to-date corporately average. I know you mentioned the corporate development expenses, but just wondering what's going to drive the SG&A to be meaningfully lower in Q4 to hit your guidance range.

Yeah, thanks, Jeffrey. It's Adrian. I mean, basically the short answer is that we're three quarters of the way through the year now, so we have a little bit of a better read on where the performance type compensation is going to land. But again, I do want to reiterate that when you look at the SG&A increase in the quarter, again, it related to corporate development, which we're going to incur these expenses to generate future incremental profits, and also performance compensations. And so the performance compensation relates to pretty impressive sales. So 2.9 billion in gross sales of mutual funds year to date versus 2.2 in the full year last year. So that obviously drives some expenses. And we recorded $280 million worth of net sales in mutual funds in a seasonally slow quarter. So I just want to make sure everyone understands that some of the increases in the first three quarters really relate to the fact that we didn't anticipate the performance to be as strong as it has been for the year, but we have a pretty good readout now on where the full year 2021 is going to land.

I mean, that's what I'm trying to get. The other thing I'd reiterate is that we've tried to X out what I call sales-based and investment performance comp and just bonus comp based on the success. The core SG&A is running basically flat from where it was a year ago.

Right, and it's just, I mean, obviously the net sales, and we see it in the numbers as you've reported, right, and the AUM has been reported. And I'm just trying to get a sense as, okay, if we see the momentum sustain itself into Q4, do you still hit, you know, with all the factors in terms of performance-based comp and the corporate development, are you still comfortable that you can hit it within that range or as a result of, the growth you've had and the performance you've had, it's going to come in higher just to make sure there's a matching in terms of trying to forecast out what the margins look like for the last quarter of the year.

Yeah, Jeff, it's Kevin again. Yeah, so I would say lean it toward the high end there, right? But that can get you back to where it is. We do try to true update each quarter so we don't have this effect. So clearly if we have another blowout quarter in sales, we may have to push that a little higher, but I think you guys would look at that and say that's a pretty good short-term tradeoff. Remember, some of these things will reset, right? The bonus numbers all start to reset as we go into a new year. The targets get higher, et cetera. So these are essentially the impacts of probably too great a success on some of these metrics. These would be where we had planned, right? But some of these will reset as we move into 2022. And we haven't done that work yet. We're just starting in our planning process right now. But lean to forward toward the high end of the range right now.

Okay, so if you have, sorry, just to not belabor the point, if you have the same momentum through the first three quarters as you get into Q4, are you comfortable that you'll still be within the target range?

Yeah, I mean, I think we've said a number of times on the prepared remarks and during the answers that we're end of the range, which is 190. And, you know, we're not going to, we can't give you too much transparency into some of the, you know, the... minutia around how we do the forecast, but at this point, that's what we're anticipating. So we're certainly not going to change that today.

Okay. Just on your alternatives business, can you help us understand, I guess, how much have your clients invested into the various alternative strategies, and what is that kind of mix between the different, you know, in terms of institutional versus retail versus, you know, have a client that's sort of segmentation.

Yeah, hey, I think, Jeff, the way you want to look at that between our current, which is roughly $2.2 billion of private alternative assets, right, we've got $150-ish in our money in that. Again, there's some other commitments that will follow on to that, but you can think of the rest of that as third-party client money. that stretches from institutions and family offices. And we've just started on the side on the really rolling out this retail product that will be available to high end brokers. So you'll see that come on last. So I would say of the 2.2-ish, most of that is institutional family office type money across the spectrum of products.

Okay. And one last question to your point, Kevin, in terms of if alternatives is where it's at and where our clients are going, shifting capital, Does it make sense to build kind of an in-house specialization, an in-house team, as opposed to kind of partnering with some third parties as you've kind of done so far?

Yeah, we've spent a lot of time on this, right, with our Alternatives Advisory Committee and the team here. You know, I think you guys, and I've been on, you know, I come from this as a PM and an analyst in my DNA, right? If we went out and just started ramping up OpEx to build it out, you wouldn't see the return on that for six or seven years. I think if we can partner, take majority stakes, work with folks on GP structures where we're joined together in it, that's a way to kind of rent to own it model, which I think you drive the earnings first and bring what I call that knowledge equity in-house over time. That's to us a better way to reward our shareholders to get the earnings flowing quicker, be in the space, test out some partners, and think of it as a portfolio of... products and managers that will acquire over time. But you should think of it, though. That should lead you to hopefully over time bring that expertise in-house, but not through an organic body-by-body expensive growth.

Okay, thank you.

Thank you. Our next question online comes from Mr. Tom McKinnon from BMO Capital. Please go ahead.

Yeah, thanks very much. Morning. Just on the $5 billion private old school... You know, you've been sitting at $2.2 billion now for about a year, certainly talking as if you would be putting more capital or work into this. But if you want that goal, that $5 billion goal by the end of 2022, that's more than doubling within a year or about five quarters, I guess. So can you give us any kind of path as to how we should be thinking about this? And then, you know, would that be another commitment of, you know, $100 million of your capital? Just, you know, if I kind of look at the $150 million and put in the $2.2 billion we have so far. So, you know, just two parts to that question. The path to get to $5 billion and what are some of the cash flow demands of that?

Yeah, Tom, thanks. It's Kevin. I think we're still pretty comfortable with that $5 billion number over the next horizon, for sure. In that, it implies a couple of new initiatives we may be putting on the board over the next year. to get us there. There may be a little slippage, but I think we're comfortable with what we're line of sight to that. In terms of what our capital would be, we've already disclosed that we're going to put $50 million into support fund three on Instar when that rolls out. And then, obviously, a couple of the other ventures, we'll probably have some seed capital to work with there. So not sure if we've circled the number yet. You can know that 50 is clearly committed. And so it could be in that range. It could be higher. But it's not going to be significantly in the first year. In other words, I wouldn't see us out of that band. But again, it's stuff that we're comfortable with right now.

And you mentioned over the next horizon. Is that by the end of 2022?

Yeah, I think that's what we said. And I think we're still looking at the end of 2022. And I said if there's slippage, it may be a quarter or two. But it feels like it's tracking to that at this point.

Well, if it feels like it's tracking, it's been flat over the last year. So what are you reading in terms of making it feel like it's tracking to get to that?

Yes, we've had some modifications that have been bringing things down. We haven't had a lot of new initiatives, as I said, on the early part of the call. We have just rolled out a new product with SAP, which we have high expectations for, but there will be a ramp time there. At the same time, we've made an investment in our first early-stage venture fund. That hasn't been called yet. So while we've got some things that we have started to ink, it'll take a little bit of time to get in that call. And there are things that we're working on that are in the pipeline that will also play into that. So I'm not fussed by the flash, given the fact that we've had some monetizations in carry that came through. I mean, Adrian, you may have some other thoughts on that.

Okay, thanks. I think that covers it. Anything else on that, Tom?

No, that's good. Thanks, Adrian.

Thank you. Our next question online comes from Nick Preby from CIBC Capital Markets. Please go ahead.

Yeah, thanks. So just to build on the conversation surrounding excess capital deployment and the recent cash build, you know, in the past two quarters you've alluded to some of the commitments that you've made to various funds on the private alt side. I was wondering if you might just be able to give us a sense of what your total unfunded commitments might amount to. I'm just trying to keep track of that to better understand how excess capital might be at least partly earmarked.

Yeah, thanks for the question. It's Adrian. So there's about $77 million of unfunded commitments that we have with the funds that are up and running now. But one of the things you have to keep in mind is that when we look back over the years, a lot of these new commitments get funded through recycled capital, number one. And that would be monetizations from investments within the funds that we've invested in, but also cash earnings that are coming out of the GPs in the form of a recurring management fee and other income, as well as carried interest. So you sort of have to look at a net number, which would be much lower than that.

Understood. Okay. And then just one high-level question on the net flows outlook. You know, demand for retail investment products at the industry level has clearly been very strong this year, you know, presumably a consequence of improving household balance sheets and higher savings rates, among other factors. Just interested to canvas your views on the, you know, the sustainability and the trajectory of that trend, you know, as we see spending patterns begin to normalize, how quickly we might see demand for, you know, retail investment products normalize if accordingly. You know, I wouldn't expect you to have a crystal ball, but just thought I'd add for your read on some of those macro dynamics.

Yeah. Hey, Kevin, I'll start and I'll pass it to you for some of the micro parts of our business on that. Yeah. I think, you know, what's been a big benefit has been the higher savings rate. Um, We think that that savings rate probably stays up a little bit elevated with the hybrid work world. So think about the fact that if folks only work downtown two or three days a week, they're saving commuting costs, et cetera, gas, things like that. There'll be some offsets with higher inflated prices for things. But if you put that in the mix, there should be some extra disposable income in that. So we've seen that go into some of, we know it's going into some parts of the savings world in the market. How sustainable is that? I think it will wane out over time as we normalize hybrid and the downtown starts to come back. I'd say probably second most important thing and maybe even more important is the market itself. If the market stays in this range, even if it's range-bound to choppy range-bound upward trend, close will be fine. I think where you get into trouble in our industry, as you've seen, is when you have market declines of 20%, 30%. The retail investor steps back. You see redemptions. And this last recession was a little odd because it was so short driven, right? The market dropped and came back pretty quickly. So I'd say that's probably the bigger impact of the two on the macro front is what the market does over in the near term. Having said that, I think things, we're not calling, you're calling for, like many others some choppiness in here, maybe some minor pullbacks, but we're not seeing a scenario where we think things are coming off a cliff at this point. So, you know, those are the two big drivers on the macro side.

And then, I don't know, Judy, thoughts on where we're seeing... I mean, just with AGF itself, I mean, we've been outpacing the industry by about 15% year over year. And I guess what we're seeing is just the breadth and scope of our product offering out of the top 10 selling funds, six are top quartile performing funds. So we would be very optimistic that we could continue that outpacing of industry going forward.

Yeah, and I'd add to that, Nick, that there are also things that are probably the highest demanding. So it's not only strong performance, but also in key categories of people. We focus the shelf to things that advisors really can't do themselves, so things that are harder to do, more global, et cetera, and that's where we're having the outperformance. there's some linkage to that sustainability there, I would suspect, as well.

Okay. That's good color. Thanks for taking my questions. I'll pass the line.

Thank you. Once again, for any questions or follow-ups, that's star then 1 on your touch-tone phone. Our next question on line comes from Mr. Graham Riding from TD Securities.

Hi. Good morning. Can you hear me? We can, Graham. Good morning. Okay, great. The investment in the first descent, I just want to make sure I've got that correct. It's a $30 million commitment on your end. Is that incremental to the $77 million, Adrian, that you flagged as commitments otherwise to your private health platform? Okay, Graham, no, that's included because we've made that commitment, yeah. Okay. And then should we interpret that... partnership as something that you're hoping will grow into a fund and a sort of a fee-earning AUM opportunity for you?

Yeah, it's a good question. I mean, this is an investment fund. It's really a partnership and a structure where we'll have multiple points of revenue, if you think about it, right, not just as an LPC, but also through the structure itself and some carry. But it really sets us up to do more with them in the future, what we think is one of the better early-stage technologies. venture firms out there. So think of it really as the first part of a multi-pronged approach to this.

Okay. Understood.

And then my second question, not related, just the regulatory changes around client-focused reforms. We've seen recently that some of the banks have announced that they're moving to a more proprietary model within their branch channels. Any expectation that that would have an impact on your flows at all or you know, the independent asset managers largely?

This is Judy. You know, this has been a trend that has been developing over a number of years. And so for ourselves, and I do, I would argue with most of the independent asset managers, it will have minimal impact as we really have not seen a significant sales flow through the bank branch in many years. So we're not concerned about it. You know, it's an interesting development. It'll be interesting to see what the regulator says to it. But... At this point, we're not concerned.

Okay. Thanks, Judy. And then maybe just to follow on that, you know, your mutual fund sales momentum is strong. Can you give us some indication of how that is currently split across, you know, the different channels, IROC, MFDA, and then your strategic partnerships?

Yeah. The growth sales across – well, we're seeing – about a 50% increase across IROC and MFDA both, just in terms of the sales, in terms of the trajectory of where they're going, and in terms of the split, we're seeing about 25%, I believe, through IROC, and a smaller, yeah, I believe it's about 25% through IROC, and the rest, is that, where is it? I think that's correct, yeah. Sorry, I can get that number and firm it up for you.

If it's directionally incorrect, then that's fine. Thank you.

We have no further questions at this time. Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. AGF's next earnings call will take place on January 26, 2022. You may now disconnect.