Welcome to the Q3 2022 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 zero one 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 2022. 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 McCreadie, Chief Executive Officer and Chief Investment Officer. For the question and answer period with investment analysts following the presentation, Judy Goldring, President and Head of Global Distribution, and Jenny Quinn, Vice President and Chief Accounting Officer, will also be available to address questions. Turning to slide four, I'll provide an agenda for today's call.
We'll discuss the highlights of Q3 2022, 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 2022. After the prepared remarks, we will be happy to take questions. With that, I'll turn the call over to Kevin.
Thank you, Adrian, and thank you everyone for joining us today. Before I speak to our quarterly results, I want to take some time to address a recent leadership change and address our transition plans for the Chief Financial Officer position within the firm. As announced this morning, after 18 years with AGF, including six most recently as CFO, Adrian Basaraba informed our senior leadership team of his desire to leave his position as Senior Vice President and Chief Financial Officer. Adrian helped guide us through the difficult period of the pandemic, which we greatly appreciate. With the pandemic largely behind us, our finances in solid, stable position, and with the strategic priorities progressing positively against plan, Adrian felt the timing was now right for him to make this career change.
During his tenure, Adrian contributed to major advances in AGF's business operations and the successful management of AGF's capital and liquidity. During Adrian's time with AGF, the organization has transformed incredibly, increasing our strategic focus and capacity to deliver diversified investment options for our clients. We want to thank him for all he has done, in particular his contribution to the firm's growth over the years. Jenny Quinn, who has been with AGF for more than 15 years and serves as our current Chief Accounting Officer, has been named interim CFO and will remain in place through Adrian's departure and the announcement of a new CFO. The search process has been launched, and we're pleased to note that Adrian has agreed to remain with AGF in an advisory capacity until November 30 to help with the transition. Now to our quarterly results.
The third quarter of 2022 saw continued market volatility. Despite the challenging backdrop, we had another solid quarter. I'll begin with some highlights. We reported AUM and fee earning assets of CAD 39.6 billion at the end of Q3. Our mutual fund business reported net sales of CAD 51 million, marking the eighth consecutive quarter of positive mutual fund net sales. We reported diluted EPS of CAD 0.32, up 52% from a year ago. Our investment performance in the quarter outperformed target. 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 one year and 40% over three years.
At the end of Q3, the average percentile ranking was 39% over the past one year and 34% over the past three years, with a number of our top selling funds remaining in the top quartile. In the midst of this market volatility, we continued to deliver strong investment performance through our disciplined processes and focus on risk management and saw the benefits of our unique liquid alternative offerings, where our anti-beta market neutral strategy saw almost 100% year-over-year increase in assets. One of our subsidiaries, AGF International Advisors Company Limited, was once again accepted as a signatory to the U.K. Stewardship Code, a best practice benchmark in investment stewardship. This stands as a testament to the rigor of our responsible investing practices and our ongoing focus on our corporate sustainability initiatives.
We ended the quarter with CAD 55 million in cash, CAD 198 million in short and long term investments and no debt. We remain well positioned to weather the market volatility and have capital available to strategically invest to generate recurring earnings and return capital to shareholders. We aim to have a balanced approach to capital, including investing for growth and returning capital to shareholders. Over the last two years, we have returned CAD 119 million to shareholders. That includes dividends, share repurchases under our NCIB, and the CAD 40 million substantial issuer bid, or SIB, completed in November 2020. Today, we have announced our intention to launch another substantial issuer bid in which the board has approved the plan to utilize up to CAD 40 million to return capital to our Class B shareholders.
Given our current share price, we believe that buying back our own shares is an attractive option. Subject to market and other conditions, we expect the terms of the SIB to be finalized in early October and the SIB to be completed in November. Investing for growth is an imperative, especially because we have excess capital, which is an attractive situation considering the current market disruption. While we currently have no debt, we're comfortable increasing our net debt to EBITDA up to 1.5 x should the right opportunities arise. Our remaining capital commitment to our private markets business, recently rebranded as AGF Private Capital, is CAD 57 million. Not included in this is our anticipated commitment of $50 million to an upcoming third fund managed by Instar.
Capital commitment may be funded from excess free cash flow, but keep in mind there will also be further recycling of capital as monetizations occurs, which will help to fund future commitments. Redeploying excess capital to generate recurring earnings is a key strategic priority. We would consider small acquisitions, tuck-ins, and partnerships to add to or complement our suite of products, especially in the private market space. AGF's value proposition is bolstered by a strong history of successes and product innovation, and we offer access to distribution channels and top-notch operational and government infrastructure. Outside of private markets, we would also consider opportunities that are strategically in line with our priorities. Over the past few months, we continue to evaluate our pipeline of capital deployment opportunities. However, with the current market environment, conditions to complete a transaction have become more challenging.
The board also declared a CAD 0.10 per share dividend for Q3 2022. 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 decreased by 5%. I'll provide more color on our mutual fund business in a moment. Institutional sub-advisory and ETF AUM decreased compared to prior year, mainly due to institutional redemptions we addressed in previous quarters. We continue to see interest from institutional investors across multiple strategies and jurisdictions, which bodes well for future sales. We are expanding our U.S. SMA business. As of August, we have successfully onboarded SMA strategies onto three leading U.S. turnkey asset management platforms, Vestmark, SMArtX Advisory Solutions LLC, and Envestnet.
Our U.S. SMA relationships continued to generate positive flows in the quarter, and AUM is expected to grow gradually over time. During market volatility, our liquid alternative products also attracted interest from investors. Managed by our quantitative team in the U.S., our market neutral anti-beta strategy has the potential to generate positive returns in highly volatile negative markets. In the recent market volatility, when the S&P retreated from the summer rally, down 14% from August 16th, our market neutral anti-beta strategy was up 10%. This strategy has doubled in assets from a year ago. As uncertainty looms in the market, we have seen interest in this strategy from investors who are looking for a strategic or tactical hedge for their equity portfolios. Our private client business is captured under the new AGF Private Wealth brand, continues to demonstrate resiliency with AUM decreasing 4% year-over-year.
AGF Private Capital AUM and fee-earning assets were CAD 2.1 billion. It is our goal to reach CAD 5 billion in AUM in fee-earning assets. However, our timing of this target could slip into 2023. The delay is a natural delay given the current market conditions, and we continue to take a measured approach when evaluating our pipeline of opportunities. Achievement of the target will also depend on timing of fund closes. Turning to slide seven, I'll provide some detail on the mutual fund business. The mutual fund industry, which continued to experience outflows, reported net redemptions of approximately CAD 20 billion for the three months ended August 2022. Despite the industry trend, our mutual fund business remained positive, reporting net sales of CAD 51 million for the quarter.
AGF outperforming the industry is attributable to our fund's strong performance, advancing discussions with our key clients and partners, and diversifying our relationships across different channels. Effective June 1, sales into mutual funds on a deferred sales commission basis are no longer available. Our business is positioned for industry changes with a lineup of products that can accommodate a variety of fee arrangements and purchase options such as ETFs, SMAs, and F-series for fee-based accounts. We continue to work with our partners to support them through the transition, as well as review our products to ensure they remain competitively positioned. Subsequent to quarter end, we won an allocation of over CAD 200 million from a strategic partner into one of our equity strategies, which is expected to be funded in Q4. With that, I will turn the call back over to Adrian.
Thank you, Kevin. Slide eight reflects a summary of our financial results for the third quarter with sequential quarter and year-over-year comparisons. EBITDA before commissions for the current quarter was CAD 33.2 million, which is CAD 2.2 million lower than Q2 2022 and CAD 4.3 million lower than the prior year. When we look at net revenue, it was CAD 5.3 million lower than Q2 2022 and CAD 4.5 million lower than Q3 2021, driven by lower AUM reflecting the market decline. AGF Private Capital contributed EBITDA of CAD 6.6 million in the quarter, which is CAD 1.3 million higher than Q2 2022 and CAD 1.7 million lower than Q3 2021. The increase against Q2 was mainly due to favorable fair value adjustments from investments in our private capital LP funds.
AGF participates as an investor in units of private capital LP funds, benefiting from valuation increases and distributions from the funds, which can vary. On a long-term basis, we expect 8%-10% returns from investing in private capital LPs. The decrease versus prior year is mainly due to CAD 2.2 million of carried interest revenue recorded last year as one of our long-term private capital investments managed by SAF fully monetized with a strong IRR. SG&A for the quarter was CAD 46.4 million, which is CAD 0.9 million favorable to Q2 2022, and CAD 3.7 million favorable to prior year, mainly due to lower performance-based compensation. Diluted EPS was CAD 0.32 this quarter compared to CAD 0.14 in Q2 and CAD 0.21 in Q3 of last year. The elimination of deferred sales charge purchase option came into effect June 1st, 2022.
As a result, our net income and EPS were bolstered by the elimination of upfront commission charge. As previously mentioned, this lift to our net income and EPS will reverse over time, but it will provide a temporary lift to our net income and free cash flow levels. Turning to slide nine, I'll walk through the yield on our business in terms of basis points. This slide shows our revenue, operating expenses, and EBITDA before commissions on a percentage of average AUM from the current quarter, as well as a trailing twelve-month view. Note that AUM and related results from the AGF Private Capital and other income are excluded. EBITDA before commission yield of 28 basis points is 1 basis point lower than the trailing twelve months due to higher SG&A basis points.
While revenue decreases are in line with AUM, our SG&A is less variable, resulting in the basis point increase. SG&A on an absolute basis is trending lower than the trailing 12 months. Turning 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 twelve-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 CAD 59 million, and our dividend payout ratio was 44%. As previously mentioned, net income and free cash flow for Q3 2022 benefited from the elimination of deferred selling commissions that took effect June 1st, 2022.
As a result, our excess capital position will be bolstered temporarily, but the benefit will reverse over time. Prior to the DSC elimination, we paid CAD 66 million in deferred selling commissions over 12 months. We'll have further updates on this in coming quarters. Before I pass the call back to Kevin, I want to take this opportunity to thank the management team and board of AGF. The past 18 years has been a great learning experience, and I'm excited about what is next for me personally. I also want to wish the company continued success going forward. Turning to slide 11, I'll now turn it over to Kevin to wrap up the call.
Thanks, Adrian. During the third quarter, we continued progress against several of our strategic priorities. We recorded the eighth consecutive quarter of positive mutual fund net flows and continued to outperform the industry. We delivered strong investment performance through our disciplined processes and focus on risk management and saw the benefits of our unique liquid alternatives offerings. Diluted EPS for the quarter was CAD 0.32, 52% higher than the same time last year, reflecting the elimination of the upfront deferred selling commissions charge. We welcomed employees to our new head office at CIBC Square. The move marked the official start of our hybrid work approach, which is an important step forward as we evolve our business practices as well as our culture.
The new space provides our employees with a flexible workspace, enhanced collaboration, and greater communication, while continuing to advance the reduction of the firm's office footprint by approximately 22% of square footage. The market environment remains uncertain, and we expect it to continue until it's clear what the impact of tighter monetary policy is on inflation and economic growth. As we navigate these markets, we remain focused on managing the risks and our results. A persistent market downturn negatively impacts our profitability and cash flow as a significant portion of our revenue is driven by market sensitive AUM. In general, for every CAD 1 billion reduction in average AUM, not including AGF Private Capital, net revenue would decline by approximately CAD 8 million annually. Keep in mind, 70% of our AUM is linked to equity market exposure.
Given the market conditions last quarter, we indicated that SG&A for 2022 was expected to be CAD 196 million, which was 2 million lower than our original guidance of CAD 198 million. As a result of continued market volatility this quarter, we are updating our revised 2022 SG&A guidance to CAD 190 million dollars. As a reminder, our SG&A guidance does not include severance and costs related to acquisition should any materialize, and it assumes performance at its current trajectory. Significant changes in sales or investment performance could result in variability in compensation expenses. We will continue to monitor the environment and will be thoughtful and disciplined with our approach to expenses.
As we head into the last quarter of fiscal 2022, we remain focused on our strategic priorities, which are to deliver consistent and repeatable investment performance, maintain our sales momentum, and generate net inflows, build a diversified private markets business, meet our expense guidance while continuing to invest in key growth areas, and enhance our corporate sustainability programs. We sincerely thank Adrian for his significant contributions to AGF's success and to the firm's growth over the years. The management team and the board of AGF appreciate his dedication and commitment to the strategy and goals of the organization and wish him well in his future endeavors. I want to thank Jenny for ensuring continuity and stability by taking on the interim CFO role while a permanent replacement is sought. Finally, I want to thank everyone on the AGF team for all of their hard work.
We will now take your questions.
Thank you. We will now begin the question and answer session. If you have a question, please press zero one on your touch-tone phone. If you wish to be removed from the queue, please press zero two. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press zero one on your touch-tone phone. We're standing by for questions. Our first question online comes from Gary Ho from Desjardins Capital Markets. Please go ahead.
Thanks, good morning. Kevin, first question, on the portfolio positioning and the fund performance. Very strong numbers here. What have you done on the portfolio side to deliver these results? Maybe touch on your outlook, significant shifts in the mix. I think you mentioned the kind of liquid alts, overlay as well.
Yeah. Thanks, Gary. You know, I think everyone on this call knows we've been cautious about these markets, probably since last fall, given the tightening cycle that central banks were gonna have to go through. If you look at just kind of as a snapshot, our balanced suite has held more cash. We've used a variety of liquid alternatives, whether they be real assets, an anti-beta hedge at different times that we have moved up and down. But generally just underlying that in the use of those instruments, it's really been at the underlying fund level, a broad, you know, series of outperformance by our active managers.
I think part of that being with that cautious tone, in sitting at maybe more cash at the fund level and being more tactical as things have gone through. You know, we're, you know, again, part of it is risk management too. I think we feel that it all came together. It's not just been the one year. As you look at this three years backwards look, which is really that pre-COVID, in the COVID, coming out of that, and now this downdraft. I think that's how we think about it is, can you perform in both legs of those markets? I think we have.
Okay. Got it. That, that's helpful. My next question maybe for Judy. You know, can we get an update on the Primerica channel, how that has performed since the narrowing of the shelf to AGF and Mackenzie? I think Mackenzie has launched, you know, some funds on the back of that. You know, how do you see this channel evolve? I think Mackenzie has set out kind of pretty lofty targets, of their own.
Oh, thanks. You know, we're not gonna really comment on internal targets or guidance on a specific partner channel. We did launch 19 new funds for the PD model, as they called it, exclusively for Primerica's clients, and we're very comfortable. First of all, we believe the product is really attractive for that channel. As well, I think we're very encouraged by the flows of the initial period.
Yeah. Gary, it's Kevin. I mean, the other thing I'd say is that there are numbers floating out there about market share, et cetera, that were given out by the other partner, which again, did not come from us and don't represent our fact pattern. For those who are confused about that and those, they should go back to where that source was. We, as Judy said, don't really comment on specific partner relationships. Having said all that, we're pretty pleased with all of our partners navigating DSC. It's early, but three months in, I'd say that we're in the backdrop of this volatile market. We think people have actually handled that transition really well.
Okay. Any update on where flows stand, month to date?
Sure. I can comment on that. For September, retail flows are really sitting kind of flat to modestly negative if you exclude certain institutional redemptions out of our Series I. We're really encouraged actually at, given the market's environment right now. We do expect that the industry overall is probably gonna struggle. To see our results where they sit right now is quite encouraging. I think it was commented in the opening remarks. We did announce a subsequent to the quarter end an allocation of about $200 million to one of our U.S. growth mandates from another strategic partner. Again, we're looking forward to some, you know, positive momentum going into the remainder of the quarter.
Yeah. Gary, I have no facts on this, but I will tell you anecdotally from what we're hearing in the channel, September looks to be a very tough month for the industry, given the market volatility. So flat, I think, is. We'll take that right now.
Yep. No. Got it. Then just maybe last question just on the SIB. I know there's no debt, CAD 55 million in cash. Maybe just update us on your capital allocation plan. Like, how do you balance the SIB versus M&A opportunities, particularly in the private alt? I think, Kevin, you still hang on to the CAD 5 billion target for private alts.
Yeah. No, a lot in that question, Gary, so let me take them piece by piece. We've always had a balanced approach to the capital side of our story, which is growth and investing in our future. Dividend, which we've again increased now for two years. I think we have a great dividend as well as payout ratio here. Then lastly, buybacks, right? We've given back over the last two years pre this SIB probably CAD 119 million to shareholders between a combination of buybacks and dividends. At different times, we're gonna play with different levers. Right now the capital markets, as you all know, has kind of jumped up. What I mean by that, not a lot of deals being done.
M&A activity for the first half is down 27% from where it was a year ago. I would guess that when we look at the second half, it's gonna be worse. Our pipeline of things that we're looking at to get to the growth part of the lever is pretty active. It's just, it's hard to transact things right now. Think of it this way. We wanna pay multiples that look attractive and sellers wanna pay things that look a lot higher. It takes time for those two things to unlock. In the middle of that, we look at where our stock's trading. The fact that from enterprise value to EBITDA, it's 2.5x to 2.6x. We know this company really well.
We know the team that we've got. We know the fundamentals are probably the best in the industry here in Canada all the way around. It's opportunistic for us to invest in our team. I think in terms of a very attractive opportunity. This time we're using the SIB lever to put that and give that money back to our shareholders in a prudent way, in an attractive time.
Okay. Got it. Okay, those are my questions. Thanks very much.
Thank you.
Thank you. Our next question online comes from Geoff Kwan from RBC Capital Markets.
Good morning. Judy, I just wanted to follow up on your response to Gary's question on the retail net sales thing. You're talking. I think it was flat to modestly negative, excluding I-class redemptions. Do you have a number on what those redemptions would be? Then also that CAD 200 million from the strategic partner in the equity mandate, is that going into the retail side, or is that on the institutional?
The CAD 200 million contribution is going into retail. We don't comment on specific asset sort of levels out of the Series I, but it is not a material amount, generally speaking. I mean, it's
Okay.
It was a one-time redemption.
Is the 200 then included in that flat to modestly negative?
No.
It's not because it hasn't funded yet.
Correct. It's gonna fund throughout Q4, probably later in October, early November.
Okay. My next question was just on with the DSC elimination, how you kind of see the trailer fee expense as a percentage of average AUM, just how you see that magnitude changing maybe on a, like a year-over-year basis, like, you know, X based upon the year, just how you think it'll kind of gravitate based on the mix and optimal market assumptions.
Yeah. I'll take that. Hey, Geoff, it's Kevin. Early days on that mix over to this model. It's hard for us to take a three-month view with this market volatility and make a lot of predictions on that right now. I'll tell you though, post DSC, our cash flow probably goes up CAD 15 million-CAD 20 million a quarter for a bit. And obviously, as new business comes on, that trailer will pick up. It's hard for us to put a finger on that. As we've told you guys on this call several times, right, the early years on this will again for us to use that cash flow and put it back to work is beneficial. Over time, this all levels out.
If you think out over five, six, seven years, the trailers pick up and compensate for where that DSC is. Where that shift actually takes place, probably kind of mid to later part of that cycle. But we don't have enough data yet at three months in to basically give out that kind of guidance on the trail side. But that's the way to think about it. It's heavy on the cash flow on the front, and as new sales come on over time, the trailers pick up, and it kind of evens out over, you know, five to seven years.
Okay. Just my last question was, obviously with the Q3 net sales results in the industry being a net redemption, like when you kind of segment it, whether or not it's by, you know, product strategy, distribution channel, like how would you kind of characterize in terms of, you know, these were the things that we were getting some good flows in there, and then what were the things where maybe there was a shift of maybe more in line with the industry redemptions or essentially net sales being weaker such that net-net you still wound up on the positive side?
Yeah. I guess what I would just start with is I think, obviously, we've had incredibly strong performance, which has really demonstrated, you know, it's held up in a very volatile market, and it's really in the categories that people are wanting. We're seeing continued great flows into our U.S. growth, our concentrated global, and our sustainable. You know, that continues to just still sustain itself. We're not really seeing a big shift across the different strategies, but just again, continued flows into those categories that are continuing to see good performance, great brand representation, and of course, strong relationships with our team.
Yeah. Geoff , if I can add, I mean, what's going on in the industry is, the backdrop, this is the worst probably period of fixed income returns we've had in 40 years, right? So those shops that are more biased towards selling fixed income are gonna see it first. We've had two quarters of negative returns in fixed income, now a third, with this backup in rates. So when I referenced September, I got a feeling that October, when people get statements who've been heavily in bond funds are gonna get impacted. As you know, we have most of our tilt on our shop is more toward the equity side, so we're gonna be less hit with that, if you will.
You know, if you're a client that's gotten burned, you're probably gonna put pressure to go to a GIC or something like that. You're gonna see a lot of cash piling up on the sideline, which will return to the markets always later than when the markets turn. I think that's where it's been. When I look through where some of the big, some of the other dealers or asset managers have seen the flow, it's been in that balanced account tilted toward fixed income, but equity as well.
We've also seen what we know about this industry, if when you have this kind of a market downturn, if you're a manager who actually underperforms that, meaning that if you're down 25% on the S&P right now and the manager's down 30 or north of that, it's a tough slog. You will see probably redemptions from those type of managers. As Judy mentioned, our performance has been outstanding. We hope to take advantage of that as people tax loss sell those managers who've underperformed this year and maybe turn back to some of our top decile, top quartile products that, you know, that have actually really done quite well.
Perfect. Thank you.
Thank you. Our next question online comes from Mr. Nik Priebe from CIBC Capital Markets.
Okay, thanks. Just in light of the lower SG&A guidance, I wanted to ask a question on how that line item might travel as we look out into 2023. I understand there's a component of variable comp that would be sensitive to the level of sales achieved in any given period. Is there also a component that would be market sensitive, if you will, or correlated to AUM levels? If so, are you able to help us quantify that just in the context of a volatile market environment?
Yeah. Thanks, Kevin. You know, we took probably, pre-COVID, you know, depending upon where you wanna start it, but probably CAD 20 million-ish or more out of our SG&A line, right? We went into that downturn, you know, probably leaner than a lot of other folks. We maintained our headcount through COVID. Our core SG&A has been flat through that period of time. You know, the ability to have a strong balance sheet right now and producing a fair amount of cash flow would leave us a little bit, I'd say a little bit more comfortable that we can ride through this without having to do something that others might have to.
I'd say in the near term, you know, in a tight labor market, we're investment professionals and pretty much all professional SAF right now is tight. We'd rather be a little bit more thoughtful about that. Having said that, to your question, if we're sitting here a year from now and we take another leg down, all of us in the industry are gonna have to look through where we can find efficiencies. But we won't give guidance at this point about what that would look like from an AUM level and related to SG&A.
It's safe to say that, you know, if we were to be sustained in this, we would do the right thing as we always have in terms of taking out SG&A where we need to to match up with the decline in the economics on the revenue side.
Okay. Okay, fair enough. Maybe staying in the same vein, you know, inflationary pressure on wages has obviously been a by-product of a tight labor market. You head into year-end here, you know, how are you thinking about the influence of wage pressures on your ability to manage expenses as we go into 2023?
Yeah. We're in our budgeting and planning processes right now, so we're looking at that, in terms of, you know, where competitive compensation needs to be on key levels. Also back to the first question, we'll flesh out in our budgeting process where we've seen efficiencies from technology and other things that may play into that SG&A question as well. Too early to tell. We'll give expense guidance in January for the year as we always do. Obviously that process is ongoing right now. You're right, it's a tight labor market, and we're obviously cognizant of that and make sure we wanna keep our best talent.
Okay. All right, thanks. That's it for me. I'll pass the line.
Thank you. Our next question on the line comes from Tom MacKinnon from BMO Capital Markets.
Yeah, thanks. Good morning, everyone. Just a shout-out to Adrian. Best of luck to you as you move on to your next career change here. All the best. Question with respect to management and advisory fees. They seem to be a little bit lower than at least we were looking for, certainly lower than the levels in the first and the second quarter. You know, we're actually quarter-over-quarter down more than the average assets were down quarter-over-quarter. Was there anything in that management fee line that was unusual, and how should we be looking at that as a percentage of AUM going forward?
Hey, I'll take that. Actually, let me give it to Adrian, and maybe I can swing back around to that, and maybe Jenny and I can touch on it as well.
Yeah, for sure. Thanks, Tom, for the well wishes. First of all, appreciate that. You're one of the individuals that I think I have known for over 20 years based on a shared past that we won't go into on the call, but I appreciate your kind words. On the revenue rate, you are correct. What is influencing the revenue rate this quarter is actually not management fees. Just keep in mind that the absorption in the funds are netted against management fees to come up with that revenue in the basis point calculation that you've done there. Q2, there was actually a reversal that reduced our absorption. Q2 2022 was actually abnormally low for absorption. In the quarter, it's kind of ticked back up.
Management fee rates, excluding absorption, have remained relatively flat. If you include absorption, sometimes there's a bit of noise quarter to quarter.
Okay, that's great. Just a follow-up question with respect to the SIB. I think in your press release, it said that there was a comment saying that you might offer it at a premium to the current market price. I think when you did your last SIB, the range actually started below the market price and then went up to above the market price. Is there anything different in this one, or is it kind of similar to the same SIB that you did that September 2020? Just wondering if what your thinking was on that commentary about being at a premium to the current market price. Is that just the top end of the range or even the bottom end of the range starting at a current premium?
Yeah. Tom, it's Kevin. Maybe I'll ask Adrian or Jenny to follow if they want. You know, it's gonna be very similar. We're obviously gonna offer premium. We need to see, you know, where shares settle out and where the circular will be. Pricing hasn't been determined yet, but you shouldn't think of it as any different in terms of there will be a fair premium that's offered out there.
Okay, thanks for that.
Thank you. Again, for any questions on the line, that's zero then one on your touch tone phone. Our next question comes from Graham Ryding from TD Securities.
Hi, good morning. Maybe I'll start with just SG&A quickly. Was it entirely related to performance-based comp, the reduction in your guidance this year? Is that just a reflection of the lower sales, or is there anything else driving performance-based comp?
Yeah, it's a couple things, Graham. It's Kevin. One is, it is primarily sales. Even though we're net positive, we're way off from where last year's gross sales were, we're past. We're still outperforming the industry by a fair bit, but that's a large number on that. Second, as a company, we're running where we, you know, where we had planned probably, which is, you know. I'd say we're running a little bit differently than last year given the market headwinds. Think about SAF and executive comp maybe looking different. Third, you know, we had planned to do some corporate development this year and other things which, as I said earlier in my comments, right, it's just hard to execute things right now. Some of those expenses won't materialize.
Our core SG&A is kind of running flat for now. You're right, most of it is related to obviously if the sales tap turns back on miraculously in Q4, that number may change, but we're comfortable at CAD 190 right now.
Okay. Understood. Judy, just maybe a little bit of color on that Primerica channel, because I know you've launched these new funds specifically for them, sort of the sales that you're getting from that channel, is it a mix now between like A-class, traditional A-class funds and the new funds that you've launched for them? Or are the sales primarily going into their sort of the new funds that you've launched for them?
We are seeing just net new money going into the new funds. That's the structure of the PD platform. That is what is available to the Primerica reps. I think, you know, the 19 new funds seem to be offering a nice sort of suite of offerings for the advisors. As I mentioned, I think, you know, we don't comment specifically on the flows, but we're very encouraged by current trends.
Commenting on that, Graham, is that there will be some existing accounts that have automatic plans, et cetera, that may go into our older funds there. As Judy's point, anything new clients through Primerica, new investments will go into that new platform. The performance on that platform, again, it's only three months in, has actually been quite strong. You know, the combination of those two probably sets us up pretty well.
Okay. Understood. Have you seen any difference in the sort of net flows rate from Primerica, you know, before the DSC versus after the DSC?
No. To be honest, no, not particularly. It's sort of the nature of the beast of that channel overall and the MFDA channel generally. They tend to be consistent acquirers into the market. They don't react the way the IIROC channel tends to. It's been, again, encouraging consistent pattern.
Graham, that's in the backdrop of this market volatility. It's really hard for us to actually see what it could be, right, when you look at that. Say the fact that we're pretty pleased with our partner there on how they're performing, how they transition this, with what we're seeing, you know, in this backdrop. It's pretty encouraging because, again, there's some of it is clouded obviously because of this market volatility.
Yeah, that's totally fair. I could see how that would be difficult. My last question would just be, you know, can you remind us, Kevin, you know, what are the parameters that you need to check when you're sort of screening for potential deals here on the private capital side? In addition, what are you potentially interested in that would be outside the private capital area?
Yeah, no, you know, Ash Lawrence onboarded earlier in the year from Brookfield. He has done an amazing job of getting himself up to speed with a lot of help from a lot of folks in the firm. You know, it's not very different than, you know, what we've said over the last couple of years. We have three ways we earn money in the alts business, in the private capital business, I should say, which is really about, you know, management fees if we partner with someone on a structure or where we own a piece of them. The second is, you know, where we would put our capital out to support them in a fund, so in a seed capital. We earn that as an investor. Then third is carried interest rates.
We put that stack together, and we think about earning 8%-10% on that. That's one way to think of it. We also think about our cost of capital and where we would have to put money back to work on that cash flow to find that attractive. You know, I think there are going to be great opportunities in that space. Think about those in two ways, what we'd earn in that platform, 8%-10%, and think about our cost of capital trying to earn that. Outside of alternatives, there's not much we need to do. I mean, we were just on the pre-call looking at performance across a varied set of things and had a conversation with one of our fund managers this morning.
There's just not a lot that we need that we don't have. Having said that, there may be tuck-in things on our core business that others may not. There's specialty things we may wanna build out that are more extensions of things, but there's not anything that I would say would be significant spend on the existing business that we'd have to do.
Okay. That's helpful. Thank you.