CI Financial Corp

TSX:CIX

Earnings Call Transcript 2021-Q2

[Operator]

Good morning, ladies and gentlemen. At this time, I would like to welcome everyone to the CI Financial 2021 Second Quarter Results Webcast. [Operator Instructions]Please take note of the cautionary language regarding forward-looking statements and non-IFRS measures on the second page of the presentation.I would now like to turn the call over to Mr. Kurt MacAlpine, CEO of CI Financial. Mr. MacAlpine, you may begin.

[Kurt MacAlpine, CEO & Director]

Good morning, everyone, and welcome to CI Financial's Second quarter earnings call. Joining me on today's call is our new CFO, Amit Muni, who officially started on June 1st.During the call, we will cover the following topics. A discussion of the highlights of the quarter, a review of our financial performance during the quarter, an update on the execution of select items of our corporate strategy, then we will take your questions.Q2 was a record quarter for CI. Growing contributions from Wealth Management, a return to net inflows in Asset Management and strong operational discipline, helped drive a number of record metrics, including record adjusted EPS of $0.75 per share.Building on continued M&A success and strong organic growth, our Wealth Management assets surpassed our assets under management for the first time in the firm's history. This is an important milestone as it positions CI as a much more balanced and diverse company.We continue to take a dynamic approach to capital allocation. During the quarter, we spent $132 million to repurchase 6 million shares. We also took advantage of attractive -- the attractive U.S. environment to lock in low cost, long term capital by raising USD 900 million in what was the largest ever 30-year bond offering by an asset manager globally. The Board also declared an $0.18 per share dividend consistent with prior quarters.Asset Management net sales turned positive for the first time in nearly 4 years, led by the strongest Canadian retail results in nearly 6 years. This turnaround in net flows can be directly attributed to the strategic changes we made to our business.In Wealth Management, we continue to generate strong organic growth with net flows of $4 billion in the first half of 2021 across our global platform. While we don't plan to disclose Wealth Management flows on a regular basis, I wanted to provide some insight into the strong organic growth in that part of our business.Since we've entered the U.S. RIA marketplace, we've been the clear market leader in M&A, but more importantly, where we are really standing out is with the quality of firms that have selected CI to be their strategic partner. This is reflected in the robust net flows that we've experienced post closing of our acquisitions.On the M&A front, strategic momentum continued in the second quarter. In Q2, we closed 5 U.S. acquisitions, adding $50 billion of client assets, more than doubling the size of our U.S. platform. We announced RIA acquisitions of Philadelphia area based Radnor in just this morning, Columbus, Ohio based BRR, both of which should close this quarter and be very valuable additions to our Wealth Management platform.In Canada, Assante ranked highest in overall investor satisfaction among full-service investment firms in the J.D. Power study. We take considerable pride in being recognized for the high level of service Assante provided clients during such a disruptive year.Now Amit will review the financial results for the quarter.

[Amit Muni, Executive VP & CFO]

Thank you, Kurt, and good morning, everyone. Turning to Slide 4. Starting with the chart on the left, our global assets under management increased to $304 billion at the end of June. Our Asset Management business AUM increased 4%. Our Canadian Wealth Management assets increased 7%, and our U.S. Wealth Management assets increased 16% before taking into account the $50 billion from acquisitions during the quarter. These increases were from a combination of strong markets and positive flows.These top line operating results translated into revenues increasing to $653 million, adjusted EBITDA reaching a record $242 million and adjusted net income of $153 million or $0.75 per share for the quarter.Turning to the next slide, we can take a deeper dive into revenue and expense changes. Total adjusted revenues increased by $33 million as compared to the first quarter. Management fees, which are driven by our Asset Management business increased by $16 million due to a combination of positive market movement and positive net inflows.Wealth Management fees increased by $26 million, primarily due to the acquisitions during the quarter. Other income declined $10 million. In the first quarter, we recognized higher seasonal income from our Australian business.On the chart on the right, you can see the change in our adjusted expenses. On a comparative basis, before additional SG&A expenses from our acquisitions this quarter, total expenses increased approximately 2%. SG&A increased $5 million, primarily due to the full quarter effect of compensation changes made during the first quarter, additional fund operating costs from higher average AUM and expenses related to the launch of our crypto EPS.Interest expense increased $3 million due to the additional capital we raised in June, partially offset by lower amortization of previous debt transaction costs. Dealer costs declined due to lower levels of spending and other expenses declined due to higher seasonal expenses incurred during the first quarter. We had $19 million of additional SG&A expenses from acquisitions this quarter. We remain disciplined on cost, balanced with investing in the right areas to support our strategic initiatives.On the next slide, we can review our capital priorities. We generated strong free cash flows of $164 million for the quarter. We deployed a $132 million for buybacks and $37 million for dividends. Our operating model allows us the benefit of generating strong cash flows, which we were able to both invest back into our business to support our strategic initiatives as well as returning excess capital to shareholders through dividends and buybacks.On the next slide, we can review our debt statistics. In June, we added additional capital to support our strategic initiatives around M&A with a USD 900 million of 30-year debt offering. As Kurt mentioned earlier, this was the largest amount raised in the Asset Management space, and we believe this response from the fixed income market supports investors' positive views on our strategy.Importantly, there is no change to our credit ratings or outlook from the rating agencies. As of June, we had approximately $3.4 billion of debt outstanding on a gross basis or $2.5 billion on a net basis, and our net leverage is 2.5x based on our annualized second quarter results. Thank you.Let me now turn the call back to Kurt to give you an update on the progress we've made on our strategic priorities.

[Kurt MacAlpine, CEO & Director]

Thank you, Amit. This slide provides a recap of our corporate strategic priorities. I'm going to highlight the early impact associated with the modernization of our Canadian Asset Management business and how we are expanding Wealth Management and globalizing our company through our U.S. expansion strategy.Starting with Asset Management. As I highlighted earlier, Asset Management net sales of $356 million in the second quarter marked the first positive net sales quarter in nearly 4 years. Canadian retail net sales of $530 million represented the best quarter for Canadian retail net sales in nearly 6 years.The progress we have made modernizing our Asset Management business, since embarking on our new corporate strategy has had an undeniable impact on our flows. Today, our Asset Management business looks fundamentally different than it did a year ago.We've made a series of structural, strategic and tactical changes to our product development process, and we're well positioned to win in high growth categories, including liquid alternatives, thematic strategies, cryptocurrencies and ETFs. Those strategies contributed $844 million to net sales in Q2 and have added more than $2 billion of new sales through the first half of the year.As we've discussed at length in recent quarters, we completely transformed our sales and marketing process, establishing a strong foundation powered by data and predictive analytics, provided us with the information we needed to overhaul our approach to distribution and marketing. We are now able to serve clients in a highly customized way, leveraging qualitative and quantitative insights, which are driving both improved gross sales productivity and better asset retention.Just this past month, we completed the rebranding of the Signature, Cambridge, Sentry and Lawrence Park products and now every fund in our lineup carries the CI name. This move reflects last year's integration of our investment boutiques into one CI Global Asset Management team and significantly simplifies our product offering for advisers and clients, making it easier for them to do business with us.With our integrated platform in place, in June, we announced the hiring of Marc-Andre Lewis as our Head of Investment Management. With his experience at the Abu Dhabi Investment Authority and CDPQ in Quebec, he will bring global expertise and leadership and is the ideal person to drive CI's integrated investment team. We are excited to have Marc-Andre join the Toronto office on September 1st.One of the outcomes we anticipated from enhanced collaboration and improved scale as part of the integrated model was improved investment management performance. While it is impossible to precisely isolate and attribute improved investment performance to any specific factor, since integrating the investment platforms, we have generated improved relative investment performance. At June 30, 72% of our mutual fund assets were outperforming peer averages on a 3-year basis compared to just 37% 2 quarters ago.The third quarter is off to a positive start. We ended the month of July with record total assets of $309 billion. We also generated $295 million in net inflows in our Asset Management business, continuing the positive trend from Q2.Moving on to Wealth Management. We've made significant progress in our U.S. Wealth Management business. During the second quarter, we more than doubled the size of our U.S. business with the closing of 5 acquisitions, adding more than USD 40 billion of client assets and bringing our total platform to just under USD 70 billion at the end of Q2.The leading RIAs continue to choose CI as their preferred strategic partner, and our acquisition pipeline remains robust as CI's value proposition continues to resonate with the highest quality and fastest-growing firms. RIA owners are attracted to our deep expertise in asset and Wealth Management, our client first approach, long term commitment to the sector and our strategic vision to build the leading private wealth platform in the U.S.Additionally, potential tax changes have further increased the number of quality entrepreneurs, exploring strategic alternatives for their businesses.While overshadowed by our M&A activity, client retention remains near 100%, and organic growth and margins remain robust, in most cases, exceeding our pre-acquisition expectations. We are extremely focused on integration and building the leading high net worth platform in the U.S.But as we've discussed before, these are all high-quality, well-run firms with strong organic growth and margin profiles. As human capital businesses, where the employees are the primary asset and the client experience is crucial to the long term success of the business, we are taking a collaborative, thoughtful and methodical approach to integration.We are initially focused on the areas where we can positively impact the business with no disruption to the velocity of the organic growth and the client experience. We have already been able to use CI's scale to facilitate some savings through vendor negotiations, and there will be more to come as contracts come up for renewal.We've created a centralized compliance function. Our marketing team has started to help several of our affiliates enhance their branding and add digital marketing and lead generation capabilities. We have stood up a robust cross-border offering, and we are unifying our CRM system. It's still very early days, and there is a lot of work to be done to achieve our aspirations, but it's an important aspect of the strategy that we're laser-focused on.As you can see from this slide, we've completely transformed our Wealth Management business over the past year. Including assets from announced but not yet closed transactions, our Wealth Management assets have more than tripled since the fourth quarter of 2019 to $170 billion, up from $51 billion. For the first time in our history, we are now larger in Wealth Management than Asset Management.While M&A has been a core driver of growth, we have also seen strong organic growth. Collectively, our Wealth Management business has generated $4 billion of net flows year-to-date. Importantly, the AUM growth has come with strong economics as we've seen significant EBITDA emergence given the attractive profile of the RIAs we've acquired.On an annualized basis, we generated $108 million of Wealth Management segment EBITDA in the first half of the year with a number of larger transactions only having contributed for 2 months or less. Including the Radnor and BRR acquisitions expected to close in late Q3, run rate adjusted EBITDA for the Wealth Management segment is up to $196 million. This is $179 million increase since we initiated the strategy.Consistent with prior quarters, I want to be clear that this is not a forecast. This number only includes our current interest in these companies and does not include any growth or market assumptions. It also excludes any strategic or cost synergies, Asset Management product sales, business model improvements or planned but unannounced transactions. We are confident that meaningful synergy opportunities exist, but we prefer not to give guidance.That concludes our prepared remarks, and we would now like to open up the call for your questions.

[Operator]

[Operator Instructions] We'll take our first question from Geoff Kwan with RBC Capital Markets.

[Geoffrey Kwan, Analyst]

First question was on the merging of the Asset Management team. I just wanted to understand, is this essentially complete or essentially, how much more do you have to go? And then also from a financial impact, I know you kind of talked about the SG&A numbers but what's been kind of the net-net financial impact from that? Have you seen some cost savings out of that or how would you quantify it?

[Kurt MacAlpine, CEO & Director]

Sure. So let me take them in order, Geoff. So first, in terms of the changes that we're making to the platform, I would say that all of the structural changes that we've intended to make have now been made. We've rebranded the overall investment business. We've integrated the various teams last September. We've renamed the funds to better align with the new platform. And as I mentioned, we appointed a new -- our first ever actually head of investment management, who will be joining us to oversee that group starting on September 1.So, from a structural basis, the changes have been made, clearly, there's a lot of underlying work continuing to take place as we strengthen and improve and continue to build on a lot of the capabilities that we now have within that integrated investment business.As it relates to the expenses, this was done specifically to improve and strengthen and provide more consistency to our investment performance. We have realized some of cost savings associated with the integration of our platform. Some of that has come from some modest restructuring, others have come from the internalization of third-party mandates, where we now have robust internal capabilities to be running those assets.But the primary reason for the integration of the platform was to modernize it, simplify it from a client perspective and to deliver better, more consistent investment results and early days, signs are pointing to us achieving all 3 of those so far.

[Geoffrey Kwan, Analyst]

And just my second question was on the net sales side on the Canadian. So if we define the Canadian retail net sales, including your closed products. If we go into the assumption that the industry isn't going to go into net redemptions in the near term, how would you describe your level of confidence that you've returned back to positive net sales territory?And then similarly, I'm just trying to understand, like if we exclude, for example, like ETFs and any kind of products that were launched in the past year, would the retail net sales have remained positive in the past quarter or 2? I'm just trying to understand the net sales performance of the underlying kind of the signature, Cambridge harbor brand, et cetera.

[Kurt MacAlpine, CEO & Director]

Sure. So I'll take them also in order as well. So I don't like to give forward-looking guidance. So I think what we try to do is to focus ourselves on the things that we can control. So when we started down this strategic journey of modernizing our Asset Management business, we noticed a number of opportunities or changes that we felt we needed to make to position ourselves better to drive consistent, strong industry-leading organic growth. So that's stuff that we've talked about around completely revamping and restructuring our approach to product development, which you've seen, a lot of our success coming from strategies we didn't have before.Building that industry's first or Canada's first predictive analytic database really allowed us to completely revamp our client coverage, our sales process and change how we market and engage with clients on a digital basis. And then the changes that we've made to our investment management function really have allowed us to, as I mentioned, drive better investment performance, create a much cleaner, smoother platform for clients to better understand how to access us. So I think all of those changes have allowed us to move from meaningful redemptions a few quarters ago into positive sales territory.So when I'm typically looking at, Geoff, I could guess and tell you, I think, that these changes are going to last forever. I would say that what I'm really focused on is I feel like the work that we've done on the platform, it's just a different business today and I feel very good about the quality of the strategy and the progress that the team has made really integrating and transforming that business. So I feel like we're very well positioned to generate success. I just don't like to give specific guidance as it relates to estimates of go-forward flows.I think the July number is important. We're a month into the quarter. That positive momentum has continued, and you saw the numbers associated with that. As it relates to flows, I mean, this is always going to be a particular balance. At a very macro level, when you think about it from an industry perspective, for the most part, the products that people are buying today aren't the same products they bought 10 or 15 years ago, and that's not going to be the case 10 years from now as well. So really, the onus is on us to make sure that we're constantly evolving our investment platform.We have great teams. We have great capabilities. We have great people in our system -- in our network and our investment teams and it's really important for us to make sure that we are bringing the best of those capabilities to market. So it's certainly a balance. But I think we are playing a little bit of catch-up on the product development process front and I think we went from probably lagging a little bit to, I think, certainly leading when you look at the magnitude of the changes we've made, which is positively being reflected in our flows.

[Operator]

Our next question comes from Robert Lee with KBW.

[Robert Andrew Lee, MD & Analyst]

Maybe, Kurt, just wanted to start with -- on the Wealth Management side. I mean you mentioned on the call in the slide deck that the early stages of putting together the platform and compliance tech marketing have started. But can you maybe -- if it's possible to kind of dive into is a bit more like -- I know there's more left to go. But any update in terms of time line of kind of what's next for that integration process over the next 12 months, how we should be anticipating that to move forward?

[Kurt MacAlpine, CEO & Director]

Yes. I think the priorities that I've mentioned, Robert, are the ones that we're focused on right now, as you can imagine, integrating and unifying a CRM system. So we are moving our CRM to sales force, which will allow us to do the digital marketing, lead generation, that predictive analytics at scale across all of our different RIAs. So those 2 things are running in parallel right now.We are rebranding or co-branding, I should say is a better term, a lot of our different platforms. So 2 are completed so far. 3 are in process right now, which is a pretty meaningful lift, if you think about revamping websites, adjusting collateral, changing go-to-market strategies. So that's queued up.And the other area that we've been spending a lot of time on is operations and technology. And one of the things we've been working through as a leadership committee for our U.S. wealth businesses, what do we want that client experience to look like? And how do we use our collective scale and capabilities to deliver an industry-leading client experience, not only in person but also digitally, and that's been a major priority for us as well. so, we're certainly very early stages of that one, but making some very nice progress as well.It's a delicate balance, as I mentioned in comments around, we're trying to focus on the areas of the business where we can see the greatest financial impact without compromising in any capacity, the incredible growth and momentum that we have in the firms that we've acquired, which you see through the flow numbers that we've disclosed a couple of times now.

[Robert Andrew Lee, MD & Analyst]

And then maybe as a follow-up. You mentioned in the deck and remarks about kind of the robust M&A pipeline, but just maybe I'd try to put some more color on that. 4.5 months left in the year, pretty broad-based expectations, taxes going up next year. I mean is it reasonable that we -- that you think that we should be -- you think you may see this kind of next couple of months is kind of a year-end kind of flurry push of more transactions to get closed by year-end in the U.S. and then maybe it kind of slows down in the first part of next year? Is that a reasonable way to think of it?

[Kurt MacAlpine, CEO & Director]

Yes, it could be a little bit. It's -- when you look at -- I think people are concerned about the tax uncertainty right now. So we did see a lot of businesses come up for sale last year, leading up to the election. Given the January runoff, we saw a number of businesses come to market in Q1 and Q2. It still remained robust throughout the course of the summer. I was expecting it to taper off a little bit just as people are looking to get a close in before year-end. Obviously, as every month passes, that becomes harder and harder to do.But right now, the pipeline remains robust. We're having a lot of incredibly high-quality conversations, obviously, as evidenced by the transaction we just announced this morning, which is the leading RIA in the Columbus, Ohio market.So, I would anticipate, Rob, that the pipeline will remain robust for the foreseeable future, but I would anticipate, as people are trying to better understand and process whatever potential tax changes are coming, that may cause a little bit of a slowdown as people look for clarity.I don't think it changes the overall story, though. There is a flight to scale. People are looking what used to constitute scale in the RIA marketplace is no longer the case. And that number keeps going up. So firms are either looking to figure out how they best access that scale or looking whether it's building it on their own and making those strategic investments or looking to partner and collaborate with the broader platform. So I don't think the macro trend changes, but you might see a little bit of lumpiness in the short term as people process whatever potential tax changes might be coming and position themselves for success.

[Operator]

Our next question comes from Scott Chan with Canaccord Genuity.

[Scott Chan]

So Kurt, the $4 billion, and you kind of quantified in net sales and Wealth Management in the first half of this year, how much is related to, I guess, this side or the Canadian side relative to the U.S. side? And you kind of talked about not disclosing it too often, but is this something that we'll see every quarter from here on in?

[Kurt MacAlpine, CEO & Director]

Sure. So we've experienced strong organic growth in both our Canadian and our U.S. businesses. So both are growing organically. It's not a tale of one business versus the other.And then on the disclosure, as I mentioned, I'll do it periodically. So I don't anticipate it being every quarter but I did provide everyone with organic growth that we realized in 2020, a couple of quarters ago and prodding a midyear update now. So I'm trying to figure out the appropriate cadence for sharing that flow number, but I'm not anticipating it making it a quarterly occurrence like in Asset Management. Just because the Wealth Management segment or the businesses operate differently, very few firms disclose that number at all. So just want to think through the most effective, consistent way for us to do it. So, for now, the plan is to do it periodically to provide you with an update on how the business is performing, but we'll -- at some point, we will get into a consistent rhythm for how that gets disclosed.

[Scott Chan]

And on the free cash flow, up 5% quarter-over-quarter and this quarter was used to pay your dividend, and you continue to do aggressive share buybacks with NCIB. How should we think about that perhaps in the back half of the year? And I guess it's tied to your valuation, but just trying to get a sense on if you're going to remain very active on the back half of this year.

[Kurt MacAlpine, CEO & Director]

As it relates to M&A or the buyback?

[Scott Chan]

The buybacks or...

[Kurt MacAlpine, CEO & Director]

The buyback is informed based upon the multiple of which we're trading at. So we've seen the share price improve, but our multiple hasn't expanded at all. And I think one of the things that we see when we look at our share price today, I mean, we're a much stronger, much more stable global diversified business than we were a year ago, and our multiple doesn't look any different. so, we see a huge disconnect internally between the inherent value of our company and what our stock is trading at and we're very comfortable taking advantage of that disconnect for as long as it exists.So, I would anticipate if the multiple remains consistent with where it is today, you'll see us continue to be an active buyer of our shares for the foreseeable future. I don't think that disconnect will remain intact forever, just given the velocity of changes we're making to Wealth Management. I shared this in the prepared remarks. But we were making $17 million from Wealth Management 2 years ago, today, our run rate is $196 million. I think everyone would say that wealth managers trade at a better multiple than asset managers if you're looking at industry comps, and our multiple hasn't changed at all. So for us, it's really taking advantage of that disconnect and deploying capital in, we think, a very effective way.

[Scott Chan]

And just one last question. I noticed you took some legal and restructuring charges. I think it was over $17 million in the quarter. I'm assuming it's mostly the latter. With all the announcements that you made post quarter, should we expect any restructuring charges in Q3 or is it complete?

[Kurt MacAlpine, CEO & Director]

Well, we're continuing to look at our business, and we're reevaluating everything that we're doing. So as we make enhancements, modifications, adjustments that sometimes comes with restructuring charges. So I wouldn't anticipate anything major coming in the third quarter, but we're going to be constantly looking to improve strength and automate, enhance our business overall. Sometimes, as Amit mentioned, that will involve us making strategic investments, strategic hires, other times, that will result in some restructuring.

[Operator]

Our next question comes from Tom Mackinnon with BMO Capital.

[Tom MacKinnon, MD & Analyst]

Just a question with respect to becoming a more balanced company here with Wealth Management assets greater than AUM. That's obviously been as a result of the U.S. RIA acquisition strategy. And is the -- are the efforts here to continue on that? Do you see this -- do you see CI down the road becoming a company that has, say, Wealth Management assets twice as much as AUM, especially given the fact that you've had success with U.S. RIA strategy. Interest rates are low, you can fund them nicely and as you mentioned, it would garnish a higher multiple for more Wealth Management assets. So maybe you can talk about sort of how far you are through the strategy with that backdrop? And just a little bit more color on what some of the tax changes that are helping to increase activity in that regard.

[Kurt MacAlpine, CEO & Director]

Sure. So when I look at the business mix, Tom, that's really been a function of the opportunities that have been presented to us. So everything that we do is tied to one or more of the 3 strategic priorities that we've outlined. So we've experienced incredible momentum really from a dead standstill when we entered the U.S. marketplace last year.I think what's really happened, it's been a, a solid or strong market for M&A. I think CI has really stood out amongst our peers in M&A because of the quality of firms that we've been able to attract to our platform. So and this has really created a momentum for us that when we started down this path, I wouldn't have anticipated that we would have been able to achieve the scale that we've achieved, the assets that we've achieved and the quality of the earnings that we've achieved. But really, it's been a function of just being able to attract high-quality firms and then other high-quality firms want to come work with. So it's been this incredible momentum based event.The way I think about M&A, which is true for Asset Management and Wealth Management is, we're looking for essentially high-quality, well-run firms with great people that want to stay in and continue to work with us and operate these businesses. So that's kind of what we're looking for. So we don't have an M&A target. I never have a geography target. I have a quality target. We're looking to buy the best businesses with the best people that want to stay in and operate those businesses.The other thing that we're looking for businesses that we would see as non commoditizable. And it's very important to us to make sure that we're strategically deploying our capital to areas of the industry that can't be commoditized. And if you take a look at high-net-worth Wealth Management, as an example, that's an area of the marketplace that is very hard to commoditize that because of the high degree of specialization, customization, one-on-one engagements or team-based engagement that's required to service clients effectively the way that we do.So, when I look forward, I could see a scenario where our Wealth Management business continues on a current M&A trajectory. I think that will be a function of 2 things, though. One, the same quality of firms continue to come to market that we've been able to transact with over the past 18 months. And then valuations remain consistent with what we're comfortable in paying. So right now, both of those things remain intact. So I think you will see continued strong momentum in our U.S. Wealth Management business. But if either of those change, I don't feel compelled to buy anything. So we're taking a very, very disciplined approach to M&A.As it relates specifically to the tax changes that I was referring to. There are some pending potential tax changes that would impact capital gains and dividends tax for essentially entrepreneurs or individuals in the U.S., which is causing people to rethink whether it makes sense to run a business on a standalone basis or to affiliate or come work with a larger business or a larger entity.I think most of the decision to partner strategically are firms that are looking to leverage scale, be part of a broader essentially strengthen and enhance the offering they can provide to clients. But I think point in time, given these pending tax changes that could have some serious personal implications, it may be accelerating some of the conversations that would have taken place over the next 2 or 3 years and pulling them forward to 2021.

[Tom MacKinnon, MD & Analyst]

And then as a follow-up, I think you've changed a little bit of your comp structure in Asset Management to have some more variable comp. And with probably better growth in average AUM in your core assets that would have led to some higher variable SG&A costs in the quarter. I'm wondering if you might be able to help us understand what the variable component was of SG&A for the Asset Management segment in the quarter. Just to give us a feel for how to kind of model that in more normal quarters, if you will.

[Kurt MacAlpine, CEO & Director]

Sure. So why don't I tell you exactly how we're paying people on the investment side. So one of the challenges when we had the multi-boutique structure was, in addition to each of the businesses running independently, therefore, giving up the collective scale. Every boutique over the years had ended up building its own compensation model. So one of the actions that we had taken as part of the integration was we wanted to unify compensation and pay everybody on exactly the same metrics, which were 100% aligned with client outcomes and business success.So, our entire investment management organization, regardless of asset class or team or which subsector or segment that you work in, the majority of your compensation is driven by your investment performance relative to your peers and relative to your benchmark. So we've essentially shifted that focus where everyone's now paid primarily based upon the alpha that they're generating on a risk-adjusted basis relative to competitors and benchmarks.They're also paid part of their compensation on the third-party demand or viability for their strategy. So essentially, how effective are they? And how well are they collaborating with our sales and marketing teams to drive growth into their strategies overall. So we did change our compensation model. So part of the reason you've seen a slight uptick is because the variable compensation component has -- well, the metrics have changed. Our performance has improved, as I shared earlier, and therefore, the compensation is a little bit higher as well. So everyone now, as I mentioned, on our investment teams, is paid under the exact same format, which are those 2 metrics.

[Tom MacKinnon, MD & Analyst]

And is there any way you can -- like how much of the Asset Management SG&A was related to variable? How should we be thinking about that going forward? Was it outsized in the quarter? Anything you can add on that?

[Kurt MacAlpine, CEO & Director]

Amit, is there anything you wanted to add on that?

[Amit Muni, Executive VP & CFO]

Yes. So I don't think it's anything in particular. We had a little bit on some of our external PM costs because of the higher average AUM, but it wasn't an outsized driver of the SG&A expense. It was really more around the full quarter effect of compensation decisions that we had made in the first quarter. You get the full quarter effect in Q2.

[Operator]

Our next question comes from Graham Ryding with TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

In your Wealth Management division, SG&A was up notably quarter-over-quarter, but then your investment dealer fees were down. Is that just reflecting the Segall acquisition and that its sort of cost structure is a little bit more like an asset manager as opposed to a wealth manager? Or what's driving that change?

[Kurt MacAlpine, CEO & Director]

Amit, why don't you take that one?

[Amit Muni, Executive VP & CFO]

Sure. So if you're looking -- some of it is just the lower level of spending. On the dealer side, just on a standalone basis, we did have some reclassifications if you're looking at it from Q1 to Q2. As the new RIAs have come in, we've taken a look at some of how the expenses are, and we've reclassified some of those expenses from dealer to SG&A to reflect more of the compensation structure, the way it works in the U.S. RIA market. But if you look at it -- looking at it, the expenses are down on a comparable basis, is really just purely a function of just lower level of spending.

[Graham Ryding, Research Analyst of Financial Services]

That helps. You obviously raised some new debt in the quarter, and it looks like you're sitting on a higher cash balance at the end of Q2, sort of relative to your historical levels. Is that cash earmarked for Wealth Management acquisitions? And then perhaps, what are you anticipating in terms of how that net debt-to-EBITDA ratio should trend for the remainder of the year?

[Kurt MacAlpine, CEO & Director]

Sure. So it's not earmarked for any specific transaction, we took advantage of the opportunity that was presented to us in the market. As Amit had mentioned earlier, we raised the $900 million of 30-year money in the largest ever Asset Management bond issuance of that duration globally. We had a 180 basis point spread. So incredibly attractive long term capital.We didn't go-to-market for a specific planned acquisition, but we do envision deploying some of that capital to acquisitions that we think will get worked through our pipeline over the foreseeable future. So we don't have kind of set timing yet for when and how much of that will ultimately be deployed. But I do anticipate using some of it over the coming months.

[Graham Ryding, Research Analyst of Financial Services]

Okay. And you've got some contingent consideration sitting on your balance sheet. I think $359 million is considered current. How should we anticipate you funding that any equity potentially? Or is it going to be sort of cash and debt on that?

[Amit Muni, Executive VP & CFO]

Yes. That will be mostly -- that will be through our cash flow from operations to fund that.

[Operator]

Thank our next question comes from Gary Ho with Desjardins Capital Markets.

[Gary Ho, Analyst]

Just, Kurt, just going back to the U.S. RIA integration with initial focus on appliance technology, marketing and branding. So one item not listed in there is the cross-sell opportunity? Is that a TBD item or any pushback from advisers given their fiduciary duties? Any color on that would be great.

[Kurt MacAlpine, CEO & Director]

Yes, absolutely. I mean look, there's no pushback from advisers. We're focused on from an integration standpoint, the highest impact opportunities that benefit our clients overall. So we've been working very closely with our partner firms on identifying what those priorities look like, what we should ultimately prioritize that allow us to deliver the best client experience possible while continuing to enhance and strengthen our platform.I look at investment management product cross-sells is just another opportunity to drive enhanced margin across the business, the same as the unification of our CRM system, the same as streamlining our branding and getting the respective scale that we're getting. Same thing as streamlining compliance and reducing all the different redundancies in the platform as well.I wouldn't look anything into it, Gary, aside from a sequencing standpoint. But our goal -- I mean, we're only buying fiduciary businesses. I love the fiduciary standard. I love how much that stands out relative to the suitability standard that a lot of advisers in the U.S. hold themselves accountable to. So we'll only be using our products where it makes sense for clients, and that's just a matter of timing and sequencing and seeing where those opportunities fit.I mean one of the beauties, as we've talked about on previous calls about this business relative to other segments of Wealth Management or more specifically, Canadian Wealth Management is that you can run, which we're doing a high-quality at scale RIA with margins that are just like an asset manager prior to selling any sort of products. So I think we're going to keep reaping the benefits of those scale, keeping enhancing those margins continuing to grow at incredible or very strong growth rates organically. And then where there's benefit for clients, we'll absolutely be looking to strengthen and improve their investment capabilities.

[Gary Ho, Analyst]

My second question is for, Amit, maybe just ask Graham's question another way. Just curious to hear if there's any changes in your view on leverage and comfort leverage ratio here. You mentioned 2.5x leverage at quarter end. How do you view the $568 million acquisition-related liabilities in the leverage equation? If my math is right, if I'm including that, that's -- you're above 3x here.

[Amit Muni, Executive VP & CFO]

So, I'd say overall, we're comfortable with the leverage levels that we have now. We have run some stress analysis of what the business would look like, and we're even with those. We're comfortable with the leverage levels. And I think the fact that we were able to do the large transaction back in June, it shows you that even the fixed income market is comfortable with taking on that additional amount. I do expect over time that we will continue to deleverage, but that will be balanced with the needs around our M&A strategy. So overall, I'd say, yes, we're comfortable with the leverage levels.

[Gary Ho, Analyst]

And the credit agencies, they get a little bit more plus when it's close to 3, is that the threshold to look for?

[Amit Muni, Executive VP & CFO]

Not necessarily. It's really the quality of your overall earnings, what you're using the proceeds for how your EBITDA is going to grow. So there is really no sort of bright line test.

[Kurt MacAlpine, CEO & Director]

Yes. And Gary, as Amit had mentioned, I mean, when we went back to the market, we wanted to be very conscious of our credit rating. So we were actively engaging the various rating agencies have a very strong and transparent dialogue. We've also picked up an additional rating as we've continued to expand in the U.S. marketplace.And I think the reason people were so excited are the reason we've been so successful at raising these long term bonds in the U.S. is the conviction that people have around the strategy. They like -- at least they've indicated us. They like what we're doing strategically. They love the Wealth Management business, the quality of earnings and the organic growth that we're experiencing in that segment. So I think, Amit's point it's less about just the leverage ratio and more about the quality of what you're doing and how you're deploying the capital.

[Operator]

[Operator Instructions] We'll take our next question from Nik Priebe with CIBC Capital Markets.

[Nikolaus Priebe, Research Analyst]

Just one for me. This one is a bit of a high-level question. But just wondering if there are any observations you might have on the impact that the events of the past 18 months might have had on the rate of industry fee compression in the Asset Management space. Prior to the pandemic, there was -- the concentration of inflows into lower fee funds and outflows from higher fee funds. And then post-pandemic, it seems like mutual funds have actually performed better from an asset gathering perspective relative to ETFs than I would have expected. So I was just wondering if you have any thoughts on those dynamics.

[Kurt MacAlpine, CEO & Director]

I think it's a pretty fluid market. I think if you take a step back and pull it up a few levels, the fee compression issue, while it bounces around a little bit, is actually relatively consistent over a very extended period of time. So even with the emergence of ETFs a couple of decades ago, as they've continued to take market share, the fee erosion remains relatively consistent. I think what you're seeing really is a separation between what people are willing to pay for in some instances in other areas what they're not willing to pay for.And I think what we're trying to do is to make sure that we are positioning our product lineup to benefit and call it, more of the commodity-based products like we're seeing in our crypto strategies, our gold fund and things like that, but also in the higher alpha strategies that we're seeing in our core investment management platform and so I think it's a mix of both. I wouldn't look too much into any sort of short-term deployment of capital as a structural trend at this point. But I do think it's pretty consistent what's been playing out from a fee compression standpoint across the Canadian market.One thing I did want to mention just because we've had a couple of questions just around the contingent liabilities, just to kind of weave in a couple of responses is. Part of those contingent considerations, we have a couple of puts that are put in place because of a structure that we are building in our private wealth business. So one of the things that we are doing is, so oftentimes, you see us announce transactions where we're buying 100% of that business. Essentially, sometimes that's true, but there's typically a portion of that business where people are essentially firms that are selling to us are swapping their equity or a portion of their equity for equity participation, call it, in our U.S. private Wealth Management platform. So I'll talk about that in a little bit more detail, most likely on our next earnings call. But when you're looking at the contingent liabilities, I wouldn't assume that all of that is going to be used with cash because some of that were puts that were put in place before we had this structure stood up.So essentially giving them the option in the event that the structure didn't come to fruition, that they would be able to call it sell as opposed to exchange their remaining shares. But all indications strategically that we've heard from our partner firms that have that put is that they intend to roll into this broader, call it, equity participation unit as opposed to holding stub equity or putting shares in their respective business. So I just wanted to call that out, like I wouldn't assume that all of that contingent liability is a cash obligation.

[Operator]

All right, and we will move on to our next question from Robert Lee with KBW.

[Robert Andrew Lee, MD & Analyst]

I appreciate it. I was just kind of curious to maybe drilling down a little bit into the improvement in Asset Management sales. So possibly to get a sense of by channel a little bit, how much of that maybe came from your own wealth -- Canadian Wealth Management platform versus third parties, if you're seeing any kind of changes in proprietary distribution that may be helping to drive some of the flows?

[Kurt MacAlpine, CEO & Director]

Yes, Rob, it's actually been a pretty balanced improvement. So we've seen improvement in internal channels, not from a percentage basis. The platform has grown and we've participated proportionately with that growth, but we've also seen very strong turnaround in our sales through various third-party channels, both the IIROC channel and the MFDA channel. So it's been an improvement across the board.

[Robert Andrew Lee, MD & Analyst]

And then maybe a quick follow-up on that. I mean the improvement in net flows clearly is positive. But if we think -- if we drill down deeper and think of it from a maybe a net revenue or net EBITDA contribution perspective, would it still be positive? Is it -- is there anything about the shifting mix that is maybe somewhat less profitable than legacy products? So if we think on a go-forward basis or is it pretty consistent?

[Kurt MacAlpine, CEO & Director]

So, it's certainly still profitable. I think that the fees that people are commanding on products that come to market today are different from products that came to market in the '90s or early 2000s. I mean that's a function of our industry and that's why the importance of both scale across your platform. So we started down this strategic journey. Our platform was $172 billion of assets 18 months ago were $309 billion today, and it's also a function of the operational discipline that we've taken across our entire business because we're trying to get in front of a trend that's been playing out for a couple of decades. So it's very important for us to continue to exert extreme operational discipline.I shared this on previous quarters, but in our core legacy business, essentially, the businesses that we had prior to the start of the strategic transformation, we had structurally removed about $80 million of SG&A expense through a series of different initiatives. And that's allowed us to create a lot more positive operating leverage as we continue to grow. We're not done. There's a lot more we're doing on digitization, automation, strengthening, enhancing some of our platforms. As Amit mentioned, investments in technology that will give us that increased positive operating leverage.So yes, the fees on new products, I don't think it's a CI thing. It's an industry thing or a little bit cheaper than products, like I said from before, but I do believe the investments in scale and the operational discipline and cost reduction will allow us to be just as profitable on a per dollar basis as we were before.

[Operator]

We'll take our final question from Graham Ryding with TD Securities.

[Graham Ryding, Research Analyst of Financial Services]

Yes. Kurt, I just wanted to follow-up on your comment around the contingent liability there. When you talk about some firms have swapped their equity for, I guess, a stake in your U.S. Wealth Management platform. So are these actually -- is this equity in their U.S. Wealth Management platform? Or is this equity in your CI financial shares?

[Kurt MacAlpine, CEO & Director]

So, what I was referring to specifically was equity in our U.S. Wealth Management platform. Like I said, I'll spend more time on this on the next call to provide visibility into what we're doing there, which I think is incredibly exciting and compelling. But the way to think of it strategically is, instead of keeping stub equity in their particular business, they're able to swap that stub equity in, call it, RIA, ABC, for broader participation or shares in our U.S. Wealth Management business. So instead of owning a percentage of your existing RIA, you now have broader participation in CI's entire RIA platform, which is an incredibly compelling value proposition for people that are selling to us. So they not only continue to be entrepreneurs and partners in their business, but they can also benefit from the broader success of our overall platform.And I think that, that creates perfect alignment across our overall platform. So essentially, we have people that are collectively working together to drive outsized organic growth. And then everybody who's perfectly aligned on driving synergies where they make sense across the platform because instead of just benefiting from your specific business, you're benefiting from the entire entity.So, I'll dedicate some significant time on our next earnings call to talking through it in more detail. But I just wanted to make sure that people weren't assuming that all of those contingent liabilities were cash out the door anticipated. And some of it's a put, given just the timing by which we made those earlier acquisitions and how far along that particular structure was. But we should be in a great place to talk about it in more detail next quarter.

[Graham Ryding, Research Analyst of Financial Services]

And then in terms of the economics flowing through your business today, would that just be sort of a minority interest component?

[Kurt MacAlpine, CEO & Director]

Yes. I mean we're doing minority transactions. I think you see where we have minority. When we disclose economically, we're only disclosing our share in those businesses. So that's not the total with something to be backed out. That's the amount of EBITDA that flows through to CI specifically.So, we're not anywhere near minority, just given the percentage of the transaction and the number of transactions. So we would be comfortably in the majority on each individual transaction that we're announcing and then also, in aggregate, clearly, as people are swapping equity.I'm sorry, everyone. I was going to -- I wanted to talk it through proactively, but just because of the questions as it related to the contingent, I wanted to just get in front of it a little bit. But I think it will make a lot more sense next quarter when I have a chance to just talk through the concept, what we're doing, why we've done it, the progress we've made and how I think it will really differentiate us in the marketplace relative to others.

[Operator]

Thank you. That does conclude the question-and-answer session. I would like to turn the call back over to Kurt MacAlpine for any additional or closing remarks.

[Kurt MacAlpine, CEO & Director]

I just want to take a moment to thank everyone for their interest in CI, and I look forward to chatting with you all next quarter.

[Operator]

And that concludes today's presentation. Thank you for your participation. You may now disconnect.