Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) is a partner to independent investment management firms. Its Affiliates manage approximately $635.8 billion of assets under management as of September 30, 2023. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods.
During the period, AMG completed a minority investment in Forbion Group Holding B.V. and sold its consolidated Affiliate, Veritable, LP. In October 2023, after quarter-end, AMG completed a minority investment in Ara Partners Group, LLC.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Consolidated revenue | $525.2 million | $578.6 million | $1,555.2 million | $1,789.9 million |
| Net income | $286.0 million | $164.3 million | $661.9 million | $557.0 million |
| Net income attributable to controlling interest | $217.0 million | $112.6 million | $476.8 million | $368.0 million |
| Diluted EPS | $5.48 | $2.80 | $12.28 | $8.83 |
| Adjusted EBITDA attributable to controlling interest | $208.4 million | $221.2 million | $639.6 million | $676.1 million |
| Economic net income attributable to controlling interest | $149.5 million | $167.0 million | $474.9 million | $507.1 million |
| Operating cash flow | Not separately provided | Not separately provided | $619.4 million | $797.4 million |
Net income margins were approximately 54.5% in Q3 2023 and 42.6% for the first nine months, compared with approximately 28.4% and 31.1%, respectively, in the prior-year periods. These margins were materially increased by the $133.1 million pre-tax gain on the Veritable transaction and other investment gains.
- Aggregate fees declined 14% to $997.5 million in Q3 and 5% to $3,505.7 million for the nine months. Q3 performance-based fees fell 8% and asset-based fees fell 6%.
- Consolidated revenue declined 9% in Q3 and 13% year to date, primarily from lower performance-based fees, lower average assets under management, and the impact of the BPEA transaction.
- Equity method income increased 25% year to date to $154.3 million, despite a 11% Q3 decline to $39.8 million.
- Interest expense increased 10% in Q3 and 9% year to date, primarily due to higher rates on the term loan.
- Cash and cash equivalents were $999.2 million at September 30, 2023, compared with $429.2 million at December 31, 2022.
- Total debt was $2,536.9 million, including $349.9 million of senior bank debt, $1,096.4 million of senior notes, $751.8 million of junior subordinated notes, and $338.8 million of junior convertible securities.
- AMG had no borrowings outstanding under its $1.25 billion revolving credit facility. The $350 million term loan matures in October 2026; the revolver matures in October 2027.
- Shareholders’ equity was $3,495.0 million at September 30, 2023. AMG repurchased 2.0 million common shares for $213.6 million net during the first nine months and had 5.0 million shares available for repurchase under its programs as of the October 16, 2023 authorization.
Material Changes Versus the Prior Comparable Period
- Controlling-interest net income increased 93% in Q3 and 30% year to date, but Adjusted EBITDA declined 6% and 5%, respectively, and Economic net income declined 10% and 6%, respectively. The divergence primarily reflects the nonrecurring Veritable gain.
- The Veritable transaction generated $287.4 million of cash proceeds net of transaction costs, a $133.1 million pre-tax gain, and $225.1 million of after-tax net cash proceeds. Veritable’s assets under management declined by approximately $17.8 billion in the quarter as a result of the sale.
- Average assets under management declined 2% in Q3 and 9% year to date. Period-end assets under management declined 1% from September 30, 2022 and 2% from December 31, 2022.
- Client cash flows were negative $9.4 billion in Q3 and negative $23.1 billion year to date. Alternatives generated positive net flows, while global and U.S. equity strategies experienced outflows.
- Operating cash flow decreased to $619.4 million from $797.4 million, while investing cash flow improved to an inflow of $477.9 million, mainly due to Veritable proceeds and investment-security maturities and sales.
- Compensation expense declined 23% in Q3 and 17% year to date in line with lower revenue. Selling, general and administrative expense was broadly stable.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide a specific quantitative earnings or revenue forecast in the filing. Management expects continued investment in new and existing Affiliates, private markets, liquid alternatives, sustainable strategies, wealth management, Asia, marketable securities, and share repurchases. Management stated that cash on hand, operating cash flow, investment-security sales, and available revolver capacity should be sufficient for foreseeable liquidity needs.
- Management cited continuing demand for alternative strategies but noted persistent outflows in equity strategies, particularly global equities.
- AMG expected net purchases of approximately $30 million of Affiliate equity during the remainder of 2023.
- Unfunded commitments to co-invest in Affiliate-sponsored products were $151.7 million.
- AMG had contingent payment obligations with a fair value of $18.2 million and maximum potential contingent payments of up to $110.0 million, primarily potentially payable in 2024 and 2025.
- AMG had $57.3 million of deferred payments related to equity-method Affiliates payable in 2024 and contingent obligations of up to $198.1 million tied to specified Affiliate financial targets; management expected approximately $13 million of those payments.
- Equity-method investments had a carrying value and maximum exposure to loss of $2,034.9 million. Judgments concerning Affiliate consolidation, equity-method accounting, valuation, goodwill, acquired client relationships, and contingent obligations may materially affect reported results.
- Goodwill and indefinite-lived acquired client relationships were not impaired in the annual assessment completed during the period.
- The filing identifies investment-market volatility, changes in asset levels and client flows, performance-based fee variability, foreign exchange movements, interest rates, liquidity, regulatory requirements, legal proceedings, and the performance of Affiliates as material risk factors. Actual results may differ materially from forward-looking statements.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the $133.1 million Veritable transaction gain and other investment gains; Adjusted EBITDA and Economic net income both declined year over year.
- Assess the sustainability of asset levels, client flows, performance-based fees, and the concentration of growth in alternatives and private markets.
- Review the February 2024 maturity of $400 million of senior notes and AMG’s refinancing or repayment plans.
- Evaluate leverage, interest-rate exposure, available revolver capacity, and the extent to which cash belongs to controlling versus non-controlling interests.
- Monitor contingent and deferred Affiliate-related payments, redeemable non-controlling interests of $432.3 million, and $151.7 million of unfunded investment commitments.
- Confirm the financial impact and timing of the Forbion and post-quarter-end Ara Partners investments, including provisional valuation assumptions and one-quarter reporting lags.