AFFILIATED MANAGERS GROUP, INC. quarterly report, Q1 FY2022

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Business Context and Reporting Period

Affiliated Managers Group, Inc. is a global partner to independent active investment management firms. The company reported unaudited results for the three months ended March 31, 2022, compared with the three months ended March 31, 2021. Assets under management were approximately $776.7 billion at quarter-end, up 5% year over year.

Financial Performance and Position

  • Revenue: Consolidated revenue was $607.3 million, up 9% from $559.1 million, driven by higher asset-based fees and consolidated Affiliate average assets under management.
  • Profit: Net income was $218.7 million, up 2%. Net income attributable to controlling interests was $146.0 million, down 3% from $149.9 million. Diluted EPS was $3.44 versus $3.41; basic EPS was $3.68 versus $3.52.
  • Margins: Net income represented approximately 36% of consolidated revenue, while controlling-interest net income represented approximately 24%. Comparability is affected by the company’s consolidation of certain Affiliates and allocation to non-controlling interests.
  • Non-GAAP measures: Adjusted EBITDA attributable to controlling interests increased 3% to $255.3 million. Economic net income increased 3% to $190.0 million, and economic EPS increased to $4.65 from $4.28.
  • Cash flow: Operating cash flow was $145.0 million, compared with $188.9 million. Investing cash flow used $157.4 million, primarily for $147.8 million of Affiliate investments. Financing cash flow used $388.9 million, including $201.3 million of share repurchases and $122.5 million of distributions to non-controlling interests.
  • Liquidity: Cash and cash equivalents were $501.0 million at March 31, 2022, down from $908.5 million at December 31, 2021. The company had no revolver borrowings and stated that cash, operating cash flow, and available revolver capacity should cover foreseeable needs.
  • Debt: Debt was $2.578 billion, up from $2.490 billion at year-end, primarily reflecting the accounting adoption that increased the carrying value of junior convertible securities. The company had $1.25 billion of revolver capacity, with no outstanding revolver borrowings, and a $350 million term loan.
  • Other metrics: Aggregate fees declined 6% to $1.331 billion, as a 13% decline in performance-based fees more than offset a 7% increase in asset-based fees. Average assets under management increased 7% to $787.3 billion.

Material Changes Versus the Prior Comparable Period

  • Consolidated revenue increased 9%, but equity method revenue declined 15% and equity method income declined 6%, primarily because of lower performance-based fees, particularly in liquid alternatives.
  • Investment and other income decreased 58% to $13.6 million, mainly because of lower net unrealized gains on other investments.
  • Total consolidated expenses increased 4% to $395.1 million. Selling, general and administrative expenses increased 13%, and intangible amortization and impairments increased 68% to $12.6 million. Other expenses declined 59% because of changes in contingent payment and Affiliate equity purchase obligations.
  • Cash declined substantially as the company funded Affiliate investments, share repurchases, non-controlling-interest distributions, debt-security repurchases, and other financing uses.
  • The company repurchased 1.3 million common shares for $184.6 million on the balance sheet, or $201.3 million on the cash flow statement, at an average price of $144.42 per share. Approximately 4.2 million shares remained authorized for repurchase at March 31, 2022.
  • Effective January 1, 2022, ASU 2020-06 required the junior convertible securities to be accounted for wholly as debt. Adoption increased reported debt by $101.5 million and beginning retained earnings by $4.5 million, while reducing additional paid-in capital by $80.6 million and deferred tax liabilities by $25.4 million.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

  • Outlook: The filing does not provide formal quarterly or annual earnings guidance. Management cited continued demand in private markets, liquid alternatives, Asia, wealth management, and ESG, while noting outflows in certain equity strategies and continued demand for passive products.
  • BPEA transaction: In March 2022, AMG agreed to sell its Baring Private Equity Asia interest to EQT. Expected consideration is $240.0 million in cash, 28.68 million EQT ordinary shares, and retained participation in future carry. Closing was expected in the fourth quarter of 2022, subject to customary conditions. Management expected approximately 40% of gross proceeds to fund taxes, transaction expenses, and debt repayment, with the balance allocated to growth investments and share repurchases over time.
  • Transaction risks: Closing is not assured, and the value of the EQT shares may fluctuate because of EQT’s share price, foreign exchange rates, market conditions, and other factors. The gain is expected to be taxable at closing.
  • Commitments: Unfunded commitments to co-invest in Affiliate-sponsored investment products were $152.8 million. Deferred payment obligations totaled $265.0 million, and contingent payment obligations had a $31.4 million fair value, with maximum contingent payments of up to $110.0 million under specified conditions.
  • Affiliate-related exposures: The company had additional contingent payment obligations of up to $147.5 million related to Affiliates accounted for under the equity method, although management expected approximately $13 million to become payable. Affiliate equity interests had a current redemption value of $686.4 million.
  • Market and operating risks: Results are sensitive to market performance, asset flows, investment performance fees, foreign currency movements, valuation changes, interest rates, and the performance of independent Affiliates. The filing states there were no material changes to previously disclosed market-risk information.
  • Controls: Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material change in internal control over financial reporting during the quarter.

Facts Investors Should Verify

  • Whether the BPEA sale closes on the expected timeline and the ultimate value of the EQT share consideration.
  • The sustainability of asset-based fee growth given negative net client cash flows of $2.2 billion and market-related AUM declines of $31.2 billion during the quarter.
  • The recovery or further decline of performance-based fees, which fell 13% year over year.
  • Cash generation after planned Affiliate equity purchases, expected net Affiliate equity purchases of approximately $100 million for the remainder of 2022, share repurchases, distributions, and debt obligations.
  • The effect of the ASU 2020-06 adoption and the higher reported junior convertible securities balance on leverage, diluted EPS, and future capital allocation.
  • The timing and amount of deferred, contingent, and redeemable Affiliate-related obligations, including the $152.8 million of unfunded co-investment commitments.