Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) is a partner to independent investment management firms. Its Affiliates manage approximately $668.0 billion of assets as of March 31, 2023, across alternatives, global and U.S. equities, multi-asset, fixed income, and wealth management strategies. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Consolidated revenue | $517.4 million | $607.3 million | Down 15% |
| Net income | $188.5 million | $218.7 million | Down 14% |
| Net income attributable to controlling interest | $134.5 million | $146.0 million | Down 8% |
| Basic EPS | $3.74 | $3.68 | Up 2% |
| Diluted EPS | $3.47 | $3.44 | Up 1% |
| Adjusted EBITDA attributable to controlling interest | $216.8 million | $240.0 million | Down 10% |
| Economic net income attributable to controlling interest | $158.1 million | $178.5 million | Down 11% |
| Economic EPS | $4.18 | $4.36 | Down 4% |
| Operating cash flow | $234.8 million | $145.0 million | Up 62% |
Net income margin was approximately 36.4% in Q1 2023 versus 36.0% in Q1 2022. Net income attributable to controlling interest represented approximately 26.0% of revenue versus 24.0% in the prior-year quarter. These comparisons are affected by the mix of consolidated and equity-method Affiliates and investment gains.
- Aggregate fees increased 13% to $1.505 billion, driven primarily by a 27% increase in performance-based fees, principally in liquid alternatives. Asset-based fees declined 14%.
- Average assets under management declined 16% to $660.4 billion, while period-end assets under management declined 14% to $668.0 billion. Net client cash flows were negative $3.2 billion, with inflows in alternatives offset by outflows in equity strategies.
- Equity method income increased 21% to $58.6 million, supported by higher performance-based fees, while equity method revenue increased 37% to $987.7 million.
- Consolidated expenses declined 4% to $380.5 million. Compensation expense fell 13%, while selling, general and administrative expense increased 9%, primarily from higher professional fees.
- Investment and other income increased to $38.0 million from $13.6 million, primarily due to higher realized and unrealized gains on marketable securities.
- Cash and cash equivalents were $832.8 million at March 31, 2023, compared with $429.2 million at December 31, 2022. Investing cash flow was $288.0 million, primarily reflecting securities maturities and sales.
- Total debt was $2.536 billion at March 31, 2023, including $350.0 million of senior bank debt, $1.099 billion of senior notes, $765.9 million of junior subordinated notes, and $341.7 million of junior convertible securities. No revolver borrowings were outstanding.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue decreased $89.9 million, primarily because consolidated Affiliate average assets under management declined 16% and asset-based fees fell $90.7 million.
- Performance-based fees increased substantially, but much of the increase occurred at Affiliates in which AMG has a lower economic interest; consequently, aggregate fees rose while controlling-interest Adjusted EBITDA declined.
- Other expenses increased by $8.8 million, primarily because of higher values assigned to contingent payment and Affiliate equity purchase obligations.
- Interest expense increased 5%, principally because of higher interest rates on the term loan. Q1 2022 had also included a $16.5 million repurchase of junior convertible securities; no such repurchases occurred in Q1 2023.
- Investment cash flow shifted from a $157.4 million use in Q1 2022 to a $288.0 million source in Q1 2023, primarily due to marketable-security maturities and sales.
- AMG did not repurchase common stock during Q1 2023. Its December 2022 accelerated share repurchase agreement, funded with an upfront payment of $225.0 million, was expected to settle in the second or third quarter of 2023.
- The company updated the definitions of Adjusted EBITDA and Economic net income to exclude unrealized gains and losses on strategic investments and include only realized economic gains and losses. Prior periods were recast for comparability.
Outlook, Commentary, Risks, and Unusual Items
Management expects continued demand for alternatives, private markets, liquid alternatives, sustainable strategies, wealth management, and Asia-focused offerings. It also expects independent investment firms to continue seeking partnership solutions and identifies opportunities to invest in additional Affiliates. The filing does not provide a specific earnings or revenue guidance range.
- Management expects approximately $120 million of net Affiliate equity purchases during the remainder of 2023.
- Management states that cash on hand, operating cash flow, securities-sale proceeds, and available revolver capacity should be sufficient for foreseeable cash needs. The company also expects to use cash for Affiliate investments, share repurchases, dividends, debt repayment, Affiliate distributions, taxes, and working capital.
- Unfunded commitments to co-invest in Affiliate-sponsored products were $154.9 million at March 31, 2023.
- Deferred payment obligations totaled $65.0 million, and the fair value of contingent payment obligations was $22.9 million. Maximum contingent payments related to certain consolidated Affiliates could reach $110.0 million.
- AMG was contingently liable for up to $153.5 million related to specified financial targets at certain equity-method Affiliates; management expected approximately $13 million of payments.
- Key business risks include market declines, investment underperformance, client outflows, reduced performance fees, volatility in securities valuations, foreign-exchange movements, interest-rate increases, Affiliate and partner liquidity demands, acquisition and integration risks, regulatory requirements, and legal or other contingencies.
- Management reported no significant violations of applicable regulatory capital requirements, no material changes in market-risk disclosures, and effective disclosure controls as of March 31, 2023.
Most Important Facts for Investors to Verify
- Whether the decline in average assets under management and equity-strategy outflows persists, particularly given the company’s reliance on asset-based fees.
- The sustainability and economic attribution of elevated performance-based fees, including AMG’s ownership interests in the Affiliates generating those fees.
- The final share count and cash impact of the accelerated share repurchase agreement expected to settle in Q2 or Q3 2023.
- The timing and amount of the anticipated $120 million of Affiliate equity purchases and related put, call, and redemption obligations.
- Refinancing or repayment plans for the $400 million of senior notes maturing in 2024 and the $350 million maturing in 2025.
- The effect of higher interest rates on the term loan and other variable-rate obligations.
- Potential cash requirements from the $154.9 million of unfunded commitments and contingent payment obligations, including the maximum exposure of up to $153.5 million at equity-method Affiliates.
- The impact of marketable-security valuation changes, including the decline in EQT shares held by AMG from $405.1 million at December 31, 2022 to $141.5 million at March 31, 2023.