Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2023. AMG partners with independent investment management firms globally and had approximately $673.9 billion of aggregate assets under management (AUM) at quarter-end.
- Quarter-end AUM declined 2% from June 30, 2022, while average AUM declined 8% year over year.
- Alternatives generated net client inflows during the quarter, while global and U.S. equity strategies experienced outflows.
Financial Performance and Key Metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Consolidated revenue | $512.5 million | $604.1 million | Down 15% |
| Net income | $187.4 million | $174.0 million | Up 8% |
| Net income attributable to controlling interest | $125.3 million | $109.4 million | Up 15% |
| Diluted EPS | $3.25 | $2.68 | Up 21% |
| Adjusted EBITDA attributable to controlling interest | $214.3 million | $214.9 million | Down less than 1% |
| Economic net income attributable to controlling interest | $167.3 million | $161.6 million | Up 4% |
Net income margin was approximately 36.6% in Q2 2023 versus 28.8% in Q2 2022. Net income attributable to controlling interest represented approximately 24.4% of consolidated revenue versus 18.1% in the prior-year quarter. Consolidated revenue declined primarily because of lower asset-based and performance-based fees, but higher equity method income and investment gains more than offset the revenue decline.
| Metric | Six months 2023 | Six months 2022 | Change |
|---|---|---|---|
| Consolidated revenue | $1,029.9 million | $1,211.4 million | Down 15% |
| Net income | $375.9 million | $392.6 million | Down 4% |
| Net income attributable to controlling interest | $259.8 million | $255.4 million | Up 2% |
| Diluted EPS | $6.74 | $6.10 | Up 10% |
| Adjusted EBITDA attributable to controlling interest | $431.1 million | $454.9 million | Down 5% |
| Economic net income attributable to controlling interest | $325.4 million | $340.1 million | Down 4% |
Cash Flow, Liquidity, Debt, and Balance Sheet
- Operating cash flow was $325.5 million for the first six months of 2023, compared with $506.5 million in the prior-year period.
- Investing cash flow was an inflow of $291.1 million, primarily reflecting $510.1 million of maturities and sales of investment securities.
- Financing cash flow was an outflow of $265.2 million, including $156.4 million of distributions to non-controlling interests and $44.3 million of net common-stock repurchases.
- Cash and cash equivalents were $785.5 million at June 30, 2023, compared with $429.2 million at December 31, 2022.
- Total debt was $2.536 billion, consisting of senior bank debt, senior notes, junior subordinated notes, and junior convertible securities.
- The $1.25 billion revolving credit facility had no outstanding borrowings. The $350 million term loan was outstanding, with an interest rate based on term SOFR plus a 0.85% margin at quarter-end.
- Nearer-term senior notes include $400 million due in 2024 and $350 million due in 2025. Management stated that cash, operating cash flow, securities proceeds, and available borrowing capacity should fund foreseeable requirements.
- AMG reported investment-grade ratings of A3 from Moody’s and BBB+ from S&P Global Ratings.
Material Changes Versus the Prior Comparable Period
- Average consolidated Affiliate AUM fell 6% in Q2 and 11% for the six-month period, contributing to lower consolidated revenue.
- Aggregate fees decreased 15% in Q2 to $1.003 billion. For the first six months, aggregate fees were essentially flat at $2.508 billion because higher performance-based fees largely offset lower asset-based fees.
- Equity method income increased 83% in Q2 to $55.8 million and 45% for the six-month period to $114.5 million, helped by performance-based fees and lower equity method intangible amortization.
- Investment and other income improved to $26.5 million in Q2 from an expense of $22.0 million, and to $64.3 million for the six-month period from an expense of $8.4 million. The improvement primarily reflected gains on marketable securities and other investments.
- Interest expense increased 13% in Q2 and 9% year to date, primarily due to higher term-loan interest rates.
- Other expenses increased because of changes in the values of contingent payment obligations, including a $17.7 million Q2 increase and a $28.5 million six-month increase.
- AMG repurchased 713,656 common shares during the six months at an average price of $125.13. The company completed a $225 million accelerated share repurchase agreement, receiving a total of 1.5 million shares at an average price of $147.29.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects continued demand for alternatives, private markets, liquid alternatives, sustainable strategies, wealth management, and Asia-focused offerings, while acknowledging continued pressure on equity-strategy flows.
- No formal earnings guidance was provided in the filing text.
- In July 2023, AMG agreed to sell a consolidated Affiliate for approximately $294 million of gross cash proceeds. Closing is expected in the second half of 2023, subject to customary conditions; the gain could not yet be estimated.
- AMG entered into an agreement to acquire a minority interest in Forbion Group Holding B.V., a European venture capital and growth-equity firm. Closing was expected in the second half of 2023.
- Unfunded commitments to Affiliate-sponsored investment products were $154.3 million. The company also had contingent payment obligations with a fair value of $23.4 million and maximum potential contingent payments of up to $110 million under certain arrangements.
- AMG was contingently liable for up to $153.5 million related to financial targets at certain equity-method Affiliates; management expected approximately $13 million of payments.
- The business is exposed to market performance, AUM levels, client flows, foreign currency movements, investment performance, interest rates, valuation assumptions, regulatory requirements, and the results of Affiliates accounted for under the equity method.
- Management stated that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the planned Affiliate sale closes and the ultimate proceeds, tax effects, and gain recognized.
- The timing and terms of the Forbion investment and any effect on future earnings or cash usage.
- Trends in average AUM, net client flows, performance-based fees, and equity-strategy outflows.
- Cash generation relative to distributions, expected approximately $100 million of Affiliate-equity purchases during the remainder of 2023, share repurchases, and debt maturities.
- Interest-rate sensitivity of the term loan and refinancing plans for the 2024 and 2025 senior notes.
- The valuation and settlement timing of contingent payment obligations, Affiliate equity put rights, and other commitments.
- The non-GAAP definitions and reconciliations for Adjusted EBITDA and Economic net income, which were updated in 2023 and may affect period-to-period comparability.