Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) is an asset management company that holds equity investments in a diverse group of boutique investment management firms ("Affiliates"). The company operates through three principal distribution channels: Mutual Fund, Institutional, and High Net Worth. This summary covers the fiscal year ended December 31, 2008.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Revenue | $1,158.2 million | $1,369.9 million |
| Net Income | $23.2 million | $182.0 million |
| EBITDA | $335.3 million | $418.2 million |
| Cash Flow from Operations | $255.7 million | $326.7 million |
| Assets Under Management (AUM) | $170.1 billion | $274.8 billion |
| Total Assets | $3,246.4 million | $3,395.7 million |
| Senior Debt Outstanding | $233.5 million | $519.5 million |
| Cash and Cash Equivalents | $396.4 million | $223.0 million |
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 15% to $1,158.2 million, primarily driven by a 13% decrease in average assets under management due to negative investment performance and net client outflows.
- Net Income Collapse: Net income plummeted 87% to $23.2 million. This was largely caused by a $150.0 million non-cash impairment charge on equity method investments (ValueAct and BlueMountain) and a significant drop in revenue.
- Segment Performance:
- Mutual Fund: Revenue down 18%; Net Income down 37%.
- Institutional: Revenue down 13%; Net Income turned negative at $(21.0) million.
- High Net Worth: Revenue down 14%; Net Income turned negative at $(1.4) million.
- Debt Reduction: Senior bank debt outstanding decreased significantly from $519.5 million to $233.5 million as the company repaid borrowings.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items: The company recognized a $150.0 million non-cash charge in Q4 2008 to reduce the carrying value of certain equity method investments to fair value. Additionally, a $43.3 million gain was realized on the repurchase of junior convertible trust preferred securities.
- Outlook: Management expects to repurchase approximately $50 million of Affiliate equity in 2009. The company anticipates needing to raise additional capital for future investments and potential contingent purchase payments (up to $232 million through 2012).
- Risks:
- Market Volatility: Results are highly sensitive to equity market performance and AUM levels.
- Regulatory Changes: Recent global financial developments may lead to more stringent regulations.
- Key Personnel: The business relies heavily on key investment managers; their departure could materially impact results.
- Accounting Changes: Adoption of new accounting standards (FSP APB 14-1) in 2009 is expected to increase interest expense by approximately $14 million.
Investor Verification Checklist
- Impairment Charge: Verify the details and recoverability of the $150 million non-cash impairment on equity method investments.
- Debt Covenants: Confirm continued compliance with the credit facility covenants (max 3.5x debt-to-EBITDA; min 3.0x EBITDA-to-interest), especially given the volatility in EBITDA.
- Contingent Liabilities: Assess the potential cash outflow for the $232 million in contingent purchase payments and the $806.5 million potential obligation to purchase remaining Affiliate equity interests.
- Forward Equity Sale: Monitor the execution of the forward equity sale agreement (up to $200 million) and its impact on share count and dilution.
- Accounting Impact: Review the impact of FSP APB 14-1 adoption on 2009 interest expense and net income.