AMG

Business Context and Reporting Period

Company: Affiliated Managers Group, Inc. (AMG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: AMG is an asset management company with equity investments in a diverse group of mid-sized investment management firms (Affiliates). Operations are conducted through three principal distribution channels: Mutual Fund, Institutional, and High Net Worth. As of September 30, 2007, Affiliates managed approximately $276.8 billion in assets under management (AUM).

Key Financial Metrics

Note: Debt figures exclude mandatory convertible securities and junior convertible trust preferred securities, which management does not consider debt for leverage ratio purposes. Leverage ratio was 1.3:1 as of September 30, 2007.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 23% ($65.2 million) for the three months and 17% ($145.3 million) for the nine months ended September 30, 2007, compared to the same periods in 2006. This was driven by a 32% increase in average AUM for the quarter and 29% for the year-to-date, primarily due to positive investment performance and net client cash flows.
• Net Income: Net income rose 29% ($9.4 million) for the quarter and 18% ($18.8 million) for the nine months. Growth was fueled by higher revenue and increased income from equity method investments (up 43% and 41% respectively).
• Operating Expenses: Total operating expenses increased 22% for the quarter and 17% for the nine months. Compensation and related expenses rose 22% and 21% respectively, largely due to revenue-sharing arrangements with Affiliates and the inclusion of the Chicago Equity Partners investment acquired in late 2006.
• Segment Performance: The Institutional channel saw the strongest revenue growth (35% for the quarter, 26% for nine months), followed by Mutual Fund (15% and 12%) and High Net Worth (12% and 8%).

Guidance, Outlook, and Risks

Management Commentary & Outlook: Management attributes growth to internal expansion, positive market performance, and strategic acquisitions. The company utilizes a "Cash Net Income" non-GAAP measure, which increased 21% for the quarter and 15% for the nine months, to assess operating performance excluding non-cash intangible amortization and deferred taxes.

Recent Transactions & Future Events:

• Acquisitions: Announced definitive agreement to acquire ~70% of Cooke & Bieler ($9B AUM) and an interest in ValueAct Capital ($6B AUM).
• Debt Management: Announced intent to call $300 million of floating rate senior convertible securities in February 2008; expects substantial conversion to equity. Increased senior revolving credit facility capacity to $750 million in October 2007.
• Capital Markets: Issued $500 million of junior convertible trust preferred securities in October 2007; used proceeds for debt repayment and a prepaid forward purchase agreement for stock repurchases.

Risks & Contingencies:

• Market Sensitivity: Performance is directly tied to global financial markets; declines in equity markets could reduce advisory fees and AUM.
• Acquisition Integration: Success depends on finding and integrating new firms on favorable terms.
• Capital Requirements: Potential need to raise capital for new investments or to fund mandatory purchases of Affiliate equity interests (estimated potential obligation of $1.55 billion if all triggering events occurred).

Investor Verification Checklist

• Convertible Securities Conversion: Verify the extent to which the $300 million floating rate senior convertible securities convert to equity in February 2008 versus being repaid in cash, as this impacts dilution and debt levels.
• Acquisition Closing: Monitor the closing status and integration progress of the Cooke & Bieler and ValueAct Capital transactions.
• Equity Method Investments: Review the performance of equity-method Affiliates (not consolidated in revenue) which contributed significantly to income growth but are excluded from top-line revenue figures.
• Stock Repurchases: Track ongoing share repurchase activity, including the use of proceeds from the October 2007 preferred securities issuance.
• Intangible Amortization: Assess the impact of non-cash intangible amortization ($23.8 million for nine months) on reported Net Income versus Cash Net Income.