AMG

Business Context and Reporting Period

Affiliated Managers Group, Inc. (AMG) is an asset management company with equity investments in a diverse group of mid-sized investment management firms (Affiliates). The company operates through three principal distribution channels: Mutual Fund, Institutional, and High Net Worth. As of September 30, 2005, AMG's Affiliates managed approximately $175.3 billion in assets. This report covers the quarterly period ended September 30, 2005.

Key Financial Metrics

Note: Debt figures exclude mandatory convertible securities, which management does not consider debt for leverage ratio purposes.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 41% ($68.3 million) for the quarter and 35% ($168.0 million) for the nine months compared to the prior year periods. This growth was driven primarily by a 61% increase in average assets under management (AUM) for the quarter and 49% for the nine months.
• Acquisition Impact: The significant increase in AUM and revenue was principally due to the July 2005 acquisition of First Asset Management Inc. (renamed AMG Canada Corp), which added six Canadian asset management firms managing $24.7 billion. Other 2005 investments included Fremont Investment Advisors.
• Profitability: Net Income increased 70% for the quarter and 49% for the nine months. Operating expenses rose 51% (quarter) and 46% (nine months), largely due to revenue-sharing arrangements where compensation scales with revenue growth.
• Segment Performance:
  • Mutual Fund: Revenue up 66% (quarter) and 52% (nine months); AUM up 70% (quarter).
  • Institutional: Revenue up 38% (quarter) and 43% (nine months); AUM up 75% (quarter).
  • High Net Worth: Revenue remained flat for the quarter and declined 9% for the nine months, primarily due to net client cash outflows at Rorer Asset Management.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects principal uses of cash to include investments in new/existing Affiliates, debt service, and share repurchases. The company anticipates closing an amended and restated credit facility by December 31, 2005, to increase borrowing capacity at favorable rates.
• Debt Structure: AMG maintains a senior revolving credit facility with a $405 million capacity (expandable to $450 million). Outstanding debt includes Senior Notes due 2006 ($65.8 million), Zero Coupon Convertible Notes ($124.4 million), and Floating Rate Convertible Securities ($300.0 million).
• Contingencies: Affiliate operating agreements provide managers the conditional right to require AMG to purchase their retained equity interests. If all such purchases were triggered as of September 30, 2005, the aggregate payment would be approximately $935 million. Additionally, AMG may be required to make additional payments of approximately $174 million if specified financial targets are achieved at certain Affiliates.
• Risks: Performance is directly affected by global financial market conditions. A decline in equity markets could decrease advisory fees and operating results. The company also faces risks related to the availability of capital for new investments and the integration of acquired firms.
• Accounting Changes: AMG amended its definition of the Mutual Fund distribution channel to include foreign-registered products following the First Asset acquisition, resulting in reclassifications of prior period results.

Investor Verification Checklist

• Acquisition Integration: Verify the financial contribution and integration progress of the First Asset acquisition, which drove the majority of AUM growth.
• Debt Covenants: Confirm compliance with financial covenants (leverage, interest coverage) on the senior revolving credit facility, especially given the increased debt load from the acquisition.
• Equity Purchase Obligations: Assess the potential cash impact of the $935 million conditional obligation to purchase Affiliate equity interests and the company's liquidity strategy to fund these if triggered.
• Revenue Quality: Analyze the sustainability of revenue growth in the High Net Worth segment, which declined year-to-date due to outflows at Rorer Asset Management.
• Non-GAAP Measures: Review the reconciliation of Net Income to "Cash Net Income" and EBITDA to understand management's view of operating performance excluding non-cash amortization and deferred taxes.