Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) filed this Form 10-K for the fiscal year ended December 31, 2016. AMG invests in boutique asset-management firms and provides strategic, distribution, marketing, product-development and operational support while preserving Affiliate management autonomy. Assets under management were $688.7 billion at year-end, or approximately $727 billion pro forma for subsequently closed or lag-accounted investments, across more than 550 products and three principal channels: Institutional, Mutual Fund and High Net Worth.
Key Financial Metrics
| Metric | 2016 | Change vs. 2015 |
|---|---|---|
| Assets under management | $688.7 billion | Up 13% |
| Average assets under management | $655.6 billion | Up 5% |
| Revenue | $2,194.6 million | Down 12% |
| Operating income | $705.3 million | Down from $835.0 million |
| Net income | $739.0 million | Down 11% |
| Net income attributable to controlling interest | $472.8 million | Down 7% |
| Diluted EPS | $8.57 | Down from $9.17 |
| Adjusted EBITDA attributable to controlling interest | $945.5 million | Up less than 1% |
| Economic net income attributable to controlling interest | $703.6 million | Up 2% |
| Economic EPS | $12.84 | Up from $12.47 |
| Operating cash flow | $1,027.6 million | Down from $1,208.4 million |
| Cash and cash equivalents | $430.8 million | Down from $563.8 million |
Approximate margins were 32.1% for operating income and 21.5% for net income attributable to controlling interest, based on reported revenue. The filing emphasizes non-GAAP Adjusted EBITDA and Economic net income because they include AMG’s share of equity-method Affiliates and exclude certain acquisition-related non-cash items.
Revenue and Operating Trends
- Aggregate revenue, including equity-method Affiliate revenue, increased approximately 4%, supported by 27% growth in equity-method revenue to $2,101.7 million.
- Reported consolidated revenue declined 12% to $2,194.6 million as consolidated Affiliate average assets under management fell 6% and fee rates declined.
- Institutional revenue declined 10% to $878.5 million; Mutual Fund revenue declined 16% to $1,036.0 million; High Net Worth revenue increased 5% to $280.1 million.
- Net client cash flows were positive by $7.4 billion. Market changes added $41.1 billion, new investments added $37.3 billion, and foreign exchange reduced assets under management by $7.1 billion.
- Operating expenses declined 10% to $1,489.3 million, primarily from lower compensation, distribution and selling expenses.
Balance Sheet, Debt and Liquidity
- Total assets were $8.749 billion, including $2.628 billion of goodwill, $1.497 billion of acquired client relationships and $3.368 billion of equity-method Affiliate investments.
- Debt carrying values included $870.0 million of senior bank debt, $945.1 million of senior notes and $307.5 million of convertible securities. The filing also describes total outstanding debt of approximately $2.3 billion.
- The credit facilities mature in September 2020. At year-end, AMG had approximately $965 million of remaining revolver capacity, a 1.7x bank leverage ratio and an 11.8x interest-coverage ratio, compared with covenants of 3.25x and 3.00x, respectively.
- Financing cash flow was positive $200.9 million, including $440.3 million of proceeds from settling 2.7 million shares under a forward equity sale.
- Redeemable non-controlling interests were $673.5 million. AMG repurchased $69.1 million of Affiliate equity during 2016 and expected approximately $100 million of such repurchases in 2017.
Material Changes Versus the Prior Comparable Period
- Year-end assets under management increased $77.4 billion, primarily from market appreciation, new equity-method investments and positive net client flows.
- Reported revenue and GAAP earnings declined despite higher aggregate assets under management because growth shifted toward equity-method Affiliates and consolidated Affiliates experienced outflows, particularly in higher-fee Mutual Fund and Institutional products.
- Net income attributable to AMG declined partly because 2015 included a $44.7 million non-cash gain from revaluing contingent payment obligations, compared with a $2.8 million gain in 2016.
- Equity-method intangible amortization increased $24.9 million, primarily from the full-year impact of 2015 investments and partial-year impact of 2016 investments.
- Cash used for Affiliate investments increased substantially to $1.361 billion from $297.7 million, reflecting significant 2016 minority investments.
- AMG completed minority investments in Systematica, Baring Private Equity Asia, Capula, CapeView, Partner Fund Management and Winton Group. It completed a minority investment in Forbes Family Trust on January 5, 2017.
- AMG adopted several accounting updates in 2016 and revised prior-period financial statements for an immaterial error involving deferred tax benefits on Affiliate equity transactions. The revision reduced previously reported 2015 controlling-interest net income by $6.5 million and 2014 net income by $18.2 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management did not provide a formal numerical earnings or revenue outlook in the filing. Management expressed confidence in continued demand for alternative and multi-asset strategies, positive opportunities to invest in boutique firms and the sufficiency of operating cash flow, revolver borrowings and the equity distribution program to meet foreseeable needs.
- Key business risks include market declines, changes in investor preferences toward passive products, client withdrawals, fee-rate compression, performance-fee volatility and loss of key Affiliate personnel.
- AMG is highly dependent on the investment performance, reputation, succession planning and operational execution of its Affiliates, over which it generally has limited day-to-day control.
- The company is subject to extensive global regulation, including potential changes affecting derivatives, fund liquidity, retirement advice, cross-border distribution and the UK’s exit from the European Union.
- AMG had up to $396.9 million of contingent purchase payments through 2019; it expected $10.3 million of payments, including $3.0 million in 2017. Unfunded co-investment commitments were $92.2 million.
- Third Avenue Management recorded a $15.0 million reserve related to proposed resolution of claims involving the Focused Credit Fund. The reserve was funded by Third Avenue and did not affect AMG’s controlling-interest net income.
- No material adverse legal proceedings were identified by management. Annual impairment testing identified no goodwill or client-relationship impairments, although the filing notes potential future impairment risk at certain Affiliates.
- A 1% change in assets under management was estimated to affect annualized asset-based fees by approximately $19.0 million for consolidated Affiliates and $17.3 million for equity-method Affiliates. A 1% increase in interest rates was estimated to increase variable-rate debt expense by $8.7 million.
- AMG initiated a quarterly cash dividend program after year-end, declaring an initial dividend of $0.20 per share in January 2017.
Most Important Facts for Investors to Verify
- Whether positive market performance and new investments offset continued outflows from consolidated Institutional and Mutual Fund Affiliates.
- The sustainability and fee economics of the rapidly expanding equity-method Affiliate portfolio.
- Debt repayment, interest-rate exposure, credit-facility covenant compliance and the cash requirements of Affiliate equity put rights.
- Actual timing and amounts of contingent acquisition payments, co-investment commitments and Affiliate equity repurchases.
- Potential impairment of goodwill, acquired client relationships and equity-method investments if market values, assets under management or client retention deteriorate.
- The effects of regulatory changes on renewal commissions, retirement-product distribution, fund liquidity requirements and cross-border operations.
- The effect of the 2017 dividend, share repurchases and potential use of the $500 million equity distribution program on capital allocation and dilution.