Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) is a global partner to independent active investment management firms. The unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. AMG reported approximately $690.9 billion of aggregate assets under management at June 30, 2022, down 9% from December 31, 2021 and June 30, 2021.
Key Financial Metrics
| Metric | Q2 2022 | Q2 2021 | Six Months 2022 | Six Months 2021 |
|---|---|---|---|---|
| Consolidated revenue | $604.1 million | $586.3 million | $1,211.4 million | $1,145.4 million |
| Net income | $174.0 million | $184.2 million | $392.6 million | $398.2 million |
| Net income attributable to controlling interest | $109.4 million | $109.0 million | $255.4 million | $258.9 million |
| Diluted EPS | $2.68 | $2.55 | $6.10 | $5.96 |
| Adjusted EBITDA attributable to controlling interest | $213.4 million | $227.3 million | $468.7 million | $474.1 million |
| Economic net income attributable to controlling interest | $160.5 million | $171.2 million | $350.5 million | $356.0 million |
| Operating cash flow | Not separately provided | Not separately provided | $506.5 million | $550.9 million |
Q2 net income attributable to the controlling interest margin was approximately 18.1% of consolidated revenue, compared with 18.6% in Q2 2021. The six-month margin was approximately 21.1%, compared with 22.6% in the prior-year period. Adjusted EBITDA margin on consolidated revenue was approximately 35.3% in Q2 2022 and 38.8% in the first six months of 2022.
- Aggregate fees declined 1% to $1,179.6 million in Q2 and 3% to $2,510.0 million year to date. Performance-based fees declined, particularly in liquid alternatives, while asset-based fees increased year to date.
- Consolidated revenue increased 3% in Q2 and 6% year to date, driven primarily by higher performance-based fees in illiquid alternatives and, year to date, higher consolidated Affiliate average assets under management.
- Equity method income declined 19% to $30.5 million in Q2 and 11% to $79.1 million year to date, reflecting lower equity method revenue and higher or continuing intangible amortization effects.
- Investment and other income changed from income of $21.1 million in Q2 2021 to expense of $22.0 million in Q2 2022, and from income of $53.5 million to expense of $8.4 million year to date. The changes primarily reflected lower unrealized gains on other investments and marketable securities.
- Cash and cash equivalents were $606.8 million at June 30, 2022, compared with $908.5 million at December 31, 2021. Total debt was $2.534 billion, compared with $2.490 billion at year-end.
- Operating cash flow of $506.5 million was offset by $172.0 million of investing outflows and $616.2 million of financing outflows, resulting in a $301.7 million decrease in cash during the first six months.
- At June 30, 2022, AMG had no borrowings under its $1.25 billion revolving credit facility. The $350.0 million term loan and revolver mature in October 2026.
Material Changes Versus the Prior Comparable Period
- Revenue growth was partly offset by increased compensation, selling and administrative costs, and intangible amortization. Total consolidated expenses increased 3% in Q2 and 4% year to date.
- Compensation and related expenses increased 8% in Q2 and 6% year to date, while selling, general and administrative expenses increased 5% and 9%, respectively.
- Intangible amortization and impairments increased 40% in Q2 and 52% year to date, primarily due to investments in new Affiliates.
- Lower investment gains and reduced equity method income pressured earnings, but lower income tax expense and lower other expenses substantially offset those effects.
- AMG repurchased 0.6 million shares in Q2 and 1.9 million shares year to date for $80.0 million and $264.6 million, respectively. Approximately 3.5 million shares remained available under repurchase authorizations at June 30, 2022.
- AMG repurchased $60.9 million of junior convertible securities during the first six months, compared with $22.8 million in the prior-year period.
- Foreign currency translation produced an $85.2 million after-tax comprehensive loss year to date, compared with a $31.3 million gain in 2021.
- Effective January 1, 2022, AMG adopted ASU 2020-06. Junior convertible securities are now accounted for wholly as debt, increasing reported debt by $101.5 million at adoption and changing diluted EPS calculations.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management did not provide explicit quarterly or full-year earnings guidance in the filing.
- Management expects current cash, operating cash flow, and potential revolver borrowings to fund foreseeable uses, including Affiliate investments, share repurchases, debt repayment, distributions, dividends, and working capital.
- AMG expects approximately $50 million of net Affiliate equity purchases during the remainder of 2022.
- AMG expects the sale of its Baring Private Equity Asia interest to EQT to close in the fourth quarter of 2022, subject to customary conditions. Consideration is expected to include $240.0 million of cash and 28.68 million EQT shares. Management expects approximately 40% of gross proceeds to fund taxes, transaction expenses, and debt repayment, with the remainder allocated between growth investments and share repurchases over time.
- At June 30, 2022, unfunded commitments to co-invest in Affiliate-sponsored products were $146.1 million. Deferred payment obligations totaled $265.0 million, and contingent payment obligations had a fair value of $14.2 million, with maximum potential contingent payments of up to $110.0 million in certain arrangements.
- AMG was contingently liable for up to $147.5 million related to financial targets at certain equity method Affiliates; management expected payments of approximately $13 million.
- Investment results and assets under management remain exposed to market declines, foreign exchange movements, client outflows, performance-based fee variability, and demand shifts toward passive products. Q2 AUM declined primarily from market changes, net client outflows, and foreign exchange.
- Other risks include Affiliate performance and retention, valuation of private investments and contingent obligations, acquisition integration, regulatory requirements, debt refinancing, and the timing and completion of the BPEA transaction.
- As of June 30, 2022, management reported effective disclosure controls and no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether market performance, client flows, and foreign exchange trends continued to reduce AUM and performance-based fees after June 30, 2022.
- The closing date, tax impact, proceeds, and final accounting treatment of the BPEA sale to EQT.
- The sustainability of operating cash flow relative to share repurchases, Affiliate distributions, debt maturities, and investment commitments.
- The carrying value, valuation assumptions, and liquidity of equity method investments, private funds, marketable securities, and other investments.
- The impact of ASU 2020-06 and potential settlement of junior convertible securities and redeemable Affiliate equity interests on diluted share count and leverage.
- Actual payments under deferred, contingent, and Affiliate equity purchase obligations, including the $146.1 million of unfunded co-investment commitments.