Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) filed an Annual Report on Form 10-K for the fiscal year ended December 31, 2020, covering the full fiscal year rather than a standalone fourth quarter. AMG partners with independent active investment management firms globally through consolidated and equity-method Affiliates. Assets under management were approximately $716.2 billion at year-end across alternative, global equity, U.S. equity, and multi-asset and fixed-income strategies.
Financial Performance and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Consolidated revenue | $2,027.5 million | $2,239.6 million | Down 9% |
| Net income | $427.0 million | $305.1 million | Up 40% |
| Net income attributable to controlling interest | $202.2 million | $15.7 million | Increase not meaningful |
| Diluted earnings per share | $4.33 | $0.31 | Increase not meaningful |
| Adjusted EBITDA attributable to controlling interest | $798.8 million | $841.6 million | Down 5% |
| Economic net income attributable to controlling interest | $624.4 million | $720.2 million | Down 13% |
| Aggregate fees | $4,626.4 million | $4,962.7 million | Down 7% |
| Operating cash flow | $1,009.3 million | $929.1 million | Up 9% |
Average assets under management declined 12% to $664.4 billion, while year-end assets under management declined 1%. Aggregate fees decreased primarily because asset-based fees fell 11%, partially offset by a 4% increase in performance-based fees. Consolidated expenses declined 7% to $1,509.8 million, including lower compensation and selling, general and administrative expenses.
Net income attributable to controlling interest benefited from a $300.0 million reduction in equity-method intangible amortization and impairment expense. This benefit was partly offset by lower revenue, higher interest expense, higher income taxes, and increased share-based compensation. The filing does not provide a single consolidated operating margin for the full business that includes equity-method Affiliates; consolidated revenue and expenses exclude the revenue and expenses of those Affiliates.
Cash and cash equivalents increased to $1,039.7 million from $539.6 million. Cash used in investing activities was $53.7 million, including $44.5 million invested in new Affiliates. Cash used in financing activities was $455.4 million, including $351.9 million returned to shareholders through repurchases and dividends, $294.9 million of net Affiliate equity repurchases, and a $100.0 million term-loan repayment.
Debt carried on the balance sheet was $2,312.1 million at year-end. The filing also describes approximately $2.5 billion of outstanding debt based on principal amounts. The company had no revolver borrowings, a 1.6x bank leverage ratio, and a 10.1x interest coverage ratio, compared with covenant limits of 3.25x and 3.00x, respectively. AMG was in compliance with its debt covenants and was rated A3 by Moody’s and BBB+ by S&P.
Material Changes Versus the Prior Comparable Period
- Assets under management declined from $722.5 billion to $716.2 billion. Net client cash outflows were $61.8 billion, partly offset by $44.0 billion of market appreciation, $14.3 billion from new investments, and $2.7 billion of foreign-exchange effects.
- Net client outflows occurred in alternatives, global equities, and U.S. equities, while multi-asset and fixed-income strategies generated $2.9 billion of net inflows.
- Performance-based fees increased $188.7 million, but asset-based fees decreased $525.0 million.
- Net income attributable to controlling interest improved substantially from 2019, when results were affected by significant equity-method impairments and amortization. Economic net income and Adjusted EBITDA declined because they exclude or adjust for many of those non-cash items.
- AMG completed minority investments in Comvest Partners, Inclusive Capital Partners LP, and Jackson Square Partners LLC. These investments were accounted for under the equity method.
- The company issued $350.0 million of 3.30% senior notes due 2030 and $275.0 million of 4.75% junior subordinated notes due 2060. Proceeds were used partly to repay bank debt and otherwise retained for general corporate purposes.
- AMG repurchased 5.0 million common shares during 2020 at an average price of $86.35. Between January 1 and February 18, 2021, it repurchased an additional 1.2 million shares for $151.9 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management expects current cash, operating cash flow, and revolver availability to fund normal operations, new and existing Affiliate investments, share repurchases, dividends, debt repayment, Affiliate equity purchases, and working capital for the foreseeable future. The filing does not provide specific earnings, revenue, assets-under-management, or margin guidance.
Management stated that AMG and its Affiliates remained fully operational during the COVID-19 pandemic with minimal disruption to client service. However, prolonged market weakness, additional outflows, investment underperformance, changing investor preferences, fee pressure, or pandemic-related disruption could reduce assets under management, fees, earnings, and the value of intangible assets.
AMG recorded $332.0 million of equity-method intangible amortization and impairments in 2020, including $185.0 million of impairment charges for one Affiliate. It also recorded $70.7 million of aggregate impairment expense on acquired client relationships, including amounts related to a strategic repositioning and sale of an Affiliate and the closure of retail products. Future impairments remain possible because the company carries substantial goodwill, acquired client relationships, and equity-method investments.
Other material exposures include $671.5 million of redeemable non-controlling interests, $122.2 million of unfunded commitments to co-invest in Affiliate-sponsored products, contingent payments potentially due through 2025, and uncertain future Affiliate equity repurchase obligations. A minority owner also may sell a 5% interest in an equity-method Affiliate during the first half of 2021; the settlement amount was not determinable at filing.
Key ongoing risks include market and asset-flow volatility, concentration in performance and asset-based fees, competition from passive and other investment products, retention of key Affiliate principals, regulatory and compliance obligations, cybersecurity and operational risks, foreign-exchange exposure, LIBOR transition risk, tax-law changes, and the company’s significant leverage and intangible asset balances. No material pending legal proceedings were reported, and management and the independent auditor concluded that internal control over financial reporting was effective.
Most Important Facts for Investors to Verify
- Reconcile the improvement in GAAP net income with the decline in Adjusted EBITDA and Economic net Income, focusing on the $300.0 million reduction in equity-method amortization and impairment expense.
- Monitor net client flows, performance-based fees, fee rates, and strategy mix, particularly continued outflows in quantitative, equity, and certain liquid-alternative strategies.
- Assess the sustainability of approximately $1.0 billion of annual operating cash flow after share repurchases, dividends, Affiliate equity purchases, and investment commitments.
- Review debt maturity, refinancing, covenant headroom, interest-rate exposure, and the distinction between $2.312 billion of carrying-value debt and approximately $2.5 billion of stated outstanding debt.
- Evaluate the sensitivity of goodwill, acquired client relationships, and $2.075 billion of equity-method investments to lower assets under management, client attrition, and reduced growth assumptions.
- Track the $671.5 million redeemable non-controlling interest balance, expected 2021 Affiliate equity repurchases of approximately $125 million, and potential contingent or put-related obligations.
- Review post-year-end share repurchases, the January 2021 term-loan refinancing, and the February 2021 investment in Boston Common Asset Management.