AMG

Business Context and Reporting Period

Company: Affiliated Managers Group, Inc. (AMG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: AMG is a global asset management company with equity investments in a diverse group of boutique investment management firms ("Affiliates"). As of March 31, 2010, the company managed approximately $232.1 billion in assets across three distribution channels: Mutual Fund, Institutional, and High Net Worth.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 41% to $251.0 million, driven primarily by a 33% increase in average assets under management (AUM) due to investment performance and new affiliate investments.
• Profitability Surge: Net Income attributable to the controlling interest increased 187% to $17.5 million. This was fueled by higher revenue and increased income from equity method investments, partially offset by higher operating expenses and taxes.
• Operating Expenses: Total operating expenses rose 37% to $183.3 million. Compensation expenses increased 42% due to revenue-sharing arrangements with affiliates and increased share-based compensation at the holding company.
• Investing Activity: Cash used in investing activities increased significantly to $131.9 million (from $3.7 million in Q1 2009), primarily due to a $127.7 million increase in investments in affiliates, including the acquisition of Artemis Investment Management Ltd.
• Debt Utilization: The company drew $170.0 million on its senior revolving credit facility during the quarter to finance investments, compared to no outstanding balance at year-end 2009.

Guidance, Outlook, and Risks

• Pending Investments: AMG completed the acquisition of Aston Asset Management LLC in April 2010 (post-period) and announced an agreement to purchase Pantheon Ventures, expected to close in Q2 2010. The Pantheon investment is planned to be financed via the credit facility and forward equity sales.
• Liquidity and Leverage: The company maintains a $770 million revolving credit facility with $600 million remaining capacity. The internal leverage ratio (debt to EBITDA) was 1.2:1 as of March 31, 2010. Management anticipates the bank leverage ratio will increase to approximately 3.0 following the closing of pending investments.
• Forward Equity Sales: $349.3 million of forward equity sales remain unsettled as of March 31, 2010, with a weighted average price of $57.54.
• Risks: Performance is directly affected by global financial market conditions. A decline in equity markets could decrease advisory fees. There are also risks associated with the success of new investments and the ability to raise capital on acceptable terms.
• Contingent Obligations: The company has contingent payment obligations related to acquisitions, with a projected payment of $80.3 million in 2012 based on current estimates.

Investor Verification Checklist

• Asset Flows: Verify the sustainability of AUM growth given that net client cash flows were negative ($1.5 billion outflow) in Q1 2010, with growth driven primarily by investment performance.
• Debt Covenants: Confirm compliance with the credit facility covenants (max debt/EBITDA of 3.5x; min interest coverage of 3.0x) following the anticipated increase in leverage from pending acquisitions.
• Acquisition Integration: Monitor the integration and revenue contribution of the Artemis and Aston acquisitions, noting that Artemis's contribution in Q1 was not material.
• Convertible Securities: Review the terms of the $460 million 2008 senior convertible notes and $730.8 million junior convertible trust preferred securities, specifically regarding conversion triggers and potential dilution.
• Non-GAAP Measures: Reconcile "Cash Net Income" ($50.8 million) to GAAP Net Income to understand the impact of non-cash amortization and deferred taxes on reported profitability.