Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) is a global asset management company that holds equity investments in a diverse group of boutique investment management firms ("Affiliates"). The company operates through three principal distribution channels: Mutual Fund, Institutional, and High Net Worth. AMG's strategy focuses on internal growth and acquiring equity interests in high-quality boutique firms, maintaining operational autonomy for Affiliate managers while providing scale economies.
Reporting Period: Fiscal year ended December 31, 2009.
Key Financial Metrics
| Metric | 2009 | 2008 | 2007 |
|---|---|---|---|
| Assets Under Management (AUM) (in billions) | $208.0 | $170.1 | $274.8 |
| Revenue (in millions) | $841.8 | $1,158.2 | $1,369.9 |
| Net Income (Controlling Interest) (in millions) | $59.5 | $(1.3) | $176.5 |
| EBITDA (in millions) | $242.8 | $309.0 | $417.1 |
| Cash Flow from Operating Activities (in millions) | $243.2 | $508.0 | $509.4 |
| Total Assets (in millions) | $3,390.9 | $3,212.7 | $3,373.8 |
| Long-term Debt (in millions) | $964.3 | $1,184.1 | $1,746.2 |
| Cash and Cash Equivalents (in millions) | $259.5 | $396.4 | $223.0 |
Segment Performance (2009 Revenue vs. 2008):
- Mutual Fund: $313.2 million (down 31%)
- Institutional: $415.6 million (down 26%)
- High Net Worth: $113.0 million (down 21%)
Material Changes vs. Prior Period
- Revenue Decline: Revenue decreased 27% to $841.8 million, primarily driven by a 21% decrease in average AUM due to the 2008 global equity market decline and negative net client cash flows in 2008 and 2009. Performance fees also declined as a percentage of revenue (3% in 2009 vs. 6% in 2008).
- Profitability Recovery: Net Income (controlling interest) rebounded to $59.5 million from a loss of $1.3 million in 2008. This improvement was driven by a significant increase in income from equity method investments (reversing a $150 million non-cash impairment charge taken in 2008) and a 24% reduction in operating expenses.
- Operating Expenses: Total operating expenses fell 24% to $606.8 million. Compensation expenses dropped 22% due to lower revenue at Affiliates and the absence of a $38.7 million non-recurring stock option charge present in 2008. Selling, general, and administrative expenses decreased 37% due to lower distribution expenses and the absence of one-time 2008 costs.
- Acquisitions: In August 2009, AMG acquired a majority interest in Harding Loevner LLC. In November 2009, it acquired a 5% stake in Value Partners Group Limited.
Guidance, Outlook, and Risks
Pending Investments: AMG announced three pending acquisitions expected to close in Q2 2010, subject to regulatory approval:
- Aston Asset Management: Majority equity interest; financing via stock issuance.
- Artemis Investment Management: Majority equity interest; financing via credit facility and forward equity sales.
- Pantheon Ventures: Acquisition of business; financing via credit facility and forward equity sales.
Liquidity and Capital Resources: AMG maintains a $770 million revolving credit facility with no borrowings outstanding as of December 31, 2009. The company is in compliance with all covenants (Bank Leverage Ratio 2.3x; Interest Coverage Ratio 4.6x). Management anticipates funding pending investments through borrowings and forward equity settlements. The company does not anticipate paying cash dividends.
Risks and Contingencies:
- Market Sensitivity: Revenue is highly correlated with equity market performance and AUM levels. Further market declines would adversely affect fees.
- Regulatory Environment: Affiliates face extensive regulation; new laws or interpretations could increase costs or limit operations.
- Intangible Assets: Approximately $2.0 billion of total assets are intangible assets (goodwill and acquired client relationships). Impairment of these assets could materially impact results.
- Key Personnel: The business relies heavily on the retention of key investment managers at Affiliates.
Investor Verification Checklist
- Equity Method Investments: Verify the sustainability of the recovery in income from equity method investments (ValueAct and BlueMountain) following the 2008 impairment charge.
- Pending Acquisitions: Monitor the closing status and financing terms of the Aston, Artemis, and Pantheon transactions, as they will increase leverage and dilution.
- AUM Flows: Track net client cash flows to determine if the negative flow trend observed in 2008-2009 has stabilized.
- Debt Covenants: Confirm continued compliance with the 3.5x debt-to-EBITDA leverage ratio as new debt is incurred for acquisitions.
- Intangible Asset Valuation: Review the annual impairment testing assumptions for goodwill and indefinite-lived intangible assets, given the significant portion of the balance sheet they represent.