AMG

Business Context and Reporting Period

Affiliated Managers Group, Inc. (AMG) is an 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, acquiring additional boutique firms, and providing strategic support to Affiliates while maintaining their operational autonomy.

Reporting Period: Fiscal year ended December 31, 2007.

Key Financial Metrics

Liquidity: As of December 31, 2007, AMG maintained a leverage ratio (net debt to EBITDA) of 1.6:1. The company has a senior credit facility with a total capacity of $950 million, of which $519.5 million was outstanding.

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 17% to $1.37 billion, driven primarily by a 27% increase in average assets under management. Growth was fueled by positive investment performance and net client cash flows in 2006, as well as new investments.
• Profitability: Net Income rose 20% to $182.0 million. EBITDA increased 22% to $418.2 million. The increase in Net Income was partially offset by higher operating expenses, interest expense, and minority interest allocations.
• Acquisitions: In late 2007, AMG acquired minority interests in two alternative investment managers: ValueAct Capital (November 2007) and BlueMountain Capital Management (December 2007). These investments are accounted for under the equity method.
• Debt Structure: Senior debt increased significantly to $519.5 million due to borrowings under the credit facility to fund acquisitions. In October 2007, the company issued $500 million of junior convertible trust preferred securities.
• Share Repurchases: The company repurchased approximately 3.6 million shares of common stock in 2007, including 1.6 million shares via a prepaid forward purchase contract.

Guidance, Outlook, and Risks

Outlook and Commentary: Management expects long-term industry growth driven by market-related increases in AUM, demographic trends, and wealth creation. AMG anticipates continued opportunities to invest in high-quality boutique firms. The company does not pay cash dividends, as it intends to retain earnings to finance investments, repay debt, and repurchase stock.

Key Risks and Contingencies:

• Market Dependency: Revenue is directly tied to equity market returns and AUM levels. Declines in financial markets would adversely affect fees and results.
• Regulatory Risk: Affiliates are subject to extensive regulation by U.S. and non-U.S. authorities. Changes in laws or enforcement actions could materially impact operations.
• Key Personnel: The business relies heavily on the services of key principals at Affiliates. The departure of key managers could result in the loss of client accounts.
• Intangible Assets: Approximately $1.7 billion of total assets are intangible assets (goodwill and client relationships). Impairment of these assets could adversely affect financial results.
• Capital Requirements: Future growth and obligations to purchase additional equity in Affiliates (estimated potential payments of up to $1.47 billion if all rights were exercised) may require additional capital raising.

Investor Verification Checklist

• Equity Method Investments: Verify the impact of the new ValueAct and BlueMountain investments on future earnings, noting that their revenue is not consolidated but their share of profits is included in Net Income.
• Convertible Securities: Review the terms of the $300 million floating rate senior convertible securities and $300 million mandatory convertible securities, which were converted or settled in early 2008, resulting in significant share issuance (approx. 11 million shares).
• Intangible Asset Valuation: Assess the assumptions used for the valuation of $1.7 billion in intangible assets and the potential for future impairment charges.
• Debt Covenants: Confirm compliance with the leverage and interest coverage covenants of the $950 million senior credit facility maturing in 2012.
• Contingent Payments: Monitor the $232 million in contingent purchase payments due through 2011 based on the achievement of financial targets by Affiliates.