AMG

Business Context and Reporting Period

Affiliated Managers Group, Inc. (AMG) filed its Quarterly Report on Form 10-Q for the period ended June 30, 2005. AMG is an asset management company that holds equity investments in a diverse group of mid-sized investment management firms ("Affiliates"). As of June 30, 2005, these Affiliates managed approximately $138.0 billion in assets across three principal distribution channels: Mutual Fund, Institutional, and High Net Worth. Pro forma for a subsequent acquisition of First Asset Management Inc., total assets under management were approximately $163 billion.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 31% ($49.6 million) for the quarter and 32% ($99.7 million) for the six months compared to the prior year periods. This growth was driven primarily by a 41% increase in average assets under management, resulting from new investments (Genesis, TimesSquare, AQR) and the acquisition of assets from Fremont Investment Advisors (FIA).
• Profitability: Net Income rose 39% for the quarter and 40% for the six months. Operating income increased to $75.8 million (quarter) and $150.3 million (six months).
• Segment Performance:
  • Mutual Fund: Revenue increased 45% (quarter) and 40% (six months) due to asset growth and the FIA acquisition.
  • Institutional: Revenue increased 42% (quarter) and 50% (six months), driven by significant asset growth from new investments.
  • High Net Worth: Revenue decreased 12% (quarter) and 11% (six months) due to a 20% decline in average assets under management, primarily from net outflows at Rorer Asset Management.
• Expenses: Operating expenses increased 44% for the quarter and 43% for the six months, largely due to revenue-sharing arrangements where compensation scales with revenue growth, as well as expenses from new 2004 investments.

Guidance, Outlook, and Risks

• Acquisitions: Subsequent to the reporting period (July 28, 2005), AMG completed the acquisition of First Asset Management Inc. for approximately $250 million, adding $24.7 billion in assets under management. The purchase was funded via cash, borrowings under the senior revolving credit facility, and common stock issuance.
• Capital Structure: The company maintains a senior revolving credit facility of up to $405 million (option to increase to $450 million). As of June 30, 2005, the leverage ratio was 1.7:1. The company does not consider mandatory convertible securities as debt for leverage calculations.
• Contingencies: AMG has conditional obligations to purchase retained equity interests from Affiliate managers. If all such interests were purchased as of June 30, 2005, the aggregate cost would be approximately $815.5 million. Additionally, contingent payments of approximately $178 million may be required if specific financial targets are met at certain Affiliates.
• Risks: Performance is directly affected by financial market conditions. A decline in equity markets could decrease advisory fees and operating results. The company also faces risks related to the success of future investments and the availability of capital.
• Accounting Changes: AMG is required to adopt FAS 123(R) in the first quarter of 2006, which requires fair-value measurement for employee share-based payments. Management does not expect a material impact on the Statement of Income.

Investor Verification Checklist

• Verify the impact of the First Asset Management Inc. acquisition (closed July 2005) on future revenue and asset growth, noting the $250 million purchase price and $24.7 billion in added assets.
• Review the High Net Worth segment performance, specifically the cause of the 20% decline in assets under management and net outflows at Rorer Asset Management.
• Assess the contingent equity purchase obligations totaling $815.5 million and the potential cash flow impact if triggered.
• Monitor the leverage ratio and debt service capabilities, particularly given the recent draw on the credit facility for the First Asset acquisition.
• Confirm the treatment of minority interest in earnings, which increased 9-12% year-over-year, reflecting profit allocations to Affiliate managers.