10-K: Affiliated Managers Group Reports Full Year 2023 Results, Demonstrating Resilience Amid Market Challenges

Affiliated Managers Group (AMG) navigated a challenging 2023, reporting a decrease in net income while strategically positioning itself for future growth through key investments and divestitures.

Summary

• Affiliated Managers Group (AMG) reported a decrease in net income (controlling interest) to $672.9 million in 2023, down 41% from $1,145.9 million in 2022.
• The decline was primarily attributed to a $508.8 million decrease in Affiliate Transaction gains and a $58.1 million decrease in Equity method income (net).
• These decreases were partially offset by a $169.1 million decrease in Income tax expense attributable to the controlling interest.
• Adjusted EBITDA (controlling interest) also decreased by 11% to $935.7 million, primarily due to a 9% decrease in aggregate fees.
• AMG's aggregate assets under management (AUM) were approximately $673 billion as of December 31, 2023, up 3% from $650.8 billion in 2022.
• The company completed minority investments in Forbion Group Holding B.V. and Ara Partners Group, LLC, expanding its presence in private markets.
• AMG also completed the sale of its equity interest in Veritable, LP, receiving $287.4 million in cash and recording a gain of $133.1 million.
• The company repurchased 3.0 million shares of its common stock at an average price of $132.99 per share in 2023.

Sentiment

Score: 6

Explanation: While AMG faced challenges in 2023 with declines in net income and adjusted EBITDA, the company's strategic investments, strong balance sheet, and focus on growth areas like private markets provide a foundation for future success. The sentiment is cautiously optimistic, reflecting both the current headwinds and the potential for long-term value creation.

Positives

• AMG continues to invest in areas of long-term client demand, including private markets, liquid alternatives, sustainable investment strategies, wealth management, and Asia.
• The company maintains a strong balance sheet with ample liquidity to support future growth initiatives.
• AMG has a proven track record of successful partnerships with independent investment firms.
• The company is committed to returning excess capital to shareholders through share repurchases and dividends.
• AMG's strategic investments in Forbion and Ara Partners position the company to benefit from growth in the private markets sector.

Negatives

• Net income (controlling interest) decreased by 41% in 2023 compared to 2022.
• Adjusted EBITDA (controlling interest) decreased by 11% in 2023 compared to 2022.
• Aggregate fees decreased by 9% in 2023 compared to 2022.
• Equity strategies, particularly global equities, experienced outflows in line with industry trends.

Risks

• AMG's financial results are dependent on its Affiliates' ability to maintain fee levels and attract client assets, which can be impacted by investment performance, competition, and market trends.
• The company's growth strategy relies on its ability to make successful investments in independent investment firms, which may be challenging in a competitive market.
• The structure of AMG's partnership interests in its Affiliates may expose it to unanticipated changes in Affiliate revenue and operating expenses.
• The investment management industry is highly regulated, and changes in regulations could adversely affect AMG's and its Affiliates' businesses.
• AMG and its Affiliates are subject to cybersecurity risks and data privacy regulations, which could result in financial losses, reputational damage, and regulatory penalties.

Future Outlook

AMG anticipates that independent investment firms will continue to seek access to an evolving range of partnership solutions and believes it has a significant opportunity to invest in additional high-quality firms across the global investment management industry. The company is focused on investing in areas of long-term client demand, including private markets, liquid alternatives, sustainable investment strategies, wealth management, and Asia.

Management Comments

• Our strategy is to generate long-term value by investing in a diverse array of high-quality independent partner-owned firms, referred to as Affiliates, through a proven partnership approach, and allocating resources across our unique opportunity set to the areas of highest growth and return.
• With their entrepreneurial, investment-centric cultures and alignment of interests with clients through direct equity ownership by firm principals, independent firms have fundamental competitive advantages in offering unique return streams to the marketplace.
• Through AMGs distinctive approach, we enhance these advantages to magnify the long-term success of our Affiliates and actively support their independence.
• Our innovative model enables each Affiliates management team to retain autonomy and significant equity ownership in their firm, while they leverage our strategic capabilities and insight, including growth capital, product strategy and development, capital formation, and incentive alignment and succession planning.
• Our goal in partnering with Affiliates is to be an excellent and engaged partner, and to collaborate with Affiliates to magnify each firms long-term success.
• We take a long-term partnership approach with our Affiliates, which provides stability in facilitating succession planning across generations of Affiliate management principals.
• We are uniquely able to provide strategic capabilities and expertise across various stages of our Affiliates growth.
• We believe that clients recognize these fundamental characteristics of partner-owned firms, as well as the alignment created by direct equity ownership by firm principals, as competitive advantages in achieving client investment goals and objectives.
• Independent firms seeking an institutional partner are attracted to our unique partnership approach and our global reputation as a successful strategic partner to independent investment firms around the world.
• We are well-positioned to execute upon these investment opportunities through our: established process of identifying and cultivating high-quality prospective Affiliates; broad industry network and proprietary relationships developed with prospects over many years; substantial experience and expertise in structuring and negotiating transactions; global reputation as an excellent partner to our Affiliates, having provided innovative solutions for the strategic needs of independent investment firms across three decades; and successful engagement with our Affiliates to enhance their long-term prospects, including through product development, distribution, and other business development initiatives.

Industry Context

AMG's results reflect broader trends in the investment management industry, including a challenging market environment, outflows from equity strategies, and growing demand for alternative investments. The company's focus on private markets aligns with the industry's shift towards this asset class.

Comparison to Industry Standards

• AMG's AUM growth of 3% in 2023 compares favorably to some competitors, such as Franklin Resources, Inc. which saw a decrease in AUM, and Invesco Ltd., which experienced modest AUM growth.
• AMG's focus on private markets is in line with industry trends, as evidenced by the growth of firms like Ares Management Corporation and Blue Owl Capital Inc.
• AMG's performance in alternative strategies, with net inflows in 2023, contrasts with some competitors, such as Janus Henderson Group plc, which experienced outflows in this area.
• Compared to AllianceBernstein Holding L.P., which has a significant presence in fixed income, AMG's multi-asset and fixed income strategies saw relatively flat net client cash flows.
• AMG's diversified business model, with exposure to private markets, liquid alternatives, and differentiated long-only strategies, positions it differently from more specialized firms like Artisan Partners Asset Management Inc., which focuses primarily on long-only equity strategies.
• AMG's results are generally in line with or slightly better than industry averages, particularly in the context of the challenging market environment for traditional asset managers. However, the company's performance in specific asset classes may vary compared to competitors with different investment focuses.

Corporate Governance

Legal Proceedings

• Governmental and regulatory authorities in the U.S. and other jurisdictions in which we and our Affiliates operate regularly make inquiries and administer examinations with respect to our and our Affiliates compliance with applicable laws and regulations, and from time to time, we and our Affiliates may be parties to various claims, lawsuits, complaints, regulatory investigations, and other proceedings in the ordinary course of business.
• Currently, there are no such claims, lawsuits, complaints, regulatory investigations, or other proceedings against us or our Affiliates that, in our opinion, would have a material adverse effect on our financial position, liquidity, or results of operations.

Related Party Transactions

• A prior owner of one of the Companys consolidated Affiliates retains interests in certain of the Affiliates private equity partnerships and, as a result, is a related party of the Company.
• The prior owners interests are included in Other liabilities and were $21.0 million and $18.5 million as of December 31, 2022 and 2023, respectively.
• The Company may invest from time to time in funds or products advised by its Affiliates.
• The Companys executive officers and directors may invest from time to time in funds advised or products offered by its Affiliates, or receive other investment services provided by its Affiliates, on substantially the same terms as other participating investors.
• In addition, the Company and its Affiliates earn assetand performance-based fees and incur distribution and other expenses for services provided to Affiliate sponsored investment products.
• Affiliate management owners and the Companys officers may serve as trustees or directors of certain investment vehicles from which the Company or an Affiliate earns fees.
• Also, from time to time, the Company may enter into ordinary course engagements for capital markets, banking, brokerage, and other services with beneficial owners of 5% or more of the Companys voting securities.
• The Company has related party transactions in association with its deferred and contingent payment obligations, and Affiliate equity transactions.

Stakeholder Impact

• Shareholders: Potential impact from changes in share price, dividends, and share repurchases. The company's performance and strategic decisions may affect shareholder value.
• Employees: Potential impact from changes in compensation, benefits, and job security. The company's financial performance and growth prospects may affect employee morale and retention.
• Customers: Potential impact from changes in investment products, services, and fees. The performance of AMG's Affiliates may affect customer investment returns.
• Suppliers: Potential impact from changes in business relationships and contracts. The company's financial stability may affect its ability to meet its obligations to suppliers.
• Creditors: Potential impact from changes in the company's creditworthiness and ability to repay debt. The company's financial performance and debt levels may affect its credit ratings and borrowing costs.

Next Steps

• Continue to invest in areas of long-term client demand, including private markets, liquid alternatives, sustainable investment strategies, wealth management, and Asia.
• Pursue additional investments in high-quality independent investment firms.
• Execute on share repurchase programs and return excess capital to shareholders.
• Manage capital structure consistent with an investment grade company.
• Monitor and adapt to changes in the regulatory environment.

Key Dates

Keywords

investment management, private markets, liquid alternatives, asset management, wealth management, sustainable investing, global equities, acquisitions, strategic partnerships, Forbion, Ara Partners, Veritable, BPEA, EQT