How does AMG make money from its affiliates?

AMG holds majority interests in affiliates and receives its share of the Owners' Allocation, typically 30-50% of each affiliate's revenue after the Operating Allocation (typically 50-70%) covers management's salaries, bonuses and operating costs. Managers is the exception: AMG owns substantially all of it and consolidates its full revenues and expenses.

How sustainable are the 1999 earnings?

Partly uncertain. Performance-based fees, which were about 39% of 1999 revenue and concentrated largely at Essex in technology-sector strategies, were of unusual magnitude, and management explicitly says they may not recur at the same level. Asset-based fees and new affiliates also contributed, but investors should separate one-time performance fees from recurring asset-based revenue.

What are the main balance sheet risks?

Debt and intangibles are the key risks. Credit facility borrowings were $240.5M at March 23, 2000, with $89.5M of capacity left and a December 2002 maturity. Intangible assets and goodwill total $574.9M, against $477.99M of stockholders' equity. The company may need more debt or equity to fund future acquisitions, which could raise interest expense or dilute shareholders.

Could future obligations to affiliate owners affect cash flow?

Yes. AMG must buy out affiliate management owners through put rights, call rights and buy-out rights, with contingent obligations ranging from $83.6M (for early resignations or terminations for cause) to $386.9M (for death, disability or termination without cause), at multiples of the affiliate's Owners' Allocation. These payments could be made in cash, which may require borrowing, or in AMG stock, which could dilute existing shareholders.

Does AMG pay dividends or buy back stock?

AMG has never paid a cash dividend and its credit facility prohibits dividends, so it intends to retain earnings. It has been repurchasing its own stock: 346,900 shares by year-end 1999 at an average of $26.83, and a further 681,600 shares through March 23, 2000 at an average of $37.44, under a program covering up to 5% of outstanding shares.

AMG 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 30, 2000. Cited figures are marked; the original filing is the authoritative source.

Affiliated Managers Group (AMG) reported a strong 1999 for its FY ended December 31, 1999.

The company buys equity stakes (typically majority interests) in mid-sized investment management firms, which keep operating autonomy and share revenues through an Operating Allocation (typically 50-70% of revenue for operating expenses) and an Owners' Allocation (typically 30-50%, largely to AMG). Revenues rose 117% to $518.7 million and net income climbed to $72.2 million^a ($3.18 diluted EPS) from $25.6 million, driven largely by performance-based fees (about 39% of 1999 revenue, up from 18%), principally at Essex. EBITDA rose to $166.8 million and Cash Net Income to $98.3 million.

Assets under management reached $82.0 billion^b at year-end (pro forma $87.0 billion across 15 affiliates). The investor case has real risks. Management itself warns that 1999 performance fees were of unusual magnitude and may not recur, and that growth depends heavily on continued new acquisitions.

Acquisitions have been funded largely with bank debt: $240.5 million^c was outstanding under the credit facility as of March 23, 2000 (after the January 2000 Frontier purchase), against $89.5 million of remaining capacity, with the facility maturing in December 2002. Total assets were $909.1 million, of which $574.9 million (about 63%) were intangibles and goodwill, so amortization and impairment risk is significant. Future put and purchase obligations to affiliate owners are contingent but substantial, ranging from $83.6 million to $386.9 million.

AMG has never paid a cash dividend, and its credit facility prohibits dividends. AMG also had a small holding company (25 employees) and was repurchasing its own stock.

Shares closed at $50.00^d on March 23, 2000, versus a 1999 high of $40 7/16, and the non-affiliate market value was about $1.03 billion. Its business model is attractive when affiliate performance is strong, but earnings quality depends on performance fees and on the company's ability to keep funding acquisitions.

02—Key points

Key Highlights

Revenue up 117% to $518.7M in 1999 (from $238.5M); net income up 182% to $72.2M, or $3.18 diluted EPS (from $1.33).
Performance-based fees rose to about 39% of revenue (from 18%), mainly from Essex, and management says these may not recur at the same level.
EBITDA of $166.8M (up 119%) and Cash Net Income of $98.3M (up 115%); pro forma EBITDA was $185.3M.
Assets under management reached $82.0B at year-end 1999 (pro forma $87.0B across 15 affiliates), up from $57.7B; 1999 investment performance added $17.4B.
Leverage and intangibles are high: $240.5M of credit facility debt at March 23, 2000 after the Frontier acquisition, and intangibles of $574.9M make up about 63% of $909.1M total assets.
Contingent put and purchase obligations to affiliate owners range from $83.6M to $386.9M, and AMG has never paid a cash dividend, so cash returns depend on growth and buybacks.
Strategy and recent activity: acquired Rorer and Managers (1999) and Frontier (January 2000), began repurchasing shares, and bought a site for a future headquarters in Prides Crossing, MA.

03—Questions

Frequently Asked Questions

How does AMG make money from its affiliates?
AMG holds majority interests in affiliates and receives its share of the Owners' Allocation, typically 30-50% of each affiliate's revenue after the Operating Allocation (typically 50-70%) covers management's salaries, bonuses and operating costs. Managers is the exception: AMG owns substantially all of it and consolidates its full revenues and expenses.
How sustainable are the 1999 earnings?
Partly uncertain. Performance-based fees, which were about 39% of 1999 revenue and concentrated largely at Essex in technology-sector strategies, were of unusual magnitude, and management explicitly says they may not recur at the same level. Asset-based fees and new affiliates also contributed, but investors should separate one-time performance fees from recurring asset-based revenue.
What are the main balance sheet risks?
Debt and intangibles are the key risks. Credit facility borrowings were $240.5M at March 23, 2000, with $89.5M of capacity left and a December 2002 maturity. Intangible assets and goodwill total $574.9M, against $477.99M of stockholders' equity. The company may need more debt or equity to fund future acquisitions, which could raise interest expense or dilute shareholders.
Could future obligations to affiliate owners affect cash flow?
Yes. AMG must buy out affiliate management owners through put rights, call rights and buy-out rights, with contingent obligations ranging from $83.6M (for early resignations or terminations for cause) to $386.9M (for death, disability or termination without cause), at multiples of the affiliate's Owners' Allocation. These payments could be made in cash, which may require borrowing, or in AMG stock, which could dilute existing shareholders.
Does AMG pay dividends or buy back stock?
AMG has never paid a cash dividend and its credit facility prohibits dividends, so it intends to retain earnings. It has been repurchasing its own stock: 346,900 shares by year-end 1999 at an average of $26.83, and a further 681,600 shares through March 23, 2000 at an average of $37.44, under a program covering up to 5% of outstanding shares.

04—Continue

← View all 10-K filings