10-K 1 amg_10-kx12312014.htm 10-K AMG_10-K_12.31.2014
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________

FORM 10-K
(Mark One)
 
 
ý
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                to                               
Commission File Number 001-13459
____________________________________________________________________________

Affiliated Managers Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
04-3218510
(IRS Employer
Identification Number)
777 South Flagler Drive, West Palm Beach, Florida, 33401
(Address of principal executive offices)
(800) 345-1100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock ($.01 par value)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
____________________________________________________________________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
 
Non-accelerated filer o
 (Do not check if a smaller
reporting company)
 
Smaller reporting company o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý
At June 30, 2014, the aggregate market value of the common stock held by non-affiliates of the registrant, based upon the closing price of $205.40 on that date on the New York Stock Exchange, was $11,317,162,064. Calculation of holdings by non-affiliates is based upon the assumption, for this purpose only, that executive officers, directors and any persons holding 10% or more of the registrant's common stock are affiliates. There were 54,895,148 shares of the registrant's common stock outstanding on February 18, 2015.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on or about June 15, 2015 are incorporated by reference into Part III.
 



FORM 10-K
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i


PART I
Forward-Looking Statements
When used in this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission, in our press releases and in oral statements made with the approval of an executive officer, the words or phrases "are expected to," "will continue," "is anticipated," "may," "intends," "believes," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among others, the factors discussed under the caption "Item 1A. Risk Factors."
These factors (among others) could affect our financial performance and cause actual results to differ materially from historical earnings and those presently anticipated and projected. We will not undertake and we specifically disclaim any obligation to release publicly the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of events, whether or not anticipated. In that respect, we caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.
Item 1.
Business
We are a global asset management company with equity investments in leading boutique investment management firms, which we refer to as our "Affiliates." We pursue a growth strategy designed to generate shareholder value through the growth of our existing Affiliates, as well as through additional investments in boutique investment management firms. In addition, we provide centralized assistance to our Affiliates in strategic matters, marketing, distribution, product development and operations.
We hold meaningful equity interests in each of our Affiliates. The remaining equity interests are retained by management of the Affiliate, thereby aligning our interests and enabling management to continue to participate in the Affiliate's long-term future growth. Our innovative investment approach provides a degree of liquidity and diversification to principal owners of boutique investment management firms, and also addresses the succession and ownership transition issues facing many founders and principal owners. Our partnership approach also ensures that our Affiliates maintain operational autonomy in managing their businesses, thereby preserving the Affiliate's entrepreneurial culture and independence. In particular, our structures are designed to:
maintain and enhance Affiliate management equity incentives directly in their own firms;

preserve each Affiliate's distinct culture, investment focus and operational autonomy; and

provide Affiliates with access to the resources and scale of a global asset management company in areas such as global distribution, operations, compliance and technology.
Although we invest in boutique investment management firms that we anticipate will grow independently and without our assistance, we are committed to helping Affiliates identify opportunities for growth and leverage the benefits of economies of scale.
We believe that substantial opportunities to make investments in additional high-quality boutique investment management firms will continue to arise as their founders seek to institutionalize their businesses through broader equity ownership, or approach retirement age and begin to plan for succession. We identify the highest quality boutiques based on our thorough understanding of the asset management industry and have developed long-term relationships with a significant number of these firms. Within our target universe, we seek the strongest and most stable boutiques with the best growth prospects, especially with respect to the growth potential for their product area(s) of focus, such as global and emerging markets equities and alternative strategies. These boutiques are typically characterized by a strong multi-generational management team with focused investment discipline, entrepreneurial culture and a commitment to building longer-term success, and by a diverse set of products sold across multiple distribution channels. We are focused on investing in the highest quality boutique investment management firms globally, including traditional, alternative and wealth management firms, specializing in an array of investment styles and asset classes. We anticipate that we will have significant additional investment opportunities across the global asset management industry, most often in independent boutique investment management firms, but also including the potential for investments resulting from subsidiary divestitures, secondary sales and other special situations.
Investment Management Operations

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As of December 31, 2014, we managed $620.2 billion in assets through our Affiliates ($626 billion including a pending investment) across a broad range of asset classes and investment styles in three principal distribution channels: Institutional, Mutual Fund and High Net Worth. We believe that our diversification across distribution channels, Affiliates, asset classes, investment styles and geographies helps to mitigate our exposure to the risks created by changing market environments.
A summary of selected financial data attributable to our operations for each distribution channel is included in Management's Discussion and Analysis of Financial Condition and Results of Operations.
Institutional Distribution Channel
Through our Affiliates, we manage assets for large institutional investors world-wide including sovereign wealth funds, foundations, endowments, and retirement plans for corporations and municipalities.
Our institutional investment services and products are distributed by sales and marketing professionals developing new institutional business through direct sales efforts and established relationships with pension consultants around the world. Our global distribution platform operates in key markets to extend the reach of our Affiliates' own business development efforts, including offices in Sydney, serving institutional investors in Australia and New Zealand; London and Zurich, serving institutional investors in the United Kingdom and continental Europe; Dubai, serving institutional investors in the Middle East; and Hong Kong, serving institutional investors in Asia. Our efforts are designed to provide our Affiliates with the necessary resources and expertise to ensure that their products and services are responsive to the evolving demands of the global marketplace. Our Affiliates currently manage assets for non-U.S. clients in more than 50 countries, including all major developed markets.
Mutual Fund Distribution Channel
Through our Affiliates, we provide advisory or sub-advisory services to mutual funds, UCITS and other retail-oriented products. These funds are distributed globally to retail and institutional clients directly and through intermediaries, including independent investment advisors, retirement plan sponsors, broker-dealers, major fund marketplaces and bank trust departments.
Through AMG Funds, our U.S. retail distribution platform, we provide access to the U.S. mutual fund wholesale distribution channel and wrap sponsor platforms, and provide our Affiliates with a single point of contact for retail intermediaries such as banks, brokerage firms and other sponsored platforms.
High Net Worth Distribution Channel
Through our Affiliates, we provide advisory services to ultra-high net worth individuals and family trusts. Direct services to these clients include customized investment counseling, investment management and fiduciary services. AMG Wealth Partners extends and tailors our innovative partnership approach to equity investments in ultra-high net worth wealth management firms.
Also through our Affiliates, we provide advisory services to high net worth individuals through managed account relationships with intermediaries such as brokerage firms and, through our global distribution platform, we provide our Affiliates with enhanced managed account distribution and administration capabilities to individual managed account clients.
Diversification of Assets under Management
The following table provides information regarding the composition of our assets under management:

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December 31, 2012
 
December 31, 2013
 
December 31, 2014
(in billions)
Assets under
Management
 
Percentage
of Total
 
Assets under
Management
 
Percentage
of Total
 
Assets under
Management
 
Percentage
of Total
Distribution Channels
 
 
 
 
 
 
 
 
 
 
 
Institutional
$
254.3

 
59
%
 
$
300.6

 
56
%
 
$
355.6

 
57
%
Mutual Fund
121.9

 
28
%
 
169.4

 
32
%
 
188.4

 
31
%
High Net Worth
55.6

 
13
%
 
67.3

 
12
%
 
76.2

 
12
%
Total
$
431.8

 
100
%
 
$
537.3

 
100
%
 
$
620.2

 
100
%
Asset Class
 
 
 
 
 
 
 
 
 
 
 
Equity(1)
$
271.2

 
63
%
 
$
351.8

 
65
%
 
$
390.4

 
63
%
Alternative(2)
105.1

 
24
%
 
128.4

 
24
%
 
171.2

 
28
%
Fixed Income
55.5

 
13
%
 
57.1

 
11
%
 
58.6

 
9
%
Total
$
431.8

 
100
%
 
$
537.3

 
100
%
 
$
620.2

 
100
%
Geography(3)
 
 
 
 
 
 
 
 
 
 
 
Global
$
226.3

 
52
%
 
$
278.8

 
52
%
 
$
324.2

 
52
%
Domestic
154.2

 
36
%
 
202.0

 
38
%
 
234.7

 
38
%
Emerging Markets
51.3

 
12
%
 
56.5

 
10
%
 
61.3

 
10
%
Total
$
431.8

 
100
%
 
$
537.3

 
100
%
 
$
620.2

 
100
%
_______________________________________________________________________________

(1)
The Equity asset class includes equity, balanced and asset allocation products.

(2)
The Alternative asset class includes private equity, multi-strategy, market neutral equity and hedge products.

(3)
The Geography of a particular investment product describes the general location of its investment holdings.
Our Structure and Relationship with Affiliates
We establish and maintain long-term partnerships with our Affiliates, believing that Affiliate equity ownership (along with AMG's ownership) aligns our interests and provides a powerful incentive for the principal owners of our Affiliates to continue to grow their businesses. Our partnership approach allows for the principal owners of our Affiliates to retain equity sufficient to address their particular needs and to maintain operational autonomy in managing their businesses, thereby preserving their entrepreneurial culture and independence. Although the equity structure of each investment is tailored to meet the needs of a particular Affiliate, in all cases we maintain a meaningful equity interest in the firm, with the remaining equity interests retained by Affiliate management.
The contractual structures of our investments vary from Affiliate to Affiliate, reflecting our tailored partnership approach.  Where we own a majority of the equity interests of a firm, we typically use structures referred to as revenue sharing arrangements where a percentage of revenue is allocable to fund operating expenses, including compensation (the "Operating Allocation"), while the remaining revenue (the "Owners' Allocation") is allocable to us and Affiliate management. In other revenue sharing arrangements, we own a minority interest that allocates a percentage of the Affiliate's revenue to us, with the remaining revenue available to the Affiliate to pay operating expenses and profit distributions to the other owners. Under our revenue sharing arrangements, our contractual share of revenue generally has priority over allocations to Affiliate management. Certain of our Affiliates operate under profit-based arrangements through which we receive a share of profits as cash flow, rather than a percentage of revenue through a typical revenue sharing agreement. As a result, we participate in increases or decreases in the margin of such firms. From time to time, we may consider changes to the structure of our relationship with an Affiliate in order to better support the Affiliate's growth strategy.
Many of our operating agreements provide Affiliate management with conditional rights ("put rights") that enable them to gradually sell their retained equity interests to us at certain intervals over time. These agreements also provide us conditional rights that require Affiliate management to sell their equity interests to us ("call rights"). These rights enhance our ability to keep our ownership within a desired range and provide Affiliate management with sufficient incentives to grow and improve their business and create equity value for themselves. These conditional rights help facilitate our ability to provide equity ownership opportunities in our Affiliates to a broader group of management. In cases where we own a minority interest, we don't typically have such put and call arrangements.
When we own a majority of the equity interests of a firm, we consolidate the Affiliate's results. When we hold a minority investment, we generally use the equity method of accounting. Consistent with the equity method of accounting, we do not

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consolidate the operating results (including the revenue) of these Affiliates and, therefore, increases or decreases in these firms' assets under management and the resulting changes in advisory fees and performance fees will not affect our reported revenue.
Investments in Affiliates
Our target investment universe includes more than 1,800 investment management firms globally, and we have established long-term relationships with approximately 800 of these firms and continue to develop new relationships with additional firms. With our track record of successful partnership, we are uniquely positioned to execute on a diverse opportunity set, including a broad array of traditional, alternative and wealth management firms. We believe that demographic trends will continue to create a number of succession planning opportunities as the founders of independent firms recognize the need for partnership transition, or otherwise seek a degree of financial diversification and access to the resources and scale of a global asset management company to pursue their growth strategy. In addition, we believe alternative firms will continue to seek institutional partnerships and liquidity, thereby creating a number of opportunities for minority investments. Finally, we expect that transaction opportunities will continue to include the potential for investments resulting from subsidiary divestitures, secondary sales and other special situations.
We are well positioned to execute upon these investment opportunities through our established process of identifying and cultivating investment prospects, our broad industry relationships, and our substantial experience and expertise in structuring and negotiating transactions. We have a strong reputation as an outstanding partner to our existing Affiliates, and are widely recognized in the marketplace as providing an innovative solution for the succession needs of the highest quality boutique investment management firms in the world.
Competition
In each of our three principal distribution channels, we and our Affiliates compete with a large number of other domestic and foreign investment management firms, as well as subsidiaries of larger financial organizations. These firms may have significantly greater financial, technological and marketing resources, captive distribution and assets under management and many offer an even broader array of investment products and services. Since certain Affiliates are active in the same distribution channels, from time to time they compete with each other for clients. In addition, there are relatively few barriers to entry for new investment management firms to compete with our Affiliates, especially in the Institutional distribution channel. We believe that the most important factors affecting our ability to compete for clients in our three principal distribution channels are the:
performance records, investment style, discipline and reputation of our Affiliates and their management teams;

ability to attract and retain high quality investment professionals;

depth and continuity of client relationships;

diversity of products offered;

level of client service offered;

continued success of our global distribution platform and the strong business relationships with the major intermediaries who currently distribute our products; and

development and marketing of new investment strategies to meet the changing needs of investors.
The relative importance of each of these factors can vary depending on the distribution channel and the type of investment management service involved, as well as general market conditions. Each Affiliate's ability to retain and increase assets under management would be adversely affected if client accounts underperform in comparison to relevant benchmarks or peer groups, or if key personnel leave the Affiliate. The ability of each Affiliate to compete with other investment management firms also depends, in part, on the relative attractiveness of its investment philosophies and methods under then-prevailing market trends.
We compete with a number of acquirers of investment management firms, including other investment management companies, private equity firms, sovereign wealth funds and larger financial organizations. We believe that important factors affecting our ability to compete for future investments are the:

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degree to which target firms view our investment model, equity incentive structures and economies of scale as preferable, financially, operationally or otherwise, to acquisition or investment arrangements offered by other potential purchasers; and

reputation and performance of our existing and future Affiliates, by which target firms may judge us and our future prospects.
Government Regulation
Our business is subject to complex and extensive regulation by various regulatory authorities in jurisdictions around the world. This regulatory environment may be altered without notice by new laws or regulations, revisions to existing laws or regulations or new or revised interpretations or guidance. Global financial regulatory reform initiatives are likely to result in more stringent regulation, and changes in laws or regulations and their application to us (including under the new risk regime established by the Dodd-Frank Wall Street Reform and Consumer Protection Act) could have a material adverse impact on our business, our financial results and mode of operations, and could require that we or our Affiliates incur substantial cost or curtail our operations or investment offerings. Regulatory authorities may also conduct examinations or inspections of our operations or those of our Affiliates and any determination of a failure to comply with laws or regulations could result in disciplinary or enforcement action with penalties that may include the disgorgement of fees, fines, suspensions or censure of individual employees or revocation or limitation of business activities or registration. Even in the absence of wrongdoing, regulatory inquiries or proceedings could cause substantial expenditures of time and capital and result in reputational damage, and potentially have an adverse effect on the price of our common stock.

Our U.S. retail distribution platform is comprised of two advisers registered with the U.S. Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940 (Advisers Act), and they collectively sponsor over 70 U.S. mutual funds registered under the Investment Company Act of 1940 (Investment Company Act) that are managed by Affiliates and unrelated investment managers. The Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary duties, recordkeeping requirements, operational requirements and compliance and disclosure obligations. The Investment Company Act imposes additional obligations on fund advisers, including governance, compliance, reporting and fiduciary obligations relating to the management of mutual funds. Outside of the U.S., Affiliated Managers Group Limited is regulated by the Financial Conduct Authority in the United Kingdom and its branch, AMG Limited (Dubai), is regulated by the Dubai Financial Services Authority. Affiliated Managers Group (Hong Kong) Limited is regulated by the Securities and Futures Commission in Hong Kong, and Affiliated Managers Group Pty Ltd is regulated by the Australian Securities and Investments Commission in Australia. We and our Affiliates may be subject to regulatory capital requirements, including those of federal, state and non-U.S. regulatory agencies. Our and our Affiliates’ regulatory capital, as defined, meets or exceeds all minimum requirements.

Our Affiliates’ investment management operations are also subject to regulation by U.S. and non-U.S. authorities. The majority of our Affiliates are registered as investment advisers under the Advisers Act, and many of our Affiliates are also subject to non-U.S. regulatory oversight. We have Affiliates domiciled in a number of jurisdictions and these Affiliates are subject to extensive regulation under the laws and regulations of governmental authorities in each of these jurisdictions. Our Affiliates also offer their products and services in many countries around the world, and are subject to various requirements relating to such activities. Many of our Affiliates also sponsor registered and unregistered funds in the U.S. and in other jurisdictions, including Guernsey, Ireland, Luxembourg, British Virgin Islands and the Cayman Islands, and are subject to regulatory requirements in those jurisdictions and in the jurisdictions where those funds may be offered. Our Affiliates invest in publicly traded securities of issuers across the globe and are subject to requirements in numerous jurisdictions for reporting of beneficial ownership positions and other requirements. Virtually all aspects of the asset management business, including related sales and distribution activities, are subject to regulation. These laws, rules and regulations are primarily intended to protect the clients of asset managers, and generally grant supervisory agencies and regulatory bodies broad administrative powers, including the power to limit or restrict an investment adviser from conducting its business in the event of a failure to comply with such laws and regulations, to suspend registered employees and to invoke censures or fines for both the regulated business and its employees.

We and our Affiliates are also subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), and related regulations, with respect to their retirement plan clients. ERISA imposes duties on persons who are fiduciaries under ERISA, and prohibits certain transactions involving related parties to a retirement plan. The Department of Labor administers ERISA and regulates investment advisers who service retirement plan clients.

We and certain of our Affiliates are also regulated by the Commodity Futures Trading Commission with respect to the management of mutual funds and other products that utilize futures, swaps or other derivative products.

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In addition, we and certain of our Affiliates are registered broker-dealers and members of the Financial Industry Regulatory Authority (FINRA), for the purpose of distributing funds or other asset management products. These broker-dealers are subject to net capital rules that mandate that they maintain certain levels of capital. FINRA has adopted extensive regulatory requirements relating to sales practices, compliance and supervision, compensation and disclosure, and conducts periodic examinations of member broker-dealers. The SEC, FINRA and state securities commissions may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or registered employees. These administrative proceedings, whether or not resulting in adverse findings, can require substantial expenditures and can have an adverse impact on the reputation or business of a broker-dealer.

Due to the extensive laws and regulations to which we and our Affiliates are subject, we must devote substantial time, expense and effort to remaining current on, and addressing, legal and regulatory compliance matters. We have an experienced team of legal and compliance professionals in place to address the legal, regulatory and compliance requirements relating to our global operations, and have in place relationships with various legal and regulatory advisors in each of the countries where we have business interests. Each of our Affiliates has established a compliance program to address compliance requirements for its operations, and provides ongoing reporting to us on compliance matters.
Employees and Corporate Organization
As of December 31, 2014, we and our Affiliates had approximately 2,900 employees, the substantial majority of which were full-time. Neither we nor any of our Affiliates is subject to any collective bargaining agreements, and we believe that our labor relations are good. We were formed in 1993 as a corporation under the laws of the State of Delaware.
Our Web Site
Our web site is www.amg.com. It provides information about us, as well as a link in the "Investor Relations" section of our web site to another web site where you can obtain, free of charge, a copy of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, and any amendments to those reports filed or furnished with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. We make these reports available through our web site as soon as reasonably practicable after our electronic filing of such materials with, or the furnishing of them to, the SEC. The information contained or incorporated on our web site is not a part of this Annual Report on Form 10-K.

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Item 1A.
Risk Factors
We face a variety of risks that are substantial and inherent in our business, including market, liquidity, credit, operational, legal and regulatory risks. The following are some of the more important factors that could affect our business. Certain statements in “Risk Factors” are forward-looking statements. See “Forward-Looking Statements.”
Our financial results depend on investment management fees received by our Affiliates, which are impacted by market returns and investment performance.
Investment management fees are typically based on the market value of assets under management, and fees will be adversely affected by declines in the capital markets and in the equity markets in particular. Some of our Affiliates are paid fees based on investment performance on an absolute basis or relative to a benchmark and, as such, are directly dependent upon investment results which may vary substantially from year to year. Unfavorable market performance and volatility in the capital markets or in the prices of specific securities may impact the ability to market Affiliate products and services and reduce our Affiliates' assets under management, which in turn may adversely affect the fees payable to our Affiliates and, ultimately, our results of operations and financial condition. These factors may also impact our ability to market the products and services available through our U.S. retail distribution platform, which in turn may adversely affect the fees payable to us and impact our financial results. Additionally, global economic conditions, exacerbated by changes in the equity or debt marketplaces, unanticipated changes in currency exchange rates, interest rates, inflation rates, the yield curve, financial crises, war, terrorism, natural disasters or other factors that are difficult to predict affect equity markets and levels of our assets under management. Because our assets under management are largely concentrated in equity products, our financial results are particularly susceptible to downturns in the equity markets, or a decline in the assets invested in the equity markets.
Our growth strategy depends upon continued growth from our existing Affiliates and upon making new investments in boutique investment management firms.
Our Affiliates may not maintain their respective levels of performance or contribute to our growth at their historical or currently anticipated levels. Also, our Affiliates may be unable to carry out their management succession plans, which may adversely affect their operations and revenue streams and thus our results of operations.
The continued success of our investment program will depend upon our ability to find suitable firms in which to invest, our ability to negotiate agreements with such firms on acceptable terms, and our ability to raise the capital necessary to finance such transactions. We cannot be certain that we will be successful in investing in such firms or that they will have favorable operating results following our investment, which could have an adverse effect on our business, financial condition and results of operations.
Our financial results would be adversely affected by any reduction in our assets under management, and may be impacted by changes in the relative levels of assets under management among our Affiliates.
Investment management fees are primarily based on a percentage of the value of assets under management, and vary with the nature of the account or product managed. Any decrease in the level of our assets under management generally, as a result of either a decline in market value of such assets or net outflows, would reduce our revenue and profitability. Our Affiliates represent a diverse group of boutique investment management firms with predominantly actively managed products, and changes in investor risk tolerance or investment preferences could result in investor allocation away from products managed by our Affiliates or adversely impact their ability to maintain existing advisory relationships and fee structures. Additionally, our contractual revenue sharing arrangements with our Affiliates are tailored to meet the needs of each Affiliate and are therefore varied, and our revenue and profitability may be adversely affected by changes in the relative performance and the relative levels of assets under management among our Affiliates, independent of overall effective fee rates and our total level of assets under management. Fluctuations in the amount and mix of our assets under management may be attributable in part to market conditions outside of our control. Any decrease in the level of our assets under management or adverse changes in the mix among our Affiliates could negatively impact our financial condition and results of operations.
Historically, equity markets and our common stock have been volatile.
The market price of our common stock historically has experienced and may continue to experience volatility, and the broader equity markets have experienced and may again experience significant price and volume fluctuations. In addition, our announcements of our quarterly operating results, including changes in net client cash flows and aggregate assets under management, changes in general conditions in the economy or the financial markets and other developments affecting us, our Affiliates or our competitors could cause the market price of our common stock to fluctuate substantially.
If our reputation is harmed, we could suffer losses in our business and financial results.

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Our business depends on earning and maintaining the trust and confidence of our Affiliates and our stockholders. Our reputation is critical to our business and is vulnerable to threats that may be difficult or impossible to control, and costly or impossible to remediate. For example, failure to comply with applicable laws, rules or regulations, errors in our public reports or litigation, or the publicity surrounding these events, even if satisfactorily addressed, could adversely impact our reputation, our relationships with our Affiliates and our ability to negotiate agreements with boutique investment management firms, as well as negatively impact our financial results.     
Our business is highly regulated.
Our business is subject to extensive regulation by various regulatory and self-regulatory authorities in jurisdictions around the world, as detailed in “Government Regulation” in Item 1. These laws and regulations impose requirements, restrictions and limitations on our and our Affiliates' businesses and compliance with these laws and regulations results in significant cost and expense. If we or any of our Affiliates were to fail to comply with applicable laws, rules or regulations or be named as a subject of an investigation or other regulatory action, the public announcement and potential publicity surrounding any such investigation or action could have a material adverse effect on our stock price and result in increased costs even if we (or our Affiliates) were found not to have violated such laws, rules or regulations. Our failure or the failure of any Affiliate to satisfy regulatory requirements could subject us to civil liability, criminal liability or sanctions that might materially impact our or our Affiliate's business. As investment advisers, our Affiliates are subject to numerous obligations, fiduciary duties and other regulatory requirements, where non-compliance could result in censure or termination of adviser status, litigation or reputational harm, any of which could have an adverse effect on our stock price and results of operations.
Proposals in the U.S. and the European Union have called for more stringent regulation of the financial services industry in which we and our Affiliates operate, which may make it more likely that changes will occur that could adversely affect our business, our access to capital and the market for our common stock.
Changes in laws or regulatory requirements, or the interpretation or application of such laws and regulatory requirements by regulatory authorities, can occur without notice and could have a material adverse impact on our financial results and mode of operations. In the U.S., regulatory uncertainty continues to surround the Dodd-Frank Wall Street Reform and Consumer Protection Act, which represented a comprehensive overhaul of the financial services regulatory environment and requires federal agencies to implement numerous new rules, which may impose additional restrictions and limitations on our and our Affiliates' businesses as they are adopted. In the United Kingdom and Europe, our business may be impacted by financial services reform initiatives enacted or under consideration in the European Union. Compliance with these new laws and regulations may also result in increased compliance costs and expenses, and non-compliance may result in fines and penalties.
Our international operations are subject to foreign risks, including political, regulatory, economic and currency risks.
We and some of our Affiliates operate offices or advise clients outside of the U.S., and several Affiliates are based outside the U.S. Accordingly, we and our Affiliates that have non-U.S. operations are subject to risks inherent in doing business internationally, in addition to the risks our business faces more generally. These risks may include changes in applicable laws and regulatory requirements, difficulties in staffing and managing foreign operations, longer payment cycles, difficulties in collecting investment advisory fees receivable, different, and in some cases, less stringent legal, regulatory and accounting regimes, political instability, fluctuations in currency exchange rates, expatriation controls, expropriation risks and potential adverse tax consequences. In addition, we and certain of our Affiliates are required to maintain minimum levels of capital and such capital requirements may be increased from time-to-time, which may have the effect of limiting withdrawals of capital, repayment of intercompany loans and payment of distributions to us by these Affiliates. These or other risks related to our non-U.S. operations may have an adverse effect both on our Affiliates and on our consolidated business, financial condition and results of operations.
Failure to comply with the applicable laws, rules, regulations, codes, directives, notices or guidelines in any jurisdiction outside of the U.S. could result in a wide range of penalties and disciplinary actions, including fines, censures and the suspension or expulsion from a particular jurisdiction or market or the revocation of licenses, any of which could adversely affect our reputation and operations. Regulators in jurisdictions outside of the U.S. could also change their policies or laws in a manner that might restrict or otherwise impede our ability to offer our investment products and services in their respective markets, or we may be unable to keep up with, or adapt to, the ever changing, complex regulatory requirements in such jurisdictions or markets, which could further negatively impact our business.

Changes in tax laws or exposure to additional income tax liabilities could have a material impact on our financial condition, results of operations and liquidity.

We are subject to income taxes as well as non-income based taxes, in both the U.S. and various jurisdictions outside of the U.S. and are subject to ongoing tax audits in such jurisdictions and may be subject to future tax audits. We regularly assess the

8


likely outcomes of these audits in order to determine the appropriateness of our tax provision. However, tax authorities may disagree with certain positions we have taken and assess additional taxes and/or penalties and interest. There can be no assurance that we will accurately predict the outcomes of these audits, and the actual outcomes of these audits could have a material impact on our financial condition. Changes in tax laws or tax rulings could materially impact our effective tax rate. For example, proposals in the U.S. and the European Union have called for additional taxation of the financial services industry and proposals for fundamental U.S. corporate tax reform, if enacted, could change the amount of taxes we are required to pay and have a significant impact on our future results of operations and financial condition.
Our Affiliates' autonomy limits our ability to alter their management practices and policies, and we may be held responsible for liabilities incurred by certain of them.
Although our agreements with our Affiliates typically give us the authority to control and/or vote with respect to certain of their business activities, we generally are not directly involved in managing our Affiliates' day-to-day activities, including investment management policies and procedures, fee levels, marketing and product development, client relationships, employment and compensation programs and compliance activities. As a consequence, our financial condition and results of operations may be adversely affected by problems stemming from the day-to-day operations of our Affiliates, where weaknesses or failures in internal processes or systems could lead to a disruption of our Affiliates' operations, liability to their clients, exposure to disciplinary action or reputational harm.
Some of our Affiliates are partnerships or limited liability companies of which we, or entities controlled by us, are the general partner or managing member. Consequently, to the extent that any of these majority-owned Affiliates incur liabilities or expenses that exceed their ability to pay for them, we may be directly or indirectly liable for their payment. Similarly, an Affiliate’s payment of distributions to us may be subject to claims by potential creditors, and an Affiliate may default on distributions that are payable to us. In addition, with respect to each of these Affiliates, we may be held liable in some circumstances as a control person for the acts of the Affiliate or its employees. While we and our Affiliates maintain errors and omissions and general liability insurance in amounts believed to be adequate to cover certain potential liabilities, we cannot be certain that we will not have claims that exceed the limits of available insurance coverage, that the insurers will remain solvent and will meet their obligations to provide coverage or that insurance coverage will continue to be available to us and our Affiliates with sufficient limits and at a reasonable cost. A judgment in excess of available insurance coverage could have a material adverse effect on our results of operations and financial condition.
The agreed-upon expense allocation under our revenue sharing arrangements with our Affiliates may not be large enough to pay for all of the respective Affiliate's operating expenses.
Our Affiliates have generally entered into agreements with us under which they have agreed to pay us a specified percentage of their respective revenue, while retaining a percentage of revenue for use in paying that Affiliate's operating expenses. We may not anticipate and reflect in those agreements possible changes in the revenue and expense base of any Affiliate, and the agreed-upon expense allocation may not be large enough to pay for all of an Affiliate's operating expenses. We may elect to defer the receipt of our share of an Affiliate's revenue to permit the Affiliate to fund such operating expenses, or we may restructure our relationship with an Affiliate with the aim of maximizing the long-term benefits to us, but we cannot be certain that any such deferral or restructured relationship would be of any greater benefit to us. Such a deferral or restructured relationship may have an adverse effect on our near-term or long-term results of operations and financial condition.
At our profit-based Affiliates, we have direct exposure to fluctuations in operating expenses relative to revenues.

We typically structure our Affiliate investments as revenue sharing arrangements, where a percentage of revenue is allocable to fund operating expenses and the remaining revenue is allocable to us and Affiliate management, with our share generally receiving priority. However, at our profit-based Affiliates, we receive a share of profits as cash flow, rather than a percentage of revenue. As a result, we participate directly in any increase or decrease in the revenue or operating expenses of such firms and our share of profits typically does not receive priority over Affiliate management or expenses. This structure allows us to benefit from any margin expansion at these Affiliates, but also exposes us directly to any margin contraction, which we may not anticipate and which could be significant.

Our industry is highly competitive.

Through our Affiliates, we compete with a broad range of domestic and foreign investment management firms, including public and private investment advisors, firms associated with securities broker-dealers, financial institutions, insurance companies, private equity firms, sovereign wealth funds and other entities that serve our three principal distribution channels, many of whom have greater resources. This competition may reduce the fees that our Affiliates can obtain for their services. We believe that our Affiliates' ability to compete effectively with other firms in our three distribution channels depends upon our Affiliates' products, investment performance, reputations, and client-servicing capabilities, and the marketing and distribution

9


of their investment products, among other factors. See "Competition" in Item 1. Our Affiliates may not compare favorably with their competitors in any or all of these categories. From time to time, our Affiliates also compete with each other for clients.

The market for acquisitions of interests in boutique investment management firms is highly competitive. Many other public and private financial services companies, including commercial and investment banks, private equity firms, sovereign wealth funds, insurance companies and investment management firms, which may have significantly greater resources than we do, also invest in or buy boutique investment management firms. Further, we utilize a structure with our Affiliates that is designed to provide appropriate incentives for management owners while enabling us to protect our interests, including through revenue sharing arrangements and through long-term employment agreements with key members of the firm. Target investment management firms may prefer investments in their firms under terms and structures offered by our competitors. We cannot guarantee that we will be able to compete effectively with such companies, that new competitors will not enter the market or that such competition will not make it more difficult or not feasible for us to make new investments in boutique investment management firms.
The failure to consummate announced investments in new boutique investment management firms could have an adverse effect on our operating results and financial condition.
Consummation of our acquisition transactions is generally subject to a number of closing conditions, contingencies and approvals, including but not limited to obtaining certain consents of the boutique investment management firms' clients. In the event that an announced transaction is not consummated, we may experience a decline in the price of our common stock to the extent that the then-current market price reflects a market assumption that we will complete the announced transaction. In addition, the fact that a transaction did not close after we announced it publicly may negatively affect our ability and prospects to consummate transactions in the future. Finally, we must pay costs related to these transactions, including legal and accounting fees, even if the transactions are not completed, which may have an adverse effect on our results of operations and financial condition.
We expect that we will need to raise additional capital in the future, and existing or future resources may not be available to us in sufficient amounts or on acceptable terms.
While we believe that our existing cash resources and cash flow from operations will be sufficient to meet our working capital needs for normal operations for the foreseeable future, our continuing acquisitions of interests in new and existing Affiliate boutique investment management firms may require additional capital. In addition, we are contingently liable to make additional purchase payments (of up to $276.0 million through 2017) upon the achievement of specified financial targets in connection with certain of our prior acquisitions. As of December 31, 2014, we expected to make payments of $75.0 million ($17.5 million in 2015) to settle obligations related to consolidated Affiliates and may make payments of up to $201.0 million related to the Company's equity method investments. Subject to certain limitations, Affiliate partners have the conditional right to put equity interests to us over time. Because these obligations are conditional and dependent upon the individual equity-holder’s decision to sell their equity, it is difficult to predict the frequency and magnitude of these repurchases (our Redeemable non-controlling interests balance at December 31, 2014 was $645.5 million). These obligations may require more cash than is then available from operations. Thus, we may need to raise capital by making additional borrowings or by selling shares of our common stock or other equity or debt securities, or to otherwise refinance a portion of these obligations.
As of December 31, 2014, we had outstanding total debt of $1.9 billion. Our level of indebtedness may increase if we fund one or more future acquisitions through borrowings under our credit facility. This additional indebtedness could increase our vulnerability to general adverse economic and industry conditions and will require us to dedicate a greater portion of our cash flow from operations to payments on our indebtedness.
The financing activities described above could increase our interest expense, decrease our Net income (controlling interest) or dilute the interests of our existing stockholders. In addition, our access to further capital, and the cost of capital we are able to access, is influenced by our credit rating. We have received credit ratings of A3 and BBB+ from Moody's Investors Service and Standard & Poor's Ratings Services, respectively. The rating agencies could decide to downgrade our ratings or the entire investment management industry, thereby making it difficult to access capital markets. In addition, a reduction in our credit rating could increase our borrowing costs.
Our credit facility imposes certain financial and other covenants relating to the conduct of our business and, if amounts borrowed under it were subject to accelerated repayment, we may not have sufficient assets or liquidity to repay such amounts in full.

Our credit facility requires us to maintain specified financial ratios, including a maximum leverage ratio and a minimum interest coverage ratio. Our credit facility also contains customary affirmative operating covenants and negative covenants that, among other things, place certain limitations on our and our subsidiaries’ ability to incur debt, merge or transfer assets and on

10


our ability to create liens. The breach of any covenant (either due to our actions or due to a significant and prolonged market-driven decline in our operating results) could result in a default under the credit facility. In the event of any such default, lenders that are party to the credit facility could refuse to make further extensions of credit to us and require all amounts borrowed under the credit facility, together with accrued interest and other fees, to be immediately due and payable. If any indebtedness under the credit facility were subject to accelerated repayment, we might not have sufficient liquid assets to repay such indebtedness in full.
We have substantial intangibles on our balance sheet, and any impairment of our intangibles could adversely affect our results of operations.
At December 31, 2014, our total assets were $7.7 billion, of which $4.4 billion were intangible assets, and $1.8 billion were Equity investments in Affiliates, an amount comprised primarily of intangible assets. We cannot be certain that we will ever realize the value of such intangible assets. An impairment of our intangible assets or an other than temporary decline in the value of our equity investments could adversely affect our results of operations.
We and our Affiliates rely on certain key personnel and cannot guarantee their continued service.
We depend on the efforts of our executive officers and our other officers and employees. Our executive officers, in particular, play an important role in the stability and growth of our existing Affiliates and in identifying potential investment opportunities for us. We do not have employment agreements with our executive officers, although each has a significant equity interest in the Company and is subject to non-solicitation and non-competitive restrictions that may be triggered upon their departure. However, there is no guarantee that these officers will remain with the Company.
In addition, our Affiliates depend heavily on the services of key principals, who in many cases have managed their firms for many years. These principals often are primarily responsible for their firm's investment decisions. Although we use a combination of economic incentives, transfer restrictions and, in some instances, non-solicitation agreements and employment agreements in an effort to retain key management personnel, there is no guarantee that these principals will remain with their firms. Since certain Affiliates contribute significantly to our revenue, the loss of key management personnel at these Affiliates could have a disproportionate adverse impact on our business.
Our controls and procedures may fail or be circumvented, our risk management policies and procedures may be inadequate, and operational risk could adversely affect our reputation and financial position.

We have adopted various controls, procedures, policies and systems to monitor and manage risk in our business. While we currently believe that our operational controls are effective, we cannot provide assurance that those controls, procedures, policies and systems will always be adequate to identify and manage the internal and external risks in our various businesses. Furthermore, we may have errors in our business processes or fail to implement proper procedures in our operating businesses, which may expose us to risk of financial loss or failure to comply with a regulatory requirement. We are also subject to the risk that our employees or contractors, the employees or contractors of our Affiliates, or other third parties may deliberately seek to circumvent established controls to commit fraud or act in ways that are inconsistent with our and our Affiliates’ controls, policies and procedures. The financial and reputational impact of control failures can be significant.

In addition, our businesses and the markets in which we operate are continuously evolving. If our risk framework is ineffective, either because it fails to keep pace with changes in the financial markets, regulatory requirements, our and our Affiliates’ businesses, counterparties, clients or service providers or for other reasons, we could incur losses, suffer reputational damage or find ourselves out of compliance with applicable regulatory or contractual mandates or expectations.
Provisions in our organizational documents, Delaware law and our debt agreements could delay or prevent a change in control of our company.
Provisions in our charter and by-laws and anti-takeover provisions under Delaware law could discourage, delay or prevent an unsolicited change in control in the Company. These provisions may also have the effect of making it more difficult for third parties to replace our current management without the consent of our Board of Directors. Provisions in our charter and by-laws that could delay or prevent an unsolicited change in control include:

the ability of our Board of Directors to issue preferred stock and to determine the terms, rights and preferences of the preferred stock without stockholder approval; and

the prohibition on the right of stockholders to call meetings or act by written consent and limitations on the right of stockholders to present proposals or make nominations at stockholder meetings.

11


Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15 percent or more of our outstanding common stock. In addition, our credit facility, the term loan and the indentures governing our senior notes contain various covenants that limit our ability, among other things, to consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets. Further, given our partnership approach, which is designed to preserve our Affiliates' operational autonomy and independence, a change in control may also be viewed negatively by our Affiliates, impacting their relationship with us.

These anti-takeover provisions and other factors may inhibit a change of control in circumstances that could give our stockholders the opportunity to realize a premium over the market price in our common stock, and may result in negative impacts on our financial results in periods following a change of control.

The sale or issuance of substantial amounts of our common stock could adversely impact the price of our common stock.

The sale or issuance of substantial amounts of our common stock in the public market could adversely impact its price. In connection with our financing activities, we have issued securities and entered into contracts including our junior convertible trust preferred securities and forward equity agreements that may result in the issuance of our common stock upon the occurrence of certain events. We also have exercisable options outstanding and unvested restricted stock that have been awarded under our share-based incentive plans. Moreover, in connection with future financing activities, we may issue additional convertible securities or shares of our common stock. Any such issuance of shares of our common stock could have the effect of substantially diluting the interests of our current equity holders. In the event that a large number of shares of our common stock are sold in the public market, the price of our common stock may fall.
Failure to maintain and properly safeguard an adequate technology infrastructure may limit our growth, result in losses or disrupt our business.
Our and our Affiliates' businesses are reliant upon our financial, accounting and technology systems and networks to process, transmit and store information, including sensitive client and proprietary information, and to conduct many business activities and transactions with clients, advisors, vendors and other third parties. The failure to implement, maintain and safeguard an infrastructure commensurate with the size and scope of our business could impede our productivity and growth, which could adversely impact our financial condition and results of operations. Further, we rely on third parties for certain aspects of our business, including financial intermediaries and technology infrastructure and service providers, and these parties are also susceptible to similar risks.
Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software, networks and mobile devices, and those of third parties on whom we rely, may be vulnerable to cyber attacks, breaches, unauthorized access, theft, misuse, computer viruses or other malicious code and other events that could have a security impact. If any such events occur, it could jeopardize our or our Affiliates', as well as our or their clients', employees', or counterparties' confidential, proprietary and other sensitive information processed and stored in, and transmitted through, our or third party computer systems, networks and mobile devices, or otherwise cause interruptions or malfunctions in our or our Affiliates', as well as our or their clients', employees' or counterparties' operations. Despite our efforts to ensure the integrity of our systems and networks, it is possible that we may not be able to anticipate or to implement effective preventive measures against all threats, especially because the techniques used change frequently and can originate from a wide variety of sources. As a result, we could experience disruption of our business, significant losses, increased costs, reputational harm, regulatory actions or legal liability, any of which could have a material adverse effect on our financial condition and results of operations. We may be required to spend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against fully or not fully covered through any insurance that we maintain.
Our financial results could be adversely affected by the financial stability of other financial institutions.

We and our Affiliates routinely execute transactions with various counterparties in the financial services industry. Historical market volatility highlights the interconnection of the global markets and demonstrates how the deteriorating financial condition of one institution may materially and adversely impact the performance of other institutions. We and our Affiliates may be exposed to credit, operational or other risk in the event that a counterparty with whom we transact defaults on its obligations, or if there are other unrelated systemic failures in the markets.
Our Affiliates' investment management contracts are subject to termination on short notice.
Our Affiliates derive almost all of their revenue from their clients based upon their investment management contracts with those clients. These contracts are typically terminable by the client without penalty upon relatively short notice (typically not longer than 60 days) and may not be assignable without consent. We cannot be certain that our Affiliates will be able to retain

12


their existing clients or attract new clients. If our Affiliates' clients withdraw a substantial amount of funds, it is likely to harm our results. In addition, investment management contracts with mutual funds are subject to annual approval by each fund's board of directors.

13


Item 1B.
Unresolved Staff Comments
There are no unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Securities Exchange Act of 1934, as amended.
Item 2.
Properties
We and our Affiliates conduct our operations around the world using a combination of leased and owned facilities. While we believe we have suitable property resources currently, we will continue to evaluate our property needs and will complement these resources as necessary.
Our principal offices are located at 777 South Flagler Drive, West Palm Beach, Florida; 600 Hale Street, Prides Crossing, Massachusetts; and 35 Park Lane, London, England. We also lease offices in Conshohocken, Pennsylvania; Norwalk, Connecticut; Chicago, Illinois; Sydney, Australia; Toronto, Canada; Zurich, Switzerland; Hong Kong; and Dubai, United Arab Emirates. In addition, each of our Affiliates leases office space in the city or cities in which it conducts business.
Item 3.
Legal Proceedings
From time to time, we and our Affiliates may be parties to various claims, suits and complaints. Currently, there are no such claims, suits or complaints that, in our opinion, would have a material adverse effect on our financial position, liquidity or results of operations.
Item 4.
Mine Safety Disclosures
Not applicable.

14


PART II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange (symbol: AMG). The following table sets forth the high and low prices as reported on the New York Stock Exchange since January 1, 2013 for the periods indicated.
 
High
 
Low
2013
 
 
 
First quarter
$
156.10

 
$
132.98

Second quarter
171.59

 
142.67

Third quarter
189.43

 
156.61

Fourth quarter
217.48

 
181.71

2014
 
 
 
First quarter
$
219.39

 
$
180.85

Second quarter
206.19

 
176.85

Third quarter
214.41

 
192.34

Fourth quarter
216.49

 
174.43

The closing price for a share of our common stock as reported on the New York Stock Exchange on February 18, 2015 was $216.63. As of February 18, 2015, there were 20 stockholders of record, including banks, brokers and other financial institutions holding shares in omnibus accounts for their customers (in total representing substantially all of the beneficial holders of our common stock).
We have not declared a cash dividend with respect to the periods presented. We do not currently anticipate paying cash dividends on our common stock as we intend to retain earnings to finance investments in new Affiliates, repay indebtedness, pay interest and income taxes, repurchase debt securities and shares of our common stock when appropriate, and develop our existing business. Furthermore, our credit facility contains limitations on cash dividends.
Issuer Purchases of Equity Securities
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under Outstanding Plans or Programs(1)
October 1-31, 2014
 

 
$

 

 
1,953,749

November 1-30, 2014
 
325,031

 
195.52

 
325,031

 
1,628,718

December 1-31, 2014
 
590,618

 
208.89

 
590,618

 
1,038,100

   Total
 
915,649

 
204.15

 
915,649

 
 
_______________________________________________________________________________
(1)
In July 2010 and October 2011, the Board of Directors approved share repurchase programs authorizing us to repurchase up to 0.5 million and 2.0 million shares, respectively, of our common stock. We repurchased approximately 0.9 million shares during the three months ended December 31, 2014. As of such date, there were no remaining shares available for repurchase under the July 2010 program and approximately 1.0 million shares remained available for repurchase under the October 2011 program, which does not expire. Purchases may be made from time to time, at management's discretion. We repurchased an additional 0.3 million shares from January 1 through February 18, 2015 and, as of February 18, 2015, approximately 0.7 million shares remained available for repurchase under the October 2011 program.

15


The following graph compares the cumulative stockholder return on our common stock from December 31, 2009 through December 31, 2014, with the cumulative total return, during the same period, on the Standard & Poor's 500 Index, the Standard & Poor's 500 Financial Sector Index and a peer group comprised of AllianceBernstein Holding L.P., Ameriprise Financial, Inc., BlackRock, Inc., Eaton Vance Corp., Franklin Resources, Inc., Invesco Ltd., Legg Mason, Inc., T. Rowe Price Group, Inc. and Waddell & Reed Financial, Inc. (collectively, the "New Peer Group"). Prior to this year, our peer group ("Old Peer Group") also included The Bank of New York Mellon Corp., Northern Trust Corp. and State Street Corp. The peer group was revised this year to return to a focus on asset management companies, and to remove banks and trusts that may not be viewed by shareholders and proxy advisory firms as comparable due to their business model and size. The comparison assumes the investment of $100 on December 31, 2009 in our common stock and each of the comparison indices and, in each case, assumes reinvestment of all dividends.


16


Item 6.
Selected Financial Data
Set forth below are selected financial data for the last five years. This data should be read in conjunction with, and is qualified in its entirety by reference to, the Consolidated Financial Statements and accompanying notes included elsewhere in this Annual Report on Form 10-K.
 
For the Years Ended December 31,
(in millions, except as noted and per share data)
2010
 
2011
 
2012
 
2013
 
2014
Assets under Management (at period end) (in billions)
$
320.0

 
$
327.5

 
$
431.8

 
$
537.3

 
$
620.2

Statement of Income Data
 
 
 
 
 
 
 
 
 
Revenue
$
1,358.2

 
$
1,704.8

 
$
1,805.5

 
$
2,188.8

 
$
2,510.9

Net income
287.3

 
359.6

 
411.4

 
669.6

 
785.6

Net income (controlling interest)
138.6

 
164.9

 
174.0

 
360.5

 
452.1

Earnings per share (diluted)
2.81

 
3.11

 
3.28

 
6.55

 
8.01

Other Financial Data
 
 
 
 
 
 
 
 
 
Cash flow from (used in):
 
 
 
 
 
 
 
 
 
Operating activities
$
480.7

 
$
708.5

 
$
633.2

 
$
957.1

 
$
1,392.2

Investing activities
(973.8
)
 
(67.7
)
 
(802.3
)
 
(50.3
)
 
(1,268.1
)
Financing activities
545.0

 
(503.8
)
 
146.2

 
(869.1
)
 
(32.9
)
Economic net income (controlling interest)(1)
299.1

 
351.0

 
408.8

 
570.1

 
644.4

Economic earnings per share(1)
6.09

 
6.62

 
7.71

 
10.31

 
11.45

EBITDA (controlling interest)(1)
404.4

 
471.3

 
543.4

 
819.9

 
900.8

Balance Sheet Data
 
 
 
 
 
 
 
 
 
Total assets
$
5,279.8

 
$
5,218.9

 
$
6,187.1

 
$
6,318.8

 
$
7,698.1

Long-term debt
1,392.0

 
1,198.2

 
1,630.6

 
1,383.7

 
1,894.9

Redeemable non-controlling interests
406.3

 
451.8

 
477.5

 
641.9

 
645.5

Total equity
2,375.3

 
2,499.6

 
3,041.4

 
3,144.6

 
3,643.2

_______________________________________________________________________________

(1)
Economic net income (controlling interest), including Economic earnings per share, and EBITDA (controlling interest) are non-GAAP performance measures and are discussed in "Supplemental Performance Measures."
In the fourth quarter of 2010, we modified our Economic net income (controlling interest) definition to no longer add back Affiliate depreciation to Net income (controlling interest). If we had applied this definition change from the beginning of 2010, Economic net income (controlling interest) would have been $292.3 million and Economic earnings per share would have been $5.95 for the year ended December 31, 2010.

17


Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of Affiliated Managers Group, Inc. and its subsidiaries (collectively, the “Company” or “AMG”) should be read in conjunction with the “Forward-looking Statements” section set forth in Part I and the “Risk Factors” section set forth in Item 1A of Part I of this Annual Report on Form 10-K and in any more recent filings with the U.S. Securities and Exchange Commission (the “SEC”), each of which describe these risks, uncertainties and other important factors in more detail.
Executive Overview
The following executive overview summarizes the significant trends affecting our results of operations and financial condition. This overview and the remainder of this Management's Discussion and Analysis of Financial Condition and Results of Operations supplements, and should be read in conjunction with, the Consolidated Financial Statements of AMG and the notes thereto contained elsewhere in this Annual Report on Form 10-K.
In 2014, we completed majority investments in SouthernSun Asset Management, LLC ("SouthernSun"), River Road Asset Management, LLC ("River Road") and Veritas Asset Management, LLP ("Veritas").  We also completed a minority investment in EIG Global Energy Partners, LLC ("EIG") as well as an additional investment in our Affiliate, AQR Capital Management, LLC ("AQR"), both of which are accounted for under the equity method of accounting.  Following the close of these transactions, Affiliate partners continue to hold a substantial portion of the equity in their respective businesses and direct its day-to-day operations.
For the year ended December 31, 2014, Net income (controlling interest) was $452.1 million, and Earnings per share (diluted) was $8.01, representing a 22% increase over the prior year. For the year ended December 31, 2013, Net income (controlling interest) was $360.5 million, and Earnings per share (diluted) was $6.55.
For the year ended December 31, 2014, Economic net income (controlling interest) was $644.4 million, Economic earnings per share was $11.45, representing an 11% increase over the prior year, and EBITDA (controlling interest) was $900.8 million. For the year ended December 31, 2013, Economic net income (controlling interest) was $570.1 million, Economic earnings per share was $10.31 and EBITDA (controlling interest) was $819.9 million. Economic net income (controlling interest), including Economic earnings per share, and EBITDA (controlling interest) are non-GAAP performance measures and are discussed in "Supplemental Performance Measures."
For the year ended December 31, 2014 our assets under management increased 15% to $620.2 billion. The increase was primarily the result of $43.7 billion from new investments, $21.4 billion from organic growth from net client cash flows and $15.0 billion from investment performance.
The table below shows our financial highlights for each of the past three years:
(in millions, except as noted and per share data)
2012
 
2013
 
% Change
 
2014
 
% Change
Assets under management (in billions)
$
431.8

 
$
537.3

 
24
%
 
$
620.2

 
15
%
Average assets under management (in billions)
381.2

 
483.8

 
27
%
 
585.9

 
21
%
Revenue
1,805.5

 
2,188.8

 
21
%
 
2,510.9

 
15
%
Net income (controlling interest)
174.0

 
360.5

 
107
%
 
452.1

 
25
%
Earnings per share (diluted)
3.28

 
6.55

 
100
%
 
8.01

 
22
%
Economic net income (controlling interest)(1)
408.8

 
570.1

 
39
%
 
644.4

 
13
%
Economic earnings per share(1)
7.71

 
10.31

 
34
%
 
11.45

 
11
%
EBITDA (controlling interest)(1)
543.4

 
819.9

 
51
%
 
900.8

 
10
%
_______________________________________________________________________________

(1)
Economic net income (controlling interest), including Economic earnings per share, and EBITDA (controlling interest) are non-GAAP performance measures and are discussed in "Supplemental Performance Measures."
Supplemental Performance Measures
Economic Net Income (controlling interest)
As supplemental information, we provide non-GAAP performance measures that we refer to as Economic net income (controlling interest) and Economic earnings per share. We consider Economic net income (controlling interest) an important

18


measure of our financial performance, as we believe it best represents our operating performance before our share of non-cash expenses relating to our acquisition of interests in our Affiliates. Economic net income (controlling interest) and Economic earnings per share are used by our management and Board of Directors as our principal performance benchmarks, including as measures for aligning executive compensation with stockholder value. These measures are provided in addition to, but not as a substitute for, Net income (controlling interest) and Earnings per share (diluted), or any other GAAP measure of financial performance or liquidity.
Under our Economic net income (controlling interest) definition, we add to Net income (controlling interest) our share of amortization (including equity method amortization) and impairments, deferred taxes related to intangible assets, and other economic items which include non-cash imputed interest expense (principally related to the accounting for convertible securities and contingent payment arrangements) and certain Affiliate equity expenses. We add back amortization and impairments attributable to acquired client relationships because these expenses do not correspond to the changes in value of these assets, which do not diminish predictably over time. The portion of deferred taxes generally attributable to intangible assets (including goodwill) is added back because we believe it is unlikely these accruals will be used to settle material tax obligations. We add back non-cash imputed interest expense and reductions or increases in contingent payment arrangements because it better reflects our contractual interest obligations. We add back non-cash expenses relating to certain transfers of equity between Affiliate partners when these transfers have no dilutive effect to shareholders.
Economic earnings per share represents Economic net income (controlling interest) divided by average shares outstanding (adjusted diluted). In this calculation, the potential share issuance in connection with our convertible securities is measured using a "treasury stock" method. Under this method, only the net number of shares of common stock equal to the value of these securities in excess of par, if any, are deemed to be outstanding. We believe the inclusion of net shares under a treasury stock method best reflects the benefit of the increase in available capital resources (which could be used to repurchase shares of common stock) that occurs when these securities are converted and we are relieved of our debt obligation. This method does not take into account any increase or decrease in our cost of capital in an assumed conversion.
The following table provides a reconciliation of Net income (controlling interest) to Economic net income (controlling interest) for each of the past three years:
(in millions, except per share data)
 
2012
 
2013
 
2014
Net income (controlling interest)
 
$
174.0

 
$
360.5

 
$
452.1

Intangible amortization and impairments(1)
 
220.9

 
148.9

 
121.0

Intangible-related deferred taxes(2)
 
17.6

 
38.1

 
47.8

Other economic items(3)
 
(3.7
)
 
22.6

 
23.5

Economic net income (controlling interest)
 
$
408.8

 
$
570.1

 
$
644.4

Average shares outstanding (diluted)
 
53.0

 
56.7

 
58.4

Assumed issuance of junior convertible securities shares
 

 
(2.0
)
 
(2.2
)
Dilutive impact of senior convertible securities shares
 

 
0.4

 

Dilutive impact of junior convertible securities shares
 

 
0.2

 
0.1

Average shares outstanding (adjusted diluted)
 
53.0

 
55.3

 
56.3

Economic earnings per share
 
$
7.71

 
$
10.31

 
$
11.45

_______________________________________________________________________________

(1)
Our reported intangible amortization includes amortization attributable to our non-controlling interests, amounts not added back to Net income (controlling interest) to measure our Economic net income (controlling interest). Further, for our equity method Affiliates, we do not separately report revenue or expenses (including intangible amortization) in our Consolidated Statements of Income. Our share of these Affiliates' amortization is reported in Income from equity method investments. Reported intangible amortization includes a $102.2 million expense in 2012, associated with the reduction in carrying value of an indefinite-lived intangible asset at one of our Affiliates.
The following table summarizes the Intangible amortization and impairments shown above:

19


(in millions)
2012
 
2013
 
2014
Reported Intangible amortization and impairments
$
200.0

 
$
128.2

 
$
122.2

Intangible amortization—non-controlling interests
(16.0
)
 
(21.0
)
 
(33.5
)
Equity method intangible amortization
36.9

 
41.7

 
32.3

Total
$
220.9

 
$
148.9

 
$
121.0


(2)
As described in Note (1) above, we reduced the carrying value of our indefinite-lived intangible assets at one of our Affiliates during 2012. The tax effect of the reduction in carrying value resulted in a $38.8 million decrease in our intangible-related deferred taxes for 2012. In 2012 and 2013 we also recorded a reduction in the United Kingdom tax rate, which decreased our intangible-related deferred taxes by $4.9 million and $7.2 million, respectively. In addition, in 2013 and 2014, we recorded reductions in our intangible-related deferred taxes for the restructuring of our non-U.S. operations of $5.9 million and $24.5 million, respectively.

(3)
In 2012, we adjusted our estimate of contingent payment obligations and recognized a gain of $35.8 million ($22.0 million net of tax). During 2013, we adjusted our estimate of contingent payment obligations and recognized a loss totaling $10.3 million ($6.3 million net of tax). During 2014, we settled our 2006 junior convertible securities and recognized a loss of $18.8 million ($11.6 million net of tax) upon redemption. These amounts are included in Imputed interest expense and contingent payment arrangements in the Consolidated Statements of Income.
EBITDA (controlling interest)
As supplemental information, we also provide a non-GAAP measure referred to as EBITDA (controlling interest). EBITDA (controlling interest) represents the controlling interest's operating performance before our share of interest expense, income taxes, depreciation and amortization. We believe that many investors use this information when comparing the financial performance of companies in the investment management industry. EBITDA, as calculated by us, may not be consistent with computations of EBITDA by other companies. This non-GAAP performance measure is provided in addition to, but not as a substitute for, Net income (controlling interest) or any other GAAP measure of financial performance or liquidity.
The following table provides a reconciliation of Net income (controlling interest) to EBITDA (controlling interest) for each of the past three years:
(in millions)
2012
 
2013
 
2014
Net income (controlling interest)
$
174.0

 
$
360.5

 
$
452.1

Interest expense
83.0

 
87.3

 
76.6

Imputed interest expense and contingent payment arrangements(1)
(12.0
)
 
31.7

 
30.1

Income taxes
71.6

 
185.0

 
213.4

Depreciation and other amortization
5.9

 
6.5

 
7.6

Intangible amortization and impairments(2)
220.9

 
148.9

 
121.0

EBITDA (controlling interest)
$
543.4

 
$
819.9

 
$
900.8

_______________________________________________________________________________
(1)
In 2012, we adjusted our estimate of contingent payment obligations and recognized a gain of $35.8 million. During 2013, we adjusted our estimate of contingent payment obligations and recognized a loss totaling $10.3 million. During 2014, we settled our 2006 junior convertible securities and recognized a loss of $18.8 million upon redemption. These amounts are included in Imputed interest expense and contingent payment arrangements in the Consolidated Statements of Income.

(2) See Note (1) to the table in the "Economic Net income (controlling interest)" section above.
Assets under Management
The following table presents changes in our Affiliates' reported assets under management by distribution channel:
Statement of Changes

20


(in billions)
Institutional
 
Mutual Fund
 
High Net
Worth
 
Total
December 31, 2011
$
205.7

 
$
85.2

 
$
36.6

 
$
327.5

Client cash inflows
43.5

 
35.0

 
11.0

 
89.5

Client cash outflows
(24.9
)
 
(25.3
)
 
(9.2
)
 
(59.4
)
Net client cash flows
18.6

 
9.7

 
1.8

 
30.1

New investments

 
14.8

 
13.2

 
28.0

Investment performance
30.8

 
12.3

 
4.4

 
47.5

Other(1)
(0.8
)
 
(0.1
)
 
(0.4
)
 
(1.3
)
December 31, 2012
$
254.3

 
$
121.9

 
$
55.6

 
$
431.8

Client cash inflows
45.4

 
52.7

 
10.9

 
109.0

Client cash outflows
(28.0
)
 
(31.1
)
 
(9.2
)
 
(68.3
)
Net client cash flows
17.4

 
21.6

 
1.7

 
40.7

New investments

 

 
3.0

 
3.0

Investment performance
31.3

 
26.0

 
7.1

 
64.4

Other(1)
(2.4
)
 
(0.1
)
 
(0.1
)
 
(2.6
)
December 31, 2013
$
300.6

 
$
169.4

 
$
67.3

 
$
537.3

Client cash inflows
52.1

 
42.9

 
10.7

 
105.7

Client cash outflows
(31.9
)
 
(43.1
)
 
(9.3
)
 
(84.3
)
Net client cash flows
20.2

 
(0.2
)
 
1.4

 
21.4

New investments
25.2

 
14.4

 
4.1

 
43.7

Investment performance
6.7

 
4.8

 
3.5

 
15.0

Other(1)
2.9

 

 
(0.1
)
 
2.8

December 31, 2014
$
355.6

 
$
188.4

 
$
76.2

 
$
620.2

_______________________________________________________________________________

(1)
Includes assets under management attributable to Affiliate product transitions, new investment client transitions and transfers of our interests in certain Affiliated investment management firms, the financial effects of which are not significant to our ongoing results.
The distribution channel analysis presented in the following table is based on average assets under management. For the Mutual Fund distribution channel, average assets under management represent an average of the daily net assets under management. For the Institutional and High Net Worth distribution channels, average assets under management reflect the billing patterns of particular client accounts. For example, assets under management for an account that bills in advance is presented in the table on the basis of beginning of period assets under management while an account that bills in arrears is reflected on the basis of end of period assets under management. Assets under management attributable to any investment in new Affiliates are included on a weighted average basis for the period from the closing date of the respective investment. We believe that this analysis more closely correlates to the billing cycle of each distribution channel and, as such, provides a more meaningful relationship to revenue.


21


 
For the Years Ended December 31,
(in millions, except as noted)
2012
 
2013
 
% Change
 
2014
 
% Change
Average Assets under Management (in billions)
 
 
 
 
 
 
 
 
 
Including equity method Affiliates
 
 
 
 
 
 
 
 
 
Institutional
$
230.9

 
$
277.1

 
20
%
 
$
334.0

 
21
 %
Mutual Fund
103.4

 
145.7

 
41
%
 
178.5

 
23
 %
High Net Worth
46.9

 
61.0

 
30
%
 
73.4

 
20
 %
Total
$
381.2

 
$
483.8

 
27
%
 
$
585.9

 
21
 %
Consolidated Affiliates
 
 
 
 
 
 
 
 
 
Institutional
$
154.0

 
$
169.4

 
10
%
 
$
188.6

 
11
 %
Mutual Fund
85.1

 
116.3

 
37
%
 
141.7

 
22
 %
High Net Worth
37.1

 
49.1

 
32
%
 
57.5

 
17
 %
Total
$
276.2

 
$
334.8

 
21
%
 
$
387.8

 
16
 %
Revenue(1)
 
 
 
 
 
 
 
 
 
Institutional
$
861.3

 
$
948.7

 
10
%
 
$
1,022.8

 
8
 %
Mutual Fund
774.4

 
1,023.0

 
32
%
 
1,242.6

 
21
 %
High Net Worth
169.8

 
217.1

 
28
%
 
245.5

 
13
 %
Total
$
1,805.5

 
$
2,188.8

 
21
%
 
$
2,510.9

 
15
 %
Net income (controlling interest)(2)
 
 
 
 
 
 
 
 
 
Institutional
$
126.0

 
$
219.9

 
75
%
 
$
227.0

 
3
 %
Mutual Fund(3)
27.3

 
103.4

 
279
%
 
180.1

 
74
 %
High Net Worth
20.7

 
37.2

 
80
%
 
45.0

 
21
 %
Total
$
174.0

 
$
360.5

 
107
%
 
$
452.1

 
25
 %
EBITDA (controlling interest)(4)
 
 
 
 
 
 
 
 
 
Institutional
$
323.5

 
$
493.3

 
52
%
 
$
482.8

 
(2
)%
Mutual Fund
169.5

 
246.1

 
45
%
 
324.9

 
32
 %
High Net Worth
50.4

 
80.5

 
60
%
 
93.1

 
16
 %
Total
$
543.4

 
$
819.9

 
51
%
 
$
900.8

 
10
 %
_______________________________________________________________________________

(1)
In 2012, 2013 and 2014, revenue attributable to clients domiciled outside the U.S. was approximately 41%, 38% and 37% of total revenue, respectively.

(2)
In 2012 and 2013, we adjusted our estimate of contingent payment obligations. In 2012, we recognized a gain of $35.8 million ($22.0 million net of tax) and allocated $19.9 million, $15.6 million and $0.3 million to our Institutional, Mutual Fund and High Net Worth channels, respectively. In 2013, we recognized a loss totaling $10.3 million and allocated $9.6 million and $0.7 million to our Mutual Fund and High Net Worth channels, respectively.

(3)
During 2012, we reduced the carrying value of an indefinite-lived intangible asset at one of our Affiliates and, accordingly, recorded expenses of $102.2 million ($63.4 million net of tax).

(4)
EBITDA (controlling interest), including a reconciliation to Net income (controlling interest), is a non-GAAP performance measure and is discussed in "Supplemental Performance Measure."
Results of Operations
Our Affiliate investments are generally structured as revenue sharing arrangements. When we own a controlling interest, we consolidate the Affiliates' results. Our discussion of revenue and operating expenses relates to our consolidated Affiliates.
When we hold a minority investment and are required to use the equity method of accounting, we do not consolidate the operating results of these firms (including their revenue). Our share of these firms' earnings (net of intangible amortization) is reported in Income from equity method investments.

22


Revenue
Through our Affiliates, we derive most of our revenue from investment management services. Investment management fees ("asset-based fees") are typically determined as a percentage fee charged on the value of a client's assets under management. Our private equity products generally bill for their services based on a percentage of committed or invested capital.
In addition, certain Affiliate alternative and equity products bill on the basis of investment performance, typically on an absolute basis or relative to a benchmark ("performance fees"). These products, which are primarily in the Institutional distribution channel, are often structured to have returns that are not directly correlated to changes in broader equity indices and, if earned, the performance fees are typically billed less frequently than an asset-based fee. Although performance fees inherently depend on investment results and will vary from period to period, we anticipate performance fees to be a recurring component of our revenue.
Our revenue is generally determined by the level of our average assets under management and the composition of our assets across our distribution channels and products within our distribution channels, which realize different fee rates. Our ratio of asset-based fees to average assets under management (in total and by channel) is calculated as asset-based fees divided by average assets under management and may change as a result of new investments, net client cash flows, investment performance or changes in contractual fees. Therefore, changes in this ratio should not necessarily be viewed as an indicator of changes in contractual fee rates billed by our Affiliates to their clients.
Our revenue increased $322.1 million or 15% in 2014, primarily from a 16% increase in average assets under management at our consolidated Affiliates. Increases in average assets under management from net client cash flows and investment performance at existing Affiliates increased revenue $243.6 million or 11% and increases in average assets under management from our 2014 investments in new Affiliates increased revenue $78.5 million or 4%.
Our revenue increased $383.3 million or 21% in 2013, primarily from a 21% increase in average assets under management at our consolidated Affiliates from investment performance, net client cash flows and the full year impact of our 2012 investments in new Affiliates. During 2013, our Mutual Fund distribution channel grew more than our other channels. This growth would have resulted in a higher total ratio of revenue to average assets under management and a corresponding increase in revenue of approximately 2%; however, the increase in revenue was offset by a decline in the ratio of revenue to average assets under management in the Mutual Fund channel due to the full year impact of our 2012 investments in new Affiliates that have comparatively lower fee rates.
Changes in contractual fee rates did not have a significant impact on our results in either 2014 or 2013.
The following discusses the changes in our revenue by distribution channel.
Institutional Distribution Channel
Our revenue in the Institutional distribution channel increased $74.1 million or 8% in 2014, primarily from an 11% increase in average assets under management. Increases in average assets under management from net client cash flows and investment performance at existing Affiliates increased revenue $72.4 million or 8% and from our 2014 investments in new Affiliates increased revenue $27.7 million or 3%. These increases were partially offset by a decline in our ratio of revenue to average assets under management which reduced revenue by $26.0 million or 3%. The decline in our ratio of revenue to average assets under management resulted from changes in the composition of our assets under management within the channel, including decreases in assets under management in certain products that realize comparatively higher fee rates and increases in assets under management in certain products that realize comparatively lower fee rates.
Our revenue in the Institutional distribution channel increased $87.4 million or 10% in 2013, primarily from a 10% increase in average assets under management at our consolidated Affiliates from investment performance and net client cash flows.
Mutual Fund Distribution Channel
Our revenue in the Mutual Fund distribution channel increased $219.6 million or 21% in 2014, primarily from a 22% increase in average assets under management at our consolidated Affiliates. Increases in average assets under management from net client cash flows and investment performance at existing Affiliates increased revenue $183.6 million or 18% and increases in average assets under management from our 2014 investments in new Affiliates increased revenue $36.0 million or 3%.
Our revenue in the Mutual Fund distribution channel increased $248.6 million or 32% in 2013, primarily from a 37% increase in average assets under management from investment performance, net client cash flows and the full year impact of

23


our 2012 investments in new Affiliates. This increase was partially offset by a decline in our ratio of revenue to average assets under management which reduced revenue by $33.5 million or 3% primarily from our 2012 investments in new Affiliates that have comparatively lower fee rates and changes in the composition of our assets under management within the channel, including decreases in assets under management in certain products that realize comparatively higher fee rates and increases in assets under management in certain products that realize comparatively lower fee rates.
High Net Worth Distribution Channel
Our revenue in the High Net Worth distribution channel increased $28.4 million or 13% in 2014, primarily from a 17% increase in average assets under management at our consolidated Affiliates, partially offset by a decline in performance fees and other revenue of $4.3 million or 2%. Increases in average assets under management from net client cash flows and investment performance at existing Affiliates increased revenue $17.9 million or 9% and increases in average assets under management from our 2014 investments in new Affiliates increased revenue $14.8 million or 7%.
Our revenue in the High Net Worth distribution channel increased $47.3 million or 28% in 2013, primarily from a 32% increase in average assets under management from our 2012 investments in new Affiliates, investment performance and net client cash flows. The increases were partially offset by a decline in our ratio of revenue to average assets under management which reduced revenue by $8.0 million or 4% primarily from our 2012 investments in new Affiliates that have comparatively lower fee rates.
Operating Expenses
The following table summarizes our consolidated operating expenses:
 
For the Years Ended December 31,
(in millions)
2012
 
2013
 
% Change
 
2014
 
% Change
Compensation and related expenses
$
784.7

 
$
947.5

 
21
 %
 
$
1,030.5

 
9
 %
Selling, general and administrative
366.9

 
427.2

 
16
 %
 
485.5

 
14
 %
Intangible amortization and impairments
200.0

 
128.2

 
(36
)%
 
122.2

 
(5
)%
Depreciation and other amortization
14.1

 
14.0

 
(1
)%
 
16.9

 
21
 %
Other operating expenses
39.4

 
37.8

 
(4
)%
 
40.6

 
7
 %
Total operating expenses
$
1,405.1

 
$
1,554.7

 
11
 %
 
$
1,695.7

 
9
 %
A substantial portion of our operating expenses was incurred by our Affiliates, the majority of which was incurred by Affiliates with revenue sharing arrangements.
Compensation and related expenses increased $83.0 million or 9% in 2014 primarily as a result of increases in compensation expenses at existing Affiliates of $25.6 million, increases in compensation expense from our 2014 investments in new Affiliates of $28.6 million and compensation expense associated with Affiliate equity transactions of $16.8 million.
Compensation and related expenses increased $162.8 million or 21% in 2013 primarily as a result of increases in compensation expense at existing Affiliates of $97.1 million and increases in compensation expense from the full year impact of our 2012 investments in new Affiliates of $43.1 million and compensation expense associated with Affiliate equity transactions of $21.8 million.
Selling, general and administrative expenses increased $58.3 million or 14% in 2014 primarily from increases in sub-advisory and distribution expenses of $34.7 million at our Affiliates in the Mutual Fund distribution channel, an increase of $9.5 million from our 2014 investments in new Affiliates and an increase in acquisition-related professional fees of $6.4 million.
Selling, general and administrative expenses increased $60.3 million or 16% in 2013 primarily from increases in sub-advisory and distribution expenses of $26.1 million at our Affiliates in the Mutual Fund distribution channel and an increase of $15.6 million from the full year impact of our 2012 investments in new Affiliates.
Intangible amortization and impairments decreased $6.0 million or 5% in 2014 and $71.8 million or 36% in 2013. The decrease in 2014 was primarily due to a reduction of $30.2 million resulting from certain assets being fully amortized in 2013. This was partially offset by 2014 increases of $24.2 million on definite-lived assets at existing and new 2014 Affiliates. The decrease in 2013 was primarily the result of a $102.2 million reduction in the carrying value of an indefinite-lived intangible asset at one of our Affiliates in 2012 which did not reoccur in 2013. This decrease was partially offset by 2013 increases of

24


$29.3 million related to the reclassification of an indefinite-lived asset to a definite-lived assets and the full year impact from our 2012 investments in new Affiliates.
Income from Equity Method Investments
When we own a minority investment and are required to use the equity method of accounting, we only recognize our share of these Affiliates' earnings net of intangible amortization. Accordingly, we have not consolidated these Affiliates' operating results (including their revenue). The following table summarizes our share of the earnings from our equity method investments:
 
For the Years Ended December 31,
(in millions)
2012
 
2013
 
% Change
 
2014
 
% Change
Equity method earnings
$
166.6

 
$
349.5

 
110
%
 
$
314.0

 
(10
)%
Equity method amortization
36.9

 
41.7

 
13
%
 
32.3

 
(23
)%
Income from equity method investments
$
129.7

 
$
307.8

 
137
%
 
$
281.7

 
(8
)%
Equity method earnings decreased $35.5 million or 10% in 2014. The decrease in 2014 was primarily due to a decline in performance fees, partially offset by higher earnings from our 2014 investment in a new Affiliate of $13.3 million. Equity method amortization decreased $9.4 million or 23% in 2014, primarily from a reduction of $20.6 million as a result of certain assets being fully amortized in 2013. This decrease was partially offset by an increase of $10.9 million of intangible amortization from our 2014 investments in new and existing Affiliates.
Equity method earnings increased $182.9 million or 110% in 2013. This increase resulted primarily from higher performance fees and an increase in revenue at equity method Affiliates due to an increase in average assets under management, as well as the full year impact of our additional investment in an existing Affiliate in 2012. Equity method amortization increased $4.8 million or 13% in 2013 primarily as a result of the full year impact of intangible amortization from our additional investment in an existing Affiliate in 2012.
Other Income Statement Data
The following table summarizes non-operating income and expense data:
 
For the Years Ended December 31,
(in millions)
2012
 
2013
 
% Change
 
2014
 
% Change
Investment and other income
$
22.0

 
$
40.8

 
85
%
 
$
23.3

 
(43
)%
Interest expense
83.0

 
87.3

 
5
%
 
76.6

 
(12
)%
Imputed interest and contingent payment arrangements
(26.1
)
 
31.7

 
N.M.(1)

 
30.1

 
(5
)%
Income tax expense
83.8

 
194.1

 
132
%
 
227.9

 
17
 %
_______________________________________________________________________________

(1)
Percentage change is not meaningful.
Investment and other income decreased $17.5 million or 43% in 2014, principally as a result of $10.5 million decrease in Affiliate investment earnings and a $7.2 million gain on the sale of a foreign office in 2013 which did not reoccur in 2014. Investment and other income increased $18.8 million or 85% in 2013, principally as a result of $17.3 million increase in Affiliate investment earnings including a $7.2 million gain on the sale of a foreign office at one of our Affiliates.
Interest expense decreased $10.7 million or 12% in 2014, primarily as a result of the settlement of our 2006 junior convertible securities in 2014 and the settlement of our 2008 senior convertible securities in 2013, which collectively reduced interest expense by $27.6 million. This decrease was partially offset by interest expense of $15.6 million on our senior notes issued in February 2014.
Interest expense increased $4.3 million or 5% in 2013, primarily as a result of an increase of $15.2 million related to the issuance of senior notes in August and October 2012, partially offset by a decrease of $9.0 million in interest expense resulting from the settlement of our 2008 senior convertible securities.
Imputed interest expense and contingent payment arrangements decreased $1.6 million in 2014 and increased $57.8 million in 2013. The decrease in 2014 was primarily a result of a $10.3 million loss on the revaluation of our contingent payment arrangements in 2013 which did not reoccur in 2014 and a $9.9 million decrease in imputed interest from the

25


settlement of our 2008 senior convertible securities in 2013, partially offset by an $18.8 million loss recognized on the settlement of our 2006 junior convertible securities in 2014. The increase in 2013 was primarily a result of a $10.3 million loss on the revaluation of our contingent payment arrangements in 2013 as compared to a $53.8 million gain on the revaluation of our contingent payment arrangements in 2012, partially offset by a $4.6 million decrease in imputed interest expense from the settlement of our 2008 senior convertible securities.
Our effective tax rate for the year ended December 31, 2014 was 32.1% as compared to 33.9% for the year ended December 31, 2013 and 29.2 % in 2012. The rate decrease in 2014 was primarily from the net benefits of restructuring our non-US operations and reductions in our state valuation allowances, partially offset by the benefits of a reduction in corporate tax rates in the United Kingdom in 2013 which did not reoccur in 2014. The rate increase in 2013 was primarily from benefits from reductions in our valuation allowance for foreign tax assets in 2012 which did not reoccur in 2013, partially offset by the benefits of restructuring our non-US operations.
Net Income
The previously discussed changes in revenue and expenses had the following effect on Net income for the past two years:
 
 
For the Years Ended December 31,
(in millions)
 
2012
 
2013
 
% Change
 
2014
 
% Change
Net income
 
$
411.4

 
$
669.6

 
63
%
 
$
785.6

 
17
%
Net income (non-controlling interests)
 
237.4

 
309.1

 
30
%
 
333.5

 
8
%
Net income (controlling interest)
 
174.0

 
360.5

 
107
%
 
452.1

 
25
%
Liquidity and Capital Resources
In 2014, we met our cash requirements primarily through cash generated by operating activities, the issuance of the 2024 senior notes and borrowings of senior bank debt. Our principal uses of cash were to make investments in new Affiliates, make distributions to Affiliate partners and repurchase shares of our common stock.
We expect that our principal uses of cash for the foreseeable future will be for investments in new and existing Affiliates, distributions to Affiliate partners, share repurchases, payment of principal and interest on outstanding debt and general working capital purposes. We anticipate that cash flows from operations, together with borrowings under our senior unsecured revolving credit facility (the "credit facility") and proceeds from any forward equity transactions, will be sufficient to support our cash flow needs for the foreseeable future.
Cash and cash equivalents were $550.6 million and $469.6 million at December 31, 2014 and 2013, respectively. The following summarizes our cash flow activity for the years ended December 31, 2014, 2013 and 2012:
 
For the Years Ended December 31,
(in millions)
2012
 
2013
 
2014
Operating cash flow
$
633.2

 
$
957.1

 
$
1,392.2

Investing cash flow
(802.3
)
 
(50.3
)
 
(1,268.1
)
Financing cash flow
146.2

 
(869.1
)
 
(32.9
)
Operating Cash Flow
The increase in cash flows from operations in 2014 as compared to 2013 resulted principally from a $333.8 million increase in net income as adjusted for distributions from equity method investments and non-cash charges, a $128.3 million decrease in receivables and a $32.7 million increase in payables, accrued liabilities and other liabilities.
The increase in cash flows from operations in 2013 as compared to 2012 resulted principally from a $215.0 million increase in net income as adjusted for distributions from equity method investments and non-cash charges and a $177.2 million increase in payables, accrued liabilities and other liabilities. These changes were partially offset by a $60.2 million increase in receivables and an $8.1 million increase in other assets.
Investing Cash Flow

26


Net cash flow used in investing activities increased $1,217.8 million in 2014, as compared to 2013. The increase was due primarily to a $1,218.7 million increase in investments in Affiliates. Net cash flow used in investing activities decreased $752.0 million in 2013 primarily from a $771.1 million decrease in investments in Affiliates.
Financing Cash Flow
Financing cash flows increased $836.2 million in 2014 as compared to 2013. This was primarily a result of a $986.5 million increase in borrowings of senior debt, and a $180.7 million decrease in repayments of senior debt and convertible securities. These increases were partially offset by a $302.3 million increase in distributions to non-controlling interests. We used available cash and borrowings under our credit facility to finance our investments in new and existing Affiliates in 2014.
Cash flows used in financing activities decreased $1,015.3 million in 2013 as compared to 2012. This was primarily a result of $646.3 million in repayments of senior debt and settlement of convertible securities in 2013, a $210.0 million decrease in borrowings of senior debt and a $85.7 million increase in distributions to non-controlling interests.
The following table summarizes certain key financial data relating to our outstanding indebtedness:
 
December 31,
(in millions)
2012
 
2013
 
2014
Senior bank debt
$
325.0

 
$
525.0

 
$
855.0

Senior notes
340.0

 
340.0

 
736.8

Convertible securities
965.6

 
518.7

 
303.1

Senior Bank Debt
We have a $1.25 billion senior unsecured revolving credit facility, which matures in April 2018. We pay interest on any outstanding obligations at specified rates, based either on the LIBOR rate or the prime rate as in effect from time to time. As of December 31, 2014, the outstanding balance under the credit facility is $605.0 million.
On April 15, 2014, we entered into a $250.0 million five-year senior unsecured term loan which matures in 2019. We pay interest at specified rates (based on either the LIBOR rate or the prime rate as in effect from time to time). The proceeds were used to repay existing borrowings under our credit facility. Subject to certain conditions, we may borrow up to an additional $100.0 million.
Under the terms of our credit facility and term loan we are required to meet two financial ratio covenants. The first of these covenants is a maximum ratio of debt to EBITDA (the "bank leverage ratio") of 3.0. The second covenant is a minimum EBITDA to cash interest expense ratio of 3.0 (our "bank interest coverage ratio"). For purposes of calculating these ratios, share-based compensation and Affiliate equity expense is added back to EBITDA. As of December 31, 2014, our bank leverage and bank interest coverage ratios were 1.5 and 14.2, respectively, and we were in compliance with all terms of our credit facility. We have $645.0 million of remaining capacity under our credit facility, and could borrow all such capacity and remain in compliance with our credit facility. The credit facility and term loan are also subject to customary affirmative and negative covenants, including limitations on priority indebtedness, liens, cash dividends, asset dispositions, fundamental corporate changes and certain customary events of default.
We have received credit ratings of A3 and BBB+ by Moody's Investors Service and Standard & Poor's Ratings Services, respectively. A downgrade of our credit rating would have no significant financial effect on any of our agreements, securities or otherwise trigger a default.
Senior Notes
At December 31, 2014, we had three senior notes outstanding. The principal terms of these notes are summarized below.

27


 
2022
Senior
Notes
 
2024
Senior
Notes
 
2042
Senior
Notes
Issue date
October 2012

 
February 2014

 
August 2012

Maturity date
October 2022

 
February 2024

 
August 2042

Potential Call Date
October 2015

 
Any Time (1)

 
August 2017

Par value (in millions)
$
140.0

 
$
400.0

 
$
200.0

Call Price
At Par

 
As Defined (1)

 
At Par

Stated coupon
5.25
%
 
4.25
%
 
6.375
%
Coupon frequency
Quarterly

 
Semi-annually

 
Quarterly

_______________________________________________________________________________

(1)
The 2024 senior notes may be redeemed at any time, in whole or in part, at a make-whole redemption price plus accrued and unpaid interest.

On February 13, 2015, we issued $350.0 million aggregate principal amount of 3.50% senior notes due 2025 (the "2025 senior notes"). The unsecured 2025 senior notes pay interest semi-annually and may be redeemed at any time, in whole or in part, at a make-whole redemption price plus accrued and unpaid interest. In addition to customary event of default provisions, the indenture limits our ability to consolidate, merge or sell all or substantially all of our assets. The net proceeds were used to repay existing borrowings under our credit facility.

Convertible Securities
In 2014, we delivered a notice to redeem all $300.0 million principal amount of our outstanding 2006 junior convertible securities. In lieu of redemption, substantially all holders of the 2006 junior convertible securities elected to convert their securities into a defined number of shares. We issued 1.9 million shares of our common stock in connection with the conversion. All of the 2006 junior convertible securities have been canceled and retired.
In 2013, we settled $460.0 million principal amount outstanding of our 2008 senior convertible securities. In connection with our settlement, we paid an aggregate of $641.3 million and all of our 2008 senior convertible securities have been retired.
At December 31, 2014, we had junior convertible trust preferred securities outstanding that were issued in 2007 (the "2007 junior convertible securities"). The carrying value ($303.1 million as of December 31, 2014) is accreted to the principal amount ($430.8 million) at maturity over a remaining life of approximately 23 years. The 2007 junior convertible securities bear interest at 5.15% per annum, payable quarterly in cash. Each $50 security is convertible, at any time, into 0.25 shares of our common stock, which represents a conversion price of $200 per share. Holders of the securities have no rights to put these securities to us. Upon conversion, holders will receive cash or shares of our common stock, or a combination therefore, at our election. We may redeem the 2007 junior convertible securities if the closing price of the our common stock exceeds $260 per share for 20 trading days in a period of 30 consecutive trading days. These convertible securities are considered contingent payment debt instruments under federal income tax regulations, which require us to deduct interest in an amount greater than our reported Interest expense. These deductions result in annual deferred tax liabilities of approximately $8.7 million. These deferred tax liabilities will be reclassified directly to stockholders' equity if our common stock is trading above certain thresholds at the time of the conversion of the securities.
Forward Equity Sale Agreement
Under a forward equity agreement, we may sell shares of common stock up to an aggregate notional amount of $400.0 million. During 2012, we entered into contracts to sell a notional amount of $147.2 million at an average share price of $121.37. During 2013, we agreed to net settle $77.0 million notional amount of forward equity contracts at an average share price of $185.56. During 2014, we net settled $70.2 million notional amount of forward equity contracts at an average share price of $198.71. At December 31, 2014, we had $252.8 million remaining notional amount that were available to sell under the forward equity agreement.
Derivative Instruments
From time to time, we seek to offset our exposure to changing interest rates under our debt financing arrangements by entering into interest rate hedging contracts. We have entered into interest rate swap contracts to exchange a fixed rate for the variable rate on a portion of our credit facility or term loan. These contracts expire between 2015 and 2017. Under these

28


contracts, we will pay a weighted average fixed rate of 1.76% on a notional amount of $100.0 million through October 2015. Thereafter, through October 2017, we will pay a weighted average fixed rate of 2.14% on a remaining notional amount of $25.0 million. As of December 31, 2014, the unrealized loss on these contracts was $1.4 million.
Our Affiliates use foreign currency forward contracts to manage the foreign exchange risks associated with specific forecasted transactions denominated in foreign currencies. As of December 31, 2014, our Affiliates had outstanding forward foreign currency forward contracts with an aggregate notional value of $56.2 million and cumulative net losses of $0.5 million.
Affiliate Equity
Many of our operating agreements provide us with a conditional right to call and Affiliate partners the conditional right to put their retained equity interests at certain intervals. In cases where we own a minority interest, we don't typically have such put and call arrangements. The purchase price of these conditional purchases is generally calculated based upon a multiple of the Affiliate's cash flow distributions, which is intended to represent fair value. Affiliate management partners are also permitted to sell their equity interests to other individuals or entities in certain cases, subject to our approval or other restrictions.
Our current redemption value of $645.5 million for these interests has been presented as Redeemable non-controlling interests on our Consolidated Balance Sheets. Although the timing and amounts of these purchases are difficult to predict, we expect to repurchase approximately $75.0 million of Affiliate equity during 2015, and, in such event, will own the cash flow associated with any equity repurchased.
Commitments
We and our Affiliates are subject to claims, legal proceedings and other contingencies in the ordinary course of our and our Affiliates' business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved in a manner unfavorable to us or our Affiliates. We and our Affiliates establish accruals for matters for which the outcome is probable and the amount of the liability can be reasonably estimated. We believe that any liability in excess of these accruals upon the ultimate resolution of these matters will not have a material adverse effect on us.
Certain of our Affiliates operate under regulatory authorities which require that they maintain minimum financial or capital requirements. We are not aware of any significant violations of such financial requirements occurring during 2014.
We have committed to co-invest in certain investment partnerships. As of December 31, 2014, these unfunded commitments totaled approximately $67.8 million and may be called in future periods. In connection with a past acquisition agreement, we are contractually entitled to reimbursement from a prior owner for $21.1 million of these commitments if they are called.
Under past acquisition agreements, we are contingently liable, upon achievement of specified financial targets, to make payments of up to $276.0 million through 2017. In 2015, we expect to make payments of $17.5 million related to these contingent arrangements.
Share Repurchases
Our Board of Directors has periodically authorized share repurchase programs (most recently October 2011). As of December 31, 2014, there were approximately 1.0 million remaining shares available for repurchase under outstanding programs. The timing and amount of repurchases are determined at the discretion of management. In 2014, we repurchased 1.2 million shares for $238.6 million at an average price per share of $204.72. We repurchased an additional 0.3 million shares from January 1 through February 18, 2015 and, as of February 18, 2015, approximately 0.7 million shares remained available for repurchase under the October 2011 program.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2014. Contractual debt obligations include cash payment of fixed interest.

29


 
 
 
Payments Due
(in millions)
Total
 
2015
 
2016-2017
 
2018-2019
 
Thereafter
Contractual Obligations
 
 
 
 
 
 
 
 
 
Senior bank debt
$
855.0

 
$

 
$
605.0

 
$
250.0

 
$

Senior notes
1,317.4

 
37.2

 
74.2

 
74.2

 
1,131.8

Junior convertible securities
941.2

 
22.2

 
44.4

 
44.4

 
830.2

Leases
201.6

 
33.8

 
54.0

 
44.4

 
69.4

Other liabilities(1)
29.3

 
29.3

 

 

 

Derivative instruments
58.7

 
57.7

 
1.0

 

 

Total contractual obligations
$
3,403.2

 
$
180.2

 
$
778.6

 
$
413.0

 
$
2,031.4

Contingent Obligations
 
 
 
 
 
 
 
 
 
Contingent payment obligations(2)
$
276.0

 
$
119.3

 
$
156.7

 
$

 
$

_______________________________________________________________________________

(1)
Other liabilities reflect amounts payable to Affiliate managers related to our purchase of Affiliate equity interests. This table does not include liabilities for uncertain tax positions or commitments to co-invest in certain investment partnerships (of $28.8 million and $67.8 million as of December 31, 2014, respectively) as we cannot predict when such obligations will be paid.

(2)
The amount of contingent payments disclosed in the table represents our expected settlement amounts related to consolidated Affiliates and maximum settlement amounts related to our equity method investments.
Recent Accounting Developments
In April 2014, the Financial Accounting Standards Board (the "FASB") issued an update to the guidance for discontinued operations accounting and reporting. The new guidance amends the definition of discontinued operations and requires entities to provide additional disclosures regarding disposal transactions that do not meet the discontinued operations criteria. The new guidance is effective for interim and fiscal periods beginning after December 15, 2014. We do not expect this guidance to have a significant impact on our Consolidated Financial Statements.
In May 2014, the FASB issued a final standard on revenue from contracts with customers. The new standard provides a comprehensive model for revenue recognition. The new standard is effective for interim and fiscal periods beginning after December 15, 2016. We are evaluating the impact of this standard on our Consolidated Financial Statements.

In November 2014, the FASB issued an update to the guidance for hybrid financial instruments. The new guidance requires entities to determine the nature of the host contract by considering all stated and implied substantive terms and features of a hybrid financial instrument, weighing each term and feature on the basis of relevant facts and circumstances. The new guidance is effective for interim and fiscal periods beginning after December 15, 2015. We do not expect this guidance to have a significant impact on our Consolidated Financial Statements.

In February 2015, the FASB issued a new standard that amended the current consolidation guidance. The new standard changes the analysis required to determine whether an entity is a variable interest entity and should be consolidated. The new standard is effective for interim and fiscal periods beginning after December 15, 2015, and early adoption is permitted. We are evaluating the impact of this new standard on our Consolidated Financial Statements.
Critical Accounting Estimates and Judgments
The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The following are our critical accounting estimates and judgments used in the preparation of the Consolidated Financial Statements and actual results could differ materially from the amounts reported.
Fair Value Measurements
Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. These standards establish a fair value hierarchy that

30


gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
We make judgments to determine the fair value of certain assets, liabilities and equity interests when allocating the purchase price of our new investments, when revaluing our contingent payment arrangements, when we issue or repurchase equity interests and when we test our intangible assets or equity and cost method investments for impairment.
In determining fair values, we make assumptions about the growth rates, profitability and useful lives of existing and prospective client accounts, and consider historical and current market multiples, tax benefits, credit risk, interest rates and discount rates. We consider the reasonableness of our assumptions by comparing our valuation conclusions to observed market transactions, and in certain instances consult with third party valuation firms.
Goodwill
Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized, and is reported within the segments in which the Affiliate operates. Our goodwill impairment assessments are performed annually at the reporting unit level (in our case, our three distribution channels), or more frequently, should circumstances suggest fair value has declined below the related carrying value. If we determine that the fair value has declined below our related carrying value, an impairment is recognized to reduce the carrying value to its fair value. We completed our annual goodwill impairment assessment and no impairments were identified. For purposes of our assessment, we considered various qualitative factors (including market multiples for asset management businesses) and determined that it was more likely than not that the fair value of each of our reporting units was greater than its respective carrying amount, including goodwill. Only a substantial decline in the fair value of any of our reporting units would indicate that an impairment may exist.
Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets are comprised of investment advisory contracts between our Affiliates and their sponsored registered investment companies. Because the contracts are with the registered investment companies themselves, and not with the underlying investors, and the contracts between our Affiliates and the registered investment companies are typically renewed on an annual basis, industry practice under GAAP is to consider the contract life to be indefinite and, as a result, not amortizable.
We perform indefinite-lived intangible asset impairment tests annually, or more frequently should circumstances suggest fair value has declined below the related carrying value. If we determine that the fair value has declined below our related carrying value, an impairment is recognized to reduce the carrying value to its fair value. We completed our annual impairment assessment and no impairments were identified. For purposes of our assessment, we considered various qualitative factors (including market multiples) and determined that it was more likely than not that the fair value of each asset was greater than its carrying amount. Only a substantial decline in the fair value would indicate that an impairment may exist.
Definite-Lived Intangible Assets
Definite-lived intangible assets are comprised of investment advisory contracts between our Affiliates and their underlying investors, and are amortized over their estimated useful lives. We monitor the useful lives of these assets and revise them, if necessary. We review historical and projected attrition rates and other events that may influence our projections of the future economic benefit that we will derive from these relationships. Significant judgment is required to estimate the period that these assets will contribute to our cash flows and the pattern over which these assets will be consumed. We are currently amortizing our definite-lived intangible assets over an average useful life of approximately ten years.
We perform definite-lived intangible asset impairment tests annually, or more frequently should circumstances suggest fair value has declined below the related carrying value. If we determine that the fair value has declined below our related carrying value, an impairment is recognized to reduce the carrying value to its fair value. We assess each of our definite-lived acquired client relationships for impairment by comparing their carrying value to the projected undiscounted cash flows of the acquired relationships. We completed our annual assessment and noted that projected undiscounted cash flows over the remaining life of each of these assets significantly exceed their carrying value and, accordingly, only a substantial decline in the undiscounted cash flows underlying these assets would indicate that an impairment may exist.
Equity and Cost Method Investments
We evaluate equity and cost method investments for impairment by assessing whether the fair value of the investment has declined below its carrying value for a period we consider other-than-temporary. If we determine that a decline in fair value below our carrying value is other-than-temporary, an impairment is recognized to reduce the carrying value of the investment to its fair value.

31


For companies with quoted market prices in active markets, we use these prices to determine the fair value of our equity and cost method investments. For companies without quoted market prices in active markets, we determine the fair values by applying a market multiple to the estimated cash flows of each investment. Our fair value multiples are supported by observed transactions and discounted cash flow analyses which reflect assumptions of current and projected levels of Affiliate assets under management, fee rates and estimated expenses.
We completed our annual evaluation of equity and cost method investments and no impairments were identified. Only a substantial decline in the fair value of any of these investments for a period that is considered other-than-temporary would indicate that an impairment may exist.
Contingent Payment Arrangements
We periodically enter into contingent payment arrangements in connection with our business combinations. In these arrangements, the Company agrees to pay additional consideration to the sellers to the extent that certain levels of revenue growth are achieved. For consolidated Affiliates, we estimate the fair value of these potential future obligations by discounting the projected future payments (such estimates being dependent upon projected revenue) using current market rates. Our discount rates are developed with input from third-party valuation firms.
We then accrete these obligations to their expected payment amounts until they are measured. If the expected payment amounts subsequently change, the obligations are reduced or increased in the current period resulting in a gain or loss, respectively. Both gains and losses resulting from changes to expected payments and the accretion of these obligations to their expected payment amounts are reflected within Imputed interest expense and contingent payment arrangements in our Consolidated Statements of Income.
Redeemable Non-controlling Interests
Redeemable non-controlling interests represent the currently redeemable value of Affiliate equity interests. We may pay for these Affiliate equity purchases in cash, shares of our common stock or other forms of consideration, at our election.
We generally value these interests upon their transfer or repurchase by applying market multiples to cash flows, which is intended to represent fair value. The use of different assumptions could change the value of these interests, including the amount of compensation expense, if any, that we may report upon their transfer or repurchase.
Income Taxes
Tax regulations often require income and expense to be included in our tax returns in different amounts and in different periods than are reflected in the financial statements. Deferred taxes are established to reflect the temporary differences between the inclusion of items of income and expense in the financial statements and their reporting on our tax returns. Our overall tax position requires analysis to estimate the expected realization of tax assets and liabilities. Additionally, we must assess whether to recognize the benefit of uncertain tax positions, and, if so, the appropriate amount of the benefit.
Our deferred tax liabilities are generated primarily from intangible assets, convertible securities and deferred revenue. Most of our intangible assets are tax-deductible because we generally structure our Affiliate investments to be taxable to the sellers. We record deferred taxes because a substantial majority of our intangible assets do not amortize for financial statement purposes, but do amortize for tax purposes, thereby creating tax deductions that reduce our current cash taxes. These liabilities will reverse only in the event of a sale of an Affiliate or an impairment. We measure the estimated cost of such a reversal using enacted tax rates and projected state apportionment percentages. Intangible-related deferred tax liabilities are not recorded on U.S. basis differences at our foreign Affiliates because of the permanent nature of our investments.
Our convertible securities generate deferred taxes because our interest deductions for tax purposes are greater than our reported Interest expense. We measure these deferred tax liabilities using enacted tax rates and apportionment estimates for the period of the expected reversal. These liabilities may be reclassified to equity if the securities convert to common stock.
We regularly assess our deferred tax assets in order to determine the need for valuation allowances. Our principal deferred tax assets are state operating losses, foreign loss carryforwards and the indirect benefits of uncertain foreign tax positions. In our assessment, we make assumptions about future taxable income that may be generated to utilize these assets, which have limited lives. If we determine that we are unlikely to realize the benefit of a deferred tax asset, we establish a valuation allowance that would increase our tax expense in the period of such determination.
In our assessment of uncertain tax positions, we consider the probability that a tax authority would sustain our tax position in an examination. For tax positions meeting a "more-likely-than-not" threshold, the amount recognized in the financial statements is the benefit expected to be realized upon the ultimate settlement with the tax authority. For tax positions not meeting this threshold, no benefit is recognized.

32


Share-Based Compensation and Affiliate Equity
We have share-based compensation arrangements covering directors, senior management and employees (including our Affiliates). We calculate share-based compensation using the fair value of the awards on the grant date. Our share-based compensation arrangements typically vest and become fully exercisable over three to five years of continued employment, and in some cases, are further subject to certain performance or market conditions. We recognize expense net of expected forfeitures on a straight-line basis over the requisite service period, including grants that are subject to graded vesting.
We estimate the fair value of stock option awards using the Black-Scholes option pricing model. The Black-Scholes model requires us to make assumptions about the volatility of our common stock and the expected life of our stock options. In measuring expected volatility, we consider both the historical volatility of our common stock, as well as the current implied volatility from traded options. In determining volatility, we have placed less emphasis on periods of high volatility that are not representative of our future expectations.
For restricted stock awards with service or performance conditions, we determine the fair value of the awards using our share price on the date of grant. For awards with market conditions, the fair value of the award is determined using a Monte Carlo simulation with inputs for expected volatility, a risk-free rate and expected dividends. Our estimate of expected volatility is developed in a manner consistent with that of our stock options.
From time to time, we grant equity interests in our Affiliates to our management and Affiliate partners, with vesting, forfeiture and repurchase terms established at the date of grant. The fair value of the equity interests is determined as of the date of grant using a discounted cash flow analysis. Key valuation assumptions include projected assets under management, fee rates and discount rates.
International Operations
In connection with our international distribution initiatives, we have offices in Sydney, Australia; London, England; Zurich, Switzerland; Hong Kong, and Dubai, United Arab Emirates. In addition, we have international operations through Affiliates who are based outside of the U.S. or have significant operations outside of the U.S., or who provide some or a significant part of their investment management services to non-U.S. clients. In the future, we may open additional offices, or invest in other investment management firms which conduct a significant part of their operations outside of the U.S. There are certain risks inherent in doing business internationally, such as changes in applicable laws and regulatory requirements, difficulties in staffing and managing foreign operations, longer payment cycles, difficulties in collecting investment advisory fees receivable, different and in some cases, less stringent, regulatory and accounting regimes, political instability, fluctuations in currency exchange rates, expatriation controls, expropriation risks and potential adverse tax consequences. There can be no assurance that one or more of such factors will not have a material adverse effect on our international operations or our Affiliates that have international operations and, consequently, on our business, financial condition and results of operations.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Our revenue is derived primarily from advisory fees which are based on assets under management. Such values are affected by changes in financial markets (including interest rates and foreign exchange rates) and accordingly, declines in the financial markets will negatively impact our Revenue.
The value of our assets under management was $620.2 million as of December 31, 2014. A proportional 1% increase or decrease in the value of all our assets under management as of December 31, 2014, excluding assets under management on which advisory fees are assessed on committed capital, would have resulted in an annualized increase or decrease in revenue of approximately $24.6 million.
We have fixed rates of interest on our senior notes and on our junior convertible securities. We pay a variable rate of interest on our credit facility and term loan. While a change in market interest rates would not affect the interest expense incurred on our fixed rate securities, such a change may affect the fair value of these securities. We estimate that a 1% change in interest rates would have resulted in a net change in the value of our fixed rate securities as of December 31, 2014 of approximately $108.5 million.
Most of our revenue and expenses are denominated in U.S. dollars. A portion of our revenue and expenses are denominated in foreign currencies and may be impacted by movements in currency exchange rates. In addition, the valuations of our foreign Affiliates are impacted by fluctuations in foreign exchange rates, which could be recorded as a component of stockholders' equity. To illustrate the effect of possible changes in currency exchange rates, as of December 31, 2014, a 1% change in the Canadian dollar and British Pound to U.S. dollar exchange rates would have resulted in an approximate $7.8 million change to

33


stockholders' equity and a $1.9 million change to income before income taxes. During 2014, changes in currency exchange rates decreased stockholders' equity by $62.0 million.
From time to time, we seek to offset our exposure to changing interest rates under our debt financing arrangements and our Affiliates seek to offset exposure to foreign currency exchange rates by entering into derivative contracts as described in Liquidity and Capital Resources. We estimate that a 1% increase in interest rates and foreign currency exchange rates relative to the U.S. dollar as of December 31, 2014 would result in a net increase in the unrealized value of these derivative contracts of approximately $1.6 million and $0.1 million, respectively.
There can be no assurance that our hedging contracts will meet their overall objective of reducing our interest expense or that we will be successful in obtaining hedging contracts in the future on our existing or any new indebtedness.
Item 8.
Financial Statements and Supplementary Data
Management's Report on Internal Control Over Financial Reporting
Management of Affiliated Managers Group, Inc. (the "Company"), is responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting processes are designed by, or under the supervision of, the Company's chief executive and chief financial officers and effected by the Company's Board of Directors, management and other senior employees to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company's financial statements for external reporting purposes in accordance with accounting principles generally accepted in the U.S.
The Company's internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on our financial statements.
As of December 31, 2014, management conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the framework established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on this assessment, management has determined that the Company's internal control over financial reporting as of December 31, 2014 was effective.
Management has excluded SouthernSun Asset Management, LLC ("SouthernSun"), River Road Asset Management, LLC ("River Road") and Veritas Asset Management, LLP ("Veritas") from our assessment of internal control over financial reporting as of December 31, 2014 because they were acquired in a business combination in 2014. SouthernSun, River Road and Veritas' combined total assets and combined total revenues represent 1.5% and 2.5%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2014.
The Company's internal control over financial reporting as of December 31, 2014 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing in "Report of Independent Registered Public Accounting Firm," which expresses an unqualified opinion on the effectiveness of the firm's internal control over financial reporting as of December 31, 2014.

34


Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Affiliated Managers Group, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in equity and cash flows present fairly, in all material respects, the financial position of Affiliated Managers Group, Inc. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded SouthernSun Asset Management, LLC, River Road Asset Management, LLC, and Veritas Asset Management, LLP, from its assessment of internal controls over financial reporting as of December 31, 2014 because they were acquired by the Company in a purchase business combination during 2014. We have also excluded SouthernSun Asset Management, LLC, River Road Asset Management, LLC, and Veritas Asset Management, LLP, from our audit of internal control over financial reporting. SouthernSun Asset Management, LLC, River Road Asset Management, LLC, and Veritas Asset Management, LLP, are controlled subsidiaries of the Company whose total assets and total revenues represent 1.5% and 2.5%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2014.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 2015

35


AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
 
For the Years Ended December 31,
 
2012
 
2013
 
2014
Revenue
$
1,805.5

 
$
2,188.8

 
$
2,510.9

Operating expenses:
 
 
 
 
 
Compensation and related expenses
784.7

 
947.5

 
1,030.5

Selling, general and administrative
366.9

 
427.2

 
485.5

Intangible amortization and impairments
200.0

 
128.2

 
122.2

Depreciation and other amortization
14.1

 
14.0

 
16.9

Other operating expenses
39.4

 
37.8

 
40.6

 
1,405.1

 
1,554.7

 
1,695.7

Operating income
400.4

 
634.1

 
815.2

Income from equity method investments
129.7

 
307.8

 
281.7

Other non-operating (income) and expenses:
 
 
 
 
 
Investment and other income
(22.0
)
 
(40.8
)
 
(23.3
)
Interest expense
83.0

 
87.3

 
76.6

Imputed interest expense and contingent payment arrangements
(26.1
)
 
31.7

 
30.1

 
34.9

 
78.2

 
83.4

Income before income taxes
495.2

 
863.7

 
1,013.5

Income taxes
83.8

 
194.1

 
227.9

Net income
411.4

 
669.6

 
785.6

Net income (non-controlling interests)
(237.4
)
 
(309.1
)
 
(333.5
)
Net income (controlling interest)
$
174.0

 
$
360.5

 
$
452.1

Earnings per share (basic)
$
3.36

 
$
6.79

 
$
8.22

Earnings per share (diluted)
$
3.28

 
$
6.55

 
$
8.01

Average shares outstanding (basic)
51.7

 
53.1

 
55.0

Average shares outstanding (diluted)
53.0

 
56.7

 
58.4

The accompanying notes are an integral part of the Consolidated Financial Statements.

36


AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
For the Years Ended December 31,
 
2012
 
2013
 
2014
Net income
$
411.4

 
$
669.6

 
$
785.6

Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustment
18.5

 
(19.6
)
 
(62.0
)
Change in net realized and unrealized gain (loss) on derivative securities, net of tax
(0.7
)
 
1.0

 
0.3

Change in net unrealized gain (loss) on investment securities, net of tax
13.5

 
11.5

 
3.4

Other comprehensive income (loss)
31.3

 
(7.1
)
 
(58.3
)
Comprehensive income
442.7

 
662.5

 
727.3

Comprehensive income (non-controlling interests)
(239.6
)
 
(311.1
)
 
(317.4
)
Comprehensive income (controlling interest)
$
203.1

 
$
351.4

 
$
409.9

The accompanying notes are an integral part of the Consolidated Financial Statements.

37


AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except par value)
 
December 31,
 
2013
 
2014
Assets
 
 
 
Cash and cash equivalents
$
469.6

 
$
550.6

Receivables
418.4

 
425.9

Investments in marketable securities
157.9

 
172.6

Other investments
164.3

 
167.2

Fixed assets, net
92.3

 
95.4

Goodwill
2,341.7

 
2,652.8

Acquired client relationships, net
1,460.7

 
1,778.4

Equity method investments in Affiliates
1,123.3

 
1,783.5

Other assets
90.6

 
71.7

Total assets
$
6,318.8

 
$
7,698.1

Liabilities and Equity
 
 
 
Payables and accrued liabilities
$
514.7

 
$
808.3

Senior bank debt
525.0

 
855.0

Senior notes
340.0

 
736.8

Convertible securities
518.7

 
303.1

Deferred income taxes
456.9

 
491.7

Other liabilities
177.0

 
214.5

Total liabilities
2,532.3

 
3,409.4

Commitments and contingencies (Note 10)


 


Redeemable non-controlling interests
641.9

 
645.5

Equity:
 
 
 
Common stock ($.01 par value, 153.0 shares authorized; 53.9 shares outstanding in 2013 and 55.8 shares outstanding in 2014)
0.5

 
0.6

Additional paid-in capital
479.9

 
672.2

Accumulated other comprehensive income
74.0

 
31.8

Retained earnings
1,711.2

 
2,163.3

 
2,265.6

 
2,867.9

Less: Treasury stock, at cost (1.0 shares in 2013 and 1.2 shares in 2014)
(131.4
)
 
(240.9
)
Total stockholders' equity
2,134.2

 
2,627.0

Non-controlling interests
1,010.4

 
1,016.2

Total equity
3,144.6

 
3,643.2

Total liabilities and equity
$
6,318.8

 
$
7,698.1

The accompanying notes are an integral part of the Consolidated Financial Statements.

38


AFFILIATED MANAGERS GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in millions)
 
 
 
Total Stockholders' Equity
 
 
 
 
 
Shares Outstanding
 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 
Treasury
Stock at
Cost
 
Non-
controlling
Interests
 
Total
Equity
December 31, 2011
53.9

 
$
0.5

 
$
927.5

 
$
50.0

 
$
1,176.7

 
$
(288.7
)
 
$
633.6

 
$
2,499.6

Net income

 

 

 

 
174.0

 

 
237.4

 
411.4

Share-based compensation

 

 
25.4

 

 

 

 

 
25.4

Common stock issued under share-based incentive plans

 

 
(62.0
)
 

 

 
135.0

 

 
73.0

Tax benefit from share-based incentive plans

 

 
25.5

 

 

 

 

 
25.5

Affiliate equity activity

 

 
(47.9
)
 

 

 

 
21.9

 
(26.0
)
Investments in Affiliates

 

 

 

 

 

 
247.6

 
247.6

Shares repurchases