UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________________
FORM 10-K
(Mark One) | ||
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the fiscal year ended December 31, 2019
OR
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
__________________________________________________________________________
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) | |
(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 | Trading Symbol(s) | Name of each exchange on which registered | ||
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 ☒ 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 ☒
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 ☒ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company | Emerging growth company | |||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ý
At June 30, 2019, the aggregate market value of the common stock held by non-affiliates of the registrant, based upon the closing price of $92.14 on June 28, 2019 on the New York Stock Exchange, was $4,627,759,695 . There were 47,867,765 shares of the registrant’s common stock outstanding on February 25, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after December 31, 2019, and delivered to stockholders in connection with the registrant’s annual meeting of stockholders, are incorporated by reference into Part III.
FORM 10-K
TABLE OF CONTENTS
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PART I
Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K, in our other filings with the U.S. Securities and Exchange Commission (the “SEC”), in our press releases and in oral statements made with the approval of an executive officer may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, and other non-historical statements, and may be prefaced with words such as “outlook,” “guidance,” “believes,” “expects,” “potential,” “preliminary,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “projects,” “positioned,” “prospects,” “intends,” “plans,” “estimates,” “pending investments,” “anticipates” or the negative version of these words or other comparable words. 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. Forward-looking statements speak only as of the date they are made, and we will not undertake and we specifically disclaim any obligation to release publicly the result of any revisions that 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.
Item 1. | Business |
We are a global asset management company with equity investments in high-quality boutique investment management firms, which we call our “Affiliates.” Our strategy is to generate long-term value by investing in leading independent active investment managers, through a proven partnership approach, and allocating resources across our unique opportunity set to the areas of highest growth and return. Through our innovative partnership approach, each Affiliate’s management team retains significant equity ownership in their firm while maintaining operational autonomy. In addition, we offer centralized capabilities to our Affiliates across a variety of areas, including strategy, marketing and distribution, and product development. As of December 31, 2019, our aggregate assets under management were approximately $726 billion, pro forma for a new Affiliate investment which has since been completed, across a broad range of active, return-oriented strategies.
AMG’s Affiliates are successful independent investment firms, typically founded by a group of entrepreneurial partners who have built a specialized, investment-centric culture over time, value their independence, and intend to build an enduring franchise which serves clients across generations of management principals. Given their long-term investment performance records, our Affiliates are recognized as being among the industry’s leaders in their respective investment disciplines. Independent firms seeking an institutional partner are attracted to AMG’s unique partnership approach and our global reputation and track record across nearly three decades as a successful and supportive partner to boutique firms around the world.
We hold meaningful equity interests in each of our Affiliates, and typically each Affiliate’s management team retains a significant equity interest in their own firm. Affiliate management equity ownership (along with AMG’s long-term ownership) aligns our interests and preserves Affiliate management equity incentives, including the opportunity for Affiliate management to participate directly in the long-term future growth and profitability of their firms. Our innovative partnership approach maintains our Affiliates’ unique entrepreneurial cultures, investment independence, and operational autonomy in managing their businesses.
In certain cases, we invest in our Affiliates by providing growth capital or complementing their own marketing resources with AMG’s proven global distribution capabilities. We also provide succession planning solutions and advice to our Affiliates, which can include a degree of liquidity and financial diversification along with incentive alignment for next-generation partners. We take a long-term partnership approach with our Affiliates, which provides stability in facilitating succession planning across generations of Affiliate management principals. AMG is uniquely able to provide strategic support and expertise across various stages of boutique firms’ growth. We believe clients recognize that through certain fundamental characteristics of focused boutique managers, especially equity ownership and investment independence, these firms are well-positioned to achieve client investment goals and objectives, especially through alpha generation. AMG’s
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investment approach preserves these essential elements of boutique firms, and in partnering with us, our Affiliates can continue to grow while retaining their independence.
AMG generates long-term value by investing in new Affiliates, investing in existing Affiliates, and investing in centralized capabilities through which we can leverage AMG’s scale and resources to benefit our Affiliates and enhance their long-term growth prospects. In partnering with Affiliates, we are focused on investing in leading boutique investment management firms around the world managing active, return-oriented strategies, including traditional, alternative, and wealth management firms. Within our target universe, we seek strong and growing boutiques that offer illiquid and liquid alternative strategies, global equities strategies and multi-asset and fixed income strategies.
We anticipate that the principal owners of boutique investment management firms will continue to seek access to an evolving range of growth and succession solutions. We will, therefore, continue to have a significant opportunity to invest in outstanding firms across the global asset management industry, including investment opportunities resulting from subsidiary divestitures, secondary sales and other special situations. In addition, we have the opportunity to make additional equity investments in our existing Affiliates, or invest in their growth by providing seed or other growth capital. We are well-positioned to execute upon these investment opportunities through our established process of identifying and cultivating high-quality investment prospects; our broad industry network and proprietary relationships developed with prospects over many years; our substantial experience and expertise in structuring and negotiating transactions; and our strong global reputation as an outstanding partner to our Affiliates, as well as for providing innovative solutions for the strategic needs of boutique investment management firms.
Investment Management Operations
Through our Affiliates, we provide a comprehensive and diverse range of active, return-oriented strategies designed to assist institutional, retail and high net worth clients worldwide in achieving their investment objectives. We manage disciplined and focused investment strategies that address the specialized needs of institutional clients, including foundations and endowments, defined benefit and defined contribution plans for corporations and municipalities, and multi-employer plans. We provide boutique investment management expertise to retail investors through advisory and sub-advisory services to active, return-oriented mutual funds, Undertakings for the Collective Investment of Transferable Securities (“UCITS”), collective investment trusts and other retail products. We also provide investment management and customized investment counseling and fiduciary services to high net worth individuals, families, charitable foundations and individually managed accounts directly and through intermediaries, including brokerage firms or other sponsors.
As of December 31, 2019, we managed approximately $726 billion, pro forma for a new Affiliate investment which has since been completed, in equities, alternative and multi-asset strategies across investment styles, asset classes and geographies. The following chart provides information regarding our equities, alternative and multi-asset strategies as of December 31, 2019.
Assets Under Management |
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Through our Affiliates, we offer investors access to a broad and diverse array of independent boutique managers with distinct brands and specialized investment processes. Our Affiliates distribute their investment services and products to institutional investors through direct sales efforts and established relationships with consultants and intermediaries around the world through their own business development resources. In addition, our global distribution platform operates in major markets to extend the reach of our Affiliates’ own business development efforts, including strategy, marketing, distribution and product development. Our Affiliates benefit from the expertise of our senior sales and marketing professionals located in Asia, Australia, Europe, the Middle East, the UK and the U.S.
Our Affiliates’ investment management services are also distributed globally to retail investors through our Affiliates’ own efforts and through our retail distribution platforms in the form of advisory and sub-advisory services to mutual funds and other retail oriented products. Our Affiliates’ investment management services are delivered to retail investors through various intermediaries, including independent investment advisers, retirement plan sponsors, broker-dealers, major fund marketplaces, sponsors of separately managed accounts (including unified managed accounts), and bank trust departments.
Our Affiliates currently manage assets for investors in more than 50 countries, including all major developed markets.
Our Structure and Relationship with Affiliates
We maintain long-term partnerships with the management equity owners of our Affiliates, and believe that Affiliate management equity ownership (along with our long-term ownership) aligns our and our Affiliates’ interests, enhances Affiliate management equity incentives, and preserves the opportunity for Affiliate management to participate directly in the long-term future growth and profitability of their firm. Our innovative partnership approach maintains our Affiliates’ unique entrepreneurial cultures, investment independence, and operational autonomy in managing their businesses. Although the equity structure of each Affiliate investment is tailored to meet the needs of the management equity owners of the particular Affiliate, we typically maintain a meaningful equity interest in the Affiliate, with a significant equity interest retained by Affiliate management.
Each of our Affiliates operates through distinct legal entities, which affords us the flexibility to design a separate operating agreement for each Affiliate that reflects our customized arrangements with respect to governance, economic participation, equity incentives and the other terms of our relationship. In each case, the operating agreement provides for a governance structure that gives Affiliate management the authority to manage and operate the business on a day-to-day basis. The operating agreement also reflects the specific terms of our economic participation in the Affiliate, which, in each case, uses a “structured partnership interest” to ensure alignment of our economic interests with those of Affiliate management.
For a majority of our Affiliates, we use structured partnership interests in which we contractually share in the Affiliate’s revenue without regard to expenses. In this type of structured partnership interest, the Affiliate allocates a specified percentage of its revenue to us and Affiliate management, while using the remainder of its revenue for operating expenses and for distributions to Affiliate management. We and Affiliate management, therefore, participate in any increase or decrease in revenue, and only Affiliate management participates in any increase or decrease in expenses. Under these structured partnership interests our contractual share of revenue generally has priority over distributions to Affiliate management.
For other Affiliates, we use structured partnership interests in which we contractually share in the Affiliate’s revenue less agreed-upon expenses. This type of partnership interest allows us to benefit from any increase in revenue or any decrease in the agreed-upon expenses, but also exposes us to any decrease in revenue or any increase in such expenses. The degree of our exposure to expenses from these structured partnership interests varies by Affiliate and includes Affiliates in which we fully share in the expenses of the business.
When we own a controlling equity interest in an Affiliate, we consolidate the Affiliate’s financial results into our Consolidated Financial Statements. When we do not own a controlling equity interest in an Affiliate, but have significant influence, we account for our interest in the Affiliate under the equity method. Under the equity method of accounting, we do not consolidate the Affiliate’s results into our Consolidated Financial Statements. Instead, our share of earnings or losses, net of amortization and impairments, is included in Equity method income (loss) (net) in our Consolidated Statements of Income, and our interest in these Affiliates is reported in Equity method investments in Affiliates (net) in our Consolidated Balance Sheets.
Whether we consolidate an Affiliate’s financial results or use the equity method of accounting, we maintain the same innovative partnership approach and provide support and assistance in substantially the same manner for all of our Affiliates. From time to time, we may restructure our interest in an Affiliate to better support the Affiliate’s growth strategy.
Competition
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Our Affiliates compete with a large number of domestic and foreign investment management firms, as well as with subsidiaries of larger financial organizations. These firms may have significantly greater financial, technological and marketing resources, captive distribution and assets under management. Many of these firms offer an even broader array of products and services in particular investment strategies such as passively-managed products, including exchange traded funds, that typically carry lower fee rates. Certain of our Affiliates offer their investment management services to the same client types and, from time to time, may compete with each other for clients. In addition, there are relatively few barriers to entry for new investment management firms, especially for those looking to provide investment management services to institutional and high net worth investors. We believe that the most important factors affecting our Affiliates’ ability to compete for clients are the:
• | investment performance, investment styles, and reputations of our Affiliates and their management teams; |
• | diversity of our Affiliates’ investment strategies and products and the continued development, either organically or through new investments, of investment strategies to meet the changing needs and risk tolerances of investors; |
• | depth and continuity of our and our Affiliates’ client relationships and the level of client service offered; |
• | maintenance of strong business relationships by us and our Affiliates with major intermediaries; and |
• | continued success of our and our Affiliates’ distribution efforts. |
The relative importance of each of these factors can vary depending on client type and the investment management service involved, as well as general market conditions. The ability to compete with other investment management firms also depends, in part, on the relative attractiveness of our Affiliates’ active, return-oriented strategies, market trends, fees or a combination of these factors.
We compete with a number of acquirers of and investors in boutique investment management firms, including other investment management companies, private equity firms, sovereign wealth funds and larger financial organizations. We believe that the most important factors affecting our ability to compete for future investments are the:
• | breadth and depth of our relationships with boutique investment management firms; |
• | target firms’ view of our innovative partnership approach, including our succession planning solutions and the preservation of their unique entrepreneurial cultures, investment independence, and operational autonomy in managing their businesses; |
• | purchase price, liquidity, equity incentive structures and access to economies of scale that we offer (financially, operationally or otherwise) as compared to acquisition or investment arrangements offered by others; and |
• | reputation and performance of our Affiliates, by which target firms may judge us and our future prospects. |
Government Regulation
Our Affiliates offer their investment management services and products around the world, and are subject to complex and extensive regulation by regulatory and self-regulatory authorities and exchanges in various jurisdictions. Virtually all aspects of the asset management business, including the provision of advice, investment strategies and trading, fund sponsorship, and product-related sales and distribution activities, are subject to regulation. These regulations are primarily intended to protect the clients of investment advisers and generally grant regulatory authorities broad administrative and enforcement powers.
The majority of our Affiliates are registered with the SEC as investment advisers under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary duties, compliance and disclosure obligations, and operational and recordkeeping requirements. Our Affiliates operating outside of the U.S. may be subject to the Advisers Act and are also subject to regulation by various regulatory and self-regulatory authorities and exchanges in the relevant jurisdictions, including, for those Affiliates active in the UK, the Financial Conduct Authority (the “FCA”). Many of our Affiliates also sponsor or advise registered and unregistered funds in the U.S. and in other jurisdictions, and are subject to regulatory requirements in the jurisdictions where those funds are sponsored or offered, including, with respect to mutual funds in the U.S., the Investment Company Act of 1940, as amended (the “Investment Company Act”). The Investment Company Act governs the operations of mutual funds and imposes obligations on their advisers, including investment restrictions and other governance, compliance, reporting and fiduciary
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obligations relating to the management of mutual funds. Many of our Affiliates are also subject to directives and regulations in the European Union and other jurisdictions relating to funds, such as the UCITS Directive and the Alternative Investment Fund Managers Directive (“AIFMD”), with respect to depositary functions, remuneration policies and sanctions, among other matters.
Our Affiliates’ sales and marketing activities are subject to regulation by authorities in the jurisdictions in which they offer investment management products and services. Our Affiliates’ ability to transact business in these jurisdictions, and to conduct related cross-border activities, is subject to the continuing availability of regulatory authorization. Through our global distribution platform, we also engage in sales and marketing activities that extend the reach of our Affiliates’ own business development efforts, and which are subject to regulation in numerous jurisdictions. Our U.S. retail distribution subsidiary is registered with the SEC under the Advisers Act. This subsidiary sponsors mutual funds registered under the Investment Company Act, and serves as an investment adviser and/or administrator for the AMG Funds complex. In the UK, our global distribution subsidiary is regulated by the FCA. We also have global distribution subsidiaries or branches of subsidiaries regulated by the Dubai Financial Services Authority, the Securities and Futures Commission in Hong Kong, and the Australian Securities and Investments Commission.
Certain of our Affiliates and our U.S. retail distribution subsidiary are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and related regulations, with respect to 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 U.S. Department of Labor (“DOL”) administers ERISA and regulates investment advisers who service retirement plan clients, and has been increasingly active in proposing and adopting additional regulations applicable to the asset management industry. Certain of our Affiliates and our U.S. retail distribution subsidiary are also members of the National Futures Association and are regulated by the U.S. Commodity Futures Trading Commission (“CFTC”) with respect to the management of funds and other products that utilize futures, swaps or other CFTC-regulated instruments.
In addition, certain of our Affiliates and our U.S. retail broker-dealer subsidiary are registered broker-dealers and members of the Financial Industry Regulatory Authority (“FINRA”), for the purpose of distributing funds or other products. FINRA has adopted extensive regulatory requirements relating to sales practices, registration of personnel, compliance and supervision, and compensation and disclosure. FINRA and the SEC have the authority to conduct periodic examinations of member broker-dealers, and may also conduct administrative proceedings. These broker-dealers are also subject to net capital rules in the U.S. that mandate the maintenance of certain levels of capital, and our Affiliates and our global distribution subsidiaries may also be subject to other regulatory capital requirements imposed by non-U.S. regulatory authorities.
Due to the extensive laws and regulations to which we and our Affiliates are subject, we and our Affiliates must devote substantial time, expense and effort to remain current on, and to address, legal and regulatory compliance matters. We have established compliance programs for each of our operating subsidiaries, and each of our Affiliates has established compliance programs to address regulatory compliance requirements for its operations. We and our Affiliates have experienced legal and compliance professionals in place to address these requirements, and have relationships with various legal and regulatory advisers in each of the countries where we and our Affiliates conduct business. See “Item 1A. Risk Factors.”
Employees and Corporate Organization
As of December 31, 2019, we and our consolidated and equity method Affiliates had approximately 4,000 employees, excluding the employees of certain Affiliates in which we are repositioning our interests and that are not significant to our results of operations. The substantial majority of employees were employed full-time by our Affiliates. Neither we nor our Affiliates are subject to any collective bargaining agreements, and we believe that our and our Affiliates’ labor relations are good. We were formed in 1993 as a corporation under the laws of the State of Delaware.
Our Website
Our website is www.amg.com. Our website provides information about us, and, from time to time, we may use it to distribute material company information. We routinely post financial, investment performance and other important information regarding the Company in the Investor Relations section of our website and we encourage investors to consult that section regularly. The Investor Relations section of our website also includes copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and 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 website as soon as reasonably practicable after our electronic filing of such materials with, or the
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furnishing of them to, the SEC. The information contained or incorporated on our website is not a part of this Annual Report on Form 10-K.
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Item 1A. | Risk Factors |
We and our Affiliates face a variety of risks that are substantial and inherent in our businesses, including those related to markets, liquidity, credit, operational, legal and regulatory risks. The following are some of the more important factors that could affect our and our Affiliates’ businesses. Certain statements in “Risk Factors” are forward-looking statements. See “Forward-Looking Statements.”
RISKS RELATED TO OUR INDUSTRY, BUSINESS AND OPERATIONS
Our financial results depend on our Affiliates’ receipt of asset and performance based fees, and are impacted by investment performance, as well as changes in fee levels, product mix and the relative levels of assets under management among our Affiliates.
Our financial results depend on our Affiliates’ receipt of asset and performance based fees, which may vary substantially from year to year. Our Affiliates’ ability to maintain current fee levels depends on a number of factors, including our Affiliates’ investment performance, as well as competition and trends in the asset management industry, including recent fee pressure, driven in part by investor demand for passively-managed products, including exchange traded funds, that typically carry lower fee rates. In addition, in the ordinary course of business, our Affiliates may reduce or waive fees on certain products for particular time periods, to attract or retain assets or for other reasons. Further, different types of assets under management can generate different ratios of asset based fees to assets under management (“asset based fee ratio”), based on factors such as the investment strategy and the type of client. Thus, a change in the composition of our assets under management, either within an Affiliate or among our Affiliates, could result in a decrease in our aggregate fees even if our aggregate assets under management remains unchanged or increases. Products that use fee structures based on investment performance may also vary significantly from period to period, depending on the investment performance of the particular product. For some of our Affiliates, performance based fees include a high-watermark provision, which generally provides that if a product underperforms on an absolute basis or relative to its benchmark, it must regain such underperformance before the Affiliate will earn any performance based fees. No assurances can be given that our Affiliates will be able to maintain current fee structures or levels. A reduction in the fees that our Affiliates receive could have an adverse impact on our financial condition and results of operations.
Additionally, our structured partnership interests are tailored to meet the needs of each Affiliate and are therefore varied, and our earnings may be adversely affected by changes in the relative performance or in the relative levels and mix of assets under management among our Affiliates, independent of our aggregate operating performance measures. Further, certain Affiliates contribute more significantly to our results than other Affiliates and, therefore, changes in fee levels, product mix, assets under management or investment performance of such Affiliates could have a disproportionate adverse impact on our financial condition and results of operations.
Our financial results could be adversely affected by any reduction in our assets under management, which could reduce the asset and performance based fees earned by our Affiliates.
Our financial results may be impacted by changes in the total level of our assets under management. The total level of our assets under management generally or with particular products or Affiliates could be adversely affected by conditions outside of our control, including:
• | a decline in market value of our assets under management, due to declines in the capital markets, fluctuations in foreign currency exchange rates and interest rates, inflation rates or the yield curve, and other market factors; |
• | changes in investor risk tolerance or investment preferences, such as the continued growth in passively-managed products, including exchange traded funds, which could result in investor allocations away from active, return-oriented strategies offered by our Affiliates; |
• | our Affiliates’ ability to attract and retain client assets and market products and services, which may be impacted by investment performance, client relationships, trends in product and service offerings, and the prices of securities generally; |
• | global economic conditions, which may be exacerbated by changes in the equity or debt markets; |
• | financial crises, political or diplomatic developments, war, terrorism, pandemics or natural disasters; and |
• | other factors that are difficult to predict. |
A reduction in our assets under management could adversely affect the fees payable to our Affiliates and, ultimately, our financial condition and results of operations.
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The asset management industry is highly competitive.
Our Affiliates compete with a broad range of domestic and foreign investment management firms, including public, private and client-owned investment advisers, firms managing passively-managed products, including exchange traded funds, as well as other firms managing active, return-oriented strategies, firms associated with securities broker-dealers, financial institutions, insurance companies, private equity firms, sovereign wealth funds and other entities. These firms may have significantly greater financial, technological and marketing resources, captive distribution and assets under management, and many of these firms offer an even broader array of products and services in particular investment strategies. Competition from these firms may reduce the fees that our Affiliates can obtain for investment management services, or could impair our Affiliates’ ability to attract and retain client assets. We believe that our Affiliates’ ability to compete effectively with other firms depends upon our Affiliates’ strategies, investment performance, reputations, client relationships, fee structures, client-servicing capabilities, and the marketing and distribution of their investment strategies, 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 may also compete with each other for clients.
If our or our Affiliates’ reputations are harmed, we could suffer losses in our business and financial results.
Our business depends on earning and maintaining the trust and confidence of our Affiliates and our stockholders, our ability to compete for future investment opportunities, and our and our Affiliates’ reputations among existing and potential clients. Our and our Affiliates’ reputations are critical to our business and could be impacted by events that may be difficult or impossible to control, and costly or impossible to remediate. For example, alleged or actual failures by us, our Affiliates or our respective employees to comply with applicable laws, rules or regulations, errors in our public reports, perceptions of our or our Affiliates’ environmental, social and governance (“ESG”) practices, threatened or actual litigation against us, any of our Affiliates or our respective employees, cyber-attack or data breach incidents, or the public announcement and potential publicity surrounding any of these events, even if inaccurate, satisfactorily addressed, or if no violation or wrongdoing actually occurred, could adversely impact our or our Affiliates’ reputations and their relationships with clients, our relationships with our Affiliates, and our ability to negotiate agreements with new boutique investment management firms, any of which could have an adverse effect on our financial condition and results of operations.
Investment management contracts are subject to termination on short notice.
Through our Affiliates, we derive almost all of our asset and performance based fees from clients pursuant to investment management contracts. While certain of our Affiliates’ private equity and alternative products have long-term commitment periods, many of our Affiliates’ investment management contracts are terminable by the client without penalty upon relatively short notice (typically not longer than 60 days). We cannot be certain that our Affiliates will be able to retain their existing clients or attract new clients. If clients terminate their investment management contracts or withdraw a substantial amount of assets, it is likely to harm our results of operations. In addition, investment management contracts with mutual funds or other retail products are subject to annual approval by the fund’s board of directors.
We may 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 boutique investment management firms and our other strategic initiatives may require additional capital. Further, we have significant repurchase obligations relating to Affiliate equity interests, and it is difficult to predict the frequency and magnitude of these repurchases. As of December 31, 2019, the current redemption value relating to Affiliate equity repurchase obligations was presented in Redeemable non-controlling interests on our Consolidated Balance Sheets and was $916.7 million, which includes $21.6 million of consolidated Affiliate sponsored investment products primarily attributable to third-party investors. See “Liquidity and Capital Resources-Affiliate Equity” in Item 7 and Notes 17 and 18 of the Consolidated Financial Statements. These obligations may require more cash than is then available from our existing cash resources and cash flows from operations. Thus, we may need to raise capital through additional borrowings or by selling shares of our common stock or other equity or debt securities, or otherwise refinance a portion of these obligations.
As of December 31, 2019, we had outstanding debt of $1.9 billion. Our level of indebtedness may increase if we fund future investments or other expenses through borrowings. Any additional indebtedness could increase our vulnerability to general adverse economic and industry conditions and may require us to dedicate a greater portion of our cash flows 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 additional capital, and the cost of capital we are able to access, is influenced by a number of factors, including the state of global credit and equity markets, interest rates, credit
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spreads and our credit ratings. We are rated A3 by Moody’s Investors Service and BBB+ by S&P Global Ratings. A reduction in our credit ratings could increase our borrowing costs under our credit facilities or, in certain cases, give rise to a termination right by the counterparty under our derivative financial instruments.
Our debt agreements impose certain covenants relating to the conduct of our business, including financial covenants under our credit facilities, any breach of which could result in the acceleration of the repayment of any amounts borrowed or outstanding thereunder.
Our debt agreements contain 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 create liens and, in the case of our credit facilities, require us to maintain specified financial ratios, including a maximum leverage ratio and a minimum interest coverage ratio. The breach of any covenant (either due to our actions or omissions or, in the case of financial covenants, due to a significant and prolonged market-driven decline in our operating results) could result in a default under the applicable debt agreement and, in the case of our credit facilities, lenders could refuse to make further extensions of credit to us. Further, in the event of certain defaults, amounts borrowed under our debt agreements, together with accrued interest and other fees, could become immediately due and payable. If any indebtedness were to become subject to accelerated repayment, we may 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 financial condition and results of operations.
As of December 31, 2019, our total assets were $7.7 billion, of which $3.8 billion were intangibles, and $2.2 billion were equity method investments in Affiliates, an amount primarily composed of intangible assets. We cannot be certain that we will realize the value of such intangible assets. Our intangible assets may become impaired as a result of any number of factors, including changes in market conditions, declines in the value of assets under management, client attrition, product performance, and changes in strategic objectives or growth prospects of an Affiliate. An impairment of our intangible assets or an other-than-temporary decline in the value of our equity method investments could adversely affect our financial condition and results of operations. Determining the value of intangible assets, and evaluating them for impairment, requires management to exercise significant judgment. In recent periods, we have recorded expenses to reduce the carrying value to fair value of certain Affiliates and certain acquired client relationships, and may experience similar impairment events in future reporting periods. See “Critical Accounting Estimates and Judgments” in Item 7 and Notes 9 and 10 of the Consolidated Financial Statements.
Market risk management activities may adversely affect our liquidity and results of operations.
From time to time, we and our Affiliates seek to offset exposure to changes in interest rates, foreign currency exchange rates and markets by entering into derivative financial instruments. See Note 6 of the Consolidated Financial Statements. The scope of these risk management activities is selective and varies based on the level and volatility of interest rates, foreign currency exchange rates and other changing market conditions. We and our Affiliates do not seek to hedge exposure to all market risks, which means that exposure to certain market risks is not limited. Further, the use of derivative financial instruments does not entirely eliminate the possibility of fluctuations in the value of the underlying position or prevent losses if the value of the position declines, and also can limit the opportunity for gain if the value of the position increases. There can be no assurance that our or our Affiliates’ derivative financial instruments will meet their overall objective or that we or our Affiliates will be successful in entering into such instruments in the future. Further, while hedging arrangements may reduce certain risks, such arrangements themselves may entail other risks, may generate significant transaction costs, and may require the posting of cash collateral. For example, if our or our Affiliates’ counterparties fail to honor their obligations in a timely manner, including any obligations to return posted collateral, our liquidity and results of operations could be adversely impacted.
The potential replacement or alteration of the London Interbank Offered Rate (“LIBOR”) or other widely used financial benchmarks introduces a number of risks for us, our Affiliates and their clients, and for the global asset management industry more broadly.
LIBOR and other financial benchmarks are the subject of recent national, international and other regulatory guidance and proposals for reform. Currently, there is uncertainty regarding the future utilization of LIBOR, the nature of any replacement rate, and the timing of any definitive changes. These reforms may have consequences that cannot be predicted, including changes in the valuation of financial instruments linked to benchmark indices, which could impact Affiliate sponsored investment products, investments, derivatives or other instruments, and may result in pricing, operational and legal implementation risks. Further, the proposed reforms could result in an increase in our or our Affiliates’ debt service costs. While it is not currently possible to determine precisely how, or to what extent, the withdrawal and replacement of LIBOR would affect us and our Affiliates, the changes may have an adverse effect on our financial condition and results of operations.
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RISKS RELATED TO OUR STRATEGY AND OUR STRUCTURED PARTNERSHIPS WITH AFFILIATES
Our growth strategy depends in part upon our ability to make investments in boutique investment management firms and to pursue other strategic partnerships.
Our continued success in investing in boutique investment management firms will depend upon our ability to find suitable firms in which to invest or make additional investments in our existing Affiliates, our ability to negotiate agreements with such firms on acceptable terms, and our ability to raise the capital necessary to finance such transactions. The market for acquisitions of interests in these 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, also invest in boutique investment management firms and may have significantly greater resources than we do. In addition to direct competition on particular prospects, these firms can also negatively impact the volume and value of transactions more broadly. Further, our long-term innovative partnership approach with our Affiliates is designed to provide succession planning and enhanced equity incentives for management equity owners, and the management of some target firms may prefer terms and structures offered by our competitors.
The success of our investments depends on our and our Affiliates’ ability to grow their businesses and carry out their management succession plans. In addition, our investments involve a number of risks, including the existence of unknown liabilities that may arise after making an investment, some of which may depend upon factors that are not under our control. We may not be successful in making investments in new firms or maintaining existing investments, and any firms that we do invest in may not have favorable results or performance following our investment, which could have an adverse effect on our financial condition and results of operations. Further, the consummation of our announced investments 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 firm’s clients and applicable regulatory approvals. In the event that an announced transaction is not consummated, we may experience a decline in the price of our common stock.
Our growth strategy also includes pursuing strategic partnerships in areas where we can assist our Affiliates in growing and diversifying their businesses. These strategic partnerships may involve risks and require resources and investment, and there is no certainty that such partnerships will deliver the anticipated benefits over the expected time frame or at all.
The structure of our partnership interests in our Affiliates may expose us to unanticipated changes in Affiliate revenue, operating expenses and other commitments, which we may not anticipate and may have limited ability to control.
For a majority of our Affiliates, we use structured partnership interests in which we contractually share in the Affiliate’s revenue without regard to expenses. In this type of structured partnership interest, the Affiliate allocates a specified percentage of its revenue to us and Affiliate management, while using the remainder of its revenue for operating expenses and for distributions to Affiliate management. In these types of structures, while our distributions generally have priority, our agreed allocations may not anticipate changes in the revenue and operating expense base of the Affiliate, and the revenue remaining after our specified share is allocated to us may not be large enough to cover all of the Affiliate’s operating expenses, which could result in a reduction of the amount allocated to us or could negatively impact the Affiliate’s operations and prospects.
For other Affiliates, we use structured partnership interests in which we contractually share in the Affiliate’s revenue less agreed-upon expenses. This type of partnership interest allows us to benefit from any increase in revenue or any decrease in the agreed-upon expenses, but also exposes us to any decrease in revenue or any increase in such expenses. The degree of our exposure to expenses from these structured partnership interests varies by Affiliate and includes Affiliates in which we fully share in the expenses of the business. In these types of structures, we may have limited or no ability to control the level of expenses at the Affiliate, and our distributions generally do not have priority. Further, the impact of Affiliate expenses on our earnings and our stock price could increase if the portion of our earnings derived from such Affiliates increases.
As a result of these factors, unanticipated changes in revenue, operating expenses or other commitments at any of our Affiliates could leave the Affiliate with a shortfall in remaining funds for distribution to us or Affiliate management, or for funding their operations. Changes in the global marketplace in particular could result in rapid changes to our Affiliates’ earnings or expenses, and our Affiliates may be unable to make appropriate expense reductions in a timely manner to respond to such changes. Any of these developments could have an adverse effect on our financial condition generally and on our results of operations for the applicable reporting period.
Additionally, regardless of the particular structure, we may elect to defer or forgo the receipt of our share of an Affiliate’s revenue or earnings, or to adjust any expenses allocated to us, to permit the Affiliate to fund expenses in light of unanticipated changes in revenue or operating expenses, with the aim of maximizing the long-term benefits. We cannot be certain that any such deferral or forbearance would be of any greater long-term benefit to us, and such a deferral or forbearance may have an adverse effect on our near- or long-term financial condition and results of operations.
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We may reposition or divest our equity interests in our Affiliates, and cannot be certain that any such repositioning or divestment will benefit us in the near- or long-term.
From time to time, we may reposition our relationships with our Affiliates, which could, among other things, include changes to our structured partnership interests, including changes in our ownership level and in the calculation of our share of revenue and/or operating expenses. Such repositioning may be done in order to address an Affiliate’s succession planning, changes in its revenue or operating expense base, strategic planning or other developments. Any repositioning of our interest in an Affiliate may result in increased exposure to changes in the Affiliate’s revenue and/or operating expenses, or in additional investments or commitments from us, or could increase or reduce our interest in the Affiliate. In some cases, this could result in the full divestment of our interest to Affiliate management or to a third party, or in our acquisition of all of the equity interests of the Affiliate. In addition, certain of our Affiliates accounted for under the equity method have customary rights in certain circumstances to sell a majority interest in their firm to a third party and to cause us to participate in such sale. Any such changes could have an adverse impact on our financial condition and 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 investments in boutique investment management firms. There is no guarantee that these executive officers will remain with the Company. We generally do not have employment agreements with our executive officers, although each has a significant deferred equity interest in the Company and is subject to non-solicitation and non-competition restrictions that may be triggered upon their departure. Changes in our management team may be disruptive to our business, and failure to attract and retain members of our executive or senior management team, or to effectively implement and manage appropriate succession plans, could adversely affect our business, financial condition and results of operations.
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, non-competition and employment agreements in an effort to retain key personnel, there is no guarantee that these principals will remain with their firms. Since certain of our Affiliates contribute more significantly to our revenue than other Affiliates, the loss of key personnel at these Affiliates could have a disproportionately adverse impact on our business, financial condition and results of operations.
RISKS RELATED TO OUR COMMON STOCK
Equity markets and our common stock have been volatile.
The market price of our common stock has experienced and may continue to experience volatility, and the broader equity markets have experienced and may continue to experience significant price and volume fluctuations. In addition, announcements of our financial and operating results or other material information, including changes in net client cash flows and assets under management, changes in our financial guidance or our failure to meet such guidance, our new investments activity, changes in general conditions in the economy or the financial markets, perceptions regarding our ESG profile, and other developments affecting us, our Affiliates or our competitors, as well as geopolitical, regulatory, economic, and business factors unrelated to us, could cause the market price of our common stock to fluctuate substantially.
The sale or issuance of substantial amounts of our common stock, or the expectation that such sales or issuances will occur, 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 junior convertible trust preferred securities and entered into an equity distribution program, either of which 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. Additionally, we have the right to settle certain Affiliate equity repurchase obligations with shares of our common stock. Moreover, in connection with future financing activities, we may issue additional convertible securities or shares of our common stock, including through forward equity transactions. 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 or issued in the public market, or the expectation that such sales or issuances will occur, the price of our common stock may decline as a result.
Provisions in our organizational documents, Delaware law and other factors could delay or prevent a change in control of the Company, or adversely affect our financial results in periods prior to and following a change in control.
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Provisions in our charter and by-laws and anti-takeover provisions under Delaware law could discourage, delay or prevent an unsolicited change in control of the Company. These provisions may also have the effect of making it more difficult for third parties to replace our executive officers without the consent of our Board of Directors. These provisions 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; |
• | 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; and |
• | legal restrictions on mergers and other business combinations between us and any holder of 15 percent or more of our outstanding common stock. |
Further, given our long-term innovative partnership approach with our Affiliates, which is designed to maintain their unique entrepreneurial cultures, investment independence, and operational autonomy in managing their businesses, a change in control may be viewed negatively by our Affiliates, impacting their relationships with us. Additionally, the disposition of certain of our Affiliates following a change in control could result in the immediate realization of taxes owed on any excess proceeds above our tax basis in the relevant Affiliate, which could impact the valuation a third party may apply to us in a change in control. Any of the forgoing factors may inhibit a change in control in circumstances that could give our stockholders the opportunity to realize a premium over the market price of our common stock, or may result in negative impacts on our financial results in periods prior to and following a change in control.
In addition, a change in control of the Company or the acquisition of a large ownership position in shares of our outstanding common stock by a single holder may constitute a change in control for certain of our Affiliates for purposes of the Advisers Act and the Investment Company Act. In that case, absent client consents, the Affiliate’s management agreements may be deemed to be “assigned” in violation of the agreement and, for mutual fund clients, will terminate. We cannot be certain that any required client consents (which the impacted Affiliates would need to be involved in requesting) would be obtained if such a change of control occurs. Any termination, deemed assignment or renegotiation of any of our Affiliates’ management agreements could result in a reduction in our assets under management or the fees payable to our Affiliates and, ultimately, our aggregate fees. Further, certain of our Affiliates operate regulated businesses in jurisdictions outside of the U.S. that, in some cases, require regulatory notifications and other filings if a single stockholder acquires an ownership position in the Company exceeding certain specified thresholds, regardless of whether a change in control has occurred for purposes of the Advisers Act or the Investment Company Act. Such an ownership position could also trigger approvals under FINRA, for Affiliates operating a broker-dealer in the U.S. As a result, a large ownership position in our stock, whether or not resulting in a change of control of the Company, could result in increased regulatory reporting and compliance costs, and potential restrictions on our or our Affiliates’ business activities, and could reduce the fees that our Affiliates receive under investment management contracts, any of which could have an adverse effect on the Company’s financial condition and results of operations.
LEGAL AND REGULATORY RISKS
Our and our Affiliates’ businesses are highly regulated.
Our and our Affiliates’ businesses are subject to complex and extensive regulation by regulatory and self-regulatory authorities and exchanges in various jurisdictions around the world, which, for our Affiliates and our U.S. retail distribution subsidiary, include those applicable to investment advisers, as detailed in “Government Regulation” in Item 1. Applicable laws, rules and regulations impose requirements, restrictions and limitations on our and our Affiliates’ businesses, and can result in significant compliance costs. Further, this regulatory environment may be altered without notice by new laws or regulations, revisions to existing laws or regulations or new or revised interpretations, guidance or enforcement priorities. Any determination of a failure to comply with applicable laws, rules or regulations could expose us, our Affiliates or our respective employees to civil liability, criminal liability, or disciplinary or enforcement action, with penalties that could include the disgorgement of fees, fines, sanctions, suspensions, termination of adviser status, or censure of individual employees or revocation or limitation of business activities or registration, any of which could have an adverse impact on our stock price, financial condition and results of operations. Further, if we, any of our Affiliates or our respective employees 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 an adverse effect on our stock price and result in increased costs, even if we, our Affiliates or our respective employees were found not to have violated such laws, rules or regulations.
Recently implemented and proposed regulations globally have called for more stringent oversight of the financial services industry in which we and our Affiliates operate, which could adversely affect our and our Affiliates’ businesses, increase
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compliance costs, require that we or our Affiliates curtail operations or investment offerings, or impact our and our Affiliates’ access to capital and the market for our common stock. In the U.S., the regulation of derivatives markets has undergone substantial change in recent years and such change may continue, which may make derivatives more costly, may limit the availability or reduce the liquidity of derivatives, and may impose limits or restrictions on the counterparties to derivative transactions. The European Union and other jurisdictions have implemented, or are in the process of implementing, similar requirements.
Further, in recent years, regulators in the U.S., the UK and other jurisdictions have expanded rules and devoted greater resources and attention to the enforcement of anti-bribery and anti-money laundering laws, and while we and our Affiliates have developed and implemented policies and procedures designed to comply with these rules, such policies and procedures may not be effective in all instances to prevent violations.
Our and our Affiliates’ international operations are subject to foreign risks, including political, regulatory, economic and currency risks.
We and certain of our Affiliates conduct business outside the U.S., and a number of our Affiliates are based outside the U.S. and, accordingly, are subject to risks inherent in doing business internationally. These risks may include 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, exposure to fluctuations in currency exchange rates, expatriation controls, expropriation risks and potential adverse tax consequences. For example, our and our Affiliates’ businesses may be impacted by the terms of the UK’s exit from the European Union, which could result in fluctuations in exchange rates, disruptions in the capital markets, changes in investor risk tolerance or investment preferences, increased compliance and administrative costs, or other impacts. Further, regulatory and other developments relating to the UK’s exit from the European Union could impact our or our Affiliates’ ability to conduct operations pursuant to a European passport and could require us or certain of our Affiliates to apply for regulatory authorization and permission in a separate European Union member state. As part of our and certain of our Affiliates’ planning for the UK’s exit from the European Union, we and such Affiliates have implemented a number of steps to prepare for the various potential outcomes and, while we do not expect the UK’s exit from the European Union to have a significant impact on the way we or our Affiliates operate, these plans and developments could result in increases to our and such Affiliates’ compliance and administrative costs. In addition, as a result of operating internationally, certain of our Affiliates and our global distribution subsidiaries are subject to requirements under foreign regulations 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 and the payment of distributions to us. These or other risks related to our and our Affiliates’ international operations may have an adverse effect on our business, financial condition and results of operations.
Changes in tax laws or exposure to additional tax liabilities could have an adverse impact on our business, financial condition and results of operations.
We are subject to income taxes as well as non-income-based taxes in the U.S. and certain foreign jurisdictions, and our Affiliates are generally subject to taxes in the jurisdictions in which they operate. Tax laws, regulations and administrative practices in these jurisdictions may be subject to significant change, with or without notice, and significant judgment is required in estimating and evaluating tax provisions and accruals. Our and our Affiliates’ effective tax rates could be affected by a change in the mix of earnings with differing statutory tax rates, changes to our or their existing businesses, and changes in relevant tax, accounting or other laws, regulations, administrative practices and interpretations. A portion of our earnings are from outside of the U.S., and the foreign government agencies in jurisdictions in which we and our Affiliates do business continue to focus on the taxation of multinational companies, and could implement changes to their tax laws. For example, changes in the tax laws of foreign jurisdictions could arise as a result of the base erosion and profit shifting (“BEPS”) project undertaken by the Organization for Economic Co-operation and Development (“OECD”), which includes recommendations that may be adopted in various jurisdictions in which we and our Affiliates do business. Any changes to federal, state or foreign tax laws, regulations, accounting standards or administrative practices, or the release of additional guidance, interpretations or other information, could impact our estimated effective tax rate and overall tax expense, as well as our earnings estimates, and could result in adjustments to our treatment of deferred taxes, including the realization or value thereof, or in unanticipated additional tax liabilities, any of which could have an adverse effect on our business, financial condition and results of operations.
In addition, we and our Affiliates may be subject to tax examinations by certain federal, state and foreign tax authorities. We regularly assess the likely outcomes of examinations that we are subject to, in order to determine the appropriateness of our tax provision; however, tax authorities may disagree with certain positions we have taken or may take, and may assess additional taxes and/or penalties and interest. There can be no assurance that we will accurately predict the outcomes of any examinations and the actual outcomes could have an adverse impact on our financial condition and results of operations.
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We or our Affiliates may be involved in legal proceedings and regulatory matters from time to time, and we may be held responsible for liabilities incurred by certain of our Affiliates.
Our operating agreements with our Affiliates provide for governance structures that give Affiliate management the authority to manage and operate their businesses on a day-to-day basis, including investment management operations, marketing, product development, client relationships, employee matters, 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 that we are not involved in, and where weaknesses or failures in internal processes or systems, legal or regulatory matters, or other operational challenges could lead to a disruption or cessation of our Affiliates’ operations, liability to their clients, exposure to claims or disciplinary action or reputational harm.
Certain of our Affiliates are limited liability companies or limited partnerships (or equivalent non-U.S. forms) of which we, or entities controlled by us, are the managing member or general partner (or equivalent). Consequently, to the extent that any of these 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. Further, we also conduct distribution, sales and marketing activities through our U.S. retail distribution subsidiary and our global distribution subsidiaries, to extend the reach of our Affiliates’ own business development efforts, and any liability arising in connection with these activities, whether as a result of our own actions or the actions of our participating Affiliates, could result in direct liability to us. Accordingly, we and our Affiliates may face various claims, litigation or complaints from time to time and we cannot predict the eventual outcome of such matters, some of which may be resolved in a manner unfavorable to us or our Affiliates, or whether any such matters could become material to a particular Affiliate or us in any reporting period. See “Legal Proceedings” in Item 3. While we and our Affiliates maintain errors and omissions and general liability insurance in amounts believed to be adequate to cover potential liabilities, we cannot be certain that we or our Affiliates will not have claims or related expenses 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. Any legal proceedings or regulatory matters that we or our Affiliates are subject to could, whether with or without merit, be time consuming and expensive to defend and could divert management attention and resources, and could result in judgments, findings, settlements or allegations of wrongdoing that could adversely affect our or their reputation, current and future business relationships, and our financial condition and results of operations.
Our or our Affiliates’ controls and procedures and risk management policies may be inadequate, fail or be circumvented, and operational risk could adversely affect our or our Affiliates’ reputation and financial position.
We and our Affiliates have adopted various controls, procedures, policies and systems to monitor and manage risk in our and their businesses. While we currently believe that our and our Affiliates’ 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 and our Affiliates’ various businesses. Furthermore, we or our Affiliates may have errors in business processes or fail to implement proper procedures in operating our respective businesses, which may expose us or our Affiliates to risk of financial loss or failure to comply with regulatory requirements. Additionally, although we and our Affiliates have systems and practices in place to monitor third-party service providers, such third parties are subject to similar risks. We and our Affiliates, as well as our respective service providers, are also subject to the risk that employees or contractors, or other third parties, may deliberately seek to circumvent established controls to commit fraud or act in ways that are inconsistent with our or their controls, policies and procedures. The financial and reputational impact of control failures can be significant.
In addition, our and our Affiliates’ businesses and the markets in which we and our Affiliates operate are continuously evolving. If our or our Affiliates’ risk frameworks are ineffective, either because of a failure to keep pace with changes in the financial markets, regulatory requirements, our or our Affiliates’ businesses, counterparties, clients or service providers or for other reasons, we or our Affiliates could incur losses, suffer reputational damage or be out of compliance with applicable regulatory or contractual mandates or expectations.
Failure to maintain and properly safeguard an adequate technology infrastructure may limit our or our Affiliates’ growth, result in losses or disrupt our or our Affiliates’ businesses.
Our and our Affiliates’ businesses are reliant upon 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, advisers, regulators, vendors and other third parties. The failure to implement, maintain and safeguard an infrastructure commensurate with the size and scope of our and our Affiliates’ businesses could impede productivity and growth, which could adversely impact our financial condition and results of operations. Further, we and our
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Affiliates rely on third parties for certain aspects of our respective businesses, including financial intermediaries, providers of technology infrastructure, and other service providers such as broker-dealers, custodians, administrators and other agents, and these parties are susceptible to similar risks.
Although we and our Affiliates take protective measures and endeavor to modify them as circumstances warrant, computer systems, software, networks and mobile devices may be vulnerable to cyber-attacks, data privacy or security breaches, ransomware, unauthorized access, theft, misuse, computer viruses or other malicious code and other events that could have a security impact. Further, although we and our Affiliates have systems and practices in place to monitor the third parties on whom we and our Affiliates rely, such third parties may have similar vulnerabilities and may lack the necessary infrastructure or resources, or may otherwise fail, to adequately protect against or respond to any cyber-attacks, data breaches or other incidents. If any such events occur, it could jeopardize confidential, proprietary or other sensitive information of ours, our Affiliates and our respective clients, employees or counterparties that may be stored in, or transmitted through, internal or third-party computer systems, networks and mobile devices, or could otherwise cause interruptions or malfunctions in our and our Affiliates’ operations or those of our respective clients or counterparties, or in the operations of third parties on whom we and our Affiliates rely. Despite efforts to ensure the integrity of systems and networks, it is possible that we, our Affiliates or our respective third-party service providers 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 or our Affiliates could experience disruption, significant losses, increased costs, reputational harm, regulatory actions or legal liability, any of which could have an adverse effect on our financial condition and results of operations. We or our Affiliates may be required to spend significant additional resources to modify protective measures or to investigate and remediate vulnerabilities or other exposures, and may be subject to litigation, regulatory investigations and potential fines, and financial losses that are either not insured against fully or not fully covered through any insurance that we or our Affiliates maintain. Further, government and regulatory oversight of data privacy in particular has been growing in recent years, including through the European Union’s General Data Protection Regulation and the California Consumer Privacy Act, resulting in heightened data security and handling requirements, increased fines, and expanded incident response and reporting obligations.
Item 1B. | Unresolved Staff Comments |
None.
Item 2. | Properties |
We 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 adjust these resources as necessary. Our Affiliates also typically lease office space in the city or cities in which they conduct business, as appropriate for their respective business needs.
Item 3. | Legal Proceedings |
Governmental and regulatory authorities in the U.S. and other jurisdictions in which we and our Affiliates operate regularly make inquiries and administer examinations with respect to our and our Affiliates’ compliance with applicable laws and regulations, and from time to time, we and our Affiliates may be parties to various claims, lawsuits, complaints, regulatory investigations and other proceedings in the ordinary course of business.
Currently, there are no such claims, lawsuits, complaints, regulatory investigations or other proceedings against us or our Affiliates that, in our opinion, would have a material adverse effect on our financial position, liquidity or results of operations. However, there is no assurance as to whether or not any such matters could arise or have a material effect on our or our Affiliates’ financial position, liquidity or results of operations in any future reporting period.
Item 4. | Mine Safety Disclosures |
Not applicable.
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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). As of February 25, 2020, there were 14 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).
Issuer Purchases of Equity Securities
__________________________
Period | Total Number of Shares Purchased(1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Average Price Paid Per Share | Maximum Number of Shares that May Yet Be Purchased Under Outstanding Plans or Programs(2) | |||||||||||
October 1-31, 2019(3) | 190,186 | $ | 81.16 | 190,186 | $ | 81.16 | 8,137,909 | |||||||||
November 1-30, 2019 | 575,789 | 85.03 | 575,789 | 85.03 | 7,562,120 | |||||||||||
December 1-31, 2019 | 663,147 | 83.91 | 663,147 | 83.91 | 6,898,973 | |||||||||||
Total | 1,429,122 | 84.00 | 1,429,122 | 84.00 | ||||||||||||
(1) | Includes shares surrendered, if any, to the Company to satisfy tax withholding and/or option exercise price obligations in connection with stock swap option exercise transactions. |
(2) | Our Board of Directors authorized share repurchase programs in October 2019, January 2019 and January 2018, authorizing us to repurchase up to 6.0 million, 3.3 million and 3.4 million shares of our common stock, respectively, and these authorizations have no expiry. Purchases may be made from time to time, at management’s discretion, in the open market or in privately negotiated transactions, including through the use of derivative financial instruments and accelerated share repurchase programs. As of December 31, 2019, there were a total of 6.9 million shares available for repurchase under our October 2019 and January 2019 share repurchase programs and no shares remained under the January 2018 program. |
(3) | Includes 0.1 million shares delivered upon the completion of a $30.0 million accelerated share repurchase program entered into in September 2019 and completed in October 2019, under which we repurchased a total of 0.4 million shares of our common stock at an average price of $76.06 per share. |
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Performance Graph
Our peer group is comprised of AllianceBernstein Holding L.P., Ameriprise Financial, Inc., Ares Management Corporation, Eaton Vance Corp., Franklin Resources, Inc., Invesco Ltd., Janus Henderson Group plc, Lazard Ltd., Legg Mason, Inc. and T. Rowe Price Group, Inc. Prior to this year, our peer group included BlackRock, Inc. and did not include Ares Management Corporation or Janus Henderson Group plc. Our peer group was revised in the fourth quarter of 2019 to reflect companies with size and market capitalizations that are more in line with our own, and to include additional firms with significant assets under management in alternative strategies. The following graph compares the cumulative stockholder return on our common stock from December 31, 2014 through December 31, 2019, with the cumulative total return, during the same period, on the Standard & Poor’s 500 Index, the Standard & Poor’s MidCap 400 Index, our prior peer group, and our current peer group. The comparison below assumes the investment of $100 on December 31, 2014 in our common stock and each of the comparison indices and, in each case, assumes reinvestment of all dividends.
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Item 6. | Selected Financial Data |
The following table presents 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) | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||
Operating Performance Measures | ||||||||||||||||||||
Assets under management (in billions) | $ | 611.3 | $ | 688.7 | $ | 836.3 | $ | 736.0 | $ | 722.5 | ||||||||||
Average assets under management (in billions) | 623.9 | 655.6 | 779.2 | 819.9 | 758.1 | |||||||||||||||
Aggregate fees | 4,140.1 | 4,296.3 | 5,545.8 | 5,442.4 | 4,962.7 | |||||||||||||||
Financial Performance Measures | ||||||||||||||||||||
Consolidated revenue | $ | 2,484.5 | $ | 2,194.6 | $ | 2,305.0 | $ | 2,378.4 | $ | 2,239.6 | ||||||||||
Net income (controlling interest) | 509.5 | 472.8 | 689.5 | 243.6 | 15.7 | |||||||||||||||
Earnings per share (diluted) | $ | 9.17 | $ | 8.57 | $ | 12.03 | $ | 4.52 | $ | 0.31 | ||||||||||
Dividends per share | $ | — | $ | — | $ | 0.80 | $ | 1.20 | $ | 1.28 | ||||||||||
Supplemental Financial Performance Measures(1) | ||||||||||||||||||||
Adjusted EBITDA (controlling interest) | $ | 942.2 | $ | 945.5 | $ | 1,116.2 | $ | 961.8 | $ | 841.6 | ||||||||||
Economic net income (controlling interest) | 687.2 | 703.6 | 824.4 | 780.7 | 720.2 | |||||||||||||||
Economic earnings per share | $ | 12.47 | $ | 12.84 | $ | 14.60 | $ | 14.50 | $ | 14.22 | ||||||||||
Balance Sheet Data | ||||||||||||||||||||
Total assets | $ | 7,769.4 | $ | 8,749.1 | $ | 8,702.1 | $ | 8,219.1 | $ | 7,653.5 | ||||||||||
Debt | 1,879.4 | 2,109.6 | 1,854.7 | 1,829.6 | 1,793.8 | |||||||||||||||
Redeemable non-controlling interests | 612.5 | 673.5 | 811.9 | 833.7 | 916.7 | |||||||||||||||
Total equity | 3,769.1 | 4,426.5 | 4,578.5 | 4,134.9 | 3,499.1 | |||||||||||||||
(1) | Adjusted EBITDA (controlling interest), Economic net income (controlling interest) and Economic earnings per share are non-GAAP performance measures and are discussed in “Supplemental Financial Performance Measures” in Item 7. |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following executive overview, which summarizes the significant trends affecting our results of operations and financial condition, as well as the remainder of this Management’s Discussion and Analysis of Financial Condition and Results of Operations of Affiliated Managers Group, Inc. and its subsidiaries, 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 SEC, and with our Consolidated Financial Statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K.
Executive Overview
We are a global asset management company with equity investments in high-quality boutique investment management firms, which we call our “Affiliates.” Our strategy is to generate long-term value by investing in leading independent active investment managers, through a proven partnership approach, and allocating resources across our unique opportunity set to the areas of highest growth and return. Through our innovative partnership approach, each Affiliate’s management team retains significant equity ownership in their firm while maintaining operational autonomy. In addition, we offer centralized capabilities to our Affiliates across a variety of areas, including strategy, marketing and distribution, and product development. As of December 31, 2019, our aggregate assets under management were approximately $726 billion, pro forma for a new Affiliate investment which has since been completed, across a broad range of active, return-oriented strategies.
New and Pending Investments
On July 5, 2019, we completed our investment in Garda Capital Partners LP (“Garda”), an alternative investment manager specializing in fixed income relative value strategies. We account for our investment in Garda under the equity method of accounting. Following the close of this transaction, Affiliate management continues to hold a significant portion of the equity in their business and directs the day-to-day operations.
On February 18, 2020, we announced the completion of our investment in Comvest Partners (“Comvest”), a leading middle-market private equity and credit investment firm. We will account for our investment in Comvest under the equity method of accounting. The financial results of this investment will be included in the Company’s Consolidated Financial Statements one quarter in arrears. Following the close of this transaction, Affiliate management continues to hold a significant portion of the equity in their business and directs the day-to-day-operations.
Operating Performance Measures
Under accounting principles generally accepted in the U.S. (“GAAP”), we are required to consolidate certain of our Affiliates and use the equity method of accounting for others. Whether we consolidate an Affiliate or use the equity method of accounting, we maintain the same innovative partnership approach and provide support and assistance in substantially the same manner for all of our Affiliates. Furthermore, all of our Affiliates are boutique investment managers and are impacted by similar marketplace factors and industry trends. Therefore, our key aggregate operating performance measures are important in providing management with a more comprehensive view of the operating performance and material trends across our entire business.
The following table presents our key aggregate operating performance measures:
For the Years Ended December 31, | ||||||||||||||||||
(in billions, except as noted) | 2017 | 2018 | % Change | 2019 | % Change | |||||||||||||
Assets under management | $ | 836.3 | $ | 736.0 | (12 | )% | $ | 722.5 | (2 | )% | ||||||||
Average assets under management | 779.2 | 819.9 | 5 | % | 758.1 | (8 | )% | |||||||||||
Aggregate fees (in millions) | 5,545.8 | 5,442.4 | (2 | )% | 4,962.7 | (9 | )% | |||||||||||
Assets under management and, therefore average assets under management, include the assets under management of our consolidated and equity method Affiliates, and as of October 1, 2019, exclude the assets under management of certain Affiliates in which we are repositioning our interests and that are not significant to our results of operations. Assets under management is presented on a current basis without regard to the timing of the inclusion of an Affiliate’s financial results in our operating performance measures and Consolidated Financial Statements. Average assets under management reflects the timing of the inclusion of an Affiliate’s financial results in our operating performance measures and Consolidated Financial Statements.
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Average assets under management for mutual funds and similar retail investment products represents an average of the daily net assets under management, while for institutional and high net worth clients, average assets under management represents an average of the assets at the beginning or end of each month during the applicable period.
Aggregate fees consists of the total asset and performance based fees earned by all of our consolidated and equity method Affiliates, and includes the aggregate fees of certain Affiliates in which we are repositioning our interests and that are not significant to our aggregate fees or our results of operations. For certain of our Affiliates accounted for under the equity method, we report aggregate fees and the Affiliate’s financial results in our Consolidated Financial Statements one quarter in arrears. Aggregate fees is provided in addition to, but not as a substitute for, Consolidated revenue or other GAAP performance measures.
Assets Under Management
Through our Affiliates, we provide a comprehensive and diverse range of active, return-oriented strategies designed to assist institutional, retail and high net worth clients worldwide in achieving their investment objectives. We continue to see demand for active, return-oriented strategies, particularly in illiquid alternative and multi-asset and fixed income strategies, reflecting continued investor demand for returns that are less correlated to traditional equity markets, while we are experiencing outflows in global equities and in quantitative strategies across liquid alternatives. In addition, investor demand for passively-managed products, including exchange traded funds has continued, and we have experienced outflows in certain equity strategies, consistent with this industry-wide trend. We believe the best-performing active equity managers (whether global-, regional-, or country-specific) will continue to have significant opportunities to grow as a result of net client cash inflows. We believe we are well-positioned to benefit from these trends.
The following charts present information regarding the composition of our assets under management by active, return-oriented strategy as of December 31, 2018 and 2019:
Assets Under Management by Strategy |
 |
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(1) | Alternatives include illiquid alternative strategies, which accounted for 12% and 13% of our assets under management as of December 31, 2018 and 2019, respectively. |
(2) | Global equities include emerging markets strategies, which accounted for 8% and 9% of our assets under management as of December 31, 2018 and 2019, respectively. |
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The following table presents changes in our assets under management by active, return-oriented strategy:
__________________________
(in billions) | Alternatives | Global Equities | U.S. Equities | Multi-Asset & Fixed Income | Total | ||||||||||||||
December 31, 2018 | $ | 293.5 | $ | 243.8 | $ | 97.6 | $ | 101.1 | $ | 736.0 | |||||||||
Client cash inflows and commitments | 35.0 | 37.6 | 16.4 | 20.8 | 109.8 | ||||||||||||||
Client cash outflows | (62.0 | ) | (57.2 | ) | (26.3 | ) | (17.8 | ) | (163.3 | ) | |||||||||
Net client cash flows | (27.0 | ) | (19.6 | ) | (9.9 | ) | 3.0 | (53.5 | ) | ||||||||||
New investments | 4.0 | — | — | — | 4.0 | ||||||||||||||
Market changes | 11.6 | 51.7 | 23.3 | 12.2 | 98.8 | ||||||||||||||
Foreign exchange(1) | 1.7 | 3.1 | 0.3 | 0.8 | 5.9 | ||||||||||||||
Realizations and distributions (net) | (3.1 | ) | (0.4 | ) | (0.2 | ) | (0.2 | ) | (3.9 | ) | |||||||||
Strategic repositioning(2) | (33.5 | ) | (2.3 | ) | (4.8 | ) | (8.4 | ) | (49.0 | ) | |||||||||
Other(3) | (6.0 | ) | (1.4 | ) | (6.3 | ) | (2.1 | ) | (15.8 | ) | |||||||||
December 31, 2019 | $ | 241.2 | $ | 274.9 | $ | 100.0 | $ | 106.4 | $ | 722.5 | |||||||||
(1) | Foreign exchange reflects the impact of translating into U.S. dollars the assets under management of our Affiliates whose functional currency is not the U.S. dollar. |
(2) | Strategic repositioning includes assets under management attributable to Affiliates that are not significant to our results of operations, or those in which we have divested of our interest. |
(3) | Other includes assets under management attributable to product transitions and reclassifications. |
The following charts present information regarding the composition of our assets under management by client type as of December 31, 2018 and 2019:
Assets Under Management by Client Type |
 |
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The following table presents changes in our assets under management by client type:
__________________________
(in billions) | Institutional | Retail | High Net Worth | Total | ||||||||||||
December 31, 2018 | $ | 432.9 | $ | 195.4 | $ | 107.7 | $ | 736.0 | ||||||||
Client cash inflows and commitments | 46.0 | 44.3 | 19.5 | 109.8 | ||||||||||||
Client cash outflows | (81.4 | ) | (65.0 | ) | (16.9 | ) | (163.3 | ) | ||||||||
Net client cash flows | (35.4 | ) | (20.7 | ) | 2.6 | (53.5 | ) | |||||||||
New investments | 4.0 | — | — | 4.0 | ||||||||||||
Market changes | 50.3 | 32.9 | 15.6 | 98.8 | ||||||||||||
Foreign exchange(1) | 3.3 | 2.1 | 0.5 | 5.9 | ||||||||||||
Realizations and distributions (net) | (3.1 | ) | (0.7 | ) | (0.1 | ) | (3.9 | ) | ||||||||
Strategic repositioning(2) | (36.9 | ) | (3.0 | ) | (9.1 | ) | (49.0 | ) | ||||||||
Other(3) | (7.9 | ) | (7.9 | ) | — | (15.8 | ) | |||||||||
December 31, 2019 | $ | 407.2 | $ | 198.1 | $ | 117.2 | $ | 722.5 | ||||||||
(1) | Foreign exchange reflects the impact of translating into U.S. dollars the assets under management of our Affiliates whose functional currency is not the U.S. dollar. |
(2) | Strategic repositioning includes assets under management attributable to Affiliates that are not significant to our results of operations, or those in which we have divested of our interest. |
(3) | Other includes assets under management attributable to product transitions and reclassifications. |
Aggregate Fees
Aggregate fees consists of asset and performance based fees. Asset based fees include advisory and other fees earned by our Affiliates for services provided to their clients and are typically determined as a percentage of the value of a client’s assets under management. Performance based fees are based on investment performance, typically on an absolute basis or relative to a benchmark, and are recognized when they are earned (i.e., when they become billable to customers and are not subject to claw-back). Performance based fees are generally billed less frequently than asset based fees, and although performance based fees inherently depend on investment performance and will vary from period to period, we anticipate performance based fees will be a recurring component of our aggregate fees.
Aggregate fees is generally determined by the level of our average assets under management, the composition of these assets across our active, return-oriented strategies that realize different asset based fee ratios, and performance based fees. Our asset based fee ratio is calculated as asset based fees divided by average assets under management.
Aggregate fees was $4,962.7 million in 2019, a decrease of $479.7 million or 9% as compared to 2018. The decrease in aggregate fees was primarily due to a $486.2 million decrease in asset based fees. The decrease in asset based fees was due to an 8% decrease in our average assets under management, primarily in alternative strategies and global equities strategies, and a 2% decline in our asset based fee ratio, principally due to a change in the composition of our assets under management.
Financial and Supplemental Financial Performance Measures
The following table presents our key financial and supplemental financial performance measures:
__________________________
For the Years Ended December 31, | ||||||||||||||||||
(in millions) | 2017 | 2018 | % Change | 2019 | % Change | |||||||||||||
Net income (controlling interest) | $ | 689.5 | $ | 243.6 | (65 | )% | $ | 15.7 | (94 | )% | ||||||||
Adjusted EBITDA (controlling interest)(1) | 1,116.2 | 961.8 | (14 | )% | 841.6 | (12 | )% | |||||||||||
Economic net income (controlling interest)(1) | 824.4 | 780.7 | (5 | )% | 720.2 | (8 | )% | |||||||||||
(1) | Adjusted EBITDA (controlling interest) and Economic net income (controlling interest) are non-GAAP performance measures and are discussed in “Supplemental Financial Performance Measures.” |
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Adjusted EBITDA (controlling interest) is an important supplemental financial performance measure for management as it provides a comprehensive view of our share of the financial performance of our business before interest, taxes, depreciation, amortization, impairments and adjustments to our contingent payment arrangements. Adjusted EBITDA (controlling interest) was $841.6 million in 2019, a decrease of $120.2 million or 12% as compared to 2018. The decrease in Adjusted EBITDA (controlling interest) was primarily due to a 9% decrease in aggregate fees and a decline in earnings at certain Affiliates in which we share in revenue less agreed-upon expenses.
Net income (controlling interest) was $15.7 million in 2019, a decrease of $227.9 million or 94%, as compared to 2018. The decrease in Net income (controlling interest) was primarily due to a $290.9 million increase in intangible amortization and impairments, including a $256.6 million increase in equity method intangible amortization and impairments and a $34.3 million increase in consolidated intangible amortization and impairments expense attributable to the controlling interest. The decrease was also the result of a $120.2 million decrease in Adjusted EBITDA (controlling interest), primarily due to a decline in aggregate fees. These decreases were partially offset by a $178.5 million decrease in Income tax expense, primarily due to a decline in income before income taxes (controlling interest).
We believe Economic net income (controlling interest) is an important supplemental financial performance measure because it represents our performance before non-cash expenses relating to our acquisition of interests in Affiliates and improves comparability of performance between periods. Economic net income (controlling interest) was $720.2 million in 2019, a decrease of $60.5 million or 8% as compared to 2018. The decrease in Economic net income (controlling interest) was primarily due to a $120.2 million decrease in Adjusted EBITDA (controlling interest), primarily from a decrease in aggregate fees, partially offset by a $60.9 million cash tax benefit recognized on the sale of an Affiliate.
Results of Operations
Our discussion and analysis of the key operating performance measures and financial results for fiscal year 2019 compared to fiscal year 2018 is included herein. For discussion and analysis of fiscal year 2018 compared to fiscal year 2017, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which was filed with the SEC on February 22, 2019.
The following discussion includes the key operating performance measures and financial results of our consolidated and equity method Affiliates. Our consolidated Affiliates’ financial results are included in our Consolidated revenue, Consolidated expenses, and Investment and other income, and our share of our equity method Affiliates’ financial results is reported, net of intangible amortization and impairments, in Equity method income (loss) (net).
Consolidated Revenue
Our Consolidated revenue is derived from our consolidated Affiliates, primarily from asset based fees from investment management services. For these Affiliates, we typically use structured partnership interests in which we contractually share in the Affiliate’s revenue without regard to expenses. Consolidated revenue is generally determined by the level of our consolidated Affiliate average assets under management, the composition of these assets across our Affiliate sponsored investment products and client accounts that realize different asset based fee ratios, and performance based fees.
The following table presents our consolidated Affiliate average assets under management and Consolidated revenue:
For the Years Ended December 31, | |||||||||||||||||
(in millions, except as noted) | 2017 | 2018 | % Change | 2019 | % Change | ||||||||||||
Consolidated Affiliate average assets under management (in billions) | $ | 406.5 | $ | 419.6 | 3 | % | $ | 395.1 | (6 | )% | |||||||
Consolidated revenue | $ | 2,305.0 | $ | 2,378.4 | 3 | % | $ | 2,239.6 | (6 | )% | |||||||
Our Consolidated revenue decreased $138.8 million or 6% in 2019, due to a $187.5 million decrease from asset based fees, partially offset by a $48.7 million increase from performance based fees. The decrease in asset based fees was primarily due to a 6% decrease in consolidated Affiliate average assets under management, primarily in U.S. equity strategies and global equity strategies, and a 2% decline in our consolidated Affiliate asset based fee ratio, principally due to a change in the composition of our assets under management.
Consolidated Expenses
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Our Consolidated expenses are primarily attributable to the non-controlling interests of our consolidated Affiliates in which we share in revenue without regard to expenses. For these Affiliates, the amount of expenses attributable to the non-controlling interests, including compensation, is generally determined by the percentage of revenue allocated to expenses as part of the structured partnership interests in place at the respective Affiliate. Accordingly, increases in revenue generally will increase a consolidated Affiliate’s expenses attributable to the non-controlling interests and decreases in revenue will generally decrease a consolidated Affiliate’s expenses attributable to the non-controlling interests.
The following table presents our Consolidated expenses:
For the Years Ended December 31, | ||||||||||||||||||
(in millions) | 2017 | 2018 | % Change | 2019 | % Change | |||||||||||||
Compensation and related expenses | $ | 979.0 | $ | 987.2 | 1 | % | $ | 943.0 | (4 | )% | ||||||||
Selling, general and administrative | 373.1 | 417.7 | 12 | % | 376.8 | (10 | )% | |||||||||||
Intangible amortization and impairments | 86.4 | 114.8 | 33 | % | 144.5 | 26 | % | |||||||||||
Interest expense | 87.8 | 80.6 | (8 | )% | 76.2 | (5 | )% | |||||||||||
Depreciation and other amortization | 20.3 | 22.0 | 8 | % | 21.3 | (3 | )% | |||||||||||
Other expenses (net) | 58.0 | 69.7 | 20 | % | 57.0 | (18 | )% | |||||||||||
Total consolidated expenses | $ | 1,604.6 | $ | 1,692.0 | 5 | % | $ | 1,618.8 | (4 | )% | ||||||||
Compensation and related expenses decreased $44.2 million or 4% in 2019, primarily due to a $30.8 million decrease in bonus and salary expenses as a result of a decline in the percentage of revenue allocated to expenses as part of the structured partnership interests in place at our consolidated Affiliates, and a $15.9 million decrease in Affiliate equity compensation expense. The decrease was also due to a $6.3 million decline in pound sterling-denominated expenses due to changes in foreign currency exchange rates. These decreases were offset by a $5.5 million increase in compensation related to headcount repositioning in 2019.
Selling, general and administrative expenses decreased $40.9 million or 10% in 2019, primarily due to a $28.9 million decrease from sub-advisory and distribution expenses related to a decrease in consolidated Affiliate average assets under management and a decrease of $5.3 million in travel-related, marketing, and notes receivable reserve expenses. The decrease was also due to a $4.8 million decline in pound sterling-denominated expenses due to changes in foreign currency exchange rates.
Intangible amortization and impairments increased $29.7 million or 26% in 2019, primarily due to a $35.0 million expense to reduce the carrying value to fair value of an indefinite-lived acquired client relationship at one of our Affiliates, and a $16.1 million expense to reduce the carrying value to zero of certain indefinite-lived acquired client relationships due to the closure of certain retail investment products on our U.S. retail distribution platform. These increases were partially offset by a $19.4 million reduction in amortization expense related to a decrease in actual and expected client attrition for certain definite-lived acquired client relationships.
Interest expense decreased $4.4 million or 5% in 2019, primarily due to a $10.1 million decrease due to our pound sterling-denominated forward foreign currency contracts and a $7.5 million decrease primarily due to lower borrowings on our senior unsecured multicurrency revolving credit facility (the “revolver”). These decreases were partially offset by a $13.4 million increase due to our junior subordinated notes issued in March 2019.
There were no significant changes in Depreciation and other amortization in 2019.
Other expenses (net) decreased $12.7 million or 18% in 2019, primarily due to a $19.5 million decrease in charitable contributions, partially offset by an $8.1 million expense to reduce certain right-of-use assets to their fair value, related to a reduction in leased office space.
Equity Method Income (Loss) (Net)
When we do not own a controlling equity interest in an Affiliate, but have significant influence, we account for our interest in the Affiliate under the equity method. Our share of earnings or losses from Affiliates accounted for under the equity method, net of amortization and impairments, is included in Equity method income (loss) (net) in our Consolidated Statements of Income.
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For a majority of these Affiliates, we use structured partnership interests in which we contractually share in the Affiliate’s revenue less agreed-upon expenses. We also use structured partnership interests in which we contractually share in the Affiliate’s revenue without regard to expenses, and in this type of partnership interest, our contractual share of revenue generally has priority over distributions to Affiliate management.
Our equity method revenue is derived primarily from asset and performance based fees from investment management services. Equity method revenue incorporates the total asset and performance based fees earned by all of our Affiliates accounted for under the equity method and is generally determined by the level of our equity method Affiliate average assets under management, the composition of these assets across our Affiliate sponsored investment products and client accounts that realize different asset based fee ratios, and performance based fees. Our Affiliates accounted for under the equity method manage a greater proportion of assets subject to performance based fees than our consolidated Affiliates and, as a result, equity method revenue will generally have more performance based fees than Consolidated revenue.
The following table presents equity method Affiliate average assets under management and equity method revenue, as well as equity method earnings and equity method intangible amortization and impairments, which in aggregate form Equity method income (loss) (net):
__________________________
For the Years Ended December 31, | ||||||||||||||||||
(in millions, except as noted) | 2017 | 2018 | % Change | 2019 | % Change | |||||||||||||
Operating Performance Measures | ||||||||||||||||||
Equity method Affiliate average assets under management (in billions) | $ | 372.7 | $ | 400.3 | 7 | % | $ | 363.0 | (9 | )% | ||||||||
Equity method revenue | $ | 3,240.8 | $ | 3,064.0 | (5 | )% | $ | 2,723.1 | (11 | )% | ||||||||
Financial Performance Measures | ||||||||||||||||||
Equity method earnings | $ | 501.4 | $ | 370.6 | (26 | )% | $ | 289.4 | (22 | )% | ||||||||
Equity method intangible amortization and impairments | (199.2 | ) | (370.8 | ) | 86 | % | (627.4 | ) | 69 | % | ||||||||
Equity method income (loss) (net) | $ | 302.2 | $ | (0.2 | ) | (100 | )% | $ | (338.0 | ) | N.M.(1) | |||||||
(1) | Percentage change is not meaningful. |
Our equity method revenue decreased $340.9 million or 11% in 2019, due to a $298.8 million decrease from asset based fees and a $42.1 million decrease from performance based fees. The decrease in asset based fees was primarily due to a 9% decrease in equity method Affiliate average assets under management, primarily in alternative strategies, and a 3% decline in our equity method asset based fee ratio, principally due to a change in the composition of our assets under management.
While equity method revenue decreased $340.9 million or 11% in 2019, equity method earnings decreased $81.2 million or 22%. Equity method earnings decreased more than equity method revenue on a percentage basis due to decreases in revenue at certain Affiliates in which we share in the Affiliate’s revenue less agreed-upon expenses. The expense bases of these Affiliates are generally less variable and in 2019 include expenses related to headcount repositioning and a reduction in leased office space.
Equity method intangible amortization and impairments increased $256.6 million or 69% in 2019, primarily due to a $485.0 million expense in 2019 to reduce the carrying value to fair value of certain Affiliates, as compared to a $273.3 million expense in 2018 to reduce the carrying value to fair value of certain Affiliates. See Note 10 of our Consolidated Financial Statements. The increase was also due to a $45.7 million increase in amortization expense due to an increase in actual and expected client attrition for certain definite-lived acquired client relationships.
Investment and other income
The following table presents our Investment and other income:
For the Years Ended December 31, | ||||||||||||||||||
(in millions) | 2017 | 2018 | % Change | 2019 | % Change | |||||||||||||
Investment and other income | $ | 64.5 | $ | 27.4 | (58 | )% | $ | 25.2 | (8 | )% | ||||||||
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Investment and other income decreased $2.2 million or 8% in 2019, primarily due to a $12.8 million decrease from the valuation of Other investments, primarily attributable to general partner investments in private equity funds, partially offset by a $9.6 million net increase from the valuation and realized gains on sales of Investments in marketable securities.
Income Tax Expense
The following table presents our Income tax expense:
__________________________
For the Years Ended December 31, | |||||||||||||||||
(in millions) | 2017 | 2018 | % Change | 2019 | % Change | ||||||||||||
Income tax expense | $ | 58.4 | $ | 181.3 | N.M.(1) | $ | 2.9 | (98 | )% | ||||||||
(1) | Percentage change is not meaningful. |
Income tax expense decreased $178.4 million or 98% in 2019, primarily due to a $406.4 million decrease in income before income taxes (controlling interest) in 2019, and a $240.0 million expense recorded to reduce the carrying value to fair value of an Affiliate for which we did not recognize an income tax benefit in 2018.
Net Income
The following table presents Net income, Net income (controlling interest) and Net income (non-controlling interest):
For the Years Ended December 31, | ||||||||||||||||||
(in millions) | 2017 | 2018 | % Change | 2019 | % Change | |||||||||||||
Net income | $ | 1,008.7 | $ | 532.3 | (47 | )% | $ | 305.1 | (43 | )% | ||||||||
Net income (non-controlling interests) | 319.2 | 288.7 | (10 | )% | 289.4 | 0 | % | |||||||||||
Net income (controlling interest) | 689.5 | 243.6 | (65 | )% | 15.7 | (94 | )% | |||||||||||
Net income (controlling interest) decreased $227.9 million or 94% in 2019, primarily due to a $337.8 million increase in Equity method loss (net), a decrease in Consolidated revenue, and a $34.3 million increase in consolidated intangible amortization and impairments expense attributable to the controlling interest. These increases were partially offset by a $178.5 million decrease in Income tax expense attributable to the controlling interest.
Supplemental Financial Performance Measures
Adjusted EBITDA (controlling interest)
As supplemental information, we provide a non-GAAP measure that we refer to as Adjusted EBITDA (controlling interest). Adjusted EBITDA (controlling interest) is an important supplemental financial performance measure for management as it provides a comprehensive view of our share of the financial performance of our business before interest, taxes, depreciation, amortization, impairments and adjustments to contingent payment arrangements. We believe that many investors use this measure when assessing the financial performance of companies in the investment management industry. This non-GAAP performance measure is provided in addition to, but not as a substitute for, Net income (controlling interest) or other GAAP performance measures.
The following table presents a reconciliation of Net income (controlling interest) to Adjusted EBITDA (controlling interest):
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For the Years Ended December 31, | ||||||||||||
(in millions) | 2017 | 2018 | 2019 | |||||||||
Net income (controlling interest) | $ | 689.5 | $ | 243.6 | $ | 15.7 | ||||||
Interest expense | 87.8 | 80.6 | 76.2 | |||||||||
Income taxes(1) | 50.4 | 169.4 | (9.1 | ) | ||||||||
Intangible amortization and impairments(2) | 265.4 | 454.9 | 745.8 | |||||||||
Other items(3) | 23.1 | 13.3 | 13.0 | |||||||||
Adjusted EBITDA (controlling interest) | $ | 1,116.2 | $ | 961.8 | $ | 841.6 | ||||||
(1) | For the year ended December 31, 2017, Income taxes includes a one-time net benefit of $194.1 million from changes in U.S. tax laws. |
(2) | Intangible amortization and impairments in our Consolidated Statements of Income includes amortization attributable to our non-controlling interests. For our Affiliates accounted for under the equity method, we do not separately report intangible amortization and impairments in our Consolidated Statements of Income. Our share of these Affiliates’ amortization is reported in Equity method income (loss) (net). |
The following table presents the Intangible amortization and impairments shown above:
For the Years Ended December 31, | ||||||||||||
(in millions) | 2017 | 2018 | 2019 | |||||||||
Consolidated intangible amortization and impairments | $ | 86.4 | $ | 114.8 | $ | 144.5 | ||||||
Consolidated intangible amortization (non-controlling interests) | (20.2 | ) | (30.7 | ) | (26.1 | ) | ||||||
Equity method intangible amortization and impairments | 199.2 | 370.8 | 627.4 | |||||||||
Total | $ | 265.4 | $ | 454.9 | $ | 745.8 | ||||||
For the year ended December 31, 2019, consolidated intangible amortization and impairments includes $51.1 million of non-cash expenses to reduce the carrying value to fair value of an indefinite-lived acquired client relationship at one of our Affiliates and to reduce the carrying value to zero of certain indefinite-lived acquired client relationships due to the closure of certain retail investment products on our U.S. retail distribution platform.
For the years ended December 31, 2017, 2018 and 2019, equity method intangible amortization and impairments includes $93.1 million, $273.3 million and $485.0 million, respectively, of non-cash expenses to reduce the carrying value to fair value of certain Affiliates.
(3) | Other items include depreciation and adjustments to contingent payment arrangements. |
Economic Net Income (controlling interest) and Economic Earnings Per Share
As supplemental information, we also provide non-GAAP performance measures that we refer to as Economic net income (controlling interest) and Economic earnings per share. We believe Economic net income (controlling interest) and Economic earnings per share are important measures because they represent our performance before non-cash expenses relating to the acquisition of interests in Affiliates and improve comparability of performance between periods. 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 one of the measures for aligning executive compensation with stockholder value. These non-GAAP performance measures are provided in addition to, but not as substitutes for, Net income (controlling interest) and Earnings per share (diluted) or other GAAP performance measures.
We adjust Net income (controlling interest) to calculate Economic net income (controlling interest) by adding back our share of pre-tax intangible amortization and impairments attributable to intangible assets because these expenses do not correspond to the changes in the value of these assets, which do not diminish predictably over time. We also add back the deferred taxes attributable to intangible assets because we believe it is unlikely these accruals will be used to settle material tax obligations. Further, we add back other economic items to improve comparability of performance between periods.
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Economic earnings per share represents Economic net income (controlling interest) divided by the Average shares outstanding (adjusted diluted). In this calculation, the potential share issuance in connection with our junior 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 junior convertible securities in excess of par, if any, is 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 presents a reconciliation of Net income (controlling interest) to Economic net income (controlling interest) and Economic earnings per share:
__________________________
For the Years Ended December 31, | ||||||||||||
(in millions, except per share data) | 2017 | 2018 | 2019 | |||||||||
Net income (controlling interest) | $ | 689.5 | $ | 243.6 | $ | 15.7 | ||||||
Intangible amortization and impairments(1) | 265.4 | 454.9 | 745.8 | |||||||||
Intangible-related deferred taxes(2) | 48.8 | 79.7 | (51.3 | ) | ||||||||
Other economic items(3) | 14.8 | 2.5 | 10.0 | |||||||||
Changes in U.S. tax laws | (194.1 | ) | — | — | ||||||||
Economic net income (controlling interest) | $ | 824.4 | $ | 780.7 | $ | 720.2 | ||||||
Average shares outstanding (diluted) | 58.6 | 53.8 | 50.6 | |||||||||
Assumed issuance of junior convertible securities shares | (2.2 | ) | — | — | ||||||||
Average shares outstanding (adjusted diluted) | 56.4 | 53.8 | 50.6 | |||||||||
Economic earnings per share | $ | 14.60 | $ | 14.50 | $ | 14.22 | ||||||
(1) | See note (2) to the table in “Adjusted EBITDA (controlling interest).” |
(2) | For the years ended December 31, 2017 and 2019, intangible-related deferred taxes decreased $35.7 million and $76.6 million, respectively, as a result of expenses to reduce the carrying value to fair value as described in note (2) to the table in “Adjusted EBITDA (controlling interest).” For the year ended December 31, 2018, intangible-related deferred taxes increased $19.9 million due to Affiliate divestments. |
(3) | For the years ended December 31, 2017, 2018 and 2019, Other economic items were net of income tax expense of $5.8 million, $0.8 million and $0.7 million, respectively. Beginning January 1, 2019, other economic items include tax windfalls and shortfalls from share-based compensation. Prior periods have not been revised as the amounts were not significant. |
Liquidity and Capital Resources
We generate long-term value by investing in new Affiliates, investing in existing Affiliates, and investing in centralized capabilities through which we can leverage our scale and resources to benefit our Affiliates and enhance their long-term growth prospects. We then return capital to shareholders through share repurchases and the payment of cash dividends on our common stock while maintaining a conservative capital structure consistent with an investment grade rating.
Cash and cash equivalents were $539.6 million as of December 31, 2019 and were primarily attributable to the non-controlling interest. In 2019, we met our cash requirements primarily through cash generated by operating activities. Our principal uses of cash during the year were for investments in new Affiliates, investments in existing Affiliates primarily through repurchases of Affiliate equity interests, repayment of debt and the return of capital through share repurchases and the payment of cash dividends on our common stock. We expect these will be the primary uses of capital for the foreseeable future.
We anticipate that cash flows from operations, together with borrowings under our revolver, will be sufficient to support our cash flow needs. In addition, we may draw funding from the debt and equity capital markets, and our credit ratings, among other factors, allow us to access these sources of funding on favorable terms. We are currently rated A3 by Moody’s Investors Service and BBB+ by S&P Global Ratings.
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The following table presents operating, investing and financing cash flow activities:
For the Years Ended December 31, | ||||||||||||
(in millions) | 2017 | 2018 | 2019 | |||||||||
Operating cash flow | $ | 1,170.4 | $ | 1,140.6 | $ | 929.1 | ||||||
Investing cash flow | 13.8 | (18.2 | ) | (24.4 | ) | |||||||
Financing cash flow | (1,189.7 | ) | (983.1 | ) | (934.7 | ) | ||||||
Operating Cash Flow
Operating cash flows are calculated by adjusting Net income for other significant sources and uses of cash, significant non-cash items and timing differences in the cash settlement of assets and liabilities.
For the year ended December 31, 2019, Cash flows from operating activities were $929.1 million, primarily from Net income of $305.1 million, adjusted for non-cash intangible amortization and impairments of $771.9 million, including $627.4 million for our Affiliates accounted for under the equity method and included in Equity method income (loss) (net) and $144.5 million for acquired client relationships at consolidated Affiliates. These items were partially offset by timing differences in the cash settlement of assets and liabilities, which reduced operating cash flow by $149.1 million on a net basis. In 2019, approximately 70% of the Cash flows from operating activities were attributable to the controlling interest.
Investing Cash Flow
For the year ended December 31, 2019, Cash flows used in investing activities were $24.4 million, primarily due to investments in new and existing Affiliates of $162.3 million, partially offset by the receipt of sales proceeds of $117.7 million from the divestment of certain Affiliates. These activities were primarily attributable to the controlling interest.
Financing Cash Flow
For the year ended December 31, 2019, Cash flows used in financing activities were $934.7 million, primarily due to the return of $421.4 million of capital to shareholders through share repurchases and dividends on our common stock and $135.5 million of Affiliate equity repurchases and issuances (net). Cash flows used in financing activities also includes the repayment of $39.3 million on a net basis of outstanding debt. These activities were attributable to the controlling interest. Cash flows used in financing activities also includes $347.9 million of distributions attributable to the non-controlling interests.
Affiliate Equity
We periodically repurchase Affiliate equity from and issue Affiliate equity to our consolidated Affiliate partners and our officers, under agreements that provide us with a conditional right to call and Affiliate equity holders with a conditional right to put their Affiliate equity interests to us at certain intervals. For Affiliates accounted for under the equity method, we do not 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 equity holders are also permitted to sell their equity interests to other individuals or entities in certain cases, subject to our approval or other restrictions.
As of December 31, 2019, the current redemption value of $916.7 million for these interests (including $21.6 million of consolidated Affiliate sponsored investment products primarily attributable to third-party investors) has been presented as Redeemable non-controlling interests. Although the timing and amounts of these purchases are difficult to predict, we paid $146.0 million for repurchases and received $10.5 million for issuances of Affiliate equity during 2019, and we expect to repurchase a total of approximately $190 million of Affiliate equity in 2020. In the event of a repurchase, we become the owner of the cash flow associated with the repurchased equity. See Notes 17 and 18 of our Consolidated Financial Statements.
Share Repurchases
Our Board of Directors authorized share repurchase programs in October 2019, January 2019 and January 2018, authorizing us to repurchase up to 6.0 million, 3.3 million and 3.4 million shares of our common stock, respectively, and these authorizations have no expiry. Purchases may be made from time to time, at management’s discretion, in the open market or in privately negotiated transactions, including through the use of derivative financial instruments and accelerated share repurchase programs. For the year ended December 31, 2019, we repurchased 4.1 million shares of our common stock, at an average price
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per share of $88.73. As of December 31, 2019, there were a total of 6.9 million shares available for repurchase under our October 2019 and January 2019 share repurchase programs and no shares remained under the January 2018 program.
Debt
The following table presents the carrying value of our outstanding indebtedness. See Note 5 of our Consolidated Financial Statements.
December 31, | ||||||||||||
(in millions) | 2017 | 2018 | 2019 | |||||||||
Senior bank debt | $ | 810.0 | $ | 780.0 | $ | 450.0 | ||||||
Senior notes | 745.7 | 746.2 | 746.8 | |||||||||
Junior convertible securities | 309.9 | 312.5 | 315.4 | |||||||||
Junior subordinated notes | — | — | 290.7 | |||||||||
The carrying value of long-term debt differs from the amount reported in the notes to our Consolidated Financial Statements, as the carrying value of the long-term debt in the table above is not reduced for debt issuance costs.
Senior Bank Debt
We have a $1.25 billion revolver and a $450.0 million senior unsecured term loan facility (the “term loan” and, together with the revolver, the “credit facilities”). The revolver matures on January 18, 2024, and the term loan matures on January 18, 2023. Subject to certain conditions, we may increase the commitments under the revolver by up to an additional $500.0 million and may borrow up to an additional $75.0 million under the term loan.
Under the terms of the credit facilities 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 3.25x. The second covenant is a minimum EBITDA to cash interest expense ratio of 3.00x (the “bank interest coverage ratio”). For purposes of calculating these ratios, share-based compensation and Affiliate equity expense are added back to EBITDA. As of December 31, 2019, our bank leverage and bank interest coverage ratios were 1.3x and 10.8x, respectively, and we were in compliance with all of the terms of our credit facilities. As of December 31, 2019, we had no borrowings outstanding under our revolver, and could borrow all capacity and remain in compliance with our credit facilities.
Senior Notes and Junior Subordinated Notes
As of December 31, 2019, we had the following senior notes and junior subordinated notes outstanding, the respective principal terms of which are presented below.
2024 Senior Notes | 2025 Senior Notes | 2059 Junior Subordinated Notes | ||||||||||
Issue date | February 2014 | February 2015 | March 2019 | |||||||||
Maturity date | February 2024 | August 2025 | March 2059 | |||||||||
Par value (in millions) | $ | 400.0 | $ | 350.0 | $ | 300.0 | ||||||
Stated coupon | 4.25 | % | 3.50 | % | 5.875 | % | ||||||
Coupon frequency | Semi-annually | Semi-annually | Quarterly | |||||||||
Potential call date | Any time | Any time | March 2024 | |||||||||
Listing | N.A. | N.A. | NYSE | |||||||||
We used a majority of the net proceeds from the junior subordinated notes, issued in 2019, to repay outstanding indebtedness under the revolver, with the remaining proceeds used for other general corporate purposes.
Junior Convertible Securities
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As of December 31, 2019, we had 5.15% junior convertible trust preferred securities outstanding (the “junior convertible securities”) with a carrying value of $315.4 million. The carrying value is accreted to the principal amount at maturity ($430.8 million) over a remaining life of approximately 18 years. Holders of the junior convertible 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 thereof, at our election. The junior 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 will generate annual deferred tax liabilities of $8.4 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. In August 2019, in accordance with the convertible securities indenture, we adjusted the conversion rate of the junior convertible securities as a result of the cumulative declared dividends on our common stock.
Equity Distribution Program
We have entered into equity distribution and forward equity agreements with several major securities firms under which we may, from time to time, issue and sell shares of our common stock (immediately or on a forward basis) having an aggregate sales price of up to $500.0 million (the “equity distribution program”). As of December 31, 2019, no sales had occurred under the equity distribution program.
Derivatives
In 2018, we entered into two separate pound sterling-denominated forward foreign currency contracts (the “forward contracts”) with a large financial institution (the “counterparty”) to access lower interest rates, and concurrently entered into two separate collar contracts with the same counterparty for the same notional amounts and expiration dates as the forward contracts. Certain of our Affiliates also use foreign currency contracts to hedge the risk of foreign exchange rate movements. See Note 6 of our Consolidated Financial Statements.
Commitments
See Note 7 of our Consolidated Financial Statements.
Contractual Obligations
The following table presents our contractual obligations as of December 31, 2019. Contractual debt obligations include the cash payment of fixed interest.
__________________________
Payments Due | ||||||||||||||||||||
(in millions) | Total | 2020 | 2021-2022 | 2023-2024 | Thereafter | |||||||||||||||
Contractual Obligations | ||||||||||||||||||||
Senior bank debt | $ | 450.0 | $ | — | $ | — | $ | 450.0 | $ | — | ||||||||||
Senior notes | 900.1 | 29.3 | 58.5 | 450.0 | 362.3 | |||||||||||||||
Junior convertible securities | 830.2 | 22.2 | 44.4 | 44.4 | 719.2 | |||||||||||||||
Junior subordinated notes | 1,000.7 | 17.6 | 35.3 | 35.3 | 912.5 | |||||||||||||||
Leases(1) | 239.4 | 39.3 | 69.9 | 47.8 | 82.4 | |||||||||||||||
Affiliate equity repurchase obligations(2) | 19.8 | 19.8 | — | — | — | |||||||||||||||
Total contractual obligations | $ | 3,440.2 | $ | 128.2 | $ | 208.1 | $ | 1,027.5 | $ | 2,076.4 | ||||||||||
Contingent Obligations | ||||||||||||||||||||
Contingent payment arrangements(3) | $ | 25.0 | $ | — | $ | 25.0 | $ | — | $ | — | ||||||||||
(1) | The total controlling interest portion is $62.6 million ($13.0 million through 2020, $23.1 million in 2021-2022, $17.4 million in 2023-2024 and $9.1 million thereafter). |
(2) | The Affiliate equity repurchase obligations disclosed in the table represent the fair value of obligations put to us and outstanding as of December 31, 2019. |