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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-05 · 131 added, 138 removed, 290 unchanged (48% of the section changed)

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We are a leading partner to independent active investment management firms globally.

Our strategy is to generate long-term value by investing in a diverse array of high-quality independent partner-owned investment firms, which we call our “Affiliates,” through a proven partnership approach, and allocating resources across our unique opportunity set to the areas of highest growth and return.

Our strategy is to generate long-term value by investing in a diverse array of high-quality partner-owned investment firms, referred to as “Affiliates,” through a proven partnership approach, and allocating resources across our unique opportunity set to the areas of highest growth and return.

Our innovative partnership approach enables each Affiliate’s management team to own significant equity in their firm while maintaining operational and investment autonomy.

In addition, we offer our Affiliates growth capital, global distribution, and other strategic value-added capabilities, which enhance the long-term growth of these independent businesses and enable them to align equity incentives across generations of principals to build enduring franchises.

As of June 30, 2021, our aggregate assets under management were $755.7 billion across a broad range of return-oriented strategies.

As of September 30, 2021, our aggregate assets under management were $747.8 billion across a broad range of return-oriented strategies.

In the first quarter of 2021, we completed a minority investment in Boston Common Asset Management LLC, a women-owned leader in global sustainable and impact investing.

In the second quarter of 2021, we completed a minority investment in OCP Asia Limited, a leading alternative manager in private markets, providing customized secured lending solutions across the Asia-Pacific region.

In July 2021, we entered into a definitive agreement to acquire a majority equity interest in Parnassus Investments (“Parnassus”), an ESG-dedicated fund manager.

Following the close of the transaction, Parnassus partners will continue to hold a substantial portion of the equity of the business and direct its day-to-day operations.

The transaction, which is expected to close during the second half of 2021, is subject to customary closing conditions and regulatory approvals.

In the third quarter of 2021, we entered into a definitive agreement to acquire a majority equity interest in Parnassus Investments (“Parnassus”), an ESG-dedicated fund manager, and on October 1, 2021, we completed our investment.

Following the close of the transaction, Parnassus partners continue to hold a substantial portion of the equity of the business and direct its day-to-day operations.

In the third quarter of 2021, we entered into a definitive agreement to acquire a majority equity interest in Abacus Capital Group LLC (“Abacus”), a real estate investment manager focused on the U.S.

multifamily sector.

Following the close of the transaction, Abacus partners will continue to hold a substantial portion of the equity of the business and direct its day-to-day operations.

The transaction, which is expected to close during the fourth quarter of 2021, is subject to customary closing conditions and regulatory approvals.

Operating Performance Measures

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The following table presents our key aggregate operating performance measures:

As of and for the Three Months Ended June 30, As of and for the Six Months Ended June 30,

As of and for the Three Months Ended September 30, As of and for the Nine Months Ended September 30,

(in billions, except as noted) 2020 2021 % Change 2020 2021 % Change

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Through our Affiliates, we provide a comprehensive and diverse range of 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 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 quantitative strategies across liquid alternative strategies and equities strategies.

We continue to see demand for return-oriented strategies, particularly in illiquid alternative and multi-asset and fixed income strategies where we have been experiencing net inflows, reflecting continued investor demand for returns that are less correlated to traditional equity markets.

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.

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We also anticipate that independent investment firms will continue to seek access to an evolving range of partnership solutions, and that we have a significant opportunity to invest in outstanding firms across the global asset management industry.

The following charts present information regarding the composition of our assets under management by strategy and client type as of June 30, 2021:

The following charts present information regarding the composition of our assets under management by strategy and client type as of September 30, 2021:

Assets Under Management

___________________________

(1) Alternatives include illiquid alternative strategies, which accounted for 14% of our assets under management as of June 30, 2021.

(2) Global equities include emerging markets strategies, which accounted for 8% of our assets under management as of June 30, 2021.

The following tables present changes in our assets under management by strategy and client type for the three and six months ended June 30, 2021:

(1) Alternatives include illiquid alternative strategies, which accounted for 15% of our assets under management as of September 30, 2021.

(2) Global equities include emerging markets strategies, which accounted for 7% of our assets under management as of September 30, 2021.

The following tables present changes in our assets under management by strategy and client type for the three and nine months ended September 30, 2021:

By Strategy - Quarter to Date

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Equities Multi-Asset & Fixed Income Total

March 31, 2021 $ 222.8 $ 284.7 $ 110.7 $ 119.8 $ 738.0

June 30, 2021 $ 223.7 $ 291.1 $ 115.5 $ 125.4 $ 755.7

Client cash inflows and commitments 12.0 10.2 3.6 5.4 31.2

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Net client cash flows 8.1 (3.0) (2.2) 0.4 3.3

New investments 2.6 — — — 2.6

Market changes 0.9 (6.1) (0.8) 0.8 (5.2)

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(0.6) — — — (0.6)

June 30, 2021 $ 223.7 $ 291.1 $ 115.5 $ 125.4 $ 755.7

September 30, 2021 $ 230.0 $ 279.7 $ 112.1 $ 126.0 $ 747.8

By Client Type - Quarter to Date

(in billions) Institutional Retail High Net Worth Total

March 31, 2021 $ 408.9 $ 196.8 $ 132.3 $ 738.0

June 30, 2021 $ 409.6 $ 207.5 $ 138.6 $ 755.7

Client cash inflows and commitments 17.1 8.5 5.6 31.2

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Net client cash flows 4.5 (2.9) 1.7 3.3

New investments 2.3 — 0.3 2.6

Market changes (3.7) (1.8) 0.3 (5.2)

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(0.9) 0.1 0.2 (0.6)

June 30, 2021 $ 409.6 $ 207.5 $ 138.6 $ 755.7

September 30, 2021 $ 406.5 $ 200.8 $ 140.5 $ 747.8

By Strategy - Year to Date

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(2.0) (0.1) 0.1 — (2.0)

June 30, 2021 $ 223.7 $ 291.1 $ 115.5 $ 125.4 $ 755.7

September 30, 2021 $ 230.0 $ 279.7 $ 112.1 $ 126.0 $ 747.8

By Client Type - Year to Date

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(2.5) 0.4 0.1 (2.0)

June 30, 2021 $ 409.6 $ 207.5 $ 138.6 $ 755.7

September 30, 2021 $ 406.5 $ 200.8 $ 140.5 $ 747.8

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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 generally recognized when it is improbable that there will be a significant reversal in the amount of revenue recognized.

Performance-based fees are based on investment performance, typically on an absolute basis or relative to a benchmark or a hurdle rate, and are generally recognized when it is improbable that there will be a significant reversal in the amount of revenue recognized.

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.

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Our asset-based fee ratio is calculated as asset-based fees divided by average assets under management.

Aggregate fees were $1,185.6 million for the three months ended June 30, 2021, an increase of $224.7 million or 23% as compared to the three months ended June 30, 2020.

Aggregate fees were $1,076.2 million for the three months ended September 30, 2021, an increase of $114.5 million or 12% as compared to the three months ended September 30, 2020.

The increase in our aggregate fees was primarily due to a $115.3 million or 12% increase from asset-based fees.

The increase in asset-based fees was due to an increase in our average assets under management, primarily driven by strong Affiliate investment performance and market appreciation.

Aggregate fees were $3,676.2 million for the nine months ended September 30, 2021, an increase of $500.5 million or 16% as compared to the nine months ended September 30, 2020.

The increase in our aggregate fees was due to a $287.4 million or 9% increase from asset-based fees and a $213.1 million or 7% increase from performance-based fees.

The increase in asset-based fees was due to an increase in our average assets under management, primarily driven by significant market appreciation and strong Affiliate investment performance.

Aggregate fees were $2,600.0 million for the six months ended June 30, 2021, an increase of $386.0 million or 17% as compared to the six months ended June 30, 2020.

The increase in our aggregate fees was due to a $214.0 million or 10% increase from performance-based fees and a $172.0 million or 7% increase from asset-based fees.

The increase in asset-based fees was due to an increase in our average assets under management, primarily driven by significant market appreciation and strong Affiliate investment performance.

The increase in asset-based fees was due to an increase in our average assets under management, primarily driven by strong Affiliate investment performance and market appreciation.

Financial and Supplemental Financial Performance Measures

The following table presents our key financial and supplemental financial performance measures:

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(in millions) 2020 2021 % Change 2020 2021 % Change

Net income (controlling interest) $ 71.3 $ 128.4 80 % $ 86.3 $ 387.3 N.M.

$ 15.1 $ 258.9 N.M.

Adjusted EBITDA (controlling interest) (2)

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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.

For the three months ended June 30, 2021, our Adjusted EBITDA (controlling interest) increased $65.2 million or 40%, primarily due to a $224.7 million or 23% increase in aggregate fees.

Adjusted EBITDA (controlling interest) increased more than aggregate fees on a percentage basis due to the recognition of performance-based fees at Affiliates in which we hold a greater economic interest.

The increase was also due to an $8.9 million decrease in share-based compensation expense, primarily due to an event in 2020 that accelerated certain share-based compensation.

For the six months ended June 30, 2021, our Adjusted EBITDA (controlling interest) increased $111.7 million or 31%, primarily due to a $386.0 million or 17% increase in aggregate fees.

The increase was also due to a $7.4 million decrease in share-based compensation expense, primarily due to an event in 2020 that accelerated certain share-based compensation.

For the three months ended June 30, 2021, our Net income (controlling interest) increased $78.3 million.

The increase in Net income (controlling interest) was greater than the increase in Adjusted EBITDA (controlling interest) primarily due to a $50.7 million decrease in intangible amortization and impairments attributable to the controlling interest and a $29.6 million increase in Investment and other income attributable to the controlling interest, partially offset by a $61.1 million increase in Income tax expense attributable to the controlling interest.

For the six months ended June 30, 2021, our Net income (controlling interest) increased $243.8 million.

The increase in Net income (controlling interest) was greater than the increase in Adjusted EBITDA (controlling interest) primarily due to a $205.9 million decrease in intangible amortization and impairments attributable to the controlling interest and a $46.9 million increase in Investment and other income attributable to the controlling interest, partially offset by a $109.4 million increase in Income tax expense attributable to the controlling interest.

For the three months ended September 30, 2021, our Adjusted EBITDA (controlling interest) increased $46.5 million or 26%, primarily due to a $114.5 million or 12% increase in aggregate fees.

Adjusted EBITDA (controlling interest) increased more than aggregate fees on a percentage basis primarily due to the recognition of asset- and performance-based fees at Affiliates in which we hold a greater economic interest and net gains on strategic investments.

For the nine months ended September 30, 2021, our Adjusted EBITDA (controlling interest) increased $158.2 million or 29%, primarily due to a $500.5 million or 16% increase in aggregate fees.

For the three months ended September 30, 2021, our Net income (controlling interest) increased $57.1 million or 80%.

The increase in Net income (controlling interest) was greater than the increase in Adjusted EBITDA (controlling interest) primarily due to a $23.5 million decrease in intangible amortization and impairments attributable to the controlling interest, partially offset by a $10.1 million increase in Income tax expense attributable to the controlling interest and a $4.7 million increase in Interest expense attributable to the controlling interest.

For the nine months ended September 30, 2021, our Net income (controlling interest) increased $301.0 million.

The increase in Net income (controlling interest) was greater than the increase in Adjusted EBITDA (controlling interest) primarily due to a $229.4 million decrease in intangible amortization and impairments attributable to the controlling interest, partially offset by a $119.5 million increase in Income tax expense attributable to the controlling interest and a $17.2 million increase in Interest expense attributable to the 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 the acquisition of interests in Affiliates and improves comparability of performance between periods.

For the three months ended June 30, 2021, our Economic net income (controlling interest) increased $41.6 million or 32%, primarily due to a $65.2 million increase in Adjusted EBITDA (controlling interest), partially offset by a $27.0 million increase in current and other deferred taxes, attributable to the controlling interest.

For the six months ended June 30, 2021, our Economic net income (controlling interest) increased $75.1 million or 27%, primarily due to a $111.7 million increase in Adjusted EBITDA (controlling interest), partially offset by a $35.4 million increase in current and other deferred taxes, attributable to the controlling interest.

For the three months ended September 30, 2021, our Economic net income (controlling interest) increased $16.4 million or 11%, primarily due to a $46.5 million increase in Adjusted EBITDA (controlling interest), partially offset by a $25.1 million increase in current and other deferred taxes, attributable to the controlling interest and a $4.7 million increase in Interest expense attributable to the controlling interest.

For the nine months ended September 30, 2021, our Economic net income (controlling interest) increased $91.5 million or 21%, primarily due to a $158.2 million increase in Adjusted EBITDA (controlling interest), partially offset by a $60.5 million increase in current and other deferred taxes, attributable to the controlling interest and a $17.2 million increase in Interest expense attributable to the controlling interest.

Results of Operations

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 (expense), and our share of our equity method Affiliates’ financial results is reported, net of intangible amortization and impairments, in Equity method income (loss) (net).

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

The following table presents our consolidated Affiliate average assets under management and Consolidated revenue:

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(in millions, except as noted) 2020 2021 % Change 2020 2021 % Change

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Consolidated revenue $ 494.8 $ 575.2 16 % $ 1,473.2 $ 1,720.6 17 %

Our Consolidated revenue increased $115.2 million or 24% for the three months ended June 30, 2021, due to a $110.5 million or 23% increase from asset-based fees and a $4.7 million or 1% increase from performance-based fees.

The increase in asset-based fees was due to an increase in consolidated Affiliate average assets under management, primarily driven by significant market appreciation and strong Affiliate investment performance.

Our Consolidated revenue increased $167.1 million or 17% for the six months ended June 30, 2021, due to a $160.1 million or 16% increase from asset-based fees and a $7.0 million or 1% increase from performance-based fees.

Our Consolidated revenue increased $80.4 million or 16% for the three months ended September 30, 2021, primarily due to a $79.1 million or 16% increase from asset-based fees.

The increase in asset-based fees was due to an increase in consolidated Affiliate average assets under management, primarily driven by strong Affiliate investment performance and market appreciation.

Our Consolidated revenue increased $247.4 million or 17% for the nine months ended September 30, 2021, due to a $239.0 million or 16% increase from asset-based fees and an $8.4 million or 1% increase from performance-based fees.

The increase in asset-based fees was due to an increase in consolidated Affiliate average assets under management, primarily driven by strong Affiliate investment performance and market appreciation.

This increase was partially offset by a change in the composition of our assets under management.

Consolidated Expenses

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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.

Accordingly, increases in revenue generally will increase a consolidated Affiliate’s expenses attributable to the non-controlling interests and decreases in revenue generally will decrease a consolidated Affiliate’s expenses attributable to the non-controlling interests.

The following table presents our Consolidated expenses:

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

% Change % Change

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Total consolidated expenses $ 359.2 $ 395.3 10 % $ 1,123.1 $ 1,163.7 4 %

Compensation and related expenses increased $32.4 million or 15% for the three months ended June 30, 2021, primarily due to a $42.1 million increase in compensation correlated to the increase in Consolidated revenue, partially offset by an $8.9 million decrease in share-based compensation expense, primarily due to an event in 2020 that accelerated certain share-based compensation.

Compensation and related expenses increased $71.4 million or 17% for the six months ended June 30, 2021, primarily due to a $70.9 million increase in compensation correlated to the increase in Consolidated revenue, and an $7.9 million increase in Affiliate equity compensation expense, partially offset by a $7.4 million decrease in share-based compensation expense, primarily due to an event in 2020 that accelerated certain share-based compensation.

Selling, general and administrative expenses increased $15.0 million or 20% for the three months ended June 30, 2021, primarily due to an $8.3 million increase in distribution and investment-related expenses principally as a result of an increase in average assets under management on which these expenses are incurred, and a $7.7 million increase in professional fees.

Selling, general and administrative expenses increased $3.6 million or 2% for the six months ended June 30, 2021, primarily due to an $8.4 million an increase in distribution and investment-related expenses principally as a result of an increase in average assets under management on which these expenses are incurred, and a $6.5 million increase in professional fees.

These increases were partially offset by a $6.6 million decrease in travel-related expenses as a result of reduced travel during the COVID-19 pandemic and a $3.5 million decrease in reserves on notes receivable.

Intangible amortization and impairments decreased $72.0 million or 89% for the three months ended June 30, 2021, primarily due to a $60.3 million decrease in expenses to reduce the carrying value of certain acquired client relationships at one of our Affiliates to zero (see Note 10 of our Consolidated Financial Statements).

The decrease was also due to a $13.6 million reduction in amortization expense related to certain definite-lived assets being fully amortized.

Intangible amortization and impairments decreased $85.1 million or 84% for the six months ended June 30, 2021, primarily due to a $60.3 million decrease in expenses to reduce the carrying value of certain acquired client relationships at one of our

Affiliates to zero.

Compensation and related expenses increased $43.9 million or 21% for the three months ended September 30, 2021, primarily due to a $36.2 million increase in compensation correlated to the increase in Consolidated revenue, a $5.5 million increase in share-based compensation expense, primarily due to an increase in the vesting assumptions of certain performance-based awards, and a $2.2 million increase in Affiliate equity compensation expense.

Compensation and related expenses increased $115.3 million or 18% for the nine months ended September 30, 2021, primarily due to a $107.0 million increase in compensation correlated to the increase in Consolidated revenue and a $10.1 million increase in Affiliate equity compensation expense.

Selling, general and administrative expenses increased $8.8 million or 12% for the three months ended September 30, 2021, primarily due to an $8.1 million increase in distribution and investment-related expenses principally as a result of an increase in average assets under management on which these expenses are incurred.

Selling, general and administrative expenses increased $12.4 million or 5% for the nine months ended September 30, 2021, primarily due to a $16.4 million increase in distribution and investment-related expenses principally as a result of an increase in average assets under management on which these expenses are incurred, and an $11.7 million increase in professional fees.

These increases were partially offset by a $7.1 million decrease in travel-related expenses as a result of reduced travel during the COVID-19 pandemic, a $3.8 million decrease in sub-advisory expenses related to the previously announced changes to our distribution platform in 2021, and a $3.1 million decrease in reserves on notes receivable.

Intangible amortization and impairments decreased $23.0 million or 72% for the three months ended September 30, 2021, primarily due to a $24.9 million decrease in expenses to reduce the carrying value of acquired client relationships at certain of our Affiliates to fair value.

See Note 10 of our Consolidated Financial Statements.

Intangible amortization and impairments decreased $108.1 million or 81% for the nine months ended September 30, 2021, primarily due to an $85.2 million decrease in expenses to reduce the carrying value of acquired client relationships at certain of our Affiliates to fair value.

See Note 10 of our Consolidated Financial Statements.

The decrease was also due to a $27.1 million reduction in amortization expense related to certain definite-lived assets being fully amortized.

Interest expense increased $4.5 million or 20% for the three months ended June 30, 2021, primarily due to a $5.4 million increase from our debt securities issued in 2020.

Interest expense increased $12.5 million or 30% for the six months ended June 30, 2021, primarily due to an $11.7 million increase from our debt securities issued in 2020 and a $2.8 million increase from the termination of our pound sterling-denominated forward foreign currency contracts, which occurred in the first quarter of 2020.

Interest expense increased $4.7 million or 20% for the three months ended September 30, 2021, primarily due to a $4.8 million increase from our junior subordinated notes issued in 2020 and 2021.

Interest expense increased $17.2 million or 26% for the nine months ended September 30, 2021, primarily due to a $16.5 million increase from our debt securities issued in 2020 and 2021, and a $2.8 million increase from the termination of our pound sterling-denominated forward foreign currency contracts, which occurred in the first quarter of 2020.

These increases were partially offset by a $2.1 million decrease from lower interest rates and lower borrowings on our senior unsecured term loan facility (the “term loan”).

There were no significant changes in Depreciation and other amortization for the three and six months ended June 30, 2021.

There were no significant changes in Other expenses (net) for the three months ended June 30, 2021.

Other expenses (net) increased $3.8 million or 17% for the six months ended June 30, 2021, primarily due to a $5.9 million decrease in gains related to changes in the value of Affiliate equity purchase obligations, partially offset by a $2.8 million gain resulting from the early termination of a lease.

There were no significant changes in Depreciation and other amortization for the three and nine months ended September 30, 2021.

There were no significant changes in Other expenses (net) for the three months ended September 30, 2021.

Other expenses (net) increased $6.0 million or 17% for the nine months ended September 30, 2021, primarily due to a $6.0 million decrease in gains related to changes in the value of Affiliate equity purchase obligations.

Equity Method Income (Loss) (Net)

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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 Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(in millions, except as noted) 2020 2021 % Change 2020 2021 % Change

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(1) Percentage change is not meaningful.

Our equity method revenue increased $109.5 million or 22% for the three months ended June 30, 2021, primarily due to a $66.0 million or 13% increase from performance-based fees and a $43.5 million or 9% increase from asset-based fees.

The increase in asset-based fees was due to investments in new Affiliates and an increase in equity method Affiliate average assets under management, primarily driven by market appreciation, partially offset by net client cash outflows.

For the three months ended June 30, 2021, equity method earnings increased $12.6 million or 23%, primarily due to a $109.5 million or 22% increase in equity method revenue.

Equity method intangible amortization and impairments decreased $7.6 million or 21% for the three months ended June 30, 2021, primarily due to a $15.9 million decrease in amortization expense related to certain definite-lived assets being fully amortized.

This decrease was partially offset by a $5.2 million increase in amortization expense due to an increase in actual and

expected client attrition for certain defined-lived acquired client relationships, and a $3.1 million increase in amortization expense due to investments in new Affiliates.

Our equity method revenue increased $218.9 million or 18% for the six months ended June 30, 2021, primarily due to a $207.0 million or 17% increase from performance-based fees and an $11.9 million or 1% increase from asset-based fees.

For the six months ended June 30, 2021, equity method earnings increased $33.3 million or 28%, primarily due to a $218.9 million or 18% increase in equity method revenue.

Our equity method revenue increased $34.1 million or 7% for the three months ended September 30, 2021, primarily due to a $36.2 million or 7% increase from asset-based fees.

The increase in asset-based fees was due to an increase in equity method Affiliate average assets under management, primarily driven by strong Affiliate investment performance and market appreciation, and investments in new Affiliates, partially offset by net client cash outflows.

For the three months ended September 30, 2021, equity method earnings increased $13.9 million or 27%, primarily due to a $34.1 million or 7% increase in equity method revenue.

Equity method earnings increased more than equity method revenue on a percentage basis, primarily due to an increase in investment and other income at our equity method Affiliates and the contribution from our investments in new Affiliates, partially offset by a decline in earnings at certain Affiliates in which we share in revenue less agreed-upon expenses.

Equity method intangible amortization and impairments decreased $5.0 million or 15% for the three months ended September 30, 2021, primarily due to a $12.8 million decrease in amortization expense related to certain definite-lived assets being fully amortized.

This decrease was partially offset by a $5.2 million increase in amortization expense due to an increase in actual and expected client attrition for certain definite-lived acquired client relationships, and a $2.6 million increase in amortization expense due to investments in new Affiliates.

Our equity method revenue increased $253.1 million or 15% for the nine months ended September 30, 2021, due to a $204.7 million or 12% increase from performance-based fees and a $48.4 million or 3% increase from asset-based fees.

increase in asset-based fees was due to an increase in equity method Affiliate average assets under management, primarily driven by strong Affiliate investment performance and market appreciation, and investments in new Affiliates, partially offset by net client cash outflows.

For the nine months ended September 30, 2021, equity method earnings increased $47.2 million or 27%, primarily due to a $253.1 million or 15% increase in equity method revenue.

Equity method earnings increased more than equity method revenue on a percentage basis, primarily due to the recognition of performance-based fees at Affiliates in which we hold more of an economic interest, partially offset by a decline in earnings at certain Affiliates in which we share in revenue less agreed-upon expenses.

Equity method intangible amortization and impairments decreased $151.7 million or 70% for the six months ended June 30, 2021, primarily due to a $140.0 million decrease in expenses to reduce the carrying value of an Affiliates to fair value (see Note 11 of our Consolidated Financial Statements) and a $27.2 million decrease in amortization expense related to certain definite-lived assets being fully amortized.

These decreases were partially offset by a $10.1 million increase in amortization expense due to an increase in actual and expected client attrition for certain defined-lived acquired client relationships, and a $5.4 million increase in amortization expense due to investments in new Affiliates.

Investment and Other Income (Expense)

The following table presents our Investment and other income (expense):

For the Three Months Ended June 30, For the Six Months Ended June 30,

Equity method intangible amortization and impairments decreased $156.7 million or 63% for the nine months ended September 30, 2021, primarily due to a $140.0 million decrease in expenses to reduce the carrying value of an Affiliate to fair value (see Note 11 of our Consolidated Financial Statements) and a $40.0 million decrease in amortization expense related to certain definite-lived assets being fully amortized.

These decreases were partially offset by a $15.3 million increase in amortization expense due to an increase in actual and expected client attrition for certain definite-lived acquired client relationships, and an $8.0 million increase in amortization expense due to investments in new Affiliates.

Investment and Other Income

The following table presents our Investment and other income:

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(in millions) 2020 2021 % Change 2020 2021 % Change

Investment and other income (expense) $ (12.1) $ 21.1 N.M.

Investment and other income $ 12.7 $ 37.5 N.M.

$ 2.9 $ 91.1 N.M.

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(1) Percentage change is not meaningful.

Investment and other income increased $33.2 million for the three months ended June 30, 2021, primarily due to a $33.8 million net increase from the valuation of Other investments.

Investment and other income increased $63.2 million for the six months ended June 30, 2021, primarily due to a $62.1 million net increase from the valuation of Other investments and Investments in marketable securities.

Investment and other income increased $24.8 million for the three months ended September 30, 2021, primarily due to a $26.6 million net increase from the valuation and realized gains on sales of Other investments.

Investment and other income increased $88.2 million for the nine months ended September 30, 2021, primarily due to an $87.5 million net increase from the valuation and realized gains on sales of Other investments.

Income Tax Expense

The following table presents our Income tax expense:

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(in millions) 2020 2021 % Change 2020 2021 % Change

Income tax expense $ 37.5 $ 44.9 20 % $ 43.0 $ 166.4 N.M.

$ 5.5 $ 121.5 N.M.

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(1) Percentage change is not meaningful.

Income tax expense increased $67.6 million for the three months ended June 30, 2021, primarily due to a $139.4 million increase in income before income taxes attributable to the controlling interest and a $25.1 million deferred tax expense resulting from the revaluation of certain deferred tax liabilities due to an increase in the UK tax rate enacted during the period.

Income tax expense increased $116.0 million for the six months ended June 30, 2021, primarily due to a $353.2 million increase in income before income taxes attributable to the controlling interest and a $25.1 million deferred tax expense resulting from the revaluation of certain deferred tax liabilities due to an increase in the UK tax rate enacted during the period.

Income tax expense increased $7.4 million or 20% for the three months ended September 30, 2021, primarily due to a $67.2 million increase in income before income taxes attributable to the controlling interest, partially offset by a $10.1 million increase in the deferred tax expense resulting from the revaluation of certain deferred tax liabilities due to an increase in the UK tax rate enacted during the third quarter of 2020 that did not reoccur.

Income tax expense increased $123.4 million for the nine months ended September 30, 2021, primarily due to a $420.5 million increase in income before income taxes attributable to the controlling interest and a $15.0 million deferred tax expense resulting from the revaluation of certain deferred tax liabilities due to an increase in the UK tax rate enacted during the second quarter of 2021.

The following table presents Net income, Net income (non-controlling interests), and Net income (controlling interest):

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(in millions) 2020 2021 % Change 2020 2021 % Change

Net income $ 127.8 $ 208.4 63 % $ 231.2 $ 606.7 N.M.

$ 103.4 $ 398.2 N.M.

Net income (non-controlling interests) 32.8 75.2 N.M.

88.3 139.3 58 %

Net income (non-controlling interests) 56.5 80.0 42 % 144.9 219.4 51 %

Net income (controlling interest) 71.3 128.4 80 % 86.3 387.3 N.M.

15.1 258.9 N.M.

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(1) Percentage change is not meaningful.

Net income (controlling interest) increased $78.3 million for the three months ended June 30, 2021, primarily due to an increase in Consolidated revenue, a decrease in Intangible amortization and impairments attributable to the controlling interest, an increase in Investment and other income attributable to the controlling interest, and an increase in Equity method income (net).

Net income (controlling interest) increased $57.1 million or 80% for the three months ended September 30, 2021, primarily due to an increase in Consolidated revenue, an increase in Investment and other income attributable to the controlling interest, an increase in Equity method income (net), and a decrease in Intangible amortization and impairments attributable to the controlling interest.

These increases were partially offset by an increase in Income tax expense attributable to the controlling interest.

Net income (controlling interest) increased $243.8 million for the six months ended June 30, 2021, primarily due to an increase in Equity method income (net), an increase in Consolidated revenue, a decrease in Intangible amortization and impairments attributable to the controlling interest, and an increase in Investment and other income attributable to the controlling interest.

Net income (controlling interest) increased $301.0 million for the nine months ended September 30, 2021, primarily due to an increase in Equity method income (net), an increase in Consolidated revenue, a decrease in Intangible amortization and impairments attributable to the controlling interest, and an increase in Investment and other income attributable to the controlling interest.

These increases were partially offset by an increase in Income tax expense attributable to the controlling interest.

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The following table presents a reconciliation of Net income (controlling interest) to Adjusted EBITDA (controlling interest):

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(in millions) 2020 2021 2020 2021

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amortization and impairments shown above:

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(in millions) 2020 2021 2020 2021

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The following table presents a reconciliation of Net income (controlling interest) to Economic net income (controlling interest) and Economic earnings per share:

For the Three Months Ended June 30, For the Six Months Ended June 30,

For the Three Months Ended September 30, For the Nine Months Ended September 30,

(in millions, except per share data) 2020 2021 2020 2021

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(2) Other economic items includes non-cash imputed interest (principally related to the accounting for convertible securities and contingent payment arrangements), tax windfalls and shortfalls from share-based compensation, certain Affiliate equity expenses, and gains and losses on general partner and seed capital investments.

For the three and six months ended June 30, 2020 and 2021, other economic items were net of income tax expense (benefit) of $(4.3) million and $(3.2) million, respectively, and $3.2 million and $10.1 million, respectively.

For the three and nine months ended September 30, 2020 and 2021, other economic items were net of income tax expense (benefit) of $2.3 million and $(0.8) million, respectively, and $3.0 million and $13.1 million, respectively.

Liquidity and Capital Resources

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We continue to manage our capital structure consistent with an investment grade company and are currently rated A3 by Moody’s Investor Services and BBB+ by S&P Global Ratings.

Cash and cash equivalents were $777.9 million as of June 30, 2021 and were attributable to both our controlling and the non-controlling interests.

In the six months ended June 30, 2021, we met our cash requirements primarily through cash generated by operating activities.

Our principal uses of cash in the six months ended June 30, 2021 were for share repurchases, investments in existing Affiliates through purchases of Affiliate equity interests, and investments in new Affiliates.

We expect investments in new Affiliates, including our pending investment in Parnassus, investments in existing Affiliates, primarily through purchases of Affiliate equity interests and general partner and seed capital investments, the return of capital through share repurchases and the payment of cash dividends on our common stock, repayment of debt, distributions to Affiliate equity holders, and general working capital to be the primary uses of cash on a consolidated basis for the foreseeable future.

Cash and cash equivalents were $1,128.0 million as of September 30, 2021 and were attributable to both our controlling and the non-controlling interests.

In the nine months ended September 30, 2021, we met our cash requirements primarily through cash generated by operating activities.

Our principal uses of cash in the nine months ended September 30, 2021 were for share repurchases, investments in existing Affiliates through purchases of Affiliate equity interests, and investments in new Affiliates.

We expect investments in new Affiliates, investments in existing Affiliates, primarily through purchases of Affiliate equity interests and general partner and seed capital investments, the return of capital through share repurchases and the payment of cash dividends on our common stock, repayment of debt, distributions to Affiliate equity holders, and general working capital to be the primary uses of cash on a consolidated basis for the foreseeable future.

We anticipate that our current cash balance, cash flows from operations, and borrowings under our revolver will be sufficient to support our uses of cash for the foreseeable future.

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The following table presents operating, investing, and financing cash flow activities:

For the Six Months Ended June 30,

For the Nine Months Ended September 30,

(in millions) 2020 2021

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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 six months ended June 30, 2021, Cash flows from operating activities were $550.9 million, primarily from Net income of $398.2 million adjusted for non-cash items of $21.3 million and $226.6 million of distributions of earnings received from equity method investments.

These items were partially offset by timing differences in the cash settlement of receivables and payables, accrued liabilities, and other liabilities of $58.9 million, primarily due to the payment of incentive compensation, and net purchases of securities by consolidated sponsored investment products of $21.3 million.

For the six months ended June 30, 2021, operating cash flows were primarily attributable to the controlling interest.

For the nine months ended September 30, 2021, Cash flows from operating activities were $897.3 million, primarily from Net income of $606.7 million adjusted for non-cash items of $22.1 million, $288.1 million of distributions of earnings received from equity method investments, and timing differences in the cash settlement of receivables, other assets, and payables, accrued liabilities, and other liabilities of $21.6 million.

These items were partially offset by net purchases of securities by consolidated sponsored investment products of $41.2 million.

For the nine months ended September 30, 2021, operating cash flows were primarily attributable to the controlling interest.

Investing Cash Flow

For the six months ended June 30, 2021, Cash flows used in investing activities were $170.7 million, primarily due to $144.8 million of investments in new Affiliates and $23.8 million of net purchases of investments securities.

For the six months ended June 30, 2021, investing cash flows were primarily attributable to the controlling interest.

For the nine months ended September 30, 2021, Cash flows used in investing activities were $177.8 million, primarily due to $144.9 million of investments in new Affiliates and $31.4 million of net purchases of investments securities.

For the nine months ended September 30, 2021, investing cash flows were primarily attributable to the controlling interest.

Financing Cash Flow

For the six months ended June 30, 2021, Cash flows used in financing activities were $642.0 million, primarily due to the return of $396.5 million of capital to shareholders, principally through share repurchases of our common stock, $193.5 million of distributions to non-controlling interests, $44.8 million of Affiliate equity purchases, net of issuances, $22.8 million of

repurchases of our junior convertible securities, and $11.3 million of taxes paid from shares withheld related to issuances of our common stock.

Cash flows used in financing activities were partially offset by the receipt of $34.6 million of subscriptions to consolidated funds, net of redemptions.

For the nine months ended September 30, 2021, Cash flows used in financing activities were $625.5 million, primarily due to the return of $496.0 million of capital to shareholders, principally through share repurchases of our common stock, $260.9

million of distributions to non-controlling interests, $47.8 million of Affiliate equity purchases, net of issuances, $26.1 million of repurchases of our junior convertible securities, and $18.8 million of taxes paid from shares withheld related to issuances of our common stock.

Cash flows used in financing activities were partially offset by $200.0 million of proceeds from borrowings of junior debt and receipt of $33.2 million of subscriptions to consolidated funds, net of redemptions.

Affiliate Equity

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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 June 30, 2021, our current redemption value of $755.7 million for Affiliate equity interests (including $21.0 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 $44.8 million for Affiliate equity purchases, net of issuances during the six months ended June 30, 2021, and we expect net purchases of approximately $70 million of Affiliate equity during the remainder of 2021.

As of September 30, 2021, our current redemption value of $748.9 million for Affiliate equity interests (including $18.3 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 $47.8 million for Affiliate equity purchases, net of issuances during the nine months ended September 30, 2021, and we expect net purchases of approximately $60 million of Affiliate equity during the remainder of 2021.

In the event of a purchase, we become the owner of the cash flow associated with the purchased equity.

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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 trading plans, as well as pursuant to accelerated share repurchase programs or other share repurchase strategies that may include derivative financial instruments.

During the three and six months ended June 30, 2021, we repurchased 0.5 million and 2.1 million shares of our common stock, respectively, at an average price per share of $158.83 and $135.92, respectively.

As of June 30, 2021, we had repurchased all of the shares of the October 2019 authorized amount, and there were a total of 4.8 million shares available for repurchase under our January 2021 share repurchase program.

During the three and nine months ended September 30, 2021, we repurchased 0.6 million and 2.8 million shares of our common stock, respectively, at an average price per share of $161.02 and $141.58, respectively.

As of September 30, 2021, we had repurchased all of the shares of the October 2019 authorized amount, and there were a total of 4.2 million shares available for repurchase under our January 2021 share repurchase program.

The following table presents the carrying value of our outstanding indebtedness.

See Note 7 of our Consolidated Financial Statements:

(in millions) December 31, 2020 June 30, 2021

(in millions) December 31, 2020 September 30, 2021

Senior bank debt $ 350.0 $ 350.0

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The carrying value of our debt differs from the amount reported in the notes to our Consolidated Financial Statements, as the carrying value of our debt in the table above is not reduced for debt issuance costs.

The table above does not include $200.0 million of our junior subordinated notes issued on July 13, 2021, as more fully described below.

Senior Bank Debt

We have a $1.25 billion senior unsecured multicurrency revolving credit facility (the “revolver”) and a $350.0 million term loan (together with the revolver, the “credit facilities”).

In January 2021, we amended the term loan to adjust the marginal rate by 0.075% to 0.95% and to extend the maturity by three years.

In June 2021, we further amended the term loan to reduce the marginal rate by 0.10% to 0.85%.

The commercial terms of the term loan otherwise remain the same.

The revolver matures on January 18, 2024, and the term loan, as amended, matures on January 18, 2026.

We amended and restated the revolver in October 2021, extending the maturity from January 18, 2024 to October 23, 2026, and amended the term loan in January 2021 and June 2021, and further amended the restated the term loan in October 2021, extending the maturity from January 18, 2023 to October 23, 2026.

Through these amendments, we also reduced applicable rates for the revolver and the term loan, and provided for customary LIBOR succession provisions.

The commercial terms of the revolver and the term loan otherwise remain the same.

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.

As of June 30, 2021, we had no outstanding borrowings under the revolver, and could borrow all capacity and remain in compliance with our credit facilities.

Senior Notes and Junior Subordinated Notes

As of June 30, 2021, we had the following senior notes and junior subordinated notes outstanding, the respective principal terms of which are presented below.

Senior Notes 2025

As of September 30, 2021, we had no outstanding borrowings under the revolver, and could borrow all capacity and remain in compliance with our credit facilities.

As of September 30, 2021, we had the following senior notes outstanding, the respective principal terms of which are presented below:

Senior Notes 2025

Senior Notes 2030

Issue date February 2014 February 2015 June 2020

Maturity date February 2024 August 2025 June 2030

Par value (in millions) $ 400.0 $ 350.0 $ 350.0

Stated coupon 4.25 % 3.50 % 3.30 %

Coupon frequency Semi-annually Semi-annually Semi-annually

Potential call date Any time Any time Any time

Junior Subordinated Notes

As of September 30, 2021, we had the following junior subordinated notes outstanding, the respective principal terms of which are presented below:

Junior Subordinated Notes 2060

Issue date February 2014 February 2015 June 2020 March 2019 September 2020

Maturity date February 2024 August 2025 June 2030 March 2059 September 2060

Junior Subordinated Notes 2061

Junior Subordinated Notes

Issue date March 2019 September 2020 July 2021

Maturity date March 2059 September 2060 September 2061

Par value (in millions) $ 300.0 $ 275.0 $ 200.0

Stated coupon 5.875 % 4.75 % 4.20 %

Coupon frequency Semi-annually Semi-annually Semi-annually Quarterly Quarterly

Potential call date Any time Any time Any time March 2024 September 2025

On July 13, 2021, we issued $200.0 million of additional junior subordinated notes with a maturity date of September 30, 2061 (the “2061 junior subordinated notes”).

The 2061 junior subordinated notes bear interest at a fixed-rate of 4.20% per annum.

The junior subordinated notes are listed on the New York Stock Exchange.

Interest is payable quarterly, commencing on September 30, 2021, and we have the right to defer interest payments in accordance with the terms of the notes.

The 2061 junior subordinated notes were issued at 100% of the principal amount and rank junior and subordinate in right of payment and upon liquidation to all of our current and future senior indebtedness.

On or after September 30, 2026, at our option, the 2061 junior subordinated notes may be redeemed in whole or in part, at 100% of the principal amount, plus any accrued and unpaid interest.

Prior to September 30, 2026, at our option, the 2061 junior subordinated notes may be redeemed in whole but not in part, at 100% of the principal amount, plus any accrued and unpaid interest, if certain changes in tax laws, regulations, or interpretations occur;

or at 102% of the principal amount, plus any accrued and unpaid interest, if a rating agency makes certain changes relating to the equity credit criteria for securities with features similar to the 2061 junior subordinated notes.

Coupon frequency Quarterly Quarterly Quarterly

Potential call date March 2024 September 2025 September 2026

Listing NYSE NYSE NYSE

In July 2021, we issued $200.0 million of junior subordinated notes with a maturity date of September 30, 2061.

We intend to use the net proceeds from the 2061 junior subordinated notes for general corporate purposes, which may include the repayment of indebtedness, share repurchases, and investments in new and existing Affiliates.

Junior Convertible Securities

As of June 30, 2021, we had 5.15% junior convertible trust preferred securities outstanding (the “junior convertible securities”) with a carrying value of $304.5 million.

As of September 30, 2021, we had 5.15% junior convertible trust preferred securities outstanding (the “junior convertible securities”) with a carrying value of $301.4 million.

The junior convertible securities were issued by AMG Capital Trust II, a Delaware statutory trust, in October 2007.

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We may redeem the junior convertible securities, subject to our stock trading at or above certain specified levels over specified times periods, and may also repurchase junior convertible securities in the open market or in privately negotiated transactions from time to time at management’s discretion.

During the six months ended June 30, 2021, we paid $22.8 million to repurchase a portion of our junior convertible securities, resulting in reductions of $15.4 million and $4.8 million to Debt and Additional paid-in capital, respectively.

During the nine months ended September 30, 2021, we paid $28.7 million to repurchase a portion of our junior convertible securities, resulting in reductions of $26.1 million and $6.1 million in Debt and Additional paid-in capital, respectively.

As a result of these repurchases, we also reduced our Deferred income tax liability (net) by $6.2 million.

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We have 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 June 30, 2021, no sales had occurred under the equity distribution program.

As of September 30, 2021, no sales had occurred under the equity distribution program.

See Note 8 of our Consolidated Financial Statements.

See Note 9 of our Consolidated Financial Statements.

As of June 30, 2021, our lease obligations were $19.4 million for the remainder of 2021, $73.3 million from 2022 through 2023, $60.3 million from 2024 through 2025, and $99.2 million thereafter.

As of September 30, 2021, our lease obligations were $9.7 million for the remainder of 2021, $72.8 million from 2022 through 2023, $59.6 million from 2024 through 2025, and $97.9 million thereafter.

The portion of these lease obligations attributable to the controlling interest were $2.5 million for the remainder of 2021, $18.4 million from 2022 through 2023, $18.1 million from 2024 through 2025, and $14.6 million thereafter.

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Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes to our Quantitative and Qualitative Disclosures About Market Risk for the three

months ended June 30, 2021.

There have been no material changes to our Quantitative and Qualitative Disclosures About Market Risk for the three months ended September 30, 2021.

Please refer to Item 7A of our 2020 Annual Report on Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis