AFFILIATED MANAGERS GROUP, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Certain matters discussed in this Quarterly Report on Form 10-Q, in our other filings with the Securities and Exchange Commission, in our press releases, and in oral statements made with the approval of an executive officer 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 “Risk Factors” in our Annual Reports on Form 10-K, and from time to time, as applicable, our Quarterly Reports on Form 10-Q . These factors (among others) could affect our financial condition, business activities, results of operations, cash flows, or overall financial performance and cause actual results and business activities to differ materially from historical periods 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. Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. Executive Overview 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 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, 2022, our aggregate assets under management were approximately $691 billion across a broad range of return-oriented strategies. In the first quarter of 2022, we completed an additional investment in Systematica Investments (“Systematica”), an innovative technology-driven systematic manager. Following the close of the transaction, our investment continues to be accounted for under the equity method of accounting and Systematica partners continue to hold a majority of the equity of the business and direct its day-to-day operations. On March 16, 2022, we and other parties entered into a Securities Purchase and Merger Agreement with EQT AB (“EQT”), a public company listed on Nasdaq Stockholm (EQT.ST), under which we and each of the other owners agreed to sell our respective equity interests in Baring Private Equity Asia (“BPEA”), our Affiliate, in connection with the announced strategic combination of BPEA and EQT. Pursuant to the terms of the agreement, we will receive $240.0 million in cash and 28.68 million EQT ordinary shares (25% of which are subject to a six-month lock-up), and will retain a portion of future carry in certain existing funds. We acquired our interest in BPEA for $187.5 million in 2016. BPEA will continue to be included in our results until closing of the transaction, which is expected to occur in the fourth quarter of 2022, subject to customary closing conditions. Our gain on the transaction will be taxable at closing. 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 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: 26 Table of Contents As of and for the Three Months Ended June 30, As of and for the Six Months Ended June 30, (in billions, except as noted) 2021 2022 % Change 2021 2022 % Change Assets under management $ 755.7 $ 690.9 (9) % $ 755.7 $ 690.9 (9) % Average assets under management 752.1 728.1 (3) % 742.8 757.7 2 % Aggregate fees (in millions) 1,185.6 1,179.6 (1) % 2,600.0 2,510.0 (3) % Assets under management, and therefore average assets under management, include the assets under management of our consolidated and equity method Affiliates. 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. 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 generally represents an average of the assets at the beginning or end of each month during the applicable period. Aggregate fees consist of the total asset- and performance-based fees earned by all of our consolidated and equity method Affiliates. 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 are 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 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, and have been experiencing net inflows in areas of secular growth, including private markets, liquid alternatives, Asia, wealth management, and ESG. 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. However, we believe the best performing and most differentiated active equity managers (whether global-, regional-, or country-specific) will continue to have significant opportunities to grow as a result of performance and client demand trends. We believe we are well-positioned to benefit from these trends. In some cases, if product returns exceed certain performance thresholds, we will participate in performance-based fees; however, we do not anticipate these fees will be a significant component of our Consolidated revenue as these fees are predominantly earned by our Affiliates accounted for under the equity method. 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, 2022: Assets Under Management ___________________________ 27 Table of Contents (1) Alternatives include illiquid alternative strategies, which accounted for 18% of our assets under management as of June 30, 2022. (2) Global equities include emerging markets strategies, which accounted for 5% of our assets under management as of June 30, 2022. The following tables present changes in our assets under management by strategy and client type for the three and six months ended June 30, 2022: By Strategy - Quarter to Date (in billions) Alternatives Global Equities U.S. Equities Multi-Asset & Fixed Income Total March 31, 2022 $ 246.1 $ 250.2 $ 159.0 $ 121.4 $ 776.7 Client cash inflows and commitments 11.6 4.8 5.8 6.3 28.5 Client cash outflows (5.1) (20.0) (8.0) (6.8) (39.9) Net client cash flows 6.5 (15.2) (2.2) (0.5) (11.4) Market changes (2.8) (29.0) (21.6) (8.2) (61.6) Foreign exchange (1) (3.0) (4.9) (0.8) (0.9) (9.6) Realizations and distributions (net) (3.0) (0.0) (0.1) (0.1) (3.2) Other (2) (0.0) 0.0 (0.0) 0.0 (0.0) June 30, 2022 $ 243.8 $ 201.1 $ 134.3 $ 111.7 $ 690.9 By Client Type - Quarter to Date (in billions) Institutional Retail High Net Worth Total March 31, 2022 $ 404.9 $ 230.6 $ 141.2 $ 776.7 Client cash inflows and commitments 11.9 9.9 6.7 28.5 Client cash outflows (16.7) (15.9) (7.3) (39.9) Net client cash flows (4.8) (6.0) (0.6) (11.4) Market changes (24.4) (25.4) (11.8) (61.6) Foreign exchange (1) (4.7) (4.4) (0.5) (9.6) Realizations and distributions (net) (3.0) (0.2) (0.0) (3.2) Other (2) (0.0) — 0.0 (0.0) June 30, 2022 $ 368.0 $ 194.6 $ 128.3 $ 690.9 By Strategy - Year to Date Alternatives Global Equities U.S. Equities Multi-Asset & Fixed Income Total December 31, 2021 $ 238.2 $ 277.5 $ 170.7 $ 127.4 $ 813.8 Client cash inflows and commitments 22.3 11.5 14.2 11.5 59.5 Client cash outflows (9.6) (33.0) (18.3) (12.2) (73.1) Net client cash flows 12.7 (21.5) (4.1) (0.7) (13.6) Market changes 1.1 (48.7) (31.3) (13.9) (92.8) Foreign exchange (1) (3.9) (6.0) (1.0) (0.7) (11.6) Realizations and distributions (net) (4.3) (0.1) (0.0) (0.1) (4.5) Other (2) 0.0 (0.1) 0.0 (0.3) (0.4) June 30, 2022 $ 243.8 $ 201.1 $ 134.3 $ 111.7 $ 690.9 By Client Type - Year to Date 28 Table of Contents Institutional Retail High Net Worth Total December 31, 2021 $ 413.8 $ 252.5 $ 147.5 $ 813.8 Client cash inflows and commitments 24.1 22.7 12.7 59.5 Client cash outflows (28.8) (31.5) (12.8) (73.1) Net client cash flows (4.7) (8.8) (0.1) (13.6) Market changes (32.8) (40.7) (19.3) (92.8) Foreign exchange (1) (5.6) (5.6) (0.4) (11.6) Realizations and distributions (net) (3.9) (0.2) (0.4) (4.5) Other (2) 1.2 (2.6) 1.0 (0.4) June 30, 2022 $ 368.0 $ 194.6 $ 128.3 $ 690.9 ___________________________ (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) Other includes assets under management attributable to product transitions and reclassifications. The following tables present performance of our investment strategies, where available, measured by the percentage of assets under management ahead of their relevant benchmark: AUM Weight % of AUM Ahead of Benchmark (1) 3-year 5-year 10-year Liquid alternatives (2) 17 % 78 % 74 % 82 % Global equity (2) 29 % 48 % 40 % 81 % U.S. equity (2) 20 % 74 % 76 % 68 % Multi-asset and fixed income (3) 16 % N/A N/A N/A AUM Weight % of AUM Ahead of Benchmark (1) IRR Latest Vintage IRR Last Three Vintages Illiquid alternatives (4) 18 % 89 % 86 % __________________________ (1) Past performance is not indicative of future results. Performance and AUM information is as of June 30, 2022 and is based on data available at the time of calculation. Product returns are sourced from Affiliates while benchmark returns are generally sourced via third-party subscriptions. (2) For liquid alternative, global equity, and U.S. equity products, performance is reported as the percentage of assets that have outperformed benchmarks across the indicated periods, and excludes market-hedging products. For purposes of investment performance comparisons, products are an aggregation of portfolios (separate accounts, investment funds, and other products) that each represent a particular investment objective, using the most representative portfolio for the performance comparison. Performance is presented for products with a three-, five-, and/or ten-year track record and is measured on a consistent basis relative to the most appropriate benchmarks. Benchmark appropriateness is generally reviewed annually to reflect any changes in how underlying portfolios/mandates are managed. Product and benchmark performance is reflected as total return and is annualized. Reported product performance is gross-of-fees for institutional and high-net-worth separate accounts, and generally net-of-fees across retail funds and other commingled vehicles such as hedge funds. (3) Multi-asset and fixed income products are mainly our wealth management and solutions offerings. These investment products are primarily customized toward wealth preservation, estate planning, and liability and tax management, and therefore are typically not measured against a benchmark. (4) For illiquid alternative products, performance is reported as the percentage of assets that have outperformed benchmarks on a since-inception internal rate of return basis. Benchmarks utilized include a combination of public market equivalents, peer medians, and absolute returns where benchmarks are not available. For purposes of investment performance comparisons, the latest vintage comparison includes the most recent vehicles and strategies (traditional long-duration investment funds, customized vehicles, and other evergreen vehicles and product structures) where meaningful 29 Table of Contents performance is available and calculable. In order to illustrate the performance of our illiquid product category over a longer period of history, the last three vintages comparison incorporates the latest vintage vehicles and the prior two vintages for traditional long-duration investment funds, as well as additional vehicles and strategies launched during the equivalent time period as the last three vintages of traditional long duration investment funds. Due to the nature of these investments and vehicles, reported performance is typically on a three- to six-month lag basis. Aggregate Fees Aggregate fees consist of asset- and performance-based fees of our consolidated and equity method Affiliates. 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, generally inclusive of uncalled commitments. 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. As of June 30, 2022, approximately 29% of our totals assets under management could potentially earn performance-based fees. These percentages were approximately 13% and 51% of our assets under management for our consolidated Affiliates and Affiliates accounted for under the equity method, respectively. Aggregate fees are generally determined by the level of our average assets under management and the composition of these assets across our 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 were $1,179.6 million for the three months ended June 30, 2022, a decrease of $6.0 million or 1% as compared to the three months ended June 30, 2021. The decrease in our aggregate fees was due to a $3.2 million or 1% decrease in performance-based fees and a $2.8 million decrease in asset-based fees. Aggregate fees were $2,510.0 million for the six months ended June 30, 2022, a decrease of $90.0 million or 3% as compared to the six months ended June 30, 2021. The decrease in our aggregate fees was primarily due to a $182.4 million or 7% decrease in performance-based fees, primarily in our liquid alternative strategies, partially offset by a $92.4 million or 4% increase in asset-based fees. The increase in asset based fees was due to an increase in average assets under management, primarily in our U.S. equity strategies, driven by investments in new Affiliates. 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, (in millions) 2021 2022 % Change 2021 2022 % Change Net income (controlling interest) $ 109.0 $ 109.4 0 % $ 258.9 $ 255.4 (1) % Adjusted EBITDA (controlling interest) (1) 227.3 213.4 (6) % 474.1 468.7 (1) % Economic net income (controlling interest) (1) 171.2 160.5 (6) % 356.0 350.5 (2) % ___________________________ (1) Adjusted EBITDA (controlling interest) and Economic net income (controlling interest) are non-GAAP performance measures and are discussed in “Supplemental Financial Performance Measures.” 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, 2022, our Adjusted EBITDA (controlling interest) decreased $13.9 million or 6%, primarily due to the recognition of performance fees at Affiliates in which we hold less of an economic interest. For the six months ended June 30, 2022, our Adjusted EBITDA (controlling interest) decreased $5.4 million or 1%, primarily due to a $90.0 million or 3% decrease in aggregate fees. Adjusted EBITDA (controlling interest) decreased less than aggregate fees on a percentage basis primarily due to net gains on strategic investments. For the three months ended June 30, 2022, our Net income (controlling interest) increased $0.4 million. This increase was primarily due to a $26.3 million decrease in Income tax expense attributable to the controlling interest, partially offset by a $22.4 million decrease in Investment and other income attributable to the controlling interest. 30 For the six months ended June 30, 2022, our Net income (controlling interest) decreased $3.5 million or 1%. This decrease was primarily due to a $30.8 million decrease in Investment and other income attributable to the controlling interest, partially offset by a $24.2 million decrease in Income tax 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, 2022, our Economic net income (controlling interest) decreased $10.7 million or 6%, primarily due to a $13.9 million decrease in Adjusted EBITDA (controlling interest). For the six months ended June 30, 2022, our Economic net income (controlling interest) decreased $5.5 million or 2%, primarily due to a $5.4 million decrease in Adjusted EBITDA (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, and our share of our equity method Affiliates’ financial results is reported, net of intangible amortization and impairments, in Equity method income (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, (in millions, except as noted) 2021 2022 % Change 2021 2022 % Change Consolidated Affiliate average assets under management (in billions) $ 435.4 $ 430.2 (1) % $ 428.7 $ 452.2 5 % Consolidated revenue $ 586.3 $ 604.1 3 % $ 1,145.4 $ 1,211.4 6 % Our Consolidated revenue increased $17.8 million or 3% for the three months ended June 30, 2022, primarily due to a $42.3 million or 7% increase in performance-based fees, primarily in our illiquid alternative strategies, partially offset by a $24.5 million or 4% decrease in asset-based fees. The decrease in asset-based fees was primarily due to changes in the composition of our assets under management. Our Consolidated revenue increased $66.0 million or 6% for the six months ended June 30, 2022, due to a $42.0 million or 4% increase in performance-based fees, primarily in our illiquid alternative strategies, and a $24.0 million or 2% increase in asset-based fees. The increase in asset-based fees was due to an increase in consolidated Affiliate average assets under management, primarily in our U.S. equity strategies, driven by investments in new Affiliates. Consolidated Expenses 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, primarily 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 generally will decrease a consolidated Affiliate’s expenses attributable to the non-controlling interests. The following table presents our Consolidated expenses: 31 Table of Contents For the Three Months Ended June 30, For the Six Months Ended June 30, % Change % Change (in millions) 2021 2022 2021 2022 Compensation and related expenses $ 248.9 $ 268.2 8 % $ 495.8 $ 523.2 6 % Selling, general and administrative 88.6 93.1 5 % 167.4 182.6 9 % Intangible amortization and impairments 8.9 12.5 40 % 16.4 25.0 52 % Interest expense 26.8 27.3 2 % 54.3 56.4 4 % Depreciation and other amortization 4.1 4.7 15 % 8.4 8.1 (4) % Other expenses (net) 12.6 (5.2) N.M. (1) 26.1 0.4 (98) % Total consolidated expenses $ 389.9 $ 400.6 3 % $ 768.4 $ 795.7 4 % __________________________ (1) Percentage change is not meaningful. Compensation and related expenses increased $19.3 million or 8% for the three months ended June 30, 2022, primarily due to a $16.6 million increase in compensation correlated to the increase in Consolidated revenue, a $1.5 million increase in share-based compensation expense, and a $1.2 million increase in Affiliate equity compensation expense. Compensation and related expenses increased $27.4 million or 6% for the six months ended June 30, 2022, primarily due to a $28.7 million increase in compensation correlated to the increase in Consolidated revenue and a $6.5 million increase in share-based compensation expense. These increases were partially offset by a $7.8 million decrease in Affiliate equity compensation expense. Selling, general and administrative expenses increased $4.5 million or 5% for the three months ended June 30, 2022, primarily due to a $4.6 million increase in distribution and investment-related expenses principally as a result of investments in new Affiliates in 2021, a $3.4 million increase in travel-related expenses, and a $1.7 million increase in non-income based and other taxes. These increases were partially offset by a $3.7 million decrease in sub-advisory expenses related to the changes to our distribution platform and a $2.7 million decrease in professional fees. Selling, general and administrative expenses increased $15.2 million or 9% for the six months ended June 30, 2022, primarily due to a $16.7 million increase in distribution and investment-related expenses principally as a result of investments in new Affiliates in 2021, a $4.9 million increase in travel-related expenses, and a $2.9 million increase in non-income based and other taxes. These increases were partially offset by a $10.1 million decrease in sub-advisory expenses related to the changes to our distribution platform and a $4.3 million decrease in professional fees. Intangible amortization and impairments increased $3.6 million or 40% for the three months ended June 30, 2022, primarily due to a $5.4 million increase in amortization expense due to investments in new Affiliates. This increase was partially offset by a $1.3 million decrease in amortization expense related to a decrease in actual and expected client attrition for certain definite-lived acquired client relationships. Intangible amortization and impairments increased $8.6 million or 52% for the six months ended June 30, 2022, primarily due to a $10.5 million increase in amortization expense due to investments in new Affiliates. This increase was partially offset by a $1.4 million decrease in amortization expense related to a decrease in actual and expected client attrition for certain definite-lived acquired client relationships. Interest expense increased $0.5 million or 2% for the three months ended June 30, 2022, primarily due to a $2.1 million increase from our debt securities issued in 2021. This increase was partially offset by a $1.7 million decrease from our junior convertible debt securities due to lower principal balance and lower accretion expense after the adoption of ASU 2020-06 in the first quarter of 2022. Interest expense increased $2.1 million or 4% for the six months ended June 30, 2022, primarily due to a $4.2 million increase from our debt securities issued in 2021. This increase was partially offset by a $1.7 million decrease from our junior convertible debt securities due to lower principal balance and lower accretion expense after the adoption of ASU 2020-06 in the first quarter of 2022. There were no significant changes in Depreciation and other amortization for the three and six months ended June 30, 2022. 32 Table of Contents Other expenses (net) decreased $17.8 million for the three months ended June 30, 2022, primarily due to an $18.1 million decrease in expenses related to the changes in the values of contingent payment and Affiliate equity purchase obligations, partially offset by a $2.8 million gain resulting from the early termination of a lease in 2021, that did not reoccur. Other expenses (net) decreased $25.7 million or 98% for the six months ended June 30, 2022, primarily due to a $27.9 million decrease in expenses related to the changes in the values of contingent payment and Affiliate equity purchase obligations, partially offset by a $2.8 million gain resulting from the early termination of a lease in 2021, that did not reoccur. Equity Method Income (Net) For our Affiliates accounted for under the equity method, we use structured partnership interests in which we contractually share in the Affiliate’s revenue or revenue less agreed-upon expenses. 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 (net). The following table presents equity method Affiliate average assets under management and equity method revenue, as well as equity method earnings, equity method intangible amortization, and equity method intangible impairments, which in aggregate form Equity method income (net): For the Three Months Ended June 30, For the Six Months Ended June 30, (in millions, except as noted) 2021 2022 % Change 2021 2022 % Change Operating Performance Measures Equity method Affiliate average assets under management (in billions) $ 316.7 $ 297.9 (6) % $ 314.1 $ 305.5 (3) % Equity method revenue $ 599.3 $ 575.5 (4) % $ 1,454.6 $ 1,298.6 (11) % Financial Performance Measures Equity method earnings $ 66.9 $ 65.1 (3) % $ 153.7 $ 137.0 (11) % Equity method intangible amortization (29.3) (34.6) 18 % (64.5) (57.9) (10) % Equity method intangible impairments — — — % — — — % Equity method income (net) $ 37.6 $ 30.5 (19) % $ 89.2 $ 79.1 (11) % Our equity method revenue decreased $23.8 million or 4% for the three months ended June 30, 2022, primarily due to a $45.5 million or 8% decrease in performance-based fees, primarily in our liquid alternative strategies, partially offset by a $21.7 million or 4% increase in asset-based fees. The increase in asset-based fees was due to changes in the composition of our assets under management, partially offset by a decrease in equity method Affiliate average assets under management, primarily in our global equity strategies, driven by equity markets. For the three months ended June 30, 2022, equity method earnings decreased $1.8 million or 3%, primarily due to a $23.8 million or 4% decrease in equity method revenue. Equity method intangible amortization increased $5.3 million or 18% for the three months ended June 30, 2022, primarily due to a $10.7 million increase in amortization expense due to an increase in actual and expected client attrition for certain definite-lived acquired client relationships and a $2.3 million increase in amortization expense due to investments in existing Affiliates. These increases were partially offset by an $8.9 million decrease in amortization expense related to certain definite-lived assets being fully amortized. Our equity method revenue decreased $156.0 million or 11% for the six months ended June 30, 2022, primarily due to a $224.4 million or 16% decrease in performance-based fees, primarily in our liquid alternative strategies, partially offset by a $68.4 million or 5% increase in asset-based fees. The increase in asset-based fees was due to changes in the composition of our assets under management, partially offset by a decrease in equity method Affiliate average assets under management, primarily in our global equity strategies, driven by equity markets. For the six months ended June 30, 2022, equity method earnings decreased $16.7 million or 11%, primarily due to a $156.0 million or 11% decrease in equity method revenue. Equity method intangible amortization decreased $6.6 million or 10% for the six months ended June 30, 2022, primarily due to a $25.4 million decrease in amortization expense related to certain definite-lived assets being fully amortized. This decrease was partially offset by an $11.3 million increase in amortization expense due to an increase in actual and expected 33 Table of Contents client attrition for certain definite-lived acquired client relationships and a $6.2 million increase in amortization expense due to investments in new and existing Affiliates. Investment and Other Income (Expense) The following table presents our Investment and other income: For the Three Months Ended June 30, For the Six Months Ended June 30, (in millions) 2021 2022 % Change 2021 2022 % Change Investment and other income (expense) $ 21.1 $ (22.0) N.M. (1) $ 53.5 $ (8.4) N.M. (1) __________________________ (1) Percentage change is not meaningful. Investment and other income decreased $43.1 million for the three months ended June 30, 2022, primarily due to decreases in net unrealized gains on Other investments and Investments in marketable securities of $28.3 million and $12.0 million, respectively. Investment and other income decreased $61.9 million for the six months ended June 30, 2022, primarily due to decreases in net unrealized gains on Other investments and Investments in marketable securities of $47.3 million and $16.6 million, respectively. 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, (in millions) 2021 2022 % Change 2021 2022 % Change Income tax expense $ 70.9 $ 38.0 (46) % $ 121.5 $ 93.8 (23) % Income tax expense decreased $32.9 million or 46% for the three months ended June 30, 2022, primarily due to a $25.1 million deferred tax expense resulting from an increase in the UK tax rate enacted in the second quarter of 2021 that did not reoccur, a $3.6 million decrease resulting from the $25.9 million decrease in Income before income taxes attributable to the controlling interest, and a $2.2 million increase in tax benefits from the reduction of certain valuation allowances on foreign net operating losses in the second quarter of 2022. Income tax expense decreased $27.7 million or 23% for the six months ended June 30, 2022, primarily due to a $25.1 million deferred tax expense resulting from an increase in the UK tax rate enacted in the second quarter of 2021 that did not reoccur and a $2.7 million increase in tax benefits from the reduction of certain valuation allowances on foreign net operating losses in the six months ended June 30, 2022. Net Income 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, (in millions) 2021 2022 % Change 2021 2022 % Change Net income $ 184.2 $ 174.0 (6) % $ 398.2 $ 392.6 (1) % Net income (non-controlling interests) 75.2 64.6 (14) % 139.3 137.2 (2) % Net income (controlling interest) 109.0 109.4 0 % 258.9 255.4 (1) % Net income (controlling interest) increased $0.4 million for the three months ended June 30, 2022, primarily due to a decrease in Income tax expense attributable to the controlling interest and a decrease in Other expenses (net) attributable to the controlling interest, primarily related to changes in the values of contingent payment and Affiliate equity purchase obligations. These increases in Net income (controlling interest) were offset by a decrease in Investment and other income attributable to the controlling interest and a decrease in Equity method income (net). 34 Table of Contents Net income (controlling interest) decreased $3.5 million or 1% for the six months ended June 30, 2022, primarily due to a decrease in Investment and other income attributable to the controlling interest and a decrease in Equity method income (net). These decreases in Net income (controlling interest) were partially offset by a decrease in Income tax expense attributable to the controlling interest and a decrease in Other expenses (net) attributable to the controlling interest, primarily related to changes in the values of contingent payment and Affiliate equity purchase obligations. 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, income taxes, depreciation, amortization, impairments, certain Affiliate equity expenses, certain gains and losses, including on general partner and seed capital investments, certain non-income based taxes, and adjustments to our contingent payment obligations. 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): For the Three Months Ended June 30, For the Six Months Ended June 30, (in millions) 2021 2022 2021 2022 Net income (controlling interest) $ 109.0 $ 109.4 $ 258.9 $ 255.4 Interest expense 26.8 27.3 54.3 56.4 Income taxes 62.2 35.9 110.6 86.4 Intangible amortization and impairments (1) 35.6 43.1 76.1 75.0 Other items (2) (6.3) (2.3) (25.8) (4.5) Adjusted EBITDA (controlling interest) $ 227.3 $ 213.4 $ 474.1 $ 468.7 ___________________________ (1) Intangible amortization and impairments in our Consolidated Statements of Income include amortization attributable to the non-controlling interests of our consolidated Affiliates. 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 and impairments is reported in Equity method income (net). The following table presents the Intangible amortization and impairments shown above: For the Three Months Ended June 30, For the Six Months Ended June 30, (in millions) 2021 2022 2021 2022 Consolidated intangible amortization and impairments $ 8.9 $ 12.5 $ 16.4 $ 25.0 Consolidated intangible amortization and impairments (non-controlling interests) (2.6) (4.0) (4.8) (7.9) Equity method intangible amortization and impairments 29.3 34.6 64.5 57.9 Total $ 35.6 $ 43.1 $ 76.1 $ 75.0 (2) Other items includes depreciation, adjustments to contingent payment obligations, certain Affiliate equity expenses, certain gains and losses, including on general partner and seed capital investments, and certain non-income based taxes. 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 35 Table of Contents 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 (including the portion attributable to equity method investments in Affiliates) 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. Economic earnings per share represents Economic net income (controlling interest) divided by the Average shares outstanding (adjusted diluted). In this calculation, we exclude the potential shares issued upon settlement of Redeemable non-controlling interests from Average shares outstanding (adjusted diluted) because we intend to settle those obligations without issuing shares, consistent with all prior Affiliate equity purchase transactions. 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 Three Months Ended June 30, For the Six Months Ended June 30, (in millions, except per share data) 2021 2022 2021 2022 Net income (controlling interest) $ 109.0 $ 109.4 $ 258.9 $ 255.4 Intangible amortization and impairments (1) 35.6 43.1 76.1 75.0 Intangible-related deferred taxes 31.0 12.8 39.9 28.5 Other economic items (2) (4.4) (4.8) (18.9) (8.4) Economic net income (controlling interest) $ 171.2 $ 160.5 $ 356.0 $ 350.5 Average shares outstanding (diluted) 44.6 44.5 45.0 48.1 Hypothetical issuance of shares to settle Redeemable non-controlling interests — (2.8) — (5.7) Assumed issuance of junior convertible securities shares (2.1) (1.8) (2.1) (1.9) Average shares outstanding (adjusted diluted) 42.5 39.9 42.9 40.5 Economic earnings per share $ 4.03 $ 4.03 $ 8.30 $ 8.67 ___________________________ (1) See note (1) to the table in “Adjusted EBITDA (controlling interest).” (2) Other economic items includes non-cash imputed interest (principally related to the accounting for convertible securities and contingent payment obligations), tax windfalls and shortfalls from share-based compensation, certain Affiliate equity expenses, and certain gains and losses, including on general partner and seed capital investments. Other economic items were net of income tax expense (benefit) of $3.2 million and $10.1 million for the three and six months ended June 30, 2021, respectively, and $(5.4) million and $(7.0) million for the three and six months ended June 30, 2022, respectively. Liquidity and Capital Resources We generate long-term value by investing in new Affiliate partnerships, 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. Given our annual cash generation from operations, in addition to investing for growth in our business, we are also able to return excess capital to shareholders primarily through share repurchases. 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. 36 Cash and cash equivalents were $606.8 million as of June 30, 2022 and were attributable to both our controlling and the non-controlling interests. In the six months ended June 30, 2022, we met our cash requirements primarily through cash generated by operating activities. Our principal uses of cash in the six months ended June 30, 2022 were for share repurchases and investments in existing Affiliates through purchases of Affiliate equity interests, including our additional investment in Systematica. 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 senior unsecured multicurrency revolving credit facility (the “revolver”) will be sufficient to support our uses of cash for the foreseeable future. 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. Pursuant to the terms of the Securities Purchase and Merger Agreement regarding the sale of our equity interest in BPEA to EQT, we will receive $240.0 million in cash and 28.68 million EQT ordinary shares (25% of which are subject to a six-month lock-up). The transaction is expected to close in the fourth quarter of 2022, subject to customary closing conditions. Following the closing, we expect to use approximately 40% of our gross proceeds to pay taxes, transaction expenses, and debt repayment, and to deploy the remaining 60% in line with our capital allocation strategy, across a combination of growth investments and share repurchases over time. The following table presents operating, investing, and financing cash flow activities: For the Six Months Ended June 30, (in millions) 2021 2022 Operating cash flow $ 550.9 $ 506.5 Investing cash flow (170.7) (172.0) Financing cash flow (642.0) (616.2) 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 six months ended June 30, 2022, Cash flows from operating activities were $506.5 million, primarily from Net income of $392.6 million adjusted for non-cash items of $42.1 million and $276.4 million of distributions of earnings received from equity method investments. These items were partially offset by timing differences in the cash settlement of receivables, other assets, and payables, accrued liabilities, and other liabilities of $196.9 million, and net purchases of securities by consolidated sponsored investment products of $7.7 million. For the six months ended June 30, 2022, operating cash flows were primarily attributable to the controlling interest. Investing Cash Flow For the six months ended June 30, 2022, Cash flows used in investing activities were $172.0 million, primarily due to $147.8 million of investments in new Affiliates and $18.9 million of net purchases of investments securities. For the six months ended June 30, 2022, investing cash flows were primarily attributable to the controlling interest. Financing Cash Flow For the six months ended June 30, 2022, Cash flows used in financing activities were $616.2 million, primarily due to the return of $280.7 million of capital to shareholders, principally through share repurchases of our common stock, $211.8 million of distributions to non-controlling interests, $58.0 million of repurchases of our junior convertible securities, $47.5 million of settlement of contingent and deferred payment obligations, $19.1 million of Affiliate equity purchases, net of issuances, and $13.3 million of taxes paid from shares withheld related to issuances of our common stock. Cash flows used in financing activities were partially offset by $6.9 million of subscriptions to consolidated funds, net of redemptions. Affiliate Equity We periodically purchase Affiliate equity from and issue Affiliate equity to our consolidated Affiliate partners and other parties, under agreements that provide us with a conditional right to call and Affiliate equity holders with a conditional right to 37 put their Affiliate equity interests to us at certain intervals. We have the right to settle a portion of these purchases in shares of our common stock. 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 June 30, 2022, the current redemption value of Affiliate equity interests was $572.8 million, of which $547.8 million was presented as Redeemable non-controlling interests (including $20.0 million of consolidated Affiliate sponsored investment products primarily attributable to third-party investors), and $25.0 million was presented as Other liabilities. Although the timing and amounts of these purchases are difficult to predict, we paid $32.2 million for Affiliate equity purchases and received $13.1 million for Affiliate equity issuances during the six months ended June 30, 2022, and we expect net purchases of approximately $50 million of Affiliate equity during the remainder of 2022. In the event of a purchase, we become the owner of the cash flow associated with the purchased equity. See Notes 14 and 15 of our Consolidated Financial Statements. Share Repurchases Our Board of Directors authorized share repurchase programs in January 2022 and January 2021 to repurchase up to 2.0 million and 5.0 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 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, 2022, we repurchased 0.6 million and 1.9 million shares of our common stock, respectively, at an average price per share of $128.75 and $139.29, respectively. As of June 30, 2022, there were a total of 3.5 million shares available for repurchase under our January 2022 and 2021 share repurchase programs. Debt The following table presents the carrying value of our outstanding indebtedness. See Note 7 of our Consolidated Financial Statements: (in millions) December 31, 2021 June 30, 2022 Senior bank debt $ 350.0 $ 350.0 Senior notes 1,098.0 1,098.3 Junior subordinated notes 765.8 765.8 Junior convertible securities 299.5 341.7 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. Effective January 1, 2022, we adjusted the carrying value of our junior convertible securities (see Note 2 of our Consolidated Financial Statements). Senior Bank Debt We have a $1.25 billion revolver and a $350.0 million senior unsecured term loan facility (the “term loan”) (together with the revolver, the “credit facilities”). Both the revolver and the term loan mature on October 23, 2026. 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, 2022, we had no outstanding borrowings under the revolver, and could borrow all capacity and remain in compliance with our credit facilities. Senior Notes As of June 30, 2022, we had the following senior notes outstanding, the respective principal terms of which are presented below: 38 Table of Contents 2024 Senior Notes 2025 Senior Notes 2030 Senior Notes 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 June 30, 2022, we had the following junior subordinated notes outstanding, the respective principal terms of which are presented below: 2059 Junior Subordinated Notes 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 Quarterly Quarterly Quarterly Potential call date March 2024 September 2025 September 2026 Listing NYSE NYSE NYSE Junior Convertible Securities As of June 30, 2022, we had $341.7 million of principal outstanding in our 5.15% junior convertible trust preferred securities (the “junior convertible securities”), maturing in 2037. The junior convertible securities were issued by AMG Capital Trust II, a Delaware statutory trust, in October 2007. Each of the junior convertible securities represents an undivided beneficial interest in the assets of the trust. The trust’s only assets are junior subordinated convertible debentures issued to it by us, and have substantially the same payment terms as the junior convertible securities. We own all of the trust’s common securities, and have fully and unconditionally guaranteed, on a subordinated basis, the payment obligations on the junior convertible securities. We do not consolidate the trust’s financial results into our Consolidated Financial Statements. 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. We may redeem the junior convertible securities, subject to our stock trading at or above certain specified levels over specified 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 and 2022, we repurchased a portion of our junior convertible securities for a purchase price of $22.8 million and $60.9 million, respectively, and as a result of these repurchases, we reduced our Deferred income tax liability (net) by $4.9 million and $11.7 million, respectively. Equity Distribution Program On May 27, 2022, we 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”). This equity distribution program superseded and replaced our prior equity distribution program. As of June 30, 2022, no sales had occurred under the equity distribution program. Commitments See Note 9 of our Consolidated Financial Statements. Other Contingent Commitments See Notes 5, 9, and 11 of our Consolidated Financial Statements. 39 Table of Contents Leases As of June 30, 2022, our lease obligations were $20.7 million for the remainder of 2022, $77.5 million from 2023 through 2024, $56.1 million from 2025 through 2026, and $105.0 million thereafter. The portion of these lease obligations attributable to the controlling interest were $5.5 million for the remainder of 2022, $21.6 million from 2023 through 2024, $13.6 million from 2025 through 2026, and $11.8 million thereafter. Recent Accounting Developments See Note 2 of our Consolidated Financial Statements. Critical Accounting Estimates and Judgments Our 2021 Annual Report on Form 10‑K includes additional information about our Critical Accounting Estimates and Judgments, and should be read in conjunction with this Quarterly Report on Form 10‑Q. Item 3. 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, 2022. Please refer to Item 7A of our 2021 Annual Report on Form 10-K.