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Item 2. Management’s Discussion and Analysis

2022-11-07 compared with 2022-08-04 · 113 added, 123 removed, 329 unchanged (42% of the section changed)

13 unchanged sentences

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.

As of September 30, 2022, our aggregate assets under management were approximately $645 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.

In the first quarter of 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 were entitled to 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 to 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.

Our gain on the transaction was taxable at closing, which occurred in October 2022.

BPEA will be included in our results through the closing date.

In October 2022, we made a minority investment in a private markets firm specializing in communications infrastructure with approximately $4 billion in assets under management.

The financial results will be recognized in the Consolidated Financial Statements one quarter in arrears.

We will account for this investment under the equity method of accounting.

Operating Performance Measures

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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.

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:

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) 2021 2022 % Change 2021 2022 % Change

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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, 2022:

The following charts present information regarding the composition of our assets under management by strategy and client type as of September 30, 2022:

Assets Under Management

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(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:

(1) Alternatives include illiquid alternative strategies, which accounted for 19% of our assets under management as of September 30, 2022.

(2) Global equities include emerging markets strategies, which accounted for 4% of our assets under management as of September 30, 2022.

The following tables present changes in our assets under management by strategy and client type for the three and nine months ended September 30, 2022:

By Strategy - Quarter to Date

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Equities Multi-Asset & Fixed Income Total

March 31, 2022 $ 246.1 $ 250.2 $ 159.0 $ 121.4 $ 776.7

June 30, 2022 $ 243.8 $ 201.1 $ 134.3 $ 111.7 $ 690.9

Client cash inflows and commitments 7.7 4.5 5.0 5.7 22.9

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(0.0) 0.1 (0.1) (0.0) (0.0)

June 30, 2022 $ 243.8 $ 201.1 $ 134.3 $ 111.7 $ 690.9

September 30, 2022 $ 237.4 $ 176.2 $ 125.7 $ 105.3 $ 644.6

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

June 30, 2022 $ 368.0 $ 194.6 $ 128.3 $ 690.9

Client cash inflows and commitments 8.9 8.0 6.0 22.9

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0.1 (0.1) 0.0 (0.0)

June 30, 2022 $ 368.0 $ 194.6 $ 128.3 $ 690.9

September 30, 2022 $ 345.3 $ 177.5 $ 121.8 $ 644.6

By Strategy - Year to Date

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0.0 (0.0) (0.0) (0.3) (0.3)

June 30, 2022 $ 243.8 $ 201.1 $ 134.3 $ 111.7 $ 690.9

September 30, 2022 $ 237.4 $ 176.2 $ 125.7 $ 105.3 $ 644.6

By Client Type - Year to Date

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1.5 (2.7) 0.9 (0.3)

June 30, 2022 $ 368.0 $ 194.6 $ 128.3 $ 690.9

September 30, 2022 $ 345.3 $ 177.5 $ 121.8 $ 644.6

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(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.

Performance and AUM information is as of September 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.

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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.

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.

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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

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.

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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.

As of September 30, 2022, approximately 30% of our total assets under management could potentially earn performance-based fees.

These percentages were approximately 13% and 53% of our assets under management for our consolidated Affiliates and Affiliates accounted for under the equity method, respectively.

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

Aggregate fees were $1,179.6 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.

Aggregate fees were $1,165.5 million for the three months ended September 30, 2022, an increase of $89.3 million or 8% as compared to the three months ended September 30, 2021.

The increase in our aggregate fees was due to a $105.1 million or 10% increase from performance-based fees primarily in our liquid and illiquid alternative strategies, partially offset by a $15.8 million or 2% decrease from asset-based fees.

The decrease in asset-based fees was due to a decrease in average assets under management, primarily in our global equity strategies, driven by equity markets, offset by changes in the composition of our assets under management.

Aggregate fees were $3,675.6 million for the nine months ended September 30, 2022, a decrease of $0.6 million as compared to the nine months ended September 30, 2021.

The decrease in our aggregate fees was primarily due to a $77.3 million or 2% decrease from performance-based fees, primarily in our liquid alternative strategies, offset by a $76.7 million or 2% increase from asset-based fees.

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) 2021 2022 % Change 2021 2022 % Change

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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, 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.

For the six months ended June 30, 2022, our Net income (controlling interest) decreased $3.5 million or 1%.

For the three months ended September 30, 2022, our Adjusted EBITDA (controlling interest) decreased $7.3 million or 3%, primarily due to net gains on strategic investments in the three months ended September 30, 2021, which did not reoccur.

For the nine months ended September 30, 2022, our Adjusted EBITDA (controlling interest) decreased $12.7 million or 2%, primarily due to net gains on strategic investments in the three months ended September 30, 2021, which did not reoccur, and the recognition of performance fees in which we hold less of an economic interest.

For the three months ended September 30, 2022, our Net income (controlling interest) decreased $15.8 million or 12%.

This decrease was primarily due to a $27.5 million decrease in Investment and other income attributable to the controlling interest, partially offset by an $8.9 million increase in Equity method income (net).

For the nine months ended September 30, 2022, our Net income (controlling interest) decreased $19.3 million or 5%.

This decrease was primarily due to a $58.3 million decrease in Investment and other income attributable to the controlling interest, partially offset by a $32.1 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).

For the three months ended September 30, 2022, our Economic net income (controlling interest) decreased $2.1 million or 1%, primarily due to a $7.3 million decrease in Adjusted EBITDA (controlling interest).

For the nine months ended September 30, 2022, our Economic net income (controlling interest) decreased $7.6 million or 1%, primarily due to a $12.7 million decrease in Adjusted EBITDA (controlling interest).

Results of Operations

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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) 2021 2022 % Change 2021 2022 % Change

1 unchanged sentence

Consolidated revenue $ 575.2 $ 578.6 1 % $ 1,720.6 $ 1,789.9 4 %

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.

Our Consolidated revenue increased $3.4 million or 1% for the three months ended September 30, 2022, primarily due to a $48.1 million or 8% increase from performance-based fees, primarily in our illiquid alternative strategies, offset by a $44.7 million or 7% decrease from asset-based fees.

The decrease in asset-based fees was due to a decrease in consolidated Affiliate average assets under management, primarily in our global equity strategies, driven by equity markets.

Our Consolidated revenue increased $69.3 million or 4% for the nine months ended September 30, 2022, due to a $90.1 million or 5% increase from performance-based fees, primarily in our illiquid alternative strategies, partially offset by a $20.8 million or 1% decrease from asset-based fees.

Consolidated Expenses

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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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Depreciation and other amortization 4.0 3.8 (5) % 12.5 11.9 (5) %

Other expenses (net) 12.6 (5.2) N.M.

26.1 0.4 (98) %

Other expenses (net) 14.6 11.9 (18) % 40.6 12.3 (70) %

Total consolidated expenses $ 395.3 $ 425.4 8 % $ 1,163.7 $ 1,221.0 5 %

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(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.

Compensation and related expenses increased $17.4 million or 7% for the three months ended September 30, 2022, primarily due to a $61.3 million increase in compensation as a result of investments in new Affiliates in the fourth quarter of 2021 and a $2.7 million increase in Affiliate equity compensation expense.

These increases were partially offset by a $40.6 million decrease in compensation correlated to the decrease in Consolidated revenue, excluding the impact of new Affiliates, and a $6.0 million decrease in share-based compensation expense.

Compensation and related expenses increased $44.8 million or 6% for the nine months ended September 30, 2022, primarily due to a $125.1 million increase in compensation as a result of investments in new Affiliates in the fourth quarter of 2021.

This increase was partially offset by a $70.3 million decrease in compensation correlated to the decrease in Consolidated revenue and a $10.5 million decrease in Affiliate equity compensation expense.

Selling, general and administrative expenses increased $10.3 million or 12% for the three months ended September 30, 2022, primarily due to a $9.1 million increase in distribution and investment-related expenses principally as a result of investments in new Affiliates in the fourth quarter of 2021.

Selling, general and administrative expenses increased $25.4 million or 10% for the nine months ended September 30, 2022, primarily due to a $25.7 million increase in distribution and investment-related expenses principally as a result of investments in new Affiliates in the fourth quarter of 2021, a $7.6 million increase in travel-related expenses, and a $3.6 million increase in non-income based and other taxes.

These increases were partially offset by a $10.7 million decrease in sub-advisory expenses related to the changes to our distribution platform and a $6.9 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.

There were no significant changes in Depreciation and other amortization for the three and six months ended June 30, 2022.

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.

Intangible amortization and impairments increased $5.5 million or 62% for the three months ended September 30, 2022, primarily due to a $5.4 million increase in amortization expense due to investments in new Affiliates in the fourth quarter of 2021.

Intangible amortization and impairments increased $14.1 million or 56% for the nine months ended September 30, 2022, primarily due to a $15.8 million increase in amortization expense due to investments in new Affiliates in the fourth quarter of 2021.

There were no significant changes in Interest expense for the three months ended September 30, 2022.

Interest expense increased $1.9 million or 2% for the nine months ended September 30, 2022, primarily due to a $4.5 million increase from our debt securities issued in 2021 and a $1.5 million increase due to higher interest rates on our term loan.

These increases were partially offset by a $3.7 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 nine months ended September 30, 2022.

There were no significant changes in Other expenses (net) for the three months ended September 30, 2022.

Other expenses (net) decreased $28.3 million or 70% for the nine months ended September 30, 2022, primarily due to a $28.2 million decrease in expenses related to the changes in the values of contingent payment obligations and Affiliate equity purchase obligations.

Equity Method Income (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, 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,

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

(in millions, except as noted) 2021 2022 % Change 2021 2022 % Change

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Equity method income (net) $ 35.9 $ 44.8 25 % $ 125.1 $ 123.9 (1) %

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.

Our equity method revenue increased $85.9 million or 17% for the three months ended September 30, 2022, primarily due to a $57.0 million or 11% increase from performance-based fees, primarily in our liquid alternative strategies and a $28.9 million or 6% increase from 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.

For the three months ended September 30, 2022, equity method earnings increased $11.0 million or 17%, primarily due to an $85.9 million or 17% increase in equity method revenue.

Equity method intangible amortization increased $2.1 million or 7% for the three months ended September 30, 2022, primarily due to a $9.1 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.

Our equity method revenue decreased $69.9 million or 4% for the nine months ended September 30, 2022, primarily due to a $167.4 million or 9% decrease from performance-based fees, primarily in our liquid alternative strategies, partially offset by a $97.5 million or 5% increase from asset-based fees.

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

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.

For the nine months ended September 30, 2022, equity method earnings decreased $5.7 million or 3%, primarily due to a $69.9 million or 4% decrease in equity method revenue.

Equity method intangible amortization decreased $4.5 million or 5% for the nine months ended September 30, 2022, primarily due to a $34.3 million decrease in amortization expense related to certain definite-lived assets being fully amortized.

This decrease was partially offset by a $20.3 million increase in amortization expense due to an increase in actual and expected client attrition for certain definite-lived acquired client relationships and an $8.6 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,

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

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

(in millions) 2021 2022 % Change 2021 2022 % Change

Investment and other income (expense) $ 37.5 $ 3.1 (92) % $ 91.1 $ (5.3) N.M.

$ 53.5 $ (8.4) N.M.

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(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.

Investment and other income decreased $34.4 million or 92% for the three months ended September 30, 2022, primarily due to a decrease in net unrealized gains on Other investments of $40.0 million.

Investment and other income decreased $96.4 million for the nine months ended September 30, 2022, primarily due to decreases in net unrealized gains on Other investments and Investments in marketable securities of $87.4 million and $3.8 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,

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

(in millions) 2021 2022 % Change 2021 2022 % Change

Income tax expense $ 44.9 $ 36.8 (18) % $ 166.4 $ 130.5 (22) %

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.

Income tax expense decreased $8.1 million or 18% for the three months ended September 30, 2022, primarily due to a $5.8 million decrease in controlling interest income taxes resulting from a decrease in Income before income taxes attributable to the controlling interest and a $3.3 million tax benefit related to a change in our estimated foreign tax expense related to 2021.

Income tax expense decreased $35.9 million or 22% for the nine months ended September 30, 2022, primarily due to a $10.5 million decrease in controlling interest income taxes resulting from a decrease in Income before income taxes attributable to the controlling interest and 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.

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) 2021 2022 % Change 2021 2022 % Change

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Net income (controlling interest) 128.4 112.6 (12) % 387.3 368.0 (5) %

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).

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.

Net income (controlling interest) decreased $15.8 million or 12% for the three months ended September 30, 2022, primarily due to a decrease in Investment and other income attributable to the controlling interest, partially offset by an increase in Equity method income (net).

Net income (controlling interest) decreased $19.3 million or 5% for the nine months ended September 30, 2022, primarily due to a decrease in Investment and other income attributable to the controlling interest, partially offset by a decrease in Income tax expense attributable to the controlling interest.

Supplemental Financial Performance Measures

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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) 2021 2022 2021 2022

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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,

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

(in millions) 2021 2022 2021 2022

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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.

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.

These non-GAAP performance measures are provided in addition to, but not as substitutes for, Net income (controlling interest) and Earnings per share (diluted) or other GAAP performance measures.

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.

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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) 2021 2022 2021 2022

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(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.

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

Other economic items were net of income tax expense (benefit) of $3.0 million and $13.1 million for the three and nine months ended September 30, 2021, respectively, and $(0.0) million and $(7.0) million for the three and nine months ended September 30, 2022, 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 $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.

Cash and cash equivalents were $622.9 million as of September 30, 2022 and were attributable to both our controlling and the non-controlling interests.

In the nine months ended September 30, 2022, we met our cash requirements primarily through cash generated by operating activities.

Our principal uses of cash in the nine months ended September 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.

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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.

Pursuant to the terms of the Securities Purchase and Merger Agreement regarding the sale of our equity interest in BPEA to EQT, we were entitled to receive $240.0 million in cash and 28.68 million EQT ordinary shares (25% of which are subject to a six-month lock-up).

Following the close of the transaction, which occurred in October 2022, we intend to use the proceeds for transaction-related expenses, taxes, repayment of indebtedness, share repurchases, investments in new and existing Affiliates, and other general corporate purposes.

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) 2021 2022

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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, 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.

For the nine months ended September 30, 2022, Cash flows from operating activities were $797.4 million, primarily from Net income of $557.0 million adjusted for non-cash items of $58.1 million and $339.7 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 $147.4 million and net purchases of securities by consolidated sponsored investment products of $10.0 million.

For the six months ended June 30, 2022, operating cash flows were primarily attributable to the controlling interest.

For the nine months ended September 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.

For the nine months ended September 30, 2022, Cash flows used in investing activities were $266.6 million, primarily due to $147.8 million of investments in Affiliates, $110.5 million of net purchases of investment securities, principally U.S.

Treasury Notes, and $9.1 million purchases of fixed assets.

For the nine months ended September 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.

For the nine months ended September 30, 2022, Cash flows used in financing activities were $779.1 million, primarily due to the return of $356.6 million of capital to shareholders, principally through share repurchases of our common stock, $278.0 million of distributions to non-controlling interests, $60.8 million of repurchases of our junior convertible securities, $60.3 million of settlement of contingent and deferred payment obligations, $21.8 million of Affiliate equity purchases, net of issuances, and $19.5 million of taxes paid from shares withheld related to issuances of our common stock.

Cash flows used in financing activities were partially offset by $6.5 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

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.

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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, 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.

As of September 30, 2022, the current redemption value of Affiliate equity interests was $512.0 million, of which $486.6 million was presented as Redeemable non-controlling interests (including $18.7 million of consolidated Affiliate sponsored investment products primarily attributable to third-party investors), and $25.4 million was presented as Other liabilities.

Although the timing and amounts of these purchases are difficult to predict, we paid $37.0 million for Affiliate equity purchases and received $15.2 million for Affiliate equity issuances during the nine months ended September 30, 2022, and we expect net purchases of approximately $15 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.

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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.

Our Board of Directors authorized share repurchase programs in October 2022, January 2022, and January 2021 to repurchase up to 3.0 million, 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.

During the three and nine months ended September 30, 2022, we repurchased 0.6 million and 2.5 million shares of our common stock, respectively, at an average price per share of $125.13 and $135.73, respectively.

As of the October 2022 authorization, there were a total of 5.8 million shares available for repurchase under our share repurchase programs.

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

(in millions) December 31, 2021 September 30, 2022

Senior bank debt $ 350.0 $ 350.0

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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.

As of June 30, 2022, we had the following senior notes outstanding, the respective principal terms of which are presented below:

As of September 30, 2022, 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, 2022, we had the following senior notes outstanding, the respective principal terms of which are presented below:

Senior Notes 2025

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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:

As of September 30, 2022, we had the following junior subordinated notes outstanding, the respective principal terms of which are presented below:

Junior Subordinated Notes 2060

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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.

As of September 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.

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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.

During the nine months ended September 30, 2021 and 2022, we repurchased a portion of our junior convertible securities for a purchase price of $28.7 million and $60.9 million, respectively, and as a result of these repurchases, we reduced our Deferred income tax liability (net) by $6.2 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”).

In the second quarter of 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.

As of September 30, 2022, no sales had occurred under the equity distribution program.

See Note 9 of our Consolidated Financial Statements.

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See Notes 5, 9, and 11 of our Consolidated Financial Statements.

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.

As of September 30, 2022, our lease obligations were $10.0 million for the remainder of 2022, $78.0 million from 2023 through 2024, $58.2 million from 2025 through 2026, and $107.7 million thereafter.

The portion of these lease obligations attributable to the controlling interest were $2.4 million for the remainder of 2022, $21.6 million from 2023 through 2024, $13.6 million from 2025 through 2026, and $12.4 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, 2022.

There have been no material changes to our Quantitative and Qualitative Disclosures About Market Risk for the three months ended September 30, 2022.

Please refer to Item 7A of our 2021 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