AFFILIATED MANAGERS GROUP, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following executive overview, which summarizes the significant trends affecting our results of operations and financial condition, as well as the remainder of this Management’s Discussion and Analysis of Financial Condition and Results of Operations of Affiliated Managers Group, Inc. and its subsidiaries, should be read in conjunction with the “Forward-Looking Statements” section set forth in Part I, the “Risk Factors” section set forth in Item 1A of Part I and with our Consolidated Financial Statements and the notes thereto contained elsewhere in this Annual Report on Form 10-K, and in any more recent filings with the SEC. Our discussion and analysis of the key operating performance measures and financial results for fiscal year 2022 compared to fiscal year 2021 is included herein. For discussion and analysis of fiscal year 2021 compared to fiscal year 2020, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was filed with the SEC on February 18, 2022. Executive Overview AMG is a leading partner to independent 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, 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 December 31, 2022, our aggregate assets under management were approximately $651 billion across a broad range of differentiated investment 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. In the fourth quarter of 2022, we completed a minority investment in Peppertree Capital Management, Inc. (“Peppertree”), a private markets firm specializing in communications infrastructure. The financial results will be recognized in the Consolidated Financial Statements one quarter in arrears. We account for this investment under the equity method of accounting. Following the close of the transaction, Peppertree management continues to hold a significant portion of the equity in the business and directs the day-to-day operations. In the fourth quarter of 2022, we completed the previously announced sale of our equity interest in Baring Private Equity Asia (“BPEA”), our Affiliate, to EQT AB (“EQT”), a public company listed on Nasdaq Stockholm (EQT.ST), (the “BPEA Transaction”) in connection with the strategic combination of BPEA and EQT. Pursuant to the terms of the Securities Purchase and Merger Agreement with EQT under which we and each of the other owners agreed to sell our respective equity interests in BPEA, we received $223.6 million in cash, net of transaction costs, and 28.68 million EQT ordinary shares (25% of which are subject to a six-month lock-up, which expires in April 2023), and other investments. Our gain on the transaction was $641.9 million. The transaction was taxable at closing. For the year ended December 31, 2022, we recorded realized and unrealized gains on EQT ordinary shares of $43.8 million and $57.9 million, respectively. During the fourth quarter of 2022 and through February 15, 2023, we have sold 17.4 million EQT ordinary shares. 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: 19 Tab l e of Contents As of and for the Years Ended December 31, (in billions, except as noted) 2020 2021 % Change 2022 % Change Assets under management $ 716.2 $ 813.8 14 % $ 650.8 (20) % Average assets under management 664.4 761.7 15 % 709.4 (7) % Aggregate fees (in millions) 4,626.4 5,611.4 21 % 5,560.5 (1) % 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 investment products generally 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 Our Affiliates provide a diverse range of differentiated return streams through their specialized investment processes. We continue to see demand for alternative strategies, as evidenced by our net inflows in this category for the year ended December 31, 2022. At the same time, we experienced outflows in equity strategies, particularly in global equities, in line with de-risking trends across the industry. We continue to invest in areas of long-term client demand — including private markets, liquid alternatives, sustainable strategies, wealth management, and Asia — through new and existing Affiliates, to better position AMG to benefit from industry growth trends. 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 additional high-quality firms across the global investment management industry. The following charts present information regarding the composition of our assets under management by strategy as of December 31, 2021 and 2022: Assets Under Management by Strategy __________________________ (1) Alternatives include private markets strategies, which accounted for 15% of our assets under management as of December 31, 2021 and 2022. The following table presents changes in our assets under management by strategy: 20 Tab l e of Contents (in billions) 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 40.4 20.3 23.9 22.7 107.3 Client cash outflows (21.5) (59.9) (33.6) (25.3) (140.3) Net client cash flows 18.9 (39.6) (9.7) (2.6) (33.0) New investments 3.3 — — — 3.3 BPEA (1) (31.6) — — — (31.6) Market changes 2.6 (43.3) (26.0) (12.4) (79.1) Foreign exchange (2) (4.2) (8.1) (1.5) (1.5) (15.3) Realizations and distributions (net) (9.8) (0.3) (0.2) (0.2) (10.5) Other (3) 3.5 (0.1) (0.0 ) (0.2) 3.2 December 31, 2022 $ 220.9 $ 186.1 $ 133.3 $ 110.5 $ 650.8 __________________________ (1) Assets under management attributable to BPEA as of the BPEA Transaction closing date. (2) 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. (3) Other includes assets under management attributable to product transitions and reclassifications. The following charts present information regarding the composition of our assets under management by client type as of December 31, 2021 and 2022: Assets Under Management by Client Type The following table presents changes in our assets under management by client type: 21 Tab l e of Contents (in billions) Institutional Retail High Net Worth Total December 31, 2021 $ 413.8 $ 252.5 $ 147.5 $ 813.8 Client cash inflows and commitments 43.3 39.6 24.4 107.3 Client cash outflows (55.9) (58.0) (26.4) (140.3) Net client cash flows (12.6) (18.4) (2.0) (33.0) New investments 3.3 — — 3.3 BPEA (1) (31.6) — — (31.6) Market changes (27.1) (35.3) (16.7) (79.1) Foreign exchange (2) (7.8) (6.6) (0.9) (15.3) Realizations and distributions (net) (9.1) (0.9) (0.5) (10.5) Other (3) 4.6 (2.4) 1.0 3.2 December 31, 2022 $ 333.5 $ 188.9 $ 128.4 $ 650.8 __________________________ (1) Assets under management attributable to BPEA as of the BPEA Transaction closing date. (2) 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. (3) 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) 19 % 69 % 77 % 82 % Global equity (2) 29 % 56 % 46 % 69 % U.S. equity (2) 20 % 84 % 78 % 84 % Multi-asset and fixed income (3) 17 % N/A N/A N/A AUM Weight % of AUM Ahead of Benchmark (1) IRR Latest Vintage IRR Last Three Vintages Private markets (4) 15 % 86 % 82 % __________________________ (1) Past performance is not indicative of future results. Performance and AUM information is as of December 31, 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. 22 Tab l e of Contents (4) For private markets 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 performance is available and calculable. In order to illustrate the performance of our private markets 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. Asset-based fees are generally impacted by the level of average assets under management and the composition of these assets across our strategies with different asset-based fee ratios. Our asset-based fee ratio is calculated as asset-based fees divided by average assets under management. In some cases, if product returns exceed certain performance thresholds, we will participate in performance-based fees. Performance-based fees are based on investment performance, typically on an absolute basis or relative to a benchmark or 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; however, we do not anticipate these fees to be a significant component of our Consolidated revenue as these fees are predominantly earned by our Affiliates accounted for under the equity method. As of December 31, 2022, approximately 27% of our total assets under management could potentially earn performance-based fees. These percentages were approximately 12% and 48% of our assets under management for our consolidated Affiliates and Affiliates accounted for under the equity method, respectively. Aggregate fees were $5,560.5 million in 2022, a decrease of $50.9 million or 1% as compared to 2021. The decrease in our aggregate fees was due to a $171.6 million or 3% decrease from asset-based fees, offset by a $120.7 million or 2% increase from performance-based fees primarily in our liquid alternative and private markets strategies. 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 new Affiliate investments in the fourth quarter of 2021 and changes in the composition of our assets under management. Financial and Supplemental Financial Performance Measures The following table presents our key financial and supplemental financial performance measures: For the Years Ended December 31, (in millions) 2020 2021 % Change 2022 % Change Net income (controlling interest) $ 202.2 $ 565.7 N.M. (1) $ 1,145.9 N.M. (1) Adjusted EBITDA (controlling interest) (2) 798.8 1,058.6 33 % 1,060.3 0 % Economic net income (controlling interest) (2) 624.4 779.8 25 % 802.1 3 % __________________________ (1) Percentage change is not meaningful. (2) 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. Adjusted EBITDA (controlling interest) increased $1.7 million in 2022, primarily due to the impact of new Affiliate investments in the fourth quarter of 2021 23 Tab l e of Contents and the recognition of performance-based fees earned by Affiliates in which we hold more of an economic interest, partially offset by the impact of the decline in markets. Net income (controlling interest) increased $580.2 million in 2022. This increase was primarily due to a $641.9 million gain from the BPEA Transaction, partially offset by a $117.8 million increase in Income tax expense attributable to the controlling interest, primarily due to the BPEA Transaction. We believe Economic net income (controlling interest) is an important supplemental financial performance measure because it represents our performance before non-cash expenses relating to our acquisition of interests in Affiliates and improves comparability of performance between periods. Economic net income (controlling interest) increased $22.3 million or 3% in 2022 primarily due to a $29.3 million decrease in current and other deferred taxes primarily attributable to the controlling interest excluding the impact of the BPEA Transaction and a $1.7 million increase in Adjusted EBITDA (controlling interest), partially offset by a $3.0 million increase in Interest expense attributable to the controlling interest. Results of Operations The following discussion includes the key operating performance measures and financial results of our consolidated and equity method Affiliates. Our consolidated Affiliates’ financial results are included in our Consolidated revenue, Consolidated expenses, and Investment and other income, and our share of our equity method Affiliates’ financial results is reported, net of intangible amortization and impairments, in Equity method income (loss) (net). Consolidated Revenue Our Consolidated revenue is derived from our consolidated Affiliates, primarily from asset-based fees from investment management services. For these Affiliates, we typically use structured partnership interests in which we contractually share in the Affiliate’s revenue without regard to expenses. Consolidated revenue is generally determined by the level of our consolidated Affiliate average assets under management and the composition of these assets across our strategies with different asset-based fee ratios and performance-based fees. The following table presents our consolidated Affiliate average assets under management and Consolidated revenue: For the Years Ended December 31, (in millions, except as noted) 2020 2021 % Change 2022 % Change Consolidated Affiliate average assets under management (in billions) $ 362.6 $ 445.8 23 % $ 422.2 (5) % Consolidated revenue $ 2,027.5 $ 2,412.4 19 % $ 2,329.6 (3) % Our Consolidated revenue decreased $82.8 million or 3% in 2022, primarily due to a $149.1 million or 6% decrease from asset-based fees, partially offset by a $66.3 million or 3% increase from performance-based fees primarily in our private markets strategies. The decrease in asset-based fees was due to a decrease in consolidated Affiliate average assets under management in our global equity strategies driven by equity markets, partially offset by increases in our U.S. equity strategies, driven by new Affiliate investments in the fourth quarter of 2021. Consolidated Expenses Our Consolidated expenses are primarily attributable to the non-controlling interests of our consolidated Affiliates. The following table presents our Consolidated expenses: 24 Tab l e of Contents For the Years Ended December 31, (in millions) 2020 2021 % Change 2022 % Change Compensation and related expenses $ 883.7 $ 1,047.1 18 % $ 1,071.5 2 % Selling, general and administrative 321.4 347.1 8 % 385.5 11 % Intangible amortization and impairments 140.5 35.7 (75) % 51.6 45 % Interest expense 92.3 111.4 21 % 114.4 3 % Depreciation and other amortization 19.1 16.6 (13) % 15.8 (5) % Other expenses (net) 52.8 73.5 39 % 34.7 (53) % Total consolidated expenses $ 1,509.8 $ 1,631.4 8 % $ 1,673.5 3 % Compensation and related expenses increased $24.4 million or 2% in 2022, primarily due to a $131.6 million increase in compensation as a result of new Affiliate investments in the fourth quarter of 2021. This increase was partially offset by a $94.4 million decrease in compensation correlated to the decrease in Consolidated revenue and an $11.9 million decrease in Affiliate equity compensation expense. Selling, general and administrative expenses increased $38.4 million or 11% in 2022, primarily due to a $36.0 million increase in distribution- and investment-related expenses principally as a result of new Affiliate investments in the fourth quarter of 2021 and a $10.0 million increase in travel-related expenses. These increases were partially offset by a $14.7 million decrease in sub-advisory expenses related to the changes to our distribution platform. Intangible amortization and impairments increased $15.9 million or 45% in 2022, primarily due to an $18.3 million increase in amortization expense due to new Affiliate investments in the fourth quarter of 2021. Interest expense increased $3.0 million or 3% in 2022, primarily due to a $4.7 million increase due to higher interest rates on our senior unsecured term loan facility (the “term loan”) and a $4.5 million increase from our debt securities issued in 2021. These increases were partially offset by a $5.5 million decrease from our junior convertible debt securities due to lower principal balance resulting from repurchases 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 in 2022. Other expenses (net) decreased $38.8 million or 53% in 2022, primarily due to a $39.7 million decrease in expenses related to changes in the values of contingent payment obligations and Affiliate equity purchase obligations. Equity Method Income (Loss) (Net) When we do not own a controlling equity interest in an Affiliate, but have significant influence, we account for our interest in the Affiliate under the equity method. Our share of earnings or losses from Affiliates accounted for under the equity method, net of amortization and impairments, is included in Equity method income (loss) (net). For a majority of these Affiliates, we use structured partnership interests in which we contractually share in the Affiliate’s revenue less agreed-upon expenses. We also use structured partnership interests in which we contractually share in the Affiliate’s revenue without regard to expenses. Our share of earnings or losses from Affiliates accounted for under the equity method, net of amortization and impairments, is included in Equity method income (loss) (net). Our equity method revenue is derived primarily from asset- and performance-based fees from investment management services. Equity method revenue incorporates the total asset- and performance-based fees earned by all of our Affiliates accounted for under the equity method and is generally determined by the level of our equity method Affiliate average assets under management and the composition of these assets across our strategies with different asset-based fee ratios and performance-based fees. Our Affiliates accounted for under the equity method manage a greater proportion of assets subject to performance-based fees than our consolidated Affiliates and, as a result, equity method revenue will generally have more performance-based fees than Consolidated revenue. The following table presents equity method Affiliate average assets under management and equity method revenue, as well as equity method earnings, equity method intangible amortization, and equity method intangible impairments, which in aggregate form Equity method income (loss) (net): 25 Tab l e of Contents For the Years Ended December 31, (in millions, except as noted) 2020 2021 % Change 2022 % Change Operating Performance Measures Equity method Affiliate average assets under management (in billions) $ 301.8 $ 315.9 5 % $ 287.2 (9) % Equity method revenue $ 2,598.9 $ 3,199.0 23 % $ 3,230.9 1 % Financial Performance Measures Equity method earnings $ 288.6 $ 417.5 45 % $ 497.2 19 % Equity method intangible amortization (147.0) (123.0) (16) % (109.1) (11) % Equity method intangible impairments (185.0) (52.0) (72) % (50.0) (4) % Equity method income (loss) (net) $ (43.4) $ 242.5 N.M. (1) $ 338.1 39 % __________________________ (1) Percentage change is not meaningful. Our equity method revenue increased $31.9 million or 1% in 2022, due to a $54.4 million or 2% increase from performance-based fees, primarily in our liquid alternative strategies, partially offset by a $22.5 million or 1% decrease from asset-based fees. The decrease in asset-based fees was due to a decrease in equity method Affiliate 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. Equity method earnings increased $79.7 million or 19% in 2022, while equity method revenue increased $31.9 million or 1%. Equity method earnings increased more than equity method revenue on a percentage basis primarily due to the recognition of performance-based fees earned by Affiliates in which we hold more of an economic interest and the impact of our additional investment in Systematica. Equity method intangible amortization decreased $13.9 million or 11% in 2022, primarily due to a $43.2 million decrease in amortization expense related to certain definite-lived assets being fully amortized. This decrease was partially offset by a $19.4 million increase in amortization expense due to an increase in actual and expected client attrition for certain definite-lived acquired client relationships and a $10.7 million increase in amortization expense due to investments in new and existing Affiliates. Equity method intangible impairments decreased $2.0 million or 4% in 2022. See Note 10 of our Consolidated Financial Statements. BPEA Transaction Gain For the year ended December 31, 2022, we recorded a $641.9 million gain on the BPEA Transaction. See Note 10 of our Consolidated Financial Statements. Investment and Other Income The following table presents our Investment and other income: For the Years Ended December 31, (in millions) 2020 2021 % Change 2022 % Change Investment and other income $ 34.1 $ 117.6 N.M. (1) $ 110.3 (6) % __________________________ (1) Percentage change is not meaningful. Investment and other income decreased $7.3 million or 6% in 2022, primarily due to a $106.3 million decrease in net realized and unrealized gains on Other investments, offset by an $82.8 million increase in realized and unrealized gains on Investments in marketable securities. Income Tax Expense 26 Tab l e of Contents The following table presents our Income tax expense: For the Years Ended December 31, (in millions) 2020 2021 % Change 2022 % Change Income tax expense $ 81.4 $ 251.0 N.M. (1) $ 358.3 43 % __________________________ (1) Percentage change is not meaningful. Income tax expense increased $107.3 million or 43% in 2022, primarily due to a $117.8 million increase in taxes attributable to the controlling interest, offset by a $10.5 million decrease in taxes attributable to the non-controlling interest. The increase in taxes attributable to the controlling interest was primarily due to a $167.6 million tax expense related to the BPEA Transaction, partially offset by a $19.1 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 an $11.8 million increase in tax benefits from foreign operations. The decrease in taxes attributable to the non-controlling interest was primarily due to a $6.0 million deferred tax expense resulting from the aforementioned UK tax rate change in 2021. Net Income The following table presents Net income, Net income (controlling interest) and Net income (non-controlling interest): For the Years Ended December 31, (in millions) 2020 2021 % Change 2022 % Change Net income $ 427.0 $ 890.1 N.M. (1) $ 1,388.1 56 % Net income (non-controlling interests) 224.8 324.4 44 % 242.2 (25) % Net income (controlling interest) 202.2 565.7 N.M. (1) 1,145.9 N.M. (1) __________________________ (1) Percentage change is not meaningful. Net income (controlling interest) increased $580.2 million in 2022, primarily due to the gain from the BPEA Transaction, partially offset by an increase in Income tax expense attributable to the controlling interest, primarily due to the BPEA Transaction. 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 expense, income taxes, depreciation, amortization, impairments, gains and losses related to the BPEA Transaction, 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): 27 Tab l e of Contents For the Years Ended December 31, (in millions) 2020 2021 2022 Net income (controlling interest) $ 202.2 $ 565.7 $ 1,145.9 Interest expense 92.3 111.4 114.4 Income taxes 69.5 229.6 347.4 Intangible amortization and impairments (1) 427.7 199.9 195.0 BPEA Transaction (2) — — (743.6) Other items (3) 7.1 (48.0) 1.2 Adjusted EBITDA (controlling interest) $ 798.8 $ 1,058.6 $ 1,060.3 __________________________ (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 (loss) (net). The following table presents the Intangible amortization and impairments shown above: For the Years Ended December 31, (in millions) 2020 2021 2022 Consolidated intangible amortization and impairments $ 140.5 $ 35.7 $ 51.6 Consolidated intangible amortization and impairments (non-controlling interests) (44.8) (10.8) (15.7) Equity method intangible amortization and impairments 332.0 175.0 159.1 Total $ 427.7 $ 199.9 $ 195.0 (2) Includes BPEA Transaction gain of $641.9 million and realized and unrealized gains on EQT ordinary shares of $43.8 million and $57.9 million, respectively. (3) Other items include 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 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 gains and losses related to the BPEA Transaction, net of tax and 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 28 Tab l e of Contents available capital resources (which could be used to repurchase shares of common stock) that occurs when these securities are converted and we are relieved of our debt obligation. This method does not take into account any increase or decrease in our cost of capital in an assumed conversion. The following table presents a reconciliation of Net income (controlling interest) to Economic net income (controlling interest) and Economic earnings per share: For the Years Ended December 31, (in millions, except per share data) 2020 2021 2022 Net income (controlling interest) $ 202.2 $ 565.7 $ 1,145.9 Intangible amortization and impairments (1) 427.7 199.9 195.0 Intangible-related deferred taxes (2) (9.9) 52.5 45.5 BPEA Transaction (3) — — (576.0) Other economic items (4) 4.4 (38.3) (8.3) Economic net income (controlling interest) $ 624.4 $ 779.8 $ 802.1 Average shares outstanding (diluted) 46.7 44.8 49.0 Hypothetical issuance of shares to settle Redeemable non-controlling interests — — (7.4) Assumed issuance of junior convertible securities shares — (2.1) (1.8) Average shares outstanding (adjusted diluted) 46.7 42.7 39.8 Economic earnings per share $ 13.36 $ 18.28 $ 20.14 __________________________ (1) See note (1) to the table in “Adjusted EBITDA (controlling interest).” (2) For the year ended December 31, 2022, intangible-related deferred taxes have been adjusted to eliminate a $13.5 million benefit related to the BPEA Transaction. (3) Includes BPEA Transaction gain of $641.9 million and realized and unrealized gains on EQT ordinary shares of $43.8 million and $57.9 million, respectively, net of $167.6 million of income tax expense. (4) Other economic items include 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. For the years ended December 31, 2020, 2021, and 2022, other economic items were net of income tax expense (benefit) of $2.6 million, $21.8 million, and $(6.4) million, respectively. Liquidity and Capital Resources We generate long-term value by investing in new Affiliate partnerships, existing Affiliates, and strategic value-add 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 Investors Service and BBB+ by S&P Global Ratings. Cash and cash equivalents were $429.2 million as of December 31, 2022 and were attributable to both our controlling and the non-controlling interests. Our principal uses of cash in 2022 were for investments in new and existing Affiliates, purchases of marketable securities, and the return of excess capital through share repurchases. In 2022, we met our cash requirements primarily through cash generated by operating activities and proceeds from the BPEA Transaction. Between January 1, 2023 and February 15, 2023, we have sold $196.0 million of EQT ordinary shares. 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, proceeds from sales of our marketable securities, 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. 29 Tab l e of Contents 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. The following table presents operating, investing, and financing cash flow activities: For the Years Ended December 31, (in millions) 2020 2021 2022 Operating cash flow $ 1,009.3 $ 1,259.2 $ 1,054.7 Investing cash flow (53.7) (583.7) (109.9) Financing cash flow (455.4) (798.3) (1,402.9) Operating Cash Flow Operating cash flows are calculated by adjusting Net income for other significant sources and uses of cash, significant non-cash items, and timing differences in the cash settlement of assets and liabilities. For the year ended December 31, 2022, Cash flows from operating activities were $1,054.7 million, primarily from Net income of $1,388.1 million adjusted for non-cash items of $852.5 million, $393.5 million of distributions of earnings received from equity method investments, and timing differences in the cash settlement of receivables, other assets, and payables, accrued liabilities, and other liabilities of $138.5 million. These items were partially offset by net purchases of securities by consolidated sponsored investment products of $12.9 million. In 2022, operating cash flows were primarily attributable to the controlling interest. Investing Cash Flow For the year ended December 31, 2022, Cash flows used in investing activities were $109.9 million, primarily due to $312.0 million of purchases of investment securities, principally U.S. Treasury Notes, $291.1 million of investments in Affiliates, and $11.4 million purchases of fixed assets. Cash flows used in investing activities were partially offset by $280.2 million sales of investment securities principally from the sale of EQT ordinary shares, and $223.6 million of cash proceeds from the BPEA Transaction. In 2022, investing cash flows were primarily attributable to the controlling interest. Financing Cash Flow For the year ended December 31, 2022, Cash flows used in financing activities were $1,402.9 million, primarily due to the return of $718.0 million of capital to shareholders, principally through share repurchases of our common stock, $341.9 million of distributions to non-controlling interests, $201.0 million of settlement of deferred payment obligations (net of $49.8 million contributed from a co-investor), $60.8 million of repurchases of our junior convertible securities, $50.5 million of other financing items, and $46.3 million of Affiliate equity purchases, net of issuances. Cash flows used in financing activities were partially offset by $13.0 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. For Affiliates accounted for under the equity method, we do not typically have such put and call arrangements. The purchase price of these conditional purchases is generally calculated based upon a multiple of the Affiliate’s cash flow distributions, which is intended to represent fair value. Affiliate equity holders are also permitted to sell their equity interests to other individuals or entities in certain cases, subject to our approval or other restrictions. As of December 31, 2022, the current redemption value of Affiliate equity interests was $489.9 million, of which $465.4 million was presented as Redeemable non-controlling interests (including $20.1 million of consolidated Affiliate sponsored investment products primarily attributable to third-party investors), and $24.5 million was presented as Other liabilities. Although the timing and amounts of these purchases are difficult to predict, we paid $61.5 million for Affiliate equity purchases and received $15.2 million for Affiliate equity issuances during 2022, and we expect net purchases of approximately $125 million of Affiliate equity in 2023. In the event of a purchase, we become the owner of the cash flow associated with the purchased equity. See Notes 17 and 18 of our Consolidated Financial Statements. Share Repurchases 30 Tab l e of Contents 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. For the year ended December 31, 2022, we repurchased 4.5 million shares of our common stock at an average price per share of $144.45. As of December 31, 2022, we had repurchased all of the shares of the January 2021 authorized amount, and there were a total of 3.9 million shares available for repurchase under our October 2022 and January 2022 share repurchase programs. In December 2022, we entered into an accelerated share repurchase agreement to repurchase shares of our common stock in exchange for an upfront payment of $225.0 million. We received an initial share delivery of 1.1 million shares in December 2022, which represents 80% of the upfront payment based on the closing price of our common stock on the agreement date. The total number of shares to be repurchased will be based on volume-weighted average prices of our common stock during the term of the agreement less a discount and subject to adjustments pursuant to the terms and conditions of such agreement. The final settlement of this transaction is expected to be completed in the second or third quarter of 2023. Debt The following table presents the carrying value of our outstanding indebtedness. See Note 6 of our Consolidated Financial Statements. December 31, (in millions) 2020 2021 2022 Senior bank debt $ 350.0 $ 350.0 $ 350.0 Senior notes 1,097.3 1,098.0 1,098.7 Junior subordinated notes 565.7 765.8 765.9 Junior convertible securities 318.4 299.5 341.7 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 1 of our Consolidated Financial Statements). Senior Bank Debt We have a $1.25 billion revolver and a $350.0 million term loan. On November 18, 2022, we (i) amended the revolver, extending the maturity date of the revolver by one year to October 25, 2027, and (ii) further amended the revolver and amended the term loan, replacing the London Interbank Offered Rate (“LIBOR”) with a term Secured Overnight Financing Rate (“SOFR”)-based rate as an applicable benchmark for each facility. The term loan matures 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. Under the terms of the credit facilities we are required to meet two financial ratio covenants. The first of these covenants is a maximum ratio of debt to EBITDA (the “bank leverage ratio”) of 3.25x. The second covenant is a minimum EBITDA to cash interest expense ratio of 3.00x (the “bank interest coverage ratio”). For purposes of calculating these ratios, share-based compensation and certain Affiliate equity expenses are added back to Adjusted EBITDA. As of December 31, 2022, our bank leverage and bank interest coverage ratios were 1.2x and 10.3x, respectively, and we were in compliance with all of the terms of our credit facilities. As of December 31, 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 December 31, 2022, we had senior notes outstanding, the respective principal terms of which are presented below: 31 Tab l e 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 December 31, 2022, we had 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 December 31, 2022, we had $341.7 million of principal outstanding in our 5.15% junior convertible trust preferred securities outstanding (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 times periods, and may also repurchase junior convertible securities in the open market or in privately negotiated transactions from time to time at management’s discretion. The junior convertible securities are considered contingent payment debt instruments under federal income tax regulations, which require us to deduct interest in an amount greater than our reported interest expense. We estimate that these deductions will generate annual deferred tax liabilities of approximately $8 million. During the years ended December 31, 2021 and 2022, we repurchased a portion of our junior convertible securities for a purchase price of $33.0 million and $60.9 million, respectively, and as a result of these repurchases, we also reduced our Deferred income tax liability (net) by $7.0 million and $11.4 million, respectively. 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 December 31, 2022, no sales had occurred under the equity distribution program. Derivatives See Note 7 of our Consolidated Financial Statements. 32 Tab l e of Contents Commitments See Note 8 of our Consolidated Financial Statements. Other Contingent Commitments See Notes 4 and 8 of our Consolidated Financial Statements. Leases As of December 31, 2022, our lease obligations were $40.4 million through 2023, $73.3 million from 2024 through 2025, $44.9 million from 2026 through 2027, and $85.9 million thereafter. The portion of these lease obligations attributable to the controlling interest were $11.0 million through 2023, $20.1 million from 2024 through 2025, $6.4 million from 2026 through 2027, and $9.8 million thereafter. See Note 11 of our Consolidated Financial Statements. Recent Accounting Developments See Note 1 of our Consolidated Financial Statements. Critical Accounting Estimates and Judgments The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. See Note 1 of our Consolidated Financial Statements for a discussion of our significant accounting policies. The following are our critical accounting estimates and judgments used in the preparation of our Consolidated Financial Statements, and due to their subjectivity, actual results could differ materially from the amounts reported. Fair Value Measurements Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. These standards establish a fair value hierarchy that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. We make judgments to determine the fair value of certain assets, liabilities, and equity interests when allocating the purchase price of our new investments, when revaluing our contingent payment obligations, when we issue or purchase Affiliate equity interests and when we test our goodwill, indefinite- and definite-lived acquired client relationships, or equity method investments for impairment. In determining fair values that reflect our own assumptions concerning unobservable inputs, we typically use valuation techniques, including probability-weighted discounted cash flow analyses and Monte Carlo simulations, where we make assumptions about growth rates of assets under management, client attrition, asset- and performance-based fee rates, and expenses. In these analyses, we also consider historical and current market multiples, tax benefits, credit risk, interest rates, tax rates, discount rates, volatility, and discounts for lack of marketability. We consider the reasonableness of our assumptions by comparing our valuation conclusions to observed market transactions and, in certain instances, by consulting with third-party valuation firms. Changes in the assumptions used could significantly impact fair values. Goodwill Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not separately recognized. We perform a qualitative impairment assessment at least annually to determine if the carrying value of our single reporting unit is in excess of its fair value. In this qualitative assessment, we typically measure the excess of the fair value of our reporting unit over its carrying value using various qualitative and quantitative factors (including our market capitalization and market multiples for asset management businesses). If there is an indication that the carrying value of the reporting unit is in excess of the fair value under this test, then we must determine if a potential impairment is more-likely-than-not. To determine if a potential impairment is more-likely-than-not, we perform a single step quantitative test with any excess of carrying value over fair value recorded as an expense in Intangible amortization and impairments. We completed our annual goodwill impairment assessment as of September 30, 2022 and no impairment was indicated. Based on our assessment, the fair value of our reporting unit was substantially greater than its respective carrying amount, including goodwill. 33 Tab l e of Contents Indefinite-Lived Acquired Client Relationships Indefinite-lived acquired client relationships include investment advisory contracts between our Affiliates and their mutual funds and other retail-oriented investment products. Because these contracts are with the investment products themselves, and not with the underlying investors, and the contracts between our Affiliates and the investment products are typically renewed on an annual basis, industry practice under GAAP is to consider the contract life to be indefinite and, as a result, not amortizable. We perform indefinite-lived acquired client relationship impairment assessments annually, or more frequently should circumstances indicate fair value has declined below the related carrying value. For purposes of our assessments, we consider various qualitative and quantitative factors (including market multiples) and determine if it is more-likely-than-not that the fair value of each asset group is greater than its carrying amount. If we determine that it is likely that the fair value has declined below our related carrying value, we perform discounted cash flow analyses to determine the fair value of the asset group and record an expense in Intangible amortization and impairments to reduce the carrying value to its fair value. For the year ended December 31, 2022, we completed our annual assessment of our other indefinite-lived acquired client relationships and only a significant decline in the fair values of these assets would result in an impairment. Definite-Lived Acquired Client Relationships Definite-lived acquired client relationships include investment advisory contracts between our Affiliates and their underlying investors, and are amortized over their expected period of economic benefit. Significant judgment is required to estimate the period that these assets will contribute to our cash flows and the pattern over which these assets will provide an economic benefit. Formally, on an annual basis, or more frequently should client attrition trends warrant a potential revision, we review historical and projected attrition rates and other events that may influence our projections of the future period of economic benefit that we will derive from these relationships. Changes in the expected period of economic benefit of these assets may warrant changes in the period over which the assets are amortized. We perform definite-lived acquired client relationship impairment assessments annually, or more frequently should client attrition trends indicate fair value has declined below the related carrying value. If we determine that the fair value has declined below our related carrying value, an expense is recorded in Intangible amortization and impairments to reduce the carrying value to its fair value. We assess each of our definite-lived acquired client relationships for impairment by comparing their carrying value to the projected undiscounted cash flows of the acquired client relationships. For the year ended December 31, 2022, we completed our annual assessment and noted that projected undiscounted cash flows over the remaining life of each of these assets exceed their carrying value and, accordingly, no impairments were identified. Equity Method Investments in Affiliates We periodically perform assessments to determine if the fair value of an investment may have declined below its related carrying value for our Affiliates accounted for under the equity method for a period that we consider to be other-than-temporary. Where we believe that such declines may have occurred, we determine the amount of impairment using valuation methods, such as discounted cash flow analyses. Impairments are recorded as an expense in Equity method income (loss) (net) to reduce the carrying value of the Affiliate to its fair value. When we test our equity method investments for impairment, we make assumptions about growth rates of projected assets under management, client attrition, asset- and performance-based fees, and expenses. In these analyses, we also make judgments about tax benefits, tax rates, and discount rates. We consider the reasonableness of our assumptions by comparing our valuation conclusions to observed market transactions, comparable company valuations, and, in certain instances, by consulting with third-party valuation firms. Changes in these assumptions could significantly impact the respective fair value of an Affiliate. For the year ended December 31, 2022, we recorded a $50.0 million expense to reduce the carrying value of an Affiliate to fair value. See Note 10 of our Consolidated Financial Statements. For the year ended December 31, 2022, we completed our annual assessment of our other investments in Affiliates accounted for under the equity method and no other impairments were identified. Income Taxes We and our Affiliates are subject to income taxes in the U.S. and certain foreign jurisdictions. Our income tax expense, 34 Tab l e of Contents deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best estimate of current and future taxes to be paid. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. We measure our deferred taxes based on enacted tax rates and projected state apportionment percentages for the years in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recorded in Income tax expense in the Consolidated Statement of Income in the period in which the change in tax rates is enacted. Our principal deferred tax assets relate to deferred compensation, state and foreign loss carryforwards, and the indirect benefits of uncertain foreign tax positions. We regularly assess the recoverability of our deferred tax assets, considering all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. A valuation allowance is utilized to adjust the carrying values of deferred tax assets to the amount that is more-likely-than-not to be realized. We record unrecognized tax benefits based on whether it is more-likely-than-not that uncertain tax positions will be sustained on the basis of the technical merits of the position. If it is determined an uncertain tax position is more-likely-than-not to be sustained, we recognize the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority. See Note 20 of our Consolidated Financial Statements. Share-Based Compensation and Affiliate Equity We have share-based compensation arrangements covering directors, senior management, and employees. Our share-based compensation arrangements typically vest and become fully exercisable over three to five years of continued employment and, in some cases, may require the satisfaction of certain performance conditions. We determine the fair value of our share-based compensation arrangements on their grant date and record compensation expense based on the number of awards expected to vest. For restricted stock units, we determine the fair value of the units using our share price on the date of grant and the number of shares expected to vest. For stock options, we estimate the fair value using the Black-Scholes option pricing model, which requires us to make assumptions about the volatility and dividend yield of our common stock and the expected life of our stock options. In measuring expected volatility, we consider both the historical volatility of our common stock, as well as the current implied volatility from traded options. For certain of our awards with performance conditions, the number of restricted stock units or stock options expected to vest may change over time depending upon the performance level achieved. For share-based compensation arrangements without performance conditions, we recognize expense based on the number of awards expected to vest on a straight-line basis over the requisite service period, including grants that are subject to graded vesting. For all other arrangements, we recognize expense based on the number of awards expected to vest on a straight-line basis for each separately vesting portion of the award. From time to time, we grant equity interests in our Affiliates to consolidated Affiliate partners and other parties, with vesting, forfeiture, and repurchase terms established at the date of grant. The fair value of the equity interests is determined as of the date of grant using a discounted cash flow analysis. Key valuation assumptions include projected assets under management, asset- and performance-based fees, tax rates, discount rates, and discounts for lack of marketability. The use of different assumptions could change the value of these interests, including the amount of compensation expense, if any, that we may report upon their transfer or repurchase. Redeemable non-controlling interests represent the currently redeemable value of Affiliate equity interests. We may pay for these Affiliate equity purchases in cash, shares of our common stock, or other forms of consideration, at our election. See Notes 16, 17, and 18 of our Consolidated Financial Statements.