AFFILIATED MANAGERS GROUP, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Certain matters discussed in this Quarterly Report on Form 10-Q, in our other filings with the Securities and Exchange Commission, in our press releases, and in oral statements made with the approval of an executive officer may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, and other non-historical statements, and may be prefaced with words such as “outlook,” “guidance,” “believes,” “expects,” “potential,” “preliminary,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “projects,” “positioned,” “prospects,” “intends,” “plans,” “estimates,” “pending investments,” “anticipates,” or the negative version of these words or other comparable words. Such statements are subject to certain risks and uncertainties, including, among others, the factors discussed under the caption “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, and from time to time, as applicable, our Quarterly Reports on Form 10-Q . These factors (among others) could affect our financial condition, business activities, results of operations, cash flows, or overall financial performance and cause actual results and business activities to differ materially from historical periods and those presently anticipated and projected. Forward-looking statements speak only as of the date they are made, and we will not undertake and we specifically disclaim any obligation to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of events, whether or not anticipated. In that respect, we caution readers not to place undue reliance on any such forward-looking statements. Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. References throughout this report to “AMG,” “we,” “us,” “our,” the “Company” and similar references refer to Affiliated Managers Group, Inc., unless otherwise stated or the context otherwise requires. 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 September 30, 2023, our aggregate assets under management were approximately $636 billion across a broad range of differentiated investment strategies. In August 2023, we completed our minority investment in Forbion Group Holding B.V. (“Forbion”), a leading European private markets firm focused on investing in high-quality life sciences companies. Following the close of the transaction, Forbion partners continue to hold a significant majority of the equity of the business and direct its day-to-day operations. In September 2023, we completed our previously announced agreement with a third party and Veritable, LP (“Veritable”), one of our consolidated Affiliates, under which the third party acquired 100% of the outstanding equity interests in Veritable (the “Veritable Transaction”). Pursuant to the terms of the agreement, we received $287.4 million in cash, net of transaction costs of $6.6 million. Our gain on the transaction was $133.1 million and our after-tax net cash proceeds were $225.1 million. In October 2023, we completed our minority investment in Ara Partners Group, LLC (“Ara Partners”), a private markets firm specializing in industrial decarbonization. Following the close of the transaction, Ara Partners’ management continues to hold a significant majority of the equity of the business and directs its day-to-day operations. The financial results will be recognized in the Consolidated Financial Statements one quarter in arrears. 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 26 Table of Contents 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 September 30, As of and for the Nine Months Ended September 30, (in billions, except as noted) 2022 2023 % Change 2022 2023 % Change Assets under management $ 644.6 $ 635.8 (1) % $ 644.6 $ 635.8 (1) % Average assets under management 680.1 663.8 (2) % 731.8 664.4 (9) % Aggregate fees (in millions) 1,165.5 997.5 (14) % 3,675.6 3,505.7 (5) % 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 client demand for alternative strategies, as evidenced by our net inflows in this category for the three and nine months ended September 30, 2023. At the same time, our equity strategies saw outflows, particularly in global equities, in line with client cash flow trends across the industry. We continue to invest in areas of long-term client demand — including private markets, liquid alternatives, sustainable investment 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 and client type as of September 30, 2023: Assets Under Management ___________________________ (1) Alternatives include private markets strategies, which accounted for 16% of our assets under management as of September 30, 2023. 27 Table of Contents The following tables present changes in our assets under management by strategy and client type for the three and nine months ended September 30, 2023: By Strategy - Quarter to Date (in billions) Alternatives Global Equities U.S. Equities Multi-Asset & Fixed Income Total June 30, 2023 $ 225.7 $ 190.5 $ 140.7 $ 117.0 $ 673.9 Client cash inflows and commitments 6.8 3.8 3.9 4.9 19.4 Client cash outflows (3.9) (13.2) (7.2) (4.5) (28.8) Net client cash flows 2.9 (9.4) (3.3) 0.4 (9.4) New investments 3.0 — — — 3.0 Veritable (1) (0.2) — — (17.6) (17.8) Market changes 3.9 (5.3) (3.6) (1.5) (6.5) Foreign exchange (2) (1.7) (2.4) (0.5) (0.4) (5.0) Realizations and distributions (net) (2.2) (0.0 ) (0.0 ) (0.1) (2.3) Other (3) (0.2) — 0.1 0.0 (0.1) September 30, 2023 $ 231.2 $ 173.4 $ 133.4 $ 97.8 $ 635.8 By Client Type - Quarter to Date (in billions) Institutional Retail High Net Worth Total June 30, 2023 $ 339.2 $ 199.2 $ 135.5 $ 673.9 Client cash inflows and commitments 8.2 6.6 4.6 19.4 Client cash outflows (11.0) (13.0) (4.8) (28.8) Net client cash flows (2.8) (6.4) (0.2) (9.4) New investments 2.8 — 0.2 3.0 Veritable (1) (0.2) — (17.6) (17.8) Market changes (0.4) (3.9) (2.2) (6.5) Foreign exchange (2) (2.8) (1.9) (0.3) (5.0) Realizations and distributions (net) (2.0) (0.1) (0.2) (2.3) Other (3) 0.1 (0.1) (0.1) (0.1) September 30, 2023 $ 333.9 $ 186.8 $ 115.1 $ 635.8 By Strategy - Year to Date Alternatives Global Equities U.S. Equities Multi-Asset & Fixed Income Total December 31, 2022 $ 220.9 $ 186.1 $ 133.3 $ 110.5 $ 650.8 Client cash inflows and commitments 22.5 13.1 13.7 14.6 63.9 Client cash outflows (15.5) (35.3) (22.4) (13.8) (87.0) Net client cash flows 7.0 (22.2) (8.7) 0.8 (23.1) New investments 3.0 — — — 3.0 Veritable (1) (0.2) — — (17.6) (17.8) Market changes 5.5 9.9 8.8 4.3 28.5 Foreign exchange (2) 0.2 0.0 0.0 (0.2) (0.0 ) Realizations and distributions (net) (4.8) (0.1) (0.1) (0.2) (5.2) Other (3) (0.4) (0.3) 0.1 0.2 (0.4) September 30, 2023 $ 231.2 $ 173.4 $ 133.4 $ 97.8 $ 635.8 28 Table of Contents By Client Type - Year to Date Institutional Retail High Net Worth Total December 31, 2022 $ 333.5 $ 188.9 $ 128.4 $ 650.8 Client cash inflows and commitments 25.1 24.1 14.7 63.9 Client cash outflows (36.1) (35.5) (15.4) (87.0) Net client cash flows (11.0) (11.4) (0.7) (23.1) New investments 2.8 — 0.2 3.0 Veritable (1) (0.2) — (17.6) (17.8) Market changes 13.1 10.1 5.3 28.5 Foreign exchange (2) 0.0 0.0 (0.0 ) (0.0 ) Realizations and distributions (net) (4.2) (0.8) (0.2) (5.2) Other (3) (0.1) (0.0 ) (0.3) (0.4) September 30, 2023 $ 333.9 $ 186.8 $ 115.1 $ 635.8 ___________________________ (1) Assets under management attributable to Veritable as of the 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) 20 % 85 % 85 % 86 % Global equity (2) 27 % 45 % 39 % 64 % U.S. equity (2) 21 % 46 % 75 % 83 % Multi-asset and fixed income (3) 16 % N/A N/A N/A AUM Weight % of AUM Ahead of Benchmark (1) IRR Latest Vintage IRR Last Three Vintages Private markets (4) 16 % 90 % 89 % ___________________________ (1) Past performance is not indicative of future results. Performance and AUM information is as of September 30, 2023 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. 29 Table 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 a hurdle rate, and are generally recognized when it is improbable that there will be a significant reversal in the amount of revenue recognized. Performance-based fees are generally billed less frequently than asset-based fees and will vary from period to period because they inherently depend on investment performance. As of September 30, 2023, approximately 28% of our total assets under management could potentially earn performance-based fees. These percentages were approximately 13% and 47% of our assets under management for our consolidated Affiliates and Affiliates accounted for under the equity method, respectively. 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 predominately earned by our Affiliates accounted for under the equity method. Aggregate fees were $997.5 million for the three months ended September 30, 2023, a decrease of $168.0 million or 14% as compared to the three months ended September 30, 2022. The decrease in our aggregate fees was due to a $101.0 million or 8% decrease from performance-based fees, primarily in our liquid alternative and private markets strategies, and a $67.0 million or 6% decrease from asset-based fees. The decrease in asset-based fees was principally due to a decrease in our average assets under management, primarily in our global equity strategies, and the impact of the BPEA Transaction (as defined in “Supplemental Financial Performance Measures”). Aggregate fees were $3,505.7 million for the nine months ended September 30, 2023, a decrease of $169.9 million or 5% as compared to the nine months ended September 30, 2022. The decrease in our aggregate fees was due to a $383.2 million or 11% decrease from asset-based fees, offset by a $213.3 million or 6% increase from performance-based fees, primarily in our liquid alternative strategies. The decrease in asset-based fees was principally due to a decrease in our average assets under management, primarily in our global equity strategies, and the impact of the BPEA Transaction. Financial and Supplemental Financial Performance Measures The following table presents our key financial and supplemental financial performance measures: For the Three Months Ended September 30, For the Nine Months Ended September 30, (in millions) 2022 2023 % Change 2022 2023 % Change Net income (controlling interest) $ 112.6 $ 217.0 93 % $ 368.0 $ 476.8 30 % Adjusted EBITDA (controlling interest) (1) 221.2 208.4 (6) % 676.1 639.6 (5) % Economic net income (controlling interest) (1) 167.0 149.5 (10) % 507.1 474.9 (6) % ___________________________ (1) Adjusted EBITDA (controlling interest) and Economic net income (controlling interest) are non-GAAP performance measures and are discussed in “Supplemental Financial Performance Measures.” 30 Table of Contents 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. Our Adjusted EBITDA (controlling interest) decreased $12.8 million or 6% in the three months ended September 30, 2023 primarily due to a $168.0 million or 14% decrease in aggregate fees. Adjusted EBITDA decreased less than aggregate fees on a percentage basis primarily due to the recognition of performance-based fees earned by Affiliates in which we hold a greater economic interest. For the nine months ended September 30, 2023, our Adjusted EBITDA (controlling interest) decreased $36.5 million or 5%, primarily due to a $169.9 million or 5% decrease in aggregate fees and the impact of the BPEA Transaction. For the three months ended September 30, 2023, our Net income (controlling interest) increased $104.4 million or 93%. This increase was primarily due to a $133.1 million gain on the Veritable Transaction and an $18.6 million increase in Investment and other income attributable to the controlling interest, partially offset by a $41.1 million increase in Income tax expense attributable to the controlling interest, primarily due to the Veritable Transaction. For the nine months ended September 30, 2023, our Net income (controlling interest) increased $108.8 million or 30%. This increase was primarily due to a $133.1 million gain on the Veritable Transaction, a $73.2 million increase in Investment and other income attributable to the controlling interest, and a $30.4 million increase in Equity method income (net). These increases were partially offset by a $234.7 million decrease in Consolidated revenue, a $28.8 million increase in Income tax expense attributable to the controlling interest, primarily due to the Veritable Transaction, and an increase in Other expenses (net) attributable to the controlling interest, primarily due to an $18.2 million increase in expenses related to changes in the values of contingent payment obligations. 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 September 30, 2023, our Economic net income (controlling interest) decreased $17.5 million or 10%, primarily due to a $12.8 million decrease in Adjusted EBITDA (controlling interest) and a $2.8 million increase in Interest expense attributable to the controlling interest. For the nine months ended September 30, 2023, our Economic net income (controlling interest) decreased $32.2 million or 6%, primarily due to a $36.5 million decrease in Adjusted EBITDA (controlling interest). Results of Operations The following discussion includes the key operating performance measures and financial results of our consolidated and equity method Affiliates. Our consolidated Affiliates’ financial results are included in our Consolidated revenue, Consolidated expenses, and Investment and other income (expense), and our share of our equity method Affiliates’ financial results is reported, net of intangible amortization and impairments, in Equity method income (net). Consolidated Revenue The following table presents our consolidated Affiliate average assets under management and Consolidated revenue: For the Three Months Ended September 30, For the Nine Months Ended September 30, (in millions, except as noted) 2022 2023 % Change 2022 2023 % Change Consolidated Affiliate average assets under management (in billions) $ 397.8 $ 397.7 (0 )% $ 434.1 $ 399.7 (8) % Consolidated revenue $ 578.6 $ 525.2 (9) % $ 1,789.9 $ 1,555.2 (13) % Our Consolidated revenue decreased $53.4 million or 9% for the three months ended September 30, 2023, due to a $47.1 million or 8% decrease from performance-based fees, primarily in our private markets strategies, and a $6.3 million or 1% decrease from asset-based fees. Our Consolidated revenue decreased $234.7 million or 13% for the nine months ended September 30, 2023, due to a $141.4 million or 8% decrease from asset-based fees and a $93.3 million or 5% decrease from performance-based fees, primarily in our private markets strategies. The decrease in asset-based fees was principally due to a decrease in consolidated Affiliate average assets under management, primarily in our global equity strategies. Consolidated Expenses Our Consolidated expenses are primarily attributable to the non-controlling interests of our consolidated Affiliates. 31 Table of Contents The following table presents our Consolidated expenses: For the Three Months Ended September 30, For the Nine Months Ended September 30, % Change % Change (in millions) 2022 2023 2022 2023 Compensation and related expenses $ 273.8 $ 211.8 (23) % $ 797.0 $ 663.0 (17) % Selling, general and administrative 93.2 91.1 (2) % 275.7 273.4 (1) % Intangible amortization and impairments 14.4 12.5 (13) % 39.4 37.5 (5) % Interest expense 28.3 31.1 10 % 84.7 92.4 9 % Depreciation and other amortization 3.8 3.0 (21) % 11.9 10.0 (16) % Other expenses (net) 11.9 7.9 (34) % 12.3 36.2 N.M. (1) Total consolidated expenses $ 425.4 $ 357.4 (16) % $ 1,221.0 $ 1,112.5 (9) % ___________________________ (1) Percentage change is not meaningful. Compensation and related expenses decreased $62.0 million or 23% for the three months ended September 30, 2023, primarily due to a $63.9 million decrease in compensation correlated to the decrease in Consolidated revenue, partially offset by a $2.5 million increase in Affiliate equity compensation expense. Compensation and related expenses decreased $134.0 million or 17% for the nine months ended September 30, 2023, primarily due to a $136.0 million decrease in compensation correlated to the decrease in Consolidated revenue, partially offset by a $3.6 million increase in Affiliate equity compensation expense. There were no significant changes in Selling, general and administrative expenses for the three months ended September 30, 2023. Selling, general and administrative expenses decreased $2.3 million or 1% for the nine months ended September 30, 2023, primarily due to a $9.0 million decrease in distribution and investment-related expenses principally as a result of a decrease in average assets under management on which these expenses are incurred. This decrease was partially offset by a $3.1 million increase in professional fees and a $3.0 million increase in travel-related expenses. There were no significant changes in Intangible amortization and impairments for the three and nine months ended September 30, 2023. Interest expense increased $2.8 million or 10% for the three months ended September 30, 2023, due to higher interest rates on our term loan. Interest expense increased $7.7 million or 9% for the nine months ended September 30, 2023, primarily due to a $10.5 million increase resulting from higher interest rates on our term loan. This increase was partially offset by a $2.9 million decrease resulting from repurchases of our junior convertible securities in the first half of 2022. There were no significant changes in Depreciation and other amortization for the three and nine months ended September 30, 2023. Other expenses (net) decreased $4.0 million or 34% for the three months ended September 30, 2023, primarily due to a $4.9 million decrease in expenses related to changes in the values of contingent payment obligations. Other expenses (net) increased $23.9 million for the nine months ended September 30, 2023, primarily due to a $23.6 million increase in expenses related to changes in the values of contingent payment obligations. Equity Method Income (Net) For our Affiliates accounted for under the equity method, we use structured partnership interests in which we contractually share in the Affiliate’s revenue or revenue less agreed-upon expenses. Our share of earnings or losses from Affiliates accounted for under the equity method, net of amortization and impairments, is included in Equity method income (net). The following table presents equity method Affiliate average assets under management and equity method revenue, as well as equity method earnings, equity method intangible amortization, and equity method intangible impairments, if any, which in aggregate form Equity method income (net): 32 Table of Contents For the Three Months Ended September 30, For the Nine Months Ended September 30, (in millions, except as noted) 2022 2023 % Change 2022 2023 % Change Operating Performance Measures Equity method Affiliate average assets under management (in billions) $ 282.3 $ 266.1 (6) % $ 297.7 $ 264.7 (11) % Equity method revenue $ 586.9 $ 472.3 (20) % $ 1,885.7 $ 1,950.5 3 % Financial Performance Measures Equity method earnings $ 76.2 $ 61.0 (20) % $ 213.2 $ 217.3 2 % Equity method intangible amortization (31.4) (21.2) (32) % (89.3) (63.0) (29) % Equity method income (net) $ 44.8 $ 39.8 (11) % $ 123.9 $ 154.3 25 % Our equity method revenue decreased $114.6 million or 20% for the three months ended September 30, 2023, due to a $60.7 million or 10% decrease from asset-based fees and a $53.9 million or 10% decrease from performance-based fees, primarily in our liquid alternatives strategies. The decrease in asset-based fees was primarily due to the impact of the BPEA Transaction, partially offset by changes in the composition of our assets under management. For the three months ended September 30, 2023, equity method earnings decreased $15.2 million or 20%, primarily due to a $114.6 million or 20% decrease in equity method revenue. Equity method intangible amortization decreased $10.2 million or 32% for the three months ended September 30, 2023, primarily due to a $9.1 million decrease due to a decline in actual and expected client attrition for certain definite-lived acquired client relationships and a $2.7 million decrease in amortization expense related to certain definite-lived assets being fully amortized. These decreases were partially offset by a $1.6 million increase in amortization expense due to an investment in a new Affiliate. Our equity method revenue increased $64.8 million or 3% for the nine months ended September 30, 2023, due to a $306.6 million or 15% increase from performance-based fees, primarily in our liquid alternative strategies, offset by a $241.8 million or 12% decrease from asset-based fees. The decrease in asset-based fees was primarily due to the impact of the BPEA Transaction, partially offset by changes in the composition of our assets under management. For the nine months ended September 30, 2023, equity method earnings increased $4.1 million or 2%, primarily due to a $64.8 million or 3% increase in equity method revenue. Equity method intangible amortization decreased $26.3 million or 29% for the nine months ended September 30, 2023, primarily due to a $23.0 million decrease due to a decline in actual and expected client attrition for certain definite-lived acquired client relationships and an $8.1 million decrease in amortization expense related to certain definite-lived assets being fully amortized. These decreases were partially offset by a $4.8 million increase in amortization expense due to an investment in a new Affiliate. Affiliate Transaction Gain For the three and nine months ended September 30, 2023, we recorded a $133.1 million pre-tax gain on the Veritable Transaction. See Note 9 of our Consolidated Financial Statements. Investment and Other Income (Expense) 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) 2022 2023 % Change 2022 2023 % Change Investment and other income (expense) $ 3.1 $ 23.0 N.M. (1) $ (5.3) $ 87.2 N.M. (1) ___________________________ (1) Percentage change is not meaningful. 33 Table of Contents Investment and other income increased $19.9 million for the three months ended September 30, 2023, primarily due to increases in net realized and unrealized gains on Other investments of $13.5 million and an increase in interest income of $6.7 million. Investment and other income increased $92.5 million for the nine months ended September 30, 2023, primarily due to increases in net realized and unrealized gains on Investments in marketable securities and Other investments of $51.6 million and $27.2 million, respectively, and an increase in interest income of $17.8 million. Income Tax Expense The following table presents our Income tax expense: For the Three Months Ended September 30, For the Nine Months Ended September 30, (in millions) 2022 2023 % Change 2022 2023 % Change Income tax expense $ 36.8 $ 77.7 N.M. (1) $ 130.5 $ 155.4 19 % ___________________________ (1) Percentage change is not meaningful. Income tax expense increased $40.9 million for the three months ended September 30, 2023, primarily due to a $38.9 million increase in taxes resulting from an increase in Income before income taxes attributable to the controlling interest primarily attributable to the gain on the Veritable Transaction. Income tax expense increased $24.9 million or 19% for the nine months ended September 30, 2023, primarily due to a $36.1 million increase in taxes resulting from an increase in Income taxes attributable to the controlling interest primarily attributable to the gain on the Veritable Transaction, partially offset by a $3.9 million decrease in tax expense attributable to the non-controlling interest, a $2.6 million increase in tax windfalls attributable to share-based compensation, and a $1.9 million discrete tax expense related to foreign income for the nine months ended September 30, 2022 that did not reoccur. Net Income The following table presents Net income, Net income (non-controlling interests), and Net income (controlling interest): For the Three Months Ended September 30, For the Nine Months Ended September 30, (in millions) 2022 2023 % Change 2022 2023 % Change Net income $ 164.3 $ 286.0 74 % $ 557.0 $ 661.9 19 % Net income (non-controlling interests) 51.7 69.0 33 % 189.0 185.1 (2) % Net income (controlling interest) 112.6 217.0 93 % 368.0 476.8 30 % Net income (controlling interest) increased $104.4 million or 93% for the three months ended September 30, 2023, primarily due to the gain on the Veritable Transaction and an increase in Investment and other income attributable to the controlling interest, partially offset by an increase in Income tax expense attributable to the controlling interest, primarily due to the Veritable Transaction. Net income (controlling interest) increased $108.8 million or 30% for the nine months ended September 30, 2023, primarily due to the gain on the Veritable Transaction and increases in Investment and other income attributable to the controlling interest and Equity method income (net). These increases were partially offset by a decrease in Consolidated revenue and increases in Income tax expense attributable to the controlling interest, primarily due to the Veritable Transaction and Other expenses (net) attributable to the controlling interest, primarily due to changes in the values of contingent payment obligations. Supplemental Financial Performance Measures As supplemental information, we provide non-GAAP performance measures of Adjusted EBITDA (controlling interest), Economic net income (controlling interest), and Economic earnings per share. Management utilizes these non-GAAP performance measures to assess our performance before our share of certain non-cash expenses and to improve comparability between periods. In the first quarter of 2023, we updated the definitions of Adjusted EBITDA (controlling interest) and Economic net income (controlling interest) to reflect AMG's strategic evolution, including our increased allocation of capital toward private markets and liquid alternatives. To align with the economic impact of these capital allocation decisions, the 34 Table of Contents updated definitions of Adjusted EBITDA (controlling interest) and Economic net income (controlling interest): (i) include only the realized economic gains and losses on seed capital, general partner commitments, and other strategic investments and (ii) exclude any unrealized gains and losses on strategic investments (consistent with the existing treatment of seed capital and general partner commitments). We have retroactively applied this definition change to prior periods. The following table presents the impact on the three and nine months ended September 30, 2022: For the Three Months Ended September 30, For the Nine Months Ended September 30, (in millions) 2022 2022 Adjusted EBITDA (controlling interest)–As reported $ 221.2 $ 676.1 Adjusted EBITDA (controlling interest)–Prior definition 220.4 689.1 Change $ 0.8 $ (13.0) % Change 0.4 % (1.9) % Economic net income (controlling interest)–As reported $ 167.0 $ 507.1 Economic net income (controlling interest)–Prior definition 166.4 516.9 Change $ 0.6 $ (9.8) % Change 0.4 % (1.9) % Economic earnings per share–As reported $ 4.23 $ 12.61 Economic earnings per share–Prior definition 4.21 12.85 Change $ 0.02 $ (0.24) % Change 0.5 % (1.9) % Adjusted EBITDA (controlling interest) Adjusted EBITDA (controlling interest) is an important supplemental financial performance measure for management as it provides a comprehensive view of the financial performance of our business before our share of interest expense, income and certain non-income based taxes, depreciation, amortization, impairments, gains and losses related to the Veritable and BPEA Transactions, and non-cash items such as certain Affiliate equity activity, gains and losses on our contingent payment obligations, and unrealized gains and losses on seed capital, general partner commitments, and other strategic investments. Adjusted EBITDA (controlling interest) is also adjusted for realized economic gains and losses related to these seed capital, general partner commitments, and other strategic investments. We believe that many investors use this non-GAAP measure when assessing the financial performance of companies in the investment management industry. This non-GAAP performance measure is provided in addition to, but not as a substitute for, Net income (controlling interest) or other GAAP performance measures. The following table presents a reconciliation of Net income (controlling interest) to Adjusted EBITDA (controlling interest): For the Three Months Ended September 30, For the Nine Months Ended September 30, (in millions) 2022 2023 2022 2023 Net income (controlling interest) $ 112.6 $ 217.0 $ 368.0 $ 476.8 Interest expense 28.3 31.1 84.7 92.4 Income taxes 34.8 76.6 121.1 150.7 Intangible amortization and impairments (1) 41.9 29.8 116.9 88.6 Affiliate Transactions (2) — (139.6) — (162.7) Other items (3) 3.6 (6.5) (14.6) (6.2) Adjusted EBITDA (controlling interest) $ 221.2 $ 208.4 $ 676.1 $ 639.6 ___________________________ (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 35 Table of Contents not separately report intangible amortization and impairments in our Consolidated Statements of Income. Our share of these Affiliates’ amortization and impairments is reported in Equity method income (net). The following table presents the Intangible amortization and impairments shown above: For the Three Months Ended September 30, For the Nine Months Ended September 30, (in millions) 2022 2023 2022 2023 Consolidated intangible amortization and impairments $ 14.4 $ 12.5 $ 39.4 $ 37.5 Consolidated intangible amortization and impairments (non-controlling interests) (3.9) (3.9) (11.8) (11.9) Equity method intangible amortization and impairments 31.4 21.2 89.3 63.0 Total $ 41.9 $ 29.8 $ 116.9 $ 88.6 (2) Includes Veritable Transaction gain of $133.1 million for the three and nine months ended September 30, 2023, and gains of $6.5 million and $29.6 million on ordinary shares of EQT AB (“EQT”), a public company listed on Nasdaq Stockholm (EQT.ST), for the three and nine months ended September 30, 2023, respectively. We received the EQT shares through the sale of our equity interest in Baring Private Equity Asia (“BPEA”), in connection with the strategic combination of BPEA and EQT, which was completed in the fourth quarter of 2022 (the “BPEA Transaction”). (3) Other items include certain non-income based taxes, depreciation, and non-cash items such as gains and losses on our contingent payment obligations, certain Affiliate equity activity, unrealized gains and losses on seed capital, general partner commitments, and other strategic investments, and realized economic gains and losses related to these seed capital, general partner commitments, and other strategic investments. 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. Under our Economic net income (controlling interest) definition, we adjust Net income (controlling interest) for 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 adjust for deferred taxes attributable to intangible assets because we believe it is unlikely these accruals will be used to settle material tax obligations. Further, we adjust for gains and losses related to the Veritable and BPEA Transactions, 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, are deemed to be outstanding. We believe the inclusion of net shares under a treasury stock method best reflects the benefit of the increase in available capital resources (which could be used to repurchase shares of our 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: 36 Table of Contents For the Three Months Ended September 30, For the Nine Months Ended September 30, (in millions, except per share data) 2022 2023 2022 2023 Net income (controlling interest) $ 112.6 $ 217.0 $ 368.0 $ 476.8 Intangible amortization and impairments (1) 41.9 29.8 116.9 88.6 Intangible-related deferred taxes (2) 12.7 14.7 41.2 44.6 Affiliate Transactions (3) — (104.7) — (122.1) Other economic items (4) (0.2) (7.3) (19.0) (13.0) Economic net income (controlling interest) $ 167.0 $ 149.5 $ 507.1 $ 474.9 Average shares outstanding (diluted) 43.5 43.4 47.8 42.9 Hypothetical issuance of shares to settle Redeemable non-controlling interests (2.3) (5.1) (5.7) (3.9) Assumed issuance of junior convertible securities shares (1.7) (1.7) (1.9) (1.7) Average shares outstanding (adjusted diluted) 39.5 36.6 40.2 37.3 Economic earnings per share $ 4.23 $ 4.08 $ 12.61 $ 12.72 ___________________________ (1) See note (1) to the table in “Adjusted EBITDA (controlling interest).” (2) For the three and nine months ended, September 30, 2023, intangible-related deferred taxes have been adjusted to eliminate a $28.9 million benefit related to the Veritable Transaction. (3) Includes Veritable Transaction gain of $133.1 million and gains on EQT shares of $6.5 million and $29.6 million, net of $34.9 million and $40.6 million income tax expense for the three and nine months ended September 30, 2023, respectively. (4) Other economic items include gains and losses related to contingent payment obligations, tax windfalls and shortfalls from share-based compensation, certain Affiliate equity activity, unrealized gains and losses on seed capital, general partner commitments, and other strategic investments, and realized economic gains and losses related to these seed capital, general partner commitments, and other strategic investments. Other economic items were net of income tax benefit of $0.0 million and $7.0 million for the three and nine months ended September 30, 2022, respectively, and income tax expense of $0.3 million and $4.7 million for the three and nine months ended September 30, 2023, 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 Investor Services and BBB+ by S&P Global Ratings. Cash and cash equivalents were $999.2 million as of September 30, 2023 and were attributable to both our controlling and the non-controlling interests. In the nine months ended September 30, 2023, we met our cash requirements primarily through cash generated by operating activities. Our principal uses of cash in the nine months ended September 30, 2023 were for investments in new Affiliates, purchases of investment securities, distributions to Affiliate equity holders, and the return of excess capital through share repurchases. We expect investments in new Affiliates, investments in existing Affiliates, primarily through purchases of Affiliate equity interests and general partner and seed capital investments, purchases of marketable securities, 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, payment of income taxes, 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. 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: 37 Table of Contents For the Nine Months Ended September 30, (in millions) 2022 2023 Operating cash flow $ 797.4 $ 619.4 Investing cash flow (266.6) 477.9 Financing cash flow (779.1) (524.0) 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 nine months ended September 30, 2023, Cash flows from operating activities were $619.4 million, primarily from Net income of $661.9 million adjusted for distributions of earnings received for equity method investments of $421.7 million. These items were partially offset by timing differences in the cash settlement of receivables, other assets, and payables, accrued liabilities, and other liabilities of $254.6 million and for non-cash items of $215.9 million. For the nine months ended September 30, 2023, operating cash flows were primarily attributable to the controlling interest. Investing Cash Flow For the nine months ended September 30, 2023, Cash flows from investing activities were $477.9 million, primarily due to $294.0 million of cash proceeds from the Veritable Transaction and $284.3 million of net maturities and sales of investment securities. These items were partially offset by $93.8 million of investments in Affiliates. For the nine months ended September 30, 2023, investing cash flows were primarily attributable to the controlling interest. Financing Cash Flow For the nine months ended September 30, 2023, Cash flows used in financing activities were $524.0 million, primarily due to $216.4 million of distributions to non-controlling interests, $213.6 million of repurchases of common stock (net) and $54.8 million of other financing items. 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 September 30, 2023, the current redemption value of Affiliate equity interests was $477.5 million, of which $432.3 million was presented as Redeemable non-controlling interests (including $13.9 million of consolidated Affiliate sponsored investment products primarily attributable to third-party investors), and $45.2 million was presented as Other liabilities. Although the timing and amounts of these purchases are difficult to predict, we paid $41.7 million for Affiliate equity purchases and received $13.4 million for Affiliate equity issuances during the nine months ended September 30, 2023, and we expect net purchases of approximately $30 million of Affiliate equity during the remainder of 2023. In the event of a purchase, we become the owner of the cash flow associated with the purchased equity. See Notes 13 and 14 of our Consolidated Financial Statements. Share Repurchases Our Board of Directors authorized share repurchase programs in October 2023, October 2022, and January 2022 to repurchase up to 3.3 million, 3.0 million, and 2.0 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. As of September 30, 2023, we had repurchased all of the shares authorized in January 2022. During the three and nine months ended September 30, 2023, we repurchased 1.2 million and 2.0 million shares of our common stock at an average price per share of $137.34 and $132.90, respectively. As of the October 16, 2023 authorization, there were a total of 5.0 million shares available for repurchase under our share repurchase programs. 38 Table of Contents 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 represented 80% of the upfront payment based on the closing price of our common stock on the agreement date. In June 2023, we received a final share delivery of 0.4 million shares. Under this agreement we repurchased a total of 1.5 million shares at an average price of $147.29 per share. In August 2022, the Inflation Reduction Act was enacted into law and included a 1% excise tax on stock repurchases after December 31, 2022. We do not currently expect the excise tax to have a material impact on our financial position or cash flows. Debt The following table presents the carrying value of our outstanding indebtedness. See Note 7 of our Consolidated Financial Statements. (in millions) December 31, 2022 September 30, 2023 Senior bank debt $ 350.0 $ 350.0 Senior notes 1,098.7 1,099.2 Junior subordinated notes 765.9 765.9 Junior convertible securities 341.7 341.7 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. Senior Bank Debt We have a $1.25 billion revolver and a $350.0 million term loan (together, the “credit facilities”). The revolver matures on October 25, 2027 and 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. As of September 30, 2023, 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 September 30, 2023, we had senior notes outstanding, the respective principal terms of which are presented below: 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 September 30, 2023, we had junior subordinated notes outstanding, the respective principal terms of which are presented below: 39 Table of Contents 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 September 30, 2023, we had $341.7 million of principal outstanding in our 5.15% junior convertible trust preferred securities (the “junior convertible securities”), maturing in 2037. The junior convertible securities were issued by AMG Capital Trust II, a Delaware statutory trust, in October 2007. Each of the junior convertible securities represents an undivided beneficial interest in the assets of the trust. The trust’s only assets are junior subordinated convertible debentures issued to it by us, and have substantially the same payment terms as the junior convertible securities. We own all of the trust’s common securities, and have fully and unconditionally guaranteed, on a subordinated basis, the payment obligations on the junior convertible securities. We do not consolidate the trust’s financial results into our Consolidated Financial Statements. Holders of the junior convertible securities have no rights to put these securities to us. Upon conversion, holders will receive cash or shares of our common stock, or a combination thereof, at our election. We may redeem the junior convertible securities, subject to our stock trading at or above certain specified levels over specified periods, and may also repurchase junior convertible securities in the open market or in privately negotiated transactions from time to time at management’s discretion. During the nine months ended September 30, 2022, we repurchased a portion of our junior convertible securities for a purchase price of $60.9 million and as a result of these repurchases, we reduced our Deferred income tax liability (net) by $11.7 million. We did not repurchase any of our junior convertible securities during the nine months ended September 30, 2023. 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 September 30, 2023, no sales had occurred under the equity distribution program. Commitments See Note 8 of our Consolidated Financial Statements. Other Contingent Commitments See Notes 5 and 8 of our Consolidated Financial Statements. Leases As of September 30, 2023, our lease obligations were $10.1 million for the remainder of 2023, $73.3 million from 2024 through 2025, $46.7 million from 2026 through 2027, and $87.3 million thereafter. The portion of these lease obligations attributable to the controlling interest were $2.9 million for the remainder of 2023, $20.2 million from 2024 through 2025, $6.4 million from 2026 through 2027, and $10.0 million thereafter. Recent Accounting Developments See Note 2 of our Consolidated Financial Statements. Critical Accounting Estimates and Judgments Our 2022 Annual Report on Form 10‑K includes additional information about our Critical Accounting Estimates and Judgments, and should be read in conjunction with this Quarterly Report on Form 10‑Q. 40 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes to our Quantitative and Qualitative Disclosures About Market Risk for the three months ended September 30, 2023. Please refer to Item 7A of our 2022 Annual Report on Form 10-K.