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Item 7. Management’s Discussion and Analysis

2024-02-16 compared with 2023-02-17 · 127 added, 184 removed, 351 unchanged (47% of the section changed)

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Executive Overview

AMG is a leading partner to independent investment management firms globally.

AMG is a strategic partner to leading independent investment 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.

With their entrepreneurial, investment-centric cultures and alignment of interests with clients through direct equity ownership by firm principals, independent firms have fundamental competitive advantages in offering unique return streams to the marketplace.

Through AMG’s distinctive approach, we enhance these advantages to magnify the long-term success of our Affiliates and actively support their independence.

Our innovative model enables each Affiliate’s management team to retain autonomy and significant equity ownership in their firm, while they leverage our strategic capabilities and insight, including growth capital, product strategy and development, capital formation, and incentive alignment and succession planning.

As of December 31, 2023, our aggregate assets under management were approximately $673 billion across a diverse range of private markets, liquid alternatives, and differentiated long-only investment strategies.

In the third quarter of 2023, we completed a minority investment in Forbion Group Holding B.V., a private markets firm focused on investing in high-quality life sciences companies, and in the fourth quarter of 2023, we completed a minority investment in Ara Partners Group, LLC, a private markets firm specializing in industrial decarbonization.

Following the close of the transactions, Affiliate management continues to hold a significant majority of the equity of the businesses and directs the day-to-day operations.

In the third quarter of 2023, we completed the sale of our equity interest in Veritable, LP (“Veritable”) (the “Veritable Transaction”).

Pursuant to the terms of the agreement, under which a third party acquired 100% of the outstanding equity interests in Veritable, we received $287.4 million in cash, net of transaction costs.

Our gain on the transaction was $133.1 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.

In the fourth quarter of 2022, we completed the sale of our equity interest in Baring Private Equity Asia (“BPEA”) 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 were subject to a six-month lock-up, which expired in April 2023), and other investments.

Our gain on the transaction was $641.9 million.

Operating Performance Measures

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The following table presents our key aggregate operating performance measures:

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As of and for the Years Ended December 31,

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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.

For certain of our Affiliates accounted for under the equity method, we report the Affiliate’s aggregate fees one quarter in arrears.

Aggregate fees are provided in addition to, but not as a substitute for, Consolidated revenue or other GAAP performance measures.

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We continue to see demand for alternative strategies, as evidenced by our net inflows in this category for the year ended December 31, 2023.

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.

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.

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(1) Alternatives include private markets strategies, which accounted for 15% of our assets under management as of December 31, 2021 and 2022.

(1) Alternatives include private markets strategies, which accounted for 15% and 17% of our assets under management as of December 31, 2022 and 2023, respectively.

The following table presents changes in our assets under management by strategy:

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(in billions) Alternatives Global Equities U.S.

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New investments 8.1 — — — 8.1

Veritable (1)

(0.2) — — (17.6) (17.8)

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(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.

(1) Assets under management attributable to Veritable as of the closing date.

(2) Foreign exchange reflects the impact of translating the assets under management of our Affiliates whose functional currency is not the U.S.

dollar into our functional currency.

(3) Other includes assets under management attributable to product transitions and reclassifications.

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The following table presents changes in our assets under management by client type:

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(in billions) Institutional Retail High Net Worth Total

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New investments 7.9 — 0.2 8.1

Veritable (1)

(0.2) — (17.6) (17.8)

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(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.

(1) Assets under management attributable to Veritable as of the closing date.

(2) Foreign exchange reflects the impact of translating the assets under management of our Affiliates whose functional currency is not the U.S.

dollar into our functional currency.

(3) Other includes assets under management attributable to product transitions and reclassifications.

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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.

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(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.

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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.

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 December 31, 2023, 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.

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 $5,066.6 million in 2023, a decrease of $493.9 million or 9% as compared to 2022.

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.

The decrease in our aggregate fees was due to a $348.7 million or 6% decrease from asset-based fees and a $145.2 million or 3% decrease 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.

These decreases were partially offset by changes in the composition of our assets under management.

Financial and Supplemental Financial Performance Measures

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Net income (controlling interest) $ 565.7 $ 1,145.9 N.M.

$ 1,145.9 N.M.

$ 672.9 (41) %

Adjusted EBITDA (controlling interest) (2)

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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

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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.

Adjusted EBITDA (controlling interest) decreased $118.1 million or 11% in 2023, primarily due to a $493.9 million or 9% decrease in aggregate fees.

Adjusted EBITDA (controlling interest) decreased more than aggregate fees on a percentage basis primarily due to the recognition of performance-based fees earned by Affiliates in which we hold less of an economic interest.

Net income (controlling interest) decreased $473.0 million or 41% in 2023.

This decrease was primarily due to a $508.8 million decrease in Affiliate Transaction gains and the impact of a $58.1 million decrease in Equity method income (net).

These decreases were partially offset by a $169.1 million decrease in Income tax expense attributable to the controlling interest.

We believe Economic net income (controlling interest) is an important supplemental financial performance measure because it represents our performance before non-cash expenses relating to 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.

Economic net income (controlling interest) decreased $79.4 million or 10% in 2023 primarily due to a $118.1 million or 11% decrease in Adjusted EBITDA (controlling interest).

Results of Operations

The following discussion includes the key operating performance measures and financial results of our consolidated and equity method Affiliates.

Our consolidated Affiliates’ financial results are included in our Consolidated revenue, Consolidated expenses, and Investment and other income, and our share of our equity method Affiliates’ financial results is reported, net of intangible amortization and impairments, in Equity method income (loss) (net).

Consolidated Revenue

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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:

Consolidated revenue is generally determined by the level of our consolidated Affiliates’ average assets under management and the composition of these assets across our consolidated Affiliates’ investment strategies with different asset-based fee ratios and performance-based fees.

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

For the Years Ended December 31,

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Consolidated revenue $ 2,412.4 $ 2,329.6 (3) % $ 2,057.8 (12) %

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.

Our Consolidated revenue decreased $271.8 million or 12% in 2023, due to a $165.5 million or 7% decrease from asset-based fees and a $106.3 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

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The following table presents our Consolidated expenses:

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For the Years Ended December 31,

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Total consolidated expenses $ 1,631.4 $ 1,673.5 3 % $ 1,496.6 (11) %

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.

Compensation and related expenses decreased $164.0 million or 15% in 2023, primarily due to a $161.9 million decrease in compensation correlated to the decrease in Consolidated revenue and a $3.0 million decrease in share-based compensation.

Selling, general and administrative expenses decreased $27.3 million or 7% in 2023, primarily due to a $26.0 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.

There were no significant changes in Intangible amortization and impairments in 2023.

Interest expense increased $9.4 million or 8% in 2023, primarily due to a $12.1 million increase resulting from higher interest rates on our senior unsecured term loan facility (the “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 in 2023.

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)

Other expenses (net) increased $11.1 million or 32% in 2023, primarily due to a $13.0 million increase in expenses related to changes in the values of contingent payment obligations.

Equity Method Income (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).

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).

For certain of our Affiliates accounted for under the equity method, we report the Affiliate’s financial results in our Consolidated Financial Statements one quarter in arrears.

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.

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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):

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For the Years Ended December 31,

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Equity method intangible impairments (52.0) (50.0) (4) % (9.6) (81) %

Equity method income (loss) (net) $ (43.4) $ 242.5 N.M.

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(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 income (net) $ 242.5 $ 338.1 39 % $ 280.0 (17) %

Our equity method revenue decreased $222.1 million or 7% in 2023, due to a $183.2 million or 6% decrease from asset-based fees and a $38.9 million or 1% decrease from performance-based fees, primarily in our liquid alternative strategies.

The decrease in asset-based fees was principally due to the impact of the BPEA Transaction, partially offset by changes in the composition of our assets under management.

Equity method earnings decreased $121.6 million or 24% in 2023, while equity method revenue decreased $222.1 million or 7%.

Equity method earnings decreased 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 less of an economic interest.

Equity method intangible amortization decreased $23.1 million or 21% in 2023, primarily due to a $22.9 million decrease in amortization expense due to a decrease in actual and expected client attrition for certain definite-lived acquired client relationships and an $8.4 million decrease due to the BPEA Transaction.

These decreases were partially offset by an $8.2 million increase in amortization expense due to investments in new Affiliates.

Equity method intangible impairments decreased $40.4 million or 81% in 2023.

See Note 9 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.

Affiliate Transaction gains

For the years ended December 31, 2022, and 2023, we recorded gains of $641.9 million on the BPEA Transaction and $133.1 million on the Veritable Transaction, respectively.

See Notes 8 and 9 of our Consolidated Financial Statements.

Investment and Other Income

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(in millions) 2021 2022 % Change 2023 % Change

Investment and other income $ 34.1 $ 117.6 N.M.

$ 110.3 (6) %

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(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.

Investment and other income $ 117.6 $ 110.3 (6) % $ 117.1 6 %

Investment and other income increased $6.8 million or 6% in 2023, primarily due to a $29.2 million net increase in realized and unrealized gains on Other investments and a $21.1 million increase in interest income.

These increases were partially offset by a $38.9 million net decrease in realized and unrealized gains on Investments in marketable securities.

Income Tax Expense

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The following table presents our Income tax expense:

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(in millions) 2021 2022 % Change 2023 % Change

Income tax expense $ 81.4 $ 251.0 N.M.

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(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.

Income tax expense $ 251.0 $ 358.3 43 % $ 185.3 (48) %

Income tax expense decreased $173.0 million or 48% in 2023, primarily due to a decrease in Income before income taxes attributable to the controlling interest and higher discrete foreign and domestic tax benefits realized on our final 2022 tax returns as a result of the change in the mix of foreign and domestic income.

See Note 19 of our Consolidated Financial Statements.

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

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(in millions) 2021 2022 % Change 2023 % Change

Net income $ 427.0 $ 890.1 N.M.

$ 1,388.1 56 %

Net income $ 890.1 $ 1,388.1 56 % $ 906.1 (35) %

Net income (non-controlling interests) 324.4 242.2 (25) % 233.2 (4) %

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(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.

Net income (controlling interest) decreased $473.0 million or 41% in 2023, primarily due decreases in Affiliate Transaction gains and Equity method income (net).

These decreases were partially offset by a decrease in Income tax expense attributable to the controlling interest.

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 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.

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.

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 and certain non-income based taxes, depreciation, amortization, impairments, gains and losses related to the BPEA and Veritable 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):

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For the Years Ended December 31,

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199.9 195.0 128.5

BPEA Transaction (2)

Affiliate Transactions (2)

— (743.6) (162.7)

Other items (3)

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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).

Our share of these Affiliates’ amortization and impairments is included in Equity method income (net).

The following table presents the Intangible amortization and impairments shown above:

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Total $ 199.9 $ 195.0 $ 128.5

(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.

(2) The year ended December 31, 2022 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.

The year ended December 31, 2023 includes Veritable Transaction gain of $133.1 million and realized gains on ordinary shares of EQT of $29.6 million.

(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

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.

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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.

Further, we adjust for gains and losses related to the BPEA and Veritable 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).

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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

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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.

We believe the inclusion of net shares under a treasury stock method best reflects the benefit of the increase in available capital resources (which could be used to repurchase shares of common stock) that occurs when these securities are converted and we are relieved of our debt obligation.

This method does not take into account any increase or decrease in our cost of capital in an assumed conversion.

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52.5 45.5 57.3

BPEA Transaction (3)

Affiliate Transactions (3)

— (576.0) (122.1)

Other economic items (4)

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(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.

(2) For the years ended December 31, 2022, and 2023, intangible-related deferred taxes have been adjusted to eliminate benefits of $13.5 million related to the BPEA Transaction and $28.9 million related to the Veritable Transaction, respectively.

(3) The year ended December 31, 2022 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.

The year ended December 31, 2023 includes Veritable Transaction gain of $133.1 million and realized gains on EQT shares of $29.6 million, net of $40.6 million income tax expense.

(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.

For the years ended December 31, 2021, 2022, and 2023, other economic items were net of income tax expense (benefit) of $21.8 million, $(6.4) million, and $5.2 million, respectively.

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Cash and cash equivalents were $813.6 million as of December 31, 2023 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.

Our principal uses of cash in 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.

In 2023, we met our cash requirements primarily through cash generated by operating activities, proceeds from the Veritable Transaction, and proceeds from the sale of our remaining ordinary shares of EQT.

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, payment of income taxes, purchases of marketable securities, 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.

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In addition, we may draw funding from the debt and equity capital markets, and our credit ratings, among other factors, allow us to access these sources of funding on favorable terms.

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Operating cash flows are calculated by adjusting Net income for other significant sources and uses of cash, significant non-cash items, and timing differences in the cash settlement of assets and liabilities.

For the 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.

For the year ended December 31, 2023, Cash flows from operating activities were $874.3 million, primarily from Net income of $906.1 million adjusted for $490.8 million of distributions of earnings received from equity method investments and non-cash items of $303.3 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 $228.6 million.

In 2023, 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.

For the year ended December 31, 2023, Cash flows from investing activities were $264.5 million, primarily due to $294.0 million of cash proceeds from the Veritable Transaction and $277.4 million of net maturities and sales of investment securities.

These items were partially offset by $294.7 million of investments in Affiliates.

In 2023, 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.

For the year ended December 31, 2023, Cash flows used in financing activities were $758.3 million, primarily due to $341.9 million of repurchases of common stock (net), $271.3 million of distributions to non-controlling interests, $55.3 million of other financing items, and $54.0 million of Affiliate equity purchases, net of issuances.

Affiliate Equity

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Affiliate equity holders are also permitted to sell their equity interests to other individuals or entities in certain cases, subject to our approval or other restrictions.

As of 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.

As of December 31, 2023, the current redemption value of Affiliate equity interests was $447.3 million, of which $393.4 million was presented as Redeemable non-controlling interests (including $11.8 million of consolidated Affiliate sponsored investment products primarily attributable to third-party investors), and $53.9 million was included in Other liabilities.

Although the timing and amounts of these purchases are difficult to predict, we paid $67.4 million for Affiliate equity purchases and received $13.4 million for Affiliate equity issuances in 2023, and we expect net purchases of approximately $100 million of Affiliate equity in 2024.

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

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Share Repurchases

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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.

Our Board of Directors authorized share repurchase programs in January 2022, October 2022, and October 2023 to repurchase up to 2.0 million, 3.0 million, and 3.3 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, 2023, we repurchased 3.0 million shares of our common stock at an average price per share of $132.99.

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.

As of December 31, 2023, we had repurchased all of the shares in the repurchase program authorized in January 2022, and there were a total of 4.2 million shares available for repurchase under our 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.

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 provision for a 1% excise tax on repurchases of our common stock.

This provision, which was effective for the Company beginning January 1, 2023, did not have a material impact on our Consolidated Financial Statements for the year ended December 31, 2023.

We do not currently expect the excise tax to have a material impact on our financial position or cash flows.

We record the excise tax as part of the cost basis of our common stock repurchased.

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

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

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.

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.

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As of December 31, 2023, we had senior notes outstanding, the respective principal terms of which are presented below:

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Senior Notes 2025

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Potential call date Any time Any time Any time

On February 15, 2024, our $400.0 million 4.25% senior notes due 2024 matured and were fully repaid.

Junior Subordinated Notes

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We estimate that these deductions will generate annual deferred tax liabilities of approximately $9 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.

For the year ended December 31, 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 $11.4 million.

We did not repurchase any of our junior convertible securities during the year ended December 31, 2023.

Equity Distribution Program

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See Note 7 of our Consolidated Financial Statements.

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See Note 8 of our Consolidated Financial Statements.

Other Contingent Commitments

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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.

We completed our annual qualitative goodwill impairment assessment as of September 30, 2023 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.

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Indefinite-Lived Acquired Client Relationships

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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.

For purposes of our assessments, we consider various qualitative and quantitative factors to 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.

For the year ended December 31, 2023, we completed our annual assessment and only a significant decline in the fair values of these assets would result in an impairment.

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 perform these assessments if certain triggering events occur or annually during the fourth quarter.

We first consider whether certain qualitative and quantitative factors (including discount rates) indicate an increased likelihood of a decline in the fair value of an Affiliate during the reporting period.

If such a decline is identified, and it is likely that an investment’s fair value may have declined below its carrying value, we perform a quantitative assessment to determine if an impairment exists.

Impairments are recorded as an expense in Equity method income (net) to reduce the carrying value of the Affiliate to its fair value.

When we quantitatively test our equity method investments for impairment, we typically use valuation methods such as discounted cash flow analyses.

In these analyses, our most significant assumptions relate to growth rates of projected assets under management, client attrition, asset- and performance-based fees, expenses, 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.

We and our Affiliates are subject to income taxes in the U.S.

and certain foreign jurisdictions.

Our income tax expense,

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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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis