The Blackstone Group

Affiliated Managers Group Inc.

(AMG – NYSE)

$164.86

Note: FLASH REPORT; more details to come, changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report: FLASH UPDATE: 1Q18 Earnings

Previous Ed.: 4Q17 and 2017 Earnings Update, Mar 2, 2018

Flash Update (earnings update to follow)

On Apr 30, 2018, Affiliated Managers announced 1Q18 results. Economic earnings of $3.92 per share outpaced the Zacks Consensus Estimate of $3.88. Also, earnings were up 22.1% year over year.

Rise in revenues and growth in AUM from the prior-year quarter benefited the results. However, higher operating expenses and outflows were the undermining factors.

Affiliated Managers’ economic net income was $215.2 million, an increase of 17.5% from the prior-year quarter.

Revenues & Expenses Rise

Total revenues grew 12.5% year over year to $612.4 million. Also, the top line beat the Zacks Consensus Estimate of $592.4 million.

Earnings before interest, taxes, depreciation and amortization were $286.5 million, up 17.5% from the year-ago quarter.

Total operating expenses increased 11.2% year over year to $435.4 million. The rise was primarily due to increase in all components except interest expenses.

As of Mar 31, 2018, total AUM was $830.9 billion, up 10.3% year over year but down nearly 1% sequentially. The quarter also witnessed net client cash outflow of $1.9 billion.

Capital & Liquidity Position Decent

As of Mar 31, 2018, Affiliated Managers had $334.2 million in cash and cash equivalents compared with $439.5 million as of Dec 31, 2017. Notably, the company had $1.56 billion of senior bank debt, relatively stable with the Dec 31, 2017 level.

Shareholders’ equity as of Mar 31, 2018, totaled $3.68 billion, down from $3.82 billion as of Dec 31, 2017.

Share Repurchase Update

During the reported quarter, the company repurchased 0.8 million shares for $151 million.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON AMG.

Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]

Affiliated Managers is a global asset management company with equity investments in leading boutique investment management firms and affiliates. It had total assets under management (AUM) of $836.3 billion as of Dec 31, 2017.

Trend of Broker Opinions: Broker sentiment on the stock remained positive as 100% of the firms in the Digest group rated the stock positive. None of the firms rendered a neutral or negative rating. Target prices provided by the firms range from a low of $215.00 to a high of $260.00 per share. The average came in at $236.00, implying a return of 25.9%.

Chief Investment Considerations:

• Favorable growth opportunities
• Strong global distribution network
• Diversified footprint
• Significant improvement in AUM
• Initiatives to strengthen retail distribution base
• Strong performance track record of affiliates
• Challenging financial and capital markets
• Elevated expenses

Positive or equivalent outlook – Six firms or 100.0%: According to these firms, Affiliated Managers is one of the best positioned asset managers in terms of earnings growth. These firms believe that the company is poised to grow with the help of its diversified distribution network, meaningful investment opportunities and solid performance record of the affiliates. Further, given the company’s strong inflows from risky products despite no similar industry trend, these firms believe that it will be able to garner significant market share once re-risking of portfolios increases. Moreover, with the rising preference of investors for alternative investment products, these firms expect Affiliated Managers to be inclined toward buying equity stakes in companies offering similar products. The company’s inorganic growth strategies remain impressive and will continue supporting revenue growth. Further, the company is upbeat about favorable investment opportunities and a gradual rise in demand for equity-oriented products. Nevertheless, these firms remain concerned about persistently rising operating expenses and increased regulations on asset managers. Further, muted demand for products in the United States remains a matter of concern, though the company is planning to enhance the domestic retail distribution business. These firms believe that it will take time before the company is able to garner benefits from these initiatives as well as the rebound in equity markets.

March 2, 2018

Overview [Note: Only highlighted material has been changed.]

Headquartered in Massachusetts, Affiliated Managers Group is a global asset manager with equity investments in a large group of investment management firms or affiliates. It offers assistance to investment management firms in strategic matters, marketing, distribution, product development and operations.

On the whole, the affiliates manage more than 500 investment products across each major product category – global, international and emerging markets equities, domestic equities, alternative and fixed income products.

The company operates its business through three principal distribution channels:

• Institutional: Through affiliates, this channel manages assets for large institutional investors worldwide, including sovereign wealth funds, foundations, endowments and retirement plans for corporations and municipalities. Moreover, affiliates manage assets for non-U.S. clients in over 50 countries. AUM acquired through this channel was $488.6 billion as of Dec 31, 2017.

• Retail: Through this channel, the company provides advisory or sub-advisory services to mutual funds and other retail-oriented products, which are distributed to retail and institutional clients directly and through intermediaries. AUM acquired through this channel was $232.7 billion as of Dec 31, 2017.

• High Net Worth: Through affiliates, the company offers advisory services to ultra-high net worth individuals, families and charitable foundations. Direct services to these clients include customized investment counseling, investment management and fiduciary services. Further, it provides advisory services to high net worth individuals through managed account relationships with intermediaries along with enhanced managed account distribution and administration capabilities to individual managed account clients through AMG Funds. AUM acquired through this channel was approximately $115 billion as of Dec 31, 2017.

Further information is available at

Key investment considerations as identified by the firms are as follows:

• Recovery of capital markets to support AUM growth
• Strong investment performance across affiliates
• Geographically diversified footprint enabling it to find new growth opportunities
• Focused on broadening distribution capabilities across its footprints
• Investors’ re-risking to enable it garner substantial market share

• Weakness in the equity markets can adversely affect revenues
• Increasing operating expenses

Note: The company’s fiscal year coincides with the calendar year.

March 2, 2018

Long-Term Growth [Note: Only highlighted material has been changed.]

According to the firms, Affiliated Managers remains a leading franchise for shareholders, given its strong position and brand name as well as good performance through market cycles. Moreover, the firms believe that with the help of a multi-boutique approach, management is providing style-specific expertise across a wide array of strategies such as growth, value and risk-managed equities, fixed income, emerging markets and alternatives, thereby trying to diversify its product line to enhance investment performance.

Further, despite an industry-wide outflow trend over the past several years, Affiliated Managers’ affiliates continued to post strong net inflows. Going forward, the firms expect this trend to persist, given the strong performance of the affiliates and expansion of distribution networks throughout the globe.

Affiliated Managers has significant organic growth prospects as well. The firms believe that the company’s portfolio of investment products provides it an edge over competitors, when it comes to fulfilling the diverse needs of its potential clients. Moreover, Affiliated Managers has an almost unbeaten track record of buying equity interests in asset management companies, which will continue to bolster organic growth.

Affiliated Managers still has considerable capabilities (strong balance sheet and liquidity position) to invest in other companies. At present, the company is targeting investments in alternatives and global strategies, given the strong investors’ preferences for the same. The firms expect the company’s investment strategies to lead to an enhancement of its global distribution platform, secular demand trends from institutional investors as well as platform diversification.

March 2, 2018

Target Price/Valuation [Note: Only highlighted material has been changed.]

Provided below is a summary of valuation and ratings as compiled by Zacks Research Digest:

Risks to the target price and ratings include deteriorating flow trends, a volatile rate environment, weak capital markets, poor investment performance, intermediary risks, intense competition and changes in the United States and foreign laws and regulations.

Recent Events [Note: Only highlighted material has been changed.]

On Jan 29, 2018, Affiliated Managers announced 4Q17 and 2017 results. Economic earnings of $4.68 per share for the quarter outpaced the Zacks Consensus Estimate of $4.55. Also, earnings were up 23.2% year over year (y/y).

Rise in revenues and solid growth in AUM benefited the results. However, higher operating expenses remained an undermining factor.

Affiliated Managers’ economic net income was $261.3 million, an increase of 23.7% from the prior-year quarter.

For 2017, economic earnings of $14.60 per share surpassed the Zacks Consensus Estimate of $14.50. Also, earnings were up 13.7% y/y. Economic net income was $824.4 million, an increase of 17.2% from the prior-year quarter.

Revenues [Note: Only highlighted material has been changed.]

In 4Q17, total revenues were $604.1 million, up 9.8% y/y. It increased 5% to $2.31 billion in 2017.

Outlook

Management expects strong organic growth in the coming years, given the growing demand for differentiated return-oriented strategies among global institutional clients.

The company expects performance fees in 1Q18 to be in the range of 20-30 cents per share.

Margins [Note: Only highlighted material has been changed.]

Total operating expenses in 4Q17 increased 4.8% y/y to $394.7 million. The rise was primarily attributable to higher compensation and related expenses. In 2017, it was $1.50 billion, up nearly 1% y/y.

Other non-operating expenses were $16 million in 4Q17, down 20% y/y. It was $40.8 million in 2017, down 31.4% y/y.

In 4Q17, operating income was $280 million, down 7.3% y/y. It was $1.11 billion in 2017, up 7.1%.

Outlook

Management expects total interest expenses to be nearly $20 million in 1Q18, flat sequentially and $80 million in 2018.

Further, the company expects amortization expenses to be nearly $47 million in 1Q18 and $190 million in 2018.

Going forward, management expects GAAP tax rate to be 25%. Additionally, the cash tax rate is projected to be 20%. As a result, the company expects $50 million in run rate tax savings, which will grow overtime.

Intangible-related deferred taxes are expected to be approximately $10 million on a quarterly basis in 2018.

Moreover, management expects the ratio of adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) to average AUM for 1Q18 to be in the range of 13.1-13.5 basis points (bps) and for 2018 it is expected to be 14.1 bps.

Also, the company projects other economic items to be around $2 million per quarter.

Economic Net Income (ENI) [Note: Only highlighted material has been changed.]

In 4Q17, ENI was $261.3 million or $4.68 per share, up from $211.2 million or $3.08 per share in 4Q16. For 2017, it was $824.4 million or $14.60 per share, up from $703.6 million or $12.84 per share.

GAAP net income was $315.4 million in 4Q17, up significantly from $150.2 million in 4Q16. It was $689.5 million in 2017, surging 45.8% y/y.

Outlook

Management expects economic earnings per share to be in the range of $16.50 to $18.50 in 2018 based on assumptions of market performance till Jan 26, 2018, 2% quarterly market growth beginning 2Q18, performance fee contribution of 13% and share repurchase plan.

Some firms increased their 2018 and 2019 ENI per share estimates to reflect 2017 results and based on the assumption of higher revenues.

Capital Structure/Other [Note: Only highlighted material has been changed.]

Balance Sheet and Asset Position

As of Dec 31, 2017, Affiliated Managers had $439.5 million in cash and cash equivalents compared with $430.8 million as of Dec 31, 2016. Further, total assets were $8.70 billion compared with $8.75 billion as of Dec 31, 2016.

Total AUM was $836.3 billion as of Dec 31, 2017, up 21.4% y/y.

Outlook: Affiliated Managers projects improvement in retail flows along with good momentum in its institutional business going forward, given the strength of the affiliates' performance and addition of several high-quality new affiliates with in-demand product sets.

Capital Deployment Activities

In 2017, Affiliated Managers repurchased nearly $415.7 million worth of shares. In January 2018, the company authorized repurchase of up to 3.4 million shares, this brought the total share buyback authorization to 5 million shares.

On Feb 23, 2018, Affiliated Managers paid a quarterly cash dividend of 30 cents per share to shareholders on record as of Feb 8. This represented 50% hike from the prior payout.

On Nov 22, 2017, Affiliated Managers paid a quarterly cash dividend of 20 cents per share to shareholders on record as of Nov 9.

Outlook: Based on the expectations of increased cash flow and the pacing of new investments, the company plans to repurchase nearly $300 million worth shares in 1H18.

Further, the company expects weighted average share count of 54.9 million in 2018.

March 2, 2018