S&P Raises Outlook on AMG (AMG) to Positive; Notes Unique Business Model, Strong Net Inflows

S&P Global Ratings today said it revised its outlook on Affiliated Managers Group Inc. (NYSE: AMG) to positive from stable. We also affirmed our 'BBB+/A-2' issuer credit ratings, 'BBB+' senior unsecured rating, and 'BBB-' preferred stock rating on AMG.

"The outlook revision reflects AMG's unique business model, which continues to attract new affiliates that have enhanced the diversity of the company's business profile," said S&P Global Ratings credit analyst Sebnem Caglayan. "The outlook revision also reflects the company's demonstrated track record of strong net inflows that have boosted AUM." With the recent announcement of the 100% acquisition of Petershill Fund I's minority equity interest in five affiliates, AMG is expected to reach 41 affiliates with approximately $700 billion in AUM (across more than 500 products and strategies) on a pro forma basis, compared with 34 affiliates and $611 billion in AUM at year-end 2015.

We expect the company to maintain leverage, as measured by debt to adjusted EBITDA, at or slightly below 2.0x in the next 18-24 months, and we expect AMG to maintain its solid market position in the asset management industry. AMG's strategy is building a portfolio of investments in asset management firms whose principals have the incentive to deliver the same superior investment performance to their clients as an affiliate of AMG as they did when they were independent. This way, the affiliates are able to prosper and grow organically, resulting in natural growth in cash flows from the affiliates to the holding company.

We believe AMG's unique business model contributes to the stability of its cash flows. AMG typically purchases majority (but not 100%) interests in boutique asset management firms, leaving the principals with a significant ownership interest. These asset management firms (known as affiliates) continue to operate independently but are typically structured to pass along a fixed portion of revenue to the holding company. This is the primary source of cash flow to the holding company for servicing its debt. In our view, this arrangement results in more stable cash flows than at traditional asset managers. AMG's owners' allocation generally has a priority claim on affiliates' revenues. Those allocations are fixed per the operating agreement. Consequently, if an affiliate's revenue declines, its principals must absorb any operating expenses not covered by the operating allocation through their portion of the owners' allocation. Conversely, if an affiliate's revenue rises, the affiliate's principals and AMG share in the growth.

The positive outlook reflects our expectation that if AMG continues to grow both organically and through affiliate acquisitions and generate strong cash flows from its affiliates while maintaining leverage at or slightly below 2.0x in the next 18-24 months, we could raise the ratings. The outlook also assumes that although debt leverage may temporarily spike to near 2x or slightly higher immediately following an investment in an affiliate, we expect it to return to less than 2x within a short period of time, likely two quarters.

If market conditions deteriorate such that leverage increases consistently closer to 2.0x, or if performance deteriorates and affiliates suffer persistent outflows, we could revise the outlook to stable. Furthermore, if AMG makes another sizable investment in a new affiliate and we do not expect the company will quickly reduce debt leverage to less than 2x, then we could lower the rating.

You May Also Be Interested In

• Evercore ISI starts 'accelerating AI play' AMD (AMD) at Outperform
• Core Scientific (CORZ) to Expand its Denton
• Piper Sandler Upgrades CNO Financial Group (CNO) to Overweight