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AFFILIATED MANAGERS GROUP, INC. - Quarter Report: 2010 June (Form 10-Q)


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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549


FORM 10-Q

(Mark One)    

ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                            

Commission File Number 001-13459


Affiliated Managers Group, Inc.
(Exact name of registrant as specified in its charter)

Delaware   04-3218510
(State or other jurisdiction of
incorporation or organization)		   (IRS Employer
Identification Number)

600 Hale Street, Prides Crossing, Massachusetts 01965
(Address of principal executive offices)

(617) 747-3300
(Registrant's telephone number, including area code)


        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
 (Do not check if a smaller reporting company)		   Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        There were 51,097,659 shares of the registrant's common stock outstanding on August 3, 2010.


PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

AFFILIATED MANAGERS GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except per share data)

(unaudited)

 
   For the Three Months
Ended June 30, 		  For the Six Months
Ended June 30, 		 
 
   2009   2010   2009   2010  

Revenue

   $ 201,246   $ 332,080   $ 379,721   $ 583,102  

Operating expenses:

                          
 

Compensation and related expenses

     103,373     142,740     187,533     261,969  
 

Selling, general and administrative

     30,953     72,126     62,413     117,365  
 

Amortization of intangible assets

     8,044     9,592     16,138     18,528  
 

Depreciation and other amortization

     3,243     3,375     6,482     6,401  
 

Other operating expenses

     4,736     8,416     10,486     14,470  
                   

    150,349     236,249     283,052     418,733  
                   

Operating income

     50,897     95,831     96,669     164,369  
                   

Non-operating (income) and expenses:

                          
 

Investment and other income

     (7,191 )   (723 )   (6,950 )   (3,545 )
 

Income from equity method investments

     (7,351 )   (9,861 )   (13,767 )   (19,007 )
 

Investment (income) loss from investments in partnerships

     (14,947 )   8,585     (11,152 )   4,493  
 

Interest expense

     15,828     16,315     32,404     32,428  
 

Imputed interest expense

     3,365     6,374     6,737     10,112  
                   

    (10,296 )   20,690     7,272     24,481  
                   

Income before income taxes

     61,193     75,141     89,397     139,888  

Income taxes

    
4,944		    
16,923		    
9,908		    
28,910		  
                   

Net income

     56,249     58,218     79,489     110,978  

Net income (non-controlling interests)

    
(30,671
)		  
(41,411
)		  
(51,549
)		  
(72,697
)

Net (income) loss (non-controlling interests in partnerships)

     (14,599 )   8,397     (10,836 )   4,386  
                   

Net Income (controlling interest)

   $ 10,979   $ 25,204   $ 17,104   $ 42,667  
                   

Average shares outstanding—basic

     41,450,659     44,610,506     40,740,486     43,491,622  

Average shares outstanding—diluted

     43,159,140     47,635,230     42,082,991     46,539,949  

Earnings per share—basic

  
$
0.26		  
$
0.56		  
$
0.42		  
$
0.98		  

Earnings per share—diluted

   $ 0.26   $ 0.53   $ 0.41   $ 0.92  

Supplemental disclosure of total comprehensive income:

                          

Net income

   $ 56,249   $ 58,218   $ 79,489   $ 110,978  

Other comprehensive income (loss)

     24,676     (24,189 )   14,804     1,203  
                   

Comprehensive income

     80,925     34,029     94,293     112,181  

Comprehensive income (non-controlling interests)

    
(45,270
)		  
(33,014
)		  
(62,385
)		  
(68,311
)
                   

Comprehensive income (loss) (controlling interest)

   $ 35,655   $ 1,015   $ 31,908   $ 43,870  
                   

The accompanying notes are an integral part of the Consolidated Financial Statements.

2


AFFILIATED MANAGERS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 
   December 31,
2009 		  June 30,
2010 		 

Assets

              

Current assets:

              
 

Cash and cash equivalents

   $ 259,487   $ 220,543  
 

Investment advisory fees receivable

     140,118     200,395  
 

Investments in partnerships

     93,809     89,554  
 

Investments in marketable securities

     56,690     62,802  
 

Unsettled fund share receivables

     —     55,817  
 

Prepaid expenses and other current assets

     35,478     30,007  
           
   

Total current assets

     585,582     659,118  

Fixed assets, net

    
62,402		    
68,086		  

Equity investments in Affiliates

     658,332     635,321  

Acquired client relationships, net

     571,573     1,397,034  

Goodwill

     1,413,217     1,983,468  

Other assets

     99,800     195,426  
           
   

Total assets

   $ 3,390,906   $ 4,938,453  
           

Liabilities and Stockholders' Equity

              

Current liabilities:

              
 

Accounts payable and accrued liabilities

   $ 117,227   $ 194,759  
 

Unsettled fund share payables

     —     50,446  
 

Payables to related party

     109,888     90,791  
           
   

Total current liabilities

     227,115     335,996  

Senior debt

    
—		    
659,500		  

Senior convertible securities

     456,976     415,856  

Junior convertible trust preferred securities

     507,358     508,588  

Deferred income taxes

     322,671     464,151  

Other long-term liabilities

     26,066     174,545  
           
   

Total liabilities

     1,540,186     2,558,636  

Redeemable non-controlling interests

    
368,999		    
344,020		  

Equity:

              
 

Common stock

     458     508  
 

Additional paid-in capital

     612,091     880,729  
 

Accumulated other comprehensive income

     45,958     47,161  
 

Retained earnings

     873,137     915,804  
           

    1,531,644     1,844,202  
 

Less: treasury stock, at cost

     (421,954 )   (356,341 )
           
   

Total stockholders' equity

     1,109,690     1,487,861  
 

Non-controlling interests

    
281,946		    
462,015		  
 

Non-controlling interests in partnerships

     90,085     85,921  
           
   

Total equity

     1,481,721     2,035,797  
           
   

Total liabilities and equity

   $ 3,390,906   $ 4,938,453  
           

The accompanying notes are an integral part of the Consolidated Financial Statements.

3


AFFILIATED MANAGERS GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(dollars in thousands)

(unaudited)

 
   Total Stockholders' Equity    
    
    
  
 
   Common
Stock 		  Additional
Paid-In
Capital 		  Accumulated
Other
Comprehensive
Income (Loss) 		  Retained
Earnings 		  Treasury
Shares
at Cost 		  Non-
controlling
interests 		  Non-
controlling
interests in
partnerships 		  Total
Equity 		 

December 31, 2009

   $ 458   $ 612,091   $ 45,958   $ 873,137   $ (421,954 ) $ 281,946   $ 90,085   $ 1,481,721  

Stock issued under option and other incentive plans

     —     (41,202 )   —     —     65,604     —     —     24,402  

Tax benefit of option exercises

     —     6,795     —     —     —     —     —     6,795  

Issuance costs

     —     (228 )   —     —     —     —     —     (228 )

Changes in Affiliate equity value

     —     (1,774 )   —     —     —     394     —     (1,380 )

Settlement of forward equity sale agreement

     24     99,980     —     —     —     —     —     100,004  

Conversion of zero coupon convertible notes

     9     47,449     —     —     9     —     —     47,467  

Share-based payment arrangements

     —     10,730     —     —     —     —     —     10,730  

Distributions to non-controlling interests

     —     —     —     —     —     (90,564 )   —     (90,564 )

Investments in Affiliates

     17     146,888     —     —     —     197,542     —     344,447  

Other changes in non-controlling interests in partnerships

     —     —     —     —     —     —     222     222  

Net Income

     —     —     —     42,667     —     72,697     (4,386 )   110,978  

Other comprehensive income

     —     —     1,203     —     —     —     —     1,203  
                                   

June 30, 2010

   $ 508   $ 880,729   $ 47,161   $ 915,804   $ (356,341 ) $ 462,015   $ 85,921   $ 2,035,797  
                                   

The accompanying notes are an integral part of the Consolidated Financial Statements.

4


AFFILIATED MANAGERS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 
   For the Three
Months
Ended June 30, 		  For the Six
Months
Ended June 30, 		 
 
   2009   2010   2009   2010  

Cash flow from operating activities:

                          
 

Net Income

   $ 56,249   $ 58,218   $ 79,489   $ 110,978  

Adjustments to reconcile Net Income to net cash flow from operating activities:

                          
 

Amortization of intangible assets

     8,044     9,592     16,138     18,528  
 

Amortization of issuance costs

     1,841     1,847     3,636     3,694  
 

Depreciation and other amortization

     3,243     3,375     6,482     6,401  
 

Deferred income tax provision

     4,866     8,997     16,828     17,655  
 

Imputed Interest Expense

     3,365     6,374     6,737     10,112  
 

Income from equity method investments, net of amortization

     (7,351 )   (9,861 )   (13,767 )   (19,007 )
 

Distributions received from equity method investments

     9,879     13,577     28,820     36,764  
 

Tax benefit from exercise of stock options

     1,459     1,802     1,459     2,076  
 

Stock option expense

     1,958     3,159     3,135     6,803  
 

Affiliate equity expense

     3,469     3,432     6,719     6,800  
 

Other adjustments

     (21,189 )   13,483     (18,580 )   9,548  

Changes in assets and liabilities:

                          
 

(Increase) decrease in investment advisory fees receivable

     (11,447 )   (24,391 )   17,895     (25,329 )
 

(Increase) decrease in investments in partnerships

     (648 )   (787 )   331     (504 )
 

(Increase) decrease in prepaids and other current assets

     (9,470 )   9,039     (9,213 )   19,768  
 

(Increase) decrease in other assets

     1,085     2,987     2,915     (8,125 )
 

(Increase) decrease in unsettled fund shares receivable

     —     96,487     —     (2,224 )
 

Increase (decrease) in unsettled fund shares payable

     —     (106,089 )   —     2,265  
 

Increase (decrease) in accounts payable, accrued liabilities and other long-term liabilities

     26,861     23,850     (61,119 )   (13,092 )
                   
   

Cash flow from operating activities

     72,214     115,091     87,905     183,111  
                   

Cash flow used in investing activities:

                          
 

Investments in Affiliates

     (1,411 )   (665,368 )   (1,411 )   (793,036 )
 

Purchase of fixed assets

     (663 )   (2,002 )   (1,215 )   (3,107 )
 

Purchase of investment securities

     (2,911 )   (15,484 )   (11,747 )   (30,403 )
 

Sale of investment securities

     —     —     5,720     11,784  
                   
   

Cash flow used in investing activities

     (4,985 )   (682,854 )   (8,653 )   (814,762 )
                   

Cash flow from (used in) financing activities:

                          
 

Borrowings of senior bank debt

     —     782,500     —     1,017,500  
 

Repayments of senior bank debt

     —     (293,000 )   (233,514 )   (358,000 )
 

Issuance of common stock

     11,622     22,959     11,622     25,414  
 

Issuance costs

     —     (147 )   (921 )   (229 )
 

Excess tax benefit from exercise of stock options

     1,086     4,358     1,086     4,719  
 

Settlement of forward equity sale agreement

     —     100,004     144,258     100,004  
 

Note payments

     (2,932 )   (520 )   (4,479 )   (25,891 )
 

Distributions to non-controlling interests

     (25,506 )   (23,779 )   (87,125 )   (60,692 )
 

Affiliate equity issuances and repurchases

     (16,421 )   (6,893 )   (32,806 )   (109,532 )
 

Subscriptions (redemptions) of non-controlling interests in partnerships

     508     787     (471 )   503  
                   
   

Cash flow from (used in) financing activities

     (31,643 )   586,269     (202,350 )   593,796  
                   

Effect of foreign exchange rate changes on cash and cash equivalents

     1,492     (1,714 )   1,036     (1,089 )

Net increase (decrease) in cash and cash equivalents

     37,078     16,792     (122,062 )   (38,944 )

Cash and cash equivalents at beginning of period

     237,291     203,751     396,431     259,487  
                   

Cash and cash equivalents at end of period

   $ 274,369   $ 220,543   $ 274,369   $ 220,543  
                   

Supplemental disclosure of non-cash financing activities:

                          
 

Notes received for Affiliate equity sales

   $ 593   $ 1,893   $ 4,060   $ 7,642  
 

Payables recorded for Affiliate equity purchases

     671     —     671     15,284  
 

Stock issued for conversion of zero coupon senior convertible note

     —     47,457     —     47,457  
 

Stock issued for Investments in Affiliates

     —     146,906     —     146,906  
 

Stock issued for settlement of forward equity sale agreement

     —     44,450     —     44,450  
 

Payables recorded under contingent payment arrangements

     —     15,283     —     64,250  

The accompanying notes are an integral part of the Consolidated Financial Statements.

5


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Basis of Presentation

        The consolidated financial statements of Affiliated Managers Group, Inc. ("AMG" or the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments considered necessary for a fair statement of the results have been included. All intercompany balances and transactions have been eliminated. All dollar amounts in these notes (except information that is presented on a per share, per security, per note or per contract basis) are stated in thousands, unless otherwise indicated. Certain reclassifications have been made to the prior period's financial statements to conform to the current period's presentation. Operating results for interim periods are not necessarily indicative of the results that may be expected for any other period or for the full year. The Company's Annual Report on Form 10-K (as amended, the "Annual Report on Form 10-K") for the fiscal year ended December 31, 2009 includes additional information about AMG, its operations, its financial position and its accounting policies, and should be read in conjunction with this Quarterly Report on Form 10-Q.

2.     Senior Bank Debt

        The Company has a $770,000 revolving credit facility (the "Revolver") and pays interest on any outstanding obligations at specified rates (based either on the Eurodollar rate or the prime rate as in effect from time to time) that vary depending on the Company's credit rating. Subject to the agreement of lenders to provide additional commitments, the Company has the option to increase the Revolver by up to an additional $175,000.

        The Revolver, which will mature in February 2012, contains financial covenants with respect to leverage and interest coverage. The Revolver also contains customary affirmative and negative covenants, including limitations on indebtedness, liens, cash dividends and fundamental corporate changes. Borrowings under the Revolver are collateralized by pledges of the substantial majority of capital stock or other equity interests owned by the Company. At June 30, 2010, the Company had $659,500 of outstanding borrowings under the Revolver; and, on July 2, 2010, used the net proceeds from the settlement of sales under its forward equity program to pay down the balance of the Revolver to approximately $465,000.

3.     Senior Convertible Securities

        The carrying values of the senior convertible securities are as follows:

 
   December 31, 2009   June 30, 2010  
 
   Carrying
Value 		  Principal amount
at maturity 		  Carrying
Value 		  Principal amount
at maturity 		 

2008 senior convertible notes

   $ 409,594   $ 460,000   $ 415,856   $ 460,000  

Zero coupon senior convertible notes

     47,382     50,135     —     —  
                   

Total senior convertible securities

   $ 456,976   $ 510,135   $ 415,856   $ 460,000  
                   

6


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2008 Senior Convertible Notes

        In August 2008, the Company issued $460,000 of senior convertible notes due 2038 ("2008 senior convertible notes"). The 2008 senior convertible notes bear interest at 3.95%, payable semi-annually in cash. The Company is accreting the carrying value to the principal amount at maturity using an interest rate of 7.4% (over its expected life of five years). Each security is convertible into 7.959 shares of the Company's common stock (at an initial conversion price of $125.65) upon the occurrence of certain events, as follows: (i) during any fiscal quarter, if the closing price of the Company's common stock, as measured over a specified time period during the preceding fiscal quarter, is equal to or greater than 130% of the conversion price of the notes on the last day of such preceding fiscal quarter; (ii) during a certain window of time, if the trading price per $1,000 principal amount of the notes for each day during a specified period is less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate of the notes on such day; (iii) upon the occurrence of specified corporate transactions; (iv) after the notes have been called for redemption; and (v) anytime after February 15, 2038. Upon conversion, the Company may elect to pay cash, deliver shares of its common stock, or a combination thereof. The holders of the 2008 senior convertible notes may require the Company to repurchase the notes in August of 2013, 2018, 2023, 2028 and 2033. The Company may redeem the notes for cash (subject to the holders' right to convert) at any time on or after August 15, 2013.

        The 2008 senior convertible notes are considered contingent payment debt instruments under federal income tax regulations. These regulations require the Company to deduct interest in an amount greater than its reported interest expense, which will result in annual deferred tax liabilities of approximately $11.2 million. These deferred tax liabilities will be reclassified directly to stockholders' equity if the Company's common stock is trading above certain thresholds at the time of the conversion of the notes.

Zero Coupon Senior Convertible Notes

        In the second quarter of 2010, the Company called the zero coupon senior convertible notes for redemption. In lieu of redemption, all of the holders elected to convert their notes into shares of the Company's common stock. The Company issued 873,626 shares of common stock to settle these conversions. All of the Company's zero coupon senior convertible notes have been cancelled and retired.

4.     Junior Convertible Trust Preferred Securities

        The carrying values of the Company's junior convertible trust preferred securities are as follows:

 
   December 31, 2009   June 30, 2010  
 
   Carrying
Value 		  Principal amount
at maturity 		  Carrying
Value 		  Principal amount
at maturity 		 

2006 junior convertible trust preferred securities

   $ 212,466   $ 300,000   $ 213,010   $ 300,000  

2007 junior convertible trust preferred securities

     294,892     430,820     295,578     430,820  
                   

Total junior convertible securities

   $ 507,358   $ 730,820   $ 508,588   $ 730,820  
                   

7


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

        In 2006, the Company issued $300,000 of junior subordinated convertible debentures due 2036 to a wholly-owned trust simultaneous with the issuance, by the trust, of $291,000 of convertible trust preferred securities to investors. The junior subordinated convertible debentures and convertible trust preferred securities (together, the "2006 junior convertible trust preferred securities") have substantially the same terms.

        The 2006 junior convertible trust preferred securities bear interest at a rate of 5.1% per annum, payable quarterly in cash. The Company is accreting the carrying value to the principal amount at maturity using an interest rate of 7.5% (over its expected life of 30 years). Each $50 security is convertible, at any time, into 0.333 shares of the Company's common stock, which represents a conversion price of $150 per share (or a 48% premium to the then prevailing share price of $101.45). Upon conversion, holders will receive cash or shares of the Company's common stock (or a combination of cash and common stock) at the election of the Company. The 2006 junior convertible trust preferred securities may not be redeemed by the Company prior to April 15, 2011. On or after April 15, 2011, they may be redeemed if the closing price of the Company's common stock exceeds $195 per share for a specified period of time. The trust's only assets are the junior convertible subordinated debentures. To the extent that the trust has available funds, the Company is obligated to ensure that holders of the 2006 junior convertible trust preferred securities receive all payments due from the trust.

        In October 2007, the Company issued an additional $500,000 of junior subordinated convertible debentures which are due 2037 to a wholly-owned trust simultaneous with the issuance, by the trust, of $500,000 of convertible trust preferred securities to investors. The junior subordinated convertible debentures and convertible trust preferred securities (together, the "2007 junior convertible trust preferred securities") have substantially the same terms.

        The 2007 junior convertible trust preferred securities bear interest at 5.15% per annum, payable quarterly in cash. The Company is accreting the discounted amount to the principal amount at maturity using an interest rate of 8.0% (over its expected life of 30 years). Each $50 security is convertible, at any time, into 0.25 shares of the Company's common stock, which represents a conversion price of $200 per share (or a 53% premium to the then prevailing share price of $130.77). Upon conversion, holders will receive cash or shares of the Company's common stock (or a combination of cash and common stock) at the election of the Company. The 2007 junior convertible trust preferred securities may not be redeemed by the Company prior to October 15, 2012. On or after October 15, 2012, they may be redeemed if the closing price of the Company's common stock exceeds $260 per share for a specified period of time. The trust's only assets are the 2007 junior convertible subordinated debentures. To the extent that the trust has available funds, the Company is obligated to ensure that holders of the 2007 junior convertible trust preferred securities receive all payments due from the trust.

        The 2006 and 2007 junior convertible trust preferred securities are considered contingent payment debt instruments under federal income tax regulations. These regulations require the Company to deduct interest in an amount greater than its reported interest expense, which will result in annual deferred tax liabilities of approximately $9.5 million. These deferred tax liabilities will be reclassified directly to stockholders' equity if the Company's common stock is trading above certain thresholds at the time of the conversion of the notes.

5.     Forward Equity Sale Agreements

        The Company has entered into three forward equity sale agreements with major securities firms to sell shares of its common stock (up to $200,000 under each agreement). Under the terms of these

8


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


agreements, the Company can settle forward sales at any time prior to December 31, 2010 by issuing shares in exchange for cash or, at the Company's option, by settling on a net stock or cash basis. As of June 30, 2010, the Company had $200,700 of forward sales outstanding, which were subsequently settled net of transaction costs on July 2, 2010 by issuing 3,193,072 shares. The Company may sell up to an additional $103,500 under an agreement entered into in July 2009.

6.     Income Taxes

        The consolidated income tax provision includes taxes attributable to controlling interests and, to a lesser extent, taxes attributable to non-controlling interests as follows:

 
   For the Three
Months
Ended June 30, 		  For the Six
Months
Ended June 30, 		 
 
   2009   2010   2009   2010  

Controlling Interests:

                          
 

Current Tax

   $ (1,126 ) $ 5,344   $ (9,171 ) $ 7,852  
 

Intangible related deferred taxes

     9,544     14,310     19,115     25,050  
 

Other Deferred Taxes

     (4,678 )   (4,852 )   (2,287 )   (6,935 )
                   
   

Total Controlling Interests

     3,740     14,802     7,657     25,967  
                   

Non-Controlling Interests:

                          
 

Current Tax

   $ 1,204   $ 2,581   $ 2,251   $ 3,403  
 

Deferred Taxes

     —     (460 )   —     (460 )
                   
   

Total Non-Controlling Interests

     1,204     2,121     2,251     2,943  
                   

Provision for income taxes

   $ 4,944   $ 16,923   $ 9,908   $ 28,910  
                   

Income before income taxes (controlling interest)

   $ 14,719   $ 40,006   $ 24,761   $ 68,634  
                   

Effective Tax rate attributable to controlling interests(1)

     25.4 %   37.0 %   30.9 %   37.8 %
(1)
Taxes attributable to controlling interests divided by Income before income taxes (controlling interest).

9


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

        A summary of the consolidated provision for income taxes is as follows:

 
   For the Three
Months
Ended June 30, 		  For the Six
Months
Ended June 30, 		 
 
   2009   2010   2009   2010  

Current:

                          
 

Federal

   $ (4,640 ) $ 544   $ (14,625 ) $ (204 )
 

State

     2,516     2,264     3,926     3,453  
 

Foreign

     2,202     5,118     3,779     8,006  
                   

Total Current

     78     7,926     (6,920 )   11,255  
                   

Deferred:

                          
 

Federal

     7,448     8,503     18,456     16,380  
 

State

     (2,149 )   1,570     (891 )   2,843  
 

Foreign

     (433 )   (1,076 )   (737 )   (1,568 )
                   

Total Deferred

     4,866     8,997     16,828     17,655  
                   

Provision for Income Taxes

   $ 4,944   $ 16,923   $ 9,908   $ 28,910  
                   

        The components of deferred tax assets and liabilities are as follows:

 
   December 31,
2009 		  June 30,
2010 		 

Deferred Tax Assets

              
 

State net operating loss carryforwards

   $ 28,694   $ 28,748  
 

Foreign tax credit carryforwards

     9,442     17,186  
 

Capital loss carryforwards

     1,808     1,472  
 

Other

     14,297     14,987  
           

Total deferred tax assets

     54,241     62,393  

Valuation allowance

     (25,294 )   (25,434 )
           

Deferred tax assets, net of valuation allowance

   $ 28,947   $ 36,959  
           

Deferred Tax Liabilities

              
 

Intangible asset amortization

   $ (188,872 ) $ (194,979 )
 

Convertible securities interest

     (139,279 )   (146,671 )
 

Non-deductible intangible amortization

     (19,745 )   (149,706 )
 

Other

     (3,722 )   (9,754 )
           

Total deferred tax liabilities

     (351,618 )   (501,110 )
           
 

Net deferred tax liability

   $ (322,671 ) $ (464,151 )
           

        Deferred tax liabilities are primarily the result of tax deductions for the Company's intangible assets and convertible securities. The Company amortizes most of its intangible assets for tax purposes only, reducing its tax basis below its carrying value for financial statement purposes and generating deferred taxes each reporting period. The Company's junior convertible trust preferred securities and 2008 senior convertible notes also generate deferred taxes because the Company's tax deductions are higher than the interest expense recorded for financial statement purposes.

10


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

        In the second quarter of 2010, in connection with the closing of the investments in Pantheon and Aston (discussed further in Note 17), the Company recorded deferred tax liabilities. As the Company's investment in Pantheon is deductible in the United States, but is not deductible outside the United States; the Company recorded a deferred tax liability of $51,917. As the Company's investment in Aston was tax-free for Highbury's shareholders, the Company only recorded a deferred tax liability of $13,171 because most of its acquired intangible assets were not deductible for tax purposes.

        At June 30, 2010, the Company had state net operating loss carryforwards that expire over a 15-year period beginning in 2010. The Company also has foreign tax credit carryforwards that expire over a 10-year period beginning in 2010. The valuation allowances at December 31, 2009 and June 30, 2010 were principally related to the uncertainty of the realization of the foreign tax credits and the state net operating loss carryforwards, which realization depends upon the Company's generation of sufficient taxable income prior to their expiration.

        At June 30, 2010, the Company's liability for uncertain tax positions was $22,150, including interest and related charges of $3,918. The Company does not anticipate that this liability will change significantly over the next twelve months.

7.     Earnings Per Share

        The calculation of basic earnings per share is based on the weighted average number of shares of the Company's common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share, but adjusts for the dilutive effect of the potential issuance of incremental shares of the Company's common stock. The following is a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share available to common stockholders. Unlike all other dollar amounts in these Notes, the amounts in the numerator reconciliation are not presented in thousands.

 
   For the Three Months
Ended June 30, 		  For the Six Months
Ended June 30, 		 
 
   2009   2010   2009   2010  

Numerator:

                          

Net Income (controlling interest)

   $ 10,979,000   $ 25,204,000   $ 17,104,000   $ 42,667,000  

Interest expense on convertible securities, net of taxes

     36,000     28,000     72,000     52,000  
                   

Net Income (controlling interest), as adjusted

   $ 11,015,000   $ 25,232,000   $ 17,176,000   $ 42,719,000  
                   

Denominator:

                          

Average shares outstanding—basic

     41,450,659     44,610,506     40,740,486     43,491,622  

Effect of dilutive instruments:

                          
 

Stock options

     557,275     987,830     324,501     951,364  
 

Forward sale

     277,403     1,375,840     144,201     1,329,622  
 

Senior convertible securities

     873,803     661,054     873,803     767,341  
                   

Average shares outstanding—diluted

     43,159,140     47,635,230     42,082,991     46,539,949  
                   

        As more fully discussed in Notes 3 and 4, the Company had certain convertible securities outstanding during the periods presented and is required to apply the if-converted method to these securities in its calculation of diluted earnings per share. Under the if-converted method, shares that are issuable upon conversion are deemed outstanding, regardless of whether the securities are

11


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


contractually convertible into the Company's common stock at that time. For this calculation, the interest expense (net of tax) attributable to these dilutive securities is added back to Net Income (controlling interest) reflecting the assumption that the securities have been converted. Issuable shares for these securities and related interest expense are excluded from the calculation if an assumed conversion would be anti-dilutive to diluted earnings per share.

        The calculation of diluted earnings per share for the three months ended June 30, 2009 and 2010 excludes the potential exercise of options to purchase 2.1 million and 0.8 million common shares, respectively, because the effect would be anti-dilutive. The calculation of diluted earnings per share for the six months ended June 30, 2009 and 2010 excludes the potential exercise of options to purchase 2.1 million and 1.2 million common shares, respectively, because the effect would be anti-dilutive.

        As discussed further in Note 19, the Company may settle portions of its Affiliate equity purchases in shares of its common stock. Because it is the Company's intent to settle these potential repurchases in cash, the calculation of diluted earnings per share excludes any potential dilutive effect from possible share settlements.

8.     Commitments and Contingencies

        The Company and its Affiliates are subject to claims, legal proceedings and other contingencies in the ordinary course of their business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved in a manner unfavorable to the Company or its Affiliates. The Company and its Affiliates establish accruals for matters for which the outcome is probable and can be reasonably estimated. Management believes that any liability in excess of these accruals upon the ultimate resolution of these matters will not have a material adverse effect on the consolidated financial condition or results of operations of the Company.

        Certain Affiliates operate under regulatory authorities which require that they maintain minimum financial or capital requirements. Management is not aware of any violations of such financial requirements occurring during the period.

        In connection with its Pantheon investment (discussed further in Note 17), the Company has committed to co-invest in certain Pantheon investment partnerships where it serves as the general partner and Russell Investments is contractually obligated to reimburse the Company for these commitments when they are called. As of June 30, 2010, these commitments totaled approximately $97,000 and may be called in future periods.

9.     Investments in Partnerships

        The activity in the Affiliate investments in consolidated partnerships was as follows for the six months ended June 30, 2010:

December 31, 2009

   $ 93,809  
 

Gross subscriptions

     6,399  
 

Gross redemptions

     (5,895 )
 

Investment income

     (4,759 )
       

June 30, 2010

   $ 89,554  
       

        Purchases and sales of investments (principally equity securities) were $189,878 and $189,374, respectively, for the six months ended June 30, 2010.

12


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

        Management fees earned from these partnerships were $200 and $227 for the three months ended June 30, 2009 and 2010, respectively, and $362 and $469 for the six months ended June 30, 2009 and 2010, respectively.

        As of December 31, 2009 and June 30, 2010, the Affiliates' investments in partnerships that are not consolidated were $17,631 and $94,656, respectively. These assets are reported within "Other assets" in the Consolidated Balance Sheets. The income or loss related to these investments is classified within "Investment and other (income) loss" in the Consolidated Statements of Income.

10.   Investments in Marketable Securities

        The cost of investments in marketable securities, gross unrealized gains and losses were as follows:

 
   December 31,
2009 		  June 30,
2010 		 

Cost of investments in marketable securities

   $ 50,631   $ 51,904  

Gross unrealized gains

     6,108     11,317  

Gross unrealized losses

     (49 )   (419 )

11.   Unsettled Fund Share Receivables and Payables

        Unsettled fund share receivables and payables are created by the normal settlement periods on transactions initiated by certain clients of Affiliate funds domiciled in the United Kingdom. The gross presentation of the receivable ($55,817) and offsetting payable ($50,446) reflects the legal relationship between the underlying investor and the Company.

12.   Fair Value Measurements

        The Company determines the fair value of certain investment securities and other financial and nonfinancial assets and liabilities. Fair value is determined based on the price that would be received for an asset or paid to transfer a liability in the most advantageous market, utilizing a hierarchy of three different valuation techniques:

13


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

        The following table summarizes the Company's assets (principally equity securities) and liabilities that are measured at fair value on a quarterly basis.

 
    
   Fair Value Measurements  
 
   December 31,
2009 		 
 
   Level 1   Level 2   Level 3  

Financial Assets

                          

Investments in partnerships

   $ 111,440   $ 93,066   $ 14,365   $ 4,009  

Investments in marketable securities

     56,690     54,480     2,210     —  

Financial Liabilities

                          

Contingent payment obligations

   $ 27,074   $ —   $ —   $ 27,074  

Obligations to related parties

     78,653     —     —     78,653  

 

 
    
   Fair Value Measurements  
 
   June 30,
2010 		 
 
   Level 1   Level 2   Level 3  

Financial Assets

                          

Investments in partnerships

   $ 184,210   $ 83,691   $ 36,829   $ 63,690  

Investments in marketable securities

     62,802     60,758     2,044     —  

Financial Liabilities

                          

Contingent payment obligations

   $ 66,239   $ —   $ —   $ 66,239  

Obligations to related parties

     48,950     —     —     48,950  

        During the three and six months ended June 30, 2010, there were no significant transfers of financial assets between Level 1 and Level 2. During the six months ended June 30, 2010, financial assets valued at $3,709 transferred from Level 3 to Level 2. The fair value of Level 2 assets was determined using quoted prices for similar instruments in active markets. The fair value of Level 3 assets and liabilities were determined using an income approach with assumptions made about future cash flows and discount rates.

        Any change in the fair value of Affiliate investments in consolidated partnerships is presented as "Investment (income) loss from investments in partnerships" in the Consolidated Statements of Income. However, the portion of this income or loss that is attributable to investors that are unrelated to the Company, if any, is reported as "Net (income) loss (non-controlling interests in partnerships)."

14


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

        The following table presents the changes in Level 3 assets and liabilities for the three and six months ended June 30, 2009 and 2010:

 
   Financial Assets  
 
   Three Months
Ended
June 30, 2009 		  Three Months
Ended
June 30, 2010 		  Six Months
Ended
June 30, 2009 		  Six Months
Ended
June 30, 2010 		 

Balance, beginning of period

   $ 4,185   $ 300   $ 4,185   $ 4,009  

Realized and unrealized gains (losses) included in net income

     —     (116 )   —     (116 )

Realized and unrealized gains (losses) included in other comprehensive income

     —     —     —     —  

New Investments

           63,506           63,506  

Purchases

     —     —     —     —  

Sales

     —     —     —     —  

Transfers in and/or out of Level 3

     —     —     —     (3,709 )
                   

Balance, end of period

   $ 4,185   $ 63,690   $ 4,185   $ 63,690  
                   

Amount of total gains (losses) included in net income attributable to unrealized gains (losses) from assets still held at end of period

  
$
—		  
$
—		  
$
—		  
$
—		  

Amount of total gains (losses) included in other comprehensive income

  
$
—		  
$
—		  
$
—		  
$
—		  

 

 
   Financial Liabilities  
 
   Three Months
Ended
June 30, 2009 		  Three Months
Ended
June 30, 2010 		  Six Months
Ended
June 30, 2009 		  Six Months
Ended
June 30, 2010 		 

Balance, beginning of period

   $ 2,568   $ 64,388   $ 27,764   $ 105,727  

Realized and unrealized (gains) losses included in net income

     (232 )   2,621     (232 )   2,454  

Realized and unrealized (gains) losses included in other comprehensive income

     —     (769 )   —     (769 )

New Investments

     —     48,950     —     98,054  

Additions

     672     —     672     15,284  

Settlements

     (1,693 )   —     (26,889 )   (105,560 )

Transfers in and/or out of Level 3

     —     —     —     —  
                   

Balance, end of period

   $ 1,315   $ 115,190   $ 1,315   $ 115,190  
                   

Amount of total gains (losses) included in net income attributable to unrealized gains (losses) from unsettled liabilities at end of period

  
$
—		  
$
2,621		  
$
—		  
$
2,621		  

Amount of total gains (losses) included in other comprehensive income

  
$
—		  
$
(769
)
$
—		  
$
(769
)

        The carrying amount of the Company's cash, cash equivalents and short-term investments approximates fair value because of the short-term nature of these instruments. The carrying value of

15


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


notes receivable approximates fair value because interest rates and other terms are at market rates. The carrying value of notes payable approximates fair value principally because of the short-term nature of the notes. The carrying value of senior bank debt approximates fair value because the debt is a credit facility with variable interest based on selected short-term rates. The fair market value of the 2008 senior convertible notes, and the 2006 and 2007 junior convertible trust preferred securities at June 30, 2010 was $448,500 and $509,224, respectively.

13.   Related Party Transactions

        The Company periodically records amounts receivable and payable to Affiliate partners in connection with the transfer of Affiliate equity interests. As of December 31, 2009 and June 30, 2010, the total receivable (reported in "Other assets") was $45,253 and $40,945, respectively. The total payable as of December 31, 2009 was $109,888, which is included in current liabilities. The total payable as of June 30, 2010 was $153,527, of which $90,791 is included in current liabilities.

        In certain cases, Affiliate management owners and Company officers may serve as trustees or directors of certain mutual funds from which the Affiliate earns advisory fee revenue.

14.   Stock Option and Incentive Plans

        The following summarizes the transactions of the Company's stock option and incentive plans for the six months ended June 30, 2010:

 
   Stock Options   Weighted
Average
Exercise
Price 		  Weighted
Average
Remaining
Contractual
Life (years) 		 

Unexercised options outstanding—January 1, 2010

     5,166,344   $ 54.29        
 

Options granted

     3,125     71.13        
 

Options exercised

     (584,956 )   43.79        
 

Options forfeited

     (3,043 )   48.79        
                   

Unexercised options outstanding—June 30, 2010

     4,581,470     55.64     4.6  
                   

Exercisable at June 30, 2010

     2,734,354     53.21     4.4  

        The Company's Net Income (controlling interest) for the three and six months ended June 30, 2010 includes compensation expense of $1,943 and $4,184, respectively (net of income tax benefits of $1,216 and $2,619, respectively, related to the Company's share-based compensation arrangements). As of June 30, 2010, the deferred compensation expense related to share-based compensation arrangements was $40,622 which is expected to be recognized over a weighted average period of approximately four years (assuming no forfeitures). As of June 30, 2010, 0.5 million options have expiration dates prior to the end of 2010.

15.   Segment Information

        Management has assessed and determined that the Company operates in three business segments representing the Company's three principal distribution channels: Mutual Fund, Institutional and High Net Worth, each of which has different client relationships.

        Revenue in the Mutual Fund distribution channel is earned from advisory and sub-advisory relationships with all domestically-registered investment products as well as non-institutional investment

16


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


products that are registered abroad. Revenue in the Institutional distribution channel is earned from relationships with foundations and endowments, defined benefit and defined contribution plans and Taft-Hartley plans. Revenue in the High Net Worth distribution channel is earned from relationships with high net worth individuals, family trusts and managed account programs.

        Revenue earned from client relationships managed by Affiliates accounted for under the equity method is not consolidated with the Company's reported revenue but instead is included (net of operating expenses, including amortization) in "Income from equity method investments," and reported in the distribution channel in which the Affiliate operates. Income tax attributable to the profits of the Company's equity-method Affiliates is reported within the Company's consolidated income tax provision.

        In firms with revenue sharing arrangements, a certain percentage of revenue is allocated for use by management of an Affiliate in paying operating expenses of that Affiliate, including salaries and bonuses, and is called an "Operating Allocation." In reporting segment operating expenses, Affiliate expenses are allocated to a particular segment on a pro rata basis with respect to the revenue generated by that Affiliate in such segment. Generally, as revenue increases, additional compensation is typically paid to Affiliate management partners from the Operating Allocation. As a result, the contractual expense allocation pursuant to a revenue sharing arrangement may result in the characterization of any growth in profit margin beyond the Company's Owners' Allocation as an operating expense. All other operating expenses (excluding intangible amortization) and interest expense have been allocated to segments based on the proportion of cash flow distributions reported by Affiliates in each segment.

17


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Statements of Income

 
   For the Three Months Ended June 30, 2009  
 
   Mutual Fund   Institutional   High Net Worth   Total  

Revenue

   $ 72,360   $ 101,491   $ 27,395   $ 201,246  

Operating expenses:

                          
 

Depreciation and other amortization

     1,011     7,476     2,800     11,287  
 

Other operating expenses

     49,660     70,638     18,764     139,062  
                   

    50,671     78,114     21,564     150,349  
                   

Operating income

     21,689     23,377     5,831     50,897  
                   

Non-operating (income) and expenses:

                          
 

Investment and other income

     (5,025 )   (1,560 )   (606 )   (7,191 )
 

Income from equity method investments

     (139 )   (6,835 )   (377 )   (7,351 )
 

Investment income from investments in partnerships

     —     (385 )   (14,562 )   (14,947 )
 

Interest expense

     5,198     11,441     2,554     19,193  
                   

    34     2,661     (12,991 )   (10,296 )
                   

Income before income taxes

     21,655     20,716     18,822     61,193  

Income taxes

     2,688     1,950     306     4,944  
                   

Net income

     18,967     18,766     18,516     56,249  
 

Net income (non-controlling interests)

     (12,994 )   (14,130 )   (3,547 )   (30,671 )
 

Net income (non-controlling interests in partnerships)

     —     (385 )   (14,214 )   (14,599 )
                   

Net Income (controlling interest)

   $ 5,973   $ 4,251   $ 755   $ 10,979  
                   

18


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 
   For the Three Months Ended June 30, 2010  
 
   Mutual Fund   Institutional   High Net Worth   Total  

Revenue

   $ 147,993   $ 152,301   $ 31,786   $ 332,080  

Operating expenses:

                          
 

Depreciation and other amortization

     2,596     8,258     2,113     12,967  
 

Other operating expenses

     102,719     99,574     20,989     223,282  
                   

    105,315     107,832     23,102     236,249  
                   

Operating income

     42,678     44,469     8,684     95,831  
                   

Non-operating (income) and expenses:

                          
 

Investment and other (income) loss

     1,351     (1,283 )   (791 )   (723 )
 

Income from equity method investments

     (408 )   (8,521 )   (932 )   (9,861 )
 

Investment loss from investments in partnerships

     126     351     8,108     8,585  
 

Interest expense

     9,156     11,331     2,202     22,689  
                   

    10,225     1,878     8,587     20,690  
                   

Income before income taxes

     32,453     42,591     97     75,141  

Income taxes

     7,565     7,862     1,496     16,923  
                   

Net income

     24,888     34,729     (1,399 )   58,218  
 

Net income (non-controlling interests)

     (14,755 )   (22,736 )   (3,920 )   (41,411 )
 

Net loss (non-controlling interests in partnerships)

     125     351     7,921     8,397  
                   

Net Income (controlling interest)

   $ 10,258   $ 12,344   $ 2,602   $ 25,204  
                   

19


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
   For the Six Months Ended June 30, 2009  
 
   Mutual Fund   Institutional   High Net Worth   Total  

Revenue

   $ 140,698   $ 183,729   $ 55,294   $ 379,721  

Operating expenses:

                          
 

Depreciation and other amortization

     2,089     14,900     5,631     22,620  
 

Other operating expenses

     94,229     127,872     38,331     260,432  
                   

    96,318     142,772     43,962     283,052  
                   

Operating income

     44,380     40,957     11,332     96,669  
                   

Non-operating (income) and expenses:

                          
 

Investment and other income

     (4,399 )   (1,727 )   (824 )   (6,950 )
 

Income from equity method investments

     (209 )   (12,946 )   (612 )   (13,767 )
 

Investment income from investments in partnerships

     (3 )   (316 )   (10,833 )   (11,152 )
 

Interest expense

     11,247     22,538     5,356     39,141  
                   

    6,636     7,549     (6,913 )   7,272  
                   

Income before income taxes

     37,744     33,408     18,245     89,397  

Income taxes

     6,215     3,171     522     9,908  
                   

Net income

     31,529     30,237     17,723     79,489  
 

Net income (non-controlling interests)

     (20,930 )   (24,430 )   (6,189 )   (51,549 )
 

Net income (non-controlling interests in partnerships)

     (3 )   (316 )   (10,517 )   (10,836 )
                   

Net Income (controlling interest)

   $ 10,596   $ 5,491   $ 1,017   $ 17,104  
                   

20


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


 
   For the Six Months Ended June 30, 2010  
 
   Mutual Fund   Institutional   High Net Worth   Total  

Revenue

   $ 245,919   $ 274,073   $ 63,110   $ 583,102  

Operating expenses:

                          
 

Depreciation and other amortization

     4,832     15,709     4,388     24,929  
 

Other operating expenses

     169,452     182,836     41,516     393,804  
                   

    174,284     198,545     45,904     418,733  
                   

Operating income

     71,635     75,528     17,206     164,369  
                   

Non-operating (income) and expenses:

                          
 

Investment and other (income) loss

     581     (2,624 )   (1,502 )   (3,545 )
 

Income from equity method investments

     (767 )   (16,344 )   (1,896 )   (19,007 )
 

Investment loss from investments in partnerships

     73     195     4,225     4,493  
 

Interest expense

     15,226     22,422     4,892     42,540  
                   

    15,113     3,649     5,719     24,481  
                   

Income before income taxes

     56,522     71,879     11,487     139,888  

Income taxes

     13,030     12,896     2,984     28,910  
                   

Net income

     43,492     58,983     8,503     110,978  
 

Net income (non-controlling interests)

     (25,750 )   (39,179 )   (7,768 )   (72,697 )
 

Net loss (non-controlling interests in partnerships)

     74     196     4,116     4,386  
                   

Net Income (controlling interest)

   $ 17,816   $ 20,000   $ 4,851   $ 42,667  
                   

Balance Sheet Information

                          

Total assets as of December 31, 2009

   $ 1,182,940   $ 1,702,983   $ 504,983   $ 3,390,906  

Total assets as of June 30, 2010

     1,752,409     2,676,571     509,473     4,938,453  

21


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16.   Goodwill and Acquired Client Relationships

        The Company periodically makes new investments in asset management firms and acquires interests from, makes additional purchase payments to and transfers interests to Affiliate management partners. The Company incurred $10,445 and $194 of acquisition-related costs which were recognized as selling, general and administrative expenses during the six months ended June 30, 2010 and June 30, 2009, respectively.

        The following table presents the change in goodwill during the six months ended June 30, 2010:

 
   Mutual Fund   Institutional   High Net Worth   Total  

Balance, as of December 31, 2009

   $ 561,753   $ 602,962   $ 248,502   $ 1,413,217  

Goodwill acquired, net

     210,383     358,110     4,757     573,250  

Foreign currency translation

     (244 )   (1,315 )   (1,440 )   (2,999 )
                   

Balance, as of June 30, 2010

   $ 771,892   $ 959,757   $ 251,819   $ 1,983,468  
                   

        The following table reflects the components of intangible assets of the Company's Affiliates that are consolidated as of December 31, 2009 and June 30, 2010:

 
   December 31, 2009   June 30, 2010  
 
   Carrying
Amount 		  Accumulated
Amortization 		  Carrying
Amount 		  Accumulated
Amortization 		 

Amortized intangible assets:

                          
 

Acquired client relationships

   $ 389,312   $ 168,538   $ 924,796   $ 187,067  

Non-amortized intangible assets:

                          
 

Acquired client relationships—mutual fund management contracts

     350,799     —     659,305     —  
 

Goodwill

     1,413,217     —     1,983,468     —  

        For the Company's Affiliates that are consolidated, definite-lived acquired client relationships are amortized over their expected useful lives. As of June 30, 2010, these relationships were being amortized over a weighted average life of approximately 10 years. The Company estimates that its consolidated annual amortization expense will be approximately $82,000 for the next five years, assuming no additional investments in new or existing Affiliates.

        The definite-lived acquired client relationships attributable to the Company's equity method investments are amortized over their expected useful lives. As of June 30, 2010, these relationships were being amortized over approximately seven years. Amortization expense for these relationships was $16,136 for the six months ended June 30, 2010. The Company estimates that the annual amortization expense attributable to its current equity-method Affiliates will be approximately $32,000 for the next five years, assuming no additional investments in new or existing Affiliates.

17.   Business Combinations

        During the quarter ended June 30, 2010, the Company completed its acquisition of Pantheon Ventures Inc., Pantheon Holdings Limited and Pantheon Capital (Asia) Limited (collectively, "Pantheon") from Russell Investments, a subsidiary of Northwestern Mutual Life Insurance Company.

        Pantheon is a global private equity fund-of-funds manager, with over 25 years of private equity investment experience. Pantheon manages regional funds-of-funds in Europe, the United States and

22


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Asia, as well as global secondary funds-of-funds, global infrastructure fund-of-funds and customized separate account programs.

        During the quarter, the Company also completed its investment in Aston Asset Management LLC ("Aston") through the acquisition of Highbury Financial Inc., Aston's parent company. Based in Chicago, Aston offers sub-advised investment products to the mutual fund and managed accounts markets. Aston is the principal advisor to the Aston Funds, a fund family of 24 sub-advised, no-load mutual funds.

Pantheon Purchase Price Allocation

        The Company has not yet completed its valuation of Pantheon and, therefore, the Company's purchase price allocation is provisional. These provisional amounts may be revised upon completion of the valuation. The excess of the enterprise value over the net assets acquired was recorded as goodwill, of which 91%, 8% and 1% was attributed to the Company's Institutional, Mutual Fund and High Net Worth segments, respectively. The goodwill and acquired client relationships are deductible for U.S. tax purposes over a 15-year life. The provisional allocation of the purchase price is as follows:

 
   Controlling
Interest 		  Non-Controlling
Interest 		  Total  

Purchase price

   $ 762,294   $ 10,700   $ 772,994  

Retained Non-Controlling interest

     —     106,027     106,027  

Contingent payment obligation

     15,283     —     15,283  
               

Enterprise Value

     777,577     116,727     894,304  

Acquired client relationships

    
431,744		    
81,382		    
513,126		  

Tangible assets, net

     13,034     32,295     45,329  

Deferred income taxes

     (51,917 )   —     (51,917 )

Goodwill

     384,716     3,050     387,766  
               

  $ 777,577   $ 116,727   $ 894,304  
               

        As part of this investment, the Company is contingently liable to make payments totaling between zero and $225,000 over the next three to five years upon the achievement of specified revenue targets. The Company measured the provisional fair value of the contingent payment obligation using a financial model that included assumptions of expected market performance and net client cash flows. Based on these assumptions, the Company projects contingent payments totaling $26,300. As of June 30, 2010, the present value of these payments was $15,300. This amount is reported in "Other long-term liabilities."

Aston Purchase Price Allocation

        The Company has not yet completed its valuation of Aston and, therefore, the Company's purchase price allocation is provisional. These provisional amounts may be revised upon completion of the valuation. The excess of the enterprise value over the net assets acquired was recorded as goodwill, of which 98% and 2% was attributed to the Company's Mutual Fund and High Net Worth segments,

23


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


respectively. Most of the acquired intangible assets are not deductible for U.S. tax purposes. The provisional allocation of the purchase price is as follows:

 
   Controlling
Interest 		  Non-Controlling
Interest 		  Total  

Purchase Price

   $ 146,906   $ —   $ 146,906  

Retained Non-Controlling interest

     —     21,287     21,287  
               

Enterprise Value

     146,906     21,287     168,193  

Acquired client relationships

    
81,175		    
14,494		    
95,669		  

Tangible assets

     4,000     —     4,000  

Deferred income taxes

     (13,171 )   —     (13,171 )

Goodwill

     74,902     6,793     81,695  
               

  $ 146,906   $ 21,287   $ 168,193  
               

        Unaudited pro forma financial results are set forth below, giving consideration to the Artemis (closed during the first quarter of 2010), Pantheon and Aston investments, as if such transactions occurred as of the beginning of 2009, assuming the revenue sharing arrangement had been in effect for the entire period and after making certain other pro forma adjustments.

 
   For the Six Months
Ended June 30, 		 
 
   2009   2010  

Revenue

   $ 572,376   $ 722,167  

Net Income (controlling interest)

     35,020     56,684  

Earnings per share—basic

     0.79     1.22  

Earnings per share—diluted

     0.77     1.16  

        Pantheon and Aston's contribution to the Company's revenue and earnings in the quarter ended June 30, 2010 was not material.

18.   Recent Accounting Developments

        During the first quarter of 2010, the Company adopted a new standard that requires an enterprise to perform a qualitative analysis to determine whether its variable interests give it a controlling financial interest in a variable interest entity ("VIE"). Under the standard, an enterprise has a controlling financial interest when it has (a) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. An enterprise that holds a controlling financial interest is deemed to be the primary beneficiary and is required to consolidate the VIE. This new standard has been deferred for certain entities that utilize the specialized accounting guidance for investment companies or that have the attributes of investment companies. The adoption of the portions of this new standard that were not deferred did not have a material impact on the Company's Consolidated Financial Statements.

        During the first quarter of 2010, the Company adopted a new standard that eliminated the concept of a qualifying special-purpose entity ("QSPE"), changed the requirements for derecognizing financial assets, and required additional disclosures to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including an entity's

24


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

continuing involvement in and exposure to the risks related to transferred financial assets. The standard also clarified the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The adoption of this new standard did not have a material impact on the Company's Consolidated Financial Statements.

19.   Affiliate Equity

        Many of the Company's operating agreements provide Affiliate managers a conditional right to require the Company to purchase their retained equity interests at certain intervals. Certain agreements also provide the Company a conditional right to require Affiliate managers to sell their retained equity interests to the Company upon their death, permanent incapacity or termination of employment and provide Affiliate managers a conditional right to require the Company to purchase such retained equity interests upon the occurrence of specified events. The purchase price of these conditional purchases are generally calculated based upon a multiple of the Affiliate's cash flow distributions, which is intended to represent fair value. Affiliate management partners are also permitted to sell their equity interests to other individuals or entities in certain cases, subject to the Company's approval or other restrictions.

        The Company may pay for Affiliate equity purchases in cash, shares of its common stock or other forms of consideration and can consent to the transfer of these interests to other individuals or entities. The Company's cumulative redemption obligation for these interests has been presented as "Redeemable non-controlling interests" on the Company's Consolidated Balance Sheets. Changes in the value of the Company's cumulative redemption obligation are recorded to Additional paid-in capital. The following table presents the changes in Redeemable non-controlling interests during the period:

Balance as of January 1, 2010

   $ 368,999  

Issuance of Redeemable non-controlling interest

     8,352  

Repurchase of Redeemable non-controlling interest

     (20,512 )

Changes in redemption value

     (12,819 )
       

Balance as of June 30, 2010

   $ 344,020  
       

        Although the timing and amounts of these purchases are difficult to predict, the Company expects to repurchase approximately $100,000 of Affiliate equity during the next twelve months, and, in such event, will own the cash flow associated with any equity repurchased.

        During the three and six months ended June 30, 2009 and 2010, the Company acquired interests from and transferred interests to Affiliate management partners. The following schedule discloses the effect of changes in the Company's ownership interest in its Affiliates on the controlling interest's equity:

 
   For the Three Months
Ended June 30, 		  For the Six Months
Ended June 30, 		 
 
   2009   2010   2009   2010  

Net Income (controlling interest)

   $ 10,979   $ 25,204   $ 17,104   $ 42,667  
   

Decrease in controlling interest paid-in capital from purchases and sales of Affiliate equity

     (5,789 )   (3,710 )   (5,111 )   (23,420 )
                   
 

Change from Net Income (controlling interest) and net transfers with non-controlling interests

   $ 5,190   $ 21,494   $ 11,993   $ 19,247  
                   

25


AFFILIATED MANAGERS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

20.   Comprehensive Income

        A summary of comprehensive income, net of applicable taxes, is as follows:

 
   For the Three Months
Ended June 30, 		  For the Six Months
Ended June 30, 		 
 
   2009   2010   2009   2010  

Net income

   $ 56,249   $ 58,218   $ 79,489   $ 110,978  

Foreign currency translation adjustment

     24,672     (16,899 )   14,955     (4,818 )

Change in net unrealized gain (loss) on investment securities

     4     (7,290 )   (151 )   6,021  
                   

Comprehensive income

     80,925     34,029     94,293     112,181  

Comprehensive income (non-controlling interests)

     (45,270 )   (33,014 )   (62,385 )   (68,311 )
                   

Comprehensive income (controlling interest)

   $ 35,655   $ 1,015   $ 31,908   $ 43,870  
                   

        The components of accumulated other comprehensive income, net of applicable taxes, are as follows:

 
   December 31,
2009 		  June 30,
2010 		 

Foreign currency translation adjustments

   $ 43,055   $ 38,237  

Unrealized gain on investment securities

     2,903     8,924  
           

Accumulated other comprehensive income

   $ 45,958   $ 47,161  
           

26

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

        When used in this Quarterly Report on Form 10-Q, in our other filings with the United States Securities and Exchange Commission, in our press releases and in oral statements made with the approval of an executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "may," "intends," "believes," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among others, the following:

        These factors (among others) could affect our financial performance and cause actual results to differ materially from historical earnings and those presently anticipated and projected. We will not undertake and we specifically disclaim any obligation to release publicly the result of any revisions which 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 wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

Overview

        We are a global asset management company with equity investments in a diverse group of boutique investment management firms (our "Affiliates"). We pursue a growth strategy designed to generate shareholder value through the internal growth of our existing business, additional investments in investment management firms and strategic transactions and relationships structured to enhance our Affiliates' businesses and growth prospects.

        As of June 30, 2010, we manage approximately $249 billion in assets through our Affiliates in more than 350 investment products across a broad range of asset classes and investment styles in three principal distribution channels: Mutual Fund, Institutional and High Net Worth. We believe that our diversification across asset classes, investment styles and distribution channels helps to mitigate our exposure to the risks created by changing market environments. The following summarizes our operations in our three principal distribution channels.

27

New Investments

        On June 30, 2010, we completed our investment in Pantheon Ventures Inc., Pantheon Holdings Limited and Pantheon Capital (Asia) Limited (collectively, "Pantheon"). Pantheon manages regional funds-of-funds in Europe, the United States and Asia, as well as global secondary funds-of-funds, global infrastructure fund-of-funds and customized separate account programs.

        On April 15, 2010, we completed our investment in Aston Asset Management LLC ("Aston") through the acquisition of Highbury Financial Inc., Aston's parent company. Based in Chicago, Aston offers sub-advised investment products to the mutual fund and managed accounts markets. Aston is the principal advisor to the Aston Funds, a fund family of 24 sub-advised, no-load mutual funds.

        On March 15, 2010, we completed our investment in Artemis Investment Management Ltd ("Artemis") in combination with the management team of Artemis. Artemis specializes in active investment management for retail and institutional investors in the UK, as well as Europe and the Middle East, across a range of mutual funds and segregated institutional accounts.

Our Structure and Relationship with Affiliates

        We operate our business through our Affiliates in our three principal distribution channels, maintaining each Affiliate's distinct entrepreneurial culture and independence through our investment structure. In making investments in boutique investment management firms, we seek to partner with the highest quality firms in the industry, with outstanding management teams, strong long-term performance records and a demonstrated commitment to continued growth and success. Fundamental to our investment approach is the belief that Affiliate management equity ownership (along with AMG's ownership) aligns our interests and provides Affiliate managers with a powerful incentive to continue to grow their business. Our investment structure provides a degree of liquidity and diversification to principal owners of boutique investment management firms, while at the same time expanding equity ownership opportunities among the firm's management and allowing management to continue to participate in the firm's future growth. Our partnership approach also ensures that Affiliates maintain operational autonomy in managing their business, thereby preserving their firm's entrepreneurial culture and independence.

28

        Although the specific structure of each investment is highly tailored to meet the needs of a particular Affiliate, in all cases, AMG establishes a meaningful equity interest in the firm, with the remaining equity interests retained by the management of the Affiliate. Each Affiliate is organized as a separate firm, and its operating or shareholder agreement is structured to provide appropriate incentives for Affiliate management owners and to address the Affiliate's particular characteristics while also enabling us to protect our interests, including through arrangements such as long-term employment agreements with key members of the firm's management team.

        In most cases, we own a majority of the equity interests of a firm and structure a revenue sharing arrangement, in which a percentage of revenue is allocated for use by management of that Affiliate in paying operating expenses of the Affiliate, including salaries and bonuses. We call this the "Operating Allocation." The portion of the Affiliate's revenue that is allocated to the owners of that Affiliate (including us) is called the "Owners' Allocation." Each Affiliate allocates its Owners' Allocation to its managers and to us generally in proportion to their and our respective ownership interests in that Affiliate. However, should actual operating expenses exceed the Operating Allocation, the excess expenses first reduce the portion of the Owners' Allocation allocated to the Affiliate's managers until that portion is eliminated, before reducing the portion allocated to us. Any such reduction in our portion of the Owners' Allocation is required to be paid back to us out of the portion of future Owners' Allocation allocated to the Affiliate's managers.

        One of the purposes of our revenue sharing arrangements is to provide ongoing incentives for Affiliate managers by allowing them to participate in the growth of their firm's revenue, which may increase their compensation from both the Operating Allocation and the Owners' Allocation. These arrangements also provide incentives to control operating expenses, thereby increasing the portion of the Operating Allocation that is available for growth initiatives and compensation.

        An Affiliate's Operating Allocation is structured to cover its operating expenses. However, should actual operating expenses exceed the Operating Allocation, our contractual share of cash under the Owners' Allocation generally has priority over the allocations and distributions to the Affiliate's managers. As a result, the excess expenses first reduce the portion of the Owners' Allocation allocated to the Affiliate's managers until that portion is eliminated, before reducing the portion allocated to us. Any such reduction in our portion of the Owners' Allocation is required to be paid back to us out of the portion of future Owners' Allocation allocated to the Affiliate's managers.

        Our minority investments are also structured to align our interests with those of the Affiliate's management through shared equity ownership, as well as to preserve the Affiliate's entrepreneurial culture and independence by maintaining the Affiliate's operational autonomy. In cases where we hold a minority investment, the revenue sharing arrangement generally allocates a percentage of the Affiliate's revenue to us. The remaining revenue is used to pay operating expenses and profit distributions to the other owners.

        Certain of our Affiliates operate under profit-based arrangements through which we own a majority of the equity in the firm and receive a share of profits as cash flow, rather than a percentage of revenue through a typical revenue sharing agreement. As a result, we participate fully in any increase or decrease in the revenue or expenses of such firms. In these cases, we participate in a budgeting process and generally provide incentives to management through compensation arrangements based on the performance of the Affiliate.

        We are focused on establishing and maintaining long-term partnerships with our Affiliates. Our shared equity ownership gives both AMG and our Affiliate partners meaningful incentives to manage their businesses for strong future growth. From time to time, we may consider changes to the structure of our relationship with an Affiliate in order to better support the firm's growth strategy.

29

        Through our affiliated investment management firms, we derive most of our revenue from the provision of investment management services. Investment management fees ("asset-based fees") are usually determined as a percentage fee charged on periodic values of a client's assets under management; most asset-based advisory fees are billed by our Affiliates quarterly. Certain clients are billed for all or a portion of their accounts based upon assets under management valued at the beginning of a billing period ("in advance"). Other clients are billed for all or a portion of their accounts based upon assets under management valued at the end of the billing period ("in arrears"). Most client accounts in the High Net Worth distribution channel are billed in advance, and most client accounts in the Institutional distribution channel are billed in arrears. Clients in the Mutual Fund distribution channel are billed based upon average daily assets under management. Advisory fees billed in advance will not reflect subsequent changes in the market value of assets under management for that period but may reflect changes due to client withdrawals. Conversely, advisory fees billed in arrears will reflect changes in the market value of assets under management for that period.

        In addition, over 50 Affiliate alternative investment and equity products, representing approximately $32 billion of assets under management (as of June 30, 2010), also bill on the basis of absolute or relative investment performance ("performance fees"). These products, which are primarily in the Institutional distribution channel, are often structured to have returns that are not directly correlated to changes in broader equity indices and, if earned, the performance fee component is typically billed less frequently than an asset-based fee. Although performance fees inherently depend on investment results and will vary from period to period, we anticipate performance fees to be a recurring component of our revenue. We also anticipate that, within any calendar year, the majority of any performance fees will typically be realized in the fourth quarter.

        For certain of our Affiliates, generally where we own a non-controlling interest, we are required to use the equity method of accounting. Consistent with this method, we have not consolidated the operating results of these firms (including their revenue) in our Consolidated Statements of Income. Our share of these firms' profits (net of intangible amortization) is reported in "Income from equity method investments," and is therefore reflected in our Net Income (controlling interest) and EBITDA. As a consequence, increases or decreases in these firms' assets under management (which totaled $55.4 billion as of June 30, 2010) will not affect reported revenue in the same manner as changes in assets under management at our other Affiliates.

        Our Net Income attributable to controlling interest reflects the revenue of our consolidated Affiliates and our share of income from Affiliates which we account for under the equity method, reduced by:

        As discussed above, for consolidated Affiliates with revenue sharing arrangements, the operating expenses of the Affiliate as well as its managers' non-controlling interest generally increase (or decrease) as the Affiliate's revenue increases (or decreases) because of the direct relationship established in many of our agreements between the Affiliate's revenue and its Operating Allocation and Owners' Allocation. At our consolidated profit-based Affiliates, expenses may or may not correspond to increases or decreases in the Affiliates' revenues.

        Our level of profitability will depend on a variety of factors, including:

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Diversification of Assets under Management

        The following table provides information regarding the composition of our assets under management:

 
   December 31, 2009   June 30, 2010  
 
   Assets under
Management 		  Percentage
of Total 		  Assets under
Management 		  Percentage
of Total 		 
(in billions)
    
    
    
    
  

Asset Class:

                          

Equity(1)

   $ 153.2     74 % $ 159.3     64 %

Alternative(2)

     31.3     15 %   59.7     24 %

Fixed Income

     23.5     11 %   30.0     12 %
                   
 

Total

   $ 208.0     100 % $ 249.0     100 %
                   

Geography:(3)

                          

Domestic

   $ 89.7     43 % $ 97.8     39 %

Global/International

     93.2     45 %   126.5     51 %

Emerging Markets

     25.1     12 %   24.7     10 %
                   
 

Total

   $ 208.0     100 % $ 249.0     100 %
                   
(1)
The Equity asset class includes equity, balanced and asset allocation products.

(2)
The Alternative asset class includes multi-strategy, market neutral equity and hedge products.

(3)
The Geography of a particular investment product describes the general location of its investment holdings.

        Our investments in Pantheon and Artemis (in the second and first quarters of 2010, respectively) further diversified our business by increasing our exposure to alternative product offerings that we anticipate will be uncorrelated to equity markets (in the case of Pantheon) and global/international product offerings (in the case of Pantheon and Artemis). Our investment in Pantheon also provides a

31

stable revenue stream because Pantheon charges management fees on the capital committed to its funds, not the value of the funds. Our investment in Aston which closed in the second quarter of 2010 increased our domestic equity product offerings.

        In addition, positive investment returns during the six months ended June 30, 2010 in our alternative and fixed income asset classes increased assets under management in those strategies. Through positive investment returns, several of our Affiliates produced performance fees in this period ($33.6 million included in our consolidated revenue).

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Results of Operations

        The following table presents our Affiliates' reported assets under management by operating segment (which are also referred to as distribution channels in this Quarterly Report on Form 10-Q).

Assets under Management

Statement of Changes—Quarter to Date
(in billions)
   Mutual Fund   Institutional   High Net
Worth 		  Total  

Assets under management, March 31, 2010

   $ 60.5   $ 140.6   $ 31.0   $ 232.1  
 

New Investments(1)

     9.9     23.9     0.4     34.2  
                   

Adjusted Assets under management, March 31, 2010

     70.4     164.5     31.4     266.3  
                   
 

Client cash inflows

     4.6     5.3     1.9     11.8  
 

Client cash outflows

     (4.4 )   (5.2 )   (1.9 )   (11.5 )
                   
   

Net client cash flows

     0.2     0.1     —     0.3  
                   
 

Investment performance

     (6.2 )   (9.4 )   (1.9 )   (17.5 )
 

Other(2)

     (0.1 )   —     —     (0.1 )
                   

Assets under management, June 30, 2010

   $ 64.3   $ 155.2   $ 29.5   $ 249.0  
                   

 

Statement of Changes—Year to Date
(in billions)
   Mutual Fund   Institutional   High Net
Worth 		  Total  

Assets under management, December 31, 2009

   $ 44.5   $ 133.9   $ 29.6   $ 208.0  
 

New Investments(1)

     22.9     26.1     0.4     49.4  
                   

Adjusted Assets under management, December 31, 2009

     67.4     160.0     30.0     257.4  
                   
 

Client cash inflows

     8.9     12.3     3.6     24.8  
 

Client cash outflows

     (7.9 )   (14.2 )   (3.4 )   (25.5 )
                   
   

Net client cash flows

     1.0     (1.9 )   0.2     (0.7 )
                   
 

Investment performance

     (4.0 )   (2.8 )   (0.7 )   (7.5 )
 

Other(2)

     (0.1 )   (0.1 )   —     (0.2 )
                   

Assets under management, June 30, 2010

   $ 64.3   $ 155.2   $ 29.5   $ 249.0  
                   
(1)
We completed our investment in Artemis during the first quarter of 2010; and we completed our investments in Pantheon and Aston during the second quarter of 2010. Our presentation of assets under management activity is pro forma assuming these investments closed at the beginning of each period presented.

(2)
Represents certain Affiliate products that we elected to close; these transactions are not material to our ongoing financial results.

        As shown in the assets under management table above, client cash inflows totaled $24.8 billion while client cash outflows totaled $25.5 billion for the six months ended June 30, 2010. The net flows for the six months ended June 30, 2010 occurred across a broad range of product offerings in each of our distribution channels, with no individual cash inflow or outflow having a material impact on our revenue or expenses.

        The operating segment analysis presented in the following table is based on average assets under management. For the Mutual Fund distribution channel, average assets under management represent an average of the daily net assets under management. For the Institutional and High Net Worth distribution channels, average assets under management takes into consideration the billing patterns of

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particular client accounts. For example, assets under management for an account that bills in advance is included in the table using beginning of period assets under management while an account that bills in arrears uses end of period assets under management. We believe that this analysis more closely correlates to the billing cycle of each distribution channel and, as such, provides a more meaningful relationship to revenue.

 
   For the Three Months
Ended June 30, 		   
   For the Six Months
Ended June 30, 		   
  
(dollars in millions, except as noted)
   2009   2010   % Change   2009   2010   % Change  

Average assets under management (in billions)(1)

                                      

Mutual Fund

   $ 33.8   $ 63.8     89 % $ 33.1   $ 55.5     68 %

Institutional

     105.1     134.4     28 %   106.6     136.3     28 %

High Net Worth

     25.3     29.7     17 %   25.5     30.0     18 %
                               
 

Total

   $ 164.2   $ 227.9     39 % $ 165.2   $ 221.8     34 %
                               

Revenue

                                      

Mutual Fund

   $ 72.3   $ 148.0     105 % $ 140.7   $ 245.9     75 %

Institutional

     101.5     152.3     50 %   183.7     274.1     49 %

High Net Worth

     27.4     31.8     16 %   55.3     63.1     14 %
                               
 

Total

   $ 201.2   $ 332.1     65 % $ 379.7   $ 583.1     54 %
                               

Net Income

                                      

Mutual Fund

   $ 6.0   $ 10.3     72 % $ 10.6   $ 17.8     68 %

Institutional

     4.2     12.3     193 %   5.5     20.0     264 %

High Net Worth

     0.8     2.6     225 %   1.0     4.9     390 %
                               
 

Total

   $ 11.0   $ 25.2     129 % $ 17.1   $ 42.7     150 %
                               

EBITDA(2)

                                      

Mutual Fund

   $ 14.4   $ 27.0     88 % $ 29.3   $ 47.9     63 %

Institutional

     31.7     45.8     44 %   59.1     83.9     42 %

High Net Worth

     7.1     8.9     25 %   14.0     18.2     30 %
                               
 

Total

   $ 53.2   $ 81.7     54 % $ 102.4   $ 150.0     46 %
                               
(1)
As described above, our average assets under management considers balances used to bill revenue during the reporting period. These amounts also include assets managed by firms whose financial results are not consolidated ($42.9 billion and $55.1 billion for the three months ended June 30, 2009 and 2010, respectively, and $43.3 billion and $56.3 billion for the six months ended June 30, 2009 and 2010, respectively). Assets under management attributable to any investments in new Affiliates are included on a weighted average basis for the period from the closing date of the respective investment.

(2)
EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. Our use of EBITDA, including reconciliation to cash flow from operations, is described in greater detail in "Liquidity and Capital Resources—Supplemental Liquidity Measure." For purposes of our distribution channel operating results, expenses not incurred directly by Affiliates have been allocated based on the proportion of aggregate cash flow distributions reported by each Affiliate in the particular distribution channel.

Revenue

        Our revenue is generally determined by the level of our assets under management, the portion of our assets across our products and three operating segments, which realize different fee rates, and the

34


recognition of any performance fees. As described in the "Overview" section above, performance fees are generally measured on absolute or relative investment performance against a benchmark. As a result, the level of performance fees earned can vary significantly from period to period and these fees may not necessarily be correlated to changes in total assets under management.

        Our total revenue increased $130.9 million (or 65%) in the three months ended June 30, 2010, as compared to the three months ended June 30, 2009, primarily from a 39% increase in average assets under management. This increase in average assets under management resulted principally from our new Affiliate investments and investment performance. Unrelated to the change in assets under management, performance fees increased $21.2 million (or 221%) in the three months ended June 30, 2010, as compared to the three months ended June 30, 2009.

        Our total revenue increased $203.4 million (or 54%) in the six months ended June 30, 2010, as compared to the six months ended June 30, 2009, primarily from a 34% increase in average assets under management. This increase in average assets under management resulted principally from our new Affiliate investments and investment performance. Unrelated to the change in assets under management, performance fees increased $22.0 million (or 191%) in the six months ended June 30, 2010, as compared to the six months ended June 30, 2009.

        The following discusses the changes in our revenue by operating segments.

Mutual Fund Distribution Channel

        Our revenue in the Mutual Fund distribution channel increased $75.7 million (or 105%) in the three months ended June 30, 2010 as compared to the three months ended June 30, 2009, while average assets under management increased 89%, and revenue increased $105.2 million (or 75%) in the six months ended June 30, 2010 as compared to the six months ended June 30, 2009, while average assets under management increased 68%. These increases in average assets under management resulted principally from investment performance and our 2009 and 2010 investments in new Affiliates.

Institutional Distribution Channel

        Our revenue in the Institutional distribution channel increased $50.8 million (or 50%) in the three months ended June 30, 2010 as compared to the three months ended June 30, 2009, while average assets under management increased 28%, and revenue increased $90.4 million (or 49%) in the six months ended June 30, 2010 as compared to the six months ended June 30, 2009, while average assets under management increased 28%. These increases in average assets under management resulted principally from investment performance, partially offset by negative net client cash flows. Unrelated to the change in assets under management, performance fees increased $21.7 million (or 235%) in the three months ended June 30, 2010, as compared to the three months ended June 30, 2009, and increased $22.8 (or 210%) in the six months ended June 30, 2010. The increase in revenue was proportionately greater than the increase in average assets under management as a result of an increase in assets under management at Affiliates that realize comparatively higher fee rates.

High Net Worth Distribution Channel

        Our revenue in the High Net Worth distribution channel increased $4.4 million (or 16%) in the three months ended June 30, 2010 as compared to the three months ended June 30, 2009, while average assets under management increased 17%, and revenue increased $7.8 million (or 14%) in the six months ended June 30, 2010 as compared to the six months ended June 30, 2009, while average assets under management increased 18%. These increases in average assets under management resulted principally from investment performance.

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Operating Expenses

        The following table summarizes our consolidated operating expenses:

 
   For the Three Months
Ended June 30, 		   
   For the Six Months
Ended June 30, 		   
  
(dollars in millions)
   2009   2010   % Change   2009   2010   % Change  

Compensation and related expenses

   $ 103.4   $ 142.7     38 % $ 187.5   $ 261.9     40 %

Selling, general and administrative

     31.0     72.1     133 %   62.4     117.4     88 %

Amortization of intangible assets

     8.1     9.6     19 %   16.1     18.5     15 %

Depreciation and other amortization

     3.2     3.4     6 %   6.5     6.4     (2 )%

Other operating expenses

     4.7     8.4     79 %   10.5     14.5     38 %
                               

Total operating expenses

   $ 150.4   $ 236.2     57 % $ 283.0   $ 418.7     48 %
                               

        The substantial portion of our operating expenses is incurred by our Affiliates, the majority of which is incurred by Affiliates with revenue sharing arrangements. For Affiliates with revenue sharing arrangements, an Affiliate's Operating Allocation percentage generally determines its operating expenses. Accordingly, our compensation expense is impacted by increases or decreases in each Affiliate's revenue and the corresponding increases or decreases in each Affiliate's respective Operating Allocation. During the three and six months ended June 30, 2010, approximately $69.6 million and $125.6 million (or 49% and 48%), respectively, of our consolidated compensation expense was attributable to our Affiliate management partners. The percentage of revenue allocated to operating expenses varies from one Affiliate to another and may also vary within an Affiliate depending on the source or amount of revenue. As a result, changes in our aggregate revenue may not impact our consolidated operating expenses to the same degree.

        Compensation and related expenses increased 38% and 40% in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively, primarily as a result of the relationship between revenue and operating expenses at extant Affiliates, which experienced increases in revenue, and accordingly, reported higher compensation expenses. These increases were also attributable to increases in aggregate Affiliate expenses of $16.1 million and $21.2 million in the three and six months ended June 30, 2010 from new Affiliate investments, as compared to the three and six months ended June 30, 2009, respectively, as well as increases in holding company incentive and stock-based compensation of $8.6 million and $13.5 million in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively. These increases were partially offset by decreases in aggregate Affiliate expenses from the transfer of our interests in certain Affiliates of $2.1 million and $2.6 million in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively.

        Selling, general and administrative expenses increased 133% and 88% in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively. These increases resulted principally from increases in aggregate Affiliate expenses of $32.4 million and $41.0 million from new Affiliate investments in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively. These increases also resulted from increases in professional fees principally related to recent investment closings of $5.5 million and $9.9 million in the three and six months ended June 30, 2010 as compared to the three and six months ended June 30, 2009, respectively.

        Amortization of intangible assets increased 19% and 15% in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively. These increases were principally attributable to increases in definite-lived intangible assets resulting from new Affiliate investments.

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        Depreciation and other amortization increased 6% in the three months ended June 30, 2010, as compared to the three months ended June 30, 2009, principally attributable to a $0.3 million increase in aggregate Affiliate expenses from new Affiliate investments, partially offset by a decrease in spending on depreciable assets in recent periods. Depreciation and other amortization decreased 2% in the six months ended June 30, 2010, as compared to the six months ended June 30, 2009, principally attributable to a decrease in spending on depreciable assets in recent periods, partially offset by an increase of $0.4 million in aggregate Affiliate expenses from new Affiliate investments.

        Other operating expenses increased 79% and 38% in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively, principally attributable to a loss realized on the transfer of Affiliate interests in the second quarter of 2010, as well as increases in aggregate Affiliate expenses of $1.0 million and $1.2 million from new Affiliate investments in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively.

Other Income Statement Data

        The following table summarizes other income statement data:

 
   For the Three Months
Ended June 30, 		   
   For the Six Months
Ended June 30, 		   
  
(dollars in millions)
   2009   2010   % Change   2009   2010   % Change  

Income from equity method investments

   $ 7.4   $ 9.9     34 % $ 13.8   $ 19.0     38 %

Investment and other income

     7.2     0.7     (90 )%   6.9     3.5     (49 )%

Investment income (loss) from investments in partnerships

     14.9     (8.6 )   (158 )%   11.2     (4.5 )   (140 )%

Interest expense

     15.8     16.3     3 %   32.4     32.4     0 %

Imputed interest expense

     3.4     6.4     88 %   6.7     10.1     51 %

Income tax expense

     4.9     16.9     245 %   9.9     28.9     192 %

        Income from equity method investments consists of our share of income from Affiliates that are accounted for under the equity method of accounting, net of any related intangible amortization. Income from equity method investments increased 34% and 38% in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively, principally as a result of increases in assets under management at Affiliates that we account for under the equity method of accounting.

        Investment and other income decreased 90% and 49% in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively, principally as a result of a decrease in Affiliate investment earnings.

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        Investment income (loss) from Affiliate investments in partnerships relates to the consolidation of certain investment partnerships in which our Affiliates are the general partner. For the three months ended June 30, 2009 and 2010, the income (loss) from Affiliate investments in partnerships was $14.9 million and $(8.6) million, respectively. For the six months ended June 30, 2009 and 2010, the income (loss) from Affiliate investments in partnerships was $11.2 million and $(4.5) million, respectively. This income (loss) was principally attributable to investors who are unrelated to us.

        Interest expense increased slightly in the three months ended June 30, 2010, as compared to the three months ended June 30, 2009, principally as a result of an increase in cost of our senior bank debt, which resulted from an increase in borrowings. Interest expense was flat in the six months ended June 30, 2010, as compared to the six months ended June 30, 2009.

        Imputed interest expense consists of interest accretion on our senior convertible securities and our junior convertible trust preferred securities as well as the accretion of our projected contingent payment arrangements. Imputed interest expense increased 88% and 51% in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively, principally as a result of a $2.6 million increase in accretion related to our contingent payment arrangements, as well as increases in the interest accretion on our convertible securities.

        Income taxes increased 245% and 192% in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively, primarily as the result of increases in Income before income taxes attributable to controlling interests, and a one-time $3.0 million benefit in 2009 from the reversal of a valuation allowance on Massachusetts net operating losses.

Net Income

        The following table summarizes Net Income:

 
   For the Three Months
Ended June 30, 		   
   For the Six Months
Ended June 30, 		   
  
(dollars in millions)
   2009   2010   % Change   2009   2010   % Change  

Net income (non-controlling interests)

   $ 30.7   $ 41.4     35 % $ 51.5   $ 72.7     41 %

Net income (loss) (non-controlling interests in partnerships)

     14.6     (8.4 )   (158 )%   10.8     (4.4 )   (141 )%

Net Income (controlling interest)

     11.0     25.2     129 %   17.1     42.7     150 %

        Net income attributable to non-controlling interests increased 35% and 41% in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, principally as a result of the previously discussed changes in revenue partially offset by the previously discussed decreases in investment and other income.

        Net income (loss) (non-controlling interest in partnerships) relates to the consolidation of certain investment partnerships in which our Affiliates are the general partner. For the three months ended June 30, 2009 and 2010, the net income (loss) from Affiliate investment partnerships attributable to the non-controlling interests was $14.6 million and $(8.4) million, respectively. For the six months ended June 30, 2009 and 2010, the net income (loss) from Affiliate investment partnerships attributable to the non-controlling interests was $10.8 million and $(4.4) million, respectively.

        Net Income (controlling interest) increased 129% and 150% in the three and six months ended June 30, 2010, as compared to the three and six months ended June 30, 2009, respectively, as a result of the previously discussed increases in revenue, partially offset by increases in reported operating and income tax expenses.

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Supplemental Performance Measures

        In reporting our financial and operating results during the second quarter, we renamed our non-GAAP performance measures to Economic Net Income and Economic earnings per share (formerly known as Cash Net Income and Cash earnings per share). We consider Economic Net Income an important measure of our financial performance, as we believe it best represents our operating performance before non-cash expenses relating to our acquisition of interests in our investment management firms. Economic Net Income and Economic earnings per share are used by our management and Board of Directors as our principal performance benchmarks, including as measures for aligning executive compensation with stockholder value. These measures are provided in addition to, but not as a substitute for, Net Income (controlling interest) and Earnings per share. Economic Net Income and Economic earnings per share are not liquidity measures and should not be used in place of any liquidity measure calculated under GAAP. These measures facilitate comparisons to other asset management firms that have not engaged in significant acquisitions or issued convertible debt.

        Under our Economic Net Income definition, we add to Net Income (controlling interest) amortization (including equity method amortization), deferred taxes related to intangible assets, Affiliate depreciation and Affiliate equity expense, and exclude the non-cash effect of APB 14-1 (principally imputed interest on convertible securities) and non-cash expenses related to contingent payment arrangements. We add back amortization attributable to acquired client relationships because this expense does not correspond to the changes in value of these assets, which do not diminish predictably over time. The portion of deferred taxes generally attributable to intangible assets (including goodwill) that we no longer amortize but which continues to generate tax deductions is added back, because we believe it is unlikely these accruals will be used to settle material tax obligations. Since our acquired assets do not generally depreciate or require replacement by us, and since they generate deferred tax expenses that are unlikely to reverse, we add back these non-cash expenses to Net Income to measure operating performance. We add back non-cash expenses relating to certain transfers of equity between Affiliate management partners, when these transfers have no dilutive effect to our shareholders. We add back the portion of consolidated depreciation expense incurred by our Affiliates because under our Affiliates' operating agreements we are generally not required to replenish these depreciating assets.

        Economic earnings per share represents Economic Net Income divided by the adjusted diluted average shares outstanding, which measures the potential share issuance from our senior convertible securities and junior convertible securities (each further described in Liquidity and Capital Resources) using a "treasury stock" method. Under this method, only the net number of shares of common stock equal to the value of these 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 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.

        In connection with recent investments in Affiliates, in the first quarter of 2010 we modified our Economic Net Income definition to exclude non-cash imputed interest and revaluation adjustments related to contingent payment arrangements from Net Income (controlling interest). The modification of the Economic Net Income definition did not have an impact on the prior periods reported.

39

        The following table provides a reconciliation of Net Income (controlling interest) to Economic Net Income:

 
   For the Three Months
Ended June 30, 		  For the Six Months
Ended June 30, 		 
(in millions, except shares and per share data)
   2009   2010   2009   2010  

Net Income (controlling interest)

   $ 11.0   $ 25.2   $ 17.1   $ 42.7  
 

Intangible amortization(1)(2)

     16.0     17.0     32.0     33.7  
 

Intangible-related deferred taxes

     9.5     14.3     19.1     25.0  
 

Imputed interest and contingent payment adjustments(3)

     2.0     3.2     4.1     5.5  
 

Affiliate equity expense

     1.9     1.8     3.9     3.5  
 

Affiliate depreciation

     2.0     2.3     3.9     4.2  
                   

Economic Net Income

   $ 42.4   $ 63.8   $ 80.1   $ 114.6  
                   

 

 
   For the Three Months
Ended June 30, 		  For the Six Months
Ended June 30, 		 
 
   2009   2010   2009   2010  

Average shares outstanding—diluted

     43,159,140     47,635,230     42,082,991     46,539,949  
 

Assumed issuance of senior convertible securities shares

     (873,803 )   (661,054 )   (873,803 )   (767,341 )
 

Assumed issuance of junior convertible securities shares

     —     —     —     —  
 

Dilutive impact of senior convertible securities shares

     1,163     185,589     581     197,651  
 

Dilutive impact of junior convertible securities shares

     —     —     —     —  
                   

Average shares outstanding—adjusted diluted

     42,286,500     47,159,765     41,209,769     45,970,259  
                   

Economic earnings per share

  
$
1.00		  
$
1.35		  
$
1.94		  
$
2.49		  
                   
(1)
We are required to use the equity method of accounting for certain of our investments and, as such, do not separately report these Affiliates' revenues or expenses (including intangible amortization) in our income statement. Our share of these investments' amortization, $8.1 million and $16.1 million for the three and six months ended June 30, 2010, respectively, is reported in "Income from equity method investments."

(2)
Our reported intangible amortization, $9.6 million and $18.5 million for the three and six months ended June 30, 2010, respectively, includes $0.7 million and $1.0 million, respectively, of amortization attributable to our non-controlling interests, amounts not added back to Net Income (controlling interest) to measure our Economic Net Income.

(3)
Our reported imputed interest expense, $6.4 million and $10.1 million for the three and six months ended June 30, 2010, respectively, includes $1.3 million of imputed interest attributable to our non-controlling interests, amounts not added back to Net Income (controlling interest) to measure our Economic Net Income.

        Economic Net Income increased 50% and 43% in the three and six months ended June 30, 2010 as compared to the three and six months ended June 30, 2009, primarily as a result of the previously-described factors that caused an increase in Net Income as well as increases in amortization and intangible-related deferred tax expenses.

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Liquidity and Capital Resources

        The following table summarizes certain key financial data relating to our liquidity and capital resources:

(in millions)
   December 31,
2009 		  June 30,
2010 		 

Balance Sheet Data

              

Cash and cash equivalents

   $ 259.5   $ 220.5  

Senior bank debt

     —     659.5  

2008 senior convertible notes

     409.6     415.9  

Zero coupon convertible notes

     47.4     —  

Junior convertible trust preferred securities

     507.4     508.6  

 

 
   For the Three Months
Ended June 30, 		  For the Six Months
Ended June 30, 		 
 
   2009   2010   2009   2010  

Cash Flow Data

                          

Operating cash flow

   $ 72.2   $ 115.1   $ 87.9   $ 183.1  

Investing cash flow

     (5.0 )   (682.9 )   (8.7 )   (814.8 )

Financing cash flow

     (31.6 )   586.3     (202.4 )   593.8  

EBITDA(1)

     53.2     81.7     102.4     150.0  
(1)
The definition of EBITDA is presented in Note 2 on page 34 and below under Supplemental Liquidity Measure.

        We view our ratio of debt to EBITDA (our "internal leverage ratio") as an important gauge of our ability to service debt, make new investments and access additional capital. Consistent with industry practice, we do not consider junior trust preferred securities as debt for the purpose of determining our internal leverage ratio. We also view our leverage on a "net debt" basis by deducting from our debt balance holding company cash (including prospective proceeds from the settlement of our forward equity sale agreements). At June 30, 2010, our internal leverage ratio was 2.2:1.

        Under the terms of our credit facility we are required to meet two financial ratio covenants. The first of these covenants is a maximum ratio of debt to EBITDA (the "bank leverage ratio") of 3.5. The calculation of our bank leverage ratio is generally consistent with our internal leverage ratio approach. The second covenant is a minimum EBITDA to cash interest expense ratio of 3.0 (our "bank interest coverage ratio"). For the purposes of calculating these ratios, share-based compensation expense is added back to EBITDA. As of June 30, 2010, our actual bank leverage and bank interest coverage ratios were 2.7 and 5.7, respectively, and we were in full compliance with all terms of our credit facility. Following the July 2 settlement of the outstanding forward equity sales and the use of these funds to pay down senior bank debt, our pro forma bank leverage ratio was 2.3. Following this repayment, we have $305.2 million of remaining capacity under our $770 million credit facility, of which we could borrow a total of $305.2 million without violating credit facility covenants.

        We are rated BBB- by Standard & Poor's. A downgrade of our credit rating, either as a result of industry or company-specific considerations, would not have a material financial effect on any of our agreements or securities (or otherwise trigger a default).

Supplemental Liquidity Measure

        As supplemental information in this Quarterly Report on Form 10-Q, we have provided information regarding our EBITDA, a non-GAAP liquidity measure. This measure is provided in addition to, but not as a substitute for, cash flow from operations. EBITDA represents earnings before

41


interest expense, income taxes, depreciation and amortization. EBITDA, as calculated by us, may not be consistent with computations of EBITDA by other companies. As a measure of liquidity, we believe that EBITDA is useful as an indicator of our ability to service debt, make new investments and meet working capital requirements. We further believe that many investors use this information when analyzing the financial position of companies in the investment management industry.

        The following table provides a reconciliation of cash flow from operations to EBITDA:

 
   For the Three Months
Ended June 30, 		  For the Six Months
Ended June 30, 		 
(in millions)
   2009   2010   2009   2010  

Cash flow from operations

   $ 72.2   $ 115.1   $ 87.9   $ 183.1  
 

Interest expense, net of non-cash items(1)

     13.9     14.4     28.7     28.6  
 

Current tax provision

     (1.1 )   5.3     (9.2 )   7.9  
 

Income from equity method investments, net of distributions(2)

     5.4     4.4     0.8     (1.6 )
 

Changes in assets and liabilities

                          
   

and other adjustments(3)

     (37.2 )   (57.5 )   (5.8 )   (68.0 )
                   

EBITDA

   $ 53.2   $ 81.7   $ 102.4   $ 150.0  
                   
(1)
Non-cash items represent amortization of issuance costs and imputed interest ($5.2 million and $8.2 million for the three months ended June 30, 2009 and 2010, respectively, and $10.4 million and $13.8 million for the six months ended June 30, 2009 and 2010, respectively).

(2)
Distributions from equity method investments were $9.9 million and $13.6 million for the three months ended June 30, 2009 and 2010, respectively, and $28.8 million and $36.8 million for the six months ended June 30, 2009 and 2010, respectively.

(3)
Other adjustments include stock option expenses, tax benefits from stock options, net income attributable to non-controlling interests and other adjustments to reconcile Net Income (controlling interest) to net cash flow from operating activities.

        In the six months ended June 30, 2010, we met our operating cash requirements primarily through cash generated by operating activities. Our principal uses of cash in the three and six months ended June 30, 2010 were to make distributions to Affiliate managers and repay our senior bank debt. We expect that our principal uses of cash for the foreseeable future will be for investments in new and existing Affiliates, distributions to Affiliate managers, payment of interest on outstanding debt, the repurchase of debt securities, and the repurchase of shares of our common stock and for working capital purposes.

        The following table summarizes the principal amount due at maturity of our debt obligations and convertible securities as of June 30, 2010:

(in millions)
   Amount   Maturity
Date 		  Form of
Repayment 		 

Senior Bank Debt

   $ 465.0 (1)   2012       (2)

2008 Senior Convertibles Notes

     460.0     2038       (3)

Junior Convertible Trust Preferred Securities

     730.8     2036/2037       (4)
(1)
Pro forma for the July 2, 2010 settlement of our forward equity sales.

(2)
Settled in cash.

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(3)
Settled in cash if holders exercise their August 2013, 2018, 2023, 2028 or 2033 put rights, and in cash or common stock (or a combination thereof) at our election if the holders exercise their conversion rights.

(4)
Settled in cash or common stock (or a combination thereof) at our election if the holders exercise their conversion rights.

Senior Bank Debt

        We have a $770 million revolving credit facility (the "Revolver") under which we pay interest at specified rates (based either on the LIBOR rate or the prime rate as in effect from time to time) that vary depending on our credit rating. Subject to the agreement of lenders to provide additional commitments, we have the option to increase the Revolver by up to $175 million. The Revolver contains financial covenants with respect to leverage and interest coverage and customary affirmative and negative covenants, including limitations on indebtedness, liens, cash dividends and fundamental corporate changes. Borrowings under the Revolver are collateralized by pledges of the substantial majority of our capital stock or other equity interests owned by us. As of June 30, 2010, we had $660 million outstanding under the Revolver; and, on July 2, 2010 used the net proceeds from the settlement of sales under our forward equity program to pay down the balance outstanding under the Revolver to approximately $465 million.

Senior Convertible Securities

        We have one senior convertible security outstanding at June 30, 2010. The principal terms of these notes are summarized below.

 
   2008
Convertible
Notes 		 

Issue Date

     August 2008  

Maturity Date

     August 2038  

Par Value

   $460.0  

Carrying Value

     415.9 (1)

Note Denomination

     1,000  

Current Conversion Rate

     7.959  

Current Conversion Price

     125.65  

Stated Coupon

     3.95 %

Tax Deduction Rate

     9.38% (2)
(1)
The carrying value is accreted to the principal amount at maturity using an interest rate of 7.4%.

(2)
The 2008 convertible notes are considered contingent payment debt instruments under tax regulations that require us to deduct interest in an amount greater than our cash coupon rate.

        The 2008 convertible notes are convertible into a defined number of shares of our common stock upon the occurrence of certain events. Upon conversion, we may elect to pay or deliver cash, shares of common stock, or some combination thereof. The holders of the 2008 convertible notes may put these securities to us in August of 2013, 2018, 2023, 2028 and 2033. We may call the notes for cash at any time on or after August 15, 2013.

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        In the second quarter of 2010, we called our Zero Coupon Senior Convertible Notes due May 7, 2021 ("zero coupon senior convertible notes") for redemption at their principal amount plus any original issue discount accrued thereon. In lieu of redemption, all of the holders elected to convert their zero coupon senior convertible notes into shares of our common stock. We issued 873,626 shares of common stock to settle these conversions. All of our zero coupon senior convertible notes have been cancelled and retired as of June 14, 2010.

Junior Convertible Trust Preferred Securities

        We have two junior convertible trust preferred securities outstanding at June 30, 2010, one issued in 2006 (the "2006 junior convertible trust preferred securities") and a second issued in 2007 (the "2007 junior convertible trust preferred securities".) The principal terms of these securities are summarized below.

 
   2006 Junior
Convertible
Trust Preferred
Securities 		  2007 Junior
Convertible
Trust Preferred
Securities 		 

Issue Date

     April 2006     October 2007  

Maturity Date

     April 2036     October 2037  

Par Value

   $300.0   $430.8  

Carrying Value

     213.0 (1)   295.6 (2)

Note Denomination

     50     50  

Current Conversion Rate

     0.333     0.250  

Current Conversion Price

     150.00     200.00  

Stated Coupon

     5.10 %   5.15 %

Tax Deduction Rate

     7.50% (3)   8.00% (3)
(1)
The carrying value is accreted to the principal amount at maturity using an interest rate of 7.5% (over its expected life of 30 years).

(2)
The carrying value is accreted to the principal amount at maturity using an interest rate of 8.0% (over its expected life of 30 years).

(3)
The 2006 and 2007 junior convertible trust preferred securities are considered contingent payment debt instruments under the federal income tax regulations. We are required to deduct interest in an amount greater than our cash coupon rate.

        Both the 2006 and 2007 junior convertible trust preferred securities are convertible, at any time, into a defined number of shares. Upon conversion, holders will receive cash or shares of our common stock, or a combination thereof. We can call the 2006 junior convertible trust preferred securities on or after April 2011 if the closing price of our common stock exceeds $195 per share for a specified period of time.

        We can call the 2007 junior convertible trust preferred securities on or after October 2012 if the closing price of our common stock exceeds $260 per share for a specified period of time. Holders of the 2006 and 2007 junior trust preferred securities have no rights to put these securities to us.

Forward Equity Sale Agreement

        We have entered into three forward equity sale agreements with major securities firms to sell shares of our common stock (up to $200 million under each agreement). Under the terms of these agreements, we can settle forward sales at any time prior to December 31, 2010 by issuing shares in exchange for cash. Alternatively, we may choose to settle forward sales on a net stock or cash basis. Through June 30, 2010, we have completed $496.5 million of forward sales. In March 2009, we settled $147.2 million of forward equity sales by issuing 1.8 million shares of our common stock. In May 2010, we settled $46.6 million of forward equity sales by issuing 0.5 million shares of our common stock. In

44


June 2010, we settled $102.0 million of forward equity sales by issuing 1.8 million shares of our common stock. In July 2010, we settled the remaining $200.7 million of outstanding forward equity sales through the issuance of 3.2 million shares of our common stock. We have the additional capacity to sell up to $103.5 million under an agreement entered into in July 2009.

Share Repurchase Program

        In the second quarter of 2010, we did not purchase any shares of common stock under our share repurchase programs. In July 2010, our Board of Directors authorized an additional 500,000 shares of common stock for repurchase under our share repurchase programs. There are currently 1,584,706 shares that could be purchased under our share repurchase program.

Affiliate Equity

        Many of our operating agreements provide Affiliate managers a conditional right to require us to purchase their retained equity interests at certain intervals. Certain agreements also provide us a conditional right to require Affiliate managers to sell their retained equity interests to us upon their death, permanent incapacity or termination of employment and provide Affiliate managers a conditional right to require us to purchase such retained equity interests upon the occurrence of specified events. The purchase price of these conditional purchases are generally calculated based upon a multiple of the Affiliate's cash flow distributions, which is intended to represent fair value. Affiliate management partners are also permitted to sell their equity interests to other individuals or entities in certain cases, subject to our approval or other restrictions.

        We may pay for Affiliate equity purchases in cash, shares of our common stock or other forms of consideration and can consent to the transfer of these interests to other individuals or entities. Our cumulative redemption obligation for these interests has been presented as "Redeemable non-controlling interests" on our Consolidated Balance Sheets. Although the timing and amounts of these purchases are difficult to predict, we expect to repurchase approximately $100 million of Affiliate equity during the next twelve months, and, in such event, will own the cash flow associated with any equity repurchased.

Operating Cash Flow

        Cash flow from operations generally represents Net Income plus non-cash charges for amortization, deferred taxes, equity-based compensation and depreciation, as well as increases and decreases in our consolidated working capital.

        The increase in cash flows from operations for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009, resulted principally from increased Net Income of $31.5 million, a decrease in settlements of accounts payable and accrued liabilities of $48.0 million and purchases of prepaids and other current assets of $29.0 million, partially offset by a decrease in collections of investment advisory fees receivable of $43.2 million.

        We consolidated $93.8 million and $89.6 million of client assets held in partnerships controlled by our Affiliates as of December 31, 2009 and June 30, 2010, respectively. Sales of $0.3 million increased operating cash flow in the six months ended June 30, 2009. Purchases of $0.5 million decreased operating cash flow in the six months ended June 30, 2010.

Investing Cash Flow

        The net cash flow used in investing activities increased $806.1 million for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009. This was primarily the result of an increase of $791.6 million relating to our investments in Pantheon and Aston during the second quarter of 2010.

45

Financing Cash Flow

        Net cash flows from financing activities increased $796.1 million for the six months ended June 30, 2010, as compared to the six months ended June 30, 2009. This was primarily a result of an increase in net borrowings of senior bank debt of $893.0 million, partially offset by an increase in repurchases of Affiliate equity of $76.7 million. In addition, we received $144.3 million and $100.0 million of proceeds from the settlement of forward equity sales in the six months ended June 30, 2009 and June 30, 2010, respectively. In July 2010, we settled our remaining forward sales with the issuance of 3.2 million shares for $194.7 million.

        Our investment in Artemis was financed through borrowings under our Revolver, and our investment in Aston was financed through the issuance of approximately 1.7 million shares of our common stock. Our investment in Pantheon was financed with borrowings under our Revolver and proceeds from the partial settlement of forward equity sales.

        Under past acquisition agreements, we are contingently liable, upon achievement of specified financial targets, to make payments of up to $601 million through 2015. In the remainder of 2010, we do not expect to make any significant payments to settle portions of these contingent obligations.

        Proceeds available under our Revolver are sufficient to support our cash flow needs for the foreseeable future.

Contractual Obligations

        The following table summarizes our contractual obligations as of June 30, 2010:

 
    
   Payments Due  
Contractual Obligations
  Total   Remainder
of 2010 		  2011-2012   2013-2014   Thereafter  

(in millions)

                                

Senior bank debt

   $ 659.5   $ —   $ 659.5   $ —   $ —  

Senior convertible securities(1)

     977.8     9.1     36.3     36.3     896.1  

Junior convertible trust preferred securities(2)

     1,717.9     18.5     74.1     74.1     1,551.2  

Leases

     82.4     10.6     33.8     23.8     14.2  

Other liabilities(3)

     155.6     21.6     134.0     —     —  
                       

Total Contractual Obligations

   $ 3,593.2   $ 59.8   $ 937.7   $ 134.2   $ 2,461.5  
                       
Contingent Obligations
   
    
    
    
    
  

Contingent payment obligations(4)

   $ 106.6   $ —   $ 80.3   $ 24.2   $ 2.1  
(1)
The timing of debt payments assumes that outstanding debt is settled for cash or common stock at the applicable maturity dates. The amounts include the cash payment of fixed interest. Holders of the 2008 convertible notes may put their interests to us for $460 million in 2013.

(2)
As more fully discussed on page 41, consistent with industry practice, we do not consider our junior convertible trust preferred securities as debt for the purpose of determining our leverage ratio.

(3)
Other liabilities reflect amounts payable to Affiliate managers related to our purchase of additional Affiliate equity interests and deferred purchase price. This table does not include liabilities for uncertain tax positions or commitments to co-invest in certain investment partnerships (of $22.2 million and $97 million as of June 30, 2010, respectively) as we cannot predict when such obligations will be paid.

(4)
The amount of contingent payments related to business acquisitions disclosed in the table represents our expected settlement amounts. While the table above reflects our current estimates, the maximum settlement amount is $167 million for the remainder of 2010 and $434 million in periods after 2010.

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Recent Accounting Developments

        During the first quarter of 2010, we adopted a new standard that requires an enterprise to perform a qualitative analysis to determine whether its variable interests give it a controlling financial interest in a variable interest entity ("VIE"). Under the standard, an enterprise has a controlling financial interest when it has (a) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and (b) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. An enterprise that holds a controlling financial interest is deemed to be the primary beneficiary and is required to consolidate the VIE. This new standard has been deferred for certain entities that utilize the specialized accounting guidance for investment companies or that have the attributes of investment companies. The adoption of the portions of this new standard that were not deferred did not have a material impact on our Consolidated Financial Statements.

        During the first quarter of 2010, we adopted a new standard that eliminated the concept of a qualifying special-purpose entity ("QSPE"), changed the requirements for derecognizing financial assets, and required additional disclosures to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including an entity's continuing involvement in and exposure to the risks related to transferred financial assets. The standard also clarified the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. The adoption of this new standard did not have a material impact on our Consolidated Financial Statements.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

        There have been no significant changes to our Quantitative and Qualitative Disclosures About Market Risk in the three and six months ended June 30, 2010. Please refer to Item 7A in our 2009 Annual Report on Form 10-K.

Item 4.    Controls and Procedures

        We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures during the quarter covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the quarter covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures are effective in ensuring that (i) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and (ii) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officers as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance of achieving their stated objectives and our principal executive officer and principal financial officers concluded that our disclosure controls and procedures are effective at the reasonable assurance level. We review on an ongoing basis and document our disclosure controls and procedures, and our internal control over financial reporting, and we may from time to time make changes in an effort to enhance their effectiveness and ensure that our systems evolve with our business.

        No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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 PART II—OTHER INFORMATION

Item 6.    Exhibits

        The exhibits are listed on the Exhibit Index and are included elsewhere in this Quarterly Report on Form 10-Q.

48


 SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    AFFILIATED MANAGERS GROUP, INC.
(Registrant)

August 9, 2010
 
/s/ DARRELL W. CRATE
 Darrell W. Crate
 on behalf of the Registrant as Executive Vice President, Chief Financial Officer and Treasurer (and also as Principal Financial and Principal Accounting Officer)

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 EXHIBIT INDEX

Exhibit No.   Description
  2.1   Amendment No. 1 to Purchase and Sale Agreement, dated as of June 30, 2010, by and among Frank Russell Company, Affiliated Managers Group, Inc., and, solely in respect of Sections 4.18, 4.19 and 8.8 of the Purchase and Sale Agreement between the parties dated as of February 10, 2010 (as amended hereby), The Northwestern Mutual Life Insurance Company.

 
31.1
 
Certification of Registrant's Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
31.2
 
Certification of Registrant's Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 
32.1
 
Certification of Registrant's Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
32.2
 
Certification of Registrant's Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 
101
 
The following financial statements from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 are furnished herewith, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Income for the three and six month periods ended June 30, 2010 and 2009, (ii) the Consolidated Balance Sheets at June 30, 2010 and December 31, 2009, (iii) the Consolidated Statement of Equity for the six month period ended June 30, 2010, (iv) the Consolidated Statements of Cash Flows for the three and six month periods ended June 30, 2010 and 2009, and (v) the Notes to the Consolidated Financial Statements.

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QuickLinks

PART I—FINANCIAL INFORMATION
AFFILIATED MANAGERS GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data) (unaudited)
AFFILIATED MANAGERS GROUP, INC. CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)
AFFILIATED MANAGERS GROUP, INC. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (dollars in thousands) (unaudited)
AFFILIATED MANAGERS GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
AFFILIATED MANAGERS GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART II—OTHER INFORMATION
SIGNATURES
EXHIBIT INDEX