Affiliated Managers Group, Inc.

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Affiliated Managers Group, Inc.

600 Hale Street
Prides Crossing, Massachusetts 01965
U.S.A.
Telephone: (617) 747-3300
Fax: (617) 747-3380
Web site: http://www.amg.com

Public Company
Incorporated:
1993
Employees: 974
Total Assets: $2.32 billion (2005)
Stock Exchanges: New York
Ticker Symbol: AMG
NAIC: 523920 Portfolio Manager

Boston-area Affiliated Managers Group, Inc. (AMG) is an asset management company with a controlling interest in more than 30 mid-sized investment management firms. Altogether these affiliates manage about $175 billion in assets in some 275 investment products, sold to both wealthy individuals and institutional investors. AMG's operating philosophy is to take an ownership position in affiliates between 50 percent and 70 percent, leaving the remaining equity with both senior and junior managers as an incentive to grow the business. In addition, affiliates are given a great deal of autonomy and allowed to retain their individual cultures and entrepreneurial spirit. By the same token, affiliates benefit from AMG's scale, realizing savings due to economies of scale in operations, distribution, and technology. AMG also has developed investment products that the affiliates market. AMG is a public company listed on the New York Stock Exchange.

FOUNDER, A PRACTICING LAWYER: 197080

AMG was founded by its chairman, William J. Nutt. The son of a western Pennsylvania dairy farmer, Nutt was able to gain his college education through full scholarships, first to Grove City College in 1963, then to the University of Pennsylvania law school. After earning his law degree in 1971 and clerking for a district court judge, Nutt began practicing corporate law for a Philadelphia law firm, making partner by the end of the decade. It was here that he began to learn the asset management field through his work for Wellington Management Company, Provident Capital Management, and other clients. In 1982 Nutt left to establish an administration, custody, and transfer agency business at Boston Company, a recent acquisition of Shearson/American Express that offered trust services primarily to wealthy individuals. Not only did Nutt begin making the transition from law to asset management, he came to appreciate how Shearson/American Express allowed Boston Co. a free hand at running its business with a minimum of interference.

When Boston Co. was sold to Mellon Bank Corp. in 1993, Nutt resigned. He had grown wealthy enough to retire at the age of 47, but decided to strike out on his own. During his days at Boston Co. he had taken an interest in the development of United Asset Management (UAM), a firm established in 1980 by Norton Reamer to acquire independent asset management companies. Reamer acquired 100 percent interests but took a hands-off approach and shared about half the revenues with the managers. This was in stark contrast to banks and insurance companies, which made money managers paid employees and sapped their entrepreneurial spirit to the detriment of the funds' performance. Nutt's idea was to improve upon the UAM model, providing actual equity to talented fund managers and thus even greater incentive. Aside from philosophy, basic demographics favored Nutt's plan to acquire mid-sized asset management firms, many of whose founders were nearing retirement age. The Employment Retirement Income Security Act of 1974 had led to an increase in investment vehicles, and a large number of money managers at banks and insurance firms launched their own companies to manage pension funds. Some 20 years later these independent managers were faced with issues of succession and attaining liquidity to plan their estates. Hence they would be receptive to Nutt's concept, which would allow them to continue running their firms as they neared retirement, keep a large equity interest, yet address the problems of succession and estate planning.

Through investment banker R. Kendrick Wilson, Nutt was introduced to TA Associates, a Boston venture capital firm known for helping Federal Express get its start. More recently it had become involved in financial services and enjoyed success investing in money management firms. The people at TA agreed with Nutt that there was an opportunity to create a vehicle to snap up mid-sized money management firms, and in September 1993 TA hired Nutt as a consultant to flesh out a business plan, which then served to solidify their interest. Before the year was out TA agreed to back Nutt and invested $20 million in AMG for an 80 percent interest. Nutt contributed $1 million for a 10 percent stake, and the remaining 10 percent was used to recruit management talent. The most notable recruit would be Sean Healey, a Goldman Sachs veteran just two years shy of a potential partnership, who would come on board in the spring of 1995.

FIRST ACQUISITION: 1994

Not only did TA provide funding, its personnel helped Nutt by compiling a list of acquisition targets. In its first deal, in 1994 AMG paid close to $10 million in cash and notes for a 51 percent interest in New York-based J.M. Hartwell, and ultimately took a 75 percent position. Hartwell's business was trending downward, however, and the firm's performance fell far below expectations, not even keeping pace with the Standard & Poor's 500 index. AMG invested another $62 million in 1995 on stakes in four more money management firms. AMG gained majority interests in New Jersey-based Systematic Financial Management, Chicago-based Skyline Asset Management, and Cincinnati-based Renaissance Investment Management. In addition, AMG bought 30 percent of the New York firm Paradigm Asset Management Company, L.L.C. The performance of these new affiliates was at best spotty, with Systematic and Renaissance suffering declines in assets, while Paradigm and Skyline enjoyed strong gains.

AMG began to come of age in early 1996 when it acquired a Xerox subsidiary, Pasadena, California-based First Quadrant, a $10.3 billion firm that described itself as a "global quantitative investment manager." AMG's winning bid of about $50 million actually tied with another suitor, but Xerox sold to AMG because it was able to pay immediately. First Quadrant's managers thrived under AMG, which gave them one-third of the firm's stock and returned 70 percent of the revenues to them to reinvest at their own discretion. Assets under management grew to $28 billion in little more than two years. Also in 1996 AMG took a controlling interest in Chicago's The Burridge Group L.L.C.

COMPANY PERSPECTIVES

AMG's unique partnership approach creates powerful incentives for continued strong performance and excellent client service by providing Affiliate management with direct equity participation in their firms alongside AMG. AMG's growth strategy is to generate shareholder value through the internal growth of existing Affiliates, accretive investments in additional, growing mid-sized investment management firms, and strategic transactions and relationships designed to enhance our Affiliates' businesses and growth prospects.

In need of a fresh infusion of cash to fuel further growth and reach the size necessary to take the company public, Nutt raised $23 million in private equity from the likes of NationsBank and ITT Corp., and then arranged with AMG's syndicate of bankers to boost the firm's line of credit from $50 to $125 million. With a replenished war chest at his disposal, Nutt returned to acquisition mode. The first stop was Chicago, where in May 1997 AMG paid about $20 million for a 65 percent interest in Gofen & Glossberg, L.L.C., a $3.8 billion firm. Later in the year, AMG added GeoCapital Corp. to its portfolio, investing another $25 million in cash and stock for 60 percent of the $2.4 billion New York firm. But the biggest deal of 1997, one that would turn the corner for AMG, was the $300 million cash purchase of a 71 percent position in New York-based Tweedy, Browne, a high-profile, and highly profitable, firm founded in 1920. AMG came along at the opportune moment, when Tweedy's three 50-something partnersbrothers Christopher and William Browne and John Spearswere looking to plan their estates and sell at least a portion of the firm's stock, which the three of them controlled. Uninterested in selling out to a large organization, such as UAM, they found AMG more to their liking. They gained the liquidity they needed, but could continue to conduct their business as long as they chose to do so.

IPO: 1997

The addition of Tweedy added greatly to AMG's profitability. Moreover, it provided the spark Nutt had been waiting for to take AMG public. He struck quickly, and in November 1997 AMG made an initial public offering (IPO) of stock with Goldman Sachs serving as lead underwriter. Selling 48 percent of the company at $23.50 per share, AMG netted $187 million. Now the firm had new funds and a public stock to use in making further acquisitions. In addition, by the end of the year the banks increased its credit line to $300 million. With Tweedy in the fold, AMG was in a better position to attract other top-notch fund managers.

In March 1998, AMG paid nearly $70 million in cash plus stock for a 68 percent interest in Boston's Essex Investment Management Company L.L.C., owned by 64-year-old Joseph McNay, who then signed a ten-year employment contract to continue running his highly profitable growth equity investment firm with $6 billion in assets. At the end of the year AMG also bought the $3 billion Houston firm of Davis, Hamilton, Jackson & Associates, paying approximately $25 million for a 65 percent stake. AMG gained a similar position in Philadelphia's $3.7 billion Rorer Asset Management, investing $64 million for a deal that closed after the new year. As a result, AMG's stable now included 13 affiliates managing collectively $64 billion. For the year 1998, AMG recorded revenues of $238.5 million and net income of $25.6 million. AMG was hitting on all cylinders in 1999, as revenues soared to $518.7 million and net income increased to $72.2 million. The firm also raised more cash in another equity offering and made a key acquisition in April 1999, acquiring Norwalk, Connecticut-based The Managers Funds L.L.C., a family of nine, no-load mutual funds run by outside managers. These funds now became available for other AMG affiliates to market. In addition, in December 1999 AMG launched Managers AMG Funds, its own line of mutual funds made available to affiliates.

NEW CENTURY: FURTHER ACQUISITIONS

AMG closed on an acquisition in January 2000, paying a reported $105 million for a controlling interest in Frontier Capital Management Company, L.L.C., a Boston firm it had originally approached four years earlier. At the time Frontier's top executives were not concerned about retirement but had since begun to explore succession options with adviser Goldman, Sachs, which not surprisingly mentioned AMG as a possible solution. AMG now had 15 affiliates managing more than $90 billion. No other acquisitions were made in 2000, which proved to be a difficult year for the stock market. Despite a decline in revenues to $458.7 million, AMG recorded net income of $56.7 million. Poor economic conditions persisted in 2001, when AMG realized net income of $50 million on revenues that receded to $408.2 million. The firm continued to introduce products, such as funds managed by the experts of multiple affiliates. It also invested in Paris-based DFD Select Group to provide new affiliates with a way to sell some of their products in the European marketplace. In addition, AMG added a pair of affiliates to its portfolio, spending $247 million on a 51 percent stake in Delaware-based Friess Associates, L.L.C., and a reported $80 million to $120 million for the 163-year-old Boston firm of Welch & Forbes, which specialized as an adviser to wealthy families.

KEY DATES

1993:
The company is founded by William Nutt.
1997:
The company is taken public.
2002:
Third Avenue Management is acquired.
2004:
Sean Healey is replaced by Nutt as CEO.
2005:
AMG acquires interests in six Canadian firms.

In 2002 AMG acquired another high-profile firm in New York's Third Avenue Management, owned by 77-year-old portfolio manager Martin J. Whitman, who took pride in calling himself a "vulture investor." The Third Avenue family of mutual funds placed a premium on buying stock in companies at highly discounted pricesan approach in keeping with the ongoing difficulties in the equity market. Conditions were such that AMG soon informed Wall Street that it was unlikely to make further acquisitions for the next year or so. Despite a softening in its stock price, AMG held steady, growing revenues to $482.5 million in 2002 and $495 million in 2003. Net income increased to $55.9 million in 2002 and $60.5 million in 2003.

With improved conditions, AMG resumed its acquisition activities in 2004, adding three affiliates. In June it acquired London, England-based Genesis Asset Managers, AMG's first foreign-based affiliate. With offices in Guernsey, Kenya, Chile, and Brazil it was also the first affiliate to focus on emerging markets. Then, in November 2004, AMG acquired AQR Capital Management, L.L.C., a Greenwich, Connecticut-based investment management firm and hedge fund manager with about $12 billion of assets under management. In that same month, AMG purchased the equity division of TimesSquare Capital Management. These additional affiliates helped to boost AMG's revenues to $660 million in 2004, when it also realized net earnings of $77.1 million. Also of note, at the end of 2004 Sean Healey became the firm's CEO, replacing Nutt, who remained chairman.

In 2005 AMG looked northward, acquiring equity interests in six Canadian asset management firms from First Asset Management Inc., a privately held Canadian holding company. The firms included Foyston, Gordon & Payne Inc.; Beutel, Goodman & Company Ltd.; Montrusco Bolton Investments Inc.; Deans Knight Capital Management Ltd.; Triax Capital Corporation; and Covington Capital Corporation. By all measure the year 2005 was highly successful for AMG, whose revenues increased to $916.5 million and net income totaled $126.5 million.

PRINCIPAL SUBSIDIARIES

First Quadrant Holdings, L.L.C.; Welch & Forbes, Inc.; Third Avenue Management L.L.C.; Tweedy, Browne Company L.L.C.

PRINCIPAL COMPETITORS

Asset Alliance Corporation; National Financial Partners Corporation; Old Mutual (US) Holdings, Inc.

FURTHER READING

Byrt, Frank, "Aging Founders May Seek to Sell Fund Concerns," Wall Street Journal, May 27, 1997, p. A13.

Der Hovanesian, Mara, "How AMG Is Growing Like Gangbusters," Business Week, January 10, 2005, p. 130.

Fraser, Katherine, "Allowing Money Managers Equityand a Free Hand," American Banker, March 12, 1996, p. 11.

Kahn, Virginia Munger, "A Ticket to the Fast Lanes of Money Management," New York Times, November 16, 1997, p. 37.

Lappen, Alyssa A., "Nutt's House," Institutional Investor, January 1999, p. 95.

Santoli, Michael, "Toll Collectors," Barron's, July 11, 2005, p. L8.

Wyatt, Edward, "Buying a Fund Company Instead of Its Products," New York Times, April 26, 1998, pp. 3, 4.

Zuckerman, Gregory, "Goldman Banker Joins Acquirer of Money Management Firms," Investment Dealers' Digest: IDD, May 8, 1995, p. 8.

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Affiliated Managers Group, Inc.

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