Washington, D.C. 20549
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Actual results may differ materially from those in forward-looking information as a result of various factors, some of which are beyond our control including but not limited to those discussed under the heading “Risk Factors” in Item 1A of this Annual Report on Form 10-K.the Original Filing. Due to such risks and uncertainties and other factors, we caution each person receiving such forward-looking information not to place undue reliance on such statements. Further, such forward-looking statements speak only as of the date of this Annual ReportAmendment and we undertake no obligations to update any forward looking statement to reflect events or circumstances after the date of this Annual ReportAmendment or to reflect the occurrence of unanticipated events.
Our future revenue, earnings and financial performance may fluctuate due to numerous factors, such as: the earnings of our Affiliates; the total value and composition of our Affiliates’ assets under management; the concentration of revenues in limited numbers of Affiliates and asset classes; the quality and autonomous nature of our relations with our Affiliates; our Affiliates’ exposure to liability; our ability to grow our Affiliates or acquire new firms; the nature of our Affiliates’ advisory agreements; market fluctuations, client investment decisions and investment returns; our or our Affiliates’ levels of debt and expenses; our Affiliates’ ability to maintain fee levels; the integrity of our and our Affiliates’ brands and reputations; our and our Affiliates’ ability to limit employee misconduct; our and our Affiliates’ ability to manage actual or potential conflicts of interest that may arise in our business; our competitors’ performance; the performance and retention of existing personnel; our or our Affiliates’ ability to recruit new personnel; our or our Affiliates ability to launch new products; our reliance on third-party service providers; our and our Affiliates’ ability to execute strategies; our ability to complete our redomestication to the United States; our and our Affiliates’ ability to conform to compliance guidelines; potential litigation (including administrative or tax proceedings) or regulatory actions; software and insurance costs; our access to capital; modifications of relevant tax laws or interpretations thereof and potential increases in our tax liability; the risks of our ownership structure; and the other factors discussed in Item 1A, “Risk Factors.”Factors” of the Original Filing.
Acadian Asset Management LLC, or Acadian ($97.7 billion in AUM as of December 31, 2017), founded in 1986, is a leading quantitatively-oriented manager of active global and international equity, and alternative strategies. The firm pursues a fundamentally-grounded, data rich and highly structured approach to investing that seeks to identify and exploit systematic and structural inefficiencies in the markets. Acadian applies a range of investment and risk considerations to a universe of over 40,500 securities taken from 100 global markets. Managed strategies include global, international and emerging markets equities, long/short strategies, and managed volatility strategies. Its flagship Emerging Markets Equity strategy has outperformed its benchmark, MSCI Emerging Markets (Net), by 2.9% (USD, gross of fees) on an annualized basis since its inception in 1994 through December 31, 2017.
Acadian invests on behalf of a wide range of institutional clients across the globe, including public and private funds, endowments and foundations, and retail clients through sub-advisory channels. The firm’s clients are domiciled in over seventeen countries across Asia, Australia, Europe and North America. Acadian’s management team is led by Co-Chief Executive Officer Ross Dowd, Co-Chief Executive Officer and Co-Chief Investment Officer, John Chisholm and Acadian’s Co-Chief Investment Officer, Brendan Bradley. The firm has 101 investment and research professionals and manages approximately 60 distinct investment strategies.
Barrow, Hanley, Mewhinney & Straus LLC, or Barrow Hanley ($91.7 billion in AUM as of December 31, 2017), founded in 1979, has an outstanding long-term track record of providing its clients with superior performance and client service in a wide range of value-oriented investment strategies. The firm applies a strict definition of value that guides all of its investment decisions, as it employs disciplined, bottom-up analysis to construct value equity portfolios of U.S., non-U.S., global and emerging market securities that exhibit below-market price-to-earnings ratios, below-market price-to-book ratios, and above-market dividend yields, regardless of market conditions. The firm’s value-oriented fixed income portfolios seek to achieve higher total returns with below-benchmark volatility by identifying temporarily mispriced securities with yield-to-maturity advantages over Treasury bonds of comparable maturity. Barrow Hanley’s flagship large cap value equity product, which had over $42.9 billion in assets at December 31, 2017, has a 38-year track record.
Barrow Hanley has a diverse and longstanding clientele; more than 25 of its clients have maintained their relationships with Barrow Hanley for more than 20 years. In addition to direct relationships with institutional investors, the firm serves as a sub-advisor to more than 45 highly regarded mutual funds, and is one of four external sub-advisors managing the Vanguard Windsor II Fund.
Ray Nixon and Cory Martin are the executive directors of Barrow Hanley and James Barrow is the firm’s Founding Director. In addition, Barrow Hanley has a team of 22 managing directors. The firm has 46 investment professionals managing approximately 25 distinct strategy composites.
Overview of Current Affiliates (cont.)
Campbell Global LLC, or Campbell Global ($5.3 billion in AUM as of December 31, 2017), founded in 1981, brings more than three decades of experience and leadership to sustainable timberland and natural resource investment management. As a full-service firm, it acquires and manages timberland for investors, while providing high quality service and expert management. The firm delivers superior investment performance by focusing on unique acquisition opportunities, client objectives, and disciplined management. Campbell Global currently manages more than 2.6 million acres (1.1 million hectares) worldwide.
Campbell Global has a diversified institutional client base that includes corporations, governments and endowments. As of December 31, 2017, the firm employed over 222 individuals across the U.S., Australia, Brazil and New Zealand, and provides its clients with an integrated, full-service approach to timberland investment through its broad expertise in sourcing and executing timberland acquisitions, as well as asset management and disposition. Campbell Global’s management team is led by Chief Executive Officer and Chairman John Gilleland. The firm has 37 investment professionals managing its investment portfolio.
Copper Rock Capital Partners LLC, or Copper Rock ($6.4 billion in AUM as of December 31, 2017), founded in 2005, offers specialized, growth equity investment management focused on small and small/mid-capitalization strategies in international, global and emerging markets growth equities. Copper Rock’s investment strategy seeks to outperform in up-markets due to the firm’s pure fundamental growth approach and also to protect clients’ capital through portfolio construction and a strong sell discipline.
Copper Rock’s client base includes pension plans, institutional investors and mutual funds located in the U.S., Canada, the United Kingdom, Ireland, Denmark, South Africa and Australia. Copper Rock’s management team is led by the firm’s Chairman and Chief Investment Officer Steve Dexter and Chief Executive Officer Mike Forrester. The firm has nine investment professionals managing four distinct investment strategies.
Overview of Current Affiliates (cont.)
Investment Counselors of Maryland, LLC,* or ICM ($2.1 billion in AUM as of December 31, 2017), founded in 1972, focuses on value-driven equities and invests through a well-established, bottom-up investment process that it applies across the entire capitalization range, with an emphasis on small- and mid-cap companies. The firm employs a team orientation in making investment decisions. Each member of ICM’s investment team has a sector focus and is responsible for generating and analyzing ideas within that sector. The most promising investment ideas are reviewed by the entire team, and the ultimate buy/sell decisions are made by the respective portfolio manager teams.
For over four decades, ICM has been managing assets for institutional clients and high net worth individuals through separate accounts and an institutional mutual fund, and has generated excellent results for its clients over this time. ICM’s management team is led by Managing Partner and Chief Investment Officer, William V. Heaphy. The firm has eight investment professionals managing four distinct investment strategies. |
| | | | | | | | | | | | | | | | | | | | | | |
| | Guang Yang1 | Stephen H. Belgrad2 | James J. Ritchie3 | | Daniel K. Mahoney4 | | Aidan J. Riordan5 | | Christopher Hadley6 | |
| Base salary | $ | 1,000,000 |
| $ | 466,346 |
| $ | 659,949 |
| | $ | 250,000 |
| | $ | 375,000 |
| | $ | 300,000 |
| |
| Incentive Awards: | | | | | | | | | | |
| Cash Incentive | — |
| 2,500,000 |
| — |
| | 255,000 |
| | 250,000 |
| | 195,000 |
| |
| Options Awarded | 2,332,200 |
| — |
| — |
| | — |
| | — |
| | — |
| |
| Time-Based Equity | — |
| — |
| 330,750 |
| | 95,000 |
| | 125,000 |
| | — |
| |
| Performance-Based Equity | — |
| — |
| — |
| | — |
| | 125,000 |
| | — |
| |
| Total incentive Awards | 2,332,200 |
| 2,500,000 |
| 330,750 |
| | 350,000 |
| | 500,000 |
| | 195,000 |
| |
| 2018 Total Compensation | $ | 3,332,200 |
| $ | 2,966,346 |
| $ | 990,699 |
| | $ | 600,000 |
| | $ | 875,000 |
| | $ | 495,000 |
| |
| 2017 Total Compensation | $ | — |
| $ | 2,550,000 |
| $ | 2,554,000 |
| | $ | 420,000 |
| | $ | 2,000,000 |
| | $ | 925,000 |
| |
| 2018 Variance to 2017 | — |
| 16% | n/a | | 43% | | (56)% | | (46)% | |
* accounted for under the equity method of accounting.
Landmark Partners, LLC, or Landmark ($14.8 billion in AUM as of December 31, 2017), founded in 1989 and acquired by OMAM in August 2016, specializes in secondary market transactions of private equity and real estate investments. The firm has one of the longest track records in the industry and is a leading source of liquidity to owners of interests in real estate, real asset, venture, mezzanine, and buyout limited partnerships. Landmark has formed 34 Funds over the last 28 years. These Funds have been capitalized at more than $21.9 billion, which has been deployed across over 2,100 partnership interests that comprise over 25,700 underlying company and property investments.
Landmark’s investor base is mostly comprised of institutional investors including: sovereign wealth funds, public pensions, corporate pensions, insurance companies, asset managers, and foundations located globally.
Landmark is led by President and Managing Partner, Timothy Haviland and Chairman and Managing Partner, Francisco Borges, supported by a team of fourteen Partners. As of December 31, 2017, Landmark employed 109 individuals across four offices in Boston, MA; New York, NY; and Simsbury, CT in the United States and London in the United Kingdom.
Overview of Current Affiliates (cont.)
Thompson, Siegel & Walmsley LLC, or TSW ($25.0 billion in AUM as of December 31, 2017), founded in 1969, applies a value-oriented investment approach across a range of products in U.S. and international equities, fixed income and alternative investments. TSW’s singular investment objective is to outperform its benchmarks, net of fees, over rolling three- to five-year periods. TSW employs a proprietary screening process to generate focused lists of companies that are most attractive within different market capitalization ranges. The firm’s investment teams then use fundamental analysis to construct portfolios, which they believe possess catalysts that can unlock value.
TSW has a diverse client base that includes corporations, public pensions, high-net-worth families and individuals, and sub-advisory clients and has generated a strong track record of providing investors with excellent long-term results. The firm’s management team is led by Chairman Lawrence Gibson, Chief Executive Officer Horace Whitworth, President Frank Reichel, Managing Director, John Reifsnider and Director of Operations, Lori Anderson. The firm has 22 investment professionals managing thirteen investment strategy composites.
Sale of Heitman
Heitman, founded in 1966, globally invests in and manages portfolios of real estate and real estate securities for its clients, which include public and corporate pension funds, endowments and foundations, and private investors. On November 17, 2017, we entered into a redemption agreement with Heitman LLC. Pursuant to the redemption agreement, Heitman agreed to redeem all of our membership interests in Heitman for cash consideration totaling $110 million. This redemption agreement was triggered by a right of first offer held by Heitman regarding a change in control of our Company. No other Affiliate has a similar right of first offer.
Heitman stopped contributing to our financial results of operations as of November 30, 2017 and the transaction closed on January 5, 2018. Unless specifically noted, flow information includes flows from Heitman for the first half of 2017, but excludes it thereafter, and AUM data at December 31, 2017 excludes the Heitman AUM. On an after tax basis, OMAM expects to receive approximately $85.7 million. For the year ended December 31, 2017, Heitman contributed approximately 8.8% of our U.S. GAAP pre-tax income from continuing operations attributable to controlling interests and 4.8% of our pre-tax economic net income (4.0% of after-tax economic net income).
Distribution Model and Client Base
Our distribution is focused on the institutional and sub-advisory channels, reached through both Affiliate-led and complementary, Center-led sales efforts. Our Affiliates have teams of established sales and client service professionals with broad and deep relationships across the major segments of the institutional investor community. Consistent with our partnership philosophy, Affiliates develop and maintain client relationships independently of both us and each other, while maintaining the option to participate in Center-led complementary distribution initiatives in the domestic sub-advisory and selected global markets. In aggregate, our Affiliates have approximately 144 sales and marketing professionals servicing over 850 institutional and sub-advisory clients.
We launched our Center-led Global Distribution platform in 2012, which consists of a team of experienced channel and regional marketing specialists focused on developing new business opportunities for our Affiliates. In the U.S., complementing and enhancing the distribution capabilities of the Affiliates, we have one executive and four sales and marketing professionals focused on cultivating relationships in the sub-advisory (mutual fund and variable annuity) channel. We also maintain independent relationships with institutional investment consultants. If requested, our team also provides strategic marketing support for the Affiliates. Outside the U.S., where scale is a meaningful advantage to support geographic reach and servicing capabilities, we have a Global Distribution team consisting of ten dedicated and strategically deployed sales and marketing professionals focused on developing client relationships and gathering assets in Canada, the United Kingdom, Europe, Asia (excluding Japan) and the Middle East. Within these channels and jurisdictions, our objective is to cultivate broad and deep relationships with key consultants and institutional investors and to generate new client opportunities for those Affiliates who take advantage of our Global Distribution platform. From January 1, 2012 through December 31, 2017, we have raised $15.2 billion in client assets for our Affiliates.
On November 29, 2017, we announced that our Global Distribution efforts will be further aligned with Affiliate Management by combining the functions. A merger of the two teams enables closer connectivity among research, product development, capital allocation, seeding and distribution and will result in a stronger complementary offering to our Affiliates and the end client.
The institutional channel accounts for 63% of our AUM. Within this channel, we have strong relationships in the public/government pension market (29% of our AUM) and the corporate plan market (19% of our AUM), which comprise a substantial portion of the institutional investment market overall, particularly in the U.S. Our institutional marketplace clients are highly diverse across segments and geographies and have various growth characteristics.
While our Affiliates market primarily to institutional investors, we participate in the individual investor market through the sub-advisory channel, which represents 33% of our AUM. Within this channel, we manage assets for mutual funds, giving us exposure to a retail investor base and the defined contribution market. We have approximately 65 sub-advisory mandates on over 50 leading platforms, including Vanguard, American Beacon, Principal and Transamerica. Our top ten sub-advisory relationships account for approximately 28% of AUM and 15% of run rate gross management fee revenue, including our equity-accounted Affiliate, and have an average tenure of over ten years. We have experienced rapid growth in this channel, with sub-advisory assets growing over 73%, or 12% annually, from January 1, 2013 through December 31, 2017.
Across our Affiliates, our client base is highly diverse with no significant concentration in our portfolio, though some Affiliates may have client exposures that are meaningful to their individual businesses. As of December 31, 2017, our Affiliates’ top five client relationships represented 13% of total run rate gross management fee revenue, including our equity-accounted Affiliate, and our Affiliates’ top 25 clients represented 28% of run rate gross management fee revenue, including our equity-accounted Affiliate. During 2017, Old Mutual plc and its subsidiaries (other than us and our Affiliates) contributed less than 1% of total gross management fee revenue, including equity-accounted Affiliates.
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Total AUM:(1) | $243.0 bnGuang Yang assumed the role of CEO on December 15, 2018. Mr. Yang was offered a nonqualified stock option to purchase 6,900,000 ordinary shares of the Company. 20% of the award vested on the date of grant with the remaining 80% vesting in equal 20% annual installments over a four-year period beginning on the first anniversary of the initial vesting date subject to continued employment with the Company on each vesting date. 2018 Options Awarded above reflects an annualized 20% of the fair value on the date of grant of $1.69 per share. |
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| (2) | Stephen H. Belgrad assumed the role of CEO on March 2, 2018 and his employment ended with the Company effective December 15, 2018. Mr. Belgrad received an incentive award pursuant to his employment agreement, which was paid in cash pursuant to his Transition Severance Agreement. |
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| (3) | James J. Richie’s role as Interim CEO ended on March 2, 2018. Mr. Richie received an incentive award pursuant to his Interim CEO agreement, which was paid in equity that vested at grant on March 16, 2018. |
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| (4) | Daniel K. Mahoney assumed the role of Head of Finance, Principal Financial Officer beginning March 2, 2018. As Mr. Mahoney was not an executive officer for the full year, his incentive was paid in cash and time-vested equity. Mr. Mahoney’s salary is annualized. |
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| (5) | Aidan J. Riordan’s employment ended with the Company on March 8, 2019. As Mr. Riordan was employed at the time incentives were awarded, his incentive was paid in the Compensation Committee approved mix for NEOs of 50% cash, 25% time-vested equity and 25% performance-vested equity. |
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| (6) | Christopher Hadley’s employment with the Company ended February 1, 2019. His incentive was paid all in cash pursuant to his Transition Severance Agreement, |
Data as of December 31, 2017
Details of the split between fixed and incentive compensation for 2018 for each of the NEOs is provided in the following table:
Products and Investment Performance
Product Mix
Our Affiliates offer leading products in U.S., global, international and emerging markets equities; U.S. fixed income; and alternative investments, including timber and secondary Funds.
The charts below present our average fee rates, average assets under management, and management fee revenue excluding equity-accounted Affiliates by asset class and illustrate the diversification benefits of our multi-boutique business model. Our largest asset class, U.S. large cap value equities, represents 25.7% of our Average AUM of consolidated Affiliates for the year ended December 31, 2017; however, with a weighted average fee rate of approximately 20 basis points, this asset class represents only 13.5% of our management fee revenue in 2017. Each of five asset classes represents 13% or more of our management fee revenue in 2017, providing a balanced earnings stream to our business. Moreover, within our three largest asset classes by revenue — international equities, alternative investments and emerging markets equity — we offer a range of strategies which provide further stability to our earnings.
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| Named Executive Officer | | Title | | Base Salary as % of Total Compensation | | Incentive Compensation as a % of Total Compensation |
Guang Yang1 | | Executive Chairman and Chief Executive Officer | | 30% | | 70% |
| Stephen H. Belgrad | | Former Chief Executive Officer | | 17% | | 83% |
James J. Ritchie2 | | Former Interim Chief Executive Officer | | 67% | | 33% |
| Daniel Mahoney | | Senior Vice President, Head of Finance, Principal Accounting Officer; Former Principal Financial Officer | | 42% | | 58% |
| Aidan J. Riordan | | Former Executive Vice President, Head of Affiliate Management | | 43% | | 57% |
| Christopher Hadley | | Former Executive Vice President, Chief Talent Officer | | 61% | | 39% |
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| (1) | Mr. Yang’s compensation is comprised of a base salary and a front loaded five-year stock option to purchase ordinary shares as the sole component of his incentive compensation. This mix is based on his annualized salary and the fair value of his stock options annualized over the five-year term as shown in th table on the previous page. |
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| (2) | Mr. Ritchie’s compensation was comprised of a fixed base salary and fixed time-based equity accrued monthly pursuant to his employment agreement. |
Data asWe believe that our incentive plans align the interests of December 31, 2017our NEOs with our shareholders and promote long-term value creation. In addition, the equity component retains executives through multi-year vesting of grants. We focus our incentive programs on rewarding performance that increases long-term shareholder value.
* Excludes equity-accounted AffiliatesOther Compensation Committee Policies and Practices
Comparator Group
We believe that ensuring that our compensation levels are competitive with the market for high-caliber talent in our industry is an important attraction and retention tool. The compensation levels of companies in our peer group are an input in assessing both our total compensation levels and the form and mix of cash and equity incentives awarded to the NEOs. We use our comparator group as a reference and guide in making total compensation decisions. In selecting the companies in our comparator group we consider, with input from McLagan, which is retained by management to conduct competitive assessments, and our independent compensation consultant, FW Cook, the following factors: business structure (i.e., multi-boutique model), assets under management, revenue, and public company status. The comparator group is evaluated on an annual basis and may change over time based upon the availability of peer data and the future characteristics of our business compared to peer companies, which includes both publicly traded and privately held asset management companies. As a result of this evaluation in 2018 the Committee decided to eliminate New York Life Investment Management and Nuveen Investments, Inc. from the comparator group and add Victory Capital Management and Virtus Investment Partners, Inc.
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Total Average AUM: $224.8 bn*American Century Investments | Total Management Fees: $858.0 m*Loomis, Sayles & Company |
Data as of December 31, 2017Artisan Partners Limited Partnership | Data as of December 31, 2017MFS Investment Management |
| Barings LLC | Neuberger Berman Group |
| Eaton Vance Investment Managers | OppenheimerFunds |
| Janus Henderson Investors | Principal Financial Group |
| Jennison Associates | Putnam Investments |
| Lazard Asset Management | Victory Capital Management |
| Legg Mason & Co. | Virtus Investment Partners, Inc. |
* Excludes equity-accounted Affiliates
We have product breadth and diversity within individual Affiliates as well as across our Affiliates. For example, Barrow Hanley, whose core offerings consist of leading value-oriented U.S. equity strategies, also offers a highly-rated suite of non-U.S. equity and U.S. investment grade fixed income investment products that adhere to the firm’s traditional value discipline. Similarly, Acadian applies its quantitative approach across a range of equities, in terms of geography as well as market capitalization.
Our Affiliates’ product offerings are well-positioned in areas of investor demand, and the diversity of investment style and asset class enables us to participate in growing segments of the industry in multiple investing environments. The chart below illustrates the diversity of our assets under management by asset class and Affiliate. In total, our Affiliates manage 106 strategy composites, including three Affiliates that manage at least ten strategies each.
Investment Performance
While each of our Affiliates has distinct investment processes and generally operates in different asset classes, our unifying mission is to produce risk-adjusted performance, or alpha, for our clients. We measure alpha generation relative to the specific benchmarks our Affiliates’ clients use to evaluate our performance in our Affiliates’ strategies. Looking at this measure on a consolidated basis, our Affiliates have competitive near- and long-term performance records and are well-positioned for continued growth.
In the chart below, which measures revenue-weighted performance relative to benchmarks over the last five years, we typically have had between 50% and 90% of our revenue derived from benchmarked products (which represent approximately 91% of our total AUM) performing ahead of their respective benchmarks on a one-, three- and five-year basis. In evaluating prospective investments, we believe institutional investors generally give the three-year performance of an investment product the greatest weighting. Favorable active management results in 2017 continued to help boost performance significantly compared to the previous year period. The one-year results increased year-over-year due to favorable active management results compared to underperformance following the Brexit vote in 2016, while the three-year period increased due to the strong returns of a domestic large cap value strategy, and the five-year period benefited from a managed volatility strategy rolling off negative returns.
Data as of December 31 for the years 2013 to 2017
In addition to analyzing our Affiliates’ performance on a revenue-weighted basis, which gives us a perspective on product performance with respect to our Affiliates’ existing client base, we also consider the number of our Affiliates’ at-scale product strategies (defined as strategies with greater than $100 million of AUM) beating benchmarks. This latter measure, labeled as “equal-weighted,” indicates the opportunity we have to generate sales in a variety of market environments. For instance, strong performance in a newer, smaller product such as small-cap emerging markets may not affect revenue-weighted performance, but it can have a meaningful effect on revenue growth given client demand for this higher fee product. The chart below indicates performance on a revenue-weighted and equal-weighted (by product) basis relative to benchmark, as at December 31, 2017. In addition, we have indicated the percentage of our assets beating their benchmarks over the same time periods. While we believe the first two methodologies provide better insight into our performance trends, we have also included AUM-weighted performance, as this is a more standard industry performance metric.
Data as of December 31, 2017
Competition
We and our Affiliates face competition from many segments in the asset management industry. At the Company level, we compete with other acquirers of investment management firms, including investment management holding companies, insurance companies, banks and private equity firms. Our Affiliates compete globally with international and domestic investment management firms, hedge funds and other subsidiaries of financial institutions for institutional assets.
Many of the organizations our Affiliates compete with offer investment strategies similar to those offered by our firms, and these organizations may have greater financial resources and distribution capabilities than we or our Affiliates are able to offer. Additionally, there are limited barriers to entry for new investment managers. Our Affiliates compete with these organizations to attract and retain institutional clients and their assets based on the following primary factors:
the investment performance records of our Affiliates’ investment strategies;
the breadth of active investment strategies offered by our Affiliates in the asset classes in which they specialize;
the alignment of our Affiliates’ investment strategies to the current market conditions and investment preferences of potential clients;
the quality and reputation of the investment teams that execute the investment strategies at our Affiliates;
the strength of our Affiliates’ and our distribution teams; and
the strength of our Affiliates’ client service and long-term client relationships.
Business History
The predecessor of OMAM was formed in 1980. OMAM was formed on May 29, 2014 as a private limited company under the laws of England and Wales. At the time of our initial public offering of our ordinary shares, or the Offering, we changed our name to OM Asset Management plc.
From the Offering until May 2017, we were a majority-owned subsidiary of OM Group (UK) Limited, or OMGUK, which was in turn wholly owned by OM plc. The board of directors of OM plc elected to undertake the Offering which was priced on October 8, 2014. On October 9, 2014, we began trading on the New York Stock Exchange under the ticker symbol “OMAM.”
Between the time of the Offering and November 2017, OM plc implemented a plan to dispose of our shares in an orderly manner which balanced value, cost, time and risk. A series of transactions were executed to dispose of OM plc’s shareholdings, including secondary offerings on the public market, sales of shares from OM plc to HNA Capital U.S., or HNA, and our repurchase and retirement of shares held by OM plc. Following these transactions, at December 31, 2017, HNA owned 24.95% of our outstanding ordinary shares and OM plc held 1,000 of our ordinary shares. See Note 1, “Organization and Description of the Business” in our Consolidated Financial Statements included in Item 8 herein for a further description of these transactions.
In August 2016, we completed the acquisition of Landmark Partners and in November 2017 we agreed to sell our stake in Heitman LLC to members of Heitman’s management, a transaction that was completed in January 2018.
Employees
As of December 31, 2017, we had 1,342 full-time equivalent employees, of which 88 were employees of the Company and 1,254 were employees of our Affiliates. None of our employees or those of our Affiliates are subject to any collective bargaining agreements. We believe our relationships with our employees to be good and have not experienced interruptions to operations due to labor disagreements.
Operations, Systems and Technology
We generally use both third-party commercial technology solutions and services to support investment management and operational activities, including functions such as portfolio management, trading, investment accounting, client reporting and financial reporting. Certain Affiliates have built proprietary systems to support the investment process where competitive advantages to do so exist. Systems and processes are customized as necessary to support our investment processes and operations. Information security, business continuity and data privacy programs have been implemented to help mitigate risks.
Our web site is www.omam.com. Our web site provides information about us, and from time to time we may use it as a distribution channel of material company information. We routinely post financial and other important information in the “Investor Relations” section of our web site and we encourage investors to consult that section regularly. That section of our web site includes “Public Filings” where one can download copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, and any other report filed or furnished with the U.S. Securities and Exchange Commission, or the SEC, pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. We make these reports available through our web site as soon as reasonably practicable after our electronic filing of such materials with, or the furnishing of them to, the SEC. The information contained or incorporated on our web site is not a part of this Annual Report on Form 10-K.
The Compensation Committee
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Our Compensation Committee is responsible for overseeing our general compensation policies and equity plans and making compensation decisions for the NEOs. Other members of the Board regularly attend and participate in Compensation Committee meetings and members of the Compensation Committee regularly meet in executive session without management present.
In making compensation decisions, the Compensation Committee considers the Company’s financial performance compared to plan targets and the prior year, the financial needs of the business, achievement of strategic objectives, the success of long-term initiatives over a multi-year period, and financial results against industry peers and the compensation levels of our peer group, and the future outlook for the Company and the industry.
Compensation Consultant
Item 1A. Risk Factors
You should carefully considerFW Cook serves as the following risk factors in additionindependent compensation consultant to the other information included or incorporated by referenceCompensation Committee. FW Cook advises the Compensation Committee on a number of compensation matters, including market data and analysis, comparator group review, and governance. FW Cook also provides design expertise in this Annual Report on Form 10-K before investing inreviewing compensation and incentive programs for our ordinary shares. Any of the following risks could have a material adverse effect on our business, financial condition, results of operations or cash flow. If any of the following risks and uncertainties actually occurs, you may lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.
Business Risks
Our overall financial results are dependent on the ability of our Affiliates to generate earnings.
OMAM is a holding company and is not a registered investment adviser under United States, or U.S., federal or state law. As such, OMAM does not manage investments for clients and does not directly receive management fees. All of OMAM’s revenue generation is dependent on our Affiliates, who are registered investment advisers under the Investment Advisers Act of 1940, as amended, or the Advisers Act, and receive the majority of their fees based on the market values of assets under management. Substantially all of OMAM’s cash flows consist of distributions receivedNEOs. A representative from our Affiliates. As a result, OMAM’s cash flows and ability to fund operations are largely dependent upon the profitability of our Affiliates.
Each Affiliate is required to make certain cash distributions to us under the operating agreement we enter into with such Affiliate. Distributions to us from an Affiliate may be subject to the Affiliate maintaining sufficient working capital, regulatory requirements, claims of creditors of the Affiliate and applicable bankruptcy and insolvency laws. Any material decrease in profits at, or material reduction in distributions from, our Affiliates could negatively impact our business and results of operations.
The ability of our Affiliates to attract and retain assets under management and generate earnings is dependent on our Affiliates maintaining competitive investment performance,FW Cook attends Compensation Committee meetings, including executive sessions, as well as marketinformal meetings, and other factors.may communicate with the Chair between meetings to prepare for Compensation Committee meetings. The Compensation Committee assesses the independence of FW Cook annually and has concluded that FW Cook does not have any conflicts of interest with respect to its engagement by the Compensation Committee.
The comparator group compensation data provided to the Compensation Committee is prepared using survey and proxy data from McLagan. In addition, reports developed by McLagan may be shared with the Compensation Committee. McLagan is retained by BrightSphere and a representative of the firm may attend meetings of the Compensation Committee from time to time.
Risk Considerations in our Compensation Programs
Our financial performancecompensation structure is dependent upondesigned with the abilitiesgoal of our Affiliates to minimizemitigating risk and protecting shareholder returns without diminishing the risk of outflows through sound relative investment performance over measured periods of time compared to relevant benchmarks and peer performance results. The performance of our Affiliates’ investment strategies, which can be impacted by factors within and/or outside the control of our Affiliates, including general market and economic conditions, is critical to retaining existing client assets and investors, including in mutual funds and private funds our Affiliates advise or sub-advise, and attracting new client and investor assets. Poor performance can be caused by our Affiliates’ choices in investing in sectors, industries, companies or assets that do not perform as well as others. Additionally, companies in which our Affiliates invest may incur negative changes in their financial conditions or suffer other adverse events that could reduce the valueseffectiveness of the Affiliates’ investments in those companies.
Net flows related toincentives. The Compensation Committee does not believe that our investment strategies can be affected by investment performance relative to other competing investment strategies or to established benchmarks. Investment management strategiescompensation programs promote excessive risk-taking. While the incentive programs are rated, ranked or assessed by independent third parties, distribution partners, and industry periodicals and services. These assessments often influencediscretionary, the investment decisions of our Affiliates’ clients and investors in mutual funds and private funds our Affiliates advise or sub-advise. If the performance or assessment of our Affiliates’ investment strategies is seen as underperforming relative to peers, it could, among other things, result in an increase in the withdrawal of assets by existing clients and investors in mutual funds and private funds our Affiliates advise or sub-advise, the termination of an Affiliate as a sub-adviser to a mutual fund and the inability to attract additional investments from existing and new clients or investors. If a significant portion of clients or investors decides to withdraw their investments or terminate their investment management agreements or sub-advisory agreements with our Affiliates, our Affiliates’ abilities to generate earnings would decline and our results of operations and financial condition would be affected.
In addition, assets could be withdrawn for any number of reasons other than poor absolute or relative investment performance, including macro-economic factors unrelated to investment performance, a reduction in market demand for the asset classes, products or strategies offered by our Affiliates, the loss of key personnel, price declines in the securities markets generally, price declines in those assets in which client assets are concentrated or changes in investment patterns of clients. Any of these factors could have a negative impact on the revenues and profits of an Affiliate and an adverse impact on our results of operations and financial condition.
Our relationships with our Affiliates are critical to our success.
Maintaining strong relationships with our Affiliates is critical to our business model. Any potential disagreements over matters such as economics or management policies, growth strategies and compensation philosophy would impact our relationships with our Affiliates if not effectively managed. Furthermore, dissatisfaction by the management teams of our Affiliates with the services that we provide to them and the conditions upon which such services are provided also could result in a strained relationship with the management of that Affiliate. Any strains in the relationships that we have with our Affiliates could be detrimental to our overall business.
Each of our Affiliates operates under ownership, governance and economic arrangements that we and such Affiliate negotiated either at inception or during the course of our relationship. Periodically, these arrangements are reviewed and, in some instances, may be renegotiated and revised. Any renegotiation that results in a reduction in our ownership interest in an Affiliate and/or a revision to the economic arrangements could reduce the economic benefits derived by us from that Affiliate.
We derive a substantial portion of our revenue from a limited number of Affiliates and investment strategies.
As of December 31, 2017, Acadian and Barrow Hanley represented 78% of our assets under management, from which we derive a substantial portion of our revenue. An adverse change in the operating results of either of these Affiliates, whether as a result of poor investment performance, withdrawals of assets under management or otherwise, could have a substantial impact on our results of operations.
While our Affiliates invest inCompensation Committee considers a number of asset classes, a significant portion of our assets are investedfactors in a limited number of investment strategies. As of December 31, 2017, $104.2 billion, or 43%, of our assets under management were concentrated across five investment strategies: Barrow Hanley’s Large Cap Value Equity ($42.9 billion, or 17%), Acadian’s Emerging Markets Equity ($23.6 billion, or 10%), Acadian’s Global Equity ($13.8 billion, or 6%), TSW’s International Equity ($12.1 billion, or 5%)making compensation decisions. In reviewing the Company’s financial and Acadian’s Global Managed Volatility Equity ($11.8 billion, or 5%). Consequently, our results of operations are dependent uponstrategic performance, the abilities of our Affiliates that manage these investment strategiesCompensation Committee places emphasis on longer-term success, particularly as it relates to minimize the risk of outflows through relatively strong performance over measured periods of time compared to relevant benchmarks and peer performance results. Also, certain investors may evaluate us on the basis of the asset-weighted performance of our assets under management. A relatively small change in the relative performance of one of our largest strategies, such as Barrow Hanley’s Large Cap Value Equity, could have a significant impact on the asset-weighted performance of our assets under management. Such volatility could adversely affect investors’ perception of us.
Our business model limits our ability to manage our Affiliates’ investment management practices and certain other aspects of their day-to-day operations.
Our multi-boutique affiliate structure offers a diversity of investment styles and client bases. While our agreements with all of our consolidated Affiliates give us ultimate control over the business activities of those Affiliates if necessary, we generally do not become directly involved in managing their day-to-day operations, including investment management practices, policies and procedures, fee levels, marketing and product development, client relationships and employment and compensation programs. If we fail to intervene in potentially serious matters arising out of the day-to-day operations of our Affiliates, our reputation could be damaged and our results of operations adversely affected.
For ICM, we exercise significant influence rather than control. Our ability to (i) direct the activities of ICM, (ii) influence its decision-making processes and (iii) require that our risk management and governance practices are applied may be limited and not consistent with those of our controlled Affiliates.
Our growth strategy is dependent upon continued growth of our existing Affiliates and our ability to successfully acquire or invest in new affiliates.
Since we depend on distributions from our Affiliates to conduct our operations, the inability of our Affiliates to meet projected distribution levels could impact their ability to grow their businesses and contribute to our future growth at current or historical levels. In addition, capacity constraints, particularly on our Affiliates’ smaller strategies, or the unavailability of appropriate investment opportunities could limit their ability to accept new client assets and, therefore, limit the growth of their and our revenue.
Our growth strategy is also enhanced by our ability to successfully make new acquisitions or investments, which will depend on our ability to find suitable firms to acquire or invest in, our ability to negotiate agreements with such firms on acceptable terms, our ability to raise the capital necessary to finance such transactions, and our ability to secure any necessary approvals for such transactions. There is no certainty that we will identify suitable candidates at prices and terms we consider attractive, consummate any such acquisition or investment on acceptable terms, have sufficient resources to complete an identified acquisition or investment, obtain necessary approvals for such investment or that our strategy for pursuing acquisitions or investments will be effective. Any acquisition or investment can involve a number of risks, including the existence of known liabilities or contingent liabilities or those not disclosed or known by us prior to closing an acquisition or investment. An acquisition or investment may impose additional demands on our staff that could strain our operational resources and increase the possibility of operational error, and require expenditure of substantial legal, investment banking and accounting fees. We may be required to issue ordinary shares or otherwise obtain additional capital or spend significant cash to consummate an acquisition or investment, resulting in dilution of ownership or additional debt leverage, or spend additional time and money on facilitating the acquisition or investment that otherwise would be spent on the development and expansion of our existing businesses. Following a completed acquisition or investment, failure by us and the target firm to achieve a strong, long-term relationship, or failure of the firm to realize incremental organic growth and growth through leveraging its relationship with us may result in our inability to achieve the anticipated benefits of the acquisition or investment, and could have an adverse impact on our business, financial condition and results of operations.
The failure to consummate announced investments in new affiliates could have an adverse effect on our operating results and financial condition.
Our ability to successfully acquire or invest in new affiliates may be subject to certain contingencies and approvals or dependent on the satisfaction of certain closing conditions (which may not be in our control), including, but not limited to, obtaining certain consents of the target’s clients and, depending on the jurisdiction, approval of certain regulatory authorities. In the event that an announced transaction is not consummated, we may experience a decline in the price of our ordinary shares.Affiliate growth. In addition, the factCompensation Committee considers the impact of the Company’s compensation practices on the Company’s broad enterprise risk management program.
We seek to keep our compensation programs simple and straight-forward and tied to our operating and stock price performance, including our total shareholder return relative to that of a transaction did not close afterdefined peer group over a three-year performance period. The addition of stock options to our compensation program changes the risk profile, but we announced it publicly may negatively affectbelieve the increased risk is mitigated by the longer vesting period of four years versus three years for other equity awards, and the other mitigating risk factors present in our ability to consummate transactions incompensation program discussed below.
During the future. Finally, we must pay costs related to these transactions, including legalyear, the Enterprise Risk Management and accounting fees, even if the transactionsHuman Resources Departments conducted an assessment of risks arising from the Company’s compensation programs and policies based on guidance from FW Cook. The assessment covered each material element of executive and non-executive employee compensation. Based on the assessment, the Company concluded and the Compensation Committee concurred that our compensation policies and practices are not completed, which may have an adverse effect on our results of operations and financial condition.
We and our Affiliates rely on certain key personnel, and our results are dependent upon our abilityreasonably likely to retain and attract key personnel.
We and our Affiliates depend on the skills and expertise of our key investment and management personnel, and our success and growth depends on our ability to attract and retain key personnel. Our Affiliates rely heavily upon the services of certain key investment and management personnel, many of whom have managed their firms for a number of years and who primarily guide the investment decision-making processes and strategies at the firms. The loss of key investment and management personnel at any of our Affiliates for any reason could have an adverse impact upon our business, results of operations and financial condition. Any of our key investment or management personnel could resign at any time, join a competitor or form a competing company. We have entered into non-competition agreements with some, but not all, of our investment and management personnel, but these agreements may not be enforceable or may not be enforceable to their full extent. In addition, we may agree to waive a non-competition agreement applicable to investment or management personnel in light of the circumstances of our relationship with that person.
All of our Affiliates have established equity plans which are intended to attract, retain and motivate key personnel and pursuant to which key Affiliate personnel may be awarded or be able to purchase equity in their firm. The equity plans provide key employees with the opportunity to participate in the appreciation in the value of their businesses. Award documents under these plans typically limit a recipient’s right to provide competitive services to clients of the Affiliates or solicit employees of the Affiliates for prescribed periods. Additionally, certain of our Affiliates’ key executive management personnel may have entered into, or been offered the opportunity to enter into, agreements with usencourage behaviors that are structuredreasonably likely to motivate and retain such personnel. However, retention strategies we and our Affiliates have put into place may not be successful and, to the extent the plans do not produce the desired results, our Affiliates may suffer a loss of valued personnel.
For certain of our Affiliates, a number of key management personnel are arriving at the point in their careers where they may be looking to limit their day-to-day involvement in their businesses or withdraw entirely. We have instituted succession planning at our Affiliates in an attempt to mitigate any disruption caused by these changes but cannot predict whether such efforts will be successful and whether the firms will be able to retain clients, assets and personnel or attract new assets and talent.
We rely upon the contributions of our senior management team to establish and implement our strategy and to manage the future growth of our business. The amount and structure of compensation and opportunities for equity ownership we offer are key components of our ability to attract and retain qualified management personnel. There is no assurance that we will be successful in designing and implementing an attractive compensation model.
Our Affiliates’ business operations are complex, and a failure to properly perform operational tasks or maintain infrastructure could have an adverse effect on our revenues and income.
In addition to providing investment management services, our Affiliates must have the necessary operational capabilities to manage their businesses effectively in accordance with client expectations and applicable law. The required non-investment management functions include sales, marketing, portfolio recordkeeping and accounting, security pricing, trading activity, investor reporting, corporate governance, compliance, net asset value computations, account reconciliations and calculations of required distributions to accounts. Some of these functions are performed either independently or with the support of or in conjunction with us or third-party service providers that are overseen by our Affiliates. Also, certain of our Affiliates are highly dependent on specially developed proprietary systems. Any material failure to properly develop, update, or maintain sufficient technological infrastructure, or perform and monitor non-investment management functions and operations, or adequately oversee the entities that provide the services, could result in potential liability to clients, regulatory sanctions, investment losses, loss of clients and damage to the reputation of our Affiliates or to our reputation.
Reputational harm could result in a loss of assets under management and revenues for our Affiliates and us.
The integrity of our brand and reputation, as well as the integrity of the brand and reputation of each of our Affiliates, is critical to the ability of us and our Affiliates to attract and retain clients, business partners and employees and maintain relationships with consultants. We operate within the highly regulated financial services industry and various potential scenarios could result in harm to our reputation. They include internal operational failures, failure to follow investment or legal guidelines in the management of accounts, intentional or unintentional misrepresentation of our Affiliates’ products and services in offering or advertising materials, public relations information, social media or other external communications, employee misconduct or investments in businesses or industries that are controversial to certain special interest groups. Such factors could potentially result in regulatory actions and litigation. The negative publicity associated with any of these factors could harm our reputation and those of our Affiliates and adversely impact relationships with existing and potential clients, third-party distributors, consultants and other business partners and subject us to regulatory sanctions. Damage to our brands or reputations would negatively impact our standing in the industry and result in loss of business in both the short term and the long term.
We or our Affiliates may not always successfully manage actual or potential conflicts of interests that may arise in our businesses.
As we continue to expand the scope of our business, we increasingly confront actual, potential and perceived conflicts of interest relating to our activities and the investment activities of our Affiliates. Conflicts may arise with respect to decisions by our Affiliates regarding, among other things, the allocation of specific investment opportunities among accounts in which Affiliates may receive an allocation of profits and accounts in which they do not receive such an allocation or among client accounts that have overlapping investment objectives yet different fee structures, including certain accounts which may pay Affiliates performance-based fees.
Certain client accounts of our Affiliates have similar investment objectives and may engage in transactions in the same types of securities and instruments. These transactions could impact the prices and availability of the securities and instruments in which a client account invests and could have an adverse impact on an account’s performance. An Affiliate may also buy or sell positions in a client account while that or another Affiliate, on behalf of other client accounts, is undertaking a similar, differing or opposite strategy, which could disadvantage the other accounts.
The SEC and other regulators have increased their scrutiny of conflicts of interest. Our Affiliates have implemented procedures and controls to identify, manage, mitigate (where possible) and disclose actual, potential or perceived conflicts of interest, but it is possible that the procedures adopted by our Affiliates may not be effective in identifying, managing or mitigating all conflicts which could give rise to the dissatisfaction of, or litigation by, investors or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult, and the reputations of us and our Affiliates could be damaged if we or they fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny, litigation or reputational risk incurred in connection with conflicts of interest would adversely impact our business in a number of ways, including by making counterparties reluctant to do business with us, impeding our ability to retain or increase our assets under management, subjecting us to potential litigation and adversely impacting our results of operations.
Conflicts of interest also may arise between our Affiliates where, for example, for competitive business reasons, more than one Affiliate may seek the same business opportunity, clients or talent or make other competitive business decisions.
We may make business decisions which we believe are in the best interests of the Company but that may have indirect negative effects on one or more of our Affiliates. We also may be required to make strategic and financial or other resource allocation decisions that may directly benefit one or more Affiliates and not others. Any decision that does not directly or indirectly benefit an Affiliate could negatively impact our relationship with that Affiliate.
Equity ownership by key employees of each Affiliate is at the level of the applicable Affiliate and not at the holding company level, although employees of our Affiliates may acquire our ordinary shares. Therefore, there may be instances where the interests of an Affiliate and its key employee equity-holders may not align with ours in effecting a desired outcome.
While we endeavor to assess and resolve any conflicts in a manner that is not disruptive or detrimental to us or our Affiliates, there is no assurance that a resolution may be possible or the interests of all parties can be taken into account.
Impairment of our Affiliates’ relationships with clients and/or consultants may negatively impact their businesses and our results of operations.
Our Affiliates have strong client and consultant relationships in their core institutional marketplaces, and they depend upon these relationships to successfully market their existing products and strategies and to introduce new products and strategies. Some Affiliates may have client exposures that are meaningful to their individual businesses. As of December 31, 2017, our Affiliates’ top five client relationships represented 13% of total run rate gross management fee revenue, including our equity-accounted Affiliate, and our Affiliates’ top 25 clients represented 28% of run rate gross management fee revenue, including our equity-accounted Affiliate. Total run rate gross management fee revenue reflects the sum for each account at each of our seven current Affiliates, of the product of (a) assets under management in each account at December 31, 2017, multiplied by (b) the relevant management fee rate on that account. This calculation includes the management fees paid by accounts at our equity-accounted Affiliate. Any negative changes in these relationships that reduce the number of client or consultant contacts, restrict access to existing or potential clients, or result in negative statements by a consultant, could have an adverse impact on our Affiliates’ businesses and negatively impact our results of operations.
The business of our Affiliates is dependent upon investment advisory agreements that are subject to negotiation, non-renewal, or termination, including termination upon assignment.
Our Affiliates derive substantially all of their revenues from the fees charged to their clients under their investment advisory agreements with those clients. The agreements generally provide for fees to be paid on the basis of the market values of assets under management, although a portion also provide for performance-based fees to be paid on the basis of investment performance against stated benchmarks.
An investment advisory agreement may be terminated by a client without penalty upon relatively short notice (typically no more than 30 days). In addition, the investment advisory agreements and sub-advisory agreements with respect to registered investment companies generally may be terminated by the mutual fund or, in those instances where an Affiliate serves as a sub-adviser, the mutual fund’s adviser, without penalty, upon 60 days’ notice and are subject to annual approval by the mutual fund’s board of directors or trustees. Clients may decide to terminate or not renew an agreement for poor investment performance or any variety of reasons which may be beyond the control of our Affiliates. A decrease in revenues resulting from termination of an investment advisory agreement or sub-advisory agreement for any reason could have a material adverse effect on the revenueCompany.
Risk Mitigators
BrightSphere has the following policies which are positive from a corporate governance perspective and profitsare risk mitigators:
Clawback policy
Stock ownership guidelines
Prohibitions on hedging and pledging
Clawback Policy
The Compensation Committee instituted a clawback policy for all NEOs for incentives awarded beginning in 2017. The clawback policy has four prongs that can cause the Compensation Committee to consider a clawback of our Affiliates and a negative effect on our results of operations.compensation paid, granted or vested in the prior three years which include:
PursuantFinancial statement restatement due to the Advisers Act, investment advisory agreements between our Affiliates, who are (or who have subsidiaries who are) U.S. registered investment advisers, and their clients are not assignable without the consentmaterial noncompliance with financial reporting requirements of the client. As required by the Investment Company Act of 1940,SEC;
Improper conduct resulting in significant adverse reputational or the Investment Company Act, investment advisory agreements and sub-advisory agreements between our Affiliates and investment company clients and/or the investment advisers to those investment companies terminate upon their assignment. Assignment, as generally defined, includes direct assignments as well as assignments that may be deemed to occur, under certain circumstances, upon the direct or indirect transfer of a “controlling block” of the voting securities of the respective Affiliate. A transaction is not deemed an assignmenteconomic impact;
Conduct constituting cause under the Advisers ActCompany’s equity plan; or the Investment Company Act, however, if it does not
Violation of risk policies that result in a change of actual control or management of the relevant Affiliate.material impact.
Stock Ownership Guidelines
If anyone acquires, or is deemed to have acquired, a controlling block of our voting securities in the future, the contractual anti-assignment and termination provisions of the investment advisory and sub-advisory agreements between our Affiliates and their clients may be implicated. If an assignment of an investment advisory or sub-advisory agreement is deemed to occur, and clients do not consent to the assignment or, with respect to investment company clients, enter into a new agreement, which may require the approval of the investment company’s shareholders in addition to its board of directors or trustees, our results of operations could be materially and adversely affected.
The historical returns of our existing investment strategies may not be indicative of their future results or of the investment strategies we may develop in the future.
We have presented information with respect to the historical returns of our existing investment strategies throughout this Annual Report on Form 10-K, including under “Business—Products and Investment Performance.” The historical returns of our Affiliates’ strategiesOur CEO and the ratingsother NEOs are subject to shareholding requirements of at least 500% of base salary and rankings our Affiliates or their strategies have received in the past should not be considered indicative300% of the future resultsbase salary, respectively. Unvested awards are excluded for purposes of these strategies or of any other strategies that our Affiliates may develop in the future. The investment performance our Affiliates achieve for their clients varies over time and the variance can be wide. The ratings and rankings our Affiliates or their strategies have received are typically revised monthly. The historical performance and ratings and rankings presented herein are as of December 31, 2017 and for periods then ended unless otherwise indicated. The returns on the strategies of our Affiliates’ have benefited during some periods from investment opportunities and positive economic and market conditions. In other periods, general economic and market conditions have negatively affected investment opportunities and the returns on our Affiliates’ strategies. These negative conditions may occur again, and in the future our Affiliates may not be able to identify and invest in profitable investment opportunities within their current or future strategies.
Pressure on fee levels of our Affiliates and changes to their mix of assets could impact our results of operations.
Our profit margins and net income are dependent on the ability of our Affiliates to maintain current fee levels for the products and services they offer. The competitive nature of the asset management industry has led to a trend toward lower fees in certain segments of the asset management market, and there can be no assurance that our Affiliates will be able to maintain their current pricing structures. Our Affiliates also may be required to restructure their fees due to regulatory changes. These factors also could inhibit the ability of our Affiliates to increase fees for certain products. A reduction in the fees charged by our Affiliates, or limited opportunities to increase fees, will reduce or limit our revenues and could reduce or limit our net income.
The fees charged by our Affiliates on their assets under management vary by asset class and produce different revenues per dollar of assets under management based on factors such as the type of assets being managed, the applicable investment strategy, the type of client and the client fee schedule. Institutional clients may have significant negotiating leverage in establishing the terms of an advisory relationship, particularly with respect to the level of fees paid, and the competitive pressure to attract and retain institutional clients may impact the level of fee income earned by an Affiliate. In order for an Affiliate to maintain its fee structure in a competitive environment, it may elect to decline to manage additional assets from potential clients who demand lower fees even though our revenues may be adversely affected in the short term.
Furthermore, a shift in the mix of assets under management from asset classes or products that generate higher fees to those that generate lower fees may result in a decrease in revenues while aggregate assets under management remain unchanged or increase. Such shifts can occur as various investment strategies go in and out of favor due to competition in the industry or as a result of movements between asset classes or certain products no longer being available to investors. In addition, in the event current or future Affiliates have or develop a focus on strategies that generate lower fees, a decrease in revenues may result. A decrease in revenues without a reduction in expenses will result in reduced net income.
Changes in how clients choose to access asset management services may also exert downward pressure on fees. Some investment consultants, for example, are implementing programs in which the consultant provides a range of services, including selection, in a fiduciary capacity, of asset managers to serve as sub-adviser at lower fee rates than the manager’s otherwise applicable rates, with the expectation of a larger amount of assets under management through that consultant. The expansion of those and similar programs could, over time, make it more difficult for us to maintain our fee rates.
Failure by our Affiliates to comply with investment guidelines set by their clients, including the boards of mutual funds that they sub-advise, or limitations imposed by applicable law could result in a loss of assets, potential damage awards or regulatory sanctions, which could adversely impact our results of operations or financial condition.
As investment advisers, our Affiliates (or their registered subsidiaries) have fiduciary duties to their clients. Our Affiliatesthis calculation. Until this shareholding requirement is met, NEOs are required to follow specified investment guidelines establishedretain 50% of their net gain shares (i.e., shares remaining after shares sold to pay taxes) received at vesting. There is no requirement for NEOs to hold shares once employment has ceased, and there is no requirement to continue to hold additional net gain shares once the shareholding requirement is met.
In 2019, to account for the grants of front-loaded stock options to the CEO and CFO, the Compensation Committee expanded the shareholding requirement to include the imputed after-tax value of vested, unexercised in-the-money stock options. Given the requirement to retain 50% of net gain shares at vesting until the shareholding requirement is met, the Committee also eliminated the five-year time period for attaining the applicable shareholding requirement for all NEOs.
Prohibitions on Hedging and Pledging
Our policies prohibit hedging and pledging of shares by their clients inour executive officers.
Impact of Tax and Accounting Policies
When the managementCompensation Committee determines NEO compensation, it considers all factors that may have an impact on our financial performance, including accounting rules and the tax consequences of client accounts. Our Affiliates that advise or sub-advise registered investment companies are also required to invest fund assets in accordance with guidelines contained in the Investment Company Act and applicable provisionscompensation awards, including under Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, as well as any guidelines established by the boards of the investment companies. Affiliates that manage accounts subject to the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974, as amended, or ERISA, must comply with the requirements of ERISA and regulations of the Department of Labor in their management of those plan accounts. An Affiliate’s failure to comply with applicable client and regulatory guidelines could result in losses to(“Section 162(m)”). Section 162(m) generally imposes a client which, depending$1 million cap on the circumstances, could resultdeductibility of compensation paid to certain executive officers of a publicly held corporation during a year. The executive officers to whom Section 162(m) applies in an Affiliate’s obligationa particular year (“covered employees”) include BrightSphere’s Chief Executive Officer and Chief Financial Officer, our next three most highly compensated executive officers, and any individual who is a covered employee in any year after 2017. While the Compensation Committee considers the deductibility of awards, it is not a material factor of our executive compensation program, and the Compensation Committee retains the flexibility to reimburse the client in whole for such losses. If an Affiliate believedaward compensation that the circumstances did not justify a reimbursement, or a client believed the reimbursement offered was insufficient, the client could seekit believes to recover damages from the Affiliate, withdraw assets from management by the Affiliate or terminate its investment advisory agreement with the Affiliate. An Affiliate that fails to follow investment guidelines or other limitationsbe in the managementbest long-term interests of a client account may be subject to actual and threatened lawsuits, or be subject to investigations and proceedings by governmental and self-regulatory organizations and potential damages, fines or sanctions. Any of these events could harmBrightSphere, even if the reputations of us and our Affiliates and adversely impact our and their results of operations and financial condition.
If our techniques for managing risk are ineffective, we may be exposed to material unanticipated losses.
In order to manage the significant risks inherent in our business, we must maintain effective policies, procedures and systems that enable us to identify, monitor and control our exposure to operational, legal and reputational risks. Our risk management methods may prove to be ineffective due to their design or implementation, or as a result of the lack of adequate, accurate or timely information or otherwise. If our risk management efforts are ineffective, we could suffer losses that could have a material adverse effect on our financial condition or results of operations. The potential for some types of operational risks, including, for example, trading errors, may be increased or amplified in periods of increased volatility, which can magnify the cost of an error. Although we have not suffered operational errors, including trading errors, of a material nature in the past, we may experience such errors in the future. Additionally, we could be subject to litigation, particularly from our clients, and investigations and enforcement proceedings by and sanctions or fines from regulators. Our Affiliates’ techniques for managing operational, legal and reputational risks in client portfolios may not fully mitigate the risk exposure in all economic or market environments, including exposure to risks that we might fail to identify or anticipate.
We or our Affiliates may be exposed to potential liability as a general partner or a controlling person.
Our Affiliates are limited liability companies of which we are, or an entity controlled by us is the majority member, except for ICM in which case we have certain consent and management rights. Certain of our Affiliates may serve as general partners, managing members or their equivalents for investment products that are organized as partnerships or other commingled vehicles. As such, we or an Affiliate may be exposed to liability in the limited liability company, partnership or investment vehicle or required to undertake certain obligations under applicable law that we or they otherwise would not be required to undertake as a holding company or investment adviser. In addition we may be deemed to be a control person of our Affiliates, as that term is defined in various U.S. federal and state statutes and, as such, potentially liable for the acts of our Affiliates or their employees. Consequently, if under such circumstances any of our Affiliates incurs liabilities or expenses that exceed its ability to pay, we may be directly or indirectly liable for its payment to the extent provided in the governing documents of the limited liability company, partnership or investment vehicle or under applicable law. While we and our Affiliates maintain errors and omissions and general liability insurance in amounts believed to be adequate to cover certain potential liabilities, we cannot be certain that claims will not be made against us that exceed the limits of available insurance coverage, that the insurers will remain solvent and will meet their obligations to provide coverage or that an adequate amount of insurance coverage will continue to be available to us and our Affiliates at a reasonable cost. A judgment against any of our Affiliates and/or us in excess of available insurance coverage could have a material adverse impact on our business and financial condition.
Our expenses are subject to fluctuations that could materially impact our results of operations.
Our results of operations are dependent upon the level of our expenses and those of our Affiliates, which can vary from period to period. We and our Affiliates have certain fixed expenses that we incur as going concerns, and some of those expenses are not subject to adjustment. If our revenues decrease, without a corresponding decrease in expenses, our results of operations would be negatively impacted. While we and our Affiliates attempt to project expense levels in advance, there is no guarantee that an unforeseen expense will not arise or that we will be able to adjust our variable expenses quickly enough to match a declining asset base. Consequently, either event could have either a temporary or permanent negative impact on our results of operations.
The cost of insuring our business is meaningful and may increase.
Our insurance costs are meaningful and can fluctuate significantly from year to year. In addition, certain insurance coverageawards may not be available or may only be available at prohibitive costs. As we renew our insurance coverage, we may be subjectfully deductible under Code Section 162(m).
For taxable years commencing before January 1, 2018, compensation paid pursuant to additional costs caused by premium increases, higher deductibles, co-insurance liability, changes in the size of our business or nature of our operations, litigation or acquisitions or dispositions. Higher insurance costs and incurred deductibles,a stockholder-approved plan that qualified as with any expense, would reduce our net income. In addition, we may obtain additional liability insurance for our directors and officers. There have been historical periods in which directors’ and officers’ liability insurance and errors and omissions insurance have been available only with limited coverage amounts, less favorable terms or at prohibitive cost, and these conditions could recur.
Investments in non-U.S. markets and in securities of non-U.S. companies may involve foreign currency exchange risk, and tax, political, social and economic uncertainties, and a reduction in assets“performance-based compensation” under management associated with investments in non-U.S. equities could have a disproportionate adverse impact on our results of operations.
A significant amount of our Affiliates’ assets under management is represented by strategies that primarily invest in securities of non-U.S. companies. Fluctuations in foreign currency exchange rates could negatively impact the account values and the investment returns of clients who are invested in these strategies, with a corresponding reduction in management fee income. In addition, an increase in the value of the U.S. dollar relative to non-U.S. currencies could result in a decrease in the U.S. dollar value of assets under management that are denominated in non-U.S. currencies, which in turn would result in lower revenues.
Many non-U.S. financial markets are not as developed or as efficient as the U.S. financial markets and, as a result, have limited liquidity and greater price volatility and may lack established regulations. Liquidity in such markets also may be adversely impacted by political or economic events, government policies, expropriation, volume trading limits by foreign investors, and social or civil unrest. The ability to dispose of an investment and its market value may be adversely impacted by any of these factors. In addition, non-U.S. legal and regulatory financial accounting standards and practices may be different from those of the U.S., and there may be less publicly available information about non-U.S. companies and non-U.S. markets. Governments of foreign jurisdictions may assert their abilities to tax local gains and/or income of foreign investors, including clients of our Affiliates, which could adversely impact the economics associated with investing in foreign jurisdictions or non-U.S. based companies. These risks also could impact the performance of strategies that invest in such markets and, in particular, strategies that concentrate investments in emerging market companies and countries.
In general, management fees for accounts that invest in non-U.S. equity markets, particularly emerging markets, are higher than those for accounts that invest in the domestic markets. Since 52% of our Affiliates’ total assets under management as of December 31, 2017 were invested in global, international and emerging markets equities, a significant reduction in assets under management associated with such investments could have a disproportionately adverse impact on our results of operations.
Our non-U.S. distribution initiatives may be unsuccessful, may expose us to other tax and regulatory risks and may not facilitate the growth of our business.
One of the primary opportunities for growth lies in expanding the geographic regions in which our Affiliates’ investment products and services are distributed. To assist our Affiliates in their non-U.S. distribution, we offer the assistance of our Center-led Global Distribution team. The success of these non-U.S. initiatives is therefore dependent upon the ability of our and our Affiliates’ teams to successfully partner in non-U.S. distribution efforts and to structure products that appeal to the global markets. The inability of the Global Distribution team and our Affiliates to successfully execute on their non-U.S. distribution plans may adversely impact the growth prospects of our Affiliates.
Our non-U.S. distribution initiative has required and will continue to require us to incur a number of up-front expenses, including those associated with obtaining regulatory approvals, as well as additional ongoing expenses, including those associated with the employment of additional support staff and regulatory compliance. Our employees routinely travel outside the U.S. in connection with our distribution efforts and may spend extended periods of time in one or more non-U.S. jurisdictions. Their activities outside the U.S. on our behalf may raise both tax and regulatory issues. If we are incorrect in our analysis of the applicability or the extent of the impact of non-U.S. tax or regulatory requirements, we could incur costs, penalties or be the subject of an enforcement or other action. We also expect that operating our business in non-U.S. markets generally will be more expensive than in the U.S. To the extent that our revenues do not increase as much as our expenses in connection with our distribution initiatives outside the U.S., our profitability could be adversely affected. Expanding our distribution initiatives into non-U.S. markets may also place significant demands on our existing infrastructure and employees.
Our outstanding indebtedness may impact our business and may restrict our growth and results of operations.
We have $392.8 million of long-term bonds outstanding as of December 31, 2017, $0.0 million of debt outstanding under our revolving credit facility with third-party lenders and $33.5 million outstanding under our non-recourse seed capital facility. For additional information regarding our revolving credit facility, our non-recourse seed capital facility and our long-term bonds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Working Capital and Long-Term Debt.”
We may incur additional indebtedness in the future for a variety of business reasons, including in relation to our acquisition strategy (e.g. initial purchase price and/or earnout), share repurchases, our obligations under the Deferred Tax Asset Deed that we have entered into with OMGUK and for seed or co-investment capital. We will be dependent on the cash flow generated from our Affiliates to service any indebtedness that is taken on by us.
The level of our indebtedness has important consequences to investors in our securities. For example, our level of indebtedness may require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available to us for working capital, capital expenditures and other general corporate purposes and may limit our ability to pay future dividends. Too much debt may limit our ability to implement our business strategy; heighten our vulnerability to downturns in our business, the financial services industry or in the general economy and limit our flexibility in planning for, or reacting to, changes in our business and the financial services industry; limit our access to additional debt; or prevent us from taking advantage of business opportunities as they arise or successfully carrying out our plans to expand our business and our Affiliates’ product offerings. Any of these consequences could have a material adverse effect on our financial condition or results of operations.
We may be unable to obtain sufficient capital and liquidity to meet the financing requirements of our business.
In October 2014, we established an independent facility with third party lenders to facilitate the growth of our business and, in particular, to finance our acquisition strategy and investments in new products. In July 2016 we issued an aggregate of $400 million of long-term bonds. Our ability to finance our operations through borrowing from our lenders under the credit facility or through future issuances of long-term bonds, and our ability to repay maturing obligations under our credit facility and long-term bonds, will be dependent in large part on the profitability of our Affiliates and our future operating performance. Any future inability to obtain financing on reasonable terms and with reasonable restrictions on the operation of our business could impair our liquidity, have a negative impact on our growth and that of our Affiliates and negatively impact our financial condition.
Our business involves risks of potential litigation that could harm our business.
We and our Affiliates may be named as defendants or co-defendants in lawsuits, or may be involved in disputes that include the threat of lawsuits seeking substantial damages. Any such legal action, whether threatened or actual, could result in reputational damage, loss of clients and assets, increased costs and expenses in resolving a claim, diversion of employee resources and resulting financial losses.
Our Affiliates make investment decisions on behalf of their clients that could result in substantial losses to those clients. If their clients suffer significant losses or otherwise are dissatisfied with the service of one of our Affiliates, that Affiliate could be subject to the risk of legal liability or actions alleging, among other theories, negligent misconduct, breach of fiduciary duty, breach of contract, unjust enrichment and/or fraud. These risks often are difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time, even after an action has been commenced. Our Affiliates may incur substantial legal expenses in defending against litigation commenced by a client or regulatory authority. Substantial legal liability levied on any one of our Affiliates could have a material adverse effect on our business, financial condition, or results of operations and could cause significant reputational harm.
Any significant limitation on the use of our facilities or the failure or security breach of our software applications or operating systems and networks, including the potential risk of cyber-attacks, could result in the disclosure of confidential client information, damage to our reputation, additional costs, regulatory penalties and financial losses.
We and our Affiliates depend upon our principal business offices and our various centers of operation for the continued operations of our businesses. A disruption in the infrastructure that supports our businesses or prevents our employees from performing their job functions, including communication failures, natural disasters, terrorist attacks and international hostilities, may have a material impact on our ability to continue business operations without interruption. Insurance and other safeguards might not be available or might only partially reimburse us for our losses.
Although we have back-up systems and disaster recovery programs in place and test their uses periodically, there can be no assurance that the recovery programs will be sufficient to mitigate any harm that may result from a disruption or disaster. Additionally, it is possible that any such disruption or disaster could have a significant impact on the general economy, domestic and local financial and capital markets or specific industries, including the financial services industry.
A significant portion of our operations relies heavily on the secure processing, storage and transmission of confidential and other information as well as the monitoring of a large number of complex transactions. With the evolving proliferation of new technologies and the increasing use of the Internet and mobile devices to conduct financial transactions, financial institutions such as us have been, and will continue to be, subject to an increasing risk of cyber incidents from these activities. We and our Affiliates take protective measures to secure information, including through system security technology. However, our technology systems may still be vulnerable to unauthorized access, computer malware or other events that have a security impact, such as an authorized employee or vendor inadvertently causing the release of confidential information or third-party unauthorized access or account takeovers, which could materially damage our operations or cause the disclosure or modification of sensitive or confidential information. Breach of our technology systems through cyber-attacks, or failure to manage and secure our technology environment, could result in interruptions or malfunctions in the operations of our business, loss of valuable information, liability for stolen assets or information, remediation costs to repair damage caused by a breach, additional costs to mitigate against future incidents and litigation costs resulting from an incident. Moreover, loss of confidential client information could harm our reputation and subject us to liability under the laws that protect personal data, resulting in increased costs or loss of revenues.
Our Affiliates and third parties with which we do business may also be sources of cybersecurity or other technological risks as we outsource certain functions. While we engage in certain actions to reduce the exposure resulting from outsourcing, such as performing onsite security control assessments, limiting third-party access to the least privileged level necessary to perform job functions, and restricting third-party processing to systems stored within our data centers, ongoing threats may result in unauthorized access, loss or destruction of data or other cyber incidents with increased costs and consequences to us such as those discussed above.
The carrying value of goodwill and other intangible assets on our balance sheet could become impaired, which would adversely affect our financial condition and results of operations.
We have recorded goodwill and intangible asset impairments in the past and could incur such charges in the future as acquisitions occur and we take on more goodwill. We review the carrying value of goodwill and intangible assets not subject to amortization on an annual basis, or more frequently if indications exist suggesting that the fair value of our intangible assets may be below their carrying values. We test the values of intangible assets subject to amortization whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Should such review indicate impairment, a write-down of the carrying value of goodwill or the intangible asset could occur, resulting in a non-cash charge that may, in turn, affect our reported results of operations, financial condition and shareholders’ equity.
Claims for indemnification may be substantial and have a negative impact on our financial condition.
We have engaged in a number of transactions involving the sale of businesses to third parties and to members of management of former Affiliates. As is customary in business transactions of these types, we were required to and did provide indemnifications with respect to third-party claims arising out of these transactions for limited periods of time with respect to certain claims, and for unlimited periods of time with respect to other claims. While we currently are not aware of exposure or potential exposure to any claim against us for indemnification, there can be no guarantee that a claim will not arise during the relevant indemnification period and that we will not have to provide the requisite indemnification. In addition, legal challenges to any potential claim for indemnification could result in increased legal expenses.
The failure of a counterparty to meet its obligations could affect our business adversely.
Our Affiliates routinely execute transactions with counterparties in the financial industry and for the provision of services that are important to the business, and we may engage in transactions with counterparties as part of our corporate finance management function and for the provision of services. As a result, we and our Affiliates and clients have exposure to the credit, operational and other risks posed by such counterparties, including the risk of default by or bankruptcy of a counterparty. The failure of a counterparty to meet its obligations or provide the services we depend on for these or other reasons could adversely affect our ability to conduct our businesses and result in loss of client assets and potential liability. With respect to the Deferred Tax Asset Deed, OMGUK will remain a significant counterparty with respect to an indemnity which covers the historical and future payments made under such Deed since the Offering.
We may be subject to financial criminal activity which could result in financial loss or damage to our reputation.
Instances of financial criminal activity, personal trading violations and other abuses, including misappropriation of assets by internal or external perpetrators, may arise despite our internal control policies and procedures. Instances of such criminal activity by financial firms and their personnel, including those in the investment management industry, have led the U.S. government and regulators to increase enforcement of existing rules relating to such activities, adopt new rules and regulations and enhance oversight of the U.S. financial industry. As we expand our international operations, we will be subject to the rules of other jurisdictions that govern and control financial criminal activities and exposed to financial criminal activities on a more global scale. Compliance with existing and new rules and regulations may have the effect of increasing our expenses. Further, should any of our or our Affiliates’ personnel be linked to financial criminal activity, either domestically or internationally, we would suffer material damage to our reputation which could result in a corresponding loss of clients and/or client assets and revenue.
We and our Affiliates are vulnerable to reputational harm because we operate in an industry in which personal relationships, integrity and client confidences are of critical importance. For example, if an employee were to engage in illegal or suspicious activities, we or an Affiliate could be subject to legal or regulatory sanctions and suffer serious harm to our reputations (as a consequence of the negative perception resulting from such activities), and impairment to client relationships and the ability to attract new clients. Our Affiliates’ businesses often require that they deal with confidential information. If their employees were to improperly use or disclose this information, even if inadvertently, our Affiliates and we could be subject to legal or regulatory action and suffer serious harm to our reputations and current and future business relationships.
It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. In addition, the SEC has increased its scrutiny of the use of non-public information obtained from corporate insiders by professional investors. Employee misconduct, or even unsubstantiated allegations of misconduct, could adversely impact our reputation, current and future business relationships and our financial condition.
We are subject to the U.K. Bribery Act, the U.S. Foreign Corrupt Practices Act and other anti-corruption laws, as well as export control laws, customs laws, sanctions laws, anti-facilitation of tax evasion laws and other laws governing our operations. If we fail to comply with these laws, we could be subject to civil or criminal penalties, other remedial measures, and legal expenses, which could adversely affect our business, results of operations and financial condition.
Our operations are subject to anti-corruption laws, including the U.K. Bribery Act 2010, or the Bribery Act, the U.S. Foreign Corrupt Practices Act, or the FCPA, and other anti-corruption laws that apply in countries where we do business. The Bribery Act, the FCPA and these other laws generally prohibit us and our employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We and our commercial partners operate in a number of jurisdictions that may pose a risk of potential Bribery Act or FCPA violations, and we participate in collaborations and relationships with third parties whose actions could potentially subject us to liability under the Bribery Act, the FCPA or local anti-corruption laws. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our internal operations might be subject or the manner in which existing laws might be administered or interpreted.
We are also subject to other laws and regulations governing our international operations, including regulations administered by the governments of the United Kingdom, or U.K., and the U.S., and authorities in the European Union, including applicable export control regulations, economic sanctions on countries or persons, customs requirements and currency exchange regulations, anti-facilitation of tax evasion rules (including the U.K. Criminal Finances Act 2017), or Trade Control Laws.
There is no assurance that we will be completely effective in ensuring our compliance with all applicable anti-corruption laws, including the Bribery Act, the FCPA or other legal requirements, including Trade Control Laws. If we are not in compliance with the Bribery Act, the FCPA and other anti-corruption laws or Trade Control Laws, we may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on our business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the Bribery Act, the FCPA, other anti-corruption laws or Trade Control Laws by U.K., U.S. or other authorities could also have an adverse impact on our reputation, business, results of operations and financial condition.
A U.K. exitSection 162(m) was exempt from the European Union could adversely impact our business.
On June 23, 2016, U.K. citizens voted in a referendum to leave the European Union.annual $1 million deduction limitation. The consequences of this vote, and the possible exit of the U.K., together with what may be protracted negotiations around the terms of any exit, are uncertain. The exit of the U.K. from the European Union and the uncertainty regarding the form and timing of such exit may have adverse effects on the U.K., European and worldwide economy and market conditions and contribute to currency exchange fluctuations. Any negative impact to overall investor confidence or instability in the global macroeconomic environment could have an adverse economic impact on our results of operations. Although an immaterial portion of our revenue is impacted by changes in value of the British pound, certain of our subsidiaries are domiciled in the U.K. and authorized by the Financial Conduct Authority to carry on certain activity, such as investment management and distribution. In addition, a withdrawal of the U.K. from the European Union could lead to legal uncertainty and potential regulatory and tax changes including a loss of certain “passporting” benefits currently afforded to firms authorized by the Financial Conduct Authority. The effect of any of these risks, were they to materialize, is difficult to quantify, but could increase our operating and compliance costs and could negatively impact the value of our securities.
Industry Risks
We operate in a competitive environment.
The investment management industry is highly competitive, with competition based on a variety of factors, including investment performance, investment management fee rates, continuity of investment professionals and client relationships, the quality of services provided to clients, reputation and the strategies offered. We and our Affiliates compete against a broad range of domestic and international asset management firms, broker-dealers, hedge funds, investment banking firms and other financial institutions. We directly compete against these organizations with respect to investment products, distribution channels, opportunities to acquire other investment management firms and retention and recruitment of talent. The capital resources, scale, name recognition and geographic footprints of many of these organizations are greater than ours. The recent trend toward consolidation in the investment management industry, and the financial services industry in general, has served to increase the size and strength of a number of our competitors. Some investors may prefer to invest with an investment manager that is not publicly traded based on the perception that a publicly traded asset manager may focus on the manager’s own growth to the detriment of investment performance for clients. Some competitors may operate in a different regulatory environment than we do, which may give them certain competitive advantages in the investment products and portfolio structures that they offer.
In addition, each of our Affiliates competes against other investment managers offering the same or different investment strategies. The competition in our industry results in pressure on fees which may hinder the ability of our Affiliates to compete. All of our Affiliates rely upon their investment performance as a competitive advantage, which may not always position them to compare favorably to their competitors. In certain instances, our Affiliates also may compete against one another for clients. It is likely that new competitors will enter the market as there are low costs and limited barriers to entry.
Our ability to attract assets also is dependent upon the ability of our Affiliates to offer a mix of products and services that meet client demand and their abilities to maintain investment management fees at competitive levels. There are a number of asset classes and product types that currently are not well covered by our Affiliates, such as index funds, passive exchange-traded funds and hedge funds. When these asset classes or products are in favor with either existing or potential clients, our Affiliates will miss the opportunity to attract and manage these assets and face the risk of assets being withdrawn in favor of competitors who manage the asset classes and/or provide these products. If our Affiliates are unable to compete effectively in their markets, our results of operations and potential business growth could be adversely affected.
Our sole business is asset management. As a result, we may be more impacted by trends and issues and more susceptible to negative events impacting the asset management industry than other more diversified financial services companies that provide asset management and other financial services.
We operate in a highly regulated industry, and continually changing federal, state, local and foreign laws and regulations could materially adversely affect our business, financial condition and results of operations.
The investment management business is highly regulated and, as a result, our Affiliates are required to comply with a wide array of domestic and international laws and regulations. The requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with us, and are not designed to protect our shareholders. Accordingly, these regulators often serve to limit our activities, including through client protection and market conduct requirements.
Our Affiliates are subject to extensive regulation in the U.S. through their primary regulator, the SEC, under the Advisers Act. Those of our Affiliates that act as investment advisers or sub-advisers to registered investment companies must comply with the terms of the Investment Company Act and the rules thereunder. The Advisers Act imposes numerous obligations on registered investment advisers, including fiduciary, record keeping, advertising and operational requirements, disclosure obligations, and prohibitions on fraudulent activities. The Investment Company Act regulates the structure and operations of registered investment companies and imposes additional obligations on advisers to registered investment companies, including detailed disclosure and regulatory requirements applicable to the registered investment companies and additional compliance responsibilities which must strictly be adhered to by the funds and their advisers. Certain of our advisory Affiliates also are subject to the rules and regulations adopted by the Commodity Futures Trading Commission, under the Commodity Exchange Act; by the Department of Labor, under ERISA; the Financial Industry Regulatory Authority, Inc., or FINRA; and state regulators.
The domestic regulatory environment in which we operate has seen significantly increased regulation in recent years. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, represents a comprehensive overhaul of the financial services industry in the U.S. and includes, among other things: (i) the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and to improve cooperation among federal agencies, (ii) the creation of the Consumer Financial Protection Bureau authorized to promulgate and enforce consumer protection regulations relating to financial products and services, and (iii) enhanced regulation of financial markets, including the derivatives and securitization markets. Certain provisions of the Dodd-Frank Act may require our Affiliates to change, or adopt new limitations on, the manner in which they conduct their business. The Dodd-Frank Act and the rules promulgated thereunder have also increased regulatory burdens and related reporting and compliance costs. Certain provisions may have unintended adverse consequences on the liquidity or structure of the financial markets. In addition, the scope and impact of many provisions of the Dodd-Frank Act remain to be determined by implementing regulations, some of which have involved lengthy proposal and promulgation periods and could lead to additional legislation or regulation. The Dodd-Frank Act impacts a broad range of market participants with whom our Affiliates interact or may interact. These changes may also impact the way in which our Affiliates conduct business with their counterparties and many aspects of the regulatory landscape continue to evolve. As a result of these uncertainties, the full impact of the Dodd-Frank Act on the investment management industry and on our and our Affiliates’ businesses, in particular, cannot be predicted at this time.
We and our Affiliates also are subject to the regulatory environments of the non-U.S. jurisdictions in which we and they operate, some of which also recently implemented or are in the process of implementing changes in regulations. In the U.K., certain of our Affiliates are subject to regulation by the Financial Conduct Authority, or FCA, which impose a comprehensive system of regulation on investment advisers and the manner in which we and they conduct our businesses. Additionally, as we are no longer included as part of OM plc’s group for consolidated supervision by the Prudential Regulation Authority, we are subject to consolidated supervision by the FCA as a result of our regulated Affiliates. Certain other of our Affiliates may be registered in jurisdictions outside of the United States and are subject to applicable regulation in those jurisdictions. We and our Affiliates are additionally subject to regulation relating to the offer and sale of financial products in each of the European Union countries in which we and they operate. The system of financial regulation outside the United States continues to develop and evolve and, as a result, the rules to which we and our Affiliates are subject (including rules relating to the remuneration of staff) are and will continue to be subject to change. As we execute on our growth strategy and continue to expand our distribution efforts into non-U.S. jurisdictions, including other member countries of the European Union, Latin America, the Middle East and certain other Asian countries, our Affiliates may be required to register with additional foreign regulatory authorities or otherwise comply with non-U.S. rules and regulations that currently are not applicable to our businesses and with respect to which we may have limited or no compliance experience. Our lack of experience in complying with any such non-U.S. or non-English laws and regulations may increase our risk of becoming a party to litigation or subject to regulatory actions. Additionally, one or more of the jurisdictions in which we operate may require our shareholders to seek the approval of, or provide notice to, an applicable regulator before acquiring a substantial amount of our outstanding shares.
Developments in the current regulatory environment in the U.S. may include heightened and additional examinations and inspections by regulators and the imposition of additional reporting and disclosure obligations. Regulators also may take a more aggressive posture on bringing enforcement proceedings which could result in fines, penalties and additional remedial activities.
Policy and legislative changes in the U.S. and in other countries are affecting many aspects of financial regulation. Our business, results of operations and financial condition may be adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations in any of the jurisdictions in which we and our Affiliates conduct business. The ability of us and our Affiliates to function in this legislative and regulatory environment will depend on our and our Affiliates’ ability to monitor and promptly react and adapt to legislative and regulatory changes, including situations where such changes in regulatory requirements may be driven by internal factors. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we and our Affiliates conduct business.
Failure to comply with applicable laws or regulations could result in fines, suspension or revocation of an Affiliate’s registration as an investment adviser, suspensions of individual employees, revocation of licenses to operate in certain jurisdictions or other sanctions, which could materially adversely affect our business, financial condition and results of operations. Even if an investigation or proceeding did not result in a fine or sanction, or the fine or sanction imposed against an Affiliate or us or our respective employees by a regulator were small in monetary amount, the adverse publicity relating to an investigation, proceeding or imposition of a fine or sanction could cause us to suffer financial loss, harm our reputation and cause us to lose business or fail to attract new business which would have a direct adverse impact on our business, financial condition and results of operations.
If we were deemed an investment company under the Investment Company Act, we would become subject to burdensome regulatory requirements and our business activities could be restricted.
We do not believe that we are an “investment company” under the Investment Company Act. Generally, a company is an “investment company” if, absent an applicable exemption, it (i) is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (ii) engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire “investment securities” having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We believe we are primarily engaged in a non-investment company business and that less than 40% of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis are comprised of assets that could be considered investment securities.
We and our Affiliates intend to conduct our operations so that we will not be deemed an investment company under the Investment Company Act. However, if we were to be deemed an investment company, restrictions imposed by the Investment Company Act, including limitations on our capital structure and our ability to transact with our Affiliates, could make it impractical for us to continue our business as currently conducted and could have a material adverse effect on our financial performance and operations.
ERISA fiduciary regulations issued by the Department of Labor could have a material adverse effect on our financial performance and operations.
In June 2017 the Department of Labor’s final “fiduciary rule” came into effect. The fiduciary rule significantly expands the circumstances in which investment-related communications with retirement investors will be treated as “investment advice” that is fiduciary in nature under ERISA, and/or under the prohibited transaction provisions of the Code. Certain aspects of significant new prohibited transaction exemptions under the fiduciary rule are not scheduled to come fully into effect until July 2019, and the Department of Labor is also currently considering whether it should modify the fiduciary rule or repeal it altogether. The fiduciary rule and exemptions are focused on financial intermediaries who provide advice to institutional and retail retirement plan clients and mandate, among other things, increased disclosure of financial intermediary compensation and the elimination or mitigation of conflicts of interest. To the extent that the fiduciary rule and exemptions lead to changes in financial intermediary and retirement plan investment preferences, and increased pressure on fees and expenses for investment services and products, such changes could have a material adverse effect on our financial performance and operations.
Risks Related to Our Ownership Structure
OM plc’s separation from us could adversely impact our relationship with our Affiliates and their clients.
In 2017, OM plc sold all but a de minimis amount of its shareholdings in our company through a private sale of a 24.95% interest to HNA, or the HNA Minority Sale, and sales in the public market and to us.
Our Affiliates are (or have subsidiaries who are) U.S. registered investment advisers. Certain of our Affiliates provide investment advisory services to investment companies registered under the Investment Company Act pursuant to the terms of an investment advisory agreement between the Affiliate and the applicable U.S. registered investment company. Certain of our Affiliates have been retained by U.S. registered investment advisers to certain U.S. registered investment companies to provide investment subadvisory services to U.S. registered investment companies pursuant to the terms of an investment subadvisory agreement between the Affiliate and the relevant U.S. registered investment adviser. Each of these investment advisory and subadvisory agreements provides for its automatic termination in the event of its “assignment,” as defined in the Investment Company Act. The investment advisory agreements between our Affiliates, (or their subsidiaries) and their non-registered investment company clients provide that there can be no “assignment,” as defined under the Advisers Act, of those agreements without the consent of the client. An assignment is generally defined to include direct assignments as well as assignments that may be deemed to occur, under certain circumstances, upon the direct or indirect transfer of a “controlling block” of the voting securities of the respective Affiliate.
If (i) the HNA Minority Sale, the other sales of ordinary shares by OM plc, any additional purchases of our ordinary shares by HNA or any future acquisition of a block of our voting securities by a third party, separately or together, were deemed an “assignment” of the underlying investment advisory and subadvisory agreements between our Affiliates (or their subsidiaries) and their clients under the Advisers Act and Investment Company Act and (ii) non-registered investment company clients do not consent to the assignment and/or registered investment company clients do not enter into new advisory agreements, our results of operations could be materially and adversely affected. In addition, current clients, prospective clients and consultants may be reluctant to commit to make new or additional investments with our Affiliates, or invest in funds sponsored or sub-advised by our Affiliates, for some period of time following the HNA Minority Sale or other sale, which may adversely affect our results of operations.
HNA has meaningful ability to influence our business.
HNA beneficially owns 24.95% of our outstanding ordinary shares. Additionally, HNA has the right to appoint two directors to our Board of Directors pursuant to the rights of HNA under the shareholder agreement with OM plc that was assigned to HNA by OM plc, or the Shareholder Agreement. This concentration of ownership may have the effect of delaying or preventing a change in control of us or discouraging others from making tender offers for our ordinary shares. It also may make it difficult for other shareholders to replace management and may adversely impact the trading price of our ordinary shares because investors often perceive disadvantages in owning ordinary shares in companies with significant shareholders. HNA will continue to have the right to appoint two directors so long as it holds at least 20% of our outstanding ordinary shares and will have the right to appoint one director so long as it holds at least 7% of our outstanding ordinary shares. Additionally, HNA will have the right to transfer these appointment rights to a transferee that acquires from HNA the foregoing percentages of our ordinary shares, at which point such unknown third party may have a meaningful ability to influence our business.
Our ability to pay regular dividends to our shareholders is subject to the discretion of our Board of Directors and may be limited by our holding company structure and applicable provisions of the laws of England and Wales.
Any declaration of dividends will be at the discretion of our Board of Directors, and will depend on our financial condition, earnings, cash needs, regulatory constraints, capital requirements and any other factors that our Board of Directors deems relevant in making such a determination. Under the laws of England and Wales, we may only pay dividends out of our accumulated, realized profits, so far as not previously utilized by distribution or capitalization and provided that at the time of payment of the dividend, the amount of our net assets is not less than the total of our called-up share capital and undistributable reserves. In addition, as a holding company, we will be dependent upon the ability of our Affiliates to generate earnings and cash flows and distribute them to us so that we may pay dividends to our shareholders. The ability of our Affiliates to distribute cash to us will be subject to their operating results, cash requirements and financial condition, the applicable provisions of governing law which may limit the amount of funds available for distribution, their compliance with covenants and financial ratios related to existing or future indebtedness, and their other agreements with third parties. As a consequence of these various limitations and restrictions, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our ordinary shares.
Risks Related to Our Tax Matters
The Internal Revenue Service, or the IRS, may not agree to treat OMAM as a foreign corporation for U.S. federal tax purposes and Section 7874 of the Code could limit our ability to use our U.S. tax attributes.
Although OMAM is incorporated in England and Wales, which are part of the U.K., the IRS may assert that it should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal tax purposes pursuant to section 7874 of the Code. For U.S. federal tax purposes, a corporation generally is considered a tax resident in the jurisdiction of its organization or incorporation. Because OMAM is a U.K.-incorporated entity, it would generally be classified as a foreign corporation (and, therefore, a non-U.S. tax resident) under these rules. Section 7874 of the Code provides an exception under which a foreign incorporated entity may, in certain circumstances, be treated as a U.S. corporation for U.S. federal tax purposes.
For OMAM to be treated as a foreign corporation for U.S. federal tax purposes under section 7874 of the Code, after certain restructuring transactions made prior to the Offering, or the Reorganization, (including for this purpose all the transactions treated as part of a plan or series of related transactions with respect to the Reorganization) either (i) the former stockholder of OMUS, i.e., OMGUK, must have owned (within the meaning of section 7874 of the Code) less than 80% (by both vote and value) of our ordinary shares by reason of holding shares in OMUS immediately prior to the Reorganization, excluding for this purpose shares owned by the expanded affiliated group including OMAM, or (ii) OMAM must have had substantial business activities in the U.K. (taking into account the activities of our expanded affiliated group).
Based on the rules for determining share ownership under section 7874 of the Code, in particular the rule excluding shares owned by OMGUK, which should be treated as a member of the expanded affiliated group including OMAM, we have taken and continue to take the position that OMGUK should be treated as owning less than 80% of our ordinary shares after the Reorganization and that, therefore, OMAM should be treated as a foreign corporation for U.S. federal income tax purposes, although no assurances can be given in this regard. If OMAM were to be treated as a U.S. corporation, income it earned would become subject to U.S. taxation, and the gross amount of any dividend payments to its non-U.S. shareholders could be subject to 30% U.S. withholding tax, depending on the application of any income tax treaty that might apply to reduce the withholding tax.
Following the acquisition of a U.S. corporation by a foreign corporation, section 7874 of the Code can limit the ability of the acquired U.S. corporation and its U.S. affiliates to utilize U.S. tax attributes such as net operating losses to offset U.S. taxable income resulting from certain transactions.
These limitations will apply if, after the Reorganization (including for this purpose all transactions treated as part of a plan or series of related transactions with respect to the Reorganization), (i) the former stockholder of OMUS, i.e., OMGUK, owned (within the meaning of section 7874 of the Code) at least 60% (by both vote and value) of our ordinary shares by reason of holding shares in OMUS immediately prior to the Reorganization, excluding for this purpose shares owned by the expanded affiliated group including OMAM, and (ii) we did not have substantial business activities in the U.K. (taking into account the activities of our expanded affiliated group).
Based on the rules for determining share ownership under section 7874 of the Code, in particular the rule excluding shares owned by OMGUK, which should be treated as a member of the expanded affiliated group including OMAM, we have taken and continue to take the position that OMGUK should be treated as owning less than 60% of our ordinary shares, and that therefore OMUS should not be subject to the limitations described above, although no assurances can be offered in this regard. If such limitations were to apply, the U.S. consolidated group that includes OMUS would owe potentially more U.S. tax due to the inability to utilize these tax attributes.
Future changes to the tax laws under which we should be treated as a foreign corporation for U.S. federal tax purposes and changes in other tax laws or tax treaties relating to multinational corporations could adversely affect us.
Under current law, as noted above, OMAM should be treated as a foreign corporation for U.S. federal income tax purposes. Changes to Section 7874 of the Code or the U.S. Treasury regulations promulgated thereunder or future IRS guidance could affect OMAM’s status as a foreign corporation for U.S. federal tax purposes, and any such changes or future IRS guidance could have prospective or retroactive application.
For instance, on April 4, 2016, the IRS issued a package of temporary regulations, addressing so-called inversion transactions under sections 7874 and 367 and certain post-inversion transactions such as under sections 304 and 956, which rules are generally effective for certain inversion transactions completed on or after November 19, 2015 or, in certain cases, to certain specified post-inversion transactions occurring after that date provided that an inversion transaction had occurred on or after September 22, 2014. While those rules would, in certain cases, apply to transactions, such as our initial public offering, that occurred after September 22, 2014, we believe that those rules would not impact the treatment of the Reorganization or OMAM’s status as a foreign corporation under Section 7874 of the Code. The IRS issued final regulations on June 3, 2015, which address the “substantial business activities” test of Section 7874 of the Code. We believe that those regulations, which have an effective date of June 4, 2015, also do not impact the treatment of the Reorganization or OMAM’s status as a foreign corporation under Section 7874.
In addition, recent legislative proposals have aimed to expand the scope of Section 7874 and/or to expand the scope of U.S. corporate tax residence. If any such legislation (or similar legislation) were enacted, or if future IRS guidance were issued addressing the scope of U.S. corporate tax residence, it could cause OMAM to be treated as a domestic corporation for U.S. federal income tax purposes as of or after the Reorganization or could otherwise adversely affect us.
In July 2013, The Organization for Economic Co-operation and Development launched an Action Plan on Base Erosion and Profit Shifting, or the BEPS Action Plan. The BEPS Action Plan identified fifteen specific actions to address Base Erosion and Profit Shifting, set deadlines to implement the actions and identified the resources needed and the methodology to implement these actions. The OECD published their final package of reports relating to the fifteen actions outlined in the BEPS Action Plan in October 2015. These contemplated changes, if finalized and adopted by countries, could adversely affect our provision for income taxes.
In connection with BEPS Action Plan 2, in 2016, the U.K. Government enacted legislation which included new anti-hybrid rules designed to neutralize the effects of hybrid mismatch arrangements, which took effect from January 1, 2017. Our financing structure includes an entity which could be treated as a hybrid for the purposes of these rules, but we have received a written opinion from Deloitte LLP that this U.K. legislation should not apply to our financing structure for the period prior to July 13, 2017, although no assurances can be offered in this regard.
The Office of Revenue Commissioners, U.S. Congress and government agencies in other jurisdictions where we and our Affiliates do business have each recently focused on issues related to the taxation of multinational corporations. As a result, the tax laws in the U.K., U.S. and other countries in which we and our Affiliates do business could change on a prospective or retroactive basis and any such changes could adversely affect us.
Dividends and interest from OMUS to OMAM, and dividends, interest or other income from foreign entities owned by Affiliates or investment in other foreign countries may be subject to withholding taxes.
Under U.S. federal income tax law, dividends and other distributions from Affiliates of OMUS to OMUS and from OMUS to OMAM UK Limited, or UK Sub, should not be subject to U.S. withholding tax. Additionally, dividends from OMAM US, Inc., or US Sub, to OMAM should not be subject to U.S. withholding tax under the income tax treaty between the U.K. and the U.S., or the Treaty, provided that OMAM satisfies the minimum holding period requirements set forth in the Treaty. Under U.S. federal income tax law, interest paid by OMUS to UK Sub should not be subject to U.S. withholding tax and, under the Treaty, interest paid by US Sub to OMAM should also not be subject to U.S. withholding tax. The IRS, however, may challenge any determination that OMAM is eligible for benefits under the Treaty, or may assert that OMAM does not qualify for a complete exemption from withholding tax on dividends under the Treaty. If OMAM is not eligible for benefits under the Treaty, the gross amount of any such dividends or interest would be subject to a 30% U.S. withholding tax. If OMAM qualifies for benefits under the Treaty, but not for a complete exemption from withholding tax on dividends, the gross amount of such dividends should nevertheless qualify for a reduced withholding tax rate of 5%.
Under U.K. tax law, dividends and other distributions from the U.K. companies in our group are not subject to U.K. withholding tax. However, dividends, interest or other income earned by OMUS or Affiliates of OMUS from foreign entities that OMUS or such Affiliates control or have invested in may be subject to foreign withholding taxes. Unless our share of these withholding taxes is fully credited against our U.S. or U.K. income tax liability or otherwise fully refunded, it could increase our aggregate tax burden. Although we intend to arrange the ownership of our foreign subsidiaries, our intercompany dividends, interest and other payments and our investments in foreign countries on our own behalf and on behalf of our clients with a view to minimizing the incurrence of such withholding taxes, there can be no assurance that such arrangements will have the intended result.
If we were treated as a “controlled foreign corporation” for U.S. federal income tax purposes, U.S. holders of 10% or more of the voting power or value of our ordinary shares may be subject to current U.S. federal income taxation on undistributed earnings and profits and certain gains from selling ordinary shares may be treated as dividends.
While we do not believe that we should be treated as a controlled foreign corporation, or CFC, for U.S. federal income tax purposes, no assurances can be offered in this regard. We will generally be classified as a CFC if more than 50% of our outstanding ordinary shares, measured by reference to voting power or value, are owned (directly, indirectly or by attribution) by “10% U.S. Shareholders.” For this purpose, a “10% U.S. Shareholder” is any U.S. person that owns directly, indirectly or by attribution, 10% or more of the voting power or value of our outstanding ordinary shares. If we are classified as a CFC, a 10% U.S. Shareholder may be subject to current U.S. federal income taxation on all or a portion of our undistributed earnings and profits attributable to certain categories of passive income and certain other income described in Subpart F of the Code, and may also be subject to U.S. federal income taxation on any gain realized on a sale of ordinary shares by treating that gain as a dividend, to the extent of our current and accumulated earnings and profits attributable to such shares.
The CFC rules are complex, and U.S. persons that are, or may be, 10% U.S. Shareholders are urged to consult their own tax advisors regarding the possible application of the CFC rules to them in their particular circumstances.
If we were treated as a passive foreign investment company for U.S. federal income tax purposes, U.S. investors in our ordinary shares could be subject to adverse U.S. federal income tax consequences.
For U.S. federal income tax purposes, a foreign corporation is classified as a passive foreign investment company, or PFIC, for any taxable year if either (i) 75% or more of its gross income for such taxable year is “passive income” (as defined for such purposes) or (ii) 50% or more of the value of the assets held by such corporation (based on an average of the quarterly values of such assets) during such taxable year is attributable to assets that produce passive income or that are held for the production of passive income.
We do not believe that we are currently a PFIC, and we do not anticipate becoming a PFIC in the foreseeable future; however, no assurances can be offered in this regard. The tests for determining PFIC status are applied annually after the close of the taxable year. It is difficult to accurately predict future income and assets relevant to this determination and no ruling from the IRS or opinion of counsel has been or will be sought with respect to PFIC status. Whether we are a PFIC will depend on our particular facts and circumstances (such as the valuation of our assets, including goodwill and other intangible assets, the treatment of intercompany interest income, etc.) and may also be impacted by the application of the PFIC rules, which are subject to differing interpretations. The fair market value of our assets is expected to depend, in part, upon (a) the market price of our ordinary shares and (b) the composition of our income and assets, which will be impacted by how, and how quickly, we spend any cash that is raised in any financing transaction. Accordingly, we cannot assure U.S. holders that we are not, or will not become, a PFIC. If we should determine that we are a PFIC, we will attempt to notify U.S. holders, although there can be no assurance that we will be able to do so in a timely and complete manner. If we are a PFIC for any taxable year during which a U.S. holder holds our ordinary shares, we generally will continue to be treated as a PFIC with respect to such U.S. holder for all succeeding taxable years during which such holder holds our ordinary shares, although a U.S. holder may avoid some of the adverse effects of the PFIC regime by making a deemed sale election with respect to our ordinary shares after we have ceased being treated as a PFIC.
If we are properly characterized as a PFIC, U.S. holders of our ordinary shares would be subject to adverse U.S. federal income tax consequences, such as ineligibility for any preferred tax rates on capital gains, or on actual or deemed dividends, interest charges on certain taxes treated as deferred, and additional annual reporting requirements under U.S. federal income tax laws and regulations. Whether or not U.S. holders of our ordinary shares make a timely mark-to-market election may impact the U.S. federal income tax consequences to U.S. holders with respect to the acquisition, ownership and disposition of our ordinary shares and any distributions such U.S. holders may receive. Investors should consult their own tax advisors regarding all aspects of the application of the PFIC rules to our ordinary shares.
Failure to comply with the tax laws of the U.S., the U.K. or other jurisdictions, which laws are subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis, may result in erroneous filings, negative impact to income and reputational damage.
We and our Affiliates are subject to a range of taxes and tax audits. Tax and other regulatory authorities may disagree with tax positions taken by us and our Affiliates based on our, or their, interpretations of the relevant tax laws, which could result in erroneous filings, retroactive adverse impact on income, the loss of tax benefits and reputational damage. We will regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes, which will require estimates and judgments. Although we will make these tax estimates on a reasonable basis, there can be no assurance that the tax authorities will agree with such estimates and judgments. From time to time, we may have to engage in litigation to attempt to achieve the results reflected in our estimates, which may be time-consuming and expensive and may have other adverse impacts. There can be no assurance that we will be successful in any such litigation or that any final determination of our tax liability will not be materially different from the historical treatment reflected in our historical income tax provisions and accruals. Any future changes to tax laws or interpretations could have a material impact on our effective tax rate and subsequently our results of operations.
While we believe that being incorporated in the U.K. should help us maintain a competitive worldwide effective corporate tax rate, we cannot give any assurance as to what our effective tax rate will be. This is because of, among other things, uncertainties regarding the tax policies of all the jurisdictions where we operate our business and uncertainties regarding the application to our structure, which is complex, of the tax laws of various jurisdictions, including, without limitation, the U.S. and the U.K. Because of this uncertainty, our actual effective tax rate may vary from our expectation and that variance could be material. Additionally, the tax laws of the U.S., the U.K. or other jurisdictions, or the administrative or judicial interpretations thereof, could change in the future, possibly with retroactive effect, and such changes could cause a material change in our effective tax rate.
U.S. federal tax legislation enacted on December 22, 2017 and potential modifications to existing tax treaties between the U.S. and foreign countries could have a material impact to our U.S. federal and state taxes.
On December 22, 2017, U.S. federal tax legislation, the Tax Cuts and Jobs Act orof 2017 (the “TCJA”) eliminated the Tax Act, was signed into law. The Tax Actperformance-based compensation exception for taxable years commencing after December 31, 2017. However, under transition relief, compensation provided under a written binding contract in effect on November 2, 2017 that is not materially modified after that date continues to be subject to Section 162(m), including its performance-based compensation exception, as previously in effect. We believe that certain compensation awards to NEOs under our 2017 Equity Plan and the 2014 Equity Plan that were outstanding on November 2, 2017 and have not been materially modified since are fully deductible under the Section 162(m) transition rules. In addition, certain awards granted to our NEOs through 2017 were exempt from Section 162(m) under the separate relief provided under Internal Revenue Service regulations for
newly public companies. However, awards made numerous changes to prior U.S. federal tax law, includingour covered employees in 2018 were made after the November 2, 2017 date and are therefore not eligible for the performance-based compensation exception.
Prior to the enactment of several provisions that impact the U.S. federal income taxation of multinational business enterprises. Among other changes,TCJA, it was the international tax provisions of the Tax Act impose a new tax assessed on indirect foreign earnings, knownCompensation Committee’s intention to structure compensation for future periods to qualify as the global intangible low-taxed income tax, or the GILTI, and a new minimum tax known as the base-erosion anti-abuse tax, or BEAT.performance-based under Section 162(m), where it was reasonable to do so while meeting our compensation objectives. The GILTI aimsCompensation Committee will continue to tax a U.S. shareholder’s share of the income of controlled foreign corporations in excess of their tangible business property returns, while the BEAT imposes a minimum tax on certain taxpayers that make deductible “base erosion” payments to foreign related parties.
We may be subject to the GILTI and BEAT taxes in future years and we are currently evaluating the impact of the Tax Act on the taxation of our foreign subsidiaries, including the impact on our transfer pricing arrangements.
The Tax Act also imposes new limitations onmonitor issues concerning the deductibility of interest paid by U.S. taxpayers. We believe the new limitations should not impede our ability to ultimately benefit from the deductions associated with the annual interest payments made under our current intercompany financing arrangements. However, the periodexecutive compensation and consider that as one factor in determining appropriate levels or types of utilization of the interest deduction carryforwards on our balance sheet will be extended. We believe this interest deduction carryforward is more likely than not permitted under U.S. federal tax law as modified by the Tax Act, however official guidance from the U.S. Treasury has not yet been provided. If the interest deduction carryforward is ultimately disallowed as a result of future guidance, our cash tax payments could be materially greater. However, payments due under the Deferred Tax Asset Deed liability would also be materially reduced. In addition, the cash tax benefits of the interest carryforward may be impacted by the GILTI and BEAT tax regimes.compensation.
Compensation Tables
2018 Summary Compensation Table
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name and Principal Position | | Year | | Salary | | Stock Awards (1) | | Option Awards (2) | | Non-Equity Incentive Plan Compensation (3) | | All Other Compensation (4) | | Total |
Guang Yang (5) | | 2018 | | $ | 42,308 |
| | $ | — |
| | $ | 11,661,000 |
| | $ | — |
| | $ | — |
| | $ | 11,703,308 |
|
| Executive Director, President & CEO | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Stephen H. Belgrad (6) | | 2018 | | $ | 466,346 |
| | $ | 1,399,995 |
| | $ | — |
| | $ | 2,500,000 |
| | $ | 2,725,000 |
| | $ | 7,091,341 |
|
| Former Chief Executive Officer & Director | | 2017 | | $ | 363,462 |
| | $ | 772,523 |
| | $ | — |
| | $ | 1,222,500 |
| | $ | 50,000 |
| | $ | 2,408,485 |
|
| | 2016 | | $ | 300,000 |
| | $ | 815,008 |
| | $ | — |
| | $ | 1,042,500 |
| | $ | 50,000 |
| | $ | 2,207,508 |
|
| | | | | | | | | | | | | | | |
James J. Ritchie (7) | | 2018 | | $ | 659,949 |
| | $ | 330,750 |
| | $ | — |
| | $ | — |
| | $ | 383,057 |
| | $ | 1,373,756 |
|
| Former Interim Chief Executive Officer and Executive Director | | 2017 | | $ | 1,892,500 |
| | $ | 661,500 |
| | $ | — |
| | $ | — |
| | $ | 448,353 |
| | $ | 3,002,353 |
|
| | | | | | | | | | | | | | | |
| Daniel K. Mahoney (8) | | 2018 | | $ | 240,385 |
| | $ | 46,013 |
| | $ | — |
| | $ | 255,000 |
| | $ | 47,275 |
| | $ | 588,673 |
|
| Senior Vice President, Head of Finance and Former Principal Financial Officer | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | |
| | |
| | |
| | |
| | |
| | |
|
| | | | | | | | | | | | | | | |
| Aidan J. Riordan (9) | | 2018 | | $ | 367,308 |
| | $ | 702,519 |
| | $ | — |
| | $ | 250,000 |
| | $ | 50,000 |
| | $ | 1,369,827 |
|
| Former Executive Vice President, Head of Affiliate Management | | 2017 | | 321,154 |
| | 540,005 |
| | — |
| | 972,500 |
| | 50,000 |
| | 1,883,659 |
|
| | 2016 | | 300,000 |
| | 615,013 |
| | — |
| | 810,000 |
| | 50,000 |
| | 1,775,013 |
|
| | | | | | | | | | | | | | | |
| Christopher Hadley (10) | | 2018 | | $ | 296,154 |
| | $ | 200,029 |
| | $ | — |
| | $ | 195,000 |
| | $ | 50,000 |
| | $ | 741,183 |
|
| Former Executive Vice President, Chief Talent Officer | | 2017 | | $ | 271,154 |
| | $ | 175,614 |
| | $ | — |
| | $ | 450,000 |
| | $ | 50,000 |
| | $ | 946,768 |
|
| | 2016 | | 250,000 |
| | 188,005 |
| | $ | — |
| | 413,400 |
| | 50,000 |
| | $ | 901,405 |
|
| |
| (1) | The amount in the Stock Awards column is the grant date fair value of awards of ordinary shares determined pursuant to FASB ASC Topic 718, Compensation - Stock Compensation ("ASC 718"). All of the awards of ordinary shares reported in the Stock Awards column were granted as restricted awards of ordinary shares under the Company’s Equity Incentive Plan. The grant for Mr. Ritchie was made on March 16, 2018 for his service as Interim CEO in 2018. Grants for the remaining NEOs were made on February 15, 2018 with respect to awards earned pursuant to our Annual Incentive Plan for the 2017 performance year. The following table details the awards made with respect to each award type. |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interim CEO Grant (A) | | CEO Promotion Award - Time- Based (B) | | CEO Promotion Award at Target - Performance- Based (C) | | Annual Incentive Plan Grant - Time- Based (B) | | Annual Incentive Plan Grant at Target - Performance- Based (C) | | Total |
| Stephen H. Belgrad | | $ | — |
| | $ | 178,992 |
| | $ | 268,488 |
| | $ | 635,005 |
| | $ | 317,510 |
| | $ | 1,399,995 |
|
| James J. Ritchie | | $ | 330,750 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 330,750 |
|
| Daniel K. Mahoney | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 46,013 |
| | $ | — |
| | $ | 46,013 |
|
| Aidan J. Riordan | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 468,341 |
| | $ | 234,178 |
| | $ | 702,519 |
|
| Christopher Hadley | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 133,347 |
| | $ | 66,682 |
| | $ | 200,029 |
|
The U.S. Treasury Department has recently published a new model U.S. income tax treaty that would, if incorporated into existing U.S. income tax treaties, potentially limit benefits on which we expect to rely. We cannot predict the outcome of any specific legislative proposals or amendments to existing treaties. However, since we operate or have operations in a number of foreign jurisdictions, our plans for expansion or our results of operations in such jurisdictions could be adversely affected if any adopted proposals resulted in an increase in our tax burden, costs of our tax compliance or otherwise adversely affected our results of operations | |
| (A) | The grant for Mr. Ritchie is compensation for service as Interim CEO in 2018. The shares were granted and fully vested following his term as Interim CEO on March 16, 2018 pursuant to his employment agreement. |
| |
| (B) | The time-based grants made as part of the Annual Incentive Plan vest ratably over three years, one-third on the first anniversary of the grant, one-third on the second anniversary of the grant and one-third on the third anniversary of the grant. Dividends are payable during the restriction period. |
| |
| (C) | Performance-based shares made as part of the Annual Incentive Plan and, for 2018, a CEO promotion grant, vest at the end of three years, subject to relative total shareholder return against a defined peer group. Dividend equivalents are paid at the end of the vesting period on the earned shares. |
See Note 2 “Significant Accounting Policies – Share Based Compensation Plans” and cash flows.
Our global effective tax rate is subject to a variety of different factors, which could create volatility in that rate, expose us to greater than anticipated tax liabilities and cause us to adjust previously recognized tax assets and liabilities.
We are subject to income taxesNote 19 “Equity-based Compensation” in the U.K., U.S. and many other jurisdictions. As a result, our global effective tax rate from periodnotes to period can be affected by many factors, including our global mix of earnings, the tax characteristics of our income and changes in tax legislation. Significant judgment is required in determining our worldwide provision for income taxes, and our determination of our tax liability is always subject to review by applicable tax authorities.
We cannot provide any assurances as to what our tax rate will be in any period because of, among other things, uncertainty regarding the nature and extent of our business activities in any particular jurisdiction in the future and the tax laws of such jurisdictions, as well as changes in U.S. and other tax laws, treaties and regulations. Our actual global tax rate may vary from our expectation and that variance may be material. Additionally, the tax laws of the U.K. and other jurisdictions could change in the future, and such changes could cause a material change in our tax rate.
We also could be subject to future audits conducted by foreign and domestic tax authorities, and the resolution of such audits could impact our tax rate in future periods, as would any reclassification or other matter (such as changes in applicable accounting rules) that increases the amounts we have provided for income taxes in our Consolidated Financial Statements. There can be no assurance that we would be successfulStatements in attempting to mitigate the adverse impacts resulting from any changes in law, audits and other matters. Our inability to mitigate the negative consequences of any changes in the law, audits and other matters could cause our global tax rate to increase, our use of cash to increase and our financial condition and results of operations to suffer.
Risks Related to Investing in our Ordinary Shares
Our efforts to raise capital could be dilutive to our ordinary shareholders and could cause our share price to decline.
If we raise additional funds by issuing additional ordinary shares, dilution to our shareholders could result. If we raise additional funds by issuing additional debt securities, these additional debt securities may have rights, preferences and privileges senior to those of holders of our ordinary shares, and the terms of the additional debt securities issued could impose significant restrictions on our operations. A failure to obtain adequate funds may affect our ability to make acquisitions of new affiliates or to seed new products of existing Affiliates, and may have a material adverse effect on our business and financial condition.
Regulatory review of the HNA Minority Sale could impact our relationship with HNA and could negatively affect our share price.
The Committee on Foreign Investment in the United States has the authority to review the HNA Minority Sale if it is deemed a “covered transaction” under Section 721 of the Defense Production Act of 1950, as amended, and all rules and regulations thereunder, or DPA. In the event that CFIUS reviews the HNA Minority Sale and at or prior to the completion of CFIUS review, CFIUS imposes any conditions or restrictions that limit or restrict HNA's involvement in our business, this could negatively impact the Company and its relationship with a significant shareholder. Moreover, if HNA sells, or there is a perception that it might sell a substantial amount of our ordinary shares in the public market, whether voluntarily or due to regulatory restrictions imposed by CFIUS or otherwise, the trading price of our ordinary shares could decline.
Future sales of our ordinary shares by us, HNA or other shareholders could cause our share price to decline.
If we, HNA or other shareholders sell, or indicate an intention to sell, or there is a perception that they might sell substantial amounts of our ordinary shares in the public market, the trading price of our ordinary shares could decline below the current trading level.
Sales by HNA or other shareholders or the possibility that these sales may occur also may make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate.
Pursuant to a registration rights agreement with HNA, we agreed to use our reasonable best efforts to file registration statements and prospectus supplements from time to time for the sale of ordinary shares held by HNA now or in the future. In addition, HNA has informed us that it has pledged certain of our ordinary shares as collateral in connection with a margin loan. We are not a party to the margin loan documents; however, a foreclosure on the pledged shares could materially and adversely affect the price of our ordinary shares. In addition, the pledged ordinary shares and margin loan could present an actual or perceived conflict of interest with respect to any employee or affiliate of HNA who may serve as a director on our Board of Directors.
We cannot predict the size of future issuances of our ordinary shares or the effect, if any, that future issuances and sales of our ordinary shares may have on the market price of our ordinary shares. Sales or distributions of substantial amounts of our ordinary shares, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur, may cause the market price of our ordinary shares to decline.
As a public company whose ordinary shares are publicly traded in the U.S., our management devotes substantial time to compliance with our public company legal and reporting obligations.
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are required to implement specific corporate governance practices and adhere to a variety of reporting requirements under the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and the related rules and regulations of the SEC, as well as the rules of the NYSE. The Exchange Act requires us to file annual, quarterly and current reports with respect to our business and financial condition. Our management and other personnel devote substantial time to compliance with our public company obligations. Moreover, these rules and regulations increase our legal and financial compliance costs and make some activities more time-consuming and costly.
In addition, Sarbanes-Oxley requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, commencing with our Annual Report on Form 10-K for fiscal year 2015, we have performed system and process evaluations and we have tested our internal control over financial reporting to allow management to report onfurther discussion of the effectivenessvaluation methodology. To see the value actually received by the NEOs in 2018 upon vesting of our internal control over financial reporting, as required by Section 404 of Sarbanes-Oxley, and obtain an auditor attestation asordinary shares, refer to the effectiveness2018 Option Exercises and Stock Vested table. Additional information on all outstanding awards of our internal controls.
Testing may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 has required that we incur additional accounting expense and expend additional management time on compliance-related issues. Moreover, if at any time we are not able to comply with the requirements of Section 404 in a timely manner, or if we identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our ordinary shares could decline, and we could be subject to sanctions or investigations byis reflected in the NYSE, the SEC or other regulatory authorities, which would require additional financial and management resources.2018 Outstanding Equity Awards table.
Risks Related to Being an English Company Listing Ordinary Shares
U.S. investors may have difficulty enforcing civil liabilities against the Company, our directors or members of senior management.
We are incorporated under the laws of England and Wales. As a result, it may be difficult for you to serve legal process on us. There is no treaty between the U.S. and England and Wales providing for reciprocal recognition and enforcement of judgments of U.S. courts in civil and commercial matters. The U.S. and the U.K. are both partiesStock awards attributable to the New York Convention onAnnual Incentive Plan for 2018, as described in the Recognition“Compensation Discussion and Enforcement of Foreign Arbitral Awards: 1958. In civil and commercial matters, a final judgment for payment obtained in a U.S. federal or state court will not automatically be recognised or enforced in England and Wales. In order to enforce any such U.S. judgments, the claimantAnalysis,” will be required to initiate English proceedings forgranted in 2019 and reported in the debt created by the foreign judgment before a competent court in England and Wales, or an English Court.
The enforceability of a judgment by an English Court is conditional upon a number of requirements, including but not limited to the following:2019 Summary Compensation Table.
| |
(i)(2) | The option award for Mr. Yang, made on December 30, 2018, is five-year option grant with an exercise price above the judgment is finaltrading price at the time of grant as the sole component of his incentive-based compensation for the five years following his commencement date (absent extraordinary circumstances) and conclusive onas an inducement to join the merits in the sense of being final and unalterable in the court that pronounced it and being for a definite sum of money;Company. |
| |
(ii)(3) | The amounts reported in the judgment does not relateNon-Equity Incentive Plan Compensation column reflect the cash portion of the amounts earned by the NEOs under the Company’s Annual Incentive Plan in 2018 and paid to penalties, fines or taxes;employees on February 15, 2019. |
| |
(iii)(4) | The amounts reported in the relevant US court had jurisdiction to hear“Total All Other Compensation” column reflect, for each Mr. Belgrad, Mr. Mahoney, Mr. Riordan and Mr. Hadley, the original proceedings according tosum of contributions by the English conflictCompany under its Profit Sharing & 401(k) Plan and its non-qualified deferred compensation plan. The 2018 amount for Mr. Ritchie includes his cash fees and Restricted Awards of laws principles;Ordinary Shares for serving as Chairman of the Company’s Board of Directors. The 2018 amount for Mr. Belgrad includes severance payments. |
| |
(iv)(5) | the judgment does not contravene English public policy or the Human Rights Act 1998;Mr. Yang was named Executive Chairman, President and CEO as of December 15, 2018. |
| |
(v)(6) | the judgment was not procured by fraud;Mr. Belgrad served as Executive Vice President, Chief Financial Officer until March 2, 2018. He served as CEO from March 2, 2018 until December 15, 2018. Severance payments are included in 2018 All Other Compensation. |
| |
(vi)(7) | the judgment does not conflict with any existing decision of an English court or the court of another jurisdiction on the issuesMr. Ritchie served as Interim Chief Executive Officer until March 2, 2018. In addition, Mr. Ritchie received board fees and consulting fees in question between the same parties;2018. See 2018 Director Compensation table. |
| |
(vii)(8) | the English enforcement proceedings were commenced within the limitation period;Mr. Mahoney served as Head of Finance, Principal Financial Officer from March 2, 2018 until January 20, 2019. He is currently Head of Finance, Principal Accounting Officer. |
| |
(viii)(9) | Mr. Riordan’s employment terminated with the judgment is not arrived at by doubling, trebling or otherwise multiplying a sum assessed as compensationCompany on March 8, 2019. |
| |
| (10) | Mr. Hadley’s employment terminated with the Company on February 1, 2019. |
2018 All Other Compensation Detail
The following table outlines those perquisites and other personal benefits and additional all other compensation.
|
| | | | | | | | | | | | | | | | | | | | | | |
| Name | | Year | | Total Perquisites | | Severance | | Director Fees | | Defined Contribution Savings Plan Company Contributions | | Total All Other Compensation |
| Guang Yang | | 2018 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | | | | |
| Stephen H. Belgrad (1) | | 2018 | | $ | — |
| | $ | 2,725,000 |
| | $ | — |
| | $ | — |
| | $ | 2,725,000 |
|
| | | 2017 | | — |
| | — |
| | — |
| | 50,000 |
| | 50,000 |
|
| | | 2016 | | — |
| | — |
| | — |
| | 50,000 |
| | 50,000 |
|
| | | | | | | | | | | | | |
| James J. Ritchie (2) | | 2018 | | $ | — |
| | $ | — |
| | $ | 383,057 |
| | $ | — |
| | $ | 383,057 |
|
| | | 2017 | | — |
| | — |
| | 448,353 |
| | — |
| | 448,353 |
|
| | | | | | | | | | | | | |
| Daniel K. Mahoney | | 2018 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 47,275 |
| | $ | 47,275 |
|
| | | | | | | | | | | | | |
| Aidan J. Riordan | | 2018 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 50,000 |
| | $ | 50,000 |
|
| | | 2017 | | — |
| | — |
| | — |
| | 50,000 |
| | 50,000 |
|
| | | 2016 | | — |
| | — |
| | — |
| | 50,000 |
| | 50,000 |
|
| | | | | | | | | | | | | |
| Christopher Hadley | | 2018 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 50,000 |
| | $ | 50,000 |
|
| | | 2017 | | — |
| | — |
| | — |
| | 50,000 |
| | 50,000 |
|
| | | 2016 | | — |
| | — |
| | — |
| | 50,000 |
| | 50,000 |
|
| |
| (1) | 2018 Severance for Mr. Belgrad reflect his severance per the loss or damage sustained;terms of his employment agreement including salary and continuation of benefits |
| |
(ix)(2) | 2018 Director Fees for Mr. Ritchie include his fees for serving as Chairman of the judgment does not breach principlesCompany’s Board of natural or substantive justice.Directors of $164,987 and a consulting fee of $43,056 both paid in cash, and $175,014 of Restricted Share Awards for a total of $383,057. The consulting agreement was entered into following Mr. Ritchie’s resignation from the Board, for a period of twelve months. Under the agreement Mr. Ritchie is paid $41,667 a month. |
It is unclear whether courts in England and Wales will enforce a civil penalty predicated solely on securities laws of the U.S. or any state of the U.S. As such, there is no assurance that U.S. judgments in civil and commercial matters will be enforceable in the English Court, including judgments under U.S. federal securities laws
English law and provisions in our articles of association may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders, and may prevent attempts by our shareholders to replace or remove our current management.
Certain provisions of English law and our articles of association (as currently in effect) may have the effect of delaying or preventing a change in control of us or changes in our management. For example, English law and our articles of association include provisions that:
establish an advance notice procedure for shareholder approvals to be brought before ourannual general meeting of our shareholders, including proposed nominations of persons for election to our Board of Directors; and
provide that if the number of directors is reduced below the minimum number fixed in accordance with the articles of association of our Company, the remaining Board of Directors may act for the purpose of filling vacancies in their number or of calling a general meeting of our Company, but for no other purpose
These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management. In addition, these provisions may adversely affect the market price of our ordinary shares or inhibit fluctuations in the market price of our ordinary shares that could otherwise result from actual or rumored takeover attempts.
The City Code on Takeovers and Mergers, or the Takeover Code, applies, among other things, to an offer for a public company (such as our Company) whose registered office is in the U.K. (or the Channel Islands or the Isle of Man) and whose securities are not admitted to trading on a regulated market in the U.K. (or the Channel Islands or the Isle of Man) if the company is considered by the U.K. Panel on Takeovers and Mergers, or the Takeover Panel, to have its place of central management and control in the U.K. (or the Channel Islands or the Isle of Man). This is known as the “residency test.” Under the Takeover Code, the Takeover Panel will determine whether we have our place of central management and control in the U.K. by looking at various factors, including the structure of our Board of Directors, the functions of the directors and where they are resident.
If at the time of a takeover offer the Takeover Panel determines that we have our place of central management and control in the U.K., we would be subject to a number of rules and restrictions, including but not limited to the following: (i) our ability to enter into deal protection arrangements with a bidder would be extremely limited; (ii) we would not, without the approval of our shareholders, be able to perform certain actions that could have the effect of frustrating an offer, such as issuing shares or carrying out acquisitions or disposals; and (iii) we would be obliged to provide equality of information to all bona fide competing bidders.
Giving regard to the fact that none of our directors are resident in the United Kingdom (or the Channel Islands or the Isle of Man), the structure of our Board of Directors, and the functions of the directors, our understanding is that the Takeover Code does not apply to us, although that position is subject to change if our center of management and control is, at the time of a takeover offer for us and having regard to the then residency of the directors and other factors which it may take into account, determined by the Takeover Panel to be in the U.K. (or the Channel Islands or the Isle of Man).
We are subject to data protection laws under U.K. legislation, and any breaches of such legislation could adversely affect our business, reputation, results of operations and financial condition.
Our ability to obtain, retain and otherwise manage personal data is governed by data protection and privacy requirements and regulatory rules and guidance. In the U.K., we must comply with the Data Protection Act 1998 in relation to processing certain personal data. The interpretation of data privacy laws can be uncertain, and as business practices are challenged by regulators, private litigants and consumer protection agencies, it is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data protection practices.
Pre-emption rights for U.S. and other non-U.K. holders of shares may be unavailable.
In the case of certain increases in our issued share capital, under English law, existing holders of shares are entitled to pre-emption rights to subscribe for such shares, unless shareholders dis-apply such rights by a special resolution at a shareholders’ meeting. These pre-emption rights were dis-applied by our shareholder prior to our initial public offering and we shall propose equivalent resolutions in the future once the initial period of dis-application has expired. However, HNA has pre-emption rights, subject to certain exceptions, until it ceases to own at least 7% of our outstanding ordinary shares. In any event, U.S. holders of ordinary shares in U.K. companies are customarily excluded from exercising any such pre-emption rights they may have, unless a registration statement under the Securities Act of 1933, as amended, or the Securities Act, is effective with respect to those rights, or an exemption from the registration requirements thereunder is available. We cannot assure U.S. investors that any exemption from the registration requirements of the Securities Act or applicable non-U.S. securities laws would be available to enable U.S. or other non-U.K. holders to exercise such pre-emption rights or, if available, that we will utilize any such exemption.
Item 1B. Unresolved Staff Comments.
There are no unresolved written comments that were received from the Securities and Exchange Commission staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Securities Exchange Act of 1934, as amended.
Item 2. Properties.
Our principal executive offices are located at Ground Floor, Millennium Bridge House, 2 Lambeth Hill, London EC4V 4GG, United Kingdom. Our principal office in the U.S. is located at 200 Clarendon Street, 53rd Floor, Boston, Massachusetts 02116. In Boston, we lease 37,946 square feet under a lease that expires on December 31, 2021. Each Affiliate has its own primary office where core investment management activities take place. Primary Affiliate-leased locations include Boston, MA; Dallas, TX; Baltimore, MD; Portland, OR; and Richmond, VA, as well as an owned property in Simsbury, CT. In addition, both we and several of our Affiliates have leased secondary offices to help support research, distribution and/or client servicing. Key locations for secondary offices include (but are not limited to) Hong Kong, Singapore and Toronto. We believe existing facilities are appropriate in size, location and functionality to meet current and future business requirements.
Item 3. Legal Proceedings.
From time to time, we and our Affiliates may be parties to various claims, suits and complaints in the ordinary course of our business. Although the amount of liability that may result from these matters cannot be ascertained, we do not currently believe that, in the aggregate, they will result in liabilities material to our consolidated financial condition, future results of operations or cash flow.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases2018 Grants of Equity Securities.
Market Information for Ordinary Shares
Our ordinary shares are traded on the New York Stock Exchange under the symbol “OMAM.” The following table sets forth the high and low sales price per ordinary share as reported on the New York Stock Exchange and dividends declared for the period indicated:Plan-Based Awards
|
| | | | | | | | | | | |
| | Share price: | | Dividends Declared |
| For the year ended December 31, 2016 | High | | Low | |
| First quarter | $ | 15.03 |
| | $ | 10.27 |
| | $ | 0.08 |
|
| Second quarter | $ | 15.52 |
| | $ | 12.58 |
| | $ | 0.08 |
|
| Third quarter | $ | 14.25 |
| | $ | 12.69 |
| | $ | 0.08 |
|
| Fourth quarter | $ | 15.51 |
| | $ | 12.10 |
| | $ | 0.08 |
|
| For the year ended December 31, 2017 | | | | | |
| First quarter | $ | 15.37 |
| | $ | 13.74 |
| | $ | 0.08 |
|
| Second quarter | $ | 16.01 |
| | $ | 13.57 |
| | $ | 0.09 |
|
| Third quarter | $ | 15.59 |
| | $ | 13.20 |
| | $ | 0.09 |
|
| Fourth quarter | $ | 17.22 |
| | $ | 14.64 |
| | $ | 0.09 |
|
The closing price per ordinary share as reported on the New York Stock Exchange on February 23, 2018 was $15.59. As of February 23, 2018, there were two shareholders of record, including banks, brokers and other financial institutions holding shares in omnibus accounts for their customers (in total representing substantially all of the beneficial holders of our ordinary shares).
Dividend policy
Our current dividend policy targets a dividend payout generally in the range of 20-25% of ENI, subject to maintaining a sustainable quarterly dividend per share. Any declaration of dividends will be at the discretion of our Board of Directors and will depend on our financial condition, earnings, cash needs, regulatory constraints, capital requirements and any other factors that our Board of Directors deems relevant in making such a determination. Under English law, we may only pay dividends out of our accumulated, realized profits, so far as not previously utilized by distribution or capitalization and provided that at the time of payment of the dividend, the amount of our net assets is not less than the total of our called-up share capital and undistributable reserves. Because we are a holding company and have no direct operations, we will only be able to pay dividends from our available cash on-hand and any funds we receive from our subsidiaries, including OMUS. Therefore, there can be no assurance that we will pay any dividends in the future to holders of our ordinary shares, or as to the amount of any such dividends.
Financial performance graph
This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of OMAM under the Securities Act.
The following graph compares the cumulative shareholder return on our ordinary shares from October 8, 2014, the date of our initial public offering, through December 31, 2017, with the cumulative total return, during the same period, of the Standard & Poor’s 500 Index, the Standard & Poor’s 500 Financial Sector Index and a peer group comprised of AllianceBernstein Holding L.P., Affiliated Managers Group, Inc., Artisan Partners Asset Management Inc., Cohen & Steers, Inc., Eaton Vance Corp., Federated Investors, Inc., Franklin Resources, Inc., Invesco Ltd., Legg Mason, Inc., T. Rowe Price Group, Inc., Virtus Investment Partners, Inc. and Waddell & Reed Financial, Inc. The peer group was revised in 2017 due to the acquisition of certain peers by other companies. The comparison assumes the investment of $100 at the time of our initial public offering on October 8, 2014 in our ordinary shares at the initial offering price of $14.00 per share and each of the comparison indices and, in each case, assumes reinvestment of all dividends.
Item 6. Selected Financial Data.
We present economic net income, or ENI, to help us describe our operating and financial performance. ENI is the key measure our management uses to evaluate the financial performance of, and make operational decisions for, our business. ENI is not audited, and is not a substitute for net income or other performance measures that are derived in accordance with U.S. GAAP. Furthermore, our calculation of ENI may differ from similarly titled measures provided by other companies. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Supplemental Performance Measure—Economic Net Income” for a more thorough discussion of ENI and a reconciliation of ENI to U.S. GAAP net income.
The following table sets forth selected historical consolidated financial data for our Company as of the dates and for the periods indicated. The data for each of the five years presented have been derived from our historical Consolidated Financial Statements audited under U.S. GAAP.
You should read our following selected historical consolidated financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical Consolidated Financial Statements and the related notes thereto, included elsewhere in this Annual Report.
|
| | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions, except per share data as noted) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
U.S. GAAP Statement of Operations Data(1): | |
| | |
| | |
| | |
| | |
|
Management fees(2) | $ | 858.0 |
| | $ | 659.9 |
| | $ | 637.2 |
| | $ | 569.7 |
| | $ | 478.2 |
|
| Performance fees | 26.5 |
| | 2.6 |
| | 61.8 |
| | 34.3 |
| | 18.1 |
|
| Other revenues | 1.2 |
| | 0.9 |
| | 0.3 |
| | 1.6 |
| | 1.8 |
|
Consolidated Funds’ revenue(2) | 1.7 |
| | 0.1 |
| | — |
| | 450.7 |
| | 430.5 |
|
Total Revenue(2) | $ | 887.4 |
| | $ | 663.5 |
| | $ | 699.3 |
| | $ | 1,056.3 |
| | $ | 928.6 |
|
Net income before tax from continuing operations attributable to controlling interests(3) | $ | 137.1 |
| | $ | 161.0 |
| | $ | 201.3 |
| | $ | 68.1 |
| | $ | 32.7 |
|
Net income from continuing operations attributable to controlling interests(2)(3) | 4.3 |
| | 120.2 |
| | 154.7 |
| | 55.3 |
| | 19.4 |
|
Net income (loss) from continuing operations(2) | 9.2 |
| | 120.0 |
| | 154.7 |
| | (45.0 | ) | | (97.1 | ) |
U.S. GAAP operating margin(2)(4) | 8 | % | | 23 | % | | 27 | % | | (6 | )% | | (11 | )% |
| U.S. GAAP basic earnings per share from continuing operations attributable to controlling interests | $ | 0.04 |
| | $ | 0.98 |
| | $ | 1.28 |
| | $ | 0.46 |
| | $ | 0.16 |
|
| U.S. GAAP diluted earnings per share from continuing operations attributable to controlling interests | $ | 0.04 |
| | $ | 0.98 |
| | $ | 1.28 |
| | $ | 0.46 |
| | $ | 0.16 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions, unless otherwise noted) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Non-GAAP Data: | | | |
| | |
| | |
| | |
|
Economic net income(5)(6): | |
| | |
| | |
| | |
| | |
|
| Management fees | $ | 858.0 |
| | $ | 659.9 |
| | $ | 637.2 |
| | $ | 589.9 |
| | $ | 499.8 |
|
| Performance fees | 26.5 |
| | 2.6 |
| | 13.7 |
| | 34.3 |
| | 18.1 |
|
| Other revenues | 16.2 |
| | 16.0 |
| | 13.0 |
| | 11.2 |
| | 9.6 |
|
| Total ENI revenue | $ | 900.7 |
| | $ | 678.5 |
| | $ | 663.9 |
| | $ | 635.4 |
| | $ | 527.5 |
|
| Pre-tax economic net income | $ | 251.3 |
| | $ | 190.7 |
| | $ | 203.5 |
| | $ | 204.1 |
| | $ | 153.0 |
|
Economic net income, excluding non-recurring performance fee(6) | 180.9 |
| | 145.1 |
| | 149.7 |
| | 151.3 |
| | 122.9 |
|
ENI operating margin(7) | 38 | % | | 35 | % | | 37 | % | | 39 | % | | 34 | % |
ENI earnings per share, excluding non-recurring performance fee, diluted(6) | 1.62 |
| | 1.21 |
| | 1.24 |
| | 1.26 |
| | 1.02 |
|
Other Operational Information(8): | | | |
| | |
| | |
| | |
|
| Assets under management at period end (in billions) | $ | 243.0 |
| | $ | 240.4 |
| | $ | 212.4 |
| | $ | 220.0 |
| | $ | 198.8 |
|
| Net client cash flows (in billions) | (6.0 | ) | | (1.6 | ) | | (5.1 | ) | | 9.5 |
| | 10.5 |
|
Annualized revenue impact of net flows (in millions)(9) | 32.9 |
| | 11.0 |
| | 18.9 |
| | 54.5 |
| | 42.5 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| U.S. GAAP Balance Sheet Data: | |
| | |
| | |
| | |
| | |
|
Total assets(10) | $ | 1,491.7 |
| | $ | 1,294.3 |
| | $ | 1,014.1 |
| | $ | 7,772.9 |
| | $ | 8,551.8 |
|
| Total assets attributable to controlling interests | 1,386.7 |
| | 1,283.0 |
| | 1,014.1 |
| | 993.2 |
| | 1,014.4 |
|
Total borrowings and debt(10) | 426.3 |
| | 392.3 |
| | 90.0 |
| | 4,309.9 |
| | 5,469.0 |
|
| Total borrowings and debt attributable to controlling interests | 426.3 |
| | 392.3 |
| | 90.0 |
| | 214.0 |
| | 1,043.2 |
|
Total liabilities(10) | 1,320.4 |
| | 1,123.8 |
| | 848.2 |
| | 5,215.5 |
| | 6,015.9 |
|
| Total liabilities attributable to controlling interests | 1,309.9 |
| | 1,118.0 |
| | 848.2 |
| | 956.7 |
| | 1,461.1 |
|
| | | | | | | | | | |
Total Equity(10) | $ | 171.3 |
| | $ | 170.5 |
| | $ | 165.9 |
| | $ | 2,557.4 |
| | $ | 2,535.9 |
|
Redeemable non-controlling interests in consolidated Funds(2) | (44.0 | ) | | (5.5 | ) | | — |
| | (61.9 | ) | | (403.3 | ) |
Non-controlling interests in consolidated Funds(2) | (50.6 | ) | | — |
| | — |
| | (2,459.0 | ) | | (2,579.3 | ) |
| Non-controlling interests | (1.3 | ) | | (1.0 | ) | | — |
| | — |
| | (0.1 | ) |
| Shareholders’ equity (deficit) | $ | 75.4 |
| | $ | 164.0 |
| | $ | 165.9 |
| | $ | 36.5 |
| | $ | (446.8 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Grant Date | | Approval or Action Date, if different | | Estimated Future Payouts Under Equity Incentive Plan Awards | | All Other Stock Awards: Number of Shares of Stock or Units (#) | | All Other Option Awards: Number of Securities Underlying Options (#) | | Grant Date Fair Value of Stock and Option Awards ($) |
| | | Threshold | | Target | | Maximum | | | |
| Guang Yang | | 12/30/2018 | | 12/30/2018 | (1) | $ | — |
| | $ | — |
| | $ | — |
| | 3,856 |
| | 6,900,000 |
| | $ | 11,661,000 |
|
| | | | | | | | | | | | | | | | | |
| Stephen H. Belgrad | | 2/15/2018 | | 1/16/2018 | (2) | — |
| | — |
| | — |
| | 39,663 |
| | — |
| | $ | 635,005 |
|
| | 2/15/2018 | | 1/16/2018 | (3) | — |
| | 19,832 |
| | 29,748 |
| | — |
| | — |
| | $ | 290,935 |
|
| | | 2/15/2018 | | 1/16/2018 | (2) | — |
| | — |
| | — |
| | 11,180 |
| | — |
| | $ | 178,992 |
|
| | | 2/15/2018 | | 1/16/2018 | (3) | — |
| | 16,770 |
| | 25,155 |
| | — |
| | — |
| | $ | 246,016 |
|
| | | | | | | | | | | | | | | | | |
| James J. Ritchie | | 3/16/2018 | | 7/1/2017 | (4) | — |
| | — |
| | — |
| | 63,000 |
| | — |
| | $ | 992,250 |
|
| | 6/20/2018 | | 1/16/2018 | (5) | — |
| | — |
| | — |
| | 11,183 |
| | — |
| | $ | 175,014 |
|
| | | | | | | | | | | | | | | | | |
| Daniel K. Mahoney | | 2/15/2018 | | 1/16/2018 | (2) | — |
| | — |
| | — |
| | 2,874 |
| | — |
| | $ | 46,013 |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Aidan J. | | 2/15/2018 | | 1/16/2018 | (2) | — |
| | — |
| | — |
| | 29,253 |
| | — |
| | $ | 468,341 |
|
| Riordan | | 2/15/2018 | | 1/16/2018 | (3) | — |
| | 14,627 |
| | 21,941 |
| | — |
| | — |
| | $ | 214,578 |
|
| | | | | | | | | | | | | | | | | |
| Christopher Hadley | | 2/15/2018 | | 1/16/2018 | (2) | — |
| | — |
| | — |
| | 8,329 |
| | — |
| | $ | 133,347 |
|
| | 2/15/2018 | | 1/16/2018 | (3) | — |
| | 4,165 |
| | 6,248 |
| | — |
| | — |
| | $ | 61,101 |
|
| | | | | | | | | | | | | | | | | |
| |
| (1) | The U.S. GAAP Statementgrant for Mr. Yang represent a nonqualified stock option to purchase ordinary shares of Operations Data above has been presented onthe Company. The shares were granted as a continuing operations basis. Please refermaterial inducement to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of our results of operations, including discontinued operations, and a reconciliation tojoin the results from continuing operations.Company. |
| |
| (2) | Statement of operations data presented in accordance with U.S. GAAP include the results of consolidated Funds managed by our Affiliates where it has been determined these entities are controlled by our Company. The effects of consolidating these entities include reductions in management fee revenue of $21.6 million and $20.2 million for the years ended December 31, 2013 and 2014, respectively, with offsetting increases in the results of consolidated Funds. There was no management fee elimination associated with Funds consolidation in 2015, 2016, or 2017. The net income from continuing operations presented as attributable to controlling interests exclude the income or loss directly attributable to third-party Fund investors, andamounts represent the net amounts attributabletime-based awards of restricted ordinary shares under the Company’s Equity Incentive Plan relating to our shareholders. Inperformance in fiscal 2017. Market Value was determined by multiplying the first quarternumber of 2015, we adopted Accounting Standard Update 2015-02, Consolidation: Amendmentsshares by the grant date fair value based on ASC 718 which is $16.01, the closing price of the Company’s ordinary shares on February 14, 2018 the day prior to the Consolidation Analysis, or ASU 2015-02, which resulted in the de-consolidationdate of all Funds previously consolidated as of December 31, 2014. For the year ended December 31, 2015, there were no Funds which required consolidation, therefore total revenue, U.S. GAAP operating margin and net income (loss) from continuing operations for the year ended December 31, 2015 are not directly comparable to 2013 and 2014. For the years ended December 31, 2016 and 2017, as a result of the purchase or deployment of seed capital investments, we consolidated certain Funds.
grant. |
| |
| (3) | The following table reconciles our net income attributableamounts represent the number of performance-based awards of restricted ordinary shares under the Company’s Equity Incentive Plan relating to controlling interestsperformance in fiscal 2017 at target and maximum. Grants vest between 0% to 150% of target at the end of three years subject to our net income from continuing operations attributablerelative total shareholder return performance against a defined peer group. Market Value was determined by multiplying the number of ordinary shares at the target level by the grant date fair value based on ASC 718 of $14.67. See Note 2, “Significant Accounting Policies - Share Based Compensation Plans” and Note 18, “Equity-based Compensation” in the notes to controlling interests and our pre-tax income from continuing operations attributable to controlling interests:Consolidated Financial Statements in our Annual Report on Form 10-K for further discussion of the valuation methodology. |
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| Net income attributable to controlling interests | $ | 4.2 |
| | $ | 126.4 |
| | $ | 155.5 |
|
| Exclude: Loss (profit) on disposal of discontinued operations attributable to controlling interests | 0.1 |
| | (6.2 | ) | | (0.8 | ) |
| Net income from continuing operations attributable to controlling interests | 4.3 |
| | 120.2 |
| | 154.7 |
|
| Add: Income tax expense | 132.8 |
| | 40.8 |
| | 46.6 |
|
| Pre-tax income from continuing operations attributable to controlling interests | $ | 137.1 |
| | $ | 161.0 |
| | $ | 201.3 |
|
| |
| (4) | U.S. GAAP operating margin equals operating income (loss) from continuing operations dividedThe amount represents the time-based awards of restricted ordinary shares under the Company’s Equity Incentive Plan relating to his duties as Interim CEO. Market Value was determined by total revenue. Excludingmultiplying the effectnumber of Funds consolidation, our U.S. GAAP operating margin would be 8% forshares by the year ended December 31, 2017, 23% forgrant date fair value based on ASC 718 which is $15.75, the year ended December 31, 2016, 27% forclosing price of the year ended December 31, 2015, 17% forCompany’s ordinary shares on March 15, 2018 the year ended December 31, 2014 and 18% forday prior to the year ended December 31, 2013.date of grant. |
| |
| (5) | Economic net income, including a reconciliationThe amount represents the time-based awards of restricted ordinary shares under the Company’s Non-Employee Director Equity Incentive Plan relating to U.S. GAAP net income (loss) attributablehis duties as Chairman. Market Value was determined by multiplying the number of shares by the grant date fair value based on ASC 718 which is $15.65, the closing price of the Company’s ordinary shares on June 19, 2018 the day prior to controlling interests, is discussedthe date of grant. |
2018 Outstanding Equity Awards at Fiscal Year-End
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Option Awards | | Stock Awards | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that Have not Vested (#) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that Have Not Vested ($) (8) |
| Name | | Grant Date | | Number of Securities Underlying Unexercised Options: Exercisable (#) | Number of Securities Underlying Unexercised Option: Unexercisable (#) | Option Exercise Price ($) | Option Expiration Date | | Number of Shares or Units of Stock that Have Not Vested (#) | | Market Value of Shares or Units of Stock that Have Not Vested ($) (8) | | |
| Guang Yang | | 12/30/2018 | (1) | 1,380,000 |
| 5,520,000 |
| $ | 12.00 |
| 12/30/2023 | | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| | | | | | | | | | | | | | | | |
| Stephen H. Belgrad | | 2/15/2018 | (2) | | | | | | 28,049 |
| | $ | 299,563 |
| | | | |
| | 2/15/2018 | (3) | | | | | | | | | | 36,602 |
| | $ | 390,909 |
|
| | 2/15/2017 | (4) | | | | | | 12,518 |
| | $ | 133,692 |
| | | | |
| | 2/15/2017 | (5) | | | | | | | | | | 13,403 |
| | $ | 143,144 |
|
| | 2/10/2016 | (6) | | | | | | 9,175 |
| | $ | 97,989 |
| | | | |
| | 2/10/2016 | (7) | | | | | | | | | | 19,094 |
| | $ | 203,924 |
|
| | | | | | | | | | | | | | | | |
| James J. Ritchie | | N/A | | | | | | | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| | | | | | | | | | | | | | | | |
| Daniel K. Mahoney | | 2/15/2018 | (2) | | | | | | 2,874 |
| | $ | 30,694 |
| | | | |
| | 2/15/2017 | (4) | | | | | | 1,630 |
| | $ | 17,408 |
| | | | |
| | 2/10/2016 | (6) | | | | | | 1,071 |
| | $ | 11,438 |
| | | | |
| | | | | | | | | | | | | | | | |
| Aidan J. Riordan | | 2/15/2018 | (2) | | | | | | 29,253 |
| | $ | 312,422 |
| | | | |
| | 2/15/2018 | (3) | | | | | | | | | | 14,627 |
| | $ | 156,216 |
|
| | | 2/15/2017 | (4) | | | | | | 15,862 |
| | $ | 169,406 |
| | | | |
| | | 2/15/2017 | (5) | | | | | | | | | | 9,369 |
| | $ | 100,061 |
|
| | | 2/10/2016 | (6) | | | | | | 12,550 |
| | $ | 134,034 |
| | | | |
| | | 2/10/2016 | (7) | | | | | | | | | | 14,409 |
| | $ | 153,888 |
|
| | | | | | | | | | | | | | | | |
| Christopher Hadley | | 2/15/2018 | (2) | | | | | | 8,329 |
| | $ | 88,954 |
| | | | |
| | 2/15/2018 | (3) | | | | | | | | | | 4,165 |
| | $ | 44,482 |
|
| | 2/15/2017 | (4) | | | | | | 5,158 |
| | $ | 55,087 |
| | | | |
| | 2/15/2017 | (5) | | | | | | | | | | 3,047 |
| | $ | 32,542 |
|
| | 2/10/2016 | (6) | | | | | | 3,836 |
| | $ | 40,968 |
| | | | |
| | 2/10/2016 | (7) | | | | | | | | | | 4,405 |
| | $ | 47,045 |
|
| |
| (1) | The options to purchase ordinary shares of the Company was granted as an employment inducement award on December 30, 2018. The options vest 20% on December 30, 2018, 20% on December 30, 2019, 20% on December 30, 2020 and 20% on December 30, 2021 |
| |
| (2) | The grants of restricted ordinary shares of the Company were made under the Company’s Equity Incentive Plan on February 15, 2018. The restricted ordinary shares vest in “Management’s Discussionone-third increments on each of February 15, 2019, February 15, 2020 and AnalysisFebruary 15, 2021. |
| |
| (3) | The grants of Financial Conditionperformance-based restricted ordinary shares of the Company were made under the Company’s Equity Incentive Plan on February 15, 2018. Subject to the performance conditions, the ordinary shares vest three years following the grant date between 0% and Results150% of Operations—Non-GAAP Supplemental Performance Measure—Economic Net Income.” Pre-taxtarget. The ordinary shares reported reflect cumulative performance at December 31, 2018 of 100% of target. |
| |
| (4) | The grants of restricted ordinary shares of the Company were made under the Company’s Equity Incentive Plan on February 15, 2017. The restricted ordinary shares vest one-third on each of February 15, 2018, February 15, 2019 and post-tax ENI are presented after Affiliate key employee distributions. These measures are conceptually equivalentFebruary 15, 2020. |
| |
| (5) | The grants of performance-based restricted ordinary shares of the Company were made under the Company’s Equity Incentive Plan on February 15, 2017. Subject to net income before tax from continuing operations attributable to controlling intereststhe performance conditions, the ordinary shares vest three years following the grant date between 0% and net income from continuing operations attributable to controlling interests, respectively.150% of target. The ordinary shares reported reflect cumulative performance at December 31, 2018 of 78.75% of target. |
| |
| (6) | In the second quarterThe grants of 2015, we recorded a non-recurring performance fee of $11.4 million, net of associated expenses and taxes. While all performance fees fall within OMAM’s definition of economic net income, we believe that the unique characteristics of this fee, including its size and the extraordinary investment performancerestricted ordinary shares of the underlying product, make it unrepresentativeCompany were made under the Company’s Equity Incentive Plan on February 10, 2016. The restricted ordinary shares vest in one-third increments on each of our recurring economics. We have therefore presented our economic net income with this non-recurring performance fee excluded from revenueFebruary 10, 2017, February 10, 2018 and expenses. This presentation provides a more comparative view across reporting periods of the line items which make up ENI revenue and expense. Unless explicitly noted, the revenue, expense and key metrics herein exclude the impact of the non-recurring performance fee. Including the non-recurring performance fee in 2015, economic net income was $161.1 million and diluted economic net income per share was $1.34.February 10, 2019. |
| |
| (7) | ENI operating margin is a non-GAAP efficiency measure, calculated based on ENI operating earnings divided by ENI revenue. For a more detailed discussionThe grants of performance-based restricted ordinary shares of the differencesCompany were made under the Company’s Equity Incentive Plan on February 10, 2016. Subject to the performance conditions, the ordinary shares vest three years following the grant date between U.S. GAAP net income0% and economic net income, see “Management’s Discussion and Analysis150% of Financial Condition and Resultstarget. The ordinary shares reported reflect cumulative performance at December 31, 2018 of Operations—Non-GAAP Supplemental Performance Measure—Economic Net Income.”76.54% of target. |
| |
| (8) | On August 2, 2017, we entered into a non-binding term sheet to sell our stake in Heitman LLC to Heitman’s management. Pursuant to this term sheet, we entered into a redemption agreement on November 17, 2017. Heitman stopped contributing to our financial results of operations as of November 30, 2017 andMarket value was determined by multiplying the transaction closed on January 5, 2018. We have broken the Heitman AUM and flows out of our AUM reporting as of July 1, 2017, in order to give the reader a better perspectivenumber of the ongoing business followingCompany’s ordinary shares by $10.68, the closing price of this transaction. Unless specifically noted, flow information includes flows from Heitman for the first half of 2017, but excludes it thereafter, and AUM data atCompany’s ordinary shares in U.S. Dollars on December 31, 2017 excludes the Heitman AUM.2018. |
|
| |
(9) | Annualized revenue impact of net flows excludes market appreciation or depreciation. Annualized revenue impact of net flows represents the difference between annualized management fees expected to be earned on new accounts and net assets contributed to existing accounts, less the annualized management fees lost on terminated accounts or net assets withdrawn from existing accounts, including equity-accounted Affiliates. The annualized management fees are calculated by multiplying the annual gross fee rate for the relevant account by the net assets gained in the account in the event of a positive flow, excluding any current or future market appreciation or depreciation, or the net assets lost in the account in the event of an outflow, excluding any current or future market appreciation or depreciation. For a further discussion of the uses and limitations of the annualized revenue impact of net flows, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Assets Under Management.” |
| |
(10) | Balance sheet data presented in accordance with U.S. GAAP for the years 2013, 2014, 2016 and 2017 include the results of Funds managed by our Affiliates where it has been determined these entities are controlled by our Company. Consolidated assets and liabilities of these entities that are attributable to third-party investors, or non-controlling interests, have the effect of increasing our consolidated assets and liabilities. The net assets and liabilities presented as attributable to controlling interests exclude the portions directly attributable to these third-party investors, and represent the net amounts attributable to our shareholders. Similarly, Shareholders’ equity (deficit) represents our net assets after excluding net assets directly attributable to these third-party investors. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Unless we state otherwise or the context otherwise requires, references in this Annual Report on Form 10-K to “OMAM” refer to OM Asset Management plc, references to the “Company” refer to OMAM, and references to “we,” “our” and “us” refer to OMAM and its consolidated subsidiaries and equity-accounted Affiliates, excluding discontinued operations. References to the holding company or “Center” excluding the Affiliates refer to OMAM Inc., or OMUS, a Delaware corporation and indirect, wholly owned subsidiary of OMAM. Unless we state otherwise or the context otherwise requires, references in this Annual Report on Form 10-K to “Affiliates” or an “Affiliate” refer to the asset management firms in which we have an ownership interest. References in this Annual Report on Form 10-K to “OM plc” refer to Old Mutual plc, our former parent. None of the information in this Annual Report on Form 10-K constitutes either an offer or a solicitation to buy or sell any of our Affiliates’ products or services, nor is any such information a recommendation for any of our Affiliates’ products or services.
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes which appear in this Annual Report on Form 10-K in Item 8, Financial Statements and Supplementary Data.
This discussion contains forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for more information. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly under Item 1A, Risk Factors.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results.
Our MD&A is presented in five sections:
Overview provides a brief description of our Affiliates, a summary of The Economics of Our Business and an explanation of How We Measure Performance using a non-GAAP measure which we refer to as economic net income, or ENI. This section also provides a Summary Results of Operations and information regarding our Assets Under Management by Affiliate and asset class.
U.S. GAAP Results of Operations for the years ended December 31, 2017, 2016, and 2015 includes an explanation of changes in our U.S. GAAP revenue, expense, and other items over the last three years as well as key U.S. GAAP operating metrics.
Non-GAAP Supplemental Performance Measure—Economic Net Income includes an explanation of the key differences between U.S. GAAP net income and ENI, the key measure management uses to evaluate our performance. This section also provides a reconciliation between U.S. GAAP net income and ENI for the years ended December 31, 2017, 2016, and 2015, as well as a reconciliation of key ENI operating items including ENI revenue and ENI operating expenses. In addition, this section provides key Non-GAAP operating metrics and a calculation of tax on economic net income.
Capital Resources and Liquidity discusses our key balance sheet data including Working Capital and Long-Term Debt. This section also discusses Cash Flows from the business; Adjusted EBITDA; Future Capital Needs; and Commitments, Contingencies and Off-Balance Sheet Obligations. The discussion of Adjusted EBITDA includes an explanation of how we calculate Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income attributable to controlling interests.
Critical Accounting Policies and Estimates provides a discussion of the key accounting policies used in the preparation of our U.S. GAAP financial statements.
Overview
We are a diversified, multi-boutique asset management firm headquartered in London, UK. We currently operate our business through seven affiliate firms to whom we refer in this Annual Report as our Affiliates. Through our Affiliates, we offer a diverse range of actively-managed investment strategies and products to institutional investors around the globe. While our Affiliates maintain autonomy in the investment process and the day-to-day management of their businesses, our strategy is to work with them to accelerate the growth and profitability of their firms.
Under U.S. GAAP, our Affiliates may be consolidated into our operations or may be accounted for as equity investments. We may also be required to consolidate certain of our Affiliates’ Funds, due to the nature of our decision-making rights, our economic interests in these Funds or the rights of third-party clients in those Funds.
Our current Affiliates2018 Options Exercised and their principal strategies include(1):Stock Vested
Acadian Asset Management LLC (“Acadian”)—a leading quantitatively-oriented manager of active global and international equity, and alternative strategies.
Barrow, Hanley, Mewhinney & Strauss, LLC (“Barrow Hanley”)—a widely recognized value-oriented investment manager of U.S., international and global equities, fixed income and a range of balanced investment management strategies.
Campbell Global, LLC (“Campbell Global”)—a leading sustainable timber and natural resource investment manager that seeks to deliver superior investment performance by focusing on unique acquisition opportunities, client objectives and disciplined management.
Copper Rock Capital Partners LLC (“Copper Rock”)—a specialized growth equity investment manager of small-cap international, global and emerging markets equity strategies.
| |
• | Investment Counselors of Maryland, LLC (“ICM”)(2)—a value-driven domestic equity manager with product offerings across the entire capitalization range and a primary focus on small-cap companies.
|
Landmark Partners, LLC (“Landmark”)—a leading global secondary private equity, real estate and real asset investment firm.
Thompson, Siegel & Walmsley LLC (“TSW”)—a value-oriented investment manager focused on small- and mid-cap U.S. equity, international equity and fixed income strategies.
|
| | | | | | | | | | | | | | |
| | | Option Awards | | Stock Awards |
| Name | | Number of Shares acquired on Exercise (#) | | Value Realized on Exercise ($) | | Number of Shares Acquired on Vesting (#) | | Value Realized on Vesting (1) ($) |
| Guang Yang | | — |
| | $ | — |
| | — |
| | $ | — |
|
| James J. Ritchie | | — |
| | $ | — |
| | 94,237 |
| | $ | 1,452,503 |
|
| Stephen H. Belgrad (2) | | — |
| | $ | — |
| | 228,724 |
| | $ | 3,108,416 |
|
| Daniel K. Mahoney | | — |
| | $ | — |
| | 3,643 |
| | $ | 55,981 |
|
| Aidan J. Riordan | | — |
| | $ | — |
| | 122,344 |
| | $ | 1,866,747 |
|
| Christopher Hadley | | — |
| | $ | — |
| | 72,393 |
| | $ | 1,102,975 |
|
| |
| (1) | In August 2017, we executedThe value realized upon vesting of restricted ordinary shares is calculated by multiplying the fair market value of an agreementordinary share on the vesting date (the closing price on the business day prior to sell our stake in Heitman LLC, a real estate manager, to Heitman’s management for cash consideration totaling $110 million. We have therefore presented operational information (including AUM and flow data) excluding Heitman for periods beginning in the third quartervesting dates) by the number of 2017 (Heitman remains in operational information for the first half of 2017). The transaction closed on January 5, 2018. Under U.S. GAAP, financial results of operations presented herein continue to include Heitman through November 30, 2017. We will retain our co-investment interests in Heitman-managed funds as well as any carried interest associated with these investments.ordinary shares vested. |
| |
| (2) | AccountedThis amount includes 90,166 time-based restricted ordinary shares that vested for undertax purposes at the equity methodtime of accounting.Mr. Belgrad’s separation of employment. These ordinary shares remain restricted through the original vesting dates per the terms of Mr. Belgrad’s separation agreement. |
2018 Nonqualified Deferred Compensation
The following table provides information on the NEOs’ participation in the Voluntary Deferral Plan and the Deferred Compensation Plan. These plans either allow eligible employees to defer part of their salary and annual incentive on a voluntary basis or provide additional pre-tax company contributions to employees whose profit sharing contributions were limited under the tax-qualified plan. The Company contribution under the Deferred Compensation Plan is at the same rate of contribution as the contribution to the Profit Sharing & 401(k) Plan.
The Economics of Our Business
Our profitability is affected by a variety of factors including the level and composition of our average assets under management, or AUM, fee rates charged on AUM and our expense structure. Our Affiliates earn management fees based on assets under management. Approximately 75% of our management fees are calculated based on average AUM (calculated on either a daily or monthly basis) with the remainder of our management fees calculated based on period end AUM or other measuring methods. Changes in the levels of our AUM are driven by our investment performance and net client cash flows. Our Affiliates may also earn performance fees when certain accounts add value in relation to relevant benchmarks or exceed required returns. Approximately $55.4 billion, or 23% of our AUM in consolidated Affiliates, are in accounts with incentive fee or carried interest features in which OMAM participates in the performance fee. The majority of these incentive fees are calculated based on value added over the relevant benchmarks on a rolling three year basis. Carried interests are features of private equity funds, which are calculated based on long-term cumulative returns. Performance fees earned on eligible AUM managed by our equity-accounted Affiliates are not reflected as part of ENI or U.S. GAAP performance fee revenue.
Our largest expense item is compensation and benefits paid to our and our Affiliates’ employees, which consists of both fixed and variable components. Fixed compensation and benefits represents base salaries and wages, payroll taxes and the costs of our employee benefit programs. Variable compensation, calculated as described below, may be awarded in cash, equity or profit interests.
The arrangements in place with our Affiliates result in the sharing of economics between OMUS and each Affiliate’s key management personnel using a profit-sharing model, except for ICM, which uses a revenue share model as a result of a legacy economic arrangement that has not been restructured. Profit sharing affects two elements within our earnings: (i) the calculation of variable compensation and (ii) the level of each Affiliate’s equity or profit interests distribution to its employees. Variable compensation is the portion of earnings that is contractually allocated to Affiliate employees as a bonus pool, typically representing a fixed percentage of earnings before variable compensation, which is measured as revenues less fixed compensation and benefits and other operating and administrative expenses. Profits after variable compensation are shared between us and Affiliate key employee equity holders according to our respective equity or profit interests ownership. The sharing of profits in this manner ensures that the economic interests of Affiliate key employees and those of OMUS are aligned, both in terms of generating strong annual earnings as well as investing those earnings back into the business in order to generate growth over the long term. We view profit sharing as an attractive operating model, as it allows us to share in the benefits of operating leverage as the business grows, and ensures all equity and profit interests holders are incentivized to achieve that growth.
Equity or profit interests owned by Affiliate key employees are either awarded as part of their variable compensation arrangements, or alternatively, may have originally resulted from OMUS acquiring less than 100% of the Affiliate. Over time, Affiliate key employee-owned equity or profit interests are recycled from one generation of employee-owners to the next either by the next generation purchasing equity or profit interests directly from retiring principals, or by Affiliate key employees forgoing cash bonuses in exchange for the equivalent value in Affiliate equity or profit interests. The recycling of equity or profit interests is often facilitated by OMUS; see “—U.S. GAAP Results of Operations—U.S. GAAP Expenses—Compensation and Benefits Expense” for a further discussion.
The diagram below provides an illustrative example of how the profit-sharing model would work initially and over time if the affiliate grew its revenue and profits. In this example, the employees’ variable compensation has been contractually set at 30% of earnings before variable compensation, and the earnings after variable compensation are split 60% to OMUS and 40% to the affiliate key employees. Revenue initially equals $200 and operating expenses equal $100. Therefore, earnings before variable compensation equal $100 and the contractual bonus pool (variable compensation) equals $30. The owners split the $70 profit after variable compensation, with OMUS receiving $42, or 60%, and the Affiliate key employees receiving $28, or 40%. Including both the contractual employee bonus pool and the key employees’ share of profit, the employees receive $58, or 58% of profit before variable compensation. Employee equity is valued at a fixed multiple of this $28 share of profits, so employees have transparency into both their earning potential in any year from the bonus pool and share of profits, as well as the current value of their equity and the long-term potential to realize value from its growth. In this structure, key employees who are managing their business have incentives to manage for profit, but also to manage the business prudently, in the interest of their clients, and invest for growth, since they will benefit over the long term as both employees and equity holders. In this way, each Affiliate is aligned with OMUS and the public shareholders to generate profits and growth over time.
Illustrative Structure: Profit-Sharing Economics
Figures in parenthesis indicate impact of model after five years if revenue and pre-bonus operating expenses grew 15% and 7% annually, respectively.
The alignment of interests is even clearer if we consider the impact of growth on the profit-sharing model. The numbers in parenthesis in the diagram represent the financial results of the illustrative business in five years, assuming revenue has grown at 15% annually and operating expenses have grown at 7% annually. With revenue of $400 and operating expenses of $140, profit before variable compensation has now increased to $260, representing an annual growth rate of 21%. The 30% contractual bonus pool of $78 has also grown 21% annually, as has OMUS’s 60% share of profits, which equals $109, and the affiliate’s 40% share of profits, which equals $73. From this example, it is clear that as profit in the affiliate’s business grows and the operating margin increases, both of the stakeholders—OMUS and the key employees—are benefiting in a proportionate way. This means that both parties are aligned to invest in the business by hiring new investment professionals, developing new products, or establishing new distribution channels. We believe this investment in turn benefits clients and should generate growth over time.
The alternative structure common in the industry is the revenue share model. In the revenue share model, the affiliate’s revenue is typically divided into two fixed percentages—the operating allocation and the owners’ allocation. All operating expenses of the business, including employee bonuses, must be covered by the operating allocation. The owners’ allocation can be owned entirely by the multi-boutique owner or ownership can be divided between the multi-boutique owner and the affiliate’s key employees. In either case, the multi-boutique owner effectively owns a fixed percentage of the affiliates’ revenue, which typically does not change as the business grows. While the initial economics of the profit share model and the revenue share model can be similar, over time the economic split and incentive structure can be quite different, leading to less alignment between the affiliate and the multi-boutique owner. The multi-boutique owner’s share of profits grows in line with revenue, while any operating leverage in the business is retained entirely by the affiliate’s employees. Likewise, new costs and investments to drive growth are borne entirely by the affiliate employees, while the revenue generated by these investments is shared with the multi-boutique owner. While the revenue share structure has been successfully implemented by a number of our peers who have a more autonomous strategy, for OMAM, which emphasizes collaborative engagement and joint investment with our Affiliates, the alignment of the profit-sharing model is mutually reinforcing with our overall growth strategy and operating philosophy.
How We Measure Performance
We manage our business in aggregate based on a single reportable segment, reflecting how our management assesses the performance of our business. Within our organizational framework, the same operational resources support multiple products and Affiliates and performance is evaluated at a consolidated level.
In measuring and monitoring the key components of our earnings, our management uses a non-GAAP financial measure, ENI, to evaluate the financial performance of, and to make operational decisions for, our business. We also use ENI to make resource allocation decisions, determine appropriate levels of investment or dividend payout, manage balance sheet leverage, determine Affiliate variable compensation and equity distributions, and incentivize management. It is an important measure in evaluating our financial performance because we believe it most accurately represents our operating performance and cash generation capability.
ENI differs from net income determined in accordance with U.S. GAAP as a result of both the reclassification of certain income statement items and the exclusion of certain non-cash or non-recurring income statement items. In particular, ENI excludes non-cash charges representing the changes in the value of Affiliate equity and profit interests held by Affiliate key employees, and the results of discontinued operations which are no longer part of our business and that portion of consolidated Funds which are not attributable to our shareholders. ENI is also adjusted for amortization of acquisition-related contingent consideration and pre-acquisition retained equity with service components.
ENI revenue is primarily comprised of the fee revenues paid to us by our clients for our advisory services and earnings from our equity-accounted Affiliates. Revenue included within ENI differs from U.S. GAAP revenue in that it excludes amounts from consolidated Funds which are not attributable to our shareholders and includes our share of earnings from equity-accounted Affiliates.
ENI expenses are calculated to reflect all usual expenses from ongoing continuing operations attributable to our shareholders. Expenses included within ENI differ from U.S. GAAP expenses in that they exclude amounts from consolidated Funds which are not attributable to our shareholders, revaluations of Affiliate key employee owned equity and profit interests, amortization and impairment of acquired intangibles and other acquisition-related items, and certain other non-cash expenses.
“Non-controlling interests” is a concept under U.S. GAAP that identifies net components of revenues and expenses that are not attributable to our shareholders. For example, the portion of the net income (loss) of any consolidated Funds that is attributable to the outside investors or clients of the consolidated Funds is included in “Non-controlling interests” in our Consolidated Financial Statements. Conversely, “controlling interests” is the portion of revenue or expense that is attributable to our shareholders.
Summary Results of Operations
The following table summarizes our results of operations for the years ended December 31, 2017, 2016, and 2015. Beginning in the third quarter of 2016, following the purchase of seed capital investments from OM plc, we consolidated certain Funds. Additional Funds have been consolidated in 2017 as additional seed and co-investment capital has been deployed:
|
| | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, | | Increase (Decrease) |
| ($ in millions, unless otherwise noted) | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| U.S. GAAP Basis | |
| | |
| | |
| | |
| | |
|
| Revenue | $ | 887.4 |
| | $ | 663.5 |
| | $ | 699.3 |
| | $ | 223.9 |
| | $ | (35.8 | ) |
| Pre-tax income from continuing operations attributable to controlling interests | 137.1 |
| | 161.0 |
| | 201.3 |
| | (23.9 | ) | | (40.3 | ) |
| Net income attributable to controlling interests | 4.2 |
| | 126.4 |
| | 155.5 |
| | (122.2 | ) | | (29.1 | ) |
U.S. GAAP operating margin(1) | 8 | % | | 23 | % | | 27 | % | | (1545) bps |
| | (389) bps |
|
| Earnings per share, basic ($) | $ | 0.04 |
| | $ | 1.05 |
| | $ | 1.29 |
| | $ | (1.01 | ) | | $ | (0.24 | ) |
| Earnings per share, diluted ($) | 0.04 |
| | 1.05 |
| | 1.29 |
| | $ | (1.01 | ) | | $ | (0.24 | ) |
| Basic shares outstanding (in millions) | 110.7 |
| | 119.2 |
| | 120.0 |
| | (8.5 | ) | | (0.8 | ) |
| Diluted shares outstanding (in millions) | 111.4 |
| | 119.5 |
| | 120.5 |
| | (8.1 | ) | | (1.0 | ) |
Economic Net Income Basis(2)(3) | |
| | |
| | |
| | |
| | |
|
| (Non-GAAP measure used by management) | |
| | |
| | |
| | |
| | |
|
ENI revenue(4)(5) | $ | 900.7 |
| | $ | 678.5 |
| | $ | 663.9 |
| | $ | 222.2 |
| | $ | 14.6 |
|
Pre-tax economic net income(4)(6) | 251.3 |
| | 190.7 |
| | 203.5 |
| | 60.6 |
| | (12.8 | ) |
Economic net income, excluding non-recurring performance fee(4)(7) | 180.9 |
| | 145.1 |
| | 149.7 |
| | 35.8 |
| | (4.6 | ) |
ENI diluted earnings per share, excluding non-recurring performance fee, ($) (4) | $ | 1.62 |
| | $ | 1.21 |
| | $ | 1.24 |
| | $ | 0.41 |
| | $ | (0.03 | ) |
ENI operating margin(4)(8) | 38 | % | | 35 | % | | 37 | % | | 261 bps |
| | (137) bps |
|
Adjusted EBITDA(4) | $ | 281.9 |
| | $ | 208.5 |
| | $ | 212.7 |
| | $ | 73.4 |
| | $ | (4.2 | ) |
Economic net income (including non-recurring performance fee)(5) | 180.9 |
| | 145.1 |
| | 161.1 |
| | 35.8 |
| | (16.0 | ) |
| ENI diluted EPS (including non-recurring performance fee),($) | $ | 1.62 |
| | $ | 1.21 |
| | $ | 1.34 |
| | $ | 0.41 |
| | $ | (0.13 | ) |
Other Operational Information(9) | |
| | |
| | |
| |
|
| |
|
|
| Assets under management (AUM) at year end (in billions) | $ | 243.0 |
| | $ | 240.4 |
| | $ | 212.4 |
| | $ | 2.6 |
| | $ | 28.0 |
|
| Net client cash flows (in billions) | (6.0 | ) | | (1.6 | ) | | (5.1 | ) | | (4.4 | ) | | 3.5 |
|
Annualized revenue impact of net flows (in millions)(10) | 32.9 |
| | 11.0 |
| | 18.9 |
| | 21.9 |
| | (7.9 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Name | | Plan | | Executive Contributions in Last FY ($)(1) | | Registrant Contribution in Last FY ($)(2) | | Aggregate Earnings in Last FY ($)(3) | | Aggregate Withdrawals/ Distributions in Last FY ($) | | Aggregate Balance at end of Last FYE ($) |
| Guang Yang | | Voluntary Deferral Plan | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| | Deferred Compensation Plan | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| Stephen H. Belgrad | | Voluntary Deferral Plan | | N/A |
| | N/A |
| | $ | (177,273 | ) | | N/A |
| | $ | 2,218,924 |
|
| | Deferred Compensation Plan | | N/A |
| | N/A |
| | $ | (13,352 | ) | | N/A |
| | $ | 168,299 |
|
| James J. Ritchie | | Voluntary Deferral Plan | | $ | 1,204,649 |
| | N/A |
| | $ | (83,161 | ) | | $ | (621,524 | ) | | $ | 1,079,532 |
|
| | Deferred Compensation Plan | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| Daniel K. Mahoney | | Voluntary Deferral Plan | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| | Deferred Compensation Plan | | N/A |
| | $ | 19,775 |
| | $ | (266 | ) | | N/A |
| | $ | 24,974 |
|
| Aidan J. Riordan | | Voluntary Deferral Plan | | N/A |
| | N/A |
| | $ | (29,028 | ) | | N/A |
| | $ | 286,834 |
|
| | Deferred Compensation Plan | | N/A |
| | $ | 22,500 |
| | $ | (8,525 | ) | | N/A |
| | $ | 167,978 |
|
| Christopher Hadley | | Voluntary Deferral Plan | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
| | Deferred Compensation Plan | | N/A |
| | $ | 22,500 |
| | $ | (18,522 | ) | | N/A |
| | $ | 267,116 |
|
| |
| (1) | U.S. GAAP operating margin equals operating incomeThe amount for Mr. Ritchie includes deferrals made from continuing operations divided by total revenue. Our U.S. GAAP operating margin is not significantly impacted byhis 2018 salary. Salary deferrals are reported in the effect“Salary” column of consolidated Funds for the years ended December 31, 2017, 2016, and 2015.2018 Summary Compensation Table. |
| |
| (2) | Economic net income is a non-GAAP measure we use to evaluateAll Company contributions are included in the performance“All Other Compensation” column of our business. For a reconciliation to U.S. GAAP financial information and a further discussion of economic net income refer to “—Non-GAAP Supplemental Performance Measures—Economic Net Income.”the 2018 Summary Compensation Tables. |
| |
| (3) | Excludes restructuring charges associated withThe earnings reflected represent deemed investment earnings or losses from voluntary deferrals and Company contributions, as applicable. The Voluntary Deferral Plan and the CEO transition amounting to $9.8 million ($5.7 million after taxes) and $1.0 million related toDeferred Compensation Plan do not guarantee a return on deferral amounts. For these plans, no earnings are reported in the Heitman transaction ($0.6 million after taxes)2018 Summary Compensation Table because the plans do not provide for the year ended December 31, 2017.above-market or preferential earnings. |
Employment Contracts and Change of Control Arrangements
Under the Company’s Equity Incentive Plan, if we experience a change of control or a corporate transaction, in the discretion of the Compensation Committee, (i) outstanding awards, including any vesting provisions, may be assumed or substituted by the successor company; (ii) outstanding and unexercised options and share appreciation rights may expire upon the closing of the change of control or other transaction, whether or not in conjunction with a payment equal to any positive difference between the value of the underlying shares and the exercise price; and/or (iii) the vesting of outstanding awards may be accelerated, in whole or in part with the exception of the NEOs with Transition Severance Agreements described below. Pursuant to Mr. Yang’s Option Award Agreement, upon termination of employment within two years following a change of control, 20% of the Shares that would have vested at the next annual vesting date, vest upon termination of employment.
| |
(4) | In the second quarter of 2015, we recorded a non-recurring performance fee of $11.4 million, net of associated expenses and taxes. While all performance fees fall within OMAM’s definition of economic net income, we believe that the unique characteristics of this fee, including its size and the extraordinary investment performance of the underlying product, make it unrepresentative of our recurring economics. We have therefore presented economic net income with this non-recurring performance fee excluded from revenue and expenses. This presentation provides a more comparative view across reporting periods of the line items which make up ENI revenue and expense. Unless explicitly noted, the revenue, expense and key ENI metrics herein exclude the impact of the non-recurring performance fee. |
| |
(5) | ENI revenue is the ENI measure which corresponds to U.S. GAAP revenue. |
| |
(6) | Pre-tax economic net income is the ENI measure which corresponds to U.S. GAAP pre-tax income from continuing operations attributable to controlling interests. |
| |
(7) | Economic net income excluding the non-recurring performance fee is the ENI measure which corresponds to U.S. GAAP net income from continuing operations attributable to controlling interests. |
| |
(8) | ENI operating margin is a non-GAAP efficiency measure, calculated based on ENI operating earnings divided by ENI revenue. The ENI operating margin is most comparable to our U.S. GAAP operating margin (excluding the effect of consolidated Funds) of 8% for the year ended December 31, 2017, 23% for the year ended December 31, 2016 and 27% for the year ended December 31, 2015. |
| |
(9) | On August 2, 2017, we entered into a non-binding term sheet to sell our stake in Heitman LLC to Heitman’s management. Pursuant to this term sheet, we entered into a redemption agreement on November 17, 2017. Heitman stopped contributing to our financial results as of November 30, 2017 and the transaction closed on January 5, 2018. We have broken the Heitman AUM and flows out of our AUM reporting as of July 1, 2017, in order to give the reader a better perspective of the ongoing business following the closing of this transaction. Unless specifically noted, flow information includes flows from Heitman for the first half of 2017, but excludes it thereafter, and AUM data at December 31, 2017 excludes the Heitman AUM. Including Heitman, AUM, net flows, and annualized revenue impact of net flows were $272.0 billion, $(5.8) billion, and $25.2 million, respectively, for the eleven months ended November 30, 2017. |
| |
(10) | Annualized revenue impact of net flows represents the difference between annualized management fees expected to be earned on new accounts and net assets contributed to existing accounts, less the annualized management fees lost on terminated accounts or net assets withdrawn from existing accounts, including equity-accounted Affiliates. The annualized management fees are calculated by multiplying the annual gross fee rate for the relevant account by the net assets gained in the account in the event of a positive flow, excluding any current or future market appreciation or depreciation, or the net assets lost in the account in the event of an outflow, excluding any current or future market appreciation or depreciation. For a further discussion of the uses and limitations of the annualized revenue impact of net flows, see “Assets Under Management” herein. |
Assets Under ManagementTransition Severance Agreements
On August 14, 2017, the Compensation Committee approved Transition Severance Agreements (each a "TSA" and collectively, the "TSAs") for Stephen H. Belgrad, Aidan J. Riordan, and Christopher Hadley.
Pursuant to the TSAs, upon a termination of the Executive's employment by the Company without cause or termination by the Executive for good reason, and in consideration for and subject to the Executive signing a general waiver and release of claims provided by the Company and ongoing compliance with certain restrictive covenants, the Executive would be entitled to receive (i) continuation of salary and bonus for twelve (12) months, payable in cash, (ii) continuation of health benefits for twelve (12) months, (iii) a pro-rated bonus for the year in which the termination of employment occurs and (iv) continued vesting of the Executive’s time- and performance-based restricted share and restricted share unit awards pursuant to their existing vesting schedules. Any short-term or long-term cash or equity-based incentive award paid to the Executives will be subject to the Clawback Policy adopted by the Company's Board of Directors, as in effect from time to time.The TSAs would have expired March 2, 2017, we2020 which was (2) years following
the commencement of employment by the Company's next new permanent Chief Executive Officer (which began on March 2, 2018).
The TSAs contain customary restrictive covenants, including, non-disclosure, non-disparagement, non-interference and a twelve (12) month non-solicitation obligation.
Employment Agreements
Guang Yang Agreement
On December 30, 2018, the Company entered into an Employment Agreement with Guang Yang in connection with the appointment of Mr. Yang as the Company’s President and Chief Executive Officer. Pursuant to the Employment Agreement, Mr. Yang’s compensation consists of an annual base salary of $1,000,000. In addition, Mr. Yang was offered a nonqualified stock option to purchase 6,900,000 ordinary shares of the Company at an exercise price per share of $12.00. 20% of the award vested on the date of grant with the remaining 80% vesting in equal 20% annual installments over a four-year period beginning on the first anniversary of the initial vesting date subject to continued employment with the Company on each vesting date. The options have a five-year term, and the vested portion of the option remain exercisable for the five-year term regardless of whether Mr. Yang is employed by the Company at the time of exercise. The options were granted at an exercise price above the trading price at the time of grant as the sole component of his incentive-based compensation and as an inducement to join the Company. In addition, if Mr. Yang’s employment is terminated by the Company without cause or Mr. Yang terminated his employment for good reason within two years following a change of control of the Company (as defined in the Option Agreement granting the option), then 20% of the shares subject to the option that would have vested at the next annual vesting date would become vested on the date of termination of employment. Mr. Yang iseligible to participate in certain Company-wide employee benefit programs, including the Company’s Profit Sharing and 401(k) Plan as well as health and welfare benefits. In addition, during the first 12 months of employment, the Company will provide a monthly housing and travel allowance up to $25,000.
In the event of a termination of Mr. Yang’s employment by the Company without Cause (as defined in the Employment Agreement) or termination by Mr. Yang for Good Reason (as defined in the Employment Agreement) (in either case a “Good Leaver Termination”), Mr. Yang would be entitled to receive (a) separation payment equal to twelve (12) months of base salary, (b) continuation of health benefits for twelve (12) months (c) continued vesting of Mr. Yang’s Option Award during the 60-day notice period pursuant to their existing vesting schedules.
Summary of Agreements of Executives whose Employment Ended in 2018
Stephen H. Belgrad Agreement
On January 31, 2018, the Company entered into an Employment Agreement with Stephen H. Belgrad in connection with the appointment of Mr. Belgrad as the Company’s President and Chief Executive Officer effective March 2, 2018. Pursuant to the Employment Agreement, Mr. Belgrad’s compensation consisted of an annual base salary of $500,000. In addition, his target incentive bonus for 2018 was $3,000,000, which was payable 50% in cash and 50% in equity of the Company. A portion (40%) of the equity award was subject to time-based vesting (ratably over 3 years) and a portion (60%) was subject to performance-based vesting (based on relative total shareholder return performance against a defined peer group). Mr. Belgrad also received a one-time grant of restricted ordinary shares of the Company totaling $500,000, which was split in the same manner as the incentive award (40% time-based and 60% performance-based). Mr. Belgrad continued to be eligible to participate in certain Company-wide employee benefit programs, including the Company’s Profit Sharing and 401(k) Plan as well as health and welfare benefits.
In the event of a termination of Mr. Belgrad’s employment by the Company without Cause (as defined in the Employment Agreement) or termination by Mr. Belgrad for Good Reason (as defined in the Employment Agreement) (in either case a “Good Leaver Termination”), Mr. Belgrad would be entitled to receive (i) upon the occurrence of a Good Leaver Termination prior to March 3, 2020, compensation and benefits consistent with the terms of Mr. Belgrad’s previously disclosed Transition Services Agreement and (ii) upon the occurrence of a Good Leaver Termination on or after March 3, 2020, (a) separation payment equal to twelve (12) months of Mr. Belgrad’s salary plus 50% of the aggregate bonus (cash and non-cash) received by Mr. Belgrad for the prior year (collectively, the “Severance”); provided, however, that such Severance shall not be less than $3,250,000 and shall be paid according to the Company’s normal payroll practices, (b) continuation of health benefits for twelve (12) months, (c) a pro-rated aggregate bonus (cash and non-cash) for the year in which the termination of employment occurs, which shall be determined at the discretion of the Compensation Committee, and (d) continued vesting of Mr. Belgrad’s time- and performance-based restricted share and restricted share unit awards pursuant to their existing vesting schedules.
On December 15, 2018, Mr. Belgrad and the Company entered into a non-binding term sheetmutual separation and severance was paid to sell our stake in Heitman LLC to Heitman’s management. Pursuant to this term sheet, we entered intoMr. Belgrad consistent with a redemption agreement on November 17, 2017. Heitman stopped contributing to our financial resultstermination without Cause under his Transition Severance Agreement.
Payments Upon Termination of Employment
The following table details payments upon termination without cause or for good reason as of November 30, 2017December 31, 2018 for each of the NEOs:
|
| | | | | | | | | | | | | | | | |
| | | Termination Without Cause or for Good Reason (1) |
| | | Salary and/or Bonus | | Benefits | | Prorated bonus | | Total |
| Guang Yang | | $ | 1,000,000 |
| | $ | 29,490 |
| | $ | — |
| | $ | 1,029,490 |
|
Daniel K. Mahoney2 | | $ | 300,000 |
| | $ | 15,496 |
| | $ | 350,000 |
| | $ | 665,496 |
|
Aidan J. Riordan3 | | $ | 875,000 |
| | $ | 35,593 |
| | $ | 500,000 |
| | $ | 1,410,593 |
|
Christopher Hadley3 | | $ | 495,000 |
| | $ | 19,832 |
| | $ | 195,000 |
| | $ | 709,832 |
|
(1) Bonus is based on 2018 actual incentive paid in 2019.
(2) Unvested equity to vest in full in accordance with equity plan award agreements.
(3) Unvested equity to vest in accordance with original vesting schedules in accordance with Transition Severance Agreements.
CEO Pay Ratio
We are providing the following information about the relationship of the median annual total compensation of our employees and the transaction closed on January 5, 2018. We have brokenannualized total compensation of Mr. Ritchie, our interim CEO at the Heitman AUM and flows outtime our median employee was determined:
For 2018, our last completed fiscal year:
the median of the annual total compensation of all employees of our AUM reportingCompany (other than our CEO) was $153,313; and
the annualized total compensation of our interim CEO was $5,458,000.
Based on this information for 2018, we reasonably estimate that the ratio of our Interim CEO’s annual total compensation to the annual total compensation of our median employee was 36:1. Our pay ratio estimate has been calculated in a manner consistent with Item 402(u) of Regulation S-K using the data and assumptions summarized below.
We are using our 2017 median employee for 2018 as of July 1, 2017,there was not a meaningful change to the employee population or compensation arrangements reflected in order to give the reader a better perspective of the ongoing business following the closing of this transaction. Unless specifically noted, flow information includes flows from Heitman for the2018 calendar year pay. To identify our median employee, we first half of 2017, but excludes it thereafter, and AUM data at December 31, 2017 excludes the Heitman AUM.
Our total assets under managementdetermined our employee population as of December 31, 2017 were $243.0 billion.(the “Determination Date”). We had 962 employees representing all full-time, part-time, seasonal and temporary employees as of the Determination Date. This number does not include any independent contractors or “leased” workers, as permitted by the applicable SEC rules. Once we identified our median employee, we then determined that employee’s total compensation, including any perquisites and other benefits, in the same manner that we determine total compensation of our NEOs for the purposes of the Summary Compensation Table disclosed above. Our 2017 median employee terminated in 2018 therefore we substituted another employee whose compensation is comparable to the original median employee based on the same method we used to select the original median employee. In addition, because our CEO served in the role for less that the full year, we annualized his 2018 compensation as permitted by the applicable SEC rules.
2018 Director Compensation
Director compensation includes both cash payments and equity granted in the form of RSUs. RSUs vest at the earlier of the one-year anniversary of grant or the date of the next year’s annual general meeting. The following table presents our assets under management by Affiliate as of each ofdetails the dates indicated:fees:
|
| | | | | | | | | | | |
| ($ in billions) | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| Acadian Asset Management | $ | 97.7 |
| | $ | 75.0 |
| | $ | 66.8 |
|
| Barrow, Hanley, Mewhinney & Strauss | 91.7 |
| | 92.3 |
| | 89.2 |
|
| Campbell Global | 5.3 |
| | 5.2 |
| | 6.3 |
|
| Copper Rock Capital Partners | 6.4 |
| | 5.1 |
| | 4.7 |
|
| Investment Counselors of Maryland | 2.1 |
| | 2.0 |
| | 1.8 |
|
| Landmark Partners | 14.8 |
| | 9.7 |
| | n/a |
|
| Thompson, Siegel & Walmsley | 25.0 |
| | 19.9 |
| | 14.5 |
|
| Total assets under management of current Affiliates | 243.0 |
| | 209.2 |
| | 183.3 |
|
| Heitman | — |
| | 31.2 |
| | 29.1 |
|
| Total assets under management* | $ | 243.0 |
| | $ | 240.4 |
| | $ | 212.4 |
|
|
| | | | |
| | | 2018 |
| Role | | Cash | | Equity |
Board Chair (Paid only if Board Chair is not an employee of the Company)1 | | $175,000 | | $175,000 |
| Board Fee | | $90,000 | | $100,000 |
Lead Independent Director2 | | $103,500 | | — |
| Chair of the Audit Committee | | $25,000 | | — |
| Member of the Audit Committee | | $10,000 | | — |
| Chair of the Compensation Committee | | $15,000 | | — |
| Member of the Compensation Committee | | $5,000 | | — |
| Chair of the Nominating and Corporate Governance Committee | | $10,000 | | — |
| Member of the Nominating and Corporate Governance Committee | | $5,000 | | — |
* Reported AUM.1NEDs that are appointed and compensated by a shareholder receive no separate compensation for their roles as BrightSphere Investment Group plc directors.
n/a Not an Affiliate as of2It is expected that the date indicatedLead Independent Director will receive cash compensation equal to the Board Fee plus 15% and will receive equity compensation consistent with the Non-Employee Director Base Fee.
Our primary asset classes include:
| |
i. | U.S. equity, which includes small cap through large cap securities and substantially value or blended investment styles; |
| |
ii. | Global/non-U.S. equity, which includes global and international equities including emerging markets; |
| |
iii. | Fixed income, which includes government bonds, corporate bonds and other fixed income investments in the United States; and |
| |
iv. | Alternatives, which consist of real estate, timberland investments, secondary Funds and other alternative investments. |
The following table presents our assets under management by strategy as of each of the dates indicated: |
| | | | | | | | | | | |
| ($ in billions) | December 31, 2017 | | December 31, 2016 | | December 31, 2015 |
| U.S. equity, small/smid cap value | $ | 7.6 |
| | $ | 7.9 |
| | $ | 6.9 |
|
| U.S. equity, mid cap value | 13.0 |
| | 11.3 |
| | 9.5 |
|
| U.S. equity, large cap value | 57.8 |
| | 59.2 |
| | 57.4 |
|
| U.S. equity, core/blend | 2.8 |
| | 3.6 |
| | 3.1 |
|
| Total U.S. equity | 81.2 |
| | 82.0 |
| | 76.9 |
|
| Global equity | 40.3 |
| | 32.3 |
| | 29.4 |
|
| International equity | 55.5 |
| | 42.5 |
| | 37.0 |
|
| Emerging markets equity | 30.4 |
| | 21.6 |
| | 18.4 |
|
| Total global/non-U.S. equity | 126.2 |
| | 96.4 |
| | 84.8 |
|
| Fixed income | 13.5 |
| | 13.9 |
| | 13.8 |
|
Alternatives(1) | 22.1 |
| | 48.1 |
| | 36.9 |
|
| Total assets under management | $ | 243.0 |
| | $ | 240.4 |
| | $ | 212.4 |
|
|
| | | | | | | | | | | |
| Name | | | | Fees Earned or Paid in Cash (1) (2) $ | | Stock Awards (3) (4) $ | | Total $ |
| Guang Yang | | Executive Officer (Chairman) appointed 11/16/2018 & CEO appointed 12/15/2018 | | — |
| | — |
| | — |
|
John Paulson(1) | | Executive Officer, Paulson & Co., appointed 11/16/2018 (Chair, Nominating & Governance Committee) | | | | | | |
Suren Rana(1) | | Resigned as appointee of former shareholder effective 8/15/2018 | | — |
| | — |
| | — |
|
Daniel Chen(1) | | Resigned as an appointee of our former shareholder effective 11/16/2018 | | — |
| | — |
| | — |
|
Enrico Marini Fichera(1) | | Resigned as an appointee of our former shareholder effective 11/16/2018 | | — |
| | — |
| | — |
|
| Robert J. Chersi | | Non-Executive Director (Chair, Audit Committee) & Lead Independent Director (11/30/2018) | | $131,137 | | $100,004 | | $231,141 |
| Mary Elizabeth Beams | | Non-Executive Director appointed 10/29/2018 | | $15,652 | | $64,385 | | $80,037 |
| Reginald Love | | Non-Executive Director appointed 8/1/2018 | | $37,500 | | $88,505 | | $126,005 |
| Barbara Trebbi | | Non-Executive Director (Chair, Compensation Committee) appointed 1/30/2018 | | $100,141 | | $125,012 | | $225,153 |
James J. Ritchie(5) | | Resigned effective 11/29/2018 | | $164,988 | | $175,014 | | $340,002 |
| Kyle Prechtl Legg | | Resigned effective 6/19/2018 | | $52,500 | | $0 | | $52,500 |
John D. Rogers(6) | | Resigned effective 1/31/2018 | | $10,417 | | $0 | | $10,417 |
| |
| (1) | ReflectsMessrs. Chen and Fichera were executive officers of our former shareholder during 2018. Mr. Rana was an executive officer of HNA Capital US. These directors receive no additional compensation for services as directors during the removal of Heitmanperiod they were employed by our former shareholder. |
| |
| (2) | Fees for NEDs are recommended by the Nominating and Corporate Governance Committee and approved by the Board pursuant to the Non-Employee Director Compensation Policy as discussed above. |
| |
| (3) | The amount in the third quarterStock Awards column is the grant date fair value of 2017.ordinary shares determined pursuant to ASC Topic 718. All of the ordinary shares reported in the Stock Awards column were granted under the Company’s Non-Employee Director Equity Incentive Plan. |
| |
| (4) | The aggregate number of awards of ordinary shares outstanding at fiscal year-end for each of the Non-Employee Directors is detailed in the table below. All awards will vest the earlier of June 20, 2019 or the date of the Company’s 2019 Annual Meeting of Shareholders. |
AUM flows and the annualized revenue impact |
| | | | | | | | | |
| Name | | Grant Date | | Grant Date Fair Value per Share | | Number of Shares of Restricted Stock Held at Year End |
| Robert J. Chersi | | 6/20/2018 | | $ | 15.65 |
| | 6,390 |
|
| Mary Elizabeth Beams | | 11/26/2018 | | $ | 12.96 |
| | 4,968 |
|
| Barbara Trebbi | | 6/20/2018 | | $ | 15.65 |
| | 7,988 |
|
| Reginald Love | | 8/7/2018 | | $ | 12.38 |
| | 7,149 |
|
| |
| (5) | Following Mr. Ritchie’s resignation from the Board, he entered into a consulting agreement with the Board for a period of net flowsIn the following tables, we present our asset flows and market appreciation by asset class, client type and client location. We also present a key metric used to better understand our asset flows, the annualized revenue impact of net client cash flows. Annualized revenue impact of net flows represents the difference between annualized management fees expected to be earned on new accounts and net assets contributed to existing accounts, less the annualized management fees lost on terminated accounts or net assets withdrawn from existing accounts, including equity-accounted Affiliates. The annualized management fees are calculated by multiplying the annual gross fee rate for the relevant account by the net assets gained in the account in the event of a positive flow, excluding any current or future market appreciation or depreciation, or the net assets lost in the account in the event of an outflow, excluding any current or future market appreciation or depreciation.
The annualized revenue impact of net flows metric is designed to provide investors with a better indication of the potential financial impact of net client cash flows, however it has certain limitations. For instance, it does not include assumptions for the next twelve months’ market appreciation or depreciation or investment performance associated with the assets gained or lost. Nor does it account for factors such as future client terminations or additional contributions or withdrawals over the next twelve months. Additionally, the basis points reported are fee rates based on the asset levels at the time of the transactions and do not consider the fact that client fee rates may change over the next twelve months. Under the agreement Mr. Ritchie is paid $41,667 a month. Mr. Ritchie received $43,056 in consulting fees in 2018, which are not included in the table above. As Mr. Ritchie is an NEO in 2018, his director fees and awards of ordinary shares are included in the 2018 Summary Compensation, Grants of Plan Based-Awards and Outstanding Equity at Fiscal Year End tables.
|
| |
| (6) | Following Mr. Roger’s resignation from the Board, he entered into a consulting agreement with the Board for a period of twelve months. Under the agreement Mr. Rogers is paid $25,000 a month. Mr. Rogers received $275,000 in consulting fees in 2018, which are not included in the table above. |
Stock Ownership Guidelines for our Directors
Our NEDs, who are not employed by a shareholder, are subject to a shareholding requirement of at least 500% of the cash board fee. Unvested share awards are excluded for the purposes of this calculation. There is no time period for
attaining this shareholding requirement but, until it is met, NEDs are required to retain 100% of their net gain shares (i.e., shares remaining after shares sold to pay taxes) at vesting.
Anti-Hedging and Anti-Pledging Policy for our Directors
NEDs are prohibited from hedging or pledging BrightSphere shares without prior Board approval. Board approval for any such action is only expected in extraordinary circumstances.
COMPENSATION COMMITTEE REPORT
The
following table summarizesCompensation Committee of our
asset flowsBoard has reviewed and
market appreciation/depreciationdiscussed the Compensation Discussion and Analysis required by
asset class for eachItem 402(b) of
Regulation S-K, which appears elsewhere in this Form 10-K/A, with our management. Based on this review and discussion, the
periods indicated: |
| | | | | | | | | | | |
| ($ in billions) | Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| U.S. equity | |
| | |
| | |
|
| Beginning balance | $ | 82.0 |
| | $ | 76.9 |
| | $ | 87.3 |
|
| Gross inflows | 4.9 |
| | 7.9 |
| | 5.6 |
|
| Gross outflows | (16.4 | ) | | (14.3 | ) | | (14.5 | ) |
| Net flows | (11.5 | ) | | (6.4 | ) | | (8.9 | ) |
| Market appreciation (depreciation) | 10.7 |
| | 11.0 |
| | (1.5 | ) |
| Other | — |
| | 0.5 |
| | — |
|
| Ending balance | $ | 81.2 |
| | $ | 82.0 |
| | $ | 76.9 |
|
| Average AUM | $ | 81.1 |
| | $ | 78.3 |
| | $ | 82.8 |
|
| Average AUM of consolidated Affiliates | 79.1 |
| | 76.5 |
| | 80.8 |
|
| | | | | | |
| Global / non-U.S. equity | |
| | |
| | |
|
| Beginning balance | $ | 96.4 |
| | $ | 84.8 |
| | $ | 84.0 |
|
| Gross inflows | 17.0 |
| | 14.1 |
| | 14.2 |
|
| Gross outflows | (16.0 | ) | | (9.6 | ) | | (10.8 | ) |
| Net flows | 1.0 |
| | 4.5 |
| | 3.4 |
|
| Market appreciation (depreciation) | 28.8 |
| | 6.7 |
| | (3.2 | ) |
| Other | — |
| | 0.4 |
| | 0.6 |
|
| Ending balance | $ | 126.2 |
| | $ | 96.4 |
| | $ | 84.8 |
|
Average AUM(1) | $ | 113.1 |
| | $ | 90.0 |
| | $ | 87.5 |
|
| | | | | | |
| Fixed income | | | | | |
| Beginning balance | $ | 13.9 |
| | $ | 13.8 |
| | $ | 15.2 |
|
| Gross inflows | 1.4 |
| | 1.2 |
| | 1.4 |
|
| Gross outflows | (2.7 | ) | | (2.1 | ) | | (2.2 | ) |
| Net flows | (1.3 | ) | | (0.9 | ) | | (0.8 | ) |
| Market appreciation (depreciation) | 0.9 |
| | 1.0 |
| | (0.3 | ) |
| Other | — |
| | — |
| | (0.3 | ) |
| Ending balance | $ | 13.5 |
| | $ | 13.9 |
| | $ | 13.8 |
|
Average AUM(1) | $ | 13.4 |
| | $ | 14.1 |
| | $ | 14.9 |
|
| | | | | | |
Alternatives(2)(3) | | | | | |
| Beginning balance | $ | 48.1 |
| | $ | 36.9 |
| | $ | 34.3 |
|
| Acquisition (removal) of Affiliates | (32.4 | ) | | 8.8 |
| | — |
|
| Gross inflows | 7.7 |
| | 6.7 |
| | 5.4 |
|
| Gross outflows | (1.1 | ) | | (1.6 | ) | | (1.8 | ) |
| Hard asset disposals | (0.8 | ) | | (3.9 | ) | | (2.4 | ) |
| Net flows | 5.8 |
| | 1.2 |
| | 1.2 |
|
| Market appreciation | 0.6 |
| | 2.0 |
| | 1.3 |
|
| Other | — |
| | (0.8 | ) | | 0.1 |
|
| Ending balance | $ | 22.1 |
| | $ | 48.1 |
| | $ | 36.9 |
|
| Average AUM | $ | 33.7 |
| | $ | 40.7 |
| | $ | 35.7 |
|
| Average AUM of consolidated Affiliates | 19.2 |
| | 10.2 |
| | 7.8 |
|
| | | | | | |
Total(2)(3) | | | | | |
| Beginning balance | $ | 240.4 |
| | $ | 212.4 |
| | $ | 220.8 |
|
| Acquisition (removal) of Affiliates | (32.4 | ) | | 8.8 |
| | — |
|
| Gross inflows | 31.0 |
| | 29.9 |
| | 26.6 |
|
| Gross outflows | (36.2 | ) | | (27.6 | ) | | (29.3 | ) |
| Hard asset disposals | (0.8 | ) | | (3.9 | ) | | (2.4 | ) |
| Net flows | (6.0 | ) | | (1.6 | ) | | (5.1 | ) |
| Market appreciation (depreciation) | 41.0 |
| | 20.7 |
| | (3.7 | ) |
| Other | — |
| | 0.1 |
| | 0.4 |
|
| Ending balance | $ | 243.0 |
| | $ | 240.4 |
| | $ | 212.4 |
|
| Average AUM | $ | 241.3 |
| | $ | 223.1 |
| | $ | 220.9 |
|
| Average AUM of consolidated Affiliates | 224.8 |
| | 190.8 |
| | 191.0 |
|
| | | | | | |
Annualized basis points: inflows(3) | 51.3 |
| | 41.9 |
| | 45.9 |
|
Annualized basis points: outflows(3) | 34.1 |
| | 36.3 |
| | 32.6 |
|
| Annualized revenue impact of net flows (in millions) | $ | 32.9 |
| | $ | 11.0 |
| | $ | 18.9 |
|
|
| |
| | Members of the BrightSphere Investment Group plc Compensation Committee Barbara Trebbi (Chair) Mary Elizabeth Beams Robert J. Chersi Reginald Love John Paulson |
67SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
| |
(1) | Average AUM equals average AUM of consolidated Affiliates. |
| |
(2) | We have removed Heitman from our AUM and cash flow metrics as of the beginning of the third quarter, 2017. Heitman stopped contributing to the Company's financial results as of November 30, 2017, therefore Heitman's December 31, 2017 AUM is not reflected in the table above. Heitman's AUM at November 30, 2017 was $33.3 billion. For the year ended December 31, 2016, $8.8 billion of acquisitions represents the investment in Landmark Partners. |
| |
(3) | Reflects the removal of Heitman in the third quarter of 2017. |
We also analyze our asset flows by client type and client location. Our client types include:
| |
i. | Sub-advisory, which includes assets managed for underlying mutual fund and variable insurance products which are sponsored by insurance companies and mutual fund platforms, where the end client is typically retail; |
| |
ii. | Institutional, which includes assets managed for public / government pension funds, including U.S. state and local government funds and non-U.S. sovereign wealth, local government and national pension funds; also includes corporate and union-sponsored pension plans; and |
| |
iii. | Retail / other, which includes assets managed for mutual funds sponsored by our Affiliates, defined contribution plans and accounts managed for high net worth clients. |
The following table summarizes our asset flows by client type for sets forth certain information with respect to the beneficial ownership of the Ordinary Shares as of April 16, 2019 by:
each of our directors;
each of our named executive officers;
each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of the periods indicated:Ordinary Shares; and
all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include Ordinary Shares issuable upon the exercise of options to purchase Ordinary Shares that are immediately exercisable or exercisable within 60 days after April 16, 2019. Except as otherwise indicated, all persons listed below have sole voting and investment power with respect to the Ordinary Shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.
Percentage ownership calculations for beneficial ownership are based on 91,865,152 Ordinary Shares outstanding as of April 16, 2019. Except as otherwise indicated in the table below, addresses of named beneficial owners are care of BrightSphere Inc., 200 Clarendon Street, 53rd Floor, Boston, Massachusetts 02116.
In computing the number of Ordinary Shares beneficially owned by a person and the percentage ownership of that person, we deemed outstanding Ordinary Shares that a person has the right to acquire within 60 days of April 16, 2019. We did not deem these Ordinary Shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Beneficial ownership representing less than 1% is denoted with an asterisk (*).
|
| | | | | | | | | | | |
| ($ in billions) | Years ended December 31, |
| | 2017(1) | | 2016 | | 2015 |
| Sub-advisory | |
| | |
| | |
|
| Beginning balance | $ | 75.9 |
| | $ | 69.0 |
| | $ | 74.1 |
|
| Acquisition (removal) of Affiliates | (3.0 | ) | | — |
| | — |
|
| Gross inflows | 8.7 |
| | 11.2 |
| | 7.8 |
|
| Gross outflows | (14.2 | ) | | (12.3 | ) | | (11.4 | ) |
| Net flows | (5.5 | ) | | (1.1 | ) | | (3.6 | ) |
| Market appreciation (depreciation) | 12.7 |
| | 7.7 |
| | (1.5 | ) |
| Other | — |
| | 0.3 |
| | — |
|
| Ending balance | $ | 80.1 |
| | $ | 75.9 |
| | $ | 69.0 |
|
| | | | | | |
| Institutional | |
| | |
| | |
|
| Beginning balance | $ | 154.1 |
| | $ | 133.8 |
| | $ | 137.2 |
|
| Acquisition (removal) of Affiliates | (29.0 | ) | | 8.6 |
| | — |
|
| Gross inflows | 20.6 |
| | 16.9 |
| | 16.6 |
|
| Gross outflows | (20.0 | ) | | (12.4 | ) | | (16.1 | ) |
| Hard asset disposals | (0.8 | ) | | (3.9 | ) | | (2.4 | ) |
| Net flows | (0.2 | ) | | 0.6 |
| | (1.9 | ) |
| Market appreciation (depreciation) | 27.0 |
| | 11.7 |
| | (1.9 | ) |
| Other | — |
| | (0.6 | ) | | 0.4 |
|
| Ending balance | $ | 151.9 |
| | $ | 154.1 |
| | $ | 133.8 |
|
| | | | | | |
| Retail / Other | |
| | |
| | |
|
| Beginning balance | $ | 10.4 |
| | $ | 9.6 |
| | $ | 9.5 |
|
| Acquisition (removal) of Affiliates | (0.4 | ) | | 0.2 |
| | — |
|
| Gross inflows | 1.7 |
| | 1.8 |
| | 2.2 |
|
| Gross outflows | (2.0 | ) | | (2.9 | ) | | (1.8 | ) |
| Net flows | (0.3 | ) | | (1.1 | ) | | 0.4 |
|
| Market appreciation (depreciation) | 1.3 |
| | 1.3 |
| | (0.3 | ) |
| Other | — |
| | 0.4 |
| | — |
|
| Ending balance | $ | 11.0 |
| | $ | 10.4 |
| | $ | 9.6 |
|
| | | | | | |
| Total | |
| | |
| | |
|
| Beginning balance | $ | 240.4 |
| | $ | 212.4 |
| | $ | 220.8 |
|
| Acquisition (removal) of Affiliates | (32.4 | ) | | 8.8 |
| | — |
|
| Gross inflows | 31.0 |
| | 29.9 |
| | 26.6 |
|
| Gross outflows | (36.2 | ) | | (27.6 | ) | | (29.3 | ) |
| Hard asset disposals | (0.8 | ) | | (3.9 | ) | | (2.4 | ) |
| Net flows | (6.0 | ) | | (1.6 | ) | | (5.1 | ) |
| Market appreciation (depreciation) | 41.0 |
| | 20.7 |
| | (3.7 | ) |
| Other | — |
| | 0.1 |
| | 0.4 |
|
| Ending balance | $ | 243.0 |
| | $ | 240.4 |
| | $ | 212.4 |
|
|
| | | | | | |
| | | Shares Beneficially Owned |
| Name of Beneficial Owner | | Number | | Percent |
| 5% Owners: | | | | |
Paulson & Co., Inc.(1) | | 20,000,552 |
| | 21.8 | % |
FMR LLC(2) | | 10,317,726 |
| | 11.2 | % |
| Directors and Named Executive Officers: | | | | |
Mary Elizabeth Beams(3) | | — |
| | * |
|
Stephen H. Belgrad(4) | | 288,939 |
| | * |
|
Robert J. Chersi(5) | | 22,273 |
| | * |
|
Christopher Hadley(4) | | 62,749 |
| | * |
|
Reginald Love(6) | | — |
| | * |
|
Daniel K. Mahoney(7) | | 8,382 |
| | * |
|
John Paulson(1) | | 20,000,552 |
| | 21.8 | % |
Suren Rana(8) | | 414,000 |
| | * |
|
Aidan J. Riordan(4) | | 200,236 |
| | * |
|
James J. Ritchie(4) | | 90,070 |
| | * |
|
Barbara Trebbi(9) | | — |
| | * |
|
Guang Yang(10) | | 1,380,000 |
| | 1.5 | % |
| All directors and current executive officers as a group (12 persons) | | 22,467,201 |
| | 24.5 | % |
| |
| (1) | ReflectsAmounts shown reflect the removalaggregate number of HeitmanOrdinary Shares held by Paulson & Co. based solely on information set forth on a Schedule 13D filed with the SEC on March 4, 2019 (the “Paulson 13D”). The Paulson 13D reported 20,000,552 Ordinary Shares held directly by Paulson & Co. Mr. Paulson, President, sole Director and Portfolio Manager of Paulson & Co., serves on the board of directors of the Company. Paulson & Co., an investment advisor that is registered under the Investment Advisors Act of 1940, furnishes investment advice to and manages the Funds (as defined in the third quarterPaulson 13D). In its role as investment advisor, or manager, as the case may be, Paulson & Co. possesses voting and investment power over the securities of 2017.the Company described in the Paulson 13D that are owned by the Funds. The address of Paulson & Co. Inc. is 1133 Avenue of the Americas, New York, NY 10036. |
It is a strategic objective to increase our percentage of assets under management sourced from non-U.S. clients. Our categorization by client location includes:
| |
i. | U.S.-based clients, where the contracting client is based in the United States, and |
| |
ii. | Non-U.S.-based clients, where the contracting client is based outside the United States. |
The following table summarizes asset flows by client location for each of the periods indicated:
|
| | | | | | | | | | | |
| ($ in billions) | Years ended December 31, |
| | 2017(1) | | 2016 | | 2015 |
| U.S. | |
| | |
| | |
|
| Beginning balance | $ | 191.6 |
| | $ | 171.8 |
| | $ | 176.6 |
|
| Acquisition (removal) of Affiliates | (25.5 | ) | | 7.4 |
| | — |
|
| Gross inflows | 22.5 |
| | 21.2 |
| | 20.6 |
|
| Gross outflows | (29.0 | ) | | (23.1 | ) | | (20.2 | ) |
| Hard asset disposals | (0.5 | ) | | (2.7 | ) | | (2.1 | ) |
| Net flows | (7.0 | ) | | (4.6 | ) | | (1.7 | ) |
| Market appreciation (depreciation) | 31.0 |
| | 16.9 |
| | (2.8 | ) |
| Other | — |
| | 0.1 |
| | (0.3 | ) |
| Ending balance | $ | 190.1 |
| | $ | 191.6 |
| | $ | 171.8 |
|
| | | | | | |
| Non-U.S. | |
| | |
| | |
|
| Beginning balance | $ | 48.8 |
| | $ | 40.6 |
| | $ | 44.2 |
|
| Acquisition (removal) of Affiliates | (6.9 | ) | | 1.4 |
| | — |
|
| Gross inflows | 8.5 |
| | 8.7 |
| | 6.0 |
|
| Gross outflows | (7.2 | ) | | (4.5 | ) | | (9.1 | ) |
| Hard asset disposals | (0.3 | ) | | (1.2 | ) | | (0.3 | ) |
| Net flows | 1.0 |
| | 3.0 |
| | (3.4 | ) |
| Market appreciation (depreciation) | 10.0 |
| | 3.8 |
| | (0.9 | ) |
| Other | — |
| | — |
| | 0.7 |
|
| Ending balance | $ | 52.9 |
| | $ | 48.8 |
| | $ | 40.6 |
|
| | | | | | |
| Total | |
| | |
| | |
|
| Beginning balance | $ | 240.4 |
| | $ | 212.4 |
| | $ | 220.8 |
|
| Acquisition (removal) of Affiliates | (32.4 | ) | | 8.8 |
| | — |
|
| Gross inflows | 31.0 |
| | 29.9 |
| | 26.6 |
|
| Gross outflows | (36.2 | ) | | (27.6 | ) | | (29.3 | ) |
| Hard asset disposals | (0.8 | ) | | (3.9 | ) | | (2.4 | ) |
| Net flows | (6.0 | ) | | (1.6 | ) | | (5.1 | ) |
| Market appreciation (depreciation) | 41.0 |
| | 20.7 |
| | (3.7 | ) |
| Other | — |
| | 0.1 |
| | 0.4 |
|
| Ending balance | $ | 243.0 |
| | $ | 240.4 |
| | $ | 212.4 |
|
| |
(1) | Reflects the removal of Heitman in the third quarter of 2017. |
At December 31, 2017, our total assets under management were $243.0 billion, an increase of $2.6 billion or 1.1% compared to $240.4 billion at December 31, 2016. The assets under management at December 31, 2016 represented an increase of $28.0 billion or 13.2% compared to $212.4 billion at December 31, 2015. In addition to the removal of Heitman, which accounted for a decrease in assets under management of $(32.4) billion, the change in assets under management during the year ended December 31, 2017 reflects net market appreciation of $41.0 billion and net outflows of $(6.0) billion. The change in assets under management during the year ended December 31, 2016 reflects net market appreciation of $20.7 billion, net outflows of $(1.6) billion and other movements of $0.1 billion, plus the acquisition of Landmark, which accounted for an increase in assets under management of $8.8 billion. Other movements in 2016 reflect the standardization of AUM definitions across Affiliates and mandates and the revaluation of certain hard assets. These changes align the definition of AUM with management fees charged to clients. The change in assets under management during the year ended December 31, 2015 reflects net market depreciation of $(3.7) billion, net outflows of $(5.1) billion and other movements of $0.4 billion. Other movements in 2015 primarily represent the AUM impact of the disposal of certain fund strategies offset by the consolidation of a joint venture.
For the year ended December 31, 2017, our net outflows were $(6.0) billion compared to net outflows of $(1.6) billion for the year ended December 31, 2016 and net outflows of $(5.1) billion for the year ended December 31, 2015. Hard asset disposals of $(0.8) billion, $(3.9) billion and $(2.4) billion are reflected in the net flows for the years ended December 31, 2017, 2016 and 2015, respectively. For the year ended December 31, 2017, the annualized revenue impact of the net flows was $32.9 million, as gross inflows of $31.0 billion during the year were into higher fee asset classes yielding an annualized fee rate of 51.3 bps, versus gross outflows and hard asset disposals in the same period of $(37.0) billion out of asset classes yielding an annualized fee rate of 34.1 bps. This is compared to the annualized revenue impact of net flows of $11.0 million for the year ended December 31, 2016 and $18.9 million for the year ended December 31, 2015.
U.S. GAAP Results of Operations
For the Years Ended December 31, 2017, 2016, and 2015
Our U.S. GAAP results of operations were as follows for the years ended December 31, 2017, 2016, and 2015.
|
| | | | | | | | | | | | | | | | | | | |
| | Years ended December 31, | | Increase (Decrease) |
| ($ in millions unless otherwise noted) | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
U.S. GAAP Statement of Operations(1) | |
| | |
| | |
| | |
| | |
|
| Management fees | $ | 858.0 |
| | $ | 659.9 |
| | $ | 637.2 |
| | $ | 198.1 |
| | $ | 22.7 |
|
| Performance fees | 26.5 |
| | 2.6 |
| | 61.8 |
| | 23.9 |
| | (59.2 | ) |
| Other revenue | 1.2 |
| | 0.9 |
| | 0.3 |
| | 0.3 |
| | 0.6 |
|
| Consolidated Funds’ revenue | 1.7 |
| | 0.1 |
| | — |
| | 1.6 |
| | 0.1 |
|
| Total revenue | 887.4 |
| | 663.5 |
| | 699.3 |
| | 223.9 |
| | (35.8 | ) |
| Compensation and benefits | 682.8 |
| | 397.4 |
| | 412.8 |
| | 285.4 |
| | (15.4 | ) |
| General and administrative | 112.9 |
| | 98.3 |
| | 88.2 |
| | 14.6 |
| | 10.1 |
|
| Amortization of acquired intangibles | 6.6 |
| | 2.6 |
| | 0.2 |
| | 4.0 |
| | 2.4 |
|
| Depreciation and amortization | 11.7 |
| | 9.4 |
| | 6.9 |
| | 2.3 |
| | 2.5 |
|
| Consolidated Funds’ expense | 2.4 |
| | 0.2 |
| | — |
| | 2.2 |
| | 0.2 |
|
| Total expenses | 816.4 |
| | 507.9 |
| | 508.1 |
| | 308.5 |
| | (0.2 | ) |
| Operating income | 71.0 |
| | 155.6 |
| | 191.2 |
| | (84.6 | ) | | (35.6 | ) |
| Investment income | 27.4 |
| | 17.2 |
| | 13.0 |
| | 10.2 |
| | 4.2 |
|
| Interest income | 0.8 |
| | 0.4 |
| | 0.2 |
| | 0.4 |
| | 0.2 |
|
| Interest expense | (24.5 | ) | | (11.3 | ) | | (3.1 | ) | | (13.2 | ) | | (8.2 | ) |
| Revaluation of DTA deed | 51.8 |
| | — |
| | — |
| | 51.8 |
| | — |
|
| Net consolidated Funds’ investment gain (loss) | 15.5 |
| | (1.1 | ) | | — |
| | 16.6 |
| | (1.1 | ) |
| Income from continuing operations before taxes | 142.0 |
| | 160.8 |
| | 201.3 |
| | (18.8 | ) | | (40.5 | ) |
| Income tax expense | 132.8 |
| | 40.8 |
| | 46.6 |
| | 92.0 |
| | (5.8 | ) |
| Income from continuing operations | 9.2 |
| | 120.0 |
| | 154.7 |
| | (110.8 | ) | | (34.7 | ) |
| Gain (loss) on disposal of discontinued operations, net of tax | (0.1 | ) | | 6.2 |
| | 0.8 |
| | (6.3 | ) | | 5.4 |
|
| Net income (loss) | 9.1 |
| | 126.2 |
| | 155.5 |
| | (117.1 | ) | | (29.3 | ) |
| Net income (loss) attributable to non-controlling interests in consolidated Funds | 4.9 |
| | (0.2 | ) | | — |
| | 5.1 |
| | (0.2 | ) |
| Net income attributable to controlling interests | $ | 4.2 |
| | $ | 126.4 |
| | $ | 155.5 |
| | $ | (122.2 | ) | | $ | (29.1 | ) |
| Basic earnings per share ($) | $ | 0.04 |
| | $ | 1.05 |
| | $ | 1.29 |
| | $ | (1.01 | ) | | $ | (0.24 | ) |
| Diluted earnings per share ($) | 0.04 |
| | 1.05 |
| | 1.29 |
| | (1.01 | ) | | (0.24 | ) |
| Weighted average basic shares outstanding | 110.7 |
| | 119.2 |
| | 120.0 |
| | (8.5 | ) | | (0.8 | ) |
| Weighted average diluted ordinary shares outstanding | 111.4 |
| | 119.5 |
| | 120.5 |
| | (8.1 | ) | | (1.0 | ) |
U.S. GAAP operating margin (2) | 8 | % | | 23 | % | | 27 | % | | (1545) bps |
| | (389) bps |
|
| |
(1) | Certain Funds have been consolidated due to our seed capital or co-investments in the Funds, including seed capital investments purchased from OM plc in September of 2016 and July 2017. |
| |
(2) | U.S. GAAP operating margin equals operating income from continuing operations divided by total revenue. |
The following table reconciles our net income attributable to controlling interests to our pre-tax income from continuing operations attributable to controlling interests: |
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| U.S. GAAP Statement of Operations | |
| | |
| | |
|
| Net income attributable to controlling interests | $ | 4.2 |
| | $ | 126.4 |
| | $ | 155.5 |
|
| Exclude: (Gain) loss on discontinued operations attributable to controlling interests | 0.1 |
| | (6.2 | ) | | (0.8 | ) |
| Net income from continuing operations attributable to controlling interests | 4.3 |
| | 120.2 |
| | 154.7 |
|
| Add: Income tax expense | 132.8 |
| | 40.8 |
| | 46.6 |
|
| Pre-tax income from continuing operations attributable to controlling interests | $ | 137.1 |
| | $ | 161.0 |
| | $ | 201.3 |
|
U.S. GAAP Revenues
Our U.S. GAAP revenues principally consist of:
| |
i. | management fees earned based on our overall weighted average fee rate charged to our clients and the level of assets under management; |
| |
ii. | performance fees earned or management fee adjustments when our Affiliates’ investment performance over agreed time periods for certain clients has differed from pre-determined hurdles; |
| |
iii. | other revenue, consisting primarily of marketing, distribution and consulting services; and |
| |
iv. | revenue from consolidated Funds, a portion of which is attributable to the holders of non-controlling interests in consolidated Funds. |
Management Fees
Our management fees are a function of the fee rates our Affiliates charge to their clients, which are typically expressed in basis points, and the levels of our assets under management.
Excluding assets managed by our equity-accounted Affiliates, average basis points earned on average assets under management were 38.2 bps for the year ended December 31, 2017, 34.6 bps for the year ended December 31, 2016 and 33.4 bps for the year ended December 31, 2015. The greatest driver of increases or decreases in this average fee rate is changes in the mix of our assets under management caused by net inflows or outflows in certain asset classes or disproportionate market movements. Additionally, average yields in the years ended December 31, 2017 and 2016 were also positively impacted by the higher yields earned on alternative assets managed by Landmark.
Our average basis points by asset class (including only consolidated Affiliates that are included in management fee revenue, unless indicated) over each of the periods indicated were:
|
| | | | | | | | | | | | | | | | | | | | |
($ in millions, except AUM data in billions and fee rates in basis points earned on AUM) | Years ended December 31, |
| 2017 | | 2016 | | 2015 |
| Revenue | | Basis Pts | | Revenue | | Basis Pts | | Revenue | | Basis Pts |
| U.S. equity | $ | 192.9 |
| | 24 |
| | $ | 187.7 |
| | 25 |
| | $ | 193.6 |
| | 24 |
|
| Global / non-U.S. equity | 465.6 |
| | 41 |
| | 374.1 |
| | 42 |
| | 366.2 |
| | 42 |
|
| Fixed income | 27.8 |
| | 21 |
| | 29.1 |
| | 21 |
| | 31.4 |
| | 21 |
|
| Alternatives | 171.7 |
| | 89 |
| | 69.0 |
| | 67 |
| | 46.0 |
| | 58 |
|
U.S. GAAP management fee revenue & weighted average fee rate on average AUM of consolidated Affiliates(1) | $ | 858.0 |
| | 38.2 |
| | $ | 659.9 |
| | 34.6 |
| | $ | 637.2 |
| | 33.4 |
|
| Average AUM excluding equity-accounted Affiliates | $ | 224.8 |
| | |
| | $ | 190.8 |
| | |
| | $ | 191.0 |
| | |
|
Average AUM including equity-accounted Affiliates & weighted average fee rate(2) | $ | 241.3 |
| | 38.2 |
| | $ | 223.1 |
| | 35.4 |
| | $ | 220.9 |
| | 34.3 |
|
| |
(1) | Amounts shown are equivalent to ENI management fee revenue. (See “ENI Revenues.”) |
| |
(2) | Average AUM including equity-accounted Affiliates excludes Heitman as of the beginning of the third quarter, 2017. |
Year ended December 31, 2017 compared to year ended December 31, 2016: Management fees increased $198.1 million, or 30.0%, from $659.9 million for the year ended December 31, 2016 to $858.0 million for the year ended December 31, 2017. The increase was primarily attributable to higher overall levels of assets under management as a result of positive markets, shifts into higher fee rate products, and incremental revenue from the Landmark transaction including subsequent increases in assets under management. Average assets under management excluding equity-accounted Affiliates increased 17.8%, from $190.8 billion for the year ended December 31, 2016 to $224.8 billion for the year ended December 31, 2017.
Overall, the increase in management fee revenue is reflective of the increases in basis point yields of our assets under management. Excluding equity-accounted Affiliates, the weighted average fee rate earned on our average assets under management was 38.2 basis points in 2017 and 34.6 basis points in 2016, with the increase driven mostly by the mix of flows and market movements in and out of assets with varying fee rates as well as the higher fee-rate assets under management added as a result of the Landmark transaction. Compared to the twelve months ended December 31, 2016, the combined share of higher fee global/non-U.S. equity and alternative assets, excluding equity-accounted Affiliates, increased by approximately 6%, to 59% of average assets, while the mix of U.S. equity and fixed income decreased approximately (6)% to 41% of average assets.
Year ended December 31, 2016 compared to year ended December 31, 2015: Management fees increased $22.7 million, or 3.6%, from $637.2 million for the year ended December 31, 2015 to $659.9 million for the year ended December 31, 2016. The increase was attributable to increases in the weighted average fee rate earned on the average AUM of consolidated Affiliates as discussed below.
Overall, the increase in management fee revenue is reflective of the increases in basis point yields of our assets under management. Excluding equity-accounted Affiliates, the weighted average fee rate earned on our average assets under management was 34.6 basis points in 2016 and 33.4 basis points in 2015 with the increase driven mostly by the mix of flows and market movements in and out of assets with varying fee rates as well as the higher fee-rate assets under management added as a result of the Landmark transaction. Compared to the twelve months ended December 31, 2016, the combined share of higher fee global/non-U.S. equity and alternative assets, excluding equity-accounted Affiliates, increased by approximately 3%, to 53% of average assets, while the mix of U.S. equity and fixed income decreased approximately (3)% to 47% of average assets. Approximately 1.5% of this shift was driven by the addition of Landmark’s $8.8 billion of alternative assets under management, while the remainder of this was due to the impact of market movements and flows.
Performance Fees
Approximately $55.4 billion, or 23% of our AUM in consolidated Affiliates at December 31, 2017, are in accounts with incentive fee or carried interest features, where we participate in such a fee. Included below is a breakdown of our AUM from consolidated Affiliates, broken out between AUM subject to performance fees or carried interest and that subject only to management fees. Our alternative products subject to performance fees or carried interest earn these performance fees upon exceeding high-water mark performance thresholds or outperforming a hurdle rate. Conversely, the separate accounts/other products, which primarily earn management fees, are potentially subject to performance adjustment up or down based on investment performance versus benchmark. For each of these categories and in total, we have indicated in the table below the ratio of performance fees or carried interest relative to total management fees and performance fees (together, total fees).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | AUM of consolidated Affiliates at December 31, 2017 ($ in billions) | | Management fees for the twelve months ended December 31, 2017 ($ in millions) | | Performance fees for the twelve months ended December 31, 2017 ($ in millions) |
| Category | | Total | | AUM of accounts without perfor-mance fees | | AUM of accounts with perfor-mance fees | | Total | | Accounts without perfor-mance fees | | Accounts with perfor-mance fees | | Total | | As a % of total category fees among accounts with perfor-mance fees | | As a % of total category fees (among all accounts) |
| Alternative products | | $ | 22.1 |
| | $ | 13.2 | * | | $ | 8.9 |
| | $ | 171.7 |
| | $ | 113.7 |
| | $ | 58.0 |
| | $ | 12.1 |
| | 17.3 | % | | 6.6 | % |
| Separate accounts/other products | | 218.8 |
| | 172.3 |
| | 46.5 |
| | 686.3 |
| | 586.8 |
| | 99.5 |
| | 14.4 |
| | 12.6 | % | | 2.1 | % |
| Total | | $ | 240.9 |
| | $ | 185.5 |
| | $ | 55.4 |
| | $ | 858.0 |
| | $ | 700.5 |
| | $ | 157.5 |
| | $ | 26.5 |
| | 14.4 | % | | 3.0 | % |
| |
* | Certain legacy Landmark Funds include a carried interest component in which we do not participate and which is not consolidated in our financial results. A majority of the $13.2 billion shown here includes such Funds managed by Landmark and any carried interest earned by these Funds is not attributable to us. |
In aggregate, we recognized $26.5 million in performance fees for the year ended December 31, 2017. Included in this number were $(12.0) million of negative performance fees, calculated in total by each account that had net negative performance fees on a year-to-date basis. The negative performance fee generally represents performance adjustments in certain sub-advisory accounts. Gross performance fees earned, excluding performance fees at equity-accounted Affiliates, were 3.0% of total fees in 2017, 0.4% of total fees in 2016, and 2.1% of total fees in 2015 (8.8% including the 2015 non-recurring performance fee). Performance fees are typically shared with our Affiliate key employees through various contractual compensation and profit-sharing arrangements, as illustrated in the following table:
|
| | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | | | | | 2015 |
| ($ in millions) | 2017 | | 2016 | | Including the non-recurring performance fee | | Excluding the non-recurring performance fee |
| Gross performance fees | $ | 26.5 |
| | $ | 2.6 |
| | $ | 61.8 |
| | $ | 13.7 |
|
Net performance fees(1) | $ | 16.7 |
| | $ | 1.8 |
| | $ | 26.7 |
| | $ | 7.6 |
|
Percentage of performance fees accruing to OMAM(2) | 63.0 | % | | 69.2 | % | | 43.2 | % | | 55.5 | % |
Gross performance fees as a percentage of total fees(3) | 3.0 | % | | 0.4 | % | | 8.8 | % | | 2.1 | % |
| |
(1) | Net performance fees are shown after the effect of contractual variable compensation and distributions to key employees of the Affiliates and represent the amount of the performance fee directly attributable to our shareholders. |
| |
(2) | Reflects net performance fees as a percentage of gross performance fees. |
| |
(3) | Total fees, comprised of management fees and performance fees, excluding the effect of consolidated Funds were $884.5 million for the year ended December 31, 2017, $662.5 million for the year ended December 31, 2016, and $650.9 million (or $699.0 million including the non-recurring performance fee) for the year ended December 31, 2015. |
Year ended December 31, 2017 compared to year ended December 31, 2016: Performance fees increased $23.9 million, or 919.2%, from $2.6 million for the year ended December 31, 2016 to $26.5 million for the year ended December 31, 2017. Performance fees are variable and are contractually triggered based on investment performance results over agreed upon time periods. The increase was primarily attributable to a performance fee earned on an alternative product in the second quarter and strong performance from global/non-U.S. equity for the fourth quarter.
Year ended December 31, 2016 compared to year ended December 31, 2015: Performance fees decreased $(59.2) million, or (95.8)% from $61.8 million for the year ended December 31, 2015 to $2.6 million for the year ended December 31, 2016. In the second quarter of 2015, we recorded a non-recurring gross performance fee of $48.1 million related to the sale and liquidation of a fund that resulted in a significant gain to the investor from the initial investment. The unique characteristics of this fee, including its size and the exceptional investment performance of the underlying product, is particular to this liquidated fund and it therefore is unrepresentative of our recurring economics. Excluding the non-recurring performance fee received in the second quarter of 2015, performance fees decreased $(11.1) million, or (81.0)% from $13.7 million for the year ended December 31, 2015 to $2.6 million for the year ended December 31, 2016. This decrease is a result of under-performance versus investment benchmarks and management fee adjustments, including net downward performance fee adjustments based on investment performance versus benchmark in separate accounts/other products. Performance fees are variable and are contractually triggered based on investment performance results over agreed upon time periods.
The liquidation of an alternative product may result in the recognition of a performance fee. With respect to liquidations likely to occur in the near term, we do not expect to receive any net performance fees that would be material to our operating results. These projections are based on market conditions and investment performance as of December 31, 2017.
Other Revenue
Year ended December 31, 2017 compared to year ended December 31, 2016: Other revenue increased $0.3 million, or 33.3%, from $0.9 million for the year ended December 31, 2016 to $1.2 million for the year ended December 31, 2017. The increase was primarily due to consulting services offered by an Affiliate in 2017.
Year ended December 31, 2016 compared to year ended December 31, 2015: Other revenue increased $0.6 million, or 200.0%, from $0.3 million for the year ended December 31, 2015 to $0.9 million for the year ended December 31, 2016. The increase was primarily due to settlement proceeds received by an Affiliate in 2016.
U.S. GAAP Expenses
Our U.S. GAAP expenses principally consist of:
| |
i. | compensation paid to our investment professionals and other employees, including base salary, benefits, sales-based compensation, variable compensation, Affiliate distributions, re-valuation of key employee owned Affiliate equity and profit interests, and the amortization of acquisition-related consideration and pre-acquisition employee equity; |
| |
ii. | general and administrative expenses; |
| |
iii. | amortization of acquired intangible assets; |
| |
iv. | depreciation and amortization charges; and |
| |
v. | expenses of consolidated Funds, the net cost of which is attributable to the holders of non-controlling interests. |
Compensation and Benefits Expense
Our most significant category of expense is compensation and benefits awarded to our and our Affiliates’ employees. The following table presents the components of U.S. GAAP compensation expense for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
Fixed compensation and benefits(1) | $ | 172.9 |
| | $ | 146.4 |
| | $ | 134.2 |
|
Sales-based compensation(2) | 18.6 |
| | 17.2 |
| | 19.7 |
|
Compensation related to restructuring expenses(3) | — |
| | — |
| | 0.6 |
|
Variable compensation(4) | 252.2 |
| | 172.7 |
| | 201.0 |
|
Affiliate key employee distributions(5) | 73.1 |
| | 41.7 |
| | 38.8 |
|
Non-cash Affiliate key employee equity revaluations(6)(7) | 95.4 |
| | (7.1 | ) | | 18.5 |
|
Acquisition-related consideration and pre-acquisition employee equity(8) | 70.6 |
| | 26.5 |
| | — |
|
| Total U.S. GAAP compensation and benefits expense | $ | 682.8 |
| | $ | 397.4 |
| | $ | 412.8 |
|
| |
(1) | Fixed compensation and benefits include base salaries, payroll taxes and the cost of benefit programs provided. For the year ended December 31, 2017, $172.4 million of fixed compensation and benefits (of the $172.9 million above) is included within economic net income, which excludes the compensation and benefits associated with the CEO transition costs. |
| |
| (2) | Sales-based compensationBased solely on information set forth in Amendment No. 5 to Schedule 13G filed with the SEC on March 11, 2019 by FMR LLC on behalf of itself and Abigail P. Johnson. FMR LLC reported sole voting power over 1,611,316 Ordinary Shares, shared voting power over none of the Ordinary Shares and sole dispositive power over 10,317,726 Ordinary Shares. Abigail P. Johnson reported sole voting power over none of the Ordinary Shares, shared voting power over none of the Ordinary Shares and sole dispositive power over 10,317,726 of the Ordinary Shares. The Amendment No. 5 to Schedule 13G further states that members of the Johnson family, including Abigail P. Johnson, are the predominant owners, directly or through trusts, of Series B voting common shares of FMR LLC, representing 49% of the voting power of FMR LLC. The Johnson family group and all other Series B shareholders have entered into a shareholders’ voting agreement under which all Series B voting common shares will be voted in accordance with the majority vote of Series B voting common shares. Accordingly, through their ownership of voting common shares and the execution of the shareholders’ voting agreement, members of the Johnson family may be deemed, under the Investment Company Act of 1940, to form a controlling group with respect to FMR LLC. Neither FMR LLC nor Abigail P. Johnson has the sole power to vote or direct the voting of the shares owned directly by the various investment companies registered under the Investment Company Act (“Fidelity Funds”) advised by Fidelity Management & Research Company (“FMR Co”), a wholly owned subsidiary of FMR LLC, which power resides with the Fidelity Funds’ Boards of Trustees. FMR Co carries out the voting of the shares under written guidelines established by the Fidelity Funds’ Boards of Trustees. The address of FMR LLC is paid to our and our Affiliates’ sales and distribution teams and represents compensation earned by our sales professionals, paid over a multi-year period, related to revenue earned on new sales. Its variability is based upon the structure of sales-based compensation due on inflows of assets under management and market-based movement in both current and prior periods.245 Summer Street, Boston, Massachusetts 02210. |
| |
| (3) | Restructuring costs incurred in continuing operations represent an exit fromOn November 26, 2018, Ms. Beams was granted 4,968 restricted share units of the Company. Each restricted share unit represents a distinct product or line of business. |
| |
(4) | Variable compensation is contractually set and calculated individually at each Affiliate, plus Center bonuses. Variable compensation is usually awarded based on a contractual percentage of each Affiliate’s ENI profits before variable compensation and may be paid in the form of cash or non-cash Affiliate equity or profit interests. In Affiliates with an agreed split of performance fees between Affiliate employees and OMAM, the Affiliates’right to receive one ordinary share of performance fees is allocated entirely to variable compensation. Center variable compensation includes cashthe Company. The restricted share units vest upon the earlier of June 20, 2019 and OMAM equity. Non-cash variable compensation awards typically vest over several years and are recognized as compensation expense over that service period. The variable compensation ratio at each Affiliate, calculated as variable compensation divided by ENI earnings before variable compensation, will typically be between 25% and 35%. |
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| Cash variable compensation | $ | 226.5 |
| | $ | 147.5 |
| | $ | 177.2 |
|
| Non-cash equity-based award amortization | 25.7 |
| | 25.2 |
| | 23.8 |
|
Total variable compensation(a)(b) | $ | 252.2 |
| | $ | 172.7 |
| | $ | 201.0 |
|
| |
(a) | For the year ended December 31, 2017, $243.4 million of variable compensation expense (of the $252.2 million above) is included within economic net income, which excludes the variable compensation associated with the CEO transition costs. |
| |
(b) | For the year ended December 31, 2015, $174.0 million of variable compensation expense (of the $201.0 million above) is included within economic net income variable compensation, which separates the variable compensation attributable to the non-recurring performance fee. |
| |
(5) | Affiliate key employee distributions represent the share of Affiliate profits after variable compensation that is attributable to Affiliate key employee equity and profit interests holders, according to their ownership interests. The Affiliate key employee distribution ratio at each Affiliate is calculated as Affiliate key employee distributions divided by ENI operating earnings at that Affiliate. At certain Affiliates with tiered equity structures, OMUS and other classes of employee equity holders are entitled to an initial proportionate preference over profits after variable compensation, structured such that before a preference threshold is reached, there would be no required key employee distributions to the tiered equity holders, whereas for profits above the threshold the key employee distribution amount to the tiered equity holders would be calculated based on the tiered key employee ownership percentages. Based on current economic arrangements, employee distributions range from approximately 20% to 40% of marginal ENI operating earnings at each of our consolidated Affiliates. |
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(6) | Non-cash Affiliate key employee equity revaluations represent changes in the value of Affiliate equity and profit interests held by Affiliate key employees. These ownership interests may in certain circumstances be repurchased by OMUS at a value based on a pre-determined fixed multiple of trailing earnings and as such this value is carried on our balance sheet as a liability. However, any equity or profit interests repurchased by OMUS can be used to fund a portion of future variable compensation awards, resulting in savings in cash variable compensation that offset the negative cash effect of repurchasing the equity. Our Affiliate equity and profit interest plans have been designed to ensure OMUS is not required to repurchase more equity than we can reasonably recycle through variable compensation awards in any given twelve month period. OMUS may also choose to retain repurchased Affiliate equity or profit interests, entitling us to an additional share of future Affiliate earnings that represents an unrecognized economic asset to us. |
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(7) | Included in non-cash Affiliate key employee equity revaluations are revaluations as a resultdate of the Landmark transaction related to contingent consideration amounting to $25.9 million for the year ended December 31, 2017 and $0.0 million for the year ended December 31, 2016, along with the revaluations of Landmark employee equity owned pre-acquisition amounting to $24.3 million for the year ended December 31, 2017 and $(0.5) million for the year ended December 31, 2016. |
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(8) | Acquisition-related consideration and pre-acquisition employee equity represents the amortization of acquisition-related contingent consideration created as a result2019 annual general meeting of the Landmark transaction amounting to $37.1 million for the year ended December 31, 2017 and $13.9 million for the year ended December 31, 2016, along with the amortization of employee equity owned pre-acquisition amounting to $33.5 million for the year ended December 31, 2017 and $12.6 million for the year ended December 31, 2016. These items have been included in U.S. GAAP compensation expense as a result of ongoing service requirements for employee recipients. |
Fluctuations in compensation and benefits expense for the periods presented are discussed below.
Year ended December 31, 2017 compared to year ended December 31, 2016: Compensation and benefits expense increased $285.4 million, or 71.8%, from $397.4 million for the year ended December 31, 2016 to $682.8 million for the year ended December 31, 2017. Fixed compensation and benefits increased $26.5 million, or 18.1%, from $146.4 million for the year ended December 31, 2016 to $172.9 million for the year ended December 31, 2017. This increase reflects the effect of the Landmark acquisition as well as new hires, CEO succession, and annual cost of living increases. Variable compensation increased $79.5 million, or 46.0%, from $172.7 million for the year ended December 31, 2016 to $252.2 million for the year ended December 31, 2017 due to the higher pre-variable compensation earnings, in part reflecting the effect of the Landmark transaction as well as severance paid to our former CEO and former Head of Global Distribution. Sales-based compensation increased $1.4 million, or 8.1%, from $17.2 million for the year ended December 31, 2016 to $18.6 million for the year ended December 31, 2017, as a result of the structure of sales-based compensation due to the timing of asset inflows triggering sales-based compensation in both current and prior periods. Affiliate key employee distributions increased $31.4 million, or 75.3%, from $41.7 million for the year ended December 31, 2016 to $73.1 million for the year ended December 31, 2017 as a result of higher underlying operating earnings, the levered structure of distributions at certain Affiliates, and the effect of the Landmark transaction, as Landmark employees own 40% of their business. Revaluations of Affiliate equity increased $102.5 million, reflecting revaluations of key employee ownership interests at certain Affiliates, and Landmark in particular, as the value of Affiliate equity decreased $(7.1) million for the year ended December 31, 2016 and increased $95.4 million for the year ended December 31, 2017. Acquisition-related consideration and pre-acquisition equity was $70.6 million for the year ended December 31, 2017 an increase of $44.1 million, or 166.4% compared to $26.5 million for the year ended December 31, 2016, and represents amortization of the value of contingent consideration and employee-owned equity, related to Landmark, recorded as compensation under U.S. GAAP due to certain service requirements associated with the arrangements. The increase in compensation resulting from the amortization of acquisition-related consideration and pre-acquisition employee equity, as well as the non-cash Affiliate key employee equity revaluations and increased variable compensation, all of which were impacted by the Landmark transaction, were the primary reasons for the reduction of our U.S. GAAP operating margin.
Year ended December 31, 2016 compared to year ended December 31, 2015: Compensation and benefits expense decreased $(15.4) million, or (3.7)%, from $412.8 million for the year ended December 31, 2015 to $397.4 million for the year ended December 31, 2016. Fixed compensation and benefits increased $12.2 million, or 9.1%, from $134.2 million for the year ended December 31, 2015 to $146.4 million for the year ended December 31, 2016. This increase reflects the effect of the Landmark acquisition as well as new hires and annual cost of living increases. Variable compensation decreased $(28.3) million, or (14.1)%, from $201.0 million for the year ended December 31, 2015 to $172.7 million for the year ended December 31, 2016, primarily due to the variable compensation associated with the non-recurring performance fee in 2015. Variable compensation excluding the non-recurring performance fee decreased $(1.3) million, or (0.7)%, from $174.0 million for the year ended December 31, 2015, to $172.7 million for the year ended December 31, 2016, which was attributable to lower pre-variable compensation earnings exclusive of the 2015 non-recurring performance fee, partially offset by the positive earnings impact of Landmark. Sales-based compensation decreased $(2.5) million, or (12.7)%, from $19.7 million for the year ended December 31, 2015 to $17.2 million for the year ended December 31, 2016, as a result of the timing and structure of sales-based compensation due. Affiliate key employee distributions increased $2.9 million, or 7.5%, from $38.8 million for the year ended December 31, 2015 to $41.7 million for the year ended December 31, 2016 primarily as a result of the Landmark transaction (as Landmark employees own 40% of their business), offset by lower earnings before Affiliate key employee distributions. Revaluations of Affiliate equity decreased $(25.6) million, reflecting revaluations of key employee ownership interests at certain Affiliates, as the value of Affiliate equity increased $18.5 million for the year ended December 31, 2015 and decreased $(7.1) million for the year ended December 31, 2016. Acquisition-related consideration and pre-acquisition equity was $26.5 million for the year ended December 31, 2016 and represents amortization of the value of contingent consideration and employee-owned equity, related to Landmark, recorded as compensation under U.S. GAAP due to certain service requirements associated with the arrangements.
General and Administrative Expense
Year ended December 31, 2017 compared to year ended December 31, 2016: General and administrative expense increased $14.6 million, or 14.9%, from $98.3 million for the year ended December 31, 2016 to $112.9 million for the year ended December 31, 2017. The increases in general and administrative expenses primarily reflect new initiatives and the impact of Landmark, offset by efficiencies of scale.
Year ended December 31, 2016 compared to year ended December 31, 2015: General and administrative expense increased $10.1 million, or 11.5%, from $88.2 million for the year ended December 31, 2015 to $98.3 million for the year ended December 31, 2016, driven by systems costs, new initiatives and the impact of Landmark.
Amortization of Acquired Intangibles Expense
Year ended December 31, 2017 compared to year ended December 31, 2016: Amortization of acquired intangibles expense increased $4.0 million, or 153.8%, from $2.6 million for the year ended December 31, 2016 to $6.6 million for the year ended December 31, 2017. The increase reflects the amortization of intangible assets acquired in the Landmark transaction.
Year ended December 31, 2016 compared to year ended December 31, 2015: Amortization of acquired intangibles expense increased from $0.2 million for the year ended December 31, 2015 to $2.6 million for the year ended December 31, 2016. Upon acquiring Landmark, the Company recorded $85.0 million of definite-lived intangible assets, the amortization of which is reflected in the 2016 activity.
Depreciation and Amortization Expense
Year ended December 31, 2017 compared to year ended December 31, 2016: Depreciation and amortization expense increased $2.3 million, or 24.5%, from $9.4 million for the year ended December 31, 2016 to $11.7 million for the year ended December 31, 2017. The increase was primarily related to additional fixed asset and technology investments in the business.
Year ended December 31, 2016 compared to year ended December 31, 2015: Depreciation and amortization expense increased $2.5 million, or 36.2%, from $6.9 million for the year ended December 31, 2015 to $9.4 million for the year ended December 31, 2016. The increase was primarily related to additional fixed asset and technology investments in the business in 2016, as well as an office move at an Affiliate.
U.S. GAAP Other Non-Operating Items of Income and Expense
Other non-operating items of income and expense consist of:
In the year ended December 31, 2017, we recorded $51.8 million of income associated with the revaluation of our DTA deed with OM plc, discussed further in “—U.S. GAAP Income Tax Expense” below.
Investment Income
Year ended December 31, 2017 compared to year ended December 31, 2016: Investment income increased $10.2 million, or 59.3%, from $17.2 million for the year ended December 31, 2016 to $27.4 million for the year ended December 31, 2017, primarily due to higher returns on seed capital investments following the purchase of approximately $40 million in seed capital from OM plc in September 2016 and approximately $63 million in July 2017, somewhat offset by lower earnings from our equity-accounted Affiliates which decreased $(0.6) million, or (4.0)%, from $15.1 million for the year ended December 31, 2016 to $14.5 million for the year ended December 31, 2017. In August 2017, the Company agreed in principle to sell its stake in Heitman LLC to Heitman’s management. Pursuant to this term sheet, the Company entered into a redemption agreement on November 17, 2017. Heitman continued to contribute to the Company’s financial results of operations through November 30, 2017 and the transaction closed on January 5, 2018. Heitman contributed $12.0 million of our investment income in 2017 and $12.6 million in 2016.
Year ended December 31, 2016 compared to year ended December 31, 2015: Investment income increased $4.2 million, or 32.3%, from $13.0 million for the year ended December 31, 2015 to $17.2 million for the year ended December 31, 2016, primarily due to higher earnings on equity-accounted Affiliates which increased $2.4 million, or 18.9%, from $12.7 million for the year ended December 31, 2015 to $15.1 million for the year ended December 31, 2016, combined with higher returns on co-investments and seed capital investments following the purchase of approximately $40 million in seed capital from OM plc in September 2016.
Interest Income
Year ended December 31, 2017 compared to year ended December 31, 2016: Interest income increased $0.4 million, or 100.0%, from $0.4 million for the year ended December 31, 2016 to $0.8 million for the year ended December 31, 2017, principally due to higher average cash balances in 2017.
Year ended December 31, 2016 compared to year ended December 31, 2015: Interest income increased $0.2 million, or 100.0% from $0.2 million for the year ended December 31, 2015 to $0.4 million for the year ended December 31, 2016, principally due to higher average cash balances for a portion of the year.
Interest Expense
Year ended December 31, 2017 compared to year ended December 31, 2016: Interest expense increased $13.2 million, or 116.8%, from $11.3 million for the year ended December 31, 2016 to $24.5 million for the year ended December 31, 2017, reflecting a full year of interest expense in 2017 and a partial year of interest expense in 2016 related to the issuance of $400 million in long-term bonds in July 2016.
Year ended December 31, 2016 compared to year ended December 31, 2015: Interest expense increased $8.2 million, or 264.5%, from $3.1 million for the year ended December 31, 2015 to $11.3 million for the year ended December 31, 2016, reflecting the issuance of $400 million in long-term bonds in July 2016.
U.S. GAAP Income Tax Expense
Our effective tax rate has been impacted by changes in reserves for uncertain tax positions, the mix of income earned in the United States versus lower-taxed foreign jurisdictions and benefits from intercompany financing arrangements. In addition, tax law changes in both the U.S. and U.K. have significantly influenced the effective tax rate in the fourth quarter of 2017. Our effective tax rate could be impacted in the future by these items as well as further changes in tax laws and regulations in jurisdictions in which we operate.
Year ended December 31, 2017 compared to year ended December 31, 2016: Income tax expense increased $92.0 million, or 225.5%, from $40.8 million for the year ended December 31, 2016 to $132.8 million for the year ended December 31, 2017. The increase relates primarily to the tax impacts associated with the 2017 enactment of the Tax Act. As a result of the enactment, we have recognized a tax charge of $122.7 million, predominately relating to the revaluation of our deferred tax assets to the reduced federal corporate tax rate of 21% which resulted in a one-time tax charge of $121.1 million. Additionally, the U.K. Finance (No.2) Bill, which was enacted on November 20, 2017, resulted in the loss of interest deductions in the U.K. as of the effective date of July 13, 2017 and had the effect of increasing our effective tax rate in the fourth quarter of 2017. The reduction of our deferred tax asset as a result of the Tax Act also caused a $51.8 million adjustment to our DTA Deed with OM plc, reflected in income from continuing operations before tax. This adjustment to the DTA Deed is not subject to U.K. tax, consequently having the effect of reducing our effective tax rate. The increase in tax expense from the Tax Act was reduced by the tax effect of decreases in income from continuing operations before tax, a favorable effective tax rate on the earnings from our seed capital investments and adjustments to uncertain tax positions. In 2016 the adjustment for uncertain tax positions increased income tax expense and in 2017 the adjustments to uncertain tax positions, primarily reflecting the expiration of the statute of limitations, decreased income tax expense. The effective tax rate increased to 93.5% for the year ended December 31, 2017 from 25.3% for the year ended December 31, 2016 primarily due to the tax charge associated with the Tax Act.
Year ended December 31, 2016 compared to year ended December 31, 2015: Income tax expense decreased $(5.8) million, or (12.4)%, from $46.6 million for the year ended December 31, 2015 to $40.8 million for the year ended December 31, 2016. The decrease relates primarily to decreases in income from continuing operations before tax. This decrease was offset by benefits recognized in 2015 which did not recur in 2016 relating to valuation allowance adjustments and changes in state tax laws. In 2015 we released our valuation allowance for foreign tax credits resulting from amending income tax returns for 2009 through 2014.
U.S. GAAP Consolidated Funds
Year ended December 31, 2017 compared to year ended December 31, 2016: Consolidated Funds’ revenue increased $1.6 million from $0.1 million for the year ended December 31, 2016 to $1.7 million for the year ended December 31, 2017. Consolidated Funds expense increased $2.2 million, from $0.2 million for the year ended December 31, 2016 to $2.4 million for the year ended December 31, 2017. Consolidated Funds’ investment gain (loss) increased $16.6 million from $(1.1) million for the year ended December 31, 2016 to $15.5 million for the year ended December 31, 2017. The increases in consolidated Funds revenue, expense and investment gain were all due to a greater number of Funds consolidated in 2017 which in turn was reflective of higher levels of seed and co-investment capital deployed on our balance sheet in 2017 in large part due to the purchase of seed capital from OM plc in September 2016 and July 2017.
Year ended December 31, 2016 compared to year ended December 31, 2015: There were no gains or losses recorded in 2015, as there were no Funds which required consolidation during that year. Funds consolidation for the year ended December 31, 2016 reflected consolidated Funds revenue of $0.1 million, consolidated Funds expense of $0.2 million and consolidated Funds investment gain (loss) of $(1.1) million. There was no income or loss attributable to non-controlling interests of consolidated Funds in the year ended December 31, 2015.
Discontinued Operations
Gains on disposal in 2015 and 2016 represents additional proceeds received, net of tax, for previously disposed-of lines of business.
Year ended December 31, 2017 compared to year ended December 31, 2016: All of our discontinued operations were wound down, sold, or transferred to OM plc prior to 2016 and there were no results from discontinued operations in either the year ended December 31, 2016 or December 31, 2017. Gain (loss) on disposal, net of tax decreased $(6.3) million, from a gain on disposal of $6.2 million for the year ended December 31, 2016 to a loss on disposal of $(0.1) million for the year ended December 31, 2017.
Year ended December 31, 2016 compared to year ended December 31, 2015: Gain (loss) on disposal, net of tax increased $5.4 million, from a gain on disposal of $0.8 million for the year ended December 31, 2015 to a gain on disposal of $6.2 million for the year ended December 31, 2016. In 2016, the management team of a previously disposed Affiliate, together with subsidiaries of ours holding interests in that Affiliate, entered into a purchase and sale agreement with a third party, which resulted in a $7.4 million payment to us, or $5.1 million, net of tax. The remaining gain on disposal in 2016 represents residual amounts received from previously discontinued operations.
Key U.S. GAAP Operating Metrics
The following table shows our key U.S. GAAP operating metrics for the years ended December 31, 2017, 2016 and 2015. In the years ended December 31, 2017 and 2016, certain Funds have been consolidated due to our seed capital or co-investments in the Funds, including seed capital investments purchased from OM plc. The second, third and fourth metrics below have each been adjusted to eliminate the effect of consolidated Funds to more accurately reflect the economics of our Company.
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| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| Numerator: Operating income | $ | 71.0 |
| | $ | 155.6 |
| | $ | 191.2 |
|
| Denominator: Total revenue | $ | 887.4 |
| | $ | 663.5 |
| | $ | 699.3 |
|
U.S. GAAP operating margin(1) | 8.0 | % | | 23.5 | % | | 27.3 | % |
| | | | | | |
Numerator: Total operating expenses(2) | $ | 814.0 |
| | $ | 507.7 |
| | $ | 508.1 |
|
| Denominator: Management fee revenue | $ | 858.0 |
| | $ | 659.9 |
| | $ | 637.2 |
|
U.S. GAAP operating expense / management fee revenue(3) | 94.9 | % | | 76.9 | % | | 79.7 | % |
| | | | | | |
| Numerator: Variable compensation | $ | 252.2 |
| | $ | 172.7 |
| | $ | 201.0 |
|
Denominator: Operating income before variable compensation and Affiliate key employee distributions(2)(4)(5) | $ | 397.0 |
| | $ | 370.1 |
| | $ | 431.0 |
|
U.S. GAAP variable compensation ratio(3) | 63.5 | % | | 46.7 | % | | 46.6 | % |
| | | | | | |
| Numerator: Affiliate key employee distributions | $ | 73.1 |
| | $ | 41.7 |
| | $ | 38.8 |
|
Denominator: Operating income before Affiliate key employee distributions(2)(3)(5)(6) | $ | 144.8 |
| | $ | 197.4 |
| | $ | 230.0 |
|
U.S. GAAP Affiliate key employee distributions ratio(3) | 50.5 | % | | 21.1 | % | | 16.9 | % |
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(1) | Excluding the effect of Funds consolidation in the applicable periods, the U.S. GAAP operating margin would be 8.1% for the year ended December 31, 2017, 23.5% for the year ended December 31, 2016, and 27.3% for the year ended December 31, 2015. |
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(2) | Excludes consolidated Funds expense of $2.4 million for the year ended December 31, 2017 and $0.2 million for the year ended December 31, 2016. We did not consolidate results from operations of any Funds in the year ended December 31, 2015. |
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(3) | Excludes the effect of Funds consolidation for the years ended December 31, 2017 and 2016. We did not consolidate results from operations of any Funds in the year ended December 31, 2015. |
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(4) | Excludes consolidated Funds revenue of $1.7 million for the year ended December 31, 2017 and $0.1 million for the year ended 2016. We did not consolidate results from operations of any Funds in the year ended December 31, 2015. |
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(5) | The following table identifies the components of operating income before variable compensation and Affiliate key employee distributions, as well as operating income before Affiliate key employee distributions: |
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| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| Operating income | $ | 71.0 |
| | $ | 155.6 |
| | $ | 191.2 |
|
| Affiliate key employee distributions | 73.1 |
| | 41.7 |
| | 38.8 |
|
| Operating loss of consolidated Funds | 0.7 |
| | 0.1 |
| | — |
|
| Operating income before Affiliate key employee distributions | $ | 144.8 |
| | $ | 197.4 |
| | $ | 230.0 |
|
| Variable compensation | 252.2 |
| | 172.7 |
| | 201.0 |
|
| Operating income before variable compensation and Affiliate key employee distributions | $ | 397.0 |
| | $ | 370.1 |
| | $ | 431.0 |
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Effects of Inflation
For the years ended December 31, 2017, 2016, and 2015, inflation did not have a material effect on our consolidated results of operations.
Non-GAAP Supplemental Performance Measure—Economic Net Income
As supplemental information, we provide a non-GAAP performance measure that we refer to as economic net income, or ENI, which represents our management’s view of the underlying economic earnings generated by us. We define economic net income as ENI revenue less (i) ENI operating expenses, (ii) variable compensation, (iii) key employee distributions, (iv) net interest and (v) taxes, each as further discussed in this section. ENI adjustments to U.S. GAAP include both reclassifications of U.S. GAAP revenue and expense items, as well as adjustments to U.S. GAAP results, primarily to exclude non-cash, non-economic expenses, or to reflect cash benefits not recognized under U.S. GAAP.
ENI is an important measure to investors because it is used by the Company to make resource allocation decisions, determine appropriate levels of investment or dividend payout, manage balance sheet leverage, determine Affiliate variable compensation and equity distributions, and incentivize management. It is also an important measure because it assists management in evaluating our operating performance and is presented in a way that most closely reflects the key elements of our profit share operating model with our Affiliates. For a further discussion of how we use ENI and why ENI is useful to investors, see “—Overview—How We Measure Performance.” We have also added additional explanatory language to item (ii) in light of the treatment of a portion of the purchase price and non-controlling interests from Landmark Partners as compensation for U.S. GAAP purposes.
To calculate economic net income, we re-categorize certain line items on our Statement of Operations to reflect the following:
We exclude the effect of Funds consolidation by removing the portion of Fund revenues, expenses and investment return which were not attributable to our shareholders.
We include within management fee revenue any fees paid to Affiliates by consolidated Funds, which are viewed as investment income under U.S. GAAP.
We include our share of earnings from equity-accounted Affiliates within other income in ENI revenue, rather than investment income.
We treat sales-based compensation as a general and administrative expense, rather than part of fixed compensation and benefits.
We identify separately from operating expenses variable compensation and Affiliate key employee distributions, which represent Affiliate earnings shared with Affiliate key employees.
We also make the following adjustments to U.S. GAAP results to more closely reflect our economic results:
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i. | We exclude non-cash expenses representing changes in the value of Affiliate equity and profit interests held by Affiliate key employees. These ownership interests may in certain circumstances be repurchased by OMUS at a value based on a pre-determined fixed multiple of trailing earnings and as such this value is carried on our balance sheet as a liability. Non-cash movements in the value of this liability are treated as compensation expense under U.S. GAAP. However, any equity or profit interests repurchased by OMUS can be used to fund a portion of future variable compensation awards, resulting in savings in cash variable compensation that offset the negative cash effect of repurchasing the equity. Our Affiliate equity and profit interest plans have been designed to ensure OMUS is never required to repurchase more equity than we can reasonably recycle through variable compensation awards in any given twelve month period. OMUS may also choose to retain repurchased Affiliate equity or profit interests, entitling us to an additional share of future Affiliate earnings that represents an unrecognized economic asset to us. |
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ii. | We exclude non-cash amortization or impairment expenses related to acquired goodwill and other intangibles as these are non-cash charges that do not result in an outflow of tangible economic benefits from the business. We also exclude the amortization of acquisition-related contingent consideration, as well as the value of employee equity owned pre-acquisition, as occurred as a result of the Landmark transaction, where such items have been included in compensation expense as a result of ongoing service requirements for certain employees. Please note that the revaluations related to these acquisition-related items are included in (i) above. |
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iii. | We exclude capital transaction costs, including the costs of raising debt or equity, gains or losses realized as a result of redeeming debt or equity and direct incremental costs associated with acquisitions of businesses or assets. |
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iv. | We exclude seed capital and co-investment gains, losses and related financing costs. The net returns on these investments are considered and presented separately from ENI because ENI is primarily a measure of our earnings from managing client assets, which therefore differs from earnings generated by our investments in Affiliate products, which can be variable from period to period. |
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v. | We include cash tax benefits associated with deductions allowed for acquired intangibles and goodwill that may not be recognized or have timing differences compared to U.S. GAAP. |
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vi. | We exclude the results of discontinued operations attributable to controlling interests since they are not part of our ongoing business, and restructuring costs incurred in continuing operations which represent an exit from a distinct product or line of business. |
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vii. | We exclude deferred tax resulting from changes in tax law and expiration of statutes, adjustments for uncertain tax positions, deferred tax attributable to intangible assets and other unusual items not related to current operating results to reflect ENI tax normalization. |
We also adjust our income tax expense to reflect any tax impact of our ENI adjustments.
Reconciliation of U.S. GAAP Net Income to Economic Net Income for the Years Ended December 31, 2017, 2016 and 2015
The following table reconciles net income attributable to controlling interests to economic net income for the years ended December 31, 2017, 2016 and 2015:
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| | | | | | | | | | | | |
| | | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| U.S. GAAP net income attributable to controlling interests | $ | 4.2 |
| | $ | 126.4 |
| | $ | 155.5 |
|
| Adjustments to reflect the economic earnings of the Company: | |
| | |
| | |
|
| i. | Non-cash key employee-owned equity and profit interest revaluations(1) | 95.4 |
| | (7.1 | ) | | 18.5 |
|
| ii. | Amortization of acquired intangible assets, acquisition-related consideration and pre-acquisition employee equity(2) | 77.2 |
| | 29.1 |
| | 0.2 |
|
| iii. | Capital transaction costs | — |
| | 6.4 |
| | 2.3 |
|
| iv. | Seed/Co-investment (gains) losses and financings(3) | (17.3 | ) | | 1.4 |
| | (0.3 | ) |
| v. | Tax benefit of goodwill and acquired intangibles deductions | 8.7 |
| | 5.0 |
| | 2.5 |
|
| vi. | Discontinued operations and restructuring(4) | 11.0 |
| | (6.2 | ) | | (0.2 | ) |
| vii. | ENI tax normalization(5) | 68.6 |
| | 2.1 |
| | (8.8 | ) |
Tax effect of above adjustments(6) | (66.9 | ) | | (12.0 | ) | | (8.6 | ) |
| Economic net income (including the non-recurring performance fee) | 180.9 |
| | 145.1 |
| | 161.1 |
|
Non-recurring performance fee, net(7) | — |
| | — |
| | (11.4 | ) |
| Economic net income, excluding the non-recurring performance fee | $ | 180.9 |
| | $ | 145.1 |
| | $ | 149.7 |
|
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(1) | Included in non-cash key employee-owned equity and profit interest revaluations are revaluations as a result of the Landmark transaction related to contingent consideration amounting to $25.9 million for the year ended December 31, 2017 and $0.0 million for the year ended December 31, 2016, along with revaluations of Landmark employee equity owned pre-acquisition amounting to $24.3 million for the year ended December 31, 2017 and $(0.5) million for the year ended December 31, 2016. |
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(2) | Acquisition-related consideration and pre-acquisition employee equity includes the amortization of acquisition-related contingent consideration created as a result of the Landmark transaction amounting to $37.1 million for the year ended December 31, 2017 and $13.9 million for the year ended December 31, 2016. It also includes the value of employee equity owned pre-acquisition amounting to $33.5 million for the year ended December 31, 2017 and $12.6 million for the year ended December 31, 2016. |
The table below summarizes the Landmark-related components included in items (i) and (ii) of the above reconciliation:
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| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| Landmark contingent consideration | $ | 63.0 |
| | $ | 13.9 |
| | $ | — |
|
| Landmark pre-acquisition employee equity | 57.8 |
| | 12.1 |
| | — |
|
| Landmark-related total | 120.8 |
| | 26.0 |
| | — |
|
| Other Affiliate equity and amortization of intangible assets | 51.8 |
| | (4.0 | ) | | 18.7 |
|
| Total | $ | 172.6 |
| | $ | 22.0 |
| | $ | 18.7 |
|
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(3) | The net return on seed/co-investment (gains) losses and financings for the years ended December 31, 2017, 2016, and 2015 are shown in the following table. |
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| Seed/Co-investment (gains) losses | $ | (22.2 | ) | | $ | (1.1 | ) | | $ | (0.3 | ) |
| Financing costs: | | | | | |
| Seed/Co-investment average balance | 88.9 |
| | 64.4 |
| | 12.3 |
|
| Blended interest rate* | 5.5 | % | | 3.9 | % | | 1.5 | % |
| Financing costs | 4.9 |
| | 2.5 |
| | — |
|
| Net seed/co-investment (gains) losses and financing | $ | (17.3 | ) | | $ | 1.4 |
| | $ | (0.3 | ) |
* Prior to the July 2016 bond issuances, the blended interest rate was based on our interest rate on our revolving credit facility. Subsequent to the 2016 bond issuance and the establishment of our non-recourse seed capital facility in July 2017, the blended rate is based first on the interest rate paid on our non-recourse seed capital facility up to the average amount drawn, and thereafter on the weighted average rate of the long-term debt.
| |
(4) | Included in restructuring for the year ended December 31, 2017 is $1.0 million related to the Heitman transaction and $9.8 million related to CEO transition costs, comprised of $0.5 million of fixed compensation and benefits, $8.8 million of variable compensation and $0.5 million of recruiting costs. |
| |
(5) | Includes $51.8 million in the year ended December 31, 2017 related to the revaluation of the Deferred Tax Asset Deed with OM plc offset by the $122.7 million impact of the Tax Act.
|
| |
(6) | Reflects the sum of line items i, ii, iii, iv and the restructuring portion of line item vi taxed at the 40.2% U.S. statutory rate (including state tax). The restructuring portion of line item vi amounted to $10.8 million for the year ended December 31, 2017, $0.0 million for the year ended December 31, 2016 and $0.5 million for the year ended December 31, 2015. |
| |
(7) | In the second quarter of 2015, we recorded a non-recurring gross performance fee of $48.1 million. The $11.4 million represents the net amount accruing to OMAM after Affiliate contractual variable compensation, other directly related expenses, and the tax effect of the non-recurring performance fee calculated using a 40.2% tax rate. |
Limitations of Economic Net Income
Economic net income is the key measure our management uses to evaluate the financial performance of, and make operational decisions for, our business. Economic net income is not audited, and is not a substitute for net income or other performance measures that are derived in accordance with U.S. GAAP. Furthermore, our calculation of economic net income may differ from similarly titled measures provided by other companies.
Because the calculation of economic net income excludes certain ongoing expenses, including amortization expense and certain compensation costs, it has certain material limitations and should not be viewed in isolation or as a substitute for U.S. GAAP measures of earnings.
ENI Revenues
The following table reconciles U.S. GAAP Revenue to ENI Revenue for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| U.S. GAAP Revenue | $ | 887.4 |
| | $ | 663.5 |
| | $ | 699.3 |
|
| Include investment return from equity-accounted Affiliates | 14.5 |
| | 15.1 |
| | 12.7 |
|
| Exclude the non-recurring performance fee | — |
| | — |
| | (48.1 | ) |
| Exclude revenue from consolidated Funds attributable to non-controlling interests | (1.7 | ) | | (0.1 | ) | | — |
|
| Other reconciling items | 0.5 |
| | — |
| | — |
|
| ENI Revenue | $ | 900.7 |
| | $ | 678.5 |
| | $ | 663.9 |
|
The following table identifies the components of ENI revenue:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
Management fees(1) | $ | 858.0 |
| | $ | 659.9 |
| | $ | 637.2 |
|
Performance fees (excluding the non-recurring performance fee)(2) | 26.5 |
| | 2.6 |
| | 13.7 |
|
Other income, including equity-accounted Affiliates(3) | 16.2 |
| | 16.0 |
| | 13.0 |
|
| ENI Revenue | $ | 900.7 |
| | $ | 678.5 |
| | $ | 663.9 |
|
| |
(1) | ENI management fees correspond to U.S. GAAP management fees. |
| |
(2) | In the second quarter of 2015, we recorded a non-recurring performance fee of $48.1 million ($11.4 million, net of associated expenses and taxes). Unless explicitly noted, the ENI revenue, ENI expenses, and ENI key metrics for the year ended December 31, 2015 exclude the impact of the non-recurring performance fee. While all performance fees fall within OMAM’s definition of economic net income, we believe that the unique characteristics of this fee, including its size and the extraordinary investment performance of the underlying product, make it unrepresentative of our recurring economics and we have therefore removed it from our presentation of ENI revenue. |
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| U.S. GAAP performance fees | $ | 26.5 |
| | $ | 2.6 |
| | $ | 61.8 |
|
| Less: non-recurring performance fee | — |
| | — |
| | (48.1 | ) |
| ENI performance fees | $ | 26.5 |
| | $ | 2.6 |
| | $ | 13.7 |
|
| |
(3) | ENI other income is comprised primarily of other revenue under U.S. GAAP, plus our earnings from equity-accounted Affiliates of $14.5 million for the year ended December 31, 2017, $15.1 million for the year ended December 31, 2016 and $12.7 million for the year ended December 31, 2015. |
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| U.S. GAAP other revenue | $ | 1.2 |
| | $ | 0.9 |
| | $ | 0.3 |
|
Investment return from equity-accounted Affiliates(a) | 14.5 |
| | 15.1 |
| | 12.7 |
|
| Other reconciling items | 0.5 |
| | — |
| | — |
|
| ENI other income | $ | 16.2 |
| | $ | 16.0 |
| | $ | 13.0 |
|
| |
(a) | Includes income from Heitman of $12.0 million for the year ended December 31, 2017, $12.6 million for the year ended December 31, 2016 and $10.2 million for the year ended December 31, 2015. |
ENI Operating Expenses
The largest difference between U.S. GAAP operating expense and ENI operating expense relates to compensation. As shown in the following reconciliation, the Company excludes the impact of key employee equity revaluations. We also exclude the amortization of contingent purchase price and pre-acquisition equity owned by employees, both with a service requirement, associated with the Landmark acquisition. Variable compensation and Affiliate key employee distributions are also segregated out of U.S. GAAP operating expense in order to align with the manner in which these items are contractually calculated at the Affiliate level.
The following table reconciles U.S. GAAP operating expense to ENI operating expense for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| U.S. GAAP operating expense | $ | 816.4 |
| | $ | 507.9 |
| | $ | 508.1 |
|
| Less: items excluded from economic net income | | | | | |
| Acquisition-related consideration and pre-acquisition employee equity | (70.6 | ) | | (26.5 | ) | | — |
|
| Non-cash Affiliate key employee equity and profit interest revaluations | (95.4 | ) | | 7.1 |
| | (18.5 | ) |
| Amortization of acquired intangible assets | (6.6 | ) | | (2.6 | ) | | (0.2 | ) |
| Capital transaction costs | — |
| | (6.4 | ) | | (2.3 | ) |
Restructuring costs(1) | (10.8 | ) | | — |
| | (0.5 | ) |
Other items excluded from ENI(2) | — |
| | 0.1 |
| | (1.6 | ) |
| Funds’ operating expenses | (2.4 | ) | | (0.2 | ) | | — |
|
| Less: items segregated out of U.S. GAAP operating expense | | | | | |
Variable compensation(3)(4) | (243.4 | ) | | (172.7 | ) | | (201.0 | ) |
| Affiliate key employee distributions | (73.1 | ) | | (41.7 | ) | | (38.8 | ) |
| ENI operating expense | $ | 314.1 |
| | $ | 265.0 |
| | $ | 245.2 |
|
| |
(1) | Included in restructuring for the year ended December 31, 2017 is $1.0 million related to the Heitman transaction and $9.8 million related to CEO transition costs, comprised of $0.5 million of fixed compensation and benefits, $8.8 million of variable compensation and $0.5 million of recruiting costs. |
| |
(2) | Other items primarily include capital transaction costs and expenses (excluding variable compensation) associated with the non-recurring performance fee in 2015. |
| |
(3) | For the year ended December 31, 2017, $252.2 million of variable compensation expense is included within U.S. GAAP net income, which includes variable compensation associated with the CEO transition costs presented in “Restructuring costs” in this table. |
| |
(4) | For the year ended December 31, 2015, $174.0 million of variable compensation expense (of the $201.0 million) is included within economic net income, which excludes the revenue and the variable compensation attributable to the non-recurring performance fee. |
The following table identifies the components of ENI operating expense:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
Fixed compensation & benefits(1) | $ | 172.4 |
| | $ | 146.4 |
| | $ | 133.2 |
|
General and administrative expenses(2) | 129.9 |
| | 109.2 |
| | 105.1 |
|
| Depreciation and amortization | 11.8 |
| | 9.4 |
| | 6.9 |
|
| ENI operating expense | $ | 314.1 |
| | $ | 265.0 |
| | $ | 245.2 |
|
| |
(1) | Fixed compensation and benefits include base salaries, payroll taxes and the cost of benefit programs provided. The following table reconciles U.S. GAAP compensation expense for the years ended December 31, 2017, 2016 and 2015 to ENI fixed compensation and benefits expense: |
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| Total U.S. GAAP compensation expense | $ | 682.8 |
| | $ | 397.4 |
| | $ | 412.8 |
|
| Acquisition-related consideration and pre-acquisition employee equity | (70.6 | ) | | (26.5 | ) | | — |
|
| Non-cash key employee equity and profit interest revaluations excluded from ENI | (95.4 | ) | | 7.1 |
| | (18.5 | ) |
| Sales-based compensation reclassified to ENI general & administrative expenses | (18.6 | ) | | (17.2 | ) | | (19.7 | ) |
| Affiliate key employee distributions | (73.1 | ) | | (41.7 | ) | | (38.8 | ) |
Compensation related to restructuring expenses(a) | (9.3 | ) | | — |
| | — |
|
Variable compensation(b) | (243.4 | ) | | (172.7 | ) | | (201.0 | ) |
Other adjustments(c) | — |
| | — |
| | (1.6 | ) |
| ENI fixed compensation and benefits | $ | 172.4 |
| | $ | 146.4 |
| | $ | 133.2 |
|
| |
(a) | Compensation related to restructuring for the year ended December 31, 2017 are comprised of $0.5 million of fixed compensation and benefits and $8.8 million of variable compensation associated with the CEO transition. |
| |
(b) | For the year ended December 31, 2015, $174.0 million of variable compensation expense (of the $201.0 million above) is included within economic net income, which excludes the revenue and the variable compensation attributable to the non-recurring performance fee. |
| |
(c) | Includes compensation related to restructuring expenses and fixed compensation and benefits associated with the non-recurring performance fee in 2015. |
| |
(2) | The following table reconciles U.S. GAAP general and administrative expense to ENI general and administrative expense: |
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| U.S. GAAP general and administrative expense | $ | 112.9 |
| | $ | 98.3 |
| | $ | 88.2 |
|
| Sales-based compensation | 18.6 |
| | 17.2 |
| | 19.7 |
|
| Capital transaction costs | — |
| | (6.4 | ) | | (2.3 | ) |
Restructuring(a) | (1.5 | ) | | — |
| | — |
|
Additional ENI adjustments(b) | (0.1 | ) | | 0.1 |
| | (0.5 | ) |
| ENI general and administrative expense | $ | 129.9 |
| | $ | 109.2 |
| | $ | 105.1 |
|
| |
(a) | Reflects $1.0 million related to the Heitman transaction and $0.5 million of CEO recruiting costs. |
| |
(b) | Additional ENI adjustments in 2015 primarily include expenses (excluding compensation) associated with the non-recurring performance fee. |
Key Non-GAAP Operating Metrics
The following table shows our key non-GAAP operating metrics for the years ended December 31, 2017, 2016 and 2015. We present these metrics because they are the measures our management uses to evaluate the profitability of our business and are useful to investors because they represent the key drivers and measures of economic performance within our business model. Please see the footnotes below for an explanation of each ratio, its usefulness in measuring the economics and operating performance of our business, and a reference to the most closely related U.S. GAAP measure:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
Numerator: ENI operating earnings(1) | $ | 343.2 |
| | $ | 240.8 |
| | $ | 244.7 |
|
| Denominator: ENI revenue | $ | 900.7 |
| | $ | 678.5 |
| | $ | 663.9 |
|
ENI operating margin(2) | 38.1 | % | | 35.5 | % | | 36.9 | % |
| | | | | | |
| Numerator: ENI operating expense | $ | 314.1 |
| | $ | 265.0 |
| | $ | 245.2 |
|
Denominator: ENI management fee revenue(3) | $ | 858.0 |
| | $ | 659.9 |
| | $ | 637.2 |
|
ENI operating expense ratio(4) | 36.6 | % | | 40.2 | % | | 38.5 | % |
| | | | | | |
Numerator: ENI variable compensation(5) | $ | 243.4 |
| | $ | 172.7 |
| | $ | 174.0 |
|
Denominator: ENI earnings before variable compensation(1)(6) | $ | 586.6 |
| | $ | 413.5 |
| | $ | 418.7 |
|
ENI variable compensation ratio(7) | 41.5 | % | | 41.8 | % | | 41.6 | % |
| | | | | | |
| Numerator: Affiliate key employee distributions | $ | 73.1 |
| | $ | 41.7 |
| | $ | 38.9 |
|
Denominator: ENI operating earnings(1) | $ | 343.2 |
| | $ | 240.8 |
| | $ | 244.7 |
|
ENI Affiliate key employee distributions ratio(8) | 21.3 | % | | 17.3 | % | | 15.9 | % |
| |
(1) | ENI operating earnings represents ENI earnings before Affiliate key employee distributions and is calculated as ENI revenue, less ENI operating expense, less ENI variable compensation. It differs from economic net income because it does not include the effects of Affiliate key employee distributions, net interest expense or income tax expense. |
The following table reconciles U.S. GAAP operating income (loss) to ENI operating earnings:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| U.S. GAAP operating income | $ | 71.0 |
| | $ | 155.6 |
| | $ | 191.2 |
|
| Include investment return on equity-accounted Affiliates | 14.5 |
| | 15.1 |
| | 12.7 |
|
| Exclude the impact of: | | | | | |
| Non-recurring performance fee | — |
| | — |
| | (48.1 | ) |
| Affiliate key employee-owned equity and profit interest revaluations | 95.4 |
| | (7.1 | ) | | 18.5 |
|
| Amortization of acquired intangible assets, acquisition-related consideration | 77.2 |
| | 29.1 |
| | 0.2 |
|
| Capital transaction costs | — |
| | 6.4 |
| | 2.3 |
|
Restructuring costs(a) | 10.8 |
| | — |
| | 0.5 |
|
Other(b) | 0.5 |
| | (0.1 | ) | | 1.6 |
|
| Affiliate key employee distributions | 73.1 |
| | 41.7 |
| | 38.8 |
|
Variable compensation(c) | 243.4 |
| | 172.7 |
| | 201.0 |
|
| Funds’ operating (income) loss | 0.7 |
| | 0.1 |
| | — |
|
| ENI earnings before variable compensation | 586.6 |
| | 413.5 |
| | 418.7 |
|
Less: ENI variable compensation(d) | (243.4 | ) | | (172.7 | ) | | (174.0 | ) |
| ENI operating earnings | 343.2 |
| | 240.8 |
| | 244.7 |
|
| Less: ENI Affiliate key employee distributions | (73.1 | ) | | (41.7 | ) | | (38.9 | ) |
| ENI earnings after Affiliate key employee distributions | $ | 270.1 |
| | $ | 199.1 |
| | $ | 205.8 |
|
| |
(a) | Included in restructuring for the year ended December 31, 2017 is $1.0 million related to the Heitman transaction and $9.8 million related to CEO transition costs, comprised of $0.5 million of fixed compensation and benefits, $8.8 million of variable compensation and $0.5 million of recruiting costs. |
| |
(b) | Other items in 2015 primarily include expenses (excluding variable compensation) associated with the non-recurring performance fee. |
| |
(c) | For the year ended December 31, 2017, $252.2 million of variable compensation expense is included within U.S. GAAP net income, which includes variable compensation associated with the CEO transition costs presented in “Restructuring costs” in this table. |
| |
(d) | For the year ended December 31, 2015, $174.0 million of variable compensation expense is included within economic net income which excludes the revenue and the variable compensation attributable to the non-recurring performance fee. |
| |
(2) | The ENI operating margin, which is calculated before Affiliate key employee distributions, is used by management and is useful to investors to evaluate the overall operating margin of the business without regard to our various ownership levels at each of the Affiliates. The ENI operating margin is most comparable to our U.S. GAAP operating margin (excluding the effect of consolidated Funds) of 8.1% for the year ended December 31, 2017, 23.5% for the year ended December 31, 2016 and 27.3% for the year ended December 31, 2015. |
The ENI operating margin is important because it gives investors an understanding of the profitability of the total business relative to revenue, irrespective of the ownership position which OMAM has in each of its Affiliates. Management and investors use this ratio when comparing our profitability relative to our peer group and evaluating our ability to manage the cost structure and profitability of our business under different operating environments.
| |
(3) | ENI Management fee revenue corresponds to U.S. GAAP management fee revenue. |
| |
| (4) | The ENI operating expense ratio is usedamount of shares beneficially owned by managementeach of Mr. Belgrad, Mr. Hadley, Mr. Riordan and is usefulMr. Ritchie are based solely on the information set forth in their most recent respective filings on Form 4 relating to investors to evaluate the level of operating expense as measured against our recurring management fee revenue. We have provided this ratio since many operating expenses, including fixed compensation and benefits and general and administrative expense, are generally linked to the overall sizeshares of the business. We track this ratio as a key measure of scale economies at OMAM because in our profit sharing economic model, scale benefits both the Affiliate employees and OMAM shareholders. The ENI operating expense ratio is most comparable to the U.S. GAAP operating expense / management fee revenue ratio.Company. |
| |
| (5) | Excludes variable compensation associated withOn June 20, 2018, Mr. Chersi was granted 6,390 restricted share units of the non-recurring performance fee.Company. Each restricted share unit represents a right to receive one ordinary share of the Company. The restricted share units vest upon the earlier of June 20, 2019 and the date of the 2019 annual general meeting of the Company. |
| |
| (6) | ENI earnings before variable compensation is calculated as ENI revenue, less ENI operating expense.On August 7, 2018, Mr. Love was granted 7,149 restricted share units of the Company. Each restricted share unit represents a right to receive one ordinary share of the Company. The restricted share units vest upon the earlier of June 20, 2019 and the date of the 2019 annual general meeting of the Company. |
| |
| (7) | On February 15, 2019, Mr. Mahoney was granted 6,850 restricted share units of the Company. Each restricted share unit represents a right to receive one ordinary share of the Company. The ENI variable compensation ratio is used by managementrestricted share units vest in equal annual installments over a three-year period with 1/3 of the restricted share units vesting on each of February 15, 2020, February 15, 2021 and is usefulFebruary 15, 2022. On February 15, 2018, Mr. Mahoney was granted 2,874 restricted shares of the Company. The restricted shares vest in equal annual installments over a three-year period with 1/3 of the restricted shares vesting on each of February 15, 2019, February 15, 2020 and February 15, 2021. On February 15, 2017, Mr. Mahoney was granted 2,446 restricted shares of the Company. The restricted shares vest in equal annual installments over a three-year period with 1/3 of the restricted shares vesting on each of February 15, 2018, February 15, 2019 and February 15, 2020. |
| |
| (8) | On January 20, 2019, Suren Rana was granted an option to investorspurchase 2,070,000 ordinary shares of the Company. The option vests in five equal annual installments of 414,000 ordinary shares over a four-year period with the first tranche vesting upon grant, and the following tranches vesting on each of January 20, 2020, January 20, 2021, January 20, 2022 and January 20, 2023, subject to evaluate consolidated variable compensation as measured against our ENI earnings before variable compensation. Variable compensation is contractually set and calculated individually at each Affiliate, plus Center bonuses. Variable compensation is usually awarded based onMr. Rana's continued employment with the Company. Upon a contractual percentagechange of each Affiliate’s ENI earnings before variable compensation and may be paidcontrol of the Company (as defined in the formaward agreement), the vesting of cash or non-cash Affiliate equity or profit interests. Center variable compensation includes cash and OMAM equity. Non-cash variable compensation awards typically vest over several years and are recognized as compensation expense over that service period. The variable compensation ratio at each Affiliate, calculated as variable compensation divided by ENI earnings before variable compensation, will typically be between 25% and 35%. The ENI variable compensation ratio is most comparableone tranche equal to 20% of the option shall accelerate pursuant to the U.S. GAAP variable compensation ratio.terms of the award agreement. |
| |
(8)(9) | The ENI Affiliate key employee distribution ratio is used by management and is usefulOn June 20, 2018, Ms. Trebbi was granted 7,988 restricted share units of the Company. Each restricted share unit represents a right to investors to evaluate Affiliate key employee distributions as measured against our ENI operating earnings. Affiliate key employee distributions represent thereceive one ordinary share of Affiliate profits after variable compensation that is attributable to Affiliate key employee equitythe Company. The restricted share units vest upon the earlier of June 20, 2019 and profit interests holders, according to their ownership interests. The Affiliate key employee distribution ratio at each Affiliate is calculated as Affiliate key employee distributions divided by ENI operating earnings at that Affiliate. At certain Affiliates with tiered equity structures, OMUS and other classes of employee equity holders are entitled to an initial proportionate preference over profits after variable compensation, structured such that before a preference threshold is reached, there would be no required key employee distributions to the tiered equity holders, whereas for profits above the threshold the key employee distribution amount to the tiered equity holders would be calculated based on the tiered key employee ownership percentages. Based on current economic arrangements, employee distributions range from approximately 20% to 40% of marginal ENI operating earnings at each of our consolidated Affiliates. The ENI Affiliate key employee distributions ratio is most comparable to the U.S. GAAP Affiliate key employee distributions ratio. |
Tax on Economic Net Income
The following table reconciles the United States statutory tax to tax on economic net income. All amounts are shown excluding the 2015 non-recurring performance fee:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
Pre-tax economic net income(1) | $ | 251.3 |
| | $ | 190.7 |
| | $ | 203.5 |
|
| Intercompany interest expense deductible for U.S. tax purposes | (78.4 | ) | | (74.0 | ) | | (71.0 | ) |
| Taxable economic net income | 172.9 |
| | 116.7 |
| | 132.5 |
|
Taxes at the U.S. federal and state statutory rates(2) | (69.5 | ) | | (46.9 | ) | | (53.3 | ) |
| Other reconciling tax adjustments | (0.9 | ) | | 1.3 |
| | (0.5 | ) |
| Tax on economic net income | (70.4 | ) | | (45.6 | ) | | (53.8 | ) |
| Add back intercompany and OM plc interest expense previously excluded | 78.4 |
| | 74.0 |
| | 71.0 |
|
| Economic net income, excluding the non-recurring performance fee | $ | 180.9 |
| | $ | 145.1 |
| | $ | 149.7 |
|
Economic net income effective tax rate(3) | 28.0 | % | | 23.9 | % | | 26.4 | % |
| |
(1) | Excludes the impactdate of the non-recurring performance fee and includes interest income and third party ENI interest expense, as shown in the following table: |
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| U.S. GAAP interest income | $ | 0.8 |
| | $ | 0.4 |
| | $ | 0.2 |
|
| U.S. GAAP interest expense | (24.5 | ) | | (11.3 | ) | | (3.1 | ) |
| U.S. GAAP net interest expense | (23.7 | ) | | (10.9 | ) | | (2.9 | ) |
Other ENI interest expense exclusions(a) | 4.9 |
| | 2.5 |
| | 0.6 |
|
| ENI net interest income (expense) | (18.8 | ) | | (8.4 | ) | | (2.3 | ) |
ENI earnings after Affiliate key employee distributions(b) | 270.1 |
| | 199.1 |
| | 205.8 |
|
| Pre-tax economic net income | $ | 251.3 |
| | $ | 190.7 |
| | $ | 203.5 |
|
| |
(a) | Other ENI interest expense exclusions in 2017 and 2016 represent cost of financing on seed capital and co-investments and in 2015 represent a portion2019 annual general meeting of the treasury rate lock hedge loss that was reclassified from shareholders’ equity to interest expense.Company. |
| |
(b)(10) | ENI earnings after Affiliate key employee distributions is calculated as ENI operating income (ENI revenue, less ENI operating expense, less ENI variable compensation), less Affiliate key employee distributions. ReferOn December 30, 2018, Guang Yang was granted an option to “—Key Non-GAAP Operating Metrics” for a reconciliation from U.S. GAAP operating income to ENI earnings after Affiliate key employee distributions, excluding the impactpurchase 6,900,000 ordinary shares of the non-recurring performance fee. |
| |
(2) | Taxed at U.S. FederalCompany. The option vests in five equal annual installments of 1,380,000 ordinary shares over a four-year period with the first tranche vesting on the grant date, and State statutory ratethe following tranches vesting on each of 40.2% |
| |
(3) | The economic net income effective tax rate is calculated by dividingDecember 30, 2019, December 30, 2020, December 30, 2021 and December 30, 2022, subject to Mr. Yang's continued employment with the tax on economic net income by pre-tax economic net income.Company. Upon a change of control of the Company (as defined in the award agreement), the vesting of one tranche equal to 20% of the option shall accelerate pursuant to the terms of the award agreement. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
RELATED PERSON TRANSACTIONS
Review and Approval of Transactions with Related Persons
Our Board has adopted written policies and procedures for transactions with related persons. As a resultgeneral matter, the policy requires our Audit Committee to review and approve or disapprove the entry by us into certain transactions with related persons. The policy applies to transactions, arrangements and relationships where the aggregate amount involved could reasonably be expected to exceed $120,000 in any calendar year and in which a related person has a direct or indirect interest. A related person is (i) any of our directors, nominees for director or executive officers, (ii) any immediate family member of any of our directors, nominees for director or executive officers and (iii) any person, and his or her immediate family members, or entity, including affiliates, that was a beneficial owner of 5% or more of any of our outstanding equity securities at the time the transaction occurred or existed.
The policy provides that if advance approval of a transaction subject to the policy is not obtained, it must be promptly submitted to the Audit Committee for possible ratification, approval, amendment, termination or rescission. In reviewing any transaction, the Audit Committee will take into account, among other factors the Audit Committee deems appropriate, recommendations from senior management, whether the transaction is on terms no less favorable than the terms generally available to a third party in similar circumstances and the extent of the enactmentrelated person’s interest in the transaction. Any related person transaction must be conducted at arm’s length. Any member of the Tax Act,Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberations or vote on the approval or ratification of the transaction. However, such a director may be counted in determining the presence of a quorum at a meeting of the Audit Committee that considers a transaction.
Relationship with OM plc, OMGUK, HNA and Paulson
Prior to our initial public offering in 2014, we expectwere a wholly-owned subsidiary of OM plc and were included in OM plc’s consolidated operations. Until May 12, 2017, the consummation of the sale of a substantial majority of the Ordinary Shares held by OM plc to HNA Capital (the “HNA Minority Sale”), OM plc indirectly owned a majority of our effective ENI tax rateOrdinary Shares. On November 18, 2018, HNA notified us that it agreed to decrease from approximately 32%sell the substantial majority of its Ordinary Shares to Paulson, which we refer to as the “Paulson Sale.” On February 25, 2019, the Paulson Sale was completed. After completion of the Paulson Sale, Paulson owned 21.7% of our Ordinary Shares and HNA did not own any of our Ordinary Shares.
We previously entered into certain agreements with OM plc and OMGUK, certain of which have partially or fully terminated due to their terms or reduced ownership percentage of our Ordinary Shares and certain of which were assigned, in 2018whole or in part, to between 23%HNA in connection with the HNA Minority Sale, and 24%subsequently, to Paulson in connection with the Paulson Sale. The following descriptions of such agreements and our U.S. aggregate marginal tax ratetransactions are summaries only and are qualified in their entirety by reference to decrease from 39% to 26%.the complete documents, each of which has been publicly filed with the SEC.
Capital Resources and Liquidity
Working Capital and Long-Term Debt
The following table summarizes certain key financial data relating toIn connection with our capital resources and liquid net assets. All amounts presented exclude the non-controlling interest portion of consolidated Funds:
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
Balance Sheet Data(1) | |
| | |
| | |
|
| Current assets | |
| | |
| | |
|
| Cash and cash equivalents | $ | 186.3 |
| | $ | 101.9 |
| | $ | 135.9 |
|
| Investment advisory fees receivable | 208.3 |
| | 163.7 |
| | 151.8 |
|
| Investments | 101.9 |
| | 42.5 |
| | — |
|
| Total current assets | 496.5 |
| | 308.1 |
| | 287.7 |
|
| Current liabilities | |
| | |
| | |
|
| Accounts payable and accrued expenses | 54.9 |
| | 45.8 |
| | 45.7 |
|
| Accrued short-term incentive compensation | 186.1 |
| | 132.3 |
| | 134.0 |
|
Other short-term liabilities(2) | 45.2 |
| | 95.0 |
| | 1.8 |
|
| Total current liabilities | 286.2 |
| | 273.1 |
| | 181.5 |
|
| Working Capital | $ | 210.3 |
| | $ | 35.0 |
| | $ | 106.2 |
|
| Long-term notes payable and other debt | $ | 426.3 |
| | $ | 392.3 |
| | $ | 90.0 |
|
| |
(1) | Excludes the non-controlling interest portion of consolidated Funds. |
| |
(2) | Excluded from other short-term liabilities for each of the years presented is an income tax reserve relating to net operating losses that does not represent a current obligation of the Company. Puts related to Affiliate equity and profits interests are also excluded on a short-term basis because they are funded through recycling. Included within other short-term liabilities are payments due to OM plc under the Deferred Tax Asset Deed, as amended, that are due within twelve months. |
Working capital is defined as current assets less current liabilities, excluding the non-controlling interest portion of consolidated Funds. Our net working capital has been positive over the past several years and was $210.3 million at December 31, 2017. Our most significant current liabilities have been accounts payable and accrued compensation expense. Total current liabilities at December 31, 2017 also includes $45.2 million payable to OM plc within twelve months under the Deferred Tax Asset Deed, as amended. Accrued compensation expense has primarily consisted of variable compensation accruals made throughout the year based on contractual arrangements. Our cash management practices generally require that working capital be maintained at each Affiliate at a sufficient level to meet short-term operational needs. Periodic distributions of Affiliate earnings to OMUS and Affiliate key employee equity holders are made according to respective Affiliate distribution policies, with OMUS having the ability to access any surplus cash at each Affiliate as necessary during interim periods.
Long-Term Debt
The following table summarizes our financing arrangements as of the dates indicated:
|
| | | | | | | | | | | |
| | Amounts outstanding at | | | | |
| ($ in millions) | December 31, 2017 | | December 31, 2016 | | Interest rate | | Maturity |
| Long-term debt of OMAM, net of issuance costs | | |
| | | | |
| Third party obligations: | |
| | |
| | | | |
| Revolving credit facility | $ | — |
| | $ | — |
| | LIBOR + 1.50% plus
0.25% commitment fee | | October 15, 2019 |
| Non-recourse seed capital facility | 33.5 |
| | — |
| | LIBOR + 1.55% plus 0.95% commitment fee | | January 17, 2019 |
| Long-term bonds: | | | | | | | |
| 4.80% Senior Notes Due 2026 | 271.9 |
| | 271.6 |
| | 4.80% | | July 27, 2026 |
| 5.125% Senior Notes Due 2031 | 120.9 |
| | 120.7 |
| | 5.125% | | August 1, 2031 |
| Total long-term debt | $ | 426.3 |
| | $ | 392.3 |
| | | | |
Revolving Credit Facility
On October 15, 2014,initial public offering, we entered into a revolving credit facilityshareholder agreement with Citibank,OM plc and OMGUK, which we refer to as administrative agent and issuing bank, and Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporatedthe Shareholder Agreement. The Shareholder Agreement included provisions as joint lead arrangers and joint book runners (as amended,to certain aspects of our continuing relationship with OM plc, including the “Credit Facility”). Pursuant to the termscomposition of the Credit Facility, we may obtain loans on a revolving credit basisBoard and procureother corporate governance matters, certain consent rights that OM plc had until the issuancedate that it ceased to beneficially own at least 20% of lettersour outstanding Ordinary Shares with respect to certain actions taken by us and our subsidiaries and certain information rights granted to OM plc. In connection with the closing of credit in an aggregate amount at any time outstanding not in excessthe HNA Minority Sale, OM plc assigned to HNA certain of $350 million. The Credit Facility has a maturity date of October 15, 2019. Borrowingsits assignable rights under the facility bear interest,Shareholder Agreement, including the right to designate two directors to our Board. In addition to assigning its right to designate two directors to our Board, OM plc assigned to HNA, effective as of the closing of the second tranche of the HNA Minority Sale, certain rights that were assignable pursuant to Section 9.15 of the Shareholder Agreement, which included, without limitation, certain rights to information and anti-dilution protections.
On November 18, 2018, HNA notified us that it agreed to sell the substantial majority of its Ordinary Shares to Paulson. On February 25, 2019, the Paulson Sale was completed. In connection with the closing of the Paulson Sale, the rights which HNA held under the Shareholder Agreement were assigned to Paulson, including the right to appoint two directors so long as Paulson holds at our option, at either the per annum rate equal to (a) the greatest of (i) the prime rate, (ii) the federal funds effective rate plus 0.5% and (iii) the one month Adjusted LIBO Rate plus 1.0%, plus, in each case an additional amount ranging from 0.25% to 1.00%, with such additional amount based from time to time on the ratioleast 20% of our total consolidated indebtednessoutstanding Ordinary Shares and the right to Adjusted EBITDA (a “Leverage Ratio”) until either Moody’s Investor Service, Inc. or Standard & Poor’s assigned an initial ratingappoint one director so long as Paulson holds at least 7% of our outstanding Ordinary Shares. As previously reported, effective November 16, 2018, HNA exercised its rights under the Shareholder Agreement, to appoint John Paulson, the President of Paulson, and Guang Yang to our senior, unsecured long-term indebtedness for borrowed money that was not subject to credit enhancement, or our credit rating, at which time such additional amount became based on our credit rating or (b) the London interbank offered rate for a period, at our election, equal to one, two, three or six months plus an additional amount ranging from 1.25% to 2.00%, with such additional amount based from time to time on our Leverage Ratio until we were assigned a credit rating, at which time such additional amount became based on our credit rating. In addition, we are charged a commitment fee based on the average daily unused portion of the revolving credit facility at a per annum rate ranging from 0.20% to 0.50%, with such amount being based from time to time on our Leverage Ratio until we were assigned a credit rating, at which time such amount became based on our credit rating.
Under the Credit Facility, the ratio of third-party borrowings to trailing twelve months Adjusted EBITDA cannot exceed 3.0x, and the interest coverage ratio must not be less than 4.0x. At December 31, 2017, our ratio of third party borrowings to trailing twelve months Adjusted EBITDA was 1.4x and our interest coverage ratio was 11.5x.
In July 2016, Moody’s Investor Service, Inc. and Standard & Poor’s each assigned an initial investment-grade rating to our senior, unsecured long-term indebtedness. As a result ofBoard. After the assignment of the credit ratings,aforementioned rights under the Shareholder Agreement, Mr. Paulson is the sole Paulson-appointed Director under the Shareholder Agreement. Pursuant to the Shareholder Agreement, until such time as Paulson no longer owns at least 20% of our interest rateOrdinary Shares, Paulson may, in its discretion, appoint a second Director to our Board.
Registration Rights Agreement
In connection with our initial public offering, we entered into the Registration Rights Agreement, pursuant to which OM plc could require us to file one or more registration statements and prospectus supplements with the SEC covering the public resale of registrable securities beneficially owned by OM plc and its subsidiaries with expected aggregate gross proceeds of at least $50 million.
Effective as of the closing of the HNA Minority Sale, OM plc and OMGUK assigned to HNA OM plc’s and OMGUK's rights under the Registration Rights Agreement in respect of the shares transferred. Effective as of the closing of the Paulson Sale, HNA assigned to Paulson HNA’s rights under the Registration Rights Agreement in respect of the shares transferred.
We may be required by Paulson to file a new shelf registration statement, one or more amendments to such new shelf registration statement and one or more prospectus supplements in connection with such new shelf registration statement in the future. We are not obligated to effect more than one demand registration, in addition to any registration on outstanding borrowings was set at LIBOR + 1.50%a shelf registration statement, in any six-month period. We are obligated to file a shelf registration statement upon any request made by Paulson. In addition, Paulson has certain “piggy-back” registration rights, pursuant to which it is entitled to register the resale of its registrable securities alongside any offering of securities that we may undertake, and the commitment feeamount of securities we may offer may be subject to “cutback” in certain cases. We are responsible for the expenses associated with any sale of the Company’s shares by Paulson pursuant to a registration statement, except for its legal fees and underwriting discounts, selling commissions and transfer taxes applicable to such sale.
Historical Related Party Transactions
Intellectual Property License Agreement
In connection with our initial public offering, we entered into an intellectual property license agreement with OM plc, and, solely for the intellectual property owned by it applicable to the agreement, Old Mutual Life Assurance Company (South Africa) Ltd., or OMLACSA, which we refer to as the Intellectual Property Agreement. Pursuant to the Intellectual Property Agreement, OM plc and OMLACSA have granted us a limited, non-exclusive, fully paid-up, royalty-free, non-transferable, non-sublicensable license to use certain trademarks, servicemarks, names and logos, including the names “Old Mutual”, “OM” and the “OM 3 anchor design logo” or collectively, the Transitional Servicemarks, with respect to our business, worldwide, subject to certain exceptions set forth in the Intellectual Property Agreement. OM plc and OMLACSA have also granted us a perpetual, limited, non-exclusive, fully paid-up, royalty-free, non-transferable, non-sublicensable license to use the term “OMAM”, or the Perpetual Servicemark, and collectively with the Transitional Servicemarks, the Servicemarks, in all or part of our corporate or trade names, businesses and activities, including in any advertising or promotional materials, and as a ticker symbol, and the perpetual right to use “OM Asset Management” in all or part of our corporate or trade names. Likewise, we have been licensed the perpetual right to use omam.com. The license term for the Transitional Servicemarks commenced upon the date of the closing of our initial public offering and ended six months after the date on which OM plc ceased to directly or indirectly own a majority of our outstanding Ordinary Shares. The right to use the Perpetual Servicemark in all or part of our corporate or trade names, businesses and activities, including in any advertising or promotional materials, and as a ticker symbol, and the right to use “OM Asset Management” in all or part of our corporate or trade names, and the right to use omam.com as our website and email address, will continue in perpetuity.
As of the date hereof, we have ceased using the Servicemarks (including the Perpetual Servicemark), as well as any domain name covered by the Intellectual Property Agreement, but we are permitted to make historical reference to our affiliation with OM plc or OMLACSA solely to the extent required under applicable law to describe the historical performance of our business or to indicate that we were formerly operating under the name “Old Mutual”.
Under the Intellectual Property Agreement, we indemnify OM plc, OMLACSA, their respective affiliates, and their respective directors, officers, and employees from and against any third-party claims resulting from (i) our breach of the Intellectual Property Agreement and (ii) the use by us or our subsidiaries of the Servicemarks. OM plc and OMLACSA, jointly and severally, indemnify us, our subsidiaries, and our respective affiliates, directors, officers, and employees from and against any third-party claims resulting from (i) OM plc’s or OMLACSA’s breach of the Intellectual Property Agreement and (ii) the use by OM plc or OMLACSA or their respective subsidiaries of the Servicemarks, provided that we are using the Servicemarks in accordance with the Intellectual Property Agreement.
Co-Investment Deed
In connection with our initial public offering, we entered into a Co-Investment Deed whereby we are obligated to pay OMGUK an amount equal to the proceeds realized by us in respect of specified pre-initial public offering co-investments owned by BrightSphere Inc. (the “Pre-IPO Co-Investments”). These Pre-IPO Co-Investments include limited partnership interests and limited liability company interests in specified entities managed by the Company’s Affiliates. As of December 31, 2018, the Pre-IPO Co-Investments had an aggregate fair value and carrying value of $4.2 million.
During the term of the Co-Investment Deed, we make quarterly cash payments to OMGUK in an amount equal to 100% of the estimated after-tax cash distributions received by us or our wholly owned subsidiaries during the three-month period ending on the unused portionlast day of the revolving credit facility was set at 0.25%. Prior tomonth preceding the assignmentpayment date. These distributions include all amounts received by us or our wholly owned subsidiaries from or in respect of the credit ratings, ourPre-IPO Co-Investments, including any distributions, disposal proceeds and carried interest rateless any taxes chargeable on outstanding borrowings was based on our Leverage Ratiothose distributions assuming statutory tax rates. If any tax losses are realized in respect of a Pre-IPO Co-Investment during a tax year and was set at LIBOR + 1.25%have not been taken into account for that year, or if the actual after-tax cash receipts differ from the estimated after-tax cash receipts, there will be a true-up, and the commitment fee on the unused portionany additional payment made to OMGUK will be made no later than November 30th of the revolving credit facility was set at 0.20%.year following that tax year.
Non-Recourse Seed Capital FacilityManagement Agreement
In July 2017,connection with our initial public offering, we purchasedentered into a seed capital management agreement, dated October 8, 2014, with OM plc and certain of its affiliates, Millpencil Limited, or MPL, Millpencil (U.S.) LP, or the Limited Partnership, and a newly formed MPL entity, or MPLUK2, as amended by the first amendment thereto on December 31, 2014 (the “Seed Capital Management Agreement”). This agreement governed the deployment of certain seed capital investments of MPL and all of the seed capital investments of the Limited Partnership in various mandates that our Affiliates managed. On June 13, 2016, we and OM plc entered into a Heads of Agreement which provided for (i) the acceleration of the transfer of approximately $35 million of seed investments to our balance sheet (the “Initial Seed Purchase”), which occurred in the third quarter of 2016; (ii) a reduction of the seed capital investments managed by us but owned by OM plc to a portfolio of approximately $100 million; and (iii) the acceleration of the transfer of all remaining seed capital investments covered by the Seed Capital Management Agreement to our balance sheet on or around June 30, 2017 (the “Final Seed Purchase”). We have completed both the Initial Seed Purchase and the Final Seed Purchase and the Seed Capital Management Agreement is no longer applicable.
Deferred Tax Asset Deed
In connection with our initial public offering, we entered into a Deferred Tax Asset Deed with OMGUK, dated September 29, 2014, as amended (the “DTA”) that provides for the payment by BrightSphere to OMGUK of amounts equal to certain deferred tax assets existing as of the date of the closing of our initial public offering (the “Pre-IPO Tax Assets”), subject to repayment by OMGUK if, and to the extent that, the Company realizes a value from the Pre-IPO Assets that is not consistent with the payments made to OM plc pursuant to the DTA. For the purposes of this DTA, the tax savings we realize are computed by comparing our actual tax liabilities with the liability for $63.4 million. We financed this purchase in part through borrowings under a non-recourse seed capital facility collateralized entirely by our seed capital holdings. Wetax we would have had if the Pre-IPO Tax Assets had not existed.
On June 13, 2016, we entered into this facility asa Heads of July 17, 2017, and may borrow upAgreement with OMGUK to $65.0 million, so long asprovide that our obligations to make future payments to OMGUK under the borrowing does not represent more than 50%DTA, which were originally scheduled to continue until January 31, 2020, were terminated in exchange for a payment by us of the net present value of the seed capital collateral. Atfuture payments due to OMGUK under the DTA, originally valued at $142.6 million as of December 31, 2016. Such payments were to be paid by us to OMGUK in three installments on each of June 30, 2017, December 31, 2017 and June 30, 2018. The reduction of the corporate tax rate and other provisions of the Tax Cuts and Jobs Act (the "Tax Act") resulted in a decrease to the DTA amounts owed by the Company to OM plc. As a result, a reduction of approximately $52 million was recorded to the DTA liability at December 31, 2017. The initial payment of $45.5 million was paid on June 30, 2017. In 2018, the Company agreed to terminate the DTA Deed with OM plc. The final cash payment of $32.7 million is expected to be made to OM plc shortly to settle the outstanding liability under the Deed, after which the Company will have no further obligation to OM plc or OMGUK under the DTA Deed.
Management Fees
We provide sub-advisory and advisory services to related party subsidiaries of OM plc. We earned management fees for providing these services amounting to $6.2 million for the year ended December 31, 2018.
Rent and Facilities Costs
Our global distribution subsidiary conducts a portion of its distribution activities in the United Kingdom, and this non-recourse seed capital facilitysubsidiary has entered into arrangements with a related party subsidiary of OM plc to utilize their premises. The amounts charged to the Company for rent and operating costs per these arrangements amounted to $33.5 million. Since this facility is non-recourseapproximately $0.2 million for the year ended December 31, 2018.
Guarantees
In connection with a sale by us in May 2012 of one of our former affiliates to us beyond the seed investments themselves, drawdowns under this facility are excluded from oura third party, debt levels for purposes of calculating our credit ratio covenantsOM plc entered into a letter agreement with the purchaser under the revolving credit facility.
Long-term Bonds
In July 2016, we issued $275.0 million of 4.80% Senior Notes due 2026, or the 2026 Notes, and $125.0 million of 5.125% Senior Notes due 2031, or the 2031 Notes. We used the net proceeds of these offeringsagreement pursuant to finance the acquisition of Landmark in August 2016, purchase seed capital fromwhich OM plc settle a Treasury rate lock contractagreed to be bound, and pay down the balance of the Revolving Credit Facility.
4.80% Senior Notes Due July 2026
The $275.0 million 2026 Notes were sold at a discount of $(0.5) million and we incurred debt issuance costs of $(3.0) million, which are being amortizedagreed to interest expense over the ten-year term. The 2026 Notes cancause its affiliates to be redeemed at any time prior to the scheduled maturity in part or in aggregate, at the greater of 100% of the principal amount at that time or the sum of the remaining scheduled payments discounted at the treasury rate (as defined) plus 0.5%, together with any related accrued and unpaid interest.
5.125% Senior Notes Due August 2031
The $125.0 million 2031 Notes incurred debt issuance costs of $(4.3) million, which are being amortized to interest expense over the fifteen-year term. The 2031 Notes can be redeemed at any time, on or after August 1, 2019, at a redemption price equal to 100.0% of the principal amount together with any related accrued and unpaid interest.
Other Long-term Liabilities
Other long-term liabilities principally consist of cash-settled Affiliate equity and profit interests liabilities heldbound, by certain Affiliate key employees, and voluntary deferred compensation plans. The following table summarizes our other long-term liabilities:
|
| | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 |
| Share-based payments liability | $ | 188.8 |
| | $ | 53.7 |
|
| Affiliate profit interests liability | 195.0 |
| | 159.2 |
|
| Employee equity | 383.8 |
| | 212.9 |
|
| Voluntary deferral plan liability | 95.1 |
| | 78.0 |
|
| Non-current compensation payable | 0.1 |
| | 0.1 |
|
| Total | $ | 479.0 |
| | $ | 291.0 |
|
Share-based payments liability represents the value of Affiliate key employee-owned equity that may under certain circumstances be repurchased by us that is considered an equity award under U.S. GAAP based on the terms and conditions attached to these interests. Profit interests represent the value of Affiliate key employee-owned equity that may under certain circumstances be repurchased by us that is not considered an equity award under U.S. GAAP, but rather a form of compensation arrangement, based on the terms and conditions attached to these interests. Our obligation in any given period in respect of funding these potential repurchases of Affiliate equity is limited to only that portion that may be put to us by Affiliate key employees, which is typically capped annually under the terms of these arrangements suchcertain covenants and agreements contained in the agreement. The covenants relate to non-solicitation and non-hiring of the former affiliate’s personnel and non-competition with the business of the former affiliate for a period of three-years following the closing date of the transaction. In addition, OMGUK unconditionally guaranteed the performance of all obligations of the sellers under the agreement, including obligations of payment pursuant to an indemnification or as otherwise required by the terms of the agreement.
Ordinary Share Repurchase Transactions and Paulson Waiver Agreement
On February 21, 2019, we announced that we are not requireddelivered a notice (the "Repurchase Notice") to repurchase more thanCitigroup Global Markets Inc. ("Citigroup") that we can reasonably recycle by re-granting the interests in lieu of cash variable compensation owedwere exercising our right to Affiliate key employees.
Certainrequire Citigroup to sell to us 4,100,000 of our Ordinary Shares (the "Repurchase Shares") pursuant to the Purchase Agreement, dated March 16, 2016, by and between us and Citigroup, as amended (the "Purchase Agreement"), at a market price of $13.89 per share (an aggregate of $56,949,000) (the "First Repurchase"). Citigroup satisfied its obligations to sell the Repurchase Shares to us under the Repurchase Notice by purchasing an equivalent number of ordinary shares from HNA and then selling such shares to us.
In preparation for potential repurchases by us in advance of the second closing of the Paulson Sale, we and Paulson agreed pursuant to that certain Waiver and Confirmation Agreement (the "Waiver Agreement") dated as of February 21, 2019 that, upon completion of the Paulson Sale, Paulson would be assigned the rights then held by HNA under the Shareholder Agreement.
On February 26, 2019, we announced that we repurchased 3,886,625 additional shares held by HNA at a price of $13.95 per share on February 25, 2019 (the “Second Repurchase,” and together with the First Repurchase, the “Repurchases”).
Director Independence
The Directors currently determined to be independent by the Board are: Mses. Beams and Trebbi and Messrs. Chersi, Love, and Paulson. Our Board has determined that Ms. Beams, Ms. Trebbi and Messrs. Chersi, Love and Paulson are independent under the rules of the New York Stock Exchange (the “NYSE Rules”). James J. Ritchie, who served on the Board from October 2014 to November 2018, served as our Interim Chief Executive Officer from July 1, 2017 until March 2, 2018. Mr. Ritchie was not deemed to be an independent director during his tenure as Interim Chief Executive Officer, but was deemed to be independent following his term as Interim Chief Executive Officer until his resignation on November 29, 2018. Mr. Yang was an independent director of the Board from November 16, 2018 until he was appointed as the Company's President and CEO, effective December 15, 2018. Upon such appointment, Mr. Yang became an employee of the Company and thus was no longer independent.
OTHER CORPORATE GOVERNANCE INFORMATION
Committees of the Board and Meetings
Meeting Attendance
During the fiscal year ended December 31, 2018, there were 30 formal meetings of the Board, and the various committees of the Board met a total of 34 times (14 Audit Committee meetings, 9 Nominating and Corporate Governance Committee meetings and 11 Compensation Committee meetings). In addition, during the fiscal year ended December 31, 2018, the Board acted by written consent 6 times. No director, including any alternate director appointed pursuant to the Company’s Articles of Association, attended fewer than 75% of the total number of meetings of the Board and of committees of the Board on which he or she served during fiscal year 2018. The Board has adopted a policy under which each member of the Board is expected to attend, in person or telephonically, each annual general meeting of our shareholders absent exigent circumstances that prevent their attendance. All directors were in attendance, either in person or telephonically, at our 2018 Annual General Meeting.
Audit Committee
Our Audit Committee met 14 times during fiscal year 2018. The Audit Committee is currently composed of Ms. Beams, Ms. Trebbi and Mr. Chersi, and Mr. Chersi is the Chair. John Rogers served as a member of the Audit Committee until January 31, 2018. Kyle Legg served as a member of the Audit Committee until June 19, 2018. Enrico Marini Fichera was appointed as a member of the Audit Committee effective August 15, 2018 and served until November 16, 2018. Suren Rana served as a member of the Audit Committee until August 15, 2018. Barbara Trebbi was appointed as a member of the Audit Committee effective September 12, 2018. James Ritchie was appointed as a member of our Audit Committee effective June 19, 2018 and served until November 29, 2018. Guang Yang was appointed as a member of our Audit Committee effective November 30, 2018 and served until December 15, 2018. Mary Elizabeth Beams was appointed as a member of the Audit Committee effective December 15, 2018. The Board has determined that each member of the Audit Committee meets the independence requirements of Rule 10A-3 under the Exchange Act and the NYSE Rules and is “financially literate” as such term is defined in the NYSE Rules. In addition, our Board has determined that each member of the Audit Committee is an “audit committee financial expert” within the meaning of SEC regulations and the NYSE Rules.
The Audit Committee has a charter that sets forth the Audit Committee’s purpose and responsibilities, which include (i) assisting the Board in fulfilling its oversight responsibilities over the financial reports and other financial information filed with the SEC, (ii) appointing our independent auditors and evaluating their independence, (iii) reviewing our audit procedures and controls, and (iv) overseeing our internal audit function and risk and compliance function.
A copy of the Audit Committee’s written charter is publicly available on our website at www.bsig.com.
Compensation Committee
Our Compensation Committee met 11 times during fiscal year 2018. The Compensation Committee is currently composed of Ms. Trebbi, Ms. Beams, Mr. Chersi, Mr. Love and Mr. Paulson. Ms. Trebbi is the Chair of our Compensation Committee. John Rogers served as a member of the Compensation Committee until January 31, 2018. Kyle Legg served as a member of our Compensation Committee until June 19, 2018. Guang Yang served as a member of our Compensation Committee until September 12, 2018. Mr. Yang was re-appointed to our Compensation Committee effective November 30, 2018 and served until December 15, 2018. Daniel Chen was appointed as a member of our Compensation Committee effective September 12, 2018 and served until November 16, 2018. Mary Elizabeth Beams was appointed as a member of our Compensation Committee effective November 30, 2018. Reginald Love was appointed as a member of our Compensation Committee effective November 30, 2018. John Paulson was appointed as a member of our Compensation Committee effective January 9, 2019. Our Board has determined that each member of the Compensation Committee is independent under NYSE Rules.
The Compensation Committee has a charter that sets forth the Compensation Committee’s purpose and responsibilities, which include annually reviewing and approving the compensation of our executive officers and reviewing and making recommendations with respect to our equity incentive plans.
The Compensation Committee’s processes and procedures for the consideration and determination of executive compensation as well as disclosure regarding the role of the Company’s compensation consultant are set forth below in “Compensation Discussion and Analysis.”
A copy of the Compensation Committee’s written charter is publicly available on our website at www.bsig.com.
Nominating and Corporate Governance Committee
Our Nominating and Corporate Governance Committee met 9 times during fiscal year 2018. The Nominating and Corporate Governance Committee is currently composed of Ms. Trebbi and Messrs. Chersi, Love and Paulson. Mr. Paulson is the Chair of our Nominating and Corporate Governance Committee. Our Board has determined that Ms. Trebbi and Messrs. Chersi, Love and Paulson are independent under the NYSE Rules. Mr. Rogers served as a member of our Nominating and Corporate Governance Committee until January 31, 2018. Ms. Trebbi was appointed as a member of our Nominating and Corporate Governance Committee effective April 18, 2018. Mr. Ritchie was appointed as a member of our Nominating and Corporate Governance Committee effective September 12, 2018 and served until November 29, 2018. Mr. Chen was appointed as a member of our Nominating and Corporate Governance Committee effective September 12, 2018 and served until November 16, 2018. Mr. Yang served as a member of our Nominating and Corporate Governance Committee until September 7, 2018. Mr. Love was appointed as a member of our Nominating and Corporate Governance Committee effective November 30, 2018. Mr. Paulson was appointed as a member of our Nominating and Corporate Governance Committee effective November 30, 2018. The Nominating and Corporate Governance Committee of our Board has consisted entirely of independent directors since July 24, 2017. The Nominating and Corporate Governance Committee has a charter that sets forth the Committee’s purpose and responsibilities, which include reviewing and recommending nominees for election as directors, assessing the performance of our directors, reviewing Corporate Governance Guidelines for our Company and reviewing and recommending for approval to the non-interested directors of the Board, the directors’ remuneration on a biennial basis.
Under our current corporate governance policies, the Nominating and Corporate Governance Committee may consider director candidates recommended by shareholders as well as from other sources, such as other directors or officers, third party search firms or other appropriate sources. For all potential candidates, the Nominating and Corporate Governance Committee may consider all factors it deems relevant, such as a candidate’s integrity, personal and professional reputation, experience and expertise, business judgment, ability to devote time, possible conflicts of interest, concern for the long-term interests of the shareholders, independence, range of backgrounds and experience and the extent to which the candidate would fill a present need on the Board. In general, persons recommended by shareholders will be considered on the same basis as candidates from other sources. If a shareholder wishes to nominate a candidate for director who is not to be included in our proxy statement, it must follow the procedures described in our Articles of Association and in “Shareholder Proposals and Nominations For Director” section of our proxy statements.
Although the Nominating and Corporate Governance Committee does not have a formal policy with regard to diversity, the Nominating and Corporate Governance Committee considers a broad range of backgrounds and experiences as well as gender, ethnic and other forms of diversity when selecting potential nominees for membership on the Board.
A copy of the Nominating and Corporate Governance Committee’s written charter is publicly available on the Company’s website at www.bsig.com.
Executive Sessions of Non-Employee Directors
In accordance with the NYSE Rules and our Affiliates’ key employeesCorporate Governance Guidelines, our Non-Employee Directors meet in regularly scheduled executive sessions without management present. The Chair of these executive sessions is an informal position and no one director has been chosen to preside as Chair over all of these executive sessions. Each session is presided over by one of the directors as the participants of the particular executive session so determine.
Board Leadership Structure and Role in Risk Oversight
Mr. Yang serves as our President, Chief Executive Officer and Executive Chairman of our Board. Mr. Yang was appointed Executive Chairman of our Board, effective November 30, 2018. Mr. Chersi was appointed as the Board’s Lead Independent Director, effective November 30, 2018. From July 1, 2017 until March 2, 2018, Mr. Ritchie served as our Interim Chief Executive Officer and served as the Chairman of our Board until November 29, 2018. From March 2, 2018 until December 15, 2018, Mr. Belgrad served as our President and Chief Executive Officer. The Board has no set policy with respect to the separation of the offices of Chairman and the Chief Executive Officer. The Board believes that this issue is part of the succession planning process and that it is in the best interest of the Company and its shareholders for the Board to make a particular determination in the context of the succession planning process. If the Chairman and the Chief Executive Officer are eligiblethe same person, the independent directors will elect a Lead Independent Director to participateserve until such person resigns or a successor is duly elected. The Lead Independent Director performs such duties as the Board of Directors determines from time to time, including, without limitation:
Speaking on behalf of the Board and chairing Board meetings when the Executive Chairman is unable to do so
Calling meetings of the independent directors as necessary
Setting the agenda for and leading executive sessions of the independent directors
Briefing the Executive Chairman and CEO on issues arising in the executive sessions
Approving the expenses of the Executive Chairman and CEO
Leading discussion by the independent directors of the Executive Chairman and CEO’s performance with the Chair of the Nominating and Corporate Governance Committee
Representing the independent directors to external stakeholders, as applicable
The Board oversees the business and affairs of our voluntary deferral plan,Company, including all aspects of risk, which includes risk assessment, risk appetite and risk management, focusing on, among other things, major strategic risks (e.g. Affiliate investment performance and Affiliate relationships and growth). In executing its risk oversight function, the Board has delegated to the Audit Committee the direct oversight over risk functions. However, the Audit Committee is not responsible for day to day management of risk. The Audit Committee reviews and subsequently reports to the Board any issues which arise with respect to the performance of our risk function including operational risks and risks relating to the quality or VDP, which providesintegrity of our senior personnel the opportunityfinancial statements. The Audit Committee also, at least annually, reviews our policies with respect to voluntarily defer a portionrisk assessment, risk appetite and risk management.
Website Availability of their compensation. Thereour Corporate Governance Guidelines
A copy of our Corporate Governance Guidelines is a voluntary deferral plan investment balance included in investmentspublicly available on the Consolidated Balance Sheets that corresponds to this deferral liability.Company’s website at www.bsig.com.
For additional discussionCompensation Committee Interlocks and Insider Participation
The members of our compensation programs, please refer tothe Compensation Committee during fiscal year 2018 are set forth above under “—Compensation Committee.” No member of the Compensation Committee was, during fiscal year 2018, or previously, an officer or employee of BrightSphere while serving on the Compensation Committee. No executive officer of the Company serves on the compensation discussions contained withincommittee or board of directors of another company that has an executive officer that serves on our definitive proxy statementCompensation Committee or Board.
Item 14. Principal Accountant Fees and Services
The Audit Committee has appointed KPMG as our independent registered public accounting firm to audit our financial statements for the fiscal year ending December 31, 2019. KPMG audited our 2018 annual meeting of shareholders incorporated herein by reference.financial statements for the fiscal year ended December 31, 2018.
Cash FlowsIn deciding to appoint KPMG, the Audit Committee reviewed auditor independence issues and existing commercial relationships with KPMG and concluded that KPMG has no commercial relationship with the Company that would impair its independence for the fiscal year ending December 31, 2019.
The following table summarizes certain keypresents fees for professional audit services rendered by KPMG for the audit of our annual financial data relating to cash flows. All amounts presented exclude consolidated Funds:statements for the years ended December 31, 2018, and December 31, 2017, and fees billed for other services rendered by KPMG during those periods.
|
| | | | | | | | | | | |
| | Years ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
Cash provided by (used in)(1)(2) | |
| | |
| | |
|
| Operating activities | $ | 224.9 |
| | $ | 123.9 |
| | $ | 255.7 |
|
| Investing activities | (10.8 | ) | | (284.3 | ) | | (62.7 | ) |
| Financing activities | (129.8 | ) | | 112.9 |
| | (230.6 | ) |
|
| | | | | | | | |
| Type of Fee | | 2018 | | 2017 |
Audit fees(1) | | $ | 3,225,489 |
| | $ | 3,253,840 |
|
Audit related fees(2) | | 357,226 |
| | 425,650 |
|
Tax fees(3) | | 87,987 |
| | 58,590 |
|
| All other fees | | — |
| | — |
|
| Total | | $ | 3,670,702 |
| | $ | 3,738,080 |
|
| |
| (1) | Excludes consolidated Funds.Audit fees consisted of audit work performed in the preparation of financial statements, as well as work generally only the independent registered public accounting firm can reasonably be expected to provide, such as statutory audits. |
| |
| (2) | Cash flow data shown only includes cash flows from continuing operations. |
Our most significant uses of cash have included our acquisition of Landmark, third-party interest payments, payments made to OM plc under the Deferred Tax Asset Deed, seed capital purchased from OM plc, repurchases of shares, dividends, and compensation and general and administrative expenses for the Center.
Comparison for the Years Ended December 31, 2017, 2016 and 2015
Net cash provided by operating activities of continuing operations excluding consolidated Funds increased $101.0 million, or 81.5%, from $123.9 million for the year ended December 31, 2016 to $224.9 million for the year ended December 31, 2017. The increase was primarily due to higher amortization and revaluation of non-cash compensation awards and the net impact of the Tax Act, somewhat offset by higher gains on other investments.
Net cash provided by operating activities of continuing operations excluding consolidated Funds decreased $(131.8) million, or (51.5)%, from $255.7 million for the year ended December 31, 2015 to $123.9 million for the year ended December 31, 2016. The decrease was primarily due to decreases in amounts due to related parties and decreases in current payables and accruals exclusive of amounts relating to the treasury rate lock.
Net cash (used in) investing activities of continuing operations excluding consolidated Funds consist primarily of investments in a new Affiliate in 2016, seed capital purchased from OM plc, purchases and sales of investment securities as part of our co-investment program and VDP, and purchases of fixed assets for use within our premises. Cash (used in) investing activities was $(10.8) million, $(284.3) million and $(62.7) million for the years ended December 31, 2017, 2016 and 2015, respectively. Cash (used in) investing activities in 2016 primarily reflects disbursements of $(219.1) million, net of cash acquired, related to the Landmark acquisition. Net cash (used in) received from the (purchase) and sale of investments was $4.8 million, $(51.7) million and $(49.1) million for the years ended December 31, 2017, 2016 and 2015, respectively. Fluctuations areAudit related fees consisted principally due to the timing of investments or redemptions of seed capital as well as acquisitions or disposals of real estate and timber assets in which we are co-investing. Net cash (used in) the purchase of fixed assets was $(13.7) million, $(13.5) million and $(13.0) million for the years ended December 31, 2017, 2016 and 2015, respectively.
Net cash provided by (used in) financing activities excluding consolidated Funds consists of share repurchases, payments made to OM plc, third-party borrowings and dividends paid. Cash provided by (used in) financing activities in 2017 was $(129.8) million and in 2016 was $112.9 million. We drew net $33.5 million against third party borrowings in 2017 and we borrowed net $302.1 million in 2016. In 2017 we made payments of $(50.4) million against amounts previously owed to OM plc (including $(45.6) million for the deferred tax arrangement and $(4.8) million for the co-investment arrangement), funded $(74.1) million for share repurchases, and paid out $(38.8) million in dividends. In 2016 we paid $(52.1) million against amounts previously owed to OM plc (including $(41.4) million for the deferred tax arrangement and $(10.7) million for the co-investment arrangement), $(98.6) million for share repurchases, and $(38.5) million in dividends. In 2015 we paid $(87.0) million against third party borrowings, $(104.9) million against amounts previously owed to OM plc (including $(37.0) million for the loan note, $(53.6) million for the deferred tax arrangement, and $(14.3) million for the co-investment arrangement) and $(38.7) million in dividends.
Supplemental Liquidity Measure—Adjusted EBITDA
As supplemental information, we provide information regarding Adjusted EBITDA, which we define as economic net income before interest, income taxes, depreciation and amortization. Adjusted EBITDA is a non-GAAP liquidity measure that we provide in addition to, but not as a substitute for, cash flows from operating activities. It should be noted that our calculation of Adjusted EBITDA may not be consistent with Adjusted EBITDA as calculated by other companies. We believe Adjusted EBITDA is a useful liquidity metric because it indicates our ability to make further investments in our business, service debt and meet working capital requirements. It is also encapsulated in our line of credit as part of our liquidity covenants.
The following table reconciles our U.S. GAAP net income attributable to controlling interests to EBITDA to Adjusted EBITDA to economic net income for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| ($ in millions) | 2017 | | 2016 | | 2015 |
| Net income attributable to controlling interests | $ | 4.2 |
| | $ | 126.4 |
| | $ | 155.5 |
|
Net interest expense(1) | 23.7 |
| | 10.8 |
| | 2.3 |
|
| Income tax expense (including tax expenses related to the non-recurring performance fee and discontinued operations) | 132.7 |
| | 44.8 |
| | 47.2 |
|
| Depreciation and amortization (including intangible assets and discontinued operations) | 18.3 |
| | 12.0 |
| | 7.1 |
|
| EBITDA | $ | 178.9 |
| | $ | 194.0 |
| | $ | 212.1 |
|
| Non-cash compensation costs associated with revaluation of Affiliate key employee-owned equity and profit-sharing interests | 95.4 |
| | (7.1 | ) | | 18.5 |
|
| Amortization of acquisition-related consideration and pre-acquisition employee equity | 70.6 |
| | 26.5 |
| | — |
|
| EBITDA of discontinued operations attributable to controlling interests | 0.2 |
| | (10.2 | ) | | (1.3 | ) |
| (Gain) loss on seed and co-investments and investment changes attributable to controlling interests | (22.2 | ) | | (1.1 | ) | | (0.3 | ) |
| Non-recurring performance fee before tax | — |
| | — |
| | (19.1 | ) |
| Deferred tax asset deed revaluation | (51.8 | ) | | — |
| | — |
|
Restructuring costs(2) | 10.8 |
| | — |
| | 0.5 |
|
| Capital transaction costs | — |
| | 6.4 |
| | 2.3 |
|
| Adjusted EBITDA, excluding non-recurring performance fee | $ | 281.9 |
| | $ | 208.5 |
| | $ | 212.7 |
|
| ENI net interest expense to third parties | (18.8 | ) | | (8.4 | ) | | (2.3 | ) |
| Depreciation and amortization | (11.8 | ) | | (9.4 | ) | | (6.9 | ) |
| Tax on economic net income | (70.4 | ) | | (45.6 | ) | | (53.8 | ) |
| Economic net income, excluding non-recurring performance fee | $ | 180.9 |
| | $ | 145.1 |
| | $ | 149.7 |
|
| |
(1) | Interest is shown net of interest incurred in 2015audits of employee benefit plans, and special procedures related to the interest rate hedge. |
| |
(2) | Included in restructuring for the year ended December 31, 2017 is $1.0 million related to the Heitman transaction and $9.8 million related to CEO transition costs, comprised of $0.5 million of fixed compensation and benefits, $8.8 million of variable compensation and $0.5 million of recruiting costs. |
For a full discussion regarding the items excluded from Adjusted EBITDA above and the calculation of economic net income, refer to “—Non-GAAP Supplemental Performance Measure—Economic Net Income.”
Limitations of Adjusted EBITDA
As a non-GAAP, unaudited liquidity measure and derivation of EBITDA, Adjusted EBITDA has certain material limitations. It does not include cash costs associated with capital transactions and excludes certain U.S. GAAP expenses that fall outside the definition of EBITDA. Each of these categories of expense represents costs to us of doing business, and therefore any measure that excludes any or all of these categories of expense has material limitations.
Future Capital Needs
We believe that our available cash and cash equivalents to be generated from operations, supplemented by short-term and long-term financing, as necessary, will be sufficient to fund current operations and capital requirements for at least the next twelve months, including our obligations under the amended Deferred Tax Asset Deed and the Landmark earn-out, as well as our day-to-day operations and future investment requirements. Refer to Note 10, Related Party Transactions in our Consolidated Financial Statements included in Item 8 herein, for additional information on the amended agreements with OM plc. Our ability to secure short-term and long-term financing in the future will depend on several factors, including our future profitability, our relative levels of debt and equity and the overall condition of the credit markets.
Commitments, Contingencies and Off-Balance Sheet Obligations
Indemnifications
In the normal course of business, such as through agreements to enter into business combinations with and divestitures of Affiliates, we occasionally enter into contracts that contain a variety of representations and warranties and which provide general indemnifications. Our maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against us that have not yet occurred.
Off-Balance Sheet Obligations
Off-balance sheet arrangements, as defined by the SEC, include certain contractual arrangements pursuant to which a company has an obligation, such as certain contingent obligations, certain guarantee contracts, retained or contingent interests in assets transferred to an unconsolidated entity, certain derivative instruments classified as equity or material variable interests in unconsolidated entities that provide financing, liquidity, market risk or credit risk support. Disclosure is required for any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, results of operations, liquidity or capital resources. We generally do not enter into off-balance sheet arrangements, other than those described in “Contractual Obligations” as well as Note 6 to our Consolidated Financial Statements included in Item 8 herein, “Variable Interest Entities.”
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | |
| | Payments due by period |
| ($ in millions) | Total | | Less then 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
| Contractual Obligations | |
| | |
| | |
| | |
| | |
|
Amounts due to OM plc(1) | $ | 58.5 |
| | $ | 45.2 |
| | $ | 13.3 |
| | $ | — |
| | $ | — |
|
Non-recourse borrowings(2) | 33.5 |
| | — |
| | 33.5 |
| | — |
| | — |
|
| Other third party borrowings | 400.0 |
| | — |
| | — |
| | — |
| | 400.0 |
|
Lease obligations(2) | 52.7 |
| | 11.8 |
| | 21.3 |
| | 14.9 |
| | 4.7 |
|
| Co-investment obligations | 59.7 |
| | 24.9 |
| | 29.8 |
| | 5.0 |
| | — |
|
Other liabilities(3) | 1.4 |
| | 0.2 |
| | 1.2 |
| | — |
| | — |
|
Maximum Affiliate equity and profits interests repurchase obligations(4) | 384.2 |
| | 21.6 |
| | 182.6 |
| | 47.6 |
| | 132.4 |
|
| Total contractual obligations | $ | 990.0 |
| | $ | 103.7 |
| | $ | 281.7 |
| | $ | 67.5 |
| | $ | 537.1 |
|
| |
(1) | Amounts due to OM plc are comprised of $45.2 million related to the deferred tax asset liability and $13.3 million related to co-investments. We entered into the Deferred Tax Asset Deed with OM plc in October 2014 and amended the agreement in June 2016. Following the passage of the Tax Act, we made adjustments to re-value the Deferred Tax Asset Deed. The continuation of certain protections provided by OM plc related to the realized tax benefit resulting from the Company's use of deferred tax assets remains unaffected. |
| |
(2) | Under the evergreen renewal option of the non-recourse seed capital facility, in January 2018 the maturity date of this facility was extended from July 2018 to January 2019.regulatory filings. |
| |
| (3) | Amounts are shown netTax fees consisted principally of income from subleasesassistance with matters related to domestic and exclude transferred Affiliates. |
| |
(4) | Represents the mortgage on a building owned by an Affiliate. |
| |
(5) | Represents amortized amounts putable by Affiliate key employees. Includes amortized portion of Landmark’s contingent paymentinternational tax compliance and employee equity owned pre-acquisition.reporting. |
Critical AccountingAudit Committee Pre-Approval Policies and EstimatesProcedures
Our accompanying Consolidated Financial Statements were prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires usSubject to make estimates or assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Due to their nature, estimates involve judgment based upon available information. Actual results could differ from these estimates or assumptions and may have a material effect on our Consolidated Financial Statements.
Our significant accounting policies are enumerated in Note 2, “Significant Accounting Policies” of our accompanying Consolidated Financial Statements. Of the significant accounting policies discussed in Note 2, we believe that the policies and estimates below constitute our critical accounting policies, as they involve significant estimates or judgment due to the sensitivity of the methods and assumptions used.
Our critical accounting policies are:
revenue recognition
compensation arrangements
share-based compensation
consolidation
fair value measurement
intangible assets
goodwill
earnings per share
income taxes
Recent accounting developments
Revenue from contracts with customers
In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers. ASU 2014-9 modifies existing U.S. GAAP revenue recognition standards to more closely align with international accounting standards. Additionally, the guidance requires improved disclosures around the nature, amount, timing and uncertainty of revenue recognized. Under the standard, a company isany necessary approvals required to (a) identify the contract(s) with a customer, (b) identify the performance obligations in the contract, (c) determine the transaction price, (d) allocate the transaction price to the performance obligations in the contract, and (e) recognize revenue when (or as) the entity satisfies a performance obligation. Since issuing the standard, the FASB has issued several amendments, primarily clarifying certain components of the standard. ASU 2014-9, as amended, was effective for us on January 1, 2018.
The guidance permits two methods of adoption; a full retrospective adoption will apply the standard to each prior reporting period presented and a modified retrospective adoption, where the cumulative effect of initially applying the guidance is recognized at the date of initial application. We will adopt the standard using the modified retrospective method.
We have completed our detailed assessment of contractual arrangements and we have concluded the following related to potential material changes to the timing of when revenue is recognized and the recording of related costs upon transition to ASU 2014-9:
Management fee revenue: We have found no instances where ASC 2014-09, as amended, would cause a change to the method and timing of how we record management fee revenue.
Performance fee revenue: We have found no instances where ASC 2014-09, as amended, would cause a change to the method and timing of how we record performance fee revenue.
Costs of acquiring a contract with a customer: We have concluded that there are no incremental costs directly and solely attributable to acquiring a contract with a customer. There are therefore no costs of acquiring a contract subject to capitalization and there will be no change to our current accounting.
Pass-through costs: We have identified certain instances where we expect we will have to change the accounting in cases where we pay expenses on behalf of a customer, typically a Fund. Where certain expenses and subsequent reimbursements were previously recorded on a net basis, this change may require them to be recorded on a gross basis. While the change in accounting for pass-through costs could increase both our revenues and expenses by identical amounts, it will not cause any changes to our net income attributable to controlling interests.
Leases
In January 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 changes existing GAAP by requiring the recognition of lease assets and lease liabilities by lessees for those leases previously classified as operating leases under previous U.S. GAAP. The lease asset would reflect a right-to-use asset and the lease liability would reflect the present value of the future lease payments. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018 and a modified retrospective transition approach is required where companies will have to recognize and measure leases at the beginning of the earliest period presented.
The Company has performed a preliminary assessment of ASU 2016-02 and has begun formulating an implementation plan. The Company is generally able to categorize its leases as either real estate leases (for office space) or as “all other” leases. Recording real estate leases under ASU 2016-02 is expected to create a category of “right-to-use” assets on the balance sheet of the Company to record the value of the leased office space in an amount equal to the net present value of future lease payments due (see Note 8), offset by a liability representing the total amounts due for the current value of future lease obligations. For all other leases, a roster must be assembled and evaluations must be performed, but the Company does not expect there to be a material impact to its Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Our exposure to market risk is directly related to the role of our Affiliates as asset managers. Substantially all of our investment management revenues are derived from our Affiliates’ agreements with their clients. Under these agreements, the revenues we receive are based on the value of our assets under management or the investment performance on client accounts for which we earn performance fees. Accordingly, our revenues and net income may decline as a result of our assets under management decreasing due to depreciation of our investment portfolios. In addition, such depreciation could cause our clients to withdraw their funds in favor of investments offering higher returns or lower risk, which would cause our revenues and net income to decline further.
Our model for assessing the impact of market risk on our results uses December 31, 2017 ending AUM and management fee rates as the basis for management fee revenue calculations. With respect to performance fee revenue, we assume that relative investment performance remains the same as it was on December 31, 2017. Therefore, market-driven changes in performance fees, which are typically based on relative performance versus market indices, reflect changes in the underlying AUM used in the calculation rather than differences in relative performance as a result of a changed market environment. The basis for the analysis is performance fees earned for the twelve months ended December 31, 2017.
Our profit sharing economic structure, described more fully in “Management’s Discussion and Analysis of Financial Condition and Results of Operation—The Economics of Our Business,” results in a sharing of market risk between us and our employees. Approximately 50% of our ENI cost structure is variable, representing variable compensation and Affiliate key employee distributions. These variable expenses generally are linked in a formulaic manner to the profitability of the business after covering operating expenses, which include base compensation and benefits, general and administrative expenses, and depreciation and amortization. In modeling the impact of market risk, we assume that these operating expenses remain unchanged, but the resulting impact on profit driven by increases or decreases in revenue will change variable compensation and Affiliate key employee distributions in line with their formulaic calculations. Any change in pre-tax profit is tax-effected at our statutory combined state and federal rate of approximately 27% to calculate profit after tax, factoring the impact of the 2017 Tax Cuts and Jobs Act.
The value of our assets under management was $243.0 billion as of December 31, 2017. A 10% increase or decrease in the value of our assets under management, if proportionally distributed over all of our investment strategies, asset classes and client relationships, would cause an annualized increase or decrease in our gross management fee revenues of approximately $95.5 million, including equity-accounted Affiliates, based on our current weighted average fee rate of 39 basis points. Approximately $56.0 billion, or 23%, of our AUM, including equity-accounted Affiliates, are in accounts subject to performance fees. Of these assets, approximately 85% are in accounts for which performance fees, or management fee adjustments, are calculated based on investment return that differs from the relative benchmark returns. Assuming the market change does not impact our relative performance and high-water mark status of our alternative assets, a 10% increase or decrease in AUM would have approximately a $2.7 million impact to our gross performance fees based on our trailing twelve month performance fees of $26.5 million as of December 31, 2017. The combined impact on our management fees and performance fees would have a direct impact on our earnings and result in an annual change of approximately $35.8 million in our post-tax economic net income, given our current cost structure and operating model.
Equity market risk, interest rate risk, and foreign currency risk are the market risks that could have the greatest impact on our management fees, performance fees and our business profitability. Impacts on our management and performance fees can be calculated based on the percentage of AUM constituting equity investments, fixed income investments, or foreign currency denominated investments, respectively, multiplied by the relevant weighted average management fee and performance fee attributable to that asset class.
Our equity markets-based AUM includes U.S. equities (including small cap through large cap securities and substantially value or blended investment styles) and global/non-U.S. equities (including global, non-U.S. and emerging markets securities). A 10% increase or decrease in equity markets would cause our $207.4 billion of equity assets under management to increase or decrease by $20.7 billion, resulting in a change in annualized management fee revenue of $70.8 million and an annual change in post-tax economic net income of approximately $26.8 million, given our current cost structure, operating model, and weighted average equity fee rates of 34 basis points at the mix of strategies as of December 31, 2017. Approximately $46.5 billion, or 22%, of our equity markets-based AUM are in accounts subject to performance fees. Of these assets, approximately 99% are in accounts for which performance fees are calculated based on investment return in excess of the relative benchmark returns. Assuming the market change does not impact our relative performance, a 10% change in equity markets would have an approximate incremental $0.7 million impact from performance fees on our post-tax economic net income, given our current cost structure and operating model.
Foreign currency AUM includes equity and alternative instruments denominated in foreign currencies. A 10% increase or decrease in foreign exchange rates against the U.S. dollar would cause our $104.5 billion of foreign currency denominated AUM to increase or decrease by $10.5 billion, resulting in a change in annualized management fee revenue of $45.2 million and an annual change in post-tax economic net income of $17.4 million, based on weighted average fees earned on our foreign currency denominated AUM of 43 basis points at the mix of strategies as of December 31, 2017. Approximately $13.0 billion, or 12%, of our foreign currency denominated AUM are in accounts subject to performance fees. Of these assets, approximately 90% are in accounts for which performance fees are calculated based on investment return in excess of the relative benchmark returns. Assuming the market change does not impact our relative performance, a 10% change in foreign currency exchange rates would have an approximate incremental $1.0 million impact from performance fees on our post-tax economic net income, given our current cost structure and operating model.
Fixed income AUM includes instruments in government bonds, corporate bonds and other fixed income investments in the United States. A change in interest rates, resulting in a 10% increase or decrease in the value of our total fixed income AUM of $13.5 billion, would cause AUM to rise or fall by approximately $1.4 billion. Based on our fixed income weighted average fee rates of 21 basis points, annualized management fees would change by $2.8 million and post-tax economic net income would change by $0.9 million annually. There are currently no material fixed income assets earning performance fees as of the year ended December 31, 2017.
Our investment income primarily represents investments in Affiliates accounted for under the equity method. Exposure to market risks for Affiliates accounted for under the equity method is immaterial and is included in the analysis above.
While the analysis above assumes that market changes occur in a uniform manner across the relevant portfolio, because of our declining fee rates for larger relationships and differences in our fee rates across asset classes, a change in the composition of our assets under management, in particular an increase in the proportion of our total assets under management attributable to strategies, clients or relationships with lower effective fee rates, could have a material negative impact on our overall weighted average fee rate.
As is customary in the asset management industry, clients invest in particular strategies to gain exposure to certain asset classes, which exposes their investment to the benefits and risks of such asset classes. We have not adopted a corporate-level risk management policy regarding client assets, nor have we attempted to hedge at the corporate level or within individual strategies the market risks that would affect the value of our overall assets under management and related revenues. Any reduction in the value of our assets under management would result in a reduction in our revenues.
Item 8. Financial Statements and Supplementary Data.
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
OM Asset Management plc:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of OM Asset Management plc and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three‑year period ended December 31, 2017, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2018, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014.
/s/ KPMG
Boston, Massachusetts
February 27, 2018
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
OM Asset Management plc:
Opinion on Internal Control Over Financial Reporting
We have audited OM Asset Management plc and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of OM Asset Management plc and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes, and our report dated February 27, 2018, expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG
Boston, Massachusetts
February 27, 2018
OM Asset Management plc
Consolidated Balance Sheets
(in millions)
|
| | | | | | | |
| | December 31,
2017 | | December 31,
2016 |
| Assets | |
| | |
|
| Cash and cash equivalents | $ | 186.3 |
| | $ | 101.9 |
|
| Investment advisory fees receivable | 208.3 |
| | 163.7 |
|
| Income taxes receivable | 30.0 |
| | — |
|
| Fixed assets, net | 41.7 |
| | 39.8 |
|
| Investments (includes balances reported at fair value of $182.6 and $126.1) | 244.4 |
| | 233.3 |
|
| Acquired intangibles, net | 78.3 |
| | 84.9 |
|
| Goodwill | 274.6 |
| | 272.7 |
|
| Other assets | 33.6 |
| | 29.0 |
|
| Deferred tax assets | 240.6 |
| | 332.7 |
|
| Assets of consolidated Funds: | |
| | |
|
| Cash and cash equivalents, restricted | 14.1 |
| | 0.4 |
|
| Investments, at fair value | 136.7 |
| | 35.5 |
|
| Other assets | 3.1 |
| | 0.4 |
|
| Total assets | $ | 1,491.7 |
| | $ | 1,294.3 |
|
| Liabilities and shareholders’ equity | |
| | |
|
| Accounts payable and accrued expenses | $ | 54.9 |
| | $ | 45.8 |
|
| Accrued incentive compensation | 186.1 |
| | 132.3 |
|
| Amounts due to OM plc | 59.1 |
| | 156.3 |
|
| Other compensation liabilities | 479.0 |
| | 291.0 |
|
| Accrued income taxes | 96.2 |
| | 90.2 |
|
| Non-recourse borrowings | 33.5 |
| | — |
|
| Third party borrowings | 392.8 |
| | 392.3 |
|
| Other liabilities | 8.3 |
| | 10.1 |
|
| Liabilities of consolidated Funds: | |
| | |
|
| Accounts payable and accrued expenses | 2.5 |
| | — |
|
| Securities sold, not yet purchased, at fair value | 7.9 |
| | 5.0 |
|
| Other liabilities | 0.1 |
| | 0.8 |
|
| Total liabilities | 1,320.4 |
| | 1,123.8 |
|
| Commitments and contingencies |
|
| |
|
|
| Redeemable non-controlling interests in consolidated Funds | 44.0 |
| | 5.5 |
|
| Equity: | |
| | |
|
| Ordinary shares (nominal value $0.001; 109,720,358 and 114,157,765 shares, respectively, issued) | 0.1 |
| | 0.1 |
|
| Shareholders’ equity | 96.9 |
| | 190.2 |
|
| Accumulated other comprehensive loss | (21.6 | ) | | (26.3 | ) |
| Non-controlling interests | 1.3 |
| | 1.0 |
|
| Non-controlling interests in consolidated Funds | 50.6 |
| | — |
|
| Total equity and redeemable non-controlling interests in consolidated Funds | 171.3 |
| | 170.5 |
|
| Total liabilities and equity | $ | 1,491.7 |
| | $ | 1,294.3 |
|
See Notes to Consolidated Financial Statements
OM Asset Management plc
Consolidated Statements of Operations
(in millions except for per share data)
|
| | | | | | | | | | | |
| | For the Years Ended
December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenue: | |
| | |
| | |
|
| Management fees | $ | 858.0 |
| | $ | 659.9 |
| | $ | 637.2 |
|
| Performance fees | 26.5 |
| | 2.6 |
| | 61.8 |
|
| Other revenue | 1.2 |
| | 0.9 |
| | 0.3 |
|
| Consolidated Funds’ revenue | 1.7 |
| | 0.1 |
| | — |
|
| Total revenue | 887.4 |
| | 663.5 |
| | 699.3 |
|
| Operating expenses: | |
| | |
| | |
|
| Compensation and benefits | 682.8 |
| | 397.4 |
| | 412.8 |
|
| General and administrative expense | 112.9 |
| | 98.3 |
| | 88.2 |
|
| Amortization of acquired intangibles | 6.6 |
| | 2.6 |
| | 0.2 |
|
| Depreciation and amortization | 11.7 |
| | 9.4 |
| | 6.9 |
|
| Consolidated Funds’ expense | 2.4 |
| | 0.2 |
| | — |
|
| Total operating expenses | 816.4 |
| | 507.9 |
| | 508.1 |
|
| Operating income | 71.0 |
| | 155.6 |
| | 191.2 |
|
| Non-operating income and (expense): | |
| | |
| | |
|
| Investment income | 27.4 |
| | 17.2 |
| | 13.0 |
|
| Interest income | 0.8 |
| | 0.4 |
| | 0.2 |
|
| Interest expense | (24.5 | ) | | (11.3 | ) | | (3.1 | ) |
| Revaluation of DTA deed | 51.8 |
| | — |
| | — |
|
| Net consolidated Funds’ investment gains (losses) | 15.5 |
| | (1.1 | ) | | — |
|
| Total non-operating income | 71.0 |
| | 5.2 |
| | 10.1 |
|
| Income from continuing operations before taxes | 142.0 |
| | 160.8 |
| | 201.3 |
|
| Income tax expense | 132.8 |
| | 40.8 |
| | 46.6 |
|
| Income from continuing operations | 9.2 |
| | 120.0 |
| | 154.7 |
|
| Gain (loss) on disposal of discontinued operations, net of tax | (0.1 | ) | | 6.2 |
| | 0.8 |
|
| Net income | 9.1 |
| | 126.2 |
| | 155.5 |
|
| Net income (loss) attributable to non-controlling interests in consolidated Funds | 4.9 |
| | (0.2 | ) | | — |
|
| Net income attributable to controlling interests | $ | 4.2 |
| | $ | 126.4 |
| | $ | 155.5 |
|
| Earnings per share (basic) attributable to controlling interests | $ | 0.04 |
| | $ | 1.05 |
| | $ | 1.29 |
|
| Earnings per share (diluted) attributable to controlling interests | 0.04 |
| | 1.05 |
| | 1.29 |
|
| Continuing operations earnings per share (basic) attributable to controlling interests | 0.04 |
| | 0.98 |
| | 1.28 |
|
| Continuing operations earnings per share (diluted) attributable to controlling interests | 0.04 |
| | 0.98 |
| | 1.28 |
|
| Weighted average ordinary shares outstanding | 110.7 |
| | 119.2 |
| | 120.0 |
|
| Weighted average diluted ordinary shares outstanding | 111.4 |
| | 119.5 |
| | 120.5 |
|
See Notes to Consolidated Financial Statements
OM Asset Management plc
Consolidated Statements of Comprehensive Income
(in millions)
|
| | | | | | | | | | | |
| | For the Years Ended
December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income | $ | 9.1 |
| | $ | 126.2 |
| | $ | 155.5 |
|
| Other comprehensive income (loss): | | | | | |
| Valuation and amortization related to derivative securities, net of tax | 1.8 |
| | (20.3 | ) | | (6.6 | ) |
| Foreign currency translation adjustment | 2.9 |
| | (3.2 | ) | | (1.5 | ) |
| Total comprehensive income | 13.8 |
| | 102.7 |
| | 147.4 |
|
| Comprehensive income (loss) attributable to non-controlling interests in consolidated Funds | 4.9 |
| | (0.2 | ) | | — |
|
| Total comprehensive income attributable to controlling interests | $ | 8.9 |
| | $ | 102.9 |
| | $ | 147.4 |
|
See Notes to Consolidated Financial Statements
OM Asset Management plc
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2017, 2016 and 2015
($ in millions, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Ordinary shares (millions) | | Ordinary shares, nominal value | | Shareholders’ equity (deficit) | | Accumulated other comprehensive income (loss) | | Total shareholders’ equity (deficit) | | Non-controlling interests | | Non-controlling interests in consolidated Funds | | Total equity | | Redeemable non-controlling interests in consolidated Funds | | Total equity and redeemable non-controlling interests in consolidated Funds |
| December 31, 2014 | 120.0 |
| | $ | 0.1 |
| | $ | 31.1 |
| | $ | 5.3 |
| | $ | 36.5 |
| | $ | — |
| | $ | 2,459.0 |
| | $ | 2,495.5 |
| | $ | 61.9 |
| | $ | 2,557.4 |
|
| Issuance of ordinary shares | 0.5 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Capital redemptions | — |
| | — |
| | (1.3 | ) | | — |
| | (1.3 | ) | | — |
| | — |
| | (1.3 | ) | | — |
| | (1.3 | ) |
| Equity-based compensation | — |
| | — |
| | 13.0 |
| | — |
| | 13.0 |
| | — |
| | — |
| | 13.0 |
| | — |
| | 13.0 |
|
| Deferred tax asset revaluation | — |
| | — |
| | 9.0 |
| | — |
| | 9.0 |
| | — |
| | — |
| | 9.0 |
| | — |
| | 9.0 |
|
| Foreign currency translation adjustment | — |
| | — |
| | — |
| | (1.5 | ) | | (1.5 | ) | | — |
| | — |
| | (1.5 | ) | | — |
| | (1.5 | ) |
| De-consolidation of Funds | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,459.0 | ) | | (2,459.0 | ) | | (61.9 | ) | | (2,520.9 | ) |
| Valuation of derivative securities, net of tax | — |
| | — |
| | — |
| | (6.6 | ) | | (6.6 | ) | | — |
| | — |
| | (6.6 | ) | |
|
| | (6.6 | ) |
| Dividends | — |
| | — |
| | (38.7 | ) | | — |
| | (38.7 | ) | | — |
| | — |
| | (38.7 | ) | | — |
| | (38.7 | ) |
| Net income | — |
| | — |
| | 155.5 |
| | — |
| | 155.5 |
| | — |
| | — |
| | 155.5 |
| | — |
| | 155.5 |
|
| December 31, 2015 | 120.5 |
| | $ | 0.1 |
| | $ | 168.6 |
| | $ | (2.8 | ) | | $ | 165.9 |
| | $ | — |
| | $ | — |
| | $ | 165.9 |
| | $ | — |
| | $ | 165.9 |
|
| Issuance of ordinary shares | 0.5 |
| | $ | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchase of ordinary shares | (6.9 | ) | | — |
| | (98.2 | ) | | — |
| | (98.2 | ) | | — |
| | — |
| | (98.2 | ) | | — |
| | (98.2 | ) |
| Capital redemptions | — |
| | — |
| | (0.4 | ) | | — |
| | (0.4 | ) | | — |
| | — |
| | (0.4 | ) | | — |
| | (0.4 | ) |
| Equity-based compensation | — |
| | — |
| | 12.8 |
| | — |
| | 12.8 |
| | — |
| | — |
| | 12.8 |
| | — |
| | 12.8 |
|
| Foreign currency translation adjustment | — |
| | — |
| | — |
| | (3.2 | ) | | (3.2 | ) | | — |
| | — |
| | (3.2 | ) | | — |
| | (3.2 | ) |
| Valuation of derivative securities, net of tax | — |
| | — |
| | — |
| | (20.3 | ) | | (20.3 | ) | | — |
| | — |
| | (20.3 | ) | | — |
| | (20.3 | ) |
| Amendment of Deferred Tax Asset Deed | — |
| | — |
| | 19.8 |
| | — |
| | 19.8 |
| | — |
| | — |
| | 19.8 |
| | — |
| | 19.8 |
|
| Business acquisition | — |
| | — |
| | — |
| | — |
| | — |
| | 1.0 |
| | — |
| | 1.0 |
| | — |
| | 1.0 |
|
| Net consolidation of Funds | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5.5 |
| | 5.5 |
|
| Dividends | — |
| | — |
| | (38.8 | ) | | — |
| | (38.8 | ) | | — |
| | — |
| | (38.8 | ) | | — |
| | (38.8 | ) |
| Net income | — |
| | — |
| | 126.4 |
| | — |
| | 126.4 |
| | — |
| | — |
| | 126.4 |
| | — |
| | 126.4 |
|
| December 31, 2016 | 114.1 |
| | $ | 0.1 |
| | $ | 190.2 |
| | $ | (26.3 | ) | | $ | 164.0 |
| | $ | 1.0 |
| | $ | — |
| | $ | 165.0 |
| | $ | 5.5 |
| | $ | 170.5 |
|
| Issuance of ordinary shares | 0.6 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Repurchase of ordinary shares | (5.0 | ) | | — |
| | (73.1 | ) | | — |
| | (73.1 | ) | | — |
| | — |
| | (73.1 | ) | | — |
| | (73.1 | ) |
| Capital contributions (redemptions) | — |
| | — |
| | (1.1 | ) | | — |
| | (1.1 | ) | | — |
| | — |
| | (1.1 | ) | | 33.4 |
| | 32.3 |
|
| Equity-based compensation | — |
| | — |
| | 15.7 |
| | — |
| | 15.7 |
| | — |
| | — |
| | 15.7 |
| | — |
| | 15.7 |
|
| Foreign currency translation adjustment | — |
| | — |
| | — |
| | 2.9 |
| | 2.9 |
| | — |
| | — |
| | 2.9 |
| | — |
| | 2.9 |
|
| Valuation of derivative securities, net of tax | — |
| | — |
| | — |
| | 1.8 |
| | 1.8 |
| | — |
| | — |
| | 1.8 |
| | — |
| | 1.8 |
|
| Business acquisitions | — |
| | — |
| | — |
| | — |
| | — |
| | 0.3 |
| | — |
| | 0.3 |
| | — |
| | 0.3 |
|
| Net consolidation of Funds | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 50.9 |
| | 50.9 |
| | (0.1 | ) | | 50.8 |
|
| Dividends | — |
| | — |
| | (39.0 | ) | | — |
| | (39.0 | ) | | — |
| | — |
| | (39.0 | ) | | — |
| | (39.0 | ) |
| Net income | — |
| | — |
| | 4.2 |
| | — |
| | 4.2 |
| | — |
| | (0.3 | ) | | 3.9 |
| | 5.2 |
| | 9.1 |
|
| December 31, 2017 | 109.7 |
| | $ | 0.1 |
| | $ | 96.9 |
| | $ | (21.6 | ) | | $ | 75.4 |
| | $ | 1.3 |
| | $ | 50.6 |
| | $ | 127.3 |
| | $ | 44.0 |
| | $ | 171.3 |
|
See Notes to Consolidated Financial Statements
OM Asset Management plc
Consolidated Statements of Cash Flows
(in millions)
|
| | | | | | | | | | | |
| | For the Years Ended
December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash flows from operating activities: | |
| | |
| | |
|
| Net income | $ | 9.1 |
| | $ | 126.2 |
| | $ | 155.5 |
|
| Less: Net (income) loss attributable to non-controlling interests in consolidated Funds | (4.9 | ) | | 0.2 |
| | — |
|
| Adjustments to reconcile net income to net cash provided by (used in) operating activities from continuing operations: | |
| | |
| | |
|
| (Gain) loss from discontinued operations, excluding consolidated Funds | 0.1 |
| | (6.2 | ) | | (0.8 | ) |
| Amortization of acquired intangibles | 6.6 |
| | 2.6 |
| | 0.2 |
|
| Depreciation and amortization | 11.7 |
| | 9.4 |
| | 6.9 |
|
| Amortization of debt-related costs | 3.1 |
| | 1.3 |
| | — |
|
| Loss on disposal of fixed assets | — |
| | 0.1 |
| | — |
|
| Amortization and revaluation of non-cash compensation awards | 192.3 |
| | 45.1 |
| | 44.4 |
|
| Net earnings from Affiliates accounted for using the equity method | (14.5 | ) | | (15.1 | ) | | (12.7 | ) |
| Distributions received from equity method Affiliates | 15.4 |
| | 13.5 |
| | 8.6 |
|
| Revaluation of DTA Deed | (51.8 | ) | | — |
| | — |
|
| Impact of Tax Act on deferred income taxes | 121.1 |
| | — |
| | — |
|
| Deferred income taxes | (30.1 | ) | | 13.3 |
| | (11.1 | ) |
| (Gains) losses on other investments | (37.4 | ) | | (3.0 | ) | | — |
|
| Changes in operating assets and liabilities (excluding discontinued operations): | |
| | |
| | |
|
| (Increase) decrease in investment advisory fees receivable and other amounts due from related parties | (44.7 | ) | | (3.1 | ) | | 12.8 |
|
| (Increase) decrease in other receivables, prepayments, deposits and other assets | (31.6 | ) | | (17.6 | ) | | (1.4 | ) |
| Increase (decrease) in accrued incentive compensation and other liabilities and amounts due to OM plc | 65.2 |
| | (14.0 | ) | | 15.4 |
|
| Increase (decrease) in accounts payable, accrued expenses and accrued income taxes | 15.3 |
| | (28.8 | ) | | 37.9 |
|
| Net cash flows from operating activities of continuing operations, excluding consolidated Funds | 224.9 |
| | 123.9 |
| | 255.7 |
|
| Net income (loss) attributable to non-controlling interests in consolidated Funds | 4.9 |
| | (0.2 | ) | | — |
|
| Adjustments to reconcile net income (loss) attributable to non-controlling interests in consolidated Funds to net cash provided by (used in) operating activities from continuing operations of consolidated Funds: | |
| | |
| | |
|
| (Gains) losses on other investments | (5.6 | ) | | 0.1 |
| | — |
|
| (Increase) decrease in receivables and other assets | (0.8 | ) | | (0.1 | ) | | — |
|
| Increase (decrease) in accounts payable and other liabilities | 2.1 |
| | 0.5 |
| | — |
|
| Net cash flows from operating activities of continuing operations of consolidated Funds | 0.6 |
| | 0.3 |
| | — |
|
Net cash flows from operating activities of continuing operations | 225.5 |
| | 124.2 |
| | 255.7 |
|
| Net cash flows from operating activities of discontinued operations | — |
| | 13.5 |
| | (2.1 | ) |
| Total net cash flows from operating activities | 225.5 |
| | 137.7 |
| | 253.6 |
|
OM Asset Management plc
Consolidated Statements of Cash Flows (Continued)
(in millions)
|
| | | | | | | | | | | |
| | For the Years Ended
December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash flows from investing activities: | |
| | |
| | |
|
| Purchase of fixed assets, excluding discontinued operations | (13.7 | ) | | (13.5 | ) | | (13.0 | ) |
| Payments for Affiliate and joint venture equity | — |
| | — |
| | (0.6 | ) |
| Business acquisitions, net of cash acquired | (1.9 | ) | | (219.1 | ) | | — |
|
| Purchase of investment securities | (84.6 | ) | | (65.0 | ) | | (67.6 | ) |
| Sale of investment securities | 89.4 |
| | 13.3 |
| | 18.5 |
|
| Cash flows from investing activities of consolidated Funds: | |
| | |
| | |
|
| Purchase of investments | (145.6 | ) | | (11.6 | ) | | — |
|
| Redemption of investments | 59.8 |
| | 11.2 |
| | — |
|
| Consolidation (de-consolidation) of Funds | 65.6 |
| | 0.5 |
| | (93.0 | ) |
Net cash flows from investing activities of continuing operations | (31.0 | ) | | (284.2 | ) | | (155.7 | ) |
| Net cash flows from investing activities of discontinued operations | — |
| | — |
| | — |
|
| Total net cash flows from investing activities | (31.0 | ) | | (284.2 | ) | | (155.7 | ) |
| Cash flows from financing activities: | |
| | |
| | |
|
| Proceeds from third party and non-recourse borrowings | 76.0 |
| | 450.1 |
| | — |
|
| Repayment of third party borrowings | (42.5 | ) | | (148.0 | ) | | (87.0 | ) |
| Repayment of related party borrowings | — |
| | — |
| | (37.0 | ) |
| Payment to OM plc for deferred tax arrangement | (45.6 | ) | | (41.4 | ) | | (53.6 | ) |
| Payment to OM plc for co-investment redemptions | (4.8 | ) | | (10.7 | ) | | (14.3 | ) |
| Repurchase of ordinary shares | (74.1 | ) | | (98.6 | ) | | — |
|
| Dividends paid to shareholders | (27.5 | ) | | (13.1 | ) | | (10.9 | ) |
| Dividends paid to related parties | (11.3 | ) | | (25.4 | ) | | (27.8 | ) |
| Cash flows from financing activities of consolidated Funds | |
| | |
| | |
|
| Redeemable non-controlling interest capital raised | 33.4 |
| | — |
| | — |
|
Net cash flows from financing activities of continuing operations | (96.4 | ) | | 112.9 |
| | (230.6 | ) |
| Net cash flows from financing activities of discontinued operations | — |
| | — |
| | — |
|
| Total net cash flows from financing activities | (96.4 | ) | | 112.9 |
| | (230.6 | ) |
| Net increase (decrease) in cash and cash equivalents | 98.1 |
| | (33.6 | ) | | (132.7 | ) |
| Cash and cash equivalents at beginning of period | 102.3 |
| | 135.9 |
| | 268.6 |
|
| Cash and cash equivalents at end of period (including cash at consolidated Funds classified as restricted) | $ | 200.4 |
| | $ | 102.3 |
| | $ | 135.9 |
|
| | | | | | |
| Supplemental disclosure of cash flow information: | |
| | |
| | |
|
| Interest paid (excluding consolidated Funds) | $ | 22.1 |
| | $ | 3.1 |
| | $ | 3.7 |
|
| Income taxes paid | $ | 71.2 |
| | $ | 23.5 |
| | $ | 9.5 |
|
| Net consolidation (de-consolidation) of Funds | $ | 50.8 |
| | $ | 5.5 |
| | $ | (2,520.9 | ) |
| Non-cash capital contribution to OM plc | $ | — |
| | $ | — |
| | $ | (0.1 | ) |
See Notes to Consolidated Financial Statements
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
1) Organization and Description of the Business
OM Asset Management plc (“OMAM” or the “Company”), through its subsidiaries, is a global asset management business with interests in a diverse group of boutique investment management firms (the “Affiliates”) individually headquartered in the United States. The Company provides investment management services globally to predominantly institutional investors, in asset classes that include U.S. and global equities, fixed income, alternative assets, real estate, timber and secondary Funds. Fees for services are largely asset-based and, as a result, the Company’s revenue fluctuates based on the performance of financial markets and investors’ asset flows in and out of the Company’s products.
The Company’s Affiliates are organized as limited liability companies. The Company generally utilizes a profit-sharing model in structuring its compensation and ownership arrangements with Affiliates. The Affiliates’ variable compensation is generally based on each firm’s profitability. OMAM and Affiliate key employees share in profits after variable compensation according to their respective ownership interests. The profit-sharing model results in the alignment of OMAM and Affiliate key employee economic interests, which is critical to the Company’s talent management strategy and long-term growth of the business.
Prior to 2014, the Company was a wholly-owned subsidiary of Old Mutual plc (“OM plc”), an international long-term savings, protection and investment group, listed on the London Stock Exchange. On October 15, 2014, the Company completed the initial public offering (the “Offering”) by OM plcshareholders pursuant to the SecuritiesCompanies Act of 1933, as amended. Additionally, between2006, the OfferingAudit Committee has the sole authority to approve the scope, fees and December 31, 2017, the Company and/or OM plc completed the following transactions in the Company’s shares, including a two-step transaction announced on March 25, 2017 for a sale by OM plc of a 24.95% shareholding in the Company to HNA Capital US (“HNA”):
|
| | | | | | | | | | | | | |
| | | | | | | Ownership percentage following the transactions for: | | |
| Date | | Transaction description | | Total shares | | OM plc | | HNA | | Note |
| October 15, 2014 | | IPO of OMAM shares by OM plc | | 24,231,375 |
| | 78.8 | % | | — | % | | (1) |
| June 22, 2015 | | Secondary public offering by OM plc | | 15,295,000 |
| | 65.8 | % | | — | % | | (2) |
| December 16, 2016 | | Secondary public offering by OM plc | | 14,950,000 |
| | — |
| | — |
| | (3) |
| December 16, 2016 | | Repurchase and retirement of shares by OMAM | | 6,000,000 |
| | 51.1 | % | | — | % | | (4) |
| May 12, 2017 | | Sale of shares from OM plc to HNA | | 11,414,676 |
| | 40.9 | % | | 9.95 | % | | (5) |
| May 19, 2017 | | Secondary public offering by OM plc | | 19,895,000 |
| | — |
| | — |
| | (6) |
| May 19, 2017 | | Repurchase and retirement of shares by OMAM | | 5,000,000 |
| | 20.1 | % | | 10.4 | % | | (4) |
| November 10, 2017 | | Sale of shares from OM plc to HNA | | 15,960,553 |
| | 5.51 | % | | 24.95 | % | | (7) |
| November 17, 2017 | | Secondary public offering by OM plc | | 6,039,630 |
| | — | % | | 24.95 | % | | (8) |
| |
(1) | Includes 2,231,375 shares purchased by the underwriters of the offering under their overallotment option. |
| |
(2) | Includes 1,995,000 shares purchased by the underwriters of the offering under their overallotment option. |
| |
(3) | Includes 1,950,000 shares purchased by the underwriters of the offering under their overallotment option. |
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
1) Organization and Description of the Business (cont.)
| |
(4) | Purchased pursuant to the share repurchase program described below. All shares repurchased by the Company were retired. |
| |
(5) | Following the May 12, 2017 sale of shares from OM plc to HNA, on May 24, 2017, OM plc appointed Dr. Guang Yang of HNA as an OM plc director.
|
| |
(6) | Includes 2,595,000 shares purchased by the underwriters of the offering under their overallotment option. |
| |
(7) | Following the November 10, 2017 sale of shares from OM plc to HNA, HNA acquired the right to appoint two directors to the Company’s board.
|
| |
(8) | Upon completion of the November 17, 2017 offering, OM plc indirectly owned 1,000 of the Company’s outstanding ordinary shares. |
Share Repurchase Program
On February 3, 2016, the Company’s Board of Directors authorized a $150 million share repurchase program, which was approved by shareholders on March 15, 2016. In 2016, the Company purchased 921,740 shares on the open market at a weighted average price of $13.22/share. In 2017, the Company did not purchase shares on the open market.
On April 29, 2016, at the Company’s Annual General Meeting, shareholders (excluding OM plc) authorized a form of contract by which the Company would be permitted to repurchase shares directly from OM plc. The shareholder authorization does not contain a maximum dollar or share amount for such purchases individually or in aggregate from OM plc. On December 16, 2016 in connection with the secondary offering by OM plc, the Company repurchased 6,000,000 shares directly from OM plc at a price of $14.25/share. On May 19, 2017 in connection with the secondary offering by OM plc, the Company repurchased 5,000,000 shares directly from OM plc at a price of $14.55/share.
All shares repurchased by the Company were retired.
Segment Information
The Company operates one business segment that provides investment management services and products to predominantly institutional clients. The primary measure used by the Chief Operating Decision Maker (“CODM”) in measuring performance and allocating resources is economic net income. As of each of December 31, 2017, and 2016, all of the Company’s material long-lived assets were domiciled in the United States. For each of the years ended December 31, 2017, 2016 and 2015, 100% of the Company’s revenue from external customers was attributed to the United States.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies
The Company’s significant accounting policies are as follows:
Basis of presentation
These Consolidated Financial Statements reflect the historical balance sheets; statements of operations; statements of comprehensive income; statements of changes in shareholders’ equity; and statements of cash flows of the Company. Within these Consolidated Financial Statements, entities that are part of OM plc’s consolidated results, but are not part of OMAM, as defined above, as well as HNA and its related entities, are referred to as “related parties.”
The Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All dollar amounts, except per share data in the text and tables herein, are stated in millions unless otherwise indicated. Transactions between the Company and OM plc are included in the Consolidated Financial Statements, however material intercompany balances and transactions among the Company, its consolidated Affiliates and consolidated Funds are eliminated in consolidation.
Revenue recognition
The Company’s consolidated revenue primarily represents management fees billed monthly, quarterly and annually by Affiliates for managing the assets of clients. Asset-based management fees are recognized monthly as services are rendered and are primarily based upon a percentage of the market value of client assets managed. Affiliates that manage tangible property may also earn transaction fees at the time the underlying property is bought and sold. Any fees collected in advance are deferred and recognized as income over the period earned. Dividend income received is recorded on the ex-dividend date. Performance fees are generally assessed as a percentage of the investment performance realized on a client’s account. Additionally, separate accounts or other products which primarily earn management fees are potentially subject to performance adjustment up or down based on investment performance versus benchmark. Performance fees, including those that are subject to clawback are recognized when they (i) become billable to customers (based on contractual terms of agreements), (ii) are not subject to contingent repayment and (iii) when collection is reasonably assured. Other income and revenues include interest income on cash and cash equivalents of Funds and revenue from marketing, distribution and consulting services.
The revenue of consolidated Funds that invest in Timber (the “Timber Funds”) is recognized from log and fiber sales upon delivery to the customer. The Company is typically responsible for all logging and hauling costs. However, under pay-as-cut timber contracts, title and risk of loss from stumpage sales transfer to the buyer as the trees are cut. Revenue is recognized as timber is harvested. The buyer is typically responsible for all logging and hauling costs.
Compensation arrangements
The Company operates short term variable compensation arrangements where generally, a percentage of each Affiliate’s annual pre-variable compensation earnings, as defined in each arrangement, is allocated to a “pool” of each respective Affiliate’s key employees, and subsequently distributed to individuals subject to recommendation and approval of a remuneration committee comprised of both the Company’s and each respective Affiliate’s management. Variable compensation expense is accrued and recognized in the Consolidated Statements of Operations as services are provided by individual employees.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
The Company operates longer term profit-interest plans whereby certain Affiliate key employees are granted (or have a right to purchase) awards representing a profits interest in their respective Affiliate, as distinct from an equity interest due to the lack of pari passu voting rights. Under these plans, the Company may award a portion of the aforementioned variable compensation arrangement through issuance of a profits interest in the Affiliate. The awards generally have a three to five year vesting period from the grant date, and the service period begins at the commencement of the financial period to which the variable compensation relates. Under these plans, Affiliate key employees are eligible to share in the profits of their respective Affiliates based on their respective percentage interest held.
In addition, under certain circumstances, Affiliate key employees are eligible to receive a series of repurchase payments upon exiting the plans based on a multiple of the last twelve months profits of their respective Affiliate, as defined. Profits allocated and movements in the potential repurchase value, determined based on a fixed multiple times trailing twelve month profits, as defined, are recognized as compensation expense. Profit interests compensation liabilities are re-measured at each reporting date at the current trailing twelve month earnings multiple, with movements treated as compensation expense in the Company’s Consolidated Statements of Operations.
Share-based compensation plans
The Company recognizes the cost of all share-based payments to directors, senior management and employees, including grants of restricted stock, as compensation expense in the Consolidated Statements of Operations over the respective vesting periods. Awards made previously under OM plc’s restricted stock and stock options plans are accounted for as equity settled, and the grant date fair value is recognized as compensation expense over the requisite service period, with a corresponding contribution to capital recorded.
Awards made under the Company’s equity plans are accounted for as equity settled, and the grant date fair value is recognized as compensation expense over the requisite service period, with a corresponding contribution to capital recorded. Valuation of restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) is determined based on the Company’s closing share price as quoted on the New York Stock Exchange on the measurement date. For performance-based awards, a Monte-Carlo simulation model is used to determine the fair value. Key inputs for the model include: assumed reinvestment of dividends, risk-free interest rate and expected volatility. All excess tax benefits and deficiencies on share-based payment awards are recognized as income tax expense or benefit in the Consolidated Statements of Operations. In addition, the tax effects of exercised or vested awards are treated as discrete items in the reporting period in which they occur and excess tax benefits or deficiencies are classified with other income tax cash flows as an operating activity in the statement of cash flows. The Company recognizes forfeitures as they occur.
Awards of equity made to Affiliate key employees are accounted for as cash settled, with the fair value recognized as compensation expense over the requisite service period, with a corresponding liability carried within other compensation liabilities on the Consolidated Balance Sheet until the award is settled by the Company. The fair value of the liability is based on the expected cash to be paid. The liability is revalued at each reporting period, with any movements recorded within compensation expense.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Consolidation
Affiliates
The Company evaluates each of its Affiliates and other operating entities to determine the appropriate method of accounting. Generally, majority-owned entities or otherwise controlled investments in which the Company holds a controlling financial interest as the principal shareholder, managing member, or general partner are consolidated.
Funds
In the normal course of business, the Company’s Affiliates sponsor and manage certain investment vehicles (the “Funds”). The Company assesses consolidation requirements with respect to its Funds pursuant to Accounting Standards Codification (“ASC”) Topic 810, Consolidation(“ASC 810”) relating to the consolidation of VIEs.
In evaluating whether or not a legal entity must be consolidated, the Company determines if such entity is a variable interest entity (“VIE”) or a voting interest entity (“VOE”). A VOE is considered an entity in which (i) the total equity investment at risk is sufficient to enable the entity to finance its activities independently and (ii) the equity holders at risk have the obligation to absorb losses, the right to receive residual returns, and the right to direct the activities of the entity that most significantly impact the entity’s economic performance. A VIE is an entity that lacks one or more of the characteristics of a VOE. Assessing whether an entity is a VIE or VOE involves judgment and analysis. Factors considered in this assessment include the entity’s legal organization, the entity’s capital structure and equity ownership and any related party or de-facto agent implications of the Company’s involvement with the entity. Investments that are determined to be VIEs are consolidated if the Company or a consolidated Affiliate is the primary beneficiary of the investment. VOEs are typically consolidated if the Company holds the majority voting interest or otherwise controls the entity.
In evaluating whether the Company is the primary beneficiary, the Company evaluates its economic interests in the entity held either directly by the Company or indirectly through related parties. The primary beneficiary of the VIE is defined as the variable interest holder that has a controlling financial interest. A controlling financial interest is defined as (i) the power to direct the activities of the VIE that most significantly impacts its economic performance and (ii) 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. If no single party satisfies both criteria, but the Company and its related parties satisfy the criteria on a combined basis, then the primary beneficiary is the entity out of the related party group that is most closely associated to the VIE. The consolidation analysis can generally be performed qualitatively, however, if it is not readily apparent that the Company is not the primary beneficiary, a quantitative analysis may also be performed. The Company generally is not the primary beneficiary of Fund VIEs created to manage assets for clients unless the Company’s ownership interest in the fund, including interests of related parties, is substantial.
The Company consolidates VOEs when it has control over significant operating, financial and investing decisions of the entity or holds the majority voting interest. For VOEs organized as limited partnerships or as an entity with governance structures similar to a limited partnership (e.g., limited liability company with a managing member), the Company consolidates an entity when it holds the controlling general partnership interest and the limited partners do not hold substantive participating rights or rights to remove and replace the general partner or rights that could provide the limited partners with the ability to impact the ongoing governance and operating activities of the entity.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Upon the occurrence of certain events (such as contributions and redemptions, either by the Company, its Affiliates, or third parties, or amendments to the governing documents of the Company’s investees or sponsored Funds) management reviews and reconsiders its previous conclusion regarding the status of an entity as a VIE or a VOE. Additionally, management continually reconsiders whether the Company is deemed to be a VIE’s primary beneficiary who consolidates such entity. In the third quarter of 2016, following the purchase of certain seed capital investments from OM plc, the Company began consolidating certain Funds pursuant to ASC 810. Additional funds have been consolidated in 2017 as additional seed and co-investment capital has been deployed.
Investments and Investment Transactions
Valuation of investments held at fair value
Valuation of Fund investments is evaluated pursuant to the fair value methodology discussed below. Other investments are categorized as trading and recorded at estimated fair value. Realized and unrealized gains and losses arising from changes in fair value of investments are reported within investment income in the Consolidated Statements of Operations. See Note 5 for a summary of the fair value inputs utilized to determine the fair value of other investments held at fair value.
Valuation of investments held at cost
Valuations of co-investments in Funds investing in timber (the “Timber Funds”) or other similar operating entities are stated at historical cost and are reported within investment income in the Consolidated Statements of Operations. Timber assets and timber lease rights of consolidated Timber Funds are stated at historical cost less depletion for timber previously harvested and less accumulated amortization and depreciation for lease rights and roads. Consolidated Timber Fund investment values are adjusted for capital additions made to the property subsequent to the valuation date. All initial silviculture costs, including site preparation and planting costs are capitalized as stand establishment costs. Stand establishment costs are transferred to a merchantable timber classification as trees reach a certain size. Generally, costs incurred subsequent to two years after planting, such as fertilization, vegetation, insect control and pre-commercial thinning are considered to be maintenance and are expensed as incurred.
Security transactions
The Company generally records securities transactions on a trade-date basis. Realized gains and losses on securities transactions are generally determined on the average-cost method (net of foreign capital gain taxes) and for certain transactions determined based on the specific identification method.
Income and expense recognition
The Company records interest income on an accrual basis and includes amortization of premiums and accretion of discounts. Dividend income and expense on dividends sold short are recorded on the ex-dividend date, net of applicable withholding taxes. Expenses are recorded on an accrual basis.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Foreign currency translation
The books and records of the Company, its Affiliates and its consolidated Funds are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars on the date of valuation. Income and expense transactions denominated in foreign currencies are translated into U.S. dollars using the average exchange rate over the period presented. The portion of realized or unrealized gains and losses resulting from changes in foreign exchange rates and from fluctuations arising from changes in the market prices of the underlying securities are included in the net realized and unrealized gain and loss on investments on the Consolidated Statement of Operations. Net realized and unrealized gains and losses on foreign currency transactions represent net foreign exchange gains or losses from forward foreign currency exchange contracts, disposition of foreign currencies, currency gains or losses between the trade and settlement date on security transactions, and the difference between the amount of the investment income and foreign withholding taxes recorded on the Funds’ books and the U.S. dollar equivalent amounts actually received or paid.
Short sales
Certain Funds may sell a security they do not own in anticipation of a decline in the fair value of that security. When a Fund sells a security short, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale. The short sales are secured by the long portfolio and available cash. The Fund records a gain, limited to the price at which the Fund sold the security short, or a loss, unlimited in size, upon the termination of a short sale. The amount of the gain or loss will be equal to the proceeds received in entering into the short sale less the cost of buying back the short security to close the short position. While the transaction is open, the Fund will incur an expense for any accrued dividends or interest which is paid to the lender of the securities. These short sales may involve a level of risk in excess of the liability recognized in the accompanying Consolidated Balance Sheet. The extent of such risk cannot be quantified.
Funds’ Derivatives
Certain Funds may use derivative instruments. The Funds’ derivative instruments may include foreign currency exchange contracts, credit default swaps, interest rate swaps, financial futures contracts and warrants. The fair values of derivative instruments are recorded as other assets of consolidated Funds or other liabilities of consolidated Funds on the Company’s Consolidated Balance Sheets. The Company has used foreign exchange forwards to hedge the risk of movement in exchange rates on financial assets on a limited basis.
The Company’s Funds have not designated any financial instruments for hedge accounting, as defined in the accounting literature, during the periods presented. The gains or losses on Fund’s derivative instruments not designated for hedge accounting are included as net consolidated Funds gains or losses in the Company’s Consolidated Statements of Operations.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Equity method investments
The Company uses the equity method of accounting for investments that provide the Company with the ability to exercise significant influence over an entity, but that do not meet the requirements for consolidation. Equity method investments include two Affiliates, Heitman LLC (through November 30, 2017) and Investment Counselors of Maryland, LLC,audit engagements, as well as all unconsolidated Funds over which the Company exercises significant influence. In August 2017, the Company agreed in principle to sell its stake in Heitman LLC to Heitman’s management. Pursuant to this term sheet, OMAM entered into a redemption agreement on November 17, 2017. Heitman continued to be recorded as an equity method investment through November 30, 2017, at which point the Company reclassified its investment in Heitman to a cost-method investment. The transaction closed on January 5, 2018.
The Company’s share of earnings from equity method investments is included in investment income in the Consolidated Statements of Operations. The carrying amounts of equity method investments are reflected in Investments in the Consolidated Balance Sheets. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value and its estimated fair value is recognized as impairment when the loss is deemed other than temporary. Other investments, in which OMAM or an Affiliate do not exercise significant influence are accounted for under the cost method. Under the cost method, income is recognized as dividends are declared.
Fair value measurements
In accordance with the provisions of FASB ASC 820, “Fair Value Measurement” (“ASC 820”), fair value is the price that the Company expects to be paid upon the sale of an asset or expects to pay upon the transfer of a liability in an orderly transaction between market participants. Pursuant to ASC 820, there is a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect the Company’s own conclusions about the assumptions that market participants would use in pricing the asset or liability based on the best information available in the circumstances. Each investment is assigned a level based upon the observabilitypermissible non-audit engagements of the inputs which are significant to the overall valuation. Assets and liabilities measured and reported at fair value are classified and disclosed in one of the following categories:
•Level I—Quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed derivatives. As required by U.S. GAAP, the Company does not adjust the quoted price for these investments.
•Level II—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies utilizing observable market inputs other than quoted prices. Investments which are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
•Level III—Pricing inputs are unobservable for the asset or liability and include assets and liabilities where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation. Investments that are included in this category generally include general and limited partner interests in corporate private equity, real estate funds, and funds of hedge funds.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment. In cases in which the fair value of an investment is established using the net asset value (or its equivalent) as a practical expedient, the investment is not categorized within the fair value hierarchy.
Use of estimates
The preparation of these Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ significantly from those estimates.
Operating segment
The Company operates in one operating segment that provides investment management services and products primarily to institutional clients. The Company’s determination that it operates one business segment is based on the fact that the Chief Operating Decision Maker (“CODM”) reviews the Company’s financial performance on an aggregate level.
Derivatives and Hedging
The Company may utilize derivative financial instruments to hedge the risk of movement of interest rates and foreign currency on financial assets and liabilities. These derivative financial instruments may or may not qualify as hedges for accounting purposes. The Company records all derivative financial instruments as either assets or liabilities on its Consolidated Balance Sheets and measures these instruments at fair value. For a derivative financial instrument that qualifies as a hedge for accounting purposes and is designated as a hedging instrument, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (loss) and subsequently reclassified into earnings over the life of the hedge. The ineffective portion of the gain or loss is reported in earnings immediately.
Cash and cash equivalents
The Company considers all highly liquid investments, including money market mutual funds, with original maturities of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates market value due to the short-term maturity of these investments.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Cash held by consolidated Funds is not available to fund general liquidity needs of the Company and is therefore classified as restricted cash.
Investment advisory fees receivable
The Company earns management and performance fees which are billed monthly, quarterly and annually in arrears, according to the terms of the relevant investment management agreement. Management and performance fees that have been earned, but have not yet been collected are presented as investment advisory fees receivable on the Consolidated Balance Sheets. Due to the short-term nature and liquidity of these receivables, the carrying amounts approximate their fair values. The Company typically does not record an allowance for doubtful accounts or bad debt expense, or any amounts recorded have been immaterial.
Fixed assets
Fixed assets are recorded at historical cost and depreciated using the straight-line method over its estimated useful lives. The estimated useful lives of office equipment and furniture and fixtures range from three to five years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining term of the lease. Computer software developed or obtained for internal use is amortized using the straight-line method over the estimated useful life of the software, which is generally three years or less. The estimated useful life of building assets is thirty-nine years. The costs of improvements that extend the life of a fixed asset are capitalized, while the costs of repairs and maintenance are expensed as incurred.
Intangible assets
Acquired Affiliates have identifiable intangible assets arising from contractual or other legal rights with their clients. In determining the value of acquired intangibles, the Company analyzes the net present value of each acquired Affiliate’s existing client relationships based on a number of factors. The Company analyzes the Affiliate’s historical and potential future operating performance, the Affiliate’s historical and potential future rates of attrition among existing clients, the stability and longevity of existing client relationships, the Affiliate’s recent and long-term investment performance, the characteristics of the firm’s products and investment styles, the stability and depth of the Affiliate’s management team and the Affiliate’s history and perceived franchise or brand value. The Company’s acquired intangible assets are predominately definite-life intangible assets and are generally amortized on a straight line basis over their estimated useful lives, ranging from five to sixteen years, reflecting the expected duration of such relationships. The Company also holds an indefinite-life intangible asset related to the trade name associated with the Landmark acquisition.
The Company tests for the possible impairment of definite-life intangibles whenever events or changes in circumstances indicate that the carrying amount of the asset is not recoverable. If such indicators exist, the Company compares the undiscounted cash flows related to the asset to the carrying value of the asset. If the carrying value is greater than the undiscounted cash flow amount, an impairment charge is recorded in the Consolidated Statements of Operations for amounts necessary to reduce the carrying value of the asset to fair value. Indefinite-life intangible assets are tested for impairment annually as of the first business day of the fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Goodwill
The Company records goodwill when the consideration paid in a business acquisition exceeds the fair value of the net total of tangible assets acquired, identifiable intangible assets acquired and liabilities assumed. Goodwill is not amortized, but rather is tested for impairment annually or more frequently if events or circumstances occur that indicate impairment may exist. Factors that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the Company’s use of the acquired assets in a business combination or the strategy for the Company’s overall business, and significant negative industry or economic trends.
The Company performs its assessment for impairment of goodwill during the fourth quarter annually as of the first business day in October, or as necessary, and the Company has determined that it has six reporting units, consisting of the six consolidated Affiliates. The Company first considers various qualitative factors to determine if it is more likely than not that the fair value of each of the reporting units is greater than its respective carrying amount, including goodwill. If based on the qualitative assessment it is determined that it is more likely than not that the fair value of any reporting unit is below its respective carrying amount, therefore indicating that impairment may exist, the impact would be determined at that point through a quantitative assessment. For purposes of assessing potential impairment, the fair value of the reporting unit is estimated and compared to the carrying value of the reporting unit. The fair value of a reporting unit is based on discounted estimated future cash flows. The assumptions used to estimate fair value include management’s estimates of future growth rates, operating cash flows, discount rates and terminal value. These assumptions and estimates can change in future periods based on market movement and factors impacting the expected business performance. Changes in assumptions or estimates could materially affect the determination of the fair value of a reporting unit. If it is determined that the carrying value of the reporting unit exceeds its fair value, the Company determines the implied fair value of the goodwill in the same manner used to determine the amount of goodwill in a business combination. If the carrying value of goodwill exceeds the implied fair value of the goodwill, an impairment charge is recognized in the amount equal to that excess. Based on the Company’s most recent annual goodwill impairment test, the Company concluded that the fair value of each of its reporting units was more likely than not in excess of their carrying values. At the close of each year, management assessed whether there were any conditions present during the fourth quarter that would indicate impairment subsequent to the initial assessment date and concluded that no such conditions were present.
During 2017, the Company changed the goodwill and indefinite life intangible assets impairment assessment date from the last day of the third quarter to the first business day of the fourth quarter of the fiscal year, or October 2, 2017. The Company believes that changing the annual goodwill impairment assessment date does not result in a material change in the method of applying the accounting requirements.
Leases
The Company and its Affiliates currently lease office space and equipment under various leasing arrangements, classified as operating leases. Some lease agreements contain renewal options, rent escalation clauses or other inducements provided by the landlord. Rent expense is accrued to recognize lease escalation provisions and inducements provided by the landlord, if any, on a straight-line basis over the lease term.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Earnings per share
The Company calculates basic and diluted earnings per share (“EPS”) by dividing net income by its shares outstanding as outlined below. Basic EPS attributable to the Company’s shareholders is calculated by dividing “Net income attributable to controlling interests” by the weighted-average number of shares outstanding. Diluted EPS is similar to basic EPS, but adjusts for the effect of potential ordinary shares unless they are antidilutive. For periods with a net loss, potential ordinary shares are considered antidilutive.
The Company considers two ways to measure dilution to earnings per share: (a) calculate the net number of shares that would be issued assuming any related proceeds are used to buy back outstanding shares (the treasury stock method), or (b) assume the gross number of shares are issued and calculate any related effects on net income available for shareholders (the if-converted or two-class method). As appropriate, the Company’s policy is to apply the more dilutive methodology upon issuance of such instruments.
Deferred financing costs
The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as other assets until such financings are consummated. After consummation of the equity financing, these costs are recorded in total equity as a reduction of Shareholders’ equity generated as a result of the offering. At the time in which the equity financing is no longer considered probable of being consummated, the deferred financing costs are expensed immediately as a charge to operating expenses in the Consolidated Statement of Operations.
The Company records debt issuance costs of term loans as a direct deduction from the carrying amount of the associated debt liability. For debt issuance costs of revolving credit loans, the Company presents debt issuance costs as an asset and subsequently amortizes the deferred costs ratably over the term of the agreement.
Income taxes
The Company uses the asset and liability method of accounting for income taxes on a “separate return” basis. Under this method, a subsidiary is assumed to file a separate return with the taxing authority, thereby reporting its taxable income or loss and paying the applicable tax to or receiving the appropriate refund from the subsidiary’s parent. The rules followed by the subsidiary in computing its tax or refund should be the same as those followed by a taxpayer filing directly with the taxing authority.
The Company files tax returns directly with the U.K., U.S. and state tax authorities and therefore, the computations under the separate return method follow the Company’s filings.
Deferred income taxes are recognized for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the Consolidated Financial Statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company’s deferred tax assets have been attributable to federal and state loss carry forwards, interest deductions, and accrued liabilities.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Deferred income tax assets are subject to a valuation allowance if, in management’s opinion, it is not more-likely-than-not that these benefits will be realized. In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence including its past operating results, the existence of cumulative earnings or losses in the most recent years and its forecast of future taxable income. In estimating future taxable income, the Company develops assumptions including the amount of future pre-tax operating income and the reversal of temporary differences. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage the underlying businesses.
A tax benefit should only be recognized if it is more-likely-than-not that the position will be sustained based on its technical merits. The Company recognizes the financial statement benefit of a tax position only after considering the probability that a tax authority would uphold the position in an examination. For tax positions meeting a “more-likely-than-not” threshold, the amount recognized in the financial statements is the largest amount of benefit greater than 50% likely of being sustained. The more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of the benefit. Unrecognized tax benefits and related interest and penalties, are adjusted periodically to reflect changing facts and circumstances. The Company’s accounting policy is to classify interest and related charges as a component of income tax expense.
Non-controlling interests
For certain entities that are consolidated, but not 100% owned, the Company reports non-controlling interests as equity on its Consolidated Balance Sheets. The Company's consolidated net income on the Consolidated Statements of Operations includes the income (loss) attributable to non-controlling interest holders of the Company's consolidated Affiliates and Funds. Ownership interests held by Affiliate key employees are categorized as liabilities on the Consolidated Balance Sheets and are revalued each reporting date, with movements treated as compensation expense in the Consolidated Statements of Operations.
Non-controlling interests in consolidated Funds on the Consolidated Balance Sheets include undistributed income owned by the investors in the respective Funds. The Company’s consolidated net income on the Consolidated Statements of Operations includes the income (loss) attributable to non-controlling interest holders of these consolidated entities.
Redeemable non-controlling interests
The Company includes redeemable non-controlling interests related to certain consolidated Funds as temporary equity on the Consolidated Balance Sheets. Non-controlling interests in certain consolidated Funds are subject to monthly or quarterly redemption by the investors. When redeemable amounts become legally payable to investors, they are classified as a liability and included in total liabilities of consolidated Funds on the Consolidated Balance Sheets.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
2) Basis of Presentation and Significant Accounting Policies (cont.)
Other comprehensive income (loss)
Other comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. For the Company’s purposes, comprehensive income (loss) represents net income (loss), as presented in the accompanying Consolidated Statements of Operations, adjusted for net foreign currency translation adjustments and adjustments to the valuation of certain derivative securities, net of tax.
Restructuring costs
A liability for restructuring is recognized only after management has developed a formal plan, approved by the Board of Directors, to which it has committed. The costs included in a restructuring liability are those costs that are either incremental or incurred as a direct result of the plan, or are the result of a continuing contractual obligation with no continuing economic benefit to the Company, or a penalty incurred to cancel the contractual obligation. Refer to Note 22 for details of the Company’s restructuring activities.
Allocated Costs from OM plc
OM plc historically provided the Company with various services, including governance through the board of directors and executive committees, investor relations, procurement of insurance coverage, human resources, financial reporting, internal audit, treasury, systems, risk and tax services. All of these services have been transitioned to the Company and therefore the cost charged by OM plc has decreased. The costs associated with the services which have been (i) directly attributable to the Company, (ii) have been charged directly to the Company by OM plc, and (iii) have been paid to OM plc by the Company have been reflected in the Company’s Consolidated Financial Statements. During the years ended December 31, 2017, 2016 and 2015, the amount of expenses charged directly to the Company from OM plc were $0.4 million, $0.9 million and $1.8 million, respectively.
3) Acquisitions
On August 18, 2016, the Company acquired a majority of the equity interests in Landmark Partners, LLC, (“Landmark”) a leading global secondary private equity, real estate and real asset investment firm. The Company acquired a 60% interest in Landmark in exchange for $242.7 million. There is also the potential for an additional payment of up to $225.0 million on or around December 31, 2018, subject to service and other conditions. The equity interests of Landmark purchased by the Company entitle the Company to participate in the earnings of Landmark. Certain key members of the management team of Landmark retained the remaining 40% interest in Landmark, subject to certain vesting conditions. The Company financed the acquisition through proceeds from multiple note offerings, including $275.0 million of 4.80% senior notes due July 27, 2026 and $125.0 million of 5.125% senior notes due August 1, 2031. (see Note 13)
The Company accounted for the acquisition of Landmark as a business combination which requires assets acquired and liabilities assumed to be recorded at fair value. The following table presents a summary of the acquisition-date fair values of the assets acquired and liabilities assumed for OMAM’s acquisition of Landmark (in millions):
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
3) Acquisitions (cont.)
|
| | | | |
| | | Landmark |
| Purchase price | | |
| Cash | | $ | 239.2 |
|
| Seller’s expenses | | 3.5 |
|
| Total consideration | | 242.7 |
|
| Identifiable assets and liabilities | | |
| Cash | | 23.4 |
|
| Receivables | | 8.5 |
|
| Indefinite-life trade name | | 1.0 |
|
| Amortizable intangible asset management contracts | | 85.0 |
|
| Fixed assets | | 5.1 |
|
| Other current assets (liabilities), net | | (26.7 | ) |
| Assets (liabilities), net | | (1.7 | ) |
| Total identifiable assets and liabilities | | 94.6 |
|
| Goodwill | | $ | 148.1 |
|
The primary aspects of the purchase price allocation relate to amortizable intangible asset management contracts, the indefinite-life trade name and goodwill, which is the amount by which the purchase price exceeds the fair value of the net assets acquired. Certain measurement period adjustments were recorded to the provisional values recorded as of December 31, 2016. These adjustments primarily related to updated estimates, which resulted in an increase to the total consideration paid of $0.3 million, a decrease to the fair value of the identifiable net assets acquired of $1.6 million and an increase to the amount recorded to goodwill of $1.9 million.
The fair value of the amortizable intangible asset management contracts was determined using the excess earnings method, a form of the income approach. The principle behind the excess earnings method is that the value of the intangible asset is equal to the present value of the after-tax cash flows attributable to the intangible asset only. Excess earnings represent the earnings remaining after applying post-tax contributory asset charges to reflect the return required on other assets that contribute to the generation of the forecast cash flows of the intangible asset. The fair value of the trade name intangible asset was determined utilizing a relief-from-royalty method. The principle behind this method is that the value of the intangible asset is equal to the present value of the after-tax royalty savings attributable to owning the intangible asset.
The fair value for all identifiable intangible assets was based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). This fair value estimate could include assets that are not intended to be used, may be sold or are intended to be used in a manner other than their best use.
The fair value of the acquired amortizable intangible asset management contracts had a useful life estimate of approximately 13.4 years at acquisition. Purchase price allocated to intangible assets and goodwill is expected to be deductible for U.S. tax purposes over a period of 15 years. Goodwill was calculated as the excess of the fair value of
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
3) Acquisitions (cont.)
the consideration paid and the values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed.
During the year ended December 31, 2016, the Company incurred $6.1 million of transaction costs related to the acquisition of Landmark. These costs are recorded within general and administrative expense in the Consolidated Statements of Operations. There were no transaction costs incurred during the year ended December 31, 2017.
In conjunction with the acquisition, the Company entered into compensation arrangements with employees of Landmark where pre-acquisition equity units held by Landmark employees became subject to a service condition. These units are accounted for as stock-based compensation, were fair valued as of the closing date of the acquisition and vest over varying increments from December 31, 2018 through December 31, 2024. These units contain put rights that provide liquidity to the employees upon vesting. The aforementioned additional payment of up to $225.0 million could be paid based on the growth of Landmark’s business. This arrangement is also accounted for as stock-based compensation, fair valued as of the closing date of the acquisition, and vests on December 31, 2018. Both the pre-acquisition equity units and the potential future payment are remeasured at the end of each reporting period.
The financial results of Landmark included in the Company’s consolidated financial results for the year ended December 31, 2017 include revenues of $131.0 million, with $(54.7) million of net loss included in net income attributable to the Company, which includes amortization of intangible assets recorded in purchase accounting and compensation expense for the arrangements with employees of Landmark noted above.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents the combined financial results of OMAM and Landmark, as though the acquisition had occurred as of January 1, 2015. The unaudited pro forma financial information reflects certain adjustments for amortization expense related to the fair value of acquired intangible assets, interest expense related to debt incurred to finance the acquisition, amortization related to stock-based compensation arrangements entered into in conjunction with the acquisition, and the income tax impact of the pro forma adjustments. The unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of the financial results that would have been achieved had the acquisition actually occurred at the beginning of the first period presented (in millions, except per-share amounts):
|
| | | | | | | |
| | For the years ended December 31, |
| | 2016 | | 2015 |
| Revenues | $ | 713.5 |
| | $ | 780.1 |
|
| Total operating expenses | 594.7 |
| | 651.9 |
|
| Income from continuing operations before taxes | 109.2 |
| | 114.8 |
|
| Net income attributable to OMAM | 91.7 |
| | 97.6 |
|
| Net income per share attributable to OMAM shareholders: | | | |
| Basic | $0.77 | | $0.81 |
| Diluted | $0.77 | | $0.81 |
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
4) Investments
Investments are comprised of the following at December 31 (in millions): |
| | | | | | | |
| | 2017 | | 2016 |
| Investments of consolidated Funds held at fair value | $ | 136.7 |
| | $ | 35.5 |
|
| Equity-accounted investments in unconsolidated Funds (Note 7) | — |
| | 30.5 |
|
| Other investments held at fair value | 87.4 |
| | 17.5 |
|
| Investments related to long-term incentive compensation plans held at fair value | 95.2 |
| | 78.1 |
|
| Total investments held at fair value | $ | 319.3 |
| | $ | 161.6 |
|
| Equity-accounted investments in Affiliates (Note 7) | 1.6 |
| | 55.2 |
|
| Investments in Affiliates carried at cost | 53.8 |
| | — |
|
| Other investments* | 6.4 |
| | 52.0 |
|
| Total investments per Consolidated Balance Sheets | $ | 381.1 |
| | $ | 268.8 |
|
* Other investments represent cost-basis investments made by one of our Affiliates, including investments in timber and timberlands. At December 31, 2016, $50.1 million of these investments were recorded at the lower of cost or fair value less costs to sell, and subsequently sold in January 2017 for a net gain of approximately $1.7 million.
In September 2016, the Company purchased approximately $39.6 million of seed investments from OM plc under the terms of the seed capital management agreement, as amended (the “Seed Capital Management Agreement”). In July 2017, the Company purchased all remaining seed capital investments covered by the Seed Capital Management Agreement from OM plc for $63.4 million. OMAM financed this purchase in part through borrowings under a non-recourse seed capital facility collateralized entirely by its seed capital holdings. See Note 13 for a further discussion of borrowings and debt.
In August 2017, the Company executed a non-binding term sheet to sell its stake in Heitman LLC to Heitman’s management for cash consideration totaling $110 million. Pursuant to this term sheet, OMAM entered into a redemption agreement on November 17, 2017 and Heitman continued to be recorded as an equity method investment through November 30, 2017, at which point the Company reclassified its investment in Heitman to a cost-method investment. Heitman continued to contribute to the Company’s financial results of operations through November 30, 2017 and the transaction closed on January 5, 2018. The carrying value of OMAM’s interest in Heitman as of December 31, 2017 was $53.8 million and is included in “Investments in Affiliates carried at cost” in the table above. OMAM will retain its co-investment interests in Heitman-managed funds as well as any carried interest associated with these investments.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
4) Investments (cont.)
Investment income is comprised of the following for the years ended December 31 (in millions):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Investment return of equity-accounted investments in unconsolidated Funds (Note 7) | $ | 1.8 |
| | $ | 1.2 |
| | $ | 0.3 |
|
| Realized and unrealized gains on other investments held at fair value | 9.4 |
| | 0.8 |
| | — |
|
| Investment return of held for sale investments | 1.7 |
| | 0.1 |
| | — |
|
| Total return on OMAM investments | 12.9 |
| | 2.1 |
| | 0.3 |
|
| Investment return of equity-accounted investments in Affiliates (Note 7)* | 14.5 |
| | 15.1 |
| | 12.7 |
|
| Total investment income per Consolidated Statement of Operations | $ | 27.4 |
| | $ | 17.2 |
| | $ | 13.0 |
|
* As previously noted, the Company reclassified its investment in Heitman to a cost-method investment as of November 30, 2017, therefore earnings from Heitman as an equity-accounted investment are included in the table above for the first eleven months of 2017.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
5) Fair Value Measurements
The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2017 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Quoted prices in active markets (Level I) | | Significant other observable inputs (Level II) | | Significant unobservable inputs (Level III) | | Uncategorized | | Total value, December 31, 2017 |
Assets of OMAM and consolidated Funds(1) | | |
| | |
| | | | |
|
| Common and preferred stock | $ | 83.8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 83.8 |
|
| Short-term investment funds | 0.5 |
| | — |
| | — |
| | — |
| | 0.5 |
|
| Other investments | 0.4 |
| | — |
| | — |
| | 51.5 |
| | 51.9 |
|
| Derivatives | 0.3 |
| | 0.2 |
| | — |
| | — |
| | 0.5 |
|
| Consolidated Funds total | 85.0 |
| | 0.2 |
| | — |
| | 51.5 |
| | 136.7 |
|
Investments in separate accounts(2) | 46.1 |
| | — |
| | — |
| | — |
| | 46.1 |
|
Investments related to long-term incentive compensation plans(3) | 95.2 |
| | — |
| | — |
| | — |
| | 95.2 |
|
Investments in unconsolidated Funds(4) | — |
| | — |
| | — |
| | 41.3 |
| | 41.3 |
|
| OMAM total | 141.3 |
| | — |
| | — |
| | 41.3 |
| | 182.6 |
|
| Total fair value assets | $ | 226.3 |
| | $ | 0.2 |
| | $ | — |
| | $ | 92.8 |
| | $ | 319.3 |
|
| | | | | | | | | | |
Liabilities of consolidated Funds(1) | | |
| | |
| | | | |
|
| Common stock | $ | (7.2 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (7.2 | ) |
| Derivatives | (0.5 | ) | | (0.2 | ) | | — |
| | — |
| | (0.7 | ) |
| Consolidated Funds total | (7.7 | ) | | (0.2 | ) | | — |
| | — |
| | (7.9 | ) |
| Total fair value liabilities | $ | (7.7 | ) | | $ | (0.2 | ) | | $ | — |
| | $ | — |
| | $ | (7.9 | ) |
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
5) Fair Value Measurements (cont.)
The following table summarizes the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2016 (in millions):
|
| | | | | | | | | | | | | | | | | | | |
| | Quoted prices in active markets (Level I) | | Significant other observable inputs (Level II) | | Significant unobservable inputs (Level III) | | Uncategorized | | Total value, December 31, 2016 |
Assets of OMAM and consolidated Funds(1) | | |
| | |
| | | | |
|
| Common and preferred stock | $ | 35.1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 35.1 |
|
| Short-term investment funds | 0.4 |
| | — |
| | — |
| | — |
| | 0.4 |
|
| Consolidated Funds total | 35.5 |
| | — |
| | — |
| | — |
| | 35.5 |
|
Investments in separate accounts(2) | 7.5 |
| | — |
| | — |
| | — |
| | 7.5 |
|
Investments related to long-term incentive compensation plans(3) | 78.1 |
| | — |
| | — |
| | — |
| | 78.1 |
|
Investments in unconsolidated Funds(4) | — |
| | — |
| | — |
| | 40.5 |
| | 40.5 |
|
| OMAM total | 85.6 |
| | — |
| | — |
| | 40.5 |
| | 126.1 |
|
| Total fair value assets | $ | 121.1 |
| | $ | — |
| | $ | — |
| | $ | 40.5 |
| | $ | 161.6 |
|
| | | | | | | | | | |
Liabilities of OMAM and consolidated Funds(1) | | |
| | |
| | | | |
|
| Common stock | $ | (5.0 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (5.0 | ) |
| Consolidated Funds total | (5.0 | ) | | — |
| | — |
| | — |
| | (5.0 | ) |
| Derivative securities | — |
| | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
| OMAM total | — |
| | (0.1 | ) | | — |
| | — |
| | (0.1 | ) |
| Total fair value liabilities | $ | (5.0 | ) | | $ | (0.1 | ) | | $ | — |
| | $ | — |
| | $ | (5.1 | ) |
| |
(1) | Assets and liabilities measured at fair value are comprised of financial investments managed by the Company’s Affiliates. $136.7 million in assets and $7.9 million in liabilities at December 31, 2017 and $35.5 million in assets and $5.0 million in liabilities at December 31, 2016 are the result of the consolidation of Funds sponsored by the Company’s Affiliates. |
The fair value of investments estimated based on quoted market prices of similar investments, dealer quotations or alternative pricing sources supported by observable inputs are classified within Level II. The Company obtains prices from independent pricing services that may utilize broker quotes, but generally the independent pricing services will use various other pricing techniques which take into account appropriate factors such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other data. The Company has not made adjustments to the prices provided. If the pricing services are only able to (a) obtain a single broker quote or (b) utilize a pricing model, such securities are classified as Level III. If the pricing services are unable to provide prices, the Company attempts to obtain one or more broker quotes directly from a dealer or values such securities at the last bid price obtained. In either case, such securities are classified as Level III. The Company performs due diligence procedures over third party pricing vendors to understand their methodology and controls to support their use in the valuation process to ensure compliance with required accounting disclosures.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
5) Fair Value Measurements (cont.)
Equity, short-term investment funds and derivatives which are traded on a national securities exchange are stated at the last reported sales price on the day of valuation. To the extent these securities are actively traded and valuation adjustments are not applied, they are classified as Level I. These securities that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs obtained by the Company from independent pricing services are classified as Level II.
| |
(2) | Investments in separate accounts of $46.1 million at December 31, 2017 consist of approximately 1% of cash equivalents and 99% of equity securities. Investments in separate accounts of $7.5 million at December 31, 2016, consist of approximately 28% of cash equivalents and 72% of equity securities. The Company has valued these using the published price as of the measurement date. Accordingly, the Company has classified these investments as Level I. |
| |
(3) | Investments related to long-term compensation plans of $95.2 million and $78.1 million at December 31, 2017 and 2016, respectively, are investments in publicly registered daily redeemable funds (some managed by Affiliates), which the Company has classified as trading securities and valued using the published price as of the measurement dates. Accordingly, the Company has classified these investments as Level I. |
| |
(4) | The uncategorized amounts of $41.3 million and $40.5 million at December 31, 2017 and December 31, 2016, respectively, relate to investments in unconsolidated Funds which consist primarily of investments in Funds advised by Affiliates and are valued using NAV which the Company relies on to determine their fair value as a practical expedient and has therefore not classified these investments in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to amounts presented in the Consolidated Balance Sheets. These unconsolidated Funds consist primarily of real estate investments Funds and UCITS. The NAVs that have been provided by investees have been derived from the fair values of the underlying investments as of the measurement dates. |
These investments are subject to longer than monthly or quarterly redemption restrictions, and due to their nature, distributions are received only as cash flows are generated from underlying assets over the life of the Funds. The range of time over which the underlying assets are expected to be liquidated by the investees is approximately one to eight years from December 31, 2017. The valuation process for the underlying real estate investments held by the real estate investment Funds begins with each property or loan being valued by the investment teams. The valuations are then reviewed and approved by the valuation committee, which consists of senior members of the portfolio management, acquisitions, and research teams. For certain properties and loans, the valuation process may also include a valuation by independent appraisers. In connection with this process, changes in fair-value measurements from period to period are evaluated for reasonableness, considering items such as market rents, capitalization and discount rates, and general economic and market conditions.
Not included in the above are $60.2 million and $52.0 million at December 31, 2017 and December 31, 2016, respectively, of various investments carried at cost, including the Company’s investment in Heitman at December 31, 2017 and investments in timber and timberlands. In January 2018, $50.1 million of these timber and timberlands investments were sold for a net gain of approximately $1.7 million, and in January, 2018 the Heitman sale transaction was completed and the Company will recognize a net gain of approximately $50.0 million during 2018 in the Consolidated Statement of Operations.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
5) Fair Value Measurements (cont.)
There were no significant transfers of financial assets or liabilities among Levels I, II or III during the years ended December 31, 2017 and 2016.
6) Variable Interest Entities
The Company, through its Affiliates, sponsors the formation of various entities considered to be VIEs. These VIEs are primarily Funds managed by Affiliates that are typically owned entirely by third-party investors, however, certain Funds are capitalized with seed capital investments from the Company and its related parties and may be owned partially by Affiliate key employees and/or individuals that own minority interests in an Affiliate.
The Company’s determination of whether it is the primary beneficiary of a Fund that is a VIE is based in part on an assessment of whether or not the Company and its related parties are exposed to the majority of the risks and rewards of the entity. Typically the Fund’s investors are entitled to substantially all of the economics of these VIEs with the exception of the management fees and performance fees, if any, earned by the Company or any investment the Company has made into the Funds. The Company generally is not the primary beneficiary of Fund VIEs created to manage assets for clients unless the Company’s ownership interest, including interests of related parties, is substantial.
The following table presents the assets and liabilities of Funds that are VIEs and consolidated by the Company at December 31 (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Assets | |
| | |
|
| Investments at fair value | $ | 106.7 |
| | $ | 14.9 |
|
| Other assets of consolidated Funds | 16.8 |
| | 0.6 |
|
| Total Assets | $ | 123.5 |
| | $ | 15.5 |
|
| Liabilities | |
| | |
|
| Other liabilities of consolidated Funds | $ | 3.3 |
| | $ | 0.7 |
|
| Total Liabilities | $ | 3.3 |
| | $ | 0.7 |
|
“Investments at fair value” consist of investments in securities and investments in related parties. The Company has also consolidated Funds that are not VIEs, and therefore the assets and liabilities of those Funds are not included in the table above.
The assets of consolidated VIEs presented in the table above belong to the investors in those Funds, are available for use only by the Fund to which they belong, and are not available for use by the Company to the extent they are held by non-controlling interests. Any debt or liabilities held by consolidated Funds have no recourse to the Company's general credit.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
6) Variable Interest Entities (cont.)
The Company’s involvement with Funds that are VIEs and not consolidated by the Company is generally limited to that of an investment manager and its investment in the unconsolidated VIE, if any. The Company’s investment in any unconsolidated VIE generally represents an insignificant interest of the Fund’s net assets and assets under management, such that the majority of the VIE’s results are attributable to third parties. The Company’s exposure to risk in these entities is generally limited to any capital contribution it has made or is required to make and any earned but uncollected management fees. The Company has not issued any investment performance guarantees to these VIEs or their investors.
The following information pertains to unconsolidated VIEs for which the Company holds a variable interest at December 31 (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Unconsolidated VIE assets | $ | 6,001.1 |
| | $ | 6,006.3 |
|
| Unconsolidated VIE liabilities | $ | 3,843.7 |
| | $ | 3,740.2 |
|
| Equity interests on the Consolidated Balance Sheet | $ | 54.4 |
| | $ | 54.2 |
|
Maximum risk of loss(1) | $ | 58.5 |
| | $ | 58.5 |
|
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(1) | Includes equity investments the Company has made or is required to make and any earned but uncollected management/incentive fees. The Company does not record performance/incentive allocations until the respective measurement period has ended. |
In addition to the multiple unconsolidated VIE Funds, the Company determined that Heitman LLC, one of the Company’s Affiliates, is a VIE. The Company concluded that it is not the primary beneficiary of Heitman LLC because it does not hold the power to direct its most economically significant activities. The Company aggregated Heitman LLC with the Company’s other unconsolidated VIE Funds due to their similar risk profiles given that the risks and rewards are driven by changes in investment values and the Affiliates’ ability to manage those assets.
In August 2017, the Company agreed in principle to sell its stake in Heitman LLC to Heitman’s management. Pursuant to this term sheet, OMAM entered into a redemption agreement on November 17, 2017. Heitman continued to contribute to the Company’s financial results of operations through November 30, 2017 and the transaction closed on January 5, 2018.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
7) Equity Accounted Investees
The following tables present summarized financial information for Affiliates and Funds accounted for under the equity method (in millions):
|
| | | | | | | | | | | | |
| | | For the year ended December 31, |
| Statements of Income | | 2017 | | 2016 | | 2015 |
Net revenues(1) | | $ | 318.9 |
| | $ | 340.9 |
| | $ | 342.6 |
|
| Operating income | | 94.1 |
| | 98.4 |
| | 114.8 |
|
| Other income, net | | 197.4 |
| | 161.9 |
| | 97.8 |
|
| Income before income taxes | | 291.5 |
| | 260.3 |
| | 212.6 |
|
| Less income tax expense | | 5.5 |
| | 8.2 |
| | 5.9 |
|
| Exclude: non-controlling interests income | | 247.6 |
| | 213.7 |
| | 177.6 |
|
| Net income attributable to controlling interests | | $ | 38.4 |
| | $ | 38.4 |
| | $ | 29.1 |
|
| OMAM equity in net income of equity method investees | | $ | 16.3 |
| | $ | 16.3 |
| | $ | 13.0 |
|
|
| | | | | | | |
| | As of December 31, |
| Balance Sheets | 2017 | | 2016 |
| Total assets | $ | 3.5 |
| | $ | 2,661.5 |
|
| Total liabilities | 1.6 |
| | 1,105.9 |
|
| Non-controlling interests in subsidiaries | 0.3 |
| | 1,477.9 |
|
| Members’ equity | $ | 1.6 |
| | $ | 77.7 |
|
| OMAM equity investment and undistributed earnings of affiliated companies, before consolidating and reconciling adjustments | $ | 1.6 |
| | $ | 55.9 |
|
| Consolidating and reconciling adjustments: | | | |
|
| Goodwill attributable to equity method investment | — |
| | 29.8 |
|
| OMAM investment in equity method investees | $ | 1.6 |
| | $ | 85.7 |
|
| |
(1) | Net revenues include advisory fees for asset management services and investment income, including interest and dividends from consolidated investment partnerships. |
As disclosed in Note 4, as of November 30, 2017, the Company reclassified its investment in Heitman to a cost-method investment. Heitman contributed to the Company’s financial results of operations for the eleven-month period from January 1, 2017 through November 30, 2017. The financial results of operations from Heitman for this eleven-month period are therefore included in the summarized statements of income table above.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
8) Fixed Assets and Lease Commitments
Fixed assets consisted of the following at December 31 (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Leasehold improvements | $ | 32.4 |
| | $ | 31.7 |
|
| Office equipment | 28.2 |
| | 25.6 |
|
| Furniture and fixtures | 7.2 |
| | 7.0 |
|
| Building | 2.9 |
| | 2.9 |
|
| Software and web development | 38.7 |
| | 28.6 |
|
| Fixed assets, at cost | 109.4 |
| | 95.8 |
|
| Accumulated depreciation and amortization | (67.7 | ) | | (56.0 | ) |
| Fixed assets, net | $ | 41.7 |
| | $ | 39.8 |
|
Depreciation and amortization expense for continuing operations was $11.7 million, $9.4 million and $6.9 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company and its Affiliates lease office space for their operations. At December 31, 2017, the Company’s aggregate future minimum payments for operating leases having initial or non-cancelable lease terms greater than one year are (in millions):
|
| | | |
| | Future minimum rentals |
| 2018 | $ | 11.8 |
|
| 2019 | 10.8 |
|
| 2020 | 10.5 |
|
| 2021 | 9.8 |
|
| 2022 | 5.1 |
|
| Thereafter | 4.7 |
|
| Total | $ | 52.7 |
|
The Company is responsible for other expenses under these leases as well. Such expenses include operating costs, insurance, taxes and broker fees. Consolidated rent and occupancy expenses for 2017, 2016 and 2015 were $12.0 million, $11.6 million and $10.9 million respectively.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
9) Goodwill and Intangible Assets
The following table presents the changes in goodwill in 2017 and 2016 (in millions):
|
| | | | | | | | | | | |
| | Gross Book Value | | Accumulated Impairment | | Net Book Value |
| December 31, 2015 | $ | 160.4 |
| | $ | (33.9 | ) | | $ | 126.5 |
|
| Additions | 146.2 |
| | — |
| | 146.2 |
|
| Impairments | — |
| | — |
| | — |
|
| Disposals | — |
| | — |
| | — |
|
| December 31, 2016 | $ | 306.6 |
| | $ | (33.9 | ) | | $ | 272.7 |
|
| Additions | 1.9 |
| | — |
| | 1.9 |
|
| Impairments | — |
| | — |
| | — |
|
| Disposals | — |
| | — |
| | — |
|
| December 31, 2017 | $ | 308.5 |
| | $ | (33.9 | ) | | $ | 274.6 |
|
The additional goodwill recorded in 2016 relates to the acquisition of Landmark, which closed in August 2016. Certain measurement period adjustments were recorded in 2017 that resulted in a $1.9 million increase in goodwill. Refer to Note 3 for additional information.
The following table presents the change in definite-lived acquired intangible assets in 2017 and 2016, comprised of client relationships (in millions):
|
| | | | | | | | | | | |
| | Gross Book Value | | Accumulated Amortization & Impairment | | Net Book Value |
| December 31, 2015 | $ | 23.3 |
| | $ | (21.8 | ) | | $ | 1.5 |
|
| Additions | 85.0 |
| | — |
| | 85.0 |
|
| Amortization | — |
| | (2.6 | ) | | (2.6 | ) |
| Disposals | — |
| | — |
| | — |
|
| December 31, 2016 | $ | 108.3 |
| | $ | (24.4 | ) | | $ | 83.9 |
|
| Additions | — |
| | — |
| | — |
|
| Amortization | — |
| | (6.6 | ) | | (6.6 | ) |
| Disposals | — |
| | — |
| | — |
|
| December 31, 2017 | $ | 108.3 |
| | $ | (31.0 | ) | | $ | 77.3 |
|
The Company’s definite-lived acquired intangibles are amortized over their expected useful lives. As of December 31, 2017, these assets were being amortized over remaining useful lives of five to twelve years. The Company recorded amortization expense of $6.6 million, $2.6 million and $0.1 million, respectively, for the years ended December 31, 2017, 2016 and 2015.
The Company also acquired a $1.0 million indefinite-lived intangible trade name in the acquisition of Landmark, included in acquired intangibles, net, on the Company’s Consolidated Balance Sheet at December 31, 2017 and 2016.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
9) Goodwill and Intangible Assets (cont.)
The Company estimates that its consolidated annual amortization expense, assuming no useful life changes or additional investments in new or existing Affiliates, for each of the next five fiscal years is as follows (in millions):
|
| | | |
| 2018 | $ | 6.6 |
|
| 2019 | 6.6 |
|
| 2020 | 6.6 |
|
| 2021 | 6.6 |
|
| 2022 | 6.5 |
|
| Thereafter | 44.4 |
|
| Total | $ | 77.3 |
|
10) Related Party Transactions
Amounts due from related parties were comprised of the following at December 31 (in millions):
|
| | | | | | | |
| | 2017(1) | | 2016 |
| Fees receivable from unconsolidated Funds | $ | 59.0 |
| | $ | 40.8 |
|
| Fees receivable from OM plc business units | — |
| | 2.0 |
|
| Other amounts due from related parties | — |
| | 2.8 |
|
| Total amounts due from related parties | $ | 59.0 |
| | $ | 45.6 |
|
Amounts due to related parties were comprised of the following at December 31 (in millions):
|
| | | | | | | |
| | 2017(1) | | 2016 |
| Other amounts due to related parties | $ | — |
| | $ | 0.4 |
|
Other amounts due to OM plc(3) | — |
| | 97.0 |
|
| Total current payables to related parties | — |
| | 97.4 |
|
Other amounts due to OM plc(3) | — |
| | 58.9 |
|
| Total long-term payables to related parties | — |
| | 58.9 |
|
| Total amounts due to related parties | $ | — |
| | $ | 156.3 |
|
Investments in related parties consisted of the following at December 31 (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Investments in equity-accounted investees (Note 7) | 1.6 |
| | 85.7 |
|
| Total related party investments | $ | 1.6 |
| | $ | 85.7 |
|
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
10) Related Party Transactions (cont.)
Related party transactions included in the Company’s Consolidated Statement of Operations for the years ended December 31 consisted of (in millions):
|
| | | | | | | | | | | |
| Revenues: | 2017 | | 2016 | | 2015 |
Management fees collected from OM plc business units(1) | $ | 8.5 |
| | $ | 7.8 |
| | $ | 9.3 |
|
Management fees collected from unconsolidated Funds(2) | 274.9 |
| | 131.0 |
| | 107.0 |
|
Performance fees collected from unconsolidated Funds(2) | 0.1 |
| | 4.2 |
| | 1.9 |
|
| Total related party revenues (including discontinued operations) | $ | 283.5 |
| | $ | 143.0 |
| | $ | 118.2 |
|
| Expenses: | | | | | |
Rent and administrative costs recharged by OM plc business units(4) | 0.2 |
| | 1.0 |
| | 1.7 |
|
| Restricted stock grants of OM plc equity to OMAM employees (Note 18) | — |
| | 0.1 |
| | 0.5 |
|
Recharged OM plc operational costs(5) | 0.4 |
| | 0.9 |
| | 1.8 |
|
| Total related party expenses (including discontinued operations) | $ | 0.6 |
| | $ | 2.0 |
| | $ | 4.0 |
|
| |
(1) | OM plc was considered a related party through November 17, 2017, at which point OM plc sold all but a deminimus amount of the Company’s ordinary shares (see Note 1). Therefore, revenue and expenses reported in the table above reflect OM plc as a related party through November 17, 2017. OM plc was not considered a related party at December 31, 2017. |
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(2) | Transactions with unconsolidated Affiliate-sponsored Funds are considered related party items on the basis of the Company’s significant influence over the activities of such entities in its capacity as investment advisor thereto. These transactions are comprised of fees for advisory services and investments in unconsolidated “master” Funds held by consolidated “feeder” Funds. |
| |
(3) | During 2016, the Company and OM plc agreed to amend the Deferred Tax Asset Deed. Under the terms of the Deferred Tax Asset Deed, as amended, the Company agreed to make a payment of the net present value of the future tax benefits due to OM plc valued as of December 31, 2016. This payment, originally valued at $142.6 million, was to be made over three installments, on June 30, 2017, December 31, 2017 and June 30, 2018. The initial payment of $45.5 million was paid on June 30, 2017, however as a result of the Tax Act, no additional payments have been made pending the continued evaluation of the Tax Act’s impact on the value of the Deferred Tax Asset Deed. The reduction of the corporate tax rate and other provisions of the Tax Act resulted in a decrease to the Deferred Tax Asset Deed of approximately$51.8 million for the year ended December 31, 2017, however there remains a possibility for additional reductions pending continued evaluation of the Tax Act’s impact on the value of the Deferred Tax Asset Deed. |
During 2014, the Company entered into a Seed Capital Management Agreement, a Co-investment Deed and a shareholder agreement with OM plc and/or OM plc’s subsidiaries. During 2016, the Company and OM plc agreed to amend the Seed Capital Management Agreement. As a result of the amendment, the Company purchased approximately $39.6 million of seed investments from OM plc in September 2016. The Company purchased the remaining seed capital investments covered by the Seed Capital Management Agreement valued at $63.4 million in July 2017, financed in part by borrowings under a non-recourse loan facility (see Note 13) and two promissory notes due and payable on March 31, 2018 in the amount of $4.5 million. Amounts owed to OM plc associated with the Co-investment Deed were $11.3 million at
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
10) Related Party Transactions (cont.)
December 31, 2017, net of tax. As of December 31, 2017, the Company had recorded $2.0 million for redemptions and estimated taxes due under the Co-investment Deed. Amounts withheld in excess of the future tax liability will be payable to OM plc upon settlement.
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(4) | The Company conducts a portion of its distribution activities out of Asia and the United Kingdom, and has entered into contractual arrangements with Related Business Units domiciled there to share their premises and leverage certain of their administrative functions. With respect to premises in Asia, such arrangements ended in the first half of 2016. |
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(5) | OM plc has historically provided the Company with various oversight services, including governance, which includes compensation for board and executive committees, investor relations, procurement of insurance coverage, human resources, financial reporting, internal audit, treasury, systems, risk and tax services. All of these services have been transitioned to the Company and therefore the cost charged by OM plc has decreased. That portion of the above costs which (i) were directly attributable to the Company, (ii) have been charged to the Company by OM plc and (iii) have been paid to OM plc by the Company, have been recorded in the Company’s Consolidated Financial Statements and were $0.4 million, $0.9 million, and $1.8 million for the years ended December 31, 2017, 2016 and 2015, respectively. |
Other related party arrangements
During 2016, the Company made a loan to an equity-method Affiliate that was used to make co-investments in Affiliate Funds. Amounts due to the Company in connection with this loan are included in other assets on the Company’s Consolidated Balance Sheet and were $3.6 million and for $2.7 million at December 31, 2017 and December 31, 2016, respectively. The Company uses the equity-method to account for its interests in Affiliates where it exercises significant influence over their operations, but does not hold a controlling interest. During 2017, 2016 and 2015, the Company recorded earnings in respect of these investees of $14.5 million, $15.1 million and $12.5 million, respectively. The Company also exercises significant influence over unconsolidated Funds; however in order to report in a manner consistent with consolidated Funds, it has elected to apply the fair value option for its investments therein. Additional information with respect to equity-accounted investees is disclosed in Note 7.
During the years ended December 31, 2017, 2016 and 2015, the Company paid dividends to OM plc of $8.8 million, $25.4 million and $27.8 million, respectively. During the year ended December 31, 2017, the Company paid dividends to HNA of $2.5 million.
As the Company is a member of a group of related businesses, it is possible that the terms of certain related party transactions are not the same as those that would result from transactions with wholly unrelated parties.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
11) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following at December 31 (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Accounts payable | 5.2 |
| | 5.1 |
|
| Accrued expenses | 39.9 |
| | 29.8 |
|
| Accrued interest payable | 7.6 |
| | 8.4 |
|
| Other | 2.2 |
| | 2.5 |
|
| Total accounts payable and accrued expenses | $ | 54.9 |
| | $ | 45.8 |
|
12) Other Compensation Liabilities
Other compensation liabilities consisted of the following at December 31 (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Share-based payments liability (Note 18) | $ | 188.8 |
| | $ | 53.7 |
|
| Non-current compensation payable | 0.1 |
| | 0.1 |
|
| Profit interests compensation liability (Note 2) | 195.0 |
| | 159.2 |
|
| Voluntary deferral plan liability (Note 17) | 95.1 |
| | 78.0 |
|
| Total other compensation liabilities | $ | 479.0 |
| | $ | 291.0 |
|
Profit interests compensation expense amounted to $41.5 million in 2017, $16.2 million in 2016, and $31.4 million in 2015. Issuances of additional profit sharing interests to Affiliate key employees for cash amounted to $0.0 million in 2017, $0.4 million in 2016, and $0.2 million in 2015. Redemption of profit sharing interests by OMAM from Affiliate key employees for cash were $5.7 million in 2017, $12.7 million in 2016, and $2.9 million in 2015.
The share-based payments liability includes the Landmark compensation arrangements and potential additional payment disclosed in Note 3 which combined amounted to $146.8 million at December 31, 2017 and $26.0 million at December 31, 2016.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
13) Borrowings and Debt
The Company’s long-term debt at December 31, 2017 was comprised of a revolving credit facility, non-recourse seed capital financing and long-term bonds.
Revolving credit facility
On October 15, 2014, the Company entered into a revolving credit facility with Citibank, as administrative agent and issuing bank, and Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated as joint lead arrangers and joint book runners (as amended, the “Credit Facility”). Pursuant to the terms of the Credit Facility, the Company may obtain loans on a revolving credit basis and procure the issuance of letters of credit in an aggregate amount at any time outstanding not in excess of $350 million. The Credit Facility has a maturity date of October 15, 2019. Borrowings under the credit facility bear interest, at OMAM’s option, at either the per annum rate equal to (a) the greatest of (i) the prime rate, (ii) the federal funds effective rate plus 0.5% and (iii) the one month Adjusted LIBO Rate plus 1.0%, plus, in each case an additional amount ranging from 0.25% to 1.00%, with such additional amount based from time to time on the ratio of the Company’s total consolidated indebtedness to Adjusted EBITDA (a “Leverage Ratio”) until either Moody’s Investor Service, Inc. or Standard & Poor’s assigned an initial rating to the Company’s senior, unsecured long-term indebtedness for borrowed money that was not subject to credit enhancement, or its credit rating, at which time such additional amount became based on its credit rating or (b) the London interbank offered rate for a period, at the Company’s election, equal to one, two, three or six months plus an additional amount ranging from 1.25% to 2.00%, with such additional amount based from time to time on the Company’s Leverage Ratio until it was assigned a credit rating, at which time such additional amount became based on its credit rating. In addition, the Company is charged a commitment fee based on the average daily unused portion of the revolving credit facility at a per annum rate ranging from 0.20% to 0.50%, with such amount based from time to time on its Leverage Ratio until it was assigned a credit rating, at which time such amount became based on the Company’s credit rating.
In July 2016, Moody’s Investor Service, Inc. and Standard & Poor’s each assigned an initial investment-grade rating to the Company’s senior, unsecured long-term indebtedness. As a result of the assignment of the credit ratings, the Company’s interest rate on outstanding borrowings was set at LIBOR + 1.50% and the commitment fee on the unused portion of the revolving credit facility was set at 0.25%. Prior to the assignment of the credit ratings, the Company’s interest rate on outstanding borrowings was based on the Company’s Leverage Ratio and was set at LIBOR + 1.25% and the commitment fee on the unused portion of the revolving credit facility was set at 0.20%. Under the Credit Facility, the ratio of third-party borrowings to trailing twelve months Adjusted EBITDA cannot exceed 3.0x, and the interest coverage ratio must not be less than 4.0x.
At December 31, 2017, the outstanding balance of the facility was $0.0 million ($350.0 million of undrawn revolving credit facility capacity). Including $392.8 million of long-term bonds and per the terms of the revolving credit facility, which excludes non-recourse debt (see below), the Company’s ratio of third-party borrowings to trailing twelve months Adjusted EBITDA was 1.4x, and interest coverage ratio was 11.5x. The fair value of borrowings on the revolving credit facility approximated the net cost basis as of December 31, 2017.
At December 31, 2016 the outstanding balance of the facility was $0.0 million ($350.0 million of undrawn revolving credit facility capacity). Including $392.3 million of long-term bonds (see below), the Company’s ratio of third-party borrowings to trailing twelve months Adjusted EBITDA was 1.9x and interest coverage ratio was 18.5x.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
13) Borrowings and Debt (cont.)
Non-recourse seed capital facility
In July 2017, the Company purchased all remaining seed capital investments covered by the Seed Capital Management Agreement from OM plc for $63.4 million. OMAM financed this purchase in part through borrowings under a non-recourse seed capital facility collateralized entirely by its seed capital holdings. The Company entered into this facility as of July 17, 2017, and may borrow up to $65.0 million, so long as the borrowing does not represent more than 50% of the value of the permitted seed capital collateral. The non-recourse seed facility bears interest at LIBOR +1.55% with a commitment fee on the unused portion of this facility of 0.95%. The facility currently has a maturity date of January 17, 2019 and includes a six-month evergreen renewal option. At December 31, 2017, amounts outstanding under this non-recourse seed capital facility amounted to $33.5 million. Per the terms of the Company’s revolving credit facility, drawdowns under this facility are excluded from the Company’s third party debt levels for purposes of calculating the Company’s credit ratio covenants. The fair value of borrowings on the non-recourse seed capital facility approximated the net cost basis as of December 31, 2017.
Long-term bonds
The Company’s long-term bonds were comprised of the following as of the dates indicated (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | December 31, 2016 |
| (in millions) | Maturity amount | | Discount and debt issuance costs | | Carrying value | | Fair Value | | Carrying value | | Fair Value |
| Long-term bonds: | | | | | | | | | | | |
| 4.80% Senior Notes Due 2026 | $ | 275.0 |
| | $ | (3.1 | ) | | $ | 271.9 |
| | $ | 285.7 |
| | $ | 271.6 |
| | $ | 271.0 |
|
| 5.125% Senior Notes Due 2031 | 125.0 |
| | (4.1 | ) | | 120.9 |
| | 124.6 |
| | 120.7 |
| | 107.9 |
|
| Total long-term bonds | $ | 400.0 |
| | $ | (7.2 | ) | | $ | 392.8 |
| | $ | 410.3 |
| | $ | 392.3 |
| | $ | 378.9 |
|
In July 2016, the Company issued $275.0 million of 4.80% Senior Notes due 2026 (the “2026 Notes”) and $125.0 million of 5.125% Senior Notes due 2031 (the “2031 Notes”). The Company used the net proceeds of these offerings to finance the acquisition of Landmark in August 2016, settle an outstanding interest rate lock, purchase seed capital from OM plc and pay down the balance of the Revolving Credit Facility.
4.80% Senior Notes Due July 2026
The $275.0 million 2026 Notes were sold at a discount of $(0.5) million and the Company incurred debt issuance costs of $(3.0) million, which are being amortized to interest expense over the ten-year term. The 2026 Notes can be redeemed at any time prior to the scheduled maturity in part or in aggregate, at the greater of the related 100% principal amount at that time or the sum of the remaining scheduled payments discounted at the treasury rate (as defined) plus 0.5%, together with any related accrued and unpaid interest.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
13) Borrowings and Debt (cont.)
5.125% Senior Notes Due August 2031
The $125.0 million 2031 Notes incurred debt issuance costs of $(4.3) million, which are being amortized to interest expense over the fifteen-year term. The 2031 Notes can be redeemed at any time, on or after August 1, 2019 at a redemption price equal to 100.0% of the principal amount together with any related accrued and unpaid interest.
The fair value of the long-term bonds was determined using broker quotes and any recent trading activity for each of the notes listed above, which are considered Level II inputs.
Interest expense
Interest expense incurred amounted to $24.5 million, $11.3 million and $3.1 million for the years ended December 31, 2017, 2016 and 2015 respectively. Interest expense consists of interest accrued on the long-term debt, commitment fees and amortization of debt-related costs. The weighted average interest rate on all debt obligations, excluding consolidated Funds, was 6.02%, 5.16% and 1.40% in each of 2017, 2016 and 2015, respectively.
As of December 31, 2017, the aggregate maturities of debt commitments, based on their contractual terms, are as follows:
|
| | | | |
| | | Future minimum debt commitments |
| 2018 | | $ | — |
|
| 2019 | | 33.5 |
|
| 2020 | | — |
|
| 2021 | | — |
|
| 2022 | | — |
|
| Thereafter | | 400.0 |
|
| Total | | $ | 433.5 |
|
The Company was in compliance with the required covenants related to borrowings and debt facilities as of December 31, 2017.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
14) Income Taxes
The components of income tax expense from continuing operations for the years ended December 31 are as follows (in millions):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Current: | |
| | |
| | |
|
| Federal | $ | 30.0 |
| | $ | 17.3 |
| | $ | 40.8 |
|
| State | 5.9 |
| | 2.6 |
| | 7.4 |
|
| Foreign | 3.6 |
| | 1.4 |
| | 1.3 |
|
| Total current | 39.5 |
| | 21.3 |
| | 49.5 |
|
| Deferred: | |
| | |
| | |
|
| Federal | 102.7 |
| | 19.6 |
| | (4.5 | ) |
| State | (9.3 | ) | | (0.2 | ) | | (4.5 | ) |
| Foreign | (0.1 | ) | | 0.1 |
| | 6.1 |
|
| Total deferred | 93.3 |
| | 19.5 |
| | (2.9 | ) |
| Total tax expense | $ | 132.8 |
| | $ | 40.8 |
| | $ | 46.6 |
|
Included in gain (loss) on disposal of discontinued operations is income tax expense of $(0.1) million, $4.0 million and $0.5 million in the years ended December 31, 2017, 2016 and 2015, respectively.
The provision for income taxes in 2017, 2016 and 2015 included benefits of $1.2 million, $4.7 million and $4.0 million, respectively, related to the utilization of net operating loss carryforwards.
The reconciliation of the difference between the Company’s U.S. Federal statutory income tax rate and the effective income tax rate for continuing operations for the years ended December 31 is as follows:
|
| | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Tax at U.S. federal statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State income taxes, net of federal benefit | 1.7 | % | | 3.0 | % | | 3.0 | % |
| Non-deductible expenses | 0.2 | % | | — | % | | — | % |
| DTA Deed liability revaluation adjustment | (12.8 | )% | | — | % | | — | % |
| Interest expense | (10.2 | )% | | (12.1 | )% | | (9.3 | )% |
| Dividends from foreign subsidiaries | — | % | | — | % | | 0.3 | % |
| Adjustment to liabilities for uncertain tax positions | (1.2 | )% | | 0.9 | % | | (0.4 | )% |
| Change in valuation allowance | 1.1 | % | | (0.6 | )% | | (3.4 | )% |
| Effect of foreign operations | (4.0 | )% | | (0.7 | )% | | (1.0 | )% |
| Effect of changes in tax law | 86.4 | % | | — | % | | (0.5 | )% |
| Effect of income from non-controlling interest | (1.3 | )% | | — | % | | — | % |
| Other | (1.4 | )% | | (0.2 | )% | | (0.5 | )% |
| Effective income tax rate for continuing operations | 93.5 | % | | 25.3 | % | | 23.2 | % |
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
14) Income Taxes (cont.)
On November 16, 2017, the U.K. Finance (No.2) Bill 2017 (the “Finance Bill”) received Royal Assent and enacted amendments to the hybrid mismatch rules which are effective from July 13, 2017. Accordingly, the Company has recognized incremental U.K. taxes of $2.7 million in 2017 due to reduced benefits from its intercompany financing arrangements as of the effective date.
During 2017, the Company recorded an additional $3.1 million valuation allowance against its state net operating loss carryforwards as management concluded it is unlikely the tax benefits will be realized largely due to Pennsylvania legislation enacted during 2017 which limits the Company’s annual usage of net operating losses within the state.
During 2015 and 2016, the Company released $2.0 million and $0.9 million of its valuation allowance relating to state net operating loss carryforwards as management has concluded that the tax benefits will be realized due to increases of income apportioned to the applicable states.
During 2015, the Company released $4.5 million of its valuation allowance relating to foreign tax credit carryforwards, as management has concluded that the tax benefits will be realized primarily due to forecasted taxable income resulting from the utilization of substantially all the Company’s remaining federal net operating loss carryforwards. As of December 31, 2017 the Company has fully realized its deferred tax asset for foreign tax credit carryforwards.
In general, it is the practice and intention of the Company to reinvest earnings of its non-U.S. subsidiaries in those operations. Management has no intention of repatriating earnings of its non-U.S. subsidiaries in the foreseeable future. At December 31, 2017, the Company has not recorded any deferred tax liabilities relating to additional taxes such as foreign withholding and state taxes which could arise on the repatriation of unremitted earnings of its non-U.S. subsidiaries.
U.S. Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law and is effective January 1, 2018. The Tax Act enacted various measures of domestic corporate tax reform that were impactful to the Company including reduction of the federal statutory corporate tax rate from 35% to 21%, limitations on the deductibility of interest expense and introduced several measures of international tax reform including the one-time tax on mandatory deemed repatriation of non-U.S. earnings.
In accordance with ASC 740-10-45-15, the Company has recognized the effect of the tax law in the period of enactment. As a result of the enactment of the Tax Act, the Company has recognized a one-time tax charge of approximately $122.7 million during 2017, which has increased the Company’s overall effective tax rate for the period, predominately related to the Company’s revaluation of its deferred tax assets to the reduced federal statutory corporate tax rate of 21%.
The amounts owed by the Company to OM plc at December 31, 2017 under the Deferred Tax Asset Deed were reduced by $51.8 million due to enactment of the Tax Act. The revaluation of the deed has been reflected as a component of income from continuing operations before taxes.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
14) Income Taxes (cont.)
Status of the Company’s Assessment
Passage of the Tax Act represents the first major tax reform to the U.S. federal corporate income tax system in over thirty years. The newly introduced domestic and international provisions require the gathering and aggregation of new information and performance of complex computations not routinely performed by the Company in the past.
Due to the rapid development of U.S. tax reform in the fourth quarter of 2017, substantial regulatory and interpretive guidance from the U.S. Department of Treasury and other applicable taxing authorities has not been released yet, although it is expected to be forthcoming.
The SEC issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to assist companies by addressing some of the uncertainty in applying ASC 740 with respect to 2017 financial statements. Under SAB 118, the Company is permitted to provide provisional amounts for recording the tax effects of the enacted tax law during a specified measurement period, ending one year after the enactment date.
Accordingly, the Company has provided provisional estimates on the effect of the Tax Act in its 2017 financial statements to the extent the necessary information is not available, prepared, or analyzed to accurately complete the tax accounting.
The Company determined reasonable estimates based on currently available information and published guidance, however the Company’s accounting for the effect of the Tax Act remains incomplete under SAB 118 with respect to the following:
Section 965 toll charge tax liability: The Company has determined a preliminary estimate of its Section 965 toll charge tax liability on the mandatory deemed repatriation of post-1986 undistributed foreign earnings of its non-U.S. subsidiaries. As of December 31, 2017, the Company has accrued income tax liabilities of $1.5 million relating to the toll charge. Starting in 2018, the liability will be paid over an eight-year period and will not accrue interest. The Company has made a reasonable estimate based on currently available information, however the accounting is incomplete and subject to finalization of estimates and amounts related to earnings and profits of its foreign subsidiaries and the filing of 2017 tax returns. U.S. Treasury regulations, administrative interpretations of the Tax Act may require further adjustments to the preliminary estimate.
The Company will continue to evaluate the Tax Act during the measurement period and record adjustments to provisional amounts in the period in which they are completed as information becomes available and further clarifying, interpretive guidance on the application of the tax law is released.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
14) Income Taxes (cont.)
Deferred tax assets and liabilities reflect the expected future tax consequences of temporary differences between the book carrying amounts and tax bases of the Company’s assets and liabilities.
The significant components of deferred tax assets and deferred tax liabilities for the years ended December 31 are as follows (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Deferred tax assets: | |
| | |
|
| Interest expense | $ | 80.9 |
| | $ | 150.5 |
|
| Federal net operating loss | 1.8 |
| | 3.7 |
|
| State net operating loss carry forwards | 8.6 |
| | 7.6 |
|
| Investment in partnerships | 140.3 |
| | 140.1 |
|
| Foreign tax credit carry forwards | — |
| | 9.1 |
|
| Intangible assets | 0.9 |
| | 1.4 |
|
| Employee compensation | 8.9 |
| | 16.5 |
|
| Other | 2.6 |
| | 5.6 |
|
| Cash flow hedge | 5.1 |
| | 5.9 |
|
| Investments | 0.1 |
| | — |
|
| Total deferred tax assets | 249.2 |
| | 340.4 |
|
| Valuation allowance | (8.6 | ) | | (5.5 | ) |
| Deferred tax assets, net of valuation allowance | 240.6 |
| | 334.9 |
|
| Deferred tax liabilities: | |
| | |
|
| Investments | — |
| | 2.2 |
|
| Net deferred tax asset | $ | 240.6 |
| | $ | 332.7 |
|
Due to the enactment of the Tax Act, The Company has revalued its deferred tax assets and related liabilities as of the enactment date of December 22, 2017, resulting in a write-down of $121.1 million.
At December 31, 2017, the Company has tax attributes that carry forward for varying periods. The Company’s federal net operating loss carryforward of $8.5 million originated during 2004 and 2006 and will expire over a seven to nine-year period. State net operating losses of $160.8 million expire over a four to twelve-year period. The Company has recorded a valuation allowance in connection with state net operating loss carryforwards for which the Company believes it is more-likely-than-not that the tax benefits will not be recognized. In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence including the existence of cumulative income in the most recent fiscal years, changes in the business in which the Company operates, and the Company’s ability to forecast future taxable income. The weight given to the evidence is commensurate with the extent to which it can be objectively verified. The more negative evidence that exists, the more positive evidence that is necessary and the more difficult it is to support a conclusion that a valuation allowance is not needed. The Company has three years of cumulative earnings as of December 31, 2017, 2016, and 2015. As of December 31, 2017, management believes it is more likely than not that the balance of the deferred tax asset will be realized based on forecasted taxable income.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
14) Income Taxes (cont.)
A reconciliation of the change in gross unrecognized tax benefits for the years ended December 31 is as follows (in millions):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Balance as of January 1 | $ | 91.3 |
| | $ | 93.5 |
| | $ | 93.9 |
|
| Additions based on current year tax positions | 0.9 |
| | — |
| | — |
|
| Reductions related to lapses of statutes of limitations | (3.5 | ) | | (2.2 | ) | | (0.4 | ) |
| Balance as of December 31 | $ | 88.7 |
| | $ | 91.3 |
| | $ | 93.5 |
|
The Company’s liability for uncertain tax positions includes unrecognized benefits of $96.9 million and $96.4 million at December 31, 2017 and 2016, respectively, that if recognized would affect the effective tax rate on income from continuing operations.
The Company recognized $2.5 million, $3.6 million, and $1.4 million in interest and penalties in its income tax provision for the years ended December 31, 2017, 2016, and 2015, respectively. The Company recognizes accrued interest and penalties relating to unrecognized tax benefits as income tax expense. The Company’s liability for uncertain tax benefits at December 31, 2017, 2016, and 2015 includes accrued interest and penalties of $8.6 million, $6.1 million and $2.8 million, respectively.
The Company believes that it is reasonably possible that a decrease of up to $46.0 million in unrecognized tax benefits may be necessary within the next twelve months, as the result of a lapse of statute of limitations.
The Company is periodically under examination by various taxing authorities. Examinations are inherently uncertain, may result in payment of additional taxes or the recognition of tax benefits and may be in process for extended periods of time. At December 31, 2017, there were no open examinations in process.
The Company and its subsidiaries file tax returns in U.K., U.S. federal, state, local and other foreign jurisdictions. As of December 31, 2017, the Company is generally no longer subject to income tax examinations by U.K., U.S. federal, state, local, or foreign tax authorities for calendar years prior to 2007.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
15) Commitments and Contingencies
Operational commitments
The Company had unfunded commitments to invest up to approximately $60 million in co-investments with its Affiliates as of December 31, 2017. These commitments will be funded as required through the end of the respective investment periods ranging through fiscal 2022.
Certain Affiliates operate under regulatory authorities that require that they maintain minimum financial or capital requirements. Management is not aware of any violations of such financial requirements occurring during the period.
Litigation
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. If an insurance claim or other indemnification for a litigation accrual is available to the Company, the associated gain will not be recognized until all contingencies related to the gain have been resolved. As of December 31, 2017, there were no material accruals for claims, legal proceedings or other contingencies.
Indemnifications
In the normal course of business, such as through agreements to enter into business combinations and divestitures of Affiliates, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred.
Foreign tax contingency
The Company has clients in non-U.S. jurisdictions which require entities that are conducting certain business activities in such jurisdictions to collect and remit tax assessed on certain fees paid for goods and services provided. The Company does not believe this requirement is applicable based on its limited business activities in these jurisdictions. However, given the fact that uncertainty exists around the requirement, the Company has chosen to evaluate its potential exposure related to non-collection and remittance of these taxes. At December 31, 2017, management of the Company has estimated the potential maximum exposure and concluded that it is not material. No accrual for the potential exposure has been recorded as the probability of incurring any potential liability relating to this exposure is not probable at December 31, 2017.
Considerations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments. The Company maintains cash and cash equivalents and short term investments with various financial institutions. These financial institutions are typically located in cities in which the Company and its Affiliates operate. For the Company and certain Affiliates, cash deposits at a financial institution may exceed Federal Deposit Insurance Corporation insurance limits.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
16) Earnings per Share
Basic earnings per share is calculated by dividing net income attributable to controlling interests by the weighted average number of shares outstanding. Diluted earnings per share is similar to basic earnings per share, but is adjusted for the effect of potentially issuable ordinary shares, except when inclusion is antidilutive.
The calculation of basic and diluted earnings per ordinary share for the years ended December 31, 2017, 2016 and 2015 is as follows (dollars in millions, except per share data):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Numerator: | |
| | |
| | |
|
| Net income attributable to controlling interests | $ | 4.2 |
| | $ | 126.4 |
| | $ | 155.5 |
|
Less: Total income available to participating unvested securities(1) | (0.2 | ) | | (0.9 | ) | | (0.6 | ) |
| Total net income attributable to ordinary shares | $ | 4.0 |
| | $ | 125.5 |
| | $ | 154.9 |
|
| Denominator: | |
| | |
| | |
|
| Weighted-average ordinary shares outstanding—basic | 110,708,598 |
| | 119,236,370 |
| | 120,000,000 |
|
| Potential ordinary shares | | | | | |
| Restricted stock units | 672,544 |
| | 283,743 |
| | 497,997 |
|
| Weighted-average ordinary shares outstanding—diluted | 111,381,142 |
| | 119,520,113 |
| | 120,497,997 |
|
| Earnings per ordinary share attributable to controlling interests: | |
| | |
| | |
|
| Basic | $ | 0.04 |
| | $ | 1.05 |
| | $ | 1.29 |
|
| Diluted | $ | 0.04 |
| | $ | 1.05 |
| | $ | 1.29 |
|
| |
(1) | Income available to participating unvested securities includes dividends paid on unvested restricted shares and their proportionate share of undistributed earnings. |
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
17) Employee Benefits
The Company has various defined contribution plans covering substantially all of its full-time employees and several of its Affiliates. In addition to pre-tax contributions made by employees, the Company also makes contributions to the qualified plans annually.
The Company also has non-qualified defined contribution plans covering certain senior employees. The Company has established a Deferred Compensation Plan under which the Board of Directors makes awards that may be invested by the recipient in investments deemed available under the plan. Vesting of awards under the Deferred Compensation Plan is based on the number of years of service already provided by the employee at the date of the grant. In addition, the Company has established a Voluntary Deferral Plan that provides officers of the Company the opportunity to voluntarily defer a portion of their compensation. The compensation deferred is deemed to be invested in one or more investment options available under the plan. These non-qualified plans are unfunded, although the Company does make contributions to a Rabbi Trust to hedge its risks in terms of providing returns to employees on their deemed investments held in the plan.
As of December 31, 2017 and 2016, a total of $95.1 million and $78.0 million, respectively, had been recorded as long-term compensation liabilities and a total of $95.2 million and $78.1 million had been invested under the Deferred Compensation and Voluntary Deferral plans, respectively. The change in the fair value of long-term compensation liabilities and the change in fair value of the assets invested under the Deferred Compensation and Voluntary Deferral plans was $9.0 million and $9.0 million, respectively, for the year ended December 31, 2017, $2.4 million and $2.4 million, respectively, for the year ended December 31, 2016, and $0.6 million, and $0.5 million, respectively, for the year ended December 31, 2015. The Company recorded total expenses in relation to its qualified and non-qualified plans within compensation and benefits in its Consolidated Statements of Operations for the years ended December 31, 2017, 2016 and 2015 of $14.8 million, $12.3 million and $12.5 million, respectively.
18) Equity-based Compensation
Cash-settled Affiliate awards
The Company has entered into compensation arrangements with certain of its Affiliates whereby in exchange for continued service, Affiliate equity is either purchased by or granted to Affiliate key employees subject to a limit imposed by the Company, and may be repurchased either by Affiliate key employees or by the Company at a future date at the then applicable fair value, subject to service requirements having been met. Compensation expense is recognized over the requisite service period equal to the cumulative vested fair value of the award at the end of each period up to vesting date.
The Company accounts for these arrangements as “cash settled” share based payments, and accordingly a corresponding share-based payments liability is recorded. Vested share-based payments liabilities are revalued at each period end until settlement date, with changes in the liabilities included within compensation expense.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
18) Equity-based Compensation (cont.)
As described within Note 3, in conjunction with the Landmark acquisition, OMAM entered into compensation arrangements with employees of Landmark where pre-acquisition equity units held by Landmark employees became subject to a service condition. These units are accounted for as stock-based compensation, were fair valued as of the closing date of the acquisition and vest over varying increments from December 31, 2018 through December 31, 2024. These units contain put rights that provide liquidity to the employees upon vesting. An additional payment of up to $225.0 million could be paid based on the growth of Landmark’s business. This arrangement is also accounted for as stock-based compensation, fair valued as of the closing date of the acquisition, and vests on December 31, 2018. Both the pre-acquisition equity units and the potential future payment are remeasured at the end of each reporting period.
The following table presents the changes in the share-based payments liability for the years ended December 31 (in millions):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Balance, beginning of period | $ | 53.7 |
| | $ | 38.5 |
| | $ | 42.3 |
|
| Amortization and revaluation of granted awards | 135.8 |
| | 15.6 |
| | 0.2 |
|
| Reclassification to profit interests award | — |
| | — |
| | (2.8 | ) |
| Repurchases (cash settled) | (0.7 | ) | | (0.4 | ) | | (1.2 | ) |
| Balance, end of period | $ | 188.8 |
| | $ | 53.7 |
| | $ | 38.5 |
|
Equity-settled corporate awards
OM Asset Management equity incentive plan
In connection with the IPO, certain employees who held unvested OM plc restricted shares were given the opportunity to exchange their OM plc restricted shares for restricted shares of OMAM held by OM Group (UK) Limited with vesting conditions similar to those to which they were currently subject. These restricted shares were awarded to employees as part of the annual incentive process and a one-time Value Incentive Plan. This exchange program was intended to provide employees who elected to participate with restricted share awards of OMAM ordinary shares of equivalent value to the OM plc restricted shares they currently held. The exchange valued OMAM ordinary shares at the price sold to investors in the IPO. The exchange valued OM plc’s ordinary shares using the weighted-average sale price over the three consecutive trading days on the London Stock Exchange up to and including the date of the exchange. The exchange occurred following the effectiveness of the OMAM registration statement on October 8, 2014. OM Group (UK) Limited transferred 559,709 unvested restricted OM Asset Management ordinary shares (Equivalent to 5,914,981 OM plc restricted shares) to employees as part of this exchange program. These awards have vested in prior years and the impact to the periods presented is not material.
Prior to the Offering, two equity plans were implemented at OMAM; one for the employees and one for non-executive directors. The plans are maintained to provide equity based compensation arrangements, including restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance based restricted stock awards (“Performance-based RSAs”) and performance based restricted stock units (“Performance-based RSUs”). Equity ownership encourages employees and directors to act in the best long-term interests of the Company.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
18) Equity-based Compensation (cont.)
Compensation expense recognized by the Company for the year ended December 31, 2017, 2016, and 2015 in relation to these plans was $14.6 million, $13.1 million, and $11.8 million respectively. The related income tax benefit recognized for years ended December 31, 2017, 2016 and 2015 was $5.7 million, $5.1 million and $4.6 million respectively. Unamortized compensation expense related to unvested RSAs, RSUs, Performance-based RSAs and Performance-based RSUs at December 31, 2017 of $6.1 million is expected to be recognized over a weighted-average period of 1.7 years. The grant date for annual awards granted in 2017 is deemed to be January 1, 2016. It is anticipated that the annual awards for 2017 with a fair value of $5.0 million will be granted during 2018 with a deemed grant date of January 1, 2017.
The following summarizes the grant date fair value of the instruments granted by the Company during the year ended December 31:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| OM Asset Management plc awards | | Shares granted | | Weighted average fair value | | Shares granted | | Weighted average fair value | | Shares granted | | Weighted average fair value |
| RSAs | | 342,637 |
| | $ | 15.13 |
| | 506,640 |
| | $ | 10.89 |
| | 559,709 |
| | $ | 17.60 |
|
| RSUs | | 51,779 |
| | 14.45 |
| | 54,556 |
| | 11.25 |
| | 47,055 |
| | 17.65 |
|
| Performance-based RSAs | | 175,586 |
| | 10.26 |
| | — |
| | — |
| | — |
| | — |
|
| Performance-based RSUs | | — |
| | — |
| | 189,335 |
| | 10.92 |
| | 451,657 |
| | 24.65 |
|
Grants of restricted shares in OM Asset Management plc
The following table summarizes the activity related to restricted share awards: |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| OM Asset Management plc RSAs | | Number of shares | | Weighted average grant date fair value per share | | Number of shares | | Weighted average grant date fair value per share | | Number of shares | | Weighted average grant date fair value per share |
| Outstanding at beginning of the year | | 1,375,201 |
| | $ | 13.77 |
| | 1,566,647 |
| | $ | 15.28 |
| | 1,212,766 |
| | $ | 14.00 |
|
| Converted during the year | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Granted during the year | | 342,637 |
| | 15.13 |
| | 506,640 |
| | 10.89 |
| | 559,709 |
| | 17.60 |
|
| Forfeited during the year | | (802 | ) | | 17.65 |
| | (7,288 | ) | | 13.65 |
| | (2,128 | ) | | 17.65 |
|
| Exercised during the year | | (1,294,109 | ) | | 13.97 |
| | (680,573 | ) | | 15.10 |
| | (203,700 | ) | | 14.00 |
|
| Other transfers | | — |
| | — |
| | (10,225 | ) | | 14.00 |
| | — |
| | — |
|
| Outstanding at end of the year | | 422,927 |
| | $ | 14.26 |
| | 1,375,201 |
| | $ | 13.77 |
| | 1,566,647 |
| | $ | 15.28 |
|
The grant date fair value per share, calculated based on the closing price as quoted on the New York Stock Exchange on the measurement date, is used to determine the fair value of restricted shares granted to employees. Restricted shares under the plan generally have a vesting period of one to three years.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
18) Equity-based Compensation (cont.)
Grants of restricted stock units in OM Asset Management plc
The following table summarizes the activity related to restricted stock units:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| OM Asset Management plc RSUs | | Number of shares | | Weighted average grant date fair value per share | | Number of shares | | Weighted average grant date fair value per share | | Number of shares | | Weighted average grant date fair value per share |
| Outstanding at beginning of the year | | 85,923 |
| | $ | 13.59 |
| | 47,055 |
| | $ | 17.65 |
| | — |
| | $ | — |
|
| Granted during the year | | 51,779 |
| | 14.45 |
| | 54,556 |
| | 11.25 |
| | 47,055 |
| | 17.65 |
|
| Forfeited during the year | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Exercised during the year | | (61,479 | ) | | 12.93 |
| | (15,688 | ) | | 17.65 |
| | — |
| | — |
|
| Other transfers | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Outstanding at end of the year | | 76,223 |
| | $ | 14.70 |
| | 85,923 |
| | $ | 13.59 |
| | 47,055 |
| | $ | 17.65 |
|
The grant date fair value per share, calculated based on the closing price as quoted on the New York Stock Exchange on the measurement date, is used to determine the fair value of restricted shares granted to employees. Restricted stock units under the plan generally have a vesting period of one to three years.
Grants of Performance-based restricted stock awards in OM Asset Management plc
The following table summarizes the activity related to performance-based restricted stock awards:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
OM Asset Management plc Performance-based RSAs | | Number of shares | | Weighted average grant date fair value per share | | Number of shares | | Weighted average grant date fair value per share | | Number of shares | | Weighted average grant date fair value per share |
| Outstanding at beginning of the year | | — |
| | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
| Granted during the year | | 175,586 |
| | 10.26 |
| | — |
| | — |
| | — |
| | — |
|
| Forfeited during the year | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Exercised during the year | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other transfers | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Outstanding at end of the year | | 175,586 |
| | $ | 10.26 |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
18) Equity-based Compensation (cont.)
The Performance-based RSAs granted by the Company have a market vesting condition; therefore a Monte-Carlo simulation model was used to determine the fair value of the restricted units granted to employees. Significant assumptions utilized in the Monte-Carlo simulation model include assumed reinvestment of dividends, a risk-free interest rate of 1.57%, and an expected volatility of 28.19%. Restricted units under the plan have a vesting period of three years.
Grants of Performance-based restricted stock units in OM Asset Management plc
The following table summarizes the activity related to performance-based restricted stock units: |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| OM Asset Management plc Performance-based RSUs | | Number of shares | | Weighted average grant date fair value per share | | Number of shares | | Weighted average grant date fair value per share | | Number of shares | | Weighted average grant date fair value per share |
| Outstanding at beginning of the year | | 640,992 |
| | $ | 20.59 |
| | 451,657 |
| | $ | 24.65 |
| | — |
| | — |
|
| Granted during the year | | — |
| | — |
| | 189,335 |
| | 10.92 |
| | 451,657 |
| | 24.65 |
|
| Forfeited during the year | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Exercised during the year | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other transfers | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Outstanding at end of the year | | 640,992 |
| | $ | 20.59 |
| | 640,992 |
| | $ | 20.59 |
| | 451,657 |
| | $ | 24.65 |
|
The Performance-based RSUs granted by the Company have a market vesting condition; therefore a Monte-Carlo simulation model was used to determine the fair value of the restricted units granted to employees. Significant assumptions utilized in the Monte-Carlo simulation model include assumed reinvestment of dividends, a risk-free interest rate of 1.57%, and an expected volatility of 28.19%. Restricted units under the plan have a vesting period of three years.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
18) Equity-based Compensation (cont.)
OM plc equity compensation plans
OM plc maintains various equity-based compensation arrangements, including stock options and restricted stock awards, in which the Company’s employees participated in the periods presented. The cost of these equity-based programs has been included in the Company’s financial results where applicable. Compensation expense recognized by the Company in respect of these arrangements was $0.0 million for the year ended December 31, 2017, $0.1 million for the year ended December 31, 2016, and $0.5 million for the year ended December 31, 2015. A corresponding capital contribution was recognized in each period. The related income tax benefit recognized for the years ended December 31, 2017, 2016, and 2015 was $0.0 million, $0.0 million, and $0.2 million, respectively.
The following disclosures represent the Company’s portion of the various equity compensation arrangements maintained by OM plc in which the Company’s employees participated.
The following table summarizes the activity related to restricted shares.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | Number of shares | | Weighted average grant date fair value per share GBP | | Weighted average grant date fair value per share USD | | Number of shares | | Weighted average grant date fair value per share GBP | | Weighted average grant date fair value per share USD | | Number of shares | | Weighted average grant date fair value per share GBP | | Weighted average grant date fair value per share USD |
| Outstanding at the beginning of the year | 155,132 |
| | £ | 2.03 |
| | $ | 2.53 |
| | 209,801 |
| | £ | 2.00 |
| | $ | 3.00 |
| | 682,346 |
| | £ | 1.77 |
| | $ | 2.92 |
|
| Granted during the year | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Forfeited during the year | — |
| | — |
| | — |
| | (8,885 | ) | | 2.03 |
| | 2.53 |
| | — |
| | — |
| | — |
|
| Exercised during the year | (155,132 | ) | | 2.03 |
| | 2.72 |
| | (113,559 | ) | | 1.98 |
| | 2.47 |
| | (472,545 | ) | | 1.67 |
| | 2.50 |
|
| Other transfers | — |
| | n/a |
| | n/a |
| | 67,775 |
| | n/a |
| | n/a |
| | — |
| | 0 |
| | — |
|
| Outstanding at the end of the year | — |
| | £ | — |
| | $ | — |
| | 155,132 |
| | £ | 2.03 |
| | $ | 2.53 |
| | 209,801 |
| | £ | 2.00 |
| | $ | 3.00 |
|
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
19) Accumulated Other Comprehensive Income
The following tables show the tax effects allocated to each component of other comprehensive income (in millions):
|
| | | | | | | | | | | |
| | For the year ended December 31, 2017 |
| | Pre-Tax | | Tax Benefit (Expense) | | Net of Tax |
| Foreign currency translation | $ | 2.9 |
| | $ | — |
| | $ | 2.9 |
|
| Change in net realized and unrealized gain (loss) on derivative securities | 2.6 |
| | (0.8 | ) | | 1.8 |
|
| Other Comprehensive income (loss) | $ | 5.5 |
| | $ | (0.8 | ) | | $ | 4.7 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, 2016 |
| | Pre-Tax | | Tax Benefit (Expense) | | Net of Tax |
| Foreign currency translation adjustment | $ | (3.2 | ) | | $ | — |
| | $ | (3.2 | ) |
| Change in net realized and unrealized gain (loss) on derivative securities | (24.6 | ) | | 4.3 |
| | (20.3 | ) |
| Other comprehensive income (loss) | $ | (27.8 | ) | | $ | 4.3 |
| | $ | (23.5 | ) |
|
| | | | | | | | | | | |
| | For the year ended December 31, 2015 |
| | Pre-Tax | | Tax Benefit (Expense) | | Net of Tax |
| Foreign currency translation adjustment | $ | (1.5 | ) | | $ | — |
| | $ | (1.5 | ) |
| Change in net realized and unrealized gain (loss) on derivative securities | (8.2 | ) | | 1.6 |
| | (6.6 | ) |
| Other comprehensive income (loss) | $ | (9.7 | ) | | $ | 1.6 |
| | $ | (8.1 | ) |
The components of accumulated other comprehensive income (loss) for the years ended December 31, 2017 and 2016 were as follows (in millions) including proportions attributable to non-controlling interests:
|
| | | | | | | | | | | | |
| | | Foreign currency translation adjustment | | Valuation of derivative securities | | Total |
| Balance, as of December 31, 2015 | | $ | 3.8 |
| | $ | (6.6 | ) | | $ | (2.8 | ) |
| Other comprehensive income (loss) | | (3.2 | ) | | (20.3 | ) | | (23.5 | ) |
| Balance, as of December 31, 2016 | | $ | 0.6 |
| | (26.9 | ) | | $ | (26.3 | ) |
| Other comprehensive income (loss) | | 2.9 |
| | 1.8 |
| | 4.7 |
|
| Balance, as of December 31, 2017 | | $ | 3.5 |
| | $ | (25.1 | ) | | $ | (21.6 | ) |
The Company reclassified $2.6 million, $1.1 million, and $0.6 million from accumulated other comprehensive income (loss) to interest expense on the Consolidated Statements of Income for the twelve months ended December 31, 2017, 2016 and 2015 respectively.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
20) Non-controlling interests
Non-controlling interests on the Consolidated Balance Sheets include capital and undistributed profits of certain entities that are consolidated, but not 100% owned, which amounted to $1.3 million at December 31, 2017 and $1.0 million at December 31, 2016.
Non-controlling interests in consolidated Funds
Net income (loss) attributable to non-controlling interests in consolidated Funds in the Consolidated Statements of Operations is comprised of the net income or loss and net gains and losses allocated to equity-holders, other than OMAM, of consolidated Funds. For the years ended December 31, 2017, 2016 and 2015 this net income (loss) was $4.9 million, $(0.2) million, and $0.0 million, respectively. Non-controlling interests in consolidated Funds on the Consolidated Balance Sheets represents the share of net assets of the Funds attributable to those equity holders who are restricted in their ability to redeem their interests, which amounted to $50.6 million at December 31, 2017, and $0.0 million at December 31, 2016.
Redeemable non-controlling interests in consolidated Funds on the Consolidated Balance Sheets represents the share of net assets of the Funds attributable to those equity holders who are not restricted in their ability to redeem their interests, which amounted to $44.0 million at December 31, 2017, and $5.5 million at December 31, 2016.
21) Derivatives and Hedging
Cash flow hedge
In July 2015, the Company entered into a $300.0 million notional Treasury rate lock contract which was designated and qualified as a cash flow hedge. The Company documented its hedging strategy and risk management objective for this contract in anticipation of a future debt issuance. The Treasury rate lock contract eliminated the impact of fluctuations in the underlying benchmark interest rate for future forecasted debt issuances. The Company assessed the effectiveness of the hedging contract at inception and on a quarterly basis thereafter. In November 2015, at the Treasury rate lock termination date, the Company de-designated the Treasury rate lock and entered into an extension for the same $300.0 million notional through early July 2016. In July 2016, the Company entered into a second extension to the Treasury rate lock in conjunction with the issuances of the previously forecasted debt. The forecasted debt issuances occurred in July 2016 and the Treasury rate lock, which had an accumulated fair value of$(34.4) million, was settled. Refer to Note 13, Borrowings and Debt, for additional information on the debt issuances.
Consistent with the original Treasury rate lock, the extended Treasury rate locks were designated and qualified as cash flow hedges. The Company documented its hedging strategy and risk management objective for these contracts in anticipation of the July 2016 debt issuance. The extended Treasury rate locks effectively eliminated the impact of fluctuations in the underlying benchmark interest rate for the debt issuances. The Company assessed the effectiveness of the hedging contracts at each of the extended Treasury rate locks’ inception dates and on a quarterly basis thereafter, where applicable. At the rate lock settlement, the hedging contracts were evaluated to be highly effective in offsetting changes in cash flows associated with the hedged items. The Company did not record any hedge ineffectiveness in 2016.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
21) Derivatives and Hedging (cont.)
Amounts recorded in accumulated other comprehensive income in connection with the settled Treasury rate lock were $2.6 million, net of tax of $(0.8) million for the year ended December 31, 2017. As of December 31, 2017, the balance in accumulated other comprehensive income (loss) in connection with the Treasury rate lock contract amounted to $(25.1) million, net of tax. This balance will be reclassified to earnings through interest expense over the life of the issued debt. Amounts of $2.6 million and $1.1 million have been reclassified for the years ended December 31, 2017, and 2016, respectively. During the next twelve months the Company expects to reclassify approximately $2.8 million to interest expense.
Derivatives of consolidated Funds
In the normal course of business, the Company’s consolidated Funds may enter into transactions involving derivative financial instruments in connection with Funds’ investing activities. Derivative instruments may be used as substitutes for securities in which the Funds can invest; to hedge portfolio investments or to generate income or gain to the Funds. The Funds may also use derivatives to manage duration; sector and yield curve exposures and credit and spread volatility. Derivative financial instruments base their value upon an underlying asset, index or reference rate. These instruments are subject to various risks, including leverage, market, credit, liquidity and operational risks. The Funds manage the risks associated with derivatives on an aggregate basis, along with the risks associated with its trading and as part of its overall risk management policies.
22) Discontinued Operations and Restructuring
All of the Company’s discontinued operations were wound down or transferred to OM plc prior to 2016.
The Company recognized a gain (loss) on disposal, net of taxes, of $(0.1) million, $6.2 million, and $0.8 million, with basic and diluted discontinued operations earnings per share of $0.00, $0.07, and $0.01 for the years ended December 31, 2017, 2016 and 2015, respectively. Gains and losses on disposal of discontinued operations represent the Company’s rights or obligations related to contractual residual interests in previously discontinued operations.
Liabilities associated with discontinued operations and restructuring included in other liabilities on the Company’s Consolidated Balance Sheets are summarized as follows as of December 31 (in millions):
|
| | | | | | | |
| | 2017 | | 2016 |
| Beginning balance at January 1 | $ | 1.1 |
| | $ | 4.1 |
|
| Abandoned lease liability principal payments | (0.8 | ) | | (1.1 | ) |
| Adjustment to sub-lease arrangement on abandoned lease | 0.1 |
| | 0.2 |
|
| Drawdowns on committed funding | — |
| | (2.1 | ) |
| Ending balance at December 31 | $ | 0.4 |
| | $ | 1.1 |
|
No additional costs are expected to be incurred in connection with discontinued operations for the events described above.
OM Asset Management plc
Notes to Consolidated Financial Statements (Continued)
December 31, 2017 and 2016
23) Selected Quarterly Financial Data (unaudited)
The following is a summary of the quarterly results of operations of the Company for the years ended December 31, 2017 and 2016 ($ in millions, unless otherwise noted):
|
| | | | | | | | | | | | | | | |
| | 2017 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenue | $ | 196.2 |
| | $ | 218.8 |
| | $ | 223.2 |
| | $ | 249.2 |
|
| Operating income | 23.5 |
| | 12.9 |
| | 8.3 |
| | 26.3 |
|
| Income from continuing operations before income taxes | 28.0 |
| | 14.6 |
| | 14.8 |
| | 84.6 |
|
| Net income (loss) | 22.3 |
| | 13.6 |
| | 19.9 |
| | (46.7 | ) |
| Net income (loss) attributable to controlling interests | 21.4 |
| | 12.9 |
| | 18.7 |
| | (48.8 | ) |
| Basic earnings (loss) per share ($) | $ | 0.19 |
| | $ | 0.12 |
| | $ | 0.17 |
| | $ | (0.45 | ) |
| Diluted earnings (loss) per share ($) | $ | 0.19 |
| | $ | 0.11 |
| | $ | 0.17 |
| | $ | (0.45 | ) |
| Basic shares outstanding (in millions) | 113.5 |
| | 111.3 |
| | 109.0 |
| | 109.0 |
|
| Diluted shares outstanding (in millions) | 114.4 |
| | 111.8 |
| | 109.7 |
| | 109.0 | (1) |
|
| | | | | | | | | | | | | | | |
| | 2016 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Revenue | $ | 149.6 |
| | $ | 156.5 |
| | $ | 170.8 |
| | $ | 186.6 |
|
| Operating income | 41.0 |
| | 44.0 |
| | 40.2 |
| | 30.4 |
|
| Income from continuing operations before income taxes | 44.0 |
| | 48.0 |
| | 41.7 |
| | 27.1 |
|
| Net income | 30.8 |
| | 36.3 |
| | 34.0 |
| | 25.1 |
|
| Net income attributable to controlling interests | 30.8 |
| | 36.3 |
| | 34.0 |
| | 25.3 |
|
| Basic earnings per share ($) | $ | 0.26 |
| | $ | 0.30 |
| | $ | 0.28 |
| | $ | 0.21 |
|
| Diluted earnings per share ($) | $ | 0.26 |
| | $ | 0.30 |
| | $ | 0.28 |
| | $ | 0.21 |
|
| Basic shares outstanding (in millions) | 120.0 |
| | 119.4 |
| | 119.3 |
| | 118.2 |
|
| Diluted shares outstanding (in millions) | 120.0 |
| | 119.6 |
| | 119.7 |
| | 118.8 |
|
| |
(1) | During periods of net loss, diluted shares are the same as basic shares. |
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) at December 31, 2017. Disclosure controls and procedures are designed to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rule and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure. Our CEO and CFO participated in this evaluation and concluded that, as of December 31, 2017, our disclosure controls and procedures were effective.
Report of Management on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting.
Management has evaluated the effectiveness of internal control over financial reporting as of December 31, 2017 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.
KPMG LLP, an independent registered public accounting firm (together with the U.K. statutory auditor, the “External Auditor”). Consistent with SEC policies regarding auditor independence, the Audit Committee has auditedresponsibility for appointing, setting compensation and overseeing the financial statements thatwork of the External Auditor. The Audit Committee pre-approves all audit and permissible non-audit services to be performed for us by the External Auditor. These services may include audit services, audit-related services, tax services and other services. On an annual basis, the Audit Committee considers whether the provision of non-audit services by our External Auditor, on an overall basis, is compatible with maintaining the External Auditor’s independence from management.
In addition to the pre-approval procedures described immediately above, the Audit Committee has adopted a written Pre-Approval Policy for Non-Audit Services Provided by External Accounting Firms (the “Non-Audit Services Policy”). Under the Non-Audit Services Policy, the Audit Committee must pre-approve the provision of non-audit services to be performed for us by any external accounting firm, subject to a de minimis threshold. Requests for non-audit services to be performed for us by an external accounting firm are included in this Annual Report on Form 10-K and expressed an opinion thereon. KPMG LLP has also expressed an opinion onsubmitted to the effectivenessChair of internal control over financial reporting asthe Audit Committee via written request. The Chair of December 31, 2017, which is included herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the fourth quarterAudit Committee reviews the request with the other members of our fiscal year ended December 31, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.the
Audit Committee and the Audit Committee determines whether to approve the request. The Non-Audit Services Policy sets forth certain non-audit services prohibited to be performed by external accounting firms.
Item 9B. Other Information.
On February 26, 2018, OMAM Affiliate Holdings LLC, a subsidiary of ours, entered into the Seventh Amended and Restated Limited Liability Company Agreement of Acadian Asset Management LLC, or the Amended and Restated Acadian LLC Agreement. The Amended and Restated Acadian LLC Agreement amends and restates the existing LLC Agreement of Acadian to (i) update certain defined terms and reference no longer applicable due to the fact that OM plc no longer holds a substantial ownership position in us; (ii) amend certain governance provisions; and (iii) create a new class of profits interests to incentivize management of Acadian by participating in certain growth initiatives of Acadian.
On February 26, 2018, OMAM Intermediary (BHMS), LLC, a subsidiary of ours, entered into the Amended and Restated Limited Liability Company Agreement of Barrow, Hanley, Mewhinney & Strauss, LLC, or the Amended and Restated BHMS LLC Agreement. The Amended and Restated BHMS LLC Agreement amends and restates the existing Barrow, Hanley, Mewhinney & Strauss, LLC Agreement to (i) update certain defined terms and references no longer applicable due to the fact that OM plc no longer holds a substantial ownership position in us and (ii) amend certain governance provisions.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item is set forth in our definitive proxy statement required to be filed pursuant to Regulation 14A for the 2018 annual meeting of shareholders.
Item 11. Executive Compensation.
The information required by this Item is set forth in our definitive proxy statement required to be filed pursuant to Regulation 14A for the 2018 annual meeting of shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is set forth in our definitive proxy statement required to be filed pursuant to Regulation 14A for the 2018 annual meeting of shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is set forth in our definitive proxy statement required to be filed pursuant to Regulation 14A for the 2018 annual meeting of shareholders.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is set forth in our definitive proxy statement required to be filed pursuant to Regulation 14A for the 2018 annual meeting of shareholders.
PART IV
Item 15. Exhibits, Financial Statement Schedules
Financial Statements: The information required by this Item is contained in Item 8 of Part II of the Original Filing.
Financial Statement Schedules: None
Exhibits: See Exhibit Index below and incorporated by reference.
Item 15. Exhibits, Financial Statements Schedules.EXHIBIT INDEX
| |
(1) | Financial Statements: The information required by this Item is contained in Item 8 of Part II of this report. |
| |
(2) | Financial Statement Schedules: None |
|
| | | |
Exhibit No. | | Description |
| 2.1 |
| | |
| | | |
| 3.1 |
| | |
| | | |
| 3.2 |
| | |
| | | |
| 4.1 |
| | |
| | | |
| 4.2 |
| | |
| | | |
| 4.3 |
| | Base Indenture, dated as of July 25, 2016, among OM Asset Management plc, as Issuer, Wilmington Trust, National Association, as Trustee, and Citibank, N.A., as Securities Administrator, incorporated herein by reference to Exhibit 4.1 to Current Report on Form 8-K filed on July 25, 2016. |
| | | |
| 4.4 |
| | Supplemental Indenture, dated as of July 25, 2016, among OM Asset Management plc, as Issuer, Wilmington Trust, National Association, as Trustee, and Citibank, N.A., as Securities Administrator, incorporated herein by reference to Exhibit 4.2 to Current Report on Form 8-K filed on July 25, 2016. |
| | | |
| 4.5 |
| | |
| | | |
| 4.6 |
| | Second Supplemental Indenture, dated as of August 1, 2016, among OM Asset Management plc, as Issuer, Wilmington Trust, National Association, as Trustee, and Citibank, N.A. as Securities Administrator, incorporated herein by reference to Exhibit 4.2 to Current Report on Form 8-K filed on August 1, 2016. |
| | | |
| 4.7 |
| | |
| | | |
|
| | | |
| 10.1 |
| | Revolving Credit Agreement, dated October 15, 2014, by and among OM Asset Management plc, certain lenders, and Citibank N.A., as administrative agent, with Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint book runners and joint lead arrangers, incorporated herein by reference to Exhibit 10.7 to Current Report on Form 8-K filed on October 20, 2014. |
| | | |
|
| | | |
Exhibit
No.
| | Description |
| 10.2 |
| | |
| | | |
| 10.3 |
| | |
| | | |
| 10.4 |
| | |
| | | |
| 10.5 |
| | |
| | | |
| 10.6 |
| | |
| | | |
| 10.7 |
| | |
| | | |
| 10.8 |
| | |
| | | |
| 10.9 |
| * | |
| | | |
| 10.10 |
| * | |
| | | |
| 10.11 |
| | |
| | | |
| 10.12 |
| | |
| | | |
| 10.13 |
| | |
|
| | | |
Exhibit
No.
| | Description |
| 10.16 |
| | |
| | | |
| 10.17 |
| | |
| | | |
| 10.18 |
| | |
| | | |
| 10.19 |
| | |
| | | |
| 10.20 |
| | |
| | | |
| 10.21 |
| | |
| | | |
| 10.22 |
| | |
| | | |
| 10.23 |
| | |
| | | |
| 10.24 |
| | |
| | | |
| 10.25 |
| | |
| | |
| 10.26 |
| | |
| | |
|
| | | |
| 10.27 |
| | |
| | |
| 10.28 |
| | |
| | |
| 10.29 |
| | |
| | | |
| 21.1 |
| * | |
| | | |
| 23.1 |
| * | |
| | | |
| 31.1 |
| * | |
| | | |
| 31.2 |
| * | |
| | | |
| 32.1 |
| * | |
| | | |
|
| | | |
Exhibit
No.
| | Description |
| 32.2 |
| * | |
| | | |
| 101 |
| * | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of December 31, 20172018 and December 31, 2016;2017; (ii) the Consolidated Statement of Operations for the years ended December 31, 2018, 2017 2016 and 2015;2016; (iii) the Consolidated Statement of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 2016 and 2015;2016; (iv) the Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2018, 2017 2016 and 2015;2016; (v) the Consolidated Statement of Cash Flows for the years ended December 31, 2018, 2017 2016 and 2015;2016; and (vi) the Notes to Consolidated Financial Statements.Statements, incorporated herein by reference to the Annual report on Form 10-K filed February 28, 2019. |
* Filed herewith
173
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
| | | |
| | | OM Asset ManagementBrightSphere Investment Group plc |
| Dated: | February 27, 2018April 17, 2019 | | |
| | | | |
| | | By: | /s/ James J. RitchieGuang Yang |
| | | | James J. RitchieGuang Yang
Chairman and InterimPresident, Chief Executive Officer and Executive Chairman
(principal executive officer) |
| | | | |
| | | | /s/ Stephen H. BelgradSuren Rana |
| | | | Stephen H. Belgrad Executive Vice President and Suren Rana Chief Financial Officer (principal (principal financial officer and principal accounting officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | |
Signature | | Title | Date |
| | | | |
/s/ JAMES J. RITCHIE | | | |
James J. Ritchie | | Chairman of the Board | February 27, 2018/s/ Daniel K. Mahoney |
| | | | |
/s/ STEPHEN H. BELGRAD | | | |
Stephen H. Belgrad | | Director | February 27, 2018 |
| | | |
/s/ ROBERT J. CHERSI | | | |
Robert J. Chersi | | Director | February 27, 2018 |
| | | |
/s/ KYLE PRECHTL LEGG | | | |
Kyle Prechtl Legg | | Director | February 27, 2018 |
| | | |
/s/ SUREN RANA | | | |
Suren Rana | | Director | February 27, 2018 |
| | | |
/s/ BARBARA TREBBI | | | |
Barbara Trebbi | | Director | February 27, 2018 |
| | | |
/s/ GUANG YANG | | | |
Guang Yang | | Director | February 27, 2018 |
| | | Daniel K. Mahoney Head of Finance (principal accounting officer) |
