Equity Method Investments in Affiliates

12 Months Ended

Dec. 31, 2019

Equity Method Investments and Joint Ventures [Abstract]

Equity Method Investments in Affiliates

In July 2019, the Company completed a minority investment in Garda Capital Partners LP. The Company’s purchase price allocation was measured using financial models that included assumptions of expected market performance, net client cash flows and discount rates. The majority of the consideration paid is deductible for U.S. tax purposes over a 15 year life.

The following table presents the change in Equity method investments in Affiliates (net):



	Equity Method Investments in Affiliates (Net)
	2018			2019
Balance, beginning of period	$	3,304.7		$	2,791.0
Earnings	370.6			289.4
Intangible amortization and impairments	(370.8		)	(627.4		)
Distributions of earnings	(466.3		)	(252.4		)
Foreign currency translation	(34.5		)	(40.0		)
Investments in Affiliates	7.3			162.3
Divestments of Affiliates	—			(117.7		)
Other	(20.0		)	(9.6		)
Balance, end of period	$	2,791.0		$	2,195.6

Definite-lived acquired client relationships at the Company’s Affiliates accounted for under the equity method are amortized over their expected period of economic benefit. The Company recorded amortization expense for these relationships of $106.1 million, $97.5 million and $142.4 million, respectively, for the years ended December 31, 2017, 2018 and 2019. Based on relationships existing as of December 31, 2019, the Company estimates the annual amortization expense attributable to its Affiliates will be approximately $130 million in 2020 and approximately $75 million in each of 2021, 2022, 2023 and 2024.

In the second quarter of 2018, the Company recorded a $33.3 million expense to reduce the carrying value to zero of an Affiliate as the business was in liquidation.

In the fourth quarter of 2018, the Company recorded a $240.0 million expense to reduce the carrying value to fair value of an Affiliate. The decline in the fair value of the Affiliate was due to a decline in assets under management as a result of client redemptions, coupled with recent negative investment returns, which resulted in the decrease of forecasted performance based fees. The fair value of the investment was determined using a discounted cash flow analysis, a level 3 fair value measurement that included a projected future growth rate of 2.5%, discount rates of 11.0% and 20.0% for asset and performance based fees, respectively, and a market participant tax rate of 25.0%. Based on the discounted cash flow analysis, the Company concluded that the fair value of its investment had declined below its carrying value and that the decline was other-than-temporary.

In connection with one of the Company’s investments in an Affiliate, a minority owner has the right to elect to sell a portion of its ownership interest in the Affiliate to the Company annually. In the second quarter of 2019, the minority owner elected to sell a 5% ownership interest in the Affiliate to the Company for $25.7 million, which settled during the year. In the fourth quarter of 2019, the Company was notified by the minority owner that it had elected to sell an additional 5% ownership interest in the Affiliate to the Company, which is expected to be completed in the first half of 2020. As of December 31, 2019, the minority owner maintains a 14% interest in the Affiliate.

In the first quarter of 2019, the Company recorded a $415.0 million expense to reduce the carrying value to fair value of an Affiliate. A series of precipitating events led the Company to conclude in March 2019 that the growth expectations of the

Affiliate had declined significantly, which the Company determined constituted a triggering event. The Affiliate’s flagship product had underperformed. The cumulative effect of associated redemptions and scaled-down fundraising expectations reduced expected asset and performance based fees and operating margin at the Affiliate. This led to a significant decrease in projected operating cash flows available to fund the Affiliate’s growth strategy, prompting a change in the strategic objectives of the Affiliate, including exiting the systematic equity business and reducing the number of new investment strategies being pursued. The Company determined that the estimated fair value of the Affiliate had declined meaningfully. Therefore, the Company performed a valuation to determine whether the fair value of the Affiliate had declined below its carrying value. The fair value of the investment was determined using a discounted cash flow analysis, a level 3 fair value measurement, that included a projected compounded asset based fee growth over the first five years of (13)%, discount rates of 11% and 20% for asset and performance based fees, respectively, and a market participant tax rate of 25%. Based on the discounted cash flow analysis, the Company concluded that the fair value of its investment had declined below its carrying value and that the decline was other-than-temporary. Subsequently, the Company sold its interest in the Affiliate on October 1, 2019, and the Company recorded no significant gain or loss on the transaction.

In the third quarter of 2019, the Company recorded a $10.0 million expense to reduce the carrying value to fair value of another Affiliate. The fair value of the investment was determined using a discounted cash flow analysis, a level 3 fair value measurement that included a projected growth rate of (20)%, discount rates of 11% and 20% for asset and performance based fees, respectively, and a market participant tax rate of 25%. Based on the discounted cash flow analysis, the Company concluded that the fair value of its investment had declined below its carrying value and that the decline was other-than-temporary.

In the fourth quarter of 2019, the Company recorded a $60.0 million expense to reduce the carrying value to fair value of an additional Affiliate. The decline in the fair value was a result of a decline in assets under management and a reduction in projected growth, which decreased the forecasted revenue associated with the investment. The fair value of the investment was determined using a discounted cash flow analysis, a level 3 fair value measurement that included a projected growth rate of 9% for assets under management, discount rates of 11% and 20% for asset and performance based fees, respectively, and a market participant tax rate of 25%. Based on the discounted cash flow analysis, the Company concluded that the fair value of its investment had declined below its carrying value and that the decline was other-than-temporary.

The Company completed its other annual evaluations of equity method investments in Affiliates as of December 31, 2019, and no other impairments were indicated.

The following table presents summarized financial information for Affiliates accounted for under the equity method:



	For the Years Ended December 31,
	2017		2018		2019
Revenue⁽¹⁾	$	3,126.3	$	3,231.7	$	2,760.9
Net income⁽¹⁾	2,182.7		1,286.1		1,061.3



	December 31,
	2018		2019
Assets	$	2,730.4	$	2,718.5
Liabilities and Non-controlling interests	1,235.1		1,212.7

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⁽¹⁾	Revenue and net income include asset and performance based fees, the impact of consolidated sponsored investment products and investments in new Affiliates for the full-year, regardless of the date of the Company’s investment.

The Company’s share of undistributed earnings from equity method investments is recorded in Equity method investments in Affiliates (net) and was $115.0 million as of December 31, 2019.

Under Rule 3-09 of Regulation S-X, the Company determined that one of its Affiliates accounted for under the equity method was significant for the years ended December 31, 2017 and 2018, and was not significant for the year ended December 31, 2019. This Affiliate reported revenue and net income of $844.8 million and $228.5 million, respectively, for the year ended December 31, 2019. This Affiliate’s total assets and total liabilities were $392.9 million and $299.8 million, respectively, as of December 31, 2019. This Affiliate’s cash flows from operating activities, cash flows used in investing activities and cash flows

used in financing activities were $308.7 million, $7.4 million and $313.1 million, respectively, for the year ended December 31, 2019.