Equity Method Investments in Affiliates

3 Months Ended

Mar. 31, 2020

Equity Method Investments and Joint Ventures [Abstract]

On February 17, 2020, the Company completed its minority investment in Comvest Partners. As of March 31, 2020, the Company had not funded any portion of the purchase consideration. The Company’s provisional purchase price allocation was measured using financial models that included assumptions of expected market performance, net client cash flows and discount rates. The associated provisional amounts may be revised upon completion of the final valuation. The Company will report its share of Comvest’s earnings one quarter in arrears, and therefore the Company did not record earnings from Comvest for the three months ended March 31, 2020.

The financial results of certain Affiliates accounted for under the equity method are recognized in the Consolidated Financial Statements one quarter in arrears.

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



	Equity Method Investments in Affiliates (Net)
Balance, as of December 31, 2019	$	2,195.6
Earnings	66.1
Intangible amortization and impairments	(179.3		)
Distributions of earnings	(124.4		)
Foreign currency translation	5.0
Investments in Affiliates	84.9
Other	(9.2		)
Balance, as of March 31, 2020	$	2,038.7

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 recognized amortization expense for these relationships of $23.2 million and $39.3 million for the three months ended March 31, 2019 and 2020, respectively. Based on relationships existing as of March 31, 2020, the Company estimates the annual amortization expense attributable to its Affiliates will be approximately $150 million in 2020, approximately $120 million in 2021, approximately $60 million in 2022, approximately $50 million in 2023 and approximately $40 million in 2024.

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. In March 2019, the Company concluded that the growth expectations of the Affiliate had declined and determined that the estimated fair value of the Affiliate had also 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. In October 2019, the Company sold its interest in the Affiliate.

In the first quarter of 2020, the Company recorded a $140.0 million expense to reduce the carrying value to fair value of an 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 projected compounded growth in assets under management over the first five years of (2)%, 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.

As of March 31, 2020, the estimated fair values of the Company’s other Affiliates accounted for under the equity method exceeded their carrying values. If financial markets remain depressed for a prolonged period of time or worsen as result of COVID-19 or other factors, the fair values of these assets could drop below their carrying values for periods considered other than temporary, resulting in future impairments.

The Company has determined that certain of its Affiliates accounted for under the equity method are significant under Rule 10-01(b)(1) of Regulation S-X. For the three months ended March 31, 2019 and 2020, these Affiliates recognized revenue of $590.5 million and $617.0 million, respectively, and net income of $328.7 million and $382.8 million, respectively.