Equity Method Investments in Affiliates

9 Months Ended

Sep. 30, 2020

Equity Method Investments and Joint Ventures [Abstract]

In the first quarter of 2020, the Company completed its minority investment in Comvest Partners, and in the third quarter of 2020, the Company established a minority equity interest in Inclusive Capital Partners. The Company’s purchase price allocation for each transaction was measured using financial models that included assumptions of expected market performance, net client cash flows and discount rates.

The financial results of certain Affiliates accounted for under the equity method, including those of Comvest Partners, 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	171.7
Intangible amortization and impairments	(250.5)
Distributions of earnings	(197.2)

Foreign currency translation	(21.6)
Investments in Affiliates	87.1

Other	(10.4)
Balance, as of September 30, 2020	$	1,974.7

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 $42.1 million and $104.1 million for the three and nine months ended September 30, 2019, respectively, and $34.3 million and $110.5 million for the three and nine months ended September 30, 2020, respectively. Based on relationships

existing as of September 30, 2020, the Company estimates the amortization expense attributable to its Affiliates will be approximately $40 million for the remainder of 2020, approximately $120 million in 2021, and approximately $50 million in each of 2022, 2023, 2024 and 2025.

In the first quarter of 2019, the Company recorded a $415.0 million expense to reduce the carrying value of an Affiliate to fair value. 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 third quarter of 2019, the Company recorded a $10.0 million expense to reduce the carrying value of an Affiliate to fair 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 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 first quarter of 2020, the Company recorded a $140.0 million expense to reduce the carrying value of an Affiliate to fair value. 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 September 30, 2020, the estimated fair values of the Company’s Affiliates accounted for under the equity method exceeded their carrying values. If financial markets worsen as a result of COVID-19 or other factors, or the financial performance of an Affiliate worsens as a result of net client cash outflows or performance, regardless of the performance of financial markets, 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 and nine months ended September 30, 2019, these Affiliates recognized revenue of $122.7 million and $429.8 million, respectively, and net income of $75.2 million and $290.9 million, respectively. For the three and nine months ended September 30, 2020, these Affiliates recognized revenue of $116.2 million and $524.5 million, respectively, and net income of $74.2 million and $379.5 million, respectively.