December 2019, a novel strain of coronavirus ("COVID-19") surfaced in Chinaand spread quickly to numerous countries, including the United States. On March 11, 2020, COVID-19 was identified as a global pandemic by the World Health Organization. As world leaders focused on the unprecedented human and economic challenges of COVID-19, global equity markets plunged as the coronavirus pandemic spread. In the remainder of 2020 and continuing through 2021, as a result of unprecedented fiscal and monetary stimulus and the fast tracking of COVID-19 vaccines, the markets have rebounded strongly. The pandemic and resulting economic dislocations did not have a significant adverse impact on our AUM. As a result of this pandemic, the majority of our employees ("teammates") were working remotely. The Company's remote work arrangements were mostly discontinued as of July 2021. As restrictions around the globe begin to lift, our teams will once again seek to meet and engage our current and prospective investors in their local jurisdictions. 11
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There continues to be no material impact of remote work arrangements on our operations, including our financial reporting systems, internal control over financial reporting, and disclosure controls and procedures, and there has been no material challenge in implementing our business continuity plan.
The following is a summary of the Company’s financial performance for the
Quarters and Years ended
($000s except per share data or as noted)
Fourth Quarter Full
2021 2020 2021
AUM – end of period (in millions)
AUM – average (in millions)
1,735 1,286 1,595
Net income/(loss) per share-diluted
0.84 Book Value Per Share
$ 42.48 $ 40.36 $ 42.48 $ 40.36Financial Condition Overview The Company consolidates certain investment partnerships and other entities for which it has a controlling financial interest. The following table reflects the net impact of the consolidated investment partnerships and other entities ("Consolidated Entities") on the consolidated statements of financial condition (in thousands): December 31, 2021 Prior to Consolidated Consolidation Entities As Reported Assets Cash 315,009 4,039 319,048 Investments 606,382 16,709 623,091 Other 69,713 191,484 261,197 Total assets $ 991,104 $ 212,232 $ 1,203,336Liabilities and equity Total liabilities 45,024 20,510 65,534 Redeemable noncontrolling interests - 202,456 202,456 Total Associated Capital Group, Inc.equity(1) 946,080 (8,978 ) 937,102 Noncontrolling interests(1) - (1,756 ) (1,756 ) Total liabilities and equity $ 991,104 $ 212,232 $ 1,203,336December 31, 2020 Prior to Consolidated Consolidation Entities As Reported Assets Cash 32,347 7,162 39,509 Investments 869,751 19,188 888,939 Other 45,709 200,388 246,097 Total assets $ 947,807 $ 226,738 $ 1,174,545Liabilities and equity Total liabilities 46,418 19,910 66,328 Redeemable noncontrolling interests - 206,828 206,828 Total equity 901,389 - 901,389 Total liabilities and equity $ 947,807 $ 226,738 $ 1,174,545(1) Debit adjustments to Associated Capital Group, Inc.equity and noncontrolling interests reflects the amortization of the discount related to the issuance of PMV SPAC's redeemable noncontrolling interest. The discount is amortized over a period of 18 months through an adjustment to additional paid-in capital and noncontrolling interest (proportionate to ownership interest in PMV Sponsor) and is also adjusted periodically for income/loss allocated to redeemable noncontrolling interest.
Consolidated Statements of Income
Investment advisory and incentive fees, which are based on the amount and composition of AUM in our funds and accounts, represent our largest source of revenues. Growth in revenues depends on good investment performance, which influences the value of existing AUM as well as contributes to higher investment and lower redemption rates and attracts additional investors while maintaining current fee levels. Growth in AUM is also dependent on being able to access various distribution channels, which is usually based on several factors, including performance and service. In light of the ongoing dynamics created by COVID-19 and its impact on the global economy and markets, we could experience higher volatility in short-term returns of our funds. Incentive fees generally consist of an incentive allocation on the absolute gain in a portfolio generally equating to 15-20% of the economic profit, as defined in the agreements governing the investment vehicle or account. We recognize such revenue only when the measurement period has been completed or at the time of an investor redemption.
Compensation includes variable and fixed compensation and related expenses paid
to officers, portfolio managers, sales, trading, research and all other
professional staff. Variable compensation is paid to sales personnel and
portfolio management and may represent up to approximately 55% of revenues.
Management fee expense is incentive-based equal to 10% of adjusted aggregate pre-tax profits paid to the Executive Chair or his designees for his services pursuant to an employment agreement.
Other operating expenses include general and administrative operating costs.
Other income and expense includes net gains and losses from investments (which include both realized and unrealized gains and losses from securities and equity in earnings of investments in partnerships), interest and dividend income, and interest expense. Net gains and losses from investments are derived from our proprietary investment portfolio consisting of various public and private investments and from consolidated investment funds. Net income/(loss) attributable to noncontrolling interests represents the share of net income attributable to third-party limited partners of certain partnerships and offshore funds we consolidate. Please refer to Notes A and E in our consolidated financial statements included elsewhere in this report.
Consolidated Statements of Financial Condition
We ended 2021 with approximately
$942 millionin cash and investments, net of securities sold, not yet purchased of $13 million. This includes $319 millionof cash and cash equivalents; $61 millionof short-term U.S. Treasuryobligations; $260 millionof securities, net of securities sold, not yet purchased, including shares of GAMCO with a market value of $60.4 million; and $289 millioninvested in affiliated and third-party funds and partnerships, including investments in closed end funds managed by an affiliate (primarily GAMCO) which have a value of $64 millionand more limited liquidity. Our financial resources provide flexibility to pursue strategic objectives that may include acquisitions, lift-outs, seeding new investment strategies, and co-investing, as well as shareholder compensation in the form of share repurchases and dividends. Total shareholders' equity attributable to shareholders of the Company was $937 millionor $42.48per share as of December 31, 2021, compared to $899 millionor $40.36per share as of the prior year-end. Shareholders' equity per share is calculated by dividing the total equity by the number of common shares outstanding. The increase in equity from the end of 2020 was largely attributable to net income for the year, partially offset by dividends, share repurchases and the impact of amortization of the discount related to the issuance of PMV SPAC's redeemable noncontrolling interest. 12
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Assets Under Management Highlights
We reported assets under management as follows (dollars in millions):
Year Ended December 31, 2021 2020 % Change Merger Arbitrage
$ 1,542 $ 1,12636.90 Event-Driven Value 195 180 8.33 Other 44 45 (2.22 ) Total AUM (a) $ 1,781 $ 1,35131.83
Changes in our AUM during 2021 were as follows (dollars in millions):
Year Ended December 31, 2021 Investment Beginning Inflows Outflows Return Ending Merger Arbitrage
$ 1,126 $ 566 $ (200 )$ 50 $ 1,542Event-Driven Value 180 5 (12 ) 22 195 Other 45 - (3 ) 2 44 Total AUM $ 1,351 $ 571 $ (215 )$ 74 $ 1,781
The majority of our AUM have calendar year-end measurement periods, and our
incentive fees are primarily recognized in the fourth quarter. Assets under
management increased on a net basis by
Operating Results for the Year Ended
Revenues Total revenues were
$20.9 millionfor the year ended December 31, 2021, $1.9 millionhigher than total revenues of $19.0 millionfor the year ended December 31, 2020. Total revenues by type were as follows (dollars in thousands): Year Ended December 31,
2021 2020 $ % Investment advisory and incentive fees
$ 20,530 $ 18,288 $ 2,24212.3 Other revenues 394 695 (301 ) (43.3 ) Total revenues $ $ 20,924$ $ 18,983 $ 1,94110.2 Investment advisory and incentive fees: We earn advisory fees based on our AUM. Investment advisory fees are directly influenced by the amount of average AUM and the fee rates applicable to various accounts.
Advisory and incentive fees were
the higher average AUM over the period.
Incentive fees are directly related to the gains generated for our clients' accounts. We earn a percentage, usually 20%, of such gains. Incentive fees were
$12.4 millionin 2021, up $1.9 millionfrom $10.5 millionin 2020, due to higher assets under management coupled with superior investment performance.
Other revenues: Other revenues were
Compensation: Compensation, which includes variable compensation, salaries, bonuses and benefits, was
$24.5 millionfor the year ended December 31, 2021, an increase of $5.1 millionfrom $19.4 millionfor the year ended December 31, 2020. Fixed compensation expense, which includes salaries, bonuses and benefits, increased to $11.1 millionin 2021 from $9.5 millionin 2020. The remainder of compensation expense represents variable compensation that fluctuates with management and incentive fee revenues as well as the investment results of certain proprietary accounts. Variable payouts are also impacted by the mix of products upon which performance fees are earned and the extent to which they may exceed their allocated costs. For 2021, these variable payouts (based on the investment performance of the products with incentive fees) were $13.4 million, an increase of $3.5 millionfrom $9.9 millionin 2020. 13
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Stock-based compensation, which primarily consists of awards accounted for as liabilities, was
$2.1 millionin 2021, an increase of $2.3 millionfrom $(0.2) millionrecorded in 2020 due to increases in the Company's share price in 2021 coupled with a new grant of awards in May 2021. Management fees: Management fee expense is incentive-based and entirely variable compensation equal to 10% of the aggregate adjusted pre-tax profits, which is paid to the Executive Chair or his designees pursuant to his employment agreement with AC. In 2021 and 2020, AC recorded management fee expense of $8.4 millionand $3.1 million, respectively. Other operating expenses: Our other operating expenses were $7.1 millionin 2021 compared to $8.9 millionin 2020, a decrease of $1.8 millionprimarily due to a one-time credit recorded in 2021 of $1.5 million.
Investment and other non-operating income/(expense), net
Net gain from investments: Net gain from investments is directly related to the performance of our proprietary portfolio. For the year ended
December 31, 2021, net gains from investments were $93.4 millioncompared to $36.9 millionin the prior year primarily driven by investment income on our holdings of GBL as well as other portfolio increases. Interest and dividend income: Interest and dividend income increased to $12.1 millionin 2021 from $8.7 millionin 2020 primarily due to the $5.1 million( $2per share) special dividend declared on our holdings of GAMCO in 2021.
In 2021 we recorded income tax expense of
$17.7 millionresulting in an effective tax rate ("ETR") of 21.8%. In 2020 we recorded income tax expense of $9.4 millionresulting in an ETR of 31.4%. The decrease in rate from 2020 is primarily driven by foreign investments which increased the 2020 rate by 9.9%.
Net income attributable to noncontrolling interests was
$4.4 millionin 2021 compared to $1.0 millionin 2020. The increase of $3.4 millionwas driven primarily by Gabelli Merger Plus+ Trust and mark to market earnings from PMV SPAC. Net Income/(Loss) Net income for the year ended December 31, 2021was $59.2 millioncompared to net income of $18.8 millionfor the prior year. The change was primarily driven by higher gains on our investment portfolio primarily driven by the 2021 market recovery from the COVID-19 pandemic.
Liquidity and Capital Resources
Our principal assets consist of cash and cash equivalents; short-term treasury securities; marketable securities, primarily equities, including 2.4 million shares of GAMCO; and interests in affiliated and third-party funds and partnerships. Although Investment Partnerships may be subject to restrictions as to the timing of distributions, the underlying investments of such Investment Partnerships are generally liquid, and the valuations of these products reflect that underlying liquidity. 14
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Summary cash flow data is as follows (in thousands):
2021 2020 Cash flows provided by (used in) continuing operations: Operating activities
$ 238,194 $ (279,483 )Investing activities 65,285 (174,072 ) Financing activities (14,394 ) 150,949 Net increase from continuing operations
289,085 (302,606 )
Cash flows provided by (used in) discontinued operations:
- 114 Net increase in cash, cash equivalents and restricted cash 289,085 (302,492 ) Cash, cash equivalents and restricted cash at beginning of period 39,509 342,001 Cash, cash equivalents and restricted cash at end of period
$ 328,594 $ 39,509We require relatively low levels of capital expenditures and have a highly variable cost structure where costs increase and decrease based on the level of revenues we receive. Our revenues, in turn, are highly correlated to the level of AUM and to investment performance. We anticipate that our available liquid assets should be sufficient to meet our cash requirements as we build out our operating business. At December 31, 2021, we had cash and cash equivalents of $319.0 million, investments in U.S.Treasury Bills of $61.0and $260.2 millionof investments net of securities sold, not yet purchased of $12.9 million. Included in cash and cash equivalents are $4.0 millionand $7.2 millionas of December 31, 2021and 2020, respectively, which were held by consolidated investment funds and may not be readily available for the Company to access. Net cash provided by operating activities from continuing operations was $238.2 millionin 2021 due to $278.1 millionof net decreases of securities and net contributions to investment partnerships and our net income of $63.6, offset by $82.9 millionof adjustments for noncash items, primarily gains on investments securities and partnership investments and deferred taxes, and $20.6 millionin net receivables/payables. Net cash used in operating activities from continuing operations was $279.5 millionin 2020 due to $295.8 millionin net purchases of trading securities, including $315.4 millionof net purchases of U.S.Treasury Bills, $10.7of net income adjusted for noncash items, primarily unrealized gains on securities and equity in net gains from partnerships, net distributions from Investment Partnerships of $31.0 millionand increases in net receivables/payables of $4.0 million. Net cash provided by investing activities from continuing operations was $65.3 millionin 2021 due to proceeds from sales of securities of $35.3 millionand return of capital on securities of $38.7 million, partially offset by purchases of securities of $8.7 million. Net cash used in investing activities from continuing operations was $174.1 millionin 2020 due to the investment of cash in a trust account by the PMV SPAC of $175 million, the purchase of our building in Londonfor $11.1 millionand purchases of securities of $2.7 millionpartially offset by proceeds from sales of securities of $13.1 millionand return of capital on securities of $1.6 million. Net cash used in financing activities from continuing operations was $14.4 millionin 2021 resulting from stock buyback payments of $7.6 million, dividends paid of $4.4 millionand redemptions of redeemable noncontrolling interests of $2.3 million. Net cash provided by financing activities from continuing operations was $150.9 millionin 2020 resulting from contributions from redeemable noncontrolling interests of $162.6 millionprimarily related to contributions to PMV SPAC and nonredeemable non-controlling interests of $2.4 millionreduced by dividends paid of $6.7 millionand stock buyback payments of $7.4 million. Cash provided by discontinued operations from the spin-off of Morgan Group was $0.1 million.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America("GAAP"). We base our estimates on historical experience, when available, and on other various assumptions that are believed to be reasonable under the circumstances. Actual results could differ significantly from those estimates under different assumptions and conditions. 15
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We believe that the following critical accounting policies require management to
exercise significant judgment:
Major Revenue-Generating Services and Revenue Recognition
The Company’s revenues are derived primarily from investment advisory and
Investment advisory and incentive fees are directly influenced by the level and mix of AUM as fees are derived from a contractually-determined percentage of the balance of each account as well as a percentage of the investment performance of certain accounts. Management fees from Investment Partnerships and offshore funds are computed either monthly or quarterly, and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. These revenues vary depending upon the level of capital flows, financial market conditions, investment performance and the fee rates applicable to each account. Incentive allocations or fees are generally recognized at the end of an annual measurement period and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition.
See Note B, Significant Accounting Policies, in the consolidated financial
statements for additional information.
Investments in Securities
Investments in securities are a recorded at fair value in the statements of financial condition in accordance with
U.S.GAAP. Securities transactions and any related gains and losses are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded on the specific identified cost basis and are included in net gain from investments on the consolidated statements of income. Management determines the appropriate classification of securities at the time of purchase. Government debt with maturities of greater than three months at the time of purchase are considered investments in debt securities. The Company has investments in debt securities accounted for as trading, including investments in marketable securities held in trust by PMV. Securities sold, but not yet purchased are recorded on the trade date, and are stated at fair value and represent obligations of AC to purchase the securities at prevailing market prices. Therefore, the future satisfaction of such obligations may be for an amount greater or less than the amounts recorded on the consolidated statements of financial condition. The ultimate gains or losses recognized are dependent upon the prices at which these securities are purchased to settle the obligations under the sales commitments. Unrealized gains and losses and realized gains and losses from covers of securities sold, not yet purchased transactions are included in net gain from investments on the consolidated statements of income.
The Company assesses all entities with which it is involved for consolidation on a case by case basis depending on the specific facts and circumstances surrounding each entity. Pursuant to accounting guidance, the Company first evaluates whether it holds a variable interest in an entity. The Company considers all economic interests, including proportionate interests through related parties, to determine if such interests are to be considered a variable interest. Fees paid to the Company that are customary and commensurate with the level of services provided from entities in which the Company does not hold other economic interests in the entity are not considered as a variable interest. For any entity where the Company has determined that it does hold a variable interest, the Company performs an assessment to determine whether it qualifies as a variable interest entity ("VIE"). The granting of substantive kick-out rights is a key consideration in determining whether a limited partnership or similar entity is a VIE and whether or not that entity should be consolidated. The Company evaluates consolidation on a case by case basis for those VIEs in which substantive kick-out rights have been granted to the unaffiliated investors to either dissolve the fund or remove the general partner. Under the variable interest entity model, the Company consolidates those entities where it is determined that the Company is the primary beneficiary of the entity. The Company is determined to be the primary beneficiary when it has a controlling financial interest in the VIE, which is defined as possessing both (a) the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. If the Company alone is not considered to have a controlling financial interest in the VIE but the Company and its related parties under common control in the aggregate have a controlling financial interest in the VIE, the Company will be deemed to be the primary beneficiary if it is the party that is most closely associated with the VIE. When the Company and its related parties not under common control in the aggregate have a controlling financial interest in a VIE, the Company would be deemed to be the primary beneficiary if substantially all the activities of the entity are performed on behalf of the Company. 16
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The Company determines whether it is the primary beneficiary of a VIE at the time it becomes initially involved with the VIE and reconsiders that conclusion as required. Investments and redemptions (either by the Company, related parties of the Company or third parties) or amendments to the governing documents of the respective entity may affect an entity's status as a VIE or the determination of the primary beneficiary. Entities that do not qualify as VIEs are assessed for consolidation as voting interest entities ("VOEs") under the voting interest model. The Company evaluates whether the entity should be evaluated under the guidance for partnerships and similar entities, or corporations, and consolidates those entities it controls through a majority voting interest or other means. If the Company is the general partner or managing member it generally will not be required to consolidate a VOE.
The Company records noncontrolling interests in consolidated Investment
Partnerships for which the Company’s ownership is less than 100%.
See Note E, Investment Partnerships and Other Entities in the consolidated
financial statements for additional information.
Investments in Partnerships and Affiliates
The Company is general partner or co-general partner of various managed funds. We also have investments in unaffiliated partnerships, offshore funds and other entities (collectively, "investments in partnerships and affiliates"). The Company accounts for its investments in partnerships and affiliates under the equity method. Substantially all of the Company's equity method investees are entities that record their underlying investments at fair value and included in investments in partnerships. Therefore, under the equity method of accounting, the Company's share of the investee's underlying net income predominantly represents fair value adjustments in the investments held by the equity method investees. The Company's share of the investee's underlying net income or loss is based upon the most currently available information and is recorded as net gain from investments on the consolidated statements of income. Capital contributions are recorded as an increase in investments when paid, and withdrawals and distributions are recorded as reductions of the investments when received. Depending on the terms of the investment, the Company may be restricted as to the timing and amounts of withdrawals.
For purposes of the preparation of the consolidated financial statements, the provision for income taxes is computed using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts on the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is expected to be recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. For each tax position taken or expected to be taken in a tax return, the Company determines whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Company recognizes the accrual of interest on uncertain tax positions and penalties in the income tax provision on the consolidated statements of income.
Recent Accounting Developments
See Note B, Significant Accounting Policies – Recent Accounting Developments, in
the consolidated financial statements.
Seasonality and Inflation
We do not believe that our operations are subject to significant seasonal fluctuations. We do not believe inflation will significantly affect our compensation costs, as they are substantially variable in nature. The rate of inflation may affect certain other expenses, however, such as information technology and occupancy costs. To the extent inflation results in rising interest rates and has other effects upon the securities markets, it may adversely affect our financial position and results of operations by reducing our AUM, revenues or otherwise. 17
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