ASSOCIATED CAPITAL GROUP, INC. Introduction
MD&A is provided as a supplement to, and should be read in conjunction with, the Company's unaudited interim consolidated financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q, as well as the Company's audited annual financial statements included in our Form 10-K filed with theSEC onMarch 16, 2020 to help provide an understanding of our financial condition, changes in financial condition and results of operations. Unless the context otherwise requires, all references to "we," "us," "our," "AC Group " or the "Company" refer collectively toAssociated Capital Group, Inc. , a holding company, and its subsidiaries through which our operations are actually conducted.
Overview
We are a
On
Event-Driven Asset Management
We conduct our investment management activities through our wholly-owned subsidiaryGabelli & Company Investment Advisers, Inc. ("GCIA" f/k/aGabelli Securities, Inc. ). GCIA and its wholly-owned subsidiary,Gabelli & Partners, LLC ("Gabelli & Partners "), collectively serve as general partners or investment managers to investment funds including limited partnerships and offshore companies (collectively, "Investment Partnerships"), and separate accounts. We primarily manage assets in equity event-driven value strategies, across a range of risk and event arbitrage portfolios. The business earns management and incentive fees from its advisory activities. Management fees are largely based on a percentage of assets under management. Incentive fees are based on the percentage of the investment returns of certain clients' portfolios. GCIA is an investment adviser registered with theSecurities and Exchange Commission under the Investment Advisers Act of 1940, as amended. The event driven asset management business met its 35th anniversary inFebruary 2020 . During the quarter merger arbitrage was not immune to the market's volatility. Merger spreads widened as levered multi-strategy and quantitative hedge funds faced margin calls, forcing them to sell positions indiscriminately to de-lever and raise cash. For the quarter, our fund slipped -7.1%, (-7.4% net of fees). It is important to note that none of the deals in our portfolio were terminated in March. The strategy is offered domestically through partnerships and separately managed accounts. Internationally, the strategy is offered through corporations and EU regulated UCITS structures. The team continues to build new channel partnerships including managing theGabelli Merger Plus Trust ("GMP") an LSE-listed investment company. While these initiatives serve to deepen and lengthen the franchise, they also broaden the client base globally.
Institutional Research Services
We provide our institutional research and underwriting services through
G.research, LLC ("G.research"), a majority controlled wholly-owned subsidiary of
Morgan Group. G.research is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and is regulated by the
Financial Industry Regulatory Authority ("FINRA"). G.research's revenues are
derived primarily from institutional research services.
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OnOctober 31, 2019 , the Company closed on the transaction whereby Morgan Group Holding Co. ("Morgan Group "), an entity under common control of the majority shareholder of AC, acquired G.research in exchange for 50 million shares of its stock. In addition, management acquired 5.15 million Morgan Group shares under a private placement for$515,000 . Subsequent to the transaction and private placement, AC has an 83.3% ownership interest in Morgan Group and consolidated the entity, which now includes G.research.
On
During the first quarter, G.research marketed the 30th Annual Pump, Valve and Water Systems Symposium onFebruary 27th and the 11th AnnualSpecialty Chemicals Virtual Conference onMarch 12th .
In addition, G.research continues to sponsor non-deal roadshows providing corporate management access to our institutional clients.
For frequent, real-time updates from our research team on social media platforms, we invite you to visit GabelliTV, our online portal, at YouTube (www.youtube.com/GabelliTV) or Facebook (www.facebook.com/GabelliTV).
Direct Investing Business
The Gabelli direct investment business was re-launched after the spin-off ofAssociated Capital in 2015. Our objective is to partner with management to identify and surface value through strategic direction, operational improvements and financial structuring. The compounded, accumulated knowledge of our team in sectors across our core competencies provides advantages to value creation. The steps taken since formation are expected to grow long term value. In this effort, we seek to collaborate with the management of target companies, establish common goals, support the restructuring and growth process, and more importantly, add value by bringing in creative capital solutions and extensive industry insights. This effort follows the framework we established with Gabelli-Rosenthal, a private equity fund launched in 1985. Our direct investment business is developing along three core pillars;Gabelli Private Equity Partners, LLC ("GPEP"), formed inAugust 2017 with$150 million of authorized capital as a "fund-less" sponsor; the formation of Gabelli special purpose acquisition vehicles, theSPAC business ("SPAC"), launched inApril 2018 ; and, the formation ofGabelli Principal Strategies Group, LLC ("GPS") to pursue strategic operating initiatives.Gabelli & Partners team is extending our marketing reach withinAsia andEurope , resulting in searches, proposal and new business for the UCITs, offshore funds and SMA's.Gabelli & Partners currently has a relationship with more than 20 third party marketing firms, principally private banks on continentalEurope . Gabelli Value forItaly (VALU), our initial vehicle launched and listed on the Italian Borsa, approached its second anniversary at the apex of the pandemic inItaly . In light of this challenge, the board voted to commence liquidation of this entity. However, the VALU effort successfully canvassed private company opportunities inItaly , with deal flow expanding throughoutEurope . We believe the platform is in place to further expand our direct investment efforts across the European continent. GPEP has the flexibility to form partnerships with former executives of global industrial conglomerates to create long term value with no pre-determined exit timetable. The Gabelli SPAC business allows us to leverage our capital markets expertise through a direct investing vehicle. We invite you to visit our activities on the corporate website:
https://www.associated-capital-group.com/DirectInvesting
InDecember 2019 , a novel strain of coronavirus ("COVID-19") surfaced inChina and has since spread quickly to other countries, includingthe United States (U.S. ), which has resulted in restrictions on travel and congregation and the temporary closure of many non-essential businesses in affected jurisdictions, including, beginning inMarch 2020 , inthe United States . OnMarch 11, 2020 , COVID-19 was identified as a global pandemic by theWorld 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 March, the unfolding events led to the worst month for stocks since 2008 and the worst first quarter since 1937. Any potential impact to our results of operations and financial condition will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other entities to contain COVID-19 or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our operating results and financial condition. In addition to these developments having adverse consequences for us and the portfolios that we manage, the operations and financial condition of AC could be adversely impacted, including through quarantine measures and travel restrictions imposed on its personnel or service providers based in affected countries, or any related health issues of such personnel or service providers. As ofMarch 31, 2020 , the pandemic and resulting economic dislocations have had adverse consequences on our investments and AUM, resulting in decreased revenues and income from investments partially offset by decreased variable operating and compensation expenses. The full extent of the negative impact on our operating results and financial condition, as well as the duration of any potential business disruption as a result of COVID-19 is uncertain.
As a result of this pandemic, the majority of our employees ("teammates") are working remotely. However, there has been 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.
Condensed Consolidated Statements of Income
Investment advisory and incentive fees, which are based on the amount and
composition of assets under management ("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 facilitates the
ability to attract 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.
Incentive fees generally consist of an incentive allocation on the absolute gain in a portfolio or a fee of 20% of the economic profit, as defined in the agreements governing the investment vehicle or account. We recognize such revenue only when the uncertainty surrounding the amount of variable consideration has ended or at the time of an investor redemption.
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Institutional research services revenues consist of brokerage commissions derived from securities transactions executed on an agency basis or direct payments from institutional clients. Commission revenues vary directly with the perceived value of the research provided, as well as account execution activity and new account generation. Compensation costs include variable and fixed compensation and related expenses paid to officers, portfolio managers, sales, trading, research and all other professional staff. Variable compensation paid to sales personnel and portfolio management and may represent up to 55% of certain revenue streams.
Management fee is incentive-based and entirely variable compensation in the
amount of 10% of the aggregate pre-tax profits which is paid to
Other operating expenses include general and administrative operating costs and clearing charges and fees incurred by our brokerage operations.
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 D in our condensed consolidated financial statements included elsewhere in this report.
Condensed Consolidated Statements of Financial Condition
We ended the first quarter of 2020 with approximately$823 million in cash and investments, net of securities sold, not yet purchased of$17 million . This includes$359 million of cash and cash equivalents;$205 million of securities, net of securities sold, not yet purchased, including shares of GAMCO and Gabelli Value for Italy S.p.a. with market values of$32 million and$9 million , respectively; and$259 million invested in affiliated and third-party funds and partnerships, including investments in affiliated closed end funds which have a value of$69 million and more limited liquidity. During the first quarter of 2020 AC purchased a building for$11.1 million . 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 was$820 million or$36.65 per share atMarch 31, 2020 compared to$897 million or$39.93 per share onDecember 31, 2019 . The decrease in equity from the end of 2019 is driven primarily by our net loss of$73 million and repurchases of Class A Common Stock of AC. 24
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RESULTS OF OPERATIONS
(in thousands, except per share data) Three months ended March
31,
2020 2019
Revenues
Investment advisory and incentive fees $ 2,700 $
2,733
Institutional research services 1,374 1,913 Other 295 6 Total revenues 4,369 4,652 Expenses Compensation 4,193 5,896 Stock-based compensation (818 ) 415 Management fee - 3,260 Other operating expenses 2,089 2,957 Total expenses 5,464 12,528 Operating loss (1,095 ) (7,876 ) Other income/(expense) Net gain/(loss) from investments (102,090 ) 34,979 Interest and dividend income 2,310 3,786 Interest expense (49 ) (44 ) Shareholder-designated contribution (227 )
-
Total other income/(expense), net (100,056 )
38,721
Income/(loss) before income taxes (101,151 ) 30,845 Income tax expense/(benefit) (23,799 ) 6,191 Net income/(loss) (77,352 ) 24,654 Net income/(loss) attributable to noncontrolling interests (3,997 )
1,507
Net income/(loss) attributable to Associated Capital Group, Inc.'s shareholders$ (73,355 ) $
23,147
Net income/(loss) attributable toAssociated Capital Group, Inc.'s shareholders per share: Basic $ (3.27 )$ 1.02 Diluted $ (3.27 )$ 1.02
Three Months Ended
Overview
Our operating loss for the quarter was$1.1 million compared to$7.9 million for the comparable quarter of 2019. The decrease in operating loss was attributable to lower operating expenses due to lower compensation costs of$2.9 million as a result of headcount reductions at G.research and a related drop in stock compensation costs, lower management fees of$3.3 million and lower other operating expenses of$0.9 million offset by lower revenues of$0.3 million . Other income was a loss of$100.1 million in the 2020 quarter compared to a gain of$38.7 million in the prior year's quarter primarily due to mark-to-market changes in the value of our investment portfolio. The Company recorded an income tax benefit in the current quarter of$23.8 million compared to an expense of$6.2 million in the year ago quarter. Consequently, our current quarter net loss was$73.4 million , or$3.27 per diluted share, compared to net income of$23.1 million , or$1.02 per diluted share, in the prior year's comparable quarter. 25
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Revenues
Total revenues were
We earn advisory fees based on the average level of AUM in our products. Advisory fees were$2.7 million for 2020, unchanged for the comparable quarter of 2019. AUM of$1.5 billion decreased$0.1 billion in the current from prior year quarter. Incentive fees are not recognized until the uncertainty surrounding the amount of variable consideration ends and the fee is crystalized, typically annually onDecember 31 . If the uncertainty surrounding the amount of variable consideration had ended onMarch 31 , we would have recognized$3.7 million of incentive fees for the quarter endedMarch 31, 2019 . No incentive fees for the quarter endedMarch 31, 2020 would have been recognized due to the losses incurred. Institutional research services revenues in the current year's third quarter decreased to$1.4 million , from the prior year's period of$1.9 million due to the termination of research agreements withGAMCO Assets andGabelli Funds , Inc. effectiveJanuary 1, 2020 and lower commissions of$0.3 million and$0.5 million respectively, offset by higher sales manager fees of$0.3 million .
Expenses
Compensation, which include variable compensation, salaries, bonuses and benefits, was$4.2 million for the three months endedMarch 31, 2020 , compared to$5.9 million for the three months endedMarch 31, 2019 . Fixed compensation, which include salaries and benefits, declined to$2.7 million for the 2020 period from$3.2 million in the prior year. Discretionary bonus accruals were$1.0 million and$0.9 million in the 2020 and 2019 periods, respectively. The remainder of the compensation expense represents variable compensation that fluctuates with management fee and incentive allocation revenues and gains on investment portfolios. Variable payouts as a percent of revenues are impacted by the mix of products upon which performance fees are earned and the extent to which they may exceed their allocated costs. For 2020, these variable payouts were$0.5 million , down$1.3 million from$1.8 million in 2019.
For the three months ended
Management fee expense represents incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is payable toMario J. Gabelli pursuant to his employment agreement. AC recorded management fee expense of$3.3 million for the three-month period endedMarch 31, 2019 . No management fee expense was recorded for the three-month period endedMarch 31, 2020 due to the year to date pre-tax loss.
Other operating expenses were
Other
Net gain/(loss) from investments is primarily related to the performance of our securities portfolio and investments in partnerships. Investment losses were$(102.1) million in the 2020 quarter versus a gain of$35.0 million in the comparable 2019 quarter reflecting mark-to-market changes in the value of our investments. Interest and dividend income decreased to$2.3 million in the 2020 quarter from$3.8 million in the 2019 quarter primarily due to higher interest rates on our cash balances and US Treasuries and increased dividends in the prior year's quarter.
ASSETS UNDER MANAGEMENT
Our revenues are highly correlated to the level of assets under management and
fees associated with our various investment products, rather than our own
corporate assets. Assets under management, which are directly influenced by the
level and changes of the overall equity markets, can also fluctuate through
acquisitions, the creation of new products, and the addition of new accounts or
the loss of existing accounts. Since various equity products have different
fees, changes in our business mix may also affect revenues. At times, the
performance of our equity products may differ markedly from popular market
indices, and this can also impact our revenues.
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Assets under management were
Assets Under Management (in millions)
% Change From
March 31, December 31, March 31, December 31, March 31,
2020 2019 2019 2019 2019
Event Merger Arbitrage$ 1,312 $ 1,525 $ 1,401 (14.0 ) (6.4 ) Event-Driven Value 112 132 127 (15.2 ) (11.8 ) Other 49 59 63 (16.9 ) (22.2 ) Total AUM$ 1,473 $ 1,716 $ 1,591 (14.2 ) (7.4 )
Fund flows for the three months ended
Market
December 31, appreciation/ Net cash March 31,
2019 (depreciation) flows 2020
Event Merger Arbitrage $ 1,525 $ (122 ) $ (91 ) $ 1,312
Event-Driven Value 132 (23 ) 3 112
Other 59 (9 ) (1 ) 49
Total AUM $ 1,716 $ (154 ) $ (89 ) $ 1,473 OPEN LIQUIDITY AND CAPITAL RESOURCES
Our principal assets are highly liquid in nature and consist of cash and cash equivalents, short-term investments, marketable securities and investments in funds and investment partnerships. Cash and cash equivalents are comprised primarily ofU.S. Treasury money market funds. Although investments in partnerships and offshore funds are subject to restrictions as to the timing of redemptions, the underlying investments of such partnerships or funds are, for the most part, liquid, and the valuations of these products reflect that underlying liquidity.
Summary cash flow data is as follows (in thousands):
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