Alternative Investment

ASSOCIATED CAPITAL GROUP, INC. : MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”) OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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 the SEC on March 17, 2022 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 to Associated Capital Group, Inc., a holding
company, and its subsidiaries through which our operations are actually
conducted.



Overview



We are a Delaware corporation, incorporated in 2015, that provides alternative
investment management services and operates a direct investment business that
over time invests in businesses that fit our criteria. Additionally, we derive
income from proprietary investments.



Alternative Investment Management




We conduct our investment management activities through our wholly-owned
subsidiary Gabelli & Company Investment Advisers, Inc. ("GCIA") and its
wholly-owned subsidiary, Gabelli & Partners, LLC ("Gabelli & Partners"). GCIA is
an investment adviser registered with the Securities and Exchange Commission
("SEC") under the Investment Advisers Act of 1940, as amended (the "Advisers
Act"). GCIA and Gabelli & Partners together 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 across a range of risk and event arbitrage
portfolios and in equity event-driven value strategies. The business earns
management and incentive fees from its advisory activities. Management fees are
largely based on a percentage of assets under management ("AUM"). Incentive fees
are based on a percentage of the investment returns of certain client
portfolios.



We manage assets on a discretionary basis and invest in a variety of U.S. and
foreign securities mainly in the developed global markets. We primarily employ
absolute return strategies with the objective of generating positive returns. We
serve a wide variety of investors globally including private wealth management
clients, corporations, corporate pension and profit-sharing plans, foundations
and endowments, as well as serving as sub-advisor to certain third-party
investment funds.



In merger arbitrage, the goal is to earn absolute positive returns. We
introduced our first limited partnership, Gabelli Arbitrage (renamed Gabelli
Associates), in February 1985. Our typical investment process begins at the time
of deal announcement, buying shares of the target at a discount to the stated
deal terms, earning the spread until the deal closes, and reinvesting the
proceeds in new deals in a similar manner. By owning a diversified portfolio of
transactions, we mitigate the adverse impact of singular deal-specific risks.



As the business and investor base expanded, we launched an offshore version in
1989. Building on our strengths in global event-driven value investing, several
investment vehicles have been added to balance investors' geographic, strategic
and sector-specific needs. Today, we manage investments in multiple categories,
including merger arbitrage, event-driven value and other strategies.



Proprietary Capital



Proprietary capital is earmarked for our direct investment business that invests
in new and existing businesses, using a variety of techniques and structures. We
launched our direct private equity and merchant banking activities in August
2017. The direct investment business is developing along several core pillars:

? Gabelli Private Equity Partners, LLC (“GPEP”), formed in August 2017 with $150

    million of authorized capital as a "fundless" sponsor.


  ? Gabelli Principal Strategies Group, LLC ("GPS") was created to pursue
    strategic operating initiatives broadly.




                                       21

——————————————————————————–

Table of Contents




Our direct investing efforts are organized to invest in various ways, including
growth capital, leveraged buyouts and restructurings, with an emphasis on small
and mid-sized companies. Our investment sourcing is across a variety of channels
including direct owners, private equity funds, classic agents, and corporate
carve outs (which are positioned for accelerated growth, as businesses seek to
enhance shareholder value through financial engineering). The Company's direct
investing vehicles allow us to acquire companies and create long-term value with
no pre-determined exit timetable.



We have a proprietary portfolio of cash and investments which we expect to use
to invest primarily in funds that we will manage, provide seed capital for new
products, expand our geographic presence, develop new markets and pursue
strategic acquisitions and alliances.



A novel strain of coronavirus, and its variants, ("COVID-19") continue to
disrupt global supply chains, adding broad inflationary pressures impacting
companies worldwide. As a result of this pandemic, many of our employees
("teammates") were working remotely. The Company's remote work arrangements were
mostly discontinued as of July 2021 and a majority of our teammates are now back
in our offices. Furthermore, in response to the invasion of Ukraine by Russia,
economic sanctions were imposed on individuals and entities within Russia by
governments around the world, including the U.S. and the European Union. The
resulting economic dislocations from the pandemic and the Ukraine-Russia
conflict did not have a significant adverse impact on our AUM.



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.



Financial Highlights


The following is a summary of the Company’s financial performance for the
quarters ended September 30, 2022 and 2021:

($000s except per share data or as noted)




                                          Third Quarter
                                        2022        2021

AUM – end of period (in millions) $ 1,752 $ 1,680
AUM – average (in millions)

              1,807       1,651

Net income/(loss) per share-diluted $ (0.75 ) $ 0.07
Book value per share at September 30 $ 39.96 $ 42.24

Condensed 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
rising interest rates, high inflation, geo-political conflict, COVID-19 and the
related impact on the global supply chain and banks, oil, travel and leisure, 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 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 generally in
December 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 55% of revenues.




Management fee expense is incentive-based compensation 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 D in
our consolidated financial statements included elsewhere in this report.



Condensed Consolidated Statements of Financial Condition




We ended the third quarter of 2022 with approximately $884 million in cash and
investments, net of securities sold, not yet purchased of $3 million and net of
payables to broker of $45 million relating to an unsettled T-bill rollover
trade. This includes $288 million of cash and cash equivalents; $134 million of
short-term U.S. Treasury obligations; $236 million of securities, net of
securities sold, not yet purchased, including shares of GAMCO with a market
value of $41.2 million; and $271 million invested in affiliated and third-party
funds and partnerships, including investments in affiliated closed end funds
which have a value of $56 million and 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 was $879 million or $39.96 per share as of September
30, 2022, compared to $937 million or $42.48 per share as of December 31, 2021.
Shareholders' equity per share is calculated by dividing the total equity by the
number of common shares outstanding. The decrease in equity from the end of 2021
was largely attributable to loss for the year to date period.



                                       22

——————————————————————————–

  Table of Contents



RESULTS OF OPERATIONS



                                              Three Months Ended           Nine Months Ended
                                                September 30,                September 30,
                                              2022          2021          2022          2021
Revenues
Investment advisory and incentive fees     $    2,472     $   2,014     $   7,409     $   6,627
Other revenues                                     90            98           281           299
Total revenues                                  2,562         2,112         7,690         6,926
Expenses
Compensation                                    3,591         2,819        10,531        11,710
Management fee                                      -           226             -         7,209
Other operating expenses                        2,100          (764 )       5,805         4,952
Total expenses                                  5,691         2,281        16,336        23,871
Operating loss                                 (3,129 )        (169 )      (8,646 )     (16,945 )
Other income/(loss)
Net gain/(loss) from investments              (19,314 )       5,676       (72,727 )      79,303
Interest and dividend income                    2,797         1,119         5,533         9,119
Interest expense                                  (66 )         (97 )        (145 )        (251 )
Shareholder-designated contribution            (1,206 )        (541 )      (1,414 )      (2,717 )
Total other income/(loss), net                (17,789 )       6,157       (68,753 )      85,454
Income/(loss) before income taxes             (20,918 )       5,988       (77,399 )      68,509
Income tax expense/(benefit)                   (4,914 )         484       (17,798 )      15,094
Income/(loss) before noncontrolling
interests                                     (16,004 )       5,504       (59,601 )      53,415
Income/(loss) attributable to
noncontrolling interests                          494         4,001         2,970         3,641
Net income/(loss) attributable to
Associated Capital Group, Inc.'s
shareholders                               $  (16,498 )   $   1,503     $ 

(62,571 ) $ 49,774


Net income/(loss) per share attributable
to Associated Capital Group, Inc.'s
shareholders:
Basic                                      $    (0.75 )   $    0.07     $   (2.84 )   $    2.25
Diluted                                    $    (0.75 )   $    0.07     $   (2.84 )   $    2.25

Weighted average shares outstanding:
Basic                                          22,010        22,084        22,033        22,141
Diluted                                        22,010        22,084        22,033        22,141




                                       23

——————————————————————————–

Table of Contents

Three Months Ended September 30, 2022 Compared to Three Months Ended September
30, 2021




Overview



Our operating loss for the quarter was $3.1 million compared to $0.2 million for
the comparable quarter of 2021. The increase in operating loss was driven
primarily by a $2.4 million one-time credit recorded in the third quarter of
2021. Other income/(loss), net was a loss of $17.8 million in the 2022 quarter
compared to a gain of $6.2 million in the prior year's quarter primarily due to
mark-to-market changes in our holdings of our securities portfolio. The Company
recorded an income tax benefit in the current quarter of $4.9 million compared
to expense of $0.5 million in the prior year's quarter. Consequently, our
current quarter net income/(loss) was $(16.5) million, or $(0.75) per diluted
share, compared to net income of $1.5 million, or $0.07 per diluted share, in
the prior year's comparable quarter.



Revenues


Total revenues were $2.6 million for the quarter ended September 30,
2022
, 21.3% higher than the prior year’s period.




We earn advisory fees based on the average level of AUM in our products.
Advisory and incentive fees were $2.5 million for 2022, $0.5 million higher than
the comparable quarter of 2021 mainly due to higher average AUM. Incentive fees
are not recognized until the uncertainty surrounding the amount of variable
consideration ends and the fee is crystalized, typically on an annual basis on
December 31. There were no material unrecognized incentive fees for the quarter
ended September 30, 2022 compared to $9.4 million for the quarter ended
September 30, 2021.



Expenses



Compensation, which include variable compensation, salaries, bonuses and
benefits, was $3.6 million and $2.8 million for the three month periods ended
September 30, 2022 and September 30, 2021, respectively. Fixed compensation,
which includes salaries and benefits and stock based compensation, increased to
$2.7 million for the 2022 period from $2.3 million in the prior year. 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 2022, these variable payouts
were $0.9 million, an increase from $0.5 million accrued in 2021 driven
primarily by higher management fees in 2022 as a result of higher average AUM.



Management fee expense represents incentive-based and entirely variable
compensation in the amount of 10% of the aggregate pre-tax profits which is
payable to Mario J. Gabelli pursuant to his employment agreement. No management
fee expense was recorded for the three-month period ended September 30, 2022 due
to the year to date pre-tax loss. AC recorded management fee expense of $0.2
million for the three-month period ended September 30, 2021.



Other operating expenses were $2.1 million during the three months
ended September 30, 2022 compared to $(0.8) million in the prior year’s quarter,
driven primarily by the $2.4 million one-time credit recorded in the third
quarter of 2021.



Other



Net gain/(loss) from investments is primarily related to the performance of our
securities portfolio and investments in partnerships. Investment gains/(losses)
were losses of $19.3 million in the 2022 quarter versus gains of $5.7 million in
the comparable 2021 quarter, the decrease driven by market volatility in Q3 2022
brought on by rising interest rates, geo-political factors and accelerating
inflation.



Interest and dividend income decreased to $2.8 million in the 2022 quarter from
$1.1 million in the 2021 quarter primarily driven by increased interest income
on our treasury bills as a result of higher interest rates in 2022.



Shareholder-designated contributions in the 2022 quarter increased to
$1.2 million compared to $0.5 million in the prior year’s quarter, driven by
timing of contributions.



Income taxes



Our provision for income taxes was a benefit of $4.9 million for the quarter
compared to expense of $0.5 million in the comparable period of 2021, primarily
driven by losses in the 2022 period. The effective tax rate for the three months
ended September 30, 2022 and September 30, 2021 was 23.5% and 8.1%,
respectively.



                                       24

——————————————————————————–

Table of Contents

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30,
2021




Overview



Our operating loss for the year to date period was $8.6 million compared to
$16.9 million for the comparable period of 2021. The decrease in operating loss
was driven primarily by no management fee expense, lower compensation accruals
and lower mark to market expense on stock-based compensation in the 2022 year to
date period. Other income/(loss), net was a loss of $68.8 million in the
2022 period compared to a gain of $85.5 million in the prior year's period
primarily due to mark-to-market changes in our securities. The Company recorded
an income tax benefit in the current period of $17.8 million compared to expense
of $15.1 million in the prior year's period. Consequently, our current period
net income/(loss) was $(62.6) million, or $(2.84) per diluted share, compared to
$49.8 million, or $2.25 per diluted share, in the prior year's comparable
period.



Revenues


Total revenues were $7.7 million for the year to date period ended September 30,
2022
, $0.8 million higher than the prior year’s period.

We earn advisory fees based on the average level of AUM in our products.
Advisory fees were $7.4 million for 2022, $0.8 million higher than the
comparable period of 2021 as a result of higher average AUM.



Expenses



Compensation, which include variable compensation, salaries, bonuses and
benefits, was $10.5 million for the nine months ended September 30, 2022, $1.2
million lower than the $11.7 million for the nine months ended September 30,
2021. Fixed compensation, which includes salaries and benefits and stock based
compensation, increased to $7.8 million for the 2022 period from $7.5 million in
the prior year. Salaries and benefits were $4.1 million and $3.8 million in the
2022 and 2021 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 2022, these variable payouts were $2.7 million, down
$1.5 million from $4.2 million in 2021 due to performance in 2022.



Management fee expense represents incentive-based and entirely variable
compensation in the amount of 10% of the aggregate pre-tax profits which is
payable to Mario J. Gabelli pursuant to his employment agreement. No management
fee expense was recorded for the nine-month period ended September 30, 2022 due
to the year to date pre-tax loss. AC recorded management fee expense of $7.2
million for the nine-month period ended September 30, 2021.



Other operating expenses were $5.8 million during the nine months ended
September 30, 2022 compared to $5.0 million in the prior year.



Other



Net gain/(loss) from investments is primarily related to the performance of our
securities portfolio and investments in partnerships. Investment gains/(losses)
were losses of $72.7 million in the 2022 period versus gains of $79.3 million in
the comparable 2021 period. In the 2022 period, our investments, other than
investments in the Arb funds, were impacted mainly on a mark to market basis due
to the market volatility brought on by rising interest rates, geo-political
factors, and accelerating inflation.



Interest and dividend income decreased to $5.5 million in the 2022 period from
$9.1 million in 2021 primarily due to the special dividend declared on our
holdings of GAMCO in the 2021 period, partially offset by higher interest income
on our treasury bills in 2022 driven by higher interest rates.



Shareholder-designated contributions were $1.4 million in 2022 compared to $2.7
million
in 2021, driven by timing of contributions.



Income taxes



Our provision for income taxes was a benefit of $17.8 million for the period
compared to expense of $15.1 million in the comparable period of 2021, primarily
driven by losses in the 2022 period. The effective tax rate for the nine months
ended September 30, 2022 and September 30, 2021 was 23.0% and 22.0%,
respectively.



                                       25

——————————————————————————–

  Table of Contents



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.



Assets under management were $1.8 billion as of September 30, 2022, a decrease
of 1.6% over December 31, 2021 and an increase of 4.3% over September 30, 2021.
The changes were attributable to market appreciation/(depreciation), foreign
currency and investor net inflows/(outflows).



Assets Under Management (in millions)




                                                                                   % Change From
                September 30,      December 31,       September 30,      December 31,       September 30,
                    2022               2021               2021               2021               2021
Merger
Arbitrage      $         1,518     $       1,542     $         1,438              (1.6 )               5.6
Event-Driven
Value                      203               195                 198               4.1                 2.5
Other                       31                44                  44             (29.5 )             (29.5 )
Total AUM      $         1,752     $       1,781     $         1,680              (1.6 )               4.3



Fund flows for the three months ended September 30, 2022 (in millions):



                                                     Market
                                   June 30,       Appreciation/         Foreign        Net Inflows/       September 30,
                                     2022        (Depreciation)       Currency(1)       (Outflows)            2022
Merger Arbitrage                  $    1,591     $            18     $         (39 )   $         (52 )   $         1,518
Event-Driven Value                       174                  (9 )               -                38                 203
Other                                     37                  (1 )               -                (5 )                31
Total AUM                         $    1,802     $             8     $         (39 )   $         (19 )   $         1,752



(1) Reflects the impact of currency fluctuations of non-US dollar classes of
investment funds.

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 decreased on a net basis by $50 million for the quarter ended
September 30, 2022 due to the impact of currency fluctuations of non-US dollar
classes of investment funds of $39 million, net investor outflows of $19
million
, partially offset by market appreciation of $8 million.

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.


Summary cash flow data is as follows (in thousands):



                                                                Nine Months Ended
                                                                  September 30,
                                                              2022            2021
Cash flows provided by (used in):
Operating activities                                       $   (30,558 )   $   488,071
Investing activities                                               251          53,254
Financing activities                                            (5,450 )   

(11,058 )
Net (decrease)/increase in cash, cash equivalents and
restricted cash

                                                (35,757 )    

530,267

Cash, cash equivalents and restricted cash at beginning
of period

                                                      328,594      

39,509

Cash, cash equivalents and restricted cash at end of
period                                                     $   292,837     $   569,776




                                       26

——————————————————————————–

Table of Contents




We 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 September 30, 2022, we had cash and cash equivalents of
$288.2 million, Investments in U.S. Treasury Bills of $133.8 million and $235.8
million of investments net of securities sold, not yet purchased of $3.2
million. Included in cash and cash equivalents are $10.7 million as of September
30, 2022 which were held by consolidated investment funds and may not be readily
available for the Company to access.



Net cash used in operating activities was $30.6 million for the nine months
ended September 30, 2022 due to $90.5 million of net decreases of securities and
net distributions from investment partnerships and our net loss of
$59.6 million, partially offset by $56.0 million of adjustments for noncash
items, primarily losses on investments securities and partnership investments
and deferred taxes and $63.6 million of net receivables/payables. Net cash
provided by investing activities was $0.3 million due to proceeds from
maturities of debt securities held to maturity of $5.1 million, return of
capital on securities of $1.9 million and proceeds from sales of securities of
$0.6 million, partially offset by purchases of securities of $5.9 million and
the impact of deconsolidation of our subsidiary of $1.4 million. Net cash used
in financing activities was $5.5 million resulting from dividends paid of $2.2
million, stock buyback payments of $2.1 million and redemptions of redeemable
noncontrolling interests of $1.2 million.



Net cash provided by operating activities was $488.1 million, which includes the
impact of the $225 million unsettled T-bill rollover trade, for the nine months
ended September 30, 2021. Excluding the impact of that unsettled rollover, net
cash provided by operating activities was $262.8 million, due to $288.5 million
of net decreases of securities and net contributions to investment partnerships
and our net income of $53.4 million, offset by $73.1 million of adjustments for
noncash items, primarily gains on investment securities, partnership investments
and deferred taxes, and $6.0 million of net receivables/payables. Net cash
provided by investing activities was $53.3 million due to purchases of
securities of $2.4 million offset by proceeds from sales of securities of
$16.7 million and return of capital on securities of $39.0 million. Net cash
used in financing activities was $11.1 million, resulting from stock buyback
payments of $7.5 million and dividends paid of $2.2 million.



Critical Accounting Policies and Estimates




The preparation of the condensed consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the condensed consolidated financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ significantly from those estimates. See Note A and
the Company's Critical Accounting Policies in Management's Discussion and
Analysis of Financial Condition and Results of Operations in AC's 2021 Annual
Report on Form 10-K filed with the SEC on March 17, 2022 for details on Critical
Accounting Policies.

© Edgar Online, source Glimpses

Source link

Leave a Comment