Associated Capital Group(AC) - 2020 Q4 - Annual Report

Part I Business Associated Capital Group, Inc. (AC) provides alternative investment management services and operates a direct investment business through its subsidiary, Gabelli & Company Investment Advisers, Inc - The company provides alternative investment management services and operates a direct investment business, investing in new and existing businesses[16] - Investment management activities are conducted through its wholly-owned subsidiary Gabelli & Company Investment Advisers, Inc. (GCIA), which serves as a general partner or investment manager to various investment funds[17] - The company's direct investment business is structured around three pillars: Gabelli Private Equity Partners, LLC (GPEP), the SPAC business, and Gabelli Principal Strategies Group, LLC (GPS)[22] Assets Under Management As of December 31, 2020, Associated Capital Group managed approximately $1,351 million in assets, a decrease from $1,716 million at the end of 2019, primarily in Event Merger Arbitrage strategy Assets Under Management (in millions) | Strategy | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Event Merger Arbitrage | $1,126 | $1,525 | | Event-Driven Value | $180 | $132 | | Other | $45 | $59 | | Total | $1,351 | $1,716 | - Total AUM includes $235 million of proprietary capital as of December 31, 2020, compared to $259 million in the prior year[21] Morgan Group Holding Co. Spin-Off The company completed the spin-off of its 83.3% stake in Morgan Group Holding Co., including its institutional research services business, on August 5, 2020 - The spin-off of Morgan Group Holding Co., which included the institutional research services business, was completed on August 5, 2020[25] - AC shareholders received approximately 0.022356 shares of Morgan Group common stock for each share of AC common stock held[25] - The historical financial results of Morgan Group are reported as discontinued operations for all periods presented through August 5, 2020[26] Business Strategy The company's strategy focuses on global growth through its "Private Market Value (PMV) with a Catalyst™" approach, expanding advisory business, direct investments, and international partnerships - Continuing the "Private Market Value (PMV) with a Catalyst™" investing approach, based on Graham & Dodd principles[28] - Growing the Investment Partnerships advisory business by introducing new products and expanding internationally[28] - Leveraging research capabilities to pursue acquisitions, alliances, and direct investments, such as the $175 million IPO of its SPAC, PMV Consumer Acquisition Corp[29] - Pursuing partnerships and joint ventures, particularly with firms that have Asian/European distribution capabilities[30] Regulation The company's operations are subject to extensive U.S. and European regulations, including SEC, ERISA, FATCA, CRS, AIFMD, UCITS, and MiFID II, with Brexit adding regulatory uncertainty - The company and its U.S. subsidiaries are primarily regulated at the federal level by the SEC and the Department of Labor[36] - European activities are impacted by the EU's Alternative Investment Fund Managers Directive (AIFMD), which regulates managers of alternative investment funds and restricts marketing within the EEA[45] - The EU's revised Markets in Financial Instruments Directive (MiFID II) created new rules regarding the use of "soft dollars" to pay for research, requiring firms to pay for it from their own resources or a separate client research payment account[49] Risk Factors As a smaller reporting company, Associated Capital Group, Inc. is not required to provide the information for this item - Smaller reporting companies are not required to provide the information required by this item[59] Properties The company owns its main offices in Greenwich, CT, and acquired a London property in 2020, which is fully leased to its affiliate, GAMCO - The company owns its offices at 191 Mason Street, Greenwich, CT through a wholly owned subsidiary[60] - On March 3, 2020, AC acquired a property in London, UK, which is fully leased to GAMCO[60] Legal Proceedings The company is not subject to material legal proceedings, and management believes potential losses from current matters are not material to its financial condition as of December 31, 2020 - The company is not currently subject to any legal proceedings with claims exceeding 10% of its consolidated assets[62] - Management believes that potential losses from any current legal or regulatory matters are not material to the company's financial condition as of December 31, 2020[62] Part II Market For The Registrant's Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities The company's Class A Stock trades on the NYSE under 'AC', and it has an active, expanded stock repurchase program, with 58,769 shares repurchased in Q4 2020 - The company's Class A Stock is traded on the NYSE under the symbol AC[63] Class A Stock Repurchases (Q4 2020) | Period | Total Shares Repurchased | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | Oct 2020 | 27,668 | $33.93 | | Nov 2020 | 5,064 | $35.25 | | Dec 2020 | 26,037 | $35.69 | | Total Q4 | 58,769 | $34.82 | - As of December 31, 2020, 893,102 shares remained available for repurchase under the publicly announced program[65] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, the company's AUM decreased to $1,351 million, total revenues fell 14.5% to $19.0 million, and net income decreased to $18.8 million, while maintaining strong liquidity - The COVID-19 pandemic and resulting economic dislocations did not have a significant adverse impact on the company's AUM or operations, with most employees working remotely without material disruption[69][70] Financial Highlights (Year Ended Dec 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | AUM (end of period, in millions) | $1,351 | $1,716 | | Average AUM (in millions) | $1,399 | $1,621 | | Net income per share – diluted ($) | $0.84 | $1.74 | | Book Value Per Share ($) | $40.36 | $39.89 | - The company ended 2020 with approximately $911 million in cash and investments, providing flexibility for strategic objectives[76] Assets Under Management Highlights Total AUM decreased by 21.3% to $1,351 million in 2020, primarily due to $450 million net outflows from a single institutional client redemption in the Event Merger Arbitrage strategy AUM by Strategy (in millions) | Strategy | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Event Merger Arbitrage | $1,126 | $1,525 | (26.2)% | | Event-Driven Value | $180 | $132 | 36.4% | | Other | $45 | $59 | (23.7)% | | Total | $1,351 | $1,716 | (21.3)% | Changes in AUM during 2020 (in millions) | Strategy | Beginning AUM | Inflows | Outflows | Investment Return | Ending AUM | | :--- | :--- | :--- | :--- | :--- | :--- | | Event Merger Arbitrage | $1,525 | $212 | $(690) | $79 | $1,126 | | Event-Driven Value | $132 | $64 | $(19) | $3 | $180 | | Other | $59 | $1 | $(18) | $3 | $45 | | Total AUM | $1,716 | $277 | $(727) | $85 | $1,351 | - The decline in AUM was primarily due to a $450 million net outflow, largely from a redemption by one institutional client following its merger[81] Operating Results (2020 vs. 2019) Net income decreased to $18.8 million in 2020 from $39.2 million in 2019, driven by lower net gains from investments and a 14.5% decrease in total revenues Revenue Breakdown (in thousands) | Revenue Type | 2020 | 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Investment advisory and incentive fees | $18,288 | $22,148 | $(3,860) | (17.4)% | | Other revenues | $695 | $57 | $638 | 1,119.3% | | Total revenues | $18,983 | $22,205 | $(3,222) | (14.5)% | - Compensation expense decreased by $4.4 million to $19.4 million in 2020, primarily due to lower variable payouts tied to performance fees[88] - Net gains from investments decreased to $36.9 million in 2020 from $60.8 million in 2019, mainly due to mark-to-market changes in the proprietary portfolio[89] - The effective tax rate for 2020 was 31.4%, higher than the statutory 21% rate, primarily due to state income taxes, a valuation allowance on charitable contributions, and foreign investments[90] Liquidity and Capital Resources The company maintained strong liquidity with $39.5 million in cash and equivalents, with net cash used in operating activities at $279.5 million and net cash provided by financing activities at $150.9 million in 2020 Summary Cash Flow Data (in thousands) | Activity | Year Ended 2020 | Year Ended 2019 | | :--- | :--- | :--- | | Operating activities (continuing) | $(279,483) | $(41,964) | | Investing activities (continuing) | $(174,072) | $(5,058) | | Financing activities (continuing) | $150,949 | $(11,584) | | Net decrease in cash | $(302,492) | $(60,976) | - At December 31, 2020, the company had $39.5 million in cash and cash equivalents, $344.4 million in U.S. Treasury Bills, and $527.0 million in other investments (net)[95] Critical Accounting Policies Key accounting policies involve significant judgment in revenue recognition, investment valuation, entity consolidation, and income tax accounting, with incentive fees recognized at the end of annual measurement periods - Revenue is primarily derived from investment advisory and incentive fees. Incentive fees are generally recognized at the end of an annual measurement period[102][103] - Investments in securities are recorded at fair value, with gains and losses recorded on a trade date basis[105] - The company consolidates entities where it is determined to be the primary beneficiary, defined as having both the power to direct significant activities and the obligation/right to absorb significant losses/benefits[110] - The provision for income taxes is computed using the asset and liability method, requiring recognition of deferred tax assets and liabilities. A valuation allowance is recorded if it is more likely than not that deferred tax assets will not be realized[115] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2020 and 2019, including income, comprehensive income, financial condition, equity, and cash flow statements, along with detailed notes Consolidated Statements of Income For 2020, total revenues were $19.0 million and net income was $18.8 million ($0.84 per diluted share), a decrease from 2019 due to lower net investment gains and advisory fees Consolidated Income Statement Highlights (in thousands) | Line Item | 2020 | 2019 | | :--- | :--- | :--- | | Total revenues | $18,983 | $22,205 | | Total expenses | $31,452 | $35,465 | | Operating loss | $(12,469) | $(13,260) | | Total other income, net | $42,352 | $70,483 | | Income before income taxes | $29,883 | $57,223 | | Net income attributable to AC shareholders | $18,816 | $39,188 | Earnings Per Share (Diluted) ($) | Category | 2020 | 2019 | | :--- | :--- | :--- | | Continuing operations | $0.87 | $1.82 | | Discontinued operations | $(0.03) | $(0.08) | | Total | $0.84 | $1.74 | Consolidated Statements of Financial Condition As of December 31, 2020, total assets increased to $1,174.5 million from $1,010.9 million in 2019, driven by investments in U.S. Treasury Bills, with total equity at $898.9 million Consolidated Balance Sheet Highlights (in thousands) | Line Item | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $39,509 | $342,001 | | Investments in U.S. Treasury Bills | $344,453 | $29,037 | | Investments in U.S. Treasury Bills held in trust | $175,040 | $0 | | Total assets | $1,174,545 | $1,010,906 | | Total liabilities | $66,328 | $63,086 | | Total AC Group, Inc. equity | $898,938 | $896,432 | Notes to Consolidated Financial Statements These notes provide detailed information on the company's organization, accounting policies, investments, fair value measurements, income taxes, related party transactions, equity, and discontinued operations - On September 22, 2020, the company's SPAC, PMV Consumer Acquisition Corp., completed a $175 million IPO. AC has a controlling financial interest and consolidates PMV in its financial statements (Note A)[154][155] - The company's revenue is primarily from asset-based advisory fees, recognized over time, and performance-based fees, which are generally recognized at the end of a measurement period when uncertainty is resolved (Note C)[210][211] - The company holds a significant investment in its affiliate, GAMCO (GBL), valued at $48.9 million as of December 31, 2020 (Note I)[269] - The spin-off of Morgan Group was completed on August 5, 2020, and its historical results are presented as discontinued operations (Note N)[289] Controls and Procedures Management concluded that disclosure controls were ineffective as of December 31, 2020, due to a material weakness from insufficient technical accounting personnel and lack of segregation of duties, with a remediation plan in place - Management concluded that disclosure controls and procedures were not effective as of December 31, 2020[295] - A material weakness in internal control over financial reporting was identified, caused by insufficient personnel with technical accounting skills and a resulting lack of segregation of duties[300] - A remediation plan is in place, which includes hiring additional qualified personnel and reassigning financial reporting responsibilities to enhance segregation of duties[303] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership Information for Items 10 through 14, covering directors, executive officers, corporate governance, compensation, and security ownership, is incorporated by reference from the company's 2021 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accountant Fees (Item 14) is incorporated by reference from the Company's 2021 Proxy Statement[305][308] Part IV Exhibits, Financial Statement Schedules This section lists all documents filed as part of the Form 10-K report, including consolidated financial statements and a detailed list of exhibits, with financial statement schedules omitted as not required - This section provides a list of all documents filed as part of the report, including financial statements and exhibits[311] - Financial statement schedules are omitted as they are not required or applicable[311]