Elizabeth Campbell Sean C. Tillman, CFA Asset Managers Have Stable Outlook Brian Estiz, CFA Jenny Panger, CFA With Risks Balanced For 2021 Nigel Greenwood Asset Manager Outlook 2021 January 15, 2021 Key Takeaways – Our outlook on both the traditional and alternative asset managers is stable. – We return to a stable outlook (from negative) on the traditional asset managers after two years that saw 19 negative rating actions, meaning negative outlook, or downgrade, out of 32 negative rating actions and 48 total rating actions. Alternative asset managers saw 10 negative rating actions while investment holding companies rounded out the difference. – We continue to believe that alternative asset managers are better positioned vis-à-vis their traditional peers. That said, we expect the traditional asset managers credit risk to be more balanced over 2021 as accommodative monetary and fiscal policy offsets some of the industry headwinds. Our current ratings incorporate these more balanced conditions and should result in a more equal distribution of upgrades and downgrades over the year. – Mergers and acquisitions (M&A) remain a focal point. 2020 saw a series of large acquisition announcements, both within the sector and involving banks and insurance companies. While the size of the deals may taper, we expect M&A to be a key strategy in the sector as firms reach for greater scale, capital, and capabilities. – In the U.S., which represents the largest pool of assets under management (AUM) and where the majority of ratings are based, S&P Global Economists expect a 4.2% U.S. real GDP rebound in 2021, after a 3.9% contraction in 2020. U.S. unemployment is forecasted to decline to 6.4% by the end of 2021, after ending 2020 at 8.3%. The Fed Funds rate is expected to be zero bound at least until 2023, while 10-year Treasuries are expected to climb to 2% over the same period, 90 basis points (bps) from current levels. The average S&P 500 value is projected to be approximately 3500. Ongoing fiscal support underpins these assumptions, so the backdrop could be volatile. 2 Global Asset Managers 2020 Rating Actions Company Date Rating/Outlook Actions CI Financial Corp. December 2020 Outlook revised to Negative from Stable at 'BBB' Vida Capital, Inc. December 2020 Outlook revised to Negative from Stable at 'B' Edelman Financial Center, LLC November 2020 Outlook revised to Stable from Negative at 'B' Icahn Enterprises L.P. November 2020 Downgraded to 'BB'; Outlook Negative TortoiseEcofin Parent Holdco LLC November 2020 Downgraded to 'CCC+'; Outlook Stable Eaton Vance Corp October 2020 Outlook revised to CreditWatch Developing from Stable at 'A-' StepStone Group Inc. September 2020 Upgraded to 'BB+'; Outlook Stable StepStone Group Inc. September 2020 'BB' Ratings Placed on CreditWatch Positive CORESTATE Capital Holdings S.A. August 2020 Downgraded to 'BB'; Outlook Negative Legg Mason, Inc. July 2020 Upgraded to 'A'; Outlook Stable Sculptor Capital Management, Inc. July 2020 Outlook revised to Negative from Stable at 'BB-' KKR & Co. Inc. July 2020 'A' Ratings Placed on CreditWatch Negative Apollo Global Management, Inc. June 2020 Downgraded to 'A-'; Outlook Stable Franklin Resources, Inc. May 2020 Downgraded to 'A'; Outlook Stable Compass Group Diversified Holdings LLC May 2020 Outlook revised to Negative from Positive at 'B+' CORESTATE Capital Holdings S.A. April 2020 Outlook revised to Stable from Positive at 'BB+' Icahn Enterprises L.P. March 2020 Outlook revised to Negative from Stable at 'BB+' Intermediate Capital Group plc March 2020 Outlook revised to Stable from Positive at 'BBB-' FinCo I LLC March 2020 Outlook revised to Negative from Stable at 'BB' Focus Financial Partners, LLC March 2020 Outlook revised to Stable from Positive at 'BB-' Lazard Group LLC March 2020 Downgraded to 'BBB+'; Outlook Stable First Eagle Investment Management, LLC March 2020 Downgraded to 'BB'; Outlook Stable CI Financial Corp. March 2020 Downgraded to 'BBB'; Outlook Stable Russell Investments Cayman Midco, Ltd. March 2020 Outlook revised to Negative from Stable at 'BB-' TortoiseEcofin Parent Holdco LLC March 2020 Downgraded to 'B'; Outlook Negative Resolute Investment Managers, Inc. March 2020 Outlook revised to Negative from Stable at 'B+' Affiliated Managers Group, Inc. February 2020 Downgraded to 'BBB+'; Outlook Stable Legg Mason Inc. February 2020 'BBB' Ratings Placed on CreditWatch Developing 3 Global Asset Managers 2019 Rating Actions Company Date Rating/Outlook Actions Intermediate Capital Group plc December 2019 Outlook revised to Positive at 'BBB-' Guangzhou Industrial Investment Fund Management Co., Ltd. December 2019 Downgraded to ‘BBB’ from ‘BBB+’, Outlook revised to Stable from Negative CORESTATE Capital Holdings S.A. November 2019 Outlook revised to Positive from Stable at 'BB+' FIL Ltd. October 2019 Downgraded to 'BBB' On Demerger of Investment Arm Franklin Resources, Inc. October 2019 Outlook revised to Negative from Stable at 'A+' Affiliated Managers Group, Inc. October 2019 Outlook revised to Negative from Stable at 'A-' Vida Capital Inc. September 2019 Assigned 'B' Rating; Outlook Stable Nuveen Finance, LLC August 2019 Upgraded to 'A'; Outlook Stable Noah Holdings Ltd. July 2019 Outlook revised to Negative from Stable at 'BBB-' Lazard Group LLC July 2019 Outlook revised to Negative from Stable at 'A-' First Eagle Investment Management LLC July 2019 Outlook revised to Negative from Stable at 'BB+' Tortoise Parent Holdco May 2019 Outlook revised to Negative from Stable at 'BB-' Victory Capital Holdings, Inc. May 2019 Downgraded to 'BB-' from 'BB'; Outlook revised to Stable from Negative Focus Financial Partners, LLC May 2019 Outlook revised to Positive from Stable at 'BB-' EIG Management Company, LLC April 2019 Downgraded to 'BB' from 'BB+'; Outlook revised to Stable from Negative Legg Mason, Inc. April 2019 Outlook revised to Positive from Stable at 'BBB' CIFC LLC March 2019 Upgraded to 'BB'; Outlook Stable BrightSphere Investment Group Inc. March 2019 Outlook revised to Negative from Stable at 'BBB-' CI Financial Corp. February 2019 Outlook revised to Negative from Stable at 'BBB+' Apollo Global Management, Inc. February 2019 Outlook revised to Negative from Stable at 'A' 4 Key Takeaways - Traditionals – We return to a stable outlook on the traditional asset managers after placing the sector on negative at the beginning of 2019. – Our stable outlook reflects the belief that, over the next year, prolonged industry headwinds will be roughly offset by elevated asset prices, supporting AUM levels, and margins. Given the numerous (largely negative) rating actions we have taken over the past two years, we believe that our ratings, at lower levels from two years ago for many, are well positioned to see balanced rating actions this year given our current view of the industry risks and rewards. – To be clear, we do not expect the decades long headwinds to the traditional asset managers to wane in 2021. Our view still incorporates a further shift to passive investing, contributing to fee compression and outflows. Heightened volatility should be a tailwind to active strategies, particularly equity, but so far remains elusive. However, we view these headwinds as mostly offset by global central banks’ support to markets. 5 Key Takeaways - Alternatives – We maintain our stable outlook on the alternative asset managers, which we initially assigned in 2020. – Like last year, we continue to believe that alternative asset managers are less exposed to many of the challenges facing the traditional managers since their AUM is largely locked-up and strategies are harder to index. Alternative asset managers have seen significant net inflows as a result of good investment returns and general expansion-- both in size of average fund and broadening platforms. – Our areas of focus for 2021 include realization activity and investment performance, both of which may be under pressure due to the macroeconomic backdrop. Furthermore, 2020 witnessed strong capital deployment and we will be monitoring if the pace can continue in 2021. Finally, we believe fundraising will be mixed. Distressed related strategies could witness robust inflows while those focused on niche areas, such as energy, could face tougher sledding. – Alternative asset managers partnering with, merging with, or acquiring insurance companies could continue as alternative asset managers seek to diversify their client base and look for additional permanent sources of capital and consequently revenues. 6 Industry – Specific Items We Are Monitoring – We believe that there are several focal points for active management: performance, lowering leverage, M&A, and environmental, social, and governance (ESG). – Performance has been elusive while the shift to passive has pressured fees and fund flows. With both monetary and fiscal policy supporting markets, beta has eclipsed alpha for over the past decade, providing a strong boost to passive strategies. – Few companies have repaid debt over the past several years; instead, they have relied on market appreciation to lower leverage on their balance sheets. Given the market drawdown in March 2020, we witnessed how ephemeral EBITDA can be in times of market volatility. Consequently, lowering leverage through repayment will be focal. – The industry has seen strong M&A activity in recent years, and we expect this trend to continue. Although we expect consolidation within the industry, cross-sector activity may grow. We have seen banks acquiring asset managers to diversify