Associated Capital Group, Inc. [AC] Filings

Forward-Looking Statements

Our disclosure and analysis in this report and in documents that are incorporated by reference contain some forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements because they do not relate strictly to historical or current facts. You should not place undue reliance on these statements. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. They also appear in any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance of our products, expenses, the outcome of any legal proceedings, and financial results.

Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ from our expectations or beliefs include, without limitation: the adverse effect from a decline in the securities markets; a decline in the performance of our products; a general downturn in the economy; changes in government policy or regulation; changes in our ability to attract or retain key employees; and unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations. We also direct your attention to any more specific discussions of risk contained in our other public filings or in documents incorporated by reference here or in prior filings or reports.

We are providing these statements as permitted by the Private Litigation Reform Act of 1995. We do not undertake to update publicly any forward-looking statements if we subsequently learn that we are unlikely to achieve our expectations or if we receive any additional information relating to the subject matters of our forward-looking statements.

Definitions

Unless we have indicated otherwise, or the context otherwise requires, references in this report to “Associated Capital Group, Inc.,” “AC Group,” “the Company,” “AC,” “we,” “us” and “our” or similar terms are to Associated Capital Group, Inc., its predecessors and its subsidiaries through which our operations are actually conducted. “GAMCO”, “GAMI”, or similar terms refer to our former parent GAMCO Investors, Inc.

The information provided in response to Item 7. Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations is provided as a supplement to, and should be read in conjunction with, the Consolidated Financial Statements and the notes thereto included in Item 8 to this report.

PART 1:         OVERVIEW

Giving Back to Society

We are committed to allow our shareholders to choose the recipients of our charitable contributions. Based on the program created by Warren Buffett at Berkshire Hathaway, our corporate charitable giving is unique in that the recipients of AC's charitable contributions are chosen directly by our shareholders, rather than by (y)our corporate entity.

On August 9, 2023, the Board of Directors approved a $0.20 per share shareholder designated charitable contribution (“SDCC”) for registered shareholders. This was an increase from last year's $0.15 per share contribution. In the first quarter of 2024, we completed the distribution of approximately $4.0 million to various organizations selected by our shareholders for our 2023 program. Since our 2015 spin off as a public company, the shareholders of AC have donated approximately $38 million, including the most recent SDCC, to over 190 501(c)(3) organizations that address a broad range of local, national and international concerns.

(Y)our Business

We are a Delaware corporation, incorporated in 2015, that provides alternative investment management services and operates a direct investment business to invest and control businesses that fit our criteria over time. 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.

In merger arbitrage, the goal is to earn absolute positive returns. We introduced our first limited partnership, Gabelli Arbitrage (renamed Gabelli Associates Fund), in February 1985. Our typical investment process begins when a deal is announced, 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 single deal-specific risks. Since inception, we have compounded net annual returns of 7.1% with 37 of 39 positive years, net, overall. As a result, a $10 million investment by a tax free vehicle in this fund at its inception would be worth more than $140 million as of December 31, 2023. In addition, the value of the investment would have exhibited significantly less volatility than that of broad equity indices.

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.

The Company is reviewing the launch of new products, including private equity, direct investment and other funds, which leverage and complement our core strengths in fundamental investing.

Assets Under Management

As of December 31, 2023, we managed approximately $1.59 billion in assets vs. $1.84 billion at December 31, 2022. The following table sets forth total AUM, including investment funds and separately managed accounts, for the dates shown:

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:

Our direct investing efforts are organized to invest in 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 invest primarily in funds that we manage, provide seed capital for new products, expand our geographic presence, develop new markets and pursue strategic acquisitions and alliances.

Business Strategy

Our business strategy targets global growth through leveraging our proven asset management strengths, including the long-term performance record of our alternative investment funds, diverse product offerings and experienced investment, research and client relationship professionals. In order to achieve performance and growth in AUM and profitability, we are pursuing a strategy which includes the following key elements:

Continuing an Active Fundamental Investment Approach

Since 1985, our results demonstrate our core competence in absolute return, event driven investing through varying market cycles to earn rates of return independent of the broad markets’ direction. Our proprietary “Private Market Value (PMV) with a Catalyst^TM” investing approach remains the principal investment philosophy guiding our global research efforts and forms the backbone of our M&A investment activities. The PMV methodology is based on investing principles first articulated by Graham & Dodd, and further refined by our Executive Chair, Mario J. Gabelli. Our M&A portfolios provide access to Gabelli’s deep history of investing in mergers and is a natural extension of our long standing research-driven investment process oriented toward undervalued assets based on our PMV methodology. The investment team takes an active approach to merger investing, analyzing the various qualitative and quantitative aspects of the transaction from announcement to deal completion, coupled with our fundamental understanding of business valuations, building and monitoring transactions in the portfolio over the deal timeline.

Growing our Investment Partnerships Advisory Business

We intend to grow our Investment Partnerships advisory operations by gaining share with existing products and introducing new products within our core competencies, such as event and merger arbitrage. In addition, we intend to grow internationally.

Capitalizing on Acquisitions and Alliances - Direct Investments

We intend to leverage our research and investment capabilities by pursuing acquisitions and alliances that will broaden our product offerings and add new sources of distribution. In addition, we may make direct investments in operating businesses using a variety of techniques and structures. 

Opportunities in Private Equity

One of our initiatives is to launch a private equity business to capitalize on the developing opportunities in the capital market place.

Pursuing Partnerships and Joint Ventures

We plan to pursue partnerships and joint ventures with firms that fit with AC’s product quality and that can provide Asian/European distribution capabilities that would complement our U.S. equity product expertise. We expect to target opportunities for investors interested in non-market correlated returns.

Competition

The alternative asset management industry is intensely competitive. We face competition in all aspects of our business from other managers in the United States and around the globe. We compete with alternative investment management firms, insurance companies, banks, brokerage firms and financial institutions that offer products that have similar features and investment objectives. Many of these investment management firms are subsidiaries of large diversified financial companies and may have access to greater resources than we do. Many are larger in terms of AUM and revenues and, accordingly, have larger investment and sales organizations and related budgets. Historically, we have competed primarily on the basis of the long-term investment performance of our investment products. We have recently taken steps to increase our distribution channels, brand awareness and marketing efforts.

The market for providing investment management services to institutional and private wealth management clients is also highly competitive. Selection of investment advisors by U.S. institutional investors is often subject to a screening process and to favorable recommendations by investment industry consultants. Many of these investors require their investment advisors to have a successful and sustained performance record, often five years or longer, and focus on one-year and three-year performance records. Currently, we believe that our investment performance record would be attractive to potential new institutional and private wealth management clients. While we have significantly increased our AUM from institutional investors since our founding, no assurance can be given that our efforts to obtain new business will be successful.

Intellectual Property

Service marks and brand name recognition are important to our business. We have rights to the service marks under which our products are offered. We have rights to use the “Gabelli” name, and the “GAMCO” brand, pursuant to a non-exclusive, royalty-free license agreement we have entered into with GAMCO (the “Service Mark and Name License Agreement”). We can use these names with respect to our funds, collective investment vehicles, Investment Partnerships and other investment products pursuant to the Service Mark and Name License Agreement. The Service Mark and Name License Agreement has a perpetual term, subject to termination only in the event we are not in compliance with its quality control provisions. Pursuant to a 1999 agreement, Mario J. Gabelli assigned his rights, title and interests in and to the “Gabelli” name for use in connection with investment management services and institutional research services to GAMCO. In addition, the funds managed by Mario J. Gabelli outside GAMCO and AC entered into a license agreement with GAMCO permitting them to continue limited use of the “Gabelli” name under specified circumstances.

Regulation

Virtually all aspects of our businesses are subject to federal, state and foreign laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and investors and the financial markets. Under such laws and regulations, agencies that regulate investment advisors have broad powers, including the power to limit, restrict or prohibit such an advisor from carrying on its business in the event that it fails to comply with such laws and regulations. Possible sanctions that may be imposed for non-compliance include civil and criminal liability, the suspension of individual employees, injunctions, limitations on engaging in certain lines of business for specified periods of time, revocation of the investment advisor and other registrations, censures and fines.

Existing U.S. Regulation Overview

AC and certain of its U.S. subsidiaries are currently subject to extensive regulation, primarily at the federal level, by the SEC, the United States Department of Labor, and other regulatory bodies. Certain of our U.S. subsidiaries are also subject to anti-terrorist financing, privacy, and anti-money laundering regulations, as well as economic sanctions laws and regulations established by these agencies.

The Advisers Act

GCIA is registered with the SEC under the Advisers Act and is regulated by and subject to examination by the SEC. The Advisers Act imposes numerous obligations on registered investment advisers including fiduciary duties, disclosure obligations and record keeping, operational and marketing requirements. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from censure to termination of an investment adviser’s registration. The failure of GCIA to comply with the requirements of the SEC could have a material adverse effect on us.

We derive substantially all of our revenues from investment advisory services under investment management agreements. Under the Advisers Act, our investment management agreements cannot be assigned without the client’s consent.

Employee Retirement Income Security Act of 1974 (“ERISA”)

GCIA is subject to ERISA and to regulations promulgated thereunder, insofar as it is a “fiduciary” under ERISA with respect to certain of its clients. ERISA and applicable provisions of the Internal Revenue Code of 1986, as amended, impose certain duties on persons who are fiduciaries under ERISA and prohibit certain transactions involving ERISA plan clients. Our failure to comply with these requirements could have a material adverse effect on us.

Anti-Tax Evasion Legislation

Our global business may be impacted by the Foreign Account Tax Compliance Act (“FATCA”), which was enacted in 2010 and introduced expansive new investor onboarding, withholding and reporting rules aimed at ensuring U.S. persons with financial assets outside of the United States pay appropriate taxes. In many instances, however, the precise nature of what needs to be implemented will be governed by bilateral Intergovernmental Agreements (“IGAs”) between the United States and the countries in which we do business or have accounts. While many of these IGAs have been put into place, others have yet to be concluded.

The Organization for Economic Cooperation and Development (“OECD”) has developed the Common Reporting Standard (“CRS”) to address the issue of offshore tax evasion on a global basis. Aimed at maximizing efficiency and reducing cost for financial institutions, the CRS provides a common standard for due diligence, reporting and exchange of information regarding financial accounts. Pursuant to the CRS, participating jurisdictions will obtain from reporting financial institutions, and automatically exchange with partner jurisdictions on an annual basis, financial information with respect to all reportable accounts identified by financial institutions on the basis of common due diligence and reporting procedures. As a result, the Investment Partnerships will be required to report information on the investors of the Partnerships to comply with the CRS due diligence and reporting requirements, as adopted by the countries in which the Investment Partnerships are organized.

The FATCA and CRS rules will impact both U.S. and non-U.S. Investment Partnerships and separately managed accounts and subject us to extensive additional administrative burdens. Our business could also be impacted to the extent there are other changes to tax laws, such as the recent tax reform legislation. Such changes could adversely affect our financial results.

The Patriot Act

The USA Patriot Act of 2001 contains anti-money laundering and financial transparency laws and mandates various regulations applicable to financial services companies, including standards for verifying client identification at account opening, and obligations to monitor client transactions and report suspicious activities. Anti-money laundering laws outside of the United States contain some similar provisions. Our failure to comply with these requirements as applicable to us could have a material adverse effect on us.

Laws and Other Issues Relating to Taking Significant Equity Stakes in Companies

Investments by AC, its affiliates, and those made on behalf of their respective advisory clients and Investment Partnerships often represent a significant equity ownership position in an issuer’s equity. This may be due to the fact that AC is deemed to be a member of a “group” that includes GAMCO, an entity under common control with AC, and, therefore, may be deemed to beneficially own the securities owned by other members of the group under applicable securities regulations. As of December 31, 2023, by virtue of being a member of the group, AC was deemed to hold five percent or more beneficial ownership with respect to approximately 64 equity securities. This activity raises frequent regulatory, legal and disclosure issues regarding our aggregate beneficial ownership level with respect to portfolio securities, including issues relating to issuers’ stockholder rights plans or “poison pills”, various federal and state regulatory limitations, including (i) state gaming laws and regulations, (ii) federal communications laws and regulations, (iii) federal and state public utility laws and regulations, (iv) federal proxy rules governing stockholder communications, and (v) federal laws and regulations regarding the reporting of beneficial ownership positions. Our failure to comply with these requirements could have a material adverse effect on us.

Potential Legislation Relating to Private Pools of Capital

We manage a variety of private pools of capital, including hedge funds. Congress, regulators, tax authorities and others continue to explore increased regulation related to private pools of capital, including changes with respect to: investor eligibility; trading activities, record-keeping and reporting; the scope of anti-fraud protections; safekeeping of client assets; tax treatment; and a variety of other matters. AC may be materially and adversely affected by new legislation, rule-making or changes in the interpretation or enforcement of existing rules and regulations imposed by various regulators.

Existing European Regulation Overview

Alternative Investment Fund Managers Directive

Our European activities are impacted by the European Union’s (“EU”) Alternative Investment Fund Managers Directive (“AIFMD”). AIFMD regulates managers of, and service providers to, a broad range of alternative investment funds (“AIFs”) domiciled within and, potentially, outside the EU. AIFMD also regulates the marketing of all AIFs inside the European Economic Area. AIFMD’s requirements restrict AIF marketing and impose additional compliance and disclosure obligations on AC regarding items such as remuneration, capital requirements, leverage, valuation, stakes in EU companies, depositaries, domicile of custodians and liquidity management. These compliance and disclosure obligations and the associated risk management and reporting requirements will subject us to additional expenses.

Undertakings for Collective Investment in Transferable Securities

The EU has also adopted directives on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (“UCITS”) impacting depositary functions, remuneration policies and sanctions. The latest initiative in this area, UCITS V, seeks to align the depositary regime, remuneration rules and sanctioning powers of regulators under the UCITS Directive with the requirements of AIFMD.

Similarly, the European Securities and Markets Authority recently revised its guidelines for exchange-traded and other UCITS funds. These guidelines introduced new collateral management requirements for UCITS funds concerning collateral received in the context of derivatives using Efficient Portfolio Management (“EPM”) techniques (including securities lending) and over-the-counter derivative transactions. We are following the guidelines with respect to our collateral management arrangements applicable to the EPM of the UCITS funds for which GCIA acts as a sub-advisor. The costs of complying with increasing regulation in the EU may negatively impact the net performance of the UCITS fund that GCIA sub advises and therefore may result in decreased remuneration to GCIA for this sub advisory activity.

Markets in Financial Instruments Directive

The EU’s revised Markets in Financial Instruments Directive (“MiFID II”), which was fully implemented in 2018, created specific new rules regarding the use of “soft dollars” to pay for research. A MiFID licensed investment firm that provides portfolio management services or independent investment advisory services to clients may not pay for third-party research with soft dollars generated through client trading activity. Research must be paid for either (i) by the investment firm out of its own resources, or (ii) through a separate research payment account for each client to pay for the research. While currently GCIA is not directly subject to MiFID II: (a) GCIA may be invoiced separately by any EU brokers from whom it purchases research in the future; and (b) clients may begin to require that GCIA “unbundle” research payments from commission trading.

The Financial Conduct Authority (“FCA”) currently regulates Gabelli Securities International (UK) Limited (“GSIL UK”), our MiFID licensed entity in the United Kingdom. Authorization by the FCA is required to conduct certain financial services-related business in the United Kingdom under the Financial Services and Markets Act 2000. The FCA’s rules adopted under that Act provide requirements dealing with a firm’s capital resources, senior management arrangements, conduct of business, interaction with clients and systems and controls. The FCA supervises GSIL UK through a combination of proactive engagement, event-driven and reactive supervision and thematic-based reviews in order to monitor our compliance with regulatory requirements. Breaches of the FCA’s rules may result in a wide range of disciplinary actions against GSIL UK and/or its employees.

Clients whose assets we manage in the EU are additionally subject to EU regulations on OTC derivatives which require (i) the central clearing of standardized OTC derivatives, (ii) the application of risk-mitigation techniques to non-centrally cleared OTC derivatives and (iii) the reporting of all derivative contracts.

Regulatory Matters Generally

The investment management industry is likely to continue to face a high level of regulatory scrutiny and to become subject to additional rules designed to increase disclosure, tighten controls and reduce potential conflicts of interest. In addition, the SEC has substantially increased its use of focused inquiries which request information from investment advisors regarding particular practices or provisions of the securities laws. We may be subject to these inquiries in the normal course of our business. Changes in laws, regulations and administrative practices by regulatory authorities, and the associated compliance costs, have increased our cost structure and could in the future have a material adverse impact. Although we have installed procedures and utilize the services of experienced administrators, accountants and lawyers to assist us in adhering to regulatory guidelines and satisfying these requirements, and maintain insurance to protect ourselves in the case of client losses, there can be no assurance that the precautions and procedures that we have instituted and installed, or the insurance that we maintain to protect ourselves in case of client losses, will protect us from all potential liabilities.

Employees

On March 6, 2024, we had a full-time staff of 25 teammates, of whom 8 served in the portfolio management, research and trading areas, 8 served in the marketing and shareholder servicing areas and 9 served in the finance, legal, operations and administrative areas. We also avail ourselves of services provided by GAMCO, in accordance with a transitional services agreement that was entered into with GAMCO as part of AC’s spin-off from GAMCO on November 30, 2015, and also have access to their global team of research analysts and industry conferences hosted by Gabelli Funds.

Status as a Smaller Reporting Company

We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K. As a result, we are eligible to take advantage of certain exemptions from various reporting requirements that are not available to other public companies that are not “smaller reporting companies”.

Our website address is www.associated-capital-group.com. Information on our website is not incorporated by reference herein and is not part of this report. We provide a link on our website to the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All such filings on our website are available free of charge. In addition, these reports and the other documents we file with the SEC are available at www.sec.gov.

Smaller reporting companies are not required to provide the information required by this item.

None.

Cybersecurity Risk Management and Strategy

We have developed and implemented a cybersecurity risk management program intended to protect the confidentiality, integrity and availability of our critical systems and information.

Our cybersecurity risk management program is aligned with the Company’s business strategy.  It shares common methodologies, reporting channels and governance processes that apply to other areas of enterprise risk, including legal, compliance, strategic, operational, and financial risk.  Key elements of our cybersecurity risk management program include:

In the last three years, the Company has not experienced any material cybersecurity incidents, and expenses incurred from cybersecurity incidents were immaterial. 

The operations of the Company are dependent on technology information and communications systems.  A failure of any such system, or a security breach or cyberattack related thereto, could significantly disrupt the Company’s operations.  The service providers of the Company are also subject to cybersecurity threats.  If the Company and/or any service provider of the Company fails to adopt, implement or adhere to adequate cybersecurity measures, or in the event of a breach of any network, information relating to the Company or the Company’s operations, as well as personal information relating to the Company’s clients, may be lost, damaged or corrupted, or improperly accessed, used or disclosed.

Any system failure, security breach or cyberattack on the Company and/or any service provider of the Company could cause the Company to suffer financial loss, disruption to its business, including its trading capabilities and its ability to transfer payments, increased operating costs, liability to third parties, regulatory intervention and reputational damage, among other things, any one or all of which could have a material adverse effect on the Company.

Cybersecurity Governance

Our Board of Directors is responsible for overseeing cybersecurity threats, among other things. Our Chief Technology Officer, who reports to our Chief Executive Officer and President, provides our senior management and our Board of Directors periodic reports on our cybersecurity risks and any material cybersecurity incidents.

Our cybersecurity risk management team, in conjunction with various information technology, internal audit, legal and compliance personnel, has primary responsibility for our overall cybersecurity risk management program.

Our team of cybersecurity professionals, led by our Chief Technology Officer, who has over 20 years of experience in the cybersecurity space and advanced training in the field of cybersecurity and technology, has primary responsibility for our internal cybersecurity personnel and our retained external cybersecurity consultants.

Our information technology team also monitors the prevention, detection, mitigation, and remediation of cybersecurity risks and incidents through various means, which may include briefings with internal personnel, threat intelligence and other information obtained from governmental, public or private sources, including external consultants engaged by us, and alerts and reports produced by security tools deployed in the information technology environment.

Our offices are owned by a wholly-owned subsidiary of AC and are located at 191 Mason Street, Greenwich, CT 06830. A portion of the space is leased to affiliates. AC received $133.8 thousand and $116.4 thousand from affiliates (primarily GAMCO) pursuant to lease agreements for this property for 2023 and 2022, respectively. These amounts are included in other revenues in the consolidated statements of income.

AC acquired 3 St. James Place, London, UK on March 3, 2020, which was fully leased to GAMCO commencing 2021. For the years ended December 31, 2023 and 2022, the Company received $227.1 thousand and $309.8 thousand, respectively, under the lease agreement. These amounts are included in other revenues in the consolidated statements of income.

During 2023 and 2022, AC paid $74.0 thousand and $72.1 thousand, respectively, to GAMCO pursuant to a sublease based on the percentage of square footage occupied by several AC teammates (including pro rata allocation of common space). These amounts are included in other operating expenses in the consolidated statements of income.

From time to time, we may be named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. We are also subject to governmental or regulatory examinations or investigations. Examinations or investigations can result in adverse judgments, settlements, fines, injunctions, restitutions or other relief. For any such matters, the consolidated financial statements include the necessary provisions for losses that we believe are probable and estimable. Furthermore, we evaluate whether there exist losses which may be reasonably possible and, if material, make the necessary disclosures. Management is not aware of any probable or reasonably possible losses at December 31, 2023. See also Note 12, Guarantees, Contingencies and Commitments, to the consolidated financial statements in Part II, Item 8 of this Form 10-K.

Not applicable.

PART II

Market for our Stock, Dividends and Stock Repurchase Program

Shares of our Class A common stock are traded on the New York Stock Exchange ("NYSE") under the symbol AC.

As of March 6, 2024, there were 114 and 18 holders of record of the Company’s Class A and Class B common stock, respectively. These figures do not include beneficial holders of Class A shares held in “street” name at various brokerage firms.

In December 2015, the Board of Directors established a stock repurchase program authorizing the Company to repurchase up to 500,000 shares. On February 7, 2017, the Board of Directors reset the available number of shares to be purchased under the stock repurchase program to 500,000 shares. On August 3, 2017 and May 8, 2018, the Board of Directors authorized the repurchase of an additional 1 million and 500,000 shares, respectively. Our stock repurchase program is not subject to an expiration date. Shares may be purchased from time to time in the future, however share repurchase amounts and prices may vary after considering a variety of factors, including the Company's financial position, earnings, other alternative uses of cash, macroeconomic issues, and market conditions.

The following table provides information for our repurchase of our Class A common stock during the quarter ended December 31, 2023:

(1): On February 6, 2024, the Board of Directors authorized the repurchase of an additional 350,000 shares. 

We have adopted the 2015 Stock Award and Incentive Plan (the “Equity Compensation Plan”). A maximum of 2.0 million shares of Class A Stock have been reserved for issuance as approved by the Company’s stockholders at the annual meeting of stockholders held on May 3, 2016. The Company withdrew the registration statement covering the issuance of those shares as of December 29, 2017.

The number of shares remaining available for future issuance under equity compensation plans is 1.1 million.

Smaller reporting companies are not required to provide the information required by this item.

Overview

Associated Capital Group, Inc. (NYSE: AC), a company incorporated under the laws of Delaware, provides alternative investment management services and operates a direct investment business. Our revenues are based primarily on the Company’s level of assets under management (“AUM”).

Financial Highlights

Financial Performance

The following is a summary of the Company’s financial performance for the quarters and years ended December 31, 2023 and 2022:

Financial Condition Overview

The Company consolidates certain investment partnerships for which it has a controlling financial interest. The following table reflects the net impact of the consolidated investment partnerships (“Consolidated Entities”) on the consolidated statements of financial condition (in thousands):

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 the conflict in the Middle East and the Russian invasion of Ukraine and their 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 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 income before management fee and income taxes and excludes the impact of consolidating entities and is 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 attributable to noncontrolling interests represents the share of net income attributable to third-party limited partners of certain investment partnerships we consolidate. Please refer to Notes 1 and 5 in our consolidated financial statements included elsewhere in this report.

Consolidated Statements of Financial Condition

We ended 2023 with approximately $867.1 million in cash and investments, net of securities sold, not yet purchased of $5.9 million. This includes $317.5 million of cash and cash equivalents; $89.2 million of short-term U.S. Treasury obligations; $190.7 million of securities, net of securities sold, not yet purchased, including shares of GAMCO with a market value of $45.6 million; and $269.7 million invested in affiliated and third-party funds and partnerships, including investments in closed end funds managed by affiliates (primarily GAMCO) which have a value of $53.0 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 equity attributable to shareholders of the Company was $907.0 million or $42.11 per share as of December 31, 2023, compared to $890.2 million or $40.48 per share as of the prior year-end. Shareholders’ equity per share is calculated by dividing the total Associated Capital Group, Inc. equity by the number of common shares outstanding. 

Assets Under Management Highlights

We reported assets under management as follows (dollars in millions):

(a) Includes $621 and $856 of sub-advisory AUM related to GAMCO International SICAV - GAMCO Merger Arbitrage, $69 and $70 of sub-advisory AUM related to Gabelli Merger Plus+ Trust Plc and $240 and $206 of 100% U.S. Treasury Fund managed by GAMCO at December 31, 2023 and 2022, respectively.

(b) Includes $236 million and $239 million of proprietary capital, respectively.

Changes in our AUM during 2023 were as follows (dollars in millions):

(1) Reflects the impact of currency fluctuations in non-US dollar denominated 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 $251 million for the year ended December 31, 2023 due to net investor outflows of $325 million, offset partially by market appreciation of $68 million and the impact of currency fluctuations of $6 million from non-US dollar classes of investment funds. In the merger arbitrage strategy, most of the outflows ($265 million) were tied to GAMCO Merger Arbitrage UCITS (a Luxembourg entity organized as an Undertaking for Collective Investment in Transferrable Securities). These outflows were generally from reallocations to other asset classes as a merger arbitrage fund’s nominal expected return is partly a function of the risk free rate, which increased from less than 1% at the end of 2021 to over 4% by the end of 2022 and was sustained at or above 5% for the entirety of 2023.

Operating Results for the Year Ended December 31, 2023 as Compared to the Year Ended December 31, 2022

Revenues

Total revenues were $12.7 million for the year ended December 31, 2023, $2.5 million lower than total revenues of $15.2 million for the year ended December 31, 2022. Total revenues by type were as follows (dollars in thousands):

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 $12.3 million for 2023 compared to $14.8 million for 2022, a decrease of $2.5 million. This decrease is the result of lower performance-based incentive fees and lower average AUM in 2023.

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 $3.5 million in 2023, down $1.6 million from $5.1 million in 2022.

Other revenues: Other revenues were $0.4 million in 2023 and $0.4 million in 2022.

Expenses

Compensation: Compensation, which includes variable compensation, salaries, bonuses and benefits, was $17.2 million for the year ended December 31, 2023, a decrease of $1.7 million from $18.9 million for the year ended December 31, 2022. Fixed compensation expense, which includes salaries, stock-based compensation, bonuses and benefits, decreased to $10.9 million in 2023 from $11.5 million in 2022. 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 2023, these variable payouts (based on the investment performance of the products with incentive fees) were $6.3 million, a decrease of $1.1 million from $7.4 million in 2022 driven by lower revenues.

Management fees: Management fee expense is incentive-based and entirely variable compensation equal to 10% of income before management fee and income taxes and excludes the impact of consolidating entities, and is paid to the Executive Chair or his designees pursuant to his employment agreement with AC. In 2023 AC recorded management fee expense of $5.4 million compared to no management fee expense in 2022 due to pre-tax losses.

Other operating expenses: Our other operating expenses were $6.9 million in 2023 compared to $7.6 million in 2022.

Investment and other non-operating income/(expense), net

Net gain/(loss) from investments: Net gain/(loss) from investments is directly related to the performance of our proprietary portfolio. For the year ended December 31, 2023, net gains from investments were $43.0 million compared to losses of $56.5 million in 2022, reflecting partial recovery from 2022's volatility. In 2022, market volatility brought on by rising interest rates, geo-political factors, and accelerating inflation impacted AC's investments, other than investments in merger arbitrage funds, on a mark-to-market basis.

Interest and dividend income: Interest and dividend income increased to $25.3 million in 2023 from $10.7 million in 2022, primarily due to higher interest income as a result of higher nominal interest rates in 2023.

Income Taxes

In 2023, we recorded income tax expense of $9.1 million resulting in an effective tax rate (“ETR”) of 19.5%. In 2022, we recorded an income tax benefit of $14.9 million resulting in an ETR of 24.7%. The decrease in rate from 2022 is primarily driven by deferred tax benefits from a foreign investment which reduced the 2023 rate. 

Noncontrolling Interests

Net income attributable to noncontrolling interests was $0.3 million in 2023 compared to $3.4 million in 2022. The decrease was driven primarily by the deconsolidation of The PMV Entities (as defined in Note 1) in Q3 2022 and the Gabelli Merger Plus+ Trust tender offers in Q3 2022 and Q1 2023, which resulted in redemptions of redeemable noncontrolling interests.

Net Income/(Loss)

Net income for the year ended December 31, 2023 was $37.5 million compared to net loss of $48.9 million for the prior year. The change was primarily driven by market uncertainty in 2022, as described in Net gain/(loss) from investments. Also contributing was higher interest income in 2023 reflecting higher nominal interest rates in 2023.

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):

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 December 31, 2023, we had cash and cash equivalents of $317.5 million, investments in U.S. Treasury Bills of $89.2 million and $190.7 million of investments, net of securities sold, not yet purchased of $5.9 million. Included in cash and cash equivalents is $18.0 million as of December 31, 2023 which is held by consolidated investment funds and may not be readily available for the Company to access.

Net cash provided by operating activities was $145.1 million in 2023. Operating cash flows in 2023 are driven by $125.9 million of net decreases in securities primarily the result of rolling investments into less than 90-day treasury bills, our net income of $37.7 million, $13.0 million of net distributions from investment partnerships and $7.8 million change in net receivables/payables. These increases were partially offset by $39.3 million of adjustments for noncash items, primarily unrealized gains on investment securities, partnership investments and deferred taxes. 

Net cash used in operating activities was $70.6 million in 2022 due to $89.4 million of net increases driven by increases of securities less net distributions from investment partnerships and our net loss of $45.5 million, partially offset by $43.6 million of adjustments for noncash items, primarily unrealized losses on investment securities and partnership investments and deferred taxes, and $20.7 million in net receivables/payables.

Net cash provided by investing activities was $5.8 million in 2023 due to proceeds from sales of securities of $6.0 million and return of capital on securities of $1.3 million, partially offset by purchases of securities of $1.5 million.

Net cash provided by investing activities was $0.4 million in 2022 due to proceeds from maturities of debt securities held to maturity of $5.1 million, proceeds from sales of securities of $2.9 million, return of capital on securities of $2.3 million, partially offset by purchases of securities of $8.5 million and the impact of deconsolidation of our subsidiary of $1.4 million.

Net cash used in financing activities was $25.0 million in 2023 resulting from stock buyback payments of $16.3 million, redemptions of redeemable noncontrolling interests of $4.4 million and dividends paid of $4.3 million.

Net cash used in financing activities was $37.2 million in 2022 resulting from redemptions of redeemable noncontrolling interests of $30.2 million, dividends paid of $4.4 million and stock buyback payments of $2.6 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.

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 incentive fees.

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 2, Significant Accounting Policies, in the consolidated financial statements for additional information.

Investments in Securities

Investments in securities are recorded at fair value in the consolidated 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/(loss) 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's investments in debt securities are classified as trading securities.

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/(loss) from investments on the consolidated statements of income.

Consolidation

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 the 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 in which 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”). A VIE is an entity in which either the equity investment at risk is not sufficient to permit the entity to finance its own activities without additional financial support or the group of holders of the equity investment at risk lack certain characteristics of a controlling financial interest.

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.

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 5, 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 are included in investments in partnerships in the consolidated statements of financial condition. 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 in net gain/(loss) from investments on the consolidated statements of income. Capital contributions are recorded as an increase in investments when payable, and withdrawals and distributions are recorded as reductions of the investments when receivable. Depending on the terms of the investment, the Company may be restricted as to the timing and amounts of withdrawals.

Income Taxes

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. To the extent uncertain tax positions exist, 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 2, 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.

Smaller reporting companies are not required to provide the information required by this item.

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

See accompanying notes.

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

See accompanying notes.

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except per share data)

As of December 31, 2023 and 2022, certain balances include amounts related to a consolidated variable interest entity (“VIE”) and voting interest entity ("VOE"), see Note 5.

See accompanying notes.

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS

(Dollars in thousands)

For the year ended December 31, 2023

See accompanying notes.

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS

(Dollars in thousands)

For the year ended December 31, 2022