AlTi Global, Inc.: Form 10-Q for the period ended Sep 30, 2023

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ALTI GLOBAL, INC.

In this section, unless the context otherwise requires, references to “AlTi,” “we,” “us,” and “our” are intended to mean the business and operations of AlTi and its consolidated subsidiaries. The following discussion analyzes the financial condition and results of operations of AlTi and should be read in conjunction with the consolidated unaudited financial statements and the related notes included in this Quarterly Report.

Amounts and percentages presented throughout our discussion and analysis of financial condition and results of operations may reflect rounded results in thousands (unless otherwise indicated) and consequently, totals may not appear to sum.

Our Business

We are a multi-disciplinary financial services business, with a diverse array of investment, advisory, and administrative capabilities with which we serve our clients and investors around the globe; and provide value to our shareholders:

• we manage or advise approximately $68.2 billion in combined assets;
• we provide holistic solutions for our Wealth Management clients through our full spectrum of Wealth Management services, including discretionary investment management services, non-discretionary investment advisory services, trust services, administration services, and family office services;
• we structure, arrange, and provide our network of investors with co-investment opportunities in a variety of alternative assets which are either managed intra-group or by carefully selected managers with a proven track record in the relevant asset class;
• we manage and advise both public and private investment funds; and
• we invest in and support financial services professionals that we believe have the experience to establish, operate, and/or grow specialist financial services firms.

Our business is global, with over 490 professionals operating in 22 cities in 10 countries across three continents as of September 30, 2023.

The services that we provide form a complex, but we believe complementary, ecosystem for our target markets of clients, investors, and businesses, many of whom share common interests and goals that we are able to connect and serve. We have an acquisitive strategy for inorganic growth through acquisitions and joint ventures and believe the complementary nature of our services positions us well for organic growth across our business lines. We also believe we are well positioned to capitalize on market trends and dynamics that we see facing our industry and the clients, investors, and businesses we serve.

Fee Structure

Management/Advisory Fees

Our fees for our investment advisory services, family office, trust, and related administrative services are structured to align our financial incentives with those of our clients to promote the issuance of objective advice in our Wealth Management segment. The majority of our fees are generated from our discretionary asset management and are calculated from the value of the assets we manage for our clients. Fee revenues increase as our clients’ assets grow in value, and vice versa.

We charge a single asset-based advisory fee based on the size of the asset base and the scope of work for the assets we are responsible for managing. Fees are charged using either an average daily balance or ending balance, quarterly in arrears. Fees, which vary depending upon the level and complexity of client assets, are calculated based on each client’s rate applied to the fair market value of the billable assets or the fund’s underlying net asset value at quarter-end.

AUA consists of all assets we are responsible for overseeing and reporting on, but we do not necessarily charge fees on all such assets. Billable assets represent the portion of our assets on which we charge fees. Non-billable assets are exempt of fees and consist of assets such as cash and cash equivalents in certain agreed upon situations, personally owned real estate, and other designated assets.

We also earn management fees in our Asset Management segment through our alternatives platform (compensation for internal fund management and advisory services), public real estate fund management fees, and private real estate recurring fees. The management fees for the alternatives platform are calculated using approximately 0.75% to 1.5% of the net asset value of the funds’ underlying investments. Management fees are normally received in advance each month or quarter.

For the public real estate strategy, we generate fees from managing and advising real estate investment funds. Our fees from managing and advising these vehicles are contained in management and advisory contracts relating to the relevant fund and are calculated on a sliding scale of percentages of the net asset value or the market capitalization of the relevant fund. As sponsor on private market direct and co-investment transactions, we generate income from debt and equity structures relating to specified real estate investments or investments in other alternative asset classes.

FOS Fees

FOS fees are generated from our families of sufficient size and complexity that require such services. FOS fees are generally structured to reflect an annual agreed upon fee or they can be structured on a project/time-based fee. FOS fees are typically billed quarterly in arrears. We also generate FOS project/time-based fees arising from accounting, administration fees, set up, FATCA, and other non-investment advisory services. FOS fees are reviewed annually.

Incentive Fees

Our Asset Management event-driven strategy and certain accounts within our international Wealth Management business are entitled to receive incentive fees if certain performance returns have been achieved as stipulated in our governing documents. We recognize our incentive fees when it is no longer probable that a significant reversal of revenue will occur. Our incentive fees are not subject to clawback provisions. The majority of fees for the event-driven strategy are typically recognized in the fourth quarter of each calendar year.

Other Transaction Fees

The Company also generates arrangement fees in its co-investment division by arranging private debt or equity financing, generally in connection with a real estate acquisition. Arrangement fees range from 0.5% to 1.75% of the equity value contributed into a transaction and are payable upon close of the deal. The Company also generates brokerage fees which are similar to arrangement fees except that they are generally paid for assisting public companies in raising capital.

Market Trends and Business Environment

Our business is directly and indirectly affected by conditions in the financial markets and economic conditions, particularly in the U.S. and to a lesser extent in Europe, and Asia. Our business is also sensitive to current and expected interest rates, as well as the currency markets.

After a strong start to the year with positive gains across equities and fixed income to the end of July 2023, global equity and fixed income markets declined in August and September to lead to an overall third quarter decline in returns. The S&P 500 and the MSCI All Country World Index decreased by 3.3% and 3.5% respectively, in the quarter. Fixed income markets were mostly negative as bond prices fell and yields rose. The 10-year U.S. Treasury bond yields increased by over 0.7% over the quarter to a 16-year high. As a result, the Bloomberg U.S. Aggregate Bond Index declined by 3.2% in the third quarter of 2023, while the Barclays Global Aggregate Index declined by 3.6% over the same time frame. Though it is worth noting that US corporate bonds, gold and hedge funds generally outperformed equities and government bonds during this period.

The main driver of the negative performance in stocks and government bonds over the quarter was the hawkish comments from the Federal Reserve that short-term interest rates need to remain ‘higher for longer’ to continue to bring down inflation. In other words, a restrictive policy stance will remain in place until the Federal Reserve and other Central Banks achieve their stated inflation targets of 2%. Investors were also unnerved by the expected size of the US fiscal deficit in 2023 as announced by the Congressional Budget Office and the need for large issuance across Treasury maturities. Rising oil prices on the back of The Organization of the Petroleum Exporting Countries, or OPEC, led production cuts, a strong US dollar and more recently in October geopolitical risk in connection with events in the Middle East have contributed to negative market returns and sentiment. The combination of these factors weighed on investors’ expectations around forward-looking growth and earnings.

Our fee-based revenue streams are driven by the value of clients’ portfolio holdings, in the case of Wealth Management, or the performance of our varied funds and direct investments in our Asset Management segment. The overall level of revenues in these businesses, however, does not correlate completely with changes in global equity and fixed income markets.

In Wealth Management, our client portfolios are well diversified across a range of asset classes and thus are not solely impacted by changes in equities or government bonds. Client portfolios also include holdings such as gold, credit and hedge funds that outperformed over the quarter, and in some cases, have exposure to private markets which are less sensitive to the daily fluctuations of public markets. Some of our international wealth client assets are based on a fixed fee model, which does not change with market conditions. Portfolio fluctuations also depend on multiple additional factors that include, but are not limited to, the level and duration of fixed income holdings with short-term money market funds showing limited volatility over the quarter, the level of alternative and private market holdings and the geographic and industry mix of client’s equity assets. We also note that our ultra-high net worth client base generally does not need to draw down from their portfolios to support day-to-day living needs and approach portfolio investing with a long-term time horizon. Hence, in terms of behavior, they are less sensitive to short-term changes in market conditions.

In Asset Management, the lion share of our fees are derived from alternative funds which are structured to have low correlation to equity and fixed income markets and in some cases benefit in times of market stress. In particular, our event-driven strategy performed well during the third quarter. However, this is not captured in our Q3 earnings or EBITDA, as GAAP only permits recognition of incentive fees when they are fully crystallized. We expect to recognize fees commensurate with this performance in Q4 should current market conditions be sustained through year-end.

Rising interest rates have had an impact on our public and private real estate assets. The higher cost of capital environment, rising costs of construction and declining real estate prices are negatively impacting some of the real estate segments in which we operate. This has impacted the price at which our public real estate vehicle trades in the market, which saw an average decline in price of 7% over the quarter, which impacted the level of management fees that we earn. These fees, however, only represent 8.4% of total company fee revenues. On the private real estate side, the more difficult market and interest rate conditions may reduce the ultimate return expected from some of these investments. It is important to note that these assets are utilized in conjunction with longer-term investment strategies and are not subject to daily market pricing.

It should also be noted that we do not hedge corporate currency risk associated with client portfolio and investor holdings across global markets. Hence, as we report our revenues in US dollars, the translation impact from changes in the value of currencies outside the US dollar can impact our results in any given financial reporting period.

During the third quarter, we continued to make progress on our strategic initiatives to set the Company up for the future. Some of these initiatives, particularly the work to restructure and reposition certain businesses, have impacted our GAAP earnings, but are consistent with our goal of simplifying the business with a focus on recurring revenues.

We have continued to right-size the organization, simplify our business lines, and initiate processes to reduce the number of our regulated entities. We’ve done this while securing important client wins and adding key revenue-generating talent. Since the beginning of the year, we have reported healthy AUM/AUA growth amidst a pressured market environment, particularly in the third quarter.

We firmly believe that the combination of Wealth Management and Asset Management differentiates us from pure-play firms in both sectors and provides a growing base of recurring and diversified revenues. On a trailing-twelve-month basis, total AUM/AUA increased 13%. And within Wealth Management, these have grown 23% in the last year validating the attractiveness of our global, holistic wealth proposition in the eyes of our target clients.

We generated revenues of $49 million, 97% of which were recurring revenues, essentially flat to the second quarter when removing revenues from AHRA, that were included in the second quarter, but we exited the business effective June 30, 2023. Year to date, we have generated revenues of nearly $160 million. We believe these results, generated largely through organic client wins, are starting to reflect the power of our franchise, which will continue to flow to an improved bottom line as we look forward to 2024.

Despite these top-line results, we are reporting a GAAP net loss of $171 million for the quarter, primarily due to a non-cash goodwill impairment charge that is largely related to decisions taken this year to restructure or exit unprofitable transaction-oriented business lines in our Asset Management segment. The results also include several other non-cash items that negatively impacted GAAP earnings. In addition, Adjusted EBITDA was negative $3 million in the quarter, resulting in year-to-date EBITDA of $19 million.

Despite what has been a challenging quarter, our core businesses are performing well. Based on the initiatives already undertaken this year and those that we expect to embark on in connection with the 2024 budgeting process that was recently initiated, we expect operating expenses to continue to trend downward in the fourth quarter and during 2024. As these cost savings and other growth initiatives take hold next year, we would expect to see the impact of operating leverage drive improvements and greater consistency in our GAAP results and Adjusted EBITDA.

Non-Comparability of Predecessor Period

Our results for the three and nine month periods of 2022 reflect only the results of TWMH and do not include the results of the TIG Entities, Alvarium, or Cartesian Growth Capital. Therefore, prior period amounts are not comparable to current period. Please see “Results of Operations” and “Reconciliation of Consolidated GAAP Financial Measures to Certain Non-GAAP Measures” for a detailed discussion of the underlying drivers of our results, including the accretive impacts of the Business Combination.

Managing Business Performance and Key Financial Measures

Non-GAAP Financial Measures

We use Adjusted Net Income and Adjusted EBITDA as non-GAAP financial measures. Adjusted EBITDA is derived from and reconciled to, but not equivalent to, its most directly comparable GAAP measure of net income (loss). Adjusted Net Income represents net income (loss) before taxes plus (a) equity-settled share-based payments, (b) transaction-related costs, including professional fees, (c) impairment of equity method investments, (d) change in fair value of investment or other financial instruments, (e) onetime bonuses recorded in the statement of operations, (f) compensation expense related to the earn-in of certain variable interest entities, and (g) adjusted income tax expense. Adjusted EBITDA represents adjusted net income plus (a) interest expense, net, (b) income tax expense, (c) adjusted income tax expense less income tax expense, and (d) depreciation and amortization expense.

We use Adjusted Net Income and Adjusted EBITDA as non-US GAAP measures to track our performance and assess our ability to service our borrowings. These non-US GAAP financial measures supplement and should be considered in addition to and not in lieu of, the results of operations, which are discussed further under “Components of Consolidated Results of Income” and are prepared in accordance with US GAAP. For the specific components and calculations of these non-GAAP measures, as well as a reconciliation of these measures to the most comparable measure in accordance with GAAP, see “Reconciliation of Consolidated GAAP Financial Measures to Certain Non-GAAP Measures.”

The following tables present the non-US GAAP financial measures for the periods indicated:

(Dollars in Thousands)

72

(Dollars in Thousands)

(a) Add-back of non-cash expense related to awards of AlTi stock (approved post-transaction).

(b) Add-back of non-cash expense related to awards of AlTi stock (approved pre-transaction).

(c) Add-back of transaction expenses related to the Business Combination, including professional fees.

(d) Represents the change in fair value of the warrant liability.

(e) Represents the change in unrealized gains/losses related primarily to Investments held at fair value (Successor) and changes in fair value to the interest rate swap (Predecessor).

(f) Represents the change in fair value of the earn-out liability.

(g) Represents cost to implement organization change to derive cost synergy.

(h) Represents impairment of intangible asset associated with the deconsolidation of AHRA $29.4 million and impairment of carried interest/equity method investments $4.0 million.

(i) Represents the impairment of goodwill.

(j) Represents the amortization of the step-up in Equity method investments.

(k) Represents reported interest, depreciation, amortization, and tax adjustments of the Company's Equity method investments.

(l) Add-back of cash portion of the compensatory earn-ins related to the Holbein acquisition as discussed in Note 5, “Equity-Based Compensation.” The $0.8 million of compensatory earn-ins is settled in 50% equity and 50% cash. Add back of equity portion of compensatory earn-ins of $0.4 million is included in the equity settled share-based payments combined EBITDA adjustment.

(m) Represents the change in the TWMH Partner’s payout related to the Business Combination.

(n) Represents forgiveness of a promissory note of a certain shareholder of TIH upon the sale of his shares in TIH to TWMH.

Operating Metrics

We monitor certain operating metrics that are common to the wealth and asset management industry, which are discussed below.

Wealth Management - AUM

AUM refers to the market value of all assets that we manage, provide discretionary investment advisory services on, and have execution responsibility for. Although we have investment responsibility for AUM, we include both billable (assets charged fees) and non-billable assets (assets exempt of fees) in our AUM calculation (e.g., we have agreements with certain clients under which we do not bill on certain securities or cash and cash equivalents held within their portfolio). AUM includes the value of all assets managed or supervised by operating partner subsidiaries, affiliates, and joint ventures in which the Company holds either a majority or minority stake. Our calculations of AUM and AUA may differ from the calculation methodologies of other wealth managers and, as a result, this measure may not be comparable to similar measures presented by other wealth managers.

The table below presents the change in our total AUM for our Wealth Management segment for the periods indicated:

(Dollars in Thousands)

74

Wealth Management - AUA

AUA includes all assets we manage as defined above, oversee, and report on. We view AUA as a core metric to measure our investment and fundraising performance as it includes non-financial assets (e.g., real estate) that are not included in AUM, investment consulting assets (not included in AUM but revenue generating) and other assets that we do not charge fees upon and do not have responsibility for investment execution responsibility, but the reporting of which is valued by our clients. AUA includes the value of all assets managed or supervised by operating partner subsidiaries, affiliates, and joint ventures in which the Company holds either a majority or minority stake. Our calculations of AUA and AUM may differ from the calculation methodologies of other wealth managers and, as a result, this measure may not be comparable to similar measures presented by other wealth managers.

The table below presents the change in our total AUA for our Wealth Management segment for the periods indicated:

(Dollars in Thousands)

Asset Management - AUM/AUA

The Company’s Asset Management AUM includes assets managed in public real estate investment fund (LXi REIT plc, “LXi”) and private real estate investment fund (Home Long Income Fund, “HLIF”) real estate investment funds ($2.2 billion) from which we generate fee revenue. The Company’s reported value of these assets are either of net asset value (in the case of HLIF) or the market capitalization (in the case of LXi). The AUM calculation also includes the Alternatives platform strategy. AUM in this strategy refers to assets on which the Company provides continuous and regular billable management services as a function of their TIG Arbitrage strategy ($2.5 billion).

For our co-investment real estate strategy, we include the value of our private market direct and co-investment real estate investments in our AUA ($9.8 billion). This amount is included in our Real Estate - Public and Private table below. The AUA of our alternatives platform additionally includes the value of the assets managed by TIG’s External Strategic Managers in the strategies of Real Estate Bridge Lending, European Long/Short Equity and Asian Credit ($5.2 billion total).

The tables below present the change in our total AUM/AUA by strategy and product for our alternatives platform for the periods indicated:

Alternatives Platform

(Dollars in Thousands)

(Dollars in Thousands)

The table below presents the change in our total AUM/AUA for our Real Estate - Public and Private funds for our Asset Management segment for the periods indicated:

(Dollars in Thousands)

* AUA is reported with a one quarter lag for HLIF as management fees are billed on that basis.

Components of Consolidated Results of Income

Revenues

Management/Advisory Fees

For services provided to each client account, the Company charges investment management, custody, and/or trustee fees based on the fair value of the assets of such account (“management/advisory fees”). The Company invoices clients based on the terms outlined in the signed customer contract (e.g., quarterly in arrears or in advance) based on the fair market value or net asset value. For those assets for which valuations are not available on a daily basis, the most recent valuation provided to the Company is used as the fair value for the purpose of calculating the quarterly fee.

The customer exchanges consideration to obtain services that are the output of the Company’s ordinary activities, which are investment management services provided to each client account. Further, none of the scope exceptions under ASC 606-10-15-2 apply to the management/advisory fees; therefore, they are in the scope of ASC 606.

Incentive Fees

The Company is entitled to receive incentive fees if certain targeted returns have been achieved as stipulated in its customer contracts. The incentive fees are generally calculated using 15% to 20% of the net profit its customers earn. Incentive fees are generally calculated and recognized when it is probable that there will be no significant reversal.

Distributions from Investments

The Company has equity interests in three entities pursuant to which it is entitled to distributions based on the terms of the respective arrangements. Distributions from each investment will be recorded upon receipt of the distribution. The Company receives distributions from our External Strategic Managers through our profit or revenue sharing arrangements that are generated through their management and incentive fees based on performance of the underlying investments.

The Company generates arrangement fees in its co-investment division by arranging private debt or equity financing, generally in connection with an acquisition. Arrangement fees range from 0.5% to 1.75% of the equity value contributed into a transaction and are payable upon close of the deal. The Company also generates brokerage fees which are similar to arrangement fees except that they are generally paid for assisting public companies in raising capital.

Expenses

Compensation and Employee Benefits: Compensation generally includes salaries, bonuses, other performance-based compensation such as commissions, long-term deferral programs, benefits, and payroll taxes. Compensation is accrued over the related service period and long-term deferral program awards are paid out based on the various vesting dates.

General, Administrative and Other Expenses: General, administrative and other expenses include costs primarily related to professional services, occupancy, travel, communication and information services, distribution costs, and other general operating items.

Depreciation and Amortization Expenses: Fixed assets are depreciated or amortized on a straight-line basis, with the corresponding depreciation and amortization expense included within depreciation and amortization in the Company’s Condensed Consolidated Statement of Operations. The estimated useful life for leasehold improvements is the lesser of the remaining lease term or the life of the asset, while other fixed assets are generally depreciated over a period of three to fifteen years.

Interest Expense: Interest expense consists of the interest expense on our outstanding debt, amortization of deferred financing costs, and amortization of original issue discount.

Income Tax Expense: Income tax expense consists of taxes paid or payable by our consolidated operating subsidiaries. Certain of our subsidiaries are treated as flow-through entities for federal income tax purposes and, accordingly, are not subject to federal and state income taxes, as such taxes are the responsibility of certain direct and indirect owners of the flow-through entities. However, the flow-through entities are subjected to UBT and other state taxes. A portion of our operations is conducted through domestic and foreign corporations that are subject to corporate level taxes and for which we record current and deferred income taxes at the prevailing rates in the various jurisdictions in which these entities operate.

Results of Operations

As a result of the Business Combination, the previous year figures are not comparable to current year amounts as prior year figures only include the results of operations of Tiedemann Wealth Management Holdings, LLC.

Consolidated Condensed Results of Operations – For the Period from July 1, 2023 to September 30, 2023 Compared to the Period from July 1, 2022 to September 30, 2022

(Dollars in Thousands)

Revenue

Management/Advisory fees. The increase in management and advisory fees during the period from July 1, 2023 to September 30, 2023 compared to the period to July 1, 2022 to September 30, 2022 was driven primarily by a $26.5 million increase in revenue from the inclusion of TIG and Alvarium post Business Combination.

Incentive fees. The increase in incentive fees during the period from July 1, 2023 to September 30, 2023 compared to the period from July 1, 2022 to September 30, 2022 was driven by a $0.9 million accretive impact of the inclusion of Alvarium and TIG’s incentive fees post Business Combination.

Distributions from investments. The increase in distributions from investments during the period from July 1, 2023 to September 30, 2023 compared to the period from July 1, 2022 to September 30, 2022 was driven by a $2.6 million accretive impact of the inclusion of TIG’s distributions from investments. Such impact included $2.6 million of revenue and profit share generated from management fees from TIG's External Strategic Managers, which are recurring in nature. The impact also includes distributions from shares of incentive fees crystallized from these managers.

Other fees / income. The increase in other fees / income during the period from July 1, 2023 to September 30, 2023 compared to the period from July 1, 2022 to September 30, 2022 was driven by a $0.7 million accretive impact of the inclusion of Alvarium’s other fees / income post Business Combination.

Expenses

Compensation Expense. The increase in compensation expense during the period from July 1, 2023 to September 30, 2023 compared to the period July 1, 2022 to September 30, 2022 of $26.5 million was primarily driven by increased compensation and benefits costs as a result of higher headcount following the Business Combination.

Non-compensation Expense. The increase in non-compensation expenses during the period from July 1, 2023 to September 30, 2023 compared to the period from July 1, 2022 to September 30, 2022 of $176.4 million was primarily driven by a $153.6 million impairment loss on goodwill, an increase in professional fees of $14.4 million, which included $7.6 million of one-time fees related to the Business Combination, interest expense of $3.7 million related to the Term Loans and Revolving Credit Facility, partially offset by a $9.3 million gain related to the change in fair value of earn-out liabilities as a result of share price appreciation

Taxes

Our effective tax rate was 1.0% for the period from July 1, 2023 to September 30, 2023, compared to 13.3% for the period from July 1, 2022 to September 30, 2022. The difference in the effective tax rate is primarily driven by the legal entity organizational changes which occurred on account of the Business Combination, the tax impact of mark-to-market losses associated with contingent liabilities and equity consideration in the Business Combination, nondeductible professional fees incurred in connection with the Business Combination, and the impact of a forecasted valuation allowance with respect to deferred tax assets generated in the Company’s subsidiaries in the U.K.

Consolidated Condensed Results of Operations – For the Period from January 3, 2023 to September 30, 2023 Compared to the Period from January 1, 2022 to September 30, 2022

(Dollars in Thousands)

Revenue

Management/Advisory fees. The increase in management and advisory fees during the period from January 3, 2023 to September 30, 2023 compared to the period from January 1, 2022 to September 30, 2022 was driven primarily by a $81.5 million increase in revenue from the inclusion of TIG and Alvarium post Business Combination.

Incentive fees. The increase in incentive fees during the period from January 3, 2023 to September 30, 2023 compared to the period from January 1, 2022 to September 30, 2022 was driven by a $1.9 million accretive impact of the inclusion of Alvarium and TIG’s incentive fees post Business Combination.

Distributions from investments. The increase in distributions from investments during the period from January 3, 2023 to September 30, 2023 compared to the period from January 1, 2022 to September 30, 2022 was driven by a $14.8 million accretive impact of the inclusion of TIG’s distributions from investments post Business Combination. Such impact included $7.1 million of revenue and profit share generated from management fees from TIG's External Strategic Managers, which are recurring in nature. The impact also includes distributions from shares of incentive fees crystallized from these managers.

Other fees / income. The increase in other fees / income during the period from January 3, 2023 to September 30, 2023 compared to the period from January 1, 2022 to September 30, 2022 was driven by a $3.4 million accretive impact of the inclusion of Alvarium’s other fees / income post Business Combination.

Expenses

Compensation Expense. The increase in compensation expense during the period from January 3, 2023 to September 30, 2023 compared to the period from January 1, 2022 to September 30, 2022 of $96.9 million was primarily driven by increased compensation and benefits costs as a result of higher headcount following the Business Combination. Results for the period from January 3, 2023 to September 30, 2023 include $40.0 million of non-cash stock based compensation related to both legacy TWMH and Alvarium incentive plans as well as the issuance of AlTi equity.

Non-compensation Expense. The increase in non-compensation expenses during the period from January 3, 2023 to September 30, 2023 compared to the period from January 1, 2022 to September 30, 2022 of $250.8 million includes a $183.0 million impairment loss on goodwill and intangible assets, $37.3 million of one-time fees related to the Business Combination, primarily in professional services, a $12.9 million loss related to the change in fair value of warrant liabilities and a $10.3 million in interest expense on the Term Loans and Revolving Credit Facility. These expenses were partially offset by a $46.2 million gain related to the change in fair value of earn-out liabilities as a result of share price appreciation.

Taxes

The Company's effective tax rate was 5.1% for the period from January 3, 2023 to September 30, 2023 compared to 25.9% for the period from January 1, 2022 to September 30, 2022. The difference in the effective tax rate is primarily driven by the legal entity organizational changes which occurred on account of the Business Combination, the tax impact of mark-to-market losses associated with contingent liabilities and equity consideration in the Business Combination, nondeductible professional fees incurred in connection with the Business Combination, and the impact of a forecasted valuation allowance with respect to deferred tax assets generated in the Company’s subsidiaries in the U.K.

Reconciliation of Consolidated GAAP Financial Measures to Certain Non-GAAP Measures

We use Adjusted Net Income and Adjusted EBITDA as non-US GAAP measures to assess and track our performance. Adjusted Net Income and Adjusted EBITDA as presented in this Quarterly Report are supplemental measures of our performance that are not required by, or presented in accordance with, US GAAP.

The following tables present the reconciliation of net income as reported in our Condensed Consolidated Statement of Operations to Adjusted Net Income and Adjusted EBITDA for the periods indicated:

(Dollars in Thousands, except share data)

81

(Dollars in Thousands, except share data)

(a) Add-back of non-cash expense related to awards of AlTi stock (approved post-transaction).

(b) Add-back of non-cash expense related to awards of AlTi stock (approved pre-transaction).

(c) Add-back of transaction expenses related to the Business Combination, including professional fees.

(d) Represents the change in fair value of the warrant liability.

(e) Represents the change in unrealized gains/losses related primarily Investments held at fair value (Successor) and changes in fair value to the interest rate swap (Predecessor).

(f) Represents the change in fair value of the earn-out liability.

(g) Represents cost to implement organization change to derive cost synergy.

(h) Represents impairment of intangible asset associated with the deconsolidation of AHRA $29.4 million and impairment of carried interest/equity method investments $4.0 million.

(i) Represents the impairment of goodwill.

(j) Represents the amortization related to the step-up in Equity method investments.

(k) Represents reported EMI adjustments for the Company’s Equity method investments.

(l) Add-back of cash portion of the compensatory earn-ins related to the Holbein acquisition as discussed in Note 5, “Equity-Based Compensation”. The $0.8 million of compensatory earn-ins is settled in 50% equity and 50% cash. Add back of equity portion of compensatory earn-ins of $0.4 million is included in the equity settled share-based payments combined EBITDA adjustment.

(m) Represents the change in the TWMH Partner’s payout related to the Business Combination.

(n) Represents forgiveness of a promissory note of a certain shareholder of TIH upon the sale of his shares in TIH to TWMH.

Liquidity and Capital Resources

Management assesses liquidity in terms of our ability to generate cash to fund operating, investing, and financing activities. Management takes prudent approach to ensure the Company's liquidity will continue to be sufficient for its foreseeable working capital needs, contractual obligations, distribution payments and strategic initiatives.

On January 3, 2023, concurrent with the consummation of the Business Combination, the Company entered into a $250.0 million credit facility with a syndicate led by BMO Capital Markets Corp. The facility, which has a term of five years and is comprised of a $150.0 million Revolving Credit Facility and a $100 million Term Loan facility, was to be used to pay down subsidiary debt and fund growth initiatives. As of September 30, 2023, the Company had $96.3 million outstanding on the Term Loan facility and $78.3 million outstanding on the Revolving Credit Facility. See Note 14 (Debt, net of unamortized deferred financing costs).

As a result of the Business Combination, the previous year figures are not comparable to current year amounts as prior year figures only include the results of operations of Tiedemann Wealth Management Holdings, LLC.

Cash Flows

For the Period from January 3, 2023 to September 30, 2023 Compared to the Period from January 1, 2022 to September 30, 2022

The following tables and discussion summarize our Condensed Consolidated Statement of Cash Flows by activity attributable to AlTi. Negative amounts represent an outflow or use of cash.

(Dollars in Thousands)

For the period from January 3, 2023 to September 30, 2023, cash and cash equivalents at the beginning of the period of $194.1 million included the proceeds from the PIPE Investors related to the issuance of shares of Class A Common Stock concurrently with the closing of the Business Combination, remaining cash held in the trust account, and the beginning balance sheet cash from each of Alvarium, TIG, and TWMH.

Operating Activities

Our cash inflows from operating activities comprise of cash collected through management and advisory fees, incentive fees, distributions from investments and other income/fees. Our cash outflows from operating activities consist of operating expenses, the most significant components of which included compensation and benefits and professional fees for the nine months ended September 30, 2023, as well as interest on our debt obligations. Our net cash outflow of $81.0 million for the period from January 3, 2023 to September 30, 2023 was driven by the payment of one-time fees related to the transaction and accrued incentive compensation related to the 2022 fiscal year performance across each of the three legacy business units and operating losses incurred.

Investing Activities

Cash used in investing activities primarily related to the acquisition of TWMH and TIG historical equity during the period from January 3, 2023 to September 30, 2023. Additionally, the Company made incremental investments of $12.0 million and $3.4 million into Zebedee and Arkkan, respectively, an acquisition of AL Wealth Partners for $14.4 million and the remaining 70% acquisition of AIMS for $3.8 million.

Financing Activities

Cash flows from financing activities during the period from January 3, 2023 to September 30, 2023 were primarily driven by issuance of the Term Loan and Revolving Credit Facility totaling $188.7 million, which were used to pay down existing debt of $141.9 million. Additionally, we used approximately $4.2 million to purchase shares issued as compensation and received $5.8 million from the exercise of warrants.

Future Sources and Uses of Liquidity

In the normal course of business, we may engage in off-financial position arrangements, including transactions in derivatives, guarantees, commitments, indemnifications, and potential contingent repayment obligations. We do not have any off-financial position arrangements that would require us to fund losses or guarantee target returns to clients.

Contractual Obligations

Tax Receivable Agreement: As discussed in Note 19 (Commitments and Contingencies) to our interim condensed consolidated financial statements included in this Quarterly Report, we may in the future be required to make payments under the TRA. As of September 30, 2023, assuming no material changes in the relevant tax laws and that the Company generates sufficient taxable income to realize the full tax benefit of the increased amortization resulting from the increase in tax basis of certain AlTi’s assets, we expect to pay approximately $15.1 million under the TRA. Future changes in the fair value of the TRA liability will be recognized in earnings. Any future cash savings and related payments under the TRA due to subsequent exchanges of Class B Units for shares of Class A Common Stock would be accounted for separately from the amounts related to the Business Combination.

Payments under the TRA are anticipated to increase the tax basis adjustment and, consequently, result in increasing annual amortization deductions in the taxable years of and after such increases to the original basis adjustments, and potentially will give rise to increasing tax savings with respect to such years and correspondingly increasing payments under the TRA.

The actual increase in tax basis of the AlTi’s assets resulting from an exchange or from payments under the TRA, as well as the amortization thereof and the timing and amount of payments under the TRA, will vary based upon a number of factors, including the following:

• The amount and timing of our taxable income will impact the payments to be made under the TRA. To the extent that we do not have sufficient taxable income to utilize the amortization deductions available as a result of the increased tax basis in the Alvarium Tiedemann’s assets, payments required under the TRA would be reduced.
• The price of our Class A Common Stock at the time of any exchange will determine the actual increase in tax basis of the Alvarium assets resulting from such exchange; payments under the TRA resulting from future exchanges, if any, will be dependent in part upon such actual increase in tax basis.
• The composition of the AlTi’s assets at the time of any exchange will determine the extent to which we may benefit from amortizing the increased tax basis in such assets and thus will impact the amount of future payments under the TRA resulting from any future exchanges.
• The extent to which future exchanges are taxable will impact the extent to which we will receive an increase in tax basis of the AlTi’s assets as a result of such exchanges, and thus will impact the benefit derived by us and the resulting payments, if any, to be made under the TRA.
• The tax rates in effect at the time any potential tax savings are realized, which would affect the amount of any future payments under the TRA.

Depending upon the outcome of these and other factors, payments that we may be obligated to make under the TRA in respect of exchanges could be substantial.

Indemnification Arrangements

In the normal course of business, the Company enters into contracts that contain indemnities for related parties of the Company, persons acting on behalf of the Company or such related parties and third parties. The terms of the indemnities vary from contract to contract and the Company’s maximum exposure under these arrangements cannot be determined and has not been recorded in the Condensed Consolidated Statement of Financial Position. As of September 30, 2023, the Company has not had prior claims or losses pursuant to these contracts and expects the risk of material loss to be remote.

Litigation

From time to time, we may be named as a defendant in legal actions. Although there can be no assurance of the outcome of such legal actions, in the opinion of management, we do not have any potential liability related to any current legal proceeding or claim that would individually or in the aggregate materially affect our results of operations, financial condition, or cash flows.

Since November 2022, Home REIT and AHRA have been the subject of a series of allegations in the UK media regarding Home REIT’s operations, triggered by a report issued by a short seller. On October 6, 2023, AFM UK and ARE received a pre-action letter of claim from a law firm acting for a group of current and former shareholders in Home REIT asserting potential claims they may bring against those two entities, amongst others. See Note 19 (Commitments and Contingencies) for more information.

We will continue to assess any potential litigation or regulatory risk associated with such matters.

Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with US GAAP. In applying many of these accounting principles, we need to make assumptions, estimates, and/or judgments that affect the reported amounts of assets, liabilities, revenues, and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates, and/or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. Actual results may also differ from our estimates and judgments due to risks and uncertainties and changing circumstances, including uncertainty in the current economic environment due to geopolitical tensions, changes in market conditions, or other relevant factors. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. For a summary of our significant accounting policies and estimates, see Note 2 (Summary of Significant Accounting Policies), to our interim condensed consolidated financial statements included in this Quarterly Report.

Estimation of Fair Values

Investments at Fair Value – External Strategic Managers: The fair values of our Investments in External Strategic Managers were determined using significant unobservable inputs. The assumptions used could have a material impact on the valuation of these assets and include our best estimates of expected future cash flows and an appropriate discount rate. Changes in the estimated fair values of these assets may have a material impact on our results of operations in any given period, as any decreases in these assets have a corresponding negative impact on our GAAP results of operations in the period in which the changes occur.

TRA Liability: We carry a portion of our TRA liability at fair value, as it is a contingent consideration related to the recent acquisition. The valuation of the TRA liability is sensitive to our expectation of future cash savings that we may ultimately realize related to our tax goodwill and other intangible assets deductions. We then apply a discount rate that we believe is appropriate given the nature of and expected timing of payments of the liability. A decrease in the discount rate assumption would result in an increase in the fair value estimate of the liability, which would have a correspondingly negative impact on our GAAP results of operations. However, payments under the TRA are ultimately only made to the extent we realize the offsetting cash savings on our income taxes due to the tax goodwill and other intangibles deduction.

Business Combination Earn-out Liability and AIMS Earn-out Liability: The fair values of our Business Combination Earn-out Securities liability and our AIMS earn-out liability were determined using various significant unobservable inputs. The assumptions used could have a material impact on the valuation of these liabilities, and include our best estimate of expected volatility, expected holding periods and appropriate discounts for lack of marketability. Changes in the estimated fair values of these liabilities may have material impacts on our results of operations in any given period, as any increases in these liabilities have a corresponding negative impact on our GAAP results of operations in the period in which the changes occur. See Note 2 (Summary of Significant Accounting Policies) for additional details.

Equity-based Compensation: The Company issued stock grants to certain employees as bonus compensation. The fair value of the grants was determined based on the share price on the date of issuance.

Income Taxes

Significant judgment is required in determining the provision for income taxes and in evaluating income tax positions, including evaluating uncertainties. We recognize the income tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the positions. The tax benefit is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If a tax position is not considered more likely than not to be sustained, then no benefits of the position are recognized. The Company’s income tax positions are reviewed and evaluated quarterly to determine whether or not we have uncertain tax positions that require financial statement recognition or de-recognition.

Deferred tax assets and liabilities are recognized for the expected future tax consequences, using currently enacted tax rates, of differences between the carrying amount of assets and liabilities and their respective tax basis. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Variable Interest Entities

The determination of whether to consolidate a VIE under GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interests. To make these judgments, we conduct an analysis, on a case-by-case basis, of whether we are the primary beneficiary and are therefore required to consolidate an entity. We continually reconsider whether we should consolidate a VIE. Upon the occurrence of certain events, such as modifications to organizational documents and investment management agreements of our products, we will reconsider our conclusion regarding the status of an entity as a VIE. Our judgement when analyzing the status of an entity and whether we consolidate an entity could have a material impact on individual line items within our consolidated financial statements, as a change in our conclusion would have the effect of grossing up the assets, liabilities, revenues and expenses of the entity being evaluated. In light of the relevantly insignificant direct and indirect investments into our products, the likelihood of a reasonable change in our estimation and judgement would likely not result in a change in our conclusions to consolidate or not consolidate any VIEs to which we have exposure.

Impact of Changes in Accounting on Recent and Future Trends

We believe that none of the changes to GAAP that went into effect during the period from January 3, 2023 to September 30, 2023, or that have been issued but that we have not yet adopted have substantively impacted our recent trends or are expected to substantively impact our future trends.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired objectives.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of September 30, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, our disclosure controls and procedures were not effective as of September 30, 2023.

As previously disclosed in Part I, Item 4 of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, management identified material weaknesses in internal control over financial reporting relating to an insufficient complement of resources to complete risk assessment which resulted in a lack of implementation and ineffectiveness of both process level controls in substantially all processes and the general information technology controls that support our financial statements and reporting.

Management is in the process of implementing a remediation plan for these material weaknesses, including, among other things, hiring additional accounting personnel and implementing process level and management review controls and documentation policies to ensure financial statement disclosures are complete and accurate and to identify and address emerging risks. We cannot reasonably estimate the cost of such remediation plan at this time. We can give no assurance that such efforts will remediate these deficiencies in internal control over financial reporting or that additional material weaknesses in its internal control over financial reporting will not be identified in the future. Failure to implement and maintain effective internal control over financial reporting could result in errors in our consolidated financial statements that could result in a restatement of our financial statements, may subject us to litigation and investigations, and could cause us to fail to meet its reporting obligations, any of which could diminish investor confidence, cause a decline in the price of the Class A Common Stock and limit our ability to access capital markets.

The material weaknesses, if not remediated, could result in misstatements of accounts or disclosures that would result in a material misstatement to the annual consolidated financial statements or the interim condensed consolidated financial statements that would not be prevented or detected.

Our management anticipates that our internal control over financial reporting will not be effective until the above material weaknesses are remediated. If our remediation of these material weaknesses is not effective, or we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal control over financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to the Nasdaq listing requirements, investors may lose confidence in our financial reporting, and the price of our common stock may decline as a result.

We hired additional accounting staff and we will continue to evaluate our accounting and financial staffing needs in light of the material weaknesses described above. While we have made progress to enhance our internal control over financial reporting and will continue to devote effort in control remediation, additional time is required to complete implementation.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period from January 3, 2023 to September 30, 2023, covered by this Quarterly Report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.