Overview

We are an investment management firm that utilizes a classic value investment approach in each of our investment strategies. We currently manage assets in a variety of value-oriented investment strategies across a wide range of market capitalizations in both U.S. and non-U.S. capital markets. At September 30, 2009, our assets under management (or "AUM"), was $13.9 billion. We manage separate accounts on behalf of institutions and high net worth individuals and act as sub-investment adviser for a variety of SEC-registered mutual funds and offshore funds.

We function as the holding company through which the business of our operating company, Pzena Investment Management, LLC, is conducted. Following our initial public offering and reorganization on October 30, 2007, we became the sole managing member of Pzena Investment Management, LLC. As such, we now control its business and affairs and, therefore, consolidate its financial results with ours. In light of our employees' and other investors' collective membership interest in our operating company, we reflect their ownership as a non-controlling interest in our consolidated financial statements. As a result, subsequent to October 30, 2007, our income is generated by our economic interest in our operating company's net income. As of September 30, 2009, the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company held approximately 13.4% and 86.6%, respectively, of the economic interests in the operations of the business.

Revenue

We generate revenue from management fees and incentive fees, which we collectively refer to as our advisory fees, by managing assets on behalf of separate institutional accounts and acting as a sub-investment adviser for retail clients, including mutual funds and certain other investment funds. Our advisory fee income is recognized over the period in which investment management services are provided. As preferred by the Revenue Recognition Topicof the FASB ASC, income from incentive fees is recorded at the conclusion of the contractual performance period, when all contingencies are resolved.

Our advisory fees are primarily driven by the level of our AUM. Our AUM increases or decreases with the net inflows or outflows of funds into our various investment strategies and with the investment performance thereof. In order to increase our AUM and expand our business, we must develop and market investment strategies that suit the investment needs of our target clients and provide attractive returns over the long term. The value and composition of our AUM, and our ability to continue to attract clients, will depend on a variety of factors including, among other things:

† our ability to educate our target clients about our classic value investment strategies and provide them with exceptional client service;

† the relative investment performance of our investment strategies, as compared to competing products and market indices;

† competitive conditions in the investment management and broader financial services sectors;

† general economic conditions;

† investor sentiment and confidence; and

† our decision to close strategies when we deem it to be in the best interests of our clients.

For our institutional accounts, we are paid fees according to a schedule, which varies by investment strategy. The substantial majority of these accounts pay us management fees pursuant to a schedule in which the rate we earn on the AUM declines as the amount of AUM increases. Certain of these clients pay us fees according to the performance of their accounts relative to certain agreed-upon benchmarks, which results in a slightly lower base fee, but allows us to earn higher fees if the relevant investment strategy outperforms the agreed-upon benchmark.

Pursuant to our sub-investment advisory agreements with our retail clients, we are generally paid a management fee according to a schedule in which the rate we earn on the AUM declines as the amount of AUM increases. Certain of these funds pay us fixed rate management fees. Due to the substantially larger account size of certain of these accounts, the average advisory fees we earn on them, as a percentage of AUM, are lower than the advisory fees we earn on our institutional accounts.

The majority of advisory fees we earn on institutional accounts are based on the value of AUM at a specific date on a quarterly basis, either in arrears or advance. Advisory fees on certain of our institutional accounts, and with respect to most of our retail accounts, are calculated based on the average of the monthly or daily market value. Advisory fees are also adjusted for any cash flows into or out of a portfolio, where the cash flow represents greater than 10% of the value of the portfolio. While a specific group of accounts may use the same fee rate, the method used to calculate the fee according to the fee rate schedule may differ as described above.

Our advisory fees may fluctuate based on a number of factors, including the following:

† changes in AUM due to appreciation or depreciation of our investment portfolios, and the levels of the contribution and withdrawal of assets by new and existing clients;

† distribution of AUM among our investment strategies, which have different fee schedules;

† distribution of AUM between institutional accounts and retail accounts, for which we generally earn lower overall advisory fees; and

† the level of our performance with respect to accounts on which we are paid incentive fees.

Expenses

Our expenses consist primarily of compensation and benefits expenses, as well as general and administrative expenses. These expenses may fluctuate due to a number of factors, including the following:

† variations in the level of total compensation expense due to, among other things, bonuses, awards of equity to our employees and members of our operating company, changes in our employee count and mix, and competitive factors; and

† expenses, such as rent, professional service fees and data-related costs, incurred, as necessary, to run our business.

Compensation and Benefits Expense

Our largest expense is compensation and benefits, which includes the salaries, bonuses, equity-based compensation, and related benefits and payroll costs attributable to our members and employees. Compensation and benefits packages are benchmarked against relevant industry and geographic peer groups in order to attract and retain qualified personnel. Cash compensation has declined as a result of lower overall compensation levels, as well as lower revenue-based variable compensation costs and a decline in headcount. The table included in the section below describes the components of our compensation expense for the three and nine months ended September 30, 2009 and 2008:

                                            For the Three Months Ended
                                                  September 30,
                                              2009             2008
                                                  (in thousands)

Cash Compensation and Other Benefits      $       5,977    $       7,888
Other Non-Cash Compensation                         255              272
Total Compensation and Benefits Expense   $       6,232    $       8,160




                                            For the Nine Months Ended
                                                  September 30,
                                              2009             2008
                                                  (in thousands)

Cash Compensation and Other Benefits      $      17,439    $      24,868
Other Non-Cash Compensation                         816              905
Total Compensation and Benefits Expense   $      18,255    $      25,773

On January 1, 2007, we adopted the PIM LLC 2006 Equity Incentive Plan, pursuant to which we have issued restricted units, and options to acquire units, in our operating company, both of which vest ratably over a four-year period. We used a fair-value method in recording the compensation expense associated with the granting of these restricted units, and options to acquire units, to new and existing members under the PIM LLC 2006 Equity Incentive Plan. Under this method, compensation expense is measured at the grant date based on the estimated fair value of the award and is recognized over the award's vesting period. The fair value of the units is determined by reference to the market price of our Class A common stock on the date of grant, since these units are exchangeable for shares of our Class A common stock on a one-for-one basis. The fair value of the options to acquire units is determined by using an appropriate option pricing model on the grant date.

On January 1, 2007, we instituted a deferred compensation plan, in which employees who earn in excess of $600,000 per year are required to defer a portion of their compensation in excess of this amount. These deferred amounts may be invested, at the employee's discretion, in certain of our investment strategies, restricted phantom units of our operating company, or money market funds. Amounts deferred in any period reduce that period's cash compensation expense and vest ratably over a four-year period

beginning on January 1 of the next calendar year; therefore, the amortization of a ratable portion of 2007 deferred amounts has been reflected in our expenses for the three and nine months ended September 30, 2009 and 2008. Should additional amounts be deferred in future periods, we would expect the non-cash portion of our compensation expense to increase as the existing and subsequently deferred amounts are amortized through income.

As of September 30, 2009, we had approximately $1.6 million in unrecorded compensation expense related to phantom operating company units issued pursuant to our deferred compensation plan and operating company unit and option grants issued under our PIM LLC 2006 Equity Incentive Plan. We expect that the amortization of these amounts will be approximately $0.7 million for 2009 and 2010, with a negligible amount amortized thereafter.

General and Administrative Expenses

General and administrative expenses include office expenses, professional and outside services fees, depreciation, and the costs associated with operating and maintaining our research, trading, and portfolio accounting systems. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the overall size and scale of our business operations.

As a result of our offering on October 30, 2007, we have incurred, and expect to incur, additional expenses associated with being a public company for, among other things, director and officer insurance, director fees, SEC reporting and compliance (including Sarbanes-Oxley compliance), professional fees, transfer agent fees, and other similar expenses. These additional expenses have and will reduce our net income.

Other Income

Other income is derived primarily from investment income or loss arising from our investments in various private investment vehicles that we employ to incubate new strategies, interest expense on our outstanding debt, mark-to-market movements on our swap agreement prior to its termination, and interest income generated on our excess cash balances. Other income is also affected by changes in our estimates of the liability due to our selling and converting shareholders associated with payments owed to them under the tax receivable agreement which was implemented subsequent to our reorganization and offering on October 30, 2007. As discussed further below, under "Tax Receivable Agreement," this liability represents 85% of the amount of cash savings, if any, in U.S. federal, state, and local income tax that we realize as a result of the amortization of the increases in tax basis generated from the Company's acquisitions of operating company units from its selling and converting shareholders. Amounts waived by our selling and converting shareholders reduce this liability. We expect the interest and investment components of other income, in the aggregate, to fluctuate based on market conditions and the performance of our investment strategies.

Non-Controlling Interests

Our operating company has historically consolidated the results of operations of the private investment partnerships over which we exercise a controlling influence. After our reorganization, we became the sole managing member of our operating company and now control its business and affairs and, therefore, consolidate its financial results with ours. In light of our employees' and outside investors' interest in our operating company, we have reflected their membership interests as a non-controlling interest in our consolidated financial statements. As a result, subsequent to October 30, 2007, our income is generated by our economic interest in our operating company's net income. As of September 30, 2009, the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company held approximately 13.4% and 86.6%, respectively, of the economic interests in the operations of the business.

Income Tax Provision/(Benefit)

While our operating company has historically not been subject to U.S. federal and certain state income taxes, it has been subject to New York City Unincorporated Business Tax. As a result of our reorganization, we are now subject to taxes applicable to C-corporations. As such, our effective tax rate has increased as a result of our reorganization. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. As of September 30, 2009 and December 31, 2008, the Company's valuation allowance against the deferred tax asset associated with our acquisition of operating company units in conjunction with the offering and subsequent grants was $60.3 million and a $62.7 million, respectively.

Operating Results

General

Our earnings and cash flows are heavily dependent upon prevailing financial market conditions. Significant increases or decreases in the various securities markets, particularly the equities markets, can have a material impact on our results of operations, financial condition, and cash flows.

In 2008 and continuing through the quarter ended March 31, 2009, the performance of our investment strategies was negatively impacted by significant volatility in the equity markets. Investment performance during 2008 was influenced by our overweight exposure to the financial services sector in particular, which underperformed. As a result, our assets under management declined by $1.6 billion, or 10.3%, from $15.5 billion at September 30, 2008, to $13.9 billion at September 30, 2009, due to net outflows of $1.2 billion and negative performance of $0.4 billion.

During the three months ended September 30, 2009, we experienced gross inflows of $1.2 billion, which were partially offset by gross outflows of $0.7 billion. Our institutional accounts experienced $0.9 billion in gross inflows, partially offset by $0.3 billion in gross outflows. Our retail accounts experienced gross outflows of $0.4 billion, which were partially offset by $0.3 billion in gross inflows. The $0.5 billion in overall net inflows was mainly attributable to strong institutional inflows into our Europe, Australasia, and Far East ("EAFE") Value investment strategies.

During the nine months ended September 30, 2009, we experienced gross outflows of $3.0 billion, which were partially offset by gross inflows of $2.7 billion. Our institutional accounts experienced $1.8 billion in gross inflows, partially offset by $1.5 billion in gross outflows. Our retail accounts experienced gross outflows of $1.5 billion, which were partially offset by $0.9 billion in gross inflows. The $0.3 billion in overall net outflows was mainly attributable to the weaker performance of our retail funds compared to that of their peers, which offset the institutional inflows described above.

Our average AUM fluctuates based on changes in the market value of accounts advised and managed by us, and on fund flows. Accordingly, given our lower AUM levels, our revenues in 2009 have declined from the prior year. A decrease in revenue results in lower operating income and net income.

We expect that we will experience continued pressure on our operating margins in the future if AUM were to further decline. Our operating expenses have declined modestly in 2009 from the comparable 2008 periods, as we identified and implemented potential cost savings opportunities.

Assets Under Management and Flows



The change in AUM in our institutional accounts and our retail accounts for the
three and nine months ended September 30, 2009 and 2008 is described below:



                                For the Three Months Ended
                                       September 30,
Assets Under Management           2009               2008
                                       (in billions)
Institutional Accounts
Beginning of Period Assets   $          7.5     $         13.0
Inflows                                 0.9                0.7
Outflows                               (0.3 )             (2.0 )
Net Flows                               0.6               (1.3 )
Performance                             2.1               (0.9 )
End of Period Assets         $         10.2     $         10.8
Retail Accounts
Beginning of Period Assets   $          3.1     $          5.5
Inflows                                 0.3                0.5
Outflows                               (0.4 )             (0.9 )
Net Flows                              (0.1 )             (0.4 )
Performance                             0.7               (0.4 )
End of Period Assets         $          3.7     $          4.7
Total
Beginning of Period Assets   $         10.6     $         18.5
Inflows                                 1.2                1.2
Outflows                               (0.7 )             (2.9 )
Net Flows                               0.5               (1.7 )
Performance                             2.8               (1.3 )
End of Period Assets         $         13.9     $         15.5

                                 For the Nine Months Ended
                                       September 30,
Assets Under Management           2009               2008
                                       (in billions)
Institutional Accounts
Beginning of Period Assets   $          7.4     $         15.9
Inflows                                 1.8                2.3
Outflows                               (1.5 )             (3.3 )
Net Flows                               0.3               (1.0 )
Performance                             2.5               (4.1 )
End of Period Assets         $         10.2     $         10.8
Retail Accounts
Beginning of Period Assets   $          3.3     $          7.7
Inflows                                 0.9                2.3
Outflows                               (1.5 )             (3.3 )
Net Flows                              (0.6 )             (1.0 )
Performance                             1.0               (2.0 )
End of Period Assets         $          3.7     $          4.7
Total
Beginning of Period Assets   $         10.7     $         23.6
Inflows                                 2.7                4.6
Outflows                               (3.0 )             (6.6 )
Net Flows                              (0.3 )             (2.0 )
Performance                             3.5               (6.1 )
End of Period Assets         $         13.9     $         15.5

In September 2009, we changed the classification of our assets under management to better reflect the underlying behavior and composition of our client base. We now group our assets into two categories: Institutional Accounts and Retail Accounts, which better illustrate the characteristics and trends inherent in our client relationships. The change in classification did not impact reported totals of assets under management.

Our Institutional Accounts are primarily comprised of foundations and endowments, defined benefit and defined contribution plans for corporations and municipalities, and funds which service institutional investors. Our Retail Accounts are generally open-end mutual funds which cater primarily to retail clients. Historical information has been reclassified for all periods presented.

At September 30, 2009, our $13.9 billion of AUM were invested in value-oriented investment strategies which represent distinct geographical segments of the U.S., Global, and EAFE markets. The following table describes the allocation of our AUM, as of September 30, 2009, among our investment strategies:

                              AUM at
                           September 30,
Investment Strategy            2009
                           (in billions)

U.S. Value Strategies     $           9.9
Global Value Strategies               2.4
EAFE Value Strategies                 1.6
Total                     $          13.9

Three Months Ended September 30, 2009 versus September 30, 2008

At September 30, 2009, the Company managed $13.9 billion in total assets, a decrease of $1.6 billion, or 10.3%, from $15.5 billion at September 30, 2008. The year-over-year decrease in AUM was due primarily to $1.2 billion in net outflows, and, to a lesser extent, market depreciation of $0.4 billion. Generally negative economic conditions and our 2008 overweight investment exposure to the financial services sector in particular, which underperformed, contributed to the performance-related decline in our AUM. Our retail accounts experienced net outflows of $0.1 billion for the three months ended September 30, 2009. These net outflows were

driven in part by our investment strategies' underperformance relative to their respective benchmarks and client asset re-balancing in response to the volatile economic environment.

The Company managed $10.2 billion in institutional accounts and $3.7 billion in retail accounts, for a total of $13.9 billion in assets at September 30, 2009. Assets in institutional accounts increased by $2.7 billion, or 36.0%, during the three months ended September 30, 2009, due to $2.1 billion in market appreciation and inflows of $0.9 billion, partially offset by outflows of $0.3 billion. Assets in retail accounts increased by $0.6 billion, or 19.4%, during the three months ended September 30, 2009, as a result of $0.7 billion in market appreciation and $0.3 billion in gross inflows, offset by $0.4 billion in gross outflows.

Nine months ended September 30, 2009 versus September 30, 2008

At September 30, 2009, the Company managed $13.9 billion in total assets, a decrease of $1.6 billion, or 10.3%, from $15.5 billion at September 30, 2008. The year-over-year decrease in AUM was due primarily to net outflows of $1.2 billion, and, to a lesser extent, $0.4 billion in market depreciation.

The Company managed $10.2 billion in institutional accounts and $3.7 billion in retail accounts, for a total of $13.9 billion in assets at September 30, 2009. Assets in institutional accounts increased by $2.8 billion, or 37.8%, during the nine months ended September 30, 2009, due to $2.5 billion in market appreciation and $0.3 billion net inflows. This compared with a decrease in institutional accounts of $5.1 billion, or 32.1%, during the nine months ended September 30, 2008, as a result of $4.1 billion in market depreciation and $1.0 billion in net outflows. Assets in our retail accounts increased by $0.4 billion, or 12.1%, during the nine months ended September 30, 2009, as a result of $1.0 billion of market appreciation, offset by $0.6 million in net outflows. This compared to a decrease in retail accounts of $3.0 billion, or 39.0%, during the nine months ended September 30, 2008, due to $2.0 billion of market depreciation and $1.0 billion in net outflows.

At September 30, 2009, institutional accounts represented 73.4% of our total AUM, and retail accounts represented 26.6% of our total AUM, as compared to 69.7% and 30.3%, respectively, at September 30, 2008. At September 30, 2009, our U.S. value strategies accounted for 71.2% of our AUM and our Global Value and EAFE Value investment strategies, combined, accounted for 28.8% of our AUM, compared to 81.3% and 18.7%, respectively, at September 30, 2008.

Our revenues from advisory fees earned on our institutional accounts and our retail accounts for the three and nine months ended September 30, 2009 and 2008 is described below:

                            Three Months Ended
                              September 30,
Revenue                     2009          2008
                              (in millions)

Institutional Accounts   $     13.8    $     20.1
Retail Accounts                 3.0           5.0
Total                    $     16.8    $     25.1




                           Nine Months Ended
                             September 30,
Revenue                     2009        2008
                             (in millions)

Institutional Accounts   $     36.5    $  66.8
Retail Accounts                 8.2       16.6
Total                    $     44.7    $  83.4

Three Months Ended September 30, 2009 versus September 30, 2008

Our total revenue decreased $8.3 million, or 33.1%, to $16.8 million for the three months ended September 30, 2009, from $25.1 million for the three months ended September 30, 2008. This change was driven primarily by a reduction in weighted average AUM, which decreased $5.4 billion, or 30.7%, to $12.2 billion for the three months ended September 30, 2009, from $17.6 billion from the three months ended September 30, 2008.

Our total weighted average fees were 0.550% and 0.569% for the three months ended September 30, 2009 and 2008, respectively. This decrease was due in part to an increase in the average account size of our institutional clients; our tiered fee schedules generally charge lower rates as account size increases. Weighted average assets in institutional accounts decreased $3.5 billion, or 28.5%, to $8.8 billion for the three months ended September 30, 2009, from $12.3 billion for the three months ended

September 30, 2008. Institutional accounts had weighted average fees of 0.630% and 0.654% for the three months ended September 30, 2009 and 2008, respectively. The year-over-year decrease in weighted average fees was primarily a result of higher institutional average account size, which generally causes a lower fee rate. Weighted average assets in retail accounts decreased $1.9 billion, for the three months ended September 30, 2009, from $5.3 billion for the three months ended September 30, 2008. Retail accounts had weighted . . .