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APAM > SEC Filings for APAM > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for ARTISAN PARTNERS ASSET MANAGEMENT INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ARTISAN PARTNERS ASSET MANAGEMENT INC.


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We are an independent investment management firm focused on providing high-value added, active investment strategies to sophisticated clients globally. Our operations are conducted through Artisan Partners Holdings and its subsidiaries. We derive essentially all of our revenues from investment management fees. Our fees are based on a specified percentage of clients' average assets under our management, except for a limited number of institutional separate account clients with which we have a fee arrangement that has a component based on the investment performance we achieve for that client. We operate our business in a single segment.
We have five autonomous investment teams that oversee twelve distinct U.S., non-U.S. and global investment strategies. Each strategy is offered through multiple investment vehicles to accommodate a broad range of client mandates. Global equity market conditions can materially affect our financial performance. Global equity markets were generally strong during the first quarter. Equity market indices generally increased in the U.S and outside the U.S. during the first quarter of 2013, as evidenced by the 10.6% and 6.5% total returns of the S&P 500 and MSCI All Country World indices, respectively, during the period. As of March 31, 2013, our assets under management ("AUM") were $83.2 billion. During the first quarter we generated $148.2 million in revenues on $79.2 billion in average AUM. A combination of net client cash inflows of $2.2 billion and market appreciation of $6.7 billion contributed to our growth in AUM and revenues. We had positive net client cash flows in 10 of our 12 strategies and 4 of 5 distribution channels, sourced from clients located in the U.S. and abroad. As of March 31, 2013 we had approximately 280 employees, including 54 employee-partners.
Factors Impacting our Results of Operations Organizational Restructuring
On March 12, 2013, APAM and the intermediary holding company through which APAM conducts its operations, Artisan Partners Holdings ("Holdings"), completed a series of transactions (the "IPO Reorganization") to reorganize their capital structures in connection with the initial public offering ("IPO") of APAM's Class A common stock. The IPO Reorganization and IPO were completed on March 12, 2013. The IPO Reorganization was designed to create a capital structure that preserves our ability to conduct our business through Holdings, while permitting us to raise additional capital and provide access to liquidity through a public company. The IPO Reorganization is described in detail under the heading "Our Structure and Reorganization" in our prospectus dated March 6, 2013, filed with the SEC in accordance with Rule 424(b) of the Securities Act of 1933 on March 7, 2013, which is accessible on the SEC's website at www.sec.gov.
The historical results of operations discussed below are those of Holdings and its consolidated subsidiaries for the period prior to March 12, 2013, and thereafter are of APAM and its consolidated subsidiaries (including Holdings). As a result of our employees' and other investors' approximate 78% equity interest in Holdings, our post-IPO results reflect a significant noncontrolling interest. Our net income represents approximately 22% of Holdings' net income. Changes Related to Class B Common Units of Artisan Partners Holdings A significant portion of our historical compensation and benefits expense related to Holdings' Class B limited partnership interests. Prior to the IPO Reorganization, Class B limited partnership interests were granted to certain employees. The Class B limited partnership interests provided both an interest in future profits of Holdings as well as an interest in the overall value of Holdings. Class B limited partnership interests generally vested ratably over a five-year period from the date of grant. Holders of Class B limited partnership interests were entitled to fully participate in profits from and after the date of grant. The distribution of profits associated with these limited partnership interests was recorded as compensation and benefits expense. Prior to the IPO Reorganization, all vested Class B limited partnership interests were subject to mandatory redemption on termination of employment for any reason, with payment in cash in annual installments over the five years following termination of employment. Unvested Class B limited partnership interests were forfeited on termination of employment. Due to the redemption feature, the Class B grants were considered liability awards. Compensation cost was measured at the grant date based on the fair value of the limited partnership interests granted, and was re-measured each period. Changes in the fair value that occurred after the end of the vesting period were recorded as compensation cost of the period in which the changes occurred through settlement of the limited partnership interests.


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As part of the IPO Reorganization, the grant agreements pursuant to which the Class B interests were granted were amended to eliminate the cash redemption feature. As a result, liability award accounting no longer applies and the costs associated with distributions to our Class B partners and changes in the value of Class B liability awards are no longer recognized as a compensation expense. However, we will continue to record compensation expense for the fair value of the Class B common units that were unvested at the time of the IPO Reorganization over their remaining vesting period. The total value of unvested Class B common units as of March 31, 2013 was $224.7 million. Also as a result of the IPO Reorganization, we recognized a non-recurring compensation expense based on the difference between the carrying value of the liability associated with the vested Class B common units immediately prior to the IPO Reorganization and the value based on the offering price per share of Class A common stock ($30.00 per share). The amount of this non-recurring charge was $287.3 million. We also recognized a $56.8 million compensation expense relating to a cash incentive compensation payment we made to certain of our portfolio managers in connection with the IPO and $20.5 million of compensation expense associated with the reallocation of profits after the IPO which otherwise would have been allocable and distributable to Holdings' pre-IPO non-employee partners but were instead allocated to certain of Artisan Partners Holdings' employee-partners. Issuance of CVRs
As part of the IPO Reorganization, Holdings issued Partnership CVRs and APAM issued APAM CVRs in order to provide holders of Holdings preferred units and APAM convertible preferred stock with economic rights following the reorganization and IPO that, collectively, are similar (although not identical) to the economic rights they possessed with respect to Holdings prior to the reorganization and IPO. The CVRs are classified as liabilities and are accounted for under ASC 815 as derivatives. As of March 31, 2013, a fair value of $30.6 million has been recorded as a liability for the CVRs. For the three months ended March 31, 2013, a gain of $24.8 million was recorded in other non-operating gains (losses) to reflect a decrease in the fair value of the CVR liability.
The CVRs may require Artisan to make a cash payment to the CVR holders on July 11, 2016, or, if earlier, five business days after the effective date of a change in control of Artisan. The amount of any required payment will depend on the average of the daily volume weighted average price, or VWAP, of APAM Class A common stock over the 60 consecutive trading days prior to July 3, 2016 or the effective date of an earlier change of control and any proceeds realized by the CVR holders with respect to their equity interest in Artisan, subject to a maximum aggregate payment of $100 million for all CVRs. The CVRs will be terminated without a payment if the average of the daily VWAP of APAM Class A common stock over any period of 60 consecutive trading days, beginning no earlier than the 15-month anniversary of the closing of the IPO, is at least $43.11 divided by the then-applicable conversion rate applicable to the convertible preferred stock.
Tax Impact of IPO Reorganization
Historically, our business was not subject to U.S. federal and certain state income taxes. However, APAM, which became the general partner of Holdings as part of the IPO Reorganization, is subject to U.S. federal and state income taxation on its allocable portion of the income of Holdings.
In connection with the IPO, APAM entered into two tax receivable agreements ("TRAs"). Under the first TRA, APAM generally is required to pay to the holders of convertible preferred stock issued as consideration for the H&F Corp Merger (or Class A common stock issued upon conversion of that convertible preferred stock) 85% of the applicable cash savings, if any, in U.S. federal and state income tax that APAM actually realizes (or is deemed to realize in certain circumstance) as a result of (i) the tax attributes of the preferred units APAM acquired in the merger, (ii) net operating losses available as a result of the merger and (iii) tax benefits related to imputed interest. Under the second TRA, APAM generally is required to pay to the holders of limited partnership units of Holdings (or Class A common stock or convertible preferred stock issued upon exchange of limited partnership units) 85% of the amount of cash savings, if any, in U.S. federal and state income tax that APAM actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain tax attributes of their units sold to APAM or exchanged (for shares of Class A common stock or convertible preferred stock) and that are created as a result of the sales or exchanges and payments under the TRAs and (ii) tax benefits related to imputed interest. Under both agreements, APAM generally will retain the benefit of the remaining 15% of the applicable tax savings.
As of March 31, 2013, a deferred tax asset of $68.8 million and amounts payable under the TRAs of $53.4 million have been recorded in the Condensed Consolidated Statements of Financial Condition as a result of the above items and other tax impacts of the IPO Reorganization.
Initial Public Offering
On March 12, 2013, APAM completed its initial public offering of 12,712,279 shares of Class A common stock for proceeds of $353.4 million, net of underwriting discounts and fees and expenses. In connection with the IPO, we used cash on hand to make cash incentive payments aggregating $56.8 million to certain of our portfolio managers. Also in connection with the IPO, we used a portion of the proceeds, combined with remaining cash on hand, for the following:
•To pay distributions of retained profits in the aggregate amount of $105.3 million to the pre-IPO partners of Holdings;


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•To repay $90.0 million outstanding under our revolving credit agreement; and
• To purchase for $76.3 million an aggregate of 2,720,823 Class A common units from certain Class A limited partners of Holdings.

Costs of Being a Public Company
Following the IPO, we expect to incur additional expenses as a result of becoming a public company, including expenses related to additional staffing, directors' and officers' liability insurance, directors fees, SEC reporting and compliance (including Sarbanes-Oxley compliance), transfer agent fees, professional fees and other similar expenses. In addition, we expect to incur significant expense in obtaining the necessary approvals from the boards and shareholders of the mutual funds we advise and sub-advise and the necessary consents from our separate account clients in connection with the change of control (for purposes of the Investment Company Act and Investment Advisers Act) that we expect to occur in 2014. Further, we may incur significant legal, accounting and other fees and expenses associated with future offerings of Class A common stock. These additional expenses will increase our general and administrative expenses and reduce our net income. Financial Overview
Assets Under Management and Investment Performance Our assets under management increase or decrease with the net inflows or outflows of client assets into our various investment strategies and with the investment performance of these strategies. The amount and composition of our assets under management are, and will continue to be, influenced by a variety of factors including, among others:
• investment performance, including fluctuations in both the financial markets and foreign currency exchange rates and the quality of our investment decisions;

• flows of client assets into and out of our various strategies and investment vehicles;

• our decision to close strategies or limit the growth of assets in a strategy when we believe it is in the best interest of our clients;

• our ability to attract and retain qualified investment, management, and marketing and client service professionals;

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

• investor sentiment and confidence.

Our AUM increased to $83.2 billion at March 31, 2013, an increase of $16.7 billion or 25.1%, from the quarter ended March 31, 2012, due to $10.1 billion in market appreciation and $6.6 billion of net client cash inflows. Average AUM during the quarter ended March 31, 2013 was $79.2 billion, an increase of 25.8% compared to average AUM during the quarter ended March 31, 2012 of $62.9 billion.
For the three months ended March 31, 2013, ten of our 12 investment strategies experienced net client cash inflows, resulting in net client cash inflows of $2.2 billion for the period. Strategies managed by our Global Value team received the largest contribution of net inflows, gathering $1.7 billion of net inflows comprised of $693 million into the Non-US Value strategy and $959 million into the Global Value strategy. Our Emerging Markets strategy experienced net client cash outflows, which was the result of a large advisory client terminating its relationship with us. Artisan Funds and Artisan Global Funds gathered $2.3 billion of net client cash inflows primarily through our broker dealer channel. Separate accounts had net client cash outflows of $0.2 billion. Historically, we have observed that client activity tends to be higher in the first and fourth quarters of the calendar year, and lower in the second and third quarters. However, there can be no guarantee that past experience will be indicative of future activity.
We monitor the availability of attractive investment opportunities relative to the amount of assets we manage in each of our investment strategies. When appropriate, we will close a strategy to new investors or otherwise take action to slow or restrict its growth, even though our aggregate AUM may be negatively impacted in the short term. We may also re-open a strategy, widely or selectively, to fill available capacity or manage strategy mix. During the first quarter of 2013 we closed our Global Value strategy to most new separate account relationships, although it remains open to new investors in the series of Artisan Funds and the sub-fund of Artisan Global Funds managed in that strategy.


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The table below sets forth changes in our total AUM:

                                            For the three months ended March 31,             Period-to-Period
                                                2013                     2012                $              %
                                                  (unaudited; in millions)
Beginning assets under management       $          74,334         $          57,104     $   17,230         30.2  %
Gross client cash inflows                           6,324                     4,410          1,914         43.4  %
Gross client cash outflows                         (4,138 )                  (3,013 )       (1,125 )       37.3  %
Net client cash flows                               2,186                     1,397            789         56.5  %
Market appreciation (depreciation)                  6,658                     7,992         (1,334 )      (16.7 )%
Ending assets under management          $          83,178         $          66,493     $   16,685         25.1  %
Average assets under management         $          79,152         $          62,925     $   16,227         25.8  %

The goal of our marketing, distribution and client services efforts is to establish and maintain a client base that is diversified by investment strategy, investment vehicle and distribution channel. As distribution channels have evolved to have more institutional-like decision making processes and longer-term investment horizons, we have expanded our distribution efforts into those areas. We have experienced strong growth in AUM through broker-dealers, where fee-based programs using centralized, institutional-like decision making continues to grow.
The table below sets forth our AUM by distribution channel:

                                          As of March 31, 2013                 As of March 31, 2012
                                      $ in millions       % of total       $ in millions       % of total
                                       (unaudited)                          (unaudited)

Defined Contribution               $           16,904          20.3 %   $           14,962          22.5 %
Broker Dealer                                  15,828          19.0 %               10,440          15.7 %
Financial Advisor                               7,690           9.2 %                6,045           9.1 %
Institutional                                  38,198          46.0 %               31,567          47.5 %
Retail                                          4,558           5.5 %                3,479           5.2 %
Ending Assets Under Management(1)  $           83,178         100.0 %   $           66,493         100.0 %


(1) The allocation of AUM by distribution channel involves the use of estimates and the exercise of judgment.


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The table below sets forth changes in our AUM by investment team:

Three Months Ended                                             By Investment Team
                              Global Equity   U.S. Value     Growth     Global Value   Emerging Markets     Total
March 31, 2013                                              (unaudited; in millions)
Beginning assets under
management                   $      20,092   $    16,722   $  14,692   $     19,886   $          2,942   $  74,334
Gross client cash inflows            1,540         1,116       1,410          1,994                264       6,324
Gross client cash outflows            (908 )        (924 )      (569 )         (343 )           (1,394 )    (4,138 )
Net client cash flows                  632           192         841          1,651             (1,130 )     2,186
Market appreciation
(depreciation)                       1,358         2,334       1,336          1,677                (47 )     6,658
Transfers                                -             -           -              -                  -           -
Ending assets under
management                   $      22,082   $    19,248   $  16,869   $     23,214   $          1,765   $  83,178
Average assets under
management                   $      21,270   $    18,157   $  16,144   $     21,720   $          1,861   $  79,152
March 31, 2012
Beginning assets under
management                   $      16,107   $    15,059   $  10,892   $     12,547   $          2,499   $  57,104
Gross client cash inflows              879         1,168       1,224          1,010                129       4,410
Gross client cash outflows          (1,005 )        (763 )      (752 )         (273 )             (220 )    (3,013 )
Net client cash flows                 (126 )         405         472            737                (91 )     1,397
Market appreciation
(depreciation)                       2,518         1,476       2,251          1,364                383       7,992
Transfers                                -             -           -              -                  -           -
Ending assets under
management                   $      18,499   $    16,940   $  13,615   $     14,648   $          2,791   $  66,493
Average assets under
management                   $      17,700   $    16,303   $  12,559   $     13,631   $          2,732   $  62,925


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The following table sets forth the changes in our AUM for Artisan Funds, Artisan Global Funds and separate account clients:

Three Months Ended
                                           Artisan Funds & Artisan
                                                Global Funds        Separate Accounts       Total
March 31, 2013                                              (unaudited; in millions)
Beginning assets under management          $          39,603       $          34,731   $      74,334
Gross client cash inflows                              4,570                   1,754           6,324
Gross client cash outflows                            (2,222 )                (1,916 )        (4,138 )
Net client cash flows                                  2,348                    (162 )         2,186
Market appreciation (depreciation)                     3,733                   2,925           6,658
Transfers                                                  -                       -               -
Ending assets under management             $          45,684       $          37,494   $      83,178
Average assets under management            $          43,205       $          35,947   $      79,152
March 31, 2012
Beginning assets under management          $          30,843       $          26,261   $      57,104
Gross client cash inflows                              2,952                   1,458           4,410
Gross client cash outflows                            (1,968 )                (1,045 )        (3,013 )
Net client cash flows                                    984                     413           1,397
Market appreciation (depreciation)                     4,291                   3,701           7,992
Transfers                                                (54 )                    54               -
Ending assets under management             $          36,064       $          30,429   $      66,493
Average assets under management            $          34,060       $          28,865   $      62,925


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As of March 31, 2013, 11 of our 12 strategies had added value relative to their broad performance benchmarks over the trailing 5-year and10-year periods and since each strategy's inception. The table below sets forth the total AUM for each of our investment teams and strategies as of March 31, 2013, the inception date for each investment composite, and the value-added by each strategy over a multi-horizon time period as of March 31, 2013.

                                      Strategy
                         Inception      AUM                 Value-Added (1) (bps)
Investment Team and
Strategy                   Date       (in $MM)     1 YR    3 YR    5 YR    10 YR  Inception
Global Equity Team                                  (unaudited; in millions)
Non-U.S. Growth Strategy  1/1/1996      $20,635     527     653     397     321      683
Non-U.S. Small-Cap
Growth Strategy           1/1/2002       $1,368    1,021    549     319     553      563
Global Equity Strategy    4/1/2010          $80    1,579    815     N/A     N/A      815

U.S. Value Team
U.S. Mid-Cap Value
Strategy                  4/1/1999      $12,895     250     192     335     331      627
U.S. Small-Cap Value
Strategy                  6/1/1997       $4,183   (1,045)  (471)    14      187      532
Value Equity Strategy     7/1/2005       $2,169      -      48      78      N/A      137

Growth Team
U.S. Mid-Cap Growth
Strategy                  4/1/1997      $13,444    (844)    312     302     135      609
U.S. Small-Cap Growth
Strategy                  4/1/1995       $1,708    (219)    622     325     128      97
Global Opportunities
Strategy                  2/1/2007       $1,683     428     991     849     N/A      687

Global Value Team
Non-U.S. Value Strategy   7/1/2002      $13,347     861     814     970     738      740
Global Value Strategy     7/1/2007       $9,867     977     717     854     N/A      655

Emerging Markets Team
Emerging Markets
Strategy                  7/1/2006       $1,765    (338)   (418)   (248)    N/A     (117)

Total Assets Under
Management (2)                          $83,178


(1) Value-added is the amount in basis points by which the average annual gross composite return of each of our strategies has outperformed the market index most commonly used by our clients to compare the performance of the relevant strategy for the periods presented and since its inception date. The market indices used to compute the value added since inception date for each of our strategies are as follows: Non-U.S. Growth strategy-MSCI EAFE® Index; Non-U.S. Small-Cap Growth strategy-MSCI EAFE® Small Cap Index; Global Equity strategy-MSCI ACWI® Index; U.S. Small-Cap Value strategy-Russell 2000® Index; U.S. Mid-Cap Value strategy-Russell Midcap® Index; Value Equity strategy-Russell 1000® Index; U.S. Mid-Cap Growth strategy-Russell Midcap® Index; Global Opportunities strategy-MSCI ACWI® Index; U.S. Small-Cap Growth strategy-Russell 2000® Index; Non-U.S. Value strategy-MSCI EAFE® Index; Global Value strategy-MSCI ACWI® Index; Emerging Markets strategy-MSCI Emerging Markets IndexSM.
(2) Includes $34.4 million, not reflected in the assets managed in any of our identified strategies, in assets managed in a portfolio not currently made available to investors other than our employees to evaluate its potential viability as a strategy to be offered to clients.


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Results of Operations
                                          For the For the three months ended          Period-to-Period
                                                       March 31,
                                               2013                 2012               $              %
Statements of operations data:                     (unaudited; in millions, except per share data)
Revenues                                 $       148.2         $     119.7       $      28.5           24  %
Operating Expenses
Total compensation and benefits                  548.9                98.6             450.3          457  %
Other operating expenses                          20.6                16.6               4.0           24  %
Total operating expenses                         569.5               115.2             454.3          394  %
Total operating income                          (421.3 )               4.5            (425.8 )     (9,462 )%
Non-operating income (loss)
Interest expense                                  (3.2 )              (2.7 )            (0.5 )         19  %
Other non-operating income                        29.6                 2.2              27.4        1,245  %
. . .
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