Artisan Partners(APAM) - 2023 Q4 - Annual Report

Forward-Looking Statements This section details forward-looking statements, emphasizing their predictive nature and inherent risks regarding future results, AUM, and financial plans - Forward-looking statements are predictions based on current management expectations and available information, subject to risks and uncertainties[6] - Key factors that could cause actual results to differ materially include loss of key personnel, adverse market conditions, poor investment performance, changes in client flows, regulatory changes, and operational errors[6] - Specific areas covered by forward-looking statements include anticipated future results, operating performance, business initiatives (new teams, strategies, vehicles), AUM levels, industry trends, financing plans, dividends, compensation, expenses, and tax rates[6] Investment Performance and Assets Under Management (AUM) Information This section explains Artisan Partners' methodology for measuring investment performance using composites and presenting AUM changes by cash flows and returns - Investment performance is measured using 'composites,' representing aggregate performance of discretionary client accounts in the same strategy, excluding those with client-imposed restrictions or non-U.S. dollar management (approximately 15% of AUM at December 31, 2023)[8] - Average annual returns are presented on a 'gross' basis (before Artisan fees, net of commissions/transaction costs) and compared to market indices (benchmarks)[8] - AUM changes are attributed to client cash flows (fundings, terminations, contributions, withdrawals, excluding non-reinvested fund distributions) and 'investment returns and other' (realized/unrealized gains/losses, net income, currency translation effects)[9] - Allocation of AUM and client cash flows by distribution channel involves estimates due to incomplete or untimely information from intermediaries[9] PART I Item 1. Business Artisan Partners is an active investment management firm providing high-value strategies to global clients, driven by AUM-based fees, operating under strict regulations in a competitive market Overview Artisan Partners, founded in 1994, delivers active investment strategies to global clients, prioritizing talent retention, capacity management, and AUM-based revenue generation - Founded in 1994, Artisan is an investment management firm focused on high-value-added, active investment strategies for sophisticated global clients[11] - The business model prioritizes attracting and retaining talented investment professionals by providing resources, transparent financial incentives, investment autonomy, and a long-term time horizon[11] - The firm manages investment capacity rigorously, willing to close strategies to new investors to protect strong investment returns and long-term profit margins, even if short-term results are impacted[11] - Revenues are primarily derived from investment management fees, mostly based on a specified percentage of clients' average assets under management (AUM), with a small portion from performance fees[11] Investment Teams Artisan offers diverse actively managed strategies across 10 investment teams, with total AUM of $150.167 billion as of December 31, 2023, and detailed performance metrics - Artisan offers a broad range of actively managed investment strategies diversified by asset class, market cap, and investment style, each managed by a dedicated investment team[12] Total AUM and Key Performance Metrics by Investment Team (as of December 31, 2023) | Investment Team and Strategy | AUM (in millions) | Value-Added Since Inception (bps) | Morningstar Fund Rating | | :--------------------------- | :---------------- | :-------------------------------- | :---------------------- | | Growth Team | | | | | Global Opportunities | 21,232 | 460 | ««« | | Global Discovery | 1,490 | 422 | «««« | | U.S. Mid-Cap Growth | 12,646 | 476 | ««« | | U.S. Small-Cap Growth | 3,178 | 286 | «« | | Global Equity Team | | | | | Global Equity | 347 | 260 | ««« | | Non-U.S. Growth | 13,218 | 438 | ««« | | Non-U.S. Small-Mid Growth | 7,151 | 418 | ««« | | China Post-Venture | 160 | 366 | Not Applicable | | U.S. Value Team | | | | | Value Equity | 4,227 | 176 | «««« | | U.S. Mid-Cap Value | 2,818 | 270 | «« | | Value Income | 12 | (468) | Not yet rated | | International Value Team | | | | | International Value | 40,762 | 570 | ««««« | | International Explorer | 247 | 773 | Not yet rated | | Global Value Team | | | | | Global Value | 25,349 | 298 | ««« | | Select Equity | 321 | (324) | «« | | Sustainable Emerging Markets Team | | | | | Sustainable Emerging Markets | 917 | 81 | ««« | | Credit Team | | | | | High Income | 9,407 | 261 | ««««« | | Credit Opportunities | 215 | 1,132 | Not Applicable | | Floating Rate | 61 | 102 | Not yet rated | | Developing World Team | | | | | Developing World | 3,453 | 655 | ««« | | Antero Peak Group | | | | | Antero Peak | 1,897 | 371 | «« | | Antero Peak Hedge | 204 | (175) | Not Applicable | | EMsights Capital Group | | | | | Global Unconstrained | 313 | 630 | Not yet rated | | Emerging Markets Debt Opportunities | 92 | 770 | Not yet rated | | Emerging Markets Local Opportunities | 450 | 293 | Not applicable | | Total AUM | 150,167 | | | Distribution, Investment Products and Client Relationships Artisan distributes to institutional and intermediary clients, with 63% of AUM from institutional channels and 52% managed in separate accounts - Distribution efforts focus on sophisticated investors and asset allocators (institutions and intermediaries) with centralized decision-making and long-term horizons[31] AUM by Distribution Channel (as of December 31, 2023) | Channel | % of Total AUM | | :------------- | :------------- | | Institutional | 63% | | Intermediary | 33% | | Retail | 4% | AUM by Investment Vehicle (as of December 31, 2023) | Vehicle Type | % of Total AUM | | :--------------------------- | :------------- | | Separate Accounts and Other | 52% | | Artisan Funds | 44% | | Artisan Global Funds | 4% | Regulatory Environment and Compliance Artisan operates under extensive and evolving U.S. and non-U.S. regulations, with non-compliance posing significant financial and reputational risks - Artisan is subject to extensive U.S. federal securities laws (Securities Act, Exchange Act, Dodd-Frank, Sarbanes-Oxley), state laws, and regulations from the SEC (Advisers Act, 1940 Act), CFTC, NFA, and DOL (ERISA)[38][40][41] - Non-U.S. operations are regulated by authorities like the U.K. Financial Conduct Authority, Central Bank of Ireland, and Hong Kong Securities and Futures Commission, with some laws having extra-territorial application[42][44] - The regulatory environment is dynamic, with recent and proposed rules impacting private fund advisers, ESG disclosures, cybersecurity, beneficial ownership, and data privacy (e.g., CCPA, SFDR)[41][44] - Compliance with evolving regulations, including those related to soft dollars (MiFID II), may increase operating expenses[44] Industry Trends and Competition The investment management industry faces intense competition and shifts towards passive investing, prompting Artisan to adapt with new strategies and distribution models - Industry trends include organic growth in passive and alternative investments, causing net organic outflows from traditional actively managed strategies over the past five years[45] - Distribution landscape shifts include increased selectivity by partners, intermediaries capturing more inflows via proprietary solutions, and client demand for lower-fee or more tax-efficient investment vehicles[45] - Artisan's response involves building alternatives capabilities, increasing investment freedom, evaluating new investment teams, and evolving its distribution structure and digital capabilities[46] - Competition is intense, based on investment performance, fee rates, continuity of professionals, client service quality, strategy/vehicle range, and brand reputation[46][63] Human Capital Resources Artisan's success relies on attracting and retaining 573 associates through competitive compensation, professional development, and diverse engagement initiatives - As of December 31, 2023, Artisan employed 573 associates: 31% in investment teams, 25% in distribution, and 45% in business management/operations[48] - The firm is committed to diverse recruitment, associate engagement, and development, supporting initiatives like tuition reimbursement and associate-led groups (Pride Alliance, Multicultural Exchange, diffAbilities, Women's Networking Initiative)[48] - Compensation and benefits are competitive, including equity or equity-linked incentives for all associates to align economic interests with clients and stockholders, and 100% 401(k) matching in the U.S[48] Sustainability Artisan defines sustainability as generating long-term wealth for clients, fostering associate success, and achieving sustainable financial outcomes for shareholders - Sustainability for Artisan means generating long-term wealth for clients, promoting success across diverse associates, and achieving sustainable financial outcomes for shareholders[49] - Key sustainability pillars include building client relationships by prioritizing investment returns and managing capacity, patient development of new talent and strategies, providing long-term opportunities and economic alignment for associates, and growing business value with financial discipline and cash distribution to shareholders[50] Our Structure APAM operates as a holding company, owning 86% of Artisan Partners Holdings LP, with a complex structure involving multiple stock classes and tax receivable agreements - APAM is a holding company whose assets primarily consist of ownership in Artisan Partners Holdings LP (Holdings), deferred tax assets, and cash[51] - APAM is the sole general partner of Holdings, controlling its business and affairs. As of December 31, 2023, APAM owned approximately 86% of Holdings[51] - The company's structure includes Class A, B, and C common stock, and two Tax Receivable Agreements (TRAs) with pre-IPO shareholders and limited partners, obligating APAM to pay 85% of certain realized tax benefits[51] Available Information All SEC filings and materials are freely available on Artisan Partners' website, www.artisanpartners.com - All SEC filings and furnished materials are available free of charge on the company's website, www.artisanpartners.com[53](index=53&type=chunk) Item 1A. Risk Factors Artisan Partners faces significant risks across human capital, market performance, competition, operations, legal/regulatory, and structural factors, potentially impacting AUM, revenue, and reputation Human Capital Risks Loss of key investment professionals or senior management poses a significant risk, potentially leading to client withdrawals, reduced AUM, and revenue decline - The loss of key investment professionals or senior management could materially adversely affect Artisan's business, leading to client withdrawals and reduced AUM and revenues[55] - The International Value team, led by N. David Samra, managed $41.0 billion (27% of AUM) and generated $302 million (31% of total revenues) for the year ended December 31, 2023, highlighting the concentration risk[55] - Competition for skilled professionals is intense, and non-compete obligations may not be fully enforceable in all jurisdictions. Changes to compensation structures could cause instability if perceived negatively by portfolio managers[55][56] Market and Investment Performance Risks Poor investment performance and adverse market conditions, including foreign currency and geopolitical risks, critically threaten AUM and revenues - Poor long-term investment performance is critical, leading to loss of AUM, reduced revenues, and negative financial impact, as fees are primarily AUM-based[57] - Difficult market conditions (e.g., elevated inflation, interest rate increases, geopolitical tensions) directly reduce AUM and revenues; AUM decreased by approximately 27% in 2022 due to market turmoil[57][59] - Approximately 57% of AUM is invested in strategies primarily focused on non-U.S. companies, and 46% in non-U.S. currencies, exposing the firm to foreign currency exchange rate fluctuations and political/economic uncertainties in those regions[59] Competition and Distribution Risks Artisan faces intense competition, fee pressure from passive products, and distribution risks due to reliance on third-party intermediaries - Artisan may not maintain current fee rates due to poor investment performance, competitive pressures, shifts in global markets, and changes in business mix, impacting profit margins[60] - The firm is highly dependent on third-party intermediaries (consultants, 401(k) platforms, broker-dealers) for attracting additional AUM; loss of these relationships could negatively affect AUM and revenues[62] - The investment management industry is intensely competitive, with factors like investment performance, management fee rates, and brand recognition driving competition[63] - Trends favoring low-fee passive products (index funds, ETFs) present a headwind, as Artisan does not currently offer these or 'solutions' products[63] Risks Related to our Business Unsuccessful new strategies, concentration in long-only equity, and risks from illiquid investments pose significant business challenges and resource strains - Efforts to establish new teams, strategies, and vehicles may be unsuccessful, initially exceeding revenues and straining resources, potentially impacting results, reputation, and culture[64] - Substantially all revenues are derived from investment advisory agreements terminable upon short or no notice, posing a risk of significant revenue decrease from client withdrawals[65] - Over 90% of AUM (19 of 25 strategies) is managed in primarily long-only equity strategies, exposing the firm to greater risk during equity market declines[65] - Newer strategies, particularly those investing in illiquid securities or derivatives, introduce different operational, regulatory, and distribution risks, requiring specialized technology and personnel, and potentially causing internal friction due to resource allocation[65][67] Risks Related to Legal or Regulatory Factors and Taxation Artisan faces substantial legal, regulatory, and tax risks, including non-compliance, international complexities, and potential litigation, which could materially impact financial condition - Failure to properly address conflicts of interest, employee misconduct, or non-compliance with client investment guidelines and legal limitations could result in reputational harm, litigation, regulatory penalties, and loss of AUM[70] - Expansion into non-U.S. markets increases tax and regulatory risks, often incurring higher costs and requiring adaptation to conflicting practices (e.g., soft dollars)[71] - Changes in tax laws or exposure to additional tax liabilities in various jurisdictions could materially impact financial condition and results of operations[73][74] - The extensive and continually changing regulatory environment (U.S. and non-U.S.) poses risks of litigation, investigations, fines, and reputational damage, with compliance being costly and complex[75][77] Operational and Cybersecurity Risks Artisan faces significant operational and cybersecurity risks from system failures, human error, and sophisticated cyber-attacks, potentially causing business disruption and reputational damage - Artisan is heavily dependent on its communications and information technology systems, as well as third-party vendors, making it vulnerable to operational risks[78] - Operational risks, including human error, system failures, cyber-attacks, and natural disasters, could disrupt business, result in losses, and damage reputation, especially with increasing complexity and mobile work[78] - Cybersecurity threats are increasing in number and sophistication, and despite measures, disruptions, unauthorized access, or data loss could lead to legal claims, regulatory scrutiny, reputational damage, and significant costs[79] Indebtedness Risks Artisan's $200 million in unsecured notes and $100 million revolving credit facility expose it to leverage risks, limiting flexibility and imposing restrictive covenants - Artisan has $200 million in unsecured notes and a $100 million revolving credit agreement, exposing it to leverage risks that could limit business flexibility and ability to withstand adverse conditions[80] - Debt service obligations are fixed, meaning a significant decline in revenues could make it difficult to meet these obligations[80] - Borrowing agreements contain financial and operating covenants (e.g., leverage ratio not exceeding 3.00 to 1.00, interest coverage ratio not less than 4.00 to 1.00) that restrict business activities, including incurring additional debt and paying dividends[82] - Failure to comply with covenants could result in an event of default, allowing lenders to accelerate repayment[82] Risks Related to Our Structure Artisan's holding company structure, complex equity rights, and Tax Receivable Agreements pose risks to liquidity, governance, and business operations - A stockholders committee controls approximately 11% of the combined voting power, and limited partners of Holdings have consent rights on certain material transactions, potentially leading to conflicts of interest[83] - The ability to pay dividends is discretionary and dependent on distributions from Holdings, which are subject to operating results, cash requirements, and debt covenants[83] - Tax Receivable Agreements (TRAs) obligate APAM to pay beneficiaries 85% of certain tax benefits, with expected payments aggregating approximately $507 million over a minimum of 15 years, which could be substantial and impact liquidity[84][85] - Payments under TRAs may be accelerated or significantly exceed actual benefits in certain cases (e.g., change of control, material breach, early termination), potentially having a substantial negative impact on liquidity[86] - Risk of being deemed an 'investment company' under the 1940 Act, which would impose restrictions making it impractical to continue business as contemplated[86] Risks Related to Our Class A Common Stock Class A common stock faces volatility, dilution risks from future sales, and potential discouragement of change-of-control transactions due to structural provisions - The market price of Class A common stock is volatile due to broader equity markets and concentrated institutional ownership, potentially leading to rapid and substantial losses[87] - Future sales of Class A common stock (e.g., from exchange of 4.4 million Class A common units, 3.5 million Class D common units, 2.2 million Class B common units, and 0.8 million Class E common units by employee-partners) could lower the stock price and dilute existing ownership[88][89] - Provisions in organizational documents and Delaware law, such as class voting rights and board's ability to issue preferred stock, could discourage change of control transactions that stockholders might favor[89] - Indemnification obligations for directors and officers pose substantial financial risks, and a forum selection clause may limit stockholders' ability to obtain a favorable judicial forum for disputes[89][90] Item 1B. Unresolved Staff Comments No unresolved staff comments to report - No unresolved staff comments[91] Item 1C. Cybersecurity Artisan integrates cybersecurity risk management into its enterprise strategy, employing a multi-layered defense, dedicated teams, and Audit Committee oversight Risk Management and Strategy Artisan's cybersecurity strategy integrates into enterprise risk management, utilizing a three-lines-of-defense model and multi-layered security, with no material breaches to date - Cybersecurity risk management is integrated into Artisan's overall risk management strategy, with annual enterprise and cybersecurity risk assessments[91] - The firm utilizes a three-lines-of-defense model: business managers (first line), legal/compliance/information security governance (second line), and internal audit (third line)[91] - A dedicated security engineering and operations team (led by Director of Technical Services and CIO) and an information security governance team (led by CISO) maintain a multi-layered defense-in-depth program[91][92] - The information security program undergoes periodic internal audits and independent third-party reviews, including penetration tests, and all associates receive annual mandatory cybersecurity training[92] - To date, no known material cybersecurity breach or threat has resulted in a material loss or impact on business strategy, results of operations, or financial condition[92] Oversight of Third-Party Service Providers A dedicated committee oversees third-party service provider risks through due diligence, ongoing monitoring, security assessments, and contingency planning - A service provider oversight committee manages third-party relationships critical to investment management activities, with a written policy for selection, due diligence, contracting, and ongoing monitoring[93] - Security assessments of service providers may include questionnaires, meetings, and onsite visits, and contingency plans are considered for key providers[93] - The internal audit team periodically tests the firm's management and oversight of key third-party service providers[93] Governance Cybersecurity governance involves management's risk assessment, incident response, and Board oversight delegated to the Audit Committee for regular reporting - Management, facilitated by the Artisan Risk and Integrity Committee and information security governance team, is responsible for assessing and managing cybersecurity risk[94] - An incident response plan guides the assessment, response, and escalation of cybersecurity incidents, ensuring appropriate individuals and groups are notified[94] - The Board of Directors oversees risk management, with cybersecurity risk oversight delegated to the Audit Committee[95] - The Audit Committee receives quarterly reports on cybersecurity events and trends, annual reports on the information security program from the CIO and CISO, and reviews the cybersecurity insurance program annually[95][97] Item 2. Properties Artisan leases all its office space, primarily in Milwaukee, and deems current facilities adequate for operations - Artisan leases all its office space, with the largest office in Milwaukee, Wisconsin[98] - Existing and contracted facilities are considered adequate to meet requirements[98] Item 3. Legal Proceedings No current legal or administrative proceedings are expected to materially impact Artisan's financial position or operations - No legal or administrative proceedings are currently believed to have a material adverse effect on the company's financial position, cash flows, or results of operations[98] Item 4. Mine Safety Disclosures This item is not applicable - Not applicable[98] Information about our Executive Officers This section provides biographical information and roles for Artisan Partners' executive officers - Key executive officers include Eric R. Colson (CEO), Charles J. Daley, Jr. (CFO), Jason A. Gottlieb (President), Christopher J. Krein (Head of Global Distribution), Eileen L. Kwei (CAO), Gregory K. Ramirez (EVP, Head of Vehicle and Investor Operations), Samuel B. Sellers (COO), and Laura E. Simpson (Chief Legal Officer)[98][99][100][101][102] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Artisan's Class A common stock trades on NYSE, with a variable dividend policy tied to cash generation and distributions from Holdings Market for Registrant's Common Equity Artisan's Class A common stock (APAM) trades on the NYSE, with 123 stockholders of record as of February 19, 2024 - Class A common stock (APAM) has been listed on the NYSE since March 7, 2013[104] - As of February 19, 2024, there were approximately 123 stockholders of record for Class A common stock; Class B and C common stock have no trading market[104] Performance Graph The performance graph compares APAM's cumulative total stockholder return against the S&P 500 and Dow Jones U.S. Asset Managers Index Cumulative Total Stockholder Return (5-Year Period Ended December 31, 2023) | Index | 2019 ($) | 2020 ($) | 2021 ($) | 2022 ($) | 2023 ($) | | :------------------------------------- | :------ | :------ | :------ | :------ | :------ | | Artisan Partners Asset Management Inc. | 166.53 | 284.70 | 292.39 | 200.90 | 321.79 | | S&P 500 Index | 131.49 | 155.68 | 200.37 | 164.08 | 207.21 | | Dow Jones U.S. Asset Managers Index | 126.72 | 145.92 | 205.19 | 160.83 | 197.56 | - A stockholder investing at IPO ($30/share on March 7, 2013) would have experienced a 9% annual total return (dividends retained) or 13% (dividends reinvested) as of December 31, 2023[106] Dividend Policy Artisan declared a $0.68 variable quarterly dividend and $0.34 special annual dividend for Q4 2023, totaling $2.78 for the year - Declared a variable quarterly dividend of $0.68 per share for Q4 2023 and a special annual dividend of $0.34 per share, totaling $2.78 for 2023[107][113] - Expected quarterly dividend is approximately 80% of cash generated (adjusted net income + long-term incentive compensation award expense - cash reserved for future franchise capital awards, with other adjustments)[107][171] - Special annual dividend is considered after year-end, based on cash needed for corporate purposes and growth initiatives[107][171] - Dividends are funded by distributions from Artisan Partners Holdings, subject to operating results, cash requirements, debt covenants, and Delaware law[108] Unregistered Sales of Equity Securities Employee-partner Class B common units are exchanged for Class E units upon termination, leading to Class C common stock issuance - Upon employment termination, Class B common units are exchanged for Class E common units, and Class B common stock is canceled, with Class C common stock issued in equal number to Class E units[109] - Class E common units are exchangeable for Class A common stock, subject to restrictions[109] Item 6. [Reserved] This item is reserved Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Artisan Partners' financial condition and results, detailing AUM changes, revenues, expenses, and critical accounting policies Overview and Recent Highlights Artisan Partners, managing 25 strategies, saw AUM increase to $150.2 billion in 2023 due to market appreciation, despite a 2% revenue decrease - Artisan Partners manages 25 investment strategies across multiple asset classes and styles through 10 autonomous investment teams[112] - The financial model is transparent and predictable, with nearly all revenues from AUM-based investment management fees and a majority of expenses (including compensation) varying directly with revenues[112] 2023 Financial Highlights | Metric | 2023 Value | Change from 2022 | | :----------------------------------- | :------------------ | :------------------ | | Assets Under Management (period end) | $150.2 billion | +17% (+$22.3 billion) | | Market Appreciation | $27.1 billion | N/A | | Net Client Cash Outflows | ($4.1 billion) | N/A | | Average AUM | $139.3 billion | -1.6% | | Total Revenue | $975.1 million | -2% | | GAAP Operating Margin | 31.1% | -3.5 percentage points | | Adjusted Operating Margin | 31.6% | -2.7 percentage points | | GAAP EPS (Basic & Diluted) | $3.19 | N/A | | Adjusted EPS | $2.89 | N/A | | Dividends Declared (2023) | $2.66 per share | N/A | | Dividends Declared (effective Jan 2024 for 2023) | $2.78 per share (total) | N/A | - Business highlights for 2023 included closing $130 million in commitments for a new closed-end fund, launching two new EMsights Capital Group strategies, and fixed income strategies surpassing $10 billion in AUM[112] Organizational Structure APAM operates as the sole general partner of Artisan Partners Holdings LP, consolidating its financials and holding 86% equity ownership - APAM conducts operations through Artisan Partners Holdings LP (Holdings) and its subsidiaries, consolidating Holdings' financial statements[113] - Limited partners of Holdings held approximately 14% of equity interests as of December 31, 2023, representing a significant noncontrolling interest[113] - APAM's equity ownership in Holdings increased from 85% at December 31, 2022, to 86% at December 31, 2023, due to unit exchanges[113] Financial Overview Global market conditions significantly impact Artisan's financial performance, with 2023 seeing AUM increase to $150.2 billion but revenues decline by 2% - Global market conditions materially affect financial performance; 2023 saw meaningful gains despite inflation and high interest rates[113] Total Returns of Relevant Market Indices (Years Ended December 31) | Index | 2023 (%) | 2022 (%) | 2021 (%) | | :----------------------------- | :------ | :------- | :------ | | S&P 500 total returns | 26.3% | (18.1)% | 28.7% | | MSCI All Country World total returns | 22.2% | (18.4)% | 18.5% | | MSCI EAFE total returns | 18.2% | (14.5)% | 11.3% | | Russell Midcap® total returns | 17.2% | (17.3)% | 22.6% | | MSCI Emerging Markets Index | 9.8% | (20.1)% | (2.5)% | | ICE BofA US High Yield Index | 13.5% | (11.2)% | 5.4% | Key Performance Indicators (Years Ended December 31) | Indicator | 2023 | 2022 | 2021 | | :----------------------------- | :---------- | :---------- | :---------- | | AUM at period end ($ millions) | 150,167 | 127,892 | 174,754 | | Average AUM ($ millions) | 139,321 | 141,516 | 171,767 | | Net client cash flows ($ millions) | (4,076) | (9,813) | 1,678 | | Total revenues ($ millions) | 975 | 993 | 1,227 | | Weighted average management fee | 69.8 bps | 70.2 bps | 70.7 bps | | Operating margin | 31.1% | 34.6% | 44.0% | | Adjusted operating margin | 31.6% | 34.3% | 44.1% | Assets Under Management and Investment Performance AUM increased by $22.3 billion to $150.2 billion in 2023, driven by market appreciation despite $4.1 billion in net client outflows, with capacity actively managed - Operating results are primarily driven by AUM changes, influenced by investment performance, client cash flows, and strategic capacity management[118] Changes in Assets Under Management (Years Ended December 31, in millions) | Metric | 2023 (in millions) | 2022 (in millions) | 2021 (in millions) | | :----------------------------------- | :-------- | :-------- | :-------- | | Beginning AUM | $127,892 | $174,754 | $157,776 | | Gross client cash inflows | $21,395 | $27,227 | $33,725 | | Gross client cash outflows | ($25,471) | ($37,040) | ($32,047) | | Net client cash flows | ($4,076) | ($9,813) | $1,678 | | Artisan Funds' distributions not reinvested | ($684) | ($497) | ($2,295) | | Investment returns and other | $27,035 | ($36,552) | $17,595 | | Ending AUM | $150,167 | $127,892 | $174,754 | | Average AUM | $139,321 | $141,516 | $171,767 | - In 2023, AUM increased by $22.3 billion due to $27.1 billion in market appreciation, partially offset by $4.1 billion in net client cash outflows[112][120] - 10 of 25 strategies had net inflows totaling $6.2 billion in 2023, offset by $10.3 billion in outflows from other strategies[120] - Artisan actively manages capacity; High Income, International Value, International Small-Mid, and U.S. Small-Cap Growth strategies are currently closed or have restricted growth[120] AUM by Distribution Channel (as of December 31) | Channel | 2023 ($ millions) | 2023 (% of total) | 2022 ($ millions) | 2022 (% of total) | 2021 ($ millions) | 2021 (% of total) | | :------------- | :---------------- | :---------------- | :---------------- | :---------------- | :---------------- | :---------------- | | Institutional | 94,652 | 63.0% | 82,456 | 64.5% | 111,705 | 63.9% | | Intermediary | 49,871 | 33.2% | 39,851 | 31.1% | 55,198 | 31.6% | | Retail | 5,644 | 3.8% | 5,585 | 4.4% | 7,851 | 4.5% | | Total AUM | 150,167 | 100.0% | 127,892 | 100.0% | 174,754 | 100.0% | AUM by Vehicle Type (as of December 31, in millions) | Vehicle Type | 2023 ($) | 2022 ($) | 2021 ($) | | :--------------------------- | :-------- | :-------- | :-------- | | Artisan Funds & Artisan Global Funds | $72,763 | $60,811 | $84,363 | | Separate Accounts and Other | $77,404 | $67,081 | $90,391 | | Total AUM | $150,167 | $127,892 | $174,754 | AUM by Asset Class (as of December 31, in millions) | Asset Class | 2023 ($) | 2022 ($) | 2021 ($) | | :-------------- | :-------- | :-------- | :-------- | | Equity | $137,368 | $116,832 | $161,083 | | Fixed Income | $10,009 | $7,059 | $8,037 | | Alternative | $2,790 | $4,001 | $5,634 | | Total AUM | $150,167 | $127,892 | $174,754 | Investment Advisory Revenues Revenues are primarily from AUM-based management fees, with Artisan Funds contributing 62% of revenues and performance fees increasing to $4.3 million in 2023 - Revenues are almost entirely from investment advisory fees (management and performance fees), influenced by total AUM, strategy composition, and fee rates[136] Investment Advisory Fees and Weighted Average Management Fee by Vehicle Type (Years Ended December 31) | Metric | 2023 (Separate Accounts & Other) ($ millions) | 2022 (Separate Accounts & Other) ($ millions) | 2023 (Artisan Funds & Global Funds) ($ millions) | 2022 (Artisan Funds & Global Funds) ($ millions) | | :----------------------------------- | :------------------------------- | :------------------------------- | :---------------------------------- | :---------------------------------- | | Investment advisory fees | $368.8 | $376.3 | $606.3 | $617.0 | | Weighted average management fee | 50.8 bps | 51.2 bps | 90.1 bps | 90.7 bps | | Percentage of ending AUM | 52% | 52% | 48% | 48% | Performance Fees Recognized (Years Ended December 31, in millions) | Year | Performance Fees ($) | | :--- | :--------------- | | 2023 | $4.3 | | 2022 | $0.6 | | 2021 | $13.3 | - Approximately 3% of AUM ($150.2 billion as of December 31, 2023) have performance fee billing arrangements[137] Operating Expenses Operating expenses, largely variable, increased by 3% in 2023, driven by a 4% rise in compensation and benefits due to headcount and long-term incentive awards - Operating expenses are primarily compensation and benefits, distribution, servicing and marketing, occupancy, communication and technology, and general and administrative expenses[139] - A significant portion of operating expenses are variable, fluctuating directly with AUM and revenues[139] Compensation and Benefits (Years Ended December 31, in millions) | Category | 2023 ($) | 2022 ($) | Change ($) | Change (%) | | :---------------------------------------- | :------ | :------ | :--------- | :--------- | | Salaries, incentive compensation and benefits | $469.9 | $458.6 | $11.3 | 2% | | Long-term incentive compensation awards | $59.5 | $51.8 | $7.7 | 15% | | Total compensation and benefits | $529.4 | $510.4 | $19.0 | 4% | - The increase in compensation and benefits was driven by a 4% increase in full-time employees and higher long-term incentive compensation due to market valuation changes on franchise capital awards[156][157] - Other operating expenses increased by $3.3 million in 2023, primarily due to increased travel expenses[157] - Fixed compensation costs are expected to rise 4% to 8% in 2024, reflecting merit increases, full-year expense for 2023 hires, and an expected 5% increase in full-time employees[140] - The company expects to reserve approximately 4% of management fee revenues quarterly for future franchise capital awards[141] Non-Operating Income (Expense) Total non-operating income significantly increased to $80.1 million in 2023, primarily due to $105.6 million in net investment gains from market conditions Total Non-Operating Income (Expense) (Years Ended December 31, in millions) | Category | 2023 ($) | 2022 ($) | Change ($) | Change (%) | | :------------------------------------------------ | :------ | :------- | :--------- | :--------- | | Interest expense | ($8.6) | ($9.9) | $1.3 | 13% | | Interest income on cash and cash equivalents and other | $6.3 | $0.3 | $6.0 | 2,000% | | Net investment gain (loss) of consolidated investment products | $62.7 | ($7.0) | $69.7 | 996% | | Net gain (loss) on the tax receivable agreements | $0.5 | $1.0 | ($0.5) | (50)% | | Net investment gain (loss) on nonconsolidated seed investments | $2.7 | ($3.5) | $6.2 | 177% | | Net investment gain (loss) on nonconsolidated franchise capital investments | $16.5 | ($13.2) | $29.7 | 225% | | Total non-operating income (expense) | $80.1 | ($32.3) | $112.4 | 348% | - Net investment gains from consolidated and nonconsolidated investment products increased by $105.6 million in 2023, predominantly due to market conditions[159] - Interest income on cash and cash equivalents increased by $6.0 million due to higher yields[159] - Interest expense decreased by $1.3 million due to a lower interest rate on the Series F senior note, which replaced the Series C note[159] Provision for Income Taxes The effective income tax rate decreased to 18.7% in 2023, influenced by non-controlling interest and flow-through entity status, but is expected to rise with APAM's ownership - The effective income tax rate decreased from 20.3% in 2022 to 18.7% in 2023, primarily due to an increase in non-controlling interest attributable to consolidated investment product gains[160] - Rate benefits arise from a portion of Holdings' taxable earnings not being subject to corporate-level taxes (16% in 2023, 17% in 2022) and tax-deductible dividends on unvested share-based awards[160] - As APAM's equity ownership in Holdings increases, the effective tax rate is expected to increase as more income becomes subject to corporate-level taxes[160] Results of Operations (2023 vs 2022) In 2023, revenues decreased by 2% while operating expenses increased by 3%, leading to a 12% decline in operating income, but net income rose 7% due to investment gains Consolidated Statements of Operations Data (2023 vs 2022, in millions, except per share data) | Metric | 2023 ($) | 2022 ($) | Change ($) | Change (%) | | :------------------------------------------------ | :------ | :------ | :--------- | :--------- | | Revenues | $975.1 | $993.3 | ($18.2) | (2)% | | Total operating expenses | $671.5 | $649.2 | $22.3 | 3% | | Total operating income | $303.6 | $344.1 | ($40.5) | (12)% | | Total non-operating income (expense) | $80.1 | ($32.3) | $112.4 | 348% | | Income before income taxes | $383.7 | $311.8 | $71.9 | 23% | | Provision for income taxes | $71.9 | $63.4 | $8.5 | 13% | | Net income attributable to Artisan Partners Asset Management Inc. | $222.3 | $206.8 | $15.5 | 7% | | Basic earnings per share | $3.19 | $2.94 | N/A | N/A | | Diluted earnings per share | $3.19 | $2.94 | N/A | N/A | - Revenue decrease of $18.2 million (2%) was driven by a $2.2 billion (2%) decrease in average AUM, partially offset by a $3.7 million increase in performance fees[153] - Weighted average investment management fee decreased from 70.2 bps in 2022 to 69.8 bps in 2023 due to a change in AUM mix among strategies[153] - Total compensation and benefits increased $19.0 million (4%), primarily due to a 4% increase in full-time employees and market valuation changes on franchise capital awards[156][157] - Non-operating income (expense) shifted from a $32.3 million expense in 2022 to an $80.1 million income in 2023, mainly due to a $105.6 million aggregate increase in net investment gains from consolidated and nonconsolidated investment products[159] Results of Operations (2022 vs 2021) In 2022, revenues decreased by 19% and operating income declined by 36%, leading to a 39% decrease in net income attributable to APAM Consolidated Statements of Operations Data (2022 vs 2021, in millions, except per share data) | Metric | 2022 ($) | 2021 ($) | Change ($) | Change (%) | | :------------------------------------------------ | :------ | :-------- | :--------- | :--------- | | Revenues | $993.3 | $1,227.2 | ($233.9) | (19)% | | Total operating expenses | $649.2 | $686.7 | ($37.5) | (5)% | | Total operating income | $344.1 | $540.5 | ($196.4) | (36)% | | Total non-operating income (expense) | ($32.3) | $11.1 | ($43.4) | (391)% | | Income before income taxes | $311.8 | $551.6 | ($239.8) | (43)% | | Provision for income taxes | $63.4 | $107.1 | ($43.7) | (41)% | | Net income attributable to Artisan Partners Asset Management Inc. | $206.8 | $336.5 | ($129.7) | (39)% | | Basic earnings per share | $2.94 | $5.10 | N/A | N/A | | Diluted earnings per share | $2.94 | $5.09 | N/A | N/A | Supplemental Non-GAAP Financial Information Management uses non-GAAP adjusted measures to evaluate profitability and efficiency, excluding specific items and assuming a 24.7% adjusted tax rate - Management uses non-GAAP 'adjusted' measures (adjusted net income, adjusted net income per adjusted share, adjusted operating income, adjusted operating margin, Adjusted EBITDA) to evaluate profitability and efficiency[165] - Adjustments remove the impact of net gain/loss on TRAs, compensation expense from market valuation changes, and net investment gain/loss of investment products[165] - Adjusted measures assume full vesting of Class A share-based awards and exchange of all Holdings units for Class A common stock, with an adjusted tax rate of 24.7% for all periods[165] Reconciliation of Non-GAAP Financial Measures (Years Ended December 31, in millions, except per share data) | Metric | 2023 ($) | 2022 ($) | 2021 ($) | | :------------------------------------------------ | :------ | :------ | :------ | | Net income attributable to Artisan Partners Asset Management Inc. (GAAP) | $222.3 | $206.8 | $336.5 | | Adjusted net income (Non-GAAP) | $233.1 | $249.6 | $399.9 | | Adjusted shares (millions) | 80.6 | 80.2 | 79.5 | | Adjusted net income per adjusted share (Non-GAAP) | $2.89 | $3.11 | $5.03 | | Operating income (GAAP) | $303.6 | $344.1 | $540.5 | | Adjusted operating income (Non-GAAP) | $308.4 | $340.3 | $540.8 | | Operating margin (GAAP) | 31.1% | 34.6% | 44.0% | | Adjusted operating margin (Non-GAAP) | 31.6% | 34.3% | 44.1% | | Adjusted EBITDA (Non-GAAP) | $327.5 | $349.2 | $548.9 | Liquidity, Capital Resources, and Contractual Obligations Artisan maintains strong liquidity with $141.0 million cash, $100 million unused credit, and $200 million in unsecured notes, while managing $364.0 million in TRA liabilities - Working capital needs are primarily met through cash generated by operations[168] Liquidity Position (as of December 31, in millions) | Metric | 2023 ($) | 2022 ($) | | :-------------------------------------- | :------ | :------ | | Cash and cash equivalents | $141.0 | $114.8 | | Accounts receivable | $101.2 | $98.6 | | Seed investments | $150.1 | $124.8 | | Undrawn commitment on revolving credit facility | $100.0 | $100.0 | - The company has $200 million in unsecured notes outstanding (Series D, E, F) and a $100 million revolving credit facility (unused as of December 31, 2023)[169] - Debt covenants include a leverage ratio limit of 3.00 to 1.00 (0.6 to 1.00 in 2023) and an interest coverage ratio of 4.00 to 1.00 (46.0 to 1.00 in 2023); the company was in compliance[170] - Future minimum rent commitments under non-cancellable leases total approximately $133.5 million as of December 31, 2023[170] - A $364.0 million liability was recorded as of December 31, 2023, for amounts payable under Tax Receivable Agreements (TRAs). Payments totaled $36.0 million in 2023, with $37.2 million expected in 2024[173] Cash Flows Net cash from operating activities decreased by $59.5 million in 2023, while cash used in investing and financing activities also decreased Consolidated Statements of Cash Flows (Years Ended December 31, in millions) | Category | 2023 ($) | 2022 ($) | 2021 ($) | | :------------------------------------------------ | :-------- | :-------- | :-------- | | Cash, cash equivalents and restricted cash as of January 1 | $143.3 | $200.8 | $199.5 | | Net cash provided by operating activities | $253.1 | $312.6 | $398.5 | | Net cash used in investing activities | ($38.2) | ($63.7) | ($27.0) | | Net cash used in financing activities | ($175.0) | ($306.4) | ($335.4) | | Net impact of deconsolidation of consolidated investment products | ($4.7) | — | ($34.8) | | Cash, cash equivalents and restricted cash as of December 31 | $178.5 | $143.3 | $200.8 | - Net cash provided by operating activities decreased by $59.5 million in 2023, primarily due to lower operating income and working capital changes[175] - Net cash used in investing activities decreased by $25.5 million, driven by lower net purchases of investment securities and reduced property/equipment acquisitions[175] - Net cash used in financing activities decreased by $131.4 million, mainly due to lower dividends paid ($65.3 million decrease) and partnership distributions ($12.5 million decrease)[177] Critical Accounting Policies and Estimates Critical accounting policies involve complex estimates for consolidation, revenue recognition, income taxes, and the $364.0 million Tax Receivable Agreement liability - Critical accounting policies and estimates include consolidation, revenue recognition, income taxes, and payments pursuant to Tax Receivable Agreements (TRAs)[179] - Consolidation involves complex judgment in determining controlling financial interest for Voting Interest Entities (VOEs) and Variable Interest Entities (VIEs), including Artisan Funds, Artisan Global Funds, and Artisan Private Funds[180][181] - Investment management fees are recognized over time, while performance fees are constrained until the end of each measurement period due to market volatility[182] - Income tax provisions require judgment in estimating liabilities, deferred tax assets, and valuation allowances, with actual results potentially differing from estimates[183] - The $364.0 million TRA liability (as of December 31, 2023) is an estimate subject to factors like tax rates, taxable income, and ownership levels, with actual amounts and timing of payments varying[185] Item 7A. Qualitative and Quantitative Disclosures Regarding Market Risk Artisan's market risk is directly linked to AUM, with a 10% AUM change potentially impacting revenues by $104.9 million, and significant exposure to foreign currency risk Market Risk Market risk is directly tied to AUM, with a 10% AUM change potentially impacting annualized revenues by $104.9 million, and $265.4 million in marketable securities also exposed - Market risk is directly related to AUM, as revenues are primarily based on AUM value and fee rates[187] - A 10% increase/decrease in AUM could cause an annualized revenue change of approximately $104.9 million (at 70 bps weighted average fee rate)[187] - Sensitivity varies by vehicle: 10% AUM change in Artisan Funds/Global Funds could mean $135.2 million revenue change (90 bps fee), while for separate accounts, it's $76.3 million (51 bps fee)[187] - The company does not adopt corporate-level risk management policies to hedge market risks affecting overall AUM[187] - Marketable securities owned by Artisan totaled $265.4 million as of December 31, 2023; a 10% change in value would impact fair value by $26.5 million[187] Exchange Rate Risk Artisan faces exchange rate risk with 46% of AUM in non-U.S. dollar securities, where a 10% dollar change could impact revenues by $48.2 million - Approximately 46% of AUM was invested in securities denominated in non-U.S. dollars as of December 31, 2023, exposing the firm to exchange rate risk[188] - A 10% increase or decrease in the U.S. dollar's value could cause an annualized revenue change of approximately $48.2 million (at 70 bps weighted average fee rate)[188] - Each investment team monitors and manages its own exchange rate risk; no corporate-level hedging policy for AUM is adopted[188] Interest Rate Risk Interest rate risk primarily affects credit strategies with $10.5 billion AUM, but a 100 basis point movement is not expected to materially impact revenues - Available cash balances are primarily invested in money market funds (mostly U.S. Treasuries), with minimal impact from interest rate changes[189] - Interest rate changes could affect revolving credit agreement payments, but no borrowings were outstanding as of December 31, 2023[189] - Credit strategies ($10.5 billion AUM) invest in fixed income securities, sensitive to interest rate changes, but a 100 basis point movement is not expected to materially impact revenues in the next 12 months[189] Item 8. Financial Information and Supplementary Data This section presents Artisan Partners' audited consolidated financial statements and detailed notes, including the independent auditor's report on critical audit matters Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued unqualified opinions on financial statements and internal controls, highlighting deferred tax assets and TRA liabilities as a critical audit matter - PricewaterhouseCoopers LLP issued unqualified opinions on Artisan Partners' consolidated financial statements and the effectiveness of internal control over financial reporting for the period ended December 31, 2023[194] - A critical audit matter identified was 'Income Taxes – Deferred Tax Assets and Amounts Payable Under Tax Receivable Agreements,' due to the significant audit effort, specialized skill required, and complexity of management's estimates[200][201] Consolidated Statements of Financial Condition Total assets increased to $1.41 billion in 2023, driven by investment securities, while total stockholders' equity rose to $351.4 million Consolidated Statements of Financial Condition (as of December 31, in thousands) | Category | 2023 ($) | 2022 ($) | | :---------------------------------------- | :---------- | :---------- | | ASSETS | | | | Cash and cash equivalents | $141,008 | $114,832 | | Accounts receivable | $101,169 | $98,634 | | Investment securities | $150,522 | $85,415 | | Deferred tax assets | $436,529 | $477,024 | | Assets of consolidated investment products | $414,897 | $289,136 | | Total assets | $1,405,858 | $1,234,608 | | LIABILITIES | | | | Accounts payable, accrued expenses, and other | $25,509 | $24,414 | | Accrued incentive compensation | $52,226 | $29,762 | | Operating lease liabilities | $113,391 | $120,847 | | Borrowings | $199,267 | $199,050 | | Amounts payable under tax receivable agreements | $364,048 | $398,789 | | Liabilities of consolidated investment products | $47,660 | $47,109 | | Total liabilities | $802,101 | $819,971 | | Redeemable noncontrolling interests | $252,406 | $135,280 | | Total stockholders' equity | $351,351 | $279,357 | Consolidated Statements of Operations Total revenues decreased to $975.1 million in 2023, but net income attributable to APAM increased to $222.3 million due to improved non-operating income Consolidated Statements of Operations (Years Ended December 31, in thousands) | Metric | 2023 ($) | 2022 ($) | 2021 ($) | | :------------------------------------------------ | :---------- | :---------- | :---------- | | Total revenues | $975,131 | $993,285 | $1,227,236 | | Total operating expenses | $671,539 | $649,188 | $686,745 | | Total operating income | $303,592 | $344,097 | $540,491 | | Total non-operating income (expense) | $80,100 | ($32,262) | $11,059 | | Income before income taxes | $383,692 | $311,835 | $551,550 | | Provision for income taxes | $71,888 | $63,450 | $107,026 | | Net income attributable to Artisan Partners Asset Management Inc. | $222,289 | $206,755 | $336,516 | | Basic earnings per share | $3.19 | $2.94 | $5.10 | | Diluted earnings per share | $3.19 | $2.94 | $5.09 | | Dividends declared per Class A common share | $2.66 | $3.67 | $4.23 | Consolidated Statements of Comprehensive Income Comprehensive income attributable to APAM increased to $222.9 million in 2023, driven by net income and a foreign currency translation gain Consolidated Statements of Comprehensive Income (Years Ended December 31, in thousands) | Metric | 2023 ($) | 2022 ($) | 2021 ($) | | :------------------------------------------------ | :---------- | :---------- | :---------- | | Net income before noncontrolling interests | $311,804 | $248,385 | $444,524 | | Foreign currency translation gain (loss) | $957 | ($2,053) | ($319) | | Total other comprehensive income (loss) | $957 | ($2,053) | ($319) | | Comprehensive income attributable to Artisan Partners Asset Management Inc. | $222,895 | $204,986 | $336,197 | Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity increased to $351.4 million in 2023, reflecting net income, equity-based compensation, and partnership distributions Key Changes in Total Stockholders' Equity (Years Ended December 31, in thousands) | Metric | 2023 ($) | 2022 ($) | 2021 ($) | | :------------------------------------------------ | :---------- | :---------- | :---------- | | Balance at January 1 | $279,357 | $295,961 | $191,042 | | Net income | $271,811 | $255,878 | $433,395 | | Other comprehensive income (loss) | $957 | ($2,053) | ($319) | | Amortization of equity-based compensation | $33,697 | $41,532 | $39,649 | | Employee net share settlement | ($6,758) | ($7,866) | ($9,245) | | Distributions | ($44,732) | ($57,199) | ($93,189) | | Dividends | ($183,378) | ($248,696) | ($274,740) | | Balance at December 31 | $351,351 | $279,357 | $295,961 | Consolidated Statements of Cash Flows Net cash from operating activities decreased to $253.0 million in 2023, while cash used in investing and financing activities also declined Consolidated Statements of Cash Flows (Years Ended December 31, in thousands) | Category | 2023 ($) | 2022 ($) | 2021 ($) | | :------------------------------------------------ | :---------- | :---------- | :---------- | | Net cash provided by operating activities | $253,028 | $312,610 | $398,551 | | Net cash used in investing activities | ($38,167) | ($63,731) | ($26,974) | | Net cash used in financing activities | ($174,963) | ($306,402) | ($335,433) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $39,898 | ($57,523) | $36,144 | | Cash, cash equivalents and restricted cash, End of period | $178,467 | $143,248 | $200,771 | Notes to Consolidated Financial Statements These notes provide detailed explanations of Artisan Partners' financial reporting, covering business nature, accounting policies, and specific financial statement items Note 1. Nature of Business and Organization APAM, as sole general partner, consolidates Artisan Partners Holdings LP, holding 86% equity ownership and providing active investment strategies globally - Artisan Partners Asset Management Inc. (APAM) is an investment management firm providing active investment strategies globally[224] - APAM is the sole general partner of Artisan Partners Holdings LP (Holdings), consolidating its financial statements and holding approximately 86% equity ownership as of December 31, 2023[225] - Artisan Partners