Business context and reporting period
Artisan Partners Asset Management Inc. (NYSE: APAM) filed this Form 10-K for the fiscal year ended December 31, 2023. The company is an active investment manager whose revenue is primarily asset-based management fees. At year-end, its 10 investment teams managed 25 strategies and $150.2 billion in assets under management (AUM).
Key financial metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Ending AUM | $150.2 billion | $127.9 billion |
| Average AUM | $139.3 billion | $141.5 billion |
| Revenue | $975.1 million | $993.3 million |
| Operating income | $303.6 million | $344.1 million |
| GAAP operating margin | 31.1% | 34.6% |
| Adjusted operating margin | 31.6% | 34.3% |
| Net income attributable to APAM | $222.3 million | $206.8 million |
| GAAP diluted EPS | $3.19 | $2.94 |
| Adjusted EPS | $2.89 | $3.11 |
| Operating cash flow | $253.0 million | $312.6 million |
AUM rose 17% year over year, chiefly from $27.0 billion of investment returns and other, offset by $4.1 billion of net client outflows and $0.7 billion of fund distributions not reinvested. The weighted average management fee declined to 69.8 basis points from 70.2 basis points. Performance-fee revenue was $4.3 million, versus $0.6 million.
Year-end cash and cash equivalents were $141.0 million, accounts receivable $101.2 million, and seed investments $150.1 million. The $100 million revolving credit facility was undrawn. Gross unsecured notes totaled $200 million, with maturities in 2025, 2027 and 2032; the company reported compliance with debt covenants. The debt leverage ratio was 0.6x against a 3.0x maximum, and interest coverage was 46.0x against a 4.0x minimum. The balance sheet also included $364.0 million payable under tax receivable agreements (TRAs).
Material changes versus the prior comparable period
- Average AUM decreased 1.6% and revenue fell 2%, even as year-end AUM recovered from the 2022 market decline.
- Operating expenses increased 3% to $671.5 million, including compensation and benefits up 4% to $529.4 million. Operating income fell 12% and GAAP operating margin contracted 3.5 percentage points.
- GAAP net income rose 7%, but adjusted net income declined to $233.1 million from $249.6 million and adjusted EPS fell to $2.89 from $3.11. The gap reflects, in part, substantially higher non-operating investment gains in 2023: total non-operating income was $80.1 million versus a $32.3 million expense in 2022. These gains are not equivalent to improvement in core operating performance.
- Client flows remained negative but improved from $9.8 billion of net outflows in 2022 to $4.1 billion in 2023. Ten strategies recorded $6.2 billion of net inflows, offset by $10.3 billion of outflows from the others.
Outlook, management commentary, risks and unusual items
Management expects financial results to vary with markets and AUM. It provided no specific revenue, earnings or AUM guidance. For 2024, fixed compensation costs excluding long-term incentive expense are expected to increase 4% to 8%; full-time headcount is expected to rise about 5%. First-quarter 2024 expenses are expected to include about $6 million of additional retirement, healthcare and payroll costs compared with the fourth quarter of 2023. Occupancy and communication and technology expenses are expected to be relatively consistent with 2023; travel costs are expected to increase.
The board declared a $0.68-per-share variable quarterly dividend for the December 2023 quarter and a $0.34-per-share special dividend in January 2024, payable February 29, 2024. The company’s stated policy is to target quarterly dividends of approximately 80% of quarterly cash generated, subject to board approval and liquidity, legal and debt-covenant constraints. It expects to pay approximately $37.2 million under the TRAs in 2024; actual amounts and timing depend on tax benefits realized and other factors.
Material business risks include market declines and poor investment performance reducing AUM and fee revenue; client outflows and fee pressure; reliance on key portfolio managers and distribution intermediaries; competition from passive and lower-cost products; regulatory change; cybersecurity and operational incidents; and foreign-currency exposure. About 57% of AUM was in strategies primarily investing in non-U.S. companies, and 46% was invested in non-U.S.-dollar-denominated securities. Management reported no legal proceedings it believes would materially affect financial position, cash flows or results. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. A critical audit matter concerned the valuation of deferred tax assets and TRA obligations.
Unusual and relevant items include 2023 investment gains on consolidated and nonconsolidated products and franchise-capital investments, which substantially affected reported non-operating income. The company also committed $16 million to seed the Artisan Dislocation Opportunities Fund; the market trigger for calling the capital had not occurred at year-end.
Important facts for investors to verify
- Whether the improvement in year-end AUM translates into sustained flows and revenue growth, given continuing net outflows and lower average AUM.
- How much reported earnings and cash generation depend on investment gains, and the trend in adjusted results and operating margins.
- The composition and effective fee rates of AUM, including continued shifts among strategies and vehicles and any further fee concessions.
- The timing, cash burden and assumptions behind the $364.0 million TRA liability, including the expected 2024 payment.
- Dividend capacity under the company’s variable policy, debt covenants, growth investments and future cash requirements.
- Portfolio-manager retention and performance, particularly for International Value, which represented about 27% of AUM and 31% of 2023 revenue.