Artisan Partners Asset Management Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 27, 2023. Artisan is an active investment manager whose revenue is primarily derived from asset-based management fees. The filing reports annual results, not a standalone fourth-quarter financial summary.
Business context and operating performance
Ten autonomous investment teams managed 25 strategies, with $127.9 billion in assets under management (AUM) at year-end. The company earned most of its revenue from management fees; performance fees were a small component. APAM owned approximately 85% of Artisan Partners Holdings at year-end.
| Metric | FY2022 | FY2021 |
|---|---|---|
| Ending AUM | $127.9 billion | $174.8 billion |
| Average AUM | $141.5 billion | $171.8 billion |
| Net client cash flows | $(9.8) billion | $1.7 billion |
| Revenue | $993.3 million | $1,227.2 million |
| Operating income | $344.1 million | $540.5 million |
| Operating margin | 34.6% | 44.0% |
| Adjusted operating margin (non-GAAP) | 34.3% | 44.1% |
| Net income attributable to APAM | $206.8 million | $336.5 million |
| Basic and diluted EPS | $2.94 | $5.10 basic; $5.09 diluted |
| Adjusted EPS (non-GAAP) | $3.11 | $5.03 |
| Operating cash flow | $312.6 million | $398.6 million |
Financial position, cash flow and distributions
- Cash and cash equivalents were $114.8 million at year-end, down from $189.2 million. The company also reported $98.6 million of receivables and $124.8 million of seed investments; the $100 million revolving facility was undrawn.
- Gross unsecured notes totaled $200 million, with $199.1 million carrying value after issuance costs. Series D, E and F bear fixed rates of 4.29%, 4.53% and 3.10%, respectively. Holdings reported leverage of 0.5x and interest coverage of 42.4x and was in compliance with debt covenants.
- Operating cash flow was $312.6 million; investing activities used $63.7 million and financing activities used $306.4 million. The filing does not present a free-cash-flow measure.
- The company recorded a $398.8 million tax receivable agreement (TRA) liability and paid $33.1 million under the agreements in 2022. It expected approximately $36 million of TRA payments in 2023.
- APAM declared and paid $3.67 per Class A share during 2022. In January 2023, it declared a $0.55 quarterly dividend and a $0.35 special dividend, or $0.90 per share, relating to 2022. Management described a target of distributing about 80% of quarterly cash generation, subject to board approval and other needs.
Material changes versus prior year
- AUM declined $46.9 billion, or 27%, from year-end 2021: $36.6 billion from market depreciation, $9.8 billion from net client outflows, and $0.5 billion from fund distributions not reinvested. Ten strategies had net inflows totaling $1.2 billion, offset by $11.0 billion of outflows in the others.
- Revenue fell 19%, driven chiefly by average AUM declining 17.6% and performance-fee revenue decreasing from $13.3 million to $0.6 million. The weighted-average management fee excluding performance fees edged down to 70.2 basis points from 70.7.
- Operating expenses decreased 5% overall, as lower incentive compensation and distribution expenses more than offset higher occupancy, travel and technology costs. Compensation and benefits were 51% of revenue, versus 46% in 2021.
- Non-operating results shifted to a $32.3 million expense from $11.1 million of income, largely reflecting investment losses in 2022. The effective tax rate rose to 20.3% from 19.4%, primarily as APAM’s ownership share of Holdings increased.
- The S&P 500 returned negative 18.1% in 2022, while major relevant equity benchmarks also declined. Strategy results varied; reported one-year gross composite returns were negative across the strategies shown.
Outlook, risks and unusual items
- Management characterized results as sensitive to markets and AUM and expected financial performance to remain “lumpy.” It emphasized long-term investment performance, strategy development and capacity management rather than providing revenue or earnings guidance.
- For 2023, management expected fixed compensation costs to rise by approximately mid-single digits and communication and technology expenses by about 5%; occupancy expenses were expected to be relatively consistent with 2022. It also expected roughly 5% employee growth, primarily in investment and distribution roles, and about $5 million of additional first-quarter costs versus fourth-quarter 2022 for certain compensation-related items.
- The board approved $57.1 million of long-term incentive awards in January 2023, effective March 1, comprising $18.1 million in equity awards and $39.0 million in franchise capital awards. Management estimated 2023 long-term incentive expense at about $14 million per quarter, excluding investment-return effects on franchise capital awards.
- Key risks include market declines and redemptions, sustained net outflows or weak strategy performance, retention of investment professionals, fee pressure, regulatory change, operational and cybersecurity incidents, foreign currency exposure, and the substantial and variable TRA obligation. The company said it did not hedge firmwide AUM market risk.
- The filing reported no legal or administrative proceedings management believed would materially affect financial position, cash flows or results. Management and the auditor concluded internal control over financial reporting was effective; the auditor gave an unqualified opinion. Deferred tax assets and TRA estimates were identified as a critical audit matter.
- Unusual items included $16.3 million of other net investment losses, chiefly seed and franchise-capital-related investments, and a $1.4 million office lease impairment charge. The company also deconsolidated an investment fund after losing control; it reported no net income impact.
Important facts for investors to verify
- Whether AUM stabilizes or improves, and whether client outflows persist beyond the 2022 market decline.
- Strategy-level performance and flows, especially in large-AUM strategies, and the effect of capacity restrictions on future growth.
- Revenue and margin sensitivity to market movements, fee mix, and the continuing decline in performance fees.
- Cash available after dividends, debt service, seed investments and TRA payments; confirm the timing and assumptions underlying the $398.8 million TRA liability.
- Whether stated 2023 expense and hiring expectations, dividend policy, and planned incentive awards remain consistent with subsequent results.
- Potential dilution from equity awards and exchangeable Holdings units, and any material regulatory, cyber or operational developments.