Artisan Partners Asset Management Inc. — Q1 2021 Form 10-Q
Business context and period. Artisan is an active investment manager reporting results for the three months ended March 31, 2021, compared with Q1 2020. It operated nine investment teams managing 20 strategies and reported $162.9 billion of assets under management (AUM) at quarter-end. APAM owned approximately 82% of Artisan Partners Holdings.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $290.7 million | $202.8 million; up 43% |
| Operating income / margin | $121.8 million / 41.9% | $71.0 million / 35.0% |
| Net income attributable to APAM | $77.3 million | $34.8 million; up 122% |
| Basic and diluted EPS | $1.19 | $0.53 |
| Adjusted net income per adjusted share (non-GAAP) | $1.13 | $0.66 |
| Operating cash flow | $192.8 million | $120.5 million |
| Cash and cash equivalents at March 31 | $215.8 million | $155.0 million at Dec. 31, 2020 |
| Borrowings | $200.0 million principal; $199.3 million balance-sheet carrying value | $200.0 million principal at Dec. 31, 2020 |
Average AUM rose 43% year over year to $162.9 billion. The weighted-average management fee was 70.8 basis points, compared with 70.7 basis points. Compensation and benefits increased 33% to $139.5 million, mainly reflecting higher incentive compensation tied to revenue growth. Net cash used in investing activities was $22.7 million; net cash used in financing activities was $52.9 million, including $81.3 million of dividends paid. Cash, cash equivalents and restricted cash totaled $281.7 million, including $65.3 million held by consolidated investment products (CIPs), which is not generally available for corporate purposes.
At March 31, the $100 million revolving credit facility was undrawn; the company reported compliance with debt covenants. Notes mature in 2022 ($90 million), 2025 ($60 million) and 2027 ($50 million). The company reported a $428.3 million tax receivable agreement (TRA) liability.
Changes versus the prior comparable period
- Revenue, operating income and APAM-attributable net income increased substantially, driven primarily by higher average AUM; operating margin expanded 6.9 percentage points.
- AUM increased $5.1 billion during the quarter: $3.7 billion from investment returns and $1.4 billion from net client inflows. Fourteen of 20 strategies had net inflows; several established strategies experienced outflows.
- Net operating cash flow increased $72.3 million year over year, reflecting higher operating income and working-capital timing.
- Non-operating results improved to $4.4 million of income from $17.9 million of expense, largely because CIP investment results shifted from a $12.9 million loss to a $6.9 million gain. These results may fluctuate with markets.
Outlook, commentary and risks
- Management described business results as potentially “lumpy,” with AUM and revenue affected by markets, investment performance, client flows, strategy mix and fee rates. It expects long-term investment performance to be a primary driver of long-term results.
- Management said it expects net inflows as a group for strategies launched in 2014 or later. US Small-Cap Growth and Global Opportunities had limited availability to most new client relationships; the High Income Fund was scheduled to limit new investments from April 30, 2021.
- The board declared a subsequent quarterly dividend of $0.88 per Class A share, payable May 28, 2021. Subject to board approval each quarter, management expects quarterly dividends to be approximately 80% of cash generated; payment amounts are not assured. The company expected approximately $32 million of 2021 TRA payments and paid $23.8 million on April 15.
- Most employees continued working remotely amid COVID-19. Management noted potential effects including client redemptions, operational errors, delays and uncertainty about longer-term impacts; it expects some operating costs to return to pre-pandemic levels when office work and travel resume.
- Other key risks include adverse markets, poor strategy performance, loss of investment professionals, regulatory changes and operational or reputational harm. The company reported no material legal proceedings, no material off-balance-sheet arrangements and effective disclosure controls.
- In Q1, the company deconsolidated one private fund after redemption of its seed investment. This reduced cash and cash equivalents by $34.8 million; management reported no net impact on Q1 results of operations.
Important facts for investors to verify
- How AUM and client flows develop by strategy, particularly continued outflows in certain established strategies and capacity restrictions.
- Whether market-driven AUM gains, fee levels and operating-margin improvement persist; Q1 results include a favorable swing in CIP investment results.
- Cash available to APAM versus cash held within CIPs, and the funding needs created by dividends, seed investments and TRA payments.
- The timing and ultimate cost of TRA obligations, which depend on tax attributes, taxable income, ownership exchanges and tax law.
- The assumptions and reconciliation for non-GAAP adjusted EPS and other adjusted measures; these are supplemental and are not substitutes for GAAP results.