Artisan Partners Asset Management Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Comparisons are with Q1 2023 unless otherwise stated. Amounts are in U.S. dollars.
Business context
Artisan is an active investment manager serving institutional and intermediary clients worldwide. At quarter-end, its 11 autonomous investment teams managed 25 strategies and $160.4 billion of assets under management (AUM). Approximately 75% of AUM was for U.S.-domiciled clients and investors. APAM owned approximately 87% of Artisan Partners Holdings.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 or prior date |
|---|---|---|
| Revenue | $264.4 million | $234.5 million; up 13% |
| Operating income | $77.6 million | $68.3 million; up 14% |
| GAAP operating margin | 29.4% | 29.1% |
| Adjusted operating margin (non-GAAP) | 30.9% | 29.9% |
| Net income attributable to APAM | $59.5 million | $50.8 million; up 17% |
| Basic and diluted EPS | $0.84 | $0.72 |
| Adjusted EPS (non-GAAP) | $0.76 | $0.64 |
| Operating cash flow | $147.0 million | $120.9 million |
| Cash, cash equivalents and restricted cash at quarter-end | $228.6 million | $178.5 million at December 31, 2023 |
| Borrowings | $200.0 million gross; $199.3 million carrying value | $200.0 million gross at December 31, 2023 |
Average AUM was $154.2 billion, up 14% year over year. Ending AUM rose 7% from December 31, 2023, primarily from $10.8 billion of market appreciation, partly offset by $0.5 billion of net client cash outflows. The weighted average management fee declined to 69.1 basis points from 70.4 basis points, mainly due to asset mix and tiered fee schedules. Performance fees were less than $0.1 million in each comparison period.
Compensation and benefits rose 14% to $149.9 million, driven largely by higher incentive compensation and long-term incentive costs. Total operating expenses increased 12% to $186.7 million. Non-operating income was $31.0 million, including $19.2 million of gains from consolidated investment products and gains on other investments. These investment gains contributed to reported earnings and are excluded from management’s adjusted measures.
Cash provided by operations increased by $26.1 million year over year. Investing activities used $29.1 million and financing activities used $63.8 million, including $71.0 million of dividends paid. The company had no revolver borrowings and $100 million of undrawn revolving credit capacity; it reported compliance with debt covenants. Consolidated investment product assets attributable to outside investors are not available for general corporate use.
Material changes and notable items
- Net client cash outflows improved to $0.5 billion from $1.2 billion in Q1 2023. Eleven of 25 strategies nevertheless had net outflows totaling $2.3 billion, partly offset by $1.8 billion of inflows across the other 14 strategies.
- AUM by asset class showed $1.6 billion of net outflows in equities, partly offset by $1.0 billion of inflows in fixed income and alternatives combined.
- Effective March 31, 2024, the International Small-Mid team became a separate autonomous investment franchise.
- One investment product was deconsolidated after third-party capital contributions changed the company’s control. The company reported no income-statement impact; $23.8 million of its direct investment was reclassified to investment securities.
- The tax receivable agreement (TRA) liability increased to $375.6 million from $364.0 million at year-end. APAM paid $27.9 million under the TRAs in April 2024.
Outlook, risks and contingencies
Management expects long-term results to depend substantially on investment performance, client flows, market values and the ability to attract and retain investment professionals. It characterizes results as potentially “lumpy” over shorter periods. Market risks cited include elevated inflation, interest-rate uncertainty, geopolitical tensions and conflicts. Other material business risks include strategy underperformance, client outflows, fee pressure, key-person departures, regulatory changes and operational or reputational events.
Management expects long-term incentive compensation expense of $17 million to $18 million in each remaining quarter of 2024, excluding changes in the investment returns underlying franchise capital awards. For 2024, it expects approximately $37.2 million in TRA payments; $27.9 million was paid in April. The TRA liability and payment timing depend on taxable income, tax rates, partnership-unit exchanges and other factors; in some cases payments may exceed realized tax benefits.
The company’s dividend policy targets a quarterly dividend of approximately 80% of cash generated, subject to board approval, and the board may consider a year-end special dividend. APAM declared a $0.61-per-share quarterly dividend on April 23, payable May 31, 2024. Dividends are not guaranteed. No legal or administrative proceedings were identified that management believed could have a material adverse effect; disclosure controls were reported effective.
Most important facts for investors to verify
- Whether market appreciation can be sustained and net client flows improve, particularly in strategies with outflows and capacity restrictions.
- How fee rates and AUM mix evolve, given the year-over-year decline in the weighted average management fee.
- How much reported earnings depend on investment gains, and how GAAP results compare with management’s non-GAAP adjusted measures.
- Whether compensation growth and projected incentive expense remain consistent with revenue growth and margins.
- The timing and funding of TRA payments, the $375.6 million recorded liability, and the assumptions underlying future tax benefits.
- The sustainability of dividends relative to cash generation, investment needs, debt maturities and other obligations.