Artisan Partners Asset Management Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; it does not provide a clear standalone fourth-quarter income statement. Artisan is an active investment manager whose revenues are primarily asset-based management fees. Figures below are in U.S. dollars unless noted.
Business context and financial performance
- Assets under management (AUM): $174.8 billion at year-end, up 11% from $157.8 billion. Average AUM increased 37.5% to $171.8 billion.
- AUM drivers: $17.6 billion of investment returns and $1.7 billion of net client cash inflows were partly offset by $2.3 billion of fund distributions not reinvested. Thirteen of 21 strategies had net inflows totaling $10.4 billion; the other strategies had $8.7 billion of net outflows.
- Revenue: $1.227 billion, up 36% from $900 million. Management fees were $1.214 billion; performance fees were $13.3 million, down from $14.7 million.
- Profitability: Operating income was $540.5 million, up 51%; GAAP operating margin was 44.0%, versus 39.8%. Net income attributable to APAM was $336.5 million, up 58%. Basic/diluted EPS was $5.10/$5.09; adjusted EPS, a non-GAAP measure, was $5.03.
- Fees and costs: Weighted-average management fee, excluding performance fees, was 70.7 basis points versus 70.9. Operating expenses rose 27% to $686.7 million, including compensation and benefits of $563.1 million, up 29%.
- Cash flow: Operating cash flow was $398.6 million, compared with $318.7 million. Investing activities used $27.0 million and financing activities used $335.4 million. Cash, cash equivalents and restricted cash ended at $200.8 million, including cash of $189.2 million on the balance sheet.
- Debt and liquidity: $200 million of senior notes were outstanding; the $100 million revolver was undrawn. The reported leverage ratio was 0.3x and interest coverage was 57.9x; the company reported compliance with debt covenants. The $90 million Series C notes mature in August 2022; the company arranged for $90 million of Series F notes, subject to customary closing conditions, to refinance them at 3.10% through 2032.
- Balance sheet: Total assets were $1.208 billion and total liabilities $801.1 million. Deferred tax assets were $497.9 million and the tax receivable agreement (TRA) liability was $425.4 million.
Material changes and operating developments
- Revenue growth was mainly driven by higher average AUM; the overall weighted-average fee rate was nearly unchanged. Expenses increased more slowly than revenue, supporting higher operating margins.
- APAM’s ownership of Artisan Partners Holdings increased from 80% to 84%, partly reflecting a 2021 follow-on offering and partnership-unit exchanges.
- Artisan launched its China Post-Venture strategy and Floating Rate strategy in 2021, and added an emerging-markets-debt team. It expected three emerging-markets-debt strategies to launch in the first half of 2022.
- Capacity management remained part of the business model: High Income, International Value and International Small-Mid were closed to most new investors, and U.S. Small-Cap Growth capacity was actively managed.
Outlook, risks and unusual items
- Management said results may be “lumpy,” with short-term performance driven by market conditions and AUM fluctuations. Long-term results depend principally on investment performance, attracting and retaining investment professionals, and developing strategies that meet client demand. No specific revenue or earnings guidance was provided.
- For 2022, management expected higher headcount and wage costs to add about $15 million to fixed compensation expense. It expected approximately $5 million of additional first-quarter costs from seasonal benefits and payroll taxes, occupancy expense to rise $5–$7 million, and communication and technology expense to rise $5–$7 million versus 2021. It also expected quarterly long-term incentive expense of about $14 million, excluding investment-return effects.
- The board declared a $1.03-per-share variable quarterly dividend and a $0.72 special dividend in early 2022, relating to 2021. The stated policy was to target quarterly dividends of approximately 80% of cash generated, subject to board approval and financial, legal and covenant constraints; dividends are not guaranteed.
- Material risks include market declines and client withdrawals, investment underperformance, loss of key portfolio managers, fee pressure and competition, reliance on intermediaries, foreign-exchange exposure, operational and cybersecurity events, changing regulation, and the effects of COVID-19. Management reported hybrid work arrangements and below-pre-pandemic business travel, but said longer-term impacts remained uncertain.
- TRA payments are a significant cash obligation: $31.3 million was paid in 2021, and approximately $33 million was expected in 2022. The company disclosed that acceleration or payment amounts exceeding realized tax benefits could pressure liquidity. The auditor identified deferred tax assets and TRA obligations as a critical audit matter; the audit opinion on the financial statements and internal controls was unqualified.
- The company reported no legal or administrative proceedings management believed would materially affect financial position, cash flows or results. A consolidated investment product was deconsolidated in 2021 after the company lost control; this reduced reported cash by $34.8 million and had no reported net income impact.
Important facts for investors to verify
- Whether AUM growth and strategy-level cash flows continue, especially given the 2021 mix of positive investment returns and modest net inflows.
- Whether investment performance, capacity restrictions, and client flows support fee revenue and the 70.7-basis-point weighted-average fee rate.
- Actual 2022 compensation, occupancy, technology and other expense growth compared with management’s estimates.
- Cash available for dividends after debt service, seed investments, incentive awards, TRA payments and growth spending; confirm that dividends remain discretionary.
- Refinancing completion and terms for the Series C maturity, along with ongoing covenant compliance and the $425.4 million TRA liability.
- Potential exposure from market and foreign-exchange movements: the filing estimates that a 10% AUM change would alter annualized revenue by about $123.6 million at the current average fee rate.