Artisan Partners Asset Management Inc. — Q2 2021 Form 10-Q
Business context and period: Artisan is an active investment manager serving institutional and intermediary clients. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods unless noted. The company operates as one segment.
Financial and operating performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $304.9m | $202.9m | $595.6m | $405.8m |
| Operating income | $137.8m | $76.6m | $259.6m | $147.6m |
| Operating margin | 45.2% | 37.8% | 43.6% | 36.4% |
| Net income attributable to APAM | $88.2m | $46.2m | $165.5m | $81.0m |
| Diluted EPS | $1.33 | $0.72 | $2.54 | $1.26 |
| Operating cash flow | Not separately reported by quarter | $259.5m | $203.9m |
Q2 management fees were $300.9m and performance fees $4.1m. Revenue rose 50% in Q2, primarily as average AUM increased 56% to $170.5bn; the weighted average management fee rate eased to 70.8 basis points from 71.8 basis points. For the first half, revenue grew 47% as average AUM rose 49%; performance fees were broadly flat at $10.8m versus $10.9m.
At June 30, AUM was $175.2bn, up from $120.6bn a year earlier. During Q2, AUM increased $12.3bn, comprising $11.3bn of investment returns and $1.0bn of net client inflows. First-half net client inflows were $2.5bn, below $2.9bn in 2020; first-half investment returns and other were positive $15.1bn versus negative $3.3bn.
Q2 operating expenses increased 32% to $167.1m, mainly reflecting revenue-linked incentive compensation and distribution costs. Compensation and benefits were 45% of revenue versus 50% a year earlier. The reported effective tax rate was 19.3% for Q2 and 18.3% for the first half.
At June 30, cash and cash equivalents were $228.7m, versus $155.0m at year-end 2020. The company reported $241.8m in cash, cash equivalents and restricted cash including consolidated investment products. Debt was $200.0m principal ($199.4m carrying value); the $100m revolving facility was undrawn. The $406.4m tax receivable agreement (TRA) liability was a significant obligation. The company reported compliance with debt covenants.
APAM declared and paid $0.88 per Class A share in Q2. For the first half, dividends declared were $2.16 per share, including a $0.31 special dividend. After quarter-end, the board declared a $1.00 per-share dividend and Holdings declared a $54.3m distribution.
Material changes and unusual items
- Q2 operating income increased 80% and APAM-attributable net income increased 91% year over year; growth reflected higher AUM and revenue, while operating expenses also rose.
- Non-operating results included gains on investments: consolidated investment product gains were $8.3m in Q2 and $15.2m for the first half. These investment results can fluctuate and are distinct from core advisory-fee performance.
- A private fund was deconsolidated after Artisan lost control, reducing reported cash by $34.8m. Another fund was deconsolidated during Q2 following third-party capital contributions. Management reported no net impact on first-half earnings from the latter deconsolidation.
- A March 2021 follow-on offering and partnership-unit exchanges contributed to APAM’s ownership of Holdings increasing from approximately 80% to 82%. Employee and other limited partners held approximately 18% at quarter-end.
Outlook, commentary and risks
Management did not provide a formal earnings or revenue forecast. It expects business results to remain variable, driven by market conditions, investment performance, AUM composition and client flows. The company expects most operating costs to return to pre-pandemic levels when employees return to offices and business travel resumes. Most employees were still working remotely at the filing date; management cited possible client redemptions, operational inefficiencies and errors, and uncertainty about longer-term COVID-19 effects.
Management said it expects, subject to quarterly board approval, to distribute approximately 80% of quarterly cash generated through variable dividends. It expects 2021 TRA payments of approximately $32m, of which $23.8m had been paid by June 30. Payments may vary, and in certain cases may be accelerated or exceed realized tax benefits.
Key risks include adverse markets, poor investment performance, client outflows, loss of key investment professionals, competition, regulatory change, operational or technology failures, and continuing pandemic effects. Several strategies were closed or capacity-managed for many new investors. The filing reported no material legal or administrative proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether AUM growth and client flows persist, particularly in strategies with reported outflows and those subject to capacity limits.
- How investment returns, client flows and fee mix affect revenue and margins; Q2’s revenue growth was primarily AUM-driven, while the average fee rate declined.
- The composition and volatility of non-operating investment gains, and the difference between GAAP results and management’s non-GAAP adjusted measures.
- Debt maturities, including $90m of notes due in 2022, and the company’s capacity to meet obligations and maintain covenant compliance.
- TRA payment timing and amount, including the $406.4m recorded liability and potential acceleration or payment amounts above realized tax savings.
- Whether the variable dividend policy remains sustainable as cash generation, investment needs and operating costs change.