Artisan Partners Asset Management Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 23, 2021. The filing is an annual report, not a stand-alone fourth-quarter report. Artisan is an active investment manager whose revenue is primarily fees based on client assets under management (AUM).
Financial and operating performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Ending AUM | $157.8 billion | $121.0 billion | +30% |
| Average AUM | $124.9 billion | $111.0 billion | +12.5% |
| Net client cash flows | +$7.2 billion | −$2.7 billion | Improved |
| Revenue | $899.6 million | $799.0 million | +13% |
| Operating income | $358.3 million | $283.5 million | +26% |
| Operating margin | 39.8% | 35.5% | +4.3 percentage points |
| Net income attributable to APAM | $212.6 million | $156.5 million | +36% |
| Basic and diluted EPS | $3.40 | $2.65 | +28% |
| Adjusted EPS (non-GAAP) | $3.33 | $2.67 | +25% |
| Operating cash flow | $318.7 million | $292.8 million | +9% |
AUM growth comprised $30.3 billion of investment returns and $7.2 billion of net inflows, offset by $0.7 billion of un reinvested fund distributions. Sixteen of 19 strategies had inflows; three strategies, including Non-US Growth, Global Opportunities and US Mid-Cap Value, had combined net outflows of $4.7 billion. Average management fee was 70.9 basis points, down from 71.6 basis points. Performance-fee revenue rose to $14.7 million from $4.6 million.
Operating expenses increased 5% to $541.2 million. Compensation and benefits rose 9% to $435.8 million, while other operating expenses declined 8% to $105.5 million, partly due to lower pandemic-related travel. Reported net income benefited from higher operating income and a smaller TRA-related loss than in 2019; non-operating results also included investment gains, including gains from consolidated investment products.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $155.0 million at year-end, versus $134.6 million a year earlier; accounts receivable were $99.9 million. Total cash, including restricted cash and cash held by consolidated investment products, was $199.5 million, but fund assets are not generally available for corporate use.
- Gross unsecured notes outstanding were $200 million: $90 million due 2022 at 5.82%, $60 million due 2025 at 4.29%, and $50 million due 2027 at 4.53%. The $100 million revolving facility was undrawn. The company reported compliance with debt covenants; leverage ratio was 0.5x and interest coverage 39.7x.
- Financing cash outflows were $282.2 million, including $203.0 million of Class A dividends, $85.8 million of partnership distributions and $26.9 million of TRA payments, partly offset by equity issuance and other items.
- Dividends declared for 2020 totaled $3.39 per Class A share. In February 2021, the board declared $0.97 per share for the December quarter and a $0.31 special dividend. The company expects, subject to board approval and constraints, quarterly dividends of approximately 80% of generated cash.
- Amounts payable under tax receivable agreements were $412.5 million at year-end. The company expected approximately $32 million of TRA payments in 2021; actual timing and amounts depend on tax benefits, taxable income, unit exchanges and other assumptions.
Material changes, outlook and risks
AUM fell from $125.4 billion on February 19, 2020 to $95.2 billion on March 31 amid COVID-19 market declines, then recovered to $157.8 billion at year-end. Management said remote operations were functioning well, but the duration and longer-term business effects of the pandemic remained uncertain. It expected many travel and operating costs to return toward pre-pandemic levels as employees resumed office work and business travel.
Management highlighted net inflows and strong returns across many newer strategies, while expecting near-term outflows to continue in certain established strategies. All strategies were open to new investors at filing, though US Small-Cap Growth and Global Opportunities had limited availability to most new relationships. The company emphasized that results can be uneven because revenue depends on market levels, investment performance, client flows and fee mix; it gave no formal earnings or AUM guidance.
- Key business risks include market declines, weak relative performance, client redemptions, fee pressure, and reliance on key investment professionals and third-party distribution channels.
- COVID-19, operational and cybersecurity incidents, regulatory changes, international and currency exposures, and the ability to retain talent could adversely affect operations and reputation.
- Dividends are discretionary and may be reduced or suspended. Debt covenants, cash needs, TRA obligations and the holding-company structure constrain capital allocation.
- New strategy launches and the 2021 franchise capital award program may affect expenses and cash available for dividends. A $79.4 million long-term incentive grant was approved for 2021, including $35.0 million of cash-based franchise capital awards.
- No material legal proceedings were reported. The independent auditor gave unqualified opinions on the financial statements and internal control; the audit identified deferred tax assets and TRA estimates as a critical audit matter.
Most important facts for investors to verify
- Whether AUM growth and net inflows persist, particularly given outflows in selected large strategies and the strong market contribution to 2020 growth.
- How investment performance, client flows and asset mix affect the weighted average fee rate and operating margin.
- The sustainability of dividends under variable cash generation, debt restrictions, TRA payments and the new cash-based incentive program.
- The assumptions behind the $412.5 million TRA liability and $482.1 million deferred tax asset, including future taxable income and tax rates.
- Whether leadership and portfolio-manager transitions, strategy launches and remote-work or cybersecurity risks affect investment results and client retention.