ARTISAN PARTNERS ASSET MANAGEMENT INC. The following discussion and analysis of the results of operations and financial condition of the Company should be read in conjunction with the "Forward-Looking Statements" disclosure preceding Part I and the "Risk Factors" set forth in Item 1A of Part I of this Annual Report on Form 10K, each of which describe our risks, uncertainties and other important factors in more detail.
Overview and Recent Highlights
We are an investment management firm focused on providing high-value added, active investment strategies in asset classes for sophisticated clients around the world. As ofDecember 31, 2022 , our ten autonomous investment teams managed a total of 25 investment strategies across multiple asset classes and investment styles. We focus on attracting, retaining and developing talented investment professionals and creating an environment in which each investment team is provided ample resources and support, transparent and direct financial incentives, a high degree of investment autonomy, and a long-term time horizon. We create new investment strategies when we identify opportunities to add value for clients, oftentimes through the use of a broad array of securities, instruments, and techniques (which we call degrees of freedom) to differentiate returns and manage risk. We offer our investment management capabilities primarily to sophisticated investors that operate with institutional decision-making processes and longer-term investment horizons. We employ knowledgeable and investment focused relationship managers who are directly aligned with our investment teams, and we pair them with regional and distribution channel experts. We provide access to our investment strategies through multiple investment vehicles, including separate accounts and different types of pooled vehicles. As ofDecember 31, 2022 , approximately 76% of our assets under management were managed for clients and investors domiciled in theU.S. and 24% of our assets under management were managed for clients and investors domiciled outside of theU.S. As a high-value added investment manager we expect that long-term investment performance will be the primary driver of our long-term business and financial results. If we maintain and evolve existing investment strategies and launch new investment strategies that meet the needs of and generate attractive outcomes for sophisticated asset allocators, we believe that we will continue to generate strong business and financial results. Over shorter time periods, changes in our business and financial results are largely driven by market conditions and fluctuations in our assets under management that may not necessarily be the result of our long-term investment performance or the long-term demand for our strategies. For this reason, we expect that our business and financial results will be lumpy over time. We strive to maintain a financial model that is transparent and predictable. Currently, we derive nearly all of our revenues from investment management fees, most of which are based on a specified percentage of clients' average assets under management. A majority of our expenses, including most of our compensation expense, vary directly with changes in our revenues. We invest thoughtfully to support our investment teams and future growth, while also paying out to stockholders and partners a majority of the cash that we generate from operations through dividends and distributions. We expect to continue to invest in the growth of the business, with a focus on adding new investment capabilities and more degrees of freedom in areas where both opportunity and client demand exist, and in which we can differentiate our active management and add value for clients.
Business highlights for 2022 included:
•OurU.S. Value team launched a third strategy, the Value Income strategy, inMarch 2022 . •InMarch 2022 , we launched the Global Unconstrained strategy, managed by theEMsights Capital Group . •InApril 2022 , we launched the Emerging Markets Debt Opportunities strategy, managed by theEMsights Capital Group . •InMay 2022 , we established theArtisan International Explorer Fund , to provide investors with access to the International Explorer strategy through aU.S. mutual fund. •InJuly 2022 , we launched the Emerging Markets Local Opportunities strategy, managed by theEMsights Capital Group .
Financial highlights for 2022 included:
•During the year endedDecember 31, 2022 , our assets under management decreased to$127.9 billion , a decrease of$46.9 billion , or 27%, compared to$174.8 billion atDecember 31, 2021 , as a result of$36.6 billion of market depreciation,$9.8 billion of net client cash outflows, and$0.5 billion of Artisan Funds' distributions that were not reinvested by fund shareholders. •Average assets under management for the year endedDecember 31, 2022 was$141.5 billion , a decrease of 17.6% from the average of$171.8 billion for the year endedDecember 31, 2021 . •We earned$993.3 million in revenue for the year endedDecember 31, 2022 , a 19% decrease from revenues of$1,227.2 million for the year endedDecember 31, 2021 . •Our GAAP operating margin was 34.6% in 2022, compared to 44.0% in 2021. Adjusted operating margin was 34.3% in 2022, compared to 44.1% in 2021. •We generated$2.94 of earnings per basic and diluted share and$3.11 of adjusted EPS. 31 -------------------------------------------------------------------------------- Table of Content s •We declared and distributed dividends of$3.67 per share of Class A common stock during 2022. •We declared, effectiveJanuary 31, 2023 , a quarterly dividend of$0.55 per share of Class A common stock with respect to theDecember 2022 quarter and a special annual dividend of$0.35 per share, for a total of$2.82 of dividends per share with respect to 2022. Organizational Structure Organizational Structure Our operations are conducted throughArtisan Partners Holdings LP ("Holdings") and its subsidiaries. OnMarch 12, 2013 ,Artisan Partners Asset Management Inc. ("APAM") and Holdings completed a series of transactions (the "IPO Reorganization") to reorganize their capital structures in connection with the initial public offering ("IPO") of APAM's Class A common stock. The IPO Reorganization and IPO were completed onMarch 12, 2013 . The IPO Reorganization was designed to create a capital structure that preserves our ability to conduct our business through Holdings, while permitting us to raise additional capital and provide access to liquidity through a public company. Limited partners of Holdings, some of whom are employees, held approximately 15% of the equity interests in Holdings as ofDecember 31, 2022 . As a result, our results reflect that significant noncontrolling interest.
We operate our business in a single segment.
Holdings Unit Exchanges
During the year endedDecember 31, 2022 , certain limited partners of Holdings exchanged 711,166 common units (along with a corresponding number of shares of Class B or Class C common stock of APAM, as applicable) for 711,166 shares of Class A common stock. In connection with the exchanges, APAM received 711,166 GP units of Holdings. APAM's equity ownership interest in Holdings increased from 84% atDecember 31, 2021 to 85% atDecember 31, 2022 , as a result of these transactions and other equity transactions during the period.
Financial Overview
Economic Environment
Global market conditions materially affect our financial performance. Global markets continued to be volatile during the year endedDecember 31, 2022 amid continued concerns about COVID-19, elevated inflation, interest rate increases, the prolonged effects of the war inUkraine , the risk of a recession and other global economic conditions. This continued volatility and uncertainty in global financial markets has impacted the value of our assets under management. Because the revenue we earn is based on the value of our assets under management, fluctuations in our assets under management will result in corresponding fluctuations in our revenues and earnings.
The following table presents the total returns of relevant market indices for
the years ended
For the Years Ended December 31,
2022 2021 2020
S&P 500 total returns (18.1) % 28.7 % 18.4 %
MSCI All Country World total returns (18.4) % 18.5 % 16.3 %
MSCI EAFE total returns (14.5) % 11.3 % 7.8 %
Russell Midcap® total returns (17.3) % 22.6 % 17.1 %
MSCI Emerging Markets Index (20.1) % (2.5) % 18.3 %
ICE BofA US High Yield Master II Total Return Index (11.2) % 5.4 % 6.2 %
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Key Performance Indicators
When we review our business and financial performance we consider, among other
things, the following:
For the Years Ended December 31,
2022 2021 2020
(unaudited; dollars in millions)
Assets under management at period end $ 127,892 $ 174,754 $ 157,776
Average assets under management(1) $ 141,516 $ 171,767 $ 124,901
Net client cash flows(2) $ (9,813) $ 1,678 $ 7,154
Total revenues $ 993 $ 1,227 $ 900
Weighted average fee(3) 70.2 bps 70.7 bps 70.9 bps
Operating margin 34.6 % 44.0 % 39.8 %
Adjusted operating margin (4) 34.3 % 44.1 % 39.8 %
(1) We compute average assets under management by averaging day-end assets under management for the applicable
period.
(2) Net client cash flows excludes Artisan Funds' income and capital gain distributions that were not reinvested by
fund shareholders.
(3) We compute our weighted average management fee by dividing annualized investment management fees (which excludes
performance fees) by average assets under management for the applicable period.
(4) Adjusted measures are non-GAAP measures and are explained and reconciled to the comparable GAAP measures in
"Supplemental Non-GAAP Financial Information" below.
Investment advisory fees and assets under management within our consolidated
investment products are excluded from the weighted average fee calculations and
from total revenues, since any such revenues are eliminated upon consolidation.
Assets under management within Artisan Private Funds are included in the
reported firmwide, separate accounts and other, and institutional assets under
management figures reported below.
Assets Under Management and Investment Performance
Changes to our operating results from one period to another are primarily caused by changes in the amount of our assets under management. Changes in the relative composition of our assets under management among our investment strategies and vehicles and the effective fee rates on our products also impact our operating results.
The amount and composition of our assets under management are, and will continue to be, influenced by a variety of factors including, among others:
•investment performance, including fluctuations in both the financial markets
and foreign currency exchange rates and the quality of our investment decisions;
•flows of client assets into and out of our various strategies and investment
vehicles;
•our decision to close strategies or limit the growth of assets in a strategy or
a vehicle when we believe it is in the best interest of our clients, as well as
our decision to re-open strategies, in part or entirely;
•our ability to attract and retain qualified investment, management, and
marketing and client service professionals;
•industry trends towards products, strategies, vehicles or services that we do
not offer;
•competitive conditions in the investment management and broader financial
services sectors; and
•investor sentiment and confidence.
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The table below sets forth changes in our total assets under management:
For the Years Ended December 31,
2022 2021 2020
(unaudited; dollars in millions)
Beginning assets under management $ 174,754 $ 157,776 $ 121,016
Gross client cash inflows 27,227 33,725 36,338
Gross client cash outflows (37,040) (32,047) (29,184)
Net client cash flows (9,813) 1,678 7,154
Artisan Funds' distributions not reinvested(1) (497) (2,295) (690)
Investment returns and other(2) (36,552) 17,595 30,296
Ending assets under management $ 127,892 $ 174,754 $ 157,776
Average assets under management $ 141,516 $ 171,767 $ 124,901
(1) Artisan Funds' distributions not reinvested represents the amount of income and capital gain distributions
that were not reinvested in the Artisan Funds.
(2) Includes the impact of translating the value of assets under management denominated in non-USD currencies
into U.S. dollars. The impact was immaterial for the periods presented.
During 2022 our assets under management decreased by $46.9 billion due to $36.6
billion of market depreciation, $9.8 billion of net client cash outflows, and
$0.5 billion of Artisan Funds' distributions that were not reinvested by fund
shareholders. For the year, 10 of our 25 investment strategies had net inflows
totaling $1.2 billion , which were offset by $11.0 billion of net outflows from
the remaining strategies.
Over the long-term, we expect to generate the majority of our AUM growth through investment returns, which has been our historical experience.
We monitor the availability of attractive investment opportunities relative to the amount of assets we manage in each of our investment strategies and the velocity at which the strategies are experiencing inflows. When appropriate, we will close a strategy to new investors or otherwise take action to slow or restrict its growth, even though our aggregate assets under management may be negatively impacted in the short term. We may also re-open a strategy, widely or selectively, to fill available capacity or manage the diversification of our client base in that strategy. We believe that management of our investment capacity protects our ability to manage assets successfully, which protects the interests of our clients and, in the long term, protects our ability to retain client assets and maintain our profit margins. As of the date of this filing, theArtisan High Income Fund ,Artisan International Value Fund andArtisan International Small-Mid Fund are closed to most new investors and their respective strategies have limited availability to most new client relationships. In addition, we are actively managing the capacity of ourU.S. Small-Cap Growth strategy with respect to new client relationships. When we close or otherwise restrict the growth of a strategy, we typically continue to allow additional investments in the strategy by existing clients and certain related entities. We may also permit new investments by other eligible investors in our discretion. As a result, during a given period we may have net client cash inflows in a closed strategy. However, when a strategy is closed or its growth is restricted we expect there to be periods of net client cash outflows. The unaudited table on the following page sets forth the average annual total returns for each composite (gross of fees) and its respective broad-based benchmark (and style benchmark, if applicable) over a multi-horizon time period as ofDecember 31, 2022 . Returns for periods less than one year are not annualized. 34
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Composite Inception Strategy AUM Average Annual Total Returns (Gross) Average Annual
Value-Added(1) Since
Investment Team and Strategy Date (in $MM) (2) 1 YR 3 YR 5 YR 10 YR Inception Inception (bps)
Growth Team
Global Opportunities Strategy 2/1/2007 $ 18,676 (29.53)% 4.71% 7.69% 11.22% 9.95% 473
MSCI All Country World Index (18.36)% 4.00% 5.22% 7.97% 5.22%
Global Discovery Strategy 9/1/2017 1,392 (30.08)% 5.65% 10.78% --- 11.28% 491
MSCI All Country World Index (18.36)% 4.00% 5.22% --- 6.37%
U.S. Mid-Cap Growth Strategy 4/1/1997 10,624 (36.04)% 4.51% 9.18% 11.30% 13.90% 494
Russell® Midcap Index (17.32)% 5.87% 7.10% 10.95% 9.86%
Russell® Midcap Growth Index (26.72)% 3.85% 7.64% 11.40% 8.96%
U.S. Small-Cap Growth Strategy 4/1/1995 3,285 (28.67)% 2.35% 9.51% 12.29% 10.37% 321
Russell® 2000 Index (20.44)% 3.10% 4.12% 9.01% 8.56%
Russell® 2000 Growth Index (26.36)% 0.65% 3.50% 9.20% 7.16%
Global Equity Team
Global Equity Strategy 4/1/2010 413 (19.79)% 3.60% 7.69% 10.41% 10.97% 342
MSCI All Country World Index (18.36)% 4.00% 5.22% 7.97% 7.55%
Non-U.S. Growth Strategy 1/1/1996 13,285 (18.44)% (0.84)% 2.83% 5.66% 9.07% 462
MSCI EAFE Index (14.45)% 0.87% 1.54% 4.67% 4.45%
Non-U.S. Small-Mid Growth
Strategy 1/1/2019 6,752 (23.02)% 3.10% --- --- 10.96% 596
MSCI All Country World Index Ex
USA Small Mid Cap (19.49)% (0.22)% --- --- 5.00%
China Post-Venture Strategy 4/1/2021 173 (27.30)% --- --- --- (21.02)% (32)
MSCI China SMID Cap Index (22.17)% --- --- --- (20.70)%U.S. Value Team Value Equity Strategy 7/1/2005 3,252 (8.21)% 8.18% 7.49% 10.41% 8.56% 111 Russell® 1000 Index (19.13)% 7.34% 9.13% 12.37% 9.07% Russell® 1000 Value Index (7.54)% 5.95% 6.66% 10.29% 7.45% U.S. Mid-Cap Value Strategy 4/1/1999 2,826 (12.11)% 6.27% 5.55% 9.03% 11.79% 255 Russell® Midcap Index (17.32)% 5.87% 7.10% 10.95% 9.09% Russell® Midcap Value Index (12.03)% 5.82% 5.72% 10.10% 9.24% Value Income Strategy 3/1/2022 10 --- --- --- --- (7.74)% 324 S&P 500 Market Index --- --- --- --- (10.98)% International Value Team International Value Strategy 7/1/2002 30,152 (6.12)% 6.76% 5.45% 8.74% 11.13% 568 MSCI EAFE Index (14.45)% 0.87% 1.54% 4.67% 5.45% International Explorer Strategy 10/1/2020 58 (13.21)% --- --- --- 12.65% 812 MSCI All Country World Index Ex USA Small Cap (Net) (19.97)% --- --- --- 4.53% Global Value Team Global Value Strategy 7/1/2007 21,432 (12.69)% 3.22% 3.95% 8.80% 7.61% 282 MSCI All Country World Index (18.36)% 4.00% 5.22% 7.97% 4.79% Select Equity Strategy 3/1/2020 335 (15.92)% --- --- --- 6.78% (467) S&P 500 Market Index (Total Return) (18.11)% --- --- --- 11.45% Sustainable Emerging Markets Team Sustainable Emerging Markets Strategy 7/1/2006 873 (27.21)% (3.69)% (1.33)% 2.67% 4.33% 39 MSCI Emerging Markets Index (20.09)% (2.69)% (1.40)% 1.44% 3.94% Credit Team High Income Strategy 4/1/2014 6,957 (9.15)% 2.62% 4.31% --- 5.83% 251 ICE BofAU.S. High Yield Master II Total Return Index (11.22)% (0.23)% 2.12% --- 3.32% Credit Opportunities Strategy 7/1/2017 136 (3.64)% 12.17% 10.48% --- 10.92% 951 ICE BofAU.S. Dollar LIBOR 3-month Constant Maturity Index 1.21% 0.82% 1.42% --- 1.41% Floating Rate Strategy 1/1/2022 47 (0.80)% --- --- --- (0.80)% 26Credit Suisse Leveraged Loan Total Return Index (1.06)% --- --- --- (1.06)% 35
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Developing World Team Developing World Strategy 7/1/2015 3,466 (40.56)% (0.15)% 4.06% --- 7.04% 486 MSCI Emerging Markets Index (20.09)% (2.69)% (1.40)% --- 2.18%Antero Peak Group Antero Peak Strategy 5/1/2017 2,948 (24.90)% 7.13% 12.96% --- 16.58% 584 S&P 500 Market Index
(18.11)% 7.65% 9.42% --- 10.74%
Antero Peak Hedge Strategy
728 (22.96)% 4.24% 9.92% --- 10.27% 29
S&P 500 Market Index
(18.11)% 7.65% 9.42% --- 9.98%
EMsights Capital Group
Global Unconstrained Strategy
16 --- --- --- --- 8.40% 698
ICE BofA 3-month Treasury Bill
Index --- --- --- --- 1.42%
Emerging Markets Debt
Opportunities Strategy 5/1/2022 45 --- --- --- --- 8.28% 927
J.P. Morgan EMB Hard
Currency/Local currency 50-50
Index --- --- --- --- (0.99)%
Emerging Markets Local
Opportunities Strategy 8/1/2022 11 --- --- --- --- 3.72% 69
J.P. Morgan GBI-EM Global
Diversified Index --- --- --- --- 3.03%
Total Assets Under Management $ 127,892 (1) Value-added is the amount, in basis points, by which the average annual gross composite return of each of our strategies has outperformed or
underperformed its respective benchmark. See "Performance and Assets Under Management Information Used in this Report" for additional information
regarding the benchmarks used. Value-added for periods less than one year is not annualized. The High Income strategy holds loans and other
security types that are not included in its benchmark, which, at times, causes material differences in relative performance. The Credit
Opportunities strategy is benchmark agnostic and has been compared to the 3-month LIBOR for reference purposes only. The Antero Peak and
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The tables below set forth changes in our assets under management by investment
team:
By Investment Team
Sustainable Antero Peak EMsights Capital
Year Ended Growth Global Equity U.S. Value International Value Global Value Emerging Markets Credit Developing World Group Group Total
December 31, 2022 (unaudited; in millions)
Beginning assets under
management $ 52,434 $ 32,998 $ 8,053 $ 31,816 $ 26,744 $ 1,173 $ 8,157 $ 8,102 $ 5,277 $ - $ 174,754
Gross client cash inflows 7,069 3,252 544 7,560 2,759 293 3,021 1,599 1,064 66 27,227
Gross client cash outflows (8,579) (8,681) (1,617) (6,617) (4,003) (226) (3,033) (2,998) (1,286) - (37,040)
Net client cash flows (1,510) (5,429) (1,073) 943 (1,244) 67 (12) (1,399) (222) 66 (9,813)
Artisan Funds'
distributions not
reinvested (1) (5) (35) (47) (173) (16) - (209) (7) (5) - (497)
Investment returns and
other (2) (16,942) (6,911) (845) (2,376) (3,717) (367) (796) (3,230) (1,374) 6 (36,552)
Ending assets under
management $ 33,977 $ 20,623 $ 6,088 $ 30,210 $ 21,767 $ 873 $ 7,140 $ 3,466 $ 3,676 $ 72 $ 127,892
Average assets under
management $ 38,565 $ 24,019 $ 7,146 $ 30,406 $ 23,574 $ 996 $ 7,548 $ 4,872 $ 4,350 $ 53 $ 141,516
December 31, 2021
Beginning assets under
management $ 52,685 $ 32,056 $ 7,149 $ 24,123 $ 22,417 $ 679 $ 6,338 $ 8,853 $ 3,476 $ - $ 157,776
Gross client cash inflows 7,418 4,384 407 8,121 4,723 499 3,158 3,499 1,516 - 33,725
Gross client cash outflows (12,528) (5,313) (1,189) (4,057) (3,809) (54) (1,582) (3,035) (480) - (32,047)
Net client cash flows (5,110) (929) (782) 4,064 914 445 1,576 464 1,036 - 1,678
Artisan Funds'
distributions not
reinvested (1) (302) (545) (47) (701) (46) - (217) (286) (151) - (2,295)
Investment returns and
other (2) 5,161 2,416 1,733 4,330 3,459 49 460 (929) 916 - 17,595
Ending assets under
management $ 52,434 $ 32,998 $ 8,053 $ 31,816 $ 26,744 $ 1,173 $ 8,157 $ 8,102 $ 5,277 $ - $ 174,754
Average assets under
management $ 53,375 $ 33,679 $ 7,835 $ 28,998 $ 25,463 $ 924 $ 7,576 $ 9,541 $ 4,376 $ - $ 171,767
December 31, 2020
Beginning assets under
management $ 34,793 $ 27,860 $ 7,402 $ 22,000 $ 19,707 $ 234 $ 3,850 $ 3,374 $ 1,796 $ - $ 121,016
Gross client cash inflows 9,532 6,479 786 6,165 4,681 349 3,438 3,527 1,381 - 36,338
Gross client cash outflows (8,616) (5,885) (1,687) (6,101) (3,535) (25) (1,415) (1,487) (433) - (29,184)
Net client cash flows 916 594 (901) 64 1,146 324 2,023 2,040 948 - 7,154
Artisan Funds'
distributions not
reinvested (1) (222) (115) (12) (46) - - (130) (142) (23) - (690)
Investment returns and
other (2) 17,198 3,717 660 2,105 1,564 121 595 3,581 755 - 30,296
Ending assets under
management $ 52,685 $ 32,056 $ 7,149 $ 24,123 $ 22,417 $ 679 $ 6,338 $ 8,853 $ 3,476 $ - $ 157,776
Average assets under
management $ 40,806 $ 26,991 $ 6,266 $ 20,045 $ 17,780 $ 476 $ 4,493 $ 5,465 $ 2,579 $ - $ 124,901 (1) Artisan Funds' distributions not reinvested represents the amount of income and capital gain distributions that were not reinvested in the Artisan Funds.
(2) Includes the impact of translating the value of assets under management denominated in non-USD currencies into
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The goal of our marketing, distribution and client services efforts is to
establish and maintain a client base that is diversified by investment strategy,
client type and distribution channel. As distribution channels have evolved to
have more institutional-like decision making processes and longer-term
investment horizons, we have expanded our distribution efforts into those areas.
The table below sets forth our assets under management by distribution channel:
As of December 31, 2022 As of December 31, 2021 As of December 31, 2020
$ in millions % of total $ in millions % of total $ in millions % of total
(unaudited) (unaudited) (unaudited)
Institutional $ 82,456 64.5 % $ 111,705 63.9 % $ 102,189 64.8 %
Intermediary 39,851 31.1 % 55,198 31.6 % 48,657 30.8 %
Retail 5,585 4.4 % 7,851 4.5 % 6,930 4.4 %
Ending Assets Under Management(1) $ 127,892 100.0 % $ 174,754 100.0 % $ 157,776 100.0 %
(1) The allocation of assets under management by distribution channel involves the use of estimates and the exercise of judgment.
Our institutional channel includes assets under management sourced from defined contribution plan clients, which made up approximately 11% of our total assets under management as ofDecember 31, 2022 . 38 -------------------------------------------------------------------------------- Table of Content s The following tables set forth the changes in our assets under management by vehicle type: Artisan Funds & Artisan Global Separate Accounts Year Ended Funds and Other(1) Total December 31, 2022 (unaudited; in millions)
Beginning assets under management
18,632 8,595 27,227
Gross client cash outflows (24,552) (12,488) (37,040)
Net client cash flows (5,920) (3,893) (9,813)
Artisan Funds' distributions not
reinvested(2) (497) - (497)
Investment returns and other(3) (16,834) (19,718) (36,552)
Net transfers(4) (301) 301 -
Ending assets under management $ 60,811 $ 67,081 $ 127,892
Average assets under management $ 68,080 $ 73,436 $ 141,516
December 31, 2021
Beginning assets under management $ 74,746 $ 83,030 $ 157,776
Gross client cash inflows 23,957 9,768 33,725
Gross client cash outflows (18,628) (13,419) (32,047)
Net client cash flows 5,329 (3,651) 1,678
Artisan Funds' distributions not
reinvested(2) (2,295) - (2,295)
Investment returns and other(3) 6,984 10,611 17,595
Net transfers(4) (401) 401 -
Ending assets under management $ 84,363 $ 90,391 $ 174,754
Average assets under management $ 83,533 $ 88,234 $ 171,767
December 31, 2020
Beginning assets under management $ 57,288 $ 63,728 $ 121,016
Gross client cash inflows 22,510 13,828 36,338
Gross client cash outflows (18,110) (11,074) (29,184)
Net client cash flows 4,400 2,754 7,154
Artisan Funds' distributions not
reinvested(2) (690) - (690)
Investment returns and other(3) 14,259 16,037 30,296
Net transfers(4) (511) 511 -
Ending assets under management $ 74,746 $ 83,030 $ 157,776
Average assets under management $ 58,629 $ 66,272 $ 124,901
(1) Separate accounts and other consists of AUM we manage in or through vehicles other than Artisan Funds
or Artisan Global Funds. This AUM includes assets we manage in traditional separate accounts, as well as
assets we manage in Artisan-branded collective investment trusts and in Artisan Private Funds. As of
December 31, 2022 , AUM for certain strategies include the following amounts for which Artisan Partners
provides investment models to managed account sponsors (reported on a one-month lag): Artisan Sustainable
Emerging Markets $48 million .
(2) Artisan Funds' distributions not reinvested represents the amount of income and capital gain
distributions that were not reinvested in the Artisan Funds.
(3) Includes the impact of translating the value of assets under management denominated in non-USD
currencies into U.S. dollars. The impact was immaterial for the periods presented.
(4) Net transfers represent certain amounts that we have identified as having been transferred out of one
investment strategy, investment vehicle or account and into another strategy, vehicle or account.
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Artisan Funds and Artisan Global Funds
As ofDecember 31, 2022 , Artisan Funds comprised$55.8 billion , or 45%, of our assets under management. For the year endedDecember 31, 2022 , fees from Artisan Funds represented$573.9 million , or 58%, of our revenues. Our contractual tiered fee rates for the series of Artisan Funds range from 0.60% to 1.05% of fund assets, depending on the investment strategy, the amount invested and other factors. As ofDecember 31, 2022 , Artisan Global Funds comprised$5.0 billion , or 3%, of our assets under management. For the year endedDecember 31, 2022 , fees from Artisan Global Funds represented$43.1 million , or 4%, of our revenues. Our contractual fee rates for Artisan Global Funds range from 0.70% to 1.85% of assets under management. The weighted average management fee rate paid by our Artisan Funds and Artisan Global Funds clients in the aggregate was 0.907%, 0.912%, and 0.916%, for the years endedDecember 31, 2022 , 2021 and 2020, respectively.
Separate Accounts and Other
"Separate accounts and other" consists of assets we manage in or through vehicles other than Artisan Funds or Artisan Global Funds, including traditional separate accounts, Artisan-branded collective investment trusts and Artisan Private Funds, as well as assets under advisement related to clients for whom we provide investment models but do not have discretionary investment authority. Separate accounts and other comprised$67.1 billion , or 52%, of our assets under management as ofDecember 31, 2022 . For the year endedDecember 31, 2022 , fees from separate accounts and other represented$376.3 million , or 38%, of our revenues. For traditional separate account clients, we generally impose standard fee schedules that vary by investment strategy and, through the application of standard breakpoints, reflect the size of the account and client relationship. The weighted average management fee rate paid by our traditional separate account clients was 0.484%, 0.484%, and 0.498% for the years endedDecember 31, 2022 , 2021 and 2020, respectively. There are a number of exceptions to our standard fee schedules, including exceptions based on the nature of our relationship with the client and the value of the assets under our management in that relationship. In general, our effective rate of fee for a particular client relationship declines as the assets we manage for that client increase, which we believe is typical for the asset management industry. A number of our investment strategies are accessible to certain types of employee benefit plans through Artisan-branded collective investment trusts. We act as investment adviser to the collective investment trusts and earn a management fee for providing this service. The weighted average management fee rate paid by our Artisan-branded collective investment trust clients was 0.714%, 0.729%, and 0.735% for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Artisan serves as the investment manager and acts as the general partner for certain Artisan Private Funds. Under the terms of these agreements, Artisan earns a management fee, and for certain funds is entitled to receive either an allocation of profits or a performance-based fee. The weighted average management fee rate paid by our Artisan Private Funds clients was 0.809%, 0.786%, and 0.800% for the years endedDecember 31, 2022 , 2021 and 2020, respectively. The weighted average management fee rate, which excludes performance fees, paid by our separate accounts and other clients in the aggregate was 0.512%, 0.513% and 0.526% for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Because, as is typical in the asset management industry, our rates of fee decline as the assets under our management in a relationship increase, and because of differences in our fees by investment strategy, a change in the composition of our assets under management, in particular a shift to strategies, clients or relationships with lower effective rates of fees, could have a material impact on our overall weighted average rate of fee. See "-Qualitative and Quantitative Disclosures Regarding Market Risk-Market Risk" for a sensitivity analysis that demonstrates the impact that certain changes in the composition of our assets under management could have on our revenues.
Investment Advisory Revenues
Essentially all of our revenues consist of fees earned from managing clients' assets. Our investment advisory fees, which are comprised of management fees and performance fees, fluctuate based on a number of factors, including the total value of our assets under management, the composition of assets under management among investment vehicles and our investment strategies, changes in the investment management fee rates on our products, the extent to which we enter into fee arrangements that differ from our standard fee schedules, which can be affected by custom and the competitive landscape in the relevant market, and, for the accounts on which we earn performance fees, the investment performance of those accounts. The different fee structures associated with Artisan Funds, Artisan Global Funds and separate accounts and other pooled vehicles, and the different fee schedules applicable to each of our investment strategies, make the composition of our assets under management an important determinant of the investment management fees we earn. Historically, we have received higher effective rates of investment management fees from Artisan Funds and Artisan Global Funds than from traditional separate accounts, reflecting, among other things, the different and broader array of services we provide to Artisan Funds and Artisan Global Funds. Investment management fees for non-U.S. funds may also be higher because they include fees to offset higher distribution costs. Our investment management fees also differ by investment strategy, with higher-capacity strategies having lower standard fee rates than strategies with more limited capacity. 40
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Certain separate account clients pay us fees based on the performance of their accounts relative to agreed-upon benchmarks, which typically results in a lower base fee, but allows us to earn higher fees if the performance we achieve for that client is superior to the performance of an agreed-upon benchmark. We may also receive performance fees or incentive allocations from Artisan Private Funds. Approximately 3% of our$127.9 billion of assets under management as ofDecember 31, 2022 have performance fee billing arrangements. Performance fees of$0.6 million ,$13.3 million , and$14.7 million were recognized in the years endedDecember 31, 2022 , 2021 and 2020, respectively.
The following table sets forth revenues we earned by vehicle type for the years
ended
For the Years Ended December 31,
2022 2021 2020
Revenues (in millions)
Management fees
Artisan Funds & Artisan Global Funds $ 617.0 $ 761.4 $ 537.2
Separate accounts and other 375.7 452.5 347.7
Performance fees 0.6 13.3 14.7
Total revenues $ 993.3 $ 1,227.2 $ 899.6
Average assets under management for period $ 141,516 $
171,767
Management fees, performance fees and incentive allocations earned from consolidated investment products are eliminated from revenue upon consolidation. For each of the years endedDecember 31, 2022 , 2021 and 2020, approximately 82%, 83%, and 83%, respectively, of our investment advisory fees were earned from clients located inthe United States .
Operating Expenses
Our operating expenses consist primarily of compensation and benefits, distribution, servicing and marketing, occupancy, communication and technology, and general and administrative expenses.
Our expenses fluctuate due to a number of factors, including the following:
•variations in the amount of total compensation expense due to, among other things, changes in the amount of incentive compensation earned and equity awards made, variations in our employee count (including the addition of new investment teams) and changes in our product mix and other competitive factors; and •expenses, such as distribution fees, rent, professional service fees, technology and data-related costs, incurred, as necessary, to operate and grow our business. A significant portion of our operating expenses are variable and fluctuate in direct relation to our assets under management and revenues. Even if we experience declining revenues, we expect to continue to make the expenditures necessary for us to manage and grow our business. As a result, our profits may decline. Compensation and Benefits
Compensation and benefits includes (i) salaries, incentive compensation and benefits costs and (ii) long-term incentive compensation expense related to equity and cash awards granted to employees.
Incentive compensation comprises a significant portion of our senior employees' total compensation. The amount of incentive compensation paid to members of our investment teams and distribution team is based in large part on formulas that are tied directly to revenues. For each of our investment teams, incentive compensation generally represents 25% of the asset-based management fees and a share of performance-based fees generated by assets under management in the team's strategy or strategies. Incentive compensation paid to most other employees is discretionary and determined based on individual performance and our overall results during the applicable year. The Company is primarily self-insured for health benefits up to certain annual stop-loss limits. Expense is recognized based on claims filed and an estimate of claims incurred but not yet reported, as determined by an independent third party. Fixed compensation costs, comprised of salaries, benefits, and equity based long term compensation expense, are expected to rise approximately mid single digits reflecting 2023 merit increases, the absorption of a full year of expense for full time employees hired in 2022, and an expected 5% increase in employees, primarily in investment and distribution roles. Certain compensation and benefits expenses are generally higher in the beginning of the year, including employer funded retirement and health care contributions and payroll taxes. We expect these costs to add approximately$5 million to our expenses in the first quarter of 2023, compared to the fourth quarter of 2022. 41
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We have granted equity awards to our employees pursuant to theArtisan Partners Asset Management Inc. 2013 Omnibus Incentive Compensation Plan, as amended. The equity awards consist of standard restricted awards that generally vest on a pro rata basis over 5 years and career awards that vest when both of the following conditions are met (1) pro-rata time vesting over 5 years and (2) qualifying retirement (as defined in the award agreements). Career-vesting awards granted to investment team members are generally further subject to the Franchise Protection Clause, which applies to current or future portfolio managers and founding investment team members. The Franchise Protection Clause provides that the total number of awards ultimately vesting will be reduced to the extent that cumulative net client cash outflows from the award recipient's investment team during generally a 3-year measurement period beginning on the date of the recipient's retirement notice exceeds a set threshold. Performance share units ("PSUs") were granted to certain executive officers of the Company in 2020, 2021 and 2022. The number of PSUs that will vest is dependent upon the Company's adjusted operating margin and total stockholder return relative to a peer group over a three year measurement period. Once determined the extent to which the performance conditions have been met, 50% of the PSUs eligible for vesting will vest, and 50% of the PSUs eligible for vesting will vest upon a qualified retirement. No performance share units were granted in 2023. The estimated grant date fair value of equity awards is recognized as compensation expense on a straight-line basis over the requisite service period of the award. The initial requisite service period is generally three years for PSUs and five years for all other equity awards that have been granted to date. Compensation expense for PSUs is only recognized if it is probable that the performance conditions will be achieved. For all awards, if a service or performance condition is not achieved, the corresponding awards are forfeited and any previously recognized compensation expense is reversed. We grant cash-based long-term incentive awards, referred to as franchise capital awards, to certain investment team members in lieu of additional equity awards. Franchise capital awards are subject to the same long-term vesting and forfeiture provisions as the equity awards. Prior to vesting, franchise capital awards are generally allocated to one or more of Artisan's investment strategies. The underlying investment holdings and franchise capital award liability are marked to market value each quarter. The change in value of the award liability is included in compensation expense. The change in value of the underlying investment holdings is included in non-operating income/(expense). We expect to reserve approximately 4% of our management fee revenues each quarter for future franchise capital awards, which we expect to make after the conclusion of each year. Over the long-term, we believe the economic impact of the reduced cash available for dividends will be offset by a corresponding reduction in dilution, as we expect to grant fewer equity awards as a result of the franchise capital awards.
On
Since the IPO and including the grant in the first quarter of 2023, our board of directors has approved equity grants of 11,866,016 restricted share-based awards. Total unrecognized non-cash compensation expense for these awards is$97.7 million . As of the date of this filing, unvested equity awards consist of the following number of shares by vesting condition:
Service & Performance
Service Only Conditions Service & Market Conditions Total
Standard Pro Rata Time Vesting 1,842,485 58,581 58,581 1,959,647
Qualified Retirement 2,867,467 1,376,369 57,002 4,300,838
Total Unvested 4,709,952 1,434,950 115,583 6,260,485
Including the long-term incentive award approved in the first quarter of 2023,
total unrecognized long-term incentive compensation expense (including both
equity grants and franchise capital awards) is $197.3 million . We expect
long-term incentive compensation expense to be approximately $14 million per
quarter in 2023, excluding the impact of investment returns on the franchise
capital awards' underlying investments.
We expect to continue to make long-term incentive awards each year, though the
form and structure of the awards may change as we seek to maximize alignment
between our employees and our clients, investors and stockholders. The actual
amount of the expense over time will depend primarily on the size of awards made
and our stock price at the time equity awards are granted. The size of long-term
incentive awards will vary from year to year and will be influenced by our
results and other factors. From time to time, we may also make individual equity
grants to people we hire.
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Distribution, Servicing and Marketing
Distribution, servicing and marketing expenses primarily represent payments we make to broker-dealers, financial advisors, defined contribution plan providers, mutual fund supermarkets and other intermediaries for selling, servicing and administering accounts invested in shares of Artisan Funds. Artisan Funds authorizes intermediaries to accept purchase, exchange and redemption orders for shares of Artisan Funds on behalf of Artisan Funds. Many intermediaries charge a fee for those services. Artisan Funds pays a portion of some of those fees, which portion is intended to compensate the intermediary for its provision of services of the type that would be provided by Artisan Funds' transfer agent or other service providers if the shares were registered directly on the books of Artisan Funds' transfer agent. Like the investment management fees we earn as adviser to Artisan Funds, distribution, servicing and marketing fees typically vary with the value of the assets invested in shares of Artisan Funds. The allocation of such fees between us and Artisan Funds is determined by the board of Artisan Funds, based on information and a recommendation from us, with the goal of allocating to us, at a minimum, all costs attributable to the marketing and distribution of shares of Artisan Funds. A significant portion of Artisan Funds' shares are held by investors through intermediaries to which we pay distribution, servicing and marketing expenses. Total distribution, servicing and marketing fees will increase as we increase our assets under management sourced through intermediaries that charge these fees or similar fees. The amount we pay to intermediaries for distribution and administrative services varies by share class. As assets have transferred from the Investor share class to the Advisor and Institutional share classes, the amount we have paid for distribution, servicing and marketing has decreased. Consistent with the experience of other investment managers, as the foregoing expenses have decreased, we have seen increased requests from intermediaries for alternative forms of compensation. To date, such alternative forms of compensation have not been material, but they could be over time.
Occupancy
Occupancy expenses include operating leases for facilities, furniture and office equipment, miscellaneous facility related costs and depreciation expense associated with furniture purchases and leasehold improvements. We expect 2023 occupancy expenses to be relatively consistent with 2022.
Communication and technology
Communication and technology expenses include information and print subscriptions, telephone costs, information systems consulting fees, equipment and software maintenance expenses, operating leases for information technology equipment and depreciation and amortization expenses associated with computer hardware and software. Information and print subscriptions represent the costs we pay to obtain investment research and other data we need to operate our business. A portion of these expenses generally increase or decrease in relative proportion to the number of our employees and the overall size and scale of our business operations. We expect to continue our measured investments in technology to support our investment teams, distribution efforts, and scalable operations. We expect communication and technology expenses to increase approximately 5% in 2023. On behalf of our clients, we make decisions to buy and sell securities for each portfolio, select broker-dealers to execute trades and negotiate brokerage commission rates. In connection with these transactions, we receive research products and services from broker-dealers in exchange for the business we conduct with such firms. Some of those research products and services could be acquired for cash and our receipt of those products and services through the use of client commissions, or soft dollars, reduces cash expenses we would otherwise incur. In response to the Markets in Financial Instruments Directive II and industry changes prompted by it, we have in the past experienced requests from clients to bear research expenses that are currently paid for using soft dollars. In response to such requests or as a result of changes in our operations, we may eventually bear a significant portion or all of the costs of research that are currently paid for using soft dollars, which would increase our operating expenses materially.
General and Administrative
General and administrative expenses include professional fees, travel and entertainment, certain state and local taxes, directors' and officers' liability insurance, director fees, and other miscellaneous expenses we incur in operating our business. Travel expenses decreased significantly in 2020 and remained lower than historical levels in 2021 due to the COVID-19 pandemic. In 2022, travel-related expenses returned to near pre-pandemic levels, partially due to the increased cost of travel as compared to pre-pandemic levels. As a result of an expected increase in headcount within our investment and distribution teams and an expected increase in the cost of travel, we expect a 5% increase in travel costs in 2023.
Non-Operating Income (Expense)
Interest Expense
Interest expense primarily relates to the interest we pay on our debt. For a
description of the terms of our debt, see "-Liquidity and Capital Resources".
Interest expense also includes interest on TRA payments, which is incurred
between the due date (without extension) for our federal income tax return and
the date on which we make TRA payments.
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Net Investment Gain (Loss) of Consolidated Investment Products
Net investment gain (loss) of consolidated investment products represents the realized and unrealized investment gains (losses) related to investment products that are included in our consolidated financial statements because Artisan holds a controlling financial interest in the respective investment entities. Significant portions of net investment gain (loss) of consolidated investment products are offset by noncontrolling interests in our Consolidated Statements of Operations. Net Investment Income Net investment income includes realized and unrealized investment gains (losses) related to nonconsolidated investment products, income earned on excess cash balances, and dividends earned on nonconsolidated equity securities.
Non-operating income (expense) also includes gains or losses related to the changes in our estimate of the payment obligation under the TRAs, including the impact of tax rate changes. The effect of changes in our estimate of amounts payable under the TRAs, including the effect of changes in enacted tax rates and in applicable tax laws, is included in net income.
Net Income (Loss) Attributable to Noncontrolling Interests
Net Income (Loss) Attributable to Noncontrolling Interests - Holdings
Net income (loss) attributable to noncontrolling interests - Holdings represents
the portion of earnings or loss attributable to the ownership interests in
Net Income (Loss) Attributable to Noncontrolling Interests - Consolidated Investment Products
Net income (loss) attributable to noncontrolling interests - consolidated investment products represents the portion of earnings or loss attributable to third-party investors' ownership interests in consolidated investment products.
Provision for Income Taxes
The provision for income taxes primarily represents APAM'sU.S. federal, state and local income taxes on its allocable portion of Holdings' income, as well as foreign income taxes payable by Holdings' subsidiaries. Our effective income tax rate is dependent on many factors, including a rate benefit attributable to the fact that a portion of Holdings' taxable earnings are not subject to corporate level taxes. Thus, income before income taxes includes amounts that are attributable to noncontrolling interests and not taxable to APAM and its subsidiaries, which reduces the effective tax rate. The effective tax rate is also lower than the statutory rate due to dividends paid on unvested share-based awards. These favorable impacts are partially offset by the impact of permanent items, including certain executive compensation expenses, that are not deductible for tax purposes.
As APAM's equity ownership in Holdings increases, the effective tax rate will likewise increase as more income will be subject to corporate-level taxes.
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Results of Operations
Year Ended
For the Years Ended December 31, Period-to-Period
2022 2021 $ %
Statements of operations data: (in millions, except share and per-share data)
Revenues $ 993.3 $ 1,227.2 $ (233.9) (19) %
Operating Expenses
Total compensation and benefits 510.4 563.0 (52.6) (9) %
Other operating expenses 138.8 123.7 15.1 12 %
Total operating expenses 649.2 686.7 (37.5) (5) %
Total operating income 344.1 540.5 (196.4) (36) %
Non-operating income (expense)
Interest expense (9.9) (10.8) 0.9 8 %
Other non-operating income (22.4) 21.9 (44.3) (202) %
Total non-operating income (expense) (32.3) 11.1 (43.4) (391) %
Income before income taxes 311.8 551.6 (239.8) (43) %
Provision for income taxes 63.4 107.1 (43.7) (41) %
Net income before noncontrolling interests 248.4 444.5 (196.1) (44) %
Less: Noncontrolling interests - Artisan Partners
Holdings 49.1 96.9 (47.8) (49) %
Less: Noncontrolling interests - consolidated
investment products (7.5) 11.1 (18.6) (168) %
Net income attributable to Artisan Partners Asset
Management Inc. $ 206.8 $ 336.5 $ (129.7) (39) %
Share Data
Basic earnings per share $ 2.94 $ 5.10
Diluted earnings per share $ 2.94 $ 5.09
Basic weighted average number of common shares
outstanding 62,475,960 59,866,790
Diluted weighted average number of common shares outstanding 62,498,509 59,881,039 Revenues The decrease in revenues of$233.9 million , or 19%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , was driven primarily by a$30.3 billion , or 18%, decrease in our average assets under management and a$12.7 million decrease in performance fee revenue. The weighted average investment management fee, which excludes performance fees, was 70.2 basis points for the year endedDecember 31, 2022 , compared to 70.7 basis points for the year endedDecember 31, 2021 . The weighted average investment management fee decreased slightly primarily due to the slight decrease in average management fee rate paid by our Artisan Funds and Artisan Global Funds clients from 91.2 basis points for the year endedDecember 31, 2021 to 90.7 basis points for the year endedDecember 31, 2022 as a result of the mix of investment within our Artisan Funds and Artisan Global Funds whereby each fund has a separate management fee. 45
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The following table sets forth the investment advisory fees and weighted average
management fee earned by investment vehicle. The weighted average management fee
for Artisan Funds and Artisan Global Funds reflects the additional services we
provide to these pooled vehicles.
Artisan Funds and Artisan
Separate Accounts and Other (2) Global Funds
For the Years Ended December 31, 2022 2021 2022 2021
(dollars in millions)
Investment advisory fees $ 376.3 $ 465.8 $ 617.0 $ 761.4
Weighted average management fee(1) 51.2 bps 51.3 bps 90.7 bps 91.2 bps
Percentage of ending AUM 52 % 52 % 48 % 48 %
(1) We compute our weighted average management fee by dividing annualized management fees (which excludes performance
fees) by average assets under management for the applicable period.
(2) Separate accounts and other consists of assets we manage in or through vehicles other than Artisan Funds or Artisan
Global Funds, including assets we manage in traditional separate accounts, Artisan-branded collective investment trusts
and Artisan Private Funds, as well as assets under advisement related to clients for whom we provide investment models but
do not have discretionary investment authority.
Operating Expenses
The decrease in total operating expenses of$37.5 million , or 5%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , was primarily a result of a decline in incentive compensation and third-party distribution expense as a result of lower revenues, partially offset by increased travel, occupancy and technology costs and higher fixed compensation costs reflecting annual merit increases and an increase in the number of full time associates, including our newest investment team.
Compensation and Benefits
For the Years Ended December Period-to-Period
31,
2022 2021 $ %
(in millions)
Salaries, incentive compensation and benefits
(1) $ 458.6 $ 516.9 $ (58.3) (11) %
Long-term incentive compensation awards 51.8 46.1 5.7 12 %
Total compensation and benefits $ 510.4 $ 563.0 $ (52.6) (9) %
(1) Excluding long-term incentive compensation
awards
The decrease in salaries, incentive compensation and benefits was driven
primarily by a
Long-term incentive compensation award expense increased$5.7 million , as the awards granted during 2022 had a higher value than the awards that became fully vested in 2022. During the first quarter of 2022, the Company's board of directors approved a grant of$87 million of long-term incentive awards consisting of$38 million of restricted share-based awards and$49 million of franchise capital awards.
Total compensation and benefits was 51% and 46% of our revenues for the years
ended
Other operating expenses
Other operating expenses increased$15.1 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , primarily due to increases in occupancy costs, increases in travel related expenses as pandemic related travel restrictions lessened, and increases in technology costs totaling$20.8 million partially offset by a$7.1 million decrease in third-party distribution expense related to the decrease in AUM subject to those fees. 46 -------------------------------------------------------------------------------- Table of Content s Non-Operating Income (Expense)
Non-operating income (expense) consisted of the following:
For the Years Ended December Period-to-Period
31,
2022 2021 $ %
(in millions)
Interest expense $ (9.9) $ (10.8) $ 0.9 8 %
Net investment gain (loss) of consolidated
investment products (7.0) 19.7 (26.7) (136) %
Other investment gain (loss) (16.4) 1.8 (18.2) (1,011) %
Net gain (loss) on the tax receivable agreements 1.0 0.4 0.6 150 %
Total non-operating income (expense) $ (32.3) $ 11.1 $ (43.4) (391) %
Non-operating income (expense) for the year ended December 31, 2022 includes a
$1.0 million gain relating to a change in estimate of the payment obligation
under the tax receivable agreements, compared to a $0.4 million gain for the
year ended December 31, 2021 . The effect of changes in that estimate after the
date of an exchange or sale is included in net income. Interest expense
decreased $0.9 million in the year ended December 31, 2022 , as a result of
savings generated by the lower interest rate on the new Series F senior notes as
compared to the Series C senior notes. The losses in net investment gain (loss)
of consolidated investment products and other net investment gain (loss),
comprised predominantly of seed investments and investments for the economic
hedge of franchise capital awards, in the year ended December 31, 2022 , compared
to gains in the year ended December 31, 2021 , was driven by market conditions.
Provision for Income Taxes
APAM's effective income tax rate for the years ended
Several factors contribute to the effective tax rate, including a rate benefit attributable to the fact that approximately 17% and 19% of Holdings' full year projected taxable earnings were not subject to corporate-level taxes for the years endedDecember 31, 2022 and 2021, respectively. Thus, income before income taxes includes amounts that are attributable to noncontrolling interests and not taxable to APAM and its subsidiaries, which reduces the effective tax rate. As APAM's equity ownership in Holdings increases, the effective tax rate will likewise increase as more income will be subject to corporate-level taxes. The effective tax rate was favorably impacted in both periods due to tax deductible dividends paid on unvested restricted share-based awards and favorable tax deductions related to the vesting of restricted share-based awards.
Earnings Per Share
Weighted average basic and diluted shares of Class A common stock outstanding were higher for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , as a result of the 2021 stock offering, unit exchanges, and equity award grants. See Note 12, "Earnings Per Share" in the Notes to the consolidated financial statements in Item 8 of this report for further discussion of earnings per share. 47
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Year Ended
For the Years Ended December 31, For the Period-to-Period
2021 2020 $ %
Statements of operations data: (in millions, except share and per-share data)
Revenues $ 1,227.2 $ 899.6 $ 327.6 36 %
Operating Expenses
Total compensation and benefits 563.0 435.8 127.2 29 %
Other operating expenses 123.7 105.5 18.2 17 %
Total operating expenses 686.7 541.3 145.4 27 %
Total operating income 540.5 358.3 182.2 51 %
Non-operating income (expense)
Interest expense (10.8) (10.8) - - %
Other non-operating income 21.9 21.8 0.1 - %
Total non-operating income (expense) 11.1 11.0 0.1 1 %
Income before income taxes 551.6 369.3 182.3 49 %
Provision for income taxes 107.1 60.8 46.3 76 %
Net income before noncontrolling interests 444.5 308.5 136.0 44 %
Less: Noncontrolling interests - Artisan Partners 96.9 81.1 15.8
Holdings 19 %
Less: Noncontrolling interests - consolidated
investment products 11.1 14.8 (3.7) (25) %
Net income attributable to Artisan Partners Asset
Management Inc. $ 336.5 $ 212.6 $ 123.9 58 %
Share Data
Basic earnings per share $ 5.10 $ 3.40
Diluted earnings per share $ 5.09 $ 3.40
Basic weighted average number of common shares
outstanding 59,866,790 55,633,529
Diluted weighted average number of common shares outstanding 59,881,039
55,637,922
A detailed discussion of the year-over-year results for the year endedDecember 31, 2021 , compared to the year endedDecember 31, 2020 , can be found in "Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , filed with theSEC onFebruary 22, 2022 . 48
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Supplemental Non-GAAP Financial Information
Our management uses non-GAAP measures (referred to as "adjusted" measures) of net income to evaluate the profitability and efficiency of the underlying operations of our business and as a factor when considering net income available for distributions and dividends. These adjusted measures remove the impact of (1) net gain (loss) on the tax receivable agreements (if any), (2) compensation expense (reversal) related to market valuation changes in compensation plans, (3) net investment gain (loss) of investment products, and (4) the remeasurement of deferred taxes. These adjustments also remove the non-operational complexities of our structure by adding back noncontrolling interests and assuming all income ofArtisan Partners Holdings is allocated to APAM. Management believes these non-GAAP measures provide meaningful information to analyze our profitability and efficiency between periods and over time. We have included these non-GAAP measures to provide investors with the same financial metrics used by management to manage the Company. Non-GAAP measures should be considered in addition to, and not as a substitute for, financial measures prepared in accordance with GAAP. Our non-GAAP measures may differ from similar measures used by other companies, even if similar terms are used to identify such measures. Our non-GAAP measures are as follows: •Adjusted net income represents net income excluding the impact of (1) net gain (loss) on the tax receivable agreements (if any), (2) compensation expense (reversal) related to market valuation changes in compensation plans, (3) net investment gain (loss) of investment products, and (4) the remeasurement of deferred taxes. Adjusted net income also reflects income taxes assuming the vesting of all unvested Class A share-based awards and as if all outstanding limited partnership units ofArtisan Partners Holdings had been exchanged for Class A common stock of APAM on a one-for-one basis. Assuming full vesting and exchange, all income ofArtisan Partners Holdings is treated as if it were allocated to APAM, and the adjusted provision for income taxes represents an estimate of income tax expense at an effective rate reflecting APAM's current federal, state, and local income statutory tax rates. The adjusted tax rate was 24.7% for all periods presented. •Adjusted net income per adjusted share is calculated by dividing adjusted net income by adjusted shares. The number of adjusted shares is derived by assuming the vesting of all unvested Class A share-based awards and the exchange of all outstanding limited partnership units ofArtisan Partners Holdings for Class A common stock of APAM on a one-for-one basis. •Adjusted operating income represents the operating income of the consolidated company excluding compensation expense related to market valuation changes in compensation plans.
•Adjusted operating margin is calculated by dividing adjusted operating income by total revenues.
•Adjusted EBITDA represents adjusted net income before interest expense, income taxes, depreciation and amortization expense.
Net gain (loss) on the tax receivable agreements represents the income (expense) associated with the change in estimate of amounts payable under the tax receivable agreements entered into in connection with APAM's initial public offering and related reorganization.
Compensation expense (reversal) related to market valuation changes in compensation plans represents the expense (income) associated with the change in the long term incentive award liability resulting from investment returns of the underlying investment products. Because the compensation expense impact of the investment market exposure is economically hedged, management believes it is useful to reflect the expected net income offset in the calculation of adjusted operating income, adjusted net income, and adjusted EBITDA. The related investment gain (loss) on the underlying investments is included in the adjustment for net investment gain (loss) of investment products.
Net investment gain (loss) of investment products represents the non-operating income (expense) related to the Company's investments, in both consolidated investment products and nonconsolidated investment products, including investments held to economically hedge compensation plans. Excluding these non-operating market gains or losses on investments provides greater transparency to evaluate the profitability and efficiency of the underlying operations of the business.
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The following table sets forth, for the periods indicated, a reconciliation from GAAP financial measures to non-GAAP measures:
For the Years Ended December 31,
2022 2021 2020
(unaudited; in millions, except per share data)
Reconciliation of non-GAAP financial measures:
Net income attributable to Artisan Partners Asset
Management Inc. (GAAP) $ 206.8 $ 336.5 $ 212.6 Add back: Net income attributable to noncontrolling
interests -
49.1 96.9 81.1
Add back: Provision for income taxes 63.4 107.1 60.8
Add back: Compensation expense (reversal) related to market valuation changes in compensation plans
(3.8) 0.3 -
Add back: Net (gain) loss on the tax receivable
agreements (1.0) (0.4) 4.7
Add back: Net investment (gain) loss of investment products attributable to APAM
16.9 (9.3) (10.3)
Less: Adjusted provision for income taxes 81.8 131.2 86.2
Adjusted net income (Non-GAAP) $ 249.6 $ 399.9 $ 262.7
Average shares outstanding
Class A common shares 62.5 59.9 55.6
Assumed vesting or exchange of:
Unvested Class A restricted share-based awards 5.7 5.4 5.4
Artisan Partners Holdings units outstanding
(noncontrolling interests) 12.0 14.2 17.9
Adjusted shares 80.2 79.5 78.9
Basic earnings per share (GAAP) $ 2.94 $ 5.10 $ 3.40
Diluted earnings per share (GAAP) $ 2.94 $ 5.09 $ 3.40
Adjusted net income per adjusted share (Non-GAAP) $ 3.11 $ 5.03 $ 3.33
Operating income (GAAP) $ 344.1 $ 540.5 $ 358.3 Add back: Compensation expense (reversal) related to market valuation changes in compensation plans
(3.8) 0.3 -
Adjusted operating income (Non-GAAP) $ 340.3 $ 540.8 $ 358.3
Operating margin (GAAP) 34.6 % 44.0 % 39.8 %
Adjusted operating margin (Non-GAAP) 34.3 % 44.1 % 39.8 %
Net income attributable to Artisan Partners Asset
Management Inc. (GAAP) $ 206.8 $ 336.5 $ 212.6 Add back: Net income attributable to noncontrolling
interests -
49.1 96.9 81.1
Add back: Compensation expense (reversal) related to market valuation changes in compensation plans
(3.8) 0.3 -
Add back: Net (gain) loss on the tax receivable
agreements (1.0) (0.4) 4.7
Add back: Net investment (gain) loss of investment products attributable to APAM
16.9 (9.3) (10.3)
Add back: Interest expense 9.9 10.8 10.8
Add back: Provision for income taxes 63.4 107.1 60.8
Add back: Depreciation and amortization 7.9 7.0 6.6
Adjusted EBITDA (Non-GAAP) $ 349.2 $ 548.9 $ 366.3
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Liquidity, Capital Resources, and Contractual Obligations
Our working capital needs, including accrued incentive compensation payments, have been and are expected to be met primarily through cash generated by our operations. The assets and liabilities of consolidated investment products attributable to third-party investors do not impact our liquidity and capital resources. We have no right to the benefits from, nor do we bear the risks associated with, the assets and liabilities of consolidated investment products, beyond our direct equity investment and any investment advisory fees earned. Accordingly, assets and liabilities of consolidated investment products attributable to third-party investors are excluded from the amounts and discussions below. The following table shows our liquidity position as ofDecember 31, 2022 andDecember 31, 2021 : December 31, December 31, 2022 2021 (in millions) Cash and cash equivalents$ 114.8 $ 189.2 Accounts receivable$ 98.6 $ 115.9 Seed investments(1)$ 124.8 $ 71.9 Undrawn commitment on revolving credit facility$ 100.0 $ 100.0 (1) Seed investments include Artisan's direct equity investments in consolidated and nonconsolidated Artisan-sponsored investment products. The balance excludes$67.3 million of investments made related to funded long-term incentive compensation plans. We manage our cash balances in order to fund our day-to-day operations. Accounts receivable primarily represent investment advisory fees that have been earned, but not yet received from our clients. We perform a review of our receivables on a monthly basis to assess collectability. As ofDecember 31, 2022 , none of our receivables were considered uncollectible. We utilize cash to make seed investments in Artisan-sponsored investment products to support the development of new investment strategies and vehicles. As ofDecember 31, 2022 , the balance of all seed investments, including investments in consolidated investment products, was$124.8 million . Subject to certain restrictions on the timing of redemptions, the seed investments are generally redeemable at our discretion. During the year endedDecember 31, 2022 , we also made investments of$48.6 million related to our economic hedge of franchise capital awards. As ofDecember 31, 2022 , the value of investments held related to the economic hedge of our franchise capital awards was$67.3 million . In the first quarter of 2023, we intend to invest an additional$39.0 million related to our economic hedge of franchise capital awards in connection with the grant that was approved by our Board onJanuary 25, 2023 .
We expect our investment portfolio to continue to grow as we grant additional annual franchise capital awards and make seed investments in new investment strategies and vehicles.
OnAugust 16, 2022 ,Artisan Partners Holdings issued$90.0 million of 3.10% Series F notes pursuant to an agreement executed inDecember 2021 and used the proceeds to repay the$90.0 million of Series C senior notes that matured onAugust 16, 2022 . In addition, Holdings amended and extended its$100.0 million revolving credit facility for an additional five-year period. As ofDecember 31, 2022 , we have$200 million in unsecured notes outstanding and a$100 million revolving credit facility with a five-year term ending inAugust 2027 . The notes are comprised of three series, Series D, Series E, and Series F, each with a balloon payment at maturity. The$100 million revolving credit facility was unused as of and for the year endedDecember 31, 2022 . The fixed interest rate on each series of unsecured notes is subject to a 100 basis point increase in the event Holdings receives a below-investment grade rating and any such increase will continue to apply until an investment grade rating is received. Holdings maintained an investment grade rating for the year endedDecember 31, 2022 . These borrowings contain certain customary covenants including limitations onArtisan Partners Holdings' ability to: (i) incur additional indebtedness or liens, (ii) engage in mergers or other fundamental changes, (iii) sell or otherwise dispose of assets including equity interests, and (iv) make dividend payments or other distributions toArtisan Partners Holdings' partners (other than, among others, tax distributions paid to partners for the purpose of funding tax liabilities attributable to their interests) when a default occurred and is continuing or would result from such a distribution. In addition, in the event of a Change of Control (as defined in the Note Purchase Agreement) or if Artisan's average assets under management for a fiscal quarter is below$45 billion , Holdings is generally required to offer to pre-pay the notes. Artisan Partners Limited Partnership, a wholly-owned subsidiary of Holdings, has guaranteed Holdings' obligations under the terms of the Note Purchase Agreement.
In addition, covenants in the note purchase and revolving credit agreements
require
•leverage ratio (calculated as the ratio of consolidated total indebtedness on any date to consolidated EBITDA for the period of four consecutive fiscal quarters ended on or prior to such date) cannot exceed 3.00 to 1.00 (Artisan Partners Holdings' leverage ratio for the year endedDecember 31, 2022 was 0.5 to 1.00); and 51 -------------------------------------------------------------------------------- Table of Content s •interest coverage ratio (calculated as the ratio of consolidated EBITDA for any period of four consecutive fiscal quarters to consolidated interest expense for such period) cannot be less than 4.00 to 1.00 for such period (Artisan Partners Holdings' interest coverage ratio for the year endedDecember 31, 2022 was 42.4 to 1.00). Our failure to comply with any of the covenants or restrictions described above could result in an event of default under the agreements, giving our lenders the ability to accelerate repayment of our obligations. We were in compliance with all debt covenants as ofDecember 31, 2022 .
See Note 5, "Borrowings", for further information on our outstanding notes and revolving credit facility.
As of
Distributions and Dividends
For the Years Ended December
31,
2022 2021
(in millions)
Holdings Partnership Distributions to Limited Partners $ 57.2 $ 93.2
Holdings Partnership Distributions to APAM 299.0 400.2
Total Holdings Partnership Distributions $
356.2
APAM, acting as the general partner of
APAM declared and paid the following dividends per share during the years ended
For the Years Ended December 31,
Type of Dividend Class of Stock 2022 2021
Quarterly Common Class A $ 2.95 $ 3.92
Special Annual Common Class A $ 0.72 $ 0.31
Our board of directors declared, effective January 31, 2023 , a variable
quarterly dividend of $0.55 per share of Class A common stock with respect to
the December quarter of 2022 and a special annual dividend of $0.35 . The
combined amount, $0.90 per share of Class A common stock, will be paid on
February 28, 2023 to stockholders of record as of the close of business on
February 14, 2023 . The variable quarterly dividend of $0.55 per share represents
approximately 80% of the cash generated (as described below) in the December
quarter of 2022 and a pro-rata portion of 2022 tax savings related to our tax
receivable agreements. The special dividend represents the remainder of
undistributed cash generated during the year ended December 31, 2022 , less cash
reserved for future growth initiatives including seed investments in new
investment strategies and vehicles.
Subject to Board approval each quarter, we currently expect to pay a quarterly
dividend of approximately 80% of the cash the Company generates each quarter. We
expect our quarterly cash generation to approximate adjusted net income plus
long-term incentive compensation award expense, less cash reserved for future
franchise capital awards (which we expect will approximate 4% of investment
management revenues each quarter) with additional adjustments made for certain
other sources and uses of cash, including capital expenditures. After the end of
the year, our Board will consider paying a special dividend after determining
the amount of cash needed for general corporate purposes and investments in
growth and strategic initiatives. Although we expect to pay dividends according
to our dividend policy, we may not pay dividends according to our policy or at
all.
Tax Receivable Agreements ("TRAs")
In addition to funding our normal operations, we will be required to fund amounts payable under the TRAs that we entered into in connection with the IPO, which resulted in the recognition of a$398.8 million liability as ofDecember 31, 2022 . The liability generally represents 85% of the tax benefits APAM expects to realize as a result of the merger of an entity into APAM as part of the IPO Reorganization, our purchase of partnership units from limited partners of Holdings and the exchange of partnership units (for shares of Class A common stock or other consideration). 52
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The estimated liability assumes no material changes in the relevant tax law and that APAM earns sufficient taxable income to realize all tax benefits subject to the TRAs. An increase or decrease in future tax rates will increase or decrease, respectively, the expected tax benefits APAM would realize and the amounts payable under the TRAs. Changes in the estimate of expected tax benefits APAM would realize and the amounts payable under the TRAs as a result of change in tax rates have been and will be recorded in net income. The liability will increase upon future purchases or exchanges of limited partnership units with the increase representing amounts payable under the TRAs equal to 85% of the estimated future tax benefits, if any, resulting from such purchases or exchanges. We intend to fund the payment of amounts due under the TRAs out of the reduced tax payments that APAM realizes in respect of the tax attributes to which the TRAs relate. The actual increase in tax basis, as well as the amount and timing of any payments under these agreements, will vary depending upon a number of factors, including the timing of sales or exchanges by the holders of limited partnership units, the price of the Class A common stock at the time of such sales or exchanges, whether such sales or exchanges are taxable, the amount and timing of the taxable income APAM generates in the future and the tax rate then applicable and the portion of APAM's payments under the TRAs constituting imputed interest or depreciable basis or amortizable basis. In certain cases, payments under the TRAs may be accelerated and/or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the TRAs. In such cases, we intend to fund those payments with cash on hand, although we may have to borrow funds depending on the amount and timing of the payments. During the year endedDecember 31, 2022 , we made payments of$33.2 million , related to the TRAs, including interest. In 2023, we expect to make payments of approximately$36 million related to the TRAs. Cash Flows For the Years Ended December 31, 2022 2021 2020 (in millions) Cash, cash equivalents and restricted cash as of$ 200.8 $ 199.5 $ 144.3 January 1 , Net cash provided by operating activities 312.6 398.5 318.7
Net cash provided by (used in) investing activities (63.7)
(27.0) 18.7
Net cash used in financing activities (306.4) (335.4) (282.2)
Net impact of deconsolidation of consolidated -
investment products (34.8) -
Cash, cash equivalents and restricted cash as of
Year Ended
Net cash provided by operating activities decreased$85.9 million for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 , primarily due to a decrease in operating income resulting from lower average AUM and revenues, partially offset by a decrease in cash outflows associated with consolidated investment products for the year endedDecember 31, 2022 , as compared toDecember 31, 2021 . Investing activities consist primarily of acquiring property and equipment, leasehold improvements and the purchase and sale of investment securities. Net cash used by investing activities increased$36.7 million during the year endedDecember 31, 2022 , primarily due to a$23.1 million increase in net purchases of investment securities, which includes a$14.0 million increase in investment securities related to the economic hedge of our franchise capital awards. Further, acquisitions of property and equipment and leasehold improvements increased$13.6 million , primarily related to build outs of newly leased space in the year endedDecember 31, 2022 . Financing activities consist primarily of partnership distributions to non-controlling interests, dividend payments to holders of our Class A common stock, proceeds from the issuance of Class A common stock in follow-on offerings, payments to purchase Holdings partnership units, and payments of amounts owed under the tax receivable agreements. Net cash used in financing activities decreased$29.0 million during the year endedDecember 31, 2022 , primarily due to a$26.0 million decrease in dividends paid and a$36.0 million decrease in distributions paid to limited partners, each related to the decrease in operating income for the year endedDecember 31, 2022 driven by the decrease in AUM. These lower cash uses were partially offset by a$32.2 million net decrease in contributions from noncontrolling interests in our consolidated investment products. During the year endedDecember 31, 2022 , the Company determined that it no longer had a controlling financial interest in an investment product that was previously consolidated. The deconsolidation of the investment product resulted in no impact on cash, cash equivalents and restricted cash. 53
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Critical Accounting Policies and Estimates
The accompanying consolidated financial statements were prepared in accordance with GAAP, and related rules and regulations of theSEC . The preparation of financial statements in conformity with GAAP requires management to make estimates or assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates or assumptions and may have a material effect on the consolidated financial statements. Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial condition. Management believes that the critical accounting policies and estimates discussed below involve additional management judgment due to the sensitivity of the methods and assumptions used.
Consolidation
We consolidate all subsidiaries or other entities in which we have a controlling
financial interest. We assess each legal entity in which we hold a variable
interest on a quarterly basis to determine whether consolidation is appropriate.
We determine whether we have a controlling financial interest in the entity by
evaluating whether the entity is a voting interest entity ("VOE") or a variable
interest entity ("VIE") under GAAP. Assessing whether an entity is a VIE or VOE
and if it requires consolidation involves judgment and analysis. Factors
considered in this assessment include the legal organization of the entity, our
equity ownership and contractual involvement with the entity and any related
party or de facto agent implications of our involvement with the entity.
Voting Interest Entities - A VOE is an entity in which (i) the total equity
investment at risk is sufficient to enable the entity to finance its activities
independently and (ii) the equity holders at risk have the obligation to absorb
losses, the right to receive residual returns and the right to direct the
activities of the entity that most significantly impact the entity's economic
performance, whereby the equity investment has all the characteristics of a
controlling financial interest. As a result, voting rights are a key driver of
determining which party, if any, should consolidate the entity. Under the VOE
model, controlling financial interest is generally defined as a majority
ownership of voting interests.
Variable Interest Entities - A VIE is an entity that lacks one or more of the
characteristics of a VOE. In accordance with GAAP, an enterprise must
consolidate all VIEs of which it is the primary beneficiary. We determine if a
legal entity meets the definition of a VIE by considering whether the fund's
equity investment at risk is sufficient to finance its activities without
additional subordinated financial support and whether the fund's at-risk equity
holders absorb any losses, have the right to receive residual returns and have
the right to direct the activities of the entity most responsible for the
entity's economic performance.
Under the VIE model, controlling financial interest is defined as (i) the power
to direct activities that most significantly impact the economic performance of
the entity and (ii) the right to receive potentially significant benefits or the
obligation to absorb potentially significant losses. We will generally
consolidate VIEs in which we meet the power criteria and hold an equity
ownership interest of greater than 10%.
We serve as the investment adviser for Artisan Funds, a family of mutual funds
registered with the SEC under the Investment Company Act of 1940, and investment
manager of Artisan Global Funds, a family of Ireland -based UCITS funds. Artisan
Funds and Artisan Global Funds are corporate entities the business and affairs
of which are managed by their respective boards of directors. The shareholders
of the funds retain voting rights, including the right to elect and reelect
members of their respective boards of directors. Each series of Artisan Funds is
a VOE and is separately evaluated for consolidation under the VOE model. The
shareholders of Artisan Global Funds lack simple majority liquidation rights,
and as a result, Artisan Global Funds is evaluated for consolidation under the
VIE model. Artisan Private Funds are also evaluated for consolidation under the
VIE model because third-party equity holders of the funds lack the ability to
remove Artisan as the general partner, or otherwise divest Artisan of its
control of the funds.
Seed Investments - We generally make seed investments in sponsored investment
portfolios at the portfolio's formation. If the seed investment results in a
controlling financial interest, we will consolidate the investment, and the
underlying individual securities will be accounted for based on their
classification at the underlying fund. If the seed investment results in
significant influence, but not control, the investment will be accounted for as
an equity method investment. Significant influence is generally considered to
exist with equity ownership levels between 20% and 50%, although other factors
are considered. Seed investments in which we do not have a controlling financial
interest or significant influence are accounted for as investment securities.
These investments are measured at fair value in the Consolidated Statements of
Financial Condition. Realized and unrealized gains (losses) on investment
securities are recorded in net investment income in the Consolidated Statements
of Operations. Dividend income from these investments is recognized when earned
and is included in net investment income in the Consolidated Statements of
Operations.
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Revenue Recognition
Investment management fees are generally computed as a percentage of assets under management and are recognized as revenue at the end of each distinct service period. Fees for providing investment management services are computed and billed in accordance with the underlying investment management agreements, which is generally on a monthly or quarterly basis. Investment management fees are presented net of cash rebates to certainArtisan Global Fund investors and expense reimbursements pursuant to contractual expense limitations of pooled investment vehicles. A number of investment management agreements provide for performance-based fees or incentive allocations, collectively "performance fees". Performance fees, if earned, are recognized upon completion of the contractually determined measurement period, which is generally quarterly or annually. Performance fees generally are not subject to claw back as a result of performance declines subsequent to the most recent measurement date. Artisan accounts for asset management services as a single performance obligation that is satisfied over time, using a time-based measure of progress to recognize revenue. Customer consideration is variable due to the uncertainty of the value of assets under management during each distinct service period. At the end of each quarter, Artisan records revenue for the actual amount of investment management fees for that quarter because the uncertainty has been resolved. Performance fees are subject to the uncertainty of market volatility, and as a result, the entire amount of the variable consideration related to performance fees is constrained until the end of each measurement period. At the end of the quarterly or annual measurement period, revenue is recorded for the actual amount of performance fees earned during that period because the uncertainty has been resolved. The portfolios of Artisan Funds and Artisan Global Funds, as well as the portfolios we manage for our other clients, are invested principally in securities for which market values are readily available, with a portion of each portfolio held in cash or cash-like instruments. With the exception of the assets managed by our Credit team andEMsights Capital Group (which represented approximately 5.6% of our assets under management atDecember 31, 2022 ), the portfolios are invested principally in publicly-traded equity securities. The investment management fees that we receive are calculated based on the values of the securities held in the accounts that we manage for our clients. For ourU.S. -registered mutual fund and UCITS funds clients, including Artisan Funds and Artisan Global Funds, and for Artisan Private Funds, our fees are based on the values of the funds' assets as determined for purposes of calculating their net asset values. Securities held by Artisan Funds, Artisan Global Funds, and Artisan Private Funds are generally valued at closing market prices, or if closing market prices are not readily available or are not considered reliable, at a fair value determined under procedures established by the fund's board (fair value pricing). Values of securities determined using fair value pricing are likely to be different than they would be if only closing market prices were used. For separate account clients, our fees may be based, at the client's option, on the values of the securities in the portfolios we manage as determined by the client (or its custodian or other service provider) or by us in accordance with valuation procedures we have adopted. The valuation procedures we have adopted generally use closing market prices in the markets in which the securities trade, without adjustment for subsequent events except in unusual circumstances. We believe that our fees based on valuations determined under our procedures are not materially different from the fees we receive that are based on valuations determined by clients, their custodians or other service providers.
Income Taxes
We operate in numerous states and countries and must allocate our income, expenses, and earnings under the various laws and regulations of each of these taxing jurisdictions. Accordingly, our provision for income taxes represents our total estimate of the liability for income taxes that we have incurred in doing business each year in all of our locations. Annually, we file tax returns that represent our filing positions with each jurisdiction and settle our tax return liabilities. Each jurisdiction has the right to audit those tax returns and may take different positions with respect to income and expense allocations and taxable earnings determinations. Because the determination of our annual income tax provision is subject to judgments and estimates, actual results may vary from those recorded in our financial statements. We recognize additions to and reductions in income tax expense during a reporting period that pertains to prior period provisions as our estimated liabilities are revised and our actual tax returns and tax audits are completed. Our management is required to exercise judgment in developing our provision for income taxes, including the determination of deferred tax assets and liabilities and any valuation allowance that might be required against deferred tax assets. As ofDecember 31, 2022 , we have not recorded a valuation allowance on any deferred tax assets. In the event that sufficient taxable income of the same character does not result in future years, among other things, a valuation allowance for certain of our deferred tax assets may be required. 55 -------------------------------------------------------------------------------- Table of Content s Payments pursuant to the Tax Receivable Agreements ("TRAs") We have recorded a liability of$398.8 million as ofDecember 31, 2022 , representing 85% of the estimated future tax benefits subject to the TRAs. The actual amount and timing of any payments under these agreements will vary depending upon a number of factors, including the timing of sales or exchanges by the holders of limited partnership units, the price of the Class A common stock at the time of such sales or exchanges, whether such sales or exchanges are taxable, the amount and timing of the taxable income APAM generates in the future and the tax rate then applicable and the portion of APAM's payments under the TRAs constituting imputed interest or depreciable basis or amortizable basis.
New or Revised Accounting Standards
See Note 2, "Summary of Significant Accounting Policies - Recent accounting pronouncements" to the Consolidated Financial Statements included in Item 8 of Part II of this Form 10-K.
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