Overview and Recent Highlights We are an investment management firm focused on providing high-value added, active investment strategies to sophisticated clients globally. As ofDecember 31, 2020 , our nine autonomous investment teams managed a total of 19 investment strategies across multiple asset classes and investment styles. Over our firm's history, we have created new investment strategies that can use a broad array of securities, instruments, and techniques (which we call degrees of freedom) to differentiate returns and manage risk. We focus our distribution efforts on sophisticated investors and asset allocators, including institutions and intermediaries that operate with institutional-like decision-making processes. We offer our investment strategies to clients and investors through multiple investment vehicles, including separate accounts and different types of pooled vehicles. As ofDecember 31, 2020 , approximately 79% of our assets under management were managed for clients and investors domiciled in theU.S. and 21% 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 distributions and dividends. Business and financial highlights for 2020 included: •Beini Zhou andAnand Vasagiri joined the Artisan International Value team and launched the International Small Cap Value strategy. Separately,Tiffany Hsiao andYuanyuan Ji joined the Artisan Global Equity team to design and launch a new strategy focused on post-venture firms in greaterChina . •The Global Value team launched its second strategy, the Select Equity strategy. •During the year endedDecember 31, 2020 , our assets under management increased to$157.8 billion , an increase of$36.8 billion , or 30%, compared to$121.0 billion atDecember 31, 2019 , as a result of$30.3 billion of market appreciation and$7.2 billion of net client cash inflows, partially offset by$0.7 billion of Artisan Funds' distributions that were not reinvested. •Average assets under management for the year endedDecember 31, 2020 was$124.9 billion , an increase of 12.5% from the average of$111.0 billion for the year endedDecember 31, 2019 . •We earned$900 million in revenue for the year endedDecember 31, 2020 , a 13% increase from revenues of$799 million for the year endedDecember 31, 2019 . •Our operating margin was 39.8% in 2020, compared to 35.5% in 2019. •We generated$3.40 of earnings per basic and diluted share and$3.33 of adjusted EPS. •We declared and distributed dividends of$3.39 per share of Class A common stock during 2020. •We declared, effectiveFebruary 2, 2021 , a quarterly dividend of$0.97 per share of Class A common stock with respect to theDecember 2020 quarter and a special annual dividend of$0.31 per share, for a total of$3.39 of dividends per share with respect to 2020. COVID-19 Pandemic During 2020, the COVID-19 pandemic contributed to significant volatility in global markets and corresponding fluctuations in the valuation of our assets under management. Because most of the revenue we earn is based on the market value of our assets under management, fluctuations in global markets impact our revenues and earnings. Our assets under management declined from$125.4 billion onFebruary 19, 2020 to$95.2 billion onMarch 31, 2020 , and have subsequently rebounded to$157.8 billion as ofDecember 31, 2020 . The COVID-19 pandemic will likely continue to impact global economies and markets and disrupt economic activities, services, travel and supply chains in ways that cannot necessarily be foreseen. 31 -------------------------------------------------------------------------------- Tabl e of Co ntents The COVID-19 pandemic continues to impact the manner in which we operate. As of the date of this filing, the majority of our employees are working from home and our employees have significantly reduced business travel. Additionally, many third-party vendors on whom we rely for certain critical functions are also operating in remote environments. Given the continued uncertainty surrounding the COVID-19 pandemic, it is difficult to predict how long such remote working conditions and travel restrictions will last. We expect most operating costs to return to pre-COVID-19 levels when employees return to the office and resume business travel. We believe we are operating well under these circumstances, benefiting from the flexible and highly mobile operating environment we have built over 25 years. However, market volatility, as well as changes in our operations and those of our key vendors, may result in increased client redemptions; inefficiencies, delays and decreased communication; and an increase in the number and significance of operational and trade errors. In addition, we do not know what, if any, longer-term impact the current operating circumstances (and/or the extension of them) will have on our business and results. Organizational Structure Organizational Structure Our operations are conducted throughArtisan Partners Holdings ("Holdings") and its subsidiaries. OnMarch 12, 2013 ,Artisan Partners Asset Management Inc. ("APAM") andArtisan Partners Holdings LP 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. Our employees and other limited partners of Holdings held approximately 20% of the equity interests in Holdings as ofDecember 31, 2020 . As a result, our results reflect that significant noncontrolling interest. We operate our business in a single segment. 2020 Follow-On Offering and Holdings Unit Exchanges OnFebruary 24, 2020 , APAM completed an offering of 1,802,326 shares of Class A common stock and utilized all of the proceeds to purchase an aggregate of 1,802,326 common units from certain limited partners of Holdings. In connection with the offering, APAM received 1,802,326 GP units of Holdings. During the year endedDecember 31, 2020 , certain limited partners of Holdings exchanged 4,128,600 common units (along with a corresponding number of shares of Class B or Class C common stock of APAM, as applicable) for 4,128,600 shares of Class A common stock. In connection with the exchanges, APAM received 4,128,600 GP units of Holdings. APAM's equity ownership interest in Holdings increased from 73% atDecember 31, 2019 to 80% atDecember 31, 2020 , as a result of these transactions and other equity transactions during the period. Financial Overview Economic Environment Global equity and debt market conditions materially affect our financial performance. The following table presents the total returns of relevant market indices for the years endedDecember 31, 2020 , 2019 and 2018: For the Years Ended December 31, 2020 2019 2018 S&P 500 total returns 18.4 % 31.5 % (4.4) %MSCI All Country World total returns 16.3 % 26.6 % (9.4) % MSCI EAFE total returns 7.8 % 22.0 % (13.8) % Russell Midcap® total returns 17.1 % 30.5 % (9.1) % MSCI Emerging Markets Index 18.3 % 18.4 % (14.6) %
ICE BofA
14.4 % (2.3) % 32
-------------------------------------------------------------------------------- Tabl e of Co ntents Key Performance Indicators When we review our business and financial performance we consider, among other things, the following: For the Years Ended December 31, 2020 2019 2018 (unaudited; dollars in millions) Assets under management at period end$ 157,776 $ 121,016 $ 96,224 Average assets under management(1)$ 124,901 $ 111,023 $ 113,769 Net client cash flows(2)$ 7,154 $ (2,658) $ (6,497) Total revenues$ 900 $ 799 $ 829 Weighted average fee(3) 70.9 bps 71.6 bps 72.6 bps Operating margin 39.8 % 35.5 % 36.8 % (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. Prior period net client cash flows have been recast to exclude Artisan Funds' distributions. (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. The weighted average management fee for prior periods have been recast to exclude performance fee revenue. 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 account, 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. 33 -------------------------------------------------------------------------------- Tabl e of Co ntents The table below sets forth changes in our total assets under management: For the Years Ended December 31, 2020 2019 2018 (unaudited; dollars in millions) Beginning assets under management$ 121,016 $ 96,224 $ 115,494 Gross client cash inflows 36,338 17,594 18,693 Gross client cash outflows (29,184) (20,252) (25,190) Net client cash flows(1) 7,154 (2,658) (6,497) Artisan Funds' distributions not reinvested(2) (690) (630) (922) Investment returns and other(3) 30,296 28,080 (11,851) Ending assets under management$ 157,776 $ 121,016 $ 96,224 Average assets under management$ 124,901 $ 111,023 $ 113,769 (1) Net client cash flows excludes Artisan Funds' income and capital gain distributions that were not reinvested. Prior period net client cash flows have been recast to exclude Artisan Funds' distributions. (2) Artisan Funds' distributions not reinvested represents the amount of income and capital gain distributions that were not reinvested in the Artisan Funds, including in theArtisan High Income Fund . (3) Includes the impact of translating the value of assets under management denominated in non-USD currencies into US dollars. The impact was immaterial for the periods presented. During 2020 our AUM increased by$36.8 billion due to$30.3 billion of investment returns and$7.2 billion of net client cash inflows, partially offset by$0.7 billion of Artisan Funds' distributions that were not reinvested. Sixteen of our 19 investment strategies had net inflows, totaling$11.8 billion . Our nine strategies with inception dates beginning in 2014 or later had$9.5 billion in net inflows, representing an organic growth rate of 78%. We expect those strategies as a group to continue to experience net inflows. The net inflows across most of our business were offset by$4.7 billion of net outflows across the remaining three of our 19 strategies, including the Non-US Growth, Global Opportunities, and US Mid-Cap Value strategies, where we generally expect net outflows as a group to continue in the near term. 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. 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, all of our strategies are open to new investors and client relationships. Our US Small-Cap Growth and Global Opportunities strategies have limited availability to most 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 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, 2020 . Returns for periods less than one year are not annualized. 34
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Tabl e of Co ntents Composite Inception Strategy AUM Average Annual Total Returns (Gross) Average Annual Value-Added(1) Since Investment Team and Strategy Date (in $MM) 1 YR 3 YR 5 YR 10 YR Inception Inception (bps) Growth Team Global Opportunities Strategy 2/1/2007$ 26,487 41.48% 21.28% 20.09% 16.03% 13.14% 690 MSCI All Country World Index 16.25% 10.05% 12.24% 9.12% 6.24% Global Discovery Strategy 9/1/2017 2,148 47.94% 27.90% --- --- 26.98% 1,551 MSCI All Country World Index 16.25% 10.05% --- --- 11.47% US Mid-Cap Growth Strategy 4/1/1997 17,504 59.81% 29.49% 21.56% 17.22% 16.79% 616 Russell® Midcap Index 17.10% 11.60% 13.38% 12.40% 10.67% Russell® Midcap Growth Index 35.59% 20.48% 18.64% 15.03% 10.63% US Small-Cap Growth Strategy 4/1/1995 6,546 62.99% 33.75% 26.83% 20.12% 13.04% 414 Russell® 2000 Index 19.96% 10.24% 13.24% 11.19% 9.64% Russell® 2000 Growth Index 34.63% 16.18% 16.34% 13.47% 8.90% Global Equity Team Global Equity Strategy 4/1/2010 2,829 30.10% 19.20% 17.57% 14.57% 14.80% 545 MSCI All Country World Index 16.25% 10.05% 12.24% 9.12% 9.35% Non-US Growth Strategy 1/1/1996 21,684 8.61% 8.59% 9.11% 8.62% 10.30% 528 MSCI EAFE Index 7.82% 4.28% 7.44% 5.50% 5.02% Non-US Small-Mid Growth Strategy 1/1/2019 7,543 35.36% --- --- --- 36.80% 1,975 MSCI ACWI ex US SMID Index 12.01% --- --- --- 17.05% US Value Team Value Equity Strategy 7/1/2005 3,479 10.86% 7.90% 13.85% 11.15% 8.78% 134 Russell® 1000 Index 20.96% 14.80% 15.58% 14.00% 10.14% Russell® 1000 Value Index 2.80% 6.06% 9.73% 10.49% 7.44% US Mid-Cap Value Strategy 4/1/1999 3,670 6.90% 5.27% 10.43% 9.88% 12.34% 282 Russell® Midcap Index 17.10% 11.60% 13.38% 12.40% 9.90% Russell® Midcap Value Index 4.96% 5.36% 9.72% 10.48% 9.52% International Value Team International Value Strategy 7/1/2002 24,107 9.76% 5.56% 9.42% 9.26% 11.78% 544 MSCI EAFE Index 7.82% 4.28% 7.44% 5.50% 6.34% International Small Cap Value Strategy (2) 10/1/2020 16 --- --- --- --- 23.62% 182 MSCI All Country World Index Ex USA Small Cap (Net) --- --- --- --- 21.80% Global Value Team Global Value Strategy 7/1/2007 22,400 7.74% 5.93% 10.31% 10.98% 8.62% 285 MSCI All Country World Index 16.25% 10.05% 12.24% 9.12% 5.77% Select Equity Strategy 3/1/2020 17 --- --- --- --- 22.61% (646) S&P 500 Market Index (Total Return) --- --- --- --- 29.07% Sustainable Emerging Markets Team Sustainable Emerging Markets Strategy 7/1/2006 679 23.06% 8.81% 16.29% 4.41% 7.28% 97 MSCI Emerging Markets Index 18.31% 6.17% 12.79% 3.63% 6.31% Credit Team High Income Strategy 4/1/2014 6,241 11.00% 8.24% 10.03% --- 8.05% 270 ICE BofA US High Yield Master II Total Return Index 6.17% 5.88% 8.43% --- 5.35% Credit Opportunities Strategy (2) 7/1/2017 97 23.71% 12.98% --- --- 13.33% 759 ICE BofAU.S. High Yield Master II Total Return Index 6.17% 5.88% --- --- 5.74% Developing World Team Developing World Strategy 7/1/2015 8,853 83.46% 30.98% 28.29% --- 22.59% 1,482 MSCI Emerging Markets Index 18.31% 6.17% 12.79% --- 7.77%Antero Peak Group (3) Antero Peak Strategy 5/1/2017 2,573 30.81% 25.05% --- --- 28.88% 1,348 S&P 500 Index 18.40% 14.17% --- --- 15.40% 35
-------------------------------------------------------------------------------- Tabl e of Co ntents Antero Peak Hedge Strategy (2) 11/1/2017 903 22.97% 20.32% --- --- 20.37% 551 S&P 500 Index 18.40% 14.17% --- --- 14.86% Total Assets Under Management$ 157,776
(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 the benchmark most commonly used by our separate account clients to compare the performance of the
relevant strategy. The benchmark most commonly used by clients in the US Mid-Cap Growth, US Small-Cap Growth, Value Equity and US
Mid-Cap Value strategies is the style benchmark and for all other strategies is the broad market benchmark. Reporting on this metric
prior to
36 -------------------------------------------------------------------------------- Tabl e of Co ntents The tables below set forth changes in our assets under management by investment team: By Investment Team Sustainable Antero Peak Year Ended Growth Global Equity US Value International Value Global Value Emerging Markets Credit Developing World Group (1) Total December 31, 2020 (unaudited; in millions) 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(2) 916 594 (901) 64 1,146 324 2,023 2,040 948 7,154 Artisan Funds' distributions not reinvested (3) (222) (115) (12) (46) - - (130) (142) (23) (690) Investment returns and other 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 December 31, 2019 Beginning assets under management$ 26,251 $ 22,967 $ 6,577 $ 17,681$ 17,113 $ 179$ 2,860 $ 1,993$ 603 $ 96,224 Gross client cash inflows 4,207 3,557 644 3,607 1,412 29 1,791 1,305 1,042 17,594 Gross client cash outflows (5,251) (5,214) (1,435) (3,474) (2,806) (14) (1,138) (780) (140) (20,252) Net client cash flows (2) (1,044) (1,657) (791) 133 (1,394) 15 653 525 902 (2,658) Artisan Funds' distributions not reinvested (3) (134) (133) (33) (199) (8) - (112) - (11) (630) Investment returns and other 9,720 6,683 1,649 4,385 3,996 40 449 856 302 28,080 Ending assets under management$ 34,793 $ 27,860 $ 7,402 $ 22,000$ 19,707 $ 234$ 3,850 $ 3,374$ 1,796 $ 121,016 Average assets under management$ 31,861 $ 25,744 $ 7,113 $ 20,072$ 18,559 $ 203$ 3,586 $ 2,634$ 1,251 111,023 December 31, 2018 Beginning assets under management$ 30,628 $ 29,235 $ 8,765 $ 21,757$ 19,930 $ 282$ 2,554 $ 2,253$ 90 $ 115,494 Gross client cash inflows 5,121 3,466 1,027 3,758 2,405 28 1,443 893 552 18,693 Gross client cash outflows (7,736) (6,776) (2,107) (4,188) (2,510) (97) (1,004) (742) (30) (25,190) Net client cash flows (2) (2,615) (3,310) (1,080) (430) (105) (69) 439 151 522 (6,497) Artisan Funds' distributions not reinvested (3) (231) (268) (70) (246) (30) - (75) - (2) (922) Investment returns and other (1,531) (2,690) (1,038) (3,400) (2,682) (34) (58) (411) (7) (11,851) Ending assets under management$ 26,251 $ 22,967 $ 6,577 $ 17,681$ 17,113 $ 179$ 2,860 $ 1,993$ 603 $ 96,224 Average assets under management$ 30,967 $ 27,908 $ 8,207 $ 20,962$ 19,909 $ 237$ 2,945 $ 2,379$ 255 113,769 (1) EffectiveOctober 1, 2020 , the Artisan Partners Thematic Team was renamedAntero Peak Group . (2) Net client cash flows excludes Artisan Funds' income and capital gain distributions that were not reinvested. Prior period net client cash flows have been recast to exclude Artisan Funds' distributions. (3) Artisan Funds' distributions not reinvested represents the amount of income and capital gain distributions that were not reinvested in the Artisan Funds, including in theArtisan High Income Fund . 37 -------------------------------------------------------------------------------- Tabl e of Co ntents The goal of our marketing, distribution and client services efforts is to establish and maintain a client base that is diversified by investment strategy, investment vehicle 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, 2020 As of December 31, 2019 As of December 31, 2018 $ in millions % of total $ in millions % of total $ in millions % of total (unaudited) (unaudited) (unaudited) Institutional$ 102,189 64.8 %$ 80,274 66.3 %$ 63,543 66.0 % Intermediary 48,657 30.8 % 35,574 29.4 % 28,363 29.5 % Retail 6,930 4.4 % 5,168 4.3 % 4,318 4.5 % Ending Assets Under Management(1)$ 157,776 100.0 %$ 121,016 100.0 %$ 96,224 100.0 %
(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 14% of our total assets under management as ofDecember 31, 2020 . 38 -------------------------------------------------------------------------------- Tabl e of Co ntents The following tables set forth the changes in our assets under management for Artisan Funds and Artisan Global Funds in the aggregate, and separate accounts: Artisan Funds & Artisan Global Year Ended Funds Separate Accounts(2) Total December 31, 2020 (unaudited; in millions) 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(3) 4,400 2,754 7,154 Artisan Funds' distributions not reinvested(4) (690) - (690) Investment returns and other 14,259 16,037 30,296 Net transfers(1) (511) 511 - Ending assets under management$ 74,746 $ 83,030$ 157,776 Average assets under management$ 58,629 $ 66,272$ 124,901 December 31, 2019 Beginning assets under management$ 46,654 $ 49,570$ 96,224 Gross client cash inflows 12,545 5,049 17,594 Gross client cash outflows (13,911) (6,341) (20,252) Net client cash flows(3) (1,366) (1,292) (2,658) Artisan Funds' distributions not reinvested(4) (630) - (630) Investment returns and other 13,003 15,077 28,080 Net transfers(1) (373) 373 - Ending assets under management$ 57,288 $ 63,728$ 121,016 Average assets under management$ 52,974 $ 58,049$ 111,023 December 31, 2018 Beginning assets under management$ 57,349 $ 58,145$ 115,494 Gross client cash inflows 13,863 4,830 18,693 Gross client cash outflows (17,233) (7,957) (25,190) Net client cash flows(3) (3,370) (3,127) (6,497) Artisan Funds' distributions not reinvested(4) (922) - (922) Investment returns and other (6,065) (5,786) (11,851) Net transfers(1) (338) 338 - Ending assets under management$ 46,654 $ 49,570$ 96,224 Average assets under management$ 56,792 $ 56,977 113,769 (1) 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. (2) Separate account AUM consists of the assets we manage in or through vehicles other than Artisan Funds or Artisan Global Funds. Separate account 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. (3) Net client cash flows excludes Artisan Funds' income and capital gain distributions that were not reinvested. Prior period net client cash flows have been recast to exclude Artisan Funds' distributions. (4) Artisan Funds' distributions not reinvested represents the amount of income and capital gain distributions that were not reinvested in the Artisan Funds, including in theArtisan High Income Fund . 39
-------------------------------------------------------------------------------- Tabl e of Co ntents Artisan Funds and Artisan Global Funds As ofDecember 31, 2020 , Artisan Funds comprised$69.6 billion , or 44%, of our assets under management. For the year endedDecember 31, 2020 , fees from Artisan Funds represented$503.6 million , or 56%, of our revenues. Our contractual tiered fee rates for the series of Artisan Funds range from 0.625% to 1.05% of fund assets, depending on the investment strategy, the amount invested and other factors. As ofDecember 31, 2020 , Artisan Global Funds comprised$5.2 billion , or 3%, of our assets under management. For the year endedDecember 31, 2020 , fees from Artisan Global Funds represented$33.6 million , or 4%, of our revenues. Our contractual fee rates for Artisan Global Funds range from 0.75% 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 0.916%, 0.915%, and 0.919%, for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Separate Accounts Separate accounts comprised$83.0 billion , or 53%, of our assets under management as ofDecember 31, 2020 . For the year endedDecember 31, 2020 , fees from separate accounts represented$362.4 million , or 40%, of our revenues. Separate account assets under management consist of the assets we manage in or through vehicles other than Artisan Funds or Artisan Global Funds, including assets that we manage in traditional separate accounts, as well as assets we manage in Artisan-branded collective investment trusts and in Artisan Private Funds. 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, with tiered rates of fee currently ranging from 0.40% of assets under management to 1.00% of assets under management. 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. The weighted average management fee rate, which excludes performance fees, paid by our separate account clients in the aggregate was 0.526%, 0.534% and 0.533% for the years endedDecember 31, 2020 , 2019 and 2018, 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 the different fee schedules 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 our separate accounts, reflecting, among other things, the different 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. 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$157.8 billion of assets under management as ofDecember 31, 2020 have performance fee billing arrangements. Performance fees of$14.7 million ,$4.6 million , and$3.0 million were recognized in the years endedDecember 31, 2020 , 2019 and 2018, respectively. While performance fees may be earned and recognized in each quarter of the year, the majority of our performance fees in 2020 were recognized during the June quarter. As of the date of this filing,$6.5 million of performance fee revenue has been recognized during the first quarter of 2021. 40
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Tabl e of Co ntents
The following table sets forth revenues we earned under our investment
management agreements with Artisan Funds and Artisan Global Funds in the
aggregate, and on the separate accounts that we managed for the years ended
For the Years Ended December 31, 2020 2019 2018 Revenues (in millions) Management fees Artisan Funds & Artisan Global Funds$ 537.2 $ 484.9 $ 522.0 Separate accounts 347.7 309.5 303.6 Performance fees 14.7 4.6 3.0 Total revenues$ 899.6 $ 799.0 $ 828.6 Average assets under management for period$ 124,901 $
111,023
Management fees, performance fees and incentive allocations earned from consolidated investment products are eliminated from revenue upon consolidation. For the years endedDecember 31, 2020 , 2019 and 2018, approximately 83%, 83%, and 84%, 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 and marketing, occupancy, communication and technology, and general and administrative. Our expenses may fluctuate due to a number of factors, including the following: •variations in the level of total compensation expense due to, among other things, incentive compensation, equity awards, changes in our employee count (including the addition of new investment teams) and product mix and 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 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 is one of the most significant parts of the total compensation of our senior employees. The amount of cash incentive compensation paid to members of our investment teams and senior members of our marketing and client service teams 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 other employees is discretionary and subjectively determined based on individual performance and our overall results during the applicable year. Certain compensation and benefits expenses are generally higher in the beginning of the year, such as employer funded retirement and health care contributions and payroll taxes. We expect these costs to add approximately$4 million to$5 million to our expenses in the first quarter of 2021, compared to the fourth quarter of 2020. We grant equity awards to our employees pursuant to theArtisan Partners Asset Management Inc. 2013 Omnibus Incentive Compensation Plan. The 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 annual time vesting over 5 years and (2) qualifying retirement (as defined in the award agreements). Investment team members generally receive franchise awards rather than career awards. Franchise awards are identical to career awards, except with respect to the Franchise Protection Clause, which applies to current or future portfolio managers. The Franchise Protection Clause provides that the total number of franchise awards ultimately vesting will be reduced to the extent that cumulative net client cash outflows from the portfolio manager's investment team during a 3-year measurement period beginning on the date of the portfolio manager's retirement notice exceeds a set threshold. We expect to continue to grant franchise awards to members of our investment teams. In 2020, we began issuing performance share units to certain executive officers of the Company. 41 -------------------------------------------------------------------------------- Tabl e of Co ntents 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 performance share units and five years for all other awards that have been granted to date. Compensation expense for performance share units 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. OnJanuary 26, 2021 , the Company's board of directors approved a grant of$79.4 million of long-term incentive awards consisting of$44.4 million of restricted share-based awards and$35.0 million of long-term cash awards to certain employees pursuant to the Company's 2013 Omnibus Incentive Compensation Plan. The grant will be effectiveMarch 1, 2021 . The share-based awards include standard restricted awards, career awards, franchise awards and performance share units. The long-term cash awards, which are referred to as franchise capital awards, were made to investment team members in lieu of additional grants of restricted share-based awards. The franchise capital awards are subject to the same long-term vesting and forfeiture provisions as restricted share-based awards. Prior to vesting, franchise capital awards will be invested in one or moreArtisan Partners investment strategies. The underlying investment holdings and franchise capital award liability will be marked to market value each quarter. The change in value of the award liability will be included in compensation expense. The change in value of the underlying investment holdings will be included in non-operating income/(expense). Because franchise capital awards are cash-based awards, they will reduce cash available for dividends. With respect to the 2020 special dividend, the franchise capital awards reduced the dividend by approximately$0.44 per share. Going forward, 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 restricted share-based awards in lieu of franchise capital awards. Since the IPO and including the grant in the first quarter of 2021, our board of directors has approved the grant of 10,416,017 restricted share-based awards. Total unrecognized non-cash compensation expense for these awards is$123.2 million . As of the date of this filing, unvested equity awards are comprised of the following:
Service & Performance
Service Only Conditions Service & Market Conditions Total Standard Pro Rata Time Vesting 2,351,894 34,596 34,597 2,421,087 Qualified Retirement 2,806,181 977,758 33,017 3,816,956 Total Unvested 5,158,075 1,012,354 67,614 6,238,043 Including the franchise capital awards and the equity grant in the first quarter of 2021, total unrecognized long-term incentive compensation expense is$158.2 million . We expect long-term incentive compensation expense to be approximately$11 million per quarter in 2021. We expect to continue to make equity grants each year, though the form and structure of equity awards may change as we seek to maximize alignment between our employees and our clients, investors, partners and stockholders. The actual size of the expense over time will depend primarily on the number of awards granted and our stock price at the time the grants are made. The amount of equity granted will vary from year to year and will be influenced by our results and other factors. From time to time, we may make individual equity grants to people we hire. 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. 42 -------------------------------------------------------------------------------- Tabl e of Co ntents 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 2021 occupancy expenses will be approximately$23 million . 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. On behalf of our mutual fund and separate account 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 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 due to the COVID-19 pandemic. We expect most operating costs, including travel expense, to return to or exceed pre-COVID-19 levels when employees return to the office and resume business travel. 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. 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.Net Gain (Loss) on the Tax Receivable Agreements 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. 43 -------------------------------------------------------------------------------- Tabl e of Co ntents 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 inArtisan Partners Holdings held by the limited partners ofArtisan Partners Holdings . 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. 44 -------------------------------------------------------------------------------- Tabl e of Co ntents Results of Operations Year EndedDecember 31, 2020 , Compared to Year EndedDecember 31, 2019 For the Years Ended December 31, Period-to-Period 2020 2019 $ % Statements of operations data: (in millions, except share and per-share data) Revenues $ 899.6$ 799.0 $ 100.6 13 % Operating Expenses Total compensation and benefits 435.8 400.5 35.3 9 % Other operating expenses 105.5 115.0 (9.5) (8) % Total operating expenses 541.3 515.5 25.8 5 % Total operating income 358.3 283.5 74.8 26 % Non-operating income (expense) Interest expense (10.8) (11.1) 0.3 3 % Other non-operating income 21.8 (3.1) 24.9 803 % Total non-operating income (expense) 11.0 (14.2) 25.2 177 % Income before income taxes 369.3 269.3 100.0 37 % Provision for income taxes 60.8 27.8 33.0 119 % Net income before noncontrolling interests 308.5 241.5 67.0 28 % Less: Noncontrolling interests - Artisan Partners Holdings 81.1 80.1 1.0 1 % Less: Noncontrolling interests - consolidated investment products 14.8 4.9 9.9 202 % Net income attributable to Artisan Partners Asset Management Inc. $ 212.6$ 156.5 $ 56.1 36 % Share Data Basic earnings per share $ 3.40$ 2.65 Diluted earnings per share $ 3.40$ 2.65 Basic weighted average number of common shares outstanding 55,633,529
51,127,929
Diluted weighted average number of common shares outstanding 55,637,922 51,127,929 Revenues The increase in revenues of$100.6 million , or 13%, for the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 , was driven primarily by a$13.9 billion , or 13%, increase in our average assets under management and a$10.1 million increase in performance fee revenue. The weighted average investment management fee, which excludes performance fees, was 70.9 basis points for the year endedDecember 31, 2020 , compared to 71.6 basis points for the year endedDecember 31, 2019 . 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 Global Separate Accounts Funds For the Years Ended December 31, 2020 2019 2020 2019 (dollars in millions) Investment advisory fees $ 362.4$ 314.1 $ 537.2 $ 484.9 Weighted average management fee(1) 52.6 bps 53.4 bps 91.6 bps 91.5 bps Percentage of ending AUM 53 % 53 % 47 % 47 %
(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. The weighted average management fee for prior periods have been recast to exclude performance fee revenue.
45 -------------------------------------------------------------------------------- Tabl e of Co ntents Operating Expenses The increase in total operating expenses of$25.8 million , or 5%, for the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 , was primarily a result of higher incentive compensation expense related to increased revenues and higher salary and benefits expenses on an increased number of employees. The increases were partially offset by lower equity-based compensation expense and a decrease in travel expenses in response to the COVID-19 pandemic. Compensation and Benefits For the Years Ended December Period-to-Period 31, 2020 2019 $ % (in millions)
Salaries, incentive compensation and benefits (1)
11 % Restricted share-based award compensation expense 36.5 42.1 (5.6) (13) % Total compensation and benefits$ 435.8 $ 400.5 $ 35.3 9 % (1) Excluding restricted share-based award compensation expense The increase in salaries, incentive compensation and benefits was driven primarily by a$34.1 million increase in incentive compensation paid to our investment and marketing professionals as a result of the increase in revenue and higher salary and benefits expenses on an increased number of employees. Restricted share-based award compensation expense decreased$5.6 million as the awards that became fully amortized during 2019 and 2020 had a higher value than the awards granted in 2019 and 2020. Total compensation and benefits was 48% and 50% of our revenues for the years endedDecember 31, 2020 and 2019, respectively. Other operating expenses Other operating expenses decreased$9.5 million for the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 , primarily due to an$8.4 million decrease in travel expenses in response to the COVID-19 pandemic. Non-Operating Income (Expense) Non-operating income (expense) consisted of the following: For the Years Ended December Period-to-Period 31, 2020 2019 $ % (in millions) Interest expense$ (10.8) $ (11.1) $ 0.3 3 % Net investment gain (loss) of consolidated investment products 26.2 10.1 16.1 159 % Other investment gain (loss) 0.3 6.4 (6.1) (95) %
Net gain (loss) on the tax receivable agreements (4.7) (19.6)
14.9 (76) % Total non-operating income (expense)$ 11.0 $ (14.2) $ 25.2 (177) % Non-operating income (expense) for the year endedDecember 31, 2020 includes a$4.7 million loss relating to a change in estimate of the payment obligation under the tax receivable agreements, compared to a$19.6 million loss for the year endedDecember 31, 2019 . The effect of changes in that estimate after the date of an exchange or sale is included in net income. The changes in estimate in 2020 and 2019 were due to the remeasurement of deferred tax assets relating to an increase in estimated state income tax rates. Provision for Income Taxes APAM's effective income tax rate for the years endedDecember 31, 2020 and 2019 was 16.5% and 10.3%, respectively. The increase in effective tax rate was primarily due to a larger remeasurement of deferred tax assets in 2019 compared to 2020, resulting from an increase in estimated state income tax rates. An increase in Artisan's state deferred income tax rates results in an increase to deferred tax assets with a corresponding decrease to the provision for income taxes. 46 -------------------------------------------------------------------------------- Tabl e of Co ntents Several factors contribute to the effective tax rate, including a rate benefit attributable to the fact that approximately 24% and 31% of Holdings' full year projected taxable earnings were not subject to corporate-level taxes for the years endedDecember 31, 2020 and 2019, 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. Earnings Per Share Weighted average basic and diluted shares of Class A common stock outstanding were higher for the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 , as a result of stock offerings, 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. Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 For the Years Ended December 31, For the Period-to-Period 2019 2018 $ % Statements of operations data: (in millions, except share and per-share data) Revenues $ 799.0$ 828.6 $ (29.6) (4) % Operating Expenses Total compensation and benefits 400.5 413.2 (12.7) (3) % Other operating expenses 115.0 110.5 4.5 4 % Total operating expenses 515.5 523.7 (8.2) (2) % Total operating income 283.5 304.9 (21.4) (7) % Non-operating income (expense) Interest expense (11.1) (11.2) 0.1 1 % Other non-operating income (3.1) 8.1 (11.2) (138) % Total non-operating income (expense) (14.2) (3.1) (11.1) (358) % Income before income taxes 269.3 301.8 (32.5) (11) % Provision for income taxes 27.8 47.6 (19.8) (42) % Net income before noncontrolling interests 241.5 254.2 (12.7) (5) % Less: Noncontrolling interests - Artisan Partners 80.1 91.1 (11.0) Holdings (12) % Less: Noncontrolling interests - consolidated investment products 4.9 4.8 0.1 2 % Net income attributable to Artisan Partners Asset Management Inc. $ 156.5$ 158.3 $ (1.8) (1) % Share Data Basic and diluted earnings per share $ 2.65$ 2.84 Basic and diluted weighted average number of common shares outstanding 51,127,929
48,862,435
A detailed discussion of the year-over-year results for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 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, 2019 , filed with theSEC onFebruary 18, 2020 . 47 -------------------------------------------------------------------------------- Tabl e of Co ntents 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) net investment gain (loss) of investment products, and (3) 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 more 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) net investment gain (loss) of investment products, and (3) 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%, 24.1% and 23.5% for the years endedDecember 31, 2020 , 2019 and 2018, respectively. •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 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. Net investment gain (loss) of investment products represents the non-operating income (expense) related to the Company's seed investments, in both consolidated investment products and nonconsolidated investment products. Excluding these non-operating market gains or losses on seed investments provides greater transparency to evaluate the profitability and efficiency of the underlying operations of the business. 48 -------------------------------------------------------------------------------- Tabl e of Co ntents 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, 2020 2019 2018 (unaudited; in millions, except per share data) Reconciliation of non-GAAP financial measures: Net income attributable to Artisan Partners Asset Management Inc. (GAAP) $
212.6
81.1 80.1 91.1 Add back: Provision for income taxes 60.8 27.8 47.6 Add back: Net (gain) loss on the tax receivable agreements 4.7 19.6 (0.3)
Add back: Net investment (gain) loss of investment products attributable to APAM
(10.3) (9.9) (1.1) Less: Adjusted provision for income taxes 86.2 66.1 69.5 Adjusted net income (Non-GAAP) $ 262.7$ 208.0 $ 226.1 Average shares outstanding Class A common shares 55.6 51.1 48.9 Assumed vesting or exchange of: Unvested Class A restricted share-based awards 5.4 5.1 4.8Artisan Partners Holdings units outstanding (noncontrolling interests) 17.9 21.8 23.3 Adjusted shares 78.9 78.0 77.0 Basic and diluted earnings per share (GAAP) $ 3.40$ 2.65 $ 2.84 Adjusted net income per adjusted share (Non-GAAP) $
3.33
Net income attributable toArtisan Partners Asset Management Inc. (GAAP) $
212.6
81.1 80.1 91.1 Add back: Net (gain) loss on the tax receivable agreements 4.7 19.6 (0.3)
Add back: Net investment (gain) loss of investment products attributable to APAM
(10.3) (9.9) (1.1) Add back: Interest expense 10.8 11.1 11.2 Add back: Provision for income taxes 60.8 27.8 47.6 Add back: Depreciation and amortization 6.6 6.8 5.7 Adjusted EBITDA (Non-GAAP) $ 366.3$ 292.0 $ 312.5 49
-------------------------------------------------------------------------------- Tabl e of Co ntents Liquidity and Capital Resources 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, 2020 andDecember 31, 2019 : December 31, December 31, 2020 2019 (in millions) Cash and cash equivalents$ 155.0 $ 134.6 Accounts receivable $ 99.9$ 81.9 Seed investments(1) $ 62.6$ 57.8 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. 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, 2020 , none of our receivables were considered uncollectable. We utilize capital to make seed investments in Artisan-sponsored investment products to support the development of new investment strategies and vehicles. As ofDecember 31, 2020 , the balance of all seed investments, including investments in consolidated investment products, was$62.6 million . The seed investments are generally redeemable at our discretion. We have$200 million in unsecured notes outstanding and a$100 million revolving credit facility with a five-year term endingAugust 2022 . The notes are comprised of three series, Series C, Series D, and Series E, each with a balloon payment at maturity. The$100 million revolving credit facility was unused as of and for the year endedDecember 31, 2020 . 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, 2020 . 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$45 billion , Holdings is generally required to offer to pre-pay the notes. Artisan Partners Limited Partnership, a wholly-owned subsidiary of Holdings, has guaranteed Holdings' obligations under the terms of the Note Purchase Agreement. In addition, covenants in the note purchase and revolving credit agreements requireArtisan Partners Holdings to maintain the following financial ratios: •leverage ratio (calculated as the ratio of consolidated total indebtedness on any date to consolidated EBITDA for the period of four consecutive fiscal quarters ended on or prior to such date) cannot exceed 3.00 to 1.00 (Artisan Partners Holdings' leverage ratio for the year endedDecember 31, 2020 was 0.5 to 1.00); and •interest coverage ratio (calculated as the ratio of consolidated EBITDA for any period of four consecutive fiscal quarters to consolidated interest expense for such period) cannot be less than 4.00 to 1.00 for such period (Artisan Partners Holdings' interest coverage ratio for the year endedDecember 31, 2020 was 39.7 to 1.00). Our failure to comply with any of the covenants or restrictions described above could result in an event of default under the agreements, giving our lenders the ability to accelerate repayment of our obligations. We were in compliance with all debt covenants as ofDecember 31, 2020 . 50 -------------------------------------------------------------------------------- Tabl e of Co ntents Distributions and DividendsArtisan Partners Holdings' distributions, including distributions to APAM, for the years endedDecember 31, 2020 and 2019 were as follows: For the Years Ended December 31, 2020 2019 (in millions) Holdings Partnership Distributions to Limited Partners$ 85.8 $ 94.8 Holdings Partnership Distributions to APAM 270.0 226.3 Total Holdings Partnership Distributions $
355.8
APAM, acting as the general partner ofArtisan Partners Holdings , declared, effectiveFebruary 2, 2021 , a distribution of$60.4 million payable byArtisan Partners Holdings onFebruary 19, 2021 to holders of its partnership units, including APAM. APAM declared and paid the following dividends per share during the years endedDecember 31, 2020 and 2019: Type of Dividend Class of Stock For the Years Ended December 31, 2020 2019 Quarterly Common Class A $ 2.79$ 2.36 Special Annual Common Class A $ 0.60$ 1.03 Our board of directors declared, effectiveFebruary 2, 2021 , a variable quarterly dividend of$0.97 per share of Class A common stock with respect to the December quarter of 2020 and a special dividend of$0.31 . The combined amount,$1.28 per share of Class A common stock, will be paid onFebruary 26, 2021 to stockholders of record as of the close of business onFebruary 12, 2021 . The variable quarterly dividend of$0.97 per share represents approximately 80% of the cash generated in the December quarter of 2020 and a pro-rata portion of 2020 tax savings related to our tax receivable agreements. The special dividend represents the remainder of undistributed cash generated during the year endedDecember 31, 2020 , less the cash reserved for the 2021 franchise capital award, which reduced the 2020 special dividend by approximately$0.44 per share. 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 cash generation will generally equal adjusted net income plus equity-based compensation 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$412.5 million liability as ofDecember 31, 2020 . 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). 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. 51 -------------------------------------------------------------------------------- Tabl e of Co ntents 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, 2020 , we made payments of$27.0 million , related to the TRAs, including interest. We expect to make payments of approximately$32 million in 2021 related to the TRAs. Cash Flows For the Years Ended December 31, 2020 2019 2018 (in millions) Cash, cash equivalents and restricted cash as of$ 144.3 $ 175.5 $ 159.8 January 1 Net cash provided by operating activities 318.7 292.9 333.3
Net cash provided by (used in) investing activities 18.7
(17.5) (14.3) Net cash used in financing activities (282.2) (306.6) (263.5) Net impact of deconsolidation of consolidated - investment products - (39.8)
Cash, cash equivalents and restricted cash as of
Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Net cash provided by operating activities increased$25.8 million for the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 , primarily due to an increase in operating income resulting from higher average AUM and revenues, partially offset by decreases resulting from income tax payments and timing differences in other working capital accounts. For the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , our operating income, excluding noncash share-based related compensation expense, increased$69.2 million . Cash paid for income taxes increased$16.9 million and changes in other working capital negatively impacted operating cash flows by$16.9 million primarily due to an increase in accounts receivable and the timing of executive bonus payments. Operating cash flows were also negatively impacted by a$9.3 million reduction in cash provided by consolidated investment products. Investing activities consist primarily of acquiring and selling property and equipment, leasehold improvements and the purchase and sale of investment securities. Net cash provided by investing activities increased$36.2 million during the year endedDecember 31, 2020 , primarily due to a$21.5 million increase in net proceeds from the sale of investment securities and a$14.7 million decrease in the acquisition of property and equipment and leasehold improvements. 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$24.4 million during the year endedDecember 31, 2020 , primarily due to a$34.4 million increase in contributions from noncontrolling interests in our consolidated investment products and a$9.0 million decrease in distributions paid to limited partners. These lower cash uses were partially offset by a$14.8 million increase in dividends paid. 52 -------------------------------------------------------------------------------- Tabl e of Co ntents Contractual Obligations The following table sets forth our contractual obligations under certain contracts as ofDecember 31, 2020 : Payments Due by Period Less than More than 5 Total 1 year 1-3 Years 3-5 Years Years (in millions) Principal payments on borrowings$ 200.0 $ -$ 90.0 $ 60.0 $ 50.0 TRAs (1) 412.5 - - - - Interest payable 39.5 10.3 15.0 9.7 4.5 Lease obligations 109.9 16.7 29.2 27.0 37.0 Total Contractual Obligations$ 761.9 $ 27.0 $ 134.2 $ 96.7 $ 91.5 (1) The estimated payments under the TRAs as ofDecember 31, 2020 are described above under "Liquidity and Capital Resources - Tax Receivable Agreements ("TRAs")". However, amounts payable under the TRAs will increase upon exchanges of Holdings units for our Class A common stock or sales of Holdings units to us, with the increase representing 85% of the estimated future tax benefits, if any, resulting from the exchanges or sales. The actual amount and timing of payments associated with our existing payable under our tax receivable agreements or future exchanges or sales, and associated tax benefits, will vary depending upon a number of factors as described above. As a result, the timing of payments by period is currently unknown. We expect to pay approximately$32 million in 2021 related to the TRAs. The table above does not include income tax liabilities for unrecognized tax benefits due to the uncertainty regarding the timing and amount of future cash outflows. As ofDecember 31, 2020 , the liability was$1.3 million , which included accrued interest of$0.2 million . Off-Balance Sheet Arrangements As ofDecember 31, 2020 , we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, results of operations, liquidity or capital resources. 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. 53 -------------------------------------------------------------------------------- Tabl e of Co ntents 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 theSEC under the Investment Company Act of 1940, and investment manager of Artisan Global Funds, a family ofIreland -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 Statement 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. 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 separate account 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 (which represented approximately 4.0% of our assets under management atDecember 31, 2020 ), 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. 54 -------------------------------------------------------------------------------- Tabl e of Co ntents 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, 2020 , 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. Payments pursuant to the Tax Receivable Agreements ("TRAs") We have recorded a liability of$412.5 million as ofDecember 31, 2020 , 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. Item 7A. Qualitative and Quantitative Disclosures Regarding Market Risk Market Risk Our exposure to market risk is directly related to the role of our operating company as an investment adviser for the pooled vehicles and separate accounts it manages. Essentially all of our revenues are derived from investment management agreements with these vehicles and accounts. Under these agreements, the investment advisory fees we receive are generally based on the value of our assets under management, our fee rates and, for the accounts on which we earn performance based fees, the investment performance of those accounts. Accordingly, if our assets under management decline as a result of market depreciation, our revenues and net income will also decline. In addition, such a decline could cause our clients to withdraw their funds in favor of investments believed to offer higher returns or lower risk, which would cause our revenues to decline further. The value of our assets under management was$157.8 billion as ofDecember 31, 2020 . A 10% increase or decrease in the value of our assets under management, if proportionately distributed over all our investment strategies, products and client relationships, would cause an annualized increase or decrease in our revenues of approximately$111.9 million at our current weighted average fee rate of 71 basis points. Because of our declining rates of fee for larger relationships and differences in our rates of fee across investment strategies, a change in the composition of our assets under management, in particular an increase in the proportion of our total assets under management attributable to strategies, clients or relationships with lower effective rates of fees, could have a material negative impact on our overall weighted average rate of fee. The same 10% increase or decrease in the value of our total assets under management, if attributed entirely to a proportionate increase or decrease in the assets of each of the Artisan Funds and Artisan Global Funds, to which we provide a range of services in addition to those provided to separate accounts and therefore charge a higher rate of fee, would cause an annualized increase or decrease in our revenues of approximately$144.5 million at the Artisan Funds and Artisan Global Funds aggregate weighted average fee of 92 basis points. If the same 10% increase or decrease in the value of our total assets under management was attributable entirely to a proportionate increase or decrease in the assets of each separate account we manage, it would cause an annualized increase or decrease in our revenues of approximately$83.0 million at the current weighted average fee rate across all of our separate accounts of 53 basis points. 55 -------------------------------------------------------------------------------- Tabl e of Co ntents As is customary in the asset management industry, clients invest in particular strategies to gain exposure to certain asset classes, which exposes their investment to the benefits and risks of those asset classes. Because we believe that our clients invest in each of our strategies in order to gain exposure to the portfolio securities of the respective strategies and may implement their own risk management program or procedures, we have not adopted a corporate-level risk management policy regarding client assets, nor have we attempted to hedge at the corporate level or within individual strategies the market risks that would affect the value of our overall assets under management and related revenues. Some of these risks (e.g., sector risks and currency risks) are inherent in certain strategies, and clients may invest in particular strategies to gain exposure to particular risks. While negative returns in our investment strategies and net client cash outflows do not directly reduce the assets on our balance sheet (because the assets we manage are owned by our clients, not us), any reduction in the value of our assets under management would result in a reduction in our revenues. We also are subject to market risk from a decline in the prices of marketable securities that we own. The total value of marketable securities we owned, including our direct equity investments in consolidated investment products, was$62.6 million as ofDecember 31, 2020 . We invested in certain Artisan Private Funds, Artisan Funds and Artisan Global Funds in amounts sufficient to cover certain organizational expenses and to ensure that the funds had sufficient assets at the commencement of their operations to build a viable investment portfolio. Assuming a 10% increase or decrease in the values of our total marketable securities, the fair value would increase or decrease by$6.3 million atDecember 31, 2020 . Management regularly monitors the value of these investments; however, given their nature and relative size, we have not adopted a specific risk management policy to manage the associated market risk. Due to the nature of our business, we believe that we do not face any material risk from inflation. Exchange Rate Risk A substantial portion of the accounts that we advise, or sub-advise, hold investments that are denominated in currencies other than theU.S. dollar. Movements in the rate of exchange between theU.S. dollar and the underlying foreign currency affect the values of assets held in accounts we manage, thereby affecting the amount of revenues we earn. The value of the assets we manage was$157.8 billion as ofDecember 31, 2020 . As ofDecember 31, 2020 , approximately 50% of our assets under management were invested in strategies that primarily invest in securities of non-U.S. companies and approximately 42% of our assets under management were invested in securities denominated in currencies other than theU.S. dollar. To the extent our assets under management are denominated in currencies other than theU.S. dollar, the value of those assets under management will decrease with an increase in the value of theU.S. dollar, or increase with a decrease in the value of theU.S. dollar. Each investment team monitors its own exposure to exchange rate risk and makes decisions on how to manage that risk in the portfolios managed by that team. We have not adopted a corporate-level risk management policy to manage exchange rate risk in the assets we manage. Assuming that 42% of our assets under management is invested in securities denominated in currencies other than theU.S. dollar and excluding the impact of any hedging arrangements, a 10% increase or decrease in the value of theU.S. dollar would decrease or increase the fair value of our assets under management by$6.6 billion , which would cause an annualized increase or decrease in revenues of approximately$47.0 million at our current weighted average fee rate of 71 basis points. We operate in several foreign countries of which theUnited Kingdom is the most prominent. We incur operating expenses and have foreign currency-denominated assets and liabilities associated with these operations. In addition, we have revenue arrangements that are denominated in non-U.S. currencies. We do not believe that foreign currency fluctuations materially affect our results of operations. Interest Rate Risk We generally invest our available cash balances in money market mutual funds that invest primarily inU.S. Treasury or agency-backed money market instruments. These funds attempt to maintain a stable net asset value but interest rate changes or other market risks may affect the fair value of those funds' investments and, if significant, could result in a loss of investment principal. Interest rate changes affect the income we earn from our excess cash balances. As ofDecember 31, 2020 ,$25.9 million of our available cash was invested in money market funds that invested solely inU.S. Treasuries. Given the current yield on these funds, interest rate changes would not have a material impact on the income we earn from these investments. The remaining portion of our cash was held in demand deposit accounts. Interest rate changes may affect the amount of our interest payments in connection with our revolving credit agreement, and thereby affect future earnings and cash flows. As ofDecember 31, 2020 , there were no borrowings outstanding under the revolving credit agreement. The strategies managed by our Credit Team, which had$6.3 billion of assets under management as ofDecember 31, 2020 , invest in fixed income securities. The values of debt instruments held by the strategy may fall in response to increases in interest rates, which would reduce our revenues. We have considered the potential impact of a 100 basis point movement in market interest rates on the portfolios of the strategies managed by our Credit Team. Based on our analysis, we do not expect that such a change would have a material impact on our revenues or results of operations in the next twelve months. 56
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Tabl e of Co ntents
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