Artisan Partners Asset Management : Reports 4Q20 Results 181 KB

Artisan Partners Asset Management Inc. Reports 4Q20 and Year Ended December 31, 2020 Results and Quarterly and Special Annual Dividend

Milwaukee, WI - February 2, 2021 - Artisan Partners Asset Management Inc. (NYSE: APAM) (the "Company" or "Artisan Partners") today reported its results for the quarter and year ended December 31, 2020, and declared a quarterly and special annual dividend.

Chairman and CEO, Eric Colson, said, "In 2020, Artisan Partners generated exceptional outcomes for our clients, our associates, and our shareholders. We executed well during a period of historic uncertainty and turmoil. We added significant value for clients. We grew our business through investment returns and net client cash flows, strengthening existing relationships and adding new clients around the world. And we continued to re-invest in our firm, focusing on investment strategies and talent that are aligned with long-term asset allocation trends.

"During 2020, our investment teams performed well on both an absolute and relative basis. We again demonstrated the value we add for clients, which is manifest in our long-term investment results. Since inception, 16 of the 17 Artisan Partners investment strategies launched prior to 2020 have added value relative to their benchmark indices, after fees. Twelve strategies have outperformed their benchmarks by an average of more than 300 basis points per year, after fees, since inception.

"Over extended periods, those basis points translate into significant dollars. Gross of fees, Artisan Partners has generated approximately $33 billion of excess returns since the founding of our firm 25 years ago. During 2020, we generated approximately $11 billion of excess returns. The wealth we generate improves retirement outcomes, pays for educations, funds charitable purposes, and improves people's lives. We are proud of our track record for clients, and we are dedicated to continuing to improve.

"During 2020, we realized over $7.0 billion in net client cash inflows. We realized net inflows across eight of nine investment teams, 16 of 19 investment strategies, all three distribution channels, and both within and outside the United States. We further diversified our business across investment teams, asset classes, client types, and geographies. And we upgraded our digital marketing capabilities and our use of sales enablement technology.

"In addition to executing for our clients and raising capital from new clients, we continued to invest in our business for the long-term. We launched the Select Equity and International Small Cap Value strategies. And we are building out an investment group and strategy focused on post-venture investing in greater China, including private investments.

"Consistent with Who We Are as an investment firm, our purpose is to generate investment results for clients-not engineer smooth client cash flows. Our investment results, our brand, and our leveraged distribution model allow us to maintain balanced AUM that supports the investment capacity and growth of our investment teams. We don't require a large fixed sales infrastructure, which would pressure our investment organization to manufacture fad products and reduce our flexibility to opportunistically hire great investors and retain them over their entire careers.

"Our business performance in 2020 resulted in a predictable and healthy financial outcome for our associates and shareholders. We finished the year with $900 million in revenue, a 48% compensation ratio, a 40% operating margin, and $3.40 and $3.33 of GAAP and adjusted EPS, respectively. Our fourth quarter dividend of $0.97 per share is our largest dividend ever with respect to a single quarter. Including our special annual dividend, we will have distributed a total of $3.39 per share with respect to 2020.

"Over our firm's 25-year history, we have brought together the consistency of Who We Are, constant change, and patience-a process we call dynamic consistency. We have maintained our talent-driven business model and investment focused culture, providing a stable home for great investors. Responding to evolving asset allocation preferences, we have guided our firm in the direction of higher value-added investing, with greater degrees of freedom and less easily replicated portfolios and outcomes. And we have thoughtfully grown our firm globally using technology and leveraged distribution to connect with a broad market of sophisticated allocators and investors-while maintaining a brand that stands for investment excellence and trust. Having established a proven framework for dynamic consistency, going forward we expect to manage increasing degrees of freedom and additional thoughtful growth."

The table below presents AUM and a comparison of certain GAAP and non-GAAP ("adjusted") financial measures.

		For the Three Months Ended				For the Years Ended
	December 31,		September 30,		December 31,		December 31,		December 31,
		2020			2020			2019			2020			2019
		(unaudited, in millions except per share amounts or as otherwise noted)
Assets Under Management (amounts in billions)
Ending	$	157.8	$	134.3	$	121.0	$	157.8	$	121.0
Average		145.0			131.0			115.8			124.9			111.0
Consolidated Financial Results (GAAP)
Revenues	$	261.1	$	232.7	$	208.4	$	899.6	$	799.0
Operating income		113.5			97.2			79.4			358.3			283.5
Operating margin		43.5 %			41.8 %			38.1 %			39.8 %			35.5 %
Net income attributable to Artisan Partners Asset Management
Inc.	$	73.1	$	58.5	$	44.5	$	212.6	$	156.5
Basic earnings per share		1.15			0.93			0.76			3.40			2.65
Diluted earnings per share		1.15			0.93			0.76			3.40			2.65
Adjusted1 Financial Results
Adjusted EBITDA2	$	116.1	$	99.1	$	81.5	$	366.3	$	292.0
Adjusted net income		83.7			71.4			58.5			262.7			208.0
Adjusted net income per adjusted share		1.06			0.90			0.75			3.33			2.67

______________________________________

• Adjusted measures are non-GAAP measures and are explained and reconciled to the comparable GAAP measures in Exhibit 2.

• Adjusted EBITDA represents adjusted net income before interest expense, income taxes, depreciation and amortization expense.

2

December 2020 Quarter Compared to September 2020 Quarter

AUM increased to $157.8 billion at December 31, 2020, an increase of 17.5%, compared to $134.3 billion at September 30, 2020, as a result of $22.0 billion of investment returns and $2.1 billion of net client cash inflows, partially offset by $0.6 billion of Artisan Funds' distributions not reinvested. For the quarter, average AUM increased 10.7% to $145.0 billion.

Revenues of $261.1 million in the December 2020 quarter increased $28.4 million, or 12%, from $232.7 million in the September 2020 quarter, primarily due to higher average AUM and a $3.2 million increase in performance fee revenue.

Operating expenses of $147.6 million in the December 2020 quarter increased $12.1 million, or 9%, from $135.5 million in the September 2020 quarter, primarily as a result of higher incentive compensation expense related to increased revenues.

Operating margin increased to 43.5% in the December 2020 quarter from 41.8% in the September 2020 quarter.

Investment gains on seed investments were $8.1 million in the December 2020 quarter, compared to gains of $3.7 million in the September 2020 quarter. These investment gains are net of income attributable to third party shareholders of consolidated investment products.

GAAP net income was $73.1 million, or $1.15 per basic and diluted share, in the December 2020 quarter, compared to GAAP net income of $58.5 million, or $0.93 per basic and diluted share, in the September 2020 quarter. Adjusted net income was $83.7 million, or $1.06 per adjusted share, in the December 2020 quarter, compared to adjusted net income of $71.4 million, or $0.90 per adjusted share, in the September 2020 quarter.

December 2020 Quarter Compared to December 2019 Quarter

AUM at December 31, 2020 was $157.8 billion, up from $121.0 billion at December 31, 2019. The change in AUM over the period was 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 not reinvested. Average AUM for the December 2020 quarter was $145.0 billion, an increase of 25% from average AUM of $115.8 billion for the December 2019 quarter.

Revenues of $261.1 million in the December 2020 quarter increased $52.7 million, or 25%, from $208.4 million in the December 2019 quarter, primarily due to higher average AUM and a $3.5 million increase in performance fee revenue.

Operating expenses of $147.6 million in the December 2020 quarter increased $18.6 million, or 14%, from $129.0 million in the December 2019 quarter, primarily as a result of higher incentive compensation expense related to increased revenues, partially offset by a decrease in travel expenses in response to the COVID-19 pandemic.

Operating margin was 43.5% for the December 2020 quarter, compared to 38.1% for the December 2019 quarter.

Investment gains on seed investments were $8.1 million in the December 2020 quarter, compared to gains of $4.1 million in the December 2019 quarter.

GAAP net income was $73.1 million, or $1.15 per basic and diluted share, in the December 2020 quarter, compared to GAAP net income of $44.5 million, or $0.76 per basic and diluted share, in the December 2019 quarter. Adjusted net income was $83.7 million, or $1.06 per adjusted share, in the December 2020 quarter, compared to adjusted net income of $58.5 million, or $0.75 per adjusted share, in the December 2019 quarter.

3

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Average AUM for the year ended December 31, 2020 was $124.9 billion, 13% higher than average AUM of $111.0 billion for the year ended December 31, 2019.

Revenues of $899.6 million for the year ended December 31, 2020 increased $100.6 million, or 13%, from $799.0 million for the year ended December 31, 2019, primarily due to higher average AUM and a $10.1 million increase in performance fee revenue.

Operating expenses of $541.3 million for the year ended December 31, 2020 increased $25.8 million, or 5%, from $515.5 million for the year ended December 31, 2019, primarily as 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.

Operating margin was 39.8% for the year ended December 31, 2020, compared to 35.5% for the year ended December 31, 2019.

Investment gains on seed investments were $10.3 million for the year ended December 31, 2020, compared to gains of $9.9 million for the year ended December 31, 2019.

Provision for income taxes was higher for the year ended December 31, 2020, compared to the year ended December 31, 2019, due to a remeasurement of deferred tax assets in 2019 resulting from an increase in the Company's estimate of state income tax expense. The GAAP effective tax rate was 16.5% for the year ended December 31, 2020, compared to 10.3% for the year ended December 31, 2019.

The adjusted tax rate was 24.7% for the year ended December 31, 2020, compared to 24.1% for the year ended December 31, 2019.

GAAP net income was $212.6 million, or $3.40 per basic and diluted share, for the year ended December 31, 2020, compared to GAAP net income of $156.5 million, or $2.65 per basic and diluted share, for the year ended December 31, 2019. Adjusted net income was $262.7 million, or $3.33 per adjusted share for the year ended December 31, 2020, compared to adjusted net income of $208.0 million, or $2.67 per adjusted share, for the year ended December 31, 2019.

Capital Management & Balance Sheet

Cash and cash equivalents were $155.0 million at December 31, 2020, compared to $134.6 million at December 31, 2019. The Company paid a variable quarterly dividend of $0.83 per share of Class A common stock during the December 2020 quarter. The Company had total borrowings of $200.0 million at December 31, 2020, and December 31, 2019.

During the December 2020 quarter, limited partners of Artisan Partners Holdings exchanged 1,708,476 common units for 1,708,476 Class A common shares. The exchanges increased the Company's public float of Class A common stock by 1,708,476 shares, or 2.8%.

Total stockholders' equity was $191.0 million at December 31, 2020, compared to $138.5 million at December 31, 2019. The Company had 63.1 million Class A common shares outstanding at December 31, 2020. The Company's debt leverage ratio, calculated in accordance with its loan agreements, was 0.5X at December 31, 2020.

Long-Term Incentive Awards

On January 26, 2021, the Company's board of directors approved a grant of $79.5 million of long-term incentive awards, consisting of $44.5 million of restricted share-based awards and $35.0 million of new long-term cash awards, which we refer to as Franchise Capital awards. The grant will be effective March 1, 2021.

The Franchise Capital awards were made to investment team members in lieu of additional restricted share-based awards. Grants of restricted share-based awards have been and will continue to be an effective way to align the interests of our key employees, including investment professionals to the interests of our shareholders. We designed the Franchise Capital awards as an added feature to our long-term incentive program to improve the alignment between investment professionals and clients, and to provide investment professionals with greater control over their long-term economic outcome. The Franchise Capital awards are subject to the same long- term vesting and forfeiture provisions as restricted share-based awards. Prior to vesting, though, Franchise Capital awards will be invested in one or more of the investment strategies managed by the award recipient's investment team.

Because Franchise Capital awards are cash-based awards, they 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 investment management revenues each quarter for annual Franchise Capital awards, which we expect to make after the conclusion of each year.

4