S-1 1 y35056sv1.htm FORM S-1 S-1
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As filed with the Securities and Exchange Commission on June 11, 2007
Registration No. 333-          
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
Pzena Investment Management, Inc.
(Exact name of registrant as specified in its charter)
 
         
Delaware   6282   20-8999751
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)
 
 
 
 
Pzena Investment Management, Inc.
120 West 45th Street, 20th Floor
New York, New York 10036
(212) 355-1600
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
 
 
 
 
Wayne A. Palladino
Chief Financial Officer
Pzena Investment Management, Inc.
120 West 45th Street, 20th Floor
New York, New York 10036
(212) 355-1600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
 
with copies to:
     
Richard B. Aftanas, Esq.
Ralph Arditi, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, NY 10036
(212) 735-3000
(212) 735-2000 (facsimile)
  Vincent Pagano Jr., Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
(212) 455-2000
(212) 455-2502 (facsimile)
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement is declared effective.
 
If any of the securities being registered on this Form are offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
    Amount of
Title of Each Class of Securities to be Registered     Aggregate Offering Price(1)     Registration Fee(2)
Class A common stock, $0.01 par value per share
    $150,000,000     $4,605.00
             
(1) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act.
(2) Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.
 
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale in not permitted.
 
 
SUBJECT TO COMPLETION, DATED JUNE 11, 2007
 
PRELIMINARY PROSPECTUS
 
           Shares
 
Pzena Investment Management, Inc.
 
Class A Common Stock
 
This is the initial public offering of our Class A common stock, each share of which entitles the holder to one vote. We are offering           shares of our Class A common stock.
 
No public market currently exists for our Class A common stock. We expect the public offering price to be between $      and $      per share. We intend to apply to have our Class A common stock approved for listing on The New York Stock Exchange (the “NYSE”) under the symbol “PZN.”
 
We intend to use the net proceeds of this offering to purchase membership units in Pzena Investment Management, LLC from its three non-employee members and will not retain any of these proceeds. None of the 23 current employee members of Pzena Investment Management, LLC will sell any of their membership units in conjunction with this offering.
 
Concurrently with the consummation of this offering, we will issue           shares of our Class B common stock, each share of which initially entitles the holder to five votes per share, to the continuing members of Pzena Investment Management, LLC. These Class B stockholders, who will hold     % of the combined voting power of our common stock immediately after this offering, will enter into a stockholders’ agreement pursuant to which they will agree to vote their shares together on all matters submitted to a vote of our common stockholders.
 
Investing in our Class A common stock involves a high degree of risk. Before buying any shares, you should read the discussion of material risks of investing in our Class A common stock under “Risk Factors” beginning on page 13 of this prospectus.
 
Neither the Securities and Exchange Commission, nor any state securities commission, has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
                 
    Per Share     Total  
 
Public offering price of Class A common stock
  $             $          
Underwriting discounts and commissions
  $       $    
Proceeds, before expenses, to Pzena Investment Management, Inc. 
  $       $  
 
To the extent that the underwriters sell more than           shares of our Class A common stock, the underwriters have the option to purchase up to           additional shares of our Class A common stock from us at the public offering price, less the underwriting discounts and commissions, within 30 days of the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $           and our total proceeds, before expenses, will be $          .
 
The underwriters are offering the Class A common stock as set forth under “Underwriting.”  Delivery of the shares will be made on or about          , 2007.
 
Goldman, Sachs & Co. UBS Investment Bank
Banc of America Securities LLC


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(BAR CHART)
 
(LINE CHART)


 

 
Until          , 2007 (25 days after the date of this prospectus), federal securities laws may require all dealers that effect transactions in our Class A common stock, whether or not participating in this offering, to deliver a prospectus. This is in addition to their obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
 
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CHANGE IN INDEPENDENT ACCOUNTANTS
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  F-1
 EX-23.2: CONSENT OF ERNST & YOUNG LLP
 EX-23.3: CONSENT OF J.H. COHN LLP
 EX-99.1: LETTER OF J.H.COHN LLP
 
Notice to Investors
 
You should rely only on the information contained in this prospectus. We and the underwriters have not authorized anyone to give you different or additional information. We are offering to sell, and seeking offers to buy, shares of our Class A common stock only in jurisdictions where those offers and sales are permitted. You should not assume that the information in this prospectus is accurate as of any date after the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our Class A common stock.


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SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before investing in our Class A common stock. You should read the entire prospectus carefully before making an investment decision, including the section entitled “Risk Factors” and our historical consolidated financial statements, and the notes thereto, and unaudited pro forma financial information, each included elsewhere in this prospectus. Unless otherwise indicated, industry data are derived from publicly available sources, which we have not independently verified.
 
In this prospectus, “we”, “our” and “us” refer to Pzena Investment Management, LLC and its consolidated subsidiaries when referring to events occurring prior to this offering and, after this offering, these terms refer to Pzena Investment Management, Inc., Pzena Investment Management, LLC and its consolidated subsidiaries.
 
Overview
 
Founded in late 1995, Pzena Investment Management, LLC is a premier value-oriented investment management firm with a record of investment excellence and exceptional client service. We have established a positive, team-oriented culture that enables us to attract and retain the best people. Over the past eleven years, we have built a diverse, global client base of respected and sophisticated investors. As of March 31, 2007, we managed approximately $28.5 billion across a range of value investing strategies on behalf of institutions, high net worth individuals, and select third-party distributed mutual funds.
 
Our investment discipline and commitment to classic value investing have been important elements of our success. We currently offer clients ten value-oriented strategies which span different market capitalization segments in both U.S. and foreign markets. All of our investment strategies generally follow the same philosophy — we seek to make investments in good businesses at low prices. We construct concentrated portfolios of these businesses, which are selected through a rigorous, fundamental research process. Our investment decisions are not motivated by short-term results, nor are they aimed at closely tracking specific market benchmarks. Instead, we are focused on generating excess returns over the long term.
 
We have greatly expanded our client base in recent years. As of March 31, 2007, we managed separate accounts on behalf of over 375 institutions and high net worth individual investors and acted as sub-investment adviser for twelve SEC-registered mutual funds and eight offshore funds. In each of the past five years, we received significantly more new money to manage from clients than has been withdrawn from the firm.


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This has supported our significant growth in assets under management, or AUM, from December 31, 2002 to March 31, 2007, as indicated below:
 
         
    AUM  
    (in billions)  
 
Assets at December 31, 2002
  $ 3.1  
Net Inflows
    1.2  
Appreciation
    1.5  
         
Assets at December 31, 2003
    5.8  
Net Inflows
    3.2  
Appreciation
    1.7  
         
Assets at December 31, 2004
    10.7  
Net Inflows
    5.1  
Appreciation
    1.0  
         
Assets at December 31, 2005
    16.8  
Net Inflows
    6.7  
Appreciation
    3.8  
         
Assets at December 31, 2006
    27.3  
Net Inflows
    1.1  
Appreciation
    0.0  
         
Assets at March 31, 2007(1)
  $ 28.5  
         
 
 
(1) Figures may not add due to rounding.
 
 
As a people-driven business, our success depends on our entire team of 67 employees, including 23 employee members who collectively own     % of our operating company. This group is led by our four-person Executive Committee, consisting of Richard S. Pzena, John P. Goetz, A. Rama Krishna and William L. Lipsey.
 
Our Competitive Strengths
 
We believe that the attractive performance of our investment strategies and our success in the asset management business is based on the following competitive strengths:
 
  •   Focus on Investment Excellence.  We recognize that we must achieve investment excellence in order to attain long-term business success. All of our business decisions, including the design of our investment process and our willingness to limit AUM in our investment strategies, are focused on producing attractive long-term investment results. According to eVestment Alliance, LLC, all five of our investment strategies that have a five-year track record ranked in the top half of their institutional peer groups as of March 31, 2007. Our four largest investment strategies, Large Cap Value, Value Service, Global Value and Small Cap Value, have outperformed their relevant benchmarks since their inception by 3.3%, 4.5%, 3.6% and 4.7%, respectively, on an annualized basis.
 
  •   Consistency of Investment Process.  We utilize the same disciplined, systematic investment process to construct and manage portfolios in each of our investment strategies. We believe that our institutional clients, and the consultants who advise them, recognize the benefits of this efficient process and, as a result, are generally receptive to the investment strategies we offer at an earlier stage in their development than otherwise is typical.
 
  •   Diverse and High Quality Client Base.  Through a combination of attractive investment performance, consistency in investment approach and a commitment to client service, we have developed a


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  favorable reputation in the institutional investment community. This is evidenced by our strong relationships with consultants and the diversity and sophistication of our investors.
 
  •   Talented Investment Professionals and a Team-Oriented Approach.  The wide range of experiences of our investment professionals gives us unique perspectives while executing our in-depth, research-based decision-making process. To capitalize on the diversity of these backgrounds, we follow a team-oriented approach to making investment decisions, in which all of our investment professionals play a significant role.
 
  •   Employee Retention.  We have focused on building an environment that we believe is attractive to talented investment professionals. In the past five years, only one investment professional has left the firm. We believe we are well positioned to continue to attract and retain highly qualified investment professionals.
 
  •   Culture of Ownership.  We believe in significant ownership of our business by the key contributors to our success. We currently have 23 employee owners positioned within all functional areas of our firm. We believe this ownership model gives us a sense of shared purpose with our clients and their advisers.
 
Our Business Strategy
 
The key to our success is continued long-term investment performance. In conjunction with this, we believe the following strategies will enable us to continue to grow our business.
 
  •   Capitalize on Growth Opportunities in Our International Value and Global Value Strategies.  Among both institutional and retail investors, there has been increasing levels of investment in portfolios including foreign equities. We believe that our International Value and Global Value investment strategies are well positioned to participate in this industry trend. Now that both of these strategies have recently completed three-year track records, an important prerequisite for consideration by many investors, we expect to participate more broadly in these industry-wide flows.
 
  •   Employ Our Proven Process to Introduce New Products.  We anticipate continuing to offer new investment strategies over time, on a measured basis, consistent with our past practice. We believe that we will be able to launch new products efficiently and successfully, utilizing our proven investment process.
 
  •   Collaborate with Strong Distributors to Create Customized Products.  Over the past several years, we have developed strong relationships with certain distributors who have packaged our investment strategies within their products. Most significant among these is our relationship with John Hancock Advisers. We currently sub-advise four mutual funds for John Hancock Advisers, which represented $9.3 billion of our AUM at March 31, 2007. Working closely with them, we have developed, and intend to continue to develop, new investment strategies which they believe will be well received by their clients.
 
  •   Work with Our Strong Consultant Relationships.  We have built strong relationships with the most important investment consulting firms in our industry. We believe that these relationships will assist us in introducing new investment strategies to key segments of the investing community.
 
  •   Expand Our Foreign Client Base.  As part of the overall expansion of our business, we have increased our efforts to develop our foreign client base. We expect to achieve considerable growth in this client base through our strong relationships with global consultants and by directly calling on the world’s largest institutional investors.
 
  •   Leverage Our Value Investment Expertise to Selectively Develop Alternative Products.  We intend to further capitalize on our investment expertise and our strong reputation by developing alternative strategies based upon our classic value investment approach.


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Our Investment Process and Strategies
 
We identify investment opportunities by following a proprietary, research-driven process. In general, we only consider investments in companies in the relevant investment universe that are among the 20% least expensive, based on the ratio of their current stock price to our estimate of their normalized long-term earnings power. We systematically sell securities within our portfolios when their valuation reaches the fiftieth percentile of the relevant investment universe based on the same ranking system.
 
The following table indicates the annualized gross returns (which is prior to the payment of advisory fees), relative to the performance of relevant indices, of our seven largest investment strategies from their inception to March 31, 2007. As long-term investors, we believe that our investment approach yields the most benefit, and is best evaluated, over the long term.
 
                 
    AUM at
    Annualized Gross Returns
 
Investment Strategy (Inception Date)
  March 31, 2007     Inception to March 31, 2007(1)  
    (in millions)        
 
Large Cap Value (October 2000)
  $ 18,456       11.4 %
Russell 1000 Value Index
            8.1  
S&P 500 Index
            1.5  
                 
Value Service (January 1996)
  $ 5,624       16.2 %
Russell 1000 Value Index
            11.8  
S&P 500 Index
            9.5  
                 
Global Value (January 2004)
  $ 1,551       17.9 %
MSCI World Index — Net/US$(2)
            14.3  
S&P 500 Index
            9.8  
                 
Small Cap Value (January 1996)
  $ 1,133       18.5 %
Russell 2000 Value Index
            13.8  
S&P 500 Index
            9.5  
                 
Mid Cap Value (September 1998)
  $ 598       18.3 %
Russell Mid Cap Value Index
            14.6  
S&P 500 Index
            6.4  
                 
All Cap Value (May 2001)
  $ 595       18.1 %
Russell 3000 Value Index
            9.0  
S&P 500 Index
            4.0  
                 
International Value (January 2004)
  $ 401       19.4 %
MSCI EAFE — Net/US$(2)
            19.7  
S&P 500 Index
            9.8  
 
 
(1) Prior to payment of advisory fees.
(2) Net of applicable withholding taxes.
 
We understand that our ability to retain and grow assets is driven primarily by delivering attractive returns to our clients and, therefore, we prioritize investment performance over asset accumulation. As a result, we have closed certain of our investment strategies to new investors to preserve capacity to effectively implement our concentrated investment strategies for the benefit of existing clients.
 
Our Client Relationships and Distribution Approach
 
Strong client relationships are critical to the growth of our asset base and our overall business. In building these relationships, our efforts are focused on areas where we can efficiently access and service large pools of clients with our team of 14 dedicated marketing and client service professionals. In the institutional channel, we drive AUM growth through both direct marketing to institutions, and dialogue with the largest investment consultants. We have also developed mutual fund sub-investment advisory arrangements with prominent retail distribution platforms, including John Hancock Advisers in the United States and BNP Paribas Asset Management outside the United States. We selectively access the high net worth channel through relationships with highly respected wealth advisers, who utilize our investment strategies in investment programs they construct for their clients and, occasionally, through direct relationships.


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The Reorganization and Our Holding Company Structure
 
On May 8, 2007, we were incorporated in Delaware. Our business is presently conducted through Pzena Investment Management, LLC, which we refer to as our operating company, the current members of which consist of 23 of our current employees, one former employee and two outside investors. Concurrently with the consummation of this offering, we will acquire approximately    % of the outstanding membership units of Pzena Investment Management, LLC (or    % if the underwriters exercise their option to purchase additional shares of Class A common stock in full) from its three non-employee members and these membership units will be reclassified as “Class A units.”  None of the 23 current employee members of Pzena Investment Management, LLC will sell any of their membership units in conjunction with this offering.
 
Immediately after our acquisition of these membership units from the three current non-employee members of Pzena Investment Management, LLC, our only material asset will be our ownership of approximately    % of the total membership units of Pzena Investment Management, LLC (or    % if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and our only business will be acting as its sole managing member. Simultaneously, the remaining approximately    % of the membership units of Pzena Investment Management, LLC (or    % if the underwriters exercise their option to purchase additional shares of Class A common stock in full) that will be held by 23 of our current employees and two outside investors will be reclassified as “Class B units.”
 
Class A and Class B units will have the same economic rights per unit. Accordingly, immediately after the consummation of the reorganization and this offering, the holders of our Class A common stock (through us) and the holders of Class B units of Pzena Investment Management, LLC will hold approximately  % and    %, respectively, of the economic interests in our business (or    % and    %, respectively, if the underwriters exercise their option to purchase additional shares of Class A common stock in full).
 
For each membership unit of Pzena Investment Management, LLC that is reclassified as a Class B unit in the reorganization, we will issue the holder one share of our Class B common stock, par value $0.00001 per share, in exchange for the payment of this par value. Each share of our Class B common stock will entitle its holder to five votes, until such time that the number of shares of Class B common stock outstanding constitutes less than 20% of the number of all shares of our common stock outstanding. From such time and thereafter, each share of our Class B common stock would entitle its holder to one vote. Initially, the holders of Class B units will have    % of the combined voting power of our common stock (or    % if the underwriters exercise their option to purchase additional shares of Class A common stock in full). When a Class B unit is exchanged for a share of our Class A common stock or forfeited, a corresponding share of our Class B common stock will automatically be redeemed and cancelled by us. Conversely, to the extent that we cause Pzena Investment Management, LLC to issue additional Class B units to our employees pursuant to the Pzena Investment Management, LLC 2006 Equity Incentive Plan, which we refer to as the PIM LLC 2006 Equity Incentive Plan, these additional holders of Class B units would be entitled to receive a corresponding number of shares of our Class B common stock (including if the Class B units awarded are subject to vesting) and, therefore, the voting power of our Class B stockholders would increase.
 
Concurrently with the consummation of this offering and the reorganization, all holders of our Class B common stock will enter into a stockholders’ agreement, pursuant to which they will agree to vote all shares of Class B common stock then held by them, and acquired in the future, together on all matters submitted to a vote of our common stockholders. Therefore, upon the closing of this offering, the Class B stockholders will be able to exercise control over all matters requiring the approval of our stockholders, including the election of our directors and the approval of significant corporate transactions.
 
Outstanding shares of our Class A common stock,     % of which will have been sold pursuant to this Offering, will represent 100% of the rights of the holders of all classes of our capital stock to receive distributions, except that holders of our Class B common stock will have the right to receive the class’s par value upon our liquidation, dissolution or winding up.
 
Pursuant to the amended and restated operating agreement of Pzena Investment Management, LLC, each vested Class B unit will be exchangeable for a share of our Class A common stock, subject to the exchange


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timing and volume limitations described under “The Reorganization and Our Holding Company Structure — Amended and Restated Operating Agreement of Pzena Investment Management, LLC — Exchange Rights.” Unvested Class B units will not be exchangeable until they have vested.
 
Pursuant to a registration rights agreement that we will enter into with the holders of Class B units of Pzena Investment Management, LLC, we intend to file a shelf registration statement in order to register the resales of the shares of our Class A common stock that are issuable upon exchange of these Class B units. See “The Reorganization and Our Holding Company Structure — Registration Rights Agreement” for a description of the timing and manner limitations on resales of these shares.


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The graphic below illustrates our holding company structure and anticipated ownership immediately after the consummation of the reorganization and this offering (assuming no exercise of the over-allotment option). For more information, please see “The Reorganization and Our Holding Company Structure.”
 
(HOLDING COMPANY FLOW CHART)
 
 
(1) The members of Pzena Investment Management, LLC, other than us, will consist of:
 
  •  the four members of our Executive Committee, Messrs. Pzena, Goetz, Krishna and Lipsey, and their respective estate planning vehicles, who will collectively hold approximately     % of the economic interests in us;
 
  •  19 of our other employees, including our Chief Financial Officer, Wayne A. Palladino, who will collectively hold approximately     % of the economic interests in us; and
 
  •  the two original outside investors in Pzena Investment Management, LLC, who will collectively hold approximately     % of the economic interests in us.
 
(2) Each share of Class A common stock is entitled to one vote per share. Class A common stockholders will have 100% of the rights of all classes of our capital stock to receive distributions, except that Class B common stockholders will have the right to receive the par value of the Class B common stock upon our liquidation, dissolution or winding up.
 
(3) Each share of Class B common stock is entitled to five votes per share for so long as the number of shares of Class B common stock outstanding represents at least 20% of all shares of common stock outstanding. Class B common stockholders will only have the right to receive the par value of the Class B common stock upon our liquidation, dissolution or winding up.
 
(4) We will hold        Class A units of Pzena Investment Management, LLC, which will represent the right to receive  % of the distributions made by Pzena Investment Management, LLC.
 
(5) The principals will collectively hold        Class B units of Pzena Investment Management, LLC, which will represent the right to receive  % of the distributions made by Pzena Investment Management, LLC.
 
Our Corporate Information
 
As of March 31, 2007, we had 67 full-time employees, located in our headquarters office at 120 West 45th Street, New York, New York 10036. Our telephone number at that address is (212) 355-1600 and our website address is www.pzena.com.  Information contained on our website is not part of this prospectus.


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The Offering
 
Class A common stock we are offering            shares of our Class A common stock.
 
Class A common stock to be outstanding immediately after this offering            shares of Class A common stock (or           shares of Class A common stock if the underwriters exercise their option to purchase additional shares of Class A common stock in full). If all holders of Class B units immediately after this offering and the reorganization were entitled, and they elected, to exchange them for shares of our Class A common stock,      shares of Class A common stock would be outstanding immediately after this offering.
 
Class B common stock to be outstanding immediately after this offering            shares of our Class B common stock (or          shares of our Class B common stock if the underwriters exercise their option to purchase additional shares of Class A common stock in full). Shares of our Class B common stock will be issued in connection with, and in equal proportion to, issuances of Class B units of Pzena Investment Management, LLC. When a Class B unit is exchanged for a share of our Class A common stock or forfeited, the corresponding share of our Class B common stock will automatically be redeemed by us. See “The Reorganization and Our Holding Company Structure.”
 
Use of Proceeds We estimate that the net proceeds to us from the sale of Class A common stock offered by us will be approximately $      million, or $      million if the underwriters exercise their option to purchase additional shares of Class A common stock in full, based on an assumed initial public offering price of $      per share (the midpoint of the price range set forth on the cover of this prospectus), in each case after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us.
 
We intend to use the net proceeds from this offering to purchase an aggregate of           membership units of Pzena Investment Management, LLC from its three current non-employee members and will not retain any of these proceeds. If the underwriters exercise their option to purchase additional shares of Class A common stock in full, we intend to use the additional approximately $      million of net proceeds, based on an assumed initial public offering price of $      per share (which is the midpoint of the price range set forth on the cover of this prospectus), to purchase additional membership units of Pzena Investment Management, LLC from two of these non-employee members. None of the 23 current employee members of Pzena Investment Management, LLC will sell any of their membership units in conjunction with this offering.
 
Voting Rights Each share of our Class A common stock will entitle its holder to one vote on all matters to be voted on by stockholders generally.


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Each share of our Class B common stock will entitle its holder to five votes until such time that the number of shares of our Class B common stock outstanding constitute less than 20% of the number of all shares of our common stock outstanding. From such time and thereafter, each share of our Class B common stock will entitle its holder to one vote.
 
Holders of our Class A common stock and Class B common stock will vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by law.
 
Lock-Up We and our directors and executive officers will enter into lock-up agreements with the underwriters pursuant to which we and these other persons may not, without the prior written approval of Goldman, Sachs & Co. and UBS Securities LLC, offer, sell, contract to sell or otherwise dispose of or hedge our Class A common stock or securities convertible into or exchangeable for our Class A common stock, subject to certain exceptions, for a period of 180 days after the date of this prospectus, subject to extension in certain circumstances. See “Underwriting — No Sales of Similar Securities” for circumstances in which this 180-day period may be extended.
 
Class B Unit Exchange and Registration Rights Pursuant to the amended and restated operating agreement of Pzena Investment Management, LLC, each vested Class B unit will be exchangeable for a share of our Class A common stock, subject to the exchange timing and volume limitations described under “The Reorganization and Our Holding Company Structure — Amended and Restated Operating Agreement of Pzena Investment Management, LLC — Exchange Rights.”  Unvested Class B units will not be exchangeable until vested.
 
Pursuant to a registration rights agreement that we will enter into with the holders of Class B units, we will agree to use our best efforts to file a registration statement for the sale of the shares of our Class A common stock that are issuable upon exchange of Class B units as soon as practicable after we become eligible to file a registration statement on Form S-3, which we expect to be one year after the consummation of this offering, and cause that registration statement to be declared effective by the SEC as soon as practicable thereafter. See “The Reorganization and Our Holding Company Structure — Registration Rights Agreement” for a description of the timing and manner limitations on resales of these shares of our Class A common stock.
 
Dividend Policy Following this offering and subject to legally available funds, we intend to pay a cash quarterly dividend initially equal to $      per share of our Class A common stock commencing with the           quarter of 2007. However, there is no assurance that sufficient cash will be available to pay such cash dividends.
 
The declaration and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors will take into account our actual future earnings, cash flow and capital requirements and the amount of distributions to us from Pzena


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Investment Management, LLC. For a discussion of the factors that will affect the determination by our board of directors to declare dividends, see “Dividend Policy.”
 
We will be a holding company and will have no material assets other than our ownership of Class A units of Pzena Investment Management, LLC. We intend to cause Pzena Investment Management, LLC to make distributions to us in an amount sufficient to cover dividends, if any, declared by us. If Pzena Investment Management, LLC makes such distributions, the holders of Class B units will be entitled to receive equivalent distributions on a pro rata basis.
 
Risk Factors You should read “Risk Factors” for a discussion of the factors to consider carefully before deciding to purchase any shares of our Class A common stock.
 
Proposed New York Stock Exchange Symbol “PZN.”
 
Unless otherwise noted, the number of shares of Class A common stock outstanding after this offering and other information based thereon in this prospectus excludes:
 
  •             shares of Class A common stock which may be issued upon the exercise of the underwriters’ option to purchase additional shares;
 
  •             shares of Class A common stock reserved for issuance upon exchange of the           Class B units that will be outstanding immediately after this offering;
 
  •             shares of Class A common stock issuable upon exchange of the Class B units reserved for issuance under the PIM LLC 2006 Equity Incentive Plan; and
 
  •             shares of Class A common stock reserved for issuance under the Pzena Investment Management, Inc. 2007 Equity Incentive Plan, which we refer to as our 2007 Equity Incentive Plan.
 
Unless we specifically state otherwise, all information in this prospectus assumes that shares of our Class A common stock will be sold at $      per share (the midpoint of the price range on the cover of this prospectus).


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Summary Selected Historical Consolidated and Pro Forma Financial Data
 
The following tables set forth summary selected historical consolidated financial data of Pzena Investment Management, LLC, and unaudited pro forma financial information of Pzena Investment Management, Inc., as of the dates and for the periods indicated. The summary selected consolidated statement of operations data for the years ended December 31, 2004, 2005 and 2006, and the consolidated balance sheet data as of December 31, 2005 and 2006 have been derived from Pzena Investment Management, LLC’s audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the three months ended March 31, 2006 and 2007 and the consolidated balance sheet data as of March 31, 2007 have been derived from Pzena Investment Management, LLC’s unaudited consolidated financial statements included elsewhere in this prospectus. These unaudited consolidated financial statements have been prepared on substantially the same basis as our audited consolidated financial statements and include all adjustments that we consider necessary for a fair presentation of our consolidated results of operations and financial condition for the periods and as of the dates presented therein. Our results for the three months ended March 31, 2006 and 2007 are not necessarily indicative of our results for a full fiscal year.
 
The following unaudited pro forma consolidated financial information presents the consolidated results of operations and financial condition of Pzena Investment Management, Inc. assuming that all of the transactions described in the five bullet points below had been completed as of January 1, 2006 with respect to the unaudited pro forma consolidated statements of operations data for the year ended December 31, 2006, as of January 1, 2007 with respect to the unaudited pro forma consolidated statement of operations data for the three months ended March 31, 2007, and as of March 31, 2007 with respect to the unaudited pro forma consolidated statement of financial condition data as of March 31, 2007. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions and this offering on the historical financial information of Pzena Investment Management, LLC. The adjustments are described in the notes to the unaudited pro forma consolidated financial statements.
 
The pro forma adjustments principally give effect to the following transactions:
 
  •  our incurrence of $      million of indebtedness and the payment of a special cash distribution of $      million, in the aggregate, to the existing members of Pzena Investment Management, LLC;
 
  •  the reorganization transactions described in “The Reorganization and Our Holding Company Structure, including our agreement to return 85% of the tax benefits that we receive as a result of our ability to step up our tax basis in the membership units of Pzena Investment Management, LLC that we acquire from one former employee and two outside investors, to such persons;
 
  •  the amendment of the operating agreement of Pzena Investment Management, LLC, effective as of March 31, 2007, to eliminate its obligation to redeem any members’ units therein upon their death, or, if applicable, termination of employment, which mandatory redemption feature had required all membership units to be classified as liabilities in Pzena Investment Management, LLC’s consolidated financial statements;
 
  •  the acceleration of the vesting of all membership units of Pzena Investment Management, LLC that were subject to vesting as of March 31, 2007, such that they became fully vested as of that date; and
 
  •  the sale of           shares of our Class A common stock in this offering at an assumed offering price of $      per share (the midpoint of the price range set forth on the cover of this prospectus) and the application of the proceeds therefrom, after payment of assumed underwriting discounts and commissions and estimated offering expenses payable by us, to purchase           membership units of Pzena Investment Management, LLC from one former employee and two outside investors.
 
You should read the following summary selected historical consolidated financial data of Pzena Investment Management, LLC and the unaudited pro forma financial information of Pzena Investment Management, Inc. together with “The Reorganization and Our Holding Company Structure”, “Unaudited Pro Forma Financial Information”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and the related notes included elsewhere in this prospectus.


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Historical
       
    Pzena Investment Management, LLC    
Unaudited Pro Forma
 
                      Unaudited
    Pzena Investment Management, Inc.  
    For the Year Ended
    For The Three Months
          For the Three
 
    December 31,     Ended March 31,     For the Year Ended
    Months Ended
 
    2004     2005     2006     2006     2007     December 31, 2006     March 31, 2007  
    (in thousands)  
 
Statement of Operations Data:
                                                       
REVENUE
                                                       
Management Fees
  $ 46,954     $ 75,003     $ 113,984     $  24,647     $  35,298                      
Incentive Fees
    4,942       3,593       1,103                              
                                                         
Total Revenue
    51,896       78,596       115,087       24,647       35,298                  
                                                         
EXPENSES
                                                       
Cash Compensation and Benefits
    18,837       23,832       34,830       8,445       8,899                  
Distributions on Compensatory Units
    6,865       10,147       17,857       7,509       12,087                  
Change in Redemption Value of Compensatory Units
    3,225       7,306       20,411       1,896       15,969                  
Change from Formula to Fair Value Plan for Compensatory Units
                232,534                              
Acceleration of Vesting of Compensatory Units
                            64,968                  
Other Non-Cash Compensation
                            1,901                  
                                                         
Total Compensation and Benefits Expense
    28,927       41,285       305,632       17,850       103,824                  
General and Administrative Expenses
    4,919       5,734       8,380       1,640       2,089                  
                                                         
TOTAL OPERATING EXPENSES
    33,846       47,019       314,012       19,490       105,913                  
                                                         
Operating Income (Loss)
    18,050       31,577       (198,925 )     5,157       (70,615 )                
Other Income
    3,170       2,661       6,114       1,342       235                  
                                                         
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY AND NON-CONTROLLING INTERESTS
    21,220       34,238       (192,811 )     6,499       (70,380 )                
Provision for Income Taxes
    1,765       2,704       3,941       751       1,129                  
Minority and Non-Controlling Interests
    3       67       1,997       740       (9 )                
                                                         
Income (Loss) Before Interest on Mandatorily Redeemable Units
    19,452       31,467       (198,749 )     5,008       (71,500 )                
Less: Interest on Mandatorily Redeemable Units
    19,452       60,136       516,708       16,544       16,575                  
                                                         
NET INCOME (LOSS)
  $ 0     $ (28,669 )   $ (715,457 )   $ (11,536 )   $ (88,075 )                
                                                         
                                                         
Per Unit Data:
                                                       
Basic and Diluted Net Income Per Unit(1)
                                                       
Weighted Average Units Used in Basic and Diluted Earnings Per Unit(1)
                                                       
 
 
(1) Pursuant to Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” or FAS 150, all membership units in our operating company were classified as liabilities in our consolidated financial statements as of, and for, the three years ended December 31, 2006 and as of, and for, the three months ended March 31, 2006 and 2007 because our operating company was required to redeem them upon the death of holders or, if applicable, the termination of their employment. Therefore, earnings per unit data has not been presented for these historical periods. Our operating company’s operating agreement was amended as of March 31, 2007 to eliminate its obligation to redeem membership units under any circumstance.
 
                                 
          Unaudited
 
    As of December 31,     As of March 31, 2007  
    2005     2006     Historical     Pro Forma  
    (in thousands)  
Balance Sheet Data:
                               
Cash and Cash Equivalents
  $ 4,969     $ 30,920     $ 24,139          
TOTAL ASSETS
    48,968       89,746       81,758          
                                 
Capital Units Subject to Mandatory Redemption
    49,729       533,553                
TOTAL LIABILITIES
    66,672       806,313       10,019          
Minority and Non-Controlling Interests
    1,965       13,399       12,783          
MEMBERS’ EQUITY (EXCESS OF LIABILITIES OVER ASSETS)
  $ (19,669 )   $ (729,966 )   $ 58,956          


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RISK FACTORS
 
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other information contained in this prospectus, before deciding to invest in our Class A common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations and cash flow, in which case, the trading price of our Class A common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also materially adversely affect our business, prospects, financial condition, results of operations and cash flows.
 
Risks Related To Our Business
 
We depend on Richard S. Pzena, John P. Goetz, A. Rama Krishna and William L. Lipsey and the loss of the services of any of them could have a material adverse effect on us.
 
The success of our business depends on the participation of Richard S. Pzena, John P. Goetz, A. Rama Krishna and William L. Lipsey, whom we collectively refer to as our managing principals. Their professional reputations, expertise in investing and relationships with our clients and within the investing community in the U.S. and abroad, are critical elements to executing our business strategy and attracting and retaining clients. Accordingly, the retention of our managing principals is crucial to our future success. There is no guarantee that they will not resign, join our competitors or form a competing company. The terms of the amended and restated operating agreement of Pzena Investment Management, LLC restrict each of our managing principals from competing with us or soliciting our clients or other employees during the term of their employment with us and for three years thereafter and the penalty for their breach of these restrictive covenants will be the forfeiture of a number of Class B units held by the managing principal that is equal to 50% of the number of membership units collectively held by the managing principal and his permitted transferees as of the earlier of the date of his breach or the termination of his employment, unless our board of directors, in its sole discretion, determines otherwise. Although we would also seek specific performance of these restrictive covenants, there can be no assurance that we would be successful in obtaining this relief. Further, after this post-employment three-year period, we will not be able to prohibit them from competing with us or soliciting our clients or employees. If any of our managing principals were to join a competitor or form a competing company, some of our current clients or other prominent members of the investing community could choose to invest with that competitor rather than us. Furthermore, we do not intend to carry any “key man” insurance that would provide us with proceeds in the event of the death or disability of any of our managing principals. The loss of the services of any of our managing principals could have a material adverse effect on our business and could impact our future performance.
 
If our investment strategies perform poorly, we could lose clients or suffer a decline in asset under management which would impair our earnings.
 
The performance of our investment strategies is one of the most important factors in retaining clients and AUM and competing for new business. If our investment strategies perform poorly, it could impair our earnings because:
 
  •  our existing clients might withdraw their funds from our investment strategies, which would cause the level of our advisory fees to decline;
 
  •  the level of the performance-based fees paid by certain of our clients, which provide us with a percentage of returns if our investment strategies outperform certain agreed upon benchmarks, would decline;
 
  •  third-party financial intermediaries, advisers or consultants may rate our investment products poorly, which may lead our existing clients to withdraw funds from our investment strategies or to the reduction of asset inflows from these third parties or their clients; or


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  •  the mutual funds and other investment funds that we sub-advise may decide not to renew or to terminate the agreements pursuant to which we sub-advise them and we may not be able to replace these relationships.
 
Our sub-investment advisory relationships with mutual funds advised by John Hancock Advisers represent a significant source of our revenues, and the termination of these relationships would impair our revenues and earnings.
 
We currently act as a sub-investment adviser to the John Hancock Classic Value Fund, the John Hancock Classic Value Fund II, the John Hancock International Classic Value Fund and the John Hancock Classic Value Mega Cap Fund, each of which are SEC-registered mutual funds advised by John Hancock Advisers. Our sub-investment advisory relationships with these four mutual funds represented 32.8% of our AUM at March 31, 2007 and 22.0% of our revenues for the three months ended March 31, 2007. There can be no assurance that our agreements with respect to these four funds will remain in place. In addition, these agreements would terminate automatically in the event that the investment management agreement between John Hancock Advisers and each individual fund is assigned or terminated. Such a termination of our sub-investment advisory agreements would significantly reduce our revenues and we may not be able to establish relationships with other mutual funds’ investment advisers and/or significant institutional separate accounts in order to replace the lost revenues.
 
Because our clients can reduce the amount of assets we manage for them, or terminate our agreements with them, on short notice, we may experience unexpected declines in revenue and profitability.
 
Our investment advisory and sub-investment advisory agreements are generally terminable upon short notice. Our sub-investment advisory agreements with twelve SEC-registered mutual funds, such as the four mutual funds advised by John Hancock Advisers, each have an initial two-year term and are subject to annual renewal by the fund’s board of directors pursuant to the Investment Company Act of 1940, as amended, which we refer to as the Investment Company Act. Five of these twelve sub-investment advisory agreements are beyond their initial two-year term, including the agreement for the John Hancock Classic Value Fund. Institutional and individual clients, and the funds with which we have sub-investment advisory agreements, can terminate their relationships with us, or reduce the aggregate amount of AUM, for a number of reasons, including investment performance, changes in prevailing interest rates, and financial market performance, or to shift their funds to competitors who may charge lower advisory fee rates, or for no stated reason. Poor performance relative to that of other investment management firms tends to result in decreased investments in our investment strategies, increased withdrawals from our investment strategies and the loss of institutional or individual accounts or sub-investment advisory relationships. In addition, the ability to terminate relationships may allow clients to renegotiate for lower fees paid for asset management services. If our investment advisory agreements are terminated, or our clients reduce the amount of assets under our management, either of which may occur on short notice, we may experience unexpected declines in revenue and profitability.
 
Difficult market conditions can adversely affect our business by reducing the market value of the assets we manage or causing our clients to withdraw funds.
 
Our business would be expected to generate lower revenue in a declining stock market or general economic downturn. Under our advisory fee arrangements, the fees we receive typically are based on the market value of our AUM. Accordingly, a decline in the prices of securities held in our clients’ portfolios would be expected to cause our revenue and net income to decline by:
 
  •  causing the value of our AUM to decline, which would result in lower advisory fees, or
 
  •  causing some of our clients to withdraw funds from our investment strategies in favor of investments they perceive as offering greater opportunity or lower risk, which also would result in lower advisory fees.
 
If our revenue declines without a commensurate reduction in our expenses, our net income will be reduced. Accordingly, difficult market conditions could materially adversely affect our results of operations.


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Our ability to retain our senior investment professionals and attract additional qualified investment professionals is critical to our success.
 
Our success depends on our ability to retain the senior members of our investment team and to recruit additional qualified investment professionals. However, we may not be successful in our efforts to retain them, as the market for investment professionals is extremely competitive. Our portfolio managers possess substantial experience and expertise in investing and, in particular, our classic value investment approach, which requires significant qualitative judgments as to the future earnings power of currently underperforming businesses. Our portfolio managers also have significant relationships with our clients. Accordingly, the loss of any one of our senior investment professionals could limit our ability to successfully execute our classic value investment approach and, therefore, sustain the performance of our investment strategies, which, in turn, could have a material adverse effect on our results of operations.
 
The substantial growth of our business in the past five years may be difficult to sustain as it may place significant demands on our resources and employees and may increase our expenses.
 
Our AUM have grown from approximately $3.1 billion as of December 31, 2002 to $28.5 billion as of March 31, 2007. This substantial growth in our business has placed, and if it continues, will continue to place, significant demands on our infrastructure, our investment team and other employees, and may increase our expenses. In addition, we are required to continuously develop our infrastructure in response to the increasing sophistication of the investment management market, as well as due to legal and regulatory developments.
 
The future growth of our business will depend, among other things, on our ability to maintain an infrastructure and staffing levels sufficient to address its growth and may require us to incur significant additional expenses and commit additional senior management and operational resources. We may face significant challenges in maintaining adequate financial and operational controls, implementing new or updated information and financial systems and procedures and training, managing and appropriately sizing our work force and other components of our business on a timely and cost-effective basis. In addition, our efforts to retain or attract qualified investment professionals may result in significant additional expenses. There can be no assurance that we will be able to manage our growing business effectively or that we will be able to continue to grow, and any failure to do so could adversely affect our ability to generate revenue and control our expenses.
 
The investment management business is intensely competitive.
 
Competition in the investment management business is based on a variety of factors, including:
 
  •  investment performance;
 
  •  investor perception of an investment manager’s drive, focus and alignment of interest with them;
 
  •  quality of service provided to, and duration of relationships with, clients;
 
  •  business reputation; and
 
  •  level of fees charged for services.
 
We compete in all aspects of our business with a large number of investment management firms, commercial banks, broker-dealers, insurance companies and other financial institutions. Our competitive risks are heightened by the fact that some of our competitors may invest according to different investment styles or in alternative asset classes which the markets may perceive as more attractive than our investment approach in the public equity markets. If we are unable to compete effectively, our earnings and revenues could be reduced, and our business could be materially adversely affected.
 
Reductions in business sourced through third-party distribution channels, or their poor reviews of us or our products, could materially reduce our revenue and ability to attract new clients.
 
New accounts sourced through consultant-led searches have been a large driver of the growth of our AUM in each of the past five years and are expected to be a major component of our future growth. In


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addition, we have established relationships with certain mutual fund providers, most significantly John Hancock Advisers, who have offered us opportunities to access new market segments through sub-investment advisory roles. We have also accessed the high-net-worth segment of the investing community through relationships with well respected wealth advisers who utilize our investment strategies in investment programs they construct for their clients. If we fail to successfully maintain these third-party distribution and sub-investment advisory relationships, our business could be materially adversely affected. In addition, many of these parties review and evaluate our products and our organization. Poor reviews or evaluations of either the particular product or of us may result in client withdrawals or may impact our ability to attract new assets through such intermediaries.
 
A change of control of us could result in termination of our sub-investment advisory and investment advisory agreements.
 
Pursuant to the Investment Company Act, each of the sub-investment advisory agreements for the SEC-registered mutual funds that we sub-advise automatically terminates upon its deemed “assignment” and a fund’s board and shareholders must approve a new agreement in order for us to continue to act as its sub-investment adviser. In addition, pursuant to the Investment Advisers Act of 1940, as amended, which we refer to as the Investment Advisers Act, each of our investment advisory agreements for the separate accounts we manage may not be “assigned” without the consent of the client. A sale of a controlling block of our voting securities and certain other transactions would be deemed an “assignment” pursuant to both the Investment Company Act and the Investment Advisers Act. Such an assignment may be deemed to occur in the event that the holders of the Class B units of Pzena Investment Management, LLC exchange enough of their Class B units for shares of our Class A common stock such that they no longer own a controlling interest in us. If such a deemed assignment occurs, there can be no assurance that we will be able to obtain the necessary consents from clients whose funds are managed pursuant to separate accounts or the necessary approvals from the boards and shareholders of the SEC-registered funds that we sub-advise. An assignment, actual or constructive, would trigger these termination and consent provisions and, unless the necessary approvals and consents are obtained, could adversely affect our ability to continue managing client accounts, resulting in the loss of AUM and a corresponding loss of revenue.
 
Our failure to comply with guidelines set by our clients could result in damage awards against us and a loss of AUM, either of which would cause our earnings to decline or affect our ability to remain in business.
 
As an investment adviser, we have a fiduciary duty to our clients. When clients retain us to manage assets on their behalf, they may specify certain guidelines regarding investment allocation and strategy that we are required to observe in the management of their portfolios. Our failure to comply with these guidelines and other limitations could result in losses to a client account that the client could seek to recover from us and could result in the client withdrawing its assets from our management or terminating our investment advisory agreement with them. Any of these events could cause our earnings to decline or affect our ability to remain in business.
 
Extensive regulation of our business limits our activities and exposes us to the potential for significant penalties, including fines or limitations on our ability to conduct our business.
 
We are subject to extensive regulation of our investment management business and operations. As a registered investment adviser, the SEC oversees our activities pursuant to its regulatory authority under the Investment Advisers Act. In addition, we must comply with certain requirements under the Investment Company Act with respect to the SEC-registered funds for which we act as sub-investment adviser. We are also subject to regulation by the Department of Labor under the Employee Retirement Income Security Act of 1974, or ERISA. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of financial services, including the authority to grant, and in specific circumstances to cancel, permissions to carry on particular businesses. A failure to comply with the obligations imposed by the Investment Advisers Act on investment advisers, including record-keeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, could result in investigations, sanctions


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and reputational damage. Our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of our registration as an investment adviser. Even if a sanction imposed against us or our personnel is small in monetary amount, the adverse publicity arising from the imposition of sanctions against us by regulators could harm our reputation, result in withdrawal by our clients from our investment strategies and impede our ability to retain clients and develop new client relationships, which may reduce our revenues.
 
We face the risk of significant intervention by regulatory authorities, including extended investigation and surveillance activity, adoption of costly or restrictive new regulations and judicial or administrative proceedings that may result in substantial penalties. Among other things, we could be fined or be prohibited from engaging in some of our business activities. The requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with us, and are not designed to protect our stockholders. Consequently, these regulations often serve to limit our activities, including through net capital, customer protection and market conduct requirements.
 
In addition, the regulatory environment in which we operate is subject to modifications and further regulation. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us and our clients also may adversely affect our business, and our ability to function in this environment will depend on our ability to constantly monitor and react to these changes. For investment management firms in general, there have been a number of highly publicized regulatory inquiries that focus on the mutual fund industry. These inquiries already have resulted in increased scrutiny in the industry and new rules and regulations for mutual funds and their investment managers. This regulatory scrutiny may limit our ability to engage in certain activities.
 
Specific regulatory changes also may have a direct impact on our revenue. In addition to regulatory scrutiny and potential fines and sanctions, regulators continue to examine different aspects of the asset management industry. New regulation regarding the annual approval process for mutual fund sub-investment advisory agreements may result in the reduction of fees or possible terminations of these agreements. These regulatory changes and other proposed or potential changes may result in a reduction of revenue associated with these activities.
 
Operational risks may disrupt our business, result in losses or limit our growth.
 
We rely heavily on our financial, accounting, trading, compliance and other data processing systems. Any failure or interruption of these systems, whether caused by fire, other natural disaster, power or telecommunications failure, act of terrorism or war or otherwise, could result in a disruption of our business, liability to clients, regulatory intervention or reputational damage, and thus materially adversely affect our business. Although we have back-up systems in place, our back-up procedures and capabilities in the event of a failure or interruption may not be adequate. The inability of our systems to accommodate an increasing volume of transactions also could constrain our ability to expand our businesses. In recent years, we have substantially upgraded and expanded the capabilities of our data processing systems and other operating technology, and we expect that we will need to continue to upgrade and expand these capabilities in the future to avoid disruption of, or constraints on, our operations.
 
Furthermore, we depend on our headquarters in New York City for the continued operation of our business. A disaster or a disruption in the infrastructure that supports our business, or directly affecting our headquarters, may have a material adverse impact on our ability to continue to operate our business without interruption. Although we have disaster recovery programs in place, there can be no assurance that these will be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses.
 
The investment management industry faces substantial litigation risks which could materially adversely affect our business, financial condition or results of operations or cause significant reputational harm to us.
 
We depend to a large extent on our relationships with our clients and our reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with our services, such dissatisfaction may be more damaging to our business than to other types of businesses. We


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make investment decisions on behalf of our clients which could result in substantial losses to them. In order for our classic value investment strategies to yield attractive returns, we expect to have to hold securities for multi-year periods and, therefore, our investment strategies may not perform well in the short term. If our clients suffer significant losses, or are otherwise dissatisfied with our services, we could be subject to the risk of legal liabilities or actions alleging negligent misconduct, breach of fiduciary duty or breach of contract. These risks are often difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. We may incur significant legal expenses in defending against litigation. Substantial legal liability or significant regulatory action against us could materially adversely affect our business, financial condition or results of operations or cause significant reputational harm to us.
 
Our management and our independent auditors have identified material weaknesses in our internal control over financial reporting that, if not properly remediated, could result in a material misstatement of our financial statements and our management’s inability to report that our internal controls are effective for 2008 and thereafter, as required by the Sarbanes-Oxley Act of 2002, either of which could cause investors to lose confidence in our reported financial information or our Class A common stock to lose value.
 
We are not yet required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, or to make an assessment of the effectiveness of our internal control over financial reporting. Further, our independent auditors have not been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting. However, they have informed us that they have identified material weaknesses in our internal control over financial reporting for complex and non-routine transactions, as well as inadequate internal review.
 
The material weaknesses relate to errors in our accounting for stock-based compensation, liabilities associated with our existing membership units, and the consolidation of investment partnerships in our consolidated financial statements. The errors occurred as a result of not having sufficient access to accounting resources with technical accounting expertise to analyze complex and non-routine transactions, as well as inadequate internal review. We have corrected these errors and believe that our audited and unaudited interim consolidated financial statements present the proper treatment for the complex and non-routine transactions identified by our independent auditors.
 
In order to improve the effectiveness of our internal control over financial reporting for complex and non-routine transactions, we have taken the following remedial measures:
 
  •  We have appointed Wayne A. Palladino, who has twelve years of public company reporting experience, as our chief financial officer.
 
  •  We have engaged a major public accounting firm to advise us on the accounting for complex and non-routine transactions.
 
  •  We have engaged an external compliance consulting firm to advise us on improving our internal controls and systems in general, and in order to become compliant with Section 404 of the Sarbanes-Oxley Act of 2002.
 
In addition, we are in the process of strengthening our internal accounting and finance staff to satisfy our financial reporting obligations as a public company.
 
The existence of material weaknesses in internal control over financing reporting is an indication that there is more than a remote likelihood that a material misstatement of our financial statements will not be prevented or detected in a future period. The process of designing and implementing effective internal controls requires us to continually expend significant resources in order to establish and maintain a system of internal controls that satisfies our financial reporting obligations as a public company. We cannot assure you that the measures we have taken, or intend to take in the future, will remediate the material weaknesses noted by our independent auditors, or that we will be able to implement and maintain adequate internal control over our financial reporting in the future. In addition, we cannot assure you that additional material weaknesses, or significant deficiencies in our internal control over financial reporting, will not be discovered in the future. If we fail to develop and maintain effective controls and procedures, we may be unable to provide required financial information in a


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timely and reliable manner, or otherwise comply with the standards applicable to us as a public company, and our management may not be able to report that our internal control over financial reporting is effective for the year ending December 31, 2008, as would be required by Section 404 of the Sarbanes-Oxley Act of 2002, or thereafter. If our management is not able to do so, our independent auditors would not be able to certify that our internal controls are effective. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC, or violations of the NYSE listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if our independent auditors report any additional material weakness or significant deficiencies in our internal control over financial reporting. This could lead to a decline in the price of our Class A common stock.
 
Fulfilling our public company financial reporting and other regulatory obligations will be expensive and time consuming.
 
As a public company, we will be required to implement specific corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules under the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, as well as the rules of the NYSE. Compliance with these requirements will increase our legal and accounting compliance costs and place significant additional demands on our accounting and finance staff and on our accounting, financial and information systems. As described above, we will need to hire additional accounting and finance staff with appropriate public company financial reporting experience and technical accounting knowledge, which will increase our compensation expense.
 
As described above, our management will be required to conduct an annual assessment of the effectiveness of our internal controls over financial reporting and include a report on our internal controls in our annual reports on Form 10-K pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we will be required to have our independent registered public accounting firm attest to and report on management’s assessment of the effectiveness of our internal controls over financial reporting. Under current rules, we will be subject to these requirements beginning with our annual report on Form 10-K for our fiscal year ending December 31, 2008. We will incur incremental costs in order to improve our internal control over financial reporting and comply with Section 404 of the Sarbanes-Oxley Act of 2002, including increased auditing and legal fees and costs associated with hiring additional accounting, internal audit, information technology, compliance and administrative staff.
 
The historical consolidated and unaudited pro forma financial information included in this prospectus is not necessarily indicative of our future financial results after the reorganization and as a public company.
 
The historical consolidated financial information included in this prospectus may not be indicative of our future financial results after the reorganization and as a public company. Our AUM have increased almost tenfold in the past five years. However, a number of the investment strategies which resulted in this significant growth, including our Large Cap Value strategy, have been closed both to new investors and to additional funds. We do not expect our AUM or revenue to grow at the same rate as they have grown in the past five years. In addition, the historical consolidated financial information included in this prospectus does not reflect the added costs that we expect to incur as a public company or the changes that will occur in our capital structure and operations in connection with our reorganization. For example, because we operated through a limited liability company prior to this offering and paid little or no taxes on our profits, our historical consolidated financial information does not reflect the tax impact of our adoption of a corporate holding company structure.
 
In preparing our unaudited pro forma financial information for the periods prior to this offering, we adjusted our historical financial information for the transactions described in “The Reorganization and Our Holding Company Structure.”  The estimates we used in this unaudited pro forma financial information are not intended to approximate our actual experience as a public company or be indicative in any way of our future performance. The results of future periods may be materially different than those of the past as a result of:
 
  •  the impact of the reorganization, in relation to our size, during the pro forma periods;


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  •  future performance of our investment strategies, which differs from the historical performance reflected in the unaudited pro forma financial information; and
 
  •  the pace of growth of our business in the future, including the formation of new investment strategies, which differs from the historical growth reflected in the unaudited pro forma financial information.
 
See “Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements included elsewhere in this prospectus.
 
An increase in our borrowing costs may adversely affect our earnings and liquidity.
 
Shortly before the consummation of this offering, we expect to borrow $       million pursuant to a      -year term loan facility, the proceeds of which will be used to finance a special one-time distribution to the current members of our operating company. Concurrently, we also expect to establish a $      million revolving credit facility, the borrowing under which would mature in          , to finance our short-term working capital needs. As our facilities mature, we will be required to either refinance them by entering into new facilities, which could result in higher borrowing costs, or issuing equity, which would dilute existing shareholders. We could also repay them by using cash on hand or cash from the sale of our assets. No assurance can be given that we will be able to enter into new facilities, or issue equity in the future, on attractive terms, or at all.
 
Our credit facilities will be floating-rate obligations based on the London Interbank Offering Rate, or LIBOR, and the interest expense we incur will vary with changes in the applicable LIBOR reference rate. As a result, an increase in short-term interest rates will increase our interest costs, which may adversely affect our earnings and liquidity.


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Risks Related to Our Investment Strategies
 
Our results of operations depend on the performance of our investment strategies. Poor performance of our investment strategies will reduce or minimize the value of our assets under management on which our advisory fees are based. As advisory fees comprise all of our operating revenues, poor performance of our investment strategies will have a material adverse impact on our results of operations. In addition, poor performance will make it difficult for us to retain or attract clients and to grow our business. The performance of our strategies is subject to some or all of the following risks.
 
Our classic value investments in concentrated portfolios subjects the performance of our investment strategies to the risk that the companies in which we invest may not achieve the level of earnings recovery that we initially expect, or at all.
 
We generally invest in companies after they have experienced a shortfall in their historic earnings, due to an adverse business development, management error, accounting scandal or other disruption, and before there is clear evidence of earnings recovery or business momentum. While very few investors are willing to invest when companies lack earnings visibility, our classic value investment approach seeks to capture the return that can be obtained by investing in a company before the market has a level of confidence in its ability to achieve earnings recovery. However, our investment approach entails the risk that the companies included in our portfolios are not able to execute the turnaround that we had expected when we originally invested in them, thereby reducing the performance of our strategies. Our strategy of constructing concentrated portfolios, generally ranging from 30 to 60 holdings, of companies underperforming their historical earnings power, is subject to a higher risk of underperformance relative to benchmarks than the investment approaches of some of our competitors. Further, since our positions in these investments are often substantial, there is the risk that we may be unable to find willing purchasers for our investments when we decide to sell them.
 
Our investment strategies may not obtain attractive returns in the short term or during certain market periods.
 
Our products are best suited for investors with long-term investment horizons. In order for our classic value investment approach to yield attractive returns, we must typically hold securities for an average of over three years. Therefore, our investment strategies may not perform well during short periods of time. In addition, our strategies may not perform well during points in the economic cycle when value-oriented stocks are relatively less attractive. For instance, during the late stages of an economic cycle, investors may purchase relatively expensive stocks in order to obtain access to above average growth, as was the case in the late 1990s. Value-oriented strategies may also experience weakness during periods when the markets are focused on one investment thesis or sector. For example, in the past two years, the markets have deemed many businesses producing commodities and basic materials to be sound investments, regardless of their prices, based on the thesis that the rapid growth of such large economies as China and India means that there will be constant shortfalls in the supply of the goods produced by these companies. We would not invest in these companies if their stocks were not inexpensively priced, thus foregoing potentially attractive returns during the periods when these companies’ stock prices are continuing to advance.
 
Our investment approach may underperform other investment approaches, which may result in significant withdrawals of client assets or client departures or a reduction in our AUM.
 
Even when securities prices are rising generally, portfolio performance can be affected by our investment approach. We employ a classic value investment approach in all of our investment strategies. This investment approach has outperformed the market in some economic and market environments and underperformed it in others. In particular, a prolonged period in which the growth style of investing outperforms the value style may cause our investment strategy to go out of favor with some clients, consultants or third-party intermediaries. Poor performance relative to peers, coupled with changes in personnel, extensive periods in particular market environments or other difficulties may result in significant withdrawals of client assets, client departures or a reduction in our AUM.


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Our investment process requires us to conduct extensive fundamental research on any company before investing in it, which may result in missed investment opportunities and reduce the performance of our investment strategies.
 
We take a considerable amount of time to complete the in-depth research projects that our investment process requires before adding any security to our portfolio. Our process requires that we take this time in order to understand the company and the business well enough to make an informed decision as to whether we are willing to own a significant position in a company whose current earnings are below its historic norms and that does not yet have earnings visibility. However, the time we take to make this judgment may cause us to miss the opportunity to invest in a company that has a sharp and rapid earnings recovery. Any such missed investment opportunities could adversely impact the performance of our investment strategies.
 
Our Global Value and International Value investment strategies consist primarily of investments in the securities of issuers located outside of the United States, which may involve foreign currency exchange, political, social and economic uncertainties and risks.
 
Our Global Value and International Value investment strategies, which together represented $2.0 billion of our AUM as of March 31, 2007, and are expected to comprise a larger portion of our AUM in the future, are primarily invested in securities of companies located outside the United States. Fluctuations in foreign currency exchange rates could negatively impact the portfolios of our clients who are invested in these strategies. In addition, foreign currency fluctuations may affect the levels of our AUM from one reporting period to another. An increase in the value of the U.S. dollar relative to non-U.S. currencies may result in a decrease in the dollar value of our AUM, which, in turn, would result in lower U.S.-dollar denominated revenue. We do not currently engage in any hedging activities for these portfolios and continue to market these products as unhedged.
 
Investments in foreign issuers may also be affected by political, social and economic uncertainty affecting a country or region in which we are invested. Many foreign financial markets are not as developed, or as efficient, as the U.S. financial market, and, as a result, liquidity may be reduced and price volatility may be higher. The legal and regulatory environments, including financial accounting standards and practices, may also be different, and there may be less publicly available information in respect of such companies. These risks could adversely impact the performance of our strategies that are invested in securities of foreign issuers.
 
The historical returns of our existing investment strategies may not be indicative of their future results or of our investment strategies under incubation.
 
We have presented the historical returns of our existing investment strategies under “Business — Our Investment Performance.”  The historical returns of our strategies should not be considered indicative of the future results that should be expected from these strategies or from any other strategies that we may be incubating or developing. Our products’ returns have benefited from investment opportunities and general economic and market conditions that may not repeat themselves, and there can be no assurance that our current or future strategies will be able to avail themselves to profitable investment opportunities.
 
Risks Related to Our Structure
 
We intend to pay regular dividends to our stockholders, but our ability to do so is subject to the discretion of our board of directors and may be limited by our holding company structure and applicable provisions of Delaware law.
 
After consummation of this offering, we intend to pay cash dividends on a quarterly basis. Our board of directors may, in its discretion, decrease the level of dividends or discontinue the payment of dividends entirely. In addition, as a holding company, we will be dependent upon the ability of Pzena Investment Management, LLC to generate earnings and cash flows and distribute them to us so that we may pay our obligations and expenses and pay dividends to our stockholders. We expect to cause Pzena Investment Management, LLC to make distributions to its members, including us. However, the ability of Pzena Investment Management, LLC to make such distributions will be subject to its operating results, cash


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requirements and financial condition and applicable Delaware laws (which may limit the amount of funds available for distribution to its members). If, as a consequence of these various limitations and restrictions, we are unable to generate sufficient distributions from our business, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our Class A common stock.
 
Our only material asset after completion of the reorganization and this offering will be our interest in Pzena Investment Management, LLC, and we are accordingly dependent upon distributions from Pzena Investment Management, LLC to pay taxes and other expenses.
 
We will be a holding company and will have no material assets other than our ownership of Class A units of Pzena Investment Management, LLC. We will have no independent means of generating revenue. Pzena Investment Management, LLC will be treated as a partnership for U.S. federal income tax purposes and, as such, will not itself be subject to U.S. federal income tax. Instead, its taxable income will be allocated to its members, including us, pro rata according to the number of membership units each owns. Accordingly, we will incur income taxes on our proportionate share of any net taxable income of Pzena Investment Management, LLC and also will incur expenses related to our operations. We intend to cause Pzena Investment Management, LLC to distribute cash to its members in an amount at least equal to that necessary to cover their tax liabilities, if any, with respect to the earnings of Pzena Investment Management, LLC. To the extent that we need funds to pay our tax or other liabilities or to fund our operations, and Pzena Investment Management, LLC is restricted from making distributions to us under applicable laws or regulations or does not have sufficient earnings to make these distributions, we may have to borrow funds to meet these obligations and run our business and, thus, our liquidity and financial condition could be materially adversely affected.
 
We will be required to pay holders of Class B units most of the tax benefit of any depreciation or amortization deductions we may claim as a result of the tax basis step up we receive in connection with the reorganization and future exchanges of Class B units.
 
In connection with the reorganization, we will use the net proceeds of this offering to purchase membership units of Pzena Investment Management, LLC from its three current non-employee members. This purchase and any subsequent exchanges of Class B units for shares of our Class A common stock are expected to result in increases in our share of the tax basis in the tangible and intangible assets of Pzena Investment Management, LLC that otherwise would not have been available. These increases in tax basis are expected to reduce the amount of tax that we would otherwise be required to pay in the future, although the Internal Revenue Service, or IRS, might challenge all or part of this tax basis increase, and a court might sustain such a challenge.
 
We intend to enter into a tax receivable agreement with each of the current members of Pzena Investment Management, LLC and any future holder of Class B units, pursuant to which we will pay them 85% of the amount of the cash savings, if any, in U.S. federal, state and local income tax that we realize as a result of these increases in tax basis. The actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of our Class A common stock at the time of the exchange, the extent to which such exchanges are taxable, the amount and timing of our income and the tax rates then applicable. We expect that, as a result of the size and increases in our share of the tax basis in the tangible and intangible assets of Pzena Investment Management, LLC attributable to our interest therein, the payments that we may make to these members likely will be substantial.
 
Were the IRS to successfully challenge the tax basis increases described above, we would not be reimbursed for any payments made under the tax receivable agreement. As a result, in certain circumstances, we could make payments under the tax receivable agreement in excess of our cash tax savings.


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Risks Related to Our Class A Common Stock
 
An active trading market may not develop for shares of our Class A common stock, which may cause our Class A common stock to trade at a discount from its initial offering price and make it difficult to sell the shares you purchase.
 
Prior to this offering, there has not been a public market for our Class A common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE or otherwise, or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling your shares of Class A common stock at an attractive price, or at all. The initial public offering price for our Class A common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our Class A common stock at prices equal to or greater than the price you paid in this offering.
 
The market price and trading volume of our Class A common stock may be volatile, which could result in rapid and substantial losses for our stockholders.
 
Even if an active trading market develops, the market price of our Class A common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our Class A common stock may fluctuate and cause significant price variations to occur. If the market price of our Class A common stock declines significantly, you may be unable to resell your shares of Class A common stock at or above your purchase price, if at all. We cannot assure you that the market price of our Class A common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our Class A common stock, or result in fluctuations in the price or trading volume of our Class A common stock, include:
 
  •  variations in our quarterly operating results;
 
  •  failure to meet our earnings estimates;
 
  •  publication of research reports about us or the investment management industry, or the failure of securities analysts to cover our Class A common stock after this offering;
 
  •  additions or departures of our managing principals and other key personnel;
 
  •  adverse market reaction to any indebtedness we may incur or securities we may issue in the future;
 
  •  actions by stockholders;
 
  •  changes in market valuations of similar companies;
 
  •  changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting our business, or enforcement of these laws and regulations, or announcements relating to these matters;
 
  •  adverse publicity about the asset management industry, generally, or individual scandals, specifically; and
 
  •  general market and economic conditions.
 
The market price of our Class A common stock could decline due to the large number of shares of our Class A common stock eligible for future sale upon the exchange of Class B units.
 
The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock eligible for future sale upon the exchange of Class B units, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate.


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We will agree with the underwriters not to issue, sell, otherwise dispose of or hedge any shares of our Class A common stock, subject to certain exceptions, for the 180-day period following the date of this prospectus, without the prior written consent of Goldman, Sachs & Co. and UBS Securities LLC. Our directors and executive officers will execute similar 180-day lock-up agreements with the underwriters. Goldman, Sachs & Co. and UBS Securities LLC may, at any time, release us and/or any of our directors or executive officers from this lock-up agreement and allow us to sell shares of our Class A common stock within this 180-day period. In addition, we and our directors and executive officers will be able to freely sell shares of Class A common stock thereafter.
 
Upon completion of this offering, approximately           Class B units of Pzena Investment Management, LLC will be outstanding and options to acquire           Class B units will be exercisable. Each Class B unit will be exchangeable for a share of our Class A common stock, subject to the exchange timing and volume limitations described under “The Reorganization and Our Holding Company Structure — Amended and Restated Operating Agreement of Pzena Investment Management, LLC — Exchange Rights.”  Pursuant to a registration rights agreement that we will enter into with the holders of Class B units, we will agree to use our best efforts to file a registration statement for the sale of the shares of our Class A common stock that are issuable upon exchange of Class B units as soon as practicable after we become eligible to file a registration statement on Form S-3, which we expect to be one year after the consummation of this offering, and cause that registration statement to be declared effective by the SEC as soon as practicable thereafter.
 
We will agree to allow all holders of Class B units to exchange a number of vested Class B units up to 15% of the number of vested and unvested Class B units that they hold as of January 1st of the year in which this Form S-3 registration statement is first declared effective, and sell the shares of Class A common stock issued upon exchange in a public offering that will occur prior to the second anniversary of this offering, at a time specified by us. If all holders of Class B units immediately after this offering and the reorganization exercised their rights to exchange 15% of their Class B units and resell the shares of Class A common stock issuable upon exchange in the first year that they are eligible to do so, approximately           shares of Class A common stock would be issued (representing  % of our Class A common stock immediately after this offering and after giving effect to this issuance) and resold in such future offering. Thereafter, the employee holders of Class B units will be able to exercise similar annual exchange and resale rights while employed by us. After their employment ends, they would not be eligible to exercise their exchange or resale rights for a certain period of time, ranging from one to three years, depending on the employee’s status, and then they would be able to exchange the remainder of their vested Class B units and resell all the shares of Class A common stock issued upon exchange. The non-employee members of our operating company immediately after this offering will be able to exchange up to 15% of the Class B units that they hold, and sell the shares of Class A common stock issued upon exchange, once a year beginning on the effective date of the shelf registration statement until the third anniversary of the consummation of this offering, and then they would be able to exchange the remainder of their Class B units and resell all the shares of Class A common stock issued upon exchange. See “The Reorganization and Our Holding Company Structure — Registration Rights” for a description of the timing and circumstances of resales of shares issuable upon exchange of Class B units.
 
Pursuant to the PIM LLC 2006 Equity Incentive Plan, we may grant awards based on Class B units, such as options to acquire Class B units and restricted Class B units, subject to vesting periods, to our employees, consultants and other persons who provide services to us. Pursuant to the PIM LLC 2006 Equity Incentive Plan, Pzena Investment Management, LLC is authorized to issue up to the number of Class B units that is equal to 15% of the number of all membership units outstanding immediately after this offering. When these equity-based awards become fully vested, the Class B units underlying them will be eligible for exchange in the same manner, and to the same extent, as described above.
 
Pursuant to our 2007 Equity Incentive Plan, each of our non-employee directors will receive a grant of a number of restricted shares of our Class A common stock having a market value equal to $          as of the date they are appointed or elected to our board. They will also be able to elect to receive 50% of their annual retainer of $          in the form of shares of our Class A common stock.


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Control by our Class B stockholders, which includes our managing principals, 19 of our other employees and two outside investors, of    % of the combined voting power of our common stock may give rise to conflicts of interest.
 
Immediately after this offering and the reorganization, our Class B stockholders will collectively hold approximately  % of the combined voting power of our common stock. Among these stockholders are each of our managing principals, 19 of our other employees and two outside investors. Concurrently with the closing of this offering and the reorganization, holders of all outstanding shares of Class B common stock will enter into a Class B stockholders’ agreement with respect to all shares of Class B common stock then held by them and any additional shares of Class B common stock they may acquire in the future. Pursuant to this agreement, they will vote these shares of Class B common stock together on all matters submitted to a vote of our common stockholders. To the extent that we cause Pzena Investment Management, LLC to issue additional Class B units, which may be granted, subject to vesting, to our employees pursuant to the PIM LLC 2006 Equity Incentive Plan, these employees will be entitled to receive an equivalent number of shares of our Class B common stock, subject to the condition that they agree to enter into this Class B stockholders’ agreement. Each share of our Class B common stock will entitle its holder to five votes per share for so long as the Class B stockholders collectively hold 20% of the total number of shares of our common stock outstanding. When a Class B unit is exchanged for a share of our Class A common stock, an unvested Class B unit is forfeited due to the employee holder’s failure to satisfy the conditions of the award agreement pursuant to which it was granted, or any Class B unit is forfeited as result of a breach of any restrictive covenants contained in our operating company’s amended and restated operating agreement, a corresponding share of our Class B common stock will automatically be redeemed by us. For so long as our Class B stockholders hold at least 20% of the total number of shares of our common stock outstanding, they will be able to elect all of the members of our board of directors and thereby control our management and affairs, including determinations with respect to acquisitions, dispositions, borrowings, issuances of securities, and the declaration and payment of dividends. In addition, they will be able to determine the outcome of all matters requiring approval of stockholders, and will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors, and could preclude any unsolicited acquisition of our company. The concentration of voting power could deprive Class A stockholders of an opportunity to receive a premium for their shares of Class A common stock as part of a sale of our company, and could ultimately affect the market price of our Class A common stock.
 
Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws could discourage a change of control that our stockholders may favor, which could negatively affect the market price of our Class A common stock.
 
Provisions in our amended and restated certificate of incorporation and bylaws may make it more difficult and expensive for a third-party to acquire control of us, even if a change of control would be beneficial to the interests of our stockholders. For example, our amended and restated certificate of incorporation, which will be in effect at the time this offering is consummated, will authorize our board of directors to issue up to           shares of our preferred stock and to designate the rights, preferences, privileges and restrictions of unissued series of our preferred stock, each without any vote or action by our stockholders. We could issue a series of preferred stock to impede the consummation of a merger, tender offer or other takeover attempt. See “Description of Capital Stock.” The market price of our Class A common stock could be adversely affected to the extent that provisions of our amended and restated certificate of incorporation and bylaws discourage potential takeover attempts that our stockholders may favor.
 
The disparity in the voting rights among the classes of our common stock may have a potential adverse effect on the price of our Class A common stock.
 
Shares of our Class A and Class B common stock entitle the respective holders to identical rights, except that each share of our Class A common stock will entitle its holder to one vote on all matters to be voted on by stockholders generally, while each share of our Class B common stock will entitle its holder to five votes for so long as the number of shares of Class B common stock represents 20% of the total number of shares of


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our common stock outstanding. The difference in voting rights could adversely affect the value of our Class A common stock to the extent that investors view, or any potential future purchaser of our company views, the superior voting rights of the Class B common stock to have value.
 
You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.
 
We expect the initial public offering price of our Class A common stock will be substantially higher than the pro forma net tangible book value per share of our Class A common stock, after giving effect to the exchange of all outstanding Class B units for shares of our Class A common stock. Therefore, investors purchasing shares of Class A common stock in this offering will pay a price per share that substantially exceeds our pro forma net tangible book value per share after this offering. As a result, investors will:
 
  •  incur immediate dilution of $      per share, based on an assumed initial offering price of $      per share of our Class A common stock (which is the midpoint of the price range set forth on the cover of this prospectus); and
 
  •  contribute approximately  % of the total amount invested to date to fund our company, based upon the assumed initial offering price of $     , but will own only approximately  % of the shares of our Class A common stock outstanding, after giving effect to the exchange of all outstanding Class B units for shares of our Class A common stock.
 
Investors in this offering will experience further dilution upon:
 
  •  the exercise of options to purchase Class B units of Pzena Investment Management, LLC which have been granted under the PIM LLC 2006 Equity Incentive Plan;
 
  •  the additional grant of options to purchase Class B units under the PIM LLC 2006 Equity Incentive Plan, or options to purchase shares of our Class A common stock pursuant to our 2007 Equity Incentive Plan; or
 
  •  the issuance of additional restricted Class B units or restricted shares of our Class A common stock under any of these equity incentive plans.


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements. Forward-looking statements provide our current expectations, or forecasts, of future events. Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts. Words or phrases such as “anticipate,” “believe,” “continue,” “ongoing,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.
 
Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in the section entitled “Risk Factors” in this prospectus. Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date of this prospectus. We undertake no obligation to publicly revise any forward-looking statements to reflect circumstances or events after the date of this prospectus, or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus.
 
Forward-looking statements include, but are not limited to, statements about:
 
  •  our anticipated future results of operations and operating cash flows;
 
  •  our business strategies and investment policies;
 
  •  our financing plans and the availability of short-term borrowing;
 
  •  our competitive position and the effects of competition on our business;
 
  •  potential growth opportunities available to us;
 
  •  the recruitment and retention of our employees;
 
  •  our expected levels of compensation for our employees;
 
  •  our potential operating performance, achievements, efficiency and cost reduction efforts;
 
  •  our expected tax rate;
 
  •  changes in interest rates;
 
  •  our expectation with respect to the economy, capital markets, the market for asset management services and other industry trends;
 
  •  the benefits to our business resulting from the effects of the reorganization; and
 
  •  the impact of future legislation and regulation, and changes in existing legislation and regulation, on our business.


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THE REORGANIZATION AND OUR HOLDING COMPANY STRUCTURE
 
Overview
 
On May 8, 2007, we were incorporated as a Delaware corporation. Our business is presently conducted through Pzena Investment Management, LLC, the current members of which consist of 23 of our current employees, one former employee and two outside investors. Concurrently with the consummation of this offering, we will acquire approximately    % of the outstanding membership units of Pzena Investment Management, LLC (or    % if the underwriters exercise their option to purchase additional shares of Class A common stock in full) from its three non-employee members and these units will be reclassified as “Class A units.”  None of the 23 current employee members of Pzena Investment Management, LLC will sell any of their membership units in conjunction with this offering.
 
Immediately after our acquisition of these membership units from the three current non-employee members of Pzena Investment Management, LLC, our only material asset will be our ownership of approximately    % of the membership units of Pzena Investment Management, LLC (or    % if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and our only business will be acting as its sole managing member. Simultaneously, the remaining approximately    % of the membership units of Pzena Investment Management, LLC (or    % if the underwriters exercise their option to purchase additional shares of Class A common stock in full) that will be held by 23 of our current employees and two outside investors will be reclassified as “Class B units.”
 
Class A and Class B units will have the same economic rights per unit. Accordingly, immediately after the consummation of the reorganization and this offering, the holders of our Class A common stock (through us) and the holders of Class B units of Pzena Investment Management, LLC will hold approximately    % and    %, respectively, of the economic interests in our business (or    % and    %, respectively, if the underwriters exercise their option to purchase additional shares of Class A common stock in full).
 
For each membership unit of Pzena Investment Management, LLC that is reclassified as a Class B unit in the reorganization, we will issue the holder one share of our Class B common stock in exchange for the payment of its par value. Each share of our Class B common stock will entitle its holder to five votes until such time that the number of shares of Class B common stock outstanding constitutes less than 20% of the total number of all shares of our common stock outstanding. Initially, the holders of Class B units will have    % of the combined voting power of our common stock (or    % if the underwriters exercise their option to purchase additional shares of Class A common stock in full). When a Class B unit is exchanged for a share of our Class A common stock, forfeited as a result of applicable vesting provisions, or forfeited as result of a breach of any restrictive covenants contained in our operating company’s amended and restated operating agreement, a corresponding share of our Class B common stock will automatically be redeemed and cancelled by us. Conversely, to the extent that we cause Pzena Investment Management, LLC to issue additional Class B units (including if the Class B units awarded are subject to vesting) to our employees pursuant to the PIM LLC 2006 Equity Incentive Plan, these employees will be entitled to receive an equivalent number of shares of our Class B common stock.
 
Concurrently with the closing of this offering and the reorganization, holders of our Class B common stock will enter into a stockholders’ agreement pursuant to which they will agree to vote all shares of Class B common stock then held by them, and acquired in the future, together on all matters submitted to a vote of our common stockholders. Therefore, upon the closing of this offering, they will be able to exercise control over all matters requiring the approval of our stockholders, including the election of our directors and the approval of significant corporate transactions.
 
Outstanding shares of our Class A common stock,  % of which will have been sold pursuant to this offering, will represent 100% of the rights of the holders of all classes of our capital stock to share in all distributions, except for the right of holders of our Class B common stock to receive its par value upon our liquidation, dissolution or winding up.


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Pursuant to the amended and restated operating agreement of Pzena Investment Management, LLC, each vested Class B unit will be exchangeable for a share of our Class A common stock, subject to the exchange timing and volume limitations described under “— Amended and Restated Operating Agreement of Pzena Investment Management, LLC — Exchange Rights.”  Unvested Class B units will not be exchangeable until they have vested.
 
Pursuant to a registration rights agreement that we will enter into with the holders of Class B units of Pzena Investment Management, LLC, we intend to file a shelf registration statement in order to register the resales of the shares of our Class A common stock that are issuable upon exchange of these Class B units. See “— Registration Rights Agreement” for a description of the timing and manner limitations on resales of these shares.


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The graphic below illustrates our holding company structure and anticipated ownership immediately after the consummation of the reorganization and this offering (assuming no exercise of the over-allotment option).
 
(HOLDING COMPANY FLOW CHART)
 
 
(1) The members of Pzena Investment Management, LLC, other than us, will consist of:
 
  •  the four members of our Executive Committee, Messrs. Pzena, Goetz, Krishna and Lipsey, and their respective estate planning vehicles, who will collectively hold approximately     % of the economic interests in us;
 
  •  19 of our other employees, including our Chief Financial Officer, Mr. Palladino, who will collectively hold approximately     % of the economic interests in us; and
 
  •  the two original outside investors in Pzena Investment Management, LLC, who will collectively hold approximately     % of the economic interests in us.
 
(2) Each share of Class A common stock is entitled to one vote per share. Class A common stockholders will have 100% of the rights of all classes of our capital stock to receive distributions, except that Class B common stockholders will have the right to receive the par value of the Class B common stock upon our liquidation, dissolution or winding up.
 
(3) Each share of Class B common stock is entitled to five votes per share for so long as the number of shares of Class B common stock outstanding represents at least 20% of all shares of common stock outstanding. Class B common stockholders will only have the right to receive the par value of the Class B common stock upon our liquidation, dissolution or winding up.
 
(4) We will hold     Class A units of Pzena Investment Management, LLC, which will represent the right to receive  % of the distributions made by Pzena Investment Management, LLC.
 
(5) The principals will collectively hold      Class B units of Pzena Investment Management, LLC, which will represent the right to receive  % of the distributions made by Pzena Investment Management, LLC.


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Holding Company Structure
 
Our only business following this offering will be to act as the sole managing member of Pzena Investment Management, LLC and, as such, we will operate and control all of its business and affairs and will be able to consolidate its financial results into our financial statements. The ownership interests of holders of Class B units of Pzena Investment Management, LLC will be accounted for as a minority interest in our consolidated financial statements after this offering.
 
Net profits and net losses and distributions of Pzena Investment Management, LLC will be allocated and made to its members pro rata in accordance with the number of membership units of Pzena Investment Management, LLC they hold. Accordingly, net profits and net losses of Pzena Investment Management, LLC will initially be allocated, and distributions will be made, approximately    % to us and approximately    % to the initial holders of Class B units (or    % and    %, respectively, if the underwriters exercise their option to purchase additional shares of Class A common stock in full).
 
Subject to the availability of net cash flow at the Pzena Investment Management, LLC level, we intend to cause Pzena Investment Management, LLC to distribute to us, and the holders of Class B units, cash payments for the purposes of funding tax obligations in respect of the taxable income and net capital gain that is allocated to us and the holders of Class B units, respectively, as members of Pzena Investment Management, LLC.
 
Assuming Pzena Investment Management, LLC makes distributions to its members in any given year, the determination to pay dividends, if any, to our Class A stockholders will be made by our board of directors. Because our board of directors may or may not determine to pay dividends to our Class A stockholders, our Class A stockholders may not necessarily receive dividend distributions relating to our pro rata share of the income earned by Pzena Investment Management, LLC, even if Pzena Investment Management, LLC makes such distributions to us.
 
Amended and Restated Operating Agreement of Pzena Investment Management, LLC
 
As a result of the reorganization, we will operate our business through Pzena Investment Management, LLC and its consolidated subsidiaries. The operations of Pzena Investment Management, LLC, and the rights and obligations of its members, are set forth in the amended and restated operating agreement of Pzena Investment Management, LLC, a form of which will be filed as an exhibit to the registration statement of which this prospectus is a part. The following description of this operating agreement is not complete and is qualified by reference to the full text of the agreement.
 
Governance
 
We will serve as the sole managing member of Pzena Investment Management, LLC. As such, we will control its business and affairs and be responsible for the management of its business. We will also have the power to delegate certain of our management responsibilities to an Executive Committee consisting of our Chief Executive Officer, Mr. Pzena, and the officers appointed by him to serve as members of the committee. Initially, Mr. Pzena and each of our Presidents, Messrs. Goetz, Krishna and Lipsey, will serve as members of the Executive Committee. No members of Pzena Investment Management, LLC, in their capacity as such, will have any authority or right to control the management of Pzena Investment Management, LLC or to bind it in connection with any matter.
 
Rights of Members
 
Pzena Investment Management, LLC will issue Class A units, which may only be issued to us, the sole managing member, and Class B units. Each Class A unit and Class B unit will entitle holders to equal economic rights. Holders of Class B units will have no voting rights, except for the right to approve amendments to the amended and restated operating agreement of Pzena Investment Management, LLC that adversely affects the rights of the holders of Class B units and to approve certain material corporate transactions. See “— Amendments” and “— Material Corporate Transactions.”


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As of the closing of this offering, all outstanding Class B units will be fully vested. We intend to cause Pzena Investment Management, LLC to issue additional Class B units pursuant to the PIM LLC 2006 Equity Incentive Plan in the future which may be subject to vesting periods set forth in the relevant award agreements.
 
Net profits and net losses and distributions of Pzena Investment Management, LLC will be allocated and made to its members pro rata in accordance with the number of membership units of Pzena Investment Management, LLC they hold (whether or not vested).
 
Coordination of Pzena Investment Management, Inc. and Pzena Investment Management, LLC
 
At any time we issue a share of our Class A common stock for cash, the net proceeds received by us will be promptly transferred to Pzena Investment Management, LLC, and Pzena Investment Management, LLC will issue to us one of its Class A units. At any time we issue a share of our Class A common stock pursuant to our 2007 Equity Incentive Plan, we will contribute to Pzena Investment Management, LLC all of the proceeds that we receive (if any) and Pzena Investment Management, LLC will issue to us one of its Class A units, having the same restrictions, if any, attached to the shares of Class A common stock issued under this plan. Conversely, if we redeem any shares of our Class A common stock for cash, Pzena Investment Management, LLC will, immediately prior to our redemption, redeem an equal number of Class A units held by us, upon the same terms and for the same price, as the shares of our Class A common stock are redeemed.
 
Pursuant to the authority of the Compensation Committee of our board of directors, as the administrator of the PIM LLC 2006 Equity Incentive Plan, this committee, in its sole discretion, may cause Pzena Investment Management, LLC to grant equity-based awards to its employees which are based on Class B units. To the extent that Class B units are issued at any time after this offering, the holder will be entitled to receive a corresponding number of shares of our Class B common stock in exchange for the payment of their par value, as long as the holder agrees to be bound by the terms of the Class B stockholders’ agreement described under “— Stockholders’ Agreement Among Class B Stockholders.” Pzena Investment Management, LLC may also, from time to time, issue such other classes or series of membership units having such relative rights, powers and duties and interests in profits, losses, allocations and distributions of Pzena Investment Management, LLC as may be designated by us.
 
Pursuant to the amended and restated operating agreement, we will agree, as managing member, that we will not conduct any business other than the management and ownership of Pzena Investment Management, LLC and its subsidiaries, or own any other assets (other than on a temporary basis). In addition, membership units of Pzena Investment Management, LLC, as well as our common stock, will be subject to equivalent stock splits, dividends and reclassifications.
 
Issuances and Transfer of Units
 
Class A units may only be issued to us, the managing member of Pzena Investment Management, LLC, and are non-transferable. Class B units may only be issued to persons or entities to which we agree to permit the issuance of units in exchange for cash or other consideration, including the services of Pzena Investment Management, LLC’s employees. Class B units may not be transferred except, with our consent, to a permitted transferee, subject to such conditions as we may specify. A holder of Class B units may not transfer any Class B units to any person unless he or she transfers an equal number of shares of our Class B common stock to the same transferee.
 
Material Corporate Transactions
 
In the event that Pzena Investment Management, LLC proposes to engage in a material corporate transaction, including a merger, consolidation, dissolution or sale of substantially all of its assets, we, in our capacity as the managing member, along with a majority in interest of the holders of the Class B units, shall have the power and authority to approve such a transaction. In addition, in the event that we, in our capacity as the managing member, along with a majority in interest of the holders of the Class B units, determine that all (or any portion) of the Class A and Class B units, should be sold to a third party purchaser, we will have the right to compel the holders of Class B units to sell all or the same portion of their Class B units to this third party purchaser.


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Exchange Rights
 
We have reserved for issuance           shares of our Class A common stock, which is the aggregate number of shares of our Class A common stock expected to be issued over time upon the exchanges by:
 
  •  all holders of Class B units outstanding immediately after this offering, and
 
  •  recipients of grants that may be made under the PIM LLC 2006 Equity Incentive Plan, pursuant to which 15% of the number of membership units of Pzena Investment Management, LLC outstanding immediately after this offering may be granted, assuming no anti-dilution adjustments based on share splits, dividends or reclassifications.
 
Holders of Class B units may exchange their vested Class B units for shares of our Class A common stock at the times and in the amounts described below.
 
Managing Principals.  Each year, in the period beginning on the first effective date of the Form S-3 registration statement described under “— Registration Rights Agreement,” or the shelf registration statement, and ending on the date of the termination of employment of a managing principal with us, a managing principal and his permitted transferees may collectively exchange up to the number of vested Class B units that equals 15% of all Class B units they collectively hold as of January 1st of that year, in accordance with the timing restrictions described under “— Registration Rights Agreement.” For the three-year period following the managing principal’s termination, the managing principal and his permitted transferees may not exchange any of their Class B units. Thereafter, they may exchange the remainder of their Class B units when they vest, subject to the same timing restrictions.
 
Other Employee Members.  Each year, in the period beginning on the first effective date of the shelf registration statement described below and ending on the date of termination of employment of an employee member other than our managing principals, he or she and his or her permitted transferees, may collectively exchange up to the number of vested Class B units that equals 15% of all Class B units they collectively hold as of January 1st of that year, in accordance with the timing restrictions described under “— Registration Rights Agreement.” For the one-year period following the employee’s termination, the employee and his or her permitted transferees may not exchange any of their Class B units. Within the following six months, they may exchange vested Class B units so long as the employee retains a number of vested Class B units equal to at least 25% of the number of vested Class B units collectively held by the employee and his or her permitted transferees on the date of the termination of employment with us, subject to the same timing restrictions. Thereafter, they may exchange the remainder of their Class B units when they vest, subject to the same timing restrictions.
 
Non-Employee Members.  Each year, in the period beginning on the first effective date of the shelf registration statement described below and ending on the third anniversary of the consummation of this offering, the non-employee members of our operating company immediately after this offering may exchange up to 15% of the Class B units they hold as of January 1st of that year, in accordance with the timing restrictions described under “— Registration Rights Agreement.” Thereafter, these non-employee members may sell the remainder of their Class B units, subject to the same timing restrictions.
 
Exceptions.  Pursuant to the amended and restated operating agreement, if the amount of income taxes that employee members are required to pay due to the grant or vesting of their Class B units, or the exercise of their options to acquire Class B units (whether or not they are employees at the time that the tax payment obligation arises), exceeds the net proceeds they would receive upon the sale of all shares of our Class A common stock issued to them in exchange for 15% of Class B units that they hold as of January 1st of the year with respect to which the tax is payable, then they will instead be entitled to exchange an amount of vested Class B units, and resell an equivalent amount of shares of our Class A common stock issued upon exchange, such that the net proceeds from the sale of this amount of shares would enable them to pay all such taxes due. In addition, our board of directors may allow holders of Class B units to make exchanges in amounts exceeding those described above at any time following the effective date of the shelf registration statement, which determination may be withheld, delayed, or granted on such terms and conditions as the board may determine, in its sole discretion.


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Redemption of Shares of Class B Common Stock.  Any Class B unitholder who has acquired a corresponding number of shares of Class B common stock in connection with the original issuance of Class B units, which includes all holders of the           Class B units to be issued to the 23 current employee members and the two outside investors in Pzena Investment Management, LLC in connection with the reorganization, must deliver a corresponding number of shares of Class B common stock to us for redemption in connection with exercising its right to exchange Class B units for shares of our Class A common stock.
 
Restrictive Covenants
 
Non-Competition
 
Pursuant to the terms of the amended and restated operating agreement, all employees who are members of Pzena Investment Management, LLC will agree not to compete with us during the term of their employment with us. In addition, each managing principal will agree not to compete with us for a period of three years following the termination of his employment. Certain other employee members of Pzena Investment Management, LLC will be subject to non-competition provisions that vary in duration, depending upon the level of their ownership, after the termination of their employment with us.
 
Non-Solicitation
 
The managing principals will agree not to solicit our clients or any other employees of Pzena Investment Management, LLC during the term of their employment and three years thereafter. Other employee members of Pzena Investment Management, LLC will be subject to similar non-solicitation provisions that vary in duration, depending upon the level of their ownership.
 
Confidential Information
 
All employee members of Pzena Investment Management, LLC will agree to protect the confidential information of Pzena Investment Management, LLC. This covenant will survive the termination of their employment.
 
Forfeiture of Class B Units
 
If a managing principal breaches any of the non-competition, non-solicitation or confidential information covenants described above during the term of his employment, or within three years thereafter, the managing principal would forfeit all of his unvested Class B units and a number of vested Class B units that is equal to 50% of the number of vested Class B units collectively held by the managing principal and his permitted transferees, in each case as of the earlier of the date of his breach or the termination of his employment, unless our board of directors, in its sole discretion, determines otherwise.
 
If certain other employee members breach any of the restrictive covenants described above, a portion (which may vary, depending on the employee member’s level of ownership) of the Class B units that they hold will be forfeited, unless we, in our sole discretion, determine otherwise.
 
Indemnification and Exculpation
 
To the extent permitted by applicable law, Pzena Investment Management, LLC will indemnify us, as its managing member, its authorized officers, its other employees and agents from and against any losses, liabilities, damages, costs, expenses, fees or penalties incurred by any acts or omissions of these persons, provided that the acts or omissions of these indemnified persons are not the result of fraud, intentional misconduct or a violation of the implied contractual duty of good faith and fair dealing, or any lesser standard of conduct permitted under applicable law.
 
We, as the managing member, and the authorized officers and other employees and agents of Pzena Investment Management, LLC, will not be liable to Pzena Investment Management, LLC, its members or their affiliates for damages incurred by any acts or omissions of these persons, provided that the acts or omissions of these exculpated persons are not the result of fraud, intentional misconduct or a violation of the implied contractual duty of good faith and fair dealing, or any lesser standard of conduct permitted under applicable law.


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Amendments
 
The amended and restated operating agreement may be amended with the consent of the managing member and a majority in interest of the Class B members, provided that the managing member may, without the consent of any Class B member, make certain amendments that, generally, are not expected to adversely affect Class B members.
 
Registration Rights Agreement
 
Pursuant to a registration rights agreement that we will enter into with each holder of Class B units, the shares of Class A common stock issued upon exchange will be eligible for resale pursuant to a registration statement on Form S-3, which we refer to as the shelf registration statement, or otherwise, subject to the resale timing and manner limitations described below. Pursuant to this agreement, when Pzena Investment Management, LLC issues any Class B units to its employees, members or other service providers pursuant to the PIM LLC 2006 Equity Incentive Plan, the recipient will be entitled to the same registration rights, and will be subject to the same restrictions, as the holders of Class B units immediately after this offering.
 
Pursuant to the registration rights agreement, we will commit to use our best efforts to:
 
  •  file a shelf registration statement in order to register the resale of these shares of Class A common stock as soon as practicable after the date that we become eligible to use Form S-3 under the Securities Act, which is expected to be one year after the consummation of this offering, and
 
  •  cause the SEC to declare the shelf registration statement effective as soon as practicable thereafter.
 
From the first effective date of this shelf registration statement until the second anniversary of the consummation of this offering, holders of Class B units, subject to the exchange timing and volume limitations described above under “— Amended and Restated Operating Agreement of Pzena Investment Management, LLC — Exchange Rights,” will only be able to sell the shares of Class A common stock issued upon exchange in connection with an underwritten offering or a block trade, the timing and manner of which will be determined by us in our sole discretion. Thereafter, holders of Class B units will be able to exchange their Class B units for shares of our Class A common stock, subject to the exchange timing and volume limitations described above, and will be permitted to sell their shares in any manner, but only at times determined by us, in our sole discretion. However, if we fail to effect such an offering by the end of any 12-month period, each holder of Class B units who is then eligible to exchange Class B units, may exercise its exchange right and resell the shares issued upon exchange in any manner of sale permitted under the registration statement or otherwise available to the holder.
 
We have agreed to indemnify the holders of Class B units against any losses or damages resulting from any untrue statement, or omission of material fact, in any registration statement or prospectus pursuant to which they may sell the shares of our Class A common stock that they receive upon exchange of their Class B units, unless such liability arose from the selling stockholder’s misstatement or omission, and the holders have agreed to indemnify us against all losses caused by their misstatements or omissions. We will pay all expenses incident to our performance under the registration rights agreement, and the selling stockholders will pay their respective portions of all underwriting discounts, commissions and transfer taxes relating to the sale of their shares of Class A common stock pursuant to the registration rights agreement.
 
Voting Rights of Class A and Class B Stockholders
 
Each share of our Class A common stock will entitle its holder to one vote. Each share of our Class B common stock will entitle its holder to five votes, until such time that the number of shares of our Class B common stock outstanding constitutes less than 20% of the number of all shares of our common stock outstanding. After such time, each share of our Class B common stock will entitle its holder to one vote.
 
Immediately after this offering, our Class B common stockholders will collectively hold approximately       % of the combined voting power of our common stock (or    % if the underwriters exercise their option to purchase additional shares in full). We intend to cause Pzena Investment Management, LLC to issue


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additional Class B units to our employees in various forms of equity compensation, such as restricted Class B units and options to acquire Class B units. Pzena Investment Management, LLC will initially be authorized to issue additional Class B units in an amount not exceeding 15% of all membership units outstanding as of the consummation of this offering pursuant to the PIM LLC 2006 Equity Incentive Plan. The holders of any vested or unvested Class B units issued after this offering will be entitled to receive a corresponding number of shares of our Class B common stock in exchange for the payment of their par value and, therefore, the voting power of our Class B common stockholders will increase to the extent that we grant Class B unit-based awards, pursuant to the PIM LLC 2006 Equity Incentive Plan, to our employees, members or other service providers. Conversely, when any holder of vested Class B units exchanges them for the corresponding number of shares of our Class B common stock, any holder of unvested Class B units forfeits a Class B unit due to applicable vesting provisions, or any holder of vested or unvested Class B units forfeits a Class B unit due to a breach of restrictive covenants contained in our operating company’s amended and restated operating agreement, it will result in the automatic redemption of the corresponding number of shares of our Class B common stock and, therefore, will decrease the aggregate voting power of our Class B stockholders.
 
Stockholders’ Agreement Among Class B Stockholders
 
Concurrently with the consummation of this offering and the reorganization, the holders of all outstanding shares of our Class B common stock will enter into a Class B stockholders’ agreement with respect to all shares of Class B common stock then held by them and any additional shares of Class B common stock that they may acquire in the future. Pursuant to this agreement, they will agree to vote all their shares of Class B common stock together on any matter submitted to our common stockholders for a vote.
 
Prior to any vote of our common stockholders, the Class B stockholders’ agreement will provide for a separate, preliminary vote of the shares of Class B common stock on each matter upon which a vote of all common stockholders is proposed to be taken. In this preliminary vote, the participating Class B stockholders may vote all of the shares of Class B common stock then owned by them in the manner that each may determine in his, her or its sole discretion. Each Class B stockholder must then vote all of their shares of Class B common stock in accordance with the vote of the majority of the shares of Class B common stock present (in person or by proxy) and voting in this preliminary vote. In order to give effect to these voting provisions, each of these Class B stockholders will grant Mr. Pzena an irrevocable proxy to vote all their shares of Class B common stock in accordance with the vote of this majority in any vote of our common stockholders.
 
For so long as the Class B stockholders own 20% of the total number of shares of our common stock outstanding, they will be able to exercise control over all matters requiring the approval of our stockholders, including the election of our directors, the approval of significant corporate transactions and the declaration and payment of dividends. See “Risk Factors — Risks Related to Our Class A Common Stock — Control by our Class B stockholders, which includes our managing principals, 19 other of our employees and two outside investors, of  % of the combined voting power of our common stock may give rise to conflicts of interest.”
 
In addition, pursuant to this Class B stockholders’ agreement, each holder of shares of Class B common stock will agree that:
 
  •  the holder will not transfer any shares of Class B common stock to any person unless the holder transfers an equal number of Class B units to the same person; and
 
  •  in the event the holder transfers any Class B units to any person, the holder will transfer an equal number of shares of Class B common stock to the same person.
 
This Class B stockholders’ agreement may only be amended with the consent of the holders of a majority of the shares of Class B common stock that are party to this agreement.
 
Tax Consequences
 
The holders of membership units of Pzena Investment Management, LLC, including us, generally will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of


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Pzena Investment Management, LLC. Net profits and net losses of Pzena Investment Management, LLC generally will be allocated to its members pro rata in proportion to their respective membership units. The amended and restated operating agreement of Pzena Investment Management, LLC will provide for cash distributions to its members if the taxable income of Pzena Investment Management, LLC gives rise to taxable income for its members. In accordance with this agreement, Pzena Investment Management, LLC will make distributions to the holders of its membership units for the purpose of funding their tax obligations in respect of the income of Pzena Investment Management, LLC that is allocated to them. Generally, these tax distributions will be computed based on our estimate of the net taxable income of Pzena Investment Management, LLC allocable per unit multiplied by an assumed tax rate equal to the highest combined U.S. federal and applicable state and local tax rate applicable to any member (taking into account the deductibility of state and local taxes for U.S. federal income tax purposes).
 
Pzena Investment Management, LLC intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, which will be effective for 2007 and for each taxable year in which an exchange of Class B units for shares of our Class A common stock occurs. As a result of this election, our initial acquisition of Class A units, and the subsequent exchanges of Class B units for our Class A shares, are expected to result in increases in our share of the tax basis in the tangible and intangible assets of Pzena Investment Management, LLC at the time of our acquisition of membership units and any future exchanges, which will increase the tax depreciation and amortization deductions available to us. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of tax that we would otherwise be required to pay in the future.
 
Tax Receivable Agreement
 
We will enter into a tax receivable agreement with the current members of Pzena Investment Management, LLC, and any future holders of Class B units, that will require us to pay them 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize (or are deemed to realize in the case of an early termination payment by us, or a change in control, as discussed below) as a result of these increases in tax basis and of certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. This will be our obligation and not the obligation of Pzena Investment Management, LLC. We expect to benefit from the remaining 15% of cash savings, if any, realized. For purposes of the tax receivable agreement, cash savings in income tax will be computed by comparing our actual income tax liability to the amount of such taxes that we would have been required to pay had there been no increase in our share of the tax basis of the tangible and intangible assets of Pzena Investment Management, LLC. The term of the tax receivable agreement will commence upon consummation of this offering and will continue until all such tax benefits have been utilized or expired, unless we exercise our right to terminate the tax receivable agreement for an amount based on an agreed-upon value of payments remaining to be made under the agreement.
 
Estimating the amount of payments that we may be required to make under the tax receivable agreement is imprecise by its nature, because the actual increase in our share of the tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including:
 
  •  the timing of exchanges of Class B units for shares of our Class A common stock — for instance, the increase in any tax deductions will vary depending on the fair market value, which may fluctuate over time, of the depreciable and amortizable assets of Pzena Investment Management, LLC at the time of the exchanges;
 
  •  the price of our Class A common stock at the time of exchanges of Class B units — the increase in our share of the basis in the assets of Pzena Investment Management, LLC, as well as the increase in any tax deductions, will be related to the price of our Class A common stock at the time of these exchanges;
 
  •  the extent to which these exchanges are taxable — if an exchange is not taxable for any reason (for instance, if a holder of Class B units exchanges units in order to make a charitable contribution), increased deductions will not be available;


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  •  the tax rates in effect at the time we utilize the increased amortization and depreciation deductions; and
 
  •  the amount and timing of our income — we will be required to pay 85% of the tax savings, as and when realized, if any. If we do not have taxable income, we generally will not be required to make payments under the tax receivable agreement for that taxable year because no tax savings will have been actually realized.
 
We expect that, as a result of the size of the increases in our share of the tax basis of the tangible and intangible assets of Pzena Investment Management, LLC attributable to our interest therein, the payments that we make under the tax receivable agreement will likely be substantial. Assuming that there are no material changes in the relevant tax law, and that we earn sufficient taxable income to realize the full tax benefit of the increased depreciation and amortization of our assets, we expect that future payments under the tax receivable agreement in respect of our initial purchase of membership units of Pzena Investment Management, LLC will aggregate $      million and range from approximately $      million to $      million per year over the next 15 years (or $      million and range from approximately $      million to $      million per year over the next 15 years if the underwriters exercise their option to purchase additional shares of our Class A common stock in full). A $1.00 increase (decrease) in the assumed initial public offering price of $      per Class A share (the midpoint of the price range set forth on the cover of this prospectus) would increase (decrease) the aggregate amount of future payments to holders of Class B units in respect of the purchase by $      million (or $      million if the underwriters exercise their option to purchase additional shares of our Class A common stock in full). Future payments under the tax receivable agreement in respect of subsequent exchanges will be in addition to these amounts and are expected to be substantial.
 
In addition, the tax receivable agreement provides that, upon certain mergers, asset sales, other forms of business combinations or other changes of control, our (or our successors’) obligations with respect to exchanged or acquired Class B units (whether exchanged or acquired before or after such transaction) would be based on certain assumptions, including that we would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement.
 
Decisions made by the continuing members of our operating company in the course of running our business, such as with respect to mergers, asset sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments that are received by an exchanging or selling member under the tax receivable agreement. For example, the earlier disposition of assets following an exchange or acquisition transaction will generally accelerate payments under the tax receivable agreement and increase the present value of such payments, and the disposition of assets before an exchange or acquisition transaction will increase an existing owner’s tax liability without giving rise to any rights of an existing owner to receive payments under the tax receivable agreement.
 
Were the IRS to successfully challenge the tax basis increases described above, we would not be reimbursed for any payments previously made under the tax receivable agreement. As a result, in certain circumstances, we could make payments under the tax receivable agreement in excess of our actual cash savings in income tax.


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USE OF PROCEEDS
 
We estimate that the net proceeds to us from the sale of Class A common stock offered by us will be approximately $      million, or $      million if the underwriters exercise their option to purchase additional shares of Class A common stock in full, based on an assumed initial public offering price of $      per share (the midpoint of the price range set forth on the cover of this prospectus), in each case after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us.
 
We intend to use the net proceeds from this offering to purchase an aggregate of          membership units of Pzena Investment Management, LLC from its three current non-employee members and will not retain any of these proceeds. If the underwriters exercise their option to purchase additional shares of Class A common stock in full, we intend to use the additional approximately $      million of net proceeds, based on an assumed initial public offering price of $      per share (the midpoint of the price range set forth on the cover of this prospectus), to purchase up to          additional membership units of Pzena Investment Management, LLC from two of these non-employee members. None of the 23 current employee members of Pzena Investment Management, LLC will sell any of their membership units in conjunction with this offering.


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DIVIDEND POLICY
 
Our Dividend Policy
 
Following this offering, subject to legally available funds, we intend to pay a quarterly cash dividend, initially equal to $      per share of our Class A common stock, commencing with the      quarter of 2007. The Class B common stock will not be entitled to any dividends. The declaration and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors will take into account:
 
  •  the financial results of Pzena Investment Management, LLC;
 
  •  our available cash, as well as anticipated cash needs;
 
  •  the capital requirements of our company and our direct and indirect subsidiaries (including Pzena Investment Management, LLC);
 
  •  contractual, legal, tax and regulatory restrictions on, and implications of, the payment of dividends by us to our stockholders or by our direct and indirect subsidiaries (including Pzena Investment Management, LLC) to us;
 
  •  general economic and business conditions; and
 
  •  such other factors as our board of directors may deem relevant.
 
We will be a holding company and will have no material assets other than our ownership of membership units of Pzena Investment Management, LLC. As a result, we will depend upon distributions from Pzena Investment Management, LLC to pay any dividends declared by us. We expect to cause Pzena Investment Management, LLC to make distributions to us in an amount sufficient to cover dividends, if any, declared by us. If Pzena Investment Management, LLC makes such distributions, holders of Class B units will be entitled to receive equivalent distributions on a pro rata basis.
 
Pzena Investment Management, LLC’s Historical Distributions
 
Prior to the completion of this offering, our operating company was owned by 23 of its current employees, a former employee and two outside investors. All decisions regarding the amount and timing of distributions were made by the sole managing member of our operating company prior to this offering, Mr. Pzena, and our Executive Committee, based on an assessment of appropriate amounts of distributions, taking into account our operating company’s capital needs, as well as actual and potential earnings.


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CAPITALIZATION
 
The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2007:
 
  •  on an actual basis for Pzena Investment Management, LLC;
 
  •  on a pro forma basis for Pzena Investment Management, LLC after giving effect to its incurrence of $      million of indebtedness immediately prior to this offering and the payment of a special cash distribution to its members of $      million in the aggregate; and
 
  •  on a pro forma, as adjusted basis for Pzena Investment Management, Inc. after giving effect to the following:
 
  •  the reorganization transactions described in “The Reorganization and Our Holding Company Structure, including our agreement to return 85% of the tax benefits that we receive as a result of our ability to step up our tax basis in the membership units of Pzena Investment Management, LLC that we acquire from two outside investors and one former employee to such persons;
 
  •  the amendment of the operating agreement of Pzena Investment Management, LLC, effective as of March 31, 2007, to eliminate its obligation to redeem any members’ units therein upon their death, or, if applicable, termination of employment, which mandatory redemption feature had required all membership units to be classified as liabilities in Pzena Investment Management, LLC’s consolidated financial statements;
 
  •  the acceleration of the vesting of all membership units of Pzena Investment Management, LLC that were subject to vesting as of March 31, 2007 such that they became fully vested as of that date; and
 
  •  the sale of           shares of Class A common stock by us in this offering at an assumed initial public offering price of $      per share (the midpoint of the price range set forth on the cover of this prospectus), and the application of the proceeds therefrom, after payment of assumed underwriting discounts and commissions and estimated offering expenses payable by us, to purchase          membership units of Pzena Investment Management, LLC from one former employee and two outside investors.
 
You should read this table together with the other information contained in this prospectus, including “The Reorganization and Our Holding Company Structure,” “Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.
 
                         
    As of March 31, 2007  
                Pzena
 
    Pzena
    Pzena
    Investment
 
    Investment
    Investment
    Management, Inc.
 
    Management, LLC
    Management, LLC
    Pro Forma,
 
    Actual     Pro Forma     As Adjusted  
    (in thousands, unaudited)  
 
Cash and Cash Equivalents
  $ 24,139     $        $     
                         
                         
Long-term Debt, less current portion
  $     $       $    
                         
Members’/Stockholders’ Equity:
                       
Class A Common Stock, $0.01 par value per share;            shares authorized;           shares issued and outstanding, pro forma, as adjusted
                   
Class B Common Stock, $0.00001 par value per share;           shares authorized;           shares issued and outstanding, pro forma, as adjusted
                   
Members’ Capital
    875,096                  
Retained Deficit
    (816,140 )                
                         
Total Members’/Stockholders’ Equity
    58,956                  
                         
Total Capitalization
  $ 58,956     $       $  
                         


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DILUTION
 
If you invest in our Class A common stock, you will experience dilution to the extent of the difference between the public offering price per share you pay in this offering and the pro forma net tangible book value per share of our Class A common stock immediately after this offering. Dilution results from the fact that the per share offering price of the Class A common stock is substantially in excess of the book value per share attributable to the existing equity holders.
 
Our pro forma net tangible book value per share as of March 31, 2007 was approximately $      million, or approximately $      per share of our Class A common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, after giving effect to the reorganization, our incurrence of $      million of indebtedness shortly before the consummation of this offering and the payment of a special cash distribution to each of the members of Pzena Investment Management, LLC, and pro forma net tangible book value per share represents pro forma net tangible book value divided by the number of shares of Class A common stock outstanding after giving effect to the reorganization and assuming that all holders of Class B units of Pzena Investment Management, LLC immediately after the consummation of the reorganization have exchanged all their Class B units for the corresponding number of shares of our Class A common stock.
 
After giving effect to the sale of the           shares of Class A common stock we are offering at an assumed initial public offering price of $      per share (the midpoint of the price range set forth on the cover of this prospectus), and after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value would have been approximately $      million, or approximately $      per share. This represents an immediate increase in pro forma net tangible book value of approximately $      per share to existing equityholders and an immediate dilution of approximately $      per share to new investors. The following table illustrates this calculation on a per share basis:
 
         
Assumed initial public offering price per share
  $    
Pro forma net tangible book value as of March 31, 2007
       
Increase in pro forma net tangible book value per share attributable to new investors
       
Pro forma net tangible book value per share after this offering
       
         
Dilution in pro forma net tangible book value per share to new investors
  $             
         
 
If the underwriters exercise their option to purchase additional shares of Class A common stock in full, pro forma net tangible book value would increase to approximately $      per share, representing an increase to existing equityholders of approximately $      per share, and there would be an immediate dilution of approximately $      per share to new investors.
 
The following table summarizes, on the same pro forma basis as of March 31, 2007, the total number of shares of Class A common stock purchased from us and the total consideration and average price per share paid by existing equity holders and by new investors purchasing Class A common stock in this offering, assuming that all holders of Class B units of Pzena Investment Management, LLC immediately after the consummation of the reorganization have exchanged all their Class B units for the corresponding number of shares of our Class A common stock:
                                         
    Shares Purchased     Total Consideration     Average Price
 
    Number     %     Amount     %     Per Share  
 
Existing Equity Holders
            %   $             %   $    
New Investors
                                  $    
                                         
Total
                100.0 %           $ 100.0 %            
                                         
 
If the underwriters exercise their option to purchase additional shares of Class A common stock in full, the following will occur:
 
  •  the pro forma percentage of shares of our Class A common stock held by existing equity holders will decrease to approximately    % of the total number of pro forma shares of our Class A common stock outstanding after this offering; and
 
  •  the pro forma number of shares of our Class A common stock held by new investors will increase to          , or approximately    % of the total pro forma number of shares of our Class A common stock outstanding after this offering.


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UNAUDITED PRO FORMA FINANCIAL INFORMATION
 
The following unaudited consolidated pro forma financial statements present the consolidated results of operations and financial condition of Pzena Investment Management, Inc. assuming that all of the transactions described in the five bullet points below had been completed as of January 1, 2006 with respect to the unaudited pro forma consolidated statement of operations data for the year ended December 31, 2006, and with respect to the unaudited consolidated pro forma statement of operations data for the three months ended March 31, 2007, and as of March 31, 2007 with respect to the unaudited pro forma consolidated statement of financial condition data as of March 31, 2007. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions and this offering on the historical financial information of Pzena Investment Management, LLC. The adjustments are described in the notes to the unaudited consolidated financial statements.
 
The pro forma adjustments principally give effect to the following transactions:
 
  •  our incurrence of $      million of indebtedness and the payment of a special cash distribution of $      million in the aggregate to the existing members of Pzena Investment Management, LLC;
 
  •  the reorganization transactions described in “The Reorganization and Our Holding Company Structure, including our agreement to return 85% of the tax benefits that we receive as a result of our ability to step up our tax basis in the membership units of Pzena Investment Management, LLC that we acquire from one former employee and two outside investors to such persons;
 
  •  the amendment of the operating agreement of Pzena Investment Management, LLC, effective as of March 31, 2007, to eliminate its obligation to redeem any members’ units therein upon their death, or, if applicable, termination of employment, which mandatory redemption feature had required all membership units to be classified as liabilities in Pzena Investment Management, LLC’s consolidated financial statements;
 
  •  the acceleration of the vesting of all membership units of Pzena Investment Management, LLC that were subject to vesting as of March 31, 2007 such that they became fully vested as of that date; and
 
  •  the sale of           shares of our Class A common stock in this offering at an assumed offering price of $      per share (the midpoint of the price range set forth on the cover of this prospectus) and the application of the proceeds therefrom, after payment of assumed underwriting discounts and commissions and estimated offering expenses payable by us, to purchase           membership units of Pzena Investment Management, LLC from one former employee and two outside investors.
 
The unaudited consolidated pro forma financial information of Pzena Investment Management, Inc. should be read together with “The Reorganization and Our Holding Company Structure”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements of Pzena Investment Management, LLC and related notes included elsewhere in this prospectus.
 
The unaudited consolidated pro forma financial information is included for informational purposes only and does not purport to reflect our results of operations or financial condition that would have occurred had we operated as a public company during the periods presented. The unaudited consolidated pro forma financial information should not be relied upon as being indicative of our results of operations or financial condition had the transactions contemplated in connection with the reorganization and this offering been completed on the dates assumed. The unaudited consolidated pro forma financial information also does not project the results of operations or financial condition for any future period or date.


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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
As of March 31, 2007
 
                                         
          Debt Issuance/
                Pro Forma,
 
    Consolidated     Distribution     Pro Forma     Offering     As Adjusted  
    (in thousands)  
 
ASSETS
                                       
Cash and Cash Equivalents
  $ 24,139     $         (A)   $             $         (B)   $    
                      (A)                     (B)        
Restricted Cash
    2,036                                              
Due From Broker
    117                                  
Advisory Fees Receivable
    26,905                                  
Investments In Marketable Securities, at Fair Value
    21,748                                  
Receivable From Related Parties
    526                                  
Other Receivables
    116                                  
Investments In Affiliates
    3,571                                  
Prepaid Expenses and Other Assets
    766                               (B)        
Property and Equipment, Net
    1,834                                  
                                         
TOTAL ASSETS
  $ 81,758     $             $             $             $          
                                         
                                         
LIABILITIES AND MEMBERS’ EQUITY
                                       
Liabilities
                                       
Accounts Payable
  $ 368             $               $    
Current Portion of Long-term Debt
        $         (A)                        
Securities Sold Short, at Fair Value
                                     
Due to Broker
    83                                  
Accrued Expenses
    8,749                                  
Long-term Debt
                  (A)                        
Other Liabilities
    819                     $         (B)        
                                         
TOTAL LIABILITIES
    10,019                                  
Minority and Non-Controlling Interests
    12,783                                  
Common Stock
                                    (B)        
Additional Paid-In Capital
                                    (B)        
Members’ Capital
    875,096                               (B)        
Retained Deficit
    (816,140 )             (A)                     (B)        
                                         
TOTAL MEMBERS’ EQUITY
    58,956                                  
                                         
TOTAL LIABILITIES AND MEMBERS’ EQUITY
  $ 81,758     $             $             $             $          
                                         


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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 2006
 
                                         
          Debt Issuance/
                Pro Forma,
 
    Consolidated     Dividend     Pro Forma     Offering     As Adjusted  
    (in thousands except unit/share and per unit/share amounts)  
 
REVENUE
  $ 115,087             $                     $          
                                         
EXPENSES
                                       
Compensation and Benefits Expense
    305,632                     $         (C)        
General and Administrative Expenses
    8,380                                  
                                         
TOTAL OPERATING EXPENSES
    314,012                                  
                                         
Operating Income (Loss)
    (198,925 )                                
                                         
Interest Income (Expense), Net
    926     $         (A)                        
Dividend Income, Net
    490                                  
Realized and Unrealized Gain, Net on Marketable Securities and Securities Sold Short
    3,280                                  
Equity in Earnings of Affiliates
    614                                  
Other
    804                                  
                                         
Total Other Income (Loss)
    6,114                                  
                                         
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY AND NON-CONTROLLING INTERESTS
    (192,811 )                                
Provision for Income Taxes
    3,941                               (E)        
                                      (E)        
Minority and Non-Controlling Interests
    1,997                               (D)        
                                         
Income (Loss) Before Interest on Mandatorily Redeemable Units
    (198,749 )                                
Less: Interest on Mandatorily Redeemable Units
    516,708                               (C)        
                                         
NET INCOME (LOSS)
  $ (715,457 )   $             $             $             $          
                                         
Basic and Diluted Net Income Per Unit
                                  $          
Weighted Average Unit Used in Basic and Diluted Earnings Per Unit
                                       


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UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2007
 
                                         
          Debt Issuance/
                Pro Forma,
 
    Consolidated     Dividend     Pro Forma     Offering     As Adjusted  
    (in thousands except unit/share and per unit/share amounts)  
 
REVENUE
  $ 35,298             $                     $          
                                         
EXPENSES
                                       
Compensation and Benefits Expense
    103,824                     $         (C)        
General and Administrative Expenses
    2,0890                                  
                                         
TOTAL OPERATING EXPENSES
    105,913                                  
                                         
Operating Income (Loss)
    (70,615 )                                
                                         
Interest Income (Expense), Net
    286     $         (A)                        
Dividend Income, Net
    129                                  
Realized and Unrealized Loss, Net on Marketable Securities and Securities Sold Short
    (170 )                                
Equity in Loss of Affiliates
    (42 )                                
Other
    32                                  
                                         
Total Other Income (Loss)
    235                                  
                                         
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY AND NON-CONTROLLING INTERESTS
    (70,380 )                                
Provision for Income Taxes
    1,129                       (E)        
                              (E)        
Minority and Non-Controlling Interests
    (9 )                     (D)        
                                         
Income (Loss) before Interest on Mandatorily Redeemable Units
    (71,500 )                                
Less: Interest on Mandatorily Redeemable Units
    16,575                       (C)        
                                         
NET INCOME (LOSS)
  $ (88,075 )   $       $       $       $  
                                         
Basic and Diluted Net Income Per Unit
                                  $    
Weighted Average Units Used in Basic and Diluted Earnings Per Unit
                                       


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NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 
(A) Reflects the incurrence of $      million of indebtedness pursuant to a          -year term, amortizing loan agreement that we intend to enter into shortly before the consummation of this offering in order to finance a one-time distribution to the current members of Pzena Investment Management, LLC. The principal amount borrowed will bear interest at a variable rate based, at our option, on (1) the one, two, three, six, nine or twelve-month LIBOR Market Index Rate plus     %, or (2) the higher of the lender’s prime rate and the Federal Funds Rate plus     %. For the year ended December 31, 2006, pro forma interest expense of $      million was computed using the 2006 average one-month LIBOR rate of 5.05%, assuming that none of the loan’s principal amount was repaid during 2006. For the three months ended March 31, 2007, pro forma interest expense of $      million was computed using the average one-month LIBOR rate for the three months ended March 31, 2007, which is 5.32%, assuming that none of the loan’s principal amount was repaid during that quarter.
 
(B) The net proceeds of this offering, estimated to be $      million (based on the midpoint of the price range set forth on the cover of this prospectus, and assuming an aggregate underwriting discount of $      million and offering expenses payable by us of $      million), will be used to acquire           of the membership units (representing approximately  % of the total number of membership units currently outstanding) of Pzena Investment Management, LLC. Pzena Investment Management, Inc. will be the sole managing member of Pzena Investment Management, LLC, and, as such, it will consolidate the results of operations and financial condition of Pzena Investment Management, LLC with a     % non-controlling interest. The acquisition of these membership units will be treated as a reorganization of entities under common control, similar to a pooling of interests, analogous to the type of transaction described in Emerging Issues Task Force Issue (EITF) 94-2, Treatment of Minority Interests in Certain Real Estate Investment Trusts. Accordingly, the pro forma adjusted net liabilities assumed by Pzena Investment Management, Inc. through this offering will be reported at Pzena Investment Management, LLC’s historical cost basis.
 
The acquisition of these membership units will allow us to make an election to step up our tax basis in the assets acquired. This step up is deductible for tax purposes over a 15-year period. Based on the estimated net proceeds of this offering and the pro forma net assets of Pzena Investment Management, LLC immediately prior to this offering, this election will give rise to a deferred tax asset of approximately $      million at March 31, 2007. Pursuant to a tax receivable agreement between the current members of Pzena Investment Management, LLC and us, 85% of the benefits of this election will be returned to the selling members as they are realized. This liability of $      million is included in pro forma other liabilities.
 
Pursuant to EITF 94-2, no additional consolidated statement of financial condition amounts of minority and non-controlling interests have been recorded in the unaudited pro forma consolidated statement of financial condition as of March 31, 2007, since the post-offering excess of liabilities over assets would cause the minority and non-controlling interests to be less than zero.
 
As illustrated below, the consolidated pro forma statement of financial condition amounts of common stock and additional paid-in capital at March 31, 2007 were determined by combining the pro forma adjusted net        of $      million, the $      million deferred tax asset that arises as a result of this offering and the $      million tax receivable liability to the selling members of Pzena Investment Management, LLC, which also arises as a result of this offering.
 


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    (in thousands)  
 
Pzena Investment Management, LLC Pro Forma Adjusted Net Deficit
  $          
Deferred Tax Asset
             
Tax Receivable Liability to Selling Members
             
         
Total
  $          
         
Common Stock
  $          
Additional Paid-In Capital
             
         
Total
  $          
         
 
(C) As a result of the elimination of our operating company’s obligation to redeem membership units under any circumstance, effective as of March 31, 2007, there will be no interest on mandatorily redeemable units as of and after such date. As a result of the acceleration, as of March 31, 2007, of the vesting of all membership units then subject to vesting, there will be no further unit-based compensation expense associated with any membership units then outstanding as of and after such date.
 
Accordingly, pro forma compensation and benefits expense has been reduced by the following amounts:
 
         
    For the Year
 
    Ended
 
    December 31, 2006  
 
Distributions on Compensatory Units
  $ 17,857  
Change in Redemption Value of Compensatory Units
    20,411  
Change from Formula to Fair Value Plan for Compensatory Units
    232,534  
         
Total
  $ 270,802  
         
 
         
    For the Three Months
 
    Ended
 
    March 31, 2007  
 
Distributions on Compensatory Units
  $ 12,087  
Change in Redemption Value of Compensatory Units
    15,969  
Acceleration of Vesting of Compensatory Units
    64,968  
Other Non-Cash Compensation
    1,901  
         
Total
  $ 94,925  
         
 
Pro forma interest on mandatorily redeemable units has been reduced to zero for the year ended December 31, 2006 and the three months ended March 31, 2007 to reflect the elimination of all mandatory redemption provisions from our operating company’s operating agreement.
 
(D) Represents the non-controlling interest allocation of  % (assuming that the underwriters do not exercise the overallotment option) of the income of Pzena Investment Management, Inc. to Pzena Investment Management, LLC.
 
(E) Reflects the impact of federal, state and local income taxes on the income of Pzena Investment Management, Inc. As a limited liability company, Pzena Investment Management, LLC has not been subject to these taxes, although it has been liable for the New York City Unincorporated Business Tax, which we refer to as the UBT. The effective rate of pro forma income tax is estimated to be approximately  %, and was determined by combining the projected federal, state and local income taxes.

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
 
The following tables set forth selected historical consolidated financial data of Pzena Investment Management, LLC as of the dates, and for the periods, indicated. The selected consolidated statements of operations data for the years ended December 31, 2004, 2005 and 2006, and the consolidated statements of financial condition data as of December 31, 2005 and 2006 have been derived from Pzena Investment Management, LLC’s audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data for the three months ended March 31, 2006 and 2007 and the consolidated statements of financial condition data as of March 31, 2007 have been derived from Pzena Investment Management, LLC’s unaudited consolidated financial statements included elsewhere in this prospectus. These unaudited consolidated financial statements have been prepared on substantially the same basis as our audited consolidated financial statements and include all adjustments that we consider necessary for a fair presentation of our consolidated results of operations and financial condition for the periods presented therein. Our results for the three months ended March 31, 2006 and 2007 are not necessarily indicative of our results for a full fiscal year. The selected consolidated statements of operations data for the years ended December 31, 2002 and 2003 and the consolidated statements of financial condition data as of December 31, 2002, 2003 and 2004 have been derived from Pzena Investment Management, LLC’s audited consolidated financial statements not included in this prospectus.
 
You should read the following selected historical consolidated financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated financial statements and the related notes included elsewhere in this prospectus.
                                                         
          Unaudited
 
    For the Year Ended December 31,     For the Three Months Ended March 31,  
    2002     2003     2004     2005     2006     2006     2007  
    (in thousands, except per unit and unit data)  
 
Statements of Operations Data:
                                                       
REVENUE
                                                       
Management Fees
  $ 20,453     $  25,132     $  46,954     $  75,003     $  113,984     $  24,647     $  35,298  
Incentive Fees
    12,364       8,452       4,942       3,593       1,103              
                                                         
Total Revenue
    32,817       33,584       51,896       78,596       115,087       24,647       35,298  
                                                         
EXPENSES
                                                       
Cash Compensation and Benefits
    12,643       14,118       18,837       23,832       34,830       8,445       8,899  
Distributions on Compensatory Units
    1,470       1,655       6,865       10,147       17,857       7,509       12,087  
Change in Redemption Value of Compensatory Units
    338       167       3,225       7,306       20,411       1,896       15,969  
Change from Formula to Fair Value Plan for Compensatory Units
                            232,534              
Acceleration of Vesting of Compensatory Units
                                        64,968  
Other Non-Cash Compensation
                                        1,901  
                                                         
Total Compensation and Benefits Expense
    14,451       15,940       28,927       41,285       305,632       17,850       103,824  
General and Administrative Expenses
    2,538       3,231       4,919       5,734       8,380       1,640       2,089  
                                                         
TOTAL OPERATING EXPENSES
    16,989       19,171       33,846       47,019       314,012       19,490       105,913  
                                                         
Operating Income (Loss)
    15,828       14,413       18,050       31,577       (198,925 )     5,157       (70,615 )
Other Income
    4,402       2,639       3,170       2,661       6,114       1,342       235  
                                                         
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY AND NON-CONTROLLING INTERESTS
    20,230       17,052       21,220       34,238       (192,811 )     6,499       (70,380 )
Provision for Income Taxes
    941       1,371       1,765       2,704       3,941       751       1,129  
Minority and Non-Controlling Interests
                3       67       1,997       740       (9 )
                                                         
Income (Loss) Before Interest on Mandatorily Redeemable Units
    19,289       15,681       19,452       31,467       (198,749 )     5,008       (71,500 )
Less: Interest on Mandatorily Redeemable Units
          15,681       19,452       60,136       516,708       16,544       16,575  
                                                         
NET INCOME (LOSS)
  $ 19,289     $ 0     $ 0     $ (28,669 )   $ (715,457 )   $ (11,536 )   $ (88,075 )
                                                         
                                                         
Per Unit Data:
                                                       
Basic and Diluted Net Income Per Unit(1)
  $ 2.55                                                  
Weighted Average Units Used in Basic and Diluted Earnings Per Unit(1)
    7,557,000                                                  
 
 
(1) Pursuant to FAS 150, membership units in our operating company were classified as liabilities in our consolidated financial statements as of, and for, the four years ended December 31, 2006 and as of, and for, the three months ended March 31, 2006 and 2007 because our operating company was required to redeem them upon the death of holders or, if applicable, the termination of their employment. Therefore, earnings per unit data has not been presented for these historical periods. Our operating company’s operating agreement was amended as of March 31, 2007 to eliminate its obligation to redeem membership units under any circumstance.


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          Unaudited
 
    As of December 31,     As of March 31,  
    2002     2003     2004     2005     2006     2007  
    (in thousands)  
 
Statements of Financial Condition Data:
                                               
Cash and Cash Equivalents
  $ 6,976     $ 7,108     $ 4,932     $ 4,969     $ 30,920     $ 24,139  
TOTAL ASSETS
    27,531       24,470       33,652       48,968       89,746       81,758  
                                                 
Capital Units Subject to Mandatory Redemption
    18,863       18,809       22,875       49,729       533,553        
TOTAL LIABILITIES
    27,531       24,470       33,649       66,672       806,313       10,019  
Minority and Non-Controlling Interests
                3       1,965       13,399       12,783  
MEMBERS’ EQUITY (EXCESS OF LIABILITIES OVER ASSETS)
  $ 0     $ 0     $ 0     $ (19,669 )   $ (729,966 )   $ 58,956  
 
For all periods presented, Pzena Investment Management, LLC operated as a partnership and was not subject to U.S. federal and certain state income taxes. Upon consummation of this offering, we will be subject to U.S. federal and certain state and local income taxes applicable to C-corporations.


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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the historical financial statements and related notes included elsewhere in this prospectus.
 
The historical financial data discussed below reflect the historical results of operations and financial condition of our operating company and do not give effect to our reorganization. See “Reorganization and Holding Company Structure” and “Unaudited Pro Forma Financial Information,” included elsewhere in this prospectus, for a description of our reorganization and its effect on our historical results of operations.
 
Overview
 
We are an investment management firm that utilizes a classic value investment approach in each of our investment strategies. We currently manage assets in ten value-oriented investment strategies across a wide range of market capitalizations in both U.S. and foreign capital markets. From December 31, 2002 to March 31, 2007, our AUM grew from $3.1 billion to $28.5 billion, representing a compound annual growth rate of 69%. As of March 31, 2007, we managed separate accounts on behalf of over 375 institutions and high net worth individuals and acted as sub-investment adviser for twelve SEC-registered mutual funds and eight offshore funds.
 
We will use the net proceeds of this offering to purchase membership units of our operating company from its three current non-employee members, which units will be reclassified as Class A units. In connection with this acquisition, we will become the sole managing member of our operating company and will continue to conduct the business now conducted by Pzena Investment Management, LLC. In addition, the membership units of all continuing members of our operating company will be reclassified as Class B units that have equal economic rights to the Class A units which we will hold. After giving effect to the reorganization transactions described above, we will hold approximately     % of the membership interests in our operating company. The continuing members, consisting of 23 of our current employees and two outside investors, will collectively hold the remaining approximately     % (or approximately     % and     %, respectively, if the underwriters exercise their over-allotment option in full). Net profits, net losses and distributions of our operating company will be allocated and made to its members pro rata in accordance with their respective membership units.
 
The historical results of operations discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are those of our operating company. After the completion of the reorganization, as the sole managing member of our operating company, we will control its business and affairs and, therefore, consolidate its financial results with ours. In light of our employees’ and other investors’ collective     % membership interest in our operating company immediately after the reorganization and this offering, we will reflect their interests as a non-controlling interest in our consolidated financial statements. As a result, our net income, after excluding a non-controlling interest, will represent     % of our operating company’s net income, and similarly, outstanding shares of our Class A common stock will represent     % of the outstanding membership units of our operating company. For more information on the pro forma impact of our reorganization, see “Unaudited Pro Forma Financial Information.”
 
Revenue
 
We generate revenue from management fees and incentive fees, which we collectively refer to as our advisory fees, by managing assets on behalf of separate accounts and acting as a sub-investment adviser for mutual funds and certain other investment funds. Our advisory fee income is recognized over the period in which investment management services are provided. Pursuant to the preferred accounting method under Emerging Issues Task Force Issue D-96, Accounting for Management Fees Based on a Formula (EITF D-96), income from incentive fees is recorded at the conclusion of the contractual performance period when all contingencies are resolved.


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Our advisory fees are primarily driven by the level of our AUM. Our AUM increases or decreases with the net inflows or outflows of funds into our various investment strategies and with the investment performance thereon. In order to increase our AUM and expand our business, we must develop and market investment strategies that suit the investment needs of our target clients and provide attractive returns over the long term. The value and composition of our AUM, and our ability to continue to attract clients, will depend on a variety of factors including, among other things:
 
  •  our ability to educate our target clients about our classic value investment strategies and provide them with exceptional client service;
 
  •  the relative investment performance of our investment strategies, as compared to competing products and market indices;
 
  •  competitive conditions in the investment management and broader financial services sectors;
 
  •  investor sentiment and confidence; and
 
  •  our decision to close strategies when we deem it to be in the best interests of our clients.
 
For our separately-managed accounts, we are paid fees according to a schedule which varies by investment strategy. The substantial majority of these accounts pay us management fees pursuant to a schedule in which the rate we earn on the AUM declines as the amount of AUM increases, subject to a minimum fee to manage each account. Certain of these clients pay us fees according to the performance of their accounts relative to certain agreed-upon benchmarks, which results in a slightly lower base fee, but allows us to earn higher fees if the relevant investment strategy out performs the agreed-upon benchmark.
 
Pursuant to our sub-investment advisory agreements, we are generally paid a management fee according to a schedule, in which the rate we earn on the AUM declines as the amount of AUM increases. Certain of these funds pay us fixed rate management fees. Due to the substantially larger account size of certain of these accounts, the average advisory fees we earn on them are lower than the advisory fees we earn on our separately-managed accounts.
 
The majority of advisory fees we earn on separately-managed accounts are based on the value of AUM at a specific date on a quarterly basis, either in arrears or advance. Advisory fees on certain of our separately-managed accounts, and with respect to most of the mutual funds that we sub-advise, are calculated based on the average of the monthly or daily market value. Advisory fees are also adjusted for any cash flows into or out of a portfolio, where the cash flow represents greater than 10% of the value of the portfolio. While a specific group of accounts may use the same fee rate, the method used to calculate the fee according to the fee rate schedule may differ as described above.
 
Our advisory fees may fluctuate based on a number of factors, including the following:
 
  •  changes in AUM due to appreciation or depreciation of our investment portfolios, and the levels of the contribution and withdrawal of assets by new and existing clients;
 
  •  distribution of AUM among our investment strategies, which have different fee schedules;
 
  •  distribution of AUM between separately-managed accounts and sub-advised funds, for which we generally earn lower overall advisory fees; and
 
  •  the level of our performance with respect to accounts on which we are paid incentive fees.
 
Expenses
 
Our expenses consist primarily of compensation and benefits expenses, as well as general and administrative expenses. These 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, bonuses, awards of equity to our employees and members of our operating company, changes in our employee count and mix, and competitive factors; and
 
  •  expenses, such as rent, professional service fees and data-related costs, incurred, as necessary, to run our business.


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Compensation and Benefits Expense
 
Our largest expense is compensation and benefits, which includes the salaries, bonuses, equity-based compensation and related benefits and payroll costs attributable to our members and employees. All compensation and benefits packages, including those of our executive officers, are benchmarked against relevant industry and geographic peer groups in order to attract and retain qualified personnel. We have experienced, and expect to continue to experience, a general rise in compensation and benefits expense commensurate with growth in headcount and with the need to maintain competitive compensation levels.
 
The table below describes the components of our compensation expense for the three years ended December 31, 2006 and the three months ended March 31, 2006 and 2007:
 
                                         
    For the Year Ended
    For the Three Months
 
    December 31,     Ended March 31,  
 
  2004     2005     2006     2006     2007  
                      (unaudited)  
    (in thousands)  
 
Cash Compensation and Benefits
  $ 18,837     $ 23,832     $ 34,830     $ 8,445     $ 8,899  
Distributions on Compensatory Units
    6,865       10,147       17,857       7,509       12,087  
Change in Redemption Value of Compensatory Units
    3,225       7,306       20,411       1,896       15,969  
Change from Formula to Fair Value Plan for Compensatory Units
                232,534              
Acceleration of Vesting of Compensatory Units
                            64,968  
Other Non-Cash Compensation
                            1,901  
                                         
Total Compensation Expense
  $ 28,927     $ 41,285     $ 305,632     $ 17,850     $ 103,824  
                                         
 
Historically, we granted profits-only interests in our operating company to selected employees. These profits-only interests entitled the holder to a share of the future distributions of our operating company. Pursuant to the terms of the operating agreement of our operating company prior to December 31, 2006, the holders of these profits-only interests had the right to require us to redeem their profits-only interests upon their termination of employment, or death, at a formula value equal to their pro rata share of our net investment advisory fee revenues for the four completed fiscal quarters preceding their termination, or death, as applicable. We have accounted for the distributions on profits-only interests, as well as the annual increase in their redemption value, in our operating company’s financial statements as compensation expense. On December 31, 2006, all then outstanding profits-only interests in our operating company were exchanged for capital units and our operating company’s operating agreement was amended to, among other things, change the formula pursuant to which it would be required to redeem the previously granted profits-only interests, subsequently exchanged for capital units, to one based on the fair market value of our firm, as determined by a third party appraiser. The change in the redemption value required us to a take a one-time compensation charge of $232.5 million in the fourth quarter of 2006, which was recorded as compensation expense, with respect to the capital units deemed compensatory. Our operating company’s operating agreement was further amended as of March 31, 2007 to eliminate its obligation to redeem units under any circumstance. Beginning with our interim financial statements for the three months ended June 30, 2007, we will no longer be required to include in compensation expense the distributions in respect of these units, or the change in their redemption value. As of March 31, 2007, we accelerated the vesting of all compensatory units then subject to vesting. The one-time charge associated with this acceleration, approximately $65.0 million, was recorded on March 31, 2007.
 
On January 1, 2007, we adopted the PIM LLC 2006 Equity Incentive Plan, pursuant to which we have issued restricted capital units, and options to acquire capital units, in our operating company, both of which vest ratably over a four-year period. We will use a fair-value method in recording the compensation expense associated with the granting of these restricted capital units, and options to acquire capital units, to new and


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existing members under the PIM LLC 2006 Equity Incentive Plan. Under this method, compensation expense is measured at the grant date based on the estimated fair value of the award and is recognized over the award’s vesting period. The fair value for the capital units will be determined by reference to the market price of our Class A common stock on the date of grant, since these units are exchangeable for shares of our Class A common stock on a one-for-one basis. The fair value for the options to acquire capital units will be determined by using an appropriate option pricing model on the grant date.
 
On January 1, 2007, we instituted a deferred compensation plan, in which employees who earn in excess of $600,000 per year are required to defer a portion of their compensation in excess of this amount. These deferred amounts may be invested, at the employee’s discretion, in certain of our investment strategies, restricted capital units of our operating company, or money market funds. All of these deferred amounts vest ratably over a four-year period and, therefore, will be reflected in our expenses over this period. Accordingly, our 2007 cash compensation expense will be lower than it would have been had we not instituted a deferred compensation plan. For the four-year period beginning in 2008, we expect the non-cash portion of our compensation expense associated with this deferred compensation plan to increase each successive year as these and subsequently deferred amounts are amortized through income. See “Management— Bonus Plan” for a further description of the terms of this plan.
 
General and Administrative Expenses
 
General and administrative expenses include professional and outside services fees, office expenses, depreciation and the costs associated with operating and maintaining our research, trading and portfolio accounting systems. Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the number of employees retained by us and the overall size and scale of our business operations.
 
Following this offering, we expect that we will incur additional expenses as a result of becoming a public company for, among other things, director and officer insurance, director fees, SEC reporting and compliance (including Sarbanes-Oxley compliance), transfer agent fees, professional fees and other similar expenses. These additional expenses will reduce our net income.
 
Other Income
 
Other income is derived primarily from interest income generated on our excess cash balances and investment income arising from our investments in various private investment vehicles that we employ to incubate new strategies. We expect the interest and investment components of other income, in the aggregate, to fluctuate based on market conditions, the success of our investment strategies and our dividend policy. See “Dividend Policy.”
 
Minority and Non-Controlling Interests
 
We have historically consolidated the results of operations of the private investment partnerships over which we exercise a controlling influence. After our reorganization, we will be the sole managing member of our operating company and will control its business and affairs and, therefore, consolidate its financial results with ours. In light of our employees’ and outside investors’ expected     % interest in our operating company immediately after the consummation of the reorganization and this offering, we will reflect their membership interests as a non-controlling interest in our consolidated financial statements. As a result, our net income, after excluding minority and non-controlling interests, will represent     % of our operating company’s net income, and similarly, outstanding shares of our Class A common stock will represent     % of the outstanding membership units of our operating company.
 
Provision for Income Tax
 
While our operating company has historically not been subject to U.S. federal and certain state income taxes, it has been subject to the UBT. As a result of our reorganization, we will become subject to taxes applicable to C-corporations. We expect our effective tax rate, and the absolute dollar amount of our tax


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expense, to increase as a result of this reorganization. For more information on the pro forma income taxes applicable to us under C-corporation status, see “The Reorganization and Our Holding Company Structure” and “Unaudited Pro Forma Financial Information.”
 
Interest on Mandatorily Redeemable Units
 
Capital units in our operating company include capital units issued to our founders and those purchased by certain of our employees. These capital units entitle the holder to a share of the distributions of our operating company.
 
We have adopted Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, or FAS 150. FAS 150 establishes classification and measurement standards for three types of free-standing financial instruments that have characteristics of both liabilities and equity. Instruments within the scope of FAS 150 must be classified as liabilities in our consolidated financial statements and be reported at settlement date value. FAS 150 was effective for us as of July 1, 2003. Prior to January 1, 2005, capital units in our operating company were mandatorily redeemable at book value. Effective January 1, 2005, the operating agreement of our operating company was amended to require that capital units be mandatorily redeemed upon a holder’s death based on such holder’s pro rata share of our operating company’s net fee revenue (as defined in the operating agreement) for the four completed fiscal quarters immediately preceding the holder’s death. These redemption amounts were exclusive of any accumulated undistributed earnings associated with these capital units, which were required to be paid additionally to the holder’s estate. Pursuant to FAS 150, distributions on capital units, and incremental changes in the net liability associated with their redemption value, were recorded as a component of interest on mandatorily redeemable units in our consolidated statements of operations beginning in 2003.
 
On December 31, 2006, the operating agreement of our operating company was amended to, among other things, change the formula pursuant to which we would be required to redeem the capital units to one based on the fair market valuation of our firm determined by a third-party appraiser. The restated terms of redemption required us to a take a charge of $463.8 million in the fourth quarter of 2006, which was included in interest on mandatorily redeemable units. The operating agreement of our operating company was further amended as of March 31, 2007, such that our operating company will no longer be required to redeem any capital units for cash upon any member’s death or, if applicable, their termination of employment. Accordingly, beginning with our financial statements for the three months ended June 30, 2007, we no longer have any expense for interest on mandatorily redeemable units.


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Operating Results
 
Revenues
 
Our revenues from advisory fees earned on our separately managed accounts and our sub-advised accounts for the three years ended December 31, 2006 and the three months ended March 31, 2006 and 2007 are described below:
 
                         
    Separately-
    Sub-
       
    Managed
    Advised
       
Revenue
  Accounts     Accounts     Total  
    (in millions)  
 
                                                  
For the Year Ended:
                       
December 31, 2004
  $ 46.8     $ 5.1     $      51.9  
December 31, 2005
    64.1       14.5       78.6  
December 31, 2006
    85.7       29.4       115.1  
                         
For the Three Months Ended:
                       
    (unaudited)
March 31, 2006
  $ 18.8     $ 5.8     $ 24.6  
March 31, 2007
    25.2       10.1       35.3  
 
The growth of our AUM in our separately-managed accounts and our sub-advised accounts from December 31, 2003 to March 31, 2007 is described below:
 
                         
    Separately-
    Sub-
       
    Managed
    Advised
       
Assets Under Management       
  Accounts(1)     Accounts(1)     Total(1)  
    (in billions)  
 
                                                  
As of December 31, 2003
  $ 5.3     $ 0.5     $      5.8  
Net Inflows
    1.4       1.8       3.2  
Appreciation
    1.4       0.3       1.7  
                         
As of December 31, 2004
    8.1       2.6       10.7  
Net Inflows
    2.3       2.7       5.0  
Appreciation
    0.6       0.5       1.0  
                         
As of December 31, 2005
    11.0       5.8       16.8  
Net Inflows
    2.6       4.1       6.7  
Appreciation
    2.3       1.5       3.8  
                         
As of December 31, 2006
    15.9       11.4       27.3  
Net Inflows
    0.6       0.6       1.1  
Appreciation
    0.1       (0.1 )     0.0  
                         
As of March 31, 2007
  $ 16.5     $ 12.0     $ 28.5  
                         
 
 
(1) Figures may not add due to rounding.
 
Three Months Ended March 31, 2007 versus Three Months Ended March 31, 2006
 
Our total revenue for the three months ending March 31, 2007 was $35.3 million, an increase of $10.7 million, or 43.2%, from $24.6 million for the three months ending March 31, 2006. This increase was driven primarily by growth in our AUM, which increased by $8.7 billion, or 44.2%, to $28.5 billion at March 31, 2007 from $19.8 billion at March 31, 2006. Contributing to the growth in AUM was $5.3 billion of net inflows and $3.5 billion of appreciation. Our weighted average fee fell to 0.504% for the three months ended March 31, 2007, from 0.529% for the three months ended March 31, 2006. The weighted average fee declined primarily due to the faster growth in sub-advised AUM (which grew 62.5%), which carries a lower


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average fee, compared with separately-managed account AUM (which grew 33.4%). At March 31, 2007, sub-advised AUM accounted for 42% of our total AUM, as compared to 37% at March 31, 2006.
 
Most of the year-over-year growth in our AUM was in our Large Cap Value investment strategy, in which AUM increased by $6.3 billion, or 52.3%, to $18.5 billion at March 31, 2007 from $12.1 billion at March 31, 2006. The AUM of our sub-advised John Hancock Classic Value Fund contributed $3.1 billion of this growth.
 
During the three months ended March 31, 2007, our AUM increased by $1.2 billion, or 4.3%, to $28.5 billion at March 31, 2007 from $27.3 billion at December 31, 2006. All of the increase was due to net inflows, with performance essentially flat for the three months ended March 31, 2007. Our non-U.S. investment strategies contributed $0.7 billion to AUM growth, increasing by 53.1% to $2.0 billion at March 31, 2007 from $1.3 billion at December 31, 2006. As of March 31, 2007, our non-U.S. investment strategies accounted for 6.8% of our total AUM.
 
Year Ended December 31, 2006 versus Year Ended December 31, 2005
 
Our total revenue increased by $36.5 million, or 46.4%, to $115.1 million for the year ended December 31, 2006, from $78.6 million for the year ended December 31, 2005. This increase was driven primarily by growth in our AUM, which increased by $10.5 billion, or 62.5%, to $27.3 billion at December 31, 2006 from $16.8 billion at December 31, 2005. Contributing to the growth in AUM was $6.7 billion of net inflows and $3.8 billion of appreciation. Our weighted average fee fell to 0.521% for the year ended December 31, 2006 from 0.595% for the year ended December 31, 2005. The weighted average fee fell due to the faster growth in sub-advised AUM (which grew 96.6%), which carries a lower weighted average fee, compared with separately-managed account AUM (which grew 44.5%). Also contributing to the decline was a reduction of $2.5 million in our performance fees as compared to the prior year. At year end, sub-advised AUM accounted for 42% of our total AUM, as compared to 35% at December 31, 2005.
 
Most of our growth in AUM in 2006 was in our Large Cap Value investment strategy, in which AUM increased by $8.7 billion, or 92%, to $18.1 billion at December 31, 2006 from $9.4 billion at December 31, 2005. The AUM of our sub-advised John Hancock Classic Value Fund contributed $4.3 billion of that growth. During 2006, we launched our Global Value and International Value investment strategies and closed our Large Cap Value investment strategy to new assets. Our non-U.S. investment strategies contributed $1.3 billion to AUM growth during 2006.
 
Year Ended December 31, 2005 versus Year Ended December 31, 2004
 
Our total revenues increased by $26.7 million, or 51.4%, to $78.6 million for the year ended December 31, 2005 from $51.9 million for the year ended December 31, 2004. This increase was driven primarily by growth in our AUM, which increased by $6.1 billion, or 57.0%, to $16.8 billion at December 31, 2005 from $10.7 billion at December 31, 2004. Of this increase, $5.0 billion was attributable to net new inflows of clients’ assets and $1.0 billion was the result of investment performance. Our weighted average fee fell to 0.595% for the year ended December 31, 2005 from 0.701% for the year ended December 31, 2004. The weighted average fee fell due to the faster growth in sub-advised AUM (which grew 124.9%), which carries a lower weighted average fee, compared with separately-managed accounts (which grew 35.2%). At year-end, sub-advised AUM accounted for 35% of our total AUM, as compared to 24% at December 31, 2004. Also contributing to the decline in the weighted average fee was the increase in the portion of our AUM attributed to separately-managed accounts managed in our Large Cap Value investment strategy, which carries a lower average fee than our other investment strategies. At year-end, our overall Large Cap Value investment strategy accounted for 56% of our total AUM, as compared to 35% at December 31, 2004. Further contributing to the decline was a reduction of $1.3 million in our performance fees as compared to the prior year.
 
In late 2003, we launched our Large Cap Value investment strategy, and in 2004 we closed our Value Service and Mid-Cap Value investment strategies to new investors. Accordingly, most of our growth in assets under management in 2005 was in our Large Cap Value strategy, in which AUM increased by $5.6 billion, to $9.4 billion at December 31, 2005 from $3.8 billion at December 31, 2004. The AUM of our sub-advised John Hancock Classic Value Fund contributed $2.7 billion of that growth.


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Operating Expenses
 
Our operating expenses are driven primarily by our compensation costs. The table included in “— Compensation and Benefits Expense” describes the components of our compensation expense for the three years ended December 31, 2006 and the three months ended March 31, 2006 and 2007. Much of the variability in our compensation costs have been driven by distributions made on our compensatory units outstanding and the incremental increases or decreases in their redemption value subsequent to their grant date. Beginning with the three months ending June 30, 2007, these items will no longer be reflected in compensation expense.
 
Three Months Ended March 31, 2007 versus Three Months Ended March 31, 2006
 
Total operating expenses increased by $86.4 million to $105.9 million for the three months ended March 31, 2007 from $19.5 million for the three months ended March 31, 2006. This increase was primarily attributable to increased compensation and benefits expense.
 
Compensation and benefits expense increased by $86.0 million to $103.8 million for the three months ended March 31, 2007 from $17.9 million for the three months ended March 31, 2006. This increase was primarily attributable to the $65.0 million increase associated with the acceleration, as of March 31, 2007, of the vesting of all compensatory units then subject to vesting, coupled with the $14.2 million increase in the redemption value of compensatory membership units outstanding and the $4.6 million increase in the distributions made to employees with respect to these units in the three months ended March 31, 2007 compared with the three months ended March 31, 2006. The balance of the increase was attributable to a $0.7 million increase in cash and non-cash compensation awarded to existing employees, as well as costs associated with the hiring of additional employees across all functional areas of the company during the twelve months ended March 31, 2007. Our employee count increased from 52 at March 31, 2006 to 67 at March 31, 2007.
 
General and administrative expenses increased by $0.4 million, or 27.4%, to $2.1 million for the three months ended March 31, 2007 from $1.6 million for the three months ended March 31, 2006. This increase was mainly attributable to a $0.2 million increase in professional and outside services fees. General office- and facility-related expenses also increased by $0.2 million in the three months ended March 31, 2007 compared to the three months ended March 31, 2006, mainly as a result of the increase in headcount and general inflation.
 
Year Ended December 31, 2006 versus Year Ended December 31, 2005
 
Total operating expenses increased by $267.0 million to $314.0 million for the year ended December 31, 2006 from $47.0 million for the year ended December 31, 2005. This was primarily attributable to a one-time compensation charge of $232.5 million due to the change in the redemption value of profits-only interests in our operating company from a formula-based amount to a fair value-based amount pursuant to an amendment and restatement of the operating agreement of our operating company on December 31, 2006.
 
Compensation and benefits expense increased by $264.3 million to $305.6 million for the year ended December 31, 2006 from $41.3 million for the year ended December 31, 2005. This increase was primarily attributable to the $232.5 million one-time compensation charge described above. Another $7.7 million of the increase was attributable to an increase in distributions made to employees with respect to compensatory membership units and $13.1 million to the increase in their redemption value. The balance of the increase, or $11.0 million, was attributable to an increase in cash compensation and bonuses awarded to existing employees, as well as costs associated with the 2006 hiring of employees across all functional areas of the company and the full-year effect of employees added during the previous year. Our employee count increased from 47 at December 31, 2005 to 65 at December 31, 2006.
 
General and administrative expenses increased by $2.6 million, or 46.1%, to $8.4 million for the year ended December 31, 2006 from $5.7 million for the year ended December 31, 2005. This increase was mainly attributable to a $1.2 million increase in professional and outside services fees. General office- and facility-related expenses also increased from $1.3 million in 2005 to $1.8 million in 2006, mainly as a result of the


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increase in headcount and the full-year effect of our move to new, larger office space, which was completed in the fourth quarter of 2005.
 
Year Ended December 31, 2005 versus Year Ended December 31, 2004
 
Total operating expenses increased by $13.2 million, or 38.9%, to $47.0 million for the year ended December 31, 2005 from $33.8 million for the year ended December 31, 2004, due primarily to a $7.4 million increase in equity-based compensation charges and headcount-related expenses associated with our growth.
 
Compensation and benefits expense increased by $12.4 million, or 42.7%, to $41.3 million for the year ended December 31, 2005 from $28.9 million for the year ended December 31, 2004. This increase was primarily driven by an increase in equity-based compensation charges of $7.4 million and an increase in cash bonuses awarded to existing employees, as well as the hiring of additional employees across all of our functional areas. Our employee count increased to 47 at December 31, 2005 from 36 at December 31, 2004.
 
General and administrative expenses increased by $0.8 million, or 16.6%, to $5.7 million for the year ended December 31, 2005 from $4.9 million for the year ended December 31, 2004. This was primarily attributable to a $0.6 million increase in professional and outside services fees. Depreciation and facility-related expenses also grew due to the write-off of existing leasehold improvements and the increased occupancy costs resulting from our move to new, larger office space, which was completed in the fourth quarter of 2005.
 
Other Income
 
Three Months Ended March 31, 2007 versus Three Months Ended March 31, 2006
 
Other income decreased by $1.1 million, or 82.5%, to $0.2 million for the three months ended March 31, 2007 from $1.3 million for the three months ended March 31, 2006. The primary reason for this decline was lower investment income due to a decrease in the amount we invested in private investment vehicles we manage during the three months ended March 31, 2007, as well as reduced investment performance on our remaining investments in these and other private investment vehicles, somewhat offset by slightly higher interest income, compared with the three months ended March 31, 2006.
 
Year Ended December 31, 2006 versus Year Ended December 31, 2005
 
Other income increased by $3.4 million to $6.1 million for the year ended December 31, 2006 from $2.7 million for the year ended December 31, 2005. Of this increase, $1.9 million represents the income attributable to minority investors arising from the initial consolidation of our investments in our Global Value and International Value investment strategies. The majority of the remainder of the growth in other income was associated with additional investment income due to an increase in the amount we invested in private investment vehicles we manage during the year.
 
Year Ended December 31, 2005 versus Year Ended December 31, 2004
 
Other income decreased by $0.5 million, or 16.1%, to $2.7 million for the year ended December 31, 2005 from $3.2 million for the year ended December 31, 2004. The majority of the decline in other income was associated with decreases in the performance of several of our private investment vehicles.
 
Provision for Income Taxes
 
Three Months Ended March 31, 2007 versus Three Months Ended March 31, 2006
 
The provision for income taxes increased by $0.4 million, or 50.3%, to $1.1 million for the three months ended March 31, 2007 from $0.8 million for the three months ended March 31, 2006, due to an increase in taxable income. Our effective tax rate for the three months ending March 31, 2007 was not meaningful, nor is a comparison of it to our effective tax rate for the three months ending March 31, 2006, due to expenses related to our units, which are not deductible for tax purposes.


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Year Ended December 31, 2006 versus Year Ended December 31, 2005
 
The provision for income taxes increased by $1.2 million, or 45.7%, to $3.9 million for the year ended December 31, 2006 from $2.7 million for the year ended December 31, 2005, due to an increase in taxable income. Our effective tax rate in 2006 was not meaningful, nor is a comparison of it to our effective tax rate for 2005, since the one-time compensation charge of $229.4 million in 2006 was not deductible for tax purposes.
 
Year Ended December 31, 2005 versus Year Ended December 31, 2004
 
The provision for income taxes increased by $0.9 million, or 53.2%, to $2.7 million for the year ended December 31, 2005 from $1.8 million for the year ended December 31, 2004, due to an increase in our taxable income. Our effective tax rate decreased from 8.3% to 7.9%, primarily driven by the relatively smaller non-deductible compensation expense as a portion of income in 2005, as compared to 2004.
 
Minority and Non-Controlling Interests
 
Three Months Ended March 31, 2007 versus Three Months Ended March 31, 2006
 
Minority and non-controlling interests decreased from $0.7 million in the three months ended March 31, 2006 to no minority interests for the three months ended March 31, 2007. This decrease was almost entirely attributable to the effects of our resignation as the managing member of two private investment partnerships and the liquidation of our investments in them, in October 2006. Consequently, there are no minority and non-controlling interests in these entities during the three months ended March 31, 2007.
 
Year Ended December 31, 2006 versus Year Ended December 31, 2005
 
Minority and non-controlling interests increased by $1.9 million to $2.0 million for the year ended December 31, 2006 from $0.1 million for the year ended December 31, 2005. This increase was almost entirely attributable to the effects of our initial adoption of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, or FIN 46(R), which resulted in the consolidation of two private partnerships in which we were investors.
 
Year Ended December 31, 2005 versus Year Ended December 31, 2004
 
Minority and non-controlling interests increased to $0.1 million for the year ended December 31, 2005 from no significant minority interest for the year ended December 31, 2004. This increase is entirely the result of the full-year effect of the consolidation of a private investment partnership in 2005, which was formed in December 2004.
 
Interest on Mandatorily Redeemable Units
 
Three Months Ended March 31, 2007 versus Three Months Ended March 31, 2006
 
Interest on mandatorily redeemable units decreased by $0.1 million to $16.4 million for the three months ended March 31, 2007 from $16.5 million for the three months ended March 31, 2006. The decrease was due primarily to a decrease in the incremental liability for redemption under the fair value-based formula used for the three months ended March 31, 2007 compared with the three months ended March 31, 2006. This decrease was almost entirely offset by an increase in interest on mandatorily redeemable units during the three months ended March 31, 2007 compared to the three months ended March 31, 2006, due to the fact that the final tax distribution to members of our operating company for 2006 was made in January 2007, whereas the final tax distribution to members of our operating company for 2005 was made in December 2005.
 
Year Ended December 31, 2006 versus Year Ended December 31, 2005
 
Interest on mandatorily redeemable units increased by $456.6 million to $516.7 million for the year ended December 31, 2006 from $60.1 million for the year ended December 31, 2005. The primary reason for this


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increase was a change in the terms of redemption of our capital units arising from the change from a formula-based repurchase plan to a fair-value plan concurrent with our reorganization on December 31, 2006.
 
Year Ended December 31, 2005 versus Year Ended December 31, 2004
 
Interest on mandatorily redeemable units increased by $40.7 million to $60.1 million for the year ended December 31, 2005 from $19.5 million for the year ended December 31, 2004. The primary reason for this increase was a change in the terms of redemption of our capital units. Effective January 1, 2005, our operating agreement was amended to require that all capital units be repurchased in the event of the holder’s termination, or death, at a formula-based price. Prior to this amendment, all capital units were required to be repurchased at their book value at the time of the holder’s death. Also contributing to the increase in expense was an increase in distributions to capital unit holders during the year ended December 31, 2005 compared to the year ended December 31, 2004.
 
Liquidity and Capital Resources
 
Historically, the working capital needs of our business have primarily been met through cash generated by our operations. In addition, in June 2006, we obtained a one-year, $7 million line of credit which allowed us to borrow amounts at various interest rates based on the LIBOR Market Index Rate plus 2.35%. At March 31, 2007, no amount was outstanding under this line of credit, which matures in June 2007.
 
We expect that our cash and liquidity requirements after the consummation of this offering will be met primarily through cash generated by our operations and, to a lesser extent, borrowings under a new revolving credit facility. We intend to satisfy our capital requirements over the next twelve months in a similar fashion. Shortly before the consummation of this offering, we expect to borrow $       million pursuant to a     -year term loan facility, the proceeds of which will be used to finance a special one-time distribution to the current members of our operating company. Concurrently, we also expect to establish a $      million revolving credit facility, the borrowing under which would mature in     , to finance our short-term working capital needs.
 
We anticipate that distributions to the members of our operating company, which, immediately following this offering, will consist of 23 of our current employees, two outside investors and us, will continue to be a material use of our cash resources and will vary in amount and timing based on our operating results and dividend policy. As discussed under “Dividend Policy,” we currently intend to declare regular cash dividends to our Class A stockholders. We are a holding company and have no material assets other than our ownership of membership interests in our operating company As a result, we will depend upon distributions from our operating company to pay any dividends to our Class A stockholders. We expect to cause our operating company to make distributions to us in an amount sufficient to cover dividends, if any, declared by us.
 
Our purchase of membership units of our operating company concurrently with this offering, and the future exchanges of Class B units of our operating company, are expected to result in increases in our share of the tax basis of the tangible and intangible assets of our operating company at the time of our acquisition and these future exchanges, which will increase the tax depreciation and amortization deductions that otherwise would not have been available to us. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of tax that we would otherwise be required to pay in the future. We will enter into a tax receivable agreement with the current members of our operating company and any future holders of Class B units pursuant to which we will agree to pay them 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize as a result of these increases in tax basis and of certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments thereunder. While the actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of shares of our Class A common stock at the time of the exchange, the extent to which such exchanges are taxable, the amount and timing of our income and the tax rates then applicable, we expect that as a result of the size of the increases in the tax basis of our tangible and intangible assets, the payments that we may make under the tax receivable agreement likely will be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize the


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full tax benefit of the increased depreciation and amortization of our assets, based on the midpoint of the price range per share of our Class A common stock set forth on the cover of this prospectus, we expect that future payments to the three current non-employee members of our operating company in respect of our purchase of membership units from them will aggregate $      million and range from approximately $     million to $     million per year over the next 15 years (or $     million and range from approximately $      million to $     million per year over the next 15 years if the underwriters exercise in full their option to purchase additional shares of our Class A common stock). A $1.00 increase (decrease) in the assumed initial public offering price of $      per Class A share would increase (decrease) the aggregate amount of future payments to these non-employee members in respect of the purchase by $      million (or $      million if the underwriters exercise in full their option to purchase additional shares of our Class A common stock). Future payments to the current members of our operating company and future holders of Class B units in respect of subsequent exchanges would be in addition to these amounts and are expected to be substantial.
 
Cash Flows
 
Net cash used by operating activities increased $4.0 million to $6.2 million for the three months ended March 31, 2007, from $2.3 million for the three months ended March 31, 2006, primarily as a result of the fact that the final tax distribution to members of our operating company for 2006 was made in January 2007 compared to the prior year when the final tax distribution to members of our operating company for 2005 was paid in December 2005. Operating activities provided $16.4 million for the year ended December 31, 2006 and used $11.3 million of net cash for the year ended December 31, 2005. This difference arose primarily as a result of higher net income in the year ended December 31, 2006, adjusted to exclude non-cash compensation and non-cash members’ interest expense, compared to the year ended December 31, 2005 and lower tax distributions paid to members of our operating company in the year ended December 31, 2006, due to the fact that the final tax distribution to members of our operating company for 2006 was made in January 2007, whereas the final tax distribution to members of our operating company for 2005 was made in December 2005. Operating activities used $11.3 million for the year ended December 31, 2005 and provided $3.1 million for the year ended December 31, 2004, primarily as a result of increased distributions to members (reflected as interest on mandatorily redeemable units) and higher working capital requirements in the year ended December 31, 2006 compared to the year ended December 31, 2005. Beginning on March 31, 2007, the effective date of an amendment to the operating agreement of our operating company to eliminate its obligation to redeem a member’s units therein under any circumstance, as well as the acceleration of the vesting of all compensatory units then subject to vesting, we expect distributions on all membership units to be classified as financing activities in our consolidated statements of cash flows. As a result, we expect net cash provided by operating activities to increase, and net cash provided by financing activities to decrease, as a result of this reclassification beginning in the three months ended June 30, 2007.
 
Investing activities consist primarily of investments in affiliates and other investment partnerships, as well as capital expenditures. Net cash provided by investing activities decreased from $5.7 million for the three months ended March 31, 2006 to no net cash provided for the three months ended March 31, 2007, primarily driven by the liquidation of our holdings in certain private investment vehicles in October 2006. Net cash provided by investing activities increased by $2.1 million to $2.5 million for the year ended December 31, 2006 from $0.4 million for the year ended December 31, 2005, primarily driven by the liquidation of some of our holdings in certain private investment vehicles. Investing activities provided $0.4 million in net cash for the year ended December 31, 2005 and used $5.3 million for the year ended December 31, 2004. This difference arose primarily as a result of our investment in investment partnerships in the year ended December 31, 2004 that was not replicated in the year ended December 31, 2005, offset by the redemption of certain of our investments in investment partnerships in the year ended December 31, 2005. In addition, we also incurred more significant capital expenditures in the year ended December 31, 2005 as compared to the prior year due to our move to new office spaces in that year. We anticipate that the funding requirements necessary to develop new strategies will continue to be a significant use of our cash resources as we grow and expand our product offerings.


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Financing activities consist primarily of contributions from members and contributions from, and distributions to, minority and non-controlling interests. Financing activities used $0.6 million for the three months ended March 31, 2007 and provided $0.2 million for the three months ended March 31, 2006. This difference arose as a result of a decrease in net cash flows from minority and non-controlling interests in the three months ended March 31, 2007, primarily due to the liquidation of the Pzena Investment Management Select Fund, L.P. during that period. Net cash provided by financing activities decreased $4.3 million, or 39.5%, to $6.6 million for the year ended December 31, 2006, from $10.9 million for the year ended December 31, 2005. This was primarily as a result of lower proceeds from the exercise of options to acquire membership units in the year ended December 31, 2006 compared to the year ended December 31, 2005. Net cash provided by financing activities increased to $10.9 million for the year ended December 31, 2005, from no net cash provided by financing activities for the year ended December 31, 2004. This difference arose primarily as a result of higher proceeds from the exercise of options to acquire membership units and increased net cash inflows from minority and non-controlling interests in the year ended December 31, 2005 compared to the year ended December 31, 2004. Following the amendment of the operating agreement of our operating company, effective as of March 31, 2007, to eliminate its requirement to redeem units under any circumstance and the acceleration, as of March 31, 2007, of the vesting of all compensatory units then subject to vesting, we expect distributions on all membership units to be classified as financing activities in our consolidated statement of cash flows, beginning with the three months ending June 30, 2007. As a result, we expect net cash provided by financing activities to decrease, and net cash provided by operating activities to increase, as a result of this reclassification beginning with the three months ending June 30, 2007. We anticipate that distributions to the members of our operating company will continue to be a material use of our cash resources, and will vary in amount and timing based on our operating results and dividend policy.
 
Contractual Obligations
 
The following table sets forth information regarding our contractual obligations as of December 31, 2006.
 
                                         
    Payments Due by Period  
          Less Than
                More Than
 
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (in millions)  
 
Operating Lease
  $ 17.8     $ 1.8     $ 3.9     $ 4.1     $ 8.0  
                                         
Total
  $ 17.8     $ 1.8     $ 3.9     $ 4.1     $ 8.0  
                                         
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements as of March 31, 2007.
 
Critical Accounting Policies and Estimates
 
The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, our results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
 
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.
 
Unit-based Compensation
 
On January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (FAS 123(R)), which requires the recognition of the cost of equity-based compensation based on the


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fair value of the award as of its grant date. Prior to the adoption of FAS 123(R), we accounted for our unit-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations. The adoption of FAS 123(R) did not have a material effect on the results of operations or financial condition of the Company.
 
Pursuant to FAS 123(R), we recognize compensation expense associated with the granting of equity-based compensation based on the fair value of the award as of its grant date if it is classified as an equity instrument, and on the changes in settlement amount for awards that are classified as liabilities. Prior to March 31, 2007, our compensatory membership unit-based awards had repurchase features that required us to classify them as liabilities. Accordingly, distributions paid on these membership units are classified as compensation expense. In addition, changes to their redemption values subsequent to their grant dates have been included in compensation expense. On December 31, 2006, we exchanged all then outstanding profits-only interests into new units and amended the operating agreement of our operating company to, among other things, change the formula pursuant to which we would be required to redeem the previously granted profits-only interests, subsequently exchanged for membership units, to one based on the fair market valuation of our firm determined by a third-party appraiser. The restated terms of redemption required us to a take a one-time compensation charge of $229.4 million in the three months ended December 31, 2006, which was recorded as compensation expense, with respect to the membership units deemed compensatory. Our operating agreement was further amended as of March 31, 2007, such that our operating company will no longer be required to redeem any membership units for cash upon a member’s termination or death. Accordingly, beginning with our interim financial statements for the three months ended June 30, 2007, we will no longer be required to include in compensation expense the distributions in respect of these membership units or the change in their redemption value.
 
Consolidation
 
Our policy is to consolidate all majority-owned subsidiaries in which we have a controlling financial interest and variable-interest entities where we are deemed to be the primary beneficiary. We also consolidate non-variable-interest entities in which we act as the general partner or managing member. All significant intercompany transactions and balances have been eliminated.
 
Investments in private investment partnerships in which we have a minority interest and exercise significant influence are accounted for using the equity method. Such investments are reflected on the consolidated statements of financial condition as investments in affiliates and are recorded at the amount of capital reported by the respective private investment partnerships. Such capital accounts reflect the contributions paid to, distributions received from, and the equity earnings of, the private investment partnerships. The earnings of these private investment partnerships are included in equity in earnings of affiliates in the consolidated statements of operations.
 
Income Taxes
 
Historically, and for all periods presented in the consolidated financial statements included in this prospectus, we have operated as a limited liability company and have elected to be treated as a partnership for tax purposes. No provision has been made for federal or state income taxes because it is the personal responsibility of the individual members to separately report their proportionate share of our taxable income or loss. A provision has been made for the UBT. We are a cash basis taxpayer.
 
We account for the UBT pursuant to the asset and liability method, which requires deferred income tax assets and liabilities to be recorded for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The income tax provision or credit is the tax payable or refundable for the period, plus or minus the change during the period in deferred tax assets and liabilities.


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Management judgment is required in determining our provision for income taxes, evaluating our tax positions and establishing deferred tax assets and liabilities. The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to earnings would result.
 
Recently Issued Accounting Pronouncements
 
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109, or FIN 48. FIN 48 prescribed the minimum recognition threshold a tax position must meet in connection with accounting for uncertainties in income tax positions taken or expected to be taken by an entity before being measured and recognized in the financial statements. We adopted FIN 48 on January 1, 2007. The impact of the adoption of this standard was not material.
 
In September 2006, the FASB released Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or FAS 157. FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. The application of FAS 157 is required for fiscal years beginning after November 15, 2007. Management is in the process of assessing the impact of this standard on our financial statements.
 
Qualitative and Quantitative Disclosures Regarding Market Risk
 
Market Risk
 
Our exposure to market risk is directly related to our role as investment adviser for the separate accounts we manage and the funds for which we act as sub-investment adviser. All of our revenue for the year ended December 31, 2006, and the three months ended March 31, 2007, was derived from advisory fees, which are typically based on the market value of AUM. Accordingly, a decline in the prices of securities would cause our revenue and income to decline due to a decrease in the value of the assets we manage. In addition, such a decline could cause our clients to withdraw their funds in favor of investments offering higher returns or lower risk, which would cause our revenue and income to decline further.
 
We are also subject to market risk due to a decline in the prices of our investments in affiliates and the value of the holdings of our consolidated subsidiaries, both of which consist primarily of marketable securities. At March 31, 2007, the fair value of these assets was $13.2 million. Assuming a 10% increase or decrease, the fair value would increase or decrease by $1.3 million at March 31, 2007.
 
Interest Rate Risk
 
The $     million that we expect to borrow under a     -year term loan shortly before the consummation of this offering, and any amounts that we borrow under the $     million revolving credit facility that we expect to obtain also at that time, will accrue interest at variable rates. Interest rate changes may therefore affect the amount of our interest payments, future earnings and cash flows. Based on the debt obligations that we expect to have as of the consummation of this offering, we estimate that the related interest expense payable would increase by $      on an annual basis, in the event interest rates were to increase by one percentage point.


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BUSINESS
 
Overview
 
Founded in late 1995, Pzena Investment Management, LLC is a premier value-oriented investment management firm with a record of investment excellence and exceptional client service. We have established a positive, team-oriented culture that enables us to attract and retain the best people. Over the past eleven years, we have built a diverse, global client base of respected and sophisticated institutional investors, high net worth individuals and select third-party distributed mutual funds for which we act as sub-investment adviser.
 
We utilize a classic value approach to investing and seek to make investments in good businesses at low prices. Our approach and process have helped us achieve attractive returns over the long term. We currently manage assets in ten value-oriented investment strategies across a wide range of market capitalizations in both U.S. and foreign capital markets. Over the period from December 31, 2002 to March 31, 2007, our AUM grew from $3.1 billion to $28.5 billion, representing a compound annual growth rate of 69%. As of March 31, 2007, we managed money for over 375 separate client relationships on behalf of institutions and high net worth individuals and acted as sub-investment adviser to twelve SEC-registered mutual funds and eight offshore funds.
 
Our investment discipline and our commitment to a classic value approach have been important elements of our success. We construct concentrated portfolios of inexpensive, good businesses selected through a rigorous fundamental research process similar to the approach of a private equity investor. Our investment decisions are not motivated by short-term results or aimed at closely tracking specific market benchmarks. Generating excess returns by utilizing a classic value investment approach requires:
 
  •  willingness to invest in companies before their stock prices reflect signs of business improvement, and
 
  •  significant patience, based upon our understanding of the business’ fundamentals, and our long-term investment horizon.
 
As a people-driven business, our success depends on our entire team of 67 employees, including 23 employee members who collectively own     % of the ownership interests in our operating company. This group is led by our four-person Executive Committee, consisting of Messrs. Pzena, Goetz, Krishna and Lipsey.
 
Our Competitive Strengths
 
We believe that the attractive performance of our investment strategies, and our success in the asset management business, are based on the following competitive strengths:
 
•  Focus on Investment Excellence.   We recognize that we must achieve investment excellence in order to attain long-term business success. All of our business decisions, including the design of our investment process and our willingness to limit AUM in our investment strategies, are focused on producing attractive long-term investment results. According to eVestment Alliance, LLC, all five of our investment strategies that have a five-year track record have ranked in the top half of their institutional peer groups as of March 31, 2007. Our four largest investment strategies, Large Cap Value, Value Service, Global Value and Small Cap Value, have each outperformed their relevant benchmarks since their inception by 3.3%, 4.5%, 3.6% and 4.7%, respectively, on an annualized basis. We believe that our investment performance, together with our willingness to close our strategies to new investors in order to optimize the prospects for future performance, has contributed to our positive reputation among our clients and the institutional consultants who advise them.
 
•  Consistency of Investment Process.   Since our inception over eleven years ago, we have utilized a classic value investment approach and a systematic, disciplined investment process to construct portfolios for our investment strategies in the U.S. and foreign markets across all market capitalizations. The consistency of our process has allowed us to leverage the same investment team to efficiently launch new products. The excess returns that we have generated for our clients over the long term have enabled us to attract new and existing clients to our recently launched strategies at an earlier stage in their development than otherwise is


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typical. Our consistent investment process and our successful investment track record have resulted in strong brand recognition of our firm in the investment community.
 
•  Diverse and High Quality Client Base.   Through a combination of attractive investment performance, consistency in investment approach and a commitment to client service, we have developed a favorable reputation in the institutional investment community. This is evidenced by our strong relationships with consultants and the diversity and sophistication of our investors. The strength of these relationships has also been beneficial in attracting client assets in the early stages of new product launch.
 
As the number of institutional consultants recommending our investment strategies has grown, we have significantly expanded our institutional client base. In each of the last five years, we received significantly more new money to manage from clients than we have seen withdrawn from the firm. We added approximately $6.8 billion and $1.1 billion of net new money in 2006 and the three months ended March 31, 2007, respectively. These amounts included the addition of 97 new institutional clients, who are advised by a total of 29 different consultants, and the loss of only 15 institutional separate account clients. With the exception of two of our sub-advised accounts, no single account represented more than 3% of our AUM as of March 31, 2007.
 
•  Talented Investment Professionals and a Team-Oriented Approach.   Our greatest asset is the talent of the individuals who execute our investment approach. In addition to detailed financial analysis, our investment process requires a long-term view of the nature of each business we are considering, the company’s current and likely future competitive standing and the management team’s strategies for change. Therefore, we have assembled a diverse team that includes individuals with corporate management, private equity, management consulting, legal, accounting and Wall Street experience. Their wide range of experiences gives us unique perspectives while executing our in-depth, research-based decision making process. To capitalize on the diversity of these backgrounds, we follow a collaborative, consensus-oriented approach to making investment decisions, in which any of our investment professionals, irrespective of seniority, can play a significant role.
 
•  Employee Retention.   As a people-driven business, we have focused on building an environment that we believe is attractive to talented investment professionals. Important among our practices are our team-oriented approach to investment decisions, rotation of coverage areas among individuals and a culture of employee ownership of our firm. In the past five years, only one investment professional has left the firm. We believe we are well positioned to continue to attract and retain highly qualified investment professionals going forward.
 
•  Culture of Ownership.   We believe in significant ownership of our business by the key contributors to our success. Since our inception, we have communicated to all our employees that they have the opportunity to become partners in our operating company. We currently have 23 employee owners positioned within all functional areas of the firm. We believe this ownership model results in a shared sense of purpose with our clients and their advisers. Following this offering, we intend to continue fostering a culture of ownership through our equity incentive plans, which are designed to align our team’s interests with those of our stockholders and clients. We believe this culture of ownership contributes to our low staff turnover, team orientation and connection with clients.


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Our Business Strategy
 
The key to our success is continued long-term investment performance. In conjunction with this, we believe the following strategies will enable us to continue to grow our business.
 
•  Capitalize on Growth Opportunities in Our International Value and Global Value Strategies.   Since our inception, we have made it a practice to leverage our knowledge of value investing and our investment processes to create new investment strategies for our clients. In early 2004, this manifested itself in the launch of our International Value and Global Value investment strategies. Among both institutional and retail investors industry-wide, there has been increasing levels of investments in portfolios including foreign equities. Now that both of these strategies have recently completed three-year track records, an important prerequisite for consideration by many investors, we expect to participate more broadly in these industry-wide flows. We believe that our ability to attract $1.3 billion in assets from 60 clients to these investment strategies as of December 31, 2006, prior to the completion of our three-year investment track record for these strategies, is a sign of our strong prospects in this regard. In the three months ended March 31, 2007, we attracted an additional $0.7 billion in assets to these strategies.
 
•  Employ Our Proven Process to Introduce New Products.   We anticipate continuing to offer new investment strategies over time, on a measured basis, consistent with our past practice. We believe that we will be able to launch new products efficiently and successfully, utilizing our proven investment process. Among the products we are considering for potential launch are: Emerging Markets, International Small Cap, European Value, Japan Value and more diversified versions of some of our existing domestic and international value investment strategies.
 
•  Collaborate with Strong Distributors to Create Customized Products.   Over the past several years, we have developed strong relationships with certain distributors who have packaged our investment strategies within their products. Most significant among these is our relationship with John Hancock Advisers. We currently sub-advise four mutual funds for John Hancock Advisers, which represented $9.3 billion of our AUM at March 31, 2007. Working closely with them, we have developed, and intend to continue to develop, new investment strategies which they believe will be well received by their clients. Recently, with John Hancock Advisers, we have created additional U.S. equity strategies that are not subject to the same capacity constraints as many of our existing concentrated portfolios. In 2007, this led to the launch of our Mega Cap Value investment strategy (as described under “— Our Investment Strategies”) and a more diversified version of our Large Cap Value investment strategy, each through sub-advised mutual funds. We believe that our investment expertise and processes are well suited to these strategies and that we will be able to invest substantial client assets before we would need to consider closing these strategies to new investors.
 
•  Work with Our Strong Consultant Relationships.   We have built strong relationships with the most important investment consulting firms who advise potential institutional clients. New accounts sourced through consultant-led searches have been a large driver of the growth of our AUM in each of the past five years and are expected to be a major component of our future growth. We believe that these relationships will assist us in introducing new strategies to key segments of the investing community.
 
•  Expand Our Foreign Client Base.   As part of the overall expansion of our business, we have increased our efforts to develop our foreign client base. Through our strong relationships with global consultants, we have been able to accelerate the development of our relationships with their non-U.S. branches. We expect to achieve considerable growth of our foreign client base through these relationships and by directly calling on the world’s largest institutional investors. These foreign marketing efforts have been particularly successful in the UK, Australia and Canada. We have also sought to expand our foreign investor base through our relationships with foreign mutual fund and other investment fund advisors. As of March 31, 2007, we managed $3.4 billion in separate accounts and sub-advised funds on behalf of 26 foreign clients. We expect considerable growth in this client base, particularly for our Global Value investment strategy, now that it has a three-year track record.
 
•  Leverage Our Value Investment Expertise to Selectively Develop Alternative Products.   We believe that we can further capitalize on our investment expertise and our strong reputation through the development of


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alternative strategies based upon our value investing process. In the current investment management environment, investors have exhibited a strong appetite for alternative strategies that are less correlated to traditional market benchmarks. Consistent with these opportunities, we recently established a joint venture for an options-based hedge fund that applies our value investing process to options investing. This joint venture managed $12 million in this strategy as of March 31, 2007.
 
Our Investment Team
 
We believe we have built an investment team that is well-suited to implementing our classic value investment strategy. Our investment team is distinguished by a diverse set of backgrounds including former corporate management, private equity, management consulting, legal, accounting and Wall Street professionals. Their diverse business backgrounds are instrumental in enabling us to make investments in companies where we would be comfortable owning the entire business for a three- to five-year period. We look beyond temporary earnings shortfalls that result in stock price declines, which may lead others to forego investment opportunities, if we believe the long-term fundamentals of a company have not changed.
 
We have an 18-member investment team. Each member serves as a research analyst, and certain members of the team also have portfolio management responsibilities. There are three portfolio managers for each investment strategy. These three managers have joint decision-making responsibility, and each has “veto authority” over all decisions regarding the relevant portfolio. For each of our current investment strategies, these three senior members are identified under “— Our Investment Strategies.”  Research analysts have sector and company-level research responsibilities which span all of our investment strategies, including those with an international focus. In order to facilitate the professional development of our team, and to keep a fresh perspective on our portfolio companies, our research analysts rotate industry coverage every three years.
 
We follow a collaborative, consensus-oriented approach to making investment decisions, such that all members of our investment team, irrespective of their seniority, can play a significant role in this decision making process. We hold weekly research review meetings attended by all portfolio managers and relevant research analysts, and are open to other members of our firm, at which we openly discuss and debate our findings regarding the normalized earnings power of potential portfolio companies. In addition, we hold daily morning meetings, attended by our portfolio managers, research analysts and portfolio administration and client service personnel, in order to review developments in our holdings and set a trading strategy for the day. These meetings are critical for sharing relevant developments and analysis of the companies in our portfolios. Our collaborative culture is attractive to our investment professionals, as evidenced by the fact that only one investment professional has left our firm during the past five years.
 
Our Investment Criteria and Process
 
We identify investment opportunities by following a proprietary, research-driven process. In general, we only consider investments in companies in the relevant investment universe that are among the 20% least expensive, based on the ratio of their current stock price to our estimate of their normalized long-term earnings power. This ensures that the composition of our clients’ portfolios are not determined by emotional inputs that can lead to investments in overvalued securities. We systematically sell securities within our portfolios when their valuation reaches the fiftieth percentile of the relevant investment universe, based on the same ranking system. We expect to hold positions for a significant period of time, which has historically averaged slightly more than three years. Our criteria and processes for security selection, portfolio construction and monitoring, selling and trading are described in detail below.
 
Security Selection
 
Since we view ourselves as buyers of businesses, as opposed to buyers of stocks, we apply intensive fundamental research to companies that are underperforming their historically demonstrated earnings power to


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determine if they meet our investment criteria. We generally seek to invest in companies that exhibit the following five characteristics:
 
  •  the company’s share price is low relative to our estimate of its normalized earnings power (i.e., the earnings expected when business conditions are neither depressed nor inflated);
 
  •  the company’s current earnings are below its historic norms;
 
  •  the company’s management has a sound plan for earnings recovery;
 
  •  the company has a history of earning attractive long-term returns; and
 
  •  the investment has identifiable downside protection (e.g., hard assets, superior cost structures, intellectual property, or an unassailable customer base).
 
We systematically review our proprietary computer model, which ranks companies in the relevant investment universe from the least to the most expensive on the basis of the ratio of their current stock price to our analysis of their normalized long-term earnings power. We assign research priority to stocks in the most undervalued 20% of the relevant investment universe, those exhibiting a group or sector theme and those offering portfolio diversification benefits. The three co-portfolio managers with overall responsibility for a particular investment strategy collectively assess whether the causes of a company’s undervaluation are likely to be temporary and whether our research process is likely to enable us to “figure it out.”  If a company exhibits both criteria, we then charge a research analyst with conducting preliminary research on the company. This stage of our research, which generally takes two weeks, is based on publicly available information, other financial analysts’ reports, interviews and other relevant information.
 
Upon conclusion of this preliminary research, we assess the research analyst’s findings at our weekly research review meeting in order to test the assumptions of our earnings forecasting computer model. Approximately 75% of the companies initially researched are then eliminated and the remaining 25% of the companies are researched in significantly greater depth. This stage of our research, which may take anywhere from a few weeks to several months, includes an analysis of the company’s key profit and cash flow drivers and interviews with suppliers, competitors, customers and other relevant sources. Our in-depth research is designed to enable us to discuss with the company’s management the strategic options available to them over the next several years, probe the key business issues uncovered in our research and test our investment thesis against management’s perception of the business.
 
Upon completion of our research and discussions with the company’s management, the research analyst develops a five-year financial statement forecast, typically including segment-level profitability and asset utilization, and a final estimate of the company’s normalized earnings. Based on these forecasts, our portfolio managers and research analysts again assess the company’s normalized earnings power at our weekly research review meeting. Our process requires that all three portfolio managers for the relevant investment strategy agree that the company’s valuation, based on our assessment of its normalized earnings power, is attractive enough to include a position in the portfolio.
 
Portfolio Construction
 
Our investment decisions are not motivated by short-term results or aimed at closely tracking specific market benchmarks. We set weights for each of the positions within our portfolios according to the criteria described below. Generally, industry and sector weights (and country weights for the portfolios including non-U.S. listed issuers) are the result of our security selection process.
 
Our first criterion is valuation. Generally, the most undervalued companies receive the highest weightings in our portfolios. We place maximum industry sector constraints on many of our portfolios and minimum industry sector constraints on selected portfolios.
 
Next, we determine whether the industry in which the company operates is inexpensive or whether the company is an outlier. We prefer higher weightings in businesses where there is broad industry undervaluation rather than a single company’s inexpensiveness.


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Thirdly, we assess the nature of each company’s undervaluation. Companies receive higher weightings when we judge that our analysis will enable us to make reasonable earnings estimates. On the other hand, we are likely to give little or no weight to companies where its stock price is clearly inexpensive, but the underlying resolution of the undervaluation is unlikely to be estimated through our in-depth research process. Outstanding legal judgments against a company or industry, or estimating demand for new products or services are examples of such “unresearchable” circumstances.
 
Finally, everything else being equal, we are inclined to give higher weight to positions that will help diversify the portfolio. Thus, while our portfolio construction process is independent of any index, our goal is that the portfolio consists of a broadly diversified group of businesses.
 
Our bi-weekly portfolio review meetings are attended by portfolio managers, portfolio administrators and client service professionals. At these meetings, portfolio managers review and construct a model portfolio for new accounts to follow for initial investments and existing accounts to attempt to follow for current management. The entire investment team evaluates the need for any changes to this model, which are made as a result of these meetings, or between them if intervening developments in any position require us to reconsider the model.
 
Portfolio Monitoring
 
Once a stock is added to the portfolio, we continue to monitor company and industry news and, as appropriate, have discussions and meetings with its management. At our daily morning meetings, portfolio managers, research analysts and traders review developments in our holdings and set the day’s trading strategy. When appropriate, we will make decisions to trim or add to a position based on information reviewed and analyzed during these meetings. We hold these meetings with this frequency in order to ensure that we are continually reviewing developments relevant to our understanding and analysis of the companies in our portfolios.
 
Sell Discipline
 
We systematically sell any stock once its valuation reaches the fiftieth percentile of the relevant investment universe. A security’s target price is determined by multiplying the normalized earnings per share for a company by the midpoint price-to-normalized earnings ratio of the relevant investment universe. There are two ways a security can reach this target — price appreciation or a reduction in its normalized earnings estimate. In the latter case, a stock may be sold if we determine that our initial normalized earnings estimate was too high. In either case, we maintain our sell discipline, which dictates that a stock must be sold when it reaches its target price. In addition, if we find a security with return and risk characteristics superior to those of another in the portfolio, we will sell earlier.
 
Trading
 
Portfolio administrators are responsible for translating portfolio construction decisions into actual trading instructions that are then passed on to our traders for execution. Trade allocation, along with pre-trade compliance review, is completed on our internal trading and portfolio management system.
 
We have a Best Execution Committee that meets quarterly to review the previous quarter’s trading activity and to address any issues. This committee is comprised of individuals from Compliance, Trading, Research, Portfolio Accounting and Portfolio Administration. In addition to an analysis of the trades and brokers used, the current trading budget is reviewed. By completing this review, individuals from all areas of the firm discuss trading activity, and the current broker relationships the firm maintains. On a weekly basis, we review the portfolios to see that security position sizes and sector weightings are in line with the current investment strategy, in an attempt to keep dispersion to a minimum.
 
Our Investment Strategies
 
As of March 31, 2007, our approximately $28.5 billion in AUM were invested in ten value-oriented investment strategies, representing distinct capitalization segments of U.S. and foreign markets. The following


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table describes our current investment strategies, and the allocation of our approximately $28.5 billion in AUM among them, as of March 31, 2007.
 
                 
Strategy   Portfolio Managers(1)     AUM  
          (in millions)  
 
Large Cap Value
    DeSpirito, Goetz and Pzena     $ 18,456  
Value Service
    Cai, Goetz and Pzena       5,624  
Global Value
    Krishna, Goetz and Peterson       1,551  
Small Cap Value
    Silver, Goetz and Pzena       1,133  
Mid Cap Value
    Tandon, Goetz and Pzena       598  
All Cap Value
    Kohn, Goetz and Pzena       595  
International Value
    Krishna, Goetz and Peterson       401  
Diversified Value
    DeSpirito, Goetz and Pzena       119  
Hedged Value
    Joint Venture with Rauner       12  
Mega Cap Value
    DeSpirito, Goetz and Pzena       6  
Other Strategies
    N/A       8  
                 
Total(2)
  $ 28,502  
         
 
 
(1) The first portfolio manager listed has day-to-day responsibility for implementing the investment strategy.
(2) Figures do not add due to rounding.
 
We understand that our ability to retain and grow assets as a firm has been, and will be, driven primarily by delivering attractive investment results to our clients. As a consequence, we have prioritized, and will continue to prioritize, investment performance over asset accumulation. Where we deemed it necessary, we have closed certain products to new investors in order to preserve capacity to effectively implement our concentrated investment strategies for the benefit of existing clients. We stopped accepting new clients in our Small Cap Value strategy in 2001 and, over the intervening years, have taken similar measures with regard to Mid Cap Value, Value Service, and All Cap Value and, in the third quarter of 2006, Large Cap Value. After closing products to new investors, we maintain waiting lists of potential clients who have expressed interest in investing in these strategies. Additional capacity may be created by asset flows or substantial growth in the markets in which we invest, and we will periodically add new clients as a result of additional capacity. For example, we have recently re-opened our Value Service strategy, on a limited basis, primarily as a result of the growth in its investable universe.
 
Our current investment strategies are further described below. We follow the same investment process (as described above in “— Our Investment Criteria and Process”) for each of these strategies. Our investment strategies are distinguished by the market capitalization ranges from which we select securities for their portfolios, which we refer to as each strategy’s investment universe, as well as the regions in which we invest. While our investment process includes ongoing review of companies in the investment universes described below, our actual investments may include companies outside of the relevant market capitalization range at the time of our investment. In addition, the number of holdings typically found in the portfolios of each of our investment strategies may vary as described below.
 
Large Cap Value.  We screen a universe of the 500 largest U.S.-listed companies, based on market capitalization, to build a portfolio of 30 to 40 stocks. We closed this portfolio to new investors in September 2006.
 
Value Service.  We screen a universe of the 1,000 largest U.S.-listed companies, based on market capitalization, to build a portfolio of 30 to 40 stocks. We closed this portfolio to new investors in June 2004 and have recently re-opened it on a limited basis.
 
Global Value.  We screen a universe of the 1,500 largest non U.S.-listed companies, based on market capitalization, and the 500 largest U.S.-listed companies, based on market capitalization, to build a portfolio of 40 to 60 stocks. This portfolio is currently open to new investors.


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Small Cap Value.  We screen a universe of U.S.-listed companies ranked from the 1,001th to 3,000th largest, based on market capitalization, to build a portfolio of 40 to 50 stocks. We closed this portfolio to new investors in December 2001 and recently re-opened it briefly.
 
Mid Cap Value.  We screen a universe of U.S.-listed companies ranked from the 201st to 1,200th largest, based on market capitalization, to build a portfolio of 30 to 40 stocks. We closed this portfolio to new investors in June 2004.
 
All Cap Value.  We screen a universe of the 3,000 largest U.S.-listed companies, based on market capitalization, to build a portfolio of approximately 25 stocks. We closed this portfolio to new investors in December 2001.
 
International Value.  We screen a universe of the 1,500 largest non U.S.-listed companies, based on market capitalization, to build a portfolio of 30 to 50 stocks. This portfolio is currently open to new investors.
 
Diversified Value.  We screen a universe of the 400 largest U.S.-listed companies, based on market capitalization, to build a portfolio of 70 to 90 stocks and, thereby, seek to reduce the level of volatility that may generally be typical of our more concentrated portfolios. Up to 20% of the portfolio can opportunistically be invested in foreign issuers within the same market capitalization range. We currently offer this product through our relationship with John Hancock Advisers, serving as the sub-investment adviser to the John Hancock Classic Value Fund II.
 
Hedged Value.  We have entered into a joint venture, PAI Hedged Strategies, LP, to manage a hedge fund which combines our intensive fundamental research with an options trading strategy. Leonard Rauner, our joint venture partner, who serves as the day-to-day portfolio manager, has 24 years of options trading experience.
 
Mega Cap Value.  We screen a universe of the 250 largest U.S.-listed companies, based on market capitalization, to build a portfolio of 30 to 40 stocks. We currently offer this product through our relationship with John Hancock Advisers, serving as the sub-investment adviser to the John Hancock Classic Value Mega Cap Fund.
 
Our Product Development Approach
 
A major component of our growth has been the development of new products. Prior to seeding a new product, we perform in-depth research on the potential market for the product, as well as its overall compatibility with our investment expertise. This process involves analysis by our client team, as well as by our investment professionals. We will only launch a new product if we believe that it can add value to a client’s investment portfolio through investment excellence. If appropriate, we create partnerships with third parties to enhance the distribution of a product or add expertise that we do not have in-house. Prior to marketing a new product, we generally incubate the product for a period of one to five years. Products are incubated using primarily our own capital, typically along with an outside investor, so that we can test and refine our investment strategy and process before actively marketing the product to our clients.
 
Furthermore, we continually seek to identify opportunities to extend our investment process into new markets or to apply it in different ways to offer clients additional strategies. This led to the introduction of our Global Value and International Value strategies in 2004 and, more recently, to the introduction of our Mega Cap Value, Diversified Value and Hedged Value strategies. We are currently incubating several products, including alternative strategies, which we believe will be highly attractive to our clients in the future.
 
Our Investment Performance
 
Since we are long-term fundamental investors, we believe that our investment strategies yield the most benefits, and are best evaluated, over a long-term timeframe.


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The following table indicates the annualized gross returns, relative to the performance of relevant indices, of our seven largest investment strategies from their inception to March 31, 2007, and in the five-year, three-year, and one-year periods ended March 31, 2007.
 
                         
    Period Ended March 31,
    Since
           
Investment Strategy (Inception Date)
  Inception   5 Years   3 Years   1 Year
 
Large Cap Value (October 2000)
                       
Annualized Gross Returns(1)
    11.4%     12.0%     13.5%     12.3%
Russell 1000 Value Index
    8.1%     10.2%     14.4%     16.8%
S&P 500 Index
    1.5%     6.3%     10.1%     11.8%
                         
Value Service (January 1996)
                       
Annualized Gross Returns(1)
    16.2%     14.0%     14.3%     15.0%
Russell 1000 Value Index
    11.8%     10.2%     14.4%     16.8%
S&P 500 Index
    9.5%     6.3%     10.1%     11.8%
                         
Global Value (January 2004)
                       
Annualized Gross Returns(1)
    17.9%     N/A     18.5%     12.0%
MSCI World Index — Net/US$(2)
    14.3%     N/A     14.6%     15.4%
S&P 500 Index
    9.8%     N/A     10.1%     11.8%
                         
Small Cap Value (January 1996)
                       
Annualized Gross Returns(1)
    18.5%     14.6%     17.1%     16.9%
Russell 2000 Value Index
    13.8%     13.6%     14.5%     10.4%
S&P 500 Index
    9.5%     6.3%     10.1%     11.8%
                         
Mid Cap Value (September 1998)
                       
Annualized Gross Returns(1)
    18.3%     13.7%     14.8%     13.6%
Russell Mid Cap Value Index
    14.6%     15.2%     18.6%     17.1%
S&P 500 Index
    6.4%     6.3%     10.1%     11.8%
                         
All Cap Value (May 2001)
                       
Annualized Gross Returns(1)
    18.1%     17.2%     17.2%     17.5%
Russell 3000 Value Index
    9.0%     10.5%     14.4%     16.2%
S&P 500 Index
    4.0%     6.3%     10.1%     11.8%
                         
International Value (January 2004)
                       
Annualized Gross Returns(1)
    19.4%     N/A     19.7%     12.0%
MSCI EAFE — Net/US$(2)
    19.7%     N/A     19.8%     20.2%
S&P 500 Index
    9.8%     N/A     10.1%     11.8%
 
 
(1) Prior to payment of advisory fees.
(2) Net of applicable withholding taxes.
 
Advisory Fees
 
We earn advisory fees on the separate accounts that we manage and under our sub-investment advisory agreements for mutual funds and other investment funds.
 
On our separately-managed accounts, we are paid fees according to a schedule which varies by investment strategy. The substantial majority of these accounts pay us management fees pursuant to a schedule in which the rate we earn on the AUM declines as the amount of AUM increases, subject to a minimum fee to manage the account. Certain of these clients pay us fees according to the performance of their accounts relative to certain agreed-upon benchmarks, which results in a slightly lower base fee, but allows for us to earn higher fees if the relevant investment strategy out-performs the agreed-upon benchmark.


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As of March 31, 2007, we sub-advised twelve SEC-registered mutual funds pursuant to sub-investment advisory agreements which generally have initial two-year terms, subject to the applicable requirements of the Investment Company Act, and are renewable only if approved annually by the fund’s board of directors after the initial term. In addition, we sub-advise eight offshore funds. Pursuant to these agreements, we are generally paid a management fee according to a schedule, in which the rate we earn on the AUM declines as the amount of AUM increases. Certain of these funds pay us fixed rate management fees. Due to the substantially larger account size of certain of these accounts, the average advisory fees we earn on them are lower than the advisory fees we earn on our separately-managed accounts.
 
The majority of the advisory fees we earn on separately-managed accounts are based on the value of AUM at a specific date on a quarterly basis, either in arrears or in advance. Advisory fees on certain of our separately-managed accounts, and with respect to most of the mutual funds that we sub-advise, are calculated based on the average of the monthly or daily market value of the account. Advisory fees are also adjusted for any cash flows into or out of a portfolio, where the cash flow represents greater than 10% of the value of the portfolio. While a specific group of accounts may use the same fee rate, the method used to calculate the fee according to the fee rate schedule may differ, as described above.
 
Our Client Relationships and Distribution Approach
 
We have successfully grown our client base over the past five years. As of March 31, 2007, we managed separate accounts on behalf of over 375 institutions and high net worth individuals and acted as sub-investment adviser for twelve SEC-registered mutual funds and eight offshore funds. We believe that strong relationships with our clients are critical to our ability to succeed and continue to grow our AUM. In building these relationships, we have focused our efforts where we can efficiently access and service large pools of sophisticated clients with our team of 14 dedicated marketing and client service professionals. We distribute our products to institutions and individuals primarily through the efforts of our internal sales team, who calls on them directly and on the consultants who serve them, as well as through the marketing programs of our sub-investment advisory partners. Since our objective is to attract long-term investors with an investment horizon in excess of three years, our sales and client service efforts focus on educating our investors regarding our disciplined value investment process and philosophy.
 
Our marketing effort is led by our five person sales team, which is responsible for:
 
  •  identifying and marketing to prospective institutional clients;
 
  •  responding to requests for investment management proposals; and
 
  •  developing and maintaining relationships with independent consultants.
 
Direct Institutional Relationships
 
Since our inception, we have directly offered institutional investment products to public and corporate pension funds, endowments, foundations and Taft-Hartley plans. Wherever possible, we have sought to develop direct relationships with the largest U.S. institutional investors, a universe we define to include approximately 1,000 plan sponsors with greater than $300 million in plan assets. Over the past two years, we have focused on expanding this direct calling effort to selected potential institutional clients outside of the U.S.
 
Investment Consultants
 
We estimate that approximately 70% of all retirement plan assets are advised by investment consultants, with a relatively small number of these consultants representing a significant majority of these relationships. We have targeted our efforts on the 75 largest consulting firms focused primarily on plan sponsors. As a result of a consistent servicing effort over our history, we have built strong relationships with those consulting firms that we believe are the most important consulting firms and believe that most of them rate our open investment strategies favorably. New accounts sourced through consultant-led searches have been a large driver of the growth of our AUM in each of the past five years and are expected to be a major component of our future


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growth. We seek to develop direct relationships with accounts sourced through consultant-led searches by our ongoing marketing and client service efforts, as described below.
 
Sub-Investment Advisory Distribution
 
In August 2002, we partnered with John Hancock Advisers to rebrand a mutual fund we had been managing as the John Hancock Classic Value Fund. John Hancock Advisers became the investment adviser to this fund and we became its sub-investment adviser. Our relationship with John Hancock Advisers has since expanded to include three additional mutual funds. John Hancock Advisers is responsible for the marketing and client service for these funds, driven by its 81 wholesalers in the field and 94 other internal support and key account managers. Capitalizing on our relationship with John Hancock Advisers allows us to access and maintain relationships with a wider segment of the investing community than we can access on our own, while maintaining our lean and efficient distribution system.
 
This relationship has been an attractive source of growth for us as well as John Hancock Advisers. We currently sub-advise four mutual funds that are advised by John Hancock Advisers. As of March 31, 2007, these four mutual funds represented $9.3 billion of our AUM. Three of these mutual funds contributed $2.3 billion and $2.9 billion to our net inflows in 2005 and 2006, respectively. These four mutual funds contributed $0.3 billion to our net inflows in the three months ended March 31, 2007. The success of this relationship has encouraged us to selectively establish relationships with other mutual fund and fund providers in the United States, who offer us opportunities to efficiently access new market segments through sub-investment advisory roles. We have also established relationships with fund providers outside the United States, such as BNP Paribas Asset Management, for which we sub-advise the Parvest U.S. Value Fund.
 
High Net Worth Advisory Firms
 
We have effectively accessed the high net worth segment of the investing community through relationships with well respected wealth advisers who utilize our investment strategies in investment programs they construct for their clients. Similar to our approach with consultants, we have targeted select firms around the world serving the family office and ultra high net worth market. This approach leads to a highly productive client servicing model and very strong relationships with wealth advisers, who ultimately view us as partners in their investment programs. Occasionally, we establish direct separate account relationships with high net worth individuals.
 
Client Service
 
Our client team’s consistent efforts are instrumental to maintaining our direct relationships with institutional and individual separate account clients and developing direct relationships with separate accounts sourced through consultant-led searches. We have a dedicated client service team, which is primarily responsible for addressing all ongoing client needs, including periodic updates and reporting requirements. Our sales team assists in providing ongoing client service to existing institutional accounts. Our institutional distribution, sales and client service efforts are also supported, as necessary, by members of our investment team.
 
Our client service team consists of individuals with both general business backgrounds and investment research experience. Our client team members are fully integrated into our research team, attending both research meetings and company management meetings to ensure our clients receive primary information. As appropriate, we introduce members of our research and portfolio management team into client portfolio reviews to ensure that our clients are exposed to the full breadth of our investment resources. We also provide quarterly reports to our clients in order to share our investment perspectives with them. We also meet and hold conference calls regularly with clients to share perspectives on the portfolio and the current investment environment.


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Competition
 
In order to grow our business, we must be able to compete effectively to maintain existing AUM and attract additional AUM. Historically, we have competed for AUM principally on the basis of:
 
  •  the performance of our investment strategies;
 
  •  our clients’ perceptions of our drive, focus and alignment of our interests with theirs;
 
  •  the quality of the service we provide to our clients and the duration of our relationships with them;
 
  •  our brand recognition and reputation within the investing community;
 
  •  the range of products we offer; and
 
  •  the level of advisory fees we charge for our investment management services.
 
Our ability to continue to compete effectively will also depend upon our ability to attract highly qualified investment professionals and retain our existing employees. We compete in all aspects of our business with a large number of investment management firms, commercial banks, broker-dealers, insurance companies and other financial institutions. For additional information concerning the competitive risks that we face, see “Risks Factors — Risks Relating to Our Business — The investment management business is intensely competitive.”
 
Employees
 
At March 31, 2007, we had 67 full-time employees. This includes 18 investment professionals; 3 traders; 14 client service and marketing personnel; 16 employees in operations; 12 legal, compliance and finance personnel and 4 other employees.
 
Facilities
 
Our corporate headquarters and principal offices are located at 120 West 45th Street, New York, New York 10036, where we occupy approximately 32,000 square feet of space under a non-cancellable operating lease, the term of which expires in October 2015. We believe our current facilities are adequate for our current needs and that suitable additional space will be available as and when needed.
 
Legal Proceedings
 
In the normal course of business, we may be subject to various legal and administrative proceedings. Currently, there are no legal proceedings pending or threatened against us.


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REGULATORY ENVIRONMENT AND COMPLIANCE
 
Our business is subject to extensive regulation in the United States at both the federal and state level, as well as by self-regulatory organizations. Under these laws and regulations, agencies that regulate investment advisers have broad administrative powers, including the power to limit, restrict or prohibit an investment adviser from carrying on its business in the event that it fails to comply with such laws and regulations. Possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of investment adviser and other registrations, censures and fines.
 
SEC Regulation
 
Our operating company, Pzena Investment Management, LLC, is registered as an investment adviser with the SEC. As a registered investment adviser, it is subject to the requirements of the Investment Advisers Act, and the SEC’s regulations thereunder, as well as to examination by the SEC’s staff. The Investment Advisers Act imposes substantive regulation on virtually all aspects of our business and our relationships with our clients. Applicable requirements relate to, among other things, fiduciary duties to clients, engaging in transactions with clients, maintaining an effective compliance program, performance fees, solicitation arrangements, conflicts of interest, advertising, recordkeeping, reporting and disclosure requirements. Twelve of the funds for which Pzena Investment Management, LLC acts as the sub-investment adviser are registered with the SEC under the Investment Company Act. The Investment Company Act imposes additional obligations, including detailed operational requirements for both the funds and their advisers. Moreover, an investment adviser’s contract with a registered fund may be terminated by the fund on not more than 60 days’ notice, and is subject to annual renewal by the fund’s board after an initial two-year term. Both the Investment Advisers Act and the Investment Company Act regulate the “assignment” of advisory contracts by the investment adviser. The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act and the Investment Company Act, ranging from fines and censures to termination of an investment adviser’s registration. The failure of Pzena Investment Management, LLC, or the registered funds for which Pzena Investment Management, LLC acts as sub-investment adviser, to comply with the requirements of the SEC could have a material adverse effect on us.
 
ERISA-Related Regulation
 
To the extent that Pzena Investment Management, LLC is a “fiduciary” under ERISA with respect to benefit plan clients, it is subject to ERISA, and to regulations promulgated thereunder. ERISA and applicable provisions of the Internal Revenue Code impose certain duties on persons who are fiduciaries under ERISA, prohibit certain transactions involving ERISA plan clients and provide monetary penalties for violations of these prohibitions. Our failure to comply with these requirements could have a material adverse effect on our business.
 
Foreign Regulation
 
Pzena Investment Management, LLC is registered with the Ontario Securities Commission, or the OSC, as an international adviser under the categories of investment counsel and portfolio manager. The OSC has extensive powers to regulate capital markets activities in the Canadian province of Ontario pursuant to which it restricts the activities of a registered international adviser. These restricted activities include the following:
 
  •  providing advice solely to certain institutional and high net worth individual clients;
 
  •  acting as an adviser in connection with Canadian securities that must be incidental to the international adviser’s activities in Ontario in respect of non-Canadian securities; and
 
  •  only acting as an international adviser for clients in Ontario such that not more than 25% of the aggregate consolidated gross revenues arise from this activity.
 
An international adviser must, upon the request of the OSC produce all books, papers, documents, records and correspondence relating to its activities in Ontario, and inform the OSC if it becomes the subject of an


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investigation or disciplinary action by any financial services or securities regulatory authority or self-regulatory authority.
 
Pzena Investment Management, LLC acts as the promoter and investment manager of an Irish-regulated umbrella fund, Pzena Value Funds plc, which has been authorized by the Irish Financial Services Regulatory Authority, or the IFSRA, as an undertaking for collective investment in transferable securities pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2003, as amended. This fund is supervised on an on-going basis by the IFSRA. As promoter and investment manager of the fund, our operating company must maintain a minimum capitalization of €635,000 and must file annual audited financial statements with the IFSRA. Any change in the domestic regulatory status of our operating company must be notified to the IFSRA and could have implications on its ongoing suitability as promoter and investment manager. Prior approval of the IFSRA is required in respect of any change in ownership or significant shareholdings in our operating company.
 
Compliance
 
Our firm maintains a Legal and Compliance Department with five full-time lawyers, including our General Counsel and our Chief Compliance Officer. Other members of the firm also devote significant time to compliance matters. For example, our four managing principals and our Chief Administrative Officer each perform compliance-related tasks and each is supported by employees who report directly to them and provide compliance-related information to our Chief Compliance Officer.


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MANAGEMENT
 
The following table provides certain information regarding our directors, nominees to our board of directors and executive officers.
 
             
Name
 
Age
 
Position
 
Richard S. Pzena
  48   Chairman, Chief Executive Officer, Co-Chief Investment Officer
John P. Goetz
  49   President, Co-Chief Investment Officer
A. Rama Krishna
  43   President, International
William L. Lipsey
  48   President, Marketing and Client Service
Wayne A. Palladino
  48   Chief Financial Officer
 
Richard S. Pzena is our Chairman, Chief Executive Officer, Co-Chief Investment Officer. Prior to forming Pzena Investment Management, LLC in 1995, Mr. Pzena was the Director of U.S. Equity Investments and Chief Research Officer for Sanford C. Bernstein & Company. Mr. Pzena joined Sanford C. Bernstein & Company in 1986 as an oil industry analyst and was named to the Institutional Investor All America Research Team from 1988 to 1990. During 1990 and 1991, Mr. Pzena served as Chief Investment Officer, Small Cap Equities, and assumed his broader domestic equity role in 1991. Prior to joining Bernstein, Mr. Pzena worked for the Amoco Corporation in various financial and planning roles. He earned a B.S. summa cum laude and an M.B.A. from the Wharton School of the University of Pennsylvania in 1979 and 1980, respectively.
 
John P. Goetz is our President, Co-Chief Investment Officer. Mr. Goetz joined us in 1996 as Director of Research and has been Co-Chief Investment Officer since 2005. Previously, Mr. Goetz held a range of key positions at Amoco Corporation for over 14 years, most recently as the Global Business Manager for Amoco’s $1 billion polypropylene business, where he had bottom-line responsibility for operations and development worldwide. Prior positions at Amoco included strategic planning, joint venture investments and project financing in various oil and chemical businesses. Prior to joining Amoco, Mr. Goetz had been employed by The Northern Trust Company and Bank of America. He earned a B.A. summa cum laude in Mathematics and Economics from Wheaton College in 1979 and an M.B.A. from the Kellogg School at Northwestern University in 1982.
 
A. Rama Krishna is our President, International. Prior to joining us in 2003, Mr. Krishna was at Citigroup Asset Management, where he was Chief Investment Officer and Head — Institutional and International, and a member of the Citigroup Management Committee. Prior to Citigroup, Mr. Krishna was Director of International Equity Research, Portfolio Manager, International Equities and Chief Investment Officer, Emerging Markets Equities at Alliance Capital Management in New York, London and Tokyo. He has also worked at Credit Suisse First Boston, first as an Equity Research Analyst and ultimately as Chief Investment Strategies and Director — Equity Research. Mr. Krishna earned a joint M.B.A./M.A. in Asian Studies with a Japan Specialization from the University of Michigan in 1987 and a B.A. (Honors) in Economics from St. Stephen’s College, The University of Delhi in 1984. Mr. Krishna received the Prize Fellowship in Japanese Business and the University Fellowship at the University of Michigan. He is a Chartered Financial Analyst.
 
William L. Lipsey is our President, Marketing and Client Service. Before joining Pzena Investment Management in 1997, Mr. Lipsey was an Investment Advisory Consultant and a Senior Vice President at Oppenheimer & Company, Inc. Prior to joining Oppenheimer, Mr. Lipsey’s career included positions at Morgan Stanley, Kidder Peabody and Hewitt Associates. At Morgan Stanley and Kidder Peabody, Mr. Lipsey managed assets for institutional and private clients. He earned a B.S. in Economics from the Wharton School of the University of Pennsylvania in 1980 and an M.B.A. in Finance from the University of Chicago in 1986.
 
Wayne A. Palladino is our Chief Financial Officer. Mr. Palladino was appointed our Chief Financial Officer in May 2007. Since 2002, he has served as our Head of Client Service. Prior to joining us in 2002, Mr. Palladino was Senior Vice President and Chief Financial Officer at the Lillian Vernon Corporation, a publicly-traded company, from 2000 to 2002. From 1991 to 2000, Mr. Palladino was Senior Vice President and Chief Financial Officer at Transworld Healthcare, Inc., also a publicly-traded company. He earned a B.S.


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in Economics and an M.B.A. in Finance with distinction from the Wharton School of the University of Pennsylvania in 1980 and 1983, respectively.
 
There are no family relationships among any of our directors, director nominees or executive officers.
 
Board Composition
 
Immediately prior to the consummation of this offering, we intend to appoint          ,          ,           and           to our board of directors. Following these appointments, we expect that our board of directors will consist of five directors.
 
Our board of directors has determined that each of          ,           and           is an “independent” director within the meaning of the applicable rules of the SEC and the New York Stock Exchange.
 
Our bylaws will provide that our board of directors will consist of five directors, or such number of directors as fixed by our board of directors from time to time. The directors will be elected for one-year terms to serve until the next annual meeting of our stockholders, or until their successors are duly appointed.
 
Board Committees
 
Although we would qualify for the “controlled company” exemption from the corporate governance rules of the NYSE, we anticipate that, prior to the consummation of this offering, our board of directors will establish an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee, each consisting solely of independent directors, and our board of directors intends to adopt new charters for its committees that comply with the NYSE and SEC rules relating to corporate governance matters. Following the closing of this offering, we intend to make copies of the committee charters, as well as our Corporate Governance Guidelines and our Code of Ethics, available on our website at www.pzena.com.
 
Audit Committee
 
Our Audit Committee will assist our board of directors in its oversight of the integrity of our financial statements, our independent registered public accounting firm’s qualifications and independence, and the performance of our independent registered public accounting firm.
 
Our Audit Committee’s responsibilities will include, among others:
 
  •  reviewing the audit plans and findings of our independent registered public accounting firm and our internal audit and risk review staff, as well as the results of regulatory examinations, and tracking management’s corrective action plans where necessary;
 
  •  reviewing our financial statements, including any significant financial items and/or changes in accounting policies, with our senior management and independent registered public accounting firm;
 
  •  reviewing our financial risk and control procedures, compliance programs and significant tax, legal and regulatory matters; and
 
  •  having the sole discretion to appoint annually our independent registered public accounting firm, evaluate its independence and performance and set clear hiring policies for employees or former employees of the independent registered public accounting firm.
 
We anticipate that          ,           and           will serve on the Audit Committee and that           will serve as its chair.
 
Compensation Committee
 
Our Compensation Committee will assist our board of directors in the discharge of its responsibilities relating to the compensation of our executive officers.


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Our Compensation Committee’s responsibilities will include:
 
  •  reviewing and approving, or making recommendations to our board of directors with respect to, the compensation of our executive officers;
 
  •  overseeing and administering, and making recommendations to our board of directors with respect to, our cash and equity incentive plans; and
 
  •  reviewing and making recommendations to the board of directors with respect to director compensation.
 
We anticipate that           ,           and           will serve on the Compensation Committee and                will serve as its chair.
 
Nominating and Corporate Governance Committee
 
The purpose of the Nominating and Corporate Governance Committee will be to oversee our governance policies, including our Corporate Governance Guidelines, nominate directors for election by stockholders, nominate committee chairpersons and, in consultation with the committee chairpersons, nominate directors for membership on the committees of the board.
 
We anticipate that          ,           and           will serve on the Nominating and Corporate Governance Committee and that           will serve as its chair.
 
Compensation Committee Interlocks and Insider Participation
 
Upon the effectiveness of the registration statement of which this prospectus forms a part, our board of directors will form a compensation committee as described above. Mr. Pzena and the Executive Committee have historically made all determinations regarding executive officer compensation.
 
None of our executive officers serves as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more of its executive officers serving as a member of our board of directors or our Compensation Committee.
 
Compensation Discussion and Analysis
 
We have established compensation practices that directly link compensation with our performance. These practices apply to all of our professionals, including our named executive officers, Messrs. Pzena, Goetz, Krishna, Lipsey and Palladino. Ultimately, ownership in our operating company is the primary tool that we use to attract and retain professionals, including the named executive officers. Our employees hold     % of the ownership interests in our operating company, the substantial majority of which is held by the four members of our Executive Committee, Messrs. Pzena, Goetz, Krishna and Lipsey, together with their estate planning vehicles.
 
We provide the following elements of compensation to our named executive officers:
 
  •  cash compensation, consisting of a base salary and annual discretionary bonuses;
 
  •  mandatory deferred compensation;
 
  •  equity-based compensation and related distributions of our earnings; and
 
  •  perquisites.
 
The executive committee of our operating company has historically had responsibility for establishing and administering compensation practices throughout our firm. Following this offering, the Compensation Committee of our board of directors will have responsibility for establishing and administering compensation programs and practices with respect to our directors and executive officers, including the named executive officers. In the future, we expect that our compensation philosophy will continue to rely heavily on performance-based cash compensation and equity compensation.


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Employment Agreements
 
We have determined that it is in the best interests of our stockholders and the owners of our operating company that we enter into employment agreements with the four members of our Executive Committee as of the consummation of this offering.
 
We are currently party to employment agreements with Messrs. Krishna and Lipsey, each of which provide for guaranteed payments of salary and annual bonuses, an additional discretionary bonus and, generally, sets forth the executive’s rights to profits interests, which were converted into membership units in our operating company, and, in the case of Mr. Krishna, options to purchase membership units, all of which have been exercised. These agreements also include restrictive covenants concerning competition with us and solicitation of our employees and clients. We intend to enter into new employment agreements with Messrs. Krishna and Lipsey, as described below, which will replace their existing ones.
 
In connection with the offering, we intend to enter into employment agreements with each of Messrs. Pzena, Goetz, Krishna and Lipsey pursuant to which each of them will be paid an annual salary of $           and a maximum annual cash bonus of $          , the exact amount of which will be determined by the Compensation Committee of our board of directors, in its sole discretion. These agreements are further described in “— Executive Employment Agreements.”
 
The amended and restated operating agreement of Pzena Investment Management, LLC will contain restrictive covenants applying to Messrs. Pzena, Goetz, Krishna and Lipsey. See “The Reorganization and Our Holding Company Structure — Amended and Restated Operating Agreement of Pzena Investment Management, LLC — Restrictive Covenants.”
 
Base Salary, Bonuses and Deferred Compensation
 
It is customary in the investment management industry to provide for base salaries and discretionary bonuses to be paid to executives upon whom the company relies for its success. We have used a compensation consultant to provide us with survey information concerning compensation levels in the investment management industry. Based on this information, we have historically targeted to pay our executives, including the named executive officers, at between the fiftieth and ninetieth percentiles of the pay of comparable executives at our peer investment management firms.
 
In the future, we expect that cash compensation in the form of a fixed base salary and discretionary bonuses will continue to constitute only a portion of the compensation that we will pay our executive officers. In the case of the four members of the Executive Committee, the amount of these bonuses will be determined by the Compensation Committee of our board of directors in its sole discretion. We expect that the substantial majority of the income that members of our Executive Committee receive from us will constitute cash distributions in proportion to their respective ownership interests of our operating company. We also expect that a significant portion of the income received by our Chief Financial Officer from us will constitute these distributions.
 
On January 1, 2007, we adopted the Pzena Investment Management, LLC 2006 Bonus Plan, which we refer to as the Bonus Plan, to enable us to attract, retain, motivate and reward highly qualified individuals to provide services to us. The Bonus Plan provides that:
 
  •  bonuses may be made to eligible employees and members of our operating company;
 
  •  certain highly compensated employees, including certain of the named executive officers, are required to defer a portion of their bonus in accordance with the terms of the Bonus Plan; and
 
  •  these employees may receive the deferred portion of their compensation in the form of restricted membership units in our operating company or invest that portion in certain of our investment strategies or money market funds.
 
During the deferral period, the value of the deferred amount is linked to the performance of the investment option that the employee chooses, which, if either one of our investment strategies or membership


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units of our operating company is chosen, is linked to our performance. Further information concerning the terms of the Bonus Plan is set forth in “— Bonus Plan.”
 
Equity Compensation
 
We have awarded many of our employees, including our named executive officers, ownership interests in our operating company.
 
The members of our Executive Committee each have substantial ownership interests in our operating company. The named executive officers receive distributions in respect of their membership units in the same amount and at the same time as distributions are made on all other membership units, including the Class A units to be owned by us following this offering, which will create an alignment of their interests with those of our Class A stockholders. In the three years ended December 31, 2006, distributions in respect of membership units owned by each of the members of our Executive Committee constituted from 65% to 90% of the total income they received from us and we expect that this will continue following this offering. A significant portion of the total income that our Chief Financial Officer received from us in this same period was in the form of distributions in respect of his membership interest in our operating company. With respect to 2006, our executive officers received approximately the following cash distributions in proportion to their respective ownership interests in our operating company (including membership interests held by their estate planning vehicles with respect to which they disclaim beneficial ownership): Mr. Pzena, $     ; Mr. Goetz, $     ; Mr. Krishna, $     ; Mr. Lipsey, $     ; and Mr. Palladino, $     .
 
We adopted the PIM LLC 2006 Equity Incentive Plan, effective January 1, 2007, which permits the grant of a variety of equity awards relating to membership units of our operating company, including options to purchase membership units and restricted membership units. On January 1, 2007, we granted options to purchase membership units to several of our employees, including certain of the named executive officers. All 126,000 options granted under the PIM LLC 2006 Equity Incentive Plan were granted with an exercise price equal to the fair market value of the underlying membership units on the date of grant and, as of their grant date, were subject to ratable vesting over a four-year term.
 
Following the offering, we intend to continue to award equity-based incentives under the PIM LLC 2006 Equity Incentive Plan as an incentive to encourage ownership in our operating company. See “— PIM LLC 2006 Equity Incentive Plan.”
 
Perquisites
 
We offer each of our employees, including each of the named executive officers, our investment management services, if they place their funds with us, without charging any advisory fees typically associated with these services. This benefit is provided at no incremental cost to us.
 
Executive Compensation
 
Prior to this offering, our business was conducted through a limited liability company. As a result, the compensation of the persons who are our executive officers has not been of the type generally used by corporations, as further described below. In May 2007, Mr. Palladino was appointed as our Chief Financial Officer. The following tables show compensation information for Mr. Palladino while he served only as our Head of Client Service.


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The following table sets forth certain summary information concerning compensation provided by Pzena Investment Management, LLC during the fiscal year ended December 31, 2006 to our Chief Executive Officer, Chief Financial Officer and the next three most highly compensated executive officers, which we refer to collectively as the named executive officers.
 
2006 Summary Compensation
 
                                         
                      All Other
       
Name and Principal Position
  Salary(2)     Bonus(3)     Stock Awards(4)     Compensation(5)     Total  
 
Richard S. Pzena,
Chief Executive Officer, Co-Chief Investment Officer
  $           $           $           $           $        
Wayne A. Palladino,
Chief Financial Officer(1)
                                               
John P. Goetz,
President, Co-Chief Investment Officer
                                               
A. Rama Krishna,
President, International
                                               
William L. Lipsey,
President, Marketing and
Client Service
                                               
 
 
(1) Mr. Palladino became our Chief Financial Officer in May 2007.
 
(2) Amounts represent guaranteed payments made to the named executive officers.
 
(3) Amounts represent the aggregate guaranteed and discretionary bonuses paid to the named executive officers for fiscal year 2006.
 
(4) Reflects the expense recognized during 2006 associated with membership units in our operating company, including distributions in respect of such units, calculated pursuant to FAS 123(R). Pursuant to FAS 123(R), our operating company recognizes compensation expense associated with the granting of equity-based compensation based on the grant-date fair value of the award if it is classified as an equity instrument, and on the changes in settlement amount for awards that are classified as liabilities. Our operating company’s compensatory unit-based awards have redemption features that necessitate their classification as liabilities and, accordingly, changes to their redemption values subsequent to the grant date have been included as a component of compensation expense. Distributions of $     , $     , $     , $      and $      were made to Messrs. Pzena, Palladino, Goetz, Krishna and Lipsey, respectively, and are attributable to the compensatory units held by them or their respective estate planning vehicles.
 
(5) Amounts represent a $        company contribution to our operating company’s simplified employee pension for each named executive officer.


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2006 Grants of Plan-Based Awards
 
The following table sets forth information concerning equity incentive plan-based compensation provided by our operating company in 2006 to the named executive officers (or their estate planning vehicles).
 
                                 
                      Grant Date
 
                      Fair Value
 
                      of Stock
 
                All Other Unit
    and Option
 
Name
  Grant Date     Approval Date     Awards(1)     Awards(2)  
 
Richard S. Pzena
    January 3, 2006                           (3)        
Wayne A. Palladino
    January 3, 2006                   (4)        
John P. Goetz
    January 3, 2006               &