10-Q 1 apam-2016x3x3110q.htm 10-Q 10-Q

 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

Form 10-Q

(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM TO

Commission file number: 001-35826
 
Artisan Partners Asset Management Inc.
(Exact name of registrant as specified in its charter)

Delaware
45-0969585
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
875 E. Wisconsin Avenue, Suite 800
Milwaukee, WI
53202
(Address of principal executive offices)
(Zip Code)
 
 

(414) 390-6100
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
 
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of outstanding shares of the registrant’s Class A common stock, par value $0.01 per share, Class B common stock, par value $0.01 per share, and Class C common stock, par value $0.01 per share, as of April 28, 2016 were 41,264,039, 17,572,251 and 15,639,101, respectively.
 



TABLE OF CONTENTS
 
 
Page
Part I
Financial Information
 
Item 1.
Unaudited Consolidated Financial Statements
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II
Other Information
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Except where the context requires otherwise, in this report, references to the “Company”, “Artisan”, “we”, “us” or “our” refer to Artisan Partners Asset Management Inc. (“APAM”) and its consolidated subsidiaries, including Artisan Partners Holdings LP (“Artisan Partners Holdings” or “Holdings”). On March 12, 2013, APAM closed its initial public offering and related corporate reorganization. Prior to that date, APAM was a subsidiary of Artisan Partners Holdings.
Forward-Looking Statements
This report contains, and from time to time our management may make, forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking words such as “may”, “might”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue”, the negative of these terms and other comparable terminology. These forward-looking statements are only predictions based on current expectations and projections about future events. These forward-looking statements are subject to a number of risks and uncertainties, and there are important factors that could cause actual results, level of activity, performance, actions or achievements to differ materially from the results, level of activity, performance, actions or achievements expressed or implied by the forward-looking statements. These factors include: the loss of key investment professionals or senior management, adverse market or economic conditions, poor performance of our investment strategies, change in the legislative and regulatory environment in which we operate, operational or technical errors or other damage to our reputation and other factors disclosed in the Company’s filings with the Securities and Exchange Commission, including those factors listed under the caption entitled “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on February 25, 2016, which is accessible on the SEC’s website at www.sec.gov. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.



Forward-looking statements include, but are not limited to, statements about:
our anticipated future results of operations;
our potential operating performance and efficiency;
our expectations with respect to future levels of assets under management, inflows and outflows;
our financing plans, cash needs and liquidity position;
our intention to pay dividends and our expectations about the amount of those dividends;
our expected levels of compensation of our employees;
our expectations with respect to future expenses and the level of future expenses;
our expected tax rate, and our expectations with respect to deferred tax assets; and
our estimates of future amounts payable pursuant to our tax receivable agreements.



Part I — Financial Information
Item 1. Unaudited Consolidated Financial Statements
ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Condensed Consolidated Statements of Financial Condition
(U.S. dollars in thousands, except per share amount)
 
March 31,
2016
 
December 31,
2015
ASSETS
Cash and cash equivalents
$
217,916

 
$
166,193

Accounts receivable
56,392

 
60,058

Investment securities
10,265

 
10,290

Property and equipment, net
17,500

 
17,995

Deferred tax assets
687,009

 
678,537

Prepaid expenses and other assets
13,550

 
12,773

Total assets
$
1,002,632

 
$
945,846

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable, accrued expenses, and other
$
24,305

 
$
27,132

Accrued incentive compensation
57,070

 
13,748

Borrowings
199,355

 
199,314

Amounts payable under tax receivable agreements
601,291

 
589,101

Total liabilities
882,021

 
829,295

Commitments and contingencies

 


Common stock
 
 
 
Class A common stock ($0.01 par value per share, 500,000,000 shares authorized, 41,266,749 and 39,432,605 shares outstanding at March 31, 2016 and December 31, 2015, respectively)
413

 
394

Class B common stock ($0.01 par value per share, 200,000,000 shares authorized, 17,572,251 and 18,327,222 shares outstanding at March 31, 2016 and December 31, 2015, respectively)
176

 
183

Class C common stock ($0.01 par value per share, 400,000,000 shares authorized, 15,639,101 and 15,649,101 shares outstanding at March 31, 2016 and December 31, 2015, respectively)
156

 
157

Additional paid-in capital
110,029

 
116,448

Retained earnings
10,706

 
13,238

Accumulated other comprehensive income (loss)
(559
)
 
(375
)
Total stockholders’ equity
120,921

 
130,045

Noncontrolling interest - Artisan Partners Holdings
(310
)
 
(13,494
)
Total equity
120,611

 
116,551

Total liabilities and equity
$
1,002,632

 
$
945,846

The accompanying notes are an integral part of the consolidated financial statements.

1


ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Operations
(U.S. dollars in thousands, except per share amounts)
 
For the Three Months Ended March 31,
 
2016

2015
Revenues
 
 
 
Management fees
$
174,378

 
$
203,229

Performance fees
151

 
346

Total revenues
$
174,529

 
$
203,575

Operating Expenses
 
 
 
Compensation and benefits
 
 
 
Salaries, incentive compensation and benefits
87,480

 
98,427

Pre-offering related compensation - share-based awards
7,819

 
10,414

Total compensation and benefits
95,299

 
108,841

Distribution and marketing
8,158

 
11,662

Occupancy
3,181

 
3,012

Communication and technology
7,217

 
5,213

General and administrative
5,949

 
7,018

Total operating expenses
119,804

 
135,746

Total operating income
54,725

 
67,829

Non-operating income (loss)
 
 
 
Interest expense
(2,905
)
 
(2,879
)
Net gain (loss) on the tax receivable agreements

 
(6,427
)
Other non-operating income (expense)
15

 
5

Total non-operating income (loss)
(2,890
)
 
(9,301
)
Income before income taxes
51,835

 
58,528

Provision for income taxes
11,517

 
5,082

Net income before noncontrolling interests
40,318

 
53,446

Less: Net income attributable to noncontrolling interests - Artisan Partners Holdings
24,057

 
33,932

Net income attributable to Artisan Partners Asset Management Inc.
$
16,261

 
$
19,514

 
 
 
 
Basic and diluted earnings per share
$
0.35

 
$
0.43

Basic and diluted weighted average number of common shares outstanding
36,970,950

 
32,633,481

Dividends declared per Class A common share
$
1.00

 
$
1.55

The accompanying notes are an integral part of the consolidated financial statements.

2


ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Comprehensive Income
(U.S. dollars in thousands)
 
For the Three Months Ended March 31,
 
2016
 
2015
Net income before noncontrolling interests
$
40,318

 
$
53,446

Other comprehensive income (loss), net of tax
 
 
 
Unrealized gain (loss) on investment securities:
 
 
 
Unrealized gain (loss) on investment securities, net of tax of $1 and $88, respectively
(26
)
 
230

Net unrealized gain (loss) on investment securities
(26
)
 
230

Foreign currency translation gain (loss)
(287
)
 
(422
)
Total other comprehensive income (loss)
(313
)
 
(192
)
Comprehensive income
40,005

 
53,254

Comprehensive income attributable to noncontrolling interests - Artisan Partners Holdings
23,928

 
33,831

Comprehensive income attributable to Artisan Partners Asset Management Inc.
$
16,077

 
$
19,423


The accompanying notes are an integral part of the consolidated financial statements.

3


ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Changes in StockholdersEquity
(U.S. dollars in thousands)
 
Class A Common stock
Class B Common stock
Class C Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Non-controlling interest - Artisan Partners Holdings
Total equity
Balance at January 1, 2016
394

183

157

116,448

13,238

(375
)
(13,494
)
116,551

Net income




16,261


24,057

40,318

Other comprehensive income - foreign currency translation





(149
)
(138
)
(287
)
Other comprehensive income - available for sale investments, net of tax






(25
)
(25
)
Cumulative impact of changes in ownership of Artisan Partners Holdings LP, net of tax



(286
)

(35
)
320

(1
)
Amortization of equity-based compensation



10,837

(409
)

8,489

18,917

Deferred tax assets, net of amounts payable under tax receivable agreements



4,402




4,402

Issuance of Class A common stock, net of issuance costs



(11
)



(11
)
Issuance of restricted stock awards
11



(11
)




Employee net share settlement



(180
)


(154
)
(334
)
Exchange of subsidiary equity
8

(7
)
(1
)





Distributions






(19,329
)
(19,329
)
Dividends



(21,170
)
(18,384
)

(36
)
(39,590
)
Balance at March 31, 2016
$
413

$
176

$
156

$
110,029

$
10,706

$
(559
)
$
(310
)
$
120,611

 
Class A Common stock
Class B Common stock
Class C Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Non-controlling interest - Artisan Partners Holdings
Total equity
Balance at January 1, 2015
$
342

$
215

$
172

$
93,524

$
16,417

$
206

$
(3,377
)
$
107,499

Net income




19,514


33,932

53,446

Other comprehensive income - foreign currency translation





(214
)
(208
)
(422
)
Other comprehensive income - available for sale investments, net of tax





95

169

264

Cumulative impact of changes in ownership of Artisan Partners Holdings LP, net of tax



(1,578
)

28

1,516

(34
)
Amortization of equity-based compensation



9,887



9,718

19,605

Deferred tax assets, net of amounts payable under tax receivable agreements



24,824




24,824

Issuance of Class A common stock, net of issuance costs
38



175,978




176,016

Forfeitures

(4
)
3

1





Issuance of restricted stock awards
6



(6
)




Exchange of subsidiary equity
5

(3
)
(2
)





Purchase of equity and subsidiary equity

(24
)
(14
)
(176,520
)



(176,558
)
Distributions






(42,105
)
(42,105
)
Dividends



(26,700
)
(26,373
)


(53,073
)
Balance at March 31, 2015
$
391

$
184

$
159

$
99,410

$
9,558

$
115

$
(355
)
$
109,462



The accompanying notes are an integral part of the consolidated financial statements.

4


ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
 
For the Three Months Ended March 31,
 
2016
 
2015
Cash flows from operating activities
 
 
 
Net income before noncontrolling interests
$
40,318

 
$
53,446

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
1,177

 
1,039

Deferred income taxes
8,118

 
(576
)
Net loss on the tax receivable agreements

 
6,427

Loss on disposal of property and equipment
22

 
10

Amortization of debt issuance costs
112

 
112

Share-based compensation
18,917

 
19,605

Excess tax benefit on share-based awards

 
(776
)
Change in assets and liabilities resulting in an increase (decrease) in cash:
 
 
 
Accounts receivable
3,666

 
2,950

Prepaid expenses and other assets
(1,167
)
 
(1,774
)
Accounts payable and accrued expenses
41,147

 
52,321

Class B liability awards
(574
)
 
(3,920
)
Deferred lease obligations
(49
)
 
(155
)
Net cash provided by operating activities
111,687

 
128,709

Cash flows from investing activities
 
 
 
Acquisition of property and equipment
(646
)
 
(587
)
Leasehold improvements
(65
)
 
(802
)
Net cash used in investing activities
(711
)
 
(1,389
)
Cash flows from financing activities
 
 
 
Partnership distributions
(19,329
)
 
(42,105
)
Dividends paid
(39,590
)
 
(53,073
)
Change in other liabilities

 
(17
)
Net proceeds from issuance of common stock

 
176,558

Payment of costs directly associated with the issuance of Class A common stock

 
(76
)
Purchase of equity and subsidiary equity

 
(176,558
)
Taxes paid related to employee net share settlement
(334
)
 

Excess tax benefit on share-based awards

 
776

Net cash used in financing activities
(59,253
)
 
(94,495
)
Net increase (decrease) in cash and cash equivalents
51,723

 
32,825

Cash and cash equivalents
 
 
 
Beginning of period
166,193

 
182,284

End of period
$
217,916

 
$
215,109

 
 
 
 
Supplementary information
 
 
 
Noncash activity:
 
 
 
Establishment of deferred tax assets
16,592

 
124,887

Establishment of amounts payable under tax receivable agreements
12,190

 
100,840

The accompanying notes are an integral part of the consolidated financial statements.

5


ARTISAN PARTNERS ASSET MANAGEMENT INC.
Notes to Unaudited Consolidated Financial Statements
(U.S. currencies in thousands, except per share or per unit amounts and as otherwise indicated)
Note 1. Nature of Business and Organization
Nature of Business
Artisan Partners Asset Management Inc. (“APAM” or “Artisan”) is an investment management firm focused on providing high-value added, active investment strategies to sophisticated clients globally. Artisan has seven autonomous investment teams that manage a broad range of U.S., non-U.S. and global investment strategies.
Strategies are offered through multiple investment vehicles to accommodate a broad range of client mandates. Artisan offers its investment management services primarily to institutions and through intermediaries that operate with institutional-like decision-making processes and have long-term investment horizons.
Organization
On March 12, 2013, APAM completed its initial public offering (the “IPO”). APAM was formed for the purpose of becoming the general partner of Artisan Partners Holdings LP (“Artisan Partners Holdings” or “Holdings”) in connection with the IPO. Holdings is a holding company for the investment management business conducted under the name “Artisan Partners”. The reorganization (“IPO Reorganization”) established the necessary corporate structure to complete the IPO while at the same time preserving the ability of the firm to conduct operations through Holdings and its subsidiaries.
As the sole general partner, APAM controls the business and affairs of Holdings. As a result, APAM consolidates Holdings’ financial statements and records a noncontrolling interest for the equity interests in Holdings held by the limited partners of Holdings. At March 31, 2016, APAM held approximately 55% of the equity ownership interest in Holdings.
Artisan Partners Asset Management has been allocated a part of Artisan Partners Holdings’ net income since March 12, 2013, when it became Holdings’ general partner. APAM and its subsidiaries are hereafter referred to collectively as “Artisan” or the “Company”.

Holdings Unit Exchanges

During the three months ended March 31, 2016, certain limited partners of Artisan Partners Holdings exchanged common units (along with a corresponding number of shares of Class B or C common stock of APAM) for shares of Class A common stock (the “Holdings Common Unit Exchanges”). The following common units were exchanged for APAM Class A common stock during the three months ended March 31, 2016:
 
Total Common Units Exchanged
Class A Common Units
Class B Common Units
Class E Common Units
Common units exchanged on March 3, 2016
764,971


754,971

10,000


The corresponding shares of APAM Class B and Class C common stock were immediately canceled upon exchange. The Holdings Common Unit Exchanges increased APAM’s equity ownership interest in Holdings and resulted in a combined increase to deferred tax assets of approximately $14.3 million and an increase in amounts payable under the tax receivable agreements of approximately $12.2 million.
Note 2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying financial statements are unaudited. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of such consolidated financial statements have been included. Such interim results are not necessarily indicative of full year results.
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting and accordingly they do not include all of the information and footnotes required in the annual consolidated financial statements and accompanying footnotes. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. As a result, the interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in APAM’s latest annual report on Form 10-K.

6


The accompanying financial statements were prepared in accordance with U.S. GAAP and related rules and regulations of the SEC. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates or assumptions.
Principles of consolidation
Artisan’s policy is to consolidate all subsidiaries or other entities in which it has a controlling financial interest. The consolidation guidance requires an analysis to determine if an entity should be evaluated for consolidation using the voting interest entity (“VOE”) model or the variable interest entity (“VIE”) model. Under the VOE model, controlling financial interest is generally defined as a majority ownership of voting interests. Under the VIE model, controlling financial interest is defined as the power to direct activities that most significantly impact the economic performance of the entity and the right to receive potentially significant benefits or the obligation to absorb potentially significant losses. The consolidated financial statements include the accounts of APAM and all subsidiaries or other entities in which APAM has a direct or indirect controlling financial interest. All material intercompany balances have been eliminated in consolidation.
Artisan serves as the investment adviser for Artisan Partners Funds, Inc. (“Artisan Funds”), a family of mutual funds registered with the SEC under the Investment Company Act of 1940, and Artisan Partners Global Funds plc (“Artisan Global Funds”), a family of Ireland-based UCITS. Artisan Funds and Artisan Global Funds are corporate entities the business and affairs of which are managed by their respective boards of directors. The shareholders of the funds retain all voting rights, including the right to elect and reelect members of their respective boards of directors. As a result, each of these entities is a VOE and is evaluated for consolidation under the VOE model.
The Company makes initial seed investments in sponsored investment portfolios, including series of Artisan Funds and Artisan Global Funds, at the portfolio’s formation, which are made on the same terms as are available to other investors. If the seed investment results in a controlling financial interest, APAM consolidates the fund, and the underlying individual securities are accounted for as trading securities. Seed investments in which the Company does not have a controlling financial interest are classified as available-for-sale investments. As of March 31, 2016, APAM does not have a controlling financial interest in any sponsored investment portfolio or series of Artisan Funds or Artisan Global Funds and therefore does not consolidate these entities.

Recent accounting pronouncements
Accounting standards adopted as of January 1, 2016
In February 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The ASU modified existing consolidation guidance for determining whether certain legal entities should be consolidated. The ASU eliminated the deferral under ASU 2010-10, Consolidation - Amendments for Certain Investment Funds, and, as a result, the Company must apply the new guidance to all entities, including investment companies. The presumption that a general partner controls a limited partnership was eliminated. In addition, fees paid to decision makers that meet certain conditions no longer cause the decision makers to consolidate VIEs, in certain instances. The new guidance was effective on January 1, 2016, and did not impact the Company’s consolidated financial statements for the periods presented.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the note liability, rather than presented as an asset. The new guidance was effective on January 1, 2016, and requires a retrospective approach to adoption. At March 31, 2016 and December 31, 2015, the Company had approximately $0.6 million and $0.7 million, respectively, of debt issuance costs that met the criteria of this amendment and are now presented as a reduction to Borrowings in the Unaudited Condensed Consolidated Statements of Financial Condition.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718). The ASU is intended to simplify several aspects of the accounting for share-based payment transactions, including income tax consequences, classification on the statement of cash flows, and accounting for the forfeiture of share-based awards. The updated guidance is effective for reporting periods beginning after December 15, 2016. Early adoption is permitted in any interim period; if early adoption is elected, the entity must adopt all of the amendments in the same reporting period and reflect any adjustments as of the beginning of the fiscal year. The Company adopted the guidance as of January 1, 2016. As part of the guidance, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) are now recognized as income tax expense or benefit in the income statement. Previously, excess tax benefits were recognized in additional paid-in-capital. The amendment also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity. The amendments related to the recognition of excess tax benefits and presentation of excess tax benefits in the statement of cash flows are applied prospectively as of January 1, 2016.

7



ASU 2016-09 also allows entities to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered (as previously required) or to account for forfeitures when they occur. The Company has elected to account for forfeitures when they occur, since that approach is expected to better reflect periodic compensation costs. The change in accounting for forfeitures is applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity. As of January 1, 2016, retained earnings decreased by $0.4 million and additional paid-in-capital increased by $0.4 million to reflect the change in accounting principle.
Accounting standards not yet adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes existing accounting standards for revenue recognition and creates a single framework. The new guidance will be effective on January 1, 2018 with early adoption permitted as of January 1, 2017. The Company is currently evaluating its transition method and the potential impact on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income. ASU 2016-01 will be effective on January 1, 2018 and will result in a cumulative-effect adjustment to the Company’s Consolidated Statements of Financial Condition upon adoption. After adoption, the Company’s unrealized gains (losses) on available-for-sale investment securities will be recognized through net income, which will be a change from the current treatment of recognition in other comprehensive income (loss).
In February 2016, the FASB issued ASU 2016-02, Leases, which introduces a lessee model that brings most leases on the balance sheet. The new guidance will be effective on January 1, 2019 and will require a modified retrospective approach to adoption. Early adoption is permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.
Note 3. Investment Securities
The disclosures below include details of Artisan’s investments.
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
March 31, 2016
 
 
 
 
 
 
 
Mutual funds
$
10,069

 
$
574

 
$
(378
)
 
$
10,265

December 31, 2015
 
 
 
 
 
 
 
Mutual funds
$
10,069

 
$
832

 
$
(611
)
 
$
10,290

Artisan’s investments in mutual funds consist of investments in shares of Artisan Funds and Artisan Global Funds and are considered to be available-for-sale securities. As a result, unrealized gains (losses) are recorded to other comprehensive income (loss).
As of March 31, 2016 and December 31, 2015, the total fair value of investments in an unrealized loss position was $4.7 million and $4.4 million, respectively. The $378 thousand unrealized losses on available-for-sale securities are considered temporary, based on the severity and duration of the unrealized losses. No impairment losses were recorded on these available-for-sale securities.
Note 4. Fair Value Measurements
The table below presents information about Artisan’s assets and liabilities that are measured at fair value and the valuation techniques Artisan utilized to determine such fair value.
In accordance with ASC 820, fair value is defined as the price that Artisan would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market for the investment. The following three-tier fair value hierarchy prioritizes the inputs used in measuring fair value:
Level 1 – Observable inputs such as quoted (unadjusted) market prices in active markets for identical securities.
Level 2 – Other significant observable inputs (including but not limited to quoted prices for similar instruments, interest rates, prepayment speeds, credit risk, etc.).
Level 3—Significant unobservable inputs (including Artisan’s own assumptions in determining fair value).

8


The following provides the hierarchy of inputs used to derive fair value of Artisan’s assets and liabilities that are financial instruments as of March 31, 2016 and December 31, 2015:
 
Assets and Liabilities at Fair Value
 
Total
 
Level 1
 
Level 2
 
Level 3
March 31, 2016
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
114,016

 
$
114,016

 
$

 
$

Mutual funds
10,265

 
10,265

 

 

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
49,005

 
$
49,005

 
$

 
$

Mutual funds
10,290

 
10,290

 

 

Fair values determined based on Level 1 inputs utilize quoted market prices for identical assets. Level 1 assets generally consist of money market funds, marketable open-end mutual funds and UCITS funds. There were no Level 2 or Level 3 assets or liabilities recorded at fair value as of March 31, 2016 and December 31, 2015.
Artisan’s policy is to recognize transfers in and transfers out of the valuation levels as of the beginning of the reporting period. There were no transfers between Level 1, Level 2 or Level 3 securities during the three months ended March 31, 2016 and 2015.
Note 5. Borrowings
Artisan’s borrowings consist of the following as of March 31, 2016 and December 31, 2015:
 
Maturity
 
Outstanding Balance
 
Interest Rate Per Annum
Revolving credit agreement
August 2017
 
$

 
NA

Senior notes
 
 
 
 
 
Series A
August 2017
 
60,000

 
4.98
%
Series B
August 2019
 
50,000

 
5.32
%
Series C
August 2022
 
90,000

 
5.82
%
Total borrowings
 
 
$
200,000

 
 
The fair value of borrowings was approximately $201.6 million as of March 31, 2016. Fair value was determined based on future cash flows, discounted to present value using current market interest rates. The inputs are categorized as Level 2 in the fair value hierarchy, as defined in Note 4, “Fair Value Measurements”.
Interest expense incurred on the unsecured notes and revolving credit agreement was $2.8 million for the three months ended March 31, 2016 and 2015.
As of March 31, 2016, the aggregate maturities of debt obligations, based on their contractual terms, are as follows:
2016
$

2017
60,000

2018

2019
50,000

2020

Thereafter
90,000

 
$
200,000


9


Note 6. Noncontrolling interest - Holdings
Holdings is the predecessor of APAM for accounting purposes, and its consolidated financial statements are Artisan’s historical financial statements for periods prior to March 12, 2013, the date on which APAM became the general partner of Holdings. As of March 31, 2016, APAM held approximately 55% of the equity ownership interests in Holdings.
Net income attributable to noncontrolling interests - Artisan Partners Holdings in the Unaudited Consolidated Statements of Operations represents the portion of earnings attributable to the equity ownership interests in Holdings held by the limited partners of Holdings.
In order to maintain the one-to-one correspondence of the number of Holdings partnership units and APAM common shares, Holdings will issue one GP unit to APAM for each share of Class A common stock APAM issues. During the three months ended March 31, 2016, APAM’s equity ownership interest in Holdings increased as a result of the following transactions:
 
Holdings GP Units
Limited Partnership Units
Total
APAM Ownership %
As of December 31, 2015
39,432,605

33,976,323

73,408,928

54
 %
Issuance of APAM Restricted Shares (1)
1,082,035


1,082,035

 %
Holdings Common Unit Exchanges
764,971

(764,971
)

1
 %
Restricted Share Award Net Share Settlement (1)
(12,862
)

(12,862
)
 %
As of March 31, 2016
41,266,749

33,211,352

74,478,101

55
 %
(1) The impact of the transaction on APAM’s ownership percentage was less than 1%.
Since APAM continues to have a controlling interest in Holdings, changes in ownership of Holdings are accounted for as equity transactions. Additional paid-in capital and Noncontrolling interest - Artisan Partners Holdings in the Unaudited Condensed Consolidated Statements of Financial Condition are adjusted to reallocate Holdings’ historical equity to reflect the change in APAM’s ownership of Holdings.
The reallocation of equity had the following impact on the Consolidated Statements of Financial Condition:
Statement of Financial Condition
For the Three Months Ended March 31,
2016
 
2015
Additional paid-in capital
$
(286
)
 
$
(1,578
)
Noncontrolling interest - Artisan Partners Holdings
320

 
1,516

Accumulated other comprehensive income (loss)
(35
)
 
28

Deferred tax assets
1

 
34

Net balance sheet impact

 

In addition to the reallocation of historical equity, the change in ownership resulted in an increase to deferred tax assets and additional paid in capital of $2.3 million for the three months ended March 31, 2016 and $6.3 million for the three months ended March 31, 2015.

10


Note 7. Stockholders’ Equity
APAM - Stockholders’ Equity
As of March 31, 2016 and December 31, 2015, APAM had the following authorized and outstanding equity:
 
 
 
Outstanding
 
 
 
 
 
Authorized
 
March 31, 2016
 
December 31, 2015
 
Voting Rights (1)
 
Economic Rights
Common shares
 
 
 
 
 
 
 
 
 
Class A, par value $0.01 per share
500,000,000

 
41,266,749

 
39,432,605

 
1 vote per share
 
Proportionate
Class B, par value $0.01 per share
200,000,000

 
17,572,251

 
18,327,222

 
5 votes per share
 
None
Class C, par value $0.01 per share
400,000,000

 
15,639,101

 
15,649,101

 
1 vote per share
 
None
(1) The Company’s employees to whom Artisan has granted equity have entered into a stockholders agreement with respect to all shares of APAM common stock they have acquired from the Company and any shares they may acquire from the Company in the future, pursuant to which they granted an irrevocable voting proxy to a Stockholders Committee. As of March 31, 2016, Artisan’s employees held 3,798,624 restricted shares of Class A common stock subject to the agreement and all 17,572,251 outstanding shares of Class B common stock.
APAM is dependent on cash generated by Holdings to fund any dividends. Generally, Holdings will make distributions to all of its partners, including APAM, based on the proportionate ownership each holds in Holdings. APAM will fund dividends to its stockholders from its proportionate share of those distributions after provision for its taxes and other obligations. APAM declared and paid the following dividends per share during the three months ended March 31, 2016 and 2015:
Type of Dividend
 
Class of Stock
 
For the Three Months Ended March 31,
 
 
 
 
2016
 
2015
Quarterly
 
Common Class A
 
$0.60

$0.60
Special Annual
 
Common Class A
 
$0.40

$0.95
APAM issued (canceled) the following shares during the three months ended March 31, 2016:
 
Total Stock
Class A Common Stock(1)
Class B Common Stock
Class C Common Stock
Balance at December 31, 2015
73,408,928

39,432,605

18,327,222

15,649,101

Holdings Common Unit Exchanges

764,971

(754,971
)
(10,000
)
Restricted Share Award Grants
1,082,035

1,082,035



Restricted Share Award Net Share Settlement
(12,862
)
(12,862
)


Balance at March 31, 2016
74,478,101

41,266,749

17,572,251

15,639,101

(1) There were 178,401 and 122,990 restricted stock units outstanding at March 31, 2016 and December 31, 2015, respectively. Restricted stock units are not reflected in the table because they are not considered outstanding or issued stock.
Each Class A, Class B, Class D and Class E common unit of Holdings (together with the corresponding share of Class B or Class C common stock) is exchangeable for one share of Class A common stock. The corresponding shares of Class B and Class C common stock are immediately canceled upon any such exchange.
Upon termination of employment with Artisan, an employee-partner’s unvested Class B common units are forfeited. Generally, the employee-partner’s vested Class B common units are exchanged for Class E common units; the employee-partner’s shares of Class B common stock are canceled; and APAM issues the former employee-partner a number of shares of Class C common stock equal to the former employee-partner’s number of Class E common units. Class E common units are exchangeable for Class A common stock subject to the same restrictions and limitations on exchange applicable to the other common units of Holdings.


11


Artisan Partners Holdings - Partners’ Equity
Holdings makes distributions of its net income to the holders of its partnership units for income taxes as required under the terms of the partnership agreement and also makes additional distributions under the terms of the partnership agreement. The distributions are recorded in the financial statements on the declaration date, or on the payment date in lieu of a declaration date. Holdings’ partnership distributions for the three months ended March 31, 2016 and 2015, were as follows:
 
 
For the Three Months Ended March 31,
 
 
2016
 
2015
Holdings Partnership Distributions
 
$19,329
 
$42,105
Holdings Partnership Distributions to APAM
 
$22,433
 
$37,265
Total Holdings Partnership Distributions
 
$41,762
 
$79,370
The portion of these distributions made to all partners are recorded as a reduction to consolidated stockholders’ equity, with the exception of the portion of distributions made to APAM, which is eliminated upon consolidation.
Note 8. Compensation and Benefits
Total compensation and benefits consists of the following:
 
 
For the Three Months Ended March 31,
 
 
2016
 
2015
Salaries, incentive compensation and benefits (1)
 
$
77,096


$
89,904

Restricted share-based award compensation expense
 
10,384


8,523

Total salaries, incentive compensation and benefits
 
87,480

 
98,427

Pre-offering related compensation - share-based awards
 
7,819

 
10,414

Total compensation and benefits
 
$
95,299

 
$
108,841

(1) Excluding restricted share-based award compensation expense
Incentive compensation
Cash incentive compensation paid to members of Artisan’s portfolio management teams and members of its distribution teams is generally based on formulas that are tied directly to revenues. These payments are made in the quarter following the quarter in which the incentive was earned with the exception of fourth quarter payments which are paid in the fourth quarter of the year. Cash incentive compensation paid to most other employees is discretionary and subjectively determined based on individual performance and Artisan’s overall results during the applicable year and has historically been paid in the fourth quarter of the year. The cash incentive compensation earned by executive officers for the year ended December 31, 2015, was paid in the three months ended March 31, 2016.
Restricted share-based awards
Artisan has registered 14,000,000 shares of Class A common stock for issuance under the 2013 Omnibus Incentive Compensation Plan (the “Plan”). Pursuant to the Plan, APAM has granted a combination of restricted stock awards and restricted stock units (collectively referred to as “restricted share-based awards”) of Class A common stock to employees. The restricted share-based awards generally vest on a pro rata basis over five years. Certain share-based awards will vest upon a combination of both (1) pro-rata annual time vesting and (2) qualifying retirement (as defined in the award agreements).

Unvested awards are subject to forfeiture upon termination of employment. Grantees receiving the awards are entitled to dividends on unvested and vested shares and units. As of March 31, 2016, 9,234,275 shares of Class A common stock were reserved and available for issuance under the Plan.
During the three months ended March 31, 2016, Artisan granted 1,082,035 restricted stock awards and 20,625 restricted stock units of Class A common stock to employees of the Company. Total compensation expense associated with the 2016 grants is expected to be approximately $33.6 million. Compensation expense related to the restricted share-based awards is recognized based on the estimated grant date fair value on a straight-line basis over the requisite service period of the award.
The initial requisite service period is generally five years for all share-based awards. As of January 1, 2016, the Company records the impact of forfeitures when they occur. There were no awards forfeited during the three months ended March 31, 2016.

12


The following table summarizes the restricted share-based award activity for the three months ended March 31, 2016:
 
 
Weighted-Average Grant Date Fair Value
 
Number of Awards
Unvested at January 1, 2016
 
$
51.58

 
2,861,984

Granted
 
$
30.51

 
1,102,660

Forfeited
 
$

 

Vested
 
$
48.17

 
(65,395
)
Unvested at March 31, 2016
 
$
45.68

 
3,899,249

Compensation expense recognized related to the restricted share-based awards was $10.4 million and $8.5 million for the three months ended March 31, 2016 and 2015, respectively. The unrecognized compensation expense for the unvested awards as of March 31, 2016 was $145.2 million with a weighted average recognition period of 3.7 years remaining. The initial requisite service period and remaining weighted average recognition period for all types of restricted share-based awards are substantially equivalent.
During the three months ended March 31, 2016, the Company withheld a total of 12,862 restricted shares as a result of net share settlements to satisfy employee tax withholding obligations. The Company paid $0.3 million in employee tax withholding obligations related to employee share transactions. These net share settlements had the effect of shares repurchased and retired by the Company, as they reduced the number of shares outstanding.
Pre-offering related compensation - share-based awards
Historical Class B share-based awards
Holdings historically granted Class B share-based awards to certain employees. These awards vested over a period of five years. Prior to the IPO, all vested Class B awards were subject to mandatory redemption on termination of employment for any reason and were reflected as liabilities measured at fair value; unvested Class B awards were forfeited on termination of employment.
The vested Class B liability awards of a terminated employee were historically redeemed in cash in annual installments, generally over the five years following termination of employment. The change in value of Class B liability awards and distributions to Class B limited partners were treated as compensation expense.
Historical redemption of Class B awards
Holdings historically redeemed the Class B awards of partners whose employment was terminated. The redemption value of the awards was determined in accordance with the terms of the grant agreement pursuant to which the award was granted. The remaining redemption payment liability for Class B awards of partners whose services to Holdings terminated prior to the IPO was $5.0 million and $5.6 million as of March 31, 2016 and December 31, 2015, respectively. Payments of $0.5 million and $3.9 million were made for the three months ended March 31, 2016 and 2015, respectively.
Modification of Class B share-based awards
As a part of the IPO Reorganization, the Class B grant agreements were amended to eliminate the cash redemption feature. The amendment was considered a modification under ASC 718 and the Class B awards have been classified as equity awards since such modification. Compensation expense is recorded for unvested Class B awards on a straight-line basis over the remaining vesting period.
The following table summarizes the activity related to unvested Class B awards for the three months ended March 31, 2016:
 
Weighted-Average Grant Date Fair Value
 
Number of Class B Awards
Unvested Class B awards at January 1, 2016
$
30.00

 
2,348,334

Granted

 

Forfeited

 

Vested
$
30.00

 
(445,331
)
Unvested at March 31, 2016
$
30.00

 
1,903,003


13


Compensation expense recognized related to the unvested Class B awards was $7.8 million and $10.4 million for the three months ended March 31, 2016 and 2015, respectively. The unrecognized compensation expense for the unvested Class B awards as of March 31, 2016, was $35.7 million with a weighted average recognition period of 1.3 years remaining.
Note 9. Income Taxes and Related Payments
APAM is subject to U.S. federal, state and local income taxation on APAM’s allocable portion of Holdings’ income. APAM’s effective income tax rate was lower than the U.S. federal statutory rate of 35% primarily due to a rate benefit attributable to the fact that, for the three months ended March 31, 2016, approximately 47% of Artisan Partners Holdings’ taxable earnings were attributable to other partners and not subject to corporate-level taxes. This favorable impact is partially offset by the impact of certain permanent items, primarily attributable to pre-IPO share-based compensation expenses, that are not deductible for tax purposes.
Components of the provision for income taxes consist of the following:
 
For the Three Months Ended March 31,
 
2016
 
2015
Current:
 
 
 
Federal
$
2,670

 
$
5,040

State and local
544

 
520

Foreign
185

 
98

Total
3,399

 
5,658

Deferred:
 
 
 
Federal
7,679

 
6,743

State and local
439

 
(7,319
)
Total
8,118

 
(576
)
Income tax expense
$
11,517

 
$
5,082

In connection with the IPO, APAM entered into two tax receivable agreements (“TRAs”). The first TRA generally provides for the payment by APAM to a private equity fund (the “Pre-H&F Corp Merger Shareholder”) of 85% of the applicable cash savings, if any, of U.S. federal, state and local income taxes that APAM actually realizes (or is deemed to realize in certain circumstances) as a result of (i) the tax attributes of the preferred units APAM acquired in the merger of a wholly-owned subsidiary of the Pre-H&F Corp Merger Shareholder into APAM in March 2013, (ii) net operating losses available as a result of the merger and (iii) tax benefits related to imputed interest.
The second TRA generally provides for the payment by APAM to current or former limited partners of Holdings of 85% of the applicable cash savings, if any, of U.S. federal, state and local income taxes that APAM actually realizes (or is deemed to realize in certain circumstances) as a result of (i) certain tax attributes of their partnership units sold to APAM or exchanged (for shares of Class A common stock, convertible preferred stock or other consideration) and that are created as a result of such sales or exchanges and payments under the TRAs and (ii) tax benefits related to imputed interest. Under both agreements, APAM generally will retain the benefit of the remaining 15% of the applicable tax savings.
For purposes of the TRAs, cash savings of income taxes are calculated by comparing APAM’s actual income tax liability to the amount it would have been required to pay had it not been able to utilize any of the tax benefits subject to the TRAs, unless certain assumptions apply. The TRAs will continue in effect until all such tax benefits have been utilized or expired, unless APAM exercises its right to terminate the agreements or payments under the agreements are accelerated in the event that APAM materially breaches any of its material obligations under the agreements.
The actual increase in tax basis, as well as the amount and timing of any payments under these agreements, will vary depending upon a number of factors, including the timing of sales or exchanges by the holders of limited partnership units, the price of the Class A common stock at the time of such sales or exchanges, whether such sales or exchanges are taxable, the amount and timing of the taxable income APAM generates in the future and the tax rate then applicable and the portion of APAM’s payments under the TRAs constituting imputed interest or depreciable basis or amortizable basis.
Payments under the TRAs, if any, will be made pro rata among all TRA counterparties entitled to payments on an annual basis to the extent APAM has sufficient taxable income to utilize the increased depreciation and amortization charges. Artisan expects to make one or more payments under the TRAs, to the extent they are required, prior to or within 125 days after APAM’s U.S. federal income tax return is filed for each fiscal year. Interest on the TRA payments will accrue at a rate equal to one-year LIBOR plus 100 basis points from the due date (without extension) of such tax return until such payments are made.

14


Amounts payable under tax receivable agreements are estimates which may be impacted by factors, including but not limited to, expected tax rates, projected taxable income, and projected ownership levels and are subject to change. Changes in the estimates of amounts payable under tax receivable agreements are recorded as non-operating income (loss) in the Consolidated Statements of Operations.

Transactions during the three months ended March 31, 2016 resulted in the following impact to deferred tax assets and amounts payable under the TRAs:
 
Amounts payable under tax receivable agreements
Deferred Tax Asset - Amortizable basis
December 31, 2015
589,101

660,254

2016 Exchanges
12,190

14,341

Amortization

(8,721
)
March 31, 2016
$
601,291

$
665,874

Net deferred tax assets comprise the following:
 
As of March 31, 2016
 
As of December 31, 2015
Deferred tax assets:
 
 
 
Amortizable basis (1)
$
665,874

 
$
660,254

Other (2)
21,135

 
18,283

Total deferred tax assets
687,009

 
678,537

Less: valuation allowance (3)

 

Net deferred tax assets
$
687,009

 
$
678,537

(1) Represents the unamortized step-up of tax basis and other tax attributes from the merger described above, the purchase of common and preferred units by APAM, and the exchange of common and preferred units for Class A common shares of APAM.
(2) Represents the net deferred tax assets associated with the merger described above and other miscellaneous deferred tax assets.
(3) Artisan assessed whether the deferred tax assets would be realizable and determined based on its history of taxable income that the benefits would more likely than not be realized. Accordingly, no valuation allowance is required.
Accounting standards establish a minimum threshold for recognizing, and a system for measuring, the benefits of income tax return positions in financial statements. There were no uncertain tax positions recorded as of March 31, 2016 and December 31, 2015.
In the normal course of business, Artisan is subject to examination by federal and certain state, local and foreign tax regulators. As of March 31, 2016, U.S. federal income tax returns for the years 2012 through 2014 are open and therefore subject to examination. State and local tax returns are generally subject to examination from 2011 to 2014. Foreign tax returns are generally subject to examination from 2011 to 2015. APAM is currently under examination by the Internal Revenue Service for the tax year 2014.
Note 10. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss), net of tax, in the accompanying Condensed Consolidated Statements of Financial Condition represents the portion of accumulated other comprehensive income attributable to APAM, and consists of the following:
 
As of March 31, 2016
 
As of December 31, 2015
Unrealized gain (loss) on investments
$
66

 
$
77

Foreign currency translation gain (loss)
(625
)
 
(452
)
Accumulated other comprehensive income (loss)
$
(559
)
 
$
(375
)
Comprehensive income (loss) attributable to noncontrolling interests - Artisan Partners Holdings in the Consolidated Statements of Comprehensive Income (Loss) represents the portion of comprehensive income (loss) attributable to the equity ownership interests in Holdings held by the limited partners of Holdings.

15


Note 11. Earnings Per Share
Basic earnings per share is computed under the two-class method by dividing income available to Class A common stockholders by the weighted average number of Class A common shares outstanding during the period. Unvested restricted share-based awards are excluded from the number of Class A common shares outstanding for the basic earnings per share calculation because the shares have not yet been earned by the employees. Income available to Class A common stockholders is computed by reducing net income attributable to APAM by earnings (distributed and undistributed) allocated to participating securities, according to their respective rights to participate in those earnings. Unvested share-based awards are participating securities because the awards include non-forfeitable dividend rights during the vesting period. Class B and Class C common shares do not share in profits of APAM and therefore are not reflected in the calculations.
The computation of basic and diluted earnings per share under the two-class method for the three months ended March 31, 2016 and 2015 were as follows:
 
For the Three Months Ended March 31,
Basic and Diluted Earnings Per Share
2016
 
2015
Numerator:
 
 
 
Net income attributable to APAM
$
16,261

 
$
19,514

Less: Allocation to participating securities
3,162

 
5,557

Net income available to common stockholders
$
13,099

 
$
13,957

Denominator:

 
 
Weighted average shares outstanding
36,970,950

 
32,633,481

Earnings per share
$
0.35

 
$
0.43

Allocation to participating securities generally represents dividends paid to holders of unvested restricted share-based awards. There were no dilutive securities outstanding during the three months ended March 31, 2015 and 2016. The Holdings limited partnership units are anti-dilutive primarily due to the impact of public company expenses and unrecognized share-based compensation expense. Unvested share-based awards receive dividends and are considered participating securities. As a result, unvested share-based awards are also anti-dilutive.

The following table summarizes the weighted-average shares outstanding that are excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive:
 
For the Three Months Ended March 31,
Anti-Dilutive Weighted Average Shares Outstanding
2016
 
2015
Holdings limited partnership units
33,740,947

 
37,609,365

Unvested restricted share-based awards
3,371,803

 
2,991,457

Total
37,112,750

 
40,600,822

Note 12. Indemnifications
In the normal course of business, APAM enters into agreements that include indemnities in favor of third parties. Holdings has also agreed to indemnify APAM as its general partner, Artisan Investment Corporation (“AIC”) as its former general partner, the directors and officers of APAM, the directors and officers of AIC as its former general partner, the members of its former Advisory Committee, and its partners, directors, officers, employees and agents. Holdings’ subsidiaries may also have similar agreements to indemnify their respective general partner(s), directors, officers, directors and officers of their general partner(s), partners, members, employees, and agents. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against us that have not yet occurred. APAM maintains insurance policies that may provide coverage against certain claims under these indemnities.

16


Note 13. Related Party Transactions
The current named executive officers of APAM and certain members of APAM’s board (or their affiliates) are limited partners of Holdings. As a result, certain transactions (such as TRA payments) between Artisan and the limited partners of Holdings are considered to be related party transactions with respect to these persons.
Affiliate transactions—Artisan Funds     
Artisan has an agreement to serve as the investment adviser to Artisan Funds, with which certain Artisan employees are affiliated. Under the terms of the agreement, which generally is reviewed and continued by the board of directors of Artisan Funds annually, a fee is paid to Artisan based on an annual percentage of the average daily net assets of each Artisan Fund ranging from 0.625% to 1.25%. Artisan generally collects revenues related to these services on the last business day of each month and records them in Management Fees in the Consolidated Statement of Operations. Artisan has contractually agreed to waive its management fees or reimburse for expenses incurred to the extent necessary to limit annualized ordinary operating expenses incurred by certain of the Artisan Funds to not more than a fixed percentage (ranging from 0.88% to 1.50%) of a Fund’s average daily net assets. In addition, Artisan may voluntarily waive fees or reimburse any of the Artisan Funds for other expenses. The officers and a director of Artisan Funds who are affiliated with Artisan receive no compensation from the funds.
Fees for managing the Funds and amounts waived or reimbursed by Artisan for fees and expenses (including management fees) are as follows:
 
For the Three Months Ended March 31,
 
2016
 
2015
Investment management fees:
 
 
 
Artisan Funds
$
111,175

 
$
134,307

Fee waiver / expense reimbursement:
 
 
 
Artisan Funds
$
133

 
$

Affiliate transactions—Artisan Global Funds
Artisan has an agreement to serve as the investment adviser to Artisan Global Funds, with which certain Artisan employees are affiliated. Under the terms of these agreements, a fee is paid based on an annual percentage of the average daily net assets of each fund ranging from 0.75% to 1.80%. Artisan reimburses each sub-fund of Artisan Global Funds to the extent that sub-fund’s expenses, not including Artisan’s fee, exceed certain levels, which range from 0.10% to 0.20%. In addition, Artisan may voluntarily waive fees or reimburse any of the Artisan Global Funds for other expenses. The directors of Artisan Global Funds who are affiliated with Artisan receive no compensation from the funds. Accounts receivable included $1.2 million and $1.3 million due from Artisan Global Funds as of March 31, 2016 and December 31, 2015, respectively.
Fees for managing Artisan Global Funds and amounts reimbursed to Artisan Global Funds by Artisan are as follows:
 
For the Three Months Ended March 31,
 
2016
 
2015
Investment management fees:
 
 
 
Artisan Global Funds
$
3,625

 
$
3,724

Fee waiver / expense reimbursement:
 
 
 
Artisan Global Funds
$
88

 
$
63

Note 14. Subsequent Events
Distributions and dividends
On April 11, 2016, Artisan Partners Holdings made a distribution of $35.1 million to holders of Artisan Partners Holdings partnership units, including APAM, pursuant to the partnership agreement.

On April 20, 2016, the board of directors of APAM declared a distribution by Artisan Partners Holdings of $33.9 million to holders of Artisan Partners Holdings partnership units, including APAM. On the same date, the board declared a quarterly dividend of $0.60 per share of Class A common stock. The APAM dividend is payable on May 31, 2016, to shareholders of record as of May 17, 2016.

On April 15, 2016, the Company made a payment of approximately $21 million under the tax receivable agreements representing a portion of the Company’s estimated total 2016 payments.

17


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are an investment management firm focused on providing high-value added, active investment strategies to sophisticated clients globally. Our operations are conducted through Artisan Partners Holdings and its subsidiaries. We derive essentially all of our revenues from investment management fees. Nearly all our fees are based on a specified percentage of clients’ average assets under our management. We operate our business in a single segment.
We have seven autonomous investment teams that manage a broad range of U.S., non-U.S., and global investment strategies. Strategies are offered through multiple investment vehicles to accommodate a broad range of client mandates.
Assets Under Management

During the three months ended March 31, 2016, global equity markets were volatile and generated mixed returns. Our AUM was $97.0 billion at March 31, 2016, a decrease of $2.8 billion, or 2.8%, compared to $99.8 billion at December 31, 2015, as a result of $1.5 billion of market depreciation and $1.3 billion in net client cash outflows.

The pronounced declines in equity markets during the first two months of the quarter followed by a partial rebound in March caused a greater decline in our average AUM than in our ending AUM. Average AUM for the three months ended March 31, 2016 decreased 8.4% compared to the three months ended December 31, 2015, and decreased 14.3% as compared to the three months ended March 31, 2015.

Business and Financial Highlights

At quarter-end, the 5-year average annual returns of 7 of our 12 investment strategies with 5-year track records exceeded the returns of the applicable benchmark. Our Global Opportunities and Global Equity strategies, both of which are open to new clients and investors and have realizable capacity, beat their benchmarks on a gross basis by over 500 and 450 basis points, respectively, over the 5-year period.
At quarter-end, the 10-year average annual returns of 6 of our 8 investment strategies with 10-year track records exceeded the returns of the applicable benchmark.
Firm-wide net outflows of $1.3 billion were primarily driven by net outflows from the strategies managed by our U.S. Value team, which experienced a total of $1.2 billion of net outflows during the quarter. During the quarter, we announced that the U.S. Value team will cease managing assets in the U.S. Small-Cap Value strategy during the second quarter of 2016.
During the first quarter, our High Income strategy raised $334 million in net client cash flows; our Developing World strategy raised $170 million in net client cash flows; and our Global Opportunities strategy raised $151 million in net client cash flows. All three strategies are open to new clients and investors. Our Global Value strategy, which we re-opened to investors in our pooled vehicles, raised $88 million in net client cash flows.
Revenues were $174.5 million for the three months ended March 31, 2016, a 14% decrease from revenues of $203.6 million for the three months ended March 31, 2015.
Operating margin was 31.4% for the three months ended March 31, 2016 compared to 33.3% for the three months ended March 31, 2015. Adjusted operating margin was 35.8% for the March quarter of 2016 compared to 38.4% for the March quarter of 2015.
Net income attributable to APAM was $16.3 million, or $0.35 per basic and diluted share, for three months ended March 31, 2016 compared to $19.5 million, or $0.43 per basic and diluted share, for the three months ended March 31, 2015. Adjusted net income per adjusted share was $0.51 in the March quarter of 2016 compared to $0.65 in the March quarter of 2015.
We continued our culture of employee ownership through a grant of 1,102,660 restricted share-based awards to our employees. A substantial majority of the awards were granted to investment professionals.
Organizational Structure
Organizational Structure
On March 12, 2013, Artisan Partners Asset Management Inc. (“APAM”) and the intermediary holding company through which APAM conducts its operations, Artisan Partners Holdings LP (“Holdings”), completed a series of transactions (“the IPO Reorganization”) to reorganize their capital structures in connection with the initial public offering (“IPO”) of APAM’s Class A common stock. The IPO Reorganization and IPO were completed on March 12, 2013. The IPO Reorganization was designed to create a capital structure that preserves our ability to conduct our business through Holdings, while permitting us to raise additional capital and provide access to liquidity through a public company. The IPO Reorganization is described in greater detail in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 25, 2016.

18


Our employees and other limited partners of Holdings held approximately 45% of the equity interests in Holdings as of March 31, 2016. As a result, our post-IPO results reflect that significant noncontrolling interest.
2016 Unit Exchanges
During the three months ended March 31, 2016, certain limited partners of Holdings exchanged 764,971 common units (along with a corresponding number of shares of Class B or Class C common stock of APAM) for 764,971 shares of Class A common stock. In connection with the exchanges, APAM received 764,971 GP units of Holdings.
APAM’s equity ownership interest in Holdings increased from 54% at December 31, 2015 to 55% at March 31, 2016, as a result of these exchanges and other equity transactions during the period.
Tax Impact of IPO Reorganization
In connection with the IPO, APAM entered into two tax receivable agreements (“TRAs”). The first TRA generally provides for the payment by us to a private equity fund (the “Pre-H&F Corp Merger Shareholder”) of 85% of the applicable cash savings, if any, of U.S. federal, state and local income taxes that we actually realize (or are deemed to realize in certain circumstances) as a result of (i) the tax attributes of the preferred units APAM acquired in the merger of a wholly-owned subsidiary of the Pre-H&F Corp Merger Shareholder into us in March 2013, (ii) net operating losses available as a result of the merger and (iii) tax benefits related to imputed interest.
The second TRA generally provides for the payment by us to current or former limited partners of Holdings of 85% of the applicable cash savings, if any, of U.S. federal, state and local income taxes that we actually realize (or are deemed to realize in certain circumstances) as a result of (i) certain tax attributes of their partnership units sold to us or exchanged (for shares of Class A common stock, convertible preferred stock or other consideration) and that are created as a result of such sales or exchanges and payments under the TRAs and (ii) tax benefits related to imputed interest. Under both agreements, APAM generally will retain the benefit of the remaining 15% of the applicable tax savings.
Transactions during the three months ended March 31, 2016, resulted in the following impact to deferred tax assets and amounts payable under the TRAs:
 
Amounts payable under tax receivable agreements
Deferred Tax Asset - Amortizable basis
 
(in millions)
December 31, 2015
$589.1
$660.3
2016 Exchanges
12.2
14.3
Amortization
(8.7)
March 31, 2016
$601.3
$665.9
Financial Overview
Economic Environment
Global equity market conditions can materially affect our financial performance. During the three months ended March 31, 2016, our AUM decreased 2.8%, 1.5% of which was due to market depreciation. The following table presents the total returns of relevant market indices for the three months ended March 31, 2016 and 2015:
 
For the Three Months Ended March 31,
 
2016
 
2015
S&P 500 total returns
1.3
 %
 
1.0
%
MSCI All World total returns
0.2
 %
 
2.3
%
MSCI EAFE total returns
(3.0
)%
 
4.9
%
Russell Midcap® total returns
2.2
 %
 
4.0
%

19


Key Performance Indicators
When we review our performance we consider, among other things, the following:
 
For the Three Months Ended March 31,
 
2016
 
2015
 
(unaudited; dollars in millions)
Assets under management at period end
$
97,032

 
$
108,723

Average assets under management (1)
$
92,896

 
$
108,410

Net client cash flows
$
(1,339
)
 
$
(2,228
)
Total revenues
$
174.5

 
$
203.6

Weighted average fee (2)
76
 bps
 
76
 bps
Adjusted operating margin (3)
35.8
%
 
38.4
%
 
(1) We compute average assets under management by averaging day-end assets under management for the applicable period.
(2) We compute our weighted average fee by dividing annualized investment management fees by average assets under management for the applicable period.
(3) Adjusted measures are non-GAAP measures and are explained and reconciled to the comparable GAAP measures in “Supplemental Non-GAAP Financial Information” below.
Because we earn investment management fees based primarily on the value of the assets we manage across a reporting period, we believe that average assets under management for a period is a better metric for understanding changes in our revenues than period end assets under management.

The weighted average fee represents annualized investment management fees as a percentage of average assets under management for the applicable period. We have historically been disciplined about maintaining our rates of fees. Over time, industry-wide fee pressure could cause us to reduce our fees.
Assets Under Management and Investment Performance
Changes to our operating results from one period to another are primarily caused by changes in the amount of our assets under management. Changes in the relative composition of our assets under management among our investment strategies and vehicles and the effective fee rates on our products also impact our operating results.

The amount and composition of our assets under management are, and will continue to be, influenced by a variety of factors including, among others:
investment performance, including fluctuations in both the financial markets and foreign currency exchange rates and the quality of our investment decisions;
flows of client assets into and out of our various strategies and investment vehicles;
our decision to close strategies or limit the growth of assets in a strategy or a vehicle when we believe it is in the best interest of our clients, as well as our decision to re-open strategies, in part or entirely;
our ability to attract and retain qualified investment, management, and marketing and client service professionals;
industry trends towards products or strategies that we do not offer;
competitive conditions in the investment management and broader financial services sectors; and
investor sentiment and confidence.

20


The table below sets forth changes in our total AUM:
 
For the Three Months Ended March 31,
 
Period-to-Period
 
2016
 
2015
 
$
 
%
 
(unaudited; in millions)
 
 
 
 
Beginning assets under management
$
99,848

 
$
107,915

 
$
(8,067
)
 
(7.5
)%
Gross client cash inflows
4,653

 
4,423

 
230

 
5.2
 %
Gross client cash outflows
(5,992
)
 
(6,651
)
 
659

 
9.9
 %
Net client cash flows
(1,339
)
 
(2,228
)
 
889

 
39.9
 %
Market appreciation (depreciation) (1)
(1,461
)
 
3,036

 
(4,497
)
 
(148.1
)%
Net transfers (2)
(16
)
 

 
(16
)
 
100.0
 %
Ending assets under management
$
97,032

 
$
108,723

 
$
(11,691
)
 
(10.8
)%
Average assets under management
$
92,896

 
$
108,410

 
$
(15,514
)
 
(14.3
)%
(1) Includes the impact of translating the value of assets under management denominated in non-USD currencies into U.S. dollars. The impact was immaterial for the periods presented.
(2) Net transfers represent certain amounts that we have identified as having been transferred out of one investment strategy or investment vehicle and into another strategy or vehicle.
We believe that growth in AUM in an investment strategy requires the availability of attractive investment opportunities relative to the amount of AUM in the strategy at a time when the strategy has a competitive performance track record and there is stable or growing client demand for the strategy or asset class. When we believe that each of these factors is present with respect to an investment strategy, we say we have “realizable capacity” in that strategy. We discuss realizable capacity in general, rather than discussing the capacity of our strategies in precise dollar amounts, because capacity is affected by a number of factors, evolves over time, and is subject to change. We are confident that we have sufficient realizable capacity to continue to thoughtfully grow. In particular, we believe that we currently have realizable capacity in our Global Opportunities and Global Equity strategies, where we believe we are well-positioned to take advantage of client and investor demand. The Global Opportunities strategy had $151 million of net client cash inflows during the three months ended March 31, 2016, while the Global Equity strategy’s net flows were slightly negative. While our past inflow experience does not guarantee future activity, if these strategies continue to perform well relative to their benchmarks and global strategies remain in demand, we expect that they will gather assets.
Across the firm, we experienced total net outflows of $1.3 billion during the three months ended March 31, 2016. The strategies managed by our U.S. Value team experienced total net outflows of $1.2 billion as a result of extended underperformance and our February 2016 announcement that we intend to cease managing assets in the U.S. Small-Cap Value strategy in the second quarter of 2016. The Small-Cap Value strategy experienced $187 million of net outflows during the March quarter. The strategy had $699 million of AUM at March 31, 2016, including $358 million of AUM in Artisan Small Cap Value Fund, which will merge into Artisan Mid Cap Value Fund in late May 2016. If the U.S. Value team’s strategies continue to underperform their benchmarks and client trends continue, we expect the team’s strategies will continue to experience net outflows.
Our High Income strategy, which we launched in March 2014, generated net inflows of $334 million during the three months ended March 31, 2016. We also saw strong interest in our Developing World strategy, which launched at the end of June 2015 and has generated a total of $550 million in net inflows since that time. And our Global Value strategy, which we re-opened to investors in our pooled vehicles in the fourth quarter of 2015, generated $88 million of net inflows during the March quarter, after several quarters of net outflows while the strategy was closed to most new investors.
Our Non-U.S. Growth strategy had net outflows of $631 million for the three months ended March 31, 2016. As previously announced, we closed the strategy to most new retail and intermediary investors in February 2016, and we will further close the strategy to most new institutional investors and employee benefit plans in October 2016. The partial closing in February and scheduled further closing have impacted and will continue to impact the strategy’s net cash flows, though we cannot estimate the impact with any certainty because of the many factors involved.
We monitor the availability of attractive investment opportunities relative to the amount of assets we manage in each of our investment strategies. When appropriate, we will close a strategy to new investors or otherwise take action to slow or restrict its growth, even though our aggregate AUM may be negatively impacted in the short term. We may also re-open a strategy, widely or selectively, to fill available capacity or manage the diversification of our client base in that strategy. We believe that management of our investment capacity protects our ability to manage assets successfully, which protects the interests of our clients and, in the long term, protects our ability to retain client assets and maintain our profit margins.


21


In addition to our Non-U.S. Growth and Global Value strategies which are partially closed as described above, as of the date of this filing, our Non-U.S. Small-Cap Growth, Non-U.S. Value, U.S. Mid-Cap Growth, U.S. Small-Cap Value, U.S. Mid-Cap Value and U.S. Small-Cap Growth strategies are closed to most new investors and client relationships.
When we close a strategy, we typically continue to allow additional investments in the strategy by existing clients and certain related entities, which means that during a given period we could have net client cash inflows even in a closed strategy. For example, during the three months ended March 31, 2016, our Non-U.S. Value strategy, which is closed to most new investors and client relationships, had $243 million in net client cash inflows. However, when a strategy is closed or its growth is restricted we expect there to be periods of net client cash outflows.
We measure investment performance based upon the results of our “composites”, which represent the aggregate performance of all discretionary client accounts, including mutual funds, invested in the same strategy except those accounts with respect to which we believe client-imposed investment restrictions may have a material impact on portfolio construction and those accounts managed in a currency other than U.S. dollars.

22


The table below sets forth the total AUM for each of our investment teams and strategies as of March 31, 2016, the inception date for each investment composite, and the average annual total returns for each composite and its respective broad-based benchmark (and style benchmark, if applicable) over a multi-horizon time period as of March 31, 2016. Returns for periods of less than one year are not annualized.
 
 
 
 
 
 
 
 
 
 
 
Average Annual
Value-Added1
Since Inception
(bps)
 
Inception
 
Strategy AUM
 
Average Annual Total Returns (%)
 
Investment Team and Strategy
Date
 
 (in $MM)
 
1 YR
3 YR
5 YR
10 YR
Inception
 
Global Equity Team
 
 
 
 
 
Non-U.S. Growth Strategy
1/1/1996
 
$
28,149

 
(10.04)%
3.98%
6.53%
4.87%
10.26%
 
605
MSCI EAFE Index
 
 
 
 
(8.27)%
2.23%
2.29%
1.80%
4.21%
 
 
Non-U.S. Small-Cap Growth Strategy
1/1/2002
 
$
1,221

 
1.09%
5.28%
7.38%
7.12%
13.77%
 
394
MSCI EAFE Small Cap Index
 
 
 
 
3.20%
7.28%
5.57%
3.44%
9.83%
 
 
Global Equity Strategy
4/1/2010
 
$
929

 
(7.92)%
6.10%
9.94%
N/A
10.90%
 
426
MSCI All Country World Index
 
 
 
 
(4.34)%
5.53%
5.22%
N/A
6.64%
 
 
Global Small-Cap Growth Strategy
7/1/2013
 
$
123

 
(6.71)%
N/A
N/A
N/A
2.48%
 
(436)

MSCI All Country World Small Cap Index
 
 
 
 
(4.50)%
N/A
N/A
N/A
6.84%
 
 
U.S. Value Team
 
 
 
 
 
 
 
 
 
 
 
U.S. Mid-Cap Value Strategy
4/1/1999
 
$
7,452

 
(5.08)%
5.55%
8.51%
8.38%
13.13%
 
424
Russell Midcap® Index
 
 
 
 
(4.04)%
10.44%
10.29%
7.44%
8.89%
 
 
Russell Midcap® Value Index
 
 
 
 
(3.39)%
9.88%
10.50%
7.22%
9.56%
 
 
U.S. Small-Cap Value Strategy
6/1/1997
 
$
699

 
(4.68)%
1.46%
1.74%
4.95%
10.79%
 
353
Russell 2000® Index
 
 
 
 
(9.76)%
6.84%
7.19%
5.25%
7.26%
 
 
Russell 2000® Value Index
 
 
 
 
(7.72)%
5.72%
6.66%
4.42%
8.32%
 
 
Value Equity Strategy
7/1/2005
 
$
1,625

 
(2.82)%
6.25%
8.76%
6.62%
7.12%
 
(45)
Russell 1000® Index
 
 
 
 
0.50%
11.51%
11.34%
7.05%
7.58%
 
 
Russell 1000® Value Index
 
 
 
 
(1.54)%
9.37%
10.23%
5.71%
6.37%
 
 
Growth Team
 
 
 
 
 
 
 
 
 
 
 
U.S. Mid-Cap Growth Strategy
4/1/1997
 
$
14,118

 
(5.93)%
10.12%
10.17%
9.69%
15.00%
 
506
Russell Midcap® Index
 
 
 
 
(4.04)%
10.44%
10.29%
7.44%
9.95%
 
 
Russell Midcap® Growth Index
 
 
 
 
(4.75)%
10.98%
9.98%
7.43%
8.51%
 
 
U.S. Small-Cap Growth Strategy
4/1/1995
 
$
2,090

 
(6.96)%
7.31%
9.63%
6.20%
9.50%
 
90
Russell 2000® Index
 
 
 
 
(9.76)%
6.84%
7.19%
5.25%
8.60%
 
 
Russell 2000® Growth Index
 
 
 
 
(11.84)%
7.90%
7.69%
6.00%
6.85%
 
 
Global Opportunities Strategy
2/1/2007
 
$
7,669

 
3.28%
10.17%
10.49%
N/A
9.10%
 
615
MSCI All Country World Index
 
 
 
 
(4.34)%
5.53%
5.22%
N/A
2.95%
 
 
Global Value Team
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. Value Strategy
7/1/2002
 
$
16,598

 
(3.33)%
7.39%
8.63%
7.92%
12.48%
 
689
MSCI EAFE Index
 
 
 
 
(8.27)%
2.23%
2.29%
1.80%
5.59%
 
 
Global Value Strategy
7/1/2007
 
$
14,172

 
(0.81)%
8.96%
11.36%
N/A
7.61%
 
551
MSCI All Country World Index
 
 
 
 
(4.34)%
5.53%
5.22%
N/A
2.10%
 
 
Emerging Markets Team
 
 
 
 
 
 
 
 
 
 
 
Emerging Markets Strategy
7/1/2006
 
$
271

 
(5.80)%
(2.50)%
(4.82)%
N/A
3.43%
 
(13)
MSCI Emerging Markets Index
 
 
 
 
(12.03)%
(4.50)%
(4.13)%
N/A
3.56%
 
 
Credit Team
 
 
 
 
 
 
 
 
 
 
 
High Income Strategy2
4/1/2014
 
$
1,343

 
0.12%
N/A
N/A
N/A
2.99%
 
400
BofA Merrill Lynch High Yield Master II Index
 
 
 
 
(3.99)%
N/A
N/A
N/A
(1.01)%
 
 
Developing World Team
 
 
 
 
 
 
 
 
 
 
 
Developing World Strategy
7/1/2015
 
$
573

 
N/A
N/A
N/A
N/A
(7.11)%
 
552
MSCI Emerging Markets Index
 
 
 
 
N/A
N/A
N/A
N/A
(12.63)%
 
 
Total Assets Under Management
 
 
$
97,032

 
 
 
 
 
 
 
 
(1) Value-added is the amount in basis points by which the average annual gross composite return of each of our strategies has outperformed the broad-based market index most commonly used by our clients to compare the performance of the relevant strategy. Value-added for periods less than one year is not annualized.
(2) The Artisan High Income strategy may hold loans and other security types, including securities with lower credit ratings, that may not be included in the BofA Merrill Lynch High Yield Master II Index. At times, this causes material differences in relative performance.

23



The tables below set forth changes in our AUM by investment team:
 
 
By Investment Team
Three Months Ended
 
Global Equity
U.S. Value
Growth
Global Value
Emerging Markets
Credit
Developing World
Total
March 31, 2016
 
(unaudited; in millions)
Beginning assets under management
 
$
32,434

$
10,369

$
24,929

$
30,182

$
571

$
989

$
374

$
99,848

Gross client cash inflows
 
1,228

353

1,229

1,210

1

447

185

4,653

Gross client cash outflows
 
(1,887
)
(1,515
)
(1,254
)
(879
)
(329
)
(113
)
(15
)
(5,992
)
Net client cash flows
 
(659
)
(1,162
)
(25
)
331

(328
)
334

170

(1,339
)
Market appreciation (depreciation)
 
(1,353
)
569

(1,027
)
273

28

20

29

(1,461
)
Net transfers(1)
 



(16
)



(16
)
Ending assets under management
 
$
30,422

$
9,776

$
23,877

$
30,770

$
271

$
1,343

$
573

$
97,032

Average assets under management
 
$
29,877

$
9,497

$
22,577

$
28,919

$
499

$
1,123

$
405

$
92,896

March 31, 2015
 
 
 
 
 
 
 
 
 
Beginning assets under management
 
$
31,452

$
18,112

$
24,499

$
32,481

$
806

$
565

$

$
107,915

Gross client cash inflows
 
2,237

445

889

719

3

130


4,423

Gross client cash outflows
 
(1,307
)
(2,586
)
(1,291
)
(1,243
)
(185
)
(39
)

(6,651
)
Net client cash flows
 
930

(2,141
)
(402
)
(524
)
(182
)
91


(2,228
)
Market appreciation (depreciation)
 
1,219

272

967

555

5

18


3,036

Net transfers(1)
 








Ending assets under management
 
$
33,601

$
16,243

$
25,064

$
32,512

$
629

$
674

$

$
108,723

Average assets under management
 
$
32,618

$
17,256

$
24,734

$
32,443

$
749

$
611

$

$
108,410

(1) Net transfers represent certain amounts that we have identified as having been transferred out of one investment strategy or investment vehicle and into another strategy or vehicle.
The goal of our marketing, distribution and client services efforts is to establish and maintain a client base that is diversified by investment strategy, investment vehicle and distribution channel. As distribution channels have evolved to have more institutional-like decision making processes and longer-term investment horizons, we have expanded our distribution efforts into those areas.
The table below sets forth our AUM by distribution channel:
 
As of March 31,
 2016(1)
 
As of March 31,
 2015(1)
 
$ in millions
 
% of total
 
$ in millions
 
% of total
 
(unaudited)
 
 
 
(unaudited)
 
 
Institutional
$
62,709

 
64.6
%
 
$
68,639

 
63.1
%
Intermediary
29,497

 
30.4
%
 
34,033

 
31.3
%
Retail
4,826

 
5.0
%
 
6,051

 
5.6
%
Ending Assets Under Management
$
97,032

 
100.0
%
 
$
108,723

 
100.0
%
(1) The allocation of AUM by distribution channel data involves the use of estimates and the exercise of judgment.

24


The following tables set forth the changes in our AUM for Artisan Funds, Artisan Global Funds and separate accounts:
Three Months Ended
Artisan Funds & Artisan Global Funds
 
Separate Accounts
 
Total
March 31, 2016
(unaudited; in millions)
Beginning assets under management
$
53,526

 
$
46,322

 
$
99,848

Gross client cash inflows
3,667

 
986

 
4,653

Gross client cash outflows
(4,221
)
 
(1,771
)
 
(5,992
)
Net client cash flows
(554
)
 
(785
)
 
(1,339
)
Market appreciation (depreciation)
(908
)
 
(553
)
 
(1,461
)
Net transfers (1)
49

 
(65
)
 
(16
)
Ending assets under management
$
52,113

 
$
44,919

 
$
97,032

Average assets under management
$
49,900

 
$
42,996

 
$
92,896

March 31, 2015
 
 
 
 
 
Beginning assets under management
$
60,257

 
$
47,658

 
$
107,915

Gross client cash inflows
3,708

 
715

 
4,423

Gross client cash outflows
(4,962
)
 
(1,689
)
 
(6,651
)
Net client cash flows
(1,254
)
 
(974
)
 
(2,228
)
Market appreciation (depreciation)
1,799

 
1,237

 
3,036

Net transfers (1)
(153
)
 
153

 

Ending assets under management
$
60,649

 
$
48,074

 
$
108,723

Average assets under management
$
60,277

 
$
48,133

 
$
108,410

(1) Net transfers represent certain amounts that we have identified as having been transferred out of one investment strategy or investment vehicle and into another strategy or vehicle.



25


Results of Operations
Three months ended March 31, 2016, Compared to Three months ended March 31, 2015
 
For the Three Months Ended March 31,
 
For the Period-to-Period
 
2016
 
2015
 
$
 
%
Statements of operations data:
(unaudited; in millions, except per share data)
Revenues
$
174.5

 
$
203.6

 
$
(29.1
)
 
(14
)%
Operating Expenses
 
 
 
 
 
 
 
Total compensation and benefits
95.3

 
108.8

 
(13.5
)
 
(12
)%
Other operating expenses
24.4

 
27.0

 
(2.6
)
 
(10
)%
Total operating expenses
119.7

 
135.8

 
(16.1
)
 
(12
)%
Total operating income
54.8

 
67.8