Artisan Partners Asset Management Inc. Class A

Hello, and thank you for standing by. My name is Jason, and I will be your conference operator today. At this time, all participants are in a listen-only mode. After the prepared remarks, management will conduct a question and answer session, and conference participants will be given instructions at that time. As a reminder, this conference call is being recorded. At this time, I will turn the call over to Michaela Taphorn, Director, Investor Relations for Artisan Partners Asset Management. Please go ahead.

Thank you. Welcome to the Artisan Partners Asset Management business update and earnings call. Today's call will include remarks from Eric Holson, CEO, and CJ Bailey, CFO. Our latest results and investor presentation are available on the investor relations section of our website. Following these remarks, we will open the line for questions. Before we begin, I'd like to remind you that comments made on today's call including responses to questions, we deal with forward-looking statements. These are subject to risks and uncertainties and are presented in the earnings release in detailed inter-filings with the SEC. We are not required to update or revise any of these statements following the call. In addition, some of our remarks made today will include references to non-GAAP financial measures. you can find reconciliations of both measures to the most comparable gap measures in the earnings relief. And with that, I'll now turn the call over to Eric Holson.

Thank you, Michaela, and thank you, everyone, for joining the call or reading the transcript. Thoughtful growth is one of our three foundational pillars. Beginning 25 years ago, during our startup phase, we benefited from talent, style categorization. Over time, we naturally evolved into a global organization with non-U.S. clients and investment strategies oriented towards a broader client base. During both our startup and global growth periods, we benefited from a naturally growing client base and asset allocation trends working in our favor. As our industry naturally ebbs and flows, we have stayed true to who we are. and fees, but on investments and performance. We have taken the opportunity to expand guidelines with more investment degrees of freedom so that our high value added active strategies better complement growing allocations to passive and exposure strategies, which have greater scale and lower fees. And we have broadened our firm with credit and alternative oriented strategies. increasing our investment degrees of freedom and broadening our platform we have further enhanced our firm as a natural home for truly active high value-added investors today we believe exposure and scaled solutions are starting to reach many asset pool targets we also believe that demand for differentiated active investment strategies including alternatives will continue to grow and broaden looking forward we think for growth the evolution of private markets and demand for alternative strategies, the under-allocation of portfolios to China, the world's second largest economy, and ongoing industry disruption. With new investment teams and strategies, we expect to capture these growth opportunities, as we have done for 25 years. And we expect to marry revenues from new In our view, compounding revenue growth over long time periods is more meaningful than net flows over short time periods. Compound revenue growth requires the management of strategies holistically, managing capacity, flows, time and duration, fees and economic alignment to stack the deck in our favor to compound assets and generate strong compound revenue growth over long periods. Slide 2 illustrates our two growth levers. During the global period, we grew new strategies from zero to more than $21 billion in AUM. Today, the strategies we launched during the global period represent approximately $60 billion of our AUM. While we were building and growing in market returns and $13.4 billion in alpha, adding another $33 billion to our total AUM after returning $40.7 billion in net capital to clients. Slide 3 summarizes the opportunities I mentioned earlier. Four growth opportunities are driving our current outlook and new activity. We have discussed three of these on recent quarterly calls. We believe that investment talent, asset allocation preferences favor more new strategies to support the growth with who we are. They are not new, but each has cemented in the last few years and it makes sense for us to invest more behind all four. In addition, because of investments we have made in our platform and capabilities over the last several years, we are now in a position to execute across all of these areas. investment team, highlighted on slide four. Mike Sarami, Mike O'Brien, and Sarah Orban joined us in September to build a new investment team focused on emerging market credit and macro opportunities. This is a seasoned group with a long history together. Their opportunity set is broad in terms of countries, currencies, issuers, and instruments. Current and forward-looking EM yields are attractive relative to alternatives. There is ample opportunity to generate alpha and differentiate from peers and the index. Demand from institutional and wealth channel investors is large, growing, and we believe durable, as allocators are hungry for yield and increasingly globalizing their credit allocations. plan to maximize the probability of success. We expect to launch the team's first strategy in the first half of next year. On slide five, we place what the new team will be doing within a simplified view of the broader credit landscape. The new team's first strategies will fall into the EM debt and non-traditional bond buckets. Concurrently, As with EM debt, the leveraged loan space is a large and growing opportunity set, poorly tracked by indexes, and offer ample opportunity for alpha and differentiation. By the middle of next year, we expect to have multiple differentiated credit and yield-oriented strategies managed by proven investment leaders and growing asset classes where investment talent can add significant value. Looking further into the future, The skill set of both our newest team and our credit team lend themselves to further expansion into additional credit markets where we believe scaled participants and inefficiencies create significant opportunity for high-value added investors. Moving to my last slide, the longest-term trend and maybe the most powerful working in our favor is industry disruption. itself at the individual firm level and more broadly. Artisan Partners has always taken advantage of disruption. We have always offered a unique combination of the investment autonomy and customization associated with owning one's own firm and the resources and support offered by a big firm. That remains true today. We provide investment leaders with investment autonomy, an unwavering commitment to of repeated success, discipline on fees and capacity management, economic alignment and transparency, and critically, patience and a long-term time horizon. Since our founding 25 years ago, the number and types of homes for investment talent have proliferated, and there are more options that look like Artisan. But we believe our value proposition remains unique. outcomes, ever-shortening time horizons making it increasingly difficult to execute a long-term investment strategy and maintain a quality of life. These trends should create more and higher quality opportunities for us to partner with new talent in asset classes with long-term demand. We believe we are better positioned for future growth today than ever before. We expect our current strategy investment platform to leverage, and the wind is at our back. I expect us to continue to generate alpha for clients, expand opportunities for talent, and grow revenue and returns for shareholders. We will do it in our way, consistent with who we are as an investment firm and over the long-term time horizons we target. I will now turn it over to CJ to discuss our financial results. Thanks, Eric.

which are detailed on slide 7. A combination of compounding client assets in excess of benchmarks with existing investment teams and investing in new teams and strategies has led to strong growth in both the quarter and on a year-to-date basis when compared to prior year periods. Assets under management, as of billion a year ago. The strong growth in AUM is the result of our ability to compound client assets. When we refer to compounded assets, we are including the impact of market returns, profit generation and access of markets, and net client cash flows. Our AUM compared to the second quarter of 2021 was down slightly as international market returns were modestly negative for the quarter. More specifically, of 2020. Assets under management by generation are on page nine. Our third generation strategies continue to achieve strong growth on a year-to-date basis with AUM up 23% since the beginning of the calendar year. And our first and second generation strategies continue to compound wealth for clients, both growing 7% in the first nine months of the year. over the much shorter quarterly time period was mixed, as negative markets and flat net client cash flows drove a 1% decline in AUM. Financial results for the quarter and year-to-date periods are presented on the next two pages. Our complete gap and adjusted results are presented in our earnings release. My comments will focus on our adjusted results. adjusted net income for adjusted share was $1.33 in the current quarter. year-to-date margin. Our balance sheet continues to remain strong and support our capital management practices. We maintain approximately $100 million of excess cash to fund operations, seed new products, and make continued investments in new teams, operational capabilities, and technology. In addition, our $100 million line of credit remains undrawn. Our Board of Directors declared a quarter variable dividend. The amount of the special dividend varies year to year as a generation of cash fluctuates each year and the need for capital to run our business and see new products may vary. Looking forward to next quarter's results. Generating income and gains for our clients is our primary purpose, and by all accounts, represents the success of our firm. The majority of the income and gains required to be distributed to clients will be reinvested, but some clients choose to not reinvest, generally to pay taxes and fund liabilities. This year, we anticipate that amount of income is broken out separately in our AUM roll forward. The last two slides highlight the financial impact of our thoughtful growth strategy. We are a growth firm, and over time, our results have consistently produced sustainable long-term growth. Over the global and degrees of freedom periods Eric discussed, revenues compounded annually at 11.1 percent and 7.4 percent, respectively. Over the combined I'll turn the call back to the operator.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Dan Fannin from Jefferies & Company. Please go ahead.

Thanks. I wanted to talk about the private markets opportunity that you've highlighted in terms of incremental growth going forward. Can you talk about what strategies you have today that allow for that, or is it something we could see from degrees of freedom going forward, something you will potentially open up for some of the funds that don't provide that today?

Hi, Dan, it's Eric. We have one strategy, the China Post Venture, that is currently investing in private companies that launched last year, or this year, and then our growth teams, or growth-oriented teams, have been meeting with private companies, especially as you go down the road, over the last few years, and that has been picking up. And so on a go-forward basis, we'll see many of our growth teams start to weave in private investing, either into existing strategies with regards to degrees of freedom or more of a hybrid strategy,

Got it. And then as a follow-up, just a general question on capacity. So first on slide five, where you kind of lay out the credit opportunity and the kind of roadmap for future products, can you... Give us a sense of kind of how you think about capacity within certain of these areas. You gave obviously some of the market sizes, but the strategies as you think about scaling them, is it something where there's limits in terms of certain size levels? And then at the broader firm level, are there other funds or strategies that you are watching or close to thinking about on the watch for potential capacity constraints?

The size levels are always difficult to estimate. As we look at each of our franchises, they grow in different ways, and so in some cases you may be strategy does use levered loans as part of its strategy and as we So we don't have a set number. And I think if you look back in time, if we looked at our small cap strategy or mid cap strategy when we launched it, especially small cap, back then you invested below $1 billion in market cap and you were really constrained to an asset size below $1 billion. And at that same time, international probably was only a few billion as well. And you never know how markets evolves or how the franchise grows and where you're going to leverage the ideas and put those to work. But we do believe that these are sizable strategies that we're launching, that they have meaningful demand, and they'll be generating good growth for the franchise. firm for the next decade. With regards to capacity management, we have obviously over the last couple of quarters announced that we were managing capacity. Our view on capacity management is you have to put an option in place to control a run-up in performance or a large flow coming in that could hurt the integrity of element to growing our revenue. And if you don't have that in place before that growth occurs, then you can never catch up to controlling to help the integrity. So we do have, you know, we have no new announcements on strategies that we're managing capacity as this quarter. And the current ones that we are managing manner.

Understood. Thank you. Our next question comes from Kenneth Lee from RBC Capital Markets. Please go ahead.

Hey, thanks for taking my question. Just one follow-up on the credit strategies. You talked about seeing expansion potentially within the credit side. Looking further out, How large could the credit AUM grow in the future for Artisan, and do you see credit strategies becoming a very material proportion of overall AUM over time? Thanks.

Yes, if you combine the potential with the credit team with Brian Krug and the new team we just brought on led by Mike Cerami, definitely the aggregate of those two could be very material, coupled with potential teams in the future. The breadth of each of these teams will have an element that is traditional as well as alternative. So we are going to control our traditional sizing. maybe a little bit lower than the big bucket scale players in this category so that we have room to manage the alternative high degree of freedom elements of these teams. credit team is a very good example of managing the flow in high income so that allows us to have the flexibility to move a levered loan strategy into the market as well as we have a credit opportunity strategy that gets us into an alternative credit space. So we will manage the balance between traditional and an aggregate basis, they'll be very meaningful in our revenue. And the strategies that we're selecting in the credit space, like all of our strategies, are high-value-added strategies. So you could expect a higher return than what you see in a traditional shop, which obviously generates the higher compounded revenue growth that you've seen over the various time periods we listed on slide two.

Great. Very helpful. And just one follow-up, if I may. Sounds like from the prepared remarks, it's a favorable environment right now for potentially adding new investment teams. Just wondering whether you could share with us any expanded outlook for the potential to add new investment teams in the near term. Thanks.

That only reinstated as a favorable environment and we've outlined a few spaces that we're interested in given the growth in asset allocation, the growth in the number of securities and opportunities at the high value added in the space, and the talent that's emerging around those categories.

Gotcha. Very helpful. Thanks again.

Again, if you have a question, please press star, then 1. The next question comes from Robert Lee from KBW. Please go ahead.

Great. Good afternoon or good morning, as the case may be. Thanks for taking questions. I have a question on really just kind of maybe some of the – expense or spending headwinds that may be out there. So, I mean, you've talked in the past about, you know, seeing, you know, even aside from adding new teams, you know, maybe comp pressures, you know, we're seeing it kind of widely, I guess, across more industries. But, you know, are you seeing that, you know, come into the numbers? You know, how does that influence how, you know, maybe we should be thinking about, you know, some expense pressures into next year. And then by the same token, in addition to adding the new team, whether it's coming out of COVID, travel picking up, maybe new technology or spending initiatives, just trying to get a sense of how we should think of maybe the progression of spend into 2022.

question, Rob. We're currently in our budget season, so we don't have anything fully baked yet, but certainly there is pressures on all of those, and we would expect our spending levels to increase next year as we execute on our growth strategy, including the onboarding of the MDET team, and specifically We would expect that to expand a couple hundred basis points into next year as we, you know, continue to onboard individuals to, you know, to build our infrastructure for our growing business, you know, to expand as, you know, low double digits. And then, you know, on the occupancy side, we're planning to open a couple of new offices, one, you know, for the EM debt team next year, and then, you know, expand, you know, in other areas as we continue to grow. So, you know, I would expect, you know, low double digit, you know, growth in expenses next year, but we're still sort of, you know, working through that in the budget process.

Okay, great. And then in terms of, you know, investment spend, I mean, a few years ago, I think you spent, you know, some time and energy, you know, investing in the wealth channel. And when we saw starting, I guess, last year, you know, this noticeable step up in gross sales in that channel, or at least the fund business. So, you know, are there, you know, Are there any kind of specific distribution initiatives that may be underway, whether it's globally or other channels where you're currently investing or plan on investing where maybe in a year or 18 months or two years you're kind of setting the seeds for maybe another kind of stair-step function or just trying to get a sense on the distribution side where you're investing?

We continue to invest in the wealth channel globally. It's the primary focus of new spend and as you marry that with the of bringing these newer, higher degree of freedom strategies tend to be a little bit more alternative oriented into the wealth space. Think about the China post venture, the credit opportunity, strategy, and some of our newer strategies we're thinking about, we're investing at the margin in the wealth channel. And how that stair step occurs, you know, we can't control the timing, but we control the quality of the talent, the type of strategies, and our view on asset allocation. And our view is that, you know, credit and yield-oriented strategies are going to be in higher demand. We think that given the growth of China and looking at the index breakdown in asset allocation, that many will realize they're under-allocated to a very growing segment of the world. more allocators look at private investing and how to create hybrid or crossover strategies to get exposure to hybrids and crossover strategies, we believe that private investing is going to become more meaningful. And with those areas of growth, we believe the wealth channel will be the greatest opportunity.

Great. Thanks for taking my questions. I appreciate it.

Again, if you have a question, please press star, then one.

There are no more questions in the queue. This concludes our question and answer session, as well as the conference. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.