Artisan Partners Asset Management Inc. Q3 FY2025 Earnings Call

Good day, and welcome to the Artisan Partners Third Quarter 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Brennan Hughes. Please go ahead.

Welcome to the Artisan Partners Asset Management Business Update and Earnings Call. Today's call will include remarks from Jason Gottlieb, CEO; and C.J. Daley, CFO. Following these remarks, we will open the line for questions. Our latest results and investor presentation are available on the Investor Relations section of our website. Before we begin today, I would like to remind you that comments made during today's call, including responses to questions, may include forward-looking statements. These are subject to known and unknown risks and uncertainties, including, but not limited to, the factors set forth in our earnings release and detailed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those disclosed in the statement, and we assume no obligation to update or revise any of these statements following the presentation. In addition, some of our remarks today will include references to non-GAAP financial measures. You can find a reconciliation of these measures to the most comparable GAAP measures in the earnings release and supplemental materials, which can be found on our Investor Relations website. Also, please note that nothing on this call constitutes an offer or solicitation to purchase or sell an interest in any Artisan investment product or a recommendation for any investment services. I will now turn it over to Jason.

Thank you, Brennan, and thank you for joining the call today. Our purpose is to generate and compound wealth for our clients over the long term. We do so by maintaining an ideal home for investment talent, providing a unique combination of autonomy, degrees of freedom, resources, and support. Our goal is to be one of the world's preeminent multi-asset class investment platforms. Over our history, we have steadily expanded our capabilities across equities, credit, and alternatives. While doing so, we have maintained our focus on investment and business results and delivered for our clients and shareholders. Turning to Slide 3. Investment performance remained strong across our platform with over 70% of our AUM outperforming their benchmarks for periods over 3 years. All 12 Artisan strategies with track records over 10 years have outperformed their benchmarks since inception. These 12 strategies have compounded capital at average annual rates of return from nearly 6% to over 13% net of fees. They have outperformed their benchmarks by an average of 243 basis points annually. On a shorter-term basis, several strategies have generated exceptional results, highlighting the breadth and diversity of our platform. In equities, the sustainable emerging markets, non-U.S. growth, global value, and franchise strategies have all generated year-to-date returns of more than 20% with outperformance ranging from 425 to 934 basis points net of fees. In credit, the emerging markets local opportunity strategy has generated a year-to-date return of over 19%, 373 basis points above its benchmark. In alternatives, both credit opportunities and global unconstrained have generated absolute returns in excess of 8%, and Antero Peak has generated year-to-date returns of almost 21%. Across the broader platform, trailing 1-year performance has been weighed down by underperformance in several of our largest equity strategies, including international value and global opportunities, both of which have very strong long-term track records. Turning to Slide 4. Strong markets and investment performance drove our assets under management to $181.3 billion, an all-time high at quarter end. Firm-wide net outflows this year and in the third quarter are primarily a result of outflows from a handful of equity strategies that continue to experience rebalancing in up markets and to a lesser extent, client terminations. Those outflows mask a lot of very positive business development initiatives across the platform. Year-to-date, we have net inflows in 14 of our 26 investment strategies. Both Select Equity and International Explorer strategies funded large new mandates in the third quarter. Each strategy is now approaching $1 billion in AUM, 5 years from launch in 2020. We have continued our multiyear success in growing our credit business with $1.8 billion in year-to-date net inflows. The third quarter represents the 13th consecutive quarter of positive credit flows. In alternatives, we have raised $336 million this year for the global unconstrained strategy, and we continue to build the pipeline for the credit opportunity strategy. Lastly, we have been executing a focused campaign to raise assets across our emerging market strategies. Each of sustainable emerging markets, developing world, emerging markets local opportunities, and emerging markets debt opportunities has net inflows for the year, and demand continues to grow across these EM strategies. These positive areas validate our strategy and give us the conviction we are growing the platform in line with long-term demand from both institutional and intermediate wealth clients. Ultimately, though, we need to sell more and lose less. And we continue to develop and reorient our distribution function in order to do so. Slide 5 highlights our methodical approach to expanding our platform with new talent and investment capabilities. These efforts take shape internally through dialogue with existing investment teams to identify new areas for growth. Recent outcomes include the global special situation strategy within the International Value Group, custom credit solutions with the credit team, and the franchise strategy we launched earlier this year with the growth team. We also maintain a regular dialogue with external talent interested in joining the Artisan platform to build differentiated and enduring investment franchises. Recent external engagements have focused on real estate, private credit, and secondaries. We believe these capabilities would be a natural extension for our platform and are at the intersection of differentiated talent, large investment opportunity sets, and long-term commercial demand. We are currently working on a number of internal and external opportunities and are excited to execute on some of these to further evolve and expand our multi-asset class platform.

Thanks, Jason. Our complete GAAP and adjusted results are presented in our earnings release. We are pleased with our financial results for the third quarter. Revenue growth fueled by strong market conditions and lower fixed expenses led to margin expansion of 450 basis points and a 23% increase in earnings compared to the second quarter of 2025. Revenues for the quarter were up 7% compared to the June quarter and up 8% compared to the prior year of third quarter. Adjusted operating expenses for the quarter were down slightly from the second quarter of 2025, primarily from the absence of $2.4 million of costs associated with the closure of the China Post-Venture strategy in the second quarter. Compared to the same quarter last year, adjusted operating costs were up 6%, primarily from higher variable incentive compensation expense due to increased revenues. Adjusted operating income increased 22% compared to the prior quarter and 12% compared to the same quarter last year. Adjusted net income per adjusted share was up 23% compared to last quarter and up 11% compared to the third quarter of 2024, consistent with operating income. Year-to-date, 2025 revenues were up 6% compared to the first 9 months of 2024 on higher average AUM. Year-to-date, adjusted operating expenses increased 5% from 2024, primarily from higher incentive compensation on elevated revenues and the impact of the addition of the January 2025 long-term incentive award. Calculating our non-GAAP measures, nonoperating income includes only interest expense and interest income. Although valuation changes on our seed investments impact shareholder economics, we fully exclude these valuation changes from our adjusted results to provide transparency into our core business operations. Turning to Slide 9. Our balance sheet remains strong with $300 million of cash on hand and $140 million of firm seed investments in emerging strategies and vehicles to support future growth. As strategies reach scale and our seed investments are redeemed, any redemption amounts realized are included in the cash available for corporate purposes, seed investments, or as an addition to our year-end special dividend. During the quarter, we completed the closing of $50 million of new private placement debt on August 15, 2025. We used the proceeds from the new debt along with cash on hand to retire the $60 million of debt that matured in August 2025. In addition, our $100 million revolving credit facility remains unused. We continue to return capital to shareholders on a consistent and predictable basis. Consistent with our dividend policy, our Board of Directors declared a quarterly dividend of $0.88 per share with respect to the September 2025 quarter, a 21% increase over the prior quarter. Looking ahead, as a reminder, the fourth quarter includes the annual mutual fund distribution related to incoming capital gains. We anticipate approximately $900 million of those distributions will not be reinvested. The fourth quarter also represents the quarter in which we have the largest opportunity to realize performance fees. The measurement period for those fee opportunities is December 31. Approximately 3% of our AUM has a performance fee component. Last year's fourth quarter included approximately $17 million of performance fees. We are currently projecting total performance fees similar to what we generated in 2024, but all such fees will remain subject to market and performance conditions through the end of the year. That concludes my prepared remarks, and I will now turn the call back to the operator.

And the first question comes from John Dunn with Evercore.

First question was just on this idea that there's growing demand for non-U.S. strategies. Maybe could you just give a flavor of regionally where the demand is and what strategy demands are? Like is it finally emerging markets? Or developed markets? Just a little more flavor on that.

Yes. It's Jason. I can provide a little bit more flavor. I'd categorize it in 3 specific areas. The first one is in global mandates, and we're seeing that in both global value and to a lesser extent, in global opportunities, where we have large institutional clients across both European and U.S. markets that are interested in global, just gaining access through a slightly more asset allocated opportunity. The second is both in the intermediate wealth and in the institutional bucket for direct international equity exposure. We've seen a pretty meaningful uptick in the number of inquiries coming specifically in areas like our global equity franchise run by Mark Yockey. We're seeing really good interest there, largely because not only the asset allocation mismatch that I think we're seeing across asset allocations, but the market has produced just phenomenal and outstanding results. For the year, I believe, is up about 900 basis points through Q3 and his international strategy. But if you look over the longer term, the numbers are quite compelling on both the benchmark relative as well as on a peer-relative basis. And we're also seeing a lot of interest from the emerging market side, both in credit as well as in equity. So our Developing World team and our Sustainable Emerging Markets team both had positive flows for the quarter and for the year. And there's just general broad renewed interest. Again, this is across both intermediate wealth and institutional, where probably no less than 18 months ago, everybody was talking about the depth of emerging markets; there were cuts to asset allocations, and now we're just seeing that being revitalized. And you combine that with the fact that a couple of our large peers and competitors have made substantial portfolio management changes. So there's just a lot of money in motion. There's a lot of activity. And we think that we've got 2 world-class franchises that are able to capitalize on that. And we're seeing the green shoots in terms of both flows, but importantly, their performance remains quite strong in both those areas.

Got you. Regarding the M&A front, you mentioned three areas you've been exploring recently. Could you provide an estimate of how much you might allocate to those opportunities? How much could you potentially invest? Additionally, what is your approach to consideration? Would you consider a stock deal, or might you look at leveraging to facilitate that?

Yes, we are actively engaged in those three areas. I’d like to draw your attention to Slide 5 in the material, which shows that we've had around 400 meetings in the past five years. Our Investment Strategy group has been very busy. However, we haven't added many teams; we've only grown by one team in that period. Nevertheless, we've been deeply involved in various compelling opportunities. I would say our pipeline has primarily been developed internally. We aren't relying on bankers for interesting prospects; instead, we're approaching this from a bottom-up perspective, which is a defining characteristic of how Artisan seeks out exceptional talent. When considering those three areas, the area with the most activity has been real estate. I recall a quarterly call from four or five quarters ago where we discussed our close involvement with a particular opportunity. Although that one didn’t materialize, we are currently examining another promising opportunity in real estate. It’s important to emphasize that the M&A opportunities we pursue will not be transformative. Our focus will be on finding ventures that align with our identity, enhancing an already talented group or individual, providing resources, ensuring a business alignment, and fostering growth. In alternatives, this may mean exploring M&A from time to time, considering initial proposals and aligning them afterward. We don't follow a one-size-fits-all approach. We prioritize talent first before determining what consideration looks like. I want to stress that, especially in the early stages, these endeavors will not be transformative; we aim to stay true to our core principles. We believe that our M&A model can closely align with how we approach lift-outs. If we do proceed with a transaction, we will consider all options regarding M&A, including stock, additional leverage, or cash. Given the magnitude of the opportunities we are exploring, cash is likely to be the most common source of funding in these cases.

Our next question comes from Bill Katz with TD Cowen.

Just, Jason, you mentioned that you're focused on trying to improve the gross flows and stem the redemptions and it seems like you have a lot of really good things happening here, but the gross flow has been persistently flattish. Can you talk a little bit about some of the efforts you are doing to sort of redesign or amplify the opportunity set? And then within that, you've also mentioned that you continue to reorient distribution. Maybe just give us an update on what you're doing incrementally just to try and better map for the opportunity to grow it?

Yes. Maybe the latter first. When it comes to distribution, I think there's a couple of things that we've talked about. And as you know, Bill, some of these things take a little time to really germinate and to see the benefits of. But the first one is we've been working with our model to just align compensation to more of a sales orientation and less of a service orientation. We've also been recruiting and hiring people. So if you think about our intermediate wealth and within that, we have an intermediary business that's facing off against RIAs, multi-family, single-family offices, etc. And we had about 10 people on the field, and we've been working really aggressively to sort of double that, and we're sort of where we need to be there. But you got to take the time to enculturate the individuals, make sure that they understand the philosophy, the process, the people. And we're starting to see some green shoots with the individuals that we brought on to the platform. And so we're excited to see some leverage and some opportunity there. Also, we're looking at growing out and expanding our regional footprint. So we haven't done a tremendous amount within the U.K. wealth market. And we would expect to have some people really targeting that area of the market, which we think is a really interesting and untapped opportunity. And at some point in the not-too-distant future, we would expect to have additional resources aligned to the Middle East, which we think is a big and broadening opportunity. And so that's one piece of it. I think the other piece is within our distribution efforts, we are really building out our capabilities around capital formation and having a team really dedicated to help identify and leverage the opportunity set across both intermediate wealth as well as the institutional channel. And those are very deliberate campaigns that we're running. You're hearing and probably heard a little bit about that in our commentary around emerging markets, where we've faced off resources against the opportunity set, and we're starting to see the fruits of that. It's a very, very early campaign. I believe we began that in late August. And I think for the quarter, we had about $400 million in gross inflows just off of that campaign. So early days, but we're also seeing early opportunity there. And then one of the things that we've been talking a lot about internally, and we're beginning to execute on is the modernization of our vehicle lineup. We've always been vehicle agnostic, being able to utilize our IP in wrappers that make sense for our business. We're seeing an evolution of our client base and their preferences, and we need to evolve with those preferences. And we're certainly working our way towards that evolution, and that can come in many different forms, models, SMAs, ETFs, semi-liquid funds, as well as private funds. And so you'll see more and more of that to be a little bit more forward lean when it comes to just the vehicle of choice.

Great. I appreciate Slide 5 and your discussion regarding both internal and external opportunities. Could you clarify what you identify as internal opportunities? When I think of real estate, secondaries, and private credit, Artisan doesn't immediately come to mind. I mean no offense by that, but I'm trying to understand what your current team could potentially transition into versus what you would need to seek externally.

Yes, that's a good question. Private credit is definitely a natural extension for us. Bryan has made significant contributions, working extensively in both private and public markets. Given his expertise and the strong team he has, it would be a logical step for our private credit platform if we choose to pursue that avenue. He is identifying opportunities by examining both public and private market perspectives, seeking the best available options. He is very much involved in the pricing and deal activity in those markets, which seem to be converging. Therefore, if we decide to enter that space, we can leverage Bryan, his reputation, and his performance. You are correct that private real estate would be an external pursuit if we decide to get involved. In private equity, we have a couple of teams that could potentially collaborate. Our growth franchise is equipped to explore more late-stage opportunities and consider a hybrid approach. However, these are discussions we are just beginning. Overall, private equity, especially in traditional buyouts or middle market, is challenging for us because we're uncertain about our competitive positioning, which is why we have been focusing on secondaries. This area would likely require us to look outside the firm. The pipeline has been specifically aligned with this focus. Therefore, private equity secondaries have emerged as a strong area of interest, and we are encountering a lot of great talent. Externally, real estate continues to provide robust opportunities, while private credit has been somewhat more variable; however, we are not actively seeking options as we believe the right opportunities are available within our platform.

And the next question comes from Kenneth Lee with RBC Capital Markets.

Just around the third quarter, you mentioned in the prepared remarks seeing some client rebalancing activity. I wonder if you could just give a little bit more color around that? What sort of trends are you seeing around that area?

In the third quarter, we experienced three significant rebalances in our intermediate wealth sector, particularly impacting the international value and international small mid teams, where performance has remained strong. These adjustments were not terminations but rather reductions in overall exposure. We are enthusiastic about our interactions with clients in this space, as they are highly sophisticated and operate models similar to those of large pension funds or institutions, resulting in frequent rebalances. Given the size of our programs and the models employed, this is to be expected. Our equity business is experiencing strong returns over various time frames, which makes us a suitable candidate for rebalancing, and Q3 reflected this trend. The only termination we noted was on a smaller scale, more idiosyncratic, related to the Australian market. Regulatory changes in Australia have led many to reevaluate their allocations toward active management in favor of passive management and in-house strategies. However, this situation does not reflect any specific issues with the Artisan platform.

Got you. Very helpful there. And just one follow-up, if I may. In terms of the expenses, wondering if there's any kind of updated outlook over the near term around expenses?

Ken, it's C.J. I would just note that I think back in the beginning of the year, and I've confirmed, we thought we'd be around mid-single digits for fixed expense growth for the year. We're tracking there maybe slightly a little bit better. We're in the process of looking forward to 2026 budgeting. So I don't really have any updates there. But as we mentioned, we've been very disciplined on expenses in 2025 after a couple of years of strong years of headcount growth and building out distribution operations, adding capabilities to grow in the areas that Jason has spoken about. So I don't expect anything unusual moving forward and the guidance that we gave for 2025 still stands, might come in a tad better.

And this concludes the question-and-answer session as well as the event. Thank you for attending today's presentation. You may now disconnect your lines.