10-Q
Table of Contents

 


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 SEPTEMBER 30, 2015
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 October 29, 2015 were 39,411,178, 18,327,222 and 15,670,672, respectively.
 


Table of Contents

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, which are subject to risks, uncertainties and assumptions, may include projections of our future financial performance, future expenses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in our business or financial results. These statements are only predictions based on our current expectations and projections about future events. Among the important factors that could cause actual results, level of activity, performance or achievements to differ materially from those indicated by such forward-looking statements are: fluctuations in quarterly and annual results, adverse economic or market conditions, incurrence of net losses, adverse effects of management focusing on implementation of a growth strategy, failure to develop and maintain the Artisan Partners brand and other factors disclosed under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, filed with the SEC on February 25, 2015, 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.


Table of Contents

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.


Table of Contents

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)
 
September 30,
2015
 
December 31,
2014
ASSETS
Cash and cash equivalents
$
217,671

 
$
182,284

Accounts receivable
67,568

 
69,361

Investment securities
9,839

 
6,712

Property and equipment, net
15,595

 
16,594

Deferred tax assets
687,060

 
562,396

Prepaid expenses and other assets
13,096

 
12,105

Total assets
$
1,010,829

 
$
849,452

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable, accrued expenses, and other
$
27,957

 
$
39,826

Accrued incentive compensation
75,823

 
12,973

Borrowings
200,000

 
200,000

Amounts payable under tax receivable agreements
588,746

 
489,154

Total liabilities
892,526

 
741,953

Commitments and contingencies

 


Common stock
 
 
 
Class A common stock ($0.01 par value per share, 500,000,000 shares authorized, 39,411,178 and 34,238,131 shares outstanding at September 30, 2015 and December 31, 2014, respectively)
394

 
342

Class B common stock ($0.01 par value per share, 200,000,000 shares authorized, 18,327,222 and 21,463,033 shares outstanding at September 30, 2015 and December 31, 2014, respectively)
183

 
215

Class C common stock ($0.01 par value per share, 400,000,000 shares authorized, 15,670,672 and 17,226,379 shares outstanding at September 30, 2015 and December 31, 2014, respectively)
157

 
172

Additional paid-in capital
111,353

 
93,524

Retained earnings
10,732

 
16,417

Accumulated other comprehensive income (loss)
(368
)
 
206

Total stockholders’ equity
122,451

 
110,876

Noncontrolling interest - Artisan Partners Holdings
(4,148
)
 
(3,377
)
Total equity
118,303

 
107,499

Total liabilities and equity
$
1,010,829

 
$
849,452

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

1

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ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Operations
(U.S. dollars in thousands, except per share amounts)
 
 For the Three Months Ended September 30,

 For the Nine Months Ended September 30,
 
2015

2014

2015

2014
Revenues
 
 
 
 
 
 
 
Management fees
$
198,233

 
$
212,225

 
$
611,888

 
$
622,350

Performance fees
80

 
181

 
1,573

 
335

Total revenues
$
198,313

 
$
212,406

 
$
613,461

 
$
622,685

Operating Expenses
 
 
 
 
 
 
 
Compensation and benefits
 
 
 
 
 
 
 
Salaries, incentive compensation and benefits
91,159

 
90,743

 
283,294

 
261,893

Pre-offering related compensation - share-based awards
10,532

 
12,431

 
31,596

 
52,234

Total compensation and benefits
101,691

 
103,174

 
314,890

 
314,127

Distribution and marketing
10,612

 
13,281

 
34,010

 
36,348

Occupancy
3,113

 
2,811

 
9,079

 
8,265

Communication and technology
6,339

 
5,735

 
17,993

 
15,694

General and administrative
6,003

 
6,389

 
20,792

 
19,258

Total operating expenses
127,758

 
131,390

 
396,764

 
393,692

Total operating income
70,555

 
81,016

 
216,697

 
228,993

Non-operating income (loss)
 
 
 
 
 
 
 
Interest expense
(2,971
)
 
(2,905
)
 
(8,828
)
 
(8,690
)
Net Investment Income
8

 
405

 
424

 
405

Net gain (loss) of Launch Equity

 
(557
)
 

 
(2,039
)
Net gain (loss) on the tax receivable agreements
(5,820
)
 
284

 
(12,247
)
 
(4,187
)
Other non-operating income (expense)
6

 
217

 
15

 
(54
)
Total non-operating income (loss)
(8,777
)
 
(2,556
)
 
(20,636
)
 
(14,565
)
Income before income taxes
61,778

 
78,460

 
196,061

 
214,428

Provision for income taxes
11,630

 
15,335

 
33,209

 
35,193

Net income before noncontrolling interests
50,148

 
63,125

 
162,852

 
179,235

Less: Net income attributable to noncontrolling interests - Artisan Partners Holdings
31,674

 
43,243

 
101,128

 
132,939

Less: Net income (loss) attributable to noncontrolling interests - Launch Equity

 
(557
)
 

 
(2,039
)
Net income attributable to Artisan Partners Asset Management Inc.
$
18,474

 
$
20,439

 
$
61,724

 
$
48,335

 
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per share
$
0.44

 
$
0.57

 
$
1.38

 
$
(1.02
)
Basic and diluted weighted average number of common shares outstanding
36,430,820

 
30,370,892

 
35,032,841

 
26,177,724

Dividends declared per Class A common share
$
0.60

 
$
0.55

 
$
2.75

 
$
3.28

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

2

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ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Comprehensive Income
(U.S. dollars in thousands)
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net income before noncontrolling interests
$
50,148

 
$
63,125

 
$
162,852

 
$
179,235

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Unrealized gain (loss) on investment securities:
 
 
 
 
 
 
 
Unrealized gain (loss) on investment securities, net of tax of ($305), ($138), ($236) and $18, respectively
(1,227
)
 
(423
)
 
(664
)
 
(117
)
Less: reclassification adjustment for gain (loss) included in net income
8

 
405

 
424

 
405

Net unrealized gain (loss) on investment securities
(1,235
)
 
(828
)
 
(1,088
)
 
(522
)
Foreign currency translation gain (loss)
(402
)
 
(458
)
 
(290
)
 
(190
)
Total other comprehensive income (loss)
(1,637
)
 
(1,286
)
 
(1,378
)
 
(712
)
Comprehensive income
48,511

 
61,839

 
161,474

 
178,523

Comprehensive income attributable to noncontrolling interests - Artisan Partners Holdings
30,773

 
42,401

 
100,325

 
132,245

Comprehensive income (loss) attributable to noncontrolling interests - Launch Equity

 
(557
)
 

 
(2,039
)
Comprehensive income attributable to Artisan Partners Asset Management Inc.
$
17,738

 
$
19,995

 
$
61,149

 
$
48,317


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

3

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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, 2015
342

215

172

93,524

16,417

206

(3,377
)
107,499

Net income




61,724


101,128

162,852

Other comprehensive income - foreign currency translation





(144
)
(146
)
(290
)
Other comprehensive income - available for sale investments, net of tax





(459
)
(592
)
(1,051
)
Cumulative impact of changes in ownership of Artisan Partners Holdings LP, net of tax



(6,105
)

29

6,039

(37
)
Amortization of equity-based compensation



31,504



28,307

59,811

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



26,158




26,158

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



175,974




176,012

Forfeitures

(4
)
3

1





Issuance of restricted stock awards
6



(6
)




Employee net share settlement



(358
)


(311
)
(669
)
Exchange of subsidiary equity
8

(4
)
(4
)





Purchase of equity and subsidiary equity

(24
)
(14
)
(176,520
)



(176,558
)
Distributions






(135,174
)
(135,174
)
Dividends



(32,819
)
(67,409
)

(22
)
(100,250
)
Balance at September 30, 2015
$
394

$
183

$
157

$
111,353

$
10,732

$
(368
)
$
(4,148
)
$
118,303

 
Class A Common stock
Class B Common stock
Class C Common stock
Convertible preferred stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Non-controlling interest - Artisan Partners Holdings
Non-controlling interest - Launch Equity
Total equity
Balance at January 1, 2014
$
198

$
253

$
252

$
34,909

$
6,388

$
1,401

$
378

$
38,060

$
50,472

$
132,311

Net income (loss)





48,335


132,939

(2,039
)
179,235

Other comprehensive income - foreign currency translation






(105
)
(85
)

(190
)
Other comprehensive income - available for sale investments, net of tax






(171
)
(236
)

(407
)
Cumulative impact of changes in ownership of Artisan Partners Holdings LP, net of tax




(12,323
)

258

11,950


(115
)
Capital contribution








2,980

2,980

Amortization of equity-based compensation




26,716



41,392


68,108

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




61,194





61,194

Issuance of Class A common stock, net of issuance costs
125




552,164





552,289

Purchase of convertible preferred stock and subsidiary equity

(38
)
(47
)
(21,652
)
(533,340
)


647


(554,430
)
Conversion of preferred stock and exchange of subsidiary
18


(32
)
(13,257
)
23,289



(10,018
)


Distributions







(213,555
)

(213,555
)
Dividends




(45,191
)
(35,858
)



(81,049
)
Balance at September 30, 2014
$
341

$
215

$
173

$

$
78,897

$
13,878

$
360

$
1,094

$
51,413

$
146,371



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

4

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ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Cash Flows
(U.S. dollars in thousands)
 
 For the Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities
 
 
 
Net income before noncontrolling interests
$
162,852

 
$
179,235

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
3,177

 
2,293

Deferred income taxes
8,131

 
10,863

Reinvested dividends

 
(213
)
Capital gains on the sale of investment securities
(424
)
 
(405
)
Net loss on the tax receivable agreements
12,247

 
4,187

(Gains) losses of Launch Equity, net

 
2,039

Proceeds from sale of investments by Launch Equity

 
93,146

Purchase of investments by Launch Equity

 
(77,598
)
Loss on disposal of property and equipment
26

 
349

Amortization of debt issuance costs
336

 
336

Share-based compensation
59,811

 
68,108

Excess tax benefit on share-based awards
(984
)
 
(901
)
Change in assets and liabilities resulting in an increase (decrease) in cash:
 
 
 
Net change in operating assets and liabilities of Launch Equity

 
(18,528
)
Accounts receivable
1,793

 
(3,436
)
Prepaid expenses and other assets
(1,811
)
 
(1,626
)
Accounts payable and accrued expenses
58,580

 
73,304

Class B liability awards
(5,008
)
 
(5,054
)
Deferred lease obligations
(97
)
 
16

Net cash provided by operating activities
298,629

 
326,115

Cash flows from investing activities
 
 
 
Acquisition of property and equipment
(1,668
)
 
(3,767
)
Leasehold improvements
(1,963
)
 
(4,095
)
Proceeds from sale of property and equipment

 
4

Proceeds from sale of investment securities
2,724

 
6,156

Purchase of investment securities
(6,750
)
 
(10,021
)
Change in restricted cash
36

 
260

Net cash used in investing activities
(7,621
)
 
(11,463
)

5

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ARTISAN PARTNERS ASSET MANAGEMENT INC.
Unaudited Consolidated Statements of Cash Flows, continued
(U.S. dollars in thousands)
 
 For the Nine Months Ended September 30,
 
2015
 
2014
Cash flows from financing activities
 
 
 
Partnership distributions
(135,174
)
 
(213,555
)
Dividends paid
(100,250
)
 
(81,049
)
Change in other liabilities
(45
)
 
(49
)
Payment of amounts owed under the tax receivable agreements
(20,040
)
 
(4,645
)
Net proceeds from issuance of common stock
176,558

 
554,129

Payment of costs directly associated with the issuance of Class A common stock
(427
)
 
(2,797
)
Purchase of equity and subsidiary equity
(176,558
)
 
(554,129
)
Taxes paid related to employee net share settlement
(669
)
 
(302
)
Capital invested into Launch Equity

 
2,980

Excess tax benefit on share-based awards
984

 
901

Net cash used in financing activities
(255,621
)
 
(298,516
)
Net increase (decrease) in cash and cash equivalents
35,387

 
16,136

Cash and cash equivalents
 
 
 
Beginning of period
182,284

 
211,839

End of period
$
217,671

 
$
227,975

 
 
 
 
Supplementary information
 
 
 
Noncash activity:
 
 
 
Establishment of deferred tax assets
132,559

 
386,324

Establishment of amounts payable under tax receivable agreements
107,385

 
326,048

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

6

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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 fifteen distinct investment strategies. During the second quarter of 2015, Artisan launched its fifteenth investment strategy, the Artisan Partners Developing World strategy, which is managed by the firm’s Developing World team.
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 September 30, 2015, APAM held approximately 54% of the total equity ownership interests 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”.
2015 Follow-On Offering
On March 9, 2015, APAM completed a registered offering of 3,831,550 shares of Class A common stock (the “2015 Follow-On Offering”) and utilized all of the proceeds to purchase an aggregate of 3,831,550 common units of Artisan Partners Holdings at a price per unit of $46.08. The offering and subsequent purchase of units had the following impact on the consolidated financial statements:

APAM received 3,831,550 GP units of Holdings, which increased APAM’s equity ownership interest in Holdings. See Note 6, “Noncontrolling interest - Holdings” for the financial statement impact of changes in ownership.
APAM’s purchase of common units of Holdings with the proceeds resulted in an increase to deferred tax assets of approximately $105.1 million and an increase in amounts payable under the tax receivable agreements of approximately $89.4 million.
The shares of Class B and Class C common stock associated with the common units purchased were immediately canceled upon completion of the offering.

Holdings Unit Exchanges

During the nine months ended September 30, 2015, 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 nine months ended September 30, 2015:
 
Total Common Units Exchanged
Class A Common Units
Class B Common Units
Class E Common Units
Common units exchanged on March 9, 2015
527,012

169,474

332,538

25,000

Common units exchanged on May 21, 2015
132,961

127,729

5,232


Common units exchanged on August 20, 2015
145,265

127,730

17,535


Total Units Exchanged
805,238

424,933

355,305

25,000


7

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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 $21.2 million and an increase in amounts payable under the tax receivable agreements of approximately $18.0 million. The corresponding shares of Class B and Class C common stock were immediately canceled upon exchange.
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.
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 and variable interest entities (“VIEs”) of which Artisan is deemed to be the primary beneficiary. The primary beneficiary is deemed to be the entity that has the power to govern the financial and operating policies of the subsidiary so as to obtain benefits from its activities. The consolidated financial statements include the accounts of APAM, all subsidiaries or other entities in which APAM has a direct or indirect controlling financial interest and VIEs of which Artisan is deemed to be the primary beneficiary. All material intercompany balances have been eliminated in consolidation.
The Company makes initial seed investments in sponsored investment portfolios at the portfolio’s formation. If the seed investment results in a controlling financial interest, APAM consolidates the investment, 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 September 30, 2015, APAM does not have a controlling financial interest in any of the funds in which it has made a seed investment.

Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes existing accounting standards for revenue recognition and creates a single framework. In August 2015, the effective date of the ASU was deferred. The new guidance will now be effective on January 1, 2018 with early adoption permitted as of the original effective date of January 1, 2017. The Company is currently evaluating its transition method and the potential impact on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The ASU will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new guidance will be effective for the year ending December 31, 2016. Early adoption is permitted. The Company does not expect the adoption of this ASU to have an impact on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The ASU modifies existing consolidation guidance for determining whether certain legal entities should be consolidated. The ASU eliminates 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 has been 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 will be effective on January 1, 2016, and requires either a retrospective or a modified retrospective approach to adoption. Early adoption is permitted. The Company is currently evaluating its transition method and the potential impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): 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 will be effective on January 1, 2016, and requires a retrospective approach to adoption. At September 30, 2015, the Company had approximately $0.7 million of debt issuance costs in prepaid expenses and other assets on its Condensed Consolidated Statements of Financial Condition that meet the criteria of this amendment.

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In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance on determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software. The new guidance will be effective on January 1, 2016. Early adoption is permitted. The Company does not expect the adoption of this ASU to have an impact 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
September 30, 2015
 
 
 
 
 
 
 
Mutual funds
$
10,069

 
$
581

 
$
(811
)
 
$
9,839

December 31, 2014
 
 
 
 
 
 
 
Mutual funds
$
5,618

 
$
1,096

 
$
(2
)
 
$
6,712

Artisan’s investments in mutual funds consist of investments in shares of Artisan Partners Funds, Inc. and Artisan Partners Global Funds plc and are considered to be available-for-sale securities. As a result, unrealized gains (losses) are recorded to other comprehensive income (loss).
As of September 30, 2015 and December 31, 2014, the total fair value of investments in an unrealized loss position was $4.2 million and $38 thousand, respectively. The $811 thousand and $2 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.
During the nine months ended September 30, 2015, Artisan made seed investments of $6.8 million, including a $5.0 million investment in the Artisan Developing World Fund. During the nine months ended September 30, 2015, Artisan sold $2.7 million of its investments, resulting in realized gains of $0.4 million. During the nine months ended September 30, 2014, Artisan sold $6.2 million of its investments, resulting in a realized gain of $0.4 million.
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).

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The following provides the hierarchy of inputs used to derive fair value of Artisan’s assets and liabilities that are financial instruments as of September 30, 2015 and December 31, 2014:
 
Assets and Liabilities at Fair Value
 
Total
 
Level 1
 
Level 2
 
Level 3
September 30, 2015
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
109,004

 
$
109,004

 
$

 
$

Mutual funds
9,839

 
9,839

 

 

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Cash equivalents
$
44,004

 
$
44,004

 
$

 
$

Mutual funds
6,712

 
6,712

 

 

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 or Undertakings for Collective Investment in Transferable Securities (“UCITS”). There were no Level 2 or Level 3 assets or liabilities recorded at fair value as of September 30, 2015 and December 31, 2014.
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 nine months ended September 30, 2015 and 2014.
Note 5. Borrowings
Artisan’s borrowings consist of the following as of September 30, 2015 and December 31, 2014:
 
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 $198.3 million as of September 30, 2015. 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 and $8.3 million for the three and nine months ended September 30, 2015 and 2014, respectively.
As of September 30, 2015, the aggregate maturities of debt obligations, based on their contractual terms, are as follows:
2015
$

2016

2017
60,000

2018

2019
50,000

Thereafter
90,000

 
$
200,000


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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 September 30, 2015, APAM held approximately 54% of the economic interests in Holdings.
Net income (loss) attributable to noncontrolling interests - Artisan Partners Holdings in the Unaudited Consolidated Statements of Operations represents the portion of earnings or loss attributable to the economic interests in Holdings held by the limited partners of Holdings.
During the nine months ended September 30, 2015, APAM’s equity ownership interest in Holdings increased from 47% to 54%, due to the following transactions:
The issuance of 562,950 Holdings GP units corresponding to 562,950 restricted shares of Class A common stock issued by APAM during the period.
The issuance of 3,831,550 Holdings GP units and cancellation of 3,831,550 Holdings common units, in connection with the 2015 Follow-On Offering.
The issuance of 805,238 Holdings GP units and cancellation of 805,238 Holdings common units, in connection with the Holdings Common Unit Exchanges.
The forfeiture of 54,730 Holdings common units as a result of the termination of employment of employee-partners.
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 Nine Months Ended September 30,
2015
 
2014
Additional paid-in capital
$
(6,105
)
 
$
(12,323
)
Noncontrolling interest - Artisan Partners Holdings
6,039

 
11,950

Accumulated other comprehensive income
29

 
258

Deferred tax assets
37

 
115

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 $6.2 million for the nine months ended September 30, 2015 and $2.8 million for the nine months ended September 30, 2014.
Note 7. Variable and Voting Interest Entities
Artisan Funds and Artisan Global Funds
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 voting interest entity (“VOE”). While Artisan holds, in limited cases, direct investments in a fund (which are made on the same terms as are available to other investors and do not represent a majority voting interest in any entity), Artisan does not have a controlling financial interest or a majority voting interest and, as such, does not consolidate these entities.
Artisan Partners Launch Equity LP
Prior to December 2014, Artisan had an agreement to serve as the investment manager of Artisan Partners Launch Equity Fund LP (“Launch Equity”), which was a private investment partnership in which the investors were certain employees or former employees (or entities beneficially owned by such persons) of Artisan Partners Holdings. Artisan Partners Alternative Investments GP LLC (“Artisan Alternatives”), a wholly-owned subsidiary of Holdings, was the general partner of Launch Equity.

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In December 2014, Launch Equity was liquidated and the net assets were distributed as a return of capital to all limited partners of the fund, including Artisan Partners Alternative Investments GP LLC, which received proceeds of $1 thousand. The fair value of the consideration distributed was equal to the carrying amount of Launch Equity’s net assets on the date of liquidation. As a result, no gain or loss was recorded in connection with the transaction.
Prior to the dissolution, Launch Equity was determined to be a variable interest entity (“VIE”) which required consolidation within Artisan’s consolidated financial statements. Artisan’s maximum exposure to investment loss from its involvement with Launch Equity was limited to its equity investment of $1 thousand while the potential benefit was limited to the management fee and incentive allocation receivable as investment adviser and general partner. Therefore, the gains or losses of Launch Equity have not had a significant impact on Artisan’s results of operations, liquidity or capital resources. Artisan had no right to the benefits from, nor did it bear the risks associated with, Launch Equity’s investments, beyond Artisan’s minimal direct investment in Launch Equity.
The following tables reflect the impact of consolidating Launch Equity’s results into the Unaudited Consolidated Statement of Operations for the three and nine months ended September 30, 2014.
Condensed Consolidating Statements of Operations
 
Three Months Ended
 
September 30, 2014
 
Before
Consolidation
 
Launch Equity
 
Eliminations
 
As Reported
Total revenues
$
212,535

 
$

 
$
(129
)
 
$
212,406

Total operating expenses
131,519

 

 
(129
)
 
131,390

Operating income (loss)
81,016

 

 

 
81,016

Non-operating income (loss)
(1,999
)
 

 

 
(1,999
)
Net gain (loss) of Launch Equity

 
(557
)
 

 
(557
)
Total non-operating income (loss)
(1,999
)
 
(557
)
 

 
(2,556
)
Income (loss) before income taxes
79,017

 
(557
)
 

 
78,460

Provision for income taxes
15,335

 

 

 
15,335

Net income (loss)
63,682

 
(557
)
 

 
63,125

Less: Net income (loss) attributable to noncontrolling interests - Artisan Partners Holdings
43,243

 

 

 
43,243

Less: Net income (loss) attributable to noncontrolling interests - Launch Equity

 
(557
)
 

 
(557
)
Net income attributable to Artisan Partners Asset Management Inc.
$
20,439

 
$

 
$

 
$
20,439

Condensed Consolidating Statements of Operations
 
Nine Months Ended
 
September 30, 2014
 
Before
Consolidation
 
Launch Equity
 
Eliminations
 
As Reported
Total revenues
$
623,073

 
$

 
$
(388
)
 
$
622,685

Total operating expenses
394,080

 

 
(388
)
 
393,692

Operating income (loss)
228,993

 

 

 
228,993

Non-operating income (loss)
(12,526
)
 

 

 
(12,526
)
Net gain (loss) of Launch Equity

 
(2,039
)
 

 
(2,039
)
Total non-operating income (loss)
(12,526
)
 
(2,039
)
 

 
(14,565
)
Income (loss) before income taxes
216,467

 
(2,039
)
 

 
214,428

Provision for income taxes
35,193

 

 

 
35,193

Net income (loss)
181,274

 
(2,039
)
 

 
179,235

Less: Net income (loss) attributable to noncontrolling interests - Artisan Partners Holdings
132,939

 

 

 
132,939

Less: Net income (loss) attributable to noncontrolling interests - Launch Equity

 
(2,039
)
 

 
(2,039
)
Net income attributable to Artisan Partners Asset Management Inc.
$
48,335

 
$

 
$

 
$
48,335


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Note 8. Stockholders’ Equity
APAM - Stockholders’ Equity
As of September 30, 2015 and December 31, 2014, APAM had the following authorized and outstanding equity:
 
 
 
Outstanding
 
 
 
 
 
Authorized
 
September 30, 2015
 
December 31, 2014
 
Voting Rights (1)
 
Economic Rights
Common shares
 
 
 
 
 
 
 
 
 
Class A, par value $0.01 per share
500,000,000

 
39,411,178

 
34,238,131

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

 
18,327,222

 
21,463,033

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

 
15,670,672

 
17,226,379

 
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 September 30, 2015, Artisan’s employees held 2,782,128 restricted shares of Class A common stock and all 18,327,222 outstanding shares of Class B common stock, all of which are subject to the agreement.
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 and nine months ended September 30, 2015 and 2014:
Type of Dividend
 
Class of Stock
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
 
 
2015
 
2014
 
2015
 
2014
Quarterly
 
Common Class A
 
$0.60

$0.55

$1.80

$1.65
Special Annual
 
Common Class A
 
$—

$—

$0.95

$1.63
Quarterly
 
Convertible Preferred
 
$—

$—

$—

$3.81
APAM issued (canceled) the following shares during the nine months ended September 30, 2015:
 
Total Stock
Class A Common Stock(1)
Class B Common Stock
Class C Common Stock
Balance at December 31, 2014
72,927,543

34,238,131

21,463,033

17,226,379

2015 Follow-On Offering

3,831,550

(2,415,253
)
(1,416,297
)
Holdings Common Unit Exchanges

805,238

(355,305
)
(449,933
)
Restricted Share Award Grants
562,950

562,950



Restricted Share Award Net Share Settlement
(14,276
)
(14,276
)


Employee/Partner Terminations
(67,145
)
(12,415
)
(365,253
)
310,523

Balance at September 30, 2015
73,409,072

39,411,178

18,327,222

15,670,672

(1) There were 122,990 and 20,612 restricted stock units outstanding at September 30, 2015 and December 31, 2014, respectively, which are not reflected in the table.
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. Class B and Class C common stock is immediately canceled upon sale or exchange.

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Table of Contents

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.
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 and nine months ended September 30, 2015 and 2014, respectively, were as follows:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Holdings Partnership Distributions(1)
 
$81,140
 
$81,632
 
$269,704
 
$329,704
Holdings Partnership Distributions to APAM
 
$42,623
 
$35,263
 
$134,530
 
$116,149
(1) Including distributions to APAM
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 9. Compensation and Benefits
Total compensation and benefits consists of the following:
 
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Salaries, incentive compensation and benefits (1)
 
$
81,392


$
83,834

 
$
255,969


$
246,493

Restricted share-based award compensation expense
 
9,767


6,909

 
27,325


15,400

Total salaries, incentive compensation and benefits
 
91,159

 
90,743

 
283,294

 
261,893

Pre-offering related compensation - share-based awards
 
10,532

 
12,431

 
31,596

 
52,234

Total compensation and benefits
 
$
101,691

 
$
103,174

 
$
314,890

 
$
314,127

(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 the named executive officers for the year ended December 31, 2014, was paid in the three months ended March 31, 2015.
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 issued 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).

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Table of Contents

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 September 30, 2015, 10,336,935 shares of Class A common stock were reserved and available for issuance under the Plan.
During the nine months ended September 30, 2015, Artisan issued 562,950 restricted stock awards and 80,000 restricted stock units of Class A common stock to employees of the Company. Total compensation expense associated with the 2015 grants is expected to be approximately $30.5 million. Compensation expense related to the restricted share-based awards is recognized based on the estimated grant date fair value, for only those awards expected to vest, on a straight-line basis over the requisite service period of the award.
The Company estimated the number of awards expected to vest based, in part, on historical forfeiture rates and also based on management’s expectations of employee turnover. Forfeitures are estimated at the time of grant and revised in subsequent periods, if necessary, based on actual forfeiture activity.
The following table summarizes the restricted share-based award activity for the nine months ended September 30, 2015:
 
 
Weighted-Average Grant Date Fair Value
 
Number of Awards
Unvested at January 1, 2015
 
$
52.59

 
2,700,634

Granted
 
$
48.17

 
642,950

Forfeited
 
$
52.71

 
(12,415
)
Vested
 
$
52.69

 
(469,041
)
Unvested at September 30, 2015
 
$
51.58

 
2,862,128

Compensation expense recognized related to awards was $9.7 million and $6.9 million for the three months ended September 30, 2015 and 2014, respectively, and $27.3 million and $15.4 million for the nine months ended September 30, 2015 and 2014, respectively. The unrecognized compensation expense for the unvested awards as of September 30, 2015 was $129.6 million with a weighted average recognition period of 3.7 years remaining.
During the nine months ended September 30, 2015, the Company withheld a total of 14,276 restricted shares as a result of net share settlements to satisfy employee tax withholding obligations. The Company paid $0.7 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 payments for Class B awards of partners whose services to Holdings terminated prior to the IPO were $9.3 million and $14.3 million as of September 30, 2015 and December 31, 2014, respectively. Payments of $0.8 million and $5.0 million were made for the three and nine months ended September 30, 2015 and 2014, 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.

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The following table summarizes the activity related to unvested Class B awards for the nine months ended September 30, 2015:
 
Weighted-Average Grant Date Fair Value
 
Number of Class B Awards
Unvested Class B awards at January 1, 2015
$
30.00

 
4,045,016

Granted

 

Forfeited
$
30.00

 
(54,730
)
Vested
$
30.00

 
(1,641,952
)
Unvested at September 30, 2015
$
30.00

 
2,348,334

Compensation expense recognized related to the unvested Class B awards was $10.5 million and $12.4 million for the three months ended September 30, 2015 and 2014, respectively, and $31.6 million and $52.2 million for the nine months ended September 30, 2015 and 2014, respectively. The unrecognized compensation expense for the unvested Class B awards as of September 30, 2015, was $54.0 million with a weighted average recognition period of 1.6 years remaining.
Note 10. Income Taxes and Related Payments
APAM is subject to U.S. federal and state income taxation on APAM’s allocable portion of the income of Holdings. 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 approximately 50% of Holdings’ earnings are not subject to corporate level taxes. This favorable impact is partially offset by the impact of certain permanent items, primarily attributable to certain compensation related expenses, that are not deductible for tax purposes. Prior to the IPO Reorganization, none of Holdings’ earnings were subject to U.S. corporate-level taxes.
Components of the provision for income taxes consist of the following:
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Current:
 
 
 
 
 
 
 
Federal
$
9,797

 
$
6,050

 
$
21,911

 
$
21,132

State and local
1,355

 
1,106

 
2,896

 
3,016

Foreign
108

 
32

 
271

 
182

Total
11,260

 
7,188

 
25,078

 
24,330

Deferred:
 
 
 
 
 
 
 
Federal
350

 
12,025

 
14,979

 
14,971

State and local
20

 
(3,878
)
 
(6,848
)
 
(4,108
)
Total
370

 
8,147

 
8,131

 
10,863

Income tax expense
$
11,630

 
$
15,335

 
$
33,209

 
$
35,193

In connection with the IPO, APAM entered into two tax receivable agreements (“TRAs”). Under the first TRA, APAM generally is required to pay to a private equity fund controlled by Hellman & Friedman LLC 85% of the applicable cash savings, if any, in U.S. federal, state and local income tax 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 private equity fund into APAM in March 2013, (ii) net operating losses available as a result of the merger and (iii) tax benefits related to imputed interest.
Under the second TRA, APAM generally is required to pay to current or former limited partners of Holdings 85% of the applicable cash savings, if any, in U.S. federal, state and local income tax 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 or convertible preferred stock) and that are created as a result of the 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.

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For purposes of the TRAs, cash savings in tax 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 future exchanges by the holders of limited partnership units, the price of the Class A common stock at the time of future exchanges, whether such 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.
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 payments under the TRAs, to the extent they are required, within 125 days after APAM’s federal income tax return is filed for each fiscal year. Interest on such payments will begin to accrue at a rate equal to one-year LIBOR plus 100 basis points from the due date (without extension) of such tax return.
Amounts payable under tax receivable agreements is an estimate which is impacted by factors, including but not limited to, expected tax rates, projected taxable income, and projected ownership levels. During the nine months ended September 30, 2015, a change in estimate of future tax benefits resulted in an increase to deferred tax assets of $14.7 million and an increase to amounts payable under tax receivable agreements of $12.2 million. During the nine months ended September 30, 2014, a change in estimate of future tax benefits resulted in an increase to deferred tax assets of $4.9 million and an increase to amounts payable under tax receivable agreements of $4.2 million. The changes in the estimates of amounts payable under tax receivable agreements are recorded in non-operating income in the Consolidated Statements of Operations.
The 2015 Follow-On Offering and Holdings Common Unit Exchanges resulted in an increase to deferred tax assets and amounts payable under tax receivable agreements of $126.3 million and $107.4 million, respectively, for the nine months ended September 30, 2015.
During the three months ended September 30, 2015, payments of $20.2 million, including interest, were made under the TRAs.
Net deferred tax assets comprise the following:
 
As of September 30, 2015
 
As of December 31, 2014
Deferred tax assets:
 
 
 
Amortizable basis (1)
$
668,414

 
$
551,952

Other (2)
18,646

 
10,444

Total deferred tax assets
687,060

 
562,396

Less: valuation allowance (3)

 

Net deferred tax assets
$
687,060

 
$
562,396

(1) Represents the unamortized step-up of tax basis 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 September 30, 2015 and December 31, 2014.
In the normal course of business, Artisan is subject to examination by federal and certain state, local and foreign tax regulators. As of September 30, 2015, 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 audit from 2011 to 2014. Foreign tax returns are generally subject to audit from 2011 to 2014.

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Note 11. 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 September 30, 2015
 
As of December 31, 2014
Unrealized gain (loss) on investments
$
(75
)
 
$
326

Foreign currency translation
(293
)
 
(120
)
Accumulated Other Comprehensive Income (Loss)
$
(368
)
 
$
206

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 economic interests in Holdings held by the limited partners of Holdings.
Note 12. Earnings (Loss) Per Share
Basic earnings per share is computed 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 dividends declared or paid to convertible preferred stockholders during the period and earnings (distributed and undistributed) allocated to participating securities, according to their respective rights to participate in those earnings. Class B and Class C common shares do not share in profits of APAM and therefore are not reflected in the calculations.
The consideration Artisan paid to purchase shares of its convertible preferred stock in March 2014 exceeded the carrying amount of the shares of convertible preferred stock on Artisan’s consolidated balance sheet; the excess was subtracted from net income as a deemed dividend to arrive at income available to common stockholders in the earnings per share calculation. The purchase of subsidiary preferred equity in March 2014 resulted in a similar deemed dividend, which also reduced net income available to common stockholders.

The computation of basic and diluted earnings per share under the two-class method for the three and nine months ended September 30, 2015 and 2014 were as follows:
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
Basic and Diluted Earnings Per Share
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
Net income attributable to APAM
$
18,474

 
$
20,439

 
$
61,724

 
$
48,335

Less: Convertible preferred stock deemed dividends

 

 

 
22,694

Less: Subsidiary preferred equity deemed dividends

 

 

 
26,469

Less: Allocation to participating securities
2,574

 
3,246

 
13,480

 
25,933

Net income (loss) available to common stockholders
$
15,900

 
$
17,193

 
$
48,244

 
$
(26,761
)
Denominator:

 
 
 
 
 
 
Weighted average shares outstanding
36,430,820

 
30,370,892

 
35,032,841

 
26,177,724

Earnings (loss) per share
$
0.44

 
$
0.57

 
$
1.38

 
$
(1.02
)
Diluted earnings per share is computed by increasing the denominator by the amount of additional Class A common shares that would have been outstanding if all potential Class A common shares had been issued. The numerator is also increased for the net income allocated to the potential Class A common shares. For periods with a net loss available to common stockholders, all potential common shares are considered anti-dilutive.

The Holdings limited partnership units are anti-dilutive primarily due to the impact of public company expenses and unrecognized share-based compensation expense. Unvested restricted awards are anti-dilutive, primarily because the unvested shares are considered participating securities.


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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 September 30,
 
 For the Nine Months Ended September 30,
Anti-Dilutive Weighted Average Shares Outstanding
2015
 
2014
 
2015
 
2014
Holdings limited partnership units
34,078,421

 
39,767,645

 
35,288,887

 
43,349,132

Convertible preferred stock

 

 

 
474,938

Unvested restricted share-based awards
3,027,787

 
2,582,934

 
3,116,835

 
1,939,126

Total
37,106,208

 
42,350,579

 
38,405,722

 
45,763,196

Note 13. 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.
Note 14. Related Party Transactions
Artisan engages in transactions with its affiliates in the ordinary course of business.
Affiliate transactions—Artisan Funds     
Artisan has an agreement to serve as the investment manager of Artisan Funds, with which certain of 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 0.63% 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 1.25% to 1.50%) of the particular 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 September 30,
 
 For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Investment management fees:
 
 
 
 
 
 
 
Artisan Funds
$
130,842

 
$
144,873

 
$
404,013

 
$
423,620

Fee waiver / expense reimbursement:
 
 
 
 
 
 
 
Artisan Funds
$
317

 
$
17

 
$
368

 
$
95

Affiliate transactions—Artisan Global Funds
Artisan has agreements to serve as the investment manager and promoter of 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 September 30, 2015 and December 31, 2014, respectively.

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Fees for managing Artisan Global Funds and amounts reimbursed to Artisan Global Funds by Artisan are as follows:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Investment management fees:
 
 
 
 
 
 
 
Artisan Global Funds
$
3,807

 
$
3,685

 
$
11,376

 
$
10,552

Fee waiver / expense reimbursement:
 
 
 
 
 
 
 
Artisan Global Funds
$
102

 
$
207

 
$
346

 
$
377

Affiliate transactions—Launch Equity
Prior to the dissolution described in Note 7, Artisan had an agreement to serve as the investment manager of Launch Equity. Under the terms of Artisan’s agreement with Launch Equity, Artisan earned a quarterly fee based on the value of the closing capital account of each limited partner for the quarter, at the rate of 1.00% (annualized). At Artisan’s discretion, the fee was waived and certain expenses reimbursed to the extent they exceeded a certain level. Artisan waived 100% of the quarterly fee and reimbursed Launch Equity for all operating expenses, and Artisan also waived other expenses as well. Expense reimbursements totaled $40 thousand and $133 thousand for the three and nine months ended September 30, 2014.
Note 15. Subsequent Events
Distributions and dividends
On October 21, 2015, the board of directors of APAM declared a distribution by Artisan Partners Holdings of $40.3 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 APAM’s Class A common stock. The APAM dividend is payable on November 30, 2015, to shareholders of record as of November 16, 2015.

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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 fifteen distinct investment strategies. Strategies are offered through multiple investment vehicles to accommodate a broad range of client mandates.
Business and financial highlights for the nine months ended September 30, 2015 included:

As of September 30, 2015, over 85% of our assets under management were in strategies out-performing their broad-based benchmarks over the trailing 3-, 5-, and 10-year periods and since each strategys inception.
As of September 30, 2015, eight of our 12 investment strategies that have a five-year track record have added value relative to their broad-based performance benchmarks over the trailing five years. Six of our eight strategies with a 10-year track record have added value over the trailing 10-year period.
The launch, in late June, of our newest investment strategy, the Artisan Developing World strategy, which is managed by our Developing World team.
Revenues of $613.5 million for the nine months ended September 30, 2015, a 1% decrease from revenues of $622.7 million for the nine months ended September 30, 2014.
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, 2014, filed with the SEC on February 25, 2015.
Our employees and other limited partners of Holdings held approximately 46% of the equity interests in Holdings as of September 30, 2015. As a result, our post-IPO results reflect that significant noncontrolling interest. As of September 30, 2015, our net income represented approximately 54% of Holdings’ net income.
2015 Offering and Unit Exchanges
On March 9, 2015, we completed an offering of 3,831,550 shares of Class A common stock and utilized all of the proceeds to purchase an aggregate of 3,831,550 common units of Holdings from certain of the limited partners of Holdings. In connection with the offering, APAM received 3,831,550 GP units of Holdings.
During the nine months ended September 30, 2015, certain limited partners of Holdings exchanged 805,238 common units (along with a corresponding number of shares of Class B or Class C common stock of APAM) for 805,238 shares of Class A common stock. In connection with the exchanges, APAM received 805,238 GP units of Holdings.
The aforementioned transactions increased APAM’s equity ownership interest in Holdings from 47% at December 31, 2014 to 54% at September 30, 2015.
Tax Impact of IPO Reorganization
In connection with the IPO, APAM entered into two tax receivable agreements (“TRAs”). Under the first TRA, APAM generally is required to pay to a private equity fund controlled by Hellman & Friedman LLC 85% of the applicable cash savings, if any, in U.S. federal, state and local income tax 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 private equity fund into APAM in March 2013, (ii) net operating losses available as a result of the merger and (iii) tax benefits related to imputed interest.

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Under the second TRA, APAM generally is required to pay to current or former limited partners of Holdings 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax 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 or convertible preferred stock) and that are created as a result of the 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.
As of September 30, 2015, deferred tax assets of $687.1 million and amounts payable under tax receivable agreements of $588.7 million have been recorded in the Condensed Consolidated Statements of Financial Condition. APAM’s purchase of Holdings common units with the 2015 Follow-On Offering proceeds resulted in an increase to deferred tax assets of approximately $105.1 million and an increase in amounts payable under tax receivable agreements of approximately $89.4 million. The Holdings Unit Exchanges during the nine months ended September 30, 2015, resulted in an increase to deferred tax assets of $21.2 million and an increase to amounts payable under tax receivable agreements of $18.0 million. The deferred tax assets and TRA payable also increased by $14.7 million and $12.2 million, respectively, for the nine months ended September 30, 2015, due to changes in estimated tax rates and other assumptions during the period.
Financial Overview
Economic Environment
Global equity market conditions can materially affect our financial performance. The following table presents the total returns of relevant market indices for the three and nine months ended September 30, 2015 and 2014:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
S&P 500 Index total returns
(6.4
)%
 
1.1
 %
 
(5.3
)%
 
8.3
 %
MSCI All Country World Index total returns
(9.4
)%
 
(2.3
)%
 
(7.0
)%
 
3.7
 %
MSCI EAFE Index total returns
(10.2
)%
 
(5.9
)%
 
(5.3
)%
 
(1.4
)%
Russell Midcap® Index total returns
(8.0
)%
 
(1.7
)%
 
(5.8
)%
 
6.9
 %
Key Performance Indicators
When we review our performance we consider, among other things, the following:
 
 For the Three Months Ended September 30,
 
 For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(unaudited; dollars in millions)
Assets under management at period end
$
96,968

 
$
106,246

 
$
96,968

 
$
106,246

Average assets under management (1)
$
104,723

 
$
110,209

 
$
108,166

 
$
108,191

Net client cash flows
$
(1,302
)
 
$
(645
)
 
$
(3,833
)
 
$
1,326

Total revenues
$
198.4

 
$
212.4

 
$
613.5

 
$
622.7

Weighted average fee (2)
75
 bps
 
76
 bps
 
76
 bps
 
77
 bps
Adjusted operating margin (3)
40.9
%
 
44.0
%
 
40.5
%
 
45.2
%
 
 
 
 
 
(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.

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The weighted average fee represents annualized investment management fees as a percentage of average assets under management for the applicable period. The decline in the weighted average fee for the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, is discussed below. 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 products and the effective fee rates on our products also impact our operating results, and in some periods the impact could be material.

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 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;
competitive conditions in the investment management and broader financial services sectors; and
investor sentiment and confidence.
The table below sets forth changes in our total AUM:
 
 For the Three Months Ended September 30,
 
Period-to-Period
 
2015
 
2014
 
$
 
%
 
(unaudited; in millions)
 
 
 
 
Beginning assets under management
$
109,174

 
$
112,041

 
$
(2,867
)
 
(2.6
)%
Gross client cash inflows
4,179

 
4,677

 
(498
)
 
(10.6
)%
Gross client cash outflows
(5,481
)
 
(5,322
)
 
(159
)
 
(3.0
)%
Net client cash flows
(1,302
)
 
(645
)
 
(657
)
 
(101.9
)%
Market appreciation (depreciation) (1)
(10,904
)
 
(5,113
)
 
(5,791
)
 
(113.3
)%
Net transfers (2)

 
(37
)
 
37

 
100.0
 %
Ending assets under management
$
96,968

 
$
106,246

 
$
(9,278
)
 
(8.7
)%
Average assets under management
$
104,723

 
$
110,209

 
$
(5,486
)
 
(5.0
)%
 
 
 
 
 
 
 
 
 
 For the Nine Months Ended September 30,
 
Period-to-Period
 
2015
 
2014
 
$
 
%
 
(unaudited; in millions)
 
 
 
 
Beginning assets under management
$
107,915

 
$
105,477

 
$
2,438

 
2.3
 %
Gross client cash inflows
13,700

 
17,411

 
(3,711
)
 
(21.3
)%
Gross client cash outflows
(17,533
)
 
(16,085
)
 
(1,448
)
 
(9.0
)%
Net client cash flows
(3,833
)
 
1,326

 
(5,159
)
 
(389.1
)%
Market appreciation (depreciation) (1)
(7,114
)
 
(520
)
 
(6,594
)
 
(1,268.1
)%
Net transfers (2)

 
(37
)
 
37

 
 %
Ending assets under management
$
96,968

 
$
106,246

 
$
(9,278
)
 
(8.7
)%
Average assets under management
$
108,166

 
$
108,191

 
$
(25
)
 
 %
(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.

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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. During the three and nine months ended September 30, 2015, the Global Opportunities strategy had net inflows of $395 million and $1.4 billion, respectively. The Global Equity strategy had net inflows of $40 million and $64 million during those respective periods. 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 continue to gather assets.

Additionally, our High Income strategy, which we launched in March 2014, has performed well since its inception and generated net inflows of $206 million during the third quarter, despite having a short-term track record. We also saw strong interest in our Developing World strategy during the third quarter, which launched at the end of June 2015.
Across the firm, we experienced total net outflows of $1.3 billion and $3.8 billion during the three and nine months ended September 30, 2015, respectively. The strategies managed by our U.S. Value team experienced total net outflows of $1.6 billion and $4.9 billion during those respective periods. 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 Global Value team’s strategies, both of which were closed to most new investors throughout the nine months ended September 30, 2015, experienced $324 million and $1.0 billion of net outflows during the three and nine months ended September 30, 2015, respectively. We re-opened the Global Value strategy across pooled vehicles on October 1, 2015. The strategy remains closed to most new separate account clients. We cannot estimate the impact of the re-opening on net flows with any certainty because of the many factors involved.
During the three and nine months ended September 30, 2015, our Non-U.S. Growth strategy, managed by our Global Equity team, had $170 million and $2.1 billion in net inflows, respectively. In September 2015, we announced that we will close the Non-U.S. Growth strategy to most new retail and intermediary investors on February 1, 2016, and to most new institutional investors and employee benefit plans on October 1, 2016. While the first change does not take effect until February 1, 2016, we expect that the announcement will have some impact on the strategy’s net flows prior to that date, 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.

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. However, when a strategy is closed or its growth is restricted we expect there to be periods of net client cash outflows.

In November 2015 we expect the Artisan Funds will make their annual income and capital gains distributions. In November 2014 those distributions resulted in about $650 million of net client cash outflows from investors who chose not to reinvest their dividends. Based on our current estimates, we expect this year’s distributions to have a similar aggregate result.

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The table below sets forth the total AUM for each of our investment teams and strategies as of September 30, 2015, the inception date for each investment composite, and the average annual total returns for each strategy and its respective broad-based benchmark (and style benchmark, if applicable) over a multi-horizon time period as of September 30, 2015. 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