Notes to Unaudited Consolidated Financial Statements
Note 1—Organization
Pzena Investment Management, Inc. (the “Company”) is the sole managing member of its operating company, Pzena Investment Management, LLC (the “operating company”). As a result, the Company: (i) consolidates the financial results of the operating company and reflects the membership interests in the operating company that it does not own as a non-controlling interest in its consolidated financial statements; and (ii) recognizes income generated from its economic interest in the operating company’s net income.
The operating company is an investment adviser registered under the Investment Advisers Act of 1940 and is headquartered in New York, New York. As of March 31, 2020, the operating company managed assets in a variety of value-oriented investment strategies across a wide range of market capitalizations in both U.S. and non-U.S. capital markets.
The Company also serves as the general partner of Pzena Investment Management, LP, a partnership formed with the objective of aggregating employee ownership in the operating company into one entity.
The Company, through its interest in the operating company, has consolidated the results of operations and financial condition of the following entities as of March 31, 2020:
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Ownership at
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|
Legal Entity
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Type of Entity (Date of Formation)
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March 31, 2020
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Pzena Investment Management, Pty
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Australian Proprietary Limited Company (12/16/2009)
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100.0%
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Pzena Financial Services, LLC
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Delaware Limited Liability Company (10/15/2013)
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100.0%
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Pzena Investment Management, LTD
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England and Wales Private Limited Company (01/08/2015)
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100.0%
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Pzena U.S. Best Ideas (GP), LLC
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Delaware Limited Liability Company (11/16/2017)
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100.0%
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|
Pzena Global Best Ideas (GP), LLC
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Delaware Limited Liability Company (2/15/2018)
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100.0%
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Pzena Investment Management International 2, LLC
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Delaware Limited Liability Company (1/21/2020)
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100.0%
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Pzena Global Focused Value Fund
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Australian Registered Investment Scheme (6/10/16)
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100.0%
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Pzena Investment Management Special Situations, LLC
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Delaware Limited Liability Company (12/01/2010)
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99.9%
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Pzena International Small Cap Value Fund, a series of Advisors Series Trust
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Open-end Management Investment Company, series of Delaware Statutory Trust (6/28/2018)
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68.4%
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|
Note 2—Significant Accounting Policies
Basis of Presentation:
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and related Securities and Exchange Commission (“SEC”) rules and regulations.
Principles of Consolidation:
The Company’s policy is to consolidate those entities in which it has a direct or indirect controlling financial interest based on either the voting interest model or the variable interest model. As such, the Company consolidates majority-owned subsidiaries in which it has a controlling financial interest, and certain investment vehicles the operating company sponsors for which it is the investment adviser that are considered to be variable-interest entities (“VIEs”), and for which the Company is deemed to be the primary beneficiary.
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Table of Contents
Pursuant to the Consolidation Topic of the FASB Accounting Standards Codification (“FASB ASC”), for legal entities evaluated for consolidation, the Company determines whether interests it holds and fees paid to the entity qualify as a variable interest. If it is determined that the Company does not have a variable interest in the entity, no further analysis is required and the Company does not consolidate the entity. If it is determined that the Company has a variable interest, it considers its direct economic interests and the proportionate indirect interests through related parties to determine if it is the primary beneficiary of the VIE.
For equity investments where the Company does not control the investee, and where it is not the primary beneficiary of a VIE, but can exert significant influence over the financial and operating policies of the investee, the Company follows the equity method of accounting. The evaluation of whether the Company exerts control or significant influence over the financial and operating policies of the investee requires significant judgment based on the facts and circumstances surrounding each investment. Factors considered in these evaluations may include the type of investment, the legal structure of the investee, the terms of the investment agreement, or other agreements with the investee.
The Company analyzes entities structured as series funds which comply with the requirements included in the Investment Company Act of 1940 for registered mutual funds as voting interest entities because the shareholders are deemed to have the ability to direct the activities of the fund that most significantly impact the fund's economic performance.
Consolidated Entities
The Company consolidates the financial results of the operating company and records in its own equity its pro-rata share of transactions that impact the operating company’s net equity, including unit and option issuances, repurchases, and retirements. The operating company’s pro-rata share of such transactions are recorded as an adjustment to additional paid-in capital or non-controlling interests, as applicable, on the consolidated statements of financial condition.
The majority-owned subsidiaries in which the Company, through its interest in the operating company, has a controlling financial interest and the VIEs for which the Company is deemed to be the primary beneficiary are collectively referred to as “consolidated subsidiaries.” Non-controlling interests recorded on the consolidated financial statements of the Company include the non-controlling interests of the outside investors in each of these entities, as well as those of the operating company. All significant inter-company transactions and balances have been eliminated through consolidation.
During 2020, the Company provided the initial cash investment for a Pzena-branded Australian Registered Investment Scheme, Pzena Global Focused Value Fund, in an effort to generate an investment performance track record to attract third-party investors. The Company is considered the primary beneficiary of this entity. At March 31, 2020, Pzena Global Focused Value Fund’s $2.3 million in net assets were included in the Company’s Consolidated Statements of Financial Condition.
On January 1, 2020, the Company redeemed its investment in the Pzena International Value Service (a series of Pzena Investment Management International, LLC). As the Company was no longer deemed the primary beneficiary of this entity, it deconsolidated the entity and removed the related assets, liabilities and non-controlling interest from the Company’s Consolidated Statements of Financial Condition.
These consolidated investment partnerships are investment companies and apply specialized industry accounting for investment companies. The Company has retained this specialized accounting for these investment partnerships pursuant to U.S. GAAP.
Non-Consolidated Variable Interest Entities
VIEs that are not consolidated receive investment management services from the operating company and are generally private investment partnerships sponsored by the operating company. The total net assets of these VIEs was approximately $152.4 million and $247.8 million at March 31, 2020 and December 31, 2019, respectively.
As of March 31, 2020 and December 31, 2019, the operating company had $1.9 million and $0.5 million in investments in certain of these firm-sponsored vehicles, the majority of which are primarily held to satisfy certain of the Company’s obligations under its deferred compensation programs, for which the Company was not deemed to be the primary beneficiary. The Company's exposure to risk in the non-consolidated VIEs is generally limited to any equity investment and any uncollected management fees. As of March 31, 2020 and December 31, 2019, the Company's maximum exposure to loss as a result of its involvement with the non-consolidated VIEs was $2.0 million and $0.7 million, respectively.
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Management’s Use of Estimates:
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses for the period. Actual results could materially differ from those estimates.
Revenue Recognition:
Revenue, comprised of advisory fee income, is recognized over the period in which advisory services are provided. Advisory fee income includes management fees that are calculated based on percentages of assets under management (“AUM”), generally billed quarterly, either in arrears or advance, depending on the applicable contractual terms. Advisory fee income also includes performance fees that may be earned by the Company depending on the investment return of the AUM, as well as fulcrum fee arrangements. Performance fee arrangements generally entitle the Company to participate, on a fixed-percentage basis, in any returns generated in excess of an agreed-upon benchmark. The Company’s participation percentage in such return differentials is then multiplied by AUM to determine the performance fees earned. In general, returns are calculated on an annualized basis over the contract’s measurement period, which usually extends to three years. Performance fees are generally payable annually or quarterly. Fulcrum fee arrangements require a reduction in the base fee, or allow for a performance fee if the relevant investment strategy underperforms or outperforms, respectively, the agreed-upon benchmark over the contract's measurement period, which extends to three years. Fulcrum fees are generally payable quarterly. Following the Revenue Recognition Topic of the FASB ASC, performance fee income is recorded at the conclusion of the contractual performance period, when it is probable that significant reversal of the performance fee will not occur. Advisory fee income also includes fund expense cap reimbursements which are required to be presented net against Revenue rather than as a component of General and Administrative Expense.
Revenue from advisory fees is disaggregated into categories based on the composition of the Company's client base and advisory fee structure for the three months ended March 31, 2020 and 2019:
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For the Three Months
Ended March 31,
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Revenue
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2020
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2019
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(in thousands)
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Separately Managed Accounts
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Asset-Based Fees
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$
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18,696
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$
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18,596
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Total Separately Managed Fees
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18,696
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18,596
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Sub-Advised Accounts
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Asset-Based Fees
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$
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13,723
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|
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$
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14,890
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Decrease in Asset-Based Fees
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(1,014
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)
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(335
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)
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Performance-Based Fees
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—
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452
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Total Sub-Advised Fees
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12,709
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15,007
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Pzena Funds
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Asset-Based Fees
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$
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3,600
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$
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3,989
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Expense Cap Reimbursements
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(326
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)
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(182
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)
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Performance-Based Fees
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—
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—
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Total Pzena Funds Fees
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3,274
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3,807
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Total
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$
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34,679
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$
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37,410
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Table of Contents
Cash and Cash Equivalents:
At March 31, 2020 and December 31, 2019, Cash and Cash Equivalents was $20.5 million and $52.5 million, respectively. The Company considers all money market funds and highly-liquid debt instruments with an original maturity of three months or less at the time of purchase to be cash equivalents. The Company maintains its cash in bank deposits, other accounts whose balances often exceed federally insured limits and treasury money market funds. Cash is stated at cost, which approximates fair value.
Interest on cash and cash equivalents is recorded as Interest Income on an accrual basis in the consolidated statements of operations.
Restricted Cash:
At both March 31, 2020 and December 31, 2019, the Company had $1.0 million of compensating balances recorded in Restricted Cash in the consolidated statements of financial condition. These balances reflect a letter of credit issued by a third party in lieu of a cash security deposit, as required by the Company’s lease for its corporate headquarters.
The following table reconciles cash, cash equivalents, and restricted cash per the consolidated statements of cash flows to the consolidated statements of financial condition.
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March 31,
2020
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December 31, 2019
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March 31,
2019
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December 31, 2018
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(in thousands)
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Cash and Cash Equivalents
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$
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20,527
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$
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52,480
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$
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14,731
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|
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$
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38,099
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Restricted Cash
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1,040
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|
|
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1,036
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|
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1,029
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1,028
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Total
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$
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21,567
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$
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53,516
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|
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$
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15,760
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|
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$
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39,127
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|
Due to/from Broker:
Due to/from Broker consists primarily of amounts payable/receivable for unsettled securities transactions held/initiated at the clearing brokers of the Company’s consolidated subsidiaries.
Non-Cash Compensation:
All non-cash compensation awards granted have varying vesting schedules and are issued at prices equal to the assessed fair market value at the time of issuance. Expenses associated with these awards are recognized over the period during which employees are required to provide service. The Company accounts for forfeitures as they occur.
Investments:
Investments, at Fair Value
Investments, at Fair Value consist of equity securities at fair value and trading debt securities held by the Company and its consolidated subsidiaries, as well as investments in open-ended registered mutual funds. Management determines the appropriate classification of its investments at the time of purchase and re-evaluates such determination on an ongoing basis. Dividends and interest income associated with the Company's investments and the investments of the Company's consolidated subsidiaries are recognized as Dividend Income on an ex-dividend basis and Interest Income, respectively, in the consolidated statements of operations.
All such investments are recorded at fair value, with net realized and unrealized gains and losses recognized as a component of Net Realized and Unrealized Gains/ (Losses) from Investments in the consolidated statements of operations.
Investments in equity method investees
The Company accounted for its investments in certain private investment partnerships in which the Company has non-controlling interests and exercises significant influence, using the equity method. These investments are included in Investments in the Company's consolidated statements of financial condition. The carrying value of these investments is recorded at the amount of capital reported by the private investment partnership or mutual fund. The capital account for each entity reflects any contributions paid to, distributions received from, and equity earnings of, the relevant entity. The earnings of these investments are recognized as in Equity in Earnings/ (Losses) of Affiliates in the consolidated statements of operations.
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Investments in equity method investees are evaluated for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amounts of the assets exceed their respective fair values, additional impairment tests are performed to measure the amounts of impairment losses, if any. During the three months ended March 31, 2020 and 2019, no impairment losses were recognized.
Securities Valuation:
Investments in equity securities for which market quotations are available are valued at the last reported price or closing price on the primary market or exchange on which they trade. If no reported equity sales occurred on the valuation date, equity investments are valued at the bid price. Investments in registered mutual funds are carried at fair value at their respective net asset values as of the valuation date. Otherwise, fair values for investment securities are based on Level 2 or Level 3 inputs detailed in Note 9. Transactions are recorded on a trade date basis.
The net realized gain or loss on sales of equity securities and securities sold short is determined on a specific identification basis and is included in Net Realized and Unrealized Gains/ (Losses) from Investments in the consolidated statements of operations.
Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, amounts due from brokers, and advisory fees receivable. The Company maintains its cash in bank deposits and other accounts whose balances often exceed federally insured limits.
The concentration of credit risk with respect to advisory fees receivable is generally limited due to the short payment terms extended to clients by the Company. On a periodic basis, the Company evaluates its advisory fees receivable and establishes an allowance for doubtful accounts, if necessary, based on a history of past write-offs, collections, and current credit conditions. At both March 31, 2020 and December 31, 2019, there was no allowance for doubtful accounts.
Property and Equipment:
Property and equipment is carried at cost, less accumulated depreciation and amortization. Depreciation is provided on a straight-line basis over the estimated useful lives of the respective assets, except for leasehold improvements, which range from three to seven years. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvements or the remaining lease term.
Leases:
The Company determines if an arrangement is a lease at inception. Operating leases are included as a component of Right-of-use (“ROU”) Assets and Lease Liabilities on the consolidated statements of financial condition. ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The lease terms may include options to extend or terminate the lease. These options to extend or terminate are assessed on a lease-by-lease basis, and the ROU assets and lease liabilities are adjusted when it is reasonably certain that an option will be exercised. If a lease arrangement does not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Lease expense associated with leases that have a term of 12 months or less as of the commencement date are recognized as a component of general and administrative expenses on a straight-line basis over the lease term.
Share Repurchases:
Share repurchases may be made from time-to-time in open market transactions or through privately negotiated transactions under the authorization approved by the Board of Directors. The Company charges the entire excess of cost over par to additional paid-in capital. If the Company’s additional paid-in capital balance is reduced to zero, any additional amounts are recognized in retained earnings.
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Table of Contents
Business Segments:
The Company views its operations as comprising one operating segment.
Income Taxes:
The Company is a “C” corporation under the Internal Revenue Code, and thus liable for federal, state, and local taxes on the income derived from its economic interest in its operating company. The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes. It has not made a provision for federal or state income taxes because it is the individual responsibility of each of the operating company’s members (including the Company) to separately report their proportionate share of the operating company’s taxable income or loss. The operating company has made a provision for New York City Unincorporated Business Tax (“UBT”) and its consolidated subsidiary Pzena Investment Management, LTD has made a provision for U.K. income taxes. The effective tax rate for interim periods represents the Company’s best estimate of the effective tax rate expected to be applied to the full fiscal year, adjusted for discrete items recognized during the quarter.
Judgment is required in evaluating the Company's uncertain tax positions and determining its provision for income taxes. The Company establishes liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These liabilities are established when the Company believes that certain positions might be challenged despite its belief that its tax return positions are in accordance with applicable tax laws. The Company adjusts these liabilities in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation or the change of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate. It is also the Company’s policy to recognize accrued interest, and penalties associated with uncertain tax positions in Income Tax Expense on the consolidated statements of operations.
The Company and its consolidated subsidiaries account for all U.S. federal, state, local, and U.K. taxation pursuant to the asset and liability method, which requires deferred income tax assets and liabilities to be recorded for temporary differences between the carrying amount and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more-likely-than-not to be realized. At both March 31, 2020 and December 31, 2019, the Company did not have a valuation allowance recorded against its deferred tax assets.
The income tax expense, or benefit, is the tax payable or refundable for the period, plus or minus the change during the period in deferred tax assets and liabilities. The Company records its deferred tax liabilities as a component of other liabilities in the consolidated statements of financial condition. All excess tax benefits or tax deficiencies related to stock- and unit-transactions are reflected in the consolidated statements of operations as a component of the provision for income taxes.
Tax Receivable Agreement:
The Company’s purchase of membership units of the operating company concurrent with the initial public offering, and the subsequent and future exchanges by holders of Class B units of the operating company for shares of Class A common stock (pursuant to the exchange rights provided for in the operating company’s operating agreement), have resulted in, and are expected to continue to result in, increases in the Company’s share of the tax basis of the tangible and intangible assets of the operating company, which will increase the tax depreciation and amortization deductions that otherwise would not have been available to the Company. These increases in tax basis and tax depreciation and amortization are each deductible for tax purposes over a period of 15 years and have reduced, and are expected to continue to reduce, the amount of cash taxes that the Company would otherwise be required to pay in the future. The Company has entered into a tax receivable agreement with past, current, and future members of the operating company that requires the Company to pay to any member involved in any exchange transaction 85% of the amount of cash tax savings, if any, in U.S. federal, state and local income tax or foreign or franchise tax that it realizes as a result of these increases in tax basis and, in limited cases, transfers or prior increases in tax basis. The Company expects to benefit from the remaining 15% of cash tax savings, if any, in income tax it realizes. Payments under the tax receivable agreement will be based on the tax reporting positions that the Company will determine. The Company will not be reimbursed for any payments previously made under the tax receivable agreement if a tax basis increase is successfully challenged by the Internal Revenue Service.
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The Company records an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the exchange. The Company records 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due under the tax receivable agreement, which is reflected as the liability to selling and converting shareholders in the accompanying consolidated financial statements. The remaining 15% of the estimated realizable tax benefit is initially recorded as an increase to the Company’s additional paid-in capital. All of the effects to the deferred tax asset of changes in any of the estimates after the tax year of the exchange will be reflected in the provision for income taxes. Similarly, the effect of subsequent changes in the enacted tax rates will be reflected in the provision for income taxes.
If the Company exercises its right to terminate the tax receivable agreement early, the Company will be obligated to make an early termination payment to the selling and converting shareholders, based upon the net present value (based upon certain assumptions and deemed events set forth in the tax receivable agreement) of all payments that would be required to be paid by the Company under the tax receivable agreement. If certain change of control events were to occur, the Company would be obligated to make an early termination payment.
Foreign Currency:
The functional currency of the Company is the U.S. Dollar. Assets and liabilities of foreign operations whose functional currency is not the U.S. Dollar are translated at the exchange rate in effect at the applicable reporting date, and the consolidated statements of operations are translated at the average exchange rates in effect during the applicable period. A charge or credit is recorded to other comprehensive income to reflect the translation of these amounts to the extent the non-U.S. currency is designated the functional currency of the subsidiary. Non-functional currency related transaction gains and losses are immediately recorded in the consolidated statements of operations. For the three months ended March 31, 2020, the Company recorded $0.5 million of other comprehensive loss associated with foreign currency translation adjustments. For the three months ended March 31, 2019, the Company recorded $0.1 million of other comprehensive income associated with foreign currency translation adjustments.
Investment securities and other assets and liabilities denominated in foreign currencies are remeasured into U.S. Dollar amounts at the date of valuation. Purchases and sales of investment securities, and income and expense items denominated in foreign currencies, are remeasured into U.S. Dollar amounts on the respective dates of such transactions.
The Company does not isolate the portion of the results of its operations resulting from the impact of fluctuations in foreign exchange rates on its non-U.S. investments. Such fluctuations are included in Net Realized and Unrealized Gains/ (Losses) from Investments in the consolidated statements of operations.
Reported net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, foreign withholding taxes, and other receivables and payables recorded on the Company’s consolidated statements of financial condition and the U.S. Dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities resulting from changes in exchange rates.
Note 3—Compensation and Benefits
Compensation and benefits expense to employees and members is comprised of the following:
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|
For the Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Cash Compensation and Other Benefits
|
|
$
|
16,250
|
|
|
$
|
14,445
|
|
Non-Cash Compensation
|
|
|
2,890
|
|
|
|
2,744
|
|
Total Compensation and Benefits Expense
|
|
$
|
19,140
|
|
|
$
|
17,189
|
|
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Table of Contents
All non-cash compensation awards granted have varying vesting schedules and are issued at prices equal to the assessed fair market value at the time of issuance, as discussed below. Details of non-cash compensation awards granted during the three months ended March 31, 2020 and 2019 are as follows:
|
|
For the Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Amount
|
|
|
Fair
Value1
|
|
|
Amount
|
|
|
Fair
Value1
|
|
Restricted Class B Units
|
|
|
—
|
|
|
$
|
—
|
|
|
|
44,470
|
|
|
$
|
7.87
|
|
Options to Purchase Delayed Exchange Class B Units2
|
|
|
—
|
|
|
$
|
—
|
|
|
|
314,960
|
|
|
$
|
1.27
|
|
Class B-1 Units3
|
|
|
2,259,683
|
|
|
$
|
3.98
|
|
|
|
—
|
|
|
$
|
—
|
|
1
|
Represents the grant date fair value per share, unit, or option.
|
2
|
Represents options to purchase Delayed Exchange Class B units issued under the 2006 Equity Incentive Plan (as defined below). These options become exercisable five years from the date of grant. Upon exercise, the resulting Delayed Exchange Class B units may not be exchanged pursuant the Amended and Restated Operating Agreement until the seventh anniversary of the exercise date and are not entitled to any benefits under the Tax Receivable Agreement.
|
3
|
Represents Class B-1 units issued under the 2007 Equity Incentive Plan (as defined below). These Class B-1 units are entitled to receive dividends for the duration of the holder’s employment, and upon the end of employment are exchanged for shares of Class A common stock in an amount based upon the appreciation in price of the Class A common stock from the date of grant to the date of exchange.
|
As part of the Company's year-end bonus structure, certain employee members may elect to have all or part of year-end cash compensation paid in the form of cash, or equity issued pursuant to Pzena Investment Management, LLC Amended and Restated 2006 Equity Incentive Plan (“the 2006 Equity Incentive Plan”). For the year ended December 31, 2019, $3.8 million of cash compensation was elected to be paid in the form of equity, which was issued and vested immediately on January 1, 2020. Details of awards associated with these elections issued on January 1, 2020 are as follows:
|
|
January 1,
|
|
|
|
2020
|
|
|
|
Amount
|
|
|
Fair Value1
|
|
Delayed Exchange Class B Units2
|
|
|
637,349
|
|
|
$
|
5.95
|
|
Options to Purchase Delayed Exchange Class B Units3
|
|
|
42,735
|
|
|
$
|
1.17
|
|
1
|
Represents the grant date fair value per share or unit.
|
2
|
Represents options to purchase Delayed Exchange Class B units issued under the 2006 Equity Incentive Plan. These options are exercisable on the date of grant. Upon exercise, the resulting Delayed Exchange Class B units may not be exchanged pursuant the Amended and Restated Operating Agreement until the seventh anniversary of the exercise date and are not entitled to any benefits under the Tax Receivable Agreement between the Company and members of the operating company.
|
3
|
Represents Class B units issued under the 2006 Equity Incentive Plan. These units vest immediately upon grant, but may not be exchanged pursuant to the Amended and Restated Operating Agreement of the operating company until the seventh anniversary of the date of grant. These units are also not entitled to any benefits under the Tax Receivable Agreement between the Company and members of the operating company.
|
Pursuant to the 2006 Equity Incentive Plan, the operating company issues Class B units, phantom Class B units and options to purchase Class B units. The operating company also issues Delayed Exchange Class B units pursuant to the 2006 Equity Incentive Plan. These Delayed Exchange Class B units vest immediately upon grant, but may not be exchanged pursuant to the Amended and Restated Operating Agreement of the operating company until at least the seventh anniversary of the date of grant. These Delayed Exchange Class B units are also not entitled to any benefit under the Tax Receivable Agreement between the Company and members of the operating company. The operating company also issues phantom Delayed Exchange Class B units and options to purchase Delayed Exchange Class B units. Under the Pzena Investment Management, Inc. 2007 Equity Incentive Plan (“the 2007 Equity Incentive Plan”), the Company issues shares of restricted Class A common stock, options to purchase Class A common stock, and contingently vesting options to acquire shares of Class A common stock. During each of the three months ended March 31, 2020 and 2019, no contingently vesting options vested. During the three months ended March 31, 2020 and 2019, 430,955 and 10,399 Delayed Exchange Class B units were issued to certain employee members, respectively, for approximately $1.9 million and $0.1 million in cash, respectively.
13
Table of Contents
Under the Pzena Investment Management, LLC Amended and Restated Bonus Plan (the “Bonus Plan”), eligible employees whose compensation is in excess of certain thresholds are required to defer a portion of that excess. These deferred amounts may be invested, at the employee’s discretion, in certain investment options designated by the Compensation Committee of the Company's Board of Directors. Amounts deferred in any calendar year reduce that year’s compensation expense and are amortized and vest ratably over a four-year period commencing the following year. The Company also issued to certain of its employees deferred compensation with certain investment options that also vest ratably over a four-year period. As of March 31, 2020 and December 31, 2019, the liability associated with all deferred compensation investment accounts was $0.8 million and $3.6 million, respectively.
Pursuant to the Pzena Investment Management, Inc. Non-Employee Director Deferred Compensation Plan (the “Director Plan”), non-employee directors may elect to have all or part of their compensation otherwise payable in cash, deferred in the form of phantom shares of Class A common stock of the Company issued under the 2007 Equity Incentive Plan. Elections to defer compensation under the Director Plan are made on a year-to-year basis. Distributions under the Director Plan are made in a single distribution of shares of Class A common stock at such time as elected by the participant when the deferral was made. Since inception of the Director Plan in 2009, the Company’s directors have elected to defer 100% of their compensation in the form of phantom shares of Class A common stock. Amounts deferred in any calendar year are amortized over the calendar year and reflected as General and Administrative Expense. As of March 31, 2020 and December 31, 2019, there were 536,755 and 455,028 phantom shares of Class A common stock outstanding, respectively. For the three months ended March 31, 2020 and 2019, no distributions were made under the Director Plan.
As of March 31, 2020 and December 31, 2019, the Company had approximately $39.7 million and $39.4 million, respectively, in unrecorded compensation expense related to unvested awards issued pursuant to its Bonus Plan and certain agreements; Class B units, option grants, Delayed Exchange Class B units, phantom Delayed Exchange Class B units, and phantom Class B units issued under the 2006 Equity Incentive Plan; and restricted Class A common stock and contingently vesting option grants issued under the 2007 Equity Incentive Plan. The Company anticipates that this unrecorded cost will amortize over the respective vesting periods of the awards.
Note 4 – Employee Benefit Plans
The operating company has a Profit Sharing and Savings Plan for the benefit of substantially all employees. The Profit Sharing and Savings Plan is a defined contribution profit sharing plan with a 401(k) deferral component. All full-time employees and certain part-time employees who have met the age and length of service requirements are eligible to participate in the plan. The plan allows participating employees to make elective deferrals of compensation up to the annual limits which are set by law. The plan provides for a discretionary annual contribution by the operating company which is determined by a formula based on the salaries of eligible employees as defined by the plan. For both the three months ended March 31, 2020 and 2019, the expense recognized in connection with this plan was $0.8 million.
Note 5—Earnings per Share
Basic earnings per share is computed by dividing the Company’s net income attributable to its common stockholders by the weighted average number of shares outstanding during the reporting period.
Under the two-class method of computing basic earnings per share, basic earnings per share is calculated by dividing net income for basic earnings per share by the weighted average number of common shares outstanding during the period. The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period. The Company’s net income for basic earnings per share is reduced by the amount allocated to participating restricted shares of Class A common stock which participate for purposes of calculating earnings per share.
14
Table of Contents
For the three months ended March 31, 2020 and 2019, the Company’s basic earnings per share was determined as follows:
|
|
For the Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Net Income for Basic Earnings per Share Allocated to:
|
|
|
|
|
|
|
|
|
Class A Common Stock
|
|
$
|
—
|
|
|
$
|
3,102
|
|
Participating Shares of Restricted Class A Common Stock
|
|
|
—
|
|
|
|
—
|
|
Total Net Income for Basic Earnings per Share
|
|
$
|
—
|
|
|
$
|
3,102
|
|
Basic Weighted-Average Shares Outstanding
|
|
|
17,790,184
|
|
|
|
18,278,773
|
|
Add: Participating Shares of Restricted Class A Common Stock1
|
|
|
—
|
|
|
|
—
|
|
Total Basic Weighted-Average Shares Outstanding
|
|
|
17,790,184
|
|
|
|
18,278,773
|
|
Basic Earnings per Share
|
|
$
|
—
|
|
|
$
|
0.17
|
|
1
|
Certain unvested shares of Class A common stock granted to employees have nonforfeitable rights to dividends and therefore participate fully in the results of the Company from the date they are granted. They are included in the computation of basic earnings per share using the two-class method for participating securities.
|
Diluted earnings per share adjusts this calculation to reflect the impact of all outstanding membership units of the operating company, phantom Class B units, phantom Delayed Exchange Class B units, phantom Class A common stock, outstanding options to purchase Class B units, options to purchase Delayed Exchange Class B units, options to purchase Class A common stock, and restricted Class A common stock, to the extent they would have a dilutive effect on net income per share for the reporting period. Net income for diluted earnings per share assumes that all outstanding operating company membership units are converted into Company stock at the beginning of the reporting period and the resulting change to the Company's net income associated with its increased interest in the operating company is taxed at the Company’s effective tax rate, exclusive of one-time charges and adjustments associated with both the valuation allowance and the liability to selling and converting shareholders and other one-time charges. When this conversion results in an increase in earnings per share or a decrease in loss per share, diluted net income and diluted earnings per share are assumed to be equal to basic net income and basic earnings per share for the reporting period.
For the three months ended March 31, 2020 and 2019, the Company’s diluted net income was determined as follows:
|
|
For the Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Net Income Attributable to Non-Controlling Interests of Pzena Investment Management, LLC
|
|
$
|
1,084
|
|
|
$
|
12,712
|
|
Less: Assumed Corporate Income Taxes
|
|
|
324
|
|
|
|
3,006
|
|
Assumed After-Tax Income of Pzena Investment Management, LLC
|
|
|
760
|
|
|
|
9,706
|
|
Net Income of Pzena Investment Management, Inc.
|
|
|
—
|
|
|
|
3,102
|
|
Diluted Net Income
|
|
$
|
760
|
|
|
$
|
12,808
|
|
Under the two-class method of computing diluted earnings per share, diluted earnings per share is calculated by dividing net income for diluted earnings per share by the weighted average number of common shares outstanding during the period, plus the dilutive effect of any potential common shares outstanding during the period using the more dilutive of the treasury method or two-class method. The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period. The Company’s net income for diluted earnings per share is reduced by the amount allocated to participating restricted Class B units for purposes of calculating earnings per share. Dividend equivalent distributions paid per share on the operating company’s unvested restricted Class B units are equal to the dividends paid per share of Company Class A common stock.
15
Table of Contents
For the three months ended March 31, 2020 and 2019, the Company’s diluted earnings per share were determined as follows:
|
|
For the Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands, except share and per share amounts)
|
|
Diluted Net Income Allocated to:
|
|
|
|
|
|
|
|
|
Class A Common Stock
|
|
$
|
701
|
|
|
$
|
12,795
|
|
Participating Shares of Restricted Class A Common Stock
|
|
|
—
|
|
|
|
—
|
|
Participating Class B Units
|
|
|
59
|
|
|
|
13
|
|
Total Diluted Net Income Attributable to Shareholders
|
|
$
|
760
|
|
|
$
|
12,808
|
|
|
|
|
|
|
|
|
|
|
Total Basic Weighted-Average Shares Outstanding
|
|
|
17,790,184
|
|
|
|
18,278,773
|
|
Dilutive Effect of Class B Units
|
|
|
53,885,546
|
|
|
|
52,117,775
|
|
Dilutive Effect of Options1
|
|
|
37,016
|
|
|
|
642,203
|
|
Dilutive Effect of Phantom Class B Units & Phantom Shares of Class A Common Stock
|
|
|
1,857,799
|
|
|
|
3,102,053
|
|
Dilutive Effect of Restricted Shares of Class A Common Stock2
|
|
|
21,686
|
|
|
|
44,120
|
|
Dilutive Weighted-Average Shares Outstanding
|
|
|
73,592,231
|
|
|
|
74,184,924
|
|
Add: Participating Class B Units and Class B-1 Units3
|
|
|
5,990,916
|
|
|
|
73,196
|
|
Total Dilutive Weighted-Average Shares Outstanding
|
|
|
79,583,147
|
|
|
|
74,258,120
|
|
Diluted Earnings per Share4
|
|
$
|
—
|
|
|
$
|
0.17
|
|
1
|
Represents the dilutive effect of options to purchase operating company Class B units and Company Class A common stock.
|
2
|
Certain restricted shares of Class A common stock granted to employees are not entitled to dividend or dividend equivalent payments until they are vested and are therefore non-participating securities and are not included in the computation of basic earnings per share. They are included in the computation of diluted earnings per share when the effect is dilutive using the treasury stock method.
|
3
|
Unvested Class B Units granted to employees have nonforfeitable rights to dividend equivalent distributions and therefore participate fully in the results of the operating company's operations from the date they are granted. They are included in the computation of diluted earnings per share using the two-class method for participating securities.
|
4
|
During the three months ended March 31, 2020, the calculation of diluted earnings per share resulted in an increase in earnings per share. Therefore, diluted earnings per share is assumed to be equal to basic earnings per share.
|
Approximately 2.9 million options to purchase Class B units, 0.1 million options to purchase shares of Class A common stock, and 1.0 million contingent options to purchase shares of Class A common stock were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2020, as their inclusion would have had an antidilutive effect based on current market prices or because the option had contingent vesting requirements that were not met. Approximately 0.3 million options to purchase Class B units, 0.1 million options to purchase shares of Class A common stock, and 2.0 million contingent options to purchase shares of Class A common stock were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2019, as their inclusion would have had an antidilutive effect based on current market prices or because the option had contingent vesting requirements that were not met.
16
Table of Contents
Note 6—Shareholders’ Equity
The Company functions as the sole managing member of the operating company. As a result, the Company: (i) consolidates the financial results of the operating company and reflects the membership interest in it that it does not own as a non-controlling interest in its consolidated financial statements; and (ii) recognizes income generated from its economic interest in the operating company’s net income. Class A and Class B units of the operating company have the same economic rights per unit. Class B-1 membership units, first issued on December 31, 2019, are entitled to receive distributions for the duration of the holder’s employment with the operating company, will participate in additional value to the extent there has been appreciation subsequent to the issuance of the Class B-1 membership unit. As of March 31, 2020 the holders of Class A common stock (through the Company) and the holders of Class B units of the operating company held approximately 24.1% and 75.9%, respectively, of the economic interest in the March 31, 2020 value of the operating company. As of March 31, 2020, the holders of Class A common stock (through the Company), the holders of Class B units of the operating company, and the holders of Class B-1 units of the operating company held 22.2%, 70.1%, and 7.7%, respectively, of the right to the future income and distributions. As of December 31, 2019, the holders of Class A common stock of the Company and the holders of Class B units of the operating company held approximately 25.4% and 74.6%, respectively, of the December 31, 2019 economic interests in the value of the operating committee. As of December 31, 2019 the holders of Class A common stock (through the Company), the holders of Class B units of the operating company, and the holders of Class B-1 units of the operating company held 24.1%, 71.0%, and 4.9%, respectively, of the right to the future income and distributions.
Each Class B unit of the operating company is issued with a corresponding share of the Company’s Class B common stock, par value $0.000001 per share. Holders of Class B common stock have the right to receive the par value of the Class B common stock held by them upon our liquidation, dissolution or winding up, but do not share in dividends. Each share of the Company’s Class B common stock entitles its holder to five votes, until the first time that the number of shares of Class B common stock outstanding constitutes less than 20% of the number of all shares of the Company’s common stock outstanding. From such time and thereafter, each share of the Company’s Class B common stock entitles its holder to one vote. When a Class B unit is exchanged for a share of the Company’s Class A common stock or forfeited, a corresponding share of the Company’s Class B common stock will automatically be redeemed and canceled. Conversely, to the extent that the Company causes the operating company to issue additional Class B units to employees pursuant to its equity incentive plan, these additional holders of Class B units would be entitled to receive a corresponding number of shares of the Company’s Class B common stock (including if the Class B units awarded are subject to vesting). Class B-1 units have not been issued corresponding shares and do not have voting rights.
All holders of the Company’s Class B common stock have entered into a stockholders’ agreement, pursuant to which they agreed to vote all shares of Class B common stock then held by them, with the majority of votes of Class B common stockholders taken in a preliminary vote of the Class B common stockholders.
The outstanding shares of the Company’s Class A common stock represent 100% of the rights of the holders of all classes of the Company’s capital stock to receive distributions, except that holders of Class B common stock will have the right to receive the class’s par value upon the Company’s liquidation, dissolution or winding up.
Pursuant to the operating agreement of the operating company, each vested Class B unit is exchangeable for a share of the Company’s Class A common stock, subject to certain exchange timing and volume limitations.
Pursuant to the operating agreement of the operating company, each vested Class B-1 unit, upon the end of the holder’s employment, is exchanged for shares of Class A common stock in an amount based upon the appreciation in price of the Class A common stock from the date of grant to the date of exchange.
The Company’s share repurchase program was announced on April 24, 2012. The Board of Directors authorized the Company to repurchase up to an aggregate of $10 million of the Company’s outstanding Class A common stock and the operating company’s Class B units on the open market and in private transactions in accordance with applicable securities laws. On February 11, 2014, the Company announced that its Board of Directors approved an increase of $20 million in the aggregate amount authorized under the program. On April 19, 2018, the Company announced that its Board of Directors approved an additional increase of $30 million in the aggregate amount authorized under the program. The timing, number and value of common shares and units repurchased are subject to the Company’s discretion. The Company’s share repurchase program is not subject to an expiration date and may be suspended, discontinued, or modified at any time, for any reason.
During the three months ended March 31, 2020, the Company purchased and retired 823,792 shares of Class A common stock and 94,830 Class B units under the current repurchase authorization at a weighted average price per share of $6.86 and $5.97, respectively. During the three months ended March 31, 2019, the Company purchased and retired 533,369 shares of Class A common stock and 95,739 Class B units under the repurchase authorization at a weighted average price per unit of $8.83 and $6.01, respectively. The Company records the repurchase of shares and units at cost based on the trade date of the transaction.
17
Table of Contents
Note 7—Non-Controlling Interests
Net Income Attributable to Non-Controlling Interests in the operations of the Company’s operating company and consolidated subsidiaries is comprised of the following:
|
|
For the Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Non-Controlling Interests of Pzena Investment Management, LLC
|
|
$
|
1,084
|
|
|
$
|
12,712
|
|
Non-Controlling Interests of Consolidated Subsidiaries
|
|
|
(315
|
)
|
|
|
128
|
|
Net Income Attributable to Non-Controlling Interests
|
|
$
|
769
|
|
|
$
|
12,840
|
|
Distributions to non-controlling interests represent tax allocations and dividend equivalents paid to the members of the operating company, as well as withdrawals from the Company’s consolidated subsidiaries. Contributions from non-controlling interests represent contributions to the Company's consolidated subsidiaries.
Note 8—Investments
The following is a summary of Investments:
|
|
As of
|
|
|
|
March 31,
2020
|
|
|
December 31, 2019
|
|
|
|
(in thousands)
|
|
Equity Investments, at Fair Value
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
$
|
9,728
|
|
|
$
|
15,715
|
|
Mutual Funds
|
|
|
7,154
|
|
|
|
20,039
|
|
Total Equity Investments, at Fair Value
|
|
|
16,882
|
|
|
|
35,754
|
|
Trading Securities
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
|
—
|
|
|
|
9,100
|
|
Total Trading Securities
|
|
|
—
|
|
|
|
9,100
|
|
Investments in Equity Method Investees
|
|
|
7,683
|
|
|
|
11,080
|
|
Total
|
|
$
|
24,565
|
|
|
$
|
55,934
|
|
Investment, at Fair Value
Investments, at Fair Value consisted of the following at March 31, 2020:
|
|
Cost
|
|
|
Unrealized
Gain/(Loss)
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Equity Securities
|
|
$
|
14,046
|
|
|
$
|
(4,318
|
)
|
|
$
|
9,728
|
|
Mutual Funds
|
|
|
7,227
|
|
|
|
(73
|
)
|
|
|
7,154
|
|
Total Equity Investments, at Fair Value
|
|
$
|
21,273
|
|
|
$
|
(4,391
|
)
|
|
$
|
16,882
|
|
|
|
Amortized Cost
|
|
|
Unrealized
Gain/(Loss)
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
U.S. Treasury Bills
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total Trading Securities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
18
Table of Contents
Investments, at Fair Value consisted of the following at December 31, 2019:
|
|
Cost
|
|
|
Unrealized
Gain/(Loss)
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Equity Securities
|
|
$
|
14,712
|
|
|
$
|
1,003
|
|
|
$
|
15,715
|
|
Mutual Funds
|
|
|
20,015
|
|
|
|
24
|
|
|
|
20,039
|
|
Total Equity Investments, at Fair Value
|
|
$
|
34,727
|
|
|
$
|
1,027
|
|
|
$
|
35,754
|
|
|
|
Amortized Cost
|
|
|
Unrealized
Gain/(Loss)
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
U.S. Treasury Bills
|
|
$
|
9,099
|
|
|
$
|
1
|
|
|
$
|
9,100
|
|
Total Trading Securities
|
|
$
|
9,099
|
|
|
$
|
1
|
|
|
$
|
9,100
|
|
Equity Investments, at Fair Value
Equity investments, at fair value consist of equity securities held by the Company’s consolidated subsidiaries and individual investments held directly by the Company primarily for the purpose of satisfying certain of the Company’s obligations under its deferred compensation program. Equity investments, at fair value also includes investments in open-ended registered mutual funds for which the Company has neither control nor the ability to exercise significant influence. Equity investments are measured at fair value based on quoted market prices or published net asset values.
Trading Securities
Trading securities consists of fixed income investments held directly by the Company. Fixed income investments are carried at fair value based on quoted market prices or market prices obtained from independent pricing services engaged by management.
Investments in Equity Method Investees
The operating company sponsors and provides investment management services to certain private investment partnerships and Pzena mutual funds through which it offers its investment strategies. The Company has made investments in certain of these private investment partnerships and mutual funds to satisfy its obligations under the Company's deferred compensation program and provide the initial cash investment in our mutual funds. The Company holds a non-controlling interest and exercises significant influence in these entities, and accounts for its investments as equity method investments which are included in Equity Method Investments on the consolidated statements of financial condition. As of March 31, 2020, the Company's investments range between 1% and 17% of the capital of these entities and have an aggregate carrying value of $7.7 million.
Note 9—Fair Value Measurements
The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The Fair Value Measurements and Disclosures Topic of the FASB ASC also establishes a framework for measuring fair value and a valuation hierarchy based upon the observability of inputs used in the valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy contains three levels: (i) valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets (Level 1); (ii) valuation inputs are quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets, and other observable inputs directly or indirectly related to the asset or liability being measured (Level 2); and (iii) valuation inputs are unobservable and significant to the fair value measurement (Level 3).
19
Table of Contents
Level 1 assets consist primarily of cash equivalents and equity investments at fair value. Cash investments in actively traded money market funds are measured at net asset values. Equity securities are exchange-traded securities with quoted prices in active markets. The fair value of investments in mutual funds are based on a published net asset values.
Level 2 assets consist of debt securities for which the fair values are determined using independent third-party broker or dealer price quotes. U.S. Treasury bills are valued upon quoted market prices for similar assets in active markets, quoted prices for identical or similar assets that are not active and inputs other than quoted prices that are observable or corroborated by observable market data. The fair value of corporate bonds is measured using various techniques, which consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer.
Also included in the Company's consolidated statements of financial condition are investments in American Depositary Receipts (“ADRs”) and Global Depositary Receipts (“GDRs”). Certain of the Company’s ADRs and GDRs may not be listed on a public exchange and may be valued using an evaluated price based on a compilation of observable market information. Inputs used include currency factors, depositary receipt ratios, exchange prices of underlying and common stock of the same issuer, and adjustments for corporate actions. ADRs and GDRs valued using an evaluated price have been classified as Level 2.
The investments in equity method investees are held at their carrying value.
The following table presents these instruments’ fair value at March 31, 2020:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
8,466
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,466
|
|
Equity Investments, at Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
9,334
|
|
|
|
394
|
|
|
|
—
|
|
|
|
9,728
|
|
Mutual Funds
|
|
|
7,154
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,154
|
|
Trading Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
24,954
|
|
|
$
|
394
|
|
|
$
|
—
|
|
|
$
|
25,348
|
|
The following table presents these instruments’ fair value at December 31, 2019:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
17,129
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17,129
|
|
U.S. Treasury Bills
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity Investments, at Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
15,195
|
|
|
|
520
|
|
|
|
—
|
|
|
|
15,715
|
|
Mutual Funds
|
|
|
20,039
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,039
|
|
Trading Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
|
—
|
|
|
|
9,100
|
|
|
|
—
|
|
|
|
9,100
|
|
Total
|
|
$
|
52,363
|
|
|
$
|
9,620
|
|
|
$
|
—
|
|
|
$
|
61,983
|
|
Transfers among levels, if any, are recorded as of the beginning of the reporting period. For each of the three months ended March 31, 2020 and 2019, there were no transfers between levels. In addition, the Company did not hold any Level 3 securities as of March 31, 2020 or December 31, 2019.
20
Table of Contents
Note 10—Property and Equipment
Property and Equipment, Net of Accumulated Depreciation is comprised of the following:
|
|
As of
|
|
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
(in thousands)
|
|
Leasehold Improvements
|
|
$
|
6,929
|
|
|
$
|
6,929
|
|
Furniture and Fixtures
|
|
|
1,590
|
|
|
|
1,591
|
|
Computer Hardware
|
|
|
734
|
|
|
|
701
|
|
Computer Software
|
|
|
879
|
|
|
|
879
|
|
Office Equipment
|
|
|
212
|
|
|
|
212
|
|
Total
|
|
|
10,344
|
|
|
|
10,312
|
|
Less: Accumulated Depreciation and Amortization
|
|
|
(5,070
|
)
|
|
|
(4,765
|
)
|
Total
|
|
$
|
5,274
|
|
|
$
|
5,547
|
|
Depreciation is included in general and administrative expense and totaled approximately $0.3 million for the three months ended March 31, 2020. For the three months ended March 31, 2019, depreciation totaled approximately $0.2 million.
Note 11—Related Party Transactions
For the three months ended March 31, 2020 and 2019, the Company earned $0.3 million and $0.3 million, respectively, in investment advisory fees from unconsolidated VIEs that receive investment management services from the Company.
The Company offers loans to employees, excluding executive officers, for the purpose of financing tax obligations associated with compensatory stock and unit vesting. Loans are generally written for a seven-year period, at an interest rate equivalent to the Applicable Federal Rate, payable in annual installments, and collateralized by shares and units held by the employee. As of March 31, 2020 and December 31, 2019, the Company had approximately $2.3 million and $1.7 million, respectively, of such loans outstanding.
The operating company, as investment adviser for certain Pzena branded SEC-registered mutual funds, private placement funds, and non-U.S. funds, has contractually agreed to waive a portion or all of its management fees and pay fund expenses to ensure that the annual operating expenses of the funds stay below certain established total expense ratio thresholds. For both the three months ended March 31, 2020 and 2019, the Company recognized $0.3 million in such expenses.
The operating company manages personal funds of certain of the Company’s employees, including the CEO, and its two Presidents. The operating company also manages accounts beneficially owned by a private fund in which certain of the Company’s executive officers invest. Investments by employees in individual accounts are permitted only at the discretion of the executive committee of the operating company, but are generally not subject to the same minimum investment levels that are required of outside investors. The operating company also manages personal funds of some of its employees’ family members. Pursuant to the respective investment management agreements, the operating company waives or reduces its regular advisory fees for these accounts and personal funds. In addition, the operating company pays custody and administrative fees for certain of these accounts and personal funds in order to incubate products or preserve performance history. The aggregate value of the fees that the Company waived related to the Company’s executive officers, other employees, and family members, was approximately $0.2 million for the three months ended March 31, 2020. For the three months ended March 31, 2019, the Company waived $0.1 million in such fees.
Note 12—Commitments and Contingencies
In the normal course of business, the Company enters into agreements that include indemnities in favor of third parties, such as engagement letters with advisers and consultants. In certain cases, the Company may have recourse against third parties with respect to these indemnities. The Company maintains insurance policies that may provide coverage against certain claims under these indemnities. The Company has had no claims or payments pursuant to these agreements, and it believes the likelihood of a claim being made is remote. Utilizing the methodology in the Guarantees Topic of the FASB ASC, the Company’s estimate of the value of such guarantees is de minimis, therefore, no accrual has been made in the consolidated financial statements.
21
Table of Contents
The Company leases office space under a non-cancelable operating lease agreement, which expires on December 31, 2025. The Company recognizes minimum lease expense for its headquarters on a straight-line basis over the lease term. The Company entered into a four-year sublease agreement commencing on October 1, 2016, which terminated on January 31, 2019. We entered into a new sublease agreement commencing on February 1, 2019, that expires on December 31, 2025. The sublease agreement is cancelable by either the Company or sublessee given appropriate notice four months prior to February 1, 2021, and each annual period thereafter. Sublease income will continue to decrease annual lease expense by approximately $0.4 million per year.
During December 2018, the Company signed a non-cancellable amendment to the corporate headquarters lease to obtain additional space that expires on December 31, 2025. In accordance with ASC 842, Leases, the lease term commenced on February 1, 2019 and the Company recorded a Right-of-use Asset and Lease Liability on the consolidated statements of financial condition associated with the new lease.
During June 2019, the Company signed a non-cancellable lease to the business development and client service office in London lease to obtain additional space that expires on October 31, 2021. In accordance with ASC 842, Leases, the lease term commenced on November 1, 2019 and the Company recorded a Right-of-use Asset and Lease Liability on the consolidated statements of financial condition associated with the new lease.
During the three months ended March 31, 2020, lease expenses were $0.7 million are included in general and administrative expense. During the three months ended March 31, 2019, lease expenses were $0.7 million. This lease expense includes short-term lease expenses associated with the Company's office spaces in the U.K. and Australia. Short-term lease expense was $0.1 million for the three months ended March 31, 2020. Lease expenses for the three months ended March 31, 2020 were net of $0.1 million of sublease income. Lease expenses for the three months ended March 31, 2019 were net of $0.1 million of sublease income.
The following table presents the components of operating lease expense, as well as supplemental cash flow information, related to the Company’s leases:
|
|
For the Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
|
(in thousands)
|
|
Operating lease expense1
|
|
$
|
712
|
|
Supplemental cash flow information:
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
724
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$
|
—
|
|
1
|
Amounts have not been reduced by sublease income of $0.1 million recognized during the three months ended March 31, 2020.
|
The following table presents information regarding the Company’s operating leases:
|
|
As of
|
|
|
|
March 31,
2020
|
|
|
|
(in thousands)
|
|
Operating lease right-of-use assets
|
|
$
|
13,264
|
|
Operating lease liabilities
|
|
$
|
13,627
|
|
Weighted-average remaining lease term (in years)
|
|
|
5.6
|
|
Weighted-average discount rate
|
|
|
4.3
|
%
|
22
Table of Contents
The maturities of lease liabilities are as follows (in thousands):
Year Ending December 31,
|
|
Operating Leases
|
|
2020 (excluding the three months ended March 31, 2020)
|
|
$
|
2,168
|
|
2021
|
|
|
2,839
|
|
2022
|
|
|
2,579
|
|
2023
|
|
|
2,600
|
|
2024
|
|
|
2,607
|
|
2025 and thereafter
|
|
|
2,607
|
|
Total undiscounted lease payments
|
|
$
|
15,400
|
|
Less discount
|
|
|
(1,773
|
)
|
Total lease liabilities
|
|
$
|
13,627
|
|
Note 13—Income Taxes
The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes. The operating company has made a provision for New York City Unincorporated Business Tax (“UBT”) and its consolidated subsidiary Pzena Investment Management, LTD has made a provision for U.K. income taxes. The Company's provision for income taxes reflects U.S. federal, state, and local incomes taxes on its allocable portion of the operating company's income. The Company's effective tax rate for the three months ended March 31, 2020 and 2019 was 56.3% and 11.5%, respectively. The effective tax rate includes a rate benefit attributable to the fact that approximately 77.1% and 74.1% of the operating company's earnings were not subject to corporate-level taxes for the three months ended March 31, 2020 and 2019, respectively. Income before income taxes includes net income attributable to non-controlling interests and not taxable to the Company, which reduces the effective tax rate.
The Income Taxes Topic of the FASB ASC establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax return positions in financial statements.
As of March 31, 2020 and December 31, 2019, the Company had $7.5 million and $7.2 million in unrecognized tax benefits that, if recognized, would affect the provision for income taxes. As of March 31, 2020 and December 31, 2019, the Company had interest related to unrecognized tax benefits of $1.2 million and $1.1 million, respectively. As of March 31, 2020 and December 31, 2019, no penalty accruals were recorded.
As of March 31, 2020 and December 31, 2019, the net values of all deferred tax assets were approximately $31.6 million and $32.7 million, respectively. These deferred tax assets primarily reflect the future tax benefits associated with the Company's initial public offering, and the subsequent and future exchanges by holders of Class B units of the operating company for shares of Class A common stock. At March 31, 2020 and December 31, 2019, the Company did not have a valuation allowance recorded against its deferred tax assets.
Note 14—Subsequent Events
On April 17, 2019, the Company’s Board of Directors approved a quarterly dividend of $0.03 per share of its Class A common stock to be declared on April 21, 2020, that will be paid on May 22, 2020 to holders of record on May 1, 2020.
No other subsequent events necessitated disclosures and/or adjustments.
23
Table of Contents