Artisan Companions Asset Administration Inc. (NYSE:APAM) Q2 2024 Earnings Convention Name July 24, 2024 1:00 PM ET
Firm Contributors
Eileen Lee Kwei – Government Vice President and CAO
Eric Colson – Chief Government Officer
Jason Gottlieb – President
C.J. Daley – Chief Monetary Officer
Convention Name Contributors
Alex Blostein – Goldman Sachs
Invoice Katz – TD Cowen
Operator
Good afternoon. And welcome to the Artisan Companions Second Quarter 2024 Earnings Name. All members might be in listen-only mode. [Operator Instructions] After immediately’s presentation, there might be a possibility to ask questions. [Operator Instructions]
Please observe this occasion is being recorded. I’d now like to show the convention over to Artisan Companions Asset Administration. Please go forward.
Eileen Lee Kwei
Welcome to the Artisan Companions Asset Administration Enterprise replace and second quarter 2024 earnings name. As we speak’s name will embrace remarks from Eric Colson, CEO; Jason Gottlieb, President; and C.J. Daley, CFO. Following these remarks, we are going to open the road for questions. Our newest outcomes and investor presentation can be found on the Investor Relations part of our web site.
Earlier than we start immediately, I want to remind you that feedback made throughout immediately’s name, together with responses to questions, could embrace forward-looking statements. These are topic to identified and unknown dangers and uncertainties, together with, however not restricted to, the elements set forth in our earnings launch and detailed in our SEC filings. These dangers and uncertainties could trigger precise outcomes to vary materially from these mentioned within the statements and we assume no obligation to replace or revise any of those statements following the presentation.
As well as, a few of our remarks immediately will embrace references to non-GAAP monetary measures. You’ll find reconciliation of these measures to probably the most comparable GAAP measures within the earnings launch and the supplemental supplies, which could be discovered on our Investor Relations web site. Additionally, please observe that nothing on this name constitutes a proposal or solicitation to buy or promote an curiosity in any Artisan Funding merchandise or a advice for any funding service.
I’ll now flip it over to Eric Colson.
Eric Colson
Thank you, Eileen, and thanks, everybody, for becoming a member of the decision or studying the transcript. Artisan Companions is a high-value-added funding agency designed for expertise to thrive in a considerate progress atmosphere.
Since our founding in 1994, now we have targeted on areas with a mixture of funding expertise, engaging absolute returns, long-term demand from subtle shoppers and market inefficiencies that enable gifted buyers to generate alpha over prolonged intervals of time. This sort of high-value-added investing transcends any single asset class, funding fashion, geography, sector or market cycle.
A enterprise constructed on high-value-added investing is sturdy, extra returns are uncommon, allocators pays a premium for them and demand will endure. Artisan Companions aligns gifted buyers with long-term allocators. We aren’t a distribution store. We don’t engineer merchandise to fulfill short-term demand.
Over our historical past, now we have remained dedicated to high-value-added investing whereas methodically increasing our capabilities by including breadth to present funding franchises and onboarding distinctive expertise in new areas.
Our strategy is guided by a core set of traits. We search distinctive funding expertise all the time. We is not going to compromise on funding expertise. We give attention to asset courses the place expertise can compound capital at engaging absolute charges of return and the place market inefficiencies and levels of freedom enable for differentiation and alpha over benchmarks.
We make investments behind long-term demand from institutional allocators. We desire fragmented markets the place competitors is predicated on web of payment returns, not payment charges or distribution scale. Lastly, we arbitrage time. We function in areas the place we imagine our endurance and our long-term strategy are aggressive benefits.
Making use of these traits, now we have traditionally entered new areas with specialty methods. We began almost 30 years in the past in small, mid-cap and worldwide equities. We then grew into much less capacity-constrained, bigger cap and world methods. In 2014, we entered Mounted Revenue within the high-yield market, and extra not too long ago, we launched Rising Market Debt.
As high-value-added investing has advanced in direction of Alternate options and Non-public Property, now we have added levels of freedom to our present methods and launched an array of latest methods with present and new expertise in much less liquid and extra Different areas.
All through, now we have established ourselves in smaller however sturdy specialist markets the place expertise issues, differentiation is feasible and buyers are prepared to pay a premium for a premium final result.
As we present on Slide 2, efficiently establishing ourselves in specialty areas has offered the muse for evolving into bigger alternative units and rising bigger and extra diversified companies. From the muse created by these 5 methods, we now handle 19 methods and over $149 billion in AUM.
Slide Three is our most up-to-date instance, the EMsights Capital Group. We recognized, recruited and onboarded distinctive and confirmed funding expertise in Mike Cirami, Sarah Orvin, and Mike O’Brien.
Rising Market Debt has traditionally generated engaging absolute returns and it has been a fertile searching floor for distinctive funding expertise, given the poor high quality of indices, the bigger variety of issuers and currencies, and a large number of how to take and handle threat.
The potential returns and diversification advantages have made Rising Markets Debt a logical goal for institutional allocators looking for each yield and uncorrelated returns.
Lastly, the aggressive panorama is extremely fragmented, with the highest 10 funds accounting for simply 25% of class AUM as of March 31, 2024.
During the last two years with the EMsights Capital Group, now we have seen these traits play out. Since inception in Might 2022 and after charges, the Rising Market Debt Alternatives technique has generated a median annual return of 11.71%, beating its index by a median of 724 foundation factors yearly. The Rising Markets native alternatives technique has generated a median annual return of 8.01% Since inception in August 2022 and after charges, beating its index by 202 foundation factors.
After we established the EMsights Capital Group, we weren’t making an attempt to time the market or fulfill near-term demand in a sizzling dot product. Actually, we launched into unprecedented outflows for the asset class.
We had been executing our playbook, getting expertise and efficiency proper within the space the place long-term demand exists and distinctive funding expertise can differentiate. However the tough enterprise atmosphere, as of July 15, now we have raised a cumulative $2.2 billion throughout the EMsights Capital Group’s three methods. This contains high-quality institutional anchors in every technique.
I’ll now flip it over to Jason to debate how we’re executing this course of and strategy in Alternate options.
Jason Gottlieb
Thanks, Eric. Now we have proven the info on Slide Four many instances. AUM income in conventional Energetic methods is plateauing, with web outflows offsetting funding returns. Web new asset progress is happening on both finish of the barbell, Passive and Alternate options. And the lion’s share of the allocator administration payment budgets are being spent on Different methods.
Conventional Energetic administration stays a really giant market, with cash always in movement and great long-term alternative. We are going to proceed to compete and have success in that market lengthy into the longer term. However our incremental investments are targeted on Different investments.
Alternate options are a really pure match for us. They’re talent-driven, they’ve generated engaging absolute returns, and plenty of Different methods function in extremely inefficient areas the place gifted buyers can generate constant and significant extra returns.
There’s demand for Alternate options from subtle allocators, each establishments and inside the wealth channel. And the panorama is extremely fragmented, with competitors centering round funding high quality, differentiation and net-a-fee returns, not scale or charges. It is a very pure evolution and progress space for us, paying homage to how now we have expanded our enterprise up to now.
As we speak, we classify six of our funding methods as Different or Liquid Alternate options; Antero Peak, Antero Peak Hedge, Credit score Alternatives, China Put up-Enterprise and World Unconstrained. Along with these open-ended methods, now we have the closed-end credit score dislocation fund, which has efficiently closed on $160 million of commitments.
Now we have methodically developed these methods over the past seven years. They’re led by confirmed leaders who’re captivated with their asset courses, their philosophies and their processes, and producing distinctive absolute and relative returns for shoppers.
To implement these methods, now we have expanded our operational platform to help extra devices, markets, counterparties, autos, information and different assets. And now we have remained affected person, understanding that it takes time to develop the monitor data mandatory for long-term enterprise success.
All 5 open-ended Different methods have carried out nicely. 4 of the 5 have generated compelling absolute returns. 4 of the 5 have generated greater than 300 foundation factors of annual outperformance, net-of-fees since inception. And the Credit score Alternatives and World Unconstrained methods have offered the diversification and low-correlation advantages sought by shoppers.
As now we have broadened out our Alternate options lineup and established funding monitor data, now we have begun to take a position extra in devoted Different distribution, rising experience, bettering advertising, and rising our community. As well as, these early outcomes have created extra alternatives so as to add extra Different capabilities with present and exterior expertise. Now we have demonstrated our capacity to efficiently execute in Different areas.
Persevering with to increase our Alternate options capabilities and sharpen our Alternate options distribution stays excessive priorities for our complete administration staff. We’re extremely assured that our enterprise mannequin and philosophy are perfect for Alternate options expertise and methods. Our early success confirms our pondering and we absolutely anticipate to do extra.
Eric Colson
Thanks, Jason. Earlier than turning it over to C.J., I need to present an replace on Rising Markets. Within the third quarter replace final yr, we included the info on Slide 6. As we mentioned then, an prolonged interval of underperformance relative to developed markets has resulted in Rising Markets allocations being underneath goal and in allocators rethinking Rising Markets allocation altogether.
We proceed to imagine that for a lot of subtle allocators, Rising Markets fairness and debt will stay significant long-term allocations. Now we have a formidable and numerous lineup of Rising Markets Fairness and Mounted Revenue methods constructed over time and targeted on the identical traits now we have been discussing.
In June, we onboarded an $800 million institutional mandate in our Sustainable Rising Markets technique. Maria Negrete-Gruson and her staff at the moment are managing simply shy of $2 billion with a wholesome pipeline of institutional curiosity. The current win is a testomony to Maria and her staff’s dedication and Artisan’s long-term strategy. We proceed to imagine that there’s vital alternative for the Sustainable Rising Markets staff to develop.
And within the first half of July, the EMsights Capital Group onboarded an $860 million institutional account within the Rising Markets Debt Alternative technique, one other recognition of the standard and potential of our Rising Markets lineup.
Throughout the methods highlighted on this web page, we handle roughly $Eight billion in AUM. Now we have appreciable extra capability and are poised to learn as allocators come again to Rising Markets or reallocate to Rising Markets managers who can add worth over what have been lackluster index returns.
As with all of our methods, the traits are constant; expertise, absolute and relative returns, long-term allocations, fragmented markets, and time. We are going to proceed to execute and stay affected person. Over time, we anticipate outcomes in step with the worth now we have traditionally added for shoppers and generated for shareholders.
I’ll now flip it over to C.J. to debate our current monetary outcomes.
C.J. Daley
Thanks, Eric. An summary of economic outcomes begins on Slide 8. Property underneath administration ended the June quarter at $159 billion, down barely from final quarter and up 11% from the June 2023 quarter. Web shopper money outflows through the quarter had been $1.6 billion. Web outflows in our progress and worth methods had been partially offset by web inflows in our Sustainable Rising Markets and Mounted Revenue methods.
Second quarter outflows had been lumpy and included two redemptions from non-U.S. shoppers totaling $1.1 billion. As Eric talked about, the second quarter included a roughly $800 million influx in our Sustainable Rising Markets technique, almost doubling the property in that technique. And in early July, we onboarded $860 million into our Rising Markets Debt Alternative technique.
Common AUM for the quarter was up 3% sequentially and up 14% in comparison with the June 2023 quarter. Our full GAAP and adjusted outcomes are offered in our earnings launch.
Revenues for the quarter elevated in keeping with common AUM, up 2% when in comparison with the March 2024 quarter. In comparison with the June 2023 quarter, revenues had been up 11% on greater common AUM.
Our common recurring payment price for the quarter was 69 foundation factors, in step with final quarter. The payment price is down 1 foundation level from the June 2023 quarter, largely as a consequence of technique combine with the addition of decrease payment Mounted Revenue inflows.
Adjusted working bills for the quarter had been up barely over the primary quarter of 2024, primarily from journey related to our annual funding discussion board held within the second quarter. The rise in short-term incentive compensation from greater income was offset by seasonal decline in sure compensation-related bills that we sometimes see within the second quarter of every yr.
Compared to the identical quarter final yr, adjusted working bills are up $18 million or 11%, primarily from greater revenue-based incentive compensation. Adjusted working revenue elevated 7% sequentially and 13% in comparison with final yr’s June quarter.
Adjusted web revenue per adjusted share improved 8% in comparison with final quarter and 15% in comparison with the June 2023 quarter. Yr-to-date revenues had been up 12% in comparison with the identical interval in 2023 on the next common AUM. Adjusted working bills elevated 11% from the 2023 six-month year-to-date interval, primarily from greater incentive compensation on elevated revenues. Additionally contributing to the rise in compensation and advantages are greater mounted comp bills from a 4% enhance within the variety of full-time associates and annual benefit will increase.
Amortization of long-term incentive compensation elevated primarily from the $Four million influence of the acceleration clause included within the 2024 annual grant mentioned final quarter. We anticipate the long-term amortization to be $16 million in every of the third and fourth quarters of this yr, excluding the mark-to-market influence. Increased revenues year-to-date led to a 15% enchancment in adjusted working revenue and a 16% enchancment in adjusted web revenue for adjusted share over the comparable prior yr interval.
In calculating our non-GAAP measures, non-operating revenue contains solely curiosity expense and curiosity revenue. Though the revenue generated on our seed investments provides to shareholder economics, we absolutely exclude these funding features from our adjusted outcomes to offer transparency into our core enterprise operations.
Our stability sheet stays robust. We presently have $150 million of seed capital in our funding merchandise with vital quantities of realizable capability. As these merchandise start to scale, we are going to redeem the seed capital to deploy into new merchandise, in any other case reinvest within the enterprise or return it to shareholders.
As well as, our $100 million revolving credit score facility stays unused. We proceed to return capital to shareholders on a constant and predictable foundation by way of quarterly money dividend funds and a year-end particular dividend. In step with our dividend coverage, our Board of Administrators declared a quarterly dividend of $0.71 per share with respect to the June 2024 quarter, which represents roughly 80% of the money generated within the quarter.
That concludes my ready remarks and I’ll now flip the decision again to the Operator.
Query-and-Reply Session
Operator
[Operator Instructions] The primary query comes from Alex Blostein with Goldman Sachs. Please go forward.
Alex Blostein
Hey. Good afternoon. Thanks for taking the query. I hoped we might begin with the Alt dialogue that you simply began at first of the presentation. So, possibly spend a pair minutes on simply strolling by way of methods that you simply anticipate to be most lively of their fundraising targets over the following 12 months to 18 months inside the Alts form of distribution and the footprint that you simply established there. And as you construct out this a part of the enterprise, are you able to discuss just a little bit in regards to the payment price inside the Alts bucket and the way that’s more likely to evolve based mostly on the place you anticipate the expansion to return from?
Jason Gottlieb
Positive. Hey. It’s Jason. I believe we’ve received fairly excessive expectations that all the methods within the Alts bucket might be lively over the following a number of months, if not 12 months to 18 months. I’d spotlight a couple of.
In the event you take a look at World Unconstrained, as you nicely know, the milestone of a three-year monitor document is a fairly significant milestone and we’re about six months or seven months away from that. That technique has continued to compound wealth at a significant absolute price of return, offered diversification advantages, low correlation, low volatility, produced very nice alpha for shoppers.
We’ve put a powerful marketing campaign round that to get out in gentle of the truth that the EMsights staff has been managing the technique going again nicely previous a decade previous to becoming a member of Artisan. So, we really feel like we’ve actually received good momentum for that technique and when the time comes when the three-year document hits, we predict we’ll be in a extremely great spot.
When you concentrate on credit score alternatives, one thing that we’ve been speaking about for some time, we’re now nicely into our seventh yr of efficiency. The five-year quantity is producing a mid-teens web return to shoppers. It’s delivering on just about each expectation that we are able to consider that shoppers are searching for.
Allocations inside Alts and Mounted Revenue are choosing up, and we’re seeing that exercise and that quantity choose up nicely. The pipeline feels actually robust there. This isn’t going to shock you. China Put up-Enterprise and simply the overhang from the macro makes it just a little bit extra of a problem.
So, whereas there may be that macro overhang, we’re nonetheless really nonetheless having shoppers partaking. They don’t need to miss the bump if and when China does re-rate. And the truth that Tiffany and her staff have continued to ship this yr alone, I would get the quantity exactly flawed, however I’m shut right here.
However we’re — they’re producing over 1,000 foundation factors of extra return year-to-date and that compounds on high of long-term alpha that they’ve already been capable of produce. So, that to us is extra of a timing challenge.
After which, when you concentrate on Antero, you’ve seen a very nice uptick of their efficiency extra not too long ago. That may take just a little bit extra time in gentle of the truth that they did have a tough alpha historical past over the past one years to 2 years. However we’re thrilled that Chris has been capable of proper the ship and put up some actually good numbers.
When you concentrate on the payment charges, all of our methods have payment charges commensurate with the alpha that we anticipate them to ship on. World Unconstrained, the expense ratio and administration charges are someplace round 100 foundation factors and we might anticipate that to be maintained.
A number of the new issues that we’re on the rise would proceed to ship in that 100-basis-point class and that 100-basis-point vary. So, we don’t see any cause to imagine that development gained’t proceed.
Alex Blostein
Acquired you. Yeah. No. I used to be pondering that the payment price may really begin to creep up just a little bit in that bucket extra meaningfully if a few of these wins come on-line. Nice.
Jason Gottlieb
Yeah, I believe you’re proper.
Alex Blostein
Cool. Nicely, talking of payment charges, are you able to possibly give just a little little bit of shade on the $800 million win you highlighted in Rising Market Debt? It sounds prefer it’s funded in July and whether or not or not that’s going to have any influence on the payment price for Mounted Revenue as we glance ahead?
Eric Colson
Yeah. Alex, it’s Eric. The payment price was extremely aggressive for a big mandate. I believe the constructive we’re beginning to see within the market as individuals rebalance and restructure is we don’t see the development in direction of simply taking the bottom payment price bid, which we had been all the time hesitant to bid over the previous couple of years when giant mandates had been simply utterly a scale and payment sport.
In newer competitors, we see a shift in direction of discovering targeted, prime quality lively managers and competing at a payment price that’s aggressive for big allocations. However I believe that the constructive development and takeaway for us is we’re beginning to actually compete there throughout the Board.
After we take a look at our pipeline throughout the agency, we’re seeing plenty of bigger mandates the place that’s the case and it’s throughout lots of our funding franchises as we glance out the following couple of quarters.
Alex Blostein
Okay. Nice. Thanks. I’ll hop again into you.
Operator
The following query comes from Invoice Katz with TD Cowen. Please go forward.
Invoice Katz
Okay. Thanks very a lot for all the colour. So simply — and taking the query. Simply when it comes to the chance set, you talked about making an attempt to get larger and Alternate options each within the manufacturing and the distribution facet. May you discuss just a little bit about the way you’re enthusiastic about incremental groups now and the way that form of play by way of on form of a de novo versus possibly an acquisition — inorganic alternative? After which the way you’re going through off within the distribution? There’s plenty of the Different managers who’ve constructed fairly sizable gross sales forces and communicate to the import of that to form of achieve traction with the standard monetary advisor group to extend these allocations. So, simply making an attempt to get a way on the place else to search for incremental funding by the staff to develop Alts after which learn how to leverage that by way of the retail distribution channel, however the notion that you simply don’t need to turn into like a distribution-led platform? Thanks.
Jason Gottlieb
Hey, Invoice. It’s Jason. I’ll take the primary a part of your query. We’re definitely spending incremental time with each our present franchises the place we predict that there’s some broad alternatives to increase levels of freedom and transfer incrementally throughout the Board into Alternate options. In order that’s taking on a good bit of our time and we’re excited to companion with our present groups. That’s going to be the best and greatest use of our time.
However after we look throughout the panorama, we’re extraordinarily busy evaluating exterior alternatives as nicely. And as you may think about, it ranges throughout various totally different asset courses. We’re seeing every little thing from non-public fairness, non-public credit score, non-public actual property, GP stakes, funding alternatives, you identify it.
And the — I’d simply spotlight one thing that I believe we talked in regards to the final quarter or the quarter earlier than, however our funding technique group, which is a really deep and skilled staff that companions with our present franchises and definitely is on the market out there speaking with new alternatives, is nicely geared up to deal with the amount.
However now we have seen a fairly significant uptick within the quantity of alternatives that’s coming throughout our desk and they’re coming in many various types. There’s clearly the lift-out strategy, which we’ve included into our enterprise for the final 30 years and definitely acquisition alternatives throughout all these asset courses.
And we’re not saying no to something, we need to look and be goal and consider each on the deserves. However as you’ve heard us say quite a few instances, it’s all the time going to return all the way down to the expertise. If we discover the precise expertise and the precise asset class that diversifies the platform, then that’s what excites us, and if we are able to make it work, we will definitely do it.
Eric Colson
Invoice, in case you’re as Eric with reference to the query on the distribution, we’ve definitely seen fairly a couple of Different outlets construct out distribution to primarily seize the wealth channel is what we’re seeing and listening to and now we have added a few people to give attention to Different technique gross sales. The suggestions we obtain from these people as we’re hiring them is that we had been a particularly engaging group to affix due to our present footprint within the middleman channel.
Now we have 80-plus scores throughout the broker-dealer area. Now we have an infinite breadth within the giant monetary advisor or RIA market. And now we have a longtime community within the financial institution belief world. It truly is simply connecting the connection to the Different facet of the home, which provides us a leg up versus ranging from zero.
Invoice Katz
That’s useful. After which simply coming again to your commentary across the alternative right here for Rising Markets to select up each when it comes to the seizing of your platform, in addition to potential allocations. Perhaps two-part, the place may these allocations be coming from and what are the implications for the remainder of what you are promoting, the expansion and the worth facet of the equation? And then you definitely talked about the large win in July. I’m wondering in case you can provide us a broader replace of what you’re seeing and among the different elements of the enterprise to web up towards that? Thanks.
Eric Colson
Primarily within the Rising Markets, we see plenty of dialogue across the institutional channel. We’ve seen an array of discussions go on over the past yr. Some individuals have excluded Rising Markets altogether. Some individuals are speaking about separating out China. And lots of are their targets and questioning, ought to they be rebalancing up or restructuring managers to handle with the decrease returns?
Web-net, we predict any dialogue round Rising Market allocations and any rebalancing again to focus on or restructuring advantages us enormously given the combo of methods now we have, particularly on the Rising Market Equities and extra not too long ago on the Rising Market Debt as our Rising Market Debt seasons and will get to that three-year document. And as we enhance the AUM in these methods, we’re going to have the ability to compete on the institutional degree the place sometimes a three-year and asset minimal is required.
So now we have a constructive outlook on our Rising Markets alternative set and see it primarily occurring within the institutional, each U.S., non-U.S. Perhaps just a little bit extra Rising Market Debt outdoors the U.S. and Equities within the U.S., however that might be a slight distinction.
And with reference to the opposite giant mandates, it’s throughout the platform that we see this tilt as individuals could have introduced down their Energetic weighting versus Passive. They’ve additionally rebalanced and structured in direction of greater high quality Energetic managers that has benefited us they usually’ve stepped again away from simply going after the bottom payment potential as they’ve rebalanced the managers. So we’ve seen a number of, a minimum of five-plus franchises compete on giant mandates on a go-forward foundation.
Invoice Katz
Thanks.
Operator
This concludes our question-and-answer session, and the Artisan Companions Asset Administration enterprise replace and 2024 earnings name. Thanks. Chances are you’ll now disconnect.