IPO Preview: Artisan Partners Asset Management

| About: Artisan Partners (APAM)

Based in Milwaukee, WI, Artisan Partners Asset Management (NYSE:APAM) scheduled a $322 million IPO with a market capitalization of $1.86 billion at a price range mid-point of $28 for Thursday, March 7, 2013.

S-1 filed February 21, 2013

Manager, Joint Managers: Citigroup; Goldman, Sachs
Co Managers: BofA Merrill Lynch; Morgan Stanley; Keefe, Bruyette & Woods; Sandler O'Neill; Scotiabank

APAM is a money management firm that grew assets under management 30% from $57 billion in 2011 to $74 billion in 2012.

Money stripped out
APAM has already stripped out as much money as possible. And post-IPO will have a negative book value of -122 million.

Non-conventional structure
APAM is set up in a non-conventional manner. It is a general partnership shell that receives payments from a subsidiary that itself is a shell that has multiple divisions.

APAM 's objective is to pay out 60% to 100% of earnings, so it is set up more like a REIT. Conventional money managers have a much simpler, more direct organizational structure, such as Manning and Napier (NYSE:MN), Eaton Vance (NYSE:EV), T. Rowe Price (NASDAQ:TROW), Black Rock (NYSE:BLK).

Non-controlling interests
The limited partnership with noncontrolling interests is scheduled to get 80% of the profits, but in the 2012 proforma financial statements noncontrolling interests were allocated 93% of the net income.

Bail out
Most of the IPO proceeds are allocated to pay distributions to shareholders or to repay debt. Even after allocating $78 million to APAM the company will still have a negative book value of -$122 million.

Negative net worth
It strains credibility to expect such a damaged balance sheet to support an almost $2bb market cap, although assets under management did grow 30% from $57 billion in 2011 to $74 billion in 2012. It is true that APAM is a service business without need for much capital. But other publicly held money managers aren't so stingy regarding capital left in the business.

Too much concentrated control
Class B shares have 5 votes each. The public Class A shares have one vote each. Initially solely Mr. Ziegler, the Executive Chairman, will be able to elect all of the members of the board of directors.

APAM expects to pay a $0.43 per share dividend on Class A common stock. That's $1.72 annualized or 6.4% annualized at a price range mid-point of $28. It's also $114 million per year if the dividend is paid on the total number of Class A, B and C shares outstanding post-IPO, which is 66.4 million shares.

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Glossary of financial terms

In spite of the above, APAM is ok to take because stockmarket averages are up. Plus institutional investors are favorably impressed with APAM's 30% increase in assets under for 2012 vs 2011.

APAM is an independent investment management firm that provides a broad range of 12 equity investment strategies spanning different market capitalization segments and investing styles in both U.S. and non-U.S. markets.

As of December 31, 2012, APAM had $74.3 billion in assets under management, up from $57 billion a year earlier. The Artisan Funds shares are not listed on an exchange. These funds issue new shares for purchase and redeem shares from those shareholders who sell.

Fees are based on a specified percentage of clients' average assets under management, except for a limited number of institutional separate account clients with which APAM has a fee arrangement that has a component based on investment performance for that client.

After the reorganization, the net profits and net losses of Artisan Partners Holdings will be allocated, and distributions of profits will be made, 20% to APAM and 80% in the aggregate to Artisan Partners Holdings' limited partners, which appears to be the operating company, not APAM.

See the Rube Goldberg organization chart here.

This is very confusing - check out their post-IPO Rube Goldberg organization chart above. It's not clear how that chart is consistent with the description below.

The actual operating entities will be subsidiaries of Artisan Partners, not the entity going public. Those operating entities will be two steps removed from the public entity.

And APAM (the public entity) will only receive 20% of the profits distribution, while Artisan Partners receives 80%. APAM, as the sole general partner of Artisan Partners Holdings, APAM will, however, control the business and will consolidate Artisan Partners' Holdings financial results with APAM's.

But…after the IPO net profits and net losses of Artisan Partners Holdings will be allocated, and distributions of profits will be made 20% to APAM and 80% in the aggregate to Artisan Partners Holdings' limited partners

APAM will reflect it's employee-partners' and other investors' collective 80% equity interest in Artisan Partners Holdings as a noncontrolling interest in the consolidated financial statements.

NOTE HOWEVER, in the 2012 proforma financials noncontrolling interests represented 93% of income, and controlling interests represented on 7% of income.

APAM intends to pay dividends annually, in the aggregate, of between 60% and 100% of annual earnings (adjusted to exclude reorganization-related compensation, expected to be $214 million through 2017).

APAM expects the first dividend will be paid in the third quarter of 2013 (in respect of the second quarter of 2013) and will be $0.43 per share of Class A common stock.

That's $1.72 annualized or 6.4% annualized at a price range mid-point of $28

APAM expects to net $297 million from its IPO. Proceed are allocated as follows:

$90mm to repay debt

$67mm to purchase Class A common units from outside investors

$61mm to pay a distribution to Artisan Partners Holdings

Remaining $78mm for working capital, and APAM will still have a negative book value.

Disclaimer: This APAM IPO report is based on a reading and analysis of APAM's S-1 filing which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.