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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31, 2020

Or

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______to______

Commission file number 001-33761

PZENA INVESTMENT MANAGEMENT, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

 

20-8999751

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

320 Park Avenue

New York, New York 10022

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (212) 355-1600

Not Applicable

(Former Address of Principal Executive Offices) (Zip Code)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A common stock, par value $0.01 per share

PZN

New York Stock Exchange

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes No

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of May 11, 2020, there were 17,195,558 outstanding shares of the registrant’s Class A common stock, par value $0.01 per share.

As of May 11, 2020, there were 54,254,029 outstanding shares of the registrant’s Class B common stock, par value $0.000001 per share.

 

 

 


Table of Contents

 

PZENA INVESTMENT MANAGEMENT, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition of Pzena Investment Management, Inc.as of March 31, 2020 (unaudited) and December 31, 2019

 

1

 

 

 

 

 

 

 

Consolidated Statements of Operations (unaudited) of Pzena Investment Management, Inc. for the Three Months Ended March 31, 2020 and 2019

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (unaudited) of Pzena Investment Management, Inc. for the Three Months Ended March 31, 2020 and 2019

 

3

 

 

 

 

 

 

 

Consolidated Statement of Changes in Equity (unaudited) of Pzena Investment Management, Inc. for the Three Months Ended March 31, 2020 and 2019

 

4

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) of Pzena Investment Management, Inc. for the Three Months Ended March 31, 2020 and 2019

 

5

 

 

 

 

 

 

 

Notes to the Consolidated Financial Statements (unaudited)

 

6

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

24

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

 

 

 

 

Item 6.

 

Exhibits

 

40

 

 

 

 

 

SIGNATURES

 

41

 

 

i


Table of Contents

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements.  Forward-looking statements provide our current expectations, or forecasts, of future events.  Forward-looking statements include statements about our expectations, beliefs, plans, objectives, intentions, assumptions and other statements that are not historical facts.  Words or phrases such as “anticipate,” “believe,” “continue,” “ongoing,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project” or similar words or phrases, or the negatives of those words or phrases, may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking.

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on our views, plans, estimates, and expectations.  Potentially inaccurate assumptions could cause actual results to differ materially from those expected or implied by the forward-looking statements.  Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in Item 1A, “Risk Factors” in Part I of our Annual Report on Form 10-K for our fiscal year ended December 31, 2019.  Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date they are made.  We undertake no obligation to publicly revise any forward-looking statements included in this Quarterly Report to reflect circumstances or events after the date of this Quarterly Report, or to reflect the occurrence of unanticipated events.  You should, however, review the factors and risks we describe in the reports we will file from time to time with the Securities and Exchange Commission ("SEC"), after the date of this Quarterly Report on Form 10-Q.

Forward-looking statements include, but are not limited to, statements about:

 

our ability to respond to global economic, market, business and geopolitical conditions, including changes in such conditions resulting from the COVID-19 pandemic and government responses thereto;

 

our anticipated future results of operations and operating cash flows;

 

our successful formulation and execution of business strategies and investment policies;

 

our financing plans and the availability of short- or long-term borrowing, or equity financing;

 

our competitive position and the effects of competition on our business;

 

our ability to identify and capture potential growth opportunities available to us;

 

the effective recruitment and retention of our key executives and employees;

 

our expected levels of compensation for our employees;

 

expectations relating to dividend payments and our ability to make such payments;

 

our potential operating performance, achievements, efficiency, and cost reduction efforts;

 

our expected tax rate;

 

changes in interest rates;

 

our expectations with respect to the economy, capital markets, the market for asset management services, and other industry trends;

 

the potential impact of disruptions as a result of natural disasters, pandemics, or other international health emergencies, including the COVID-19 pandemic; and

 

the impact of future legislation and regulation, and changes in existing legislation and regulation, on our business.

The reports that we file with the SEC, accessible on the SEC’s website at www.sec.gov, identify additional factors that can affect forward-looking statements. The impact of COVID-19 may also exacerbate these risks, any of which could have a material effect on us.

 

 

ii


Table of Contents

 

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

 

PZENA INVESTMENT MANAGEMENT, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(in thousands, except share and per-share amounts)

 

 

 

As of

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and Cash Equivalents ($4,112 and $4,190)1

 

$

20,527

 

 

$

52,480

 

Restricted Cash

 

 

1,040

 

 

 

1,036

 

Due from Broker ($0 and $145)1

 

 

14

 

 

 

149

 

Advisory Fees Receivable

 

 

29,241

 

 

 

32,887

 

Investments ($574 and $3,813)1

 

 

24,565

 

 

 

55,934

 

Receivable from Related Parties

 

 

2,755

 

 

 

1,869

 

Other Receivables ($0 and $10)1

 

 

640

 

 

 

599

 

Prepaid Expenses and Other Assets

 

 

2,531

 

 

 

2,408

 

Right-of-use Assets

 

 

13,264

 

 

 

13,860

 

Deferred Tax Asset

 

 

31,606

 

 

 

32,683

 

Property and Equipment, Net of Accumulated Depreciation of $5,070 and $4,765, respectively

 

 

5,274

 

 

 

5,547

 

TOTAL ASSETS

 

$

131,457

 

 

$

199,452

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts Payable and Accrued Expenses ($21 and $19)1

 

$

21,206

 

 

$

44,713

 

Due to Broker

 

 

6

 

 

 

40

 

Liability to Selling and Converting Shareholders

 

 

28,652

 

 

 

28,652

 

Lease Liabilities

 

 

13,627

 

 

 

14,235

 

Deferred Compensation Liability

 

 

838

 

 

 

3,600

 

Other Liabilities

 

 

 

 

 

2

 

TOTAL LIABILITIES

 

 

64,329

 

 

 

91,242

 

Commitments and Contingencies (see Note 12)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Preferred Stock (Par Value $0.01; 200,000,000 Shares Authorized; None Outstanding)

 

 

 

 

 

 

Class A Common Stock (Par Value $0.01; 750,000,000 Shares Authorized; 17,195,558 and 18,009,350 Shares Issued and Outstanding in 2020 and 2019, respectively)

 

 

171

 

 

 

179

 

Class B Common Stock (Par Value $0.000001; 750,000,000 Shares Authorized; 54,174,746 and 52,879,323 Shares Issued and Outstanding in 2020 and 2019, respectively)

 

 

 

 

 

 

Additional Paid-In Capital

 

 

3,355

 

 

 

4,829

 

Retained Earnings

 

 

18,267

 

 

 

26,439

 

Accumulated Other Comprehensive Income

 

 

119

 

 

 

(3

)

Total Pzena Investment Management, Inc.'s Equity

 

 

21,912

 

 

 

31,444

 

Non-Controlling Interests

 

 

45,216

 

 

 

76,766

 

TOTAL EQUITY

 

 

67,128

 

 

 

108,210

 

TOTAL LIABILITIES AND EQUITY

 

$

131,457

 

 

$

199,452

 

 

1

Asset and liability amounts in parentheses represent the aggregated balances at March 31, 2020 and December 31, 2019 attributable to Pzena Investment Management Special Situations, LLC, Pzena U.S. Best Ideas (GP), LLC, and Pzena Global Best Ideas (GP), LLC which were variable interest entities as of March 31, 2020 and December 31, 2019, respectively. Asset and liability amounts in parentheses at December 31, 2019 are also attributable to Pzena International Value Service (a series of Pzena Investment Management International, LLC).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

1


Table of Contents

 

 

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per-share amounts)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2020

 

 

2019

 

REVENUE

 

$

34,679

 

 

$

37,410

 

EXPENSES

 

 

 

 

 

 

 

 

Compensation and Benefits Expense

 

 

19,140

 

 

 

17,189

 

General and Administrative Expense

 

 

4,422

 

 

 

4,027

 

Total Operating Expenses

 

 

23,562

 

 

 

21,216

 

Operating Income

 

 

11,117

 

 

 

16,194

 

OTHER INCOME

 

 

 

 

 

 

 

 

Interest Income

 

 

159

 

 

 

217

 

Dividend Income

 

 

81

 

 

 

62

 

Net Realized and Unrealized Gains/ (Losses) from Investments

 

 

(5,247

)

 

 

837

 

Equity in Earnings/ (Losses) of Affiliates

 

 

(4,262

)

 

 

758

 

Other (Expense)/ Income

 

 

(87

)

 

 

(55

)

Total Other Income/ (Expense)

 

 

(9,356

)

 

 

1,819

 

Income Before Income Taxes

 

 

1,761

 

 

 

18,013

 

Income Tax Expense

 

 

992

 

 

 

2,071

 

Net Income

 

 

769

 

 

 

15,942

 

Less: Net Income Attributable to Non-Controlling Interests

 

 

769

 

 

 

12,840

 

Net Income Attributable to Pzena Investment Management, Inc.

 

$

 

 

$

3,102

 

 

 

 

 

 

 

 

 

 

Net Income for Basic Earnings per Share

 

$

 

 

$

3,102

 

Basic Earnings per Share

 

$

 

 

$

0.17

 

Basic Weighted Average Shares Outstanding1

 

 

17,790,184

 

 

 

18,278,773

 

 

 

 

 

 

 

 

 

 

Net Income for Diluted Earnings per Share

 

$

760

 

 

$

12,808

 

Diluted Earnings per Share2

 

$

 

 

$

0.17

 

Diluted Weighted Average Shares Outstanding1

 

 

79,583,147

 

 

 

74,258,120

 

 

 

 

 

 

 

 

 

 

Cash Dividends per Share of Class A Common Stock

 

$

0.46

 

 

$

0.49

 

 

1

The Company issues restricted shares of Class A common stock and restricted Class B units that have non-forfeitable dividend rights.  Under the "two-class method," these shares and units are considered participating securities and are required to be included in the computation of basic and diluted earnings per share.

2

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. Please refer to Note 5, “Earnings per Share,” for further details.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

2


Table of Contents

 

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2020

 

 

2019

 

NET INCOME

 

$

769

 

 

$

15,942

 

OTHER COMPREHENSIVE GAIN

 

 

 

 

 

 

 

 

Foreign Currency Translation Adjustment

 

 

(505

)

 

 

63

 

Total Other Comprehensive Gain/ (Loss)

 

 

(505

)

 

 

63

 

Comprehensive Income

 

 

264

 

 

 

16,005

 

Less: Comprehensive Income Attributable to Non-Controlling Interests

 

 

142

 

 

 

12,920

 

Total Comprehensive Income Attributable to Pzena Investment Management, Inc.

 

$

122

 

 

$

3,085

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

3


Table of Contents

 

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(in thousands, except share and per-share amounts)

 

 

 

Shares of

Class A

Common Stock

 

 

Shares of

Class B

Common Stock

 

 

Class A

Common Stock

 

 

Additional

Paid-In Capital

 

 

Accumulated

Other

Comprehensive

Income

 

 

Retained

Earnings

 

 

Non-Controlling

Interests

 

 

Total Equity

 

Balance at December 31, 2019

 

 

18,009,350

 

 

 

52,879,323

 

 

$

179

 

 

$

4,829

 

 

$

(3

)

 

$

26,439

 

 

$

76,766

 

 

$

108,210

 

Amortization of Non-Cash Compensation

 

 

10,000

 

 

 

321,949

 

 

 

 

 

 

479

 

 

 

 

 

 

 

 

 

1,573

 

 

 

2,052

 

Issuance of Shares under Equity Incentive Plan

 

 

 

 

 

637,349

 

 

 

 

 

 

890

 

 

 

 

 

 

 

 

 

2,952

 

 

 

3,842

 

Sale of Shares under Equity Incentive Plan

 

 

 

 

 

430,955

 

 

 

 

 

 

436

 

 

 

 

 

 

 

 

 

1,466

 

 

 

1,902

 

Directors' Share Grants

 

 

 

 

 

 

 

 

 

 

 

76

 

 

 

 

 

 

 

 

 

255

 

 

 

331

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

769

 

 

 

769

 

Foreign Currency Translation Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

122

 

 

 

 

 

 

(627

)

 

 

(505

)

Repurchase and Retirement of Class A Common Stock

 

 

(823,792

)

 

 

 

 

 

(8

)

 

 

(1,283

)

 

 

 

 

 

 

 

 

(4,357

)

 

 

(5,648

)

Repurchase and Retirement of Class B Units

 

 

 

 

 

(94,830

)

 

 

 

 

 

(131

)

 

 

 

 

 

 

 

 

(434

)

 

 

(565

)

Class A Cash Dividends Declared and Paid ($0.46 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,172

)

 

 

 

 

 

(8,172

)

Tax Impact of Transactions with Non-Controlling Shareholders

 

 

 

 

 

 

 

 

 

 

 

(717

)

 

 

 

 

 

 

 

 

 

 

 

(717

)

Effect of Deconsolidation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,685

)

 

 

(1,685

)

Contributions from Non-Controlling Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

641

 

 

 

641

 

Distributions to Non-Controlling Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33,327

)

 

 

(33,327

)

Other

 

 

 

 

 

 

 

 

 

 

 

(1,224

)

 

 

 

 

 

 

 

 

1,224

 

 

 

 

Balance at March 31, 2020

 

 

17,195,558

 

 

 

54,174,746

 

 

$

171

 

 

$

3,355

 

 

$

119

 

 

$

18,267

 

 

$

45,216

 

 

$

67,128

 

 

 

 

Shares of

Class A

Common Stock

 

 

Shares of

Class B

Common Stock

 

 

Class A

Common Stock

 

 

Additional

Paid-In Capital

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Retained

Earnings

 

 

Non-Controlling

Interests

 

 

Total Equity

 

Balance at December 31, 2018

 

 

18,398,211

 

 

 

51,253,526

 

 

$

183

 

 

$

3,913

 

 

$

35

 

 

$

28,871

 

 

$

66,006

 

 

$

99,008

 

Amortization of Non-Cash Compensation

 

 

10,000

 

 

 

241,996

 

 

 

 

 

 

414

 

 

 

 

 

 

 

 

 

1,140

 

 

 

1,554

 

Issuance of Shares under Equity Incentive Plan

 

 

 

 

 

715,874

 

 

 

 

 

 

1,065

 

 

 

 

 

 

 

 

 

3,022

 

 

 

4,087

 

Sale of Shares under Equity Incentive Plan

 

 

 

 

 

10,399

 

 

 

 

 

 

17

 

 

 

 

 

 

 

 

 

48

 

 

 

65

 

Directors' Share Grants

 

 

 

 

 

 

 

 

 

 

 

78

 

 

 

 

 

 

 

 

 

223

 

 

 

301

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,102

 

 

 

12,840

 

 

 

15,942

 

Foreign Currency Translation Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17

)

 

 

 

 

 

80

 

 

 

63

 

Repurchase and Retirement of Class A Common Stock

 

 

(533,369

)

 

 

 

 

 

(5

)

 

 

(4,369

)

 

 

 

 

 

(338

)

 

 

 

 

 

(4,712

)

Repurchase and Retirement of Class B Units

 

 

 

 

 

(95,739

)

 

 

 

 

 

(176

)

 

 

 

 

 

 

 

 

(499

)

 

 

(675

)

Class A Cash Dividends Declared and Paid ($0.49 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,951

)

 

 

 

 

 

(8,951

)

Tax Impact of Transactions with Non-Controlling Shareholders

 

 

 

 

 

 

 

 

 

 

 

(207

)

 

 

 

 

 

 

 

 

 

 

 

(207

)

Contributions from Non-Controlling Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23

 

 

 

23

 

Distributions to Non-Controlling Interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,665

)

 

 

(25,665

)

Other

 

 

 

 

 

 

 

 

 

 

 

(735

)

 

 

 

 

 

 

 

 

735

 

 

 

 

Balance at March 31, 2019

 

 

17,874,842

 

 

 

52,126,056

 

 

$

178

 

 

$

 

 

$

18

 

 

$

22,684

 

 

$

57,953

 

 

$

80,833

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4


Table of Contents

 

PZENA INVESTMENT MANAGEMENT, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

For the Three Months

Ended March 31,

 

 

 

2020

 

 

2019

 

OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net Income

 

$

769

 

 

$

15,942

 

Adjustments to Reconcile Net Income to Cash

 

 

 

 

 

 

 

 

Provided by Operating Activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

306

 

 

 

250

 

Non-Cash Compensation

 

 

2,890

 

 

 

2,744

 

Directors' Share Grants

 

 

331

 

 

 

301

 

Net Realized and Unrealized (Gains)/ Losses from Investments

 

 

5,247

 

 

 

(837

)

Equity in (Earnings)/ Losses of Affiliates

 

 

4,262

 

 

 

(758

)

Accretion of Discount

 

 

 

 

 

(50

)

Noncash Lease Expense

 

 

596

 

 

 

455

 

Foreign Currency Translation Adjustments

 

 

(505

)

 

 

63

 

Deferred Income Taxes

 

 

360

 

 

 

1,394

 

Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Advisory Fees Receivable

 

 

3,646

 

 

 

(276

)

Due from Broker

 

 

19

 

 

 

(101

)

Prepaid Expenses and Other Assets

 

 

(175

)

 

 

(65

)

Due to Broker

 

 

(34

)

 

 

(286

)

Accounts Payable, Accrued Expenses, and Other Liabilities

 

 

(23,267

)

 

 

(16,841

)

Lease Liabilities

 

 

(608

)

 

 

(366

)

Purchases of Equity Securities

 

 

(9,479

)

 

 

(3,912

)

Proceeds from Equity Securities

 

 

5,759

 

 

 

3,437

 

Net Cash Provided by/ (Used in) Operating Activities

 

 

(9,883

)

 

 

1,094

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of Investments

 

 

(21,590

)

 

 

(12,123

)

Proceeds from Sale of Investments

 

 

45,735

 

 

 

25,668

 

Payments from/ (to) Related Parties

 

 

(886

)

 

 

2,423

 

Purchases of Property and Equipment

 

 

(33

)

 

 

(514

)

Net Cash Provided by/ (Used in) Investing Activities

 

 

23,226

 

 

 

15,454

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Repurchase and Retirement of Class A Common Stock

 

 

(5,648

)

 

 

(4,712

)

Repurchase and Retirement of Class B Units

 

 

(565

)

 

 

(675

)

Sale of Shares under Equity Incentive Plan

 

 

1,902

 

 

 

65

 

Distributions to Non-Controlling Interests

 

 

(33,327

)

 

 

(25,665

)

Contributions from Non-Controlling Interests

 

 

641

 

 

 

23

 

Dividends

 

 

(8,172

)

 

 

(8,951

)

Net Cash Provided by/ (Used in) Financing Activities

 

 

(45,169

)

 

 

(39,915

)

NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

$

(31,826

)

 

$

(23,367

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of Period

 

$

53,516

 

 

$

39,127

 

Effect of (Deconsolidation)/ Consolidation of Affiliates

 

 

(123

)

 

 

 

Net Change in Cash, Cash Equivalents and Restricted Cash

 

 

(31,826

)

 

 

(23,367

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of Period

 

$

21,567

 

 

$

15,760

 

Supplementary Cash Flow Information:

 

 

 

 

 

 

 

 

Issuances of Shares under Equity Incentive Plan

 

$

3,842

 

 

$

4,087

 

Income Taxes Paid

 

$

98

 

 

$

72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Pzena Investment Management, Inc.

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: 

 

 

 

 

 

Ownership at

 

Legal Entity

 

Type of Entity (Date of Formation)

 

March 31, 2020

 

Pzena Investment Management, Pty

 

Australian Proprietary Limited Company (12/16/2009)

 

100.0%

 

Pzena Financial Services, LLC

 

Delaware Limited Liability Company (10/15/2013)

 

100.0%

 

Pzena Investment Management, LTD

 

England and Wales Private Limited Company (01/08/2015)

 

100.0%

 

Pzena U.S. Best Ideas (GP), LLC

 

Delaware Limited Liability Company (11/16/2017)

 

100.0%

 

Pzena Global Best Ideas (GP), LLC

 

Delaware Limited Liability Company (2/15/2018)

 

100.0%

 

Pzena Investment Management International 2, LLC

 

Delaware Limited Liability Company (1/21/2020)

 

100.0%

 

Pzena Global Focused Value Fund

 

Australian Registered Investment Scheme                               (6/10/16)

 

100.0%

 

Pzena Investment Management Special Situations, LLC

 

Delaware Limited Liability Company (12/01/2010)

 

99.9%

 

Pzena International Small Cap Value Fund, a series of Advisors Series Trust

 

Open-end Management Investment Company, series of Delaware Statutory Trust (6/28/2018)

 

68.4%

 

 

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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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:

 

 

 

For the Three Months