3Q26 Artisan Partners Asset Management Inc Investor Conference Call - ARTISAN PARTNERS ASSET MANAGEMENT INC

Financial Performance:

• Third-quarter revenue was $313 million, up 1% sequentially and 4% year-over-year, driven by an additional business day, a slight increase in average fee rates, and higher average assets.
• Average AUM was $180.5 billion, down 1% sequentially but up 2% compared to the prior year quarter; year-to-date average AUM grew 7%.
• Adjusted operating expenses declined 2% sequentially due to lower employee costs and seasonal expense roll-offs, but increased 5% year-over-year due to Grandview acquisition costs and higher incentive compensation.
• Adjusted operating income rose 9% sequentially and 2% year-over-year; adjusted operating margin expanded 260 basis points to 35.5% sequentially but declined 70 basis points year-over-year to 33%.
• Adjusted earnings per share reached $1.03 for the quarter and $2.84 year-to-date, up 6% from the prior year.
• Weighted average fee rate increased to 69 basis points, driven by discrete redemptions of lower-fee institutional mandates.
• Cash on hand stood at $352 million with an unused $150 million revolving credit facility, which was recently renewed and expanded.
• Net client outflows totaled $10.6 billion, largely attributable to the U.S. value team wind-down ($1.9 billion) and a global value client rebalancing ($5.9 million).
• Credit and alternative strategies generated $1.1 billion in net inflows for the quarter, marking 17 consecutive quarters of positive credit flows.

Guidance and Future Outlook:

• Q4 AUM is expected to be impacted by year-end mutual fund distributions estimated to reduce AUM by $2.5 billion.
• Management projects Q4 performance fees to be similar to the $29 million recorded in the prior year, though subject to market conditions through year-end.
• Recurring management fee rates are expected to stabilize around 70 basis points in the near term, balancing equity fee compression with higher-fee alternative and wealth product growth.
• Q1 2027 launch anticipated for an interval fund structure targeting wealth clients with public and private credit capabilities.
• Fixed cost guidance for 2027 remains unchanged at mid-single-digit growth, excluding acquisition-related expenses and LTI grant exchanges.
• Long-term goal includes expanding credit and alternatives to represent a larger share of firm-wide AUM, currently at 15% compared to 8% five years ago.

Business Segments and Product Lines:

• Credit AUM has reached $16 billion with a 100% outperformance record since 2014; the Floating Rate strategy is nearing its five-year anniversary with strong rankings.
• Alternatives segment grew by $770 million in Q3, led by the Artisan Global Unconstrained Mutual Fund; M-Site's Capital Group strategies have achieved double-digit annualized returns since inception.
• Acquired Grandview Property Partners in January 2026; closed on an anchor investor for their fourth flagship fund in Q3.
• Launched 13 new UCITS fund share classes in 2026 to target UK and European wealth markets; additional ETF share classes for the Artisan Select Equity Fund and Artisan Focus Fund are targeted for Q4 2026 pending regulatory approval.
• Onboarded John Brodnick from Sachem Head for a new long-short lift-out strategy expected to command higher fee rates.
• International Value and Global Value strategies have shown relative underperformance in the 1-3 year periods but recovered significantly in October, with 92% of firm AUM outperforming benchmarks over 10 years.

Market and Competitive Landscape:

• Credit and alternatives continue to demonstrate strong inflow momentum, contrasting with challenges in the equity platform.
• Management observes a "convergence of capital" between public and private markets, driving demand for flexible solutions like interval funds.
• The pipeline for RFPs remains relatively flat, though total dollar value in the pipeline has grown meaningfully.
• European markets (UK, Europe, Middle East) are showing increased activity levels and demand for global unconstrained strategies.
• Market breadth was historically narrow at end of Q3 (S&P 500 within 2% of highs while average stock was 17% off highs), creating potential opportunities for value-oriented teams upon normalization.

Risks and Challenges:

• Short-term equity underperformance in International and Global Value strategies contributed to net outflows and revenue headwinds.
• Potential concentration risk is managed through diversification across six teams and nine strategies for top 15-20% of clients; no single client or channel is overly dominant.
• Ongoing active-to-passive shifts in institutional mandates and de-risking in defined benefit plans may pressure lower-fee institutional equity assets.
• Regulatory and board approval hurdles remain for the upcoming ETF and interval fund launches.
• Performance fee realization remains contingent on market conditions and investment performance through year-end.

Management Commentary and Tone:

• Tone was cautious yet confident regarding long-term platform capabilities, emphasizing resilience despite short-term equity headwinds.
• Leadership highlighted the firm's "talent-driven" model and the success of credit/alts as proof of the multi-asset platform's value.
• Management expressed strong conviction in the growth trajectory of credit, alternatives, and international distribution despite recent equity volatility.
• CEO emphasized the "worst market breadth since 2000" as a contextual factor for short-term underperformance in value strategies.
• CFO confirmed strong balance sheet health and the ability to fund growth while maintaining shareholder returns via a 10% dividend increase.

Analyst Questions and Answers:

• Interval Funds: Management confirmed these will leverage credit strengths to bridge public-private markets, citing warm reception from key wealth relationships.
• ETF Strategy: New ETF share classes will be launched passively alongside existing strategies (not competing internally) at comparable fee rates, with a staged rollout starting in Q4 2026.
• M&A Strategy: Inorganic growth is leaning more toward M&A than lift-outs, particularly in private credit, secondaries, and sector-specific private equity.
• Fee Rate Trajectory: Management expects stable recurring fee rates around 70 basis points, with performance fees providing potential upside spikes in Q4.
• International Demand: Growth in Europe and UK is driven by demand for diversifiers and global unconstrained strategies in liquid wrappers.
• Concentration: Top clients are diversified across teams and channels, mitigating concentration risk despite recent large outflows.

Other Key Points:

• 99% of firm assets have grossed fees since inception; 75% and 84% of AUM are outperforming over trailing 1 and 3-year periods as of late October.
• Credit and alternatives combined AUM nearly doubled to over $26 billion in the past five years.
• The firm is actively broadening distribution in the Middle East and Europe with new share classes to address currency and reinvestment barriers.
• Grandview Property Partners' acquisition costs are being reflected in Q3 operating expenses, impacting year-over-year margin comparisons.
• The firm maintains a "distraction-free" investment environment as a core competitive differentiator.