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Pzena Investment Management, Inc. to Become Private Company and Reports Results for the Second Quarter of 2022

Company Release - 07/26/2022

Publicly Traded Shares to Receive $9.60 per Share in Cash

Pzena Management and Investment Teams to Continue to Lead Firm

Pzena Reports Second Quarter 2022 Diluted EPS of $0.15 per Share

NEW YORK, July 26, 2022 (GLOBE NEWSWIRE) -- Pzena Investment Management, Inc. (NYSE: PZN) (“PZN”) today announced that it has entered into an agreement to become a private company through a transaction in which holders of PZN Class A common stock will receive $9.60 per share in cash.  Under the terms of the definitive agreement, PZN will merge with and into a newly formed subsidiary of its operating company, Pzena Investment Management, LLC (“PIM”), in an all-cash transaction that implies an enterprise value for PZN of approximately $795 million.  The $9.60 per share price represents a premium of 49% to PZN’s closing stock price on July 26, 2022, and a premium of approximately 46% over the 90-calendar day volume weighted average price.  PZN plans to maintain its regular quarterly dividend of $0.03 per share for the third quarter of 2022, which the Board declared earlier today.

The Board of Directors of PZN formed a special committee consisting of the independent and disinterested directors of PZN (the “Special Committee”) to evaluate and negotiate the definitive agreement.  Following a robust negotiation process, the Special Committee concluded unanimously that the proposed transaction is in the best interests of the holders of PZN’s Class A common stock. Acting upon the Special Committee’s recommendation, the Board of Directors of PZN approved the transaction.

Upon completion of the transaction, Pzena Investment Management will be a privately-held company owned by the existing partners of PIM. All of Pzena Investment Management’s leadership and investment professionals are anticipated to remain in place and will retain substantially all of their equity interest in the business.

“We are excited to begin this new chapter for our firm after 15 years as a public company,” said CEO Richard Pzena.  “I would like to thank the Special Committee for its work in reaching this agreement.  We believe the transaction is in the best interest of Pzena’s Class A stockholders, and will enhance our ability to achieve investment excellence on behalf of our clients.”

The transaction is expected to close in the fourth quarter of 2022, subject to approval by PZN stockholders, including a special approval of holders of a majority of the Class A shares not held by persons who will remain as investors in PIM following the closing, receipt of applicable regulatory approvals, and other customary closing conditions.

In connection with the proposed transaction, PZN entered into a voting agreement with certain members of PZN’s management team, as a result of which all outstanding shares of Class B common stock will be voted in favor of the transaction.

Ardea Partners LP and CastleOak Securities, L.P. are acting as financial advisor, and Wachtell, Lipton, Rosen & Katz is acting as legal advisor, to the Special Committee.

J.P. Morgan Securities LLC is acting as exclusive financial advisor, and Milbank LLP is acting as legal advisor, to Pzena Investment Management, LLC.

PZN reported the following U.S. Generally Accepted Accounting Principles (GAAP) basic and diluted net income and earnings per share for the three and six months ended June 30, 2022 and 2021 (in thousands, except per-share amounts):

    GAAP Basis  
    For the Three Months Ended
June 30,
 
    2022     2021  
    (unaudited)  
Basic Net Income   $ 2,523     $ 4,603  
Basic Earnings per Share   $ 0.15     $ 0.27  
             
Diluted Net Income   $ 12,755     $ 21,176  
Diluted Earnings per Share   $ 0.15     $ 0.25  
             
    GAAP Basis  
    For the Six Months Ended
June 30,
 
    2022     2021  
    (unaudited)  
Basic Net Income   $ 5,338     $ 8,790  
Basic Earnings per Share   $ 0.31     $ 0.51  
             
Diluted Net Income   $ 26,245     $ 40,906  
Diluted Earnings per Share   $ 0.31     $ 0.49  
                 

GAAP diluted net income and GAAP diluted earnings per share were $12.8 million and $0.15, respectively, for the three months ended June 30, 2022, and $21.2 million and $0.25, respectively, for the three months ended June 30, 2021. GAAP diluted net income and GAAP diluted earnings per share were $26.2 million and $0.31, respectively, for the six months ended June 30, 2022, and $40.9 million and $0.49, respectively, for the six months ended June 30, 2021.

Assets Under Management (unaudited)
 
($ billions)                              
    For the Three Months Ended     For the Twelve Months Ended  
    June 30,     March 31,     June 30,     June 30,     June 30,  
    2022     2022     2021     2022     2021  
Separately Managed Accounts                              
Assets                              
Beginning of Period   $ 19.4     $ 19.4     $ 19.4     $ 20.0     $ 13.0  
Inflows     0.1       0.3       0.7       1.0       2.2  
Outflows     (0.7 )     (0.3 )     (0.7 )     (2.2 )     (2.7 )
Net Flows     (0.6 )                 (1.2 )     (0.5 )
Market Appreciation/(Depreciation)     (1.8 )     0.1       0.5       (1.3 )     7.0  
Foreign Exchange1     (0.6 )     (0.1 )     0.1       (1.1 )     0.5  
End of Period   $ 16.4     $ 19.4     $ 20.0     $ 16.4     $ 20.0  
                               
Sub-Advised Accounts                              
Assets                              
Beginning of Period Assets   $ 30.7     $ 30.5     $ 26.9     $ 30.2     $ 16.4  
Inflows     0.7       1.2       3.1       4.4       8.1  
Outflows     (1.4 )     (1.3 )     (0.9 )     (5.5 )     (4.6 )
Net Flows     (0.7 )     (0.1 )     2.2       (1.1 )     3.5  
Market Appreciation/(Depreciation)     (3.3 )     0.5       1.0       (1.8 )     10.0  
Foreign Exchange1     (0.6 )     (0.2 )     0.1       (1.2 )     0.3  
End of Period   $ 26.1     $ 30.7     $ 30.2     $ 26.1     $ 30.2  
                               
Pzena Funds                              
Assets                              
Beginning of Period Assets   $ 2.7     $ 2.6     $ 2.9     $ 2.9     $ 2.1  
Inflows     0.3       0.2       0.2       0.7       0.7  
Outflows     (0.1 )     (0.1 )     (0.2 )     (0.7 )     (0.9 )
Net Flows     0.2       0.1                   (0.2 )
Market Appreciation/(Depreciation)     (0.2 )                 (0.2 )     1.0  
Foreign Exchange1     (0.2 )                 (0.2 )      
End of Period   $ 2.5     $ 2.7     $ 2.9     $ 2.5     $ 2.9  
                               
Total                              
Assets                              
Beginning of Period   $ 52.8     $ 52.5     $ 49.2     $ 53.1     $ 31.5  
Inflows     1.1       1.7       4.0       6.1       11.0  
Outflows     (2.2 )     (1.7 )     (1.8 )     (8.4 )     (8.2 )
Net Flows     (1.1 )           2.2       (2.3 )     2.8  
Market Appreciation/(Depreciation)     (5.3 )     0.6       1.5       (3.3 )     18.0  
Foreign Exchange1     (1.4 )     (0.3 )     0.2       (2.5 )     0.8  
End of Period   $ 45.0     $ 52.8     $ 53.1     $ 45.0     $ 53.1  

1     Foreign exchange reflects the impact of translating non-U.S. dollar denominated AUM into U.S. dollars for reporting purposes.

Financial Discussion

Revenue (unaudited)              
($ thousands)              
    For the Three Months Ended  
    June 30,   March 31,   June 30,  
    2022   2022   2021  
Separately Managed Accounts   $ 23,756   $ 26,184   $ 26,525  
Sub-Advised Accounts     20,557     21,939     19,400  
Pzena Funds     4,384     4,637     4,952  
Total   $ 48,697   $ 52,760   $ 50,877  
               
        For the Six Months Ended  
        June 30,   June 30,  
        2022   2021  
Separately Managed Accounts       $ 49,940   $ 51,072  
Sub-Advised Accounts         42,496     36,028  
Pzena Funds         9,021     9,648  
Total       $ 101,457   $ 96,748  
               

Revenue was approximately $48.7 million for the second quarter of 2022, a decrease of 7.7% from $52.8 million for the first quarter of 2022 and a decrease of 4.3% from $50.9 million for the second quarter of 2021. 

There were $0.7 million of performance fees recognized during the second quarter of 2022, compared to $0.5 million of performance fees recognized during the first quarter of 2022 and less than $0.1 million of performance fees recognized during the second quarter of 2021. 

Average assets under management for the second quarter of 2022 were $49.5 billion, decreasing 6.8% from $53.1 billion for the first quarter of 2022, and decreasing 3.9% from $51.5 billion for the second quarter of 2021. The decrease from the first quarter of 2022 and the second quarter of 2021 reflects market depreciation and net outflows.

The weighted average fee rate was 0.393% for the second quarter of 2022, decreasing from 0.397% for the first quarter of 2022, and from 0.395% for the second quarter of 2021. 

The weighted average fee rate for separately managed accounts was 0.523% for the second quarter of 2022, decreasing from 0.532% for the first quarter of 2022 and from 0.533% for the second quarter of 2021. The decrease from the first quarter of 2021 primarily reflects the calculation methodology for certain of our separately managed accounts which are based on the value of AUM at a specific date during the quarter. The decrease from the second quarter of 2021 primarily reflects a shift in assets to certain strategies that typically carry lower fee rates.

The weighted average fee rate for sub-advised accounts was 0.286% for the second quarter of 2022, increasing from 0.285% for the first quarter of 2022, and from 0.270% for the second quarter of 2021. The increase from the first quarter of 2022 and the second quarter of 2021 reflects an increase in performance fees recognized during the second quarter of 2022. Certain accounts related to one retail client relationship have fulcrum fee arrangements. These 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.  During the second quarter of 2022 and the first quarter of 2022, the Company recognized $0.7 million and $0.5 million of performance fees, respectively, related to this client relationship. During the second quarter of 2021, the Company recognized a $1.0 million reduction in base fees related to this client relationship. To the extent the three-year performance record of this account fluctuates relative to its relevant benchmark, the amount of base fees recognized may vary.

The weighted average fee rate for Pzena funds was 0.672% for the second quarter of 2022, decreasing from 0.695% for the first quarter of 2022, and from 0.681% for the second quarter of 2021. The decrease from the first quarter of 2022 primarily reflects an increase in assets to certain strategies that typically carry lower fee rates. The decrease from the second quarter of 2021 primarily reflects an increase in expense reimbursements.

Total operating expenses were $24.1 million for the second quarter of 2022, decreasing from $26.1 million for the first quarter of 2022, and increasing from $23.0 million for the second quarter of 2021. The decrease in compensation and benefits expense from the first quarter of 2022 primarily reflects expenses recognized in the first quarter associated with tax payments and the Company's employee profit sharing and savings plan, which generally do not recur during the year. The increase in general and administrative expenses from the first quarter of 2022 primarily reflects an increase in occupancy costs and travel and entertainment expense. The decrease in compensation and benefits expense from the second quarter of 2021 reflects a decrease in compensation and the market performance of strategies tied to the Company’s deferred compensation obligation. The increase in general and administrative expenses from the second quarter of 2021 primarily reflects an increase in professional fees and occupancy costs. The increase in occupancy costs for the second quarter of 2022 is due to the extension and expansion of the Company's New York office lease.

Operating Expenses (unaudited)              
($ thousands)              
    For the Three Months Ended  
    June 30,   March 31,   June 30,  
    2022   2022   2021  
Compensation and Benefits Expense   $ 18,426   $ 21,186   $ 19,035  
General and Administrative Expense     5,718     4,945     3,920  
Operating Expenses   $ 24,144   $ 26,131   $ 22,955  
               
        For the Six Months Ended  
        June 30,   June 30,  
        2022   2021  
Compensation and Benefits Expense       $ 39,612   $ 38,170  
General and Administrative Expense         10,663     7,616  
Operating Expenses       $ 50,275   $ 45,786  

As of June 30, 2022, employee headcount was 142, decreasing from 143 at March 31, 2022, and increasing from 125 at June 30, 2021. 

The operating margin was 50.4% for the second quarter of 2022, compared to 50.5% for the first quarter of 2022, and 54.9% for the second quarter of 2021.

Other income/ (expense) was expense of approximately $7.6 million for the second quarter of 2022, income of $0.1 million for the first quarter of 2022, and $1.7 million for the second quarter of 2021. 

Other income/ (expense) primarily reflects the fluctuations in the gains/ (losses) and other investment income recognized by the Company on its direct equity investments, the majority of which are held to satisfy obligations under its deferred compensation plan.  Other income/ (expense) also includes a portion of gains/ (losses) and other investment income recognized by external investors on their investments in investment partnerships that the Company consolidates, which are offset in net income attributable to non-controlling interests.

Other Income/ (Expense) (unaudited)                  
($ thousands)                  
    For the Three Months Ended  
    June 30,     March 31,     June 30,  
    2022     2022     2021  
Net Interest and Dividend Income   $ 756     $ 462     $ 261  
Gains/ (Losses) and Other Investment Income     (8,196 )     (245 )     1,369  
Other Income/ (Expense)     (184 )     (139 )     100  
GAAP Other Income/ (Expense)     (7,624 )     78       1,730  
Outside Interests of Investment Partnerships1     2,174       (844 )     (249 )
As Adjusted Other Income/ (Expense), Net of Outside Interests   $ (5,450 )   $ (766 )   $ 1,481  
                   
          For the Six Months Ended  
          June 30,     June 30,  
          2022     2021  
Net Interest and Dividend Income         $ 1,218     $ 458  
Gains/ (Losses) and Other Investment Income           (8,441 )     5,469  
Other Income/ (Expense)           (323 )     158  
GAAP Other Income/ (Expense)           (7,546 )     6,085  
Outside Interests of Investment Partnerships1           1,330       (443 )
As Adjusted Other Income/ (Expense), Net of Outside Interests         $ (6,216 )   $ 5,642  

1  Represents the non-controlling interest allocation of the (income)/ loss of the Company's consolidated investment partnerships to its external investors.

The Company recognized income tax expense of $2.5 million for the second quarter of 2022, $8.2 million for the first quarter of 2022, and $2.6 million for the second quarter of 2021. The decrease in income tax expense from the first quarter of 2021 reflects a $5.9 million expense associated with a change in estimate of uncertain tax positions due to a change in interpretation of administrative rulings recognized during the first quarter of 2021.

Details of the income tax expense are shown below: 

Income Tax Expense (unaudited)              
($ thousands)              
    For the Three Months Ended  
    June 30,   March 31,   June 30,  
    2022   2022   2021  
Corporate Income Tax Expense   $ 1,141   $ 1,111   $ 1,520  
Unincorporated and Other Business Tax Expense     1,349     7,114     1,055  
Income Tax Expense   $ 2,490   $ 8,225   $ 2,575  
               
        For the Six Months Ended  
        June 30,   June 30,  
        2022   2021  
Corporate Income Tax Expense       $ 2,252   $ 3,020  
Unincorporated and Other Business Tax Expense         8,463     1,921  
Income Tax Expense       $ 10,715   $ 4,941  

Details of the net income attributable to non-controlling interests of the Company's operating company and consolidated subsidiaries are shown below:

GAAP Non-Controlling Interests (unaudited)                  
($ thousands)                  
    For the Three Months Ended  
    June 30,     March 31,     June 30,  
    2022     2022     2021  
Operating Company Allocation   $ 14,090     $ 14,823     $ 22,225  
Outside Interests of Investment Partnerships1     (2,174 )     844       249  
GAAP Net Income Attributable to Non-Controlling Interests   $ 11,916     $ 15,667     $ 22,474  
                   
          For the Six Months Ended  
          June 30,     June 30,  
          2022     2021  
Operating Company Allocation         $ 28,913     $ 42,873  
Outside Interests of Investment Partnerships1           (1,330 )     443  
GAAP Net Income Attributable to Non-Controlling Interests         $ 27,583     $ 43,316  

1  Represents the non-controlling interest allocation of the income/ (loss) of the Company's consolidated investment partnerships to its external investors.

Today, the Company's Board of Directors approved a quarterly dividend of $0.03 per share of its Class A common stock.  The following dates apply to the dividend:

Record Date:  August 5, 2022

Payment Date:  August 19, 2022

In light of PZN’s entry into the transaction agreement described above, PZN’s second quarter 2022 earnings conference call (previously scheduled for 10:00 a.m. ET, Wednesday, July 27, 2022) is cancelled.

Forward-looking Statements

Certain statements and information contained in this release may be considered “forward-looking statements,” such as statements relating to management's views with respect to future events and financial performance. 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.   Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical experience or from future results expressed or implied by such forward-looking statements.  Potential risks and uncertainties include, but are not limited to, economic conditions in the markets in which PZN operates; new federal or state governmental regulations; PZN’s ability to effectively operate, integrate and leverage any past or future strategic initiatives; statements regarding the merger and related matters; the ability to meet expectations regarding the timing and completion of the merger; the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement; the failure to obtain PZN stockholder approval of the transaction or the failure to satisfy any of the other conditions to the completion of the transaction; risks relating to the financing required to complete the transaction; the effect of the announcement of the transaction on the ability of PZN to retain and hire key personnel and maintain relationships with its customers, vendors and others with whom it does business, or on its operating results and businesses generally; risks associated with the disruption of management’s attention from ongoing business operations due to the transaction; significant transaction costs, fees, expenses and charges; the risk of litigation and/or regulatory actions related to the transaction; and other factors detailed in PZN’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) for the fiscal year ended December 31, 2021 and PZN’s other filings with the SEC, which are available at http://www.sec.gov and on PZN’s website at investors.pzena.com.

Additional Information and Where to Find It

In connection with the proposed merger transaction, PZN will file with the SEC and furnish to PZN’s stockholders a proxy statement and other relevant documents.  This press release does not constitute a solicitation of any vote or approval. PZN stockholders are urged to read the proxy statement when it becomes available and any other documents to be filed with the SEC in connection with the proposed merger or incorporated by reference in the proxy statement because they will contain important information about the proposed merger.

Investors will be able to obtain a free copy of documents filed with the SEC at the SEC’s website at http://www.sec.gov.  In addition, investors may obtain a free copy of the Company’s filings with the SEC from the investors section of PZN’s website at https://www.pzena.com or by directing a request to: Pzena Investment Management, Inc., 320 Park Avenue, 8th Floor, New York, NY 10022, (212) 355-1600, info@pzena.com.

Participants in the Solicitation

PZN, its directors and certain of its officers and employees, may be deemed to be participants in the solicitation of proxies from PZN stockholders in connection with the proposed transaction. Information about the Company's directors and executive officers is set forth in the Company's definitive proxy statement for its 2022 annual meeting of stockholders filed with the SEC on April 4, 2022.  To the extent the holdings of PZN securities by PZN’s directors and executive officers have changed since the amounts set forth in the proxy statement for its 2021 annual meeting of stockholders, such changes have been or will be reflected on Statements of Change in Ownership on Form 4 filed with the SEC.  These documents may be obtained free of charge at the SEC's web site at www.sec.gov and on the Investor Relations page of PZN’s website located at https://investors.pzena.com.  Additional information regarding the interests of participants in the solicitation of proxies in connection with the proposed merger will be included in the proxy statement and other relevant materials PZN may file with the SEC.

Contact: Jessica Doran, 212-355-1600 or doran@pzena.com.

PZENA INVESTMENT MANAGEMENT, INC.
 
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
 
    As of  
    June 30,   December 31,  
    2022   2021  
    (unaudited)      
ASSETS          
Cash and Cash Equivalents   $ 49,412   $ 81,133  
Restricted Cash     2,215     1,056  
Due from Broker     157     55  
Advisory Fees Receivable     36,855     41,127  
Investments     80,762     95,506  
Prepaid Expenses and Other Assets     15,713     5,836  
Right-of-use Assets     55,311     10,014  
Deferred Tax Asset     21,969     25,886  
Property and Equipment, Net of Accumulated          
Depreciation of $7,633 and $7,086, respectively     4,990     3,687  
TOTAL ASSETS   $ 267,384   $ 264,300  
           
LIABILITIES AND EQUITY          
Liabilities:          
Accounts Payable and Accrued Expenses   $ 35,456   $ 44,167  
Due to Broker     51      
Securities Sold Short     241     237  
Liability to Selling and Converting Shareholders     24,679     24,679  
Lease Liabilities     65,396     10,323  
Deferred Compensation Liability     3,604     6,840  
TOTAL LIABILITIES     129,427     86,246  
           
Equity:          
Total Pzena Investment Management, Inc.'s Equity     37,407     42,588  
Non-Controlling Interests     100,550     135,466  
TOTAL EQUITY     137,957     178,054  
TOTAL LIABILITIES AND EQUITY   $ 267,384   $ 264,300  

 

PZENA INVESTMENT MANAGEMENT, INC.
 
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per-share amounts)
 
    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2022     2021     2022     2021  
    (unaudited)                    
REVENUE   $ 48,697     $ 50,877     $ 101,457     $ 96,748  
                         
EXPENSES                        
Compensation and Benefits Expense     18,426       19,035       39,612       38,170  
General and Administrative Expense     5,718       3,920       10,663       7,616  
TOTAL OPERATING EXPENSES     24,144       22,955       50,275       45,786  
Operating Income     24,553       27,922       51,182       50,962  
                         
Other Income/ (Loss)     (7,624 )     1,730       (7,546 )     6,085  
                         
Income Before Taxes     16,929       29,652       43,636       57,047  
                         
Income Tax Expense     2,490       2,575       10,715       4,941  
Consolidated Net Income     14,439       27,077       32,921       52,106  
                         
Less: Net Income Attributable to Non-Controlling Interests     11,916       22,474       27,583       43,316  
                         
Net Income Attributable to Pzena Investment Management, Inc.   $ 2,523     $ 4,603     $ 5,338     $ 8,790  
                         
Earnings per Share - Basic and Diluted Attributable to Pzena Investment Management, Inc. Common Stockholders:                        
                         
Net Income for Basic Earnings per Share   $ 2,523     $ 4,603     $ 5,338     $ 8,790  
Basic Earnings per Share   $ 0.15     $ 0.27     $ 0.31     $ 0.51  
Basic Weighted Average Shares Outstanding     16,969,301       17,255,593       17,159,027       17,248,045  
                         
Net Income for Diluted Earnings per Share   $ 12,755     $ 21,176     $ 26,245     $ 40,906  
Diluted Earnings per Share   $ 0.15     $ 0.25     $ 0.31     $ 0.49  
Diluted Weighted Average Shares Outstanding     85,293,053       84,336,569       85,985,519       83,932,385  
                                 

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Source: Pzena Investment Management Inc
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