Thursday, February 28, 2013

Looking at an Exemplary Manager’s IPO: Artisan Partners

Looking at an Exemplary Manager’s IPO: Artisan Partners

Artisan Partners, a very fine institutional money manager, has renewed its effort to go public.  I’ll leave it to potential investors to sort through Artisan’s complex financial structure and determine whether the offering is attractive or not.  Potential investors are being asked to weigh the future profits and cash flows of the company as they are apportioned by a series of share classes, subjected to a shareholder agreement, redirected by tax arrangements and winnowed down through distributions to existing investors.  Imagine a huge river with a series of diversions that siphon off water.  The question for new investors, who sit at the mouth of the river, is whether there will be enough water to quench their thirst.

Existing investors, including the founders, key employees, Hellman & Friedman, a private firm, and Sutter Hill Ventures, a venture capital firm, enjoy a variety of tax benefits, preferred payments, downside protections, and/or additional stock grants.  In short, their shares seem to enjoy a variety of preferences.
Early Days (2008)

I met with the management and a portfolio team at Artisan in Milwaukee on September 1, 2003.  I remember this date because I didn’t sleep the night before the meeting.  By chance, we had set up our due diligence session on the morning of Harley Davidson’s 100th anniversary celebration.  Throughout the wee hours of the morning swarms of motorbikes cruised beneath the window of my hotel room in downtown Milwaukee.   

After a restless night, I conducted a day of due diligence on Artisan’s midcap growth product.  At the time Artisan was a modestly sized firm of about $20 billion.  Today it has $74 billion in assets under management.  Among other folks, I met with Andrew Klein, the CEO, and the investment team of Andrew Stephens and James Hamel.  As the day progressed, I was impressed by their business model and investment philosophy and very certain that I should recommend that the North Carolina Retirement System retain Artisan.

Just after lunch with the investment team in Artisan’s conference room, Mr. Klein asked me to step into his office.  He had an embarrassed look on his face.  He told me that another institution had just made a sizable commitment to the mid cap growth product, and the portfolio managers could no longer accept any additional assets.  In other words, the highlight of my visit to Milwaukee had been the all night motorcycle parade.  There was no need to complete the remaining part of my due diligence inquiry.

I was surprised, to say the least.  But I wasn’t angry.  Artisan had done what a topnotch money manager should do.  They were disciplined enough to close a product when they thought they had as much money as they could effectively manage.  Moreover, they hadn’t applied undue pressure on my decision-making process by warning me that the product was about to reach its capacity.  All too often, money managers accept as much capital as investors are willing to throw at them, and pressure investors to sign up before it’s too late.  As far as I can tell from the prospectus, Artisan hasn’t veered from this path, and the same growth team is still managing money at the firm.

Their decision to hire Charles Daley as their CFO only reinforces my high regard for the firm.  I worked with Mr. Daley at Legg Mason.  I’d tried to hire Scott Satterwhite to manage small cap stocks for TradeStreet Investment Associates in 1995 or 1996.  Mr. Satterwhite, who was working at First Union, made the sensible decision to turn down my offer and went to work for Artisan in 1997.

As I think about the rigor of Artisan’s investment processes and business disciplines, I’m left to wonder if they’d be willing to accept the economics and governance structure detailed in their prospectus.  Clearly, the terms are good for them as existing owners and employees.  But would this be a good deal for their investors?  The investors will have to make that decision.

Artisan's latest prospectus can be found at:

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