As filed with the Securities and Exchange Commission on October 22, 2007

Registration No. 333-143660

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 4

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

 

 

 

 

 

Pzena Investment Management, Inc.

120 West 45th Street, 20th Floor

New York, New York 10036

(212) 355-1600

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

 

 

 

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:   As soon as practicable after this Registration Statement is declared effective.

 

If any of the securities being registered on this Form are offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.   o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.

 

 

 

 

 

 

Until          , 2007 (25 days after the date of this prospectus), federal securities laws may require all dealers that effect transactions in our Class A common stock, whether or not participating in this offering, to deliver a prospectus. This is in addition to their obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

Each Russell Index referred to in this prospectus is a registered trademark or trade name of The Frank Russell Company. The Frank Russell Company is the owner of all copyrights relating to these indices and is the source of the performance statistics of these indices that are referred to in this prospectus.

 

The Morgan Stanley Capital International EAFE ^® Index, which we refer to as the MSCI EAFE ^® Index, is a trademark of Morgan Stanley Capital International, a division of Morgan Stanley. The Morgan Stanley Capital International World ^SM Index, which we refer to as the MSCI World ^SM Index, is a service mark of Morgan Stanley Capital International. Morgan Stanley Capital International is the owner of all copyrights relating to these indices and is the source of the performance statistics of these indices that are referred to in this prospectus.

 

The S&P 500 ^® Index is a registered trademark of Standard & Poor’s, a division of The McGraw Hill Companies, Inc., which is the owner of all copyrights relating to this index and the source of the performance statistics of this index that are referred to in this prospectus.

		AUM
		(in billions)
Assets at December 31, 2002		$	3.1
Net Inflows			1.2
Appreciation			1.5
Assets at December 31, 2003			5.8
Net Inflows			3.2
Appreciation			1.7
Assets at December 31, 2004			10.7
Net Inflows			5.0
Appreciation			1.0
Assets at December 31, 2005			16.8
Net Inflows			6.8
Appreciation			3.8
Assets at December 31, 2006			27.3
Net Inflows			1.3
Appreciation			2.0
Assets at June 30, 2007 (1)		$	30.6

(1)		Figures may not add due to rounding.

	•	Focus on Investment Excellence.   We recognize that we must achieve investment excellence in order to attain long-term business success. All of our business decisions, including the design of our investment process and our willingness to limit AUM in our investment strategies, are focused on producing attractive long-term investment results. According to eVestment Alliance, LLC, all five of our investment strategies that have a five-year track record ranked in the top half of their institutional peer groups as of June 30, 2007. Our four largest investment strategies, Large Cap Value, Value Service, Global Value and Small Cap Value, have outperformed their relevant benchmarks since their inception by 3.5%, 4.5%, 3.0% and 5.0%, respectively, on an annualized basis.
	•	Consistency of Investment Process.   We utilize the same disciplined, systematic investment process to construct and manage portfolios in each of our investment strategies. We believe that our institutional clients, and the consultants who advise them, recognize the benefits of this efficient process and, as a result, are generally receptive to the investment strategies we offer at an earlier stage in their development than otherwise is typical.
	•	Diverse and High Quality Client Base.   Through a combination of attractive investment performance, consistency in investment approach and a commitment to client service, we have developed a

		favorable reputation in the institutional investment community. This is evidenced by our strong relationships with consultants and the diversity and sophistication of our investors.

	•	Talented Investment Professionals and a Team-Oriented Approach.   The wide range of experiences of our investment professionals gives us unique perspectives while executing our in-depth, research-based decision-making process. To capitalize on the diversity of these backgrounds, we follow a team-oriented approach to making investment decisions, in which all of our investment professionals play a significant role.
	•	Employee Retention.   We have focused on building an environment that we believe is attractive to talented investment professionals. In the past five years, only one investment professional has left the firm. We believe we are well positioned to continue to attract and retain highly qualified investment professionals.
	•	Culture of Ownership.   We believe in significant ownership of our business by the key contributors to our success. We currently have 23 employee owners positioned within all functional areas of our firm. We believe this ownership model gives us a sense of shared purpose with our clients and their advisers.

	•	Capitalize on Growth Opportunities in Our International Value and Global Value Strategies.   Among both institutional and retail investors, there has been increasing levels of investment in portfolios including non-U.S. equities. We believe that our International Value and Global Value investment strategies are well positioned to participate in this industry trend. Now that both of these strategies have recently completed three-year track records, an important prerequisite for consideration by many investors, we expect to participate more broadly in these industry-wide flows.
	•	Employ Our Proven Process to Introduce New Products.   We anticipate continuing to offer new investment strategies over time, on a measured basis, consistent with our past practice. We believe that we will be able to launch new products efficiently and successfully, utilizing our proven investment process.
	•	Collaborate with Strong Distributors to Create Customized Products.   Over the past several years, we have developed strong relationships with certain distributors who have packaged our investment strategies within their products. Most significant among these is our relationship with John Hancock Advisers. We currently sub-advise four mutual funds for John Hancock Advisers, which represented $9.9 billion of our AUM at June 30, 2007. Working closely with them, we have developed, and intend to continue to develop, new investment strategies which they believe will be well received by their clients.
	•	Work with Our Strong Consultant Relationships.   We have built strong relationships with the most important investment consulting firms in our industry. We believe that these relationships will assist us in introducing new investment strategies to key segments of the investing community.
	•	Expand Our Non-U.S. Client Base.   As part of the overall expansion of our business, we have increased our efforts to develop our non-U.S. client base. We expect to achieve considerable growth in this client base through our strong relationships with global consultants and by directly calling on the world’s largest institutional investors.
	•	Leverage Our Value Investment Expertise to Selectively Develop Alternative Products.   We intend to further capitalize on our investment expertise and our strong reputation by developing alternative strategies based upon our classic value investment approach.

		AUM at				Annualized Returns
Investment Strategy (Inception Date)		June 30, 2007				Inception to June 30, 2007 (1)
		(in millions)
Large Cap Value (October 2000)		$	19,139
Large Cap Value — Gross							12.1	%
Large Cap Value — Net							11.6
Russell 1000 ® Value Index							8.6
S&P 500 ® Index							2.4
Value Service (January 1996)		$	6,203
Value Service — Gross							16.5	%
Value Service — Net							15.6
Russell 1000 ® Value Index							12.0
S&P 500 ® Index							9.9
Global Value (January 2004)		$	2,121
Global Value — Gross							18.3	%
Global Value — Net							17.2
MSCI World SM Index — Net/US$ (2)							15.3
S&P 500 ® Index							11.0
Small Cap Value (January 1996)		$	1,220
Small Cap Value — Gross							18.7	%
Small Cap Value — Net							17.3
Russell 2000 ® Value Index							13.7
S&P 500 ® Index							9.9
Mid Cap Value (September 1998)		$	624
Mid Cap Value — Gross							18.5	%
Mid Cap Value — Net							17.7
Russell Mid Cap ® Value Index							14.6
S&P 500 ® Index							6.9
All Cap Value (May 2001)		$	587
All Cap Value — Gross							18.6	%
All Cap Value — Net							17.4
Russell 3000 ® Value Index							9.4
S&P 500 ® Index							4.9
International Value (January 2004)		$	558
International Value — Gross							19.5	%
International Value — Net							18.3
MSCI EAFE ® Index — Net/US$ (2)							20.3
S&P 500 ® Index							11.0

(1)		The historical returns of these investment strategies are not necessarily indicative of their future performance or the performance of any of our other current or future investment strategies.
(2)		Net of applicable withholding taxes.

		As of and for the								As of and for the
		Three Months								Nine Months
		Ended September 30,								Ended September 30,
		2006				2007				2006				2007
		(in thousands, except Assets Under Management)
		(unaudited)
Assets Under Management (in billions)		$	24.9			$	28.9			$	24.9			$	28.9
Revenue		$	29,388			$	40,217			$	81,198			$	112,355
Operating Expenses			20,213				11,765				62,159				128,800
Operating Income			9,175				28,452				19,039				(16,445	)
Other Income (Loss)			2,270				(1,621	)			3,292				340
Provision For Income Taxes			(1,058	)			(1,269	)			(3,072	)			(3,876	)
Minority Interest			(720	)			711				(1,323	)			74
Interest on Mandatorily Redeemable Units			(11,314	)			—				(46,751	)			(16,575	)
Net Income		$	(1,647	)		$	26,273			$	(28,815	)		$	(36,482	)

		Period Ended September 30, (1)
		Since
Investment Strategy (Inception Date)		Inception			5 Years			3 Years			1 Year
Large Cap Value (October 2000)
Annualized Gross Returns			10.6%			19.2%			13.3%			6.1%
Annualized Net Returns			10.1%			18.7%			12.7%			5.6%
Russell 1000 ® Value Index			8.2%			18.1%			15.3%			14.5%
S&P 500 ® Index			2.6%			15.5%			13.1%			16.4%
Value Service (January 1996)
Annualized Gross Returns			15.4%			20.5%			12.4%			6.2%
Annualized Net Returns			14.5%			19.5%			11.6%			5.5%
Russell 1000 ® Value Index			11.7%			18.1%			15.3%			14.5%
S&P 500 ® Index			9.8%			15.5%			13.1%			16.4%
Global Value (January 2004)
Annualized Gross Returns			14.9%			N/A			16.3%			3.7%
Annualized Net Returns			13.9%			N/A			15.5%			3.2%
MSCI World sm Index — Net/US$ (2)			14.9%			N/A			18.0%			21.1%
S&P 500 ® Index			10.8%			N/A			13.1%			16.4%
Small Cap Value (January 1996)
Annualized Gross Returns			17.0%			20.1%			13.1%			9.3%
Annualized Net Returns			15.7%			18.9%			11.9%			8.2%
Russell 2000 ® Value Index			12.8%			18.7%			12.5%			6.1%
S&P 500 ® Index			9.8%			15.5%			13.1%			16.4%
Mid Cap Value (September 1998)
Annualized Gross Returns			16.7%			20.5%			12.2%			6.8%
Annualized Net Returns			16.0%			19.7%			11.4%			6.1%
Russell Mid Cap ® Value Index			13.7%			21.0%			17.2%			13.7%
S&P 500 ® Index			7.0%			15.5%			13.1%			16.4%
All Cap Value (May 2001)
Annualized Gross Returns			15.5%			21.6%			12.2%			2.8%
Annualized Net Returns			14.4%			20.4%			11.0%			1.8%
Russell 3000 ® Value Index			8.9%			18.1%			15.0%			13.7%
S&P 500 ® Index			5.0%			15.5%			13.1%			16.4%
International Value (January 2004)
Annualized Gross Returns			16.1%			N/A			17.3%			6.3%
Annualized Net Returns			15.1%			N/A			16.4%			5.6%
MSCI EAFE ® Index — Net/US$ (2)			19.5%			N/A			23.2%			24.9%
S&P 500 ® Index			10.8%			N/A			13.1%			16.4%

(1)		The historical returns of these investment strategies are not necessarily indicative of their future performance or the performance of any of our other current or future investment strategies.

(2)		Net of applicable withholding taxes.

(1)		The members of Pzena Investment Management, LLC, other than us, will consist of:

	•	the four members of our Executive Committee, Messrs. Pzena, Goetz, Krishna and Lipsey, and their respective estate planning vehicles, who will collectively hold approximately 65.2% of the economic interests in us;
	•	19 of our other employees, including our Chief Financial Officer, Wayne A. Palladino, who will collectively hold approximately 11.7% of the economic interests in us; and
	•	the two original outside investors in Pzena Investment Management, LLC, who will collectively hold approximately 13.7% of the economic interests in us.

(2)		Each share of Class A common stock is entitled to one vote per share. Class A common stockholders will have 100% of the rights of all classes of our capital stock to receive distributions, except that Class B common stockholders will have the right to receive the par value of the Class B common stock upon our liquidation, dissolution or winding up.
(3)		Each share of Class B common stock is entitled to five votes per share for so long as the number of shares of Class B common stock outstanding represents at least 20% of all shares of common stock outstanding. Class B common stockholders will only have the right to receive the par value of the Class B common stock upon our liquidation, dissolution or winding up.
(4)		We will hold 6,111,774 Class A units of Pzena Investment Management, LLC, which will represent the right to receive 9.5% of the distributions made by Pzena Investment Management, LLC.
(5)		The principals will collectively hold 57,937,910 Class B units of Pzena Investment Management, LLC, which will represent the right to receive 90.5% of the distributions made by Pzena Investment Management, LLC.

Dividend Policy		Following this offering and subject to legally available funds, we intend to pay a cash quarterly dividend initially equal to $0.11 per share of our Class A common stock commencing with the fourth quarter of 2007. However, there is no assurance that sufficient cash will be available to pay such cash dividends.
		The declaration and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors will take into account our actual future earnings, cash flow and capital requirements and the amount of distributions to us from Pzena Investment Management, LLC. For a discussion of the factors that will affect the determination by our board of directors to declare dividends, see “Dividend Policy.”
		We will be a holding company and will have no material assets other than our ownership of Class A units of Pzena Investment Management, LLC. We intend to cause Pzena Investment Management, LLC to make distributions to us in an amount sufficient to cover dividends, if any, declared by us. If Pzena Investment Management, LLC makes such distributions, the holders of Class B units will be entitled to receive equivalent distributions on a pro rata basis.
Risk Factors		You should read “Risk Factors” for a discussion of the factors to consider carefully before deciding to purchase any shares of our Class A common stock.
New York Stock Exchange Symbol		“PZN.”

	•	915,000 shares of Class A common stock which may be issued upon the exercise of the underwriters’ option to purchase additional shares and the corresponding number of Class B units that we would acquire with the net proceeds therefrom;
	•	57,937,910 shares of Class A common stock reserved for issuance upon exchange of the           Class B units that will be outstanding immediately after this offering;
	•	10,113,996 shares of Class A common stock issuable upon exchange of the corresponding number of Class B units reserved for issuance under the PIM LLC 2006 Equity Incentive Plan upon the exercise of options to acquire 508,310 Class B units that have been granted as of the date of this prospectus and for any additional options to acquire Class B units or other Class B unit-based awards; and
	•	628,611 shares of Class A common stock reserved for issuance under the Pzena Investment Management, Inc. 2007 Equity Incentive Plan, which we refer to as our 2007 Equity Incentive Plan.

	•	our operating company’s incurrence of $60.0 million of indebtedness and the payment of a one-time distribution of $60.0 million, in the aggregate, to its members on July 23, 2007;
	•	the reorganization transactions described in “The Reorganization and Our Holding Company Structure, including our agreement to return 85% of the tax benefits that we receive as a result of our ability to step up our tax basis in the membership units of Pzena Investment Management, LLC that we acquire from two outside investors and one former employee to such persons;
	•	the amendment of the operating agreement of Pzena Investment Management, LLC, effective as of March 31, 2007, to eliminate its obligation to redeem any members’ units therein upon their death, or, if applicable, termination of employment, which mandatory redemption feature had required all membership units to be classified as liabilities in Pzena Investment Management, LLC’s consolidated financial statements;
	•	the acceleration of the vesting of all membership units of Pzena Investment Management, LLC that were subject to vesting as of March 31, 2007, such that they became fully vested as of that date; and
	•	the sale of 6,100,000 shares of our Class A common stock in this offering at an assumed offering price of $17.00 per share (the midpoint of the price range set forth on the cover of this prospectus) and the application of the proceeds therefrom, after payment of assumed underwriting discounts and commissions and estimated offering expenses payable by us, to purchase 6,100,000 membership units of Pzena Investment Management, LLC from two outside investors and one former employee.

		Historical																												Unaudited Pro Forma
		Pzena Investment Management, LLC																												Pzena Investment
														Unaudited								Unaudited								Management, Inc.
														For the Three Months								For the Six Months								For the Year				For the
		For the Year Ended												Ended June 30,								Ended June 30,								Ended				Six Months
		December 31,												(restated)								(restated)								December 31,				Ended
		2004				2005				2006				2006				2007				2006				2007				2006				June 30, 2007
		(in thousands, except share and per share data)
Statement of Operations Data:
REVENUE
Management Fees		$	46,954			$	75,003			$	113,984			$	27,163			$	36,840			$	51,810			$	72,138			$	113,984			$	72,138
Incentive Fees			4,942				3,593				1,103				0				0				0				0				1,103				0
Total Revenue			51,896				78,596				115,087				27,163				36,840				51,810				72,138				115,087				72,138
EXPENSES
Cash Compensation and Benefits			18,837				23,832				34,830				8,773				8,533				17,218				17,432				34,830				17,432
Distributions on Compensatory Units			6,865				10,147				17,857				7,057				0				14,566				12,087				0				0
Change in Redemption Value of Compensatory Units			3,225				7,306				20,411				4,698				0				6,594				15,969				0				0
Change from Formula to Fair Value Plan for Compensatory Units			—				—				232,534				0				0				0				0				0				0
Acceleration of Vesting of Compensatory Units			—				—				—				0				0				0				64,968				0				0
Other Non-Cash Compensation			—				—				—				0				49				0				1,950				0				0
Total Compensation and Benefits Expense			28,927				41,285				305,632				20,528				8,582				38,378				112,406				34,830				17,432
General and Administrative Expenses			4,919				5,734				8,380				1,928				2,540				3,568				4,629				8,380				4,629
TOTAL OPERATING EXPENSES			33,846				47,019				314,012				22,456				11,122				41,946				117,035				43,210				22,061
Operating Income (Loss)			18,050				31,577				(198,925	)			4,707				25,718				9,864				(44,897	)			71,877				50,077
Other Income (Loss)			3,170				2,661				6,114				(320	)			1,726				1,022				1,961				2,250				29
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY AND NON-CONTROLLING INTERESTS			21,220				34,238				(192,811	)			4,387				27,444				10,886				(42,936	)			74,127				50,106
Provision for Income Taxes			1,765				2,704				3,941				1,263				1,478				2,014				2,607				6,625				4,480
Minority and Non-Controlling Interests			3				67				1,997				(137	)			646				603				637				63,848				43,117
Income (Loss) Before Interest on Mandatorily Redeemable Units			19,452				31,467				(198,749	)			3,261				25,320				8,269				(46,180	)			3,654				2,509
Less: Interest on Mandatorily Redeemable Units			19,452				60,136				516,708				18,893				0				35,437				16,575				0				0
NET INCOME (LOSS)		$	0			$	(28,669	)		$	(715,457	)		$	(15,632	)		$	25,320			$	(27,168	)		$	(62,755	)		$	3,654			$	2,509
Per Share Data:
Basic and Diluted Net Income Per Share																														$	0.60			$	0.41
Weighted Average Shares Used in Basic and Diluted
Net Income Per Share (1)																															6,111,774				6,111,774

(1)		Pro forma basic and diluted net income per share was computed by dividing the pro forma net income attributable to our Class A common stockholders by the 6,100,000 shares of Class A common stock that we will issue and sell in this offering (assuming that the underwriters do not exercise their option to purchase an additional 915,000 shares of Class A common stock to cover over-allotments), plus an aggregate of 11,768 shares of restricted Class A common stock that we will grant to our four non-employee directors shortly before the consummation of this offering, and six shares issued in connection with our initial capitalization, assuming that these 6,111,774 shares of Class A common stock were outstanding for the entirety of each of the historical periods presented on a pro forma basis. No pro forma effect was given to the future potential exchanges of the 57,937,910 Class B units of our operating company that will be outstanding immediately after the consummation of this offering and the reorganization transactions for the corresponding number of shares of our Class A common stock because the issuance of shares of Class A common stock upon these exchanges would not be dilutive.

		As of December 31,								As of June 30, 2007
		2005				2006				Historical				Pro Forma
										(unaudited)
		(in thousands)
Balance Sheet Data:
Cash and Cash Equivalents		$	4,969			$	30,920			$	10,011			$	10,592
TOTAL ASSETS			48,968				89,746				71,645				138,567
Capital Units Subject to Mandatory Redemption			49,729				533,553				—				—
TOTAL LIABILITIES			66,672				806,313				14,430				131,089
Minority and Non-Controlling Interests			1,965				13,399				14,190				14,190
MEMBERS’ EQUITY (EXCESS OF LIABILITIES OVER ASSETS)		$	(19,669	)		$	(729,966	)		$	43,025			$	(6,712	)

 

RISK FACTORS

 

Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other information contained in this prospectus, before deciding to invest in our Class A common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations and cash flow, in which case, the trading price of our Class A common stock could decline and you could lose all or part of your investment.

 

Risks Related To Our Business

 

We depend on Richard S. Pzena, John P. Goetz, A. Rama Krishna and William L. Lipsey and the loss of the services of any of them could have a material adverse effect on us.

 

The success of our business depends on the participation of Richard S. Pzena, John P. Goetz, A. Rama Krishna and William L. Lipsey, whom we collectively refer to as our managing principals. Their professional reputations, expertise in investing and relationships with our clients and within the investing community in the U.S. and abroad, are critical elements to executing our business strategy and attracting and retaining clients. Accordingly, the retention of our managing principals is crucial to our future success. There is no guarantee that they will not resign, join our competitors or form a competing company. The terms of the amended and restated operating agreement of Pzena Investment Management, LLC restrict each of Messrs. Pzena, Goetz and Lipsey from competing with us or soliciting our clients or other employees during the term of their employment with us and for three years thereafter. Under the terms of his existing employment agreement, which will be amended and restated in connection with the offering, Mr. Krishna has agreed not to compete with us for a period of 18 months following (i) his notice of resignation, which must be given six months prior to the termination of his employment with us pursuant to this agreement, or (ii) the date of any other termination of his employment with us. The penalty for their breach of these restrictive covenants will be the forfeiture of a number of Class B units held by the managing principal that is equal to 50% of the number of membership units collectively held by the managing principal and his permitted transferees as of the earlier of the date of his breach or the termination of his employment, unless our board of directors, in its sole discretion, determines otherwise. Although we would also seek specific performance of these restrictive covenants, there can be no assurance that we would be successful in obtaining this relief. Further, after this post-employment restrictive period, we will not be able to prohibit them from competing with us or soliciting our clients or employees. If any of our managing principals were to join a competitor or form a competing company, some of our current clients or other prominent members of the investing community could choose to invest with that competitor rather than us. Furthermore, we do not intend to carry any “key man” insurance that would provide us with proceeds in the event of the death or disability of any of our managing principals. The loss of the services of any of our managing principals could have a material adverse effect on our business and could impact our future performance.

 

If our investment strategies perform poorly, we could lose clients or suffer a decline in asset under management which would impair our earnings.

 

The performance of our investment strategies is one of the most important factors in retaining clients and AUM and competing for new business. If our investment strategies perform poorly, it could impair our earnings because:

 

 

 

Our sub-investment advisory relationships with mutual funds advised by John Hancock Advisers represent a significant source of our revenues, and the termination of these relationships would impair our revenues and earnings.

 

We currently act as a sub-investment adviser to the John Hancock Classic Value Fund, the John Hancock Classic Value Fund II, the John Hancock International Classic Value Fund and the John Hancock Classic Value Mega Cap Fund, each of which are SEC-registered mutual funds advised by John Hancock Advisers. Our sub-investment advisory relationships with these four mutual funds represented, in the aggregate, 32.4% of our AUM at June 30, 2007. For the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007, approximately 8%, 14%, 20%, 19% and 22%, respectively, of our total revenue was generated from these relationships. Our sub-investment advisory agreement with the John Hancock Classic Value Fund represented all, or substantially all, of this revenue during these periods. There can be no assurance that our agreements with respect to any of these four mutual funds will remain in place. In addition, these agreements would terminate automatically in the event that the investment management agreement between John Hancock Advisers and each individual fund is assigned or terminated. Such a termination of our sub-investment advisory agreements would significantly reduce our revenues and we may not be able to establish relationships with other mutual funds’ investment advisers and/or significant institutional separate accounts in order to replace the lost revenues.

 

Because our clients can reduce the amount of assets we manage for them, or terminate our agreements with them, on short notice, we may experience unexpected declines in revenue and profitability.

 

Our investment advisory and sub-investment advisory agreements are generally terminable upon short notice. Our sub-investment advisory agreements with twelve SEC-registered mutual funds, such as the four mutual funds advised by John Hancock Advisers, each have an initial two-year term and are subject to annual renewal by the fund’s board of directors pursuant to the Investment Company Act of 1940, as amended, which we refer to as the Investment Company Act. Five of these twelve sub-investment advisory agreements are beyond their initial two-year term, including the agreement for the John Hancock Classic Value Fund. Institutional and individual clients, and the funds with which we have sub-investment advisory agreements, can terminate their relationships with us, or reduce the aggregate amount of AUM, for a number of reasons, including investment performance, changes in prevailing interest rates, and financial market performance, or to shift their funds to competitors who may charge lower advisory fee rates, or for no stated reason. Poor performance relative to that of other investment management firms tends to result in decreased investments in our investment strategies, increased withdrawals from our investment strategies and the loss of institutional or individual accounts or sub-investment advisory relationships. In addition, the ability to terminate relationships may allow clients to renegotiate for lower fees paid for asset management services. If our investment advisory agreements are terminated, or our clients reduce the amount of assets under our management, either of which may occur on short notice, we may experience unexpected declines in revenue and profitability.

 

Difficult market conditions can adversely affect our business by reducing the market value of the assets we manage or causing our clients to withdraw funds.

 

Our business would be expected to generate lower revenue in a declining stock market or general economic downturn. Under our advisory fee arrangements, the fees we receive typically are based on the market value of our AUM. Accordingly, a decline in the prices of securities held in our clients’ portfolios would be expected to cause our revenue and net income to decline by:

 

 

 

If our revenue declines without a commensurate reduction in our expenses, our net income will be reduced. Accordingly, difficult market conditions could materially adversely affect our results of operations.

 

Our ability to retain our senior investment professionals and attract additional qualified investment professionals is critical to our success.

 

Our success depends on our ability to retain the senior members of our investment team and to recruit additional qualified investment professionals. However, we may not be successful in our efforts to retain them, as the market for investment professionals is extremely competitive. Our portfolio managers possess substantial experience and expertise in investing and, in particular, our classic value investment approach, which requires significant qualitative judgments as to the future earnings power of currently underperforming businesses. Our portfolio managers also have significant relationships with our clients. Accordingly, the loss of any one of our senior investment professionals could limit our ability to successfully execute our classic value investment approach and, therefore, sustain the performance of our investment strategies, which, in turn, could have a material adverse effect on our results of operations.

 

The substantial growth of our business in the past five years may be difficult to sustain as it may place significant demands on our resources and employees and may increase our expenses.

 

Our AUM have grown from approximately $3.1 billion as of December 31, 2002 to $30.6 billion as of June 30, 2007. This substantial growth in our business has placed, and if it continues, will continue to place, significant demands on our infrastructure, our investment team and other employees, and may increase our expenses. In addition, we are required to continuously develop our infrastructure in response to the increasing sophistication of the investment management market, as well as due to legal and regulatory developments.

 

The future growth of our business will depend, among other things, on our ability to maintain an infrastructure and staffing levels sufficient to address its growth and may require us to incur significant additional expenses and commit additional senior management and operational resources. We may face significant challenges in maintaining adequate financial and operational controls, implementing new or updated information and financial systems and procedures and training, managing and appropriately sizing our work force and other components of our business on a timely and cost-effective basis. In addition, our efforts to retain or attract qualified investment professionals may result in significant additional expenses. There can be no assurance that we will be able to manage our growing business effectively or that we will be able to continue to grow, and any failure to do so could adversely affect our ability to generate revenue and control our expenses.

 

The investment management business is intensely competitive.

 

Competition in the investment management business is based on a variety of factors, including:

 

 

We compete in all aspects of our business with a large number of investment management firms, commercial banks, broker-dealers, insurance companies and other financial institutions. Our competitive risks are heightened by the fact that some of our competitors may invest according to different investment styles or in alternative asset classes which the markets may perceive as more attractive than our investment approach in

the public equity markets. If we are unable to compete effectively, our earnings and revenues could be reduced, and our business could be materially adversely affected.

 

Reductions in business sourced through third-party distribution channels, or their poor reviews of us or our products, could materially reduce our revenue and ability to attract new clients.

 

New accounts sourced through consultant-led searches have been a large driver of the growth of our AUM in each of the past five years and are expected to be a major component of our future growth. In addition, we have established relationships with certain mutual fund providers, most significantly John Hancock Advisers, who have offered us opportunities to access new market segments through sub-investment advisory roles. We have also accessed the high-net-worth segment of the investing community through relationships with well respected wealth advisers who utilize our investment strategies in investment programs they construct for their clients. If we fail to successfully maintain these third-party distribution and sub-investment advisory relationships, our business could be materially adversely affected. In addition, many of these parties review and evaluate our products and our organization. Poor reviews or evaluations of either the particular product or of us may result in client withdrawals or may impact our ability to attract new assets through such intermediaries.

 

A change of control of us could result in termination of our sub-investment advisory and investment advisory agreements.

 

Pursuant to the Investment Company Act, each of the sub-investment advisory agreements for the SEC-registered mutual funds that we sub-advise automatically terminates upon its deemed “assignment” and a fund’s board and shareholders must approve a new agreement in order for us to continue to act as its sub-investment adviser. In addition, pursuant to the Investment Advisers Act of 1940, as amended, which we refer to as the Investment Advisers Act, each of our investment advisory agreements for the separate accounts we manage may not be “assigned” without the consent of the client. A sale of a controlling block of our voting securities and certain other transactions would be deemed an “assignment” pursuant to both the Investment Company Act and the Investment Advisers Act. Such an assignment may be deemed to occur in the event that the holders of the Class B units of Pzena Investment Management, LLC exchange enough of their Class B units for shares of our Class A common stock such that they no longer own a controlling interest in us. If such a deemed assignment occurs, there can be no assurance that we will be able to obtain the necessary consents from clients whose funds are managed pursuant to separate accounts or the necessary approvals from the boards and shareholders of the SEC-registered funds that we sub-advise. An assignment, actual or constructive, would trigger these termination and consent provisions and, unless the necessary approvals and consents are obtained, could adversely affect our ability to continue managing client accounts, resulting in the loss of AUM and a corresponding loss of revenue.

 

Our failure to comply with guidelines set by our clients could result in damage awards against us and a loss of AUM, either of which would cause our earnings to decline or affect our ability to remain in business.

 

As an investment adviser, we have a fiduciary duty to our clients. When clients retain us to manage assets on their behalf, they may specify certain guidelines regarding investment allocation and strategy that we are required to observe in the management of their portfolios. Our failure to comply with these guidelines and other limitations could result in losses to a client account that the client could seek to recover from us and could result in the client withdrawing its assets from our management or terminating our investment advisory agreement with them. Any of these events could cause our earnings to decline or affect our ability to remain in business.

 

Extensive regulation of our business limits our activities and exposes us to the potential for significant penalties, including fines or limitations on our ability to conduct our business.

 

We are subject to extensive regulation of our investment management business and operations. As a registered investment adviser, the SEC oversees our activities pursuant to its regulatory authority under the Investment Advisers Act. In addition, we must comply with certain requirements under the Investment

Company Act with respect to the SEC-registered funds for which we act as sub-investment adviser. We are also subject to regulation by the Department of Labor under the Employee Retirement Income Security Act of 1974, or ERISA. Each of the regulatory bodies with jurisdiction over us has regulatory powers dealing with many aspects of financial services, including the authority to grant, and in specific circumstances to cancel, permissions to carry on particular businesses. A failure to comply with the obligations imposed by the Investment Advisers Act on investment advisers, including record-keeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, could result in investigations, sanctions and reputational damage. Our failure to comply with applicable laws or regulations could result in fines, censure, suspensions of personnel or other sanctions, including revocation of our registration as an investment adviser. Even if a sanction imposed against us or our personnel is small in monetary amount, the adverse publicity arising from the imposition of sanctions against us by regulators could harm our reputation, result in withdrawal by our clients from our investment strategies and impede our ability to retain clients and develop new client relationships, which may reduce our revenues.

 

We face the risk of significant intervention by regulatory authorities, including extended investigation and surveillance activity, adoption of costly or restrictive new regulations and judicial or administrative proceedings that may result in substantial penalties. Among other things, we could be fined or be prohibited from engaging in some of our business activities. The requirements imposed by our regulators are designed to ensure the integrity of the financial markets and to protect customers and other third parties who deal with us, and are not designed to protect our stockholders. Consequently, these regulations often serve to limit our activities, including through net capital, customer protection and market conduct requirements.

 

In addition, the regulatory environment in which we operate is subject to modifications and further regulation. New laws or regulations, or changes in the enforcement of existing laws or regulations, applicable to us and our clients also may adversely affect our business, and our ability to function in this environment will depend on our ability to constantly monitor and react to these changes. For investment management firms in general, there have been a number of highly publicized regulatory inquiries that focus on the mutual fund industry. These inquiries already have resulted in increased scrutiny in the industry and new rules and regulations for mutual funds and their investment managers. This regulatory scrutiny may limit our ability to engage in certain activities.

 

Specific regulatory changes also may have a direct impact on our revenue. In addition to regulatory scrutiny and potential fines and sanctions, regulators continue to examine different aspects of the asset management industry. New regulation regarding the annual approval process for mutual fund sub-investment advisory agreements may result in the reduction of fees or possible terminations of these agreements. These regulatory changes and other proposed or potential changes may result in a reduction of revenue associated with these activities.

 

Operational risks may disrupt our business, result in losses or limit our growth.

 

We rely heavily on our financial, accounting, trading, compliance and other data processing systems. Any failure or interruption of these systems, whether caused by fire, other natural disaster, power or telecommunications failure, act of terrorism or war or otherwise, could result in a disruption of our business, liability to clients, regulatory intervention or reputational damage, and thus materially adversely affect our business. Although we have back-up systems in place, our back-up procedures and capabilities in the event of a failure or interruption may not be adequate. The inability of our systems to accommodate an increasing volume of transactions also could constrain our ability to expand our businesses. In recent years, we have substantially upgraded and expanded the capabilities of our data processing systems and other operating technology, and we expect that we will need to continue to upgrade and expand these capabilities in the future to avoid disruption of, or constraints on, our operations.

 

Furthermore, we depend on our headquarters in New York City for the continued operation of our business. A disaster or a disruption in the infrastructure that supports our business, or directly affecting our headquarters, may have a material adverse impact on our ability to continue to operate our business without interruption. Although we have disaster recovery programs in place, there can be no assurance that these will

be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses.

 

The investment management industry faces substantial litigation risks which could materially adversely affect our business, financial condition or results of operations or cause significant reputational harm to us.

 

We depend to a large extent on our relationships with our clients and our reputation for integrity and high-caliber professional services to attract and retain clients. As a result, if a client is not satisfied with our services, such dissatisfaction may be more damaging to our business than to other types of businesses. We make investment decisions on behalf of our clients which could result in substantial losses to them. In order for our classic value investment strategies to yield attractive returns, we expect to have to hold securities for multi-year periods and, therefore, our investment strategies may not perform well in the short term. If our clients suffer significant losses, or are otherwise dissatisfied with our services, we could be subject to the risk of legal liabilities or actions alleging negligent misconduct, breach of fiduciary duty or breach of contract. These risks are often difficult to assess or quantify and their existence and magnitude often remain unknown for substantial periods of time. We may incur significant legal expenses in defending against litigation. Substantial legal liability or significant regulatory action against us could materially adversely affect our business, financial condition or results of operations or cause significant reputational harm to us.

 

Our management and our independent auditors have identified material weaknesses in our internal control over financial reporting that, if not properly remediated, could result in a material misstatement of our financial statements and our management’s inability to report that our internal controls are effective for 2008 and thereafter, as required by the Sarbanes-Oxley Act of 2002, either of which could cause investors to lose confidence in our reported financial information or our Class A common stock to lose value.

 

We are not yet required to comply with Section 404 of the Sarbanes-Oxley Act of 2002, or to make an assessment of the effectiveness of our internal control over financial reporting. Further, our independent auditors have not been engaged to express, nor have they expressed, an opinion on the effectiveness of our internal control over financial reporting. However, they have informed us that they have identified material weaknesses in our internal control over financial reporting for complex and non-routine transactions, as well as inadequate internal review.

 

The material weaknesses relate to errors in our accounting for stock-based compensation, liabilities associated with our existing membership units, and the consolidation of investment partnerships in our consolidated financial statements. The errors occurred as a result of not having sufficient access to accounting resources with technical accounting expertise to analyze complex and non-routine transactions, as well as inadequate internal review. We have corrected these errors and believe that our audited and unaudited interim consolidated financial statements present the proper treatment for the complex and non-routine transactions identified by our independent auditors.

 

In order to improve the effectiveness of our internal control over financial reporting for complex and non-routine transactions, we have taken the following remedial measures:

 

 

In addition, we are in the process of strengthening our internal accounting and finance staff to satisfy our financial reporting obligations as a public company.

 

The existence of material weaknesses in internal control over financing reporting is an indication that there is more than a remote likelihood that a material misstatement of our financial statements will not be prevented or detected in a future period. The process of designing and implementing effective internal controls requires us to continually expend significant resources in order to establish and maintain a system of internal controls that satisfies our financial reporting obligations as a public company. We cannot assure you that the measures we have taken, or intend to take in the future, will remediate the material weaknesses noted by our independent auditors, or that we will be able to implement and maintain adequate internal control over our financial reporting in the future. In addition, we cannot assure you that additional material weaknesses, or significant deficiencies in our internal control over financial reporting, will not be discovered in the future. If we fail to develop and maintain effective controls and procedures, we may be unable to provide required financial information in a timely and reliable manner, or otherwise comply with the standards applicable to us as a public company, and our management may not be able to report that our internal control over financial reporting is effective for the year ending December 31, 2008, as would be required by Section 404 of the Sarbanes-Oxley Act of 2002, or thereafter. If our management is not able to do so, our independent auditors would not be able to certify that our internal controls are effective. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC, or violations of the NYSE listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if our independent auditors report any additional material weakness or significant deficiencies in our internal control over financial reporting. This could lead to a decline in the price of our Class A common stock.

 

Fulfilling our public company financial reporting and other regulatory obligations will be expensive and time consuming.

 

As a public company, we will be required to implement specific corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules under the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, as well as the rules of the NYSE. Compliance with these requirements will increase our legal and accounting compliance costs and place significant additional demands on our accounting and finance staff and on our accounting, financial and information systems. As described above, we will need to hire additional accounting and finance staff with appropriate public company financial reporting experience and technical accounting knowledge, which will increase our compensation expense.

 

As described above, our management will be required to conduct an annual assessment of the effectiveness of our internal controls over financial reporting and include a report on our internal controls in our annual reports on Form 10-K pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we will be required to have our independent registered public accounting firm attest to and report on management’s assessment of the effectiveness of our internal controls over financial reporting. Under current rules, we will be subject to these requirements beginning with our annual report on Form 10-K for our fiscal year ending December 31, 2008. We will incur incremental costs in order to improve our internal control over financial reporting and comply with Section 404 of the Sarbanes-Oxley Act of 2002, including increased auditing and legal fees and costs associated with hiring additional accounting, internal audit, information technology, compliance and administrative staff.

 

The historical consolidated and unaudited pro forma financial information included in this prospectus is not necessarily indicative of our future financial results after the reorganization and as a public company.

 

The historical consolidated financial information included in this prospectus may not be indicative of our future financial results after the reorganization and as a public company. Our AUM have increased almost tenfold in the past five years. However, a number of the investment strategies which resulted in this significant growth, including our Large Cap Value strategy, have been closed both to new investors and to additional funds. Although we have recently re-opened the Large Cap Value, Value Service, Small Cap Value, Mid Cap Value and All Cap Value strategies, we may close these strategies again at any time. We do not expect our AUM or revenue to grow at the same rate as they have grown in the past five years. In addition, the historical consolidated financial information included in this prospectus does not reflect the added costs that we expect

to incur as a public company or the changes that will occur in our capital structure and operations in connection with our reorganization. For example, because we operated through a limited liability company prior to this offering and paid little or no taxes on our profits, our historical consolidated financial information does not reflect the tax impact of our adoption of a corporate holding company structure.

 

In preparing our unaudited pro forma financial information for the periods prior to this offering, we adjusted our historical financial information for the transactions described in “The Reorganization and Our Holding Company Structure.”  The estimates we used in this unaudited pro forma financial information are not intended to approximate our actual experience as a public company or be indicative in any way of our future performance. The results of future periods may be materially different than those of the past as a result of:

 

 

See “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements included elsewhere in this prospectus.

 

An increase in our borrowing costs may adversely affect our earnings and liquidity.

 

On July 23, 2007, our operating company borrowed $60.0 million pursuant to a three-year term loan facility, the proceeds of which were used to finance a special one-time distribution to the members of our operating company as of that date. Concurrently, our operating company also obtained a $20.0 million revolving credit facility, which will expire on July 23, 2010, to finance our short-term working capital needs. As these facilities mature, we will be required to either refinance them by entering into new facilities, which could result in higher borrowing costs, or issuing equity, which would dilute existing shareholders. Our operating company could also repay them by using cash on hand or cash from the sale of our assets. No assurance can be given that we or our operating company will be able to enter into new facilities, or issue equity in the future, on attractive terms, or at all.

 

These facilities consist of floating-rate obligations based on the London Interbank Offering Rate, or LIBOR, and the interest expense we incur will vary with changes in the applicable LIBOR reference rate. As a result, an increase in short-term interest rates will increase our interest costs, which may adversely affect our earnings and liquidity.

Risks Related to Our Investment Strategies

 

Our results of operations depend on the performance of our investment strategies. Poor performance of our investment strategies will reduce or minimize the value of our assets under management on which our advisory fees are based. As advisory fees comprise all of our operating revenues, poor performance of our investment strategies will have a material adverse impact on our results of operations. In addition, poor performance will make it difficult for us to retain or attract clients and to grow our business. The performance of our strategies is subject to some or all of the following risks.

 

Our classic value investments in concentrated portfolios subjects the performance of our investment strategies to the risk that the companies in which we invest may not achieve the level of earnings recovery that we initially expect, or at all.

 

We generally invest in companies after they have experienced a shortfall in their historic earnings, due to an adverse business development, management error, accounting scandal or other disruption, and before there is clear evidence of earnings recovery or business momentum. While very few investors are willing to invest when companies lack earnings visibility, our classic value investment approach seeks to capture the return that can be obtained by investing in a company before the market has a level of confidence in its ability to achieve earnings recovery. However, our investment approach entails the risk that the companies included in our portfolios are not able to execute the turnaround that we had expected when we originally invested in them, thereby reducing the performance of our strategies. Our strategy of constructing concentrated portfolios, generally ranging from 30 to 60 holdings, of companies underperforming their historical earnings power, is subject to a higher risk of underperformance relative to benchmarks than the investment approaches of some of our competitors. Further, since our positions in these investments are often substantial, there is the risk that we may be unable to find willing purchasers for our investments when we decide to sell them.

 

Our investment strategies may not obtain attractive returns in the short term or during certain market periods.

 

Our products are best suited for investors with long-term investment horizons. In order for our classic value investment approach to yield attractive returns, we must typically hold securities for an average of over three years. Therefore, our investment strategies may not perform well during short periods of time. In addition, our strategies may not perform well during points in the economic cycle when value-oriented stocks are relatively less attractive. For instance, during the late stages of an economic cycle, investors may purchase relatively expensive stocks in order to obtain access to above average growth, as was the case in the late 1990s. Value-oriented strategies may also experience weakness during periods when the markets are focused on one investment thesis or sector. For example, in the past two years, the markets have deemed many businesses producing commodities and basic materials to be sound investments, regardless of their prices, based on the thesis that the rapid growth of such large economies as China and India means that there will be constant shortfalls in the supply of the goods produced by these companies. We would not invest in these companies if their stocks were not inexpensively priced, thus foregoing potentially attractive returns during the periods when these companies’ stock prices are continuing to advance.

 

Our investment approach may underperform other investment approaches, which may result in significant withdrawals of client assets or client departures or a reduction in our AUM.

 

Even when securities prices are rising generally, portfolio performance can be affected by our investment approach. We employ a classic value investment approach in all of our investment strategies. This investment approach has outperformed the market in some economic and market environments and underperformed it in others. In particular, a prolonged period in which the growth style of investing outperforms the value style may cause our investment strategy to go out of favor with some clients, consultants or third-party intermediaries. Poor performance relative to peers, coupled with changes in personnel, extensive periods in particular market environments or other difficulties may result in significant withdrawals of client assets, client departures or a reduction in our AUM.

 

Our investment process requires us to conduct extensive fundamental research on any company before investing in it, which may result in missed investment opportunities and reduce the performance of our investment strategies.

 

We take a considerable amount of time to complete the in-depth research projects that our investment process requires before adding any security to our portfolio. Our process requires that we take this time in order to understand the company and the business well enough to make an informed decision as to whether we are willing to own a significant position in a company whose current earnings are below its historic norms and that does not yet have earnings visibility. However, the time we take to make this judgment may cause us to miss the opportunity to invest in a company that has a sharp and rapid earnings recovery. Any such missed investment opportunities could adversely impact the performance of our investment strategies.

 

Our Global Value and International Value investment strategies consist primarily of investments in the securities of issuers located outside of the United States, which may involve foreign currency exchange, political, social and economic uncertainties and risks.

 

Our Global Value and International Value investment strategies, which together represented $2.7 billion of our AUM as of June 30, 2007, and are expected to comprise a larger portion of our AUM in the future, are primarily invested in securities of companies located outside the United States. Fluctuations in foreign currency exchange rates could negatively impact the portfolios of our clients who are invested in these strategies. In addition, foreign currency fluctuations may affect the levels of our AUM from one reporting period to another. An increase in the value of the U.S. dollar relative to non-U.S. currencies may result in a decrease in the dollar value of our AUM, which, in turn, would result in lower U.S.-dollar denominated revenue. We do not currently engage in any hedging activities for these portfolios and continue to market these products as unhedged.

 

Investments in non-U.S. issuers may also be affected by political, social and economic uncertainty affecting a country or region in which we are invested. Many non-U.S. financial markets are not as developed, or as efficient, as the U.S. financial market, and, as a result, liquidity may be reduced and price volatility may be higher. The legal and regulatory environments, including financial accounting standards and practices, may also be different, and there may be less publicly available information in respect of such companies. These risks could adversely impact the performance of our strategies that are invested in securities of non-U.S. issuers.

 

The historical returns of our existing investment strategies may not be indicative of their future results or of our investment strategies under incubation.

 

We have presented the historical returns of our existing investment strategies under “Business — Our Investment Performance.”  The historical returns of our strategies should not be considered indicative of the future results that should be expected from these strategies or from any other strategies that we may be incubating or developing. Our products’ returns have benefited from investment opportunities and general economic and market conditions that may not repeat themselves, and there can be no assurance that our current or future strategies will be able to avail themselves to profitable investment opportunities.

 

Risks Related to Our Structure

 

Our only material asset after completion of the reorganization and this offering will be our interest in Pzena Investment Management, LLC, and we are accordingly dependent upon distributions from Pzena Investment Management, LLC to pay taxes and other expenses.

 

We will be a holding company and will have no material assets other than our ownership of Class A units of Pzena Investment Management, LLC. We will have no independent means of generating revenue. Pzena Investment Management, LLC will be treated as a partnership for U.S. federal income tax purposes and, as such, will not itself be subject to U.S. federal income tax. Instead, its taxable income will be allocated to its members, including us, pro rata according to the number of membership units each owns. Accordingly, we will incur income taxes on our proportionate share of any net taxable income of Pzena Investment Management, LLC and

also will incur expenses related to our operations. We intend to cause Pzena Investment Management, LLC to distribute cash to its members in an amount at least equal to that necessary to cover their tax liabilities, if any, with respect to the earnings of Pzena Investment Management, LLC. To the extent that we need funds to pay our tax or other liabilities or to fund our operations, and Pzena Investment Management, LLC is restricted from making distributions to us under applicable laws or regulations or does not have sufficient earnings to make these distributions, we may have to borrow funds to meet these obligations and run our business and, thus, our liquidity and financial condition could be materially adversely affected.

 

We will be required to pay holders of Class B units most of the tax benefit of any depreciation or amortization deductions we may claim as a result of the tax basis step up we receive in connection with the reorganization and future exchanges of Class B units.

 

In connection with the reorganization, we will use the net proceeds of this offering to purchase membership units of Pzena Investment Management, LLC from its three current non-employee members. This purchase and any subsequent exchanges of Class B units for shares of our Class A common stock are expected to result in increases in our share of the tax basis in the tangible and intangible assets of Pzena Investment Management, LLC that otherwise would not have been available. These increases in tax basis are expected to reduce the amount of tax that we would otherwise be required to pay in the future, although the Internal Revenue Service, or IRS, might challenge all or part of this tax basis increase, and a court might sustain such a challenge.

 

We intend to enter into a tax receivable agreement with each of the current members of Pzena Investment Management, LLC and any future holder of Class B units, pursuant to which we will pay them 85% of the amount of the cash savings, if any, in U.S. federal, state and local income tax that we realize as a result of these increases in tax basis. The actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of our Class A common stock at the time of the exchange, the extent to which such exchanges are taxable, the amount and timing of our income and the tax rates then applicable. We expect that, as a result of the size and increases in our share of the tax basis in the tangible and intangible assets of Pzena Investment Management, LLC attributable to our interest therein, the payments that we may make to these members likely will be substantial.

 

Were the IRS to successfully challenge the tax basis increases described above, we would not be reimbursed for any payments made under the tax receivable agreement. As a result, in certain circumstances, we could make payments under the tax receivable agreement in excess of our cash tax savings.

 

Risks Related to Our Class A Common Stock

 

An active trading market may not develop for shares of our Class A common stock, which may cause our Class A common stock to trade at a discount from its initial offering price and make it difficult to sell the shares you purchase.

 

Prior to this offering, there has not been a public market for our Class A common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE or otherwise, or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling your shares of Class A common stock at an attractive price, or at all. The initial public offering price for our Class A common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell shares of our Class A common stock at prices equal to or greater than the price you paid in this offering.

 

The market price and trading volume of our Class A common stock may be volatile, which could result in rapid and substantial losses for our stockholders.

 

Even if an active trading market develops, the market price of our Class A common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our Class A common stock may fluctuate and cause significant price variations to occur. If the market price of our Class A common

stock declines significantly, you may be unable to resell your shares of Class A common stock at or above your purchase price, if at all. We cannot assure you that the market price of our Class A common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our Class A common stock, or result in fluctuations in the price or trading volume of our Class A common stock, include:

 

 

The market price of our Class A common stock could decline due to the large number of shares of our Class A common stock eligible for future sale upon the exchange of Class B units.

 

The market price of our Class A common stock could decline as a result of sales of a large number of shares of our Class A common stock eligible for future sale upon the exchange of Class B units, or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate.

 

We will agree with the underwriters not to issue, sell, otherwise dispose of or hedge any shares of our Class A common stock, subject to certain exceptions, for the 180-day period following the date of this prospectus, without the prior written consent of Goldman, Sachs & Co. and UBS Securities LLC. Our directors and executive officers will execute similar 180-day lock-up agreements with the underwriters. Goldman, Sachs & Co. and UBS Securities LLC may, at any time, release us and/or any of our directors or executive officers from this lock-up agreement and allow us to sell shares of our Class A common stock within this 180-day period. In addition, we and our directors and executive officers will be able to freely sell shares of Class A common stock thereafter.

 

Upon completion of this offering, approximately 57,937,910 Class B units of Pzena Investment Management, LLC will be outstanding and options to acquire 508,310 Class B units will be exercisable. Each Class B unit will be exchangeable for a share of our Class A common stock, subject to the exchange timing and volume limitations described under “The Reorganization and Our Holding Company Structure — Amended and Restated Operating Agreement of Pzena Investment Management, LLC — Exchange Rights.”  Pursuant to a resale and registration rights agreement that we will enter into with the holders of Class B units, we will agree to use our best efforts to file a registration statement for the sale of the shares of our Class A common stock that are issuable upon exchange of Class B units as soon as practicable after we become eligible to file a registration statement on Form S-3, which we expect to be one year after the consummation of this offering, and cause that registration statement to be declared effective by the SEC as soon as practicable thereafter.

 

We will agree to allow all holders of Class B units to exchange a number of vested Class B units up to 15% of the number of vested and unvested Class B units that they hold as of January 1 ^st of the year in which

this Form S-3 registration statement is first declared effective, and sell the shares of Class A common stock issued upon exchange in a public offering that will occur prior to the second anniversary of this offering, at a time and in a manner specified by us. If all holders of Class B units immediately after this offering and the reorganization exercised their rights to exchange 15% of their Class B units and resell the shares of Class A common stock issuable upon exchange in the first year that they are eligible to do so, approximately 8,690,687 shares of Class A common stock would be issued (representing 142.2% of our Class A common stock immediately after this offering) and resold in such future offering. Thereafter, the employee holders of Class B units will be able to exercise similar annual exchange and resale rights while employed by us. After their employment ends, they would not be eligible to exercise their exchange or resale rights for a certain period of time, ranging from one to three years, depending on the employee’s status, and then they would be able to exchange the remainder of their vested Class B units and resell all the shares of Class A common stock issued upon exchange. The non-employee members of our operating company immediately after this offering will be able to exchange up to 15% of the Class B units that they hold, and sell the shares of Class A common stock issued upon exchange, once a year beginning on the effective date of the Form S-3 registration statement described above until the third anniversary of the consummation of this offering, and then they would be able to exchange the remainder of their Class B units and resell all the shares of Class A common stock issued upon exchange. See “The Reorganization and Our Holding Company Structure — Resale and Registration Rights Agreement” for a description of the timing and circumstances of resales of shares issuable upon exchange of Class B units.

 

Pursuant to the PIM LLC 2006 Equity Incentive Plan, we may grant awards based on Class B units, such as options to acquire Class B units and restricted Class B units, subject to vesting periods, to our employees, consultants and other persons who provide services to us. Pursuant to the PIM LLC 2006 Equity Incentive Plan, Pzena Investment Management, LLC is authorized to issue up to the number of Class B units that is equal to 15% of the number of all membership units outstanding immediately after this offering. When these equity-based awards become fully vested, the Class B units underlying them will be eligible for exchange in the same manner, and to the same extent, as described above.

 

Pursuant to our 2007 Equity Incentive Plan, each of our non-employee directors will receive a grant of a number of restricted shares of our Class A common stock having a market value equal to $50,000 as of the date they are appointed or elected to our board. They will also be able to elect to receive 50% of their annual retainer of $70,000 in the form of shares of our Class A common stock.

 

Control by our Class B stockholders, which includes our managing principals, 19 of our other employees and two outside investors, of 97.9% of the combined voting power of our common stock may give rise to conflicts of interest.

 

Immediately after this offering and the reorganization, our Class B stockholders will collectively hold approximately 97.9% of the combined voting power of our common stock. Among these stockholders are each of our managing principals, 19 of our other employees and two outside investors. Concurrently with the closing of this offering and the reorganization, holders of all outstanding shares of Class B common stock will enter into a Class B stockholders’ agreement with respect to all shares of Class B common stock then held by them and any additional shares of Class B common stock they may acquire in the future. Pursuant to this agreement, they will vote these shares of Class B common stock together on all matters submitted to a vote of our common stockholders. To the extent that we cause Pzena Investment Management, LLC to issue additional Class B units, which may be granted, subject to vesting, to our employees pursuant to the PIM LLC 2006 Equity Incentive Plan, these employees will be entitled to receive an equivalent number of shares of our Class B common stock, subject to the condition that they agree to enter into this Class B stockholders’ agreement. Each share of our Class B common stock will entitle its holder to five votes per share for so long as the Class B stockholders collectively hold 20% of the total number of shares of our common stock outstanding. When a Class B unit is exchanged for a share of our Class A common stock, an unvested Class B unit is forfeited due to the employee holder’s failure to satisfy the conditions of the award agreement pursuant to which it was granted, or any Class B unit is forfeited as result of a breach of any restrictive covenants contained in our operating company’s amended and restated operating agreement, a corresponding share of our

Class B common stock will automatically be redeemed by us. For so long as our Class B stockholders hold at least 20% of the total number of shares of our common stock outstanding, they will be able to elect all of the members of our board of directors and thereby control our management and affairs, including determinations with respect to acquisitions, dispositions, borrowings, issuances of securities, and the declaration and payment of dividends. In addition, they will be able to determine the outcome of all matters requiring approval of stockholders, and will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors, and could preclude any unsolicited acquisition of our company. Our Class B stockholders will have the ability to prevent the consummation of mergers, takeovers or other transactions that may be in the best interests of our Class A stockholders. In particular, this concentration of voting power could deprive Class A stockholders of an opportunity to receive a premium for their shares of Class A common stock as part of a sale of our company, and could ultimately affect the market price of our Class A common stock.

 

Anti-takeover provisions in our amended and restated certificate of incorporation and bylaws could discourage a change of control that our stockholders may favor, which could also adversely affect the market price of our Class A common stock.

 

Provisions in our amended and restated certificate of incorporation and bylaws may make it more difficult and expensive for a third party to acquire control of us, even if a change of control would be beneficial to our stockholders. For example, our amended and restated certificate of incorporation, which will be in effect at the time this offering is consummated, will authorize our board of directors to issue up to 200,000,000 shares of our preferred stock and to designate the rights, preferences, privileges and restrictions of unissued series of our preferred stock, each without any vote or action by our stockholders. We could issue a series of preferred stock to impede the consummation of a merger, tender offer or other takeover attempt. See “Description of Capital Stock.” The anti-takeover provisions in our amended and restated certificate of incorporation and bylaws may impede takeover attempts, or other transactions, that may be in the best interests of our stockholders and, in particular, our Class A stockholders. In addition, the market price of our Class A common stock could be adversely affected to the extent that provisions of our amended and restated certificate of incorporation and bylaws discourage potential takeover attempts, or other transactions, that our stockholders may favor.

 

We intend to pay regular dividends to our stockholders, but our ability to do so is subject to the discretion of our board of directors and may be limited by our holding company structure and applicable provisions of Delaware law.

 

After consummation of this offering, we intend to pay cash dividends on a quarterly basis. Our board of directors may, in its discretion, decrease the level of dividends or discontinue the payment of dividends entirely. In addition, as a holding company, we will be dependent upon the ability of Pzena Investment Management, LLC to generate earnings and cash flows and distribute them to us so that we may pay our obligations and expenses and pay dividends to our stockholders. We expect to cause Pzena Investment Management, LLC to make distributions to its members, including us. However, the ability of Pzena Investment Management, LLC to make such distributions will be subject to its operating results, cash requirements and financial condition and applicable Delaware laws (which may limit the amount of funds available for distribution to its members). If, as a consequence of these various limitations and restrictions, we are unable to generate sufficient distributions from our business, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our Class A common stock.

 

The disparity in the voting rights among the classes of our common stock may have a potential adverse effect on the price of our Class A common stock.

 

Shares of our Class A and Class B common stock entitle the respective holders to identical rights, except that each share of our Class A common stock will entitle its holder to one vote on all matters to be voted on by stockholders generally, while each share of our Class B common stock will entitle its holder to five votes for so long as the number of shares of Class B common stock represents 20% of the total number of shares of

our common stock outstanding. The difference in voting rights could adversely affect the value of our Class A common stock to the extent that investors view, or any potential future purchaser of our company views, the superior voting rights of the Class B common stock to have value.

 

You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.

 

We expect the initial public offering price of our Class A common stock will be substantially higher than the pro forma net tangible book value per share of our Class A common stock, after giving effect to the exchange of all outstanding Class B units for shares of our Class A common stock. Therefore, investors purchasing shares of Class A common stock in this offering will pay a price per share that substantially exceeds our pro forma net tangible book value per share after this offering. As a result, investors will:

 

 

Investors in this offering will experience further dilution upon:

 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus 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 potentially inaccurate assumptions that 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 the section entitled “Risk Factors” in this prospectus. Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date of this prospectus. We undertake no obligation to publicly revise any forward-looking statements to reflect circumstances or events after the date of this prospectus, 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 SEC after the date of this prospectus.

 

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

 

 

THE REORGANIZATION AND OUR HOLDING COMPANY STRUCTURE

 

Overview

 

On May 8, 2007, we were incorporated as a Delaware corporation. Our business is presently conducted through Pzena Investment Management, LLC, the current members of which consist of 23 of our current employees, two outside investors (one of whom has agreed to serve as one of our directors) and one former employee. Concurrently with the consummation of this offering, we will acquire approximately 9.5% of the outstanding membership units of Pzena Investment Management, LLC from its three non-employee members and these membership units will be reclassified as “Class A units.” If the underwriters exercise their option to purchase additional shares of Class A common stock, we would use the additional net proceeds to acquire newly issued membership units of Pzena Investment Management, LLC. We would own 10.8% of the total membership units of Pzena Investment Management, LLC if the underwriters exercise their option to purchase additional shares of Class A common stock in full. None of the 23 current employee members of Pzena Investment Management, LLC will sell any of their membership units in conjunction with this offering.

 

Immediately after our acquisition of these membership units from the three current non-employee members of Pzena Investment Management, LLC, our only material asset will be our ownership of approximately 9.5% of the membership units of Pzena Investment Management, LLC (or 10.8% if the underwriters exercise their option to purchase additional shares of Class A common stock in full) and our only business will be acting as its sole managing member. Simultaneously, the remaining approximately 90.5% of the membership units of Pzena Investment Management, LLC (or 89.2% if the underwriters exercise their option to purchase additional shares of Class A common stock in full) that will be held by 23 of our current employees and two outside investors will be reclassified as “Class B units.”

 

Class A and Class B units will have the same economic rights per unit. Accordingly, immediately after the consummation of the reorganization and this offering, the holders of our Class A common stock (through us) and the holders of Class B units of Pzena Investment Management, LLC will hold approximately 9.5% and 90.5%, respectively, of the economic interests in our business (or 10.8% and 89.2%, respectively, if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

For each membership unit of Pzena Investment Management, LLC that is reclassified as a Class B unit in the reorganization, we will issue the holder one share of our Class B common stock in exchange for the payment of its par value. Each share of our Class B common stock will entitle its holder to five votes until such time that the number of shares of Class B common stock outstanding constitutes less than 20% of the total number of all shares of our common stock outstanding. Initially, the holders of Class B units will have 97.9% of the combined voting power of our common stock (or 97.6% if the underwriters exercise their option to purchase additional shares of Class A common stock in full). When a Class B unit is exchanged for a share of our Class A common stock, forfeited as a result of applicable vesting provisions, or forfeited as result of a breach of any restrictive covenants contained in our operating company’s amended and restated operating agreement, a corresponding share of our Class B common stock will automatically be redeemed and cancelled by us. Conversely, to the extent that we cause Pzena Investment Management, LLC to issue additional Class B units (including if the Class B units awarded are subject to vesting) to our employees pursuant to the PIM LLC 2006 Equity Incentive Plan, these employees will be entitled to receive an equivalent number of shares of our Class B common stock.

 

Concurrently with the closing of this offering and the reorganization, holders of our Class B common stock will enter into a stockholders’ agreement pursuant to which they will agree to vote all shares of Class B common stock then held by them, and acquired in the future, together on all matters submitted to a vote of our common stockholders. Therefore, upon the closing of this offering, they will be able to exercise control over all matters requiring the approval of our stockholders, including the election of our directors and the approval of significant corporate transactions.

 

The 6,111,774 shares of our Class A common stock that will be outstanding after this offering, 6,100,000 of which will be sold pursuant to this offering, 11,768 of which will be granted to our four non-employee directors under the Pzena Investment Management, Inc. 2007 Equity Incentive Plan concurrently with this

offering and six shares issued in connection with our initial capitalization, will represent 100% of the rights of the holders of all classes of our capital stock to share in all distributions, except for the right of holders of our Class B common stock to receive its par value upon our liquidation, dissolution or winding up.

 

Pursuant to the amended and restated operating agreement of Pzena Investment Management, LLC, each vested Class B unit will be exchangeable for a share of our Class A common stock, subject to the exchange timing and volume limitations described under “— Amended and Restated Operating Agreement of Pzena Investment Management, LLC — Exchange Rights.”  Unvested Class B units will not be exchangeable until they have vested.

 

Pursuant to a resale and registration rights agreement that we will enter into with the holders of Class B units of Pzena Investment Management, LLC, we intend to file a registration statement on Form S-3 in order to register the resales of the shares of our Class A common stock that are issuable upon exchange of these Class B units. See “— Resale and Registration Rights Agreement” for a description of the timing and manner limitations on resales of these shares.

The graphic below illustrates our holding company structure and anticipated ownership immediately after the consummation of the reorganization and this offering (assuming no exercise of the over-allotment option).

 

 

 

 

 

Holding Company Structure

 

Our only business following this offering will be to act as the sole managing member of Pzena Investment Management, LLC and, as such, we will operate and control all of its business and affairs and will be able to consolidate its financial results into our financial statements. The ownership interests of holders of Class B units of Pzena Investment Management, LLC will be accounted for as a minority interest in our consolidated financial statements after this offering.

 

Net profits and net losses and distributions of Pzena Investment Management, LLC will be allocated and made to its members pro rata in accordance with the number of membership units of Pzena Investment Management, LLC they hold. Accordingly, net profits and net losses of Pzena Investment Management, LLC will initially be allocated, and distributions will be made, approximately 9.5% to us and approximately 90.5% to the initial holders of Class B units (or 10.8% and 89.2%, respectively, if the underwriters exercise their option to purchase additional shares of Class A common stock in full).

 

Subject to the availability of net cash flow at the Pzena Investment Management, LLC level, we intend to cause Pzena Investment Management, LLC to distribute to us, and the holders of Class B units, cash payments for the purposes of funding tax obligations in respect of the taxable income and net capital gain that is allocated to us and the holders of Class B units, respectively, as members of Pzena Investment Management, LLC.

 

Assuming Pzena Investment Management, LLC makes distributions to its members in any given year, the determination to pay dividends, if any, to our Class A stockholders will be made by our board of directors. Because our board of directors may or may not determine to pay dividends to our Class A stockholders, our Class A stockholders may not necessarily receive dividend distributions relating to our pro rata share of the income earned by Pzena Investment Management, LLC, even if Pzena Investment Management, LLC makes such distributions to us.

 

Amended and Restated Operating Agreement of Pzena Investment Management, LLC

 

As a result of the reorganization, we will operate our business through Pzena Investment Management, LLC and its consolidated subsidiaries. The operations of Pzena Investment Management, LLC, and the rights and obligations of its members, are set forth in the amended and restated operating agreement of Pzena Investment Management, LLC, a form of which will be filed as an exhibit to the registration statement of which this prospectus forms a part. The following is a description of the material terms of this operating agreement.

 

Governance

 

We will serve as the sole managing member of Pzena Investment Management, LLC. As such, we will control its business and affairs and be responsible for the management of its business. We will also have the power to delegate certain of our management responsibilities to an Executive Committee consisting of our Chief Executive Officer, Mr. Pzena, and the officers appointed by him to serve as members of the committee. Initially, Mr. Pzena and each of our Presidents, Messrs. Goetz, Krishna and Lipsey, will serve as members of the Executive Committee. No members of Pzena Investment Management, LLC, in their capacity as such, will have any authority or right to control the management of Pzena Investment Management, LLC or to bind it in connection with any matter.

 

Voting and Economic Rights of Members

 

Pzena Investment Management, LLC will issue Class A units, which may only be issued to us, the sole managing member, and Class B units. Each Class A unit and Class B unit will entitle holders to equal economic rights. Holders of Class B units will have no voting rights, except for the right to approve amendments to the amended and restated operating agreement of Pzena Investment Management, LLC that adversely affects the rights of the holders of Class B units and to approve certain material corporate transactions. See “— Amendments” and “— Material Corporate Transactions.”

 

As of the closing of this offering, all outstanding Class B units will be fully vested. We intend to cause Pzena Investment Management, LLC to issue additional Class B units pursuant to the PIM LLC 2006 Equity Incentive Plan in the future which may be subject to vesting periods set forth in the relevant award agreements.

 

Net profits and net losses and distributions of Pzena Investment Management, LLC will be allocated and made to its members pro rata in accordance with the number of membership units of Pzena Investment Management, LLC they hold (whether or not vested). Pzena Investment Management, LLC will agree to make distributions to the holders of its membership units, which includes us, for the purpose of funding their tax obligations in respect of Pzena Investment Management, LLC that is allocated to them. See “— Tax Consequences.” However, our operating company may not make any distributions to its members if doing so would violate any agreement to which it is then a party or any law then applicable to it, have the effect of rendering it insolvent or result in it having net capital lower than that required by applicable law.

 

Coordination of Pzena Investment Management, Inc. and Pzena Investment Management, LLC

 

At any time we issue a share of our Class A common stock for cash, the net proceeds received by us will be promptly transferred to Pzena Investment Management, LLC, and Pzena Investment Management, LLC will issue to us one of its Class A units, or, alternatively, we may agree to transfer the net proceeds to a member of Pzena Investment Management, LLC in exchange for one Class B Unit of Pzena Investment Management, LLC held by such member, which Class B Unit will be automatically converted into a Class A Unit. At any time we issue a share of our Class A common stock pursuant to our 2007 Equity Incentive Plan, we will contribute to Pzena Investment Management, LLC all of the proceeds that we receive (if any) and Pzena Investment Management, LLC will issue to us one of its Class A units, having the same restrictions, if any, attached to the shares of Class A common stock issued under this plan. In the event that we issue other classes or series of our equity securities, Pzena Investment Management, LLC will issue, and Class B Units (if any) transferred to us by its members in exchange for our newly issued equity securities will be automatically converted into, an equal amount of equity securities of Pzena Investment Management, LLC with designations, preferences and other rights and terms that are substantially the same as our newly issued equity securities. Conversely, if we redeem any shares of our Class A common stock (or our equity securities of other classes or series) for cash, Pzena Investment Management, LLC will, immediately prior to our redemption, redeem an equal number of Class A units (or its equity securities of the corresponding classes or series) held by us, upon the same terms and for the same price, as the shares of our Class A common stock (or our equity securities of such other classes or series) are redeemed.

 

Pursuant to the authority of the Compensation Committee of our board of directors, as the administrator of the PIM LLC 2006 Equity Incentive Plan, this committee, in its sole discretion, may cause Pzena Investment Management, LLC to grant equity-based awards to its employees which are based on Class B units. To the extent that Class B units are issued at any time after this offering, the holder will be entitled to receive a corresponding number of shares of our Class B common stock in exchange for the payment of their par value, as long as the holder agrees to be bound by the terms of the Class B stockholders’ agreement described under “— Stockholders’ Agreement Among Class B Stockholders.” Pzena Investment Management, LLC may also, from time to time, issue such other classes or series of membership units having such relative rights, powers and duties and interests in profits, losses, allocations and distributions of Pzena Investment Management, LLC as may be designated by us.

 

Pursuant to the amended and restated operating agreement, we will agree, as managing member, that we will not conduct any business other than the management and ownership of Pzena Investment Management, LLC and its subsidiaries, or own any other assets (other than on a temporary basis), although we may incur indebtedness and may take other actions if we determine in good faith that such indebtedness or other actions are in the best interest of Pzena Investment Management, LLC. In addition, membership units of Pzena Investment Management, LLC, as well as our common stock, will be subject to equivalent stock splits, dividends and reclassifications.

 

Issuances and Transfer of Units

 

Class A units may only be issued to us, the managing member of Pzena Investment Management, LLC, and are non-transferable. Class B units may only be issued to persons or entities to which we agree to permit the issuance of units in exchange for cash or other consideration, including the services of Pzena Investment Management, LLC’s employees. Class B units may not be transferred except, with our consent, to a permitted transferee, subject to such conditions as we may specify. A holder of Class B units may not transfer any Class B units to any person unless he or she transfers an equal number of shares of our Class B common stock to the same transferee.

 

Material Corporate Transactions

 

In the event that Pzena Investment Management, LLC proposes to engage in a material corporate transaction, including a merger, consolidation, dissolution or sale of substantially all of its assets, we, in our capacity as the managing member, along with a majority in interest of the holders of the Class B units, shall have the power and authority to approve such a transaction. In addition, in the event that we, in our capacity as the managing member, along with a majority in interest of the holders of the Class B units, determine that all (or any portion) of the Class A and Class B units, should be sold to a third party purchaser, we will have the right to compel the holders of Class B units to sell all or the same portion of their Class B units to this third party purchaser.

 

Exchange Rights

 

We have reserved for issuance 68,051,906 shares of our Class A common stock, which is the aggregate number of shares of our Class A common stock expected to be issued over time upon the exchanges by:

 

 

Holders of Class B units may exchange their vested Class B units for shares of our Class A common stock at the times and in the amounts described below.

 

Managing Principals.   Each year, in the period beginning on the first effective date of the Form S-3 registration statement described under “— Registration Rights Agreement,” or the shelf registration statement, and ending on the date of the termination of employment of a managing principal with us, a managing principal and his permitted transferees may collectively exchange up to the number of vested Class B units that equals 15% of all Class B units they collectively hold as of the first day of that year, in accordance with the timing restrictions described under “— Registration Rights Agreement.” For the three-year period following the managing principal’s termination, the managing principal and his permitted transferees may not exchange any of their Class B units. Thereafter, they may exchange the remainder of their Class B units when they vest, subject to the same timing restrictions.

 

Other Employee Members.   Each year, in the period beginning on the first effective date of the shelf registration statement described below and ending on the date of termination of employment of an employee member other than our managing principals, he or she and his or her permitted transferees, may collectively exchange up to the number of vested Class B units that equals 15% of all Class B units they collectively hold as of the first day of that year, in accordance with the timing restrictions described under “— Registration Rights Agreement.” For the one-year period following the employee’s termination, the employee and his or her permitted transferees may not exchange any of their Class B units. Within the following six months, they may exchange vested Class B units so long as, except as may be agreed by us, the employee retains a number of vested Class B units equal to at least 25% of the number of vested Class B units collectively held by the

employee and his or her permitted transferees on the date of the termination of employment with us, subject to the same timing restrictions. Thereafter, they may exchange the remainder of their Class B units when they vest, subject to the same timing restrictions.

 

Non-Employee Members.   Each year, in the period beginning on the first effective date of the shelf registration statement described below and ending on the third anniversary of the consummation of this offering, the non-employee members of our operating company immediately after this offering may exchange up to 15% of the Class B units they hold as of the first day of that year, in accordance with the timing restrictions described under “— Registration Rights Agreement.” Thereafter, these non-employee members may sell the remainder of their Class B units, subject to the same timing restrictions.

 

Exceptions.   Pursuant to the amended and restated operating agreement, if the amount of income taxes that employee members are required to pay due to the grant or vesting of their Class B units, the exercise of their options to acquire Class B units and/or the exchange of their Class B units for shares of our Class A common stock (whether or not they are employees at the time that the tax payment obligation arises) exceeds the net proceeds they would receive upon the sale of all shares of our Class A common stock issued to them in exchange for 15% of Class B units that they hold as of the first day of the year with respect to which the tax is payable, then they will instead be entitled to exchange an amount of vested Class B units, and resell an equivalent amount of shares of our Class A common stock issued upon exchange, such that the net proceeds from the sale of this amount of shares would enable them to pay all such taxes due. In addition, we may allow holders of Class B units to make exchanges in amounts exceeding those described above at any time following the effective date of the shelf registration statement, which determination may be withheld, delayed, or granted on such terms and conditions as the board may determine, in its sole discretion.

 

Redemption of Shares of Class B Common Stock.   Any holder of Class B units who has acquired a corresponding number of shares of Class B common stock in connection with the original issuance of Class B units, which includes all holders of the 57,937,910 Class B units to be issued to the 23 current employee members and the two outside investors in Pzena Investment Management, LLC in connection with the reorganization, must deliver a corresponding number of shares of Class B common stock to us for redemption in connection with exercising its right to exchange Class B units for shares of our Class A common stock.

 

Restrictive Covenants

 

 

Confidential Information

 

All employee members of Pzena Investment Management, LLC will agree to protect the confidential information of Pzena Investment Management, LLC. This covenant will survive the termination of their employment.

 

Forfeiture of Class B Units

 

Unless otherwise determined by our board of directors, in its sole discretion, or previously agreed to by the employee member, his or her permitted transferees and us:

 

 

Indemnification and Exculpation

 

To the extent permitted by applicable law, Pzena Investment Management, LLC will indemnify us, as its managing member, its authorized officers, its other employees and agents from and against any losses, liabilities, damages, costs, expenses, fees or penalties incurred by any acts or omissions of these persons, provided that the acts or omissions of these indemnified persons are not the result of fraud, intentional misconduct or a violation of the implied contractual duty of good faith and fair dealing, or any lesser standard of conduct permitted under applicable law.

 

We, as the managing member, and the authorized officers and other employees and agents of Pzena Investment Management, LLC, will not be liable to Pzena Investment Management, LLC, its members or their affiliates for damages incurred by any acts or omissions of these persons, provided that the acts or omissions of these exculpated persons are not the result of fraud, intentional misconduct or a violation of the implied contractual duty of good faith and fair dealing, or any lesser standard of conduct permitted under applicable law.

 

Amendments

 

The amended and restated operating agreement may be amended with the consent of the managing member and a majority in interest of the Class B members, provided that the managing member may, without the consent of any Class B member, make certain amendments that, generally, are not expected to adversely affect Class B members.

 

Notwithstanding the foregoing, no amendment may

 

 

Resale and Registration Rights Agreement

 

Pursuant to a resale and registration rights agreement that we will enter into with each holder of Class B units, the shares of Class A common stock issued upon exchange will be eligible for resale pursuant to a registration statement on Form S-3, which we refer to as the shelf registration statement, or otherwise, subject to the resale timing and manner limitations described below. Pursuant to this agreement, when Pzena Investment Management, LLC issues any Class B units to its employees, members or other service providers pursuant to the PIM LLC 2006 Equity Incentive Plan, the recipient will be entitled to the same resale and registration rights, and will be subject to the same restrictions, as the holders of Class B units outstanding immediately after this offering.

 

Pursuant to the registration rights agreement, we will commit to use our best efforts to:

 

 

From the first effective date of this shelf registration statement until the fourth anniversary of the consummation of this offering, holders of Class B units, subject to the exchange timing and volume limitations described above under “— Amended and Restated Operating Agreement of Pzena Investment Management, LLC — Exchange Rights,” will only be able to sell the shares of Class A common stock issued upon exchange in connection with a public offering, which may be an underwritten offering or a block trade. We will determine the timing and manner of these public offerings, but will be required to provide for at least one public offering in each twelve-month period from the effective date of this shelf registration statement to the fourth anniversary of this offering. However, if we fail to provide for a public offering by the end of any such twelve-month period, each holder of Class B units who is then eligible to exchange Class B units, may exercise its exchange right and resell the shares issued upon exchange in any manner of sale permitted under the registration statement or otherwise available to the holder. Thereafter, holders of Class B units will be able to exchange their Class B units for shares of our Class A common stock, subject to the exchange timing and volume limitations described above, and will be permitted to sell their shares in any manner, but only at times determined by us, in our sole discretion.

 

We have agreed to indemnify the holders of Class B units against any losses or damages resulting from any untrue statement, or omission of material fact, in any registration statement or prospectus pursuant to which they may sell the shares of our Class A common stock that they receive upon exchange of their Class B units, unless such liability arose from the selling stockholder’s misstatement or omission, and the holders have agreed to indemnify us against all losses caused by their misstatements or omissions. We will pay all expenses incident to our performance under the registration rights agreement, and the selling stockholders will pay their respective portions of all underwriting discounts, commissions and transfer taxes relating to the sale of their shares of Class A common stock pursuant to the registration rights agreement.

 

Voting Rights of Class A and Class B Stockholders

 

Each share of our Class A common stock will entitle its holder to one vote. Each share of our Class B common stock will entitle its holder to five votes, until the first time that the number of shares of our Class B common stock outstanding constitutes less than 20% of the number of all shares of our common stock outstanding. After this time, each share of our Class B common stock will entitle its holder to one vote.

 

Immediately after this offering, our Class B common stockholders will collectively hold approximately 97.9% of the combined voting power of our common stock (or 97.6% if the underwriters exercise their option to purchase additional shares in full). We intend to cause Pzena Investment Management, LLC to issue additional Class B units to our employees in various forms of equity compensation, such as restricted Class B units and options to acquire Class B units. Pzena Investment Management, LLC will initially be authorized to issue additional Class B units in an amount not exceeding 15% of all membership units outstanding as of the consummation of this offering pursuant to the PIM LLC 2006 Equity Incentive Plan. The holders of any vested or unvested Class B units issued after this offering will be entitled to receive a corresponding number of shares of our Class B common stock in exchange for the payment of their par value and, therefore, the voting power of our Class B common stockholders will increase to the extent that we grant Class B unit-based awards, pursuant to the PIM LLC 2006 Equity Incentive Plan, to our employees, members or other service providers. Conversely, when any holder of vested Class B units exchanges them for the corresponding number of shares of our Class B common stock, any holder of unvested Class B units forfeits a Class B unit due to applicable vesting provisions, or any holder of vested or unvested Class B units forfeits a Class B unit due to a breach of restrictive covenants contained in our operating company’s amended and restated operating agreement, it will result in the automatic redemption of the corresponding number of shares of our Class B common stock and, therefore, will decrease the aggregate voting power of our Class B stockholders.

 

Stockholders’ Agreement Among Class B Stockholders

 

Concurrently with the consummation of this offering and the reorganization, the holders of all outstanding shares of our Class B common stock will enter into a Class B stockholders’ agreement with respect to all shares of Class B common stock then held by them and any additional shares of Class B common stock that they may acquire in the future. Pursuant to this agreement, they will agree to vote all their shares of Class B common stock together on any matter submitted to our common stockholders for a vote.

 

Prior to any vote of our common stockholders, the Class B stockholders’ agreement will provide for a separate, preliminary vote of the shares of Class B common stock on each matter upon which a vote of all common stockholders is proposed to be taken. In this preliminary vote, the participating Class B stockholders may vote all of the shares of Class B common stock then owned by them in the manner that each may determine in his, her or its sole discretion. Each Class B stockholder must then vote all of their shares of Class B common stock in accordance with the vote of the majority of the shares of Class B common stock present (in person or by proxy) and voting in this preliminary vote. In order to give effect to these voting provisions, each of these Class B stockholders will grant Mr. Pzena an irrevocable proxy to vote all their shares of Class B common stock in accordance with the vote of this majority in any vote of our common stockholders.

 

For so long as the Class B stockholders own 20% of the total number of shares of our common stock outstanding, they will be able to exercise control over all matters requiring the approval of our stockholders, including the election of our directors, the approval of significant corporate transactions and the declaration and payment of dividends. See “Risk Factors — Risks Related to Our Class A Common Stock — Control by our Class B stockholders, which includes our managing principals, 19 other of our employees and two outside investors, of 97.9% of the combined voting power of our common stock may give rise to conflicts of interest.”

 

In addition, pursuant to this Class B stockholders’ agreement, each holder of shares of Class B common stock will agree that:

 

 

 

This Class B stockholders’ agreement may only be amended with the consent of the holders of a majority of the shares of Class B common stock that are party to this agreement.

 

Tax Consequences

 

The holders of membership units of Pzena Investment Management, LLC, including us, generally will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of Pzena Investment Management, LLC. Net profits and net losses of Pzena Investment Management, LLC generally will be allocated to its members pro rata in proportion to their respective membership units. The amended and restated operating agreement of Pzena Investment Management, LLC will provide for cash distributions to its members if the taxable income of Pzena Investment Management, LLC gives rise to taxable income for its members. In accordance with this agreement, Pzena Investment Management, LLC will make distributions to the holders of its membership units for the purpose of funding their tax obligations in respect of the income of Pzena Investment Management, LLC that is allocated to them. Generally, these tax distributions will be computed based on our estimate of the net taxable income of Pzena Investment Management, LLC allocable per unit multiplied by an assumed tax rate equal to the highest combined U.S. federal and applicable state and local tax rate applicable to any member (taking into account the deductibility of state and local taxes for U.S. federal income tax purposes).

 

Pzena Investment Management, LLC intends to make an election under Section 754 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, which will be effective for 2007 and for each taxable year in which an exchange of Class B units for shares of our Class A common stock occurs. As a result of this election, our initial acquisition of Class A units, and the subsequent exchanges of Class B units for shares of our Class A common stock, are expected to result in increases in our share of the tax basis in the tangible and intangible assets of Pzena Investment Management, LLC at the time of our acquisition of membership units and any future exchanges, which will increase the tax depreciation and amortization deductions available to us. These increases in tax basis and tax depreciation and amortization deductions are expected to reduce the amount of tax that we would otherwise be required to pay in the future.

 

Tax Receivable Agreement

 

We will enter into a tax receivable agreement with the current members of Pzena Investment Management, LLC, and any future holders of Class B units, that will require us to pay them 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we actually realize (or are deemed to realize in the case of an early termination payment by us, or a change in control, as discussed below) as a result of the increases in tax basis described above and certain other tax benefits related to entering into the tax receivable agreement, including tax benefits attributable to payments under the tax receivable agreement. This will be our obligation and not the obligation of Pzena Investment Management, LLC. We expect to benefit from the remaining 15% of cash savings, if any, realized. For purposes of the tax receivable agreement, cash savings in income tax will be computed by comparing our actual income tax liability to the amount of such taxes that we would have been required to pay had there been no increase in our share of the tax basis of the tangible and intangible assets of Pzena Investment Management, LLC. The term of the tax receivable agreement will commence upon consummation of this offering and will continue until all such tax benefits have been utilized or expired, unless we exercise our right to terminate the tax receivable agreement for an amount based on an agreed-upon value of payments remaining to be made under the agreement.

 

Estimating the amount of payments that we may be required to make under the tax receivable agreement is imprecise by its nature, because the actual increase in our share of the tax basis, as well as the amount and timing of any payments under the tax receivable agreement, will vary depending upon a number of factors, including:

 

 

 

We expect that, as a result of the size of the increases in our share of the tax basis of the tangible and intangible assets of Pzena Investment Management, LLC attributable to our interest therein, the payments that we make under the tax receivable agreement will likely be substantial. Assuming that there are no material changes in the relevant tax law, and that we earn sufficient taxable income to realize the full tax benefit of the increased depreciation and amortization of our assets, we expect that future payments under the tax receivable agreement in respect of our initial purchase of membership units of Pzena Investment Management, LLC will aggregate $54.5 million and range from approximately $2.4 million to $6.2 million per year over the next 15 years (or $62.5 million and range from approximately $2.8 million to $7.1 million per year over the next 15 years if the underwriters exercise their option to purchase additional shares of our Class A common stock in full). A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per Class A share (the midpoint of the price range set forth on the cover of this prospectus) would increase (decrease) the aggregate amount of future payments to holders of Class B units in respect of the purchase by $3.2 million (or $3.6 million if the underwriters exercise their option to purchase additional shares of our Class A common stock in full). Future payments under the tax receivable agreement in respect of subsequent exchanges will be in addition to these amounts and are expected to be substantial.

 

In addition, the tax receivable agreement provides that, upon certain mergers, asset sales, other forms of business combinations or other changes of control, our (or our successors’) obligations with respect to exchanged or acquired Class B units (whether exchanged or acquired before or after such transaction) would be based on certain assumptions, including that we would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement.

 

Decisions made by the continuing members of our operating company in the course of running our business, such as with respect to mergers, asset sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments that are received by an exchanging or selling member under the tax receivable agreement. For example, the earlier disposition of assets following an exchange or acquisition transaction will generally accelerate payments under the tax receivable agreement and increase the present value of such payments, and the disposition of assets before an exchange or acquisition transaction will increase an existing owner’s tax liability without giving rise to any rights of an existing owner to receive payments under the tax receivable agreement.

 

Were the IRS to successfully challenge the tax basis increases described above, we would not be reimbursed for any payments previously made under the tax receivable agreement. As a result, in certain circumstances, we could make payments under the tax receivable agreement in excess of our actual cash savings in income tax.

 

USE OF PROCEEDS

 

We estimate that the net proceeds to us from the sale of Class A common stock offered by us will be approximately $92.6 million, or $107.1 million if the underwriters exercise their option to purchase additional shares of Class A common stock in full, based on an assumed initial public offering price of $17.00 per share (the midpoint of the price range set forth on the cover of this prospectus), in each case after deducting assumed underwriting discounts and commissions and estimated offering expenses payable by us.

 

We intend to use the net proceeds from this offering to purchase an aggregate of 6,100,000 membership units of Pzena Investment Management, LLC from its three current non-employee members and will not retain any of these proceeds. As a result, the purchase price for the membership units will be determined by the public offering price of our Class A common stock in this offering less the amount of offering expenses incurred by us. None of the 23 current employee members of Pzena Investment Management, LLC will sell any of their membership units in conjunction with this offering.

 

If the underwriters exercise their option to purchase additional shares of Class A common stock in full, we intend to use the additional approximately $14.5 million of net proceeds, based on an assumed initial public offering price of $17.00 per share (the midpoint of the price range set forth on the cover of this prospectus), to purchase up to 915,000 newly issued membership units of Pzena Investment Management, LLC. Pzena Investment Management, LLC intends to use these proceeds, if any, for general corporate purposes, which may include providing funds to seed new investment strategies.

 

DIVIDEND POLICY

 

Our Dividend Policy

 

Following this offering, subject to legally available funds, we intend to pay a quarterly cash dividend, initially equal to $0.11 per share of our Class A common stock, commencing with the fourth quarter of 2007. We intend to fund our initial dividend, as well as future dividends, with available cash generated from our operations. The Class B common stock will not be entitled to any dividends.

 

The declaration and payment of any future dividends will be at the sole discretion of our board of directors. Our board of directors will take into account:

 

 

We will be a holding company and will have no material assets other than our ownership of membership units of Pzena Investment Management, LLC. As a result, we will depend upon distributions from Pzena Investment Management, LLC to pay any dividends declared by us. We expect to cause Pzena Investment Management, LLC to make distributions to us in an amount sufficient to cover dividends, if any, declared by us. If Pzena Investment Management, LLC makes such distributions, holders of Class B units will be entitled to receive equivalent distributions on a pro rata basis.

 

Except as described below, neither we nor our operating company have any debt obligations which limit our or its ability to pay dividends to us, in the case of our operating company, or our stockholders, in the case of us. Pursuant to a credit agreement which our operating company entered into on July 23, 2007, it will not be restricted from declaring dividends to us unless an event of default exists thereunder, and it will be permitted to pay dividends which it declares prior to the existence of an event of default as long as no payment or bankruptcy event of default has occurred. In addition, pursuant to the amended and restated operating agreement, our operating company may not make any distributions to its members, including us, if doing so would violate any agreement to which it is then a party or any law then applicable to it, have the effect of rendering it insolvent or result in it having net capital lower than that required by applicable law.

 

Our dividend policy has certain risks and limitations, particularly with respect to liquidity. Although we expect to pay dividends according to our dividend policy, we may not pay dividends according to our policy, or at all, if, among other things, we do not have the cash necessary to pay our intended dividends. To the extent we do not have cash on hand sufficient to pay dividends, we may decide not to pay dividends. By paying cash dividends rather than investing that cash in our future growth, we risk slowing that pace of our growth, or not having a sufficient amount of cash to fund our operations or unanticipated capital expenditures, should the need arise.

 

Pzena Investment Management, LLC’s Historical Distributions

 

Prior to the completion of this offering, our operating company was owned by 23 of its current employees, two outside investors and a former employee. All decisions regarding the amount and timing of

distributions were made by the sole managing member of our operating company prior to this offering, Mr. Pzena, and our Executive Committee, based on an assessment of appropriate amounts of distributions, taking into account our operating company’s capital needs, as well as actual and potential earnings.

 

In connection with the reorganization, Pzena Investment Management, LLC intends to make a distribution to its existing members representing all of the undistributed earnings generated between June 30, 2007 and the date of the offering, less any amounts required to fund its working capital needs.

 

CAPITALIZATION

 

The table on the following page sets forth our cash and cash equivalents and capitalization as of June 30, 2007:

 

 

 

As a result of the reorganization transactions and this offering, we will be the sole managing member of Pzena Investment Management, LLC and hold 9.5% of the membership interests therein. Therefore, we will consolidate the results of operations and financial condition of Pzena Investment Management, LLC into our financial statements. As the result of these transactions, the other members of Pzena Investment Management, LLC will hold a 90.5% non-controlling interest in our operating company. Our acquisition of membership interests in Pzena Investment Management, LLC will be treated as a reorganization of entities under common control pursuant to the guidance set forth in Financial Accounting Standards Board Technical Bulletin No. 85-5, Issues Relating to Accounting for Business Combinations (“FTB 85-5”). Accordingly, the pro forma adjusted net liabilities assumed by us through this offering will be reported at Pzena Investment Management, LLC’s historical cost basis.

 

You should read this table together with the other information contained in this prospectus, including “The Reorganization and Our Holding Company Structure,” “Unaudited Pro Forma Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and related notes included elsewhere in this prospectus.

 

 

DILUTION

 

If you invest in our Class A common stock, you will experience dilution to the extent of the difference between the public offering price per share you pay in this offering and the pro forma, as adjusted net tangible book value (deficit) per share of our Class A common stock immediately after this offering. Dilution results from the fact that the per share offering price of the Class A common stock is substantially in excess of the book value per share attributable to the existing equity holders.

 

Our pro forma, as adjusted net tangible book value (deficit) per share as of June 30, 2007 was approximately $(2.8) million, or approximately $(0.04) per share of our Class A common stock. Pro forma, as adjusted net tangible book value represents the amount of total tangible assets less total liabilities, after giving effect to the reorganization, our incurrence of $60.0 million of indebtedness and the payment of a special distribution of $60.0 million to the current members of Pzena Investment Management, LLC on July 23, 2007, and pro forma net tangible book value per share represents pro forma net tangible book value divided by the number of shares of Class A common stock outstanding after giving effect to the reorganization and assuming that all holders of Class B units of Pzena Investment Management, LLC immediately after the consummation of the reorganization have exchanged all their Class B units for the corresponding number of shares of our Class A common stock.

 

After giving effect to the sale of 6,100,000 shares of Class A common stock that we are offering at an assumed initial public offering price of $17.00 per share (the midpoint of the price range set forth on the cover of this prospectus), the deduction of assumed underwriting discounts and commissions and estimated offering expenses payable by us and the assumed exchange of all Class B units that will be outstanding immediately after the reorganization for the corresponding number of shares of our Class A common stock, our pro forma, as adjusted net tangible book value would have been approximately $7.5 million, or approximately $0.12 per share. This represents an immediate increase in pro forma net tangible book value of approximately $0.16 per share to existing equity holders and an immediate dilution of approximately $16.88 per share to new investors. The following table illustrates this calculation on a per share basis:

 

 

The following table summarizes, on the same pro forma basis as of June 30, 2007, the total number of shares of Class A common stock purchased from us and the total consideration and average price per share paid by existing equity holders, which consist of the principals, and by new investors purchasing Class A common stock in this offering, assuming that all holders of Class B units of Pzena Investment Management, LLC immediately after the consummation of the reorganization have exchanged all their Class B units for the corresponding number of shares of our Class A common stock:

 

 

 

 

Under our 2007 Equity Incentive Plan, we will grant an aggregate of 11,768 shares of our Class A common stock, all of which will vest two years after their date of grant, to our four non-employee directors shortly before the consummation of this offering. When these shares fully vest, it will decrease our pro forma net tangible book value per share after this offering, and increase the dilution to new investors in this offering by a de minimus amount.

 

If the underwriters exercise their option to purchase additional shares of Class A common stock in full, the following will occur:

 

 

If the underwriters exercise their option to purchase additional shares of Class A common stock in full, pro forma, as adjusted net tangible book value would be approximately $0.12 per share, representing an increase to existing equity holders of approximately $0.16 per share, and there would be an immediate dilution of approximately $16.88 per share to new investors.

 

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

 

The following unaudited pro forma consolidated financial statements present the consolidated results of operations and financial condition of Pzena Investment Management, Inc. assuming that all of the transactions described in the five bullet points below had been completed as of January 1, 2006 with respect to the unaudited pro forma consolidated statement of operations data for the year ended December 31, 2006, and with respect to the unaudited pro forma consolidated statement of operations data for the six-month period ended June 30, 2007, and as of June 30, 2007 with respect to the unaudited pro forma consolidated statement of financial condition data as of June 30, 2007. The pro forma adjustments are based on available information and upon assumptions that our management believes are reasonable in order to reflect, on a pro forma basis, the impact of these transactions and this offering on the historical financial information of Pzena Investment Management, LLC, which is the accounting predecessor. The adjustments are described in the notes to the unaudited pro forma consolidated financial statements.

 

The pro forma adjustments principally give effect to the following transactions:

 

 

All unit and per unit amounts in the following unaudited pro forma consolidated financial information have been adjusted to account for the 5-for-1 unit split effected by our operating company on July 17, 2007. Pro forma basic and diluted net income per share was computed by dividing the pro forma net income attributable to our Class A common stockholders by the 6,100,000 shares of Class A common stock that we will issue and sell in this offering (assuming that the underwriters do not exercise their option to purchase an additional 915,000 shares of Class A common stock to cover over-allotments), plus an aggregate of 11,768 shares of restricted Class A common stock that we will grant to our four non-employee directors shortly before the consummation of this offering, assuming that these 6,111,774 shares of Class A common stock were outstanding for the entirety of each of the historical periods presented on a pro forma basis. No pro forma effect was given to the future potential exchanges of the 57,937,910 Class B units of our operating company that will be outstanding immediately after the consummation of this offering and the reorganization transactions for the corresponding number of shares of our Class A common stock because the issuance of shares of Class A common stock upon these exchanges would not be dilutive.

 

The unaudited pro forma consolidated financial information is included for informational purposes only and does not purport to reflect our results of operations or financial condition that would have occurred had we operated as a public company during the periods presented. We have not made any pro forma adjustment relating to reporting and compliance costs and investor relations costs that we will incur as a public company. The unaudited pro forma consolidated financial information should not be relied upon as being indicative of our results of operations or financial condition had the transactions contemplated in connection with the reorganization and this offering been completed on the dates assumed. The unaudited pro forma consolidated financial information also does not project the results of operations or financial condition for any future period or date.