Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2017
Or
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ______to______
 
Commission file number 001-33761
PZENA INVESTMENT MANAGEMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
 
20-8999751
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification No.)
320 Park Avenue
New York, New York 10022
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (212) 355-1600

Not Applicable
(Former Address of Principal Executive Offices) (Zip Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
 
 
(Do not check if a smaller reporting company)
Smaller reporting company o
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes o No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 4, 2017, there were 17,285,307 outstanding shares of the registrant’s Class A common stock, par value $0.01 per share.
As of August 4, 2017, there were 51,195,179 outstanding shares of the registrant’s Class B common stock, par value $0.000001 per share.
 

Table of Contents

PZENA INVESTMENT MANAGEMENT, INC.
FORM 10-Q
TABLE OF CONTENTS

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

i
Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

Forward-looking statements are subject to known and unknown risks and uncertainties and are based on our views, plans, estimates, and expectations. Potentially inaccurate assumptions could cause actual results to differ materially from those expected or implied by the forward-looking statements.  Our actual results could differ materially from those anticipated in forward-looking statements for many reasons, including the factors described in Item 1A, “Risk Factors” in Part I of our Annual Report on Form 10-K for our fiscal year ended December 31, 2016 .  Accordingly, you should not unduly rely on these forward-looking statements, which speak only as of the date they are made.  We undertake no obligation to publicly revise any forward-looking statements included in this Quarterly Report to reflect circumstances or events after the date of this Quarterly Report, or to reflect the occurrence of unanticipated events.  You should, however, review the factors and risks we describe in the reports we will file from time to time with the Securities and Exchange Commission ("SEC"), after the date of this Quarterly Report on Form 10-Q.

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

•
our ability to respond to global economic, market, business and geopolitical conditions;
•
our anticipated future results of operations and operating cash flows;
•
our successful formulation and execution of business strategies and investment policies;
•
our financing plans and the availability of short- or long-term borrowing, or equity financing;
•
our competitive position and the effects of competition on our business;
•
our ability to identify and capture potential growth opportunities available to us;
•
the effective recruitment and retention of our key executives and employees;
•
our expected levels of compensation for our employees;
•
our potential operating performance, achievements, efficiency, and cost reduction efforts;
•
our expected tax rate;
•
changes in interest rates;
•
our expectations with respect to the economy, capital markets, the market for asset management services, and other industry trends; and
•
the impact of future legislation and regulation, and changes in existing legislation and regulation, on our business.
The reports that we file with the SEC, accessible on the SEC’s website at www.sec.gov, identify additional factors that can affect forward-looking statements.

 

ii
Table of Contents

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements


PZENA INVESTMENT MANAGEMENT, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share and per-share amounts)
 
As of
 
June 30, 2017
 
December 31, 2016
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and Cash Equivalents ($3,403 and $3,258) 1
$
34,749

 
$
43,522

Restricted Cash
4,298

 
3,636

Due from Broker ($820 and $0) 1
820

 
842

Advisory Fees Receivable
29,724

 
26,326

Investments in Marketable Securities, at Fair Value ($4,736 and $3,174) 1
18,853

 
14,323

Equity Method Investments
8,106

 
7,987

Receivable from Related Parties
1,485

 
1,008

Other Receivables ($21 and $9) 1
145

 
302

Prepaid Expenses and Other Assets
844

 
769

Deferred Tax Asset
72,160

 
73,441

Property and Equipment, Net of Accumulated Depreciation of $2,540 and $2,260, respectively
6,503

 
6,965

TOTAL ASSETS
$
177,687

 
$
179,121

LIABILITIES AND EQUITY
 

 
 

Liabilities:
 

 
 

Accounts Payable and Accrued Expenses ($9 and $18) 1
$
18,777

 
$
24,648

Due to Broker ($570 and $3) 1
608

 
17

Securities Sold Short, at Fair Value
3,291

 
2,622

Liability to Selling and Converting Shareholders
65,485

 
65,485

Deferred Compensation Liability
2,163

 
4,157

Other Liabilities
956

 
858

TOTAL LIABILITIES
91,280

 
97,787

Commitments and Contingencies (see Note 11)


 


Equity:
 

 
 

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

 
—

Class A Common Stock (Par Value $0.01; 750,000,000 Shares Authorized; 17,285,307 and 17,340,090 Shares Issued and Outstanding in 2017 and 2016, respectively)
172

 
173

Class B Common Stock (Par Value $0.000001; 750,000,000 Shares Authorized; 51,109,592 and 50,461,598 Shares Issued and Outstanding in 2017 and 2016, respectively)
—

 
—

Additional Paid-In Capital
6,795

 
5,996

Retained Earnings
23,308

 
22,349

Accumulated Other Comprehensive Loss
(11
)
 
(25
)
Total Pzena Investment Management, Inc.'s Equity
30,264

 
28,493

Non-Controlling Interests
56,143

 
52,841

TOTAL EQUITY
86,407

 
81,334

TOTAL LIABILITIES AND EQUITY
$
177,687

 
$
179,121


1
Asset and liability amounts in parentheses represent the aggregated balances at  June 30, 2017  and  December 31, 2016  attributable to Pzena International Value Service (a series of Pzena Investment Management, LLC) and Pzena Investment Management Special Situations, LLC, which were variable interest entities as of  June 30, 2017  and  December 31, 2016 , respectively.









See accompanying notes to unaudited consolidated financial statements.

1
Table of Contents

PZENA INVESTMENT MANAGEMENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per-share amounts)

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
REVENUE
$
34,113

 
$
26,435

 
$
66,157

 
$
52,273

EXPENSES
 
 
 
 
 
 
 
Compensation and Benefits Expense
14,296

 
11,699

 
29,918

 
24,197

General and Administrative Expense
3,198

 
3,475

 
6,523

 
6,519

Total Operating Expenses
17,494

 
15,174

 
36,441

 
30,716

Operating Income
16,619

 
11,261

 
29,716

 
21,557

OTHER INCOME/ (EXPENSE)
 
 
 
 
 

 
 

Interest Income
14

 
48

 
30

 
57

Dividend Income
109

 
87

 
201

 
174

Net Realized and Unrealized Gains/ (Losses) from Investments
297

 
(420
)
 
1,093

 
(387
)
Equity in Earnings/ (Losses) of Affiliates
220

 
(86
)
 
655

 
(15
)
Change in Liability to Selling and Converting Shareholders
—

 
700

 
—

 
(178
)
Other Income/ (Expense)
103

 
14

 
119

 
(26
)
Total Other Income/ (Expense)
743

 
343

 
2,098

 
(375
)
Income Before Income Taxes
17,362

 
11,604

 
31,814

 
21,182

Income Tax Expense
2,241

 
2,247

 
3,967

 
2,467

Net Income
15,121

 
9,357

 
27,847

 
18,715

Less: Net Income Attributable to Non-Controlling Interests
12,492

 
7,951

 
22,882

 
15,687

Net Income Attributable to Pzena Investment Management, Inc.
$
2,629

 
$
1,406

 
$
4,965

 
$
3,028

 
 
 
 
 
 
 
 
Net Income for Basic Earnings per Share
$
2,629

 
$
1,406

 
$
4,965

 
$
3,028

Basic Earnings per Share
$
0.15

 
$
0.09

 
$
0.29

 
$
0.20

Basic Weighted Average Shares Outstanding 1
17,314,218

 
15,832,806

 
17,337,556

 
15,512,659

 
 
 
 
 
 
 
 
Net Income for Diluted Earnings per Share
$
10,458

 
$
6,465

 
$
19,190

 
$
12,974

Diluted Earnings per Share
$
0.15

 
$
0.09

 
$
0.27

 
$
0.19

Diluted Weighted Average Shares Outstanding 1
70,661,596

 
68,903,766

 
70,777,295

 
68,597,999

 
 
 
 
 
 
 
 
Cash Dividends per Share of Class A Common Stock
$
0.03

 
$
0.03

 
$
0.31

 
$
0.35

1  
The Company issues restricted shares of Class A common stock and restricted Class B units that have non-forfeitable dividend rights. Under the "two-class method," these shares and units are considered participating securities and are required to be included in the computation of basic and diluted earnings per share.  

See accompanying notes to unaudited consolidated financial statements.


2
Table of Contents

PZENA INVESTMENT MANAGEMENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)



 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
NET INCOME
$
15,121

 
$
9,357

 
$
27,847

 
$
18,715

OTHER COMPREHENSIVE GAIN/ (LOSS)
 
 
 
 
 
 
 
Foreign Currency Translation Adjustment
44

 
(36
)
 
56

 
(41
)
Total Other Comprehensive Gain/ (Loss)
44

 
(36
)
 
56

 
(41
)
Comprehensive Income
15,165

 
9,321

 
27,903

 
18,674

Less: Comprehensive Income Attributable to Non-Controlling Interests
12,525

 
7,924

 
22,924

 
15,656

Total Comprehensive Income Attributable to Pzena Investment Management, Inc.
$
2,640

 
$
1,397

 
$
4,979

 
$
3,018

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 































See accompanying notes to unaudited consolidated financial statements.

3
Table of Contents

PZENA INVESTMENT MANAGEMENT, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(in thousands, except share and per-share amounts)   
 
Shares of
Class A
Common Stock
 
Shares of
Class B
Common Stock
 
Class A
Common Stock
 
Additional
Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained
Earnings
 
   Non-Controlling
Interests
 
Total Equity
Balance at December 31, 2016
17,340,090

 
50,461,598

 
$
173

 
$
5,996

 
$
(25
)
 
$
22,349

 
$
52,841

 
$
81,334

Adjustment for the Cumulative Effect of Applying ASU 2016-09
—

 
—

 
—

 
—

 
—

 
1,377

 
—

 
1,377

Adjusted Balance at January 1, 2017
17,340,090

 
50,461,598

 
173

 
5,996

 
(25
)
 
23,726

 
52,841

 
82,711

Amortization of Non-Cash Compensation
24,934

 
16,671

 
—

 
588

 
—

 
—

 
1,710

 
2,298

Issuance of Shares under Equity Incentive Plan
—

 
620,543

 
—

 
1,118

 
—

 
—

 
3,295

 
4,413

Sale of Shares under Equity Incentive Plan
—

 
13,677

 
—

 
20

 
—

 
—

 
60

 
80

Directors' Share Grants
—

 
—

 
—

 
71

 
—

 
—

 
211

 
282

Net Income
—

 
—

 
—

 
—

 
—

 
4,965

 
22,882

 
27,847

Foreign Currency Translation Adjustments
—

 
—

 
—

 
—

 
14

 
—

 
42

 
56

Repurchase and Retirement of Class A Common Stock
(79,717
)
 
—

 
(1
)
 
(707
)
 
—

 
—

 
—

 
(708
)
Repurchase and Retirement of Class B Units
—

 
(2,897
)
 
—

 
(10
)
 
—

 
—

 
(29
)
 
(39
)
Class A Cash Dividends Declared and Paid ($0.31 per share)
—

 
—

 
—

 
—

 
—

 
(5,383
)
 
—

 
(5,383
)
Contributions from Non-Controlling Interests
—

 
—

 
—

 
—

 
—

 
—

 
3,639

 
3,639

Distributions to Non-Controlling Interests
—

 
—

 
—

 
—

 
—

 
—

 
(28,789
)
 
(28,789
)
Other
—

 
—

 
—

 
(281
)
 
—

 
—

 
281

 
—

Balance at June 30, 2017
17,285,307

 
51,109,592

 
$
172

 
$
6,795

 
$
(11
)
 
$
23,308

 
$
56,143

 
$
86,407

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares of
Class A
Common Stock
 
Shares of
Class B
Common Stock
 
Class A
Common Stock
 
Additional
Paid-In Capital
 
Accumulated Other Comprehensive Loss
 
Retained
Earnings
 
   Non-Controlling
Interests
 
Total Equity
Balance at December 31, 2015
15,218,355

 
52,089,472

 
$
152

 
$
5,819

 
$
(2
)
 
$
12,453

 
$
67,040

 
$
85,462

Adjustment for the Cumulative Effect of Applying ASU 2015-02
—

 
—

 
—

 
—

 
—

 
—

 
(10,835
)
 
(10,835
)
Adjusted Balance at January 1, 2016
15,218,355

 
52,089,472

 
152

 
5,819

 
(2
)
 
12,453

 
56,205

 
74,627

Unit Conversion
1,369,811

 
(1,369,811
)
 
14

 
1,243

 
—

 
—

 
(1,071
)
 
186

Amortization of Non-Cash Compensation
24,934

 
22,723

 
—

 
355

 
—

 
—

 
1,047

 
1,402

Sale of Shares under Equity Incentive Plan
—

 
69,978

 
—

 
78

 
—

 
—

 
244

 
322

Directors' Shares
—

 
—

 
—

 
63

 
—

 
—

 
214

 
277

Net Income
—

 
—

 
—

 
—

 
—

 
3,028

 
15,687

 
18,715

Foreign Currency Translation Adjustments
—

 
—

 
—

 
—

 
(10
)
 
—

 
(31
)
 
(41
)
Option Exercise
—

 
13,576

 
—

 
—

 
—

 
—

 
—

 
—

Repurchase and Retirement of Class A Common Stock
(190,780
)
 
—

 
(2
)
 
(1,504
)
 
—

 
—

 
—

 
(1,506
)
Repurchase and Retirement of Class B Units
—

 
(8,574
)
 
—

 
(16
)
 
—

 
—

 
(50
)
 
(66
)
Class A Cash Dividends Declared and Paid ($0.35 per share)
—

 
—

 
—

 
—

 
—

 
(5,303
)
 
—

 
(5,303
)
Contributions from Non-Controlling Interests
—

 
—

 
—

 
—

 
—

 
—

 
469

 
469

Distributions to Non-Controlling Interests
—

 
—

 
—

 
—

 
—

 
—

 
(31,702
)
 
(31,702
)
Other
—

 
—

 
—

 
(239
)
 
—

 
—

 
239

 
—

Balance at June 30, 2016
16,422,320

 
50,817,364

 
$
164

 
$
5,799

 
$
(12
)
 
$
10,178

 
$
41,251

 
$
57,380

See accompanying notes to unaudited consolidated financial statements.

4
Table of Contents


PZENA INVESTMENT MANAGEMENT, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
 
 
 
 
Net Income
$
15,121

 
$
9,357

 
$
27,847

 
$
18,715

Adjustments to Reconcile Net Income to Cash
 
 
 
 
 
 
 
Provided by Operating Activities:
 
 
 
 
 
 
 
Depreciation
249

 
272

 
501

 
539

Loss on Disposal of Fixed Assets
—

 
—

 
6

 
—

Non-Cash Compensation
2,260

 
1,581

 
4,931

 
3,182

Directors' Share Grants
101

 
99

 
282

 
277

Net Realized and Unrealized Gains/ (Losses) from Investments
(297
)
 
420

 
(1,093
)
 
387

Equity in Earnings/ (Losses) of Affiliates
(220
)
 
86

 
(655
)
 
15

Foreign Currency Translation Adjustments
44

 
(36
)
 
56

 
(41
)
Change in Liability to Selling and Converting Shareholders
—

 
(700
)
 
—

 
178

Deferred Income Taxes
1,563

 
1,720

 
2,656

 
1,497

Changes in Operating Assets and Liabilities:


 


 


 


Advisory Fees Receivable
(619
)
 
(212
)
 
(3,398
)
 
731

Due from Broker
(383
)
 
(424
)
 
57

 
(335
)
Restricted Cash
(467
)
 
(48
)
 
(662
)
 
86

Prepaid Expenses and Other Assets
264

 
64

 
82

 
(222
)
Due to Broker
(27
)
 
201

 
591

 
345

Accounts Payable, Accrued Expenses, and Other Liabilities
6,823

 
5,116

 
(5,986
)
 
4,367

Purchases of Equity Securities and Securities Sold Short
(11,499
)
 
(8,388
)
 
(25,191
)
 
(13,361
)
Proceeds from Equity Securities and Securities Sold Short
10,786

 
6,262

 
23,081

 
11,171

Net Cash Provided by Operating Activities
23,699

 
15,370

 
23,105

 
27,531

INVESTING ACTIVITIES
 
 
 
 
 
 
 
Purchases of Investments
(249
)
 
(131
)
 
(485
)
 
(1,872
)
Proceeds from Sale of Investments
242

 
1,404

 
329

 
2,163

Payments to Related Parties
(43
)
 
(158
)
 
(477
)
 
(293
)
Purchases of Property and Equipment
(23
)
 
(18
)
 
(45
)
 
(95
)
Net Cash (Used in)/ Provided by Investing Activities
(73
)
 
1,097

 
(678
)
 
(97
)
FINANCING ACTIVITIES
 
 
 
 
 
 
 
Repurchase and Retirement of Class A Common Stock
(631
)
 
(753
)
 
(708
)
 
(1,506
)
Repurchase and Retirement of Class B Units
—

 
(47
)
 
(39
)
 
(66
)
Sale of Shares under Equity Incentive Plan
55

 
274

 
80

 
322

Distributions to Non-Controlling Interests
(9,039
)
 
(11,319
)
 
(28,789
)
 
(31,702
)
Contributions from Non-Controlling Interests
1,212

 
198

 
3,639

 
469

Dividends
(521
)
 
(452
)
 
(5,383
)
 
(5,303
)
Net Cash Used in Financing Activities
(8,924
)
 
(12,099
)
 
(31,200
)
 
(37,786
)
NET CHANGE IN CASH
$
14,702

 
$
4,368

 
$
(8,773
)
 
$
(10,352
)
CASH AND CASH EQUIVALENTS - Beginning of Period
$
20,047

 
$
20,470

 
$
43,522

 
$
35,417

Adjustment for the Cumulative Effect of Applying ASU 2015-02
—

 
—

 
—

 
(227
)
Net Change in Cash
14,702

 
4,368

 
(8,773
)
 
(10,352
)
CASH AND CASH EQUIVALENTS - End of Period
$
34,749

 
$
24,838

 
$
34,749

 
$
24,838

Supplementary Cash Flow Information:
 
 
 
 
 
 
 
Issuances of Shares under Equity Incentive Plan
$
—

 
$
—

 
$
4,413

 
$
—

Income Taxes Paid
$
130

 
$
124

 
$
544

 
$
370


See accompanying notes to unaudited consolidated financial statements.

5
Table of Contents
Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements


Note 1—Organization
 
Pzena Investment Management, Inc. (the “Company”) is the sole managing member of its operating company, Pzena Investment Management, LLC (the “operating company”).  As a result, the Company: (i) consolidates the financial results of the operating company and reflects the membership interests in the operating company that it does not own as a non-controlling interest in its consolidated financial statements; and (ii) recognizes income generated from its economic interest in the operating company’s net income.
 
The operating company is an investment adviser registered under the Investment Advisers Act of 1940 and is headquartered in New York, New York. As of June 30, 2017 , the operating company managed assets in a variety of value-oriented investment strategies across a wide range of market capitalizations in both U.S. and non-U.S. capital markets.

The Company also serves as the general partner of Pzena Investment Management, LP, a partnership formed with the objective of aggregating employee ownership in the operating company into one entity.
 
The Company, through its interest in the operating company, has consolidated the results of operations and financial condition of the following entities as of June 30, 2017 : 
 
 
 
 Ownership at
Legal Entity
Type of Entity (Date of Formation)
 
June 30, 2017
Pzena Investment Management, Pty
Australian Proprietary Limited Company (12/16/2009)
 
100.0%
Pzena Financial Services, LLC
Delaware Limited Liability Company (10/15/2013)
 
100.0%
Pzena Investment Management, LTD
England and Wales Private Limited Company (01/08/2015)
 
100.0%
Pzena Investment Management Special Situations, LLC
Delaware Limited Liability Company (12/01/2010)
 
99.9%
Pzena International Value Service, a series of Pzena Investment Management International, LLC
Delaware Limited Liability Company (12/22/2003)
 
68.7%
Pzena Long/Short Value Fund, a series of Advisors Series Trust
Open-end Management Investment Company, series of Delaware Statutory Trust (3/31/2014)
 
65.1%
Pzena Mid Cap Value Fund, a series of Advisors Series Trust
Open-end Management Investment Company, series of Delaware Statutory Trust (3/31/2014)
 
55.3%
 
Note 2—Significant Accounting Policies
 
Basis of Presentation:
 
Principles of Consolidation:

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and related Securities and Exchange Commission (“SEC”) rules and regulations.  The Company’s policy is to consolidate those entities in which it has a direct or indirect controlling financial interest based on either the voting interest model or the variable interest model. As such, the Company consolidates majority-owned subsidiaries in which it has a controlling financial interest, and certain investment vehicles the operating company sponsors for which it is the investment adviser that are considered to be variable-interest entities (“VIEs”), and for which the Company is deemed to be the primary beneficiary.

Pursuant to the Consolidation Topic of the FASB Accounting Standards Codification (“FASB ASC”), for legal entities evaluated for consolidation, the Company determines whether interests it holds and fees paid to the entity qualify as a variable interest. If it is determined that the Company does not have a variable interest in the entity, no further analysis is required and the Company does not consolidate the entity. If it is determined that the Company has a variable interest, it considers its direct economic interests and the proportionate indirect interests through related parties to determine if it is the primary beneficiary of the VIE.


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Table of Contents
Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


For equity investments where the Company does not control the investee, and where it is not the primary beneficiary of a VIE, but can exert significant influence over the financial and operating policies of the investee, the Company follows the equity method of accounting. The evaluation of whether the Company exerts control or significant influence over the financial and operating policies of the investee requires significant judgment based on the facts and circumstances surrounding each investment. Factors considered in these evaluations may include the type of investment, the legal structure of the investee, the terms of the investment agreement, or other agreements with the investee.

The Company analyzes entities structured as series funds which comply with the requirements included in the Investment Company Act of 1940 for registered mutual funds as voting interest entities because the shareholders are deemed to have the ability to direct the activities of the fund that most significantly impact the fund's economic performance.

Consolidated Entities

The Company consolidates the financial results of the operating company and records in its own equity its pro-rata share of transactions that impact the operating company’s net equity, including unit and option issuances, repurchases, and retirements.  The operating company’s pro-rata share of such transactions are recorded as an adjustment to additional paid-in capital or non-controlling interests, as applicable, on the consolidated statements of financial condition.

The majority-owned subsidiaries in which the Company, through its interest in the operating company, has a controlling financial interest and the VIEs for which the Company is deemed to be the primary beneficiary are collectively referred to as “consolidated subsidiaries.”  Non-controlling interests recorded on the consolidated financial statements of the Company include the non-controlling interests of the outside investors in each of these entities, as well as those of the operating company.  All significant inter-company transactions and balances have been eliminated through consolidation.

During 2014, the Company provided the initial cash investment for three Pzena mutual funds in an effort to generate an investment performance track record to attract third-party investors. During 2016, the Company provided the initial cash investment for the launch of a fourth Pzena mutual fund: the Pzena Small Cap Value Fund. Due to their series fund structure, registration, and compliance with the requirements of the Investment Company Act of 1940, these funds are analyzed for consolidation under the voting interest model. As a result of the Company's initial interests, it consolidated the Pzena Mid Cap Value Fund, Pzena Long/Short Value Fund, Pzena Emerging Markets Value Fund, and Pzena Small Cap Value Fund. On July 11, 2016, due to additional subscriptions into the Pzena Small Cap Value Fund, the Company's ownership decreased to 36.1% . As the entity was no longer deemed to control the fund, the Company deconsolidated the entity, removed the related assets, liabilities and non-controlling interest from its balance sheet and classified the Company's remaining investment as an equity method investment. Upon adoption of ASU No. 2015-02 as of January 1, 2016, the Company was deemed to not have a controlling interest in the Pzena Emerging Markets Value Fund. The Pzena Mid Cap Value Fund and Pzena Long/Short Value Fund will continue to be consolidated to the extent the Company has a majority ownership interest in them. At June 30, 2017 , the aggregate of these funds' $11.9 million in net assets was included in the Company's consolidated statements of financial condition.

The operating company is the managing member of Pzena International Value Service, a series of Pzena Investment Management International, LLC.  The operating company is considered the primary beneficiary of this entity. At June 30, 2017 , Pzena International Value Service’s $4.9 million in net assets was included in the Company’s consolidated statements of financial condition.

These consolidated mutual funds and investment partnerships are investment companies and apply specialized industry accounting for investment companies. The Company has retained this specialized accounting for these mutual funds and investment partnerships pursuant to U.S. GAAP.

Non-Consolidated Variable Interest Entities

VIEs that are not consolidated receive investment management services from the operating company and are generally private investment partnerships sponsored by the operating company.  The total net assets of these VIEs was approximately $47.4 million and $44.3 million at June 30, 2017 and December 31, 2016 , respectively.  

As of June 30, 2017 and December 31, 2016 , in order to satisfy certain of the Company's obligations under its deferred compensation programs, the operating company had $3.0 million and $3.2 million in investments, respectively, in certain of these firm-sponsored vehicles, for which the Company was not deemed to be the primary beneficiary. The Company's exposure to risk in the non-consolidated VIEs is generally limited to any equity investment and any uncollected management fees. As of

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Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


June 30, 2017 and December 31, 2016 , the Company's maximum exposure to loss as a result of its involvement with the non-consolidated VIEs was $3.1 million and $3.3 million , respectively.

Accounting Pronouncements Adopted in 2017:

In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." The Company adopted ASU No. 2016-09 as of January 1, 2017. This standard requires excess tax benefits and tax deficiencies to be recorded in the consolidated statements of operations as a component of Income Tax Expense/ (Benefit) when equity awards vest or are settled. The Company is no longer required to delay recognition of an excess tax benefit until it reduces current taxes payable. The standard also requires excess tax benefits to be classified as operating activities along with other income tax cash flows within the consolidated statements of cash flows. In addition, ASU No. 2016-09 allows entities to make an accounting policy election to either estimate the number of forfeitures expected to occur, as was previously required, or to account for actual forfeitures as they occur. The Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures.

The adoption of ASU No. 2016-09 resulted in a net cumulative effect adjustment reflecting a $1.4 million increase to retained earnings and the deferred tax asset as of January 1, 2017, related to the recognition of the previously unrecognized excess tax benefits using the modified retrospective method. Estimates of forfeitures in prior periods were immaterial, and therefore are not included in the cumulative effect adjustment. The amendments related to the classification of the excess tax benefits in the consolidated statements of cash flows were adopted on a prospective basis, which did not require the restatement of prior periods.

Management’s Use of Estimates:
 
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses for the period.  Actual results could materially differ from those estimates.
 
Revenue Recognition:
 
Revenue, comprised of advisory fee income, is recognized over the period in which advisory services are provided.  Advisory fee income includes management fees that are calculated based on percentages of assets under management (“AUM”), generally billed quarterly, either in arrears or advance, depending on the applicable contractual terms.  Advisory fee income also includes performance fees that may be earned by the Company depending on the investment return of the AUM, as well as fulcrum fee arrangements.  Performance fee arrangements generally entitle the Company to participate, on a fixed-percentage basis, in any returns generated in excess of an agreed-upon benchmark.  The Company’s participation percentage in such return differentials is then multiplied by AUM to determine the performance fees earned. In general, returns are calculated on an annualized basis over the contract’s measurement period, which usually extends to three years .  Performance fees are generally payable annually.  Fulcrum fee arrangements require a reduction in the base fee, or allow for a performance fee if the relevant investment strategy underperforms or outperforms, respectively, the agreed-upon benchmark over the contract's measurement period, which extends to three years.  Fulcrum fees are generally payable quarterly. Following the preferred method identified in the Revenue Recognition Topic of the FASB ASC, performance fee income is recorded at the conclusion of the contractual performance period, when all contingencies are resolved.  For the three and six months ended June 30, 2017 , the Company recognized $0.4 million and $0.7 million in performance fee income. The Company did no t recognize performance fee income during three months ended June 30, 2016 . For the six months ended June 30, 2016 the Company recognized approximately $0.1 million in performance fee income. For the three months ended June 30, 2017 , the Company did no t recognize a reduction in base fees related to fulcrum fee arrangements. For the six months ended June 30, 2017 , the Company recognize a $0.1 million reduction in base fees related to fulcrum fee arrangements. For the three and six months ended June 30, 2016 , the Company did no t recognize a reduction in base fees related to fulcrum fee arrangements.

Cash and Cash Equivalents:
 
At June 30, 2017 and December 31, 2016 , Cash and Cash Equivalents was $34.7 million and $43.5 million , respectively.  The Company considers all highly-liquid debt instruments with an original maturity of three months or less at the time of purchase to be cash equivalents.  The Company maintains its cash in bank deposits and other accounts whose balances often exceed federally insured limits.
 

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Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Interest on cash and cash equivalents is recorded as interest income on an accrual basis in the consolidated statements of operations.
 
Restricted Cash:
 
At June 30, 2017 and December 31, 2016 , the Company had $4.3 million and $3.6 million , respectively, of compensating balances recorded in Restricted Cash in the consolidated statements of financial condition.

Included in these balances at June 30, 2017 and December 31, 2016 , is a $1.0 million letter of credit issued by a third party in lieu of a cash security deposit, as required by the Company’s lease for its corporate headquarters.  

Also included in these balances at June 30, 2017 and December 31, 2016 , were amounts of cash collateral for margin accounts established by the Pzena Long/Short Value Fund required to maintain to support securities sold short, not yet purchased of $3.3 million and $2.6 million , respectively.

Due to/from Broker:
 
Due to/from Broker consists primarily of amounts payable/receivable for unsettled securities transactions held/initiated at the clearing brokers of the Company’s consolidated subsidiaries.
 
Non-Cash Compensation:

All non-cash compensation awards granted have varying vesting schedules and are issued at prices equal to the assessed fair market value at the time of issuance. Expenses associated with these awards are recognized over the period during which employees are required to provide service. The Company accounts for forfeitures as they occur.

Investments:
 
Investment Securities, trading

Investments classified as trading securities consist of equity securities held by the Company and its consolidated subsidiaries. Dividends associated with the Company's investments and the investments of the Company's consolidated subsidiaries are recognized as dividend income on an ex-dividend basis in the consolidated statements of operations.

Securities Sold Short represents securities sold short, not yet purchased by the Pzena Long/Short Value Fund, which is consolidated with the Company's financial statements. Dividend expense associated with these investments is recognized in Other Income/ (Expense) on an ex-dividend basis in the consolidated statements of operations.
 
All such investments are recorded at fair value, with net realized and unrealized gains and losses reported in earnings. Net realized and unrealized gains and losses are recognized as a component of Net Realized and Unrealized Gains/ (Losses) from Investments in the consolidated statements of operations.

Investments in equity method investees

During the three and six months ended June 30, 2017 , the Company accounted for its investments in certain private investment partnerships, the Pzena Emerging Markets Value Fund and the Pzena Small Cap Value Fund, in which the Company has non-controlling interests and exercises significant influence, using the equity method. These investments are included in Investments in the Company's consolidated statements of financial condition. The carrying value of these investments are recorded at the amount of capital reported by the private investment partnership or mutual fund. The capital account for each entity reflects any contributions paid to, distributions received from, and equity earnings of, the relevant entity. The earnings of these investments are recognized as equity in the earnings of affiliates and reflected as a component of Equity in Earnings/ (Losses) of Affiliates in the consolidated statements of operations.

Investments in equity method investees are evaluated for impairment as events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the carrying amounts of the assets exceed their respective fair values, additional impairment tests are performed to measure the amounts of impairment losses, if any. During the three and six months ended June 30, 2017 and 2016 , no impairment losses were recognized.


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Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Securities Valuation:
 
Investments in equity securities and securities sold short for which market quotations are available are valued at the last reported price or closing price on the primary market or exchange on which they trade.  If no reported equity sales occurred on the valuation date, equity investments are valued at the bid price. Transactions are recorded on a trade date basis.

The net realized gain or loss on sales of equity securities and securities sold short is determined on a specific identification basis and is included in Net Realized and Unrealized Gains/ (Losses) from Investments in the consolidated statements of operations.
 
Concentrations of Credit Risk:
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, amounts due from brokers, and advisory fees receivable.  The Company maintains its cash and cash equivalents in bank deposits and other accounts whose balances often exceed federally insured limits.

The concentration of credit risk with respect to advisory fees receivable is generally limited due to the short payment terms extended to clients by the Company.  On a periodic basis, the Company evaluates its advisory fees receivable and establishes an allowance for doubtful accounts, if necessary, based on a history of past write-offs, collections, and current credit conditions.  For both the three and six months ended June 30, 2017 , approximately 11.1% of the Company's advisory fees were generated from advisory agreements with one client relationship. For the three and six months ended June 30, 2016 , approximately 11.0% and 10.9% of the Company's advisory fees, respectively, were generated from advisory agreements with one client relationship. At June 30, 2017 and December 31, 2016 , there was no allowance for doubtful accounts.
 
Property and Equipment:
 
Property and equipment is carried at cost, less accumulated depreciation and amortization.  Depreciation is provided on a straight-line basis over the estimated useful lives of the respective assets, except for leasehold improvements, which range from three to seven years .  Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the improvements or the remaining lease term.
 
Business Segments:
 
The Company views its operations as comprising one operating segment.
 
Income Taxes:
 
The Company is a “C” corporation under the Internal Revenue Code, and thus liable for federal, state, and local taxes on the income derived from its economic interest in its operating company.  The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes.  It has not made a provision for federal or state income taxes because it is the individual responsibility of each of the operating company’s members (including the Company) to separately report their proportionate share of the operating company’s taxable income or loss.  The operating company has made a provision for New York City Unincorporated Business Tax (“UBT”) and its consolidated subsidiary Pzena Investment Management, LTD has made a provision for U.K. income taxes. The effective tax rate for interim periods represents the Company’s best estimate of the effective tax rate expected to be applied to the full fiscal year, adjusted for discrete items recognized during the quarter.

Judgment is required in evaluating the Company's uncertain tax positions and determining its provision for income taxes. The Company establishes liabilities for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These liabilities are established when the Company believes that certain positions might be challenged despite its belief that its tax return positions are in accordance with applicable tax laws. The Company adjusts these liabilities in light of changing facts and circumstances, such as the closing of a tax audit, new tax legislation or the change of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the effect of reserve provisions and changes to reserves that are considered appropriate. It is also the Company’s policy to recognize accrued interest, and penalties associated with uncertain tax positions in Income Tax Expense on the consolidated statements of operations.
 

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Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


The Company and its consolidated subsidiaries account for all U.S. federal, state, local, and U.K. taxation pursuant to the asset and liability method, which requires deferred income tax assets and liabilities to be recorded for temporary differences between the carrying amount and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income.  Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more-likely-than-not to be realized.  At June 30, 2017 , the Company did no t have a valuation allowance recorded against its deferred tax assets.
    
The income tax expense, or benefit, is the tax payable or refundable for the period, plus or minus the change during the period in deferred tax assets and liabilities. The Company records its deferred tax liabilities as a component of other liabilities in the consolidated statements of financial condition.

Upon adoption of ASU No. 2016-09 as of January 1, 2017, all excess tax benefits or tax deficiencies related to stock- and unit-transactions are reflected in the consolidated statements of operations as a component of the provision for income taxes. Previously, these excess tax benefits were not recognized until they resulted in a reduction of cash taxes payable, and were subsequently recorded in equity when they reduced cash taxes payable. The Company only recognized a tax benefit from stock- and unit-based awards in Additional Paid-In Capital if an incremental tax benefit was realized after all other tax benefits available had been utilized. The adoption of ASU No. 2016-09 resulted in a net cumulative effect adjustment reflecting a $1.4 million increase to retained earnings and the deferred tax asset as of January 1, 2017, related to the recognition of the previously unrecognized excess tax benefits using the modified retrospective method.

Tax Receivable Agreement:

The Company’s purchase of membership units of the operating company concurrent with the initial public offering, and the subsequent and future exchanges by holders of Class B units of the operating company for shares of Class A common stock (pursuant to the exchange rights provided for in the operating company’s operating agreement), have resulted in, and are expected to continue to result in, increases in the Company’s share of the tax basis of the tangible and intangible assets of the operating company, which will increase the tax depreciation and amortization deductions that otherwise would not have been available to the Company. These increases in tax basis and tax depreciation and amortization are each deductible for tax purposes over a period of 15 years and have reduced, and are expected to continue to reduce, the amount of cash taxes that the Company would otherwise be required to pay in the future. The Company has entered into a tax receivable agreement with past, current, and future members of the operating company that requires the Company to pay to any member involved in any exchange transaction 85% of the amount of cash tax savings, if any, in U.S. federal, state and local income tax or foreign or franchise tax that it realizes as a result of these increases in tax basis and, in limited cases, transfers or prior increases in tax basis. The Company expects to benefit from the remaining 15% of cash tax savings, if any, in income tax it realizes. Payments under the tax receivable agreement will be based on the tax reporting positions that the Company will determine. The Company will not be reimbursed for any payments previously made under the tax receivable agreement if a tax basis increase is successfully challenged by the Internal Revenue Service.
The Company records an increase in deferred tax assets for the estimated income tax effects of the increases in tax basis based on enacted federal and state tax rates at the date of the exchange. The Company records 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due under the tax receivable agreement, which is reflected as the liability to selling and converting shareholders in the accompanying consolidated financial statements. The remaining 15% of the estimated realizable tax benefit is initially recorded as an increase to the Company’s additional paid-in capital. All of the effects to the deferred tax asset of changes in any of the estimates after the tax year of the exchange will be reflected in the provision for income taxes. Similarly, the effect of subsequent changes in the enacted tax rates will be reflected in the provision for income taxes.
If the Company exercises its right to terminate the tax receivable agreement early, the Company will be obligated to make an early termination payment to the selling and converting shareholders, based upon the net present value (based upon certain assumptions and deemed events set forth in the tax receivable agreement) of all payments that would be required to be paid by the Company under the tax receivable agreement.  If certain change of control events were to occur, the Company would be obligated to make an early termination payment.

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Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)



Foreign Currency:
 
The functional currency of the Company is the U.S. Dollar.  Assets and liabilities of foreign operations whose functional currency is not the U.S. Dollar are translated at the exchange rate in effect at the applicable reporting date, and the consolidated statements of operations are translated at the average exchange rates in effect during the applicable period.  A charge or credit is recorded to other comprehensive income/ (loss) to reflect the translation of these amounts to the extent the non-U.S. currency is designated the functional currency of the subsidiary. Non-functional currency related transaction gains and losses are immediately recorded in the consolidated statements of operations. For the three and six months ended June 30, 2017 , the Company recorded less than $0.1 million and $0.1 million , respectively, of other comprehensive income associated with foreign currency translation adjustments. For the three and six months ended June 30, 2016 , the Company recorded less than $0.1 million of such income.

Investment securities and other assets and liabilities denominated in foreign currencies are remeasured into U.S. Dollar amounts at the date of valuation.  Purchases and sales of investment securities, and income and expense items denominated in foreign currencies, are remeasured into U.S. Dollar amounts on the respective dates of such transactions.
 
The Company does not isolate the portion of the results of its operations resulting from the impact of fluctuations in foreign exchange rates on its non-U.S. investments.  Such fluctuations are included in Net Realized and Unrealized Gains/ (Losses) from Investments in the consolidated statements of operations.
 
Reported net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, foreign withholding taxes, and other receivables and payables recorded on the Company’s consolidated statements of financial condition and the U.S. Dollar equivalent of the amounts actually received or paid.  Net unrealized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities resulting from changes in exchange rates.

Recently Issued Accounting Pronouncements Not Yet Adopted:

In November 2016, the FASB issued ASU No. 2016-18, " Statement of Cash Flows (Topic 230): Restricted Cash. " This update requires entities to show the changes in the total cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. This guidance is effective for the fiscal years and interim periods within those years beginning after December 15, 2017. The guidance should be applied using a retrospective approach. Upon adoption, the net change in cash presented in the consolidated statement of cash flows will reflect the total of cash, cash equivalents, and restricted cash.
    
In August 2016, the FASB issued ASU No. 2016-15, " Statement of Cash Flows (Topic 230) ."  This update provides specific guidance on cash flow classification issues, which is intended to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The guidance is effective for the fiscal years and interim periods within those years beginning after December 15, 2017.  The guidance should be applied using a modified retrospective approach.  The Company is assessing the impact this standard will have on the consolidated financial statements and related disclosures.
    
In June 2016, the FASB issued ASU No. 2016-13, " Financial Instruments - Credit Losses (Topic 326). "  This new guidance requires the use of an “expected loss” model, rather than an “incurred loss” model, for financial instruments measured at amortized cost and also requires companies to record allowances for available-for-sale debt securities rather than reduce the carrying amount.  The guidance is effective for the fiscal years and interim periods within those years beginning after December 15, 2019.  The guidance should be applied using a retrospective approach.  The Company is currently assessing the impact of this standard, however, does not expect the standard to have a material impact on the consolidated financial statements.


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Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


In February 2016, the FASB issued ASU No. 2016-02, " Leases (Topic 842). " This amended standard was written to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new standard requires lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosure. Accounting guidance for lessors is largely unchanged. This guidance is effective for the fiscal years and interim periods within those years beginning after December 15, 2018, and requires a modified retrospective approach to adoption. The Company is currently evaluating the impact of adoption on its consolidated financial statements. The standard is expected to result in an increase in total assets and total liabilities, but will not have a significant impact on the consolidated statement of operations.

In May 2014, the FASB issued ASU No. 2014-09, " Revenue from Contracts with Customers (Topic 606) ." The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. In July 2015, the FASB postponed the effective date of this new guidance from January 1, 2017 to January 1, 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating its transition method and continues to assess the impact of adoption. While we have not identified material changes in the timing of revenue recognition, we continue to evaluate the presentation of certain revenue related costs on a gross versus net basis as well as the additional disclosures required by the standard. However, based on current evaluations, the Company does not expect the adoption to have a material impact on its consolidated financial statements.
 
Note 3—Compensation and Benefits
 
Compensation and benefits expense to employees and members is comprised of the following:


For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Cash Compensation and Other Benefits
$
12,036

 
$
10,118

 
$
24,987

 
$
21,015

Non-Cash Compensation
2,260

 
1,581

 
4,931

 
3,182

Total Compensation and Benefits Expense
$
14,296

 
$
11,699

 
$
29,918

 
$
24,197

   
All non-cash compensation awards granted have varying vesting schedules and are issued at prices equal to the assessed fair market value at the time of issuance, as discussed below.   No new non-cash compensation awards were issued during the three months ended June 30, 2017 and 2016 . Details of non-cash compensation awards granted during the six months ended June 30, 2017 and 2016 are as follows:
 
For the Six Months Ended June 30,
 
2017
 
2016
 
Amount
 
Fair
Value 1
 
Amount
 
Fair
Value 1
Restricted Class B Units
40,500

 
$
11.11

 
5,812

 
$
8.60

Options to Purchase Shares of Class A Common Stock 2
50,000

 
$
3.04

 
—

 
$
—

Options to Purchase Delayed Exchange Class B Units 3
2,630,000

 
$
2.30

 
—

 
$
—

Options to Purchase Class B Units 2
320,000

 
$
3.04

 
—

 
$
—

Deferred Compensation Phantom Delayed Exchange Class B Units 4
—

 
$
—

 
149,533

 
$
5.12

1
Represents the grant date fair value per share, unit, or option.
2
Represents options to purchase shares of Class A common stock or Class B units. These options become exercisable five years from the date of grant.
3
Represents options to purchase Delayed Exchange Class B units issued under 2006 Equity Incentive Plan (as defined below). These options become exercisable five years from the date of grant. Upon exercise, the resulting Delayed Exchange Class B units may not be exchanged pursuant the Amended and Restated Operating Agreement until the seventh anniversary of the exercise date and are not entitled to any benefits under the Tax Receivable Agreement.

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Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


4
Represents phantom Delayed Exchange Class B units issued under the Bonus Plan (as defined below). These units vest ratably over four years and become Delayed Exchange Class B units upon vesting which may not be exchanged pursuant the Amended and Restated Operating Agreement until the seventh anniversary of the vesting date and are not entitled to any benefits under the Tax Receivable Agreement.

As part of the Company's year-end bonus structure, certain employee members may elect to have all or part of year-end cash compensation paid in the form of cash, or equity issued pursuant to Pzena Investment Management, LLC Amended and Restated 2006 Equity Incentive Plan (“the 2006 Equity Incentive Plan”). For the year ended December 31, 2016, $4.5 million of cash compensation was elected to be paid in the form of equity, which was issued and vested immediately on January 1, 2017. Details of awards associated with these elections issued on January 1, 2017 are as follows:
 
January 1,
 
2017
 
Amount
 
Fair Value 1
Phantom Class B Units 2
5,200

 
$
9.61

Delayed Exchange Class B Units 3
620,023

 
$
7.11

1
Represents the grant date fair value per share or unit.
2
Represents phantom Class B units issued under the 2006 Equity Incentive Plan. These phantom units vest ratably over ten years starting immediately and are not entitled to receive dividend or dividend equivalents until vested.
3
Represents Class B units issued under the 2006 Equity Incentive Plan. These units vest immediately upon grant, but may not be exchanged pursuant to the Amended and Restated Operating Agreement of the operating company until the seventh anniversary of the date of grant. These units are also not entitled to any benefits under the Tax Receivable Agreement between the Company and members of the operating company.
    
Pursuant to the 2006 Equity Incentive Plan, the operating company issues Class B units, phantom Class B units and options to purchase Class B units.  The operating company also issues Delayed Exchange Class B units pursuant to the 2006 Equity Incentive Plan. These Delayed Exchange Class B units vest immediately upon grant, but may not be exchanged pursuant to the Amended and Restated Operating Agreement of the operating company until at least the seventh anniversary of the date of grant. These Delayed Exchange Class B units are also not entitled to any benefit under the Tax Receivable Agreement between the Company and members of the operating company. Under the Pzena Investment Management, Inc. 2007 Equity Incentive Plan (“the 2007 Equity Incentive Plan”), the Company issues shares of restricted Class A common stock and contingently vesting options to acquire shares of Class A common stock. During each of the three and six months ended June 30, 2017 and 2016 , no contingently vesting options vested. During the three months ended June 30, 2017 and 2016 , 9,789 and 57,283 Delayed Exchange Class B units were issued to certain employee members, respectively, for approximately $0.1 million and $0.3 million in cash, respectively. During the six months ended June 30, 2017 and 2016 , 13,677 and 69,978 Delayed Exchange Class B units were issued to certain employee members, respectively, for approximately $0.1 million and $0.3 million in cash, respectively.

Under the Pzena Investment Management, LLC Amended and Restated Bonus Plan (the “Bonus Plan”), eligible employees whose compensation is in excess of certain thresholds are required to defer a portion of that excess.  These deferred amounts may be invested, at the employee’s discretion, in certain investment options designated by the Compensation Committee of the Company's Board of Directors.  Amounts deferred in any calendar year reduce that year’s compensation expense and are amortized and vest ratably over a four -year period commencing the following year.  The Company also issued to certain of its employees deferred compensation with certain investment options that also vest ratably over a four -year period. As of both June 30, 2017 and December 31, 2016 , the liability associated with all deferred compensation investment accounts was $2.2 million and $4.2 million , respectively.

Pursuant to the Pzena Investment Management, Inc. Non-Employee Director Deferred Compensation Plan (the “Director Plan”), non-employee directors may elect to have all or part of their compensation otherwise payable in cash, deferred in the form of phantom shares of Class A common stock of the Company issued under the 2007 Equity Incentive Plan.  Elections to defer compensation under the Director Plan are made on a year-to-year basis.  Distributions under the Director Plan are made in a single distribution of shares of Class A common stock at such time as elected by the participant when the deferral was made.  Since inception of the Director Plan in 2009, the Company’s directors have elected to defer 100% of their compensation in the form of phantom shares of Class A common stock.  Amounts deferred in any calendar year are amortized over the calendar year and reflected as General and Administrative Expense.  As of June 30, 2017 and December 31, 2016 , there were 334,133 and 291,230 phantom shares of Class A common stock outstanding, respectively. For the three and six months ended June 30, 2017 and 2016 , no distributions were made under the Director Plan.

As of June 30, 2017 and December 31, 2016 , the Company had approximately $33.7 million and $30.0 million , respectively, in unrecorded compensation expense related to unvested awards issued pursuant to its Bonus Plan and certain

14
Table of Contents
Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


agreements; Class B units, Delayed Exchange Class B units, and phantom Class B units issued under the 2006 Equity Incentive Plan; and restricted Class A common stock and contingently vesting option grants issued under the 2007 Equity Incentive Plan. The Company anticipates that this unrecorded cost will amortize over the respective vesting periods of the awards.

Note 4 – Employee Benefit Plans
 
The operating company has a Profit Sharing and Savings Plan for the benefit of substantially all employees.  The Profit Sharing and Savings Plan is a defined contribution profit sharing plan with a 401(k) deferral component.  All full-time employees and certain part-time employees who have met the age and length of service requirements are eligible to participate in the plan.  The plan allows participating employees to make elective deferrals of compensation up to the annual limits which are set by law.  The plan provides for a discretionary annual contribution by the operating company which is determined by a formula based on the salaries of eligible employees as defined by the plan.  For the three and six months ended June 30, 2017 , the expense recognized in connection with this plan was $0.1 million and $0.8 million , respectively. For the three and six months ended June 30, 2016 , the expense recognized in connection with this plan was $0.2 million and $0.6 million , respectively.

Note 5—Earnings per Share
 
Basic earnings per share is computed by dividing the Company’s net income attributable to its common stockholders by the weighted average number of shares outstanding during the reporting period.  

Under the two-class method of computing basic earnings per share, basic earnings per share is calculated by dividing net income for basic earnings per share by the weighted average number of common shares outstanding during the period.  The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period.  The Company’s net income for basic earnings per share is reduced by the amount allocated to participating restricted shares of Class A common stock which participate for purposes of calculating earnings per share.  

For the three and six months ended June 30, 2017 and 2016 , the Company’s basic earnings per share was determined as follows:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except share and per share amounts)
Net Income for Basic Earnings per Share Allocated to:
 
 
 
 
 
 

Class A Common Stock
$
2,629

 
$
1,405

 
$
4,963

 
$
3,024

Participating Shares of Restricted Class A Common Stock
—

 
1

 
2

 
4

Total Net Income for Basic Earnings per Share
$
2,629

 
$
1,406

 
$
4,965

 
$
3,028

Basic Weighted-Average Shares Outstanding
17,314,218

 
15,817,872

 
17,332,193

 
15,492,309

Add: Participating Shares of Restricted Class A Common Stock 1
—

 
14,934

 
5,363

 
20,350

Total Basic Weighted-Average Shares Outstanding
17,314,218

 
15,832,806

 
17,337,556

 
15,512,659

Basic Earnings per Share
$
0.15

 
$
0.09

 
$
0.29

 
$
0.20

1
Certain unvested shares of Class A common stock granted to employees have nonforfeitable rights to dividends and therefore participate fully in the results of the Company from the date they are granted. They are included in the computation of basic earnings per share using the two-class method for participating securities.

Diluted earnings per share adjusts this calculation to reflect the impact of all outstanding membership units of the operating company, phantom Class B units, phantom Delayed Exchange Class B units, phantom Class A common stock, outstanding Class B unit options, options to purchase Class A common stock, and restricted Class A common stock, to the extent they would have a dilutive effect on net income per share for the reporting period.  Net income for diluted earnings per share assumes that all outstanding operating company membership units are converted into Company stock at the beginning of the reporting period and the resulting change to the Company's net income associated with its increased interest in the operating company is taxed at the Company’s effective tax rate, exclusive of one-time charges and adjustments associated with both the valuation allowance and the liability to selling and converting shareholders and other one-time charges.

15
Table of Contents
Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


 
For the three and six months ended June 30, 2017 and 2016 , the Company’s diluted net income was determined as follows: 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Net Income Attributable to Non-Controlling Interests of Pzena Investment Management, LLC
$
12,385

 
$
8,019

 
$
22,505

 
$
15,760

Less: Assumed Corporate Income Taxes
4,556

 
2,960

 
8,280

 
5,814

Assumed After-Tax Income of Pzena Investment Management, LLC
7,829

 
5,059

 
14,225

 
9,946

Net Income of Pzena Investment Management, Inc.
2,629

 
1,406

 
4,965

 
3,028

Diluted Net Income
$
10,458

 
$
6,465

 
$
19,190

 
$
12,974

 
Under the two-class method of computing diluted earnings per share, diluted earnings per share is calculated by dividing net income for diluted earnings per share by the weighted average number of common shares outstanding during the period, plus the dilutive effect of any potential common shares outstanding during the period using the more dilutive of the treasury method or two-class method.  The two-class method includes an earnings allocation formula that determines earnings per share for each participating security according to dividends declared and undistributed earnings for the period.  The Company’s net income for diluted earnings per share is reduced by the amount allocated to participating restricted Class B units for purposes of calculating earnings per share.  Dividend equivalent distributions paid per share on the operating company’s unvested restricted Class B units are equal to the dividends paid per Company Class A common stock.


16
Table of Contents
Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


For the three and six months ended June 30, 2017 and 2016 , the Company’s diluted earnings per share were determined as follows:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except share and
per share amounts)
Diluted Net Income Allocated to:
 
 
 
 
 
 
 
Class A Common Stock
$
10,449

 
$
6,460

 
$
19,171

 
$
12,962

Participating Shares of Restricted Class A Common Stock
—

 
1

 
2

 
4

Participating Class B Units
9

 
4

 
17

 
8

Total Diluted Net Income Attributable to Shareholders
$
10,458

 
$
6,465

 
$
19,190

 
$
12,974

 
 
 
 
 
 
 
 
Total Basic Weighted-Average Shares Outstanding
17,314,218

 
15,832,806

 
17,337,556

 
15,512,659

Dilutive Effect of Class B Units
51,103,321

 
51,392,409

 
51,100,305

 
51,753,361

Dilutive Effect of Options 1
328,695

 
371,747

 
420,878

 
164,671

Dilutive Effect of Phantom Class B Units & Phantom Shares of Class A Common Stock
1,785,487

 
1,224,257

 
1,785,783

 
1,090,118

Dilutive Effect of Restricted Shares of Class A Common Stock 2
64,989

 
41,490

 
67,887

 
36,133

Dilutive Weighted-Average Shares Outstanding
70,596,710

 
68,862,709

 
70,712,409

 
68,556,942

Add: Participating Class B Units 3
64,886

 
41,057

 
64,886

 
41,057

Total Dilutive Weighted-Average Shares Outstanding
70,661,596

 
68,903,766

 
70,777,295

 
68,597,999

Diluted Earnings per Share
$
0.15

 
$
0.09

 
$
0.27

 
$
0.19

1
Represents the dilutive effect of options to purchase operating company Class B units and Company Class A common stock.
2
Certain restricted shares of Class A common stock granted to employees are not entitled to dividend or dividend equivalent payments until they are vested and are therefore non-participating securities and are not included in the computation of basic earnings per share. They are included in the computation of diluted earnings per share when the effect is dilutive using the treasury stock method.
3
Unvested Class B Units granted to employees have nonforfeitable rights to dividend equivalent distributions and therefore participate fully in the results of the operating company's operations from the date they are granted. They are included in the computation of diluted earnings per share using the two-class method for participating securities.

Approximately 0.7 million options to purchase Class B units, 0.1 million options to purchase shares of Class A common stock, and 3.0 million contingent options to purchase shares of Class A common stock were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2017 , as their inclusion would have had an antidilutive effect based on current market prices or because the option had contingent vesting requirements. Approximately 0.6 million and 1.0 million options to purchase Class B units were excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2016 , respectively, as their inclusion would have had an antidilutive effect based on current market prices. Approximately 0.7 million options to purchase shares of Class A common stock and 3.0 million contingent options to purchase shares of Class A common stock were also excluded from the calculation of diluted earnings per share for the three and six months ended June 30, 2016 , as their inclusion would have had an antidilutive effect based on current market prices or because the option had contingent vesting requirements.

Note 6—Shareholders’ Equity
 
The Company functions as the sole managing member of the operating company.  As a result, the Company: (i) consolidates the financial results of the operating company and reflects the membership interest in it that it does not own as a non-controlling interest in its consolidated financial statements; and (ii) recognizes income generated from its economic interest in the operating company’s net income.  Class A and Class B units of the operating company have the same economic rights per unit.  As of June 30, 2017 , the holders of Class A common stock of the Company and the holders of Class B units of the operating company held approximately 25.3% and 74.7% , respectively, of the economic interests in the operations of the business. As of December 31, 2016 , the holders of Class A common stock of the Company and the holders of Class B units of the operating company held approximately 25.6% and 74.4% , respectively, of the economic interests in the operations of the business.


17
Table of Contents
Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Each Class B unit of the operating company is issued with a corresponding share of the Company’s Class B common stock, par value $0.000001 per share.  Holders of Class B common stock have the right to receive the par value of the Class B common stock held by them upon our liquidation, dissolution or winding up, but do not share in dividends. Each share of the Company’s Class B common stock entitles its holder to five votes, until the first time that the number of shares of Class B common stock outstanding constitutes less than 20% of the number of all shares of the Company’s common stock outstanding.  From such time and thereafter, each share of the Company’s Class B common stock entitles its holder to one vote.  When a Class B unit is exchanged for a share of the Company’s Class A common stock or forfeited, a corresponding share of the Company’s Class B common stock will automatically be redeemed and canceled.  Conversely, to the extent that the Company causes the operating company to issue additional Class B units to employees pursuant to its equity incentive plan, these additional holders of Class B units would be entitled to receive a corresponding number of shares of the Company’s Class B common stock (including if the Class B units awarded are subject to vesting).
 
All holders of the Company’s Class B common stock have entered into a stockholders’ agreement, pursuant to which they agreed to vote all shares of Class B common stock then held by them, with the majority of votes of Class B common stockholders taken in a preliminary vote of the Class B common stockholders.
 
The outstanding shares of the Company’s Class A common stock represent 100% of the rights of the holders of all classes of the Company’s capital stock to receive distributions, except that holders of Class B common stock will have the right to receive the class’s par value upon the Company’s liquidation, dissolution or winding up.
 
Pursuant to the operating agreement of the operating company, each vested Class B unit is exchangeable for a share of the Company’s Class A common stock, subject to certain exchange timing and volume limitations. These acquisition of additional operating company membership was treated as a reorganization of entities under common control as required by the Business Combinations Topic of the FASB ASC.

The Company’s share repurchase program was announced on April 24, 2012.  The Board of Directors authorized the Company to repurchase up to an aggregate of $10 million of the Company’s outstanding Class A common stock and the operating company’s Class B units on the open market and in private transactions in accordance with applicable securities laws.  On February 11, 2014, the Company announced that its Board of Directors approved an increase of $20 million in the aggregate amount authorized under the program. The timing, number and value of common shares and units repurchased are subject to the Company’s discretion.  The Company’s share repurchase program is not subject to an expiration date and may be suspended, discontinued, or modified at any time, for any reason.

During the six months ended June 30, 2017 , the Company purchased and retired 79,717 shares of Class A common stock and 2,897 Class B units under the current repurchase authorization at a weighted average price per share of $8.88 and $11.11 , respectively.  During the six months ended June 30, 2016 , the Company purchased and retired 190,780 shares of Class A common stock and 8,574 Class B units under the repurchase authorization at a weighted average price per unit of $7.89 and $7.81 , respectively. The Company records the repurchase of shares and units at cost based on the trade date of the transaction.

During the six months ended June 30, 2016 , 37,039 Class B unit options exercised resulted in the issuance of 13,576 net Class B units as a result of the redemption of 23,463 Class B units for the cashless exercise of options. No options were exercised during the six months ended June 30, 2017 .

Note 7—Non-Controlling Interests
 
Net Income Attributable to Non-Controlling Interests in the operations of the Company’s operating company and consolidated subsidiaries is comprised of the following:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
 
 
 
 
Non-Controlling Interests of Pzena Investment Management, LLC
$
12,385

 
$
8,019

 
$
22,505

 
$
15,760

Non-Controlling Interests of Consolidated Subsidiaries
107

 
(68
)
 
377

 
(73
)
Net Income Attributable to Non-Controlling Interests
$
12,492

 
$
7,951

 
$
22,882

 
$
15,687

 

18
Table of Contents
Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Distributions to non-controlling interests represent tax allocations and dividend equivalents paid to the members of the operating company, as well as withdrawals from the Company’s consolidated subsidiaries. Contributions from non-controlling interests represent contributions to the Company's consolidated subsidiaries.

Note 8—Investments

The following is a summary of Investments:
 
As of
 
June 30, 2017
 
December 31, 2016
 
(in thousands)
Investment Securities, Trading
 

 
 

Equity Securities
$
18,853

 
$
14,323

Total Investment Securities, Trading
18,853

 
14,323

Investments in Equity Method Investees
8,106

 
7,987

Total
$
26,959

 
$
22,310


Investment Securities, Trading
 
Investments, at Fair Value consisted of the following at June 30, 2017 :
 
 
Cost
 
Unrealized
Gain/(Loss)
 
Fair Value
 
(in thousands)
Equity Securities
$
16,993

 
$
1,860

 
$
18,853

Total
$
16,993

 
$
1,860

 
$
18,853


    Securities Sold Short, at Fair Value consisted of the following at June 30, 2017 :
 
Proceeds
 
Unrealized
(Gain)/ Loss
 
Fair Value
 
(in thousands)
Securities Sold Short
$
3,156

 
$
135

 
$
3,291

Total
$
3,156

 
$
135

 
$
3,291


    
Investments, at Fair Value consisted of the following at December 31, 2016 :
 
 
Cost
 
Unrealized
Gain/(Loss)
 
Fair Value
 
(in thousands)
Equity Securities
$
13,105

 
$
1,218

 
$
14,323

Total
$
13,105

 
$
1,218

 
$
14,323



19
Table of Contents
Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Securities Sold Short, at Fair Value consisted of the following at December 31, 2016 :

 
Proceeds
 
Unrealized
(Gain)/ Loss
 
Fair Value
 
(in thousands)
Securities Sold Short
$
2,646

 
$
(24
)
 
$
2,622

Total
$
2,646

 
$
(24
)
 
$
2,622


Investments in Equity Method Investees

The operating company sponsors and provides investment management services to certain private investment partnerships and Pzena mutual funds through which it offers its investment strategies. The Company has made investments in certain of these private investment partnerships and mutual funds to satisfy its obligations under the Company's deferred compensation program and provide the initial cash investment in our mutual funds. The Company holds a non-controlling interest and exercises significant influence in these entities, and accounts for its investments as equity method investments which are included in Investments on the consolidated statements of financial condition. On July 11, 2016, due to additional subscriptions into the Pzena Small Cap Value Fund, the Company's ownership decreased to 36.1% . As the entity was no longer deemed to control the fund, the Company deconsolidated the entity, removed the related assets, liabilities and non-controlling interest from its balance sheet and classified the Company's remaining investment as an equity method investment. As of June 30, 2017 , the Company's investments range between 4% and 21% of the capital of these entities and have an aggregate carrying value of $8.1 million .

Note 9—Fair Value Measurements
 
The Fair Value Measurements and Disclosures Topic of the FASB ASC defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.  The Fair Value Measurements and Disclosures Topic of the FASB ASC also establishes a framework for measuring fair value and a valuation hierarchy based upon the transparency of inputs used in the valuation of an asset or liability. Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The valuation hierarchy contains three levels: (i) valuation inputs are unadjusted quoted market prices for identical assets or liabilities in active markets (Level 1); (ii) valuation inputs are quoted prices for identical assets or liabilities in markets that are not active, quoted market prices for similar assets and liabilities in active markets, and other observable inputs directly or indirectly related to the asset or liability being measured (Level 2); and (iii) valuation inputs are unobservable and significant to the fair value measurement (Level 3).
 
Included in the Company’s consolidated statements of financial condition are investments in equity securities and securities sold short, both of which are exchange-traded securities with quoted prices in active markets. The fair value measurements of the equity securities, securities sold short, have been classified as Level 1. The investments in equity method investees are held at their carrying value.

20
Table of Contents
Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


    
The following table presents these instruments’ fair value at June 30, 2017 :

 
Level 1
 
Level 2
 
Level 3
 
Investments Not Held at Fair Value
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
Equity Securities
$
18,853

 
$
—

 
$
—

 
$
—

 
$
18,853

Investments in Equity Method Investees
—

 
—

 
—

 
8,106

 
8,106

Total Fair Value
$
18,853

 
$
—

 
$
—

 
$
8,106

 
$
26,959


 
Level 1
 
Level 2
 
Level 3
 
Investments Not Held at Fair Value
 
Total
 
(in thousands)
Liabilities:
 
 
 
 
 
 
 
 
 
Securities Sold Short
$
3,291

 
$
—

 
$
—

 
$
—

 
$
3,291


The following table presents these instruments’ fair value at December 31, 2016 :

 
Level 1
 
Level 2
 
Level 3
 
Investments Not Held at Fair Value
 
Total
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
Equity Securities
$
14,323

 
$
—

 
$
—

 
$
—

 
$
14,323

Investments in Equity Method Investees
—

 
—

 
—

 
7,987

 
7,987

Total Fair Value
$
14,323

 
$
—

 
$
—

 
$
7,987

 
$
22,310


 
Level 1
 
Level 2
 
Level 3
 
Investments Not Held at Fair Value
 
Total
 
(in thousands)
Liabilities:
 
 
 
 
 
 
 
 
 
Securities Sold Short
$
2,622

 
$
—

 
$
—

 
$
—

 
$
2,622


For each of the three and six months ended June 30, 2017 and 2016 , there were no transfers between levels. In addition, the Company did not hold any Level 2 or Level 3 securities during these periods.


21
Table of Contents
Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Note 10—Property and Equipment
 
Property and Equipment, Net of Accumulated Depreciation is comprised of the following:
 
 
As of
 
June 30,
2017
 
December 31,
2016
 
(in thousands)
Leasehold Improvements
$
6,832

 
$
6,832

Furniture and Fixtures
1,190

 
1,190

Computer Hardware
566

 
756

Computer Software
247

 
238

Office Equipment
208

 
209

Total
9,043

 
9,225

Less: Accumulated Depreciation and Amortization
(2,540
)
 
(2,260
)
Total
$
6,503

 
$
6,965


Depreciation is included in general and administrative expense and totaled approximately $0.2 million and $0.5 million for the three and six months ended June 30, 2017 , respectively. For the three and six months ended June 30, 2016 , depreciation totaled approximately $0.3 million and $0.5 million , respectively.

Note 11—Related Party Transactions
 
For each of the three months ended June 30, 2017 and 2016 , the Company earned $0.1 million in investment advisory fees from unconsolidated VIEs that receive investment management services from the Company. For each of the six months ended June 30, 2017 and 2016 , the Company earned $0.2 million in such fees.
 
The Company offers loans to employees, excluding executive officers, for the purpose of financing tax obligations associated with compensatory stock and unit vesting. Loans are generally written for a seven -year period, at an interest rate equivalent to the Applicable Federal Rate, payable in annual installments, and collateralized by shares and units held by the employee. As of June 30, 2017 and December 31, 2016 , the Company had approximately $1.3 million and $0.9 million , respectively, of such loans outstanding.

The operating company, as investment adviser for certain Pzena branded SEC-registered mutual funds, private placement funds, and non-U.S. funds, has contractually agreed to waive a portion or all of its management fees and pay fund expenses to ensure that the annual operating expenses of the funds stay below certain established total expense ratio thresholds. For the three and six months ended June 30, 2017 , the Company recognized $0.3 million and $0.5 million of such expenses, respectively. For the three and six months ended June 30, 2016 , the Company recognized $0.3 million and $0.5 million of such expenses.

The operating company manages personal funds of certain of the Company’s employees, including the CEO, its two Presidents, and its Executive Vice President.  The operating company also manages accounts beneficially owned by a private fund in which certain of the Company’s executive officers invest.  Investments by employees in individual accounts are permitted only at the discretion of the executive committee of the operating company, but are generally not subject to the same minimum investment levels that are required of outside investors.  The operating company also manages personal funds of some of its employees’ family members.  Pursuant to the respective investment management agreements, the operating company waives or reduces its regular advisory fees for these accounts and personal funds. In addition, the operating company pays custody and administrative fees for certain of these accounts and personal funds in order to incubate products or preserve performance history.  The aggregate value of the fees that the Company waived related to the Company’s executive officers, other employees, and family members, was approximately $0.2 million and $0.4 million for the three and six months ended June 30, 2017 , respectively. For each of the three and six months ended June 30, 2016 , the Company waived $0.2 million and $0.3 million in such fees, respectively.
 

22
Table of Contents
Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Note 12—Commitments and Contingencies
 
In the normal course of business, the Company enters into agreements that include indemnities in favor of third parties, such as engagement letters with advisers and consultants. In certain cases, the Company may have recourse against third parties with respect to these indemnities. The Company maintains insurance policies that may provide coverage against certain claims under these indemnities. The Company has had no claims or payments pursuant to these agreements, and it believes the likelihood of a claim being made is remote. Utilizing the methodology in the Guarantees Topic of the FASB ASC, the Company’s estimate of the value of such guarantees is de minimis, therefore, no accrual has been made in the consolidated financial statements.

The Company leases office space under a non-cancelable operating lease agreement, which expires on December 31, 2025. The Company recognizes minimum lease expense for its headquarters on a straight-line basis over the lease term. During the third quarter of 2016, the Company terminated its five -year sublease agreement which commenced on May 1, 2015.  The Company entered into a new four -year sublease agreement commencing on October 1, 2016 that is cancelable by either the Company or sublessee given appropriate notice after the thirty-first month following the commencement of the sublease agreement. The sublease agreement is for certain office space associated with the Company's operating lease agreement in its corporate headquarters. Sublease income will continue to decrease annual lease expense by approximately $0.4 million per year.

During the three and six months ended June 30, 2017 , lease expenses were $0.5 million and $1.0 million , respectively, and are included in general and administrative expense. During the three and six months ended June 30, 2016 , lease expenses were $0.4 million and $0.9 million , respectively. This lease expense includes expenses associated with the Company's office spaces in the U.K. and Australia. Lease expenses for the three and six months ended June 30, 2017 were net of $0.1 million and $0.2 million of sublease income, respectively. Lease expenses for the three and six months ended June 30, 2016 were net of $0.1 million and $0.2 million of sublease income, respectively.

Note 13—Income Taxes
 
The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes. The Company's provision for income taxes reflects U.S. federal, state, and local incomes taxes on its allocable portion of the operating company's income. The Company's effective tax rate for the six months ended June 30, 2017 and 2016 was 12.5% and 11.7% , respectively. The effective tax rate includes a rate benefit attributable to the fact that approximately 74.7% and 75.6% of the operating company's earnings were not subject to corporate-level taxes for the six months ended June 30, 2017 and 2016 , respectively. Income before income taxes includes net income attributable to non-controlling interests and not taxable to the Company, which reduces the effective tax rate. This favorable impact is partially offset by the impact of certain permanently non-deductible items.

The Income Taxes Topic of the FASB ASC establishes the minimum threshold for recognizing, and a system for measuring, the benefits of tax return positions in financial statements.  

As of June 30, 2017 and December 31, 2016 , the Company had $3.7 million and $2.8 million in unrecognized tax benefits that, if recognized, would affect the provision for income taxes. As of both June 30, 2017 and December 31, 2016 , the Company had interest related to unrecognized tax benefits of $0.3 million . As of June 30, 2017 and December 31, 2016 , no penalty accruals were recorded.

As of June 30, 2017 and December 31, 2016 , the net values of all deferred tax assets were approximately $72.2 million and $73.4 million , respectively. These deferred tax assets primarily reflect the future tax benefits associated with the Company's initial public offering, and the subsequent and future exchanges by holders of Class B units of the operating company for shares of Class A common stock. At June 30, 2017 and December 31, 2016 , the Company did no t have a valuation allowance recorded against its deferred tax assets.


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Pzena Investment Management, Inc.
Notes to Unaudited Consolidated Financial Statements (Continued)


Note 14—Subsequent Events

On July 18, 2017, the Company declared a quarterly dividend of $0.03 per share of its Class A common stock that will be paid on August 24, 2017 to holders of record on July 28, 2017.

No other subsequent events necessitated disclosures and/or adjustments.

24

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
 
We are an investment management firm that utilizes a classic value investment approach across all of our investment strategies.  We currently manage assets in a variety of value-oriented investment strategies across a wide range of market capitalizations in both U.S. and non-U.S. capital markets.  At June 30, 2017 , our assets under management, or AUM, was $33.5 billion .  We manage separate accounts on behalf of institutions, act as sub-investment adviser for a variety of SEC-registered mutual funds and non-U.S. funds, and act as investment adviser for the Pzena mutual funds, private placement funds and non-U.S. funds.
 
We function as the sole managing member of our operating company, Pzena Investment Management, LLC (the “operating company”).  As a result, we: (i) consolidate the financial results of our operating company with our own, and reflect the membership interest in it that we do not own as a non-controlling interest in our consolidated financial statements; and (ii) recognize income generated from our economic interest in our operating company’s net income.  As of June 30, 2017 , the holders of Class A common stock (through the Company) and the holders of Class B units of our operating company held approximately 25.3% and 74.7% , respectively, of the economic interests in the operations of our business.

The Company also serves as the general partner of Pzena Investment Management, LP, a partnership formed with the objective of aggregating employee ownership in one entity.

Certain of our named executive officers and employees have interests in Pzena Investment Management, LP and certain estate planning vehicles through which they indirectly own Class B units of our operating company. As of June 30, 2017 , through direct and indirect interests, our five named executive officers; 39 other employee members; and certain other members of our operating company, including one of our directors, his related entities, and certain former employees, collectively held 54.2%, 4.6%, and 15.9% of the economic interests in our operating company, respectively.
 
GAAP and Non-GAAP Net Income
 
GAAP diluted net income and GAAP diluted earnings per share were $10.5 million and $0.15 , respectively, for the three months ended June 30, 2017 , and $6.5 million and $0.09 , respectively, for the three months ended June 30, 2016 . GAAP diluted net income and GAAP diluted earnings per share were $19.2 million and $0.27 , respectively, for the six months ended June 30, 2017 , and $13.0 million and $0.19 , respectively, for the six months ended June 30, 2016 . Our results for the three and six months ended June 30, 2016 include accounting adjustments related to our deferred tax asset generated by the Company's initial public offering and subsequent Class B unit conversions, as well as our tax receivable agreement and the associated liability to our selling and converting shareholders.  We believe that these accounting adjustments add a measure of non-operational complexity that partially obscures a clear understanding of the underlying performance of our business.  Therefore, in evaluating our financial condition and results of operations, we also review certain non-GAAP measures of earnings, which are adjusted to exclude these items.  As adjusted, non-GAAP diluted net income and non-GAAP diluted earnings per share were $6.6 million and $0.10, respectively, for the three months ended June 30, 2016 . As adjusted, non-GAAP diluted net income and non-GAAP diluted earnings per share were $12.9 million and $0.19, respectively, for the six months ended June 30, 2016 . No such adjustments were made to the GAAP results for the three and six months ended June 30, 2017 due to the release of the valuation allowance recorded against the deferred tax assets during the fourth quarter of 2016.  

GAAP and non-GAAP net income for diluted earnings per share generally assumes all operating company membership units are converted into Company stock at the beginning of the reporting period, and the resulting change to our net income associated with our increased interest in the operating company is taxed at our historical effective tax rate, exclusive of the adjustments related to changes in the valuation allowance recorded against the deferred tax asset and other discrete and permanently non-deductible items.  Our effective tax rate, exclusive of these adjustments, was 36.8% for the three and six months ended June 30, 2017 , and 36.9% for the three and six months ended June 30, 2016 .  See “Operating Results - Income Tax Expense” below.
 
We use these non-GAAP measures to assess the strength of the underlying operations of the business. We believe that these adjustments, and the non-GAAP measures derived from them, provide information to better analyze our operations between periods and over time. We also use non-GAAP net income as one factor in determining the amount of dividends we pay.  See

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Table of Contents

“Dividend Policy” below.  Investors should consider these non-GAAP measures in addition to, and not as a substitute for, financial measures prepared in accordance with U.S. GAAP.

A reconciliation of the most comparable GAAP measures to the non-GAAP measures is included below:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except share and per share data)
GAAP Net Income
$
2,629

 
$
1,406

 
$
4,965

 
$
3,028

Net Effect of Tax Receivable Agreement
—

 
125

 
—

 
(58
)
Non-GAAP Net Income
$
2,629

 
$
1,531

 
$
4,965

 
$
2,970

 
 
 
 
 
 
 
 
Basic Weighted Average Shares Outstanding
17,314,218

 
15,832,806

 
17,337,556

 
15,512,659

GAAP Basic Earnings per Share
$
0.15

 
$
0.09

 
$
0.29

 
$
0.20

Net Effect of Tax Receivable Agreement
—

 
0.01

 
—

 
(0.01
)
Non-GAAP Basic Earnings per Share
$
0.15

 
$
0.10

 
$
0.29

 
$
0.19

 
 
 
 
 


 


GAAP Net Income for Diluted Earnings per Share
$
10,458

 
$
6,465

 
$
19,190

 
$
12,974

Net Effect of Tax Receivable Agreement
—

 
125

 
—

 
(58
)
Non-GAAP Net Income for Diluted Earnings per Share
$
10,458

 
$
6,590

 
$
19,190

 
$
12,916

 
 
 
 
 


 


Basic Weighted Average Shares Outstanding
70,661,596

 
68,903,766

 
70,777,295

 
68,597,999

GAAP Basic Earnings per Share
$
0.15

 
$
0.09

 
$
0.27

 
$
0.19

Net Effect of Tax Receivable Agreement
—

 
0.01

 
—

 
—

Non-GAAP Basic Earnings per Share
$
0.15

 
$
0.10

 
$
0.27

 
$
0.19


Revenue
 
We generate revenue primarily from management fees and performance fees, which we collectively refer to as our advisory fees, by managing assets on behalf of institutional accounts and for retail clients, which are generally open-end mutual funds catering primarily to retail investors.  Our advisory fee income is recognized over the period in which investment management services are provided.  Following the preferred method identified in the Revenue Recognition Topic of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”), income from performance fees is recorded at the conclusion of the contractual performance period, when all contingencies are resolved.
 
Our advisory fees are primarily driven by the level of our AUM.  Our AUM increases or decreases with the net inflows or outflows of funds into our various investment strategies and with the investment performance thereof.  In order to increase our AUM and expand our business, we must develop and market investment strategies that suit the investment needs of our target clients, and provide attractive returns over the long term.  The value and composition of our AUM, and our ability to continue to attract clients depends on a variety of factors as described in "Item 1 — Risk Factors — Risks Related to Our Business — Our primary source of revenue is derived from management fees, which are directly tied to the levels of our assets under management. Fluctuations in AUM therefore will directly impact our revenue" of our Annual Report on Form 10-K for the year ended December 31, 2016 .

For our institutional accounts, we are paid fees according to a schedule, which varies by investment strategy.  The substantial majority of these accounts pay us management fees pursuant to a schedule by which the rate we earn on the AUM declines as the amount of AUM increases.
 
Pursuant to our sub-investment advisory agreements with our retail clients and advisory agreements with Pzena branded funds, we are generally paid a management fee according to a schedule in which the rate we earn on the AUM declines as the amount of AUM increases.  Certain of these funds pay us fixed-rate management fees.  Due to the substantially larger account size of certain of these accounts, the average advisory fees we earn on them, as a percentage of AUM, are lower than the advisory fees we earn on our institutional accounts.

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Table of Contents

 
Advisory fees we earn on institutional accounts are generally based on the value of AUM at a specific date on a quarterly basis. Certain of our institutional accounts, and all of our retail accounts, are calculated based on the average of the monthly or daily market value. Advisory fees are also generally adjusted for any cash flows into or out of a portfolio, where the cash flow represents greater than 10% of the value of the portfolio. While a specific group of accounts may use the same fee rate, the calculation methodology may differ as described above.

Certain of our clients pay us performance fees according to the performance of their accounts relative to certain agreed-upon benchmarks, which results in a lower base fee, but allows for us to earn higher fees if the relevant investment strategy outperforms the agreed-upon benchmark. Some performance-based fee arrangements include high-water mark provisions, which generally provide that if a client account underperforms relative to its performance target, it must gain back such underperformance before we can collect future performance-based fees. Fulcrum fee arrangements require a reduction in the base fee, or allow for a performance fee if the relevant investment strategy underperforms or outperforms, respectively, the agreed-upon benchmark.
 
Our advisory fees may fluctuate based on a number of factors, including the following:
 
•
changes in AUM due to appreciation or depreciation of our investment portfolios, and the levels of the contribution and withdrawal of assets by new and existing clients;

•
distribution of AUM among our investment strategies, which have differing fee schedules;

•
distribution of AUM between institutional accounts and retail accounts, for which we generally earn lower overall advisory fees; and

•
the level of our performance with respect to accounts on which we are paid performance fees or have fulcrum fee arrangements.

Expenses
 
Our expenses consist primarily of Compensation and Benefits Expense, as well as General and Administrative Expense.  Our largest expense is Compensation and Benefits, which includes the salaries, bonuses, equity-based compensation, and related benefits and payroll costs attributable to our employee members and employees.  Compensation and benefits packages are benchmarked against relevant industry and geographic peer groups in order to attract and retain qualified personnel.  General and Administrative Expense includes lease expenses, professional and outside services fees, depreciation, the costs associated with operating and maintaining our research, trading and portfolio accounting systems, the costs associated with being a public company, and other expenses.  Our occupancy-related costs and professional services expenses, in particular, generally increase or decrease in relative proportion to the overall size and scale of our business operations.

Our expenses may fluctuate due to a number of factors, including the following:
 
•
variations in the level of total compensation expense due to, among other things, bonuses, awards of equity to our employees and employee members of our operating company, changes in our employee count and mix, and competitive factors; and

•
general and administrative expenses, such as rent, professional service fees and data-related costs, incurred, as necessary, to run our business.

Other Income/ (Expense)
 
Other Income/ (Expense) is derived primarily from investment income or loss arising from our consolidated entities, income or loss generated by our investments, and interest income generated on our cash balances.  Other Income/ (Expense) is also affected by changes in our estimates of the liability due to our selling and converting shareholders associated with payments owed to them under the tax receivable agreement, which was executed in connection with our reorganization and initial public offering on October 30, 2007.  As discussed further below under “Tax Receivable Agreement,” this liability represents 85% of the amount of cash savings, if any, in U.S. federal, state, and local income tax that we realize as a result of the amortization of the increases in tax basis generated from our acquisitions of our operating company’s units from our selling and converting shareholders.  We expect the interest and investment components of Other Income/ (Expense), in the aggregate, to fluctuate based on market conditions and the performance of our consolidated entities and other investments.

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Table of Contents


  Non-Controlling Interests

We are the sole managing member of our operating company and control its business and affairs and, therefore, consolidate its financial results with ours. In light of our employees’ and outside investors’ direct and indirect interests in our operating company, we have reflected their membership interests as non-controlling interest in our consolidated financial statements.  As of June 30, 2017 , the holders of Class A common stock of the Company and the holders of Class B units of the operating company held approximately 25.3% and 74.7% , respectively, of the economic interests in the operations of the business. In addition, our operating company consolidates the results of operations of the private investment partnerships and Pzena-branded mutual funds over which we exercise a controlling influence.  Non-controlling interests recorded in our consolidated financial statements include the non-controlling interests of the outside investors in these consolidated subsidiaries.

Operating Results
 
Assets Under Management and Flows
 
As of June 30, 2017 and 2016 , our AUM of approximately $33.5 billion and $25.4 million, respectively, was invested in a variety of value-oriented investment strategies, representing distinct capitalization segments of U.S. and non-U.S. equity markets.  The assets under management and performance of our largest investment strategies as of June 30, 2017 are further described below.  We follow the same investment process for each of these strategies.  Our investment strategies are distinguished by the market capitalization ranges from which we select securities for their portfolios, which we refer to as each strategy’s investment universe, as well as the regions in which we invest and the degree to which we concentrate on a limited number of holdings.  While our investment process includes ongoing review of companies in the investment universes described below, our actual investments may include companies outside of the relevant market capitalization range at the time of our investment.  In addition, the number of holdings typically found in the portfolios of each of our investment strategies may vary, as described below.


28
Table of Contents

The following tables describe the allocation of our AUM among our investment strategies and the domicile of our accounts, as of June 30, 2017 and 2016 :
 
 
AUM at June 30,
Strategy
 
2017
 
2016
 
 
(in billions)
U.S. Value Strategies
 
 
 
 
Large Cap Value
 
$
10.0

 
$
9.2

Mid Cap Value
 
2.6

 
2.1

Value
 
2.0

 
1.8

Small Cap Value
 
1.5

 
1.2

     Total U.S. Value Strategies
 
16.1

 
14.3

 
 

 

Global and Non-U.S. Value Strategies
 
 
 
 
International (ex-U.S.) Value
 
5.4

 
4.1

Global Value
 
5.3

 
3.6

Emerging Markets Value
 
3.7

 
2.1

European Value
 
2.8

 
1.1

Other Non-U.S. Strategies
 
0.2

 
0.2

     Total Global and Non-U.S. Value Strategies
 
17.4

 
11.1

     Total
 
$
33.5

 
$
25.4


 
 
AUM at June 30,
Account Domicile
 
2017
 
2016
 
 
(in billions)
U.S.
 
$
22.8

 
$
18.8

Non-U.S.
 
10.7

 
6.6

Total
 
$
33.5

 
$
25.4


The following table indicates the annualized returns, gross and net (which represents annualized returns prior to, and after, payment of advisory fees, respectively), of our largest investment strategies from their inception to June 30, 2017 , and in the five-year, three-year, and one-year periods ended June 30, 2017 , as well as the performance of the market index which is most commonly used by our clients to compare the performance of the relevant investment strategy.

Effective July 1, 2017, we have eliminated the word "Expanded" from portfolios and added regional identifiers where appropriate to simplify our strategy naming convention and more accurately reflect the underlying nature of our portfolios. Affected strategies appear with their previous names footnoted. We are retaining "Focused" for our most concentrated portfolios in each strategy.
 
 
Period Ended June 30, 2017 1
Investment Strategy (Inception Date)
 
Since   Inception
 
5 Years
 
3 Years
 
1 Year
Large Cap Value (July 2012) 2
 
 
 
 
 
 
 
 
Annualized Gross Returns
 
15.9
%
 
15.9
%
 
8.4
 %
 
27.0
%
Annualized Net Returns
 
15.7
%
 
15.7
%
 
8.2
 %
 
26.8
%
Russell 1000 ®  Value Index
 
13.9
%
 
13.9
%
 
7.4
 %
 
15.5
%
International Value EAFE (November 2008) 3
 
 
 
 
 
 
 
 
Annualized Gross Returns
 
11.4
%
 
11.7
%
 
1.7
 %
 
28.5
%
Annualized Net Returns
 
11.1
%
 
11.4
%
 
1.4
 %
 
28.1
%

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Table of Contents

MSCI EAFE ®  Index—Net/U.S.$ 4
 
8.0
%
 
8.7
%
 
1.2
 %
 
20.3
%
Large Cap Focused Value (October 2000)
 
 
 
 
 
 
 
 
Annualized Gross Returns
 
7.5
%
 
15.9
%
 
8.7
 %
 
30.6
%
Annualized Net Returns
 
7.1
%
 
15.5
%
 
8.3
 %
 
30.1
%
Russell 1000 ®  Value Index
 
6.8
%
 
13.9
%
 
7.4
 %
 
15.5
%
Emerging Markets Focused Value (January 2008)
 
 
 
 
 
 
 
 
Annualized Gross Returns
 
3.2
%
 
7.9
%
 
1.8
 %
 
34.4
%
Annualized Net Returns
 
2.3
%
 
7.1
%
 
1.1
 %
 
33.4
%
MSCI ®  Emerging Markets Index—Net/U.S.$ 4
 
0.2
%
 
4.0
%
 
1.1
 %
 
23.8
%
European Focused Value (August 2008)
 
 
 
 
 
 
 
 
Annualized Gross Returns
 
5.9
%
 
12.8
%
 
0.5
 %
 
34.7
%
Annualized Net Returns
 
5.5
%
 
12.3
%
 
0.1
 %
 
34.3
%
MSCI ®  Europe Index – Net/U.S.$ 4
 
2.4
%
 
8.8
%
 
(0.2
)%
 
21.1
%
Global Focused Value (January 2004)
 
 
 
 
 
 
 
 
Annualized Gross Returns
 
5.9
%
 
14.1
%
 
4.7
 %
 
33.4
%
Annualized Net Returns
 
5.2
%
 
13.4
%
 
4.1
 %
 
32.6
%
MSCI ®  All Country World Index – Net/U.S.$ 4
 
6.8
%
 
10.5
%
 
4.8
 %
 
18.8
%
Global Value World (January 2010) 5
 
 
 
 
 
 
 
 
Annualized Gross Returns
 
9.4
%
 
13.4
%
 
4.8
 %
 
28.8
%
Annualized Net Returns
 
9.0
%
 
13.1
%
 
4.4
 %
 
28.4
%
MSCI ®  World Index – Net/U.S.$ 4
 
9.1
%
 
11.4
%
 
5.2
 %
 
18.2
%
Mid Cap Value (April 2014) (6)
 
 
 
 
 
 
 
 
Annualized Gross Returns
 
9.8
%
 
N/A

 
9.4
 %
 
27.4
%
Annualized Net Returns
 
9.5
%
 
N/A

 
9.1
 %
 
27.1
%
Russell Mid Cap ®  Value Index
 
8.7
%
 
N/A

 
7.5
 %
 
15.9
%
Focused Value (January 1996)
 
 
 
 
 
 
 
 
Annualized Gross Returns
 
11.1
%
 
16.2
%
 
8.6
 %
 
28.7
%
Annualized Net Returns
 
10.3
%
 
15.6
%
 
7.9
 %
 
28.1
%
Russell 1000 ®  Value Index
 
8.9
%
 
13.9
%
 
7.4
 %
 
15.5
%
Small Cap Focused Value (January 1996)
 
 
 
 
 
 
 
 
Annualized Gross Returns
 
14.1
%
 
16.8
%
 
10.1
 %
 
27.6
%
Annualized Net Returns
 
12.9
%
 
15.7
%
 
9.0
 %
 
26.3
%
Russell 2000 ®  Value Index
 
10.0
%
 
13.4
%
 
7.0
 %
 
24.9
%
International (ex-U.S.) Focused Value (January 2004)
 
 
 
 
 
 
 
 
Annualized Gross Returns
 
6.8
%
 
12.7
%
 
2.5
 %
 
33.1
%
Annualized Net Returns
 
6.0
%
 
12.0
%
 
2.0
 %
 
32.4
%
MSCI ®  All Country World ex-U.S. Index – Net/U.S.$ 4
 
6.2
%
 
7.2
%
 
0.8
 %
 
20.5
%
Mid Cap Focused Value (September 1998)
 
 
 
 
 
 
 
 
Annualized Gross Returns
 
13.2
%
 
17.0
%
 
9.3
 %
 
30.3
%
Annualized Net Returns
 
12.4
%
 
16.2
%
 
8.7
 %
 
29.6
%
Russell Mid Cap ®  Value Index
 
10.6
%
 
15.1
%
 
7.5
 %
 
15.9
%
1
The historical returns of these investment strategies are not necessarily indicative of their future performance, or the future performance of any of our other current or future investment strategies.
2
Formerly known as Large Cap Expanded Value
3
Formerly known as International (ex-U.S.) Expanded Value
4
Net of applicable withholding taxes and presented in U.S. Dollars
5
Formerly known as Global Expanded Value
6
Formerly known as Mid Cap Expanded Value

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Table of Contents


Large Cap Value .  This strategy reflects a portfolio composed of approximately 50 to 80 stocks drawn from a universe of 500 of the largest U.S. listed companies, based on market capitalization. This strategy was launched in July 2012. At June 30, 2017 , the Large Cap Value strategy generated a one-year annualized gross return of 27.0% , outperforming its benchmark. The outperformance was primarily driven by our stock selection and overexposure in the financial services sector, our stock selection in the technology sector, and our underexposure to the utilities sector.
International Value EAFE .  This strategy reflects a portfolio composed of approximately 60 to 80 stocks drawn from a universe of 1,500 of the largest companies across the world excluding the United States, based on market capitalization. This strategy was launched in November 2008. At June 30, 2017 , the International Value EAFE strategy generated a one-year annualized gross return of 28.5% , outperforming its benchmark. This outperformance was primarily driven by our stock selection and overexposure in the financial services sector, and certain positions in the information technology sector.
Large Cap Focused Value .  This strategy reflects a portfolio composed of approximately 30 to 40 stocks drawn from a universe of 500 of the largest U.S. listed companies, based on market capitalization. This strategy was launched in October 2000. At June 30, 2017 , the Large Cap Focused Value strategy generated a one-year annualized gross return of 30.6% , outperforming its benchmark. The outperformance was driven primarily by our stock selection and overexposure in the financial services sector, our stock selection in the technology and health care sectors, and lack of exposure to the utilities sector. This outperformance was partially offset by our stock selection in the energy sector.
Emerging Markets Focused Value. This strategy reflects a portfolio composed of approximately 40 to 80 stocks drawn from a universe of 1,500 of the largest emerging market companies, based on market capitalization. This strategy was launched in January 2008. At June 30, 2017 , the Emerging Markets Focused Value strategy generated a one-year annualized gross return of 34.4% , outperforming its benchmark. This outperformance was driven primarily by our stock selection in the industrials, materials, and financial services sectors and the performance of certain stocks in the consumer staples sector. This relative outperformance was partially offset by our stock selection in the information technology sector.
European Focused Value. This strategy reflects a portfolio composed of approximately 40 to 50 stocks drawn from a universe of 750 of the largest European companies, based on market capitalization. This strategy was launched in August 2008. At June 30, 2017 , the European Focused Value strategy generated a one-year annualized gross return of 34.7% , outperforming its benchmark. This outperformance was broad based and primarily driven by our overexposure and stock selection in the financial services sector, our stock selection in the information technology sector, our underweight position in the health care and consumer staples sectors, and the performance of certain French stocks and stocks in the materials sector.
Global Focused Value .  This strategy reflects a portfolio composed of approximately 40 to 60 stocks drawn from a universe of 2,000 of the largest companies across the world, based on market capitalization. This strategy was launched in January 2004. At June 30, 2017 , the Global Focused Value strategy generated a one-year annualized gross return of 33.4% , outperforming its benchmark.  This main contributors to this outperformance were our stock selection and overexposure in the financial services sector, our stock selection in the information technology and materials sectors, and our underweight position in the health care sector.
Global Value World.   This strategy reflects a portfolio composed of approximately 60 to 95 stocks drawn from a universe of 2,000 of the largest companies across the world, based on market capitalization. This strategy was launched in January 2010. At June 30, 2017 , the Global Value World strategy generated a one-year annualized gross return of 28.8% , outperforming its benchmark. This outperformance was primarily driven by our stock selection and overexposure in the financial services sector and our stock selection in the information technology sector.
Mid Cap Value . This strategy reflects a portfolio composed of approximately 50 to 80 stocks drawn from a universe of U.S. listed companies ranked from the 201st to 1,200th largest, based on market capitalization. This strategy was launched in April 2014. At June 30, 2017 , the Mid Cap Value strategy generated a one-year annualized gross return of 27.4% , outperforming its benchmark. This outperformance was driven by our stock selection in the financial services, our overexposure to the technology sectors and our underexposure in the utilities sector, partially offset by our stock selection in the energy sector.
Focused Value.   This strategy reflects a portfolio composed of a portfolio of approximately 30 to 40 stocks drawn from a universe of 1,000 of the largest U.S. listed companies, based on market capitalization. This strategy was launched in January 1996. At June 30, 2017 , the Focused Value strategy generated a one-year annualized gross return of 28.7% , outperforming its benchmark. The relative outperformance was driven primarily by our stock selection and overexposure in the financial services sector, lack of exposure in the utilities sector, and our stock selection in the technology, producer durables and health care sectors. This outperformance was partially offset by our stock selection in the energy sector.
Small Cap Focused Value .  This strategy reflects a portfolio composed of approximately 40 to 50 stocks drawn from a universe of U.S. listed companies ranked from the 1,001 st to 3,000 th largest, based on market capitalization. This strategy was

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launched in January 1996. At June 30, 2017 , the Small Cap Focused Value strategy generated a one-year annualized gross return of 27.6% , outperforming its benchmark. The main contributors to this outperformance include our stock selection in the financial services, materials, and consumer discretionary sectors and our lack of exposure to the utilities sector. This outperformance was partially offset by our stock selection in the health care sector and our overweight position in the producer durables sector.
International (ex-U.S.) Focused Value . This strategy reflects a portfolio composed of approximately 30 to 50 stocks drawn from a universe of 1,500 of the largest companies across the world excluding the United States, based on market capitalization. This strategy was launched in January 2004. At June 30, 2017 , the International (ex-U.S.) Focused Value strategy generated a one-year annualized gross return of 33.1% , outperforming its benchmark. This relative outperformance was driven by our stock selection and overweight position in the financial services sector, certain positions in the information technology and materials sectors, and our underweight positions in the health care and consumer staples sectors.
Mid Cap Focused Value. This strategy reflects a portfolio composed of approximately 30 to 40 stocks drawn from a universe of U.S. listed companies ranked from the 201st to 1,200th largest, based on market capitalization. This strategy was launched in September 1998. At June 30, 2017 , the Mid Cap Focused Value strategy generated a one-year annualized gross return of 30.3% , outperforming its benchmark.  Our stock selection, particularly in the financial services sector, was the largest contributor to this outperformance.
Our earnings and cash flows are heavily dependent upon prevailing financial market conditions.  Significant increases or decreases in the various securities markets, particularly the equities markets, can have a material impact on our results of operations, financial condition, and cash flows.
 

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The change in AUM in our institutional and retail accounts for the three and six months ended June 30, 2017 and 2016 is described below.  Inflows are composed of the investment of new or additional assets by new or existing clients.  Outflows consist of redemptions of assets by existing clients.
Assets Under Management
 
 
 
 
 
 
 
 
($ billions)
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
Institutional Accounts
 
 
 
 
 
 
 
 
  Assets
 
 
 
 
 
 
 
 
  Beginning of Period
 
$
17.8

 
$
14.5

 
$
16.9

 
$
14.9

     Inflows
 
0.6

 
0.4

 
1.2

 
0.8

     Outflows
 
(0.4
)
 
(0.3
)
 
(1.1
)
 
(1.0
)
     Net Flows
 
0.2

 
0.1

 
0.1

 
(0.2
)
     Market Appreciation/(Depreciation)
 
0.7

 
(0.3
)
 
1.7

 
(0.4
)
  End of Period
 
$
18.7

 
$
14.3

 
$
18.7

 
$
14.3

 
 
 
 
 
 
 
 
 
Retail Accounts
 
 
 
 
 
 
 
 
  Assets
 
 
 
 
 
 
 
 
  Beginning of Period
 
$
14.2

 
$
11.6

 
$
13.1

 
$
11.1

     Inflows
 
0.5

 
0.2

 
1.4

 
1.0

     Outflows
 
(0.2
)
 
(0.7
)
 
(0.6
)
 
(1.0
)
     Net Flows
 
0.3

 
(0.5
)
 
0.8

 
—

     Market Appreciation/(Depreciation)
 
0.3

 
—

 
0.9

 
—

  End of Period
 
$
14.8

 
$
11.1

 
$
14.8

 
$
11.1

 
 
 
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
 
  Assets
 
 
 
 
 
 
 
 
  Beginning of Period
 
$
32.0

 
$
26.1

 
$
30.0

 
$
26.0

     Inflows
 
1.1

 
0.6

 
2.6

 
1.8

     Outflows
 
(0.6
)
 
(1.0
)
 
(1.7
)
 
(2.0
)
     Net Flows
 
0.5

 
(0.4
)
 
0.9

 
(0.2
)
     Market Appreciation/(Depreciation)
 
1.0

 
(0.3
)
 
2.6

 
(0.4
)
  End of Period
 
$
33.5

 
$
25.4

 
$
33.5

 
$
25.4

 
Three Months Ended June 30, 2017 and June 30, 2016

At June 30, 2017 , we managed $18.7 billion in institutional accounts and $14.8 billion in retail accounts, for a total of $33.5 billion in assets under management.  For the three months ended June 30, 2017 , we experienced market appreciation of $1.0 billion and total gross inflows of $ 1.1 billion , partially offset by total gross outflows of $0.6 billion .  Assets in institutional accounts increased by $0.9 billion , or 5.1% , from $17.8 billion at June 30, 2016 , due to $0.7 billion in market appreciation and $0.6 billion in gross inflows, partially offset by $0.4 billion in gross outflows. Assets in retail accounts increased by $0.6 billion , or 4.2% , from $14.2 billion at June 30, 2016 , due to $0.5 billion in gross inflows and $0.3 billion in market appreciation, partially offset by $0.2 billion in gross outflows.
 
At June 30, 2016 , we managed $14.3 billion in institutional accounts and $11.1 billion in retail accounts, for a total of $25.4 billion in assets under management. For the three months ended June 30, 2016 , we experienced total gross outflows of $1.0 billion and market depreciation of $0.3 billion , partially offset by total gross inflows of $0.6 billion . Assets in institutional

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accounts decreased by $0.2 billion , or 1.4% , from $14.5 billion at March 31, 2016, due to $0.3 billion in gross outflows and $0.3 billion in market depreciation, partially offset by $0.4 billion in gross inflows. Assets in retail accounts decreased by $0.5 billion , or 4.3% , from $11.6 billion at March 31, 2016 due to $0.7 billion in gross outflows, partially offset by $0.2 billion in gross inflows.

Six Months Ended June 30, 2017 and June 30, 2016

For the six months ended June 30, 2017 , we experienced market appreciation of $2.6 billion and total gross inflows of $2.6 billion , which were partially offset by total gross outflows of $1.7 billion . Assets in institutional accounts increased by $1.8 billion , or 10.7% , from $16.9 billion at December 31, 2016 due to $1.7 billion in market appreciation and $1.2 billion in gross inflows, partially offset by $1.1 billion in gross outflows. Assets in retail accounts increased $1.7 billion, or 13.0%, from $13.1 billion at December 31, 2016 due to $1.4 billion in gross inflows and $0.9 billion in market appreciation, partially offset by $0.6 billion in gross outflows.

For the six months ended June 30, 2016 , we experienced total gross outflows of $2.0 billion and market depreciation of $0.4 billion , which were partially offset by total gross inflows of $1.8 billion . Assets in institutional accounts decreased by $0.6 billion , or 4.0% , from $14.9 billion at December 31, 2015 due to $1.0 billion in gross outflows and $0.4 billion in market depreciation, partially offset by $0.8 billion in gross inflows. Assets in retail accounts were flat due to $1.0 billion in gross inflows offset by $1.0 billion in gross outflows.

Revenue

Our revenue from advisory fees earned on our institutional accounts and our retail accounts for the three and six months ended June 30, 2017 and 2016 is described below:
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
Revenue
 
2017
 
2016
 
2017

2016
 
 
(in thousands)
Institutional Accounts
 
$
24,256

 
$
19,169

 
$
47,203

 
$
38,166

Retail Accounts
 
9,857

 
7,266

 
18,954

 
14,107

Total
 
$
34,113

 
$
26,435

 
$
66,157

 
$
52,273


Three Months Ended June 30, 2017 and June 30, 2016

Our total revenue increased by $7.7 million , or 29.0% , to $34.1 million for the three months ended June 30, 2017 , from $26.4 million for the three months ended June 30, 2016 . This change was driven primarily by an increase in our average AUM due to market appreciation and net inflows. Average AUM increased 25.3% to $32.7 billion from $26.1 billion for the three months ended June 30, 2017 and 2016 , respectively.  We recognized $0.4 million in performance fees during the three months ended June 30, 2017 . We did not recognize any performance fees during the three months ended June 30, 2016 .  

Our weighted average fees were 0.417% and 0.405% for the three months ended June 30, 2017 and 2016 , respectively.

Average assets in institutional accounts increased $3.7 billion to $18.3 billion for the three months ended June 30, 2017 , from $14.6 billion for the three months ended June 30, 2016 , and had weighted average fees of 0.530% and 0.526% for the three months ended June 30, 2017 and 2016 , respectively.  The increase in weighted average fee rates primarily reflects an increase in assets in non-U.S. strategies that generally carry higher fee rates. Assets in non-U.S. and global strategies represented 51.9% of total assets under management as of June 30, 2017 , increasing from 43.7% as of June 30, 2016 .

Average assets in retail accounts increased $2.9 billion to $14.4 billion for the three months ended June 30, 2017 , from $11.5 billion for the three months ended June 30, 2016 , and had weighted average fees of 0.274% and 0.253% for the three months ended June 30, 2017 and 2016 , respectively.  The increase in retail weighted average fee rates primarily reflects an increase in performance fees recognized during the three months ended June 30, 2017 , as well as an increase in assets in non-U.S. strategies that generally carry higher fee rates.  We did not recognize any performance fees during the three months ended June 30, 2016 , compared to $0.4 million recognized during the three months ended June 30, 2017 .


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Six Months Ended June 30, 2017 and June 30, 2016

Our total revenue increased by $13.9 million , or 26.6% , to $66.2 million for the six months ended June 30, 2017 , from $52.3 million for the six months ended June 30, 2016 . This change was driven primarily by an increase in our average AUM due to market appreciation and net inflows. Average AUM increased 25.0% to $32.0 billion from $25.6 billion for the six months ended June 30, 2017 and 2016 , respectively.  

Our weighted average fees were 0.414% and 0.409% for the six months ended June 30, 2017 and 2016 , respectively.

Average assets in institutional accounts increased $3.6 billion to $17.9 billion for the six months ended June 30, 2017 , from $14.3 billion for the six months ended June 30, 2016 , and had weighted average fees of 0.526% and 0.533% for the six months ended June 30, 2017 and 2016 , respectively.  

Average assets in retail accounts increased $2.9 billion to $14.1 billion for the six months ended June 30, 2017 , from $11.2 billion for the six months ended June 30, 2016 , and had weighted average fees of 0.270% and 0.251% for the six months ended June 30, 2017 and 2016 , respectively.  The increase in retail weighted average fee rates primarily reflects an increase in retail performance fees.

Expenses
 
Our operating expenses are driven primarily by our compensation and benefits costs.  The table below describes the components of our operating expenses for the three and six months ended June 30, 2017 and 2016 .
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Cash Compensation and Other Benefits
$
12,036

 
$
10,118

 
$
24,987

 
$
21,015

Other Non-Cash Compensation
2,260

 
1,581

 
4,931

 
3,182

Total Compensation and Benefits Expense
14,296

 
11,699

 
29,918

 
24,197

General and Administrative Expense
3,198

 
3,475

 
6,523

 
6,519

Total Operating Expenses
$
17,494

 
$
15,174

 
$
36,441

 
$
30,716


Three Months Ended June 30, 2017 and June 30, 2016

Total operating expenses increased by $2.3 million , or 15.3% , to $17.5 million for the three months ended June 30, 2017 , from $15.2 million for the three months ended June 30, 2016 .  This increase reflects an increase in compensation and benefits expense, partially offset by a decrease in general and administrative expense. 
 
Compensation and benefits expense increased by approximately $2.6 million , or 22.2% , to $14.3 million for the three months ended June 30, 2017 , from $11.7 million for the three months ended June 30, 2016 .  This increase reflects an increase in headcount and compensation rates.
 
General and administrative expense decreased by $0.3 million , or 8.0% , to $3.2 million for the three months ended June 30, 2017 from $3.5 million for the three months ended June 30, 2016 .

Six Months Ended June 30, 2017 and June 30, 2016

Total operating expenses increased by $5.7 million , or 18.6% , to $36.4 million for the six months ended June 30, 2017 , from $30.7 million for the six months ended June 30, 2016 .  This increase was attributable to an increase in our compensation and benefits expenses.
 
Compensation and benefits expense increased by approximately $5.7 million , or 23.6% , to $29.9 million for the six months ended June 30, 2017 , from $24.2 million for the six months ended June 30, 2016 .  This increase reflects an increase in headcount

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and compensation rates, as well as other charges recognized during the three months ended March 31, 2017, which we do not expect to recur during the year.
 
General and administrative expense was $6.5 million for the six months ended June 30, 2017 , flat from $6.5 million for the six months ended June 30, 2016 .

Other Income/ (Expense)

Three Months Ended June 30, 2017 and June 30, 2016
 
Other Income/ (Expense) was income of $0.7 million for the three months ended June 30, 2017 , and consisted primarily of $0.3 million in income related to net realized and unrealized gains from investments, $0.2 million in equity in the earnings of affiliates, and $0.1 million in dividend income. Other Income/ (Expense) was income of $0.3 million for the three months ended June 30, 2016 , and consisted primarily of $0.7 million of income related to adjustments to our liability to our selling and converting shareholders and $0.1 million in dividend income, partially offset by $0.4 million in net realized and unrealized losses from investments and $0.1 million in equity in the losses of affiliates.  As discussed further below, the liability to our selling and converting shareholders represents 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we realize as a result of the amortization of the increases in tax basis generated from our purchase of operating company units from our selling shareholders.

Six Months Ended June 30, 2017 and June 30, 2016

Other Income/ (Expense) was income of $2.1 million for the six months ended June 30, 2017 , and consisted primarily of $1.1 million in income related to net realized and unrealized gains from investments, $0.7 million in equity in the earnings of affiliates, and $0.2 million in dividend income. Other Income/ (Expense) was an expense of $0.4 million for the six months ended June 30, 2016 , and consisted primarily of $0.4 million in net realized and unrealized losses from investments and $0.2 million in expense related to adjustments to our liability to our selling and converting shareholders, partially offset by $0.2 million in dividend income.  As discussed further below, the liability to our selling and converting shareholders represents 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we realize as a result of the amortization of the increases in tax basis generated from our purchase of operating company units from our selling shareholders.

Income Tax Expense
 
For the three and six months ended June 30, 2017 and 2016 , components of our income tax expense are as follows:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Unincorporated and Other Business Tax Expenses
$
672

 
$
512

 
$
1,300

 
$
977

Corporate Tax Expense:
 
 
 
 
 
 
 
Corporate Income Tax Expense
1,569

 
915

 
2,667

 
1,730

Change in Valuation Allowance
—

 
820

 
—

 
(240
)
Total Corporate Tax (Benefit)/ Expense
1,569

 
1,735

 
2,667

 
1,490

Total Income Tax Expense
$
2,241

 
$
2,247

 
$
3,967

 
$
2,467


The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes. The Company's provision for income taxes reflects its U.S. federal, state, and local incomes taxes on its allocable portion of the operating company's income. The effective tax rate includes a rate benefit attributable to the fact that approximately 74.7% and 76.5% of the operating company's earnings were not subject to corporate-level taxes for the three months ended June 30, 2017 and 2016 , respectively. Income before income taxes includes net income attributable to non-controlling interests and not taxable to the Company, which reduces the effective tax rate. This favorable impact is partially offset by the impact of certain permanently non-deductible items. These factors are expected to continue to impact the effective tax rate for future years, although as the Company's economic interest in the operating company increases, the effective tax rate will likewise increase as more income will be subject to corporate-level taxes. The effective tax rate will also be affected by the discrete tax impact of

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future dividends on unvested share-based awards and future vesting of restricted share-based awards based on fluctuations in the trading price of the Company's Class A common stock between grant date and vesting date.

Excluding discrete and permanently non-deductible items, which includes the net income attributable to non-controlling interest, the Company's effective tax rate was 36.8% and 36.9% for the three months ended June 30, 2017 and 2016 , respectively.

Three Months Ended June 30, 2017 and June 30, 2016

Income Tax Expense was $2.2 million for both the three months ended June 30, 2017 and 2016 .  Income tax expense for the three months ended June 30, 2017 consisted of $0.7 million in operating company unincorporated and other business taxes and $1.6 million of corporate income taxes. Income tax expense for the three months ended June 30, 2016 consisted of $0.5 million in operating company unincorporated and other business taxes, $0.9 million of corporate income taxes, and a  $0.8 million expense associated with an increase in the valuation allowance recorded against our deferred tax asset. No changes in the realizability of the deferred tax asset were recorded during the three months ended June 30, 2017 .

Six Months Ended June 30, 2017 and June 30, 2016

Income Tax Expense was $4.0 million for the six months ended June 30, 2017 and $2.5 million for the six months ended June 30, 2016 .  Income tax expense for the six months ended June 30, 2017 consisted of $1.3 million in operating company unincorporated and other business taxes and $2.7 million of corporate income taxes. Income tax expense for the three months ended June 30, 2016 consisted of $1.0 million in operating company unincorporated and other business taxes, $1.7 million of corporate income taxes, and a  $0.2 million benefit associated with a decrease in the valuation allowance recorded against our deferred tax asset. No changes in the realizability of the deferred tax asset were recorded during the six months ended June 30, 2017 .

Net Income Attributable to Non-Controlling Interests
 
Three Months Ended June 30, 2017 and June 30, 2016

Net income attributable to non-controlling interests was $12.5 million for the three months ended June 30, 2017 , and consisted of $12.4 million associated with our employees’ and outside investors’ approximately 74.7% weighted average interest in the income of the operating company and $0.1 million associated with the non-controlling interest in the income of our consolidated entities.  Net income attributable to non-controlling interests was $8.0 million for the three months ended June 30, 2016 , and consisted of $8.0 million associated with our employees’ and outside investors’ approximately 76.5% weighted average interest in the income of the operating company.  The change in net income attributable to non-controlling interests primarily reflects the increase in net income for the three months ended June 30, 2017 , partially offset by the decrease in our employees’ and outside investors’ weighted average interest in the income of the operating company.  We expect the interests in our operating company in subsequent periods to depend on changes in our shareholder’s equity and the size and composition of Class B units awarded by our operating company’s compensation plans.

Six Months Ended June 30, 2017 and June 30, 2016

Net income attributable to non-controlling interests was $22.9 million for the six months ended June 30, 2017 , and consisted primarily of $22.5 million associated with our employees’ and outside investors’ approximately 74.7% weighted average interest in the income of the operating company and $0.4 million associated with the non-controlling interest in the income of our consolidated entities.  Net income attributable to non-controlling interests was $15.7 million for the six months ended June 30, 2016 , and consisted of $15.8 million associated with our employees’ and outside investors’ approximately 77.0% weighted average interest in the income of the operating company, partially offset by a loss of $0.1 million associated with the non-controlling interest in the losses of our consolidated entities.  The change in net income attributable to non-controlling interests primarily reflects the increase in net income for the six months ended June 30, 2017 , partially offset by the decrease in our employees’ and outside investors’ weighted average interest in the income of the operating company.  We expect the interests in our operating company in subsequent periods to depend on changes in our shareholder’s equity and the size and composition of Class B units awarded by our operating company’s compensation plans.


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Liquidity and Capital Resources

Historically, the working capital needs of our business have primarily been met through the cash generated by our operations.  Distributions to members of our operating company are our largest use of cash.  Other activities include purchases and sales of investments to fund our deferred compensation program, capital expenditures, and supporting strategic growth initiatives such as providing the initial cash investment in our mutual funds.

We expect to fund the liquidity needs of our business in the next twelve months, and over the long term, primarily through cash generated from operations.  As an investment management company, our business is materially affected by conditions in the global financial markets and economic conditions throughout the world.  Our liquidity is highly dependent on the revenue and income from our operations, which is directly related to our levels of AUM.  For the three months ended June 30, 2017 , our average AUM and revenues increased by 25.3% and 29.0% , respectively, compared to our average AUM and revenues for the three months ended June 30, 2016 . At June 30, 2017 , cash and cash equivalents was $34.7 million , inclusive of $4.3 million in cash held by our consolidated subsidiaries.  Advisory fees receivable was $29.7 million . We also had approximately $11.5 million in investments set aside to satisfy our obligations under our deferred compensation programs.
 
In determining the sufficiency of liquidity and capital resources to fund our business, we regularly monitor our liquidity position, including, among other things, cash, working capital, investments, long-term liabilities, lease commitments, and operating company distributions.  Compensation is our largest expense.  To the extent we deem necessary and appropriate to run our business, recognizing the need to retain our key personnel, we have the ability to change the absolute levels of our compensation packages, as well as change the mix of their cash and non-cash components.  Historically, we have not tied our level of compensation directly to revenue, as many Wall Street firms do.  Correspondingly, there is not a linear relationship between our compensation and the revenues we generate.  This generally has the effect of increasing operating margins in periods of increased revenues, but can reduce operating margins when revenue declines.
 
We regularly evaluate our staffing requirements and compensation levels with reference to our own liquidity position and external peer benchmarking data.  The result of this review directly influences management’s recommendations to our Board of Directors with respect to such staffing and compensation levels.
 
We anticipate that tax allocations and dividend equivalent payments to the members of our operating company, which consist of certain of our employees, unaffiliated persons, former employees, and us, will continue to be a material financing activity.  Cash distributions to operating company members for partnership tax allocations would increase should the taxable income of the operating company increase.  Dividend equivalent payments will depend on our dividend policy and the discretion of our Board of Directors, as discussed below.
      
We believe that our lack of long-term debt, and ability to vary cash compensation levels, have provided us with an appropriate degree of flexibility in providing for our liquidity needs.
 
Dividend Policy
 
We are a holding company and our primary investment is our ownership of membership interests in our operating company. As a result, we depend upon distributions from our operating company to pay any dividends that our Board of Directors may declare to be paid to our Class A common stockholders. When, and if, our Board of Directors declares any such dividends, we then cause our operating company to make distributions to us in an amount sufficient to cover the dividends declared. Our dividend policy has certain risks and limitations, particularly with respect to liquidity. We may not pay dividends to our Class A common shareholders in amounts that have been paid to them in the past, 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 in the future, we may decide not to pay dividends. By paying cash dividends rather than investing that cash in our future growth, we risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations or unanticipated capital expenditures, should the need arise.
 
On an annual basis, our Board of Directors has targeted a cash dividend payout ratio of approximately 70% to 80% of our non-GAAP diluted net income, subject to growth initiatives and other funding needs.  Our ability to pay dividends is subject to the Board of Directors’ discretion and may be limited by our holding company structure and applicable provisions of Delaware law.
 

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Tax Receivable Agreement

Our purchase of membership units of our operating company concurrent with our initial public offering, and the subsequent and future exchanges by holders of Class B units of our operating company for shares of our Class A common stock (pursuant to the exchange rights provided for in the operating company’s operating agreement), has resulted in, and is expected to continue to result in, increases in our share of the tax basis of the tangible and intangible assets of our operating company, which will increase the tax depreciation and amortization deductions that otherwise would not have been available to us. These increases in tax basis and tax depreciation and amortization deductions have reduced, and are expected to continue to reduce, the amount of cash taxes that we would otherwise be required to pay in the future. We entered into a tax receivable agreement with the current members of our operating company, the one member of our operating company immediately prior to our initial public offering who sold all membership units to us in connection with our initial public offering and any future holders of Class B units. This tax receivable agreement requires us to pay these members 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 described in the tax receivable agreement) 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.

Cash Flows

  Three Months Ended June 30, 2017 and June 30, 2016

Cash and cash equivalents increased $14.7 million to $34.7 million during the three months ended June 30, 2017 compared to a $4.4 million increase in cash and cash equivalents to $24.8 million during the three months ended June 30, 2016 .  Net cash provided by operating activities was $23.7 million in the three months ended June 30, 2017 , compared to $15.4 million provided by operating activities in the three months ended June 30, 2016 .  The increase in cash provided was primarily due to an increase in net income and changes in operating assets and liabilities, and working capital.
 
Net cash used in investing activities was $0.1 million for the three months ended June 30, 2017 , compared to net cash provided by investing activities of $1.1 million for the three months ended June 30, 2016 . The increase in cash used in investing activities was primarily due to a $1.3 million decrease in net proceeds of investments, partially offset by a $0.1 million decrease in payments to related parties during the three months ended June 30, 2017 .
   
Net cash used in financing activities decreased $3.2 million for the three months ended June 30, 2017 to $8.9 million from $12.1 million for the three months ended June 30, 2016 . The decrease in cash used is primarily due to a $3.3 million decrease in net distributions from non-controlling interests and a $0.2 million decrease in the repurchase and retirement of shares of Class A common stock and Class B units, partially offset by a $0.2 million decrease in cash received for the purchase of Delayed Exchange Class B Units during the three months ended June 30, 2017 .

Six Months Ended June 30, 2017 and June 30, 2016

Cash and cash equivalents decreased $8.8 million to $34.7 million during the six months ended June 30, 2017 compared to a $10.6 million decrease in cash and cash equivalents to $24.8 million during the six months ended June 30, 2016 .  Net cash provided by operating activities decreased $4.4 million in the six months ended June 30, 2017 to $23.1 million from $27.5 million in the six months ended June 30, 2016 .  The decrease was primarily due changes in operating assets and liabilities, and working capital.
 
Net cash used in investing activities increased $0.6 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 .  The increase was primarily due to a $0.4 million increase in net purchases of investments and $0.2 million increase in payments to related parties during the six months ended June 30, 2017 .
   
Net cash used in financing activities decreased $6.6 million for the six months ended June 30, 2017 to $31.2 million from $37.8 million for the six months ended June 30, 2016 . The decrease in cash used is primarily due to a $6.1 million decrease in net distributions from non-controlling interests and a $0.8 million decrease in the repurchase and retirement of shares of Class A common stock and Class B units, partially offset by a $0.2 million decrease in cash received for the purchase of Delayed Exchange Class B Units during the six months ended June 30, 2017 .


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Table of Contents

Contractual Obligations

The lease for our former corporate headquarters expired in October 2015.  We entered into an 11-year lease agreement in June 2014, the term of which commenced in October 2014.  Annual minimum rent during the term is approximately $2.0 million.  During the third quarter of 2016, we terminated a five-year sublease agreement which commenced on May 1, 2015. We entered into a new four-year sublease agreement commencing on October 1, 2016, which is cancelable by either the Company or sublessee given appropriate notice after the thirty-first month following the commencement of the sublease agreement.  Sublease income decreases annual lease expense by approximately $0.4 million per year.

Off-Balance Sheet Arrangements
 
We did not have any off-balance sheet arrangements as of June 30, 2017 .
 
Critical Accounting Policies and Estimates
   
The preparation of our consolidated financial statements, in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), requires management to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources.  We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
 
Accounting policies are an integral part of our financial statements.  A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial condition.  Management believes that the critical accounting policies discussed below involve additional management judgment due to the sensitivity of the methods and assumptions used.
 
Consolidation
 
Our policy is to consolidate all majority-owned subsidiaries in which we have a controlling financial interest and variable-interest entities of which we are deemed to be the primary beneficiary.  We assess our consolidation practices regularly, as circumstances dictate.  All significant inter-company transactions and balances have been eliminated.

Income Taxes
 
We are a “C” corporation under the Internal Revenue Code, and thus liable for federal, state and local taxes on the income derived from our economic interest in our operating company.  The operating company is a limited liability company that has elected to be treated as a partnership for tax purposes.  Our operating company has not made a provision for federal or state income taxes because it is the responsibility of each of the operating company’s members (including us) to separately report their proportionate share of the operating company’s taxable income or loss.  Similarly, the income of our consolidated subsidiaries is not subject to income taxes, as such income is allocated to each partnership’s individual partners.  The operating company has made a provision for New York City Unincorporated Business Tax.
 
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases, net operating loss carryforwards and tax credits.  A valuation allowance is recorded on our deferred tax assets when it is more-likely-than-not that all or a portion of such assets will not be realized. When evaluating the realizability of our deferred tax assets, all evidence, both positive and negative, is evaluated, which requires management to make significant judgments and assumptions. Items considered when evaluating the need for a valuation allowance include our forecast of future taxable income, future reversals of existing temporary differences, tax planning strategies and other relevant considerations.
 
We believe that the accounting estimate related to the valuation allowance is a critical accounting estimate because the underlying assumptions can change from period to period.  For example, tax law changes, or variances in future projected operating performance, could result in a change in the valuation allowance.  If we are not able to realize all or part of our net deferred tax assets in the future, an adjustment to our deferred tax asset valuation allowance would be charged to income tax expense in the period such determination was made.


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Table of Contents

During the first quarter of 2017, the Company adopted ASU No. 2016-09, " Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting," issued by the FASB in March 2016. This standard requires all excess tax benefits or tax deficiencies related to stock and unit transactions to be reflected in the consolidated statements of operations as a component of the provision for income taxes. Previously, these excess tax benefits were not recognized until they resulted in a reduction of cash taxes payable, and were subsequently recorded in equity when they reduced cash taxes payable. The Company only recognized a tax benefit from stock and unit-based awards in Additional Paid-In Capital if an incremental tax benefit was realized after all other tax benefits available had been utilized. The Company adopted ASU No. 2016-09 under a modified retrospective approach by recording a cumulative effect adjustment to equity as of the January 1, 2017, related to the recognition of the previously unrecognized excess tax benefits. The effects of ASU No. 2016-09 on the Company’s consolidated financial statements are included in “Note 2 — Significant Accounting Policies — Accounting Pronouncements Adopted in 2017” of this Quarterly Report on Form 10-Q.

Management's judgment is required in determining our provision for income taxes, evaluating our tax positions and establishing deferred tax assets and liabilities.  The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations.  If the ultimate resolution of uncertainties is different from currently estimated, it could affect income tax expense and the effective tax rate.
 
Recently Issued Accounting Pronouncements Not Yet Adopted

See Note 2, "Significant Accounting Policies — Recently Issued Accounting Pronouncements Not Yet Adopted" of the consolidated financial statements included in this Quarterly Report on Form 10-Q.    

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Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
Market Risk
 
Our exposure to market risk is directly related to our role as investment adviser for the institutional separate accounts we manage and the retail clients for which we act as sub-investment adviser.  
 
Our revenue for the three and six months ended June 30, 2017 and 2016 was generally derived from advisory fees, which are typically based on the market value of our AUM, which can be affected by adverse changes in interest rates, foreign currency exchange and equity prices.  Accordingly, a decline in the prices of securities would cause our revenue and income to decline, due to a decrease in the value of the assets we manage.  In addition, such a decline could cause our clients to withdraw their funds in favor of investments offering higher returns or lower risk, which would cause our revenue and income to decline further.

The value of our AUM was $33.5 billion as of June 30, 2017 . A 10% increase or decrease in the value of our AUM, if proportionately distributed over all of our investment strategies, products, and client relationships, would cause an annualized increase or decrease in our revenues of approximately $13.8 million at our current weighted average fee rate excluding the impact of performance fees and fulcrum fees of 0.412%. There are differences in our fee rates across distribution channels, investment strategies and the size of client relationships. As such, a change in the composition of our AUM, in particular an increase in the proportion of our total assets under management attributable to strategies, clients or relationships with lower effective fee rates, could have a material negative impact on our overall weighted average fee rates and thus different impact to revenues on the same 10% increase or decrease in the value of our AUM.
 
We are also subject to market risk due to a decline in the value of the our holdings and the holdings of our consolidated subsidiaries, which, as of June 30, 2017 , consist primarily of marketable securities, investments in equity method investees, and securities sold short.  At June 30, 2017 , the value of our assets subject to market risk was $27.0 million. At June 30, 2017 , the value of our liabilities subject to market risk was $3.3 million . Assuming a 10% increase or decrease, the fair value of assets and liabilities would have increased or decreased by $2.7 million and $ 0.3 million , respectively, at June 30, 2017 .

Exchange Rate Risk

A substantial portion of the accounts that we advise, or sub-advise, hold investments that are denominated in currencies other than the U.S. Dollar. Movements in the rate of exchange between the U.S. Dollar and the underlying foreign currency affect the values of assets held in accounts that we manage, thereby affecting the amount of revenues we earn. The value of our AUM was $33.5 billion as of June 30, 2017 and approximately 36% of our assets under management across our investment strategies were invested in strategies that primarily invest in securities of non-U.S. companies and approximately 41% of our assets under management were invested in securities denominated in currencies other than the U.S. Dollar. To the extent our assets under management are denominated in currencies other than the U.S. Dollar, the value of those assets under management will decrease with an increase in the value of the U.S. Dollar, or increase with a decrease in the value of the U.S. Dollar. Because we believe that many of our clients invest in those strategies in order to gain exposure to non-U.S. currencies, or may implement their own hedging programs, we do not hedge an investment portfolio’s exposure to a non-U.S. currency.

We have not adopted a corporate-level risk management policy to manage this exchange rate risk. Assuming that 41% of our assets under management is invested in securities denominated in currencies other than the U.S. Dollar, a 10% increase or decrease in the value of the U.S. Dollar would decrease or increase the fair value of our assets under management by $1.4 billion, which would cause an annualized increase or decrease in revenues of approximately $6.0 million at our current weighted average fee rate excluding the impact of performance fees and fulcrum fees of 0.412%.

We operate in several foreign countries, including the United Kingdom and Australia. We incur operating expenses and have foreign currency-denominated assets and liabilities associated with these operations, although our revenues are predominately realized in U.S. Dollar. We do not believe that foreign currency fluctuations materially affect our results of operations and, as such, have not adopted a corporate-level risk management policy to manage this exchange rate risk.


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Interest Rate Risk
   
As of June 30, 2017 , our $34.7 million in cash and cash equivalents was primarily held in demand deposit accounts. As such, interest rate changes would not have a material impact on the income we earn from these deposits. Since the Company does not have any debt that bears interest at a variable rate, it did not have any direct exposure to interest rate risk at June 30, 2017 .

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Item 4.   Controls and Procedures.
 
During the course of the review of our consolidated financial statements as of June 30, 2017 , our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2017 , our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
There have not been any changes in our internal control over financial reporting during the three and six months ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Issuances

During the three months ended June 30, 2017 , in connection with employee equity purchases we issued an aggregate of 9,789 Class B units of our operating company and the corresponding number of shares of Class B common stock. Certain of these Class B units are Delayed Exchange Class B units, which have the right to receive dividend payments; but cannot be exchanged for shares of the Company's Class A common stock until seven years after the date of grant and do not carry rights associated with the tax receivable agreement.

These issuances did not involve any public offering, general advertising or general solicitation. The certificates representing the securities bear a restrictive legend. The securities were issued in a transaction not involving a public offering and were issued in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The table below sets forth information regarding purchases of our Class A Common Stock on a monthly basis during the three months ended June 30, 2017 .
Period
 
(a) Total Number of Shares of Class A Common Stock Purchased
 
(b) Average Price Paid per Share of Class A Common Stock
 
(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 1
 
(d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
 
 
 
 
 
 
 
 
(in millions)
April 1, 2017 - April 30, 2017
 
—

 
$
—

 
—

 
$
—

May 1, 2017 - May 31, 2017
 
63,103

 
8.78

 
63,103

 
6.8

June 1, 2017 - June 30, 2017
 
8,198

 
9.36

 
8,198

 
6.7

Total
 
71,301

 
$
8.84

 
71,301

 
$
6.7


1
Our share repurchase program was announced on April 24, 2012. The Board of Directors authorized us to repurchase an aggregate of $10 million of our outstanding Class A common stock and the operating company's Class B units on the open market and in private transactions in accordance with applicable securities laws. In February 2014, the Company announced an increase of $20 million in the aggregate amount authorized under the repurchase program. The timing, number and value of common shares and units repurchased are subject to the Company’s discretion. The Company’s share repurchase program is not subject to an expiration date and may be suspended, discontinued, or modified at any time, for any reason.
 

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Item 6.  Exhibits.
Exhibit
 
Description of Exhibit
10.1
 
Pzena Investment Management, LLC Amended and Restated 2006 Equity Incentive Plan
10.2
 
Pzena Investment Management, LLC Amended and Restated 2007 Equity Incentive Plan
31.1
 
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) (filed herewith)
31.2
 
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) (filed herewith)
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
101
 
Materials from the Pzena Investment Management, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in Extensible Business Reporting Language (XBRL):  (i) Consolidated Statements of Financial Condition, (ii) Consolidated Statements of Operations, (iii) Consolidated Statement of Changes in Equity, (iv) Consolidated Statements of Cash Flows, and (vi) related Unaudited Notes to the Consolidated Financial Statements, tagged in detail (furnished herewith).


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: August 7, 2017

 
PZENA INVESTMENT MANAGEMENT, INC.
 
 
 
 
By:
/s/ R ICHARD  S. P ZENA
 
 
Name:
Richard S. Pzena
 
 
Title:
Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
By:
/s/ J ESSICA  R. D ORAN
 
 
Name:
Jessica R. Doran
 
 
Title:
Chief Financial Officer
(Principal Financial and Accounting Officer)

47


Amended and Restated Pzena Investment Management, LLC 2006 Equity Incentive Plan





Table of Contents

Page
1. Purpose    
2

2. Definitions
2

3. Term of the Plan
6

4. Administration
6

5. Authorization of Grants    
6

6. Specific Terms of Awards
8

7. Adjustment Provisions
12

8. Settlement of Awards    
14

9. No Special Employment or Other Rights
15

10. Nonexclusivity of the Plan
15

11. Termination and Amendment of the Plan and Awards
15

12. Notices and Other Communications
16

13. Governing Law
16
































1


PZENA INVESTMENT MANAGEMENT, LLC
Amended and Restated 2006 Equity Incentive Plan
1.
Purpose

Pzena Investment Management, LLC originally adopted the Pzena Investment Management, LLC Amended and Restated 2006 Equity Incentive Plan (the “Plan”) effective as of October 30, 2007. The Plan was later amended and restated as of April 5, 2013. The Plan is hereby amended and restated and shall be effective upon its approval by the stockholders of Pzena Investment Management, Inc. at its Annual Meeting of Stockholders to be held on May 23, 2017 (or, if the vote on the Plan is postponed, such other date on which a stockholders’ meeting to vote to approve the Plan occurs). If the Plan, as amended and restated, is not so approved, then the Plan, as in effect immediately prior to such Annual Meeting, shall remain in effect. This Plan is intended to encourage ownership of Class B Units of the Company by persons providing services to the Company and/or its subsidiaries, including members of the Company and employees and consultants of the Company and/or its subsidiaries, and to provide additional incentives for them to promote the success of the Company’s business.
2.
Definitions

As used in this Plan, the following terms shall have the following meanings, except as otherwise provided in the Award Agreement:
2.1     Accelerate , Accelerated , and Acceleration , when used with respect to an Option or Unit-Based Award, means that as of the time of reference the Option or Unit-Based Award will vest and, if applicable, will become exercisable with respect to some or all of the Class B Units or cash equivalent for which such Option or Unit-Based Award was not then otherwise exercisable by its terms, and, when used with respect to Restricted Units, means that the Risk of Forfeiture otherwise applicable to the Class B Units shall expire with respect to some or all of the Class B Units then otherwise subject to the Risk of Forfeiture.

2.2     Award means any grant or sale pursuant to the Plan of Options, Restricted Units, Unit Grants or other Unit-Based Awards or LTIP Units.

2.3     Award Agreement means an agreement between the Company and the recipient of an Award, setting forth the terms and conditions of the Award.

2.4     Cause means “Cause”, as described in the Operating Agreement, provided that references to an “Employee Member” shall be replaced by references to a “Participant.”

2.5     Class A Stock means Class A common stock, par value $0.01 per share, of Pzena Investment Management, Inc.

2



2.6     Class B Unit means a “Class B Unit” in the Company, as defined in the Operating Agreement.

2.7     Client means “Client”, as described in the Operating Agreement, provided that references to an “Employee Member” shall be replaced by references to a “Participant.”

2.8     Code means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto, and any regulations issued from time to time thereunder. To the extent that reference is made to any particular section of the Code, such reference shall be, where the context so admits, to any corresponding provisions of any succeeding law.

2.9     Committee means any committee of the board of directors of Pzena Investment Management, Inc., in its capacity as the Managing Member of the Company, that is delegated responsibility by such board of directors for the administration of the Plan, as provided in Section 4 of the Plan; provided , that such committee shall be comprised solely of directors of Pzena Investment Management, Inc. who are (a) “non-employee directors” under Rule 16b-3 of the Exchange Act, (b) “outside directors” under Code Section 162(m) and (c) “independent directors” pursuant to New York Stock Exchange requirements. For any period during which no such committee is in existence, “Committee” shall mean the Managing Member and all authority and responsibility assigned to the Committee under the Plan shall be exercised, if at all, by the Managing Member.

2.10     Company means Pzena Investment Management, LLC, a limited liability company organized under the laws of the State of Delaware.

2.11     Confidential Information means “Confidential Information”, as defined in the Operating Agreement.

2.12     Exchange Act means the Securities Exchange Act of 1934, as amended from time to time, and as now or hereafter construed, interpreted and applied by regulations, rulings and cases.

2.13     Fair Market Value of a Class B Unit on any given date means such value as the Committee, in its sole discretion, shall determine in good faith using any reasonable method; provided that in the case of a determination of the exercise price of an Option, such determination shall be made in a manner which permits the Option to be exempt from the application of Section 409A of the Code. In making a determination of Fair Market Value, the Committee shall take into account the information available with respect to the value of the Company, which factors may include (but are not limited to) (i) if the Class A Stock is listed for trading on the New York Stock Exchange or any other national securities exchange, the closing price per share of Class A stock on the applicable exchange on that date (or, if no closing price is reported, the last reported sale price) and (ii) discounts for lack of marketability of the Class B Units or waivers of benefits under the Tax Receivable Agreement, dated October 30, 2007, by and among Pzena Investment Management, Inc., the Company and the Continuing Members and Existing Members named on the signature pages thereto.

3



2.14     Good Reason means the occurrence of any of the following events without either (i) the Participant’s prior written consent; or (ii) full cure within 30 days after the Participant gives written notice to the Company describing the event in reasonable detail and requesting cure: any material diminution in the Participant’s title, responsibilities or authority with the Company; or any relocation of the Participant’s place of employment to a location that is more than 50 miles from both the Company’s principal office and the Participant’s then current principal residence.

2.15     Grant Date means the date as of which an Option is granted, as determined under Section 6.1(a).

2.16     Investment Advisory Services means any services that involve (i) the management of an investment account or fund (or portions thereof or a group of investment accounts or funds), (ii) the giving of advice with respect to the investment and/or reinvestment of assets or funds (or any group of assets or funds), or (iii) otherwise acting as an “investment adviser” within the meaning of the Investment Advisers Act of 1940, as amended (whether or not required to be registered under such act), and performing activities related or incidental thereto, provided that “Investment Advisory Services” shall exclude any service in respect of which no compensation or economic benefit is provided directly or indirectly to any person in respect of such service.

2.17     IPO means the initial public offering of Class A Stock, as contemplated in the registration statement on Form S-1 of Pzena Investment Management, Inc. (No. 333-143660).

2.18     LTIP Unit means a certain class or classes of membership interests in the Company which, upon the occurrence of certain events, may convert into Class B Units.

2.19     Managing Member has the meaning set forth in the Operating Agreement

2.20     Obligations means the Participant not engaging in any of the following activities: (i) directly or indirectly, whether as an officer, director, owner, partner, investor, member, adviser, representative, consultant, agent, employee, co-venturer or otherwise, providing Investment Advisory Services, except in the performance of his duties with the Company, or engaging, or assisting others to engage, in whole or in part, in any business in competition with the business of the Company, (ii) directly or indirectly (other than in the course of performing his duties to the Company) (a) soliciting the hiring of or hiring any employee of the Company or any person who, within the prior six months, had been an employee of the Company, assisting in, or encouraging such hiring by any person or encouraging any such employee to terminate or alter his relationship with the Company; (b) in competition with the Company, soliciting, seeking, inducing, pursuing in any way, or accepting a business relationship of any kind with, any person who is a Client of the Company, including by way of indirect or sub-advisory arrangements (such obligation to include the duty of the Participant to decline any such offered business activity even if unsolicited); (c) otherwise soliciting, encouraging or inducing any Client to terminate or reduce its business or relationship with the Company; or (d) otherwise take any action or have any communication with any person the purpose of which is, or the reasonably likely effect of which could be, to cause any such Client to terminate, alter, reduce, modify or restrict in any way its relationship or business with the Company; or (iii) except as required by law or on the written request or with the written consent of the Company, disclosing any Confidential Information, directly or indirectly, or using Confidential Information in any way.

4


        
2.21     Operating Agreement means the Company’s Amended and Restated Operating Agreement, dated as of October 30, 2007, as in effect from time to time.

2.22     Option means an option to purchase Class B Units of the Company.

2.23     Optionee means a Participant to whom an Option shall have been granted under the Plan.

2.24     Participant means any holder of an outstanding Award under the Plan.

2.25     Plan means this Pzena Investment Management, LLC 2006 Amended and Restated Equity Incentive Plan, as amended from time to time, and including any attachments or addenda hereto.

2.26     Restricted Units means Class B Units issued or sold to a Participant subject to a Risk of Forfeiture.

2.27     Restriction Period means the period of time, established by the Committee in connection with an Award of Restricted Units, during which such Restricted Units are subject to a Risk of Forfeiture described in the applicable Award Agreement.

2.28     Risk of Forfeiture means a limitation on the right of the Participant to retain Restricted Units, including a right in the Company to reacquire the Restricted Units at less than their then Fair Market Value, arising because of the occurrence or non-occurrence of specified events or conditions.

2.29     Securities Act means the Securities Act of 1933, as amended from time to time.

2.30     Unit Grant means a grant of Class B Units not subject to restrictions or other forfeiture conditions.

2.31     Unit-Based Award means an Award granted pursuant to Section 6.4 of the Plan.

5




3.
Term of the Plan

Unless the Plan shall have been earlier terminated by the Company, Awards may be granted under this Plan at any time in the period commencing on the date of approval of the Plan or any amendment and restatement of the Plan by the stockholders of the Company and ending immediately prior to the tenth anniversary of such date. Awards granted pursuant to the Plan within that period shall not expire solely by reason of the termination of the Plan.
4.
Administration

The Plan shall be administered by the Committee; provided, however , that at any time and on any one or more occasions the Managing Member may itself exercise any of the powers and responsibilities assigned the Committee under the Plan and when so acting shall have the benefit of all of the provisions of the Plan pertaining to the Committee’s exercise of its authorities hereunder; and provided further, however, that the Committee may delegate to one or more “executive officers” (as defined under applicable rules promulgated under the Exchange Act) the authority to grant Awards hereunder to employees who are not executive officers, and to consultants, in accordance with such guidelines as the Committee shall set forth at any time or from time to time. Subject to the provisions of the Plan, the Committee shall have complete authority, in its discretion, to make or to select the manner of making all determinations with respect to each Award to be granted by the Company under the Plan including the member, employee or consultant to receive the Award and the form of Award. In making such determinations, the Committee may take into account the nature of the services rendered by such members, employees and consultants, their present and potential contributions to the success of the Company, and such other factors as the Committee in its discretion shall deem relevant. Subject to the provisions of the Plan, the Committee shall also have complete authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of the respective Award Agreements (which need not be identical), and to make all other determinations necessary or advisable for the administration of the Plan. The Committee’s determinations made in good faith on matters referred to in the Plan shall be final, binding and conclusive on all persons having or claiming any interest under the Plan or an Award made pursuant hereto.
5.
Authorization of Grants

5.1     Eligibility . The Committee may grant from time to time and at any time prior to the termination of the Plan one or more Awards, either alone or in combination with any other Awards, to any service provider to the Company or any of its subsidiaries, including members of the Company and employees and consultants of the Company and/or its subsidiaries.

6



5.2     General Terms of Awards . Each grant of an Award shall be subject to all applicable terms and conditions of the Plan (including but not limited to any specific terms and conditions applicable to that type of Award set out in Section 6), and such other terms and conditions, not inconsistent with the terms of the Plan, as the Committee may prescribe. Restricted Units and Units Grants under the Plan shall at all times be subject to the terms of the Operating Agreement.

5.3     Non-Transferability of Awards . Awards shall not be transferable, and no Awards or interest therein may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, and all of a Participant’s rights in any Award may be exercised during the life of the Participant only by the Participant or the Participant’s legal representative. Notwithstanding the foregoing, Unit Grants and, following lapse of the Restriction Period, Restricted Units may be transferred in accordance with the provisions of the Operating Agreement.

5.4     Conditions to Receipt of Awards .
(a) No prospective Participant shall have any rights with respect to an Award unless and until such Participant has executed an agreement evidencing the Award, delivered a fully executed copy thereof to the Company, and otherwise complied with the applicable terms and conditions of such Award.
(b) Notwithstanding anything herein to the contrary, no Award of Options, Restricted Units, Unit Grants, other Unit- Based Awards, LTIP Units and no issuance of Class B Units upon exercise of an Option or the settlement of any Unit-Based Award, may be made to a person who has committed any act which could serve as a basis for (i) denial, suspension or revocation of the registration of any investment adviser, including the Company, under Section 203(e) of the Investment Advisers Act of 1940, as amended, or Rule 206(4)-4(b) thereunder, or for disqualification of any investment adviser, including the Company, as an investment adviser to a registered investment company pursuant to Sections 9(a) or 9(b) of the Investment Company Act of 1940, as amended, (ii) precluding the Company from acting as a fiduciary by operation of Section 411 of the Employee Retirement Income Security Act of 1974, as amended, or (iii) the Company failing to qualify as a “qualified professional asset manager” within the meaning of Department of Labor Prohibited Transaction Exemption 84-14.
(c) Each Award of Restricted Units, Unit Grants, other Unit-based Awards or LTIP Units and each issuance of Class B Units to the recipient of an Award of Options upon exercise of the Options or upon settlement of a Unit-Based Award, shall be conditioned upon the recipient’s execution of the Operating Agreement or an agreement of accession thereto.

5.5     Units Subject to Plan . The maximum number of Class B Units reserved for the grant or settlement of Awards under the Plan shall be 30,113,996 Class B Units, subject to adjustment as provided herein. If any Class B Units subject to an Award are forfeited, canceled, exchanged or surrendered or if an Award otherwise terminates or expires without a distribution of Class B Units to the Participant, the Class B Units with respect to such Award shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Awards under the Plan. Notwithstanding the foregoing, Class B Units that are exchanged by a Participant or withheld by the Company as full or partial payment in connection with any Award under the Plan, as well as any Class B Units exchanged by a Participant or withheld by the Company to satisfy the tax withholding obligations related to any Award under the Plan, shall not be available for subsequent Awards under the Plan.

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6.
Specific Terms of Awards

6.1     Options .
(a) Date of Grant . The granting of an Option shall take place at the time specified in the Award Agreement.

(b) Exercise Price . The price at which a Class B Unit may be acquired under each Option shall be no less than 100% of the Fair Market Value of such Class B Unit on the Grant Date.

(c) Option Period . The exercise period with respect to each Option shall be determined in the sole discretion of the Committee and specified in each Award Agreement; provided, however, that no Option may be exercised on or after the tenth anniversary of the Grant Date.

(d) Exercisability . An Option may be immediately exercisable or become exercisable in such installments, cumulative or non-cumulative, as the Committee may determine and as set forth in each Award Agreement. In the case of an Option not otherwise immediately exercisable in full, the Committee may Accelerate such Option in whole or in part at any time.

(e) Termination of Association with the Company - Generally. Unless the Committee shall provide otherwise for any Award with respect to any Option and except as provided in Section 6.1(f), if the Optionee’s employment or other association with the Company ends for any reason, any outstanding Option of the Optionee shall cease to be exercisable in any respect and shall terminate not later than 90 days following that event and, for the period it remains exercisable following that event, shall be exercisable only to the extent exercisable at the date of that event (and to the extent not then exercisable, shall terminate as of the date of such event), after giving effect to the last sentence of this Section 6(e). Military or sick leave or other bona fide leave shall not be deemed a termination of employment or other association, provided that it does not exceed the longer of ninety (90) days or the period during which the absent Optionee’s reemployment rights, if any, are guaranteed by statute or by contract. Notwithstanding anything contained herein to the contrary, unless the Committee shall otherwise provide, an Optionee shall immediately become fully vested in all Options if (i) such Optionee dies while employed by or providing services to the Company, (ii) such Optionee’s employment with or provision of services to the Company is terminated by the Company without Cause or (iii) such Optionee voluntarily terminates the provision of services to or employment with the Company with Good Reason; provided , that any termination of an Optionee’s employment (x) by reason of the Company’s waiver of any termination notice period given by an Optionee or (y) by the Company after such Optionee has given notice of voluntary termination will, in either case, be deemed a voluntary termination as of the date of the Optionee’s actual termination of employment.

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(f) Termination of Association with the Company Following Ten Years of Continuous Service . Notwithstanding anything contained herein to the contrary and unless the Committee shall provide otherwise for any Award with respect to any Option, in the event the Optionee voluntarily terminates employment or other association with the Company and has, as of the time of such termination, been employed by or providing services to the Company for a continuous period of no less than ten years, then (i) such Optionee will, subject to the Optionee’s continued compliance with the Obligations, continue to vest in any outstanding Options held by the Optionee in accordance with the vesting schedule set forth in the Award Agreement and (ii) any outstanding Option of the Optionee will remain outstanding until the earlier to occur of (x) the expiration date of such Option and (y) the date the Optionee violates any of the Obligations.

(g) Method of Exercise . An Option may be exercised by the Optionee giving written notice, in the manner provided in Section 12, specifying the number of Class B Units with respect to which the Option is then being exercised. Where the exercise of an Option is to be accompanied by payment, the Committee may determine the required or permitted forms of payment, subject to the following: (a) all payments will be by cash or check acceptable to the Committee, or (b) if so permitted by the Committee, (i) through the delivery of Class B Units that have a Fair Market Value equal to the exercise price, except where payment by delivery of Class B Units would adversely affect the Company’s results of operations under U.S. generally accepted accounting principles or where payment by delivery of Class B Units outstanding for less than six months would require application of securities laws relating to profit realized on such Class B Units, (ii) by other means acceptable to the Committee, or (iii) by means of withholding of Class B Units, with an aggregate Fair Market Value equal to (A) the aggregate exercise price and (B) unless the Company is precluded or restricted from doing so under debt covenants or the Committee determines otherwise, minimum statutory withholding taxes with respect to such exercise, or (iv) by any combination of the foregoing permissible forms of payment. The delivery of Class B Units in payment of the exercise price under clause (g)(i) above may be accomplished either by actual delivery or by constructive delivery through attestation of ownership, subject to such rules as the Committee may prescribe.

(h) No Certificates . Class B Units are not represented by certificates. The “issuance” of Class B Units pursuant to the exercise of an Option granted under the Plan shall not require the creation or delivery of a certificate or other evidence of ownership, other than that provided by the applicable Award Agreement, but instead only the Company’s recognition of the Optionee on its books and records as the beneficial holder of such Class B Units.

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(i) Rights Pending Exercise . No person holding an Option shall be deemed for any purpose to be a member of the Company with respect to any of the Class B Units issuable pursuant to his or her Option, except to the extent that the Option shall have been exercised with respect thereto.

6.2     Restricted Units .

(a)     Purchase Price . Class B Units or Restricted Units shall be issued under the Plan for such consideration, in cash, other property or services, or any combination thereof, as is determined by the Committee.

(b)     No Certificates . Class B Units are not represented by certificates. The “issuance” of Class B Units or Restricted Units under the Plan shall not require the creation or delivery of a certificate or other evidence of ownership, other than that provided by the applicable Award Agreement, but instead only the Company’s recognition of the Participant on its books and records as the beneficial holder of such Class B Units or Restricted Units.

(c)     Restrictions and Restriction Period . During the Restriction Period applicable to Restricted Units, such Restricted Units shall be subject to limitations on transferability and a Risk of Forfeiture arising on the basis of such conditions related to the performance of services, Company performance or otherwise as the Committee may determine and provide for in the applicable Award Agreement. Any such Risk of Forfeiture may be waived or terminated, or the Restriction Period shortened, at any time by the Committee on such basis as it deems appropriate.

(d)     Rights Pending Lapse of Risk of Forfeiture or Forfeiture of Award . Except as otherwise provided in the Plan or the applicable Award Agreement, at all times prior to lapse of any Risk of Forfeiture applicable to, or forfeiture of, an Award of Restricted Units, the Participant shall have all of the rights of a holder of Class B Units of the Company, including the right to receive any distributions with respect to, the Restricted Units.

(e)     Termination of Association with the Company - Generally. Unless the Committee shall provide otherwise for any Award of Restricted Units and except as provided in Section 6.2(f), upon termination of a Participant’s employment or other association with the Company and its subsidiaries for any reason during the Restriction Period, all Restricted Units still subject to Risk of Forfeiture shall be forfeited or otherwise subject to return to or repurchase by the Company on the terms specified in the Award Agreement; provided, however , that military or sick leave or other bona fide leave shall not be deemed a termination of employment or other association if it does not exceed the longer of ninety (90) days or the period during which the absent Participant’s reemployment rights, if any, are guaranteed by statute or by contract. Notwithstanding anything contained herein to the contrary, unless the Committee provides otherwise, the Restriction Period applicable to Restricted Units shall immediately lapse if (i) such Participant dies while employed by or providing services to the Company, (ii) such Participant’s employment with or provision of services to the Company is terminated by the Company without Cause or (iii) such Participant voluntarily terminates the provision of services to or employment with the Company with Good Reason; provided , that any termination of a Participant’s employment (x) by reason of the Company’s waiver of any termination notice period given by a Participant or (y) by the Company after such Participant has given notice of voluntary termination will, in either case, be deemed a voluntary termination as of the date of the Participant’s actual termination of employment.

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(f)     Termination of Association with the Company Following Ten Years of Continuous Service . Notwithstanding anything contained herein to the contrary and unless the Committee shall provide otherwise for any Award of Restricted Units, in the event a Participant voluntarily terminates employment or other association with the Company and has, as of the time of such termination, been employed by or providing services to the Company for a continuous period of no less than ten years, then such Participant will, subject to the Participant’s continued compliance with the Obligations, continue to vest in any outstanding Restricted Units subject to a Risk of Forfeiture in accordance with the vesting schedule set forth in the Award Agreement .

6.3     Unit Grants . Class B Unit Grants shall be awarded solely in recognition of significant contributions to the success of the Company, in lieu of compensation otherwise already due and in such other limited circumstances as the Committee deems appropriate. Unit Grants shall be made without forfeiture conditions of any kind.

6.4     Unit-Based Awards . The Committee, in its sole discretion, may grant Awards of phantom Class B Units and other Awards that are valued in whole or in part by reference to, or are otherwise based on the Fair Market Value of a Class B Unit. Such Unit-Based Awards shall be in such form, and dependent on such conditions, as the Committee shall determine, including, without limitation, the right to receive one or more Class B Units (or the equivalent cash value of such Class B Units) upon the completion of a specified period of service, the occurrence of an event and/or the attainment of performance objectives. Unit-Based Awards may be granted alone or in addition to any other Awards granted under the Plan. Subject to the provisions of the Plan, the Committee shall determine: (a) the number of Class B Units to be awarded under (or otherwise related to) such Unit-Based Awards; (b) whether such Unit-Based Awards shall be settled in cash, Class B Units or a combination of cash and Class B Units; and (c) all other terms and conditions of such Unit-Based Awards (including, without limitation, the vesting provisions thereof).

6.5     LTIP Units . LTIP Units may be granted as free-standing awards or in tandem with other Awards under the Plan, and may be valued by reference to the Class B Units, and will be subject to such other conditions and restrictions as the Committee, in its sole and absolute discretion, may determine, including, but not limited to, continued employment or service, computation of financial metrics and/or achievement of pre-established performance goals and objectives. LTIP Units, whether vested or unvested, may entitle the participant to receive, currently or on a deferred or contingent basis, distributions or distribution equivalent payments with respect to the number of Class B Units corresponding to the LTIP Unit or other distributions from the Company and the Committee may provide in the applicable Award Agreement that such amounts (if any) shall be deemed to have been reinvested in additional Class B Units or LTIP Units. The LTIP Units granted under the Plan will be subject to such terms and conditions as may be determined by the Administrator in its sole and absolute discretion, including, but not limited to the conversion ratio, if any, pursuant to which LTIP Units may be exchanged for Class B Units in accordance with the terms of the Operating Agreement. LTIP Units may be structured as “profits interests,” “capital interests” or other types of interests for federal income tax purposes.

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6.6     Awards to Participants Outside the United States . The Committee may modify the terms of any Award under the Plan granted to a Participant who is, at the time of grant or during the term of the Award, resident or primarily employed outside of the United States in any manner deemed by the Committee to be necessary or appropriate in order that the Award shall conform to laws, regulations, and customs of the country in which the Participant is then resident or primarily employed, or so that the value and other benefits of the Award to the Participant, as affected by foreign tax laws and other restrictions applicable as a result of the Participant’s residence or employment abroad, shall be comparable to the value of such an Award to a Participant who is resident or primarily employed in the United States. The Committee may establish supplements to, or amendments, restatements, or alternative versions of the Plan for the purpose of granting and administrating any such modified Award.

7.
Adjustment Provisions

7.1     Adjustment for Company Actions . Subject to Section 7.2, if subsequent to the adoption of the Plan by the Company the outstanding Class B Units are increased, decreased, or exchanged for a different number or kind of units or other securities, or if additional units or new or different units or other securities are distributed with respect to Class B Units, through merger, consolidation, sale of all or substantially all the property of the Company, reorganization, recapitalization, reclassification, dividend, unit split, reverse unit split, or other similar distribution with respect to such Class B Units, the Committee shall make an adjustment, to the extent appropriate and proportionate, in (i) the numbers and kinds of Class B Units or other securities subject to the then outstanding Awards, and (ii) the exercise price for each Class B Unit or other securities subject to then outstanding Options (without change in the aggregate purchase price as to which such Options remain exercisable).

7.2     Reorganizations . Upon a sale, merger, reorganization, separation or liquidation of the Company or a sale of all or substantially all of the Company’s assets, except to the extent modified by an applicable Award Agreement, the Committee shall have the discretion, exercisable either in advance of such a transaction or at the time thereof, to provide for one or more of the following: (i) the continuation of outstanding Awards after the transaction without change (ii) the cash-out of outstanding Options as of the time of the transaction as part of the transaction for an amount equal to the difference between the price that would have been paid for the Class B Units subject to such outstanding Options if such Options were exercised upon the closing of such transaction and the exercise price of such outstanding Options; provided that if the exercise price of the Options exceeds the price that would have been paid for the Class B Units subject to the outstanding Options if such Options were exercised upon the closing of the transaction, then such Options may be cancelled without making a payment to the Optionees, (iii) the expiration of the exercise period for outstanding Options upon the closing of the transaction, (iv) the cancellation of outstanding Restricted Units and/or Unit-Based Awards and payment to the Participants holding such Restricted Units and/or Unit-Based Awards equal to the value of the underlying Class B Units as of the closing date of the transaction, in such form and at such time as the Committee shall determine, (v) a requirement that the buyer in the transaction assume outstanding Options and/or Restricted Units and/or Unit-Based Awards, (vi) a requirement that the buyer in the transaction substitute outstanding Options with comparable options to purchase the equity interests of the buyer or its parent and/or substitute outstanding Restricted Units and/or Unit-Based Awards with comparable restricted stock or units of the buyer or its parent, and (vii) the Acceleration of outstanding Options, Restricted Units and Unit-Based Awards. Each outstanding Option, Restricted Unit and Unit-Based Award that is assumed in connection with such a transaction, or is otherwise to continue in effect subsequent to the transaction, will be appropriately adjusted, immediately after the transaction, as to the number and class of securities and, with respect to an Option, the price at which it may be exercised, in accordance with Section 7.1.

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7.3     Dissolution or Liquidation . Upon dissolution or liquidation of the Company, other than as part of a transaction referred to in Section 7.2, each outstanding Option shall terminate, but the Optionee (if at the time in the employ of or otherwise associated with the Company) shall have the right, immediately prior to the dissolution or liquidation, to exercise the Option to the extent exercisable on the date of dissolution or liquidation.

7.4     Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events . In the event of any Company action not specifically covered by the preceding Sections, including but not limited to an extraordinary cash distribution on Units, a Company separation, spin-off, split off or other reorganization or liquidation, the Committee shall make such adjustment of outstanding Awards and their terms, if any, as it, in its sole discretion, may deem equitable and appropriate in the circumstances.

7.5     Related Matters . Any adjustment in Awards made pursuant to this Section 7 shall be determined and made, if at all, by the Committee and shall include any correlative modification of terms, including of Option exercise prices, rates of vesting or exercisability, Risks of Forfeiture and applicable repurchase prices for Restricted Units and Unit-Based Awards, which the Committee may deem necessary or appropriate so as to ensure the rights of the Participants in their respective Awards are not substantially diminished nor enlarged as a result of the adjustment and Company action other than as expressly contemplated in this Section 7. No fraction of a Class B Unit shall be issued or purchasable or deliverable upon exercise, but in the event any adjustment hereunder of the number of Class B Units covered by an Award shall cause such number to include a fraction of a Class B Unit, such number of Class B Units shall be adjusted to the nearest smaller whole number of Class B Units.

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8.
Settlement of Awards

8.1     Violation of Law . Notwithstanding any other provision of the Plan or the relevant Award Agreement, if, at any time, in the reasonable opinion of the Company, the issuance of Class B Units or LTIP Units covered by an Award may constitute a violation of law, then the Company may delay such issuance and the delivery of such Class B Units or LTIP Units, as applicable, until approval shall have been obtained from such governmental agencies as may be required under any applicable law, rule, or regulation, and the Company shall take all reasonable efforts to obtain such approval.

8.2     Restrictions on Rights in Units . Any Class B Unit or LTIP Unit to be issued pursuant to Awards granted under the Plan shall be subject to all restrictions upon the transfer thereof which may be now or hereafter imposed by the Certificate of Formation of the Company, as amended from time to time, and the Operating Agreement, as amended from time to time.

8.3     Investment Representations . The Company shall be under no obligation to issue any Class B Units or LTIP Units covered by any Award unless the intended recipient has made such written representations to the Company (upon which the Company believes it may reasonably rely) as the Company may deem necessary or appropriate for purposes of confirming that the issuance of such Class B Units or LTIP Units, as applicable, will be exempt from the registration requirements of the Securities Act and any applicable state securities laws and otherwise in compliance with all applicable laws, rules and regulations, including but not limited to that the Participant is acquiring the Class B Units or LTIP Units, as applicable, for his or her own account for the purpose of investment and not with a view to, or for sale in connection with, the distribution of any such Class B Units or LTIP Units.

8.4     Registration . If the Company shall deem it necessary or desirable to register under the Securities Act or other applicable statutes any Class B Units or LTIP Units issued or to be issued pursuant to Awards granted under the Plan, or to qualify any such Class B Units or LTIP Units, as applicable for exemption from the Securities Act or other applicable statutes, then the Company shall take such action at its own expense. The Company may require from each recipient of an Award such information in writing for use in any registration statement, prospectus, preliminary prospectus or offering circular as is reasonably necessary for that purpose and may require reasonable indemnity to the Company and its Managing Member, officers and directors from that holder against all losses, claims, damage and liabilities arising from use of the information so furnished and caused by any untrue statement of any material fact therein or caused by the omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. In addition, the Company may require of any such person that he or she agree that, without the prior written consent of the Company or the managing underwriter in any public offering of Class B Units or LTIP Units, as applicable, he or she will not sell, make any short sale of, loan, grant any option for the purchase of, pledge or otherwise encumber, or otherwise dispose of, any Class B Units or LTIP Units, as applicable, during the 180 day period commencing on the effective date of the registration statement relating to the underwritten public offering of securities.

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8.5     Tax Withholding . Whenever Class B Units or LTIP Units are issued or to be issued pursuant to Awards granted under the Plan, the Company shall have the right to require the recipient to remit to the Company in cash an amount sufficient to satisfy federal, state, local or other withholding tax requirements if, when, and to the extent required by law (whether so required to secure for the Company an otherwise available tax deduction or otherwise) coincident with the recipient’s exercise of such Option or receipt of Class B Units or LTIP Units, as applicable. The obligations of the Company under the Plan shall be conditional on satisfaction of all such withholding obligations and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the recipient of an Award.

9.
No Special Employment or Other Rights

Nothing contained in the Plan or in any Award Agreement shall confer upon any recipient of an Award any right with respect to the continuation of his or her employment or other association with the Company or any of its subsidiaries, or interfere in any way with the right of the Company or any of its subsidiaries, subject to the terms of any separate employment or consulting agreement, any provision of law, the Company’s Certificate of Formation or the Operating Agreement to the contrary, at any time to terminate such employment or consulting agreement or to increase or decrease, or otherwise adjust, the other terms and conditions of the recipient’s employment or other association with the Company or any of its subsidiaries.
10.
Nonexclusivity of the Plan

The adoption of the Plan by the Company shall not be construed as creating any limitations on the power of the Company to adopt such other incentive arrangements as it may deem desirable, including without limitation, the granting of options and restricted units other than under the Plan, and such arrangements may be either applicable generally or only in specific cases.
11.
Termination and Amendment of the Plan and Awards

The Company may at any time terminate the Plan or make such modifications of the Plan as it shall deem advisable. Unless the Company otherwise expressly provides, or may deem necessary or appropriate to comply with applicable law, including without limitation the provisions of Section 409A of the Code, no termination or amendment of the Plan may adversely affect the rights of the recipient of an Award previously granted hereunder without the consent of the recipient of such Award.
The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, provided that the Award as amended is consistent with the terms of the Plan, and further provided that, other than as the Committee may deem necessary or appropriate to comply with applicable law, including without limitation the provisions of Section 409A of the Code, no amendment or modification of an outstanding Award may adversely affect the rights of the recipient of such Award without his or her consent.

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12.
Notices and Other Communications

Any notice, demand, request or other communication hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or duly sent by first class registered, certified or overnight mail, postage prepaid, or by facsimile with a confirmation copy by regular, certified or overnight mail, addressed or sent by facsimile, as the case may be, (i) if to the recipient of an Award, at his or her residence address last filed with the Company and (ii) if to the Company, at its principal place of business, addressed to the attention of the Managing Member, or to such other address or facsimile number, as the case may be, as the addressee may have designated by notice to the addressor. All such notices, requests, demands and other communications shall be deemed to have been received: (i) in the case of personal delivery, on the date of such delivery, (ii) in the case of mailing, when received by the addressee, and (iii) in the case of facsimile transmission, when confirmed by facsimile machine report.
13.
Governing Law

The Plan and all Award Agreements and actions taken thereunder shall be governed, interpreted and enforced in accordance with the laws of the State of New York without regard to the conflict of laws principles thereof.


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Amended and Restated Pzena Investment Management, Inc. 2007 Equity Incentive Plan




As Adopted
by the Board of Directors of
Pzena Investment Management, Inc.
on October 24, 2007
(Amended and restated as of January 31, 2017)




Pzena Investment Management, Inc.
Equity Incentive Plan
 
1.
PURPOSE; TYPES OF AWARDS; CONSTRUCTION.
The purposes of the Pzena Investment Management, Inc. Equity Incentive Plan are to attract, motivate and retain (a) employees of the Company and any Subsidiary or Affiliate, (b) independent contractors who provide significant services to the Company, any Subsidiary or Affiliate and (c) nonemployee directors of the Company, any Subsidiary or any Affiliate. The Plan is also designed to encourage stock ownership by such persons, thereby aligning their interest with those of the Company’s stockholders and to permit the payment of compensation that qualifies as performance-based compensation under Section 162(m) of the Code. Pursuant to the provisions hereof, there may be granted stock options (including “incentive stock options” and “non-qualified stock options”), and other stock-based awards, including but not limited to restricted stock, restricted stock units, dividend equivalents, performance units, Stock Appreciation Rights (payable in cash or shares) and other long-term stock-based or cash-based Awards. Notwithstanding any provision of the Plan, to the extent that any Award would be subject to Section 409A of the Code, no such Award may be granted if it would fail to comply with the requirements set forth in Section 409A of the Code and any regulations or guidance promulgated thereunder.
2.
DEFINITIONS. For purposes of the Plan, the following terms shall be defined as set forth below, except as otherwise provided in the Award Terms:

(a) “Affiliate” means an affiliate of the Company, as defined in Rule 12b-2 promulgated under Section 12 of the Exchange Act.

(b) “Award” means individually or collectively, a grant under the Plan of Options, Restricted Stock, Restricted Stock Units or Other Stock-Based Awards or Other Cash-Based Awards.

(c) “Award Terms” means any written agreement, contract, or other instrument or document evidencing an Award.

(d) “Beneficial Owner” shall have the meaning set forth in Rule 13d-3 under the Exchange Act.

(e) “Board” means the Board of Directors of the Company.

(f) “Cause” shall mean, with respect to a Grantee, (a) such Grantee being charged or indicted for a felony involving the Company or any Affiliate’s business, or being convicted of any other felony (or guilty plea, or nolo contendere plea in connection therewith), (b) such Grantee’s willfully and materially defrauding the Company or any Affiliate, or (c) such Grantee’s committing a willful and material breach of such Grantee’s obligations to protect the Company or any Affiliate’s confidential information, such Grantee’s obligation of loyalty to the Company or any Affiliate or such Grantee’s obligation to comply with the Company or any Affiliate’s Code of Ethics or any other compliance regulations, policies or procedures, (d) the gross negligence or willful misconduct of such Grantee in the performance of such Grantee’s duties which gross negligence or willful misconduct has the purpose, or the reasonable likely effect, of causing material harm to the Company or any Affiliate, or (e) such Grantee fails to maintain in good standing any and all licenses, registrations or other permits necessary for the performance of his duties hereunder. For purposes of the definition of Cause, “materially,” and “material” shall mean damages caused to the Company or any Affiliate in excess of $100,000 or any significant damage to the reputation of the Company or any Affiliate.

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(g) “Change in Control” shall have the meaning set forth in Section 7(b) hereof.

(h) “Code” means the Internal Revenue Code of 1986, as amended from time to time.

(i) “Committee” means the Compensation Committee of the Board. Unless otherwise determined by the Board, the Committee shall be comprised solely of directors who are (a) “nonemployee directors” under Rule 16b-3 of the Exchange Act, (b) “outside directors” under Section 162(m) of the Code and (c) “independent directors” pursuant to New York Stock Exchange requirements.

(j) “Company” means Pzena Investment Management, Inc., a corporation organized under the laws of the State of Delaware, or any successor corporation.

(k) “Covered Employee” shall have the meaning set forth in Section 162(m)(3) of the Code.

(l) “Effective Date” means the date that the Plan is effective as set forth in Section 8(e).

(m) “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time, and as now or hereafter construed, interpreted and applied by regulations, rulings and cases.

(n) “Excise Tax” shall have the meaning set forth in Section 7(d) hereof.

(o) “Fair Market Value” means, with respect to Stock or other property, the fair market value of such Stock or other property determined by such methods or procedures as shall be established from time to time by the Committee. Unless otherwise determined by the Committee in good faith, the per share Fair Market Value of Stock as of a particular date shall mean (i) if the Stock is listed for trading on the New York Stock Exchange, the closing sale price per share of Stock on the New York Stock Exchange on that date (or, if no closing sale price is reported, the last reported sale price), (ii) if the Stock is not listed for trading on the New York Stock Exchange, the closing sale price (or, if no closing sale price is reported, the last reported sale price) as reported on that date in composite transactions for the principal national securities exchange registered pursuant to Section 6(g) of the Exchange Act on which the Stock is listed, (iii) if the Stock is not so listed on a national securities exchange, the last quoted bid price for the Stock on that date in the over-the-counter market as reported by Pink Sheets LLC or a similar organization, or (iv) if the Stock is not so quoted by Pink Sheets LLC or a similar organization such value as the Committee, in its sole discretion, shall determine in good faith.

(p) “Grantee” means a person who, as an employee of or independent contractor or nonemployee director with respect to the Company, a Subsidiary or an Affiliate, has been granted an Award under the Plan.

(q) “IPO” means the initial public offering of Stock, as contemplated in the Company’s prospectus, dated October 24, 2007.

(r) “ISO” means any Option intended to be and designated as an incentive stock option within the meaning of Section 422 of the Code.

(s) “NQSO” means any Option that is designated as a nonqualified stock option.

(t) “Option” means a right, granted to a Grantee under Section 6(b)(i), to purchase shares of Stock. An Option may be either an ISO or an NQSO.

(u) “Other Cash-Based Award” means an Award granted to a Grantee under Section 6(b)(iv) hereof, including cash awarded as a bonus or upon the attainment of Performance Goals or otherwise as permitted under the Plan.

(v) “Other Stock-Based Award” means an Award granted to a Grantee pursuant to Section 6(b)(iv) hereof, that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock including but not limited to performance units, Stock Appreciation Rights (payable in cash or shares) or dividend equivalents, each of which may be subject to the attainment of Performance Goals or a period of continued employment or other terms and conditions as permitted under the Plan.

(w) “Performance Goals” means performance goals based on one or more of the following criteria: (i) earnings including operating income, earnings before or after taxes, earnings before or after interest, depreciation, amortization, or

2


extraordinary or special items or book value per share (which may exclude nonrecurring items); (ii) pre-tax income or after-tax income; (iii) earnings per common share (basic or diluted); (iv) operating profit; (v) revenue, revenue growth or rate of revenue growth; (vi) return on assets (gross or net), return on investment, return on capital, or return on equity; (vii) returns on sales or revenues; (viii) operating expenses; (ix) stock price appreciation; (x) cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital; (xi) implementation or completion of critical projects or processes; (xii) economic value created; (xiii) cumulative earnings per share growth; (xiv) operating margin or profit margin; (xv) common stock price or total stockholder return; (xvi) cost targets, reductions and savings, productivity and efficiencies; (xvii) strategic business criteria, consisting of one or more objectives based on meeting specified market penetration, geographic business expansion, customer satisfaction, employee satisfaction, human resources management, supervision of litigation, information technology, and goals relating to acquisitions, divestitures, joint ventures and similar transactions, and budget comparisons; (xviii) personal professional objectives, including any of the foregoing performance goals, the implementation of policies and plans, the negotiation of transactions, the development of long-term business goals, formation of joint ventures, research or development collaborations, and the completion of other corporate transactions; and (xix) any combination of, or a specified increase in, any of the foregoing. Where applicable, the Performance Goals may be expressed in terms of attaining a specified level of the particular criteria or the attainment of a percentage increase or decrease in the particular criteria, and may be applied to one or more of the Company, a Subsidiary or Affiliate, or a division or strategic business unit of the Company, or may be applied to the performance of the Company relative to a market index, a group of other companies or a combination thereof, all as determined by the Committee. The Performance Goals may include a threshold level of performance below which no payment will be made (or no vesting will occur), levels of performance at which specified payments will be made (or specified vesting will occur), and a maximum level of performance above which no additional payment will be made (or at which full vesting will occur). Each of the foregoing Performance Goals shall be determined in accordance with generally accepted accounting principles, if applicable, and shall be subject to certification by the Committee. The Committee may provide that the Performance Goals be adjusted to include or exclude any specified circumstances or events that occurs during a performance period, including, without limitation by way of example but without limitation the following: (A) asset write-downs or impairment charges; (B) litigation or claim judgments or settlements; (C) the effect of changes in tax laws, accounting principles or other laws or provisions affecting reported results; (D) accruals for reorganization and restructuring programs; (E) extraordinary unusual, infrequent or non-recurring items as described in the then-current accounting principles and/or in management's discussion and analysis of financial condition and results of operations appearing in the Company's annual report to stockholders for the applicable year; (F) acquisitions or divestitures; and (G) foreign exchange gains and losses; (H) gains or losses on the sale of assets; (I) severance, contract termination and other costs relating to certain business activities; (J) gains or losses from the early extinguishment of debt; (K) extraordinary gains and losses; (L) the effect of any statements issued by the Financial Accounting Standards Board or its committees; (M) currency fluctuations; (N) expenses related to goodwill and other intangible assets, stock offerings, stock repurchases and loan loss provisions; and (O) any changes in the business, operations, corporate structure, or capital structure of the Company, or manner in which the Company conducts business. To the extent such inclusions or exclusions affect Awards to a Covered Employee, they shall be prescribed in a form that meets the requirements of Section 162(m) of the Code for deductibility.

(x) “Person” shall have the meaning set forth in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof and the rules thereunder, except that such term shall not include (1) the Company or any Subsidiary corporation, (2) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary corporation, (3) an underwriter temporarily holding securities pursuant to an offering of such securities, or (4) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

(y) “Plan” means this Pzena Investment Management, Inc. Equity Incentive Plan, as amended from time to time.

(z) “Plan Year” means a calendar year.

(aa) “Restricted Stock” means an Award of shares of Stock to a Grantee under Section 6(b)(ii) that may be subject to certain restrictions and to a risk of forfeiture.

(bb)    “Restricted Stock Unit” means a right granted to a Grantee under Section 6(b)(iii) of the Plan to receive Stock or cash at the end of a specified period, which right may be subject to the attainment of Performance Goals in a period of continued employment or other terms and conditions as permitted under the Plan.

(cc)    “Rule 16b-3” means Rule 16b-3, as from time to time in effect promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, including any successor to such Rule.

(dd)    “Stock” means shares of Class A common stock, par value $0.01 per share, of the Company.

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(ee)    “Stock Appreciation Right” means an Other Stock-Based Award, payable in cash or stock, that entitles a Grantee upon exercise to the excess of the Fair Market Value of the Stock underlying the Award over the base price established in respect of such Stock.

(ff)    “Subsidiary” means any corporation in an unbroken chain of corporations beginning with the Company if, at the time of granting of an Award, each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.

(gg)    “Total Payments” shall have the meaning set forth in Section 7(d) hereof.

3.
ADMINISTRATION.

(a) The Plan shall be administered by the Committee or, at the discretion of the Board, the Board, provided that any Award to the Chairman of the Board shall be subject to ratification by the Board. In the event the Board is the administrator of the Plan, references herein to the Committee shall be deemed to include the Board. The Board may from time to time appoint a member or members of the Committee in substitution for or in addition to the member or members then in office and may fill vacancies on the Committee however caused. The Board or the Committee may delegate the ability to grant Awards to employees who are not subject to potential liability under Section 16(b) of the 1934 Act with respect to transactions involving equity securities of the Company at the time any such delegated authority is exercised.

(b) The decision of the Committee as to all questions of interpretation and application of the Plan shall be final, binding and conclusive on all persons. The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the power and authority either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including without limitation, the authority to grant Awards, to determine the persons to whom and the time or times at which Awards shall be granted, to determine the type and number of Awards to be granted, the number of shares of Stock to which an Award may relate and the terms, conditions, restrictions and Performance Goals relating to any Award; to determine Performance Goals no later than such time as is required to ensure that an underlying Award which is intended to comply with the requirements of Section 162(m) of the Code so complies; to determine whether, to what extent, and under what circumstances an Award may be settled, canceled, forfeited, accelerated, exchanged, or surrendered (provided that, unless approved by the Company’s stockholders, no Award shall be settled, canceled, forfeited, exchanged or surrendered in exchange or otherwise in consideration for a new Award with a value in excess of the value of such settled, canceled, forfeited, exchanged or surrendered Award); to make adjustments in the terms and conditions (including Performance Goals) applicable to Awards; to construe and interpret the Plan and any Award; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Award Terms (which need not be identical for each Grantee); and to make all other determinations deemed necessary or advisable for the administration of the Plan. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Award Terms granted hereunder in the manner and to the extent it shall deem expedient to carry the Plan into effect and shall be the sole and final judge of such expediency. No Committee member (or member of the Management Committee) shall be liable for any action or determination made with respect to the Plan or any Award.

4.
ELIGIBILITY.

(a) Awards may be granted to officers, independent contractors, employees and nonemployee directors of the Company or of any of its Subsidiaries and Affiliates; provided, that ISOs shall be granted only to employees (including officers and directors who are also employees) of the Company, its parent or any of its Subsidiaries.

(b) No ISO shall be granted to any employee of the Company, its parent or any of its Subsidiaries if such employee owns, immediately prior to the grant of the ISO, stock representing more than 10% of the voting power or more than 10% of the value of all classes of stock of the Company or a parent or a Subsidiary, unless the purchase price for the stock under such ISO shall be at least 110% of its Fair Market Value at the time such ISO is granted and the ISO, by its terms, shall not be exercisable more than five years from the date it is granted. In determining the stock ownership under this paragraph, the provisions of Section 424(d) of the Code shall be controlling.

5.
STOCK SUBJECT TO THE PLAN.

(a) The maximum number of shares of Stock reserved for the grant or settlement of Awards under the Plan shall be 17,059,658 shares of Stock, and shall be subject to adjustment as provided herein. The aggregate number of shares of Stock made subject to Awards granted during any fiscal year to any single individual shall not exceed 2,000,000 shares of Stock. The

4


maximum number of shares of Stock that may be issued upon exercise of ISOs granted under the Plan shall be 17,059,658. No nonemployee director may be granted, in any one fiscal year, Awards with an aggregate maximum value calculated as their respective date of grant, of more than $500,000. Determinations made in respect of the limitation set forth in the preceding sentence shall be made in a manner consistent with Section 162(m) of the Code. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company in the open market, in private transactions or otherwise. If any shares subject to an Award are forfeited, canceled, exchanged or surrendered or if an Award otherwise terminates or expires without a distribution of shares to the Grantee, the shares of stock with respect to such Award shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Awards under the Plan. Notwithstanding the foregoing, shares of Stock that are exchanged by a Grantee or withheld by the Company as full or partial payment in connection with any Award under the Plan, as well as any shares of Stock exchanged by a Grantee or withheld by the Company or any Subsidiary to satisfy the tax withholding obligations related to any Award under the Plan, shall not be available for subsequent Awards under the Plan. Upon the exercise of any Award granted in tandem with any other Awards, such related Awards shall be canceled to the extent of the number of shares of Stock as to which the Award is exercised and, notwithstanding the foregoing, such number of shares shall no longer be available for Awards under the Plan.

(b) Except as provided in any Award Terms or as otherwise provided in the Plan, in the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, Stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Grantees under the Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (i) the number and kind of shares of Stock or other property (including cash) that may thereafter be issued in connection with Awards or the total number of Awards issuable under the Plan, (ii) the number and kind of shares of Stock or other property issued or issuable in respect of outstanding Awards, (iii) the exercise price, grant price or purchase price relating to any Award, (iv) the Performance Goals and (v) the individual limitations applicable to Awards; provided that, with respect to ISOs, any adjustment shall be made in accordance with the provisions of Section 424(h) of the Code and any regulations or guidance promulgated thereunder, and provided further that no such adjustment shall cause any Award hereunder which is or becomes subject to Section 409A of the Code to fail to comply with the requirements of such section.

6.
SPECIFIC TERMS OF AWARDS.

(a) General . The term of each Award shall be for such period as may be determined by the Committee. Subject to the terms of the Plan and any applicable Award Terms, payments to be made by the Company or a Subsidiary or Affiliate upon the grant, maturation, or exercise of an Award may be made in such forms as the Committee shall determine at the date of grant or thereafter, including, without limitation, cash, Stock, or other property, and may be made in a single payment or transfer, in installments, or, subject to the requirements of Section 409A of the Code, on a deferred basis.

(b) Awards . The Committee is authorized to grant to Grantees the following Awards, as deemed by the Committee to be consistent with the purposes of the Plan. The Committee shall determine the terms and conditions of such Awards.
(i)
Options . The Committee is authorized to grant Options to Grantees on the following terms and conditions:
(A)
The Award Terms evidencing the grant of an Option under the Plan shall designate the Option as an ISO or an NQSO.

(B)
The exercise price per share of Stock purchasable under an Option shall be determined by the Committee, but in no event shall the exercise price of an Option per share of Stock be less than the Fair Market Value of a share of Stock as of the date of grant of such Option. The purchase price of Stock as to which an Option is exercised shall be paid in full at the time of exercise; payment may be made in cash, which may be paid by check, or other instrument acceptable to the Company, or, with the consent of the Committee, in shares of Stock, valued at the Fair Market Value on the date of exercise (including shares of Stock that otherwise would be distributed to the Grantee upon exercise of the Option), or if there were no sales on such date, on the next preceding day on which there were sales or (if permitted by the Committee and subject to such terms and conditions as it may determine) by surrender of outstanding Awards under the Plan, or the Committee may permit such payment of exercise price by any other method it deems satisfactory in its discretion. In addition, subject to applicable law and pursuant to procedures approved by the Committee, payment of the exercise price may be made through the sale of Stock acquired on exercise

5


of the Option, valued at Fair Market Value on the date of exercise, sufficient to pay for such Stock (together with, if requested by the Company, the amount of federal, state or local withholding taxes payable by Grantee by reason of such exercise). Any amount necessary to satisfy applicable federal, state or local tax withholding requirements shall be paid promptly upon notification of the amount due. The Committee may permit such amount of tax withholding to be paid in shares of Stock previously owned by the employee, or a portion of the shares of Stock that otherwise would be distributed to such employee upon exercise of the Option, or a combination of cash and shares of such Stock.

(C)
Options shall be exercisable over the exercise period (which shall not exceed ten years from the date of grant), at such times and upon such conditions as the Committee may determine, as reflected in the Award Terms; provided that, the Committee shall have the authority to accelerate the exercisability of any outstanding Option at such time and under such circumstances as it, in its sole discretion, deems appropriate. An Option may be exercised to the extent of any or all full shares of Stock as to which the Option has become exercisable, by giving written notice of such exercise to the Committee or its designated agent.
(D)
Upon the termination of a Grantee’s employment or service with the Company and its Subsidiaries or Affiliates, the Options granted to such Grantee, to the extent that they are exercisable at the time of such termination, shall remain exercisable for such period as may be provided in the applicable Award Terms, but in no event following the expiration of their term. The treatment of any Option that is unexercisable as of the date of such termination shall be as set forth in the applicable Award Terms.

(E)
Options may be subject to such other conditions including, but not limited to, restrictions on transferability of, or provisions for recovery of, the shares acquired upon exercise of such Options (or proceeds of sale thereof), as the Committee may prescribe in its discretion or as may be required by applicable law.

(ii)
Restricted Stock .

(A)
The Committee may grant Awards of Restricted Stock, alone or in tandem with other Awards under the Plan, subject to such restrictions, terms and conditions, as the Committee shall determine in its sole discretion and as shall be evidenced by the applicable Award Terms (provided that any such Award is subject to the vesting requirements described herein). The vesting of a Restricted Stock Award granted under the Plan may be conditioned upon the completion of a specified period of employment or service with the Company or any Subsidiary or Affiliate, upon the attainment of specified Performance Goals, and/or upon such other criteria as the Committee may determine in its sole discretion.

(B)
The Committee shall determine the price, which, to the extent required by law, shall not be less than par value of the Stock, to be paid by the Grantee for each share of Restricted Stock or unrestricted stock or stock units subject to the Award. Each Award Terms with respect to such stock award shall set forth the amount (if any) to be paid by the Grantee with respect to such Award and when and under what circumstances such payment is required to be made.

(C)
Except as provided in the applicable Award Terms, no shares of Stock underlying a Restricted Stock Award may be assigned, transferred, or otherwise encumbered or disposed of by the Grantee until such shares of Stock have vested in accordance with the terms of such Award.

(D)
If and to the extent that the applicable Award Terms may so provide, a Grantee shall have the right to vote and receive dividends on Restricted Stock granted under the Plan. Unless otherwise provided in the applicable Award Terms, any Stock received as a dividend on or in connection with a stock split of the shares of Stock underlying a Restricted Stock Award shall be subject to the same restrictions as the shares of Stock underlying such Restricted Stock Award.

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(E)
Upon the termination of a Grantee’s employment or service with the Company and its Subsidiaries or Affiliates, the Restricted Stock granted to such Grantee shall be subject to the terms and conditions specified in the applicable Award Terms.

(iii)
Restricted Stock Units . The Committee is authorized to grant Restricted Stock Units to Grantees, subject to the following terms and conditions:

(A)
At the time of the grant of Restricted Stock Units, the Committee may impose such restrictions or conditions to the vesting of such Awards as it, in its discretion, deems appropriate, including, but not limited to, the achievement of Performance Goals. The Committee shall have the authority to accelerate the settlement of any outstanding award of Restricted Stock Units at such time and under such circumstances as it, in its sole discretion, deems appropriate, subject to the requirements of Section 409A of the Code.

(B)
Unless otherwise provided in Award Terms or except as otherwise provided in the Plan, upon the vesting of a Restricted Stock Unit there shall be delivered to the Grantee, as soon as practicable following the date on which such Award (or any portion thereof) vests (but in any event within such period as is required to avoid the imposition of a tax under Section 409A of the Code), that number of shares of Stock equal to the number of Restricted Stock Units becoming so vested.

(C)
Subject to the requirements of Section 409A of the Code, an Award of Restricted Stock Units may provide the Grantee with the right to receive dividend equivalent payments with respect to Stock subject to the Award (both before and after the Stock subject to the Award is earned or vested), which payments may be either made currently or credited to an account for the Grantee, and may be settled in cash or Stock, as determined by the Committee. Any such settlements and any such crediting of dividend equivalents may be subject to such conditions, restrictions and contingencies as the Committee shall establish, including the reinvestment of such credited amounts in Stock equivalents.

(D)
Upon the termination of a Grantee’s employment or service with the Company and its Subsidiaries or Affiliates, the Restricted Stock Units granted to such Grantee shall be subject to the terms and conditions specified in the applicable Award Terms.

(iv)
Other Stock-Based or Cash-Based Awards .

(A)
The Committee is authorized to grant Awards to Grantees in the form of Other Stock-Based Awards or Other Cash-Based Awards, as deemed by the Committee to be consistent with the purposes of the Plan. The Committee shall determine the terms and conditions of such Awards, consistent with the terms of the Plan, at the date of grant or thereafter, including the Performance Goals and performance periods. Stock or other securities or property delivered pursuant to an Award in the nature of a purchase right granted under this Section 6(b)(iv) shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including, without limitation, Stock, other Awards, notes or other property, as the Committee shall determine, subject to any required corporate action.

(B)
The maximum value of the aggregate payment that any Grantee may receive with respect to Other Cash-Based Awards pursuant to this Section 6(b)(iv) in respect of any annual performance period is $15 million and for any other performance period in excess of one year, such amount multiplied by a fraction, the numerator of which is the number of months in the performance period and the denominator of which is twelve. No payment shall be made to a Covered Employee prior to the certification by the Committee that the Performance Goals have been attained. The Committee may establish such other rules applicable to the Other Stock- or Cash-Based Awards to the extent not inconsistent with Section 162(m) of the Code.

(C)
Payments earned in respect of any Cash-Based Award may be decreased or, with respect to any Grantee who is not a Covered Employee, increased in the sole discretion of the

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Committee based on such factors as it deems appropriate. Notwithstanding the foregoing, any Awards may be adjusted in accordance with Section 5(b) hereof.

7.
CHANGE IN CONTROL PROVISIONS.

(a) Unless otherwise determined by the Committee or evidenced in an applicable Award Terms or employment or other agreement, in the event of a Change in Control, the Committee shall have the discretion, exercisable either in advance of such Change in Control or at the time thereof, to provide for one or more of the following:

(i)
the continuation of outstanding Awards after the Change in Control without change;

(ii)
the cash-out of outstanding Options as of the time of the transaction as part of the transaction for an amount equal to the difference between the price that would have been paid for the shares of Stock subject to such outstanding Options if such Options were exercised upon the closing of such transaction and the exercise price of such outstanding Options; provided that if the exercise price of the Options exceeds the price that would have been paid for the shares of Stock subject to the outstanding Options if such Options were exercised upon the closing of the transaction, then such Options may be cancelled without making a payment to the Optionees;

(iii)
the expiration of the exercise period for outstanding Options upon the closing of the transaction;

(iv)
the cancellation of outstanding Restricted Stock, Restricted Stock Units and/or Other Stock-Based Awards and payment to the Grantees holding such Awards equal to the value of the underlying shares of Stock as of the closing date of the transaction, in such form and at such time as the Committee shall determine;

(v)
a requirement that the buyer in the transaction assume outstanding Options and/or Restricted Stock and/or Restricted Stock Units;

(vi)
a requirement that the buyer in the transaction substitute outstanding Options with comparable options to purchase the equity interests of the buyer or its parent and/or substitute outstanding Restricted Stock Units and/or Other Stock-Based Awards with comparable restricted stock or units of the buyer or its parent; and

(vii)
the acceleration of outstanding Options, Restricted Stock Units and Other Stock-Based Awards.

Notwithstanding any other provision of the Plan, in the event of a Change in Control in which the consideration paid to the holders of shares of Stock is solely cash, the Committee may, in its discretion, provide that each Award shall, upon the occurrence of a Change in Control, be canceled in exchange for a payment in an amount equal to (i) the excess of the consideration paid per share of Stock in the Change in Control over the exercise or purchase price (if any) per share of Stock subject to the Award multiplied by (ii) the number of Shares granted under the Award.

(b) A “Change in Control” shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred:

(i)
any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 30% or more of the combined voting power of the Company’s then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (I) of paragraph (iii) below; or

(ii)
the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company’s stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or

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(iii)
there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or other entity, other than (I) a merger or consolidation which results in (A) the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation and (B) the individuals who comprise the Board immediately prior thereto constituting immediately thereafter at least a majority of the board of directors of the Company, the entity surviving such merger or consolidation or, if the Company or the entity surviving such merger is then a subsidiary, the ultimate parent thereof, or (II) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 30% or more of the combined voting power of the Company’s then outstanding securities; or

(iv)
the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets (it being conclusively presumed that any sale or disposition is a sale or disposition by the Company of all or substantially all of its assets if the consummation of the sale or disposition is contingent upon approval by the Company’s stockholders unless the Board expressly determines in writing that such approval is required solely by reason of any relationship between the Company and any other Person or an Affiliate of the Company and any other Person), other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity (i) at least 60% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition and (ii) the majority of whose board of directors immediately following such sale or disposition consists of individuals who comprise the Board immediately prior thereto.

(c) Notwithstanding the foregoing, a “Change in Control” shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions.

(d) Unless otherwise provided by the Committee or set forth in a Grantee’s Award Terms, notwithstanding the provisions of the Plan, in the event that any payment or benefit received or to be received by the Grantee in connection with a Change in Control or the termination of the Grantee’s employment or service (whether pursuant to the terms of the Plan or any other plan, arrangement or agreement with the Company, any Subsidiary, any Affiliate, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, “Total Payments”) would be subject (in whole or part), to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then, after taking into account any reduction in the Total Payments provided by reason of Section 280G of the Code in such other plan, arrangement or agreement, the payment or benefit to be received by the Grantee upon a Change in Control shall be reduced to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax but only if the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments) is greater than or equal to the net amount of such Total Payments without such reduction (but after subtracting the net amount of federal, state and local income taxes on such Total Payments and the amount of Excise Tax to which the Executive would be subject in respect of such unreduced Total Payments).

8.
GENERAL PROVISIONS.

(a) Nontransferability, Deferrals and Settlements . Unless otherwise determined by the Committee or provided in an Award Terms, Awards shall not be transferable by a Grantee except by will or the laws of descent and distribution and shall be exercisable during the lifetime of a Grantee only by such Grantee or his guardian or legal representative. Notwithstanding the foregoing, any transfer of Awards to independent third parties for cash consideration without stockholder approval is

9


prohibited. Any Award shall be null and void and without effect upon any attempted assignment or transfer, except as herein provided, including without limitation any purported assignment, whether voluntary or by operation of law, pledge, hypothecation or other disposition, attachment, divorce, trustee process or similar process, whether legal or equitable, upon such Award. The Committee may require or permit Grantees to elect to defer the issuance of shares of Stock (with settlement in cash or Stock as may be determined by the Committee or elected by the Grantee in accordance with procedures established by the Committee), or the settlement of Awards in cash under such rules and procedures as established under the Plan to the extent that such deferral complies with Section 409A of the Code and any regulations or guidance promulgated thereunder. It may also provide that deferred settlements include the payment or crediting of interest, dividends or dividend equivalents on the deferral amounts.

(b) No Right to Continued Employment, etc. Nothing in the Plan or in any Award granted or any Award Terms, promissory note or other agreement entered into pursuant hereto shall confer upon any Grantee the right to continue in the employ or service of the Company, any Subsidiary or any Affiliate or to be entitled to any remuneration or benefits not set forth in the Plan or such Award Terms, promissory note or other agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary or Affiliate to terminate such Grantee’s employment or service.

(c) Clawback . If a Grantee engages in misconduct (as defined herein), the Grantee: (i) forfeits the right to receive any future Awards or other equity-based incentive compensation under the Plan; and (ii) the Company may demand repayment of any Awards or cash payments already received by a Grantee, including without limitation repayment due to making retroactive adjustments to any Awards or cash payments already received by a Grantee under the Plan where such Award or cash payment was predicated upon the achievement of certain financial results that were subsequently the subject of a restatement as a result of misconduct by the Grantee. The Grantee shall be required to provide repayment within ten (10) days following such written demand. For the purposes of the Plan, “misconduct” means (i) Grantee’s employment or service is terminated for Cause, or (ii) the breach of a noncompete or confidentiality covenant set out in the employment agreement between the Grantee and the Company or an Affiliate, or (iii) the Company has been required to prepare an accounting restatement due to material noncompliance, as a result of fraud or misconduct, with any financial reporting requirement under the securities laws, and the Committee has determined in its sole discretion that the Grantee: (A) had knowledge of the material noncompliance or the circumstances that gave rise to such noncompliance and failed to take reasonable steps to bring it to the attention of appropriate individuals within the Company; or (B) personally and knowingly engaged in practices which materially contributed to the circumstances that enabled a material noncompliance to occur.

(d) Taxes . The Company or any Subsidiary or Affiliate is authorized to withhold from any Award granted, any payment relating to an Award under the Plan, including from a distribution of Stock, or any other payment to a Grantee, amounts of withholding and other taxes due in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Grantees to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Stock or other property with a Fair Market Value not in excess of the minimum amount required to be withheld (except as otherwise determined by the Committee in its sole discretion) and to make cash payments in respect thereof in satisfaction of a Grantee’s tax obligations.

(e) Effective Date; Stockholder Approval; Amendment and Termination . The Plan was originally approved by the Company’s stockholders and effective on October 24, 2007 (the “Effective Date”) and was later amended and restated as of May 19, 2009. The Pzena Investment Management, Inc. Equity Incentive Plan (as Amended and Restated as of January 31, 2017) shall be effective upon its approval by the Company’s stockholders at its Annual Meeting of Stockholders to be held on May 23, 2017 (or, if the vote on the Plan is postponed, such other date on which a stockholders’ meeting to vote to approve the Plan occurs). If the Plan, as amended and restated, is not so approved, then the Plan, as in effect immediately prior to such Annual Meeting, shall remain in effect. The Board may amend, alter or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made that would impair the rights of a Grantee under any Award theretofore granted without such Grantee’s consent, or that without the approval of the stockholders (as described below) would, except as provided in Section 5, increase the total number of shares of Stock reserved for the purpose of the Plan. In addition, stockholder approval shall be required with respect to any amendment that materially increases benefits provided under the Plan or materially alters the eligibility provisions of the Plan or with respect to which stockholder approval is required under the rules of any stock exchange on which Stock is then listed. Unless earlier terminated by the Board pursuant to the provisions of the Plan, the Plan shall terminate on the tenth anniversary of the Effective Date, or, if the stockholders approve an amendment and restatement of the Plan, the tenth anniversary of such approval. No Awards shall be granted under the Plan after such termination date.

(f) No Rights to Awards; No Stockholder Rights . No individual shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Grantees. No individual shall have any right to an Award or to payment or settlement under any Award unless and until the Committee or its designee shall have determined that

10


an Award or payment or settlement is to be made. Except as provided specifically herein, a Grantee or a transferee of an Award shall have no rights as a stockholder with respect to any shares covered by the Award until the date of the issuance of such shares.

(g) Unfunded Status of Awards . The Plan is intended to constitute an “unfunded” plan for incentive and deferred compensation. With respect to any payments not yet made to a Grantee pursuant to an Award, nothing contained in the Plan or any Award shall give any such Grantee any rights that are greater than those of a general creditor of the Company.

(h) No Fractional Shares . No fractional shares of Stock shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, other Awards, or other property shall be issued or paid in lieu of such fractional shares or whether such fractional shares or any rights thereto shall be forfeited or otherwise eliminated.

(i) Regulations and Other Approvals .

(i)
The obligation of the Company to sell or deliver Stock with respect to any Award granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee.

(ii)
Each Award is subject to the requirement that, if at any time the Committee determines, in its absolute discretion, that the listing, registration or qualification of Stock issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Award or the issuance of Stock, no such Award shall be granted or payment made or Stock issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Committee.
 
(iii)
In the event that the disposition of Stock acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act of 1933, as amended (the “Securities Act”), and is not otherwise exempt from such registration, such Stock shall be restricted against transfer to the extent required by the Securities Act or regulations thereunder, and the Committee may require a Grantee receiving Stock pursuant to the Plan, as a condition precedent to receipt of such Stock, to represent to the Company in writing that the Stock acquired by such Grantee is acquired for investment only and not with a view to distribution.

(j) Section 409A .

(i)
The Plan is intended to comply and shall be administered in a manner that is intended to comply with Section 409A of the Code and shall be construed and interpreted in accordance with such intent. To the extent that an Award, issuance and/or payment is subject to Section 409A of the Code, (I) distributions shall only be made in a manner and upon an event permitted under Section 409A of the Code, (II) payments to be made upon a termination of employment or service shall only be made upon a “separation from service” under Section 409A of the Code, (III) unless the Grant specifies otherwise, each installment payment shall be treated as a separate payment for purposes of Section 409A of the Code, and (IV) in no event shall a Grantee, directly or indirectly, designate the calendar year in which a distribution is made except in accordance with Section 409A of the Code.

(ii)
Any provision of the Plan that would cause an Award, issuance and/or payment to fail to satisfy Section 409A of the Code shall have no force and effect until amended to comply with Section 409A of the Code (which amendment may be retroactive to the extent permitted by applicable law). Any Award that is subject to Section 409A of the Code and that is to be distributed to a Key Employee (as defined below) upon separation from service shall be administered so that any distribution with respect to such Award shall be postponed for six months following the date of the Grantee’s separation from service, if required by Section 409A of the Code. If a distribution is delayed pursuant to Section 409A of the Code, the distribution shall be paid within 15 days after the end of the six-month period. If the Grantee dies during such six-month period, any postponed amounts shall be paid within 90 days of the Grantee’s death. The determination of Key Employees, including the number and identity of persons considered Key Employees and the identification date, shall be

11


made by the Committee or its delegate each year in accordance with Code Section 416(i) and the “specified employee” requirements of Section 409A of the Code.

(k) Section 162(m) . Notwithstanding any provision of the Plan or any Award Terms to the contrary, if an Award under the Plan is intended to qualify as performance-based compensation under Section 162(m) of the Code and the regulations issued thereunder and a provision of the Plan or the Award Terms would prevent such Award from so qualifying, such provision shall be administered, interpreted and construed to carry out such intention (or disregarded to the extent such provision cannot be so administered, interpreted or construed).

(l) Disclaimer . Although it is the intent of the Company that the Plan and Awards hereunder, to the extent the Committee deems appropriate and to the extent applicable, comply with Rule 16b-3 and Sections 162(m), 409A and 422 of the Code: (a) none of the Company, the Board, the Committee, or any other person warrants that any Award under the Plan will qualify for favorable tax treatment under any provision of the federal, state, local or non-United States law; and (b) in no event shall any member of the Board or the Committee or the Company (or its employees, officers or directors) have any liability to any Grantee (or any other Person) due to the failure of an Award to satisfy the requirements of Rule 16b-3 or Section 162(m), 409A or 422 of the Code or for any tax, interest, or penalties the Grantee might owe as a result of the grant, holding, vesting, exercise, or payment of any Award under the Plan.

(m) Governing Law . The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware without giving effect to the conflict of laws principles thereof.


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CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)

I, Richard S. Pzena, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Pzena Investment Management, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 7, 2017
/s/ RICHARD S. PZENA
 
 
 
Name: Richard S. Pzena
 
Title: Chief Executive Officer






CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)

I, Jessica R. Doran, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Pzena Investment Management, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 7, 2017
/s/ JESSICA R. DORAN
 
 
 
Name: Jessica R. Doran
 
Title: Chief Financial Officer
         (Principal Financial and Accounting Officer)





Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Pzena Investment Management, Inc. (the “Company”) for the quarter ended June 30, 2017, as filed with the Securities and Exchange Commission (the “Report”), Richard S. Pzena, as Chief Executive Officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)    The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 7, 2017
/s/ RICHARD S. PZENA
 
 
 
Name: Richard S. Pzena
 
Title: Chief Executive Officer





Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Pzena Investment Management, Inc. (the “Company”) for the quarter ended June 30, 2017, as filed with the Securities and Exchange Commission (the “Report”), Jessica R. Doran, as Chief Financial Officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)    The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 7, 2017
/s/ JESSICA R. DORAN
 
 
 
Name: Jessica R. Doran
 
Title: Chief Financial Officer
         (Principal Financial and Accounting Officer)